New York Co v. Nickals

• Decision Date: 29 November 1886
• Citation: 7 S.Ct. 209,119 U.S. 296,30 L.Ed. 363
• Parties: NEW YORK, L. E. & W. R. CO. v. NICKALS and another. 1
• Court: U.S. Supreme Court

119 U.S. 296

7 S.Ct. 209

30 L.Ed. 363

NEW YORK, L. E. & W. R. CO. v. NICKALS and another.¹

November 29, 1886.

Suit to recover dividends upon preferred stock. Decree for plaintiffs. Defendants appealed. W. D. Shipman, B. H. Bristow New York, L. E. & W. R. Co.

Chas. E. Tracy

Mr. Justice HARLAN, after stating the facts in the foregoing language, delivered the opinion of the court.

By the decree below it was adjudged, in accordance with the prayer of the bill, that the New York, Lake Erie & Western Railroad Company was required, by its articles of association, to declare a dividend of 6 per cent. upon its preferred stock, for the year ending September 30, 1880, payable out of the net profits accruing that year from the use of its property, after meeting operating expenses, interest on funded debt, rentals of leased lines, and other fixed charges. A judgment was rendered against it for $20,280,—the amount which the plaintiffs would have received if a dividend had been made,—with interest thereon from January 15, 1881, to the date of the decree, and also for their costs and disbursements. The cause was referred to a special commissioner to ascertain the names of all other parties entitled to receive similar dividends. The case made by the pleadings, exhibits, and proofs is substantially as will now be stated.

The Farmers' Loan & Trust Company having commenced an action in the supreme court of New York for the foreclosure of two mortgages executed by the Erie Railway Company upon its line of railway, property, rights, privileges, and franchises,—one of September 1, 1870, to secure its obligations known as first consolidated mortgage bonds and sterling loan bonds, and the other of February 4, 1874, to secure its obligations known as second consolidated mortgage bonds and gold convertible bonds,-and having also brought ancillary suits for t e foreclosure of the same mortgages in the states of New Jersey and Pennsylvania, certain parties, on the fourteenth of December, 1877, entered into a plan and agreement for the readjustment of their rights in the mortgaged premises upon an equitable basis. Those constituting in that agreement the parties of the first part were holders of common and preferred stock of the Erie Railway Company, of coupons of the first consolidated mortgage and sterling loan bonds, and of bonds and coupons both of the second consolidated mortgage and gold convertible series. The parties of the second part, Edwin D. Morgan, John Lowber Welsh, and David A. Wells, were purchasing trustees. The agreement provided for co-operation in all proceedings for final foreclosures and sales in the respective states under the mortgage of February 4, 1874; for the purchase of the mortgaged premises and franchises by the trustees with bonds and coupons, and other means to be placed at their disposal for that purpose by the parties of the first part; and for the organization by such trustees, in conformity with the laws of New York, of new corporation, with an amount of stock not exceeding the then amount of the stock of the Erie Railway Company, and which should hold the property, rights, and franchises purchased, to deliver to the parties of the first part its funded coupon bonds, bearing interest at 7 per cent, in gold to an amount equal to the principal of the second consolidated and gold convertible bonds held by the parties, and secured by the mortgage of February 4, 1874,--the back interest to be represented by funded coupon bonds. In reference to the sterling loan bonds the agreement provided that they should be regarded as having been exchanged for the first consolidated mortgage bonds on the first of September, 1875; the coupons due on that day being funded at the rate of 6 per cent, per annum as it stood previous to such assumed exchange.

The provisions of the plan and agreement which bear more or less upon the question before the court are as follows:

'(13) Preferred stock, to an amount equal to the preferred stock of the Erie Railway Company now outstanding, to-wit, eighty-five thousand three hundred and sixty-nine (85,369) shares, of the nominal amount of one hundred dollars each, entitling the holders to non-cumulative dividends, at the rate of six per cent. per annum, in preference to the payment of any dividend on the common stock, but dependent on the profits of each particular year, as declared by the board of directors.

'(14) Common stock, to an amount equal to the amount of the common stock of the said company now outstanding, to-wit, seven hundred and eighty thousand shares, of the nominal amount of one hundred dollars each.'

'(18) Preferred stock of the old company, in respect of which three dollars gold for each share has been or may be paid, and common stock of the old company, in respect of which six dollars gold per share has been paid or may be paid, may be exchanged for the new stock, in paragraphs 13 and 14 mentioned, share per share, preferred for preferred, and common for common, without any liability to make any further payment in respect of such new stock: provided, however, that such new stock, whether common or preferred, shall be issued and held in comformity with and subject to the trust for voting hereinafter mentioned.

'(19) In addition to the new common and preferred stock, the parties of the first part shall also receive for the amount of such payments, as mentioned in the last preceding paragraph. non-cumulative income bonds, without mortgage security, payable in gold, in London and New York, on the first day of June, 1977, and bearing interest from December 1, 1879, also payable in gold, in London and New York, at the rate of six per cent. per annum, or at such lesser rate for any fiscal year as the net earnings of the company for that year, as declared by the board of directors and applicable for the purpose, shall be sufficient o satisfy; these bonds to have yearly coupons attached.

'(20) Preferred stock, in respect of which two dollars gold per share has been paid or may be paid, and common stock, in respect of which four dollars gold per share has been or may be paid, may be exchanged share for share, but in conformity with and subject to the said trust for voting, for new stock of like class, without any liability to make any further payment in respect of such new stock; but no income bonds or other obligation or security shall be issued or delivered in respect of such reduced payments.

'(21) * * * And all payments made or to be made in respect of old preferred or common stock shall be deemed to be in consideration of the concessions and agreements made by the holders of the said first and second consolidated mortgage and gold convertible bonds; the available funds resulting from such concessions being used for the improvement or increase of the property of the new company.

'(22) The stock of the new company, both common and preferred, not required for exchange as above provided, may, with the consent of the parties of the first part, but not otherwise, be issued and disposed of by the company for its own benefit at such rates and upon such terms as to the said company may seem proper. All moneys which have been or may hereafter be paid in respect of stock as above set forth, and which shall not be required for the purpose of carrying into execution this plan and agreement, shall be expended for the benefit of said new company, or in the improvement or increase of its property, under the direction of the parties of the first part, and any balance not so expended shall be paid over to the said new company.'

The property and franchises in question were sold, under decrees of foreclosure, on the twenty-fourth of April, 1878, and were purchased by the trustees, subject to the before-mentioned six mortgages. Immediately thereafter, on April 26, 1878, the purchasing committee and their associates organized the New York, Lake Erie & Western Railroad Company, in conformity with statutes providing for the reorganization of railroads sold under mortgage, and for the formation in such cases of new companies. Laws N. Y. 1874, c. 430; Id. 1876, c. 446. The provisions of the before-mentioned plan and agreement were set out in the articles of association. On the ninth of December, 1880, the board of directors submitted to shareholders and bondholders a report of the operations of the new company for the fiscal year ending September 30, 1880, from which it appears that the gross earnings for that year were $18,693,108.86, while operating expenses were $11,643,925.35, leaving $7,049,183.51 as 'net earnings from traffic.' To this sum the report adds $783,956.65 'as earnings from other sources,' making $7,833,140.16 as the total earnings for the year in question. From the last sum, $6,042,519.45 were deducted for 'interest on funded debt, rentals of leased lines, and other charges,' leaving, in the language of the report, 'a net profit from the operations of the year of $1,790,620.71.' Referring to the latter sum, the report continues: 'This amount, together with $737,119.34 received during the year from the assessments paid on the stock of the Erie Railway Company, has been applied to the building of double track, erection of buildings, providing additional equipment, acquiring and constructing docks at Buffalo and Jersey City, and to the addition of other improvements to the road and property.'

The theory of the present suit is that the sum of $1,790,620.71, ascertained to be the 'net profit' derived from the operations of the company for the fiscal year end ng September 30, 1880, after paying operating expenses and fixed charges, constituted a fund applicable primarily to the payment of a 6 per cent. dividend upon preferred stock. The use of that fund for any other purpose was, it is claimed, a breach of trust on the part of the company, and a violation of rights secured to preferred stockholders both by the plan and agreement of December 14, 1877, and by the...