Penington v. Commonwealth Hotel Construction Corporation

• Decision Date: 19 July 1930
• Citation: 17 Del.Ch. 188,151 A. 228
• Parties: ROBERT PENINGTON, v. COMMONWEALTH HOTEL CONSTRUCTION CORPORATION, a corporation organized and existing under the laws of the State of Delaware. HUGH MCATAMNEY, v. BROADWAY, SEVENTH AVENUE & FIFTY-SIXTH STREET HOTEL REALTY CORPORATION, a corporation organized and existing under the laws of the State of Delaware
• Court: Court of Chancery of Delaware

151 A. 228

17 Del.Ch. 188

ROBERT PENINGTON, v. COMMONWEALTH HOTEL CONSTRUCTION CORPORATION, a corporation organized and existing under the laws of the State of Delaware. HUGH MCATAMNEY, v. BROADWAY, SEVENTH AVENUE & FIFTY-SIXTH STREET HOTEL REALTY CORPORATION, a corporation organized and existing under the laws of the State of Delaware

Court of Chancery of Delaware, New Castle

July 19, 1930

PETITION BY RECEIVER TO HAVE DETERMINED THE DISTRIBUTIVE SHARES OF VARIOUS CLASSES OF STOCKHOLDERS. The Receiver for Commonwealth Hotel Corporation, an insolvent corporation and one of the defendants in the above consolidated causes, filed a petition for the purpose of requiring persons claiming a right to share in the distribution of the present and yet expected cash assets in his hands to appear and assert their claims.

All the claimants are stockholders. Creditors have been, or will be paid in full.

The claiming stockholders may be classified as follows:

(a) Persons who have subscribed to and paid in full for shares of preferred stock.

(b) Persons who have subscribed to and paid in full for shares of common stock.

(c) Persons who have subscribed for shares of preferred stock but who have paid only part of their respective subscriptions.

(d) Persons who have subscribed for shares of common stock but who have paid only part of their respective subscriptions.

(e) Members of classes (a) and (b) who have paid a premium above par for their stock.

The question which the petition presents calls for a definition of the principle upon which distribution of the assets after payment of all creditors should proceed.

The insolvent company never at any time earned profits, and at no time did it possess a surplus above liabilities and capital.

Charles C. Keedy, for the receiver.

William Prickett and Samuel Zirn, of Brooklyn, N. Y., for preferred stockholders.

Walter E. Godfrey, of New York City, for certain stockholders.

William F. Unger, of the firm of Unger & Unger, of New York City, for a preferred stockholder.

E Ennalls Berl and Paul Leahy, of the firm of Ward & Gray, for common stockholders.

John Biggs, Jr., and Mortimer Brenner, of New York City, for stockholders' protective committee.

OPINION

THE CHANCELLOR

The questions which the rival contentions in this case present concern stockholders only, the creditors having been satisfied in full. They involve a construction of the charter provisions which deal with the classes of stock authorized to be issued and their relation to a situation of liquidation and distribution of assets.

The pertinent charter provisions are as follows:

"The holders of the preferred stock of this corporation shall be entitled to receive and the corporation shall be obligated to pay thereon out of the surplus or net profits of the business of the corporation in each year dividends at the rate of seven per centum (7%) per annum and no more payable on such dates as may be fixed by the Board of Directors. Such dividends on the preferred stock shall be payable before any dividends shall be payable or set apart on the common stock and shall be cumulative, so that if dividends for any past dividend period at the rate of seven per centum (7%) per annum shall not have been paid thereon or set apart therefor the deficiency shall be fully paid or set apart, but without interest, before any dividend shall be paid or set apart for the common stock.

"Whenever dividends at the rate of seven per centum (7%) per annum upon the preferred stock for all past dividend periods shall have been declared and the same shall have been paid by the corporation or funds for the payment thereof shall have been set aside, the Board of Directors, if the remaining surplus or net profits be sufficient therefor may declare dividends on the common stock at such rates and payable at such time as the Board may fix.

"After the payment of the said preferential dividend of seven per centum (7%) per annum to the holders of the preferred stock and noncumulative dividends of six per centum (6%) on the common stock the Board of Directors shall set aside twenty per centum (20%) of the remaining net profits for any year, as a sinking fund to be used in the purchase or redemption of the preferred stock, which fund shall be kept separate and apart from all other funds of the corporation.

"The moneys constituting the sinking fund shall be applied by the corporation in each year to the purchase of shares of the preferred stock at not exceeding $ 110 per share or the redemption thereof as herein provided.

"In the event of any liquidation, dissolution or winding up of the corporation, or upon any distribution of its capital, other than the redemption of its preferred stock, the holders of the preferred stock shall be entitled to be paid in full the par value thereof, and all unpaid dividends accrued thereon, before any amount shall be paid or any assets distributed to the holders of the common shares, and after the payment to the holders of the preferred stock of the amount payable to them as hereinbefore provided, the remaining assets and funds of the corporation shall be divided and paid to the holders of the common shares according to their respective shares."

The receiver now has in hand twenty-five thousand dollars. This sum will be very considerably augmented later on and it is desired that the method of distribution may be now defined so that when the ultimate fund is in hand, the stockholders may receive expeditious payments.

It should be borne in mind that the fund to be finally distributed represents less than the capital stock paid in. Not only does it contain no profits or surplus; it falls short of equalling invested capital.

The questions presented and the court's views will now be stated.

1. As to the stockholders who paid par and a premium for their stock, may the premium be regarded as capital paid in and as such may it share in the distribution? In other words, may stockholders who paid a premium for their stock be permitted to share in the distribution in proportion to what they paid for their shares rather than in proportion to the par value thereof? Grone v. Economic Life Ins. Co., (Del. Ch.) 38 Del.Ch. 158, 80 A. 809, decided by Chancellor Curtis, is an authority in the negative. So also are In re Driffield Gas Light Co., [1898] 1 Ch. 451, and 1 Machen, Modern Law of Corporations, par. 522. These authorities are persuasive and the order will direct that a premium paid above par should be disregarded in ascertaining the shareholder's proportion in distribution.

2. Under this head we are to consider a question which is presented by the fact that some of the shares, both preferred and common, all of the par value of one hundred dollars, were paid for in full and some of them only in part. There having been a loss whereby the assets, after paying debts and receivership costs and expenses, are insufficient to pay in full the entire capital paid in, the question arises of whether the partly paid shares may share in the distribution in the proportion that the amount paid on them bears to the total amount paid on all. If they may, it is apparent that the partly paid shares will be allowed to participate in such manner as to be relieved of bearing their equitably proportionate share of the losses.

For illustration, let us suppose a case where capital shares of a hundred dollars par are subscribed for in the amount of $ 1,500,000, that $ 1,000,000 has been fully paid, and $ 500,000 has been paid to the extent of fifty per cent. only. In that case the capital actually paid in is $ 1,250,000, and $ 250,000 is agreed to be paid into the capital account. The partially paid subscribers are liable for the latter sum. They have therefore paid and bound themselves to pay a sum equal to one-third of the capital. Now suppose the company loses $ 500,000 of the paid in capital of $ 1,250,000, whereby on liquidation it has only $ 750,000 left for distribution. If the partly paid stock participates in the distribution on a basis proportional to its actual payments, it would receive 250,000/1,250,000, or one-fifth of the $ 750,000 That would mean that it would receive $ 150,000 back from its cash investment of $ 250,000, a loss to it of $ 100,000. But it had obligated itself to be a one-third owner of the enterprise and if it were compelled to keep its obligation, its loss would be one-third of $ 500,000 or $ 166,666 2/3. Thus by the method of distribution based on paid-in proportions, the stockholders who had only partly paid for their stock in the supposed case would be spared from bearing $ 66,666 2/3 of loss which, had they performed their contract obligations, they would have been compelled to bear. Saving to them the burden of this loss means the shifting of it to the shoulders of their associates in the enterprise who, unlike them, had kept their obligations to it to the full. Such a result would be highly inequitable.

In the instant case, the situation is such that justice demands that the partially paid stock should be required to equalize itself with the fully paid stock of the same class through a theoretical if not an actual performance of its contract obligations, before participating with it on a pro rata paid-in basis in the distribution of the depleted capital. It ought, before receiving benefits from the fund, to be required, so to speak, to do equity by it.

The authorities support this conclusion. Re Anglesea Colliery Co., [1866] L. R. 1 Ch. 555; Ex parte Maude, [1870] L. R. 6 Law Rep. Ch. 516; In re Weymouth & Channel Islands Steam Packet Co., [1891] 1 Ch. 66; Wilton v. Soffery, [1897] A. C. 299; In re Wakefield Rolling Stock Co., [1892] 3 Ch 165; In re Anglo-Continental Corporation of...