Synnott v. Cumberland Bldg. Loan Ass'n

• Decision Date: 08 July 1902
• Docket Number: 1,045.
• Parties: SYNNOTT et al. v. CUMBERLAND BLDG. LOAN ASS'N.
• Court: U.S. Court of Appeals — Sixth Circuit

117 F. 379

SYNNOTT et al. v. CUMBERLAND BLDG. LOAN ASS'N.

No. 1,045.

United States Court of Appeals, Sixth Circuit.

July 8, 1902

W. B Russell, for appellant.

A. W Chambliss, for appellee.

The complainants are severally holders of shares in the capital stock of the defendant corporation of the class called 'common stock.' The object of the bill is to recover the price paid for their shares upon the theory that the issuance of said 'common stock,' with the rights and privileges accorded it over the general shares, called 'installment stock,' was ultra vires the corporation. The defendant is, as its name implies, a building and loan incorporation, and was organized in 1892 under the general laws of Tennessee authorizing such corporations. Section 14, c. 142, Acts Tenn. 1875 (Shannon's Code Tenn. Secs. 2128-2142). In April, 1893 its charter was amended so as to acquire the additional powers conferred by chapter 12 of the Tennessee Acts for 1893. The by-laws fixed the authorized capital stock at $10,000,000, of which not more than $100,000 should be 'common stock.' To the shares misleadingly called 'common stock' was accorded the entire control and management of the corporation, the general or 'installment stock' possessing no vote or voice in shareholders' meetings until fully paid up. Aside from the provisions for an unusual and undue participation of the 'common stock' in the profits of the association, to be more fully shown later, and this very unusual disfranchisement, the 'installment stock' was substantially like the ordinary shares in the modern building and loan association. To compensate for the disadvantages mentioned the by-laws provided that the indemnity fund to be permanently held and invested for the protection of investors and installment stockholders. ' To accomplish this the common stockholders surrendered all right of 'withdrawal,' and consented that the capital contributed by them should remain until a final winding up, -subject to reduction only for the purpose of making good 'any losses of the association.' The complainants aver and show that, after the corporation had organized and adopted the constitution and by-laws under which the common stock was authorized, they severally, upon solicitation, and because of the peculiar advantages, rights, and privileges accorded such shares, became subscribers for the shares now severally held by them. The total number of shares of common stock issued and paid for was 337, of the par value of $100 each. The entire affairs of the company from its organization in 1892 until July, 1898, was exclusively in the hands of this small body of common stockholders. While thus in control a loss of 45 per cent. of this total of common stock was charged up against the common stockholders to make good an impairment of capital to the extent of $15,000. This loss was assumed and charged against the common stock at a meeting of the stockholders of such common stock held on December 14, 1897, at which each one of the complainants was present in person or by proxy, and to which action each said stockholder assented. On January 17, 1898, at a meeting of all the shareholders, common and installment, the distinction between common and installment shares was abolished by amending the by-laws so as to strike out every privilege, right, or advantage which that stock had over the installment stock. The burden of standing as an indemnity against company losses was also removed, and the two kinds of stock put on a common plane in respect of burdens and benefits and in the right of voting. Complainants aver that the issuance of said common stock was in excess of the power of the corporation, and that they therefore stand as creditors to the extent of their several payments on account of their subscriptions to said stock. They further insist that the corporation itself has, by the action taken on January 17, 1898, repudiated said stock by abolishing the distinctions between such shares and the installment shares. They pray for a decree restoring to them the price paid, and tender their several certificates for cancellation. In the alternative they ask, if their shares were validly issued, that the common shareholders be restored to the control of the corporation, and that the installment shareholders be restrained from voting and held to their places in the rear. Upon the pleadings and proof the court below dismissed the bill, and from this decree an appeal has been perfected.

Before LURTON, DAY, and SEVERENS, Circuit Judges.

LURTON Circuit Judge, after making the foregoing statement of the case, .

I. It must be conceded that whether the special privileges accorded the 'common stock' over the 'installment stock' were valid or invalid it was entirely competent for the common stockholders to agree with the company and the installment shareholders that their 'common' shares should stand upon the same footing as shares of the 'installment' shareholders, and that all distinction between the two kinds of stock should be eliminated. This is precisely what the corporate minute of the stockholders' meeting of January 17, 1898, shows was done. That minute includes the following recital:

'State Examiner Craig then called attention to the feature in the present plan of the association providing for the creation of common stock and endowing it with powers not granted to other classes of stock, and stated that the state department regarded this feature as calculated to destroy the mutuality of the association, and that the state department required that such mutuality be restored. After full discussion, and the common stockholders, by Mr. Hayward, having expressed a desire to be rid of the burdens they had assumed for which they would be willing to give up their special privileges and rights, Mr. Bemis moved and Mr. Chapin seconded the adoption of the following resolution.'

The minute following shows the adoption of a series of resolutions amending the constitution and by-laws, operating to place the common and installment stock upon the same footing in respect to profits, burdens, and control. This action was taken upon a stock vote of 7,315 shares in the affirmative to 14 shares in the negative.

The evidence in respect to the occurrences of that meeting support this minute, and shows that the installment shareholders were somewhat reluctant to yield to what they had every reason to suppose was the express wish and desire of the common stockholders, and that in surrendering their claim to be indemnified against losses by the common stockholders they gave a full equivalent for equality in control and in distribution of profits. The evidence furthermore shows that Hayward, who then undertook to voice the wishes of the common stockholders, was the then owner of a full sixth of the whole issue, and that he held the proxies of the great mass of common stockholders, including, Mrs. Synnott and her co-complainants.

How do the complainants propose to escape the results of the actions of the stockholders' meeting of January 17, 1898? Although the inspector for the state advised that the powers granted the common stock operated to destroy the mutuality of the association, it does not appear that there was any purpose upon the part of the association to repudiate the common shares or ignore the contract rights of such stockholders. The objection of the state inspector was undoubtedly pointed to that feature by which the small class of common stockholders were given exclusive control of the affairs of the corporation. The prepaid character of the stock and provisions for dividends to be paid out of earnings were features expressly authorized by the amended charter under the act of April 5, 1893, and therefore not inconsistent with the mutual character of the association. The agreement by the common stockholders to stand as indemnitors of the other class of stock against losses was an agreement in the general nature of a preference to the installment shareholders, and had proven a very serious burden to the common stockholders, and was probably unobjectionable. Hamlin v. Railroad Co., 24 C.C.A. 271, 78 F. 664, 36 L.R.A. 826; Cook, Corp. (4th Ed.) Secs. 268, 269. It was this burden, operating as a preference in favor of the installment shares, which the common stock was desirous of escaping, and that they might do so their representative stated to the assembled stockholders of both kinds that to be rid of this burden 'they would be willing to give up their special privileges and rights. ' Upon the face of the minute of the meeting of January 17, 1898, and upon the evidence as to the occurrence at that meeting, there was no repudiation by the corporation of the common stock as ultra vires, but an agreement between the two classes of stockholders and the company by which the common stockholders were relieved from the burden they had assumed in conceding a preference out of profits to installment stockholders as far as necessary to make good any impairment of capital by losses, in consideration of their surrender of the power of control and any other special advantages over other prepaid stock in respect of dividends. The bill does not challenge the regularity of the meeting at which this action was taken, nor that complainants were present or represented, or aver that their agent and attorney in fact exceeded his authority. After alleging that the complainants had subscribed for their stock in the full belief that the provisions of the contract in respect thereto would be carried out and that the agreement was valid, it is charged that the installment stock present or represented at the meeting of January 17, 1898, greatly outnumbered in voting power the common stock present, and that the action taken was ...