Tower Hill Connellsville Coke Co. v. Piedmont Coal Co.

• Decision Date: 08 July 1929
• Docket Number: No. 2846.,2846.
• Citation: 33 F.2d 703
• Parties: TOWER HILL CONNELLSVILLE COKE CO. OF WEST VIRGINIA v. PIEDMONT COAL CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

33 F.2d 703 (1929)

TOWER HILL CONNELLSVILLE COKE CO. OF WEST VIRGINIA v. PIEDMONT COAL CO. et al.

No. 2846.

Circuit Court of Appeals, Fourth Circuit.

July 8, 1929.

Thomas Watson, of Pittsburgh, Pa., and E. W. Knight, of Charleston, W. Va. (Lon H. Kelly, of Charleston, W. Va., and M. W. Acheson, Jr., and Robert M. Steffler, both of Pittsburgh, Pa., on the brief), for appellant and cross-appellee.

E. C. Higbee, of Uniontown, Pa., and William M. Robinson and Edwin W. Smith, both of Pittsburgh, Pa. (Arthur S. Dayton, of Charleston, W. Va., on the brief), for appellees and cross-appellants.

Before PARKER and NORTHCOTT, Circuit Judges, and WEBB, District Judge.

NORTHCOTT, Circuit Judge.

This is a suit in equity brought in the District Court of the United States for the Southern District of West Virginia by the Piedmont Coal Company, a corporation created and existing under the laws of the commonwealth of Pennsylvania, and G. S. Harah, Edgar S. Hackney, and Walter E. Hess, executor under the last will and testament of John E. Hess, deceased, the three individual plaintiffs being citizens of said commonwealth, against the Tower Hill Connellsville Coke Company of West Virginia, a West Virginia corporation, that will be hereinafter referred to as the Tower Hill of West Virginia. The stock of the defendant company consisted of 15,000 shares of preferred stock of the par value of $100 each, and 40,000 shares of common stock of the par value of $100 each.

The plaintiffs, at the time of the institution of this suit, were the owners of a total of 10,850 shares of the preferred stock, of which there was then outstanding 13,247 shares; 1,753 shares having been purchased for various prices, and canceled by the defendant. The preferred stock under the law of West Virginia and the provisions of the certificate of incorporation was entitled, in preference to the common stock, to cumulative dividends at the rate of 6 per centum yearly, payable quarterly, half yearly, or annually; that is to say, dividends might be paid on the common stock only out of the excess earnings over and above the amount necessary to pay 6 per centum on the fiscal year, and any arrearages of dividends upon the preferred stock. When this amount had been earned and paid, or earned and set aside for this purpose, then out of the excess dividends might be paid upon the common stock, when and as the board of directors should determine.

The preferred stock also has a preference over the common stock in any distribution of assets other than profits, until the full par value thereof and 6 per centum per annum thereon from the time of issue should have been paid by dividends or distribution.

The preferred stock had the right to vote, and was not to receive any dividends from profits in excess of said 6 per centum per annum, nor any share in the distribution of assets in excess of said par value and the amount then unpaid of such cumulative dividends; but the common stock alone was to receive all further dividends and shares in distribution.

The certificate of incorporation provided that:

"The corporation shall not be at liberty, without the consent in writing first obtained of the holders of two thirds in amount of the preferred stock issued and outstanding:

"(a) To create or issue any other or further shares ranking in any respect pari passu with or in priority to the aforesaid issue of one million, five hundred thousand dollars, par value, of preference shares.

"(b) Nor to create any charge except as hereinafter provided upon the net profits of the corporation which shall be detrimental to the rights of the preference shares.

"(c) Nor to reserve a surplus fund which shall not be chargeable with the payment of the accrued dividends upon the preference shares."

The assets of the defendant company consisted solely of all the stock of the Tower Hill Connellsville Coke Company of Pennsylvania, a Pennsylvania corporation, hereinafter referred to as the Tower Hill of Pennsylvania, consisting of 50 shares of the par value of $100 each of common stock. The Tower Hill of West Virginia was a holding company, and conducted no operation, owned no plant, and did no business other than that connected with its ownership of the stock of the Tower Hill of Pennsylvania. The Tower Hill of Pennsylvania conducted a large coal and coke operation, in the state of Pennsylvania, where it owns a large acreage of coal and operates a coal mine and coking plant. There was originally an issue of bonds which constituted a mortgage on property of the Pennsylvania company, amounting to $2,500,000, of which $384,000 remain unpaid. The directorate of the West Virginia and the Pennsylvania companies was identical, and the principal officers were the same for both.

The Tower Hill of Pennsylvania was incorporated on the 2d day of February, 1906, and the Tower Hill of West Virginia was incorporated on the 21st day of January, 1907. The Tower Hill of Pennsylvania originally owned approximately 2,000 acres of coal and 183 acres of surface, for which was paid $500,000 cash, $1,000,000 of the first mortgage bonds, and the entire capital stock, which capital stock was afterwards transferred to Tower Hill of West Virginia, for the entire issue of both common and preferred stock of that company.

In 1907, the Tower Hill of Pennsylvania divided said properties into mines No. 1 and No. 2, and opened the same for the removal of coal, constructed tipples and equipment at each mine, and built coke plants for the manufacture of coke, and on January 1, 1920, the cost to said company of the plants and equipment for both mines was $2,624,476.31.

In the year 1920, Tower Hill of Pennsylvania sold mine No. 1, together with 560 acres of coal land.

With the exception of a dividend of 9 per cent. paid in the year 1924, no dividends have been paid on the preferred stock of the defendant, so that, at the time of the entry of the decree below, dividends on the preferred stock were in default to the amount of more than 120 per cent. of the par value. These deferred dividends bear no interest.

No meeting of the directors of the defendant company was held from May 3, 1920, up to the date of the submission of the suit in the court below in May, 1926.

Plaintiffs brought this suit and filed their bill, charging, among other things, that there was mismanagement in the affairs of the two companies, and that an effort was being made to manipulate them in the interest of the holders of the common stock of Tower Hill of West Virginia, and to the detriment of the holders of the preferred stock; that the officers and directors proposed a certain merger, greatly to the disadvantage of the preferred stockholders; that there were ample funds in the assets of Tower Hill of Pennsylvania to pay at least a part of the passed dividends; and that such payments were not made with the deliberate purpose of lowering the value of the preferred stock. The bill, among other things, prayed for the appointment of a receiver to take charge of the assets of the defendant, with power to exercise all the rights, privileges, and remedies of the defendant company, with respect to the matters set out in the bill, and with the right to bring such suit or suits in Pennsylvania as might be necessary to protect the interests of the holders of the preferred stock.

The defendant filed its answer, denying all charges of fraud and mismanagement, and setting up the claim that the free liquid assets in the hands of Tower Hill of Pennsylvania were not more than sufficient to provide reserve for federal taxes, working capital, accidents, bad debts, and the completion of electrification of the mine which was in progress, and the modernizing of the plant by substituting by-product coke ovens for the company's beehive ovens, and for other needed betterments, and to meet the operating losses under which business was being conducted at the time of the suit. The answer averred that the payment of the dividends on the preferred stock would impair the capital of Tower Hill of Pennsylvania.

Evidence was taken, a large number of exhibits were filed, and on April 5, 1928, the learned judge below filed a memorandum decision, which concluded as follows:

"It seems to me that these preference shares created under the law of the state of incorporation, and under the terms of the certificate (which is a contract) are entitled to some real consideration and relief herein.

"I will not undertake to analyze the figures as to the assets of the Pennsylvania Company, but I hold that there seems to be sufficient available funds to pay a dividend of twenty dollars on each share of preferred stock of the West Virginia Company, and that the Pennsylvania Company should pay to the West Virginia Company, sufficient dividends to enable it to declare and pay such sums as dividends upon the preferred stock.

"If the management of these companies does not within thirty days take reasonable steps to do this, then a decree will be entered, appointing a receiver, or receivers of the defendant company in this suit, and appropriate authority will be given to such receivers, to do things necessary and proper to collect such sums as may be required to pay such amount of money as a part of the cumulative dividends aforesaid."

After this decision, no decree having been entered in the meantime, attorneys presented and asked leave to file a motion to dismiss the bill, for the reasons, among others, that there was no substantial defendant to the suit, that the directors and officers of the defendant were necessary and indispensable parties to the suit, and that all of them were residents of the state of Pennsylvania, as were the plaintiffs, and that making them parties would deprive the court of jurisdiction, because of a lack of diversity of citizenship.

On April 30, 1928, an order was entered reciting the various steps taken and various appearances made by defendant's attorneys, together...