Hay v. Hay
| Citation | 230 P.2d 791,38 Wn.2d 513 |
| Decision Date | 01 May 1951 |
| Docket Number | No. 31476,31476 |
| Parties | , 25 A.L.R.2d 776 HAY, v. HAY. |
| Court | Washington Supreme Court |
Fielding H. Ficklen, Keith, Winston, MacGillivray & Repsold, Spokane, for appellant.
David O. Hamlin, Seattle, Weaver & Jones, Spokane, for respondents.
The liquidating trustees of the Big Bend Land Company, a Washington corporation, instituted this action to secure a declaratory judgment construing Article VI of its amended articles of incorporation. The question presented is whether the holders of cumulative preferred stock upon liquidation of the corporation are entitled to be paid accrued dividends from the corporate assets before the common stockholders become entitled to participate in the distribution thereof, the corporation having no earned surplus or net profits.
The trial court entered a judgment declaring that the amended articles of incorporation required that the holders of the cumulative preferred stock receive from the assets of the corporation, so far as they might reach, an amount equal to six per cent per annum computed on the par value of each share from the date of issuance thereof to date of liquidation (January 18, 1947), and that the holders of the common stock were not entitled to receive any distribution of assets until payment of the six per cent per annum accrued dividend to the preferred stockholders had been fully made. The defendant Edward T. Hay, individually and as administrator of the estate of Fayette H. Imhoff, deceased, has appealed.
The history of the Big Bend Land Company is set forth in Hay v. Big Bend Land Co., 32 Wash.2d 887, 204 P.2d 488, to which reference is made for details concerning its corporate structure.
The respondents have moved to dismiss the appeal upon the ground that Bruce M. Hay, trustee for Sara Ann Hay, a minor, was not served with notice of appeal. The trustee held shares of preferred stock in trust for the minor. He was not made a party to the action. After commencement of the trial one of counsel for respondents asked that the trustee be made an additional party defendant, and the request was granted by the court. The trustee signed an answer prepared by the attorneys for respondents, which consisted of a general denial and a requirement that respondents be held to strict proof of the allegations of their complaint. The trustee took no part in the trial. The record does not disclose any reason why the trustee should have been made a party defendant to the action. All of the preferred stockholders had a common interest in the objective sought by respondents. In effect they represented such stockholders. The adverse parties were the common stockholders. We are of the opinion that the trustee was not a necessary party to the action and that appellant was not obliged to serve him with notice of appeal in order to confer jurisdiction on this court to review the declaratory judgment. The motion is denied.
Prior to December 27, 1921, the capital stock of The Big Bend Land Company consisted entirely of common stock. On that date Article VI of the articles of incorporation was amended to read as follows:
'Amended Article VI
'The amount of the capital stock of this Corporation is One Million Five Hundred Thousand ($1,500,000) Dollars, divided into fifteen thousand (15,000) shares of the par value of One Hundred ($100) Dollars each.
'The stock of this Corporation is divided into two classes, namely; common stock in the amount of eighty-five hundred (8500) shares of the par value of One Hundred ($100) Dollars each, and preferred stock in the amount of sixty-five hundred (6500) shares of the par value of One Hundred ($100) Dollars each.
'The terms on which these two classes of stock are created and the particular character of the preference of the preferred stock and the conditions and limitations applying thereto and to the common stock are as follows:
* * *
'(b) This Corporation may at any time, or from time to time as shall be permitted under the laws of the State of Washington, redeem the whole or any part of its preferred stock on any annual dividend date by paying therefor in cash One Hundred and one and 50/100 ($101.50) Dollars per share, and all accrued unpaid dividends thereon at the date fixed for such redemption. * * *
'(c) Out of any surplus profits of the Corporation remaining after the payment of full dividends on the preferred stock for all previous dividend periods and after full dividends thereon for the then current annual dividend period shall have been declared and paid in full or provided for, then, and not otherwise, dividends may be declared upon the common stock.
'(d) In the event of any liquidation, dissolution or winding up of the Corporation the holders of the preferred stock shall be entitled to be paid in full the par value thereof, and all accrued unpaid dividends thereon before any sum shall be paid to or any assets distributed among the holders of the common stock, but after payment to the holders of the preferred stock of the amounts payable to them as hereinbefore provided, the remaining assets and funds of the Corporation shall be paid to and distributed among the holders of the common stock.'
We have italicized the words which constitute the crux of this controversy.
There are no corporate creditors involved. The holders of the preferred stock have received from the liquidating trustees the par value thereof. No dividends on the cumulative preferred stock have ever been declared or paid. No surplus profits are available with which to pay the accumulated dividends. There is a substantial amount of assets on hand, but they would all be absorbed if they should be applied in payment of accrued dividends on the preferred stock.
Appellant takes the position that the phrase 'all accrued unpaid dividends' means that before there can be a dividend there must be surplus profits, and that, since none ever existed, the right to such dividends never accrued and therefore none are payable. In support of his theory, appellant cites Penington v. Commonwealth Hotel Const. Corp., 17 Del. Ch. 188, 151 A. 228. This case was decided by the chancellor of Delaware, who so construed a like phrase. Appellant also relies on the case of Michael v. Cayey-Caguas Tobacco Co., 190 App.Div. 618, 180 N.Y.S. 532, which is in accord with the construction placed upon the phrase by the chancellor and is based upon a statute similar to Rem.Rev.Stat. § 3823, discussed later in this opinion.
On the other hand, it is the contention of respondents that subdivisions (a), (b) and (c) of Amended Article VI of the articles of incorporation relate to the payment of dividends to preferred stockholders out of surplus profits while the corporation is a going concern, but that subdivision (d) authorizes the payment of accumulated and unpaid dividends out of assets upon liquidation of the corporation, even though there be no surplus profits available. They argue that the corporation, being in the process of liquidation, there can be no impairment of its capital and, therefore, there is no longer any purpose in restricting the payment of dividends to surplus profits.
It seems clear, even without reference to the decisions of other courts of last resort hereinafter cited, that the two classes of stockholders contracted between themselves with respect to the division of the assets in case of liquidation. Their agreement was that the preferred stockholders should receive the par value of their stock plus an amount equal to 'all accrued unpaid dividends thereon' before any assets should be distributed to the common stockholders.
It should be noted that the articles contain no condition to the effect that the surplus profits must be equal to, or greater than, the total of all accrued unpaid dividends before such distribution could be made. The parties were contracting with reference to a possible future liquidation, a situation where the statutory prohibition, Rem.Rev.Stat. § 3823, against declaration of dividends out of capital had no application.
Appellant's construction of the subparagraph (d) of Amended Article VI as being subject to an implied condition (applicable only to a going concern) that such cumulative dividends are payable only out of surplus profits is contrary to the fundamental concept of the law of corporations. Appellant's construction of subparagraph (d) is based upon a failure to recognize the vital distinction between a corporation which is a going concern and one which is in liquidation. The reference to 'all accrued and unpaid dividends' in subparagraph (d) is the only practical yardstick by which the total share of the assets (which the preferred stockholders were to receive upon liquidation) could be measured. At the time the amended article was drafted and adopted, the quoted phrase was the most definite way that the preferential rights of the preferred stockholders could have been described. It stated the method by which the amount distributable to the preferred stockholders could be computed in the event of a liquidation in the future.
The decisions bearing on this subject were formerly in direct conflict but the great weight of authority presently supports the...
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