Westerfield-Bonte Co. v. Burnett

• Decision Date: 08 June 1917
• Citation: 195 S.W. 477,176 Ky. 188
• Parties: WESTERFIELD-BONTE CO. v. BURNETT.
• Court: Kentucky Court of Appeals

195 S.W. 477

176 Ky. 188

WESTERFIELD-BONTE CO. v. BURNETT.

Court of Appeals of Kentucky.

June 8, 1917

Appeal from Circuit Court, Jefferson County; Chancery Branch, First Division.

Action by Henry Burnett against the Westerfield-Bonte Company. From a judgment for plaintiff, defendant appeals. Affirmed.

Bruce &amp Bullitt, of Louisville, for appellant.

W Pratt Dale and Burnett, Batson & Cary, all of Louisville, for appellee.

HURT J.

The appellant, Westerfield-Bonte Company, is a corporation organized under the corporation laws of the state of Kentucky, with its home in the city of Louisville. The capital stock consists of 250 shares, of the par value of $100 each. Sixty shares of the capital stock, of the par value of $100 each, are what is denominated preferred stock and the remainder of the shares is what is known as common stock. At the creation of the corporation all of the stock was what is denominated common stock, but on the 4th day of June, 1910, amended articles of incorporation were adopted, in the manner provided by law, by which it was provided that 60 shares of the capital stock should be of the class known as preferred stock, and the remainder should be common stock. These amended articles were adopted by the unanimous action of all the holders of the capital stock of the corporation. The amended articles provided as follows:

"The preferred stock may, by vote of the majority of the board of directors of said company, be redeemed on any dividend date, as fixed by the by-laws, at any time after one year from the 1st day of July, 1910, at the price of one hundred and five dollars ($105) per share, and any accumulated dividends, and this preferred stock shall, upon request to the board of directors of said company from the holders of two-thirds thereof, be retired at the price of one hundred dollars ($100) per share and any accumulated dividends, at any time after July 1, 1915."

In the face of the certificates issued as representative of the preferred stock were the following provisions:

"This stock is part of an issue amounting in all to $6,000 par value, authorized by the amended certificate of incorporation of the company, filed in the office of the clerk of the Jefferson county court, in Jefferson county, Kentucky, on the 4th day of June, 1910, and subsequently lodged for record in the office of the secretary of state of the state of Kentucky. This certificate entitles the holder thereof to receive, and the company is bound to pay, a fixed yearly dividend of eight per centum (8%) per annum, payable half yearly, before any dividends shall be set apart or paid on the common stock, and the dividends on the preferred stock are cumulative."

The appellee, Henry Burnett, became the owner of 40 shares of the preferred stock, which was two-thirds of it, and on July 28, 1915, made a demand in writing to the board of directors of appellant, by which he requested it to retire the preferred stock, which he held, and to pay him therefor the sum of $100 per share, with interest at 8 per centum per annum from July 1, 1915. The demand was acknowledged by the board of directors, but it refused to retire the stock or redeem the same, as provided by the articles of incorporation. The appellee, on October 15, 1915, instituted this action, and in addition to the above stated facts alleged that the corporation was amply able to retire his stock and to pay him the sum necessary for that purpose, according to the articles of incorporation, without detriment or danger to the rights of appellant's creditors, and that appellant did not owe anything beyond its current bills, and that the rights of its creditors would not be in any manner injuriously affected.

The appellant, by answer and two amendments thereto, denied that the effect of the articles of incorporation was to authorize the appellee to demand the retirement or to receive the par value of his preferred stock, so long as the corporation was a going concern, except that the preferred stock might be redeemed out of the surplus funds of the corporation and without infringement upon its capital stock, and denied that the preferred stock was entitled to any preference over the common stock, except in payment of dividends or upon a final dissolution of the corporation to be redeemed out of the assets of the corporation before the common stock should be redeemed. A denial was made that the corporation had no indebtedness beyond its current bills, or that the rights of the creditors would not be jeopardized by the payment of the appellee's claim, or that the corporation was able to pay the appellee's claim without danger or detriment to the rights of its creditors. The answer also alleged that the regular dividends provided for had been regularly paid upon the preferred stock until January, 1915; that the corporation had no money or property of any kind, except its machinery, equipment, and supplies used in the conduct of its business; that it had $3,903.55, face value, of accounts, worth 60 per centum of their face value, and that its average amount of cash on hand was about $250; that its pay roll was about $250 per week, and that in order to raise the money necessary to retire the preferred stock and to pay appellee's claim it would have to sell or mortgage its property; that its machinery, equipment, and supplies cost originally $20,000, but some of it was several years of age, and, while valuable to a going concern, would probably sell for only a small percentage of its original cost; and that the corporation owed debts to the amount of $1,500, and that $200, par value, of its common stock had never been subscribed for nor sold. The answer, furthermore, set out in full the amended articles of incorporation heretofore referred to, bearing upon the preference provided for the preferred stock in the payment of dividends, and the redemption of the shares upon a final dissolution.

A general demurrer was interposed, and by the court sustained, to the answer as amended. Before the submission of the case, however, the appellee took the deposition of the president of the corporation, and by him it was shown that after the redemption of the entire preferred stock, and the payment of all the creditors of the corporation, there would be a surplus of assets for distribution among the common stockholders of something between $1,200 and $1,500. The action having been submitted for trial and judgment upon the pleadings, exhibits, and the proof on file, the court adjudged that to require the corporation to retire the preferred stock of appellee and to pay him therefor would not in any way injuriously affect the rights of the corporation's creditors, and therefore adjudged that the appellee recover of it the sum of $4,197.33, with interest thereon at 6 per centum per annum, from the date of the rendition of the judgment, and from this judgment the appeal was prayed and taken.

(a) The argument is advanced that the judgment is erroneous, because the action of a corporation, in Kentucky, in providing in its articles of incorporation for the redemption and retirement on demand, of its preferred stock, is void, because such action is against public policy, and for this reason the contract between the corporation and its preferred stockholders, by which it obligated itself to redeem and retire the preferred stock at any time after July 1, 1915, upon the demand of the holders of two-thirds of it, is void and unenforceable, because against a sound public policy. There is a principle, which is invoked in determining whether a thing is against public policy, which is to the effect that one cannot lawfully do that which tends to be injurious to the public, or is contrary to the public good, and, in short,...