Whitridge v. Mt. Vernon Woodberry Cotton Duck Co.
| Decision Date | 20 December 1913 |
| Citation | 210 F. 302 |
| Parties | WHITRIDGE et al. v. MT. VERNON WOODBERRY COTTON DUCK CO. et al. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Charles Morris Howard and William L. Marbury, both of Baltimore, Md for complainants.
Bond Robinson & Duffy, of Baltimore, Md., for Mt. Vernon Woodberry Cotton Duck Co.
Lemmon & Clotworthy, of Baltimore, Md., for Consolidated Cotton Duck Co.
Gans & Haman, of Baltimore, Md., for International Trust Co.
All three defendants are corporations. Two of them, viz., the Mt Vernon Cotton Duck Company and the Consolidated Cotton Duck Company, hold their charters from the state of Delaware. For brevity the former will be called the 'Mt. Vernon,' the latter the 'Consolidated.'
The plaintiffs are citizens of Maryland. They hold 164 out of 6,000 income bonds issued by the Mt. Vernon. The third defendant is the International Trust Company of Maryland. It is the trustee under the mortgage securing the income bonds. It is a Maryland corporation. The plaintiffs expressly say that they ask no relief against it. It is therefore either a nominal party, the citizenship or state of incorporation of which is immaterial, or else its proper position on the record is that of a plaintiff. It will be referred to as the trustee.
The income bonds provide for the payment of cumulative interest, if earned, at the rate of 5 per centum per annum payable semiannually. These bonds were of the denomination of $1,000 each. The suit was brought August 9, 1909. Eight years had then elapsed since July 1, 1901. If the Mt. Vernon had been prosperous, $400 might in that time have been paid as interest on each bond. Only $100 was. The plaintiffs claim that the remaining $300 a bond, or a material part of it, was in fact earned but has been wrongfully withheld from them.
The Mt. Vernon was incorporated June 23, 1899. It was formed for the purpose of buying and operating 14 different mills which had been theretofore engaged in the production of cotton duck. It was said that those mills made 90 per cent. of all the cotton duck. It was in this country. The plan under which the Mt. Vernon was launched called for the creation of $8,000,000 of first mortgage 5 per cent. bonds ($1,000,000 of which were to be retained in the company's treasury to provide for its future needs), $6,000,000 of 5 per cent. cumulative income bonds, and $9,500,000 of capital stock. The par value of the securities which were to be at once floated was thus $22,500,000. An underwriting syndicate bought the $7,000,000 first and the $6,000,000 income bonds, paying for them $11,275,000. The price realized by the company for its first mortgage bonds was 92 1/2 and for its income bonds 80. It gave the syndicate as a bonus $3,250,000 of its stock. Its actual resources as against its nominal capitalization of $22,500,000 were $11,275,000 cash and the remaining $6,250,000 par value of common stock. Out of these it paid for the mills it was formed to buy, and compensated the promoters who had secured options on them and who had brought about its own organization.
There are some things in the testimony which at least suggest that the bulk, if not all, of the $6,250,000 of common stock which did not go to the underwriting syndicate was received by the promoters. It appears probable that the actual price obtained by the former owners of the tangible property acquired by the Mt. Vernon did not exceed, if it equalled, the $11,275,000 cash paid in by the syndicate. None of these former owners were under any legal compulsion to sell. None prices accepted must have been at least all that they thought their properties were worth to them. Except in one instance, the record does not show how the sum paid by the Mt. Vernon for the mills which it bought compared with the cost of those mills to its vendors. That case may not be typical. It is suggestive. The mill in question for the six years preceding the organization of the Mt. Vernon never paid a dividend. One of 3 per cent. was paid by it a few days after the Mt. Vernon was incorporated and a few days or a few weeks before it was transferred to the latter company. It cost the Mt. Vernon $237.50 for each $100 share of its stock.
The period when the Mt. Vernon came into being was that immediately following the Spanish-American War. The reaction from the long period of depression which had followed the panic of 1893 was at its height. In those days many thought that a number of different business properties if combined in a single ownership would be worth several times as much as the aggregate of their individual values if they were to be separately operated. It might be, and often was, the case that the large company could, if it were so minded, duplicate all the old factories and equip them with the most modern appliances for a fraction of the price it paid their former owners. Such fact was regarded as immaterial. Fortune in finance, as in other things, sometimes favors the bold, provided that they know when to let go as well as when to take hold. By a coincidence which has been frequently noted in like cases, the statements issued by the Mt. Vernon during the early months of its existence were very encouraging. Interest on both the first and the income mortgage bonds were paid. Dividends on the capital stock were reported earned and were declared. With the coming in of the new century, or a few months earlier, things took on a different complexion. The Mt. Vernon's brief period of real or apparent prosperity ended. It was without sufficient working capital. Its credit was impaired, if not destroyed. The services of financial doctors had to be called in. The treatment prescribed was the formation of another company. This new concern was to buy three or four mills which had not gone into the first company. It was to pay cash for them. They were clear of important incumbrances. One of them had a large amount of quick assets. This second Richmond was known as the United States Cotton Duck Corporation. It will be spoken of as the 'United States.' It was a New Jersey creation. It was not to issue bonds. Its capital was to be in the form of common and preferred stock. It was hoped by purchase or exchange to acquire all the capital stock of the Mt. Vernon and to induce the holders of the income bonds of the latter to exchange them for preferred stock of the United States. If the new mills could be bought for less than their worth, something substantial would have been accomplished. If the price paid for them was equal to or in excess of their value, their acquirement was not in itself a gain, except, perhaps, as a bait to draw into the enterprise fresh capital which otherwise could not have been tempted in that direction.
The United States was organized. It bought the mills in question. It acquired an overwhelming majority of the stock of the Mt. Vernon, but the holders of the income bonds of the latter were not willing to exchange them for the preferred stock of the new company. For some four years the United States, as the owner of the new mills, in its own right and as the holder of the great majority of the stock of the Mt. Vernon, directed the business of both corporations. In the spring of 1905 things again came to such a pass as to lead those in actual control of the companies to believe that some new scheme to diminish the fixed charges and to increase the credit of the concerns was imperatively necessary. Again they sought relief in the formation of a new company, the third, the defendant, the Consolidated. It was hoped that it might do what the United States had failed to accomplish. The latter, it is true, had brought all the mills under what was in fact a single control; but in legal theory there were still two companies. It had not been able to get rid of the Mt. Vernon income bonds. In any event, and on any theory of the rights of the parties to this litigation, it may be said that down to the spring of 1905 experience had abundantly shown that, capitalized and managed as it was, the Mt. Vernon would not ordinarily earn enough to pay the full interest on its income bonds and to provide a sufficient reserve to offset depreciation in its buildings and machinery. The Consolidated proposed to take over all the common stock of both the Mt. Vernon and the United States and to give $500 in par value of its preferred and $133 1/3 of its common stock for each income bond of the Mt. Vernon. It had no difficulty in acquiring all the stock of the United States. The last-named company thereupon went out of existence. The Consolidated became the owner of more than 96 per cent. of the entire stock of the Mt. Vernon. The holders of the great majority of the income bonds of the latter agreed to exchange them for the stock of the Consolidated on the terms already stated.
At the time of the taking of the testimony in this case, the Consolidated held 5,758 out of the 6,000 income bonds, or about 96 per cent. of the total issue. A few of the owners of the income bonds would not transfer them to the Consolidated. The majority of such bonds not now belonging to the latter are held by the plaintiffs. Within a year or thereabouts after the Consolidated was formed, it made up its mind to concentrate the selling of the products of both companies in the hands of a single selling agency. It selected the old established concern of J. Spencer Turner & Co., some of whose members or officers had been among its own directors. It was arranged that a new corporation to take over the Turner business should be formed under the laws of New York. It was organized under the name of J. Spencer Turner Company. It will be referred to as the 'Turner.' It was capitalized at $600,000. All of its stock was acquired by the Consolidated. ...
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