Yoakam v. Providence Biltmore Hotel Co.

• Court: U.S. District Court — District of Rhode Island
• Writing for the Court: LETTS
• Citation: Yoakam v. Providence Biltmore Hotel Co., 34 F.2d 533 (D. R.I. 1929)
• Decision Date: 12 August 1929
• Docket Number: No. 312.,312.
• Parties: YOAKAM v. PROVIDENCE BILTMORE HOTEL CO. et al.

34 F.2d 533 (1929)

YOAKAM v. PROVIDENCE BILTMORE HOTEL CO. et al.

No. 312.

District Court, D. Rhode Island.

August 12, 1929.

COPYRIGHT MATERIAL OMITTED

Herbert M. Sherwood and Sidney Clifford, both of Providence, R. I., for complainant.

Edward P. Jastram, Elliot G. Parkhurst, John S. Dole, and Edwards & Angell, all of Providence, R. I., for respondents.

LETTS, District Judge.

This action was brought to restrain the respondent corporation from putting into effect a plan of corporate reorganization, embodied in several amendments to its charter, and from assuming and paying the expenses of the reorganization committee.

The case also involves a consideration of how far the Legislature of the state of Delaware may, under the reserved power in its General Corporation Law in effect when the respondent was incorporated, confer by subsequent enactment upon the majority of stockholders the power to adopt charter amendments which will be binding upon a dissenting minority. There are involved no rights of creditors, no problem for the raising of needed new capital.

The Providence Biltmore Hotel Company was organized under the General Corporation Law of the state of Delaware on June 10, 1920. Under the terms of the certificate of incorporation it is given broad powers to carry on any business incident or advantageous to owning and operating hotels in the state of Rhode Island. Actually, the corporation was created for the purpose of building, owning, and operating the Biltmore Hotel in the city of Providence.

In the course of the completion and equipment of the hotel the following indebtedness was created and securities issued:

  Mortgage secured debt ............ $1,900,000
                  First preferred stock 7 per cent
                    cumulative, par $100 ...........     24,981 shares
                  Second preferred stock 7 per cent
                    cumulative, par $100 ...........     10,000 shares
                  Common stock, no par .............     10,000 shares
                

Through the application of two separate sinking funds authorized in the certificate of incorporation, one of said funds being provided for the reduction of the mortgage indebtedness and the other for the retirement of outstanding first preferred stock, the capital structure of the respondent on December 31, 1928, and as of the time when the charter amendments here involved were adopted, was as follows:

  Mortgage secured indebtedness ........  $1,615,000
                  First preferred stock outstanding ....      22,475 shares
                  Second preferred stock outstanding ...      10,000 shares
                  Common stock outstanding .............      10,000 shares
                

The complainant is the owner of 270 shares of first preferred stock. Solely in respect to his rights as such holder is this bill brought.

The certificate of incorporation, in respect to the first preferred stock, embodied, prior to the adoption of the amendments here opposed, the following provisions:

First. The payment of a yearly dividend of 7 per cent., payable quarterly from the surplus or net profits of the corporation, which dividend is cumulative and payable before any dividend can be paid upon the second preferred or common stock.

Second. The first preferred stock may be redeemed upon 60 days' notice, in which event, or in event of liquidation, the holder thereof is entitled to receive $110 per share.

Third. The corporation shall, on or before the last day of each year, beginning with the last day of the year 1922, make fixed payments of $20,000 into a sinking fund, to be deposited in the Rhode Island Hospital Trust Company, to be used by it each year to purchase or redeem outstanding preferred stock. All stock so purchased or redeemed in the application of this fund is to be canceled and not again reissued.

Fourth. The first preferred stock is given the right to elect two directors, which right may not be altered without unanimous consent. This stock is given the further right of assuming the exclusive voting control of the corporation, in event the annual sinking fund be not set aside and/or in event the dividends thereon shall be in arrears 1½ years. This right to take over the management of the corporation continues so long as such failure or default exists. In the absence of such failure in either of said respects, the first preferred stock has no vote, other than for the election of two directors.

Fifth. Paragraph fifth of the certificate (excepting a mortgage secured indebtedness not in excess of $2,000,000) provides as follows:

"Fifth. (a) This corporation, except as herein provided, shall not without the consent in writing of the holders of record of seventy-five per cent. (75%) in amount of the outstanding first preferred stock or without the consent of seventy-five per cent. (75%) in amount given by vote at a meeting of the first preferred stockholders duly called and held for the purpose, (a) increase the amount of the first preferred stock authorized by this certificate, (b) nor mortgage, pledge or create any lien upon any real estate or interest therein or leases or leaseholds, fixtures, furnishings or equipment owned by it, (c) issue or guarantee any obligations having a longer maturity than one year or incur any obligations for money borrowed maturing later than one year from the incurring thereof, (d) change any voting powers of any class of capital stock, (e) change the purposes for which the corporation is formed or the nature of the business to be transacted by it, (f) create any issue of stock in any respect prior to or on a parity with the aforesaid issue of said first preferred stock (g) dispose by sale, lease, exchange, consolidation, merger or otherwise of all or the major part of its property or business: * * *"

The aforementioned provisions of respondent's charter remained unchanged until December 31, 1928. The certificate is silent in respect to conferring upon the first preferred stockholders pre-emptive rights to subscribe to new issues of stock.

The Providence Biltmore Hotel was completed and started operation in July of 1922. In no year has the net income of the corporation been sufficient to meet current dividend requirements upon the first preferred stock. It does appear, however, that between 1922, when the hotel was operated at a loss of more than $60,000, to the close of the year of 1928, substantial progress has been made. During the latter year the hotel was operated at a net profit of $85,721.11. During this period the corporation operated without financial embarrassment, other than to its stockholders, and has accumulated a substantial earned surplus. It has no present need of raising additional capital. As of December 31, 1928, there was cash on hand amounting to $417,639.94 and accounts payable in the sum of $6,210.25. The real estate and personal property appertaining to the hotel have been maintained, as well as adequate depreciations written off. All requirements in respect to the sinking fund for the reduction of the mortgage indebtedness, as well as that for the retirement of first preferred stock, have been punctually met.

During this period there have, however, accumulated unpaid dividends upon the first preferred stock of $42 per share, amounting to approximately $943,950. There have also accumulated dividends upon the second preferred stock amounting to $45.50 per share, aggregating $455,000.

The Providence Chamber of Commerce originally sponsored in part the organization of the corporation. It also assisted in the sale of its first preferred stock, and otherwise aided in raising the necessary capital to build and equip the hotel. Presumably because of this interest in the affairs of the corporation, and because of the nonpayment of dividends upon the stock which had been sold, the president of the Chamber in 1927 appointed a committee, consisting of holders of first preferred stock, to consider the advisability of recommending a reorganization of the corporation's capital structure. The committee, through personal ownership by its members and the ownership by corporations which they individually represented, owned 1,629 shares, or approximately 5 per cent., of the total first preferred stock outstanding. The first preferred stock is widely distributed, there being some 1,500 holders. Approximately 26 per cent. of the total is, however held by Messrs. John McE. Bowman and Lou C. Wallick, president and vice president, respectively, of the corporation. They also own all the outstanding second preferred stock and more than 80 per cent. of all outstanding common stock.

Point was made in the complainant's argument and brief of the advantages to Messrs. Bowman and Wallick from the adoption of the plan of reorganization, by virtue of their predominating ownership of the junior securities. It is agreed, however, that they did not originate the plan. There is no basis for finding actual or constructive fraud in this controversy; in fact, the high standing in the community of each individual member of the reorganization committee is sufficient assurance that the proposed plan is free from any intentional unfairness. The case involves only an analysis and definition of legal rights.

Under date of March 2, 1928, the committee submitted a report designated as "Plan and Agreement of Recapitalization of Providence Biltmore Hotel Company." The plan provided for the deposit of certificates of first preferred stock with the Rhode Island Hospital Trust Company as depositary, to be voted by the committee for the approval or rejection of the plan.

In November, 1928, the proposed plan of reorganization, with some minor alterations, was approved by the directors. These directors had been elected by the holders of common stock, as the holders of the first preferred had never exercised their right to take over the management of the corporation.

Thereafter, on December 27, 1928, at a meeting of the stockholders, approximately 82 per cent. of the outstanding first preferred stock was voted by the committee in approval of...