KICKAI,S
7;.
NElWt:ORK, L.'El&
w.
R. 00.
junction is not now allowed, its business w,-ill be like water spilled on t,he ,Kerr, Inj. , secured by the operation Qf.section 36'of the 'oorporation act, a9 now construed,it;l the ,right td'take ,reasonable ,,rolls; re,ttsonable can agree about determined, ,by th(l: But, for the. purpose of the provisiona.l the,cburt,willasmnIe that ·the cOmpensation heretofore paid by the plaintiff t6;th'e defend'ants for expresll facilities, is ,l;I.Jld will to Ju.mish .qurmg tbependencjY Qf, the suit, olJuntil .. furtberorder of the court, upon their lines of transportation, and; the extenSidtts of them, at the same r a t e s . ' " Let an injunction issue commanding an4 restrainip({ in each case, as prayed for in the Dond, wi,tp in the sum ot. $20,000, .to pay .a as heretofore, an aimlages 'which J deferidant may stlstaiilhy .reason of th,is,' ·Jtin'ction, be to 'a reference or otherWIse, as court may duecl. v.J! :ley, 443.,r!' .\ , , ii, ',;, !
n,'I
NtoXALS 'and others ".NBWYoRX;:L. E., & "'"
The dividend onpreferred 'stock may judiciously be conditioned on the declaration Qf"profits by the board of directors of a corporation ; and when such intention appears from the juxtaposition of terms, and an. examination of the agreement of the it will be sustained. , I . 2. SAME-NATURE OF PROFITS.
That a board of directors has dete.rmined to apply all profits made by a road present character. ,In this respect to its improvement does not take away net earnings and profits are alike; and, largely at least, the improvement would be chargeablll to capital. 3. SAME-RIGHT' TO 'COMPEL DIVISION. The rights ,Of preferred stockholders are not those of creditors; but still tpey
may, under the plan of organization of a corporation, be made so far superior to those of common stockholders as to enable tbem to compei a division 01 profit.&, which the board of directors had determined to accumulate. -Reversed. See 7 Sup. Ct. Rep. 2O'J·.
576
FEDERAL REPORTER.
4. SAllE-CASE ST,\TED. Owners of preferred stock entiUM to an annual, non-accumulating dividend, dependent on"ll, declaration of profits by a board of directors, which had reported more than sufficient net profits, but had determined to use all for the improvement of the road, can compel the payment of dividends therefrom. If they do not get their dividends each year, they will never get them; the expectedihcrease in net earnings could not benefit them as long as the road could pay these non-accumulating dividends. Such property could be appropriated for the general good of all stockholders no more than any other property of these stockholders. 5. SAME-AsBlGNMENT.
to share in profits are mere Increments 6£, aud pass by assignment OI, tall stock; though this might not be true of fullY7deciared dividends.
In Equity. , G. E.Trac!J, for orators. Wm. D. Shipman, for defenllants. WHEELER 1 J. The defendant ,oqrporation appears to have been organized under the laws of the state of New York by the preferred and stock and security-holders of the Erie Railway Company. pursuant to' ,l:J, plan of, reorganization assented to by them, whioh became a part of its charter or of organization under the law. Among other stooK andsecurities'ofthe new oompany provided for in the plan to be issued and delivered. there was to be, as specified in paragraph 13,"Preferred stock .0 an amouDC equal to the preferred stock of the Erie Rail,way, Compf}ny now outstanding, to-wit,85,369 shares. of the nominal amount of $100 each, entitling the holders to non-cumulative dividends at the rate of 6 per cent. per annUln, in preference to the payment, of allY dividend on the common stock, but' dependent on the profits of each particular .year, as declared by the board of directors."
The board of directors, in "their report of the operations of the company for the fiscal year ending September 30,1880," state tbatThe gross earnings and operating expenses of the road, including all branches and leased lines, have been as follows: EARNINGS.
" " .. ..
passengers, mails, express, miscelhineous,
$11,199,498 37 3,191,616 96 3,682,951 18 163,771 38 328,867 15 116,40Fl 82 - - - - $18,693,10886
NICKALS
NEW YORK. L. E. & W. B. CO.
577 $18,693,108 86
Am{)unt brought forward, OPERATING EXPENSES.
For condueting transportation, .. motive power, .. maintenance of cars, " maintenance of way, .. general expenses, Net earnings from traffic, To which add earnings from other sources,
$5,109,979 90 3,291,141 43 861,135 29 1,938,71541 442,953 32
$11,643,925 35, $7,049,183 51 783,95665 $7,833,140 16 6,042,519 45
Total From which deduct interest on fundel! debt, rentals of leased lines l and other charges,
Leaving a net profit from the operations of the year of $1,790,620 71
A dividend of 6 per cent upon the amount of preferred stock standing would amount .to $489,403.50. This whole amount of net profit, togethenvith $737,119.34 received during the year from assessments on stock, was applied by the direotors "to the building of double track, erection of buildings, providing additional equipment, acquiring and constructing docks at Buffalo and Jersey City, and to the addition of other improvements to the road and p·roperty." And they "Resolved, that in the present condition of the property of the New York, Lake Erie & Western Railroad Company, its directors do not deem it wise or expedient to declare a dividend upon ferredstock." The orators are holders of preferred stock transferred to them since the close of the fiscal year 1880, and since the report of the directors of that year, and by their bill of complaint seek, among other things, that the net profits of that fiscal year be ascertained, and that 'the dividends due to the holders of preferred stock in respect thereof be directed to be paid. There is no question made, nor any apparent room for any, but that all the rights which the orators have are the rights of stockholders as such, and not as of creditors, nor but that the holders of the preferred stock have rights under the law of the organization superior to those of the common stockholders, according to the plan of the organization. The principal question is as to the true con· struction and legal effect of this plan. Counsel, at the outset, differ as to what is the import of the language of this thirteenth paragraph. The counsel for the orators insists that the profits a·re what are to be v.l\no.8-37
.578
FlllDERAL REPORTER.
deoltU:sd, by the directors, and that a d,eclarationof profits by them entitles the holders of the preferre4stock to dividends from the profits so declared; while the counsel for the defendants insists that the dividends themselves .are to be deolared, .and that until declared these stockholders cannot veentitled to any. The sentence "as'dildared by-the bOard oldirectors" is directly ponllected: 1Vith theorie embracing profits, and not with the one including-dividends, and can only be construed as applying to the latterby outside force. It is argued that the expression is applicable to dividends, and not to profits, and that it D1ust be understood as intended to apply to that to which it is appropriate. It is, however, not wholly inapplicable. The affairs of the corporation were to be in thQ hands of the directors, and might well be supposed that they would know and make known whether there were profits arnot; and if any resurt was to be made upon the, existen:ce of profits, the, factof ,their ex,istencemight well be refal!'red to the. pf the di,r(ilctors. This pIau is an entire inthe s.ame langultge throughout, and the obvious meaning ,of similar expreEisiqns .jp. other parts might throw some ligh,tupon t4e,qleaningof ,this.,'rn 'paragraph 19 there are provisr jons{or the payment of non-eJ:up:lUll1tive interest at "the rate of pel' cent. per at lesser rate for any fiscal year as the for that year, as, declared pythe boa.rd net earnings of the of directors, and applicable for that purpose, ehall be sufficient to satisfy." Here it is p1aip that the net earnings, and not the interest, fl,re to .be declared by the directors, and that the payment of the interest was to be dependent upon the decla.rationof the net earnings. There is nothing more incongruous about the declaration of profits than of net earnings by a board of directors of a railroad company, and it is patural to infer that the payment of dividends to preferred stock· holders was intended to be made dependent, in one aspect, upon a declaration of profits by the directors, the same as a payment of interest to bondholders was upon a declaration of net earnings by the same board. The next question is whether the directors have so declared such profits for the fiscal year 1880 as to entitle the holders of preferred stock to dividends for that year. They have expressly stated a net profit, after deducting. from the earnings all expenses attending the making of the earnings, and of maintaining the property by which the earnings wOre made, and all fixed. charges for interest and rentals,
NlCKALS V: NEWtORK,
t. t:'&
W. R. QO.
579
several times larger than the whole amdurtt of this dividend. Tl,ley have, on the other hand, stated the improvements, and resolvedt.h:at they do not deem it wise or expedient to .declare. a. dividen4to preferred stockholders. . There iano pretense'bUt what the of the directors are all true, in fact, nor but that in what they have done they have acted in good faith.' . Here is no question of separatingone part ofthe businessfromthereat; as there was in St. John v. Erie Ry. 00. 10 Blatchf. 271, and 22 WalL 130; there is here a net profit over all expenses of all the operations by which profit was made. It is wanted for'judicious improvements of the property, looking to future profits;' This does not takeaway its character as a present profit. It would be a profit, whether it should be laid out upon the property to enhance its value, or left in the treasury of the company, or divided among the stockholders: This question ia somewhat like tha.t in Union Pacific R. 00. v. U. S. 99 U. S. 402. There the question was as to net earnings. In treatJ ing this subject, Mr. Justice BRADLEY said: ".As a general proposition, net earnings are the elCcess of the gross earn ings over the expenditures defrayed in producing them aside from and exclusive of the expenditure of capital laid out in constructing and equipping :the works themselves. 'fheoretically the expenses chargeable to earnings include the general expenses of keeping up the organization of the company, and all expenses incurred in operating the works and keeping them in good condi· tion and repair; while expenses chargeable to capital include those which are incurred in the original construction of the works, aIllI in the subsequent en:.. largement and impl'ovement thereof." w
There is a difference in some respects between net earnings and profits. but not in this aspect. What would be net earnings would be a profit, unless there should be some liability outside the earnings to be met before there could be any profit left. Within the definition of Mr. Justice BRADLEY the improvement sought to be set over against earnings would largely, at least, be chargeable to capital, and not left to reduce profit. And the decision of this qne'stion may properly be somewhat affected by the nature of the dividend to which it is sought to have the profits applied, as appears by some of the reasoning in that case. Stress was there laid upon the fact that the government would be merely put off in receiving, but not defeated as to, its share of the net earnings bya liberal allowance in their expenditure upon the property. Here these dividends are non-cumulative, and if the holders of this stock do not get these dividends in each particular year they never can have them. The improvement of the property by the expenditure of the money belonging to them goes to the bene-
"----
580
fit of the other owners, and not to them, so long as it would pay the dividends on. the preferred stock without the expenditure. This property for the year in question was able, as it W9,S, to pay the preferred dividends; the improvements were made for the pose of increasing the dividends"but they would not inorease these stockholders' dividends. When it comes to the question of using the profits which would go to one set of stockholders for the benefit of another set, a more rigid rule should be applied. The question bec0.llles more one of right, to be determined by the law, than one of policy, to be determined by the discreticlU of the directors. Here were profits in fact; stockholders had rights dependent upon this fact. These rights could not lawfully be passed by for the benefit of other interests, however intimately connected, any more than any other property of the preferred stockholders could be appropriated to the same purpose, on the ground that. such appropriation oUt would be for the best good of the whole. These rights are the rights of stockholders, and not of creditors; and it is said that stockholders are not entitled to receive dividends until they have been in some manner declared. This is, doubtless, in general true. It grows out of the contract by which stockholders'become such. Each stockholder in effect agrees to be bound by the corporate action within the scope of the corporate powers; but there may be other agreements limiting 'what shall be done in special cases. A corporation may doubtless accumulate its profits instead of dividing them, and a common stockholder would be bound oj" the determination to do so, however much he might prefer to have his share. of them divided out to him. But here was another agreement among the shareholders, made a part of the frame-work of the cOl'poration, that when there were annual profits shown by the official declaration of the directors, they should, t6 the extent of 6 per cent. on their stock, be divided among these stockholders. This agreement was warranted by the law of the state, and, as imbedded in the oharter, is as binding as any involved in the enterprise. It applies to this first accumulation of profits with the same force that the others do to the rest of the profits. It was not made with the corporation, but was made between the shareholders in prospect before there was a perfeoted oorporation; therefore the c()rporation oannot be sued for a breach of it; but it attaohes to and affeots the profits as they come to the hands of the oorporation. This amount of annual profits is received by it in trust for the preferred stockholders, the same as the general profits are for the body of the
PROEBSTEL V. HOGUE.
581
stockholders. No declaration of a dividend was necessary to-complete the equitable right of these stockholders to this amount. Board· man v. Lake Shore Mich. R. Co. 84 N. Y. 157; Richardson v. Vermont Mass. R. 00. 44 Vt. 613; Dent v. London Tramways 00. .L . R. 16 Ch. Div. 353. None of the eases cited for the defendants ap.. pear to be contrary to this. In most or all of them the profits applicable to the preferred stock or superior right did not exist in fact; and the right to the profits, if they should exist, was recognized. It is further suggested that if these profits were 8a situated that anyone became entitled to share in them on account of the preferred stock, that right would attach to the holders at that time, and would not pass to the orators by a mere transfer of tha stock afterwards. Fully-declared dividends might not so pass. But here was no declaration of a dividend upon this stock separating the share of the profits from the other assets belonging to the stock. The right to share in these profits remained aB a mere increment of the stock, and would pass a8 an incident to it. Boardml1n v. L. S. S. R. Co. 84 N. Y. 157. Upon the whole ease, the orators appear to be entitlel to a decree according to the prayer of the bill. Let there bea decree for the orators according to the prayer of the bill, with costs.
PROEBSTEL V. HOGUE
and others. March 9, 1883.)
'OiTcuit (Jom't, P. Oregon.
DOXATTON TO MARRIED PERSONS UNDER SECTION
5 OF THE DONATION ACT. Upon the death of a married donee, intestate, under sectiOn 5 of the donation act, (9 St. 497,) after compliance with the act. and before the issue of a patent, the share of the deceased in the donation descends to his or her heirs, under the local law of descents,-(Or. Laws, 547,) and is not affected by the prOVision in section 4 of said act, giving the share of a married donee, dying under like circumstances, to the survivor and children, or heirs of the deceased, in equal parts.
At Law. Action to recover possession of real property. Geo. II. Williams, for plaintiff. Joseph N. Dolph and Benton Killin, for defendants. DEADY, J. This action is brought to recover the possession of the N. t of the Wendell Proebstel donation, the same being situate in nomah county, and consisting of parts of sections 27 and 28 of town-
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