Heller, Hirsch & Co. v. National Marine Bank

McSherry, C. J., delivered the opinion of the Court. The contention in this case is between the holders of what is called preferred stock and creditors of an insolvent corporation. The stockholders of the Chesapeake Guano Company, a corporation formed under the general corporation laws of this State, voted some years ago to increase the company’s capital by the issue of sixty thousand dollars of preferred stock. Without pausing at this point to examine whether the method pursued was the proper one or not, it suffices for the present to say that the authorized shares were all taken.

Subsequently the company contracted the debts due to unsecured creditors and thereafter became insolvent, and its property and assets were placed in the hands of receivers. The funds now for distribution arose from sources that will be named hereafter. As the discussion requires, and the ultimate decision of the controversy involves, for ⁶⁰⁸ the first time, a judicial interpretation of the statutes under the provisions of which this stock was issued, the enactments, though somewhat lengthy, will be set forth in full. They are contained in Sec. 294, Art. 23, of the Code.

This section is made up of two Acts of Assembly passed at different periods. They are the Act of 1868, ch. 471, sec. 219, and the Act of 1880, ch. 474. In transcribing them below the terms of the later Act will be put in italics, so that they may be easily distinguished; and more especially, so that the radical changes they made in the substance of the thing with which the Legislature had dealt under the earlier, may be more readily perceived. The following are the words of the Code : “ Every corporation incorporated under the laws of this State, which has the power to issue bonds as evidences of indebtedness, and to secure the same by mortgage of the property of such corporation, or which has the power to obtain such money upon mortgage, may, whenever in the judgment of said corporation it is expedient to do so, in place of issuing such bonds and securing the same by a mortgage of the property of said corporation, or instead of obtaining money upon mortgage, issue a preferred stock for any amount for which said corporation maybe authorized to issue its bonds, or for any amount which the said corporation may be authorized to obtain upon mortgage of its property, and may dispose of the said stock by sale, on such terms as it’ may prescribe, or by permitting the same to be subscribed for, as in the judgment of said corporation may be deemed expedient; and eveiy corporation creating such preferred stock as aforesaid, may execute as agreement under seal, to be acknowledged as conveyances of la7id a7'e 7'equÍ7'ed to be acknowledged, and recoi'ded in the. office of the Cle7'k of the CÍ7'cuit Coui't for the county where the principal office of such corporation shall be sihiated, or in the office of the Clei'k of the Superior Court of Balti11107'e City, in case such office shall be sihiated in said city, guaranteeing to the purchasers of, or subscribers to, such preferred stock, a perpetual dividend of six per centum per ⁶⁰⁹ annum out of the profits of the said corporation, payable yearly or half-yearly, as said corporation shall determine, before any dividend is distributed to any of the stockholders of the said corporation, other than the holders of said preferred stock so created; and the holders thereof shall have all the incidents, rights, privileges and immunities, and liabilities, to which the capital stock of said corporation, or the holders thereof, may be entitled or subject; provided, however, that no corporation shall exercise any power under this section, unless the creation of such preferred stock shall be authorized by a general meeting of the stockholders of such corporation; and the said preferred stock shall be and constitute a lien on the franchises and property of such corporation, and have priority over any subsequently created mortgage, or other incumber anee,” The provision requiring an agreement to be executed and to be placed on record was strictly complied with.

The certificates were issued and the amount subscribed was fully paid. Thereafter the debts which it is claimed ought to be paid out of the fund now in Court for distribution, were contracted. The fund arose in this way: The improvements on the company’s property — that is, the buildings and machinery— together with the stock in trade, were insured by the corporation against loss by fire. After the receivers had been appointed these improvements and this stock, or some of it, were burned.

The receivers collected the insurance. This constitutes part of the fund. The rest is made up of book-accounts and rents collected by the receivers. No part of the property* real or personal, except, perhaps, stock in trade, appears to have been sold.

The holders of the preferred stock — or of what is called preferred stock — issued under the above quoted section of the Code, claim that they are, as holders of those shares and in virtue of the-terms of the statute, preferred creditors and entitled, in consequence, to be paid back out of these funds the amount paid in by them on their shares, whilst the persons who became creditors of the company after the recording of the ⁶¹⁰ agreement already alluded to, insist that they are entitled to be paid the debts due to them before any distribution is made' to the stockholders. Thus this feature of the controversy is sharply defined. If this stock is preferred stock, pure and simple, the contention of the creditors is right. The law is perfectly well settled that as between creditors and ordinary preferred stockholders, the latter, as owners of the property of an insolvent corporation, are, upon a distribution of its assets, •entitled to nothing until its creditors are first fully paid.

There is a palpable difference between the relation of a stockholder and a creditor to the corporate property. Stock, whether preferred or common, is capital; and generally speaking, a certificate of stock merely evidences the amount which the holder has contributed to or ventured in the enterprise. Such a certificate, representing nothing more than the extent of his ownership in the capital, cannot well be treated as indicating that he is, by virtue of it alone, also to the same extent a creditor who may compete with other creditors in the distribution of the fund arising from a conversion of the corporation’s assets into money. He cannot, if he is simply an ordinary preferred stockholder, in the nature of things, so far as third persons are concerned, be at one and the same time and by force of the same certificate, both part-owner of the property and creditor of the company for that portion of its capital which stands in his name.

His certificate, therefore, in such circumstances, merely measures the quantum of his ownership. As his chance of gain throws on the stockholder, as respects creditors, the entire risk of the loss of his contribution to the capital, it is a fixed characteristic of capital stock that no part of it can be withdrawn for the purpose of repaying the principal of the capital until the debts of the corporation are satisfied. Warren v. King, 108 U. S. 389 ; Cook on Stock, &c., sec. 271 ; Hamlin v. Toledo, St. L. & K. R. R. Co., 47 U. S. App. 422 ; S. C., 36 L. R. A. 826. Whether this characteristic may be modified by statute will be con ⁶¹¹ sidered later on.

To be strictly accurate, we ought to say there is a sense in which a shareholder is a creditor. In that sense every corporation includes its capital stock amongst its liabilities, but it is a liability which is postponed to every other liability. And as to the matured and unpaid guaranteed dividends due on preferred stock, the relation of creditor undoubtedly exists. B. & O. R. R. Co. v. State, 36 Md. 541 .

But, after all, is this particular stock, technically speaking, ordinary preferred stock, and subject consequently to the legal incidents and characteristics of that species of property ? If you call it preferred stock, and it is what you call it, then the law is perfectly clear that it has no priority over the contesting creditors. If you call it preferred stock, and it is not preferred stock, then, obviously, it is not governed by the principles applicable to preferred stock, but by those relating to the thing that it really is. The mere naming of it does not make it that which it is named, if, in fact, it is something else.

Its properties and qualities determine what it is. If the statute calls it what its properties and qualities show that it is not, surely it does not thereby become what it is misnamed, and cease to be what it essentially is. Calling stock preferred stock does not per se define the rights in such stock, but these depend on the statute or contract under which it was issued. Elkins v. Cam. & A. R. Co., 36 N. J. Eq. 233.

As said by the Supreme Court of Ohio : “ To call a thing a wrong name does not change its nature. A mortgage creditor, although denominated a preferred stockholder, is a mortgage creditor nevertheless; and interest is not changed into a dividend by calling it a dividend. Nothing is more common in the construction of statutes and contracts than for the Court to correct such self-evident misnomers by supplying the proper words. To use the language of the Court in Corcoran v. Powers, 6 Ohio St. 19 , ‘The question in such cases is, not what did the parties call it, but what do the facts and cir ⁶¹² cumstances require the Court to call it.’ ” Burt v. Rattle, 31 Ohio St. 116 .

Courts are not influenced by mere names. They look beyond these and give to the subject dealt with the character — the status — which its properties denote it possesses. The qualities and properties of a thing are its essentials — they define and mark what it is — the name is- purely accidental — it is no part of the thing named. If, then, the thing which the statute contemplates, possesses the characteristics and qualities of preferred stock— and possesses none other — it is preferred stock; but if, on the other hand, it possesses characteristics and qualities that are entirely foreign to preferred stock as strictly defined, and that are descriptive of something else, then the thing is obviously either not ordinary preferred stock, or not preferred stock at all, even though it be called preferred stock, and have in addition to its own qualities some of the characteristics that do pertain to preferred stock.

Precisely because preferred stock has no lien on the company’s property and cannot be repaid in advance of general creditors, it is necessarily true that a security which is, by express and emphatic legislative enactment, entitled to just such a lien and just such priority, is not preferred stock technically speaking, though called by that name and though having many features incident to preferred stock. The whole ingenious and exceedingly able argument for the appellants proceeded upon the assumption that this is ordinary preferred stock, because called preferred stock, and because it possesses the incidents of such stock (but it ignored the fact that it has a quality which preferred stock has not), and the conclusion thence deduced was, that being that kind of stock it has no preferential lien. Now, the converse is exactly true. If the statute plainly gives a lien and a preference, then this so-called preferred stock is not ordinary preferred stock at all, no matter what it is called and no matter what incidents it may have in common with preferred stock, and therefore, it has not that particular characteristic which, if it were ordinary preferred stock, would defer it to the ⁶¹³ claims of unsecured creditors.

Brushing aside the name, let us see what are the essential qualities of this statutory creation. The Act of 1868, ch. 471, sec. 219, authorized corporations to issue preferred stock. It was an alternative method of obtaining money. Any corporation which, under its charter, had authority to borrow money and issue bonds therefor, and secure the payment of the bonds by mortgage, might, instead of resorting to that method, issue preferred stock.

In issuing it the companies were empowered to execute an agreement guaranteeing to the purchasers of, or subscribers to, such preferred stock, a perpetual dividend of six per cent, out of the profits of the corporation before any dividend could be paid to the holders of the common stock. The holders of such preferred stock were given all the incidents, rights, privileges and immuninities, and made subject to all the liabilities to which the holders of common stock were entitled or subject. This was strictly and technically ordinary preferred stock. It had no priority over creditors or over subsequent mortgages or incumbrances, and it had no lien on the franchises or the property of the corporation.

It merely guaranteed a dividend of six per cent, out of the profits — that is the net profits — and if there were no profits there would be no dividend. Its priority was simply a priority over the usual rights and interest of another, but subordinate, class of stockholders. That is the kind of preferred stock authorized by the Act of 1868, as a mere glance at its provisions — quoted in the beginning of this opinion, omitting the lines in italics— will demonstrate. In the language of the Supreme Court Warren, v. King, supra, “ It would be difficult to say that these statutory provisions allowed any preference in shares of capital stock, except a preference amongst classes of shares, or any preference of any class over creditors. * * * * There is nothing in the certificate that clothes them with a single attribute of a creditor.” The stock authorized by the Act of 1868, was not only called preferred stock, but ⁶¹⁴ it had every incident of stock, and none that was not.

For twelve years the statute remained unchanged. Shares issued under it were, as we have said, essentially shares of capital with none of the qualities of an evidence of debt, and shareholders were simply owners of the capital, with none of the rights of creditors of the company. But in 1880 the statute was amended by the addition of the words in italics. By the provision requiring the agreement to be recorded no change was effected in the relation of the preferred to the common shareholder — the former was given no greater right over the latter than he had before the agreement was required to be recorded — and the relation of the preferred shareholder to the company’s subsequent creditors was not disturbed unless the last clause, givingJhe_shareholder a ..Ken _and declaring a preference in hisjavor, altered the nature of the. preferred stock and made it something that it had not been under the Act of 1868.

If the clause giving the shareholder a lién and a priority did not create a new species of preferred stock, or a security differing radically from ordinary preferred stock, it is difficult, if not impossible to assign any reason for the adoption of the Act of 1880. The clause specifically declaring that “the said preferred stock shall be and constitute a lien on the franchises and property of such corporation, and have priority over any subsequently created mortgage or other incumbrance,” essentially changed the whole nature of the thing antecedently described as preferred stock, and the statutory lien converted it into something wholly different. The statute says ‘ ‘ said preferred stock ’ ’ — not the guaranteed dividend thereon — shall be and constitute a lien on the property and franchises of the company. If you say the lien only extends to the dividend, then you say the stock shall not be a lien, though the Legislature said it should be.

Preferred stock under the Act of 1868 had no lien whatever ; this statutory preferred stock, under the Act of 1880 —“ The said preferred stock ” — has a lien on franchises and on property. Preferred stock under the Act of 1868 had ⁶¹⁵ no priority over creditors ; this statutory preferred stock under the Act of 1880 has priority over subsequent mortgages and incumbrances. The two are therefore intrinsically different, and the argument that gives to the latter no greater effect or wider range than the former possessed, simply because of the identity in the name applied to both, must totally ignore and in fact expunge the clause of the statute expressly creating the lien. If this statutory preferred stock has a lien, then it differs from ordinary preferred stock in that it has the lien.

If, because it is called preferred stock, it has no lien, though the statute says it shall have, then the name controls the substance, and the lien expressly given is simultaneously taken away by the name conferred. Either the name or the substance must yield and certainly the latter cannot be made subordinate to the former. Giving to the holder of Adiat the Act of 1880 designates preferred stock, a lien is not without precedent. It can be done and the ultimate question always is, has it been done?

That it can be done a few citations will show. In Elliott on Railroads, sec. 85, the general rule is thus stated : “Unless a preference in payment of capital invested has been specially contracted for (Re Bangor, &c. Co., L. R. 20, Eq. 59 ; Re Bridgewater Nav. Co., L. R. 39 Ch.