James F. Powers Foundry Co. v. Miller

Sloan, J., delivered tbe opinion of tbe Court. , There are two appéals in this record, tbe first taken by tbe corporate defendant from a decree appointing receivers for it, the second taken by tbe plaintiffs from so much of the decree as dismissed their bill as against William Sterling Evans and Standley Evans, tbe appellees in Ho>. 36. On March 31st, 1933, tbe plaintiffs, Thomas B. Miller and William J. Fenton, filed a bill of complaint on behalf of themselves and such other holders of preferred stock of tbe James F. Powers Foundry Company of Cecil County as might join with them, praying tbe appointment of a receiver and a decree against William Sterling Evans and Standley Evans for such sums as they bad received as dividends on tbe common stock of tbe corporation in excess of tbe rate of dividends paid on tbe preferred stock. Four others later were made parties plaintiff. The James F. Powers Foundry Company, a corporation, 'owns and for many years operated an iron foundry at Elkton, in Cecil County, which for lack bf business bad suspended operations in 1931.

It bad a capital stock consisting of 419 shares of tbe par value of $100 each, of which 404 shares were preferred stock and 15 shares were common stock. William Sterling Evans and Standley Evans owned all of tbe common stock. Tbe plaintiffs owned or held 180 shares of the preferred stock, and William Sterling Evans and Standley Evans and their relatives 213 shares. All of tbe shares, common and preferred, have equal voting privileges.

Dividends at six per cent, were paid on tbe preferred stock every year from its issue in 1909 to July 1st, 1929, and none since. ⁵⁹³ From 1910 to 1925, both inclusive, twelve dividends, one of live per cent., six for six per cent, and five for five per cent., were paid on the common stock. In five of those years, no dividends were declared. On October 26th, 1926, a dividend of 430 per cent, was paid, and on October 17th, 1927, and again on October 22nd, 1928, a dividend of 150 per cent, was paid on the common stock, and none since October, 1928. It appears from the company’s statement for the year 1926, the year in which it is charged that William Sterling Evans and Standley Evans acquired control of the corporation, that it had a surplus of $7,936 with the depreciated value of the building carried on the hooks at $16,539.46.

At that time its financial condition was good. It had no bills payable, had $5,600 of government bonds, $11,500 cash, goods then inventoried at $5,000, and in January, 1927, this was augmented by $10,000, the proceeds of an insurance policy on the life of James F. Powers, who founded the corporation, which cost the company for premiums $3,753.30. According to the agreed statement in the record: “When the Evanses gained control of the Foundry Company in 1926, said company was losing money. The new management increased the business temporarily, but it later fell off.

For the year ending September 30, 1927, the operating account showed a loss. For the year 1928 the operating account showed a profit of $1,328.53 before payment of $2,424.00 in dividends on the preferred stock and $2,510 on the common stock. The operating loss for 1929 was $1,873.67 and for 1930, $1,226.73. In 1931 operation was at a loss.” During the yearn 1926 to 1929, both inclusive, dividends at six per cent, per annum, amounting to $8,484, were, paid on the preferred stock, and $10,950 on the fifteen shares of common stock, or a total in the four years of $18,434, or about $12,000 loss than the amount of cash or its equivalent on hand by the end of January, 1927.

The company has not operated the foundry since 1931 and its financial condition is anything hut strong. Its statement as of September 30th, 1932, shows assets of $33,290.12, and ⁵⁹⁴ liabilities $45,417.59, including $41,900' capital stock, and bills payable $3,517.59. Of tbe bills payable, $1,249.48 was due the Messrs. Evans on their salary accounts and substantially all of the balance for taxes.

The item of real estate, exclusive of equipment, is carried in the 1932 statement at $25,000, and consists of tire foundry property and a warehouse, not needed or used in the business, bought prior to 1926 and rented at $50 per month. Three witnesses testified to the value of the real estate. William Stephens, a builder, said the foundry building and ground were worth $35,000, and that $400 would put it in good repair. His estimate was based largely on the cost of reproduction, rather than on the market value.

He valued the warehouse property at $3,500. Manley Drennen, who- qualified as a real estate expert, gave the foundry building and lot a value of $20,000 and the warehouse $5,000. Charles P. Bartley, who- also qualified, valued the foundry and lot at $25,000 and warehouse property at $4,000. All said there was no present, market for the foundry and none of them included the equipment.

Messrs. Drennen and Bartley said there was a market for the warehouse property at their estimates of its value. According to- these witnesses, the value put on the real estate in the statement of September, 1932, was not excessive'. What that statement does show is an impairment of the capital stock, but it does not show insolvency, though that might be the result if the property were now thrown on the market and disposed of at public auction; there being nothing less valuable than an idle factory building, no matter what it cost.

The evidence is that the building has been kept in a fair state of repair, and,- if conditions warrant, the foundry business can be resumed on short notiee-, and the company assume its corporate functions, which cannot be done if the plaintiffs have their way. It is also charged, as a contributing factor toward the company’s present condition, that William Sterling Evans and Standley Evans have been receiving excessively .high salaries for services insufficiently or inefficiently rendered. ⁵⁹⁵ The joint salaries reached their maximum amount at $15 a week from July 28th, 1929, to May 13, 1931, reduced to $55 for four and a half months, and $50 a week from October 2nd, 1931, to September 30th, 1932, since which time no salaries have been charged and none are “expected”. Of a balance of $2,550, $150 has been paid, and a worthless note held by the company for $1,135.44, accepted on account, leaving the balance heretofore noted. This bill is filed, not by creditors demanding payment of their accounts, but by forty-three per cent, of the preferred stockholders, and then nearly five years after the commission of the last of the offenses complained of. “The acquiescence or consent of a shareholder for a long period of years in any given state of facts or conduct on the part of the corporate authorities, which he afterwards seeks to make the foundation for the appointment of a receiver, will generally prove a bar to the relief sought.” High on Receivers (4th Ed.), sec. 295.

If this is a controversy between stockholders, as it now appears to bo, a majority of whom are in favor of holding the property for more- favorable business conditions, the others demanding that the property be sold for what it may bring and the corporation dissolved, it means the wrecking of a business that has been and may again be successful. If the corporation can take care of the taxes-, which, seem to be the only claims which might become pressing, then the- property of the company can be preserved at much less co-st than by a destructive receivership. “Mere internal dissensions among stockholders, or mere differences or disputes as to- corporate management, so long as the officers or stockholders do- no- act that is fraudulent, illegal, or ultra vires, will not warrant the intervention o-f a court of chancery, because, in the absence of fraud, illegality, or conduct that is ultra vires, the will of the majority is entitled to control the policy and the business of the body corporate.” Du Puy v. Transportation & Terminal Co., 82 Md. 408, 426 , 33 A. 889, 890 ; Callaway v. Powhatan Improvement Co., 95 Md. 177, 185 , 52 A. 916 ; Howeth v. Colbourne Bros. Co., 115 Md. 107, ⁵⁹⁶ 117, 80 A. 916 ; 1 Clark on Receivers, sec. 223. “So long as the majority, acting in good faith, are in favor of going on, the minority shareholders are without remedy, although bankruptcy may be the probable consequence of continuing.” France on Corporations, sec. 163. The company owes taxes for three years amounting to about $2,000, but there is no evidence of its inability to pay them.

On the contrary, there is evidence that it can. There is a provision in the by-laws for the borrowing of money up to $3,000 “to meet the exigencies of the business” of the corporation; but in no event shall any sum in excess of this amount be borrowed “without previous authority from the stockholders.” It has a building not used in the operations of the company, upon which, according to the evidence, this amount could be easily raised. Although it has been held that inability to- meet its debts in the ordinary course of business is evidence of insolvency such as to justify a receivership, by the Acts of 1933, chapter 531, sec. 1, the circuit courts of the state “shall not appoint a receiver or receivers only because of the inability of a debtor to pay his or its debts as they become due in ordinary course of business; or because of an apparent excess'of liabilities over assets unless, in determining such excess, said assets shall be valued at their fair market value;” but “notwithstanding any allegation or proof of insolvency, the appointment of a receiver shall remain in all cases within- the sound judicial discretion of the court.” In view of the apparent present ability of the foundry company to provide for its- outstanding obligations, it seems unnecessary to- invoke this statute. The- principal grievance of the plaintiffs is the payment of the three" dividends on the fifteen shares of common stock in the- years 1926, 1927, and 1928, and they contend that the two common stockholders should be required to pay to the receivers- “for the benefit of the creditors and preferred stockholders all excessive dividends by them received”, and “all salaries in excess of fair compensation.” This contention . ⁵⁹⁷ was erroneously decided, favorably to tbe plaintiffs, on their demurrer to the fourth paragraph of the answer, in which the defendants allegations expressly submitted the question of the preferred stockholders’ right to have their dividends equalized with those paid to the common stockholders.

The court declined to express an opinion as to the liability of the Messrs. Evans., and dismissed the bill as to them without prejudice. We think, however, that the question of their liability for any excess of dividends over the rate allowed the preferred stockholders has been decided by the ruling on the demurrer to the fourth paragraph of the answer, and an opinion expressed thereon by the lower court, and, as bill and answer both submit the question, we shall here decide it, and as this is the principal ground alleged for the appointment of the receivers, it cannot be ignored. If, there could have been no. declaration of common stock dividends in excess of such amount as might be distributed to the preferred stock, then the only question here involved would be one of procedure, and if the excessive common stock dividends could be recovered without a receivership it should be so done.

Howeth v. Colbourne Bros. Co., 115 Md. 107, 115 , 80 A. 916 . If, on the other hand, the preferred stock was not entitled to share with the common in dividends on the latter in excess of six per cent., there would be nothing illegal about the dividends if the corporation was solvent and the capital not impaired. Code, art. 23, sec. 87. “Preferred,” as applied to stock, means preference or priority over common stock in the payment of dividends out of net profits or earnings.

Ever since the' Acts of 1908, ch. 240, sec. 34 (Code, art. 23, sec. 38), the law in this state has been that it shall have “such preferences, voting powers, restrictions and qualifications thereof not inconsistent with law as shall be expressed iti its charter." The preferred stock of the foundry compauy was issued by the authority of an amendment to its charter made February 18th, 1909, and approved by the judges of the Circuit Court for Cecil County, whereby it was authorized to. issue 650 shares of preferred ⁵⁹⁸ stock, all of the preferred stock outstanding being issued out of the stock so authorized, it being provided by the charter as so amended that: “The holders thereof are to receive, and the said corporation be bound to pay an annual dividend of