Kraft v. Rochambeau Holding Co.

Henderson, J., delivered the opinion of the Court. By bill of complaint filed April 1, 1955, the appellants sought to require the appellee, a Maryland corporation, to redeem its entire issue of perferred stock held by the appellants. .After a demurrer to the bill was overruled, the appellee filed an answer to which the appellants demurred. The case was submitted upon bill and answer and demurrer to the answer, and after argument the demurrer was overruled and the bill dismissed. The appellee was incorporated on May 20, 1952, primarily to acquire the Rochambeau Apartments, at Charles and Franklin Streets, Baltimore, from the Rochambeau Company, Inc. This apartment property had been operated by the seller, which by 1951 was in serious financial difficulties.

The property was subject to three large mortgages, all in default, State and City taxes for 1950 and 1951 were unpaid, and there were substantial unsecured debts and claims. Negotiations eventuated in an agreement dated August 23, 1951, for a sale at a price of $400,000.00, to a corporation “to be formed,” and a supplemental agreement of the same date whereby the seller and others agreed to subscribe to $50,000.00 of appellee’s nonvoting, redeemable preferred stock, which was to “become due and payable” at the expiration of five years from the settlement date. The sale was consummated as of May 20, 1952. A $250,000.00 purchase money mortgage, repayable with interest in equal installments over fifteen years, was procured for appellee by the seller from American National Building and Loan Association, as provided in the agreement.

Appellee contributed $91,200.00 obtained by sales of its common stock for cash at par. This money, after down payments of $96,500.00, was applied in the amount of $243,500.00 to the three defaulted mortgages, State and City taxes for 1950, 1951 and 1952, a lien of $78.56 held by the Collector of Internal Revenue, and other items, leaving a balance of $56,141.19 due the seller. Against this, the $50,000.00 preferred stock sub ³²⁸ scription was credited, and the shares were issued by the direction of the seller and others to the appellant, Anna M. Kraft, 272 shares, William D. Lilly and wife, 170 shares, and Mrs. Marie Codd Cook (since deceased), 58 shares, in settlement of their respective claims against the seller as creditors. Presumably the balance of $6,141.19 was paid in cash.

The seller was later dissolved. In practical effect the transaction was a complete refinancing of the property, with $91,200.00 of new money supplied by the common stockholders of the appellee. On taking over the property, appellee found that extensive repairs and replacements were necessary, including replacement of the elevator, at a cost of $15,000.00, which in August, 1952, was condemned by the Building Engineer of Baltimore as unsafe because of structural defects. Earnings from the property have never been more than enough to cover operating expenses, taxes, interest and current obligations, and appellee has been forced at times to borrow money to meet current expenses.

The non-voting preferred stock, issued and outstanding in the amount of $50,000.00, contained the following provision quoted from the Articles of Incorporation: “The Corporation shall redeem 10% of the original preferred stock issue, at $100.00 per share for each share thereof, at any time during the first year of its corporate existence; and it shall further redeem an additional 10% of said original preferred stock issue at $100.00 per share at any time during the second year of its corporate existence; and it shall further redeem the balance of 80% of the original preferred stock issue during the third year of its corporate existence at $100.00 per share. The redemption price shall include all dividends thereon accrued.” A dividend, of 3% for the six months period ending November 20, 1952, was declared and paid in 1953. This was the only payment of dividends and none of the preferred stock has been redeemed. The appellants contend that there is an obvious default in the obligation to redeem, which a court of. equity should enforce.

The appellee contends, and the Chancellor agreed, that the redemption clause is invalid and un ³²⁹ enforceable under the circumstances of this case. It was alleged in the answer that at no time has the appellee “had cash or other available assets for redemption of any of its preferred stock without rendering it unable to meet its debts as they mature in the usual course of business.” Code (1951), Art. 23, sec. 14 (a), as enacted by Acts of 1951, ch. 135, provides that “Every corporation of this State by its charter may provide: * * * (5) That one or more classes of stock, as specified, may be redeemed at the option of the corporation or of the holders of such stock and the terms and conditions of redemption. * * * (9) Other preferences, rights, restrictions and qualifications not inconsistent with law.” Sec. 28 provides: “(a) Any corporation of this State may, from time to time, subject to the limitations contained in this section: (1) Redeem shares of its stock subject to redemption * * * in accordance with the applicable charter provisions; * * * (b) (3) (as amended by Acts of 1953, ch. 405, 1956 Supp., p. 148). Except in case of acquisitions pursuant to the preceding paragraphs (a) (3), (b) (1) and (b) (2) of this section, no corporation may acquire by purchase or redemption shares of its own stock except out of surplus, (c) No corporation of this State may redeem or acquire for value any shares of its own stock when it is insolvent or when the effect of such redemption or acquisition would be to render