Bailey v. Railroad Company
84 U.S. 96

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U.S. Supreme Court

Bailey v. Railroad Company, 84 U.S. 17 Wall. 96 96 (1872)

Bailey v. Railroad Company

84 U.S. (17 Wall.) 96

Syllabus

A railroad company with stockholders and bondholders, being much embarrassed, put before the latter a plan by which they should surrender a part of their bonds and receive preferred stock therefor, the same to "be 7 percent stock and not cumulative, but to share with the common stock any surplus which may be earned over and above 7 percent upon both in anyone year." The bondholders having accepted the plan, a committee was appointed to "carry out the intention" of it. The committee reported an indenture in form to be signed by the bondholders and the company. The indenture contained this provision:

"And said corporation covenants and agrees that said preferred stock shall be entitled to a dividend of 7 percent from the net earnings of said road in each year, before any dividend shall be declared upon other, unpreferred shares of said corporation, and to an equal dividend with said other shares in the net earnings of said corporation, beyond SAID 7 percent, but shall at no time be entitled to an accumulated dividend,"

&c. The indenture was approved by the stockholders, who ordered it to be executed and ordered the directors "to procure such certificates in relation to the preferred stock, to be issued under said agreement, as may be necessary to carry the Same into effect." In accordance with this, the directors issued and gave to the former bondholders certificates which, premising that they were issued in adjustment of bonds, "and subject to the terms and conditions of the indenture," &c., and "with the rights set forth therein," declared that the

Page 84 U. S. 97

holder was entitled

"to receive all the net earnings of said company, which may be divided pursuant to said indenture, in each year, up to $7 per share, and to share in any surplus beyond $7 per share, which may be divided upon the common stock."

Held:

1st. That parol evidence was inadmissible to show how all the parties in interest understood the transaction, from its commencement to its consummation.

2d. That after the preferred stockholders received 7 percent, the common stockholders were entitled to an equal sum, percent, before the preferred ones got more.

The Hannibal & St. Joseph Railroad, in Missouri, with an income of but $450,000 and having a capital stock of $3,000,000, a debt of $8,000,000 of 7 percent bonds, and an arrear in interest of $4,000,000 -- both bonds and interest -- secured by mortgage on all the property of the company, found itself, A.D. 1862, in consequence of the then universal depression of values brought about by the rebellion, in such embarrassments that it could neither pay dividends on its stock nor interest on its debt, and as the State of Missouri had a lien of $3,000,000 upon it, which had precedence of every other claim, it became obvious that some vigorous measures of reorganization were necessary if anything was to be saved for either bond creditors or stockholders.

In this state of things, on the 15th of October, 1862, the company issued to the several holders of its bonds a circular entitled, "A plan for extricating it from its present difficulties, and improving its securities." In this plan, the company proposed to these several bondholders that they should exchange their bonds in part for other bonds, having a longer time to run, and in part for preferred stock,

"the preferred stock to be 7 percent, and not cumulative, but to share with the common stock any surplus which may be earned over and above 7 percent, UPON BOTH, in anyone year."

Prior to November 24, 1862, all the bondholders had come into this plan, their assent being signified by an agreement in these words annexed to the plan itself:

"We, the subscribers, owners of bonds issued by the Hannibal

Page 84 U. S. 98

& St. Joseph Railroad Company, of the kinds and amounts set opposite our names, respectively, hereby agree to surrender the same and receive in exchange therefor new bonds and preferred stock, in accordance with the provisions of the plan for extricating the company from its present difficulties and improving its securities, dated 15th October, 1862, and hereunto annexed."

On the same 24th of November, 1862, the board of directors of the road

"Voted that Messrs. Bartlett, Thayer, and Hunnewell be, and they are hereby appointed a committee with power to carry out the intention of the circular of October 15, 1862, entitled 'A plan for extricating it from its present difficulties and improving its securities,' and that they are authorized to make such expenditures therefor as to them may seem discreet."

This committee, in discharge of the duties of their appointment, reported an "indenture" to be executed by the company on the one hand, and the bondholders or the trustees of the mortgage on the other, which, after referring to the embarrassments of the company, went on to give effect to the plan, though no reference was anywhere made in the instrument to this agreement itself. The indenture contained this clause:

"And said corporation covenants and agrees that said preferred stock shall be entitled to a dividend of 7 percent from the net earnings of said road in each year, whenever a dividend of said net earnings shall be made, before any dividend shall be declared upon other unpreferred shares of said corporation, and to an equal dividend with said other shares in the net earnings of said corporation beyond SAID 7 percent, but in no case to be entitled to an accumulated dividend (in case a dividend shall fail to be made in any one or more years, or, if made, be insufficient to pay said 7 percent) in any subsequent division of said net earnings, but shall be entitled only in that event to SAID 7 percent, and to share in said surplus earnings as aforesaid."

On the 1st April, 1863, this form of indenture, being laid before the board of directors, was by it referred to a stockholders'

Page 84 U. S. 99

meeting to be held on the 30th May, 1863. At this meeting, the board of directors were

"Instructed to procure and adopt, on behalf of the corporation, such certificates in relation to the preferred stock, to be issued under said agreement, as may be necessary to carry the same into effect, and cause the same to be executed in behalf of this corporation in such manner as they may think best."

Under this authority, the indenture was accordingly executed by Mr. W. H. Swift and others, trustees for the bondholders, on the one part, and the company on the other, and the directors, on the 26th June, 1863, prepared and adopted a form of certificate thus: [Footnote 1]

"NUMBER] STATE OF MISSOURI [SHARES"

"Hannibal & St. Joseph Railroad Company"

"PREFERRED STOCK] SHARES $100 EACH [SEVEN PERCENT"

"Issued in adjustment of the bonds of said company, . . . and subject to the terms and conditions of an indenture between said corporation and W. H. Swift and others, trustees, dated April 1st, 1863, and with the rights set forth therein, and may be transferred upon the books of the company and new certificates issued, and may be used, with the bonds of said company bearing date April 1, 1863, in the purchase of its lands, as provided in said indenture."

"The Hannibal & St. Joseph Railroad Company hereby certifies that, in consideration of the surrender and placing in trust of bonds and coupons in pursuance of said indenture, __________ is entitled to ___ shares of the preferred stock of said corporation, and to receive all the net earnings of said company which may be divided pursuant to said indenture in each year, up to $7 per share, and to share in any surplus beyond $7 per share which may be divided upon the common stock."

"WITNESS the seal of the corporation and the signatures of the transfer agent and of one of the directors, at Boston, Mass., the ___ day of _______, A.D. 186_."

"__________________________"

"Transfer Agent"

Certificates were made out accordingly in this form, and

Page 84 U. S. 100

given to the bondholders, who received them without any expressed exception to their tenor.

In January, 1870, the company had so far retrieved its disasters as to declare a dividend of 7 percent on the preferred stock. Having yet a surplus, it made a dividend of 3 1/2 percent of it to the common or unpreferred stock, to the exclusion of the preferred stock, and was about to make another dividend of 3 1/2 percent in the same way.

Hereupon one Bailey, owner of several shares of the preferred stock, filed a bill, annexing the indenture and form of certificate, but not the plan, as exhibits to enjoin this further dividend on the unpreferred stock and to have it appropriated to the preferred stock.

The defendants answered the bill, annexing the plan and form of certificate, but not the indenture, as exhibits and contending that on a true construction of the documents in the case no such appropriation ought to be made, and on the hearing they introduced, against the objection of the plaintiff, the evidence of persons who had prepared the indenture that it was drawn with the purpose of giving effect to the plan and that from the commencement of the transaction to its conclusion parties concerned understood the transaction as they, the defendants, alleged it when rightly construed to be.

The court dismissed the bill and the complainant appealed.

Page 84 U. S. 102

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