Weaver Power Co. v. Elk Mountain Mill Co.

BeoavN, J. The certificates set out in the record are substantially in the usual form for preferred shares of stock in a corporation, issued by authority of our statute, Rev., sec. 1159, which authorizes corporations to issue two or more kinds of stock of such classes, with such designations, preferences, and voting powers, or restrictions or qualifications thereof, as shall be presented by those holding two-thirds of the capital stock outstanding. At one time it was a matter of discussion as to whether a preferred stockholder had any rights as a creditor of the corporation or could properly be classified as such. But the law is now clearly settled and beyond dispute that a preferred stockholder is not a creditor, and must be confined to his rights as a stockholder. Cook on Corp. (6 Ed.), sec. 217, where the cases are fully collected in the notes. Field v. Lamson, 27 L. R. A., 136, and notes; Warren v. King, 108 U. S., 389; 2 Thompson on Corp., secs. 2278 et seq.; 1 Machen on Modern Corp., secs. 540 to 548. The difference between a creditor and a preferred stockholder is well stated by Judge Barton, now of the United States Supreme Court, in Hamlin v. R. R., 78 Fed., 664. “There is a wide difference,” says the learned judge, “between the relation of a creditor and a stockholder to the corporate property. One cannot well be a creditor, as respects creditors proper, and a stockholder by virtue of a certificate evidencing his contribu *78 tion to the capital of the corporation. Stock is capital, and a stock certificate but evidences that the bolder has ventured bis means as a part of the capital. It is a fixed cbaracteristic of capital stock that no part of it can be withdrawn for the purpose of reimbursing the principal of the capital stock until the debts of the corporation are paid. These principles are elementary. Warren v. King, 108 U. S., 389, 2 Sup. Ct., 789; Cook Stock, Stockholders and Corp. Law (3 Ed.), sec. 271. The chance of gain throws on the stockholders, as respects creditors, the entire risk of the loss of bis contribution to capital. He cannot be both a creditor and debtor by virtue of bis ownership of stock. If the purpose in providing for these peculiar shares was to arrange matters so that, under any circumstances, a part of the principal of the stock might be withdrawn before the full discharge of all corporate debts, the device would be contrary to the nature of capital stock, opposed to public policy, and void as to creditors affected thereby. Cook Stock, Stockholders and Corp. Law (2 Ed.), 271; Chaffee v. R. R., 55 Vt., 110; McCutcheon v. Capsule Co., 19 C. C. A., 108-115, 71 Fed., 787; Morrow v. Steel Co., 87 Tenn., 262, 10 S. W., 495. If that was the purpose of this arrangement, most doubtful language was employed. There is a sense in which every shareholder is a creditor of tbe corporation to the extent of bis contribution to the capital stock. In that sense every corporation includes its capital stock among its liabilities. But tbat creditor relation is one which exists only between the corporation and its shareholders. It is a liability which is postponed to every other liability, and no part of tbe capital stock can be lawfully returned to tbe stockholders until all debts are paid or provided for. The violation of this wdll understood principle is a breach of trust, and a creditor affected thereby may pursue the stockholders, and recover as for an unlawful diversion of assets.” It is true tbat in the petitioner’s certificates of stock it is provided that they “shall be a preferred lien on the assets of tbe company.” But those words are to be construed along with the entire instrument, and it is manifest from tbe whole paper that the corporation never intended to place the petitioner in tbe *79 position of a creditor, but only to give ber, and like stockholders, a preferred lien on the assets of the corporation when in liquidation over the common stockholders. The judgment of the Superior Court is Affirmed.