Hewitt v. Linnhaven Orchard Co.

BEAN, J. 1. The question for determination is as to the priority of the claims and liens of the respective parties. In addition to the contention made on behalf of the' appealing defendants in the case of First Savings Bank v. Linnhaven Orchard Co., 89 Or. 354 (174 — 8 — Pac. 614), these defendants challenge the right of the preferred stockholders to obtain security by virtue of the trust deeds given as mortgages to secure the redemption of their certificates of stock, to the exclusion of the general creditors of the corporation. The statutes of some of the states authorize corporations to dispose of preferred stock to a certain amount, upon certain conditions and guarantee holders of such stock dividends, and to secure the redemption of the same. Article XI, Section 3, of our Constitution provides that the stockholders of all corporations shall be liable for the indebtedness of the corporation to the amount of their stock, subscribed and unpaid. The general rule is that a preferred stockholder possesses all the rights, and is subject to the general liabilities of ordinary stockholders. The rights of preferred stockholders, like those of common stockholders, depend upon their contract with the corporation: 7 E. C. L., § 170, p. 200; Heller v. National Marine Bank, 89 Md. 602 (43 Atl. 800, 73 Am. St. Rep. 212, note page 231, 45 L. R. A. 438). Preferred stockholders, as well as common, in a certain sense are creditors. It is in the sense that a corporation includes all its capital stock among its liabilities, but it is a liability which is postponed to every other liability. As such a creditor, a stockholder is subordinate to every other creditor of the corporation. In the ordinary sense, a stockholder cannot be a creditor of the corporation by virtue of his ownership of stock: Belfast & M. L. R. Co. v. Belfast, 77 Me. 445 (1 Atl. 362). It has frequently been attempted to issue stock which shall at once prefer its owners to the holders of common stock, and protect them against any subsequent indebtedness of the corporation by giving their claims priority over subse — 9 — quent creditors. These attempts have usually proved futile. As a matter of public policy, a stockholder cannot claim an interest in the property of a corporation paramount to the rights of creditors, whatever rights he might have in relation to his fellow-stockholders. A corporation cannot in the absence of statutory authority make its preferred stock a lien upon its property as against general creditors: 7 R. C. L., § 171, p. 201; 2 Clark & Marshall on Corporations, p. 1313. A preferred stockholder is either a stockholder or a creditor. He cannot by virtue of the same certificate be both; he does not sustain a dual relation to the corporation. A stockholder takes a risk in the concerns of the company not only as to dividends and a proportion of assets on the dissolution of the company, but as to the statutory liability for debts in case the corporation becomes insolvent. A creditor takes no interest in the company’s affairs; is not concerned in its property or profits as such: 4 Thompson on Corporations (2 ed.), § 3607, p. 186. 2. The fact that the agent of the defendant corporation, making the sales of the preferred stock in question, stated to the purchasers thereof, or to the public, that the certificates of the stock were secured by mortgage, and were “practically a bond” would not change the obligation of the contract. Such mortgages are referred to in 1 Cook on Stock and Stockholders and Corporation Law (3 ed.), Section 271, page 370, in the following language: ‘ ‘ Occasionally, however, a mortgage is given by the corporation to secure the payment of dividends on preferred stock and to give it a preference in payment over subsequent debts of the corporation upon insolvency or dissolution. It is difficult to see how such a mortgage would be legal except where it is issued — 10 — under express statutory authority. It is difficult to see how stockholders can contrive legally to obtain a preference over corporate creditors secured or unsecured, as they would do by such a mortgage.” 3. An agreement to secure preferred stockholders so that their claims will be prior to the general indebtedness of the corporation is against public policy and void as to subsequent creditors of said corporation: Hamlin v. Toledo, St. L. & K. C. R. Co., 78 Fed. 664 (37 C. C. A. 587, 36 L. R. A. 826); Miller v. Ratterman, 47 Ohio St. 141 (24 N. E. 496); Heller v. National Marine Bank, 89 Md. 602 (43 Atl. 800, 73 Am. St. Rep. 212, note at page 228, 45 L. R. A. 438); Lloyd v. Pennsylvania Electric Vehicle Co., 75 N. J. Eq. 263 (72 Atl. 16, 138 Am. St. Rep. 557, 20 Ann. Cas. 122, note, 21 L. R. A. (N. S.) 228); note to Field v. Lamson & Goodnow Mfg. Co., 167 Mass. 388 (38 N. E. 1126, 27 L. R. A. 136). A person holding interest-bearing stock, payable out of the profits of a concern, is a stockholder, and not a creditor: Elliott on Railroads, §86; Heller v. National Marine Bank, 89 Md. 602 (43 Atl. 800, 73 Am. St. Rep. 212, note at page 220, 45 L. R. A. 438). In Heller v. National Marine Bank, 89 Md. 602 (43 Atl. 800, 73 Am. St. Rep. 212, 45 L. R. A. 438), one of the principal cases upon which plaintiff relied, it was held that the holder of preferred stock, so called, was entitled to a preference as to capital over subsequent mortgages and other encumbrances, where the statute under which the “preferred stock” was issued expressly declared that it should be and constitute a lien on the franchise and property of the corporation, and have priority over any subsequent mortgages or other encumbrances: See note to Lloyd v. Pennsylvania Electric Vehicle Co., 75 N. J. Eq. 263 (72 Atl. — 11 — 16, 138 Am. St. Rep. 557, 20 Ann. Cas. 122, 21 L. R. A. (N. S.), at p. 230). 4. In the present ease, the record discloses that the $200,000 of common stock was considered fully paid up by the transfer to the corporation of options to purchase about 3,000 acres of land. So that the capital of the company was principally realized by the sale of preferred stock. The provision in the certificate that the preferred stock was not entitled to vote nor participate in profits beyond its preferential dividends of 5 per cent per annum, was practically neutralized by the' transfer as a bonus of an equal number or shares of common stock to each purchaser of preferred stock. All of such purchasers were interested in the affairs of the company, and were affected by its success or failure. The preferred stock was offered for sale upon the market and plaintiff alleges in his complaint that it was sold to the several persons. The agent of the company was allowed 10 per cent for making the sale. The averment of plaintiff, of the conclusion that the “issue of preferred stock was made to evidence a borrowing transaction” under the law in this state, and the facts of this case, is not borne out. We think the transaction was a sale of shares of stock, and not a loan to the corporation. The creditors of the corporation should first be provided for before the holder of preferred stock in the corporation would have the right to have the company return to him his money with interest, when the corporation is unable to pay all its debts. The various suits involving the affairs of the Linnhaven Orchard Company illustrate its condition. The manager of the corporation stated that in 1914 the mortgage indebtedness of the company was $52,361, and. the floating indebtedness $10,444. The company is insolvent. — 12 — We find no authority contrary to this holding except where preferred stockholders are by special statutes given a right to a lien upon the property of the company. The purchasing defendants were residents of eastern States, and had no actual knowledge of the status of the corporation at the time they made their purchases and payments. As to the defendants, B. F. Baines et al., who claim •judgment liens, we see no reason for any further discussion than that in the case of First Savings Bank v. Linnhaven Orchard Co., supra. 5. As against the holders of the common stock of the company, we hold that the trust deeds are valid as mortgages, but the lien of plaintiff by virtue thereof must be postponed to the claims of the defendants against the defendant company. The decree of the- lower court will be modified so as to declare the purchasing defendants, Bernard Arndt et al., each to have a lien upon the respective tract purchased by him or her, and that such liens are superior in right to plaintiff’s mortgages; that such purchasing defendants are entitled to have their claims satisfied' from the proceeds of the sale of said land next after the satisfaction of the judgment liens of defendants, B. F. Raines et al., and before the payment of plaintiff’s mortgages. Modified. Rehearing Denied. McBride, C. J., Benson and Johns, JJ., concur.