Graselli Chemical Co. v. Ætna Explosives Co.

MANTON,, Circuit Judge (after stating the facts nas above). The petition upon which the order appealed from was granted, after reciting that Prince & Company, the petitioners, are the owners of common stock, alleges that the receivership has been a successful one, and substantially the facts stated above, and, further, that the plan of readjustment hereinafter referred to is sought to be adopted by certain preferred stockholders exercising their claim of voting rights by reason of the default in the payment of dividends. Copy of the readjustment plan is made a part of the petition, and it is alleged that, if approved and adopted, it would be in violation of the rights of the common stockholders. It points out, further, that no new capital is to be paid in of provided for by the readjustment agency, and that, for the services of the so-called readjustment, they are to be paid $750,000. The effect of this, it is said, will give the bondholders and preferred stockholders .the privileges and rights to which they are not [459] entitled under the contractual obligations of the defendant, and will place in control a hoard of directors who would be unfavorable and unjust to the interests of the common stockholders, and who will assist in the adoption of the readjustment plan, with the result that great and irreparable injury will be done the petitioner and a great majority of the common stockholders. The appellants assert that the District Judge had no power to interfere with the stockholders of the defendant in the election of the directors, at the annual meeting of :he company, and it: is said that the injunction granted by the District Court is entirely outside of the scope of the bill of complaint and of the receivership thereunder. [1] The order appointing the receivers placed the corporation in ihe custody and control of the court. It placed the receivers under the admonition, direction, and guidance of the court. The court possesses jurisdiction over the corporation, as well as over the property of the corporation, and it has complete power to deal with either, and it is essential that it should have, for it could not control the property without the power to control the corporation. The appointment of the receiver supersedes the power of the directors to carry on the business of the corporation, and the receivers take possession of the corporation, its books, its records, and assets. Indeed, it is often the custom for courts of equity, in an order appointing the receiver, to expressly restrain the corporation and its officers from exercising any of the privileges or franchises of the corporation until the further order of the court. The court’s power to take from the directors their right to direct can also, while in control, restrain action by the stockholders, when it deems it for the best interests of all concerned to do so. [2] A court of equity’s modes of relief are not fixed and rigid. It can mold it remedies to meet, the conditions with which it has to deal. The jurisdiction of equity is the whole domain of conscience, limited only by legislative enactment. The faculty of equity must be energetic, productive, and progressive. But to exercise this right of the court of equity there must be some show of an injustice attempted or about to be perpetrated upon the petitioners. Judge Ward, writing in Davidson v. American Blower Co., 243 Fed. 167, 156 C. C. A. 33, announced that the court of equity had the power in the proper case “to deprive stockholders holding a majority of the stock from voting it, and to turn over the control of a corporation to the minority stockholders.” In Lehigh Coal & Navigation Co. v. Central R. R. Co., 35 N. J. Eq. 349, an insolvent corporation in the hands of the court, with its railroad operated by a receiver, refused to hold a meeting of the stockholders. A petition was addressed to the court to direct such a meeting, which the court denied in the following language: “Tiie affairs of the company had for many years been in the hands of this court. There had boten no election of directors by the stockholders since the insolvency was declared. The existing board disputed Ihe power of the stockholders to hold the election. The proceeding was under a provision of the law, the applicability of which to an insolvent company, whose affairs were under the management of the court, was denied, it was quite evident .that [460] the election, if held under the circumstances, would be subject to imputations of surprise and unfairness, and to questions as to its validity, which would lead to litigation or induce this court to refuse to recognize it as a just and proper expression of the choice of the stockholders. Hence it was not permitted to take place.” [3] A mistaken notion seems'to exist with the appellants that the receivers are appointed for the sole benefit of creditors and are not interested in the benefits to accrue to all other parties interested,, such as stockholders. In Atlantic Trust Co. v. Chapman, 208 U. S. 360, 28 Sup. Ct. 406, 52 L. Ed. 528, 13 Ann. Cas. 1155, the court said that a receiver— “is appointed in behalf of all parties, and not of the complainant or of the defendant only. He is appointed for the benefit of all parties who may establish rights in the cause.” In Western Union Telegraph Co. v. United States & Mexican Trust Co., 221 Fed. 545, 137 C. C. A. 113, Sanborn, J., said: “The property of an insolvent railroad corporation in thje custody of a court in a suit to foreclose a mortgage upon it is charged with a trust for the benefit, first, of the holders of preferential claims superior in equity to the lien of the mortgage; second, of the holders of the lien of tire mortgage and of other such liens in their order of priority; third, of the unsecured or general creditors of the mortgagor; and, fourth, of its stockholders.” In Hayes v. Pierson, 65 N. J. Eq. 353, 45 Atl. 1091, 58 Atl. 728, Vice Chancellor Stevens said: “The receiver is, it is true, the representative of the creditors, but he is liso the representative of the corporation and of its stockholders.” The possession of the receiver is the possession of the court; and the court itself holds and administers the estate, through the receiver as its officer, for the benefit of those whom the court shall ultimately judge to be entitled to it. Porter v. Sabin, 149 U. S. 473, 13 Sup. Ct. 1008, 37 L. Ed. 815. The District Judge stated that he did not pass upon the merits or demerits of the readjustment plan. He said in effect that the election at the present time would not be in the interest .of the success and welfare of the receivership or of the corporation and the stockholders, but that it should be adjourned and held at a later date well in advance of the time when the receivership was about to come to an end, subject to the right of modifications reserved. In this court, the appellees, large common stockholders, have attacked the merits of the readjustment plan, and, we believe, with just cause. In the absence of power created by legislation in this country, the federal judges, sitting in courts of equity, have endeavored to secure to the rights of those interested, including the stockholders at the time of readjustment of large corporations a protection to meet the needs of the occasion. Changing times, with change in economic needs, require the courts of equity to mold remedies to meet the conditions with which they have to deal. In railroad foreclosure suits, where plans of reorganization were proposed, the federal courts have exercised the right of approval or disapproval. Fearon v. Bankers’ Trust Co., 238 Fed. 83, 151 C. C. A. 159; Guaranty Trust [461] Co. v. Missouri Pacific Ry. Co. (D.C.) 238 Fed. 812. In the latter case, Judge Hook said: “It lias sometimes been claimed that plans of reorganization formulated by bondholders and stockholders of a railroad in the hands of receivers are exclusively of private coil corn, free from judicial action or interference. But for various reasons the view cannot be sustained in principle. After all that can be said from tire standpoint of theory and strict right, the fact remains that many railroad receiverships, and the one here is typical of them, are Hie instruments for consummating plans of reorganization, and courts have come to realize that such use of their jurisdiction and processes entails a correlative duty to those affected by the result. * 19 * The relation between the receivership ' * “ and the plan of reorganization agreed upon is close and intimate. So far as properly can be, the judicial proceeding is conducted in harmony with the plan, and the success of the agreed readjustin’ent is promoted by the orders of the court and the acts of its receivers. Generally the judicial course, would not be different if the court were carrying out a plan of reorganization of its own making or one affirmatively adopted by judicial order or decree. * * * while it is the settled domine that reorganizatlous will be encouraged, yet, on the other hand, a court of equity will not lend its aid to one that is inequitable or oppressive. * * The conclusion is manifest that the general duty of a court in a railroad foreclosure suit to take cognizance of a plan of reorganization by the bondholders and stockholders which is to he aided by its decree, and to protect the equitable rights of all, becomes specific and imperative upon me complaint of an interested party.” So long as the suit continues, the corporation and the res are in the possession of the District Court; the court, having the power as an incident thereto, and as ancillary to its proceedings, to determine when and under what circumstances an election may be held which will determine what persons will receive the property from the corporation and control the property upon the discharge of the receivers. [4] Was there justification therefor under the circumstances disclosed here? Tt is claimed that at the meeting a board of directors was to be elected, which would permit the control of the corporation to pass into the hands of the preferred stockholders. It is said that they represent the same group of men who so mismanaged the property as to result in a receivership. At this time there appears to be no requirement for new capital, nor is any offered by the plan of readjustment. The property is being successfully managed by the receivers; it has very profitable contracts, and is, or will very shortly, be able to pay all its indebtedness, including the bonded indebtedness, if need be. It can pay the arrears of dividends on the preferred stock, and may retire the preferred stock. If the dividends are paid, the right of the preferred stock to vote on the basis of nine for one is eliminated, and, when a meeting is held, the business policy of the corporation can be determined by the will of the majority of common stockholders. Therefore, the right of the preferred stockholders to vote being but temporary, with every prospect of the common stockholders regaining control of the corporation, the court should not lend its aid nor permit a group of preferred stockholders electing a board of directors who would permit this plan of readjustment to be adopted. Although it is not admitted by the appellants that it is the intention to vote upon the readjustment plan at this meeting, the fact is evident that such is the plain intention. [462] On their face, the bonds do not mature until 1945. The plan of readjustment provides for their payment at an earlier period. These bonds, are largely held by the owners of the preferred stock, both of which securities were obtained as part of the purchase price for plants which were sold to or consolidated with the defendant corporation at the time of the consolidation. The plan further creates a retirement provision for the preferred stock, which is not only a deprivation of the common stockholders’ rights, but it would seem is injurious to the preferred stockholders as well. It creates a voting trust of the common stock, and therefore deprives the common stockholders of control of their company. It leaves the future of the corporation to a new company, and, without apparent limitation, places it in the hands of readjustment managers, with unrestricted power given to issue and dispose of new securities, and grants them an allowance of $750,OTO for their services. The entire plan means a large and unnecessary expense, and reduces the cash assets of the company, which might again result in another period of financial embarrassment. In our opinion, the complaint of the common stockholders is fully justified. The court below, in the exercise of its obligation to the common stockholders and all others interested, might well, in its equitable protection, have inquired into the merits of the plan of readjustment, and have granted the order appealed from upon its disapproval of the same. The course pursued by the court below was well within its power. The original intention of the corporation and the stockholders, as evidenced by its charter, giving no right to -vote to the preferred stockholders, except as above indicated, indicates the right of the common stockholders to exercise control and management of the corporation. From the above indications, when the deferred dividends are paid out of the surplus profits, which are very rapidly accumulating, the property of the corporation and the control thereof will.pass to the common stockholders, where it was when the court took possession of the property, and with this course no injustice will be visited upon any of the interested parties. Order affirmed. Footnotes [1] ig^For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes