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Ky.)

SMITH V. SOUTHERN FOUNDRY CO.

205

"Neither is the clause in the deed providing 14. CORPORATIONS O156—DIVIDENDS-STATUS that John Chappel 'is not to sell or convey the AS DEBT. above land to any one except the heirs of Reu- Where the directors of a corporation declare ben Chappel' * * * binding upon him. It is a dividend, or where the company has earned entirely inconsistent with the deed, and an un- profits, and get the directors wrongfully refuse reasonable limitation upon the right of disposi- to declare a dividend, a preferred stockholder tion vested in him by the deed subject to the occupies the position of a corporate creditor to estate retained by the grantors.”

the extent of the accumulated profits due him. For the reasons stated, we conclude that [Ed. Note. For other cases, see Corporations, the clause in the deed under which appel-Cent. Dig. 88 581–583, 593-603; Dec. Dig. Om

156.] lants hold which attempts to restrain their

5. CORPORATIONS Om95 CONSTRUCTION OF power of alienation of the land is an unrea

PARTIES—"INTEREST'' _"DIVIDEND." sonable restraint and limitation, and is void. Where a certificate of preferred stock in a

The judgment appealed from, so far as it corporation provided that it bore interest at the is a personal judgment against Martha Chap- rate of 7 per cent. per annum, payable annually pell for the amounts of the notes sued on, is "interest” did not require that the certificate be

in the way of dividends, such use of the word reversed. The judgment otherwise is af- construed as a certificate of indebtedness, rather firmed.

than a certificate of stock, since a further provision of the certificate, that "the said annual dividends shall be paid before any dividends shall be

declared or paid on the common stock,” showed SMITH v. SOUTHERN FOUNDRY CO. that the words "interest” and “dividends" were (Court of Appeals of Kentucky. Oct. 14, 1915.) used interchangeably. 1. CORPORATIONS Omw170 CONSTRUCTION Cent. Dig. § 436; Dec. Dig. Cm95.

[Ed. Note.-For other cases, see Corporations, WITH REFERENCE TO LAW.

For other definitions, see Words and Phrases, citals of a certificate of preferred stock must be First and Second Series, Dividend; Interest.] construed in connection with the statutory law 6. CORPORATIONS Eww152 DIVIDENDS DISupon the point to determine whether the holder CRETION OF DIRECTORS. was a creditor of the corporation or a stock- Dividends are payable from the profits and holder.

surplus funds of a corporation as the directors, [Ed. Note.-For other cases, see Corporations, in the exercise of a sound discretion, declare, Cent. Dig. $8 624-632; Dec. Dig. Om 170.] with which discretion the courts will not inter

fere except for the directors' bad faith or willful 2. CORPORATIONS Om 178 — STOCKHOLDERS

abuse. RELATIVE RIGHTS OF COMMON AND PREFERRED STOCKHOLDERS.

[Ed. Note.-For other cases, see Corporations, Except as to preference in the payment of Cent. Dig. 8$ 561-567; Dec. Dig. Om 152.] dividends and distribution of the assets, as when Appeal from Circuit Court, Daviess County. provided by a certificate of preferred stock and

Action by Robert W. Smith against the the corporation's charter, and authorized by statute, the holders of common and preferred stock Southern Foundry Company. Judgment for have the same rights and are subject to the same defendant, and plaintiff appeals. Affirmed. liabilities. [Ed. Note.—For other cases, see Corporations, Miller, Sandidge & Malin, of Owensboro, for

Dean & Dean, of Owensboro, for appellant. Cent. Dig. 88 658-662; Dec. Dig. Om 178.]

appellee. 3. CORPORATIONS Om 170—STOCK-PREFERRED STOCK-HOLDER AS CREDITOR.

Where a corporation was organized, the NUNN, J. The question here is whether charter and preferred certificates providing that ownership of a certificate of preferred stock the preferred stock should constitute a prior and made appellant a corporate creditor or stockpreferred lien on the plant and stock and all property of the corporation, and should be en- holder. The Southern Foundry Company is titled, at the end of each fiscal year, to a divi- a Kentucky corporation organized March 9, dend of 7 per cent., and no more, and that at 1901. By provision of its charter its capital the end of the third fiscal year 10 per cent. of the stock is fixed at $40,000, consisting of 800 preferred stock should be redeemed and retired, and 10 per cent. thereafter at the end of each shares of $50 each. These shares are dividyear until the entire amount should have been ed into two classes, viz., common and preredeemed and retired, a holder of a certificate of ferred. The corporation was authorized to such preferred stock did not become, by virtue of issue $25,000 of its capital as common stock, his ownership, a creditor of the corporation, entitled to enforce payment to him at all events, and $15,000 of it as preferred. We quote since, unless the holder of the certificate were a clause 6 of the charter: stockholder, and not a creditor, the provision for "(6) The preferred stock shall constitute a 7 per cent. dividends would be usurious, and his prior and preferred lien on the plant and stock contract with the corporation void, while it is and all property of the corporation. And it shall only in cases where the corporation is solvent be entitled at the end of each fiscal year to a and the rights of creditors will not be injuriously dividend of 7 per cent., and no more. At the end affected that agreements as to preferences among of the third fiscal year 10 per cent. of said prestockholders, as between the holders of common ferred stock shall be redeemed and retired, and and preferred stock, can be enforced, since the at the end of each fiscal year thereafter 10 per entire capital of a corporation, without regard cent. of said preferred stock shall be redeemed to arrangement between common and preferred and retired until the entire amount shall have stockholders, is at all times subject to and liable been redeemed and retired. However, it is profor the debts of the corporation, and no part of vided that at the end of second fiscal year the the capital can be withdrawn from the business board of directors of said corporation shall have until discharge of the debts.

the option of redeeming and retiring all or any [Ed. Note.-For other cases, see Corporations, part of said preferred stock, provided that said Cent. Dig. $$ 624-632; Dec. Dig. Om 170.] part shall be equal to 10 per cent. of said stock.” The charter fixes $20,000 as the maximum whereupon he will amend and make the boldindebtedness of the corporation, and exempts ers parties in order that they may set up the private property of the stockholders from their claims. He prays judgment against the the payment of corporate indebtedness other-corporation for $2,000, and accrued interest wise than as provided by section 547 of the at 7 per cent., and that he be adjudged a statute as it then existed ; that is, no more prior lien on all the corporate property, and than double liability.

that the lien be enforced. The court susAppellant was not one of the original in- tained demurrer to this petition, and, appelcorporators. His interest in the corporation lant refusing to plead further, it was dismissbegan five years later, the 1st of June 1906, ed. The appeal is prosecuted from that when the corporation issued to him a certifi- judgment. cate for "40 shares of $50 each of preferred

Waiving the question as to whether his capital stock of the Southern Foundry Com-debt, if such it may be called, was due at pany, fully paid and nonassessable." The the time the action was instituted, we take following provision is contained in the cer

up the real question in the case, and the one tificate:

passed upon below, and that is whether the “The stock is preferred stock and constitutes appellant, by virtue of the certificate, bea prior and preferred lien on the plant and stock came a stockholder or a creditor of the corand all the property of the corporation, and bears interest at the rate of 7 per cent. per an

poration. His petition is framed upon the num payable annually in the way of dividends, idea that he was not a stockholder, and that and the holder shall be entitled to receive said the writing upon which the action was foundinterest in the way of annual dividends, on the 9th day of March in each year, and the payment ed, although styled a “stock certificate,” was, of said annual interest or dividend and the pay- in fact, a certificate of indebtedness to him ment of the par value of said stock (when same on the part of the corporation. The question shall be payable) shall have preference over the is one of interpretation, and in this case de provided in the articles of incorporation of the pends upon the certificate, charter, and statcompany. The said annual dividends shall be utes of the state. Section 564, Ky. St., aupaid before any dividends shall be declared or thorizes a corporation to classify its capital paid on the common stock of said company. And stock into common and preferred shares, and at the end of the third year after organization 10 per cent. of said preferred stock shall be re- it may give to each of the several classes deemed and retired, and each year thereafter such priority of right in the payment of the 10 per cent. of said stock shall be redeemed and dividends and in redemption of the shares as retired. After two years from the date of its organization said corporation shall have the may be prescribed in the rules and regularight and option to redeem and retire any part tions adopted by the shareholders; and on or all of said preferred stock, provided said part the voluntary or other dissolution of the comshall be equal to 10 per cent. of said stock. This stock shall not be entitled to participate in the pany the holders of preferred stock are entiprofits or earnings of the said company, or to tled to have their shares redeemed at par receive any dividend on said stock in excess of before any distribution of the assets is made the annual 7 per cent. dividend as aforesaid."

among the holders of common stock. This Appellant brought this suit in equity on section was not intended to, and must not be the certificate referred to, claiming that construed to give a stockholder of either thereby the corporation promised and agreed class a preference over creditors as to the to pay to him the sum of $2,000, with 7 per corporate assets. The charter itself recognizcent. interest thereon annually from its date ed the holders of preferred shares as stockuntil paid, and also "promised to pay him holders in the corporation, for such shares one-tenth of said principal sum at the end of are included within the total capitalization the third year after the organization of said of the company.

of the company. To construe the charter corporation, and one-tenth at the end of each otherwise would mean to limit the authorizyear thereafter until all of said principal sum ed indebtedness of the corporation to $5,000; was paid.” This allegation was made in the for, if the $15,000 preferred stock be held face of the fact that the certificate was not to be corporate indebtedness, it would pracissued to him until five years after the cor- tically nullify the provision for $20,000 inporation was organized. Except the inter- debtedness elsewhere authorized by the charest up to March 9, 1908, he alleged that no ter. Such an interpretation of the charter part of the principal or interest was ever would be unreasonable and one which would paid. He alleged further that by the cer- not be given by any person considering an tificate the corporation gave to him a prior extension of credit to the company. The lien on the plant and all its other property. authorized $20,000 indebtedness was certainAfter describing the corporate property, he ly not intended to embrace any of the capitalalleged that on January 15, 1909, the corpora- ization. tion executed a mortgage thereon to H. B. [1] Priority as to dividends, liens, and reEagles, as trustee, to secure a bonded indebt- demptions relate to stockholders, and they edness aggregating $50,000. Averring that are rights which the preferred stockholder he does not know to what extent the bonds has over the common. The charter and cerhave been negotiated or sold, if at all, nor to tificate must be construed in connection whom, he asks that the corporation be requir-with the statute, and in this state there is Ky.)

RAMEY V. IRONTON LUMBER CO.

207

ferrred stock a lien upon the property of the tion. As we have already noted, the petition company to the prejudice of creditors. By shows that some of the dividend payments the charter the preferred stock is a part of are past due. He might be treated as a the $10,000 capitalization, and by the certifi- corporate creditor to that extent, if it had cate in question it is stipulated to be a part appeared that the directors had declared a of the capitalization. The organization tax dividend or that profits had been earned was paid thereon. Unless that was the pur- and the directors had wrongfully refused to pose of the certificate, and unless the holder declare a dividend. thereof be considered a stockholder, and [5] The use of the word "interest" in the not a creditor, then the provision for 7 per certificate does not require that it be concent. dividends would be usurious—in conflict strued as a certificate of indebtedness rather with the statutes.

than stock. The provision is that: [2] Except as to preference in the payment "It bears interest at the rate of 7 per cent. of dividends and distribution of the assets, per annum, payable annually in the way of divias provided by the certificate and charter, dends, and the holder shall be entitled to receive

said interest in the way of annual dividends,” and when authorized by statute, the holders

etc. of common and preferred stock have the same

That is, the interest is payable in the way rights and are subject to the same liabilities.

or manner of dividend payments; in other “As against creditors a preferred stockholder words, the payments are due and payable at has no greater rights than a common stockholder, such times and in the way dividends are and the corporation cannot give them greater paid-out of the net profits, 7 per cent., and rights in the assets of the corporation as against no more. That the words interest and divthe creditors, unless by virtue of an express idends are used interchangeably is shown statutory provision.” 2 Clarke & Marshall on by the following quotation from the certifiPrivate Corporations, § 413.

cate: This text was approved in the case of Fryer v. Wiedemann, 148 Ky. 379, 146 S. W. fore any dividends shall be declared or paid on

“The said annual dividends shall be paid be752, 39 L. R. A. (N. S.) 1011, and, reasoning the common stock of said company." therefrom, the court concluded that:

[6] Dividends are payable out of the prof"As preferred stock is a part of the capital stock of a corporation, holders of such stock are its and surplus funds of the corporation as not preferred to the creditors of the corpora- the directors may, in the exercise of a sound tion in the distribution of its assets. Conse- discretion, declare. Unless the directors are quently, the preferred stockholders cannot be reimbursed before the corporate debts are paid." guilty of bad faith or a willful abuse of dis

cretion, the courts will not interfere. There [3] The Fryer Case, supra, followed the being no allegation of profits or of bad faith rule laid down in Rider v. John G. Delker or abuse of discretion on the part of the & Sons Co., 145 Ky. 634, 140 S. W. 1011, 39 directors, the presumption follows that there L. R. A. (N. S.) 1007, where a holder of pre- are no profits out of which to pay dividends. ferred stock sued a corporation, as in this

We are of opinion that the petition and case, and insisted that he be treated as a exhibits show that appellant is a stockholdcreditor, rather than a stockholder. The

er and not a creditor. It follows, therefore, court said:

“The capital of a corporation is the sum total of that he is not entitled to a judgment against its stock, whether common or preferred. Certifi- the corporation for any investment he made cates of stock are mere evidences that the holders in the corporate stock. thereof have invested the sums called for in the The judgment of the lower court, sustaincertificates in the enterprise. They run the risk ing demurrer to the petition, is therefore of losing their stock if the business is not a suc

affirmed. cess. As between themselves and third persons who deal with the corporation and give it credit, their stock is equally liable. It is only in cases where the corporation is solvent and the rights of creditors will not be injuriously affected there- RAMEY et al. v. IRONTON LUMBER CO. by that agreements as to preferences among

et al. themselves may be enforced. The entire capital, without regard to any arrangement which may

(Court of Appeals of Kentucky. Oct. 20, exist between common and preferred stockhold

1915.) ers, is at all times subject to and liable for the 1. LOGS AND LOGGING Om3_ACTION FOR ADdebts of the corporation, and no part of the cap

VANCES-SUFFICIENCY OF EVIDENCE. ital can be withdrawn from the business until

In an action to recover the balance of monthe debts of the corporation are satisfied.”

ey advanced on a timber contract, in which de[4] But appellant says that this rule does fendants admitted an indebtedness and alleged not apply because there is nothing in the its overpayment by an order on the cross-decase to show that the corporation is insol- petition 'sought to recover against the cross-de

fendants, and in which plaintiff by an amended vent, and therefore, he argues, we cannot fendants, and in which the measurement of logs infer that the rights of any creditor will be sold by defendants to the cross-defendants was prejudiced. This argument is inconsistent the issuable fact, evidence held sufficient to sus

tain a judgment for defendants against the because it is based upon the theory that ap- cross-defendants. pellant is a stockholder and entitled to have

[Ed. Note.-For other cases, see Logs and his stock contract enforced with the corpora- Logging, Cent. Dig. SS 6-12; Dec. Dig. m3.]

2. APPEAL AND ERROR Om877—RIGHT TO AL- Company for the difference between $1,379,LEGE ERROR-INSTRUCTIONS-ESTOPPEL.

In such action the cross-defendants were 72, for which the order had been given the estopped to complain of instructions with refer- Ironton Lumber Company on them, and $1,ence to a branch of the case affecting only the 254.78, the amount they (Greers and Burke) plaintiff and the defendants and authorizing a admitted owing the Ironton Lumber Comverdict for cross-defendants against plaintiff, since neither had any bearing on the verdict pany. The Ironton Lumber Company filed upon which the judgment for defendants against an amended petition making J. B. Ramey, cross-defendants was entered.

Grant Thornberry, and L. R. Thornberry, [Ed. Note.-For other cases, see Appeal and partners composing the Breaks Lumber ComError, Cent. Dig. 88 3560–3572; Dec. Dig. Em pany, defendants to the action, setting up the 877.]

order on them received from Greers and 3. LOGS AND LOGGING OM3 – ACTION FOR Burke, their acceptance of same, and asking ADVANCES-INSTRUCTIONS AND ISSUES.

In such action and cross-actions an in- judgment against them for the amount therestruction that the jury would find for the de- of, to wit, $1,379.72. The acceptance of the fendants against the cross-defendants the value of all timber delivered by defendants to the order in question was in the following lancross-defendants under a contract with them, guage: after deducting the amount paid by the cross- “We hereby accept the above order to the defendants when the contract was made and a amount that we will owe Greer under timber certain other payment, and find for defendants contract.” the amount admitted by cross-defendants to be

The acceptance was signed by Ramey and due, was proper.

[Ed. Note.-For other cases, see Logs and the two Thornberrys. It was further alleged Logging, Cent. Dig. $$ 6-12; Dec. Dig. cm3.] in the amended petition of the Ironton Lum4. APPEAL AND ERROR Om 216_REVIEW-IN- ber Company that after their acceptance of STRUCTIONS.

the order appellants became indebted to Greer The contention on appeal that an addition under the timber contract to the full amount al instruction should have been given in the terms indicated by appellants' brief would not of the order accepted by them. be considered, where no such instruction was of- After being served with summons upon the fered or asked by appellants.

amended petition of the Ironton Lumber [Ed. Note. For other cases, see Appeal and Company and the cross-petition of Greers Error, Dec. Dig. em 216; Trial, Cent. Dig. $ and Burke, the appellants filed, as applicable 627.]

to both, a pleading styled an answer, counAppeal from Circuit Court, Pike County.

terclaim, and cross-petition, much of which Action by the Ironton Lumber Company was properly stricken out by the circuit against W. M. Greer, Franklin Greer, and court. Included, however, in the parts not M. M. Burke, with cross-complaint by de- stricken out were allegations to the effect fendants against J. B. Ramey and others, that they had, by a written contract made composing the partnership of the Breaks in March, 1911, with W. M. Greer, bought of

Company, and amended petition him what he falsely represented to be 300 making Ramey and others defendants. Ver- logs in Shelby creek, Pike county, for which dict for plaintiff against defendants, for they agreed to pay him certain prices set cross-defendants against plaintiff, and for forth in the contract, $2,000 of which was defendants Greer against cross-defendants, paid when the contract was made, the reand the cross-defendants appeal. Affirmed.

mainder to be paid when the logs were rafted J. S. Cline, of Pikeville, for appellants. and measured. The writing evidencing the J. F. Butler, Roscoe Vanover, E. J. Picklesi- contract was filed with and made a part of mer, and J. J. Moore, all of Pikeville, for ap- the answer, counterclaim, and cross-petition. pellees.

It was also alleged in the answer, counter

claim, and cross-petition that there were, in SETTLE, J. The appellee Ironton Lumber fact, only about 200 logs in the Tot purchased Company sued in the court below to recover by them of Greer, that when delivered and of the appellees W. M. Greer, Franklin Greer, measured the price of the 200 logs amounted and M. Burke $1,530.70, alleged balance due to only $2,297, $2,000 of which had previousit for money advanced them on a timber con- ly been paid, and that out of the $297 retract. The answer of Greer and Burke, maining they paid one Sol Tackitt the sum which was made a cross-petition against the of $168 for assisting them in, and other exappellants, J. B. Ramey, Grant Thornberry, penses growing out of, the running of the and L. R. Thornberry, composing the partner- logs to the mouth of Shelby creek, which ship known as the Breaks Lumber Company, left them owing Greer only $99.80. They admitted an indebtedness to the Ironton Lum- denied, however, that the $99.80 should be ber Company of $1,254.78, and alleged its paid to the Ironton Lumber Company on the overpayment by an order for $1,379.72 they order given on them by Greer, and alleged gave it upon the Breaks Lumber Company; that the Ironton Lumber Company was init being alleged that the latter company was debted to them in the sum of $119 for some then owing them in excess of that amount. of their timber which that company had Judgment was asked in the cross-petition of wrongfully converted to its use, for which the Greers and Burke against the members sum they prayed judgment against that comof the partnership of the Breaks Lumber pany.

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Ky.)

RAMEY v. IRONTON LUMBER CO.

209

Following the filing of the above pleading, the whole, which, after deducting the $2,000 Greers and Burke filed an amended answer, previously received by Greer, they were reply, and cross-petition containing a trav- to immediately pay. erse of the averments of the answer, coun- Such being the meaning of the contract, terclaim, and cross-petition of appellants, the question that next arises is: Did Greer and alleging that W. M. and Franklin Greer deliver in the river a sufficient number of delivered to the latter in Sandy river at logs to amount at the contract prices to a the mouth of Shelby creek, under their con- sum that would equal the $2,000 paid him tract with them, 337 logs, the contract price at the making of the contract, plus $168 of which amounted to $4,004, and, after de- which appellants admittedly paid Tackitt, ducting therefrom the $2,000 which they plus $1,200, the amount of the verdict and were paid by appellants when the contract judgment recovered by the Greers. If this with respect to the logs was made, and the proposition has been established by the evi$168 which the latter paid to Tackitt, there dence, the right of the Greers to recover of was left due them from appellants $1,836, for appellants the $1,200 awarded them by the the difference between which and the order verdict of the jury and judgment of the of $1.379.70 they had given the Ironton Lum-court cannot be doubted. ber Company they asked judgment against

It is not to be overlooked that the logs appellants. The Ironton Lumber Company, which were sold under the contract were in by reply to the pleading last mentioned, Shelby creek at the time of the sale, and waived all of its claim against Greer and that appellants, or some of them, then saw Burke, except $1,254.78.

the logs and joined with Greer in making After the filing of the voluminous pleadings the estimate as to the number. If there referred to the case went to trial, and the were then less than 300 of the logs, they jury returned a verdict in favor of the Iron would hardly have agreed with Greer that ton Lumber Company against Greer and Burke for $1,254.78, of which the latter do

such was their number. It was also their not complain. They also returned a verdict estimate, as well as his, that the $2,000 they in favor of appellants against the Ironton then willingly paid him did not exceed half Lumber Company for the sum of $119, of the estimated value of the logs then in the which the latter company makes no com

creek. Otherwise it is not reasonable to supplaint; and, finally, a verdict in favor of pose that they would then have paid him $2,W. M. and Franklin Greer against appel- 000 as the estimated half of the value of the

logs. lants, J. B. Ramey and Grant and L. R.

There is no contrariety of evidence Thornberry, for $1.200. Judgment was enter- as to the fact that at the time of the instied in conformity to the above findings, and tution of this action all the logs which the court, on its own motion, credited the Greer had in Shelby creek he had delivered judgment of the Ironton Lumber Company at the boom or in the river, and that they of $1,254.78 against Greer and Burke with had been measured after their delivery both the $1,200 for which W. M. and Franklin by W. M. Greer and his brother, Franklin, Greer were given a verdict by the jury and also measured by the appellants when against appellants. Appellants complain of rafted by them. the verdict of $1,200 returned against them According to the evidence of the Greers in favor of the Greers, and by this appeal there were 337 logs delivered. W. M. Greer seek the reversal of the judgment entered testified, in which he was corroborated by his thereon. The grounds urged by appellants brother, Franklin Greer, that he and his for the reversal of the judgment are: brother measured all of these logs, and that (1) That the trial court erred in refusing by actual measurement there were 13,360 their request for a peremptory instruction cubes, which, at the contract price, amountdirecting a verdict in their behalf as against ed to $4,004, and that, after giving appellants the Greers; (2) that the verdict is flagrantly credit by the $2,000 paid before the delivery against the evidence; (3) error of the trial and the $168 paid Tackitt, there was still court in instructing the jury.

left a balance in his (Greer's) favor of $1,836. [1] The first and second grounds will be The measurements thus made were also corconsidered together. In our view of the evi- roborated by the original tally sheets condence neither of them can be sustained. The taining the entries which were made by W. written contract between W. M. Greer M. Greer and Franklin Greer. The measureand appellants, properly interpreted, simply ment of the logs made by appellants at a means that appellants purchased of Greer, different time was not shown by the introat the prices therein stipulated, what they duction of original tally sheets, but only by and Greer estimated to be 300 logs then in the ledger, purporting to have been copied Shelby creek; that $2,000 of the purchase from the original entries, without showing money was then paid Greer by the appel- the details contained in the Greer tally lants; that these logs were to be delivered sheets. by Greer at the boom or the mouth of Shel- The evidence introduced for appellants by creek, and, when delivered, were to be tended to prove that there were between 200 rafted by appellants, and by them then and 240 logs. In addition to the measuremeasured to ascertain the purchase price of ment shown by their ledger, the appellants

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