Bailey v. Hannibal and St. Joseph Railroad Company/Opinion of the Court

Certificates of stock, described in the bill of complaint as common or unpreferred stock, amounting to $3,000,000, were issued by the respondents, divided into shares of one hundred dollars each, which constituted their capital stock. Pecuniary obligations were contracted by the company in constructing the road, much beyond their means of payment, which consisted of three classes of bonds, issued by the company at different times, in aid of the construction and equipment of the road, and which were secured by three several mortgages, and were known as land bonds, convertible bonds, and second mortgage bonds. Embarrassment necessarily ensued, as the stock of the company had become of no value in the market, and as the respondents were unable to pay the interest on their bonds or to make any dividends, they issued to the holders of the bonds a circular or plan for extricating the company from their difficulties and for improving their securities. By that plan they proposed to the several holders of the bonds that they should exchange the same in part for other bonds and in part for preferred stock of such a nature that its holders should have the right to receive '7 per cent., not cumulative, but to share with the common stock any surplus which may be carried over and above 7 per cent. upon both in any one year.' Measures were adopted to send that circular to all the holders of the bonds, and it appears that a large majority of the bondholders approved and accepted the terms and conditions of the proposed arrangement, and as evidence thereof signed an instrument by which they agreed to surrender the mortgage bonds which they held, 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 for improving their securities; that the respondents thereupon appointed a committee with power to carry it into effect; that the committee prepared an indenture to accomplish that end; that they subsequently, by order of the directors, submitted the same to a meeting of the stockholders convened for that purpose, and that the stockholders did then and there accept and ratify the action of the directors and of the committee and ordered that the indenture should be duly executed and delivered. Authority was also conferred upon the directors, at the same meeting, to adopt, in behalf of the company, such certificates in relation to the preferred stock to be issued under the agreement 'as may be necessary to carry the same into effect,' and to cause the same to be executed, in behalf of the company, as they may think best. They, the directors, accordingly prepared and adopted, in behalf of the company, the form in which all of the certificates of the preferred stock were for a time issued by the respondents, which contains the recital that the holder 'shall be 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.' Certificates of preferred stock were issued in that form until the legislature passed the act authorizing the company to convert their bonds secured by mortgage into preferred stock, when the certificates issued in that form were recalled and a new form was adopted, but inasmuch as it contains the same provision in respect to the right of the holder to participate in the yearly net earnings of the company it need not be reproduced, except to say that the certificates in the second form, as well as in the first, purport, on their face, to be issued subject to the terms and conditions of the indenture between the company and the trustees, which the stockholders directed should be executed and delivered to carry the plan sent to the bondholders into effect. Pursuant to that order it was executed, and it contains the following provision: 'That said preferred stock shall be entitled to a dividend of 7 1/2 per cent. 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 of the net earnings of the company beyond said 7 per cent., but shall at no time be entitled to an accumulated dividend in any subsequent division of said net earnings.' Eight hundred shares of the preferred stock are owned by the complainant, and he filed the bill of complaint claiming that by the true construction of the indenture the preferred stock is entitled, not only to a dividend of 7 per cent. from the net earnings of the road in each year, before any dividend is declared in favor of the unpreferred stock, but also to an equal dividend with the unpreferred stock in the net earnings of the same year beyond the amount required to discharge the dividend of 7 per cent. secured to the preferred stock.

Shares of the preferred stock, it is conceded, are entitled to a dividend of 7 per cent. from the net earnings of the road in each year whenever a dividend of net earnings is made, before any dividend can be claimed for the shares of the unpreferred stock, as that is a matter of priority created by the indenture, but it is insisted by the respondents that the priority does not extend beyond the 7 per cent., that when that priority is satisfied the preferred stock is not entitled to any further dividend in that year until the unpreferred stock shall receive a 7 per cent. dividend from the net earnings of the road in the same year.

Ten and a half per cent. net having been earned by the road in one year, the directors, adopting the views of the respondents, made a dividend of 7 per cent. upon the preferred stock, and having satisfied that priority, they made a dividend of 3 1/2 per cent. from the residue of the net earnings beyond the 7 per cent. upon the unpreferred stock, and the complainant insisting that the fund of 3 1/2 per cent. was to be shared equally between the preferred and the unpreferred stock, filed the present bill of complaint and prayed for an injunction to restrain the company from paying any such dividend upon the unpreferred stock. Proofs were taken and the parties having been heard the court entered a decree for the respondents, dismissing the bill of complaint.

Evidence was introduced showing that all the parties understood the transaction, from its commencement to its final consummation, as it is understood by the respondents, but it is insisted by the complainant that such evidence is inadmissible, as its tendency is to explain and qualify what is in writing, and the court is inclined to concur with the complainant in that proposition. Such evidence cannot be admitted in the case except for the purpose of connecting the several written instruments together, and of showing that they are all parts of one transaction; nor is it admitted that the evidence is necessary in this case, even for that purpose, as the instruments themselves contain the most persuasive evidence to establish that fact, and inasmuch as it appears that they were all introduced, either by the complainant or by the respondents, without objection, they are properly before the court. Such being the fact it is quite clear that they must all be regarded as instruments in pari materia, and that as such they are the proper subjects of consideration in order to ascertain and determine what is the true nature of the transaction and the true construction of the contract between the parties. All of these writings were executed as means to the same end, which was to enable the company to find relief from the impending dangers and great embarrassments with which they and all interested in their affairs were surrounded. They could command nothing, nor were the bondholders in much better condition, as a foreclosure would not, in all probability, accomplish much except to sacrifice the interests of all concerned. Everything connected with the enterprise was in jeopardy except the interest of the State, whose loan of $3,000,000 was secured by a first mortgage, covering the franchise, road-bed, and all the rolling stock of the company, whose lands, franchise, roadbed, and other property were also incumbered by the other three mortgages before mentioned, amounting to $8,000,000.

No attempt was made to negotiate with the State, but the relief sought was obtained by the arrangement with the holders of the bonds issued by the company, and which were secured by the three mortgages aforesaid which were subject to the mortgage given to the State, as follows: (1.) Holders of bonds under the first of the three mortgages were to surrender 30 per cent. of their bonds and all their unpaid coupons, and to accept preferred stock for the amount. (2.) Persons holding bonds under the second mortgage were to surrender 40 per cent. of their bonds and all their unpaid coupons, and they were to accept preferred stock as stipulated in the indenture. (3.) Those holding bonds under the third mortgage were to surrender the whole of their bonds and unpaid coupons, and were to accept preferred stock for both bonds and coupons.

Priority was thus secured by the bondholders over the unpreferred stock amounting to a lien, as against the holders of the latter stock, for a yearly dividend of 7 per cent., if the net earnings of the road were sufficient for that purpose, as conceded by both parties. Prior stockholders yielded them that preference, but they insist that no just construction of the contract will give them any more in any one year until the net earnings of the road will also give to the holders of the unpreferred stock a dividend for the same amount, and the court is inclined to adopt the same conclusion.

Test the question by the circular addressed to the bondholders, which they all signed as the preliminary step to the arrangement, and the inquiry is too clear for argument, as the statement is that the preferred stock shall 'be 7 per cent., not cumulative, but to share with the common stock any surplus which may be carried over and above 7 per cent. upon both in any one year,' which means, as plainly as language can express the idea, that the preferred stock shall share in the surplus arising from the net earnings of the company, in any one year, beyond what is necessary to pay a dividend to the whole stock, preferred and unpreferred, of 7 per cent. Nothing more favorable could be expected by the bondholders, as they signed the circular and agreed to surrender the number of bonds set against their respective names and to receive in exchange therefor new bonds and preferred stock in accordance with the provisions of the plan for extricating the company from their present difficulties and for improving their securities, showing that their attention had been called to the plan and that they were satisfied with its terms and conditions. Beyond doubt the directors understood the matter in the same way, as they invested the committee, which they appointed, with the power to make such expenditures as to them should seem discreet to carry out the plan, which was sent to all the bondholders for their approval.

Suppose that is so, still it is insisted that the indenture is the only evidence of the contract between the parties, but it is too late to advance that proposition, as all the other instruments are before the court without objection, and several of them were introduced by the complainant as exhibits to the bill of complaint. Seasonable objections, however, could not have availed the complainant if they had been made, as it is well-settled law that several writings executed between the same parties substantially at the same time and relating to the same subject-matter may be read together as forming parts of one transaction, nor is it necessary that the instruments should in terms refer to each other if in point of fact they are parts of a single transaction. Until it appears that the several writings are parts of a single transaction, either from the writings themselves or by extrinsic evidence, the case is not brought within the rule, as it may be that the same parties may have had more than one transaction in one day of the same general nature. Doubt upon that subject, however, cannot arise in this case, as the due relation of the several writings to each other is conceded by both parties.

Standing alone it may be admitted that the indenture furnishes some support to the views of the complainant, but it is clear that all ambiguity disappears when it is read in connection with the writings which preceded and followed it in respect to the same subject-matter. Ample justification for that remark is found in the plan which preceded it and which was approved and signed by all the bondholders, and in the form prepared for the certificate of the preferred stock which was adopted subsequently to the execution of the indenture, and which was accepted by all the holders of the preferred stock as a complete fulfilment of the arrangement between them and the company. Holders of preferred stock, as there provided, are entitled to receive all the net earnings of the company which may be divided pursuant to the 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, which in substance and legal effect is the same regulation as that contained in the circular or plan, and all the other writings upon the subject which were given in evidence at the final hearing.

Viewed in any reasonable light the court is of the opinion that the decision of the Circuit Court is correct, and that there is no error in the record.

DECREE AFFIRMED.