net profits sufficient to make such repayment in | distribution of its assets, including those now whole or in part. its stockholders, who are, as before stated, of the Distilling Company, or their value, to very numerous, and who reside in many parts of the United States and probably in foreign countries. The guaranties have about 40 2. This guaranty shall be irrevocable. No voluntary or involuntary dissolution or merger or consolidation of said Industrial Co. or of the first party shall, except by and with the written consent of the holders of record of all of said preferred stock outstanding at the time, release, discharge, modify or affect said guaran-years yet to run. ty in any way." On March 25, 1907, the Distilling Company entered into a similar contract with the Cuba Company and all of the then present and future holders of its preferred stock. The Distilling Company under its charter had full authority to enter into these contracts. They were for valuable considerations, were authorized by the board of directors, and ratified and approved by the stockholders of the Distilling Company. The Industrial Company has outstanding $6,000,000 of preferred stock, and the Cuba Company $2,500,000 upon each and every certificate of which the guaranty is printed. The Distilling Company has outstanding common and preferred stock to the extent of 773,698 shares of the par value of $100 each, of which the Distillers Securities Corporation (hereafter called the Securities Company) owns 770,026 shares, or more than 992 per cent. It is conceded that the only shares not held by the Securities Company are such as cannot be located. At the time the guaranties were entered into the stock ownership of the Distilling Company was the same as now. Prior to November 27, 1916, the directors and stockholder (i. e., the Securities Company) of the Distilling Company took proceedings to dissolve it, and on that date there was filed with the secretary of state the record of the proceedings under the terms of the statute. The consent to the dissolution was executed by the Securities Company as a holder of more than twothirds of the stock of the Distilling Company. Thereupon the secretary of state issued his -certificate. Publication was begun, and would have been completed about December 20, 1916, if ad interim restraint had not intervened. It will be at once perceived that the same stock ownership as approved the contracts of guaranty now assert the power to dissolve this guarantor company without regard to any supposed rights of the guaranteed preferred stockholders. The stock of the Securities Company is widely distributed. It is dealt in on the New York Stock Exchange. The Industrial and Cuba Companies are prosperous operating concerns. The Distilling Company has never yet been called upon to respond to the guaranties. It is a holding corporation having assets of a par, and concededly real, value of approximately $66,000,000. The effect of the dissolution will be substantially a turning over of the assets of the Distilling Company to the Securities Company. There is then nothing to prevent the Securities Company from dissolving and the The Industrial and Cuba Companies now have assets which, if reduced to cash, would be sufficient to retire the preferred stock at par and above. The preferred stockholders of the Industrial and Cuba Companies cannot be put in status quo. The consideration is executed. The issue is, If A. corporation, authorized by a provision in its charter to guarantee payment of dividends on stock of B. corporation, does so guarantee such payment for a period of 40 years yet to run, for a valuable consideration, executed, so that the parties cannot be placed in status quo, such contract of guaranty being approved by the stockholders of A. corporation, can it be permitted to dissolve, and may the holders of the stock of A. corporation who have approved the contract of guaranty be permitted to vote such stock in favor of such dissolution, without making some adequate provision for the contingent liability of A. corporation to the stockholders of B. corporation? Defendants insist that under sections 1, 31, 53, 54 and 58 of the Act Concerning Corporations, Revision of 1896 (P. L. p. 277), the Distilling Company may be dissolved by its stockholders and its assets distributed among them after payment of its debts (section 54), and that such contingent liabilities as are sought to be asserted by the complainants are not debts within the meaning of the statute, and that complainants are not creditors within the meaning of section 58, which provides that the trustees or receivers on dissolution shall pay ratably, so far as the money and property of the corporation shall enable them, all of the creditors who prove their debts in the manner directed by the court, and that the balance, after the payment of such debts, be distributed among stockholders. The cases relied upon are those which hold that upon insolvency or bankruptcy obligations of this character cannot be enforced against assets on a par with creditors holding certain claims (Riggin v. Magwire, 15 Wall. 549, 21 L. Ed. 232; Dunbar v. Dunbar, 190 U. S. 340, 23 Sup. Ct. 757, 47 L. Ed. 1084; Conklin v. U. S. Shipbuilding Company [C. C.] 136 Fed. 1006; Id. [C. C.] 143 Fed. 631; In re Pettingill [D. C.] 137 Fed. 143; People v. Metropolitan Surety Company, 205 N. Y. 135, 98 N. E. 412, Ann. Cas. 1913D, 1180); those which hold that upon the administration of the estate of a deceased such obligations cannot be enforced (Field v. Thistle, 58 N. J. Eq. 339, 43 Atl. 1072, affirmed 60 N. J. Eq. 444, 46 Atl. 1099; Terhune v. White, 34 N. J. Eq. 98); those which hold that the lige these preferred stockholders, upon a breach of the contracts of guaranty 30 or 40 years hence, to follow the assets of the Distilling Company or the stockholders of the Securities Company, wherever they might then be, is in reality any remedy. court will not prevent the distribution of an | among its stockholders, residing in all parts estate in order to permit such claims to ripen of the United States and foreign countries. into certain obligations (Jervis v. Wolferstan, I cannot believe a remedy which would ob 18 L. R. Eq. Cases, 18; In re Nixon [1904] 1 Ch. Div. 638); those which hold that the existence of such a contingent liability does not bring a voluntary conveyance within the rule that the contemporaneousness of a gift and the existence of a debt is conclusive of fraud in proceedings to set aside an alleged fraudulent conveyance (Severs v. Dodson, 53 N. J. Eq. 633, 34 Atl. 7, 51 Am. St. Rep. 641; Mason v. Somers, 59 N. J. Eq. 451, 45 Atl. 602); these latter cases must be confined to the very point decided (Dodson v. Taylor, 53 N. J. Law, 200, 21 Atl. 293; N. J. Ins. Co. v. Meeker, 37 N. J. Law, 282). They also rely upon the opinion of Vice Chancellor Stevenson in Hoopes v. Basic Co., 69 N. J. Eq. 679, 61 Atl. 979. poration and its stockholders, rendered of no force or effect. One party to a contract would be given the absolute privilege of avoiding it without liability. Guaranties of corporations would be of substantially the value of the paper upon which they were written. It was apparently seriously contended upon the oral argument that because, upon the dissolution of this corporation, its assets will go to the Securities Company, substantially the single stockholder, it was a mere conversion, and the preferred stockholders, in case of default, might sue the Securities Company, and that the relative rights are not altered. This is not true. The liabilities of the Securities Company are substantially different from those of the Distilling Company. Complainants insist that the assets of a There are no liabilities of the Distilling Comcorporation are a trust fund to secure the pany, save those under the contracts of guarpayment of its debts or obligations, certain anty. The case must be treated precisely as or contingent, and that it is unjust and in- if the corporation, instead of having one equitable to permit the distribution of this stockholder, had 20,000. Unless relief can trust fund to stockholders unless adequate be granted in these cases in some form, a provision is first made to take care of the guaranty of a corporation, solemnly entered contingent liability to the preferred stock- into by its directors and approved by its holders of the Cuba and Industrial Com- stockholders, may be, by action of the corpanies; that their rights are superior to any rights of stockholders; that the stockholders of the Distilling Company have by the terms of the contracts of guaranty estopped themselves from taking any action to dissolve the Distilling Company without making adequate provision for these contingent obligations; that to permit dissolution in the manner contemplated would be to deprive complainants of any remedy upon the contracts of guaranty. To this the defendants reply that complain-asserted, but the underlying reason for the ants accepted such contracts of guaranty with full knowledge of the law, and that the dissolution of the Distilling Company does not in fact deprive complainants of a remedy because by virtue of the statute (sections 53, 87, and 90 of the Corporation Act) corporate existence is continued for certain purposes, among which is that of being sued upon this class of liabilities; that if in the future there should be a default in the payment of dividends by the Cuba and Industrial Companies which would convert the contingent into a certain liability, the preferred stockholders might sue the corporation, make service upon it, obtain judgment against it, and then enforce the judgment against its assets in the hands of its stockholders, or against its stockholders for the value of the assets that they have received. The mere statement of the remedy reserved to the preferred stockholders of the Cuba and Industrial Companies proves its total inadequacy. If the assets of the Distilling Company are turned over to the Securities Company, the Securities Company in turn may be dissolved and its assets distributed For the purposes of this opinion it may be conceded that it is settled law that in cases of bankruptcy or insolvency or the estates of deceased, claims of this nature may not be rule is convenience. Natural justice requires that contingent obligations should be protected as well as certain. It is only be cause there is no method by which their money worth can be presently ascertained and because to withhold distribution of assets of insolvents and estates of deceased until such worth could be ascertained would be impracticable that the courts have been foreed to adopt the prevailing rule. Judge Noyes in Pa. Steel Co. v. N. Y. City Ry. Co., 198 Fed. 721, 117 C. C. A. 503 (C. C. A. 2d Cir.) clearly points this out, as does the court in Gay Mfg. Co. v. Gittings, 53 Fed. 45, 3 C C. A. 422 (C. C. A. 4th Cir.). In the latter case the court says: It "This case has been decided as between crediwas stated at the bar that the property of the tors and persons claiming to be creditors. Gay Manufacturing Company may realize more than enough to pay the liens and the proved past-due debts. Should this be the result of the sale, there may arise a very different question with regard to this surplus, as between the petitioners and the stockholders. No opinion is expressed on this point." The case in its facts was very similar te those presented by the bills in the cases sub judice. The guaranty there dealt with was of the principal and interest of a bond issue and in the present instance is of dividends on preferred stock. In People v. Metropolitan Surety Company, 205 N. Y. 135, 98 N. E. 412, Ann. Cas. 1913D, 1180, the Court of Appeals of New York, although excluding participation of holders of contingent obligations in assets on a par with creditors holding certain claims said: "They [that is, the orders under review] do not affect his right to share in any surplus which would otherwise be returned to the corporation or paid to its stockholders. They simply exclude him, on account of sound public policy founded on convenience, if not necessity, from sharing in a trust fund applicable only to claims in existence when the court through its receiver took possession of the corporate assets. The contest is between creditors of the corporation, not between the claimant and the corporation." The court modified the orders below so that they would state that they were without prejudice to the right of claimant to share in the surplus, if any, after payment of the provable debts at the date of dissolution. I am firmly of the opinion that the rule ought not to be extended further than its reason requires. Holders of this class of contingent obligations have been recognized as creditors (Tod v. Kentucky Union Land Co. [C. C.] 57 Fed. 47; Marbury v. Kentucky Union Land Co., 62 Fed. 335, 10 C. C. A. 393 [C. C. A. 6th Cir.]) and entitled to share with other creditors in assets where a method could be devised of ascertaining the money worth of the claim. vency, prove against assets. It is because of sheer necessity. It may well be, therefore, that in those sections of the act dealing with voluntary dissolution the words "debt" and "creditor" must be held to include holders of contingent obligations, for the rule of necessity does not apply. Can it be conceived that the Legislature ever intended to give a corporation express power to enter into such contracts and at the same time give its stockholders express power to, whenever they elect, avoid the contracts by voluntary dissolution leaving the other parties to the contracts (where they have parted with valuable consideration of which the stockholders have the advantage) to the inadequate remedy of, at some subsequent time, when the contingent liabilities have ripened into certain, suing the dissolved corporation and then following its assets and its stockholders? A corporation might enter into a contract of guaranty to run for 20 years, and might receive the sum of $100,000, the next day or shortly thereafter proceedings might be taken to dissolve it, the $100,000 might be distributed among its stockholders, and the holders of the guaranty left helpless. The language of Justice Parker in Hould v. Squire & Co., 81 N. J. Law, 103, 105, 79 Atl. 282, 283, is as applicable here as it was to the case then before the court. He was dealing with the right of a holder of a contingent obligation to sue a corporation after dissolution, and, determining that he could, he said: to defeat valid causes of action for heavy dam"To hold otherwise would enable a corporation ages by the simple expedient of dissolution and organization of a new corporation taking over the assets of the old one.' There is great force in the argument of complainants that the Legislature never intended to permit a voluntary dissolution of a To hold that a corporation after entering corporation and the distribution of its assets into contracts of guaranty may be dissolved to stockholders, under the provisions of the by its stockholders without regard to the statute heretofore referred to, until all of the rights of the guaranteed would, in my view, obligations of the corporation, contingent or permit a situation to exist as unjust as that otherwise, should have been adequately pro- denounced by Justice Parker. The language vided for, and that the terms "debt" and "cred- of Vice Chancellor Stevenson in Hoopes v. itors" used in the sections of the statute deal- Basic Company, 69 N. J. Eq. 679, 61 Atl. 979, ing with dissolution include holders of con- with respect to the qualifications a creditor tingent obligations as well as certain and must possess in order to institute proceedings are synonymous with the words used in sec-in insolvency, has no application to what I tion 107 with respect to merger or consolidation, "debts, liabilities and duties." The words "debt" and "creditors" used in that portion of the corporation act dealing with insolvency have been held to have no narrow, restricted, or technical meaning. Rosenbaum v. Credit System Co., 61 N. J. Law, 543, 548, 40 Atl. 591; Spader v. Mural Decoration Mfg. Co., 47 N. J. Eq. 18, 20 Atl. 378; Bolles v. Crescent Drug & Chemical Co., 53 N. J. Eq. 614, 32 Atl. 1061; Lehigh & Wilkesbarre Co. v. Stevens & Condit Trans. Co., 63 N. J. Eq. 107, 51 Atl. 446. It is not because of any technical signification of the words "debt" or "creditor" that courts have been constrained to rule that holders of contingent obligations cannot, in case of insol am now discussing. What the Vice Chancellor said, I think, was obiter. It may be that, in order to institute the equitable quo warranto provided for under the statute, that a creditor must be such as, at least prima facie, is entitled to an immediate payment out of assets, but I can hardly believe that the holder of a contingent obligation is not entitled, upon voluntary dissolution, to intervene for the protection of the trust fund, the assets of the corporation, which is the security for the performance of the contingent liability. [1] The conclusion which I have reached, however, makes it unnecessary to pass upon the broad question as to whether or not, under any circumstances, the stockholders of a corporation which has entered into contin- | Dissolution of corporations has been preventgent obligations will be permitted to dissolve ed. Fisk v. Railroad Co., 10 Blatchf. 518, it without making adequate provision for Fed. Cas. No. 4830, referred to in Louisiana such obligations. I think the stockholders State Lottery Co. v. Fitzpatrick, 3 Woods, have effectively estopped themselves from 222, Fed. Cas. No. 8541; Kessler v. Contiexercising their right under the statute in the nental Construction and Improvement Co. (C. manner in which they are now attempting to C.) 42 Fed. 258. While it may be said that exercise it. The contracts of guaranty, these cases are not directly in point, yet they stamped upon the back of each of the certifi- recognize the jurisdiction of a court of equity cates of preferred stock, the dividends upon to enjoin a party from disenabling himself which were guaranteed, contain this provi- from performing a contract and the power sion: of the court to enjoin the dissolution of a corporation. "This guaranty shall be irrevocable. No voluntary or involuntary dissolution or merger or consolidation of said Industrial Co. or of the first party shall, except by and with the written consent of the holders of record of all said preferred stock outstanding at the time, release, discharge, modify or affect said guaranty in any way.' of Illinois v. Chicago Auditorium Association, Justice Pitney, in Central Trust Company 240 U. S. 581, at page 591, 36 Sup. Ct. 412, at page 415 [60 L. Ed. 811] said: "Commercial credits are, to a large extent, bascontracts of acknowleged validity will be pered upon the reasonable expectation that pending formed in due course; and the same principle that entitles the promisee to continued willingof the promisor. In short, it must be deemed ness entitles him to continued ability on the part an implied term of every contract that the promisor will not permit himself, through insolvency or acts of bankruptcy, to be disabled from makproceedings are but the natural and legal conseing performance; and, in this view, bankruptcy quence of something done or omitted to be done by the bankrupt, in violation of his engagement." that bankruptcy proceedings are an equivaAnd he therefore reaches the conclusion lent of an anticipatory breach of a continu Defendants insist that this clause indicates that the parties had in contemplation that there might be a voluntary dissolution, that the clause was inserted to avoid what counsel indicated was the law of New York, i. e., that upon voluntary dissolution such a contract would become absolutely null and void so that no relief could be had by following assets or proceeding against stockholders, that the intent of the parties was merely to preserve such rights. I cannot believe that, as matter of fact, this was the understanding of the holders of the stock. I have already indicated that such a remedy would be inadequate, and I do not believe that the holders ing agreement. of the guaranteed stock ever assumed that they were receiving such practically worth-law to continued willingness and continued A promisee, being entitled as matter of less obligations. My construction of the clause is that the parties agreed that no proceedings should be taken which would "release, discharge, modify or affect" the guaranty; that if voluntary proceedings in dissolution cannot be taken without affecting the guaranty, the Distilling Company and its stockholders contracted that no such proceed-out ings should be taken; that the taking of such proceedings is a breach of the contract which this court may prevent because of the inadequate remedy at law. While it may be true that, as matter of law, voluntary dissolution does not discharge or release the contract of guaranty nor modify its terms, yet it clearly affects it, and that in a most vital particular, i. e., the remedy to which the holders of the guaranteed stock would be entitled. That a corporation or its stockholders may estop themselves from exercising statutory rights needs no citation of authority. ability on the part of the promisor, has, upon the promisor's disenabling himself, an action at law for damages, but he also may go into a court of equity to enjoin the promisor from voluntarily disenabling himself if the remedy at law for the breach be inadequate, as in these cases. power to prevent bankruptcy or insolThe court is, of course, withvency just as it is without power to prevent a man who has deliberately asserted that he intends to commit suicide in order that his estate may be distributed without regard to contingent obligations from carrying out his threat, because its decree would be ineffective. power, however, to prevent a corporation There is no such want of from dissolving if equitable consideration requires that this should be done. Much confusion has been created by a failure to distinguish between lack of jurisdiction and lack of power to enforce a decree or order. are to serve the purpose of the creation of So long as courts of equity this state the Court of Chancery is the sucthe Court of Chancery of England, and in v.cessor, in all that such term implies, of that court, jurisdiction must depend only upon the existence of, or a threatened wrong, and the absence of an adequate remedy at law. The court has full and complete jurisdiction, if there be no adequate remedy at law, to compel a singer to perform his contract, to [2] There is no want of jurisdiction or of power in this court. The court may enjoin a defendant from disenabling himself from performing a continuing contract. Hooper Brodrick, 9 L. J. Ch. 321 (N. S.) 59 Eng. Reprint, 791; De Mattos v. Gibson, 4 D. G. J. 276, 28 L. J. Ch. 165, 498, 45 Eng. Reprint, 108; Cockrell v. Warner, 14 Ark. 345; Southern Ry. Co. v. Franklin & Pittsylvania R. Co., 96 Va. 693, 32 S. E. 485, 44 L. R. A. 297. compel an innkeeper to keep open an inn, to making unnecessary and improper any excompel a person to so act as to continue sol- pression of opinion upon the merits of the vent in order to permit the performance of Rice bill. I am of the opinion, resting upon a contract, and cases of like nature. The the jurisdiction of this court to enjoin a court will not act, however, directly in such person from disenabling himself to perform cases because its order or decree would be a contract where the remedy at law is inadewholly ineffective. It is therefore often im- quate, to enjoin a breach of a contract, and properly said to lack jurisdiction. That this to compel its specific performance where is not so is clearly indicated by the fact that there is no adequate remedy at law, and to if a negative order or decree would be effec- protect the rights of cestui que trustents in tive, the court grants it. Due to our habit of trust funds, the dissolution of the corporaendeavoring to find decided cases to fit each tion may be prevented. I am unwilling to situation, we too often overlook the funda- say whether I would or would not be inclinmental reasons for the creation or evolutioned to grant relief under the Rice bill if I am of the court. It received no grant of express powers, nor were express duties imposed upon it. The law courts were left to deal with the violation of all rights for which they .could give an adequate remedy. The duty of relieving against any remaining wrongs was imposed upon the Court of Chancery. If equity is to be held bound by fixed rules and limitations of jurisdiction as law, there will be the necessity of a third court to serve, as to equity, the purpose of the institution of equity as to law. In the cases sub judice I have found the existence of a threatened wrong, and the absence of an adequate remedy at law which gives jurisdiction, and no obstacle against the exercise of such jurisdiction. Courts have intervened for the pro-ing the motions to strike out, making the tection of contingent rights. Van Duyne v. Vreeland, 12 N. J. Eq. 142; Flight v. Cook, 2 Ves. Sr. 619, 28 Eng. Reprint, 394. wrong in enjoining dissolution. The fact that dissolution has been enjoined, however, removes from the Rice bill its element of anticipated damage, and no order, therefore, can be made under it. I am sorry for this, because I had hoped that all three cases might go to the Court of Appeals at one time. I have asked counsel to devise some plan, and both they and I have failed. I have concluded, however, not to dismiss the Rice bill, but to postpone consideration of it until such time as the Court of Appeals may pass upon the Allen and Industrial Company bills, or it is evident that no appeals are to be taken. The orders, therefore, will be in the Allen and Industrial Company cases, deny orders to show cause absolute, and granting the injunction asked for. In the Rice bill the order will be that consideration of the case be postponed, but that either party may have the right to bring it on or to make such applications as they see fit upon five days' notice. (87 N. J. Eq. 524) Bijur v. Standard Distilling & Distributing Co., 74 N. J. Eq. 546, 70 Atl. 934, presents no obstacle to the granting of relief. In that case Vice Chancellor Emery held that there was no remaining obligation on the part of the company to enforce; and, secondly, that the estoppel claimed, which was based CAHILL v. TOWN OF HARRISON et al. on fraud, had not been proven. That there (No. 33/534.) is no precedent will not prevent a court of (Court of Chancery of New Jersey. March 19, equity from acting. Earle v. American Sugar Refining Company, 74 N. J. Eq. 751, 71 Atl. 391, where the present chancellor, then vice 1. TAXATION 652-JURISDICTION-SUIT TO chancellor, said the principles of equity will be applied to new cases as they are presented, and relief will not be withheld merely on the ground that no precedent can be found. And he reiterated this in Palmer v. Palmer, 84 N. J. Eq. 550, 95 Atl. 241. ENJOIN TAX SALE. 1917.) Where bill sought an injunction restraining a town and its collector from selling lands of the complainant held by virtue of a tax title to satisfy an alleged lien and for adjusted taxes, reported subsequent to the tax sale to complainant, jurisdiction must be rested, if it exists, upon the power of the court to remove a cloud from title or to enjoin such a proceeding as will create a cloud on title. Cent. Dig. §§ 1324-1331.] 2. TAXATION 652 RESTRAINING SALE The factors in this case which distinguish it from any other brought to my attention are: First, the corporation was expressly authorized to enter into the contracts; second, the stockholders of the corporation approved BILL-AMENDMENT. the contracts; third, the contracts were for Although the bill does not specifically pray valuable considerations executed, and the that the cloud cast upon the complainant's title parties cannot be put in status quo; fourth, by a report of the adjustment commissioners should be removed, or that the town should be the corporation and its stockholders express-prevented from taking such proceedings as will ly contracted that no voluntary dissolution would affect the contracts. I have concluded, therefore, to deny the motions to dismiss the Allen and Industrial Company bills and to enjoin the dissolution of the Distilling Company. This results in cast a cloud upon the title, and does not specifically allege that the result and conduct of the town would be, if permitted, a deprivation of amended to include such allegations. complainant's constitutional rights, it may be [Ed. Note.-For other cases, see Taxation, Cent. Dig. §§ 1324-1331.] For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes |