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    Augusta Trust Co. v. Augusta, Et Al.

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    Kevin Hernandez
    The Supreme Court of Maine ruled that holders of preferred stock who had previously held bonds were not entitled to share equally with remaining bondholders in the proceeds of foreclosed railroad properties. The Court found that by converting their bonds to preferred stock, the former bondholders ceased being creditors of the railroad and became stockholders subordinated to the claims of creditors. Additionally, the Court affirmed the lower court ruling that a company that had purchased the railroad properties at foreclosure did not assume liability for debts secured by the foreclosed mortgages.

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    Augusta Trust Co. v. Augusta, Et Al.

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    Kevin Hernandez
    67 views3 pages
    The Supreme Court of Maine ruled that holders of preferred stock who had previously held bonds were not entitled to share equally with remaining bondholders in the proceeds of foreclosed railroad properties. The Court found that by converting their bonds to preferred stock, the former bondholders ceased being creditors of the railroad and became stockholders subordinated to the claims of creditors. Additionally, the Court affirmed the lower court ruling that a company that had purchased the railroad properties at foreclosure did not assume liability for debts secured by the foreclosed mortgages.

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    The Supreme Court of Maine ruled that holders of preferred stock who had previously held bonds were not entitled to share equally with remaining bondholders in the proceeds of foreclosed railroad properties. The Court found that by converting their bonds to preferred stock, the former bondholders ceased being creditors of the railroad and became stockholders subordinated to the claims of creditors. Additionally, the Court affirmed the lower court ruling that a company that had purchased the railroad properties at foreclosure did not assume liability for debts secured by the foreclosed mortgages.

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    © All Rights Reserved
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    67 views3 pages

    Augusta Trust Co. v. Augusta, Et Al.

    Uploaded by

    Kevin Hernandez
    The Supreme Court of Maine ruled that holders of preferred stock who had previously held bonds were not entitled to share equally with remaining bondholders in the proceeds of foreclosed railroad properties. The Court found that by converting their bonds to preferred stock, the former bondholders ceased being creditors of the railroad and became stockholders subordinated to the claims of creditors. Additionally, the Court affirmed the lower court ruling that a company that had purchased the railroad properties at foreclosure did not assume liability for debts secured by the foreclosed mortgages.

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    © All Rights Reserved
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    Augusta Trust Co. v Augusta, Hallowell & Gardiner Railroad Co., et al.

    August 11, 1936 | Sturgis, J.


    Summary: Augusta, Hallowell & Gardiner Railroad Co. had outstanding bonds secured by a
    mortgage. The bond holders are given the right to convert the bonds into preferred stocks
    (entitled to fixed 4% dividends yearly, redeemable). Action was brought to foreclose
    mortgaged properties. Clarification was sought as to the right to share in the proceeds of
    the foreclosure sale of the bondholders who converted to preferred stock. The Court said
    that by surrendering their bonds and converting them to preferred stocks, the bondholders
    ceased to be creditors and became mere stockholders.
    Facts:
    The Augusta Trust Company (ATC), a banking corporation in Augusta, Maine, was
    named as trustee in the general convertible mortgage that Augusta, Hallowell &
    Gardiner Railroad Company (AHG) executed. The latter formerly furnishes
    transportation service in and between the cities of Augusta, Hallowell & Gardiner.
    This mortgage was executed by AHG to secure its issue of bonds amounting to
    $250,000, of which $50,000 were outstanding and $195,000 were preferred stocks
    (the holders of the bonds were given the right and privilege of converting the same
    into preferred stocks). The holders of the preferred stocks were entitled to received
    4% dividend and payment of said dividends and principal were likewise secured by
    the mortgage executed with ATC.
    By a vote of its stockholders, AHG conveyed all its properties, rights, privileges, and
    franchises to Augusta, Winthrop & Gardiner Railway (AWG), a street railway
    corporation. AWG likewise executed a convertible mortgage in the amount of
    $150,000, naming ATC the trustee (same arrangement as the first mortgage i.e.
    bonds convertible into preferred stocks, 4% dividends). $95,000 of this $150,000
    were converted into preferred stocks and $55,000 were outstanding.
    AWG, again, placed another mortgage to secure another bond issue of $125,000,
    naming ATC as trustee. $100,000 remain outstanding and were in default.
    In a foreclosure proceeding, all the properties, rights, and operating franchises of
    AWG were sold to a new corporation Androscoggin & Kennebec Railway Company
    (AK). For a time, AK operated the railway system. But system was soon abandoned.
    Part of the physical properties were then sold and part of the proceeds were
    deposited with ATC as trustee.
    The action was brought by ATC primarily to foreclose the several mortgages given
    by AHG and AWG as security for the issuance of the bonds. ATC contended that even
    if such properties were foreclosed, the proceeds would not enough to cover the
    amount remaining due upon the bonds and preferred stocks issued under the
    mortgages and so AK should be held liable for the deficiency.
    AK for its part denied liability secured by these mortgages. Intervening
    bondholders, on the other hand, deny the right of the owners of preferred stocks to
    share equally and ratably with the bondholders in the proceeds of the properties
    covered by the mortgages.
    The Supreme Judicial Court of Kennebec County ruled that (1) the holders of the
    preferred stocks issued and outstanding in exchange for bonds are entitled to share
    with the bondholders; and (2) AK is the liable for the deficiencies in the debts
    secured by the mortgages.
    Issue:
    [Main] WON the holders of preferred stockholders may equally and ratably share with the
    bondholders in the proceeds of the properties covered by the mortgages. NO.
    [Minor] WON AK should be held liable for the deficiencies. NO.
    Doctrine:
    As to the status of preferred stockholders with respect to the proceeds
    The Court cited various cases to illustrate its point.
    o Spear v. Rockland-Rockport Lime Co.: A preferred stockholder is not a
    creditor. He is a stockholder, although his peculiar rights arise from contract.
    He is a stockholder as to creditors, and his rights are subordinate to theirs.
    He cannot claim dividends out of funds that are needed for, or that properly
    should be applied to, the payment of debts.

    o Belfast & M. Lake R. Co. v. Belfast: Stockholders, even preferred stockholders,
    can have no priority over creditors.

    o Warren v. Queen & Co.: It would be against public policy to permit a preferred
    stockholder to assert his claim as such against the funds of a corporation in
    preference to the claims of creditors. The stock is part of the capital of the
    corporation which the holder cannot withdraw until its indebtedness is paid.
    The preferred stockholder is but a stockholder with a right to have his
    dividend paid before dividends on the common stock are paid, and he is not
    entitled to any dividend until the corporation has funds which are properly
    applicable to the payment of dividends. A corporation has no right to make
    any rules by which the holder of stock, common or preferred, may be
    preferred in the liquidation of its assets over the creditors of the company

    o Commentary of Cook on Corporations: Formerly it was a matter of doubt and
    discussion whether or not a preferred stockholder had any rights as a
    creditor of the company or was confined to his rights as a stockholder. The
    law is now clearly settled that a preferred stockholder is not a corporate
    creditor. A contract that dividends shall be paid on the preferred stock
    whether any profits are made or not would be contrary to public policy and
    void. An agreement to pay dividends absolutely and at all events--from the
    profits when there are any and from the capital when there are not--is an
    undertaking that is contrary to law and is void. Public policy condemns with
    emphasis any such undertaking on the part of a corporation as to its
    preferred or guaranteed stock. An agreement of a corporation to pay the
    preferred stockholders before corporate creditors are paid is void.

    Court added that it is within the power of the Legislature, by charter or statute, to
    prescribe that corporations may issue certificates in the form of certificates of
    preferred stocks making them creditors of the corporation as well as stockholders,
    and giving them a lien upon the property of the corporation with a priority over
    other creditors. However, the preference given the holders of the preferred stocks in
    the conversion agreements in this case were not authorized by statute when made.

    Therefore, by surrendering their bonds and taking in lieu thereof preferred stock
    the bondholders of these street railway companies ceased to be creditors and
    became mere stockholders. Those who have not made the exchange and hold their
    bonds are entitled to the security of the mortgages. The preferred stockholders are
    not entitled to share in the assets of the companies until all creditors have been paid
    in full.

    As to the liability of AK
    Ruling of the Supreme Judicial Court of Kennebec County affirmed. Records show
    that AK purchased the equities of redemption in the properties covered by the
    mortgages subject to incumbrances but without assuming payment of the mortgage
    debts. Nor does any accompanying contract, fact, or circumstance indicate that the
    purchaser AK intentionally assumed this obligation to pay the mortgage debts.

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