on 583; 1869, National Bank v. Commonwealth, 76 U. S. (9 Wall.) 353, on 359; 1873, The Delaware Railroad Tax, 85 U. S. (18 Wall.) 206, on 229; 1877, Farrington v. Tennessee, 95 U. S. 679, on 686; 1884, State Bank v. City of Richmond, 79 Va. 113; 1896, Shelby Co. v. Union & P. Bank, 161 U. S. 149, on 154; 1895, Bank of Commerce v. Tennessee, 161 U. S. 134, on 146; 1897, Union Bank v. City of Richmond, 94 Va. 316; 1898, Bank v. Memphis, 101

Tenn. 154.

7. Capital means the property of the company: 1861, People v. Commissioners, etc., 23 N. Y. 192, on 219; 1862, Bank of Commerce v. N. Y. City, 67 U. S. (2 Black) 620, on 629; 1865, Van Allen v. Assessors, 70 U. S. (3 Wall.) 573, on 583; 1869, National Bank v. Commonwealth, 76 U. S. (9 Wall.) 353, on 359; 1874, Bailey v. Clark, 88 U. S. (21 Wall.) 284; 1878, Burrall v. Bushwick R., 75 N. Y. 211; 1880, Bradley v. Bauder, 36 Óhio St. 28, on 35; 1883, Williams v. Western U. Tel. Co., 93 N. Y. 162; 1886, Tennessee v. Whitworth, 117 U. S. 129, on 139; 1895, Wells v. Green Bay, etc., Co., 90 Wis. 442.

8. Capital is the same as capital stock of the corporation: 1883, Williams v. Western Union Tel. Co., 93 N. Y. 162; 1891, People v. Coleman, 126 N. Y. 433, supra, p. 778: 1892, Railway Co. v. Furnace Co., 49 Ohio St. 102; 1894, American, etc., Co. v. State Board, 56 N. J. L. 389; 1895, Tradesman Pub. Co. v. Car Wheel Co., 95 Tenn. 634.

9. Capital is not the same as shares of stock in the hands of the shareholders: 1865, Van Allen v. The Assessors, 70 U. S. (3 Wall.) 573, on 583; 1866, Commonwealth v. Hamilton Mfg. Co., 12 Allen (Mass.) 298, on 302-4; 1866, People v. Commissioners, 71 U. S. (4 Wall.) 244, on 255; 1866, Bradley v. The People, 71 U. S. (4 Wall.) 459; 1869, National Bank v. Commonwealth, 76 U. S. (9 Wall.) 353, on 359; 1880, Bradley v. Bauder, 36 Ohio St. 28; 1886, Tennessee v. Whitworth, 117 U. S. 129; 1897, New Orleans v. Citizens' Bank, 167 U. S. 371, on 402.

10. Property of the corporation is not the same as shares of stock: 1866, Commonwealth v. Hamilton Mfg. Co., 12 Allen (Mass.) 298, on 302-4; 1898, State v. Travelers' Ins. Co., 70 Conn. 590, on 603; 1899, Owensboro National Bank v. Owensboro, 173 U. S: 664.

Sec. 211. Capital stock-Kinds, common and preferred.

HAMLIN v. CONTINENTAL TRUST COMPANY.1

1897. IN THE UNITED STATES CIRCUIT COURT OF APPEALS, Sixth Circuit (Ohio), 47 U. S. Appeals Rep. 422-438, 78 Fed. Rep. 664, 36 L. R. A. 826, 7 A. & E. C. C. N. S. 631.

[Certain unsecured creditors of the insolvent Toledo, St. L. & K. C. R. Co., in May, 1893, filed a bill on behalf of all the creditors to wind up the affairs of the railroad and distribute its assets; a receiver was appointed under this bill; the bondholders were not made parties to this suit, but in December, 1893, the Continental Trust Company, trustees for the holders of some $9,000,000 mortgage bonds, filed in the same court a bill to foreclose the mortgage, whereupon the same receiver was appointed as before, and the two cases ordered to be consolidated. Before any decree adjudicating claims or decreeing foreclosure, Hamlin et al., appellants herein, asked to become parties defendant with leave to file an answer and cross-bill; this was granted, 1Statement of facts abridged. Only part of opinion given.

50-WIL. CASES.

subject to the right of complainants, after further examination, to move to strike from the files, or strike out anything attacking the validity of the consideration for the mortgage bonds. Such motion was afterward made accordingly, and the court gave an opinion "denying the claim of the appellants (Hamlin et al.) to be creditors of the railroad company, or that as preferred stockholders they had any lien valid as against creditors, or any right or interest in or to the property of said company antagonistic to the corporation or to the class of common stockholders," and thereupon an order was entered "denying the appellants the right to intervene or file an answer or other pleading. This ruling, and the decree following it, are appealed from. Other facts are stated in the opinion.]

LURTON, Circuit Judge. * The case made by the petition, answer and cross-bill was substantially this: The appellants and those acting in concert with them are owners and holders of certificates of preferred non-voting stock issued by the Toledo, St. Louis and Kansas City Railroad Company. The total issue of these certificates was $5,805,000, and of this total the appellants and those represented by them hold about $2,000,000. They claim that these certificates are money obligations of the railroad company, secured by a lien next after the existing first mortgage bonds of said company. They aver that, though no mortgage was executed and registered to secure said certificates, they constitute a valid equitable mortgage, binding upon the corporation and upon all creditors who become such with notice of this equitable lien. These certificates are in form alike, and were issued simultaneously with the execution of the first mortgage sought to be foreclosed herein, and were registered by the trustee under said first mortgage. We here set out one of these certificates and one of the coupons attached:

"Toledo, St. Louis and Kansas City Railroad Company.

"No.

Preferred capital stock.

10 shares. "This is to certify that James M. Quigley, or bearer, is entitled to ten shares of one hundred dollars each, of the preferred non-voting capital stock of the Toledo, St. Louis and Kansas City Railroad Company.

"This stock constitutes a lien upon the property and net earnings of the company next after the company's existing first mortgage. It does not entitle the holder to vote thereon. After the first day of January, 1888, it is entitled to, and carries interest at the rate of 4 per cent. per annum, payable semi-annually, represented by interest coupons attached to this certificate. Such interest is only payable out of the net earnings of the company after the payment of interest upon its existing first mortgage bonds, and the cost of maintenance and operation. A statement showing the business of the company for the half of its fiscal year next preceding shall be exhibited at the office of the company in New York to the holder of this certificate, at the maturity of each interest coupon, and the net earnings applicable to such interest shall be reckoned for such period. Such interest is not to ac-

cumulate as a charge, and the coupons representing unearned interest must be surrendered and canceled on the payment in whole or in part of a subsequently maturing coupon. At any time after the first day of January, 1891, and before the first day of January, 1898, this certificate may be converted into the common capital stock of the company. If not converted, then to become a preferred four per cent. non-cumulative stock. The company will create no mortgage of its main line other than its first mortgage, nor of any part thereof, except expressly subject to the prior lien of this certificate, without the consent of the holders of at least two-thirds of this stock present at a meeting, of which reasonable personal notice must be given to each registered stockholder, and by publication for at least three successive weeks in two leading daily newspapers published in the cities of New York and Boston. One-third of the entire issue of this stock present in person or by proxy shall constitute a quorum. Nor will the company increase the issue of these certificates of stock without consent obtained as above. This certificate of stock shall be transferrable by delivery or by transfer on the book of the company in the city of New York, after a registration of ownership, certified hereon by the transfer agent of the company.

"Countersigned.

"The Toledo, St. Louis and Kansas City Railroad Company will pay to bearer on the first day of January, 1898, upon the surrender of this warrant, at its office or agency, in the city of New York, any amount that may be due hereon under the conditions set forth in the certificate of stock to which this is attached, not exceeding the sum of twenty dollars. Coupon No. 20. No.

"ISAAC WHITE, Secretary.'

I

In the absence of charter regulation or prohibition by the law of the state under which a corporation is organized, a corporation at its organization may classify its stock, and provide for a preference of one class over another in respect of both capital and dividends. Cook on Stock and Stockholders (3d ed.), §§ 267, 268, 278; Warren v. King, 108 U. S. 389; Lockhart v. Van Alstyne, 31 Mich. 76; Kent v. The Quicksilver Mining Company, 78 N. Y. 159; McGregor v. The Home Insurance Company of Newark, New Jersey, 33 N. J. Eq. 181; Miller v. Ratterman, 47 Ohio St. 141, 163.

In providing for the lien of this stock upon the "property" of the company next after the company's existing first mortgage, "property and net earnings" are coupled together. This is significant. The lien given on "net earnings" is the same kind of lien as that given on the "property" of the company. In such case it is a preference over

the usual rights and interests of another but subordinate class of stockholders. Neither do we think that the provision that this stock shall "become a preferred four per cent. non-cumulative stock," in the event the holder fails to avail himself of the privilege of converting it into common stock within the time allowed, is indicative that it was not preferred stock before the rejection of the option to become common stock. Before that it was a non-voting, non-cumulative preferred stock with the option to become common stock. After that time this option is lost, and with it the privilege of sharing equally with the other class of stock in the control of the corporation and in the distribution of dividends without the limitation prescribed as to the amount of such dividends. That seems to be the only result of

rejecting the option.

There is a wide difference between the relation of a creditor and a stockholder to the corporate property. One can not well be a creditor as respects creditors proper, and a stockholder by virtue of a certificate evidencing his contribution to the capital of the corporation. Stock is capital, and a stock certificate but evidences that the holder has ventured his means as a part of the capital. It is a fixed characteristic of capital stock that no part of it can be withdrawn for the purpose of repaying the principal of the capital stock until the debts of the corporation are paid. These principles are elementary. Warren v. King, 108 U. S. 389; 1 Cook on Stock and Stockholders (3 ed.), $271. The chance of gain throws on the stockholder, as respects creditors, the entire risk of the loss of his contribution to capital. "He can not be both creditor and debtor by virtue of his ownership of stock.' Warren v. King, supra. If the purpose in providing for these peculiar shares was to arrange matters so that under any circumstances a part of the principal of the stock might be withdrawn before the full discharge of all corporate debts, the device would be contrary to the nature of capital stock, opposed to public policy, and void as to creditors affected thereby. 1 Cook on Stock and Stockholders (3d ed.), §§ 270, 271; Chaffee v. Rutland Railroad Company, 55 Vermont 110; McCutcheon v. Merz Capsule Company, 37 U. S. App. 586, 598; Morrow v. Iron & Steel Co., 3 Pickle (Tenn.) 262. If that was the purpose of this arrangement, most doubtful language was employed. There is a sense in which every shareholder is a creditor of the corporation to the extent of his contribution to the capital stock. In that sense every corporation includes its capital stock among its liabilities. But that creditor relation is one which exists only between the corporation and its shareholders. It is a liability which is postponed to every other liability, and no part of the capital stock can be lawfully returned to the stockholders until all debts are paid or provided for. The violation of this well-understood principle is a breach of trust, and a creditor affected thereby may pursue the stockholders and recover as for an unlawful diversion of assets.

The appellants say that it was originally contemplated that the new corporation should pay them for their interests in the foreclosed rail

road, and for that purpose should issue to them its second mortgage bonds. If that plan had been carried out there would be no doubt as to their attitude. They would have become creditors. Under it their relation would have been one of no doubt, and notice by registration would have put all who dealt with the corporation on guard. That plan was abandoned. They agreed to take and did take the relation of stockholders toward the new company. They surrendered the privilege of voting. That was perhaps a valid agreement between stockholders, though of doubtful public policy. They thereby gave some additional value to the common stock. The latter was the exclusive voting stock, and that was worth something as railway management now goes. The surrender of the right to vote does not make them creditors. They bargained for preferred shares of stock, preferred as to dividends and preferred as to capital. For this advantageous position they surrendered the first intention by which they were to have become secured creditors. If they intended to become creditors and not stockholders, they adopted a most singular method of defining their relation. We will not presume that their purpose was to adopt a device by which they might withdraw their contribution to the capital stock and leave creditors unpaid. If they intended that, they have not made it plain, and if it was plain, the device would be invalid as to creditors.

Although the appellants were not creditors proper, yet they show a case on the face of their certificates entitling them to a preference over common stockholders in relation to both dividends and capital. Ordinarily preferred stock is entitled to no preference over other stock in relation to capital. But where there is an expressed agreement giving such a preference, not prohibited by local law or the charter, we see no reason why it is not a valid contract as between the corporation and such preferred stockholders, and binding upon the common stockholders. I Cook on Stock and Stockholders (3d ed.), § 278; Warren v. King, 108 U. S. 389; Chaffee v. Rutland Railroad Company, 55 Ver. 110; In re Bangor and Portmadoc Slate and Slab Company, L. R. 20 Eq. 59; Lockhart v. Van Alstyne, 31 Mich. 76; Kent v. The Quicksilver Mining Company, 78 N. Y. 159. Such a preference would not be inconsistent with their relation as stockholders, and would not affect creditors. This relation to the corporation and to its common stockholders, in view of the non-voting provision in this arrangement, makes it eminently proper that these preferred stockholders should be represented by a reasonable number standing for the class with the right to stand for and defend in respect to their own rights. Bronson v. La Crosse and Milwaukee Railroad Company, 2 Wall. 283, 302.

*

The effect of dismissing the appellants from the case after admitting them as parties was to deny them the preference over common stockholders, and was such a decree as was final, and, therefore, appealable. Ex parte Jordan, 94 U. S. 248. For this error the decree will be reversed.

Note. 1. As to nature of preferred stock, see, 1844, Davis v. Proprietors,