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Barrett v. Denver Tramway Corporation.

December 13, 1944


Appeal from the District Court of the United States for the District of Delaware; Paul Leahy, Judge.

Author: Mclaughlin

Before DOBIE and McLAUGHLIN, Circuit Judges, and KALOONER, District Judge.

McLAUGHLIN, Circuit Judge.

This matter arises out of the recapitalization of a Delaware corporation which eliminated accrued dividends on its old preferred shares. Suit was brought by preferred stockholders who attacked the then proposed plan as unfair. Diversity of citizenship is the basis of federal jurisdiction. The District Court dismissed their complaint.

There is a preliminary question on the appellee's motion to dismiss the appeal. The grounds for the motion are: (a) Failure on the part of the appellants to file the bond referred to in the order of this court of January 27, 1944, and (b) that all acts sought to be enjoined have been performed and that the case is moot. The first part of the January 27, 1944, order enjoins the plan of recapitalization and related acts. Its final paragraph reads: "3. This order shall become effective upon the Plaintiffs-Appellants' filing with the Clerk of this Court a bond in the sum of Twenty Thousand Dollars ($20,000.00), with corporate surety to be approved by a Judge of this Court, conditioned that if the Plaintiffs-Appellants shall prosecute their appeal to effect and answer all damages sustained by the Defendant-Appellee and costs, if they fail to make such appeal good; it being understood that such bond shall not be considered as paying any damages which may have resulted prior to the date hereof."

The bond was not filed, with the result that the injunctive part of the order never went into effect. The defendant, having been advised by the plaintiffs that such bond would not be filed, consummated its plan. Plaintiffs went on with their appeal without injunctive relief and among other steps in the cause did actually file the customary $250 cost bond.

The contingent language of the order is plain and is based upon Rule 73(d) Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, which reads: ,"Supersedeas Bond. Whenever an appellant entitled thereto desires a stay on appeal, he may present to the court for its approval a supersedeas bond which shall have such surety or sureties as the court requires. * * *"

In order to obtain the sought for injunction pending this appeal, plaintiffs were required to post the stated bond. They chose to continue their appeal without the protection of a restraint against the defendant and in so doing did not violate the above referred to order. The mechanics of the appeal itself were prosecuted diligently under the circumstances.

Nor do we see that the controversy has been rendered moot by the fact that the defendant has followed through on its reclassification program. The prayers for relief in the complaint in addition to seeking restraint of the plan asked that "said plan and amendments be declared null and void" and for "such other and further relief as this honorable court may deem meet and proper." The illegality of the plan, because of its alleged unfairness, is vigorously urged in this court as it had been below. Plaintiffs are entitled to have that question passed upon. In United States v. Bates Valve Bag Corporation, D.C.Del., 39 F.2d 162, at page 164, the court said: "* * * in a suit in which the pleadings disclose a proper case for injunctive relief when the suit was instituted and a prayer for an injunction and incidental relief, the removal during the pendency of the suit of the grounds for injunctive relief does not take away the jurisdiction or bar the court from granting the incidental relief, if upon final hearing the allegations are sustained by proof." And see cases there collected.

The one point on the merits of this appeal is whether the plan was fair to the preferred stockholders. This is a diversity case with a question of substantive right involved. Under the facts here, Delaware law controls the issue and it is our duty, as it was the duty of the trial court, to ascertain and apply the law of that State. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487; Fidelity Union Trust Co. v. Field, 311 U.S. 169, 61 S. Ct. 176, 85 L. Ed. 109; Meredith v. Winter Haven, 320 U.S. 228, 64 S. Ct. 7; Huddleston et al. v. Dwyer et al., 322 U.S. 232, 64 S. Ct. 1015; Lich v. United States Rubber Co., D.C.N.J., 39 F.Supp. 675, affirmed per curiam 3 Cir., 123 F.2d 145.

The Denver Tramway Corporation, which operates the public transportation system in Denver, Colorado, was incorporated under the Delaware Corporation Act in 1925 following a federal receivership reorganization. Its certificate of incorporation provided, inter alia: "The holders of preferred stock shall be entitled to receive out of the surplus or net profits of the corporation * * * dividends * * *" This limitation in regard to the funds out of which preferred dividends could be paid was in keeping with the law as it then existed in Delaware.*fn1 In 1927 the statute was changed in such a way as to empower the directors of a corporation to declare and pay dividends on shares of capital stock out of net assets in excess of capital or current net profits, subject to any restrictions in the corporate charter.*fn2

In September, 1943, when the plan under consideration was proposed, defendant corporation had outstanding 104,412 shares of cumulative preferred of a par value of $100 and 61,240 shares of common, without par, representing capital of $10,441,200 and $7,670,576.58 respectively.

Preferred enjoyed the usual privileges over common:

(a) Though both preferred and common had full voting power, this passed exclusively to preferred whenever preferred dividends were in arrears in excess of 1/4 of 1% for one year or more.

(b) Preferred was entitled to dividends of 7% per annum on the par value of $100 per share out of the surplus or net profits of the corporation before any dividends could be paid on common, whenever the directors so declared a dividend.The dividends were cumulative as to the first 5% per annum whether earned or not, and cumulative as to the next 2% if earned. Common was not entitled to any dividends until preferred's current and accumulated dividends had been paid.

(c) Preferred, in the event of dissolution, winding up or liquidation was entitled to receive its par value plus an amount equal to all accumulated and unpaid dividends at the rate of 7% per annum to the date of distribution, before any distribution to common, though it was not ...

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