157 Agusta Trust Co., plaintiff v.

Agusta, Hollowell & Gardiner AUTHOR: BONDOC

Railroad Co et. al, defendant
Read it from the book
TOPIC: Preference stockholder is not a creditor
PONENTE: Strugis J.
FACTS:

The defendant railroad company had an outstanding bond secured by mortgage. These bonds gave the holders right to convert into preferred stocks
of the company.

This action was brought to foreclose the mortgage and the question was raised as to the right of the holders of these preferred shares to share in
the proceeds on the sale of the mortgage property.

ISSUE(S):

WON the holders of the certificate of preferred shares are creditors of the railroad.

WON the certificate of preferred stocks issued in exchange for bonds were certificate of indebtedness and not stocks

HELD:
RATIO:

No.

It is within the powers if the legislature, by charter or statute, to prescribe that corporation may issue certificates in the form of certificate of
preferred stocks, thereby making the holders creditors of the corporation as well as stockholders. And such preferred stocks is not ordinary
preferred stock nor is it preferred stocks at all. It is a sui generis, governed by the provisions of the statute by which is its authorized. In this case, the
preference given to the holders of the preferred stocks in the conversion agreement here were not authorized by the statute when made. The stock
was not a statutory preferred stocks of kind just described here. Therefore, the holders are not creditors of the corporation.

No, they are stocks.

In this case all facts and circumstances convincingly characterized the preferred stocks issued by the street railway companies as preferred stocks. In
each instance, the stockholders voted increases in the capital stocks by the creation of the preferred stocks. The certificate delivered to the bond
holders designated the stocks as preferred stocks. The holders of this stocks had the right to vote in the election of directors and were entitled to
receive dividends at the time specified therein. The certificate contains essential features of a certificate of preferred stocks and none of the
contract creating relationship of creditor of the corporation.

Therefore, by surrendering their bonds and taking in lieu thereof preferred stocks, the bondholders of these street railway companies ceased to be a
creditors and became a stockholder. The preferred stockholders are not entitled to share in the assets of the companies until all creditors have been
paid.

CASE LAW/ DOCTRINE:

Although a preferred stockholder may enjoy preference preferences over other stockholder, he is not a creditor of the corporation
DISSENTING/CONCURRING OPINION(S):