Augusta Trust Co v.

Augusta
143 Me. 314, 187 A.I.
1938
Augusta
Trust
Co
petitioners
responden Augusta, Hallowell and Gardiner Railroad Co.

Sturgis J.

pq

ts
summary P questions the conversion from bonds to preferred stock and claims that the

holders of preferred shares have no right to share in the proceeds of the sale of
the mortgaged properties. Court held that the conversion from bond holders to
preferred shares transformed the creditors (holders) to mere stockholders who
only have the right to the proceeds after all debts have been paid.

facts of the case

The respondent railroad company had outstanding bonds, which were secured by mortgage.
The bonds gave the holders the right to convert it into preferred stocks of the company. 1
There was a statement on the back of the certificate that it was exchanged for an equal
amount of principal of the bonds and was equally and ratably secured with the bonds by the
mortgage. (I dont get this)
An action was brought by the petitioner to foreclose the mortgage and questioned the right of
the holders of preferred shares to share in the proceeds on the sale of the mortgaged
property.

issue

WON the holders of preferred shares have the right to the proceeds of the sale of the mortgaged
property. Yes, but only after all debts to creditors have been paid.

ratio

It is within the power of the legislature, by charter or statute, to prescribe that corporations
may issue certificates in the form of preferred stock.
However, there must be a statute conferring this power upon corporations. Moreover, the
statute must be clear and definite in its terms.
In this case, the conversion agreements from bonds to preferred stocks were not authorized
by statute. Therefore, it was not statutory preferred stock in this sense. (From my
understanding, despite the preferred stock not being being authorized by statute, it was still
valid. Just not statutorily)
The petitioners argue that the certificates of preferred stock issued in exchange for bonds
were in fact certificated of indebtedness and not stock.
The court disagrees with this.
o In this case, all the facts and circumstances lead to the conclusion that the documents
issued by the railway country are preferred stock.
o The holders of this stock had a right to vote in the election of directors and were entitled
to receive fixed yearly dividends.

1 The certificates of the preferred stocks read: This stock is part of an issue limited two
hundred and fifty thousand dollars par value. The holder is entitled to receive and the
company is bound to pay thereon a fixed yearly dividend of four per centum, payable
half-yearly in Jan 1 and July 1. This share is redeemable on or after July 1, 1911, at 104
and accrued interest, and will be redeemed at par on July , 1951. The payment of
principal and dividends is equally and ratably secured by a trust mortgage to the
Augusta Trust Company, duly recorded in the Country of Kennebec.
1

The certificates contain every essential feature of a certificate of preferred stock and none
of a contract creating the relation of a creditor of the corporation.
In conclusion, the act of surrendering their bonds and taking in lieu of it, preferred
stock, the bondholders ceased to be creditors and became mere stockholders.
On the other hand, those who have not made the exchange and held 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.
o