This action was brought for the dissolution of the New York Building-Loan Banking Company, a domestic corporation which, in February, 1904, was adjudged insolvent, a dissolution decreed, and a receiver appointed. A referee was appointed to take and state the accounts for the first year of the receivership and to report on disputed claims. The referee reported that all claims of class “ W ” shareholders should be disallowed; that such shares were legally issued ; and that the holders thereof were not entitled to participate in the distribution of funds of the corporation until all other' creditors and shareholders had been paid in full. The report was confirmed and the holders of class “ W ” shares appeal.
The question presented involves the- determination of the rights and liabilities assumed by the holders of class “ W ” shares. ; It is contended on behalf of some of the appellants that class “W” shares were never legally issued, but I do not think they are in a position to raise that question. The corporation in good faith, at least, attempted to comply with all the requirements of the law in issuing such shares, and the holders accepted the same and participated in whatever benefits accrued until the corporation became insolvent. I am of the opinion that these shares were legally issued, but if they were not, those who took them and accepted the *832benefits cannot now be heard to assert their illegality to the- prej.n-' dice of third parties. If the corporation had succeeded, añd by reason thereof the shares had become valuable, there can be no doubt that the holders would have insisted — and would have had a right to insist as against the corporation and the other shareholders — that although the proper formalities were not observed in the. issue, their rights were nevertheless fixed by,the agreement under which they took their shares. It is, therefore, unnecessary to discuss the legality of the issue of these shares, since a court of equity will not permit the* claimants to set up such claim. Class “ W” shares were issued to provide a fixed capital, for the corporation. The subscrib- . ers were required to pay one-third of the par value of their shares at the time they subscribed and the balance was payable thereafter in monthly installments. The holders of such shares were entitled to semi-annual dividends of three and one-half per cent on the amount paid in, and after all other dividends were paid, one-half of the net surplus profits was to: be credited to them in proportion to the-' amount paid in until the credits and total payments amounted to . $100, the par value of the shares,, when the payments to them were to be in cash. - The other half of the net surplus profits was , to be held as -a reserve fund until- it amounted- to $1,000,000, and there, after the whole net surplus profits were to be divided .among the class. “ W ” holders. In the event-of the dissolution of the corporation,, any balance of the reserve fund remaining after the payment of the other obligations of the company was to be distributed among. them jiro rata. The sums paid in on these shares lip to their par value were not withdrawable. It was. a permanent fund for the use . of the corporation. Host of the shares were issued in Í900 and the interest, dividends were paid down to February, 1903.
The appellants’ contention ' is that they' are entitled to share , equally and ratably with the other shareholders in the assets of the insolvent corporation. The court below, in confirming the report of tlie..referee, held that they were not, and I am of the-opinion that such conclusion- is corréct.. The purpose of the' issue of the class “ W ” shares was to guarantee the obligations of the corporation and to provide a permanent working capital. -Thei resolution of the board of directors authorizing the issue — which was afterwards incorporated into the articles of association — commenced with the *833preamble: “ Whereas it is desirable that this Company shall have a permanent capital that shall serve as a guarantee of the performance of its obligations.” It provided that the shares were entitled to the further dividends “ in consideration of the guarantee to the other classes of shares arising from the creation of these shares,” and that the sums paid in should not be withdrawable, “ but shall constitute the Guaranty Pund of the said Company and shall be and stand as a guarantee for the payment of all the obligations of the Company.” The stock was called' guaranty capital stock, and in viexv of the unmistakable terms used -in the resolution regarding it, which xvere thus inserted in the' articles of association by amendment, I.think-the only reasonable interpretation is that these shares were not to be paid in case of-a dissolution until all other obligations of the corporation—including the other classes of shares—• had been paid in full. It is true that the board of directors did not pass a resolution amending the preamble by adding the words “ including its obligations to the holders of all other classes of shares under the Articles of Association,” and the appellants insist thar, while this was not done at the meeting xvhich adopted the resolutions and amended the articles, it is nevertheless controlling evidence that it xvas never intended that the class “ W ” shares should guarantee,, the other classes of shares. I do not think this necessarily follows. The body of the resolution provided that the stock was to stand as a guaranty for the payment of all the obligations of the corporation, and that the further dividends were to be paid “in consideration of the guarantee to the, other classes of shares.” These words are sufficiently plain, and the neglect to pass, or the rejection of, the proposed amendment may quite conceivably have been because it was regarded as mere surplusage and not because it did not state the correct intention. And whether it did or not, it was not binding on the corporation, and would be a forced construction to say that all the obligations of the corporation meant only the obligations to third parties, especially in view of the .nature and manner in which .the business of the corporation xvas conducted. It would not only be a forced construction, but one which 1 think the court would not be justified in adopting, to say that the “ guarantee to the other classes of shares,” in con- ' *834sideration of which this stock was entitled to extraordinary dividends, meant' a guaranty only that the debts to third parties should be paid. And it seems this was the view at. one time of the holders of a large majority of class “ W ” shares, for when the insolvency proceedings were about to be instituted they signed certain declarations to the effect that class “ W ” shares were not a liability of the corporation and ought not to be considered in determining its solvency— asserting that they were held solely under sections 3 and 4 of article 29 of the articles of association as amended, which, were practically identical with-the. resolution of the board of directors authorizing their issue; that thé fund represented hy the shares was not withdrawable; that the holders, were entitled only to profits actually earned,, and, therefore, the shares were not a .iability of the corporation.
The appellants also contend that upon the insolvency of the corporation its assets ought to. be distributed pro. rata among all the shareholders, and that even if there were a contract of .guaranty to the other classes of shares it was terminated by the insolvency of the corporation. As a general rule this contention nothing appearing to the contrary—would be sound, but it has no application,.here if the foregoing views be correct, because there was an express contract between the holders of class “W’*- shares and the corporation that they should not share equally with the other shareholders. The guaranty to the other shareholders could mean nothing except in case of a dissolution. No injustice has bééíi done to the holders of class “ W ” shares by refusing to permit them to share ratably with the other shareholders. Their shares were entitled to a regular seven per cent cash dividend; they paid only a fraction of its par' value, the balance being payable in small monthly installments, and. half the net surplus profits of the corporation were to be divided among them, first as credited payments tipon their shares until the par value was paid, and after'that in cash. The other half was to be accumulated into a reserve fund, and in the event of the dissolution of the corporation,-after-the payment of its debts, this fund or the balance of it was to be divided among them. After the fund .. reached $1,000,000 the whole of the net surplus profits of the corporation was'to be divided among them. If the: corporation prospered, the class “W”.shares would be very valuable; if it did not, *835then the class “ W ” shares stood' as a guaranty of the corporation’s obligations, and the holders could not participate in the distribution # of its' assets until all other claims were paid. For those vsdio had confidence in the stability and success of the corporation, this Was an attractive arrangement. It. would, as it seems, to me, be most inequitable to now permit the holders of class “ W ” shares to repudiate the agreement under which such shares were issued and place them on the same footing with the other shareholders. Having accepted and retained the benefits, they now must submit to the liabilities which such shares imposed.
The.order "appealed from, therefore, should be affirmed, with ten dollars costs and disbursements.
Patterson, P. J., Ingraham, Clarke and Lambert, JJ., concurred.
Order affirmed, with ten dollars costs "and disbursements.