The result of this decision will be a final judgment resulting not from a trial on the merits but from what may be only a technical deficiency of the complaint. The allegations of the answer cannot be considered because there is a general denial of them in the reply. So the complaint is entitled to a liberal construction. But the opinion construes the complaint strictly — exceedingly so — against plaintiffs.
It appears that the holders of the first preferred stock were entitled to the usual preference as to dividends and in the event of liquidation to par value, plus a premium of five dollars, on each share before any payment to the holders of the second preferred or common stock. After such payment of the first preferred, the holders of the second preferred are "entitled to be paid in full the par value of their shares before any amount shall be paid to the holders of the common stock." These provisions are in the contract of incorporation. If a violation of such contract rights is disclosed by the complaint, a remedy should be afforded.
The complaint, in addition to pleading the applicable provisions of the articles of incorporation, states that the result of the transaction was to render the corporation "unable to meet or pay its debts or obligations in the ordinary course of business;" that a judgment against it resulted; and that receivers were appointed. For what purpose is not stated, but certainly the inference is that there has been an adjudication of insolvency, for that is the ordinary result of a judgment against a corporation and its inability to pay it. It is also alleged that the purchase of the common stock and the payment of the purchase price will render all the preferred stock worthless, "whereas, if said notes are cancelled and said moneys paid out for said common stock returned to said corporation, said preferred stock will be worth more than the par value thereof." These allegations negative the suggestion that the purchase might have been made from surplus profits as distinguished from capital assets, and it is of course wholly immaterial that in form the corporate action was unobjectionable. The complaint could have been worded somewhat more carefully with respect to basic facts *Page 110 as distinguished from conclusions or results. But when a pleading is subjected to a motion for judgment, it is entitled to a liberal construction. Here I think the motion should have been denied so as to permit a trial on the merits with such amendments as might be called for.
Aside from the question of whether in a given case a corporation may purchase its own stock, it must be the rule that where there are preferred stockholders having such contract rights as appear here, they should have an appropriate remedy to protect such rights against invasion by transactions between the corporation and other stockholders which are wrongful because in violation of the articles of incorporation.
I cannot see that Marvin v. Anderson, 111 Wis. 387,87 N.W. 226, has much bearing. That was an action by a trustee in bankruptcy to set aside an alleged fraudulent deed of the bankrupt corporation. In the same transaction the corporation had taken in some of its own stock held by one Anderson. The transaction was acquiesced in by all the stockholders for more than two years, and the only claim proved in bankruptcy which existed at the time of the transaction was a small one which prior to the commencement of the action had been paid. It was held that the corporation had power to purchase its own stock, but such a conclusion does not touch the question whether it may buy in common stock when the result is to breach a contract right of preferred stockholders. That question was not present nor even related to any of those discussed in Marvin v. Anderson. The distinction there accurately drawn between the meaning of "insolvency" in bankruptcy law and the "general meaning" of the same term is not material here, for the purchase of its common stock by a corporation might seriously invade the rights of preferred stockholders without causing insolvency of any kind.
With respect to stock preferred both as to dividends and in case of liquidation, it cannot be argued that there is no depletion of security by the purchase by the corporation of its common stock, even though the purchase be at less than actual value. That is because before the transaction the preferred stock has a claim on the assets paramount to that of the common and afterwards the *Page 111 security has been reduced by whatever has been paid for the common stock. The purchase of the common has no more helped the preferred than the release of a junior aids a paramount lien. Although no lien is now present, there are the paramount rights of the preferred and the subordinate rights of the common stockholders in a common fund, the corporate assets. And the effect on those rights of the transactions now challenged is, normally, the same as would follow from the wrongful use of security to pay a junior in disregard of a senior charge.
The suit being in equity and there being a prayer for general relief, any omission or other error in a prayer for specific relief has nothing to say to the sufficiency of the complaint; and if the plaintiffs have shown themselves injured in such a way that equity ought to interfere, judgment should not go against them on the pleadings. There should be opportunity for amendment and trial on the merits. In this connection the complaint is not open to the construction of being on behalf of the corporation or in the nature of the ordinary stockholders' suit to remedy a wrong done by the corporation to all the stockholders. It is rather a suit by individual preferred stockholders, without joining other preferred stockholders, to remedy a wrong done through a breach by the corporation and certain of the common stockholders of the contract of incorporation. It is therefore not open to any objections peculiar to a derivative action where stockholders sue on behalf of the corporation. For the reasons already indicated, and without ignoring the respects in which the complaint could be put farther beyond criticism, I think it sufficient to have prevented an adverse judgment on the pleadings. For that reason I dissent.