liability. As such a creditor, a stockholder is subordinate to every other creditor of the corporation. In the ordinary sense, however, a stockholder cannot be a creditor of the corporation by virtue of his ownership of stock: Belfast etc. R. R. Co. v. Belfast, 77 Me. 445. One cannot well be a creditor as respects creditors proper, and a stockholder by virtue of a certificate evidencing his contribution to the capital of the corporation: Hamlin v. Toledo etc. R. R. Co., 78 Fed. Rep. 664. The difference between preferred stockholders and creditors was well stated in Miller v. Ratterman, 47 Ohio St. 141: "The relation of a holder of preferred stock is, in some of its aspects, similar to that of a creditor, but he is not a creditor save as to dividends after the same are declared. Nor does he sustain a dual relation to the corporation. He is either a stockholder or a creditor. He cannot, by virtue of the same certificate, be both. If the former, he takes a risk in the concerns of the company, not only as to dividends and a proportion of assets on the dissolution of the company, but as to the statutory liability for debts in case the corporation becomes insolvent; if the latter, he takes no interest in the company's affairs, is not concerned in its property, or profits as such, but his whole right is to receive agreed compensation for the use of money he furnishes, and the return of the principal when due. Whether he is one or the other depends upon a proper construction of the contract he holds with the company." Guaranteed or preferred stock is not a debt, but a dividend, and its holder can have no action against the company as for a debt, but his right is to a dividend. Preferred stock is not an indebtedness which can be considered in determining whether the obligations of a railroad company are such as to prevent its operating an additional train: People v. St. Louis etc. R. R. Co., 176 Ill. 512. Stipulated interest on stock cannot become a debt payable absolutely, which the stockholder can recover regardless of the profits applicable to its payment: Barnard v. Vermont etc. R. R. Co., 7 Allen, 512; Chaffee v. Rutland R. R. Co., 55 Vt. 110. When stock is guaranteed to pay certain dividends, it is not a debt that is guaranteed but a dividend, and if no profits are made, no recovery can be had by a preferred stockholder: Taft v. Hartford etc. R. R. Co., 8 R. I. 310, 5 Am. Rep. 575. The certificate of stock is, nevertheless, a contract with the stockholder, and the relation of debtor and creditor is created to the extent that his right and claim against the corporation growing out of his contract cannot be changed without his consent: McLaughlin v. Detroit etc. Ry. Co., 8 Mich. 100. The holder of preferred stock is not such a creditor that he can sue at law to recover payment of a guaranteed dividend: Williston v. Michigan etc. R. R. Co., 13 Allen, 400.

The issuance of preferred stock is a device resorted to very largely in the reorganization of railroad corporations. The exigencies of the situations in which these corporations have been placed have been such that the greatest security must be offered to induce capital to come to their help. Accordingly, attempts have been

made to issue stock which shall at once prefer its owners to the holders of common stock and protect them against any subsequent indebtedness of the corporation by giving their claims priority over subsequent creditors. These attempts have in the main proved futile, the courts holding that, as a matter of public policy, a stockholder could not claim an interest in the property of a corporation paramount to the rights of creditors, whatever rights he might have in relation to his fellow stockholders. Accordingly, where stock was entitled to preferred dividends out of the net earnings of a road, "after payment of mortgage interest and delayed coupons in full," it was held that the holders of such stock were not entitled to dividends prior to payments on account of new leases of connecting roads or of additionally borrowed money: St. John v. Erie Ry. Co., 10 Blatchf. 271; affirmed in 22 Wall. 136. To the same effect see Mercantile Trust Co. v. Baltimore etc. R. R. Co., 82 Fed. Rep. 360, where preferred stockholders were allowed no priority over the claims of subsequent creditors. And in Culver v. Reno Real Estate Co., 91 Pa. St. 367, a preferred stockholder was not allowed to share in surplus money in the treasury of the corporation in accordance with an agreement, where it would work gross injustice to creditors: See, also, Phillips v. Eastern R. R., 138 Mass. 122. The attempt has been made to make preferred shares of stock a lien on the corporate property paramount to all claims except the first mortgage on the property. But it is held that a corporation cannot, in the absence of statutory authority, make its preferred stock a lien upon its property; nor can an agreement between the subscribers to the stock of the corporation make such stock a lien on its property, as against bondholders or general creditors without notice of such agreement: Continental Trust Co. v. Toledo etc. R. R. Co., 72 Fed. Rep. 92. In a similar case, Hamlin v. Toledo etc. R. R. Co., 78 Fed. Rep. 664, where a lien to preferred stockholders was given subsequent only to a first mortgage, the court said: "If the purpose in providing for these peculiar shares was to arrange matters so that, under any circumstances, a part of the principal of the stock might be withdrawn before the full discharge of all corporate debts, the device would be contrary to the nature of capital stock, opposed to public policy, and void as to creditors affected thereby." Continental Trust Co. v. Toledo etc. R. R. Co., 86 Fed. Rep. 929, is not in conflict with this case, but directly approves it, and the statement in the syllabus of the case that "a corporation may issue preferred stock which shall be a lien upon its property and earnings second only to an existing first mortgage," does not mean that such stockholders are creditors with a claim on corporate property and assets superior to that of subsequent creditors, but signifies merely that preferred stockholders have a priority over common stockholders in the distribution of capital: See Mercantile Trust Co. v. Baltimore etc. R. R. Co., 82 Fed. Rep. 360. Creditors of a corporation, abandoning their position as such and becoming holders of preferred stock, lose their rights as creditors of the corporation,

and assume the same position as other stockholders toward existing and future indebtedness: Warren v. King, 108 U. S. 389. It is possible, however, for one to be a real creditor, though called a preferred stockholder; and where one advances money to a corporation, receiving therefor certificates secured by a mortgage, these certificates to receive a guaranteed "dividend," and to be repaid at a stated time, the holder taking no interest or risk in the affairs of the company, but having a right to exchange his stock for common stock, such so-called “dividend" is interest, the transaction is a loan, and the preferred stockholder is a creditor, and calling him by a different name cannot change his essential character: Burt v. Rattle, 31 Ohio St. 116. Preferred stock may be given a lien on the property of the corporation superior to any right the common stockholders may have in it, and, after an acquiescence of ten years, common stockholders cannot object to such a lien on the final distribution of the property of the company: Toledo etc. R. R. Co. v. Continental Trust Co., 95 Fed. Rep. 497. Preferred stock may also have a priority over a subsequent debt, when such subsequent creditor agrees thereto: Skiddy v. Atlantic etc. R. R. Co., 3 Hughes, 320. A corporation may mortgage its property to secure to preferred stockholders the payment of dividends guaranteed, but such stockholders cannot in this way be given priority over corporation creditors, either existing or subsequent: Miller v. Ratterman, 47 Ohio St. 141. While preferred stock has no lien on the property of a corporation, and the parties themselves cannot create such a lien so as to encroach upon the rights of existing or subsequent creditors, yet a statute may authorize such a lien, which will be paramount to the rights of subsequent creditors. This lien would not be against public policy, for, under such circumstances, the statute creates the public policy, and the holders of such stock are changed from their character as stockholders and become, to the extent of their lien, real creditors of the corporation. As stockholders they are not creditors, but as holders of a statutory lien they be come such: See the principal case.

Preferred stockholders possess some rights which, at least, approach those of a creditor. A corporation is not required to pay all its debts before a dividend should be declared, and if the financial condition of a corporation is such that a right to a dividend is clear and could be declared without injury to creditors or to the corporation, although there may be outstanding debts, then preferred stockholders can require that a dividend be declared and a court of equity will enforce their demand: Belfast etc. R. R. Co. v. Belfast, 77 Me. 445. In Nickals v. New York etc. R. R. Co., 15 Fed. Rep. 575, it was held that while preferred stockholders were not creditors, yet their rights were so far superior to those of common stockholders as to enable them to compel a division of profits, which the board of directors had determined to accumulate. This case was reversed In 119 U. S. 296, where it was held that preferred stockholders could

not compel the declaring of a dividend as of right, but only where the directors ought to declare a dividend, and that whether a dividend should be declared in any year is a matter belonging, in the first instance, to the directors themselves to determine. To this extent, then, the doctrine of the original case is modified, and the rights of preferred stockholders are less like those of a creditor. The case of Storrow v. Texas etc. Mfg. Assn., 87 Fed. Rep. 612, decided in the circuit court of appeals for the fifth circuit, materially extends the rights of preferred stockholders as creditors with reference to the profits of the corporation. The court said: "So far as the face value of the preferred stock is concerned, it is in the nature of a debt against the corporation, and the interest thereon becomes a debt as soon as it can be shown that there were profits wherewith to pay it, and becomes a lien prior to the rights of the holders of common stock upon the net earnings, if there were such, for the amount of the dividend, and can be followed wherever invested by the company."

Rights of Preferred Stockholders as Stockholders.-In General, a preferred stockholder possesses all the rights and is subject to the general liabilities of ordinary stockholders: Miller v. Ratterman, 47 Ohio St. 141. Failing in their attempt to create for themselves rights in the property of the corporation superior to those of subsequent creditors, preferred stockholders laid claim to being the entire corporation. This contention was denied in Higgins v. Lansingh, 154 Ill. 301, in a case where the preferred stock was authorized and created by the holders of common stock, and the holders of common stock had for more than twenty years elected managers and performed all other acts as stockholders of the company. Where preferred stockholders are the only ones allowed to vote, they become in effect the entire corporation: Mackintosh v. Flint etc. R. R. Co., 32 Fed. Rep. 350. The rights of preferred stockholders, as of those of common stockholders, depend upon their contract with the corporation, whether such contract is evidenced by a certificate or is found in the by-laws: Belfast etc. R. R. Co. v. Belfast, 77 Me. 445. A holder of stock has a right to have such stock set forth the fact of preference: State v. Cheraw etc. R. R. Co., 16 S. C. 524. See Belfast etc. R. R. Co. v. Belfast, 77 Me. 445. The rights of preferred stockholders resting upon contract, the preference fixed by such contract cannot be changed without their consent: Pronik v. Spirits Distributing Co. (N. J. Eq.), 42 Atl. Rep. 586; West Chester etc. R. R. Co. v. Jackson, 77 Pa. St. 321; Ashbury v. Watson, L. R. 30 Ch. Div. 376. Where, however, a corporation leased its railroad line to another corporation, the lessee guaranteeing a certain dividend on the stock of the lessor, the amount of this dividend guaranteed may be changed by a subsequent contract between the corporations, and a stockholder cannot object. The rights of the stockholder depend on the contract between the corporations, to which contract he was not a party and a change in which he

cannot prevent: People v. Metropolitan etc. Ry. Co., 26 Hun, 82. Where the by-laws allow a change in the privileges pertaining to preferred stock, or a stockholder assents to such change, such a change is valid and the holder is bound thereby: Compton v. The Chelsea, 128 N. Y. 537; affirming 13 N. Y. Supp. 722. Holders of preferred stock have no special control over the corporation or its management. And where a corporation has power to perform certain acts, such acts may be done, and preferred stockholders have no ground to object, though the act or contract entered into was detrimental to their interest: Thompson v. Erie Ry. Co., 42 How. Pr..68. Though preferred stock is entitled to quarterly or semiannual dividends, these dividends must be declared in accordance with statutory authority. And where the statute provides that, in the absence of days fixed in the charter or by-laws on which dividends may be declared, they must be declared in January, dividends on preferred stock are subject to this limitation, and directors have no power to declare quarterly dividends on such stock on days selected in their discretion: Marquand v. Federal Steel Co., 95 Fed. Rep. 725.

Right to Dividends.—A dividend is money paid out of profits by a corporation to its shareholders. A preferred dividend is that which is paid to one class of shareholders in priority to that to be paid to another class: Taft v. Hartford etc. R. R. Co., 8 R. I. 310, 5 Am. Rep. 575. Preferred stockholders are entitled to dividends before the holders of common stock can be paid anything. But it is well established that dividends on preferred stock are payable only out of net earnings which are applicable to the payment of dividends. Such dividends are not payable absolutely and unconditionally as interest is, but only out of profits made by the company. The preference is limited to profits whenever earned: Chaffee v. Rutland R. R. Co., 55 Vt. 110. The proprietorship of a preferred stockholder in the net earnings of a corporation is a right to receive from them so much a year, if earned, before the common stock receives any dividend therefrom: Warren v. King, 108 U. S. 389. In Virginia, however, it has been held that dividends on guaranteed stock should be paid from gross earnings, instead of net earnings, under a statute allowing an increase of capital stock for the purpose of liquidating all arrears of debts, interest, and dividends, by the issue of guaranteed stock, where the corporation was in dire need of funds, extraordinary inducements were necessary to secure the requisite amount of money, and no dividends were possible unless paid from gross earnings. The legislative intent and the obvious purpose of the statute were deemed controlling, and public policy was not violated by following the statute: Gordon v. Richmond etc. R. R. Co., 78 Va. 501. All the holders of preferred stock are entitled to dividends, although some may be entitled to a less dividend than others: Coey v. Belfast etc. Ry. Co., 2 I. R. C. L. 112.

The income of a corporation may be so adjusted that the preferred stock will entirely absorb it, leaving nothing for the holders of