{ "id": 2468660, "name": "Paul J. Kern et al., Plaintiffs-Appellants, v. Chicago & Eastern Illinois Railroad Company, Defendant-Appellee", "name_abbreviation": "Kern v. Chicago & Eastern Illinois Railroad", "decision_date": "1972-06-09", "docket_number": "No. 55588", "first_page": "247", "last_page": "253", "citations": [ { "type": "official", "cite": "6 Ill. App. 3d 247" } ], "court": { "name_abbreviation": "Ill. App. Ct.", "id": 8837, "name": "Illinois Appellate Court" }, "jurisdiction": { "id": 29, "name_long": "Illinois", "name": "Ill." }, "cites_to": [ { "cite": "28 A.2d 531", "category": "reporters:state_regional", "reporter": "A.2d", "year": 1963, "opinion_index": 0 }, { "cite": "132 N.J. Eq. 460", "category": "reporters:state", "reporter": "N.J. Eq.", "case_ids": [ 930458 ], "year": 1963, "opinion_index": 0, "case_paths": [ "/nj-eq/132/0460-01" ] }, { "cite": "25 A.2d 418", "category": "reporters:state_regional", "reporter": "A.2d", "pin_cites": [ { "page": "422" } ], "opinion_index": 0 }, { "cite": "131 N.J. Eq. 419", "category": "reporters:state", "reporter": "N.J. Eq.", "case_ids": [ 928867 ], "opinion_index": 0, "case_paths": [ "/nj-eq/131/0419-01" ] }, { "cite": "38 N.E.2d 895", "category": "reporters:state_regional", "reporter": "N.E.2d", "opinion_index": 0 }, { "cite": "110 Ind.App.. 312", "category": "reporters:state", "reporter": "Ind. App.", "case_ids": [ 1586622 ], "opinion_index": 0, "case_paths": [ "/ind-app/110/0312-01" ] }, { "cite": "311 F.Supp. 412", "category": "reporters:federal", "reporter": "F. Supp.", "case_ids": [ 3088354 ], "opinion_index": 0, "case_paths": [ "/f-supp/311/0412-01" ] }, { "cite": "125 F.2d 800", "category": "reporters:federal", "reporter": "F.2d", "case_ids": [ 1086304 ], "pin_cites": [ { "page": "805" } ], "opinion_index": 0, "case_paths": [ "/f2d/125/0800-01" ] }, { "cite": "312 I.C.C. 564", "category": "reporters:federal", "reporter": "I.C.C.", "year": 1961, "opinion_index": 0 }, { "cite": "257 N.E.2d 500", "category": "reporters:state_regional", "reporter": "N.E.2d", "opinion_index": 0 }, { "cite": "121 Ill.App.2d 298", "category": "reporters:state", "reporter": "Ill. App. 2d", "case_ids": [ 1582668 ], "pin_cites": [ { "page": "308" } ], "opinion_index": 0, "case_paths": [ "/ill-app-2d/121/0298-01" ] }, { "cite": "59 N.E.2d 907", "category": "reporters:state_regional", "reporter": "N.E.2d", "weight": 2, "pin_cites": [ { "page": "910" } ], "opinion_index": 0 }, { "cite": "116 Ind.App. 55", "category": "reporters:state", "reporter": "Ind. App.", "case_ids": [ 1595910 ], "weight": 2, "pin_cites": [ { "page": "59, 60" }, { "page": "63" } ], "opinion_index": 0, "case_paths": [ "/ind-app/116/0055-01" ] }, { "cite": "189 F.2d 927", "category": "reporters:federal", "reporter": "F.2d", "case_ids": [ 484026 ], "opinion_index": 0, "case_paths": [ "/f2d/189/0927-01" ] }, { "cite": "91 F.Supp. 285", "category": "reporters:federal", "reporter": "F. Supp.", "case_ids": [ 294232 ], "opinion_index": 0, "case_paths": [ "/f-supp/91/0285-01" ] } ], "analysis": { "cardinality": 685, "char_count": 13454, "ocr_confidence": 0.747, "pagerank": { "raw": 1.0185898273815304e-07, "percentile": 0.5441402182134943 }, "sha256": "c05bf05dcfc6c79c465ee728ae87eec5153928393c6101055dec55fb91229428", "simhash": "1:f5e30d67625c4fbd", "word_count": 2169 }, "last_updated": "2023-07-14T18:03:18.777064+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [], "parties": [ "Paul J. Kern et al., Plaintiffs-Appellants, v. Chicago & Eastern Illinois Railroad Company, Defendant-Appellee." ], "opinions": [ { "text": "Mr. JUSTICE DRUCKER\ndelivered the opinion of the court:\nPlaintiffs are two shareholders of Class A (preferred) Stock in the defendant Chicago & Eastern Illinois Railroad Company, hereinafter C & El. They seek to compel the payment of a 1959 dividend of $2 per share which they claim should have been paid to persons who exchanged or had their Class A shares redeemed in 1965, or who still hold their shares. The trial court granted defendant\u2019s motion for summary judgment and plaintiffs appeal therefrom. The issues on appeal deal with the propriety of defendant\u2019s computations upon which it based its conclusion that there were no net earnings available for dividends on Class A shares for the year 1959.\nThe following facts are undisputed. Defendant C & El was incorporated in Indiana in 1939 pursuant to reorganization proceedings supervised by the Interstate Commerce Commission, hereinafter ICC, and approved by Federal district court. As provided in its Articles of Incorporation, each share of Class A stock has a par value of $40 with an annual maximum dividend rate of $2. Dividends are cumulative but only to the extent that there are \u201cnet earnings available for dividends\u201d in any given calendar year. As stated in the Articles of Incorporation:\n\u201cIf in any year there shall be no net earnings available for dividends, or if the amount of net earnings available # # shall be less than the maximum dividend requirement * * *, the deficiency shall not be made good in any subsequent year, nor shall any dividends accumulate with respect thereto.\u201d\nDuring March 1965 the defendant made an offer to Class A shareholders to exchange each share of Class A stock for $40 in C & El common stock plus $6 in dividends that had been \u201caccumulated earned and unpaid\u201d on the Class A shares. Seventy-five thousand, one hundred and five Class A shares were then outstanding. In July 1965 C & El called the remaining outstanding Class A shares (39,712) for redemption. The redemption price was $47.17; this figure represented the par value ($40) plus $7.17 in dividends that were then \u201caccrued and unpaid\u201d on the Class A shares. Under the terms of both the exchange offer and the redemption call, the C & El computed that no dividends for the year 1959 had been \u201caccumulated earned and unpaid\u201d or \u201caccrued and unpaid\u201d on Class A shares. Defendant\u2019s records show that there was a deficiency in \u201cnet earnings available for dividends\u201d on Class A stock for 1959 in the amount of $18,435.13.\nPlaintiffs urge two theories in support of their claim for a $2 dividend for the year 1959. The first theory is based on the following: In 1959 defendant\u2019s wholly owned subsidiary, Chicago Heights Terminal Transfer Railroad Company, hereinafter CHTT, had net earnings of $392,193. CHTT\u2019s board of directors declared a $300,000 stock dividend; this sum was included in defendant\u2019s income statement and considered in computing the \u201cnet earnings available for dividends\u201d on the Class A shares. CHTT placed $50,000 of the remaining $92,193 in its mandatory sinking fund; the other $42,193 was credited to its retained earnings account. The $92,193 in undistributed earnings of CHTT was not considered by C & El as income nor as \u201cnet earnings available for dividends\u201d on its Class A shares.\nPlaintiffs contend that the undistributed 1959 earnings of CHTT should have been included in the income accounts of C & El for 1959 thereby becoming \u201cnet earnings available for dividends\u201d to Class A shareholders. They argue that their contention is supported by a proper construction of the defendants Articles of Incorporation and the Uniform System of Accounts to which the Articles refer and also by generally accepted principles of accounting.\nAlthough the issue was not briefed, it is clear that the law of Indiana, the state where defendant is incorporated, is controlling. See Guttman v. Illinois Central R. Co., 91 F.Supp. 285, affd 189 F.2d 927; Restatement (Second) of Conflicts \u00a7 304 (1971); 11 Fletcher Cyc Corp. \u00a7 5334 (perm. ed. rev. 1971).\nIndiana, like Illinois, recognizes that the rights of preferred shareholders to dividends are contractual rights with the Articles of Incorporation serving as the terms of the contract. Rubens v. Marion-Washington Realty Corp., 116 Ind.App. 55, 59, 60, 59 N.E.2d 907; see Elward v. Peabody Coal Co., 121 Ill.App.2d 298, 308,257 N.E.2d 500.\nDefendant\u2019s Articles of Incorporation state that \u201cnet earnings available for dividends\u201d to Class A shareholders are to equal the amount of \u201cincome available for contingent charges\u201d (income less fixed charges less certain specified sums). Income available for contingent charges, in turn, is to be computed in accordance with the 1939 Uniform System of Accounts prescribed by the Interstate Commerce Commission for steam railroads. The 1939 Uniform System of Accounts provides that:\n\u201cIncome accounts are those designed to show, as nearly as practicable, for each fiscal period * * * the returns accrued upon investments * * *. The net balance of income [or loss] shall be carried to Profit and Loss.\u201d (Emphasis supplied.)\nAffidavits submitted by defendant in support of its motion for summary judgment showed that prior to and since 1959 CHTT has operated as a separate entity from defendant C & El, having its own books, records and bank accounts. In 1959 the shareholders of C & El and CHTT approved a plan to merge the two companies. However, in 1961 the ICC refused to approve the merger proposal. The decision, reported at 312 I.C.C. 564 (1961), stated that CHTT was to be maintained as a \u201cdistinct corporate entity.\u201d Additional affidavits submitted by defendant showed that officers of C & El requested advice from the ICC as to the proper manner in which to account for the undistributed earnings of CHTT for 1959. A letter from the Director of the Bureau of Accounts for the ICC stated that:\n\u201cThe Uniform System of Accounts does not require the transfer of earnings of a subsidiary to its parent, in the form of dividends or otherwise. Therefore, payment by a subsidiary to its parent of only those dividends duly declared by its board of directors is within the meaning of these rules.\u201d\nDefendant\u2019s independent auditor was of the same opinion.\nPlaintiffs state that since C & El\u2019s 100% ownership of CHTT is an investment, all income of CHTT must be considered income of C & EL We disagree. Plaintiffs\u2019 argument assumes that the phrase \u201creturns accrued on investments\u201d in the Uniform System of Accounts, supra, applies to undistributed earnings of a subsidiary corporation. Black\u2019s Law Dictionary 37 (4th ed. 1988) defines \u201caccrued\u201d as \u201cdue and payable, vested.\u201d For Federal tax purposes income does not accrue to a taxpayer until he has a fixed or unconditional right to receive it (see Franklin County Distilling Co. v. Commissioner of Int. Rev. (6th cir. 1942), 125 F.2d 800, 805) and with reference to corporate law it is stated that:\n\u201cIt is the declaration of the dividend which creates both the dividend itself and the right of the stockholder to demand and receive it. Eleven Fletcher Cyc Corp. \u00a7 5321 (perm. ed. rev. 1971).\u201d (Emphasis supplied.)\nSee Rubens v. Marion-Washington Realty Corp., 116 Ind.App. 55, 63, 59 N.E.2d 907, 910.\nAccepting plaintiffs\u2019 argument would, in effect, mean \u201cpiercing the corporate veil\u201d that exists between CHTT and C & El. This would be inappropriate where each entity maintains separate books, records and accounts (see American Trading & Pro. Corp. v. Fischbach & Moore, Inc. (N.D. Ill. 1970), 311 F.Supp. 412, 415 \u2014 416), and further, where the ICC has turned down a request to merge, stating that they were to be maintained as separate and distinct entities. See Hart, Schaffner & Marx v. Campbell, 110 Ind.App.. 312, 38 N.E.2d 895.\nIn an analogous situation in Cintas v. American Car & Foundry Co., 131 N.J. Eq. 419, 25 A.2d 418, 422, aff\u2019d per curiam, 132 N.J. Eq. 460, 28 A.2d 531, the court stated: have been consolidated for purposes of determining \u201cnet earnings available for dividends\u201d on Class A stock under generally accepted principles of accounting. They cite DeCapriles, Modern Financial Accounting, 38 N.Y.L.R. 1, 43 \u2014 48 (1963). The author of the article supports the method of reporting a parent corporations earnings on a consolidated basis for the purpose of informing interested parties as to the overall financial condition of the parent. However, contrary to plaintiffs\u2019 position, the author notes that recourse to the separate financial statements must be had when determining the legality of dividend declarations or other actions by any of the corporations. The \u201cseparate entity\u201d view conforms with the following statement from Wixon, Kell & Bedford, Accountant\u2019s Handbook, 23 \u2014 2 (5th ed. 1970):\n\u201c[T]he defendant company must be considered a separate and distinct entity for the purpose of fixing dividends and the earnings and profits of the subsidiary companies do not enure to the benefit of defendant\u2019s stockholders until dividends are actually declared by its subsidiaries.\u201d (Emphasis supplied.)\nPlaintiffs further argue that the earnings of C & EI and CHTT should\n\u201cProfits of the subsidiary companies do not inure to the benefit of parent company shareholders until a dividend declaration is effected by the subsidiaries.\u201d\nIn conclusion, we, along with the court below and the Director of the Bureau of Accounts for the ICC, believe that the $92,193 in undistributed earnings of CHTT was properly excluded by the defendant when determining the \u201cnet earnings available for dividends\u201d in 1959 on its Class A shares.\nPlaintiffs\u2019 second theory for recovery of a $2 dividend for 1959 is based on the following:\nIn 1959 the C & EI\u2019s Illinois real estate tax bill amounted to approximately $535,000. It was paid under protest. In 1961 the Illinois Supreme Court ruled that the assessment base used in computing the real estate taxes of railroads was improper. Thereafter C & EI began receiving refunds on the 1959 taxes paid under protest. As refunds were received over the years they were credited to the current year\u2019s income account rather than reopening and adjusting the income accounts for the year 1959; thus these amounts were not considered by C & El as \u201cnet earnings available for dividends\u201d to Class A shares for 1959.\nThe Director of the Bureau of Accounts for the ICC was also asked for advice as to the proper manner in which to account for these refunds. In a letter to the defendant he stated:\n\u201cThe reopening and adjustment of income and expense accounts of applicable prior years for the purpose of recording subsequent years\u2019 transactions therein is not appropriate. Adjustments of this kind should be lodged in either current income or expense accounts or in appropriate retained income accounts.\u201d\nThe defendant\u2019s auditors, in expressing their opinion as to the proper accounting treatment for the $215,000 tax refund received in 1966, stated that it should be credited directly to the retained earnings account because a material distortion would result in the current income account if credited thereto; generally, non-material adjusting entries are credited to current income accounts. They further stated that whether refunds would affect the \u201cnet earnings available for dividends\u201d for 1959 was \u201ca legal issue relating to contractual relationships * *\nThe relevant provision of defendant\u2019s Articles of Incorporation states as follows:\n\u201cArticle III, Section 7:\nFor the purposes of this certificate of Incorporation, any adjustments necessary to correct the income accounts of any prior year shall be made by appropriate entries which may either be made in the accounts of the current year or, * * * may be made, in whole or\nin part, in the accounts of any subsequent year or years, and any such debits or credits made in the accounts of any year to adjust entries in the income accounts of prior years shall be treated as income items for the year in which entered on the boolcs, whether cleared through income or profit and loss accounts.\u201d (Emphasis supplied.)\nPlaintiffs apparently construe the phrase \u201cyear in which [they are] entered on the books\u201d to refer to the year in which the original entry, i.e., the entry being adjusted, was recorded. However, we believe that the phrase clearly refers to the year in which the adjusting entry is made to the appropriate account. Thus, prior years\u2019 accounts are not to be reopened.\nThis has always been the defendant\u2019s policy. In fact, the \u201cnet earnings available for dividends\u201d in 1959 were enhanced by refunds from real estate taxes received in 1959 but paid in prior years. The Articles of Incorporation clearly refute plaintiffs\u2019 argument that previous income accounts are to be reopened for the purpose of recomputing dividends. The decision of the circuit court is affirmed.\nJudgment affirmed.\nLORENZ, P. J., and ENGLISH, J., concur.\nPlaintiffs purportedly still hold their Class A shares, i.e., they neither exchanged them nor had them redeemed.\nIt is agreed that the net refunds were in excess of $200,000 \u2014 more than enough to pay the $2 dividend for 1959.", "type": "majority", "author": "Mr. JUSTICE DRUCKER" } ], "attorneys": [ "Levin & Berger, of Chicago, (Burton Berger, of counsel,) for appellants.", "Frank F. Fowle, Herbert S. Wander, Paul E. Freehling, and Pope, Ballard, Kennedy, Shepard & Fowle, all of Chicago, (Patrick C. Mullen, of counsel,) for appellee." ], "corrections": "", "head_matter": "Paul J. Kern et al., Plaintiffs-Appellants, v. Chicago & Eastern Illinois Railroad Company, Defendant-Appellee.\n(No. 55588;\nFirst District\nJune 9, 1972.\nLevin & Berger, of Chicago, (Burton Berger, of counsel,) for appellants.\nFrank F. Fowle, Herbert S. Wander, Paul E. Freehling, and Pope, Ballard, Kennedy, Shepard & Fowle, all of Chicago, (Patrick C. Mullen, of counsel,) for appellee." }, "file_name": "0247-01", "first_page_order": 269, "last_page_order": 275 }