175 N.E.2d 408 (Ill.App. 1 Dist. 1961), 48099, Kern v. Chicago & E. I. R. Co.

Docket Nº:Gen. No. 48099.
Citation:175 N.E.2d 408, 31 Ill.App.2d 300
Party Name:Paul J. KERN and Irving M. Lesch, Plaintiffs-Appellants, v. CHICAGO & EASTERN ILLINOIS RAILROAD CO., an Indiana corporation, Alfred MacArthur, David O. Mathews and F. S. Yantis, Defendants-Appellees.
Case Date:March 01, 1961
Court:Court of Appeals of Illinois
 
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Page 408

175 N.E.2d 408 (Ill.App. 1 Dist. 1961)

31 Ill.App.2d 300

Paul J. KERN and Irving M. Lesch, Plaintiffs-Appellants,

v.

CHICAGO & EASTERN ILLINOIS RAILROAD CO., an Indiana

corporation, Alfred MacArthur, David O. Mathews

and F. S. Yantis, Defendants-Appellees.

Gen. No. 48099.

Court of Appeals of Illinois, First District, Third Division.

March 1, 1961.

As Modified on Denial of Rehearing June 28, 1961.

Page 409

[31 Ill.App.2d 301] Goldberg & Levin, Chicago, Mayer Goldberg and Marvin Sacks, Chicago, of counsel, for appellants.

P. C. Mullen and Gerald J. O'Rourke, Jr., Chicago, for appellees.

[31 Ill.App.2d 302] SCHWARTZ, Presiding Justice.

This is an appeal from an order sustaining defendants' motion for summary decree and dismissing for want of equity a suit brought by preferred shareholders seeking a declaratory decree holding that defendant company had illegally amended its bylaws in order to create a system of staggered elections of directors, and for injunctive and other relief. The principal issue is whether that amendment is in violation of a provision for cumulative voting and annual election of all directors, as contained in a reorganization plan, a decree of court and the articles of incorporation.

Defendant Chicago and Eastern Illinois Railroad Company was an Illinois corporation until 1940 when, after reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, it was incorporated as an Indiana corporation. It is licensed to do business in the State of Illinois, where it maintains general offices and transacts business. It has offices and does business in Indiana as well. A plan of reorganization approved by the Interstate Commerce Commission in 1939, 230 I.C.C.Rep. 571, included a provision for the issuance of Class A preferred stock with the right of cumulative voting in the election of directors and for a board of thirteen members, each director to serve one year. That plan was subsequently approved and confirmed by the United States District Court for the Northern District of Illinois, Eastern Division. In the Matter of Chicago & E. I. R. R., Debtor, No. 52871.

Defendant company was duly organized according to plan. Its certificate of incorporation provided for the right of cumulative voting for all stockholders. As to holders of Class A stock (preferred), it was provided that so long as any such stock should remain outstanding, the consent of at least two-thirds thereof should be given to amend, alter or repeal any provisions of the certificate of incorporation or bylaws which have reference[31 Ill.App.2d 303] to preferences, voting rights, and other incidents of the Class A stock. The certificate also provided for thirteen directors and stated that they should serve for a period not exceeding one year. Bylaws were adopted which conformed to the plan and the certificate of incorporation, and the company operated thereunder until 1953. These will be examined in greater detail later in this opinion.

On July 10, 1953, the railroad's board of directors approved an amendment to the bylaws which provided for thirteen directors, four of whom were to hold office for one year, four to hold office for two years, and five to hold office for three years, and that as each director's term of office expired, he or his successor was to be elected to office for three years. Thus, the maximum number of directors to be elected in any one year was to have been five and the minimum, four, thereby creating a system of classified directors and staggered elections and sharply qualifying or completely defeating the cumulative voting provisions of the plan.

On November 12, 1958, plaintiff Kern filed suit as a Class A preferred shareholder in behalf of himself and others similarly situated, naming the railroad and individual members of the board of directors as defendants, seeking the relief hereinbefore

Page 410

referred to. On November 14, 1958 the defendant directors met at a regularly scheduled meeting and adopted a resolution repealing the July 10, 1953 amendment and providing for non-staggered, one year terms of office for the company's directors, as originally fixed in the plan of reorganization. At the same meeting, four directors whose remaining terms exceeded one year and expired after May 1959 resigned and were then re-elected by the remaining nine directors, to serve until May 1959. Thereafter, five more directors whose remaining terms exceeded one year and expired after May 1959 resigned and were also re-elected to new terms until May 1959.

[31 Ill.App.2d 304] On April 6, 1959 plaintiff Lesch, also a Class A preferred shareholder, petitioned and was granted leave to become a party plaintiff and to adopt the allegations and prayers of Kern's complaint, including the prayer for relief. On July 31, 1959, defendants moved for summary decree, supporting their motion by affidavits and suggestions. On October 14, 1959, plaintiffs filed their motion for summary decree, also supported by an affidavit and suggestions. An order was entered March 8, 1960, denying plaintiffs' motion and granting defendants' motion for summary decree and dismissing the suit for want of equity at plaintiffs' costs. It is from that order that plaintiffs appeal.

Defendants contend that...

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