In re Northern Cent. Ry. Dividend Cases

• Decision Date: 14 April 1915
• Docket Number: 56,63,70,78.
• Citation: 94 A. 338,126 Md. 16
• Parties: In re NORTHERN CENTRAL RAILWAY DIVIDEND CASES. v. MILLER et al. SAFE DEPOSIT & TRUST CO.
• Court: Maryland Court of Appeals

94 A. 338

126 Md. 16

In re NORTHERN CENTRAL RAILWAY DIVIDEND CASES.

SAFE DEPOSIT & TRUST CO. v. MILLER et al.

Nos. 56, 63, 70, 78.

Court of Appeals of Maryland

April 14, 1915

Appeals from Circuit Court of Baltimore City and Circuit Court No. 2 of Baltimore City; James M. Ambler, Judge.

"To be officially reported."

Suits between the Safe Deposit & Trust Company and Mary V. Miller and others, Bertha White and others, Nathaniel W. James and others, Isabel M. Gambell, Sherwin MacKenzie and others Robert T. Wilson, executor, Henry J. Waters, guardian, Olivia C. Turnbull, Henrietta G. Buchanan, and the Church Home Infirmary of the City of Baltimore. From decrees in each case, the parties aggrieved appeal. Reversed in part, and affirmed in part, and remanded.

John J Donaldson, of Baltimore, for appellants.

J Hemsley Johnson, of Baltimore, for Robert T. Wilson and others.

German H. H. Emory and Edwin G. Baetjer, both of Baltimore, for Safe Deposit & Trust Co., of Baltimore and others.

BURKE J.

The appeals in the above-entitled cases were taken from eight decrees dated January 8, 1915. Four of these decrees were passed by the circuit court of Baltimore city, and four by circuit court No. 2 of Baltimore city. The appeals involve: First, questions arising between life tenants and remaindermen over certain dividends declared by the Northern Central Railway Company; and, secondly, questions of apportionment of such dividends between life tenant and remaindermen as may be determined to be income. The determination of the questions involved can be readily reached by the application to the facts of each particular case of principles which appear to be well settled in this state. The amounts involved are very large, and the decision which we make on these appeals will be of great importance to trustees and others holding stock of the Northern Central Railway Company and interested in the dividends which form the subject of this controversy. As the decision of each case depends upon the same general principles, all the cases will be disposed of in one opinion to be filed in No. 56--the case of Safe Deposit & Trust Company of Baltimore, Trustee, v. Mary V. Miller et al.

A statement of what we regard as the controlling and determining facts upon Which the main questions in the case depend will now be made:

The Northern Central Railway Company is a corporation under the laws of Maryland and Pennsylvania, operating a line of railroad from Baltimore, Md., to Sunbury, Pa., with a number of branches, and has for many years been physically connected with the lines of the Pennsylvania Railroad Company. Prior to 1900 the Pennsylvania Railroad and its subsidiaries acquired approximately one-half of the stock of the Northern Central Railway, and in 1906 acquired an actual majority of said stock. For many years there had been a controversy or difference of opinion between the Pennsylvania Railroad and the minority stockholders of the Northern Central Railway, based upon the contention of the minority stockholders, among others, that too large a proportion of the real earnings of the Northern Central Railway were withheld from dividend distributions, and with the accounting methods or principle by which the earnings of the Northern Central Railway were ascertained.

The controversy resulted in 1909 in the appointment of a committee to consider what was described as permanent operating relations between the Pennsylvania Railroad and the Northern Central Railway, and intended to insure to the stockholders a fixed, but larger, income return both on account of past and future earnings. After prolonged negotiations, a settlement was reached, which provided: First, for a lease of the Northern Central Railway to the Pennsylvania Railroad at an annual rent, over and above all costs of operation and maintenance, and available for distribution as dividends to the stockholders of the Northern Central Railway of $2,166,360, this amount being an increase over the dividends paid annually for the preceding ten years of $618,964; second, the declaration of a stock dividend of 40 per cent., amounting to $7,734,050, and a cash dividend of 10 per cent., amounting to $1,934,250.

At a meeting of the stockholders of the Northern Central Railway held on November 2, 1910, the settlement was approved, and the lease was authorized and the capital stock of the company increased by an amount sufficient to provide for the stock dividend, and the dividends were approved. The resolutions of this meeting recited that the question of the proposed increase of the capital stock of the company of 154,741 shares of the par value of $50 each, over and above the 368,851 shares of the par value of $50 each, then issued and outstanding, and the issuance thereof having been, pursuant to resolution of the board of directors and after 60 days' notice given and published as required by law, submitted to the meeting for the consent and authority of the stockholders, it was-- "Resolved, that the consent and authority of the stockholders of this company be, and they are hereby, given to the proposed increase of said company's capital stock of one hundred and fifty-four thousand seven hundred and forty-one (154,741) shares, of the par value of fifty (50) dollars each, over and above the three hundred and eighty-six thousand eight hundred and fifty-one (386,851) shares, of the par value of fifty (50) dollars each, now issued and outstanding, and the issuance and disposition of said increase primarily for the purpose mentioned and prescribed in the resolution of the board of directors of 14th July, 1910, viz.: As and for a stock dividend upon the company's present outstanding capital stock, representative of and based on expenditures for additions and betterments of the company's property made from time to time out of its surplus earnings to a larger amount in the aggregate, and which might otherwise have been available for and distributable as dividends among its stockholders, if the directors had so determined," etc.

The report of the board of directors of the company for the year 1910, reporting the capitalization of the extraordinary expenditures out of income and the extraordinary expenditure fund, is here transcribed:

"During the year the capital accounts of your company were increased $6,638,155.77, distributed as between cost of road, $6,057,252.02, and cost of equipment, $580,903.75, representing a portion of expenditures for new construction, equipment and real estate during the ten years ended December 31, 1909, heretofore expended out of surplus income, and which have not been heretofore entered in your capital accounts. This action was taken to place upon your books the cost of additions and betterments, which were, in the judgment of the board, properly considered a capital investment, and also, with other changes, to conform to the uniform accounting regulations and new form of general balance sheet promulgated by the Interstate Commerce Commission and the state of Maryland."

The controversies between the minority stockholders and the Northern Central Railway Company, above referred to, had been of long standing. The character of the controversy and the consideration for the settlement are shown in the statement of the claims made on behalf of the minority stockholders. In some instances these claims were made as claims of right against the railway company, whether the lease was made or not, and in part were contingent upon the execution of the lease. The settlement that was made included the execution of the lease and the issue of the stock dividend as inseparable parts of a single transaction.

The claims made by the stockholders were as follows: (1) That the Northern Central Railway had an earning capacity far in excess of the amount shown by the company's statements, and in excess of the amount distributed as dividends, and the stockholders were entitled, as a matter of right, to an increase in the dividend. (2) That this large earning capacity had existed for many years; that a good portion of the earnings of the company had been diverted to capital purposes through the extraordinary expenditure fund, and also through the charge of capital items directly to income or to expense of operation. (3) For distribution of the increase in the sales value of the securities over the book value. For the distribution of the surplus of the Union Railroad Company. For the increase in the value of the insurance fund. By a small minority of the stockholders the validity of the sale to the Pennsylvania Railroad of part of the stock of the Union Railroad was also questioned.

The amounts involved in the claims or contentions of the various parties were accurately ascertained by expert examination, but the settlement was not based upon any exact agreement between the parties as to the amounts to which the stockholders might be entitled.

The fluctuating market value of the stock of the Northern Central Railway Company between the years 1900 and 1914 is shown by the following table:

Years.	High.	Low.
1900 ....	100	82 1/2
1901 ....	106 1/2	88 1/2
1902 ...	125 1/4	104
1903 ....	118	84 1/2
1904 ....	109 1/2	71
1905 ....	110 3/4	99
1906 ....	111 1/4	97
1907 ....	97	78 1/2
1908 ....	102	80
1909 ....	121 1/2	100
1910 ....	132	115
1911 ....	130 3/4	121
1912 ....	130	121
1913 ....	123	106 1/2
1914 ....	129 1/2	85

Since the payment of the extraordinary dividend and the execution of the loan, the value of the stock has varied between $82 and $85 per share.

Owing to threatened...