Opinion
No. 21294
Decided February 6, 1929.
Public Utilities Commission — Authorization to utility to further issue capital stock may be suspended — Section 614-53, General Code — Using commission's order to advertise securities, good cause for suspension.
1. Under Section 614-53, General Code, the Public Utilities Commission of Ohio, after authorizing a public utility to issue capital stock, may for good cause shown suspend the right of such utility to further issue and dispose of such stock within this state.
2. Where the record shows that such utility has used the order of the Public Utilities Commission authorizing it to issue its capital stock as a basis for advertising its securities and inducing their purchase in Ohio and other states, good cause for the suspension of such authority is shown.
ERROR to the Public Utilities Commission.
This case arises as an error proceeding to a finding and order of the Public Utilities Commission, which finding and order are as follows:
"On the 28th day of December, 1926, this Commission made and entered a certain Order wherein consent and authority to issue and dispose of 10,000 shares of common capital stock of the par value of $10.00 per share was granted the International Telepost Company, Inc., of No. 299 Broadway, New York, New York.
"The proceeds from the sale of these securities was to be used to reimburse the treasury of the International Telepost Company, Inc., for expenditures made in construction within the State of Ohio of its line between the City of Toledo, Ohio, and Chicago, Illinois, which is the only complete line it possesses anywhere.
"Early in January, 1928, certain information was lodged with the Commission which led it upon its own motion to investigate the activities and status of the respondent company. On January 10, 1928, the Commission suspended the said Order of the 28th day of December, 1926, and cited the International Telepost Company, Inc., to appear before it to show cause why the said Order should not be vacated and set aside. The President of the said Company appeared before the Commission but the Commission being of the opinion that the facts were not fully before it set the case for formal hearing. The matter came on to be heard accordingly on the 17th of May, 1928.
"From the record adduced herein the Commission finds that the scheme of the respondent is almost entirely promotional. A few years ago certain patent rights, assets of the Telepost Company of Arizona, appear to have been purchased by one Alexander Wolf from the referee in bankruptcy for the said Arizona Company for the sum of $5,100.00. The International Telepost Company was then incorporated with $18,000,000 in common stock, consisting of 1,800,000 shares of a par value of $10.00 per share. One million shares of this stock with a total par value of $10,000,000 were given to Alexander Wolf, the President of the Company, in payment for the assets of the Arizona Company acquired at bankruptcy sale for the said sum of $5,100.00. The remaining 800,000 shares were treasury stock which were to be offered to the public at $10.00 per share and for each share of stock purchased by the public, Mr. Wolf offered to present one share from his personal holdings.
"In February, 1928, the authorized capital stock of the International Telepost Company was voluntarily reduced from 1,800,000 shares to 1,000,000 shares of par value of $10.00, leaving the total capitalization as $10,000,000. Before this reduction 45,000 shares appear to have been sold to the public. About 2,500 of the 10,000 shares authorized in Ohio had been disposed of when the suspension Order of January 10, 1928, was issued.
"Mr. Wolf testified before the Commission that all shares not sold are still in the Treasury of the Company. If that be true, but one conclusion can be drawn, namely, that Mr. Wolf has created himself a creditor of all shares not outstanding in the hands of the public.
"The record discloses the fact that nine patents assigned to the International Telepost Company have not expired; of the nine, one is for a secret wireless telegraph system, the other eight are minor improvements on the Telepost System; two expire in 1929, two in 1932, one in 1936, two in 1937 and one in 1942. The stock paid Mr. Wolf is evidence that these patents are carried on the books of the company at a value of several million dollars. There is no evidence that anything has been charged off for these patents thus far or that any appreciable amount can be charged off during the life of the patents. The Commission is of the opinion that sound financing requires that this be done.
"The line of the respondent company between Toledo, Ohio, and Chicago, Illinois, is not of high class construction. It consists partly of poles which were originally set some thirteen years ago, many of which have been reset. The majority of these poles are Class D, twenty-five feet in length, which have had no butt treatment; three lines have been strung on the said poles. The main office in Toledo is at the Fort Meigs Hotel and the receiving office is at Junction Avenue, some two miles distant. Messages originating at the Fort Meigs office are telephoned to the Junction Avenue office. The company has no leased or special wires for telephonic communication. The terminal of the line at Chicago is at Sixty-Third Street and Loomis Avenue. This office is approximately twelve miles from the 'Loop' District which is the business part of Chicago. According to the testimony of Mr. Wolf the company has one business solicitor in Chicago and also one in Toledo. The line was placed in operation on January 17, 1928. From January 17 to March 21, 1928, the total revenue from these messages originating at Toledo amounted to only $62.12. Of this, the maximum received in any day was $5.60.
"When Mr. Wolf's holdings and his claims to the stock of this Company are considered in the light of the almost negligible receipts, the Commission is of the opinion that the members of the public who are stockholders cannot possibly receive dividends on their investments. The Commission is not unmindful of the fact that two large companies are already furnishing telegraphic service, within the State of Ohio, and also throughout the United States. This is indeed significant when we reflect on the evidence in this case, which is undisputed, that the Telepost System has attained no advantages over the general telegraphic system. In fact, in some ways it is undoubtedly inferior. For example, the simultaneous use of a circuit for transmission from and to several points, which is a part of other systems, does not appear to have been achieved by Telepost; with it, transmitting double, triple and quadruplicate messages over the same wire at the same time, if the testimony in this record is correct, is not possible. Communications are sent by first placing the message in the dot-dash code — upon a perforated tape. These must then be checked and put through a transmitting machine. The operator at the receiving station obtains the message on a tape which must be extracted from the machine, decoded and typed.
"No application to the Public Service Commission of Indiana or the Illinois Commerce Commission for authority to issue securities in the States of Indiana and Illinois has ever been made by the respondent although the laws of both States require interstate telegraph companies to secure consent and authority for the issuance of securities which are to be sold to provide funds for construction of plants within those States. The record in this case shows, however, that the International Telepost Company has sold stock in the States of both Indiana and Illinois. Having secured authority from the Public Utilities Commission of Ohio on the 28th day of December 1926, to issue and dispose of $100,000.00 worth of common capital stock the company used that permissive Order as a basis for advertising its securities and inducing their purchase in Ohio and other States as well. This matter came to the Commission's attention some weeks ago and the President of the respondent company was immediately notified to desist from such practices. As the blue sky department for public utility securities our position should not require definition; we pass upon the merits of stocks and bonds only as to the reasonable certainty of their ability to earn as of the time an application for security issue is before us; good business management and proper development of companies cannot be assured; misrepresentations may be taken at face value, their falsity not being detectable at the moment and what appears to be in demand as a utility today may be obsolete tomorrow. It will thus be seen that as a Commission we cannot — and do not pretend to — guarantee the integrity of investments. Our orders do not possess the miraculous power of turning what may be dross to pure gold and we refuse to tolerate the use of the name of the Commission for the sole purpose of deceiving an unsuspecting public and concealing the necessity for making investigation of a company before purchasing its securities. We condemn all companies that so advertise and candidly state that as a rule their wares will not bear close scrutiny.
"Exhibits of record, which are substantiated by testimony of Mr. Wolf, prove conclusively to the mind of the Commission that high pressure sales methods have been employed and misrepresentation of securities dealt in, in addition to those above referred to, so that those who are purchasing the securities are misinformed of the true nature of the project in which they are investing their money, all of which is not only objectionable but also repulsive, deserving severe censure and invoking drastic action.
"Witnesses for the respondent have testified that a line is now in process of construction between Toledo, Ohio, and Detroit, Michigan, and also that there is an intention on its part to extend it some time in the future to Cleveland, Ohio. The completion of these constructions is mediate, however, and not immediate. Should the business secured by the respondent after those lines are placed in operation be no more voluminous than that which the company is now enjoying between Chicago and Toledo, we are of the opinion that even those extensions cannot produce a sound company and especially will that be true if the financial structure of the International Telepost Company remains as it now exists.
"In consideration of the foregoing facts the Commission finds that Order No. 4358 granting the International Telepost Company, Inc., authority to issue 10,000 shares of common capital stock at a par value of $10.00 per share should be set aside as to all shares not sold and outstanding in the hands of the public prior to January 10, 1928, and it is accordingly,
"Ordered, That the temporary Order of January 10, 1928, suspending the right of the International Telepost Company, Inc., to further issue and dispose of capital stock by virtue of Order No. 4358 be and hereby it is made permanent."
Further facts are stated in the opinion.
Mr. Alexander Wolf, Mr. Keyes Winter, Messrs. Hackett Lynch and Messrs. Brown Sanger, for plaintiff in error.
Mr. Edward C. Turner, and Mr. Gilbert Bettman, attorneys general, Mr. A.M. Calland and Mr. T.J. Herbert, for defendant in error.
The legal question of substance involved in this record is whether the Public Utilities Commission, after authorizing an issue of capital stock by a public utility within this state, may later suspend such authority. The question arises under Section 614-53, General Code, the pertinent portion of which reads as follows: "A public utility or a railroad, as defined in this act, may, when authorized by order of the commission, and not otherwise, issue stocks, bonds, notes and other evidences of indebtedness, payable at periods of more than twelve months after date thereof, when necessary for the acquisition of property, the construction, completion, extension or improvement of its facilities or for the improvement or maintenance of its service, or for the reorganization or readjustment of its indebtedness and capitalization, or for the discharge or lawful refunding of its obligations, or for the reimbursement of moneys actually expended from income or from any other moneys in the treasury of the public utility or railroad not secured or obtained from the issue of stocks, bonds, notes or other evidences of indebtedness of such public utility or railroad within five years next prior to the filing of an application therefor as herein provided, or for any of the aforesaid purposes except maintenance of service and except replacements in cases where the applicant shall have kept its accounts and vouchers of such expenditures in such manner as to enable the commission to ascertain the amount of money so expended and the purposes for which said expenditure was made."
The other portions of the section relate to the purpose for, and terms under, which such issue may be authorized, and have no bearing here.
It is the contention of the plaintiff in error that, under the above section, the Public Utilities Commission is authorized only to permit the issue of stock, and not to suspend such issue after the sale is authorized. It is to be observed that the order attacked in this error proceeding does not deal with stock issued prior to the effective date of the order, and relates only to future issuance of the securities in question.
It is true that the Public Utilities Commission possesses no powers except such as are conferred by statute. City of Cincinnati v. Public Utilities Commission, 91 Ohio St. 331, 337, 110 N.E. 461, Ann. Cas. 1916 E, 1081; Village of New Bremen v. Public Utilities Commission, 103 Ohio St. 23, 132 N.E. 162. Nevertheless, we do not agree with the contention of the plaintiff in error. If it were true that every exercise of authority by the commission had to be expressly permitted by the statute, there would be little ground for the holding of this court in the case of Lima Toledo Rd. Co. v. Public Utilities Commission, 108 Ohio St. 330, 140 N.E. 603. That case held that: "The Commission is clearly authorized to deny the application for the issuance of securities based upon an overvalution, or one, upon which, taking into consideration the earning value of the property, a fair return upon the amount of such capitalization may not probably be realized or reasonably expected."
The express authority to deny the application is nowhere given in the statute. It was held in the Lima Toledo Rd. Co. case, supra, to be inherent in the power to authorize the issuance of such securities.
It is within the inherent power of the commission to vacate, modify, or suspend an order which it has authority to grant, when such order deals with a subject over which the commission has continuing jurisdiction.
As shown by the record, the original order, dated December 28, 1926, which authorized the plaintiff in error to issue its common capital stock in shares of the par value of $10 a share, further ordered that "the proceeds arising from the sale of said capital stock be expended and used for the following purposes, and no others, to wit: The reimbursement of the applicant's treasury for said uncapitalized, capital expenditures therefrom, of $64,000.00, to the first day of October, 1926, and the completion and equipment of the applicant's initial line from the West to Toledo, at an estimated cost of $36,000.00," and that the "applicant make verified report to this Commission semiannually, within fifteen days after the close of each calendar, semiannual period, of the issue and disposition of said capital stock and, in reasonable detail, the expenditure of the proceeds thereof pursuant to the terms and conditions of this order."
The jurisdiction of the Public Utilities Commission over the issuance of this stock was therefore, as a matter of fact, a continuing jurisdiction, and it has the power to amend, vacate, or suspend its original order, expressly authorized by the statute, because these powers are necessarily incident to the powers specifically conferred. Rambarger v. Curl, 115 Ohio St. 81, 152 N.E. 18.
Section 614-53 plainly specifies that: "A public utility * * * may, when authorized by order of the commission, and not otherwise, issue stocks * * *." Since, under the power necessarily incident to the express power, the authority to issue the stock has been suspended, such authority no longer exists; and, as the public utility may only issue stock when authorized by order of the commission, and not otherwise, we conclude that there is no authority of law for the issuance of any further stock by the plaintiff in error from and after the effective date of the order.
The suspension, modification, or vacation of an order previously made by the commission cannot be capricious or arbitrary. An administrative body must exercise its powers reasonably and lawfully. Thus administrative orders quasi-judicial in character are void if a hearing was denied, or if granted on an inadequate or unfair hearing, or if the finding was contrary to the indisputable character of the evidence. Interstate Commerce Commission v. Louisville N. Rd. Co., 227 U.S. 88, 33 S.Ct., 185, 57 L.Ed., 431; Louisville N. Rd. Co. v. Sloss-Sheffield Steel Iron Co., 269 U.S. 217, 46 S.Ct., 73, 70 L.Ed., 242.
In this case, however, the Public Utilities Commission has not acted capriciously or arbitrarily. The fullest possible hearing was given, and the finding of the commission is amply sustained by the evidence.
The record shows that in this case an advertising leaflet was put out by the plaintiff in error, which made these two statements:
"The International Telepost Co., Inc., now invites the public at large to become participating partners. The experimental work has long been passed; the securities have been authorized by the Ohio Utilities Commission and if determination, good will and ability to accomplish big things count for success, then the corporation stands eloquently in the limelight of One Hundred Per Cent Efficiency."
"It is not a simple matter to bring about the success of an enterprise whose work intertwines the sanction of municipalities and other quasi-governmental institutions. The officers of the International Telepost Co., Inc., have succeeded in meeting every obstacle, and so much so, that after a complete investigation by the Public Utilities Commission of Ohio, its consent was given to extend the lines into the business centers of that state, thus linking commerce, finance and industry with Columbus, Lima, Dayton, Cincinnati, Youngstown, Akron and Cleveland."
Such use of the permissive order to sell the stock as an advertisement within and without this state, for the purpose of inducing purchase of capital stock, whether taken by itself or together with the other circumstances shown by this record, constitutes good cause for the suspension of the order.
Order affirmed.
MARSHALL, C.J., ROBINSON, JONES and DAY, JJ., concur.
KINKADE and MATTHIAS, JJ., not participating.