Opinion
September 24, 1909.
William S. Opdyke [ Morgan J. O'Brien and Lewis E. Carr of counsel], for the relator.
Ledyard P. Hale and Edward H. Wells, for the respondents.
We are safe in saying, from the opinions of the Commissioners and the brief of their counsel, that the principal reason for the refusal of the consent and authority of the Commission was the fact that the mortgage in question covers only the railroad property and not the coal lands and the trolley properties or the securities representing them.
By section 40 of the Stock Corporation Law, which was in full force when the original indebtedness now sought to be refunded was incurred, a stock corporation may purchase, hold and dispose of stocks, bonds and other evidence of indebtedness of another corporation engaged in a business similar to its own. In a litigation between the relator and one of the subsidiary companies of the Hudson Valley Railway Company it was determined that the relator must join in a connection of its tracks with those of the electric road for the interchange of business. ( Matter of Stillwater M. St. R. Co., 171 N.Y. 589.) By the decision of this court in Hudson Valley R. Co. v. Boston Maine Railroad ( 106 App. Div. 375) it was held that the steam road must interchange cars and freight with the electric road. It cannot, therefore, well be denied that the relator, the Hudson Valley Company and the United Traction Company were engaged in similar businesses. Whether we consider the notes in question as given for the Hudson Valley securities or for the United Traction Company stock, it must be deemed that the notes represented a valid debt incurred for a lawful purpose of the relator. The relator in borrowing money upon its notes to lend its subsidiary companies to buy coal lands, and receiving therefor the certificate of indebtedness of such companies, was, in effect, purchasing evidences of indebtedness of corporations engaged in a business similar to its own, the relator being a coal company as well as a railroad company. These notes, assuming the transactions honest and the purchases bona fide, were obligations incurred for the lawful purposes of the relator. To issue bonds in good faith to refund a bona fide debt is a right the relator has, and the Legislature, if it has the power so to do, never has attempted to prevent the exercise of that right. We cannot assume that the coal lands are to be used in such a manner as to meet the condemnation of the commodities clause of the Hepburn Act, as interpreted by the United States Supreme Court in United States v. Delaware Hudson Co. ( 213 U.S. 366). The presumption is that the coal lands will be used in a legal way. The coal may be sold in good faith before shipment.
The relator and the Commission join issue as to the power of the Commission. The relator contends that the Commission is of quite limited jurisdiction in the premises; that the statute itself has defined in what cases and for what purposes a railroad corporation may issue its bonds and securities; that the Commission is a statutory board whose duty in this case is solely to determine whether the proposed issues are to be made and marketed in good faith for necessary corporate purposes as defined by the statute; that it appears conclusively that the bonds desired are for the refunding, on an equitable basis, of obligations which existed against the company before the Public Service Commissions Law was passed, and for a purpose directly permitted by the statute, and that, therefore, the consent of the Commission must follow. The Commission feels that although the indebtedness was honestly incurred before the Public Service Commissions Law went into effect, and for a purpose mentioned in the statute as one for which bonds and mortgages may issue, nevertheless that it has a discretionary power to say whether such issue shall be permitted, and if permitted, upon what part of the property of the corporation the security shall rest.
If we adopt the construction contended for by the relator, the validity of the statute is plain beyond question; for when there is a statutory or common-law duty resting upon a corporation, the Legislature may vest in a commission the power to see that the corporation acts within such duty. ( Village of Saratoga Springs v. Saratoga Gas, etc., Co., 191 N.Y. 123.) In such cases the statute gives the measure by which the conduct of the corporation is to be gauged and within the bounds of which it is to be kept. The powers of the Commission are merely executive or administrative. If, however, the judgment and discretion of the Commission is the measure of the duties of the corporation, a more serious question arises. Then the Commission is not to determine whether the corporation is keeping within the law, and to make proper regulations to compel it to observe the law, but is in itself laying down new laws by which the corporation must be governed. It is enforcing its will, its law, and not the law of the State.
A Minnesota statute which required the consent of its Commission for an increase of capital stock, but gave no measure by which it could be determined when a corporation might or might not increase its stock, was held invalid as leaving it to the discretion and will of the Commission to determine what issues of stock were proper and what issues were improper. ( State of Minnesota v. Great Northern Railway Co., 100 Minn. 455.) As said by Mr. Justice BREWER, for a unanimous court, in Interstate Commerce Comm. v. Chicago G.W. Ry. ( 209 U.S. 108, 118): "It must be remembered that railroads are the private property of their owners; that while from the public character of the work in which they are engaged the public has the power to prescribe rules for securing faithful and efficient service and equality between shippers and communities, yet in no proper sense is the public a general manager."
The Commission stands in the place neither of the owner of the property nor of the Legislature, but is a board of public officers whose powers are to be found in the statute and are not to be implied or assumed. Section 3 of the charter of the relator, intrusting the management of its concerns to thirteen managers, repels rather than invites the construction that the officers of the State and not the officers of the corporation are to manage its business. At common law the duty devolves upon a common carrier, and those engaging in a similar public service, to furnish to the public a reasonable service at a reasonable price; under the police power, legislation enacted for the public health, the public welfare and the public safety, may impose additional duties upon persons and corporations, and may restrict rights which they otherwise might enjoy. Otherwise every person — and a corporation is a person within the constitutional guaranty of protection to property and liberty — has the right to carry on his own business and manage his own property in his own way. Under its police power the Legislature may appoint a commission charged with the duty of seeing that persons engaged in a public service shall observe the obligations to the public which have been imposed upon them either by the common law or by the statutes, and may adopt reasonable regulations tending to enforce upon such persons the observance of such laws. It has not been called to my attention that any executive or administrative commission has been vested with the authority to set up its will and judgment as the measure by which the acts of a public service corporation may be tested, it being conceded that the corporation is acting in every respect according to its common-law and statutory obligations and rights.
Without further discussion we may assume that a statute which attempted to vest in a commission a general discretion over a corporation, so that its judgment shall be the test of the propriety of the corporate acts — so that it may prevent a corporation from issuing its bonds or mortgages in good faith for full value to pay the honest debts of the corporation incurred for purposes expressly authorized by statute — would at least be of doubtful constitutionality, or a statute the validity of which cannot be said to be beyond question.
In the recent case of United States v. Delaware Hudson Co. ( 213 U.S. 366), where the validity of the commodities clause of the Hepburn Act was questioned, the court emphasized the rule that where two constructions of an act of legislation are permissible, one of which may render it invalid or may lead to an honest dispute as to its validity, the court will adopt that construction which removes the validity of the statute from question. With that case in mind we have greater confidence in saying that the court will not read into an act powers not given by it when such powers make the validity of the act questionable. It, therefore, seems to be a proper construction of the statute in question to say that it furnishes the measure and the limit of the authority of the Commission. It requires, in substance, in the case of a mortgage that it shall only issue for the lawful purposes of the corporation, with the consent of the stockholders owning at least two-thirds of its stock and the Commission, and in the case of bonds that they shall issue only when necessary for the acquisition of property, the construction, completion, extension or improvement of its facilities, for the improvement or maintenance of its service or for the discharge or lawful refunding of its obligations, "provided, and not otherwise, that there shall have been secured from the proper Commission an order authorizing such issue, and the amount thereof, and stating that in the opinion of the Commission the use of the capital to be secured by the issue of such stock, bonds, notes or other evidence of indebtedness is reasonably required for the said purposes of the corporation." The Commission is authorized to hold hearings "and examine such witnesses, books, papers, documents or contracts as it may deem of importance in enabling it to reach a determination."
The stockholders' consent is required. They may arbitrarily decline to mortgage or bond their property, even though every reasonable consideration would seem to dictate that a mortgage or bond issue is necessary for the business requirements and safety of the corporation. The authority of the Public Service Commission to issue bonds, and its consent to mortgage, is required not as an owner, or as one authorized to control or manage the property or business, but as a board of public officials charged with the duty of seeing that the law is observed. Its order, under section 55 authorizing such issue, must state the amount thereof, and that, in the opinion of the Commission, the use of the money to be secured thereby is reasonably required for one of said purposes. This clearly indicates that one matter only is to be determined by the Commission, namely, what amount of securities if any is necessary to issue to produce money required for a purpose mentioned in that section. If other matters were to be determined, and the board was to place its decision upon other considerations, the statute would naturally require a statement of its conclusions upon such other matters also. In the absence of such requirement, the fact that the Commission is to state the amount found necessary for a purpose mentioned indicates that that is the only matter for its determination.
If the will of the Commission alone is the determining guide as to when and how the stockholders of a corporation may market or issue bonds, then the statutory requirement that they may issue for certain purposes is unnecessary. The fact that the statute names the cases in which the mortgage or bonds may issue indicates clearly that the Commission is to determine whether the conditions exist, and that it is not to add new conditions.
A fair construction of the statute is that bonds or stocks may issue in the cases mentioned in the statute; that if the Commission is not satisfied that the proposed issue comes within the terms of the statute it may refuse consent, but when the statutory requirements have been fully met it then is the duty of the Commission to grant its consent. The Commission cannot find the debt one for which the statute authorizes the company to issue bonds and refuse consent because the mortgage does not cover all of the corporate property or because the corporation and the Commission disagree as to the part of the corporate property upon which the bonds should be secured.
This conclusion is the more satisfactory when we consider the salutary rule for the interpretation of a remedial statute, first to ascertain the evil in the existing law and then assume that the statute was intended to remedy such evil. The statutes of this State provide that no corporation shall issue stocks or bonds except for money, labor done or property actually received for the use and lawful purposes of the corporation, but permit a corporation to purchase property and to issue stock for the value thereof, and, in the absence of fraud in the transaction, the judgment of the directors as to the value of the property purchased is conclusive. Under this statute many corporations issue securities in exchange for property or labor turned into the company at fictitious values, so that the securities in fact do not represent actual values, but are, in common parlance, known as watered. It was deemed that such securities issued by a public service corporation were detrimental to the public interest, so far at least as the public might purchase the same, and perhaps as affecting rates to be charged the public. This statute was evidently intended to protect the public from such securities; to prevent the officers of the company from receiving fictitious values for property or services of which they might be both the buyer and seller; to enable the Commission rather than the directors alone to determine whether the corporation, under the provisions of the statute, is entitled to issue the securities, and to see that they are issued at a just value so that the public interests may not be injured by the improper use or the improper disposition of them.
Another suggestion has great force confirming this construction of the statute. No authority of the Public Service Commission is required for the issue of bonds, notes or obligations unless the time of payment thereof exceeds one year. From a business point of view the company is more apt to be wrecked or thrown into bankruptcy on account of a floating debt than by a funded debt payable upon favorable terms in the distant future. If it was intended that the Commission should act in a way as guardian of the company and see that its indebtedness should not imperil its safety, and thereby possibly injure the public interests, the question of a short-time indebtedness would have been submitted to it also because of the greater peril from such issue. But the fact that the Commission only has authority over stock issues, and bond issues maturing after one year's time, indicates clearly that the object of the authority of the Commission is to protect the public as would be purchasers of the securities. The Commission is not to save the company from itself, or from the honest but unwise act of its officers and stockholders in whom alone the statute has vested the power to manage its property and business, but is to protect the public from the wrongful issue of the stocks and securities in which the public are apt to deal.
It seems clear, therefore, that the authority of the Commission in this case is that of an executive or administrative board charged with the duty of determining whether the proposed issue of bonds or mortgages is necessary for a purpose for which the statute permits the issue, and is to be marketed in a manner in which the company will receive the just value thereof. It was, therefore, the duty of the Commission, upon the undisputed facts, to grant the consent and authority asked.
The same result follows if we assume that a sound discretion is lodged with the Commission to refuse consent to the issue of bonds or authority to mortgage, even though all the statutory requirements have been fully complied with. This company is in a strong financial position, and from the fiscal showing made it is not possible that the public can be injured by a sale of its bonds at their fair value. If we assume that a stock or bond issue has a bearing upon rates, which is very doubtful, it can have no bearing upon rates whether this indebtedness is secured by a mortgage upon the railroad property alone or upon the railroad property, the coal company collaterals and the trolley collaterals also, or upon the coal company collaterals and the trolley collaterals each separately. If the Commission is to protect the public from securities of a doubtful nature a bond of the relator secured by its first and refunding mortgage is a security the value of which is beyond question. A collateral trust bond or a second mortgage is of less value and safety. As a matter of sound business judgment, the relator having outstanding a first and refunding mortgage for $50,000,000, under which but about one-half the bonds have issued, it would be of doubtful propriety to put upon the market bonds secured upon the coal company collaterals and another issue of bonds secured by the trolley collaterals or a second mortgage bond upon its railroad property also secured by the coal and trolley collaterals. It is evident that the credit of the company is better preserved and that a lower rate of interest can be obtained under its first mortgage bonds than by two issues of collateral trust bonds or by a second mortgage. It would seem, therefore, that any refunding or new financing of the company, so far as rests with the Commission to determine, may better be done under its outstanding mortgage than to attempt to issue new securities of inferior grade while that mortgage is not closed.
In any event it rests with the stockholders and officers of the company to dictate its financial policy and to make the best possible bargain for the company in the flotation of its securities. The public interests cannot in any manner be imperilled by the method of refunding which the company has selected. Its method seems a wise and proper one, and the refusal by the Commission of its consent is not a reasonable exercise of the discretion which may rest with it.
The determination is, therefore, annulled so far as it refuses consent and authority to issue the bonds in question, and the matter is remitted to the Commission for its further action.
SEWELL, J., concurred; SMITH, P.J., concurred in memorandum, in which CHESTER and COCHRANE, JJ., concurred.
I concur upon the ground last stated. I am not ready to agree that the Commission is required to authorize the issuance of these bonds in all cases if the conditions of the statute are fulfilled. If the railroad property upon which it was proposed to make them a lien were inadequate as full security, while the company held other property which might be included in the mortgage, and which if included would give full security to the bonds, I think the Commission might withhold its approval for the protection of the public, who are the ultimate purchasers. But this power would seem to be denied by the logic of Mr. Justice KELLOGG'S opinion. The necessity for this class of legislation lies in the inability of the Legislature to itself supervise the corporate acts of public service corporations. Its justification lies in the right of the State to protect the public and the public interests. It is nowhere claimed that this Commission may be vested by the Legislature with arbitrary and discretionary powers, nor is it possible in all cases to fix a specific standard by which the Commission is to be guided. That standard must be at times more or less general. In the case of Village of Saratoga Springs v. Saratoga Gas, etc., Co., cited in Mr. Justice KELLOGG'S opinion, it was held that a Commission might fix "reasonable" rates. The necessity and purpose of this legislation would themselves seem to place a limitation upon the powers of the Commission and a standard by which it should be guided, to wit, the protection of public interests. In all cases it should be made clearly to appear that the act of the corporation in the management of its affairs, which is assumed to be vetoed by the Commission, is an act in conflict with the public interests. Otherwise the right of the corporation to manage its own affairs would seem to be clearly guaranteed by the Constitution. I agree with Mr. Justice KELLOGG that there is nothing in the case at bar to show that the public interests are in any way imperilled by the proposed issue of bonds by the corporation, and that the Public Service Commission should, therefore, have approved of the issue.
CHESTER and COCHRANE, JJ., concurred.
Determination annulled so far as it refuses consent and authority to issue the bonds in question, and the matter remitted to the Commission for further consideration.