#### Continental Securities Company and Clarence H. Venner, as Stockholders of the New York Central and Hudson River Railroad Company, in Behalf of Themselves and All Other Stockholders Similarly Situated, Appellants, *v.*New York Central and Hudson River Railroad Company and Others, Respondents.

Second Department,

May 25, 1915.

Railroads — consolidation of railroad companies — refunding bonds — issuance of bonds at higher rate of interest — statutes construed.

A railroad company which with the consent of its bondholders proposes to consolidate with another railroad company may legally he authorized, as an incident to such consolidation, to issue four per cent interest bearing bonds in order to replace and retire outstanding three and one-half per cent bonds which it had previously issued. Such an issue of refunding bonds hearing a higher rate of interest is not a violation of either section 141 of the Railroad Law or section 55 of the Public Service Commissions Law, when issued in connection with such consolidation.

The prohibition against the issuance of bonds or evidences of debt in connection with the consolidation of railroad companies contained in section 141 of the Railrqad Law relates only to indebtedness of principal and interest which has already accrued.

Appeal by the plaintiffs, Continental Securities Company and another, from a judgment of the Supreme Court in favor *346of the defendants, entered in the office of the clerk of the county of Westchester on the 11th day of February, 1915, upon the decision of the court after a trial at the Westchester Special Term.

*J. Aspinwall Hodge [Alexander Holtzoff*and *Charles E. Robinson*with him on the brief], for the appellants.

*Albert H. Harris [Francis Lynde Stetson*and *Alexander S. Lyman*with him on the brief], for the respondent railroad company and others.

*Frederick L. Allen [William W. Green*and *Murray Downs*with him on the brief], *for*the respondents The Mutual Life Insurance Company of New York and another.

*J. Du Pratt White [Joseph M. Hartfield*and *Charles J. Fay*with him. on the brief], for the respondent Bankers Trust Company.

Mills, J.:

This is an action brought by the plaintiffs, as stockholders of the New York Central Bailroad Company, in their own behalf and in behalf of all other such stockholders, against the said company and certain other defendants, to enjoin the said company from issuing certain four per cent interest bearing bonds to replace and retire certain outstanding three and one-half per cent bonds as an incident of the proposed consolidation with that company of the Lake Shore and Michigan Southern Bail-way Company.

The contention of the plaintiffs is that such issue of the new bonds would violate both section 141 of the Bailroad Law and section 55 of the Public Service Commissions Law. At the Westchester Special Term for motions, upon a motion duly made, a temporary injunction was granted. The justice presiding wrote an opinion indicating that he sustained the plaintiffs’ contention. Very shortly thereafter, the case was tried at the Westchester Special Term for trials. The justice there presiding came to the opposite conclusion and accordingly gave decision to the defendants, upon which judgment was duly entered, from which the plaintiffs appealed to this court.

There appears to be no controverted question of fact in the *347case. In 1898 the New York Central and Hudson River Railroad Company, one of the predecessor companies of the present New York Central Railroad Company, one of the defendants here, purchased a large part, about ninety per-cent, of the capital stock of the Lake Shore and Michigan Southern Railway Company at the rate of $200 a share, and paid for the same in its bonds bearing interest at the rate of three and one-half per cent, secured by a special pledge of the stock so purchased with a certain trust company, under a certain agreement, which, among other things, provided, in effect, that there should be no consolidation of the Lake Shore and Michigan Southern Railway Company with the said New York Central, except “upon such terms as shall be approved by the holders of seventy-five per cent in amount of the bonds secured by this indenture,” viz., said three and one-half per cent bonds. For some years past the directors of both companies have been considering the subject of consolidation, with the result that a proposed plan for such consolidation was, in December, 1911, in the form of a circular, submitted to the holders of those bonds, proposing that in case the consolidation should be effected, the said New York Central would issue its new bonds to replace the present ones at the same rate of interest; but the requisite number of consents was not obtained from such bondholders. Thereafter a new or revised plan was proposed, by which the new bonds to be so issued and used were to bear four per cent interest instead of three and one-half. To this plan the requisite consents were secured. Due application was made to the Public Service Commission of this State, and that Commission made its order December 12, 1914, finally consenting to and approving the proposed consolidation and the issue of the proposed new bonds. The approval and consent of the Public Service Commissions of certain other States necessary to be had, namely, Pennsylvania, Michigan and Illinois, were likewise obtained. Upon each application to either of those Commissions the plaintiffs appeared and were heard in opposition. Thereafter this present action was brought.

The sole question presented for determination by this appeal is whether or not the scheme of issuing four per cent bonds to refund and replace such part of the present three and one-half *348per cent bonds as the holders thereof may elect to have so replaced will constitute a violation of section 141 of the Railroad Law (Consol. Laws, chap. 49; Laws of 1910, chap. 481) and of section - 55 of the Public Service Commissions Law (Consol. Laws, chap. 48; Laws of 1910, chap. 480), or of either of them. The pertinent parts of those sections are as follows:

“But in no case shall the capital stock of the corporation formed by such consolidation exceed the sum of the capital stock of the corporations so consolidated, at the par value thereof. Nor shall any bonds'or other evidences of debt be issued as a consideration for, or in connection with, such consolidation.” (Railroad Law, § 141.)

“Nor shall the capital stock of a corporation formed by the merger or consolidation of two or more other corporations, exceed the sum of the capital stock of the corporations so consolidated, at the par value thereof, or such sum and any additional sum actually paid in cash; nor shall any contract for consolidation or lease be capitalized in the stock of any corporation whatever; nor shall any corporation hereafter issue any bonds against or as a lien upon any contract for consolidation or merger.” (Public Service Commissions Law, § 55.)

It seems plain that such proposed issue of the new four per cent bonds can by no manner of construction be held to be in violation of said section 55 of the Public Service Commissions Law. Those new bonds are not proposed to be and will not in any sense be issued “ against or as a lien upon any contract for consolidation or merger.” The plain purpose of that particular statutory provision is to prohibit the capitalization, by a stock or bond issue, of the mere contract for consolidation. Here the bonds are to be issued as a result of the completed consolidation and to be the securities of the actually consolidated corporation.

It is my opinion that neither the said section 55 of the Public Service Commissions Law nor section 668 of the Penal Law, cited by the appellants’ counsel as indicating the public policy of the State, is to be construed as relating to the proposal of a plan for consolidation, and the offer therein of advantages to assenting parties to be realized as a result of the completed consolidation.

*349The question whether or not the plan is in violation of section 141 of the Railroad Law is, upon the facts here, limited to the question whether the proposed increase of one-half of one per cent in the.interest rate upon the new bonds over that upon the present, so far as the same may, at the option of the holders, be exchanged, will constitute the issue of “ bonds or other evidences of debt * * * as a consideration for, or in connection with, such consolidation.” The following section 142 of the Railroad Law must of course be read in connection with said section 141, and so read it clearly shows that the issuing of the new bonds by the consolidated corporation, to refund or replace the old, is not prohibited, but, on the contrary, is expressly allowed. The statute nowhere contains any express limitation upon the rate of interest of the new bonds; and it does not appear that any such limitation may be implied. Indeed the learned counsel for the appellants, in his argument here, stated, in effect, that he does not question that “upon a consolidation a bond of a higher rate of interest may retire a bond of a lower rate.” This much being conceded, there does not appear to be substantial force in his contention that the mere fact that, in the proposal issued by the company seeking to effect the consolidation, it was stated that the same, if effective, should be upon condition that the new bonds to take up the old should be issued at the proposed increased rate of interest, would make the issue of the proposed new bonds a violation of the prohibition contained in said section 141. If it be competent, as a result of the consolidation, for such company to issue the new bonds at an increased rate of interest, it must also be competent for it, in its proposal to interested parties of its plan for such consolidation, to state that as one of the features of such plan; and the two sections, 141 and 142, taken together, must not be construed so to prevent such statement or indeed such subsequent issue of the new bonds. No doubt in a literary or popular sense, any feature of the plan set forth in such proposal may be said to be a consideration for the solicited assents to the plan.

Moreover, it would seem that the prohibition contained in said section 141, being in derogation of the general authority to consolidate otherwise given, must be strictly, not broadly, *350construed, and, therefore, must be limited in its application to the indebtedness already accrued — that is, the principal and any past due interest.

There seems to be no decision by any court directly in point upon this particular question. There are, however, several such decisions by the courts of other States applying this rule of construction to various constitutional and statutory provisions limiting the amount of municipal indebtedness. The learned justice at Special Term, in granting the motion for temporary injunction, stated in his opinion, in effect, that such provisions limiting municipal indebtedness must of necessity be so construed, as otherwise the principal and the interest to accrue in the future upon a relatively small municipal indebtedness would exceed the limit. It would seem that there was an equal argument from necessity in favor of holding that an advantage set forth in a proposal for such consolidation, to accrue to an assenting party from the consolidation, if effected, should not be regarded as a consideration given for such assent and so as violating said section 141.

Therefore, my conclusion is that the proposed issue of four per cent bonds to retire the present three and one-half per cent bonds will not violate either section 141 of the Bailroad Law or section 55 of the Public Service Commissions Law. Hence I advise that the judgment appealed from be affirmed, with costs.

Jenks, P. J., Thomas, Stapleton and Bioh, JJ., concurred.

The parties hereto having stipulated in open court that a justice may be substituted in place of Burr, J., deceased, Mr. Justice Mills was so substituted. Judgment affirmed, with costs.