Opinion ID: 1483191
Heading Depth: 1
Heading Rank: 6

Heading: 1c Wastage of Assets.

Text: Mr. Meyer presses that there was wastage in the assets of Debtor resulting in reduced earnings and in reduction of assets which would otherwise have been available to produce income. He specifies three matters of wastage and two others he regards as related to wastage. (1) Reconstruction of Corsicana Line. The first of the three matters of wastage claimed is the reconstruction of the Mt. Pleasant-Corsicana line at a cost of $5,493,282.00 in 1928 to 1930. That the road was much improved and modernized by this reconstruction cannot be successfully questioned. The line was made suitable for heavy fast running. This line was the hand reaching out toward the Pacific for all kinds of freight traffic, either via Texas & New Orleans or via Texas & Pacific. On the face of the situation it would seem to have been a wise move by Debtor, a bridge railroad. However, the argument of Mr. Meyer is that this reconstruction was not for the general good of the Debtor. He urges it was made to facilitate movement of perishables entering Debtor at Corsicana from Pacific, via Texas & New Orleans, when the officials of Debtor knew there was a decided revenue loss to it on this kind of traffic. That this nefarious purpose existed seems inconsistent with the evidence. The exact date when the plan for this reconstruction was begun does not appear or has escaped us. However, it is clear that Debtor's engineering forces were put in the field to make a detailed study and an estimate of cost of the plan in 1925 and construction under a plan started in June, 1928. Debtor was a Gould property until March 11, 1925, when the Rock Island bought the stock of Edwin Gould. The Rock Island retained the control until October, 1925, when it sold to the Southern which retained control until April 15, 1929, when it sold to the Syndicate. The Pacific did not begin serious buying of Debtor stock until late in 1929 and did not acquire stock control until July 15, 1930. This reconstruction was completed in June, 1930. Thus the plan for reconstruction was being worked out for several years before Pacific control and the construction under a plan was completed prior to such control. If handling perishable traffic from the Pacific was the moving impulse for this improvement, those who conceived this plan must have believed such traffic was desirable and profitable since Debtor was at none of this time within control of Pacific. In fact, the perishable traffic arrangement (via Texas & New Orleans) to Corsicana was not initiated until May, 1927. There is some further support in the situation that such traffic seems, as found by the Commission, to be profitable. (2) Acquisition of short lines. Mr. Meyer urges wastage of $3,428,000.00 in 1929 and 1930, for the construction and the acquisition and reconstruction of short lines in the St. Francis Basin. Before this improvement, Debtor's line passed some miles west of Memphis and had access to that city only by trackage rights over the Rock Island from Brinkley. Brinkley was southwest of Memphis so that Debtor's line from St. Louis to Memphis was somewhat circuitous and relatively much longer than other St. Louis-Memphis lines. [13] By this improvement, Debtor's St. Louis-Memphis line was shortened about sixty miles to 347.4 miles. This project was approved by the Commission. St. Louis S. W. Ry. Co. Construction, 150 I. C. C. 685; St. Louis S. W. Ry. Co. Acquisition, 158 I. C. C. 206 and 162 I. C. C. 625. A reading of these I. C. C. Reports convinces that the project seemed reasonable at those times and in the public interest. The fact that the project has not turned out to be as productive as hoped or has been even unproductive is proof that experience is better than anticipation but it falls far short of proof of conscious wastage. (3) Excessive maintenance of way expenditures. Mr. Meyer claims that an average annual expenditure for maintenance of way and structures during the six years (1925-1930) of $4,550,773 was grossly excessive at a time when the revenues of Debtor were declining. He estimates that a more reasonable expenditure would have improved Debtor's position at the end of this period by $6,000,000. In short, this contention would mean an average annual expenditure of $3,550,773 during this period. The exhibit from which Mr. Meyer takes his figures for actual expenditure is a condensed income account and averages, years 1915 to 1937, incl. This table shows that prior to 1918, such annual expenditures were less than $2,000,000. From then on to 1937, such expenditures have been as follows: 1918  $3,240,696 1919  $4,168,790 1920  $6,385,071 1921  $3,962,520 1922  $4,299,557 1923  $4,251,897 1924  $4,232,984 1925  $4,626,890 1926  $4,864,847 1927  $4,641,477 1928  $4,642,108 1929  $5,177,658 1930  $3,351,655 1931  $1,963,175 1932  $1,838,052 1933  $1,438,431 1934  $1,507,456 1935  $1,733,466 1936  $2,461,053 1937  $3,412,747 While the expenditure for any particular one or two consecutive years might not be revealing unless something was known about the conditions necessitating such, yet several things may be fairly deduced from a comparison of annual expenditures over this continuous period of twenty years. The depression in this country came in 1930 and it may be reasonably assumed that the effect thereof was, for several years thereafter, reflected in a pronounced decrease in all expenditures wherever possible. This begins to show here in 1930 and becomes drastic during the following five or six years. Recovery in expenditures for this maintenance does not begin until 1937 and then is not quite up to the expenditure for 1918. The deferred maintenance of $3,173,500, found by the Commission as of several years after 1937, is a natural result of the under-maintenance during these lean years. It is unlikely that excessive over-maintenance of way and structures  which have a certain element of stability  would have resulted in such deferred maintenance. If there was excessive expenditures during the six year period (1925-1930) they must have been fortunate in aiding the Debtor during the succeeding trying years by requiring less than normal annual outlay for such maintenance. Another matter is that Mr. Meyer seems to regard this road as well managed before the Rock Island came into the picture in March, 1925. During the six year period (1919-1924) immediately preceding the period about which he objects, such average annual expenditure was $4,550,137  this is not far from the $4,550,773 which Mr. Meyer attacks. Mr. Meyer approaches this matter from another direction, namely, a comparison of Debtor with the four other main north-south roads in this Gulf territory. This comparison takes the form of percentage of annual (1925-1930) expenditures for maintenance of way and structures to total operating revenue. Such comparison standing alone has no probative value, since it depends upon all the variances and influences and situations as to operating revenue and as to such maintenance applying to each particular railroad. (4) Purchase of M-K-T stock and provision for debt maturity. In conjunction with this subject and as illustrating the entire lack of trustee spirit actuating those in control of the Debtor, Mr. Meyer urges two matters: purchase by Debtor of M-K-T stock and lack of provision to meet an important debt maturity. This purchase of 100,000 shares of the M-K-T was to aid Southern and its bankers in acquiring stock control of that road. It was engineered by Southern during its stock control of Debtor and was a part of Southern's plan to unify the three roads. The use of these funds of Debtor for this purpose was motivated by the desire of Southern to protect itself and was accomplished because of Southern stock control of Debtor. From the standpoint of Debtor, this transaction was indefensible. However, no actual loss was suffered by Debtor as Southern, under attack for this transaction, took over the stock at cost to Debtor and carrying charges. The other matter has to do with the maturity of $20,727,750 of Consolidated Mortgage bonds due on June 1, 1932. It seems to be Mr. Meyer's contention that the failure to provide a sinking fund to meet this maturity resulted from deliberately contrived lessening of revenue and non-reduction of operating expenses. Just how far before this maturity, provision for such sinking fund should have begun is not definite beyond a quotation (several times repeated by Mr. Meyer) from a letter to the stockholders of Debtor by Mr. Pierce, Chairman of the Board, dated April 28, 1927. This letter was sent out in reply to one by Mr. Meyer to the stockholders soliciting proxies and which contained serious charges against the good faith of the existing officials of Debtor. This somewhat lengthy Pierce letter dealt with the matters of attack in Mr. Meyer's letter  one of which was Dividends on common stock. In discussing this topic, Mr. Pierce wrote: Dividends upon the Preferred Stock of the Company at varying rates and times were paid between the years 1909 and 1914. During the period between 1914 and 1922 no dividends were paid upon the preferred Stock of the Company. In 1922 the vastly improved situation, due to the use of surplus earnings in improvement and equipment of the property, was considered by the Board in connection with the then uncompleted program of betterment and equipment, and the conclusion was reached that while a resumption of dividends upon the Preferred Stock was justified, effective use of surplus could not be discontinued. Those who have long followed the fortunes of the Company will remember the discussion of its affairs and the announcement of its policies in the communication of November 23, 1922 of Mr. Edwin Gould, then Chairman of the Board, to the stockholders, which concluded with the statement that the formulated policies of the company should have preference in the following order: First: A liberal budget for the maintenance of the property to a high standard of efficiency for the service of the public; Second: Seasonable provision, in proper measure, by way of sinking fund, for an important maturity at an early year, which must be now taken into account as a definitely approaching exigency; and Third: Dividends to stockholders in the order of their established rights. The policy thus outlined, and which the company has pursued, has afforded the best promise of future and maintained dividends on the Common Stock and the appreciation of that stock itself is the best justification of that policy. Mr. Meyer uses the Second paragraph of this quotation as proof that Mr. Pierce had in mind this particular maturity and recognized the necessity of providing therefor. The attack for failure to provide such sinking fund is apparently directed at the period following the stock sale by Gould, March, 1925, during which there was control of the Debtor by other roads. As to deliberate lessening of revenue, this must largely have occurred through diversion, which has been dealt with hereinbefore and not sustained. As to total operating expenses, there is, apparently, no serious departure from the years before this period  either positively or in relation to operating revenue. [14] Maintenance of way and structures, an important item of operating expenses, has been separately examined hereinbefore. But entirely aside from what the figures and facts may show as constituting material evidence to sustain the conclusions of the Commission, the raw fact is that there resulted no ultimate detriment to Debtor from failure to establish this sinking fund even if it could have been established out of earnings  which it could not have. The maturing bonds were refunded under circumstances and upon conditions not harmful to Debtor. At this place we will deal with three matters: conspiracy, anti-trust action and lease by Pacific.