Court Opinion

ID: 9639837
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:49:44.056622+00
Date Added: 2024-06-11T18:10:22.270232
License: Public Domain

CHASE,. Circuit Judge
(dissenting).
It is obvious that; by the statutory definition of áffiliate-in ■ § 2(a) (11)' (D) of the Act, 15 U.S.C.A. § 79b(a) (11) (D), as “any person or ■ ¿lass' óf pers'ons that the Commission determines, after appropriate notice and opportunity for hearing, to stand in such relation to such specified company that there is liable to be such an absence of arm’s-length bargaining in transactions' between them as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that such person be subject to the obligations, duties, and liabilities imposed in this chapter upon affiliates of a company” Congress has delegated to the Commission very broad and comprehensive power to declare who is, or is not, within the reach of the statute. For present purposes, I shall assume that this delegation of power is as full and complete as it may be and still be within the constitutional limitations upon Congress recognized in Schechter Poultry Corp. v. United States, 295 U.S. 495, 55 S.Ct. 837, 79 L.Ed. 1570, 97 A.L.R. 947, and Panama Refining Co. v. Ryan, 293 U.S. 388, 55 S.Ct. 241, 79 L.Ed. 446. Even so, there must be some standard of interpretation less vague than the Commission’s uncontrolled discretion. Compare Champlin Refining Co. v. Corporation Commission of Oklahoma, 286 U.S. 210, 52 S.Ct. 559, 76 L.Ed. 1062, 86 A.L.R. 403; A. B. Small Co. v. American Sugar Refining Co., 267 U.S. 233, 45 S.Ct. 295, 69 L.Ed. 589; United States v. L. Cohen Grocery Co., 255 U.S. 81, 41 S.Ct. 298, 65 L.Ed. 516, 14 A.L.R. 1045; International Harvester Co. v. Kentucky, 234 U.S. 216, 34 S.Ct. 853, 58 L.Ed. 1284. What is “liable to be or to have been” is, indeed, an elastic expression which, when applied to the rather uncertain concept of what may be “such an absence of arm’s-length bargaining * * * as to make it necessary or appropriate in the public interest” to impose upon one the statutory status of an affiliate, gives the whole a meaning still more elusive. For that very reason it is especially important for a reviewing court to make sure that the Commission’s order has substantial evidence to support the findings of fact upon which it is based. Only if there is substantial evidential support for them are they conclusive. 15 U.S.C.A. § 79x(a). And this means support more firm than that afforded by suspicion, conjecture or but a scintilla of evidence. “It means such relevant evidence as a reasonable mind might, accept as adequate to support a conclusion.” Consolidated Edison Co. v. National Labor Relations Board, 305 U.S. 197, 229, 59 S.Ct. 206, 217, 83 L.Ed. 126. See, also, Gunning v. Cooley, 281 U.S. 90, 94, 50 S.Ct. 231, 74 *334L.Ed. 720; National Labor Relations Board v. Columbian Company, 306 U.S. 292, 300, 59 S.Ct. 501, 83 L.Ed. 660; Ballston-Stillwater Co. v. National Labor Relations Board, 2 Cir., 98 F.2d 758, 760.
Before discussing the evidence, the Commission’s Rule U-12 F-2 should be considered for that was relied on as the justification in law for the order. In so far as now material, its promulgation was an attempt by the Commission to apply the above-mentioned statutory definition of affiliate to any underwriter of any securities in connection with the issue, sale or acquisition of which an application or declaration was required under the Act. This was expressly limited, however, to the purpose of the rule which was to make it possible to deny a fee to any person found to be within its scope. I have little doubt that this rule was within the Commission’s rule-making power and that it is valid provided it is not construed so broadly as to make it a. substitute for proof. Yet it does, indeed, resemble punitive legislation beyond the limits of the Act. What I would emphasize is that the same sort of substantial evidence is needed to bring any person within the rule as is required to bring one within § 2(a) (11) (D), 15 U.S.C.A. § 79b(a) (11) (D). The rule-making power does not, of course, exceed the power of Congress itself to legislate. And the authority of an administrative board to make rules is always only to make them in accord with the specific power, subject to its limitations, lawfully granted by Congress in the statute. United States v. Chicago, Milwaukee, etc., R. R. Co., 282 U.S. 311, 324, 51 S.Ct. 159, 75 L.Ed. 359.
The pertinent language of the rule is that it shall be applicable to, “Any person who the Commission finds stánds in such relation to the declarant, or applicant, or to the person by whom the fee is to be paid, that there is liable to be or to have been an absence of arm’s-length bargaining with respect to the transaction.” It is perhaps significant that here, in some contrast to what may be called the parent section of the statute, the test, so far as language is concerned, is made solely the liability of an absence of arm’s-length bargaining with respect to the transaction. In this particular instance the Commission did reach the conclusion that the public interest was liable to be adversely affected but if it is held, as I think this court is, in effect, holding, to mean in practice that the Commission may apply the rule as it happens to see fit whenever it elects to regard its own conjectures as evidence of fact the rule itself is invalid because it gives the Commission uncontrolled discretion to blow hot or cold as it happens to choose — a power which even Congress could not delegate to it under the Constitu-. tion and the authorities above cited.
The assumption of uncontrolled power has in this instance led the Commission to dispense with essential evidence in making its order and to arrive at a result unsupported by the facts under the law. That ipakes it necessary to review the facts briefly.
The petitioner was organized by the partners of J. P. Morgan & Co., and they continued to have such an interest in its affairs that I agree there is evidence which would support a finding that, for the purpose of Rule U-12 F-2, it and the Morgan firm may fairly be treated as one. That is by no means true, however, in respect to Dayton. There was no intimate relationship by way of stock interest. The Morgan partners had but a negligible, minute stock interest of less than 1/2 of 1% even in United, and United owned only some 19.6% of the voting stock of Columbia Gas & Electric Corporation, of which Dayton was a wholly owned subsidiary. It is true that there had been in the past satisfactory business transactions between the men in what may be. called generally the Dayton management and what may be equally generally called the Morgan firm. No doubt there were also personal -friendships, and it is scarcely to be doubted that what is often called goodwill in business was present. This would naturally lead Dayton to consider consulting the petitioner concerning this financing operation with a view to learning whether it was a feasible one and whether some agreement to have the petitioner undertake it could be reached. That was done and an agreement was made under which the petitioner did do the work both, as is conceded by all, well and at a reasonable cost. The evidence will support no contrary findings which are of fact alone and no such findings were made.
And so far as the present petition is concerned, it is to be taken for granted that the bond issue, in amount and otherwise, was in the public interest. It had been- authorized by .the Public Utilities Commission of Ohio and it had the approval of the Securities and Exchange Commission to the extent of an order ap*335proving an application for exemption under § 6(b) of the Act, 15 U.S.C.A. § 79f(b). In re The Dayton Power and Light Company, 6 S.E.C. 787. Obviously it was entirely proper for Dayton to sell these bonds and it was reasonable, if not absolutely necessary, for Dayton to engage some underwriter to do that. If not the petitioner, someone else in that business. Consequently, one would naturally look for evidence in support of this order to indicate the likelihood that, if the petitioner did it, the work would not be as well done or would not be as economically done or would in some way not be as beneficial to Dayton and to the public as it would be if done by someone else. This record is barren of any such evidence.
In the absence of proof, worthy of the name, to show that the petitioner had any means by which it could bend Dayton to its will, the Commission at long length, by extremely tenuous and subtle deductions, finally guessed itself into believing that there were subtle relationships which supported its ultimate conclusion that the petitioner should be denied its fee under Rule U-12 F-2. Its opinion as filed discloses, without expressly admitting, that the Commission merely suspected what it concluded in this regard. The only tenable alternative is that it acted on information it had which was not in evidence. If so, the order is palpably erroneous. As Mr. Justice Brandéis said in the Chicago Junction case, 264 U.S. 258, 263, 44 S.Ct. 317, 319, 68 L.Ed. 667, “Facts conceivably known to the Commission, but not put in evidence, will not support an order. Interstate Commerce Commission v. Louisville & Nashville R. R. Co., 227 U.S. 88, 93, 33 S.Ct. 185, 57 L.Ed. 431.” And as the same learned justice also said in the same case “ * * * to make an essential finding without supporting evidence is arbitrary action.”
The result is that the Commission, having attributed some new, and “subtle” meaning to the phrase “arm’s-length bargaining” as ■ used in its rule, has made a determination of a mixed question of law and fact not binding upon a reviewing court which performs its duty under Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 57 S.Ct. 569, 81 L.Ed. 755. A conclusion as to an arm’s-length transaction is open to correction. Campana Corporation v. Harrison, 7 Cir., 114 F.2d 400.
That term as used in this rule or in this statute has received no judicial interpretation so far as I am aware and most of the cases dealing with it have been those where some fiduciary or subsidiary relationship was involved. In Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, there was the claim of a director against his bankrupt corporation. American Telephone & Telegraph Co. v. United States, 299 U.S. 232, 57 S.Ct. 170, 81 L.Ed. 142, was concerned with the relationship of many subsidiaries and affiliates in the Bell system. In Natural Gas Pipeline Co. v. Slattery, 302 U.S. 300, 58 S.Ct. 199, 82 L.Ed. 276, the court pointed out that where there were common directors and common ownership of a substantial amount of stock of the two transacting companies there need not be control secured through ownership of a majority of the voting stock to constitute absence of arm’s-length bargaining. Joint adventurers were involved in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1. And in Webster v. Kelly, 274 Mass. 564, 175 N.E. 69, and Feiber v. Copeland, 232 App.Div. 504, 250 N.Y.S. 429, the relationship was that of attorney and client. E. Albrecht & Sons v. Landy, 8 Cir., 114 F.2d 202; Bourjois, Inc. v. McGowan, D.C., 12 F.Supp. 787, affirmed 2 Cir., 85 F.2d 510, and Inecto v. Higgins, D.C., 21 F.Supp. 418, had to do with the phrase in tax situations respecting transactions between corporations and wholly owned subsidiaries. In Black’s Law Dictionary it is stated that, “Parties are said to deal at arm’s-length when each stands upon the strict letter of his rights, and conducts the business in a formal manner, without trusting to the other’s fairness or integrity, and without being subject to the other’s control or overmastering influence.” As used in this rule “arm’s-length bargaining” should mean bargaining in which the issuer of the security is competent to, and does, freely seek to promote its own best interest with due regard for the public and in accord with fair and honest business methods. Any conclusion that the arrangements for this financing were not so made by the representatives of Dayton, or were liable not to have been so made by, them in dealing with the petitioner, goes far beyond any substantial evidence in this record.
I would grant the petition to set aside the order.