Court Opinion

ID: 5219271
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:30:03.998602+00
Date Added: 2024-06-11T08:27:29.587095
License: Public Domain

Kellogg, J. (dissenting) :
The amendment to section 69 of the Public Service Commissions Law (Laws of 1910, chap. 480) was in force when the order denying the application for a rehearing was made. The terms of that statute prohibit the issue of bonds or stock to pay the notes in question, if they represent replacements or expenditures which are properly chargeable to operating expenses or to income. A corporation is an artificial body, the life, acts and powers of which are regulated by statute. By the old statute, now section 55 of the Stock Corporation Law, it can issue no stock or bonds except for *800money, labor done, or property actually received for its use and lawful purposes. Experience and business requirements have adduced from this provision, and the nature of corporations and their business, the rule that where machinery, appliances and other property which become obsolete by time and use are represented in the capital account of a corporation, their upkeep and replacement are properly chargeable to the expense or income account and not to capital account. Otherwise the capital of a corporation would from year to year grow more and more out of proportion to the real value of its property. The courts recognize this rule. (People ex rel. Jamaica Water Supply Co. v. Tax Comrs., 196 N. Y. 39; 197 id. 33; 128 App. Div. 13; Knoxville v. Water Co., 212 U. S. 1.)
The requirement that replacements of property already capitalized cannot again be charged to capital account, but are chargeable to operating expenses or to income, does not originate in this amendment to the statute, but the amendment to that extent is substantially a declaration of the existing law. An issue of forty-year bonds to meet the expenses of rebuilding a permanent plant may be considered an increase of capital liabilities.
The section in question requires the Commission to make such inquiry and investigation, hold such hearings, and examine such witnesses, books, papers, documents or contracts as it may deem of importance to enable it to reach a determination whether or not its certificate should issue. The statute does not contemplate that the Commission shall merely hear the proof offered, but that it shall make all proper investigation to enable it to decide the question which it is required to decide. The first order purports to deny the application, but holds the matter to enable the company to present further proof if it desires. The opinion referred to in the order indicates that from the evidence tiefore the Commission it considered that it could not definitely determine whether or not the notes were given for replacements, what the actual value of the property is, or just what the facts are. In substance it assumes facts without sufficient proof, and thereupon denies the application, with permission to the relator to prove that it is wrong. The second order, without further evidence and without a rehearing, or an application for a rehearing, permits the company to issue $197,500 of new bonds upon condition that it cancel $100,000 of its capital *801stock, or credits fixed capital with that amount. The certificate of the Commission is not required for the issue of bonds, notes or like obligations which by their terms are payable within a year. It is only necessary in the case of stocks, and of bonds, notes and other evidence of indebtedness running longer than a year, being such securities as are usually bought and sold in the market, and the inference is irresistible that the object of the statute is to protect the public in the purchase of such securities. (People ex rel. Jamaica Water Supply Co. v. Tax Comrs., 196 N. Y. 39; 197 id. 33; 128 App. Div. 13.) In every other respect a short term note is subject to every reasonable objection which can be raised to one running more than a year, and the short term obligation is more hazardous to the company and its stockholders.
The first order assumes that the notes represent replacements; the second order, apparently as a concession, without a different finding and without a rehearing, grants in part the certificate upon condition.
It is beyond the power of the Commission to permit the issue of improper securities upon the condition that the company cancel stock of about half the amount. Bead together, the two orders permit the company to issue unauthorized securities, but attempt to lessen the harm to the public which may result therefrom. The Commission has no power to thus barter away the public interests, or on its own terms to permit the issue of securities which the law prohibits. Its discretion cannot override the discretion of the officers of the company in the managemement of its affairs, or the provisions of the statute which prescribe the cases in which securities are permitted. Its duty in the premises is to determine whether the proposed issue is necessary for the proper purposes of the company, is authorized by law and is to be used in a proper manner. If such are the facts it cannot withhold its certificate; otherwise it cannot grant it. If the corporation has been properly managed, and its securities properly issued, the issue of new stock or bonds if necessary for a corporate purpose for which securities may issue, cannot be denied solely upon the ground that the capital liabilities of the company thus increased will exceed the value of its physical property. Such circumstance may call for more careful exarni*802nation of the entire situation, but alone will not justify the denial of bonds and stocks for an expenditure which a proper service to the public requires the company to make and for which the statute permits such securities. The Commission does not create the law ; its sole duty is to see that the law in respect to such issues is observed.
It is not probable that the plant of the relator entirely broke down immediately after the purchase and required replacement on account of obsolescence. It is evident that the growth of the city of Binghamton and the requirements of the service made necessary a larger and more extended plant with greater facilities. Growing business requirements may make it necessary for a railroad company to replace its sixty-pound rail with a ninety-pound rail. If the sixty-pound rail is represented in the capitalization, the difference between the cost of it and of the ninety-pound rail is not so represented, and may be capitalized. It is an improvement or extension rather than a technical replacement. It is not reasonably chargeable to expense of operation or to income. If the growth of the city and demands of the service require engines, dynamos or machinery of much greater capacity, and consequently of much greater cost than those represented in the capitalization, the difference between the capitalized cost of the smaller engines, dynamos or machines and that of the larger or more powerful ones which take their place, may properly be represented in the capitalization. The mere fact, therefore, that the old plant was practically dismantled and a new and larger one constructed, does not show that the expenditure, or the greater part of it, was necessarily a replacement. It may in great part have been an extension or improvement which from its nature was not reasonably chargeable to operating expenses or to income. ■' The record gives us no real assistance in determining how much of the expenditures were for replacements and how much represented real extensions, improvements and new property.
The record does not disclose whether or not the stock or bonds sought are necessary for a proper corporate purpose. The company may have, from the former issue of stock or bonds, means with which it may meet all, or a part at least, of these notes. It does not appear that the company has received the par value of the stock heretofore *803issued to the firms or members thereof who are now virtually in control of the corporation and who, in substance, make this application, and it is not clear whether or not-other sums are payable by them to the company. It is apparent that if the present owners of the company are indebted to it for moneys past due sufficient to pay the notes in question, there is no necessity for an issue of new stock or bonds. The evidence indicates that the relator, by its present principal owners, delivered $350,000 of its common stock for the entire $280,000 capital stock of the Binghamton General Electric Company, upon the property of which was a bonded indebtedness of $266,500, and also delivered $30,000 of its common stock for the stock of the Broome County Electric Light Company, which company had no tangible assets. It immediately proceeded practically to scrap the old plant and build a new and more expensive one. In the construction of the new plant but a small part of the old plant or property was of value, and but very little was realized from the part not used. The record necessarily suggests that the relator paid too much for the stock of the old companies and that the same was not worth at the time of purchase $410,000 in addition to the bonded indebtedness. But immediately following the purchase the relator issued $120,000 of its Common stock to the interests apparently controlling it for alleged services apparently in the making of this poor bargain. One of such interests is a banking firm, the other an engineering firm, or the members of those firms. We find the banking firm taking from the company preferred stock at $22,500 less than its par value, and, several years afterwards, when advised by counsel that such act was illegal, a bookkeeping entry was made to equalize it by charging the company in behalf of the firm that amount for commissions on loans procured during several preceding years with the firm’s assistance, indorsements or guaranty. Twenty-five thousand dollars was paid for engineering, the particulars of which are not clear, and $42,000 for discount on bonds, the facts as to which do not fully appear. Heither does it appear who were the owners of the stock of the old companies for which the relator apparently paid an excessive price or whether the same parties were practically both the sellers and buyers. Without further evidence it does not appear what, if anything, is due the company from its present owners. It may be that *804upon a proper adjustment it will be found that the company does not need the hew bonds to enable it to liquidate its outstanding notes. We are not determining that any of the stockholders are in fact indebted to the company on account of any of these matters; neither could the Commission so determine because the evidence is an insufficient basis for a determination either way.
I think the Commission did not make the inquiry or the determination contemplated, by the statute and that it was the right of the relator to have its application determined for dr against it upon evidence which it has a reasonable opportunity to meet or explain. The property interests and the very life of the relator may depend upon the decision of the Commission. The inquiry, so far as may be, should be surrounded with the usual safeguards required in the case of the trial of other questions of fact. The record does not disclose just what information the Commission received from its expert or whether it properly interpreted his conclusions. The relator had the right to hear his evidence and examine him. This case emphasizes the necessity of having the expert sworn ' as a witness as to facts upon which the Commission may base its decisions. Otherwise a court of review from the record before it cannot satisfactorily perform its duties.
It follows from these considerations that the three orders should be annulled and the matter remitted to the Commission for further action, without costs.
Determination confirmed, with fifty dollars costs and disbursements.