Court Opinion

ID: 5277626
Source: CourtListenerOpinion
Date Created: 2022-01-06 21:45:14.233007+00
Date Added: 2024-06-11T08:28:20.173811
License: Public Domain

Burr, J.
(dissenting):
I dissent on the ground that the clause in article 6 of the lease which provides “ No reduction of the guaranteed annual dividend rental or in the term of years of this lease shall be made without the unanimous consent of the shareholders of record of the Lessor ” is contrary to public policy and void, and on the further ground that the guaranty of the payment of the seven per cent rental dividend “ in accordance with the terms and provisions ” of the lease could not survive a valid revocation or modification of the lease by the parties to the lease, the defendant’s obligation to the stockholders under the guaranty, being limited to its obligation to pay rent. The intent and necessary effect of the provision requiring unanimous consent is to limit, the Manhattan Company in the exercise of its statutory power of leasing corporate property devoted to a public use. The lease is practically perpetual, the term and rental are its most vital elements. The State, the public and the contracting corporations .are thus forever constrained in the use and development of railway property in the public streets. The disabling clause is an attempted contract not to exercise a statutory power. This is explicitly recognized by the concluding words of the very sentence which express the requirement of unanimous consent: “ Nothing herein contained shall otherwise limit the lawful powers of the Board of Directors and shareholders of the Lessor.”
The “ lawful power ” thus limited is the statutory contractual power conferred by chapter 218 of the Laws of 1839, which is now section 148 of the Railroad Law and, in the phraseology of the Railroad Law, provides that “ Any railroad corporation or any corporation owning or operating any railroad or railroad route *509within this State may contract with any other such corporation for the use of their respective roads or routes, or any part thereof.”
The question, therefore, is as to the power of a public service corporation to nullify by private contract an essential statutory power conferred and here exercised not merely in the interest of its stockholders but in that of the public.
The unification of railroad systems by lease has been encouraged as a matter of established public policy in this State since 1839. (Woodruff v. Erie R. Co., 93 N. Y. 609)
Section 148 of the Railroad Law provides for guaranties in connection with the leasing of railroad property and, therefore, only as rent. Otherwise a guaranty of “ dividends ” would be ultra vires, (See Continental Insurance Co. v. N. Y. & H. R. R. Co., 187 N. Y. 225, 236; Louisville, New Albany & Chicago R. Co. v. Louisville Trust Co., 174 U. S. 552, 567; Pennsylvania Steel Co. v. New York City Railway Company, 198 Fed. 721, 762-764.)
The legislative intent and public policy is that railroad corporations shall possess and preserve freedom of action in leasing their properties. The obligation to preserve all corporate powers the exercise of which may be necessary in the public interest is paramount. Statutory corporate powers, the free exercise of which is required by public policy, cannot be abridged by the mere agreement of stockholders.
Freedom of corporate action is necessary to the most efficient use of public franchises in the public streets for the public service. The law does not permit the stockholders to create a sterilized board of directors. All powers directly conferred by statute, or impliedly granted, of necessity must be exercised by the directors who are constituted by the law as the agency for the doing of corporate acts. The stockholders do not confer, nor can they revoke those powers. (Manson v. Curtis, 223 N. Y. 313, 322; Durkee v. People, 155 Ill. 354; Matter of Boulevard Theatre & R. Co., 195 App. Div. 518; affd., 231 N. Y. 615; Katz v. H. & H. Mfg. Co., 109 App. Div. 49; affd., 183 N. Y. 578.) The first step towards unification of transit is usually the exercise of the leasing power. The Manhattan Company itself represents a merger of lines formerly leased, and it also found it necessary “ in the public interest ” to modify an existing lease by reducing an excessive rental. (See Beveridge v. N. Y. Elevated R. R. Co., 112 N. Y. 1.) As appears by the amended answer of defendant both the Manhattan Company and the Interborough Rapid Transit Company through their respective boards of directors with the assent of over two-thirds of the stockholders of each company have now agreed to a plan of readjustment resulting in a modification of the Manhattan *510lease by, among other things, reducing the rental dividend from seven per cent per annum to three per cent for 1922, four per cent for 1923 and five per cent for 1924 and each succeeding year, such plan of readjustment and modification of the lease having, it is alleged, been found necessary to avoid a threatened receivership of the defendant. It is common knowledge that the excessive rental dividends assumed or guaranteed in the unification of the surface railways operating in New York city largely contributed to force the surface railway system into the bankruptcy courts twice within the past twenty years.
The provision of the lease requiring unanimous consent being void and unenforeible, the right of the individual stockholder to receive the rent reserved in the lease cannot survive that of the lessor corporation which is necessarily superseded by the agreement or plan of modification and readjustment. No right can vest contrary to public policy. We cannot recognize a vested right to do a manifest wrong, viz., to abrogate a statutory power conferred upon a public service corporation in the public interest.
There is no estoppel against showing that a contract is invalid, as in violation of a statute or against public policy. No contract by a railroad corporation creating a disability in respect of its public duties can be enforced. In Thomas v. Railroad Co. (101 U. S. 71, 83), Mr. Justice Miller, speaking for the Supreme Court of the United States, stated the general principle as follows: “ That principle is that where a corporation, like a railroad company, has granted to it by charter a franchise intended in large measure to be exercised for the public good, the due performance of those functions being the consideration of the public grant, any contract which disables the corporation from performing those functions which undertakes, without the consent of the State, to transfer to others the rights and powers conferred by the charter, and to relieve the grantees of the burden which it imposes, is a violation of the contract with the State, and is void as against public policy.”
In Greenhood on Public Policy (p. 316) it is stated: “ Any contract which will disable a public or quasi public corporation from performing the duty which it has undertaken, or has been imposed upon it, for the public weal, or compels it to make the public accommodation or convenience subservient to its private interests, is void.”
Nothing could more effectually destroy the capacity of a street railway or transit corporation operating in the city of New York to serve the public interest under any plan of unification based as necessarily it must be here under existing franchise contracts on a fixed five-cent fare, than a practically perpetual lease imposing *511onerous conditions which cannot be changed or modified in essential respects. Such lease is injurious to the interests of the public, it is incompatible with the declared public policy of the State and cannot be upheld.
For the foregoing reasons, I dissent from the modification and vote to affirm the order appealed from in this action.
Order modified by granting motion so far as to provide that the issues raised by the “ nineteenth ” paragraph of the answer alone be tried, and as so modified affirmed, without costs.