Court Opinion

ID: 9419189
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:47:21.163644+00
Date Added: 2024-06-11T16:41:57.481543
License: Public Domain

Mr. Justice Jackson
delivered the opinion of the Court.
The appellant, commonly known as the Nickel Plate Road, was organized in 1923 as a consolidated corporation under the laws of five states: New York, Pennsylvania, Ohio, Indiana, and Illinois. The agreements and articles of consolidation provided that it should succeed to all of the properties and franchises, contracts, and obligations owned by its constituent companies. Section 143 of the New York Railroad Law, under which the new corporation came into being, provided that “all debts and liabili*362ties incurred by either of such corporations shall thenceforth attach to such new corporation, and be enforced against it and its property to the same extent as if incurred or contracted by it.”1 Among the constituent companies was the Lake Erie & Western Railroad. In connection with a lease of certain properties from the Northern Ohio Railway it had guaranteed payment of principal and interest upon the latter’s bonds secured by mortgage on the leased property. Because of the contention that the state law “attached” the obligations of this guaranty to the Nickel Plate, it has now; been held liable upon defaulted coupons by a Municipal Court of the City of New York.
The appellant defended on two grounds: First, that the original guaranty by the Lake Erie was ultra vires. This defense was overruled by the state court and nothing of that issue survives for our consideration. Second, that approval by the Interstate Commerce Commission was necessary under § 20a of the Interstate Commerce Act before appellant legally could “assume” the obligation,2 *363and that such approval had not been given. This defense, too, was overruled by the state court, and this federal question comes here by appeal.
In support of this defense the appellant set forth a letter, dated November 25, 1939, from the Secretary of the Interstate Commerce Commission, which advised “that the New York, Chicago & St. Louis Railroad Company has never applied for, nor received authorization pursuant to section 20 (a) of the Interstate Commerce Act to' assume any obligation or liability as lessor, lessee, guarantor, endorser, surety, or otherwise in respect of bonds of the Northern Ohio Railway Company.” But it added that “for further information I would refer” to a reported case in which the Commission had said: “That the consolidation had the effect of transferring the guaranty of the Lake Erie to the Nickel Plate appears to be generally assumed by the parties to the reorganization proceeding ...” 3
*364This reference suggests an examination of the administrative history of the Nickel Plate consolidation and financing to learn what administrative application has been made of the statutes in question to the debt structure of this particular appellant.
Shortly after its consolidation the appellant asked the Interstate Commerce Commission to certify under § 1 of the Interstate Commerce Act that public convenience and necessity required the acquisition and operation by it of the railroad lines owned by the constituent companies. It also asked authority under § 20a to issue preferred and common capital stocks in the amounts fixed by the agreements and articles of consolidation. It did not, however, ask under § 5 of the Act for approval of its consolidation. Acquisition and Stock Issue by N. Y., C. & St. L. R. Co., 791. C. C. 581.
This application required the Commission to construe the Transportation Act of 1920, which had recently introduced a wide range of innovations into the Interstate Commerce Act. Section 5 of the Interstate Commerce Act, as amended by the Transportation Act of 1920, directed the Commission to formulate “as soon as practicable” a complete plan for the consolidation of the railways into a limited number of systems. As so amended, § 5 also subjected voluntary consolidations to the ap*365proval of the Commission and required that they be approved if found, among other things, to be in harmony with such complete plan for general consolidation and if it appeared that the bonds of the consolidated corporations at par together with the outstanding capital stock at par would not exceed the value of the consolidated properties as determined by the Commission. By adding § 20a, the Transportation Act placed the issue of new securities and the assumption of obligations under the control of the Commission. The Act did not, however, provide for federal incorporation or for federal consolidation of carriers, but left the creation of new or consolidated corporations to state laws.
At the time of the Nickel Plate’s application for approval of its acquisition and operation of properties and the issue of its stock, the Commission had not completed its valuation of the constituent companies nor adopted a complete plan of consolidation. The question arose, therefore, whether under the peculiarities of the statute the Commission was yet authorized to exercise any control over voluntary consolidations and the legal incidents and consequences thereof. On this question the Commission was divided in opinion. Commissioner Eastman, supported by Commissioners Esch and Hall, thought the amendment to § 5 of the Interstate Commerce Act should be construed as being immediately effective to make any consolidation not approved by the Commission unlawful. Had such a view prevailed, the terms of the Nickel Plate consolidation would have been subject to scrutiny at that time. Each item of its debt would have been examined and approved or rejected, and its capital structure, including stock issue as well as debts, would have been tested by the valuation of its properties. The majority opinion, however, held that the Commission’s approval under § 5 was unnecessary. It stated: “Applicable State laws afford means to effect the consolidation. Such laws *366are in force. They are, in fact, the laws to which resort must be had to effectuate consolidations which the interstate commerce act is designed to facilitate. We can not conclude that they have been nullified or superseded. As valid existing laws we have no power to suspend them. Whether State corporations in matters regarding their status as legal entities as distinguished from their participation in interstate commerce may avail themselves of such laws does not depend upon our election or anything we do. Authority in us to withhold approval in the public interest of security issues when State laws permit consolidation does not mean that we may not grant approval when public interest requires that we do so. Furthermore, in the absence of mandatory provisions of a Federal statute we should give full faith and credit to the acts of sovereign States, especially when, as in this case, their action is unanimous.” 79 I. C. C. at pp. 585-586. The majority opinion added that the Act did not provide for “compulsory consolidation,” that such a provision had been “considered by the Congress and rejected,” and that accordingly “it does not seem we should conclude that the Congress intended to prevent voluntary consolidations under available State laws in order thereby to force consolidation under such general plan as we may ultimately adopt.” Id., p. 586. It said that “if the Congress had intended to suspend State laws until we should at some later time elect to permit their use, such intent would have been manifested in plain terms.” Ibid. The majority of the Commission concluded that by virtue of the state proceedings and notwithstanding the lack of approval by the Interstate Commerce Commission “all things necessary to the completion and consummation of the consolidation have been effected.” 79 I. C. C. at p. 583.
The Commission thereupon entered an order giving appellant its formal approval to the issue of new stock, including that to be exchanged share for share for upwards *367of $23,000,000 par value of the shares in the old Lake Erie Company, subject to an agreement to contribute a relatively small part of it to the treasury of the new company, all as provided in the agreements and articles of consolidation.
The Commission did not, in authorizing this stock issue, make any finding that such stock at par together with bonds at par did not exceed the value of the consolidated properties. It made no order approving assumption of any indebtedness of any kind. It appears that the appellant at that time sought no such authority. Approaching maturity of some issues of bonds eventually forced it to take some corporate action, and upon such later occasions it sought and obtained authorization to extend maturity dates and in connection with such extensions to make an express assumption of liability as primary obligor.
One of the constituent companies — the old Nickel Plate — had outstanding at consolidation $16,381,000 of a bond issue dated October 1, 1887, maturing October 1, 1937. The assumption of this obligation was not approved until September 17, .1937, at which time the Commission approved a proposal to extend the maturity date for ten years and to assume obligation as primary obligor in respect of the extended bonds. N. Y., C. & St. L. R. Co. Bonds and Assumption, 221 I. C. C. 772. The published reports of the Commission disclose two instances of similar approval of extension and assumption of primary liability with respect to bonds of the Lake Erie & Western outstanding at the date of consolidation, one as recent as June 7, 1941. N. Y., C. & St. L. R. Co. Assumption of Obligation, 217 I. C. C. 598; N. Y., C. & St. L. R. Co. Assumption of Obligation, 2471. C. C. 71.
It does not appear that either the Nickel Plate or the Commission questioned the Nickel Plate’s obligation to pay either interest or principal of the debts of the con*368stituent companies, although for long periods after the consolidation they were without the Commission’s approval. Instead, the Commission has indicated that it regarded the state law as adequate to attach liability to the new company for such debts. In 1923, shortly after the consolidation, the Nickel Plate applied under § 20a of the Interstate Commerce Act to endorse its guaranty of payment upon certain bonds to be issued by a constituent company, and the premise upon which relief was granted was stated by the Commission: “It appears that the consolidation was completed on April 11, 1923, and that the new company is now vested with the property, rights, and franchises of the Nickel Plate and other constituent companies, subject to- all their debts, obligations, and liar-bilities.” (Italics supplied.) N. Y., C. & St. L. R. R. Bonds, 821. C. C. 365,366. The following year, in dealing with another constituent company, the Commission defined the status of this appellant as follows: “The applicant is the successor, by consolidation, of the Toledo, St. Louis & Western Railroad Company and other companies, and by virtue of such consolidation has acquired all property, rights, and powers, and has assumed all obligations of the Toledo, St. Louis & Western Railroad Company.” (Italics supplied.) Pledge of Bonds by N. Y., C. & St. L. R. K, 86 I. C. C. 465.
The Commission, as well as appellant, as recently as 1938 gave unmistakable recognition to the validity of the guaranty on which appellee has recovered. This appears from the reorganization proceedings under § 77 of the Bankruptcy Act involving the properties of the Northern Ohio, the original obligor whose payments were guaranteed by appellant’s constituent company, the Lake Erie & Western. The Commission stated that: “From the consolidation of the Lake Erie & Western with the New York, Chicago & St. Louis, resulting liability of the latter on the Lake Erie’s guaranty of the Northern’s bonds thus is ap*369parently admitted.” (Italics supplied.)4 Upon that premise the Commission made allowance in the plan of reorganization for the indemnification of the appellant because, if required to make good on the guaranty, it would become subrogated to the rights of the Northern Ohio bondholders as a mortgage creditor and would become a general creditor in the amount of any deficiency.
*370We draw the following conclusions from this history of the Nickel Plate’s experience before the Interstate Commerce Commission:
By its decision in Acquisition and Stock Issue by N. Y., C. & St. L. R. Co., 79 I. C. C. 581, the Commission adopted the construction of the Transportation Act which the Nickel Plate urged upon it and held itself precluded from supervision of the consolidation under § 5. This Court subsequently approved that construction in Snyder v. N. Y., C. & St. L. R. Co., 118 Ohio St. 72, 160 N. E. 615, 278 U. S. 578, holding that the Nickel Plate had the rights of a de jure corporation notwithstanding its failure to have its creation by consolidation approved by the Commission, on the ground that the consolidation took place at a time when § 5 had “not as yet become applicable.”
It seems clear that the Commission applied a like construction of its powers under § 20a over the assumption of the debts and liabilities of the constituent companies. That it deliberately deferred to a later day consideration of all debts seems the correct inference from its express *371caveat that “Nothing in this report shall be construed as restricting the commission in its action with respect to the promulgation of a complete consolidation plan or upon the subject of valuation.” 79 I. C. C. at p. 585. Even apart from this caveat, it is clear that the Commission’s failure at this time to make either order or investigation with reference to any debts or liabilities was due to no delusion that the Nickel Plate was being launched as a debt-free railroad. It was a matter of common knowledge that the constituent companies were heavily in debt for which no provision had been made other than by attachment to the new corporation under state law. This and the resulting burden of fixed charges on the revenues of the new company were well known to the Commission.5 The disappearance of all debt from consideration by the Commission cannot be accounted for except on the ground that the Commission held itself without jurisdiction to deal with it until the company should propose some action of its own, such as extension, endorsement, or issue of sub*372stitute securities — as distinguished from the effect of the law of consolidation on the fact of pre-existing debts. That such was the holding is further indicated by the Commission’s subsequent handling of the obligations of the constituent companies.
Whether we would agree with the Commission’s interpretation of the Act as an original matter, it is not necessary to decide. Considerations of public interest certainly should have weighed heavily in favor of the Commission, had it asserted power to review the debts of the new company before giving even tentative and formal approval to capitalization of its equity. What we must now decide is the present effect of the Commission’s interpretation of its powers as to the indebtedness of this particular appellant, woven, as it has been, by a series of actions by the Commission, into the whole financial fabric of this important carrier system. We are now asked blindly to unravel we know not what, by reversing a consistent and longstanding interpretation of § 20a by the administrative body to which its enforcement was committed.6 We are asked to do this to the enrichment of a stockholder equity which itself was capitalized with no thorough scrutiny by virtue of the same interpretation. We are asked to do this *373although the Commission, with knowledge of the claim of illegality, has set aside securities in the Akron reorganization to compensate it in some measure and has made no effort to enjoin the Nickel Plate from using its revenues to satisfy, in part at least, the claims of these bondholders.
Under the circumstances of this case, the administrative interpretation on which the Commission has acted in its long course of dealing with Nickel Plate affairs should not be upset. United States v. Chicago North Shore R. Co., 288 U. S. 1.
The judgment appealed from is

Affirmed.

 The complete text of § 143 of the New York Railroad Law was as follows:
“The rights of all creditors of, and all liens upon the property of, either of such corporations, parties to such agreement and act, shall be preserved unimpaired, and the respective corporations shall be deemed to continue in existence to preserve the same, and all debts and liabilities incurred by either of such corporations shall thenceforth attach to such new corporation, and be enforced against it and its property to the same extent as if incurred or contracted by it. No. actions or proceedings in which either of such corporations is a party shall abate or be discontinued by such agreement and act of consolidation, but may be conducted to final judgment in the names of such corporations, or such new corporation may be, by order of the court, on motion substituted as a party ”

 § 20a (2) of the Interstate Commerce Act provided that:
“It shall be unlawful for any carrier to issue any share of capital stock or any bond or other evidence of interest in or indebtedness *363of the carrier (hereinafter in this section collectively termed 'securities’) or to assume any obligation or liability as lessor, lessee, guarantor, indorser, surety, or otherwise, in respect of the securities of any other person, natural or artificial, even though permitted by the authority creating the carrier corporation, unless and until, and then only to the extent that, upon application by the carrier, and after investigation by the Commission of the purposes and uses of the proposed issue and the proceeds thereof, or of the proposed assumption of obligation or liability in respect of the securities of any other person, natural or artificial, the Commission by order authorizes such issue or assumption. The Commission shall make such order only if it finds that such issue or assumption: (a) is for some lawful object within its corporate purposes, and compatible with the public interest, which is necessary or appropriate for or consistent with the proper performance by the carrier of service to the public as a common carrier, and which will not impair its ability to perform that service, and (b) is reasonably necessary and appropriate for such purpose.”

 Akron, C. & Y. Ry. Co. & Northern 0. Ry. Co. Reorganization, 2361. C. C. 214, 216-217.
Compare the following, from a letter written by the Director of the Commission to one Zinman, dated March 19, 1940, referring to *364tbe Nickel Plate Guaranty on the Northern Ohio bonds, and appearing in the Commission’s file in Acquisition and Stock Issue by N. Y., C. & St. L. R. Co., 79 I. C. C. 581:
' “As to the matter of assumption of obligation and liability in respect of the securities of others, it is our understanding that no authority was sought nor granted in connection with the application recorded under the above Finance Docket number. It is our further understanding that the consolidated company took the properties, rights, and franchises of the constituent companies, subject to all their debts, obligations, and liabilities, such as might be imposed by the consolidation statutes of the states of the constituent companies. See 82 I. C. C. 365 (366).”

 Akron, C. & Y. Ry. Co. and Northern 0. Ry. Co. Reorganization, 228 I. C. C. 645, 647.
The plan approved by the Commission provided:
“Appropriate securities of the new company as hereinafter noted, consistent with the other provisions of the plan, with which to recompense the New York, Chicago and St. Louis Railroad Company for the debtor’s and the intervening debtor’s liability to it for amounts expended in the performance of its guaranty of the first-mortgage bonds of the intervening debtor, shall be issued and held in treasury.” Id., pp. 679-680. Also, “The New York, Chicago & St. Louis Railroad Company, upon presentation to the treasurer of the new company of appropriate proof of loss sustained in the performance of its contract of guaranty of bonds of the intervening debtor, shall receive of the new company stock issued in reorganization and held in treasury, for each $100 of loss so proved, $22.79, par value, of new common stock; and shall participate equally and ratably with the holders of class A warrants in any distribution of stock pursuant thereto, each $100 of proved loss entitling the New York, Chicago & St. Louis Railroad Company to participate in the distribution to the same extent as one class A warrant.” Id., pp. 681-682.
The true inwardness of these provisions of the reorganization plan appears from the opinion:
“The New York, Chicago & St. Louis should be treated as though having a claim equal to the losses it will sustain in the performance of its guaranty. The mathematical maximum of this claim would be equal to the principal of the outstanding Northern bonds plus the four years of overdue interest thereon, or $3,000,000. The probable maximum would be very much less, but cannot be determined on any definite basis. Securities should accordingly be reserved pending performance of the New York, Chicago & St. Louis guaranty on the basis of its having a $3,000,000 claim.” Id., p. 673.
The securities, however, thus set aside to the Nickel Plate were to come back to others “as may be made possible through the New York, *370Chicago & St. Louis settling with the Northern bondholders, or otherwise discharging its liabilities, for less than the maximum. . . .” Id., pp. 673-674.
An effort was apparently made to get rid of this obligation, in part at least, in the reorganization; but the Commission held that this guaranty ran to each Northern bondholder individually, and that the Nickel Plate could not deal with the bondholders as a class, on the ground that there appeared to be no provision in § 77 “for enforcing on all in lieu of the guaranty a compromise that may be agreeable to a majority but not acceptable to a minority, and no provision for discharging in these proceedings the New York, Chicago & St. Louis, a solvent obligor able to meet its debts as they mature, from any of its obligations. It follows that a provision in a plan of reorganization of the debtors, pursuant to section 77, releasing the guaranty, would be of such doubtful validity as to require our disapproval, and that settlements for this guaranty should be made separately from the plan of reorganization. . . .” Id., p. 667.

 The application of the Nickel Plate asked authority to issue 327,200 shares of preferred stock and 462,479 shares of common stock to be exchanged share for share for the stocks of the constituent companies. It included a general balance sheet of each constituent company and a consolidated balance sheet showing long-term debts of the constituent companies aggregating $78,897,000, which items and exact amounts were carried into the consolidated balance sheet.
The Lake Erie & Western Railroad Company was shown to have outstanding capital stocks with a par value of $23,680,000, $13,895,600 of long-term debt, and $4,996,944 of “deferred liabilities.” The stock was replaced with a like amount of stock in the new company, and the debt and “deferred liabilities” were carried in full into the consolidated balance sheet under the same headings. The obligation in suit was not specified; perhaps it was included in “deferred liabilities.”
A Stockholders’ Protective Committee of the old Nickel Plate filed objections to the plan of consolidation, one of the grounds of which was the alleged assumption of a heavy bond indebtedness ahead of the stock, and complaint was specifically made of the indebtedness of the Lake Erie & Western.

 This interpretation is not inconsistent with the Commission’s practice in other cases. Assumption of Obligation by Hudson River Connecting R. R., 72 I. C. C. 595, dealt with assumption of liability on a mortgage which the applicant had agreed to assume as part of the purchase price of a piece of land. It had no connection with any consolidation proceeding. Rock Island System Consolidation, 193 I. C. C. 395, was decided after amendment of § 5 by the Emergency Railroad Transportation Act approved June 16, 1933. The Commission had by the time of that decision promulgated a plan of consolidation, and it found that the Rock Island consolidation would be “in harmony with and in furtherance of the plan.” Id., p. 403. It was the absence of such a plan that defeated jurisdiction of the Commission to approve the Nickel Plate consolidation. Snyder v. N. Y., C. & St. L. R. Co., supra.