Court Opinion

ID: 9309628
Source: CourtListenerOpinion
Date Created: 2022-12-02 17:37:55.0914+00
Date Added: 2024-06-11T17:14:04.693105
License: Public Domain

On Rehearing,
ALLREAD, J.
Upon application of counsel for the railway company a rehearing has been allowed upon two propositions, viz: The discontinuance of the guarantee of the coal companies, and the competing character of the K. & M. Ry. Co.
The propositions involved in the rehearing have been argued with great earnestness and ability by the respective counsel,. both orally and by supplemental briefs.
These questions were somewhat overshadowed in the former decision, by the main question of the right of the railway company, to hold the stock of the subsidiary coal companies, and the court has therefore reviewed and considered these propositions anew, in view of their importance and in the light of the present argument.
The “commodities clause” decision, which was announced by the Supreme Court of the United States, pending this re-hearing, has been cited for its bearing upon the question of the bond guaranty and has been considered by the court upon the main question of stock ownership in the coal companies.
The court is of opinion that the “commodities clause” case involved the application of different principles and may therefore, be distinguished from the ease at bar.
The railway companies there, had the charter power, expressly granted and held valid by the state, to hold the coal company stocks, and the act of congress was in derogation of the power so granted by the state. In view of its conflict with the rights granted and held valid by the state, and of defeated amendments during, the passage of the act, expressly forbidding stock ownership in subsidiary companies, the court applied a strict construction of the “commodities *193clause,” so as to avoid grave constitutional questions and preserve as far as possible the state charter.
In the ease at bar the state denies the power and the court is called upon to construe the charter at the suit of the state granting it. The- uniform rule of construction in cases of this kind is to resolve all doubt in favor of the state and against the grantee.
This is the uniform trend of the Ohio cases. Taft, J., in Humboldt Min. Co. v. Manufacturing, Min. & Mill. Co. 62 Fed. Rep. 356, 361 [9 O. F. D. 153; 10 C. C. A. 415], says:
“There is no court in the country which has been stricter in enforcing the principle that corporations are prohibited from exercising any powers which are not expressly conferred upon them in their charters, or which are not fairly incidental to the express objects of their creation, than the Supreme Court of Ohio.”
The doctrine is aptly stated by Mr. Justice Brewer, sitting in circuit in the case of Chicago, R. I. & P. Ry. v. Railway, 47 Fed. Rep. 16, 22:
“All grants, even grants of corporate franchises, are construed strongly in favor of the government, and against the grantee. So when the state challenges the action of one of its corporate creations, it may insist on clear warrant for such action.”
We think the distinction between the principles applicable here, and those of the “commodities” case clearly warranted. But even if the “commodities” case be in conflict and incapable of reconciliation, the court is bound to follow the decisions of our own state, where,’ as in this ease, no federal question arises, and where only state statutes and policies are involved.
In this connection the case of Stockton v. Railway, 50 N. J. Eq. 52 [24 Atl. Rep. 964; 17 L. R. A. 97], may be cited as strikingly similar to the ease at bar. The claim was there made, as here, that the ownership of a majority of the capital stock of the coal companies by a railway company did not vest the railway company with the ownership nor control of the coal companies, and the claim was characterized by the chancellor as a “disguise and evasion.” And as to the monopoly formed by the union of the coal' and railway companies, said:
“The commodity in which these-three companies deal is a necessary of life in this state. It is the principal fuel of its homes and factories. The slightest increase in its price is felt by a population uf hundreds of thousands of persons, for their necessity compels -them *194to pay that increase. If once a complete monopoly is established by the destruction of competition, whether that be through lease or by co-operation, the promoters of it and sharers in it may have whatever prices their cupidity suggests. The disaster which will follow cannot be measured. It will permeate the entire community, — furnaces, forges, factories, and homes,- — leaving in its trail murmurings. of discontent with a government which will tolerate it, and all the-evil effects of. oppression.”
It is urged by the counsel for the railway company that the guaranty of the bonds of the coal companies, and the contract between the railway company and the Continental Coal Co. for the equal division of the shipments, is a proper and authorized method of obtaining'business and therefore within the charter of the railway company as ah’ implied and incidental power.
Tonnage contracts, as such and without other features, have been generally if hot universally upheld. The following cases to that effect are cited by counsel for the railway company: Cleveland & M. Ry. v. Furnace Co. 37 Ohio St. 321 [41 Am. Rep. 509]; Interstate Commerce Com. v. Railway, 209 U. S. 108 [52 L. Ed. 705]; Jacksonville, M. P. Ry. & Nav. Co. v. Hooper, 160 U. S. 514 [16 Sup. Ct. Rep. 379; 40 L. Ed. 515]; Bald Eagle Val. Ry. v. Railway, 171 Pa. St. 284 [33 Atl. Rep. 239; 29 L. R. A. 423; 50 Am. St. Rep. 807]; Lough v. Outerbridge, 143 N. Y. 271 [38 N. E. Rep. 292; 25 L. R. A. 674; 42 Am. St. Rep. 712]; Temple St. Cable Ry. v. Hellman, 103 Cal. 634 [37 Pac. Rep. 530]; Old Colony Railroad Corp. v. Evans, 72 Mass. (6 Gray) 25 [66 Am. Dec. 394].
In Cleveland & M. Ry. v. Furnace Co. supra, the question of discrimination was eliminated by the finding of the jury in the trial court, and' the contract was upheld as a tonnage contract. The question of public policy and the rights of the public were not involved m the case as presented in the Supreme Court.
In the case of Interstate Commerce Com. v. Railway, supra, the decision was based' upon the finding that the rate in question had been fixed upon actual genuine competition and in good faith. The-question raised by the interstate commission, was, whether it was proper to fix a different rate for live stock than upon packed beef. And upon the finding as to competition it was held that a different rate in a different class did not affect the validity of the rate so fixed upon actual competition in the same class. In none of the other cases; cited does the question of public policy arise.
Now, is the contract for the guaranty of the coal company bonds,. *195and the equal division of the shipments of the Continental Coal Co. merely a tonnage contract?
In one view it may be said that the guaranty of the bonds was to enable the coal company to obtain more money, to buy more mines and ship more coal. But in a broader sense and in the view evidently adopted by the railway company the underlying and dominant feature was the control of the coal production and transportation and the ultimate restriction of competition. This was the declared purpose of the promoters of the reorganization and -the evident result.
The written contract of the Continental Coal Co. was first made with the T. & O. C. By. Co. This contract standing alone, might, with some plausibility, be said to be one of tonnage. But under a. permissive clause of that contract, the Hocking Valley, a competing company, is brought in by a contract between that company and the T. & O. C. Co. providing for a joint guaranty of the bonds of the Continental Coal Co. and an equal division of the traffic.
We do not see how the conclusion can be escaped that such an agreement between naturally competing railway companies tends to monopoly and leads to discrimination. The vice of illegality taints and vitiates the contract and renders the transaction void as against the state. The charter of the defendant was granted and extraordinary powers conferred for the public good and it should not, therefore, be used to accomplish an unlawful purpose.
It is contended that all public purposes are accomplished by forbidding the stock holding and that it is not necessary nor competent to terminate the bond guaranty, which has been executed and is outstanding.
This question has given the court a great deal of trouble. But our conclusion is, that the guaranty being an unlawful exercise of power and that a complete separation of interest and identity cannot be had while the • guaranty exists, and the railway company remains interested in the financial operation of the coal company and while the coal company’s stock is pledged with the fiscal agents of the railway company, the state has the right to have the whole relationship severed. It is no defense to the railway company to plead the rights of third parties, nor that the illegal act has been executed.
The court agrees with counsel, that it has no jurisdiction to determine in this action the rights of the bondholders. The suggestion in the original opinion as to the validity of the bonds as against the property of the railway company was employed in an effort to distinguish the decision by Lurton, J., in Central Trust Co. of N. Y. v. *196Railway, 10 O. F. D. 328 [87 Fed. Rep. 815], from the case at liar. It is clear to the court that the rights of the bondjholders can only be determined when an appropriate suit is brought, wherein they aré made parties. Whether, therefore, the bondholders can exact of the railway company the full amount with interest to maturity, or whether the vice of ultra vires affects the validity of the bonds, is not now for decision. But as against the railway company, the state has the right to call upon the defendant, as an alternative to save its charter, that it purge itself of the illegal act.
It is also urged that the portion of the contract providing for an equal division of the tonnage of the Continental Co., is not set out in the amended petition as. a foundation for relief. But we think the tenth cause of action as to the agreement for discrimination between all the railway and coal companies, reaches this issue.
It is contended that the Continental Co. -and the; Tailway companies being satisfied, the agreement should not be disturbed. The state, however, is not bound by the fact that the contracting parties are satisfied, but may inquire whether others and especially the public at large are prejudiced, or whether the contract tends to prejudice them. The tendency of this contract is toward discrimination against other operators in whom the railway company is not interested and through such discrimination to affect the body of consumers.
Taking up the question of the competitive character of the K. & M. Railway and the Hocking Valley Railway, it may be conceded that if Athens be accepted as the terminus of the Hocking Valley, and the K. & M. be considered independently of its connections, there would be little support for the claim that the two railways are competing lines. But we think the view may be somewhat enlarged, and treated upon a more practical basis.
The charter of the Hocking Valley Co. describes its line as “extending from the city of Toledo, by way of Gallipolis to the city of Pomeroy, * * * together with all branches or sidings of said railroad. ’ ’
From the charter, therefore, as well as the general situation disclosed by the evidence, it appears that the main line of the Hocking Valley extends from Toledo to the Ohio river, and that the extension to Athens is a branch.
The K. & M. charter describes the initial terminus of its railway .as the village of Corning, and thence extending by-way of Jacksonville, Athens and Middleport to the Ohio river at Point Pleasant, and into West Virginia, by way of Charleston to the Gauley river.
*197It may fairly be assumed that- the chief commercial importance of the village of Corning as a starting point of a railway was, its. being the terminus and connecting point of the T. & O. C. railroad. The K. & M. railway is a coal carrying road, extending from the Hocking Valley district to the Kanawha district of West Virginia, and reaching the markets through its connections, largely, the T. & O. C. The K. & M. railway was, naturally, adopted by the T. & O. C. Co. as a connecting branch, and the adoption made more permanent by the T. & O. C. Co. acquiring and owning a majority of its capital stock.
The T. & O. C. railway company was authorized by the letter and spirit of Sec. 3300 Rev. Stat. to acquire the stock of the K. & M. Company, as they were not competing but connecting and continuous lines, and extended thereby the competitive influence of the T. & O. C, from Coming through the coal district to Athens and the Ohio river. This acquisition of stock by the T. & O. C. Co. and its virtual ownership and control of the K. & M. was not only legal, but subserved the public interest by extending the field of competition.
It is claimed that the trackage contract between the Hocking Valley Co. and the K. & M. for the joint use of the track along the Ohio river between Gallipolis and Pomeroy, which contained a clause forbidding the K. & M. taking any business off the Hocking Valley lines to, or from, any point on the Hocking Valley lines, except Athens, so limited competition along the Ohio river, as to leave nothing substantial between the two companies. There is some obscurity as to whether the K. & M. had the right to take business off the Hocking Valley lines for the T. & O. C. connection and points beyond. Mr. Conners, superintendent of both railways, states that the K. & M. with the T. & O. C. connections was in competition with the Hocking Valley at Ohio river points and at Athens, for Columbus, Toledo, and intermediate points. And we are of opinion that it fairly appears from the evidence, especially from the fact of the K. & M. line touching the Ohio river at Point Pleasant, and coming near at Hobson, that the K. & M. was in a position, independent of the trackage, to compete with the Hocking Valley for the business coming down the Ohio river, and also at Athens, for the markets of Columbus, Toledo and intermediate points accessible to both railways.
While the K. & M. and T. & O. C. were connected by stock ownership, and operated in alliance, a shipper at Athens or upon the Ohio river, had a choice of routes and the benefit of competition. By the transfer of the majority of the stock of the K. & M. from the T. & O. C. t-o the Hocking Valley, all competition from the Ohio river and *198across southern Ohio to the T. & O. C. connection was swept' away and all that territory brought under the influence of the Hocking Valley alone. The purchase by one railway company of the majority or controlling stock of another is tested as to its validity, by Sec. 3300 Eev. Stat., which authorizes such ownership when the lines are connecting and noncompeting. The acquisition of this stock by the Hocking Valley from the T. & O. C. is not within the permissive authority of the statute, nor sanctioned by public policy, because the K. & M. Ey. considered with reference to its T. & O. C. connection, was a competitive road with the Hocking Valley, and the act of the Hocking Valley in the acquisition of said stock was illegal.
In Hafer v. Railway, 4 Dec. 487 (29 Bull. 68), the C. J. & M. Ey. Co. was declared to be a competitor of the C. H. & D. Ry. Co. between Cincinnati and Toledo, although the former depended for its entrance into Cincinnati upon a trackage arrangement, temporary in its nature.
In the East Line & R. R. Ry. v. State, 75 Tex. 434 [12 S. W. Rep. 690], the finding of fact entered by the trial court was, that disregarding connections with other lines, those involved in the purchase were not competing, but with reference to the connections they were competitive. Upon this finding the court held the railways were competitive lines.
Still more nearly in point is the ease of State v. Railway, 21 Mont. 221 [53 Pac. Rep. 623; 45 L. R. A. 271], where the connections were considered in determining the question of competition.
The broader and more practical view of competition adhered to in the cases cited, has been' established as the rule of this state in State v. Vanderbilt, 37 Ohio St. 590.
The claim is made that the rule of public policy in this state has been supplanted by the state railway commission act. On the other hand, it is claimed that the commission act is Supplemental i to the existing laws. We do not find it necessary to express an opinion on this subject, as the offenses were committed and the suit brought before the passage of the act.
We therefore conclude that the K. & M. Ey. Co. in its broader and more practical sense is a competing road with the Hocking Valley. And that the Hocking Valley Co. did not have the right to acquire and hold the majority stock of that railway company.
The former decision is therefore adhered to.
Sullivan and Dustin, JJ., concur.