Ticonderoga Railroad v. Delaware & Hudson Co.

This action was brought for an accounting, and that the defendant be adjudged to pay the plaintiff the amount of surplus earnings, if any, that should be found to be due and owing by the defendant. Both parties are railroad corporations, the plaintiff owning a line running from the village of Ticonderoga, about two miles in length, to a point where it makes connection with the defendant’s road; the defendant owning or leasing and operating a line extending from Albany, New York, to the Canadian border, with a branch running to Baldwin, near the northerly end of Lake George. The plaintiff company has issued its capital stock to the amount of thirty thousand dollars, and has also issued an equal amount of bonds secured by a mortgage. Having determined to build its road, the plaintiff entered into a contract with the defendant to operate the same, as follows:

“ This agreement, made the 13th day of August, 1890, by and between the president, managers and company of the Delaware & Hudson Canal Company, of the first part, and the Ticonderoga Railroad Company, of the second part,

“Witnesseth :

“Whereas, the first party is a corporation duly organized under and by virtue of the laws of the State of New York, with power to lease and operate railroads within said State, under and by virtue of chapter 841 of the Laws of 1867 of said State; and

“Whereas, said Baldwin branch extends from the main line of the New York and Canada Railroad to the village of Baldwin, a distance of about five miles, on very high ground, passing the village of Ticonderoga on the south about three-quarters of a mile therefrom, and at a considerable elevation above the same; and

“Whereas, said village of Ticonderoga is a thriving manufacturing village located upon a stream, the outlet of Lake G-eorge, which affords water power and natural facilities for the development of manufacturing industries of an unusual order; and

“ Whereas, the industrial development of said village and surrounding territory has been impeded on account of the lack of adequate and convenient railroad facilities and also by reason of the necessity for carting all freight up a very steep grade to the Academy Station on the Baldwin branch, about three-quarters of a mile, or to Addison Junction on the main fine about two and one-half miles, thereby imposing- very heavy charges for cartage on all such freights and placing manufacturers at a great disadvantage in competition with those located on other roads; and

“Whereas, the said first party is desirous of promoting the industrial development of said village and territory, and removing the disabilities that now operate against the manufacturers and shippers, and thus secure an increase of traffic upon said railroad at the smallest expense to itself; and

“Whereas, the second party is a corporation duly organized by the citizens of said village, under and by virtue of the Laws of this State, for the purpose of con

“ Whereas,- said proposed road can be most economically operated by said first party as a side or switch track, at but a slight expense over that required to handle the freight and passenger traffic of said village with present imperfect facilities,

“ Now, Therefore, in consideration of one dollar by each party to the other in hand duly paid, receipt whereof is hereby acknowledged, and in consideration of the premises and of the faithful performance of the covenants and agreements hereinafter contained, it is mutually agreed as follows:

“ First. The party of the second part agrees to construct a single track railroad from a point at or near the village of Ticonderoga, Essex County, New York, by the most feasible route established by its engineer to connect with said Baldwin branch at a convenient point to be established by said engineer, which said railroad it is estimated will be about two miles in length. The said road shall consist of steel rails weighing not less than sixty-seven pounds to the yard, and shall comprise a sufficient freight and passenger station at the village of Ticonderoga, with the usual necessary switches, side tracks and other appurtenances. All of such construction shall be done in first-class manner and shall conform in all respects to the requirements of the Chief Engineer of the Delaware & Hudson Canal Company.

“ Second. The party of the second part agrees to procure such legislation as may be necessary to authorize and permit charges for transportation upon said railroad to be made at not exceeding the following rates, viz., for each passenger, twenty-five cents; for each gross ton of factory or mill supplies or products, twelve and one-half cents, and for each ton of general merchandise, seventy-five cents. None of the provisions of this contract shall be binding upon the party of the first part unless and

“ Third. Upon the completion of said proposed railroad, said first party agrees to take possession thereof, and maintain, manage and operate the same, and provide the freight and passenger connection with all-day trains on the New York and Canada Railroad that may stop at Addison Junction, upon the terms and conditions hereinafter specified, during the corporate existence of said second party.

“ Fourth. It is mutually agreed that all taxes and assessments against said proposed road shall be paid by the second party, including corporation franchise tax,, but excluding tax on rolling stock, which shall be paid by the first party.

“ Fifth. It is mutually agreed that the first party, so far as it lawfully may, shall assume all the duties, obligations, liabilities, rights, privileges and franchises of the second party incident to the maintenance and operation of said proposed road, except as herein otherwise specified, but the said first party shall in no event be liable or. responsible for any debts or liabilities of the second party, for whatever purpose the same may have been incurred.

“Sixth. It is mutually agreed that in the operation of said proposed railroad of the party of the second part, the charges for the transportation of freight shall not exceed twelve and one-half cents per gross ton for all freight to or from any manufactory for manufacturing purposes (over the whole or any part of said proposed road) and shall not exceed a minimum rate of seventy-five cents per ton for all other freight. The charge for passenger traffic shall not exceed twenty-five cents for each person one way over the whole or any part of said Ticonderoga road.

“ Seventh. It is mutually agreed that the party of the first part may retain twenty-five per cent of the annual gross earnings derived from all traffic upon said Ticonderoga Railroad, as full compensation for managing, operating and maintaining said railroad, and the .remaining

“ First. To pay all taxes and assessments levied against said second party or against said first party as operators of, and on account of, said proposed road of the second party including corporation franchise tax, but excluding tax on rolling stock, which shall be paid by first party.

“ Second. To pay interest charges on bonded indebtedness, which interest charges shall not exceed eighteen hundred dollars per annum.

“ Third. To deposit with three trustees to be appointed when mortgage is executed for a sinking fund to liquidate its bonded indebtedness when due, a sum' not to exceed one thousand dollars per annum over and above the expenditures required by the first two mentioned items.

“Fourth. To pay to the party of the second part all moneys received in excess of that required to meet the expenditures above stated to the extent of a sum sufficient to pay a dividend not to exceed five per cent upon its capital stock, which capital stock shall not exceed thirty thousand dollars.

“Fifth. To pay to the first party any unexpended balance that may remain after appropriating the aforesaid amounts, to be applied in paying the cost of extension or improvements, so far as it may find the same necessary.”

The referee has found in substance that after the plaintiff corporation had constructed its road of about two miles in length to a point where if intersected the Baldwin branch of the defendant’s road, the defendant entered into the possession of the road and has ever since operated it under the provisions of the contract, and that out of the gross earnings it had paid the taxes, interest upon the bonded indebtedness, a thousand dollars to create a sinking fund for the retirement of the bonds when due, five per cent dividend to the stockholders each year, and had accumulated in its hands a reserve fund amounting at that time to $112,'796:97; that $15,000.00 was a sufficient amount to reserve in the defendant’s hands, and that the bal

The main question discussed by the learned referee and the Appellate Division pertains to the construction that should be adopted with reference to the provision of the contract. The referee appears to have reached the conclusion that under the contract the defendant company became a trustee of the stockholders of the plaintiff company, by which it agreed to operate the road during its corporate life for twenty-five per cent of its gross earnings, and that out of the remaining seventy-five per cent it, as such trustee, would annually pay the taxes, the interest on the bonded indebtedness, one.thousand dollars to the commissioners of the sinking fund for the retirement of the bonds at their maturity, five per cent dividend to the stockholders, and retaining the balance for the purpose of paying the cost of extension or improvements, so far as it may find the same necessary, and consequently that the surplus belonged to the stockholders of the plaintiff company. In support of such conclusion special attention is called to the provision of the seventh clause of the contract, in which it is mutually agreed by the parties that the defendant company “may retain twenty-five per cent of the annual gross earnings derived from all traffic upon said Ticonderoga Railroad, as full compensation for managing, operating and maintaining said railroad.” Special stress is laid upon the words “full compensation,” and attention is called to correspondence that took place between the officers of the respective companies before the contract was executed,

Whatever name is given to the contract does not affect the question which we are now to consider, for under its provisions we deem it clear that the defendant holds the surplus, to be applied in paying the cost of extension or improvements, so far as it may find the same necessary. As operator of the road, the defendant is interested in having its tracks, roadbed and bridges maintained in such condition as to permit of its operation with safety to itself, its employees and to the public. It is interested in extending its tracks so as to accommodate factory and business enterprises which tend to advance the business

This railroad was constructed and taken over by the defendant in 1890. It has now been in use for twenty-one years, and the time necessarily will soon arrive when it will become necessary to reconstruct or renew the railroad in whole or in part. The original cost of construction was about sixty thousand dollars, which was paid for by the issue of thirty thousand dollars in bonds and thirty thousand dollars in stock. We are also aware that in the operation of "railroads unforeseen accidents may occur through fire, storms and floods resulting in great damage and involving a large expenditure of money in

This action was brought for an accounting, as well as for the distribution of the surplus fund. We think that the plaintiff was entitled to maintain the action, to the extent of having an account taken and the amount of the surplus determined. The defendant, as we have already shown, had an interest in the fund, at least to the extent of having the road extended and improved, as specified in the contract. Upon the accounting had before the referee there was a conflict in the views of the respective parties as to the amount of the earnings of the plaintiff’s road. It appears that the plaintiff’s road intersected the defendant’s road at a point about two miles distant from the village of Ticonderoga; that there was no station at that point, and consequently the trains over the plaintiff’s road were run by the defendant from the point of intersection with its .own road to the next station. The referee has charged the defendant with the amount that it collected for passengers and freight from the village of Ticonderoga to the defendant’s station upon its own line. The defendant claims that it could only be charged proportionately with the amount which the mileage of the plaintiff’s road bears to the mileage on the defendant’s road. It may be that some reason exists why the mileage basis should not be adopted in determining this question, but it would seem equitable that the defendant should be credited with some portion of the earnings. Another question has arisen with reference to the amount of interest with which the defendant should be charged. The defendant instead of investing the surplus fund separately from its own fund, as it should have done, paid the same over into the treasury of the company, where the moneys became mingled with

I concur in the result reached by Judge Haight, but as I have some views which he has not expressed, I will briefly announce my conclusions without much effort at argument.

The primary question is, what does the contract mean ? This, as I think, is a question of law which we should now decide, so 'that both parties may know their rights and understand their legal relations to each other during the long period that their contract yet has to run. The meaning of a written agreement is rarely a question of fact, although in case of doubt surrounding circumstances may be taken into account, so that the court may read the instrument in the same light that the parties wrote it.

The contract is not a lease, either in form or substance, any more than an agreement to work a farm. The terms, conditions and covenants usually found in leases are wholly wanting. There is no rent reserved, no exclusive right to income and no covenant to pay rent, as such, or in effect. On the other hand, compensation, expressly named as such, is provided through a division of gross earnings to pay one party for “managing, operating and maintaining ” the railroad belonging to the other.

No express trust was created, for the elements of such a relation are absent. Title to the railroad property continued in the original owner, while the other party was

What, then, was the relation between the parties as created by the contract ? When that relation began the defendant was an old railroad company, operating along' line of road, fully equipped with the rolling stock, men and appliances necessary to manage not only its own road but also any short road connecting therewith that it might acquire the right to operate. Thus, without much increase of expense by adding a short line as a “feeder,” it could enlarge the business of its main road. On the other hand, the plaintiff was simply a road on paper, duly organized as a railroad corporation, with its road projected but not built. As described in its charter, its road was to extend from a branch of the defendant a distance of two miles through the village of Ticonderoga, past one manufactory and to another. It had the right to issue bonds and stock to build its road, but it could not itself operate a fine only two miles long to advantage. As the contract recited, “ such proposed road can be most economically operated by said first party (the defendant) as a side or switch track, at but a slight expense over that required to handle the freight and passenger traffic of said village with present imperfect facilities.” Ticonderoga, as it is further recited, was a “thriving manufacturing village,” with “ water power and natural facilities for the development of manufacturing industries of an unusual order.” It was situated about three-quarters of a mile from a branch of the defendant, which was built. “ on very high ground * * * and at a considerable elevation above ” the village. The plaintiff wanted to build the road, for its projectors were interested in the manufacturing plants reached by it. The defendant wanted the road built so as to use it as a feeder to its own “ and thus,” as was also recited, “secure an increase of traffic upon said railroad at the smallest expense to itself.” While the plaintiff was willing to build the road, it could

Such being the situation, the parties came together and entered into the contract, which I regard as an operating agreement between principal and agent, which implies a trust relation, but not that of cestui que trust and trustee. The plaintiff agreed to build the road wholly at its own expense with steel rails of a specified weight, “a sufficient freight and passenger station at the village of Ticonderoga, with the usual and necessary switches and side tracks and other appurtenances. ” All the construction was to be done in first-class manner and to “ conform in all respects to the requirements of the Chief Engineer of the Delaware & Hudson Canal Company.” The plaintiff also agreed to procure the legislation necessary to authorize charges not exceeding twenty-five cents for each passenger, twelve and one-half cents for each ton of factory supplies or products, and seventy-five cents for each ton of general merchandise. It was stipulated that no provision of the contract should bind the defendant unless such legislation was secured. The factory rate thus prescribed was very low, the rate for general freight very high and the rate for passengers almost unprecedented. After the plaintiff had performed these stipulations the defendant was to take possession, maintain, manage and operate the road and provide freight and passenger connection with all day trains on its own road during the corporate existence of the plaintiff, which was fifty years. These were the special promises of the respective parties, the remaining provisions being mutual by express statement.

After thus providing for the construction of the road by one party and the operation thereof by the other, it was mutually agreed that the gross earnings should be disposed of as follows: The defendant was to “retain twenty-five per cent of the annual gross earnings derived from all traffic upon said Ticonderoga Railroad, as full compensation for managing, operating and maintaining said railroad.” The remaining seventy-five per cent was

When the road was built it belonged to the plaintiff and the defendant had no interest in it except as given by the contract. It was to manage, operate and maintain a railroad belonging to another party and to receive a certain percentage of the gross proceeds in full compensation for such services. It was not to be liable for any debt of the plaintiff, nor to expend a dollar of its own money except to operate the road and not even for that purpose unless its share of the gross receipts was insufficient. When one person agrees to manage another person’s property for a definite time at a prescribed compensation, with no transfer of title, the- relation of principal and agent exists between them, and the same is true if the two contracting parties happen to be railroad companies. The defendant was not to work for itself but for another, using its property in order to do the work. As it operated the road, it necessarily received the income, not for its own use, however, except to a limited extent, but as agent. It was to retain a certain proportion of the income as full compensation for its services in managing property belonging to another railroad company, and was to devote the remainder to certain specific purposes. I see nothing in the nature of a lease or of an express trust in such an arrangement, but simply an agreement between principal and agent. The relation was fiduciary in character, because the plaintiff intrusted its property to the defendant to manage, receive

In order that a proper accounting may be had it is necessary to know how the gross earnings are to be disposed of according to the contract. The defendant is to retain twenty-five per cent thereof, in any event, even if there is not enough left to pay the interest and taxes. That is its compensation in full for all services rendered. From the seventy-five per cent remaining, the taxes, interest and a deposit for a sinking fund áre to be met and the rest is to be paid to the plaintiff, “to the extent of a smn sufficient to pay a dividend not to exceed five per cent upon its capital stock.” There is no controversy over this provision, although it is relied upon as an aid in construing the final stipulation. After all these payments-are made the remainder of the gross proceeds is to be paid to the defendant, not, however, for its own use and benefit, but “to be applied in paying the cost of extensions or improvements, so far as it may find the same necessary.”

As I read the contract, the twenty-five per cent to be retained by the defendant is not simply for operating expenses, but is in “full compensation for managing, operating and maintaining said railroad,” and hence it is all that in any event the defendant can receive under the contract for its oto benefit. The words “ full compensation ” are words of exclusion and forbid the defendant from taking any more as its own property. What

The defendant, however, was to retain any unexpended balance that might remain after making all the other .payments specified, not for its own use but for a definite purpose clearly specified. It was to retain it '“ to be applied in paying the cost of extensions or improvements so far as it may find the same necessary. ” “To be applied ” are the controlling words in this controversy. They govern the disposition of all the final residue. They fasten upon the entire “ unexpended balance,” however large it may be, and hold it so as to leave no ground for the contention that one party can keep as its own what both parties agreed should be applied in paying the cost of improving the property in which both were interested. The defendant was made the custodian of the residuum simply for the purpose of applying it to the object mentioned. It had no right to keep the money for itself, but it had the right in its soimd discretion to* expend it in improvements when necessary and it was the sole judge of the necessity so long as it acted in good faith. While the balance did not belong to the defendant, it had the power to hold it and use it to benefit the plaintiff’s property and for no other purpose. If all should be thus used the plaintiff would have the benefit of it in the increased value of its property and while it could derive no immediate benefit from it its stockholders might through appreciation in the value of their stock. " All improvements and extensions belong to it as fast as they are made and at the end of the fifty years of corporate life its stockholders will have the benefit thereof upon sale or

The defendant expended but little of the balance in extensions and improvements, and in the nature of things, more will be required in the future, as the road gradually wears out and needs reconstruction. The balance, already a large sum, is increasing by several thousand dollars each year, and the referee was of the opinion that the sum of $15,000 out of that already on hand, together with the annual accumulations, would be sufficient to take care of the future. This involved a question of fact, and as the Appellate Division reversed that determination we cannot interfere with their conclusion in that regard ( 139 App. Div. 542 , 551). A new trial is, therefore, necessary, for the plaintiff had a right to an accounting in any event, and hence the complaint should not have been dismissed. Upon the new trial it may be found as a fact that all of the residuum, including interest, for the defendant did not invest the fund, but used it for its own purposes, will be needed for necessary extensions and improvements. In that event the plaintiff, although entitled to the accounting, will not be entitled to recover any part of the surplus in this action. If, however, it should be found as a fact that even upon the most liberal estimate all the remainder will not be needed for extensions and improvements, I think the plaintiff will “be entitled to judgment for the part not so needed, with the right to pay it out in dividends to its stockholders. The limitation to a dividend of “not to exceed five per cent” does not extend to an unexpended balance

As the Appellate Division had the right to reverse the judgment of the referee on the facts, its judgment to. that extent should be affirmed, but as it had no right to dismiss the complaint, its judgment in that respect should be reversed and a new trial ordered, with costs to abide the event.

Willard Bartlett, Hisoock and Collin, JJ., concur with Haight, J.; Cullen, Ch. J., concurs with Vann, J.; Cray, J., not sitting.

Judgment reversed, etc.