Berkey v. Third Avenue Railway Co.

The plaintiff boarded a street car at Fort Lee Ferry and One Hundred and Twenty-fifth street on October 4, 1916, in order to go east on One Hundred and Twenty-fifth street to Broadway, and thence south oh Broadway to Columbia University at One Hundred and Seventeenth street. She was hurt in getting out of the car through the negligence of the motorman in charge of it. The franchise to operate a street railroad along the route traveled by the plaintiff belongs to the Forty-second Street, Manhattanville and Saint Nicholas Avenue Railway Company (described for convenience as the Forty-second Street Company) and no one else. Substantially all the stock of that company is owned by the Third Avenue Railway Company, the defendant, which has its own franchise along other streets and avenues. Stock ownership alone would be insufficient to charge the dominant company with liability for the torts of the subsidiary (Elenkrieg v. Siebrecht, 238 N. Y. 254 ; Stone v. C., C., C. & St. Louis Ry. Co., 202 N. Y. 352 ). The theory of the action is that under the screen of this subsidiary and others, the defendant does in truth operate for itself the entire system of connected roads, and is thus hable for. the torts of the consolidated enterprise (Chicago, etc., Ry. Co. v. Minn. Civic Assn., 247 U. S. 490 ; Davis v. Alexander, 269 U. S. 114 ).

We are unable to satisfy ourselves that such dominion was exerted. The Forty-second Street Company deposits in its own bank account the fares collected on its route. It pays out of that account and no other the wages of the motormen and conductors engaged in the operation of its cars. It was not organized by the defendant as a decoy or a blind. It was not organized, so far as the record shows, by the defendant at all. There is no evidence that at the túne of its formation the defendant had any

The question is whether other circumstances yet to be noted neutralize these indicia of separate life and operation. The defendant, as we have seen, was the owner in 1916 of substantially all the stock of the subsidiary corporation. Its president in reporting to the stockholders the financial situation-, at the end of the fiscal year informed them that to make the picture ■ accurate, the statement must exhibit the consolidated income, and this was obviously true. Other ties must be shown in addition to the one resulting from ownership of shares. The members of the two boards of directors were nearly, though not quite the same. Each road had the same executive officers, i. e., the same president, treasurer, general manager, paymaster and counsel. The parent has made loans to the subsidiary from time to time, sometimes for construction, sometimes for operating expenses. The loan for construction expenses ($6,415,152.92) is represented by a demand note. There is nothing to show whether the money was borrowed for the original construction in 1884 or for later changes of 'construction when the road was electrified. The parent is also the holder of the second mortgage bonds, $1,487,000,

One other circumstance or group of circumstances is the subject of much emphasis in the arguments of counsel. The defendant was the dominant stockholder, not only in this subsidiary, but also in many others. The routes when connected cover an area from the lower part of Manhattan at the south to Yonkers "and other points in Westchester at the north. All the cars, wherever used, are marked “ Third Avenue System.” On the other hand, the transfer slips bear the name in each instance of the company that issues them. The cars, when new ones become necessary, are bought by the defendant, and then leased to the subsidiaries, including, of course, the Forty-second Street Company, for a daily rental which is paid. The cars leased to one road do not continue along the routes o' others. The motormen and

. Upon these facts we are to say whether the parent corporation, the owner of a franchise to operate a street railroad on Third avenue and the Bowery and a few connected streets, has in truth operated another railroad on Broadway and Forty-second street, and this in violation of the statutes of the State. The plaintiff’s theory of the action requires us to assume the existence of a contract between the defendant on the one side and the Forty-second Street Company on the other. The several circumstances relied upon — community of interest and in a sense community of management — are important only in so far as they are evidence from which the existence of a contract may fairly be inferred. The contract in the plaintiff’s view was one between the two corporations by which the defendant was to use and operate the other’s franchise as its own. If such a contract was made, it was not only ultra vires, but illegal, because prohibited by statute. By Public Service Commissions Law (§ 54), “ no franchise nor any right to or under any franchise, to own or operate a railroad or street railroad shall be assigned, transferred or leased, nor shall any contract or agreement with reference to or affecting any such franchise or right, be valid or of any force or effect whatsoever, unless the assignment, transfer, lease, contract or agreement shall have been approved by the proper commission.” By section 56 any violation of the provisions of the statute exposes the offending corporation to continuing fines of large amounts, and its officers and agents to prosecution and punishment as guilty of a misdemeanor. If a written contract had been made for the operation by the defendant of the subsidiary’s line, no one

We cannot bring ourselves to believe that an agreement, criminal in conception and effect, may be inferred from conduct or circumstances so indefinite and equivocal. Community of interest there must obviously be between a'subsidiary corporation and a parent corporation, the owner of its stock. This community of interest would prompt the parent, not unnaturally, to make advances' for operating expenses to the subsidiary when con-venience would be thus promoted. The advances so; made have for the most part been repaid, and in so far as they remain unpaid have been carried as a debt. During all this time the cars have been manned by the subsidiary’s servants, who are paid for their work out of the subsidiary’s fares. We do not stop to inquire whether the inference of unified operation would be legitimate in a case where a contract for such an extension of the area of activity would be permitted by the law. We feel assured that no such inference is to be drawn from acts so uncertain in their suggestions where the inference is also one of the commission of a crime. The law prohibits a contract for operation by the parent of a franchise other than its own without the consent of the appropriate commission. It does not prohibit stock ownership, or at least did not, so far as the record shows, when the defendant bought the shares. We are now asked to draw from conduct appropriate to the ownership of stock, and fairly explicable thereby, the inference of a contract prohibited by law. We do not obviate the difficulty when we say that the stockholders by acquiescence have ratified any departure from the restrictions of the charter. They could do this so as to wipe out the transgression of their officers if the act constituting the transgression were ultra vires only. They could not do so where the act was one prohibited by law

We do not mean that a corporation which has sent its cars with its own men over the route of another corporation may take advantage of the fact that its conduct in so doing is illegal to escape liability for the misconduct of its servant (Nims v. Mt. Hermon Boys School, 160 Mass. 177 ; Bissell v. Mich. R. R. Co., 22 N. Y. 258 ). There is no room for varying constructions when operation results from acts so direct and unequivocal. A defendant in such circumstances is liable for the tort, however illegitimate the business, just as much as it would be if its board of directors were to order a motorman to run a traveler down. We do mean, however, that an intention to operate a route in violation of a penal statute is not to be inferred from acts which reasonably interpreted are as compatible with innocence as with guilt (Shotwell v. Dixon, 163 N. Y. 43 , 52). Such, it seems to us, whether viewed distributively or together, are the acts relied on here to establish an agreement between two corporations that the business of one shall be the business of the other. Many arrangements for economy of expense and for convenience of administration may be made between

There is no need to enter into a minute analysis of cases such as Davis v. Alexander ( 269 U. S. 114 ); Lehigh Valley R. R. Co. v. Dupont ( 128 Fed. Rep. 840 ); Lehigh Valley R. R. Co. v. Delachesa ( 145 Fed. Rep. 617 ); A., T. & S. F. R. R. Co. v. Davis ( 34 Kan. 199 ); Wichita Falls, etc., Ry. Co. v. Puckett ( 53 Okla. 463 ); and many others that might be added. In none of them was an illegal agreement imputed to the dominant railroad by force of conduct fairly compatible with an innocent construction. On the contrary, the defendant in every case would have acted wholly within its rights if it had assumed liability as principal by an unequivocal engagement. Thus, in Davis v. Alexander (supra) a contract for the carriage of goods was made in Texas, the transportation to begin on the route of the parent corporation and to continue over the line in the ownership of the subsidiary. There is no doubt that at common law a corporation doing business as a carrier of passengers or goods may charge itself with liability for loss on a connecting line, and to that end may enter, within reasonable limitations not yet accurately defined, into a joint adventure with another (Swift v. Pac. Mail S. S. Co., 106 N. Y. 206 , 216, 217). The situation was the same in Lehigh Valley R. R. Co. v. Dupont and Lehigh Valley R. R. Co v. Delachesa (supra). Indeed, in

The whole problem of the relation between parent and1subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the

The order of the Appellate Division should be reversed, and the judgment of the Trial Term affirmed with costs in the Appellate Division and in this court.

(dissenting). The United States Supreme Court in Davis v. Alexander ( 269 U. S. 114 ) said: " Where one railroad company actually controls another and operates both as a single system, the dominant company will be liable for injuries due to the negligence of the subsidiary company.” This court decided in Stone v. Cleveland, C., C. & St. L. Ry. Co. ( 202 N. Y. 352 ) “ that the ownership of a majority of the stock of a corporation, while it gives a certain control of the corporation, does not give that control of corporate transactions which makes the holder of the stock responsible for the latter.”

These two decisions are not inconsistent. Each depends upon the particular facts and the nature and extent of the control by the dominant company of the subsidiary. It is largely a question of degree. This was recognized in the opinion in the Stone case when referring to the Federal authorities. We there said (p. 361) that the facts in those cases were stronger for the plaintiff than in the Stone action.

On this appeal we must determine which of these two rules is applicable to the facts in this case. The Trial Term dismissed the plaintiff’s complaint. The Appellate Division has reversed and granted a new trial, holding that it was a question of fact for a jury to determine whether the Third Avenue Railway Company was liable for an injury to the plaintiff happening on the line of the Forty-second Street, Manhattanville and St. Nicholas Avenue Railway Company, called the Forty-second Street Railway Company.

The plaintiff was injured on the evening of October 4, 1916, by stepping into an unlighted excavation in the street, while alighting from a car at the corner of Broadway and One Hundred and Seventeenth street. The proof of negligence for this appeal is unquestioned and need not be further mentioned, so that we may turn our attention at once to the corporation responsible.

The Forty-second Street Railway Company is a street

The report of the president to the stockholders for the year ending June 30, 1917, stated:

“ The Third Avenue Railway System is composed of the Third Avenue Railway Company and the following subsidiary companies.”

The Forty-second Street Railway Company was one of these named subsidiary companies.

“ The Third Avenue Railway Company,” says the report, “ controls all the above companies through ownership of stock and to arrive at the result of the operations it is necessary to consolidate the income accounts and the balance sheets of all the corporations and eliminate the inter-company transactions so that all duplications may be avoided. This explanation is made in order that there may be no misunderstanding in considering the statements appearing in this report.”

The outstanding second mortgage bonds, amounting to $1,487,000, were entirely owned by the Third Avenue Railway Company. This second mortgage was past due.

415,152.98 was due for construction. It was repre

The officers for both companies were the same. Edward A. Maher, Jr., was the assistant manager of the Third Avenue Railway Company and of the Forty-second Street Railway Company. His father, Edward A. Maher, was the general manager of both. Each railway company had the same president, treasurer, secretary and the same board of directors with some slight variation. “ They were practically all the same directors.” The following question was asked of Edward A. Maher, Jr.: “ Q. Take the Third Avenue Railroad Company and the Forty-second Street and Manhattanville Railroad Company, were they identical? A. They were.”

The general auditor, Walter Farrington, was asked:

“ Q. I notice on page 6 of this report this statement: The Employes Association — the statement is as follows: ‘ The Association on June 30th, 1917, had a membership of 3,412, and had to its credit on that date New York City bonds valued at $79,833.30, and cash on deposit amounting to $13,285.51, the total of $93,116.81.’ These employes were employes of the entire system? A. Yes.

“ Q. The next item to which I would call your attention is on page 6:' It is most gratifying to contrast the attitude of some of the employes of the company with the strikes, was the response of the men to the company’s invitation to subscribe to the Liberty Loan of 1917 within two weeks of the announcement of the company’s partial payment plan of 3,265 subscriptions which have been received from 73%, and investment of bonds to the value of $200,000.’ That refers to the employes of the subsidiary companies as well as of the others; as well as of the Third Avenue? A. May I see what you are reading from?

“ Q. Yes. ‘ Subscription to Liberty Loan Bonds.’ A. It does.

The company referred to, of which these men were the employes, was the Third Avenue Railway Company. In its report the company did not discriminate.

Again, the Third Avenue Railway Company had a printing plant, referred to as follows:

“ Q. I find on page 9 of this report this expression: ‘ The economical effect to the operation of its own printing plant has continued during the past year. All of the company’s printing has been done in its own plant.’ That refers to the printing plant which was used for printing matter of not only the Third Avenue Railway Company, but of the subsidiary Companies? A. It does, yes.”

As to pensions for employes, the report of the president said: “ Under this plan, any employes who have reached the age of seventy years after at least twenty years service with the company, or who have reached the age of sixty-five and have been incapacitated are eligible for pensions,” etc. That the company referred to was the Third Avenue Railway Company appears from this testimony:

“ Q. You had a system of pensions for the employes, didn’t you? A. Yes.

“ Q. That was entirely under the control of the Third Avenue Railway Company, wasn’t it? A. Yes.

“ Q. Which handled that entirely; is that right? A. Yes.”

The executive officers, above referred to, were paid by the checks of the Third Avenue Railway Company; the general manager of the entire system had charge of the superintendents of operation, who in turn had control of the conductors and motormen, all of whom reported to a central school for instruction; repairs and construction were operated from a single department; the cars of

“ Q. How many paymasters were there for the whole system? A. I think there was one so-called paymaster, possibly two assistants.

“ Q. And they were employes of the Third Avenue Railway Company? A. They were paid out of the Third Avenue Railway Company’s general fund.

“ Q. Was there any such department in the Forty-second Street and Manhattan Railway Company pay department? A. No. * * * They were employes just as much of the 42nd Street company as they were of the Third Avenue. * * *

“ Q. Who pays that paymaster and his subordinates? A. The paymaster was paid out of the Third Avenue Company’s fund.”

The legal department for the adjustment and settlement of claims and the claims themselves were paid by the Third Avenue Railway Company. So, too, the accounting department was for the entire system paid by the Third Avenue Railway Company. Walter Farring

“ Q. Who was it paid to? A. It was paid to the Third Avenue Railway.”

Ely M. T. Ryder, engineer of the Forty-second Street Railway Company, swore that the annual report of that company states that the road was held in joint title by the Third Avenue Railway Company and the Forty-second Street Railway Company.

“ Q. What does that mean, joint title? A. That is the title to the ownership of the road, which has nothing to do with maintenance.

“ Q. Then the ownership of the road is jointly in the ■two companies; is that right? A. It is so stated.

“ Q. Will you go a little further and read the next section, ‘ Operated jointly with/ and say whether the same statement is not made there? A. It states, ‘ Operated jointly with/

“ Q. That means the joint operation of the two, does it not? A. Yes.

“ Q. Do you still adhere to your former statement that it was operated alone by the Forty-second Street and Manhattanville Railway Company? A. I did not say that it was operated alone, but it was maintained by the Forty-second Street.

“ Q. You admit that it is jointly owned, jointly operated, but that you say that it is jointly — it is maintained solely by the one road? A. Correct.”

These being the facts regarding the maintenance and operation of the Third Avenue Railway System, what is our conclusion? Is it that the Forty-second Street -Railway Company maintained a separate and distinct existence as a corporation operating its railroad as a corporate entity under the guidance and control of its own officers and board of directors? Such to my mind

These are the facts which cannot be changed by mere bookkeeping entries. It is true that the Forty-second Street Railway Company made out separate reports required by law; that it existed as a corporation; that it owned the street franchise; that upon the books of the Third Avenue Company charges were made for the various services and expenses to the Forty-second Street Railway Company as though it were in reality an independent, vital organism. But all these things cannot hide the reality or cover up the fact that the Third Avenue Railway Company in operation, in control, in dominance, in execution and in the furnishing of service to the city of New York was the Forty-second Street Railway Company.

No facts could exist which would justify the application of the statement in the Davis Case (supra), if these facts did not. “ Where one railroad company actually controls another and operates both as a single system, the

“ Much emphasis is laid upon statements made in various decisions of this court that ownership, alone, of capital stock in one corporation by another, does not create an identity of corporate interest between the two companies, or render the stockholding company the owner of the property of the other, or create the relation of principal and agent or representative between the two. * * *

“ While the statements of the law thus relied upon are satisfactory in the connection in which they were used, they have been plainly and repeatedly held not applicable where stock ownership has been resorted to, not for the purpose of participating in the affairs of a corporation in the normal and usuai manner, but for the purpose, as in this case, of controlling a subsidiary company so that it may be used as a mere agency or instrumentality of the owning company or companies.” (See, also, U. S. v. Lehigh Valley R. R. Co., 220 U. S. 257 , p. 274; Lehigh Valley R. R. Co. v. Delachesa, 145 Fed. Rep. 617 ; Lehigh Valley R. R. Co. v. Dupont, 128 Fed. Rep. 840 ; Summon. Snare & TriestCo., 166 App. Div. 425 ; Wichita Falls & N. W. Ry. Co. v. Puckett, 53 Okla. 463 ; Foard Co. v. State of Maryland, 219 Fed. Rep. 827 ; Atchison, Topeka & Santa Fe Ry. Co. v. Davis, 34 Kans. 199 .)

His cock, Ch. J., McLaughlin, Andrews and Lehman, JJ., concur; Crane, J., dissents in opinion in which Pound, J., concurs.

Ordered accordingly.