People ex rel. Binghamton Light, Heat & Power Co. v. Stevens

Before discussing the legal questions involved, it is well to point out the facts which led up to this decision of the commission. The balance sheet of the relator upon December 31, 1908, showed a fixed capital to the amount of $1,302,725.72. Included within this amount was $543,494.53, which had been put into construction and replacement, tangible and intangible, since the purchase from the Binghamton General Electric Company. The balance, $759,231.19, was the amount appearing upon the books of the company as of March 1, 1902, as the value of the property, real estate and personal and franchise rights of the Binghamton General Electric Company. It is perhaps interesting to note that upon February 28, 1902, the condensed balance sheet of the Binghamton General Electric Company showed total assets amounting to $607,159.58. This increase within a single day to $759,231.19, as it was placed upon the books of the relator, is nowhere explained. An expert in the employ of the Public Service Commission was put upon the books and examined the property of the relator and the property purchased by the relator from the Binghamton General Electric Company. Part of that property had been sold for about $15,000. All the remaining property that passed from the Binghamton General Electric Company was valued as $51,-000. So that of this $759,231.19 which is included in this $1,302,-725 of the claimed fixed capital of the relator over $600,000 in round numbers has absolutely disappeared. It is not contended that it has been fraudulently disposed of. The fact is that it has been laid aside and thrown away, and that in its place the new machinery and new construction has been substituted for which relator has charged fixed capital at $543,000.

Of course, there are certain betterments to property that are properly chargeable to capital. The general upkeep of a plant or of a

In determining the price at which this Public Service Corporation can charge the public for its product, it is allowed only a fair return upon its actual value at the time. So that the statement of fixed capital in its balance sheet at $1,303,735 is an actual misrepresentation of at least $600,000. The relator was asking permission practically to float $1,000,000 worth of its bonds upon a valuation of about $600,-000, with a misrepresentation of an additional $600,000 at least as part of its fixed capital. These bonds will go upon the market with the advertised approval of the Public Service Commission. Every care should be taken, therefore, that those methods adopted by the law for the protection of the innocent purchaser should not become a trap to snare him. If the commission had power, therefore, to place any condition upon the authorization of this increase in bonds or stock, it would seem that the only criticism to be made upon their condition annexed was that it was not stringent enough.

It is here insisted that the commission was not authorized to find that the present value of the property transferred by the Binghamton General Electric Company was only $51,000, and that these moneys were expended substantially for replacements; that that finding is from the report of its special agent, which was not introduced at the hearing, and therefore was not proper evidence upon which any determination by them can be based. To support this contention the case of the People ex rel. Joline v. Willcox, 134 App. Div. 563 , 119 N. Y. Supp. 641 , is cited. ' That was a case in which it appears apparently for the first time upon the return to the writ of certiorari that certain private information had been considered by the commission in making the determination, and it was therefore held that the determination based thereupon could not stand. The learned justice in writing the opinion in that case based it in part upon the authority of the Village of Saratoga Springs v. Saratoga Gas & Electric Co., reported in 191 N. Y. 133 -147. At page 148 ( 83 N. E. 693 , at page 701 [ 18 L. R. A. (N. S.) 713 ]) the opinion in that case in part reads:

“It is plain that no corporation could make its defense until it was clearly notified of what was charged against it and the proof to support such charge was given. While the commission might not be bound by technical rules of evidence, still it was plainly intended that the whole proceeding should assume a quasi judicial aspect. This is necessarily so, for the Appellate Division is empowered to review the order of the commission, a review which requires something in the shape of a record of the proceedings of the commission. The commission being empowered to subpoena witnesses and take

testimony, its inspectors or agents could, be required to appear and verify any reports made by them, or, if we assume that such reports could be received in the first instance without verification, the inspectors or agents could be compelled to attend at the instance of either party and be examined as to the truth of the statements in their reports and their knowledge of the facts therein contained.”

The case at bar comes clearly within the rule therein stated. The relator was notified of the examination to be-made by these experts. In the opinion of August 4, 1909, the conclusion of the expert was stated and the order was then made continuing the proceedings, giving the right to the relator to produce further testimony if he should so desire. After this opinion was written and upon August 34th, the commissioners wrote to relator among other things:

“The company is at liberty to ask for a further hearing, upon which it can present proof showing or tending to show that the foregoing assumption of fact is incorrect.”

This fact assumed was that the expenditures had been for replacements.. A rehearing was asked for by relator by a notice which made no complaint that ex parte testimony had been received, which in no way questioned the facts which had been assumed by the commission-in its determination, and no request was made to examine the experts or produce any testimony to show any greater value than $51,000 in the property that stood upon their books as fixed capital to the amount of over $700,000. With full notice given, therefore, of the finding of this fact upon the evidence of this expert, and full opportunity given to the relator either to cross-examine this expert or to bring other evidence to controvert his conclusion, the authority cited becomes inapplicable, and the commission must be deemed to have properly found the facts.

Under section 66 of the Public Service Commission’s law (Consol. Laws 1910, c. 48), this commission is given general supervision of all gas corporations and electrical corporations. Under section 69 this stock or these bonds cannot be issued without authority from the commission, and the order granting that authority must state that the proceeds of the stock or bonds to be issued are “reasonably required for the purposes specified in the order.” One of the primary purposes of this general law is to prevent overcapitalization and to protect the public from the floatation of securities that do not represent actual values. The mischief is just as great, .whether this overcapitalization arises at the initiation of the corporation or whether it is the result of a process by which property has been replaced, and the original capitalization is still carried on the books in addition to the cost of replacement. In view, then, of the general purposes of the act, of the general supervision given by section 66 of the statute, and of the certificate required to be made under section 69, we are of opinion that the statute should be so construed as to authorize a condition that those .securities shall not be sold over a misleading statement in the •fixed capital account. It is true that the powers of the commission are stringently stated in the Delaware & Hudson Case, 197 N., Y. 13 , 90 N. E. 60 ; but that statement must be read in connection with the questions then before the court for decision. In that case there.

“The evidence does not disclose the cost of the old plant or its value, except we may infer its value from the purchase price. The present owners paid $87,500 over the par value of the stock, which does not seem an unreasonable price when we consider the earnings of the company hereinafter referred to.”

The question of replacement was not there considered, and no question was raised as to any substantial overcapitalization or any needed protection by the public, so that the questions there discussed were materially different from those arising in the case at bar. Moreover, in that case the question arose as to the absolute refusal of the commission to grant permission to. issue securities. Here the permission was granted, and was only conditioned upon the rectification of the company’s books so as to more nearly show the relation between the actual value and the fixed capitalization as carried on those books. It is not impossible that criticism might be made of the act of the commission in determining that bonds only should be issued upon the request of the relator for authority to issue both bonds and stock. There might be some question as. to the right of the commission to decide as to the policy of the company as between the issuance of bonds and stock if it were not for chapter 480 of the Laws of 1910 (Consol. Laws 1910, c. 48), which has amended the Public Service .Commission’s law, and which statute will now be considered.

This application was made in February, 1909. The order was first made denying the petition August 4, 1909. A rehearing was thereafter had resulting in the order of January 10, 1910, which is the order complained of. Upon August 25, 1910, relator’s motion for a rehearing was denied. Upon June 14, 1910, chapter 480 of the Laws of that year took effect. Section 69 so far as is material reads as follows :

. “Sec. 69: Approval of issues of stock, bonds and other forms of indebtedness. A gas corporation or electrical corporation organized or existing, or hereafter incorporated, under or by virtue of the laws of the state of New York, may issue stocks, bonds, notes or other evidence of indebtedness payable at periods of more than twelve months after the date thereof, when necessary for the acquisition of property, the construction, completion, extension or improvement of its plant or distributing system, or for the improvement or maintenance of its service or for the discharge or lawful refunding of its obligations or for the reimbursement of moneys actually expended from income or from any other moneys in the treasury of the corporation not secured or obtained from the issue of stocks, bonds, notes or other evidence of indebtedness of such corporation, within five years next prior to the filing of an application with the proper commission for the required authorization, for any of the aforesaid purposes except maintenance of service and except replacements in cases where the applicant shall have kept its accounts and vouchers of such expenditure in such manner as to enable the commission to ascertain the amount of moneys so expended and the purposes for which such expenditure was made; provided and not otherwise that there shall have been secured from the proper commission an order authorizing such issue, and the amount thereof, and stating the purposes to which the issue or proceeds thereof are to be applied, and that, in the opinion of the commission, the money, property or labor to be procured or paid for by the issue of such stock, bonds, notes or other evidence of indebtedness is or has been reasonably required for the purposes specified in the order, and that except as otherwise permitted in the order in the case of bonds, notes and other evidence of indebtedness, such purposes are not in whole or in part reasonably chargeable to operating expenses or to income.”

This statute is not discussed by the relator’s counsel in his brief other than with the statement that it became a law after the relator’s application had been filed. It was not the law at the time the order was made which is sought here to be reviewed. It was the law when the notice of a rehearing was denied. If we should reverse the determination of the commission, we could only send it back to the commission to make the certificate which'the law requires, and they could only make such certificate as is now authorized by law. This proceeding is not akin to an action at law where the rights of the parties are determinable as of the date when the application is filed. The act of 1910 does not save proceedings pending before the commission prior thereto from the effect of its provisions, and it seems to me clear that our determination must be made upon the law as it now stands. I confess that I am unable to satisfactorily glean what was the full intent of the Legislature when that law was passed. It seems, in the first place, to authorize the issuance of stocks and bonds payable at a period of more than 12 months only in case where the moneys for which they are sought to be issued have not been used for “maintenance of service” or “replacements.” Thereafter authority seems to be given to issue bonds, notes, and other evidences of indebtedness (not stock) only with the express permission of the Public Service Commission in case the moneys for which they are issued should properly be charged to “operating expenses or to income.” The omission of the term “stock” from this sentence would seem to authorize only the issuing of bonds, notes, or other evidences of indebtedness for such purpose. If any force be given to the word “permitted” as therein used, it would seem to give a discretionary power to the commission in those cases where the moneys to be reimbursed were moneys which should

Our conclusion, therefore, follows that the relator has naught of which it can complain in the determination made, which must be confirmed with $50 costs and disbursements.

Determination confirmed, with $50 costs and disbursements. All concur, except KELLOGG, J., dissenting in opinion.

(dissenting). The amendment to section 69 of the Public Service Commission law (chapter 480 of the Laws of 1910) was in force when the order denying the application for a rehearing was made. The terms of that statute prohibit the issue of bonds or stock to pay the notes in question, if they represent replacements or expenditures which are properly chargeable to operating expenses or to income. A corporation is an artificial body, the life, acts, and powers of which are regulated by statute. By the old statute, now section 55 of the stock corporation law (Consol. Laws 1909, c. 59), it can issue no stock or bonds except for money, labor done, or property actually received for its use and lawful purposes. Experience and business requirements have adduced from this provision, and the nature of corporations and their business, the rule that where machinery, appliances, and other property which become obsolete by time and use are represented in the capital account of a corporation their upkeep and replacement are properly chargeable to the expense or income account, and not to capital account. Otherwise the capital of a corporation would from year to year grow more and more out of proportion to the real value of its property. The courts recognize this rule. People ex rel. Jamaica W. S. Co. v. Tax Com’rs, 196 N. Y. 39 , 89 N. E. 581 ; s. c. 197 N. Y. 33 , 90 N. E. 112 ; Id., 128 App. Div. 13 , 112 N. Y. Supp. 392 ; Knoxville v. Knoxville Water Co., 212 U. S. 1 , 29 Sup. Ct. 148 , 53 L. Ed. 371 .

The- first order assumes that the notes represent replacements. The second order, apparently as a concession, without a different finding and without a rehearing, grants in part the certificate upon condition. Ii is beyond the power of the commission to permit the issue of improper securities upon the condition that the company cancel stock of about half the amount. Read together, the two orders permit the company to issue unauthorized securities, but attempt to lessen the harm to the public which may result therefrom. The commission- has no power to thus barter away the public interests, or on its own terms to permit the issue of securities which the law prohibits. Its discretion cannot override the discretion of the officers of the company in the management of its affairs, or the provisions of the statute which prescribe the cases in which securities are permitted. Its

It is not probable that the plant of the relator entirely broke down immediately after the purchase and required replacement on account of obsolescence. It is evident that the growth of the city of Binghamton and the requirements of the service made necessary a larger and more extended plant with greater facilities. Growing business requirements may make it necessary for a railroad company to replace its 60-pound rail with a 90-pound rail. If the 60-pound rail is represented in the capitalization, the difference between the cost of it and of the 90-pound rail is not so represented, and may be capitalized.It is an improvement or extension rather than a technical replacement. It is not reasonably chargeable to expense of operation or to income. If the growth of the city and demands of the service require engines, dynamos, or machinery of much greater capacity and consequently of much greater cost than those represented in the capitalization, the difference between the capitalized cost of the smaller engines, dynamos, or machines and that of the larger or more powerful ones which take their place may properly be represented in the capitalization. The mere fact, therefore, that the old plant was practically dismantled and a new and larger one constructed does not show that the expenditure or the greater part of it was necessarily a replacement. It may in great part have been an extension or improvement which from its nature was not reasonably chargeable to operating expenses or to income. The record gives us no real assistance in determining how much of the expenditures were for replacements and how much represented real extensions, improvements, and new property.

The record does not disclose whether or not the stock or bonds sought are necessary for a proper corporate purpose. The companies may have from the former issue of stock or bonds means with which it may meet all, ór a part at least, of these notes. It does not appear that the company has received the par value of the stock heretofore issued to the firms or members thereof who are now virtually in control of the corporation, and who, in substance, make this application, and it is not clear whether or not other sums are payable by them to the company. It is apparent that, if the present owners of the company are indebted to it for moneys past due' sufficient to pay the notes in question, there is no necessity for an issue of new stock or

I think the commission did not make the inquiry or.the determination contemplated by the statute, and that it was the right of the relator to have its application determined for or against it upon evidence which it has a reasonable opportunity to meet or explain. The property interests and the very life of the relator may depend upon the decision of the commission. The inquiry, so far as may be, should be surrounded with the usual safeguards required in the case of the trial of other questions of fact. The record does not disclose just what information the commission received from its expert, or whether it properly interpreted his conclusions. The relator had the right to hear his evidence and examine him. This case emphasizes the necessity of having the expert sworn as a witness as to facts upon which the commission may base its decisions. Otherwise a court of

It follows from these considerations that the three orders should be annulled and the matter remitted to the commission for further action, without costs.