Laird v. Baltimore & Ohio Railroad

Under date of January 9th, 1913, the Baltimore and Ohio Railroad Company issued a circular letter to its stockholders. From this it appeared that the company proposed to issue as of March 1st, 1913, $63,250,000 gold bonds of the company, which were to run for twenty years from their date of issue and to bear interest at the rate of four and one-half per cent. per annum. The circular further stated that these bonds so to be issued were to be convertible into common stock of the company on the basis of $110 per share at any time prior to February 28th, 1923, and that thereafter by giving ninety days previous notice, the company should be entitled to redeem the bonds on any interest date at 102 1/2 per cent. While the circular letter was not explicit as to the property which was to be pledged by way of mortgage to secure the proposed issue, by inference it was to cover the main lines upon which there had been issued what was termed its prior lien mortgage, the Pittsburg Junction and Middle Division, the Southwestern Division, the Pittsburg, Lake Erie West Virginia System, and all of the lines of railroad owned by any company and the stock of which is pledged or assigned under any of the mortgages already placed upon any of the above named divisions.

The bonds which the company thus proposed to issue were offered to the stockholders at 95 1/2 and accrued interest. Prior to the issue of this circular letter no application had been made to the Public Service Commission of the State for *Page 183 its order authorizing and approving of this issue. Accordingly on February 19th, 1913, the Public Service Commission of this State, acting under the provisions of section 28 of the Public Service Act (Acts 1910, Ch. 180, p. 338), filed a bill in the Circuit Court No. 2 of Baltimore City, praying for an injunction restraining the railroad company from issuing the proposed bonds, or any of them "until such time as there shall have been secured from the Public Service Commission an order authorizing such issue." Two days after the bill was filed the railroad company answered fully, setting up the various provisions of its charter; denying that it was a corporation subject to the provisions of the Public Service Commission Act; setting out the act of the Legislature of Virginia of 1827 confirming the act of incorporation passed by the General Assembly of this State; averring that it owned and operated 281 miles of railroad in this State, 996 in the State of West Virginia, and through the other lines forming its system and extending through a number of States, a total mileage of 4450. The answer further sets out, that the issue of the bonds was necessary for the acquisition of property, the construction, completion, extension, improvement and maintenance of its facilities and its service and the discharge and lawful refunding of its obligations, that the balance of the moneys raised by the said issue of bonds, after the refunding of such obligations as were to be refunded, was to be expended largely in West Virginia.

This answer was sworn to, and the case was heard in the first instance upon the bill, answer and exhibits. The case thus presents two questions for consideration: First whether the Baltimore and Ohio Railroad Company is subject in any respect to the jurisdiction of the Public Service Commission of Maryland; and secondly, if it is, how far does that jurisdiction extend? It is not attempted to be denied that both before and after the passage of the Public Service Commission Act in 1910, the company was subject to the police power of the State. This might be, as was the case prior to 1910, exercised *Page 184 directly by the State, and in so far as the exercise of those powers was by the Act conferred upon the Public Service Commission, might be exercised by it.

Many of the cases cited in the brief filed on behalf of the Commission, and especially those from Massachusetts, illustrate this aspect of the case. In addition to this power derived from the police power of the State, the Commission has conferred on it in the interest of the general public, certain other powers in connection with the conduct of public service corporations doing business within the State. These will be found collected in section 3 of the Act, and so far as this case is concerned, must come under one of the following enumerations: "(1) To railroads and street railroads lying within this State, and to the person or corporation, owning, leasing, operating or controlling the same. (3) To such portions of the lines of any other railroad as lie within this State, and to the person or corporation owning, leasing, operating and controlling the same, so far as concerns the construction, maintenance, equipment, terminal facilities and local transportation facilities and local transportation of persons or property within the State.

(4) To any common carrier operating or doing business within the State." Through all of these runs the same fundamental idea, that the power and control of the Commission exists as to matters of service, transportation and rates within the State, and full power over that is expressly given to the Commission. This necessarily includes many matters which are not the subject-matter of an exercise of the police power. Thus questions of traffic or fares, or the adequacy or inadequacy of service, or facilities with regard to business conducted wholly within the State, may properly come within the jurisdiction of the Commission. In this connection the three opinions by the late CHIEF JUSTICE WAITE in the cases of the C.B. Q . v. Iowa, 94 U.S. 155 ; Peik v. Chicago N.W.R.R., 94 U.S. 164 , and the C., M. St. P . v. Ackley, 94 U.S. 179 , are directly in point.

In the first case the C., B. Q.R.R. was operating, as lessee, the Missouri River Railroad Company, *Page 185 which latter was operated solely within the State of Iowa. The Legislature of Iowa passed an Act establishing a maximum rate for railroads in that State. The decision held that the statute was applicable to that portion of the C., B. Q.R.R. located in Iowa, upon the principle enunciated in Munn v. Illinois, which dealt with the rates to be charged for storage of grain in a warehouse situate in Illinois. And it is the same doctrine which is involved in the two other cases cited.

It, therefore, follows, that the Baltimore and Ohio Railroad Company is subject to the jurisdiction of the Public Service Commission of this State, both in respect to those matters which, coming under the police power of the State have been confided to the Commission, and to business conducted wholly within this State. The present bill of complaint claims for the Commission a far wider jurisdiction. By reason of the location of the home office of the company in Maryland, it claims to possess a right to control the expenditure of moneys, the creating and issue of evidence of indebtedness, the prices at which such bonds or debentures shall be marketed, the necessity and expediency of the creation of the indebtedness, in general to direct the entire physical and fiscal policy of one of the great common carriers of this country, over its entire system of 4450 miles of railroad, of which but 281 are within this State and 4169 located without the State, and one of which other States, West Virginia, might with equal propriety by reason of the confirmatory act of Virginia of 1827 and the far greater amount of mileage in that State, make a similar claim. The statement of the claim, taken with the terms of the Act of 1910 would seem to afford a conclusive answer to the proposition.

When the Act is carefully limited by its very terms to operations within this State, any line of reasoning which aims to extend it beyond, is alike in flat contradiction of the Act and entirely beyond the power of the State to adopt. The Commission makes this extraordinary claim of power under the following provisions of Section 27 of the act: *Page 186 "Sec. 27. And be it further enacted, That a common carrier, railroad corporation, street railroad corporation, or other corporation subject to the provisions of this Act, organized or existing, or hereafter incorporated, under and by virtue of the laws of the State of Maryland, 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 facilities, or for the improvement or maintenance of its service, or the discharge or lawful refunding of its obligations; provided, and not otherwise, that there shall have been secured from the commission an order authorizing such issue, and the amount thereof, and stating that, in the opinion of the commission, the use of the capital to be secured by the issue of such stocks, bonds or other evidence of indebtedness is reasonably required for the said purposes of the common carrier, railroad corporation, street railroad corporation, or such corporations, but this provision shall not apply to any lawful issue of stock, to the lawful execution and delivery of any mortgage, or to the lawful issue of bonds thereunder, before the time when this Act becomes a law. For the purpose of enabling it to determine whether it should issue such an order the commission shall make such inquiry or investigation, hold such hearings, and examine such witnesses, books, papers, documents or contracts, as it may deem of importance in enabling it to reach a determination.

Such common carrier may issue notes for proper corporate purposes, and not in violation of any provision of this or any other Act, payable at periods of not more than twelve months, without such consent, but no such notes shall, in whole or in part, directly or indirectly, be refunded by any issue of stock or bonds, or by any evidence of indebtedness running for more than twelve months, without the consent of the commission." *Page 187 This section is almost a verbatim copy of section 55 of the similar act passed in New York, to regulate public service corporations. It was given its fullest effect and scope in the case of the Binghampton L.H. P. Co . v. Stevens, 203 N.Y. 7 , where all of the property to be affected by the proposed bond issue, and the expenditure of the money so raised, and the conduct of the business of the corporation were all within the State of New York, yet even there it was said, "the discretion of a Public Service Commission cannot override the discretion of the officers of a corporation in the management of its affairs or the provisions of the statute in which securities are permitted to be issued." The evils which this section was intended to correct are perfectly well recognized and understood. That issues of stocks and bonds have been made fraudulently and palmed off on a credulous public to their ultimate serious loss is a matter of common knowledge. Facts in relation to such issues, especially with regard to local public utilities have been difficult, if not impossible to obtain, leaving it to the stimulated imagination of some broker or syndicate who, actuated by a heavy commission to be realized by creating a market until such stock or bonds could be unloaded, have reaped a reward in dollars and cents at the cost of those who were induced to give full faith and credit to their representations.

The Legislatures of many States have therefore through the media of Public Service Commissions seen fit to establish a quasi guardianship over prospective investors. It is of course true that in such a condition many legitimate enterprises should come under the same sort of suspicion which attaches to the more hazardous schemes, devised and carried on for the