Warren v. Fitzgerald

Markell, J., delivered the opinion of the Court. This is a stockholders’ suit to enjoin The Baltimore Transit Company from abandoning almost 50 per cent of its track mileage and substituting for trolley cars motor buses, to be owned by a wholly owned subsidiary, The Baltimore Coach Company, “without having first obtained the authority or approval” of its stockholders. Plaintiffs own 1275 shares of common stock (out of 169,142.61 outstanding) and 100 shares (out of 233,-427.2325) of preferred stock. The bill prays that the company be enjoined from (a) “pursuing the aforesaid illegal and fraudulent plans of ‘conversion,’ whereby the property and assets of said Company are being transferred to The Baltimore Coach Company * * * and many millions of dollars worth of trolley car equipment is to be abandoned” or (5) “changing* the corporate function of said Company, from that of a local operating-street railway company to a mere holding company, without having first obtained the authority or approval of the stockholders of said Company, as by law required.” From a decree dismissing the bill plaintiffs appeal.

As appears from the bill, testimony and the opinion below, the case was originally based largely upon charges of fraud on the part of Transit Company’s directors. The charges of fraud involved alleged “domination” of Transit Company by National City Lines, Inc., a “holding corporation” which owns almost 30 per cent of the preferred and common stock of Transit Company and also owns stock of local transportation companies in many other cities, and alleged contractual and financial relations between National, “its local operating com ⁴⁸¹ pañíes” and certain “supplier corporations” whereby National was furnished “money and capital” by the “supplier corporations,” used this “money and capital” to secure control of, or financial interest in, “local transit systems” and purchased and caused its “operating companies” to purchase “tires, tubes, petroleum products and buses” from the “supplier corporations.” This mention of the charges of fraud need not be elaborated or made more definite or even more accurate. At the argument appellants stated that the charges of fraud had not been proved and were abandoned. No question of fraud, actual or constructive, is stated in appellants’ brief.

The only questions argued orally or in the brief were whether the “conversion from trolley cars to motor buses” and from an “operating Company” to a “holding company” is ultra vires of the corporation or its directors. Alleged acts, omissions, opinions, knowledge or lack of knowledge of directors may be considered only in so far as they may relate to questions of power, apart from any question of fraud. We may add that no evidence has come to our notice which indicates fraud on the part of any of the directors, either National’s “representatives” or Baltimore directors not interested in National. Several of the latter have been directors ever since 1935; one or more of them had then been nominated by Judge Coleman, as “representative” of “the interests of the owners of the property and the public as a whole,” and selected from his nominations as voting trustees in the reorganization under section 77B of the Bankruptcy Act, 11 U. S. C. A. Sec. 207, In re United Railways & Electric Co. of Baltimore’s Reorganization, D. C. 11 F. Supp. 717, 718, 723 .

For the purposes of this case it is not necessary to detail the history of Transit Company and its predecessors from 1859 to date or its past and present transportation problems. Much of that history and those problems is written at length in the opinions and records of this court and in the law reports of other jurisdictions. Present transportation and traffic problems are matters ⁴⁸² of common (but not expert or informed) acquaintance. To a large extent it will suffice to state appellants’ contentions as to the facts and assume (without deciding) that they are true.

Transit Company, which was reorganized under the Bankruptcy Act and renamed in 1935, was originally incorporated under the name “The United Railways and Electric Company of Baltimore” by consolidation in 1899. By that consolidation and previous consolidations and transfers (under statutory authority) it succeeded to the charter powers of upwards of thirty former “street railway” corporations. Until 1890 its predecessors operated only horse cars. One of its constitutent corporations, The Baltimore City Passenger Railway Company, was incorporated by Chapter 71 of the Acts of 1861 and was empowered “to lay down and construct, and to use and operate, Passenger Railways” in the streets of Baltimore.

By Chapter 271 of the Acts of 1890 its charter was amended and it was empowered “to use upon any or all of its railway tracks in the city of Baltimore and upon any suburban railways of the said company, any cable system or other system of propulsion by means of stationery engines, any pneumatic motors, stored electricity motors and any motive power and means of traction which the mayor and city council of Baltimore may sanction, or which shall be authorized to be made use of in the city of Baltimore by any other corporation exercising street railway franchises therein.” Another constituent corporation, Electric Light and Railway Corppany of Baltimore County, was incorporated by Chapter 477 of the Acts of 1892 and was empowered to establish and operate “lines of electric railway” in Baltimore County. By Chapter 337 of the Acts of 1896 its charter was amended, its name changed to “The Baltimore and Northern Electric Railway Company,” and it was given the right “to lay down, construct, maintain and operate a single or double track railway” upon such streets of Baltimore as should be approved by the City, “with the right to use as a means of traction for its ⁴⁸³ said cars, electricity, cable, compressed air or other improved motive power (excepting steam)”. About 1890 the use of cable cars was begun and before 1899 horse cars (and later cable cars) were superseded by electric trolley cars. In 1915 operation of motor buses was begun by Transit Company through wholly owned subsidiaries, which in 1926 were consolidated to form The Baltimore Coach Company.

Through Coach Company, Transit Company also operated one short trackless trolley line. In the 1935 reorganization Judge Coleman had power and responsibility (which in a stockholders’ suit we have not) to consider operating problems to determine whether the plan of reorganization was “feasible”. For this purpose he appointed as special master a traffic expert, Charles W. Chase, who submitted a full report of a “Consolidated Rail, Trackless Trolley and Motor Coach Program” and related subjects. Judge Coleman expressed his belief “that the plan which the special master embodies in the report indicates a very feasible manner, if not indeed the most feasible manner, in which the imperative rehabilitation and modernization of the company’s service can be accomplished”.

In re United Railways & Electric Co. of Baltimore’s Reorganization, supra, 11 F. Supp. 723 . He also mentioned that in the report it was proposed “that rail operation be restricted as far as possible to the heaviest traffic lines and to those portions of such lines where the traffic is most dense * * *; and that, where practicable in the future, trackless trolley or bus service be substituted for all outlying portions of rail routes” . Supra, 11 F. Supp. 725 . From 1935 until 1940 bus lines or trackless trolleys were substituted for a number of rail routes and some new bus lines were established.

During the War further “conversion” from trolley cars to buses was forbidden; diminution of automobile competition and influx of war workers strained the facilities but greatly increased the earnings of Transit Company and transportation companies in other industrial cities. ⁴⁸⁴ At the end of the War, when restrictions on construction and operation of buses were removed, Transit Company says it began planning to meet present and future traffic problems and to mitigate future shrinkage of earnings when automobile competition is fully restored. After consideration, and consultation with independent experts, the result is the present proposed plan of “conversion from trolley cars to motor buses.” On October 9, 1946, the Public Service Commission “presently disapproved” the plan as to almost half of the proposed abandonment of track mileage (about 21 per cent out of 46 per cent) and approved the remainder of the plan by an order authorizing abandonment of electric railway service over specified lines (Code, Art. 23, sec. 389) and operation of motor bus lines over specified routes in substitution therefor, granting a permit to operate such motor vehicles (Art. 56, sec. 304; see also Art. 23, sec. 388), and directing Transit Company promptly to submit to the Commission recommendations with respect to changes in its accounting procedure appropriate “to provide for losses to be sustained in the abandonments which will result from the conversion of its street railway lines to motor bus operation.” Such recommendations as to accounting changes have not yet been submitted. The plan of conversion from trolley cars to motor buses has already been carried out to the extent of removal of cars and substitution of buses on Charles, St. Paul and Calvert Streets. Plaintiffs say: The undepreciated book value of the electric railway property proposed to be abandoned (including the part just abandoned and also the part of the plan “presently disapproved” by the Public Service Commission) is about $24,000,000, about 38 per cent of such book value ($62,000,000) of the entire electric railway system.

If reserves for depreciation and retirement and for obsolete property were prorated and deducted, the book value less such deductions would be $18,000,000. New buses and garages and other buildings and equipment, which would cost $12,000,000, would be ⁴⁸⁵ acquired by Coach Company on the credit of Transit Company and on the security of the buses themselves. By such “conversion” 37 per cent of the (gross) revenues of Transit Company would be “transferred” to Coach Company. Just how these bus purchases are to be financed has not yet been decided.

Previous purchases have been financed 20 per cent out of Transit Company’s own funds, 80 per cent (to the extent of $2,600,000) by banks on equipment trust certificates or analogous notes secured by chattel mortgages. (See Machen on Corporations, sec. 1912. Cf. Code, Art. 21 sec. 109, Acts of 1882, ch. 215.

Whether in this statute “railroad” includes street railway, and how far, if at all, the statute is more than declaratory of previous law, are questions on which we intimate no opinion.) Plaintiffs contend (1) that Transit Company’s directors cannot abandon $24,000,000 of street railway assets, and in lieu thereof purchase, on its own credit, to be owned by Coach Company, $12,000,000 of motor buses and equipment, without approval of its stockholders; and (2) “incidental” to the first contention, that Transit Company’s charter power is limited to the operation of a street railway and does not include power to purchase and operate motor buses. We shall consider these contentions in inverse order. At the hearing below the City of Baltimore intervened, as a party defendant, to advocate the proposed “conversion”. The City’s intervention cannot change Transit Company’s charter, as a contract between stockholders, or subtract anything from plaintiffs’ contract rights.

Nor does the Public Service Commission’s approval change the charter, as a contract between stockholders or as a contract (subject to the reserved power of amendment) between the corporation and the State. The action of the City and the approval of the Commission, and express statutory provision for permits to operate motor vehicles, “in substitution for the whole or any part of an electric trolley car franchise”, on application of a company, or a subsidiary of a company, “engaged ⁴⁸⁶ in furnishing mass transportation in any incorporated municipality” by electric trolley cars and operating motor vehicles “in connection with or as a service supplementary to a service by trolley cars,” Art. 56, sec. 304, are nevertheless reminders that we are now construing a contract between stockholders, not a grant by the sovereign which must be strictly construed. There is a verbal plausibility in the contention that a street railway corporation has no power to operate without rails. The short answer is that the contention is narrowly verbal and also ignores material words.

Power and right to lay rails in the streets was indeed, in 1859 and since, an important grant by the sovereign. It was, however, a grant of a privilege, as a means to an end, not a restriction upon other corporate powers or upon progress. Transit Company has power to use “any motive power and means of traction” sanctioned by the City or any “improved motive power (excepting steam)”. Transportation is the end, rails and motive power are means.

When new motive power makes rails unnecessary, power to furnish transportation is not lost. If there had been any doubt on this score Transit Company’s charter could have been amended at any time from 1935 to 1945 by the voting trustees (who were also directors), who held 100 per cent of the preferred and common stock. . Art. 23, secs. 28, 29; Brown v.