
    The People of the State of New York ex rel. Bath and Hammondsport Railroad Company, Relator, v. The Public Service Commission of the Second District of the State of New York, Frank W. Stevens and Others, Comprising the Public Service Commission of the Second District of the State of New York, and the Hornell, Bath and Lake Keuka Railway Company Respondents.
    Third Department,
    June 18, 1908.
    Railroad — certificate'of-public convenience and necessity — payment of-percentage of capital stock—erroneous rejection of evidence that payment was fictitious. ■ .
    If ten-per cent of the minimuip-amount of Capital stock óf a railroad applying for a certificate of convenience and necessity has not been subscribed and paid in good faith and in' cash the Public Service Commission should refuse the certificate. - - •••'„■
    A determination granting such certificate Will be annulled where the Public Service Commission excluded evidence .tending to show that the required percentage of capital stock had not been paid in good faith in cash,’but'that the incorporators merely borrowed money from a bank and redeposited it with the understanding that it could not be'withdrawn except to pay the obligation of the borrower: ' .
    Chester and Sewell, JJ., dissented, with.opinion.
    . Certiorari issued out of the Supreme Court and attested on the 14th day of ..September, 1907, directed to the Public Service Com-. mission of the Second District of the'State-of New.York and to the individual members theréof, commanding them to certify and return to the office of the clerk of the county of Albany all and singular the proceedings had by the State Board of Bailroad Commissioners in the matter of the application of the Hornell,’ Bath and Lake Keuka Bail way Company for a certificate of public convenience and.necessity under section 59 of the Bailroad Law (Laws of 1890, chap. 565, added by Laws of 1892, chap. 676, and amd. by Laws of 1895, chap. 545). (See Public Service Commissions Law [Laws’ of 1907, chap. 429], §§ 80, 84-86, 89.) "
    
      Orcutt, Robbins & Brown [Floyd G. Greene of counsel], for the relator.
    
      Milo M. Acker, for the respondents.
   Kellogg, J.:

It is the duty of the Board of Railroad Commissioners to ascertain and determine whether the alleged railroad company is duly incorporated. If the ten per cent of the minimum amount of capital stock has not been subscribed and paid in good faith and in cash, the certificate should be denied. (People ex rel. Erie R. R Co. v. Board R. R. Comrs., 105 App. Div. 273; People ex rel. N. Y. C. & H. R. R. R. Co. v. Pub. Serv. Com., 122 id. 283.)

The only evidence tending to show the payment of such ten per cent is that three of the directors called at the Bank of Steuben in Hornell, one of them produced $50,000 in currency and gold, which was counted by the other two and handed over to the receiving teller of the bank for deposit, for which the teller gave them a bank book giving credit therefor to the three persons “As Directors of the Hornell, Bath and Lake Keuka Bail way Company.” This took place the day before the certificate of incorporation was filed. At the first meeting of the board of directors, a few days afterwards, the president stated that the $50,000, paid in to the directors, had been deposited in the Bank of Steuben to the credit of the three directors, and suggested that it remain there until the by-laws of the company were adopted designating the proper custodian of the funds and defining his duties, whereupon a resolution was passed that the. funds of the company remain on depositas stated by the president until further action is taken by the board regarding the same.

The relator called as a witness the director who produced the money at the bank, and who had subscribed for $20,000 of. stock in the company, and inquired if the company or himself had made any previous arrangements at the bank in relation to the money; also if the company at any previous time, or any of its directors, issued or gave their obligations for the purpose of obtaining the money; also if the money had previously been borrowed by the company from the same bank, which evidence was objected to and excluded. Thereupon counsel stated that the object of the question Was to investigate and ascertain whether there was a payment of ten per cent in good faith, and to ascertain the history of the transaction, whether it was really a paper transaction whereby the company in reality did "not obtain $50,000 without outstanding obligations against it, or whether-it was in fact a payment whereby the treasury of the company became augmented to that extent. And he-then again renewed the first question whether the company, or the. director had made any previous arrangement at the bank in relation to the money, which was excluded. Exceptions were, taken, to all of the rulings excluding this -class of testimony.. .

¡N otwithstanding the fact that $50,000 stood upon the books of the bank "to the credit of the three directors as such, it does not follow that as' between them and the bank, or between the company and the bank, the money so deposited was the unqualified property of.' the railroad company. The relator .sought to show that the. persons in- whose name the deposit was made had incurred an obligation. at the bank for the amount of money which was returned to the bank, or. that , such obligation had .been made in behalf of the ■ company. It is evident- that if this money had been obtained at the Bank- of Steuben by the three directors, with the .understanding. that-it was to be deposited;in their name but was not to be withdrawn until the obligation which the -bank received, for the money- was fully paid, or that the bank might, apply it at any time to the payment of stieh obligation, that as between the-directors and the bank, ■ or the company and the bank, the money was not.the free property^ of the- company but was subject to the obligation to, the batik given therefor. It is not claimed :that the bank had knowledge'or notice that this deposit was to be made to circumvent the law, or for what particular purpose it was made. • Therefore the. bank would not be estopped from claiming that as between it and the directors, or it and the company, the,money should not be' paid for the company until the obligation was paid-upon, which the hank advanced it. We must assume, in determining the materiality of the evidence offered, that the result would have shown that the bank held an obligation of thé directors or company for a- corre-', spending. amount, and that it would have appeared that the money • could not be withdrawn from the bank except to pay the obligation, or .after its payment.'- If such facts could have-beep shown, then the. alleged- payment of the ten per cent was purely a paper transaction and.was not a payment in good faith, in cash. ' It is true that at the time of. the deposit -there-was not in Tact any organized company which could give its note. Beither were there any legal directors of the company. But if an obligation had been given in the name of the company, or in the name of the three directors as such, and the same money deposited to the credit of the three directors or of the company, the bank could hold the money as a legal offset to the obligation, or could charge the obligation against the deposit and thus extinguish the deposit.

Ordinarily the Board of Bailroad Commissioners is not subject to the same rules as to the admission of evidence as applies in a court of justice, and their proceedings should not be vacated for an erroneous ruling in rejecting or receiving evidence except where such evidence might be controlling. But where material and convincing evidence is offered tending to show that the ten per cent has not been paid actually and in good faith in cash, the exclusion of such evidence is error and calls for a reversal of their determination. It in effect held, no matter how the director came into possession of the $50,000, whether it was upon the company’s note or the note of the three directors, that the fact was immaterial so long as the deposit was made in the name of the three directors. If the questions asked had been answered, and the answers were favorable to the relator, as we must assume they would have been for the purpose of determining the materiality of the questions, it might have conclusively appeared that the railroad company had no right to the $50,000 as against the bank, and that as between the company and the bank, or the three directors and the bank, the latter had a perfect defense to it, and that in fact no moneys had been paid in cash for the company. The determination appealed from should, therefore, be annulled, with fifty dollars costs and disbursements to be paid by the respondent railroad company.

All concurred, except Chesteb, J., dissenting in an opinion in which Sewell, J., concurred.

Chester, J. (dissenting):

The evidence clearly sustains the finding of the Board of Bail-road Commissioners that public convenience and a necessity require the construction of the railroad in question, but the prevailing opinion advises that that determination shall be annulled, not on the ground that it is against the weight of evidence, but because the Board of Bailroad. Commissioners erred in the; exclusion óf, certain offered testimony with respect, to whether or not ten per centum of the capital, stock had been paid in good faith to the directors named in the certificate of incorporation. Affixed to such certificate was the affidavit of thrpe directors named in the certificate of incorporation in conformity with the requirements of section 2 of the Bailroad Law (Laws of 1890, chap. 565, as amd. by Laws of 1892, chap. 676) that at least $1,000. of capital stock for each mile of road built or proposed tó be built as stated in the certificate, being at least ten per centum of the minimum amount of capital stock authorized by law, has been ■ subscribed thereto and paid in good faith and in casli to the, directors named;in the. certificate. This affidavit was supplemented on the hearing by testimony showing that on the 23d day of January, 1907, there wás paid to said three directors $50j000 in cash, and the Same was thereupon deposited by them in the Bank of Steuben to their credit as the" directors of said company, whereupon such bank issued to them a pass book showing such deposit and such credit. The 'pass book showing , the credit was put' in evidence. It was shown, that at the time of the. hearing such deposit still remained in. the same form in which it was entered in the pass book, and the minutes of the first meeting, of the board of directors of such: company showed that a resolution was passed requiring said funds to remain on deposit until the, by-laws of the company had been adopted designating, the proper custodian or. custodians of the funds of the. company and defining his or their powers and duties. All this was clear and convincing evidence that the required amount of capital stock had in fact been paid in in good faith and in cash to such directors, and that- they still held it for the company.

The Board of Bailroad Commissioners were not governed by such ■strict rules of law as are the courts in the reception or rejection- of evidence, and it is not- surprising that they ■ Were .convinced by the evidence, both oral and documentary, presented in relation thereto of the good faith of the transaction in ■ question. After being so convinced it was evident that they did' not desire to prolong the examination with respect to it. The testimony which was excluded did not show or tend to show that the' money, in question was not in fact subscribed. It was aimed at finding out from what source the money came, or to prove that the company or some of its directors had incurred some obligation to procure it. Those matters were immaterial so long, as the money had been properly subscribed and deposited to the credit of the directors named in the certificate. The. company could not incur an indebtedness. Nor was it important to show that the directors as individuals had incurred some obligations in procuring the money, for if they had, it was their personal obligation, and was not the debt of the company, for the company had not yet been fully organized so that it could exercise its corporate powers, and could not, therefore, incur any indebtedness. Neither could these moneys so deposited be applied to any other uses or purposes than to the uses and purposes of the company when the time came when it could exercise its corporate powers. ' If the individual incorporators misapplied these, funds they would be guilty of a breach of trust, and would be individually liable therefor. I think, therefore* the ruling of the Board of Railroad Commissioners in excluding the testimony was , correct. But, even if such exclusion should be held to be technical error, I do not think, with the clear and convincing testimony of good faith presented, that it should be. regarded as"reversible error which should result in the annulment of the certificate in question.

I, therefore, advise the affirmance of the determination, ■ with fifty dollars costs and disbursements.

Sewell, J., concurred.

Determination annulled,, with fifty dollars costs and disburse^ ments, to be paid by the respondent, the Homell, Bath and Lake Keuka Railway Company, to the relator.  