
    The People of the State of New York, Plaintiff, v. The New York Central and Hudson River Railroad Company, Defendant.
    Third Department,
    May 4, 1910.
    Public Service Commission — railroad—permission to issue securities — agreement evading law—penalty.
    Five railroad corporations, forming a single system, desiring to issue securities without obtaining the consent of the Public Service Commission, entered into an agreement with four individuals, vice-presidents of the five railroads, parties of the first part, and a trust company, which, afteryeciting that the railroads desired more equipment and deemed it expedient tp obtain the same through the medium of an equipment trust, provided that the parties of the first part should sell to the trust company the necessary equipment; that ten per cent of the purchase price should be paid at once by the railroads and the remainder in certificates known as “New York Central Lines Equipment Trust Certificates of 1907.’’ It was further provided that the trust company having the legal title should then rent the equipment to the railroads upon their agreement to pay as rental the costs of the trusts, all taxes, assessments, licenses and dues, the dividend warrants attached to the certificates, and an annual sum sufficient to retire each year a part of the issue, all of which rental the trust company covenanted to apply to its proper purposes. It was further provided that the trust company should in no event be liable on the certificates and that in case of default the holders could proceed at once against the railroads. The certificates were delivered to the parties of the first part, who sold them and with the proceeds purchased the necessary equipment.
    
      Beld, that the certificates were in the nature of stock, bonds, etc., within the meaning of section 65 of the Public Service Commissions Law and that the railroads, having issued them without the permission of the Commission, are liable for the penalty prescribed by section 56.
    The certificates were in effect the obligations of the railroad companies, which . should not be allowed to accomplish through a fiscal agent what they were forbidden to do directly.
    The object of section 55 of the Public Service Commissions Law. is to protect the public and, perhaps, stockholders of corporations, from an issue of securities which represent useless and unnecessary expenditure.
    Submission of a controversy upon an agreed statement of facts, pursuant to section 1279 of the Code of Civil Procedure.
    
      Ledyard P. Hale, for the plaintiff.
    
      Albert II. Harris, for the defendant.
   Smith, P. J.:

This controversy involves the right of the plaintiff to recover against the defendant a penalty under section 56 of the Public Service Commissions Law (Láws of 1907, chap. 429). ' By that section any common carrier subjects itself to a penalty not to exceed the sum of $5,000 for a violation of any of the requirements of the Public Service Commissions Law.

Defendant is charged with the violation of the provisions of section 55 of that law.' That section, so far as material to this controversy, reads as follows: “ A common carriel’, railroad corporation or street railroad 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 facilities, or for the improvement or maintenance of its service or for the discharge or lawful refunding, of its obligations,' provided and not otherwise that there shall have been secured from the proper commission an order a'uthorizingsuch 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 stock, bonds, notes or other evidence of indebtedness is reasonably required for the said purposes of the corporation * •* *.”

In 1907'the defendant, with its allied companies, required for its .'service rolling, stock of the value of "about $30,000,000. This sum it was desired to pay in installments, running over a period of fib teen years-.. To issue bonds or notes would confessedly have required the consent of the Public Service Commission under the provision of law above quoted.' The money, however, was raised in a different way. An agreement was entered into between four-persons, who were the vice-presidents of five.railway companies, calling themselves in combination “ The New York Central Lines,” as parties of the first part, the Guaranty Trust Company of New York, called the trustee, as party of the second; part, and the said five railway companies as parties of the third part. The agreement recited that these railroad companies desired equipment additions and deemed it expedient to make provision therefor through the medium of an equipment trust. It was then agreed on behalf of the parties of the first part that they would sell to the Guaranty Trust Company such rolling stock or equipment as should be requested by the presidents of the several railroad companies, parties of the third part. Ten per cent of the purchase price of said rolling stock was to be paid at once by the said railroad companies. The remaining ninety per cent was to be paid to said vendors by the delivery to them of equipment certificates to be known as the “ New York Central Lines Equipment Trust Certificates of 1907.” The Guaranty Trust Company then with legal title to this rolling stock rented the same to the several companies parties of the, third part, upon the agreement of the companies to pay in rental therefor: “ (1) The cost of administering its trust under this trust agreement, the expense incurred by it under the leases made pursuant hereto, and proper compensation for its services under said agreement and leases. (2) All taxes, assessments, licenses and dues, Federal, • State and municipal, which may be levied upon or assessed against the equipment covered by the lease or against the trustee on account thereof. (3) The amount of the dividend warrants belonging to the certificates representing the cost of the equipment covered by the lease as such warrants severally fall due ; and (4) An annual sum equal to one-fifteenth (1/15) of the principal of said certificates issued on account of the equipment covered by said lease.” The trustee thereupon covenanted to apply the rentals so by it to be received to the payment of said expenses, taxes, dividend warrants and certificates as .they shall respectively fall due. It was further provided that the trustee should in no event be liable upon these certificates. Provision was made -in case of default that the trustee should pro-' ceed to collect the said rentals in behalf of the certificate holders, and should, if necessary, enforce any lien that it might hold upon-said equipment by reason of the title thereto reserved in itself upon the giving of the leases, as security for the payment of these trust certificates. The railroad company indemnify the vendors against all expenses. These trust certificates were so drawn as to entitle the holder to so many shares of one thousand dollars each in the New York Central Lines Equipment Trust of 1907, payable in gold coin upon a date certain, and also to the dividends thereon, payable semi-annually on the first days of May and November ot each year, in gold coin, at the rate of five per cent per annum, as evidenced by the' dividend warrants attached. These payments were to be made only from and out of rentals received under the aforesaid lease, ’ ■

• These trust certificates to the- extent of ninety per cent of the purchase price of this equipment, and not exceeding in the aggregate $30,000,000,- were delivered to the vendors by the Guaranty Trust Company, and by them placed upon the market and sold to the public, and the proceeds used in payment of the- -purchase price of this equipment, the title to which had been given by the said vendors to the Guaranty Trust Company.

The contention of the defendant is that no bonds, notes or other evidences of indebtedness within the terms of section 55 of the Public' Service Commissions Law have been issued by the companies, but simply a contract of lease, and that the trust certificates were not the obligations of the companies, but were the obligations of the Guaranty Trust Company, the issuance of which required no permission from the Public Service Commission. I agree that -the words “.other evidence of indebtedness,” as-stated "in the statute, refer to obligations of like character with, stock, bonds and notes, and that a lease as such is not included therein. But these trust certificates are in their nature securities of like nature to stock, bonds and notes, and if under the agreements they are to be deemed the obligations of these railroad companies, their issuance without the permission, of the Public Service Commission is in vio-, lation of law, and subjects the defendant and the other- railroad companies to the penalty prescribed in section 56 of said law. In the trust' certificates themselves it is provided that neither the certificate nor dividend warrants pertaining thereto should be deemed in anywise the -obligation or promise to pay of the trustee. No party is liable to pay those certificates except the railroad companies-themselves. They have not' promised to pay directly, but through the medium of the trustee, to which they pay the amounts due thereupon under the name of rentals, under-a covenant that the trustee shall pay the same to the holders of these certificates. It would séem clear, therefore, that these trust certificates were the obligations of these companies and their obligations alone. If in case of default the trustee failed under the conditions of this agree-meat to collect these moneys, the. certificate holders are themselves authorized to bring action for such purpose; Such protection is vouchsafed to them by the law itself, as well as recognized specifically in the agreements made. To hold that by this device the railroad companies might escape the requirement of the approval of such securities by the Public Service Commission would be to annul the force of the statute. The' defendant cannot accomplish by indirection through a fiscal agent what it has been forbidden by the statute to do directly.

It is of small assistance to refer to authorities in the determination of this issue. , Other cases arising under other statutes differ so materially in the questions presented as to throw little light upon the controversy here. The object of this statute seems to be to protect the public and, perhaps, the stockholders of the corporations from the flotation of securities which are bought and sold in the open market which represent useless and unnecessary expenditure.' The purchasers of these trust certificates are in need of the protection of the statute in the samé degree as would be the purchasers of bonds and notes of the corporation. They have no more additional security than they would have in the purchase of such bonds and notes, and in the ultimate analysis they; have exactly the same obligation to be paid through a trustee instead of directly by the railroad companies.

As this controversy is submitted for the purpose of obtaining a construction of this law, the plaintiff’s counsel asks only for a nominal penalty. I advise judgment against this defendant for the sum of $100, with costs. '

All concurred.

Judgment ordered against defendant for Sum of $100, with costs;  