
    RAILWAY RENDERED A COMPETITIVE LINE BY VIRTUE OF ITS CONNECTIONS.
    Circuit Court of Franklin County.
    State, ex rel Attorney-General, v. The Hocking Valley Railway Co.
    
    Decided, July 21, 1909.
    
      Monopoly and Discrimination in Railroad Rates — Arising from a-Joint Guaranty by Competing Railway Companies of Coal Company Bonds —Such a Transaction not in the Nature of a Tonnage Contract, When — Test as to Whether Railway Lines are Competing — One Line in Competition with Another by Virtue of Its Connections, When — Doubts as to the Powers Granted under Corporate Franchises Resolved in Favor of the State — Decision,p of the United States Supreme Court not Controlling on the State Courts, When.
    
    1. Where a court is called upon to construe a corporate franchise at the suit of the state granting it, all doubt will be resolved in favor of the state and against the grantee.
    2. An Ohio court is bound to follow the decisions of the courts of this state, as distinguished from those of the United States Supreme Court, where only state statutes and policies are involved and no federal question arises.
    3. The guaranty of the bonds of a coal company by a railway company can not be construed as a tonnage contract, but is in the nature of monopoly and leads to discrimination where under a permissive clause a competing railway company is brought in to share the guaranty on condition of an equal division of the traffic arising from the mines of the company issuing the bonds; and where such a guaranty exists, it is an unlawful exercise of power, i
    4. The state is not bound by the fact that the contracting parties to an illegal agreement are satisfied therewith, but may inquire whether others and especially the. public at large are prejudiced thereby.
    5. The Kanawha & Michigan railway is by virtue of its connections a competing railway with the Hocking Valley in the broad and practical sense, and the acquirement by the Hocking Valley Railway Company of a majority of the stock of the Kanawha & Michigan was illegal.
    
      
      U. G. Denman, Attorney-General; Smith W. Bennett, E. C. Morion and Freeman T. Eagleson, for plaintiff.
    
      James H. Hoyt, Doyle, Lewis & Shauffelberger and C. O. Hunter, contra.
    Allread, J.; Sullivan, J., and Dustin, J., concur.
    
      
       For previous opinion in the same case, see ante, p. 49.
    
   Upon application of counsel for the railway company a rehearing has been allowed upon two propositions, viz., the discontinuance of the guarantee of the coal companies, and the competing character of the K. & M. Railway Company.

The propositions involved in the rehearing have been argued with great earnestness and ability by the respective counsel, both orally and by supplemental briefs.

These questions were somewhat overshadowed in the former decision, by the main question of the right of the railway company to hold the stock of the subsidiary coal companies, and the court has therefore reviewed and considered these propositions anew, in view of their importance and in the light of the present argument.

The “commodities clause” decision, which was announced by the Supreme Court of the United States, pending this rehearing, has been cited for its bearing upon the question of the bond guaranty, and has been considered by the court upon the main question of stock ownership in the coal companies.

The court is of opinion that the ‘ ‘ commodities clause ’ ’ ease involved the application of different principles and may, therefore, be distinguished from the ease at bar.

The railway companies there, had the charter power, expressly granted and held valid by the state, to hold the coal company stocks, and the act of Congress was in derogation of the power so granted by the state. In view of its conflict with the rights granted and held valid by the state, and of defeated amendments during the passage of .the act expressly forbidding stock ownership in subsidiary companies, the court applied a strict construction of the “commodities clause,” so as to avoid grave constitutional questions and preserve as far as possible the state charter.

In the case at bar the state denies the power, and the court is called upon to construe the charter at the suit of the state granting it. The uniform rule of construction in cases of this kind is to resolve all doubt in favor of the state and against the grantee.

This is the uniform trend of the Ohio cases. Taft, J., in Humboldt Mining Co. v. Milling Co., 62 Fed., 356, 361, says:

“There'is no court in the country which has been stricter in enforcing the principle that corporations are prohibited from exercising any powers, which are not expressly conferred upon them in their charters, or which are not fairly incidental to the express objects of their creation, than the Supreme Court of Ohio.”

The doctrine is aptly stated by Mr. Justice Brewer, sitting in circuit in the case of Chicago, etc., Ry. Co. v. Union Pac. Ry. Co, 47 Fed., 22:

“All grants, even grants of corporate franchises,- are construed strongly in favor of the government, and against • the grantee. So when the state challenges the action of one of its corporate creatures, it may insist on clear warrant for such action.”

We think the distinction between the principles applicable here, and those of the “commodities” case clearly warranted. But even if the “commodities” case be in conflict and incapable of reconciliation, 'the court is bound to follow the decisions of our own state, where as in this ease no federal question arises, and where only state statutes and policies are involved.

In this connection the case of Stockton, Atty.-Genl., v. Central Railroad Co., 50 N. J. Eq., 52, may be cited as strikingly similar to the case at bar. The claim was there made, as here, that the ownership of a majority of the capital stock of the coal companies by a railway company did not vest, the railway company with the ownership or control of the coal companies, and the claim was characterized by the chancellor as a “disguise and evasion. ’ ’ And as to the monopoly formed by the union of the coal and railway companies, said:

“ The commodity in which these three companies deal is a necessary of life in this state. It is the principal fuel of its homes and factories. The slightest increase in its price is felt by a population of hundreds of thousands of persons, for their necessity compels them to pay that increase. If once a complete monopoly is established by the destruction of competition, whether that be through lease or by co-operation, the promoters of it and sharers of it may have whatever prices their cupidity suggests. The disaster which will follow can not be measured. It will permeate the entire community, furnaces, forges, factories and homes, leaving in its trail murmurings of. discontent with a government which will tolerate it and all the evil effects of oppression.”

It is urged by the counsel for the railway company that the guaranty of the bonds of the coal companies, and the contract between the railway company and the Continental Coal Company for the equal division of the shipments, is a proper and authorized method of obtaining business and therefore within the charter of the railway company as an implied and incidental power. .

Tonnage contracts, as such and without other features, have been generally if not universally upheld. The following eases to that effect are cited by counsel for the railway company: Ry. Co. v. Furnace Co., 37 O. S., 321; Interstate Commerce Commission v. Ry. Co., 209 U. S., 108; Ry. Co. v. Hooper, 160 U. S., 514; Bald Eagle Valley Railroad Co. v. Nitteny Valley Railroad Co., 171 Pa. State, 284; Lough v. Outerbridge, 143 N. Y., 271; Temple Street Cable Ry. Co. v. Helman, 103 Cal., 634; Old Colony Railroad Corporation v. Evans, 6 Gray, Francis Mass., 25.

In Railroad Co. v. Furnace Co., supra, the question of discrimination was eliminated by the finding of the jury in the trial court, and the contract was upheld as a tonnage contract. The question of public policy and the rights of the public were not involved in the case as presented in the Supreme Court.

In the case of Interstate Commerce Commission v. Railway Co., supra, the decision was based upon the finding that the rate in question had been fixed upon actual genuine competition and in good faith. The question raised by the Interstate Commission was whether it was proper to fix a different rate for live stock than upon packed beef. And upon the finding as to competition it was held that-a different rate ip. a different elass did not affect the validity of the rate so fixed upon actual competition in the same class. In none of the other eases cited does the question of public policy arise.

Now is the contract for the guaranty of the coal company bonds, and the equal division of the shipments of the Continental Coal Company merely a tonnage contract?

In one view it may be said that the guaranty of the bonds was to enable the coal company to obtain more money, to buy more •mines and ship more coal. But in a broader sense and in the view evidently adopted by the railway company the underlying and dominant feature was the control of the coal production and transportation and the ultimate restriction of competition. This was the declared purpose of the promoters of the re-organization and the evident result.

The written contract of the Continental Coal Company was first made with the Toledo .& Ohio Central Railway’ Company. This contract standing alone, might, with some plausibility, be said to be one of tonnage. But under a permissive clause of that contract, the Hocking Valley, a competing company, is brought in by a contract between that company and the Toledo & Ohio Central Company providing for a joint guaranty of the bonds of the Continental Company and an e*qual division of the traffic.

We do not see how the conclusion can be escaped that such an agreement between naturally competing railway companies tends to monopoly and leads to discrimination. The vice of illegality taints and vitiates the contract and renders the transaction void as against the state. The charter of the defendant was granted and extraordinary powers conferred for the public good and it should not, therefore, be used to accomplish an unlawful purpose.

It is contended that all public’purposes are accomplished by forbidding the stock holding, and that it is not necessary nor competent to terminate the bond guaranty which has been executed and is outstanding.

This question has given the court a great deal of trouble. But our conclusion is, that the guaranty being an unlawful exercise of power, and that a complete separation of interest and identity can not be had while the guaranty exists and the railway company remains interested in the financial operation of the coal company and while the coal, company’s stock is pledged with the fiscal agents of the railway company, the state has the right -to have the whole relationship severed. It is no defense to the railway company to plead'the rights of third parties, nor that the illegal act has been executed.

The court agrees with counsel, that it has no jurisdiction to determine in this action the rights of the bondholders. The suggestion in the original opinion as to the validity of the bonds as against the property of the railway company was employed in an effort to distinguish the decision by Lurton, J., in the Hocking Valley case, reported in 87 Fed., 815, from the case at bar. It is clear to the court that the rights of the bondholders can only be determined when an appropriate suit is brought, wherein they are made parties. Whether, therefore, the bondholders can exact of the railway company the full amount with interest to maturity, or whether the vice of ultra vires affects the validity of the bond, is not now for decision. But as against the railway company, the state has the right to call upon the defendant, as an alternative to save its charter, that it purge itself of the illegal act.

It is also urged that the portion of the contract providing for an equal division of the tonnage of the Continental Company, is not set out in the amended petition as a foundation for relief. But we think the tenth cause of action, as to the agreement for discrimination between all the railway and coal companies, reaches this issue.

It is contended that the Continental Company and the railway-companies, being satisfied, the agreement should not be disturbed. The state, however, is not bound by the fact that the contracting parties are satisfied, but may inquire whether others and especially the public at large are prejudiced, or whether the contract tends to prejudice them. The tendency of this contract is toward discrimination against other operators in which the railway company is not interested, and through such discrimination to affect the body of consumers.

Taking up the question of the competitive character of K. & M. Railway and the Hocking Valley Railway, it may be conceded that if Athens be accepted as the terminus of the Hocking Valley, and the K. & M. be considered independently of its connections, there would be little support for the claim that the two railways are competing lines. But we think the view may. be somewhat enlarged, and treated upon a more practical basis.

The charter of the Hocking Valley Company describes its line as “extending from the city of Toledo, by way of Gallipolis to the city of Pomeroy, * * * together with all branches or sidings of said railroad. ”

From the charter, therefore, as well, as the general situation disclosed by the evidence, it appears that the main line of the Hocking Valley extends from Toledo to the Ohio river, and that the extension to Athens is a branch.

The K. & M. charter describes the initial terminus of its railway as the village of Corning, and thence extending by way of Jacksonville, Athens and Middleport to the Ohio river at Point Pleasant, and into West Virginia, by way of Charleston to the Gauley river.

It may fairly be assumed that the chief commercial importance of the village of Corning as a starting point of a railway was, its being the terminus and connecting point of the Toledo & Ohio Central Railroad. The El. & M. Railway is a coal carrying road, extending from the Hocking Valley district to the Kanawha district of West Virginia, and reaching the markets through its connections, largely, the Toledo & Ohio Central. The K. & M. Railway was, naturally, adopted by the Toledo & Ohio Central Company as a connecting branch, and the adoption made more permanent by the Toledo & Ohio Central Company acquiring and owning a majority of its capital stock.

The Toledo & Ohio Central Railway Company was authorized by the letter and spirit of Section 3300, Revised Statutes, to acquire the stock of the K. & M. Company, as they were not competing but connecting and continuous lines, and extended thereby the competitive influence of the Toledo & Ohio Central from Corning through the coal district to Athens and -the Ohio river. This acquisition of stock by the Toledo & Ohio Central Company and its virtual ownership and control of the K. & M. was not only legal, but subserved the public interest by extending the field of competition.

It is claimed that the trackage contract between the Hocking Valley Company and the EL & ML for the joint use of the track along the Ohio river between Gallipolis and Pomeroy, which contained a clause forbidding the K. & M. taking any business off the Hocking Valley lines to or 'from any point on the.Hocking Valley lines, except Athens, so limited competition along the Ohio river, as to leave nothing substantial between the two companies. There is some obscurity as to whether the BL & M. had the right to take business off the Hocking Valley lines for the Toledo & Ohio Central connection and points beyond. Mr. Conners, superintendent of both railways, states that the K. & M. with the Toledo & Ohio Central connections was in competition with the Hocking Valley at Ohio river points and at Athens, for Columbus, Toledo and intermediate points. And we are of opinion that it fairly appears from the evidence, especially from the fact of the K. & M. line touching the Ohio river at Point Pleasant, and coming near at Hobson, that the K. & M. was in a position, independent of the trackage, to compete with the Hocking Valley for the business coming down the Ohio river, and also at Athens, for the markets of Columbus, Toledo and intermediate points accessible to both railways.

While the K. & M. and Toledo & Ohio Central were connected by stock ownership, and operated in alliance, a shipper at Athens or upon the Ohio river had a choice of routes and the benefit of competition. By the transfer of the majority of the stock of the K. & M. from the Toledo & Ohio Central to the Hocking Valley, all competition from the Ohio river and across Southern Ohio to the Toledo & Ohio Central connection was swept away, and all that territory brought under the influence of the Hocking Valley alone. The purchase by one railway company of the majority or controlling stock of another is tested as to its validity, by Section 3300, Revised Statutes, which authorizes such ownership when the lines are conecting and non-competing. The acquisition of this stock by the Hocking Valley from the Toledo & Ohio Central is not within the permissive authority of the statute, nor sanctioned by public policy, because the K. & M. Railway, considered with reference to its Toledo & Ohio Central connection, was a competitive road with the Hocking Valley, and the act of the Hocking Valley in the acquisition of said stock was illegal.

In the Hafer case (4 O. D., 478), the C., J. & M. Railway Company was declared to be a competitor of the Cincinnati, Hamilton & Dayton Railway Company between Cincinnati and Toledo, although the former depended for its entrance into Cincinnati upon a trackage arrangement, temporary in its nature.

In East Line & Red River Railway Co. v. Texas, 75 Tex., 34, the finding of fact entered by"the trial court was, that disregarding connections with other lines, those involved in the purchase were not competing, but with reference to the connections they were competitive. Upon this finding the court held the railways were competitive lines.

Still more nearly in point is the case of State, ex rel Atty.Genl., v. Montana Railway Co., 21 Mont., 22, where the connections were considered in determining the question of competition.

The broader and more practical view of competition adhered to in the eases cited, has been established as the rule of this state in the Vanderbilt case, 37 O. S., 590.

The claim is made that the rule of public policy in this state has been supplanted by the State Railway Commission Act. On the other hand, it is claimed that the commission act is supplemental to the existing laws. We do not find it necessary to express an opinion on this subject, as the offenses were committed and the suit brought before the passage of the act.

We therefore conclude that the K. & M. Railway Company in its broader and more practical sense is a competing road with the Hocking Valley. And 'that the Hocking Valley Company did not have the right to acquire and hold the majority stock of that railway company.

The former decision is therefore adhered to.  