Berkey v. Third Avenue Railway Co. , 244 N.Y. 84 ( 1926 )

The plaintiff boarded a street car at Fort Lee Ferry and One Hundred and Twenty-fifth street on October 4, 1916, in order to go east on One Hundred and Twenty-fifth street to Broadway, and thence south on Broadway to Columbia University at One Hundred and Seventeenth street. She was hurt in getting out of the car through the negligence of the motorman in charge of it. The franchise to operate a street railroad along the route traveled by the plaintiff belongs to the Forty-second Street, Manhattanville and Saint Nicholas Avenue Railway Company (described for convenience as the Forty-second Street Company) and no one else. Substantially all the stock of that company is owned by the Third Avenue Railway Company, the defendant, which has its own franchise along other streets and avenues. Stock ownership alone would be insufficient to charge the dominant company with liability for the torts of the subsidiary (Elenkrieg v. Siebrecht, 238 N.Y. 254; Stone v. C., C., C. St. Louis Ry. Co., 202 N.Y. 352). The theory of the action is that under the screen of this subsidiary and others, the defendant does in truth operate for itself the entire system of connected roads, and is thus liable for the torts of the consolidated enterprise (Chicago, etc., Ry. Co. v. Minn. CivicAssn., 247 U.S. 490; Davis v. Alexander, 269 U.S. 114).

We are unable to satisfy ourselves that such dominion was exerted. The Forty-second Street Company deposits in its own bank account the fares collected on its route. It pays out of that account and no other the wages of the motormen and conductors engaged in the operation of its cars. It was not organized by the defendant as a decoy or a blind. It was not organized, so far as the record shows, by the defendant at all. There is no evidence that at the time of its formation the defendant had any interest in it as shareholder or otherwise. Its franchise goes back to the year 1884, and through all the intervening years it has preserved its corporate organization with property adequate to the maintenance of life. Its balance sheet for the year ending July, 1917, shows assets of $12,456,847.86. The values there stated are much in excess of the debts and liabilities, including in the reckoning of liabilities the outstanding capital stock. In no possible view, even if they are to be scaled down to some extent, are they unsubstantial or nominal. True the subsidiary lost money that year, but so also did its parent. The fact remains that it was functioning as a corporation continuously and actively. It was so functioning at the trial in 1924. There is no evidence or suggestion that it has ceased to function since.

The question is whether other circumstances yet to be noted neutralize these indicia of separate life and operation. The defendant, as we have seen, was the owner in 1916 of substantially all the stock of the subsidiary corporation. Its president in reporting to the stockholders the financial situation at the end of the fiscal year informed them that to make the picture accurate, the statement must exhibit the consolidated income, and this was obviously true. Other ties must be shown in addition to the one resulting from ownership of shares. The members of the two boards of directors were nearly, though not quite the same. Each road had the same executive officers, i.e., the same president, treasurer, general manager, paymaster and counsel. The parent has made loans to the subsidiary from time to time, sometimes for construction, sometimes for operating expenses. The loan for construction expenses ($6,415,152,92) is represented by a demand note. There is nothing to show whether the money was borrowed for the original construction in 1884 or for later changes of construction when the road was electrified. The parent is also the holder of the second mortgage bonds, $1,487,000, the first mortgage bonds, however ($1,200,000), being issued to the public. The operating loans are temporary advances for electric power, for materials or supplies and for the salaries of executive officers. As a matter of convenience these are made in the first instance out of the treasury of the parent company. They are then charged to the account of the subsidiary, and repaid generally the following month, and not later than the following year. Repayment is inconsistent with an understanding that the parent in making the advances was operating on its own account the cars of a connecting line. The charges are more than book entries, mere devices of an accountant. Drafts are drawn upon the subsidiary and paid with its own money. The unpaid advances for operation in July, 1917, were only $253,029.37, and this at the end of a poor year. We are not to confuse the salaries of the executive officers with the wages of motormen and conductors. The latter, as already pointed out, were paid in the first instance as well as ultimately by the subsidiary itself. So were many other expenses for maintenance and repair. So were the many judgments for personal injuries recovered in the past.

One other circumstance or group of circumstances is the subject of much emphasis in the arguments of counsel. The defendant was the dominant stockholder, not only in this subsidiary, but also in many others. The routes when connected cover an area from the lower part of Manhattan at the south to Yonkers and other points in Westchester at the north. All the cars, wherever used, are marked "Third Avenue System." On the other hand, the transfer slips bear the name in each instance of the company that issues them. The cars, when new ones become necessary, are bought by the defendant, and then leased to the subsidiaries, including, of course, the Forty-second Street Company, for a daily rental which is paid. The cars leased to one road do not continue along the routes o others. The motormen and conductors do not travel beyond their respective lines. With the approval of the Public Service Commission, transfer slips are issued between one route and another, but transfers could have been required by the Commission if not voluntarily allowed (Public Service Comm. Law, § 49, subds. 3 and 6; Cons. Laws, ch. 48).

Upon these facts we are to say whether the parent corporation, the owner of a franchise to operate a street railroad on Third avenue and the Bowery and a few connected streets, has in truth operated another railroad on Broadway and Forty-second street, and this in violation of the statutes of the State. The plaintiff's theory of the action requires us to assume the existence of a contract between the defendant on the one side and the Forty-second Street Company on the other. The several circumstances relied upon — community of interest and in a sense community of management — are important only in so far as they are evidence from which the existence of a contract may fairly be inferred. The contract in the plaintiff's view was one between the two corporations by which the defendant was to use and operate the other's franchise as its own. If such a contract was made, it was not only ultra vires, but illegal, because prohibited by statute. By Public Service Commissions Law (§ 54), "no franchise nor any right to or under any franchise, to own or operate a railroad or street railroad shall be assigned, transferred or leased, nor shall any contract or agreement with reference to or affecting any such franchise or right be valid or of any force or effect whatsoever, unless the assignment, transfer, lease, contract or agreement shall have been approved by the proper commission." By section 56 any violation of the provisions of the statute exposes the offending corporation to continuing fines of large amounts, and its officers and agents to prosecution and punishment as guilty of a misdemeanor. If a written contract had been made for the operation by the defendant of the subsidiary's line, no one would doubt that such contract would fall within the condemnation of section 54 of the act. The contract is not the less illegal because made by word of mouth.

We cannot bring ourselves to believe that an agreement, criminal in conception and effect, may be inferred from conduct or circumstances so indefinite and equivocal. Community of interest there must obviously be between a subsidiary corporation and a parent corporation, the owner of its stock. This community of interest would prompt the parent, not unnaturally, to make advances for operating expenses to the subsidiary when convenience would be thus promoted. The advances so made have for the most part been repaid, and in so far as they remain unpaid have been carried as a debt. During all this time the cars have been manned by the subsidiary's servants, who are paid for their work out of the subsidiary's fares. We do not stop to inquire whether the inference of unified operation would be legitimate in a case where a contract for such an extension of the area of activity would be permitted by the law. We feel assured that no such inference is to be drawn from acts so uncertain in their suggestions where the inference is also one of the commission of a crime. The law prohibits a contract for operation by the parent of a franchise other than its own without the consent of the appropriate commission. It does not prohibit stock ownership, or at least did not, so far as the record shows, when the defendant bought the shares. We are now asked to draw from conduct appropriate to the ownership of stock, and fairly explicable thereby, the inference of a contract prohibited by law. We do not obviate the difficulty when we say that the stockholders by acquiescence have ratified any departure from the restrictions of the charter. They could do this so as to wipe out the transgression of their officers if the act constituting the transgression were ultra vires only. They could not do so where the act was one prohibited by law (Kent v. Quicksilver Mining Co., 78 N.Y. 159). The statute is aimed at more than the protection of the stockholders. It protects the creditors also, and beyond the creditors the public. Creditors are to be guarded against an increase of liabilities and an impairment of assets by an extension of corporate activities not approved by the Public Service Commission, the representative of the State. The public is to be guarded against like consequences, for the public which rides upon the cars has an interest, not to be ignored, in cheap, continuous and efficient operation. These benefits cannot be enjoyed if a road has been plunged into insolvency by improvident extensions. "The business of a railroad [i.e., a street railroad] is to run its own lines. The law does not permit it at its pleasure to run the lines of others" (Doran v. N.Y. City Int. Ry. Co., 239 N.Y. 448).

We do not mean that a corporation which has sent its cars with its own men over the route of another corporation may take advantage of the fact that its conduct in so doing is illegal to escape liability for the misconduct of its servant (Nims v.Mt. Hermon Boys School, 160 Mass. 177; Bissell v. Mich. R.R.Co., 22 N.Y. 258). There is no room for varying constructions when operation results from acts so direct and unequivocal. A defendant in such circumstances is liable for the tort, however illegitimate the business, just as much as it would be if its board of directors were to order a motorman to run a traveler down. We do mean, however, that an intention to operate a route in violation of a penal statute is not to be inferred from acts which reasonably interpreted are as compatible with innocence as with guilt (Shotwell v. Dixon, 163 N.Y. 43, 52). Such, it seems to us, whether viewed distributively or together, are the acts relied on here to establish an agreement between two corporations that the business of one shall be the business of the other. Many arrangements for economy of expense and for convenience of administration may be made between carriers without subjecting them to liability as partners or as coadventurers "either inter sese or as to third persons" (Ins.Co. v. Railroad Co., 104 U.S. 146, 158). For like reasons such arrangements may be made without establishing a relation of principal and agent. Where the coadventure or the agency, if created, carries consequences along with it that are offensive to public policy, the law will not readily imply the relation it condemns. The basis for the implication must be either intention or estoppel. We perceive no evidence sufficient to support a finding of estoppel. Intention is presumed, unless the inference of innocence is belied with reasonable certainty, to be conformable to law.

There is no need to enter into a minute analysis of cases such as Davis v. Alexander (269 U.S. 114); Lehigh Valley R.R.Co. v. Dupont (128 Fed. Rep. 840); Lehigh Valley R.R. Co. v.Delachesa (145 Fed. Rep. 617); A., T. S.F.R.R. Co. v.Davis (34 Kan. 199); Wichita Falls, etc., Ry. Co. v.Puckett (53 Okla. 463); and many others that might be added. In none of them was an illegal agreement imputed to the dominant railroad by force of conduct fairly compatible with an innocent construction. On the contrary, the defendant in every case would have acted wholly within its rights if it had assumed liability as principal by an unequivocal engagement. Thus, in Davis v.Alexander (supra) a contract for the carriage of goods was made in Texas, the transportation to begin on the route of the parent corporation and to continue over the line in the ownership of the subsidiary. There is no doubt that at common law a corporation doing business as a carrier of passengers or goods may charge itself with liability for loss on a connecting line, and to that end may enter, within reasonable limitations not yet accurately defined, into a joint adventure with another (Swift v. Pac. Mail S.S. Co., 106 N.Y. 206, 216, 217). The situation was the same in Lehigh Valley R.R. Co. v. Dupont and LehighValley R.R. Co v. Delachesa (supra). Indeed, in the Dupont case the court was at pains to point out that the contract of carriage, if extended to the connecting route, was not even ultra vires (128 Fed. Rep. at p. 845). Other differences are exposed when we press the process of dissection farther. Thus, in Davis v. Alexander (supra) the case was submitted to the jury upon the theory that the proceeds of operation over the two routes were commingled in a single fund. Not only that, but engines and cars were used indiscriminately, and so also were the crews. The jury were told that all these facts must be found to coexist before the wrong of the subsidiary could be charged against the parent. The Supreme Court in its opinion does not catalogue the circumstances supporting the inference of unity of control. The opinion is confined to the statement that "the shippers introduced substantial evidence in support of their allegations." The facts are disclosed when we examine the record on appeal. So in Wichita Falls Ry. Co. v.Puckett (supra) the same employees worked on the entire route, and a common treasury received the proceeds of the system. Between such cases and the one before us there exists a distinction plain upon the surface. This being so, there is no need to choose between the Federal doctrine and our own, if indeed when they are understood, there is any difference between them. Liability of the parent has never been adjudged when the subsidiary has maintained so consistently and in so many ways as here the separate organization that is the mark of a separate existence, and when the implication of a contract for unity of operation would be the implication of a contract for the commission of a crime.

The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an "alias" or a "dummy." All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice (Ballantine, Parent Subsidiary Corporations, 14 Calif. Law Review, 12, 18, 19, 20). The logical consistency of a juridical conception will indeed be sacrificed at times when the sacrifice is essential to the end that some accepted public policy may be defended or upheld. This is so, for illustration, though agency in any proper sense is lacking, where the attempted separation between parent and subsidiary will work a fraud upon the law (Chicago, etc., Ry. Co. v. Minn. Civic Assn., 247 U.S. 490;United States v. Reading Company, 253 U.S. 26, 61, 63). At such times unity is ascribed to parts which, at least for many purposes, retain an independent life, for the reason that only thus can we overcome a perversion of the privilege to do business in a corporate form. We find in the case at hand neither agency on the one hand, nor on the other abuse to be corrected by the implication of a merger. On the contrary, merger might beget more abuses than it stifled. Statutes carefully framed for the protection, not merely of creditors, but of all who travel upon railroads, forbid the confusion of liabilities by extending operation over one route to operation on another. In such circumstances, we thwart the public policy of the State instead of defending or upholding it, when we ignore the separation between subsidiary and parent, and treat the two as one.

The order of the Appellate Division should be reversed, and the judgment of the Trial Term affirmed with costs in the Appellate Division and in this court.