East St. Louis Connecting Ry. Co. v. Jarvis

92 F. 735, 34 C.C.A. 639, 1899 U.S. App. LEXIS 2185

• Court: Court of Appeals for the Seventh Circuit
• Decided: March 28, 1899
• Docket: No. 377
• Status: Published

Opinion

JENKINS, Circuit Judge,

after stating the facts as above, delivered the opinion of the court.

Upon this record three questions are presented for consideration: First, is the Wiggins Ferry Company shown to be liable for the rental reserved by the lease? second, are the Venice & Carondelet and the East St. Louis Connecting Railways parallel or competing lines of railway? and, third, do the leases amount to a “consolidation,” within the meaning of the constitution of ,the state of Illinois prohibiting the consolidation of the stock, franchises, or property of parallel or competing lines of railway? These questions will be considered in their order.

1. The bill is brought to recover rental claimed to be due upon the lease. The . sole averment connecting the Wiggins Ferry Company with the transaction is that it “has some interest in the East St. Louis Connecting Railway Company, by virtue of which it controls and 'operates the said connecting company, and has an interest in, and is bound by the terms of, the leases above set out, but the precise nature of the relation existing between the said defendant companies is now unknown to these complainants, and in making up the reports of gross earnings required by the lease caused its agents and bookkeepers to fraudulently suppress and reduce the earnings of through traffic passing over the leased premises and the other lines operated by the Wiggins Ferry Company”; by reason whereof “only one-half of the proper earnings from such through traffic appeared in the account from which the annual statement was rendered to the said Louisville, Evansville & St. Louis Consolidated Railroad Company as a basis for fixing the annual rent to become due and payable under the terms of the said contract of lease, * * * and by means whereof it was deprived of large revenues, amounting in the aggregate, for the years mentioned, to about the sum of $50,000, which these complainants are entitled to have and receive from the said defendant companies or either of them.” It is to be observed that this is a suit founded purely upon the lease qnd to recover the rental thereby reserved. The only ground upon which the equity jurisdiction can be invoked or sustained is to enforce the accounting which the lease required to be kept of the gross earnings of the lines specified in the lease. The lessor company, however, had no equitable lien upon, or any right to, those gross earnings, or any part of them. The account of them which was to be kept had no function except as a measure of the quantum of rental to be paid under the lease. The language of the contract is explicit, and leaves no room for contention in this respect. The lessee is to pay as rental the sum of $8,000 per annum in equal monthly installments at the end of each and every month. This amount of rental was absolute for the first three years of the lease, but thereafter, should the gross earnings of the East St. Louis Connecting Railway Company from all its business, including the earnings of all lines, exceed the sum of $160,000 for any one yea:;, then the lessee covenanted and agreed to pay as rental a sum equal to 7 per cent, of such gross earnings; .8 per cent, if the gross earnings should exceed $170,000 for any one year, and 9 per cent, if it exceeded §180,000 in any one year. So that tbe lessor company bad no interest in tbe gross earnings of tbe leased road, or any right to tbeir appropriation to any particular purpose. They were the, absolute property of tbe lessee, and which, so far as concerned the lessor, it could dispose of as it saw fit. The lessor company was in-, deed entitled to know tbeir amount, because the contract of lease required the lessee to furnish a statement of the gross earnings, and this because, and only because, the lessee agreed to pay as rental a sum equal to a certain percentage of the gross earnings. The amount of gross earnings was a mere standard by which to measure the rental which the lessee agreed to pay. The gross earnings were not pledged for the payment of the rental, nor was any right to íbera, or any part of them, conferred upon tbe lessor company. The Wiggins Ferry Company, it appears, was substantially the owner of all the stock of the East St. Louis Connecting Railway Company, but that fact does not render the former company liable for the rental. There was neither privity of contract nor privity of estate charged or shown between the lessor company and the Wiggins Ferry Company. The extent of its offending, and the ground upon which liability for this rental is imputed, is this: That by reason of its ownership of the stock of the East St. Louis Connecting Railway Company it received all the gross earnings of the latfer company, of which it kept an account, and that it falsified that account with respect to the through traffic, so as to show that the lessor company should receive a less sum as rental than that to which it was entitled. We fail, however, to understand upon what principle these acts of the Wiggins Ferry Company, assuming them, to be broadly fraudulent as charged, could render it liable for the rental. If the lessor company had an equitable interest in the gross earnings, and they had been converted by the Wiggins Ferry Company, or had been diverted from the purpose to which they should he applied, there would be possible ground for the contention; but: as the lessor company had no interest, legal or equitable, in "these gross earnings, and must rely upon the covenants of tbe lease for the recovery of the rental reserved, it is not perceived tha t the Wiggins Ferry Company has rendered itself liable upon those covenants entered into by another party, and by which it is not bound, merely because it rendered, or caused to be rendered, to the lessor an untrue statement of the gross earnings, and falsified the standard by which the quantum of rental was to be measured. The decree adjudging the Wiggins Ferry Company liable for the rentals was therefore erroneous.

2. The constitution of the state of Illinois (article 11, § 11) provides: “No railroad corporation shall consolidate its stock, property or franchise with any other railroad corporation owning a parallel or competing line.” Were these two railways “parallel or competing lines,” within the meaning of this provision? They were both designed as belt lines of railway, intended principally to connect the termini of the many railroads terminating at East St. Louis with the river transfers to the city of St. Louis. There was the Madison Ferry Transfer at the north and at or near Venice, the ferry of the Wiggins Ferry Company between Venice and Cahokia creek,' and that of the

Illinois & St. Louis Railroad & Coal Company south of Caliokia creek and at the dyke. The one line was constructed on Front street, in the city of East St. Louis, near the water’s edge; the other by a circuitous route to the tracks of the Illinois & St. Louis Kailroad & Coal Company, and connected by means of the tracks of the latter company with the ferry transfer at the dyke, and by another line of railway with the Madison Ferry at the north. The two belt lines crossed and tapped all of the various railways north of Cahokia creek, terminating at East St. Louis. The charter of each company made the northerly terminus of the road at Venice, and authorized connection at the south with the road of the Illinois & St. Louis Kailroad & Coal Company. We cannot doubt that these lines are “parallel lines,” within the meaning and intent of the constitutional provision. The term “parallel” is not employed in the constitution in its merely geographical sense. It does not mean two lines of railway that are equidistant from each other. That would be a narrow construction of the- constitutional provision, which would defeat its purpose. It means lines of railway having the same general direction, and therefore likely to come in competition with each other. We also think it clear, upon the evidence and from the charters of the companies, that they were, and were designed to be, competing lines of railway. The Venice & Carondelet Kailway crossed all the lines of railway which were crossed by the railway of the East St. Louis Connecting Kailway Company. The one company connected with the Madison Ferry Transfer on the north, and with the ferry transfer of the Illinois & St. Louis Railroad & Coal Company on the south. The other company connected with the Wiggins Ferry Company, which latter company owned practically all of its stock. Necessarily they would compete with each other with respect to the transfer to the ferry companies of cars coming to East St. Louis over the lines of any railway which they both crossed. It is true that, with respect to certain local industries, they were not competing, because both had not access to them,' but the principal business designed was the transfer of through traffic to the city of St. Louis, and the one company, in connection with the ferry companies with which it connected, was the competitor of the other. We think this plain upon its face, and that no elaboration could strengthen the statement. The evidence of the case also clearly demonstrates the fact. It appears that in the year 1884 these two companies were cutting rates, buying business, and losing money, and upon the advice of a mutual friend, not then connected with either company or with either of the ferry companies, the two companies concluded to put the two properties under the same management, and as a result the leases in question were made. The effect of this transaction was to place these two belt lines under one control, giving connection with all the roads entering East St. Louis and with all the car ferries crossing the river to St. Louis. This, of course, avoided competition and enabled the management to establish rates and avoid the danger of cutting rates. The practical effect was to create a monopoly, stifling competition, and that this was designed is manifest from the terms of the lease. To accomplish it, required not only the Souse of the Venice & Carondelet Railway, which was built in the interest of and leased to the Illinois & Bt. Louis Kailroad & Coal Company, but also a lease of the ferry transfer of the latter company. This placed both the belt railways and the ferry transfers under one control. In the lease of the Venice & Carondelet Railway the lessor agreed that during the term of the lease it would not engage in the business of switching cars from any connecting railway for any purpose whatever, nor permit any one operating its road so to do, and in the lease of the ferry the lessor agreed that during the term of the lease it would not engage in or carry on the business of transferring railroad cars in boats or barges across the Mississippi river to or from any point in Bt. Louis. It would be difficult to conceive a scheme which could more effectually stille competition and create monopoly.

3. Is a lease for 10 years a consolidation of the franchises or property, within the constitutional provision? It is contended that the term “consolidation” means a permanent union of the interests, management, and control of two roads, either in the formation of a new company out of the consolidated one, or else by consolidated management of the old ones unitedly while their distinct corporate entities still remained. This distinction is true in the general sense in which one speaks of the “consolidation” of railroads. The term may also mean Ihe act of forming into a more firm or compact mass, body, or system. The constitutional convention, representing the people of the state, sought to provide against monopolies, and to preserve to the public the benefit that would accrue from competition between parallel or competing lines of railway. It sought for practical results. It intended to provide that parallel or competing lines should continue to be competing, and this it aimed to accomplish by prohibiting the consolidation of the stock or the franchises or the property of any' such competing lines of railway. The union of such lines was prohibited, in view of the objects sought to be accomplished. The term “consolidate,” we think, must be construed to have been used in the sense of “join” or “unite.” To permit two such competing lines of railway under a single management and a single control would accomplish the very purpose which the constitution sought to prevent. We must have regard to the spirit and 1he object of that constitutional provision, and not juggle with the technical meaning of the word. The prohibition goes to the consolidation or uniting of the stock of two competing roads, or of the franchises of two competing roads, or of the property of two competing roads. The doing of either would create the prohibited monopoly, and'either is within the intendment and meaning of the constitutional provision. Nor do we think that there is force in the contention that this union or consolidation was by means of a temporary arrangement, if thereby that is accomplished which is prohibited by the constitution. If it be lawful, by means of a lease for 10 years, to consolidate and unite the properties of competing lines of railway, -we perceive no reason why a lease for 99 years would not be equally valid. We cannot draw the line in that respect between what is permanent and what is temporary. Whatever produces the prohibited result is obnoxious to the spirit and the letter of the constitutional provision, and is illegal. We must deal with the result accomplished, without regard to the means employed. It cannot be permitted that one may effect a prohibited result by indirection which he may not lawfully accomplish by direct means. We must therefore hold that the leases in question practically effected a consolidation of the properties of two competing lines, and are within the inhibition of the constitution. Morrill v. Railroad Co., 55 N. H. 531; Gulf, C. & S. F. Ry. Co. v. State, 72 Tex. 404, 10 S. W. 81; State v. Atchison & N. R. Co., 24 Neb. 143, 38 N W. 43.

These leases being, then, invalid, the constitution imposed upon railroad companies an absolute prohibition to enter into them. They were absolutely void from their inception. It was ultra vires the corporations to enter into them. Being void, the covenants contained in them were of no binding effect, and no recovery can be had upon them. A railroad corporation cannot lease its line of railway without statutory power so to do. It certainly cannot when there is an express constitutional prohibition so to do. These contracts, therefore, being prohibited, are void ab initio, and no suit can be maintained upon them. Thomas v. Railroad Co., 101 U. S. 71; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U. S. 316, 6 Sup. Ct. 1094; Central Transp. Co. v. Pullman’s Palace-Car Co., 139 U. S. 24, 11 Sup. Ct. 478. In the latter case it is said: “The objection to the contract is not merely the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it.” In Bank v. Hawkins, 34 U. S. App. 423, 18 C. C. A. 78, and 71 Fed. 369, we drew a distinction between acts of a corporation without power conferred upon it and those acts done in excess of conferred powers. We held that the latter acts were illegal as to shareholders, but that the corporation was liable therefor to innocent parties. The doctrine of that case, however, is shaken, if not overruled, by the decision of the supreme court in Bank v. Kennedy, 167 U. S. 362, 17 Sup. Ct. 831. But, even under the doctrine as we declared it, we think the contract here in question would be held wholly beyond the authority of the corporation to make or to perform for any purpose; but, avhether so or not, it is our duty to conform our judgment to the ruling of the ultimate tribunal. Here the appellee brings his suit upon this prohibited and void lease, and seeks to recover rentals due under it. He invokes the performance of a contract which is prohibited by the fundamental law of the state, and which neither the lessor nor the lessee had power or authority to make. He necessarily relies upon an illegal and void contract, and therefore he cannot recover. Miller v. Ammon, 145 U. S. 421, 12 Sup. Ct. 884; McCormick v. Bank, 165 U. S. 538, 17 Sup. Ct. 433; Bank v. Kennedy, supra. In McCormick v. Bank, supra, there is a suggestion that in such case there may be a recovery for the value of that actually received and enjoyed under the illegal contract. Whether that suggestion can be applied here, and whether jurisdic-lion in equity can be sustained, are questions which we do not now consider or del ermine; the bill here containing no apt allegation, upon which to decree in that regard. In reversing the judgment, as we must, we are disposed to do so with leave to the appellee, if lie be so advised, to move the court below to amend the bill to charge the appellants, or either of them, for the value of the use of that received and enjoyed under the lease; reserving, however, the determination of all questions not herein decided. The decree is reversed, and the cause remanded, with directions to the court below to dismiss the bill upon the merits, unless the appellee shall avail himself of the leave allowed.

Judge SHOWALTER took no part in the decision of this case.