Where the state exercised its power to regulate rates charged by a street railroad company, held, that the fact a municipality thereafter contracted as to existing rates does not preclude the state from altering the rates.

18. COURTS ~366(1)—PRECEDENTS-STATE DECISIONS.

Interpretation of a state statute by the highest court of the state enacting it is binding on the federal courts, including the national Supreme Court, where there is no infringement of the United States Constitution, except when the Supreme Court has first passed on the matter.

The New York Public Service Commissions Law does not allow the Public Service Commission to regulate the rates of a street railroad company, where there is a valid contract between such company and a municipality as to such rates.

A rate limiting a street railroad company to a 5-cent charge per passenger held confiscatory.

In Equity. Suit by the Westinghouse Electric & Manufacturing Company against the Binghamton Railway Company, in which William T. Phelps was appointed receiver. In the matter of the application of the receiver for an order authorizing and directing him to increase the rates of fare for carrying passengers on defendant's road from the present rate of 5 cents to 7 cents, and to apply to the Public Service Commission of the Second District of New York for a determination by it as to the reasonableness of such increased rate, and for such other and further order, decree, or direction in the premises as the court may deem proper. Application granted.

This is an application made by William G. Phelps, as receiver of the Binghamton Railway Company, for permission and direction to apply to the Public Service Commission of the Second District of the State of New York, for an order authorizing an increase in the rates of fare for carrying passengers on said railway, such increased rate to continue during the war in which the United States is now engaged, and for two years thereafter. Before such direction should be given to the receiver by this court, it is necessary to determine three propositions, to wit:

First. Does there exist a contract between the city of Binghamton and the defendant company which precludes the Public Service Commission from authorizing an increase in the rate of fare?

Second. Are all of the corporations, which have by mergers or consolidations become the Binghamton Railway Company, subject to the provisions of the general street railroad laws of the state of New York?

Third. Has the Public Service Commission, upon the application of the receiver under the direction of the court, power to authorize an increase in rates?

Geo. B. Curtiss, of Curtiss, Keenan & Tuthill, of Binghamton, N. Y., for receiver.

John J. Irving and Wm. H. Riley, both of Binghamton, N. Y., for city of Binghamton.

Jas. E. Connerton, of Johnson City, N. Y., for village of Johnson City.

E. H. Moody and D. V. Ashley, both of Binghamton, N. Y., for town of Union.

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

RAY, District Judge (after stating the facts as above). The Binghamton Railway Company, owning and operating a surface street railway, extends through certain of the streets of the city of Binghamton, N. Y., and also to points outside of said city, and is made up of an original company and several other companies, subsequently organized and thereafter consolidated therewith. It is the only line of street railway in or near the city of Binghamton, and extends to the village of Lestershire, Johnson City, and the village of Union, and also to the State Asylum for the Insane and to Port Dickinson.

Owing to the war and war conditions mainly, if not wholly, the present rate of fare charged, five cents, has proved to be wholly inadequate to the production of revenues sufficient for the maintenance of the road; that is, payment of running and operating expenses, taxes, and the interest due on its bonded indebtedness, excluding all consideration of dividends to stockholders, and even the purchase of new and needed equipment, or the making of contemplated and needed extensions and improvements, which would be of benefit, not only to the company itself, but to the public.

The maintenance and continual operation of this road is a matter of concern, not to its stockholders alone, but to the general public and every resident of the city of Binghamton and of the communities named and to which the road reaches. This financial condition of this corporation is not due to any financial or business mismanagement, or to ill-considered or unnecessary outlays, or to excessive salaries paid to officers or managers, or to the payment of dividends to stockholders, but to the rapid and unforeseen increase in the cost of material, especially iron and steel, and other equipment, and the cost of labor absolutely essential to the operation of the road and the keeping of same in even ordinary repair, consistent with the safety of those riding thereon. The cost of labor and material, in most cases, has more than doubled, and in some cases is three or four times what it was formerly.

The company found itself without revenues to pay overdue taxes, bills overdue for necessary supplies purchased and used for needed repairs, current expenses, and cars purchased, but not paid for, saying nothing of interest on its bonded indebtedness falling due in the immediate future. It had borrowed to the limit of wisdom, if not to that of possibility. It found itself threatened with suits to which it had no defense, executions and levies on its personal property, cars, and other equipment, which would render operation impossible, and with default in payment of interest on its outstanding bonds and a foreclosure of the mortgages given to secure same and a sale of its property.

With this situation confronting it, a suit in equity was brought by one of its large creditors, in which this court was called upon to appoint a receiver of the company and of its property, whose duty it should be to protect and preserve the property as a going concern and operate the road for the benefit of all concerned, applying the earnings to the payment of necessary current expenses. An able business man, not connected with any interest, was selected by the court and appointed to this place. There was no objection to his selection.

The court has found it necessary to authorize the issue and sale of receiver's certificates to provide for overdue taxes and other expenses, and has taken considerable evidence in this proceeding establishing all the facts stated on a full hearing and on due notice to all concerned, and in which counsel for the city of Binghamton and the other places named have been heard.

This application, as before stated, was and is directed to this court for authority and direction to the receiver, William G. Phelps, to apply to the Public Service Commission of the State of New York, Second Division, for authority to increase the rate of fare charged on this road from 5 cents per trip to 7 cents per trip, or to such sum as the court may recommend and the Public Service Commission may approve and grant. It is not sought to have this increase permanent, but for the period of the war, soon to close finally, and for the two years following, when it is expected conditions will be more normal. It is doubted and denied by some that the said Public Service Commission possesses such power in this case, and this court has taken proof of all the pertinent facts to enable it to determine whether or not, in its opinion, such power exists, and whether or not the facts demand the exercise of such power, if it does exist, to the end that said receiver, who is but the arm of the court, may be directed to incur the expense of a proper application to that commission invoking its action.

Necessity.

[1] The necessity for the invocation of such power, if it exists in this case, is beyond all question. This court is without power in any case or under any circumstances to increase rates of fare, or direct its receiver so to do, even while in possession of and operating the road for the benefit of the public who use it. The court cannot do this, even when to run at the present established rates entails large losses to creditors and stockholders. The statutes of the United

"Whenever in any cause pending in any court of the United States there shall be a receiver or manager in possession of any property, such receiver or manager shall manage and operate such property according to the requirements of the valid laws of the state in which such property shall be situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof. Any receiver or manager who shall willfully violate any provision of this section shall be fined not more than three thousand dollars, or imprisoned not more than one year, or both." Comp. St. § 1047.

It is the duty of a receiver appointed by the federal court to operate the railroad according to the valid laws of the state in which such road is situated. Erb v. Morasch, 177 U. S. 584, 585, 20 Sup. Ct. 819, 44 L. Ed. 897; United States v. Harris, 177 U. S. 305, 20 Sup. Ct. 609, 44 L. Ed. 780; Act Aug. 13, 1888, c. 886, § 3, 25 Stat. 433, 436, 1 U. S. Comp. St., p. 1184, § 1047; Judicial Code, § 65. In Erb v. Morasch, supra, it is said:

"Now, in respect to the federal questions, we remark, first, that it is the duty of a receiver, appointed by a federal court to take charge of a railroad, to operate such road according to the laws of the state in which it is situated.

Act Aug. 13, 1888, c. 866, § 2, 25 Stat. 433, 436; United States v. Harris, ante, 305 [20 Sup. Ct. 609, 44 L. Ed. 780]."

[2] In Chicago & Grant Trunk Railway v. Wellman, 143 U. S. 339, 344, 12 Sup. Ct. 400, 402 (36 L. Ed. 176), the court said:

"The Legislature has power to fix rates, and the extent of judicial interference is protection against unreasonable rates."

To the same effect is Stone v. Farmers' Loan & Trust Co., 116 U. S. 307, 6 Sup. Ct. 334, 388, 1191, 29 L. Ed. 636; Chicago, Milwaukee, etc., Ry. Co. v. Minnesota, 134 U. S. 418, 10 Sup. Ct. 462, 33 L. Ed. 970.

[3] In the state of New York the Public Service Commission is to increase or change rates of fare. Public Service Commissions Law, §§ 33, 48, 49. Section 49, amended by chapter 546, Laws of 1911, provides:

"Whenever either commission shall be of opinion, after a hearing had upon its own motion or upon a complaint, that the rates, fares or charges demanded, exacted, charged or collected by any common carrier, railroad corporation or street railroad corporation subject to its jurisdiction for the transportation of persons or property within the state, or that the regulations or practices of such common carrier, railroad corporation or street railroad corporation affecting such rates are unjust, unreasonable, unjustly discriminatory or unduly preferential, or in anywise in violation of any provision of law, or that the maximum rates, fares or charges, chargeable by any such common carrier, railroad or street railroad corporation are insufficient to yield reasonable compensation for the service rendered, and are unjust and unreasonable, the commission shall with due regard among other things to a reasonable average return upon the value of the property actually used in the public service and to the necessity of making reservation out of income for surplus and contingencies, determine the just and reasonable rates, fares and charges to be thereafter observed and in force as the maximum to be charged for the service to be performed, notwithstanding that a higher rate, fare or charge has been heretofore authorized by statute, and shall fix the same by order to be served upon all common carriers, railroad corporations or street railroad corporations by whom such rates, fares and charges are thereafter to be observed."

See People ex rel. U. & D. R. Co. v. Public Service Commission, 171 App. Div. 607, 156 N. Y. Supp. 1065, affirmed 218 N. Y. 643, 112 N. E. 1071.

[4] This power of the court does not exist, however, in cases where there is a valid contract in force fixing the rates between the municipality and the railroad company. Such contracts cannot be disregarded or overthrown by the action of the court. Detroit v. Detroit C. S. R. Co., 184 U. Š. 368, 382, 22 Sup. Ct. 410, 46 L. Ed. 592; Matter of Quimby v. Public Service Commission, 223 N. Y. 244, 263, 119 N. E. 433. This is admitted or not questioned by the receiver in this case, but he denies the existence of such a contract. The court, however, in such cases as this, has the equitable power to restrain suits which would hamper the operation of the road, inconvenience the public, waste the assets, and destroy the value of the stock and road. It may, if necessary, order a sale of the property and the distribution of the proceeds to creditors, balance, if any, to stockholders. It is immaterial whether we term such equitable suit one in the nature of a sequestration proceeding or one in the nature of a conserva

tion of assets proceeding; the end sought to be attained is the same, and the powers of the court in the premises are substantially the same. The only denial of the necessity for an increase of rate of fare on this railroad is found in the argument that the war with the German Empire and Austria is substantially over, and that the soldiers are rapidly returning home and to their accustomed avocations, and that reasonably it may be expected that business and industrial conditions. will speedily assume or regain the normal, and that all necessity for an increase in the rate of fare will soon disappear, and also that this railroad company, as individuals and private corporations have done, should be willing to submit uncomplainingly and cheerfully to the losses growing out of war conditions.

This assumes that the financial ruin of this railroad company is not impending, and the foreclosure of the mortgages thereon and the "wiping out" of the stock held by the stockholders and large losses to general creditors are not imminent. It is within the knowledge of the court that already preparations are being made and steps taken to bring about a foreclosure of the mortgages, or at least one of them, on this road, and a sale of the property. Such action would destroy the value of the stock and result in large losses to the general creditors (unless it be certain preferred ones, whose claims may be preferred to the lien of the mortgage bondholders). The court is also informed, and has no reason to doubt, that it is not the desire of such interests to avail themselves of such foreclosure remedy, if it can be avoided without sacrificing the rights of the mortgage bondholders.

In the judgment of this court the true interests of the city of Binghamton and of the villages to and through which this railroad runs demand that action which probably would lead to the results indicated should be avoided, and that affirmative action should be taken if it reasonably can be done, which will make such results impossible. Every failure of a substantial character in almost any community is a blow to its financial and industrial prosperity. Sales of such properties as this, under present financial conditions, are sure to result in a great sacrifice by those who in good faith have put their money into the stock of the companies and those who in good faith have given credit without security, depending on their continued prosperity and ability to pay from current revenues. It would seem that those who use this road as a great public utility and convenience, and every interest in the city of Binghamton and the villages concerned, should be willing to pay temporarily an increased rate of fare for this service commensurate with its actual cost and the increased rate of wages paid to all workers, including those who operate the road, and by and to those industrial and manufacturing concerns which make and sell the iron, steel, and equipment necessary for the operation of this road. Adequate rates of fare under conditions prevailing prior to the war are inadequate under prevailing conditions, and those who enjoy the benefits of the service ought to be willing to pay a fair compensation therefor. It may be remarked, without digressing too far, that in several instances the rates of fare on similar lines of roads have been increased,