The Ticonderoga Rd. Co. v. . the Delaware and Hudson Co.

Haight, J. This action was brought for an accounting, and that the defendant be adjudged to pay the plaintiff the amount of surplus earnings, if any, that should be found to be due and owing by the defendant. Both parties are railroad corporations, the plaintiff owning a line running from the village of Ticonderoga, about two miles in length, to a point where it makes connection with the defendant’s road; the defendant owning or leasing and operating a line extending from Albany, New York, to the Canadian border, with a branch running to Baldwin, near the northerly end of Lake George. The plaintiff company has issued its capital stock to the amount of thirty thousand dollars, and has also issued an equal amount of bonds secured by a mortgage. Having determined to build its road, the plaintiff entered into a contract with the defendant to operate the same, as follows: “ This agreement, made the 13th day of August, 1890, by and between the president, managers and company of the Delaware & Hudson Canal Company, of the first part, and the Ticonderoga Railroad Company, of the second part, “Witnesseth : “Whereas, the first party is a corporation duly organized under and by virtue of the laws of the State of New York, with power to lease and operate railroads within said State, under and by virtue of chapter 841 of the Laws of 1867 of said State; and *590 “ Whereas, said first party with due authority is lessee in the possession, management and operation of the New York and Canada Railroad, which said railroad extends from the village of Whitehall, Washington County, New York, to the village of Plattsburg, Clinton County, New York, and by branch (known as the Baldwin branch) to the village of Baldwin at the foot of Lake George; and “Whereas, said Baldwin branch extends from the main line of the New York and Canada Railroad to the village of Baldwin, a distance of about five miles, on very high ground, passing the village of Ticonderoga on the south about three-quarters of a mile therefrom, and at a considerable elevation above the same; and “Whereas, said village of Ticonderoga is a thriving manufacturing village located upon a stream, the outlet of Lake G-eorge, which affords water power and natural facilities for the development of manufacturing industries of an unusual order; and “ Whereas, the industrial development of said village and surrounding territory has been impeded on account of the lack of adequate and convenient railroad facilities and also by reason of the necessity for carting all freight up a very steep grade to the Academy Station on the Baldwin branch, about three-quarters of a mile, or to Addison Junction on the main fine about two and one-half miles, thereby imposing- very heavy charges for cartage on all such freights and placing manufacturers at a great disadvantage in competition with those located on other roads; and “Whereas, the said first party is desirous of promoting the industrial development of said village and territory, and removing the disabilities that now operate against the manufacturers and shippers, and thus secure an increase of traffic upon said railroad at the smallest expense to itself; and “Whereas, the second party is a corporation duly organized by the citizens of said village, under and by virtue of the Laws of this State, for the purpose of con *591 structing a railroad from said village of Ticonderoga, or a point west therefrom upon said outlet of Lake George, by the most feasible route, to connect at a convenient point with said Baldwin branch; and “ Whereas,- said proposed road can be most economically operated by said first party as a side or switch track, at but a slight expense over that required to handle the freight and passenger traffic of said village with present imperfect facilities, “ Now, Therefore, in consideration of one dollar by each party to the other in hand duly paid, receipt whereof is hereby acknowledged, and in consideration of the premises and of the faithful performance of the covenants and agreements hereinafter contained, it is mutually agreed as follows: “ First. The party of the second part agrees to construct a single track railroad from a point at or near the village of Ticonderoga, Essex County, New York, by the most feasible route established by its engineer to connect with said Baldwin branch at a convenient point to be established by said engineer, which said railroad it is estimated will be about two miles in length. The said road shall consist of steel rails weighing not less than sixty-seven pounds to the yard, and shall comprise a sufficient freight and passenger station at the village of Ticonderoga, with the usual necessary switches, side tracks and other appurtenances. All of such construction shall be done in first-class manner and shall conform in all respects to the requirements of the Chief Engineer of the Delaware & Hudson Canal Company. “ Second. The party of the second part agrees to procure such legislation as may be necessary to authorize and permit charges for transportation upon said railroad to be made at not exceeding the following rates, viz., for each passenger, twenty-five cents; for each gross ton of factory or mill supplies or products, twelve and one-half cents, and for each ton of general merchandise, seventy-five cents. None of the provisions of this contract shall be binding upon the party of the first part unless and *592 until such necessary legislation and such authority and permission shall be obtained. “ Third. Upon the completion of said proposed railroad, said first party agrees to take possession thereof, and maintain, manage and operate the same, and provide the freight and passenger connection with all-day trains on the New York and Canada Railroad that may stop at Addison Junction, upon the terms and conditions hereinafter specified, during the corporate existence of said second party. “ Fourth. It is mutually agreed that all taxes and assessments against said proposed road shall be paid by the second party, including corporation franchise tax,, but excluding tax on rolling stock, which shall be paid by the first party. “ Fifth. It is mutually agreed that the first party, so far as it lawfully may, shall assume all the duties, obligations, liabilities, rights, privileges and franchises of the second party incident to the maintenance and operation of said proposed road, except as herein otherwise specified, but the said first party shall in no event be liable or. responsible for any debts or liabilities of the second party, for whatever purpose the same may have been incurred. “Sixth. It is mutually agreed that in the operation of said proposed railroad of the party of the second part, the charges for the transportation of freight shall not exceed twelve and one-half cents per gross ton for all freight to or from any manufactory for manufacturing purposes (over the whole or any part of said proposed road) and shall not exceed a minimum rate of seventy-five cents per ton for all other freight. The charge for passenger traffic shall not exceed twenty-five cents for each person one way over the whole or any part of said Ticonderoga road. “ Seventh. It is mutually agreed that the party of the first part may retain twenty-five per cent of the annual gross earnings derived from all traffic upon said Ticonderoga Railroad, as full compensation for managing, operating and maintaining said railroad, and the .remaining *593 seventy-five per cent of such annual gross earnings shall he appropriated and used by them as follows, viz.: “ First. To pay all taxes and assessments levied against said second party or against said first party as operators of, and on account of, said proposed road of the second party including corporation franchise tax, but excluding tax on rolling stock, which shall be paid by first party. “ Second. To pay interest charges on bonded indebtedness, which interest charges shall not exceed eighteen hundred dollars per annum. “ Third. To deposit with three trustees to be appointed when mortgage is executed for a sinking fund to liquidate its bonded indebtedness when due, a sum' not to exceed one thousand dollars per annum over and above the expenditures required by the first two mentioned items. “Fourth. To pay to the party of the second part all moneys received in excess of that required to meet the expenditures above stated to the extent of a sum sufficient to pay a dividend not to exceed five per cent upon its capital stock, which capital stock shall not exceed thirty thousand dollars. “Fifth. To pay to the first party any unexpended balance that may remain after appropriating the aforesaid amounts, to be applied in paying the cost of extension or improvements, so far as it may find the same necessary.” The referee has found in substance that after the plaintiff corporation had constructed its road of about two miles in length to a point where if intersected the Baldwin branch of the defendant’s road, the defendant entered into the possession of the road and has ever since operated it under the provisions of the contract, and that out of the gross earnings it had paid the taxes, interest upon the bonded indebtedness, a thousand dollars to create a sinking fund for the retirement of the bonds when due, five per cent dividend to the stockholders each year, and had accumulated in its hands a reserve fund amounting at that time to $112,'796:97; that $15,000.00 was a sufficient amount to reserve in the defendant’s hands, and that the bal *594 anee, together with the interest thereon, amounting to $56,380.33, making in the aggregate the sum of $154,111. 30, should be paid over to the plaintiff’s stockholders. The Appellate Division having unanimously reversed the judgment entered upon the report of the referee upon both the facts and the law, this court has no power to review the same in view of the fact that its jurisdiction is limited to the review of questions of law only unless it appears that there was no material, controverted question of fact or of inferences to be drawn therefrom. (Otten v. Manhattan Ry. Co., 150 N. Y. 395.) The main question discussed by the learned referee and the Appellate Division pertains to the construction that should be adopted with reference to the provision of the contract. The referee appears to have reached the conclusion that under the contract the defendant company became a trustee of the stockholders of the plaintiff company, by which it agreed to operate the road during its corporate life for twenty-five per cent of its gross earnings, and that out of the remaining seventy-five per cent it, as such trustee, would annually pay the taxes, the interest on the bonded indebtedness, one.thousand dollars to the commissioners of the sinking fund for the retirement of the bonds at their maturity, five per cent dividend to the stockholders, and retaining the balance for the purpose of paying the cost of extension or improvements, so far as it may find the same necessary, and consequently that the surplus belonged to the stockholders of the plaintiff company. In support of such conclusion special attention is called to the provision of the seventh clause of the contract, in which it is mutually agreed by the parties that the defendant company “may retain twenty-five per cent of the annual gross earnings derived from all traffic upon said Ticonderoga Railroad, as full compensation for managing, operating and maintaining said railroad.” Special stress is laid upon the words “full compensation,” and attention is called to correspondence that took place between the officers of the respective companies before the contract was executed, *595 and to the annual report made by the companies to the state. On the other hand, the Appellate Division appears to have reached the conclusion that the contract was in effect a lease by the plaintiff company to the defendant for the entire period of its corporate existence; that the provision, quoted from the seventh clause of the contract, pertained only to the cost of operation, which was first to be retained by the defendant to cover its expenses; and that the following provisions with reference to the payment of taxes, interest, sinking fund and dividends followed in their order, together with the costs of necessary extensions and improvements, before the defendant was entitled to any profit out of the operation of the road; and consequently that the provision of the seventh clause pertained to cost of operating only, and not to profits to be derived from such operation, if any. In support of this construction special attention is drawn to subdivision four of the seventh clause of the contract, in which the defendant agrees to pay to the plaintiff company out of the “moneys received in excess of that required to meet the expenditures above stated to the extent of a sum sufficient to pay a dividend not to exceed five per cent upon its capital stock, which capital stock shall not exceed thirty thousand dollars.” In addition to that we have the sixth clause of the contract, in which the plaintiff company was careful to limit the charges for transportation of freight and passengers that should be made by the defendant company to an amount not exceeding the sum specified, which is urged as being inconsistent with the theory that the plaintiff company was to receive the surplus. Our attention has also been called to the fact that for six years the defendant company rendered to the plaintiff an annual report showing a surplus each year, thereby advising the stockholders that there was a surplus, and that for seventeen years they made no claim that they were entitled to such surplus or any part thereof. Our attention is also called to the correspondence and to the annual reports as sustaining such conclusions. *596 It is conceded that the provision of clause seven, subdivision five, of the contract is ambiguous. It does not in express terms disclose which party shall be entitled to the surplus that remains after using such fund as may be necessary for extensions and improvements. It is as follows: “ To pay to the first party (the defendant) any unexpended balance that may remain after appropriating the aforesaid amounts, to be applied in paying the cost of extension or improvements, so far as it may find the same necessary.” That is, after the defendant has retained twenty-five per cent of the gross earnings for the cost of its operation of the road and has paid the taxes, interest, sinking fund and dividend to the stockholders, then that which remains is to be paid to itself, to be applied in paying the cost of extension or improvements, so far as it may find the same necessary. It being ambiguous as to the particular to which attention has been called, it becomes necessary to consider not only the provision of the contract but the correspondence under which it was executed, the discussion of the parties at the time, so far as it bears upon the subject in controversy, and the manner in which it was subsequently considered and treated by them in order that their true intent may be determined. This presents a situation involved .in fact and the inferences that may be drawn therefrom. Under the view taken by us of another question in this case, a determination of this question is not now necessary, and it may never arise again. Whatever name is given to the contract does not affect the question which we are now to consider, for under its provisions we deem it clear that the defendant holds the surplus, to be applied in paying the cost of extension or improvements, so far as it may find the same necessary. As operator of the road, the defendant is interested in having its tracks, roadbed and bridges maintained in such condition as to permit of its operation with safety to itself, its employees and to the public. It is interested in extending its tracks so as to accommodate factory and business enterprises which tend to advance the business *597 of the defendant. It is for the interest of the plaintiff’s stockholders that the road should he maintained and rebuilt when necessary, to the end that at the termination of the lease they may come into their property in good condition. The provision- of the seventh clause, already alluded to, in which the defendant undertakes to operate and maintain the road, has reference to the ordinary daily repairs necessary in operating a road of this character. This apparently was understood by the parties, for in subdivision five of the clause alluded to, we find that the balance is to be retained by the defendant for improvements, so far as the same may be necessary, which would include rebuilding when worn out. This view was also taken by us in People ex rel. Jamaica Water Supply Co. v. State Board of Tax Commissioners (196 N. Y. 39-57), in which Willard Bartlett, J., in speaking for the court, says: “We suppose that judicial notice may be taken of the fact that in the conduct of many industrial enterprises there is a constant deterioration of the plant which is not made good by ordinary repairs which, of course, operates continually to lessen the value of the tangible property which it affects. The amount of this depreciation differs in different enterprises, but the annual rate is usually capable of estimate and proof by skilled witnesses. No corporation would be regarded as well conducted which did not make some provision for the necessity of ultimately replacing the property thus suffering deterioration.” This railroad was constructed and taken over by the defendant in 1890. It has now been in use for twenty-one years, and the time necessarily will soon arrive when it will become necessary to reconstruct or renew the railroad in whole or in part. The original cost of construction was about sixty thousand dollars, which was paid for by the issue of thirty thousand dollars in bonds and thirty thousand dollars in stock. We are also aware that in the operation of "railroads unforeseen accidents may occur through fire, storms and floods resulting in great damage and involving a large expenditure of money in *598 restoring the buildings and road. The public service commission is invested with power to regulate rates and charges that should be made for the transportation of persons and property by the railroads of the state, and it may reduce the charges and thus lessen the surplus. The parties in entering into this contract evidently had in mind some of the necessities for the expenditure of money in the future, either through reconstruction or losses by unavoidable accidents, and saw fit to create a fund to meet such contingencies by reserving the surplus earnings for that purpose. The referee, as we have seen, has ordered judgment that all of this fund, except the sum of fifteen thousand dollars, be now paid over to the plaintiff for the purpose of distribution among its stockholders, thus, in effect, paying a dividend on the .stock of five hundred per cent. This, it appears to us, is in violation of the express provision of the contract, which is, in substance, that the annual dividend paid upon the capital. stock shall “not exceed five per cent.” It is also in violation of the express provision of the contract which pays over to the defendant any unexpended balance that may remain, making it the custodian of the fund, to be applied for the purpose specified in the contract. We think the referee had no power to decree such a distribution of the fund. It appears to us that the surplus earned is, by the terms of the contract, placed in the hands of the defendant, and is in the nature of a trust fund in which both the plaintiff and the defendant have an interest. It is to be used for the purpose specified in the contract. True- the defendant is given discretionary power to determine the necessity of its use, but this power must be exercised within reasonable bounds; and if it neglects to use it for necessary extensions or improvements, it may be compelled to do so at the instance of the plaintiff. No time is specified in the contract during which this fund shall be held by the defendant, and it, therefore, necessarily follows that it must be continued during the lifetime of the contract, which is fifty years. It is possible that contingencies may arise in the future, *599 which now 'cannot he foreseen by the court, in which it will become necessary to expend the entire fund. If, however, at the termination of the contract there should be an unexpended balance of the fund still remaining, then and in that event the courts may be again called upon to determine the question as to which of the parties is entitled to it. This action was brought for an accounting, as well as for the distribution of the surplus fund. We think that the plaintiff was entitled to maintain the action, to the extent of having an account taken and the amount of the surplus determined. The defendant, as we have already shown, had an interest in the fund, at least to the extent of having the road extended and improved, as specified in the contract. Upon the accounting had before the referee there was a conflict in the views of the respective parties as to the amount of the earnings of the plaintiff’s road. It appears that the plaintiff’s road intersected the defendant’s road at a point about two miles distant from the village of Ticonderoga; that there was no station at that point, and consequently the trains over the plaintiff’s road were run by the defendant from the point of intersection with its .own road to the next station. The referee has charged the defendant with the amount that it collected for passengers and freight from the village of Ticonderoga to the defendant’s station upon its own line. The defendant claims that it could only be charged proportionately with the amount which the mileage of the plaintiff’s road bears to the mileage on the defendant’s road. It may be that some reason exists why the mileage basis should not be adopted in determining this question, but it would seem equitable that the defendant should be credited with some portion of the earnings. Another question has arisen with reference to the amount of interest with which the defendant should be charged. The defendant instead of investing the surplus fund separately from its own fund, as it should have done, paid the same over into the treasury of the company, where the moneys became mingled with *600 the moneys of the company. This it claims to have done in good faith, under the belief that it was entitled to the surplus. The referee, however, in substance, has found bad faith on the part of the defendant, and that consequently it should be charged with six per cent interest. The rule is that with a diligent trustee he should be charged with only such interest as he had been able to collect. We think, therefore, that the judgment should be reversed and the order of the Appellate Division should be modified sp as to direct a new trial, and as modified the order of the Appellate Division should be affirmed, with costs to abide the event.