New York Central Railroad v. New York, New Haven & Hartford Railroad

Rabin, J. Broadly stated, we are asked to define the rights of the New Haven Railroad and those of New York Central Railroad with respect to the operation of the Biltmore Hotel. New Haven claims that it has an equal voice in the management of that property whereas it is the claim of Central that its position with respect to control is a dominant one. Central asserts that the only right New Haven has is to join in any of the decisions unilaterally made by Central with respect to the maintenance and leasing of the property and that failing to do so New Haven would lose whatever rights it had in the hotel and in any of the income derived therefrom. The issue was raised when New Haven refused to join in a lease of the Biltmore Hotel, unilaterally prepared and signed by Central on December 8, 1958. Following such refusal Central commenced this action pursuant to article 15 of the Real Property Law in which it seeks to have the respective rights of the railroads determined. New Haven through its counterclaims seeks similar relief. Both parties agree that their rights may be determined from the written documents and, accordingly, each moved for summary judgment in its favor. Special Term granted the motion made by New Haven and entered a judgment which essentially established New Haven’s right to an equality of control with that of Central and provided for injunctive relief in favor of New Haven and dismissed Central’s complaint. It is from this judgment that Central appeals. A brief summary of the facts follows: In 1848 New Haven acquired the right to use, jointly with Central or its predecessors, the tracks running into New York City. The fee to the properties used in this railroad operation was in Central or its predecessors. In 1903 and 19Ó4, through — 312 — legislative enactment, the further use of steam locomotives was prohibited and it was required that the tracks along Park Avenue be depressed below street level. This, in turn, required that new depot facilities be erected. At that time Central took the position that it alone could proceed to erect a new depot as it saw fit and that New Haven would have no right to its use absent Central’s consent. New Haven took a contrary view. The differences between the parties were submitted to George W. Wickersham for resolution. That dispute was resolved in favor of New Haven. Subsequent thereto, and in 1907, New Haven and Central entered into an agreement, the object of which was to arrange for the joint use by New Haven and Central of the trackage and the proposed new terminal. By that document Central agreed to furnish the land and erect the terminal. In consideration therefor New Haven agreed to pay to Central annually its proportion of interest at the rate of 4%% on the cost of the land and the construction of the new terminal in addition to other amounts fixed by the agreement. • It also agreed to pay, among other things, its proportionate share of the cost of maintaining and operating the terminal properties. By that agreement Central leased to New Haven during the term of New Haven’s charter and all renewals thereof “ the use, in common with the Central Company * * * of the said Railroad Terminal for the accommodation of the traffic of the New Haven Company”. The railroad terminal was defined to include “ the land, and interests in land,- and all improvements thereon * * * and all rights in any ways on which said land may abut”.* Provision was made in that agreement for the establishment of a so-called “ Terminal Account” into which all rentals (not belonging exclusively to either party) received from the use of any part of the terminal was to be deposited for the eventual benefit of both New Haven and Central, it being provided that such sums were to be applied to defray the cost of the maintenance, and operation of the terminal. The amount which New Haven was to pay for the use of the terminal facilities depended on the percentage of use it made of the terminal facilities after credit had been given for the amounts deposited in the Terminal Account. Subsequently the parties perceived the possibility of using the surface above the tracks for the construction of buildings. Commencing in 1910 they joined in the financing and construction of buildings and over the next 20 years about 18 buildings were so erected. In 1912 an agreement was entered into between — 313 — Central and New Haven for the construction of the Biltmore Hotel. Simultaneously an agreement was made for the leasing of the property to a third party, Central and the New Haven being designated in such leasing agreement as lessors. The cost of the construction of the hotel amounted to about $5,600,000, and to that cost of construction New Haven, as it was obligated to do, contributed equally with Central. In 1913 Central and New Haven entered into the agreement which contains the clause which we are called upon to construe. The preamble to that agreement stated that it was made “ to express more fully the intent of the parties ” with respect to the construction, maintenance and use of the buildings contemplated to be built pursuant thereto and with respect to the rentals accruing from the leasing of such buildings. The 1913 agreement was expressly made a part of the 1907 agreement, the provision being that the words of the 1913 agreement ‘ ‘ be added at the end of paragraph 3 ” of the 1907 agreement. The provision of the 1913 agreement which must be construed in order to determine the issue in controversy is as follows: ‘ ‘ It is understood and agreed that the use of the Railroad Terminal demised by this paragraph to the New Haven Company shall include the right on the part of the New Haven Company to join with the Central Company, in accordance with agreements relating thereto, made, or from time to time to be made, by and between the Central Company and the New Haven Company, in the construction, holding, maintenance and leasing of buildings, or parts thereof (other than such buildings or parts thereof as form a part of the Railroad Terminal to be constructed by the Central Company as hereinafter provided) upon the land included within the Railroad Terminal. In every such building, together with the right to support thereof, toward the construction of which the New Haven Company shall furnish or contribute money, and until it is reimbursed therefor, the New Haven Company shall have and own an undivided interest which shall bear the same proportion to the entire building as the amount of money furnished or contributed by the New Haven Company, and for which it has not been reimbursed, bears from time to time to the entire cost of the construction of such building. At the time when the New Haven Company shall be fully reimbursed for all moneys furnished or contributed by it for or toward the construction of any such building, with interest at such rate as shall have been agreed upon, such undivided interest of the New Haven Company shall cease. In all cases in which the New Haven Company and the Central Company shall join in the construction of any such building or buildings, the — 314 — rentals to be credited to the fixed charges or to the cost of maintenance and operation of the Railroad Terminal under the provisions of Paragraph 14 of this agreement shall include all rentals accruing from the leases of the buildings or parts of buildings so constructed, except such rentals as by agreement between the New Haven Company and the Central Company shall be paid over to the New Haven Company and the Central Company or either of them as a proper return for the moneys advanced by such party to provide for the construction of any said buildings. It is expressly understood and agreed that, to facilitate the raising of money for the construction of such buildings, any rights of the New Haven Company or of the Central Company in such buildings or any of them or any parts thereof and in or to any rentals accruing from the lease of such buildings or any of them or any parts thereof, may be, by agreement between the Central Company and New Haven Company, at any time hereafter, conveyed, assigned or pledged to one or' more corporations, associations or trustees.” Subsequent to the construction of the Biltmore, the third-party tenant entered into possession and continued in possession until 1934 when it defaulted. In consequence of such 'default it surrendered possession to both New Haven and Central and at the time of such surrender the name “ Biltmore ” and the furniture, furnishings and equipment of the hotel were conveyed jointly to Central and New Haven. Thereafter, the Biltmore was operated for the benefit of both Central and New Haven through a subsidiary corporation wholly owned by Central to which a one-year lease was given by New Haven and Central as joint lessors. That lease by its terms was renewable from year to year and was renewed until December 8, 1958, at which time Central unilaterally gave to that subsidiary a five-year lease in which it asked New Haven to join. New Haven refused, claiming Central had no right to execute a lease unilaterally but that a lease to the Biltmore could only be made through the joint co-operation of New Haven and Central inasmuch as New Haven was entitled to an equal voice with Central in the management and leasing of the properties. It should be here stated that the advances for the construction of the Biltmore, made by both Central and New Haven, had been fully repaid in 1957 and that -under the terms of the 1913 agreement, upon such repayment to New Haven, its “ undivided interest” in the building as such, “shall cease ”, However, despite that provision the parties agree that New Haven’s rights — whatever they may be—with respect to “holding, maintenance and leasing” of the building did not cease; that such — 315 — rights continued beyond the period of repayment; that the net profit from the operation of the building would still be deposited in the Terminal Account for the benefit of both parties. Indeed, Central continued to deposit the net profits of the building operation into the Terminal Account even though both parties had received repayment of their investment with interest. It was not until the refusal of New Haven to join in the 1958 lease that Central took the position that all of New Haven’s rights in the hotel and the income from the hotel were forfeited. The present lawsuit was the consequence of that position taken by Central. In this action Central seeks to have the court declare its position to be dominant to that of New Haven and that the lease made by it unilaterally in 1958 is a valid one. It further seeks a declaration to the effect that by reason of New Haven’s failure to join in that lease it forfeited any interest in the Biltmore Hotel or in the income derived therefrom. On the other hand New Haven seeks a declaration that it has an equal right in the control and management of the Biltmore Hotel and that in consequence no lease signed by Central unilaterally—and particularly over New Haven’s objection — can be valid. Special Term concluded that the position of New Haven was the correct one and the judgment embodying such view is before us for review. I believe that the decision of Special Term is essentially correct. I come to the conclusion that New Haven has a right to share in the control and management of the Hotel Biltmore — a right equal to that claimed by Central. I believe that Central can no more compel the New Haven — as a condition to its retaining its interest in the Biltmore — to sign a lease unilaterally prepared by Central than New Haven could compel Central to sign a lease unilaterally prepared by it. Nor does it make any difference that the lease tendered is a good one. Certainly, New Haven cannot compel Central to sign a lease unilaterally prepared by it—even a most desirable one. In consequence, believing as I do that the rights in that respect are equal, I conclude that Central may not compel New Haven to do so. While I could very well rest on the carefully considered opinion of Special Term, I deem it best to advance some of the reasons for reaching my conclusion. We need go no further than to examine the 1913 agreement to find that the rights claimed by New Haven —and they are not unusual for one that advanced 50% of the cost of construction—were granted to it in what I consider to be plain, simple — 316 — and clear language. That agreement provides that the New Haven Company may not only join in the construction of the building, but may also join in the “ holding, maintenance and leasing ’ ’ of the building. If we are to give any meaning to that language we can only construe it to mean that New Haven has a right to participate in the holding, maintenance and leasing of the building. How, for example, can anyone join in the maintenance of a building if he has nothing to say as to how it is to be maintained? It seems to me that Central is claiming unusual rights when it claims the right to control the operation of the Biltmore to the exclusion of New Haven. And, I fail to find any language in the 1913 document or any other document which gives the Central that right. While I think that the conclusion I reach can clearly be gathered from the language of the 1913 document alone, yet reading it in the light of the 1907 and the 1912 agreements and having in mind the relationship between the parties theretofore existing, such conclusion becomes even more clear. Whatever rights New Haven has were not newly created by the 1913 document. New Haven did not come to the negotiation table in 1913 empty-handed looking for an opportunity to join in the development of the railroad terminal properties as a gratuity. The rights of New Haven in the Biltmore had already been established by the contract between it and Central, signed in 1912. There is nothing in the 1912 agreement, or in the documents jointly signed by Central and New Haven on the same day with their prospective tenant, that even suggests that Central hold a dominant position. On the contrary, throughout they seem to point to equal rights and equal responsibilities. Notably the 1912 agreement provides that not only shall the' cost of construction be borne equally but that should structural changes be required subsequently, each party would bear one half of the cost of such structural changes. Nor was the joinder by New Haven with Central in the 1912 instruments the result of a benefit gratuitously bestowed upon New Haven by Central. New Haven was in the Biltmore project as a matter of right—a right arising out of its interests in the railroad terminal property acquired by the 1907 agreement, for the good and valuable considerations therein set forth. What rights did the 1907 agreement give to New Haven with respect to the “ Railroad Terminal” within the limits of which the Biltmore was built? It should be noted that the words “ Railroad Terminal” are defined to mean the “land and interests in land ” and also “all improvements thereon”. The 1907 — 317 — instrument gave to New Haven the use of the railroad terminal “in common” with the Central Company. “ [I]n common” were the words used—not subservient to Central; “in common ’ ’ and not with Central as the dominant partner. Implicit in the words “ in common ” is that New Haven had the right to the use of the lands ‘ ‘ and all improvements thereon ’ ’ on equal terms with Central. And lest it be urged that such right to the use of the railroad terminal in common with Central be limited to properties underground, we consider the following: the 1907 agreement was written in the light of the legislative mandate that the tracks be covered and yet it gives New Haven the right to use in common with Central not only the land but also “ all improvements thereon ”; it was written with the parties knowing of the opinion of George W. Wickersham, who, at the instance of the parties, had defined their, rights and established among other things New Haven’s depot rights, indicating that railroading requires use of land over as well as under the ground; the practical construction of the parties implicit in their entering into the 1912 construction agreement and jointly agreeing to and signing the necessary documents with their prospective tenant; and lastly, but significantly, the signing of the 1913 agreement which by its terms was made a part of the 1907 agreement. It might be here added that having been made a part of the 1907 agreement, the 1913 agreement should be so read. To do so we must read the word “join” together with the expressed intent of the parties that they use the properties in common. Joining in common with Central spells for New Haven an equality of control rather than a position subservient to Central. It is apparent, therefore, that the parties did not come to the conference table in 1913 to establish new rights but rather — as stated in the 1913 preamble — to define rights already established and already acted upon. And they came to the conference table on equal terms despite the fact that Central was the owner of the fee. Its ownership had already been encumbered—encumbered by the rights of New Haven to use the terminal land “ in common ” with Central. Moreover, whatever advantage Central claims by reason of being the owner of the fee was neutralized by the obligation of New Haven to pay to Central and Central to receive 4%%' of its actual net expenditures in acquiring the land and for the construction of the railroad terminal. And in consequence, provision was made for a ground rent to be paid, not to Central alone, but for the — 318 — benefit of New Haven' as well, through the medium of the terminal account. Ordinarily the ground rent' is' paid only to the owner of a fee or one who has an interest in the fee. Incidentally, that' ground rent is still being credited "to that .account to the advantage not only of Central but of New Haven. The actual underlying fee of the land upon which this great railroad terminal was laid out is largely a matter of only historic importance, since it is clear that it became dedicated by the fee owner to the railroad passenger terminal usages of both railroads, and all of its structures and facilities were incidental to those usages, or were created to provide income to maintain those usages. No such importance attaches to rights of the party who owns the underlying fee as might be expected in the usual leasing or licensing of land; and what is of greater importance on the intention of both parties, they had already fixed their rights in the terminal area land and in its development as being equal rights before they undertook the construction of the Biltmore or other structures or facilities incidental to the terminal passenger operation. They had, in effect, converted themselves into owners of the fee together, as far as the area of this controversy stretches. It is clear that the- development of the lands over the tracks was but another step in the joint exploitation of the railroad properties made possible by the covering of the tracks. It was an incident in the development of the railroad terminal in which each party had a joint interest —that of Central as owner of the fee and that of New Haven by virtue of its rights which, for good consideration, were carved out of the fee. Nor does the fact that New Haven ceased to have an undivided interest in the structure as such, after its investment had been returned, alter the conclusion reached. There was then no need for New Haven to have an undivided interest in the building as such. The effect of that provision was merely to merge title to the building with that of the fee. The entire fee, however, still remained and remains encumbered by the rights of New Haven. That those rights, however they may be construed, continued beyond the repayment of New Haven’s investment is now conceded by Central; Had they not, Central would not have continued to credit New Haven with its share of the income from the building after the return of its principal.and there would have-been no point in or necessity for Central having tendered the 1958 lease to New Haven for signature as it did. Central’s position is that having failed to sign the lease unilaterally prepared by Central, New Haven failed to exercise its option to join in the “ leasing ” and in consequence whatever — 319 — interest New Haven had in the Biltmore was forfeited.* That position presupposes the right of Central to negotiate and close the lease to the Biltmore property without the participation or acquiescence of New Haven. That claimed right New Haven stoutly, and I believe rightly, contests. Furthermore that position wrongly assumes that when New Haven first exercised its option to join in the ' ‘ construction, holding, maintenance and leasing ” of the property by paying one half of the cost of construction no definitive rights in the property were acquired by New Haven except the right to join docilely in each of the decisions made by Central. How many times must New Haven exercise its option to join in order to retain the interest in the property originally acquired when it first exercised that option! However, Central seems to say that New Haven must continue to join and rejoin in each decision of Central because it assumed no obligation to stay joined and it is free to abandon the enterprise at will. I can find nothing in the documents that gives it that right and it seems to me that such right attributed to New Haven is a highly questionable one. There is no precedent that points to such right. When New Haven did withdraw from one project it did so only with the assent and agreement of Central. The refusal to sign the lease tendered is no indication that New Haven has any desire to withdraw from the Biltmore — nor may such refusal constitute a withdrawal. New Haven simply contests the right of Central to compel it to sign the lease tendered as a condition of its continued interest. My dissenting colleagues very properly consider such refusal as an assertion of right and do not attach to it the consequences sought by Central. However, Central suggests that it was not contemplated that New Haven share in rentals from a lease in which it did not join. But that statement assumes that Central’s position is the correct one; that it had a right to make the lease without the approval of New Haven and that New Haven is obliged to sign it as a condition to receive its share of the proceeds derived from the property. .Upon argument Central compared the position of 'New Haven to that of a minority stockholder.' The comparison could be considered an accurate one- if Central -were correct in its contention. . But such comparison does not help solve the problem presented because it assqmes that' New Haven has' no right to a voice in the control of the properties — the very question we — 320 — are called upon to resolve. It must be observed, however, that a minority stockholder is not usually invited or permitted to join in the operation and maintenance of corporate properties — certainly not in common with those in control. I believe that a more accurate description of New Haven’s position, if we wish to consider it in corporate terms, would be that of one holding stock in an amount sufficient to give it equality in control. A still better description of New Haven’s position would be that of a partner. It is urged that the parties could not have intended to give to New Haven an equal voice in the “ holding, maintenance and leasing” of the Biltmore, despite the language of the 1913 agreement, for to so construe that document would put the Central at the mercy of New Haven. However, to construe it as Central would have it construed would to an even greater extent put New Haven at the mercy of Central. I do not think that the parties intended to do either. The documents spell out an equality of control. There is nothing unusual in parties engaging in joint ventures with an equality of control. On the contrary, such arrangements are quite common. Great industrial and financial dynasties have been controlled by partnerships. Indeed, corporations are regularly organized in a manner that would result in joint and equal control by the incorporating parties. Of course, it would have greatly facilitated the operation of the terminal properties and the Biltmore Hotel, of which it was a part, if one of the parties were empowered to make the decisions, which the other would be obliged to accept. But unless the parties so expressly provide, it is not for the court to set up a dominant party. The parties, of course, could have done so but the documents will be searched in vain for any evidence that they did do so. We are told that the parties could not have intended an equality of control because the companies would be subjected to deadlocks, without any provision having been made to resolve them. However, the parties did envision a possible deadlock (which could only occur if both parties had equal control) and they did attempt to provide the means by which such impasse could be surmounted. That attempt was expressed in the arbitration clause contained in the 1907 agreement and which applied with like force to the 1913 agreement which became a part thereof. By that clause it was agreed that in the event of a disagreement with respect to the rights and obligations of the parties to the documents, or if the parties ‘ ‘ are unable to agree as to any matter which is left to their determination ’ ’ the sub — 321 — ject matters shall he submitted to three arbitrators who “ shall decide with all reasonable despatch the issues before them.” Thus it is apparent that a deadlock, resulting from equal control, was foreseen and that provision was made which was considered sufficient to resolve such deadlock. It has been suggested that the agreement to arbitrate might not be enforcible. That is of no consequence nor is the fact that the arbitration clause might not have the effect intended by the parties of any consequence. Its importance in the resolution of the problem before us is that it points to the intention of the parties. If New Haven were merely obliged to accept decisions, made unilaterally by Central, what was the necessity for this arbitration clause? If New Haven was to have no voice in the management of the property, what would be the necessity for this arbitration clause? If we are to construe their relationship as giving Central a dominant position, what would be the necessity for this arbitration clause? There could be no deadlocks and there would be no disputes between the parties necessitating resort to arbitration. The arbitration clause — regardless of its effectiveness—points directly to the intention of the parties and that was equality of control. Consequently, I believe that the basic determination of Special Term that New Haven has an equal voice with Central with respect to the control, maintenance and leasing of the Biltmore is a correct one and it need not sign the 1958 lease tendered to it by Central for signature nor does its refusal to do so result in a forfeiture of any of its rights. I, therefore, agree with Special Term that the lease entered into by Central with its subsidiary in 1958 is invalid. I would affirm the judgment of Special Term with the exception of that portion which orders the removal forthwith of all the subtenants now occupying the Biltmore Hotel. I think it was not within the power of the court to order such removal because such subtenants were not made parties to the action and were not before the court. New Haven, however, should be permitted to apply at the foot of the judgment for such relief it might deem proper in the circumstances if so advised. Accordingly, the judgment in favor of the defendant should be modified, on the law, by striking therefrom so much of the fifth decretal paragraph as directs the forthwith removal of those claiming under Realty; and by granting leave to the defendant to apply at the foot of the judgment, if so advised, for such relief as it might deem proper in the circumstances; and as so modified, the judgment should be affirmed, without costs. Footnotes [*] The Biltmore Hotel was erected on the lands designated. [*] It certainly did not forfeit New Haven’s equal right to the name “ Biltmore ” or its right to a 50% interest in the personal property acquired by it jointly with Central from their former tenant upon the occasion of that tenant’s default.