Wheeling & L. E. R. Co. v. Carpenter

PIOLLISTER, District Judge (after stating the facts as above). [1] The plan of reorganization of the coal company was in fact the plan of the railroad company. By its agents and employes it brought about the incorporation of the new coal company to take over the assets of the old coal company, which it controlled. It engineered the various steps through which the prior lien obligations were exchanged for the obligations of the old coal company prior to its bonded indebtedness, and the new bonds were issued in exchange for the old bonds at a reduction of 25 per cent, of their face value, and the stock of the new company was issued to itself. In this way, by agreement with the bondholders, becoming the owner of- all of the capital stock of the new coal company, its control over that company was absolute. It brought about the Hanna mining company contract with the coal company for royalties. Its own clerks kept the books of the coal company without additional compensation. It itself made with the Hanna mining company the contract modifying the mining company lease, which it caused its coal company to thereafter ratify. The various agreements to which the new coal company was a party were its agreements — the coal company solemnly going through the forms of corporate sanction. It dominated the bondholders’ committee, the secretary of which was one of its officers. It was admittedly the “real lessor” in the Hanna mining company lease. The only function left to the bondholders’ committee, as such, was to issue the prior lien obligations and the new bonds to those entitled thereto. Even these, dated July 1, 1901, could not be delivered until the railroad company had brought about that lease and the contract for coal for its own consumption. When the lease, dated July 1, 1901; was consummated, the railroad company, on the date of its actual execution, August 15, 1901, directed the bondholders’ committee to “go ahead.” The lease was the foundation of the plan, for the railroad company, neither by itself nor through its coal company, mined, intended to mine, or could mine any — 281 — coal. The mining company guaranteed by Hanna & Co., was to mine the coal, and the royalty paid by it was the only revenue the coal company had from which, together with the railroad company’s contributions payable to the trustee of the bondholders on the coal actually transported, the prior lien obligations, within the 10 years of their life, and interest, and interest on the bonds, and taxes on the real estate for 10 years, could be paid. So the only income contemplated by the plan and available for its purposes came directly or indirectly from the coal mined by the mining company. This revenue, within the 10 years, must be $200,000 for the prior lien obligations, $100,000 as interest at 5 per cent., $253,800 as interest on $634,500 of bonds, and $70,000 for realty taxes, estimated in the plan at $7,000 a year — a total of $623,-800. In these figures is found the reason why the railroad company required the Hanna mining company to agree on a minimum production of 700,000 tons a year. The royalties on that minimum would amount, in 10 years, to $455,000, and the railroad company’s contributions (leaving out of consideration, for the moment, the railroad company’s agreement with the mining company for coal for its own consumption, which, as it was not transported, was not subject to the agreed contribution per ton), $189,000, a total of $644,000, in which there is a margin of $20,200 over the $623,800, the bare necessities of the plan required. It was expected by all concerned that more than the minimum would be mined, and that the royalties and contributions would not only provide for the requirements of the plan, but would produce a sum in addition sufficiently large to accelerate the time of payment of the prior lien obligations and apply also to the payment of some of the bonds on allotment. The mining company was willing to mine, and could have mined, more than the minimum the railroad company required it to agree to mine, and Hanna & Co. were willing to sell, and could have sold more than the minimum, had not the railroad company refused and failed to transport the coal. It is clear enough that, if only the minimum were mined, the railroad company could not, consistently with the requirements of the plan, purchase from the mining company more coal during the 10 years than is represented by $20,200 at the percentage, under its contribution contract, of one cent and two cents, respectively, for the first two years, and three cents per ton for the succeeding eight years, for every ton it bought of the mining company for its own consumption reduced its contribution to the plan; the more it bought, the less its contributions would be, and vice versa. It is equally clear the mining company could not mine even the minimum, or any amount of coal, unless the railroad company furnished cars sufficient to carry it away. The success of the plan, therefore, lay wholly within the power of the railroad company. It could destroy the plan by denying: to Hanna & Co. cars sufficient to haul the coal away, or by purchasing from the mining company more coal for its own consumption than the integrity of the plan permitted. For the first two years (1902 and 1903) there were mined 95,932.95 tons in excess of the minimum, and thereafter there was a falling away each year in production from the minimum of enormous amounts of — 282 — coal — in 1904, more than 164,000 tons; in 1905, more than 306,000 tons; in 1906, nearly 252,000 tons; in 1907, more than 270,000 tons (the record not disclosing completely the deficits in each of the following years). And the evidence shows the railroad’s average purchase of fuel coal for the ten years was 185,564 tons (estimating the last year on the average for the preceding nine years), representing a contribution of about $50,000, which is nearly $30,000 more than was consistent with the integrity of the plan. Primarily the plan failed because, and admittedly, the railroad company did not furnish the Hanna mining company cars necessary to transport the coal. The railroad company is therefore to blame for the failure of the plan and the consequent damage to the bondholders by reason of the nonpayment of the prior lien obligations and interest unpaid. The railroad company, notwithstanding the failure of the plan because of its own wrongdoing, claims that in any event it can be required to pay only on the amount of coal actually mined and transported, as in its contribution contract it expressly agreed to pay, and that it is under no other obligation to the bondholders of its coal company. Can the railroad company, notwithstanding its culpability, escape legal liability to the bondholders ? The answer to the question depends, not only upon its express agreement to pay to the trustee of the bondholders the contribution on the-amount of coal transported by it, but also on its relation to its coal company, to Hanna & Co., and their mining company, and to the plan of reorganization of the coal company, as well as upon the effect of che receipt by it under the plan of all of the stock of the coal company and the advantage accruing to it of a diminution, to the extent of 25 per cent., of the bonded debt of its old coal company. The obligations of Hanna mining company under the original agreement to pay royalties are not now involved and cannot be considered, for the reason that the bondholders have not appealed from, and in their brief acquiesce in, the judgment of the District Court in which the validity of the modification of June 2, 1908, by which Hanna & Co. and their mining company were absolved from the payment of royalties in default and the minimum was reduced to 550,000 tons a year, was established. So far as the obligations of the railroad company rest upon express contract, they are found in its contribution agreement. This is drawn in such a way that it expressly obligates itself to pay only on “each ton of coal produced by the mines of said coal company and transported upon or over the road of said railroad company * * * until the entire principal and interest of such prior lien obligations should be paid and discharged.” There is here no requirement to pay on at least 700,000 tons annually, or any specific number of tons. So far as express contract is concerned, the railroad company obligated itself to pay only on the amount Hanna & Co. mined and it transported, although the amount it transported depended solely upon itself. Nor can it be said that the circumstances raise an implied agreement for a contribution on at least 700,000 tons a year, because, the subject-matter being expressly agreed upon, no other agreement can be implied. Hawkins v. United States, 96 U. S. 689, 24 L. Ed. 607; Creighton v. To — 283 — ledo, 18 Ohio St. 447. Nor can the railroad company be estopped from denying that it agreed to contribute on at least the minimum number of tons, because the bondholders must be held to have known, technically, at least, the extent of the railroad company’s express contract liability to them, as disclosed by its agreement. If the bondholders must depend upon the express agreement alone, the elaborate plan devised by the railroad company, which seemed to promise so much to the bondholders and in reliance on which they were willing to, and did, scale their holdings against the railroad’s coal property 25 per cent, and consent to-the railroad company’s ownership of all stock of its coal company as reorganized, was a mockery indeed. Is it possible the bondholders have no remedy, and a court of justice is powerless to afford them relief? We think the rights of the bondholders do not altogether rest upon express contract. Granting that in the railroad company’s agreement there was no limitation on the amount of coal it could take for fuel purposes, even if the amount it took was such encroachment upon the necessities of the plan as would result in reducing its contributions to a figure less than the amount the success of the plan required, and that no legal liability rested upon it to take only so much fuel coal as the integrity of the plan permitted, yet the fundamental fact underlay the plan and the various agreements that the railroad company would transport the coal. It is obvious that the bondholders and Hanna & Co. would not have gone into the plan if they had not supposed and had not reason to suppose that the railroad company’s equipment was sufficient for the purposes of the plan. Indeed, the railroad company made an express representation to Hanna & Co. of this fact. That a similar express representation was made to the bondholders or their committee does not appear, but we think an agreement with the bondholders to furnish sufficient cars to Hanna & Co. is implied from the circumstances of the case. The basis of the plan was the sufficiency of the equipment of the railroad company, a fact assumed as a matter of course — a fact which went with the plan — for without it the plan was a phantom, a framework of a plan, with form enough, but no substance. The situation is the same as if the railroad company had actually said to the bondholders that it would furnish sufficient cars to Hanna & Co. to carry the amount of coal Hanna & Co. agreed with it to rpine. It is no defense for the railroad company, against its own wrongdoing, to say that under the requirements of the Interstate Commerce Commission and the Ohio Railroad Commission and the decisions of courts it must distribute such cars as it had among all the coal operators on its line in the ratio of their relative needs; for this is not the case of an independent coal company or coal mining company operating on the line of a common carrier of freight whose supply of cars in times of shortage must be apportioned according to those requirements, for this coal company existed only on paper, and was owned and controlled by the railroad company. It made no move of its own volition, but was manipulated by the railroad company for its own purposes and in its own interests. But even if this is true, the bondholders — 284 — knew the relation of the railroad company to the coal company, and with that knowledge accepted the bonds. It, therefore, cannot be held that the prior lien obligations are the contract debt of the railroad company in the sense that it itself executed those obligations. Such a holding would necessarily involve the indebtedness of the railroad company on the bonds themselves. This the bondholders do not claim. No corporate form was used to deceive them. So far as express contract rights are concerned, the bondholders dealt with the coal company as a separate and distinct entity. If the railroad, company had permitted its coal-company to manage-its own affairs and deal with its creditors on terms of reorganization satisfactory to both, the relation of it to the coal company and its bondholders would be the same as to any other coal company along the line of its road, and this would probably be true even if it so happened that the railroad company owned all of the coal company’s stock; but here the coal company had no vitality as a corporation. Its owner devised and brought about the plan of reorganization making a separate express agreement with the bondholders, and brought about the agreement with Hanna & Co. Both agreements were integral parts of the plan. The railroad company for its own ends thrust itself into a situation with which it had no concern, if its coal company had an existence separate from it. Its interference caused the bondholders to agree to give something to it in exchange for the benefits promised them by the plan. Its intermeddling brought it into a direct "relation with the bondholders beyond and deeper than its express contract relation. That direct relation embodied the existence of a fact without which the bondholders would not have agreed to the plan, and in reliance upon which they have been subjected to loss. This fact was that the railroad company would haul away the coal mined, less what it bought for its own consumption. This fact, with the contribution agreement and the agreement to pay royalties, were the inducements to the acceptance of the plan and involved a tacit agreement by the railroad company to do the things it alone had the power to do to make the plan effective. When, therefore, the railroad company tendered the plan to the bondholders, it knew and they knew that its requirements involved an adequate supply of cars for transporting the coal. The railroad company, having brought about the Hanna mining company lease, directed the bondholders’ committee to “go ahead with the reorganization.” They did go ahead; and thereupon the bondholders, on their part, agreed that the railroad company should have all the stock of the coal company and the coal company should be excused from the payment of 25 per cent, of its bonded debt held by them. The bondholders complied with their agreement. The railroad company received the consideration. To. now permit it to limit its liability to a contribution only on the coal- actually transported by it, when the means of transportation were wholly in its own hands, would be to sanction conduct amounting to fraud on the bondholders. We think the railroad company’s liability can safely rest on an implied contract to furnish sufficient cars to transport at least the minimum. Nor is this conclusion wanting in -harmony with the rule “ex285 pressum facit cessare taciturn,” under which the railroad company claims that it is bound to do only that which it expressly agreed to do. That rule is not applicable here, because the express contract does not involve the same subject-matter. That was an express agreement to pay money as contributions on coal transported. This is an implied agreement to do that which, under the circumstances, the bondholders necessarily understood the railroad company would do. The bondholders are not suing for the amount the railroad company agreed to pay as contributions per ton on coal transported, but for damages for the failure of the railroad company to furnish cars to carry at least the amount of coal it required the mining company to mine. The implication arises from the nature and the circumstances of the case. [2] That circumstances surrounding an express contract and what is to be performed under it may raise implied incidental agreements not directly involving the subject-matter expressly agreed upon is illustrated by a decision of this court in C. & O. Ry. Co. v. McKell, 209 Fed. 514, 522, 126 C. C. A. 336, 344. In that case there was an express contract, which in one aspect was an agreement by a railroad company to take all the coal on McKell’s property, mined by him or his lessees, at a price, and to build a branch railroad on the property to reach the coal. The railroad company built the branch, but did not take all the coal contracted for. One of its defenses for its breach was that it was bound in law to impartially distribute its cars among all coal operators and had not enough to supply this particular operation. On this point Judge Denison said: “We agree with the court below that, if this contract is to be treated as one for the purchase by the railroad company of its fuel coal, it implied the liability to furnish cars, and that the railroad’s failure to provide cars to take away the fuel which it had bought and agreed to take when offered would be a breach of such contract, and that the full performance of defendant’s duties as a common carrier in impartially distributing a fair supply of cars would be no answer to the breach. * * * ” In Lovering v. Coal Co., 54 Pa. 291, the Supreme Court of Pennsylvania held that, a coal company’s railroad connecting its mines with navigation being notoriously its only means of transportation, all contracts with it for coal were made in view of that fact. For a valuable consideration the railroad company furnished a plan to the bondholders, the success of which depended solely upon itself. It was indispensable to the working of the plan that it would furnish Hanna & Co. with sufficient cars to carry the coal. It was so understood by all interests concerned, and it was not necessary to expressly stipulate on such matters. In 2 Parsons on Contracts (7th Ed.) p. 646, it is said. “The general ground of a legal implication is that the parties to the contract would have expressed that which the law implies, had they thought of it, or had they not supposed it was unnecessary to speak of it, because the law provided for it.” In 2 Elliott on Contracts, § 1360, it is said: “The above rule, * * * that where there is an express contract the law will not imply one, is only applicable to those cases in which the ex- — 286 — press contract and tliat implied by law relate to the same subject-matter, and where the provisions of the express contract are intended to control and supersede those which would otherwise be raised by implication.” Judge Minshall in Railway Co. v. Gaffney, 65 Ohio St. 104, 114, 61 N. E. 152, 153, aptly defines the kind of implied contract dealt with here. He says: “But contracts that are true contracts are frequently termed, implied contracts, as where, from the facts and circumstances, a court or jury may fairly infer, as a matter of fact, that a contract existed between the parties, explanatory of the relation existing between them. Such implied contracts are not generic-ally different from express contracts; the difference exists simply in the mode of proof. Express contracts are proved by showing that the terms were expressly agreed on by the parties,1 whilst in the other case the terms are inferred as .a matter of fact from the evidence offered of the circumstances surrounding the parties, making it reasonable that a contract existed between them by tacit understanding.” By not providing sufficient cars to transport the minimum, and to that extent reducing the tonnage upon which it expressly contracted to make contributions to a figure at which the plan could not succeed, the railroad company broke its implied contract with the bondholders to transport at least the minimum, less fuel coal, and the measure of their damage is the loss to which they have been subjected by the breach. Apparently the loss, recoverable, as disclosed by the record, is the face of the prior lien obligations, less about 5 per cent., figuring royalties on the amount actually mined in 1902 and 1903, and on 700,-000 tons annually for the succeeding eight years, and agreed contributions on the balance each year, after deducting the amount of fuel coal bought that year by the railroad company for its own consumption. But it is said by the railroad company that the adjudication of the validity of the modification was, since the bondholders were parties to the case, in effect a finding that it was within the power of the railroad company and its coal company, on the one side, and Hanna & Co. and their mining.company, on the other, to do away by agreement with all the obligations of the Hanna mining company and the railroad’s coal company, not only as between themselves, but also between the railroad company and the bondholders. The railroad company’s claim is that in that adjudication were included any and every obligation by the railroad company to the bondholders not embraced in the express agreement for contributions. We do not think this conclusion follows, for the reason that the rights of the bondholders asserted against the railroad company in this action were not directly in issue in that controversy, since the issues involved there and decided were between the railroad company, its coal company, and the Hanna mining company, and between the Hanna mining company, and the bondholders. In that controversy no issue was raised between the railroad company and the bondholders, for, if the court below had, in making its decision on the validity of the modification of the lease intended thereby to foreclose the bondholders against the railroad company, it could not have held, as it did, the bondholders entitled to require the railroad to pay the prior ljen obligations before maturity. — 287 — If we are right in holding the railroad company obligated to pay the damage caused the bondholders by its failure to furnish sufficient cars, it' is immaterial that it paid to the Mercantile Trust Company contributions, amounting to $54,578.73, or that its receiver advanced to the coal company $45,519.71, with which to pay interest on the coal company’s funded debt, the only credits which, in its assignments of error, it claims the court below erred in not allowing to it. These, or any other payments on such accounts, are immaterial, for the reason that if the cars hád been furnished under the implied agreement we have found to exist, to the extent and on the basis hereinbefore stated, the coal company’s receipts, in royalties and contributions, would have been sufficient to have paid interest on prior lien obligations, interest on bonds, and taxes on real estate, and to have accumulated a sum only a few thousand dollars short of the face of the prior lien obligations, as hereinbefore shown. Since the contribution was to continue until the prior lien obligations were paid, there can be no inequity in denying the application of the usual rule authorizing a receiver to elect not to be bound by a contract thought detrimental to his trust. The court below was right in setting aside its order discontinuing those payments. The claim of the railroad company to be excused from liability in any event, because of the clause in each of the bonds, “It is agreed by the holder of this bond that no recourse shall be had for its payment to the individual liability of any incorporator, stockholder, director, or officer of the Pittsburgh, Wheeling & Rake Erie Coal Company in any manner howsoever,” cannot be maintained, because that provision undoubtedly has reference to what is known as the double liability of stockholders under the Constitution and laws of Ohio in force when the bonds were issued, and for the further reason that this suit is not maintained because the railroad company was the owner of all of the stock of its coal company, but, having received by the plan all the stock of the coa.1 company and a reduction of that company’s debts, it, in consideration of these, made the express and implied agreements dealt with herein. As the court below expressly reserved questions of priority between the holders of prior lien obligations and other creditors of the railroad company not parties to this suit, transferring such question for final determination to case No. 7603 of the District Court of the United States for the Northern District of Ohio, Eastern Division, this decision does not interfere with, or affect in any way, the order of the District Court in that behalf. The conclusion is that the judgment of the District Court on the questions involved in this appeal must be and is modified, and the case is remanded to that court, with instructions to ascertain, by reference to a master or otherwise, the exact amount due the bondholders by the railroad company on the basis o £ computation herein indicated, and to enter a decree in conformity with the views expressed in this opinion. The costs in this court will be divided equally between the parties to this appeal.