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Chase Nat. Bank of City of New York v. Citizens Gas Co.

June 6, 1940


Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division. Rebert C. Baltzell, Judge.

Author: Kerner

Before MAJOR and KERNER, Circuit Judges and IGOE, District Judge.

KERNER, Circuit Judge.

This action was brought by Chase National Bank (as trustee under a deed of trust) against (1) the city of Indianapolis and the individual members of its board of trustees and its board of directors for Utilities, (2) the Citizens Gas Company and (3) the Indianapolis Gas Company. Hereafter Chase National Bank will be referred to as "Chase"; defendant (1) as the "City"; defendant (2) as the "Citizens Gas"; and defendant (3) as the "Indianapolis Gas."

Chase sued as trustee under a mortgage deed of trust securing the payment of principal and interest of the mortgage bonds of Indianapolis Gas. Among other things Chase sought to recover judgment for the overdue interest on the bonds against all of the defendants and also against the property formerly owned by Citizens Gas and now owned and operated by the City. Chase also sought a declaratory judgment holding that a certain lease hereafter described is binding on all the defendants and the property just referred to.

The cause was tried by the District Court who made special findings of fact and pronounced its conclusions of law thereon. In substance the court concluded that the lease in question was invalid, and that Chase recover the sum of $1,032,150 from Indianapolis Gas (this being the amount of overdue and unpaid coupons on the Indianapolis Gas bonds at the time of the court's decree). Chase and Indianapolis each prosecuted separate appeals from the court's decree. These appeals have been consolidated and are now before this court.

Both Chase and Indianapolis Gas contend that the District Court erred in holding the lease invalid and not binding on Citizens Gas and the City. Moreover, Chase contends that the District Court erred in failing to render judgment for unpaid coupons against all the defendants and the property referred to above. These contentions and others as well shall be considered in the course of the opinion. Now we shall relate the pertinent facts which on the whole are not in dispute.

Natural gas was discoverd in Indiana in 1886 several miles from Indianapolis. At that time the only gas plant in the City was that of Indianapolis Gas, which supplied artificial gas. Shortly after natural gas was discovered, Indianapolis Gas acquired all the natural gas lines extending from the city to the producing field. The people feared a possible monopoly by Indianapolis Gas. This led to the birth of the Consumers' Gas Trust Company, organized in 1887 for the purpose of furnishing natural gas. For more factual detail, see Consumers' Gas Trust Company v. Quinby, 7 Cir., 137 F. 882; Todd v. Citizens' Gas Co. (Cotter v. Citizens' Gas Co.), 7 Cir., 46 F.2d 855, 859, 860.

In 1902 Indianapolis Gas executed a mortgage to secure the payment of bonds issued and to be issued in the future. The mortgage contained an after-acquired property clause, and Chase is now the sole trustee under the mortgage deed of trust. Originally, $4,000,000 bonds were issued. Later more bonds were issued, and now there are bonds outstanding in the amount of $6,881,000. For more factual detail, see Chase Nat. Bank v. Citizens Gas Co., 7 Cir., 96 F.2d 363, 364.

The Consumers' Gas Trust Company conducted its gas business until 1904, when the natural gas field failed. This marked the corporate death of this company, for the manufacture and sale of artificial gas was beyond the scope of its charter. Quinby case, 7 Cir., 137 F. 882. At this time the City's right to purchase this plant arose, and the doubt was resolved in the City's favor. City of Indianapolis v. Consumers' Gas Trust Co., 7 Cir., 144 F. 640. See, also, Act of 1905, Ind., c. 129, pp. 247, 252, 279, 280, 396, c. 139, p. 434; Todd case, supra, 7 Cir., 46 F.2d at pages 857, 858. The City did not purchase the plant, however, but the circumstances at this time gave birth to Citzens Gas (as shall be described below).

On August 25, 1905 the City passed its "franchise ordinance," by virtue of which it entered into a franchise contract granting the right to carry on the business of manufacturing and distributing artificial gas to the City and its inhabitants for 25 years. This franchise was granted on the express condition that the grantees would organize a corporation to which the franchise would be assigned and whose charter would include certain specified provisions. In 1906 Citizens Gas was organized and to it was assigned the franchise just mentioned. The provisions required to be embodied in the charter, described below, in the main related to the capital stock, the creation of the voting trust and the duty of the trustees to convey the plant to the city upon certain conditions.

Citizens Gas was organized for a corporate term of 50 years for the purpose of supplying the city of Indianapolis with light, heat and power. The capital stock was issued immediately and then turned over to the trustees, and certificates of equitable ownership were delivered to the owners of the stock. The trustees and directors elected by them were to operate the gas plant until the time came for them to convey the property to the City. The duty to convey was dependent upon the receipt by the certificate holders of an amount equal to their investment plus a return of 10% per year thereon. Upon the satisfaction of the claims of the certificate holders, the plant and property of Citizens Gas was to be conveyed to the City subject to all outstanding legal obligations of the company.*fn1

Once organized Citizens Gas purchased the gas plant property of Consumers Gas Trust Company and soon this public utility was actively engaged in the business of manufacturing and distributing gas. As such, Citizens Gas became "amenable to the law [of Indiana] to the same extent as any other public utility." Williams v. Citizens' Gas Co., 206 Ind. 448, 457, 188 N.E. 212, 215. Also "the Citizens' Gas Company, as a public utility, had the privilege of surrendering its franchise and the right to receive an indeterminate permit," Williams case, 206 Ind. at page 458, 188 N.E. at page 215, supra, and this it did in 1921, although receiving this benefit under the law carried with it utility consent to a future purchase of its property by the municipality which it served. 10 Burns' Indiana Stat. Ann. 1933, Secs. 54-605 and 54-606.

These then were the circumstances which gave birth to Citizens Gas, and to the courts these circumstances spelled out a public charitable trust. As this court expressed it, Citizens Gas "was a quasi public corporation"; the "legal title to the property which was acquired with the money contributed by the certificate holders was in the Citizens' Company, subject to the trust in favor of the inhabitants of the city. * * * The conveyance to the city to be made when the charge in favor of certificate holders was released was a continuance of the trust; the city being the successor in the fiduciary relationship." Todd v. Citizens' Gas Co., 7 Cir., 46 F.2d 855, 865, 866. Yet, even granting the "existence of a trust relationship between the Citizens' Gas Company and a class of persons [inhabitants of the City] * * *, that relationship cannot qualify the power of control of the state over the Citizens' Gas Company as a public utility." Williams v. Citizens' Gas Co., 206 Ind. 448, 457, 188 N.E. 212, 215.

And thus it came to pass that Citizens Gas and Indianapolis Gas became and were competing utilities in the city of Indianapolis. This competitive condition existed until 1913 when negotiations between the two rivals were begun which culminated in the execution of the 99 years lease in question. It is to be noted that in 1913 Indianapolis Gas had 375 miles of mains and was completing a modern coke oven and plant, and Citizens Gas had 184 miles of mains.The capital stock of the former was $2,000,000 and bonds in the amount of $4,835,000 were outstanding, while that of the latter was $1,250,000 and $1,247,000 respectively. In addition reports issued by Citizens Gas to its stockholders during this period indicated that it considered the existing competition between the two rivals dangerous to the company and to the community and that a merger would make possible certain important economies.

At any rate in March of 1913 the Indiana legislature passed the Shively-Spencer Act which created the Public Service Commission and conferred upon it certain broad powers of control and regulation over public utilities. 3 Burns' R.S. 1926, p. 1238, ยง 12672 et seq. Among other things the act provided that when two public utilities are engaged in the same business in the same locality, one may lease or sell its property to the other if the transaction meets with approval by the Commission. Shortly thereafter the two utilities in question jointly petitioned the Public Service Commission for permission to execute the 99-year lease here involved.

The power to execute this 99 years lease was authorized by the Commission in October of 1913. According to the lease as finally approved and executed, Indianapolis Gas leased its gas plant property to Citizens Gas for a term of 99 years. In return the lessee agreed to pay a 6% return on the capital stock of Indianapolis Gas (par value $2,000,000), interest on the mortgage bonds of Indianapolis Gas ($6,881,000 now outstanding), and taxes on the leased property plus certain additional miscellaneous expenditures.During the administrative proceedings one Frank S. Fishback intervened and objected to the execution of the lease. The City was represented by counsel but it did not object to the execution of the lease or to the order of the Commission. The objections were overruled, an order approving the lease entered, and Fishback's petition for rehearing denied.

Fishback intervened as an inhabitant of the city of Indianapolis and as certificate holder of Citizens Gas, and objected in essence that the lease was invalid. Among other things he stated the following: Citizens Gas had no power to execute the lease because (a) the duration of the lease exceeded the corporate life of the lessee and (b) the city of Indianapolis was the real owner of the lessee's property. In his petition for rehearing he stated the following: (1) Compliance with the terms of the lease would make it impossible for Citizens Gas to perform its contract with the City relating to the taking over of the property of Citizens Gas and (2) the City had not given its consent to the lease. The Commission overruled these grounds of objection and approved the lease.

Then Fishback instituted suit in the state court to set aside the order of the Commission, and joined as parties defendant the Commission, Citizens Gas, Indianapolis Gas, and the City. In the main the complaint alleged the grounds urged at the administrative proceedings. The City's answer denied these alleged grounds, and the other defendants demurred thereto. On the day of judgment and prior to entry thereof Fishback dismissed as to the City. A judgment was rendered sustaining the demurrers and an appeal was taken therefrom. Later the appeal was dismissed for failure to perfect it in time. Fishback v. Public Service Commission et al., 193 Ind. 282, 138 N.E. 346, 139 N.E. 449.

Thus it happened that in 1913 the competition between Indianapolis Gas and Citizens Gas came to an end. Citizens Gas acquired the plant property of the other and from 1913 to September 9, 1935, operated the leased property with its own as part of a consolidated system. During this period Citizens Gas controlled the entire gas business of the city of Indianapolis and after 1921 it operated the two properties in question under an indeterminate permit of the Public Service Commission. In all Citizens Gas made payments under the lease that amounted to $11,668,984.77. It also expended around $2,000,000 for capital improvements on the leased property, but for this it was reimbursed by the issuance of Indianapolis Gas bonds which Citizens Gas then sold to the public through a firm of investment bankers.*fn2

On March 11, 1929, the Indiana legislature passed legislation which authorized cities to "take over, adopt and assume the performance of the provisions of any lease under which any utility property may be held at the time of the acquisition of any utility by any such city." Chapter 77, Laws of 1929, Ind., pp. 252, 257, 259, 260. This legislation also provided that the transferee city "shall be authorized to accept, hold and own all the property of such corporation so transferred to it * * * and any right, title or interest such transferring corporation [the utility] may have in any lease upon other property." Chapter 78, Laws of 1929, Ind., pp. 268-271. This legislation becomes pertinent in view of certain pleadings in a federal case filed April 30, 1929. Todd v. Citizens' Gas Co. et al., 7 Cir., 46 F.2d 855. Therein the city of Indianapolis admitted in its answer to the complaint that the legislation above was introduced and passed at the request of the City and that the particular legislation was prepared by special counsel of the City "employed for the purpose of bringing about a transfer of the plant and property" of Citizens Gas to the City.*fn3

Nine days later on March 20, 1929 the City gave Citizens Gas notice that it was exercising its right to take over the trust property as successor trustee of the public charitable trust. Thus in the resolution of March 20 the City resolved that it would take over "all rights, title, itnerests and ownership, of whatever nature or character * * * transferred or vested in and to said City in * * * the gas plant, mains and property of said Citizens Gas Company by virtue of" (1) the franchise contract of August 25, 1905, (2) the articles of incorporation of Citizens Gas, (3) the conditions stated in the certificates of the owners of the stock, and (4) all "Statutes of this state and other laws relating to the subject matter hereof."

By this same resolution the City directed Citizens Gas to mortgage the property in a sum sufficient to discharge the certificate holders and then demanded Citizens Gas to convey "the plant, property and assets" subject to "such mortgage and other legal obligations against said company." This resolution was served upon Citizens Gas and on April 3, 1929, that company recognized "the trust created by the franchise * * * and by the Articles of Association," acknowledged the right ...

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