113 F.2d 217 (7th Cir. 1940), 7143, Chase Nat. Bank of City of New York v. Citizens Gas Co. of Indianapolis

Docket Nº:7143, 7144.
Citation:113 F.2d 217
Case Date:June 06, 1940
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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113 F.2d 217 (7th Cir. 1940)







Nos. 7143, 7144.

United States Court of Appeals, Seventh Circuit.

June 6, 1940

         Rehearing Denied July 19, 1940.

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[Copyrighted Material Omitted]

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         William L. Taylor and Harvey J. Elam, both of Indianapolis, Ind., and Howard F. Burns and John Adams, both of Cleveland, ohio (Baker, Hostetler & Patterson, of Cleveland, Ohio, of counsel), for Chase Nat. Bank.

         Louis B. Ewbank and William R. Higgins, both of Indianapolis, Ind., for Indianapolis Gas Co.

         Paul Y. Davis and William G. Sparks, both of Indianapolis, Ind. (Davis, Pantzer, Baltzell & Sparks, of Indianapolis, Ind., of counsel), for Citizens Gas Co. of Indianapolis.

         Edward H. Knight, Michael B. Reddington, William H. Thompson, and Patrick J. Smith, all of Indianapolis, Ind., for City of Indianapolis and others.

         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 discovered 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

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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.2dat pages 857, 858. The City did not purchase the plant, however, but the circumstances at this time gave birth to Citizens 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. 1

         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

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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 Shivley-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, Sec. 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...

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