Todd v. CITIZENS'GAS CO. OF INDIANAPOLIS

Decision Date16 January 1931
Docket Number4401.,No. 4394,4394
PartiesTODD v. CITIZENS' GAS CO. OF INDIANAPOLIS et al. COTTER v. SAME.
CourtU.S. Court of Appeals — Seventh Circuit

COPYRIGHT MATERIAL OMITTED

Frederick E. Matson, Earl B. Barnes, and Austin V. Clifford, all of Indianapolis, Ind. (Matson, Ross, McCord & Clifford, and Barnes & Johnson, all of Indianapolis, Ind., of counsel), for appellant Todd.

William B. Cockley and Walter J. Milde, both of Cleveland, Ohio, and Louis B. Ewbank, Samuel Dowden, William L. Taylor, and Jackson Carter, all of Indianapolis, Ind., for appellants Cotter and others.

Fred C. Gause, John W. Holtzman, Edward H. Knight, Henry H. Hornbrook, Paul Y. Davis, Wm. H. Thompson, and Albert L. Rabb, all of Indianapolis, Ind. (Smith, Remster, Hornbrook & Smith, Pickens, Davidson, Gause, Gillion & Pickens, and Thompson, Rabb & Stevenson, all of Indianapolis, Ind., of counsel), for appellees.

Before ALSCHULER and EVANS, Circuit Judges, and WILKERSON, District Judge.

These appeals are from decrees, dismissing for want of equity bills of appellants, stockholders of appellee gas company, seeking to prevent the transfer by the gas company to the city of Indianapolis of an interest in the property of the gas company, pursuant to the terms of an ordinance passed in 1905, under which the company derived its right to enter upon and use the city streets and to operate its plant. The terms of the ordinance relating to the transfer to the city were embodied in the articles of incorporation of the company.

The first is a derivative action, and jurisdiction is based solely on the alleged unconstitutionality of a validating act passed by the Indiana Legislature in 1929. The second is a representative action, and jurisdiction is asserted on the ground of diversity of citizenship as well as the unconstitutionality of the validating act. The facts are substantially the same in both cases and are not in dispute.

To understand the contentions of the parties, it is necessary to have in mind the powers conferred upon the city by state statutes at the time the ordinance was passed. The city council was given power to license and regulate the supply, distribution, and consumption of artificial and natural gas, to fix by contract or franchise the prices thereof, to regulate the laying of mains and pipes, and to designate the streets and alleys through which the same should be laid and maintained. Acts 1905, p. 252. The state statutes also provided that the board of public works of the city should have power (1) to purchase, construct by contract or otherwise, and operate gas works, provided the power should not be exercised except pursuant to ordinance of the council and after an election held in relation thereto; (2) to contract for the furnishing of gas to the city and its inhabitants, and in the contract to fix terms and conditions and the prices to be charged therefor, provided the contract should be approved by ordinance of the council; (3) to authorize gas companies to use city streets and erect necessary structures therein, to prescribe the terms and conditions of such use, and to fix by contract the prices to be charged to patrons, provided the contract was approved by ordinance of the council. Acts 1905, pp. 279, 280. Another section of the act relating to cities provided that a city might determine to erect public utility works (including gas works) or to purchase or lease the same provided the council, before the approval of the contract or resolution therefor, should submit the question to the voters of the city in the manner specified in the act. Acts 1905, p. 392, 393.

The state statute relating to cities also provided that the council should have power to receive gifts, donations, bequests, and public trusts, and to agree to the conditions and terms accompanying the same and bind the corporation to carry them out. Acts 1905, p. 247.

The ordinance of August 25, 1905, approved a contract between the board of public works of Indianapolis and three individuals, who subsequently assigned their interest therein to the appellee gas company. The contract granted permission to enter upon the city streets and to construct, maintain, and operate a system of gas pipes and appurtenances thereto for the distribution and supply of gas to the city and its inhabitants. The grant was subject to the condition that the grantees should organize a corporation under the laws of Indiana to which the franchise and all interests thereunder should be assigned. It was required that the articles of incorporation of that corporation should contain, among other matters, the following provisions:

The capital stock of the corporation shall be not less than $1,000,000, and no increase shall be permitted, unless the new stock shall be sold to the highest bidder at a public auction.

The entire capital stock shall be placed under the control of five trustees, to be named in the articles of incorporation (one of them to be nominated by the Mayor), which board of trustees shall have full, complete, exclusive, and irrevocable power, during the continuance of the corporation, to hold the stock and vote the same as fully and completely as if they were the owners of the stock, to elect directors and fill vacancies in the board of directors. The stock shall be voted as a unit, and, in case of disagreement, the majority shall cast the vote of the board. Vacancies in the board shall be filled in the manner specified in the agreement.

The trustees shall issue to each subscriber to the capital stock, upon payment of the subscription and upon the stock therefor being issued to the trustees, an assignable certificate showing the amount of stock held by the trustees, in trust for the subscriber, and the holder of the certificate shall be entitled to receive all dividends declared on the stock, not exceeding, however, 10 per cent. per annum, so long as the certificates shall remain outstanding and uncanceled.

The earnings of the company shall be used in the following order, to wit: First, to the payment of matured debts and operating expenses; second, to the payment semiannually of said dividends of 10 per centum per annum and any unpaid accrued dividends; third, to such extensions and betterments as may be ordered by the board of public works; and the excess to the payment in whole or partial payments of the amounts subscribed.

When the certificate holders shall have received, by dividends or otherwise, an amount equal to the face of the certificates and interest at the rate of 10 per cent. per annum, the certificates, so issued to the subscribers, shall be deemed fully paid and canceled, and it shall be the duty of the trustees and directors of the company to convey the gas plant and property belonging to the company to the city to be owned and operated or leased by it, and all the right, title, and interest of the company or its certificate holders, stockholders, officers, directors, or trustees shall be deemed to be fully paid and extinguished, and all such certificates, whether of stock or otherwise, shall be surrendered and canceled and the corporation shall be wound up.

The business and prudential concerns of the corporation shall be managed by a board of directors of nine members to be chosen by the board of trustees. If upon the expiration of the term and period of the franchise, the same shall terminate without the payment of the certificates and dividends thereon, as above provided, then, upon notice to such effect, to be given by the board of public works to the board of directors of the corporation at least six months before the expiration of the franchise period, the board of directors shall mortgage the gas plant and property for such sum as will enable the corporation to pay its stock or certificate holders an amount which with what has been paid already will equal the full amount of such subscription, with dividends at the rate of 10 per cent. per annum thereon, and with the proceeds thereof, or, with the mortgage notes so issued in proper amounts, pay off and discharge the amounts due such certificate holders and convey the plant to the city, subject to such obligations and other legal obligations against the company.

The agreement expressly stated that it was understood that all the above stipulations to be provided in the articles of incorporation of the company should bind and be enforceable by the city against the company as conditions of the contract.

The agreement also provided that the grant was made upon the condition that the grantees or their assigns should secure or construct, and put in operation, a fuel gas plant with not less than 100 miles of mains within eighteen months from the date of the sale of the Consumers' Gas Trust Company mains now pending, and, failing therein, should forfeit all rights under the grant.

The agreement also provided that the grant was made on additional conditions. Those conditions provided for a bond for the performance of the contract, protected the city against damage claims, stated requirements as to the laying of pipes and the supervision thereof by the board of public works, specified the quality of gas to be furnished, and limited the price thereof, provided for extensions of service, and for inspections and tests by the board of public works, and contained other regulations to which the utility was to be subject in rendering its service to the public. The agreement provided that it was to be in force for twenty-five years from the date of its ratification by the council, and that thereafter all rights of the company to occupy the city streets should cease.

The agreement also contains the following provisions:

"If the plant and system of mains of said company shall not have become the property of said city by the cancellation of the certificates of subscribers and conveyances of such property to said city by the Board of Directors and Trustees of said company on or before...

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