Ashwander v. Tennessee Valley Authority

Decision Date17 February 1936
Docket NumberNos. 403,404,s. 403
Citation297 U.S. 288,80 L.Ed. 688,56 S.Ct. 466
PartiesASHWANDER et al. v. TENNESSEE VALLEY AUTHORITY et al. (two cases). *
CourtU.S. Supreme Court

[Syllabus from pages 288-290 intentionally omitted] Messrs. Forney Johnston, of Birmingham, Ala., and James M. Beck, of Washington, D.C., for petitioners.

[Argument of Counsel from pages 291-307 intentionally omitted]

Page 307

Messrs. John Lord O'Brian and Stanley F. Reed, Sol. Gen., both of Washington, D.C., for respondent Tennessee Valley Authority.

[Argument of Counsel from pages 307-314 intentionally omitted]

Page 314

Mr. W. H. Mitchell, f Florence, Ala., for respondent City of florence, ala.

Messrs. Thomas W. Martin, Perry W. Turner, and William Logan Martin, all of Birmingham, Ala., for respondent Alabama Power Co.

Messrs. Courtland Palmer, of New York City, and John T. Stokely, of Birmingham, Ala., for respondent Chemical Bank & Trust Co.

Page 315

Mr. Chief Justice HUGHES delivered the opinion of the Court.

On January 4, 1934, the Tennessee Valley Authority, an agency of the federal government,1 entered into a contract with the Alabama Power Company, providing (1) for the purchase by the Authority from the Power Company of certain transmission lines, substations, and auxiliary properties for $1,000,000; (2) for the purchase by the Authority from the Power Company of certain real property for $150,000; (3) for an interchange of hydroelectric energy, and, in addition, for the sale by the Authority to the Power Company of its 'surplus power,' on stated terms; and (4) for mutual restrictions as to the areas to be served in the sale of power. The contract was amended and supplemented in minor particulars on February 13 and May 24, 1934.2

The Alabama Power Company is a corporation organized under the laws of Alabama, and is engaged in the generation of electric energy and its distribution generally throughout that state; its lines reaching 66 counties. The transmission lines to be purchased by the Authority extend from Wilson Dam, at the Muscle Shoals plant owned by the United States on the Tennessee river in

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northern Alabama, into seven counties in that state, within a radius of about 50 miles. These lines serve a population of approximately 190,000, including about 10,000 individual customers, or about one-tenth of the total number served directly by the Power Company. The real property to be acquired by the Authority (apart from the transmission lines above mentioned and related properties) is adjacent to the area known as the 'Joe Wheeler dam site,' upon which the Authority is constructing the Wheeler Dam.

The contract of January 4, 1934, also provided for co-operation between the Alabama Power Company and the Electric Home & Farm Authority, Inc., a subsidiary of the Tennessee Valley Authority, to promote the sale of electrical appliances, and to that end the Power Company, on May 21, 1934, entered into an agency contract with the Electric Home & Farm Authority, Inc. It is not necessary to detail or discuss the proceedings in relation to that transaction, as it is understood that the latter corporation has been dissolved.

There was a further agreement on August 9, 1934, by which the Alabama Power Company gave an option to the Tennessee Valley Authority to acquire urban distribution systems which had been retained by the Power Company in municipalities within the area served by the transmission lines above mentioned. It appears that this option has not been exercised and that the agreement has been terminated.

Plaintiffs are holders of preferred stock of the Alabama Power Company. Conceiving the contract with the Tennessee Valley Authority to be injurious to the corporate interests and also invalid, because beyond the constitutional power of the federal government, they submitted their protest to the board of directors of the Power Company and demanded that steps should be taken to have the contract annulled. The board refused, and the

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Commonwealth & Southern Corporation, the holder of all the common stock of the Power Company, declined to call a meeting of the stockholders to take action. As the protest was unavailing, plaintiffs brought this suit to have the invalidity of the contract determined and its performance enjoined. Going beyond that particular challenge, and setting forth the pronouncements, policies, and programs of the Authority, plaintiffs sought a decree restraining these activities as repugnant to the Constitution, and also asked a general declaratory decree with respect to the rights of the Authority in various relations.

The defendants, including the Authority and its directors, the Power Company and its mortgage trustee, and the municipalities within the described area, filed answers, and the case was heard upon evidence. The District Court made elaborate findings and entered a final decree annulling the contract of January 4, 1934, and enjoining the transfer of the transmission lines and auxiliary properties. 9 F.Supp. 965. The court also enjoined the defendant municipalities from making or performing any contracts with the Authority for the purchase of power and from accepting or expending any funds received from the Authority or the Public Works Administration for the purpose of constructing a public distribution system to distribute power which the Authority supplied. The court gave no consideration to plaintiffs' request for a general declaratory decree.

The Authority, its directors, and the city of Florence appealed from the decree and the case was severed as to the other defendants. Plaintiffs took a cross-appeal.

The Circuit Court of Appeals limited its discussion to the precise issue with respect to the effect and validity of the contract of January 4, 1934. The District Court had found that the electric energy required for the territory served by the transmission lines to be purchased

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under that contract is available at Wilson Dam without the necessity for any interconnection with any other dam or power plant. The Circuit Court of Appeals accordingly considered the constitutional authority for the construction of Wilson Dam and for the disposition of the electric energy there created. In the view that the Wilson Dam had been constructed in the exercise of the war and commerce powers of the Congress and that the electric energy there available was the property of the United States and subject to its disposition, the Circuit Court of Appeals decided that the decree of the District Court was erroneous and should be reversed. The court also held that plaintiffs should take nothing by their cross-appeal. 78 F.(2d) 578. On plaintiffs' application we granted writs of certiorari. 296 U.S. 562, 56 S.Ct. 145, 80 L.Ed. 396.

First. The Right of Plaintiffs to Bring this Suit. Plaintiffs sue in the right of the Alabama Power Company. They sought unsuccessfully to have that right asserted by the Power Company itself, and, upon showing their demand and its refusal, they complied with the applicable rule.3 While their stock holdings are small, they have a real interest, and there is no question that the suit was brought in good faith.4 If otherwise entitled, they should not be denied the relief which would be accorded to one who owned more shares.

Plaintiffs did not simply challenge the contract of January 4, 1934, as improvidently made—as an unwise exercise of the discretion vested in the board of directors. They challenged the contract both as injurious to the

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interests of the interests of the corporation and as an illegal tran action—violating the fundamental law. In seeking to prevent the carrying out of the contract, the suit was directed, not only against the Power Company, but against the Authority and its directors upon the ground that the latter, under color of the statute, were acting beyond the powers which the Congress could validly confer. In such a case it is not necessary for stockholders—when their corporation refuses to take suitable measures for its protection—to show that the managing board or trustees have acted with fraudulent intent or under legal duress. To entitle the complainants to equitable relief, in the absence of an adequate legal remedy, it is enough for them to show the breach of trust or duty involved in the injurious and illegal action. Nor is it necessary to show that the transaction was ultra vires the corporation. The illegality may be found in the lack of lawful authority on the part of those with whom the corporation is attempting to deal. Thus, the breach of duty may consist in yielding, without appropriate resistance, to governmental demands which are without warrant of law or are in violation of constitutional restrictions. The right of stockholders to seek equitable relief has been recognized when the managing board or trustees of the corporation have refused to take legal measures to resist the collection of taxes or other exactions alleged to be unconstitutional (Dodge v. Woolsey, 18 How. 331, 339, 340, 345, 15 L.Ed. 401; Pollock v. Farmers' Loan & Trust Company, 157 U.S. 429, 433, 553, 554, 15 S.Ct. 673, 39 L.Ed. 759; Brushaber v. Union Pacific R. Co., 240 U.S. 1, 10, 36 S.Ct. 236, 60 L.Ed. 493, L.R.A. 1917D, 414, Ann.Cas. 1917B, 713); or because of the failure to assert the rights and franchises of the corporation against an unwarranted interference through legislative or administrative action (Greenwood v. Union Freight R. Co., 105 U.S. 13, 15, 16, 26 L.Ed. 961; Cotting v. Kansas City Stock Yards Co., 183 U.S. 79, 114, 22 S.Ct. 30, 46 L.Ed. 92). The remedy has been accorded to stockholders of public service corporations with respect to rates alleged to be con-

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fiscatory. Smyth v. Ames, 169 U.S. 466, 469, 517, 18 S.Ct. 418, 42 L.Ed. 819; Ex parte Young, 209 U.S. 123, 129, 130, 143, 28 S.Ct. 441, 52 L.Ed. 714, 13 L.R.A.(N.S.) 932, 14 Ann.Cas. 764. The fact that the directors in the exercise of...

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