Illinois Bell Telephone Co. v. Moynihan

• Decision Date: 31 January 1930
• Docket Number: No. 3746.,3746.
• Parties: ILLINOIS BELL TELEPHONE CO. v. MOYNIHAN et al. (CITY OF CHICAGO, Intervener.)
• Court: U.S. District Court — Northern District of Illinois

38 F.2d 77 (1930)

ILLINOIS BELL TELEPHONE CO. v. MOYNIHAN et al. (CITY OF CHICAGO, Intervener.)

No. 3746.

District Court, N. D. Illinois, E. D.

January 31, 1930.

COPYRIGHT MATERIAL OMITTED

Cutting, Moore & Sidley, of Chicago, Ill. (Horace K. Tenney, Wm. D. Bangs and Leslie N. Jones, all of Chicago, Ill., of counsel), for plaintiff.

Samuel A. Ettelson, Corp. Counsel, Haight, Adcock & Banning and Benjamin F. Goldstein, all of Chicago, Ill. (David E. Lilienthal, of Chicago, Ill., of counsel), for City of Chicago.

Oscar E. Carlstrom, Atty. Gen. of Illinois (Wm. C. Clausen, Asst. Atty. Gen., of counsel), for Illinois Commerce Commission.

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

EVANS and PAGE, Circuit Judges, and WILKERSON, District Judge.

The bill in this case, filed September 20, 1923, seeks to enjoin, on grounds of confiscation, rates for telephone service prescribed in an order of the Illinois Commerce Commission made on August 16, 1923, and effective October 1, 1923.

The rates now charged are those fixed by the Public Utilities Commission (the predecessor of the Commerce Commission) by order of December 20, 1920. The Commerce Commission instituted proceedings against the plaintiff on September 13, 1921, and by the order here attacked reduced the rates for four classes of coin box service.

The bill alleges that some of the company's property was arbitrarily disregarded in making the valuation, that the valuation is too low, and that certain expenses were improperly rejected. The commission and the city of Chicago, which was permitted to intervene as a defendant, answered the bill. Application for a temporary injunction was made. This was granted on December 21, 1923, after a hearing on affidavits, in which the disputed points were covered at length on both sides. The injunctional order recites that the affidavits are conflicting; that the court is of the opinion that the preliminary injunction should issue because the rates are confiscatory; that the whole matter should go to a final hearing upon evidence to be adduced before the court and not merely upon affidavits; that the court is prepared to set the case down for immediate trial; that a final disposition of the suit on its merits can be made within a few weeks; and that, pending such final hearing, a preliminary injunction should be granted.

The defendants did not avail themselves of the offer of an immediate trial tendered by the court, but elected to appeal to the Supreme Court from the order granting the temporary injunction. That order was affirmed in a memorandum opinion October 19, 1925. Smith v. Illinois Bell Telephone Company, 269 U. S. 531, 46 S. Ct. 22, 70 L. Ed. 397. Plaintiff then moved for a permanent injunction on the pleadings. That motion was denied, the reasons for the ruling being stated in the memorandum filed July 1, 1927. 39 F.(2d) 157.

The order granting the temporary injunction required plaintiff to enter into an undertaking that it would refund to its subscribers the amounts paid by them in excess of the sums chargeable under the order of August 16, 1923. The amounts so reserved for refunds up to January 1, 1929, were as follows: $427,289 for the last quarter of 1923; $1,719,624 for 1924; $1,765,444 for 1925; $1,774,492 for 1926; $1,793,918 for 1927; $1,812,746 for 1928. The exact sum for 1929 is not in the record, but almost $2,000,000 more has been added to the amount which has been accumulated in the reservation for refunds, the entire amount of such reservation being now more than $11,000,000.

Delay in bringing the case to trial is attributable to the city. The company has been ready at all times to proceed. Postponements were sought repeatedly by the city on the ground of change of counsel, lack of preparation, and inability to procure money with which to employ experts. Finally there was a peremptory setting of the case for trial on April 15, 1929. Counsel who now represent the city then came into the case and proceeded with the trial without delay. By agreement the evidence was taken before one of the judges. Hearings were held during a period of approximately two months, and a record made consisting of 3,000 pages of testimony and 281 exhibits.

We consider first the city's attack upon the standing of the Illinois Company as the real plaintiff in the case. Ninety-nine per cent. of the stock of the Illinois Company is owned by the American Telephone & Telegraph Company, which owns also substantially the same proportion of the stock of the Western Electric Company. The Illinois and American Companies unite in rendering long-distance service under an arrangement for division of tolls. At the time of this inquiry, October 1, 1923, there was in effect an agreement by which the Illinois Company paid to the American Company 4½ per cent. of its gross revenues for rent of instruments and as compensation for engineering, executive, financial, and other services. A large part of the materials entering into the construction of the plant and equipment of the Illinois Company were purchased from the Western Electric Company and much of its operating expense consisted of payments made under a contract with that company for apparatus and supplies.

The American Company, at the time in question, owned a controlling interest in 15 telephone companies which, in connection with other companies controlled by those subsidiaries and some companies in which its interest was not controlling, were and now are operated as a system with the avowed purpose of rendering a nation-wide and unified telephone service. "The Associated Companies," the American Company says, "are specialists in local service problems, with local operating forces identified and familiar with the needs of the communities they serve. The parent Company undertakes the solution of the problems that are common to all." In this way, it is said there is provided a central authority equipped to perform adequately general functions, leaving to the local companies responsibility for local affairs.

The city urges that, in bringing about this unified service, the American Company has exercised its control in such a way as to destroy the corporate identity of the Illinois Company, with the result that either the suit must fail for lack of the real plaintiff or, if permitted to stand, must be tried as if the American Company were the party before the court. "The Illinois Company," it is said, "is a mere agency or instrumentality of the American Company." The stock ownership gives to the American Company power to control the Illinois Company through the election of directors. This power, in itself, however, does not make the American Company the one which is operating the local public utility. It does not have the effect of destroying the separate corporate identity of the local company. The stock ownership does not give authority to dictate the acts of the directors of the local company; and, against accusations of fraud and misconduct, it will be presumed that the directors have performed their official duties honestly, and have acted in good faith with respect to the corporation of whose affairs they are in charge and the public to which it gives service. Pullman Palace Car Co. v. Missouri Pacific Co., 115 U. S. 587, 596, 6 S. Ct. 194, 29 L. Ed. 499; Porter v. Pittsburgh Bessemer Steel Co., 120 U. S. 649, 670, 7 S. Ct. 741, 30 L. Ed. 830; Peterson v. Chicago, Rock Island & Pacific Ry., 205 U. S. 364, 383, 27 S. Ct. 513, 51 L. Ed. 841; Houston v. S. W. Bell Tel. Co., 259 U. S. 318, 323, 42 S. Ct. 486, 66 L. Ed. 961; Missouri ex rel. S. W. Bell Tel. Co. v. Public Service Commission of Missouri, 262 U. S. 276, 288, 289, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; Indiana Bell Telehone Co. v. Public Service Com. (D. C.) 300 F. 190, 204; Northwestern Bell Telephone Co. v. Spillman (D. C.) 6 F.(2d) 663.

Courts, of course, will look through form to substance. Where the power of stock ownership is so exercised as to commingle the affairs of the corporations and make them practically one, courts will not permit themselves "to be blinded or deceived by mere forms of law but, regardless of fiction, will deal with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require." U. S. ex rel. Atty. Gen. v. Delaware & Hudson Co., 213 U. S. 366, 29 S. Ct. 527, 53 L. Ed. 836; C., M. & St. P. Ry. Co. v. Minneapolis Civic & Commerce Association, 247 U. S. 490, 38 S. Ct. 553, 557, 62 L. Ed. 1229.

It must not be overlooked that the order of the commission here involved is directed against the Illinois Company. The commission did not find that the corporate identity of the Illinois Company had been destroyed. It was treated as a corporation for the purpose of compelling it to establish the prescribed rates for service furnished by the operation of the property to which it has the legal title. It is not a fair application of the rule invoked by the city to say that the order of the commission may be enforced against the Illinois Company, as a corporate entity, and that the company then loses its corporate character when it attempts to show that the commission's order is confiscatory. Moreover, the commission, in establishing the rates complained against, did not deal with the business of the Illinois Company as an integral part of the business of the American Company. The city maintains that the question to be determined is: "What is a fair return to the investors who have placed their investment in the American Telephone and Telegraph Company, the real operator of the Chicago property in so far as the local property and the local use is concerned?" The commission did not proceed on that theory. The commission did not make an investigation of the business of the American Company for the purpose of fixing rates for that company. If the position now taken by the city is correct, the method pursued...