Pittsfield & North Adams Railroad Corp. v. Boston & Albany Railroad Co.

• Decision Date: 30 June 1927
• Parties: PITTSFIELD AND NORTH ADAMS RAILROAD CORPORATION v. BOSTON AND ALBANY RAILROAD COMPANY.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

260 Mass. 390

PITTSFIELD AND NORTH ADAMS RAILROAD CORPORATION v. BOSTON AND ALBANY RAILROAD COMPANY.

Supreme Judicial Court of Massachusetts, Suffolk.

June 30, 1927

December 10, 1926.

Present: RUGG, C.

J., BRALEY, CROSBY PIERCE, & SANDERSON, JJ.

Landlord and Tenant, Construction of lease: covenant to pay "expenses." Contract, In writing; Construction conduct of parties. Tax, Income. Railroad. Words, "All expenses."

In an action, by one railroad corporation against a second which was the successor to all rights of a third railroad corporation as lessee under the provisions of a lease, and renewal thereof by the plaintiff of its railroad together with all its "lands, depots, buildings, tracks, fixtures, property, rights, privileges and franchises thereto appertaining" with the full right to use the same in any way, the declaration set out the agreement in renewal of the lease which was between the plaintiff and the defendant as the original lessee's successor and in which was a paragraph containing covenants to be performed by the plaintiff to enable the defendant to operate the railroad and which closed with the words, "all expenses of . . . [the plaintiff] being paid by the . . . [defendant]." The lease contained no reference whatever to taxes. There were further allegations in the declaration that the defendant always had paid taxes assessed upon the plaintiff, including Federal income taxes, until the controversy arose. The action was to recover Federal income tax assessed in 1924 which the plaintiff had paid. The defendant demurred. Held, that

(1) It could not be said as matter of law, in view of all the allegations of the declaration, that the clause in which was found the word "expenses" was limited to such expenditures as arose from performance of the covenants of the lessor;

(2) It was difficult to believe that the subject of taxes on the railroad of the plaintiff was absent from the minds of those who drafted the two indentures;

(3) The words "all expenses" in the circumstances were ambiguous and therefore the interpretation placed by the action of the parties through so many years upon the scope of that obligation imposed upon the defendant by the indenture was of controlling significance;

(4) The declaration set forth a good cause of action; (5) Stony Brook Railroad v. Boston & Maine Railroad, ante, 379, distinguished.

Position of a clause in a written instrument is not a decisive factor in determining its meaning or its modifying effect; its subject matter is a significant element in this regard; its relative importance must be weighed in connection with all the other conditions in the instrument and the purpose to be accomplished.

The general rule that, where a lease is silent on the subject, the obligation to pay taxes rests upon the lessor, is not an inflexible principle; it yields to a contrary conclusion where overbalancing considerations lead to that result.

It is a general rule for the construction of written instruments that, when the language is open to doubt and parties whose interests are diverse have from the outset adopted and acted upon a particular construction, such construction will be of great weight with the court, and will usually be adopted by it.

CONTRACT, with a declaration as amended described in the opinion. Writ dated June 2, 1925.

The defendant demurred to the declaration. The demurrer was heard and overruled in the Superior Court by Cox, J., who reported his ruling to this court for determination.

N. Matthews, (C.

H.Baesler with him,) for the plaintiff.

L.A. Mayberry, (G.H. Fernald, Jr., & W.F. Levis with him,) for the defendant.

RUGG, C.J. This is an action of contract brought to recover certain instalments of the Federal income tax assessed against the plaintiff on account of rental received by it from the defendant. The case was heard upon a demurrer to the declaration. The allegations in brief are that both the plaintiff and the defendant are corporations organized under the laws of Massachusetts. In 1845, at about the time of the incorporation of the plaintiff, the Western Railroad Corporation entered into a written agreement with subscribers of stock in the plaintiff whereby, in consideration of subscriptions to stock of the plaintiff to construct its railroad, the amount to be not less than a specified sum, the Western Railroad Corporation agreed with the subscribing parties that it would take a lease of the railroad of the plaintiff for a stated term for a rental to equal six per cent upon the cost of the railroad. In 1846 an indenture under seal was entered into by the plaintiff and the Western Railroad Corporation, a predecessor of the defendant, whereby the Western Railroad Corporation agreed to construct and finish the Pittsfield and North Adams Railroad "in the name and under the charter of the party of the second part [the Pittsfield and North Adams Railroad Corporation], with funds to be provided by the said party of the second part;" and the plaintiff did lease unto the Western Railroad Corporation the whole of its railroad together with all its "lands, depots, buildings, tracks fixtures, property, rights, privileges and franchises thereto appertaining" with the full right to use the same in any way. The term of this lease was for thirty years with a right of renewal. It is further alleged that "the said Western Railroad Corporation agreed by said indenture to pay all expenses of the plaintiff; to proceed in the name and under the charter of the plaintiff to construct said Pittsfield and North Adams Railroad Corporation, its buildings and fixtures as the funds shall be provided by the plaintiff; when constructed to provide the necessary power and equipment and open and run the same during the demised term." The rent reserved was a sum equal to six per cent annually of the whole cost of the road. The railroad was completed and opened for public use in 1846 and operated by the Western Railroad Corporation in conformity to the lease. In 1867, the Boston and Albany Railroad Company became the corporate successor of the said Western Railroad Corporation and operated the said demised railroad during the remainder of the term of the 1846 indenture. The option for a new lease was exercised by the defendant and an indenture between the plaintiff and defendant was executed in 1876. This indenture contained substantially the same description of the property demised as the earlier indenture and conferred many of the same powers upon the lessee. The clause as to rental was that the defendant will "pay as rent therefor a sum of Twenty-Two Thousand Five Hundred dollars, said sum being equal to five per cent annually upon the amount of the whole cost of said road, its buildings and fixtures, as the same shall have been paid" by the plaintiff, to be paid semiannually during the term, which was for ninety-nine years. The lease contained the further clause, identical with a clause in the indenture of 1846, namely: "And the said party of the second part [the plaintiff] hereby covenant and agree with the said party of the first part [the defendant] their successors and assigns, that they will during the term, in which the provisions of this indenture shall be in force, at all times continue and preserve the legal organization of the said Pittsfield and North Adams Railroad Corporation; will hold such meetings, pass such votes, appoint all such officers, and confer upon them all such powers, keep such records of their proceedings, make such reports to the Legislature or otherwise, as may be required by law, and do all such other acts as may be necessary and proper to carry into full effect all the objects and provisions of this indenture, and that they will on reasonable demands, hereafter give such other assurances as may be necessary therefor, all expenses of said party of the second part, being paid by the party of the first part." Further allegations of the declaration are that after the making of the indenture of 1846 and during its term the Western Railroad Corporation and the defendant after 1867 paid "all the expenses of every kind of the plaintiff and all moneys and debts including taxes due by it to any person, corporation or governmental authority," and that after the indenture of 1876 the defendant and its successors have operated the demised railroad and have "paid annually all the local taxes assessed annually to the plaintiff on its property by the cities and towns through which its railroad runs, and all the franchise taxes assessed annually by the Commonwealth," and that it has paid all Federal income taxes assessed upon the plaintiff based upon the income accrued under the indenture of 1876 from the date when such taxes were first imposed, about 1900, to 1924, except a part of those for 1924 which are sought to be recovered in the present action. Allegations as to the relations of the defendant with the New York Central Railroad Company have no direct bearing upon the questions of law to be decided, and hence we make no summary of them.

The instrument out of which this litigation arises is a lease of a railroad. The legal perspective of the transaction is that the original lessee corporation held out inducements for the furnishing of funds to build the railroad of the plaintiff and shortly thereafter the two corporations entered into an indenture whereby among other matters the lessee corporation agreed to construct the railroad of the plaintiff and then to operate it for thirty years. In this indenture the words vital to the present controversy first appear. They were inserted without substantial change in the present indenture on the expiration of the earlier one. Thus it appears that the plaintiff corporation has never been an operating...