Potter v. Mich. Bell Tel. Co.

• Decision Date: 29 March 1929
• Docket Number: April Term.,No. 177,177
• Citation: 246 Mich. 198,224 N.W. 438
• Parties: PEOPLE et rel. POTTER, Atty. Gen., v. MICHIGAN BELL TELEPHONE CO.
• Court: Michigan Supreme Court

246 Mich. 198

224 N.W. 438

PEOPLE et rel. POTTER, Atty. Gen.,

v.MICHIGAN BELL TELEPHONE CO.

No. 177, April Term.

Supreme Court of Michigan.

March 29, 1929.

Information in the nature of quo warranto by the People, on the relation of William W. Potter, Attorney General, agianst the Michigan Bell Telephone Company. Judgment for plaintiff.

Argued before FEAD, C. J., and NORTH, FELLOWS, WIEST, CLARK, McDONALD, and SHARPE, JJ.

Fellows, J., dissenting. Wilber M. Brucker, Atty. Gen., Harold Goodman, Sp. Asst. Atty. Gen., and William W. Potter, Ex-Atty. Gen., for plaintiff.

H. E. Spalding and Thomas G. Long, both of Detroit, for defendant.

CLARK, J.

This is an information in the nature of quo warranto, filed by the people of the state of Michigan, on relation of Andrew B. Dougherty, then Attorney General to oust the Michigan Bell Telephone Company, a Michigan corporation, of its franchise. After plea and replication, evidence was adduced upon the following, stipulated by counsel to be the issue:

‘Whether the defendant exercises its corporate franchises and conducts its business, or such substantial part thereof, as to warrant judgment of ouster, subject to the domination and in accordance with and in submission to the dictation of the American Telephone & Telegraph Company, or, instead of itself conducting such business, permits said American Telephone & Telegraph Company to conduct it, so that the said defendant is merely the instrumentality and form by and under which said American Telephone & Telegraph Company itself conducts such telephone business in the state of Michigan, and said defendant thereby has misused and abandoned its franchises, and should therefore, by the judgment of this court, be ousted from its corporate rights, privileges and franchises.’

As briefed and submitted for decision the controversy is reduced, quoting the concluding paragraph of the main brief of the Attorney General:

‘It is respectfully submitted that this court render a judgment of ouster, unless within a reasonable time the telephone company makes adequate provisions to insure the rendition of the license contract services at no more than a reasonable rate, over which the Public Utilities Commission shall be accorded supervision.’

From this and the other briefs it appears that this suit is an attack on the so-called 4 1/2 per cent. (later 4 per cent.) contract. As gathered from the briefs, the contention of plaintiff is that the services rendered by the American Telephone & Telegraph Company, a corporation, hereinafter called American Company, under the so-called license or 4 per cent. contract with the Michigan Bell Telephone Company, hereinafter called Michigan Company, is an essential part of the telephone business; taht such services, purporting to be rendered under contract, are not in fact so rendered; that the American Company, through ownership of nearly all the capital stock of the Michigan Company, and through domination, is itself conducting business in the state; that such domination and the surrender by the Michigan Company of its telephone business constitute an abuse of the franchise, which, unless corrected, warrants forfeiture.

The defendant contends that the services rendered under the contract are very valuable, easily worth the 4 per cent. of gross revenue paid therefor, that it exercised a proper business discretion in making the contract, and that it is entitled, in fixing a rate, to credit for the full amount paid pursuant to the contract; to which plaintiff replies that the contract is pretended, due to domination of the American Company, in effect made by it with itself, that it does the business in Michigan, and that the Public Utilities Commission of the state, in fixing a rate, is entitled to have in evidence the American Company's actual cost of the services rendered. Apparently, the plaintiff's position is that the cost to the American Company of these services, rather than the cost thereof to the Michigan Company under the contract, should be the amount of this item considered in rate making.

It is recognized that we have here two corporate entities. Fraud is expressly disclaimed. We are asked to disregard the ‘corporate fiction,’ the ‘entity theory,’ and to look to the substance, on the ground that ‘the forms of corporate organization are used to accomplish a violation of law or a result contrary to public policy.’

The information avers, and the plea admits, that the Michigan Company was organized and exists under the provisions of chapter 169, 2 Comp. Laws 1915 (sections 8788-8796), being Act No. 129, Pub. Acts 1883. Section 4 of the act gives the company, among other things, the power ‘to conduct and carry on the business of providing and supervising communication by telephone.’ Section 2 of the act provides: ‘The stock, property, and affairs of every corporation organized hereunder shall be managed by its directors.’ The record is convincing that these provisions are not being observed, but are being violated, to the injury of the public. The Michigan Company is not conducting and carrying on telephone business in Michigan; the American Company is doing it. The board of directors of the Michigan Company does not manage the property and affairs of the company; that is done by the American Company. The American Company owns 99.99 per cent. of the common stock of the Michigan Company. Nearly 70 shares are held by certain directors. We quote from a brief:

‘In 1911 five great companies, of which the Michigan Company was one, operated with one president for all, practically an identical set of directors, and a single general manager. Comprised in this central group of Bell Telephone Companies were, besides the Michigan Company, the Chicago Telephone Company, the Cleveland Telephone Company, the Wisconsin Telephone Company, and the Central Union Telephone Company. Nothing in the minutes of the Michigan Company evidences that arrangement. On April 11, 1911, Mr. Sunny was elected president of the Michigan Company (he was at that time president of four other companies), and on the same date the board of directors, on motion of Mr. Kingsbury, a vice president of the American Telephone & Telegraph, unanimously appointed H. F. Hill general manager. He was likewise manager of the four other companies.

‘In passing, we direct attention to the fact that every resolution of the board of directors-the evidence extends from 1911 to date-was unanimously passed. It is significant that no division of opinion ever appears, either in respect to policy or persons nominated. This arrangement-the group organization-persisted from 1911 to 1920, when it was terminated in accordance with the view of the American Telephone & Telegraph. At the meeting of the board of directors, January 30, 1920, the chairman explained the growth of the companies comprising the group and the view of the American Telephone & Telegraph as follows:

“Since the time of the organization, state Utility Commissions have been organized in the several states, and rate cases in behalf of some companies have had to be conducted under the auspices of the Chicago headquarters, which, with respect to states other than Illinois, was somewhat objectionable. Under control of state Utilities Commissions, home companies seemed to be in more favorable position than companies managed from other states. It is now the view of the American Telephone & Telegraph Company that, on account of the very large growth of the several properties, the regulation of rates by the state Utilities Commissions, and because of other considerations, the group idea does not lend itself to the best interests of the respective companies. Therefore it is proposed to officer the Michigan State Telephone Company on a state basis and separate it from the central group.”

The Michigan Company (then Michigan State, now Michigan Bell) was separated and ‘officered’ accordingly. Witnesses, officers of both the Michigan and the American Company, testified of conclusion that there was no domination of the Michigan Company. The record does not support the conclusion. An annual report of the American Company states that ‘an effective common control over all’ associated companies was necessary, and that the units ‘will be closely associated under the control of one central organization, exercising all the function of centralized general administration.’

Again: “Administration' is centralized; it is legislative, determinative of general subjects, supervisory and judicial, acts alike for all branches and divisions, and may be located apart from the seats of action. ‘Operation’ is executive. It is the action, the operation supreme as to local questions, but responsible to the central administration. It may be separated into divisions or departments, each having operating relations with the other, but no lines of authority between them. In the Bell System the ‘administration’ is in the American Telephone & Telegraph Company, the central company. The ‘operation’ is in the associated companies, each operating on defined lines in distinct territory, each in fact an operating division, and no more.'

A review of all the evidence is convincing that in the Bell System the Michigan Company is merely an operating unit, ‘operating on defined lines,’ and the lines, to achieve standardization in method, practice, materials, and equipment, are most minutely defined and are as minutely followed. The Michigan Company is no more engaged in conducting and carrying on a telephone business than is the ordinary station agent engaged in conducting and carrying on the railroad business of his employer. The agent must use reason and intelligence, and has a certain discretion; but it would be remarkable, were his ‘lines' as closely defined as are those of the Michigan Company. The admitted purpose of having in this state a separate corporate entity has been stated and quoted.

Where a corporation is so organized...