Rochester Telephone Corporation v. United States

• Decision Date: 20 June 1938
• Citation: 23 F. Supp. 634
• Parties: ROCHESTER TELEPHONE CORPORATION v. UNITED STATES et al.
• Court: U.S. District Court — Western District of New York

23 F. Supp. 634

ROCHESTER TELEPHONE CORPORATION v. UNITED STATES et al.

District Court, W. D. New York.

June 20, 1938.

T. Carl Nixon, of Rochester, N. Y. (Justin J. Doyle, of Rochester, N. Y., of counsel), for petitioner.

Hampson Gary, Gen. Counsel, James A. Kennedy, Asst. Gen. Counsel, and Elizabeth C. Smith, Asst. Counsel, all of Washington, D. C., Robert M. Cooper, Sp. Asst. to Atty. Gen., Thurman Arnold, Asst. Atty. Gen., and Wendell Berge and John J. Abt, Sp. Assts. to Atty. Gen., for Federal Communications Commission.

Before MANTON, Circuit Judge, and KNIGHT and BURKE, District Judges.

MANTON, Circuit Judge.

This suit is brought to set aside an order of the Federal Communications Commission which directs petitioner to comply with certain orders of the Commission. 47 U.S.C. A. § 402(a). The United States is made a party (§ 211 of the Judicial Code; 28 U.S. C.A. § 48). The petitioner maintains that it is not subject to such supervision because of § 2 (b) (2) of the Communications Act of 1934 (48 Stat. 1064; 47 U.S.C.A. § 152 (b) (2) which provides: "Subject to the provisions of section 301, nothing in this chapter shall be construed to apply or to give the Commission jurisdiction with respect to * * * (2) any carrier engaged in interstate or foreign communication solely through physical connection with the facilities of another carrier not directly or indirectly controlling or controlled by, or under direct or indirect common control with, such carrier; except that sections 201 to 205 of this Act chapter, both inclusive, shall, except as otherwise provided therein, apply to carriers described in clause (2)." By § 402(a) "the provisions of the Act of October 22, 1913 (38 Stat. 219 sections 43 and 44 of Title 28, and sections 16 and 50 of Title 49) relating to the enforcing or setting aside of the orders of the Interstate Commerce Commission" are applicable to suits to enforce or set aside any order of the Commission under the Communications Act.

Between July 20, 1934, and September 13, 1934, the Communications Commission promulgated general orders Nos. 1, 2, 3, 5, 6, 6a and 9 which required telephone carriers subject to its jurisdiction to report information regarding their operations and corporate structure to the Commission. Petitioner failed to comply with these orders and ultimately, after notice and a hearing, was classified by the Commission as a wire telephone carrier subject to all common carrier provisions of the Communications Act and therefore subject to all general orders of the Commission applicable to such carriers.

The questions presented are: (1) what type of influence and control Congress intended to include by the phrase "directly or indirectly * * * controlled by" as used in § 2 (b) (2) of the Act, 47 U.S.C.A. § 152 (b) (2); and (2) whether the petitioner is directly or indirectly controlled by the New York Telephone Company within the same section. Section 2(a), 47 U.S.C.A. § 152(a), makes all carriers engaged in interstate or foreign commerce by wire or radio, subject to the provisions of the act. But § 2 (b) (2) exempts petitioner from the Commission's jurisdiction if it is engaged in interstate and foreign communications solely through physical connection with the facilities of another carrier and is not directly or indirectly controlled by such other carrier. Petitioner is concededly engaged in interstate and foreign communications solely by wire through its physical connections with the facilities of the New York Telephone Company, and the latter is a carrier subject to the jurisdiction of the Communications Commission.

It is essential to find what meaning Congress intended by the use of the word "control" in the statute. The report of the Committees of Congress may be consulted to find the Congressional intent. Woodward v. De Graffenried, 238 U.S. 284, 35 S.Ct. 764, 59 L.Ed. 1310; Lapina v. Williams, 232 U.S. 78, 34 S.Ct. 196, 58 L.Ed. 515. From these reports it is clearly indicated that Congress intended "control" as used in the statute to be broadly construed. In House Report 1850, 73 Cong., Second Session, pp. 4, 5, it is stated: "No attempt is made to define `control', since it is difficult to do this without limiting the meaning of the term in an unfortunate manner. Where reference is made to control the intention is to include actual control as well as what has been called legally enforceable control." Congress has recognized the fact that there are many ways in which actual control may be exerted, such as stock ownership, leasing, contract and agency. Congress also realized that control may be exercised "through ownership of a small percentage of the voting stock of the corporation, either by the ownership of such stock alone or through such ownership in combination with other factors." Broadly used, "control" may embrace every form of control, actual or legal, direct or indirect, negative or affirmative. And in Natural Gas Co. v. Slattery, 302 U.S. 300, 58 S.Ct. 199, 82 L. Ed. ___, the court said (pages 307, 308, 58 S.Ct. page 203): "We have not said, nor do we perceive any ground for saying, that the Constitution requires such an inquiry to be limited to those cases where common control of the two corporations is secured through ownership of a majority of their voting stock. We are not unaware that, * * * there are other methods of control of a corporation than through such ownership. Common management of corporations through officers or directors, or common ownership of a substantial amount, though less than a majority of their stock, gives such indication of unified control as to call for close scrutiny of a contract between them whenever the reasonableness of its terms is the subject of inquiry."

Since provisos and exceptions in statutes are intended to restrain or except that which otherwise would be within the scope of the general language, they must be strictly construed and limited to objects fairly within their terms. The petitioner must bring itself within this exception. Schlemmer v. Buffalo, Rochester & P. R. R. Co., 205 U.S. 1, 27 S.Ct. 407, 51 L.Ed. 681; Ross v. Duval, 13 Pet. 45, 10 L.Ed. 51.

Usually the management of corporate affairs is vested in the stockholders and where a majority of the voting stock is owned by another corporation, the control of the first company resides there. It may not be disputed that a minority stockholder can exercise strong influence and even control over the affairs of a corporation. See United States v. Union Pac. Ry. Co., 226 U.S. 61, 33 S.Ct. 53, 57 L.Ed. 124.

The petitioner was incorporated February 14, 1920 for the purpose of acquiring and consolidating the properties of the New York Telephone Company in the Rochester territory and the Rochester Telephone Company. The petitioner took over the properties of both at an appraised valuation, approved by the New York Public Service Commission, in accordance with the provision of a reorganization agreement. The Rochester Telephone Company's valuation was fixed at $1,600,000, subject to a bonded indebtedness of $1,058,000, which amount was paid with bonds issued by the petitioner for that purpose; these bonds have been retired. The properties of the New York Telephone Company in the Rochester territory were valued at $4,814,000 and were paid for by petitioner with its present second preferred stock. The petitioner was authorized to capitalize its investment at $7,000,000 and to issue 70,000 shares of stock at a par value of $100. per share consisting of 1,000 shares of common (full voting) stock and 69,000 shares of 5% cumulative preferred stock. It began its operations August 1, 1921. In March 1926, it was authorized to increase its capitalization to $12,000,000 and to issue 50,000 shares of 6 to 6½% cumulative preferred stock with a par value of $100. This was classified as first preferred stock and the...