The City of Erie v. The Erie Gas & Mineral Company

• Decision Date: 06 June 1908
• Docket Number: 15,592
• Court: Kansas Supreme Court
• Parties: THE CITY OF ERIE v. THE ERIE GAS & MINERAL COMPANY

97 P. 468

78 Kan. 348

THE CITY OF ERIE v. THE ERIE GAS & MINERAL COMPANY

No. 15,592

Supreme Court of Kansas

June 6, 1908

Decided January, 1908.

Error from Neosho district court; LEANDER STILLWELL, judge.

Judgment reversed.

SYLLABUS

SYLLABUS BY THE COURT.

NET PROFITS--Computation and Division--Agreement between City and Gas Company--Sale of Gas for "Domestic Purposes." In consideration of the franchise and the transfer of certain leases, wells and city bonds the defendant company agreed to pay to the city, annually one-fifth of the actual net profits derived from the sale of gas to the inhabitants of Erie for domestic purposes. In a suit for an accounting and recovery of such profits it is held: (1) That the company, with the aid contributed by the city, was to create and own the necessary instrumentalities for producing and distributing gas, in which the city has no proprietary interest and in the cost of which it has no voice or concern. (2) In computing the profits to be divided the expenditures of the company for these instrumentalities can not be charged as expenses against its receipts from the sale of gas. Such expenditures constituted the company's contribution to the plant with which it was to produce and distribute the product. (3) The cost of operating the plant in furnishing gas within the city upon which profits are to be divided, including necessary repairs, should be charged as expenses, to be deducted from the amount received for such gas, in order to determine the profits thereon. Such expenses will not include expenditures for new wells, mains or other permanent improvements or betterments; nor the cost of supplying gas and making other sales in the profits of which the city does not share. (4) "Domestic purposes," as the term is here used, includes gas furnished for homes, churches, stores, offices, and the opera-house, where its principal use is for heating and lighting, and not for power.

Hugh P. Farrelly, Thomas R. Evans, and Fred F. Groelle, for plaintiff in error.

W. R. Cline, and J. Q. Stratton, for defendant in error.

OPINION

BENSON, J.:

The city of Erie voted $ 5000 in bonds to prospect for, and to secure a supply of, natural gas, and used $ 2700 of the amount in such undertaking. Its success was only partial. About the same time the defendant, the Erie Gas & Mineral Company, was engaged in mining for, and selling, natural gas in the same vicinity, and had made some progress and secured some gas. In this situation, on the 24th of August, 1900, the parties entered into a contract incorporated into an ordinance of the city, whereby the city agreed to turn over to the company its gas-wells and leases and $ 2000 in city bonds and the company agreed to furnish gas for the city and its inhabitants. For that purpose the company was granted the right to lay its mains and pipes in the streets. The contract, among other provisions, contains the following:

"Said party of the first part further covenants and agrees to pay annually, on or before the first day of August of each year, to the said The City of Erie, one-fifth of the actual net profits of the said The Erie Gas & Mineral Company, derived from the sale of gas to the inhabitants of the said city for domestic purposes, for the fiscal year ending June 30."

The city turned over to the company with the bonds a lease on six acres of land, and one gas-well furnishing a small supply; also, another well drilled to the first gas-sand, which the company completed at its own expense. Both wells are still used, but these, together with the two wells it already owned, were insufficient, and the company has since diligently endeavored, by drilling many new wells and improving the old ones, to furnish a supply of gas, and has been reasonably successful in this effort, although the gas-field appears to be a poor one.

The company commenced to furnish gas under the agreement above recited in November, 1900, but rendered no account of profits to the city and made no payments thereon, and this suit was brought January 4, 1906, for an accounting of such profits, and to recover one-fifth thereof. The answer denied that any profits had been made. The trial was to the court, resulting in a general finding for the defendant.

The plaintiff alleges several errors, but the one principally relied upon is the conclusion that before being chargeable with profits the company should be allowed its entire outlay in providing its plant, which includes its wells, mains, pipes, and equipment, by means of which it supplies its patrons, and that no profits could be considered as earned until the company was reimbursed for these expenditures. From the opinion of the learned judge it appears that this was the theory adopted by the court, and that the cost of providing the wells and the necessary pipes and appliances was allowed as expense, without taking into consideration the value of these instrumentalities constituting the plant.

"Net profits" have been defined as "the gain that accrues on the investment, after deducting the losses and expenses of the business." (2 Bouv. Law Dic. 486. See, also, Tutt v. Land, 50 Ga. 339; Connolly v. Davidson et al., 15 Minn. 519, 2 Am. Rep. 154.) In the case of Eyster v. Centennial Board of Finance, 94 U.S. 500, 24 L.Ed. 188, involving the distribution of the remaining funds of the Centennial Exposition Company, it was said:

"The capital stock of this corporation was not employed in, but to prepare for, the business of the contemplated exhibition; and the receipts of the exhibition, over and above its current expenses, are the profits of the business. These were the only profits anticipated. They are, in fact, the net receipts, which, according to the common understanding, ordinarily represent the profits of a business. . . . Popularly speaking, the net receipts of a business are its profits. So here, as the business to be carried on was that of a exhibition, and its profits were to be derived only from its receipts, to the popular mind the net receipts would represent the net profits." (Page 503.)

The import of the term "net earnings" was considered in the leading case of Union Pacific R. R. Co. v. United States, 99 U.S. 402, 25 L.Ed. 274, where it was said:

"Having considered the question of receipts or earnings, the next thing in order is the expenditures which are properly chargeable against the gross earning in order to arrive at the 'net earnings,' as this expression is to be understood within the meaning of the act. As a general proposition, net earnings are the excess of the gross earnings over the expenditures defrayed in producing them aside from, and exclusive of, the expenditure of capital laid out in constructing and equipping...