LECTURES DELIVERED BEFORE THE ASSOCIATION 
 
 OF THE BAR OF THE CITY OF 
 
 NEW YORK, 1916 
 
 SOME LEGAL PHASES OF COEPOEATE 
 
 FINANCING, EEOEGANIZATION 
 
 AND EEGULATION 
 
THE MACMILLAN COMPANY 
 
 NEW YORK BOSTON CHICAGO DALLAS 
 ATLANTA SAN FRANCISCO 
 
 MACMILLAN & CO., LIMITED 
 
 LONDON BOMBAY - CALCUTTA 
 MELBOURNE 
 
 THE MACMILLAN CO. OF CANADA, LTD. 
 
 TORONTO ' 
 
SOME LEGAL PHASES OF CORPORATE 
 
 FINANCING, REORGANIZATION 
 
 AND REGULATION 
 
 BY 
 
 FRANCIS LYNDE STETSON 
 
 JAMES BYRNE 
 
 PAUL D. CRAVATH 
 
 GEORGE W. WICKERSHAM 
 
 GILBERT H. MONTAGUE 
 
 GEORGE S. COLEMAN 
 
 WILLIAM D. GUTHRIE 
 
 THE MACMILLAN COMPANY 
 
 1917 
 
 All rights reserved 
 
COPTBIGHT, 1917, 
 
 BT THE MACMILLAN COMPANY. 
 
 Set up and electrotyped. Published March, 1917. 
 
 Norton ott 
 
 J. 8. Gushing Co. Berwick & Smith Co. 
 Norwood, Mass., U.S.A. 
 
CONTENTS 
 
 PAGE 
 
 INTRODUCTORY NOTE vii 
 
 PREPARATION OF CORPORATE BONDS, MORTGAGES, COLLATERAL 
 TRUSTS, AND DEBENTURE INDENTURES, BY FRANCIS LYNDE 
 
 STETSON 1 
 
 FORECLOSURE OF RAILROAD MORTGAGES, BY JAMES BYRNE . 77 
 
 REORGANIZATION OF CORPORATIONS, BY PAUL D. CRAVATH . 153 
 
 THE SHERMAN ANTI-TRUST LAW, BY GEORGE W. WICKERSHAM 235 
 THE FEDERAL TRADE COMMISSION AND THE CLAYTON ACT, BY 
 
 GILBERT H. MONTAGUE 275 
 
 THE PUBLIC SERVICE COMMISSIONS, BY GEORGE S. COLEMAN . 327 
 
 PUBLIC SERVICE COMMISSIONS, BY WILLIAM D. GUTHRIE . . 347 
 
 INDEX 375 
 
 CASES CITED OR DISCUSSED .... 379 
 
 358852 
 
INTRODUCTORY NOTE 
 
 THE addresses of which this volume is composed were 
 delivered during the early spring of 1916, at the instance 
 of the Association of the Bar of the City of New York, to 
 audiences drawn from the practicing lawyers of New York 
 City. They excited so much interest, evidenced not only 
 by an unexpectedly large attendance but by repeated and 
 continuing requests for copies of the lectures, that the 
 Executive Committee of the Association has felt justified 
 in permitting their publication. 
 
 In the autumn of 1915, the Association decided to offer, 
 periodically, a series of law lectures by especially qualified 
 lawyers upon some particular subject or upon closely related 
 subjects which should, in such degree as might be practi- 
 cable, afford the general practitioner the benefit of the expe- 
 rience and practical counsel of those who have become expert 
 in the branch of law under discussion. The addresses con- 
 tained in this book constitute the first series of lectures pre- 
 sented in execution of this purpose. The reader should 
 understand that these papers were not intended for general 
 reading nor even for the instruction of law students, although, 
 doubtless, any one possessing a certain amount of technical 
 knowledge may find in them much that will prove of inter- 
 est. They were not designed to suggest reforms in law or 
 in judicial procedure, however much or undeniably such 
 reforms may be needed. Nor were they designed to set 
 forth in any comprehensive way the body even of the very 
 special branch of the law with which they are concerned. 
 
Vili INTRODUCTORY NOTE 
 
 They were intended for the practical guidance of practicing 
 lawyers, already familiar with the general principles and 
 rules of practice, in accomplishing specific things in the best 
 and most efficacious ways. 
 
 The task of supervising the legal phases of the work of 
 reorganizing and refinancing great corporate enterprises 
 whether regenerated by complete reorganization or merely 
 reinvigorated by voluntary recapitalization is performed 
 by a relatively small number of lawyers. Almost every such 
 undertaking requires the investment of new capital, which 
 must be supplied or "underwritten" in advance; for in 
 such an affair the consequences of failure are too serious and 
 the injuries inflicted too nearly permanent to justify risking 
 a fiasco. Moreover, a scheme of reorganization or of financ- 
 ing which cannot be underwritten in advance must, almost 
 certainly, be one which is foredoomed. The dominant figure, 
 therefore, in every such undertaking, is that of the banker 
 and the guiding spirit is the banker's lawyer. Bankers who 
 are qualified by wealth, experience, and influence to under- 
 take such affairs are few in number; in direct ratio, the 
 membership of what may, not unappropriately, be denomi- 
 nated " the financial bar " is also limited. There are, never- 
 theless, numerous instances in which lawyers habitually 
 engaged in other branches of practice are called upon to 
 advise clients who are deeply interested in corporate reor- 
 ganizations, and occasionally such a lawyer finds himself in 
 the role of adviser to a reorganization committee, a syndicate 
 of underwriters, or a mortgage trustee. However well 
 grounded in principle or familiar with precedent he may be, 
 however competent to discover by an expenditure of time 
 and labor what should be done and how to do it, any such 
 person must necessarily, for a time at least, be at a loss for 
 that practical guidance which cannot be found in books or 
 decisions. These lectures were designed to serve persons 
 thus situated and, as well, younger members of the profes- 
 sion called on to assist more experienced lawyers in such 
 
INTRODUCTORY NOTE IX 
 
 matters or ambitious to engage in practice of the sort 
 described. 
 
 The Lectures on the Sherman Anti-Trust Law and the 
 Clayton Act discuss important phases of the law of inter- 
 corporate relations that are necessarily involved in any 
 present-day consideration of the financing and reorganization 
 of corporations. 
 
 The realization of the plan for courses of lectures of which 
 these addresses form the first instalment was due, in great 
 part, to the zeal and unselfish endeavor of the late Francis 
 C. Huntington, the Chairman of the Special Committee 
 charged with the execution of the plan. Mr. Huntington's 
 untimely death occurred while the lectures for which he 
 had arranged were in process of delivery. In a very real 
 sense this book is, by the very circumstances of its produc- 
 tion, dedicated to the memory of that sweet-natured, high- 
 souled, and public-spirited lawyer. 
 
SOME LEGAL PHASES OF COEPOEATE 
 
 FINANCING, EEOEGANIZATION, 
 
 AND EEGULATION 
 
 PREPARATION OF CORPORATE BONDS, MORT- 
 GAGES, COLLATERAL TRUSTS AND DEBENTURE 
 INDENTURES 
 
 Papers read February 9 and February 16, 1916, before The Association of the 
 Bar of the City of New York by Francis Lynde Stetson l 
 
 THE papers to be presented by me in the present series are 
 intended not as treatises, but rather for practical guidance in 
 the preparation and examination of corporate bonds and mort- 
 gages, collateral trusts and debenture indentures. They are 
 related to and arise out of the activities of corporations 
 organized for the transaction of business, usually the business 
 of transportation. This evening, after a general introduction, 
 the paper will deal only with the subject of corporate bonds 
 and mortgages and deeds of trust, strictly so called, the con- 
 sideration of collateral trusts and debentures having been as- 
 signed to the evening of February 16th. 
 
 The Historical Development of the Corporate Bond and Mortgage 
 
 The conditions and objects of the law concerning corporate 
 bonds and mortgages may be presented conveniently as the 
 
 1 At the very outset it is proper that I should state that except for the prom- 
 ised and abundant cooperation of my friend and associate Mr. George H. 
 Gardiner I should have been unable to accept the invitation to read before this 
 Association the papers to which without reserve he has contributed from bis 
 large experience. 
 
 B 1 
 
2 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 same has been developed in connection with railroad corpora- 
 tions, particularly as created or regulated by the statutes of 
 our own state, to which your attention is first invited. 
 
 It is difficult to realize that less than a century has elapsed 
 since the enactment of the first railroad charter in this State, 
 viz., that of the Mohawk & Hudson Railroad Company, incor- 
 porated April 17, 1826, 1 to construct and operate a railroad 
 eighteen miles long from Albany to Schenectady. This charter 
 authorized a capital stock not exceeding $500,000, and reserved 
 to the state the right within five years from completion to take 
 over the railroad at cost and interest. An expenditure in excess 
 of the authorized capital could hardly have been anticipated, 
 for the act contained no grant of power to mortgage. But, as 
 has been usual in later experience, the original estimate of cost 
 proved inadequate; and eight years later acts were passed 
 increasing the stock, and authorizing a mortgage for not more 
 than $250,000, and also the conversion of the loan into stock 
 at par within two years after the passage of the act. This 
 chapter 39 of 1834 is the earliest New York act in which I have 
 found provisions expressly authorizing a railroad mortgage or 
 the conversion of a loan into stock ; but in the next decade the 
 charter of the Hudson River Railroad Company, enacted 
 May 12, 1846, 2 gave such powers more freely and with much 
 elaboration, subject, however, to the limitations that the 
 $2,000,000 mortgage thereby authorized should not cover the 
 personal property, should always be $500,000 less than the 
 paid-up capital stock, and that the whole capital represented 
 by the stock and the bonds should not exceed $6,000,000. 
 
 Just before this time Mr. Charles O'Conor had been arguing 
 before Vice-Chancellor Sandford, with boldness and great sub- 
 tlety, but unsuccessfully, that such a limitation upon capital 
 constituted a limitation also upon the total amount of property 
 that a corporation might own, and that bonds issued in payment 
 for property, thereby exceeding that amount, were void and 
 
 1 Laws of N. Y. 1826, Chap. 253. 2 Ibid. 1846, Chap. 216. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 3 
 
 unenforcible ; in other words, that the power to borrow money 
 and to acquire property must be construed as being confined 
 within the limits of the total authorized capital of the corpora- 
 tion. Had the courts sustained Mr. O'Conor in his contention 
 in February, 1844, in the case of Barry v. Merchants' Exchange 
 Company, 1 the history of corporate enterprise in this State 
 would have been very different from what it has been, unless, 
 as the exigencies of events would have required, relief had been 
 obtained from the legislature. The importance of this decision 
 of Vice-Chancellor Sandford, as the first adjudication in this 
 State of the right of a corporation to borrow, even in the absence 
 of express statutory authority, was considered later at length 
 in the luminous and eloquent opinion of Judge Comstock in the 
 great case of Curtis v. Leavitt. 2 The conclusion was there 
 reached "that corporations, along with their specific" powers, 
 take all the reasonable means of execution, all that are " adapted 
 to the end in view," and that it is within the power of corpo- 
 rations generally to issue bonds or notes when no prohibitory or 
 restraining statute is violated and the purpose or occasion of 
 making them is lawful. The establishment of these principles, 
 almost platitudinous now, involved at the outset battles royal 
 between the keenest intellects of this bar, Beardsley, Bidwell, 
 Bronson, B. F. Butler, Cutting, Duer, Hill, William Kent, Lord, 
 Noyes, and O'Conor. 
 
 But the adjudicated power to issue bonds or notes did not, 
 without express authority, carry the power also to secure the 
 same by lien or mortgage upon the public franchises of the cor- 
 poration, 3 nor were such franchises ordinarily subject to seizure 
 and sale under execution. 4 This necessary power to mortgage 
 was granted by the legislature of New York with great hesitation 
 and many limitations, by special acts from time to time up to 
 
 1 1 Sandf . Ch. (N. Y.) 280-312 ; 1844. 
 1 15 N. Y. 1,51-62; 1857. 
 
 3 Carpenter v. Black Hawk Gold Mining Co., 65 N. Y. 43-50 ; 1875. Snell v. 
 Chicago, 152 U. S. 191-199 ; 1893. 
 
 4 Gue v. Tide Water Canal Co., 24 How. (U. S.) 257-263; 1860. 
 
4 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 April 2, 1850, when by the great general railroad law of that year 
 (Chapter 140) / which with some enlargements is substantially 
 our present law, there was granted to railroad companies gen- 
 erally power "to mortgage their corporate property and fran- 
 chises to secure the payment of any debt contracted by the 
 company" for completing, finishing or operating their railroad, 
 with the right to confer on the holders of bonds the right to 
 convert the principal due or owing thereon into stock of the 
 company. Now the mortgaging power has been granted 
 throughout the United States, by statutes which vary so widely 
 and contain so many special restrictions, that no one should 
 address himself to the preparation or approval of a mortgage 
 upon any railroad without first studying carefully the pertinent 
 provisions of law in every state through which the railroad runs. 
 Tedious and even meticulous examination beforehand of the 
 constitution and the statutes, both general and special, of the 
 several states in question, may be rewarded by relief from that 
 particular form of subsequent misery which Tom Moore de- 
 clared to be Hell, that is, "truth known too late." 
 
 From this summary indication of the fundamental legal re- 
 quirements for a valid corporate mortgage or deed of trust we 
 may proceed to a consideration of such instruments and of the 
 bonds or debentures supposed to be secured by such instru- 
 ments. 
 
 In the year 1825 occurred two events of momentous im- 
 portance in the subsequent history of the world and of cor- 
 porate obligations the opening of George Stephenson's rail- 
 road from Darlington to Stockton-on-Tees and of De Witt Clin- 
 ton's canal from Lake Erie to the Hudson River. Immediately, 
 throughout our Atlantic States, there developed an excited and 
 even frenzied demand both for canals and for railroads. In 
 New York the demand, as in the case of the Mohawk & Hud- 
 son and its later connections west to Buffalo, was for competi- 
 tion with the canal, and as in the case of the New York and 
 
 i Laws of N. Y. 1850, Chap. 140. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 5 
 
 Erie Railroad, chartered April 24th, 1832, 1 to run through the 
 southern tier of counties, as compensation to them for the 
 State's canal construction through central New York. 2 Char- 
 ters almost without number were followed by preliminary sur- 
 veys, resulting in disappointments or disasters. Scheme fol- 
 lowed scheme defiant of natural conditions or sound finance, 
 and bubbles burst in bankruptcies, until appeals for aid, be- 
 yond the inadequate returns from issues of unsecured capital 
 stock, were pressed most urgently upon the State and upon 
 the general public. In 1834, the Baltimore & Ohio Railroad 
 Company obtained from the State of Maryland considerable 
 loans, for the repayment of which it gave back a mortgage 
 upon its railroad, following the example of the New York and 
 Lake Erie Railroad ^Company, which, in 1833, by mortgaging its 
 railroad to the State of New York, obtained for certain of its 
 stock the guaranty of the State. 
 
 But in each case the aid thus obtained proved inadequate, 
 and then came into operation the American form of corporate 
 bonds secured by mortgage upon the railroad property and 
 franchises, involving foreclosure and sale in case of default, 
 after the familiar form of a mortgage on real estate. The first 
 of such mortgages was that of the Baltimore & Ohio Railroad 
 in 1846, and the next, that of the New York and Erie Railroad 
 dated July 1, 1847, to secure $3,000,000 bonds of which there 
 
 1 The expectations centering upon the New York and Erie Railroad were 
 thus stated in the first number of the American Railroad Journal, published 
 January 2, 1832: "With such a Railroad intersected at convenient distances 
 by other railroads running from the Erie Canal and one from Ogdensburgh to 
 Syracuse or Utica almost every county in the State would be brought within 
 twenty-four hours of New York. It would prevent a recurrence of the state 
 of things which now exists in this city. There would not then be, as there now 
 is, thousands of barrels of flour and other kinds of produce in proportion frozen 
 up in canal boats, and in sloops on the Hudson ; salt would not be now selling 
 in Albany for two dollars and fifty cents per bushel, and pork at two dollars 
 per hundred for want of salt to save it, while in this city it is worth from five 
 to seven dollars. Coal would not sell here for fifteen or sixteen dollars per 
 ton, ... as has been the case for two or three weeks past, if railroads were in 
 general use." 
 
 2 Laws of N. Y. 1832, Chap. 224. 
 
6 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 are still outstanding $2,482,000, the time of payment having 
 been extended to 1937. This form of mortgage upon railroad 
 property, involving a foreclosure sale in case of default, is not 
 available to railroad corporations in England. The borrowings 
 of English railroads are upon promissory obligations somewhat 
 similar to our corporate bonds, but which constitute merely a 
 charge upon "the undertaking," or, in other words, upon the 
 income of the property enforcible through the appointment of a 
 receiver. 1 Such obligations are given the general term " deben- 
 tures." Sir Francis Palmer in his "Company Precedents," 
 traces the term "debentures" from very early times, and con- 
 cludes that the word admittedly has no technical significance, 
 but that its meaning is to be determined by the popular sense 
 in which it is used. In England, according to Palmer, the term 
 "debenture" seems to comprehend all serial obligations of the 
 corporation, whether or not secured by a charge, and whether 
 or not issued under a trust deed, those issued under a trust deed 
 being generally styled debenture stock. In this country, the 
 term " debentures " has come to mean any class of serial obliga- 
 tions of a corporation not secured by a specific lien upon property. 
 
 From the very beginning, and still continuing, the form of 
 the corporate serial obligation and of the mortgage or other 
 instrument pursuant to which such obligations are issued, has 
 been undergoing enlargement because of the development of 
 new requirements by investors. The condition corresponds to 
 that which originally produced the idea of the corporate bond 
 and mortgage, namely, the urgent demand for capital for cor- 
 porate enterprise, and the necessity of offering to the public a 
 form of security which will satisfy as well as attract purchasers 
 of corporate bonds. 
 
 The mortgage of the Baltimore & Ohio, made in October, 
 1846, to the President of the Company and his successors as 
 
 1 The English and Canadian procedure "takes the place . . . of foreclosure 
 sales in the United States, which in general accomplish substantially the same 
 result with more expense and greater delay." WAITE, C. J., Canada Southern 
 Railway Co. v. Gebhard, 109 U. S. 527, 539 ; 1883. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 7 
 
 Trustees, is interesting, in that it recites that the Company has 
 issued "certificates of debt in which was contained the pledge 
 of the property and funds and stock " of the Company, and 
 that "it has been suggested that the security intended to be 
 given by the Company to the holders of said certificates, and 
 their assigns, would be to them more satisfactorily expressed if 
 there was executed by the said Company an instrument of 
 writing which being duly acknowledged might be recorded as 
 deeds and mortgages are recorded," and thereupon proceeds to 
 grant in trust for the holders of said certificates the property 
 and funds of the Company comprehended in the authority of 
 the statute governing the Company. Except as to the recitals, 
 the mortgage instrument is substantially an ordinary real estate 
 mortgage without covenants. The Baltimore & Ohio issued also 
 various mortgages, including a sterling mortgage running to Bar- 
 ing & Company of London, in 1850, and three later mortgages 
 in 1850 and 1853 to the President of the Company as trustee. 
 
 In 1850 and later, various railroads in the South were mort- 
 gaged by statute to secure advances made to them by the in- 
 corporating State, among which may be mentioned the First 
 Mortgage of the Richmond and Danville Railroad to the Com- 
 monwealth of Virginia, made in 1850 to indemnify the State 
 against its indorsement of $200,000 six per cent bonds of the 
 Railroad Company; the Second Mortgage of the same com- 
 pany to the Board of Public Works of Virginia to secure a loan 
 by the State of $600,000; a lien upon the Laurens railroad 
 created by the South Carolina statute of 1859; and various 
 liens upon other roads under the Internal Improvement Laws 
 of Tennessee and other states in 1853 and 1854. 
 
 In tracing the development of the corporate mortgage from the 
 statutory lien phase it may be advantageous now to resume and 
 continue consideration of the story of the funded debts of the New 
 York and Erie Railroad and its successors. For a long period 
 the managers of that corporation were the pioneers in the gradual 
 expansion of the corporate mortgage from a simple real estate 
 
8 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 lien to the complex agreements which have become necessary to 
 meet the increasingly exacting demands of the investing public. 
 
 The Baltimore & Ohio mortgages are of less interest than 
 the Erie mortgages, inasmuch as the modern form of instru- 
 ment indicates a development of the Erie mortgages rather 
 than of the Baltimore & Ohio form. 1 
 
 Next succeeding the New York and Erie bonds of July 1, 
 1847, secured by the State lien of 1845, came the Company's 
 so-called "second mortgage," being its first deed of trust, 
 dated March 1, 1849, to John J. Palmer and others as Trustees. 
 This mortgage granted to the trustees of the railroad all the 
 appurtenances of the Company "now owned ... or which 
 shall hereafter be owned," but subject to the $3,000,000 lien 
 of the statute of 1845. It will be observed that, even at this 
 early date, there was recognized the necessity of obtaining a 
 lien on the corporate enterprise as a whole, by providing that 
 after-acquired property should be included. The debt to be 
 secured by the mortgage was $4,000,000, evidenced by 7 per 
 cent bonds, each of one thousand dollars. 
 
 The bonds in terms acknowledge the company to be in- 
 debted to "John J. Palmer or bearer in the sum of $1,000, 
 lawful money of the United States, which sum they promise to 
 pay to the said John J. Palmer or bearer," and provided for the 
 payment of the interest semi-annually "on presentation and 
 delivery of the annexed dividend warrants." The bond then 
 proceeds to recite that it is one of the series issued for the ex- 
 tension of the railroad, and that the holder is entitled to the 
 security of the described mortgage. It is of interest to note 
 also that a stock conversion privilege is included as follows: 
 
 "The holder of this bond shall be entitled at any time before the 
 first day of March, 1859, to convert the principal sum into the capital 
 stock of the Company at par, on surrendering the bond with the war- 
 wants not then due annexed." 
 
 1 The Erie Railroad Company and its predecessors and subsidiaries have issued 
 twenty-seven mortgages now outstanding, of which eight cover the main line. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 9 
 
 The mortgage instrument contains about twenty folios. It 
 recites briefly the corporate authority of the mortgagor, and 
 the purpose of the deed, sets forth the form of the bonds in 
 full, grants the mortgaged property in trust to the trustees 
 subject to the prior state statutory lien, contains a covenant of 
 further assurance, and provides that in case of default it shall 
 and may be lawful for the trustees " upon the request in writ- 
 ing of any one of the holders of the bonds on which interest 
 or principal is not fully paid," to enter upon and take posses- 
 sion of the property and to sell the same, and as attorneys of 
 the mortgagor to execute conveyance to the purchaser, and to 
 apply the proceeds of sale to the payment of costs, the satis- 
 faction of the mortgage debt and the rendering of the surplus 
 to the mortgagor or assigns. The mortgage contains also a 
 provision for the filling of vacancies among the trustees. This 
 mortgage was drafted probably by Judge William Kent, then 
 the counsel of the railroad, son of Chancellor Kent, and himself 
 of high authority as a lawyer, conveyancer and judge. 
 
 Upon March 1, 1853, the New York and Erie Railroad Com- 
 pany executed its so-called "third mortgage" to James Brown 
 and John Davis, as Trustees. This third mortgage provides 
 for the issue of $10,000,000 bonds, of which $4,000,000 were to 
 provide for the payment of an equal amount of bonds secured 
 by the former mortgage of 1849. This seems to have been 
 the inception of the refunding mortgage. 
 
 The bond is substantially in the form of the pioneer of 1849, 
 but there appears on the margin the following; 
 
 "New York and Erie Railroad Company 
 Mortgage Bond No. $1000. 
 
 This is to certify that the within bond is included in a mortgage on 
 the entire property of the New York and Erie Railroad Company, 
 duly executed to James Brown and John Davis, Trustees, and dated 
 March 1, 1853." 
 
 While the signature of the trustees does not appear to have 
 been required, this is clearly the origin of the certificate of 
 
10 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 authentication which invariably is placed upon bonds of the 
 present day and is signed by the trustee. 
 
 The mortgage itself follows generally the form of the last 
 preceding mortgage. 
 
 The so-called "fourth mortgage" of New York and Erie 
 Railroad Company, dated August 15, 1857, was executed to 
 James Brown and John C. Bancroft Davis, as Trustees. 
 
 The bond follows the form of the early bond, except that it 
 contains a provision that in case of six months' default in the 
 payment of any of the interest warrants "on the bonds of this 
 issue . . . then the principal of the said bonds shall be due 
 and payable." It provides also for the countersignature of the 
 trustees at the foot of the bond. 
 
 The mortgage covers not only the railroad of the company, 
 but also the rights of the company under leases of other rail- 
 roads. It repeats the provision in the bonds about the accelera- 
 tion of the maturity of the principal in case of default and con- 
 tains also provisions setting forth the immunities of the trustees. 
 In text this mortgage is about twice the length of the original 
 mortgage of 1849. 
 
 The so-called fifth Erie mortgage, dated June 1, 1858, indi- 
 cates no further development in form, but it provides for the 
 issue of bonds of $500 each as well as bonds of $1000. 
 
 Subsequently to the fifth mortgage and in September, 1865, 
 the Erie Railway Company, the successor of the New York 
 and Erie Railroad Company, issued a series of convertible un- 
 secured bonds for the principal amount of 1,000,000 which 
 had no lien upon the property of the Company. 
 
 Then there appears the first mortgage of the Company to a 
 corporate trustee, the First Consolidated Mortgage of 1870 
 from the Erie Railway Company to the Farmers Loan and 
 Trust Company. The mortgage instrument is similar to the 
 preceding one, but the bonds contain three features appearing 
 for the first time. The first is a promise to pay, at the option 
 of the holder, in sterling money at a fixed rate of exchange in- 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 11 
 
 stead of in United States gold coin. The second is the provi- 
 sion for the registration of the principal sum. The third is the 
 recital that "this bond shall not become obligatory until au- 
 thenticated by a certificate endorsed hereon signed by the said 
 Trustee," which certificate in terms declared that the bond is 
 one of the bonds secured by the mortgage and that the mort- 
 gage was duly recorded. 
 
 In 1874 the same company issued its Second Consolidated 
 Mortgage. This mortgage secured not only $30,000,000 of 
 bonds issuable thereunder, but also $10,000,000 of convertible 
 bonds issued two years previously. Such provision for secur- 
 ing equally with the mortgage bonds a prior unsecured debt 
 was a new feature in such an instrument; and the bond con- 
 tains a provision, then novel, reserving to the company the 
 right to redeem the bond before maturity. 
 
 Generally, the earliest mortgages ran to a single individual 
 as trustee, although in the case of the New York and Erie 
 Railroad Company from the beginning there were two or more 
 individual trustees. Subsequently it became the general prac- 
 tice to name two or three individuals as trustees. Still later, 
 the individual trustee was superseded customarily by a corporate 
 trustee, and in recent years, to meet the requirements of State 
 statutes calling for a resident trustee, a natural person and 
 citizen of the State oftentimes is joined with a corporate trustee, 
 to which, however, is assigned exclusively all active duties prior 
 to default. 
 
 In the earliest mortgages, the trust estate was the real 
 property, appurtenances and equipment of the mortgagor; 
 then leaseholds were added, and still later security interests in 
 other companies. Such security interests were assigned in 
 terms and without delivery to the trustee of the stock and bonds 
 themselves ; in other words, by way of mortgage rather than 
 pledge. 1 As an illustration, in the New York, Lake Erie & 
 
 1 Wilson v. Little, 2 N. Y. 443; 1850. Story on Bailments, Sections 290- 
 297 ; 9th Ed., 1878. 
 
12 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 Western Second Consolidated Mortgage bonds of 1878, the 
 assignment is of " all the estate, right, title and interest of the 
 party of the first part in the following corporations ... in- 
 tending hereby to convey ... all and every right, title and 
 interest of the party of the first part . . . whether as lessee or 
 as holder of stock or bonds of the corporations, associations and 
 organizations. ..." 
 
 A later development in this direction was the deposit of the 
 corporate securities with the trustee, thus effecting a perfect 
 pledge of the property so delivered. In some instances, such 
 a pledge of corporate securities was made in addition to and as 
 part of a mortgage on the railroad property, and, in other in- 
 stances, the pledged property constituted the sole trust estate. 
 An early instance of a pledge as sole security was a mortgage 
 of the New York, Lake Erie & Western Railroad Company of 
 October 1, 1885, to secure its funded coupon bonds, the security 
 being the pledge with the trustee of coupons appertaining to 
 bonds secured by certain prior mortgages. Except for such 
 mortgage lien, the promises of the obligor could not be regarded 
 as constituting collateral security for its subsequent promises. 
 
 Other early examples of indentures under which the security 
 was solely corporate bonds and stocks, are the two indentures 
 of the Richmond & West Point Terminal Railway and Ware- 
 house Company, one dated February 1, 1887, and the other 
 dated March 1, 1889, each securing bonds by the pledge with 
 a trust company of a number of parcels of different corporate 
 bonds and stocks. There may be mentioned also a collateral 
 trust mortgage of the Georgia Company made in 1888, secur- 
 ing bonds by the pledge with a trust company of stock of the 
 old Central Railroad & Banking Company of Georgia, and 
 nothing else. 
 
 A prominent instance of a mortgage creating a lien on real 
 property and a pledge of corporate securities, was the Consoli- 
 dated Mortgage of the Northern Pacific Railway Company of 
 1889, wherein provision was made for delivery to the trustee 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 13 
 
 of various corporate securities, of which large amounts were 
 held in pledge by the trustee at the time of the foreclosure of 
 the mortgage in 1896. At the present time nearly all large 
 railroad mortgage indentures include pledges of corporate securi- 
 ties in addition to the mortgage lien on the real property and 
 appurtenances. 
 
 The panic of 1893 and the hard times ensuing led to defaults 
 under many railroad mortgages, resulting in foreclosure sales 
 followed by comprehensive reorganizations. In most cases 
 such reorganizations involved the issue of long-time bonds of 
 large amounts secured by all-embracing mortgages, and pro- 
 viding particularly for the increase of the initial debt by the 
 issue of additional bonds for refunding and improvement pur- 
 poses. The mortgages of the great reorganized railroad com- 
 panies, such as the Southern, the Erie, the Northern Pacific, 
 the Atchison, and the Union Pacific, made from 1894 to 1896, 
 were the result of comprehensive study of such instruments by 
 many counsel, and they established the form of the corporate 
 mortgage now substantially followed. 
 
 The foregoing sketch of the development of corporate mort- 
 gages, while in no sense exhaustive, is given as affording a useful 
 and perhaps interesting preliminary to the announced subject 
 matter of these papers the preparation of corporate mortgages, 
 bonds, collateral trusts and debentures, the further discussion 
 in this lecture being devoted to special consideration of corpo- 
 rate bonds and mortgages. 
 
 Corporate Bonds and Mortgages 
 
 In the treatment of this subject some definitions of terms 
 may be useful. As herein employed, the term " corporate mort- 
 gage" is to be understood as referring to a corporate indenture 
 intended to convey real property and appurtenances, and 
 usually franchises, as security for corporate obligations issued 
 or to be issued in series. The term "collateral trust" is limited 
 to conveyances by way of pledge of corporate stocks and 
 
14 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 bonds with or without other intangible personal property. 
 The term "debentures" is confined to obligations issued under 
 an indenture which provides no security by way of mortgage or 
 pledge, but which may or may not contain covenants afford- 
 ing protection to debenture holders by way of equitable mort- 
 gage or covenant for future mortgage, or covenants conferring 
 other privileges upon the holders. 
 
 It would be impossible, within reasonable compass, to describe 
 in detail the almost innumerable variations in the provisions 
 of different issues of corporate obligations and of instruments 
 securing or safeguarding the same. The scope of this paper 
 necessarily must be confined to an outline of the essential 
 and customary forms of such instruments. Preliminarily to 
 undertaking actually to prepare the mortgage, the draftsman 
 should obtain complete information not only (1) as to the per- 
 tinent provisions of the constitution or the statutes of the 
 States having jurisdiction over the corporation or the corporate 
 property, and corporate compliance with such provisions, but 
 also as to (2) the conditions under which the debt is to be 
 contracted and its possible amount as affected by statutory 
 restrictions ; (3) the form of the obligation to be issued to evi- 
 dence the debt and the privileges to be given to the holders of 
 such obligations ; and (4) the general character of the security 
 to be provided, or the benefits to be afforded by the indenture 
 providing for and governing the issue of the obligations. 
 
 (1) As to corporate authority. Except as restricted by con- 
 stitution or statute or by provision of the charter or by-laws, 
 as before stated, a corporation has implied power for its proper 
 corporate purposes, to contract debts and to issue written 
 obligations evidencing such debts. This is true of railroads 
 and public utilities corporations as well as of private business 
 companies. If there be no incident mortgage or pledge of 
 property, inquiry may be limited to ascertaining whether the 
 ordinary borrowing power of the corporation is subject to any 
 express limitation or regulation either in the constitution or 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 15 
 
 laws of the State of incorporation, or possibly, of any State in 
 which corporate property has a situs, or in the charter or the 
 by-laws of the corporation. Care must be taken to meet all 
 such requirements. At this point, it is not necessary to con- 
 sider what may be the rights of bona fide holders of securities 
 issued ultra vires. It is the duty of counsel to avoid any such 
 questions by examination into and compliance with specific 
 legal requirements. 
 
 If, however, the borrowing corporation purposes to give 
 security for its debts, as before stated, a sharp distinction must 
 be drawn between corporations operating under public fran- 
 chises and those conducting private businesses. In this coun- 
 try, as well as in England, the general rule is that when the 
 government grants a franchise to a particular person, it is pre- 
 sumed to trust that person, and no other, and the powers con- 
 ferred are not transferable unless expressly authorized by law. 
 
 A private business corporation, however, as before stated, 
 has the same implied power to mortgage and pledge its property 
 to secure its debts, as it has in respect of the contracting of the 
 debts. The restrictions are such only as may be imposed by 
 constitution or statute or by express provision of the charter or 
 by-laws. 
 
 (2) The character of the debt and the conditions under which it is 
 contracted. Where the debt in its entirety has been or is con- 
 tracted antecedently to or contemporaneously with the execution 
 of the indenture, of course no question is presented as to the con- 
 ditions upon which the debt may be incurred. But if, as gener- 
 ally is the case in corporate borrowings, a considerable part or all 
 of the debt is to be contracted subsequently to the execution 
 of the mortgage or indenture, the conditions under which it 
 is to be incurred must be presented with definiteness. The 
 amount of the debt to be secured is the essence of the mort- 
 gage or pledge. It affects directly the rights of every bond- 
 holder, and the courts will hold the mortgagor and the trustee 
 to strict compliance with the terms of the instrument authoriz- 
 
16 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 ing the creation of the debt. The method of expressing such 
 terms in the indenture will be considered later. 
 
 Wherever, as in many States, the amount of corporate in- 
 debtedness is limited either by reference to the amount of the 
 capital stock or otherwise, any possible excess of debt must 
 be carefully guarded against. 
 
 (3) The form of the obligation to evidence the debt and the privi- 
 leges to be given to holders. Under this head, special forms of 
 corporate securities such as equipment-trust obligations, de- 
 mand obligations, etc., are not considered. We are now con- 
 sidering only corporate obligations to pay at stated times, issued 
 in series for circulation in the markets, and constituting charges 
 upon the general credit of the corporation. If sufficient for 
 identification, even by parol, the simplest statement of indebted- 
 ness will entitle the obligations to the benefit of the security so 
 far as concerns merely the payment of the debt. The elabora- 
 tions of the obligation are intended as inducements to purchasers. 
 
 Primarily, a corporate bond contains a promise to pay a 
 fixed sum at a time and place specified, and to pay interest 
 thereon at a rate, time and place also specified. To identify the 
 bonds as entitled to the benefits of the indenture, the bonds set 
 forth the amount and title of the issue, and the parties and 
 date of the indenture, and refer to the indenture for a statement 
 of the security (if any) and the rights of the trustee and of the 
 bondholders in respect of such security or under such indenture. 1 
 
 There is a recital also that certification by the trustee under 
 the indenture is requisite to the enforcibility of the bond. 
 
 1 A mere recital that the bonds are issued under an indenture, according to a 
 Minnesota decision (Guilford v. Minneapolis &c. Ry., 48 Minn. 560 ; 1892. 51 
 N. W. 658 ; 1892. Elliott on Railroads, Vol. 1, pp. 653-654 ; 1907 ; Sec. 484) 
 does not limit the rights of the holder of the bond. (See also 49 L. R. A., N. S. 
 155-159 and Mr. Foster's exhaustive brief in Watson v. C. R. I. & P. R. #.,169 
 App. Div. N. Y. 663; 1915). But, if the indenture contain provisions render- 
 ing uncertain the date of maturity of the bond, and these are brought into the 
 bond by its reference to the indenture, the bond may have been deprived of 
 negotiability (McClelland v. Norfolk <fe Southern R. R., 110 N. Y. 469; 1888). 
 No such effect would result if the contingency be merely to make the bond 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 17 
 
 This certification then becomes as essential to the validity of 
 the bonds as to the security thereof by the indenture. 1 
 
 Such a simple bond properly executed and attested is the 
 stock upon which from time to time have been grafted various 
 provisions intended to make the bonds attractive to purchasers 
 or to protect the obligor. The number and variety jof such 
 provisions are many, limited only by the ingenuity of the bor- 
 rower and the necessity of avoiding any contravention of the 
 promise to pay. Some of the more usual provisions may be 
 noted. 
 
 (a) The first important provision concerns the form of obli- 
 gation whether as coupon bonds payable to bearer (with or 
 without a provision for the registration of the principal in the 
 name of the owner), or as registered bonds without coupons, 
 payable both principal and interest to the registered holder or 
 assigns. If the bonds are issuable in each form, the market 
 now expects that the coupon bonds and registered bonds shall 
 be interchangeable. In such case the bonds must state briefly 
 the conditions upon which the registration or the interchange 
 may be made. The coupons attached to coupon bonds in- 
 variably are payable to the bearer regardless of the registration 
 of the principal. 
 
 (6) The bonds may be issuable in various denominations and 
 the several denominations may or may not be interchangeable. 
 If the denominations are interchangeable, the conditions of 
 interchange should be set forth. 
 
 (c) It is advisable always to include in the bond a waiver of 
 
 become due earlier than a date fixed for maturity (Chicago Railway Equipment 
 Co. v. Merchants National Bank, 136 U. S. 268 ; 1889. Negotiable Instruments 
 Law, New York Consolidated Laws, Chap. 43, Sec. 23-2). The present policy 
 of the Stock Exchange disfavors the restricting clause considered in the Rock 
 Island case (169 App. Div. 663 ; 1915) and it would be better now to adopt the 
 form quoted by Mr. Foster : "The principal sum of this bond may be declared 
 due before the date above stated in the manner and with the effect provided in 
 said trust deed." Consideration will be given later to the provisions of the 
 trust deed in this particular. 
 
 1 Maas v. Mo. Kan. & Texas Ry., 83 N. Y. 223 ; 1880. 
 C 
 
18 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 liability of officers, directors and stockholders, even if at the 
 time of the issue of the bond no such liability exists. Subse- 
 quent use or acceptance of statutory provisions of consolidation 
 or amendment of charter or otherwise, may constitute an 
 acceptance of all statutory burdens existing at the later date 
 and may involve a personal liability not existing at the date or 
 at the issuance of the bond. Indeed, comparatively recently 
 the Supreme Court of the United States has held that a cor- 
 poration formed in a State without stockholders' liability, but 
 declared to be intended for business in a State with such lia- 
 bility, may by carrying on such business bring its members 
 under the liability laws of the latter State. The better practice 
 is to insert the waiver in the bond as well as in the indenture. 
 
 (d) It is the general practice to make the payment of the 
 obligation subject to acceleration in case of default in one or 
 more of the covenants in the bond or in the indenture. It is 
 well that such a statement should appear also in the bonds. 
 Otherwise, in such case, the default will not entitle the trustee 
 to foreclose for the principal debt. 1 
 
 (e) If the obligor desires to reserve the right of redemption 
 of some or all of the bonds before maturity, the condition upon 
 which such right may be exercised should be briefly stated. 
 In this connection, the Stock Exchange Committee requires 
 a clear statement of the method, the notice and the period 
 for which notice shall be given. 
 
 (f) If a sinking fund is to be set up, there may well be a brief 
 statement referring to the mortgage provisions therefor. 
 
 (g) Any right to convert the bond into stock should be also 
 the subject of reference to mortgage provisions sufficient to 
 cover contingencies of consolidation, 2 of increases of stock, or 
 the creation of preferred stock. 
 
 1 Cf. Mallory v. W. S. R. R., 35 Superior Ct. (N. Y.) 174 ; 1874. See also, 
 Batchelder v. C. G. W. Co., 131 N. Y. 42 ; 1892. Watson v. C. R. I. & P. R. R. Co., 
 169 App. Div. 663 ; 1915. And Jones' Corp. Securities, Sec. 56 ; Ed. 3. 1907. 
 
 2 Rosenkrans v. Lafayette &c. Ry., 18 Fed. 513 ; 1883. Parkinson v. West 
 End Ry., 173 Mass. 446 ; 1899 ; 53 N. E. 891 ; 1899. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 19 
 
 These last three points will be considered more fully in con- 
 nection with the subject of Collateral Trust Indentures. 
 
 Prior to the outbreak of the present European war, attended 
 by wide and perilous fluctuations in exchange discouraging 
 such practice, it was quite customary in large bond issues to 
 provide for the issue of bonds payable at the option of the 
 holder at home in United States gold coin, or abroad, and in 
 the latter event, in foreign currencies, sometimes, in one or 
 more such currencies, or at one or more places. Such an obli- 
 gation must define, or render possible of certain definition, the 
 amount payable in each designated place, or it will not be 
 negotiable. 1 
 
 Until the enactment of the Federal Income Tax Law, it was 
 almost invariably the practice for the obligor to covenant to 
 pay principal and interest without deduction for taxes. While 
 this covenant still is demanded generally by investors, many 
 large corporations, realizing the uncertainty of the obligation, 
 are adopting the policy of omitting any such provision from 
 recent bond issues. It is asserted, and it also is denied, that 
 the present Federal Income Tax Law makes void any subse- 
 quent promise of an obligor to pay the normal federal income 
 tax of the holder of the bond in respect thereof. In absence 
 of a controlling adjudication it is better not to insert such a 
 promise. 2 
 
 The ordinary coupon is a promise to pay a specific sum at a 
 certain time and place, stated to be interest for a named period 
 upon a bond bearing an indicated number. If the bond be 
 subject to redemption before the due date of the coupon, 
 the coupon should recite that its payment is subject to the 
 call of the bond for previous redemption. In view of the 
 many judicial opinions that for most purposes a detached 
 coupon constitutes a separate and distinct obligation of the 
 
 1 Parsons v. Jackson, 99 U. S. 434 ; 1878. 
 
 2 Haight v. Pittsburgh &c. R. R., 6 Wall. (U. S.) 15 ; 1868. The provision 
 referred to is omitted from the new Income Tax Act of 1916. 
 
20 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 corporation, 1 it is desirable that the coupon itself should dis- 
 tinctly state every intended qualification of the direct promise 
 to pay. 
 
 The trustee's certificate, usually endorsed on bonds, is 
 merely a statement that the bond is one of the bonds men- 
 tioned in the indenture, and is signed by the trustee. 
 
 (4) The general character of the security or the benefits to be 
 provided for the bonds. 
 
 The security may be a mortgage of real estate or of chattels, 
 or a pledge or assignment of bonds, stock or other securities, 
 and may or may not be subject to prior liens. Most large 
 mortgages include some of each of the several classes of property. 
 
 The security may be for the protection of two or more series 
 of bonds, the several series not ranking equally but having 
 relative priorities. The Stock Exchange Committee considers 
 it undesirable to have different series of bonds of unequal rank 
 secured by mortgage to the same trustee ; but oftentimes such 
 a unity is the necessary result of preexisting obligations. An 
 illustration of prior lien series and subordinate lien series of 
 bonds secured by the same instrument, is the First Consoli- 
 dated Mortgage of 1895 of the Erie Railroad Company and the 
 recent Consolidation Mortgage of 1913 of the New York Cen- 
 tral, the latter securing several classes of previously issued bonds 
 entitled to different relative liens on the mortgaged property. 
 It is not easy to draw an instrument to express with artistic 
 completeness the relative rights of different lien holders in rela- 
 tion to the many provisions of the instrument. Of course, if 
 the subordinate lien is created by a different instrument, it is 
 comparatively simple to recognize prior liens by an appropriate 
 reference in the grant. 
 
 If there be no security, some of the provisions appearing in 
 indentures affording benefit to bondholders, are covenants to 
 
 i Watson v. C. R. I. & P. R. R., 169 N. Y. App. Div. 663 ; 1915. Con- 
 tinental Securities Co. v. N. Y. Central R. R., 217 N. Y. 119 ; 1916. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 21 
 
 make no future mortgage, or to secure the bonds under and by 
 a future mortgage, if any be given, or to maintain a specified 
 amount of quick assets, or to provide a sinking fund to redeem 
 the bonds. 
 
 Some of the matters to be considered in stating these rights 
 will be referred to in discussing the form of collateral trusts or 
 debentures. 
 
 The Modern Corporate Mortgage 
 
 The corporate mortgage of the present day, as a result of 
 the great advance in the activities and needs of corporations, 
 particularly railroad corporations, has taken on form, features 
 and dimensions vastly different from the early indentures which 
 we have been considering, and includes an elaborate contract as 
 well as provisions for an expanding lien. 
 
 The following illustrations may be given of a few of the com- 
 plexities of the contract for which provision must be made in 
 the mortgage indenture and of the reasons therefor : 
 
 (a) The investment market requires a form of obligation 
 which may be made non-negotiable, partly or wholly, tem- 
 porarily or permanently, in order to protect trustee holdings, 
 or to guard against loss by theft. Thus are required (as 
 a substitute for the early day safety precaution of detaching 
 all coupons) detailed provisions for the registration of the prin- 
 cipal sum of the bonds (leaving the interest to continue to be 
 payable to the bearer of the coupons) or else for the registration 
 of the bond as to both principal and interest (in which case the 
 mortgage should recite the form of such fully registered bond), 
 and finally for the interchange of coupon bonds and fully regis- 
 tered bonds. Until a comparatively recent date, such inter- 
 change was not provided for, and the consequence was that at 
 times the market quotation of coupon bonds and registered 
 bonds without coupons of the same issue varied by more than 
 one per cent. The most succinct statement in the indenture 
 of such rights of registration and interchange would cover as 
 
22 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 many folios as were contained in the old Erie mortgage of 
 1849. 
 
 (6) The modern mortgage generally must be something more 
 than a security for a debt then or theretofore created. In most 
 cases it embodies an agreement to provide for future advances. 
 If the mortgage debt is subject to increase, then of necessity 
 there must be expressed precisely the conditions of increase. 
 The investing public, through the bond distributing houses and 
 the large investing institutions such as the insurance companies, 
 require a greater and greater specification of the safeguards in 
 connection with any permission to augment the mortgage debt. 
 If the increase is to be allowed for additions and improvements, 
 the mortgagor must be required to furnish elaborate statements 
 as to the construction or the acquisition to be paid* for out of 
 the additions to the debt. If only the refunding of prior obli- 
 gations is the purpose of increase, then again there is necessary 
 a recital of the conditions governing increase for that purpose 
 and a prescription of the method in which the refunding is to 
 be accomplished. Occasionally the refunding is of bonds of sub- 
 sidiary corporations, which, of course, will involve still further 
 details of procedure. There are many recent corporate mort- 
 gages in which the provisions concerning additional bond issues 
 cover ten times the number of printed pages required for the 
 old Erie mortgage. 
 
 (c) In view of the ready currency of corporate obligations in 
 the investment market and of the large amount of the aggre- 
 gate debt, the individual trustee has given place to a corporate 
 trustee to accept the mortgage conveyance, and by its certificate 
 to authenticate the bonds as being issued in accordance with 
 the terms of the mortgage indenture, thus interposing protection 
 against irregular or unauthorized issues. This development 
 has been accompanied by a further specification of the duties of 
 the trustee. Corporate mortgages of realty continue to confer 
 upon the trustee a power to enter and to operate the mortgaged 
 premises, but the present effect of this provision is little else 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 23 
 
 than to afford a basis for the appointment of a court receiver 
 and for the assertion of a claim upon the income. Existing 
 State laws limiting the powers of foreign corporations may 
 effectually nullify a granted power to a corporate trustee to 
 enter and operate, even though the trustee were willing to 
 assume the liabilities incident to the conduct of a complex 
 business. Consequently, there has grown up the custom of a 
 more comprehensive specification of the remedies available to 
 a trustee in case of default. Oftentimes the mortgaged proper- 
 ties extend through several different States, with varying and 
 often conflicting laws, and it is the prevailing opinion that in 
 the interest of expeditious and uniform procedure, there shall be 
 a definite statement of the rights of the trustee and the bond- 
 holders, as full as practicable in view of the diversity of laws. 
 Among the important rights thus specified are generally, the 
 right to declare the entire principal due in case of default in 
 the payment of any interest or of default in one or more other 
 conditions, with a reserved right of waiver (which is quite 
 necessary), the right to foreclose by suit or otherwise as may 
 be advised by counsel, the right to sell without such foreclosure 
 (limited in practice generally to sale of pledged stocks and 
 bonds), the right to recover a deficiency judgment for the 
 benefit of bondholders, the right to apply for a receiver, the 
 right of the bondholders to precipitate the maturity of the prin- 
 cipal upon a foreclosure sale for default in interest, the right 
 of the bondholders to use the bonds and coupons in payment of 
 the purchase price of the mortgaged property upon a foreclosure 
 sale, the limitation upon the right of the bondholder to sue 
 under the indenture unless the trustee shall fail in its duty, and 
 the waiver by the mortgagor of any right to claim the benefit 
 of any stay or extension or appraisement laws. 
 
 (d) The corporate mortgage of to-day includes a varying 
 number of covenants, designed principally to compel the com- 
 pany to maintain the priority and integrity of the mortgage 
 security. In the old Erie mortgage above mentioned, the only 
 
24 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 covenant is one to execute further assurances. The number and 
 the scope of the covenants now inserted in such instruments vary 
 according to the character of the corporation and the nature of 
 the security. Generally speaking, more comprehensive cove- 
 nants are required from a strictly private corporation than from 
 a quasi-public or public utility corporation, whose corporate 
 transactions promptly become publicly known. It would seem 
 that the larger and more prominent the corporation, the less is 
 the number of covenants deemed necessary by bond buyers. 
 Oftentimes, the security is of a nature that suggests and re- 
 quires covenants of special application. To illustrate, in the 
 Interborough Rapid Transit mortgage of 1912, which operates, 
 or in the future will operate, under many different contracts, 
 leases and certificates, there are numerous covenants strictly 
 limited in application, but deemed necessary to prevent im- 
 pairment of the mortgage security by defaults by the Company 
 under its leasehold and other estates. So in a case where part 
 or all of the security under an indenture consists of shares of 
 stock or bonds of other corporations, the mortgagor must be and 
 always is shorn of power to alter the capitalization of such cor- 
 porations to the detriment of the security under the indenture. 
 (e) The events of default upon which the trustee may assert 
 the remedies provided by the mortgage are specified in corre- 
 spondence with the respective covenants. It is not practicable 
 to include within a single omnibus default clause the right of 
 the mortgagee to exercise the remedy upon default in any 
 of the covenants. The period of grace intervening between 
 a default and the enforcement of the remedy therefor, upon a 
 reasonable view of its application, may properly vary according 
 to the nature of the default, as for instance, a longer period 
 of grace is allowed after default in payment of taxes than after 
 a default in interest. Less important covenants may be the 
 subject of actionable default only after notice and demand 
 of performance shall have been made on the company. In 
 other cases, the period of grace should begin to run without re- 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 25 
 
 quirement of precedent notice, notably in case of failure to pay 
 interest, a default as to which the mortgagor has the earlier 
 knowledge. Oftentimes, as in the case of the Interborough 
 Rapid Transit mortgage, the events of default are numerous. 
 
 (/) The reservation to the mortgagor of the right to obtain 
 releases from the trustee upon stated conditions, is another 
 highly important feature of the modern mortgage. The neces- 
 sities of a trunk-line railroad, for instance, to obtain for various 
 purposes releases of portions of its mortgaged properties are 
 often imperative, particularly in connection with dealings with 
 governmental authorities. Provisions for releases of mortgaged 
 property require careful drafting in order to protect the bond- 
 holder and the trustee, and at the same time afford to the 
 company reasonable freedom of action. Precedents may be 
 found in the New York Central mortgage of 1913 and the 
 Northern Pacific mortgage of 1914. 
 
 It is such complexities of contract that enlarge some of the 
 present-day corporate mortgages to volumes of two hundred 
 printed pages. It has been remarked that it was devoutly to 
 be wished that some genius would arise to point the way to a 
 reduction of the text of such instruments ; but where the oppor- 
 tunity has been afforded to discuss the subject with such 
 critics, they have been able to indicate little which upon full 
 consideration they would be willing to omit. Some fifteen 
 years ago the eminent general counsel of a railroad in the Cen- 
 tral States submitted a form of refunding mortgage which was 
 unsatisfactory to the bond-purchasing bankers as being in what 
 was considered a primitive style, and on behalf of the bankers 
 there was submitted a form of mortgage in the form which 
 had become familiar in New York. The first criticism of the 
 railroad counsel was the general one that to a large extent he 
 regarded most of the provisions of the mortgage ineffectual. 
 On subsequent and careful analysis the only provision which 
 finally he was prepared to condemn as useless was a provision 
 in general terms that as a matter of right the trustee should be 
 
26 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 entitled to the appointment of a receiver, a statement which he 
 considered assumed to limit the discretionary power of the 
 court, but which had proved useful in aiding the court to exer- 
 cise its discretion. One New York .counsel was quite out- 
 spoken in his criticism of the length of corporate mortgages 
 until charged with the duty of preparing one for an important 
 street railroad system. Upon careful consideration of this it 
 was found to be in some respects more elaborate in detail than 
 some for which I may have been regarded as responsible. 
 
 It is very well to argue that various provisions expressly set 
 forth in a corporate mortgage would be implied in any event 
 in any controversy before a court; but it may be said that 
 those who have had large experience in such matters are con- 
 vinced that the answer to the question whether rights or obli- 
 gations will be implied by a court, oftentimes is affected by the 
 atmosphere surrounding the litigation. Substantially all of 
 the provisions from time to time added to corporate mortgages 
 have been intended to avoid contentions which previously had 
 been made in reported cases. Furthermore, it is to be remem- 
 bered that a substantial part of the modern mortgage concerns 
 the duties and responsibilities and immunities of the corporate 
 trustee. In practical experience, a trust company, having 
 many corporate mortgage trusts, is called upon daily to per- 
 form, or to refrain from performing, acts which may or may 
 not be specifically provided for in the indenture. If they are 
 specifically provided for, the action or non-action follows as a 
 matter of course. If not clearly authorized, the question is 
 referred to counsel for advice, with incident delay and expense. 
 Perhaps the greatest amount of study and care in the drafting 
 of corporate mortgages has been to regulate specifically the 
 relative rights of the mortgagor and the trustee prior to any 
 default whatsoever. Under the old mortgages prior to default 
 the trustee was regarded generally as little more than a " rubber 
 stamp." 1 In the new mortgages, the trustee's activities before 
 
 1 Rhinelander v. Farmers Loan & Trust Co., 172 N. Y. 519 ; 1902. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 27 
 
 default certainly are more varied and oftentimes involve ques- 
 tions more difficult than are raised upon a foreclosure, and the 
 provisions for the protection of the trustee deserve the most 
 careful consideration and adequate statement. 
 
 From this extended introduction, we may proceed now, and, 
 for the sake of emphasis, at the risk of some repetition, to indi- 
 cate in detail the general method of preparing the indenture 
 intended to regulate the issue of the bonds, to express the rights 
 and remedies, severally and respectively, of the parties to the 
 indenture and the bondholders and to provide security for the 
 bonds. The purpose will be to suggest provisions, and the 
 purpose of provisions, which have been adopted as the result 
 of experience. These may be considered conveniently under 
 the following heads : 
 
 I. Names of the parties and the preambles. 
 II. The consideration and grant or the assignment in trust. 
 
 III. The conditions governing the issue of the bonds, including (1) limi- 
 
 tations in amount, and (2) conditions of (a) certification and 
 delivery, (6) registration, and (c) interchange of the bonds. 
 
 IV. Particular covenants of the mortgagor. 
 
 V. Provisions as to any pledged stocks and bonds. 
 
 VI. Remedies of trustees and bondholders. 
 
 VII. Releases and leases. 
 
 VIII. Consolidations, mergers and purchases affecting the mortgagor. 
 
 IX. Provisions concerning the trustee. 
 
 X. Possession prior to default, and defeasance. 
 
 XI. Acceptance of the trust by the trustee. 
 
 XII. Execution, acknowledgment, recording, affidavits of good faith, 
 
 etc. 
 
 XIII. Miscellaneous provisions. 
 
 I. Names of the Parties and the Preambles 
 
 Of course, the party of the first part is the mortgagor. Either 
 following its corporate name or in the preambles should be 
 mentioned the State of incorporation, and whether the company 
 was organized under general laws or created by special charter, 
 
28 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 or consolidation, or merger or otherwise. The party of the 
 second part is the trustee to accept and to hold the title in 
 trust for the takers of the bonds. Any person, not incom- 
 petent or an infant, even a bondholder, may be trustee, but, 
 under the rules of the Stock Exchange, not a director or officer 
 of the mortgagor company. It is desirable, however, to have 
 a corporate trustee to control the issue of the bonds, and to 
 hold possession of pledged securities or moneys. In view, 
 however, of the varying laws of the several States limiting the 
 rights therein of foreign corporations, in many jurisdictions it is 
 safe to join with the corporate trustee an individual to act as 
 co-trustee. In this particular the laws of the several States are 
 various and many are of uncertain scope. A statute of Cali- 
 fornia assumes to require the association of a California trust 
 company with every foreign trustee. Even the law of New 
 York contains provisions l which may limit the rights of a for- 
 eign trust company to act as a mortgage trustee of property 
 within this State. If there be more than one trustee, the rela- 
 tive rights of each should be set forth, as will be more fully 
 mentioned in the discussion of the provisions concerning the 
 trustee. 
 
 The functions of the preambles following the naming of the 
 parties, are first to explain the purposes of the indenture, and 
 next to constitute representations by the maker which after 
 the issue of the bonds will serve as an estoppel against it and 
 those claiming under it. It is advisable to state in the pre- 
 ambles that the mortgage and the bond issue have been duly 
 authorized by due corporate proceedings, but it is best not 
 always to quote literally the resolutions of the directors or stock- 
 holders, unless it is absolutely certain that as quoted the resolu- 
 tions are legally sufficient. Such a quotation of resolutions not 
 legally sufficient may be ineffective as an estoppel, whereas a 
 simple statement of due authorization would be entirely effect- 
 ive. The fact of stockholders* due consent to the mortgage 
 
 1 N. Y. Banking Law, Sees. 233, 185, Consolidated Laws, Chap. 10. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 29 
 
 should similarly be recited in those cases where it is required 
 by statute, charter or by-laws. This is desirable especially in 
 the State of New York to obtain the protection afforded by 
 Sec. 7 of the Stock Corporation Law 1 against the perils of a 
 lack of sufficient consent by stockholders. 2 It may be well 
 also to insert immediately before the grant, a clause stating 
 expressly that all acts and things required by law and other- 
 wise in respect of the mortgage and the bonds have been duly 
 performed and complied with : thus clearly creating an estoppel 
 operative generally in favor of those purchasing bonds upon 
 faith of such statement. 3 Of course, as to acts that in the strict 
 sense are ultra vires the corporation, there can be no estoppel, 
 but there may be as to acts irregularly or even insufficiently 
 performed if they are within the general scope of the powers 
 conferred by the legislature. 4 Such deficiencies do not affect 
 the apparent rights of bona fide purchasers for value, and the 
 presence of such an express assertion of regularity may assist 
 the purchaser in repelling an attack upon his good faith. 5 
 
 To identify the debt secured, the form of the bonds, the 
 coupons and the trustee's certificate usually are set forth. If 
 variation be permitted in any of the bonds of the issue, it is 
 prudent to make a brief statement of the authorized variations. 
 It is the general opinion that the description of the bonds or 
 debt secured should be precise; and if practicable it is well 
 that this should be the case, but I believe in the sufficiency of 
 any description of the debt beyond reasonable possibility of 
 mistake. In this view, mere subdivisions of amounts or slight 
 variations of terms would not affect the security of bonds other- 
 wise practically identifiable. 
 
 1 N. Y. Consolidated Laws, Chap. 61. 
 
 2 Vail v. Hamilton, 85 N. Y. 453 ; 1881 ; The Vigilancia, 73 Fed. Rep. 452- 
 457 ; 1896. Hamilton Trust Co. v. Clemes, 17 N. Y. App. Div. 152 ; 1897. 
 
 3 City Ry. Co. v. Citizens 1 St. R. R. Co., 166 U. S. 557-566; 1896. 
 
 4 Louisville N. A. & C. Ry. Co. v. Louisville Trust Co., 174 U. S. 552-574 ; 
 1898. 
 
 6 See Logan County Bank v. Townsend, 139 U. S. 67-72-76 ; 1890 ; and cases 
 cited. 
 
30 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 II. The Consideration and the Grant or the Assignment in Trust 
 
 After the preambles follow the granting clauses, prefaced by 
 a statement of the consideration. Formerly this was stated 
 as being a nominal sum paid by the trustee, but now it is 
 recognized that besides the trustee's reception of the property 
 for the specified purposes a real and important consideration 
 exists as to the cestui que trusts, that is, the purchasers of the 
 bonds, and as to them the principal consideration is their pur- 
 chase and acceptance of the bonds. 
 
 As to the granting clause, it may be said first that if the 
 mortgage be of real property the description should be suffi- 
 cient to enable the mortgage to be made a record lien. In the 
 case of large corporations it is seldom practicable to give any 
 detailed description of the property. It is advisable to make 
 the grant comprehensive by conveying all the property of the 
 company in specified jurisdictions, and if desired, to follow the 
 general grant by stating that the same includes property there- 
 after more fully described. It is generally convenient by a 
 clause of exception to reserve any property desired to be re- 
 tained free of the mortgage rather than to describe all the 
 property that is included. If a land grant is to be included this 
 should be done expressly and adequately, for land does not 
 pass as appurtenant to other land. 1 
 
 The laws of the jurisdictions concerned should be examined 
 carefully as to the protection of any mortgage lien upon chattels. 
 Generally it is impracticable to give a satisfactory lien on mov- 
 ables, if the same are liable to pass out of the jurisdiction in 
 which the mortgage is recorded or filed as a chattel mortgage. 
 The question is important where the mortgage assumes to cover 
 private rolling stock or other vehicles. As to railroads, the 
 statutes of many States declare the appurtenant chattels of a 
 railroad to be real estate for mortgage purposes. 
 
 Turning for a moment to mining, lumbering and trading 
 
 1 N. O. Pac. Ry. v. Parker, 143 U. S. 42-55 ; 1891. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 31 
 
 companies, it may be observed here that serious questions are 
 presented by the statutes in force in nearly all the States mak- 
 ing void any instrument which purports to mortgage stock in 
 trade left in the custody of the mortgagor, such transactions 
 being deemed, as stated in the early cases, "a badge of 
 fraud." 
 
 The statutes and the decisions upon this point in the several 
 States in which the property may be located should be examined, 
 and, when the question is doubtful, stock in trade should be 
 excepted from the mortgage by clauses as exclusive as language 
 permits. The question is of particular importance in respect 
 of mortgages of mining and lumbering companies where part of 
 the realty through removal or severance becomes the stock in 
 trade of the owner. 
 
 If any leaseholds are to be covered by the mortgage, the con- 
 sent of the lessor should be obtained if the lease contains a 
 covenant against assignments. While the making of a mort- 
 gage leaving possession in the mortgagor does not constitute a 
 violation of such a covenant, the enforcement of the mortgage 
 by entry or foreclosure in some jurisdictions would constitute 
 a violation. 1 It is doubtful whether the reservation from the 
 mortgage of the last day of the term of the lease is effective to 
 avoid a violation of such a covenant. 
 
 If the security includes corporate bonds, stocks and other 
 securities, the lien should be effected, if practicable, by deposit 
 of the same with the trustee in order to create a legal pledge. 
 If not so delivered, the same should be expressly assigned and 
 notice of the assignment should be given to the persons holding 
 the property. 
 
 After the conveyance of the property owned by the corpora- 
 tion, it is important to determine if any future-acquired property 
 is to be included in the mortgage. It is well settled that, being 
 expressed in apt language, a mortgage of after-acquired property 
 
 1 West Shore R. Co. v. Wenner, 70 N. J. Law, 233 ; 1904. Contra, Riggs v. 
 Pursell, 66 N. Y. 193 ; 1876. Dunlop v. Mulry, 85 A. D. (N. Y.) 498 ; 1903. 
 
32 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 is practically effective as a lien. 1 In most cases the value of 
 the corporate property to a large extent depends upon its use 
 as a going concern, and generally, and in fact almost invariably, 
 it is required by bond buyers that the mortgage shall cover at 
 least all after-acquired property used in connection with or for 
 the purposes of the business, however acquired by the mortga- 
 gor. It is argued by Mr. Machen 2 that the after-acquired 
 property grant should cover income, not qua income, but as 
 after-acquired property. This, however, has not been finally 
 adjudicated, and if so desired it should be so stated. In that 
 case the trustee might be entitled to the income accumulated 
 prior to his demand for possession, or receivership. 
 
 It is logical and desirable also to include in the mortgage all 
 after-acquired property, even if not used in connection with 
 the described premises, if such acquisition be made out of 
 moneys representing proceeds of bonds or of released property ; 
 but it is in order to reserve expressly from the mortgage full 
 right on the part of the mortgagor to own or to acquire, free 
 from the lien, any property not acquired for use in connection 
 with the mortgaged premises or with moneys derived from the 
 bonds or under the mortgage. 
 
 If the corporation possesses and exercises any franchise 
 as is the case with all public service corporations such fran- 
 chise should be included in the mortgage, for otherwise the 
 property would have little value to a purchaser on foreclosure. 3 
 
 1 Pennock v. Coe, 23 How. (U. S.), 117 ; 1859. 
 
 An interesting question not yet finally determined arises in connection 
 with the consolidation of two railroads each subject to an after-acquired property 
 mortgage. (N. Y. Security v. L. N. E. & St. L. Consol. Ry., 102 Fed. 382 ; 
 1900 ; and cases cited.) It has been held by the United States Circuit Court in 
 an able opinion by Judge Woods that such a lien will not attach to the equip- 
 ment acquired after the consolidation by the new company. This point should 
 be covered both as to equipment and as to other accessions after consolidation, 
 either one way or the other. See also Compton v. Jesup, 68 Fed. 263 ; 1895. 
 Polhemus v. Fitchburg R. R., 123 N. Y. 502 ; 1890. 
 
 Machen, Modern Law Corporations, Sec. 1879 (1908). 
 
 3 See Lord v. Yonkers Fuel Gas Co., 99 N. Y. 547 ; 1885. 101 N. Y. 614 ; 
 1886. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 33 
 
 The franchise rights mortgaged, of course, may not include the 
 franchise to be a corporation, which franchise is not ordinarily 
 the subject of sale or mortgage. 1 There should be included 
 also the income and profits of the corporation, thus creating a 
 lien thereon which will become effective after entry by the 
 trustee or by a mortgage receiver, 2 or upon the institution of a 
 suit for possession as distinguished from a suit for foreclosure 
 and sale. 3 
 
 The habendum clause should run to the trustee, its succes- 
 sors and assigns forever, subject to any liens or encumbrances 
 of recognized priority (all of which so far as practicable should 
 be specified so as to preclude avoidable disappointments and 
 controversies), 4 in trust for the equal and proportionate benefit 
 of the holders of the bonds whenever the same be issued. 
 
 III. The Conditions Governing the Issue of the Bonds 
 
 A most important point here to be covered, of course, is the 
 amount of the issue which is authorized to be secured by the 
 mortgage. Usually the amount is limited by definite state- 
 ment of amount, but it may be unlimited (securing all future 
 advances represented by the issue of the bonds), or it may be 
 limited only by the prescription of a ratio to the capital stock 
 from time to time outstanding, or even by some stated relation 
 to the earnings applicable to the payment of interest. 
 
 The mortgage of the Chicago City Railway Company pre- 
 pared in 1907 is an unlimited mortgage, but the use of the 
 bonds and of their proceeds is carefully restricted to capital pur- 
 poses under the direction of public authorities. The mortgage 
 of the New York Central of 1913, and of the Northern Pacific 
 of 1914, are mortgages unlimited by specification of amount, 
 but subject to the requirement of a fixed relation to the capital 
 
 1 Memphis & Little Rock R. R. Co. v. Commissioners, 112 U. S. 609; 1884. 
 1 See Allen v. Dallas & Wichita R. R., 3 Woods 316 ; 1878. Atlantic Trust 
 Co. v. Dana, 128 Fed. Rep. 209 ; 1903. 
 
 3 Dow v. Memphis R. R. Co., 124 U. S. 652 ; 1887. ' 
 
 4 Central Trust Co. v. C. H. V. <fc T. Ry., 87 Fed. 815 ; 1898. 
 
 D 
 
34 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 stock from time to time outstanding. The unlimited mortgage 
 is the outgrowth of the realization of the fact that it is almost 
 impossible to forecast the possible growth and demands of a 
 railroad system. The general mortgages made at the time of 
 the reorganizations of twenty years ago, then considered ample, 
 have proved inadequate in amount and in flexibility. 
 
 Specification also should be made in the indenture as to any 
 variations in the recited form of the bonds which may be per- 
 mitted under the indenture that is, as to denominations, 
 rates of interest of various series, conversion privileges, re- 
 demption rights, etc., and also by whom the bonds may be 
 executed. 
 
 The amount and character of the bonds being specified, the 
 provisions next in order and which require more careful con- 
 sideration than any other, are those for the issue of the bonds. 
 Questions continually arise between mortgagor corporations 
 and trustees as to their relative rights and duties in respect 
 of such issue. It is the aim of counsel of trustees, and should 
 be the desire of counsel of mortgagors, to specify clearly all 
 conditions upon which bonds may be issued. The trust com- 
 panies desire to expedite the business of their customers, 
 but the liabilities they may incur by unauthorized acts in- 
 creasing the mortgage debt are so enormous in the aggregate 
 that in many cases prudent trust officers are compelled to 
 take deliberate advice of counsel with resultant expense which 
 might have been avoided had the indenture been more definite. 
 
 The determination of the conditions upon which bonds may 
 be issued depends solely upon practical considerations that 
 is to say, the marketability of the bonds. Of course, it is im- 
 practicable to indicate even generally the variety possible in 
 respect of such restrictions. The most that can be presented 
 is an outline of conditions which at the present time are desir- 
 able in respect of bond issues intended for general circulation. 
 
 In most cases, the mortgage provides for the issue forth- 
 with of a specified amount of bonds upon merely the order of 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 35 
 
 the company, sometimes to be accounted for by the company 
 before any further issue. The remainder of the bonds are re- 
 served for future use for specified purposes. Comprehensively 
 speaking, these purposes are to provide for the refunding or pay- 
 ment of prior liens and for the acquisition of additional property. 
 The orderly practice is to reserve by separate sections the amount 
 required for refunding and the amount issuable for additions, 
 in each case specifying the restrictions and the conditions appli- 
 cable to such issue. In such specification, detail and precision 
 are necessary, and any matters of fact should be established by 
 certificates and affidavits made by officers of the company or 
 other persons having knowledge in the premises, and filed with 
 the trustee. The mortgage should provide expressly that all 
 such writings shall be conclusive in establishing the matters 
 therein stated in favor of the trustee as against the bondholders 
 and all others. Without incurring expense which the mortgagor 
 would be quite unwilling to pay, it would be impossible for a 
 trustee to make separate in vestigation of the many requisite mat- 
 ters of fact. If any questions of law are to be determined, the 
 mortgage should provide for the furnishing of the written 
 opinion of counsel, also to be filed with the trustee. In the 
 case of large corporations having legal counsel of recognized 
 capacity, it is usual to specify that such opinion may be that of 
 the counsel for the company ; but if this be desired, express au- 
 thority should be conferred on the trustee to receive such opinion. 
 Some of the legal questions to be determined in connection with 
 bond issues are the necessity of authorizations by governmental 
 commissions, the sufficiency of conveyances of any property, 
 and the effective attaching of the lien of the mortgage upon 
 new property. 
 
 As to the bonds to be issued for refunding, the general prac- 
 tice is to provide that the refunded bonds be delivered to the 
 trustee, and, if so desired, that the same shall be kept alive so 
 far as legally practicable, and also that the new bonds be issued 
 in exchange for such deposited bonds. To avoid any question 
 
36 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 in the premises, the authority to the trustee to receive such 
 refunded bonds should in terms provide that the same may be 
 before, at or after maturity, and may be either canceled or un- 
 canceled. It is usual, also, to provide that within a limited 
 period prior to the maturity of an underlying bond issue, the 
 mortgagor may receive refunding bonds for the purpose of 
 sale, provided the face (or other) value be deposited with 
 the trustee, to be withdrawn from time to time upon the 
 deposit of the refunded bonds. If canceled bonds are to 
 be received, there should be a requirement that evidence be 
 presented that no bond in lieu thereof has been issued and is 
 outstanding. 
 
 As to the issue of the bonds reserved for additions, there has 
 been a considerable variation during the past twenty years in 
 the attitude of the investment market. In the reorganization 
 mortgages of twenty years ago, the usual provision was for the 
 issue of a comparatively small amount of the bonds in each 
 calendar year, the object being to prevent sudden increase 
 of fixed charges. The additional bonds were not issuable 
 until the bonds previously issued had been applied to improve- 
 ments as established by certificates of officers of the mortgagor. 
 The rapid growth of the railroads made these provisions inade- 
 quate, and during a few years prior to 1907, mortgages often 
 provided for the issue of a substantial amount of bonds to be 
 reserved in the hands of the company itself for use for im- 
 provements, and permitted additional bonds to be issued at 
 any time as fast as previous issues had been used up. 
 
 Following 1907, however, the requirements of the bond- 
 buying houses and institutions became more exacting, and the 
 usual provision now is that no bonds shall be issued under the 
 mortgage except to reimburse the company for moneys actually 
 expended, unless the proceeds of the bonds be deposited with 
 the trustee to be withdrawn from time to time for immediate 
 expenditure by the company for capital purposes authorized 
 by the mortgage. The rate at which the bonds are to be issu- 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 37 
 
 able to reimburse the company, may be either their face value 
 or a specified percentage of their face value, and the same 
 rule applies to the amount of money deposited with the trustee 
 upon the issue of bonds. 
 
 In many cases, especially those of industrial corporations, 
 the requirement is that bonds shall be issued only to the extent 
 of 75 per cent or 80 per cent of the cost of improvements, re- 
 quiring the company to make up the deficiency out of its 
 general funds. 
 
 The expenditures by the company for which bonds or their 
 proceeds may be used are established by certificates made by 
 competent persons and filed with the trustee. These certifi- 
 cates are required to contain statements identifying the prop- 
 erty affected and indicating that the expenditures are for the 
 purposes chargeable strictly to capital account. 
 
 The provisions for the issue of the bonds should be in detail 
 as to both coupon bonds and registered bonds and their inter- 
 change, and they should be such as to permit of the issue of 
 registered bonds as such originally and without necessity of 
 interchange. They should permit also the transfer of regis- 
 tered bonds. 
 
 There should be provisions also for the issue of new bonds in 
 place of bonds mutilated or destroyed, or of registered bonds 
 lost. Considerable danger attends the issue of new bonds for 
 coupon bonds claimed to be lost, and usually it is better as it 
 is safer to put a claimant for such a bond to his proof by a legal 
 proceeding. An illustration of the attitude of the courts toward 
 such claimants is indicated by the decision of Switzer and Co. v. 
 N. Y. Central Co. 1 
 
 In view of the care and time required for the preparation of 
 engraved definite bonds, it is a matter of practical convenience 
 to provide in the mortgage for the issue of a temporary bond 
 or bonds in typewritten or printed form of large denomination, 
 to be exchangeable for the definitive bonds when prepared. 
 
 1 152 App. Div. (N. Y.) 70 ; 1912. 
 
38 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 IV. Particular Covenants of the Mortgagor 
 
 The mortgage should contain a covenant to pay the principal 
 and interest of the bonds, in substance corresponding to the 
 similar covenant in the bonds, but subject to the provisions of 
 the mortgage. A breach of the covenant to pay thus will 
 constitute a breach of the covenant in each instrument: as 
 either breach will create a right of action in personam either 
 may be enforced. 1 In many of the large mortgages made within 
 the last year or two, there is inserted in this covenant a provi- 
 sion for the protection of the company, against liability under 
 the income tax law, authorizing it to require persons entitled 
 to interest to furnish proper certificates in compliance with the 
 terms of that law. 
 
 Another covenant proper for all mortgages is that to execute 
 further assurances, and to obtain further assurances from others 
 obligated to the company to make conveyance. 
 
 In mortgages covering limited parcels of real estate, there is 
 usually inserted a covenant as to title and freedom from encum- 
 brances except as specified. 
 
 If the place of payment of the principal and interest of the 
 bonds is stated in general terms as being the office or agency 
 of the company, there should be a covenant in the mortgage to 
 maintain such an agency at the place stated. 
 
 If the bonds are subject to registration, a covenant should 
 be included to maintain books at the office or agency in which 
 such registration may be made under reasonable regulations 
 and where transfer of registered bonds similarly may be made. 
 Where a new bond is issuable upon any transfer or interchange, 
 a nominal charge, usually one dollar, is made by the company 
 to cover the expense, in addition to the amount of any revenue 
 stamp chargeable against the transferer. 
 
 It is customary in all mortgages to include a covenant to 
 maintain in good condition the mortgaged premises, and in rail- 
 
 1 See Hulbert v. Clark, 57 Hun. (N. Y.) 558 ; 1890. ' 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 39 
 
 road mortgages a covenant to keep in proper repair all equip- 
 ment and to replace it when worn out or otherwise disposed of, 
 and also to keep a record of all rolling stock and to permit it to 
 be inspected by the trustee. 
 
 Other general provisions are those to pay taxes and assess- 
 ments (subject, however, to the right of the company to test 
 the legality thereof), to maintain the priority of the mortgage 
 lien, and to discharge claims of mechanics, laborers and others. 
 
 Besides these there are the covenants to apply proceeds of 
 bonds only as authorized by the mortgage, and to record the in- 
 denture and to pay any recording tax, the trustee usually being 
 discharged from any and all responsibility to cause the record 
 to be made. 
 
 V. Provisions as to Pledged Stocks and Bonds 
 
 Provisions as to pledged stocks and bonds of course are ap- 
 propriate only in an indenture in which the security in whole 
 or in part consists, or may consist, of such property; but the 
 number of large corporate mortgages which include such securi- 
 ties is far greater than of those which do not. The points neces- 
 sary to be considered in connection with such pledges will be 
 discussed in the paper upon Collateral Trusts. 
 
 The principal interest of the pledger is to reserve until de- 
 fault the right to collect the income and to exercise the other 
 rights of an owner of the pledged securities. This is accom- 
 plished by express provision to that effect, and by the further 
 provision sometimes that until default no transfer shall be made 
 upon the corporation books of the shares for which the certifi- 
 cates indorsed for transfer by the pledger are delivered to the 
 trustee, and sometimes that the trustee may transfer the same 
 to itself or its nominee either immediately or when it deems 
 proper. In case of such transfer of stock it is usually stipulated 
 that from tune to time when and as requested prior to default 
 the trustee shall give to the pledger a proper proxy to vote 
 thereon except as expressly limited. 
 
40 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 VI. Remedies of Trustees and of Bondholders 
 
 Under this head we may consider the defaults in respect of 
 which the remedies may be invoked, particularly the three prin- 
 cipal remedies : (1) the right to declare the principal due, (2) the 
 right of entry either by the trustee or a receiver, and (3) the 
 right of foreclosure and sale either with or without suit. 
 
 Among the usual defaults are (a) default in the payment of 
 principal of any of the bonds when the same shall have become 
 due whether at maturity, or prior thereto by declaration or 
 otherwise, (6) default in the payment of any interest on any 
 bond, (c) default in the observance of any other important 
 covenants in the mortgage, such as sinking fund obligations, 
 rentals or taxes affecting valuable parts of the mortgaged 
 premises, and (d) default in payment of principal or interest of 
 underlying bonds. 
 
 In case of defaults, other than a default in payment of the 
 principal of a bond, it is usual to allow to the mortgagor a 
 period of grace. In the case of railroads this period of grace 
 generally is six months and in cases of other companies thirty 
 or sixty or ninety days from the date of default, notice thereof 
 not being required. Defaults in the due observance of other 
 covenants of the indenture usually are penalized only after the 
 expiration of a specified period initiated by written notice of the 
 default to the mortgagor given by the trustee or the bond- 
 holders the purpose of this provision being to require ob- 
 servance of all the covenants, without subjecting the company 
 to irrevocable penalty for remediable defaults unless the trustee 
 or the bondholders shall have deemed the same of sufficient 
 consequence to give such notice. 
 
 A general remedy given to the trustee of mortgaged realty, 
 and one which is a survival of the earliest days, is the right to 
 enter and to operate for the benefit of the bondholders. This 
 provision rarely, if ever, is availed of at the present time, be- 
 cause of the laws of the several States restrictive of the rights 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 41 
 
 therein of foreign corporations, as well as because of the liabili- 
 ties which the trustee might incur through such entry; but 
 the provision should always be phrased in optional form. It 
 affords a basis for the appointment of a mortgage receiver to 
 collect the income and to apply the net to the amounts due on 
 the bonds. In special cases, there has been inserted a provi- 
 sion that a trustee might cause to be organized a corporation 
 to operate a property of which the trustee might deem it desir- 
 able to take possession. 
 
 Another remedy which has come down from the early real 
 property mortgages is that authorizing the trustee itself to sell 
 the mortgaged premises without judicial foreclosure. This 
 ancient right is now limited in many of the States and involves 
 so many questions of procedure that it seldom is exercised with 
 respect to realty. It is availed of frequently at the present 
 time, however, to effect sales of pledged securities by the 
 trustee in the same manner as pledged securities are sold in 
 enforcement of ordinary collateral notes by the banks. 
 
 Of course, the mortgage also will authorize the enforcement 
 of the security by foreclosure or other legal proceedings. 
 
 As to pledged stocks and bonds, it is proper to empower the 
 trustee in an event of default or of receivership, to terminate 
 the right of the company to collect the income of pledged 
 stocks and bonds, or to vote in respect of the stocks. 
 
 The mortgage should specify that it is the duty of the trustee 
 upon request of the holders of a prescribed amount of bonds 
 and upon receiving indemnity to enforce the provisions of the 
 indenture in such manner as may be advised by counsel. 
 
 To prevent annoyance or damage by any litigious holder of 
 a few bonds against the interest of the holders generally, 
 through involving the trustee of the company in litigation in 
 respect of the bonds or indenture, it is customary to pro- 
 vide that a trustee shall not be required to take any action 
 unless requested so to do by the holders of a substantial amount 
 of the bonds, usually 10 per cent to 25 per cent. 
 
42 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 Another very desirable provision gives to the trustee the 
 right at its option to act upon an event of default without 
 awaiting any period of grace, in case the company shall be put 
 in the hands of a receiver at the suit of any one other than the 
 trustee. In cases of commercial corporations, the mortgage 
 security may be impaired if the company be left in the custody 
 of a receiver for unsecured creditors, during the substantial 
 period pending the termination of a period of grace. If the 
 trustee is authorized to act promptly, it may have the receiver- 
 ship extended to the mortgaged property for its benefit and its 
 protection. 
 
 In discussing the form of the bond, much attention was given 
 to the mode of providing therein for the acceleration of the 
 maturity of the principal of the debt in case of defaults, es- 
 pecially a continuing default in payment of interest. This 
 right, of great importance to the trustee and the bondholders, 
 should be conferred also in the mortgage with particular care. 
 The method and the effect of foreclosing for any default except 
 in payment of principal are vague and unsatisfactory. Unless 
 the principal can be made to become due upon such a default, 
 effective enforcement of the mortgage will be impracticable. 
 Usually, this right is made exercisable by the trustee either in 
 its discretion, or pursuant to the mandatory request of the 
 holders of a specified amount of bonds. Without such speci- 
 fication the request of bondholders might have to be by all. 1 
 Such a right of declaration should be accompanied by the cor- 
 responding right of the holder of at least a majority of the 
 bonds to waive the declaration and its consequences, without 
 prejudice however to any other right of the trustee or the 
 bondholders, or to the right of future declarations, thus avoid- 
 ing the rule in Dumpor's case 2 that a condition once waived is 
 lost forever. 
 
 It should be provided also that in case of sale of the property 
 
 * See Mallory v. W. S. R. R. Co., 35 Superior Rep. (N. Y.) 174 ; 1873. 
 See 4 Coke's Rep. 119 b ; 1602. 
 
X 
 
 COLLATERAL TRUSTS AND DEBENTURE INDENTURES 43 
 
 for any cause either under the mortgage, or under any claim 
 having priority thereto, the principal sum should become due 
 forthwith without any further action. 
 
 Usually it is desirable that the entire mortgaged premises 
 be sold in one parcel and as an entirety, and provision to that 
 effect should be inserted in the mortgage, subject of course to 
 other direction by bondholders or to the requirement of statutes. 
 
 The character of notice to be given of the time and place of 
 any sale should be prescribed, and power should be given to 
 the person conducting the sale to adjourn the same to an ap- 
 pointed time at the same place without further notice or pub- 
 lication. 
 
 The trustee should have power to execute and to deliver to 
 the purchasers upon such sale suitable conveyances, and the 
 mortgage should contain a power of attorney from the mortgagor 
 to execute such conveyances, and properly also a provision that 
 if requested by the trustee the mortgagor itself will join in the 
 execution. 
 
 The receipt of the trustee for the purchase money should 
 be made a sufficient discharge therefor to the purchaser, and 
 such purchaser should not be bound to inquire as to the use 
 or the application of the proceeds or the necessity of the sale. 
 
 Provision should be made to govern the order in which the 
 proceeds of sale should be distributed. 
 
 It is important here to provide against acts by the mortgagor 
 which would avoid the due payment of coupons and result in 
 their being kept alive and entitled to the prior or equal security 
 of the mortgage, thus increasing the debt in case of foreclosure. 1 
 
 The mortgage should provide that any such coupons so kept 
 alive shall not be entitled to the security or to any share of the 
 proceeds of sale except subject to the payment of the principal 
 and of all coupons not so funded. 
 
 1 See Ketchum v. Duncan, 96 U. S. 659 ; 1877 ; Wood v. Guarantee Trust 
 Co., 128 U. S. 416; 1888; Morgan's Co. v. Texas Cent. Ry., 137 U. S. 171-196; 
 1890. 
 
44 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 It is usual for the mortgagor to authorize the bondholders to 
 purchase without accountability except for the purchase price, 
 and on account of the purchase price to use any bonds or interest 
 obligations to the extent of the amount payable upon them out 
 of the proceeds of sale. 
 
 A covenant usual in the modern mortgage is that the mort- 
 gagor will pay the principal and the interest of the bonds to 
 the trustee as trustee of an express trust ; and that the trustee 
 shall have the right to recover judgment therefor either before 
 or after or during the pendency of foreclosure proceedings. 
 These provisions may support a claim by the trustee to recover 
 a deficiency judgment in jurisdictions where deficiency judg- 
 ments are allowable. 1 
 
 As a precaution against unforeseen contingencies, there is 
 oftentimes inserted in mortgages a provision (of doubted legality) 
 authorizing the mortgagor, prior to default, to surrender pos- 
 session to the trustee and consenting to the appointment of a 
 receiver. Such a provision might be useful in case of unjusti- 
 fiable or predatory attempts to interfere with the exercise of the 
 corporate powers. 
 
 In connection with the enforcement of the remedies of the 
 trustee, the mortgage should provide specifically that the 
 mortgagor waives its rights under any stay or extension law 
 providing for valuation or appraisement or other postponement 
 of the right of enforcement, and should contain an express 
 waiver of the benefit of stay, extension, valuation and appraise- 
 ment laws, and of any statutory right of redemption after a 
 sale in enforcement of the mortgage. Even if at the time of the 
 mortgage there be no such statutes in force, they may be made 
 the subject of later enactment. 
 
 1 An interesting review by Judge EARL, of the right to judgment for defi- 
 ciency will be found in Frank v. Davis, 135 N. Y. 275 ; 1892. 
 
 See U. S. Sup. Ct. Equity Rule 10 ; Noonan v. Lee, 2 Black 499 ; 1862 ; 
 Mackay v. Randolph Macon Co., 178 Fed. Rep. 881 ; 1910; Watson v. C. R. I. 
 & P. R. R. Co., 169 App. Div. (N. Y.) 663 ; 1915 ; Grant v. Winona & S. W. 
 By. Co., 85 Minn. 422 ; 1902 ; 89 N. W. 60 ; 1902. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 45 
 
 Remedies frequently specified in important mortgages are 
 the right of the trustee to obtain the appointment of a re- 
 ceiver of the mortgaged premises, the right of the company 
 to deliver possession to the trustee prior to default, and the 
 right of the trustee to maintain suits against impairment of the 
 security by governmental authorities under unconstitutional 
 legislation. 
 
 It is usual to provide that no delay or omission of the trustee 
 shall be construed as a waiver, or a default, or an acquiescence. 
 
 The provision that all remedies shall be cumulative and not 
 exclusive, but additional to any others given by law, has been 
 considered already in discussing the very recent case, Watson v. 
 C. R. I. & P. R. R, 1 hereinafter examined. 
 
 The provision as to cumulative remedies probably was intro- 
 duced originally to obtain or to save for the trustee a right to 
 sue at law for the debt, concurrently with a suit to foreclose 
 the mortgage or pledge, except where there may be statutory 
 requirement of leave of the court, 2 and also to avoid any impli- 
 cation that conditions affecting one of the trustee's remedies, 
 such as foreclosure by advertisement, affected his right also as 
 to a distinct and unconditional remedy such as foreclosure by 
 suit. 3 
 
 In connection with the statement of remedies, it should be 
 provided that no holder of any bond or coupon shall have a 
 right to institute proceedings under the indenture for any pur- 
 pose whatsoever unless first he shall have given notice to the 
 trustee and shall have afforded to the trustee reasonable oppor- 
 tunity to enforce such provision of the indenture, and shall 
 have indemnified the trustee, nor unless the holders of a speci- 
 fied amount of bonds shall have joined with him in demanding 
 such action. This requirement, however, would not be opera- 
 tive in any case where it would bar the bondholder of his just 
 
 1 169 App. Div. (N. Y.) 663 ; 1915. 
 
 2 See Vanderbilt v. Schreyer, 91 N. Y, 392 ; 1883 ; Robert v. Kidansky, 111 
 App. Div. (N. Y.) 475 ; 1906. 
 
 Morgan's Co. v. Texas Central Ry. Co., 137 U. S. 171-192 ; 1890. 
 
46 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 and equitable rights as in case of unjustifiable refusal or neg- 
 lect by the trustee, or where the trustee, or others acting in 
 behalf of the trustee or of the mortgagor, hold so many of the 
 bonds as to render it impossible for the aggrieved bondholder 
 to obtain support in the specified amount. The trust relation 
 of the bondholders inter sese would restrict inequitable oppres- 
 sion of the minority. 1 
 
 In the frequently mentioned recent case of Watson v. C. R. I. 
 & P. Ry., 2 the question was presented as to the effect of these 
 and similar provisions, upon the right of a bondholder to obtain 
 judgment on his bond with the view of reaching property not 
 covered by the mortgage or pledge, which contained special 
 provisions authorizing the trustee not only to declare the prin- 
 cipal due, but also as trustee of an express trust to recover 
 judgment for the entire principal of all the bonds then out- 
 standing, together with all interest in default, and to sell there- 
 under the property mortgaged or pledged, and, in the event of 
 deficiency, to enter judgment therefor. All of these steps 
 having been taken by the trustee, the holder of one bond 
 brought action at law in the City Court and obtained judgment 
 which was reversed by the Appellate Term, and the reversal 
 was sustained by the Appellate Division, where two opinions 
 were delivered. That of the Court by Mr. Justice Clarke, 
 seems to rest upon the fact that the trustee had acted. He 
 says, " I am satisfied that, the trustee having acted, no independ- 
 ent action by a bondholder can be maintained." But what if 
 the trustee had not acted ? In his separate though concurring 
 opinion, Presiding Justice Ingraham took a different and some- 
 what wider view, seeming to have regard to the essential equality 
 of right in all bondholders, which equality would be violated 
 by allowing one bondholder in his own separate right to recover 
 a judgment enforcible against property of the mortgagor even 
 
 1 Linder v. Hartwell R. Co., 73 Fed., 320; 1896; Cochranv. Pittsburgh Co., 
 150 Fed., 682 ; 1907 ; Ettlinger v. Persian Rug & C. Co., 142 N. Y., 1891 ; 1894. 
 2 169 App. Div. N. Y. 663 ; 1915. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 47 
 
 though not covered by the mortgage. This would operate to 
 the prejudice of other bondholders relying upon, and acting 
 by, their common representative, the trustee. Similar con- 
 sideration of the equality of right and duty of co-bondholders 
 inter sese was indicated in Gue v. Canal Co., 1 by Chief Justice 
 Taney who said, " It would be against the principles of equity 
 to allow a single creditor to destroy a fund to which other 
 creditors had a right to look for payment" ; in Pennock v. Coe, 2 
 by Mr. Justice Nelson, who said, "To permit therefore one 
 of the bondholders under the second mortgage to proceed at 
 law in the collection of his debt upon execution would . . . 
 disturb the pro rata distribution in case of a deficiency and 
 give him an inequitable preference over his associates"; and 
 in Jackson v. Ludeling, 3 by Mr. Justice Strong, who held for 
 the Court that, "When two or more persons have a common 
 interest in a security, equity will not allow one to appropriate 
 it exclusively to himself, nor to impair its worth to others." 
 It is common knowledge that seizure under execution of rail- 
 road property not covered by a mortgage impairs the worth 
 of the mortgaged railroad to the bondholders, and no one of 
 them should be allowed thus selfishly to injure those with 
 whom he has entered into a trust relationship. 
 
 The principle recognized in these decisions of our highest 
 court and challenged in this latest action should be protected 
 in express terms, and it might be proper to provide that 
 no bondholder proceeding thus separately at law for his own 
 benefit, should be entitled to share in the proceeds of the 
 property covered by the mortgage or pledge ; certainly not in 
 any way that should give him an advantage over his fellow 
 bondholders. 
 
 The provisions of the mortgage being for the benefit of the 
 trustee and the bondholders on the one part, and of the mort- 
 gagor company on the other part, grave difficulties might arise 
 
 1 24 How. (U. S.) 263 ; 1860. 2 23 How. (U. S.) 117 ; 1859. 
 3 21 Wall. (U. S.) 616 ; 1874. 
 
48 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 if under any rule of law 1 third persons were invested with 
 any right to claim that any provisions of the mortgage were 
 intended for their benefit. To avoid any such contention or 
 any consequent enforcement of such a contention, the mortgage 
 should provide in express terms that nothing in the indenture 
 or the bonds is intended to give to any such third persons any 
 rights whatever, and that the provisions of the bonds and 
 mortgage are solely for the benefit of the parties thereto and 
 the holders of bonds thereunder. 
 
 The draftsman should include in the mortgage (with concise 
 reference thereto in the bonds) full exemption from liability on 
 account of the mortgage debt on the part of incorporators, 
 stockholders, officers and directors. 
 
 VII. Releases and Leases 
 
 The points to be covered in the article concerning releases 
 are (a) the character and extent of the property subject to 
 release; (6) the identification of the specific parcels and the 
 ascertainment of their value; (c) the application of the pro- 
 ceeds of released property ; and (d) the subjection to the mort- 
 gage lien of new property acquired with proceeds of releases. 
 
 The character and extent of the property permitted to be 
 released depends of course upon the character of the property 
 of the mortgagor and the nature of its business. 
 
 The general provision is one that the property released shall 
 be such as shall not be necessary or advantageous for the opera- 
 tion, maintenance or use of the railroad or of the manufactur- 
 ing plants, as the case may be, and that the release must be 
 required for the purpose of carrying out an agreement for the 
 sale of the property to be released or for the exchange thereof 
 for other property, or as an incident to some change or modi- 
 fication in right of way or terminals, or in the adjustment of 
 boundary disputes. 
 
 1 Like that in Lawrence v. Fox, 20 N. Y. 269 ; 1859. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 49 
 
 These facts should be made the subject of proof to the trustee 
 by a resolution of the directors authorizing the company to 
 request the release and a certificate of one or more officers of 
 the company, having knowledge in the premises, setting forth 
 the above facts concerning the property, as well as a specific 
 description, and a statement of the value, of the property 
 affected. In the case of railroad mortgages, it is usual to 
 accept the certificate of responsible officers. In case of manu- 
 facturing or commercial companies, the release clause is further 
 limited by requiring that there be furnished to the trustee 
 further proof through appraisers or examiners satisfactory to 
 the trustee. 
 
 Properly the proceeds of all released property should be held 
 by the trustee, though the mortgage may authorize the com- 
 pany under proper safeguards to retain such moneys to be 
 applied by it within a reasonable time for specified purposes. 
 Obviously these purposes must be such as shall protect the 
 security of the debt either by redemption of bonds or by en- 
 hancing the value of the mortgaged property. 
 
 The mortgage should require that new acquisitions be con- 
 veyed properly to the trustee as part of the security, or that 
 the trustee should be entitled to rely upon the opinion of 
 counsel that no such conveyance is necessary. 
 
 Express provision should be made that the purchaser of re- 
 leased property should not be required to see to the application 
 of the proceeds or to the necessity of release. 
 
 Generally there is reserved to the mortgagor full power 
 without notice to the trustee to dispose of worn-out machinery 
 and other chattels upon condition that the same be replaced 
 by new property. 
 
 In mortgages of railways, power should be reserved to the 
 mortgagor to make changes or substitutions of trackage rights, 
 agreements and contracts subject to the indenture, and, if 
 there be important leases or contracts which are to be subject 
 to no modification or subject to modification only with the con- 
 
50 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 sent of the trustee, they should be specifically excepted from 
 the general clause. In a railroad mortgage, usually it is desir- 
 able to include in the grant in general terms all the so-called 
 "structural contracts" in order that in case of foreclosure the 
 entire property may be taken over as a going concern. Among 
 the contracts which would be included in such an omnibus 
 clause undoubtedly may be many which are subject to frequent 
 change; and while it is desirable to mortgage all these con- 
 tracts it is still more desirable that the operating efficiency of 
 the road should not be hampered by preventing their modifi- 
 cation. The railroad company also should reserve liberty to 
 make changes of tracks, terminals, etc., to meet the require- 
 ments of municipal and other governmental authorities, even 
 though, because of the absence of any equivalent property, the 
 changes may involve some apparent reduction in the money 
 value of the mortgaged premises. 
 
 The release clause should provide for the termination of the 
 mortgagor's rights thereunder in case of default, subject to a 
 discretion and right in the trustee to permit such a release after 
 default and even after the company may have passed into the 
 hands of a receiver. As already considered, the value of the 
 mortgaged property as security lies largely in its earning ca- 
 pacity as a going concern, and anything that impairs its suc- 
 cessful operation either in the possession of the mortgagor or 
 of a receiver will result in loss to the holders of the mortgage 
 bonds. 
 
 Any power to lease the mortgaged property or the property 
 of any company whose stock is pledged should provide that in 
 case of foreclosure and sale the lease should be terminable at 
 the option of the purchaser. 
 
 VIII. Consolidations, Mergers and Provisions Affecting the 
 Mortgagor 
 
 As most mortgages provide for the issuance from time to 
 time of additional bonds, either those increasing the mortgage 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 51 
 
 debt or those issued upon interchanges of one form of bond for 
 another, it is important to anticipate the effect of the mort- 
 gaged premises passing to another legal corporate entity as the 
 result of a consolidation or a merger or of a sale of the premises 
 as an entirety, especially if the mortgage contains the usual 
 covenant that the mortgagor company will maintain its cor- 
 porate existence and preserve its corporate property. Upon a 
 strict merger under the New York Stock Corporation Law, 1 
 the obligations of the merged company are enforcible only 
 against it, and not against the company into which it is merged. 2 
 This would seem to be the case also in respect of a merger of 
 railroad corporations under the Railroad Law, 3 thus differing 
 in effect from a merger of banking corporations under Sections 
 35-40 of the Banking Law. 4 
 
 For market purposes all bonds of the same series should be 
 substantially identical in form, and therefore provision should 
 be made for the issue of bonds in the name of the original cor- 
 poration notwithstanding any such loss of its identity. 
 
 A few years since, in a case where it was proposed to consoli- 
 date a railroad company but to retain the right under an exist- 
 ing mortgage to issue a residue of bonds, it was decided that 
 prior to the consolidation the mortgagor company should 
 actually execute and have certified all the unissued bonds and 
 place them in escrow for issue as provided in the mortgage. A 
 comparatively recent case has taken the view that in such 
 case the bonds could not be issued by the successor. 5 This 
 cumbrous procedure would have been unnecessary if the 
 indenture had contained a clause authorizing a successor cor- 
 poration to issue bonds in the name of the original mortgagor. 
 This point should be covered by mortgage provisions to the 
 effect fc that nothing therein contained should prevent any con- 
 
 1 Sec. 15, Ch. 61, N. Y. Consolidated Laws. 
 
 * Irvine v. N. Y. Edison Co., 207 N. Y. 425 ; 1913. 
 
 8 Sec. 149, Ch. 49, N. Y. Consolidated Laws. 
 
 4 See Matter of Bergdorf, 206 N. Y., 309 1912. 
 
 6 See Diggs v. Fidelity Co., 75 Atlantic Rep. 517 ; 1905. 
 
52 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 solidation or merger or any conveyance or transfer of the 
 property subject to the indenture as an entirety, provided 
 that the lien and security shall not be impaired and that the 
 successor corporation shall have assumed the payment of the 
 bonds and the obligations of the indenture. Upon such assump- 
 tion the successor corporation is authorized to issue such 
 residue of bonds either in its own name or in the name of the 
 original obligor. 
 
 IX. Provisions Concerning the Trustee 
 
 Theoretically the trustee of a corporate mortgage ought to 
 have an active supervision of the trust; but practically the 
 liabilities which in such case it would assume would be alto- 
 gether out of proportion to the compensation which mortgagors 
 are able or willing to pay. 1 In fact, the compensation paid to 
 trustees for services prior to defaults are merely a reasonable 
 sum to cover the value of supervision and clerical work in 
 connection with the issue of bonds. 
 
 Accordingly, the responsible trust companies in New York 
 require provisions granting them immunities from the strict 
 duties of a trustee. They assume no responsibility for acts of 
 agents selected with reasonable care, or for anything except 
 willful misconduct or gross negligence. They assume no duty 
 to see to the use of bonds delivered pursuant to the provisions 
 of the indenture nor for the validity of the bonds nor the value 
 of the security. They are not to be bound to take any action 
 toward the enforcement of the trust unless notified of default 
 by bondholders and furnished with satisfactory indemnity 
 against expense, nor required to take any action unless spe- 
 cifically requested so to do by a specified percentage of the bond- 
 holders, usually 10 per cent to 25 per cent. They are to be 
 protected in acting upon any instrument believed by them to 
 be genuine, and are entitled to advice of counsel at the expense 
 
 1 See Rhinelander v. F. L. & T. Co., 172 N. Y. 519 ; 1902. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 53 
 
 of the mortgagor. They assume no responsibility for recitals 
 and statements in the indenture, and make no covenant as to 
 the rights of any person thereunder, nor are they to be respon- 
 sible for the recording or other registration of the indenture, 
 nor for the maintenance of insurance of the mortgaged 
 property. 
 
 Provisions should be inserted for the removal or the resig- 
 nation of the trustee. The usual provision is that the trustee 
 may resign at any time by its own act or may be removed by 
 writing under the hands of more than a majority or more than 
 three-fourths of the bondholders, as desired. In case of the 
 trustee so ceasing to act, it is usual to authorize the mortgagor 
 company immediately to appoint a successor, subject to such 
 appointee being superseded by a trustee appointed by a 
 majority or more of the bondholders. 
 
 It should be provided specifically that in case any corporate 
 trustee is taken under the control of a public officer or of a 
 receiver, a new trustee may be appointed. In one instance 
 where a corporate trustee was in the hands of the State 
 banking department, it was considered as having the power 
 neither to resign nor to act under the mortgage. Provision 
 should be made also that a corporation succeeding the corporate 
 trustee by merger or consolidation ipso facto shall succeed to 
 trusteeship under the indenture. 1 This result is accomplished 
 in case of merger by a statute of this state; but, notwith- 
 standing, the counsel of several railroads having property in 
 Western States have considered it necessary, in the absence 
 of such a provision, to have executed and recorded a supple- 
 ment to the indenture establishing the transfer of title on the 
 record. 
 
 If an individual trustee be associated with the corporate 
 trustee the indenture should limit the powers and duties of the 
 individual trustee. So far as law will permit, the corporate 
 trustee always should have the custody of stocks, bonds and 
 
 1 See Matter of Bergdorf, 206 N. Y. 309 ; 1912. 
 
54 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 moneys, and also all powers in respect of the certification of 
 bonds. Any notices or writings delivered to the corporate 
 trustee should be deemed as having been delivered to all the 
 trustees, and the individual trustee should be authorized to 
 constitute the corporate trustee his attorney to do such acts 
 as may be lawful. The individual trustee should be subject to 
 removal at any time by joint act of the mortgagor and the 
 corporate trustee, provision being made also for the appoint- 
 ment of his successor. 
 
 If an individual trustee be not appointed, it is prudent to 
 include in the indenture an express provision authorizing the 
 appointment by joint action of the trustee and the company 
 of an individual trustee whenever required by the law of any 
 jurisdiction in which mortgaged property is situated, or in 
 case the corporate trustee shall deem it in the interests of the 
 bondholders. Of course if the trust under the mortgage has 
 once taken effect, the statutory disqualification of the cor- 
 porate trustee would not prevent the enforcement of the trust 
 through a qualified trustee appointed by the court, but it is 
 preferable that the appointment of the qualified trustee should 
 be made by the company and the representative of the bond- 
 holders rather than by the court. The object to be accom- 
 plished, where statutes require the appointment of an individual 
 trustee, is to name such a trustee in the instrument originally, 
 giving him only such powers as relate to the enforcement of the 
 indenture against the property by entry or legal proceedings. 
 Thus the grant to him would be effective to constitute a trust, 
 even if the grant to a corporation foreign to the jurisdiction in 
 which the property was located would be void under a statute. 
 If the trust has once taken effect, it does not matter much 
 whether the individual trustee resigns or is removed or dies. 
 No new individual trustee need be appointed until action 
 against the security is desired, and in such case such appoint- 
 ment should be within the power of the corporate trustee or 
 the company or both. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 55 
 
 X. Possession Prior to Default, Defeasance and Notices 
 
 In the early mortgages, these essential provisions were set 
 forth at the beginning of the instrument, but now they are 
 generally relegated to the end. The company should have the 
 right to retain possession, and to operate the mortgaged premises, 
 and to collect and enjoy the earnings. However, if part of the 
 security consists of pledged bonds or stock, or in case any cash 
 is to come into the possession of the trustee under the inden- 
 ture, such security or cash should be retained by the trustee 
 to be administered under provisions specifically relating thereto. 
 
 The usual defeasance clause is to the effect that when the 
 whole amount due and payable on the bonds for principal and 
 interest and all other obligations under the indenture are dis- 
 charged, the estate of the trustee ceases, and at the expense 
 of the company the trustee is to cancel the indenture and to 
 execute any conveyances or reassignments, and to deliver to 
 the company any personal property held by the trustee. The 
 clause is desirable principally for convenience of proof that the 
 indenture is a pledge or a mortgage, for if it be such, any proof 
 to that effect will establish the right of the obligor to a return 
 of the property on full payment of the debt. 
 
 The manner in which notices and requests to the trustee 
 shall be executed by the bondholders and the method of con- 
 clusively establishing ownership of the bonds in respect of 
 which the writing is made should be clearly set forth. 
 
 XI. Acceptance of the Trust 
 
 The formal acceptance of the trusts by the trustee is a 
 statement that such trusts are accepted upon the terms and 
 conditions of the indenture. Ordinarily such acceptance does 
 not bind the trustee by the covenants of the mortgagor 1 but 
 it is usual also by express disclaimer to guard this point. 
 
 1 Rhinelander v. F. L. & T. Co., 172 N. Y. 519 ; 1902. 
 
56 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 XII. Execution, Acknowledgment, Etc. 
 
 The instrument closes with a proper attestation clause 
 signed by each of the parties by the officers authorized by the 
 resolutions, and the corporate seal is attested by the secretary 
 or other custodian. Pennsylvania requires that the instrument 
 shall contain an express power of attorney to specified persons 
 to execute. Many of the states require that the instrument 
 should be witnessed by two or more witnesses. 
 
 Care should be taken that the acknowledgment or proof of 
 the instrument complies with the requirements of the record- 
 ing statutes in each and every jurisdiction in which any part 
 of the mortgaged property is situate. In some cases it is con- 
 sidered preferable to have a separate acknowledgment executed 
 in statutory form for record in each such State. In South 
 Carolina proof is required instead of acknowledgment. Where 
 proof is required, strict compliance with the statute is neces- 
 sary, failure to state the place of residence of the subscribing 
 witness being regarded in some jurisdictions as a fatal defect. 
 A defective proof or acknowledgment generally vitiates the 
 record as constructive notice, and in some jurisdictions the 
 conveyance itself. 
 
 The officer before whom the acknowledgment is taken should 
 be disinterested, for in many jurisdictions it is considered that 
 if he be an interested party he is disqualified from acting in 
 this quasi judicial capacity. Corporate mortgages have been 
 denied the protection of the recording acts, when acknowledged 
 before a notary public who was also a stockholder in the 
 trustee corporation or even in the mortgagor corporation, 
 though not so in New York. 1 It is said also that the acknowl- 
 edgment should not be taken by the attorney for either the 
 mortgagor or the trustee. 
 
 In many of the Western and Southern States there is a re- 
 quirement that all mortgages covering personal property shall 
 
 1 Canandaigua Academy v. McKechnie, 90 N. Y. 618-629 ; 1882. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 57 
 
 contain an affidavit by the mortgagor and the mortgagee that 
 the instrument is made in good faith to secure a specified debt 
 and not with any design to hinder, delay or defraud creditors. 
 The statutes should be consulted as to the form of such affi- 
 davits and to ascertain whether or not they are required to be 
 recorded with the instrument. 
 
 Of course, there should be a prompt and formal delivery of 
 the instrument to the trustee or its agent, and in many juris- 
 dictions a record within a specified period after delivery. In 
 some jurisdictions the record of the mortgage by the mortgagor 
 is deemed prima facie evidence of delivery, but as this is refut- 
 able it is better that actual delivery be made. 
 
 Collateral indentures, debentures, income bonds and guaran- 
 tees and Stock Exchange Rules will next be considered. 
 
 Collateral Trust Indentures 
 
 The term "Collateral Trust Indenture" is understood usually 
 to refer to agreements whereby corporate bonds or stock or 
 both are pledged or assigned in trust to a trustee as security 
 for a series of notes or bonds. The pledge of such collateral 
 securities almost always is a feature also of trust deeds cover- 
 ing realty, and repetition will be avoided by treating under 
 this head of Collateral Trust Indentures, such pledges, when 
 so included in deeds of trust, to which will apply also these 
 provisions of pledge and the various provisions for the adminis- 
 tration of securities so pledged. 
 
 Ordinarily, the stock pledged under such agreements is the 
 stock of some company or companies subsidiary to the pledger, 
 and the bonds pledged are either those of such subsidiary 
 companies, or long-term mortgage bonds of the obligor pledged 
 as security for its own short-term notes. Security of the latter 
 class is resorted to when short-time money is obtainable on 
 better terms than long-time money. Accordingly, the cor- 
 poration issues a series of notes payable within a few years, 
 
58 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 and secured by the pledge of its own long-term mortgage 
 bonds, the expectation being that such bonds may be sold on 
 favorable terms at the maturity of the notes, which then may 
 be paid from the proceeds. Unless secured by mortgage such 
 pledged bonds, being merely the obligations of the pledgor, 
 would not constitute collateral security for the pledger's own 
 notes. 
 
 In case of bond issues secured by the pledge of stocks and 
 bonds of companies subsidiary to the obligor, it is necessary 
 to guard against possible dilution by the subsidiary com- 
 pany through an increase of its stock or the incurring of 
 obligations having priority to the securities so pledged by 
 the holding company. The protective provision usually in- 
 serted in the indenture is that there shall be no increase of 
 stock unless there be pledged under the indenture such amount 
 of the stock so added as shall be necessary to maintain there- 
 under the same proportion of the whole issue as that thereto- 
 fore pledged under the indenture and either that no debt 
 shall be incurred by the subsidiary company except in the 
 usual course of its regular business, or else that if bonds or 
 notes shall be issued either the whole amount or a portion 
 thereof as stated shall be brought under the pledge. It is cus- 
 tomary to provide also that any stocks and bonds of the pledged 
 issues held by others at the time of the pledge but thereafter 
 under any circumstances acquired by the pledgor shall be 
 brought under the pledge. In every such case the indenture 
 should authorize the cancellation and discharge of the indebted- 
 ness so brought under the pledge, thus restoring the original 
 value of the pledged shares. 
 
 Sometimes a so-called holding company with a large number 
 of subsidiaries desires to create a subordinate lien upon col- 
 lateral theretofore pledged to and held by a trustee as security 
 for an outstanding bond issue of the pledgor. This purpose 
 is accomplished by assigning to a trustee the equity remaining 
 in the pledgor company, and by providing for the appropria- 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 59 
 
 tion to the benefit of such subordinate debt, of the pledged 
 securities, whenever they shall have been released from the 
 existing pledge. Such a prior lien and such a secondary lien 
 on pledged stocks and bonds were created by the two inden- 
 tures of the United States Steel Corporation of 1901 and 1903 
 to the United States Trust Company, as trustee, which holds a 
 vast amount of stocks and bonds as security for the two in- 
 dentures in the order of their stated priority. This illustrates 
 the desirability (indicated already in the previous reference to 
 the Erie First Consolidated Mortgage of 1895 and the New 
 York Central Mortgage of 1913) of having the same trustee 
 in respect of indentures securing liens of different rank, by the 
 pledge of stocks or bonds or other intangibles, for only by such 
 actual holding by one trustee can there be perfected a technical 
 pledge for the protection of the junior debt. 
 
 The trustee should be authorized to transfer registered bonds 
 into its own name, to exchange coupon bonds for bonds so 
 registered, and also to transfer into its own name, or into the 
 name of its nominee, any shares of pledged stock. 
 
 But in pledging such bonds or stocks the pledgor corporation 
 must guard two important points, viz. that unless or until 
 it shall have made default, it may receive the income there- 
 from in the shape of dividends or interest, and to the fullest 
 extent consistent with the special provisions of the pledge may 
 exercise the voting rights in respect of the stock. This requires 
 express provision, as under the general rule of law the pledgee 
 would be entitled to have the income of the pledged securities 
 applied towards the payment of the debt so secured. 
 
 As to income, the provisions ordinarily are that until default 
 the pledgor shall have the right to collect the dividends and 
 the interest, and, if necessary, to receive from the trustee 
 appropriate orders for that purpose. These provisions should 
 be qualified so that the pledgor company may not collect any 
 interest or any dividends unless the same shall be paid out of 
 the ordinary income of the issuing company or collect the 
 
60 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 same by legal proceedings, or retain any stock dividends, or 
 exercise any rights in respect thereof except to collect and dis- 
 charge the same. In the event that any sum shall become 
 receivable on account of the principal of pledged bonds, or on 
 account of pledged stock out of capital on distribution or dis- 
 solution, it should be provided that all such proceeds shall be 
 received by the trustee and be applied to the improvement of 
 the security either through the acquisition of additional property 
 or by retirement of part of the secured debt. There should be 
 further provisions empowering the trustee to enforce its rights 
 as the holder of the pledged bonds and stock by legal proceed- 
 ings in cases of foreclosure, dissolution or winding up, and also 
 to make use of such stock and bond holdings to acquire the 
 property of the company issuing the same. These provisions 
 must be phrased with care and precision. 
 
 As to the reserved right of the pledgor to vote on pledged 
 stock and for such purpose to receive proxies from the trustee, 
 it will be well to specify that the pledgor shall have the right 
 not only to vote but also to give the consent required under 
 provision of any law, or by law or contract in respect of such 
 pledged stock. Recently a trustee acknowledging its duty to 
 give to the pledgor a proxy to vote at a corporate meeting in 
 respect of the pledged stock, denied its power to give to the 
 pledgor the equivalent power to execute the written consent 
 authorized by the Stock Corporation Law in lieu of such meet- 
 ing and vote. This technical construction required the delay, 
 trouble and expense of calling a wholly unnecessary meeting of 
 stockholders. 
 
 A privilege most convenient to the pledgor and by it often 
 availed of, is that authorizing the use of pledged stocks and 
 bonds in effecting consolidations or mergers of the company by 
 which the same were issued, and allowing the requisite sub- 
 stitution of securities. The pertinent clauses should contain 
 provisions for maintaining the value of the security, and re- 
 quiring opinion of counsel as to legal effect of the proceedings. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 61 
 
 Of course there can be no objection to permitting the pledger 
 company to acquire by merger or by purchase the property of 
 any subsidiary company, if all property so acquired shall be 
 subjected to the lien of the pledge. 
 
 There should be provisions authorizing the renewal or exten- 
 sion of pledged bonds, or the renewal or extension of any bonds 
 by companies whose stock is pledged, subject to specified con- 
 ditions intended for the protection of the security. The 
 pledger also should reserve the right to require a reassignment 
 of pledged shares necessary to qualify directors. 
 
 The pledge should provide that the company issuing the 
 pledged stock should not sell its property nor lease the same, 
 except by a lease expressly conferring upon the trustee the 
 superior right to terminate such a lease in case of default under 
 the mortgage. 
 
 The collateral trust indenture, as well as a mortgage con- 
 taining a pledge of stocks, generally contains various special 
 stipulations as a result of negotiations between the issuing cor- 
 poration and the intending buyer of the bonds to be issued. 
 Such stipulations have no direct relation to the mortgage or 
 other security, but are constituted covenants for the failure to 
 perform which the remedies under the mortgage may be en- 
 forced. 
 
 Among such covenants are the following : 
 
 (1) Sinking fund. A valuable safeguard to the bondholder 
 is a provision in the indenture requiring the obligor's amortiza- 
 tion of its debt by annual payments into a sinking fund. In 
 early mortgages, even of railroads, such sinking fund provisions 
 were quite common, but later fell into disuse except in cases of 
 mining, lumbering and shipping corporations and the smaller 
 manufacturing companies. Recently, however, the desirability 
 of providing for amortization of the corporate debt is being 
 widely realized, and the vendibility of a bond is helped mate- 
 rially by the existence of a sinking fund, even though it be 
 sufficient to retire only a third or a half of the debt. 
 
62 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 Broadly speaking, sinking funds are of two classes (1) the 
 ordinary sinking fund in which the moneys are applied to the 
 payment and the cancellation of the bonds, and (2) the sinking 
 fund known among bond dealers as "cumulative," in which 
 the bonds acquired by the use of sinking fund moneys are held 
 in the sinking fund as enforcible obligations entitling the 
 trustee to collect from the company the interest thereon as 
 additional payments to the sinking fund. Under a cumulative 
 sinking fund the moneys receivable increase from year to year 
 and promote a rapid retirement of the debt. 
 
 To make really effective any sinking fund necessarily any 
 cumulative sinking fund the bonds should be subject to 
 redemption or purchase for purposes of the sinking fund, so 
 that by calling a sufficient amount for redemption, if not 
 otherwise obtainable, the moneys may be applied promptly to 
 the acquisition of bonds. 
 
 In the absence of a redemption provision, the indenture 
 should provide for the investment of the sinking fund moneys 
 until bonds may be secured within the specified price. 
 
 The usual provision is to allow the company to make sinking 
 fund payments either in cash or in bonds of the issue at a price 
 not greater than par; and that any moneys received by the 
 trustee may be applied by it to the purchase in the market of 
 such bonds at a stated price, but not greater than the redemp- 
 tion price. 
 
 The sinking fund is established by a covenant to pay to the 
 trustee under the indenture (or to a separate sinking fund 
 trustee) on specified dates, annually or more frequently, 
 amounts of money either specified or determinable. In the 
 case of mining and lumbering companies and companies whose 
 property is consumed in operation, the sinking fund should be 
 based upon the consumption of the wasting property, measured 
 either by actual exhaustion or computed upon the basis of 
 the obligor's earnings from such wasting property. Where the 
 value of the property depends upon franchises or leases, the 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 63 
 
 sinking fund should be calculated so as to retire the bonds prior 
 to the termination of the franchises or leases. Such a sinking 
 fund is illustrated in the Interborough Rapid Transit Mort- 
 gage of 1913. 
 
 If the sinking fund be cumulative, the company covenants 
 to pay also the interest on the bonds acquired for the sinking 
 fund when and as the same shall mature. 
 
 The indenture should provide that in case its purchase of 
 bonds shall not exhaust the sinking fund, the sinking fund 
 trustee shall determine by lot the numbers of the bonds to be 
 redeemed ; should specify the method of publication of notice 
 of the redemption of the bonds called ; and should recite 
 that upon the presentation of the bonds, with all coupons 
 maturing after the redemption date there shall be paid out 
 of the sinking fund the amount due thereon for principal and 
 premium. 
 
 The right to purchase or redeem all of the bonds at once 
 should be reserved to be exercised in the same manner except- 
 ing of course the lottery for determination of bonds. It should 
 be provided also that from the date to be fixed by publication 
 of which holders of bonds would be bound to take notice, the 
 earning of interest on all called bonds shall cease. 
 
 Unless it be intended that the accrued interest on the bonds 
 also is to be paid out of the sinking fund, the indenture should 
 provide that the interest obligations maturing on the redemp- 
 tion day should be paid in accordance with the terms thereof 
 by the obligor out of its own funds. 
 
 The date for redemption customarily is an interest payment 
 day, though of course this is a matter of convenience subject 
 to agreement between the persons interested. 
 
 If the bonds are not subject to redemption for the sinking 
 fund, provision should be made for the investment of the sink- 
 ing fund moneys with adequate specification of the classes of 
 investments and the powers of the sinking fund trustee in 
 respect thereof. 
 
64 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 Of course any undue funding may accelerate the date upon 
 which bonds may be called. This will not be permitted by the 
 courts. 1 The right of the bondholder to continue his invest- 
 ment until payable in due course, is as inviolable as his right 
 to receive payment at maturity. The right of the obligor to 
 free himself from his interest-bearing debt when due either 
 upon a named or accelerated date, as the stipulation may war- 
 rant, is similarly inviolable. These relative and conflicting rights 
 must be made the subject of careful and adequate stipulations. 
 
 (2) Redemption before maturity. The right to redeem before 
 maturity is a valuable privilege to the obligor, particularly 
 one obligated to supply a sinking fund. The redemption 
 price may be par or a premium over par. The redemption 
 price is a matter of bargain between the obligor and the bond 
 buyer. Usually it operates as a peg to stop the increase in 
 the market price of the bonds, and therefore a redemption 
 price high enough to leave some speculative possibility of in- 
 crease in such market price is the usual insistence of the bond 
 buyer. The longer the term of the bond the higher soars the 
 redemption price. The redemption price varies from par up to 
 ten per cent or fifteen per cent above par. Redemption provi- 
 sions are disadvantageous also to the bond buyer in that he may 
 fail to take timely notice of the publication of redemption and 
 thus may lose some interest in an interval between investments. 
 Except for purposes of a sinking fund, therefore, the more 
 general provision is that the issue shall be subject to redemp- 
 tion only as an entirety or in comparatively large installments, 
 and during a period beginning some years subsequent to the 
 issue, and at a price estimated as probably equal to any ad- 
 vance in the market price of the bonds. The above comments 
 on the calling of bonds for the sinking fund are pertinent also to 
 redemption of bonds for retirement by the company. 
 
 1 M. K. & T. Ry. v. Union Trust Co., 156 N. Y. 592; 1898; Harnickell v. 
 Omaha Water Co., 146 App. Div. N. Y. 693 ; 1911. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 65 
 
 (3) The right to convert into stock. As an aid to the 
 sale of bonds sometimes there is given to bondholders the 
 right, during a specified period, to convert the bonds into 
 stock of the company at a specified rate. The right to issue 
 convertible bonds and the rate of conversion are governed, of 
 course, by the statutes affecting the corporation. When the 
 corporation sells the bonds at less than par, thus varying the 
 actual as distinguished from the nominal consideration for 
 the stock issuable, the question as to whether, under the local 
 rule of law, the discount or underwriters' commissions or other 
 deductions raise any question as to the full payment of the 
 stock when issued, must be determined upon the facts and the 
 law in each case. 
 
 As the exercise of the right of conversion affects the security 
 of the bonds issued only by improving it by reducing the 
 debt secured, considerable liberty may safely be allowed 
 the corporation in fixing the terms of the conversion, even 
 among different series of the same issue. Inherently, the right 
 is an individual right of each bondholder as distinguished from 
 his common right with other bondholders in the benefit of the 
 security. Such being the case, provisions in the indenture re- 
 stricting the right of enforcement of the covenants by joint 
 action of a number of bondholders, should except the bond- 
 holders' right to enforce the conversion privilege. All conver- 
 sion privileges should contain a covenant that the corporation 
 will make such increase of its stock as may be necessary to 
 provide for the conversion when made. Bonds converted should 
 be canceled and not reissued. In case the bonds are redeem- 
 able, provision should be made that the company may not, 
 by redeeming the bonds, destroy the conversion right 
 without affording reasonable opportunity to the bondholder 
 to make conversion. As observed above in the discussion of 
 mortgage provisions, it is necessary to safeguard the conver- 
 sion privilege so that if desired upon or after consolidation it may 
 be exercised in respect of stock of the consolidated corporation. 
 
66 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 (4) Maintenance of specified amounts of net quick assets. In- 
 dentures creating no trust fund as security, or constituting 
 merely a pledge or assignment of stock of subsidiary com- 
 panies of the obligor, often contain a covenant that the 
 obligor or subsidiary companies will maintain a specified per- 
 centage of net quick assets whereof verified statements are 
 to be furnished periodically to the trustee, and that failure to 
 maintain such assets shall constitute a default authorizing the 
 declaration of the maturity of the principal of the bonds and 
 the enforcement of all remedies. The object is to enable the 
 bondholders to act in case the company is tending towards in- 
 solvency. If such a provision be inserted in the indenture, 
 care must be taken to specify the method of computing the 
 assets and the items to be included in the computation. 
 
 Debenture Agreements 
 
 In the United States, as already mentioned, the term "de- 
 benture" is understood to mean serial obligations of a corpora- 
 tion not secured by a specific mortgage, pledge or assignment 
 of property. Of course a series of debentures may be issued 
 without the execution of any indenture relating thereto. Prior 
 to 1900 the few issues that had been made of such debentures 
 were not accompanied by a trust agreement. In such case the 
 rights and privileges given to bondholders were set forth at 
 length in the obligation, thus making a somewhat lengthy 
 instrument. Since an issue of debentures under trust agree- 
 ments by the Lake Shore R. R. Co. and by the New York 
 Central, the custom of adopting such agreements has become 
 general. Originally in 1893 the General Electric Company 
 made a large issue of debentures without an agreement, but 
 at the time of the refunding in 1912 a trust agreement was 
 executed. 
 
 Generally the trust agreement contains covenants additional 
 to those providing for the registration or interchange of the 
 debentures, intended for the benefit of the debenture holder. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 67 
 
 Among such beneficial covenants may be mentioned those for 
 the immediate maturity of the principal by declaration in case 
 of default under other outstanding obligations, or in case of 
 bankruptcy or insolvency or receivership, etc. ; those that the 
 debentures shall be secured equally or otherwise under any 
 future mortgage made by the obligor ; those requiring the obli- 
 gor to maintain indicated amounts of quick assets or prohibit- 
 ing increase of indebtedness. The trust agreement also may 
 contain provisions, which may not be set forth in adequate 
 detail in the debentures themselves, for the redemption or for 
 the conversion into stock of the debentures. Generally in fact 
 all provisions of a corporate mortgage, except those relating 
 to the security and its enforcement, are appropriate and useful 
 in the debenture agreement. 
 
 In the case of debenture issues the real difficulty presented 
 is to insure their enforcement equally and ratably for the benefit 
 of all holders, and to prevent preferences on the part of the 
 company, or, in case of default, a race of diligence between 
 holders. It is somewhat uncertain whether this can be accom- 
 plished satisfactorily without affecting the negotiability of the 
 paper, if negotiable instrument laws are intended to limit 
 flexibility in the form of negotiable instruments. Unless 
 affected by the so-called uniform statutes, the general rule of 
 law was that negotiability depended not only upon statutes 
 but upon the custom of merchants, i.e. the law merchant. 
 It certainly is the custom of merchants to regard a bearer deben- 
 ture as negotiable even though it contains a provision limiting 
 the right of individual enforcement. The English debentures 
 contain on their face the recital that they are issued subject 
 to conditions indorsed thereon, which are to be deemed part 
 of the debentures, and although such provisions are not in 
 accordance with the strict idea of negotiability it is there 
 recognized that bearer debentures are negotiable instruments. 
 This is in accordance with the popular understanding under 
 which stock certificates are regarded as negotiable while they 
 
68 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 are merely assignable. The fact is that the term "negotiable" 
 has a double outlook, one towards transfer by delivery; the 
 other towards relief of the transferee from the prior defects of 
 title. It is in the latter sense only that debentures are rendered 
 non-negotiable by reason of the restrictions usual in the col- 
 lateral indenture. No one would hesitate to deem them as 
 transferable by delivery and in that sense negotiable. 
 
 In England it is a common practice to give to the holders of 
 a majority or more of debentures the power to sanction certain 
 modifications of the rights of the holders as a body, such 
 power being exercisable by resolution at a meeting or by a 
 provisional agreement for modification made on behalf of all 
 and sanctioned in writing by a specific percentage. The object 
 of conferring this power on the majority is to protect it against 
 unreasonable conduct on the part of the minority and to pre- 
 vent a defeat of a beneficial arrangement because unanimity 
 cannot be obtained. 1 
 
 Though in the United States it is unusual to give to majori- 
 ties of bondholders such a right to sanction modifications of 
 the indenture, there is inserted here in many indentures in- 
 cluding mortgages a provision that in case of default and to 
 avoid a foreclosure and sale, the trustee may consent to a plan 
 of reorganization which shall authorize the creation of a lien 
 prior to that of the indenture for the purpose of obtaining 
 necessary moneys; the authority being exercisable by regis- 
 tered holders of not less than four-fifths of the bonds by a 
 writing directed to the trustee. The right is given only to 
 registered holders in order that the consent may be properly 
 evidenced, and of course any coupon bond may be registered 
 for that purpose. The power generally is limited so that no 
 bond shall be changed as to the amount of principal, or rate or 
 date of payment of interest. Such agreement authorized to be 
 made in behalf of all the bondholders is to be reduced to a 
 written agreement between the company and the trustee and 
 
 *3 Palmer Company Precedents, 162; llth Ed., 1912. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 69 
 
 in case of mortgages is to be recorded in the various jurisdic- 
 tions as a modification thereof. 
 
 The United States Steel Corporation trust indentures con- 
 tain unusual provisions for meetings of bondholders to take 
 action upon proposed modifications of the indentures. 
 
 There may be inserted in the indenture also a provision that 
 registered holders may direct the trustee at any sale under the 
 mortgage to purchase the premises for the use and benefit of 
 all the bondholders, and in such case to settle for the purchase 
 price by receipting for the entire amount of the proceeds ap- 
 plicable to the payment of the bonds and interest, thus limiting 
 bondholders' rights to a share in the proceeds of the premises 
 so purchased. To that end the trustee may transfer the 
 property to a new corporation to be organized as directed by 
 the bondholders making such request, and thereupon shall dis- 
 tribute the securities according to any plan of reorganization 
 so agreed upon by said bondholders. 
 
 (5) Income bonds. In connection with reorganizations, often- 
 times in order to provide for the settlement of outstanding 
 obligations of the predecessor corporation, it becomes neces- 
 sary to issue promissory obligations upon which the interest 
 charge shall be conditional upon the realization of adequate 
 net earnings by the obligor. Seldom if ever are such bonds 
 issued for new financing by a solvent corporation. The pay- 
 ment of interest sometimes is made conditional throughout 
 the life of the bond but generally only during a limited period 
 of years after issue. In the case of such bonds the covenant 
 to pay interest may be made conditional upon the determina- 
 tion by the company that the amount has been earned, sup- 
 plemented by specific provisions as to the method of computing 
 the earnings for the purpose. Much litigation in respect of 
 income bonds has arisen because of disputes as to the compu- 
 tation of the earnings, and too much care may not be given 
 to avoid uncertainties. The case of Mackintosh v. Flint & 
 
70 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 P. M. R. Co., 1 between different classes of stockholders, illus- 
 trates the difficulty of determining the amount of net earnings, 
 and the difficulty even greater of finding a judicial officer fully 
 equal to solving the problem in the masterly manner of Judge 
 Jackson in that case. 
 
 Guaranties 
 
 Corporate bonds are often guaranteed by other corporations. 
 The validity of such guaranty by a strong company is a matter 
 of serious concern to the taker of the bond of a weak obligor. 
 Such a guaranty cannot be given by a corporation, as an ac- 
 commodation, or merely because of some direct compensation 
 by it received therefor. 2 It is valid only if authorized expressly 
 by law, 3 or for a legitimate purpose incidental to the main busi- 
 ness of the corporation, 4 such as the enhancement of the value 
 of bonds owned by it, upon its sale thereof, 5 or as part of its 
 lawful agreement to purchase the shares or bonds of holders 
 thereof, 6 or for the protection of its property interest in the 
 company whose obligation it so guarantees, 7 though it is ques- 
 tioned whether a New York corporation could exercise such a 
 power in this latter case, except by a vote of the holders of 
 two-thirds of its stock. 8 A general guaranty of negotiable paper 
 is itself negotiable in the sense of being transferable or assign- 
 able. 9 The guaranty inures to the benefit of the assignee of the 
 principal debt even though not mentioned in the assignment. 10 
 
 1 34 Fed. Rep. 582 ; 1888. 
 
 2 In re Romadka Co., 216 Fed. Rep. (U. S.) 113-114 ; 1914. 
 
 3 See New York Stock Corporation Law, Section 8 ( N. Y. Consolidated Laws, 
 Ch. 61). 
 
 Holmes v. Willard, 125 N. Y. 75-81 ; 1890. 
 
 6 Olcott v. Tioga R. R. Co., 27 N. Y. 546 ; 1863 ; Arnot v. Erie R. Co., 67 
 N. Y. 315 ; R. R. Co. v. Howard, 7 Wall. (U. S.) 392 ; 1868 ; Rogers &c. v, 
 Southern R. Ass., 34 Fed. 278 ; 1888. 
 
 6 Windmuller v. Standard Co., 106 App. Div. (N. Y.) 246 ; 1905. 
 
 7 Re N. Y. Car Wheel Works, 141 Fed. (U. S.), 430; 1906. 
 
 8 Stock Corporation Law, Section 8 (N. Y. Consolidated Laws, Ch. 61). 
 
 9 Claflin v. Ostrom, 54 N. Y. 581 ; 1874 ; Everson v. Gere, 122 N. Y. 290 ; 
 1890; Arents v. Com., 18 Gratt. (Va.), 750; 1868. 
 
 10 Stillman v. Northrup, 109 N. Y. 473 ; 1888. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 71 
 
 Generally and almost always in this community it becomes 
 desirable in order to enhance their marketability that corporate 
 bonds of any important or long-term issue shall be listed by 
 the New York Stock Exchange. 
 
 To effect such listing it is necessary to comply not only with 
 the general rules of law, but also with the special rules of the 
 Stock Exchange. This lecture will now close with a brief 
 consideration of those rules. 
 
 New York Stock Exchange Rules 
 
 So far as they affect the form of the obligations, the rules 
 of the New York Stock Exchange are intended solely for the 
 protection of the holders and in the interest of free trading. 
 Just as in the case of the securities themselves, from time to 
 time the rules have been modified as experience has developed 
 difficulties of observance. A revised edition of the rules is now 
 in preparation and is about to be issued. Those who may be 
 interested will find a copy of the rules in force always available 
 at the Exchange. In our communications with the Com- 
 mittee, we have found it disposed to exhibit a liberal purpose to 
 construe the rules broadly, and, when reasonably necessary, in 
 exceptional cases, to waive strict compliance. 
 
 The objects to which the rules tend are the following : 
 
 (1) That all rights of the holders of obligations (other than 
 in respect of the security) shall appear succinctly in the instru- 
 ment itself and without the necessity of recourse to any other 
 instrument. 
 
 (2) That irrespective of provisions for other places, payment 
 and registration or interchange or conversion of the bonds and 
 publication of notice of redemption, etc., shall be made in the 
 Borough of Manhattan, City of New York. 
 
 (3) That the collective rights of the holders shall be pro- 
 tected by a trustee without adverse or divided interest. 
 
 (4) That the legality of the issuance of the securities shall be 
 attested by reasonable evidence and the opinion of counsel. 
 
72 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 (5) That there shall be a safeguard against forged or un- 
 authorized issues. 
 
 Many of the provisions involved have been referred to in 
 the preceding discussion, but it may be useful to summarize 
 them here under the several headings mentioned. 
 
 1. As to the completeness of the instrument in itself, a 
 number of specifications are urged upon corporations by the 
 Committee and generally are adopted. Thus, it is desired 
 that there shall appear in the bond a summary statement of 
 the rights of registration or interchange or conversion of bonds, 
 of the period and place of publication of notice of redemption, 
 of the conditions of redemption, of the amount of the issue and 
 of the date of and parties to the indenture under which they 
 are issued. As to the registration and transfer, the text of the 
 bonds relating thereto should omit reference to any require- 
 ment of entry on the corporate books. If the bonds of the 
 issue may be varied in respect of the rate of interest or other 
 provisions, the bonds must have a serial designation distin- 
 guishing one class from the other. 
 
 If the bonds are subject to redemption, the coupons maturing 
 after the earliest date of redemption must recite the promise 
 to pay "unless the bonds shall have been called for previous 
 redemption." In recent years the Committee has been quite 
 firm in its position that in the case of all new issues, all coupons 
 in form shall be strictly negotiable, which has led to the abandon- 
 ment of the clause at one time generally incorporated in coupons 
 to the effect that they were subject to the terms and conditions 
 of the bond and the indenture under which it was issued. Of 
 course, the independent character of coupons is qualified so 
 long as they are attached to the bond or are in the hands of 
 the same holder. 1 
 
 2. As to the place of exercise of their rights by bondholders, 
 the Committee insists that either by provision in the obliga- 
 
 1 Watson v. Chicago, Rock Island & Pacific R. R., 169 App. Div. (N. Y.) 
 663; 1915. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 73 
 
 tion when practicable, or otherwise by supplemental agree- 
 ment with the applicant for listing, there shall be maintained 
 in the Borough of Manhattan an office or agency where the 
 bonds and coupons may be presented for payment and where 
 all notices or demands for registration, interchange of bonds 
 or conversion, may be given or made. Similarly, it is insisted 
 that for a specified period in advance of any redemption date, 
 publication of notice of redemption shall be made in newspapers 
 published in the Borough of Manhattan. 
 
 3. As to the trustee, the general requirement of the rule is 
 that there shall be an independent trustee for each issue of 
 obligations by a corporation, and that no trustee shall be an 
 officer or director of the issuing corporation. On this point, 
 I do not think that the general opinion of counsel experienced 
 in the workings of corporate mortgages accords with the posi- 
 tion of the Committee. The greater part of the administration 
 of a corporate mortgage is prior to any default or necessity for 
 enforcement of the security. In case of necessity for enforce- 
 ment of the security, the responsible trust company, holding 
 conflicting liens, will resign all but a single one in favor of 
 independent trustees. But as only a few of the many mortgages 
 issued go to default, and prior to default, save in exceptional 
 cases, there is no real conflict of interest between the holders of 
 prior liens and subordinate liens, clearly it is in the interest of 
 ease of administration to have as few trustees as possible rep- 
 resenting liens on the same corporate property. Especially is 
 this so in the case of pledges of corporate securities, such as 
 has been made by the United States Steel Corporation under 
 its indentures of 1901 and 1903 covering the same collateral 
 security, both of which agreements name the same trustee. 
 Again, it is to be remembered that the number of trust com- 
 panies in the city of New York especially those with experi- 
 enced trust departments is not great, and I doubt whether 
 in the cases of the large railroad corporations it would be prac- 
 ticable to obtain separate corporate trustees of their general 
 
74 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 mortgages and of the many underlying mortgages. This is 
 recognized by the Committee, and they have not undertaken 
 to enforce resignations of trusteeships when consolidations 
 or mergers of the mortgagors or of the trust companies have 
 resulted in the same trustee succeeding to several trusts in re- 
 spect of the same property. 
 
 4. As to the evidence of the legality of issuance of the listed 
 securities, the requirement of the Committee is entirely reason- 
 able that the legality shall be attested by opinion of counsel 
 and by certified copies of the corporate proceedings and of the 
 consents of the proper governmental authorities having juris- 
 diction. 
 
 With the intent of identifying listed bonds even when there 
 exists the right of interchange of coupon bonds and registered 
 bonds, the Committee from time to time have made rules re- 
 quiring a recital to be indorsed on registered bonds substan- 
 tially in the following form : 
 
 "The within bond is issued in lieu of or in exchange for (a) coupon 
 bond(s) numbered * * * for $1000 (each), not contemporaneously 
 outstanding, and (a) coupon bond(s) bearing the said serial num- 
 ber (s) will be issued in exchange for this bond upon its surrender and 
 cancellation." 
 
 But a new difficulty in such identification was introduced by 
 the issue of coupon and registered bonds of denominations of 
 less than $1000 each, all denominations being interchangeable. 
 Various forms of legends have been placed upon these so-called 
 "baby" bonds in an effort to identify them as being issued in 
 lieu of a $1000 bond of a specific number, but the bookkeeping 
 complications in endeavoring to carry out the various plans 
 have made them generally impracticable. At present all that 
 the Stock Exchange requires is a recital that upon surrender 
 and cancellation of "baby" bonds for that amount, there will 
 be issued in exchange therefor coupon bonds for $1000, re- 
 served unissued for the purpose. 
 
COLLATERAL TRUSTS AND DEBENTURE INDENTURES 75 
 
 It does not seem necessary or advisable to set forth in the 
 indenture the exact form of the recital, inasmuch as change in 
 custom may make the requirement obsolete. The proper way 
 would seem to be to insert in the indenture a provision that 
 "baby" bonds may be identified by number or letter in accord- 
 ance with such plan as may be adopted by the Company with 
 the approval of the trustee and may have imprinted thereon 
 a legend that it has been issued in lieu of or exchange for a 
 bond of higher denomination not contemporaneously outstand- 
 ing and the statement that such a bond is reserved for exchange, 
 together with such other specification in the premises as may 
 be required to comply with the rules of any Stock Exchange 
 or to conform to usage. 
 
 5. To guard against unauthorized issues, it is required further 
 that the certification and registration are to be made by an 
 acceptable trust company and that the engraving of the securi- 
 ties and protection of the plates shall be in the hands of an 
 acceptable engraving company. 
 
 The other items of the rules in respect to the form of the 
 application for listing, balance sheets, list of officers, transfer 
 agents, registrars and agreements to be made by the corpora- 
 tion with the Exchange as to notices of corporate actions affect- 
 ing security holders and similar matters, are set forth in the 
 rules of the Stock List Committee, a copy of which may be 
 obtained at the Exchange at any time. The Secretary of the 
 Committee will always be found desirous of conferring with 
 counsel while the form of the securities and other instruments 
 are in course of preparation, with the view of obtaining con- 
 formity with the rules. 
 
 While it has been the purpose of this paper to indicate sub- 
 stantially all the points to be developed in the preparation of 
 a corporate bond and mortgage or indenture, it is to be 
 remembered that it is not intended as a treatise, and that the 
 
76 PREPARATION OF CORPORATE BONDS, MORTGAGES 
 
 r 
 
 authorities cited are such only as bear upon points of particular 
 interest. It has not been practicable to outline all the many 
 variations possible in such indentures, or to quote the custom- 
 ary phraseology of the instruments now in general use. Copies 
 of the more recent trunk-line railroad mortgages are generally 
 available for examination at the offices of investment bankers 
 or at the principal offices of the mortgagor companies, if not 
 otherwise obtainable. With such assistance, and the exercise 
 of diligence and care, the preparation of effective and system- 
 atic corporate obligations and trust indentures should be a 
 task much less formidable than it appeared to me when I 
 undertook such work some thirty-five years ago. 
 
THE FORECLOSURE OF RAILROAD MORTGAGES 
 IN THE UNITED STATES COURTS 
 
 Paper read February 23, 1916, before the Association of the Bar of the City of 
 New York by James Byrne 
 
 ON January 1, 1912, the Judicial Code of the United States, 
 under which the circuit court was abolished and the jurisdiction 
 of the district court was enlarged, went into operation. As the 
 almost invariable method in recent years of proceeding to fore- 
 close a railroad mortgage has been in substance the same be- 
 fore and since the Code, in describing it I shall speak in the 
 present tense as though there were no Code ; and then tell the 
 details in which the Code affects it. 
 
 I take the case of an insolvent railroad company operating 
 in different states a railroad built up by purchases, leases and 
 consolidations ; and assume, as the fact is in all but very rare 
 instances, that it wishes its property to be put in the hands of 
 receivers. 
 
 The procedure is as follows : 
 
 A general creditor, at the suggestion of the railroad com- 
 pany, files a bill in behalf of himself and all other creditors, 
 against the company in the proper United States Circuit Court, 
 in which he alleges that 
 
 (a) the defendant is a corporation organized and existing under 
 the laws, and a citizen, of the state in which the suit is brought and 
 the complainant is a citizen of some other state ; 
 
 (b) the principal operating offices of the defendant and a material 
 portion of its railroad are in the district in which the bill is filed ; 
 
 (c) the defendant is indebted to the complainant ; 
 
 (d) the defendant is insolvent; and, as there are many creditors 
 whose debts have matured or are about to mature and the defendant 
 is unable to pay them, if the court does not take the assets of the 
 defendant into its possession, attachments will be levied, judgments 
 
 77 
 
78 FORECLOSURE OF RAILROAD MORTGAGES 
 
 obtained and executions issued, and the railroad of the defendant 
 thereby dismembered and its property wasted. 
 
 (e) the matter in controversy exceeds exclusive of interest and 
 costs the sum or value of three thousand dollars. 
 
 The prayer of the bill is that the court will administer the 
 assets of the defendant and appoint a receiver pending the suit. 
 
 The company files an answer admitting the allegations and 
 joining in the prayer of the bill. 
 
 On the pleadings the court enters an order appointing a 
 receiver. 
 
 This bill is called the primary or principal bill ; the suit the 
 primary or principal suit ; and the court in which it is brought 
 the court of primary jurisdiction. 
 
 The creditor then files ancillary bills in every judicial district 
 in which any part of the railroad lies or in which there is any 
 substantial amount of other property of the railroad company. 
 In an ancillary bill it is as necessary to allege diversity of citi- 
 zenship as in the principal bill. 1 Such a bill contains the same 
 allegations as the primary bill except that it omits (b) 2 ; and in 
 addition it alleges that the primary bill, a copy of which is an- 
 
 1 As to the necessity of a bill in one jurisdiction brought in aid of a bill in 
 another meeting all the requirements of an original bill, see the opinion of Mr. 
 Justice Harlan in Mercantile Trust Co. v. Kanawha & O. Ry. Co., 39 Fed., 337 ; 
 1889 ; and the comments upon this case of Judge Lurton in New York P. & O. R. 
 Co. v. New York L. E. & W. R. Co., 58 Fed., 268, 278-80 ; 1893. See also the 
 statement in Coltrane v. Templeton, 106 Fed., 370, 374, C. C. A., 4th Circuit, 1901, 
 that the bill brought in aid of the primary bill is an "auxiliary" bill and not 
 an "ancillary" bill. 
 
 2 It may be that a portion of the railroad of the defendant is in a state of 
 which the railroad company is not a citizen. In that case the ancillary bill 
 changes (a) of the primary bill to an allegation that the complainant and the 
 defendant are citizens of different states. The appearance of the defendant 
 would in any case be a waiver of the objection that suit must be brought in 
 the district of which either complainant or defendant is a resident ; but where 
 the property is in the district no such objection lies, as in that case a citizen of 
 one state may bring suit against a citizen of another state, although neither of 
 them is a resident of the district and the defendant may be served by publica- 
 tion. Jellinik v. Huron Copper Mining Co., 177 U. S M 1 ; 1900; Section 57 of 
 the Judicial Code superseding the act of March 3, 1875, C. 137, Sec. 8, 18 Stat. 
 at L. 472. 
 
FORECLOSURE OF RAILROAD MORTGAGES 79 
 
 nexed, has been filed in the court of primary jurisdiction ; that 
 the defendant has answered it admitting all its allegations and 
 joining in its prayer ; that the court of primary jurisdiction has 
 appointed receivers of the property of the defendant ; and that 
 some of the property of the defendant is in the district in which 
 the ancillary suit is brought. The bill prays as in the primary 
 bill ; and in addition asks that the court will appoint as receivers 
 under it the receivers appointed by the court of primary juris- 
 diction. 
 
 The defendant files answers in all the ancillary suits similar 
 to the answer in the primary suit; and the different courts 
 enter orders appointing as receivers the same persons named 
 by the court of primary jurisdiction. 
 
 Some days or weeks or months later the trustee of the mort- 
 gage which is to be foreclosed files bills in the courts in which 
 the creditor's suits are pending, and the receivers appointed 
 under the creditor's bills are appointed receivers also under the 
 foreclosure bills. 
 
 Why do things take this course? Why is it that the filing 
 of a creditor's bill and the appointment of a receiver under it so 
 almost invariably precede the foreclosure suit as practically to 
 be a part of it? 
 
 For three reasons : 
 
 1. As a receiver under a bill to foreclose a mortgage is 
 receiver only of the mortgaged property, it may be that, be- 
 cause it is unmortgaged, property useful, perhaps almost essen- 
 tial, to the best operation of the road will not come into his 
 possession. Such property may be seized at law by creditors 
 pursuing their legal remedies ; and it may be claimed that the 
 liens which they obtain by judgment, attachment or execution 
 extend to property which the receiver claims under the mort- 
 gage. These troubles are avoided by beginning with a credi- 
 tor's bill ; for the receiver under that bill is, of course, receiver 
 of all the property of the railroad company, mortgaged or un- 
 
80 FORECLOSURE OF RAILROAD MORTGAGES 
 
 mortgaged, and the administration of the property, its marshal- 
 ing and distribution are all in the equity court. 1 
 
 2. The mortgage is not always in a condition to be fore- 
 closed. The railroad company may find itself without money 
 to pay its bills at a time when no interest is due on the mortgage 
 and there is no default of any kind justifying the beginning 
 of a foreclosure suit. If a creditor's suit is not begun in the 
 federal courts, not only may operation be interfered with by 
 levies under attachments and executions, but a state court 
 may appoint a receiver. State courts are in many ways not as 
 well suited as the federal courts for the foreclosure of a mort- 
 gage of a railroad company or the administration of its assets, 
 particularly where the railroad is in several states. Federal 
 courts have had much greater experience in such litigation; 
 their rules and procedure are comparatively settled and are sub- 
 stantially the same in all districts and circuits ; their relations 
 with one another are more intimate than those of state courts ; 
 and they accept more easily than state courts the position of 
 ancillary courts. 
 
 3. There may be all sorts of jurisdictional difficulties in the 
 way of a foreclosure in the federal courts. The trustee of the 
 
 1 The following method of getting all the assets of a corporation* into the 
 possession of the court under a bill praying for the foreclosure of a mortgage, 
 without a separate creditor's bill, was recently adopted. The trustee filed a 
 bill setting up the clause now common in trust deeds that upon default in the 
 payment of principal the mortgagee should be entitled to recover judgment 
 for the amount due ; alleging that in order to preserve the unity of the busi- 
 ness and to carry it on to the best advantage a receiver should be appointed of 
 all the property of the defendant corporation ; and praying that judgment 
 should be entered in favor of the trustee for the whole amount due, that the 
 mortgage should be foreclosed, that the property covered by the mortgage 
 and any remaining property should be sold in separate parcels, and that the 
 proceeds of all such sales should be distributed among those whom the court 
 should find to be entitled thereto. On the consent of the defendants a receiver 
 of all its property was appointed. The bill is a combined foreclosure bill and 
 creditor's bill. Under Rule 26 of the new equity rules the plaintiff may join 
 in one bill as many equity causes of action as he has against the defendant. 
 
 * Not a railroad corporation. References will include cases in which the mort- 
 gages are not railroad mortgages, the principle involved in them being applicable 
 to the subject treated in this paper. 
 
FORECLOSURE OF RAILROAD MORTGAGES 81 
 
 mortgage and the railroad company may be citizens of the same 
 state. They are almost sure to be when the railroad company 
 is a citizen of the State of New York; and when it is not, it 
 often happens, owing to the growth in importance of trust com- 
 panies of other states, laws requiring a local trustee, and the 
 union of railroad companies into a consolidated corporation 
 existing under the laws of several states, that the trustee, or 
 where there are several trustees one of them, is a citizen of a 
 state of which the railroad company is also a citizen. 
 
 Take the case of a railroad company operating a railroad 
 from a point in Ohio to a point in Missouri : it may be a con- 
 solidated corporation existing under the laws of Ohio, Indiana, 
 Illinois and Missouri. It is then for jurisdictional purposes in 
 Ohio a corporation and citizen of Ohio ; in Indiana a corporation 
 and citizen of Indiana ; in Illinois a corporation and citizen of 
 Illinois ; and in Missouri a corporation and citizen of Missouri. 1 
 It has made a mortgage to two trustees, one a Chicago trust 
 company and another, a citizen of Missouri, an individual ; the 
 interest on the bonds secured by the mortgage has not been 
 paid, and the trustees wish to foreclose the mortgage in the 
 federal courts. The impossibility of maintaining suits in the 
 federal courts of all four states is seen at once. In Ohio and 
 
 1 Railway Co. v. Whitton, 13 Wall. 270 ; 1871. Muller v. Dows, 94 U. S. 444 
 447 ; 1876. Clark v. Barnard, 108 U. S. 436, 448, 452 ; 1883. See Southern Ry. 
 Co. v. Allison, 190 U. S. 326, 1903, to the effect that where a statute of North 
 Carolina provided that a foreign railroad company desiring to carry on business 
 within the state must comply with certain provisions and on compliance should 
 become a domestic corporation, a foreign corporation did not by complying with 
 the statute become a citizen of North Carolina for purposes of federal jurisdiction. 
 In Muller v. Dows, 94 U. S. 444, the Court says : "A corporation itself can 
 be a citizen of no state in the sense in which the word 'citizen' is used in the 
 Constitution of the United States. . . . For the purposes of jurisdiction it 
 is conclusively presumed that all the stockholders are citizens of the state 
 which by its laws created the corporation. It is therefore necessary that it be 
 made to appear that the artificial being was brought into existence by the law 
 of some state other than that of which the adverse party is a citizen." It is, of 
 course, usual to speak of a corporation as a citizen of the state under the laws 
 of which it is organized. 
 
82 FORECLOSURE OF RAILROAD MORTGAGES 
 
 Indiana the federal courts have jurisdiction, for of both those 
 states the railroad company is, and each of the trustees is not, 
 a citizen ; but . in Illinois and Missouri the federal courts 
 have not jurisdiction, for the Chicago trust company and 
 the railroad company are both citizens of Illinois, and the 
 individual trustee and the railroad company are both citizens 
 of Missouri. 
 
 Another case where a jurisdictional difficulty arises is where 
 a junior mortgagee is a citizen of the same state as the trustee 
 of a senior mortgage. If the latter begins a foreclosure suit, 
 it is for practical purposes absolutely necessary that the junior 
 mortgagee should be a party defendant, but if the foreclosure bill 
 makes it a defendant, the jurisdiction of the court is ousted. 
 
 All these jurisdictional difficulties in the way of a foreclosure 
 suit disappear when the first step is a creditor's bill; for a 
 creditor may be chosen to file the bill who is not a citizen of 
 any of the states of which any of the defendants are citizens or 
 by any possibility may be claimed to be. And when a federal 
 court takes possession by its receiver under the creditor's bill 
 of the property of the railroad company, such possession draws 
 to that court all suits and proceedings with respect to that 
 property, regardless of whether or not in such suits or pro- 
 ceedings there is a diversity of citizenship. 1 A mortgagee 
 applies in the creditor's suit for permission to file a bill to 
 foreclose and when permission is given he proceeds exactly as 
 in an ordinary foreclosure suit. 
 
 This method of getting the assets of an insolvent railroad 
 corporation into the federal courts and of foreclosing its mort- 
 gages there, is so direct and effective, the question arises why it 
 is only in recent years that its use has become so universal. 
 
 There are two reasons : 
 
 First, the doctrine that the mere fact of possession of the res 
 by a federal court gives a mortgagee a right to foreclose in that 
 
 1 Wabash Railroad v. Adelbert College, 208 U. S., 38, 54 ; 1908. 
 
FORECLOSURE OF RAILROAD MORTGAGES 83 
 
 court and that the foreclosure suit when once begun proceeds 
 in all respects as an entirely independent suit, while it follows 
 logically from the principle that the court which first takes juris- 
 diction has the right to exercise exclusive jurisdiction and from 
 the rules of equity pleading, was not widely or fully compre- 
 hended until the time of the decisions in Morgan's Co. v. Texas 
 Central Railway, 137 U. S., 171, 201 ; 1890; Compton v. Jessup, 
 68 Fed., 263, 279-282 ; 1895 ; and Continental Trust Company v. 
 Toledo St. L. & K. C. R. Co., 82 Fed., 642 ; 1897. In the Con- 
 tinental Trust Company case Judge Taft after saying that the 
 jurisdiction of the federal court over the foreclosure suit de- 
 pended upon the possession of the res under the creditor's bill, 
 added, p. 645 : 
 
 "Such dependence does not throw both suits into hotchpot, and 
 dispense with the ordinary rules of pleading and practice as to parties 
 proper and necessary to each cause of action. * * * The parties to the 
 original bill have no more right to intervene in the dependent cause 
 than if the court had independent jurisdiction thereof. Hence the 
 rule as to who may appear to a foreclosure bill and file answers is the 
 same here as if the bill had in fact been an independent bill. In other 
 words, the relation between the two suits is principal and ancillary 
 only so far as that, without possession of the res in the former suit, the 
 court would have no jurisdiction of the latter; but, having thus 
 acquired and thus maintaining its jurisdiction in the second suit, the 
 court proceeds in it without further regard to the pleading or course of 
 the principal action." 
 
 Second, the creditor's bill is demurrable on the ground that 
 it does not show that the complainant has exhausted his remedy 
 at law by obtaining judgment and return of execution thereon 
 unsatisfied ; and while the general belief always was that such 
 a lack of equity was available only to the defendant, and to him 
 only on the threshold of the litigation, it was feared that a de- 
 fendant who had not made the objection at the beginning might 
 be allowed to do so later, or that some intervening creditor or 
 stockholder might set up the defense, and get the proceedings 
 dismissed. 
 
84 FORECLOSURE OF RAILROAD MORTGAGES 
 
 These fears were ended by the cases of Hollins v. Brierfield 
 Company, 150 U. S., 371, and Central Trust Company v. Me- 
 George, 151 U. S., 129, decided in 1893. 
 
 In the Hollins case the court said that while simple contract 
 creditors of an insolvent corporation " cannot come into a court 
 of equity to obtain the seizure of the property of then- debtor 
 and its application to the satisfaction of their claims," neverthe- 
 less " defenses existing in equity suits may be waived . . . and 
 when waived the cases stand as though the objection never 
 existed"; and that the defense that the complainants had not 
 exhausted their legal remedies was waived if not made in 
 limine. 
 
 In the Central Trust Company case the court held that where 
 the defendant corporation by entering an appearance and join- 
 ing in the prayer of the bill for the appointment of a receiver 
 had waived the objection that the suit was not brought in the 
 district whereof it was an inhabitant ; inasmuch as the corpora- 
 tion itself had submitted to the jurisdiction of the court, it was 
 not open to any intervening stockholder or creditor to set up 
 the defense thus waived. The principle of the case is broad 
 enough to cover any jurisdictional defense which can be 
 waived such as that the complainant has not exhausted its 
 legal remedies. 1 
 
 Before the Hollins case it was usual for some creditor to 
 obtain judgment by confession, and after execution had been 
 issued and returned unsatisfied, to file a judgment creditor's bill. 
 This procedure was troublesome, especially when the railroad 
 ran through many different districts, in each of which the pre- 
 liminary proceedings took place. There was frequent delay 
 which gave creditors a chance to obtain a preference through 
 attachments or executions ; and defenses were interposed con- 
 troverting the validity of the issuing and return of the execution 
 and denying the authority to confess judgment of the officers 
 of the company who had done so. 
 
 1 Horn v. P&re Marquette Railroad Company, 151 Fed., 626; 1907. 
 
FORECLOSURE OF RAILROAD MORTGAGES 85 
 
 Sometimes when a creditor took the chance of filing a bill 
 before having exhausted his legal remedies, he would file the 
 bill as a general creditor and join a stockholder as co-complain- 
 ant and add charges of mismanagement in the hope that if it 
 failed as a creditor's bill, it might be sustained as a stock- 
 holder's bill. 
 
 A method of its own was adopted by the Wabash, St. Louis 
 & Pacific Railway Company in 1884. The company itself was 
 the complainant, naming as defendants the trustees of its 
 general mortgage, the trustees of underlying mortgages, the 
 owners of railroads of which it was the lessee, in all some ninety 
 defendants. The bill alleged that the railroad company was 
 practically insolvent; that its line of railroad extended into 
 many districts ; that it was a consolidated corporation existing 
 under the laws of many states; that it had placed mortgages 
 upon all of its property ; that it had bought different portions of 
 its line from different railroad companies, which had all mort- 
 gaged their properties before the complainant had acquired 
 them, and that it was the lessee of different lines, mortgages 
 upon which had been made by the lessors before leasing them ; 
 that its entire property was being operated by another railroad 
 company ; that it had a large floating debt, and was unable to 
 pay this debt or the interest upon it, and that it would be un- 
 able to pay the interest on some of its mortgages ; that suits 
 would be brought in different districts in which creditors would 
 levy attachments and issue executions on judgments and its 
 entire railroad system would be disrupted to the great loss of 
 creditors, stockholders, and the public. 1 Upon this bill the court 
 appointed receivers. 
 
 There was widespread criticism of these proceedings. The 
 Missouri Supreme Court in a similar case 2 said that the appoint- 
 ment was void and could be attacked collaterally ; 
 
 1 Wabash, St. Louis & Pacific Railway Company v. Central Trust Company 
 22 Fed., 138; 1884. 
 
 8 State ex rel. Merriam v. Ross, 122 Mo., 435; 1894. 
 
86 FORECLOSURE OF RAILROAD MORTGAGES 
 
 ". . . it is simply a petition by a debtor for the appointment of a 
 receiver to manage and carry on its business, so that its creditors can- 
 not enforce their legal rights in the courts of the country, and not a 
 petition stating a cause of action either at law or in equity in which, 
 as incident thereto, a receiver might be appointed. The filing of that 
 petition no more instituted an actual controversy between contending 
 suitors in court than would the filing of a copy of the Lord's prayer." 
 
 The Supreme Court of the United States, however, never 
 condemned the procedure in the Wabash case. On the con- 
 trary, in a case l growing out of the Wabash litigation, the court 
 stated the provisions of the bill at length and said : 
 
 "The bill was obviously framed upon the theory that an insolvent 
 railroad corporation has a standing in a court of equity to surrender 
 its property into the custody of the court, to be preserved and disposed 
 of according to the rights of its various creditors and, in the meantime, 
 operated in the public interest." 
 
 and later 2 cited the case in a way to indicate that it regarded 
 the statement just quoted as an approval of the theory. 
 
 Why counsel adopted the method they used in the Wabash 
 case it is hard to see. It would seem from an opinion of Judge 
 Baxter 3 to have been in the hope that on the bill and the cross-bill 
 of the trustees of the general mortgage the court might be in- 
 duced to make a decree directing a sale of all of the property 
 of the company free from underlying liens and distribution of 
 the proceeds among all persons interested in some equitable 
 manner to be determined after the sale, and that the making of 
 such a decree would force all parties in interest to assent to a 
 speedy reorganization. 
 
 Notwithstanding the criticism of the Wabash method, it was 
 not infrequently followed; and a very good reason for follow- 
 ing it arose when the Circuit Court of Appeals for the Ninth 
 Circuit decided in Chapman v. Atlantic Trust Company, 119 
 
 1 Quincy M. & P. Co. v. Humphreys, 145 U. S., 82, 95 ; 1892. 
 
 2 Re Metropolitan Railway Receivership, 208 U. S., 90, 111 ; 1908. 
 
 3 Wabash, St. Louis & Pacific Railway Company v. Central Trust Co., 22 Fed. 
 138; 1884. 
 
FORECLOSURE OF RAILROAD MORTGAGES 87 
 
 Fed. 257, 1902, 145 Fed. 820, 1906, that the complainant in a 
 suit in which a receiver was appointed was liable for the in- 
 debtedness of the receiver incurred to preserve the estate and 
 for his compensation and lawyers' fees, to the extent that the 
 assets of the receivership were insufficient. 
 
 If this decision was correct, there was no reason why the 
 complainant should not be liable for the indebtedness of the 
 receiver for whatever purpose contracted if it exceeded the 
 amount realized from the assets. What such a liability might 
 be no one could tell. In the case, for instance, of the Oregon 
 Pacific Railroad Company there were, I believe, receivers' cer- 
 tificates to the amount of a million dollars or so upon which 
 the holders received only an insignificant dividend. The pos- 
 sibility that a trustee for bondholders who had filed a bill for 
 foreclosure, or a creditor for five or ten thousand dollars who 
 had consented to let his name be used as complainant in a 
 creditor's bill, might ultimately be held for some huge amount, 
 was enough to make any one who considered the subject think 
 with favor of the Wabash method of obtaining a receivership. 
 If to be a complainant was to run such a risk the most suitable 
 complainant undoubtedly was the insolvent railroad company 
 itself. 
 
 Fortunately, the Supreme Court in Chapman v. Atlantic 
 Trust Company, 208 U. S., 360, 1908, reversed the Circuit Court 
 of Appeals, and held that the mere fact that a complainant had 
 asked and obtained the appointment of a receiver was not suffi- 
 cient to justify the court in holding him liable for debts of the 
 receivership. This case and the case of Re Metropolitan Rail- 
 way Receivership, 208 U. S. 90, 1908 in which the Supreme 
 Court held that so long as the indebtedness of the defendant 
 to the complainant was real and the diversity of the citizenship 
 of the parties was real, there was a controversy of which the 
 federal courts had jurisdiction and the parties were not guilty 
 of collusion in arranging with one another for the bringing of 
 the suit, for the admission of the allegations of the bill, or for the 
 
88 FORECLOSURE OF RAILROAD MORTGAGES 
 
 appointment of receivers have disposed of all the fears and 
 doubts which the most cautious counsel felt in proceeding by 
 general creditor's bill to bring the property of an insolvent 
 corporation into the federal courts. 1 
 
 Having now shown the usual method by which an insolvent 
 railroad corporation is placed in the hands of a receiver and 
 the reasons why that method, after trial of others, has been 
 adopted, I take up the procedure more in detail. 
 
 When the interests of creditors and stockholders really re- 
 quire a receivership, it is of the utmost importance, in order to 
 prevent unfair preferences or interference with the operation of 
 the road by seizure under attachments of rolling stock, that all 
 necessary applications to the courts should be made as quickly 
 and quietly as possible. 
 
 If the railroad and all the other property of the company are 
 in a single district, it is a comparatively simple matter: the 
 filing of a bill and answer and the appointment of a receiver in 
 that district. But, except in the case of street railway com- 
 panies, the property of a railroad company is usually in many 
 districts; and therefore it is necessary to file many bills and 
 obtain under every bill a receivership order. This necessity 
 arises out of the fact that the jurisdiction of a federal court is 
 
 1 See also Dickerman v. Northern Trust Company, 176 U. S., 181, 192, 1900, 
 "if a person takes up a bona fide residence in another State, he may sue in the 
 Federal court, notwithstanding his purpose was to resort to a forum of which he 
 could not have availed himself if he were a resident of the State in which the 
 court was held" ; Blair v. City of Chicago, 201 U. S. 400, 448-9, 1906, "As to 
 the conspiracy to get the case into the Federal Court, with a view to the deci- 
 sion of the rights of the parties therein, we are not aware of any principle which 
 prevents parties having the requisite citizenship and a justiciable demand from 
 seeking the Federal courts for redress. ... It is true that the judgments 
 were taken and the receivers appointed the same day, and it is quite likely that 
 the receiverships were in view when the judgments were taken and that prepa- 
 rations had been made in that direction, but we perceive in this no legal objec- 
 tion to the jurisdiction of the court" ; and In re Cleland, 218 U. S., 120, 1910, 
 holding that a federal court had jurisdiction of a suit where the shares of stock 
 owned by the complainant had been transferred out and out to him for the 
 express purpose of enabling him to sue in that court. 
 
FORECLOSURE OF RAILROAD MORTGAGES 89 
 
 confined, in the absence of some statute extending it, within 
 the territorial limits of a judicial district 1 and that as a chan- 
 cery receiver takes no title to property, but is only an officer of 
 the court which appoints him, he has no jurisdiction which 
 that court has not. 
 
 In Great Western Mining Company v. Harris, 198 U. S., 561, 
 1905, the Supreme Court, after saying that it was held in Booth v. 
 Clark, 17 How. (U. S.), 322, 1854, that in the absence of some con- 
 veyance or statute vesting the property in him, a receiver cannot 
 sue to recover property in courts of a foreign jurisdiction even 
 when authorized by the court which appointed him 2 adds, page 
 
 577: 
 
 " It is doubtless because of the doctrine " of Booth v, Clark, "that 
 the practice has become general in the courts of the United States, 
 where the property of a corporation is situated in more than one 
 
 1 Section 742 of the Revised Statutes (now Section 55 of the Judicial Code) 
 is an example of a statute extending the jurisdiction of a federal court beyond 
 the limits of the district. 
 
 "Any suit of a local nature, at law or in equity, where the land or other 
 
 subject matter of a fixed character lies partly in one district and partly in 
 
 another, within the same State, may be brought in the [circuit] district 
 
 court of either district; and the court in which it is brought shall have 
 
 jurisdiction to hear and decide it, and to cause mesne or final process to 
 
 be issued and executed, as fully as if the said subject matter were wholly 
 
 within the district in which such court is constituted." 
 
 A suit to foreclose a mortgage is a suit of a local nature, and so, as was 
 
 decided by Judge Lurton in Horn v. Pere Marguette Railway Company, 151 Fed., 
 
 626, 1907, is a creditors' bill to administer the property of an insolvent railroad. 
 
 In that case Judge Lurton held that as the Pere Marquette Railroad Company 
 
 was in both districts in Michigan, a receiver appointed in a creditor's suit in one 
 
 district had jurisdiction and control of the property of the company in the other. 
 
 2 A statutory receiver does not always get title to property, but he does 
 very frequently, and when the cases or textbooks speak of a statutory receiver 
 in contradistinction to a chancery receiver they generally mean a receiver in 
 whom all of the property of the corporation vests by the terms of the statute 
 which authorizes his appointment a receiver, for instance, appointed under 
 the provisions of Sections 65-68, of the New Jersey Corporation Law, or of 
 Sections 106 and 191 of the General Corporation Law of New York. In Keatley 
 v. Furey, 226 U. S., 399, 403, 1912, the Court said, "The effect of such a pro- 
 vision" that a receiver should have title "need not be considered in this 
 case. In some instances, at least, it would be enforced outside of the State. 
 Bernheimer v. Converse, 206 U. S., 516, 534 ; 1907. Converse v. Hamilton, 224, 
 U. S. 243, 257 ; 1912." In the cases cited, it was held that a statutory receiver 
 might sue in a foreign jurisdiction. 
 
90 FORECLOSURE OF RAILROAD MORTGAGES 
 
 jurisdiction, to appoint ancillary receivers of the property in such 
 separate jurisdictions. It is true that the ancillary receiverships are 
 generally conducted in harmony with the court of original jurisdiction, 
 but such receivers are appointed with a view of vesting control of 
 property rights in the court in whose jurisdiction they are located." 
 
 It follows from what has been said that the property of the 
 railroad company in all districts the jurisdiction of which is for- 
 eign to the districts where a receiver has been appointed is sub- 
 ject to the liens of judgments, executions and attachments to the 
 same extent as if no receiver had been appointed in any district. 
 The interval, therefore, between the appointment of the re- 
 ceivers in the principal district and their appointment in all other 
 districts where there is property of the company should be 
 shortened as much as possible. To this end action is taken as 
 follows : 
 
 When the directors, principal officers and counsel of a rail- 
 road company see that a receivership is inevitable, some credi- 
 tor is told who can be trusted not to take advantage of the in- 
 formation in order to get a preference for himself by attachment 
 or other process and is asked to file a general creditor's bill. 
 The creditor's lawyer and the counsel for the railroad company 
 then prepare the necessary papers. 
 
 The principal bill, the answer to it and the order appointing 
 receivers under it are first prepared. They are entitled in the 
 circuit court (it will be remembered that I am assuming the 
 Judicial Code which abolished the circuit court has not gone 
 into effect) for the district where the principal operating offices 
 of the railroad company and some material part of the mortgaged 
 railroad are situated. For that court has been held by four jus- 
 tices of the Supreme Court 1 to be the court of primary jurisdic- 
 tion and of principal decree. Ancillary bills to be filed in the 
 courts of all districts where any part of the railroad or other 
 real property or money or securities are situated, answers to 
 them, and orders appointing receivers under them are then pre- 
 
 1 Farmers Loan & Trust Co. v. Northern Pacific R. Co., 72 Fed. 26 ; 1896. 
 
FORECLOSURE OF RAILROAD MORTGAGES 91 
 
 pared. Each set of papers is entitled in the court in which they 
 are to be used. 
 
 When all these papers have been prepared, a meeting of the 
 directors of the railroad company is held, at which the different 
 bills and answers and orders are presented and a resolution is 
 passed directing counsel to appear in the principal and ancillary 
 suits, to file answers substantially in the form of those that have 
 been prepared, to consent to the entering of the proposed orders, 
 and in general to do all things necessary and proper to the 
 appointment of receivers in all jurisdictions where any of 
 the assets of the company are situated. 
 
 Counsel for the complainant and the defendant then take 
 the papers in the suit in the court of primary jurisdiction and in 
 the ancillary suits in the other courts of the same circuit to one 
 of the circuit judges of that circuit. Usually it is of importance, 
 and the court is willing, that some one connected with the rail- 
 road in an operating capacity should be a receiver. The court 
 ordinarily appoints as a co-receiver some one not previously con- 
 nected with the railroad of whose fitness it has personal knowl- 
 edge. When the court decides upon the receivers it signs the 
 order of appointment and delivers the papers to the clerk of the 
 court or mails them to him or gives thetoi to counsel to deliver 
 to him. The pleadings in the ancillary suits are then verified 
 and the ancillary orders appointing receivers are signed, and 
 the assistants of counsel take them to the clerks of the various 
 courts to be filed. 1 
 
 1 In Horn v. Pere Marquette R. Co., 151 Fed., 626, 1907, Judge Lurton said in 
 regard to an order which he as circuit judge had made at his chambers in Cin- 
 cinnati in a suit in the United States Circuit Court for the Western District of 
 Michigan : 
 
 "An order appointing a receiver made at chambers . . . presupposes 
 a pending case. The objection that there was no' pending suit when the 
 order in this case was made is a misconception. I am not at all inclined 
 to agree that when the complainant's bill and the defendant's answer 
 were exhibited to me at Cincinnati, and an application made by both 
 parties for the appointment of a receiver, that this lodging of the plead- 
 ings with me and this consent by the defendants was not such a com- 
 mencement of the suit and filing of the bill as to make my order relate 
 
92 FORECLOSURE OF RAILROAD MORTGAGES 
 
 Meanwhile other assistants are waiting near a circuit judge 
 in each of the other circuits where any substantial portion of the 
 mortgaged property is situated with the papers in the ancillary 
 suits which are to be filed there. As soon as a telegram or a 
 telephone message tells them that the suit in the principal court 
 has been begun and receivers appointed, the pleadings in the 
 ancillary suits are verified and presented to the circuit judge 
 having jurisdiction and he signs orders appointing receivers in 
 all the courts in his circuit. The pleadings and the orders are 
 then sent with all possible speed to be filed in the offices of the 
 clerks of the proper courts. 
 
 How has the procedure I have been describing been affected 
 by the Judicial Code? As follows: 
 
 First. Formerly creditor's suits and suits to foreclose mort- 
 gages were brought in the circuit court. That court having 
 been abolished by the Code, they are now brought in the dis- 
 trict court. 
 
 Second. Formerly a circuit judge could sign, wherever he 
 happened to be in his circuit, orders appointing receivers in 
 the principal suit, and in the ancillary suits for all the districts 
 in his circuit, no matter how many states those districts might 
 be in. 1 Now he cannot do this, and if to-day counsel deems it 
 advisable in the case of an insolvent railroad company to file a 
 creditor's bill in each judicial district through which the road 
 runs, he should have the receivership order in each district 
 signed by a judge whether the district judge or a cir- 
 cuit judge designated to act as a district judge actually 
 
 to the very time when I acted at Cincinnati. Universal Savings &Trust 
 Co. v. Stoneburner, 113 Fed., 251 ; 51 C. C. A., 208; (1902). To save the 
 question I made my order to take effect when the bill should be filed at 
 Grand Rapids, and directed the clerk to then issue the necessary process. 
 Thus the order was signed by me on December 4th. It was provisional 
 upon the actual filing of the bill, and became effective then only. The 
 pleadings were then intrusted to one of the counsel to be lodged in the 
 clerk's office at Grand Rapids and this was done. ..." 
 1 Horn v. Pere Marguette R. Co., 151 Fed. 626 ; 1907. 
 
FORECLOSURE OF RAILROAD MORTGAGES 93 
 
 present, and having jurisdiction, in that district. The reason 
 is this : 
 
 When the Judicial Code abolished the circuit court, it pro- 
 vided that the circuit judges should continue to hold their 
 offices during the terms for which appointed. The duty of these 
 judges is to hear and decide cases in the circuit court of ap- 
 peals and to do whatever is necessary in connection with such 
 appeal work. For the performance by them of any other judi- 
 cial act some specific authority is needed. Section 18 of the 
 Code provides that "Whenever in the judgment of the senior 
 circuit judge of the circuit in which the district lies, or of the 
 circuit justice assigned to such circuit, or of the Chief Justice, 
 the public interest shall require, the said judge or associate 
 justice or Chief Justice shall designate and appoint any circuit 
 judge of the circuit to hold said district court." Section 19 
 provides that " all the acts and proceedings in the courts held by 
 him, or by or before him, in pursuance of said provisions, shall 
 have the same effect and validity as if done by or before the dis- 
 trict judge of the said district." As a circuit judge, by such 
 designation, gets the powers of a district judge and no others, 
 it seems clear that no matter in how many districts he may 
 have been designated to act as a district judge, a circuit judge 
 has no longer the power he formerly had to sign orders when 
 in one district of his circuit in suits pending in other districts. 1 
 
 Third. Section 56 provides that if a receiver is appointed 
 in a suit where the land or other property of a fixed character, 
 the subject of the suit, lies within different states in the same 
 
 1 In Horn v. Pere Marquette R. Co., Judge Lurton intimated that it was a 
 sufficient answer to the objection that the power of a circuit judge could not be 
 exercised validly outside of the particular district in which the order was to be 
 entered that the defendant company had joined in the application for the order 
 and therefore neither it nor its creditors nor stockholders could object. See 
 also Continental Trust Co. v. Toledo, St. L. & K. C. R. Co., 99 Fed., 171 ; 1900. 
 In the same way, it may perhaps be said that where the parties consent to a 
 district judge or a circuit judge designated to act as a district judge, signing an 
 order out of the district where he has jurisdiction and where the order is to be 
 entered, the order cannot be subsequently objected to by any of the parties or 
 any one claiming under them. 
 
94 FORECLOSURE OF RAILROAD MORTGAGES 
 
 judicial circuit, the receiver shall upon giving bond immediately 
 be vested with full jurisdiction and control over all the property, 
 the subject of the suit lying or being within such circuit ; sub- 
 ject, however, to the disapproval of such order, within thirty 
 days thereafter, by the circuit court of appeals for such circuit, 
 or by a circuit judge thereof, after notice to adverse parties 
 and opportunity to be heard ; and subject also to the filing in 
 each district court of the circuit in which any of the property 
 may lie or be, within ten days thereafter, of a duly certified 
 copy of the bill and of the order of appointment. The Act 
 further provides that in any such case in which a receiver shall 
 be appointed, process may issue and be executed within any 
 district of the circuit in the same manner and to the same 
 extent as if the property were wholly within the same district ; 
 but orders affecting such property shall be entered of record in 
 each district in which the property affected may lie or be. 
 
 Since this took effect, the general practice where a railroad is 
 in several circuits is this : the complainant files the principal 
 bill in the primary district ; the railroad company answers and 
 joins in the prayer of the bill ; the circuit judge designated to 
 act in that district or the district judge signs in that district the 
 order appointing receivers and it is there entered; the com- 
 plainant forthwith files certified copies of the bill and order in 
 all the district courts of the circuit where there is property ; the 
 complainant also files, as soon as the order appointing receivers 
 has been made in the primary district, an ancillary bill in one 
 district of each of the other circuits and the railroad company 
 files the usual answer ; the district judge or designated circuit 
 judge signs in that district an ancillary order appointing re- 
 ceivers and it is there entered, and the complainant files certified 
 copies of the ancillary bill and order in all other districts of that 
 circuit where there is property. 
 
 This is the practice adopted in the receiverships of the Chi- 
 cago, Rock Island and Pacific Railway Company, the St. Louis 
 and San Francisco Railroad Company, the Missouri, Kansas & 
 
FORECLOSURE OF RAILROAD MORTGAGES 95 
 
 Texas Railway Company, the Missouri Pacific Railway Com- 
 pany and the Western Pacific Railway Company. In all these 
 cases except that of the last named company the receivership is 
 under the general charge of a circuit judge designated to act as 
 a district judge. 
 
 As the powers of chancery receivers arising from the mere 
 fact of their appointment are few, it is customary for the court 
 in the order of appointment to give them express authority to 
 do the things that experience has shown they ought to have the 
 right to do if the receivership is to produce the best results. 
 The order appointing receivers under the creditor's bill author- 
 izes them : 
 
 (1) to manage and operate the railroad and other properties; and 
 to exercise the franchises and to discharge the public duties of the rail- 
 road company. 
 
 (2) to institute and prosecute in their own names or in the name 
 of the railroad company all such suits as may be necessary for the 
 protection of the trust estate and to defend all actions instituted against 
 them and to defend any suits to which the railroad company is a party, 
 the defense of which is necessary for the protection of the estate ; 
 
 (3) to pay wages and debts for current operating expenses and 
 supplies incurred within six months prior to the appointment of the 
 receivers ; 
 
 and directs : 
 
 (4) the officers, directors and employees of' the railroad company 
 and all other persons to deliver up to the receivers all moneys and 
 other property under their control ; 
 
 (5) the railroad company and its officers and employees and all 
 other persons to refrain from interfering with the possession or manage- 
 ment of the property or interfering in any way with the receivers in 
 the discharge of their duties ; 
 
 (6) the receivers to give a bond for the faithful performance of their 
 duties. 
 
 The following orders are sometimes part of the receivership 
 order ; if not they are entered almost immediately : 
 
96 FORECLOSURE OF RAILROAD MORTGAGES 
 
 (1) An order naming the counsel of the receivers. Such 
 counsel are chosen by the receivers subject to the approval of 
 the court. 
 
 (2) An order requiring the receiver to file monthly reports 
 and appointing a master to examine and pass upon them. 
 
 (3) An order requiring all creditors to present claims to a 
 designated master before a fixed date ; and directing that notice 
 be published in certain newspapers; that a copy of the order 
 be mailed to creditors who are on the books of the company ; 
 that any creditor be allowed to object to the claim of any other 
 creditor; and that a hearing be had before the master on the 
 date fixed in the order or on such other date as the master may 
 name. 
 
 Notwithstanding the order of appointment may authorize the 
 payment of all preferred claims, the only preferential payments 
 the receivers actually make without a special order are of wages 
 due employees and traffic balances of small amounts. Traffic 
 balances of large amounts the receivers pay promptly, but not 
 till they have obtained the permission of the court. Payments 
 of supply claims and the like are not made until the right to a 
 preference has been passed upon by a master and his report 
 has been confirmed. It is well at the outset to have an order 
 entered directing all creditors demanding a preference to make 
 the demand when presenting their claims to the master, and 
 permitting all other creditors to be heard in opposition to the 
 demand. If such an order is not promptly made, creditors 
 claiming a preference will file petitions of intervention ; and in 
 many courts orders allowing them to intervene will be entered 
 almost as a matter of course, with the effect of unnecessarily 
 multiplying proceedings. The practice adopted in this district 
 is to require the individual creditors to file their claims with a 
 statement of the preference they deem themselves entitled to, 
 and, where there are many creditors, to permit committees to 
 intervene who represent different classes of creditors claiming 
 
FORECLOSURE OF RAILROAD MORTGAGES 97 
 
 a preference, contract creditors, tort creditors, and so on. In 
 the New York City Railway receivership the intervening com- 
 mittees were made parties defendant to the litigation, thus 
 obtaining the right to be heard on all questions, not merely on 
 the question of their right to a preference. 
 
 It is of the highest importance that at the very earliest 
 moment there should be in the files of the court, for its guidance 
 and that of all parties in interest, as full and clear a report of 
 what the court has in its hands for administration as the re- 
 ceivers and their counsel can quickly prepare with the aid of 
 the accounting and other departments of the railroad company. 
 This report should tell what the assets and liabilities of the 
 company are, what mortgages are on the property, what they 
 cover, when they mature and what defaults will accelerate their 
 maturity, when the interest falls due, what car trust agreements 
 there are, how much has been paid on them, what payments 
 remain to be made, what rolling stock the company owns and 
 whether it is too much or too little, what the earnings and ex- 
 penditures have been for some years of the railroad as a whole, 
 of leased lines, of branches, and of various divisions of the road. 
 The report should not confine itself to the past, but should give 
 the judgment of the receivers as to the prospects for the future 
 and make suggestions as to the best way to get new business or 
 hold what the road already has. The court sometimes author- 
 izes the receivers to hire experts to aid them in the preparation 
 of such reports. 
 
 One of the first questions presented to receivers is whether or 
 not they shall pay interest on mortgage bonds, non-payment of 
 which may accelerate the maturing of the principal. Some of 
 the mortgages may be liens on all of the railroad, others may be 
 divisional mortgages, as they are called, with liens only on a 
 portion of the road. Some may cover parts of the main line, 
 the loss of which would be irreparable; others may cover 
 
98 FORECLOSURE OF RAILROAD MORTGAGES 
 
 branches not essential to the system, but valuable as feeders. 
 The general practice is to pay the interest due on mortgages 
 upon the main line senior to the mortgage being foreclosed; 
 upon valuable links; upon branches which are clearly worth 
 more than the mortgages upon them ; and even upon mort- 
 gages covering parts of the property the value of which is 
 doubtful, until the stockholders and general creditors or bond- 
 holders under junior mortgages have a short time in which to 
 make up their minds what the best interests of the property 
 require. 1 
 
 But the receivers may be quite sure that interest ought to be 
 paid and find they have no money to spare for that purpose. 
 In that case they present to the court a petition giving all the 
 facts and arguments which have convinced them ; and ask that 
 they be directed to pay the interest and for that purpose to 
 borrow money and issue receivers 5 certificates. The court sets 
 down the petition for hearing and directs that notice of hear- 
 ing be given to all parties and to the trustees of the mort- 
 gages on which it is a question of paying interest and of 
 junior mortgages, whether such trustees are parties or not. 
 The court, if it directs interest on bonds to be paid and re- 
 ceivers' certificates to be issued, orders that the certificates shall 
 state on their face the lien which the court has given them, 
 usually a lien just subsequent to the lien of the mortgage secur- 
 ing the bonds. To give the certificates a prior lien would be to 
 pay the bondholders their interest ,at the expense of their 
 mortgage. 2 
 
 1 In Guaranty Trust Co. v. International Steam Pump Company, 231 Fed., 
 594, 595, 1916, Judge Mayer said that when interest becomes due on a mort- 
 gage during a receivership under a creditor's bill, and a failure to pay it may 
 entitle the trustee to declare the principal of the bonds due, the receivers ought 
 to apply to the court for instructions. 
 
 2 Of course the bondholders themselves for various reasons such as a desire 
 to put off foreclosure and sale until times of business depression pass away 
 and meanwhile to receive their interest, may be willing that the lien of the cer- 
 tificates should be placed ahead of their mortgage. If they are not willing 
 that the certificates should be paid ahead of their bonds either out of net in- 
 come to which they are otherwise entitled or out of the corpus, the bondholders 
 
FORECLOSURE OF RAILROAD MORTGAGES 99 
 
 The court has power to issue certificates without notice to 
 anyone. 1 Before, however, they are allowed to displace any 
 existing lien, . before, that is, they are paid at the expense of 
 any existing lien, the lienor must be given a hearing. At the 
 hearing it is not enough for him to show that he did not have 
 
 or their representatives should see that in the order and in the certificates it be 
 declared that the lien of the certificates is subordinate to that of the mort- 
 gage, both upon income and corpus, and that the certificates are not to be paid 
 out of either until after the payment in full of the principal and interest of the 
 bonds. The importance of fully and explicitly defining the rights of the cer- 
 tificate holders and the bondholders, is shown by the case of American Trust 
 Co. v. Metropolitan Steamship Co., 183 Fed., 250; 1910; affirmed 190 Fed., 113; 
 1911 ; C. C. A., First Circuit. There, receivers' certificates had been issued to 
 raise money in order to pay interest on bonds ; the sale under foreclosure of the 
 mortgaged property had not produced enough to pay the bonds, principal and 
 interest, in full ; a large amount of net earnings had been accumulated subsequent 
 to the appointment of receivers in the suit to foreclose the mortgage securing the 
 bonds. The court held that the receivers' certificates were payable out of the 
 net earnings ahead of the amounts still remaining due on the bonds, notwith- 
 standing the order and the certificates both provided that the lien on the 
 mortgaged property of the certificates should be subordinate and inferior to 
 the lien of the mortgage securing the bonds. There is language in the opinion 
 of the court of appeals, page 116, which, it may be argued, means that even if 
 the order and certificates had said in so many words that the mortgage was to 
 be prior to the certificates in lien upon the income as well as to the corpus, 
 nevertheless, the court would have ordered the certificates to be paid out of the 
 income ahead of the bonds. And in Union Trust Co. v. Illinois Midland Co.-, 
 117 U. S., 434, 480-1, the court said that, notwithstanding the orders and certifi- 
 cates provided that certain certificates should have priority over other cer- 
 tificates and receivers' debts, the final decree in that case should deny them 
 such priority. It would seem in fairness to purchasers and all parties that 
 the rights apparently given by the language of the certificates should not sub- 
 sequently be altered. If it be said that such alteration may from the necessities 
 of the case sometimes be necessary, the power to make it should be reserved by 
 the court on the face of the certificates. 
 
 1 "Though prior notice to persons interested, by notifying them as parties, 
 first requiring them to be made parties if they are not, is generally the better 
 way, yet many circumstances may be judicially equivalent to prior notice. A 
 full opportunity, as in this case, to be heard on evidence, as to the propriety of 
 the expenditures and of making them a first lien, is judicially equivalent." 
 Union Trust Co. v. Illinois Midland Co., 117 U. S., 434 at 456 ; 1886. "It was 
 for the court to say whether the Canal & Irrigation Company should be kept on 
 its feet by moneys borrowed or obtained under its orders by the receiver. The 
 wishes of the parties could not control as to such matters. Indeed they need 
 not in strictness have been consulted as to what should be done from time to 
 time in the management of the property." Atlantic Trust Co. v. Chapman, 208 
 U. S., 360, 371 ; 1908. 
 
100 FORECLOSURE OF RAILROAD MORTGAGES 
 
 notice before the certificates were issued. He must show such 
 objections to the merits of the order as would have availed him 
 if presented to the court before the order was entered. "The 
 receiver and those lending money to him on certificates issued 
 on orders made without prior notice to parties interested, take 
 the risk of the final action of the court, in regard to the loans." 1 
 As a practical matter the court nearly always directs notice to 
 be given to persons, whether parties or not, whose liens may be 
 affected by the certificates, for whatever the power of the court 
 may be, bankers hesitate to buy certificates unless all persons, 
 who at any time may have a right to be heard on the question 
 of their priority, are heard before they are issued. 
 
 Very frequently when the receivers under a creditor's bill 
 take possession of a railroad, they find there are unpaid taxes, 
 interest is running at a high rate, and heavy penalties are being 
 incurred. If the court deems it essential to act at once, it will 
 authorize certificates to be issued without notice to mortgagees, 
 with the same lien as the tax levies. There is, of course, noth- 
 ing unfair about this. It may be, however, that the issuing of 
 such certificates will be a breach of some condition of a per- 
 fectly well secured mortgage, and the trustee of that mortgage 
 may be thus enabled to foreclose for the face amount of the 
 bonds secured by it, although the bonds may be selling in the 
 market for sixty or seventy per cent of their par value. For 
 that reason the certificates should not be given a lien ahead of 
 any such mortgage, even if otherwise they can only be sold at a 
 discount. 
 
 A question which a receiver ought to consider very promptly 
 is what contracts he wishes to adopt because whatever the 
 effect may be upon the railroad corporation of a disaffirmance, 
 the receiver has an absolute right to disaffirm, and it is his duty 
 to disaffirm, any executory contracts that are not beneficial. 
 
 1 Union Trust Company v. Illinois Midland Co., 117 U. S. f 434 at 456 ; 1886. 
 
FORECLOSURE OF RAILROAD 
 
 This brings me to the question which arises where the insol- 
 vent railroad company is the lessee of other railroads and the 
 entire system is in the hands of receivers of the lessee. What 
 are the rights of the lessor and the rights and duties of the 
 receiver ? 
 
 The New York Court of Appeals has held 1 that the " prin- 
 ciples which govern the liability of an assignee of a lease seem 
 to be applicable to the case of a receiver ;" and therefore the 
 taking possession of the leased road by the receiver of the lessee 
 makes him liable to pay the rental fixed in the lease during his oc- 
 cupation. This is not the law of the federal courts. That law 
 is stated thus : 2 "If the order of the court, under which the re- 
 ceiver acts, embraces the leasehold estate, it becomes his duty, 
 of course, to take possession of it. But he does not, by taking 
 such possession, become assignee of the term, in any proper 
 sense of the word. He holds that, as he would hold any other 
 personal property involved, for and as the hand of the court 
 and not as assignee of the term." Nor, the court adds, does 
 actual operation of the leased railroad by the receiver render 
 him liable under the covenants of the lease even for the time 
 that he operates the property. He has a reasonable tune to 
 decide whether as receiver he shall adopt the lease. 
 
 The subject was thoroughly discussed by the Circuit Court 
 of Appeals of the Second Circuit in the New York City street 
 railway litigation. 3 The court held in substance that during 
 the trial period of operation of a leased road, the receiver was 
 holding for the lessee or the lessor according as he ultimately 
 adopted or rejected the lease a logical conclusion from the 
 principle so often stated by the Supreme Court, recently in 
 Atlantic Trust Company v. Chapman, 208 U. S., 360, 1908, that a 
 receiver is not appointed in behalf of any particular person, but 
 "for the benefit of all parties who may establish rights in the 
 
 1 Woodruff v. Erie Railway Company, 93 N. Y., 609, 624 ; 1883. 
 
 2 Quincy M. & P. Co. v. Humphreys, 145 U. S., 82, 98 ; 1892. 
 
 3 Pennsylvania Steel Co. v. New York City Railway Co., 198 Fed., 721, 728-34 ; 
 1912. 
 
102 FORECLOSURE OF RAILROAD MORTGAGES 
 
 cause." When the receiver elects not to adopt a lease, it 
 follows that the court during the trial period has been oper- 
 ating for the lessor; that the receiver therefore is not bound 
 to pay rent for the trial period but only (in the absence of 
 special equities which may justify a larger payment ) to 
 turn over to the lessor the net amount earned by the leased road 
 during operation ; that where there are no net earnings and the 
 leased road has been operated by a receiver at an actual loss, 
 as in the case before the court, the lessor, not the lessee, must 
 bear that loss. 
 
 Whether the estate of the lessor could be charged with the 
 loss to the displacement of mortgage liens, the Court said was 
 not before it, but it intimated that it agreed with the special 
 master who had held that the lessor could. 
 
 Illustrations of the special equities which might require the 
 payment by the receiver of a reasonable rental regardless of 
 the fact that the leased property did not actually earn it are a 
 depot or terminal earning nothing but useful to the system, 
 and "feeders" and connecting lines, not themselves earning 
 large amounts, but furnishing valuable business to the lessee. 
 
 The court said that if the lessor does not acquiesce in the 
 court operating its railroad, " if it knock at the door of the court 
 and demand back its property," it is in a position to demand 
 the rental stipulated in the lease. 1 This holding is in accord- 
 ance with a decision of Judge Jenkins in the Northern Pacific case 2 
 
 1 Any important demand made upon a receiver not only should be carefully 
 considered by the receiver but should be communicated by him to all parties in 
 interest in order that whether the demand is granted or refused action may be 
 taken only after they have had an opportunity to consider the consequences. 
 In one case where the receiver did not pay the installments of the purchase price 
 of rolling stock under a car trust agreement but kept possession of it notwith- 
 standing occasional not too emphatic demands for its surrender, when the decree 
 of sale was entered, it directed that the entire proceeds of the sale of the rail- 
 road should be applied if necessary to pay the amount due for the cars and 
 nothing but the appearance of a totally unexpected bidder at the sale saved 
 the bondholders from seeing, as the result of three years operation by the court, 
 their entire railroad go to pay for the rental of rolling stock. 
 
 8 Farmers' Loan & Trust Company v. Northern Pacific R. Co., 58 Fed., 257; 
 1893. 
 
FORECLOSURE OF RAILROAD MORTGAGES 103 
 
 and with the language of the Supreme Court in the Wabash 
 case. 1 
 
 Of course if the receiver adopts the lease he must pay rent as 
 fixed by the lease. 
 
 Sometimes the fall of the lessee brings down the lessor. It 
 needs a receiver as much as the lessee. As the court has pos- 
 session of its property, a general creditor, whether a citizen of 
 the same state as the lessor or not, may file his bill in the courts 
 where the suits against the lessee are pending and obtain an 
 order appointing receivers of the property of the lessor. A 
 simpler method was used in the New York street railway litiga- 
 tion. The lessor, the Metropolitan Street Railway Company, 
 filed a petition in the creditor's suit pending in the United 
 States Circuit Court against its lessee, the New York City 
 Railway Company, in which it asked to be made a party to 
 that suit and to have the receivership extended so as to em- 
 brace all its interest in the property of which the receivers of the 
 City Company had taken possession. It alleged that its affairs 
 were inextricably tied up with those of the City Company, as 
 all of its property was leased to that company; it had pay- 
 ments falling due on mortgages and leases ; and it was dependent 
 on the City Company for money with which to make the pay- 
 ments. The court made the order prayed for. Its action was 
 attacked in the state courts and in the United States Supreme 
 Court. A justice of the state court held it absolutely void, and 
 appointed state court receivers. 2 The Supreme Court of the 
 United States sustained the order of the circuit court. 3 
 
 I now come to the foreclosure suit. 
 
 The federal courts having the property of the railroad com- 
 pany in their possession through their officers, it is withdrawn 
 
 1 Quincy M. & P. Co. v. Humphreys, 145 U. S., 82, 101 ; 1892. 
 * People v. Hasbrouck (Metropolitan St. Railway Company), 57 Misc., 130, 
 133-6; 1907. 
 
 3 Re Metropolitan Street Railway Receivership, 208 U. S., 90; 1908. 
 
 
104 FORECLOSURE OF RAILROAD MORTGAGES 
 
 from the jurisdiction of all other courts and they have as ancil- 
 lary to the suits in which the possession was acquired jurisdic- 
 tion to hear and determine all questions respecting the title, 
 the possession or the control of the property, although in the 
 ancillary proceedings there is no diversity of citizenship. 1 
 
 Under this principle the trustee of any mortgage of the rail- 
 road company by the terms of which the right to begin a fore- 
 closure suit has arisen, has his remedy in the courts where the 
 creditors* suits are pending and the mortgaged property is 
 situated. 
 
 Ordinarily the question of whether that right has arisen is 
 beyond controversy. Upon default in payment there is a right 
 to foreclose for the amount due, whether principal or interest. 2 
 Restrictive provisions are strictly construed and will not be 
 held to restrict the right to foreclose if there is any other right 
 such as a right to enter 3 or a right to sell under a power of sale 4 
 to which they may have been intended to apply. " A mortgage 
 is a security for a debt and failure to pay the debt in whole or 
 in part when it is due is necessarily a breach." A breach gives 
 a right to enforce the mortgage and nothing but perfectly clear 
 language can limit this right. The case from which I have just 
 quoted, Mercantile Trust Company v. Chicago P. & St. L. Rail- 
 road Company, 61 Fed. 372, 1893, has always been an authority 
 upon which counsel have relied when defending the right, im- 
 mediately upon default in payment of interest, to foreclose mort- 
 gages which contain language seemingly, on a first reading at 
 
 1 Wabash Railroad v. Adelbert College, 208 U. S., 38, at p. 54 ; 1908. As to 
 whether actual possession as distinguished from priority in beginning suit or in 
 moving for the appointment of a receiver is essential to exclusive jurisdic- 
 tion, see Adams v. Mercantile Trust Co., 66 Fed. 617 ; 1895 ; C. C. A. 5th Circuit. 
 Knott v. Evening Post Co., 124 Fed. 342 ; 1903. Appleton Water Works Co. v. Cen- 
 tral Trust Co., 93 Fed., 286 ; 1899 ; C. C. A. 7th Circuit. Farmers Loan & Trust 
 Co. v. Lake Street Elevated R. R. Co., 177 U. S. 51 ; 1900. Compton v. Jesup, 68 
 Fed. 263, 283 ; 1895. 
 
 2 Howett v. Western R. R. Co., 94 U. S., 463 ; 1877. Chicago & Vincennes 
 Railroad Co. v. Fosdick, 106 U. S., 47, 68; 1883. 
 
 3 State Trust Co. v. Kansas City Railroad Co., 120 Fed., 398; 1903. 
 
 * Morgan's Company v. Texas Central Railway Co., 137 U. S., 171 ; 1890. 
 

 FORECLOSURE OF RAILROAD MORTGAGES 105 
 
 any rate, intended to postpone such right until the default has 
 continued for six months or some other fixed period of time. As 
 in Central Trmt Company v. Worcester Cycle Mfg. Co., 93 Fed., 
 712, 1899, it was held that a provision in a mortgage postponing 
 the right to foreclose for default in payment of interest for six 
 months is solely for the benefit of the mortgagor and if waived 
 by it cannot be set up by anyone else ; it may be of no impor- 
 tance in a "friendly" foreclosure suit whether the language of 
 a mortgage amounts to such a provision or not ; but where the 
 relations of the trustee of the mortgage and the railroad com- 
 pany are hostile it may be of great importance. I shall there- 
 fore give a brief statement of what is held in the leading cases 
 which discuss the question. 
 
 In Morgan's Company v. Texas Central Railway Company, 
 137 U. S., 171, 1890, the mortgage provided that in case the rail- 
 way company should default in the payment of any of the princi- 
 pal or interest of the bonds and the default should continue sixty 
 days after demand, the principal should immediately become 
 due, and upon the request of the holders of seventy-five per 
 cent of the bonds the trustee might and should take possession 
 of the railway ; and upon request of the holders of seventy-five 
 per cent of the bonds it should be the duty of the trustee "to 
 foreclose this mortgage . . . and sell the property ... at pub- 
 lic auction." The court held that this language applied solely 
 to foreclosure and sale at public auction without the aid of the 
 court and did not limit the power of the trustee to proceed in a 
 suit to foreclose, especially in view of the fact that the mortgage 
 contained a further clause that " nothing herein contained shall 
 be held ... to prevent . . . the foreclosure of this instrument, 
 the appointment of a receiver, or any other act or proceeding 
 appropriate in such cases, by any court of competent jurisdic- 
 tion." In Chicago & Vincennes Railroad Company v. Fosdick, 
 106 U. S., 47, 1883, the mortgage provided, page 50, that if de- 
 fault should be made in the payment of interest on any of the 
 bonds and the default should continue six months after demand, 
 
106 FORECLOSURE OF RAILROAD MORTGAGES 
 
 and the principal of all the bonds should become immediately 
 due, the trustee might so declare the same and notify the com- 
 pany thereof ; and upon the written request of the holders of a 
 majority of the bonds should proceed to collect principal and 
 interest of all bonds outstanding by foreclosure and sale or 
 otherwise. The court held, page 68, that inasmuch as by its 
 terms the conveyance was declared to be for the purpose of 
 securing the payment of interest as well as principal, and "by 
 the fourth article, the mortgagor's right of possession terminates 
 upon a default in the payment of interest as well as principal/' 
 the trustees on non-payment of interest might file a bill of fore- 
 closure. " This right . . . follows from the nature of the secur- 
 ity and arises upon its face unless restrained by its terms." 
 The court did not consider that there was anything in the mort- 
 gage which operated as such restraint. But although the court 
 said that suit to foreclose for non-payment of interest would lie 
 upon default, it held it would not lie to foreclose for accelerated 
 principal except upon the written request of the holders of a 
 majority of the bonds, pages 77-8. In Mercantile Trust Co. v. 
 Chicago, P. & St. L. R. Co., 61 Fed., 372, 1893, the mortgage pro- 
 vided that if default should be made in the payment of interest 
 and should continue for six months it should be the duty of the 
 trustee to proceed at law or in equity to enforce the rights of 
 the holders of the bonds upon a requisition of the holders of at 
 least one-third in amount of the bonds. The court held that 
 this clause did not deprive the trustee of the right to proceed 
 immediately upon non-payment of interest without more wait- 
 ing. The court laid stress upon the fact that the mortgage 
 fixed the right of the mortgagor to continue in possession 
 until default in breach of a condition and not until default and 
 six months thereafter. 
 
 In Central Trust Company v. Worcester Cycle Mfg. Co., 93 
 Fed., 712, 1899, article 2 of the mortgage provided that the mort- 
 gagor might remain in possession until six months after default ; 
 article 4 that in case default in payment of interest should con- 
 
FORECLOSURE OF RAILROAD MORTGAGES 107 
 
 tinue for six months the trustee might enter ; article 5 that in 
 the same case the trustee might sell and dispose of the property ; 
 and article 6 that the provision in article 5 was cumulative to 
 the ordinary remedy of foreclosure in the courts and that the 
 trustee at the written request of the holders of a majority in 
 value of the bonds "should, whenever entitled to do so by the 
 terms thereof, institute proceedings to foreclose this mortgage." 
 The court considered that these articles were intended to post- 
 pone a suit to foreclose even for interest until the expiration of 
 the six months, particularly in view of a proviso to article 6 
 that " neither the trustee nor the . . . holders of the bonds . . . 
 or any of them, shall sell the premises hereby mortgaged . . . 
 or institute any . . . proceeding in law or equity for the fore- 
 closure hereof . . . otherwise than in the manner herein pro- 
 vided." 
 
 In general, it may be said that the language of railroad 
 mortgages in recent years is usually sufficient to prevent fore- 
 closure even for interest until the expiration of the period of 
 grace, while that of older mortgages is not. 
 
 A provision that the mortgaged premises shall not be sold 
 under proceedings at law or equity, " it being the intention . . . 
 of the parties that the mode of sale by the trustee prescribed 
 in the mortgage shall be exclusive," is void on the ground that 
 it is an attempt to oust the jurisdiction of the court. 1 
 
 Before beginning a suit to foreclose, the trustee of the mort- 
 gage should see that every preliminary condition is complied 
 with and should try to have evidence of such compliance which 
 will be satisfactory even if the occasion for its use may not 
 arise for years. So far as possible, written admissions of de- 
 mands, notices and requests should be obtained, and where any- 
 thing is done written admission of which cannot be obtained, 
 the doing of it should be witnessed by several people to cover 
 contingencies of death, disappearance and so on. The trustee 
 
 1 Guaranty Trust Co. v. Greene Cove Co., 139 U. S., 137, 142 ; 1891. 
 
108 FORECLOSURE OF RAILROAD MORTGAGES 
 
 should not confine itself to doing only such things as it thinks 
 are necessary to establish its right to foreclose. It should do 
 whatever anyone whose interest it might be to delay the fore- 
 closure could possibly think of saying ought to have been done, 
 provided, of course, it can be done without prejudice to the 
 rights of the trustee. On the day the interest is due and 
 on the expiration of the days of grace, 1 if any, several bond- 
 holders should demand payment, presenting the coupons at 
 the place where the interest, by the terms of the bond, is pay- 
 able, and, as an additional precaution, at the place where the 
 last coupon was paid, at the office of the company, and at the 
 office of the receiver, if there is one. The bondholders should 
 make affidavits to the fact of the presentation, demand and 
 non-payment and should deliver the affidavits with the coupons 
 attached to the trustee to hold. 
 
 Where the mortgage provides that if a default in payment 
 of interest continues for six months the trustee shall upon the 
 demand of the holders of a majority in amount of the bonds 
 declare the principal due and begin suit to foreclose, a demand 
 in the language of the mortgage should be signed by the neces- 
 sary bondholders; they should place opposite their signatures 
 the amount and numbers of the bonds held by them and should 
 exhibit the bonds to the trustee if so required. Such demands 
 are usually made by a committee of bondholders who have in 
 their own possession or that of a depositary acting for them 
 more than a majority in amount of the bonds. The committee 
 passes a resolution authorizing the secretary to make the de- 
 mand on its behalf and the secretary delivers to the trustee a 
 certified copy of the resolution which is usually signed also by 
 the members of the committee. The secretary also certifies to 
 
 1 In Alabama & G. Mfg. Co. v. Robinson, 56 Fed., 690, 1893, C. C. A., 5th 
 Circuit, the court declined to pass on the question of whether the coupons were 
 or were not entitled to days of grace, but said that even if they were, where the 
 bonds provided that the principal should become due if default in interest should 
 continue for six months after maturity and demand of payment, the six months 
 was not in addition to days of grace but ran from the day of payment named 
 in the coupon. 
 
FORECLOSURE OF RAILROAD MORTGAGES 109 
 
 the trustee the number of bonds which the committee has in its 
 possession. The trustee then notifies the mortgagor that in 
 accordance with the request of the majority of the bondholders 
 it declares the principal of the bonds due. 
 
 If the mortgage provides that upon default in payment of 
 interest continuing for a specified time the principal shall be- 
 come due, the trustee at the expiration of the time may fore- 
 close for principal and interest without a formal declaration of 
 the maturity of the principal. 1 It has been held that if an 
 option to declare the principal due is to be exercised it should 
 be done promptly. 2 
 
 Acceptance of the interest before the principal becomes due 
 is a waiver of the default ; acceptance of the interest after the 
 principal has become due has also been held to be a waiver. 3 
 
 Let us assume that the trustee of the mortgage is satisfied 
 that it has a right to foreclose and goes ahead. What does it 
 do? 
 
 It presents a petition, entitled in the creditor's suit, to the 
 court of primary jurisdiction praying to be allowed to bring 
 suit to foreclose its lien. Usually the prayer of the petition is 
 granted as a matter of course. 4 The bill which has been pre- 
 sented to the court with the petition is immediately filed. 
 
 1 Morgan's Co. v. Texas Central Railway Co., 137 U. S., 171 ; 1890. 
 
 2 Wilson v. Winter, 6 Fed., 16; 1881. 
 
 3 Alabama & G. Manufacturing Co. v. Robinson, 56 Fed. 690; 1893; C. C. 
 A., 5th Circuit. 
 
 4 But not always. In the pending creditor's suit for the administration of 
 the assets of the Chicago, Rock Island & Pacific Railway Company, a petition 
 by the holders of bonds issued under the Refunding Mortgage (the trustee 
 having refused to act) for leave to file a bill praying among other things for a 
 foreclosure of the mortgage, was presented to the court on March 21, 1916. 
 The following day the court set it down for hearing on April 24, 1916. The 
 hearing took place before Judge Geiger on May 24, 1916. Counsel for the rail- 
 road company in opposition to the application argued that the court had the 
 right to deny the application where the bill clearly stated no case, and that 
 even if the bill stated a case or it was doubtful whether it did or not, the court 
 was not bound to permit an independent suit to be brought or an ancillary or 
 independent bill to be filed, but might only permit an intervention pro interesse 
 
110 FORECLOSURE OP RAILROAD MORTGAGES 
 
 It was usual formerly to begin the bill with the statement that 
 the complainant files "this its dependent bill." Sometimes the 
 foreclosure bill and other papers in the foreclosure suit were 
 entitled both in the creditor's suit and the foreclosure suit. 
 Anything of the sort is unnecessary. The suit is an ordinary 
 suit to foreclose a mortgage. From the time the court enters 
 the order permitting the bill to be filed "the court proceeds in 
 it," as Judge Taft said in the passage already quoted, supra, 
 page 83 : " without further regard to the pleading or course of 
 the principal action." Any proper party may be joined as a 
 party defendant regardless of whether he is a party to the 
 creditor's bill or not. 
 
 The trustee has the right to bring the suit without joining any 
 bondholders as parties complainant or defendant. The same 
 parties should be made defendants as in any foreclosure suit, 
 the mortgagor, its grantees, subsequent mortgagees, lienors and 
 so on. It is usual to join the receivers in the creditor's bill as 
 parties defendant, but it is unnecessary and has been held to 
 be improper. 1 
 
 The foreclosure bill sets out : 
 
 (a) diversity of citizenship where it exists ; 
 
 an unnecessary fact stated on the principle of pleading all the 
 grounds of jurisdiction there are : 
 
 (6) the making of the mortgage, the execution of the bonds secured 
 by it, the certification of them by the trustee, the issuing of them in 
 
 suo; citing Wiswell v. Sampson, 14 How. (U. S.), 52, 65, 67, 1853. Compton v. 
 Jesup, 68 Fed., 263, 279 ; 1895. 
 
 Counsel for the petitioners contended that the bill stated a cause of action, and 
 that consequently the petitioners had an absolute right to file the bill ; citing Minot 
 v. Hasten, 95 Fed., 734 ; 1899. United States Trust Co. v. Chicago Terminal Co., 
 188 Fed., 292; 1911. Western Union Company v. United States & Mex. Trust 
 Co., 221 Fed., 545 ; 1915. Odell v. Batterman Co., 223 Fed., 292 ; 1915. Neither 
 counsel cited any case where it had been held that the court was bound to allow 
 a mortgagee to proceed by bill rather than by intervention pro interesse suo; 
 nor on the other hand any unreversed case where the court had refused to allow 
 the mortgagee to proceed either by bill or intervention. 
 
 Judge Geiger granted the prayer of the petition August |14, 1916. 
 
 1 Continental Trust Co. v. Toledo, St. L. & K. C. R. Co., 82 Fed., 642 ; 1897. 
 
FORECLOSURE OF RAILROAD MORTGAGES 111 
 
 accordance with the terms of the mortgage, and the ownership of them 
 by purchasers for value ; 
 
 (c) a description of the property mortgaged ; 
 
 (d) a statement of any liens the holders of which are made parties 
 defendant and if any of the liens are prior to the mortgage the reasons 
 that justify the complainant in making parties the holders of such liens ; 
 
 (e) a statement of the default ; 
 
 (/) provisions of the mortgage that upon default the income is 
 assigned to the mortgagee or the trustee is entitled to the appointment 
 of a receiver to operate the railroad and receive the income ; the in- 
 solvency of the defendant and the inadequacy of the mortgaged prop- 
 erty as security ; 
 
 (g) the possession of the mortgaged property by the court under the 
 creditor's bill ; 
 
 (h) the fact that the matter in controversy exceeds exclusive of in- 
 terest and costs, the sum or value of three thousand dollars : 
 
 a fact alleged on the same principle as (a). 1 
 
 If the principal has become due by acceleration or otherwise 
 the bill so states, and prays that the mortgage be foreclosed 
 unless the whole amount due for principal and interest is 
 paid. 
 
 If the default is non-payment of interest only, the prayer is 
 that the mortgage be foreclosed unless the interest is paid. It 
 would seem, however, in view of what has been said in the Su- 
 preme Court and acted upon in lower courts, that it might be well 
 for the bill to pray also that, in case the overdue interest should 
 be paid, the court should retain jurisdiction in order to sell the 
 property in case of another default in payment of interest or 
 principal. 2 If the principal becomes due before judgment a 
 supplemental bill is filed setting up the fact and enlarging the 
 prayer. 
 
 The bill in addition to praying for a foreclosure and sale 
 
 1 Of course where the mortgaged property is not in the prossession of the 
 Court allegation (g) is omitted and allegations (a) and Qi) are essential. 
 
 2 Howell v. Western Railroad Co., 94 U. S., 463, 466 ; 1877. Chicago & Vincennes 
 R. R. Co. v. Fosdick, 106 U. S., 47 at 68 and 69 ; 1883. In Toler v. East Tennessee, 
 V. & G. Ry. Co., 67 Fed., 168, 1894, at 181, the court said : "The debtor can pre- 
 vent a sale by paying into the master's office the amount necessary to pay the 
 interest in default. All proceedings will then be stayed until another default." 
 
112 FORECLOSURE OF RAILROAD MORTGAGES 
 
 asks that a receiver pending the suit be appointed, and that the 
 trustee have judgment against the company for the amount of 
 the bonds, or, if there is no provision in the mortgage authoriz- 
 ing such a judgment, that the bondholders have judgment for 
 any deficiencies. 
 
 The railroad company seldom files an answer at once. It 
 usually appears and consents to an order that the receiver- 
 ship under the creditor's bill be extended to the foreclosure 
 suit and that the receivers under the creditor's bill be 
 appointed receivers under the foreclosure bill ; but without the 
 appearance or consent of the railroad company the court will 
 make the order where the property is in the hands of receivers 
 and there is a default under the mortgage. The order contains 
 generally the same provisions as the order appointing receivers 
 under the creditor's bill, such as provisions authorizing them 
 to operate the property, to pay preferred claims and to bring 
 and defend suits. It sometimes contains provisions that all 
 liabilities of the receivers incurred while operating under the 
 creditor's bill shall be liabilities of the receivers under the 
 foreclosure bill. In the New York City Railway receivership it 
 was announced more than once by Judge Lacombe that the 
 court would hold all the property over which it had appointed 
 receivers liable to the last penny for the indebtedness of the re- 
 ceivers whether incurred in operating the properties as receivers 
 under the creditor's bill or under the foreclosure bills and 
 whether incurred as receivers of the lessee New York City Rail- 
 way Company or the lessor Metropolitan Street Railway Com- 
 pany; as between the lessee and the lessor, the deficit which 
 arose from expenditures for permanent improvements upon the 
 property of the lessor made before it had been taken over by 
 separate receivers, was charged on the settlement of accounts 
 to the lessor ; and the court intimated although it considered 
 that on the facts before it it did not have to decide the question 
 that the lien of the mortgagees of the lessor would be dis- 
 placed, if necessary, in favor of the claim of the receivers of the 
 
FORECLOSURE OF RAILROAD MORTGAGES 113 
 
 lessee to be repaid such expenditures. 1 There are cases which 
 say that indebtedness for permanent improvements made upon 
 the mortgaged property during a receivership under a judg- 
 ment creditor's bill ought not to be paid out of the mortgaged 
 property or even out of the income earned after the receiver- 
 ship has been extended to the foreclosure suit. 
 
 "The reconstruction, enlargement, or permanent improvement of 
 mortgaged property by a court's receiver, under such circumstances 
 does not any more displace or postpone the prior mortgage lien than 
 would the like act of the mortgagor in the absence of a receivership." 2 
 
 The court relied upon Kneeland v. American Loan Company, 
 136 U. S., 89, 1890, where a claim for so-called rental of rolling 
 stock under a car trust agreement against a receiver appointed 
 at the instance of a judgment creditor of a railroad company was 
 sought to be enforced against the receiver in the foreclosure suit 
 as a lien upon the property in priority to the mortgage. The 
 court held that the claim could not be given such a preference 
 and that too, although the mortgagees were parties defendant 
 to the creditor's bill. But the court clearly did not consider 
 the claim a debt of the receivership at all (see page 99). It said 
 that there were two lien holders one with a lien on the railroad 
 and the other with a lien on the cars and neither could claim 
 to be paid out of the properties of the other. On the general 
 question of the liability of the receiver in a foreclosure suit for 
 the indebtedness of the receiver under the creditor's bill, the 
 court laid down this principle : 
 
 "A court which appoints a receiver acquires, by virtue of that 
 appointment, certain rights and assumes certain obligations, and the 
 expenses which the court creates in discharge of those obligations are 
 burdens necessarily on the property taken possession of, and this irre- 
 spective of the question who may be the ultimate owner, or who may 
 have the preferred lien, or who may invoke the receivership. So if, at 
 
 1 Pennsylvania Steel Co. v. New York City Ry. Co., 198 Fed., 721, 734 ; 1912 ; 
 C. C. A., 2d Circuit. 
 
 2 Atlantic Trust Co. v. Dana, 128 Fed., 209, 230 ; 1903 ; C. C. A., 8th 
 Circuit. 
 
114 FORECLOSURE OF RAILROAD MORTGAGES 
 
 the instance of any party rightfully entitled thereto, a court should ap- 
 point a receiver of property, the same being railroad property, and 
 therefore under an obligation to the public of continued operation, it, 
 in the administration of such receivership, might rightfully contract 
 debts necessary for the operation of the road, either for labor, supplies 
 or rentals, and make such expenses a prior lien on the property itself." 
 
 To say that the court meant that only debts contracted by it 
 for operation as distinguished from debts for construction are 
 to be paid out of the property, is to disregard what the court 
 lays stress on, "the obligation to the public of continued opera- 
 tion," and the fact that to the performance of this obligation 
 new construction is often as essential as supplies. Suppose 
 after a receiver is appointed under a creditor's bill, the court 
 finds it is dangerous to operate trains unless a portion of the 
 railroad is entirely reconstructed. In endeavoring to fulfill 
 "the obligation to the public of continued operation" the court 
 orders the receiver to make a contract for such reconstruction. 
 It knows that no contractor would undertake any such work 
 with the understanding that the only fund to pay him would 
 be the earnings of the receivership under the creditor's bill, and 
 that such receivership might be superseded at any moment. 
 Surely nothing can be more unfortunate than to allow the con- 
 tractor to perform his contract with the court and then when 
 he has performed it, to say to him that the court refuses to 
 pay him, although it has property in its hands worth millions 
 of dollars, because other parties have come into the litigation 
 since the work was undertaken. 
 
 What effect upon the rights of the bondholders and the 
 general creditors follows from the extension of the receivership 
 to the foreclosure suit ? * 
 
 1 When a suit to foreclose is begun, pending a creditor's suit, the order 
 directs sometimes that the receivership be extended to the foreclosure suit ; 
 sometimes that the receivers already appointed be appointed receivers of the 
 property covered by the mortgage ; very often the order contains both direc- 
 tions. By "extension of the receivership," I mean the making of any of these 
 orders. 
 
FORECLOSURE OF RAILROAD MORTGAGES 115 
 
 To whom do the net earnings of the receivership belong so 
 long as the receivership is simply under the creditor's bill? 
 The question is seldom one of practical importance, because 
 such a receivership is usually so brief that the net earnings all 
 go to the payment of preferred debts, laborers' wages,, traffic 
 balances and so on. I think lawyers generally have been under 
 the impression that any net earnings not so used were distrib- 
 utable pro rata to all creditors secured or unsecured, particularly 
 where the mortgage did not purport to assign the income to the 
 mortgagee ; the reason for this impression being the statement 
 so often made, for instance in United States Trust Company v. 
 Wabash, 150 U. S., 287, 1893, at page 308, that "until the mort- 
 gagee asserts his rights under the mortgage to the possession 
 of the road by filing a bill of foreclosure, or, if the road be 
 in the hands of a third party, by demanding possession of such 
 party, he has no right to its earnings and profits." Judge 
 Sanborn so held in Farmers' Loan & Trust Co. v. American 
 Waterworks Co., 107 Fed., 23, 1895, saying that the income earned 
 by receivers appointed at the suits of stockholders and creditors 
 prior to the beginning of the foreclosure suit was free from any 
 equitable lien of the mortgage bondholders ; that it required a 
 demand of surrender of the income and profits or the filing of 
 a bill of foreclosure to charge this income with the superior lien 
 of the mortgage and that the income earned by receivers prior 
 to the foreclosure bill was applicable to the payment of the 
 unsecured as well as the secured debts ; but Judge Taft held in 
 Thomas v. Cincinnati, N. 0. & T. P. Ry. Co., 91 Fed., 202, 1898, 
 that the net earnings from the operation of the railroad property 
 by a receiver under a general creditor's bill belonged to the credi- 
 tors in the same order of priority as the proceeds of the sale of 
 the property itself, and the court of appeals for the third circuit 
 held in Haehnlen v. Drayton, 192 Fed., 300, 1911, that the 
 net earnings in the period between the filing of a bill, which 
 though filed by a judgment creditor the court considered clearly 
 a general creditor's bill, and the beginning of a foreclosure suit 
 
116 FORECLOSURE OF RAILROAD MORTGAGES 
 
 belonged to the bondholders. Where the creditor's bill is 
 brought by a judgment creditor for his own benefit the net 
 earnings go to him until a mortgagee takes steps to impound 
 them. 1 From the moment the receivership is extended to the 
 foreclosure suit, the net earnings belong to the bondholders 
 secured by the mortgage whether the mortgage assigns income 
 or not. 2 
 
 Even though the mortgage by its terms covers earnings, they 
 do not pass to the mortgagee until he makes demand for the 
 mortgaged property or for surrender of its possession under the 
 provisions of the mortgage. 3 The usual way of securing the 
 earnings for the bondholders is by the appointment of a receiver 
 in the foreclosure suit; but a demand for possession made by 
 the commencement of a suit by a mortgagee to be put in posses- 
 sion, 4 or the filing by the mortgagee of an intervening petition 
 in a pending receivership claiming the income, 5 is sufficient to 
 get for the mortgagee all income thereafter earned. 
 
 At the time the order is made extending the receivership of 
 the general creditor's bill to the foreclosure suit, it is usual to 
 make an order consolidating the two suits. Such litigations 
 used to go on after the order of consolidation without any one 
 connected with them having any definite idea unless perhaps 
 an erroneous one of what difference it made whether the suits 
 had been consolidated or not, except that pleadings and orders 
 were entitled in both suits, until the question was discussed in 
 opinions by Judges Taft and Lurton in the receivership of the 
 Toledo, St. Louis and Kansas City Railroad Company. 6 They 
 
 1 Sage v. Memphis & Little Rock R. R. Co., 125 U. S., 361 ; 1888. 
 
 2 Central Trust Company of New York v. Chattanooga R. & C. R. Co., 94 
 Fed., 275, 281, 1899, and Freedman's Saving Company v. Shepherd, 127 U. S., 494, 
 502; 1888. 
 
 *Galveston Railroad Company v. Cowdrey, 11 Wall., 459; 1871. 
 4 Dow v. Memphis & L. R. Co., 124 U. S., 652 ; 1888. 
 6 Atlantic Trust Co. v. Dana, 128 Fed., 209, 219; 1903. 
 Continental Trust Co. v. Toledo, St. L. & K. C. R. Co., 82 Fed. 642, 645-6-7 ; 
 1897. 95 Fed. 497, 505-6; 1899; C. C. A., 6th Circuit. 
 
FORECLOSURE OF RAILROAD MORTGAGES 117 
 
 said that each suit is after consolidation an independent suit; 
 consolidation does not change the rules of equity pleading 
 nor the rights of the parties ; the parties in one suit do not be- 
 come parties in the other and a decree in one suit is not a decree 
 in the other unless so directed ; the bringing on of the two suits 
 for hearing does not avoid the necessity of separate decrees in 
 each case ; nor does the fact that the two suits have been con- 
 solidated require that every issue under each suit should be 
 heard at the same time. A statement sometimes made that 
 Judge Taft held, where a creditor's suit and a foreclosure suit 
 are consolidated, any creditor may defend against the bill to 
 foreclose, is not correct. What he did hold was that every 
 creditor has the right in the creditor's suit to attack the claim 
 of every other creditor who files a claim in that suit ; and con- 
 sequently as a committee had presented the claim of the bond- 
 holders in that suit the bonds could be attacked like any other 
 claim a holding which shows the advisability of bondholders 
 keeping out of the creditor's suit unless there is something sub- 
 stantial to be gained by getting in. 
 
 I shall now consider the subjects of preferred claims and 
 interventions. 
 
 Certain classes of indebtedness incurred by the railroad com- 
 pany before the receivership are entitled to payment in priority 
 to bonds and other debts out of the income of the receivership 
 and sometimes out of the body of the property, mortgaged or 
 unmortgaged, of the railroad company. Indebtednesses of this 
 sort are called "preferred claims" and are described in the cases 
 as "current debts," "debts for current expenses," "debts of 
 income," "debts of operation" or "supply claims." 
 
 Before considering the extent to which current debts are en- 
 titled to priority, whether out of income or corpus, I shall give 
 the definition of a current debt in the words of the Supreme 
 Court : a " debt not contracted upon the personal credit of the 
 
118 FORECLOSURE OF RAILROAD MORTGAGES 
 
 company but to keep the railroad itself in condition to be used 
 with reasonable safety for the transportation of persons and 
 property, and with the expectation of the parties that it is to 
 be met out of the current receipts of the company." 1 
 
 In order to bring his claim within this definition a claimant 
 need not prove that anything was said by him or the railroad 
 company about their expectations or the sort of credit he was 
 contracting upon. The question of whether the creditor con- 
 tracted upon the personal credit of the railroad company, or on 
 the contrary with the expectation that he was to be paid out 
 of current receipts, is to be determined "in each case by the 
 amount of the debt, the time and terms of payment and all other 
 circumstances attending the transaction." Two decisions of 
 the Supreme Court, handed down on the same day, one, South- 
 ern Railway v. Carnegie Steel Company, 176 U. S., 257, 1900, 
 holding that an indebtedness for rails sold in certain circum- 
 stances was a preferred debt, and the other, Lackawanna Iron & 
 Coal Company v. Farmers' Loan & Trust Company, 176 U. S., 
 298, 1900, holding that an indebtedness for rails sold in other 
 circumstances was not, are helpful to an understanding of what 
 a current debt is. In the Carnegie Company case the court said 
 that in view of the comparatively small amount of rails there 
 was nothing to suggest "that they were to be used in con- 
 structing new and additional road and not to keep existing roads 
 in proper condition for use. Every railroad must have on hand 
 a limited quantity of rails in order to keep every part of its line 
 in proper and safe condition." In the Lackawanna Company 
 case the court said that " the work required to be done in order 
 to put the main road . . . and its divisions in proper condition 
 was not such as would be done in the ordinary course of the 
 business and operation of a railroad, but was so extensive as 
 to amount to reconstruction or the construction of new road," 
 and therefore, although the " rails were imperatively required in 
 order that the road might be safely used for transportation of 
 
 1 Southern Railway v. Carnegie Steel Company, 176 U. S., 257, 285 ; 1900. 
 
FORECLOSURE OF RAILROAD MORTGAGES 119 
 
 persons and property," the claimant was not entitled to a pref- 
 erence even out of the income of the receivership. These two 
 cases have been generally treated by the courts as authority, 
 notwithstanding qualifying statements in both, for the broad 
 propositions, that where supplies or work are for repairs, main- 
 tenance, to keep the road up, the indebtedness is a current 
 debt; where they are for construction, whether original con- 
 struction or reconstruction, the indebtedness is not a current 
 debt. 
 
 The Supreme Court has often said that the priority of un- 
 secured claims "is recognized only in a few specific cases" and 
 that " it is the exception, not the rule that the priority of mort- 
 gage liens can be displaced"; but, as a matter of fact, in the 
 ordinary receivership of a railroad, the majority of the unsecured 
 claims are given priority. The principal claims that are not are 
 indebtednesses for money lent, for land, equipment, except 
 perhaps such as may be necessary to keep the road a going con- 
 cern, 1 new construction, rent, guaranties on bonds or stocks 
 of other railroads and tort claims. 2 
 
 In Fosdick v. Schatt, 99 U. S., 235, 1878, the court laid down 
 these rules : 
 
 (1) When a railroad mortgagee asks a court of chancery to appoint 
 a receiver of railroad property pending foreclosure proceedings the 
 mortgagee is asking for a favor and not a right ; and therefore the court 
 may provide, as a condition upon which the appointment is made, that 
 outstanding debts for labor, supplies, equipment or permanent improve- 
 ments of the mortgaged property shall be paid out of the income 
 earned during the receivership (p. 253). 
 
 (2) If no such provision is made when the receiver is appointed, and 
 it appears in the progress of the case that earnings which ought to have 
 been employed to pay debts for labor, supplies and the like had been 
 used to pay bonded interest or to provide additional equipment or 
 
 1 Rhode Island Locomotive Works v. Continental Trust Co,, 108 Fed., 5, 7 ; 
 1900 ; C. C. A., 6th Circuit. 
 
 2 Penn. Steel Co. v. N. Y. City Ry. Co., 216 Fed., 458, 472 ; 1914 ; C. C. A., 
 2d Circuit. St. Louis Trust Co. v. Riley, 70 Fed. 32 ; 1895 ; C. C. A., 8th Circuit. 
 
120 FORECLOSURE OF RAILROAD MORTGAGES 
 
 permanent improvements, the court has power to use the income of the 
 receivership to pay debts which but for the diversion of the income 
 would have been paid in the ordinary course of business (p. 253). 
 
 (3) If income of the receivership which would otherwise be applied 
 to the payment of debts for current expenses, i.e. under the provisions 
 of rules (1) and (2), is used during the receivership to make permanent 
 improvements, to the extent to which this is done the proceeds of the 
 sale of the mortgaged property may be used to pay off such debts. 
 " The same may sometimes be true in respect to expenditures before 
 the receivership" (p. 254). 
 
 The theory upon which the court based these rules was that 
 daily and monthly earnings ordinarily should go to pay daily 
 and monthly expenses ; and when these earnings are used to pay 
 bonded interest or make permanent improvements for the better- 
 ment of the mortgaged property, they are diverted from those 
 to whom in equity they belong to the benefit of the mortgage 
 creditors. 
 
 It will be noted that these rules did not authorize the court 
 to apply the earnings of the receivership to current debts unless 
 
 (a) the order was made as a condition to the appointment of a 
 receiver, or 
 
 (6) there was a diversion before the receivership of current earnings 
 from the payment of current debts to the benefit of the bondholders. 
 
 These limitations were removed in Burnham v. Bowen, 111 
 U. S., 776, 1884. In that case, a foreclosure suit, no provision 
 was made in the order appointing the receiver for the payment 
 of current debts ; and there was no proof of any diversion by the 
 company of current earnings. The court nevertheless held that 
 current debts were a charge on the income earned during 
 the receivership, saying that when, in enforcing the rights of 
 mortgage creditors, a court of chancery took possession of a 
 mortgaged railroad, it ought to do what the company would 
 have been bound to do if it had remained in possession, 
 namely, pay out of what the court receives from earnings all 
 the debts which in equity and good conscience are chargeable 
 
FORECLOSURE OF RAILROAD MORTGAGES 121 
 
 upon such earnings; "debts of the income should be paid 
 from the income before it is applied in any way to the use 
 of the mortgagees." 
 
 Rule 2 of Fosdick v. Schall as modified by the holding in 
 Burnham v. Bowen therefore may be stated thus : the court has 
 power at any time to use the income of the receivership to pay 
 current debts of the railroad company. 
 
 Upon the theory which underlies Rule 1 in Fosdick v. Schall, 
 some judges considered it proper to make it a condition of the 
 order appointing a receiver of a railroad that substantially all 
 unsecured debts should be paid preferentially out of the income 
 of the receivership or even out of the mortgaged property. 
 This practice .was condemned in Kneeland v. American Loan 
 Company, 136 U. S., 89, 1890, the court saying (see page 97), 
 "when a court appoints a receiver of railroad property it 
 has no right to make that receivership conditional on the 
 payment of other than those few unsecured claims which, 
 by the rulings of this court, have been declared to have an 
 equitable priority." 
 
 The effect of this decision was to take from the court the 
 right to give any preference in an order appointing a receiver 
 which it had not the right to give at any time during the 
 receivership. 
 
 Rule 3 of Fosdick v. Schall has been carried to its fullest 
 extent. The diversion which entitles the holder of a current 
 debt to a preference out of the corpus may be diversion of the 
 income of the receivership or of the company for a limited period 
 before receivers were appointed; * and under Southern Railway v. 
 Carnegie Steel Company, 176 U. S., 257, 1900, the term diver- 
 sion covers not only income spent for permanent improve- 
 ments, but for the payment of charges upon the mortgaged 
 property and for other purposes beneficial to the mortgagee. 
 
 1 Virginia & Alabama Coal Co. v. Central R. & B. Co., 170 U. S. 365 ; 1898. 
 International Trust Co. v. Townsend Co., 95 Fed. 850 ; 1899. Rhode Island Loco- 
 motive Works v. Continental Trust Co., 108 Fed. 5 ; 1900. 
 
122 FORECLOSURE OF RAILROAD MORTGAGES 
 
 In that case the court held that payment of interest on under- 
 lying bonds and bonds of lessor roads was a diversion, al- 
 though in St. Louis, etc., R. R. Co. v. Cleveland, etc., R. Co., 125 
 U. S., 658, 1888, it had held that payment of interest on a 
 prior mortgage was not. 
 
 Some current debts are entitled to a preference out of the 
 corpus, although there has been no diversion of income. 
 
 In Gregg v. Metropolitan Trust Co., 197 U. S., 183, 1905, the 
 Court refused such a preference to a claim for cross ties essential 
 to the replacement of ties decayed in current operation of the 
 railroad, saying that claims for supplies essential to the preserva- 
 tion of the road were not entitled to such a preference, but only 
 claims the payment of which was "necessary to the business 
 of the road." As instances of these the court referred to the 
 claims which were given a preference out of the corpus in Mil- 
 tenberger v. Logansport Ry. Co., 106 U. S., 286, 1882 : debts to 
 connecting lines of road for materials, repairs, and unpaid 
 ticket and freight balances, and debts to operatives for 
 wages. In that case, the court said that, unless wages were 
 paid, the operatives might stop work to the injury both of the 
 property and of the public ; and if the amounts due to connect- 
 ing railroads were not paid, they might refuse to continue busi- 
 ness relations with the insolvent railroad company and its 
 receiver. 
 
 Three judges dissented in the Gregg case, saying that the 
 correct test of the right to priority out of the corpus is whether 
 or not the indebtedness is for something essential to keep the 
 railroad in operation; "that as the road from its nature and 
 public responsibilities must be kept a going concern, whatever 
 is furnished for that purpose must be paid regardless of 
 whether there is income or whether there has been diversion 
 of income." 
 
 The rules as followed by the courts to-day may be stated 
 thus: 
 
FORECLOSURE OF RAILROAD MORTGAGES 123 
 
 1. Any current debt is entitled to a preference 
 
 (a) out of the income of the receivership, regardless of whether there 
 is any diversion of income before or after the receivership, and 
 
 (6) out of the corpus of the mortgaged property to the extent that 
 there has been diversion of income during the receivership or for a 
 limited time before the receivership. 
 
 2. A current debt the payment of which is necessary to the busi- 
 ness of the road is entitled to a preference out of the corpus of the prop- 
 erty whether or not there has been diversion of income at any time 
 before or during the receivership. 
 
 The preference to which the holder of a current debt may 
 be entitled is not confined to the property of the company 
 with which the creditor contracted. Thus if the lessee of 
 the property of a company buys supplies to be used upon the 
 property of the lessor company, the creditor is entitled to 
 priority of payment out of income or corpus, as the case may 
 be, of the lessor company. 1 
 
 In one case 2 it has been held that claims of current creditors 
 are to be preferred only over mortgage creditors and not over 
 general creditors. In the New York City Railway litigation 
 the master, the circuit judge and the circuit court of appeals 
 declined to follow this ruling. There was no mortgage by the 
 City Company and the receiver of the City Company had in 
 his hands a large amount of assets on which there were no liens, 
 unless a lien attached for current debts. The question was 
 whether the holders of current debts were entitled to any prefer- 
 ence, and if so, to what extent. Judge Lacombe held, and his 
 ruling was affirmed by the Circuit Court of Appeals, that cur- 
 rent debts were entitled to preferred payment over general debts, 
 and out of any assets whether corpus or income, as in his 
 opinion it is only where a creditor is asking to displace a lien that 
 it is necessary to go into the question of diversion of income. 3 
 
 1 Virginia and Alabama Coal Company v. Central Railroad Company, 170 U. S., 
 355 ; 1898. 
 
 8 Whelan v. Enterprise Transportation Company, 175 Fed., 212, 1909. 
 
 3 Pennsylvania Steel Company v. New York City Railway Company, 208 Fed., 
 168, 182-3, 1913 ; aff. 216 Fed., 458, 471, 1914. 
 
124 FORECLOSURE OF RAILROAD MORTGAGES 
 
 Preferred claims are often spoken of as six months' claims. 
 Mr. Justice Holmes uses this term in Gregg v. Metropolitan Trust 
 Company. Under the decisions, however, all the meaning that 
 can be given to those words is that the claim must not be very 
 old. In Southern Railway v. Carnegie Steel Company, 176 U. S., 
 257, 1900, the court said that while a rule limiting the claims to 
 those accruing within six months did justice in most cases, there 
 was no absolute rule on the subject and older claims might 
 under the circumstances of particular cases be included among 
 preferred claims. 
 
 In the Carnegie Steel Company case it appears, page 272, 
 that interest was allowed upon the entire claim by the lower 
 courts and the order appealed from was affirmed by the United 
 States Supreme Court. This was followed in Penn. Steel Co. v. 
 N. Y. City Ry. Co., 216 Fed., 458, 471 ; 1914. The court dis- 
 cussed Thomas v. Railroad Company, 149 U. S., 95, 1893, which 
 has often been supposed and justly to hold that interest on 
 all claims ceased from the time of the appointment of a receiver ; 
 and said that that ruling did not apply where the fund was 
 large enough to pay principal and interest of all claims of any 
 given class entitled to a preference out of the fund. This prin- 
 ciple, the court said, was settled by American Iron Company v. 
 Seaboard Air Line Railway Company, 233 U. S., 261 ; 1914. 
 
 The principles which govern the right to intervene in a fore- 
 closure suit are simple and easily applied. But one who ap- 
 proaches the subject for the first time may easily be confused 
 or even misled by general statements in the cases and textbooks 
 which are true only as to some kinds of interventions and are 
 untrue as to other kinds. An inference may be drawn from 
 such statements that permission to intervene is difficult to get ; 
 that the consent of the plaintiff is in general a prerequisite; 
 and that the cases are in hopeless confusion as to the right to 
 intervene of one with a paramount title by which I mean a 
 right antagonistic or superior to that of one or both of the 
 
FORECLOSURE OF RAILROAD MORTGAGES 125 
 
 parties ; but nothing can be more erroneous. In practice a 
 petition to intervene, if it makes anything of a case, is nearly 
 always granted; the consent of a plaintiff is seldom a pre- 
 requisite ; and the right to intervene pro interesse suo is granted 
 to a petitioner asserting a paramount title almost as a matter 
 of course. 
 
 A few illustrations may make clear the different sorts of in- 
 terventions that are usual in foreclosure suits and the different 
 principles applicable to them. 
 
 A company mortgages its railroad to a trustee for bondholders 
 subject to all rights and equities which exist in favor of A against 
 the company. Upon default the trustee brings suit to foreclose 
 the mortgage making the railroad company the sole defendant. 
 A petitions to be allowed to intervene and become a party defend- 
 ant, in order that the question of what his rights are may be ad- 
 judged and the decree may direct that the entire property of the 
 railroad be sold subject to his rights as adjudged by the decree ; 
 or that it be sold free and clear of all those rights, a certain 
 amount of the purchase price to go to A. The position the 
 trustee takes upon such a petition depends on whether he thinks 
 it more important to get the best possible price at the sale or 
 to get a speedy decree. The trustee may say: "The railroad 
 will bring a better price if the purchaser knows exactly what 
 he is getting, either a property free from all incumbrances or 
 with an incumbrance in favor of A, the exact limits of which 
 the decree defines ; such a decree can only be made if the prayer 
 of the petition be granted and therefore I consent that A be 
 made a party defendant." Upon that consent the court will 
 always allow A to intervene and become a party defendant. 
 On the other hand, the trustee may say : " I am in a great hurry 
 to get a decree ; the bondholders expect to buy in the railroad 
 at foreclosure sale and reorganize the property; they have 
 agreed' on a plan or reorganization and bankers are ready to 
 take bonds of the reorganized company; to try out the ques- 
 tion of what the rights of A are, or whether he has any, may 
 
126 FORECLOSURE OF RAILROAD MORTGAGES 
 
 take a year or more, and by the time the matter is decided, times 
 may be bad and the reorganization impossible ; the bondholders 
 are quite ready to take the title subject to the rights of A ; and 
 he should be left to fight out later with the reorganized com- 
 pany what those rights are." On this statement the court 
 might very well say to the petitioner: "As long as the com- 
 plainant objects, I ought not to delay him in getting the sort 
 of a decree he is willing to take ; you are not deprived of any 
 rights by not being allowed to become a party defendant, and, 
 although I would make the order you ask if the plaintiff were 
 willing, in the face of his opposition I must deny your petition." 
 That is the sort of case the court was referring to in French v. 
 Gapen, 105 U. S., 509, 1881, when it said at page 525 : 
 
 "But while the petitioners were not in fact parties, they might 
 with propriety have been made such, and there cannot be a doubt 
 that if they had intervened before the decree of sale, and asked to be 
 made defendants, it would have been within the power of the court, 
 with the consent of the complainants to take them in." 
 
 But suppose A says to the court : " I am in a hurry too. I 
 ought not to be compelled to wait till this litigation is over, but 
 the order of the court does compel me to wait. For this court 
 has exclusive jurisdiction over the railroad and you refuse to 
 let me enforce my rights against it here by denying my petition 
 to be allowed to intervene and become a party defendant." 
 
 The court would answer : " Not at all. I deny you leave to 
 intervene and become a party. I do not deny you permission 
 to enforce your rights in this court. I give you permission now 
 to intervene pro interesse suo. Under that sort of an interven- 
 tion you do not become a party complainant or defendant to 
 the main suit. You get no right to be heard on the issues in- 
 volved in that suit. File a petition setting up the facts as to 
 your rights. I will order any party to the suit who thinks he 
 may be affected by your claim to move to dismiss your petition 
 or answer within a limited time. If there is a motion to dismiss 
 I will pass on the motion promptly myself. If there is an 
 
FORECLOSURE OF RAILROAD MORTGAGES 127 
 
 answer, I will refer it to the master and you may bring on the 
 master's report for a hearing as soon as you and the other side 
 are ready." 
 
 So whether one may be permitted to intervene or not depends 
 upon the sort of an intervention prayed for. An intervention 
 of one with a paramount title for the purpose of becoming a 
 party defendant is usually denied if the complainant objects; 
 for the purpose of protecting one's interest pro interesse suo, 
 -is usually granted, regardless of whether complainant con- 
 sents or opposes, unless it complicates the main suit and it is 
 perfectly clear that the petitioner's rights can be completely 
 protected in some other way. The principle is plain enough : 
 a complainant ought not, without his consent, to be involved 
 in controversies with a stranger which will delay the enforce- 
 ment of his rights, nor ought he, by refusing his consent, to be 
 able to delay the stranger in the enforcement of the stranger's 
 rights. 
 
 In foreclosure suits the sort of intervention which the court 
 refuses to allow if complainant objects is in practice not com- 
 mon. Where there is such a case the complainant is often quite 
 as willing as the petitioner to have the prayer granted. 
 
 The intervention pro interesse suo is the most common of 
 all. 1 
 
 A third kind of intervention is common also : someone who 
 is represented by a party to the record a bondholder by the 
 trustees of the mortgage, a stockholder or a general creditor by 
 the railroad company asks to be allowed to intervene and be- 
 come a party plaintiff or defendant, as the case may be. As 
 he is already represented what facts must he show to succeed ? 
 Clearly, that his representative is not doing his duty or by 
 reason of conflicting interests is not in a position to do his duty. 
 About the principle governing these applications there is no 
 
 1 The development of the petition pro interesse suo from the examination 
 pro interesse suo and of the "dependent" bill from the petition pro interesse suo 
 is traced in Krippe ndorf v. Hyde, 110 U. S. 276, 1884. 
 
128 FORECLOSURE OF RAILROAD MORTGAGES 
 
 conflict. The only question is one of fact is the representa- 
 tive, already a party to the suit, failing in the performance of 
 his duty ; is his position such that he must in all probability 
 fail? If so, the applicant is allowed to intervene and become 
 a party plaintiff or defendant ; if not, the application is denied. 
 Thus Judge Taf t said : " The refusal of the board of directors 
 to make a valid and equitable defense to the foreclosure of the 
 mortgage and a sale of all of the franchises and property belong- 
 ing to the road when the existence of such a defense is brought 
 to their knowledge would of itself constitute such gross neglect 
 or fraud on their part as to require the court to permit their 
 interested cestuis que tnistent, the stockholders, to make the de- 
 fense themselves." 1 In a case 2 where one trust company was 
 trustee under three different mortgages and brought one suit to 
 foreclose all three, bondholders under the second and third 
 mortgages were permitted to intervene as defendants ; the court 
 saying " it is manifestly impossible for the trustee to fairly rep- 
 resent both sides in the resulting controversies except by assum- 
 ing such a position of neutrality as would seriously affect the 
 force with which such conflicting interests are to be presented 
 for the consideration of the court. 5 ' 
 
 The court may allow a person claiming some or all of the 
 property in its possession to proceed by an action at law or by 
 intervening petition or in a proper case by bill. Where the 
 court allows the claimants to proceed by intervention in the 
 suit, if the intervention is based on a legal cause of action it 
 may be submitted on proper issues to a jury. In such a case 
 the verdict is advisory and may be disregarded by the court 
 in whole or in part. 3 The usual method, however, even where 
 the claim is a legal one, of disposing of an intervention, is by 
 reference to a master. 
 
 1 Farmers' Loan & Trust Co. v. Toledo, A. A. & N. M. Ry. Co., 67 Fed., 49; 
 1895. 
 
 Fanners' Loan & Trust Co. v. Northern Pacific R. Co., 70 Fed., 423 ; 1895. 
 
 Kohn v. McNulta, 147 U. S., 238 ; 1893. Clyde v. Richmond & D. R. Co., 72 
 Fed. 121 ; 1896 ; C. C. A., 4th Circuit. 
 
FORECLOSURE OF RAILROAD MORTGAGES 129 
 
 It is sometimes said that to proceed by intervention is more 
 expeditious than by bill. This is probably so in matters of 
 minor importance ; but not so in a matter like the foreclosure 
 of a mortgage covering a substantial part of a railroad. At any 
 rate, the fact that trustees of mortgages always prefer to pro- 
 ceed by bill shows that this is their opinion. The reason in 
 their mind is that everything is more clearly defined about a 
 suit to foreclose than an intervention for that purpose. The 
 parties to the foreclosure suit are those named in the bill and 
 such others as the court makes parties by order; the parties 
 to the creditor's bill are not from that fact parties to the fore- 
 closure bill, even after an order is made consolidating the two 
 suits. On the other hand, while it may be that the court has 
 the right to confine the defense to a foreclosure by intervening 
 petition to such parties as would be necessary parties to a bill, 
 it is generally assumed that all parties to the main suit have 
 a right to defend. Every party to the suit in which the in- 
 tervening petition is filed is bound to take notice of every 
 intervention. 1 
 
 In what cases, if any, does an appeal lie from an order deny- 
 ing or granting a motion to intervene ? 
 
 In the federal courts "an appeal, as a general rule, lies only 
 from a final decree." 2 But there may be many final decrees, 
 for the purposes of appeal, in an equity suit. Every decree is 
 a final decree which disposes finally of someone's claim. In 
 Central Trust Co. v. Grant Locomotive Works, 135 U. S., 207, 1890, 
 the Court gives several illustrations of such final decrees : an 
 order for the allowance of costs and expenses to a complainant 
 suing on behalf of a trust fund, a decree in a foreclosure suit 
 fixing the compensation to be paid to the trustees of the 
 
 1 McLeod v. City of New Albany, 66 Fed., 378, 381 ; 1895 ; C. C. A., 7th 
 Circuit, "Being parties to the suit, they were in fact parties to the intervening 
 petition." Central Trust Company v. Madden, 70 Fed., 451 ; 1895 ; C. C. A., 
 4th Circuit. 
 
 2 U. S. Fidelity Co. v. Bray, 225 U. S., 205, 214 ; 1914. McLish v. Roff, 141 
 U. S., 661 ; 1891. 
 
 K 
 
130 FORECLOSURE OF RAILROAD MORTGAGES 
 
 mortgage, a decree upon an intervening petition in respect 
 to cars used by a railroad company under a contract with the 
 manufacturers. 
 
 Plainly an order granting a motion to intervene is not a final 
 disposition of the claim of an intervenor, and therefore from it 
 an appeal never lies. 
 
 The question of the appealability of orders denying motions 
 to intervene is not so easily disposed of. Ex parte Cutting, 
 94 U. S., 14, 1876, held that an appeal did not lie from an 
 order refusing stockholders leave to intervene and to become 
 parties to a foreclosure suit, the court saying, "that was only 
 a motion in the cause and not an independent suit in equity 
 appealable here." By an "independent suit" the court doubt- 
 less meant what is described in Williams v. Morgan, 111 U. S., 
 684, 1884, at 699, as "a matter distinct from the general sub- 
 ject of the litigation a matter by itself which affected only 
 the parties to the particular controversy and those whom they 
 represented." The court also said in Exparte Cutting that such 
 an application "is always addressed to the sound judicial dis- 
 cretion of the court." In Credits Commutation Company v. 
 U. S., 177 U. S., 311, 1900, the facts were that a company 
 claiming to have the right to connect its tracks when completed 
 with those of a railroad company, against which suits were pend- 
 ing to foreclose a mortgage, petitioned to be allowed to inter- 
 vene in those suits; the lower court denied the application; 
 the Circuit Court of Appeals held that there was no right 
 of appeal; and the Supreme Court sustained the Court of 
 Appeals. The Supreme Court said the petitioner had a good 
 remedy by independent suit ; therefore the order was not final 
 and was discretionary ; only where the denial of the petition to 
 intervene is a practical denial of relief to which the intervenor 
 is fairly entitled and which he can only obtain by intervention 
 is the order of denial final and therefore appealable. " Cases of 
 this sort," says the court, "are those where there is a fund in 
 court undergoing administration to which a third party asserts 
 
FORECLOSURE OF RAILROAD MORTGAGES 131 
 
 some right which will be lost in the event that he is not allowed 
 to intervene before the fund is dissipated." 
 
 It would seem to follow from these opinions that 
 
 (1) orders denying the right to intervene and to become a 
 party complainant or defendant, whether to enforce a paramount 
 right or to protect rights which it is alleged that the party to the 
 record representing the petitioner has failed properly to protect, 
 are not appealable, and 
 
 (2) orders denying a petition to intervene pro interesse suo 
 are sometimes appealable and sometimes not, the test being 
 whether or not the petitioner has any other remedy that is of 
 real value. 
 
 But (1) cannot be considered as an accepted rule in view 
 of a decision of the Circuit Court of Appeals for the Second 
 Circuit. 1 The suit was to foreclose a collateral trust mort- 
 gage. A bondholder petitioned to be allowed to intervene as a 
 party defendant, not for the purpose of setting up any defense 
 to the mortgage, but for the purpose of objecting to the manner 
 in which the sale was to be made. The bondholder alleged that 
 the trustee was not properly representing him and other bond- 
 holders who had not deposited their bonds under a plan of re- 
 organization with a bondholders' committee, of which the presi- 
 dent of the trustee was a member. On an appeal from an order 
 denying the petition of the bondholder the order was reversed 
 and the petition granted. The court was of the opinion that the 
 subject matter of the mortgage might, after sale, be scattered 
 so as to make an independent action by the bondholder to set 
 aside the sale of no practical value. 
 
 I turn now from these incidents of the foreclosure suit to the 
 suit itself what is being done, while the rights of preferred 
 
 1 Central Trust Co. v. Chicago, R. I. & P. R. Co., 218 Fed., 336, 1914, C. C. A., 
 2d Circuit. See Investment Registry v. Chicago & Milwaukee Electric Ry. Co., 
 213 Fed., 492, 1914. 
 
132 FORECLOSURE OF RAILROAD MORTGAGES 
 
 creditors and intervenors are being adjudicated, toward the ac- 
 complishment of its purposes : the foreclosure of the mortgage 
 and the sale of the mortgaged property? 
 
 Often, for a long time, nothing. Intervenors may be claim- 
 ing to own valuable portions of the terminals of the company 
 or of its line; persons may be claiming preferences for large 
 amounts; and the trustee and the bondholders may deem it 
 essential to have these questions settled before a sale of the 
 property is ordered. Or the railroad may have been kept out of 
 the hands of receivers too long, and in the struggle of the rail- 
 road company to meet its obligations out of insufficient earnings, 
 its equipment may have become inadequate and its roadbed un- 
 safe. With the railroad in the possession of the court earnings 
 formerly used for interest and moneys borrowed on receivers* 
 certificates may be devoted to the improvement of the property. 
 Bondholders and stockholders alike may wish to see such ex- 
 penditures continue for a year or two in order to find out what 
 the railroad is capable of under favorable financial conditions. 
 For these and other reasons no one, it may be, concerns himself 
 with thoughts of foreclosure and sale. In such circumstances 
 not infrequently the railroad company fails to answer the bill ; 
 and the complainant nevertheless takes no step to enter a decree. 
 It is usually well, however, for the trustee of the mortgage, if 
 the railroad company defaults in pleading, to enter a decree pro 
 confesso at the earliest opportunity. There is no legal reason 
 why a creditor or stockholder should be allowed to intervene 
 in order to defend in behalf of the railroad company on any less 
 complete showing of a good defense before decree than after; 
 as a matter of fact, however, when it is a question of opening a 
 default the rule that such a showing must be made seems to be 
 applied with more strictness, and it is easy for the court to say 
 to a bondholder, as Judge Lurton did in Central Trust Company 
 v. Cincinnati, H. & D. Railway Company, 169 Fed., 466, 1908, 
 where the holders of $2,000,000 of bonds petitioned for leave to 
 intervene and become defendants and to file an answer and 
 
FORECLOSURE OF RAILROAD MORTGAGES 133 
 
 cross bill for the purpose of having it declared that practically 
 all the remaining bonds of the same issue, some $15,000,000, 
 were invalid : 
 
 "It is not necessary before a decree for sale under such a railway 
 mortgage that the validity or ownership of every bond secured by it shall 
 be first determined. . . . The mortgagor company makes no defense 
 and a decree pro confesso has been taken long since. . . . There exists, 
 then, all that is necessary for a decree nisi. It is undoubtedly proper 
 practice, if not always essential, that such a decree nisi shall definitely 
 disclose the nature of the default and the amount of principal and 
 interest due as a consequence. This is to fix the amount which the 
 mortgagor must pay in to prevent a sale, for it is necessary that a 
 reasonable time be allowed for such redemption, for otherwise a valu- 
 able right of the mortgagor may be destroyed. But in order to de- 
 clare and determine the amount of bonds due and outstanding and the 
 amount of interest due and unpaid, it is not essential that the bonds 
 and coupons shall be produced and proved. The necessary declara- 
 tion of the amount to be paid in order that the mortgagor may redeem 
 is not regarded as final or conclusive upon the point of the amount 
 of the debt, for it is well settled that any holder of such bonds who 
 presents them for a dividend out of the proceeds of sale may challenge 
 the claim of any other when the allowance will diminish his own share 
 in the fund. . . . Indeed it is proper in any such decree to require 
 that all holders of bonds shall present them to a special master and 
 that all persons claiming a right to share in the proceeds of sale shall 
 have the right to challenge the right of anyone presenting a bond to 
 the special master for such purpose." 
 
 But if a decree had not been entered the court might well 
 have hesitated before denying the petitioners the right to have 
 it settled before the foreclosure sale whether the total amount 
 of valid bonds was two million dollars or seventeen million. 
 Great harm may be done to a bondholder if it is not decided 
 before the sale what bonds are valid and what invalid. Let us 
 suppose, for instance, that in the case from which I have just 
 quoted, the mortgaged property was actually worth one million 
 dollars, and that in all probability the property in a few years 
 would be worth two million dollars. The petitioners owning 
 the two million dollars of bonds might be willing to buy it in 
 
134 FORECLOSURE OF RAILROAD MORTGAGES 
 
 for that amount, if their bonds were the only valid ones, for in 
 that event all the cash they would need as purchasers would 
 be an amount for expenses, allowances, and so on, as they 
 could make payment of the rest of the purchase price by credit- 
 ing the amount of it on their bonds. Or if they did not care 
 to buy the property but wished merely to get as much cash as 
 possible for their bonds, they could bid up to a million dollars 
 and let the property go at that figure to some other bidder and 
 receive from the proceeds of the sale a dividend of approxi- 
 mately fifty per cent. 
 
 If, however, it is unsettled at the time of the sale, whether 
 the other fifteen million dollars of bonds are valid or not, the 
 holders of the two million dollars of bonds cannot bid without 
 running the risk of ultimately being held liable to pay fifteen- 
 seventeenths of their bid in cash. This means that the holders of 
 the two million dollars of bonds are practically deprived not only 
 of their right to take a chance of getting payment in full in a few 
 years, but of a certainty of getting a dividend of fifty per cent 
 in cash at once, for against a committee representing holders 
 of the fifteen million dollars of bonds, the holders of the two 
 million dollars of bonds will not dare to bid even one million 
 dollars, still less two million, with the possibility that they may 
 be called upon to pay most of the bid in cash ; nor will any out- 
 side purchaser appear at the sale because everyone knows the 
 committee will outbid everyone else. The committee will con- 
 sequently be able to bid in the property at less than its value 
 say five hundred thousand dollars, so that even if the two million 
 dollars of bonds are ultimately held to be the only valid ones, 
 the holder will receive a dividend of less than twenty-five per 
 cent. Nor can this injustice to the minority bondholders be 
 remedied by fixing a price in the decree below which the property 
 shall not be sold, for such an upset price could hardly be greater 
 than one million dollars, the value of the property ; and even 
 if it were fixed and obtained the minority holders would have 
 lost the chance of making the face of their bonds by buying in 
 
FORECLOSURE OF RAILROAD MORTGAGES 135 
 
 the property. Moreover, fixing an upset price and getting it 
 are two different things. If no one bid the amount fixed the 
 court would have to reduce it. 
 
 It is only in a limited number of cases such as where the 
 mortgage and the bonds are absolutely void under some con- 
 stitutional or statutory provision, or the bonds have been fraud- 
 ulently issued and are in the hands of the original holders that 
 there is a real defense to a foreclosure suit; for where the 
 power to make the mortgage or the bonds exists, defects in the 
 mode of executing the power such as irregularities in calling 
 meetings of stockholders to authorize the mortgage or the bonds, 
 or even complete failure to hold such meetings, are waived by 
 payment of interest for several years 1 and other acts of ratifica- 
 tion and acquiescence. 
 
 The railroad company frequently neither defaults nor puts 
 in an answer, but gets from the trustee extensions of time to 
 answer; stockholders and general creditors having notified it 
 that unless the opportunity to put in a defense is kept open 
 until a plan of reorganization satisfactory to them is proposed 
 by the bondholders, they will ask to be allowed to intervene 
 on the ground that the railroad company is in collusion with 
 the trustee in not setting up some alleged defense. Sometimes 
 a plan satisfactory to all parties is soon agreed upon and a decree 
 is entered without opposition; sometimes the bondholders, 
 general creditors and stockholders are obstinate, a change is 
 made in the directors of the railroad company, or stockholders 
 are allowed to intervene, and an answer is filed attacking the 
 validity of the mortgage or the bonds. Evidence is taken ; and 
 negotiations continue. Finally the parties interested get closer 
 together ; the times are favorable for launching the reorganized 
 company, selling bonds to raise money for the improvement of 
 the property, and so on, or there is fear that bad times are 
 
 1 Farmers' Loan & Trust Co. v. Toledo, A. A. & N. M. R. Co., 67 Fed., 49, 
 at p. 59 ; 1895. 
 
136 FORECLOSURE OF RAILROAD MORTGAGES 
 
 approaching, and everyone is anxious to end the litigation and 
 get the property out of the courts ; the bondholders raise their 
 offer to the stockholders, the stockholders lower their demands, 
 and all come to an agreement; enough additional evidence is 
 added to justify a decree ; and the decree is entered. 
 
 All that is necessary for a decree is to prove that the mort- 
 gage was executed and delivered and that the bonds were 
 executed and certified and are outstanding. Ordinarily, the 
 method of proof is as follows : the mortgage is produced from 
 the files of the trustee ; then the secretary of the railroad com- 
 pany and the secretary of the trustee or their respective assist- 
 ants and someone who presented coupons and made demands 
 for payment of interest and of principal are called as witnesses : 
 by them it is proved that the signatures and the seal of the 
 company are genuine ; that the mortgage was recorded in vari- 
 ous states and counties, the fact usually appearing from the 
 endorsements on it ; that meetings of stockholders and directors 
 were held and at them resolutions, which are put in evidence, 
 were adopted authorizing the mortgage and the bonds; that 
 bonds to a certain amount were executed by the company, cer- 
 tified by the trustee, and issued, under the provisions of the 
 mortgage, to take up other bonds of the company or to pay 
 debts or to raise money; that interest was paid on them for 
 several years ; that they appeared as outstanding liabilities in 
 the annual reports sent to the stockholders of the company; 
 that default was made in the payment of interest after demand 
 and subsequently the principal was declared due by the trustee 
 and default was made in the payment of that. 
 
 The testimony of the officials of the railroad and the trustee 
 are frequently to what they know only from the records of their 
 offices, the records themselves being presented for inspection. 
 It is not necessary to produce the bonds themselves or to prove 
 who the owners are; all that being reserved for the hearing 
 before the master on the distribution of the proceeds of sale, 
 when, notwithstanding by the decree of foreclosure it may have 
 
FORECLOSURE OF RAILROAD MORTGAGES 137 
 
 been adjudged that the whole issue is valid and outstanding, 
 every holder is at liberty to attack the validity of the bonds of 
 every other holder. 
 
 When there is a contest, what is the procedure? Formerly 
 almost always an order of reference was made to a master to 
 take testimony and report. The master took testimony where- 
 ever and whenever it was convenient for counsel. The new 
 rules provide that " In all trials in equity the testimony of wit- 
 nesses shall be taken orally in open court, except as otherwise 
 provided by statute or these rules," and "save in matters of 
 account a reference to a master shall be the exception, not the 
 rule, and shall be made only upon a showing that some excep- 
 tional condition requires it." Nevertheless it is likely that 
 the manner of trying a contested foreclosure suit will remain as 
 before, by a reference to a master. 
 
 Masters' reports are of two kinds : 
 
 (a) What may be called the ordinary report of a master in chancery 
 under an order of reference which the court has power to enter over the 
 opposition of any or all of the parties ; and 
 
 (6) A report made by a master under an order to hear and decide 
 all the issues in a case. Such an order of reference can be made by 
 the court only upon consent of all the parties. 1 
 
 What is the weight to be given the findings in report (a) ? 
 Statements can be found in the cases and textbooks answering 
 this question in various ways ; it is said that the report is ad- 
 visory only ; 2 that its " office is to present the case to the court 
 in such a manner that intelligent action may be there had," 3 
 and that while the findings of a master are not absolutely bind- 
 ing upon the court, there is a presumption in their favor and 
 they will not be set aside or modified in the absence of some 
 clear error or mistake. 4 A finding on a disputed question of 
 
 1 Kimberly v. Arms, 129 U. S., 512; 1889. 
 
 * Boesch v. Graff, 133 U. S., 697, 705 ; 1890. 
 
 3 North Carolina R. R. Co. v. Swasey, 23 Wall, 405, 410 ; 1874. 
 
 * Boesch v. Graff, 133 U. S., 697, 705 ; 1890. 
 
138 FORECLOSURE OF RAILROAD MORTGAGES 
 
 fact it is said will not be disregarded, unless the finding "ap- 
 pears to be palpably wrong by the most persuasive weight of 
 evidence." 1 It may, perhaps, be said that the court gives to 
 the findings in what I have called the ordinary report of a master 
 the weight that the Appellate Division of the New York Supreme 
 Court gives to the findings of a lower court in an equity case. 
 
 When the report of a master is confirmed by the court, the 
 findings are not necessarily conclusive on the court of appeals. 
 All that can be said is that the confirming of the report gives 
 the findings added weight. In a case where the court of ap- 
 peals set aside the report of a master, the court said that it was 
 not unmindful of the rule that the findings of a master concurred 
 in by the court to which they were reported were presumptively 
 correct and would be permitted to stand unless there was an 
 obvious error of law or important mistake of fact, but that a 
 master's findings have not the force of a verdict or of the report 
 of a referee, and on exceptions thereto the court must determine 
 by its own judgment the controversy presented, and on appeal 
 the court of review, of course, has the same power and respon- 
 sibility. 2 
 
 I have said that a reference to a master to hear and decide all 
 the issues can only be made on consent of all parties. When so 
 made the findings of fact are more conclusive than those in an 
 ordinary master's report; and have, what the circuit court of 
 appeals says the latter have not, the force of a verdict or of the 
 report of a referee. In a case where the order of reference made 
 by consent of parties was " to hear said causes and report to this 
 court his findings of fact and conclusions of law" the Supreme 
 Court said : 
 
 "... we think that his finding, so far as it involves questions of fact, 
 is attended by a presumption of correctness similar to that in the case 
 of a finding by a referee, the special verdict of a jury, the findings of a 
 Circuit Court in a case tried by the court under Revised Statutes, 
 
 1 Fordyce v. R. R. Co., 145 Fed., 544, 557; 1906. 
 
 2 Bosworth v. Hook, 77 Fed., 686 ; 1897. 
 
FORECLOSURE OF RAILROAD MORTGAGES 139 
 
 Section 649, or in an admiralty cause appealed to this court. In neither 
 of these cases is the finding absolutely conclusive, as if there be no testi- 
 mony tending to support it ; but so far as it depends upon conflicting 
 testimony, or upon the credibility of witnesses, or so far as there is any 
 testimony consistent with the finding, it must be treated as unassail- 
 able." l 
 
 Out of a creditor's bill or of a bill to foreclose a mortgage 
 other suits may arise before the entering of a decree of sale. 
 There may be several mortgages of the same railroad company 
 in default, two divisional mortgages and a general mortgage 
 covering the entire property of the railroad company. Each 
 divisional mortgagee may claim priority of lien upon some par- 
 ticular portion of the road. If one of the divisional mortgagees 
 is the first to begin a foreclosure suit, it makes the other divi- 
 sional mortgagee and the general mortgagee parties defendant. 
 If either of these defendants wishes to foreclose its mortgage it 
 files what used to be called a cross bill and is now or perhaps 
 it is safer to say may be under equity rules 30, and 31, a 
 set-off or counter-claim. A cross bill is a bill filed by a party 
 defendant to an original bill against some or all of the other 
 parties to the bill. Defendants to the original bill may be resi- 
 dents of the same state and in the cross bill be on opposite 
 sides; the federal court nevertheless has jurisdiction. Shields 
 v. Barrow, 17 How., 129, 145, 1854, is a leading case to the effect 
 that no new party may be brought in by cross bill, the reason 
 given being that to allow it would open the door for the indefinite 
 extension of the jurisdiction of the federal courts. This reason 
 seems to have no application to cross bills in cases where the 
 court has possession of the property, because that mere fact ex- 
 tends the jurisdiction to all suits for the possession or control of 
 the property. In practice it has not been uncommon to bring 
 in without objection new parties as defendants to cross bills. 
 
 We now come to the decree. 
 
 In the preparation of a decree which is to be entered both in 
 
 1 Davis v. Schwartz, 155 U. S., 631 ; 1895. 
 
140 FORECLOSURE OF RAILROAD MORTGAGES 
 
 the creditor's suit and the foreclosure suit, it is necessary to have 
 in mind the disposition of three funds : 
 
 1. the moneys in the hands of the receiver; 
 
 2. the proceeds of the sale of the mortgaged property and, if more 
 than one mortgage is being foreclosed, the proceeds of the properties 
 covered by the respective mortgages, and 
 
 3. the proceeds of the unmortgaged properties ; 
 
 and the rights and obligations of the following persons or sets 
 of persons : 
 
 1. the trustee of the mortgage; 
 
 2. bondholders; 
 
 3. receivers; 
 
 4. holders of receivers' certificates and other creditors of the re- 
 ceivers ; 
 
 5. intervenors; 
 
 6. preferred creditors ; 
 
 7. other creditors ; 
 
 8. the railroad company ; 
 
 9. the purchaser. 
 
 If the decree says nothing about the earnings in the hands 
 of the receiver they do not pass to the purchaser, but are dis- 
 tributable, so far as they are not applied to the payment of pref- 
 erential claims, among the bondholders. Sometimes the decree 
 provides that the receivers shall turn such earnings over to the 
 purchaser. 
 
 The proceeds of the property covered by the mortgage or 
 mortgages, as the case may be, the decree gives to the bond- 
 holders entitled thereto, usually, but not always, providing, as 
 we shall see later, that there shall first be paid out of such pro- 
 ceeds the receivers' indebtedness and preferred claims. 
 
 The proceeds or property not covered by the mortgage or 
 mortgages, the decree provides shall be distributed among all 
 creditors entitled to share therein. Bondholders have the same 
 right to share as other creditors. The question whether pre- 
 ferred claims which are entitled to be paid out of the corpus 
 should be paid out of the unmortgaged property rather than 
 
FORECLOSURE OF RAILROAD MORTGAGES 141 
 
 the mortgaged, has not been much discussed ; usually no one is 
 interested in raising it, as the value of the unmortgaged property 
 is small, the amount for which the bondholders are entitled to 
 prove against the unmortgaged assets is very large in propor- 
 tion to the unsecured debts, and the bondholders and unsecured 
 creditors are parties to the same reorganization agreement. 
 
 In theory the railroad company may be able to raise the money 
 necessary to save its property from sale and therefore the decree 
 should fix the exact amount, whether due to bondholders or to 
 preferred creditors or as allowances to receivers and trustees and 
 counsel, upon payment of which the company may get its rail- 
 road out of the hands of the court. In theory too, the property 
 will bring a higher price if the decree describes with precision 
 what is to be sold and what the rights and liabilities of the pur- 
 chaser are to be than if anything is left unsettled ; therefore, in 
 order to get the most for the railroad company and its creditors, 
 the decree should be so framed as to tell intending bidders 
 exactly what they will get if they buy and exactly what respon- 
 sibility in dollars and cents they are assuming when they bid. 
 
 But in practice such precision in the decree is found to be 
 unnecessary, for the court and everyone else know that the rail- 
 road company cannot possibly get the money to pay what it 
 owes ; and they know in ninety-nine cases out of a hundred that 
 there will be only one bidder. A railroad mortgage securing 
 bonds to the amount of fifty million dollars is foreclosed in this 
 country in the same way as a mortgage for ten thousand dollars 
 on a house. The only bidder at the foreclosure sale of a house 
 is usually the owner of the mortgage. Whether he bids one 
 thousand dollars or ten thousand dollars, the amount of cash 
 which he has to pay is nearly the same : enough to cover the 
 expenses of the sale. The rest of the purchase price he pays by 
 crediting the amount of it as a payment upon the mortgage bond. 
 The bondholders, when their mortgage is about to be foreclosed, 
 endeavor to get themselves into the position of the owner of the 
 
142 FORECLOSURE OF RAILROAD MORTGAGES 
 
 mortgage on the house, a position where they can act as one 
 man. They deposit their bonds with a committee under an 
 agreement authorizing the committee, among other things, to 
 form a plan of reorganization and to purchase the property at 
 foreclosure before or after the plan has been formed or approved. 
 Before the sale a plan has been usually agreed upon with com- 
 mittees representing general creditors and stockholders, under 
 which a reorganization committee, composed of representatives 
 of all classes of creditors and stockholders, holds at the time of 
 the sale a great majority of the bonds and outstanding claims 
 and stock. If the committee represents all of the bonds it is 
 able to bid fifty million dollars as inexpensively as to bid one 
 million. If the committee has only forty-nine million dollars 
 of the outstanding fifty millions, the higher it bids the more 
 cash it will have to pay in order to provide money to pay the 
 bondholders who have not deposited their bonds the dividend 
 to which they are entitled as their share of the purchase price. 
 Usually the amount of bonds held by the committee is so large 
 in proportion to undeposited bonds that no attempt is made by 
 the holders of the latter to bid up the price at the sale and the 
 committee gets the property at what it chooses to bid ; the court 
 endeavoring to secure the holders of undeposited bonds a 
 reasonable payment by fixing an upset price. If, at the sale, 
 no one bids this price, the fact is brought to the attention of 
 the court which then lowers the upset price for the next sale. 
 
 So far, therefore, as the railroad company and its bondholders 
 and general creditors and stockholders ordinarily are concerned, 
 it is of no real importance that a theoretically perfect decree of 
 sale should be made. The railroad company is an empty shell ; 
 its bondholders, creditors and stockholders are going to be the 
 purchasers and to be, with such people as agree with them to 
 put fresh money into the property, the bondholders and stock- 
 holders of the new company which is to own the road after fore- 
 closure sale. The important thing when the parties in interest 
 are ready for a decree is not so much the form of the decree as 
 
FORECLOSURE OF RAILROAD MORTGAGES 143 
 
 the speed with which the property can be transferred from the 
 possession of the officers of the court to the possession of its 
 owners. The courts recognize the desirability of this change 
 and are willing to hasten it by entering decrees which leave 
 many things unsettled. They have held, therefore, that it is 
 not necessary to adjust all the disputed claims of original 
 parties and intervenors growing out of foreclosure proceedings 
 before ordering a sale. 1 All that is "indispensable in such a 
 decree" of foreclosure and sale 
 
 " is that there should be declared the fact, nature and extent of the 
 default which constituted the breach of the condition of the mortgage 
 and which justified the complainant in filing his bill to foreclose it and 
 the amount due on account thereof which, with any further sums 
 subsequently accruing and having become due according to the terms 
 of the security the mortgagor is required to pay within a reasonable 
 time to be fixed by the court and which if not paid a sale of the 
 mortgaged premises is directed." 2 
 
 The receiver and the holders of debts due by the receiver and 
 of preferred claims and liens of minor importance, the extent or 
 priority of which the mortgagee is contesting, are seldom con- 
 cerned with the question of whether decrees of sale are so framed 
 as to bring the highest possible price ; for they are otherwise 
 satisfactorily cared for by provisions in decrees varying accord- 
 ing to circumstances. Where the railroad is a valuable property, 
 everyone knows that claims entitled to priority of payment will 
 be paid by the new company as soon as it gets possession and 
 they can be adjusted, and often more speedily and inexpen- 
 sively than if they were dealt with in court proceedings ; and 
 therefore a provision in the decree that the purchaser shall take 
 the property subject to preferred debts, receivers' certificates, 
 allowances and the like with a reservation by the court of the 
 
 1 Alabama & G. Mfg. Co. v. Robinson, 72 Fed., 708 ; 1896. Guaranty Trust 
 Co. v. Metropolitan Street Ry. Co., 168 Fed., 937 ; 1909 ; affirmed on this point 
 177 Fed. 925; 1910. 
 
 * Chicago & Vincennes R. R. Co. v. Fosdick, 106 U. S., 47, at page 70; 
 
 1882. 
 
144 FORECLOSURE OF RAILROAD MORTGAGES 
 
 right to retake the property if payment of any claim is not 
 made promptly by the purchaser is all that is really neces- 
 sary for the protection of such claims. On the other hand, 
 where the railroad is a poor one, the courts have found that 
 after reorganization it is sometimes soon back in court with 
 preferred claims or even debts of the old receivership unpaid, 
 and, therefore, when they are doubtful about the future of a 
 property, the courts try to make the payment of receivership 
 debts and expenses and preferred claims certain, by providing 
 in the decree that an amount which they consider sufficient to 
 meet all such claims shall be paid in cash. 
 
 The courts now often leave out provisions that used to be in 
 decrees which rendered the purchaser uneasy, but were of little 
 if any practical benefit to anyone; such, for example, as the 
 requirement that the purchaser should not only take subject to 
 all the debts of the receiver and unpaid preferred claims, but 
 should personally agree to pay them. When no time was fixed 
 by the decree within which such claims had to be presented, 
 and by the order appointing receivers all sorts of claims were 
 made preferential, the purchaser did not know until the statute 
 of limitations had run what his liabilities might be. The present 
 day decree usually limits the claims to those which have been 
 already presented to the court, or which shall be presented 
 within a fixed time ; and does not require the purchaser to agree 
 to pay such claims, but merely to take the property subject to 
 their payment. Sometimes when the decree requires that the 
 purchaser shall agree to pay such claims, it provides that if the 
 purchaser assigns his bid to a new company, the liability to pay 
 on the part of the bidder shall cease and shall attach to the 
 company. 
 
 In the interest of the purchase at foreclosure sale it is now 
 always provided that the purchaser shall be allowed to defend 
 against all unsettled claims subject to which he takes the 
 property and shall have the right to appeal from decrees allow- 
 ing them. In the absence of an express provision or of some- 
 
FORECLOSURE OF RAILROAD MORTGAGES 145 
 
 thing from which such a right can be implied the purchaser has 
 no such right. 1 
 
 It is now customary also to insert in the decree clauses, the 
 effect of which is in the language of the court in Wabash Railroad 
 Company v. Adelbert College, 208 U. S., 38, 53, 1908, "to say to 
 any purchaser under it you must take this property subject to 
 all claims which this court shall hereafter adjudge to be lawful 
 and you may be assured that you will be held to pay none other, 
 and for the purpose of making this statement good, the court 
 reserves jurisdiction over the property and claims in respect 
 to it. . . ." The court said, page 55, that, except for the 
 presence of such clauses in the decree of foreclosure, under 
 Shields v. Coleman, 157 U. S., 168, 1895, the exclusive jurisdic- 
 tion of the federal court would have terminated with the receiver- 
 ship ; but, as it was, the jurisdiction of the federal court sur- 
 vived and consequently a decree of a state court made in a 
 suit, which had been begun before the suit in the federal 
 court, adjudging a lien upon the property which had been 
 sold by the federal court, must be reversed. 2 
 
 I shall end by giving a rough draft of a decree : 
 
 1. That the mortgage is a valid lien upon the railroad and 
 other property described in the decree ; that bonds to a specified 
 amount secured by the mortgage have been duly executed, 
 certified by the trustee and issued and are outstanding in the 
 hands of the public ; that default has been made by the defend- 
 ant railroad company in the payment of principal or interest 
 as the case may be, and that a specified amount is due by the 
 railroad company to the holders of the bonds and coupons. 
 
 2. That the mortgagor within twenty days, or some other 
 fixed period after entry of the decree, shall pay to the trustee 
 of the mortgage the amount found due with interest from the 
 date of the decree. 
 
 1 Swann v. Wright 1 8 Executor, 110 U. S., 590, 601 ; 1884. 
 
 2 See also Julian v. Central Trust Company, 193 U. S., 93 ; 1904. 
 
146 FORECLOSURE OF RAILROAD MORTGAGES 
 
 3. That unless such payment is made the special master 
 appointed by the decree shall sell at public sale the property 
 which is subject to the lien of the mortgage, both that de- 
 scribed in the mortgage and any other property which may 
 have been acquired during the receivership or otherwise and 
 which passes under the mortgage. In describing the property 
 the decree uses broad words, such as all the property covered 
 by the mortgage, and then adds a full description. 
 
 4. That any purchaser may turn in as part of the purchase 
 price bonds and coupons secured by the mortgage foreclosed 
 or receivers' certificates or other obligations payable ahead of 
 the bonds and coupons, and be credited with the amount which 
 would be payable thereon if the entire purchase price were paid 
 in cash ; and that the securities so turned in shall be stamped 
 so as to show payment thereon of the amount with which the 
 purchaser has been credited and shall then be returned to the 
 purchaser unless the amount of the payment is equal to the full 
 amount due thereon. 
 
 5. That the proceeds of the sale of the property shall be 
 applied : 
 
 (a) to the payment of the costs of the complainant, the receivers 
 and the trustee and their respective counsel, and their charges and 
 allowances ; 
 
 (6) to the payment of receivers' certificates and the debts of the 
 receivership generally ; 
 
 (c) to the payment of amounts due to creditors entitled to a prefer- 
 ence; 
 
 (d) to the payment of the bonds, principal and interest, or if the 
 proceeds shall be insufficient for full payment, to the payment thereof 
 ratably as far as the proceeds will go. 
 
 This last provision is varied to fit the terms of the mortgage. 
 Sometimes coupons which were due before the foreclosure suit 
 was begun are directed to be paid in full. 
 
 If the decree is solely in the foreclosure suit it usually pro- 
 vides that any surplus shall be held subject to the further order 
 
FORECLOSURE OF RAILROAD MORTGAGES 147 
 
 of the court. If the decree is a decree both in the foreclosure 
 suit and the creditor's suit it either reserves the disposition of 
 the surplus for a further decree, or it directs that the surplus 
 together with the proceeds of any unmortgaged property 
 directed to be sold, or any other moneys or property in the pos- 
 session of the receiver not covered by the mortgage shall be 
 applied, after paying an allowance to counsel for the com- 
 plainant creditor and preferential claims, to the payment of 
 all creditors entitled to share in the proceeds of unmortgaged 
 property, and that the master, before whom general creditors 
 have been directed to file their claims, shall report to the court 
 the amount of moneys so applicable and the amount of claims 
 which are entitled to share in such property. 
 
 The decree sometimes provides that an amount in cash must 
 be paid by the purchaser sufficient to pay everything which 
 the decree requires to be paid before the bonds ; but not always, 
 as those having preferential claims are often satisfied with other 
 provisions for their payment which the decree usually makes 
 and which appear later on. 
 
 6. That the purchaser as a condition of the purchase, 
 shall take subject to all pending contracts of, and all indebted- 
 ness and liabilities incurred by, the receivers, and all allow- 
 ances and expenses and preferential claims which shall not 
 be paid out of the proceeds of sale, and shall save harm- 
 less and indemnify the receivers; that in case the pur- 
 chaser after demand shall refuse to pay or discharge any 
 such obligation or perform any such contract the person holding 
 the claim may, upon ten days' notice to the purchaser or his 
 successors or assigns, file his petition to have the claim enforced 
 against the property, that the purchaser or his assigns may 
 appear and make defense to such claim, and that either party 
 may appeal from any decree, order or judgment made thereon ; 
 
 That the court retains jurisdiction for the purpose of enforc- 
 ing these provisions ; and reserves the right to retake and sell 
 
148 FORECLOSURE OF RAILROAD MORTGAGES 
 
 the property in case there shall be a failure to comply with any 
 order in regard to the performance of such a contract or pay- 
 ment of such a liability. 
 
 7. That the Master shall sell at a time to be fixed by 
 him at the request of the solicitor for the trustee or after 
 consultation with the court at a place named in accordance 
 with Section 1640, Volume I of the Compiled Statutes of the 
 United States, usually some railway station on the line of 
 the road ; and that the Master shall give notice of such sale in 
 accordance with Section 1642 by publication once a week for 
 four weeks in such newspapers as are named in the decree 
 including one printed, issued and circulating in a county 
 where some part of the railroad lies, the notice to contain a 
 brief general description of the property to be sold and place 
 of sale and a reference to the decree for a more particular de- 
 scription. Power is given to the Master to adjourn the sale by 
 announcement at the time of the sale upon consent of the solici- 
 tors for the complainant or with the approval of the court. 
 
 The decree usually fixes an upset price. 
 
 8. That any party to the cause or any holder of the bonds 
 or receivers' certificates, may purchase at the sale and hold the 
 property in his own right free from any trust or right of re- 
 demption. If the foreclosure is under one mortgage only, un- 
 less there is some very strong reason to the contrary, the Master 
 is directed to sell the property in one parcel as an entirety. 
 If the decree is one for the foreclosure of several mortgages, one 
 of which is general, covering the entire property, and two of 
 which say are divisional, that is covering parts of the property 
 only, the decree directs that the property upon which the divi- 
 sional mortgage A is a lien shall be first offered for sale and the 
 price bid be noted; that the property covered by divisional 
 mortgage B shall next be offered as a separate parcel and the 
 bid noted; that the entire property shall then be offered as 
 
FORECLOSURE OF RAILROAD MORTGAGES 149 
 
 a whole and if the price bid for the entire property is greater 
 than the total of the prices bid for the two parcels the bid for 
 the entire property shall be accepted, but if the total of the 
 amounts bid for the separate divisions is greater than the price 
 bid for the property as a whole, the bids for the divisional 
 properties shall be accepted ; and that in case the bid for the 
 entire property is accepted the proceeds are to be deemed 
 attributable to the properties covered by the two divisional 
 mortgages respectively in the proportions which the bids for 
 those properties bear to one another. 
 
 9. That no bid shall be received from any bidder unless 
 he shall first deposit a certain sum in cash with the Special 
 Master or a certified check or receivers' certificates, or bonds 
 or coupons, to a named amount, to be returned to him if his bid 
 is not accepted; otherwise to be treated as part payment of 
 the purchase price. The court reserves the right to reject any 
 bid and also to retake and resell the property upon the failure of 
 any purchaser to comply with the terms of sale. 
 
 10. That the receivers file with the clerk of the court before 
 the sale an inventory to include as complete a list of indebted- 
 ness, obligations and contracts as possible, such inventory to 
 be deemed advisory and not to constitute a warranty; that 
 the enumeration in such inventory or the decree of any lease 
 or executory contract to which the railway company is a party 
 shall not be deemed an adoption of such lease or contract by 
 the court or by the receivers ; that at any time after the con- 
 firmation of the sale and before the delivery to the purchaser 
 of the property the court will direct the receivers to take such 
 action as to adopting or not adopting such lease or other 
 contract as the purchaser may request upon receiving proper 
 indemnity from the purchaser; that any purchaser shall be 
 allowed a certain time, three months or six months or a year 
 from the date of confirmation, within which to elect to adopt 
 
150 FORECLOSURE OF RAILROAD MORTGAGES 
 
 or to refuse to adopt any lease or other executory contract 
 which may be included in the properties sold and in the event 
 of the failure to file a statement refusing to adopt the lease or 
 contract the purchaser shall be deemed to have elected to adopt 
 it ; that the court reserves the power to direct the payment by 
 the purchaser or by the receivers of such amounts as shall be 
 found to be equitable upon an accounting or otherwise in re- 
 spect of any lease or traffic or trackage agreement which the 
 purchaser shall elect not to adopt, and jurisdiction is reserved 
 to enforce such payment; that the court reserves the power 
 and jurisdiction to deliver to a purchaser or purchasers title to 
 and possession of the property and to determine all controversies 
 as to the character, extent and validity of the title and posses- 
 sion of such purchaser or purchasers acquired through the 
 execution of the decree. 
 
 11. That upon confirmation of the sale and compliance 
 with the terms of sale by the purchaser, the Master shall make 
 proper instruments of conveyance and assignment, in which 
 the receivers, the railroad company and the trustee of the 
 mortgage and every person holding the record title for any 
 of the property conveyed shall join, and shall deliver the 
 same to the purchaser. 
 
 12. That the purchaser receiving such instruments shall 
 be vested with and shall hold possession of the property and all 
 the rights and franchises subject to the provisions of the de- 
 cree as fully and completely as the mortgagor or its receivers 
 at the time of the decree hold or enjoy or have theretofore held 
 or enjoyed the same, and in particular shall hold them freed 
 and discharged from the lien of the mortgage which has been 
 foreclosed and from any claim of the mortgagor, its stockholders, 
 creditors and receivers and of any party to the cause and any 
 person claiming by, through or under them, or any of them, 
 except as specifically provided in the decree. 
 
 The court finally reserves for further determination all 
 matters of equity not expressly adjudged in the decree and 
 
FORECLOSURE OF RAILROAD MORTGAGES 151 
 
 any party to the cause is authorized to apply for further order 
 and direction. The term of the court at which the decree is 
 entered is sometimes extended until after the complete execu- 
 tion of the provisions of the decree. 1 
 
 After the expiration of the time given to the railroad com- 
 pany to pay the amount adjudged due, the trustee files an 
 affidavit of non-payment. 
 
 The notice of sale is then published. The description of all 
 real estate owned by the company other than the rights of way 
 should be as full as possible. The important provisions of the 
 decree should also be stated in the notice; and it should 
 wind up with a particular reference to the decree for all further 
 details. 
 
 After the sale the master makes a report to the court. Where 
 the sale has been made under the decrees of several courts and 
 the same master has been appointed under all the decrees as 
 he always is, his report to the different courts recites his 
 appointment under these different decrees. The report should 
 show strict compliance with all the conditions of the decree 
 and of the general law necessary to the making of a valid sale ; 
 and should state that the purchaser was the highest bidder; 
 that he signed a memorandum of the sale, has complied with 
 all the preliminary terms and conditions, and is entitled to 
 a conveyance upon full payment as provided by the decree 
 of sale. 
 
 At the time of this report, the purchaser enters his appear- 
 ance, and files his petition for confirmation of the sale. He 
 refers to the report of the master, and if he is a repre- 
 sentative of the reorganization committee, as he usually is, he 
 says he is prepared to deliver to the master, in order to have 
 credited thereon as part of the purchase price the dividend 
 
 1 Guaranty Trust Company of New York v. Metropolitan Street Railway, 177 
 Fed. 925; 1910. 
 
152 FORECLOSURE OF RAILROAD MORTGAGES 
 
 applicable thereto, bonds, or receivers' certificates, or whatever 
 it has been provided by the decree may be accepted, and he 
 offers in all respects to comply with the terms of his purchase, 
 subject to all the provisions in the decree of sale. He prays for 
 leave to intervene and to be made a party to the suit, and that 
 the report made by the master be approved and confirmed. 
 The trustee moves also for the confirmation of the report. 
 Ordinarily the report of the master, the petition of the purchaser 
 to intervene and the motion to confirm, are all made at the 
 same time, the various parties to the suit waiving their right 
 to file exceptions, and consenting that the petition and the 
 motion may come on for hearing at once. On the same day, 
 the decree of confirmation is made. This decree should recite 
 in detail that all the things have been done or have happened, 
 which, by the decree of foreclosure, were precedent to the right 
 of the master to make the sale, and that all things have been 
 done subsequent to the sale to entitle the purchaser to a decree 
 of confirmation. 
 
THE REORGANIZATION OF CORPORATIONS; BOND- 
 HOLDERS' AND STOCKHOLDERS' PROTECTIVE 
 COMMITTEES; REORGANIZATION COMMITTEES; 
 AND THE VOLUNTARY RECAPITALIZATION OF 
 CORPORATIONS 
 
 A Lecture Delivered before the Association of the Bar of the City of New 
 York, by Paul D. Cravath, March 1 and 8, 1916. 
 
 THE late Adrian H. Joline and no lawyer of his day had 
 a more varied contact with corporate reorganizations said 
 in one of his Harvard lectures delivered in 1910, that after an 
 experience running over a period of thirty years, he found it 
 about as difficult to tell how to reorganize a corporation as it 
 would be for a poet to tell how to write poetry. One cannot 
 formulate many rules or refer to many precedents which will 
 serve as a guide to the reorganizer, for each reorganization 
 differs more or less from all others. I can therefore do little 
 more than offer a series of practical suggestions based upon 
 experience. This should be the most helpful method of ap- 
 'proaching our subject, because in few branches of practice does 
 experience count for more and there are none in which the 
 books furnish so little help. 
 
 I shall deal chiefly with the legal, rather than the economic 
 and financial aspects of reorganizations, although in a great 
 measure the legal and business questions are very closely inter- 
 twined. Usually it is not the duty of a lawyer to give advice 
 to his client on economic questions. If you tell him what he 
 may lawfully do, you may usually leave it to him to decide 
 what he may wisely do. But in reorganizations, particularly 
 if your clients are inexperienced in reorganization practice, it 
 is often the duty of counsel to advise them both as to the prac- 
 tical and legal aspects of the questions presented for decision. 
 
 153 
 
154 REORGANIZATION OF CORPORATIONS 
 
 A plan of reorganization, however lawful, will bring disappoint- 
 ment and discredit to its authors if its terms are not such as to 
 command the support of security holders. It is quite as im- 
 portant to propose a plan which will be supported by the se- 
 curity holders as one which will be supported by the courts. 
 In both aspects it is important that the plan should be fair 
 and just, for even after it has been accepted by a majority of 
 the security holders, the courts are very apt to find a way of 
 upsetting it, if it presents elements of unfairness or oppression. 
 You will get some idea of the practical importance of this 
 branch of professional activity when I tell you that during the 
 past twenty-five years railroad corporations owning about one- 
 half of the total mileage of the United States have been sub- 
 jected to the process of reorganization or readjustment and 
 that over eighty railroad corporations, owning about forty-two 
 thousand miles of railroad or about sixteen per cent of the total 
 mileage of the country, with an aggregate capitalization of 
 about two million and a quarter dollars, are now in receivers' 
 hands and awaiting reorganization. In addition, a surprisingly 
 large proportion of the great industrial enterprises of the 
 country, including several which are now enjoying sensational 
 prosperity, have passed through some form of reorganization. 
 United States District Judge Hough of this District 1 recently' 
 estimated that fifty per cent of the corporations of to-day have 
 gone through some form of reorganization in the last twenty 
 years. 
 
 Definitions 
 
 The term "reorganization," as applied to corporations, may 
 somewhat loosely be defined as the rearrangement of the 
 financial structure of an incorporated enterprise, rendered neces- 
 sary by insolvency or by the inability of the corporation to 
 secure the necessary funds for its operations because of obstacles 
 resulting from its financial structure. Corporate reorganiza- 
 
 1 Southern District of N. Y. 
 
REORGANIZATION OF CORPORATIONS 155 
 
 tions usually, though not always, follow, and are based upon, 
 the foreclosure of mortgages or the enforcement of the rights 
 of creditors in some form. 
 
 Reorganizations of corporations which are insolvent or suf- 
 fering from a defective financial structure are sometimes ac- 
 complished by the voluntary action of the security holders. 
 It is to such operations that the term "readjustment" is usually 
 applied, although in some measure the terms "reorganization" 
 and "readjustment" are used interchangeably. A recent illus- 
 tration of the common use of the terms is furnished by the 
 Plan for the Readjustment of the Capital and Debt of The 
 Missouri Pacific Railway Company, which was first offered for 
 the voluntary acceptance of the security holders in the hope 
 that their acceptance of the Plan would render the foreclosure 
 of mortgages unnecessary. It was then spoken of as a "Plan 
 of Readjustment." It was not accepted by the security holders 
 with sufficient promptness to avert a default in the interest 
 payments under various mortgages, upon which the trustees 
 thereupon instituted foreclosure proceedings. The same Plan, 
 although not changed, automatically came to be called a 
 "Plan of Reorganization" instead of a "Plan of Readjust- 
 ment." 
 
 There are cases where, without the spur of insolvency or 
 financial necessity of any kind, corporations are, to use a com- 
 mon expression, "recapitalized," that is, their corporate or 
 financial structure is changed for some reason other than to 
 meet financial stress, as, for instance, to increase or decrease 
 the amount of stock outstanding, to replace bonds by stock or 
 vice versa. 
 
 Our subject therefore naturally divides itself into three 
 divisions : 
 
 First: Reorganizations based on the foreclosure of mort- 
 gages or the enforcement of other rights of creditors and in- 
 volving the organization of a new corporation to acquire the 
 property which is the subject of the reorganization ; 
 
156 REORGANIZATION OF CORPORATIONS 
 
 Second: Readjustments of the debt or share capital of cor- 
 porations because of insolvency or financial needs of some sort 
 where the property is not transferred to a new corporation ; 
 
 Third: The recapitalization of corporations for some other 
 purpose than to meet insolvency or correct defects of financial 
 structure and which may be accomplished either with or with- 
 out the transfer of the property to a new corporation. 
 
 REORGANIZATIONS BASED ON THE FORECLOSURE OF 
 MORTGAGES OR THE ENFORCEMENT OF OTHER RIGHTS 
 OF CREDITORS AND INVOLVING THE ORGANIZATION OF 
 A NEW CORPORATION TO ACQUIRE THE PROPERTY 
 WHICH is THE SUBJECT OF THE REORGANIZATION 
 
 I shall deal chiefly with reorganizations based upon defaults 
 under, and the foreclosure of, mortgages. By far the greater 
 number of reorganizations, and almost all railroad reorganiza- 
 tions, come under this head. 
 
 In order to make our discussion more definite and concrete, 
 let us assume that* you are dealing with an insolvent railroad 
 corporation which has several bond issues, each secured by 
 mortgage, issues of preferred and common stock, and a sub- 
 stantial floating debt in addition to its ordinary current operat- 
 ing debt for wages, supplies and the like. We shall assume 
 that this railroad company is about to default in the payment 
 of interest upon one of its mortgages and that you are con- 
 sulted by the banker by whom the bonds secured by that 
 mortgage were issued and who therefore has an interest in see- 
 ing that proper steps are taken to protect those bonds. In 
 practice this is the way in which a reorganization usually 
 starts. We will assume that it is recognized that the railroad 
 company can no longer pay the interest upon its bonds and 
 that a default under, and the foreclosure of, the mortgage is 
 deemed inevitable. 
 
REORGANIZATION OF CORPORATIONS 157 
 
 The Appointment of Receivers 
 
 The first step is to bring about the appointment of a receiver 
 or receivers with sufficient power to protect, and continue the 
 operation of, the property pending foreclosure and reorganiza- 
 tion. I say "pending reorganization" because, as was said by 
 Chief Justice Waite in Canada Southern Railway Company v. 
 Gebhard, 1 
 
 "It rarely happens in the United States that foreclosures of railway 
 mortgages are anything else than the machinery by which arrange- 
 ments between the creditors and other parties in interest are carried 
 into effect, and a reorganization of the affairs of the corporation under 
 a new name brought about." 
 
 It rarely is safe to delay the application for the appointment 
 of receivers until a foreclosure bill, based upon a default under 
 the mortgage, can be filed, for when it becomes notorious that 
 a corporation is nearing insolvency and that a default in the 
 payment of its fixed charges is imminent, it is difficult to obtain 
 the necessary credit to enable it to continue its operations. 
 There is also the danger of attack by creditors either by attach- 
 ment or by unfriendly receivership proceedings. The experi- 
 enced reorganizer stands in special dread of an unfriendly 
 receivership proceeding which may force the property into the 
 hands of a receiver who is incompetent or who is under the 
 direction of a court lacking the necessary powers effectively 
 to administer a property running through several States. The 
 special danger from this direction lies in the fact that the law 
 is well settled that the court in which the first receivership bill 
 is filed is entitled to appoint the receiver, assuming that the 
 allegations of the bill are sufficient to support the appointment. 2 
 
 Mr. Byrne has stated in his lecture the reasons why a receiver- 
 ship in the Federal Courts is preferred to one in the State 
 Courts and has outlined the procedure in receivership proceed- 
 
 1 109 U. S. 539 ; 1883. 
 
 1 Farmers' Loan and Trust Co. v. Lake Street Elevated R. R., 177 U. S. 51 ; 
 1900. 
 
158 REORGANIZATION OF CORPORATIONS 
 
 ings in the Federal Courts. He has also told you the methods 
 ordinarily adopted in order to have receivers appointed as 
 speedily as possible in all jurisdictions in which property of 
 the corporation is situated. I wish to emphasize what he has 
 said in regard to your right deliberately to select, as the 
 creditor who is to file the bill, one whose citizenship is such 
 that he can go into the Federal Court for the express purpose 
 of securing a receivership in that court rather than in the 
 State Court, and your right to arrange that the creditor's bill 
 should be submitted to counsel for the corporation and that 
 all the procedure should be agreed to in advance. 
 
 Only last month, the United States Circuit Court of Appeals 
 of this Circuit expressly approved the action of the Board of 
 Directors of a large industrial corporation, organized under the 
 laws of New Jersey, in filing an answer admitting the allega- 
 tions of a creditor's bill brought in this District and joining in 
 the prayer for the appointment of a receiver, where it clearly 
 appeared that the creditor had been requested to file a bill 
 and that it had been filed with the knowledge of the Company's 
 Board of Directors and counsel for the avowed purpose of secur- 
 ing the prompt appointment of receivers by the Federal Court. 1 
 
 I have emphasized the so-called "Consent Receiverships" 
 in the Federal Courts because, as the result of the appar- 
 ently widespread misapprehension regarding them which has 
 been current of late, counsel are very apt to attempt to do by 
 indirect and circuitous methods what they should do directly 
 and openly. 
 
 I refer you to Mr. Byrne's lecture for a discussion of the dif- 
 ference between a chancery receivership and a statutory receiver- 
 ship and for the procedure in respect of ancillary receiverships 
 in the Federal Courts. It may be, as was recently remarked 
 by a distinguished New Jersey Vice-Chancellor, that "the 
 jurisdiction which the Federal Courts have thus worked out 
 
 1 Guaranty Trust Company of New York v. International Steam Pump Com- 
 pany, 231 Fed. 594 ; 1916. 
 
REORGANIZATION OF CORPORATIONS 159 
 
 ... is somewhat extraordinary," but it is a most effective 
 system. It possesses an elasticity and capacity to be molded 
 to meet emergencies which is not possible under any system 
 regulated by statute. A system of ancillary receiverships all 
 centering around a primary receivership avoids the conflict 
 and working at cross-purposes which are inevitable where the 
 administration of a property is in the hands of several State 
 Courts, and the Federal Courts have built up a system of prec- 
 edents which guide the practitioner in meeting most of the 
 emergencies that arise in the administration of complicated 
 properties. 
 
 In the case of industrial corporations organized under the 
 laws of New Jersey, it has recently been found necessary to 
 supplement a Federal Receivership by a receivership in the 
 State Courts under the New Jersey Corporation Act. 1 
 
 The Circuit Court of Appeals for the Third Circuit has held 
 that the proceedings in the Federal Court for the appointment 
 of receivers and the distribution of assets were conducted under 
 the New Jersey statutes and could accomplish all the results 
 contemplated by those statutes excepting the dissolution of 
 the corporation. 2 This view, however, has not been accepted 
 by the New Jersey Courts. In Gallagher v. Asphalt Company 
 of America, 3 the New Jersey Court expressed the opinion that 
 the New Jersey Courts were the proper tribunals for the exer- 
 cise of the rights created by the statute. In several recent 
 instances 4 where the primary receivers were appointed by the 
 United States District Court for the Southern District of New 
 York, the New Jersey Court of Chancery, upon the application 
 of stockholders made under the New Jersey statutes, appointed 
 a separate receiver, who was, however, instructed not to inter- 
 
 1 63, 64 and 65; Conklin v. United States Shipbuilding Co., 140 Fed. 219 ; 
 1905. 
 
 2 Land Title & Trust Co. v. Asphalt Co. of America, 127 Fed. 1 ; 1903. 
 
 3 65 N. J. Eq. 258 ; 1903. 
 
 4 E.g., International Steam Pump Company and International Mercantile 
 Marine Receiverships. 
 
160 REORGANIZATION OF CORPORATIONS 
 
 fere with the administration of the assets in the possession of 
 the Federal Receivers, but simply to take possession of any 
 assets which were not in the possession of the Federal receivers, 
 and to stand ready to receive any assets which might be turned 
 over to him by the Federal receivers. I think it may now be 
 regarded as settled practice that where receivers of a New 
 Jersey corporation are appointed by the Federal Courts there 
 should be a receiver appointed by the New Jersey Court of 
 Chancery under the New Jersey statutes to represent the cor- 
 poration and act as the protector of the rights of its stock- 
 holders. 1 
 
 It is the usual, although not the invariable, practice in the 
 Federal Courts, at least in this district, to appoint two receivers, 
 one suggested by the applicant, frequently an officer of the cor- 
 poration, and the other an independent person chosen by the 
 court, usually a lawyer. The usual preference of the court to 
 appoint at least one person of its own selection as an inde- 
 pendent receiver is justified by the very grave responsibility 
 assumed by the Federal Court in receiverships, which makes it 
 proper that at least one of the receivers should be a person 
 having the full confidence of the Court and known to the Court 
 to be free from bias and entanglements. As has been well 
 said, the Receiver is "the eyes," "the ears/' and "the hands" 
 of the Court and should be "absolutely impartial." 
 
 In the case of an insolvent industrial corporation, bank- 
 ruptcy has one advantage over an equity receivership, namely, 
 that the trustee in bankruptcy receives title to the property 
 wherever located, thus avoiding the necessity of instituting an 
 ancillary proceeding in every jurisdiction in which the corpora- 
 tion has property. Among the disadvantages of a bankruptcy 
 proceeding over an equity receivership are the necessity of 
 strictly complying with statutory requirements with the result- 
 ing inelasticity of procedure, statutory limitations upon the 
 power of the bankruptcy court to permit the continuation of 
 
 1 See Gallagher v. Asphalt Company of America, 67 N. J. Eq. 441 ; 1904. 
 
REORGANIZATION OF CORPORATIONS 161 
 
 the business, and the impatience of the bankruptcy court to 
 secure an early sale and distribution. In the case of industrial 
 corporations of large magnitude, an equity receivership is much 
 to be preferred to bankruptcy. An equity receivership is no 
 insurance against bankruptcy proceedings, for it is within the 
 power of three creditors to force bankruptcy on an insolvent 
 corporation within four months after the act of bankruptcy 
 which is often involved in an equity receivership. Railroad 
 companies are not subject to bankruptcy proceedings, which 
 can be instituted by creditors only against a "moneyed, busi- 
 ness or commercial corporation, except a municipal, railroad, 
 insurance or banking corporation." 1 
 
 The Foreclosure of the Mortgage 
 
 Having secured the appointment of receivers, your next 
 important step would normally be the foreclosure of the mort- 
 gage so soon as a default permitting foreclosure has occurred. 
 In that event the receivership would, to use a common expres- 
 sion, be extended to the foreclosure suit, which means that the 
 persons who were appointed receivers upon the creditor's bill 
 would also be appointed receivers under the foreclosure bill. 
 
 The primary foreclosure suit should, in turn, be followed 
 promptly by the filing of an ancillary foreclosure bill in each 
 of the other circuits in which there is mortgaged property and 
 in each of those ancillary suits an order should be entered ap- 
 pointing ancillary receivers. I will not follow the proceedings 
 in the foreclosure suit because they have been described in Mr. 
 Byrne's lecture. 
 
 It is to the interest of your committee that the creditor's 
 suit and the foreclosure suit should be confined to the necessary 
 parties and your tactics should be directed to that end. Those 
 who wish to harass you are very apt to seek leave to intervene 
 in the creditor's suit or in the foreclosure suit, so that they will 
 
 1 Bankruptcy Act, 4. 
 
162 REORGANIZATION OF CORPORATIONS 
 
 become entitled to an opportunity to oppose all proceedings. 
 Courts are more liberal in admitting intervenors in creditors' 
 suits than in foreclosure suits. Judge Lacombe in the Metro- 
 politan Street Railway receivership proceedings adopted the 
 policy of admitting as parties to both creditors' and foreclosure 
 suits the committees representing substantial holdings of securi- 
 ties, including the stock, and of excluding all other applicants. 1 
 This practice of admitting committees is not general. 2 
 
 Ordinarily, bondholders will not be admitted as parties to a 
 foreclosure suit instituted by their trustee, but in the recent 
 Rock Island case, 3 the Circuit Court of Appeals of this Circuit 4 
 admitted a minority bondholders' committee upon the theory 
 that the attitude of the Trust Company, which, as trustee of 
 the mortgage, was complainant in the foreclosure suit, was 
 "ambiguous," it having appeared that its President was also 
 Chairman of the majority bondholders' committee with which 
 the minority bondholders' committee was at odds. This deci- 
 sion raises a question as to the wisdom of the practice, which 
 has heretofore been common, of appointing an officer of the 
 trust company which is trustee of the mortgage, a member of 
 the committee to represent bonds secured by the mortgage. 
 
 The Protective Committee and the Deposit Agreement 
 
 While you have been preparing the receivership papers, it 
 may be assumed that your client, the banker, has been engaged 
 in forming a bondholders' protective committee, in which event 
 it becomes part of your task to draw the Bondholders' Protec- 
 tive Agreement appointing the committee, defining its powers 
 and providing for the deposits of bonds thereunder. The terms 
 of such an agreement, of course, vary with circumstances, but 
 its primary purpose is to confer upon the committee the power 
 
 1 Pennsylvania Steel Co. v. New York City Ry. Co., 160 Fed. 222 ; 1908. 
 
 2 Metropolitan Street Railways case, 181 Fed. 285 ; 1910. 
 
 3 Central Trust Co. v. Chicago R. I. & P. R. Co., 218 Fed. 336 ; 1914. 
 
 4 Second Circuit. 
 
REORGANIZATION OF CORPORATIONS 163 
 
 to take any action it may deem necessary or proper for the 
 protection of the bondholders and the enforcement of their 
 rights in the foreclosure proceedings or in any other proceedings 
 affecting the mortgaged property. The powers conferred in 
 this regard cannot well be too broad. The purpose of the agree- 
 ment should be to place the committee practically in the posi- 
 tion of owners of the bonds, with power to exercise all the rights 
 and pursue all the remedies conferred by the mortgage. Under 
 modern mortgages, the action of the trustee is usually placed, 
 subject to certain limitations, under the control of the holders 
 of a designated proportion of the bonds, and it is important 
 that the protective committee should, so soon as practicable, 
 have on deposit at least the proportion of the bonds in which 
 that control is vested. 
 
 The usual parties to the agreement are the bondholders' 
 committee and the depositing bondholders, or rather, the 
 holders of the certificates of deposit issued by the depositary 
 appointed by the Committee to receive deposits of bonds, 
 usually a trust company. It is not usual to require bondholders 
 to sign the agreement, but machinery is provided whereby the 
 bondholder automatically becomes a party by depositing his 
 bonds and accepting a certificate of deposit issued by the de- 
 positary. These certificates of deposit may be transferable on 
 transfer books kept by the depositary, or they may be in 
 bearer form and transferable by mere delivery. 
 
 If the bonds are listed on the New York Stock Exchange, 
 the certificates of deposit should be engraved or printed on 
 engraved forms which most Trust Companies have on hand. 
 So soon as a substantial amount of bonds have been deposited, 
 the certificates of deposit should be listed, for listing increases 
 their availability as collateral for loans and therefore encourages 
 deposits. If listing is contemplated, a registrar for the certifi- 
 cates of deposit must be appointed. 
 
 Certificates of deposit representing securities deposited under 
 a protective agreement are frequently referred to as "nego- 
 
164 REORGANIZATION OF CORPORATIONS 
 
 tiable." The term, however, is used loosely as meaning trans- 
 ferable by delivery, for such a certificate is not a negotiable 
 instrument in a technical sense. I shall not take time to dis- 
 cuss the interesting question as to how far the qualities of 
 negotiability may be conferred by agreement in respect of an 
 instrument which does not meet the definition of a negotiable 
 instrument. 1 
 
 The contract resulting from the deposit of securities under a 
 deposit agreement is rather a peculiar one. It imposes no 
 affirmative liability on the depositor. He ceases to be a party 
 to the agreement the moment he transfers his certificate to an- 
 other. It is practically an agreement in rem which follows the 
 certificate into the hands of any holder. If the certificates are 
 payable to bearer, there is no way of identifying the holders at 
 a particular time. Effective notice to them can be given only 
 by publication in the manner prescribed in the agreement. In 
 case of default by the depositor in meeting the conditions of 
 deposit, there is no remedy against him individually, but the 
 remedy is by forfeiture or sale of the property represented by 
 his certificate. The provisions of the agreement in this regard 
 must therefore be clear and precise. The records of any action 
 taken for the forfeiture or sale should be carefully preserved 
 because the certificate holder may turn up to assert his rights 
 years after the event. 
 
 I will not attempt to indicate in any detail what should be 
 the provisions of a protective agreement, whether it be for 
 bonds or unsecured obligations or stock, but I will tell how 
 you may simplify your task in preparing such an agreement if 
 you pursue the course most lawyers do. Do not attempt to 
 evolve the agreement out of your own consciousness, for it 
 would take you days to work out clauses covering half of the 
 contingencies for which provision should be made. If you 
 
 1 See In re Goy & Co., Limited (1900), 2 Ch. 149; In re Brown & Gregory, 
 Limited (1904), 1 Ch. 627 ; Goodwin v. Roberts (1876), 1 App. Gas. 476 ; France 
 v. Clarke (1884), 26 Ch. Div. 257 ; Evertson v. Bank, 66 N. Y. 14, 19 ; 1876. 
 
REORGANIZATION OF CORPORATIONS 165 
 
 have not a model for such an agreement in your own office, 
 go to some friend, a lawyer or banker or broker, and get from 
 him a copy of the deposit agreement used in some previous 
 transaction of such magnitude and dignity that the agreement 
 must have been the workmanship of some experienced and 
 competent counsel. You can, without much difficulty, find a 
 model which, with some change, will fit almost any situation. 
 It is then a comparatively simple task to eliminate the provi- 
 sions which are inapplicable to your situation and to add the 
 provisions required by its special circumstances. 
 
 I do not intend to give you the impression that the greatest 
 care is not required in the preparation of such an agreement, 
 for few instruments call for greater care or more painstaking 
 attention to detail. It is your Committee's grant of power and 
 it should be broad enough to cover every emergency with which 
 the Committee is likely to have to deal. There will be no oppor- 
 tunity to correct mistakes, because there will be as many parties 
 to the agreement as there are holders of certificates of deposit 
 there may be thousands of them and the agreement can- 
 not be changed without the consent of each. 
 
 There are a few comments applicable to protective agree- 
 ments under almost all circumstances. In the first place, do 
 not place too great reliance upon the effectiveness of the general 
 clauses which appear in most deposit agreements and which 
 purport to give the Committee power to do almost anything 
 it chooses. So far as possible, have a specific grant of power 
 for everything the Committee is likely to be required to do, 
 remembering that your Committeejs a trustee for its depositors 
 and that the agreement may be strictly construed against it. 
 In United Water Works Company, Limited, v. The Omaha Water 
 Company, 1 a bondholders' committee had been appointed under 
 an agreement which described a very simple plan of reorgani- 
 zation and provided that in case the Committee purchased the 
 property at foreclosure sale it should 
 
 1 164 N. Y. 41 ; 1900. 
 
166 REORGANIZATION OF CORPORATIONS 
 
 "prior to the conveyance of any purchased property to the new com- 
 pany, submit to the certificate holders a detailed plan of reorganiza- 
 tion, which shall be binding upon all said holders, unless the holders 
 of a majority in interest of the outstanding certificates shall, within 
 thirty days, file with the Trust Company their written dissent from 
 said plan." 
 
 The agreement then provided that 
 
 "The Committee may supply any defects or omissions in this plan 
 which it shall deem necessary to be supplied to enable the Committee 
 to carry out the general purposes of the plan ; and with the consent 
 of the holders of a majority in interest of the outstanding certificates, 
 may take any action other than is provided for in this plan which the 
 Committee shall unanimously determine to be for the benefit ratably 
 of all of the certificate holders." 
 
 The Committee, having purchased the property, submitted a 
 detailed Plan of Reorganization which differed from the original 
 Plan in that it allotted a certain interest in the new company 
 to stockholders and created a voting trust. The Court of 
 Appeals held that because of this departure the failure of a 
 majority to dissent from the modified Plan within thirty days 
 did not result in the adoption of the detailed Plan. In 
 other words, the provisions of the original agreement creat- 
 ing the machinery for the modification of the Plan applied 
 only to modifications which were consistent with the original 
 Plan. 
 
 Another excellent illustration of the danger of relying upon 
 the broad clauses giving general grants of power is furnished 
 by the recent decision of Judge Mayer of this District 1 in 
 Titus v. United States Smelting, Refining and Mining Explora- 
 tion Company. 2 In that case a bondholders' protective agree- 
 ment, after providing that the committee could do certain 
 things, provided that the money and securities in its hands 
 might be used "for such other purposes as the committee in 
 its uncontrolled discretion may determine." The Court held 
 
 1 Southern District of N. Y. * Not yet reported. 
 
REORGANIZATION OF CORPORATIONS 167 
 
 that this grant of power, although apparently unlimited, must 
 be controlled by the manifest purposes of the agreement and 
 that a contract by which the committee turned over the property 
 to a stranger for exploration and development was beyond its 
 power, because the protective agreement did not authorize the 
 committee thus to surrender its discretion. 
 
 The Protective Agreement should provide that the Com- 
 mittee shall have power to add to its number, to accept resig- 
 nations of its members and to fill vacancies. There should 
 be express provision authorizing the Committee to act by a 
 majority and permitting members to vote by proxy, and suit- 
 able provisions for protecting the Committee and Depositary 
 against mistakes. The Committee should have the power to 
 employ accountants, engineers, counsel and other experts, 
 arrange for their compensation and for other expenses and hold 
 or pledge the deposited securities as security therefor. The 
 agreement usually provides that the Committee's decision as 
 to its own compensation, as well as its expenses, shall be bind- 
 ing upon the depositors. There is no doubt that this provision 
 is effective so far as the Committee's expenses, incurred by it 
 in good faith, are concerned, but it is questionable whether any 
 provision in an agreement appointing trustees can make them 
 the final arbiters of their own compensation. 
 
 It is therefore advisable that provision should be made by 
 which the Committee's compensation may ultimately be fixed 
 by agreement or by the exercise of some independent judgment. 
 A protective agreement usually fixes a maximum limit to the 
 Committee's compensation and expenses. In the case of re- 
 organization agreements the usual method of meeting the prob- 
 lem is to provide that the approval of the Committee's com- 
 pensation by the board of directors of the reorganized company 
 shall be conclusive. Such a provision is doubtless effective 
 unless the board of directors is so made up as to be under the 
 domination or influence of the committee. It is often provided 
 that a statement of the Committee's compensation and expenses 
 
168 REORGANIZATION OF CORPORATIONS 
 
 shall be filed with the depositary and shall be deemed approved 
 by all depositors unless objections are made within a specified 
 period. 
 
 A protective agreement usually confers upon the Committee 
 power to adopt a plan of reorganization of its own devising or 
 one prepared by some one else. It is not usual to give a pro- 
 tective committee power to adopt a plan without first sub- 
 mitting it to the depositors. The common provision is to 
 require that any Plan and Agreement shall be lodged with the 
 depositary subject to examination by all depositors and that 
 a notice of the filing of the Plan, but not describing it, be pub- 
 lished at stated intervals for a specified period. Usually the 
 agreement provides that depositors who are dissatisfied with 
 the Plan may, within a designated period, say thirty days 
 after the first publication of the notice, withdraw their securi- 
 ties upon surrender of their certificates of deposit and making 
 a contribution, at some specified rate, toward the expenses 
 and compensation of the Committee. Under such a notice 
 the holders of certificates of deposit who do not withdraw 
 their securities within the specified period automatically be- 
 come bound by, and parties to, the Plan and Agreement of 
 Reorganization. 
 
 Protective agreements sometimes provide that the Plan of 
 Reorganization shall become binding upon all depositors if 
 within a specified period after publication of the notice of the 
 filing of the Plan the holders of a specified proportion of the 
 deposited securities do not file with the depositary notice of 
 their dissent from the Plan. In this case, the dissatisfied 
 minority may be bound by the failure of the satisfied majority 
 to dissent from the Plan. 
 
 In order to insure that depositors shall not have the right 
 to withdraw securities until after the announcement of a Plan 
 of Reorganization, the agreement should expressly so provide 
 and should show also some consideration running to the de- 
 positors, such, for instance, as covenants on the part of the 
 
REORGANIZATION OF CORPORATIONS Io9 
 
 Committee to endeavor to protect the interests of the depositors 
 and to formulate a Flan of Reorganization. In the case of 
 Colonial Tnot Co. v. Wallace, 1 the United States Circuit Court 
 of Appeals i or this Circuit * held that under the form of deposit 
 agreement then usually used which gave depositors the right 
 of withdrawal within a certain period after the announcement 
 of a Plan of Reorganization, the right of withdrawal accrued 
 immediately upon deposit and was not dependent upon the 
 announcement of a Flan. 
 
 In view of the decision of our Court of Appeals in Industrial 
 A Trust Co., Ltd. v. Tod* the agreement should expressly pro- 
 vide that a Han of Reorganization may be proposed after, as 
 well as before, a foreclosure sale of the property. 
 
 Tliis very interesting decision affects many questions in- 
 volved in the preparation, construction and enforcement of 
 and Tf*fiTpaniTHM"i^m agreements. In that c asff a 
 
 bondholders' committee was created under a deposit agreement 
 winch, in the language of Judge Vann's opinion, "conferred 
 almost unlimited powers upon them." Tne agreement specif- 
 ically authorized the Committee to purchase the railroad at 
 foreclosure sale and to use the bonds in payment of the pur- 
 chase price. It also authorized the Committee to prepare a 
 Flan of Reorganization, but did not specifically provide whether 
 this should be before or after the purchase of the property. 
 Hie agreement contained the usual provisions for giving notice 
 of the filing of the Han and affording to dissatisfied bondholders 
 an opportunity to withdraw. The Committee purchased the 
 railroad at the foreclosure sale, paid for it by the use of the 
 deposited securities and subsequently prepared, filed and an- 
 nounced a Man of Reorganization. Tne Industrial & General 
 Trust Company, a depositor of bonds, although it did not 
 exercise the privilege of withdrawal, protested against the Flan 
 of Reorganization and brought suit against the Committee for 
 conversion. The Court of Appeals held that a suit for con- 
 
 1 183 FfaL 887; 1910. * Second Grant. * 180 N. T. 315; 19Ox 
 
170 REORGANIZATION OF CORPORATIONS 
 
 version did not lie, 1 whereupon the complaint was amended to 
 a cause of action for breach of contract. The Court below dis- 
 missed the complaint. Its judgment was affirmed by the 
 Appellate Division but reversed by the Court of Appeals, 
 Judge Vann writing the prevailing opinion and Judge Gray the 
 dissenting opinion, in which Judge O'Brien concurred. In the 
 prevailing opinion the Court reached the following instructive 
 conclusions : (p. 225) 
 
 1. That "as the reorganization agreement was prepared by the 
 committee, and the language used is wholly their own, it should be 
 construed most favorably to the bondholders, who had no part in 
 preparing it, but were compelled to accept it as it was, or not accept 
 it at all." 
 
 2. That under the broad provisions of the agreement to the 
 effect that the Committee's construction of its provisions should 
 be final, the Committee (p. 226) 
 
 "were doubtless protected from the outcome of errors of judgment 
 and honest mistakes, but good faith is the standard, erected by the 
 law, by which all their acts and omissions are to be judged," 
 
 and that, therefore, no provision, however strong, could shield 
 the Committee from liability unless good faith is observed. 
 
 Judge Gray in the dissenting opinion expressed the view, as 
 did the Appellate Division, that the provisions in question did 
 protect the Committee in the action which they had taken. 
 
 3. That while there was no express provision to the effect 
 that the Plan of Reorganization should be promulgated prior 
 to the acquisition of the property by the Committee at fore- 
 closure sale, there being no provision to the contrary, there was 
 an implied obligation on the part of the Committee to propose 
 the Plan of Reorganization prior to the sale in order that dis- 
 satisfied bondholders might have an opportunity of withdraw- 
 ing their bonds and protecting themselves at the foreclosure 
 sale. 
 
 1 The Industrial & General Trust Limited v. Tod, 170 N. Y., 233 ; 1902. 
 
REORGANIZATION OF CORPORATIONS 171 
 
 The facts before the Court seemed to make this a hard case, 
 and the decision went very far, but the cautions which it gives 
 to draftsmen of protective and reorganization agreements are 
 too striking to require comment. 
 
 In practice, members of a committee are frequently owners 
 of securities of the issue which it is their duty to protect and 
 they may wish to be free to purchase further securities of the 
 same issue as well as certificates of deposit issued by the Deposi- 
 tary. The agreement should expressly authorize such trans- 
 actions. It should also authorize the members of the Com- 
 mittee to form, or take part in, syndicates for underwriting the 
 cash requirements of the Plan or otherwise aiding the reorgani- 
 zation. It frequently happens that the same banking firm is 
 represented on the Committee, acts as reorganization managers, 
 and also forms and manages the syndicate to provide the cash 
 requirements. Manifestly the provisions permitting these 
 inter-relationships must be clear, full and explicit. 
 
 The present rules of the New York Stock Exchange require 
 that every protective agreement affecting listed securities shall 
 fix a date by which depositors should be entitled either to their 
 new securities or to the return of their old securities. It is 
 usual to fix a date so far ahead, as, for instance, five years, to 
 allow ample latitude. 
 
 The bondholders' protective committee having been formed 
 and having executed the protective agreement and lodged it 
 with the depositary, the Committee should then give notice of 
 its formation and call for the deposit of bonds. The notice is 
 usually published as an advertisement and also mailed to bond- 
 holders in so far as their addresses are ascertainable. The 
 notice of the formation of the Committee is sometimes published 
 in advance of the actual preparation and execution of the deposit 
 agreement, particularly if there is fear that another committee 
 with an ambition to represent the same securities is in process 
 of formation. There is, of course, a distinct advantage in your 
 Committee being the first in the field with its announcement. 
 
172 REORGANIZATION OF CORPORATIONS 
 
 A bondholders' committee naturally does all in its power to 
 encourage deposits. A common expedient to this end is an 
 offer to depositors to purchase the maturing interest coupons 
 or to advance the maturing interest upon the security of the 
 depositor's bonds. The purchase of coupons is becoming less 
 frequent than formerly because modern mortgages do not 
 accord to interest priority of lien over principal and often con- 
 tain provisions for subordinating the lien of purchased coupons 
 to that of the principal. It is now more usual to offer to ad- 
 vance the maturing interest, at the depositor's option, upon the 
 security of his bonds and coupons. 
 
 The announcement of the formation of your Committee is 
 likely soon to be followed by the formation of other protective 
 committees to represent other classes of securities, whether 
 bonds or stock or unsecured claims, as the case may be. Or 
 there may be a rival committee calling for the deposit of the 
 bonds of the same issue as those for the protection of which 
 your client's committee was formed. 
 
 If need be, you and your clients should arrange that com- 
 mittees are formed to represent the various other issues of 
 securities which are likely to be dealt with in the reorganization, 
 for, manifestly, when the time comes to prepare a Plan it is 
 essential that there should be representatives of the other 
 classes of securities with whom your clients can negotiate. 
 Above all things, see to it that neither your Committee nor any 
 other committee represents conflicting interests. It is a rule 
 to which there are few exceptions that the same protective com- 
 mittee should represent but one class of securities. It is rarely 
 wise that the same committee should even represent both pre- 
 ferred and common stock, because some of the most perplex- 
 ing questions which arise in reorganizations are as to the equi- 
 table adjustment of the relative participation to be accorded to 
 pi ef erred and common stock, 
 
 I emphasize the importance to your clients of these sugges- 
 tions regarding the formation of committees representing the 
 
REORGANIZATION OF CORPORATIONS 173 
 
 other classes of securities to be dealt with, because the success 
 of the Plan of Reorganization finally adopted may be just as 
 dependent upon the support of the holders of the other classes 
 of securities as it is upon the support of the holders of the par- 
 ticular class of securities which your clients represent. 
 
 The same person should not be a receiver and a member of 
 the committee representing security holders. In Fowler v. 
 Jarriy-CarJdw Mortgage Co., 1 Judge Lacombe refused to remove 
 a receiver simply upon the ground that he was a member of 
 the reorganization committee, and said : 
 
 "Several Federal 
 
 neutrality on the part of its 
 
 conflict over the pan of 
 
 from membershi of the 
 
 The suggestions I have made regarding the importance of 
 having a separate committee to represent each class of securi- 
 ties are made upon the assumption that protective committees 
 are being formed with a view to ultimate negotiations looking 
 towards a Plan of Reorganization. It occasionally happens 
 that a Plan of Reorganization is prepared by a kiting firm 
 or by a self-appointed committee without having previously 
 called for the deposit of securities. In such a case, the first 
 announcement made is of the Flan of Reorganization in which 
 the holders of the various classes of securities are invited to 
 participate. In such a case a single committee, or a banting 
 firm acting as reorganization managers, may undertake to act 
 for the security holders of all classes in carrying out that par- 
 ticular plan, for presumably there will be no dash of interests 
 between the various classes of security holders in carrying out 
 a definite Plan to which they have indtratfd AMT adherence. 
 In such a case the proponents of the Flan announce that they 
 have prepared a Flan of Reorganization which they regard as 
 
 163 Fed. 888; IBM. 
 
174 REORGANIZATION OF CORPORATIONS 
 
 fair to all the interests affected and invite the various classes of 
 security holders to participate in it. But even in such a case 
 there is danger of embarrassment in case a modification of the 
 original Plan should become necessary, for the reorganizers 
 may find themselves in the position of making changes that 
 will be favorable to one class of security holders and unfavor- 
 able to another. Such a modification would not be attempted, 
 of course, without submitting it to the security holders for their 
 adoption or rejection, but there is the risk of losing their sup- 
 port simply because they would feel that there had been no 
 independent representation of the various conflicting interests. 
 Accordingly, experienced counsel sometimes prefer in cases 
 where a Plan of Reorganization is announced in advance to 
 provide for a separate representation for each important interest 
 affected by the reorganization. 
 
 We have now completed the first stage of our campaign. 
 The property is in the hands of receivers, a bill to foreclose the 
 mortgage securing our bonds has been filed, a bondholders' 
 protective committee has been formed, the agreement defining 
 its powers has been lodged with the depositary, and the pub- 
 lication of the notice calling for the deposits of bonds has 
 begun. 
 
 I have not time to deal with the infinite variety of inter- 
 mediate questions with which you will have to deal as counsel 
 to the bondholders' committee in case the property is an im- 
 portant one and the conditions of the receivership are at all 
 complex. In railroad reorganizations you are apt to have 
 interesting problems arising out of the issue of receiver's cer- 
 tificates and the application of the rules which have been 
 worked out by the Federal courts according priority to claims 
 arising out of the current operations of the property. These, 
 which have come to be popularly known as "six months 
 claims," have been discussed in Mr. Byrne's lecture. 
 
REORGANIZATION OF CORPORATIONS 175 
 
 The Plan and Agreement of Reorganization 
 
 We will now pass on to the stage when your clients feel that 
 a Plan of Reorganization should be adopted. It is assumed 
 that in the meantime a majority, and the larger the majority 
 the better, of the bonds secured by the mortgage have been 
 deposited with your Committee and that progress has been 
 made with the foreclosure proceedings. One of the funda- 
 mental rules of tactics which you should always have in mind 
 as counsel for a bondholders' committee is to press your fore- 
 closure proceedings to an early decree. This will require con- 
 stant pressure and constant vigilance, "because the foreclosure 
 proceedings are conducted, not by yourself, but by counsel for 
 the trust company which is trustee of the mortgage, and coun- 
 sel for trust companies are proverbially busy. If possible, 
 get your decree of foreclosure before the adoption of a Plan of 
 Reorganization, for the Plan rarely suits every interest and is 
 very apt to result in the formation of opposition groups dis- 
 posed to adopt obstructive tactics for the purpose of securing 
 modifications, and their best opportunity for obstruction is in 
 the foreclosure proceedings. 
 
 Thus far it has been possible to suggest procedure in some 
 measure applicable to most of the cases which are likely to 
 arise, but when we approach the reorganization stage it is not 
 possible to lay down fixed rules. Each reorganization presents 
 its own questions and complications. I can therefore do little 
 more than discuss some of the problems. 
 
 A Plan of Reorganization is usually the result of negotiations 
 between two or more committees each representing a different 
 class of securities. In the simplest reorganization there is, at 
 least, a stockholders' committee and a bondholders' committee. 
 In the more complex reorganizations, there will probably be a 
 committee for the preferred stock, one for the common stock, 
 and a separate committee for each of several classes of obliga- 
 tions ; and there may be two or more committees representing 
 securities of the same issue. 
 
176 REORGANIZATION OF CORPORATIONS 
 
 If the Plan of Reorganization results from an agreement on 
 the part of several committees, there is usually a joint reorgani- 
 zation committee made up of representatives of the various 
 committees which join in the adoption of the Plan, although 
 sometimes the Plan is carried out by some one of the com- 
 mittees under an agreement with the others or by a banking 
 firm acting as Reorganization Managers. 
 
 We will now assume that your clients, with your aid, have 
 agreed with the committees representing the other interests 
 upon the financial structure of the Plan of Reorganization and 
 that you have been appointed counsel to the joint reorganiza- 
 tion committee or the reorganization managers. You are now 
 confronted with the preparation of the formal papers required 
 in the adoption, promulgation and consummation of the Plan. 
 The basic papers are the Plan and the Agreement of Reorgani- 
 zation. 
 
 I speak of the Plan and Agreement because it has become the 
 custom to state the terms of the reorganization and the powers 
 of the reorganizes in two papers, one the Plan, which con- 
 tains the financial details of the reorganization, and such in- 
 formation regarding the machinery for carrying it out as should 
 be communicated to the ordinary security holder. The other 
 paper the Agreement is usually a much longer and more 
 formidable document. It contains a fuller statement of the 
 powers of the Committee, the rights of participants in the 
 Plan and the machinery for carrying the Plan into execution. 
 Few documents require so much elaboration and such frequent 
 changes in their preparation as a Plan of Reorganization. In 
 important reorganizations it is usual, both for convenience and 
 precision, to begin securing printed proofs of the Plan during 
 its early stages. It is not unusual for a Plan to pass through a 
 score or more of proofs before it reaches its final form. 
 
 Again, I suggest that you get some classic model to serve as 
 a skeleton for the body which you are to create. Thus you 
 will not only save yourself a great deal of trouble, but you will 
 
REORGANIZATION OF CORPORATIONS 177 
 
 get the benefit of the experience of many able counsel during 
 the last quarter of a century during which the law and practice 
 regarding reorganizations have largely been developed, and 
 furthermore, you will be adapting your Plan to established 
 practices so that it will be more readily understood by the aver- 
 age investor and the average lawyer. Most modern Plans of 
 Reorganization follow a general pattern and have a great many 
 features in common. You will get some idea of the enormous 
 accumulation of experience which is accessible if you will com- 
 pare some modern Plan of Reorganization with one] adopted, 
 say, twenty-five years ago. You will find that the old plans 
 follow no uniform scheme and while they are often very short 
 and simple, they seem very inadequate to the modern prac- 
 titioner. 
 
 Here I am tempted to digress to offer some reflections pro- 
 voked by the length and complexity of modern reorganization 
 agreements and corporate mortgages. There can be no doubt 
 that instruments of this class have attained proportions, both 
 in length and elaborateness of provision for all conceivable 
 eventualities, of which the wildest imagination of the practitioner 
 of fifty years ago could form no conception. The Wabash Plan 
 and Agreement of Reorganization of 1915 is about three times 
 as long as the Wabash Plan and Agreement of Reorganization 
 of 1887. The Baltimore & Ohio Refunding Mortgage of 1915 
 is about thirty times as long as the typical Baltimore and Ohio 
 mortgage of fifty years ago and eight times as long as its typical 
 mortgage of twenty-five years ago. Illustrations might be 
 multiplied indefinitely, but these few serve to illustrate my 
 point. 
 
 There is a common impression that the modern long re- 
 organization agreement or corporate mortgage is a delusion 
 and a snare and that we should go back to the short and simple 
 forms which our fathers used. That this idea is entirely wrong 
 is known to any experienced lawyer of to-day who has had 
 occasion to act under the typical reorganization agreement or 
 
ITS REORGANIZATION OF CORPORATIONS 
 
 corporate mortgage of the early period. The provisions of the 
 modern reorganization agreement and the modern corporate 
 mortgage are the result of the experience and prophetic vision 
 of a great many able lawyers. Every new provision is 
 gested either by some decision of the courts or by an actual 
 experience or by some lawyer's conception of a possible exi- 
 gency. Ordinarily in drafting a document a lawyer must draw 
 chiefly upon his own experience and the results of his own 
 observation, but corporate mortgages and reorganization agree- 
 ments are public documents so that each lawyer can have the 
 benefit of the experience of many others. It would indeed be a 
 courageous man who would say that any of the provisions 
 which some of these lawyers have conceived to be wise should 
 be rejected simply because he cannot for the moment think 
 when or how it win become useful. 
 
 I doubt not that the modern corporate mortgage and the 
 modern reorganization agreement are needlessly long and need- 
 lessly complex, but the genius who has the combination of time, 
 wisdom and experience materially to shorten and simplify, 
 without weakening, them has not yet appeared. How difficult 
 is the task is known to every experienced New York lawyer 
 having occasion to pass upon a mortgage evolved by the wisest 
 country lawyer or even by a leader of the New York Bar who 
 has had the hardihood to discard precedent and attempt to 
 draw a simple railroad mortgage or a simple Plan of Reorgani- 
 I advise you to adhere to precedent and, in most 
 you wiO find the long reorganization agreement based on 
 precedent much safer than the agreement hah* as long drawn 
 by your neighbor who scorns precedent. 
 
 We now return from our digression to consider the typical 
 flan and Agreement of Reorganization. I hold in my hand a 
 typical Plan and Agreement. On the cover of the first page 
 are the names of the Joint Reorganization Committee, its coun- 
 sel and secretary, the names of the various committees which 
 joined in the adoption of the Plan and in the appointment of 
 
REORGANIZATION OF CORPORATIONS 179 
 
 the joint reorganization committee and the names of the de- 
 positary of each dass of securities. Then follows the introduc- 
 tory statement which, without going into precise details, briefly 
 presents the causes which led to the insolvency of the corpora- 
 tion, the measures taken by the committees for the investiga- 
 tion of the property, a brief summary of the results of that 
 investigation and of the reasons why the Plan is regarded as 
 effective to accomplish the purposes in view and is deemed to 
 be fair to the various classes of security holders. 
 
 Then follows the Plan itself, which, as I have already said, 
 is intended to give the financial details of the reorganization. 
 It begins with a statement of the present securities outstanding, 
 subdivided into underlying bonds which are not to be disturbed, 
 and those which are to be dealt with under the Plan. Then 
 follows a statement of the cash requirements, a description of 
 the new securities, a statement of the distribution of the new 
 securities among the various classes of existing 
 
 table showing at a glance what the holders of each dass of 
 existing securities will receive under the Plan, the provision 
 made for underwriting, a statement of the terms and conditions 
 of the cash assessment to be paid by the assenting stockholders 
 and bondholders, a statement of the capitalization and fixed 
 charges of the new company, showing the reduction in caphali- 
 zation and the reduction in fixed charges to be accomplished 
 by the reorganization, the provision made for unsecured cred- 
 itors, and the designation of the joint reorganization committee. 
 Then follows what should be present in every Plan of Reorgani- 
 zation, a provision that the statements contained in the Plan 
 have been compiled from sources believed to be accurate and 
 reliable, but that certain of them are only approximate and 
 none of them are to be construed as representations. There is 
 then a precise statement of the method and terms of participa- 
 tion in the Plan by the various security holders showing under 
 a separate heading what the holders of each dass of securities 
 must do in order to participate in the Han. The Plan doses 
 
180 REORGANIZATION OF CORPORATIONS 
 
 with a reference to the agreement of reorganization and the 
 statement that its provisions shall govern in case they conflict 
 with the Plan. 
 
 Your effort should be to make the Plan clear, succinct and 
 accurate, and, so far as possible, free from legal technicalities 
 and unnecessary details. .You should save for the reorganiza- 
 tion agreement all provisions which are not deemed essential 
 to inform the security holder regarding the essential elements 
 of the Plan and the procedure for his participation. 
 
 The typical agreement of reorganization which I hold in my 
 hand is thirteen pages long. The parties to it are the Joint 
 Reorganization Committee, parties of the first part, the holders 
 of the certificates of deposit issued by the various depositaries, 
 parties of the second part, and the depositaries under the 
 Plan, parties of the third part. This particular agreement pro- 
 ceeds upon the assumption that holders of securities shall join 
 in the Plan by depositing their securities with the depositary 
 of the proper protective committee. It is sometimes provided 
 that holders of undeposited securities shall join in the Plan by 
 depositing their securities with a new depositary appointed 
 under the reorganization agreement. The former course is less 
 likely to cause confusion, inasmuch as it provides for but one 
 class of certificates of deposit representing each class of securities. 
 
 The purpose of the reorganization agreement is to give the 
 Committee, as nearly as may be, authority to exercise all the 
 powers of owner of the deposited securities and moneys for the 
 purpose of carrying out the Plan and to provide a ready means 
 for securing the assent of depositors to any modification of the 
 Plan that the Committee may deem wise. It is very important 
 that counsel should see that the powers conferred by the agree- 
 ment are sufficiently broad to meet every probable emergency, 
 because he would be chagrined beyond measure if it developed 
 that through some omission in the Agreement the Committee 
 lacked the power to deal with an emergency which should have 
 been foreseen and was compelled to submit to the expense, 
 
REORGANIZATION OF CORPORATIONS 181 
 
 delay and risk involved in submitting to the depositors a formal 
 modification of the agreement for the purpose of conferring 
 additional power. The grant of power can hardly be too broad, 
 so long as it is confined to the carrying out of the Plan which 
 the Committee's constituents are asked to approve. Provided 
 always that this limitation is preserved, you will be surprised 
 to find how willing security holders are to place almost unlimited 
 power in a committee of reputable men. 
 
 On the other hand, as no one can be certain that every 
 emergency has been foreseen, it is important that the provi- 
 sions for modifying the Plan and Agreement should be broad 
 enough not only to provide for a modified Plan, but also for 
 any increase in the powers of the Committee that may be re- 
 quired to carry out the original Plan. The agreement should 
 be so drawn that any additional grant of power that may be 
 required can be obtained by filing a statement of the modifica- 
 tion with the depositary which shall become binding upon all 
 depositors unless they affirmatively exercise the privilege of re- 
 jecting the modification by the withdrawal of their securities. 
 
 Practical Questions Arising in Connection with Reorganizations 
 
 I shall now discuss a few of the practical questions which 
 are apt to arise in connection with reorganizations. 
 
 The theory of a Plan of Reorganization based, as most re- 
 organizations are, upon the foreclosure of one or more mort- 
 gages or upon the enforcement of the rights of creditors in 
 some other form, is that the Reorganization Committee be- 
 comes the owner of the deposited securities. It acquires the 
 property of the old company by purchase at the sale held pur- 
 suant to a decree of foreclosure or judgment and then transfers 
 it to a new corporation which the Committee has organized, 
 receiving as consideration therefor the new securities, whether 
 obligations or shares of stock, or both, required to carry out the 
 Plan. The Master's deed runs to the Committee's represen- 
 
182 REORGANIZATION OF CORPORATIONS 
 
 tative, who in turn executes a deed to the new corporation; 
 or the Master's deed may run directly to the new corporation, 
 the Committee's representative having assigned thereto his 
 rights under his bid. The Committee thus becomes the owner 
 of the new securities, subject to its obligation to distribute 
 them pursuant to the Plan. 
 
 It is manifest that, in practice, a Reorganization Committee 
 will always have to provide a certain amount of money - 
 sometimes a very large amount. It must have money for its 
 own expenses and for the distributive share of the proceeds of 
 sale to which the holders of the obligations not joining in the 
 Plan are entitled. Money is frequently required to retire re- 
 ceivers' certificates and underlying liens, and almost every 
 reorganization provides fresh capital for the enterprise. 
 
 This money may be provided in a variety of ways, but it is 
 usually provided by means of a so-called "assessment" upon 
 the holders of the securities which represent the equity in the 
 property junior to the obligations which are being enforced - 
 an equity which, presumably, would be wiped out by the strict 
 enforcement of those obligations. The Committee, in effect, 
 says to the holders of these junior securities, usually stock- 
 holders : if you wish to retain your equity or some share of it 
 you must provide part or all of the cash required by the Plan. 
 For the cash which the owners of the equity are thus required 
 to provide as a condition to participation in the reorganization 
 they are usually given some form of security, either new shares 
 of stock or obligations. 
 
 Assuming that the control of the reorganization is in the 
 hands of a Bondholders' Committee, its aim is to transfer to 
 the stockholders the burden of furnishing the new cash required 
 at the least possible cost to the bondholders. You may safely 
 be influenced by the natural impulse of the average stockholder 
 to protect his investment and to stay in the property even at 
 the price of an additional investment involving some peril. 
 It is usually wise not to require the payment of any assessment 
 
REORGANIZATION OF CORPORATIONS 183 
 
 with the deposit of securities, for the securities are usually 
 sufficient security for the payment of the assessment when 
 called. 
 
 I have used the term " assessment " as describing the pay- 
 ments required of stockholders and others interested in the 
 equity as a condition to their participation in a reorganization 
 because it is the term commonly used. It is, however, in- 
 accurate, inasmuch as on final analysis the opportunity offered 
 is to purchase from the Committee a portion of the securities 
 which are to be issued to it by the new company in return for 
 the property acquired and for the cash provided under the 
 Plan. It is simply a sale of securities. 
 
 In order to insure the success of the Plan, it is usual to 
 arrange in advance with bankers or with a syndicate to under- 
 write the cash requirements, that is, to agree to purchase such 
 of the securities offered to the security holders interested in the 
 equity as may not be taken by them. The announcement that 
 the Plan has been underwritten usually has the effect of prac- 
 tically insuring the participation of the greater part of the 
 security holders interested in the equity. 
 
 Underwriters usually receive a cash commission upon their 
 maximum obligation. If all the security holders who are 
 assessed pay their assessment, no payment is required of the 
 underwriters and they simply receive their cash commission 
 for the obligation which they have assumed. If, on the other 
 hand, only a portion of the security holders pay their assess- 
 ment, the underwriters provide the remainder of the cash and 
 receive, in addition to the cash commission, the new securities 
 which would have gone to the non-assenting security holders 
 had they assented to the Plan. 
 
 Plans of reorganization are rarely strictly logical. If they 
 were, the practice would be to limit participation on the part 
 of holders of the old securities to such of them as have a real 
 interest in the property based upon its value as a going concern. 
 For instance, with a property deemed to be worth $12,000,000, 
 
184 REORGANIZATION OF CORPORATIONS 
 
 against which there are $10,000,000 of bonds, $5,000,000 of 
 preferred stock and $10,000,000 of common stock, it can be 
 seen at a glance that there is no equity for the common shares 
 and the logical course would be to exclude them and confine 
 the participation in the reorganization to the bondholders and 
 the preferred stockholders. But this rarely happens in prac- 
 tice. Bondholders usually want to escape or reduce the burden 
 of raising the new money required for the property by appeal- 
 ing to the impulse of the stockholders to protect their invest- 
 ment, so that stockholders are frequently offered a participa- 
 tion in the reorganization, conditioned upon the payment of an 
 assessment, even though upon no theory of valuation would 
 the aggregate value of the property exceed the amount of the 
 prior securities. 
 
 The difficulty in securing underwriters to underwrite the 
 assessment of stockholders whose equity is so attenuated that 
 there is room for doubt as to their willingness to pay an assess- 
 ment, may be met by requiring the holders of the securities 
 next in line to act as intermediate underwriters of the assess- 
 ment and forming a syndicate to underwrite the participation 
 of this last class of securities. For instance, at the time of the 
 promulgation of the Plan for the reorganization of the Wabash 
 Railroad Company last year the market value of its preferred 
 and common shares had dwindled to almost nothing. The 
 cash requirements of the Plan were over $27,000,000. The 
 Plan levied an assessment of $30 per share upon the preferred 
 and common stockholders alike and for this assessment new 
 Five Per Cent. Profit Sharing Preferred stock and common 
 stock was offered. It was doubtful whether stockholders 
 would, in any considerable number, pay the assessment, and it 
 was manifest that a syndicate could not be formed to under- 
 write the participation of the stockholders. Accordingly, the 
 Plan provided that the bondholders whose mortgage was being 
 foreclosed should be required, in effect, to underwrite the par- 
 ticipation of the stock, that is, to provide such part of the cash 
 
REORGANIZATION OF CORPORATIONS 185 
 
 requirements as was not furnished by the stockholders, and an 
 underwriting syndicate was formed to provide such part of this 
 remainder as the bondholders failed to pay. 
 
 Another interesting illustration is furnished by the recent 
 reorganization of an important industrial company which had 
 outstanding about $10,000,000 of bonds, $11,000,000 of pre- 
 ferred stock and $17,000,000 of common stock. The property 
 if sold at forced sale would not yield enough to pay the bonds. 
 At the time the Plan was promulgated the bonds were selling 
 on the market at about forty-four per cent, of par, the preferred 
 shares at six per cent, of par and the common shares at three 
 per cent, of par. The cash requirement of the Plan was about 
 $3,600,000, which was to be provided by an assessment of $12.50 
 per share upon the preferred and common stock and new first 
 preferred stock was to be issued at par for the cash assessment. 
 The bondholders insisted that the preferred stock should under- 
 write the assessment of the common stock, that is to say, that 
 to such extent as the common stockholders failed to pay the 
 assessment of $12.50 per share their place should be taken by 
 the preferred stock, so that the syndicate practically under- 
 wrote the participation of the preferred shares. As a matter of 
 fact, so strong was the impulse of the common stockholders to 
 stay by their investment that they paid the assessment with 
 substantial unanimity, leaving but an insignificant fraction of 
 their burden to be assumed by the preferred stock. 
 
 An important question for counsel in connection with a 
 modern reorganization is as to the aggregate amount of the 
 new securities. I am not now referring to the financial aspects 
 of the new capitalization, such as the amount of the fixed charges, 
 the rate of interest upon the obligations and the rate of divi- 
 dends upon the preferred stock, because those are questions 
 which primarily concern the financier rather than the lawyer; 
 I refer to the amount of capitalization which the law will per- 
 mit, for that is a question primarily for counsel. In the old 
 days, before we had public service commissions and before the 
 
186 REORGANIZATION OF CORPORATIONS 
 
 courts had begun seriously to enforce the laws regarding the 
 liability to creditors of holders of partly paid stock, very little 
 attention was paid to the amount of new securities so far as 
 questions as to their validity or stockholders' liability were con- 
 cerned. The lawyer usually was prepared to provide his client 
 with as large an amount of new securities as he wanted. In 
 those days, it frequently happened, particularly in the case of 
 industrial enterprises, that reorganizations resulted in increas- 
 ing the aggregate amount of securities outstanding, and re- 
 organizers were very apt to try to make up for what the securi- 
 ties lacked in quality by increasing their quantity. In railroad 
 reorganizations, practically the only limit of capitalization 
 which was recognized was the par amount of the old securities 
 plus the new capital. 1 Those days are past. Railroad re- 
 organizations now, in most instances, must be approved by 
 the public service commissions, and if the railroad which you 
 propose to mortgage in carrying out your Plan happens to run 
 through half a dozen States you are lucky if you do not have 
 to deal with as many public service commissions. If your 
 client has had the painful experience of having been forced to 
 respond to creditors as the holder of stock which turned out 
 not to be fully paid, he is apt, particularly in the case of indus- 
 trial corporations, to insist that you assure him that the stock 
 which he is to acquire is fully paid and carries no risk of per- 
 sonal liability to creditors. 
 
 There are as yet very few precedents and very few authori- 
 ties to guide counsel in determining what must be done to 
 make plans of reorganization conform to the requirements of 
 the public service commissions of the various States, because 
 very few large reorganizations have been carried through since 
 public service commissions became the rule rather than the 
 exception. The first of the present crop of reorganizations of 
 interstate railroads escaped the public service commissions be- 
 cause the Plan did not involve the creation of a mortgage. 
 
 1 See Memphis & Little Rock R. R. v. Dow, 120 U. S. 287 ; 1887. 
 
REORGANIZATION OF CORPORATIONS 187 
 
 The law seemed to be clear, in that case at least, that a corpora- 
 tion organized under the laws of one State to acquire an inter- 
 state railroad running through several States could acquire the 
 property at foreclosure sale without consulting the public serv- 
 ice commissions of the other States, but that any reorganiza- 
 tion involving the creation of a mortgage would, in effect, have 
 required the approval of the public service commission of 
 every State into which the mortgaged lines extended. 
 
 The Plan for the reorganization of one of the great railroad 
 systems now in receivers' hands, after having been worked out 
 with infinite care and after months of negotiation, has just 
 been halted by the first public service commission to which it 
 was submitted, and their decision seems to recognize no fixed 
 principles by which the reorganizers can be guided. 
 
 In the case of some railroad systems which must soon be re- 
 organized the difficulties in the way of reorganization presented 
 by the conflicting requirements of the laws of the various States 
 concerned and possible conflict between the requirements of 
 the public service commissions in the respective States are 
 appalling. It is, I am sure, the ardent prayer of every railroad 
 reorganizer, as it is of most railroad officials, that a Federal 
 incorporation law will bring relief from the intolerable condi- 
 tions resulting from conflicting State laws and clashing public 
 service commissions. 
 
 In most States, the law makes it the duty of the public serv- 
 ice commissions to limit the securities to be issued upon re- 
 organization to the value of the property. In this State, the 
 Public Service Commission law, enacted in 1907 * at the in- 
 stance of Governor Hughes, expressly provides that in valuing 
 the property of a public service corporation as a basis for the 
 issue of securities no value shall be attributed to the corpora- 
 tion's franchises beyond the amount paid the State therefor. 
 When the insolvent street railway corporations of Manhattan 
 and The Bronx came to be reorganized several years ago the 
 
 1 N. Y. Consolidated Laws. 
 
188 REORGANIZATION OF CORPORATIONS 
 
 Public Service Commission for the First District insisted that 
 the amount of the new securities which it would authorize was 
 measured by the then value of the Corporation's property, 
 exclusive of its franchises. The Court of Appeals, however, 
 held in the Third Avenue Railway Case l that under the so-called 
 reorganization statute 2 new securities could be issued at least 
 to the amount of the old securities plus the additional cash 
 paid in, regardless of the value of the property. The Legisla- 
 ture, however, promptly amended the law 3 so that to-day, in 
 the case of reorganizations, as in the case of new enterprises, the 
 securities must not "exceed the fair value of the property in- 
 volved." 
 
 Reorganizations of industrial corporations in this country 
 are not under governmental supervision, nor are they, nor for 
 that matter are railroad reorganizations in this country, sub- 
 ject to the supervision of the courts. In England, statutes 
 require that Plans for the reorganization, or, to use the terms 
 of the English statute, for the "reconstruction" of corporations, 
 shall have the approval of the courts. 4 The Plan must be filed 
 by its proponents with the Court as a public document and an 
 opportunity must be afforded to security holders to file objec- 
 tions upon which they are entitled to a hearing and the Plan 
 does not become finally effective until it has been approved by 
 the Court. It then becomes binding upon all security holders 
 whether they have assented or not. 
 
 The limitations imposed by our Federal Constitution create 
 difficulties in the way of working out in this country any 
 scheme of public supervision of reorganization which would 
 compel non-assenting security holders to accept plans of re- 
 organization against their will or compel mortgagees or other 
 creditors to surrender the right of doing as they please with 
 
 ^OSN. Y. 299; 1911. 
 
 2 Stock Corporation Law, 9 (N. Y. Consolidated Laws) . 
 
 3 Public Service Commissions Law, 55a and 69a (N. Y. Consolidated 
 Laws). 
 
 * English Companies Act, Part IV, Sections 129, 182, 199. 
 
REORGANIZATION OF CORPORATIONS 189 
 
 their own property. Without the power to compel the accept- 
 ance of reorganization terms by non-assenting security holders, 
 I fear that public regulation of reorganizations, like so much 
 other public regulation in this country, would simply mean the 
 power to harm without effective power to help. 
 
 Twenty years ago Kentucky adopted a statute 1 regulating 
 the reorganization of insolvent railroad and bridge companies 
 which was modeled upon the English procedure. This statute 
 was hailed as the beginning of a great reform by Mr. Moorfield 
 Storey in his address as President of the American Bar Asso- 
 ciation in 1896, but even that statute recognized the constitu- 
 tional difficulties in the way of the unrestricted adoption of the 
 English system by providing that 
 
 "where claims have arisen or securities have been issued prior to the 
 passage of this act, and any holder of such claim or securities shall 
 object to the plan or reorganization, there shall be inserted in such a 
 plan a provision for preserving and maintaining the right of such 
 holder so as not to impair the obligation of his contract." 
 
 While the laws of several States either directly or in practical 
 effect require that the reorganization of public service corpora- 
 tions shall be subject to supervision by their Public Service 
 Commissions, no State, so far as I know, has followed the ex- 
 ample of Kentucky in adopting a statute which attempts to 
 make reorganizations approved by the Commission or by a 
 certain portion of the security holders binding upon the non- 
 assenting bondholders. Public regulation of reorganizations 
 has very recently received the support of Judge Hough of the 
 United States District Court for this District, 2 who in a recent 
 opinion said : 
 
 "There is a good deal to be said in favor of a new scheme of law 
 which would in some way confer upon an impartial and disinterested 
 tribunal the entire supervision of corporate reorganizations. . . ." 3 
 
 1 Kentucky Statutes, 771-A. 
 
 2 Southern District of N. Y. 
 
 3 Guaranty Trust Co. of New York v. International Typesetting Machine Co. 
 (not yet reported). 
 
190 REORGANIZATION OF CORPORATIONS 
 
 Judge Hough added in a public interview that this " was . . . 
 the expression of a hope" which he did "not expect to live to 
 see realized." 
 
 There is an erroneous impression that the Federal Courts 
 exercise supervision over reorganizations. Several years ago a 
 United States Circuit Judge endeavored to use the power of 
 the Court to force a Plan of Reorganization upon unwilling 
 bondholders. The Plan was doubtless a beneficent one, but 
 the United States Circuit Court of Appeals, presided over by 
 Mr. Justice Brewer of the Supreme Court, very promptly con- 
 vened and set aside the order. 1 Mr. Justice Brewer in his 
 opinion said (p. 927) : 
 
 "There is no wide discretion vested in the chancellor which permits 
 him to disturb contract rights rights of property," 
 
 and quoted the language of the United States Supreme Court 
 in Kneeland v. American Loan Co., 2 where it said (p. 97) : 
 
 ' ' One holding a mortgage debt upon a railroad has the same right 
 to demand and expect of the Court respect for his vested and con- 
 tracted priority as the holder of a mortgage on a farm or lot. . . . 
 We emphasize this fact of the sacredness of contract liens, for the 
 reason that there seems to be growing an idea that the chancellor, 
 in the exercise of his equitable powers, has unlimited discretion in this 
 matter of the displacement of vested liens.' " 
 
 Mr. Justice Brewer goes on to say, referring to the Plan of 
 Reorganization (p. 929) : 
 
 "Now, that may be a wise business proposition, and if the court 
 had power to take hold of these things and do for the people, who are 
 mortgage bondholders, that which it thinks best for them, we might 
 have no hesitation in sustaining this ; but every man in this country 
 decides questions in respect to his own property for himself." 
 
 There have, of course, been not infrequent instances in 
 which the courts have successfully interfered with the execu- 
 tion of plans of reorganization, but, in every case, upon the 
 
 1 Merchants Loan & Trust Co. v. Chicago Rys. Co., 158 Fed. 923 ; 1907. 
 
 2 136 U. S. 89 ; 1890. 
 
REORGANIZATION OF CORPORATIONS 191 
 
 theory that some legal right was being violated, as in the well 
 known Monon case, 1 where the Supreme Court upheld the 
 power of a court of equity to set aside a foreclosure decree upon 
 the ground that it was intended to carry out a conspiracy be- 
 tween the holders of the mortgage debt and the stockholders of 
 the corporation to bring about a needless default under, and a 
 foreclosure of, the mortgage, for the purpose of transferring 
 the mortgaged property to a new corporation in which the 
 stockholders of the old corporation should have an interest to 
 the exclusion of the floating debt. When the case reached its 
 second trial the Circuit Judge dismissed the charge of con- 
 spiracy and sustained the foreclosure decree. 2 There is no in- 
 stance in the books, so far as I know, where, at the instance of 
 stockholders, the courts of this country have interfered with 
 plans of reorganization proposed by bondholders, unless the 
 validity of the foreclosure decree could be attacked. 
 
 Three years ago the Supreme Court, in a decision fore- 
 shadowed by its opinion in the Monon case, placed a very 
 serious and unexpected limitation upon the power of mortgage 
 bondholders to deal in reorganizations with property purchased 
 at foreclosure sale. I refer to the decision in Northern Pacific 
 Railroad Company v. Boyd. 8 If you are to have to do with 
 reorganizations, you should know about this decision, because 
 if you do not you are very likely to be subjected to the humilia- 
 tion of being told about it by your client. In reorganizations 
 of to-day a very large part of the time and energy of bond- 
 holders' committees and their counsel are devoted to discussion 
 of the Boyd case and the possible means of meeting its require- 
 ments. It will accordingly be worth our while to consider it 
 with some care. 
 
 The Northern Pacific Railway Company was reorganized 
 about twenty years ago. The mortgage bonds and the re- 
 
 1 Louisville Trust Company v. Louisville, New Albany and Chicago Ry. Co., 
 174 U. S. 674 ; 1899. 
 
 2 Farmers' Loan & Trust Co., et al. v. Louisville, N. A. & C. Ry. Co., et al. t 
 103 Fed. 110; 1900. 3 228 U. S. 482 ; 1913 (Boyd Case). 
 
192 REORGANIZATION OF CORPORATIONS 
 
 ceivers' certificates aggregated $157,000,000 and there was a 
 large issue of stock. The reorganization was primarily a bond- 
 holders' reorganization based upon the foreclosure of their 
 mortgage. The Plan of Reorganization gave to the old pre- 
 ferred stock 50 per cent in new preferred stock and 50 per cent 
 in new common stock on paying an assessment of $10 per 
 share, and to the old common stock 100 per cent in new com- 
 mon stock on paying an assessment of $15 per share. The 
 aggregate assessment was $11,000,000. The capitalization of 
 the new company was to be $190,000,000 in bonds, $75,000,000 
 in preferred stock and $80,000,000 in common stock, a total of 
 $345,000,000, and this capitalization was based upon the assump- 
 tion, or one might say fiction, that the property then had a 
 value of $345,000,000. No provision was made in the Plan 
 for the floating debt, which was considerable. 
 
 A committee of unsecured creditors sought to defeat the 
 foreclosure suit upon the ground that it was the result of a 
 conspiracy between bondholders and stockholders to exclude 
 the floating debt and to turn over the valuable equity in the 
 property to the stockholders. This effort was unsuccessful, 
 the Circuit Court holding that the assets were insufficient to 
 pay the mortgage debt and the net earnings insufficient to pay 
 the fixed charges and that there was no equity in the property 
 out of which unsecured creditors could be paid and that there 
 was no reason why the mortgage bondholders in purchasing the 
 property at foreclosure sale should not make any arrangements 
 they chose for the participation of the old stockholders in the 
 ownership of the stock of the reorganized company. 1 No 
 appeal was taken from this decision. 
 
 The property was bought in at foreclosure sale by the bond- 
 holders' committee for $61,500,000, which was $86,000,000 less 
 than the secured debts. It was transferred immediately to a 
 new corporation which issued the $345,000,000 of securities 
 contemplated by the Plan, and the old stockholders, most of 
 
 1 Paton v. Northern Pacific Ry. Co., 85 Fed. 838 ; 1896. 
 
REORGANIZATION OF CORPORATIONS 193 
 
 whom paid the assessment, became the owners of the bulk of 
 the stock of the new company. 
 
 About ten years after the consummation of this reorganiza- 
 tion, the new Northern Pacific Company having in the mean- 
 time become highly prosperous, Boyd, the owner of a judgment 
 for an unsecured claim against the old company, brought a 
 suit against the old company and the new company, seeking to 
 subject the property acquired by the latter from the former 
 at foreclosure sale to the payment of his judgment. He claimed 
 that the foreclosure sale was invalid because it was made in 
 pursuance of a Plan of Reorganization between bondholders 
 and stockholders of the railroad company which made no pro- 
 vision for the payment of the unsecured creditors, although the 
 stockholders retained their interest by receiving shares in the 
 new Company. The Court below sustained this contention 
 and entered a decree making Boyd's claim a lien upon the 
 property of the old company in the hands of the new company 
 but subject to the mortgages placed thereon at the time of the 
 reorganization. The Supreme Court, by a vote of five to four, 
 affirmed the judgment, the dissenters being Chief Justice White 
 and Justices Lurton, Holmes and Van Devanter. 
 
 The opinion of the majority of the Court proceeds upon the 
 theory that while the bondholders might have lawfully bought 
 in the property covered by the mortgage and kept it for them- 
 selves to the exclusion of both the unsecured debt and the 
 stockholders, the moment they provided for participation in 
 the new company by the stockholders, even at the price of 
 paying a heavy assessment, the obligation arose to make pro- 
 vision for the unsecured debt which would recognize its priority 
 to the interest of the stockholders. 
 
 The prevailing opinion says (p. 504) : 
 
 "The property was a trust fund charged primarily with the pay- 
 ment of corporate liabilities. Any device, whether by private con- 
 tract or judicial sale under consent decree, whereby stockholders were 
 preferred before the creditor was invalid. Being bound for the debts, 
 
194 REORGANIZATION OF CORPORATIONS 
 
 the purchase of their property, by their new company, for their bene- 
 fit, put the stockholders in the position of a mortgagor buying at his 
 own sale. . . . That such a sale would be void, even in the absence 
 of fraud in the decree, appears from the reasoning in Louisville Trust 
 Company v. Louisville Ry., 174 U. S. 674, 683, 684 (the Monon case) 
 where 'assuming that foreclosure proceedings may be carried on to 
 some extent at least in the interests and for the benefit of both mort- 
 gagee and mortgagor (that is, bondholder and stockholder) ' the court 
 said that 'no such proceedings can be rightfully carried to consum- 
 mation which recognize and preserve any interest in the stockholders 
 without also recognizing and preserving the interests, not merely of 
 the mortgagee, but of every creditor of the corporation. . . . Any 
 arrangement of the parties by which the subordinate rights and in- 
 terests of the stockholders are attempted to be secured at the expense 
 of the prior rights of either class of creditors comes within judicial 
 denunciation.' " 
 
 The Court then says (p. 507) : 
 
 "The invalidity of the sale flowed from the character of the re- 
 organization agreement regardless of the value of the property, for in 
 cases like this, the question must be decided according to a fixed prin- 
 ciple, not leaving the rights of the creditors to depend upon the 
 balancing of evidence as to whether on the day of sale the property 
 was insufficient to pay prior encumbrances." 
 
 The Court continues (p. 508) : 
 
 "This conclusion does not, as claimed, require the impossible and 
 make it necessary to pay an unsecured creditor in cash as a condition 
 of stockholders retaining an interest in the reorganized company. 
 His interest can be preserved by the issuance, on equitable terms, of 
 income bonds or preferred stock. If he declines a fan* offer he is left 
 to protect himself as any other creditor of a judgment debtor, and, 
 having refused to come into a just reorganization, could not there- 
 after be heard in a court of equity to attack it." 
 
 This is the one hint which the Court vouchsafes as to" the 
 procedure which should be adopted in providing for unsecured 
 debts under Plans of Reorganization based on the foreclosure 
 of a mortgage but offering participation to stockholders. 
 
REORGANIZATION OF CORPORATIONS 195 
 
 Mr. Justice Lurton was right when he said in his dissenting 
 opinion, that "The consequences which may result from the 
 decision to the numerous reorganizations of railroad companies 
 which occurred about the time of this reorganization or since, 
 are to my mind alarming." 
 
 The result of this decision has been to introduce the greatest 
 uncertainty and confusion in the reorganizations which have 
 since been attempted and those which are now pending. It 
 has materially reduced the opportunities for stockholders to 
 participate in reorganizations controlled by mortgage bond- 
 holders, for, manifestly, the simplest way for a committee of 
 mortgage bondholders to avoid the embarrassments of the 
 Boyd 1 case is completely to exclude the stockholders and 
 thereby gain freedom to exclude the unsecured debt. But 
 still, in most large reorganizations, the stockholders knock 
 loudly at the door for participation, and it is still the prefer- 
 ence of most bondholders' committees to afford them partici- 
 pation, partly to avoid the dissatisfaction, litigation and delay 
 which might result from their exclusion, and partly to secure 
 new capital by appealing to the desire of stockholders to retain 
 their interest in the property and their consequent willingness 
 to furnish new capital on more favorable terms than could be 
 obtained from strangers. 
 
 Naturally bondholders' committees are usually unwilling to 
 admit stockholders upon a basis which will involve the pay- 
 ment of the unsecured creditors in cash. Therefore some offer 
 of securities meeting the requirements of the Boyd 1 case must 
 be made. This consideration is of special importance in several 
 pending reorganizations of large magnitude, where the parent 
 company is liable as guarantor of the obligations or contracts 
 of subsidiary or affiliated companies the properties of which 
 are to be excluded from the reorganization. In such cases 
 there may be an enormous unsecured contingent liability which 
 will be represented by no value whatever in the reorganized 
 
 1 See ante. 
 
196 REORGANIZATION OF CORPORATIONS 
 
 property. The decision in the Boyd 1 case gives to the 
 holders of these guaranteed obligations or contracts a position 
 of unwarranted strength. They can say to the committee 
 representing the bondholders of the parent corporation, un- 
 less you settle with us, we will assert our rights under the 
 Boyd 1 case and practically force you to exclude your stock- 
 holders from the reorganization and thereby deprive you of 
 the opportunity of raising your new capital by assessing them. 
 In some cases the difficulty has been met by an agreement 
 with the holder of the large unsecured claims, but in other 
 cases counsel must form a conclusion as to what provision 
 for the unsecured debt will meet the requirements of the 
 Boyd 1 case. 
 
 It will be remembered that in the Boyd l case the Court said 
 that the decision does not "make it necessary to pay an un- 
 secured creditor in cash as a condition of stockholders retaining 
 an interest in the reorganized company/' that "his interest can 
 be preserved by the issuance, on equitable terms, of income 
 bonds or preferred stock," and that "if he declines a fair offer 
 . . . and having refused to come into a just reorganization, 
 he could not thereafter be heard in a court of equity to attack 
 it." This, you will observe, is a very vague guide. It would 
 seem reasonably clear that the opinion would be met by offer- 
 ing the unsecured creditor par in income bonds or preferred 
 stock which would be prior to all the securities of the new com- 
 pany appropriated for the old stockholders, but in the ordinary 
 case the old stockholders' participation is conditioned upon his 
 paying a cash assessment for which he will receive a preferred 
 security that would naturally rank ahead of the preferred 
 stock or income bonds appropriated for the unsecured creditors. 
 The opinion says he must be offered income bonds or preferred 
 stock "on equitable terms." Does that mean that they may 
 be offered at less than par? I am sure that no one can tell. 
 Apparently the opinion leaves it for the court to determine in 
 
 1 See ante. 
 
REORGANIZATION OF CORPORATIONS 197 
 
 each case whether or not the terms offered to the floating debt 
 are equitable. 
 
 Mr. Joline, in his lecture of six years ago, said that 
 
 "The opinion of Justice Brewer in the Monon case stands . . . 
 upon the pages of the reports, a dangerous weapon in the hands of 
 guerrillas who hang about the outskirts of reorganizations and en- 
 deavbr to levy tribute as a condition of abating the nuisance of their 
 presence, and that even to this day, reorganizes stand in more or less 
 terror of the Monon l case, and it looms up as a perpetual spectre in 
 their path." 
 
 If this were true of the Monon 1 case, may we not say that the 
 specter of six years ago has now become materialized into a 
 veritable demon incarnate standing across the path of the re- 
 organizer to-day? It must earnestly be hoped that before 
 long the Supreme Court will have an opportunity of handing 
 down a decision which will supplement its decision in the Boyd 
 case by indicating some fixed principles to be applied in making 
 provision for the floating debt in reorganizations based upon 
 the foreclosure of mortgages which offer participation to stock- 
 holders. 
 
 The Boyd 2 case has been construed by the Federal Courts In 
 several adjudicated cases, but none of them are of material aid. 3 
 It had been the hope of the Bar that in the case of the Kansas 
 City Southern Railway Company v. Guardian Trust Company, 
 et al., argued at the October Term, the Supreme Court would 
 hand down a decision limiting the doctrine of the Boyd 4 case 
 or at all events laying down rules which would serve as a guide 
 to counsel, but to their disappointment the opinion of Mr. 
 Justice Holmes, handed down last week, concurred in by all of 
 
 i See ante. * Ibid. 
 
 3 Keech v. Stowe-Fuller Co., 205 Fed. 887 ; 1913 ; Mechanics & Metals Nat. 
 Bank v. Howell, 207 Fed. 973 ; 1913 ; Central Improvement Co. v. Cambria Steel 
 Co., 210 Fed. 696; 1913; Investment Registry v. Chicago & M. E. R. Co., 212 
 Fed. 594 ; 1913 ; In re Howell, 215 Fed. 1 ; 1914 ; Equitable Tr. Co. v. United 
 Box Board & Paper Co., 220 Fed. 714; 1915; Western Union Tel. Co. v. U. S. 
 & Mexican Trust Co., 221 Fed. 545 ; 1915. 
 
 * See ante. 
 
198 REORGANIZATION OF CORPORATIONS 
 
 his associates excepting the Chief Justice and Mr. Justice Van 
 Devanter, seems only to .add to the uncertainty. In that case 
 there was a bondholders' reorganization based upon the fore- 
 closure of their mortgage. Although the Plan reserved a certain 
 amount of cash for the payment of the floating debt which 
 turned out to be very largely in excess of that amount, it did 
 not definitely provide that the floating debt should all be paid 
 but left it to the Reorganization Committee to determine 
 whether and to what extent the cash so reserved should be used 
 for that purpose. The Reorganization Committee paid a large 
 number of the floating debt creditors, but not the complainant. 
 The Court held that the provision in the Plan for the floating 
 debt was inadequate, and that inasmuch as the Plan had ad- 
 mitted the stockholders, the New Company was liable for the 
 debt of the complainant. The only new light shed by this de- 
 cision is in the suggestion that if, in a given case, floating debt 
 creditors are to be preferred to stockholders "it is essential to 
 inquire whether the appellant (the New Company) . . . got 
 by the foreclosure more than enough to satisfy the mortgage, 
 which was a paramount lien." In the Boyd 1 case the Court, on 
 the contrary, said that "the invalidity of the sale flowed from 
 the character of the reorganization agreement regardless of the 
 value of the property, ..." and later in the opinion it seemed 
 to assume that, whatever may have been the actual value of 
 the property, the New Company was concluded by the esti- 
 mate of value upon which its issue of new securities was based. 
 The recent decision accordingly affords some hope that mort- 
 gage bondholders could carry through a Plan of Reorganization 
 which admitted the stock and excluded the floating debt pro- 
 vided it could be shown that the value of the property did not 
 exceed the mortgage lien, and provided also, possibly, that the 
 new securities were based upon a valuation of the property 
 which did not exceed that amount. 
 
 1 See ante. 
 
REORGANIZATION OF CORPORATIONS 199 
 
 The Underwriting and Syndicate Agreements 
 
 Having completed the Plan and Agreement of Reorganiza- 
 tion, the next important paper is the underwriting agreement. 
 The parties to that are usually the reorganization committee 
 or the reorganization managers on the one hand and the under- 
 writing Syndicate or, more frequently, the Syndicate managers, 
 on the other hand. It may be a very simple contract. Not 
 infrequently an underwriting agreement creating an obligation 
 running into tens of millions is expressed in a letter less than 
 a page long. The agreement should refer to the Plan and Agree- 
 ment of Reorganization, and provide that the Syndicate or 
 Syndicate Managers shall, for a designated commission, agree 
 to purchase such of the securities offered to the security holders 
 whose participation is underwritten as shall not be subscribed 
 for by them, paying therefor the amount of the so-called 
 assessment and receiving all of the securities which would have 
 gone to the non-assenting security holders had they joined in 
 the Plan. 
 
 If your client, the bankers, happens to be the Syndicate 
 Manager, it will also be your duty to draw the syndicate agree- 
 ment, that is, the agreement between the Syndicate Managers 
 and the participants in the Syndicate. This agreement also 
 is sometimes embodied in a short letter, addressed by the Syn- 
 dicate Managers to each participant and accepted by him, but 
 more frequently, particularly in the case of large syndicates 
 with numerous participants, a more formal instrument is em- 
 ployed. Such an agreement confers upon the Syndicate 
 Managers power to bind the participants within the limit of 
 the maximum syndicate obligation. It should provide that 
 the liability of the Syndicate's subscribers shall be several and 
 not joint and that the securities acquired for syndicate 
 account may remain for a designated period under the control 
 and management of the Syndicate Managers and sometimes, 
 but not always, with the privilege to participants to withdraw 
 
200 REORGANIZATION OF CORPORATIONS 
 
 their securities from sale. The agreement should confer broad 
 powers upon the Syndicate Managers to take such action in 
 their discretion as they shall deem to be advantageous in the 
 interest of the Syndicate. It is wise to provide that the Syndi- 
 cate participations shall not be transferable except with the 
 permission of the Syndicate Managers. 
 
 Consummation of the Plan 
 
 The Plan and Agreement of Reorganization having been 
 adopted and signed on behalf of the committees and filed with 
 the depositary, you next publish, in such newspapers and at 
 such intervals as are designated in the Protective Agreement, 
 the notice of the filing of the Plan, affording to depositors the 
 privilege of withdrawing their securities in case they are dis- 
 satisfied with the Plan and to holders of undeposited securities 
 the opportunity of depositing their securities under the Plan. 
 The time for such additional deposits may be extended from 
 time to time, with or without the payment of a penalty, until 
 the Committee is satisfied that a sufficient proportion of the 
 various classes of securities has been deposited to justify it in 
 declaring the Plan operative. Its action in declaring the Plan 
 operative usually consists of resolutions adopted, or an instru- 
 ment signed, by its members which is filed with the depositary, 
 and of notice given by publication as provided in the Agree- 
 ment. Even after the Plan has been declared operative, 
 further opportunity for the deposit of securities may be, and 
 usually is, offered. 
 
 It is usually wise to advise your client to adopt a liberal 
 policy in accepting deposits of securities and to avoid forcing 
 minorities to fight by excluding them from participation in the 
 Plan, however undeserving they may seem to be. The under- 
 writing agreement and the syndicate agreement should clearly 
 provide that, with or without the consent of the Syndicate 
 Managers, preferably without, the Reorganization Committee 
 
REORGANIZATION OF CORPORATIONS 201 
 
 may permit delinquent security holders to participate in the 
 Plan even after the date when under the terms of the under- 
 writing agreement the Syndicate becomes entitled to receive 
 the securities which would have gone to the non-assenting 
 security holders had they participated in the Plan. Without 
 such a provision, the rights of the Syndicate in respect of these 
 securities would become fixed and the Reorganization Com- 
 mittee, and even the Syndicate Managers, would be powerless 
 to appropriate any of the securities to the delinquent depositors. 
 The action of the Committee in declaring the Plan opera- 
 tive does not mean that the Plan has been executed, or even 
 that it can be executed immediately. It simply means that 
 the Syndicate is bound and that the Committee has deter- 
 mined to proceed with its effort to carry the Plan into execu- 
 tion. Even after the Plan has been declared operative, it 
 may be modified or abandoned by action taken pursuant to 
 the agreement. Reorganizations cannot be carried through 
 over night. It usually takes from one to three years from the 
 date of default to carry an important railroad system through 
 reorganization. At the time that the Plan is declared opera- 
 tive your trustee may not have procured the foreclosure decree 
 and almost certainly the foreclosure sale will not have taken 
 place. It is very desirable that you should have obtained your 
 foreclosure decree before the adoption of the Plan because 
 then there will be much less opportunity for obstruction and less 
 basis for a court holding, as it was held in the Boyd 1 case, 
 that the decree was in effect a consent decree, inasmuch as the 
 stockholders, by agreeing in advance to a Plan of Reorganiza- 
 tion, had lost all incentive to oppose the entry of the decree. 
 Much can be said in favor of the view that the doctrine of the 
 Boyd 1 decision would not apply to a case where bondholders 
 had obtained their decree without the assistance of stock- 
 holders, particularly if it had been obtained in the face of their 
 active opposition. 
 
 1 See ante. 
 
202 REORGANIZATION OF CORPORATIONS 
 
 An important problem in connection with the entry of the 
 foreclosure decree is the fixing of the upset price. It should 
 be sufficiently high not to be unfair to non-assenting bond- 
 holders but sufficiently low so that the distributive share of 
 the proceeds of sale payable to the non-assenting bondholders 
 is not so large as to impose a serious burden upon the reorgani- 
 zers or encourage bondholders to refrain from participating in 
 the Plan. If there is a large amount of junior debt not pro- 
 vided for in the Reorganization you will naturally be interested 
 in keeping down the price to be paid for the mortgaged property 
 in order that there may be as large a deficiency judgment as 
 possible to share with the junior debt in the distribution of the 
 unmortgaged assets. Reorganizations have sometimes been 
 held up for months, even years, because the Court upon its 
 own motion or at the instance of non-assenting bondholders, 
 unsecured creditors or stockholders has fixed so high an upset 
 price that the reorganizers were unwilling to provide the cash 
 which would go to the non-assenting bondholders or others in 
 case that upset price were paid. An effort to secure an in- 
 ordinately high upset price is one of the favorite devices of 
 those who seek to delay reorganizations either from good 
 motives or bad. 
 
 You have now reached the stage when the professional 
 obstructor is most likely to appear, if he has not already ap- 
 peared. I was going to call him the professional striker, but 
 that would hardly be fair, because the small security holder 
 who seeks to obstruct a reorganization is not always a striker, 
 by which I mean a person who seeks by creating a nuisance 
 value for himself to force the payment of an amount wholly 
 disproportionate to his interest in the property as the price of 
 the withdrawal of the nuisance of his presence. There are a 
 certain number of men who make it a profession to watch 
 reorganizations and other large corporate transactions with a 
 view to instituting litigation at some critical moment in the 
 hope of creating a nuisance value for themselves. On the 
 
REORGANIZATION OF CORPORATIONS 203 
 
 other hand, among the thousands of security holders affected 
 by an important reorganization there are very apt to be men 
 who, through vanity, personal spite, stubbornness or mere 
 fondness for opposition, are disposed to be diligent in hunting 
 for an opportunity to oppose the plans of the majority and 
 who have no ambition to be bought off. Opposition may come 
 also from security holders who are sincerely opposed to the 
 Plan from honorable motives. 
 
 Courts often seem inclined to favor small minorities upon 
 the theory that for some reason they should be protected against 
 the assumed oppression of the majority. Our own Court of 
 Appeals has been particularly critical of reorganizations and 
 diligent in protecting minorities. 1 My own observation leads 
 me to the opinion that most cases of oppression in reorganiza- 
 zations are not cases where the majority seek to oppress the 
 minority but where the minority become the oppressors by 
 seeking to hold up or delay the plans of the majority. Plans 
 of reorganization are usually fair and any plan must give all 
 security holders of the same class an equal opportunity to par- 
 ticipate. Most of the outcry against the unfairness of re- 
 organizations comes from people who for selfish purposes seek 
 an advantage out of proportion to their interest in the property. 
 
 If there is a weak place in your armor, some critic is very 
 apt to find it out, and even where there is none, the amount 
 of expense, trouble and delay which the holder of a small 
 amount of securities may cause by vigorous litigation is astound- 
 ing. If his motive is a corrupt one, he is very apt to enter the 
 arena at the most critical stage of your plans when, perhaps 
 because of favorable market conditions, your clients have 
 chosen to launch their reorganization and when even a month's 
 delay may bring failure although at the moment success seems 
 assured. It may be that the underwriting syndicate is only 
 
 1 See United States Water Works Company, Limited v. The Omaha Water Co., 
 164 N. Y. 41 ; 1900, ante; Industrial & Trust Co. v. Todd, 180 N. Y. 215 ; 1905, 
 ante; and Cox v. Stokes, 156 N. Y. 491 ; 1898. 
 
204 REORGANIZATION OF CORPORATIONS 
 
 bound for a limited period and that it will be released in case 
 the action of the security holders is delayed beyond that period 
 by injunction or otherwise. It may well be that although you 
 feel certain of ultimate success in defeating it, the attack has 
 been so timed that the mere delay involved in meeting it will 
 imperil, if not defeat, your client's plans. You may find your- 
 self in such a predicament, although you have taken every con- 
 ceivable precaution to guard against it, and then you have to 
 face the hardest problem with which counsel in reorganizations 
 and large corporate transactions have to deal, and that is, 
 shall you advise your client to fight or to settle. Your instinct 
 will doubtless be to fight, but, fortunately for your peace of 
 mind, when you have given your advice your client will prob- 
 ably take the decision into his own hands. 
 
 The Plan having been declared operative, you are in a posi- 
 tion to determine whether the amounts of cash paid in by the 
 assenting security holders are sufficient for the requirements 
 of the purchase and the other cash requirements which must 
 be met prior to the organization of the new company. If not, 
 the Syndicate must be called upon to pay in the required 
 amount of cash to be held subject to the order of the Com- 
 mittee. 
 
 At the foreclosure sale the bidder for the Committee is 
 usually a subcommittee designated a "purchasing committee/* 
 The subcommittee must be armed with instructions from the 
 Committee as to how high it shall bid in case there are rival 
 bidders. Counsel who have acted frequently for reorganiza- 
 tion committees have spent a great many anxious hours pre- 
 paring for the unexpected bidder, but in my own experience 
 he has never appeared. The reason for this, of course, is that 
 the Committee can pay the major part of the purchase price 
 by surrendering bonds, while a rival bidder, unless it be a rival 
 bondholders' committee, must pay in cash. Manifestly in most 
 sales where the security holders interested in the sale have 
 combined and placed then* interest in the hands of a 
 
REORGANIZATION OF CORPORATIONS 205 
 
 committee there is not likely to be serious competition at 
 the sale. As a protection against bogus or holdup bids see 
 to it that the decree requires a substantial deposit to qualify 
 bidders. 
 
 In order to secure a reasonably prompt sale, it is often neces- 
 sary to defer the determination of many questions relating to 
 the relative priorities of claimants until the distribution of the 
 proceeds of sale. Such a course may mean that the value at 
 which your Committee's bonds will be received in payment of 
 the purchase price will be less than what you deem to be their 
 ultimate interest in the distribution of the proceeds of sale. 
 Usually this does not increase the amount of actual cash re- 
 quired to be paid by the Committee at the time of sale, be- 
 cause of the convenient practice of inserting in the decree a 
 provision that even after the confirmation of the sale the court 
 shall retain jurisdiction for the purpose of enforcing the pay- 
 ment of the purchase price. Courts are therefore lenient in 
 permitting purchasing committees to take possession of the 
 property even though there is a chance that it may be subse- 
 quently determined that further payments are required upon 
 the purchase price. 1 
 
 Special care must be exercised that the sale is conducted 
 fairly and in strict compliance with the decree and the pub- 
 lished terms of sale and that no basis is offered for a successful 
 attack upon the sale, particularly if there is a substantial 
 amount of non-assenting bonds. It is well settled that the 
 mere fact that the security holders have combined to bid at 
 the sale is not a ground for setting it aside. 2 Courts are not 
 disposed to set aside sales where there was a fair opportunity 
 for outside bidders and no fraud or irregularity can be shown. 
 
 The sale having been confirmed by the Court, the Master 
 is ready to deliver his deed, which may either be to the pur- 
 
 1 Short on Railway Bonds and Mortgages, p. 733 ; 1897 ; First National 
 Bank of Cleveland v. Shedd, 121 U. S. 74 ; 1887. 
 
 2 Robinson v. Iron Railway Co., 135 U. S. 522 ; 1890. 
 
206 REORGANIZATION OF CORPORATIONS 
 
 chasing committee, or, upon its order, to the new company 
 which has been organized with authority to issue the securities 
 contemplated by the Plan. 
 
 Having applied the proceeds of sale to your bonds, you 
 should then see to the entry by the Trustee of the deficiency 
 judgment which will participate with the unsecured debt in 
 the distribution of the proceeds of the unmortgaged assets. 
 The deficiency judgment is usually a relatively unimportant 
 factor in railroad reorganizations because the amount of un- 
 mortgaged assets is generally small, but it is often highly 
 important in the reorganization of an industrial corporation 
 inasmuch as a very large proportion of its property, including 
 current assets, is usually not covered by the mortgage. 
 
 One of the most important questions you have to decide is 
 as to the State in which to incorporate the new company. 
 If it is a railroad company you can usually choose any of the 
 States through which its lines run. Your choice will be in- 
 fluenced by a great variety of considerations such as the rela- 
 tive liberality of the corporation laws of the various States 
 and the powers and policy of their public service commissions. 
 The latter consideration is especially important if the only 
 securities to be issued by the new company are shares of stock, 
 for probably in that case the only public service commission 
 you will have to consult with will be that of the State of in- 
 corporation, but, as I have already pointed out, if the reor- 
 ganization contemplates an issue of mortgage bonds, you will 
 probably have to secure the approval of the mortgage by the 
 public service commission of each State in which the lines to be 
 mortgaged extend. In the case of railroad reorganizations, it is 
 sometimes necessary to organize a separate corporation to hold 
 the property in a particular State because the laws of that 
 State forbid foreign corporations to acquire railroads within 
 that State. As a rule, the separate corporations thus formed 
 are ultimately consolidated and you then create that hydra- 
 headed monster, a consolidated corporation of two or more 
 
REORGANIZATION OF CORPORATIONS 207 
 
 States. Many States, including New York, 1 provide special 
 statutes for the organization of corporations to carry out re- 
 organizations. 
 
 The Reorganization Committee not only causes the pur- 
 chasing committee, or the Master, to deed the purchased 
 property to the new company, but turns over to it all unpaid 
 subscriptions for new securities and all the cash in its hands 
 except such as it requires for its expenses. It is also usual to 
 turn over to the new company all of the deposited securities 
 to serve as muniments of title in case any question should sub- 
 sequently develop as to the Company's title to the property 
 acquired from the committee. 
 
 The new company, besides issuing to the Committee the 
 new securities required by the Plan, should approve the Com- 
 mittee's compensation and expenses and assume its liabilities 
 so that the Committee may be discharged of any further re- 
 sponsibility respecting the reorganization to others than its 
 depositors. 
 
 The Committee should now publish notice that the new 
 securities are ready for distribution and that each depositor 
 may receive his share of the new securities upon surrendering 
 to the depositary his certificate of deposit endorsed in blank 
 and making the final payment on his assessment, if it has not 
 already been paid in full. 
 
 It is desirable that definitive engraved certificates should be 
 ready for distribution, and provision for this should be made 
 well in advance as the engraving requires several weeks, 
 sometimes several months. If the engraved certificates are 
 not ready, temporary printed certificates exchangeable for 
 engraved certificates may be distributed. Resort to temporary 
 certificates should be avoided if possible, because of the addi- 
 tional trouble and expense involved in their issue and ultimate 
 exchange for definitive certificates. 
 
 1 Stock Corporation Law, Sec. 9 et seq. (N. Y. Consolidated Laws). 
 
208 REORGANIZATION OF CORPORATIONS 
 
 Voting Trusts 
 
 Voting trusts are usual to insure control for a period of time 
 in persons chosen by the reorganizers so that there may be 
 reasonable assurance of adherence to the policy contemplated 
 by the reorganization. Ordinary questions, such as the elec- 
 tion of directors, are usually left to the discretion of the Voting 
 Trustees, but it is usual to provide that questions of a radical 
 nature such as the sale of the property, the increase of the capi- 
 tal stock and the creation of a mortgage shall be submitted to 
 the holders of the voting trust certificates for their approval or 
 disapproval. There is not time to discuss the perplexing ques- 
 tions as to the limits within which voting trusts are lawful. 
 Suffice it to say that it is usually possible to create, for a limited 
 period, an effective voting trust of the stock issued in a re- 
 organization. In New York voting trusts for a period not 
 exceeding five years under certain limitations are expressly 
 authorized by statute 1 and it is customary in reorganizations 
 centering in New York to endeavor to comply with the terms 
 of that statute. 
 
 General Remarks 
 
 In tracing the proceedings of the reorganization, I have, for 
 the sake of simplicity and continuity, assumed that you have 
 been acting as counsel for a Committee representing mortgage 
 bonds whose position was such as to dominate, if not control, 
 the reorganization. The problems presented would be some- 
 what different if you were acting as counsel for unsecured 
 creditors or for mortgage bondholders not in a dominant or 
 controlling position, or for committees representing preferred 
 or common stock. 
 
 When the Plan has been executed, that is, when your com- 
 mittee has received the new securities and cash, and not until 
 then, I am sorry to say, the time has come for the Committee 
 
 1 General Corporation Law, Sec. 25 (N. Y. Consolidated Laws). 
 
REORGANIZATION OF CORPORATIONS 209 
 
 to pay your fee and also to pay its own compensation and that 
 of the depositaries and the other agents which have been em- 
 ployed in the course of the reorganization. I know not why, 
 but although committees are willing to use the funds under 
 their control or even to borrow money upon the pledge of the 
 deposited securities for almost every other purpose, from time 
 immemorial it has been the custom for counsel not to receive 
 or even ask for their fees until the reorganization has been 
 consummated or abandoned. That is one reason why the fees 
 paid to counsel in reorganizations are popularly supposed to 
 be much higher than they really are. A fee of $100,000 to 
 counsel upon the consummation of a successful reorganization 
 may seem high to one who does not realize that it is compen- 
 sation for two or even three or four years of perhaps the hardest 
 work and the gravest responsibility which fall to a lawyer's 
 lot and that there are few departments of professional activity 
 where experience, familiarity with established practices, office 
 organization and equipment and willingness to work under 
 pressure without regard to personal convenience, count for so 
 much. 
 
 READJUSTMENT OF THE DEBT OR SHARE CAPITAL OF CORPO- 
 RATIONS BECAUSE OF INSOLVENCY OR FINANCIAL NEEDS 
 
 OF SOME SORT WHERE THE PROPERTY is NOT TRANS- 
 FERRED TO A NEW CORPORATION 
 
 In these cases it is usually necessary to start, as in the case 
 of the other class of reorganizations, with committees and 
 deposit agreements calling for the deposit of the various classes 
 of securities to be dealt with, because, in order to carry through 
 a voluntary readjustment, it is necessary that the power to 
 deal with the securities shall be concentrated in a few hands. 
 Manifestly, if A holds the entire capital stock of a company, 
 and B holds its entire issue of mortgage bonds, and C holds 
 its entire floating debt, those three men could, by acting together, 
 make practically any rearrangement of the capitalization they 
 
210 REORGANIZATION OF CORPORATIONS 
 
 chose, providing no rule of law was violated. In practice it is 
 necessary that just this kind of control should be brought 
 about by the deposit of the outstanding securities with one or 
 more committees. Sometimes deposits are invited before a 
 Plan of Readjustment has been formulated, and in that event 
 there must be provision for the promulgation of a Plan, and 
 in most cases there should also be provision, such as we have 
 already discussed in connection with reorganizations, for afford- 
 ing to depositors an opportunity to reject the Plan and with- 
 draw their securities. Sometimes a Plan of Readjustment is 
 announced at the outset and deposits of securities under that 
 particular Plan are invited. 
 
 In the case of corporations having large issues of widely 
 scattered securities, it is often necessary that the Plan and 
 Agreement should be so drawn that, if the readjustment can- 
 not be affected by the voluntary action of the security holders, 
 it may, without a further grant of power from the depositors, 
 be effected by mortgage foreclosure or other enforcement of 
 the rights of security holders. 
 
 A voluntary readjustment may be preceded by a receiver- 
 ship, or even by the institution of foreclosure proceedings, for 
 in case the necessary support of security holders eventually is 
 forthcoming, the receivership can be dismissed, or the fore- 
 closure suit abandoned. Very frequently, a receivership or 
 foreclosure suit furnishes the only effective means of convinc- 
 ing the security holders of a corporation that its position is 
 such that cooperation in a voluntary reorganization is essential 
 to avert the loss and expense incident to foreclosure sale or 
 liquidation. The very complex reorganization of The Balti- 
 more and Ohio Railroad Company in 1899 was finally carried 
 through as a voluntary reorganization, although foreclosure 
 suits had been instituted and the property was in the hands of 
 receivers for over three years. The widely scattered securities 
 finally came in with practical unanimity so that old mortgages 
 and old stock issues were canceled, new bond issues and new 
 
REORGANIZATION OF CORPORATIONS 211 
 
 stock issues were created, the old securities were exchanged 
 for the new, and thus the whole financial structure of the cor- 
 poration was reconstructed. 
 
 The same result was accomplished in the reorganization of 
 the Texas and Pacific Company in 1887, where the foreclosure 
 sale actually took place but was never confirmed. The consent 
 of the security holders finally made it possible to cancel the 
 old mortgages, dismiss the foreclosure proceedings, create new 
 mortgages and issue additional stock, thereby preserving the 
 corporation's Federal charter. 
 
 A more recent and somewhat remarkable instance of a suc- 
 cessful voluntary readjustment is that of the Hudson & Man- 
 hattan Railroad Company, the owner of the so-called Hudson 
 Tubes connecting New York with New Jersey, which was carried 
 through in 1913. This company found its earnings insufficient 
 to pay the interest upon its $67,000,000 of mortgage bonds which 
 were outstanding and widely scattered. Under a plan for the 
 voluntary readjustment of its debt, under which three banking 
 firms acted as Readjustment Managers, and without court pro- 
 ceedings of any kind, it succeeded in securing the surrender of 
 practically its entire bond issue in exchange for new first mort- 
 gage bonds and new income bonds, half and half, and also 
 secured the payment of a cash assessment of about $3,800,000 
 from the stockholders, for which they received new first mort- 
 gage bonds. 
 
 Voluntary reorganizations are, however, comparatively in- 
 frequent in the case of railroad companies. The business of a 
 railroad company is not apt to suffer seriously from a receiver- 
 ship. Indeed a railroad often emerges from foreclosure and 
 receivership materially strengthened by the purging process 
 through which it has passed. Not so with the average indus- 
 trial corporation, whose business, goodwill and trade position 
 are apt to be shattered by the effects of even the most success- 
 ful receivership or the most expeditious foreclosure. While in 
 the case of a railroad, liquidation is usually impossible, if the 
 
212 REORGANIZATION OF CORPORATIONS 
 
 affairs of an insolvent industrial corporation once get into the 
 courts there is always the danger that creditors will force 
 liquidation, preferring the cash proceeds of liquidation to the 
 securities of a reorganized company. Consequently sensible 
 men, in dealing with an insolvent industrial corporation, make 
 every effort to accomplish a voluntary readjustment, and the 
 consequences of failure are so serious to the security holders 
 that their cooperation is much more likely to be forthcoming 
 than in the case of an insolvent railroad. 
 
 As I have already said, the purpose of an agreement provid- 
 ing for the voluntary readjustment of the capital and debt of a 
 corporation is to concentrate the securities in one hand or in 
 a few hands, so that the necessary changes can readily be ac- 
 complished. It is rarely possible, however, in the case of a 
 corporation with considerable amounts of widely scattered 
 securities to secure literal unanimity. The Readjustment 
 Agreement should, therefore, provide that the Committee or 
 the Readjustment Managers shall have discretion to determine 
 when the deposited securities are sufficient in amount to justify 
 the consummation of the readjustment, even though it results 
 in preferential treatment for the security holders who do not 
 assent to the Plan. For instance, if the holders of 90 per cent, 
 of the bonds assent to the Plan, it may be necessary to use part 
 of the cash produced by the assessment paid by the assenting 
 security holders to pay the non-assenting bonds in full. In 
 other cases it may be necessary to grant, in effect, a preference 
 to non-assenting stock. Except in the comparatively rare case 
 of redeemable preferred stock, there is usually no way in a vol- 
 untary readjustment by which the status of stock can be changed 
 without the consent of its holders, so that it becomes necessary 
 in such a case to continue the non-assenting stock without dis- 
 turbing its status except so far as may be permitted by the 
 exercise of the powers expressly conferred by the corporation's 
 charter or by the statutes subject to which the corporation was 
 organized. In all these cases the reorganizers must determine 
 
REORGANIZATION" OF CORPORATIONS 213 
 
 whether the expense and practical injustice involved in^thus 
 preferring the non-assenting securities is more than counter- 
 balanced by the advantages to the assenting securities which will 
 accrue from a successful consummation of the readjustment with- 
 out the expense and loss incident to foreclosure or liquidation. 
 
 A receivership in the Federal courts, such as we considered 
 in discussing reorganizations, is usually the most serviceable 
 means of preserving the property pending an effort to carry 
 through a voluntary readjustment. When an agreement has 
 been reached with the holders of the entire overdue debt or of 
 so much of it that the balance can be paid from the cash which 
 has accumulated in the hands of the receiver or which is pro- 
 vided by the assessment upon the assenting security holders, 
 the receivership can be lifted and the property restored to the 
 corporation, which automatically becomes solvent again. It 
 must be remembered, however, that a receivership proceeding 
 based upon a creditor's bill is a proceeding for the benefit of 
 all creditors, and is beyond the control of the immediate parties 
 to the suit, with the result that the receivership cannot be ter- 
 minated unless the court is satisfied that the Company will be 
 solvent and that all the creditors holding overdue claims have 
 assented or that adequate provision has been made for the 
 payment of all non-assenting claims. 
 
 Courts of equity, particularly the Federal courts, will go very 
 far and exercise very wide powers in protecting the property 
 and business of an industrial corporation where there appears 
 to be a reasonable prospect of carrying through a readjustment. 
 They will authorize their receivers to continue the business in 
 the regular way, to extend the usual credits to customers*, to 
 borrow money, to carry on extensive manufacturing operations, 
 to improve manufacturing plants, to enter into contracts in- 
 volving large commitments running over considerable periods 
 of time, and to protect the assets against foreclosure proceed- 
 ings by paying interest on the mortgage debt. There is no 
 such latitude and elasticity in statutory receiverships in any 
 
214 REORGANIZATION OF CORPORATIONS 
 
 State with which I am familiar, although, as now conducted by 
 the courts, bankruptcy proceedings for industrial corporations 
 are by no means hopeless. As I have already explained in the 
 case of industrial corporations, an equity receivership is no 
 assurance against bankruptcy proceedings, and a threat to 
 institute bankruptcy proceedings is a common weapon of the 
 creditor who seeks to create a nuisance value for himself at the 
 expense of those who are endeavoring to effect a readjustment. 
 
 In dealing with creditors in voluntary readjustments, the 
 principles which must guide you are comparatively simple. 
 If the creditors' claims are overdue, you are at their mercy and 
 you must either pay them or induce them to accept some 
 security in satisfaction of their claims. This of course is wholly 
 a matter of agreement. It is in dealing with stock, and with 
 the rights of stockholders, that the most difficult and perplex- 
 ing questions are apt to arise. 
 
 In issuing stock you must never forget that the corporation 
 must get something for it and in most States it must get par 
 value in money or in money's worth. As the stock of a corpora- 
 tion which is in financial difficulty usually sells much below 
 par, its unissued stock, or to speak more accurately, its capacity 
 to issue additional stock, is not apt to be of much use, for not 
 even the unanimous consent of stockholders will, as against 
 creditors, legalize the issue of stock which is not fully paid. 1 
 
 Therefore, in voluntary readjustments of corporations in 
 financial straits, you are usually compelled to resort to one or 
 both of two devices, if you intend to raise money by the sale of 
 stock. The first is to create preferred stock, which, by reason 
 of its preference, may be salable at par. The second is to 
 secure the surrender of stock already outstanding, which being 
 already fully paid, can be sold at any fair price that the com- 
 pany may fix. 2 I might add a third device, namely, that of 
 
 1 Goodnow v. American Writing Paper C0./72 N. J. Eq. 645 ; 1907, aff'd, 
 73 N. J. Eq. 692. 
 
 2 Lake Superior Iron Co. v. Drexel (1882), 90 N. Y. 87 ; 1882; Williams v. 
 Taylor, 120 N. Y. 244 ; 1890. 
 
REORGANIZATION OF CORPORATIONS 215 
 
 selling obligations at a large discount, accompanied by the sale 
 of stock at par, 1 but there are difficulties in the way of this 
 device which usually render it of little practical value. 
 
 The statutes of many of the States expressly provide for the 
 creation of preferred stock by the vote of a certain proportion 
 of the existing stock, and in such a case, if the necessary vote 
 can be secured, it is perfectly simple to create preferred stock 
 which will take precedence both as to assets and dividends over 
 common stock, or, in some cases, a new preferred stock which 
 will take precedence over preferred stock already existing. If 
 you can thus create preferred stock and sell it at par, the prob- 
 lem is simple. 
 
 Usually where the statutes of a State do not specifically 
 authorize preferred stock it can be created by contract between 
 the stockholders under the doctrine of the decision of our Court 
 of Appeals in the case of Kent v. Quicksilver Mining Co., 2 but 
 in the case of a voluntary readjustment based upon this prin- 
 ciple it is necessary to secure the consent of the holders of all 
 the outstanding stock unless you are willing, and your agree- 
 ment permits, that the rights of the non-assenting minority in 
 assets and dividends should not be disturbed by the creation 
 of the new preferred stock. 
 
 In dealing with preferred stock already outstanding, you 
 can usually do very little without the unanimous consent of the 
 stock affected. Without that consent you cannot increase or 
 decrease the rate of dividends 3 or impair the stockholders' 
 right to arrears of dividends 4 but can sometimes, as I have 
 said, create a prior preferred stock. 
 
 Manifestly the second of the expedients I have suggested 
 is the one which is most useful and it is the one most frequently 
 resorted to, that is, securing the surrender of outstanding stock 
 which, being fully paid, may be disposed of for any fair con- 
 
 1 See Gamble v. Queens Co. Water Co., 123 N. Y. 91 ; 1890. 
 
 2 78 N. Y. 159 ; 1879. 
 
 8 Pronick v. Spirits Distributing Co., 58 N. J. Eq. 97 ; 1899. 
 4 Colgate v. United States Leather Co., 73 N. J. Eq. 72 ; 1907. 
 
 
216 REORGANIZATION OF CORPORATIONS 
 
 sideration without regard to its par value. Such stock, when 
 surrendered by the stockholders, can be disposed of by the cor- 
 poration itself or by a readjustment committee, can be sold at 
 any fair price to raise cash, can be given as a bonus with the 
 sale of unissued stock at par or with a sale of obligations at 
 their fair market value, can be given to stockholders in return 
 for a cash assessment, and can be used in almost any other 
 way that happens to fit the requirements of the case. It may 
 also be placed in the treasury of the company for subsequent 
 sale. 
 
 Voluntary readjustments of capital stock may sometimes be 
 accomplished by the sale of the corporation's property as an 
 entirety under statutes or charter provisions permitting such 
 sales with the consent of a certain proportion of its stockholders. 
 Such statutes and charter provisions, however, are usually not 
 of great practical value in the readjustment of the capital of 
 corporations in financial distress, because provision must be 
 made for the payment of creditors, and also because in most 
 States the sale of the entire property of a corporation is not 
 valid against dissenting stockholders if the purchase price is 
 payable in new securities or otherwise than in cash ; and finally, 
 because of the difficulties towards non-assenting stockholders 
 due to the fact that necessarily the majority interests are both 
 purchasers and sellers. In the case of a corporation in financial 
 straits having both common stock and preferred stock which is 
 preferred as to assets as well as dividends, it is usually out of 
 the question to effect a readjustment by this means without 
 the unanimous action of the preferred stock, because the pre- 
 ferred stockholders are entitled to the proceeds of sale, up to 
 the par value of their stock plus arrears in dividends, before 
 provision can be made for the common stock. 
 
 There is an interesting group of problems which have often 
 been presented, and are apt to be presented again, in connec- 
 tion with industrial corporations of the kind which were organ- 
 ized in great numbers fifteen or twenty years ago with an issue 
 
REORGANIZATION OF CORPORATIONS 217 
 
 of cumulative preferred stock, usually preferred both as to 
 assets and dividends, and an issue of common stock, represent- 
 ing the organizer's hopes for the future. In many instances 
 the hopes which were thus capitalized in common stock were 
 not realized so that eventually the corporation finds itself in 
 this predicament : There is a large arrears of dividends upon 
 its preferred stock. It may be perfectly solvent in the sense 
 that its assets are ample for the payment of its debts, and it 
 may be earning substantial profits. These, however, must be 
 applied in payment of the arrears of dividends upon the pre- 
 ferred stock before any dividend can be declared upon the 
 common stock. But the common stock, which may equal or 
 exceed in amount the preferred stock, has voting control and 
 elects the directors. By reason of the accumulation of dividends 
 upon the preferred stock the prospect for dividends upon the 
 common stock is so remote that the directors who represent 
 the common stock are apt to forget that the chief purpose of a 
 business corporation is to pay dividends. The natural result 
 of such an unsatisfactory situation is an effort to recapitalize 
 on a basis which will more nearly represent the value and earn- 
 ing capacity of the property and provide fairly for both the 
 preferred and common shares. It may well be that the aggre- 
 gate value of the enterprise is less than the par value of the 
 preferred stock and its accumulated arrears of dividends. This 
 naturally prompts the preferred stockholders to feel that they 
 own the property and should give nothing on recapitalization 
 to the common stock. The common stockholders, on the other 
 hand, may say : We control the corporation through our power 
 to elect the directors and we will not surrender our position 
 unless we are recognized in the readjustment. These conflict- 
 ing views have, in many cases, resulted in a deadlock which 
 still exists and which, perhaps, some of you may be called 
 upon to break. 
 
 Certain stockholders of the United States Leather Company 
 tried to meet such a situation in 1905 by organizing the Central 
 
218 REORGANIZATION OF CORPORATIONS 
 
 Leather Company which acquired a large majority of the pre- 
 ferred stock and common stock of the old company. An 
 attempt was then made to merge the old company into the 
 new upon the basis of exchanging the old preferred stock for 
 bonds, preferred stock and common stock of the new company. 
 Here we find the inherent embarrassment, incident to any 
 merger of this character, that the same interests control both 
 the merging and merged company and the merger is simply a 
 means of carrying out a prearranged plan which will have the 
 effect of disturbing the relative positions of the preferred and 
 common shareholders of the old company. The New Jersey 
 Court of Errors and Appeals held the merger invalid upon the 
 ground that the old preferred shareholders had a vested interest 
 in the arrears of dividends which could not be destroyed with- 
 out their consent. 1 This decision left the Central Leather 
 Company as the owner of the preponderating majority of com- 
 mon and preferred stock of the United States Leather Com- 
 pany, which continued for several years as the operating com- 
 pany, paying dividends to the holding company, which in turn 
 distributed this income by way of dividends upon its own shares. 
 Ultimately the old company was successfully merged into the 
 new company, presumably after the latter had acquired by 
 purchase all the shares of the old company. 
 I A somewhat different method of meeting the same problem 
 was adopted by the American Malt Corporation. This cor- 
 poration was organized in 1897, with approximately $15,000,000 
 of cumulative preferred stock and $15,000,000 of common 
 stock. In 1906 it found itself entirely solvent but 'its earnings 
 were insufficient to pay the current dividends on its preferred 
 stock, to say nothing of the forty-five and one-half per cent 
 accumulated arrears of dividends. A new corporation called 
 the American Malt Corporation was formed under the laws of 
 New Jersey with an authorized capital stock of $9,000,000 
 of preferred and $6,000,000 of common stock. It offered to 
 
 1 Colgate v. United States Leather Co., ante. 
 
REORGANIZATION OF CORPORATIONS 219 
 
 acquire the outstanding common and preferred shares of the old 
 company on the basis of $62 in new preferred stock for each 
 share of old preferred stock, including arrears of dividends, 
 and $44 in new common stock for each share of old common 
 stock. Under this plan, a full dividend paid by the old com- 
 pany upon its preferred stock would provide the new company 
 with an income sufficient to pay the full dividend upon the 
 new preferred stock and a substantial dividend upon the new 
 common stock. Before very long over ninety per cent of each 
 class of the old stock had been acquired, and the new company 
 continued as the holding company and the old company as the 
 operating company. Gradually additional amounts of the old 
 stock were exchanged until in 1913 the new company had ac- 
 quired over ninety-eight per cent of the old stock. Then an 
 attempt was made to merge the old company into the new, but 
 this plan was defeated by the refusal of the Board of Public 
 Utility Commissioners of New Jersey to approve the merger. 
 Their refusal was based on the grounds, first, that the businesses 
 of the two corporations were not similar in character within 
 the meaning of the Corporation Act permitting merger, as one 
 was a manufacturing company and the other a holding com- 
 pany ; and second, that the property did not justify the pro- 
 posed capitalization of $15,000,000 and therefore involved an 
 issue of stock at less than par; and third, that the plan was 
 unfair to the preferred stockholders. The Supreme Court of 
 New Jersey upheld the action of the Board upon the last two 
 grounds and this decision was sustained by the Court of Errors 
 and Appeals. 1 I understand that the plan was then dropped 
 and that no attempt has since been made to complete the re- 
 adjustment. 
 
 I cannot furnish a more instructive illustration of the appli- 
 cation of several of the principles to be applied in voluntary 
 readjustments of capitalization than by briefly describing 
 
 1 American Malt Corporation v. Board of Public Utility Commissioners, 92 
 Atl. 362 ; 1914. 
 
220 REORGANIZATION OF CORPORATIONS 
 
 three successive voluntary readjustments of the capital and 
 debt of a certain well-known and now highly prosperous indus- 
 trial corporation. 1 
 
 This company was organized in 1885 with a comparatively 
 small capital. I shall pass over its first recapitalization five 
 years later when the enterprise, by the unanimous action of its 
 stockholders, was transferred from the original company to a 
 new company having a larger capital and a special charter 
 conferring very broad powers. There were successive increases 
 in the authorized capital of the company and in 1891 it had 
 outstanding about $7,000,000 of common stock out of an 
 authorized issue of $10,000,000. Having incurred a large 
 floating debt, it found itself in embarrassed circumstances, and 
 in order to meet the situation the following readjustment was 
 adopted : 
 
 The company, by an appropriate vote of its stockholders, 
 authorized $4,000,000 of preferred stock. It had, however, 
 only $3,000,000 of unissued stock and accordingly it asked 
 its stockholders to surrender forty per cent, of their hold- 
 ings, and in order to encourage this surrender it was provided 
 that the remaining sixty per cent, of the stock retained by the 
 assenting stockholders should be called "assenting stock" and 
 should become a second preferred stock entitled to dividends 
 in preference to the common stock held by those who declined 
 to turn in the forty per cent, of their holdings. The holders of 
 all the common stock except about six thousand shares joined 
 in the Plan (years later all came in) so that the Company, be- 
 sides its $3,000,000 of unissued stock, had $2,600,000 of full- 
 paid stock surrendered by stockholders. One million dollars 
 of this latter stock, together with the $3,000,000 of unissued 
 stock, was used to make up the $4,000,000 of preferred stock, 
 and the balance, $1,600,000, remained in the treasury as "as- 
 
 1 The Westinghouse Electric & Manufacturing Company. For a study of 
 its principal readjustment, see Dewing, Corporate Promotions and Reorgani- 
 zations (Harvard Economic Studies, Vol. X), p. 165. 
 
REORGANIZATION OF CORPORATIONS 221 
 
 senting" or second preferred stock. The corporation therefore 
 had $4,000,000 of first preferred stock and $1,500,000 of second 
 preferred stock, all of which was fully paid except the $3,000,000 
 of unissued preferred stock, so that the entire block of stock 
 could have been sold for $3,000,000. As a matter of fact, it 
 was sold on a much more favorable basis than that, and the 
 crisis was successfully met. 
 
 The Company prospered and grew, indeed it grew too 
 rapidly for its capital, for by 1907 it was confronted with a 
 financial crisis more grave than the one of fifteen years before. 
 By this time it had outstanding, roughly, the following securi- 
 ties: 
 
 Preferred Stock $ 4,000,000 
 
 Assenting and non-assenting common stock, about . . . 25,000,000 
 
 Five per cent. Convertible Bonds 18,500,000 
 
 Other obligations, chiefly floating debt 16,500,000 
 
 The Company found itself unable to meet its maturing float- 
 ing debt and accordingly, upon a creditor's bill and the usual 
 answer of the Company, receivers were appointed by the Federal 
 District Courts. 
 
 A bondholders' protective committee was formed which pre- 
 pared a Plan of Reorganization, to which it is unnecessary to 
 refer, as it was never carried into effect. The receivers were 
 able to continue the business very efficiently under the liberal 
 orders of the Federal courts, and they were even authorized 
 to pay the maturing interest upon the bonds, thereby prevent- 
 ing a default upon the bonds and an acceleration of their 
 maturity by the Trustee. A so-called "Merchandise Creditors' 
 Committee" carried through a Plan whereby the merchandise 
 creditors took new common stock at par in payment for claims 
 aggregating about $4,000,000, the stockholders paid a cash 
 assessment aggregating about $6,000,000, receiving therefor 
 new common stock at par, and bank creditors to the amount 
 of some $8,000,000 were paid in part by long-time obligations 
 and in part by stock at par. The convertible bonds were not 
 
222 REORGANIZATION OF CORPORATIONS 
 
 disturbed. Thus the holders of the greater part of the floating 
 debt agreed to take new securities and sufficient cash was pro- 
 vided to pay the balance of the floating debt and provide work- 
 ing capital. Thereupon the Company filed a petition in each 
 of the United States District Courts in which Receivers had 
 been appointed, setting forth the facts and, after allowing time 
 for creditors to be heard and being satisfied that upon the con- 
 summation of the Plan the Company would be solvent and 
 that provision had been made for all of its overdue debts, each 
 Court entered an order discharging the Receivers. This in 
 many ways is the most remarkable voluntary readjustment of 
 capital with which I am familiar. 
 
 With the added strength resulting from this readjustment, 
 the Company again prospered and grew until it reached an- 
 other crisis brought on by prosperity. The agreement secur- 
 ing its convertible bonds limited the purposes for which they 
 could be issued, precluded the incurring of other debt beyond 
 a certain limit which had almost been reached as a result of 
 increased business, and placed limitations upon the issue of 
 common stock with which it would have been difficult to comply 
 even if additional common stock could have been marketed, 
 which was not the case, as its market price was below par. 
 The redemption of the convertible bonds and the creation of a 
 new issue of bonds would have been a most expensive opera- 
 tion, inasmuch as they were selling several points below par 
 and could be redeemed only at a premium of five per cent above 
 par, and of course the cost of selling a new issue of securities 
 would be considerable. This is an excellent illustration of a 
 prosperous and thoroughly solvent corporation requiring re- 
 adjustment because defects in its financial structure prevented 
 it from securing additional capital required for the develop- 
 ment of its business. 
 
 When the prosperity resulting from the European war sent 
 the common stock of the Company above par, the Board of 
 Directors authorized a new issue of convertible bonds precisely 
 
REORGANIZATION OF CORPORATIONS 223 
 
 like the old ones, except that they were convertible into new 
 stock at par instead of at a premium of one hundred per cent, 
 as was the case with the original issue, and were secured by a 
 trust indenture which omitted certain restrictive covenants 
 contained in the trust indenture securing the old bonds. The 
 Company then offered to the holders of the old bonds the priv- 
 ilege of exchanging them for the new bonds or for cash or for 
 part cash and part new bonds, subject to the prior offering to 
 the stockholders of the privilege of subscribing for the new con- 
 vertible bonds. The sale of the new bonds was underwritten 
 by a banking syndicate. The net result of this last readjust- 
 ment was the retirement of the old bonds and the substitution 
 of the new bonds and, I may add, the ultimate conversion of 
 the greater part of the latter into common stock at par. As a 
 result of this series of voluntary readjustments there is now a 
 corporation, practically out of debt, with an issued capital 
 stock of about $4,000,000 of preferred and $37,000,000 of com- 
 mon stock. No one can estimate how different the result 
 might have been if at either one of the two earlier crises the for- 
 bearance of creditors and the faith of stockholders had not 
 made it possible to avoid a reorganization based upon fore- 
 closure or other enforcement of the claims of creditors. 
 
 I think I have said enough to suggest the infinite variety 
 and complexity of the questions which are likely to arise in 
 efforts for the voluntary readjustment of the capital and debt 
 of corporations with large amounts of securities in the hands 
 of widely scattered holders. There is no department of prac- 
 tice in which there is a greater opportunity for ingenuity, re- 
 sourcefulness and originality on the part of counsel, and for 
 courage, patience and wisdom on the part of security holders, 
 directors and officers of corporations. 
 
224 REORGANIZATION OF CORPORATIONS 
 
 THE RECAPITALIZATION OF CORPORATIONS FOR SOME OTHER 
 PURPOSE THAN TO MEET INSOLVENCY OR CORRECT 
 DEFECTS OF FINANCIAL STRUCTURE AND WHICH MAY BE 
 ACCOMPLISHED EITHER WITH OR WITHOUT THE TRANSFER 
 OF THE PROPERTY TO A NEW CORPORATION 
 
 Here again the objects sought to be accomplished and the 
 methods employed are so varied that few rules can be laid 
 down. I can do little more than suggest examples. 
 
 There is however one underlying principle which it is useful 
 to have in mind and that is, that under the decisions of the 
 United States Supreme Court, the Court of Appeals of New 
 York and the courts of most of the States, any readjustment 
 of the capitalization of a corporation which is agreed upon by 
 the holders of all the stock is binding upon the corporation and 
 all subsequent holders of the stock issued upon such recapitali- 
 zation. In other words, leaving out of consideration the rights 
 of creditors, any such readjustment is permanently effective if 
 agreed upon by all the owners of the property at the time. 
 
 The rule is well stated by our Court of Appeals in Seymour 
 v. The Spring Forest Cemetery Association. 1 In speaking of a 
 transaction where the owners of property sold it at a price 
 alleged to be greatly in excess of its value to a corporation 
 which the vendors controlled and of which they were the only 
 stockholders, Judge Finch said (p. 340) : 
 
 "The sellers were the buyers. They sold as individuals and bought 
 as a corporation, and no one else had any interest in the question of 
 price or terms of sale. If they were the vendors on the one hand, 
 dealing with themselves in a corporate capacity on the other, they 
 were also the sole beneficiaries to be affected and could not defraud 
 themselves. The abstraction of the corporate entity should never be 
 allowed to bar out and pervert the real and obvious truth. As bene- 
 ficiaries, the stockholders necessarily assented to all the details of the 
 arrangement, and no just criticism is possible either upon the legality 
 or morality of the transaction." 2 
 
 1 144 N. Y. 333 ; 1895. 2 See also Blum v. Whitney, 185 N. Y. 232 ; 1906. 
 
REORGANIZATION OF CORPORATIONS 225 
 
 I think that practically all the authorities agree that such a 
 transaction as I have described is binding not only upon the 
 original holders of the stock but also upon subsequent holders 
 of that stock. 1 The same result follows in the case of bonds. 
 Where an issue of bonds is assented to by the corporation and 
 all of its stockholders neither the original takers of the bonds 
 nor subsequent holders of the assenting stock can question the 
 legality of the issue. 2 
 
 The case of Mayer v. Metropolitan Traction Company 3 is an 
 excellent illustration of the extent to which this doctrine has 
 been carried. In that case, the owner of a railroad of insig- 
 nificant value organized a corporation to which it transferred 
 the railroad in exchange for $1,500,000 of bonds and $1,500,000 
 of stock. The bonds were guaranteed by their owner, a strong 
 corporation, which eventually sold them to investors and 
 pocketed the proceeds of sale, not a dollar of which was spent on 
 the mortgaged property. Years later when the guarantor corpo- 
 ration became insolvent and the mortgaged property was found 
 to be almost worthless, the investors who held the bonds sought 
 through their receiver to enforce a claim against the original 
 owner of the bonds, which organized the corporation and received 
 its bonds and stock in payment for the property transferred. 
 This seemed like a hard case, but the Appellate Division of the 
 Supreme Court for the First Department found that no legal 
 wrong had been committed, saying in their opinion (p. 503) : 
 
 1 Cases supra and Barr v. New York, Lake Erie and Western Railroad Com- 
 pany, 125 N. Y. 263; 1891; Parsons v. Hayes, 14 Abb. N. C. (N. Y.) 419; 
 1883 ; Bostwick v. Young, 118 App. Div. 490 ; 1907 ; aff'd, 194 N. Y. 516 ; 1909 ; 
 In re Syracuse etc. R. R. Co., 91 N. Y. 1 ; 1883 ; Kent v. Quicksilver Mining Co., 
 78 N. Y. 159 ; 1879. 
 
 2 Belden v. Burke, 147 N. Y. 542 ; 1895 ; Mayer v. Metropolitan Traction 
 Company, 165 App. Div. 497 ; 1914 ; Seymour v. Spring Forest Cemetery Asso- 
 ciation, supra; Tompkins v. Sperry, Jones & Co., 54 Atl. 254 (Md.) ; 1903; The 
 Columbus Hocking Valley etc. Ry. Co. v. Lanier (N. Y. Sup. Ct. 1893), 8 N. Y. 
 Law Jour. No. 104 (Feb. 4, 1893) ; Old Dominion Copper Mining and Smelting 
 Co. v. Bigelow, 188 Mass. 315, 325; 1906; Mason v. Carrothers, 74 Atl. 1030 
 (Me.) ; 1909. 
 
 3 165 App. Div. 497 ; 1914. 
 
226 ' REORGANIZATION OF CORPORATIONS 
 
 " . . . the vendor and vendee could lawfully put any price upon 
 the property which they chose, and if the price was agreed upon by 
 all persons interested as directors and stockholders in the vendee com- 
 pany, as it appears to have been in this case, neither that company nor 
 anyone suing in its right can question the transaction on the ground 
 that the price was too high." 
 
 When we come to consider the effect of such a transaction 
 upon the holders, not of the original issue of stock, but of stock 
 subsequently issued, we find the courts divided. The most 
 interesting instance of this is furnished by the Old Dominion 
 Copper Company litigation, in which the Supreme Court of 
 the United States and the Supreme Court of Massachusetts 
 reached diametrically opposite conclusions upon precisely the 
 same state of facts. In that case, Bigelow, Lewisohn and their 
 associates organized a mining company of which they became 
 the sole stockholders and of which the board of directors was 
 composed of themselves and their nominees. They sold to the 
 corporation certain mining property w r hich they owned, in 
 return for an amount of stock greatly in excess of the value 
 of the property. Then, without any disclosure of the profit 
 which they were making, they caused the corporation to sell 
 to the public for cash an additional amount of stock for working 
 capital. Several years later, the corporation brought suit 
 against Bigelow in Massachusetts in the State court and against 
 Lewisohn in New York in the Federal Court to rescind the 
 sale or for an accounting or damages. The Supreme Court of 
 Massachusetts held that the corporation was entitled to recover 
 upon the theory that Bigelow and Lewisohn, being promoters, 
 were bound to make disclosure of their profit and that their 
 own knowledge "was not equivalent to a disclosure to the 
 plaintiff corporation, although they owned all the stock of the 
 plaintiff corporation outstanding at the time the sale was 
 made." The Court seems to have assumed that subsequent 
 purchasers of the particular stock originally issued to Lewisohn 
 and Bigelow, would be "bound by the acquiescence of their 
 
REORGANIZATION OF CORPORATIONS 227 
 
 vendors" and that the corporation would have been bound 
 had the transaction been "acquiesced in not only by all those 
 interested but by all those" who, it was contemplated, should 
 " be interested in the corporation, except as third persons should 
 acquire the interest of some one or more of those persons." 
 The Court, however, found a cause of action in the corporation 
 because of the subsequent issue of stock to subscribers to whom 
 no disclosure of the promoters' profit had been made, particu- 
 larly as such subsequent issue was contemplated at the time 
 of the original transaction. 1 
 
 The Circuit Court of Appeals for the Second Circuit in the 
 suit against Lewisohn reached precisely the opposite conclu- 
 sion and its decision was affirmed by the Supreme Court of 
 the United States. 2 The opinion of Mr. Justice Holmes pro- 
 ceeded upon the theory that at the time of the original trans- 
 action " there was no wrong done to any one. Bigelow, Lewisohn 
 and their syndicate were on both sides of the bargain, and they 
 might issue to themselves as much stock in their corporation 
 as they liked in exchange for their conveyance of their land," 
 and that the assent originally given by all the stockholders 
 bound the corporation for all time inasmuch as its identity 
 was not changed by the subsequent addition of new members, 
 for, as Justice Holmes tersely said, "a corporation does not 
 change its identity by adding a cubit to its stature." 
 
 After the decision in the United States Supreme Court, 
 Bigelow endeavored to secure a rehearing of his case by the 
 Massachusetts Supreme Court, but this was refused, and in the 
 end Bigelow or his estate was compelled to pay under the deci- 
 sion of the Supreme Court of Massachusetts while Lewisohn 
 went scot free under the decision of the Supreme Court of 
 the United States. 
 
 The question involved in the Old Dominion Copper Com- 
 pany 3 litigation subsequently came before the Supreme Court 
 
 1 Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315; 1905. 
 
 2 Ibid., Lewisohn, 210 U. S. 206 ; 1908. 3 See ante. 
 
228 REORGANIZATION OF CORPORATIONS 
 
 of Maine in Mason v. Carrothers. 1 That court followed the 
 Supreme Court of Massachusetts and refused to follow the Su- 
 preme Court of the United States. It attempted, however, 
 to distinguish the case before it upon the ground that the suit 
 was brought, not by the corporation, but by the stockholders 
 who purchased stock from the treasury of the corporation, and 
 it construed the opinion of the Supreme Court of the United 
 States as intimating that subsequent purchasers of stock from 
 the corporation might have the right to maintain an action 
 because they were the parties who were wronged. This con- 
 struction is erroneous because the kind of action which the 
 Supreme Court had in mind in the intimation referred to was 
 an action by the purchasers of the stock for deceit, while in 
 the case before the Supreme Court of Maine the suit was by 
 stockholders to compel the holders of the stock under attack 
 to surrender it to the corporation for cancellation. 
 
 I have discussed thus fully the doctrines of the Old Dominion 
 Copper cases, Blum v. Whitney and similar cases, because they 
 come up so frequently in cases of voluntary recapitalization. 
 
 I will now give a few examples of recapitalization. 
 
 A corporation which has accumulated a large surplus fre- 
 quently wishes to distribute among its stockholders some 
 security to represent this accumulation. Often stock to a par 
 amount not exceeding the surplus is distributed among the 
 stockholders. This is called a stock dividend. In this coun- 
 try, bonds or other obligations may also be issued for this pur- 
 pose 2 in the absence of a statute to the contrary. 3 
 
 If a corporation with a large surplus whose stock is selling 
 substantially above par, wishes to accomplish the double 
 
 1 74 Atl. 1030 ; 1909. 
 
 * Wood v. Lary, 47 Hun. 550 ; N. Y. 1888 ; aJTd, 124 N. Y. 83 ; 1891 ; Bil- 
 lingham v. Gleason Mfg. Co., 91 N. Y. Supp. 1046 ; 1905 ; Barnard v. Vermont 
 etc. R. R. Co., 7 Allen (Mass.) 512 ; 1863. See also Bailey v. R. R. Co., 22 Wall. 
 (U. S.) t 604; 1874. As to England see Wood v. Odessa Waterworks Co. (1889), 
 42 Ch. Div. 636 ; Hoole v. Great Western Ry. Co. (1867), 3 Ch. App. 262. 
 
 8 See Delaware General Corp. Law, par. 35, as amended by Laws 1911, Chap. 
 188, Sees. 1 and 2. 
 
REORGANIZATION OF CORPORATIONS 229 
 
 purpose of practically distributing a stock dividend and at the 
 same time securing additional capital, it may offer stock to its 
 stockholders for pro rota subscription at a price below the 
 actual value of the stock, but of course not less than par. 
 Such an offer does not necessarily place upon the stockholder 
 the burden of actually subscribing for his pro rata share of the 
 new stock, because his right to subscribe is usually evidenced 
 by a transferable warrant which should be saleable on a basis 
 which represents approximately the difference between the sub- 
 scription price and the market value of the stock which he is 
 entitled to purchase. 
 
 Except in the case of a corporation having a charter which 
 expressly provides for the sale of stock without first offering 
 it to stockholders, new stock (as distinguished from stock which 
 has already been issued and has been acquired by the corpora- 
 tion as treasury stock) must always be offered for pro rata sub- 
 scription to the stockholders before it is sold to others. 1 Even 
 where the charter contains such a provision, the new stock 
 should be offered to stockholders before it is sold to others at 
 less than its fair market price. 
 
 Perhaps the most frequent case of recapitalization is where 
 the stock of a corporation has been closely held during the 
 period of development and does not represent the actual value 
 of the property, and the owners for some reason, usually for the 
 purpose of creating a market for their securities, desire a capi- 
 talization based upon the actual value and earning capacity of 
 the enterprise and more nearly in scale with the capitalization 
 of other similar enterprises. Here the problem is quite simple 
 if the assent of the entire outstanding capital stock can be pro- 
 cured. Either of two methods may then be used. One method 
 is to authorize the new securities to such an amount as the 
 value of the property will justify and then issue them pro rata 
 to the holders of the old stock as a dividend. Under the doc- 
 trine of Old Dominion Copper Company v. Lewisohn, and Blum 
 
 1 Stokes v. Continental Trust Co., 186 N. Y. 285 ; 1906, 
 
230 REORGANIZATION OF CORPORATIONS 
 
 v. Whitney (supra), there can be no objection to the securities 
 thus issued inasmuch as all the stockholders have agreed to 
 their issue, it being assumed that the rights of creditors are not 
 impaired. 
 
 The other method, and the one usually adopted, is to organ- 
 ize a new corporation with authority to issue the required 
 amount of securities and cause it to acquire the business and 
 property of the old corporation, issuing in payment its own 
 securities in the required amount, which are received by the 
 old company and distributed among its stockholders after 
 provision has been made for creditors, which is usually 
 done by the new company assuming the debts of the old 
 company. 
 
 In some States it is possible to issue obligations to retire 
 preferred stock. A very interesting application of this device 
 was made by the United States Steel Corporation in 1902 
 when it issued $200,000,000 of Five Per Cent. Bonds to provide 
 for the retirement of an equal amount of Seven Per Cent. Pre- 
 ferred Stock. This transaction was upheld by the New Jersey 
 Court of Errors and Appeals in Berger v. United States Steel 
 Corporation. 1 
 
 A very convenient method of accomplishing the practical 
 recapitalization of an enterprise where the entire capital stock 
 is not under control is by means of the so-called holding com- 
 pany. The holding company is a comparatively modern de- 
 vice. It was the law in most of the States until a few years 
 ago, that a corporation had no power to hold the stocks of 
 other corporations. The general power to do so was not con- 
 ferred by statute in New York until the enactment of Chapter 
 688 of the Laws of 1892. 2 It was conferred a few years 
 earlier in New Jersey. 3 In some States, as in Illinois, 4 and 
 
 1 63 N. J. Eq. 809 ; 1902. 
 
 3 See Laws 1890, Chap. 564, Sec. 40, and Laws 1850, Chap. 140, Sec. 8. 
 8 In 1889. 
 
 4 Act of June 11, 1897, Sec. 1 ; 111. Stat. Annot. 1913, par. 8748; Laws I1L 
 1913, p. 475. 
 
REORGANIZATION OF CORPORATIONS 231 
 
 Missouri 1 it has never been conferred except to a limited 
 extent in the case of certain classes of corporations. 
 
 I have already called attention to one of the frequent uses 
 of the holding company in the recapitalization of industrial 
 corporations having outstanding preferred stock with large 
 arrears of dividends, as in the case of the Central Leather 
 Company and the American Malt Corporation. It is fre- 
 quently resorted to where the unanimous action of stockholders 
 cannot be procured at the outset and as a means of accom- 
 plishing the ultimate direct recapitalization of one or more 
 underlying enterprises. An interesting illustration of this is 
 furnished by the history of the Metropolitan Traction Com- 
 pany, which was a holding company, pure and simple, organ- 
 ized to acquire the capital of, and ultimately consolidate, 
 various street railway corporations operating street surface 
 railroads in New York City. Gradually the entire capital 
 stock of all of the important underlying companies was ac- 
 quired and by means of consolidations and mergers they were 
 welded into one railroad corporation, called the Metropolitan 
 Street Railway Company, all of the capital stock of which 
 was owned by the Metropolitan Traction Company as the 
 holding company. The latter then went into voluntary liqui- 
 dation and distributed the stock of the Metropolitan Street 
 Railway Company among its stockholders. The holding com- 
 pany having thus accomplished its mission was dissolved. 
 The Brooklyn Rapid Transit Company was organized for a 
 similar purpose and is still a holding company, pure and 
 simple. 
 
 In the last few years the organization of holding companies 
 has become less fashionable than formerly, both because of 
 restrictive Federal and State legislation and because of their 
 unpopularity, due partly to the misfortunes of certain ill-con- 
 ceived holding companies and the extent to which they were 
 organized in carrying through consolidations which, although 
 
 i Rev, Stat. (1909), 3316, 3329, 3443. 
 
232 REORGANIZATION OF CORPORATIONS 
 
 deemed lawful at the time of their organization, were subse- 
 quently held to have been organized in violation of the Federal 
 Anti-trust Laws. The enactment of the so-cal,led "Seven 
 Sisters" by the Legislature of New Jersey in 1913 1 has prac- 
 tically put an end to the organization of holding companies in 
 New Jersey except within very narrow limits, and Section 7 
 of the Clayton Act 2 enacted by Congress in 1914 provides that 
 
 "No corporation shall acquire, directly or indirectly, the whole or 
 any part of the stock or other share capital of two or more corporations 
 engaged in commerce where the effect of such acquisition, or the use of 
 such stock by the voting or granting of proxies or otherwise, may be 
 to substantially lessen competition between such corporations, or any 
 of them, whose stock or other share capital is so acquired, or to re- 
 strain such commerce in any section or community, or tend to create 
 a monopoly of any line of commerce." 
 
 No discussion of the practical aspects of voluntary recapi- 
 talization would be complete without a reference to the strange 
 form of organization commonly known as a "Massachusetts 
 Trust," which seems to have found its origin in the fact that 
 the Massachusetts statutes did not permit the organization of 
 a corporation to hold land. In Massachusetts the rule against 
 perpetuities apparently is satisfied if all rights vest during any 
 number of lives in being, which may be those of complete 
 strangers to the trust. Although in Windsor v. Mills* there 
 is a dictum to the effect that the permissible period of restraint 
 on alienations should be assimilated to that of the rule against 
 perpetuities, no limitation upon restrictions on alienation of 
 equitable estates has yet been made. 4 The practical result of 
 this is that if it is so stipulated in a deed of trust, there will not, 
 as in New York and elsewhere, be a merger of the legal and 
 equitable estates, even though the entire present equitable 
 
 i Laws 1913, Chaps. 13, 14, 15, 16, 17, 18 and 19. 
 
 * U. S. Stat. 1914, Chap. 321. 
 
 3 157 Mass. 362 ; 1892. 
 
 4 Southard v. Southard, 210 Mass. 347 ; 1911. 
 
REORGANIZATION OF CORPORATIONS 233 
 
 estate and the entire future legal estate are vested in the same 
 person. 1 In Massachusetts there is also another rule, not 
 generally current, that a provision in a partnership agreement 
 that partnership interests may be freely sold without terminat- 
 ing the partnership, is valid and effective. 2 
 
 Under these favoring laws the custom has grown up in 
 Massachusetts of depositing shares of one or more corporations 
 with trustees under declarations of trust, which provide for 
 the use of a name like that of a corporation, the issue of freely 
 vendable certificates of interest or shares, with or without par 
 value, the election of directors, and many other attributes of 
 a corporation. These organizations fall roughly into two classes, 
 those which are strict trusts and those which I may call part- 
 nership trusts. In the strict trust the certificate holders are 
 not personally liable for the organization's debts, but they 
 apparently have no right of control over the business unless it 
 be that certain things may not be done without their consent. 
 In the partnership trust the estate is usually handled by the 
 trustees under the direction of the certificate holders or of a 
 committee appointed by them, which may or may not include 
 the trustees, and in this case the partners may, depending on 
 the particular form of the transaction, be held liable for the 
 organization's debts. 3 
 
 While these trusts are sometimes created to operate enter- 
 prises, they are more frequently used to accomplish the same 
 purpose as holding companies in cases where for some reason 
 it is not wise to organize a holding company. 
 
 There are a considerable number of organizations of this 
 character which are doubtless generally assumed to be cor- 
 
 1 Broadway National Bank v. Adams, 133 Mass. 170 ; 1882 ; and subsequent 
 cases citing it. 
 
 * Phillips v. Blatchford, 137 Mass. 510; 1884; Williams v. Milton, 215 
 Mass. 1 ; 1913. 
 
 3 Mayo v. Moritz, 151 Mass. 481; 1890; Hussey v. Arnold, 185 Mass. 202; 
 1904; Williams v. Milton, 215 Mass. 1; 1913; Frost v. Thompson, 219 Mass. 
 360; 1914; Howe v. Morse, 174 Mass. 491 ; 1899. 
 
234 REORGANIZATION OF CORPORATIONS 
 
 porations. The Mackay Companies, the Massachusetts Gas 
 Companies, and the Chicago Elevated Railways, Unincor- 
 porated, are conspicuous examples. 1 
 
 1 The Massachusetts statues relating to these trusts are Chapter 441 of 
 1909, as amended by Chapter 454 of 1913 and Chapter 471 of 1914, and Chap- 
 ters 509 and 596 of 1913. 
 
 Chapter 596 of 1913 provides for annual publication by the Massachusetts 
 State commissioner of corporations of the trust agreements on file in his office. 
 Copies of this publication are easily to be had and contain a variety of precedents. 
 
 S. R. Wrightington's Unincorporated Associations, Boston, 1916, in addition 
 to much valuable information on the subject generally, has an appendix which 
 contains a number of precedents, some of which have been passed upon by 
 the Massachusetts courts. 
 
 Other books and articles on the subject are : J. H. Sears's Trust Estates as 
 Business Companies, St. Louis, 1912 ; A. D. Chandler's Express Trusts under 
 the Common Law, Boston, 1912, and an article by Mr. Wrightington in the 
 Yale Law Journal for February, 1912. 
 
THE SHERMAN ANTI-TRUST LAW 
 
 A Lecture Delivered before the Association of the Bar of the City of New York 
 by George W. Wickersham, March 15, 1916 
 
 SENATOR GEORGE F. HOAR, of Massachusetts, in a eulogy of 
 John Sherman, delivered in the Unites States Senate after the 
 death of the latter, said : l 
 
 "It is a little singular that the two great measures that are called 
 by his name are measures, one of which he disapproved, and with 
 the other of which he had nothing to do. I mean the bill for the pur- 
 chase of silver, known as the Sherman Law, and the bill in regard 
 to trusts, known as the Sherman Antitrust Law. The former was 
 adopted against his protest by a committee of conference, although 
 he gave it a reluctant and disgusted support at the end. . . . The 
 other, known as the Sherman Antitrust Bill, I suppose he introduced 
 by request. I doubt very much whether he read it. If he did, I do 
 not think he ever understood it. It was totally reconstructed in the 
 Judiciary Committee." 
 
 This statement was probably the origin of the impression, 
 widely disseminated in the community at a later date when 
 the true meaning and effect of the Sherman Law began to be 
 understood and felt, that the bill had been framed in haste and 
 passed in ignorance of its meaning, with a confused idea of its 
 effect. Nothing could be more remote from the actual facts, 
 and Senator Hoar's statement furnishes another example of the 
 effect of time upon the memory of even acute-minded and able 
 men. 
 
 Senator Sherman's original bill was introduced in the Senate 
 on August 14, 1888. It was entitled, "A bill to declare unlaw- 
 ful trusts and combinations in restraint of trade and produc- 
 tion." It provided that "all arrangements, contracts, agree- 
 
 1 Autobiography of Seventy Years, Vol. II, p. 22. 
 235 
 
236 SHERMAN ANTI-TRUST LAW 
 
 ments, trusts, or combinations between persons or corporations, 
 made with a view, or which tend, to prevent full and free com- 
 petition in the production, manufacture, or sale of articles of 
 domestic growth or production, or of the sale of articles im- 
 ported into the United States, and all arrangements, contracts, 
 agreements, trusts, or combinations between persons or corpora- 
 tions designed, or which tend, to advance the cost to the con- 
 sumer of any of such articles, are hereby declared to be against 
 public policy, unlawful and void ; . . ." 
 
 A right of action was given to any person injured by any 
 such agreement, etc., and it was declared that any corporation 
 doing business within the United States which took part in 
 any such arrangement should forfeit its corporate franchise. 
 
 The bill was referred to the Finance Committee, was reported 
 with certain amendments a month later, was briefly debated in 
 the following January, again recommitted and re-reported with 
 further amendments, upon which there was further debate, 
 during which Senator George, of Mississippi, subjected the 
 measure to severe criticism and demonstrated that it was be- 
 yond the constitutional power of Congress to enact, because it 
 did not attempt to regulate commerce among the States, but 
 only transactions which antedated that commerce. This was 
 during the short session of Congress. During the same session, 
 fourteen bills relating to the same subject were introduced into 
 the House of Representatives, where they were the subject of 
 some discussion. At the following session, in December, 1889, 
 the first bill introduced in the Senate was Senator Sherman's 
 amended bill (S. 1), bearing the same title as that introduced 
 by him at the previous session, but modified to meet the criti- 
 cisms that had been made of it during the debates. It was 
 referred to the Committee on Finance, and on January 14, 
 1890, was reported back with amendments. It was debated 
 from time to time during the entire session, some of the ablest 
 members of the Senate taking part in the discussions. Sena- 
 tors Cullom, Ingalls, Allison, Dawes, Teller, Reagan, Hoar, 
 
SHERMAN ANTI-TRUST LAW 237 
 
 Spooner, Gray, Gorman and Wilson, besides the introducer of 
 the bill, engaged in the debate. These debates took a wide 
 range and their record fills upwards of 220 pages of the Con- 
 gressional Record. At an early stage in the discussions, Mr. 
 Sherman in a carefully prepared speech explained the objects 
 of his bill : 
 
 "It declares," he said, "that certain contracts are against public 
 policy, null and void. It does not announce a new principle of law, 
 but applies old and well recognized principles of the common law to 
 the complicated jurisdiction of our State and Federal Government. 
 Similar contracts in any State in the Union are now, by common or 
 statute law, null and void. Each State can and does prevent and 
 control combinations within the limit of the State. This we do not 
 propose to interfere with. The power of the State courts has been 
 repeatedly exercised to set aside such combinations, as I shall here- 
 after show, but these courts are limited in their jurisdiction to the 
 State, and, in our complex system of government, are admitted to be 
 unable to deal with the great evil that now threatens us. 
 
 "Unlawful combinations, unlawful at common law, now extend to 
 all the States and interfere with our foreign and domestic commerce 
 and with the importation and sale of goods subject to duty under the 
 laws of the United States, against which only the general government 
 can secure relief. They not only affect our commerce with foreign 
 nations, but trade and transportation among the several States. The 
 purpose of this bill is to enable the courts of the United States to apply 
 the same remedies against combinations which injuriously affect the 
 interests of the United States that have been applied in the several 
 States to protect local interests." 
 
 It is important to note this statement at the outset, because 
 through all the varying forms which the bill took until its final 
 enactment, the end sought by the lawmakers was always that 
 thus expressed by Senator Sherman. Continuing his argument, 
 he made another statement, which so clearly expresses the evil 
 against which the legislation was directed, that I may perhaps 
 be pardoned if I reproduce it here in full, as furnishing a clear 
 description of that mischief which the old Federal law was 
 powerless to remedy, and to meet which the new law was de- 
 
238 SHERMAN ANTI-TRUST LAW 
 
 signed; thus following the time-honored rule laid down by 
 Blackstone for the construction of statutes. Senator Sherman 
 devoted some time to stating what his bill did not pretend to 
 accomplish. He said it did not interfere with any lawful busi- 
 ness in the United States, whether conducted by a corporation 
 or a partnership or an individual. It dealt, he said : 
 
 "Only with unlawful combinations, unlawful by the code of any 
 law of any civilized nation of ancient or modern times." 
 
 "But," he continued, "associated enterprise and capital are not 
 satisfied with partnerships and corporations competing with each 
 other, and have invented a new form of combination, commonly 
 called trusts, that seeks to avoid competition by combining the con- 
 trolling corporations, partnerships and individuals engaged in the 
 same business, and placing the power and property of the combination 
 under the government of a few individuals, and often under the con- 
 trol of a single man called a trustee, a chairman or a president. 
 
 "The sole object of such a combination is to make competition im- 
 possible It can control the market, raise or lower prices, as will 
 best promote its selfish interests, reduce prices in a particular locality 
 and break down competition and advance prices at will where com- 
 petition does not exist. Its governing motive is to increase the profits 
 of the parties composing it. The law of selfishness, uncontrolled by 
 competition, compels it to disregard the interest of the consumer. It 
 dictates terms to transportation companies, it commands the price of 
 labor without fear of strikes, for in its field it allows no competitors. 
 Such a combination is far more dangerous than any heretofore in- 
 vented, and, when it embraces the great body of all the corporations 
 engaged in a particular industry in all of the States of the Union, it 
 tends to advance the price to the consumer of any article produced, it 
 is a substantial monopoly injurious to the public, and, by the rule of 
 both the common and the civil law, is null and void and the just sub- 
 ject of restraint by the courts, of forfeiture of corporate rights and 
 privileges, and in some cases should be denounced as a crime, and the 
 individuals engaged in it should be punished as criminals. It is this 
 kind of a combination we have to deal with now. 
 
 "If the concentered powers of this combination are intrusted to a 
 single man, it is a kingly prerogative, inconsistent with our form of 
 government, and should be subject to the strong resistance of the 
 State and national authorities. If anything is wrong this is wrong. 
 If we will not endure a king as a political power we should not endure 
 
SHERMAN ANTI-TRUST LAW 239 
 
 a king over the production, transportation and sale of any of the 
 necessaries of life. If we would not submit to an emperor we should 
 not submit to an autocrat of trade, with power to prevent competition 
 and to fix the price of any commodity. If the combination is con- 
 fined to a State the State should apply the remedy ; if it is interstate 
 and controls any production in many States, Congress must apply 
 the remedy." 
 
 As examples of the combination against which the legislation 
 was directed, Senator Sherman referred to the Standard Oil 
 combination, the Diamond Match Company, the Chicago Gas 
 Company, the Sugar Trust, etc. 
 
 After a very extensive debate, in which a number of objec- 
 tions to the bill as framed were pointed out by different Sena- 
 tors, the bill was, on March 27, 1890, committed to the 
 Committee on the Judiciary, from which, on April 2, it was 
 reported back in substantially the same form in which it was 
 later enacted. It was debated on April 2 and April 8, during 
 which Senator Hoar, Chairman of the Judiciary Committee, 
 reiterated his statement that, 
 
 "The great thing that this bill does, except affording a remedy, is to 
 extend the common-law principles, which protected fan* competition 
 in trade in old times in England, to international and interstate com- 
 merce in the United States." 
 
 On April 8, 1890, the bill was passed by the Senate by a 
 vote of 52 to 1. It came up for consideration in the House of 
 Representatives on May 1, 1890, in the form in which it 
 passed the Senate, and was debated on that and on subsequent 
 days. It was passed in a somewhat different form from the 
 Senate bill, went to conference, and after disagreement and 
 report to each house upon the disagreement, it was again re- 
 ferred back, debated, recommitted, re-referred, and finally, on 
 June 20, 1890, the House accepted the bill as it had passed the 
 Senate. On July 2, 1890, it was signed by the President. 
 
 As so enacted, the act, which is entitled, "An Act to protect 
 trade and commerce against unlawful restraints and monopo- 
 
240 SHERMAN ANTI-TRUST LAW 
 
 lies," contains eight sections. The first declares to be illegal 
 " every contract, combination in the form of trust or otherwise, 
 or conspiracy, in restraint of trade, or commerce among the 
 several States, or with foreign nations/' and every person who 
 shall make any such contract or engage in any such combination 
 or conspiracy, to be guilty of a misdemeanor and liable to fine 
 and imprisonment. The second section provides that "Every 
 person who shall monopolize, or attempt to monopolize, or 
 combine, or conspire with any other person or persons, to 
 monopolize any part of the trade or commerce among the 
 several States or with foreign nations, shall be deemed guilty 
 of a misdemeanor," and liable to fine and imprisonment. By 
 the fourth section, the several Circuit Courts of the United 
 States are invested with jurisdiction "to prevent and restrain 
 violations of this act," and it is made the duty of the several 
 district attorneys, under the direction of the Attorney-General, 
 to institute proceedings in equity to prevent and restrain such 
 violations. By the seventh section, a right of action is given 
 to any person who shall be injured in his interests or property 
 by any other person or corporation by reason of anything for- 
 bidden or declared to be unlawful by the act, to sue therefore 
 in any Circuit Court of the United States in the district in 
 which the defendant may reside or be found, without respect 
 to the amount in controversy, and to recover threefold the 
 damages sustained by him and the costs of suit, including a 
 reasonable attorney's fee. 
 
 Shortly after the passage of this act, a petition was filed by 
 the United States in the Circuit Court at Philadelphia, attack- 
 ing certain contracts made by one Searles on behalf of the 
 American Sugar Refining Company for the purchase of four 
 separate refineries in the City of Philadelphia, by which con- 
 tracts, it was alleged, the American Sugar Refining Company 
 secured control of 96 per cent of all the manufactories of sugar 
 in the United States. The bill prayed for the rescission of these 
 contracts. District Judge Butler, in dismissing the bill, said : 
 
SHERMAN ANTI-TRUST LAW 241 
 
 "The contracts and acts of the defendants relate exclusively to the 
 acquisition of sugar refineries and the business of sugar refining in 
 Pennsylvania. They have no reference and bear no relation to com- 
 merce between the States or with foreign nations. ... It is the 
 stream of commerce flowing across the States and between them and 
 foreign nations that Congress is authorized to regulate. To prevent 
 direct interference with, or disturbance of, this flow alone was the 
 power granted to the Federal Government." 
 
 Upon this finding of fact, the bill was dismissed, and on 
 appeal, the Supreme Court, Justice Harlan alone dissenting, 
 approved the action of the trial judge, and treating the whole 
 question to be whether, conceding that the execution of these 
 contracts and the conveyance to the American Sugar Refining 
 Company pursuant thereto of the four refineries embraced 
 therein, would give the Sugar Company a monopoly in manu- 
 facture, held that a monopoly of such manufacture could not 
 be directly suppressed under the act of Congress in the mode 
 attempted by the bill, because, while the power to control the 
 manufacture of a given thing involves in a certain sense the 
 control of its disposition, this is a secondary and not a primary 
 sense, for although the exercise of that power might result in 
 bringing the operation of commerce into play, it did not con- 
 trol it, but affected it only incidentally and indirectly. There 
 was nothing in the proofs, said Chief Justice Fuller, in writing 
 the opinion of the court, 
 
 "to indicate any intention to put a restraint upon trade or commerce, 
 and the fact, as we have seen, that trade or commerce might be in- 
 directly affected was not enough to entitle complainants to a decree. 
 The subject matter of the sale was shares of manufacturing stock, 
 and the relief sought was the surrender of property which had already 
 passed and the suppression of the alleged monopoly in manufacture 
 by the restoration of the status quo before the transfers." l 
 
 Justice Harlan based his dissent upon a broader inference 
 from the facts, contending that the acts of the defendant must 
 
 U56U. S. 17, 34; 1895. 
 
242 SHERMAN ANTI-TRUST LAW 
 
 be regarded as indicating a distinct intention to monopolize 
 interstate trade and commerce in sugar. 
 
 "It may be admitted," he said, "that an act which did nothing 
 more than forbid, and which had no other object than to forbid, the 
 mere refining of sugar in any State, would be in excess of any power 
 granted to Congress. But the act of 1890 is not of that character. 
 It does not strike at the manufacture simply of articles that are legiti- 
 mate or recognized subjects of commerce, but at combinations that 
 unduly restrain, because they monopolize, the buying and selling of 
 articles which are to go into interstate commerce." 
 
 He summed up the discussion in these words : 
 
 "Whatever improperly obstructs the free course of interstate 
 intercourse and trade, as involved in the buying and selling of articles 
 to be carried from one State to another, may be reached by Congress, 
 under its authority to regulate commerce among the States. The 
 exercise of that authority so as to make trade among the States, in all 
 recognized articles of commerce, absolutely free from unreasonable or 
 illegal restrictions imposed by combinations, is justified by an express 
 grant of power to Congress and would redound to the welfare of the 
 whole country. I am unable to perceive that any such result would 
 imperil the autonomy of the States, especially as that result cannot be 
 attained through the action of any one State. 
 
 "Undue restrictions or burdens upon the purchasing of goods in 
 the market for sale, to be transported to other States, cannot be im- 
 posed even by a State without violating the freedom of commercial 
 intercourse guaranteed by the Constitution. But if a State within 
 whose limits the business of refining sugar is exclusively carried on 
 may not constitutionally impose burdens upon purchases of sugar to 
 be transported to other States, how comes it that combinations of 
 corporations or individuals, within the same State, may not be pre- 
 vented by the national government from putting unlawful restraints 
 upon the purchasing of that article to be carried from the State in 
 which such purchases are made ? " l 
 
 Justice Harlan's dissenting opinion has finally become the 
 law of the court, but, for the time, the application of the law 
 received a severe setback by this decision and the views of 
 
 U56U. S. 37, 38; 1895. 
 
SHERMAN ANTI-TRUST LAW 243 
 
 the statute entertained by the other Justices as expressed by 
 Chief Justice Fuller. 
 
 Attorney General Harmon reported to Congress, in 1895, 
 that neither combinations nor monopolies could be reached 
 under the Sherman Act " simply because they are combinations 
 and monopolies, nor because they may engage in interstate 
 commerce as one of the incidents of their business " and, in the 
 following year, he told Congress that the restricted scope of 
 the provisions of the Act, as they had been construed in the 
 Knight Case, "makes amendment necessary if any effective 
 action is expected of this department." 1 
 
 In March, 1897, the Supreme Court, in the Trans-Missouri 
 Freight Association Case, 2 held the act to be applicable to rail- 
 road companies and that it made illegal a traffic association by 
 which free competition between competing railroads was pre- 
 vented ; a decision which was reiterated in the Joint Traffic 
 Association Case 3 a year later. In each of those cases the 
 opinion was written by Mr. Justice Peckham and expressed a 
 construction of the law which, while not required by the facts 
 of the cases before the court, yet gave rise to a school of literal 
 construction of the act which was wholly destructive of the 
 original intent of its framers and in effect amounted to a re- 
 ductio ad absurdum of the statute, because it converted a meas- 
 ure intended to prevent unlawful restraints upon commerce 
 into an act to forbid the ordinary contracts essential to any 
 healthy conduct of commerce. This construction was squarely 
 repudiated by the Supreme Court when it was presented in the 
 Standard Oil 4 and Tobacco Cases. 5 But long before them, in 
 February, 1898, the Circuit Court in the Sixth Circuit, com- 
 posed of Justice Harlan and Judges Lurton and Taft, the latter 
 writing the opinion, gave an application to the act which in 
 some measure removed the blight upon its effectiveness result- 
 ing from the Knight Case, by holding it applicable to a com- 
 
 1 Attorney Gen. Rep. (U. S.), 1896, p. xxvii. 166 IT. S. 290; 1897. 
 3 171 U. S. 505; 1898. 4 221 U. S. 1; 1911. Ibid., 106; 1911. 
 
244 SHERMAN ANTI-TRUST LAW 
 
 bination of corporations manufacturing iron pipe in different 
 States, whereby the freedom of competition among them in 
 the manufacture and sale of that commodity among a number 
 of Southern States was suppressed. Judge Taft's analysis and 
 history of the English Law relating to unreasonable restraints 
 of trade is one of the most exhaustive and accurate summaries 
 of the subject to be found in the books. His analysis of the 
 Knight Case 1 restricted the application of that decision sub- 
 stantially as it was subsequently restricted by the Supreme 
 Court. 
 
 "It seems to us clear," he said, "that, from the beginning to the 
 end of the opinion, the Chief Justice draws the distinction between a 
 restraint upon the business of manufacturing and a restraint upon 
 the trade or commerce between the States in the articles after manu- 
 facture, with the manifest purpose of showing that the regulating 
 power of Congress under the Constitution could affect only the latter, 
 while the former was not under Federal control, and rested wholly 
 with the States. . . . The subject matter of the restraint here was not 
 articles of merchandise or their manufacture, but contracts for sale of 
 such articles to be delivered across State lines, and the negotiations and 
 bids preliminary to the making of such contracts, all of which, as we 
 have seen, do not merely affect interstate commerce, but are interstate 
 commerce. It can hardly be said that a combination in restraint of 
 what is interstate commerce does not directly affect and burden that 
 commerce. The error into which the Circuit Court fell, it seems to 
 us, was in not observing the difference between the regulating power 
 of Congress over contracts and negotiations for sales of goods to be 
 delivered across State lines, and that over the merchandise, the sub- 
 ject of such sales and negotiations. The goods are not within the 
 control of Congress until they are in actual transit from one State to 
 another. But the negotiations and making of sales which necessarily 
 involve in their execution the delivery of merchandise across State 
 lines are interstate commerce, and so within the regulating power of 
 Congress even before the transit of the goods in performance of the 
 contract has begun." 
 
 This decision was unanimously affirmed by the Supreme 
 Court, 2 Justice Peckham writing the opinion, in which he 
 
 1 85 Fed. 297; 1898. 2 175 U. S. 225; 1899. 
 
SHERMAN ANTI-TRUST LAW 245 
 
 stated that the court was of the opinion that the direct effect 
 of the agreement or combination under consideration was to 
 regulate interstate commerce, and, therefore, that the case was 
 not covered by the decision in United States v. Knight. 1 
 
 "The direct purpose of the combination in the Knight Case," he 
 said, "was the control of the manufacture of sugar. There was no 
 combination or agreement, in terms, regarding the future disposition 
 of the manufactured article ; nothing looking to a transaction in the 
 nature of interstate commerce. The probable intention on the part 
 of the manufacturer of the sugar to thereafter dispose of it by send- 
 ing it to some market in another State, was held to be immaterial 
 and not to alter the character of the combination. The various cases 
 which had been decided in this Court relating to the subject of inter- 
 state commerce, and to the difference between that and the manu- 
 facture of commodities, and also the police power of the States as 
 affected by the commerce clause of the Constitution, were adverted 
 to, and the case was decided upon the principle that a combination 
 simply to control manufacture was not a violation of the act of Con- 
 gress, because such a contract or combination did not directly con- 
 trol or affect interstate commerce, but that contracts for the sale and 
 transportation to other States of specific articles were proper subjects 
 for regulation because they did form part of such commerce." 
 
 On the other hand, he agreed with the court below that the 
 combination of the pipe manufacturers did involve contracts 
 of the nature last mentioned, not incidentally or collaterally, but 
 as a direct and immediate result of the combination engaged in 
 by the defendants. 
 
 The Court of Appeals in the Second Circuit, in December, 
 1908, in a suit brought by the Pennsylvania Sugar Refining 
 Company against the American Sugar Refining Company and 
 its directors, distinguished the Knight Case substantially as was 
 done in the Addyston Pipe Case. 2 The complaint there alleged 
 that the defendants conspired to prevent the plaintiff from 
 reengaging in the business of importing raw sugar from other 
 states and foreign countries into the State of Pennsylvania, 
 there manufacturing it into refined sugar, and exporting the 
 
 156 U. S. 1 ; 1895. 2 166 Fed. 254 ; 1908. 
 
246 SHERMAN ANTI-TRUST LAW 
 
 manufactured product to other States and countries, and that 
 they accomplished their object by inducing one who indirectly 
 held the controlling stock interest in the plaintiff corporation, 
 to accept a loan of a large sum of money and turn over to them 
 such interest with the voting power attached, which they exer- 
 cised to elect new directors, whom they caused to vote that the 
 plaintiff should do no business. The Court, speaking by Judge 
 Noyes, said : 
 
 "A comparison of the Knight Case with the case at bar shows 
 some striking superficial resemblances. Both related to actions of the 
 American Sugar Refining Company in obtaining control of independent 
 sugar refining companies in Philadelphia. But there is this funda- 
 mental distinction between them : The one was an agreement for the 
 restriction of competition which related directly to manufacture and 
 only indirectly to interstate commerce; the other was a conspiracy 
 to prevent a manufacturer from engaging in business which necessarily 
 directly restrained interstate commerce. . . . The decision in the 
 Knight Case was that upon the proofs the agreements there in question 
 related to manufacture to production and were not in restraint 
 of interstate commerce, although they may have affected such com- 
 merce incidentally and indirectly. But there was present in this case 
 that which Mr. Chief Justice Fuller said was absent in the Knight Case : 
 
 "'There was nothing in the proofs to indicate any intention to put 
 a restraint upon trade or commerce, and the fact, as we have seen, 
 that trade or commerce might be indirectly affected, was not enough 
 to entitle complainants to a decree.' 
 
 ******* 
 
 "It must be clearly borne in mind that the defendants in this case 
 are not charged simply with preventing the plaintiff from engaging in 
 a manufacturing business. If they were, the Knight decision would 
 undoubtedly be applicable. They are expressly charged also with 
 preventing the plaintiff from engaging in interstate commerce with 
 preventing the importation of raw materials and the exportation of 
 the manufactured product. . . . The purpose of the conspiracy in 
 the present case was not only to obtain control of the plaintiff cor- 
 poration and thus doubtless acquire a monopoly, but to exercise the 
 power of control so obtained to wholly prevent the plaintiff from 
 engaging in a business, the carrying on of which necessarily involved 
 interstate commerce." 
 
SHERMAN ANTI-TRUST LAW 247 
 
 The court held that the principles of the Addyston Pipe Case, 1 
 distinguishing the Knight Case, were directly applicable, and 
 that, because the conspiracy charged in the complaint did not 
 relate wholly to production within the State of Pennsylvania, 
 the case was not controlled by the Knight decision. 
 
 It seems incredible that after the decision in the Addyston 
 Pipe Case 1 anybody should have assumed that the decision of 
 the Knight Case would protect from the operation of the Sher- 
 man Law any combination or agreement which directly sup- 
 pressed competition between persons engaged in the manufac- 
 ture and sale of merchandise among the several States, or that 
 it could be relied upon to protect anything more than the very rare 
 case of a combination between persons or corporations engaged 
 wholly in manufacturing and selling within a single State. 
 Nevertheless, those who wished to centralize control over manu- 
 factured products by various forms of agreement or corporate 
 ownership clung to the Knight Case as the rock of their salva- 
 tion, until the Chief Justice in the Standard Oil opinion forever 
 disposed of it in a few brief words. 
 
 The next stage in the development of the Sherman Law was 
 reached in April, 1903, when the United States Circuit Court 
 in the Eighth Circuit, by the unanimous vote of all four Cir- 
 cuit Judges, held the act to be applicable to the Northern 
 Securities Company, a New Jersey corporation which had 
 acquired control of the stock of the Northern Pacific and the 
 Great Northern Railway Companies, thereby placing it in 
 the power of the Securities Company to suppress competition 
 between those two competing and parallel lines of railroad en- 
 gaged in interstate commerce ; a decision which was affirmed 
 by the Supreme Court in March, 1904, 2 by a bare majority of 
 the Court. Justice Harlan wrote the principal opinion in sup- 
 port of the affirmance, and Justice Brewer filed an opinion 
 which, while concurring with Justice Harlan in the result 
 expressed, dissented from some of the reasoning of his opinion. 
 
 1 See supra. * 193 U. S. 197 ; 1904. 
 
248 SHERMAN ANTI-TRUST LAW 
 
 He recorded the fact that he had been with the majority of the 
 Court in the decision of the Freight Association and Joint Traffic 
 Cases and in the Addyston Pipe & Steel Company Case, and that 
 while subsequent discussion and consideration had not dis- 
 turbed his conviction that those cases were rightly decided, 
 he did think that in some respects the reasons given for the 
 judgments could not be sustained. 
 
 "Instead of holding that the Antitrust Act," he said, "included 
 all contracts, reasonable or unreasonable, in restraint of interstate 
 trade, the ruling should have been that the contracts there presented 
 were unreasonable restraints of interstate trade and as such within 
 the scope of the act. That act as appears from its title, was leveled 
 at only 'unlawful restraints and monopolies.' Congress did not in- 
 tend to reach and destroy those minor contracts in partial restraint 
 of trade which the long course of decisions at common law had affirmed 
 were reasonable and ought to be upheld. The purpose rather was to 
 place a statutory prohibition, with prescribed penalties and remedies, 
 upon those contracts which were in direct restraint of trade, unreason- 
 able and against public policy. Whenever a departure from common 
 law rules and definitions is claimed, the purpose to make the depar- 
 ture should be clearly shown." 1 
 
 The important point of the decision in this case was, that no 
 matter in what form an undue restraint upon interstate com- 
 merce was imposed, the Sherman Act invalidated it and the 
 Federal equity courts would penetrate corporate organization 
 as well as as any other kind of contract, and require the re- 
 straint to be ended. Whether the undue control over com- 
 merce were accomplished by agreement between separate in- 
 dividuals or corporations, or by vesting the capital stocks of 
 competing corporations in a third separate corporation, the 
 Sherman Law enabled a Federal court of equity to require 
 the combination to be ended and competitive conditions re- 
 stored. 
 
 Finally, the last step in the authoritative construction and 
 application of the law was taken in the epoch-making decisions 
 
 * 193 U. S. 361 ; 1904. 
 
SHERMAN ANTI-TRUST LAW 249 
 
 in the cases against the Standard Oil Company and the 
 American Tobacco Company, decided in May, 1911. These 
 cases are so recent and so well known to the bar as to require 
 but little comment here. In them, the Supreme Court for the 
 first time gave thorough consideration to the second section 
 of the act, which is directed against attempts to monopolize 
 interstate trade or commerce. The gravamen of the decision 
 in each case was that in determining the meaning of the words 
 " every contract, combination in the form of trust or otherwise, 
 or conspiracy in restraint of trade or commerce," the history of 
 those terms as they were used in the law before the enactment 
 must be considered ; that the language of the act, all compre- 
 hensive as it is, must be given a reasonable construction, not 
 such a narrow verbal one as would entirely destroy the purpose 
 for which the law was enacted. Curiously enough, Justice 
 Harlan, who had advocated precisely this interpretation in his 
 dissenting opinion in the Knight Case seventeen years previously, 
 dissented from this conclusion, and in vigorous opinions urged 
 the adoption of a literal construction; while the language em- 
 ployed by the Chief Justice in the prevailing opinions was 
 seized upon by hostile critics for the purpose of convincing the 
 public that some new, strange and artificial construction had 
 been adopted, the effect of which would be to emasculate the 
 act. Yet, as Judge Lanning said in writing the opinion of the 
 Court in the Third Circuit in the Powder Trust Case (E. I. du 
 Pont de Nemours & Company) 1 decided very shortly after the 
 Standard Oil and Tobacco Cases: 
 
 "From early times it has been a rule of the courts not to construe 
 a legislative act in a literal manner, where it is clear that by such 
 construction the legislative purpose will be defeated ; . . . " and 
 
 "The recent decisions of the Supreme Court in Standard Oil Co. v. 
 United States, and American Tobacco Co. v. United States, make it 
 quite clear that the language of the Antitrust Act is not to receive 
 that literal construction which will impair rather than enhance free- 
 dom of interstate commerce." 
 
 i 188 Fed. 149; 1911. 
 
250 SHERMAN ANTI-TRUST LAW 
 
 That Judge Lanning correctly interpreted the decisions of 
 the Supreme Court was in effect declared by that tribunal 
 itself in the following year in Nash v. United States, 1 where 
 referring to the Oil and Tobacco Cases, the court said, speak- 
 ing by Justice Holmes : 
 
 "Those cases may be taken to have established that only such con- 
 tracts and combinations are within the act as by reason of intent or 
 the inherent nature of the contemplated acts prejudice the public 
 interests by unduly restricting competition or unduly obstructing the 
 course of trade." 
 
 In the opinion in the Union Pacific Case, 2 the court summed 
 up as follows : 
 
 "In the recent discussion of the history and meaning of the act in 
 the Standard Oil and Tobacco Cases this court declared that the 
 statute should be given a reasonable construction with a view to 
 reaching those undue restraints of interstate trade which are intended 
 to be prohibited and punished." 
 
 Thus, after a lapse of more than twenty years, did the court 
 declare as a principle of construction, the rule stated by Sena- 
 tor Hoar in closing the debate upon the bill in the Senate in 
 April, 1890, when he said : 
 
 "The common law in the States of the Union, of course, extends 
 over citizens and subjects over which the State itself has jurisdiction. 
 Now, we are dealing with an offense against interstate or international 
 commerce which the State cannot regulate by penal enactment and 
 we find the United States without any common law. The great thing 
 that this bill does, except affording a remedy, is to extend the com- 
 mon-law principles which protected fair competition in trade in old 
 times in England to international and interstate commerce in the 
 United States." 
 
 It would extend this paper far beyond its necessary limits 
 to consider at length the nature of the evidence upon which 
 courts have held combinations of one kind or another to offend 
 against the prohibition of the Sherman Act. 
 
 1 229 U. S. 373, 376; 1913. 226 U. S. 61; 1912. 
 
SHERMAN ANTI-TRUST LAW 251 
 
 Justice Holmes, in the philosophical analysis of the Sherman 
 Law contained in his dissenting opinion in the Northern Securi- 
 ties Case, 1 speaks of the sweeping general character of the 
 statute and says : 
 
 "It hits 'every' contract or combination of the prohibited sort, 
 great or small, and 'every' person who shall monopolize or attempt to 
 monopolize, in the sense of the act, 'any part' of the trade or com- 
 merce among the several States. There is a natural inclination to 
 assume that it was directed against certain great combinations, and 
 to read it in that light. It does not say so. On the contrary, it says 
 'every' and 'any part.' . . . According to popular speech, every 
 concern monopolizes whatever business it does, and if that business 
 is trade between two States it monopolizes a part of the trade among 
 the States. Of course, the statute does not forbid that. It does not 
 mean that all business must cease. A single railroad down a narrow 
 valley or through a mountain gorge monopolizes all the railroad trans- 
 portation through that valley or gorge. Indeed, every railroad mo- 
 nopolizes, in a popular sense, the trade of some area. Yet I suppose 
 no one would say that the statute forbids a combination of men into 
 a corporation to build and run such a railroad between the States. . . . 
 Size has nothing to do with the matter. A monopoly of 'any part' of 
 commerce among the States is unlawful. . . . But the act of Con- 
 gress will not be construed to mean the universal disintegration of 
 society into single men, each at war with all the rest, or even the pre- 
 vention of all further combinations for a common end. 
 
 "There is a natural feeling that somehow or other the statute 
 meant to strike at combinations great enough to cause just anxiety 
 on the part of those who love their country more than money, while 
 it viewed such little ones as I have supposed with just indifference. 
 This notion, it may be said, somehow breathes from the pores of the 
 act, though it seems to be contradicted in every way by the words 
 in detail. And it has occurred to me that it might be that when a 
 combination reached a certain size it might have attributed to it more 
 of the character of a monopoly merely by virtue of its size than would 
 be attributed to a smaller one. I am quite clear that it is only in 
 connection with monopolies that size could play any part." 
 
 But he goes on to say, after examples regarding railroads, 
 that the very words of the act made such a distinction im- 
 possible in the instant case. 
 
 '193U. S. 402; 1904. 
 
252 SHERMAN ANTI-TRUST LAW 
 
 This question of size effected a lodgment in the public mind, 
 although every court in construing the act has repudiated 
 mere size as a criterion of legality. Thus, in the Standard Oil 
 Case, the opinion of the Chief Justice dwelt upon the fact that 
 the vast capital aggregated by combining in the New Jersey 
 corporation the stocks of so many other corporations, gave rise 
 to a prima facie presumption of intent and purpose to maintain 
 a dominancy over the oil industry, " not as a result of normal 
 methods of industrial development, but by new means of com- 
 bination which were resorted to in order that greater power 
 might be added than would otherwise have arisen had normal 
 methods been followed, the whole with the purpose of exclud- 
 ing others from the trade and thus centralizing in the combina- 
 tion a perpetual control of the movements of petroleum and its 
 products in the channels of interstate commerce." 
 
 And in the Tobacco Case, 1 the court, reviewing the history of 
 the combination, held the conclusion of monopolistic purpose 
 to be inevitable, "not because of the vast amount of property 
 aggregated by the combination, not because alone of the many 
 corporations which the proof shows were united by resort to 
 one device or another. Again, not alone because of the do- 
 minion and control over the tobacco trade which actually 
 exists, but because we think the conclusion of wrongful pur- 
 pose and illegal combination is overwhelmingly established by" 
 the various considerations summarized in the opinion. 
 
 Judge Noyes, in passing upon the plan of dissolution of the 
 American Tobacco Company in the Circuit Court, Southern 
 District of New York, 2 said : 
 
 "The Supreme Court did not condemn the combination on account 
 of the great amount of property which it had acquired. Indeed, it 
 must now be accepted that magnitude of business in and of itself 
 does not constitute unlawful monopoly, as least up to the point where 
 economy of production and management are thereby promoted. 
 There must be something more some unlawful or oppressive act or 
 
 1 221 U. S. 182; 1911. s 191 Fed. 371, 387; 1911. 
 
SHERMAN ANTI-TRUST LAW 253 
 
 purpose in acquiring the business or after its acquisition to come 
 within the condemnation of the statute." 
 
 In United States v. International Harvester Co. 1 Judge Smith 
 said : 
 
 "There is no limit under the American law to which a business 
 may not independently grow, and even a combination of two or more 
 businesses, if it does not unreasonably restrain trade is not illegal." 
 
 In the recent decision of the four Circuit Judges of the Third 
 Circuit in the Government's suit against the United States 
 Steel Corporation 2 Judge Buffington says, after a review of the 
 evidence concerning the size of the business carried on by the 
 defendant : 
 
 "These significant figures prove that mere size or bigness of busi- 
 ness is not necessarily a monopoly of business at the expense of all 
 others engaged in it. And in that connection and as aptly expressive 
 of our views we may quote with approval the language of Judge 
 Hook of the Eighth Circuit in his concurring opinion in the Standard 
 Oil Case, 3 
 
 '"Success and magnitude of business, the rewards of fair and honor- 
 able endeavor were not among the evils which threatened the public 
 welfare and attracted the attention of Congress, but when they had 
 been obtained by wrongful or unlawful methods and competition has 
 been crippled or destroyed, the elements of monopoly are present.' " 
 
 In the debate on the bill in the United States Senate in 
 April, 1890, Senator Kenna asked whether the Judiciary Com- 
 mittee intended by the use of the words "every person who 
 shall monopolize, etc." to indicate that if an individual engaged 
 in trade between the States, etc., by his own skill and energy, 
 and by the propriety of his conduct generally, shall pursue his 
 calling in such a way as to monopolize a trade, his action would 
 be a crime under the proposed act. 
 
 " Suppose," he said, " a citizen of Kentucky is dealing in short-horn 
 cattle and by virtue of his superior skill in that particular product it 
 
 1 214 Fed. 987, 1000; 1914. 2 223 Fed. 55; 1915. 
 
 3 173 Fed. 196; 1909. 
 
254 SHERMAN ANTI-TRUST LAW 
 
 turns out that he is the only one in the United States for whom an 
 order comes from Mexico for cattle of that stock for a considerable 
 period, so that he is conceded to have a monopoly of that trade with 
 Mexico; is it intended by the Committee that the bill shall make 
 that man a culprit ? " 
 
 Senator Hoar replied that it was neither intended, nor did 
 the bill do it, and Senator Edmunds concurred in that opinion, 
 while Senator Hoar added that the word "monopoly" was a 
 technical term known to the common law which had a clear 
 and legal signification, and it is this : " It is the sole engross- 
 ing to a man's self by means which prevent other men from 
 engaging in fair competition with him." 
 
 In the Standard Oil Case, the Chief Justice held that the 
 meaning of the words as employed in the statute was made 
 clear by recourse to the previous history of the law of restraint 
 of trade and the indication which it gave of the practical evolu- 
 tion by which monopoly and the acts that produced the same 
 result as monopoly, that is, an undue restraint of the course of 
 trade, all came to be spoken of as, and indeed to be synony- 
 mous with, restraint of trade. In other words, he said : 
 
 "Having by the first section forbidden all means of monopolizing 
 trade, that is, unduly restraining it by means of every contract, com- 
 bination, etc., the second section seeks, if possible, to make the pro- 
 hibitions of the act all the more complete and perfect by embracing 
 all attempts to reach the end prohibited by the first section, that is, 
 restraints of trade, by any attempt to monopolize, or monopolization 
 thereof, even although the acts by which such results are attempted 
 to be brought about or are brought about be not embraced within the 
 general enumeration of the first section." l 
 
 In the Steel Corporation Case, Judge Buffington, after re- 
 ferring to the definitions of the act established by the preceding 
 decisions of the Supreme Court, said that the basic question 
 for the court there to decide was one of fact, namely : whether 
 the union of the several defendant companies in the United 
 
 *221 U. S. 61; 1911. 
 
SHERMAN ANTI-TRUST LAW 255 
 
 States Steel Corporation "prejudices the public interest by 
 unduly restricting competition or unduly obstructing the 
 course of trade." 
 
 "The public interests thus prejudiced/' he said, "consist of first, 
 competitors in trade; second, the purchasing public; and third, the 
 general public. For example, if this Steel Company was in any way 
 guilty of unfair business competition, if it was guilty of such conduct 
 as to unfairly force a competitor out of the steel business, or if it un- 
 fairly prevented those who wanted to go into the steel business from 
 doing so, then the Steel Company was, in the judgment of the Supreme 
 Court, prejudicing the public interests by unfairly driving individuals 
 out of business or preventing them from entering it, and it was also 
 injuring the public by unduly restraining trade. So also if this Steel 
 Company was restricting output in order to exact unfair prices ; if it 
 was buying up competing plants and dismantling them to needlessly 
 restrict output ; if it was by reason of its controlling power furnishing 
 the public with inferior goods ; if it was using its power to needlessly 
 and unfairly reduce wages; if it was seeking to deceive purchasers 
 by a false appearance of competition, when in fact it owned or con- 
 trolled such seeming competition then it was prejudicing not only 
 that portion of the public which desired to buy steel, but the public in- 
 terests generally by unduly obstructing the course of trade and thereby 
 preventing the steel business from moving in its natural and normal 
 channel." 
 
 Applying these principles, Judge Buffington said it would 
 appear that the questions of fact for the court to determine 
 from the evidence were, viz. : 
 
 "First. Was the Steel Corporation, when this bill was filed in 
 1911, prejudicing the public interests by unduly restricting competi- 
 tion, or unduly obstructing the course of the steel and iron trade, 
 between the States, or with foreign nations? If this question be 
 answered, yes, the law was then being violated and an injunction 
 should issue to restrain present and future violations. 
 
 "Second. Did the Steel Corporation, when it was formed in 1901, 
 either by the intent of those forming it, or by the inherent nature of 
 that Company's contemplated acts, prejudice the public interests by 
 unduly restricting competition or unduly obstructing the course of 
 the steel and iron trade, interstate or foreign? If this question be 
 
256 SHERMAN ANTI-TRUST LAW 
 
 answered, yes, then the law was violated, and the Steel Corpora- 
 tion must be adjudged originally illegal. If illegal, it must be dis- 
 solved, because only thus can its inherent nature be prevented from 
 continuing to work further violations of the statute. On the other 
 hand, if these questions are negatived, then the Steel Corporation 
 should not be dissolved, but permitted to pursue that usual course of 
 trade, which it was the purpose, as we have seen, of this statute to 
 protect." 
 
 As the court reached the conclusion that these questions should 
 be answered in the negative, the relief prayed in the bill was 
 denied. 
 
 One unsettled question under the act is left for the decision 
 of the Supreme Court ; a question which is squarely presented 
 in cases now awaiting argument in that court against the Inter- 
 national Harvester Company and the United States Steel Cor- 
 poration. That question is, whether in a case where a com- 
 bination has been formed by vesting a corporation with the 
 control through stock ownership or otherwise of a number of 
 competing corporations, thereby suppressing, or empowering 
 the holding corporation to suppress existing competition, and 
 to dominate the commerce in commodities dealt with, but the 
 power so attained has not been unfairly used, competition has 
 not been destroyed, and in fact competitiors have increased in 
 number and in the amount of business controlled by them, 
 and at the time the Government sues the defendant corpora- 
 tion actually controls a smaller percentage of the interstate 
 commerce conducted by it than it did when formed, the original 
 unlawful purpose must be attributed to the existing situation, 
 and the combination dissolved. 
 
 In the Harvester Case * a majority of the Circuit Judges in 
 the Eighth Circuit answered that question in the affirmative. 
 (See opinion of Smith, J., at p. 1000.) Judge Hook thus 
 summed up the decision of the court : 
 
 "The International Harvester Company is not the result of the 
 normal growth of the fair enterprise of an individual, a partnership 
 1 214 Fed. 987; 1914. 
 
SHERMAN ANTI-TRUST LAW 257 
 
 or a corporation. On the contrary, it was created by combining five 
 great competing companies which controlled more than 80 per cent 
 of the trade in necessary farm implements, and it still maintains a sub- 
 stantial dominance. That is the controlling fact; all else is detail." 
 
 In the Steel Case, two of the judges were of the opinion that 
 no matter what had been the case in the past, the combination 
 would not be dissolved unless the evidence showed a violation 
 of the act when presented to the court, that is whether in that 
 case, "the union of the several defendant companies in the 
 United States Steel Corporation 'prejudices the public in- 
 terests by unduly restricting competition or unduly restraining 
 the course of trade/" and that, "the acts of the combination 
 are fair tests of the real inherent nature of the combination, 
 and that in such a case the time-tried rule, 'By their fruits ye 
 shall know them/ might well serve to best gauge the source or 
 tree from or on which the fruit matured " (p. 116). 
 
 Judges Hunt and Woolley reached the conclusion that as a 
 matter of fact and law "the organizers of the corporation 
 
 (1) intended to create a monopoly and to restrain trade, and 
 
 (2) combined with others and attempted to monopolize trade, 
 within the meaning of the act, and that the corporation 
 (1) neither attempted nor possessed the power alone to do 
 the unlawful things intended by its formation, but (2) that it 
 unlawfully combined with others to restrain trade by control- 
 ling prices." That whatever remedy there might be against 
 the organizers of the corporation for acts violative of the 
 statute, "certainly in this proceeding in equity a decree of dis- 
 solution cannot be awarded against the corporation for the 
 unlawful intent and the unsuccessful attempt of its organizers 
 to violate the law. Upon the finding that the corporation in 
 and of itself is not now and has never been a monopoly or a 
 combination in restraint of trade, a decree of dissolution should 
 not be entered against it." But as they found that the cor- 
 poration had violated one of the provisions of the statute by 
 combining with others to unduly restrain trade, and possessed 
 
258 SHERMAN ANTI-TRUST LAW 
 
 the power to again unlawfully combine with others to do the 
 same unlawful acts, although not at the moment actively 
 threatening the same, yet because of the disposition displayed 
 throughout a large portion of its history, it might again do so, 
 these two judges were of opinion that the corporation should 
 be prevented from doing the things and repeating the prac- 
 tices respecting the fixing and maintaining of prices which 
 they viewed as illegal. 
 
 As we have seen, the Anti-trust Law is entitled, "An act 
 to protect trade and commerce against unlawful restraints 
 and monopolies," and by the third section, the several Circuit 
 Courts of the United States are invested with jurisdiction "to 
 prevent and restrain violations of this act." The power given 
 in this brief and comprehensive language has been held to 
 justify the application of remedies twofold in character, viz. : 
 first, to forbid the doing in the future of acts such as those 
 which the court finds to have been done in the past, which would 
 be violative of the statute; and second, the exertion of such 
 measure of relief as will effectually dissolve the combination 
 found to exist in violation of the statute. 1 
 
 In ordinary cases of combinations, such as that presented in 
 the Addyston Pipe & Iron Company Case, an injunction against 
 the continuance of the combination is effective to secure the 
 relief sought. In the Northern Securities Case, the decree of 
 the Circuit Court, following the prayer of the bill, enjoined the 
 Securities Company from voting the stocks in the Railway 
 Companies held by it, or from collecting dividends on them, 
 but provided that nothing in the decree should be construed to 
 prohibit the Securities Company from returning the stocks of 
 the respective Railway Companies to the holders and owners 
 of its own stock originally issued in exchange or payment for 
 the stocks of the Railway Companies. After the affirmance of 
 the decree by the Supreme Court, the Securities Company, 
 
 1 Standard Oil Co. v. United States, 221 U. S. 78; 1911. United States v. 
 Union Pacific Railroad Company, 226 U. S. 96 ; 1912. 
 
SHERMAN ANTI-TRUST LAW 259 
 
 instead of attempting to return the stocks of the Railway 
 Companies held by it to the individuals from whom it had 
 received them in exchange for its own stock, reduced its capi- 
 tal from $400,000,000 to a trifle under $4,000,000, and directed 
 the distribution of the stocks of the Railway Companies held 
 by it pro rata among all of its stockholders. Mr. Harriman 
 and the Union Pacific Railroad Company objected to this dis- 
 tribution, contending that they should get back what they 
 had put in, and brought suit to compel the Securities Company 
 to make this return; but the courts denied them that relief, 
 holding that the pro rata distribution was proper. In the 
 opinion of the Supreme Court, the Chief Justice said, referring 
 to the suit by the United States against the Northern Securi- 
 ties Company : 
 
 "Some of our number thought that as the Securities Company 
 owned the stock, the relief sought could not be granted, but the con- 
 clusion was that the possession of power, which, if exercised, would 
 prevent competition, brought the case within the statute, no matter 
 what the tenure of title was." 
 
 After reviewing the whole situation, he concluded in this 
 language : 
 
 "Doubtless it became the duty of the Securities Company to end 
 a situation that had been adjudged unlawful, and this could be effected 
 by sale and distribution in cash, or by distribution in kind, and the 
 latter method was adopted, and wisely adopted, as we think, for the 
 forced sale of several hundred millions of stock would have manifestly 
 involved disastrous results. In fine, the title to these stocks having 
 intentionally been passed, the former owners or part of them cannot 
 reclaim the specific shares and must be content with their ratable pro- 
 portion of the corporate assets." l 
 
 Throughout the discussion in all the courts, it appeared to 
 be recognized that no principle of law could prevent the same 
 group of individuals from acquiring and owning stocks in com- 
 peting corporations in the same proportions, but that the law 
 
 1197U. S. 244, 298; 1905. 
 
260 SHERMAN ANTI-TRUST LAW 
 
 did condemn the acquisition of a perpetual control of compet- 
 ing corporations by vesting their stocks in corporate hands, 
 thereby preventing the ultimate distribution of ownership 
 which always results from individual stockholding. In 1895, 
 when an effort was made on behalf of the Great Northern Rail- 
 road Company to secure control of the Northern Pacific Rail- 
 way by putting the stock of the latter in the hands of a trustee 
 for the benefit of the stockholders of the Great Northern, the 
 Supreme Court had, while condemning that agreement, ex- 
 pressly recognized that individual stockholders could lawfully 
 acquire by purchase a majority or even the whole of the stock 
 of another and competing company, but it was pointed out that 
 in such case the companies would still remain separate corpora- 
 tions, with no interests as such in common, and that within a 
 short time by sales of the stock so acquired, the control of those 
 corporations might, and in all probability would, become fully 
 dissevered. In the Northern Securities Case, Justice Holmes, 
 in his dissenting opinion, said : 
 
 "I do not expect to hear it maintained that Mr. Morgan could be 
 sent to prison for buying as many shares as he liked of the Great 
 Northern and the Northern Pacific, even if he bought them both at 
 the same time and got more than half the stock of each road." l 
 
 The decree entered by the Circuit Court in the Standard 
 Oil Case enjoined the Standard Oil Company from voting the 
 stocks of its twenty odd subsidiary corporations, from collect- 
 ing dividends upon them, or through the ownership of those 
 stocks from exercising any control over such subsidiary cor- 
 porations; but it specifically provided, that "the defendants 
 are not prohibited by this decree from distributing ratably to 
 the shareholders of the principal Company the shares to which 
 they are equitably entitled in the stocks of the defendant cor- 
 porations that are parties to the combination." This decree 
 was affirmed by the Supreme Court, with a slight modification, 
 
 U93 U. S. 409; 1904. 
 
SHEKMAN ANTI-TRUST LAW 261 
 
 thus in effect approving this method of dissolving the unlawful 
 combination ; the court taking pains to say that in applying 
 remedies "the fact must not be overlooked that injury to 
 the public by the prevention of an undue restraint on or the 
 monopolization of trade or commerce, is the foundation upon 
 which the prohibitions of the statute rest, and moreover, that 
 one of the fundamental purposes of the statute is to protect, 
 not to destroy, rights of property." 1 But in the case of the 
 unlawful combination found to have been created by the ac- 
 quisition by the Union Pacific Railroad Company of a control- 
 ling interest in the stock of the Southern Pacific Company, the 
 Supreme Court took occasion to say that in order to conclude 
 the operating force of the combination, a disposition should be 
 made of the shares of stock acquired by the Union Pacific 
 Company, subject to the approval and decree of the District 
 Court, and that any plan for the disposition of that stock must 
 be such as to effectually dissolve the unlawful combination 
 thus created. It directed the District Court to proceed, upon 
 the presentation of any plan, to hear the government and the 
 defendants, and to bring in any additional parties whose presence 
 might be necessary to the final disposition of the stock in con- 
 formity to the views expressed in the opinion of the court. 1 
 
 For the purpose of more clearly elucidating the meaning of 
 this provision in the opinion of the court, an application was 
 made to the court by both the Attorney-General and the repre- 
 sentatives of the defendant Company for further instructions, 
 by provision, to be incorporated in the mandate, or otherwise, 
 as to whether or not a sale of the Southern Pacific stock to 
 and among the stockholders of the Union Pacific substantially 
 in proportion to their respective holdings, or the distribution 
 thereof by dividends to Union Pacific stockholders entitled to 
 such dividends, would, in the opinion of the court, constitute 
 a disposition of such shares in compliance with its previous 
 opinion. The court entertained the motion, and held that such 
 
 '226U. S. 61, 97; 1912. 
 
262 SHERMAN ANTI-TRUST LAW 
 
 a distribution would not so effectually end the combination as 
 to comply with its decision; that the main purpose of the 
 Anti-trust Law was to prevent combinations and conspiracies 
 in undue restraint of trade, or intending to monopolize it, and 
 that the object of proceedings of this character was to decree 
 by as effectual means as a court may, the end of such unlawful 
 combinations and conspiracies. 
 
 "So far as is consistent with this purpose," they said, "a court of 
 equity dealing with such combinations should conserve the property 
 interests involved, but never in such wise as to sacrifice the object 
 and purpose of the statute. The decree of the courts must be faith- 
 fully executed and no form of dissolution be permitted that in sub- 
 stance or effect amounts to restoring the combination which it was the 
 purpose of the decree to terminate." l 
 
 In the American Tobacco Company Case the Supreme Court 
 said: 
 
 "Our conclusion being that the combination as a whole, involving 
 all its cooperating or associated parts, in whatever form clothed, con- 
 stitutes a restraint of trade within the first section, and an attempt 
 to monopolize or a monopolization within the second section of the 
 antitrust act, it follows that the relief which we are to afford must be 
 wider than that awarded by the lower court; . . . but in order to 
 enable us to award relief coterminous with the ultimate redress of the 
 wrongs which we find to exist, we must approach the subject of relief 
 from an original point of view." 
 
 The court then pointed out, that a mere decree forbidding 
 stock ownership by one part of the combination in another 
 part, or an entity thereof, would afford no adequate measure 
 of relief, since different ingredients of the combination would 
 remain unaffected, and by the very nature and character of 
 their organization would be able to continue the wrongful 
 situation which it was their duty to destroy. Considering all 
 of the questions involved and the difficulties which presented 
 themselves, in view of the extent of the combination, the vast 
 
 1226U. S. 470, 477; 1913. 
 
SHERMAN ANTI-TRUST LAW 263 
 
 field which it covered, the all-embracing character of its activi- 
 ties concerning tobacco and its products, to at once enjoin the 
 movement in interstate commerce of the products which 
 the combination or its operating forces produced or controlled, 
 might effect infinite injury on the public by the stoppage 
 of immediate supply and the great enhancement of prices; 
 and to at once resort to a receivership might not only do 
 grievous injury to the public, but cause widespread and per- 
 haps irreparable loss to many innocent people. Under all these 
 circumstances, the court decreed that the combination in and 
 of itself, and as to all of its elements, was unlawful under the 
 first and second sections of the Antitrust Act; that the Dis- 
 trict Court should hear the parties for the purpose of ascer- 
 taining and determining upon some plan or method of dissolv- 
 ing the combination and of re-creating out of the elements 
 then composing it a new condition which would be honestly 
 in harmony with and not repugnant to the law, and that for 
 this purpose a period of six months was allowed from the receipt 
 of the mandate of the Supreme Court, with the right to an 
 extension of not to exceed sixty days; and that if before the 
 expiration of that period "a condition of disintegration in har- 
 mony with the law is not brought about, either as the conse- 
 quence of the action of the court in determining an issue on 
 the subject, or in accepting a plan agreed upon, it shall be the 
 duty of the court, either by way of an injunction restraining 
 the movement of the products of the combination in the chan- 
 nels of interstate or foreign commerce, or by the appointment 
 of a receiver, to give effect to the requirements of the statute." 1 
 It is safe to say that no task ever has been imposed upon the 
 law officers of the government and the judges of a court com- 
 parable in magnitude and complexity to that which was thus 
 devolved upon the Department of Justice and the Judges of 
 the Second Circuit by this decree of the Supreme Court. The 
 combination which the Supreme Court adjudged "as a whole, 
 
 '221 U. S. 187, 188; 1911. 
 
264 SHERMAN ANTI-TRUST LAW 
 
 involving all its cooperating or associated parts, in whatever 
 form clothed," to constitute a restraint of trade within the 
 first section, and an attempt to monopolize or a monopolization 
 within the second section of the Anti-trust Act, was composed 
 of sixty-five separate corporations of different States and 
 twenty-nine individuals. The American Tobacco Company 
 which, by the direct or indirect ownership of properties and 
 stocks of other corporations, exercised effective control of the 
 combination, had outstanding issues of $78,000,000 of preferred 
 stock, without voting power, distributed to the public, and 
 $40,000,000 of common stock, with voting power, the majority 
 of which was controlled by the twenty-nine individual defend- 
 ants, and it also had outstanding in the hands of the public 
 two issues of bonds, aggregating upwards of $104,000,000. 
 The combined assets of the combination at the date of the 
 filing of the bill in 1907, amounted to more than $400,000,000, 
 and the combined income of the companies for that year exceeded 
 $36,000,000. Excluding cigars, the American Tobacco Com- 
 pany and its subsidiaries manufactured and distributed more 
 than 75 per cent of all tobacco products of the United States, 
 and they were engaged in business and owned property in 
 almost every State of the Union and in many foreign coun- 
 tries. The Supreme Court had laid down as principles which 
 must guide the action of the court in terminating the existing 
 wrongful situation : 
 
 "1. The duty of giving complete and efficacious effect to the pro- 
 hibitions of the statute; 2, the accomplishing of this result with as 
 little injury as possible to the interest of the general public; and 
 3, a proper regard for the vast interests of private property which 
 may have become vested in many persons as a result of the acquisi- 
 tion either by way of stock ownership, or otherwise, of interests in the 
 stock or securities of the combination, without any guilty knowledge 
 or intent in any way to become actors or participants in the wrongs 
 which we find to have inspired and dominated the combination from 
 the beginning." l 
 
 *221 U. S. 185; 1911. 
 
SHERMAN ANTI-TRUST LAW 265 
 
 There were no precedents to furnish any guide in working 
 out the required plan of disintegration. No machinery had 
 been provided by Congress to aid either the court or the De- 
 partment of Justice in discharging the task. That it was 
 accomplished, that a combination of such magnitude and 
 complexity was disintegrated without the loss of a dollar to 
 public or private interests, save the curtailment for the future 
 of the monopolistic profits which theretofore had resulted from 
 the combination ; that bond issues of upwards of $100,000,000 
 were paid off without the loss of a dollar ; that the holders of 
 seventy-eight million dollars in preferred stock received its 
 equivalent value in new securities, and that the business, which 
 was largely one of brands, was distributed among fourteen 
 separate distinct and competing corporations, and that the 
 will of the Supreme Court was adequately carried out and its 
 caution specifically followed, will ever remain, to those who 
 were responsible for the result, a source of abiding gratification. 
 
 The voting power which had controlled this vast corporation 
 by being lodged in the hands of the holders of a majority of the 
 $40,000,000 of common stock, was distributed among the 
 holders of all the new stocks, including not only that amount 
 of common stock, but also the $78,000,000 of preferred stocks. 
 The business of the combination was divided up among four- 
 teen separate and distinct corporations in such manner that 
 no one was given an amount of the business in any particular 
 line in excess of 40 per cent of the business of the country in 
 that line, and save in one or two instances, not in excess of 
 one third of such business. The various brands were so dis- 
 tributed among the respective companies that no one com- 
 pany had the advantage in brands over another. No com- 
 pany was given a dominant position in the purchase of any 
 particular type of leaf tobacco from another. The licorice 
 business, the tin foil business and the snuff business were sepa- 
 rated from the tobacco business, and transferred to separate 
 corporations, and the companies engaged in foreign business 
 
266 SHERMAN ANTI-TRUST LAW 
 
 were divorced entirely from the domestic companies. This 
 plan of distribution was submitted to and approved as eco- 
 nomically sound by experts of the Bureau of Corporations of 
 the Department of Commerce and Labor, who had, through a 
 study of years, become thoroughly familiar with the tobacco 
 industry. All restrictive covenants, foreign and domestic, 
 were terminated. The twenty-nine individual defendants, 
 who had controlled the combination in the past, were enjoined 
 from increasing their holdings in any of the new companies. The 
 fourteen new companies were specifically enjoined from convey- 
 ing property from one to the other, from acquiring stock in one 
 another and from lending financial assistance to each other. 
 They were enjoined from making agreements with each other 
 as to prices, terms of purchase or sale of leaf tobacco or other 
 products dealt in by them, or apportioning business among 
 themselves with respect to localities. Every company was 
 enjoined from employing the same business organization as that 
 of another company, from having the same purchasing or sell- 
 ing agents, and from occupying the same offices. They were 
 enjoined from having common directors or common officers. 
 Every distributee company was enjoined from doing business 
 except in its own name or in that of a subsidiary company, 
 and where business was done in the name of a subsidiary, it was 
 provided that the product should bear the name of the con- 
 trolling company. They were enjoined from selling any brand 
 or product on condition that the purchaser should also buy 
 from the vendor some other brand manufactured or sold 
 by it. 
 
 This plan, as the Circuit Court, speaking by Judge Noyes, 
 said: 
 
 "has been built up almost in our presence, and whatever question 
 there may be as to its merits there is none of the good faith of its 
 authors, nor of the ability and conscientiousness with which they 
 have performed their task/' 1 
 
 1 191 Fed. 386; 1911. 
 
SHERMAN ANTI-TRUST LAW 267 
 
 It was unanimously approved by the four Circuit Judges, 
 every one of whom wrote an opinion. It was at once made the 
 object of bitter partisan attack on the part of those who de- 
 sired to see all business reduced to small retail units on the 
 one hand, on the part of political partisan opponents to the 
 national administration then in power on the other hand, and 
 also on the part of theorists with no sense of responsibility for 
 the vast interests at stake, and who entertained a totally mis- 
 taken idea of the nature and purpose of the law which com- 
 pelled the dissolution. 
 
 On the hearing before the Circuit Court, the Attorney- 
 General urged that the decree should reserve to the government 
 the right at any time within five years from the date of its entry 
 to apply to the court for other and further relief, upon a show- 
 ing that, as a matter of fact, such plan had not resulted in 
 creating a new condition which should be honestly in harmony 
 with and not repugnant to the law. He pointed out to the 
 court that it was obvious that any plan submitted to the 
 consideration of the court must be more or less a matter of con- 
 jecture, and that it was impossible for the court to determine 
 in advance whether or not a plan which proposed to restore 
 competitive conditions would actually accomplish the purpose 
 intended. The Circuit Court declined to accede to this sug- 
 gestion, upon the ground that it was beyond its power. Neither 
 in the mandate of the Supreme Court, said Judge Lacombe, 
 
 "nor in its opinion, is there any warrant for the conclusion that this 
 court is to prescribe the temporary terms of a modus vivendi, with 
 power to reassemble five years hence, ourselves or our survivors and suc- 
 cessors, and modify those terms, while in the interim by purchase or 
 exchange of these bonds, upwards of $100,000,000 worth of property 
 shall have changed hands irrevocably. The only function assigned 
 to us is to consider any proposed plan which responsible parties engage 
 to carry out, and approve or reject it. In the event of rejection the 
 only alternative is injunction, receivership and sale. The time limit 
 fixed in the mandate six months, and possibly two more pre- 
 cludes any other construction of its terms." 
 
268 SHERMAN ANTI-TRUST LAW 
 
 A different view has been since taken by other courts. Thus 
 in the Keystone Watch Company Case, the Circuit Judges in 
 the Third Circuit, while directing that an injunction should 
 issue to restrain the corporation defendant from repeating the 
 performance of the acts theretofore done by it which were held 
 to be in violation of the Anti-trust Law, declined to break up 
 the existing corporate entity, on the ground that they saw no 
 sufficient evidence that the public interests required such 
 action ; but they added : 
 
 "In case conditions in the future should make it desirable for the 
 government to ask for additional relief, even to the point of breaking 
 up the defendant corporation, we shall retain jurisdiction of the bill 
 with leave to the government to take such action hereafter as may 
 seem appropriate." l 
 
 In the United States Steel Corporation Case, the court held 
 that the government had not made out a case that should be 
 followed by a decree of dissolution, but some of the judges 
 being of opinion that the corporation should be prevented from 
 doing certain things and repeating certain practices respecting 
 the fixing and maintaining of prices which were regarded as 
 illegal, the court decided that if desired by the government, it 
 would retain jurisdiction of the bill for the purpose of allowing 
 future application to be made to restrain the doing of such 
 illegal acts in case they should be repeated in the future. And 
 in the suit against the American Can Company, recently de- 
 cided by Judge Rose at Baltimore, similar action is reported to 
 have been taken. 
 
 Shortly after the decree of dissolution in the Tobacco Case f 
 the so-called Powder Trust was dissolved by decree of the Cir- 
 cuit Court in Philadelphia. By that decree entered June 13, 
 1912, a large number of subsidiary corporations belonging to 
 the illegal combination were ordered to be dissolved and their 
 properties to be distributed among the stockholders. The 
 
 1 218 Fed. 502, 519; 1915. 
 

 SHERMAN ANTI-TRUST LAW 269 
 
 main businesses of the manufacture of dynamite, black blasting 
 powder, black sporting powder and smokeless powder, were 
 ordered distributed between three companies, two of them 
 newly incorporated for the purpose. The value of the property 
 transferred by the parent company to the two new companies 
 was under the decree to be represented by 50 per cent in bonds 
 and 50 per cent in stock, and the court decreed that one half 
 of the stocks which should be distributed to the individual 
 defendants who had brought about and controlled the combina- 
 tion, should be without voting power and should have no vot- 
 ing power so long as such stock was held by any one of such 
 defendants or their respective wives or children. The decree 
 further enjoined the distributee companies from conveying 
 property one to the other, from making agreements between 
 each other, or having common officers, directors or clerical 
 forces, and from acquiring stock in one another. 
 
 In passing upon an application for the construction of its 
 mandate in the Union Pacific Case, the Supreme Court said : 
 
 "As was said in the opinion filed in this case, however, each case 
 under the Sherman Act must stand upon its own facts, and we are 
 unable to regard the decrees in the Northern Securities Company case 
 and the Standard Oil Company case as precedents to be followed now 
 in view of the different situation presented for consideration." l 
 
 And in finally determining a very vexed question as to the 
 form of the decree to be entered against the Great Lakes Tow- 
 ing Company, which the District Court in the Northern Dis- 
 trict of Ohio had adjudged to constitute an unlawful combina- 
 tion, 2 that court, composed of the three Circuit Judges, reviewed 
 the history of the relief which had been granted in different 
 cases for the purpose of preventing and restraining continued 
 violations of the Sherman Act, as follows : 
 
 "In the Northern Securities Case, 193 U. S. 197 ; 1904, dissolution was 
 accomplished by requiring such Securities Company to largely reduce 
 
 * 226 U. S. 474; 1913. 2 208 Fed. 733; 1913. 
 
270 SHERMAN ANTI-TRUST LAW 
 
 its own stock and in lieu of the stock so retired to distribute to its 
 own stockholders a proportionate amount of the competitive stocks 
 held by it. In the Standard Oil Case, 221 U. S. 1 ; 191 1, the New Jersey 
 corporation which held the stocks of a large number of other corpora- 
 tions in exchange for its own, was required to distribute the stock so 
 held among its own stockholders. In the Tobacco Case, 221 U. S. 
 106 ; 1911, the business was divided between four corporations ; the con- 
 trolling companies being again so subdivided that business control 
 was in the hands of a large number of separate corporations. Certain 
 stock distributions were made and injunctive relief given. In the 
 Union Pacific Case, 226 U. S. 470 ; 1913, dissolution was affected by the 
 sale of the Southern Pacific stock. In the Reading Case, the unlawful 
 combination was held to exist as to the Temple Iron Company and the 
 65 per cent contracts, and defendants were enjoinedfrom voting the stock 
 of the Iron Company, the contracts referred to were cancelled, and their 
 further execution enjoined. In the St. Louis Terminal Case, 224 U. S. 
 383 ; 1912, the unlawful condition was relieved against by such revamp- 
 ing of conditions as that all the railroad companies could get the benefit 
 of the terminal facilities on equal terms. It is thus seen that even 
 where the remedy by injunction is thought to be inadequate, there is 
 no uniform rule respecting the means to be employed in putting an 
 end to the unlawful combination. Each case must stand upon its 
 own facts; and methods adopted in other cases are not necessarily 
 to be followed as precedents, except where the same situation is pre- 
 sented. Union Pacific Case, 226 U. S. 470; 1913." 1 
 
 In most instances, the result is accomplished, as was done in 
 the Tobacco Case, by adjudging the defendants to be in unlaw- 
 ful combination and providing that unless a plan to restore 
 legality be adopted and approved by the court within a given 
 time, injunction and receivership shall go. This, of course, 
 requires the parties to devise and submit to the law officers of 
 the government and to the court a plan which will terminate 
 the existing illegal condition and afford satisfactory guarantees 
 against the re-creation in the future of the unlawful status. 
 
 The Federal Trade Commission Act, 2 recently enacted, con- 
 tains the following provision, which is substantially what was 
 recommended by the Attorney-General to Congress in his 
 
 1 217 Fed. 659 ; 1914. 2 38 U. S. Stat. at Large 717. 
 
SHERMAN ANTI-TRUST LAW 271 
 
 annual report for 1911 after the adoption of the plan of dis- 
 integration of the Tobacco Trust : 
 
 "Whenever a final decree has been entered against any defendant 
 corporation in any suit brought by the United States to prevent and 
 restrain any violation of the antitrust acts, to make investigation, 
 upon its own initiative, of the manner in which the decree has been 
 or is being carried out, and upon the application of the Attorney- 
 General it shall be its duty to make such investigation. It shall 
 transmit to the Attorney-General a report embodying its findings and 
 recommendations as the result of any such investigation, and the re- 
 port shall be made public in the discretion of the commission. . . . 
 
 "Upon the application of the Attorney-General to investigate and 
 make recommendations for the readjustment of the business of any 
 corporation alleged to be violating the antitrust acts in order that 
 the corporation may thereafter maintain its organization, management 
 and conduct of business in accordance with law. 
 
 "That in any suit in equity brought by or under the direction of 
 the Attorney-General as provided in the antitrust acts, the court may 
 upon the conclusion of the testimony therein, if it shall be then of 
 opinion that the complainant is entitled to relief, refer said suit to 
 the commission as a Master in Chancery to ascertain and report an 
 appropriate form of decree therein. . . . The commission shall proceed 
 upon such notice to the parties and under such rules of procedure as 
 the court may prescribe and upon the coming in of such report such 
 exceptions may be filed and such proceedings had in relation thereto 
 as upon the report of a master in other equity cases, but the court 
 may adopt or reject such report in whole or in part and enter such 
 decree as the nature of the case may in its judgment require/' l 
 
 About fifty-four decrees in equity dissolving combinations, 
 have been entered in the various Circuit and District Courts 
 of the United States, beginning with the decree entered June 17, 
 1891, in the Circuit Court for the Middle District of Tennessee 
 against the Jellicoe Mountain Coal & Coke Company, down to 
 and including the most recent decrees, namely; that entered 
 January 20, 1916, in the District Court for the Western Dis- 
 trict of New York against the Eastman Kodak Company and 
 others, and that entered in the District Court of the Eastern 
 
272 SHERMAN ANTI-TRUST LAW 
 
 District of Pennsylvania on January 24, 1916, against the 
 Motion Picture Patents Company and others. The combina- 
 tions dissolved by these decrees were of infinite variety. They 
 included traffic associations between railroad companies, such 
 as those described in the Joint Traffic l and Traffic Association 
 Cases 2 ; combinations between competing manufacturers for the 
 purpose of suppressing competition, such as that before the 
 court in the Addyston Pipe Case; the control by one corpora- 
 tion of the capital stock of two competing transcontinental 
 railway systems (Northern Securities Co. v. U. $. 3 ) ; the control 
 by one corporation of the capital stock of another competing 
 railroad (U. S. v. Union Pacific 4 ) ; a combination controlling 
 all the terminals in the city of St. Louis (U. S. v. Terminal 
 Railway Association 5 ) ; combinations of wholesale grocers ; of 
 manufacturers of incandescent electric lights; of dealers in 
 plumbing supplies; of manufacturers of kindling wood; of 
 retail lumber dealers, having for their purpose the suppres- 
 sion of competition and the control of prices; combinations 
 of owners of patents extending the monopoly secured by the 
 Patent Laws beyond the scope of those statutes; pooling 
 agreements formed for the control of the price of cotton, and 
 various other contracts and combinations which on the evi- 
 dence were held to constitute undue restraints upon interstate 
 or foreign commerce, or an attempt to monopolize the same. 
 In all of these cases, the decrees dealt comprehensively with 
 contracts, organizations or practices which had grown up or 
 had been formed between two substantial competitors in a 
 given line, for the purpose of excluding competition or fixing 
 prices, and by various conveyances, transfers, cancellations and 
 dissolutions broke them up, and then, by injunctions forbid- 
 ding specified acts, made provision against their renewal in the 
 future. 
 
 It only remains to consider the criminal provisions of the 
 
 1 166 U. S. 290; 1897. 2 171 U. S. 505; 1898. 3 193 U. S. 197; 1904. 
 4 226 U. S. 61 ; 1912. B 224 U. S. 383 ; 1912. 
 
SHERMAN ANTI-TRUST LAW 273 
 
 statute. All of the acts which it declares unlawful are also 
 made misdemeanors, punishable by fine and imprisonment. 
 But while prosecutions have from time to time been brought to 
 enforce these penalties, juries have shown great reluctance to 
 convict individual defendants, and in the few instances where 
 convictions have been had, the penalty of imprisonment has 
 but seldom been imposed, and in every instance, but one, 
 where imprisonment has been imposed by the court upon a 
 defendant the judgment has been reversed on appeal. Such 
 was the case of the prosecution of the members of the so-called 
 Turpentine Trust in Savannah (Nash v. U. S. 1 ) and the con- 
 viction of the officers of the National Cash Register Company 
 in Cincinnati, Ohio (Patterson v. U. S. 2 ). In the sole case 
 where the appellate court affirmed the conviction which carried 
 a sentence of imprisonment, namely, that of the so-called Night 
 Riders in Kentucky, the President commuted the sentences 
 and remitted the penalty of imprisonment. It is true that in 
 a large number of instances, fines have been imposed and col- 
 lected, and the liability to criminal prosecution undoubtedly 
 has served as a deterrent, particularly in recent years, against 
 conscious violation of the law. 
 
 The decisions thus reviewed have demonstrated the Sher- 
 man Anti-trust Law to be an effective instrument for the 
 accomplishment of the purposes which the national legislature 
 had in view upon its enactment. It may seriously be doubted 
 whether the so-called Clayton Law, enacted at the last session 
 of Congress, has not, in its effort to add specific prohibitions 
 to the broad general denunciation of unlawful restraint on 
 interstate and foreign commerce embodied in the Sherman Law, 
 really weakened the provisions of that great enactment. It 
 has become a fashion of speech in some quarters to speak of the 
 Sherman Law as having been a failure. That the policy adopted 
 by Congress of seeking to prevent the arbitrary and far-reach- 
 ing centralization of power over industry which was making 
 
 1 229 U. S. 373 ; 1913. * 222 Fed. 599 ; 1915. 
 
 T 
 
274 SHERMAN ANTI-TRUST LAW 
 
 startling progress at the time of its enactment was demanded 
 by a regard for the national health and welfare, hardly can be 
 questioned ; that the Sherman Law, mistaken as was the original 
 conception of its provisions by some of the courts, halting and 
 imperfect as for a long time was its application, in the light of 
 modern interpretation has been made an effective means of 
 enforcing the rule of competition, as against the rule of combina- 
 tion, can admit of no candid doubt. There is, of course, a cer- 
 tain borderland of uncertainty in its application. It may 
 frankly be conceded, too, that in many instances healthy co- 
 operation makes for the public welfare more than destructive 
 competition. I have always thought that a different rule 
 should be applied with respect to foreign trade and commerce 
 than as regards domestic trade. When American business 
 seeks expansion in foreign countries, it meets conditions over 
 which it has no control. In many foreign countries the rule 
 of competition has been abolished and state control of asso- 
 ciated industry has been substituted for it. To send American 
 merchants into fields so controlled, prohibited from combining 
 for their own protection, is like sending ordinary State militia 
 regiments to contend with the trained armies of France or 
 Germany. But that the consideration which moved the 
 statesmen of 1890 to frame the Sherman Law was a whole- 
 some fear of the effect upon Republican institutions of the 
 centralization in a few hands of control over American indus- 
 try, appears to me to be beyond dispute. That the law they 
 enacted has, through the construction -finally given to it by the 
 Supreme Court, achieved its main purpose now has been 
 irrefutably demonstrated. 
 
THE FEDERAL TRADE COMMISSION AND THE 
 CLAYTON ACT 
 
 A Lecture Delivered before the Association of the Bar of the City of New 
 York, by Gilbert H. Montague, March 22, 1916 
 
 THE Sixty-third Congress convened for its Second Session 
 in December, 1913, with antitrust legislation for its chief 
 appointed work. The Presidential campaign of 1912 had been 
 largely waged upon the issue of trusts ; and Mr. Wilson took 
 pains frequently during the campaign to attack the Progressive 
 party for tolerating, under its proposals of regulation, the exist- 
 ence and development of business units and combinations so 
 large as to constitute substantial dominance in their respective 
 industries. 
 
 A Trade Commission, of some kind, was proposed in the 
 platforms of the Democratic, the Republican and the Progres- 
 sive parties. But the Democratic party, influenced apparently 
 by the recommendation of the Stanley Committee which had 
 investigated the United States Steel Corporation, proposed also 
 a program of legislation, supplementary to the Sherman Act, 
 which should specify and enumerate, in definite language, cer- 
 tain acts as ipso facto violations of the antitrust laws ; and the 
 Republican party, influenced apparently by the report of Sena- 
 tor Cummins from the Senate Committee on Interstate Com- 
 merce on antitrust legislation in 1912, and by the proposals 
 for antitrust legislation that had been introduced and agitated 
 by Congressman Lenroot and Senator La Follette, declared even 
 more definitely for "the enactment of legislation supplemen- 
 tary to the existing antitrust act, which will define, as criminal 
 offenses, those specific acts that uniformly mark attempts to 
 restrain and monopolize trade." The refusal of the Progressive 
 party to take such advanced ground in this direction, and the 
 
 275 
 
276 THE FEDERAL TRADE COMMISSION 
 
 emphasis placed throughout the campaign by the Progressive 
 party upon the ruthlessness of the Sherman Act and upon the 
 economies of big business, had the natural consequence of 
 strengthening the adherence of the Democratic party, and par- 
 ticularly its Presidential candidate, to these proposals for sup- 
 plementing and strengthening and clarifying the Sherman Act. 
 
 This, briefly, was the background for the Address of Presi- 
 dent Wilson to Congress on January 20th, 1914, in which he 
 outlined " changes which opinion deliberately sanctions and for 
 which business waits " : 
 
 "It waits," President Wilson continued, " with acquiescence, in the 
 first place, for laws which will effectually prohibit and prevent such 
 interlockings of the personnel of the directorates of great corpora- 
 tions banks and railroads, industrial, commercial, and public 
 service bodies as in effect result in making those who borrow and 
 those who lend practically one and the same, those who sell and those 
 who buy but the same persons trading with one another under different 
 names and in different combinations, and those who affect to compete 
 in fact partners and masters of some whole field of business. . . . 
 
 "The business of the country awaits also, has long waited and has 
 suffered because it could not obtain, further and more explicit legis- 
 lative definition of the policy and meaning of the existing antitrust 
 law. Nothing hampers business like uncertainty. Nothing daunts 
 or discourages it like the necessity to take chances, to run the risk of 
 falling under the condemnation of the law before it can make sure 
 just what the law is. Surely we are sufficiently familiar with the 
 actual processes and methods of monopoly and of the many hurtful 
 restraints of trade to make definition possible, at any rate up to the 
 limits of what experience has disclosed. These practices, being now 
 abundantly disclosed, can be explicitly and item by item forbidden 
 by statute in such terms as will practically eliminate uncertainty, the 
 law itself and the penalty being made equally plain. 
 
 "And the business men of the country desire something more than 
 that the menace of legal process in these matters be made explicit 
 and intelligible. They desire the advice, the definite guidance and 
 information which can be supplied by an administrative body, an 
 interstate trade commission. 
 
THE CLAYTON ACT 277 
 
 "The opinion of the country would instantly approve of such a 
 commission. It would not wish to see it empowered to make terms 
 with monopoly or in any sort to assume control of business, as if the 
 Government made itself responsible. It demands such a commission 
 only as an indispensable instrument of information and publicity, as 
 a clearing house for the facts by which both the public mind and the 
 manager of great business undertakings should be guided, and as an 
 instrumentality for doing justice to business where the processes of 
 the courts or the natural forces of correction outside the courts are 
 inadequate to adjust the remedy to the wrong in a way that will meet 
 all the equities and circumstances of the case. 
 
 "Producing industries, for example, which have passed the point 
 up to which combination may be consistent with the public interest 
 and the freedom of trade, cannot always be dissected into their com- 
 ponent units as readily as railroad companies or similar organizations 
 can be. Their dissolution by ordinary legal process may oftentimes 
 involve financial consequences likely to overwhelm the security market 
 and bring upon it breakdown and confusion. There ought to be an 
 administrative commission capable of directing and shaping such cor- 
 rective processes, not only in aid of the courts but also by independent 
 suggestion if necessary. . . . 
 
 "There is another matter in which imperative considerations of 
 justice and fair play suggest thoughtful remedial action. Not only 
 do many of the combinations effected or sought to be effected in the 
 industrial world work an injustice upon the public in general; they 
 also directly and seriously injure the individuals who are put out of 
 business in one unfair way or another by the many dislodging and 
 exterminating forces of combination. I hope that we shall agree in 
 giving private individuals who claim to have been injured by these 
 processes the right to found their suits for redress upon the facts and 
 judgments proved and entered in suits by the Government where the 
 Government has upon its own initiative sued the combinations com- 
 plained of and won its suit, and that the statute of limitations shall be 
 suffered to run against such litigants only from the date of the con- 
 clusion of the Government's action. It is not fair that the private 
 litigant should be obliged to set up and establish again the facts 
 which the Government has proved. He cannot afford, he has not 
 the power, to make use of such processes of inquiry as the Govern- 
 ment has command of. Thus shall individual justice be done while 
 the processes of business are rectified and squared with the general 
 conscience." 
 
278 THE FEDERAL TRADE COMMISSION 
 
 Other recommendations made by President Wilson in this 
 Address need not here detain us. . 
 
 Immediately following President Wilson's Address, Mr. Clay- 
 ton, Chairman of the House Judiciary Committee, announced 
 four tentative bills. 
 
 Tentative bill Number 1 proposed to add several sections to 
 the Sherman Act : 
 
 Section 9 forbade certain kinds of price discriminations, and 
 may thus be called the progenitor of section 2 of the present 
 Clayton Act. 
 
 Section 10 forbade certain kinds of exclusive contracts of 
 sale conditional upon discounts and rebates, and may thus 
 be called the progenitor of section 3 of the present Clayton 
 Act. 
 
 Section 12 provided that a final judgment or decree in behalf 
 of the Government in a Sherman Act suit should be conclusive 
 of the same issues of law in any other proceeding under the 
 Act. This, of course, was intended to assist private complain- 
 ants suing for treble damages under section 7 of the Sherman 
 Act. It also provided that the statute of limitations for such 
 private complainants should be suspended pending a suit by 
 the Government under the Sherman Act. This section may 
 thus be called the progenitor of section 5 of the present Clay- 
 ton Act. 
 
 Section 13 authorized private complainants to sue for in- 
 junctive relief against violations of the Sherman Act. This 
 may thus be called the progenitor of sections 16, 17, 18 and 19 
 of the present Clayton Act. 
 
 Tentative bill Number 2 proposed to include specifically 
 within the provision of the Sherman Act any combination or 
 agreement in interstate commerce 
 
 "First : To create or carry out restrictions in trade or to acquire a 
 monopoly in any interstate trade, business or commerce. 
 
 "Second: To limit or reduce the production or increase the price of 
 merchandise or of any commodity. 
 
THE CLAYTON ACT 279 
 
 "Third: To prevent competition in manufacturing, making, trans- 
 porting, selling, or purchasing of merchandise, produce, or any com- 
 modity. 
 
 "Fourth: To make any agreement, enter into any arrangement, or 
 arrive at any understanding by which they, directly or indirectly, 
 undertake to prevent a free and unrestricted competition among them- 
 selves or among any purchasers or consumers in the sale, production, 
 or transportation of any product, article or commodity." 
 
 This bill also provided that corporate officers and agents 
 authorizing violations of the Act should be personally punished. 
 This provision may thus be called the progenitor of section 14 
 of the present Clayton Act. 
 
 Tentative bill Number 3 proposed to prohibit various inter- 
 locking directorships and relationships in railroad, railroad 
 equipment companies, banks, trust companies and public ser- 
 vice companies. This bill may thus be called the progenitor of 
 section 8 of the present Clayton Act. 
 
 Tentative bill Number 4 proposed to prohibit intercorporate 
 stockholding in certain circumstances ; and may thus be called 
 the progenitor of section 7 of the present Clayton Act. 
 
 Other provisions of these tentative bills, which have no bear- 
 ing upon the Clayton Act as passed, need not here detain us. 
 
 Besides these tentative bills Mr. Clayton introduced a bill 1 
 to create an Interstate Trade Commission. 
 
 Hearings upon all these bills were then begun and continued 
 for several weeks. 
 
 On February 16th, Chairman Adamson of the House Inter- 
 state Commerce Committee, to which had been referred Mr. 
 Clayton's Interstate Trade Commission bill, appointed a sub- 
 committee to draft a bill ; and on March 14th, Mr. Covington, 
 Chairman of the Sub-Committee, introduced a bill 2 which was 
 supported by the entire Sub-Committee, Democrats and Repub- 
 licans, and by President Wilson. 
 
 On April 13th, Mr. Covington introduced a revised draft 3 
 
 1 H. R. 12,120, 63d Cong. H. R. 14,631, 63d Cong. 
 
 3 H. R. 15,613, 63d Cong. 
 
280 THE FEDERAL TRADE COMMISSION 
 
 which was reported with a report of the whole Committee to 
 the House on April 14th. All the Republican members of the 
 Committee concurred in this report. Mr. Stevens, of New 
 Hampshire, however, a Democratic member of the Com- 
 mittee, submitted, on April 20th, a minority report, which 
 foreshadowed provisions far in advance of any in the bill as 
 reported. Mr. Stevens said : 
 
 "The bill reported by the majority of the committee takes no steps 
 toward the proper regulation of competition. The new commission 
 has no more power than the old Bureau of Corporations, which it 
 supplants. Apparently a large part of its time will be devoted to 
 merely aiding the Department of Justice in the enforcement of the 
 antitrust acts. The Department of Justice undoubtedly needs the 
 aid of an expert board in its work, but an independent trade commis- 
 sion should have a far broader purpose. 
 
 "My own views of the scope and power of an interstate trade 
 commission are embodied in H. R. 15660. This bill confers upon 
 the trade commission all the powers of investigation conferred by 
 the committee bill, with two important additions, one of which is 
 fundamental. 
 
 "(1) The commission is given the discretionary power to require 
 those corporations which furnish annual reports to adopt as far as it is 
 practical a uniform system of accounts. Annual reports, unless based 
 upon a sound and uniform system of accounting, convey little infor- 
 mation and are of little value for the sake of comparisons. This pro- 
 vision follows the present Interstate Commerce Commission law. 
 The work of the Interstate Commerce Commission has been made 
 much more effective by giving it power to compel the railroads to 
 adopt uniform accounts. I see no reason why corporations which are 
 doing the same kind of business might not be classified and required 
 to adopt uniform account systems like the railroads. 
 
 " (2) Section 10 of H. R. 15660 declares unfair and oppressive compe- 
 tition to be unlawful and directs the commission to enforce the law. I 
 have not attempted to define unfair or oppressive competition. That 
 is a question of fact to be decided by the commission the same way 
 that the Interstate Commerce Commission decides what rates and 
 practices of the railroads are unreasonable and unfair. Unless the 
 commission is to have some power to regulate competition it would 
 seem hardly worth while to abolish the Bureau of Corporations." 
 
THE CLAYTON ACT 281 
 
 On June 5th, the Interstate Trade Commission bill, as 
 reported by the Committee, passed the House. 
 
 In the Senate the Interstate Trade Commission bill was re- 
 ferred to the Senate Committee on Interstate Commerce. On 
 June 13th, Senator Newlands, Chairman of the Committee, re- 
 ported the bill with amendments embodying substantially the 
 additions that Congressman Stevens had proposed. After a 
 spirited debate the bill passed the Senate by a vote of 53 
 to 16. 
 
 The bill, then known as the Federal Trade Commission bill, 
 then went to conference, from whence it emerged on Septem- 
 ber 4th, and was thereupon adopted, and on September 26th 
 was signed by the President. 
 
 Meanwhile Mr. Clayton's tentative bills above described 
 were progressing. 
 
 On April 14th, Mr. Clayton introduced a bill 1 which in- 
 cluded substantially the provisions of the tentative bills herein- 
 before discussed, and a provision that nothing in the antitrust 
 laws should be construed to forbid the existence or operation 
 of labor and agricultural organizations, and also provisions 
 that defined the practice in respect of injunctions. On May 
 6th, this bill was reported to the House with amendments. 
 On June 5th, the bill passed the House. 
 
 In the Senate the bill was referred to the Senate on Judiciary. 
 On July 22d, Senator Culberson, Chairman of the Committee, 
 reported the bill to the Senate with amendments. These in- 
 cluded provisions giving the Trade Commission and Interstate 
 Commerce Commission authority to enforce compliance with 
 sections prohibiting certain kinds of price discrimination, inter- 
 locking directorships, intercorporate stockholding and exclu- 
 sive contracts. The Senate debated the bill from July 22d 
 until September 2d. It struck out the provisions regarding 
 price discriminations and exclusive contracts. Later it put 
 back a substitute for the exclusive contract provision. It 
 
 1 H. R. 15,657, 63d Cong. 
 
282 THE FEDERAL TRADE COMMISSION 
 
 added several sections relating to carriers. On September 2d, 
 the bill as amended passed the Senate by vote of 46 to 16. 
 
 The bill then went to conference from whence it emerged 
 on September 23d. In the Senate a spirited debate followed, 
 but a motion to recommit was lost by vote of 35 to 25, and 
 the bill, as reported from conference, was finally agreed to on 
 October 5th, by a vote of 35 to 24. On October 8th the bill, 
 as reported, was agreed to by the House by vote of 244 to 54, 
 and on October 15th was signed by the President. 
 
 II 
 
 Several remedies have been added to the Sherman Act by 
 the Clayton Act. 
 
 Section 4 of the Clayton Act, closely following the language 
 of section 7 of the Sherman Act, provides : 
 
 "That any person who shall be injured in his business or property 
 by reason of anything forbidden in the anti-trust laws may sue there- 
 for in any district court of the United States in the district in which 
 the defendant resides or is found or has an agent, without respect to 
 the amount in controversy, and shall recover threefold the damages 
 by him sustained, and the cost of suit, including a reasonable attor- 
 ney's fee." 
 
 Section 12 of the Clayton Act provides that 
 
 " ... all process in such cases may be served in the district of which 
 it is an inhabitant, or wherever it may be found." 
 
 The "district in which the defendant resides or is found/' 
 within the meaning of section 7 of the Sherman Act, is the dis- 
 trict in which the defendant, at the commencement of the action, 
 resides, or, being a corporation, is domiciled, or where the defend- 
 ant is physically present, or, being a corporation, actually has 
 some kind of agent, or is actually transacting some kind of 
 business of such character as fairly to give it situs in that dis- 
 trict. This district, under the Sherman Act, was the only 
 
THE CLAYTON ACT 283 
 
 district in which the defendant could be sued; save only in 
 the exceptional cases provided for in section 5 of the Sherman 
 Act, when, in Government suits, "the ends of justice require 
 that other parties should be brought before the court." 
 
 This was not appreciated by Congress. In the report of the 
 House Judiciary Committee on the Clayton Bill, the Com- 
 mittee said that " under the law as it now exists, a suit against 
 a corporation must be brought in the district whereof it is an 
 inhabitant." The same error was repeated in the report of 
 the Senate Judiciary Committee. These reports, and the dis- 
 cussion of these sections on the floor of Congress, indicate that 
 the language of section 7 of the Sherman Act was departed 
 from only in the attempt to arrive at the result that had already 
 been reached by the Sherman Act. 
 
 The words above quoted, which section 12 of the Clayton 
 Act has added to the law, have raised a question of interpreta- 
 tion. And it has been held by one court 1 that the legislative 
 intent to expand the jurisdiction of the court, so far as service 
 of initial process is concerned, beyond that defined in section 7 
 of the Sherman Act, is quite clear : 
 
 "Ordinarily, process either of a state court or a District Court of 
 the United States cannot be served beyond the territorial limits of 
 the state or of the district, as the case may be. A non-resident cor- 
 poration may be doing business in a district, and therefore theoretically 
 be liable to suit therein; but if it is not represented therein by an 
 agent, upon whom process against it may be legally served, it cannot, 
 against its will, be brought into court. The framers of the Clayton 
 Act, however, have taken care that suits authorized by it shall not 
 be so obstructed. . . . 
 
 "A corporation may be sued under this statute where it transacts 
 business. It cannot escape the obligation to respond because no 
 agent of it, of the rank and character qualified to be served for it, 
 can be there found. Suit may be there brought and process may 
 issue to a district in which it cannot deny its liability to service." 
 
 1 Frey & Son v. Cudahy Packing Company, 228 Fed. 209, D. C. Maryland, 
 1915. 
 
284 THE FEDERAL TRADE COMMISSION 
 
 The court, accordingly, held that suit might be commenced 
 in Maryland, by service of summons and declaration in Illinois, 
 against an Illinois corporation doing business in Maryland. 
 
 Section 5 of the Clayton Act provides in part as follows : 
 
 "That a final judgment or decree hereafter rendered in any criminal 
 prosecution or in any suit or proceeding in equity brought by or on 
 behalf of the United States under the anti-trust laws to the effect 
 that a defendant has violated said laws shall be prima facie evidence 
 against such defendant in any suit or proceeding brought by any other 
 party against such defendant under said laws as to all matters re- 
 specting which said judgment or decree would be an estoppel as 
 between the parties thereto : Provided, This section shall not apply 
 to consent judgments or decrees entered before any testimony has 
 been taken : Provided further, This section shall not apply to consent 
 judgments or decrees rendered in criminal proceedings or suits in equity, 
 now pending, in which the taking of testimony has been commenced 
 but has not been concluded, provided such judgments or decrees are 
 rendered before any further testimony is taken." 
 
 As passed by the House, the Clayton Act made such decrees 
 conclusive, instead of prima facie, evidence against the defend- 
 ant, and contained none of these provisos. 
 
 Anxiety regarding the constitutionality of the measure ap- 
 pears to have prompted the change from "conclusive" to 
 "prima facie," and the proviso in respect of defendants that 
 already had consented to decrees. And a common-sense atti- 
 tude toward defendants desiring hereafter to consent to decrees 
 without contest appears to have prompted the second proviso. 
 
 Such consent, under certain circumstances, in some jurisdic- 
 tions, may make the judgment or decree proper evidence as an 
 admission against interest, and available against the defendant, 
 in suits by third parties. 1 This possibility, however, existed 
 
 1 Compare the following cases of former judgments taken upon the defend- 
 ant's plea of guilty: Clark v. Iroin, 9 Ohio 131 ; 1839. Bradley v. Bradley, 11 
 Maine 367 ; 1834. Green v. Bedell, 48 New Hampshire 546 ; 1869. Schreiner v. 
 High Ct. of F., 35 111. App. 576 ; 1890. Crawford v. Bergen, 91 Iowa 675 ; 1894. 
 23 Cyc. 1349. Compare the following case of former judgment taken upon the 
 defendant's plea of nolo contendere: Commonwealth v. Horton, 9 Pickering 
 
THE CLAYTON ACT 285 
 
 before the Clayton Act, and is quite unaffected by it. Except 
 for this, the section undoubtedly constitutes a real inducement 
 to defendants to consent to decrees without contest. 
 
 Whether this section will ever fulfill to private complainants, 
 in their actions against defendants already condemned in Gov- 
 ernment suits under the antitrust laws, the full measure of 
 assistance that it seems to promise may well be doubted. 
 
 The limitation of the effect of this section to "matters re- 
 specting which said judgment or decree would be an estoppel 
 as between the parties thereto" requires the complainant first 
 to ascertain just what matters have been conclusively deter- 
 mined and become res adjudicata between the Government and 
 the defendant, and just what are the issues in respect of which 
 there is an estoppel between the Government and the defend- 
 ant by virtue of the judgment or decree. 
 
 "The general principle announced in numerous cases/' said 
 the Supreme Court in Southern Pacific Railroad v. United 
 States, 1 
 
 "is that a right, question, or fact distinctly put in issue and directly 
 determined by a court of competent jurisdiction, as a ground of re- 
 covery, cannot be disputed in a subsequent suit between the same 
 parties or their privies ; and even if the second suit is for a different 
 cause of action, the right, question, or fact once so determined must, 
 as between the same parties or their privies, be taken as conclusively 
 established, so long as the judgment in the first suit remains un- 
 modified." 
 
 (Mass.) 206, 1829. Compare the following cases of former judgments taken 
 upon the defendant's default : Ellis v. Jameson, 17 Maine 235 ; 1840. Cragin v. 
 Carleton, 21 Maine 492 ; 1842. St. Louis Mut. L. Ins. Co. v. Cravens, 69 Missouri 
 72 ; 1878. Eisenlord v. Clum, 126 N. Y. 552, 559, 560 ; 1891. Millard v. Adams, 
 1 Misc. (N. Y.) 431 ; 1892. Greenleaf: Evidence, Volume 1, Sections 527a and 
 537; Black: Judgments, Second Edition, Section 608; Freeman: Judgments, 
 Fourth Edition, Section 417a ; 23 Cyc. 1288. By the weight of authority, how- 
 ever, it would seem that such former judgment can be qualified or explained 
 or rebutted by other testimony : Clark v. Irvin, 9 Ohio 131 ; 1839. Green v. 
 Bedell, 48 New Hampshire 546 ; 1869. Schreiner v. High Ct. of F., 35 111. App. 
 576 ; 1890. Crawford v. Bergen, 91 Iowa 675 ; 1894. Commonwealth v. Horton, 
 9 Pickering (Mass.) 206 ; 1829. But see Cragin v. Carleton, 21 Maine 492 ; 1842. 
 1 168 U. S. 1, 48, 1897. 
 
286 THE FEDERAL TRADE COMMISSION 
 
 In the absence of express findings of fact and conclusions of 
 law set forth in the judgment or decree in the Government 
 suit, a private complainant, whose cause of action arises out of 
 transactions constituting only a fraction of the Government's 
 case, would seem likely to find great difficulty in establishing 
 that this judgment or decree conclusively determined, or made 
 res adjudicata, or estopped from dispute, as between the defend- 
 ant and the Government, the issue of the legality of the par- 
 ticular transaction on which his cause of action is predicated. 1 
 And unless he can establish this, the judgment or decree in 
 the Government suit would seem, under any reasonable view 
 of section 5 of the Clayton Act, to be wholly unavailable as evi- 
 dence to a private complainant in a suit against the defendant. 
 
 The constitutionality of the section was disputed in Congress ; 
 but the change from "conclusive" to "prima facie" has gone 
 far to reduce the possibility that the section will be declared 
 unconstitutional . 
 
 Section 5 of the Clayton Act further provides : 
 
 "Whenever any suit or proceeding in equity or criminal prosecu- 
 tion is instituted by the United States to prevent, restrain, or punish 
 violations of any of the anti-trust laws, the running of the statute of 
 limitations in respect of each and every private right of action arising 
 
 1 See Richardson v. City of Boston, 19 How. (U. S.) 263, 267-268 ; 1856. 
 Washington, Alexandria & Georgetown Steam-Packet Company v. Sickles, et al., 
 24 How. (U. S.) 333, 344-345 ; 1860. Packet Company v. Sickles, 5 Wall. (U. S.) 
 580, 590-592 ; 1866. Cromwell v. County of Sac, 94 U. S. 351 ; 1876. Davis v. 
 Brown, 94 U. S. 423, 428-429; 1876. Russell v. Place, 94 U. S. 606, 608-610; 
 1876. Stewart v. Lansing, 104 U. S. 505, 510; 1881. Nesbit v. Riverside Inde- 
 pendent District, 144 U. S. 610, 618-621 ; 1892. Wilmington & Welden Railroad 
 v. Alsbrook, 146 U. S. 279, 302 ; 1892. McComb v. Frink, 149 U. S. 629, 639-642 ; 
 1892. Keokuk & Western Railroad Company v. Missouri, 152 U. S. 301, 313- 
 316; 1894. De Sollar v. Hanscome, 158 U. S. 216, 221-222; 1895. Stone v. 
 United States, 167 U. S. 178, 184, 186-189; 1897. New Orleans v. Citizens' 
 Bank, 167 U. S. 371, 389-400; 1897. Dennison v. United States, 168 U. S. 241, 
 249; 1897. Southern Pacific Railroad Company v. United States, 183 U. S. 519, 
 525, 528, 530, 432-534 ; 1902. Lander v. Mercantile Bank, 186 U. S. 458, 476- 
 477; 1902. Yates v. Utica Bank, 206 U. S. 181, 183-184; 1907. Virginia- 
 Carolina Chemical Company v. Kirven, 215 U. S. 252, 257-259 ; 1909. Troxell. 
 v. Delaware, Lackawanna & Western Railroad Company, 227 U. S. 434, 440-443 ; 
 1913. 
 
THE CLAYTON ACT 287 
 
 under said laws and based in whole or in part on any matter complained 
 of in said suit or proceeding shall be suspended during the pendency 
 thereof." 
 
 The limitation of the effect of this provision to "any matter 
 complained of in said suit or proceeding" raises the question 
 as to whether the private cause of action is really based upon 
 a matter complained of in the Government suit. Unless the 
 particular transaction, on which the private cause of action in 
 whole or in part is based, is specifically referred to in the bill or 
 indictment in the Government suit, this question is almost as 
 difficult as that raised by the preceding paragraph of section 5 
 hereinbefore discussed. 
 
 Upon the score of constitutionality, the provisions above 
 quoted would seem to be unexceptionable. 
 
 Section 6 of the Clayton Act provides : 
 
 "That the labor of a human being is not a commodity or article of 
 commerce. Nothing contained in the anti-trust laws shall be con- 
 strued to forbid the existence and operation of labor, agricultural, or 
 horticultural organizations, instituted for the purposes of mutual help, 
 and not having capital stock or conducted for profit, or to forbid or 
 restrain individual members of such organizations from lawfully carry- 
 ing out the legitimate objects thereof; nor shall such organizations, 
 or the members thereof, be held or construed to be illegal combina- 
 tions or conspiracies in restraint of trade, under the anti-trust laws." 
 
 The word "lawfully" was added to this section in the Senate. 
 This word, and the words "legitimate objects," import into 
 this section all the qualifications and standards of all the anti- 
 trust laws. Considered by itself, therefore, this section would 
 not in the least alter the law as heretofore interpreted and en- 
 forced in respect of labor organizations. But in so far as other 
 sections of the Clayton Act may have relaxed the law in respect 
 of labor controversies, this section has clearly changed the law 
 in respect of labor organizations. Considered, therefore, in the 
 light of the discussion hereinafter of section 20, there maybe 
 concealed under the platitudinous language of section 6 a sub- 
 
288 THE FEDERAL TRADE COMMISSION 
 
 stantial relaxation of the Sherman Act as heretofore interpreted 
 and enforced by the courts in respect of labor organizations. 
 
 Section 13 of the Clayton Act provides that subpoenas for 
 witnesses in Government suits under the antitrust laws may 
 run into any district, but that subpoenas for witnesses in civil 
 suits shall not, without permission of the trial court, run more 
 than 100 miles outside the district in which the court is held. 
 "Under the existing law," said the Judiciary Committees of 
 the House and the Senate, "subpoenas for witnesses in such 
 suits run only in the district in which they are issued." This 
 section, therefore, was enacted for the purpose of meeting this 
 situation. 
 
 Section 15 of the Clayton Act closely follows the language of 
 sections 4 and 5 of the Sherman Act in authorizing United 
 States District Attorneys, under the direction of the Attorney 
 General, to sue to restrain violations of the Clayton Act. 
 
 Section 16 of the Clayton Act changes the rule, expressed 
 by the Supreme Court in Minnesota v. Northern Securities Com- 
 pany, 1 and enforced in other cases, that heretofore has re- 
 stricted to the United States the right to sue for an injunction 
 to restrain a violation of the Sherman Act. Except as against 
 common carriers in respect of matters under the jurisdiction of 
 the Interstate Commerce Commission, section 16 of the Clay- 
 ton Act extends this right of suit for injunction, in respect of 
 all the antitrust laws, to "any person, firm, corporation, or 
 association." 
 
 The provisions of section 16 in respect of giving security 
 against damages are explicit and apparently unambiguous. In 
 connection with subsequent sections of the Clayton Act, how- 
 ever, they have given rise to a curious confusion. 
 
 Section 18 of the Clayton Act provides : 
 
 "That, except as otherwise provided in section 16 of this Act, no 
 restraining order or interlocutory order of injunction shall issue, except 
 upon the giving of security by the applicant in such sum as the court 
 
 1 194U. S. 48; 1904. 
 
THE CLAYTON ACT 289 
 
 or judge may deem proper, conditioned upon the payment of such 
 costs and damages as may be incurred or suffered by any party who 
 may be found to have been wrongfully enjoined or restrained thereby." 
 
 Section 16 of the Clayton Act, it will be recalled, relates to 
 suits for injunction by private complainants. So far as pre- 
 liminary injunctions are concerned, instead of providing any 
 exception to the terms of section 18, section 16 substantially 
 paraphrases the provisions of section 18 in respect of the giving 
 of security. 
 
 Section 18, therefore, would appear to have changed the 
 whole practice of restraining orders and interlocutory orders of 
 injunction in Government suits, and to require now that the 
 Government give security like a private complainant. Since 
 no means exist by which the Government can do this, the con- 
 sequence would seem to be that until machinery is created by 
 which the Government may comply with the sweeping and 
 apparently absolute requirements of section 18, the Govern- 
 ment cannot obtain any restraining order or interlocutory order 
 of injunction. 
 
 Section 15 of the Clayton Act provides that, in suits by the 
 Government, "pending such petition and before final decree, 
 the court may at any time make such temporary restraining 
 order or prohibition as shall be deemed just in the premises/' 
 But since exemption from giving security is not expressly given 
 by this section, and since section 18 is so sweeping and absolute 
 in its terms, there is ground for contending that section 18 
 governs section 15, and that the provisions of the latter above 
 quoted cannot be invoked until means are provided by which 
 the Government may give security for any "restraining order 
 or interlocutory order of injunction" that it may obtain. 
 
 In the only case that has thus far arisen on this point, how- 
 ever, 1 the United States obtained a temporary restraining 
 order, and later a preliminary injunction, without giving any 
 
 1 United States v. United Shoe Machinery Company, D. C., E. D., Missouri, 
 227 Fed. 507; 1915. 
 U 
 
290 THE FEDERAL TRADE COMMISSION 
 
 security whatsoever. But appeal is now pending from this 
 preliminary injunction, and pending the appeal the defendants 
 have obtained from the Circuit Court of Appeals a stay of the 
 preliminary injunction by themselves filing a substantial bond. 1 
 
 Ill 
 
 Influenced apparently by the desire to meet criticisms long 
 directed by organized labor against federal court injunctions, 
 Congress included in the Clayton Act the substance of two 
 bills 2 relating to injunctions and procedure in contempt cases, 
 which had been favorably reported by the House Judiciary 
 Committee and passed by the House in the preceding session. 
 
 Section 18, relating to injunction bonds, has already been 
 discussed. 
 
 Section 17 provides that no preliminary injunction shall be 
 granted without notice, and that, unless irreparable injury has 
 been shown, no temporary restraining order shall be granted 
 without notice. 
 
 Section 19 sets forth what specific allegations must be in- 
 cluded in this injunction. 
 
 One court has apparently held that these provisions are not 
 binding upon the Government, when it applies for a restrain- 
 ing order and a preliminary injunction in a Government suit 
 under the Clayton Act. 3 But appeal is now pending from this 
 decision, and pending the appeal the defendants have obtained 
 from the Circuit Court of Appeals a stay of the preliminary 
 injunction by themselves filing a substantial bond. 4 
 
 Section 20 prescribes the conditions under which injunctions 
 shall be issued in cases between employer and employees. The 
 
 1 Upon this appeal, decided May, 1916, this preliminary injunction was 
 vacated ; but the court did not discuss the point above mentioned. 
 8 H. R. 26,635 and H. R. 22,591. 
 
 3 United States v. United Shoe Machinery Company, D. C., E. D., Missouri, 
 227 Fed. 507 ; 1915. 
 
 4 Upon this appeal, decided May, 1916, this preliminary injunction was 
 vacated ; but the court did not discuss the point above mentioned. 
 
THE CLAYTON ACT 291 
 
 section follows the best preexisting practice, in limiting injunc- 
 tions to cases where they are 
 
 "necessary to prevent irreparable injury to property, or to a property 
 right, of the party making the application, for which injury there is 
 no adequate remedy at law, and such property or property right must 
 be described with particularity in the application, which must be in 
 writing and sworn to by the applicant or by his agent or attorney." 
 
 But the section breaks new ground in its remaining provisions : 
 
 "And no such restraining order or injunction shall prohibit any 
 person or persons, whether singly or in concert, from terminating any 
 relation of employment, or from ceasing to perform any work or labor, 
 or from recommending, advising, or persuading others by peaceful 
 means so to do ; or from attending at any place where any such per- 
 son or persons may lawfully be, for the purpose of peacefully obtain- 
 ing or communicating information, or from peacefully persuading any 
 person to work or to abstain from working ; or from ceasing to patron- 
 ize or to employ any party to such dispute, or from recommending, 
 advising, or persuading others by peaceful and lawful means so to do ; 
 or from paying or giving to, or withholding from, any person engaged 
 in such dispute, any strike benefits or other moneys or things of value ; 
 or from peaceably assembling in a lawful manner, and for lawful pur- 
 poses ; or from doing any act or thing which might lawfully be done 
 in the absence of such dispute by any party thereto ; nor shall any 
 of the acts specified in this paragraph be considered or held to be vio- 
 lations of any law of the United States." 
 
 These provisions legalize, so far as federal law is concerned, 
 transactions which may clearly be acts in the chain of a con- 
 spiracy in violation of the Sherman Act and, therefore, unlawful 
 under the Sherman Act as heretofore interpreted and enforced 
 by the courts. How far these provisions may prevent the 
 courts, in the future, from holding to be in violation of the Sher- 
 man Act labor combinations of the character heretofore de- 
 nounced as unlawful in Loewe v. Lawlor l and other cases will 
 undoubtedly be a much litigated question. 
 
 i 208 U. S. 283 ; 1908. 
 
292 THE FEDERAL TRADE COMMISSION 
 
 Sections 21 and 22 provide that when the act contempt of an 
 injunction constitutes also a criminal offense against a federal 
 or state statute, the accused shall be tried by the court, or, upon 
 demand of the accused, by a jury, and if found guilty shall be 
 punished by fine or imprisonment or both. 
 
 Section 23 provides for a review of these proceedings in the 
 manner heretofore provided in criminal cases, and for admis- 
 sion of the accused to bail. 
 
 Section 24 provides : 
 
 "That nothing herein contained shall be construed to relate to 
 contempts committed in the presence of the court, or so near thereto 
 as to obstruct the administration of justice, nor to contempts com- 
 mitted in disobedience of any lawful writ, process, order, rule, decree, 
 or command entered in any suit or action brought or prosecuted in 
 the name of, or on behalf of, the United States, but the same, and 
 all other cases of contempt not specifically embraced within section 
 twenty-one of this Act, may be punished in conformity to the usages 
 at law and in equity now prevailing." 
 
 Section 25 fixes one year as the statute of limitations in con- 
 tempt proceedings. 
 
 IV 
 
 The substantive provisions of the Clayton Act, relating to 
 price discriminations, exclusive contracts, intercorporate stock- 
 holdings and interlocking directorships, have thus far proved 
 the most controversial provisions of the act. 
 
 Section 2 of the Clayton Act provides : 
 
 "That it shall be unlawful for any person engaged in commerce, in 
 the course of such commerce, either directly or indirectly to dis- 
 criminate in price between different purchasers of commodities, which 
 commodities are sold for use, consumption, or resale within the United 
 States or any Territory thereof or the District of Columbia or any 
 insular possession or other place under the jurisdiction of the United 
 States, where the effect of such discrimination may be to substantially 
 lessen competition or tend to create a monopoly in any line of com- 
 merce : Provided, That nothing herein contained shall prevent dis- 
 crimination in price between purchasers of commodities on account of 
 
THE CLAYTON ACT 293 
 
 differences in the grade, quality, or quantity of the commodity sold, 
 or that makes only due allowance for difference in the cost of selling 
 or transportation, or discrimination in price in the same or different 
 communities made in good faith to meet competition : And provided 
 further, That nothing herein contained shall prevent persons engaged 
 in selling goods, wares or merchandise in commerce from selecting 
 their own customers in bona fide transactions and not in restraint of 
 trade." 
 
 Many causes contributed to the provisions above quoted. 
 
 By 1914, nineteen states had adopted statutes prohibiting 
 price discriminations of one form or another, and most of these 
 statutes had been enacted during the three years immediately 
 preceding the passage of the Clayton Act. In cases arising 
 under the federal and state antitrust acts, predatory price dis- 
 criminations had repeatedly and specifically been denounced 
 by the courts. In the proposed antitrust legislation advocated 
 prior to the enactment of the Clayton Act by Congressman 
 Lenroot, Senator La Follette and Congressman Stanley all 
 of which influenced strongly, though unconsciously, the legis- 
 lative temper that directed the course of legislation in 1914, at 
 least in its earlier stages specific prohibitions against various 
 kinds of price discrimination had a prominent place. So hard, 
 however, was it found to take care of the legitimate exceptions 
 to the general prohibition against price discriminations that 
 the Senate voted to drop the section entirely. But the proposal 
 already had too much popular strength, and argument to the 
 effect that the generic provisions of the Sherman Act, and sec- 
 tion 5 of the Federal Trade Commission Act forbidding unfair 
 competition already reached every possible evil of price dis- 
 crimination fell on deaf ears. The conference committee hav- 
 ing charge of the Clayton bill, in deference to a very popular 
 superstition, felt obliged to legislate expressly against price dis- 
 criminations, and accordingly put back the section, with amend- 
 ments, and with the section in the bill its report was finally 
 adopted by the Senate as well as the House. 
 
 Section 3 of the Clayton Act provides : 
 
294 . THE FEDERAL TRADE COMMISSION 
 
 "That it shall be unlawful for any person engaged in commerce 
 in the course of such commerce, to lease or make a sale or contract 
 for sale of goods, wares, merchandise, machinery, supplies or other 
 commodities, whether patented or unpatented, for use, consumption 
 or resale within the United States or any territory thereof or the 
 District of Columbia or any insular possession or other place under 
 the jurisdiction of the United States, or fix a price charged therefor, 
 or discount from, or rebate upon such price on the condition, agree- 
 ment, or understanding that the lessee or purchaser thereof shall not 
 use or deal in the goods, wares, merchandise, machinery, supplies or 
 other commodities of a competitor or competitors of the lessor or 
 seller, where the effect of such lease, sale or contract for sale or such 
 condition, agreement or understanding may be to substantially lessen 
 competition or tend to create a monopoly in any line of commerce." 
 
 Agitation against systems of limited licenses under patents, 
 popularly associated with the United Shoe Machinery Com- 
 pany, the Motion Picture Patents Company, and some other 
 concerns, and against various kinds of exclusive contracts and 
 so-called "tying" contracts, that had been variously charged in 
 several antitrust suits and that had led to legislation in Texas, 
 Michigan, Massachusetts and some other states and to the 
 reverberant dissenting opinion of Chief Justice White in Henry 
 v. A. B. Dick Co., 1 was probably responsible for the provisions 
 above quoted. 
 
 Similar provisions had a prominent place in the proposals 
 of Congressman Lenroot, Senator La Follette, and Congress- 
 man Stanley before the passage of the Clayton Act. Like the 
 price discrimination section, however, the exclusive contract 
 section was found, in the course of the Senate debate on section 
 5 of the Federal Trade Commission Act forbidding unfair com- 
 petition, to be probably superfluous, in view of the Sherman 
 Act and this section of the Federal Trade Commission Act. 
 But while the Senate was willing to drop the price discrimina- 
 tion section, it clung to the exclusive contract section, and after 
 wrestling with various statutes and amendments, the Senate 
 
 i 224 U. S. 1 ; 1912. 
 
THE CLAYTON ACT 295 
 
 adopted the section which was amended and brought into its 
 present form in conference and finally agreed to by the House 
 and Senate. 
 
 Neither the price discrimination section nor the exclusive 
 contract section have any operation except where their effect 
 " may be to substantially lessen competition or tend to create a 
 monopoly in any line of commerce." 
 
 At the outset, therefore, it must be determined what this 
 phrase means. 
 
 In the prototype of these sections in Mr. Clayton's tentative 
 bill Number 1, this phrase did not appear ; but in tentative bill 
 Number 4, where certain kinds of intercorporate stockholding 
 were forbidden, there appear the words "where the effect of 
 the acquisition is to eliminate or lessen competition between 
 the corporation whose stock is so acquired and the corpora- 
 tion making the acquisition, or to create a monopoly of any 
 line of trade in any section or community." This seems to 
 mark the genesis of the phrase. 
 
 In the form in which it passed the House, these sections did 
 not contain this phrase, nor anything that can fairly be called 
 equivalent to it. 
 
 The words " may . . . create a monopoly in any line of com- 
 merce" have clearly the same meaning as the words "monop- 
 olize, or attempt to monopolize . . . any part of the trade 
 or commerce," in the Sherman Act. But neither the phrase 
 " substantially lessen competition," nor any corresponding lan- 
 guage, appears in the Sherman Act. 
 
 The so-called antitrust provisions of the Wilson Tariff Act 1 
 referred to restraint of "competition" in a manner that might, 
 perhaps, have been taken to be in contradistinction to "restraint 
 of lawful trade." Section 73 provides : 
 
 "That every combination ... or contract is hereby declared to 
 be ... illegal, and void, when the same is made by or between two 
 or more persons or corporations either of whom is engaged in import- 
 
 1 U. S. 28 Stat. L., 570, August 27, 1894, Chap. 349. 
 
296 THE FEDERAL TRADE COMMISSION 
 
 ing any article from any foreign country into the United States, and 
 when such combination, conspiracy, trust, agreement, or contract is 
 intended to operate "in restraint of lawful trade, or free competition in 
 lawful trade or commerce. . . ." (italics mine) 
 
 This section was expressly preserved in the Dingley Tariff 
 Act. 1 
 
 The section above quoted was amended in 1913 2 by insert- 
 ing after the words "corporations either of whom" the words 
 "as agent or principal." 
 
 The foregoing section appears never to have been judicially 
 construed. Whether restraint of " competition," in this section, 
 is intended to be anything different from "restraint of lawful 
 trade" is, therefore, at best doubtful. 
 
 Language corresponding somewhat to the phrase "substan- 
 tially lessen competition" appears in the antitrust statutes 
 of many of the states. Among them may be mentioned Ala- 
 bama, Arizona, Arkansas, California, Colorado, Florida, 
 Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, 
 Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, 3 
 Missouri, 4 Montana, Nebraska, New Jersey, New Mexico, New 
 York, North Carolina, North Dakota, Ohio, Oklahoma, South 
 Carolina, South Dakota, 5 Tennessee, Texas, Utah, Wisconsin 
 and Wyoming. Examination of the decisions construing the 
 statutes of these various states tends to support the view that 
 phrases therein, which may fairly be called comparable to the 
 phrase "substantially lessen competition," are simply the 
 equivalents of "restraint of trade or commerce" and "monopo- 
 lize, or attempt to monopolize," as those phrases in the Sherman 
 Act have been interpreted and enforced by the Supreme Court 
 of the United States. Cases tending to support this proposi- 
 
 i 30 U. S. Stat. L., 213, Sec. 34. 
 
 a Act of February 12, 1913, Chap. 370. 
 
 3 See especially Grenada Lumber Company v. Mississippi, 217 U. S. 433 ; 1910. 
 
 4 See especially International Harvester Company v. Missouri, 234 U. S. 199 ; 
 1914. 
 
 5 See especially Central Lumber Company v. South Dakota, 226 U. S. 157 ; 
 1912. 
 
THE CLAYTON ACT 297 
 
 tion may be found in Alabama, Georgia, Indiana, Michigan, 
 Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New 
 York, Ohio, South Carolina, and Tennessee. Cases deserving 
 attention because of their apparent disagreement with this 
 view, but which appear, upon analysis, to be probably distin- 
 guishable may be found in Kansas 1 and Texas. 2 
 
 Examination of the decisions under the Sherman Act affords 
 further confirmation of the view that the words "substantially 
 lessen competition" are only a paraphrase for the words" re- 
 straint of trade or commerce" and "monopolize, or attempt to 
 monopolize." 
 
 Contracts and acts that "substantially lessen competition" 
 have repeatedly been held to be in violation of the Sherman 
 Act. Thus the Sherman Act has been held by the Supreme 
 Court to forbid 
 
 an "agreement" that "does in fact prevent competition" though per- 
 haps it "purports to restrain competition ... in a very slight degree 
 and on a single point" ; 3 
 
 "any contract . . . where the natural and direct effect of such a con- 
 tract will be, when carried out, to directly, and not as a mere incident 
 to other and innocent purposes, regulate to any substantial extent 
 interstate commerce" ; 4 
 
 "contracts which directly and substantially, and not merely indirectly, 
 remotely, incidentally and collaterally, regulate to a greater or less 
 degree commerce among the several states"; 5 
 
 "contracts which would directly and substantially and not as a mere 
 incident regulate interstate commerce"; 6 
 
 an agreement that "directly effects a restraint of interstate commerce" 
 though "it does not amount to one per cent of the business of the 
 dealers in tiles in that city"; 7 
 
 1 See especially Smiley v. Kansas, 196 U. S. 447 ; 1905. 
 
 8 See especially National Cotton Oil Company v. Texas, 197 U. S. 115 ; 1905; 
 and Waters-Pierce Oil Company v. Texas, 212 U. S. 86 ; 1909. 
 
 3 United States v. Joint Traffic Association, 171 U. S. 505, 575 ; 1898 (italics 
 mine). 
 
 *Addyston Pipe and Steel Co. v. United States, 175 U. S. 211,228; 1900 
 (italics mine). 
 
 6 Ibid., p. 229 (italics mine). Ibid., p. 229 (italics mine). 
 
 7 Montague & Company v. Lowry, 193 U. S. 38, 46 ; 1904. 
 
298 THE FEDERAL TRADE COMMISSION 
 
 "any combination which by its necessary operation destroys or re- 
 stricts free competition among those engaged in interstate commerce" ; * 
 acts "which operated to the prejudice of the public interests by unduly 
 restricting competition or unduly obstructing the due course of trade" ; 2 
 acts which "injuriously restrained trade" ; 3 
 
 "destroying or greatly abridging the free operation of competition 
 theretofore existing", even though "this competitive traffic was in- 
 finitesimal when compared with the gross amount of the business 
 transacted by both roads" and "a comparatively small part of the 
 sum total of all traffic, state and interstate carried over them " because 
 apparently, in this case, "it was by no means a negligible part but a 
 large and valuable part, of interstate commerce which was thus 
 directly affected" and "was in a substantial part the subject matter of 
 rivalry and competition between these two systems"; 4 
 a "concerted scheme" that operates "to unduly suppress competition 
 and restrain freedom of commerce among the States"; 5 
 a combination whose "necessary result is materially to restrain trade 
 between the States"; 6 
 
 an arrangement that "affords evidence of an intent to suppress that 
 competition and of a purpose to unduly restrain the freedom of pro- 
 duction, transportation and sale of the product at tide- water markets " ; 6 
 "artificial conditions, which necessarily impede or burden the due 
 course of such trade or commerce or restrict the common liberty to 
 engage therein"; 7 
 
 "only such contracts and combinations ... as by reason of intent 
 or the inherent nature of the contemplated acts prejudice the public 
 interests by unduly restricting competition or unduly obstructing the 
 course of trade" ;* 
 
 combinations <( unduly restrictive of the flow of commerce or unduly re- 
 strictive of competition" ; 9 
 
 1 Northern Securities Company v. United States, 193 U. S. 197, 337 ; 1904 
 (italics mine). 
 
 2 United States v. American Tobacco Co. 221 U. S. 106, 179; 1911 (italics 
 mine). 
 
 3 Ibid., 179 (italics mine). 
 
 4 United States v. Union Pacific Railroad Company, 226 U. S. 61, 88-89; 
 1912 (italics mine). 
 
 s United States v. Reading Company, 226 U. S. 324, 369 ; 1913 (italics mine). 
 
 *Ibid., 370 (italics mine). 
 
 i United States v. Patten, 226 U. S. 525, 541 ; 1913 (italics mine). 
 
 8 Nash v. United States, 229 U. S. 373, 376; 1913 (italics mine). 
 
 9 Eastern States Retail Lumber Dealers Association v. United States, 234 U. S. 
 600, 610; 1914 (italics mine). 
 
THE CLAYTON ACT 299 
 
 "practices which unduly restrain competition or unduly obstruct the free 
 
 flow of such commerce" ; l 
 
 acts which "unduly suppress competition"; 2 
 
 acts "which were unreasonably restrictive of competitive conditions";* 
 
 That the standard of legality set up in the Clayton Act by 
 the words "substantially lessen competition'' is none other 
 than the standard established by the Sherman Act in the words 
 "restraint of trade or commerce" and "monopolize, or attempt 
 to monopolize" is the view of practically every authority thus 
 far expressed. 
 
 Thus in Great Atlantic & Pacific Tea Company v. Cream of 
 Wheat Company 4 Judge Hough declared that 
 
 "there is nothing in the Clayton Act to compel or induce courts to 
 hold that the trade restraint referred to by this statute differs in kind, 
 quality, or degree from that now held to be meant by the Sherman 
 Act. . . . Section 2 plainly identifies the lessening of competition 
 with restraint of trade." 
 
 Similarly, Ex-President Taft in his Address before the An- 
 nual Meeting of the American Bar Association, on October 
 2, 1914, stated: 
 
 "The words 'with the effect substantially to lessen competition' are 
 to be construed in the light of then* association with the words that follow 
 them in order to secure some guide to the meaning of 'substantially.' 
 It certainly does not mean any lessening of competition, however small, 
 because its ordinary signification prevents that. . . . The only rea- 
 sonable solution would seem to be to hold that it means such substan- 
 tial suppression of competition as to constitute a real restraint of trade 
 and a tendency to monopolize." 
 
 Against this view, however, two considerations are likely to 
 be urged : 
 
 First, that the sponsors in Congress of the Clayton bill un- 
 doubtedly intended and believed, and repeatedly stated, that 
 its substantive provisions go further than the Sherman Act. 
 
 1 Ibid., 613 (italics mine). 2 Ibid., 614 (italics mine). 
 
 3 Standard Oil Co. v. United States, 221 U. S. 1, 58; 1911 (italics mine). 
 
 4 224 Fed. 566, 573; 1915; affirmed. 227 Fed. 46; 1915. 
 
300 THE FEDERAL TRADE COMMISSION 
 
 Second, that if Congress had intended by the phrase "sub- 
 stantially lessen competition" to set up merely the legal stand- 
 ard of the Sherman Act, it would have used the language of 
 the Sherman Act, viz., "restraint of trade or commerce" and 
 "monopolize, or attempt to monopolize," instead of painfully 
 evolving new language. 
 
 The first proposition was clearly expressed by the Senate 
 Judiciary Committee in its report upon the Clayton Act : 
 
 "It is well, at the outset, to state the theory of the bill, both as it 
 passed the House of Representatives and as it is proposed to be 
 amended, for the general scope of the House measure is unchanged. 
 It is not proposed by the bill or amendments to alter, amend, or change 
 in any respect the original Sherman Anti-trust Act of July 2, 1890. 
 The purpose is only to supplement that act and the other anti-trust 
 acts referred to in section 1 of the bill. Broadly stated, the bill, in 
 its treatment of unlawful restraints and monopolies, seeks to prohibit 
 and make unlawful certain trade practices which, as a rule, singly 
 and in themselves, are not covered by the act of July 2, 1890 or other 
 existing anti-trust acts, and thus, by making these practices illegal, 
 to arrest the creation of trusts, conspiracies, and monopolies in their 
 incipiency and before consummation. Among other of these trade 
 practices which are denounced and made unlawful may be mentioned 
 discrimination in prices for the purpose of wrongfully injuring or 
 destroying the business of competitors, exclusive and tying contracts, 
 holding companies, and interlocking directorates " (italics mine). 
 
 This view, both before and after the bill had assumed the 
 form of the present Clayton Act, was repeatedly expressed on 
 the floor of Congress by sponsors of the bill. 
 
 This view, however, seems pretty satisfactorily disposed 
 of by the fact that when the Clayton Act was passed, 
 Congress, as appears from the debates, was under a general 
 misapprehension that the Sherman Act had proved insufficient 
 to cover "substantial lessening of competition," and therefore 
 believed that language different from the Sherman Act was 
 needed in order to accomplish the result, which, unperceived 
 by Congress, the Sherman Act had already accomplished. 
 
THE CLAYTON ACT 301 
 
 The second proposition depends upon the familiar rule of 
 statutory construction that interpretations supported only by 
 elaborate inference and argument are not favored by the courts 
 when, in the opinion of the courts, it would have been easy 
 for the legislature to have explicitly expressed such meaning. 
 This rule, expressed in the maxim "it would have been easy 
 to say so," has been repeatedly applied by the Supreme Court. 
 
 Applying now this rule to the Clayton Act and the Sherman 
 Act: 
 
 Examination of the phrase "substantially lessen competition," 
 in sections 2 and 3 of the Clayton Act, in comparison with the 
 analogous phrases in section 7, develops the fact that in section 
 7, relating to intercorporate stockholding, the phrases used are 
 "substantially lessen competition between the corporation whose 
 stock is so acquired and the corporation making the acquisition" 
 and " substantially lessen competition between such corporations, 
 or any of them, whose stock or other share capital is so acquired." 
 
 This shows that Congress had no intention, in the phrase 
 "substantially lessen competition" to mean substantially lessen 
 competition simply between any two concerns. The fact that "it 
 would have been easy to say so," and the further fact that in 
 section 7 Congress did say so, conclusively establish this propo- 
 sition. 
 
 But the maxim "it would have been easy to say so" does not, 
 however, go to the extent of proving that " substantially lessen 
 competition" necessarily means something different from "re- 
 straint of trade or commerce " and " monopolize, or attempt to 
 monopolize," in the Sherman Act. For when the Clayton Act 
 was passed, Congress, as appears from the debates, misappre- 
 hended the effect of the Sherman Act, and erroneously believed 
 that it did not cover "substantial lessening of competition," 
 and therefore deemed it necessary to select language different 
 from the Sherman Act in order to accomplish the result, which, 
 unperceived by Congress, the Sherman Act had already ac- 
 complished. 
 
302 THE FEDERAL TRADE COMMISSION 
 
 Several other clauses in the price discrimination section raise 
 questions of interpretation : 
 
 Does the exemption of discriminations "made in good faith 
 to meet competition" depart from the standards of legality set 
 up in the Sherman Act? 
 
 Probably not, according to the rule laid down in Patterson v. 
 United States 1 and in the charge of Judge Rellstab to the jury 
 in Buckeye Powder Company v. E. I. du Pont de Nemours Pow- 
 der Company, 2 and in some of the decrees entered upon consent 
 in Government suits under the Sherman Act. But the point 
 is not altogether clear. 
 
 Does the proviso that "nothing herein contained shall pre- 
 vent persons engaged in selling goods, wares or merchandise 
 in commerce from selecting their own customers in bona fide 
 transactions and not in restraint of trade" lay down an ex- 
 ception to the Sherman Act ? 
 
 In Great Atlantic & Pacific Tea Company v. Cream of Wheat 
 Company, 3 Judge Hough, discussing this section and particu- 
 larly this clause said: 
 
 "Section 2 plainly identifies the lessening of competition with re- 
 straint of trade. (Cf. the body of the section with the last exception.) 
 But price discrimination is only forbidden when it 'substantially' 
 lessens competition. Construing the whole section together, the last 
 exception reads in effect that a 'vendor may select his own bona fide 
 customers providing the effect of such selection is not to substantially 
 and unreasonably restrain trade.'" 
 
 Judge Hough's conclusion in this case, that the Cream of 
 Wheat Company could not be restrained from refusing to sell 
 to the Great Atlantic & Pacific Tea Company, because the 
 latter was cutting the retail price of Cream of Wheat, hardly 
 depends, therefore, upon this proviso of section 2. But it sug- 
 gested, perhaps, the line taken by Judge Hough in the follow- 
 ing much quoted passage of this decision : 
 
 i 222 Fed. 599, 650 (C. C. A. 6th C. March 13, 1915). 
 
 D. C. N. J., Feb. 1914, unreported, affirmed 223 Fed. 881; 1915. 
 
 3 224 Fed. 566, 574 ; 1915. 
 
THE CLAYTON ACT 303 
 
 " How it "can be called substantial and unreasonable restraint 
 of trade to refuse to deal with a man who avowedly is to use his deal- 
 ing to injure the vendor, when said vendor makes and sells only such 
 an advertisement begotten article as Cream of Wheat, whose fancy 
 name needs the nursing of carefully handled sales to maintain an out- 
 put of trifling moment in the food market, is beyond my compre- 
 hension. . . . 
 
 "If it be granted that section 2 does apply, and that defendant's 
 selection of customers results in unlawful restraint of trade, can it be 
 possible that such person's evil ways are to be amended, not by stop- 
 ping his business, but by adding to his list of customers one or many 
 persons chosen by Congress ? Numerous individuals and corporations 
 have been enjoined from restraining the trade of other people, no 
 matter how flourishing the offenders' trade might be, nor how greatly 
 the general volume of trade had increased during the period of re- 
 straint. But never before has it been urged that, if J. S. made enough 
 of anything to supply both Doe and Roe, and sold it all to Doe, refus- 
 ing even to bargain with Roe, for any reason or no reason, such con- 
 duct gave Roe a cause of action." 
 
 The same proviso, perhaps, contributed to the vigor of Judge 
 Lacombe's language 1 in the opinion of the Circuit Court of 
 Appeals affirming Judge Hough's decision. 
 
 "We had supposed that it was elementary law that a trader could 
 buy from whom he pleased and sell to whom he pleased and that his 
 selection of seller and buyer was wholly his own concern. 'It is a 
 part of a man's civil rights that he be at liberty to refuse business rela- 
 tions with any person whomsoever, whether the refusal rests upon 
 reason, or is the result of whim, caprice, prejudice or malice.' Cooley 
 on Torts, p. 278. See also our own opinion in Greater New York Film 
 Company v. Biograph Company, 203 Fed. 39 ; 1913. Before the Sher- 
 man Act it was the law that a trader might reject the offer of a 
 proposing buyer, for any reason that appealed to him : It might be 
 because he did not like the other's business methods, or because he 
 had some personal difference with him, political, racial or social. 
 That was purely his own affair with which nobody else had any 
 concern. Neither the Sherman Act, nor any decision of the Supreme 
 Court construing the same, nor the Clayton Act has changed the 
 
 1 Great Atlantic & Pacific Tea Company v. Cream of Wheat Company, 227 
 Fed. 46, 49, C.C.A. 2d C. November 10, 1915. 
 
304 THE FEDERAL TRADE COMMISSION 
 
 law in this particular. We have not yet reached the stage, where 
 the selection of a trader's customers is made for him by the govern- 
 ment." 
 
 Although advanced ground in denial of the right to refuse to 
 deal with a prospective customer under circumstances similar 
 to the foregoing has repeatedly been taken by the Department 
 of Justice in investigations relating to complaints under the 
 Sherman Act, it is noteworthy that in proceedings thus far 
 commenced under the Sherman Act the Department has denied 
 this right only in cases where it has been alleged that there also 
 existed an actual agreement to maintain prices or to do other 
 things that in themselves were more colorably in violation of 
 the Sherman Act. It may be doubted, therefore, whether this 
 proviso in any way alters the rule established by the Sherman 
 Act. 
 
 Disposition exists in some quarters to regard section 2 of the 
 Clayton Act as somehow relaxing the rule of the Sherman Act 
 in respect of price discriminations. That this would be the 
 result, if the standards of legality set up in this section were 
 lower than those of the Sherman Act, would seem to be clear, 
 under the well-settled rule that a subsequent special statute 
 (viz. the Clayton Act), following a prior general statute (viz. 
 the Sherman Act) and in any respect inconsistent therewith, 
 supersedes in respect of all inconsistent provisions the prior 
 general statute. Taking section 2 altogether, therefore, in the 
 light of all the foregoing considerations, it seems probable that 
 it merely paraphrases, without any substantial change what- 
 soever, the Sherman Act in its application to price discrimina- 
 tions. 
 
 Section 3 of the Clayton Act, relating to exclusive contracts, 
 becomes operative, like the price discrimination section, only 
 where the effect of the "lease, sale, or contract for sale or 
 such condition, agreement or understanding may be to sub- 
 stantially lessen competition or tend to create a monopoly in 
 any line of commerce." For the reasons above set forth, there- 
 
THE CLAYTON ACT 305 
 
 fore, such arrangements would seem to be lawful, unless they 
 offend against the standards of legality already established by 
 the Sherman Act. 
 
 Some have contended that the inclusion in this section of 
 patented, as well as unpatented, commodities extends the law 
 beyond the area covered by the Sherman Act. 
 
 This view appears to rest upon one or the other of two popu- 
 lar misconceptions : 
 
 First, the popular misconception regarding the extent to 
 which the Sherman Act, in its relation to patented articles, 
 already forbids many arrangements, that formerly were thought 
 to be included within the patent protection, but latterly have 
 been held to be outside ; and 
 
 Second, the popular misconception regarding the extent to 
 which the patent laws, within the legitimate scope of their 
 operation, prevent the courts, upon clear constitutional grounds, 
 from indulging the inference that Congress intended to amend 
 the patent laws. 
 
 The materials for the correction of these two popular mis- 
 conceptions exist in several recent decisions of the Supreme 
 Court and the lower federal courts, and need not here be dis- 
 cussed. 1 But it is confidently believed that they amply sup- 
 port the proposition that, so far as patented articles are con- 
 cerned, the rule established by the Sherman Act has not been 
 altered by section 3 of the Clayton Act. 
 
 Section 3, of the Clayton Act provides that it shall be un- 
 lawful to lease, sell, or contract to sell, or fix a price, discount 
 or rebate upon " the condition, agreement, or understanding that 
 the lessee or purchaser thereof shall not use or deal in the goods, 
 wares, merchandise, machinery, supplies or other commodities 
 of a competitor or competitors of the lessor or seller." 
 
 1 See especially Standard Sanitary Manufacturing Co. v. United States, 226 
 U. S. 20 ; 1913. Virtue v. Creamery Package Co., 227 U. S. 8 ; 1913. Winslow v. 
 United States, 227 U. S. 202 ; 1913. Blount Manufacturing Co. v. Yale & Towne 
 Manufacturing Co., 166 Fed. 555 ; 1908. United States v. United Shoe Machinery 
 Company, 222 Fed. 349 ; 1915. 
 X 
 
306 THE FEDERAL TRADE COMMISSION 
 
 Literally, this language makes the section operative only 
 when the customer is denied absolutely all freedom to "use or 
 deal in" a competitor's goods. Where, as in Henry v. A. B. 
 Dick Co. 1 therefore, the notice on the mimeograph provided 
 that "this machine is sold by the A. B. Dick Company with the 
 lessee's restriction that it may be used only with the stencil 
 paper, ink and other supplies made by A. B. Dick Company," 
 it would follow that since the customer was not denied abso- 
 lutely all freedom to use a competitor's stencil paper, ink and 
 other supplies, but was merely forbidden to use them on the 
 Dick machine, and was, therefore, left free to use them in any 
 other way, the notice would not fall within this clause of the 
 section, and would, therefore, be entirely outside the pro- 
 hibition of the law. 
 
 If this be the interpretation of the section and its literal 
 language plainly suggests it then most of the arrangements 
 that have furnished the inspiration for this section plainly fall 
 wholly outside it. 
 
 In several investigations now pending in the Department of 
 Justice and the Federal Trade Commission, and in a suit which 
 the Government has recently begun under this section 2 the 
 Government's view appears to be that this clause means any 
 "condition, agreement, or understanding" which, in the 
 slightest degree, denies to the customer any part of his entire 
 freedom to "use or deal in" a competitor's goods. 
 
 But this construction can hardly be possible. 
 
 A competitor's machinery, to illustrate, may be capable of 
 four practical uses A, B, C and D. The condition, agree- 
 ment or understanding may, in effect, prevent use D, and leave 
 uses A, B and C intact to the lessees. Can it be contended that 
 a "condition, agreement or understanding" that leaves to the 
 lessee all these wes of the competitor's machinery is a "condi- 
 
 1 224U. S.I; 191 2. 
 
 2 United States v. United Shoe Machinery Company, D. C. E. D., Missouri, 
 227 Fed. 507; 1915; upon appeal, decided May, 1916, this preliminary in- 
 junction was vacated. 
 
THE CLAYTON ACT 307 
 
 tion, agreement or understanding that the lessee . . . shall not 
 use . . . the . . . machinery ... of a competitor . . . of the 
 lessor . . .?" 
 
 Such a contention would involve a clear distortion of the 
 statute. 
 
 A competitor's goods may be capable of being used or dealt 
 in by the customer in many different ways. 
 
 The customer may "use or deal in" them anywhere, any- 
 how, and any time; or he may "use or deal in" them only in 
 specified places, or in a specified manner, or under specified 
 conditions, or within specified periods. 
 
 The customer may "use or deal in" a competitor's goods 
 unconditionally and with absolute freedom ; or he may be for- 
 bidden to "use or deal in" them within a particular territory, 
 or in a particular manner, or in connection with a particular 
 plant or machine or under certain specified conditions, or 
 during a particular period. 
 
 Take other illustrations : 
 
 The arrangement may simply forbid the dealer to "use or 
 deal in" a competitor's goods in preference to the seller's 
 goods. The prohibition of the section would hardly apply to 
 this case; for the dealer is still permitted to "use or deal in" 
 the competitor's goods to any degree he desires, short of giving 
 them the preference over the selling goods. 
 
 Again: The arrangement may forbid the dealer to push 
 the sale of a competitor's goods as hard as he pushes the sale 
 of a seller's goods. The prohibition of the section would 
 hardly apply to this case ; because the dealer is still permitted 
 to "use or deal in" the competitor's goods, provided he does 
 not push their sale as hard as he pushes the seller's goods. 
 
 Selection and predilection, within limitations prescribed by 
 the Sherman Act and the Clayton Act, are still legitimate fac- 
 tors in trade relations. So long as customers and dealers are 
 left any reasonable degree of practical freedom, there would 
 seem to be no violation of section 3 of the Clayton Act. 
 
308 THE FEDERAL TRADE COMMISSION 
 
 A medium course in construing this clause of section 3 
 would be to construe it as meaning any "condition, agreement 
 or understanding" which in fact denies to the customer sub- 
 stantially all practical freedom to "use or deal in" a competitor's 
 goods. 
 
 But even these limited classes of arrangements, it is submitted, 
 are forbidden by section 3 of the Clayton Act only when they 
 tend to restrain trade or monopolize, or attempt to monopolize 
 within the meaning of the Sherman Act. The conclusion fol- 
 lows, therefore, that this section simply reaffirms the rule of 
 the Sherman Act in respect of exclusive contracts. 
 
 In Elliott Machine Co. v. Center 1 a lease made before the 
 passage of the Act was held to be in violation of this section. 
 The opinion, however, did not discuss any of the points here- 
 inbefore considered, and can hardly be regarded as really an 
 authority against any of them. 
 
 Section 7 of the Clayton Act provides : 
 
 "That no corporation engaged in commerce shall acquire, directly 
 or indirectly, the whole or any part of the stock or other share capital 
 of another corporation engaged also in commerce, where the effect 
 of such acquisition may be to substantially lessen competition between 
 the corporation whose stock is so acquired and the corporation making 
 the acquisition, or to restrain such commerce in any section or com- 
 munity, or tend to create a monopoly of any line of commerce. 
 
 "No corporation shall acquire, directly or indirectly the whole or 
 any part of the stock or other share capital of two or more corpora- 
 tions engaged in commerce where the effect of such acquisition, or 
 the use of such stock by the voting or granting of proxies or other- 
 wise, may be to substantially lessen competition between such cor- 
 porations, or any of them, whose stock or other share capital is so 
 acquired, or to restrain such commerce in any section or community, 
 or tend to create a monopoly of any line of commerce." 
 
 Several writers have suggested that these provisions have 
 merely adopted the standard of legality in respect of intercor- 
 porate stockholding established by the Sherman Act. 
 
 ^227 Fed. 124; 1915. 
 
THE CLAYTON ACT 309 
 
 If the words "between the corporation whose stock is so 
 acquired and the corporation making the acquisition," and the 
 words "between such corporations, or any of them, whose 
 stock or other share capital is so acquired" had been omitted 
 from these provisions, this view would seem sound. But with 
 these words in the section, it appears, for reasons hereinbefore 
 stated, that a standard of legality much stricter than the Sher- 
 man Act has here been* established. 
 
 How much stricter it is difficult to say. 
 
 No one familiar with negotiations for the simultaneous acqui- 
 sition of several incorporated businesses can fail to see what 
 an obstacle this provision places in the way of combinations that 
 would clearly be permissible under the Sherman Act. Several 
 recent decisions have plainly indicated that combinations of com- 
 petitors into a single business unit, that can insure economies of 
 operation, and efficiency in competition, without threatening any 
 domination of the market, are not in violation of the Sherman 
 Act. 1 Public policy, indeed, would seem actually to favor such 
 combinations, particularly in any industry where to-day a single 
 large concern overshadows all competitors. But so long as 
 this section requires a combination to be effected through pur- 
 chase of plants and property, instead of through acquisition of 
 stock control, the difficulties of combining small competitors 
 into units large enough to compete, on equal terms, with the 
 biggest concern in the industry are greatly accentuated. 
 
 By the remaining clauses of the section, corporations are 
 permitted to acquire stock for investment and to create sub- 
 sidiary corporations for carrying on legitimate branches of their 
 business ; and carriers are permitted to acquire stock in branch 
 lines; and all acquisitions of stock lawfully acquired before 
 the passage of the Clayton Act are excluded from its operation. 
 
 Section 8 of the Clayton Act provides that after two years 
 from the passage of the Act 
 
 1 See United States v. United Shoe Machinery Co., 222 Fed. 349 ; 1911. 
 United States v. United States Steel Corporation, 223 Fed. 55 ; 1912. 
 
310 THE FEDERAL TRADE COMMISSION 
 
 "no person shall at the same time be a director or other officer or 
 employee of more than one bank, banking association or trust com- 
 pany, organized or operating under the laws of the United States, 
 either of which has deposits, capital, surplus, and undivided profits 
 aggregating more than $5,000,000 ; and no private banker or person 
 who is a director in any bank or trust company, organized and operat- 
 ing under the laws of a state, having deposits, capital, surplus, and 
 undivided profits aggregating more than $5,000,000, shall be eligible 
 to be a director in any bank or banking association organized or operat- 
 ing under the laws of the United States." 
 
 Section 8 further provides : 
 
 "No bank, banking association or trust company, organized or 
 operating under the laws of the United States, in any city or incor- 
 porated town or village of more than two hundred thousand inhabi- 
 tants, as shown by the last preceding decennial census of the United 
 States, shall have as a director or other officer or employee any private 
 banker or any director or other officer or employee of any other bank, 
 banking association or trust company located in the same place : Pro- 
 vided : That nothing in this section shall apply to mutual savings banks 
 not having a capital stock represented by shares : Provided further, That 
 a director or other officer or employee of such bank, banking associa- 
 tion, or trust company may be a director or other officer or employee 
 of not more than one other bank or trust company organized under 
 the laws of the United States or any State where the entire capital 
 stock of one is owned by stockholders in the other; And provided 
 further, That nothing contained in this section shall forbid a director 
 of class A of a Federal reserve bank, as defined in the Federal Re- 
 serve Act from being an officer or director or both an officer and 
 director in one member bank." 
 
 This later provision has been construed by the Federal 
 Reserve Board and the Department of Justice to be operative, 
 like the preceding provision above quoted, only after two 
 years from the passage of the Act. 
 
 To the clause above quoted there was added, by amendment on 
 May 15, 1916, this further clause : " And provided further, That noth- 
 ing in this Act shall prohibit any officer, director, or employee of any 
 member bank or class A director of a Federal reserve bank, who shall 
 first procure the consent of the Federal Reserve Board, which board 
 
THE CLAYTON ACT 311 
 
 is hereby authorized, at its discretion, to grant, withhold, or revoke 
 such consent, from being an officer, director, or employee, of not more 
 than two other banks, banking associations, or trust companies, 
 whether organized under the laws of the United States or any State, 
 if such other bank, banking association, or trust company is not in 
 substantial competition with such member bank. The consent of the 
 Federal Reserve Board may be procured before the person applying 
 therefor has been elected as a class A director of a Federal reserve 
 bank or as a director of any member bank." 
 
 The figures and provisos set forth in these provisions portray 
 the illogicality of this class of legislation. 
 Section 8 further provides : 
 
 "That from and after two years from the date of the approval of 
 this Act no person at the same time shall be a director in any two or 
 more corporations, any one of which has capital, surplus, and un- 
 divided profits aggregating more than $1,000,000 engaged in whole 
 or in part in commerce, other than banks, banking associations, trust 
 companies and common carriers subject to the Act to regulate com- 
 merce, approved February fourth, eighteen hundred and eighty-seven, 
 if such corporations are or shall have been theretofore, by virtue of 
 their business and location of operation, competitors, so that the 
 elimination of competition by agreement between them would con- 
 stitute a violation of any of the provisions of any of the anti-trust laws." 
 
 This appears to forbid interlocking directorships between 
 corporations, of the size specified, only when an agreement 
 between such corporations not to compete would constitute 
 a violation of the Sherman Act. 
 
 Section 10 of the Clayton Act provides elaborate regulation 
 for dealings and contracts with carriers relating to securities, 
 supplies, construction, and maintenance, to the amount of 
 more than $50,000 in the aggregate in any one year, 
 
 "when the said common carrier shall have upon its board of direc- 
 tors or as its president, manager or as its purchasing or selling officer, 
 or agent in the particular transaction, any person who is at the same 
 time a director, manager, or purchasing or selling officer, of, or who 
 has any substantial interest in such other corporation, firm, partner- 
 ship or association. ..." 
 
312 THE FEDERAL TRADE COMMISSION 
 
 In this, as in the section just before discussed, there seems to 
 be nothing to prevent a director of a holding company, law- 
 fully holding stock in its subsidiary companies but itself not 
 carrying on any business, from serving as director in any com- 
 pany competing with one of such subsidiaries, or in any rail- 
 road dealing with any such subsidiaries. But in so far as the 
 holding company actively carries on business, or actively super- 
 vises or participates in the dealings and contracts of its sub- 
 sidiaries with their customers, there is ground for the appre- 
 hension that these sections may possibly apply, upon the analogy 
 of the decision in the second Commodities Clause Case, 1 and 
 some of the cases which have followed it. 2 
 
 Other clauses of the Clayton Act, regarding eligibility, com- 
 petitive bidding, embezzlement, personal liability, and various 
 provisos, need not here detain us. 
 
 V 
 
 The Federal Trade Commission was created by the Federal 
 Trade Commission Act and consists of five commissioners. 
 The Commission succeeded to the powers, proceedings, and 
 office personnel and equipment of the old Bureau of Corpora- 
 tions. It has jurisdiction over every corporation engaged in 
 interstate or foreign commerce, and it is authorized, among 
 other things, 
 
 " (a) To gather and compile information concerning, and to investi- 
 gate from time to time the organization, business, conduct, practices, 
 and management of any corporation engaged in commerce, excepting 
 banks and common carriers subject to the Act to regulate commerce, 
 and its relation to other corporations and to individuals, associations, 
 and partnerships. 
 
 "(6) To require, by general or special orders, corporations engaged 
 in commerce, excepting banks, and common carriers subject to the 
 
 ' U. 8. v. Lehigh Valley R. R. Co., 220 U. S. 257 ; 1911. 
 
 8 See U. S. v. Delaware, Lackawanna & Western R. R. Company, 238 U. S. 
 516 ; 1915. Hocking Valley R. R. v. N. Y. Coal Co., 207 Fed. 727 ; 1913 (C. C. A. 
 6th C.). U. S. v. Reading Company, 226 Fed. 229; 1915 (D. C. E. D. Penn- 
 sylvania). 
 
THE CLAYTON ACT 313 
 
 Act to regulate commerce or any class of them, or any of them, respec- 
 tively, to file with the commission in such form as the commission 
 may prescribe annual or special, or both annual and special, reports 
 or answers in writing to specific questions, furnishing to the commis- 
 sion such information as it may require as to the organization, busi- 
 ness, conduct, practices, management, and relation to other corpora- 
 tions, partnerships, and individuals of the respective corporations 
 filing such reports or answers in writing. Such reports and answers 
 shall be made under oath, or otherwise, as the commission may pre- 
 scribe, and shall be filed with the commission within such reasonable 
 period as the commission may prescribe, unless additional time be 
 granted in any case by the commission. . . . 
 
 "(/) To make public from time to time such portions of the infor- 
 mation obtained by it hereunder, except trade secrets and names of 
 customers, as it shall deem expedient in the public interest; and to 
 make annual and special reports to the Congress and to submit 
 therewith recommendations for additional legislation ; and to provide 
 for the publication of its reports and decisions in such form and 
 manner as may be best adapted for public information and use. 
 " (</) From time to time to classify corporations and to make rules 
 and regulations for the purpose of carrying out the provisions of this 
 Act." 
 
 Other departments and bureaus of the Government, when 
 directed by the President, must furnish to the Commission all 
 records, papers, and information in their possession relating to 
 any corporation subject to the Act, and must detail such 
 officials and employees to the Commission as the President 
 may direct. 
 
 For all purposes of the Act, the Commission is given 
 
 "access to, for the purpose of examination, and the right to copy any 
 documentary evidence of any corporation being investigated or pro- 
 ceeded against; and the commission shall have power to require by 
 subpoena the attendance and testimony of witnesses and the produc- 
 tion of all such documentary evidence relating to any matter under 
 investigation." 
 
 The Commission may compel the attendance of witnesses 
 and the production of documentary evidence, and disobedience 
 
314 THE FEDERAL TRADE COMMISSION 
 
 to its subpoenas and orders in this regard is punishable as for 
 contempt in the federal courts. Documentary evidence is 
 defined to include "all documents, papers, and correspondence 
 in existence at and after the passage of this act." Falsification 
 of reports required by the Commission and any falsification, 
 willful omission, willful mutilation, or removal of any such docu- 
 mentary evidence is punishable by fine and imprisonment. 
 
 Doubtless there is a line of privacy beyond which these 
 tremendous investigatory powers cannot constitutionally be 
 exercised by the Commission. 1 Notwithstanding the disabili- 
 ties of corporations it is believed that some limitation must be 
 implied upon these sweeping provisions. In Harriman v. Inter- 
 state Commerce Commission 2 the Supreme Court dealt with an 
 individual, not a corporation; but in this case, and in others 
 therein cited, there would seem to be authority for the view 
 that even corporations might have some relief against the fullest 
 exercise of these tremendous powers. 
 
 Under the Bureau of Corporations 3 and thus far under the 
 Commission, this question has happily been academic. But 
 with the increased duties of the Commission it may at any time 
 become exceedingly practical. 
 
 The Commission also has power to investigate the manner 
 in which decrees in Government antitrust suits are being 
 carried out ; and under direction of the President or Congress, 
 to investigate and report the facts regarding alleged violations 
 of the antitrust laws; and under direction of the Attorney- 
 General to investigate and make recommendations for the re- 
 adjustment of any corporate business alleged to be violating 
 the antitrust laws ; and under direction of the courts to act as 
 Master in Chancery to ascertain and report an appropriate 
 form of decree of dissolution. Passing reference to these last 
 two powers has been made in two recent decisions under the 
 
 1 See Hale v. Henkel, 201 U. S. 75 ; 1906. 
 
 2211 U. S. 407; 1909. 
 
 8 See United States v. Armour, 142 Fed. 808, 812 ; 1906. 
 
THE CLAYTON ACT 315 
 
 antitrust laws, but no directions thereunder appear as yet to 
 have resulted. 1 
 The Commission also has power 
 
 "(h) To investigate, from time to time, trade conditions in and 
 with foreign countries where associations, combinations, or practices 
 of manufacturers, merchants, or traders, or other conditions, may 
 affect the foreign trade of the United States, and to report to Congress 
 thereon, with such recommendations as it deems advisable." 
 
 Recommendations, following an investigation recently made 
 under this provision, are promised by the Commission for the 
 near future. 
 
 Section 5 of the Federal Trade Commission Act provides 
 that "unfair methods of competition in commerce are hereby 
 declared unlawful." 
 
 Behind these words lies a field of litigation which will prob- 
 ably prove as wide and hard-fought as the Sherman Act. 
 
 In the Trade Commission bill, as reported to the Senate 
 by Senator Newlands, Chairman of the Senate Interstate 
 Commerce Committee, the words "unfair competition" were 
 used instead of "unfair methods of competition." 
 f In the Senate debate upon this section which in duration, 
 acuteness, and research did justice to the best traditions of the 
 Senate a number of definitions of "unfair competition" were 
 ventured by sponsors of the bill. 2 
 
 Senator Newlands' definition included 
 
 Substantially all violations of the antitrust laws, including even 
 wrongs arising from interlocking directorates and intercorporate 
 relationships. 
 
 1 In U. S. v. Corn Products Refining Company (D. C. S. D. N. Y., decided June 
 24, 1916, not yet reported) Judge Learned Hand has since made such a direction. 
 
 2 This debate I have summarized elsewhere in my article entitled "Unfair 
 Methods of Competition," Yale Law Journal, vol. XXV, No. 1, pp. 20-41, 
 November, 1915, from which I have abstracted the various definitions herein- 
 after discussed. The references in the footnotes of that article to the pages 
 of the Congressional Record refer to the temporary and not the permanent 
 paging of the Congressional Record. 
 
316 THE FEDERAL TRADE COMMISSION 
 
 All other acts affecting a competitor, for which any remedy "lies 
 either at law or in equity." 
 
 All other acts affecting a competitor that are "against public 
 morals," though heretofore quite lawful and not forbidden by the 
 Sherman Law or any other law. 
 
 Senator Cummins' definition was 
 
 "Imposture," or any "vicious practice or method . . . that has a 
 tendency to affect the people of the country or to be injurious to their 
 welfare," though heretofore quite lawful under the Sherman Law. 
 
 Senator Robinson's definition was 
 
 The act of passing off one's business or goods for another's. 
 "Unfair competition" from an economic point of view. 
 All other acts which "normal business men" might deem incon- 
 sistent with "efficiency in producing and in selling." 
 
 Senator Robinson elaborated his definition as follows : 
 
 "Mr. William S. Stevens, of Columbia University, in an article 
 called to my attention by Congressman Stevens, of New Hampshire, 
 who introduced this provision in the House, discusses the subject of 
 * unfair competition' from an economic point of view, and classifies 
 according to their elementary characteristics 11 forms of 'unfair com- 
 petition' as follows : I read now from his article on page 283 of the 
 Political Science Quarterly for June, 1914 : 
 
 "1. Local price cutting. 
 
 "2. Operations of bogus 'independent' concerns. 
 
 "3. Maintenance of 'fighting ships' and 'fighting brands/ 
 
 "4. Lease, sale, purchase, or use of certain articles as a condition 
 of the lease, sale, purchase, or use of other required articles. 
 
 "5. Exclusive sales and purchase arrangements. 
 
 "6. Rebates and preferential contracts. 
 
 "7. Acquisition of exclusive or dominant control of machinery or 
 goods used in the manufacturing process. 
 
 "8. Manipulation. 
 
 "9. Black lists, boycotts, white lists, etc. 
 
 " 10. Espionage and use of detectives. 
 
 "11. Coercion, threats, and intimidation. 
 
 "The terms used fairly define without detailed discussion the various 
 practices thus classified, and undoubtedly embrace nearly all of the 
 methods of 'unfair competition' now in use. . . . 
 
THE CLAYTON ACT 317 
 
 "Nearly all normal business men can distinguish between 'fair 
 competition' and 'unfair competition.' Efficiency is generally re- 
 garded as the fundamental principle of power-efficiency in produc- 
 ing and in selling, while oppression or advantage obtained by decep- 
 tion or some questionable means is the distinguishing characteristic of 
 'unfair competition.'" 
 
 Senator Saulsbury defined it as 
 
 All "customs of merchants" which are in violation of "the ethics 
 of a profession or a business." 
 
 According to Senator Walsh it included 
 
 Every act of passing off one's business or goods for another's. 
 All other acts comprehended within the meaning which "unfair 
 competition" has to-day in common parlance and in literature. 
 
 Senator Williams' definition boiled down to 
 
 All unfair methods of stifling competition. 
 Senator Hollis' definition included 
 
 "Means of restraining or monopolizing trade" heretofore forbidden 
 by the Sherman Law. 
 
 Methods which fall short of violating the Sherman Law but which 
 "the proposed trade commission . . . decides . . . may lead to 
 monopoly or restraint of trade." 
 
 All other acts which interfere with "efficiency." 
 
 From all these various definitions, offered by sponsors of the 
 bill, unfair competition would seem to include 
 
 Every act of passing off one's business or goods for another's. 
 
 All methods of competition tending to restraint of trade or monopoly 
 which have been forbidden by the Sherman Law. 
 
 Substantially all violations of the antitrust laws, including even 
 wrongs arising from interlocking directorates and allied incorporate 
 relationships. 
 
 All unfair methods of stifling competition. 
 
 All other acts which the "commission . . . decides . . . may lead 
 to monopoly or restraint of trade" though not now forbidden by the 
 Sherman Act. 
 
 All other acts affecting a competitor for which "a remedy lies either 
 at law or in equity." 
 
318 THE FEDERAL TRADE COMMISSION 
 
 All other acts which either affect a competitor and are "against 
 public morals," or in any way interfere with economic "efficiency," 
 though heretofore quite lawful and not forbidden by the Sherman law 
 or by any other law. 
 
 The provision regarding " unfair competition" was vigorously 
 assailed on the floor of the Senate by Senators Thomas, Clapp, 
 Pomerene, Sutherland, Borah, Nelson, Colt, Brandegee, Ster- 
 ling, McCumber and Reed as either limited to "passing off" 
 one's business or goods for another's, or as so hopelessly in- 
 definite as to be absolutely meaningless. Sponsors of the bill 
 cited, during the course of the debate, various decisions in which 
 "unfair competition" or "unfair methods of competition" or 
 "unfair" practices had been mentioned, 1 and various other 
 decisions in which "fair competition" had been mentioned 2 
 and a decree in which "unfair competition" had been enjoined 3 
 and a decree in which "fair competition" had been mentioned 4 
 and various decrees in which neither "unfair" nor "fair" com- 
 petition had been mentioned, but certain specified methods of 
 competition had been particularly enjoined. 5 But these vari- 
 
 1 Standard Oil Co. v. United States, 221 U. S. 1, 43; 1911. State v. Central 
 Lumber Co. 123 N. W. (S. D.) 504, 509, affirmed Central Lumber Co. v. South 
 Dakota, 226 U. S. 158 ; 1913. United States v. American Naval Stores Co., 172 
 Fed. 455, 459 ; 1909. Ware-Kramer Tobacco Co. v. American Tobacco Co., 180 
 Fed. 160; 1910. United States v. Patterson, 205 Fed. 292, 301 ; 1913; reversed 
 222 Fed. 599 ; 1915. Beside these might be cited the cases of United States v. 
 American Tobacco Co., 221 U. S. 106, 179 ; 1911. Buckeye Powder Co. v. E. I. 
 du Pont de Nemours Powder Co., D. C. N. J. Feb. 25, 1914, Judge Rellstab's 
 charge to the jury, not reported, affirmed in 223 Fed. 881 ; 1915. United States 
 v. Keystone Watch Case Co., 218 Fed. 502, 515 ; 1915. 
 
 2 In re Greene, 52 Fed. 104 ; 1892. Ware-Kramer Tobacco Co. v. American 
 Tobacco Co., 180 Fed. 160 ; 1910. State v. Fairmont Creamery Co., 153 Iowa 
 702, 709-710; 1912. Beside these might be cited the case of Buckeye Powder 
 Co. v. E. I. du Pont de Nemours Powder Co., supra. 
 
 3 United States v. Central West Publishing Co., D. C. N. D. 111., August 3, 
 1912. 
 
 4 United States v. General Electric Co., N. D. Ohio, October 12, 1911. 
 
 6 United States v. Aluminum Co. of America, D. C. W. D. Pa., June 7, 1912. 
 United States v. American Coal Products Co. D. C. S. D. N. Y., March 4, 1913. 
 Beside these might be cited the decrees in United States v. Nome Retail Grocers' 
 Association, D. C. Alaska ; November 5, 1905. United States v. National Asso- 
 ciation of Retail Druggists, C. C. Ind., May 9, 1907. United States v. Southern 
 
THE CLAYTON ACT 319 
 
 ous decisions and decrees, all of which were rendered either 
 under the Sherman Act or under one or another of the various 
 state statutes against price discrimination, indicated to the 
 minds of these opposing Senators no clear definition of "unfair 
 competition." They merely convinced them of the importance 
 of adhering strictly to the specific, well-defined language of the 
 Sherman Act and the various state statutes against price dis- 
 crimination. Restraint of trade had long been a definite term 
 in the law, and price discrimination was easily defined. "Un- 
 fair competition," in their opinion, had acquired no such 
 definiteness. 
 
 Nevertheless the Trade Commission bill, with this provision 
 declaring "unfair methods of competition" unlawful, passed 
 the Senate by vote of 53 to 16. 
 
 In conference, the words "unfair methods of competition" 
 were substituted for the words "unfair competition," for the 
 purpose, apparently, of preventing the clause from being 
 limited to cases of "passing off" one's business or goods for 
 another's. 
 
 The enforcement of this section, and of the sections of the 
 Clayton Act relating to price discriminations, exclusive con- 
 tracts, intercorporate stockholding (except where applicable 
 to carriers, when the Interstate Commerce Commission takes 
 jurisdiction) and interlocking directorships (except where ap- 
 
 Wholesale Grocers' Association, C. C. N. D. Alabama, October 17, 1911. United 
 States v. Standard Sanitary Manufacturing Co., C. C. Md., November 25, 1911. 
 United States v. Standard Wood Co., C. C. S. D. N. Y., March 11, 1912. United 
 States v. Pacific Coast Plumbing Supply Association, C. C. S. D. Cal., January 
 6, 1912. United States v. Philadelphia Jobbing Confectioners 1 Association, E. D. 
 Pa., February 17, 1913. United States v. Burroughs Adding Machine Co., D. C. 
 Mich., March 3, 1913. United States v. New Departure Manufacturing Co., 
 D. C. W. D. N. Y., May 27, 1913. United States v. Elgin Board of Trade, D. C. 
 N. D., 111., April 27, 1914. United States v. National Wholesale Jewellers' Asso- 
 ciation, D. C. S. D. N. Y., June 30, 1914. United States v. Eastern States Lum- 
 ber Dealers Association, C. C. S. D. N. Y., March 1, 1913, affirmed 234 U. S. 
 600 ; 1914. United States v. Hamburg-Amerikanische Packetfahrt Actien-Gesell- 
 schaft, and others, D. C. S. D. N. Y., October 13, 1914, 216 Fed. 971 ; 1914, but 
 reversed because now moot in consequence of the European War, 239 U. S. 1 ; 
 1915. 
 
320 THE FEDERAL TRADE COMMISSION 
 
 plicable to banks and carriers, when the Federal Reserve Board 
 and the Interstate Commerce Commission respectively take 
 jurisdiction) is vested in the Federal Trade Commission. The 
 jurisdiction of the Commission in respect of " unfair methods of 
 competition" is exclusive; but in respect of the sections of the 
 Clayton Act above mentioned, it is concurrent with proceed- 
 ings by the Attorney General and by private complainants in 
 the federal courts. 
 
 The procedure of the Commission in respect of "unfair 
 methods of competition" is elaborately defined in section 5 of 
 the Federal Trade Commission Act. Briefly, it consists of the 
 following steps : 
 
 (1) If "the Commission shall have reason to believe that any 
 . . . person, partnership, or corporation has been or is using 
 any unfair method of competition," and "if it shall appear to 
 the Commission that a proceeding by it in respect thereof 
 would be to the interest of the public," it serves a complaint 
 upon the defendant, giving 30 days notice of hearing. 
 
 (2) The hearing before the Commission then occurs; any- 
 one "upon good cause shown" may intervene; the defendant 
 may show cause why an order should not be entered against 
 him ; testimony shall be reduced to writing and filed with the 
 Commission. 
 
 (3) If the Commission is of the opinion that the method of 
 competition in question is prohibited by the Act, the Commis- 
 sion shall report in writing its findings of fact and shall issue 
 its order against the defendant. If the Commission is of the 
 opinion that the statute is not being violated, the Commission 
 apparently is not required to report in writing its findings of 
 facts or to make any order in the premises. 
 
 (4) If the Commission deems proper, it may at any time 
 before the transcript of record is filed in the Circuit Court of 
 Appeals, as provided in (5) below, modify or set aside in whole 
 or in part such report or order. 
 
 (5) If the defendant fails to obey the order against him, the 
 
THE CLAYTON ACT 321 
 
 Commission may upon filing the transcript of the record (in- 
 cluding the testimony, report and order) apply to the Circuit 
 Court of Appeals, where the defendant resides or carries on 
 business or violated the statute, for a decree enforcing its 
 order ; the jurisdiction of the Circuit Court of Appeals is exclu- 
 sive, and such proceedings shall be given precedence over other 
 cases; the court shall serve upon the defendant notice of the 
 filing of such application and transcript. 
 
 (6) If the defendant desires a review of the order against 
 him he may, upon filing in the Circuit Court of Appeals a peti- 
 tion praying that the order be set aside, obtain a review ; the 
 jurisdiction of the Circuit Court of Appeals is exclusive, and 
 such proceedings shall be given precedence over other cases; 
 a copy of the petition shall be served on the Commission which 
 shall certify the filing of the transcript. It seems that if the 
 Commission should decide in favor of the defendant, and re- 
 port in writing its findings of fact, and issue its order to the 
 effect that the statute was not being violated, there would be 
 no method for reviewing such report and order. 
 
 (7) The Circuit Court of Appeals shall take jurisdiction of 
 the proceedings and of the questions determined therein; the 
 jurisdiction of the Circuit Court of Appeals shall be exclusive, 
 and such proceedings shall be given precedence over other 
 cases ; the evidence of the Commission as to the facts, if sup- 
 ported by testimony, shall be conclusive. 
 
 (8) If either party applies in the Circuit Court of Appeals 
 for leave to adduce additional evidence, and shall satisfy the 
 court that it is material and that there were reasonable grounds 
 for failure to adduce it before the Commission, the court hiay 
 order it to be taken before the Commission ; and the Commis- 
 sion may modify its findings as to the facts, and may make 
 new findings by reason of additional evidence so taken, and 
 shall return such additional evidence and file such modified or 
 new findings, and recommend modifying or setting aside its 
 original order; the court may order such additional evidence 
 
322 THE FEDERAL TRADE COMMISSION 
 
 to be adduced upon the hearing before the court in such man- 
 ner and on such terms as the court deems proper. 
 
 (9) The Circuit Court of Appeals shall have power to make 
 and enter upon the pleadings, testimony and proceedings set 
 forth in such transcript a decree affirming, modifying or setting 
 aside the order of the Commission. 
 
 (10) The decree of the Circuit Court of Appeals shall be 
 final, excepting that it may be reversed by the Supreme Court 
 upon certiorari and that it shall not in any wise relieve or 
 absolve any person from any liability under the antitrust 
 acts. No order of the Commission or board or the judgment 
 of the court to enforce the same shall in any wise relieve or 
 absolve any person from any liability under the antitrust 
 acts. 
 
 The first proceeding by the Commission under the act is 
 now pending in the first stage above described. 
 
 The procedure of the Commission, in respect of violations of 
 the Clayton Act, is substantially the same as that regarding 
 "unfair methods of competition"; excepting that the require- 
 ment, in the first stage of the latter procedure, that "it shall 
 appear to the Commission that a proceeding by it in respect 
 thereof would be to the interest of the public" is significantly 
 omitted. 
 
 Since "unfair methods of competition" have not yet been 
 defined by the courts, and since the Senate has proved so hope- 
 lessly divided upon the definition, it is hardly the part of pru- 
 dence to venture at this time any definition whatsoever. For 
 the purpose, however, of correcting what is believed to be a 
 serious misconception, likely to be fostered by the first proceed- 
 ing already begun by the Commission, the following observations 
 are summarily stated : 
 
 "Unfair methods of competition" are those methods of 
 competition that already are forbidden by the Sherman Act. 
 They are the methods of business competition denounced in a 
 long line of Supreme Court and federal court decisions, and in 
 
THE CLAYTON ACT 323 
 
 a number of decrees in Government suits under the Sherman 
 Act. 1 In this connection, it is fair to add that these precedents 
 show many more methods of business competition to be for- 
 bidden by the Sherman Act than were generally supposed, in 
 Congress or outside, when the Federal Trade Commission Act 
 was passed. 
 
 "Passing off" one's goods or business for another's, mis- 
 branding, and similar acts which, in Justice Holmes' phrase in 
 Nash v. United States 2 are " no more than . . . small dishon- 
 esties of trade " and " small local offenses" that cannot be said 
 to "prejudice the public interests by unduly restricting competi- 
 
 1 See Standard Oil Co. v. United States, 221 U. S. 43 ; 1911. United States v. 
 American Tobacco Co., 221 U. S. 106, 179; 1911. Central Lumber Co. v. South 
 Dakota, 226 U. S. 157 ; 1913. United States v. American Naval Stores Co., 172 
 Fed. 455, 459 ; 1909. Ware-Kramer Tobacco Co. v. American Tobacco Co., 180 
 Fed. 160; 1901. United States v. Keystone Watch Case Company, 218 Fed. 502, 
 515 ; 1915. Buckeye Powder Company v. E. I. du Pont de Nemours Powder Co., 
 D. C. N. J., February 25, 1914, Judge Rellstab's charge of the jury, not re- 
 ported, affirmed in 223 Fed. 881 ; 1915. See also the decree in United States v. 
 Central West Publishing Company, D. C. N. D. 111., August 3, 1912, in which 
 "unfair competition" was enjoined, and the decree in United States v. General 
 Electric Co., N. D. Ohio, October 12, 1911, in which "fair competition" was 
 mentioned, and the decrees in the following cases in which neither "unfair" 
 nor "fair" competition was mentioned, but certain specified methods of com- 
 petition were particularly enjoined ; United States v. Aluminum Co. of America, 
 D. C. W. D. Pa., June 7, 1912. United States v. American Coal Products Co., 
 D. S. S. D. N. Y., March 4, 1913. Besides these might be cited the decrees 
 in United States v. Nome Retail Grocers' Association, D. C. Alaska, November 5, 
 1905. United States v. National Association of Retail Druggists, C. C. Ind., 
 May 9, 1907. United States v. Southern Wholesale Grocers 1 Association, C. C. 
 N. D. Alabama, October 17, 1911. United States v. Standard Sanitary Manu- 
 facturing Co., C. C. Md., November 25, 1911. United States v. Standard Wood 
 Co., C. C. S. D. N. Y., March 11, 1912. United States v. Pacific Coast Plumb- 
 ing Supply Association, C. C. S. D. Cal., January 6, 1912. United States v. 
 Philadelphia Jobbing Confectioners' Association, E. D. Pa., February 17, 1913. 
 United States v. Burroughs Adding Machine Co., D. C. Mich., March 3, 1913. 
 United States v. New Departure Manufacturing Co., D. C. W. D. N. Y., May 
 27, 1913. United States v. Elgin Board of Trade, D. C. N. D. 111., April 27, 1914. 
 United States v. National Wholesale Jewellers Association, D. C. S. D. N. Y., 
 June 30, 1914. United States v. Eastern States Lumber Dealers Association, 
 
 C. C. S. D. N. Y., March 1, 1913, affirmed 234 U. S. 600; 1914. United 
 States v. Hamburg-Amerikanische Packetfahrt Actien-Gesettschaft, and others, 
 
 D. C. S. D. N. Y., October 13, 1914, 216 Fed. 971, 1915, but reversed because 
 now moot in consequence of the European War, 239 U. S. 466 ; 1914. 
 
 * 229 U. S. 373, 376, 378 ; 1913. 
 
324 THE FEDERAL TRADE COMMISSION 
 
 tion or unduly obstructing the course of trade 1 " are not, it is 
 submitted, "unfair methods of competition" punishable under 
 the Federal Trade Commission Act. Support for this view is 
 supplied by the subsequent provision in the same section, 
 which requires that "it shall appear to the Commission that a 
 proceeding by it in respect thereof would be to the interest of 
 the public." This seems, indeed, to incorporate the very test 
 that Judge Holmes expressed in the passage above quoted. 
 
 Support for this view is also found in the essential character 
 of the Commission. It is not, and cannot be, a judicial body. 
 Since the Commission must always be the complainant in all 
 proceedings before it, and the Federal Trade Commission Act, 
 unlike the Interstate Commerce Commission Act, provides for 
 no such party as a private complainant, the Federal Trade 
 Commission seems lacking in at least one quasi- judicial func- 
 tion possessed by the Interstate Commerce Commission. The 
 Federal Trade Commission is an administrative body, charged 
 with public duties, with only such quasi-judicial functions as 
 the Act confers for the more perfect administration of its 
 public duties. 
 
 These considerations, independent of the unlikelihood that 
 Congress had any intention of paralleling the federal and state 
 courts with another tribunal for the adjustment of personal 
 controversies, or of smothering under this avalanche of private 
 trade disputes a Commission charged with so many well- 
 defined and highly important duties, seem clearly to support 
 the interpretation above suggested. 
 
 The reports which the Commission has published, the con- 
 ference rulings it has announced, and the proceedings it has 
 commenced, are only a fraction of the work it has already 
 accomplished. 
 
 Hundreds of petitions for the issuance of complaints have 
 been and are being handled by the Commission. Under a 
 
 Citing Standard Oil Company v. United States, 221 U. S. 1, 42; 1911. 
 United States v. American Tobacco Company, 221 U. S. 106, 179; 1911. 
 
THE CLAYTON ACT 325 
 
 policy of notifying the party complained of before any pro- 
 ceedings under the Act are begun or even determined upon by 
 the Commission, and of affording the party complained of 
 opportunity to explain matters before these steps are taken, 
 scores of matters have been and are being adjusted without 
 the necessity of any formal proceedings. 
 
 By an arrangement with the Attorney General, complaints 
 lodged with the Department of Justice, regarding matters 
 already under investigation by the Commission, are now being 
 turned over to the Commission for action. 
 
 Whether the Commission will, or legally can, undertake to 
 consider the legality of business projects submitted to it in 
 advance of their consummation, is not and probably will not 
 be settled for some time to come. Several conference rulings, 
 that the Commission already has made, seem to point in this 
 direction. The legal and practical arguments against such 
 practice, however, are very formidable. No authority to en- 
 force or even interpret the Sherman Act appears to be vested 
 in the Commission. Without this jurisdiction, the Commis- 
 sion is, and will be, helpless to rule, either before or after the 
 event, upon questions of organization and combination, aris- 
 ing under the Sherman Act. 
 
 Nevertheless, a great area, once under the Sherman Act, 
 and now included under the "unfair methods of competition" 
 section of the Federal Trade Commission Act, and the "price 
 discrimination" and "exclusive contract" section of the Clay- 
 ton Act, has come under the jurisdiction of the Commission. 
 To this has also been added the unexplored field defined by the 
 "intercorporate stockholding" and "interlocking directorship" 
 sections of the Clayton Act. 
 
 Wise exercise of the Commission's powers and sound choice 
 of its policy ought eventually to lead to its being permitted to 
 take over from the Attorney General a troublesome variety of 
 antitrust cases that now threaten to swamp the Department 
 of Justice; and, even more auspiciously, to the Commission's 
 
326 THE FEDERAL TRADE COMMISSION 
 
 making to Congress recommendations ripened by full study 
 and a wealth of experience for the correction of legislative mis- 
 takes and omissions regarding our domestic, and more par- 
 ticularly our foreign commerce, by which governmental prac- 
 tice and commercial efficiency may at last be brought into a 
 degree of harmony to which both have heretofore been un- 
 happily strangers. 
 
THE PUBLIC SERVICE COMMISSIONS 
 
 A Lecture Delivered before the Association of the Bar of the City of New York 
 by George S. Coleman, March 29, 1916 
 
 THE Committee on Lectures have suggested that I confine 
 myself to a statement of the origin of the Public Service Com- 
 missions Law of New York, its general provisions, the organi- 
 zation of the Commissions and the method of work under the 
 Law, with perhaps a reference to some decisions of the courts 
 that have clarified the legislative intent. 
 
 The germ of this law may be found in the first inaugural 
 address of Governor Hughes, January 1, 1907. His early state- 
 ments are like the overture of an opera, in that the law as passed 
 and now in effect carries out in detail the suggestions of the 
 inaugural and earliest messages. The following paragraph 
 from the inaugural is significant : 
 
 It must freely be recognized that many of the evils of which we 
 complain have their source in the law itself, in privileges carelessly 
 granted, in opportunities for private aggrandizement at the expense 
 of the people recklessly created, in failure to safeguard our public 
 interests by providing means for just regulation of those enterprises 
 which depend upon the use of public franchises. Wherever the law 
 gives unjust advantage, wherever it fails by suitable prohibition or 
 regulation to protect the interests of the people, wherever the power 
 derived from the State is turned against the State, there is not only 
 room, but urgent necessity for the assertion of the authority of the 
 State to enforce the common right. 
 
 In his first message to the Legislature, on January 2, the 
 Governor referred to various matters of importance but gave 
 the greatest prominence to the subject of Public Service Cor- 
 porations. The following extracts will perhaps best indicate 
 what he had in mind : 
 
 327 
 
328 PUBLIC SERVICE COMMISSIONS 
 
 Proper means for the regulation of the operation of railroad cor- 
 porations should be supplied. For want of it, pernicious favoritism 
 has been practiced. Secret rebates have been allowed, and there have 
 been unjust discriminations in rates and in furnishing facilities for 
 transportation. Those who have sought to monopolize trade have 
 thus been enabled to crush competition and to grow in wealth and 
 power by crowding out their rivals who have been deprived of access 
 to markets upon equal terms. These abuses are not to be tolerated. 
 Congress has legislated upon the subject with reference to interstate 
 commerce, where naturally the evil has been most prominent. But 
 domestic commerce must be regulated by the State, and the State 
 should exercise its power to secure impartial treatment to shippers 
 and the maintenance of reasonable rates. There is also need of regu- 
 lation and strict supervision to insure adequate service and due regard 
 for the convenience and safety of the public. The most practicable 
 way of attaining these ends is for the Legislature to confer proper 
 power upon a subordinate administrative body. 
 
 The present scheme of regulation is inadequate. There is a lack 
 of precision in the definition of the powers of the board and an absence 
 of suitable means to compel compliance with its decisions. No penal- 
 ties are provided for disobedience to orders of the board made within 
 its proper authority. Nor is the board authorized to institute and 
 conduct legal proceedings for the purpose of enforcing its requirements. 
 
 I, therefore, recommend that the present Board of Railroad Com- 
 missioners and the Commission of Gas and Electricity be abolished 
 and that a new commission be constituted, with powers of regulation 
 and supervision, within constitutional limits, of the corporations now 
 subject to the existing commissions. The commission should have 
 all the powers possessed by the present commissions and such additional 
 powers as may be needed to insure proper management and operation. 
 Its powers should be clearly defined and should embrace the power 
 to act upon its own initiative as well as upon complaint; to pass 
 upon the issue of stocks and bonds; to examine properties, books, 
 and accounts ; to require detailed reports in prescribed form ; to pre- 
 scribe reasonable rates; to require adequate and impartial service; 
 to provide for the safety of employees and for the protection of the 
 public ; and generally to direct whatever may be necessary or proper 
 to safeguard the public interests and to secure the fulfillment of the 
 public obligations of the corporations under its supervision. Provision 
 should be made for suitable inspection so that the commission may 
 be advised as to all matters within its purview and be in a position 
 
PUBLIC SERVICE COMMISSIONS 329 
 
 to take action on behalf of the people without the formal institution 
 of proceedings by complainants. A prescribed quorum should be 
 entitled to decide all questions, and any one commissioner should 
 be empowered to make examinations and investigations, and the pro- 
 ceedings and decisions of one, when approved by the board, should 
 stand as its proceedings and decisions. 
 
 The corporation guilty of disobedience to its orders, and all officers 
 and other persons responsible for such disobedience should be visited 
 with appropriate penalties. The commission should also be entitled 
 to institute legal proceedings for the enforcement of its orders and 
 all such proceedings should be expedited by suitable preference in all 
 the courts of the State. The Legislature should thus provide, within 
 its constitutional power, adequate means for the entirely just and 
 impartial regulation of these important public enterprises. 
 
 After making special reference to conditions in Greater New 
 York and clearly stating his reasons for thinking that there 
 should be one commission for that city and a separate com- 
 mission for the rest of the State, he closed the subject with this 
 recommendation : 
 
 I recommend that the Board of Rapid Transit Commissioners be 
 abolished and that a new board be created, to have all the powers now 
 exercised by the Rapid Transit Board, and also to have powers with 
 reference to operations within the territory of Greater New York, 
 or if deemed advisable, within a wider district embracing the adjoin- 
 ing counties into which certain lines of the surface railroads extend, 
 similar to the powers which I have suggested should be conferred 
 upon the new commission for the rest of the State. There would 
 thus be included the regulation of gas and electric corporations. Pro- 
 vision should be made for the retention by the board of estimate and 
 apportionment of the city, of all the powers, including powers of 
 approval, which it now enjoys. The commission proposed for the 
 State generally should have jurisdiction over all traffic between points 
 within the city of New York and points elsewhere in the State. It is 
 believed that in this manner the whole question of transportation, 
 and of gas and electric service, in the territory of Greater New York 
 can be dealt with in an intelligent and efficient manner, and that to 
 the fullest extent possible the just requirements of that great com- 
 munity may be satisfied. 
 
330 PUBLIC SERVICE COMMISSIONS 
 
 The first emergency message of Governor Hughes to the 
 Legislature in 1907 related to Senate Bill No. 1738, entitled 
 "An Act to establish the public service commissions and pre- 
 scribing their powers and duties, and to provide for the regu- 
 lation and control of certain public service corporations and 
 making an appropriation therefor." 
 
 Every Governor from Cleveland down had at one time or 
 another suggested some form of control and regulation of 
 public service corporations by state officials, but it remained for 
 Governor Hughes to have the idea put in systematic form and 
 made effective. As you read the Public Service Commissions 
 Law of 1907 you find that every important suggestion of the 
 first message is crystallized in the statute. 
 
 Instead of being purely advisory the work of the Commis- 
 sion is directory, and the law has sharp teeth. If the facts 
 warrant, the parties who fail to obey either the law or the 
 orders of the Commission may be suitably punished in civil or 
 criminal proceedings. You will find provisions to overcome 
 the defects of the railroad law of years ago, when favoritism 
 was disclosed, when different rates were allotted to the same 
 classes of shippers, when rebates were permitted to some and 
 denied to others abuses that gave rise to the Granger Cases 
 and led ultimately, as you know, to the Interstate Commerce 
 Law. But even the Interstate Commerce Law did not con- 
 tain the provisions of the Public Service Commissions Law 
 which give power to the Commissions, through the properly 
 constituted authorities, to enforce their lawful orders. 
 
 General Provisions 
 
 It is hardly necessary, nor does it seem desirable, on this 
 occasion to discuss in detail the provisions of the Public Service 
 Commissions Law. Those who have occasion to refer to it 
 will find the provisions embodied in a single statute, with 
 amendments, and they will discover that although relating to 
 
PUBLIC SERVICE COMMISSIONS 331 
 
 different classes of corporations somewhat similar provisions 
 are found with respect to each particular kind of service. 
 
 The Law was originally enacted in 1907. It applied to rail- 
 roads, street railroads and common carriers, gas and electric 
 corporations. By the general revision of 1910 a new article 
 was added relating to telegraph and telephone corporations and 
 in 1913 a further article was enacted relating to steam corpora- 
 tions. By the original act of 1907 the former board of railroad 
 commissioners, the commission of gas and electricity and the 
 board of rapid transit railroad commissioners were abolished 
 and the powers and duties of such boards were conferred and 
 imposed upon the Public Service Commission. Also, the offices 
 of inspector and deputy inspectors of gas meters were abolished 
 and their powers and duties likewise transferred. 
 
 As in most modern legislation of this character, the statute 
 begins with definitions of the various important words and 
 phrases used in the Law. In Article I the territorial limits of 
 the two districts are stated, the jurisdiction of the respective 
 Commissions is defined, provisions are made for necessary 
 officers, clerks, inspectors, experts and employees, for meetings 
 of the Commissions, payment of salaries and expenses, reports 
 of Commissions, attendance of witnesses and practice before 
 the Commissions, court proceedings, service and effect of orders 
 and actions to recover penalties or forfeitures. 
 
 In Article II are found provisions relating to railroads, street 
 railroads and common carriers, their service and charges, switch 
 and side-track connections, publication of tariff schedules, con- 
 tracts, agreements or arrangements between carriers, unjust 
 discrimination, unreasonable preference, transportation, rates 
 and passes, false billing by carrier or shipper and similar pro- 
 visions. 
 
 Article III contains provisions relating to the powers of the 
 Commissions in respect to common carriers, railroads and street 
 railroads; the duty of such corporations to make and file 
 periodical reports; investigation of accidents; the fixing of 
 
332 PUBLIC SERVICE COMMISSIONS 
 
 rates and service; power of Commissions to order necessary 
 repairs or changes in tracks, switches, terminals, etc., and the 
 power of the Commissions to order changes in schedules for the 
 running of cars and trains; establishment of uniform system 
 of accounts and the right of access to accounts; necessity of 
 securing permission and approval for exercising of franchises 
 and privileges, for transfer of franchises or stocks, for the issue 
 of stocks, bonds and other forms of indebtedness ; supervision 
 and authorization of reorganizations ; and forfeitures or penal- 
 ties for violations of the Law or failure to comply with orders of 
 the Commission. 
 
 Article IV contains appropriate provisions with respect to 
 gas and electrical corporations and the regulation of the price 
 and quality of gas and electricity; and the later Articles of 
 1910 and 1913 contain appropriate provisions to carry out the 
 same general purpose for the control of telephone and telegraph 
 corporations and steam corporations. 
 
 In connection with the provisions of the Public Service 
 Commissions Law must be considered the provisions of the 
 Railroad Law, the Transportation Corporations Law and the 
 Stock Corporation Law. 
 
 Speaking generally and considering the Law as a whole, the 
 declared object of the Legislature was to secure, in every in- 
 stance, safe and adequate service, just and reasonable rates, 
 SAFE AND ADEQUATE SERVICE, JUST AND REASONABLE RATES ; 
 and the whole endeavor, apparently, of the State is to har- 
 monize those two things. But often it is difficult to apply the 
 principle satisfactorily and to determine in a given case what is 
 safe and adequate service and what are just and reasonable 
 charges. Perhaps no two cases are exactly alike and there is 
 room for the ingenuity of man to present obstacles as serious 
 and as hard to get over as the pitfalls and barbed wire entangle- 
 ments of modern defensive warfare. If any difficulty en- 
 countered is due to a defect in the statute, the remedy of the 
 people through the Commission is to secure an amendment of 
 
PUBLIC SERVICE COMMISSIONS 333 
 
 the statute. If there is a fundamental defect in the Law, it 
 may require even a constitutional amendment. In a proper 
 case it is believed that the people of the State will not hesitate 
 to grant the necessary powers to carry out the legitimate 
 objects of their legislation. 
 
 It may be noted that while the work of the Commissions is 
 divided generally by territorial lines (the Commission for the 
 First District attending to matters in the counties constitut- 
 ing Greater New York and the Commission for the Second 
 District attending to matters in the rest of the State), the 
 regulation of telegraph and telephone corporations is com- 
 mitted exclusively to the Commission for the Second District, 
 while the powers and duties arising under the Rapid Transit 
 Act are exercised and performed exclusively by the Commis- 
 sion for the First District. And in cases where it appears 
 to both Commissions that separate jurisdiction has not been 
 conferred "a joint hearing shall be fixed and had by members 
 of both commissions, and the determination shall be by joint 
 order, which shall be effective when concurred in by not less 
 than three members of each commission." ( 49, 5.) 
 
 The Rapid Transit Act (Laws of 1891, Chapter 4), "AN ACT 
 to provide for rapid transit railways in cities of over one mil- 
 lion inhabitants," as amended to date, while in form a general 
 statute, affects now only the City of New York. It is designed 
 to secure for the people of the City the necessary extension and 
 improvement of intra-urban railroad service at a low and uni- 
 form fare. It is the province of the Commission to determine 
 the necessity for new routes or lines and to initiate the neces- 
 sary proceedings, prepare plans, contracts and specifications 
 for construction, equipment and operation and to supervise 
 generally and in detail the work of such construction. In a 
 work of such magnitude, involving under present plans an 
 investment by the City and by private railroad corporations of 
 over three hundred million dollars, it is essential that while 
 the initiative under the law belongs to the Commission the 
 
334 PUBLIC SERVICE COMMISSIONS 
 
 approval of the local authorities should be secured before a 
 new route or line is established or public money committed 
 to the enterprise. Under constitutional provisions it also is 
 necessary to secure the consents of abutting property owners, 
 or in lieu thereof the consent of the courts, before a new route 
 can be legalized. 
 
 It may be remembered that when the Public Service Com- 
 missions Law was proposed it did not have the approval of the 
 local authorities of the City of New York. It also may be 
 remembered that after its enactment the validity of the Law 
 was assailed in the courts, and that it was not found convenient 
 to secure money for rapid transit development because a ques- 
 tion had been raised as to the City's borrowing capacity under 
 the provisions of the State Constitution. It took years to have 
 these matters judicially determined ; and while the demand for 
 increased transit facilities became urgent and insistent there 
 was not money enough to enable the City to carry out its part 
 of the program until not only additional legislation had been 
 secured but also an amendment to 10 of Article VIII of the 
 Constitution providing that certain rapid transit bonds might 
 be excluded in estimating the City's indebtedness. When 
 these adverse conditions were finally overcome, one great object 
 of the Commission was achieved by the ratification in March, 
 1913, of what are commonly known as the Dual System Con- 
 tracts for the construction and operation of the entire rapid 
 transit system of Greater New York. The work is proceed- 
 ing rapidly toward completion. When entirely completed the 
 effect will be to treble and in some places to quintuple existing 
 service. In spite of all that may be said as to the wisdom or 
 unwisdom of the contracts, if at the end of the period provided 
 for in the operating agreements the City takes over, without 
 further obligation, the roads into which so many millions of 
 dollars of private capital have gone, it will not have spent its 
 money in vain. Of course, when the contracts were made, it 
 was anticipated that in the course of time the City would 
 
PUBLIC SERVICE COMMISSIONS 335 
 
 receive not only what it contributed but interest on the invest- 
 ment and a share of the profits. But in any event the com- 
 pletion of the stupendous undertaking will have added enor- 
 mously to the values of real estate and will greatly enhance 
 the comfort and convenience of our teeming population. 
 
 Organization of Commission 
 
 To carry out the purpose of the Law the Public Service 
 Commission for the First District has been obliged to organize 
 and maintain a large and diversified staff. The duties imposed 
 by statute upon the five commissioners appointed by the Gov- 
 ernor would, of course, be impossible of performance without 
 the aid of numerous and efficient assistants and employees. 
 Section 8 of the Law provides : 
 
 Each commission shall have power to employ, during its pleasure, 
 such officers, clerks, inspectors, experts and employees as it may deem 
 necessary to carry out the provisions of this chapter, or to perform 
 the duties and exercise the powers conferred by law upon the com- 
 mission. 
 
 Under this authority the organization of the Commission for 
 the First District has grown to include 
 
 1. Commissioners and staff. 
 
 2. General administration. 
 
 3. Legal Department. 
 
 4. Bureau of Transit Inspection. 
 
 5. Bureau of Gas and Electricity. 
 
 6. Bureau of Statistics and Accounts. 
 
 7. Bureau of Electrical Equipment and Inspection. 
 
 8. Engineering Department. 
 
 On January 1, 1915, the number of Commissioners and 
 members of the various staffs amounted to 2107, and the pay- 
 roll aggregated $2,909,873. The salaries of the Commissioners, 
 Counsel and Secretary aggregating $91,000 were payable 
 by the State ; the balance by the City of New York. At the 
 
336 PUBLIC SERVICE COMMISSIONS 
 
 present time I am informed that the number now embraced in 
 the organization is about 2,300, mainly due to increased work 
 of the Engineering Department on account of rapid transit 
 construction. As that progresses to completion the various 
 staffs will doubtless rapidly decrease in numbers until perhaps 
 three hundred persons will be able to handle the regular work 
 of the Commission. If even that number should seem exces- 
 sive, a careful reading of the provisions of the Law relating to 
 the powers and duties of the Commissions in relation to com- 
 mon carriers, railroads, gas and electric corporations and steam 
 corporations would probably satisfy you that the estimate was 
 moderate. Take for example the following from 45, sub- 
 division 2 : 
 
 Each commission shall have the general supervision of all common 
 carriers, railroads, street railroads, railroad corporations and street 
 railroad corporations within its jurisdiction as hereinbefore denned, 
 and shall have power to and shall examine the same and keep in- 
 formed as to their general condition, their capitalization, their fran- 
 chises and the manner in which their lines and property, owned, 
 leased, controlled or operated, are managed, conducted and operated, 
 not only with respect to the adequacy, security and accommodation 
 afforded by their service, but also with respect to their compliance 
 with all provisions of law, orders of the commission and charter re- 
 quirements. Each commission shall have power, either through its 
 members or responsible engineers or inspectors duly authorized by it, 
 to enter in or upon and to inspect the property, equipment, buildings, 
 plants, factories, power-houses and offices of any of such corporations 
 or persons. . . . 
 
 Consider, also, the work involved in connection with the 
 annual and other reports of corporations under 46 ; with in- 
 vestigation of accidents under 47 ; with investigations of 
 complaints under 48 ; with rates and service under 49, 
 50 and 51 ; with corporate accounts under 52, franchises and 
 privileges under 53, transfer of franchises and stocks under 
 54, approval of issues of stock, bonds and other forms of 
 indebtedness under 55, with reorganizations under 55a, 
 
PUBLIC SERVICE COMMISSIONS 337 
 
 and with forfeitures and penalties and summary proceedings 
 under 56-58. Then consider similar work arising with re- 
 spect to gas and electric corporations and steam corporations. 
 Consider, also, the number of the various corporations under 
 the jurisdiction of the Commission, their capitalization, the 
 extent and complexity of their business, and the multitude of 
 people daily and hourly affected by their operation. The re- 
 sponsibility for the proper supervision and regulation of these 
 corporations in affairs so vast and so important to the welfare, 
 comfort and convenience of the people and to the interests of 
 the corporations themselves, demands at all times a sufficient 
 and capable staff. 
 
 Method of Work 
 
 All matters for the Commission go first to the administration 
 department and are there duly assigned. If a complaint is 
 sent to the legal department for attention, it is usually taken 
 up with the department or bureau having general charge of the 
 subject-matter. If a public hearing is deemed necessary, the 
 matter is put upon the calendar and set down for a day cer- 
 tain and the parties are notified. There are, of course, thou- 
 sands of complaints that never reach the form of an order, or 
 even of a public hearing, but are disposed of by correspondence 
 or by informal conference. Many hundreds of hearings, how- 
 ever, have been formally held and have resulted in formal orders. 
 Some cases have taken an hour, some half a day, some have 
 consumed weeks or months or even years, before the hearings 
 were concluded and the matter disposed of. Rate cases are 
 particularly liable to be protracted. They usually involve the 
 investigation of ancient and voluminous records and technical 
 evidence by experts. Since the rate looks to the future, if it 
 is urged that the prices of labor and materials are advancing 
 and that they will continue to advance, the facts must be care- 
 fully established and considered. While there have been com- 
 plaints of delay incident to rate cases, it has seemed impossible 
 
338 PUBLIC SERVICE COMMISSIONS 
 
 at times to expedite such cases and yet give a full and fair 
 hearing to the parties concerned. However, speed may come 
 with experience. If some bright legal mind would devise a 
 system of legal logarithms, some simple formula whereby, with 
 certain known elements in any given case, you could imme- 
 diately indicate the just and reasonable rate, a great boon 
 would be conferred upon every modern community. Mean- 
 time, an amendment of the Law providing for rebate covering 
 the period of controversy in case of eventual reduction would 
 encourage a prompt determination of the issue. 
 
 Where the question presented involves a proposed issue of 
 stock or bonds, it usually requires the attention of the account- 
 ants. Where it is a question of refunding outstanding obliga- 
 tions, it may be quite impossible, owing to lost or defective 
 records, to prove that the obligations were originally issued 
 for a capital as distinguished from an operating purpose; and 
 yet the fact should somehow be established. Also it may be 
 disclosed that the property purchased with the proceeds of 
 securities concededly issued for a capital purpose has become 
 worn out or destroyed and that no replacements have been 
 made nor any depreciation fund maintained. If in such case 
 it should be held that because obligations were originally 
 issued for a capital purpose the Commission must allow new 
 obligations to replace them, without existing property to rep- 
 resent them, it might seriously interfere with the apparent 
 intent of the legislature as indicated in 55 of the Public Serv- 
 ice Commissions Law relating to railroads, street railroads 
 and common carriers, and in similar provisions relating to other 
 corporations under the jurisdiction of the Commissions. 
 
 Matters affecting travel on surface or other railroads, com- 
 plaints as to transfers, overcrowding, shortage of cars, lack of 
 facilities and other matters affecting the comfort and convenience 
 of the public are handled by the Bureau of Transit Inspection. 
 Questions as to the quality of gas or electricity, including the 
 accuracy of meters, are referred to the Bureau of Gas and 
 
PUBLIC SERVICE COMMISSIONS 339 
 
 Electricity; and where the safety or adequacy of electrical 
 equipment is involved, to the Bureau organized for that pur- 
 pose. The Engineering Department, as its name suggests, is 
 concerned with matters of construction, equipment and super- 
 vision of railroads, power houses, tunnels, bridges, sewers, and 
 other structures connected with the operation of companies 
 subject to the jurisdiction of the Commission. Its principal 
 work during the years since 1907 has been in connection with 
 the plans and construction contracts for the development of 
 rapid transit, and it also has supervised the important work of 
 eliminating dangerous grade crossings under the Railroad Law. 
 
 The work accomplished by the Commissions in both dis- 
 tricts is set forth in annual reports, in records of proceedings 
 and in volumes of opinions, in printed and permanent form, 
 accessible to public inspection. The variety and practical im- 
 portance of matters arising from day to day would interest any 
 intelligent citizen and would appeal particularly to lawyers. 
 More than seven hundred written opinions have been rendered 
 by the legal department to the Commission for the First Dis- 
 trict, and a much larger number of oral opinions. 
 
 About fifty litigated cases have been tried and determined, 
 not including cases arising under the Rapid Transit Act. A 
 brief reference to several of the reported decisions may help to 
 illustrate the character of the questions involved. 
 
 The case of People ex rel. Joline v. Willcox, 1 arose in connec- 
 tion with the attempt of our Commission to establish transfers 
 on certain street surface lines in the City of New York. The 
 Supreme Court of the United States had held that fixing a 
 rate for the future was a legislative function (Prentis v. Atlantic 
 Coast Line 2 ), but the Court of Appeals, with great reluctance, 
 felt constrained to follow the views formerly expressed by the 
 courts of this State, and to regard the fixing of a rate as at 
 least quasi-judicial and subject to review by certiorari. 
 
 i 129 App. Div. (N. Y.) 267; 1908; 194 N. Y. 383 ; 1909. 
 211 U. S. 210; 1908. 
 
340 PUBLIC SERVICE COMMISSIONS 
 
 In Gubner v. McClellan, 1 it was contended that the Public 
 Service Commissions Law was obnoxious to Section 16 of 
 Article 3 of the State Constitution, as being a private and local 
 bill embracing more than one subject, and that it violated 
 Section 10 of Article 8 in that it provided for incurring city 
 debts for other than city purposes. Both contentions were 
 overruled. Numerous other objections to the validity of the 
 law were alleged in the complaint, but were not argued by coun- 
 sel nor passed upon by the court. 
 
 People ex rel. South Shore Traction Company v. Wfflcox*, in- 
 volved the question whether, after the Commission had given 
 its approval to a certain route proposed by a surface railroad 
 company, and the company had obtained from the Board of 
 Estimate and Apportionment what is called its local or second- 
 ary franchise, the Commission could thereafter decline to ap- 
 prove the construction of the road on the ground that it was 
 not satisfied with the terms which the City imposed. The 
 ordinary procedure for a company desiring to establish a new 
 line is to apply to the Commission for a certificate of convenience 
 and necessity, and then to the Board of Estimate for the con- 
 stitutional consent of the local authorities, which takes the 
 form of a franchise contract and contains many specific terms. 
 Then the Commission is called upon under Section 53 of the 
 Law to authorize construction and the exercise of franchise 
 rights. In the case of the South Shore Traction Company the 
 Commission had found that the route proposed was ideal, in 
 fact the only available route from Jamaica to Manhattan Island, 
 but when the matter came back from the Board of Estimate 
 and the franchise contract contained certain provisions which 
 the Commissioners did not approve they declined to give their 
 consent under Section 53. The courts decided that the Com- 
 mission could not withhold consent on the grounds stated. 
 The Court of Appeals, however, did say that if any condition 
 
 1 130 App. Div. (N. Y.) 716 ; 1909. 
 
 2 133 App. Div. (N. Y.) 556; 1909 ; 196 N. Y. 212; 1909. 
 
PUBLIC SERVICE COMMISSIONS 341 
 
 imposed by the local authorities should conflict with provisions 
 of the Public Service Commissions Law the latter law should 
 govern. In the case of the City of Troy v. United Traction 
 Company, 1 it appeared that the City, by ordinance, tried to 
 establish a ten-minute headway of cars on certain streets, but 
 the Commission for the Second District had previously fixed a 
 fifteen-minute headway as reasonable. The court held that 
 the Public Service Commission had fixed the reasonable head- 
 way, after a hearing, at fifteen minutes, and that even though 
 the City had made the ordinance originally it could not reduce 
 the headway. The only way to secure relief, provided that 
 relief was proper, would be to apply to the Commission itself 
 for rehearing and, if necessary, have the matter reviewed in 
 court. In other words, the Public Service Commissions Law 
 is regarded as supreme, even as against the City, in matters 
 that come within the regulatory powers of a Commission. 
 
 The case of People ex rel. New York, New Haven & Hartford 
 Railroad Company v. Willcox, 2 involved the question of handling 
 certain species of freight. We know it as the "Manure Case," 
 because the handling of that refuse caused unpleasant odors in 
 the region of the Harlem River, and many complaints were 
 made to the Commission by persons living in the vicinity. It 
 seemed to come within the general provisions of the Public 
 Service Commissions Law, and the Commission, after a hear- 
 ing, issued an order to the Company to take proper sanitary 
 precautions in loading the cars, so that no offensive odors 
 should arise. When the matter finally reached the courts it 
 was decided by the Appellate Division, four to one, that the 
 Commission had a right to direct what improvements should 
 be made in the handling of that property, but in the Court of 
 Appeals it was held, four to three, the other way. The decision 
 turned on the point that in the particular case presented it was 
 a matter of public health rather than of transportation, and 
 
 1 134 App. Div. (N. Y.) 756 ; 1909. 
 
 2 138 App. Div. (N. Y.) 330 ; 1910 ; 200 N. Y. 423; 1911. 
 
342 PUBLIC SERVICE COMMISSIONS 
 
 that the care of the public health had been committed by the 
 charter so exclusively to the City that it would take something 
 very much stronger than the general language of the Public 
 Service Commissions Law to deprive the City of jurisdiction. 
 In the course of the prevailing opinion Judge Gray, referring 
 to the Public Service Commissions Law, said (p. 431) : 
 
 The object of the legislature, as fairly to be deduced from its enact- 
 ment, was to regulate the management and the operations of common 
 carriers, within the state, in the interest of the public ; that is, of the 
 persons who should use the facilities for the transporation of them- 
 selves, or of their property ; who should serve them ; or who should 
 be interested in them, as holders of their capital stock, or obligations. 
 
 In other words, only the patrons, employees, shareholders or 
 bondholders of a railroad constitute the "public" entitled to 
 protection through the Commission. If, therefore, property 
 owners along the line of a steam railroad should be annoyed 
 by ashes, smoke or cinders from locomotives it might be neces- 
 sary to call upon a board of health to abate the nuisance. 
 
 In People ex rel. Delaware & Hudson Company v. Public Serv- 
 ice Commission 1 it was held that the Public Service Commis- 
 sion may reduce the rate of fare allowed by statute without 
 infringing the constitutional prohibition against the impair- 
 ment of contracts. It was decided that the act authorizing 
 the Company to charge twenty-five cents a mile was not a 
 contract, but a mere gift or concession and not a general right 
 to change or alter or amend the charter. 
 
 In Willcox v. Richmond Light and Railroad Company, 2 the 
 question was for the first time, I think, decided in this State 
 that the ordinance of a village was in effect a statute. In the 
 New Haven Railroad case, just referred to, Judge Gray, speak- 
 ing of the duties of railroads and other corporations to comply 
 with the "provisions of law," said (p. 432) that the words 
 "provisions of law" did not mean "all the provisions of the 
 statute, or common law," but obviously only the provisions of 
 
 1 140 App. Div. (N. Y.) 839 ; 1910. 
 
 142 App. Div. (N. Y.) 44; 1910; aff'd 202 N. Y. 515; 1911. 
 
PUBLIC SERVICE COMMISSIONS 343 
 
 the Public Service Law; but I think even Judge Gray would 
 have conceded, if the point had been pressed upon him, that 
 the provisions of law, even when limited to the provisions of the 
 Public Service Commissions Law, must, by implication, cover 
 any provision of the Railroad Law or other statutes which the 
 Commission is obliged to enforce. In the case of Willcox v. 
 Richmond Light & Railroad Company 1 there were presented 
 two village ordinances whereby two separate surface railroad 
 companies were granted rights to operate within the village. 
 In accepting the ordinances the companies agreed to exchange 
 transfers with intersecting roads wherever their lines met 
 within the village limits. Having refused to comply with the 
 request for transfers, a mandamus proceeding was brought 
 to compel them to do it. It was held by Mr. Justice Clarke, 
 in Richmond, in an opinion which was adopted by the Appel- 
 late Division in Brooklyn, that where there is a violation of 
 law, as the term is used in Section 57 of the Public Service 
 Commissions Law, the Commission may compel the fulfill- 
 ment of the obligation ; and that the failure to comply with the 
 requirement of an ordinance which had been duly accepted 
 was as much a violation of law as would have been a violation 
 of a statute. 
 
 There are, of course, many other decisions affecting different 
 provisions of the Public Service Commissions Law. They are 
 all interesting to those concerned. Perhaps reference may be 
 permitted to the following : 
 
 Peo. ex rel. Delaware and Hudson Co. v. Stevens, 134 App. Div. 99 ; 
 1909. 197 N. Y. 1 ; 1909. 
 
 Peo. ex rel. Cohoes Railway Co. v. Public Service Commission, 143 
 App. Div. 769; 1911. 202 N. Y. 547; 1911. 
 
 Peo. ex rel. Binghampton Light, Heat and Power Co. v. Stevens, 143 
 App. Div. 789; 1911. 203 N. Y. 7; 1911. 
 
 Public Service Commission v. Westchester Street Railroad Co., 151 
 App. Div. 914; 1912. 206 N. Y. 209; 1912. 
 
 Peo. ex rel. New York Edison Co. v. Willcox, 151 App. Div. 832; 
 1912. 207 N. Y. 86; 1912. 
 
 1 Supra. 
 
344 PUBLIC SERVICE COMMISSIONS 
 
 Public Service Commission v. New York Railways Co., 77 Misc. 487; 
 1912. . 
 
 Peo. ex rel. Bridge Operating Co. v. Public Service Commission, 153 
 App. Div. 129; 1912. 
 
 Peo. ex rel. Kings County Lighting Co. v. Willcox, 156 App. Div. 
 603. 157 App. Div. 922; 1913. 210 N. Y. 479; 1914. 
 
 Matter of Public Service Commission (Re Mendel), 162 App. Div. 
 371; 1914. 214 N. Y. 46; 1915. 
 
 Peo. ex rel. Dry Dock, &c. Railroad Co. v. Public Service Commission, 
 167 App. Div. 286; 1915. 
 
 Public Service Commission v. New York and Queens County Railway 
 Co., 170 App. Div. 580; 1915. 
 
 In concluding this portion of the address I would refer to a 
 single further case, People ex rel. Ulster & Delaware Railroad 
 Company v. Public Service Commission, reported in the New 
 York Law Journal of January 31, 1916. 
 
 The case involved a construction of Section 60 of the Rail- 
 road Law and Sections 33 and 49 of the Public Service Com- 
 missions Law. The question flatly presented was whether 
 when a statute prescribed a rate of fare to be charged as a 
 maximum the Commission, under its regulatory powers, might 
 authorize an increase of rate above the statutory limit, if in 
 its judgment the increase was necessary in order to provide a 
 fair return for service rendered. The Commission had decided 
 that it had no power to grant the increase. The Appellate 
 Division of the Second Department divided three to two, 
 Mr. Justice Cochrane writing the prevailing opinion, in which 
 Justices Lyon and Howard concurred, declared the authority 
 of the Commission to increase mileage book rates above two 
 cents per mile, the maximum fixed by the Railroad Law. Jus- 
 tices Kellogg and Woodward dissented in elaborate opinions. 
 The case will certainly be taken to the Court of Appeals, but 
 has not yet been argued there. 1 
 
 1 The opinions of the Appellate Division appear in 171 App. Div. 607. 
 Upon appeal to the Court of Appeals, upon a question certified, the order of 
 the Appellate Division was affirmed "on the opinion of Cochrane, J., below." 
 The Court of Appeals divided four to three, 218 N. Y., memoranda. 
 
PUBLIC SERVICE COMMISSIONS 345 
 
 There was no express provision in the Public Service Com- 
 missions Law for court review of the Commission's determina- 
 tions. It was urged at the time that there should be some 
 such provision, but none has ever been inserted. However, 
 it is found that in most cases the decisions of the Commission, 
 taking the form of orders, may be reviewed by certiorari under 
 the provisions of the Code of Civil Procedure; in that way 
 every judicial question may be presented and disposed of. 
 And if the proceeding appears to have been taken in good 
 faith, even though unsuccessful, the pendency of the litigation 
 prevents the enforcement of penalties that otherwise might 
 have been imposed under Section 24 of the Law. 
 
 Personally I believe in the right of judicial review, even 
 though it cause some delay in the carrying out of orders. 
 Where the matter reviewed involves technical knowledge, or a 
 full and careful consideration of facts, if the record is suffi- 
 ciently clear I think the tendency of courts will be less and 
 less to interfere with the decisions of a properly constituted 
 board. The burden put upon the relator under the Code pro- 
 visions for review by certiorari is such that only a very strong 
 case should prevail against the determination of the Commission. 
 
 When the Law became operative, on July 1, 1907, the City 
 of New York was suffering from severe financial depression. 
 Before the end of that year, or very shortly thereafter, nearly 
 every surface railroad line in Manhattan was in the hands of a 
 receiver. It was a very unpropitious time to begin adminis- 
 tering a law which contained so many teeth and which imposed 
 upon the Commissioners so many duties involving apparently 
 endless investigation and the solution of long-standing prob- 
 lems. In the beginning there was much opposition to their 
 action on the part of corporations and much dissatisfaction on 
 the part of the general public. But many of the questions 
 that eight years ago vexed both the public and the corporations 
 have since been laid to rest. Commissioners have come and 
 Commissioners have gone. But the law itself has been grad- 
 
346 PUBLIC SERVICE COMMISSIONS 
 
 ually clarified either by amendment or by actual decisions of 
 the courts, and as it stands to-day is pretty nearly, I think, as 
 the Commission and the public generally would have it. 
 
 At the present time I believe every state in the Union (except 
 Delaware and Utah) has established a commission of its own, 
 and the District of Columbia has one. In compliance with the 
 further suggestion of the Committee on Lectures I shall re- 
 frain from discussing the philosophy or psychology of Public 
 Service Commissions as a whole, and shall leave that broader 
 field to my brother Guthrie for consideration at the next meet- 
 ing. But with respect to the particular Commission with 
 which I have been intimately associated for eight years past, 
 after an experience of twice that length of time in the City's 
 Law Department, it is my privilege and pleasure to state that 
 I have never seen a better esprit de corps among so many men 
 and have never seen a larger volume of novel, difficult and 
 important work better performed than by the members of the 
 staffs of the various departments of the Public Service Com- 
 mission. It is impossible always to satisfy the public or the 
 corporations in the attempt to carry out the evident purpose 
 of the Law; but I believe, gentlemen, that in the process of 
 time, with the aid of the men themselves who represent the 
 corporations, and with the aid and advice of the courts, and 
 with the cooperation of the people, the conviction will be 
 strengthened that Governor Hughes made no mistake in giving 
 his prompt and vigorous attention to establishing a compre- 
 hensive system for the regulation and control of public utilities. 
 
PUBLIC SERVICE COMMISSIONS 
 
 A Lecture Delivered before the Association of the Bar of the City of New York, 
 by William D. Guthrie, April 5, 1916. 
 
 IN his interesting and instructive address last Wednesday 
 evening, Mr. George S. Coleman recalled to our minds the pur- 
 poses of those who in 1907 promoted the governmental experi- 
 ment involved in the creation of public service commissions 
 vested with broad powers of regulation over businesses now ge- 
 nerically called public utilities. Most of us, I assume, agree with 
 him that the theory of regulation by commission is sound, that 
 these commissions ought to be continued as permanent depart- 
 ments of government, and that they should be made effective 
 and satisfactory instruments for the service of the public. I 
 want to urge this evening, although in a manner necessarily 
 cursory and incomplete, that public service commissions can 
 be made permanently useful and successful only by observing 
 three conditions, namely, (1) by limiting their powers to fewer 
 and simpler functions, (2) by appointing as commissioners men 
 who are really experts, qualified as such by technical training 
 and practical experience, and (3) by eliminating all exercise of 
 judicial power, or, if any judicial power be retained, then by 
 affording the full judicial review necessary for the protection of 
 the rights of those whose property and business are affected by 
 such regulation. 
 
 It seems to me that you will regard it as quite fitting and proper 
 for me to say that no one in the employ of our state or muni- 
 cipality in recent years has rendered more efficient or valuable 
 public service or service of a higher standard of professional 
 merit than Mr. Coleman has rendered as head of the law 
 department of the Public Service Commission for the first dis- 
 
 347 
 
348 PUBLIC SERVICE COMMISSIONS 
 
 trict. 1 He was exceptionally equipped to undertake the work 
 after sixteen years of conspicuously able service in the office of 
 the Corporation Counsel. Certainly to his advice, manage- 
 ment and direction as counsel to the commission under many 
 discouraging difficulties are due in great measure whatever 
 success has attended its work so far and whatever promise its 
 past labors and performances hold out for the future. I believe 
 that this is generally recognized by the profession and that it 
 awards to him the credit he deserves. 
 
 Of the political phenomena of our times, perhaps none is 
 more striking than the constant extension of the functions 
 of government, with the consequent multiplication of public 
 officials and increase of public expenditures. . The tendency 
 to extend the activities of the state has been world-wide, for 
 manifestations of it are observable in every country, whatever 
 the form of government may be. In the United States we are 
 developing at enormous cost in the most intensive fashion a 
 multitudinous bureaucracy with autocratic powers and arbitrary 
 discretion and a vast system of complicated and often conflict- 
 ing administrative jurisdictions in business matters which reach 
 and affect almost every individual, and most of which, only a 
 few years ago, would have been regarded as of strictly private 
 concern. We are vesting and combining in administrative 
 bodies extensive legislative, administrative and judicial powers 
 in distinct and reckless disregard of the sound principle of the 
 separation of governmental powers which was deemed so essential 
 by the wise founders of our governments. Even controverted 
 questions of law and fact heretofore regarded as exclusively 
 for judicial determination we are entrusting to bureaucratic 
 discretion, and for orderly judicial procedure and the com- 
 petent and impartial interpretation and enforcement of the 
 laws, we are substituting arbitrary methods and untrained 
 judgment. The increase in public functionaries and public 
 expenditures within the past twenty years has been at a rate 
 
 i New York. 
 
PUBLIC SERVICE COMMISSIONS 349 
 
 which is regarded by many thoughtful observers with alarm as 
 imperiling not only our liberties but the very solvency of the 
 state. 
 
 The particular subject of public service commissions fur- 
 nishes an instructive illustration of this tendency towards 
 bureaucracy in our national and state governments. The 
 Federal Interstate Commerce Commission, which began its 
 work in 1887 wjth a staff of a few secretaries, stenographers 
 and messengers at an annual expenditure of $97,800, has 
 developed into an immense bureau with an organization of 
 2,500 employees, and its maintenance now calls for an annual 
 appropriation by Congress of nearly $5,000,000. So, likewise, 
 our own Public Service Commission for the first district, which 
 began its activities only nine years ago with a staff of 326 em- 
 ployees and an annual expenditure of a few hundred thousand 
 dollars, is now operating with an organization of 2,300 em- 
 ployees at an annual cost of more than $3,600,000, although 
 this staff and expense will, it is expected, be curtailed as soon 
 as the pending rapid transit construction is completed. 
 
 Almost every state in the Union has similarly created regu- 
 latory commissions under varying names, such as public serv- 
 ice, public utilities and railroad commissions. Not only the 
 legislative bodies, but all of these commissions are constantly 
 at work regulating the use of private property and exercising a 
 control over business that is being gradually extended and 
 broadened and made more and more oppressive year after year. 
 Indeed, as Chief Judge Cullen warningly said in one of his 
 opinions l : " The great misfortune of the day is the mania for 
 regulating all human conduct by statute, from responsibility 
 for which few are exempt, since many of our most intelligent 
 and highly educated citizens, who resent as paternalism and 
 socialism legislative interference with affairs in which they are 
 interested, are most persistent in the attempt to regulate by 
 law the conduct of others." 
 
 !204N.Y. 534; 1912. 
 
350 PUBLIC SERVICE COMMISSIONS 
 
 In our own state, during the past five years our legislators 
 have enacted 3,555 separate statutes covering 11,674 printed 
 pages of laws. The fruits of the labors of the pending session 
 at Albany are not yet known. President Elliott, of the New 
 Haven Railroad Company, in his recent address at Washing- 
 ton before the Chamber of Commerce of the United States, 
 declared that "from 1909 to 1915 the states enacted 60,001 
 and Congress enacted 2,013 new laws which involved the con- 
 sideration of more than one-half million legislative propositions, 
 or an annual production of over 12,000 new laws to be assimi- 
 lated by the business world," and that "the Sixty-Third 
 Congress alone considered 30,053 bills and enacted 700." The 
 total cost to the taxpayers of the country of the regulation of 
 business by direct legislation and by commissions is stupen- 
 dous; but, in addition to this more or less common burden 
 imposed on the taxpayers of all classes, there is further imposed 
 upon the businesses regulated an enormous expense in comply- 
 ing with statutory and administrative regulations sometimes 
 of no practical benefit to any one, and frequently a hindrance to 
 business. The single item of the voluminous reports and statis- 
 tics which the national and state commissions require to be 
 furnished involves an annual expense of millions of dollars to 
 the industries being regulated. In fact, the cost of regulation 
 so far has been out of all proportion to the service rendered by 
 these commissions, the protection afforded, or the benefit secured. 
 
 Whilst in many respects the regulation of business by com- 
 mission is still experimental, and it has yet to be proved that 
 any such extensive and complicated bureaucratic system can 
 be successful, or that these bodies are competent to exercise 
 beneficially and satisfactorily the far-reaching jurisdictions and 
 vast powers already vested in them, they are nevertheless at 
 almost every session of Congress or state legislature having 
 granted to them still more extensive jurisdiction and still greater 
 powers and duties of regulation and control. They are being 
 compelled to undertake such multiform tasks and to perform 
 
PUBLIC SERVICE COMMISSIONS 351 
 
 functions so complex, so comprehensive and so gigantic in 
 scale as to be quite beyond the capacity of any one body of 
 men however talented, and the commissioners are forced to 
 neglect many of their functions and to rely upon subordinates 
 for the performance of many of their duties. The commissions 
 are being paralyzed by having altogether too much to do and 
 by attempting to deal with too many non-essential details. 
 In truth, they are finding themselves unable to see the forest 
 because of the trees. 
 
 Statistics taken from the latest annual report of the Inter- 
 state Commerce Commission submitted to Congress for the 
 year ending October 31, 1915, will show the extent to which 
 the federal body is being overwhelmed and swamped. The 
 commission during that one year conducted 1,543 hearings in 
 the course of which it took 200,438 pages of testimony. It 
 heard oral arguments in 198 cases; it decided 902 cases upon 
 what it terms its "formal docket"; 6,500 separate complaints 
 were entered upon its "informal docket" and 6,690 applica- 
 tions upon its "special docket," and it made 822 orders under 
 the "long-and-short-haul" clause. No less than 149,449 rate 
 schedules were filed with it, which in theory at least the com- 
 mission is supposed to examine and digest, that is, an average 
 of 500 rate schedules per working day. The report of the com- 
 mission then adds, perhaps protestingly, if not despairingly, 
 that "a mere recital of these figures scarcely gives an adequate 
 idea of the volume of work disposed of and the enormous 
 interests involved in the cases that came before the commis- 
 sion." Yet, at the present session of Congress it is proposed to 
 increase the duties of the commission still further by vesting in 
 it control over corporate finances and the issuing of corporate 
 securities and by greatly extending its inquisitorial powers. 
 One of the pending bills, for example, would grant to the com- 
 mission and its special agents and examiners access to all the 
 "accounts, records, memoranda, correspondence, documents, 
 papers, and other writings, and indexes thereto, regardless of 
 
352 PUBLIC SERVICE COMMISSIONS 
 
 the dates thereof, relating to financial transactions of, for, or 
 with [any] carrier, and kept or preserved by or for, or in the 
 custody or under the control of ... any director, stockholder, 
 officer, agent, attorney [and] employee" as well as of "any other 
 person, persons, corporation, joint-stock company, or corporate 
 combination having, or having had, any financial transactions 
 with or for [a] carrier." This sweeping power is to be con- 
 ferred under the notion that it is necessary in order to enable 
 the commission to determine what are reasonable rates. 
 
 The next step to be taken and this is being strenuously 
 advocated by the champions of the commission system will 
 be to grant power to the Interstate Commerce Commission to 
 fix the wages of railroad employees, on the ground that this is 
 an item of paramount influence in the cost of the service rendered 
 by carriers and of much more importance in rate-making than 
 the issuing of securities or the rate of interest payable upon 
 money borrowed by corporations. It is argued that the grant- 
 ing of this additional power would accord with justice and com- 
 mon sense, that it is absolutely necessary for the protection of 
 the public who use the railways, and that, as the commission 
 now regulates rates and exercises broad and far-reaching super- 
 vision over the business of the carriers, it should regulate em- 
 ployees as well as employers and be in a position to say whether 
 or not the wages of engineers, conductors, firemen, trainmen 
 and track workers should be increased or reduced. The same 
 reasoning would, of course, include all the supplies and equip- 
 ment of railways and the wages of those producing them. 
 American labor may some day find that, under the euphemistic 
 nomenclature of arbitration made compulsory by law, we have 
 drifted into enacting a new form of the English Statute of 
 Labourers. And the commission would then find itself the 
 storm-center of industrial disputes, with all its time and atten- 
 tion engrossed in investigating and determining what it should 
 adjudge to be reasonable wages for railroad employees in every 
 state of the Union under infinitely varying conditions. 
 
PUBLIC SERVICE COMMISSIONS 353 
 
 The work of the New York Public Service Commissions 
 at least in the first district is scarcely less onerous and mul- 
 tifarious than that of the Interstate Commerce Commission. 
 Indeed, the jurisdiction of the New York commissions is much 
 more extensive, for it applies not only to carriers by railroad 
 but to the varying and dissimilar businesses of street railways, 
 telegraph and telephone lines, gas and electric light and power 
 plants, steam plants, stockyards, stages and busses, and other 
 public utilities, including in the first district the construction 
 of rapid transit facilities. The New York commissions also 
 supervise and control the issuing of corporate securities, re- 
 organizations, transfers of franchises, etc., and are constantly 
 employed in the exercise of judicial powers and in the deter- 
 mination of extremely complicated questions of law and of fact. 
 The commission in the first district in its latest report states 
 that during the year 1915 it received 5,732 complaints and held 
 812 hearings in 337 "formal cases." But these hearings con- 
 stituted only a small part of the work of the commission. To 
 mention only a few other items, the commission in the first 
 district reports that it supervised generally the business of 102 
 public service companies having an aggregate capital of 
 $1,325,273,548, not including certain holding companies and 
 trunk line railroads which are under the jurisdiction of the com- 
 mission as to certain special matters ; that it inspected, in 236 
 manufacturing plants located in 143 towns and cities scattered 
 through 17 different states, construction material valued at 
 $11,500,000; that it maintained a chemical laboratory for the 
 testing of materials; that it awarded subway contracts aggre- 
 gating $26,000,000, bringing the total of these contracts up to 
 about $168,000,000 ; that it passed upon applications for issues 
 of corporate stocks and bonds and authorized the same to the 
 extent of $23,000,000, making the total amount of the issues 
 thus authorized $635,159,477, and that it tested 383,401 gas 
 meters during the year 1915, bringing the total number 
 of meters tested up to 3,088,155. In addition to these vast 
 
 2A 
 
354 PUBLIC SERVICE COMMISSIONS 
 
 administrative details, the supervision of the subway construc- 
 tion, and very extensive and difficult judicial labors, more than 
 sufficient, if thoroughly done, to have engrossed all the time 
 and thought of a dozen commissions of trained experts, the 
 commissioners were constantly formulating rules and orders, 
 with the power to make disobedience to their orders or fiats a 
 criminal offense and punishable as such. 
 
 The powers originally vested in the Interstate Commerce 
 Commission by the Act of Congress of 1887 were quite suffi- 
 cient for any one body to exercise ; but these powers have been 
 so extended and are so varied as to create a volume of work 
 beyond the capacity of any one commission. The powers now 
 vested in and exercised by the New York Public Service Com- 
 missions, particularly the commission for the first district, and 
 the varied duties they attempt to perform are likewise beyond 
 the capacity of any single body of five members, or even half 
 a dozen such bodies. They are expected to supervise and solve 
 the most difficult and intricate problems of corporate finance 
 and the issuing and refunding of corporate securities and the 
 reorganization of corporations. They must fix reasonable rates 
 in the varying businesses under their control. They are 
 expected to regulate the management of innumerable details 
 of many complex businesses. They must determine intricate 
 questions as to the operation of all classes of public utilities. 
 They must have encyclopedic knowledge and talents such as 
 no one board of directors could rationally be expected to 
 possess. They constantly substitute their judgment as to 
 business questions for the judgment of the trained and expert 
 managers of the 102 corporations regulated. The supervision 
 of the dual subway enterprise alone, during the period of pro- 
 motion, experiment and construction, involved the greatest 
 municipal undertaking in history and a task of the utmost 
 complexity and difficulty, and required exceptional expert 
 knowledge and constant and strenuous labor sufficient to en- 
 gross the time and attention of the five commissioners; yet 
 
PUBLIC SERVICE COMMISSIONS 355 
 
 the commissioners, busy if not overwhelmed with innumerable 
 other important and difficult tasks, were compelled to take up 
 this stupendous additional task and to act in the capacity of 
 negotiators, financiers and expert engineers. A great business 
 concern, for example the Pennsylvania Railroad Company, 
 would, of course, have placed the supervision of the planning 
 and construction of such a system in charge of trained engineers 
 of experience and established reputation experts of the stand- 
 ing of Mr. Barclay Parsons, Messrs. Jacobs and Davies, Mr. 
 Bion Arnold and certainly would not have turned the whole 
 matter over to a commission or committee composed of five 
 members, not one of whom at that time had ever had any tech- 
 nical training or practical experience in such work. 
 
 That the commissions are being overburdened and over- 
 whelmed with the many tasks imposed upon them has long 
 been recognized by those who are familiar with the system and 
 competent to judge. In an address delivered in 1907, Com- 
 missioner Prouty, of the Interstate Commerce Commission, 
 used the following language : " If the Interstate Commerce 
 Commission is vested with a jurisdiction so tremendous in 
 extent, and of such finality, every effort should be made to 
 provide a body adequate to the trust. ... I very much 
 doubt whether the same body can properly discharge both 
 these functions [executive and judicial]. In the end it will 
 either become remiss in its executive duties or will, in the zeal 
 of these, become unfit for the dispassionate performance of its 
 judicial functions. Whatever may have been true in the past, 
 the time has come when the commission should be relieved of 
 all its duties except the hearing and deciding of complaints." 
 
 This and similar advice and admonition have been wholly 
 disregarded, not only by Congress but by the state legislatures. 
 Despite the enormous burden of executive, administrative and 
 judicial duties existing in 1907, the powers of the Interstate 
 Commerce Commission have since then been increased, and 
 it is exercising in an ever extending measure the most far- 
 
356 PUBLIC SERVICE COMMISSIONS 
 
 reaching legislative, executive and judicial functions. This is 
 equally true of the state commissions. In my judgment the 
 fact that the commissions have become ineffective and dis- 
 credited in public opinion is due principally to their being over- 
 burdened and overwhelmed with a multiplicity of tasks and a 
 mass of extremely difficult and complicated duties which they 
 cannot possibly perform in any satisfactory manner. As a 
 consequence, to quote what a distinguished statesman recently 
 declared, "the very name * regulation' has become an offense 
 and an abomination to many honest business men." 
 
 I, therefore, submit that the first step to be taken is to 
 limit the functions of these commissions to fewer and simpler 
 tasks, which will be within the capacity of one body of five or 
 seven or nine men to attend to intelligently and competently. 
 
 In the inspiring address which Mr. Justice Hughes delivered 
 before the State Bar Association in January, 1 he must have 
 had particularly in mind our public service commissions when 
 he said that "the ideal which has been presented in justifica- 
 tion of these new agencies, and that which alone holds promise 
 of benefit rather than of hurt to the community, is the ideal of 
 special knowledge, flexibility, disinterestedness and sound judg- 
 ment applying broad legislative principles that are essential to 
 the protection of the community and of every useful activity 
 affected, to the intricate situations created by expanding enter- 
 prise. But mere bureaucracy narrow, partisan, or inexpert 
 is grossly injurious ; it not only fails of the immediate pur- 
 pose of the law and is opposed to traditions which happily are 
 still honored, but its failure creates a feeling of discouragement 
 bordering on pessimism which forms the most serious obstacle 
 to real improvements in the adjustment of governmental 
 methods to new exigencies." 
 
 It must be apparent that, above all other considerations, the 
 ideal as well as the indispensable condition, if we are reasonably 
 
 1 1916. 
 
PUBLIC SERVICE COMMISSIONS 357 
 
 to expect success in this new governmental departure and ex- 
 periment, is special knowledge, that is, knowledge which comes 
 from technical training and practical experience, which the 
 public at large does not possess, and which it cannot in the 
 very nature of things be expected to possess. This special 
 knowledge is ordinarily to be found only in trained experts. 
 In an interesting and able article in the World's Work for 
 February, 1 a competent critic, the well-known banker, Mr. 
 Kahn, states that although the Interstate Commerce Commis- 
 sion "has greater powers and greater responsibilities concern- 
 ing the industrial life of the nation than probably any other 
 tribunal anywhere in the world exercises, there has never yet 
 been appointed a man who came to it qualified by first-rate 
 experience in railway operation, or by broad business experi- 
 ence, or any considerable experience in financial matters." A 
 ray of light and promise appears in the Federal Reserve Bank- 
 ing Act, which provides that the "Federal Reserve Agent" of 
 each bank must be a person of "tested banking experience." 
 This is a precedent to be followed. 
 
 In nine years we have had in the first district fourteen public 
 service commissioners, most of whom were lawyers by profes- 
 sion. Yet not one of these gentlemen before his appointment, 
 so far as I have been able to ascertain, had* had any special 
 knowledge of any of the various complicated businesses over 
 which he was to exercise the most extensive powers of super- 
 vision and control. Certainly none of them had such expert 
 knowledge derived from technical training or practical experi- 
 ence in these matters as would have warranted any large private 
 concern in placing such comprehensive powers in his hands. 
 Only one of the present commissioners has been in office a 
 year, and his training when appointed had been that of a law- 
 yer with little or no practice or experience in the particular 
 industries he was to regulate. I am not disparaging his talents 
 or his ability as a lawyer. I am simply pointing out that he 
 
 1916. 
 
358 PUBLIC SERVICE COMMISSIONS 
 
 was not an expert and did not have the special knowledge which 
 Mr. Justice Hughes recognizes as indispensable and which, he 
 says, alone holds out promise of benefit rather than of hurt to 
 the community. Four of the present commissioners have been 
 in office but a few weeks. It is true that they are men of 
 ability and character, but none of them is really an expert in 
 any one of the businesses which the commission supervises and 
 regulates. Mr. Hodge is a capable engineer of experience and 
 established reputation but has, I understand, had little to do 
 with the particular businesses he will now supervise. Although 
 Mr. Whitney as secretary of the commission undoubtedly ac- 
 quired much information which must be of great service to the 
 commission and the public, nevertheless I doubt whether he 
 would seriously class himself as a trained and experienced expert 
 in any one of the businesses placed under the regulation and 
 control of the commission. The distinguished and public- 
 spirited chairman was trained as a lawyer; but he withdrew 
 from practice thirty-five years ago to enter private business, 
 and his business experience and public work since then have 
 not been such as to give him special knowledge of any of the 
 businesses under the jurisdiction of his commission. I am in- 
 formed that he candidly so stated when he accepted the appoint- 
 ment. Moreover, none of the present commissioners could 
 reasonably be said to have had such training in the law of this 
 state as we would deem essential for high and important judicial 
 office ; yet they will all sit day after day in hearings essentially 
 judicial in their nature ruling upon difficult controverted ques- 
 tions of law and fact of vital interest, not only to the public 
 but to the 102 corporations regulated, and their rulings upon 
 the admissibility and credibility of testimony as well as upon 
 all inferences warranted by the evidence and their findings and 
 conclusions of fact will be practically conclusive. 
 
 We must concede, of course, that it is extremely difficult to 
 induce competent, trained and experienced experts to serve on 
 such commissions and that we have not yet devised a civil 
 
PUBLIC SERVICE COMMISSIONS 359 
 
 service system which will invite men of first-class ability to 
 make their life careers in the permanent public service, as in 
 Europe and British India. How we shall bring this about is 
 the great problem of government facing us to-day. 
 
 President Lowell of Harvard in his lectures on "Public 
 Opinion and Popular Government" urges the recognition of 
 the imperative necessity of having experts in our government 
 service, national and state. He says that we are now training 
 men for all professional work except that of the government. 
 Speaking of administrative offices, he points out that "they 
 require quite as great skill as many positions in private employ 
 to which one would not think of appointing an untrained man," 
 and that we are "intrusting such duties to a periodically shift- 
 ing body of officials drawn for political motives from an inex- 
 perienced public." He adds that "in many branches of the 
 public service, central and local, we have no experts at all, no 
 permanent officials playing an important part in the adminis- 
 tration, and that even in those matters . . . where experts are 
 regularly employed we rarely allow men to remain in office 
 long enough to acquire that familiarity with their peculiar 
 problems which confers efficiency and authority." He de- 
 clares that "the United States is the only great nation with a 
 popular government to-day which has not permanent officers 
 of that kind," and that "it is they who keep the machinery of 
 government elsewhere in efficient working order." 
 
 And President Goodnow of the Johns Hopkins University in 
 his work on "Politics and Administration" also urges the im- 
 perative necessity for experts with special knowledge and train- 
 ing. Although he doubts that the securing of experts in the 
 higher posts of public service can be accomplished by any 
 changes in the law, he nevertheless believes that this will be 
 brought about through the appointing power when an educated 
 and intelligent public opinion shall demand it. 
 
 We lawyers might do much to educate public opinion in this 
 respect. We are better qualified to lead in these matters than 
 
360 PUBLIC SERVICE COMMISSIONS 
 
 any other class. We have stood altogether too much aloof from 
 these public problems. Commissioner Whitney may be justi- 
 'fied in complaining, as I am informed he recently did, of the 
 failure of the bar of the City of New York to help the Public 
 Service Commission with constructive suggestions. A joint 
 committee of the bar associations of the state would render a 
 great public service by making a thorough, impartial, and ex- 
 haustive investigation of this whole problem of public service 
 commissions and pointing out the crying need for experts in our 
 public service. This is a task worthy of our profession and one 
 which would enable it to render a great and patriotic service to 
 the nation and the state. Progress and efficiency in the future, 
 as our conditions become more and more complex, will only be 
 found in the advice and direction of men qualified by study 
 and experience to advise and point out the way, and certainly 
 not in the haphazard experiments with which our representa- 
 tives in public office are now groping and blundering. 
 
 But, in the meantime, as at present the difficulty of securing 
 public service commissioners who are really experts and who 
 have special knowledge of the particular businesses to be regu- 
 lated seems to be almost insuperable, should we not limit the 
 powers of these commissioners to simpler tasks and duties, such 
 as they can be reasonably expected to perform for the protec- 
 tion and benefit of the public ? If the jurisdiction of our public 
 service commissions were now limited to fewer matters and the 
 commissions were made strictly administrative bodies without 
 judicial powers, they would be able to render much more 
 effective, valuable and satisfactory service to the public than 
 is now possible. Mr. Coleman, after more than eight years of 
 exceptional opportunities for observation and study, has indi- 
 cated the true lines to follow, that is, to limit the powers and 
 efforts of the present commissions to two fundamental objects, 
 namely, securing safe and adequate service and just and reason- 
 able rates. These two objects are sufficient to keep any com- 
 
PUBLIC SERVICE COMMISSIONS 361 
 
 mission busy. All collateral matters, including problems of 
 corporate finance, should be excluded, or vested in separate 
 bodies, even though these collateral matters constitute ele- 
 ments indirectly affecting service or rates. For example, the 
 actual or nominal capitalization of a corporation need have no 
 relation to what ought to be the controlling question of the 
 actual value of property devoted to a public use or the actual 
 cost of construction or duplication. Why then waste day after 
 day in taking testimony as to discounts on securities, market 
 rates of interest, profits of promoters, and other financial details ? 
 A reasonable rate of charge reasonable for the public as well 
 as for the owner of the utility can be determined without 
 litigating these collateral issues. 
 
 Firmly believing that what we need in our public service 
 commissioners is less of the judge and more of the expert, I 
 want to emphasize particularly that public service commissions 
 should not be permitted to exercise judicial power. These 
 bodies are not constituted for the due and impartial perform- 
 ance of such duties. The elimination of judicial power would 
 not impair the practical usefulness or efficiency of the commis- 
 sions. On the contrary, in my judgment, both the Interstate 
 Commerce Commission and the commissions of the several 
 states would accomplish more than they are now accomplishing 
 and render better and more efficient service to the public if 
 they did not exercise judicial powers and did not act at the 
 same time as party, prosecutor and judge in so many cases 
 before them. 
 
 A single commission cannot properly discharge administra- 
 tive and judicial duties at the same time, and our commis- 
 sioners are generally not qualified to exercise judicial powers. 
 Commissioner Prouty's remarks as to the Interstate Com- 
 merce Commission apply equally to our public service com- 
 missions, as every lawyer who has appeared before them must 
 have realized. In the zealous performance of their executive 
 
362 PUBLIC SERVICE COMMISSIONS 
 
 duties, in their championing of the interests of the public, 
 which they properly feel are especially confided to their care, 
 in the prosecution of complaints instituted by themselves, in 
 their natural endeavor to establish the correctness of their own 
 preconceived and frequently predeclared views and policies, 
 they become unfit for the dispassionate performance of judicial 
 functions, and they therefore inevitably deny to parties before 
 them the fair trial before an impartial, unbiased and competent 
 tribunal to which every one every class in the community 
 should be entitled as of absolute legal right. Such commis- 
 sions ought to have no concern but the public good and no 
 personal interest in the questions before them ; but at present 
 they are placed in the false position of being litigants fighting 
 for their own advantage or for their own views or policies. 
 
 Under the existing system, in many instances the sitting 
 commissioner or the commission itself necessarily becomes 
 what an English writer has called "that judicial monster, a 
 judge in his own cause." In nearly all controversies before 
 the commissions, on one side will be found their own employees 
 and counsel as the prosecutors or adversaries of those whose 
 property rights may be materially affected, if not ruined, by the 
 decision. Constituted as humanity is, the commissioners must 
 be unconsciously biased in favor of their own associates and 
 subordinates. Frequently, if my information be accurate and 
 I believe it is, the commissioners, federal and state, sitting as 
 judges direct the preparation of the evidence to be adduced 
 before them and privately confer in regard to the particular 
 case or complaint in hand, not only with their own associate 
 or subordinate appearing before them as counsel for the com- 
 mission but with their own employees who are to testify as 
 witnesses. The commissioners and their employees necessarily 
 become partisans. The whole atmosphere is the negative of 
 what a court of justice ought to be. Under such circumstances, 
 it is simply preposterous to expect in cases or complaints or 
 hearings before commissions that impartiality, open-minded- 
 
PUBLIC SERVICE COMMISSIONS 363 
 
 ness, disinterestedness and sound judgment which are indis- 
 pensable in a judge and essential to evenhanded and unbiased 
 justice as we lawyers understand that term. 
 
 It cannot well be denied that the Interstate Commerce 
 Commission and other public service commissions are constantly 
 exercising judicial powers, and that there is seldom any effec- 
 tive judicial review of their rulings. The essential nature of 
 their acts of power is not, of course, to be changed by calling 
 them quasi-judicial or by any other nomenclature. The power 
 to hear evidence and decide a controverted question of fact is 
 a judicial function just as much as the power to decide a ques- 
 tion of statutory construction or other question of law. In 
 the recent Federal Trade Commission Act 1 it is expressly pro- 
 vided that "the findings of the Commission as to the facts, if 
 supported by testimony, shall be conclusive," thus practically 
 withdrawing such decisions from judicial review. The theory 
 upon which this exercise of judicial power is being allowed 
 under the Federal Constitution, which separates the judicial 
 from the legislative and executive powers, is that performance 
 of judicial duties may be vested in executive or administrative 
 officers where such power is merely incidental to the execution 
 of functions peculiarly administrative. 
 
 The Supreme Court has, it is true, gone very far in uphold- 
 ing such grants of judicial power to administrative bureaus, as 
 notably in the Fraud Order and the Chinese Exclusion cases. 
 The present rule, as it seems to me, must ultimately be limited 
 along the lines indicated in the dissenting opinion of Justices 
 Brewer and Peckham in the Ju Toy case, 2 because it will sooner 
 or later become intolerable that administrative officers should 
 be vested with essentially arbitrary and autocratic powers in 
 respect of disputed questions of fact affecting the personal and 
 property rights of individuals. I profoundly believe, with all 
 deference to the court, that the spirit of the Constitution is 
 
 i 38 U. S. Stat. at Large, 717. 
 
 U. S. v. Ju Toy, 198 U. S. 253; 1905. 
 
364 PUBLIC SERVICE COMMISSIONS 
 
 being violated in the exercise by the Interstate Commerce Com- 
 mission of much of its judicial power, and that this is equally 
 true of other departments of the national government. The 
 Supreme Court has held that the findings of fact of the Inter- 
 state Commerce Commission, if supported by evidence, are 
 conclusive and cannot be reviewed by the courts. It results 
 from this ruling that in many of the proceedings before the 
 commission, where every element of a judicial proceeding will 
 be found and where the commissioners are clearly acting 
 as judges and exercising judicial power, the decision of the 
 commission becomes a practical finality, to use Commissioner 
 Prouty's expression, and parties are frequently denied any fair 
 review before a court of justice of the ruling or decision of the 
 commission. In other words, the very evils are being repro- 
 duced which were sought to be prevented in framing the Federal 
 Constitution by adopting the principle of English constitutional 
 law obtaining in the seventeenth and eighteenth centuries that 
 judicial power should be exercised only by judges learned in 
 the law whose term of office should be during good behavior 
 and who would for that reason be more likely to feel independ- 
 ent of the executive. 
 
 It is true that it has for many years been the settled rule of 
 constitutional law that the ultimate finding or ruling of a com- 
 mission, whether federal or state, for example, as to the suffi- 
 ciency of particular rates, could not be made conclusive. The 
 same result, however, is being in many instances allowed to be 
 accomplished indirectly by giving a practically conclusive effect 
 to the findings of commissions upon controverted questions of 
 fact and the inferences to be drawn from uncontradicted evi- 
 dence. A rule making the finding of fact of a commission 
 prima facie correct, or creating a rebuttable presumption in its 
 support would not, of course, necessarily or unreasonably preju- 
 dice a party, for it would operate generally no further than to 
 shift the affirmative of the issue and the burden of proof. This 
 would frequently be no more than a matter of the order of 
 
PUBLIC SERVICE COMMISSIONS 365 
 
 testimony or procedure. We can ordinarily acquiesce in a rule 
 by which appellate courts shall not review the conclusions of 
 fact or conflicts in testimony in the lower courts, because in 
 such cases we have had at least our one day in a court of jus- 
 tice proceeding according to those long-established rules and 
 safeguards of evidence which we believe to be essential for the 
 ascertainment of the truth, the protection of individual rights, 
 and the impartial and competent administration of justice. 
 In this state, 1 by virtue of our Code of Civil Procedure (sec- 
 tion 2140), the findings or conclusions of fact of our public 
 service commissions must be given as much force and effect 
 as the verdict of a jury after a judicial trial. 
 
 If, therefore, the findings or conclusions of fact of adminis- 
 trative boards are not to be susceptible of full review by the 
 courts, and if they are to be made practically conclusive when- 
 ever there is any evidence to support them, there will then be 
 in the majority of cases a complete denial of any fair trial in 
 a court of justice as much as if the ultimate ruling or decision 
 of the commission were also made conclusive. It is, of course, 
 well known that many, if not most, of the cases before these 
 commission tribunals depend in final analysis upon the facts, 
 and that, if the facts are not to be reviewable in the courts, 
 the decisions of the commissions will in such cases become 
 final. This will become more and more the practical result 
 as the statutes are authoritatively interpreted by the courts 
 and all questions of mere legal power and procedure definitely 
 settled. 
 
 The doctrine that all findings of fact of an administrative 
 commission are to be treated as sacrosanct is in many respects 
 both absurd and dangerous. Indeed, it seems to me that it 
 was a mistake to permit any departure from the principle of 
 constitutional law denying the power to give conclusive effect 
 to the findings of commissions. An aggrieved party should 
 have at least one day in court, and, when appealing to a court 
 
 i New York. 
 
366 PUBLIC SERVICE COMMISSIONS 
 
 of original jurisdiction for justice, should not be prejudiced or 
 handicapped by any findings or conclusive presumptions, 
 whether of fact or law, against his contentions in that court. 
 Otherwise, we shall have no real judicial protection against 
 arbitrary and unjust action by commissions. 
 
 The power to determine conclusively all controverted ques- 
 tions of fact now vested in these bodies has undoubtedly im- 
 pelled the courts generally to hold the commissions to the most 
 technical rules of law affecting the rights of parties and to re- 
 quire competent proof of all the facts necessary to be proved in 
 order to authorize the making of a determination. The result 
 is that the conduct of proceedings before these commissions is 
 becoming more and more technical and formal ; administrative 
 efficiency is thereby being cramped and diminished, if not fre- 
 quently paralyzed, and procedure is beginning to receive even 
 more attention than matters of substance and the merits. As 
 Mr. Coleman put it, procedure in this administrative field is 
 full of pitfalls, trenches and barbed wire. Every order of a 
 commission must be supported by findings of fact ascertained 
 and proved by competent evidence in each particular proceed- 
 ing as it affects the party regulated and contesting. The 
 statutory provision generally inserted that these tribunals 
 shall not be bound by the technical rules of evidence, I venture 
 to say, has only complicated the performance of their duties 
 and has been of little practical help, for legal evidence must 
 still be adduced in order to support any finding. Professor 
 Wyman has said that "the more liberal the practice in admit- 
 ting testimony, the more imperative the obligation to preserve 
 those essentials of action in accordance with evidence adduced 
 by which rights have immemorially been asserted or defended." 
 The commissioners may have the most accurate expert and 
 special knowledge of the situation presented by the case or 
 complaint then before them ; they may have a few weeks before 
 concluded a thorough investigation of the subject in all its 
 aspects and at great expense and delay; they may know all 
 
PUBLIC SERVICE COMMISSIONS 367 
 
 the material facts with reasonable certainty; prompt action 
 may be advisable and they may be fully prepared to act ; but 
 they must nevertheless in each case proceed anew to hear and 
 consider and rule upon every particle of evidence relevant or 
 irrelevant which counsel may offer to adduce. Hence the great 
 mass of information which the commission is laboriously accu- 
 mulating year after year is not available to it as evidence upon 
 which to base an order in any contested case in hand. 
 
 On the other hand, if the commissions were not exercising 
 judicial powers, they would have far greater liberty and facility 
 of action. They could then be safely constituted entirely of 
 experts, and they could be charged with the sole duty of ac- 
 quiring special and accurate knowledge as to all so-called public 
 utilities and of formulating rules as to public safety and con- 
 venience, as to public service, and as to rates of charge, which 
 rules could be made prima facie correct and binding, with 
 liberty to the corporation or individual affected to challenge 
 them as unreasonable and to test that issue in the courts. Full 
 powers of investigation should be continued so that the com- 
 missioners may thereby readily acquire the special knowledge 
 they need. The commissioners or their subordinates should 
 continue at liberty to make informal investigations and to avail 
 of any information they have, and base rulings thereon after 
 notice to the party affected and a concise statement of the 
 grounds upon which they are proceeding. Any one affected 
 should be compellable and should have the right to furnish in- 
 formation on any such investigation, but should not be entitled 
 to a formal judicial hearing before the commission with the 
 technical procedure and competent evidence that that always 
 implies. 
 
 Although the principle of the separation of governmental 
 powers was long observed in this country in its integrity and is 
 still generally recognized as a sound governmental policy, we 
 must perceive that it is being gradually undermined in national 
 and state affairs. The constitutional rule as to the federal 
 
368 PUBLIC SERVICE COMMISSIONS 
 
 government is different from the rule obtaining in some of the 
 states, for example, in this state. The Federal Constitution 
 separates the judicial power by expressly vesting it in courts 
 of justice constituted of judges appointed during good behavior, 
 and if that provision be followed according to its intent and 
 spirit, the separation will be maintained. The New York 
 state constitution, however, does not separate the judicial 
 power from the other branches of government, and therefore 
 in this state administrative boards may be vested with the 
 fullest and broadest judicial powers; and their rulings, even 
 on questions of law, may be made final and conclusive without 
 any right of appeal to the courts. The Supreme Court of the 
 United States has declared that neither the fourteenth amend- 
 ment nor any other provision of the Federal Constitution for- 
 bids a state from granting to an administrative body the final 
 determination of questions of law or of fact, and all that is 
 necessary is to afford a hearing before final determination. 
 
 It is interesting to note that the same tendency to invest 
 administrative boards with judicial powers and to supersede 
 and undermine the law courts by bureaucracy has also been 
 developing in England and, notwithstanding the supremacy of 
 Parliament, is being challenged there as involving a grave 
 menace to the principle of the supremacy of the law and to the 
 rights of the individual. The Master of the Rolls, Sir H. H. 
 Cozens-Hardy, in a speech at the Guildhall banquet of Novem- 
 ber 9, 1911, referred to the tendency in recent years to remove 
 from the courts matters which properly belonged to them, and 
 to intrust them to government departments, and he solemnly 
 expressed the view that this was a great mistake. The British 
 Constitution Association has issued a protest against this prac- 
 tice, characterizing it as vicious and insisting that bureau- 
 cratic decisions are certain to be biased and unscientific. Many 
 lawyers in England declare that trials before such tribunals are 
 a denial of the fundamental right or privilege of a fair trial 
 
PUBLIC SERVICE COMMISSIONS 369 
 
 before competent and impartial judges guaranteed to English- 
 men by Magna Carta. 
 
 The bureaucratic development in England and the tendency 
 to withdraw from the courts matters essentially proper for 
 judicial review and protection coincide closely in time with our 
 own development of administrative bureaus. The encroach- 
 ment of the administrative on the judicial department there is 
 to be traced back to a section in the Public Health Act of 1875. 
 This section had to do with sewage and drainage, and it pro- 
 vided that any person feeling himself aggrieved by any assess- 
 ment might address a memorial to the local government board, 
 and that any order made by this board should be binding and 
 conclusive on all parties. This provision of the Public Health 
 Act was the parent and prototype of all the statutory inroads 
 that have since been made on the powers of the law courts in 
 England. It was reproduced almost verbatim in the Educa- 
 tion Act of 1902, which virtually placed the children of Eng- 
 land under the absolute control of a governmental bureau. An 
 extreme example of the encroachment of the administrative 
 upon the judicial department in England will be found in the 
 National Insurance Act of 1911. This statute places the inde- 
 pendence and happiness of the poorer classes in many respects 
 within the power of a bureaucratic organization without any 
 right of appeal to the courts. 
 
 In writing the introduction to the latest edition of his "Law 
 of the Constitution/' 1 published last year, Professor Dicey, the 
 great English authority on constitutional law, took occasion 
 to deprecate the growth of bureaucracy in England and the 
 decay of the great English principle of the rule of law adminis- 
 tered by courts of justice. He compares the development in 
 England with that of France. He shows that whereas in Eng- 
 land the recent development, contrary to all constitutional 
 precedent, has been away from judicial control towards an 
 arbitrary bureaucracy, in France just the opposite development 
 
 i 1915. 
 2B 
 
370 PUBLIC SERVICE COMMISSIONS 
 
 has been taking place. There the tendency has been to check 
 and control the bureaucracy by means of responsible judicial 
 bodies which protect individual rights against the encroach- 
 ments of administrative officials. Dicey says: "And it may 
 not be an exaggeration to say that in some directions the law 
 of England is being 'officialized/ if the expression may be 
 allowed, by statutes passed under the influence of socialistic 
 ideas. It is even more certain that the droit admin i^tratif of 
 France is year by year becoming more and more judicialized." 
 Thus, in England, as in America, the people are drifting from 
 the courts of justice as the bulwark of their liberties and the 
 only fit instruments for curbing executive tyranny, and are 
 placing arbitrary and autocratic powers in the hands of adminis- 
 trative officials generally untrained in the law and uncontrolled 
 and unchecked by judicial review. 
 
 Those who advocate conferring judicial powers on these 
 public service commissions without right of review in the courts 
 frequently refer to the efficient French administrative depart- 
 ments and the so-called French administrative courts as an 
 example of what may be accomplished by administrative offi- 
 cials. It is said that in France the courts are not allowed to 
 interfere with administration, and that there the individual is 
 afforded no right to question in courts of justice the orders or 
 acts of administrative bodies. Unfortunately, for the purposes 
 of this argument, the statement is not strictly accurate. Al- 
 though the famous act of 1790 prohibiting the ordinary courts 
 from interfering with administrative officials is still in force, 
 there is nevertheless an appeal from administrative officials to 
 the French Council of State, the highest administrative tribunal 
 in France, and the Council in one of its branches is now organ- 
 ized as an independent court of justice entirely separate from 
 its organization as an administrative body. The individual 
 whose rights have been infringed by an administrative official 
 may carry his alleged grievance to the Council of State as the 
 
PUBLIC SERVICE COMMISSIONS 371 
 
 court of last resort, and thus get a final review of his case by a 
 judicial body acting according to orderly judicial procedure and 
 reasoned judgment, based on established rules and precedents. 
 Most of the progress made by the French towards judicial 
 review of the acts of administrative officials has taken place 
 under the Third Republic. It was by the law of May 24, 1872, 
 that the Council of State was given its character as an inde- 
 pendent court of law, and that the present Conflict Court was 
 created. The Council of State has since then been so liberal 
 in finding grounds to protect the rights of individuals and in 
 checking or restraining any arbitrary, oppressive, or unjust 
 action on the part of administrative officials that to-day the 
 humblest citizen in France, at a trifling expense, may judicially 
 question the act of any administrative or executive official, 
 from a constable to the president of the Republic. In the pro- 
 tection of individual rights the French Council of State has 
 repeatedly annulled acts and orders of the highest governmental 
 departments and even of the president himself. Under the 
 administrative system as now developed in France, the private 
 citizen has probably a greater measure of protection by judicial 
 bodies against arbitrary, unjust, or illegal acts of government 
 officials than in any other country. In a word, since 1872, 
 the whole tendency in France has been toward judicial control. 
 The use of the word "administrative" is apt to mislead us. 
 Though in their origin the present French administrative courts 
 were strictly administrative bodies, to-day they are truly courts 
 of justice, offering all the guaranties afforded by fixed rules of 
 law enforced by learned, impartial and independent judges. 
 The people now look with confidence to these tribunals for the 
 protection of their legal rights and regard them as essentially 
 judicial. It has been found in France, as it will be ultimately 
 found with us, that private rights can be afforded full protec- 
 tion under the rule of law impartially enforced by independent 
 judicial tribunals without unduly interfering with or hamper- 
 ing administrative efficiency. 
 
372 PUBLIC SERVICE COMMISSIONS 
 
 I find it impossible within the limits of this address to deal 
 satisfactorily or comprehensively with such a large and im- 
 portant subject as the regulation and control of public utilities 
 by means of administrative commissions, and particularly the 
 aspect of judicial review. I can do no more than suggest some 
 points for reflection. It seems to me that the theory of regu- 
 lation by commissions is inherently sound. Large legislative 
 bodies such as Congress or our state legislatures cannot act in 
 these matters so intelligently and competently as a board or 
 commission of trained experts. The people at large must be 
 protected against those who are engaged in certain businesses 
 in which the public is interested and upon which the public 
 must depend. The managers of these concerns generally have 
 it within their power to oppress the public and make a prey of 
 their necessities. But it should be recognized that such bodies 
 as these commissions are not fitted or qualified by training or 
 temperament for the exercise of judicial power. The corpora- 
 tions and individuals whose businesses are regulated, whose earn- 
 ing capacity may be destroyed, or whose property may be prac- 
 tically confiscated by unwise and unjust regulation, ought to 
 have a day in court as of right before an impartial judicial tri- 
 bunal composed of men learned in the law and bound to decree 
 justice according to law. If this involves delay and expense, it 
 is far better to submit to that inconvenience than to withdraw 
 the protection of the law from any class in the community. 
 The example or precedent is altogether too dangerous. Neither 
 expedition nor economy has resulted or ever will result in the 
 long run from disregarding fundamentals and confusing powers 
 which in their nature and in their proper exercise are radically 
 different and require different treatment and different points 
 of view. 
 
 I am not prepared to say that it would be wise or unwise to 
 create special courts similar to the French administrative courts, 
 or our Court of Claims, or the ill-fated and short-lived Federal 
 Commerce Court. I recognize also that it is by no means 
 
PUBLIC SERVICE COMMISSIONS 373 
 
 certain that the ordinary law courts are in all cases the best 
 bodies for adjudicating upon the errors or abuses of adminis- 
 trative bureaus. Some exceptions may be necessary. How- 
 ever, generally speaking, my own view is that it would be 
 better and more satisfactory to afford full review of all essen- 
 tially judicial questions in our regular courts, in view of their 
 learning and training, their long-established prestige, and their 
 moral authority. We might well create special divisions of 
 such courts to hear and determine controversies relating to 
 orders or regulations of our public service commissions. For 
 example, our Court of Claims would probably be a more satis- 
 factory tribunal if it were composed of Supreme Court justices 
 and were organized as a branch or division of that court. A 
 study of the decisions of our ordinary superior courts, federal 
 and state, in cases involving the most complicated problems 
 ever submitted to commissions, such as the Minnesota and 
 Missouri Rate Cases 1 and People ex rel. Kings Co. Lighting Co. 
 v. Willcox, 2 must convince us that they are fully competent 
 to deal with all judicial questions likely to arise from time to 
 time in the administration of federal and state commission 
 laws. In most cases much more expedition and economy would 
 be secured if long and formal hearings before commissions were 
 dispensed with and if controverted issues about to be litigated 
 were at the outset taken into a court of justice. A plain and 
 concise statement of the grounds upon which an order of a com- 
 mission has been based ought to be sufficient to enable the 
 courts to test the contention of the individuals or corporations 
 affected that such order is unreasonable or illegal. 
 
 Finally, I venture to predict that the continuance of the 
 present tendency towards vesting judicial power in these ad- 
 ministrative bureaus, unless checked, will defeat the whole 
 experiment of public service commissions. The "American 
 people will not long be content with having their rights con- 
 clusively determined by administrative fiat, but will inevitably 
 
 * 230 U. S. 352, 474 ; 1913. 8 210 N. Y. 479 ; 1914. 
 
374 PUBLIC SERVICE COMMISSIONS 
 
 turn back to the courts of justice and insist upon a judicial 
 trial, with its guaranty of a fair hearing, and will demand 
 reasoned judgment consistently applying ascertained general 
 principles and precedents and excluding official discretion with 
 its danger of action dictated by caprice, prejudice, or passion. 
 We will not permanently tolerate despotism in any form, how- 
 ever temporarily expedient or benevolent. The corresponding 
 risk of ultimate arbitrary power and bureaucratic tyranny is 
 altogether too great. In the last analysis, the survival of self- 
 governing democracies and what our fathers termed regulated 
 liberty will depend, as English and American history ought 
 surely to teach us, upon the separation of the judicial power in 
 nation and state and upon its freedom from executive and 
 political control, in a word, upon its complete independence, 
 but above all, if I may recall the immortal language of Magna 
 Carta, upon its exercise only by judges "such as know the law 
 of the realm and mean to observe it well." 
 
INDEX 
 
 American Malt Corporation, reorgani- 
 zation, 218 
 Antitrust Laws 
 
 Clayton Act. See Clayton Act 
 Federal Trade Commission Act. See 
 
 Federal Trade Commission Act 
 Sherman Law. See Sherman Anti- 
 trust Law 
 
 Baltimore & Ohio Railroad 
 Mortgages, 5, 6, 8 
 Reorganization, 177 
 
 Bondholders' Protective Committees, 162 
 Bonds 
 
 Collateral Trust Indentures, 57 
 Debenture Indentures, 66 
 Guaranties, 70 
 Historical Development, 1 
 Income bonds, 69 
 Mortgage Regulating Issue, 27 
 Protective Committees, 162 
 Stock Exchange Rules as to, 71 
 Brewer, Mr. Justice; extract from 
 opinion in Merchants Loan & 
 Trust Co. v. Chicago Rys. Co., 190 
 Buffington, Judge; extract of opinions 
 on Sherman Antitrust Law, 253, 
 254, 255 
 
 Bureau of Corporations; reference to, 
 in lecture on Federal Trade Com- 
 mission, 312, 314 
 Butler, Judge; extract of opinion on 
 
 Sherman Anti-trust Law, 241 
 Byrne, James ; paper by, 77-152 
 
 Cases Cited or Discussed. See Alpha- 
 betical List on page 379 
 Chicago City Railway mortgage dis- 
 cussed, 33 
 Clayton Act 
 
 Lecture on, by Gilbert H. Montague, 
 
 275-326 
 Reference to, in Lecture on Sherman 
 
 Antitrust Law, 273 
 Violations; procedure of Federal 
 
 Trade Commission as to, 322 
 Coleman, George S. ; paper by, 327 
 Collateral Trust Indentures, 13, 57 
 
 Committees 
 
 Protective; bondholders' and stock- 
 holders', 162 
 Reorganization, 181 
 
 Corporate Bonds, Mortgages, Collateral 
 Trusts and Debenture Indentures ; 
 paper by Francis Lynde Stetson, 
 1-76 
 Corporations 
 
 Dissolutions under Sherman Anti- 
 trust Law. See Sherman Anti- 
 trust Law 
 Recapitalization without insolvency, 
 
 224 
 
 Reorganization on Insolvency 
 With new Corporation, 156 
 Without new Corporation, 209 
 Cravath, Paul D. ; paper by, 153 
 Cullen, Chief Judge; extract from 
 
 opinion in Hoffer v. Britt, 349 
 Cummins, Senator ; definition of "unfair 
 methods of competition," 316 
 
 Debenture Indentures, 6, 14, 66 
 Dicey, A. V. ; on bureaucratic develop- 
 ment in England, 369, 370 
 on the French droit administratif, 
 370, 371 
 
 England 
 
 Bureaucratic development in, 368-370 
 Debenture holders in, rights of, 68 
 Reorganization of corporations in, 188 
 
 Federal Trade Commission 
 
 Powers and duties, 312-315, 319, 325 
 Procedure in respect of "unfair meth- 
 ods of competition," 320-322 
 Procedure in respect of violations of 
 
 Clayton Act, 322 
 Federal Trade Commission Act 
 
 Citation, in lecture on Sherman 
 
 Antitrust Law, 270, 271 
 History, 275-281 
 
 Section 5 : discussion on phrase "un- 
 fair methods of competition," 315- 
 326 
 
 375 
 
376 
 
 INDEX 
 
 Federal Trade Commission Act (con- 
 tinued) 
 
 Section 5 : procedure in respect of 
 "unfair methods of competi- 
 tion," 320-322 
 
 Federal Trade Commission and Clayton 
 Act; paper by Gilbert H. Mon- 
 tague, 275-326 
 
 Finch, Judge; extract of opinion in 
 Seymour v. Spring Forest Ceme- 
 tery Association, 224 
 
 Foreclosure of Railroad Mortgages; 
 paper by James Byrne, 77-152 
 
 Foreclosures 
 
 of Corporate mortgages generally, 153 
 of Railroad mortgages, 77, 156 
 
 French administrative departments, ref- 
 erence to, 370, 371 
 
 Fuller, Chief Justice ; extract of opinions 
 on Sherman Antitrust Law, 241, 
 259 
 
 Goodnow, Frank J. ; on the need of ex- 
 perts in the government service, 
 359 
 
 Government, growth of bureaucracy in 
 
 England and America, 368-370 
 need of trained experts in, 347, 356- 
 370, 372 
 
 Gray, Judge; extract of opinion on 
 Public Service Commissions Law, 
 342 
 
 Guaranteed bonds, 70 
 
 Guthrie, William D. ; paper on Public 
 Service Commissions, 347-374 
 
 Harlan, Justice ; extract of opinions on 
 
 Sherman Antitrust Law, 241, 242 
 Harmon, Attorney-General ; report to 
 
 Congress on Sherman Antitrust 
 
 Law, 243 
 Hoar, Senator; remarks on Sherman 
 
 Antitrust Law, 250 
 Holding Companies, 230 
 Hollis, Senator; definition of "unfair 
 
 methods of competition," 317 
 Holmes, Justice ; extract of opinions on 
 
 Sherman Antitrust Law, 250, 
 
 251, 260 
 Hook, Judge; extract of opinions on 
 
 Sherman Antitrust Law, 253, 256 
 Hough, Judge 
 
 extract of opinion in Guaranty Trust 
 
 Co. v. Inter. Type. Mach. Co., 
 
 189 
 extract of opinions on Clayton Act, 
 
 299, 302, 303 
 
 Hudson River Railroad mortgage, 2 
 Hughes, Governor ; extract from address 
 and message pertaining to Public 
 Service Commission, 327, 328, 
 329 
 
 Hughes, Mr. Justice; extract from ad- 
 dress before State Bar Associa- 
 tion, 356 
 
 Income bonds, 69 
 
 Interstate Commerce Commission; ref- 
 erence to, in lecture on Public 
 Service Commissions, 349, 351, 
 352, 354, 355, 357, 363, 364 
 
 Interstate Trade Commission. See Fed- 
 eral Trade Commission 
 
 Introductory Note, vii 
 
 Judicial Code of U. S. ; effect on fore- 
 closure of railroad mortgages, 77, 
 92 
 
 Judiciary threatened in England and 
 America by growth of bureau- 
 cracy, 363-370 
 
 Kahn, Otto H. ; extract from article in 
 
 World's Work, 357 
 Kenna, 1 Senator ; remarks in debate on 
 
 Sherman Antitrust Law, 253 
 
 Lacombe, Judge 
 
 extract of opinion on Clayton Act, 
 
 303 
 
 extract of opinion on Sherman Anti- 
 trust Law, 267 
 Lanning, Judge 
 
 extract of opinion on Sherman Anti- 
 trust Law, 249 
 
 Lowell, A. Lawrence ; on need of ex- 
 perts in the government service, 
 359 
 
 Lumbering Companies mortgages, 30 
 Lurton, Judge 
 
 extract of opinion in Central Trust Co. 
 v. Cincinnati H. & D. Ry. Co., 
 133 
 
 extract of opinion in Horn v. Pere 
 Marquette R. Co., 91 
 
 Massachusetts trusts, 232 
 
 Metropolitan Traction Company, re- 
 organization, 231 
 
 Mining Companies mortgages, 30 
 
 Mohawk & Hudson Railroad mortgage, 
 2 
 
 Montague, Gilbert H. ; paper by, 275- 
 326 
 
INDEX 
 
 377 
 
 Mortgages 
 
 Discussed 
 
 Baltimore & Ohio R. R., 5, 6, 8 
 Chicago City Ry., 33 
 Erie Railroad, 5, 7-10, 12 
 Hudson River Railroad, 2 
 Mohawk & Hudson Railroad, 2 
 N. Y. Central Ry., 33 
 Northern Pacific Ry., 12, 33 
 Richmond & Danville Railroad, 7 
 Richmond & West Point Terminal 
 Ry. & Warehouse Co., 12 
 
 Foreclosure 
 
 Corporate generally, 153 
 Protective committees, 162 
 Railroad, 77, 156 
 
 Historical development, 1 
 
 of Lumbering, Mining and Trading 
 Companies, 30 
 
 Preparation, conditions, covenants 
 and execution, 27 
 
 Nelson, Mr. Justice ; extract from 
 opinion in Pennock v. Coe, 47 
 
 Newlands, Senator; definition of "un- 
 fair methods of competition," 315 
 
 New York & Erie Railroad mortgages, 
 5, 7-10, 12 
 
 New York Central Railroad mortgage, 
 33 
 
 New York City 
 
 Public Service Commission. See Pub- 
 lic Service Commission (The) 
 Rapid Transit Act. See Rapid Transit 
 Act 
 
 New York Stock Exchange 
 Rules as to bond issues, 71 
 Rules as to protective agents, 171 
 
 Northern Pacific Railway, mortgage, 12, 
 33 
 
 Noyes, Judge; extract of opinions on 
 Sherman Antitrust Law, 246, 
 252, 266 
 
 Old Dominion Copper Company, re- 
 organization, 226, 227 
 
 Papers read 
 
 by Byrne, James, 77 
 
 by Coleman, George S., 327 
 
 by Cravath, Paul D., 153 
 
 by Guthrie, William D., 347 
 
 by Montague, Gilbert H., 275 
 
 by Stetson, Francis Lynde, 1 
 
 by Wickersham, George W., 235 
 
 Peckham, Justice ; extract of opinion on 
 Sherman Antitrust Law, 245 
 
 President Wilson ; extract of address to 
 Congress on Trade Commission, 
 276-277 
 
 Protective Committees, 162 
 Prouty, Commissioner; extract from 
 address of, on jurisdiction of In- 
 terstate Commerce Commission, 
 355 
 
 Public Service Commission (The N. Y.) 
 See also Public Service Commissions 
 See also Public Service Commis- 
 sions Law 
 of First District, 
 Jurisdiction, 333 
 Organization, departments, etc. , 335- 
 
 336 
 
 Method of work, 337-339 
 Reference to personnel of , in lecture 
 on Public Service Commissions, 
 357 
 Jurisdiction and Powers 
 
 of First District. See above 
 Reference to, in lecture by William 
 
 D. Guthrie, 353, 354, 355 
 of Second District. See below 
 Paper on, by George S. Coleman, 327- 
 
 346 
 
 Reports and opinions, 339 
 Review of decisions of, 345 
 of Second District 
 Jurisdiction, 333 
 Public Service Commissions 
 Conditions for usefulness, 347 
 Duties of commissioners ; fewer and 
 
 simpler, 347-356, 360 
 Judicial powers, 361-374 
 New York Public Service Commission. 
 
 See Public Service Commission 
 Paper on, by William D. Guthrie, 
 
 347-374 
 Qualifications of commissioners; ex- 
 
 pertness, 356-360 
 
 Reference to, in lecture on Reorgani- 
 zation of Corporations, 186, 187, 
 189, 206 
 
 Review, of rulings, 364-366 ; 373 
 Public Service Commissions Law 
 
 See also Public Service Commission 
 Construction ; discussion and citation 
 of cases tried under law, 339-345 
 General provisions, 330-332 
 History, 327-330 
 Object of Law, 332, 342 
 Reference to, in lecture on Reorgani- 
 zation of Corporations, 187 
 
 Railroad mortgages, foreclosure, 77 
 
378 
 
 INDEX 
 
 Rapid Transit Act; jurisdiction of 
 Public Service Commission as to, 
 333-334 
 
 Recapitalization, 224 
 Receivers 
 
 Corporations generally, 157 
 Railroads, 78, 91, 112 
 Reorganization of Corporations ; Bond- 
 holders' and Stockholders' Pro- 
 tective Committees ; Reorgani- 
 zation Committees and Voluntary 
 Recapitalization ; Paper by Paul 
 D. Cravath, 153-234 
 Reorganizations 
 
 Committees, bondholders' and stock- 
 holders', 181 
 Discussed 
 
 American Malt Corporation, 218 
 Baltimore & Ohio R. R., 177 
 Metropolitan Traction Co., 231 
 U. S. Leather Co., 217 
 U. S. Steel Corporation, 230 
 Wabash Railroad, 177, 184 
 Westinghouse Manufacturing & 
 
 Electric Co., 220 
 Income bonds, 69 
 in Insolvency, 156, 208 
 Recapitalization, 224 
 Richmond & Danville Railroad mort- 
 gage, 7 
 
 Richmond & West Point Terminal Rail- 
 way & Warehouse Company 
 mortgage, 12 
 
 Robinson, Senator ; definition of "unfair 
 methods of competition," 316 
 
 Saulsbury, Senator ; definition of " unfair 
 
 methods of competition," 317 
 Senate Judiciary Committee; extract 
 
 of report on Clayton Act, 300 
 Sherman Antitrust Law 
 
 Contents as originally enacted, ab- 
 stract of, 240 
 
 Criminal Provisions discussed, 272 
 History of act, 235-239 
 Objects as explained in debate, 237- 
 
 239 
 Paper on ; by George W. Wickersham, 
 
 235-274 
 
 Stetson, Francis Lynde ; paper by, 1-76 
 Stevens, Congressman; extract of mi- 
 nority report on Clayton Act, 
 280 
 
 Stock Exchange Rules 
 Bond issues, 71 
 Protective agreements, 171 
 Stockholders' Protective Committees, 162 
 
 Storey, Moorfield ; extract from address 
 to American Bar Association, 189 
 
 Strong, Mr. Justice ; extract from opin- 
 ion in Jackson v. Ludeling, 47 
 
 Taft, Ex-President ; extract from address 
 
 referring to Clayton Act, 299 
 Taft, Judge 
 
 extract of opinion in Continental 
 
 Trust Co. case, 83 
 extract of opinion in Farmers Loan & 
 
 Trust Co. . Toledo A. A. & N. M. 
 
 Ry. Co., 128 
 
 extract of opinion on Sherman Anti- 
 trust Law, 244 
 Taney, Chief Justice; extract from 
 
 opinion in Gue v. Canal Co., 47 
 Tariff Act, Wilson ; section 73 discussed, 
 
 295, 296 
 Trade Commission and Clayton Act ; 
 
 paper by Gilbert H. Montague, 
 
 275-326 
 
 Trading Companies mortgages, 30 
 Trustees; provisions concerning, in 
 
 mortgages, 40, 52, 55 
 
 Unfair methods of Competition. For 
 discussion of phrase in reference 
 to Federal Trade Commission Act, 
 see Federal Trade Commission 
 Act 
 
 United States Judicial Code. See Judi- 
 cial Code of United States 
 
 United States Leather Company, re- 
 organization, 217 
 
 United States Steel Corporation, re- 
 organization, 230 
 
 Voting Trusts, 208 
 
 Wabash Railroad , reorganization, 1 77 , 1 84 
 
 Walsh, Senator; definition of "unfair 
 methods of competition," 317 
 
 Westinghouse Manufacturing and Elec- 
 tric Company, reorganization, 220 
 
 White, Chief Justice ; extract of opinion 
 on Sherman Antitrust Law, 254 
 
 Wickersham, George W ; paper by, 235- 
 274 
 
 Williams, Senator; definition of "un- 
 fair methods of competition," 317 
 
 Wilson, President; extract of address 
 to Congress on Trade Commission, 
 276-277 
 
 Wilson Tariff Act ; section 73 discussed, 
 295, 296 
 
 Wyman, Bruce ; on public service com- 
 missions, 366 
 
CASES CITED OR DISCUSSED 
 
 Listed under both title of plaintiff and defendant. Cases in Federal Courts 
 are given under each of these titles without attempting to indicate the moving 
 party in appellate cases, especially when the United States is a party. 
 
 A. B. Dick Co., Henry ., 294, 306 
 Adams, Broadway Nat'l Bank v., 233 
 Adams v. Mercantile Trust Co., 104 
 Adams, Millard ., 285 
 Adams v. Robinson, 108, 109, 143 
 Addyston Pipe & Steel Co. t>. United 
 
 States, 245-247, 258, 272, 297 
 Adelbert College, Wabash R. R. ., 
 
 82, 104, 145 
 
 Alabama & Georgia Mfg. Co. v. Robin- 
 son, 108, 109, 143 
 
 Allen v. Dallas & Wichita R. R., 33 
 Allison, Southern Ry. v,, 81 
 Alsbrook, Wilmington & Welden R. R. 
 
 ., 286 
 Aluminum Co. v. United States, 318, 
 
 323 
 American Coal Products Co. v. United 
 
 States, 318, 323 
 American Iron Co. v. Seaboard Air 
 
 Line Ry., 124 
 American Loan Co., Kneeland ., 113, 
 
 121, 190 
 American Malt Corporation v. Board 
 
 of Public Utility Commissioners, 219 
 American Naval Stores Co. v. United 
 
 States, 318, 323 
 American Sugar Refining Co., Penn 
 
 Sugar Refining Co. t>., 245 
 American Sugar Refining Co. v. United 
 
 States, 240 
 American Tobacco Co., United States 
 
 v., 243, 249, 252, 262, 264, 266, 270, 
 
 318, 323, 324 
 American Tobacco Co., Ware-Kramer 
 
 Tobacco Co. v., 318, 323 
 American Trust Co. v. Metropolitan 
 
 Steamship Co., 99 
 American Waterworks Co., Farmers 
 
 Loan & Trust Co. ., 115 
 American Writing Paper Co., Goodman 
 
 v., 214 
 Appleton Water Works Co. v. Central 
 
 Trust Co., 104 
 
 Arents z>. Commonwealth (Va.), 70 
 
 Armour v. United States, 314 
 
 Arms, Kimberly v., 137 
 
 Arnold, Hussey v., 233 
 
 Arnot v. Erie R. R., 70 
 
 Asphalt Co., Gallagher v., 159, 160 
 
 Asphalt Co. of America, Land Title & 
 
 Trust Co. v., 159 
 
 Atlantic Coast Line, Prentis ., 339 
 Atlantic Trust Co. v. Chapman, 86, 99, 
 
 101 
 Atlantic Trust Co. v. Dana, 33, 113, 116 
 
 Bailey v. New York Central & H. R. R. f 
 
 228 
 
 Bank (Nat'l, Newport), Evertson t>., 164 
 Barnard, Clark ., 81 
 Barnard v. Vermont etc. R. R., 228 
 Barr v. N. Y., Lake Erie & Western 
 
 R. R., 225 
 
 Barrow, Shields ., 139 
 Barry v. Merchants' Exchange Co., 3 
 Batchelder v. C. G. W. Co., 18 
 Batterman Co., Odell v., 110 
 Bedell, Green v., 284 
 Belden v. Burke, 225 
 Bergdorf, Matter of, 51, 53 
 Bergen, Crawford v., 284 
 Bergen . U. S. Steel Corporation, 230 
 Bernheimer v. Converse, 89 
 Bigelow, Old Dominion Copper Co. 
 
 v., 225-227 
 
 Billingham v. Gleason Mfg. Co., 228 
 Binghampton Light, Heat & Power 
 
 Co. v. Stevens, Peo. ex rel., 343 
 Black Hawk Gold Mining Co., Carpen- 
 ter ., 3 
 
 Blair . City of Chicago, 88 
 Blatchford, Phillips t>., 233 
 Blount Mfg. Co. v. Yale & Towne Mfg. 
 
 Co., 305 
 
 Blum v. Whitney, 224, 228, 229 
 Board of Public Utility Commissioners, 
 
 American Malt Corporation v., 219 
 
 379 
 
380 
 
 CASES CITED OR DISCUSSED 
 
 Boesch v. Graff, 137 
 
 Booth v. Clark, 89 
 
 Boston, City of, Richardson v., 286 
 
 Bostwick v. Young, 225 
 
 Bosworth v. Hook, 138 
 
 Bowen, Burnham v., 120 
 
 Boyd, Northern Pacific R. R. v., 191, 
 
 195-198, 201 
 Bradley t>. Bradley, 284 
 Bray, U. S. Fidelity Co. v., 129 
 Bridge Operating Co. v. Public Service 
 
 Comm., Peo. ex rel., 344 
 Brierfield Co., Hollins v., 84 
 Broadway Nat'l Bank v. Adams, 233 
 Brown, Davis v., 286 
 Brown & Gregory Ltd., In re, 164 
 Buckeye Powder Co. v. E. I. du Pont 
 
 de Nemours Powder Co., 302, 318, 
 
 323 
 
 Burke, Belden v., 225 
 Burnham v, Bowen, 120 
 Burroughs Adding Machine Co. v. 
 
 United States, 319, 323 
 
 Cambria Steel Co., Central Improve- 
 ment Co. *., 197 
 
 Canada Southern Ry. v. Gebhard, 6 
 Canandaigua Academy v. McKechnie, 
 
 56 
 
 Carleton, Cragin v., 285 
 Carnegie Steel Co., Southern Ry. ., 
 
 118, 121, 123, 124 
 Carpenter v. Black Hawk Gold Mining 
 
 Co., 3 
 
 Can-others, Mason v., 225, 228 
 Center, Elliott Machine Co. v., 308 
 Central Improvement Co. v. Cambria 
 
 Steel Co., 197 
 Central Lumber Co. v. South Dakota, 
 
 296, 318, 323 
 Central R. R., Virginia & Alabama 
 
 Coal Co. ., 123 
 Central Trust Co., Appleton Water 
 
 Works Co. v., 104 
 Central Trust Co. v. Chattanooga 
 
 R. & C. R. Co., 116 
 Central Trust Co. v. C. H. V. & T. Ry., 
 
 33 
 Central Trust Co. v. Chicago & R. I. 
 
 R. R., 131, 162 
 Central Trust Co. v. Cincinnati, 
 
 H. & D. Ry., 132 
 Central Trust Co. v. Grant Locomotive 
 
 Works, 129 
 
 Central Trust Co., Julian v., 145 
 Central Trust Co. t>. Madden, 129 
 Central Trust Co. v. McGeorge, 84 
 
 Central Trust Co., Wabash, St. Louis 
 
 & Pacific Ry. v., 85, 86 
 Central Trust Co. v. Worcester Cycle 
 
 Mfg. Co., 105, 106 
 Central West Pub. Co. v. United 
 
 States, 3 18, 323 
 
 C. G. W. Co., Batchelder v., 18 
 C. H. V. & T. Ry., Central Trust Co. 
 
 ., 33 
 Chapman, Atlantic Trust Co. v., 86, 
 
 99, 101 
 
 Chattanooga R. & C. R. R. Co., Cen- 
 tral Trust Co. ., 116 
 Chicago, City of, Blair v., 88 
 Chicago & Milwaukee Electric Ry., 
 
 Investment Registry v., 131, 197 
 Chicago & N. W. Ry. v. Whitton, 
 
 Adm., 81 
 
 Chicago, P. & St. Louis R. R., Mer- 
 cantile Trust Co. v., 104, 106 
 Chicago, R. I. & P. R. R. v. Howard, 70 
 Chicago, R. I. & P. R. R., Watson ., 
 
 16, 18, 20, 44-46, 72 
 Chicago & R. I. R. R., Central Trust 
 
 Co. v., 131, 162 
 
 Chicago Ry. Equipment Co. v. Mer- 
 chants National Bank, 17 
 Chicago Ry., Merchants Loan & 
 
 Trust Co. v., 190. 
 Chicago, Snell ., 3 
 Chicago Terminal Co., United States 
 
 Trust Co. v., 110 
 Chicago & Vincennes Railroad v. Fos- 
 
 dick, 104, 105, 111, 143 
 Cincinnati, H. & D. Ry., Central 
 
 Trust Co. ., 132 
 Cincinnati, N. O. & S. Ry., Thomas v., 
 
 115 
 
 Citizens' Bank, New Orleans ., 286 
 Citizens' St. R. R., City Ry. Co. v., 29 
 City Ry. Co. v. Citizens' St. R. R., 29 
 Claflin v. Ostrom, 70 
 Clark v. Barnard, 81 
 Clark, Booth v., 89 
 Clarke, France v., 164 
 Clark, Hulburt v., 38 
 Clark v. Irvin, 284 
 Cleland, In re, 88 
 
 Clemes, Hamilton Trust Co. v., 29 
 Cleveland etc. R. R., St. Louis etc. 
 
 R. R. v., 122 
 Clum, Eisenlord v., 285 
 Clyde v. Richmond & D. R. Co., 128 
 Coe, Pennock v., 32, 47 
 Cohoes Ry. v. Public Service Comm., 
 
 Peo. ex rel., 343 
 Coleman, Shields v., 145 
 
CASES CITED OR DISCUSSED 
 
 381 
 
 Colgate v. U. S. Leather Co., 215, 218 
 Colonial Trust Co. . Wallace, 169 
 Coltrane v. Templeton, 78 
 Columbus, Hocking Valley etc. Ry. 
 
 v. Lanier, 225 
 Commissioners, Memphis & Little 
 
 Rock R. R. v., 33 
 
 Commonwealth (Mass.),. Horton, 284 
 Commonwealth (Virginia) , Arents v., 70 
 Compton v. Jessup, 32, 83, 104, 110 
 Continental Securities Co, v. N. Y. 
 
 Central R. R., 20 
 Continental Trust Co., Rhode Island 
 
 Locomotive Works v., 119, 121 
 Continental Trust Co. v. Toledo, St. 
 
 L. & K. C. R. R., 83, 93, 110, 116 
 Converse, Bernheimer v., 89 
 Converse v. Hamilton, 89. 
 Corn Products Refining Co. v. United 
 
 States, 315 
 
 County of Sac (Iowa), Cromwell v., 286 
 Cowdrey, Galveston Railroad v., 116 
 Cox v. Stokes, 203 
 Cragin v. Carleton, 285 
 Cravens, St. Louis Mut. L. Ins. Co. v., 
 
 285 
 
 Crawford v. Bergen, 284 
 Creamery Package Co., Virtue v., 305 
 Cream of Wheat Co., Great A. & P. 
 
 Tea Co. v., 299, 302, 303 
 Credits Commutation Co. v. United 
 
 States, 130 
 
 Cromwell v. County of Sac (Iowa), 286 
 Cudahy Packing Co., Frey & Son ., 
 
 283 
 
 Curtis v. Leavitt, 3 
 Cutting, ex parte, 130 
 
 Dallas & Wichita R. R., Allen ., 33 
 Dana, Atlantic Trust Co. v., 33, 113, 
 
 116 
 
 Davis v. Brown, 286 
 Davis, Frank v., 44 
 Davis v. Schwartz, 139 
 Delaware, L. & W. R. R., Troxell ., 286 
 Dennison v. United States, 286 
 De Sollar v. Hanscome, 286 
 D. & H. Co. v. Public Service Comm., 
 
 Peo. ex rel, 342 
 D. & H. Co. v. Stevens (Publ. Ser. 
 
 Comm.) Peo. ex rel., 343 
 (A. B.) Dick Co., Henry v., 294, 306 
 Dickerman v. N. Trust Co., 88 
 Diggs v. Fidelity Co., 51 
 D. L. & W. R. R. v. United States, 312 
 Dow, Memphis & Little Rock R. R. ., 
 
 186 
 
 Dow v. Memphis & S. R. R., 33, 116 
 
 Dows, Muller v., 81 
 
 Drayton, Haehulen v., 115 
 
 Drexell, Lake Superior Iron Co. v., 214 
 
 Dry Dock etc. R. R., v. Public Service 
 
 Commission, Peo. ex rel., 344 
 Duncan, Ketchum v., 43 
 Dumpor's Case, 42 
 Dunlop v. Mulry, 31 
 (E. I.) du Pont de Nemours Powder 
 
 Co., Buckeye Powder Co. v., 302, 
 
 318, 323 
 
 Eastern States Retail Lumber Dealers 
 Association v. United States, 298, 
 
 319, 323 
 
 Eastman Kodak Co. v. United States, 
 
 271 
 East Tennessee, V. & G. Ry., Toler ., 
 
 Ill 
 
 Eisenlord v. Clum, 285 
 Elgin Board of Trade v. United States, 
 
 319, 323 
 
 Elliott Machine Co. v. Center, 308 
 Ellis v. Jameson, 285 
 Enterprise Transportation Co., Whelan 
 
 v., 123 
 Equitable Trust Co. v. United Box 
 
 Board & Paper Co., 197 
 Erie R. R., Arnot ., 70 
 Erie Ry., Woodruff ., 101 
 Ettlinger v. Persian Rug & C. Co., 46 
 Evening Post Co., Knott v., 104 
 Eversonfl. Gere, 70 
 Evertson v. National Bank, Newport, 
 
 164 
 
 Fairmont Creamery Co., State (Iowa) 
 
 ., 318 
 Farmers Loan & Trust Co. v. American 
 
 Waterworks Co., 115 
 Farmers Loan & Trust Co., Lacka- 
 
 wanna Iron & Coal Co. v., 118 
 Farmers Loan & Trust Co. v. Lake 
 
 Street Elevated Ry. Co., 104, 157 
 Farmers Loan & Trust Co. et al., v. 
 
 Louisville, N. A. & C. Ry. et al., 191 
 Farmers Loan & Trust Co. v. Northern 
 
 Pac. R. R., 90, 102, 128 
 Farmers Loan & Trust Co., Rhine- 
 lander v., 26, 52, 55 
 Farmers Loan & Trust Co. v. Toledo 
 
 A. A. & N. M. Ry., 128, 135 
 Fidelity Co., Diggs v., 51 
 First National Bank, Cleveland, v. 
 
 Shedd, 205 
 
 Fitchburg R. R., Polhemus v., 32 
 Flint & P. M. R. R., Mackintosh ., 70 
 
382 
 
 CASES CITED OR DISCUSSED 
 
 Fordyce . Omaha, K. C. & E. R. R., 
 
 138 
 Fosdick, Chicago & Vincennes Railroad 
 
 v., 104, 105, 111, 143 
 Fosdick v. Schall, 118, 121 
 Fowler v. Jarvis-Conklin Mortgage Co., 
 
 173 
 
 Fox, Lawrence v., 48 
 France v. Clarke, 164 
 Frank v. Davis, 44 
 
 Frey & Son v. Cudahy Packing Co., 283 
 Friedman's Saving Co. v. Shepherd, 116 
 Frink, McComb v., 286 
 French v. Gapin, 126 
 Frost v. Thompson, 233 
 Furey, Keatley v., 89 
 
 Gallagher v. Asphalt Co. of America, 
 
 159, 160 
 
 Galveston Railroad v. Cowdrey, 116 
 Gamble v. Queens Co. Water Co., 215 
 Gapin, French v., 126 
 Gebhard, Canada Southern Ry. 0., 6 
 General Electric Co. v. United States, 
 
 318, 323 
 
 Gere, Everson v., 70 
 Gleason Mfg. Co., Billingham v., 228 
 Goodman v. American Writing Paper 
 
 Co., 214 
 
 Goodwin v. Roberts, 164 
 Goy & Co. Ltd., In re, 164 
 Graff, Boesch v., 137 
 Grant v. Winona & S. W. Ry., 44 
 Grant Locomotive Works, Central 
 
 Trust Co. v., 129 
 Great A. & P. Tea Co. v. Cream of 
 
 Wheat Co., 299, 302, 303 
 Great Lakes Towing Co. v. United 
 
 States, 269 
 Great Western Mining Co. v. Harris, 
 
 89 
 
 Great Western Ry., Hoole ., 228 
 Green v. Bedell, 284 
 Greene Cove Co., Guaranty Trust Co. 
 
 ., 107 
 
 Greene, In re, 318 
 Gregg v. Metropolitan Trust Co., 122, 
 
 124 
 
 Grenada Lumber Co. v. Mississippi, 296 
 Guarantee Trust Co., Wood ., 43 
 Guaranty Trust Co. v. Greene Cove 
 
 Co., 107 
 Guaranty Trust Co. v. International 
 
 Steam Pump Co., 98, 158 
 Guaranty Trust Co., N. Y. . Inter- 
 national Typesetting Machine Co., 
 
 189 
 
 Guaranty Trust Co., N. Y. v. Metro- 
 politan St. Ry., 143, 151 
 Gubner v. McClellan, 340 
 Gue v. Tide Water Canal Co., 3, 47 
 Guilford v. Minneapolis & C. Ry., 16 
 
 Haehulen v. Dray ton, 115 
 
 Haight v. Pittsburg & C. R. R., 19 
 
 Hale v. Henkel, 314 
 
 Hamburg- Amerikanische Packetfahrt 
 
 Actien & Gesellschaft v. United 
 
 States, 319, 323 
 Hamilton, Converse v., 89 
 Hamilton, Vail v., 29 
 Hamilton Trust Co. v. Clemes, 29 
 Hanscome, De Sollar v., 286 
 Harnickell v. Omaha Water Co., 64 
 Harriman v. Interstate Commerce 
 
 Commission, 314 
 Harris v. Great Western Mining Co., 
 
 89 
 
 Hartwell R. Co., Linder v., 46 
 Hasbrouck (Metropolitan St. Ry. Co.), 
 
 People ., 103 
 Hayes, Parsons v., 225 
 Henkel, Hale v., 314 
 Henry v. A. B. Dick Co., 294, 306 
 High Ct. of F., Schreiner v., 284. 
 Hocking Valley R. R. *. N. Y. Coal 
 
 Co., 312 
 
 Hollins v. Brierfield Co., 84 
 Holmes v. Willard, 70 
 Hook, Bosworth v., 138 
 Hoole v. Great Western Ry., 228 
 Horn v. Pere Marquette R. R., 84, 89, 
 
 91-93 
 Horton, Commonwealth (Mass), v., 
 
 284 
 Howard, Chicago, R. I. & P. R. R. ., 
 
 70 
 
 Howe v. Morse, 233 
 Howell, In re, 197 
 Ho well, Mechanics & Metals Nat. 
 
 Bank ., 197 
 
 Howell v. Western R. R., 104, 111. 
 Hulbert v. Clark, 38 
 Humphreys, Quincy M. & P. Co. v., 
 
 86, 101, 103 
 Huron Copper Mining Co., Jellinik v., 
 
 78 
 
 Hussey v. Arnold, 233 
 Hyde, Krippendorf v., 127. 
 
 Illinois Midland Co., Union Trust Co. 
 
 ., 99, 100 
 Industrial & Trust Co. c. Todd, 169, 
 
 203 
 
CASES CITED OR DISCUSSED 
 
 383 
 
 International Harvester Co. v. Mis- 
 souri, 296 
 
 International Harvester Co. v. United 
 States, 253, 256 
 
 International Mercantile Marine Re- 
 ceivership, 159 
 
 International Steam Pump Co., 
 Guaranty Trust Co. v., 98, 158 
 
 International Steam Pump Co., Re- 
 ceivership, 159 
 
 International Typesetting Machine 
 Co., Guaranty Trust Co. c., 189. 
 
 Interstate Commerce Commission, 
 Harriman v., 314 
 
 Investment Registry v. Chicago & 
 Milwaukee Electric Ry., 131, 197 
 
 Iron Railway Co., Robinson v., 205 
 
 Irvin, Clark ., 284 
 
 Irvine v. N. Y. Edison Co., 51 
 
 Jackson v. Ludeling, 47 
 
 Jackson, Parsons v., 19 
 
 Jameson, Ellis v., 285 
 
 Jarvis-Conklin Mortgage Co., Fowler 
 
 v., 173 
 Jellicoe Mountain Coal & Coke Co. v. 
 
 U. S., 271 
 
 Jellinik v. Huron Copper Mining Co., 78 
 Jessup, Compton v., 32, 83, 104, 110 
 Joint Traffic Association Cases, 243 
 
 272, 297 
 Joline v. Willcox (Pub. Ser. Comm.) 
 
 Peo. ex rel., 339 
 Julian v. Central Trust Co., 145 
 Ju Toy v. United States, 363 
 
 Kanawha & O. Ry., Mercantile Trust 
 
 Co. ., 78 
 Kansas City Ry. Co., State Trust Co. 
 
 -o., 104 
 
 Kansas, Smiley v., 297 
 Keatley v. Furey, 89 
 Keech v. Stowe-Fuller Co., 197 
 Kent v. Quicksilver Mining Co., 215, 
 
 225 
 Keokuk & Western R. R. v. Missouri, 
 
 286 
 
 Ketchum v. Duncan, 43 
 Keystone Watch Co. v. United States, 
 
 268, 318, 323 
 Kidansky, Robert v., 45 
 Kimberly v. Arms, 137 
 Kings Co. Lighting Co. v. Willcox 
 
 (Pub. Serv. Comm.) Peo. ex rel., 344, 
 
 373 
 Kirven, Virginia-Carolina Chemical 
 
 Co. v., 286 
 
 Kneeland v. American Loan Co., 113, 
 
 121, 190 
 
 Knight v. United States, 243-245 
 Knott v. Evening Post Co., 104 
 Kohn v. McNulta, 128 
 Krippendorf v. Hyde, 127 
 
 Lackawanna Iron & Coal Co. . 
 
 Farmers Loan & Trust Co., 118 
 Lafayette etc. Ry., Rosen-Kraus v., 
 
 18 
 Lake Street Elevated Ry. Co., Farmers 
 
 Loan & Trust Co. v., 104, 157 
 Lake Superior Iron Co. v. Drexel, 214 
 Land Title & Trust Co. v. Asphalt Co., 
 
 159 
 
 Lander v. Mercantile Bank, 286 
 Lanier, Columbus, Hocking Valley 
 
 etc. Ry. ., 225 
 Lansing, Stewart ., 286 
 Lary, Wood v., 228 
 Lawlor, Loewe v., 291 
 Lawrence v. Fox, 48 
 Leavitt, Curtis v., 3 
 Lee, Noonan v., 44 
 Lehigh Valley R. R. v. United States, 
 
 312 
 Lewisohn, Old Dominion Copper Co. 
 
 v., 226, 227, 229 
 Linder v. Hartwell R. Co., 46 
 Little, Wilson ., 11 
 L. N. E. & St. Louis Consol. Ry., N. Y. 
 
 Security v., 32 
 Loewe v. Lawlor, 291 
 Logan County Bank v. Townsend, 29 
 Logansport Ry., Miltenberger v., 122 
 Lord v. Yonkers Fuel Gas Co., 32 
 Louisville, N. A. & C. Ry., et al., 
 
 Farmers Loan & Trust Co. ., 191 
 Louisville N. A. & C. Ry. v. Louisville 
 
 Trust Co., 29, 191, 194, 197 
 Louisville Trust Co., Louisville N. A. 
 
 & C. Ry. ., 29, 191, 194, 197 
 Lowry, Montague & Co. v., 297 
 Ludeling, Jackson v., 47 
 
 Maas r. Mo. Kan. & Texas Ry., 17 
 Mackay v. Randolph, 44 
 Mackintosh v. Flint & P. M. R. R., 70 
 Madden, Central Trust Co. v., 129 
 Mallory v. W. S. R. R., 18, 42 
 Mandel, In re, 344 
 Mason v. Carrothers, 225, 228 
 Masten, Minot v., 110 
 Matter of Bergdorf, 51, 53 
 Matter of Public Service Commission 
 (In re Mandel), 344 
 
384 
 
 CASES CITED OR DISCUSSED 
 
 Mayer v. Metropolitan Traction Co., 
 
 225 
 
 Mayo v. Moritz, 233 
 McClellan, Gubner v., 340 
 McClelland v. Norfolk & Southern R. 
 
 R M 16 
 
 McComb v. Frink, 286 
 McGeorge, Central Trust Co. v., 84 
 McKechnie, Canandaigua Academy 
 
 v., 56 
 
 McLeod v. City of New Albany, 129 
 McLish v. Roff, 129 
 McNulta, Kohn v., 128 
 Mechanics & Metals Nat. Bank v. 
 
 Howell, 197 
 
 Memphis & Little Rock R. R. v. Com- 
 missioners, 33 
 Memphis & Little Rock R. R. v. Dow, 
 
 186 
 Memphis & Little Rock R. R., Sage v., 
 
 116 
 
 Memphis & S. R. R., Dow ., 33, 116 
 Mercantile Bank, Lander v., 286 
 Mercantile Trust Co., Adams v., 104 
 Mercantile Trust Co. v. Chicago P. & 
 
 St. L. R. R., 104, 106 
 Mercantile Trust Co. v. Kanawha & O. 
 
 Ry., 78 
 
 Merchants' Exchange Co., Barry v., 3 
 Merchants Loan & Trust Co. v. 
 
 Chicago Ry., 190 
 Merchants National Bank, Chicago 
 
 Ry. Equipment Co. v., 17 
 Merriam . Ross, Peo. ex rel., 85 
 Metropolitan Ry. Receivership, In re, 
 
 86, 103, 162 
 
 Metropolitan Steamship Co., American 
 |k Trust Co. v., 99 
 Metropolitan St. Ry., Guaranty Trust 
 
 Co. v., 143, 151 
 Metropolitan Traction Co., Mayer v., 
 
 225 
 Metropolitan Trust Co., Gregg v., 122, 
 
 124 
 
 Millard v. Adams, 285 
 Mills, Windsor ., 232 
 Miltenberger v. Logansport Ry., 122 
 Milton, Williams v., 233 
 Minneapolis etc. Ry., Guilford ., 16 
 Minnesota v. Northern Securities Co., 
 
 288 
 
 Minnesota Rate Cases, 373 
 Minot v. Masten, 110 
 M. K. & T. Ry. v. Union Trust Co., 
 
 64 
 Mississippi, Grenada Lumber Co. v., 
 
 296 
 
 Missouri, International Harvester Co. 
 
 v., 296 
 Missouri, Keokuk & Western R. R. v., 
 
 286 
 
 Missouri Rate Cases, 373 
 Mo. Kan. & Texas Ry., Maas v., 17 
 Monon Cases, 29, 191, 194, 197 
 Montague & Co. v. Lowry, 297 
 Morgan's Co. v. Texas Central Ry., 43, 
 
 45, 83, 104, 105, 109 
 Morgan, Williams v., 130 
 Moritz, Mayo v., 233 
 Morse, Howe v., 233 
 Motion Picture Patents Co. v. United 
 
 States, 272 
 Muller v. Dows, 81 
 Mulry, Dunlop v., 31 
 
 Nash v. United States, 250, 273, 298, 
 
 323. 
 National Association, Retail Druggists 
 
 v. United States, 318, 323 
 National Bank, Newport, Evertson v,, 
 
 164 
 National Cash Register Case, 273, 302, 
 
 318 
 National Cotton Oil Co. v. Texas, 
 
 297 
 
 National Wholesale Jewelers Associa- 
 tion v. United States, 319, 323 
 Nesbit v. Riverside Independent Dis- 
 trict, 286 
 
 New Albany, City of, McLeod v., 129 
 New Departure Mfg. Co. v. United 
 
 States, 319, 323 
 
 New Orleans v. Citizens' Bank, 286 
 New York Car Wheel Wks., In re, 70 
 New York Central & H. R. R., Bailey 
 
 v., 228 
 New York Central R. R., Continental 
 
 Securities Co. ., 20 
 New York Central R. R., Switzerland 
 
 Co. ., 37 
 New York City Ry., Penn Steel Co. 
 
 ., 101, 113, 119, 123, 124, 162 
 New York Coal Co., Hocking Valley 
 
 R. R. v., 312 
 
 New York Edison Co., Irvine v., 51 
 New York Edison Co. v. Willcox, 
 
 (Pub. Serv. Comm.) Peo. ex rel., 344 
 New York, L. E. & W. R. R., Barr ., 
 
 225 
 New York, L. E. & W. R. R., New 
 
 York, P. & O. R. R. v., 78 
 New York, N. H. & Hartford R. R. 
 
 v. Willcox (Pub. Serv. Comm.) Peo. 
 
 ex rel., 341 
 
CASES CITED OR DISCUSSED 
 
 385 
 
 New York, P. & O. R. R. v. New York, 
 
 L. E. & W. R. R., 78 
 New York & Queens Co. Ry., Public 
 
 Service Commission v., 344 
 New York Railways, Public Service 
 
 Comm. v., 344 
 New York Security v. L. N. E. & St. 
 
 L. Consol. Ry., 32 
 Nome Retail Grocers' Association v. 
 
 United States, 318, 323 
 Noonan v. Lee, 44 
 Norfolk & Southern R. R., McClelland 
 
 ., 16 
 
 North Carolina R. R. v. Swasey, 137 
 Northern Pacific R. R. v. Boyd, 191, 
 
 195-198, 201 
 Northern Pacific R. R., Farmers Loan 
 
 & Trust Co. ., 90, 102, 128] 
 Northern Pacific Ry. v. Parker, 30 
 Northern Pacific Ry., Paton v., 192 
 Northern Securities Co., Minnesota v., 
 
 288 
 Northern Securities Co. v. United 
 
 States, 247, 251, 259, 269, 272, 298 
 N. Trust Co., Dickerman ., 88 
 Northrop, Stillman v., 70 
 
 Odell v. Batterman Co., 110 
 
 Odessa Waterworks Co., Wood ., 228 
 
 Olcott v. Tioga R. R., 70 
 
 Old Dominion Copper Co. v. Bigelow, 
 
 225-227 
 Old Dominion Copper Co. v. Lewisohn, 
 
 226, 227, 229 
 Omaha, K. C. & E. R. R., Fordyce v., 
 
 138 
 
 Omaha Water Co., Harnickell v., 64 
 Omaha Water Co., U. S. Water Works 
 
 Co. Ltd. t>., 165, 203 
 Ostrom, Claflin v., 70 
 
 Pacific Coast Plumbing Supply Asso- 
 ciation v. United States, 319, 323 
 
 Parker, N. O. Pac. Ry. v., 30 
 
 Parkinson v. West End Ry., 18 
 
 Parsons v. Hayes, 225 
 
 Parsons v. Jackson, 19 
 
 Paton v. Northern Pacific Ry., 192 
 
 Patten v. United States, 298 
 
 Patterson v. United States, 273, 302, 318 
 
 Pennock v. Coe, 32, 47 
 
 Pennsylvania Steel Co. v. N. Y. City 
 Ry., 101, 113, 119, 123, 124, 162 
 
 Pennsylvania Sugar Refining Co. v. 
 American Sugar Refining Co., 245 
 
 Peo. v. Hasbrouck (Metropolitan St. 
 Ry. Co., 103 
 2c 
 
 Peo. ex rel. Binghampton Light, Heat 
 
 & Power Co. v. Stevens, 343 
 Peo. ex rel. Bridge Operating Co. v. 
 
 Public Service Commission, 344 
 Peo. ex rel. Cohoes Ry. v. Public Ser- 
 vice Comm., 343 
 
 Peo. ex rel. D. & H. Co. v. Public Ser- 
 vice Comm., 342 
 Peo. ex rel. D. & H. Co. v. Stevens 
 
 (Pub. Serv. Comm.), 343 
 Peo. ex rel. Dry Dock etc. R. R. v. 
 
 Public Service Comm., 344 
 Peo. ex rel. Joline v. Willcox (Public 
 
 Service Comm.), 339 
 Peo. ex rel. King's County Lighting Co. 
 
 v. Willcox (Pub. Serv. Comm.), 344, 
 
 373 
 
 Peo. ex rel. Merriam v. Ross, 85 
 Peo. ex rel. N. Y. Edison Co. v. Will- 
 cox (Pub. Serv. Comm.), 344 
 Peo. ex rel. N. Y. N. H. & Hartford R. 
 
 R. v. Public Service Commission, 341 
 Peo. ex rel. South Shore Traction Co. 
 
 v. Willcox (Pub. Serv. Comm.), 340 
 Peo. ex rel. Ulster & Delaware R. R. 
 
 v. Public Service Comm., 344 
 Pere Marquette R. R., Horn ., 84, 
 
 89, 91-93 
 
 Persian Rug etc. Co., Ettlinger ., 46 
 Philadelphia Jobbing Confectioners' 
 
 Association v. United States, 319, 323 
 Phillips v. Blatchford, 233 
 Pittsburgh etc. R. R., Haight ., 19 
 Place, Russell ., 286 
 Polhemus v. Fitchburg R. R., 32 
 Powder Trust Case, 249, 268 
 Prentis v. Atlantic Coast Line, 339 
 Pronick v. Spirits Distributing Co., 215 
 Public Service Commission (Stevens), 
 
 Binghampton Light, Heat & P. Co. 
 
 v., Peo. ex rel., 343 
 Public Service Commission, Bridge 
 
 Operating Co. v., Peo. ex rel., 344 
 Public Service Commission (Stevens), 
 
 D. & H. Co. v., Peo. ex rel., 343 
 Public Service Commission, Cohoes 
 
 Ry. v., Peo. ex rel., 343 
 Public Service Commission, D. & H. 
 
 Co. ., Peo. ex rel., 342 
 Public Service Commission, Dry Dock 
 
 etc. R. R. v., Peo. ex rel., 344 
 Public Service Commission, Matter of 
 
 (Mandel), 344 
 Public Service Commission v. N. Y. & 
 
 Queens Co. Ry., 344 
 Public Service Commission v. N. Y. 
 
 Rys., 344 
 
386 
 
 CASES CITED OR DISCUSSED 
 
 Public Service Commission, Ulster & 
 
 Delaware R. R. ., Peo. ex rel., 344 
 Public Service Commission v. West- 
 
 chester Street R. R., 343 
 Public Service Commission (Willcox), 
 
 Joline v., Peo. ex rel., 339 
 Public Service Commission (Willcox), 
 
 Kings Co. Lighting Co. v., Peo. ex rel., 
 
 344, 373 
 Public Service Commission (Willcox), 
 
 N. Y. Edison Co. v., Peo. ex rel., 344 
 Public Service Commission (Willcox), 
 
 N. Y., N. H. & Hartford v., Peo. ex 
 
 rel., 341 
 Public Service Commission (Willcox) 
 
 v. South Shore Traction Co., Peo. ex 
 
 rel., 340 
 Pursell, Riggs v., 31 
 
 Queens Co. Water Co., Gamble ., 215 
 Quicksilver Mining Co., Kent v., 215, 
 
 225 
 Quincy M. & P. Co. v. Humphreys, 
 
 86, 101, 103 
 
 Railroad Co. v. Bailey, 228 
 Railroad Co. v. Fordyce, 138 
 Railroad Co. v. Howard, 70 
 Railroad Co. . Thomas, 124 
 Railway Co. v. Whitton, 81 
 Randolph, Mackay ., 44 
 Reading Co. v. United States, 270, 298, 
 
 312 
 Rhinelander v. Farmers Loan & Trust 
 
 Co., 26, 52, 55 
 Rhode Island Locomotive Works v. 
 
 Continental Trust Co., 119, 121 
 Richardson v. City of Boston, 286 
 Richmond & D. R. Co., Clyde v., 
 
 128 
 Richmond Light & R. R. Co., Willcox 
 
 v., 342, 343 
 Riggs v. Pursell, 31 
 Riley, St. Louis Trust Co. ., 119 
 Riverside Independent District, Nesbit 
 
 ., 286 
 
 Roberta. Kidansky, 45 
 Roberts, Goodwin ., 164 
 Robinson, Adams v., 108, 109, 143 
 Robinson, Alabama & G. Mfg. Co. ., 
 
 108, 109, 143 
 
 Robinson v. Iron Ry., 205 
 Roff, McLish v., 129 
 Rogers etc. v. Southern R. Association, 
 
 70 
 
 Romodka Co., In re, 70 
 Rosenkrans v. Lafayette etc. Ry., 18 
 
 Ross, Merriam v., State (Mo.) ex rel., 85 
 Russell v. Place, 286 
 
 Sac, County of (Iowa) v. Cromwell, 286 
 Sage v. Memphis & Little Rock R. R., 
 
 116 
 St. Louis Mut. L. Ins. Co. v. Cravens, 
 
 285 
 St. Louis etc. R. R. v. Cleveland etc. 
 
 R. R., 122 
 
 St. Louis Terminal Case, 270, 272 
 St. Louis Trust Co. v. Riley, 119 
 Sampson, Wiswell v., 110 
 Schall, Fosdick v., 118, 121 
 Schreiner v. High Ct. of F., 284 
 Schreyer, Vanderbilt v., 45 
 Schwartz, Davis v., 139 
 Seaboard Air Line Ry., American Iron 
 
 Co. ., 124 
 Seymour v. Spring Forest Cemetery 
 
 Association, 224, 225 
 Shedd, First National Bank, Cleveland 
 
 ., 205 
 Shepherd, Friedman's Saving Co. v., 
 
 116 
 
 Shields v. Barrow, 139 
 Shields v. Coleman, 145 
 Sickles, Washington A. & G. Steam 
 
 Packet v., 286 
 Smiley v, Kansas, 297 
 Snell v. Chicago, 3 
 Southard v. Southard, 232 
 South Dakota, Central Lumber Co. 
 
 v., 296, 318, 323 
 Southern Pacific R. R. Co. v. United 
 
 States, 261, 285, 286 
 Southern Ry. v. Allison, 81 
 Southern Ry. v. Carnegie Steel Co., 
 
 118, 121, 123, 124 
 Southern R. Association, Rogers etc. 
 
 v., 70 
 
 Southern Wholesale Grocers' Associa- 
 tion v. United States, 319, 323 
 South Shore Traction Co. v. Willcox 
 
 (Pub. Serv. Comm.) , Peo. ex rel., 340 
 Sperry, Jones & Co., Tompkins ., 225 
 Spirits Distributing Co., Pronick v., 215 
 Spring Forest Cemetery Association, 
 
 Seymour v., 224, 225 
 Standard Co., Windmuller ., 70 
 Standard Oil Co. v. United States, 243, 
 
 249, 252, 254, 258, 260, 270, 318, 323, 
 
 324 
 Standard Sanitary Mfg. Co.1 . United 
 
 States, 305, 319, 323 
 Standard Wood Co. v. United States, 
 
 319, 323 
 
CASES CITED OR DISCUSSED 
 
 387 
 
 State (Iowa) v. Fairmont Creamery Co., 
 
 318 
 
 State (Mo.) ex rel. Merriam v. Ross, 85 
 State Trust Co. v. Kansas City Ry. Co., 
 
 104 
 Stevens (Pub. Serv. Comm.), Bing- 
 
 hampton Light, Heat & Power Co. 
 
 v., Peo. ex rel., 343 
 Stewart v. Lansing, 286 
 Stillman v. Northrop, 70 
 Stokes, Cox v., 203 
 Stoneburner, Universal Savings & 
 
 Trust Co. v., 92 
 Stone v. United States, 286 
 Stowe-Fuller Co., Keech v., 197 
 Swann v. Wright's Executor, 145 
 Swasey, North Carolina R. R. v., 137 
 Switzerland Co. v. N. Y. Central R. R., 
 
 37 
 Syracuse etc. R. R., In re, 225 
 
 Templeton, Coltrane v., 78 
 
 Terminal Ry. Association v. United 
 States, 243, 270, 272 
 
 Texas Central Ry., Morgan's Co. v., 
 43, 45, 83, 104, 105, 109 
 
 Texas, National Cotton Oil Co. v., 297 
 
 Texas, Waters-Pierce Oil Co. v., 297 
 
 Third Avenue Ry. Case, 188 
 
 Thomas t>. Cincinnati, N. O. & S. Ry., 
 115 
 
 Thomas v. Western Car Co., 124 
 
 Thompson, Frost ., 233 
 
 Tide Water Canal Co., Gue v., 3, 47 
 
 Tioga R. R., Olcott v., 70 
 
 Titus v. United States Smelting, Re- 
 fining & Mining Exploration Co., 166 
 
 Todd, Industrial & Trust Co. v., 169, 
 203 
 
 Toledo, A. A. & N. M. Ry., Farmers 
 Loan & Trust Co. v., 128, 135 
 
 Toledo, St. L. & K. C. R. R., Con- 
 tinental Trust Co. v., 83, 93, 110, 116" 
 
 Toler v. East Tennessee, V. & G. Ry., 
 Ill 
 
 Tompkins v. Sperry, Jones & Co., 225 
 
 Townsend, Logan County Bank v., 29 
 
 Trans-Missouri Freight Association v. 
 United States, 243 
 
 Troy, City of, v. United Traction Co., 
 341 
 
 Troxell v. Delaware, L. & W. R. R., 286 
 
 Ulster & Delaware R. R. Co. . Pub. 
 
 Serv. Comm. Peo. ex el., 344 
 Union Pacific R. R. v. United States, 
 
 250, 258, 261, 262, 269, 270, 272 
 
 Union Trust Co. v. Illinois Midland 
 Co., 99, 100 
 
 Union Trust Co., M. K. & T. Ry. v., 64 
 
 United Box Board & Paper Co., Equi- 
 table Trust Co. ., 197 
 
 United Shoe Mfg. Co. v. United 
 States, 305, 306, 309 
 
 United States v. Addyston Pipe & 
 Steel Co., 245, 258, 272, 297 
 
 United States v. Aluminium Co., 318, 
 323 
 
 United States v. American Coal Prod- 
 ucts Co., 318, 323 
 
 United States v. American Naval 
 Stores Co., 318, 323 
 
 United States v. American Sugar Re- 
 fining Company, 240 
 
 United States v. American Tobacco 
 Co., 243, 249, 252, 262, 264, 266, 
 270, 318, 323, 324 
 
 United States v. Armour, 314 
 
 United States v. Burroughs Adding 
 Machine Co., 319, 323 
 
 United States v. Central West Pub. Co., 
 
 318, 323 
 
 United States v. Corn Products Re- 
 fining Co., 315 
 
 United States v. Credits Commutation 
 Co., 130 
 
 United States v. Dennison, 286 
 
 United States v. D. L. & W. R. R. Co., 
 312 
 
 United States v. Eastern States Retail 
 Lumber Dealers' Association, 298, 
 
 319, 323 
 
 United States v. Eastman Kodak Co., 
 
 271 
 United States v. Elgin Board of Trade, 
 
 319, 323 
 United States v. General Electric Co., 
 
 318, 323 
 United States v. Great Lakes Towing 
 
 Co., 269 
 United States v. Hamburg-Ameri- 
 
 kanische Packetfahrt Actien 
 
 Gesellschaft, 319, 323 
 United States v. International Har- 
 vester Co., 253, 256 
 United States v. Jellicoe Mountain 
 
 Coal & Coke Co., 271 
 United States v. Joint Traffic Asso., 
 
 243, 272 
 
 United States v. Ju Toy, 363 
 United States v. Keystone Watch Co., 
 
 268, 318, 323 
 
 United States . Knight, 243-245 
 United States v. Lehigh Valley R. R., 312 
 
388 
 
 CASES CITED OR DISCUSSED 
 
 United States v. Motion Picture 
 Patents Co., 272 
 United States v. Nash, 250, 273, 298, 
 
 323 
 United States v. National Association 
 
 Retail Druggists, 318, 323 
 United States v. National Cash Regis- 
 ter Company, 273, 302, 318 
 United States v. National Wholesale 
 
 Jewellers' Association, 319, 323 
 United States v. New Departure Mfg. 
 
 Co., 319, 323 
 United States v. Nome Retail Grocers' 
 
 Association, 318, 323 
 United States v. Northern Securities 
 
 Co., 247, 251, 259, 269, 272, 298 
 United States v. Pacific Coast Plumb- 
 ing Supply Association, 319, 323 
 United States v. Patten, 298 
 United States v. Patterson, 273, 302, 
 
 318 
 United States v. Philadelphia Jobbing 
 
 Confectioners' Association, 319, 323 
 United States v. Powder Trust, 249, 
 
 268 
 United States v. Reading Co., 270, 298, 
 
 312 
 United States v. Southern Pacific R. R. 
 
 Co., 261, 285, 286 
 United States v. Southern Wholesale 
 
 Grocers' Association, 319, 323 
 United States v. Standard Oil Co., 243, 
 
 249, 252, 254, 258, 260, 270, 318, 
 323, 324 
 
 United States v. Standard Sanitary Mfg. 
 Co., 305, 319, 323 
 
 United States v. Standard Wood Co., 
 319, 323 
 
 United States v. Stone, 286 
 
 United States v. Terminal Ry. Associa- 
 tion, 243, 270, 272 
 
 United States v. Trans-Missouri 
 Freight Association, 243 
 
 United States v. Union Pacific R. R., 
 
 250, 258, 261, 262, 269, 270, 272 
 United States . United Shoe Mfg. Co., 
 
 305, 306, 309 
 
 United States v. United States Machin- 
 ery Co., 289, 290 
 United States v. United States Steel 
 
 Corporation, 253, 254, 268 
 United States v. Winslow, 305 
 United States Fidelity Co. v. Bray, 129 
 United States Leather Co., Colgate v. t 
 
 215, 218 
 
 United States Machinery Co. v. 
 United States, 289, 290 
 
 U. S. & Mex. Trust Co., Western 
 
 Union Co. v., 110, 197 
 U. S. Smelting, Refining & Mining 
 
 Exploration Co., Titus ., 166 
 U. S. Steel Corporation, Bergen v., 230 
 U. S. Steel Corporation v. United 
 
 States, 253, 254, 268 
 U. S. Trust Co. v. Chicago Terminal 
 
 Co., 110 
 
 U. S. Trust Co. v. Wabash, 115 
 U. S. Water Works Co. Ltd. v. Omaha 
 
 Water Co., 165, 203 
 Universal Savings & Trust Co. v. 
 
 Stoneburner, 92 
 United Traction Co., Troy, City of, v., 
 
 341 
 UticaBank, Yates v. t 286 
 
 Vail v. Hamilton, 29 
 
 Vanderbilt v. Schreyer, 45 
 
 Vermont etc. R. R., Barnard v., 228 
 
 (the) Vigilancia, 29 
 
 Virginia & Alabama Coal Co. z>. Cen- 
 tral R. R., 123 
 
 Virginia-Carolina Chemical Co. v. 
 Kirven, 286 
 
 Virtue v. Creamery Package Co., 305 
 
 Wabash R. R. v. Adelbert College, 82, 
 
 104, 245 
 Wabash, St. Louis & Pacific Ry. v. 
 
 Central Trust Co., 85, 86 
 Wabash, United States Trust Co. v., 
 
 115 
 
 Wallace, Colonial Trust Co. v., 169 
 Ware-Kramer Tobacco v. American 
 
 Tobacco Co., 318, 323 
 Washington, A. & G. Steam Packet Co. 
 
 v. Sickles, 286 
 
 Waters-Pierce Oil Co. v. Texas, 297 
 Watson v. Chicago, Rock Island & 
 
 Pacific R. R., 16, 18, 20, 44-46, 72 
 Wenner, West Shore R. R. v., 31 
 Westchester Street R. R., Public 
 
 Service Commission 0., 343 
 West End Ry., Parkinson v., 18 
 Western Car Co., Thomas v., 124 
 Western R. R., Howell t>., 104, 111 
 Western Union Co. v. U. S. & Mex. 
 
 Trust Co., 110, 197 
 West Shore R. R., Mallory v., 18, 42 
 West Shore R. R. v. Wenner, 31 
 Whelan v. Enterprise Transportation 
 
 Co., 123 
 
 Whitney, Blum v., 224, 228, 229 
 Whitton, Admr., Chicago & North- 
 western Ry. v., 81 
 
CASES CITED OR DISCUSSED 
 
 389 
 
 Willard, Holmes v., 70 
 
 Willcox (Pub. Serv. Comm.), New 
 
 York, N. H. Hartford R. R. ., Peo. 
 
 ex rel., 341 
 Willcox (Pub. Serv. Comm.), New 
 
 York Edison Co. v., 344 
 Willcox (Pub. Serv. Comm.) v. Rich- 
 mond Light & R. R., 342, 343 
 Willcox (Publ. Serv. Comm.), South 
 
 Shore Traction Co. v., Peo. ex rel., 
 
 340 
 
 Williams v. Milton, 233 
 Williams v. Morgan, 130 
 Wilmington & Weldon R. R. v. 
 
 Alsbrook, 286 
 Wilson v. Little, 11 
 Wilson v. Winter, 109 
 Windmuller . Standard Co., 70 
 Winsor v. Mills, 232 
 
 Winona & S. W. Ry., Grant v., 44 
 
 Winslow v. United States, 305 
 
 Winter, Wilson v., 109 
 
 Wiswell v. Sampson, 110 
 
 Wood v. Guarantee Trust Co., 43 
 
 Wood v. Lary, 228 
 
 Wood -o. Odessa Waterworks Co., 228 
 
 Woodruff v. Erie Ry., 101 
 
 Worcester Cycle Mfg. Co., Central 
 
 Trust Co. v., 105, 106 
 Wright's Executor, Swan v., 145 
 W. S. R. R., Mallory v., 18, 42 
 
 Yale & Towner Mfg. Co., Blount Mfg. 
 
 Co. v., 305 
 
 Yates v. Utica Bank, 286 
 Yonkers Fuel Gas Co., Lord v., 32 
 Young, Bostwick v., 225 
 
 Printed in the United States of America. 
 
E following pages contain advertisements of a 
 few of the Macmillan books on kindred subjects 
 
Law and Order in Industry 
 
 BY JULIUS HENRY COHEN 
 
 Cloth, I2tno, $1.50 
 
 A lawyer who knows the facts of the case from intimate 
 knowledge gives in this book a comprehensive story of the 
 " Protocol " experiences in the cloak and suit industry of New 
 York. He describes vividly the processes and results of 
 collective dealing between a trades union and an employers' 
 association covering a period of five years. The solution of 
 the apparently baffling problems furnishes lessons of great 
 immediate and future import to all employers of labor, trades 
 unionists, social reformers and students of political science 
 and economics. 
 
 " The book is a distinct contribution to the science of social 
 relations and as such should have a wide reading both here 
 and abroad." The Independent. 
 
 " His book is a sound and reliable study of a small, but 
 significant, phase of a world- wide movement." 
 
 Boston Daily Advertiser. 
 
 THE MACMILLAN COMPANY 
 
 Publishers 64-66 Fifth Avenue New York 
 
Voting Trusts: Chapters in Recent Cor- 
 porate History 
 
 BY HARRY A. GUSHING 
 
 Of the New York Bar 
 
 Cloth, 8vo, $1.50 
 
 This is a concisely written volume of real interest to inves- 
 tigators and business men as well as to trust company officials 
 and lawyers. It is the first book on the subject and covers 
 the early history of voting trusts and the details of their more 
 recent development. The facts have been gathered and 
 collated with substantial thoroughness as illustrations of the 
 discussion under the three heads of the significance, the con- 
 tents, and the law of voting trusts. A selection of important 
 documents is also included. 
 
 " This is a book on a modern development of corporate law 
 written by one who shows an intimate acquaintance with 
 present commercial methods and with recent history of cor- 
 porate management. Mr. Cushing's literary style is excellent, 
 his citation of authorities is exhaustive, and he has given in 
 compact form a clear and illuminating statement of the law 
 of voting trusts not elsewhere to be found." 
 
 Harvard Law Review. 
 
 "The first adequate treatise on that modern development 
 in the direction of corporate activity." 
 
 Journal of Commerce and Commercial Bulletin. 
 
 THE MACMILLAN COMPANY 
 
 Publishers 64-66 Fifth Avenue New Tork 
 
A History of Currency in the United 
 States 
 
 BY A. BARTON HEPBURN, LL.D. 
 
 Chairman of the Board of Directors of the Chase National Bank, formerly 
 Comptroller of the Currency, ex-Superintendent of Banks of the State 
 of New York, ex-President of the New York Chamber of Com- 
 merce and ex- President of the New York Clearing House 
 
 New edition, cloth, 8vo, $2.50 
 
 The purpose of this volume is to place before the public 
 all the essential facts as to currency, coinage and banking, 
 from the wampumpeage of the colonies to the notes of our 
 Federal Reserve Banks as well as the indispensable political 
 history connected therewith. 
 
 " Nobody who follows financial subjects can afford to be 
 without this book . . . libraries ought to have it, men of busi- 
 ness should study it, and would find pleasure in doing so, 
 many legislators are in especial need of reading, learning, 
 and inwardly digesting it." New York Times. 
 
 " No more authoritative work upon the currency of the 
 United States ever has been issued than that written by A. 
 Barton Hepburn . . . the book should be carefully read by 
 every banker or other persons interested in finance." 
 
 Boston Herald. 
 
 THE MACMILLAN COMPANY 
 
 Publishers 64-66 Fifth Avenue New York 
 
Day in Court 
 
 BY FRANCIS L. WELLMAN 
 
 Cloth, gilt top, 258 pp., 8vo, $2.00 
 
 This book will give to the general reader and to young men who desire 
 to become successful advocates a practical knowledge of the art of great 
 advocates in eliciting the truth, indicating the methods by which they 
 charm and convince both court and jury and win them over to their side 
 of the controversy. The work is filled with the hints and suggestions 
 which have been derived from the author's experience of many years in the 
 courts and with many concrete examples and illustrative materials. 
 
 "An excellent and most entertaining book." New York Post. 
 "An excellent book for young lawyers to read." The Outlook. 
 
 The Art of Cross-Examination 
 
 With some cross-examinations of impor- 
 tant witnesses in some celebrated cases. 
 
 BY FRANCIS L. WELLMAN 
 
 Cloth, 8vo, 404. pp., $2.50 
 
 OPINIONS OF THE PRESS 
 
 "Mr. Wellman understands his subject thoroughly, there can be no 
 question. Those looking to perfect themselves in the art of cross-examina- 
 tion can hardly do better than to make a study of this book." 
 
 Chicago Tribune. 
 
 11 It is not often that a book, written on so technical a subject as this 
 most subtle branch of the advocate's art, possesses so much genuine 
 interest for the thinking reader. There is scarcely a business man of good 
 intelligence anywhere, who would not find < The Art of Cross-Examination ' 
 as fascinating as a novel." Brooklyn Daily Eagle. 
 
 THE MACMILLAN COMPANY 
 
 Publishers 64-66 Fifth Avenue New York 
 
AN INITIAL RETO 
 
 OVERDUE. ===== 
 
YC 2673 P. 
 
 358852 
 
 UNIVERSITY OF CALIFORNIA LIBRARY