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general grants of power to the majority will be construed closely, because of uncertainty and because of the nature of the relationship involved. No careful lawyer drawing a deposit agreement, whereby securities are to be deposited with a committee effecting a reorganization, fails to insert an express and concrete power to do everything possible; 61 yet general clauses in the case of deeds of trust giving the majority general powers are usually relied upon.

Thus, the conventional provision providing for a meeting of the bondholders, or their consent thereto in writing, and binding the minority absent or present, to do anything the majority decide upon, so far as reorganizations are concerned, appears to miss the mark. An effort has been made to show that majority control is not the sole essential of a reorganization; the plan provided must be a fair one, and a means must be afforded of determining that the plan is fair.62 Surely the majority cannot draw up the plan, accept it, and also determine that it is fair. Reorganizations, since they involve large property rights, absent parties, and also represent a fundamental change in the nature of the corporation, and since the public interests are often concerned, should be carried out publicly under the protection and guidance of a court as is done in England. And it seems clear that the courts will not allow general provisions in a deed of trust to deprive them of this duty. Definite provisions can well be inserted in a deed of trust providing that, upon default of the mortgagor corporation, the trustee must propose, or accept at the request of two thirds of the security holders of all classes, a fair plan of reorganization providing for and open to all classes of security holders; that upon the written consent of a majority of each class, and determination of the court before whom the foreclosure is pending that the plan is fair to all security holders,63 each and every bondholder surrenders all rights to have an upset price fixed, and agrees to accept securities under the reorganization, similar to those

61 See, as to the dangers of general provisions. United Water Works, Limited ". Omaha Water Co., 164 N. Y. 41, 58 N. E. 58, 59 (1900); SHORT, RAILWAY BONDS & MORTGAGES (1897), § 28.

62 See COOK ON CORPORATIONS, 7 ed., § 833.

63 Possibly it is difficult to confer jurisdiction upon a court to determine a condition precedent the fairness of the plan. Yet the court should void the surrender of the right to fix an upset price if the plan is fraudulent or oppressive. Thus the result is

the same.

accepted by the majority creditors, in satisfaction of all rights. In short the vital and determining feature of a reorganization is the fixing of an upset price; definite provisions should be made for the surrender of that right where the plan is fair to all concerned. Such a provision is essential; the failure of deeds of trust to provide for the relinquishment of this right to have an upset price fixed is indeed startling.

This phase of corporation law, however, should not be left to the parties to agree upon and codify as part of their contract. Like other phases of corporation law, where certainty and definiteness of rights are vital, the subject is peculiarly one requiring codification by statute.64 A short section added to the corporation laws of the various states, and especially to the Federal Judicial Code, would complete our statutory corporation law and do much to establish the value and safety of corporate securities.65 Possibly arguments for such an improvement in the law are visionary; yet the codification of other branches of corporation law, and the improvements by statute in England, afford ground for hope.

BOSTON, MASS.

Samuel Spring.

64 Kentucky has a statute in force enacted in 1896 which follows the English procedure and requires the minority to assent without the intervention of a foreclosure. To avoid constitutional difficulties, the act provides that contract rights arising before the passage of the act are not to be affected thereby. (KENTUCKY STatutes, CarROL, 1915, § 771.) No other state, evidently, has passed such a statute. See, generally, SHORT, RAILWAY BONDS & MORTGAGES (1897), § 878, note 1.

65 In 1896, Mr. Moorfield Story, in his address as President of the American Bar Association, discussed the Kentucky statute, supra, and suggested that other states adopt it. Mr. Story trenchantly pointed out the defects in our law governing reorganization, describing the "existing practice, of which the country has had a bitter experience within the last few years and of which the railroad cases furnish the most conspicuous examples." "Reorganization of Railway and Other Corporations," REPORT OF AMERICAN BAR ASSOCIATION (1896), Vol. XIX, page 240. His comments are equally true to-day, twenty-two years later.

VALUE OF THE SERVICE AS A FACTOR IN
RATE MAKING*

"THE

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HE reasonableness of the schedule as a whole depends as has been seen, upon whether it yields a fair return to the carrier;" yet "the requirement that no person may be charged more than a reasonable rate may be insisted upon although the result is that the company does not get a fair return from its schedule as a whole.” 2 Rates may be so high as to be "unreasonable in themselves," although the company is "earning no more than a fair return"; 3 yet "the rule that a carrier should not charge more than the traffic can bear . . . does not impose upon a carrier any duty to carry traffic at a loss." 4

5

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These antitheses are from one work on rate regulation. It contains more statements that the cost of a service outweighs its value in determining rates than statements that value outweighs cost; at one point the author casts doubt, in terms, upon the value test which he repeatedly lays down; in the preface he expresses his "preference for cost"; and he tells us that "more and more, the [Interstate Commerce] Commission has been laying 1 BRUCE WYMAN, 2 ed., BEALE AND WYMAN, Railroad RATE REGULATION (1915), § 220.

2 Ibid., § 225.

3 Ibid., § 445.

• Ibid., § 434.

Cf. "It is certain upon fundamental principles that the company cannot justify exorbitant profits by urging that the rates are reasonable in themselves." Ibid., § 226. "Nothing is better established than that the Commission may not make the needs of the shipper the basis of reasonable rates." Ibid., § 434.

"A railway may not impose an unreasonable rate merely because the business of the shipper is so profitable that he can pay it." Ibid., § 439.

• The statement (Ibid., § 435) that "the value of the service to the shipper should be considered, which includes a consideration of the profit that the shipper can make," carries this comment: "The correctness of this view may be doubted: at all events, the Commission has rejected any theory to the effect that rates may be increased by successive advances, so long as traffic moves freely. But, on the other hand, the Commission has said repeatedly that consideration must be given to the value of the service in determining reasonableness of rates.”

7 Ibid., vi, vii.

* I am much indebted to the critical suggestions of my friend Professor Charles K. Burdick, who kindly read the manuscript and proof.

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emphasis upon the cost of the service, as the element to be given precedence in the determining of a rate." If the book conveys any net impression on the subject, it is that, while the criterion of cost is gaining ground as against the criterion of value, and should for some reason be preferred to it, value is none the less a criterion substantially coördinate with cost, and there is no knowing what will be done in a particular case when the two conflict.

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Is value of the service, or reasonableness to the consumer, or reasonableness to the public - anything other than cost of the service (and discrimination) - a factor in public-service rate regulation? If so, in what relation does this factor, whatever it is, stand to the factor of cost? Commissions and courts have said things as inconclusive and contradictory as Mr. Wyman. The courts have long laid it down that a public utility is entitled to "a fair return upon the value of that which it employs for the public convenience"; that is, rates are to be determined by the cost of the service, taking cost to include not only current out-go and depreciation but a reasonable return upon the value of the property employed. But a great deal is said about value of the service, reasonableness to the consumer, and the like, which, taken at its face, conflicts with this. Many dicta set up value as a criterion apparently coördinate with cost, and leave us to worry over the inevitable conflict. Thus the Interstate Commerce Commission said in 1912:

"Cost is generally an important element in arriving at a judgment with respect to a rate. What weight shall be given to that element as compared with all the other elements entering into a particular rate, such as the value of the service, with its bundle of constituents, and the various conditions surrounding the particular traffic, is a matter to be decided in each individual case. . . . Both cost and value must be considered as well as all other elements entering into a rate." 10

The same opinion speaks of "the two cardinal principles of rate making the cost of the service and the value of the service." Again in 1916 the commission said, "The law contemplates that

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8 BRUCE WYMAN, 2 ed., BEALE AND WYMAN, RAILROAD RATE REGULATION (1915), § 385. He adds: .. Certainly, the adequacy of the revenue for the service performed by the carriers must take precedence over market conditions in determining the reasonableness of a rate."

9 Smyth v. Ames, 169 U. S. 466, 547 (1898).

10 Per Meyer, Commr., in Boileau v. P. & L. E. R. R. Co., 22 I. C. C. 640, 652 (1912).

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the rates shall be just and reasonable to shipper and carrier alike." Language of the same sort has long been used by the Supreme Court of the United States. In Smyth v. Ames, Mr. Justice Harlan said:

"What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth." 12

Speaking for the court in 1915, Mr. Justice Hughes said: "There are many factors to be considered, - differences in the articles transported, the care required, the risk assumed, the value of the service..." 13 Again in 1917 the Supreme Court repeated that "the nature and value of the service rendered by the company to the public are matters to be considered." 14

Another group of dicta go further, and make of value of the service, or reasonableness to the public, a criterion not merely coördinate with, but superior to, cost of service. "Reasonableness relates to both the company and the customer. Rates must be reasonable to both, and, if they cannot be to both, they must be to the customer." 15 "The rates must be reasonable to the company, but they must, in any event, be reasonable to the public." 16 Mr. Robert H. Whitten, in an article on "Fair Value for Rate Purposes," uses closely similar language — "Reasonable compensation . . . must be just to the public and should be just to the company; but if it cannot be just to both it must in any event be just to the public." 17

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Logically, there are two halves to the proposition that cost must give way to value: rates must sometimes be fixed below cost, and they must sometimes be fixed above it. They must be fixed below cost when the value of the service to the public is less than

11 New England Plaster, 41 I. C. C. 687, 704 (1916).

12 169 U. S. 466, 547 (1898).

13 Northern Pacific Ry. Co. v. North Dakota, 236 U. S. 585, 599 (1915).

14 Darnell v. Edwards, 244 U. S. 564, 570 (1917).

15 Brunswick & T. Water Dist. v. Maine Water Co., 99 Me. 371, 380, 59 Atl. 537, 540 (1904).

16 Southern Pacific Co. v. Bartine, 170 Fed. 725, 767 (1909).

17 27 HARV. L. REV. 421. Cf. Puget Sound Electric Railway v. R. R. Commission, 65 Wash. 75, 117 Pac. 739 (1911).

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