Company, for an injunction restraining the voting, at a stockholders' meeting, of certain shares of the stock of the latter company held by a corporate trustee, in favor of the execution and issuance of the mortgage submitted to the Commission in Case No. 1614, was heard in the United States District Court for the Southern District of New York, by Mr. Justice Lacombe on February 24, 1913, and a decision handed down by him on February 27, 1913, denying the plaintiff's motion. (New York Law Journal, March 4, 1913.) A temporary injunction restraining the execution and delivery of the proposed contracts with the Interborough Rapid Transit Company and the New York Municipal Railway Corporation, obtained in a suit instituted by Mr. John J. Hopper, was, on February 11, 1913, unanimously vacated and set aside by the Appellate Division of the Supreme Court for the First Department, in an Opinion handed down by that Court (Hopper v. Wilcox et al.,- App. Div. -). This Opinion discussed the validity of some of the financial arrangements involved in the contracts and mortgages for the carrying out of the so-called dual system of rapid transit. On February 28, 1913, the Appellate Division denied the application of the plaintiff for leave to appeal to the Court of Appeals. Presiding Justice Ingraham wrote for the majority, and with him concurred McLoughlin, Scott and Clarke, J. J. Mr. Justice Laughlin filed an Opinion in dissent. Further facts as to the action taken in the matter appear in the Orders entered. Oliver C. Semple, Le Roy T. Harkness, and Arthur Richard Reid Rogers, James L. Quackenbush, and George D. Yeomans, Arthur M. Williams, Charles L. Albert S. Bard, for the Citizens' Union of the City of J. Aspinwall Hodge and Alexander Holtzoff, for the MALTBIE, Commissioner (dissenting): These two applications for approval by the Commission under the Public Service Commissions Law of mortgages and bond issues thereunder are a result of the contracts recently entered into between the Commission, acting as a rapid transit commission for the City of New York, and the Interborough Rapid Transit Company and the New York Municipal Railway Corporation. But I shall discuss here only those phases of the financial plans which have been submitted for our approval as a regulatory body, and against which there are serious objections. CAPITALIZATION OF REPLACEMENTS A fundamental objection to both the Brooklyn Rapid Transit and the Interborough proposals is the contemplated capitalization of replacements. The New York Municipal Railway Corporation (Brooklyn Rapid Transit) purposes to issue 532-year bonds to cover an expenditure of approximately $6,000,000 on the reconstruction of existing railroads and $3,880,000 on the third-tracking of existing elevated lines. A very considerable portion of the former sum will be spent on the mere replacement of existing property, leaving but a small part to cover actual additions to the property; and the same applies in a diminished degree to the second item. The cost of moving a track from one location to another, and installing new ties, rails, etc., is necessarily an element of operating expense, whether incurred in consequence of wear and tear, or of obsolescence and inadequacy. It is so treated in the accounting systems of this Commission and the Interstate Commerce Commission. Every well-managed corporation, before ascertaining profits and declaring dividends, sets aside some portion of its revenue to provide for extraordinary replacements that are not properly charged to the operating expenses of a single year. The proposed plan of the Interborough company is even more objectionable, as that company proposes to take advantage of the situation to scrap a considerable amount of electrical apparatus in the Manhattan power house that has become out of date and uneconomical in operation. The machinery that will replace the discarded apparatus ought to be paid for (up to the cost of the latter) out of its depreciation fund, rather than the proceeds of 53-year bonds. The company is merely repeating the experience which brought the surface railways of Manhattan to financial difficulties. When money is borrowed to replace property originally acquired with borrowed funds, the necessary result is the existence of two debts or liens on a single property. The capitalization of replacements was strongly condemned in the Binghamton case by the Court of Appeals, which said (People ex rel. Binghamton Light, Heat and Power Co. v. Stevens, 203 N. Y. 21, 25): "It will not be denied that fuel and such other materials as are consumed from day to day and the labor incurred in daily maintenance should be paid for from the earnings of the corporation as a part of its running expenses prior to the payment of interest upon bonds or dividends upon capital stock. A reasonable consideration of the interests of a corporation and the ultimate good of its stock and bondholders, and a regard for the investing public and that fair dealing which should be observed in all business transactions, require that machines and tools paid for and charged to capital account, but which necessarily become obsolete or wholly worn out within a period of years after the same are purchased or installed, should be renewed or replaced by setting aside from time to time an adequate amount in the nature of a sinking fund or that by some other system of financing the corporation put upon the purchaser from the corporation the expense not alone of the daily maintenance of the plant but a just proportion of the expense of renewing and replacing that part of the plant which although not daily consumed must necessarily be practically consumed within a given time. If that is not done and renewals and replacements are continually added to the capital account, the capital account must necessarily become more and more out of proportion to the real value of the property of the corporation." REFUNDING EXISTING BONDS The Interborough proposal to refund $48,000,000 of outstanding bonds and notes invites severe criticism on the ground that a considerable part of those evidences of indebtedness was not issued for capital purposes. The book liability on bond account is $39,460,000, but of this amount $5,501,000 bonds have never been sold and $1,603,000 have been reacquired for sinking-fund purposes, etc., so that the net amount outstanding is $32,896,000. But most of these bonds were issued at a discount, so that the amount of cash realized and used for the acquisition of property was much less than $32,896,000. A portion of the discount has been made up out of income, or by the sale of a few bonds at a premium, but the balance sheet of December 31, 1912, showed that there was still $1,392,724 of debt discount and expense unamortized. Every principle of sound finance would require that bonds to this amount should be purchased and retired through the application of moneys in the company's treasury, rather than the moneys borrowed on a 53-year obligation. Moreover, the engineers of the Commission who examined the property acquired with the outstanding bonds found and testified under oath that certain of this property had been retired and was no longer in existence, while other expenditures on side-door experiments had been charged to capital account which should have been included in maintenance. The various items amounted in the aggregate to $145,656, which sum should have been drawn from the depreciation fund and applied to the retirement of bonds. Altogether, more than $1,500,000 of the outstanding bonds should have been redeemed out of current assets. In order to redeem outstanding bonds, the company has to pay the bondholders a premium of 5 per cent., which amounts in the aggregate to $1,644,800. This is another item that a conservative plan of financing would require to be charged against surplus, and not against the new bond issue. CAPITALIZING LOSSES Among the purposes to which the proceeds of $15,000,000 of short-term notes were devoted was the purchase of real estate on investment account. Some $1,118,000 was thus expended, in addition to which the company charged against the notes interest and taxes on the investment after the date of acquisition to the amount of nearly $200,000. None of this real estate is used by the company or intended for immediate use. Some of it is rented, but the revenue derived therefrom amounted to only $18,000 and the net loss to the company in the five years covered was $176,416.56. On what principle a public service corporation can distribute among its stockholders the profits from some of its investments before deducting losses on other classes of investments is a question that deserves answer. This company's practice of charging interest and taxes on real estate to Investment Account, instead of Income Account, according to the testimony of the chief statistician of the Commission, contravenes the accounting rules prescribed by the Public Service Commission. This item is, however, small in amount compared with the losses on the Steinway tunnel, which the company seeks to capitalize. Up to the beginning of 1908, the company had advanced to the New York & Long Island Railroad Company (the title of the company that built the Steinway tunnel) $3,745,500, and to the trustees who took possession of the assets of the company when its corporate existence ceased $3,332,401.16, in addition to the $402,035 which it paid for the tunnel company's stock. As is very generally known, the expenditure is greatly in excess of the value of the tunnel, whether figured on the reasonable cost or the earning capac ity. In its attempt to complete the tunnel before the expiration of its franchise, the tunnel company spent money so lavishly that large sums were wasted. The company has allowed the tunnel to lie idle ever since its completion, and practically the only work done on it for several years has |