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LOUISVILLE V. CUMBERLAND TEL. & TEL. CO., 224 U. S. 649 (1912)
U.S. Supreme Court
Louisville v. Cumberland Tel. & Tel. Co., 224 U.S. 649 (1912)
Louisville v. Cumberland Telephone and Telegraph Company
Argued March 7, 8, 1912
Decided May 13, 1912
224 U.S. 649
Under the then Constitution of Kentucky, in 1886, the legislature had the sole right to create corporations and grant franchises to use the streets of municipalities; a charter granted by the state, subject to conditions to be imposed by the municipality, became, after the acceptance of the conditions, a grant not of the municipality, but of the state, and one which cannot be impaired by an ordinance made by the municipality.
The new constitution of 1891, conferring upon municipalities the right to grant street franchises, and the later statute repealing special corporate privileges, did not and could not repeal rights vested in corporations nor relieve them of the burdens imposed by prior charter contract.
The Constitution of Kentucky of 1891, while limiting the power to sell franchises in the future, distinctly protected previously granted charter rights under which work had in good faith been begun.
While franchises to be are not transferable without express authority, franchises to have and to hold and to use are contractual and proprietary, and can be transferred, and held in this case that the franchise granted to a telephone company was property, taxable and alienable under the conditions on which it was granted, and, under the contract clause of the Constitution, could not be abrogated as against a transferee whose rights had been recognized by the municipality.
Permitting the transferee of a franchise to act thereunder and expend large sums of money and exacting from it a bond to comply with the conditions of the franchise will operate to estop a municipality from denying that the franchise was transferable and the transferee had succeeded to all the rights of the transferring corporation.
Where the state, and not a municipality, has granted an assignable right in perpetuity to use the streets of that municipality, the grant
is not affected by the status of the city being changed so to give it the greater rights than when the grant was made.
In construing the duration of a telephone franchise, the nature of the system to be operated must be considered as well as the facts that the necessary structures are permanent in nature and require large investments, and that revocation of the franchise at will would operate to nullify it and defeat the purpose of the state to procure the system desired, and so held that the legislative grant made prior to the adoption of its present constitution by the State of Kentucky to a telephone company to use the streets of Louisville was one in perpetuity, was assignable, and could not be revoked by a subsequent ordinance of the City of Louisville as against the assignee of the original corporation.
On April 3, 1886, the Legislature of Kentucky chartered the Ohio Valley Telephone Company, fixing no limit to its corporate existence. Its principal office was to be at Louisville, but the company was empowered to construct and maintain within the state and elsewhere telephone lines, exchanges, and systems, and authorized
"to purchase or to acquire and dispose of real estate, apparatus, patents, licenses, rights, and franchises relating to such business; to borrow money, and to issue and sell bonds, and to secure the payment of the same by a mortgage on all the property of the company, and on any of its . . . franchises, easements, rights of way, privileges. . . ."
In § 5 it was enacted that
"the said company may construct, equip, and maintain said telephone systems and exchanges, erect poles and string wires thereon, and operate its telephone lines over, along, or under any highway, street, or alley in the City of Louisville, with and by the consent of the General Council of said city."
On August 17, 1886, the city council passed an ordinance which, after reciting this section of the charter, ordained that the act of the legislature above mentioned, so far as it refers to the use of the streets of Louisville,
"is hereby ratified and confirmed, and the right is hereby granted and confirmed to the said Ohio Valley
Telephone Company, its successors and assigns, to maintain a telephone system, and to erect poles and string wires thereon; . . . and to operate its telephone lines over, along, or under any street, avenue, alley, or sidewalk in the City of Louisville."
There were also provisions in this ordinance regulating the manner of erecting poles and stringing wires in the street, and requiring the company to carry the fire and police wires of the city free of charge, and to give a bond in the sum of $50,000, with surety, to save the city harmless against any damage caused by the opening of any street for telephone purposes. This bond was to be renewed from time to time as required by the city. It was declared that nothing in the ordinance should be construed to give the Ohio Valley Telephone Company, its successors or assigns, any exclusive right in the streets.
The ordinance was accepted, the $50,000 bond was given, and the Ohio Valley Telephone Company erected poles, strung wires, and maintained a telephone exchange in the City of Louisville until January 27, 1900, when it consolidated with the Cumberland Telephone & Telegraph Company. By virtue of the Kentucky statute then of force, a new corporation was created under the name of the Cumberland Telephone & Telegraph Company, and the appellee was thereafter vested with all the "property . . . of the constituent companies, without deed or transfer, and bound for their debts and liabilities." The statute at that time was silent as to the transfer of "franchises," but in 1902 (Ky.Stat. § 556), it was amended so as to provide that, upon the filing of the certificate, the consolidated company should be vested "with all the rights, privileges, franchises, exemptions, property, assets, and effects of the constituent companies."
Upon this consolidation, on January 27, 1900, the Cumberland Telephone & Telegraph Company entered into
possession of all the property of the Ohio Valley Telephone Company, and operated the plant, poles, and wires in Louisville until April 7, 1902, when the city council passed an ordinance that the Cumberland Company should execute a bond for $50,000, as required of the Ohio Valley Telephone Company under the ordinance of August 17, 1886. This was done, and, on June 2, 1902, the council passed a resolution that
"the bond of the Cumberland Telephone & Telegraph Company, successor of the Ohio Valley Telephone Company, principal, and the American Bonding Company, of Baltimore city, as surety, be and the same is hereby accepted and approved, and the Ohio Valley Telephone Company and its sureties are hereby relieved from all liability under their bond of August 28, 1886."
The Cumberland Company fully complied with the agreement as to carrying the police and fire wires of the city free of charge, greatly enlarged the telephone system in the city, and at an expense of more than a million dollars, improved the plant and trebled the number of subscribers, although there was in the city another telephone company with a large number of patrons.
In 1908, a difference arose between the city and the company, the city claiming that the company's methods were dictatorial and oppressive, that it rendered poor service at high rates, and was guilty of discrimination among its patrons. This the company denied, claiming that its service was good, its rates were low, and that what was called discrimination consisted in different rates for different classes of service, open on equal terms to all members of the public alike.
No proceedings of any sort were instituted to decide the merits of this controversy or to secure appropriate relief if, after a hearing, the charges were found to be true. But, apparently with the view of having only one telephone system, an ordinance was submitted to the City Council
of Louisville in 1908 providing for the creation of a comprehensive telephone system, repealing all existing rights, and granting a new franchise, which was to be sold to the highest bidder.
The Cumberland Company gave notice that it would rely on its existing contract to use the streets, and would not be a bidder at the proposed sale. Thereupon this ordinance was withdrawn, and another introduced and passed, by which the city, on January 23, 1909, repealed the ordinance of August 17, 1886, under which the Ohio Valley Telephone Company had erected poles, strung wires, and conducted a telephone system.
The Cumberland Company thereupon filed its bill in the United States Circuit Court for the Western District of Kentucky setting out the facts above outlined, alleging that it was the successor to the Ohio Valley Telephone Company, which, in reliance upon the ordinance of August 17, 1886, had erected a telephone system; that the Cumberland Company, as its successor under the terms of the consolidation act, and in accordance with the contract between the city and the Ohio Valley Telephone Company, carried on the telephone business, and does now carry upon its poles and underground conduits the fire alarm and police wires of the city, free of charge, which wires have been and now are daily used by the city in the conduct of its police and fire departments; that the Cumberland Company has largely extended and improved the plant, appliances, and business, and in doing so has expended $1,700,000, "all of which was done upon the faith of and in reliance upon the said ordinance." It alleged that the repealing ordinance of 1909 impaired the obligation of its contract and deprived the company of its business and property without due process of law, and that, unless enjoined, the city would remove the poles and wires and destroy the company's business, to its irreparable damage.
A temporary injunction was granted, and the city's demurrer to the bill for want of equity was overruled. The case was referred to a master to take testimony as to the extent of the discrimination and other matters as to which the city made complaint. On consideration of his report, the court said:
"We find nothing in the answer of the defendant nor in the large mass of testimony heard on the issues made by the pleadings which should in any way change the views expressed in passing on the demurrer and the motion for a temporary injunction."
He thereupon entered a final decree making the injunction permanent. The city appealed, alleging generally that the court erred in overruling the demurrer and in granting the injunction. It specifically alleges that the court erred in holding (1) that the charter granted to the Ohio Valley Telephone Company the right, with the consent of the city, to operate a telephone system, which could not be repealed by the city council; (2) that the ordinance of August 17, 1886, constituted a valid and binding contract between the city and the company, which could not be repealed by the council; (3) that, upon the consolidation of the Ohio Valley Telephone Company with the Cumberland Telephone & Telegraph Company, all the rights of the former under its charter and the ordinance passed to and are now owned by and vested in the Cumberland Telephone & Telegraph Company, and (4) that the ordinance of January 23, 1909, repealing that of August 17, 1886, was void and of no effect.
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