Story Case

The Central Elevator Company operated a group of public elevators in the state of Illinois, where it charged a maximum rate, as fixed by the state commission, for its storage space. The same company also entered the business of buying and selling grain through its own elevators. One of the methods it used to compete with other elevator men, was to overbid other dealers as much as a quarter of a cent per bushel, and immediately resell the same wheat at a quarter of a cent less than the grain cost, and charge storage in an amount more than covering the loss.

The state attorney, of Illinois, brought an action against the elevator company to prohibit it from entering the business of buying and selling grain, and storing the same in its warehouses, because such warehouses are public employments, and the use of the owners for their own purpose destroys the public service. "Will the action be maintained ?

Euling Court Case No. 1. The People Vs. John S. Hannah, Volume 198 Illinois Reports, Page 77

The Attorney General of Illinois instituted suits against many of the owners of grain elevators in the city of Chicago, among them, John S. Hannah, to have them enjoined from the practice which had grown up among the elevator owners of buying grain and storing it in their own elevators. Hannah was a member of a partnership which dealt in grain, and also a stockholder and manager of the Central Elevator Company. The Constitution of Illinois declares that grain warehouses shall be public warehouses. This action rests upon the principle that the duty of the public warehouse to serve the public was in danger of being neglected if the owners were in competition with the public in the grain markets. It was shown that the warehousemen would buy at the market price and then sell immediately at a lower figure, charging the purchaser a storage fee which made the deal profitable. They had also been accused of mixing inferior wheat in the common stock, so that the customer received a poorer grade than he had bought for storage, while the warehouseman, having put in the low grade, would receive the mixture of a slightly higher quality. The result of these practices had been to drive the general public out of the grain market, so that on some railroads the only grain buyers were the elevator owners, and practically all of the grain stored in Chicago was owned by them. Hannah contended that it would deprive him of his property unlawfully, to forbid him to keep his own grain in his elevator, and that the practices complained of could be checked by inspection and regulation, without requiring the prohibition sought in this suit.

The court said, in an opinion by Mr. Justice Boggs: "The Constitution declares such warehouses shall be public warehouses. This Constitutional provision impresses the business of keeping a public warehouse with a public use, and those who apply for and accept licenses, voluntarily occupy a relation to those who store grain, which makes it incumbent upon such warehousemen to discharge certain duties to such owners and producers and shippers of grain. The license authorizes the warehouseman to pursue a public employment. The rules of law applicable to the position of the warehousemen are the same as those that apply to trustees and others who occupy fiduciary relations. The rule is, not only that frauds shall be prevented, but that opportunity and temptation to fraud shall not be permitted. It would be idle to expect a warehouseman to perform his duty to the public as an impartial holder of the grain of different proprietors, if he is permitted to occupy a position where his self interest is at variance with his duty."

It was held that by going into the public service business, Hannah had surrendered the privilege of free use of his property, and had made himself subject to restriction in the public interest. His ownership ceased to be absolute, but was in the nature of that of a trustee. Since a trustee cannot stand in a position where his own interests conflict with those of the beneficiary, Hannah was enjoined from mixing his own grain in the common stock, and from buying the receipts from his warehouse.

Ruling Court Case No. 2. United States Vs. Delaware & Hudson Railway Company And Other Railways, Volume 29 United States Supreme Court Reports, Page 527

The Delaware & Hudson Railway Company and the other defendants, also, were engaged directly or indirectly in the business of mining coal. A few of the corporations owned and worked mines and transported the coal over their own rails in interstate commerce; some of them leased mines and carried the coal away on their own rails; others owned large stock interests in the coal mining corporations. The United States petitioned for injunctions, and in separate suits brought mandamus proceedings to compel the defendants to stop the interstate transportation of coal from the mines thus controlled. The actions were based on the Interstate Commerce Act, which made it illegal for railroad companies to transport coal, in the mining of which they were interested. The railroad companies plead that the act was unconstitutional, in that Congress had no power under the interstate commerce clause, to take property without due process of law; and also that it was repugnant to the Constitution, because the act was discriminatory, in that it made exception to timber and the products manufactured therefrom.

Justice White delivered the opinion of the court: "The commodity clause in question makes it unlawful for a railroad company to engage in interstate commerce carrying "any article or commodity, other than timber and the manufactured products thereof, manufactured, mined, or produced by it, or under its authority, or which it may own in whole or in part, or in which it may have any interest, direct or indirect, except such articles or commodities as may be necessary and intended for its use in the conduct of its business as a common carrier." The purpose of the act is to prevent railroads from unfairly competing with outside parties in articles that must be moved over railroads. The act prohibits railroads carrying commodities in interstate commerce: "(a) Where the article or commodity has been manufactured, mined, or produced by the carrier, or under its authority, and at the time of transportation the carrier has not in good faith, before the act of transportation, dissociated itself from such article or commodity; (b) when the carrier owns the article in whole or in part; (c) when the carrier at the time of transportation has an interest, direct or indirect, in a legal or equitable sense in the article or commodity," not including articles made or mined by a bona fide corporation in which a railroad is a stockholder. With such an interpretation, the statute regulates only interstate commerce and such is clearly in the power of Congress. Congress, having the power, can exercise it, although it may inconvenience many doing, under state law, the prohibited act. Neither is it unconstitutional because of discrimination, since the exception as to timber, under the circumstances, is a reasonable exception. This act is not unconstitutional." Decree for the petitioner, the United States.

Ruling Law. Story Case Answer

It is a fundamental rule of the Common Law, that if one person is the servant or agent of another, he must not do anything which will be a breach of trust to his employer. He must not only refrain from committing a breach of trust, but he must not put himself in a position where there will be any temptation to commit a wrong to the master or employer. Thus, an agent cannot buy his employer's property or enter any business in conflict with the agency, without the clear consent of the employer. A corporation director cannot contract with himself, in his official capacity as director. This rule is applied to partners, guardians, administrators, executors, managing officers, and all those who occupy a fiduciary relation.

In the case of public service corporations, the courts forbid interests which conflict with the public duty. The courts will not permit the public servant to conduct a rival business, and then try to regulate it, and see that the two are conducted in good faith. It will absolutely forbid that business which conflicts with the public duty. Thus, it was held illegal for a railroad company to maintain public elevators, on the ground that it was against public policy to permit a railroad company the power to monopolize the elevator business. In the same way it has been held illegal for a railroad company to own coal mines along its right-of-way. The Ruling Court Case No. 1, shows that the state may forbid an elevator company from buying and selling grain and storing it in its own warehouses. Otherwise, the warehousemen could monopolize the grain business by overbidding their rivals, and by selecting their own grain from that stored.

The United States Ruling Court Case indicates how Congress has crystalized the rule with reference to interstate commerce. The Supreme Court of the nation recognizes that public service corporations are trustees of the power granted to them, and that they cannot put themselves in a position to make their own interests adverse to the public interest. Manifestly, for the same reason, the state will win in the suit of the Story Case.