debit to the Judge loan account in the same amount.
NFGC charged interest totaling $ 9,197.16 on the total $ 2.6 million amount of the Judge loan account from September 28, 1917, the date of the first activity in the Judge loan account, until the end of 1917. Ex. 140; PF 30. In addition, $ 78,403.02 in interest was charged to the Judge loan account for the first six months of 1918. Ex. 150.
On December 31, 1918, NFGC reversed the interest charges to the Judge loan account for 1918 by entering a voucher showing a debit to its interest account. Ex. 178. The voucher indicates that the reason for the reversal was that the PSC would not allow the capitalization of interest on the account for the year 1918. Ex. 178. On December 30, 1920, the $ 50,091.19 in interest ($ 40,894.03 $ 9,197.16) paid in 1917 was reversed. Ex. 129. The voucher states that these amounts were improperly charged.
After reversing the interest charges for 1917 and 1918, the Judge account was no longer treated as an account receivable for the years 1919 and 1920, the accounting treatment consistent with a loan, but rather was treated as an investment of NFGC. The reasons for the reversal, and the conclusions to be drawn from the changed accounting status, are a central feature of this litigation. The trial testimony concerning these practices is discussed in more detail below.
Interest was charged, capitalized, and debited from the Judge loan account in 1917 and 1918. Tr. 149. In 1917, the Judge loan account was recorded as cash on the NFGC accounting statement. Ex. 154; Tr. 258. In 1918, the Judge loan account was recorded as an account receivable. Ex. 154; Tr. 152, 258. The treatment of the loan account as cash or an account receivable is consistent with the view that the account was a loan. Tr. 258.
Although the interest was charged in 1917 and 1918, there is no definitive memorandum of how much, if any, interest was actually paid. PF 31; Tr. 149; 315. William Rooney testified that although NFGC accounted for interest charged in 1917, "this is strictly from an accounting point of view in which they would have recognized it in profit and loss . . . and because they didn't receive it they had to debit that to some asset account, and that's what they did when they charged or capitalized the W.J. Judge loan account." Tr. 149. Paul Kramer testified that although NFGC clearly charged interest on the loan through June 30, 1918, and that some type of payment was made by Judge to NFGC, "there is no indication whether [the amount noted is] a payment on the principal, whether it's interest or what the payment is." Tr. 315. Kramer went on to state: "I assume that they're reductions of the total loan and not interest payments . . . ." Tr. 315.
In 1919 and 1920, the treatment of the loan account changed. On the NFGC final balance sheet for 1919, the loan account is reclassified as an investment of NFGC. Ex. 154; Tr. 155. On the final balance sheet for 1920, the account is also treated as an investment. Id. No interest was charged on the loan account for 1919 and 1920. PF 31, NFR 31.
Throughout the existence of the Judge loan account, NFGC clearly identified the account in its records. A financial audit conducted by the certified public accounting firm of Perine & Nichols for fiscal year 1921 noted that the Judge loan account balance totaled $ 2,626,715.65, or approximately 7.5% of NFGC's total asset value. Ex. 154. Perine & Nichols did not include any explanation of the nature of the Judge loan account. Id.
At trial, Westwood's expert conceded on cross-examination that if Judge had held such a large loan as an agent of NFGC, the auditors should have insisted that the agency relationship be recorded on the company financial statements. Tr. 260. No such record was ever made. Id.
In testimony before the PSC in 1918, Judge said of the BGC assets that he was "the legal owner with a moral responsibility." PF 33. When asked whether NFGC was the real party in interest in the BGC acquisition, Judge replied: "They have loaned me the money that I have now invested. From their loans I have reimbursed the bank from which I originally borrowed, which was Mr. Gethoeffer's bank." When asked if he was under a legal or moral obligation to turn the property over to the company, Judge answered: "I am under a moral obligation, I fell [sic] to dispose of the properties as they might elect." Ex. 49, pp. 366-67; PF 33. NFR 33
At a continuation of that proceeding, Kenefick told the PSC: "We frankly admitted he borrowed the money of the National Fuel Gas Company and he feels under a moral obligation, there not being any legal obligation, to turn that plant over to whomever they direct when they get it in shape to know what they want to do with it." Ex. 49, pp. 904-5; PF 33. NFR 33.
During Judge's tenure of the assets, he owned and operated them as a sole proprietorship known as W.J. Judge-Buffalo Gas. Judge and NFGC maintained separate and independent financial books and records and made separate filings with the PSC. National Fuel Ex. 2; Exs. 43, 48, 126. As an unincorporated entity, National Fuel argues that the Judge-BGC assets could not have been officially treated as a subsidiary of NFGC.
There is no record that Judge made any significant investment of capital that was not loaned to him directly by NFGC and debited from the Judge loan account. NFGC guaranteed certain performance and payments by Judge in his acquisition of the BGC assets. PF 35; NFR 35. In June 1923, NFGC paid $ 15,000 in legal fees to Kenefick, Cook, Mitchell & Bass. These fees were incurred by Judge during his acquisition of the BGC assets. PF 37; NFR 37. Judge did, however, personally enter into contracts, Exs. 7, 15, agree to assume obligations of and indemnify the receivers of BGC, Exs. 55, 56 and 156, obtained an appellate bond, was subject to personal risks in litigation, Exs. 9, 14 and 69, and assumed franchise taxes and local assessments. Ex. 51.
B. The Transfer to Niagara
On April 9, 1921, the stockholders of Niagara agreed to purchase the BGC assets from Judge for $ 4 million, subject to the approval of the PSC. Ex. 13; PF 38. The resolution specifically stated that the offer was for all of Judge's BGC assets, including $ 2,045,00.00 of a par value of a total issue $ 2,100,000.00 in People's bonds and $ 2,702,400 of a par value of $ 3,000,000.00 in People's stock. Ex. 13.
When Niagara, a wholly owned subsidiary of NFGC, sought to acquire the BGC assets held by Judge, both Judge and Niagara made independent applications to the PSC for approval. Neither the submissions to, nor the orders from, the PSC make any reference to a purported agency relationship. Exs. 13-15, 43-48, 51, 53, 55, 56, 82-83, 170; National Fuel Exs. 2, 8-10.
In examining Judge's petition, the staff of the PSC noted that it was unclear how Judge arrived at the $ 4 million price, given that his proprietorship account amounted to over $ 15 million. PF 40, Ex. 170. The staff noted that the $ 15 million included the value of securities, and that there was no data to support the value asserted by Judge. The staff concluded that in the event of a hearing, Judge should be questioned as to what the property actually cost him. Id. The PSC subsequently approved the transaction at a price of $ 3 million. PF 41, Ex. 14. In making its determination, the PSC found that Judge acquired the BGC assets at a foreclosure sale on October 1, 1917, for a total of $ 2.6 million, and that $ 379,000 had been spent in permanent additions to equipment and in working capital. Ex. 14; PF 41.
Following the determination of the PSC, Kenefick sent a letter to Judge stating that although Judge could appeal the determination, Kenefick had little hope it would be reversed by the Appellate Division. Kenefick stated:
While the order is not as favorable as I hoped for, or as I think we were reasonably entitled to, yet under all the circumstances I believe it should be accepted so that we may push ahead without further delay on our larger plans. Of course, we have the right to review the order by certiorari in the Appellate Division but I have little hope that we could succeed in annulling the order. I am inclined to think the court would regard the original purchase as having been made for the National Fuel Gas Company and that the present proceeding was in effect simply a method of changing the form of investment from an account receivable against W.J. Judge to stock of the Niagara Gas Corporation, and looking at it in this aspect would hold that the Commission was justified in determining that the bid price on the foreclosure was the real value of the property at that time, notwithstanding that evidence was before the Commission indicating a greater value . . . .
Ex. 125; PF 42.
Following the PSC's approval of the transaction, Kenefick also wrote to the PSC on September 13, 1921, to reiterate that the sale was "subject to his [Judge's] liabilities." Kenefick went on to explain that "the transfer of the properties . . . is subject to any liability in excess of $ 10,000 which may be imposed upon Mr. Judge in the litigation now pending . . . ." Ex. 170; PF 38.
Judge and his wife then conveyed by separate deeds certain of the BGC assets to Niagara, and the remainder of the assets to the Iroquois Building Corporation, another NFGC subsidiary. Neither of the deeds mentions a transfer of the People's stocks and bonds held by Judge, and no other documents were found which memorialize the transfer. Item 135, p.42.
On October 1, 1921, NFGC executed a voucher entry reflecting its receipt from Judge of all 30,000 shares of the Niagara stock received by him from Niagara for the BGC assets. At the same time, NFGC credited the Judge loan account $ 2,566,715.65. The voucher entry provides:
Capital stock (common) of Niagara Gas Corporation by authority of Public Service Commission, New York State for Investment carried under title of "W.J. Judge Loan Account" 30,000 shares of par $ 100.