is unjustly enriched. It is true that the defalcation of the trustee may have impoverished the estate, but that is in a separate transaction, for which the creditor is in no way responsible. Although the trustee is not an agent of the cestui que trust, he is in a sense an agent of the estate. The situation is therefore different from the case where a bailee makes a contract for the improvement of the thing bailed, in which case the owner cannot be held liable for the incidental benefit.73 The enrichment of the cestui que trust is not merely incidental. As a matter of fact, the creditor frequently looks to the solvency of the estate and gives credit on the faith of it. It is true, he relies also on the trustee, and if the trustee is solvent and within the jurisdiction, it is a wise rule to make the creditor pursue him. But when the remedy against the trustee is unavailing, there is no good reason why the estate should profit at the expense of the creditor. In most jurisdictions, however, a direct right against the estate, based on the prevention of unjust enrichment, is denied; and the creditor's right against the trust estate is dependent on and limited to the extent of the trustee's right to exoneration, and it is necessary in every case to go into the trustee's accounts to ascertain whether he has a right to exoneration, except in the cases where the trustee has expressly mortgaged or pledged, or has expressly charged, the trust estate.

74

HARVARD LAW SCHOOL.

73 Cahill v. Hall, 161 Mass. 512, 37 N. E. 573 (1894).

Austin W. Scott.

74 In re Johnson, 15 Ch. Div. 548 (1880); In re Evans, 34 Ch. Div. 597 (1887); In re British Power, etc. Co., [1910] 2 Ch. 470; In re Morris, 23 L. R. Ir. 333 (1889); Hewitt. Phelps, 105 U. S. 393 (1881); Dantzler v. McInnis, 151 Ala. 293, 44 So. 193 (1907) (semble); Mason v. Pomeroy, 151 Mass. 164, 24 N. E. 202 (1890) (semble); Clopton v. Gholson, 53 Miss. 466 (1876); Norton v. Phelps, 54 Miss. 467, 471 (1877) (semble); Wells-Stone Mercantile Co. v. Aultman, Miller & Co., 9 N. D. 520, 84 N. W. 375 (1900) (semble). But if the trustee pays the creditor, using, to the creditor's knowledge, funds of the trust estate, the creditor need not refund, although on an accounting the trustee is subsequently proved to be in default to the estate unless at the time of making the payment the trustee was in default to the estate, and the creditor knew that he was in default. In re Blundell, 40 Ch. Div. 370 (1888).

SEPARATION OF INTERSTATE AND INTRASTATE ACCOUNTS IN FEDERAL AND STATE REGULATION OF RATES

WH

I

HEN a railroad runs through several states, as almost all the railway systems of our day do, it is unavoidable that in determining the reasonableness of a rate established by one of the states the situation of the whole line must be considered. But there is involved inevitably, if the theory underlying the Constitution of our United States is to be put into practice in state and federal regulation of rates, a separation of intrastate and interstate accounts. Thus, where the intrastate rates of an interstate system are brought in question, one of two plans must be adopted: (1) if the income of the whole line is taken as a basis of inquiry, then the possibility of the other states fixing a similar rate must be considered; (2) or if, on the other hand, this one rate is considered, its reasonableness must be determined by an examination of the capitalization and income of the road within the particular state. It would seem to be clear upon theory that the rates for such transportation as begins and ends in the state must be established with reference solely to the amount of business done by the carrier wholly within such state, to the cost of doing such local business, and to the fair value of the property used in conducting it, without taking into consideration the amount and cost of its interstate business and the value of the property employed in it. The argument to the contrary leads to the conclusion that a state could go beyond the confines of its jurisdiction to the extent of requiring local business to be conducted even at an actual loss, if the company earned on its interstate business enough to give it just compensation in respect of its entire line and all its business, interstate and domestic. Although the general rule governing this whole situation which has finally been established may be stated in a few words, the application of it to particular facts by reason of the complication of the accounts involved is a very dif

ficult matter indeed. But the principle which has been established is sufficiently stated when it is said that the Constitution as interpreted by the Supreme Court of the United States requires that the value of the plant utilized in the intrastate business and the net earnings from such business must both be ascertained in order to determine whether the rates fixed by the state or its Commission are reasonable or confiscatory.

II

In the earlier days the contention was tentatively put forth that such interstate traffic as originates or terminates in the state should be divided upon a mileage basis, and such portion thereof as was done within the state held to be subject to state control, and taken into consideration in determining the reasonableness of the rates fixed by its Commission. This, however, as was appreciated almost from the outset, cannot be done. Commerce which begins in one state and passes into another is not less interstate commerce than that which passes entirely across states. If the different states could regulate that portion of interstate commerce which is moved within their respective limits, there would be left no commerce whatever subject to congressional control. This whole matter has been repeatedly before the Supreme Court of the United States, and since the case of Wabash, St. Louis & Pacific Railroad v. Illinois1 that court has uniformly held that the states cannot fix rates for, or regulate in any manner, that portion of interstate commerce which moves within their territorial limits. Such traffic, throughout its entire course, is subject to the exclusive jurisdiction of Congress, just as commerce between two points wholly within a state is subject solely to the jurisdiction of its authorities, according to the present exercise of powers of government under our system.

All this was first pointed out by Mr. Justice Brewer in the leading case of Chicago & Northwestern Ry. Co. v. Dey.2

1 118 U. S. 557 (1886).

Until a statutory rate is established what would be a reasonable rate at common law under the Constitution governs, and furthermore what is the reasonable rate in the case of statutory regulation under the Constitution depends upon the significance of that phrase at common law. Southern Indiana R. Co. v. Railroad Commission, 172 Ind. 113, 87 N. E. 966 (1909).

"Defendant's road runs through other states; these states may impose no schedule of rates; part of its business is interstate, and only Congress can limit that; so that from the business elsewhere revenues may be earned which will enable it to make up any deficiency in this state. But the invalidity of this schedule does not depend upon legislation or action elsewhere. If this schedule may be put in force here, a similar one may be in Illinois, Minnesota, and other states through which the company's road runs. For some purposes its property in this state is separate and distinct from its property elsewhere, and out of this property within this state it is entitled to receive some compensation. Robbing Peter to pay Paul has never received judicial sanction."

The other possibility, that the reasonableness of the rate must be determined upon the assumption that the same rate will be adopted throughout the whole system, was that applied in Steenerson v. Great Northern Ry. Co.3

"It seems to us that there is scarcely any good reason why a railway system should be divided on state lines at all for the purpose of fixing rates. After rejecting the portions that are not self-supporting, the balance of the system may be considered as a whole; and, in fixing rates in one state, it will only be necessary to see that, if rates are properly adjusted throughout so as to correspond with the rates thus fixed, the whole of such balance of the system will yield a reasonable income on the cost of reproducing the same."

The Supreme Court of the United States, however, adopting the first alternative, has long since insisted upon the separation of the value of the plant used for merely intrastate business, and also of the net earnings from such business, and that upon these bases the reasonableness of the rate fixed by the state shall be determined. In the leading case on this point, Smyth v. Ames, Mr. Justice Harlan said:

"In our judgment, it must be held that the reasonableness or unreasonableness of rates prescribed by a state for the transportation of persons and property wholly within its limits must be determined without reference to the interstate business done by the carrier, or to the

3 69 Minn. 353, 396, 72 N. W. 713, 724 (1897).

4169 U. S. 466, 541 (1898).

See Philadelphia & R. Ry. Co. v. Interstate Commerce Commission, 174 Fed. 687 (1909), as to the impropriety of assuming that the cost of moving a particular traffic is the average cost of handling all traffic.

profits derived from it. The state cannot justify unreasonably low rates for domestic transportation, considered alone, upon the ground that the carrier is earning large profits on its interstate business, over which, so far as rates are concerned, the state has no control. Nor can the carrier justify unreasonably high rates on domestic business upon the ground that it will be able only in that way to meet losses on its interstate business. So far as rates of transportation are concerned, domestic business should not be made to bear the losses on interstate business, nor the latter the losses on domestic business."

III

The observance of this rule depends ultimately upon the practicability of allocating shares in accounts necessarily joint. But this process must be employed in order to determine the cost of any branch of a service rendered by a system, whether it be a question of separating passenger capital from freight, or interstate expense from intrastate. Of any given railroad it may be said that it is entitled to take as gross receipts from its whole business a certain sum, determined by taking its operating expenses, including therewith all proper maintenance charges, and adding to these its fixed charges, that is, a fair return upon a reasonable capitalization. In testing freight rates the standard to be determined is the ton-mile cost. If the sum of the whole amount of freight carried be one hundred million ton-miles, and the gross revenue required from freight be one million dollars, the average rate of freight will be one cent per ton-mile. If there were no other factors in the problem, therefore, a fair proportionate rate would be the ton-mile average charge. But as other factors are always present which cause a difference between commodities with respect to the fair charge for carrying them, a uniform ton-mile rate applied to all cases would not result in reasonable rates.5

Evidence must be adduced by the carrier, in attacking the rates fixed by the government, of sufficient force to convince the court that the authorities have acted arbitrarily without reference to cost. Although generally abhorrent to economists, the ton-mile cost basis is well recognized in determining the reasonableness of particular rates. In a recent case in the United State Supreme

5 Wood v. Vandalia R. R. Co., 231 U. S. 1 (1913).

• Atlantic C. L. R. Co. v. Florida, 203 U. S. 256, 260 (1906).