Barings v. Dabney

ERROR to the Supreme Court of South Carolina; the case being thus:

In 1812, the legislature of South Carolina, by a legislative act, created a bank by the name of the Bank of the State of South Carolina. The capital was to consist of various stocks, bonds, and securities specified, then belonging to the State; the same being in fact all the stocks, bonds, and securities which the State owned. The bank thus belonged to the State. The president and directors were to be elected by the legislature, and were made a corporation and body politic. The faith of the State was pledged for the support of the bank, for the supply of any deficiency in the funds specially pledged, and for making good all losses arising from such deficiency. The usual powers were conferred upon the corporation; to purchase, hold, and transfer property of all kinds; to sue and be sued; to adopt its own rules and by-laws; to issue notes, and to make loans by way of discount, secured by mortgage; and to do all acts which might appertain to its functions as a bank.

In December, 1821, by another legislative act, the future profits of the bank were pledged and set apart for the payment of a certain 6 per cent. stock, which the State had previously issued.

In 1838, the city of Charleston suffered from an extensive fire, and the legislature passed, in that same year, an act entitled 'An act for rebuilding the city of Charleston.'

By the first section of this act the governor was directed and required, in the name of the State, to issue bonds or other contracts not exceeding $2,000,000, for the purpose of procuring a loan on the credit of the State to rebuild the burnt portion of the said city; and the faith and funds of the State were pledged for the punctual payment of the bonds or contracts, with interest.

By the third section the money, when obtained in Charleston, was to be deposited in the bank, and become a part of its capital.

By the tenth, eleventh, and twelfth sections it was enacted as follows, to wit:

'SECTION 10. It shall be the duty of the president and directors of the Bank of the State of South Carolina to make proper provisions for the punctual payment of the interest of such loan, and also for the ultimate payment of the principal thereof.

'SECTION 11. It shall be the duty of the president and directors of the Bank of the State of South Carolina to cause to be opened in the books of said bank an account in which they shall debit themselves with the profits arising out of the additional capital created out of the two millions loan aforesaid, for the year ending October 1st, 1839, and with all the future profits of the said loan as the same shall hereafter be annually declared; which said fund, with its annual accumulations, shall be considered solemnly pledged and set apart for the payment of the interest on said loan and the final redemption thereof; and it shall be the duty of the president and directors of the said bank annually to report to both branches of the legislature the exact state of that fund.

'SECTION 12. When the profits of the said Bank of the State of South Carolina shall have paid the interest of certain stocks for which they have been heretofore pledged and set apart, the said profits shall also be considered solemnly pledged and set apart for the payment of the interest on the said loan and the final redemption thereof.'

Under this act a large amount of bonds, known as 'Fire Loan bonds,' were issued and negotiated, of which 109,000 payable in London, and due in 1868, were still outstanding in the hands of Baring Brothers & Co. These bonds, by an indorsement thereon, were guaranteed by the bank.

Certificates of State stock, known as 'Fire Loan stock,' were also issued under the act, payable at the State treasury, and not expressly guaranteed by the bank; of which $318,000 were still outstanding in the hands of a few persons in South Carolina.

Notwithstanding the directions of the eleventh section of the act of 1838, to keep a distinct account of the profits arising out of the additional capital created by the two millions loan, no such account was ever kept; and though the net profits of the bank were annually ascertained, the particular sources from which they arose could not be distinguished, so that at the close of the rebellion in 1865, during which the resources of the bank had been enormously drawn on by the State, the assets which remained were a product made up of capital increased by profits, and the sum diminished by losses till insolvency had supervened.

The bank being thus, at the close of the war, insolvent, the General Assembly, on the 21st of December, 1865, passed an act, entitled 'An act to raise supplies for the year,' &c.; by the eleventh section of which it was enacted,

'That the president and directors of the Bank of the State of South Carolina be, and they are hereby authorized and required to close the branches and agencies of said bank, and that the principal bank at Charleston shall cease to be a bank of issue, but shall continue to act as a bank of deposit until further action of the legislature; and the said president and directors are hereby authorized and required to collect the assets and property of the bank, and hold the same especially appropriated,

'First. To the payment of the principal and interest of the bonds known as the Fire Loan bonds, payable in Europe.

'Second. To the payment of the principal and interest of the Fire Loan bonds, payable in the United States; and,

'Third. To the redemption of outstanding notes hitherto issued by said bank.'

In October, 1867, before the scheme provided in this act was carried out, Dabney, Morgan & Co., holding bills of the bank, filed the bill in this case in the Chancery Court of First Instance of the State for the Charleston District, on behalf of themselves and all other billholders of the bank, against the Baring Brothers & Co. (the holders of 109,000 Fire Loan bonds), and the persons in South Carolina holding the $318,000 of the Fire Loan stock.

Dabney, Morgan & Co. insisted that the Fire Loan bondholders and Fire Loan stockholders were not creditors of the bank, and that the act of 1865 was unconstitutional in that, by directing the property of the bank to be applied to the payment of the debts of the State, which were not debts of the bank, it impaired the obligation of contracts. The bill prayed that the bank might be restrained from carrying the act into effect, and that the complainants and other billholders might be decreed to be paid out of the property and assets of the bank.

The Barings, as Fire Loan bondholders, and the other defendants, as Fire Loan stockholders, answered, each relying largely for himself on the clauses already quoted of the act of 1838; appropriating the profits of the loan (after the payment of the interest on the earlier 6 per cent. stock which had confessedly long since been paid off) to the payment of the Fire Loan; and the argument of their counsel, in view of the fact that no separate account had been kept of the profits, being that a pledge of profits carried the capital from which the profits came; in the same way as the bequest of the interest of public funds, or of the dividends of stock, or a devise of the rents and profits of an estate, is a bequest of the funds or stock themselves, or a devise of the estate from which the rents and profits sprung.

The Barings especially (rather than the Fire Loan stockholders) relied on the act of 1865. They said in their answer:

'If it was apparent in 1865 that, from the force of circumstances, the State would be unable to meet its obligations at the maturity of the bonds in July, 1868, this was in itself good ground for legislative interference to confirm the appropriation of funds as originally pledged.

'Nor was the act of 1865 either unconstitutional, as impairing the obligation of contracts, or contrary to good faith, equity, or conscience.

'The bank had long suspended its payments, and, from the events of the war, was not in a condition to pay at once all its creditors. No bankrupt law existed at the time of the passage of the act. The legislature represented the sole stockholder. Its power and control over the bank was, at least, equal to that of the united stockholders of a private bank. The bank was but its servant. The legislative will was supreme. This paramount power, exercising for the corporation the ordinary privileges accorded, as defendants are advised, by the then existing law, undertook to prefer certain named creditors, while the whole of the assets were appropriated to the payment of debts, nothing being reserved to the corporation or stockholder controlling. The defendants submit that the preferences made were not only in conformity with the then existing law and with good faith, but in accordance with the strictest equity and most enlightened conscience. They aver that the act was a statutory assignment of assets for the benefit of creditors, and that the said assignment was executed by the highest power known to the corporation, and in form the most solemn.'

During the pendency of this suit the legislature of South Carolina, by an act passed September 15th, 1868, entitled 'An act to close the operations of the Bank of the State of South Carolina,' amongst other things repealed the eleventh section of the act of December 21st, 1865, above referred to.

On the 7th of May, 1870, the Court of First Instance, where the bill was filed, decreed that the Fire Loan bondholders and Fire Loan stockholders be first paid pari passu, out of the assets of the bank, and that any surplus be applied pro rata to the billholders, depositors, and other creditors, after adjusting the claims that arose during the war to the value thereof in United States currency. This decree disregarded the eleventh section of the act of 1865 altogether, as being unconstitutional, on two grounds: first, as disposing of property which the State did not own, and violating a solemn contract, on the faith of which the loan was taken; and secondly, as having no relation to the other matter of the act, and the subject of it not being expressed, as the constitution of South Carolina requires that each subject of an act should be, in its title. The contract which the court held to have been violated by this section, was the pledge of profits contained in the eleventh and twelfth sections of the act of 1838, authorizing the Fire Loan. The court held not only that the pledge of the profits was a pledge of the capital, but that the capital had all been drawn out by, and returned to, the State, and that the resulting fund now remaining consisted only of profits. The court further held that this pledge of profits related to both branches of the Fire Loan alike, and that the Fire Loan stock stood on an equal footing with the Fire Loan bonds, although the latter only had been guaranteed by the bank.

The Supreme Court of South Carolina, on appeal, reversed this decree, placing the Fire Loan bondholders on an equality with the other creditors, and holding that the Fire Loan stockholders were not creditors of the bank at all, and not entitled to any participation in the fund; and directed the assets to be distributed among all the creditors of the bank, in proportion to the amount of their claims, reducing those arising during the war to their value in National currency.

The grounds on which this decree was made were:

First, that the pledge of profits in the act of 1838 expressly related to profits as distinguished from the capital; that no separate account of such profits had ever been kept; and that the result was, in fact, a loss instead of profit, the small residue of assets yet subsisting being the joint result of capital, deposits, and moneys received from loans and discounts; and, therefore, that the pledge relied on by the Fire Loan bondholders and stockholders had nothing specific and distinct on which to attach; and that, in fact, nothing was in existence on which it could attach.

Secondly, that the Fire Loan bondholders were to be admitted as creditors only by virtue of the express guarantee of the bonds of the bank; and that the Fire Loan stockholders were to be excluded because the bank had never guaranteed said stock.

Thirdly, that no claim could be sustained by either under the eleventh section of the act of 1865, because that act did not amount to an assignment (which could only be made by the bank), but amounted only to a direction which was never carried into effect, which the State, as sole stockholder of the bank, could, at any time before its execution, revoke, and which, by the act of September, 1868, repealing the said section, it did revoke; and that if the act of 1865 had amounted to an assignment, it could not have been sustained as to the Fire Loan stockholders, because they were not even creditors of the bank.

This decree was brought here by a writ of error, under the second section of the act of the 5th of February, 1867. The interposition of this court was invoked on the ground that the eleventh section of the act of 1865 became a contract with the Fire Loan bondholders and Fire Loan stockholders, and that the validity of the said contract was impaired by the act of 1868, which repealed the said section, and which repealing act was sustained by the decree of the Supreme Court of South Carolina.

Messrs. I. W. Hayne and W. W. Boyce, for the plaintiffs in error; Mr. D. H. Chamberlain, contra.

Mr. Justice BRADLEY delivered the opinion of the court.