Cosmopolitan Club v. Virginia/Opinion of the Court

Complaint having been made in due form that the Cosmopolitan Club, a corporation of Virginia, formed to promote social intercourse, athletic and physical culture, and to encourage manly sports, had violated and evaded the laws of that commonwealth regulating the licensing and sale of liquors, the corporation court of the city of Norfolk, where the club had its domicil, gave notice that it would, on a named day, inquire into the truth of the charge.

The proceeding was based on a statute of Virginia passed March 12th, 1904, amendatory of a previous statute, and providing that 'upon complaint of any person that any such corporation so chartered as a social club is being conducted, or has been conducted, for the purpose of violating or evading the laws of this state regulating the licensing and sale of liquors, and after service of such complaint on such corporation at least ten days before the hearing of said complaint, the circuit court of the county or the corporation court of the city wherein is located its place of business or meeting, or the judge thereof in vacation, shall inquire into the truth of said complaint; and if the court, or judge in vacation, shall adjudge that the said corporation is being conducted, or has been conducted, for the purpose of violating or evading the laws of the state regulating the licensing and sale of liquors, the chartered rights and franchises of said corporation shall cease and be void without any further proceedings, and the said corporation and all persons concerned in the violation or evasion of said law shall be subject to the penalties prescribed herein.'

At the hearing of the case the club, by its counsel, moved to dismiss the complaint on the ground that, under the Constitutions of Virginia and of the United States, the court had no power to entertain it, and that the act under which it was filed was contrary to those Constitutions. The motion to dismiss was overruled and the parties introduced their evidence. The result was a judgment by the corporation court that the club had been conducted for the purpose of violating and evading the laws of Virginia regulating the licensing and sale of liquors. The defendant then applied to the supreme court of appeals of Virginia for a writ of error and supersedeas. The latter court, upon inspection of the record, refused the application upon the ground that the judgment was plainly right. The president of that court allowed a writ of error for the review of its judgment by this court.

It is contended by the plaintiff in error that the judgment against it was inconsistent with the contract clause of the Constitution of the United States. The charter of the club, it is insisted, was a contract between it and Virginia, which could not be amended or annulled unless, at the time it was granted, the state, by constitutional provision or by legislative act, had retained or reserved the right of repealing, forfeiting, or modifying it. Neither the state Constitution nor any statute, it was alleged,-and we assume such to be the fact,-contained any such reservation at the time the club's charter was granted.

Assuming that the charter of the club constituted a contract between it and the state, it would not follow that the statute of Virginia, enacted in 1904, after the granting of such charter, was inconsistent with the clause of the Constitution forbidding a state from passing any law impairing the obligation of a contract. The principle is well established that the charter of a private corporation may be forfeited or annulled for the misuse of its corporate privileges and franchises, and that its forfeiture or annulment by appropriate judicial proceedings, for such a reason, would not impair the obligation of the contract arising between the state and the corporation out of the mere granting of the charter. In Chicago L. Ins. Co. v. Needles, 113 U.S. 574, 580, 28 L. ed. 1084, 1087, 5 Sup. Ct. Rep. 681, 683, an insurance company contested the validity, under the contract clause of the Constitution, of a statute of Illinois prescribing certain regulations (not in force when the company's charter was granted) in reference to the conduct of life insurance business in that state. This court overruled the contention, observing: 'The right of the plaintiff in error to exist as a corporation, and its authority, in that capacity, to conduct the particular business for which it was created, were granted, subject to the condition that the privileges and franchises conferred upon it should not be abused, or so employed as to defeat the ends for which it was established, and that, when so abused or misemployed, they might be withdrawn or reclaimed by the state, in such way and by such modes of procedure as were consistent with law. Although no such condition is expressed in the company's charter, it is necessarily implied in every grant of corporate existence. Terrett v. Taylor, 9 Cranch, 43, 51, 3 L. ed. 650, 653; Angell & A. Priv. Corp. 9th ed. § 774, note. Equally implied, in our judgment, is the condition that the corporation shall be subject to such reasonable regulations, in respect to the general conduct of its affairs, as the legislature may, from time to time, prescribe, which do not materially interfere with or obstruct the substantial enjoyment of the privileges the state has granted, and serve only to secure the ends for which the corporation was created. Sinking Fund Cases, 99 U.S. 700, 25 L. ed. 496; Com. v. Farmers & M. Bank, 21 Pick. 542, 32 Am. Dec. 290; Commercial Bank v. State, 4 Smedes & M. 497, 503. If this condition be not necessarily implied, then the creation of corporations, with rights and franchises which do not belong to individual citizens, may become dangerous to the public welfare through the ignorance, or misconduct, or fraud of those to whose management their affairs are intrusted. It would be extraordinary if the legislative department of a government, charged with a duty of enacting such laws as may promote the health, the morals, and the prosperity of the people, might not, when unrestrained by constitutional limitations upon its authority, provide, by reasonable regulations, against the misuse of special corporate privileges which it has granted, and which could not, except by its sanction, express or implied, have been exercised at all.'

These principles were expressly reaffirmed, upon a review of the adjudged cases, in New Orleans Waterworks Co. v. Louisiana, 185 U.S. 336, 347, 46 L. ed. 936, 942, 22 Sup. Ct. Rep. 691.

It must, therefore, be held that the contract between the club and the state did not authorize the club to disregard the valid law of the state regulating the licensing and sale of liquors. Such a course upon the part of the club was alleged to be a misuse of its corporate privileges and franchises. The district charge against the club in the corporation court was that it was being conducted for the purpose of violating and evading the statute regulating the licensing and sale of liquors,-a statute which the commonwealth could rightfully enact under its power to care for the health and morals of its people. And the court adjudged that the charge against the club was sustained,-the result being that, by the statute, the chartered rights and franchises of the club ceased without any further proceedings. Even if this court could re-examine the judgment of the corporation court on the facts, the present record would not justify us in holding that error was committed.

Was this result consistent with the due process enjoined by the Constitution? This question must be answered in the affirmative. The proceedings against the club were had in a court competent under the Constitution and laws of Virginia to determine the questions raised by the complaint against the club. This must be assumed to be the case after the highest court of Virginia refused a writ of error, upon the ground that the judgment of the corporation court was plainly right. The mode of proceeding against the club was not unusual in such cases. As early as Terrett v. Taylor, 9 Cranch, 43, 51, 3 L. ed. 650, 653, this court said: 'A private corporation created by the legislature may lose its franchises by a misuser or a nonuser of them; and they may be resumed by the government under a judicial judgment upon a quo warranto to ascertain and enforce the forfeiture.' So, in New Orleans Waterworks Co. v. Louisiana, above cited, the first of several questions raised there was that, since the charter of a certain waterworks company prescribed mandamus as the remedy to maintain a lawful tariff of water rates, was not the substitution by the writs of forfeiture of charter, as a remedy for the maintenance of unlawful rates, a breach of the contract, and a deprivation of the property without due process of law, and a denial of the equal protection of the laws? The court answered the question by saying: 'The answer to the first question, as to mandamus being the exclusive remedy for illegal rates, is that the state court has otherwise construed the charter, and has held that mandamus is not the only remedy, but that the company was liable to be proceeded against by quo warranto at the suit of the state, through its attorney general. The claim that, by so proceeding, there is any impairment of the obligation of a contract by any subsequent legislation, or that there has thus been a deprivation of property without due process of law, or a denial of the equal protection of the laws, has no colorable foundation. An examination of this question, among others, was made by the state court after full hearing by all parties, and all that can possibly be claimed on the part of the plaintiff in error is that such court erroneously decided the law. That constitutes no Federal question.'

It thus appears that the club ceased to exist as a corporation in virtue of a judgment of a court of competent jurisdiction, all the parties being before it and given full opportunity to be heard. Such a judgment cannot be held to have violated any right belonging to the club under the contract or other clause of the Federal Constitution. Foster v. Kansas, 112 U.S. 201, 206, 28 L. ed. 629, 697, 5 Sup. Ct. Rep. 8, 97; Kennard v. Louisiana, 92 U.S. 480, 23 L. ed. 478; New Orleans Waterworks Co. v. Louisiana, above cited.

Judgment affirmed.