New York ex rel. Schurz v. Cook/Opinion of the Court

The present writ of error is prosecuted to review and reverse this judgment, on the ground that the decision of the court of appeals, in enforcing the provisions of the law of 1886 against the relators, plaintiffs in error, and requiring of them the payment of one eighth of 1 per centum upon the amount of the capital stock of the company sought to be incorporated, as a condition precedent to the filing of the certificate and becoming a body politic and corporate under the name of the Western New York & Pennsylvaia Railway Company of New York, impaired the obligation of a contract made and entered into between the state and the several corporations and mortgagees thereof, to whose rights, properties, and franchises the plaintiffs in error, under the foreclosure proceedings aforesaid, had succeeded. Their claim is that, under and by virtue of the provisions of the Laws of 1874, as amended in 1876, embodying the alleged contract with the state, they are entitled to be incorporated, and cannot lawfully be required to pay any tax to the state before becoming a corporation and acquiring the right to exercise corporate functions and franchises. The act of 1874, as amended in 1876, is by its caption entitled 'An act to facilitate the reorganization of railroads sold under mortgage, and to provide for the formation of new companies in such cases.' The provisions of the statute, so far as material to this case, are the following:

'In case the railroad and property connected therewith, and the rights, privileges, and franchises of any corporation, except a street-railroad company, created under the general railroad law of this state, or existing under any special or general act or acts of the legislature thereof, shall be sold under or pursuant to the judgment or decree of any court of competent jurisdiction made or given to execute the provisions or enforce the lien of any deed or deeds of trust or mortgage theretofore executed by any such company, the purchasers of such railroad property and franchises, and such persons as they may associate with themselves, their grantees or assignees, or a majority of them, may become a body politic and corporate, and as such may take, hold, and possess the title and property included in said sale, and shall have all the franchises, rights, powers, privileges, and immunities which were possessed before such sale by the corporation whose property shall have been sold as aforesaid, by and upon filing in the office of the secretary of state a certificate, duly executed under their hands and seals, and acknowledged before an officer authorized to take an acknowledgment of deeds, in which certificate the said persons shall describe, by name and reference to the act or acts of the legislature of this state under which it was organized, the corporation whose property and franchises they shall have acquired as aforesaid, and also the court by authority of which such sale shall have been made, giving the date of the judgment or decree thereof authorizing or directing the same, together with a brief description of the property sold, and shall also set forth the following particulars:

'(1) The name of the new corporation intended to be formed by the filing of such certificate.

'(2) The maximum amount of its capital stock, and the number of shares into which the same is to be divided, specifying how much of the same shall be common, and how much preferred, stock, and the classes thereof, and the rights pertaining to each class.

'(3) The number of directors by whom the affairs of the said new corporation are to be managed, and the names and residences of the persons selected to act as directors for the first year after its organization.

'(4) Any plan or agreement which may have been entered into pursuant to the second section thereof.

'And upon the due execution of such certificate, and the filing of the same in the office of the secretary of state, the persons executing such certificate, and who shall have acquired the title to the property and franchises sold as aforesaid, their associates, successors, and assigns, shall become and be a body politic and corporate, by the name specified in such certificate, and shall become and be vested with and entitled to exercise and enjoy all the rights, privileges, and franchises which, at the time of said sale, belonged to or were vested in the corporation which last owned the property so sold, or its receiver.'

Now, it is contended by plaintiffs in error that the state having, by and under these provisions of law, agreed to give to the purchasers of railroad properties and franchises acquired under foreclosure proceedings, not merely the right to hold, use, and operate the same, but also to confer on them the corporate capacity necessary for that purpose, this latter branch of the contract is violated when the state thereafter either refuses to confer such corporate capacity, or imposes any condition upon the purchasers' right to be and to become a body politic and coporate. Upon this theory the claim is made that the tax imposed by the law of 1886, which was held by the state courts to apply to their case and to the corporation they proposed to form, impaired the obligation of the contract, and was, therefore, unconstitutional. This claim was disposed of by the New York court of appeals, speaking by Peckham, J., as follows:

'We think it also plain that, under the reorganization acts above mentioned, when the purchasers at the foreclosure sale undertake to reorganize under those acts, and for that purpose to file in the secretary's office a certificate, upon the filing of which they become a body politic and corporate, the corporation thus formed is a new and entirely different one from that whose property and franchises the purchasers may have bought under the foreclosure proceedings. It is true that the corporation about to be formed by the filing of the certificate has, by force of the statute, when formed, all the rights, franchises, powers, privileges, and immunities which were possessed before such sale by the corporation whose property was sold; but that does not make the corporation the same by any means. The right to be a corporation, which the old corporation had, was not mortgaged, and was not sold, and did not pass to the purchasers; and they only obtain such a right upon filing the certificate mentioned, and they then obtain it by direct grant from the state, and not in any degree by the sale and purchase of the franchises, etc., of the old corporation.

'The last ground argued by counsel is, we think, equally untenable. There has been no violation of any contract. These mortgages, it is true, were all executed, and the bonds issued, long prior to the passage of the tax act of 1886, already mentioned. The franchises of the corporations were duly mortgaged under the provisions of state laws, by which it was provided that purchasers at foreclosure sales under such mortgages could, upon compliance with the law, file certificates and become incorporated bodies. But such acts were in no sense contracts on the part of the state with persons purchasing bonds secured by such mortgages, or with future possible purchasers at foreclosure sales, that the provisions existing at the time of the mortgaging of the franchise for the incorporation of such purchasers should remain the same. I think this question has been decided in this way by the supreme court of the United States, and further discussion of it is unnecessary. Memphis & L. R. Co. v. Railroad Com'rs, 112 U.S. 609, 5 Sup. Ct. Rep. 299.'

The principles and reasoning in the decision of this court in Memphis & L. R. Co. v. Railroad Com'rs, 112 U.S. 609, 5 Sup. Ct. Rep. 299, are directly applicable to the present case. The attempt to distinguish the two cases necessitates the drawing of distinctions too refined and theoretical to form the basis of sound judicial determination. It was said by this court in that case, (page 621, 112 U.S., and page 304, 5 Sup. Ct. Rep.:) 'In many, if not in most, acts of incorporation, however special in their nature, there are various provisions which are matters of general law, and not of contract, and are, therefore, subject to modification or repeal. Such, in our opinion, would be the character of the right in the mortgage bondholders, or the purchasers at the sale under the mortgage, to organize as a corporation, after acquiring title to the mortgaged property, by sale under the mortgage, if, in the charter under consideration, it had been conferred in express terms, and particular provision had been made as to the mode of procedure to effect the purpose. It would be matter of law, and not of contract. At least, it would be construed as conferring only a right to organize as a corporation according to such laws as might be in force at the time when the actual organization should take place, and subject to such limitations as they might impose. It cannot, we think, be admitted that a statutory provision for becoming a corporation in future can become a contract, in that sense of the clause of the constitution of the United States which prohibits state legislation impairing its obligation, until it has become vested as a right by an actual organization under it; and then it takes effect as of that date, and subject to such laws as may then be in force. * *  * The state does not part with the franchise until it passes to the organized corporation; and when it is thus imparted it must be what the government is then authorized to grant and does actually confer.' It is further said therein that 'the franchise of being a corporation need not be implied as necessary to secure to the mortgage bondholders, or the purchasers at a foreclosure sale, the substantial rights intended to be secured. They acquire the ownership of the railroad, and the property incident to it, and the franchise of maintaining and operating it as such; and the corporate existence is not essential to its use and enjoyment. All the franchises necessary orimportant to the beneficial use of the railroad could as well be exercised by natural persons.' Page 619, 112 U.S., and page 303, 5 Sup. Ct. Rep.

But it is urged by plaintiffs in error that, under the decisions of the highest court of New York, they cannot, as private persons or as an association, so use, maintain, and operate the railroad which they have purchased. Without reviewing the New York cases cited in support of this position, we doubt whether they go to that extent. But if they so held under any law of the state passed since the execution of the mortgages under which plaintiffs in error have succeeded to the properties and franchises of the railroad sold under foreclosure, as already mentioned, then the question would be whether the impairment of the obligation of the contract would not consist in denying the purchasers the right to use the property and franchises so acquired. The fact, if it exists, that plaintiffs in error are not allowed to operate the railroad and exercise the franchises purchased without first obtaining corporate existence, in no way shows or tends to establish their contention that said act of 1874, as amended in 1876, constituted a contract on the part of the state to confer corporate capacity upon them without imposing any tax as a prerequisite to the grant of corporate existence. Again, there is nothing in the acts of 1874 and 1876 which would or could have exempted the railroad corporation to whose rights, privileges, and franchises the plaintiffs in error have succeeded from the payment of taxes such as the state by its legislation might thereafter impose. If they were not in fact, they could constitutionally have been made, subject to the provisions of said act of 1886, and been required to pay the tax of one eighth of 1 per centum upon the amount of their capital stock. The settled rule of this court and of the courts of New York requires that exemption from taxation, so essential to the existence of government, must be expressed in the clearest and most unambiguous language, and not be left to implication or inference. Railroad Co. v. Dennis, 116 U.S. 665, 6 Sup. Ct. Rep. 625; Railroad Co. v. Guffey, 120 U.S. 569, 7 Sup. Ct. Rep. 693; Railroad Co. v. Alsbrook, 146 U.S. 279, 294, 13 Sup. Ct. Rep. 72; and People v. Davenport, 91 N. Y. 574, 586.

The plaintiffs in error acquired the properties and franchises of these corporations, which were subject to the taxing power of the state, after the act of 1886 was passed and went into effect. There is no provision of the law under which they made their purchase requiring them to become incorporated; but, desiring corporate capacity, they demanded the grant of a new charter under which to exercise the franchises so acquired without compliance with the law of the state existing at the time their application for incorporation was made. We are clearly of the opinion that the act of 1874, as amended in 1876, set up and relied upon by them, does not sustain such a claim. The provisions of that act do not constitute a contract on the part of the state with either the corporations or the mortgagees, bondholders, or purchasers at foreclosure sale. They are merely matters of law, instead of contract, and the right therein conferred upon purchasers of the corporate properties and franchises sold under foreclosure of mortgages thereon to reorganize and become a new corporation is subject to the laws of the state existing or in force at the time of such reorganization, and the grant of a new charter of incorporation. Memphis & L. R. Co. v. Railroad Com'rs, supra.

There is another difficulty in the way of sustaining the claim of the plaintiffs in error in this case. The constitution of New York, providing for the formation of corporations under general laws, reserves to the state the power to alter, change, or repeal all such general laws. The Revised Statutes of the state (volume 3, [8th Ed.] c. 18, tit. 3, § 8, p. 1724) provides that 'the charter of every corporation that shall be granted by the legislature shall be subject to alteration, suspension, or repeal in the discretion of the legislature;' and by the general railroad law of New York (chapter 140, § 48, Laws of 1850) it is provided that 'the legislature may at any time annul or dissolve any corporation formed under this act, but such dissolution shall not take away or impair any remedy given against such corporation, its stockholders or officers, for any liability which shall have been previously incurred.'

In the case of People v. O'Brien, 111 N. Y. 1, 18 N. E. Rep. 692, cited by counsel for the plaintiffs in error, while the court held that it was not within the power of the legislature to destroy the property rights of a corporation, it was not questioned that the legislature could destroy the existence of the corporation.

In the still later case of Mayor, etc., v. Twenty-Third St. R. Co., 113 N. Y. 311, 21 N. E. Rep. 60, it was directly held that the right reserved to the legislature to alter or repeal the charter of a corporation included the right to tax a corporation upon its franchises as such, instead of exacting license fees, as before prescribed. Earl, J., speaking for the court there, said: 'As it [the legislature] has the power utterly to deprive the corporation of its franchise to be a corporation, it may prescribe the conditions and terms upon which it may live and exercise such franchises. It may enlarge or limit its powers, and it may increase or limit its burdens.' This construction of the statutes of the state by its highest court is of controlling authority. Bucher v. Railroad Co., 125 U.S. 555, 8 Sup. Ct. Rep. 974; Gormley v. Clark, 134 U.S. 338, 10 Sup. Ct. Rep. 554; and Stutsman Co. v. Wallace, 142 U.S. 293, 12 Sup. Ct. Rep. 227. The right being thus reserved to the legislature, under the power to alter or repeal the charter of corporation, not only to terminate their existence, but to impose upon them increased burdens, it cannot be properly asserted that the act of 1886, imposing the tax complained of, was unconstitutional, even though the act of 1874 created a contract with corporations and their mortgagees, to whose right, properties, and franchises plaintiffs in error have succeeded. The corporations, mortgagees, and bondholders, under such circumstances, acquire their rights subject to the reserved power of the legislature to enlarge or diminish the franchises conferred, and to increase or reduce the burdens thereon. Purchasers succeeding to properties and franchises of corporations thus situated cannot occupy any better position in respect to their application for a new charter of incorporation.

In Hamilton Gaslight Co. v. Hamilton City, 146 U.S. 258, 270, 13 Sup. Ct. Rep. 90, it was said by this court that 'a legislative grant to a corporation of special privileges, if not forbidden by the constitution, may be a contract; but where one of the conditions of the grant is that the legislature may, alter or revoke it, a law altering or revoking, or which has the effect to alter or revoke, the exclusive character of such privileges, cannot be regarded as one impairing the obligation of the contract. * *  * The corporation by accepting the grant subject to the legislative power so reserved by the constitution, must be held to have assented to such reservation;' citing, in support of those views, Greenwood v. Freight Co., 105 U.S. 13, 17. This principle should be especially maintained and applied in cases like the present, where the taxing power of the state is involved.

We do not deem it necessary to consider other points made in the briefs of counsel. They are of minor importance, and do not affect or control the principal question presented. Our conclusion is that there is no error in the judgment complained of, and that the same should be affirmed.