The Constitution of the United States of America: Analysis and Interpretation Part 34

There are three ways in which the charter of a corporation may be regarded. In the first place, it may be thought of simply as a license terminable at will by the State, like a liquor-seller's license or an auctioneer's license, but affording the incorporators, so long as it remains in force, the privileges and advantages of doing business in the form of a corporation. Nowadays, indeed, when corporate charters are usually issued to all legally qualified applicants by an administrative officer who acts under a general statute, this would probably seem to be the natural way of regarding them were it not for the Dartmouth College decision. But in 1819 charters were granted directly by the State legislatures in the form of special acts, and there were very few profit-taking corporations in the country.[1616] The later extension of the benefits of the Dartmouth College decision to corporations organized under general law took place without discussion.

Secondly, a corporate charter may be regarded as a franchise const.i.tuting a vested or property interest in the hands of the holders, and therefore as forfeitable only for abuse or in accordance with its own terms. This is the way in which some of the early State courts did regard them at the outset.[1617] It is also the way in which Blackstone regards them in relation to the royal prerogative, although not in relation to the sovereignty of Parliament; and the same point of view finds expression in Story's concurring opinion in Dartmouth College _v._ Woodward, as it did also in Webster's argument in that case.[1618]

The Dartmouth College Case

The third view is the one formulated by Chief Justice Marshall in his controlling opinion in Trustees of Dartmouth College _v._ Woodward.[1619] This is that the charter of Dartmouth College, a purely private inst.i.tution, was the outcome and partial record of a contract between the donors of the college, on the one hand, and the British Crown, on the other, which contract still continued in force between the State of New Hampshire, as the successor to the Crown and Government of Great Britain, and the trustees, as successors to the donors. The charter, in other words, was not simply a grant--rather it was the doc.u.mentary record of a still existent agreement between still existent parties.[1620] Taking this view, which he developed with great ingenuity and persuasiveness, Marshall was able to appeal to the obligation of contracts clause directly, and without further use of his fiction in Fletcher _v._ Peck of an executory contract accompanying the grant.

A difficulty still remained, however, in the requirement that a contract must, before it can have obligation, import consideration, that is to say, must be shown not to have been entirely gratuitous on either side.

Nor was the consideration which induced the Crown to grant a charter to Dartmouth College a merely speculative one. It consisted of the donations of the donors to the important public interest of education.

Fortunately or unfortunately, in dealing with this phase of the case, Marshall used more sweeping terms than were needful. "The objects for which a corporation is created," he wrote, "are universally such as the government wishes to promote. They are deemed beneficial to the country; and this benefit const.i.tutes the consideration, and in most cases, the sole consideration of the grant." In other words, the simple fact of the charter having been granted imports consideration from the point of view of the State.[1621] With this doctrine before it, the Court in Providence Bank _v._ Billings,[1622] and again in Charles River Bridge Company _v._ Warren Bridge Company,[1623] admitted, without discussion of the point, the applicability of the Dartmouth College decision to purely business concerns.

Cla.s.ses of Cases Under the Clause

The cases just reviewed produce two princ.i.p.al lines of decisions stemming from the obligation of contracts clause: first, public grants; second, private executory contracts. The chief category of the first line of cases consists, in turn, of those involving corporate privileges, both those granted directly by the States and those granted by munic.i.p.alities by virtue of authority conferred upon them by the State;[1624] while private debts, inclusive of munic.i.p.al debts, exhaust for the most part the second line.

Public Grants

Munic.i.p.al Corporations.--Not all grants by a State const.i.tute "contracts" within the sense of article I, section 10. In his Dartmouth College decision Chief Justice Marshall conceded that "if the act of incorporation be a grant of political power, if it creates a civil inst.i.tution, to be employed in the administration of the government, * * *, the subject is one in which the legislature of the State may act according to its own justment," unrestrained by the Const.i.tution[1625]--thereby drawing a line between "public" and "private" corporations which remained undisturbed for more than half a century.[1626] It has been subsequently held many times that munic.i.p.al corporations are mere instrumentalities of the State for the more convenient administration of local governments, whose powers may be enlarged, abridged, or entirely withdrawn at the pleasure of the legislature.[1627] The same principle applies, moreover, to the property rights which the munic.i.p.ality derives either directly or indirectly from the State. This was first held as to the grant of a franchise to a munic.i.p.ality to operate a ferry, and has since then been recognized as the universal rule.[1628] As was stated in a case decided in 1923: "The distinction between the munic.i.p.ality as an agent of the State for governmental purposes and as an organization to care for local needs in a private or proprietary capacity," while it limits the legal liability of munic.i.p.alities for the negligent acts or omissions of its officers or agents, does not, on the other hand, furnish ground for the application of const.i.tutional restraints against the State in favor of its own munic.i.p.alities.[1629] Thus no contract rights are impaired by a statute removing a county seat, even though the former location was by law to be "permanent" when the citizens of the community had donated land and furnished bonds for the erection of public buildings.[1630] Likewise a statute changing the boundaries of a school district, giving to the new district the property within its limits which had belonged to the former district, and requiring the new district to a.s.sume the debts of the old district, does not impair the obligation of contracts.[1631] Nor was the contracts clause violated by State legislation authorizing State control over insolvent communities through a Munic.i.p.al Finance Commission.[1632]

Public Offices.--On the same ground of public agency, neither appointment nor election to public office creates a contract in the sense of article I, section 10, whether as to tenure, or salary, or duties, all of which remain, so far as the Const.i.tution of the United States is concerned, subject to legislative modification or outright repeal.[1633] Indeed there can be no such thing in this country as property in office, although the common law sustained a different view which sometimes found reflection in early cases.[1634] When, however, services have once been rendered, there arises an implied contract that they shall be compensated at the rate which was in force at the time they were rendered.[1635] Also, an express contract between the State and an individual for the performance of specific services falls within the protection of the Const.i.tution. Thus a contract made by the governor pursuant to a statute authorizing the appointment of a commissioner to conduct, over a period of years, a geological, mineralogical, and agricultural survey of the State, for which a definite sum had been authorized, was held to have been impaired by repeal of the statute.[1636] But a resolution of a New Jersey local board of education reducing teachers' salaries for the school year 1933-1934, pursuant to an act of the legislature authorizing such action, was held not to impair the contract of a teacher who, having served three years, was by earlier legislation exempt from having his salary reduced except for inefficiency or misconduct.[1637] Similarly, it was held that an Illinois statute which reduced the annuity payable to retire teachers under an earlier act did not violate the contracts clause, since it had not been the intention of the earlier act to propose a contract but only to put into effect a general policy.[1638] On the other hand, the right of one, who had become a "permanent teacher" under the Indiana Teachers Tenure Act of 1927, to continued employment was held to be contractual and to have been impaired by the repeal in 1933 of the earlier act.[1639]

Revocable Privileges Versus "Contracts": Tax Exemptions.--From a different point of view, the Court has sought to distinguish between grants of privileges, whether to individuals or to corporations, which are contracts and those which are mere revocable licenses, although on account of the doctrine of presumed consideration mentioned earlier, this has not always been easy to do. In pursuance of the precedent set in New Jersey _v._ Wilson,[1640] the legislature of a State "may exempt particular parcels of property or the property of particular persons or corporations from taxation, either for a specified period or perpetually, or may limit the amount or rate of taxation, to which such property shall be subjected," and such an exemption is frequently a contract within the sense of the Const.i.tution. Indeed this is always so when the immunity is conferred upon a corporation by the clear terms of its charter.[1641] When, on the other hand, an immunity of this sort springs from general law, its precise nature is more open to doubt, as a comparison of decisions will serve to ill.u.s.trate.

In Piqua Branch of the State Bank _v._ Knoop,[1642] a closely divided Court held that a general banking law of the State of Ohio which provided that companies complying therewith and their stockholders should be exempt from all but certain taxes, was, as to a bank organized under it and its stockholders, a contract within the meaning of article I, section 10. "The provision was not," the Court said, "a legislative command nor a rule of taxation until changed, but a contract stipulating against any change, from the nature of the language used and the circ.u.mstances under which it was adopted."[1643] When, however, the State of Michigan pledged itself, by a general legislative act, not to tax any corporation, company, or individual undertaking to manufacture salt in the State from water there obtained by boring on property used for this purpose and, furthermore, to pay a bounty on the salt so manufactured, it was held not to have engaged itself within the const.i.tutional sense. "General encouragements," said the Court, "held out to all persons indiscriminately, to engage in a particular trade or manufacture, whether such encouragement be in the shape of bounties or drawbacks, or other advantage, are always under the legislative control, and may be discontinued at any time."[1644] So far as exemption from taxation is concerned the difference between these two cases is obviously slight; but the later one is unquestionable authority for the proposition that legislative bounties are repealable at will.

Furthermore, exemptions from taxation have in certain cases been treated as gratuities repealable at will, even when conferred by specific legislative enactments. This would seem always to be the case when the beneficiaries were already in existence when the exemption was created and did nothing of a more positive nature to qualify for it than to continue in existence.[1645] Yet the cases are not always easy to explain in relation to each other, except in light of the fact that the Court's wider point of view has altered from time to time.[1646]

Vested Rights.--Lastly, the term "contracts" is used in the contracts clause in its popular sense of an agreement of minds. The clause therefore does not protect vested rights that are not referable to such an agreement between the State and an individual, such as the right to recovery under a judgment. The individual in question may have a case under the Fourteenth Amendment, but not one under article I, section 10.[1647]

Reservation of the Right to Alter and Repeal

So much for the meaning of the word "contract" when public grants are meant. It is next in order to consider four principles or doctrines whereby the Court has itself broken down the force of the Dartmouth College decision in great measure in favor of State legislative power.

By the logic of the Dartmouth College decision itself the State may reserve in a corporate charter the right to "amend, alter, and repeal"

the same, and such reservation becomes a part of the contract between the State and the incorporators, the obligation of which is accordingly not impaired by the exercise of the right.[1648] Later decisions recognize that the State may reserve the right to amend, alter, and repeal by general law, with the result of incorporating the reservation in all charters of subsequent date.[1649] There is, however, a difference between a reservation by a statute and one by const.i.tutional provision. While the former may be repealed as to a subsequent charter by the specific terms thereof, the latter may not.[1650]

The Right to Reserve: When Limited.--Is the right which is reserved by a State to "amend" or "alter" a charter without restriction?

When it is accompanied, as it generally is, by the right to "repeal,"

one would suppose that the answer to this question was self-evident.

None the less, there are a number of judicial dicta to the effect that this power is not without limit, that it must be exercised reasonably and in good faith, and that the alterations made must be consistent with the scope and object of the grant, etc.[1651] Such utterances amount, apparently, to little more than an anchor to windward, for while some of the State courts have applied tests of this nature to the disallowance of legislation, it does not appear that the Supreme Court of the United States has ever done so.[1652]

Quite different is it with the distinction pointed out in the cases between the franchises and privileges which a corporation derives from its charter and the rights of property and contract which accrue to it in the course of its existence. Even the outright repeal of the former does not wipe out the latter or cause them to escheat to the State. The primary heirs of the defunct organization are its creditors; but whatever of value remains after their valid claims are met goes to the former shareholders.[1653] By the earlier weight of authority, on the other hand, persons who contract with companies whose charters are subject to legislative amendment or repeal do so at their own risk: any "such contracts made between individuals and the corporation do not vary or in any manner change or modify the relation between the State and the corporation in respect to the right of the State to alter, modify, or amend such a charter, * * *"[1654] But later holdings becloud this rule.[1655]

Corporations As Persons Subject To The Law.--But suppose the State neglects to reserve the right to amend, alter, or repeal--is it, then, without power to control its corporate creatures? By no means.

Private corporations, like other private persons, are always presumed to be subject to the legislative power of the State; from which it follows that immunities conferred by charter are to be treated as exceptions to an otherwise controlling rule. This principle was recognized by Chief Justice Marshall in the case of Providence Bank _v._ Billings,[1656] in which he held that in the absence of express stipulation or reasonable implication to the contrary in its charter, the bank was subject to the taxing power of the State, notwithstanding that the power to tax is the power to destroy.

Corporations and the Police Power.--And of course the same principle is equally applicable to the exercise by the State of its police powers. Thus, in what was perhaps the leading case before the Civil War, the Supreme Court of Vermont held that the legislature of that State had the right, in furtherance of the public safety, to require chartered companies operating railways to fence in their tracks and provide cattle yards. In a matter of this nature, said the Court, corporations are on a level with individuals engaged in the same business, unless, from their charter, they can prove the contrary.[1657]

Since then the rule has been applied many times in justification of State regulation of railroads,[1658] and even of the application of a State prohibition law to a company which had been chartered expressly to manufacture beer.[1659]

The Strict Construction of Public Grants

Long, however, before the cases last cited were decided, the principle which they ill.u.s.trate had come to be powerfully reinforced by two others, the first of which is that all charter privileges and immunities are to be strictly construed as against the claims of the State; or as it is otherwise often phrased, "nothing pa.s.ses by implication in a public grant."

The Charles River Bridge Case.--The leading case is that of the Charles River Bridge Company _v._ Warren Bridge Company,[1660] which was decided shortly after Chief Justice Marshall's death by a substantially new Court. The question at issue was whether the charter of the complaining company, which authorized it to operate a toll bridge, stood in the way of the State's permitting another company of later date to operate a free bridge in the immediate vicinity. Inasmuch as the first company could point to no clause in its charter which specifically vested it with an exclusive right, the Court held the charter of the second company to be valid on the principle just stated. Justice Story, who remained from the old Bench, presented a vigorous dissent, in which he argued cogently, but unavailingly, that the monopoly claimed by the Charles River Bridge Company was fully as reasonable an implication from the terms of its charter and the circ.u.mstances surrounding its concession as perpetuity had been from the terms of the Dartmouth College charter and the environing transaction.

The Court was in fact making new law, because it was looking at things from a new point of view. This was the period when judicial recognition of the Police Power began to take on a doctrinal character. It was also the period when the railroad business was just beginning. Chief Justice Taney's opinion evinces the influence of both these developments. The power of the State to provide for its own internal happiness and prosperity was not, he a.s.serted, to be pared away by mere legal intendments; nor was its ability to avail itself of the lights of modern science to be frustrated by obsolete interests such as those of the old turnpike companies, the charter privileges of which, he apprehended, might easily become a bar to the development of transportation along new lines.[1661]

Applications of the Strict Construction Rule.--The rule of strict construction has been reiterated by the Court many times. A good ill.u.s.tration is afforded by the following pa.s.sage from its opinion in Blair _v._ Chicago,[1662] decided nearly seventy years after the Charles River Bridge Case: "Legislative grants of this character should be in such unequivocal form of expression that the legislative mind may be distinctly impressed with their character and import, in order that the privileges may be intelligently granted or purposely withheld. It is a matter of common knowledge that grants of this character are usually prepared by those interested in them, and submitted to the legislature with a view to obtain from such bodies the most liberal grant of privileges which they are willing to give. This is one among many reasons why they are to be strictly construed. * * * 'The principle is this, that all rights which are a.s.serted against the State must be clearly defined, and not raised by inference or presumption; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper interpretation to be given to it, those doubts are to be solved in favor of the State; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State.'"[1663]

Strict Construction of Tax Exemptions.--An excellent ill.u.s.tration of the operation of the rule in relation to tax exemptions is furnished by the derivative doctrine that an immunity of this character must be deemed as intended solely for the benefit of the corporation receiving it and hence may not, in the absence of express permission by the State, be pa.s.sed on to a successor.[1664] Thus, where two companies, each exempt from taxation, were permitted by the legislature to consolidate the new corporation was held to be subject to taxation.[1665] Again, a statute which granted a corporation all "the rights and privileges" of an earlier corporation was held not to confer the latter's "immunity" from taxation.[1666] Yet again, a legislative authorization of the transfer by one corporation to another of the former's "estate, property, right, privileges, and franchises" was held not to clothe the later company with the earlier one's exemption from taxation.[1667]

Furthermore, an exemption from taxation is to be strictly construed even in the hands of one clearly ent.i.tled to it. So the exemption conferred by its charter on a railway company was held not to extend to branch roads constructed by it under a later statute.[1668] Also, a general exemption of the property of a corporation from taxation was held to refer only to the property actually employed in its business.[1669] Also, the charter exemption of the capital stock of a railroad from taxation "for ten years after completion of the said road"

was held not to become operative until the completion of the road.[1670]

So also the exemption of the campus and endowment fund of a college was held to leave other lands of the college, though a part of its endowment, subject to taxation.[1671] Likewise, provisions in a statute that bonds of the State and its political subdivisions are not to be taxed and shall not be taxed were held not to exempt interest on them from taxation as income of the owners.[1672]

Strict Construction and the Police Power.--The police power, too, has frequently benefited from the doctrine of strict construction, although, for a reason pointed out below, this recourse is today seldom, if ever, necessary in this connection. Some of the more striking cases may be briefly summarized. The provision in the charter of a railway company permitting it to set reasonable charges still left the legislature free to determine what charges were reasonable.[1673] On the other hand, when a railway agreed to accept certain rates for a specified period, it thereby foreclosed the question of the reasonableness of such rates.[1674] The grant to a company of the right to supply a city with water for twenty-five years was held not to prevent a similar concession to another company by the same city.[1675]

The promise by a city in the charter of a water company not to make a similar grant to any other person or corporation was held not to prevent the city itself from engaging in the business.[1676] A munic.i.p.al concession to a water company which was to run for thirty years and which was accompanied by the provision that the "said company shall charge the following rates," was held not to prevent the city from reducing such rates.[1677] But more broadly, the grant to a munic.i.p.ality of the power to regulate the charges of public service companies was held not to bestow the right to contract away this power.[1678] Indeed, any claim by a private corporation that it received the rate-making power from a munic.i.p.ality must survive a two-fold challenge: first, as to the right of the munic.i.p.ality under its charter to make such a grant; secondly, as to whether it has actually done so; and in both respects an affirmative answer must be based on express words and not on implication.[1679]

The Doctrine of Inalienable State Powers

The second of the doctrines mentioned above whereby the principle of the subordination of all persons, corporate and individual alike, to the legislative power of the State has been fortified, is the doctrine that certain of the State's powers are inalienable, and that any attempt by a State to alienate them, upon any consideration whatsoever, is _ipso facto_ void, and hence incapable of producing a "contract" within the meaning of article I, section 10. One of the earliest cases to a.s.sert this principle occurred in New York in 1826. The corporation of the City of New York, having conveyed certain lands for the purposes of a church and cemetery together with a covenant for quiet enjoyment, later pa.s.sed a by-law forbidding their use as a cemetery. In denying an action against the city for breach of covenant, the State court said the defendants "had no power as a party, [to the covenant] to make a contract which should control or embarra.s.s their legislative powers and duties."[1680]

The Eminent Domain Power Inalienable.--The Supreme Court first applied similar doctrine in 1848 in a case involving a grant of exclusive right to construct a bridge at a specified locality.

Sustaining the right of the State of Vermont to make a new grant to a competing company, the Court held that the obligation of the earlier exclusive grant was sufficiently recognized in making just compensation for it; and that corporate franchises, like all other forms of property, are subject to the overruling power of eminent domain.[1681]

This reasoning was reinforced by an appeal to the theory of State sovereignty, which was held to involve the corollary of the inalienability of all the princ.i.p.al powers of a State.

The subordination of all charter rights and privileges to the power of eminent domain has been maintained by the Court ever since; not even an explicit agreement by the State to forego the exercise of the power will avail against it.[1682] Conversely, the State may revoke an improvident grant of the public pet.i.tionary without recourse to the power of eminent domain, such a grant being inherently beyond the power of the State to make. So when the legislature of Illinois in 1869 devised to the Illinois Central Railroad Company, its successors and a.s.signs, the State's right and t.i.tle to nearly a thousand acres of submerged land under Lake Michigan along the harbor front of Chicago, and four years later sought to repeal the grant, the Court, in a four-to-three decision, sustained an action by the State to recover the lands in question. Said Justice Field, speaking for the majority: "Such abdication is not consistent with the exercise of that trust which requires the government of the State to preserve such waters for the use of public. The trust devolving upon the State for the public, and which can only be discharged by the management and control of property in which the public has an interest, cannot be relinquished by a transfer of the property. * * * Any grant of the kind is necessarily revocable, and the exercise of the trust by which the property was held by the State can be resumed at any time."[1683] The case affords an interesting commentary on Fletcher _v._ Peck.[1684]

The Taxing Power Not Inalienable.--On the other hand, repeated endeavors to subject tax exemptions to the doctrine of inalienability though at times supported by powerful minorities on the Bench, have always failed.[1685] As recently as January, 1952, the Court ruled that the Georgia Railway Company was ent.i.tled to seek an injunction in the federal courts against an attempt by Georgia's Revenue Commission to compel it to pay _ad valorem_ taxes contrary to the terms of its special charter issued in 1833. To the argument that this was a suit contrary to the Eleventh Amendment it returned the answer that the immunity from Federal jurisdiction created by the Amendment "does not extend to individuals who act as officers without const.i.tutional authority."[1686]

The Police Power; When Inalienable.--The leading case involving the police power is Stone _v._ Mississippi, 101 U.S. 814, decided in 1880. In 1867 the legislature of Mississippi chartered a company to which it expressly granted the power to conduct a lottery. Two years later the State adopted a new Const.i.tution which contained a provision forbidding lotteries; and a year later the legislature pa.s.sed an act to put this provision into effect. In upholding this act and the const.i.tutional provision on which it was based, the Court said: "The power of governing is a trust committed by the people to the government, no part of which can be granted away. The people, in their sovereign capacity, have established their agencies for the preservation of the public health and the public morals, and the protection of public and private rights," and these agencies can neither give away nor sell their discretion. All that one can get by a charter permitting the business of conducting a lottery "is suspension of certain governmental rights in his favor, subject to withdrawal at will."[1687]

The Court shortly afterward applied the same reasoning in a case in which was challenged the right of Louisiana to invade the exclusive privilege of a corporation engaged in the slaughter of cattle in New Orleans by granting another company the right to engage in the same business. Although the State did not offer to compensate the older company for the lost monopoly, its action was sustained on the ground that it had been taken in the interest of the public health.[1688] When, however, the City of New Orleans, in reliance on this precedent, sought to repeal an exclusive franchise which it had granted a company for fifty years to supply gas to its inhabitants, the Court interposed its veto, explaining that in this instance neither the public health, the public morals, nor the public safety was involved.[1689]

Later decisions, nonetheless, apply the principle of inalienability broadly. To quote from one: "It is settled that neither the 'contract'

clause nor the 'due process' clause has the effect of overriding the power to the State to establish all regulations that are reasonably necessary to secure the health, safety, good order, comfort, or general welfare of the community; that this power can neither be abdicated nor bargained away, and is inalienable even by express grant; and all contract and property rights are held subject to its fair exercise."[1690] Today, indeed, it scarcely pays a company to rely upon its charter privileges or upon special concessions from a State in resisting the application to it of measures claiming to have been enacted by the police power thereof. For if this claim is sustained by the Court, the obligation of the contract clause will not avail; while if it is not, the due process of law clause of the Fourteenth Amendment will furnish a sufficient reliance. That is to say, the discrepancy which once existed between the Court's theory of an overriding police power in these two adjoining fields of Const.i.tutional Law is today apparently at an end. Indeed, there is usually no sound reason why rights based on public grant should be regarded as more sacrosanct than rights which involve the same subject matter but are of different provenience.

Private Contracts

Scope of the Term.--The term "private contracts" is, naturally, not all-inclusive. A judgment, though granted in favor of a creditor, is not a contract in the sense of the Const.i.tution;[1691] nor is marriage.[1692] And whether a particular agreement is a valid contract is a question for the courts, and finally for the Supreme Court, when the protection of the contract clause is invoked.[1693]

Source of the Obligation.--The question of the nature and source of the obligation of a contract, which went by default in Fletcher _v._ Peck and the Dartmouth College case, with such vastly important consequences, had eventually to be met and answered by the Court in connection with private contracts. The first case involving such a contract to reach the Supreme Court was Sturges _v._ Crowninshield[1694] in which a debtor sought escape behind a State insolvency act of later date than his note. The act was held inoperative; but whether this was because of its retroaction in this particular case or for the broader reason that it a.s.sumed to excuse debtors from their promises, was not at the time made clear. As noted earlier, Chief Justice Marshall's definition on this occasion of the obligation of a contract as the law which binds the parties to perform their undertakings was not free from ambiguity, owing to the uncertain connotation of the term _law_.