Source: https://supreme.justia.com/cases/federal/us/156/649/
Timestamp: 2019-04-25 09:49:36+00:00

Document:
A special statutory exemption or privilege (such as immunity from taxation or a right to fix and determine rates of fare) does not accompany the property of a railroad company in its transfer to a purchaser, in the absence of an express direction in the statute to that effect.
When a state legislature establishes a tariff of railroad rates so unreasonable as to practically destroy the value of the property of companies engaged in the carrying business, courts of the United States may treat it as a judicial. question, and hold such legislation to be in conflict with the Constitution of the United States as depriving the company of its property without due process of law and as depriving it of the equal protection of the laws.
Railroad Commission Cases, 116 U. S. 307; Dow v. Beidelman, 125 U. S. 681; Chicago, Milwaukee &c. Railway v. Minnesota, 134 U. S. 418; Chicago & Grand Trunk Railway v. Wellman, 143 U. S. 339, and Reagan v. Farmers' Loan & Trust Co., 164 U. S. 362, examined in detail.
When, by legislation and consolidation, a railroad which was originally all in one state becomes consolidated with other roads in other states, and the state originally incorporating it enacts laws to regulate the rates of the consolidated road within its borders, the proper test as to the reasonableness of these rates is as to their effect upon the consolidated line as a whole.
When a state prescribes rates for a railroad only a part of which is within its borders, the company may raise the question of their reasonableness by way of defense to an action for the recovery of penalties for violating the directions.
Railway Company, and authorized to construct a railway from the northern boundary of the State of Arkansas to Fayetteville, in that state. This railroad was connected at its northern terminus with the railroad of the St. Louis, Arkansas and Texas Railway Company, a corporation of the State of Missouri, and at its southern terminus with the railroad of the Missouri, Arkansas and Southern Railway Company, a corporation of the State of Arkansas.
Under provisions of the laws of the states of Arkansas and Missouri, on the 10th day of June, 1881, the three companies mentioned were consolidated into a single corporation under the style of the St. Louis, Arkansas and Texas Railway Company, Consolidated.
On and previous to the 21st day of February, 1882, it was provided by the laws of the states of Arkansas and Missouri that any railroad company incorporated under the laws of the State of Missouri might lease or purchase any part of a railroad, with all its rights, privileges, immunities, real estate, and other property, the whole or a part of which was in the State of Missouri, and constructed, owned, or leased by any other company, if the lines of the roads of said companies were connected and continuous, and that any railroad company incorporated under the laws of the State of Arkansas whose road was wholly or in part constructed and in operation was authorized to sell, lease, or otherwise dispose of the whole or any part of its railroad, with all the rights, privileges, franchises, and immunities thereunto belonging, to any connecting railroad or any railroad corporation then or thereafter organized under the laws of the State of Missouri, or of the United States, or of both.
In the manner provided by those laws, the St. Louis, Arkansas and Texas Railway Company, Consolidated, on the 21st day of February, 1882, sold and conveyed all of its railway in the states of Arkansas and Missouri, together with all its rights, privileges, franchises, and immunities, to the St. Louis and San Francisco Railway Company, a corporation organized under the general laws of the State of Missouri and under several acts of the Congress of the United States.
By an Act of the legislature of Arkansas, approved April 14, 1887, the maximum rate of passenger fares to be charged in that state was fixed at three cents per mile, and a penalty of $300 was given the passenger for each overcharge. At the fall term of 1887 of the Washington County Circuit Court, John B. Gill brought an action against the St. Louis and San Francisco Railway Company, alleging that said company, operating a railroad within the State of Arkansas more than seventy-five miles in length had on five distinct occasions charged and received from the plaintiff more than three cents per mile, and demanding judgment for the penalties prescribed in the said statute.
The St. Louis and San Francisco Railway Company filed several pleas or special answers to the complaint, two of which are alleged to raise federal questions. To these special pleas the plaintiff demurred, and the demurrers were sustained. The defendant then made several offers tending to show that the rate of three cents per mile for each passenger carried was unreasonable, and did not enable the defendant to pay its interest or to earn anything on its capital stock. These offers were ruled out, on plaintiff's objection, as incompetent and irrelevant. Due exceptions were taken by the defendant to the action of the court in sustaining the demurrers and in excluding plaintiff's evidence. Judgment went for the plaintiff, which was on appeal affirmed by the Supreme Court of Arkansas, to whose judgment a writ of error was sued out to this Court.
By the Act of April 14, 1887, the Legislature of Arkansas prescribed a maximum rate of three cents per mile for each passenger carried by the railroads of that state, and a penalty of three hundred dollars for each overcharge, payable to the passenger from whom such overcharge had been exacted.
amount equal to three percent on the capital actually paid in; that the net earnings or profits for the next ensuing two years will not exceed three percent on the capital actually paid in, or on the amount actually expended in the construction of said railroad; that the consolidation of the St. Louis, Arkansas and Texas Railway Company of Arkansas with the company of the same name, incorporated in Missouri, and the sale by the company so formed of its railroad to the defendant, each severally became and were compacts made between the states of Missouri and Arkansas with each other, with the consolidated company, and with the defendant company, respectively; that the Act of April, 1887, of the Legislature of Arkansas, attempting to fix passenger rates at less than five cents per mile, insofar as it relates to the defendant's line of railway, never received the assent of the State of Missouri or of the defendant company, and that such enactment was an alteration and impairment of a contract, and as such null and void under the provisions of the Constitution of the United States.
To this plea or special answer the plaintiff demurred.
compensation, and is therefore in violation of the Fifth and Fourteenth Amendments to the Constitution of the United States.
that no less than five cents per mile would be a reasonable sum, or one that would be just to the defendant; that defendant never had, since the construction or completion of said lines of railway, been able to earn from all its sources of revenue an amount which, after paying for the actual cash expenditures necessary for the operation of its road, would yield a profit equal to one percent upon the actual cash cost of said road, which amounted to over $40,000 for every mile of railway constructed.
To this evidence the plaintiff objected as incompetent and irrelevant. The objection was sustained, and the defendant excepted to the action of the court in sustaining the demurrers and in rejecting the said offers of evidence. There was judgment for the plaintiff, from which the defendant appealed to the Supreme Court of Arkansas, from whose judgment, affirming that of the court below, a writ of error was allowed to this Court.
The plaintiff in error bases its demand that the judgment of the Supreme Court of Arkansas should be reversed on two propositions: first, that the Act of April, 1887, as applied to the defendant's railroad, was a violation of a contract between the State of Arkansas and the various corporations which constructed or subsequently acquired the line of railway in question, and second that as the act, as applied to the defendant's railroad, requires the defendant to do business at a positive loss, it therefore constitutes a taking of defendant's property without just compensation or due process of law.
The first proposition requires the plaintiff in error to show that there existed a contract between the State of Arkansas and the St. Louis, Arkansas and Texas Railway Company which, under the existing facts, forbade the application of the act of 1887 to the business of that company, and that the plaintiff in error, the St. Louis and San Francisco Railway Company, succeeded to such contract right.
whenever in their opinion it may be injurious to the citizens of the state, in such manner, however, that no injustice shall be done to the corporators. The law under which the St. Louis Arkansas and Texas Railway Company was organized provided that the legislature might, when any such railroad shall be opened for use, from time to time, alter or reduce the rates of toll, fare, freights, or other profits upon such road; but the same shall not, without the consent of the corporation, be so reduced as to produce with said profits less than fifteen percent per annum on the capital actually paid in, nor unless, on an examination of the amounts received and expended, to be made by the Secretary of State, he shall ascertain that the net income derived by the company, from all sources, for the year then last past, shall have exceeded an annual income of fifteen percent upon the capital of the corporation actually paid in.
The contention is that, if the facts show that the company has not earned fifteen percent per annum on the capital actually paid in, the state is precluded, notwithstanding the power reserved in the Constitution, from reducing the rates or charges.
The supreme court of the state, 54 Ark. 101, as we learn from the record in this case, was of the opinion that the power to alter and amend charters, reserved to the state in its constitution, was not parted with or controlled by the subsequent act of the legislature incorporating the railroad company and authorizing it to establish rates, and that accordingly the passage of a subsequent general law, prescribing rates, could not be deemed an infringement of a contract between the state and the company.
We do not find it necessary to express an opinion on this view of the case, but prefer to base our judgment on another ground, which will bring us to the same result. It has been frequently decided by this Court that a special statutory exemption or privilege, such as immunity from taxation or a right to fix and determine rates of fare, does not accompany the property in its transfer to a purchaser, in the absence of express direction to that effect in the statute. Morgan v. Louisiana, 93 U. S. 217; Wilson v. Gaines, 103 U. S. 417; Chesapeake & Ohio Railway v. Miller, 114 U. S. 176.
"The corporations owning the several parts of the road as to which it is charged that the act operates unjustly were dissolved years before it was passed. As to them, it could not operate unjustly, and in their behalf no cause of complaint can exist."
These considerations dispose of the proposition that the Act of April, 1887, if made to apply to the railroad of the plaintiff in error, would operate as a violation of a contract subsisting between the State of Arkansas and the St. Louis and San Francisco Railway Company.
We are thus brought to the second proposition relied on by the plaintiff in error -- that as the act, when applied to the defendant's railroad, requires the company to do business at a positive loss, it therefore constitutes a taking of defendant's property without due process of law.
Whether, if the power of the state to fix and regulate the passenger and freight charges of railroad corporations has not been restricted by contract, there can be found, by judicial inquiry, a limit to such power in the practical effect its exercise may have on the earnings of the corporations presents a question not free from difficulty. Given the case of a general law prescribing rates to all companies, can the courts inquire whether such rates are reasonable, and may they find that as to one company the prescribed rates permit it to do business at a profit, and as to another, whose facilities are inferior, or where expenditures are greater, the rates afford no profit? And will the fate of the law, as to its validity, depend in each case on the result of such an inquiry?
United States as depriving the companies of their property without due process of law and as depriving them of the equal protection of the laws. Railroad Commission Cases, 116 U. S. 331; Dow v. Beidelman, 125 U. S. 681; Chicago, Milwaukee &c. Railway v. Minnesota, 134 U. S. 418; Chicago & Grand Trunk Railway v. Wellman, 143 U. S. 339; Reagan v. Farmers' Loan & Trust Co., 154 U. S. 362.
The so-called Railroad Commission Cases, 116 U. S. 307, arose under an act of the State of Mississippi passed March 11, 1884, which created a railroad commission, and charged it with the duty of supervising railroads, and particularly with the duty of revising the tariff of charges. The Mobile and Ohio Railroad Company had been theretofore incorporated by a charter which granted to it "the right from time to time to fix, regulate, and receive the tolls and charges by them to be received for transportation." A bill was filed by the Farmers' Loan and Trust Company, a New York corporation, to enjoin the railroad commission from enforcing against the Mobile and Ohio Railroad Company the provisions of the railroad commission act and averring that the complainants were the trustees in a mortgage that had been executed prior to said act, and that the enforcement of the latter would impair their security.
The court held, two justices dissenting, that the statute incorporating the company did not deprive the State of its power, within the limits of its general authority, to act upon the reasonableness of the tolls and charges so fixed and regulated, and reversed the decree of the circuit court which had granted an injunction as prayed for in the bill. We now refer to this case for the purpose of calling attention to the facts that the act provided that proceedings to enforce its provisions were to be instituted by the commission, and that the suit was in form a bill in equity to restrain the commission from applying the terms of the act to the Mobile and Ohio Railroad Company.
compel the railroad companies to perform the services which their duty requires them to do for the general public, which is equivalent to establishing by judicial proceedings the reasonableness of the charges fixed by the commission, I think the court has the same right and duty to inquire into the reasonableness of the tariff of rates established by the commission before granting such relief that it would have if called upon so to do by a bill in chancery."
"Can it be, under these circumstances, that the court erred in peremptorily refusing to instruct the jury that an act fixing a maximum rate at two cents per mile is unconstitutional? Is the validity of a law of this nature dependent upon the opinion of two witnesses, however well qualified to testify? Must court and jury accept their opinion as a finality? Must it be declared, as a matter of law that a reduction of rates necessarily diminishes income? May it not be possible, indeed does not all experience suggest the probability, that a reduction of rates will increase the amount of business, and therefore the earnings?"
behalf of the people of the state took any part. What difference there might have been in the record had the people been represented in the court below, however, in our view, of the case, is not of material inquiry,"
"We think there is much in the suggestion. The theory upon which, apparently, this suit was brought is that parties have an appeal from the legislature to the courts, and that the latter are given an immediate and general supervision of the constitutionality of the acts of the former. Such is not true. Whenever, in pursuance of an honest and actual antagonistic assertion of rights by one individual against another, there is presented the validity of any act of any legislature, state or federal, and the decision necessarily rests on the competency of the legislature so to enact, the court must, in the exercise of its solemn duties, determine whether the act be constitutional or not; but such an exercise of power is the ultimate and supreme function of courts. It is legitimate only in the last resort, and as a necessity in the determination of real, earnest, and vital controversy between parties. It was never thought that, by means of a friendly suit, a party beaten in the legislature could transfer to the courts an inquiry as to the constitutionality of the legislative act. . . . One suggestion is only to indicate how easily courts may be misled into doing grievous wrong to the public, and how careful they should be not to declare legislative acts unconstitutional upon agreed and general statements, and without the fullest disclosure of all material facts."
case, by reason of the admitted facts, that with the same traffic that their road now has, and charging for transportation at the rate of three cents per mile, the net yearly income will pay less than one and a half percent on the original cost of the road, and only a little more than two percent on the amount of its bonded debt. But there is no evidence whatever as to how much money the bonds cost, or as to the amount of the capital stock of the company as reorganized, or as to the sum paid for the road by that corporation or its trustees. It certainly cannot be presumed that the price paid at the sale under the decree of foreclosure equaled the original cost of the road or the amount of outstanding bonded debt. Without any proof of the sum invested by the reorganized corporation or its trustees, the court has no means, if it would under any circumstances have the power, of determining that the rate of three cents a mile fixed by the legislature was unreasonable. Still less does it appear that there has been any such confiscation as amounts to a taking of the property without due process of law."
rates, and also restraining the Attorney General from instituting any suits to recover penalties for failing to conform to such rates. The International and Great Northern Railroad Company appeared, filed an answer, and also a cross-bill similar in its scope and effect to the bill filed by the plaintiff, and praying substantially the same relief. The commission and the attorney at first filed answers, which they subsequently withdrew, and filed demurrers, leave being given at the same time to the complainant and cross-complainant to amend the bill and cross-bill before the filing of the demurrer. The amendments contained allegations in considerable detail of the losses in revenue sustained by the company through the enforcement of the statutory rates, and the average reduction caused thereby in the rate theretofore existing.
The circuit court entered a decree granting the injunctions as prayed for, restraining and forbidding the commission from enforcing the established rates, and from making or publishing any other or further rates.
The opinion of this Court on appeal was that while it was within the power of a court of equity in such case to decree that the rates so established by the commission were unreasonable and unjust and to restrain their enforcement, it was not within its power to establish rates itself, or to restrain the commission from again establishing rates.
"It may not be just to take this as an allegation of a mere matter of fact, the truthfulness of which is admitted by the demurrer, and which, as thus admitted, eliminates from consideration all questions as to the true character and effect of the rates; yet it is not to be ignored. There are often in pleadings general allegations of mixed law and fact, such as the ownership of property and the like, which, standing alone, are held to be sufficient to sustain judgments and decrees, and yet are always regarded as qualified, limited, or even controlled by particular facts stated therein. It would not, of course, be tolerable for a court of equity to seize upon a technicality for the purpose or with the result of entrapping either of the parties before it. Hence, we should hesitate to take the filing of the demurrers to these bills as a direct and explicit admission on the part of the defendants that the rates established by the commission are unjust and unreasonable. It must be noticed that at first answers were filed, tendering issue upon the matters of fact, and testimony was taken, the extent of which, however, is not disclosed by the record. After that, the defendants applied for leave to withdraw their answers and file demurrers. It is not to be supposed that this was done thoughtlessly. But one conclusion can be drawn from that action, and that is that upon the taking of the testimony, defendants became satisfied that the particular facts were as stated in the bills, and that the conclusions to be drawn from such facts could not be overthrown by any other matters. Hence, if it appears that the facts stated in detail tend to prove that the rates are unreasonable and unjust, we must assume, as against the demurrers, that the general allegation heretofore quoted is true, and that there are no other and different facts which, if proved, might induce a different conclusion, and compel a different result."
"he actual cost of carrying each passenger over that portion of defendant's railway in plaintiff's petition mentioned, and over all its railway therein referred to, did and does now exceed the sum of three cents per mile for each and every passenger so carried,"
"three cents per mile for the service rendered by defendant in carrying passengers at the times in plaintiff's petition mentioned, over the line of railroad therein mentioned, was not reasonable compensation, and that no less than five cents per mile would be a reasonable sum."
part would be unremunerative; that it would be practically impossible to ascertain in what proportion the several parts should share with others in the expenses and receipts in which they participated; and finally that to the extent that the question of injustice is to be determined by the effects of the act upon the earnings of the company, the earnings of the entire line must be estimated as against all its legitimate expenses under the operation of the act within the limits of the State of Arkansas.
Sometimes, in acting on this subject, the state legislatures have created commissions or boards of public works, with power to establish rates for the transportation of passengers and freight, and in such instances the course recommended by Mr. Justice Miller, already cited, may well be followed -- that the remedy for a tariff alleged to be unreasonable should be sought in a bill in equity or some equivalent proceeding wherein the rights of the public as well as those of the company complaining can be protected.
But there are other cases, and the present is one, where the legislatures choose to act directly on the subject by themselves establishing a tariff of rates and prescribing penalties. In such cases, there is no opportunity to resort to a compendious remedy such as a proceeding in equity, because there is no public functionary or commission which can be made to respond, and therefore, if the companies are to have any relief, it must be found in a right to raise the question of the reasonableness of the statutory rates by way of defense to an action for the collection of the penalties.
Legislature of Arkansas which on its face appears to be a legitimate exercise of power, and which has not been shown by clear and satisfactory evidence to operate unjustly and unreasonably, in a constitutional sense, against the plaintiff in error.

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