Source: https://supreme.justia.com/cases/federal/us/96/432/
Timestamp: 2019-04-19 14:21:02+00:00

Document:
1. Wherever rights acknowledged and protected by the Constitution of the United States are denied or invaded by state legislation which is sustained by the judgment of a state court, this Court is authorized to interfere. Its jurisdiction, therefore, to reexamine such judgment cannot be defeated by showing that the record does not in direct terms refer to some constitutional provision nor expressly state that a federal question was presented. The true jurisdictional test is whether it appears that such a question was decided adversely to the federal right.
2. The provision in that Constitution that no state shall pass a law impairing the obligation of contracts is a limitation upon the taxing power of a state as well as upon all its legislation, whatever form it may assume. Therefore a law changing the stipulations of a contract, or relieving a debtor from a strict and literal compliance with its requirements, enacted by a state in the exercise of that power is unconstitutional and void.
3. A city, when it borrows money and promises to repay it with interest, cannot, by its own ordinances, under the guise of taxation, relieve itself from performing to the letter all that it has expressly promised to its creditors.
4. Debts are not property. A nonresident creditor of a city cannot be said to be, in virtue of a debt which it owes him, a holder of property within its limits.
"such assessments on the inhabitants of Charleston, or those who hold taxable property within the same, for the safety, convenience, benefit, and advantage of the city as shall appear to them expedient."
Under this power, there was an ordinance of the city, ratified March 22, 1870, "to raise supplies for the fiscal year ending Dec. 31, 1870." Sec. 1 authorizes and requires the city appraiser to assess a tax of two cents upon the dollar of the value of all real and personal property in the city for the purpose of meeting the expenses of the city government for the current fiscal year.
Sec. 3 directs that the tax assessed on city stock shall be retained by the city treasurer out of the interest thereon, when the same is due and payable.
Murray, as a holder, brought suit, Nov. 17, 1871, in the Court of Common Pleas for the County of Charleston against the City Council of Charleston to recover the amount of the tax which the treasurer had retained out of the interest due to him, alleging that the said tax was illegal.
The answer of the council, among other matters, sets forth that the stock was duly assessed and that it was not expressly exempted from taxation by the ordinance under which it was issued.
1. That the plaintiff has been, since January, 1870, the holder and owner of $35,262.33 of six percent stock issued by defendant, the interest thereon payable quarterly.
3. That the defendant owed the plaintiff for interest on his said stock the several sums set forth in the fourth paragraph of the complaint, on the several days therein named, and that it paid the same to him, less certain sums retained.
4. That the several sums so retained by the defendant, amounting in all to $440.75, were by the defendant kept as the amount of taxes due from the said plaintiff to the said city, being a tax at the rate of two percent per annum upon the principal of said stock, said tax being imposed by virtue of the ordinance of the said City Council of Charleston, ratified March 22, 1870, entitled "An ordinance to raise supplies for the fiscal year ending Dec. 31, 1870," and a similar ordinance, ratified March 1, 1871, to raise supplies for the fiscal year ending Dec. 31, 1871, and that said stock was not specifically exempted from taxation by the ordinance under which it was issued.
5. That the plaintiff, by his agent, protested against the deduction of said tax and duly entered his protest on each receipt for interest on said stock.
1. That the City Council of Charleston, as a municipal corporation, has a right, under the constitution and laws of the state, to tax the property of the plaintiff invested in stock issued by it, said stock not being specifically exempted by law from taxation nor being exempt from taxation by the ordinance under which it was issued.
2. That the City Council of Charleston had a right to collect the tax imposed on the property of the plaintiff in said stock by retaining the amount of such tax out of payments made to the plaintiff on account of the interest due thereon, and the plaintiff cannot recover the same.
1. That plaintiff, being resident in a foreign country, is not liable to the tax levied and retained by the city council.
2. That the laws of the state do not authorize the city council to levy and retain a tax upon its own stock.
"existed at the time of the contract, and so entered into it as to become one of its necessary elements and attributes. The obligation of the contract was not impaired by the imposition of the tax, because it was a property which attached to the contract."
was given for the defendant. This judgment was subsequently affirmed by the supreme court, and the record is now before us, brought here by writ of error. It is objected that we have no jurisdiction of the case because, it is said, no federal question was raised of record or decided in the court of common pleas, where the suit was commenced.
"make such assessments on the inhabitants of Charleston, or those who hold taxable property within the same, for the safety, convenience, benefit, and advantage of the city as shall appear to them expedient."
"where is drawn in question the validity of a statute of, or an authority exercised under, any state on the ground of their being repugnant to the Constitution, treaties, or laws of the United States and the decision is in favor of their validity."
Not a word is said respecting the mode in which it shall be made to appear that such a question was presented for decision. In the present case, it was necessarily involved, without any formal reference to any clause in the Constitution, and it is difficult to see how any such reference could have been made to appear expressly.
"that it is not necessary the question should appear on the record to have been raised, and the decision made in direct and positive terms, in ipsissimis verbis, but that it is sufficient if it appears by clear and necessary intendment that the question must have been raised, and must have been decided, in order to have induced the judgment."
This case was followed by Armstrong v. Treasurer of Athens County, 16 Pet. 281, where it was held sufficient to give this Court jurisdiction if it appear from the record of the state court that the federal question was necessarily involved in the decision and that the court could not have given the judgment or decree which they passed without deciding it. See also Bridge Proprietors v. Hoboken Company, 1 Wall. 116, and Furman v. Nichol, 8 Wall. 44.
by pleading its own ordinances directing its officer to withhold the two percent of the interest promised whenever it became due and payable according to the stipulations of the contract, calling the amount detained a tax. Of course the question is directly presented whether the ordinances are a justification; whether they can and do relieve the debtor from full compliance with the promise -- in other words, whether the ordinances are valid and may lawfully be applied to the contract. The court gave judgment for the defendant, which would have been impossible had it not been held that they have the force of law, notwithstanding the Constitution of the United States, and the supreme court affirmed the judgment. Our jurisdiction, therefore, is manifest.
"True, our assumption was to pay to you quarterly a sum of money equal to six percent per annum on the debt we owe you. Such was our express engagement. But we now lessen our obligation. Instead of paying all the interest to you, we retain a part for ourselves, and substitute the part retained for a part of what we expressly promised you."
of a right in the creditor to change its terms, a right reserved when the contract was made -- unless some power was withheld, not expressed or disclosed, but which entered into and limited the express undertaking. But how that can be -- how an express contract can contain an implication or consist with a reservation directly contrary to the words of the instrument, has never yet been discovered.
It has been strenuously argued on behalf of the defendant that the State of South Carolina and the City Council of Charleston possessed the power of taxation when the contracts were made, that by the contracts the city did not surrender this power, that therefore the contracts were subject to its possible exercise, and that the city ordinances were only an exertion of it. We are told the power of a state to impose taxes upon subjects within its jurisdiction is unlimited (with some few exceptions), and that it extends to everything that exists by its authority or is introduced by its permission. Hence it is inferred that the contracts of the City of Charleston were made with reference to this power, and in subordination to it.
"You need not pay to your creditor all of what you have promised to him. You may satisfy your duty to him by retaining a part for yourself, or for some municipality, or for the state treasury."
Much less can a city say, "We will tax our debt to you, and in virtue of the tax withhold a part for our own use."
"involve two contradictory things: an obligation to do and a right not to do; an obligation to pay a certain sum and a right to retain it in the shape of a tax. It is against the rules both of law and of reason to admit by implication in the construction of a contract a principle which goes in destruction of it."
The truth is, states and cities, when they borrow money and contract to repay it with interest, are not acting as sovereignties. They come down to the level of ordinary individuals. Their contracts have the same meaning as that of similar contracts between private persons. Hence, instead of there being in the undertaking of a state or city to pay a reservation of a sovereign right to withhold payment, the contract should be regarded as an assurance that such a right will not be exercised. A promise to pay with a reserved right to deny or change the effect of the promise is an absurdity.
creditor -- namely, payment to him -- without a violation of the Constitution.
"The true rule of every case of property founded on contract with the government is this: it must first be reduced into possession, and then it will become subject, in common with other similar property, to the right of the government to raise contributions upon it. It may be said that the government may fulfill this principle by paying the interest with one hand and taking back the amount of the tax with the other. But to this the answer is that to comply truly with the rule, the tax must be upon all the money of the community, not upon the particular portion of it which is paid to the public creditors, and it ought besides to be so regulated as not to include a lien of the tax upon the fund. The creditor should be no otherwise acted upon than as every other possessor of money, and consequently the money he receives from the public can then only be a fit subject of taxation when it is entirely separated [from the contract], and thrown undistinguished into the common mass."
3 Hamilton, Works, 514 et seq. Thus only can contracts with the state be allowed to have the same meaning as all other similar contracts have.
"Where the importer has so acted upon the thing imported that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import and has become subject to the taxing power of the state."
to vary or lessen the debtor's obligation imposed by the contracts.
In opposition to the conclusion we have reached, we are referred to Champaign County Bank v. Smith, 7 Ohio St. 42, and People v. Home Insurance Co., 29 Cal. 533, in which it is said the power of a state to tax its own bonds was sustained. We do not, however, regard those cases as in conflict with the opinion we now hold, and if they were, they would not control our judgment when we are called upon to determine the meaning and extent of the federal Constitution. In the former, it appeared that the tax collected was in virtue of an assessment of state bonds belonging to the bank, but deposited with the auditor of state as security for the circulating notes of the company. The tax thus assessed having been carried into the duplicate, the collector seized and appropriated the banknotes and money of the bank, and suit was brought to recover the amount so taken. In sustaining a demurrer to the petition, the court held, it is true, that a state has power to tax its own bonds equally with other property, and that the exercise of such a power involves no violation of a contract. But it was not held that the state could collect the tax by withholding from the creditor and part of what the state had assumed to pay. The tax was laid not upon the debt, but upon the creditor, and it was collected not out of what the state owed, but out of the general property of the bank. Neither by the assessment nor in the collection was there any interference with the contract. In People v. Home Insurance Company, the question was whether bonds of the State of California, belonging to a New York insurance company but deposited and kept in the state as required by an act to tax and regulate foreign insurance companies doing business in the state, were assessable for taxation there. It was ruled that they were. This case no more than the former meets the question we have before us. It certainly does not hold that a state or a city, by virtue of its taxing power, can convert its undertaking to pay a debt bearing six percent interest into one bearing only four.
"the law which requires the treasurer of the company (indebted) to retain five percent of the interest due to the nonresident bondholder is not . . . a legitimate exercise of the taxing power. It is a law which interferes between the company and the bondholder, and, under the pretense of levying a tax, commands the company to withhold a portion of the stipulated interest and pay it over to the state. It is a law which thus impairs the obligation of the contract between the parties. The obligation of a contract depends upon its terms and the means which the law in existence at the time affords for its enforcement. A law which alters the terms of a contract by imposing new conditions or dispensing with those expressed is a law which impairs its obligation, for such a law . . . relieves the parties from the moral duty of performing the original stipulations of the contract, and it prevents their legal enforcement."
This was said, it is true, in a case where the question was whether a tax thus imposed upon a nonresident holder of bonds issued by a company chartered by the state was warranted by the Constitution. But so far as it speaks of what constitutes impairing the contract obligation, it is applicable in its fullest extent to all legislation affecting contracts, no matter who may be the parties.
We do not care now to enter upon the consideration of the question whether a state can tax a debt due by one of its citizens or municipalities to a nonresident creditor, or whether it has any jurisdiction over such a creditor or over the credit he owns. Such a discussion is not necessary, and it may be doubtful whether the question is presented to us by this record.
to it in all its spirit. The inviolability of contracts, and the duty of performing them, as made, are foundations of all well ordered society, and to prevent the removal or disturbance of these foundations was one of the great objects for which the Constitution was framed.
I am of opinion that the power of taxation found in the charter of the City of Charleston, long before the contract was made which is here sued on, entered, like all other laws, into the contract and became a part of it. In other words, the contract was made subject to this power of taxation by the City of Charleston, as found in her charter from 1781 to the present time.
NOTE -- In Jenkins v. Charleston, error to the Supreme Court of the State of South Carolina, which was argued by Mr. A. G. Magrath and Mr. James Lowndes for the plaintiff in error and by the same counsel for the defendant in error as was the preceding case, MR. JUSTICE STRONG, in delivering the opinion of the Court, remarked: "This case is like Murray v. Charleston, and is governed by the decision there made."

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