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THE PROVIDENCE BANK, PLAINTIFFS IN ERROR v. ALPHEUS BILLINGS AND THOMAS G. PITTMAN.

January 1, 1830

THE PROVIDENCE BANK, PLAINTIFFS IN ERROR
v.
ALPHEUS BILLINGS AND THOMAS G. PITTMAN.



THIS was a writ of error to the supreme judicial court of the state of Rhode Island; and the question which was presented for the consideration of the court, was the constitutionality of an act passed by the legislature of the state of Rhode Island, in January 1822, entitled 'an act imposing a duty upon licensed persons and others, and bodies corporate within this state;' alleged to be a violation of the contract contained in the charter of the bank. Under the provisions of this act, and in conformity with them, a tax was imposed on the Providence Bank; and the bank having refused payment thereof, a seizure was made for the amount of the tax in the banking house, by Alpheus Billings, the sheriff of the county of Providence, and by Mr Pittman, the general treasurer of the state of Rhode Island. The bank instituted an action of trespass for this taking against the sheriff and the treasurer, in the court of common pleas of the county of Providence; to which action the defendants pleaded in their defence the act imposing the tax, and the amendments thereto; and that in pursuance of the provisions of the same a warrant was issued, and the proceedings which were the subject of the action were done.

To this plea the bank filed a general and a special demurrer. Among the causes of demurrer, the repugnancy of the acts of the general assembly imposing the tax to the constitution of the United States, inasmuch as they violate the contract set forth in the declaration, the act incorporating the bank, and, inasmuch as they authorise private property to be taken for public purpose, without providing any compensation; are distinctly stated.

A judgment against them was submitted to by the bank in the court of common pleas; and they appealed to the supreme judicial court, where the judgment of the inferior court was confirmed by submission on the part of the bank; and they prosecuted this writ of error, under the twenty-fifth section of the judiciary act of 1789.

The Providence Bank was chartered by the legislature of Rhode Island in October 1791. The preamble of the act states,

'Whereas, the president and directors of a bank established at Providence, on the 3d of October last, have petitioned this general assembly for an act to incorporate the stockholders in said bank, and whereas, well regulated banks have proved very beneficial in several of the United States, as well as in Europe; therefore be it enacted by the general assembly, and by the authority thereof it is hereby enacted; that the stockholders in said bank, their successors and assigns, shall be, and are hereby created, and made a corporation and body politic, by the name and style of the president, directors and company of the Providence Bank, and by that name shall be, and are hereby made able and capable in law, to have, purchase, receive, possess, enjoy, and retain to them and their successors, rents, tenements, hereditaments, goods, chattels and effects of what kind or nature soever, and the same to sell, grant, devise, alien or dispose of, to sue and be sued, plead and be impleaded, answer and be answered, defend and be defended, in courts of record, or any other place whatsoever; and also to make, have and use a common seal, and the same to break, alter and renew at their pleasure, and also to ordain, establish and put in execution such by-laws, ordinances and regulations, as shall seem necessary and convenient for the government of the said corporation, not being contrary to law, or the constitution of said bank, and generally to do and execute all and singular acts, matters and things, which to them it shall or may appertain to do.

'And whereas, the stockholders, on the said 3d day of October, formed and adopted a constitution for said bank, in the words following, viz.

'Taught by the experience of Europe and America, that well regulated banks are highly useful to society, by promoting punctuality in the performance of contracts, increasing the medium of trade, facilitating the payment of taxes, preventing the exportation of specie, furnishing for it a safe deposit, and by discounts rendering easy and expeditious the anticipations of funds on lawful interest, advancing at the same time the interest of the proprietors; we, the subscribers, desirous of promoting such an institution, do hereby engage to take the number of shares set against our names respectively, in a bank to be established in Providence, in the state of Rhode Island, on the following plan, &c.

The plan of the association is set forth in the act, and is made a part of the charter. It provides for the opening of subscriptions for the stock of the bank, to consist of six hundred and twenty-five shares, of four hundred dollars each, making a capital of two hundred and fifty thousand dollars; and for the organization of the bank. The act gives to the corporation the usual powers necessary to carry into effect the objects of its formation, and makes provisions for the transaction of the business of the company. Amendments to this act were afterwards passed by the legislature.

The case was argued by Mr Whipple, for the plaintiffs in error; and by Mr Hazzard and Mr Jones, for the defendants.

Mr Whipple, for the plaintiff in error, said; as this case involves constitutional principles of great delicacy and importance, it may not be useless to advert to the principles established by this court.

At no period in the political or civil history of England or of this country, has it been admitted that the legislature possessed unlimited or absolute power. Under the British government, the rights of private property were respected, long antecedent to emigration to this country; although violence to the political rights of the subjects of the crown are frequently recorded in history. The immunities of private property, and the inviolability of vested rights, have been asserted by political and legal writers, and established by judicial decisions, for three centuries past.

The assertion of a limit to legislative authority was constant during the colonial existence of this country; and the principle was afterwards inserted in the bills of rights, and in the constitutions of states. At a very early period after the establishment of the government of the United States, it became necessary to give to these received opinions the sanction of judicial authority; and this was done by this court in 1798, in the case of Calden vs. Ball, 3 Dall. Rep. 186. 1 Condensed Rep. 172. The principles of that case, so far as they declare the obligation of a contract to be superior to the power of the legislature, were re-asserted in Fletcher vs. Peck, 6 Cranch's Rep. 88. Again these principles were maintained in the cases of the State of New Jersey vs. Wilson, 7 Cranch, 104. Terrett vs. Taylor, 9 Cranch, 43. The Town of Pawlet vs. Clarke et al. 9 Cranch, 202. Sturges vs. Crowninshield, 4 Wheat. 122. M'Culloch vs. Maryland, 4 Wheat. 316. The Dartmouth College vs. Woodward, 4 Wheat. 518. Weston vs. The City Council of Charleston, 2 Peters, 450.

The cases which have the strongest bearing, and which are thought to decide the present case, are Fletcher vs. Peck, M'Culloch's case, the Dartmouth College case, and the case of the City Council of Charleston. Fletcher vs. Peck establishes the principle that a state cannot invalidate its own grant; that in making a grant, it acts as a party, and is bound as a party. 'Every grant (say the court) is, in its own nature, an extinguishment of the right of the grantor; and implies an obligation not to re-assert that right.'

The Dartmouth College case puts an end to all discussion of the question, whether a charter is a contract, and whether the public benefit derived from them is not a sufficient consideration? The language of the court is so full and clear upon those points, that it is believed that no doubt will be entertained upon them.

Mr Whipple then went into a particular examination of the case. He said the bank was incorporated in 1791, with the usual powers of a corporation. The motives of the legislature in granting the charter, which was the legal consideration of the grant, are declared in these terms.

'Taught by the experience of Europe and America, that well regulated banks are highly useful to society, by promoting punctuality in the performance of contracts, increasing the medium of trade, facilitating the payment of taxes, preventing the exportation of specie, furnishing for it a safe deposit, and by discounts rendering easy and expeditious the anticipations of funds on lawful interest, advancing at the same time the interest of the proprietors,' &c.

The first and seventh sections of the charter evidently contemplate the ownership of property by the bank in its corporate capacity. The real estate and the profits of the capital stock, previous to a dividend, may be considered as belonging to the bank. But the capital stock itself is as much the property of a stranger as of the bank. There cannot well be two entire owners to the same property. The stockholders have the property, and the corporation the management of it. The corporation is not even the trustee: for it has not the legal estate, and no power to sell. It has merely the naked possession, with the perpetual legal right of using the funds for the benefit of the legal and equitable owners.

The stock was subscribed for at a very early period, and the bank went into successful operation. The capital was subsequently increased to five hundred thousand dollars. For many years past, the shares have sold from fifteen to twenty-five per cent. advance, owing, in part, to the belief that the charter was perpetual, and that the legislature had no power over it. No power to repeal or to modify, by subsequent law, was reserved; and none was believed to exist, until January 1822.

Most of the present owners purchased their stock at an advance, a part of which will be lost to them, if the power recently claimed by the legislature has a legal and a constitutional existence. The charter of the Providence bank was the first that was granted by the legislature of Rhode Island. For several years it was the only bank in the state. Between the date of its charter, however, and June 1822, several charters were granted, substantially like it. In June 1822, the time when the act imposing a tax on banks went into operation, the charter of the Mount Hope bank, in Warren, was granted.

The eighth section provides, 'that this act of incorporation be, and the same is hereby declared to be, subject to all acts which may be passed by the general assembly, in amendment or repeal thereof, or in any way affecting the same.'

The power of the legislature to tax the banks had been previously denied; and the argument against the power was delivered but a few days before the granting the charter of the Mount Hope bank. All the charters since contain a similar reservation.

From the earliest period, down to the act of 1822, taxes in Rhode Island had been uniform. The proportion which each town was bound to contribute was settled by an act passed in 1747. By the act of 1747 the proportion which the town of providence paid towards the expenses of the state was one-ninth. A new apportionment among the several towns in the state was made in 1796, by which the town of Providence was required to pay one-fifth. In 1824 another apportionment fixed nearly one-third upon that town. Only one tax, however, has ever been ordered under that estimate.

The made of collecting taxes under these various laws produced great uniformity as to individuals. The treasurer of the state issued his warrant to the treasurers of the several towns, requiring them to collect from the inhabitants each town's proportion of the sum to be raised. The proportion of each town was assessed upon individuals, according to the supposed value of their real and personal estate. This has been the usage from the earliest settlement of the state, with very slight variations, down to the act of 1822. With the exception of one tax of fifteen thousand dollars, ordered by an act of May 1824, the whole expenses of the state have been paid under the act of 1822. The whole amount collected under the license act of 1822, from its commencement to the end of the year 1827, is thirty-five thousand nine hundred and twenty-one dollars twelve cents. Of that amount twenty-six thousand three hundred and eighty dollars eighty-six cents was paid by the town of Providence, and twelve thousand eight hundred and eighteen dollars by the banks. The largest proportion of the bank capital is in that town, and the effect of the license act has been to burthen it with more than two-thirds of the taxes of the state. The amount paid under the act, in 1828 and 1829, by the town of Providence, was three-fourths of the whole. The proportion has been increasing against the town from 1822 to the present time, as will be seen by an examination of the accounts of the treasury. The whole real estate, and all other property in the state, is exempted from taxation; and the paying part of the business of government thrown principally upon one town.

The question for the consideration of the court is, whether such a tax, so far as regards the banks, whose charters were granted previous to 1822, and without any reservation of authority over them, is a constitutional tax? It will be kept in mind that the charters of all banks established since May 1822 contain ample reservations of power.

The charter of the Providence Bank was granted in November 1791; and until 1797 it was the only bank in the state. Its capital, at first, was fixed at two hundred and fifty thousand dollars, but it was subsequently increased to five hundred thousand dollars. Although no bonus was paid to the state, yet the advantages expected by the public, are fully stated in the charter, and constitute the consideration of the contract. The contract was, that the stockholders should be entitled to all the advantages of employing their money in banking business, through the agency of a corporation; and the state to all the benefit of a 'well regulated bank.' These advantages were expected by the parties, for they are expressly stated in the charter, and constitute reciprocal rights and obligations. Whenever the business of the corporation is so managed as to injure instead of benefiting the public; whenever an undue amount of bills is issued; specie payments refused, and the currency depreciated; then is there a violation of the contract on the part of the stockholders, and the sovereign may interfere, for they contracted to maintain a 'well regulated bank.' The state has a right to see this object accomplished, and to pass all laws necessary for the purpose. The admission which we most freely make, of a power in the state, so to regulate the conduct of corporations as to attain the objects of their formation may appear to conflict with a proposition, which we shall endeavor to sustain; which is this, that the state, by becoming a party to the contract, was as much bound to respect the rights of the other party, as if the state had been an individual. There is, however, in reality, no hostility between the admission and the proposition. All the legislative power which the state has a right to exert, is remedial in its character, furnishing remedies for or against the corporations, and imposing penalties for violations of their contract. The same power might have been exercised over the Dartmouth college, and the same authority is constantly exercised in all the states, over corporations of their own creation. The proceedings of the legislatures of some of the states are of a mixed character, partly legislative and partly judicial. So far as they are legislative, they are clearly remedial; so far as they are judicial, they annex penalties for doing what, under a more regular system of jurisprudence, they would be adjudged to have forfeited their charter for doing.

In the examination of this case, it will be necessary to consider,

1. The contract, the rights which it confers on one party, and the obligations it imposes on the other.

2. The act of 1822, and the effect which that act has upon the rights conferred by the contract.

3. The provision in the constitution of the United States, against impairing the obligation of contracts.

First, what was the contract? This general question involves an inquiry into the elements which usually constitute what the law terms a contract. The usual ingredients are: a consideration, parties, and a subject matter. What is called the obligation of a contract, is the duty which the law imposes upon a party not to disturb any of the legal rights conferred upon the other party. The extent of the rights of one party, therefore, is the measure of the obligation of the other.

In the first place, there was a full and an ample consideration; not a consideration implied, but expressly stated. The risk of advancing two hundred and fifty thousand dollars, in 1791, to be employed in banking business, was very great. The constitution of the United States was not ratified in Rhode Island, we think, until the year 1790. Although at that period the people of that state had been 'taught, by the experience of Europe and America, that well regulated banks were highly useful to society,' yet they had not been taught that they were very profitable to the stockholders. The times were still very feverish. The shock occasioned by paper money had not entirely subsided. The effect of the constitution of the general government had not been ascertained. Money was very scarce, credit very low, and punctuality out of the question. Indeed, it is stated in the charter, that one of the effects beneficial to the public, expected from the bank, was to promote punctuality in payments. The wonderful activity given to trade a short time after, by the war in Europe, was then unlooked for. Under these circumstances, it required all the influence of the leading men in the town of Providence, to obtain money sufficient for so hazardous and doubtful an denterprise. So uncertain was the experiment, that a subscription could not be obtained, without providing in the charter a remedy for the collection of debts due to the bank, which was withheld from all individuals. This remedy consisted in the power of attaching the real and personal estate of the debtor, on mesne process. In practice, this amounted to a priority of payment. The state willingly granted this, in consideration of the value of the institution to the public, and the hazard to the stockholders. The same remedy has been granted to all banks since, in order that one may have no advantage over the other.

Notwithstanding these inducements, a period of six years elapsed before another bank went into operation. The first meeting of the stockholders of the bank of Rhode Island was at Newport, in January 1797. The consideration then was ample. The stockholders purchased the privilege of banking. They paid for it a high price, and the case will result in a question whether they are to pay for it again.

The parties to the contract were the stockholders in their individual capacity, on one side; and the state in its sovereign character, on the other. It was not a contract between the state and the corporation; the corporation had no existence until the contract was completed. The corporation, instead of being a party, was the subject of the contract. It was the thing granted, and not the person to whom the grant was made. The other party was a state, possessing various and extensive sovereign powers. In making this contract, it acted in its sovereign character; for it had no other character in which it could act. It meant to bind itself in its sovereign character; for there was no other character which it could bind. It was well known that the principal strength of sovereignty consisted in its power of making laws, and that the only effectual mode of binding sovereignty was to restrain its law-making power; and that, to restrain its law-making power upon all subjects but one, and leave it free upon that, was tantamount to no restraint at all. If, therefore, the state was a party to a contract, it intended to bind its law-making power. The law presumes that a party understands the legal effect of a contract, and that he intends that legal effect. The legaleffect of a contract is to bind the parties to all its stipulations; to bind them in the capacity in which they contracted, and to bind them equally. It was intended then that both the parties should be bound, and that, consequently, neither should possess the power to liberate itself, without the consent of the other.

It therefore results from the fact that the charter is a contract; that the state meant to bind itself in its sovereign capacity, and to restrain the exercise of all its law-making powers, so that it should not be able to resume the grant, or to render the subject of the grant of no value, or to make its value dependent on its own will, instead of being dependent upon the terms of the contact, and the law of the land.

But further the fact of the state's having become a party to a contract, is not only conclusive evidence that it intended to bind itself, and to restrain all its law-making powers, but it is evidence of the extent to which it meant to impose that restraint. The object of binding the state at all, was to secure the rights of the other party: consequently the degree of restraint must be such as will afford that security. There is an absurdity in saying that the state meant to bind itself, in order to secure the rights of the other party, and saying, at the same time, it intended a less degree of restraint than was sufficient for the purpose.

If the state intended to be bound at all, it intended to be bound to the same extent as thought it had been an individual, and not a sovereign state. A contract, in its very nature, imports reciprocity of rights and obligations. One party is not to be bound to a greater extent than the other, unless it is so expressed, or unless it is implied from necessity.

Having briefly considered what was the consideration of the contract and who were the parties, a more important object presents itself, which is to ascertain its obligation. This can be done in no other way than by resorting to its subject matter.

Rights and obligations are correlative terms. The extent of the rights of one party is the exact measure of the obligation of the other: for, in the language of this court, 'every grant implies an obligation not to re-assert the right granted.'

1. There was granted to the stockholders, and to their successors, a perpetual right to the powers and capacities of a corporation, denominated 'the president, directors and company of the Providence Bank.'

2. There was also granted a perpetual right to employ five hundred thousand dollars in banking business.

It would be absured to say that the stockholders obtained an act of incorporation, for the sake of an act of incorporation; that they obtained a grant of the right of doing banking business for the sake of banking business; but both were granted for the profit that might arise from them. It it not fairly to be implied, that the amount of that profit should be all that could be made by making business under the general laws of the land? The corporation, and the right to transact banking business, were granted as mere means: the end was the expected profit.

It must be agreed, that the charter was to be perpetual, and that the stockholders cannot be deprived of it. It must be agreed that the right to transact banking business was to be perpetual, and that the stockholders cannot be deprived of it. Must it not, then, be agreed, that the right to all the profits was to be perpetual, and that the stockholders cannot be deprived of it? If the right to the means was intended to be legal rights, was not the right to the end to be of the same character? Can it be believed that perpetual means would be granted, to obtain a doubtful and uncertain end? That the subordinate parts of the contract should be held as rights, subject only to the law of the land; but that the main object should be possessed only as a legislative indulgence? The presumption of law is, that all the rights between the same parties, and conferred by the same grant, are to be of the same character, subject to the same tenure, and to continue during the same time. Nothing but strong language to the contrary will create a difference. That act of incorporation is a legal right, subject to no partial or direct legislation. The right to banking business is a legal right, subject to no partial or direct legislation. Why, then, is not a perpetual right to all the profits a legal right, and subject to no partial legislation? Why should the control of the state over one of these rights be greater than over the other?

We will now examine the act of 1822, with a view to ascertain whether it involves the power to destroy the rights granted by the contract.

The very title of the act is significant. It is 'an act, imposing a duty on licensed persons and others, and bodies corporate, within the state.' It classes the banks with licensed persons. It considers them, not as exercising their legal rights under their contract, but as enjoying privileges by the license and permission of the state.

It enacts that there shall be, hereafter, annually paid by the persons and bodies corporate within this state, herein named, the following sums, to wit:

'By each and every person licensed by the town councils of the several towns, the sum of two dollars, to be paid to the town councils before granting the license, and by them to be paid over to the general treasurer.

'By each and every money broker, or money changer, and each and every vendor of foreign lottery tickets, the sum of one hundred dollars, to be paid to the town councils at the time of granting licenses to those persons.

'By each and every bank within this state, (except the bank of the United States,) the sum of fifty cents on each and every thousand dollars ...


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