State taxation, limit of-bonds held by nonresidents secured by state mortgage extra-territorial effect of state law. Messrs. J. W. Simonton and J. E. Gowen, for plaintiff in error: This case is, in all essential particulars, identical with that of Railroad Co. v. Jackson, 7 Wall. 262, 19 L. ed. 88. We have only to strike out "Maryland" and insert "Ohio" and change the name of the case, when every word of the opinion in the Jackson Case will apply as well to this case as if it had been written for it. And this court has said that the adjudications of a state court are no more to control its judgment, in a cause brought here from such court, than if brought from a circuit court of the United States; and that its duty depends on the question raised, and not on the channel through which the case comes. Butz v. Muscatine, 8 Wall. 575, 19 L. ed. 490. We, therefore, look upon the case of The R. Co. v. Jackson, as an authoritative decision of the question involved in this case; and it is †1. The power of taxation of a state is limited only because the supreme court of Pennsylvania to persons, property and business within her ju- has thought proper, notwithstanding that decirisdiction. Ail taxation must relate to one of thesesion, to adhere to its own prior case of Maltby subjects. 2. Bonds issued by a railroad company are property in the hands of the holders, and when held by non-residents of the state in which the company was incorporated, they are properly beyond the jurisdiction of that state. A law of Pennsylvania, passed on the 1st of May, 1868, which requires the treasurer of the company incorporated and doing business in that state to retain five per cent of the interest due on bonds of the company, made and payable out of the state to non-residents of the state, citizens of other states, and held by them, is not, therefore, a legitimate exercise of the taxing power of the state. It is a law which interferes between the company and the bond holder, and, under the pretense of levying a tax, impairs the obligation of the contract between parties. 3. The exemption from taxation, by the state of Pennsylvania, of bonds thus issued to and held by non-residents of that state, citizens of other states, is not affected by the fact that the bonds are secured by a mortgage, executed simultaneously with them upon property situated in that state. A mortgage there, though in the form of a conveyance, is in the mortgaged premises. It simply creates a lien upon them, and only confers upon the holder or the party for whose benefit the mortgage is given, a right to proceed against the property mortgaged upon a given contingency, to enforce the payment of his demand. This right has no locality independent of the party in whom it resides. a mere security for a debt, and transfers no estate 4. The tax laws of a state can have no extrater ritorial operations; nor can any law of a state in consistent with the terms of a contract made with or payable to, parties out of a state, have any effect upon the contract whilst it is in the hands of such parties, or other non-residents of the state. [No. 31.] Argued Feb. 12, 1873. Decided Mar. 10, 1873. I Commonwealth of Pennsylvania. The auditor general and state treasurer of Pennsylvania settled an account against the plaintiff in error, for a tax on the interest paid by the company on its bonds. The company, having appealed successfully to the court of common pleas of Dauphin county, and to the supreme court of the state, in both of which courts the tax was held valid, sued out this writ of error. The case is fully stated in the opinion of the court. v. R. Co. 52 Pa. 140, that we feel it to be our duty to argue it further, and to call the attention of this court to other reasons why, as we think, the judgment should be reversed, in addition to the one sufficient ground upon which the decision in the Jackson Case is put. contend, then, further, that the judgment of the state court should be reversed. We Second. Because, for other reasons in addition to those given by this court in the Jackson Case, the said act of the legislature of Pennsylvania, as applied to the facts and circumstances of this case, is unconstitutional and void, in that it impairs the obligation of the contract between the nonresident bond holder and the corporation plaintiff in error. It was said by Mr. Justice Nelson, in delivering the opinion of the court in the latter case: "The tax upon the promissory note or bond given by the resident debtor, and the withholding of the amount from the interest due to the non-resident, would seem to be a tax upon such non-resident. It is not a tax of the money lent, because that belongs to the resident debtor, for which he is taxable; it is a tax on the security, the bond, which is in the hands of the nonresident holder." This is shown to be so by the very terms of the law under which the tax is claimed. It provides, "That the president, treasurer, or cashier of every company, except banks and saving institutions, incorporated under the laws of this commonwealth, doing business in this state, which pays interest to its bond holders or other creditors, shall, before the payment of the same, retain from said bond holders or creditors, a tax of five per centum upon every dollar of interest paid as aforesaid, and shall pay over the same to the state treasurer for the use of the commonwealth. And it has been so construed by the supreme court of Pennsylvania in Clopton v. R. Co. 54 Pa. 356. We do not doubt the power or right of the state to impose such taxes as it may see fit upon all railroads or parts of railroads which lie within its borders, nor upon the franchises of all railroad companies chartered by the state, by any general law which shall apply alike to all, according to their value. But it is a question of its power and right to levy a contribution or tax upon the contracts or choses in action of citizens of other states, by requiring the officers of the debtor corporation to withhold a part of the interest stipulated to be paid to such citizens of other states, and to pay the same into the treasury of the state. This, we contend, cannot be done upon any legal principle of taxation, and the law, if so construed and applied, would impair the obligation of the contract between the railroad company and such citizens and residents of other states, and is, therefore, repugnant to the Constitution of the United States, and null and void. The import of the terms "obligation of a contract" has been thus defined and illustrated by this cour: "The obligation of a contract consists in its binding force on the party who makes it. This depends on the laws in existence when it is made; these are necessarily referred to in all contracts, and form a part of them as the measure of the obligation to perform them by the one party, and the right acquired by the other. If any subsequent law affect to diminish the duty, or to impair the right, it necessarily bears on the obligation of the contract in favor of one party to the injury of the other; hence, any law which, in its operation, amounts to a denial or obstruction of the rights accruing by a contract, .. is directly obnoxious to the prohibition of the Constitution." McCracken v. Hayward, 2 How. 612. And Judge Story has said: "It is the civil obligation of contracts which it (the Constitution) is designed to reach; that is, the obligation which is recognized by and results from the law of the state in which it is made. When it does not fall within the predicament of being either illegal or void, its obligatory force is coextensive with its stipulations." 3 Story, Const. § 1374. Defining and illustrating the sense in which the term "impairing the obligation of a contract" is used in the Constitution, Judge Story says: "It is perfectly clear that any law which enlarges, abridges or in any manner changes the intention of the parties, resulting from the stipulations in the contract, necessarily impairs it. The manner or degree in which this change is effected, can in no respect influence the conclusion; for whether the law affect une validity, the construction, the duration, the discharge or the evidence of the contract, it impairs its obligation, though it may not do so to the same extent in all the supposed cases. Any deviation from its terms by postponing or accelerating the period of performance which it prescribes, imposing conditions not expressed in the contract, or dispensing with the perform ance of those which are a part of the contract, however minute or apparently immaterial in their effect upon it, impairs its obligation. A fortiori, a law which makes the contract wholly invalid, or extinguishes or releases it, is a law impairing it." 3 Story, Const. § 1379. The principle we believe to be this: all citizens of any given state, in entering into contracts to be performed within such state, are bound to have regard to the laws of the state then in force, which relate to or bear upon the subject; as well as to the fact that there are certain classes of laws, such as tax laws and police laws, which may be constitutionally applied to prior contracts; but a citizen of one state, entering into a contract lawful in his own state, which is to be performed there, is not bound, in contracting, to have any reference to the laws of another state, present or future, whether they be tax laws or laws of any other kind. An illustration of this principle is given in the effect of state insolvent laws. Thus, citizens of a given state, entering into a contract to be performed in such state, are bound by the fact of the existence of an insolvent law; but one who is a citizen of another state, even though contracting in the state where such law exists, with one of its citizens, is not bound to have any regard to such law, and his rights cannot be affected by it, owing to the clause of the Constitution of the United States prohibiting any state from passing any law impairing the obligation of contracts. The state law has no jurisdiction over him, and his contract is not affected by it, because he is not a citizen of such state. Ogden v. Saunders, 12 Wheat. 213; Baldwin v. Hale, 1 Wall. 223, 17 L. ed. 531; Story, Confl. L. (4th ed.) § 341. Judge Story says: "Under the peculiar structure of the Constitution of the United States, prohibiting the states from passing laws impairing the obligation of contracts, it has been decided that a discharge under insolvent laws of the state where the contract was made, will not operate as a discharge of the contract, unless it was made between citizens of the same state; it cannot, therefore, discharge a contract made with a citizen of another state." He also lays it down as a maxim (Conflict of Laws, § 20) "That no state or nation can, by its laws, directly affect or bind property out of its own territory, or bind persons not residents therein, whether they are natural born subjects or others." And see §§ 17-19. This tax law does attempt to bind and affect both persons and property out of its jurisdic tion. The law, then, is aimed directly at the contract, and, in effect as well as in terms, it says to the debtor: "You shall not perform your contract according to its stipulations," and to the bond holder: "You shall receive a part only, and not the whole of that for which you contracted." The law could not be enforced directly against the bond holder, because he is not within the jurisdiction, nor against his property, for neither is it within the jurisdiction; hence there is no penalty imposed upon him for failing to comply with the law, nor any attempt at or provision for enforcing it against him or against his property. But the debtor being within the jurisdiction and power of the law, is required, on pain of having to pay the tax himself, with a penalty added, to violate his contract with the bond holder and force him to take a part of the interest due him in full satisfaction of the whole. This we contend is "impairing the obligation of the contract," between the company and the bond holder, and taxing persons and things beyond the jurisdiction of the state. But it is said that, although the bond hold- | Justice Nelson, in Railroad Co. v. Jackson, suer is beyond the jurisdiction of the state, his pra, "belongs to the resident debtor, for which property is within it; and, indeed, this is the he is taxable." If, then, he owns neither the principal ground upon which the decision in the land bound nor the money lent, but merely the case of Maltby v. R. Co. 52 Pa. 140, is put by bond and mortgage, the choses in action which the court. It says: "There must be jurisdic- follow the person of the owner, and are actualtion over either the property or person of the ly within his possession without the state, we owner, else the power cannot be exercised; but submit that he owns nothing within the juriswhere the property is within our jurisdiction, diction of the state. Neither does he need, as and enjoys the protection of our state govern- has been argued, to invoke the aid of the courts ment, it is justly taxable, and it is of no mo- of the state to reap the fruits of his security ment that the owner who is required to pay the in case of the non-payment of the interest or tax resides elsewhere." principal of the bonds. By the express terms of the mortgages given by the plaintiff in error, the trustees therein named are authorized and, at the request of the bond holders, required to sell the mortgaged premises, in default of payment, at a place outside of Pennsylvania. And the courts of the United States have ample jurisdiction and power to give the non-resident bond holder all the judicial aid he may need. We think that this position rests upon a confusion of ideas and a confounding of things which are, in their nature, entirely distinct and separate; and that there is no proper sense in which the non-resident bond holder, as such, can be said to have any property within the state. He does not own the property or the franchises of the corporation debtor, nor anything that has an actual situs within the state. The property mortgaged belongs entirely to the debtor, who has complete control over it, and it seems to us to involve a contradiction of terms, to speak of it as belonging, in any sense, to the non-resident creditor. It is certainly as well settled as anything can be, in Pennsylvania, whatever the doctrine may be elsewhere, that a mortgage is only a lien or encumbrannce on the land mortgaged, and that the mortgagee has no estate in the land. Thus, in Wilson v. Shoenberger, 31 Pa. 299, it is said by Woodward, J.: "It is the settled law of the Pennsylvania mortgage, that though in form a conveyance of title, it is, in reality, both at law and in equity, only a security for the payment of money, or performance of other collateral contract." And in Edmonson v. Nichols, 22 Pa. 79, Lewis, J., says: "The mortgagee has no estate in the land. His mortgage is nothing but a security for a debt. It is only an encum brance." So in Witmer's Appeal, 45 Pa. 463, it is said: "A mortgagee has no estate in the land, any more than a judgment creditor. Both have liens upon it, and no more than liens. This was expressly asserted in Asay v. Hoover, 5 Pa. 35, and has been substantially, if not expressly, affirmed in many cases. Rickert v. Madeira, 1 Rawle, 325; Edmonson v. Nichols, 22 Pa. 79; Wilson v. Shoenberger, 31 Pa. 299. And, although in Pa. all possible contingent titles to land accompanied with an estate, property, or real interest in the land, are subject to levy and sale on execution (Humphreys v. Humphreys, 1 Yeates, 429; Shaupe v. Shaupe, 12 Serg. & R. 12; Streaper v. Fisher, 1 Rawle, 162), it has been settled, on the principle of want of interest or estate in the mortgagee, that the mortgaged premises cannot be taken in execution for his debt. Rickert v. Madeira, 1 Rawle, 329. This being the nature of the mortgage, it surely cannot be said that the non-resident holder and owner of a bond secured by mortgage in Pa. owns any real estate there. Does he, then, own any personal property within the state? He does not own the money lent, for that, as has been truly said by Mr. These considerations have led the courts of these states where this question has been raised, to decide in favor of the position taken by the plaintiff in error. Thus, in Nevada v. Earle, 1 Nev. 397, it is decided that the state, under a statute imposing a tax, inter alia, on "money at interest, secured by mortgage," could not tax mortgages or bonds belonging to persons not citizens nor residents of the state, although the mortgages were a lien on lands within the state. And in the case of Davenport v. Railroad Co. 12 Ià. 539, the court held that mortgages owned by non-residents of the state could not be taxed within it. Both in law and equity the mortgagee has only a chattel interest. See 1 Will. Mort. 163. The mortgage itself being personal property, a chose in action, attaches to the person of the owner. See Story, Confl. L. § 379. In Ang. & Ames, Corp. § 458, it is said: The general rule appears clearly to be that, in regard to public taxes, every person is liable to be assessed for his personal property in the state of which he is an inhabitant; and stock owned in incorporated banks, etc., by non-resident holders thereof, is not subject to the taxing power of the state. State v. Ross, 3 Zab. 517; People v. Eastman, 25 Cal. 603; People v. Park, 23 Cal. 138; Latrode v. Baltimore, 19 Md. 20. The converse of the proposition for which we contend has been held by the supreme court of Pa. in a well considered opinion delivered in M'Keen v. County of Northampton, 49 Pa. 519, where it is clearly shown and expressly decided, that the owner of shares of stock in an incorporated company, and a fortiori we say a creditor of such company, has no title whatever in the real estate or other property of the company, and that such shares are taxable as the property of the stockholder, only in the state of which he is a resident. This decision is undoubtedly correct. It was not referred to, either in argument or by the court, so far as appears by the report of the case, in Maltby v. R. Co. 52 Pa. 140. And we do not see how it can be reconciled with that case (which certainly did not intend to overrule it) unless the same property can have a situs in two or more different states at the This court, in the case of Shaw v. Robbins, 12 Wheat. 369, note, applied the same doctrine to the decision of a state court, and reversed its judgment. same time, for the same purpose precisely, which | v. Saunders, 12 Wheat. 369, as to the power of seems to us as impossible as that the same par- the states to pass insolvent laws, viz.: ty should be in two places at the same instant. "When the states pass beyond their own limThe following quotations, taken from the its and the rights of their own citizens, and opinion of the court of appeals in Hoyt v. act upon the rights of citizens of other states, Comr. of Taxes, 23 N. Y. 230, delivered by there arises a conflict of sovereign power, and a Comstock, Ch. J., shows the impossibility of collision with the judicial power granted to reconciling these two opposite principles. "The the United States, which renders the exercise statute means one thing or the other. It can- of such a power incompatible with the rights not have double and inconsistent interpreta of other states, and with the Constitution of tions. And as this is impossible, so we can the United States." not, under and according to the statute, tax the citizen of Massachusetts in respect to his chattels here, and at the same time tax the citizen of New York in respect of his chattels having an actual situs there. In both cases the The supreme court of Mass. recognized the property must be 'within this state,' or there authority of the United States Supreme Court is no right to tax it at all. It cannot be true on this principle, Kelley v. Drury, 9 Allen, 27, in fact, if a Massachusetts man owns two and following Baldwin v. Hale, 1 Wall. 223, spans of horses, one of which draws his car- 17 L. ed. 531, overruled its own prior deciriage at home, and the other is kept on his sions which were in conflict with it. It says: farm here, that both are within the state. It "The decisions of the Supreme Court of the cannot be true by any legal intendment; be- United States upon a question of this nature cause the same intendment which locates one are guides to which we yield, as the highest of them here, must locate the other abroad, exponents of the law." and beyond the taxing power. It seems to follow, then, inevitably, that before we can uphold the tax which has been imposed upon the relator's property situated in New Orleans and New Jersey, we must first determine that if he resided there, and the same goods and chattels were located here, they could not be taxed as being within the state. Such a determination would, I am satisfied, contravene the plain let-the grant of its corporate franchises. This act ter of the statute, as all sound principles underlie the subject." Messrs. F. Carroll Brewster, Wayne McVeagh and James W. M. Newlin, for defendant in error. By the original charter granted by the state of Pa. to the Cleveland, Painesville, & Ashtabula Railroad Company, the state expressly reserved to itself an unlimited power of taxation, and made it one of the terms and conditions of pro was approved May 5, 1854, and is to be found in the pamphlet laws of Pa. for the year 1854, We think it much more probable, that the on pp. 589, 590. The phraseology is as follows: rule laid down in Maltby v. Railroad Co. was Section 4. "That all the privileges and imadopted hastily, without sufficient considera-munities granted to the said Cleveland, Painestion, and without adverting to the consequences which would logically result from it, or to its antagonism to the principles already adopted by the court, and which had become a part of the settled law of the state. And hence we consider this a proper case for this court, on the principle laid down and enforced in the cases of Gelpcke v. Dubuque, 1 Wall. 175, 17 L. ed. 520; and Butz v. Muscatine, 8 Wall. 575, 19 L. ed. 490, to follow those decisions of the state court which best accord with its own decisions, with sound principle and with the constitutional rights of citizens of other states. And we would here suggest in passing, whether the double taxation which would fall upon the citizens of other states, if this law were applied to them, would be compatible with their rights under the clause of the Constitution, which guaranties to the citizens of each state all privileges and immunities of citizens of the several states. We contend that the judgment of the supreme court of Pa. should be reversed: Third. Because, by the law declared valid by that judgment, the legislature of Pa. attempt to exercise jurisdiction beyond the state, and to affect contracts and rights of citizens of other states, which are protected by the Constitution of the United States and the judicial power granted to its courts. The argument on this point is founded on the principle enunciated by Justice Johnson, in summing up the conclusion arrived at by the majority of the court in the case of Ogden ville & Ashtabula Railroad Company in and Section 5 provides that, if the duties of the corporation are neglected, or the terms and conditions of the grant are not complied with, and are so found by a court of competent jurisdiction, "then and in such case, all the rights, privileges, powers and immunities granted to said company by this act, or intended so to be, shall forthwith cease and determine." Section 1 of its charter subjects it to the general railroad law of Pa. of Feb. 19, 1849, Purd. Dig. 838, pl. 11, which provides: . "And the legislature hereby reserves the power to resume, alter or amend any charter granted under this act, and take for punc use any road constructed in pursuance of such charter." This action is upon a settlement made by the auditor-general of Pa. against the plaintiff in error, for the tax to be retained by it from the interest payable to its bond holders. The tax is imposed by the act of assembly of Pa. of May 1, 1868, Purd. Dig. p. 1537, pl. 28, as follows: "The president, treasurer or cashier of every company, except banks or savings institutions, incorporated under the laws of this common- | nation within whose territory any personal wealth, doing business in this state, which pays interest to it, its bond holders or creditors, shall, before the payment of the same, retain from said bond holders or creditors a tax of five per cent upon every dollar of interest paid as aforesaid, and shall pay over the same semiannually, on the first days of July and January, in each and every year, to the state treasurer, for the use of the commonwealth, etc. property is actually situate, has an entire dominion over it while therein, in point of sovereignty and jurisdiction, as it has over immovable property situate there. It may regulate its transfer, when subjected to process and execution, and provide for and control the uses and disposition of it to the same extent that it may exert its authority over immovable property. One of the grounds upon which, as we have seen, jurisdiction is assumed over non-resThe place of residence of the bond holders is idents, is through the instrumentality of their immaterial. The tax does not discriminate personal property, as well as of their real propagainst non-residents, and further it is levied erty, within the local sovereignty; hence it is, neither upon the security, the road, nor upon that whenever personal property is taken by the chose in action (the bond) but upon the in- arrest, attachment or execution within a state, terest payable by the defendant, the Pennsyl- the title so acquired under the laws of the vania corporation, which it is directed to with-state is held valid in every other state, and the hold and pay to the state. This interest money same rule is applied to debts due to non-resiis in the actual possession of the corporation, dents, which are subject to a like process unand it is undeniable that it might be made a der the local laws of the state." garnishee, and the money be attached in its hands by the creditors of the bond holders. Even if the tax were directly upon the chose in action, the proposition advanced by the plaintiff in error, that the thing taxed has no situs of its own, but follows the domicil of the nonresident holder and cannot be taxed elsewhere, is founded upon a fiction of law, which the au- laws for attaching the estate of non-residents, thorities abundantly show is not applicable to because such laws necessarily assume that the question of taxation. This fiction is only property has a situs entirely distinct from the intended for the convenience of transfer and owner's domicil.' If New York cannot compel for distribution in the settlement of decedents' the personal property of Bates (one of its citiestates. It prevails, even in these cases, only zens in Chicago) to contribute to the expenses when not inconsistent with the local laws. The of its government, and if Bates had the legal taxing power is an inherent attribute of sov-right to own such property there, and was proereignty, and operates whenever either the person or the thing is within the jurisdiction. In this case the thing, i. e., the interest money has a tangible situs in Pa. and can be taxed there, and the state may compel the corporation to act as its agent in the collection of the tax. In R. R. Co. v. Jackson, supra, this court expressly declined considering this question. Mr. Justice Nelson there said: "Nor shall we inquire into the competency of the legislature of Pennsylvania to impose this tax upon general principles, as we shall place the objection upon other and distinct grounds, though we must say that the tax upon promissory note or bond, given by the resident debtor, and the withholding of the amount from the interest due to the non-resident holder, would seem to be a tax upon such non-resident. It is not a tax of the money loaned, because that belongs to the resident debtor, for which he is taxable; it is a tax on the security, the bond, which is in the hands of the non-resident holder." The following authorities fully sustain the positions assumed here for the defendant in error. See, Story, Confl. L. § 550. "In the next place let us consider the subject of jurisdiction in regard to property. It will be unnecessary to discuss the matter at large as to personal property, since the general doctrine is not controverted that, although movables are for many purposes to be deemed to have no situs except that of the domicil of the owner, yet this being but a legal fiction, it yields whenever it is necessary, for the purpose of justice, that the actual situs of the thing should be examined. A Green v. Van Buskirk, 7 Wall. 139, 19 L. ed. 109: "But this fiction (i. e., situs of personal property) is by no means of universal application, and as Judge Story says: 'Yields whenever it is necessary, for the purpose of justice, that the actual situs of the thing should be examined;' and always yields to tected in its ownership by the laws of the state; and as the power to protect implies the right to regulate, it would seem to follow that the dominion of Illinois over the property was complete, and its right perfect to regulate its transfer, as subject to process and execution, in her own way and by her own laws." Bk. v. Commonwealth, 9 Wall. 360, 19 L. ed. 703: "But it is strongly urged that it is to be deemed to be a tax on the capital of the Bank, because the law requires the officer of the Bank to pay this tax on the shares of its stockholders. Whether the state has the right to do this we will presently consider; but does the fact that it has attempted to do it prove that the tax is anything else than the tax on shares? If the state cannot require of a bank to pay the tax on the shares of its stock, it must be because the Constitution of the United States or some act of Congress forbids it. There is certainly no express provision of the Constitution on the subject." St. Louis v. Ferry Co., 11 Wall. 428, 20 L. ed. 194. Duer v. Small, 7 Am. Law Reg. 500: Stat. of N. Y. that all persons doing business in the state should be taxed upon their capital invested, and that non-residents shall be so taxed the same as if they were residents. It was objected that personal property has no situs but that of its owner's domicil, and in this case, the latter being a resident of New Jersey, the tax could not be collected. Held, that the tax was lawful. Debts due from solvent debtors upon promissory notes are personal estate within the statutes of this state. Catlin v. Hull, 21 Vt. 152. |