Memphis & Little Rock R.R. Co. v. R.R. Commissioners, 112 U.S. 609 (1884)

Mr. Justice Matthews

delivered the opinion of the court. He recited the facts ás above stated, and continued:

The case of the plaintiff in error rests entirely upon the words of the ninth section of the act of incorporation of the Memphis and Little Rock Railroad Company of January 11, 1853, by.which it was empowered to borrow money “on,the credit of the company and on the mortgage of its charter and works.” ■ It is argued that these words confer power upon the company to convey to its bondholders, by way of mortgage and on foreclosure, to purchasers absolutely,, all the property' of the company, and all its franchises, including th¿ franchise of becoming and being a corporation, in the sense of acquiring the right to organize as such under the act as successor to, and substitute for, the original company, precisely as if the act had named them as corporators and endowed them with the corporate faculty. And this being assumed, it is thence inferred that the exemption contained in section 28 of the act applies to the substituted corporation as though no change of corporate existence had taken place; and thus, it is insisted, the case is taken out of rule of decision established in Morgan v. Louisiana, 93 U. S. *217; Wilson v. Gaines, 103 U. S. 417, and Louisville & Nashville Railroad Company* v. Palmes, 109. U. S. 244. According to" the principle of those decisions, the exemption from taxation must be construed to have -been the personal privilege of the very corporation specifically referred to, and to have perished with that, unless the express and clear intention of the law requires the exemption to pass as a continuing franchise to a successor. This salutary rule of interpretation is founded upon an obvious public policy, which regards- such exemptions as in derogation of the sovereign authority and of common right, and, therefore, not to be extended beyond the

exact and express requirement of the grants, construed strietissinni juris.

It is not claimed that the assignment of the charter, by way of mortgage and subsequent" judiciaf sale, constituted the purchasers to be the identical corporation that the mortgagor had been; for that would involve an assumption of its obligations and debts as well as an acquisition of its privileges and exemptions ; but, it is insisted, that it resulted in another corporation in lieu of the original one, entitled to all the provisions of the charter, by relation to its date, as though it had been originally organized under it.

But such a construction of the words authorizing a mortgage of the charter and works of the company, is, in our opinion, heyond the intention of the law and altogether inadmissible.

There is no express grant of corporate existence to any new body. At the time when this charter was granted, in 1853, there was no general law in existence in Arkansas authorizing the formation of corporations. All such grants were by special act. Neither was there any law authorizing the purchasers of railroads at judicial sale under mortgages of the property and franchises of the company, to organize themselves into corporate bodies, such as was first passed in 1874. • There is not in the act of January 11, 1853, for the incorporation of the Memphis and Little Rock Railroad Company, any reference to such a right, as vested in the mortgage bondholders or other purchasers at a sale under a foreclosure of the mortgage, nor is there any mode or machinery prescribed in the act for such an organization. The desired conclusion rests entirely on the inference deduced from the mortgage of the charter, and is an attempt to create a corporation by a judicial implication. But, as was said by this court in Central Railroad and Banking Co. v. Georgia, 92 U. S. 665, 670, “ it is an unbending rule that a grant of corporate existence is never implied. In the construction of a statute every presumption is against.it.”

The application of this rule is not avoided by the claim that the present is not the case of an original creation of a corporate body, but the transfer, by assignment of a previously existing' charter, and of the right to exist as a corporation under it.

The difference is one of words merely. The franchise of becoming and being a corporation, in its nature, is incommunicable by the act of the parties and incapable of passing by assignment. “ The franchise to be a corporation,” said Hoar, J., in Commonwealth v. Smith, 10 Allen, 448, 455, “'clearly cannot be transferred by any corporate body of its own will. Such a franchise is not, in its own nature, transmissible.” In Hall v. Sullivan Railroad Co., 21 Law Reporter, 138 (2 Redfield’s Am. Railway Cases, 621; 1 Brunner’s Collected Cases, 613), Mr. Justice Curtis said: “ The franchise to be a corporation, is, therefore, not a subject of sale and transfer, unless the law, by some positive provision, has made it so, and pointed out the modes in which such sale and transfer may be effected.” No such' positive provision is contained in the act under consideration, and no mode for effecting the organization of a series of corporations under it is pointed out, either in the act itself or in any other statute prior to that of December 9, 1874.

The franchise of being a corporation need not be implied as necessary to secure to- the mortgage bondholders, or the purchasers at a foreclosure sale, the substantial rights intended ■to be secured. They acquire the ownership of the railroad, and the property incident to it, and the franchise of maintain-ing and operating it as such; and the corporate existence is not essential to its use and enjoyment. All the franchises necessary or important to the beneficial use of the railroad could as well be exercised^ by natural persons. The essential properties of corporate existence are quite distinct from the franchises of the corporation.. The franchise of being a corporation belongs to the corporators, while the powers and privileges, vested in and to be exercised by .the corporate'body as such, are the franchises of the corporation. The latter has no power to dispose of the franchise of its members, which may survive in the mere fact of corporate existence, after the corporation, has parted with all its property and all its franchises. If, in .the present instance, we suppose that a mortgage and sale of the charter of the railroad company created a new corporation, what becomes of the old one? If it abides' for the purpose of responding to obligations not satisfied by the

sale, ór of owning property not covered by the mortgage nor embraced in the sale, as it may well do, and as 'it must if such debts or property exist, then there will be two corporations coexisting under the same charter. For, “ after an act of disposition which separates the franchise to maintain a railroad and make profit from its use, from the franchise of being a corporation, though a'judgment of dissolution may be authorized, yet, until there be such judgment, the rights of the corporators and of third persons may require that the corporation be considered as still existing.” Coe v. Columbus, Piqua, & Indiana Railroad Co., 10 Ohio St. 372, 386, per Gholson, J.

If, as required by the argument for the plaintiff in error, we regard and treat the franchise of being a corporation as an incorporeal hereditament, and an estate capable of passing between parties by deed, or of being charged by way of mortgage and of being sold under a power or by virtue of judicial process, the logical consequences will be found to involve insuperable difficulties and contradictions. In the present case, for example, after the execution of the first mortgage, we should have the railroad company continuing as a corporation in esse, and the trustees for the bondholders, or their beneficiar ries, or assigns, a corporation in posse - and, after condition broken, the company would hold the title to its own existence as a mere equity of redemption. That equity it, makes the subject of a second mortgage, and, in default, the beneficiaries under the power of sale became purchasers of the franchise, and organize themselves, by virtue of it, into the Memphis and Little Rock Railway Company. The latter can hardly claim the status of a corporation at law, as the legal title to the franchise of being a corporation had never passed to it, on the supposition that it might pass by a private grant; and, if a corporation at all, it could only be regarded as the creature of equity, according to the analogy of equitable estates, a nondescript class hitherto unknown in any system of law relating to '.the subject. It finally was displaced by the judicial sale, under which the plaintiff in error organized as successor to both. In the mean time, the original corporation has never been dissolved, and, for all purposes not covered by the mort

gage, still maintains an existence as a corporate body, capable of contracting, and of suing and being sued. A conception which leads to such incongruities must be essentially erroneous.

If we concede to the argument for the plaintiff in error the position, that the language used, which authorizes the mortgage of the charter, may be taken in a literal sense,' still the assignment would transfer it, in the very state in which it might be at the date of the transfer. But at that date the only corporation Avhich the charter provided for had already been organized. The only powers conferred' upon corporators to that end had already been exercised and exhausted. The bondholders under the mortgage, and their assignees, -the purchasers at the sale, therefore took, and could take, nothing else than the charter, so far as it remained unexecuted, Avith such franchises and powers as Avere capable of future enjoyment and activity, and not such as, having already spent their force by having been fully exerted, could not be revived by a conveyance. This Avould include, by the necessity of the case, the franchise to organize a corporation, which can only be exerted once for all; for the simple act of organization exhausts the authority, and having once been effected, is legally incapable of repetition.

It is a mistake, hoAvever, to suppose that the mortgage and sale of a charter by a corporation, in any proper sense Avhich can be legally imputed to the words, necessarily conveys every poAver and authority conferred by it, so far, at least, as to vest a title in them, as franchises, irrevocable by reason of the obligation of a contract. In many, if not in most, acts of incorporation, hoAvever special in their nature, there are various provisions Avhich are matters of general laAv and not of contract, and are, therefore, subject to modification or repeal.

Such, in our opinion, would be the character of the right in the mortgage bondholders, or the purchasers at the sale under the mortgage, to organize as a corporation, after acquiring title to the mortgaged property, by sale under the mortgage, if, in the charter under consideration, it had been conferred in express terms, and particular provision had been made as to the mode of procedure to effect the purpose. It would be matter

of law and not of contract. At least, it would be construed as conferring only a right to organize as a corporation, according to such laws as might be in force at the time when the actual organization should take place, and subject to such limitations as they might impose. It cannot, we think, be admitted that a statutory provision for becoming a corporation in futuro can become a contract, in the sense of that clause of the Constitution of the United States which prohibits State legislation impairing its obligation, until it has become vested as a right by an actual organization under it; and then it takes effect as of that date, and subject to such laws as may then be in force. Such a contract, so far as it seems to assume that form, is a provision merely that, at the time, or on the happening of the event specified, the parties designated may become a corporation according to the laws that- may then be actually in force. The stipulation, whatever be its form, must be construed as subject and subordinate to the paramount policy of the State, and to the sovereign prerogative of deciding, in the mean time, what shall constitute the essential characteristics of corporate existence. The State does not part with the franchise until it passes to the organized corporation; and, when it is thus imparted, it must be what the government is then authorized to grant and does actually confer.

It is immaterial that the form of the transaction is that of a mortgage, sale, or other transfer inter joourtes of the franchise to be a corporation. “ The real transaction, in all such cases of transfer, sale, or conveyance,” as was said by the Supreme Court of Ohio in the case of The State v. Sherman, 22 Ohio St. 411, 428, “in legal effect, is nothing inore or less, and nothing other, than a surrender or abandonment of the old charter by the corporators, and a grant de novo of a similar charter to the so-called transferees or purchasers. To look upon it in any other light, and to regard the transaction as a literal transfer or sale of the charter, is to be deceived, we think, by a mere figure or form of speech. The vital part of the transaction, and that without which it would be a nullity, is the law under which the transfer is made. The statute authorizing the transfer and declaring its effect, is the grant of a new charter

couched in few words, and to take effect upon condition of the surrender or abandonment of the old charter; and the deed of transfer is to be regarded as mere evidence of the surrender or abandonment.”

It is, of course, the law in force at the time the transaction is consummated and made effectual, that must be looked to as determining its validity and effect. This is the principle on which this court proceeded in deciding the case of Railroad Co. v. Georgia, 98 U. S. 359. The franchise to be a corporar tion remained in, and was exercised by, the old corporation, notwithstanding the mortgage of its charter, until the new corporation was formed and organized; it was then surrendered to the State, and by a new grant then made passed to the corporators of the new corporation, and was held and exercised by them under the constitutional restrictions then existing.

Our conclusions, then, are, that the exemption from taxation contained in the 28th section of the act of January 11, 1853, was intended to apply only to the Memphis and Little Rock Railroad Company as the original corporation organized under it; that it did not pass by the mortgage of its charter and works, as included in the transfer of the franchise to be'a corporation, to the mortgagees or purchasers at the judicial sale; that the franchises embraced in that conveyance were limited to those which had been granted as.appropriate to the construction, maintenance, operation, and'use of the railroad as a public highway and the right to make profit therefrom; and that the appellant, not having become a corporate body until after the restrictions in the Constitution of 18T4 took effect, was thereby incapable in law of having or enjoying the privilege of holding its property exempt from taxation.

The decree of the Supreme Court of Arkansas is accordingly