IMPAIRS THE OBLIGATION. tract of the parties, impairs its obligation. 679 Upon this prin ciple it is that if a creditor agree with his debtor to postpone the day of payment, or in any other way to change the terms of the contract without the consent of the surety, the latter is discharged, although the change was for his advantage.' "One of the tests that a contract has been impaired, is that its value has by legislation been diminished. It is not, by the Constitution, to be impaired at all. This is not a question of degree or cause, but of encroaching in any respect on its obligation, or dispensing with any part of its force." 1 If the effect is produced, it matters not by what means, because the prohibition is absolute, and equally applicable whether the law operates directly on the contract, or to impair the remedies through which it may be enforced, or the proofs by which it is sustained. A law declaring that a pre-existing contract does not bind the parties, or liberating them from the obligation, is necessarily unconstitutional, and hence, as we have seen, a State cannot pass a retroactive insolvent or bankrupt law;2 but the prohibition will also be violated by an enactment which injuriously varies the interpretation of the contract, the duties which it imposes,3 or the measure of damages, or which renders that which would not have been a defence when the contract was made an answer to an action brought to enforce its provisions; 5 as, for instance, by enacting that actions on bonds or judgments confessed previously under a warrant of attorney may be defeated by proof of want of consideration.6 It results from these principles that the legislature cannot constitutionally authorize a debtor to pay the amount of a tax which has been imposed on the creditor into the State 1 Planters' Bank v. Sharp, 6 Howard, 327. 2 Sturges v. Crowninshield, 4 Wheaton, 122; Ogden v. Saunders, 12 Id. 213; Von Hoffman v. Quincey, 4 Wallace, 535, 552. 3 Von Hoffman v. Quincey, 4 Wallace, 535; Edwards v. Kearzey, 96 U. S 600; Black on Constitutional Prohibitions, sect. 102. 566. Wilmington R. R. v. King, 91 U. S. 3; Effinger v. Kenney, 115 Id. Cornell v. Hickens, 11 Wis. 353; McElvain v. Mudd, 44 Ala. 48. • See Williams v. Haines, 27 Iowa, 251. 680 A TAX ON THE DEBT CANNOT BE treasury, and then plead it as an entire or partial satisfaction of the debt. This is clear where the creditor is a non-resident, and not less true when he is within the State; and the tax would be valid if laid directly on him. A law directing that the principal or interest of a debt shall be paid to a third person, is as contrary to the obligation as a law authorizing the debtor to retain the money for his own use. For like reasons a State or a municipal corporation cannot assess its bonds or loans and then deduct the tax from the sum due the creditors. Such a tax may be valid as regards persons who reside within the jurisdiction, but must be collected from the creditor, and not deducted by the debtor.2 In Murray v. Charleston, the clause providing that no State shall pass a law impairing the obligation of contracts, was said to be a limitation on the taxing power of the States as well as on all their other legislation; and the use of that power to vary the stipulations of a contract, or relieve the debtor from a strict and literal compliance with its terms, was unconstitutional and void. A city could not, therefore, free itself from the obligation to pay the principal and interest of its loans by an ordinance worded as a tax, but in effect authorizing the deduction of the amount from the sum due the creditor.3 1 Tax on Foreign Bonds, 15 Wallace, 319; Hartman v. Greenhow, 102 U. S. 672. 2 Murray v. Charleston, 96 U. S. 432; see ante, p. 319. "It may," said Strong, J., "safely be affirmed that no State by virtue of its taxing power can say to a debtor: 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.' What, then, is meant by the doctrine that contracts are made with reference to the taxing power resident in the State and in subordination to it? Is it meant that when a person lends money to a State, or to a municipal division of the State having the power of taxation, there is in the contract a tacit reservation of a right in the debtor to raise contributions out of the money promised to be paid before payment? That cannot be; because if it could, the contract (in the language of Alexander Hamilton) would involve two contradictory things, — an obligation to do, and a right DEDUCTED BY THE DEBTOR. 681 Agreeably to these decisions, contracts, unlike lands or chattels, cannot be taxed irrespectively of the owner's residence, and whether he is, or is not, personally subject to the power of the government which lays the tax; nor can a State constitutionally assess the money which it has borrowed, and make the tax a pretext for not paying the principal and interest in full. It may be impracticable to enforce the rule 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 unde ing 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. Is, then, property, which consists in the promise of a State, or of a municipality of a State, beyond the reach of taxation? We do not affirm that it is. A State may undoubtedly tax any of its creditors within its jurisdiction for the debt due to him, and regulate the amount of the tax by the rate of interest the debt bears, if its promise be left unchanged. A tax thus laid impairs no obligation assumed. It leaves the contract untouched. But until payment of the debt or interest has been made, as stipulated, we think no act of State sovereignty can work an exoneration from what has been promised to the 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 fulfil 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's Works, 514 et seq." 682 AGREEMENT TO RECEIVE when the debtor is a sovereign and cannot be sued; but it is valuable as teaching a lesson of good faith which may hinder governments from evading their obligations under the guise of taxation. While a debtor cannot legitimately be empowered to appropriate the amount due, to the payment of the creditor's debts without his assent, the same end may be attained indirectly through a judicial proceeding; and there is no constitutional objection to a statute authorizing the attachment of a debtor's assets, including the sums owing to him, as a means of satisfying the demands of the State or of private creditors. Such a statute may operate retroactively to compel the garnishee to pay the plaintiff in the attachment instead of the defendant, as was agreed; but the decree is pronounced by a court after a hearing at which all the parties may be present. Writs of this kind were issued under the custom of London at an early period, and are now largely employed in the United States both as mesne and final process. The right of set-off is, moreover, generally admitted; and if a government or municipality may legitimately tax its bonds, there seems to be no sufficient reason why it should not deduct the tax in settling with its creditors. The point really at issue is, Can such a tax be imposed consistently with the good faith which should be observed by nations? The contracts of a State are, as we have seen, not less strongly guarded against retroactive legislation than those of individuals; and a law declaring them invalid, or prohibiting her officers or agents from carrying them into effect, will be invalid, and cannot be set up as a justification for a failure to perform any act which was incumbent under the contract as originally made.1 Hence, when notes or coupon bonds issued by a State or by a bank which she has organized, are taken by individuals on the faith of a legislative declaration that they shall be received for taxes, a law repealing this provision and forbidding the collector to comply with its 1 New Jersey v. Wilson, 7 Cranch, 164; Wolff v. New Orleans, 103 U. S. 358; Keith v. Clark, 97 Id. 454; Poindexter v. Greenhow, 114 Id. 270; Hartman v. Greenhow, 102 Id. 672. See ante, p. 586. COUPONS IN PAYMENT OF TAXES. 683 terms will be simply void,1 and an officer who refuses to receive such notes or coupons when duly tendered by a taxpayer, and proceeds to collect the amount by distress, may be enjoined, or an action brought to recover back the goods.2 Such a suit is not against the State, or within the scope of the Eleventh Amendment, because the States, the President of the United States, and Congress, are in contemplation of law as incapable of giving an unconstitutional order as was the king, and such a mandate will no more protect those who act under it than would a writ which exceeded the jurisdiction of the court.3 So also where the laws of the State require an attorney to purchase a license before entering on the practice of the law, the license fee is a tax, and the tender of such coupons as those above described will be equivalent to payment. And if the attorney is subsequently convicted for practising without a license, the record may be removed to the Supreme Court of the United States and the judgment reversed.5 In the Planters' Bank v. Sharpe an act forbidding any banks within the State to "indorse or otherwise transfer any note, bill receivable, or other evidence of debt," was held invalid as regarded an existing bank which was expressly authorized by its charter "to have, possess, and enjoy lands, tenements, hereditaments, goods, chattels, and effects of what kind soever," and "the same to grant, demise, alien, or dispose of," and also "to discount all bills of exchange and notes." The court held that the jus disponendi was an incident of property which could not be taken away without diminishing its value, and consequently impairing the obligation of the contract which conferred the right. The prohibition is not less applicable where the injury is 1 Woodruff v. Trapnall, 10 Howard, 190, 208. 2 Poindexter v. Greenhow, 114 U. S. 270; Antoni v. Greenhow, 107 Id. 769; Clarke v. Tyler, 30 Grattan, 134. The United States v. Lee, 106 U. S. 196; Poindexter v. Greenhow, 114 Id. 270, 290. See 1 Smith's Leading Cases (8 Am. ed.). 4 Woodruff v. Trapnall, 10 Howard, 190, 208. 5 Royall v. Virginia, 116 U. S. 572. VOL. II. - 3 |