NEW YORK, L. E. & W. R. CO. v. COMMONWEALTH OF PENNSYLVANIA.

The principal question in the case is whether the commonwealth of Pennsylvania may, consistently with the constitution of the United States, impose upon the New York, Lake Erie & Western Railroad Company the duty, when paying in the city of New York the interest due upon scrip, bonds, or certificates of indebtedness held by residents of Pennsylvania, of deducting, from the interest so paid, the amount assessed upon bonds and moneyed capital in the hands of such residents of Pennsylvania.

The court recognizes the far-reaching consequences of its determination of this question, and has therefore bestowed upon it the careful consideration which its importance demands.

It is contended that, in our examination of this question, there are certain principal facts found by the court of common pleas which, so far as they are pertinent, must be accepted as the basis of any decision that may be rendered. Com. v. Westinghouse Electric & Manuf'g Co., 151 Pa. St. 265, 24 Atl. 1107, 1111, and authorities there cited. These facts are: That all the evidences of debt owing by the railroad company were created and issued under the authority of the state of New York, and were sold and delivered in that state or in London; that the interest on such indebtedness is payable and paid in the cities of New York and London; that the interest coupons are payable to bearer, and, when due, are separated from the bonds and presented for payment at the company's office in New York, by banks and their messengers, on their own behalf, or on behalf of their correspondents in other places, by whom the coupons have been sent either as cash or for collection; and that it is practically impossible for the company's officers, at the time the coupons are presented, to ascertain the residence of the owners of the bonds from which the coupons were detached, the number of coupons due semiannually amounting to more than 150,000, and those presented in a single day often amounting to 20,000, and the bankers and their messengers, at the time of presenting their coupons, not knowing, in very many instances, who own the bonds, and, as the coupons are payable to bearer, could not be compelled to disclose the ownership of either bonds or coupons.

In our judgment, however strongly those facts may indicate the injustice that would be done to the railroad company by subjecting it to the provisions of the fourth section of the statute of 1885, and although such facts are important in some aspects of this case, to be presently examined, they are not, in themselves, decisive of the question to be here determined. It is not enough to justify the overthrow, by judicial decision, of a state law imposing taxation, simply to show that such law operates unjustly. So far as the courts of the Union are concerned, they must recognize, and, when necessary to do so in cases within their jurisdiction, enforce, the statutes of the several states, unless those statutes encroach upon legitimate national authority, or violate some right granted or secured by the constitution of the United States. Kirtland v. Hotchkiss, 100 U. S. 491, 498. The question here is not one of mere injustice done to the railroad company, but one of power or authority in Pennsylvania to compel that corporation to do what the act of 1885 is held by the state court to require at its hands in respect to taxes upon bonds and moneyed capital in the hands of individual citizens of Pennsylvania.

The fundamental propositions upon which the argument of counsel for the state is based is that the New York, Lake Erie & Western Railroad Company is a private corporation of another state; that it has no right to do business in Pennsylvania without the permission of that state; and that it is, therefore, subject at all times to such reasonable regulations as may be prescribed by Pennsylvania, whether those regulations relate to taxation or to the business or property of the company in that commonwealth. This view was expressed by the supreme court of Pennsylvania in Com. v. New York, L. E. & W. R. Co., 129 Pa. St. 463, 18 Atl. 412, in the following language: 'It was competent for the legislature of Pennsylvania to impose as a condition upon foreign corporations doing business in this state that they shall assess and collect the tax upon that portion of their loans in the hands of individuals resident within this state, and otherwise comply with the provisions of the act of 1885. The act imposes no tax upon the company. It simply defines a duty to be performed, and fixes a penalty for disregard of that duty. The legislature having so provided, compliance with the act may, in some sense, be said to form one of the conditions upon which corporations may do business within the state, and the corporation continuing its business subsequently would be taken to have assented thereto. There is, however, a condition, implied even in the case of domestic corporations, that they will be subject to such reasonable regulations, in respect to the general conduct of their affairs, as the legislature may from time to time prescribe, and such as do not materially interfere with or obstruct the substantial enjoyment of the privileges the state has granted. Chicago Life Ins. Co. v. Needles, 113 U. S. 574, 5 Sup. Ct. 681. If this be so as to corporations who are entitled to their charter privileges upon the footing of a contract, how much the more is it so as to corporations who are merely permitted by the legislature to do business within this state as a matter of grace, and not of right.'

It is found as a fact in this case that, so far as Pennsylvania is concerned, the business of the railroad company consists chiefly in the transportation of freight and passengers from or to other states, into, out of, or through that state. We are not sure that the court below, or counsel here, intended to be understood as claiming that it was competent for Pennsylvania to make compliance with the fourth section of the act of 1885 a condition of the right of the railroad company to continue the use of its track in Pennsylvania for purposes of interstate commerce. Some of the considerations necessary to be borne in mind when any such question arises for determination are adverted to in the recent decision of this court in Crutcher v. Kentucky, 141 U. S. 47, 59, 11 Sup. Ct. 851. But no such question is here presented. The commonwealth of Pennsylvania has not attempted to impose any such condition upon the corporations embraced by the statute of 1885.

Assuming, for the purposes of this case, the correctness of the position taken by the learned attorney general of Pennsylvania, that the commerce clause of the constitution of the United States has no bearing upon the present inquiry, we are of opinion that the fourth section of the act of 1885, in its application to this railroad company, impairs the obligation of the contract between it and Pennsylvania, as disclosed by the acts of 1841 and 1846, and by what was done by that company upon the faith of those acts. Those acts prescribe the terms and conditions upon which Pennsylvania assented to the company's constructing and operating its road through limited portions of its territory. Those terms have been fully indicated in the statement of this case, and need not to be repeated. When the state, by the acts of 1841 and 1846, gave this assent, the possibility that the company might misuse or abuse the privileges granted to it, or violate the provisions of those acts, was not overlooked, for by the seventh section of the act of 1846, into which, by its second section, all the restrictions, prohibitions, privileges, and provisions contained in the act of 1841 were imported, it was declared that the right of the legislature to repeal it was reserved, 'if the said company shall misuse or abuse the privileges hereby granted, or shall violate any of the privileges [provisions] of this act.' And the question whether the privileges granted had been misused or abused, or the provisions of the act violated, was to be determined by scire facias issued out of the supreme court of Pennsylvania. Section 7. There is no claim in the present case of any violation by the railroad company of the provisions of the acts of 1841 and 1846 specifying the terms and conditions upon which it acquired the right, so far as it depended upon state legislation, to enter Pennsylvania and construct and operate a part of its road within the territory of that commonwealth. Consistently with those terms and conditions, Pennsylvania cannot withdraw the assent which it gave, upon a valuable consideration, to the construction and operation of the defendant's road within its limits. Nor can the right of the company to enjoy the privileges so obtained be burdened with conditions not prescribed in the acts of 1841 and 1846, except such as the state, in the exercise of its police powers for purposes of taxation, and for other public objects, may legally impose in respect to business carried on and property situate within its limits.

The argument in behalf of the state leads logically to the conclusion that notwithstanding the provisions of the acts of 1841 and 1846, prescribing the terms upon which the company acquired the privilege of constructing and operating its road in that state, Pennsylvania could, in its discretion, change those terms, and impose any others it deemed proper. If the state amended those acts so as to increase the sum to be paid annually into the state treasury, as a bonus, from $10,000 to $100,000, the argument made by its attorney general would sustain such legislation upon the ground that the state, at the outset, could have exacted the larger amount from the company as a condition of its entering the state with its road. To any view which assumes that the state could—so long, at least, as the railroad company performed the conditions of the acts of 1841 and 1846—burden the company with conditions that would substantially impair the right to maintain and operate its road within Pennsylvania upon the terms stipulated in those acts, we cannot give our assent. No such terms as those named in the act of 1885 were imposed prior to the building of the road in Pennsylvania, and, the road having been constructed in that state upon the faith of the legislation of 1841 and 1846, and with the assent of the state, given for a valuable consideration paid by the company, its maintenance in Pennsylvania cannot be made the pretext for imposing such conditions as those prescribed in the act of 1885.

But it is said that regulations prescribed after the construction of the road, applicable to railroad companies doing business in the state, such regulations being reasonable in their character, should be deemed to have been within the contemplation of the parties when those acts were passed, and therefore not in violation of the agreement under which the company entered the state for the purpose of transacting business there; and that it should not be assumed that the state intended to surrender or bargain away its authority to establish such regulations.

Of the soundness of this general proposition there can be no doubt, in view of the settled doctrines of this court. The contract in question left unimpaired the power of the state to establish such reasonable regulations as it deemed proper, touching the management of the business done and the property owned by the railroad company in Pennsylvania, which did not materially interfere with or obstruct the substantial enjoyment of the rights previously granted. But the fourth section of the act of 1885 is not within that category. It assumes to do what the state has no authority to do,—to compel a foreign corporation to act, in the state of its creation, as an assessor and collector of taxes due in Pennsylvania from residents of Pennsylvania. Under the sanction of the laws of New York the defendant corporation executed, prior to the passage of the act of 1885, bonds, with interest coupons attached, payable in that state and not elsewhere. It gave mortgages to secure the payment of those bonds and coupons, according to their tenor. Neither the bonds nor the coupons nor the mortgages contain anything that would, in law, justify the company in refusing to meet its obligations, according to their terms, and without deduction on account of taxes due from the holders of such bonds or coupons residing in another state. We have seen that the bonds and coupons in question were payable to bearer, and that it was practically impossible for the company, when the coupons were presented for payment, to ascertain who, at that time, really owned them, or the bonds from which they were detached, or whether the coupons were owned by the same person or corporation that owned the bonds. This fact is quite sufficient to show the unreasonable character of the regulations attempted to be applied to this company under the act of 1885. This view is strengthened by the fact that the coupons were negotiable instruments, and, being detached from the bonds, were separate obligations, passing by delivery, upon which an action could have been maintained by the holder, independently of the ownership of the bonds. Such is the settled doctrine of commercial law as declared by this court. Clark v. Iowa City, 20 Wall. 583; Hartman v. Greenhow, 102 U. S. 672, 684; Koshkonong v. Burton, 104 U. S. 668. And it is the doctrine of the supreme court of Pennsylvania, which has declared that 'the coupons of railroad bonds are negotiable instruments, and may be sued on by the holder separately from the bonds, and interest from the date of demand and refusal of payment may be recovered.' County of Beaver v. Armstrong, 44 Pa. St. 63.

If Pennsylvania, in order to collect taxes assessed upon bonds issued by its own corporations, and held by its resident citizens, could require those corporations to deduct the required amount from the interest when the coupons are presented by holders known at the time by the corporation paying the interest to be residents of that state (and it may be admitted, in this case, that the state, if not restrained by a valid contract to which it was a party, could establish such a regulation), it does not follow that the state may impose upon foreign corporations, because of their doing business in that state with its permission given for a valuable consideration, any duty in respect to the mode in which they shall perform their obligations in other states.

The New York, Lake Erie & Western Railroad Company is not subject to regulations established by Pennsylvania in respect to the mode in which it shall transact its business in the state of New York. The money in the hands of the company in New York, to be applied by it in the payment of interest, which by the terms of the contract is payable in New York, and not elsewhere, is property beyond the jurisdiction of Pennsylvania, and Pennsylvania is without power to say how the corporation holding such money in another state shall apply it, and to inflict a penalty upon it for not applying it as directed by its statutes; especially may not Pennsylvania, directly or indirectly, interpose between the corporation and its creditors, and forbid it to perform its contract with creditors according to its terms, and according to the law of the place of performance. No principle is better settled than that the power of a state, even its power of taxation, in respect to property, is limited to such as is within its jurisdiction. State Tax on Foreigh-Held Bonds, 15 Wall. 300, 319; Railroad Co. v. Jackson, 7 Wall. 263; St. Louis v. Ferry Co., 11 Wall. 423; Delaware Railroad Tax, 18 Wall. 206.

The fallacy of the contrary view is in the assumption that this railroad company, by purchasing from Pennsylvania the privilege of constructing and operating a part of its road through the territory of that state, thereby impliedly agreed to submit to such regulations as that state should, at any subsequent period, adopt in respect to the mode in which it should, in the state of New York, apply money in its hands in discharge of the obligation to pay interest to the holders of its bonds residing in Pennsylvania. But, for the reasons strated, this assumption is unwarranted by any sound principle of law, or by the circumstances under which the railroad company obtained the assent of Pennsylvania to build and maintain its road through that state.

It is due to learned counsel who argued this case that something be said, before concluding this opinion, about certain authorities upon which great reliance was placed.

Reference was made by counsel for the company to the decision of this court in the case of State Tax on Foreign-Held Bonds, 15 Wall. 300, 320, which case involved the validity of a Pennsylvania statute of 1868, requiring corporations, created by and doing business in that state, to deduct from the interest paid on its obligations the tax assessed on such interest by the state. It was attempted to make that statute applicable to interest payable on bonds held by nonresidents of Pennsylvania. This court said: 'The tax laws of a state can have no extraterritorial operation, nor can any law of a state inconsistent with the terms of a contract made with, or payable to, parties out of the state, have any effect upon the contract while it is in the hands of such parties or other nonresidents of the state. * * * 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, as stated on another occasion, such a law relieves the parties from the moral duty of performing the original stipulations of the contract, and it prevents their legal enforcement. The act of Pennsylvania of May 1, 1868, falls within this description. It directs the treasurer of every incorporated company to retain from the interest stipulated to its bondholders 5 per cent. upon every dollar, and pay it into the treasury of the commonwealth. It thus sanctions and commands a disregard of the express provisions of the contracts between the company and its creditors. It is only one of many cases where, under the name of taxation, an oppressive exaction is made without constitutional warrant, amounting to little less than an arbitrary seizure of private property.'

If the present case involved any question as to the authority or duty of the railroad company to deduct anything from the interest paid on its scrip, bonds, or certificates of indebtedness, when held by nonresidents of Pennsylvania, the Case of State Tax on Foreign-Held Bonds would be decisive against the state. But no such question is here presented. The statute of 1885 only applies to scrip, bonds, or certificates of indebtedness issued to, and held by, residents of Pennsylvania.

Counsel for the state insisted that the present case is controlled by Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 10 Sup. Ct. 533, reaffirmed in Jennings v. Coal Co., 147 U. S. 147, 13 Sup. Ct. 282. It is only necessary to observe that the corporations which complained in those cases of the tax assessed, under a Pennsylvania statute, upon their loans held by residents of Pennsylvania, were Pennsylvania corporations. No question arose in either of those cases as to the authority of Pennsylvania to make a corporation of another state an assessor or collector of taxes assessed by or under the authority of Pennsylvania against residents of Pennsylvania. Nor does the case now before us involve any question as to the extent to which the state may tax property within its limits belonging to the railroad company.

The views we have expressed are sufficient for the disposition of the case, without considering other grounds upon which, it is contended, the judgment below was erroneous.

The judgment of the supreme court of Pennsylvania is reversed, and the cause is remanded for further proceedings not inconsistent with this opinion.

Reversed.

The case of New York. L. E. & W. R. Co. v. Commonwealth of Pennsylvania, No. 75, and that of New York, L. E. & W. R. Co. v. Commonwealth of Pennsylvania, No. 79, each upon writ of error to the supreme court of Pennsylvania, involved the same questions as were presented, and have been determined, in the above case. For the reasons stated, the judgment in No. 75 and the judgment in No. 79 are each reversed, and those cases are remanded for further proceedings not inconsistent with the opinion in case No. 591.