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U.S. Supreme Court

South Dakota v. North Carolina, 192 U.S. 286 (1904)

South Dakota v. North Carolina

No. 8, Original

Argued April 13-15, 1903

Reargued January 8, 11-12, 1901

Decided February 1, 1904

192 U.S. 286


This Court has jurisdiction over an action brought by one state against another to enforce a property right, and where one state owns absolutely bonds of another state, which are specifically secured by shares of stock belonging to the debtor state, this Court can enter a decree adjudging the amount due and for foreclosure and sale of the security in case of nonpayment, leaving the question of judgment over for any deficiency to be determined when it arises.

The motive of a gift does not affect its validity, nor is the jurisdiction of this Court affected by the fact that the bonds were originally owned by an individual who donated them to the complainant state.

Where a statute provides that a state issue bonds at not less than par to pay for a subscription to stock of a railroad company, and, after advertising for bids in accordance with the statute and receiving none, the bonds are delivered to the railroad company in payment of the subscription, the

Page 192 U. S. 287

transaction is equivalent to a cash sale to the company at par, and the state becomes the owner of the stock even though no formal certificates therefor are issued to it.

Under the special provisions of the statute involved the endorsement on bonds that each bond for $1,000 is secured by an equal amount of the par value of the stock subscribed for by the state, is tantamount to a separation and identification of the number of shares mentioned, and constitutes a separate and registered mortgage on that number of shares for each bond.

A holder of a certain number of such bonds may foreclose on the specific number of shares securing his bonds, and the holders of other bonds and of liens on the property of the railroad company are not necessary parties to the foreclosure suit.

By an act passed in 1849, chap. 82, Laws 1848-49, the North Carolina Railroad Company was chartered by the State of North Carolina with a capital of $3,000,000, divided into 30,000 shares of $100 each. The state subscribed for 20,000 shares. The statute authorized the borrowing of money to pay the state subscription, and pledged as security therefor the stock of the railroad company held by the state. In 1855, a further subscription for 10,000 shares was authorized by statute, chap. 32, Laws 1854-55, to be issued on the same terms and with the same security. At the same session, an act was passed incorporating the Western North Carolina Railroad Company, chap. 228, Laws, 1854-55, which authorized a subscription by the state and the issue of bonds secured by the stock held by the state in said company. On December 19, 1866, a further act was passed, chap. 106, Laws, 1866-67, entitled "An Act to Enhance the Value of the Bonds to be Issued for the Completion of the Western North Carolina Railroad, and for Other Purposes," which, after referring to the prior acts of the state authorizing the issue of bonds, and stating that a portion of them had already been issued, added:

"And, whereas, it is manifestly the interest of the people of the whole state that the residue of the bonds, when issued, shall command a high price in market, therefore,"

"SEC. 1. Be it enacted by the General Assembly of the State of North Carolina, and it is hereby enacted by the authority of the

Page 192 U. S. 288

same, That the public treasurer be, and he is hereby, authorized and directed, whenever it shall become his duty under the provisions of said acts, passed at the sessions of 1854-1855 and 1860-1861, to issue bonds of the state to the amount of $50,000 or more, to mortgage an equal amount of the stock which the state now holds in the North Carolina Railroad, as collateral security for the payment of said bonds, and to execute and deliver, with each several bond, a deed of mortgage for an equal amount of stock to said North Carolina Railroad, said mortgage to be signed by the treasurer and countersigned by the comptroller, to constitute a part of said bond, and to be transferable in like manner with it, as provided in the charter of said Western North Carolina Railroad Company; and, further, that such mortgages shall have all the force and effect, in law and equity, of registered mortgages without actual registry."

Under this last act, bonds were issued in the sum of $1,000 each, having this indorsement:

"State of North Carolina, Treasury Department"

"Raleigh, July 1, 1867"

"Under the provisions of an act of the General Assembly of North Carolina entitled 'An Act to Enhance the Value of the Bonds to be Issued for the Completion of the Western North Carolina Railroad Company, and for Other Purposes,' ratified 19th December, 1866, ten shares of the stock in the North Carolina Railroad Company, originally subscribed for by the state, are hereby mortgaged as collateral security for the payment of this bond."

"Witness the signature of the public treasurer and seal of office, and the countersignature of the comptroller."

"Kemp P. Battle"

"Public Treasurer"

"S.W. Burgin, Comptroller"

These bonds ran thirty years, and became due in 1897. In 1879, the State of North Carolina appointed commissioners to adjust and compromise the state debt, and all of the last-mentioned

Page 192 U. S. 289

bonds have been compromised with the exception of about $250,000. Simon Schafer and Samuel M. Schafer, either individually or as partners, owned a large proportion of these outstanding bonds, having held them for about thirty years. In 1901, Simon Schafer gave ten of these bonds to the State of South Dakota. The letter accompanying the gift was in these words:

"Office of Schafer Brothers, no. 35 Wall Street"

"New York, September 10th, 1901"

"Hon. Charles H. Burke."

"Dear Sir: The undersigned, one of the members of the firm of Schafer Bros., has decided, after consultation with the other holders of the second-mortgage bonds issued by the State of North Carolina, to donate ten of these bonds to the State of South Dakota."

"The holders of these bonds have waited for some thirty years in the hope that the State of North Carolina would realize the justice of their claims for the payment of these bonds."

"The bonds are all now about due, beside, of course, the coupons, which amount to some one hundred and seventy percent of the face of the bond."

"The holders of these bonds have been advised that they cannot maintain a suit against the State of North Carolina on these bonds, but that such a suit can be maintained by a foreign state or by one of the United States."

"The owners of these bonds are mostly, if not entirely, persons who liberally give charity to the needy, the deserving, and the unfortunate."

"These bonds can be used to great advantage by states or foreign governments, and the majority owners would prefer to use them in this way, rather than take the trifle which is offered by the debtor."

"If your state should succeed in collecting these bonds, it would be the inclination of the owners of a majority of the total issue now outstanding to make additional donations to such

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governments as may be able to collect from the repudiating state, rather than accept the small pittance offered in settlement."

"The donors of these ten bonds would be pleased if the Legislature of South Dakota should apply the proceeds of these bonds to the state university or to some of its asylums or other charities."

"Very respectfully,"

"Simon Schafer"

Prior thereto, and on March 11, 1901, the State of South Dakota had passed the following act, Session Laws, South Dakota, c. 134, p. 227:

"An Act to Require the Acceptance and Collections of Grants, Devises, Bequests, Donations, and Assignments to the South Dakota."

"Be it enacted by the Legislature of South Dakota:"

"SEC. 1. That whenever any grant, devise, bequest, donation, or gift or assignment of money, bonds, or choses in action, or of any property, real or personal, shall be made to this state, the governor is hereby directed to receive and accept the same, so that the right and title to the same shall pass to this state, and all such bonds, notes, or choses in action, or the proceeds thereof when collected, and all other property or thing of value so received by the state as aforesaid, shall be reported by the governor to the legislature to the end that the same may be covered into the public treasury or appropriated to the state university or to the public schools, or to state charities, as may hereafter be directed by law."

"SEC. 2. Whenever it shall be necessary to protect or assert the right or title of the state to any property so received or derived as aforesaid, or to collect or to reduce into possession any bond, note, bill, or chose in action, the attorney general is directed to take the necessary and proper proceedings and to bring suit in the name of the state in any court of competent jurisdiction, state or federal, and to prosecute all such suits, and is authorized

Page 192 U. S. 291

to employ counsel to be associated with him in such suits or actions, who, with him, shall fully represent the state, and shall be entitled to reasonable compensation out of the recoveries and collections in such suits and actions."

This act was passed on the suggestion that perhaps a donation of bonds of southern states would be made to the state. On November 18, 1901, the State of South Dakota, leave having been first obtained, filed in this Court its bill of complaint, making defendants the State of North Carolina, Simon Rothschilds (alleged to be one of the holders and owners of the bonds originally issued by the state and secured by a pledge of the stock in the North Carolina Railroad Company under the acts of 1849 and 1855), and Charles Salter (alleged to be one of the holders of the bonds issued under the act of 1855 and 1866, on account of the subscription to the Western North Carolina Railroad Company), the two individuals being made defendants as representatives of the classes of bondholders to which they severally belong. In it, the plaintiff, after setting forth the facts in reference to the several issues of bonds and its acquisition of title to ten, prayed that an account might be taken of all the bonds issued by virtue of these statutes; that North Carolina be required to pay the amount found due on the bonds held by the plaintiff, and that, in default of payment, North Carolina and all persons claiming under said state might be barred and foreclosed of all equity and right of redemption in and to the 30,000 shares of stock held by the state, and that these shares, or as many thereof as might be necessary to pay off and discharge the entire mortgage indebtedness, be sold, and the proceeds, after payment of costs, be applied in satisfaction of the bonds and coupons secured by such mortgages, and also for a receiver and an injunction.

Defendant Rothschilds made no answer. On April 2, 1902, the State of North Carolina and the defendant Charles Salter filed separate answers. North Carolina, in its answer, denied both the jurisdiction of this Court and the title of the plaintiff; averred that the bonds were not issued in conformity with the

Page 192 U. S. 292

statute; admitted the ownership of 30,000 shares of stock; denied that the mortgages were properly executed or that they had the effect of conveyances or transfers, either in law or equity, of said stock or conferred any lien by way of pledge or otherwise upon the same; denied that she ever had any compact or agreement whatever other than that contained in the Constitution of the United States with South Dakota, or that South Dakota had ever informed North Carolina of any claim against her, or made any demand in respect to it, or any effort to settle or accommodate. Salter's answer was mainly an admission of the allegations of the bill, with a claim that all the stock should be sold in satisfaction of the mortgage bonds of which he was charged to be the representative. Testimony was taken under direction of the Court, before commissioners agreed upon by the parties.

Page 192 U. S. 309

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