Maryland v. Baltimore and Ohio Railroad Company (89 U.S. 105)
ERROR to the Supreme Court of Maryland; the case being thus:
In the year 1826 the State of Maryland incorporated the company now well known as the Baltimore and Ohio Railroad Company, for the purpose of making a railroad from Baltimore to the Ohio River. The capital was $3,000,000; and the State took one-sixth of it, or $500,000. The company was, however, not able to make the road with the $3,000,000 capital thus originally subscribed; and in 1836 the legislature of the State passed an act 'for the promotion of internal improvements, &c.,' meant to assist the completion of the road.
By the first section the State authorized its treasurer to subscribe $3,000,000, in instalments, to the capital of the road, on certain conditions.
Its ninth section was as follows:
'Before any subscriptions shall be made by virtue of this act, the stockholders of the said company shall stipulate, agree, and bind the company . . . to guarantee to the State of Maryland, after the expiration of three years from the payment by the State of each of the instalments on the stock hereby authorized, the payment from that time, out of the profits of the work, of six per centum per annum, payable semi-annually, on the amount of money which shall be paid to the said company by virtue of this act, until the clear annual profits of the said railroad shall be more than sufficient to discharge the interest which it shall be liable so to pay to the State of Maryland, and shall be adequate to a dividend of six per centum per annum among its stockholders, and thereafter the State shall, in reference to the stock so subscribed for, and on so much thereof as the State may hold, be entitled to have and receive a perpetual dividend of six per centum per annum, out of the profits of the work as declared from time to time, and no more, and all and so much of such annual profits as shall exceed six per centum, shall be distributed to the other stockholders according to their several interest in said company.'
The guarantee required by this section was given by the company, and accepted by the State.
The act further provided for the appointment of commissioners to proceed to Europe to negotiate loans, and fot the issue of the bonds to raise money on behalf of the State to satisfy the purposes of the act. The bonds were to be issued, redeemable, at the pleasure of the State, after the expiration of fifty years from their date, and to bear interest at the rate of six per centum per annum, payable quarterly, either at the loan office in the city of Baltimore, or at some place in Europe, as might be arranged by contract. They were not, however, to be sold at any rate which would yield to the State less than twenty per cent. net, above par. Of this premium, whatever part of it was not required to pay the interest on the loan for three years after its negotiation, was, with its increment, directed to be invested, in order to constitute a sinking fund for the ultimate redemption of the debt incurred.
The bonds were issued by the State, but the commissioner sent to Europe was unable to negotiate them on the terms prescribed by the act. The State then sold the bonds to the company itself; but rated, as they had been by the State, at $120, they proved to be unsalable by the company.
In this state of things the State passed, in 1838, an act providing that upon the surrender of the bonds, the commissioner of loans should deliver to the company 'an amount of sterling bonds or certificates of stock to be redeemable in London, at the pleasure of the State, at any time after fifty years from the date thereof, and to bear an interest of five per cent. per annum, payable semi-annually in London, on the 1st day of January and July in each and every year, equivalent to the amount of bonds delivered up by the company.' The act continued:
'And in thus changing the bonds already issued under the act aforesaid for the bonds hereby created, the said commissioner of loans shall give to the said company in the proportion of $3200 of the bonds or certficates of stock hereby created for every $3000 of the bonds so to be delivered up.
'Provided, however, that the said company shall secure by mortgage on all the property and revenues of said company to the satisfaction of the treasurer, the payment of the interest at the rate of five per centum per annum on the stock created by this act, semi-annually, at least ninety days before the first day of January and July, in every year, FOR THE TERM OF THREE YEARS from the date of the bonds, together with the cost of transmitting said interest to London to be there paid, and also the difference in the exchange of currency between London and the city of Baltimore.'
The bonds that were issued to the company by the State, under this act of 1838, owing to difficulties in disposing of them to advantage, were not appropriated by the company until about the year 1849, when they were placed on the market in Europe, and sold. As they were disposed of, the railroad company paid the interest on them as it accrued, and all costs and difference in exchange, for the term of three years; and after the expiration of that term it continued to pay such interest, cost, and exchange, by applying directly the State's guaranteed dividend of six per cent. on the stock subscribed under the act of 1836, instead of paying it over to the treasury. The company rendered no account, but treated the six per cent. dividend as equivalent to the five per cent. sterling interest, with the costs and exchange; and this continued to be its course of conduct to the 1st of July, 1865, from which time it ceased to apply the six per cent. dividend as formerly, but paid it directly into the State treasury in currency notes. The State had been, therefore, required, from the 1st of July, 1865, to the present time to provide for the payment of the sterling interest in London, together with all costs and difference in exchange; which, of course, had to be adjusted to a gold standard, while it had been in the receipt of the six per cent. dividend in currency.
At the time that the company accepted the provisions of the act, June 4th, 1836, and indeed up to the year 1861, the matter was not one of practical importance. Coin (or paper convertible on demand into it) was the currency of the country. The law recognized no tender as valid but one in coin; and in the case of this contract, as in all others made at the time that it was (A.D. 1836), the expectation of the parties, it was not denied, was that the contract would be discharged in coin.
But in the year 1861, already named, a general suspension of payments in coin took place throughout the country, and in 1862 and 1863, Congress authorized the issue of many millions of notes of the United States, which by the acts authorizing them were declared to be a tender in payment of debts. This act, this court held to be constitutional;  but the court also decided that a debtor could pay his debt with legal tender notes only when his contract did not specify that payment should be made with coin;  in other words that a debtor might have defined the medium of payment as well as have promised to pay. So that after the passage of these acts there were two kinds of money or representatives of values with which debts might be paid, coin and legal tender notes; an ordinary debtor being at liberty to pay in currency, though a debtor who had undertaken to discharge his obligation by payment in gold or silver would be held to his contract as specifically made.
Immediately on the issue of the sort of notes above mentioned they fell in value as compared with gold, and at many times since had been greatly below it. At one time during the summer of 1864 it required $285 in them to buy $100 in gold. The difference thus became vast, and it so happened that the payment, in gold, of five per cent., was the payment of a much greater sum than would have been the payment of six per cent. in the 'legal tender notes' of the United States; otherwise called 'currency.' And as the State had paid the five per cent. interest on its sterling bonds in gold the only way in which it could pay interest abroad-it now, in the suit below, asserted that it was entitled to be fully indemnified by the company, and to be repaid in gold and not in currency. This the company denied, and the question therefore was whether by the contract between the parties, the State was entitled to demand in gold what was payable to her, or whether it might be satisfied in legal tender notes. The court below was of the opinion that it might be satisfied in legal tender notes, and gave judgment against the State. To that judgment the present writ was taken.
Messrs. S. T. Wallis, I. N. Steele, and P. F. Thomas, for the plaintiff in error:
A contract to pay in gold is here implied, and the case falls within Trebilcock v. Wilson,  which obliges the debtor in such case to pay in gold.
The State had subscribed $500,000 to the road, which was yet unfinished, and desired to have the road finished; but it desired also not to really increase its own debt, and not to have to raise interest by taxation. If the road could only be finished, it could pay the interest, and, when it came due, the principal of what the State might bind itself in form to pay. The proper interpretation of the acts of the legislature construed together and in the light of surrounding circumstances, an interpretation which must have been given at the time by both parties, therefore is:
1st. That in practical effect the State only lent its credit to the company to enable the latter to borrow money in Europe; the cost of the transaction to be altogether borne by the railroad company, and the State being the mere conduit through which that cost was to be conveyed from the company to the European lender.
2d. That the transaction, though in the form of stock, paying a fixed and preferred dividend, was, in effect, a loan bearing the legal rate of interest of the State, six per cent.; the form of stock being adopted to make the loan irredeemable by the company at any fixed period, but at the same time placing in the hands of the State a source from which it could at any time after the success of the work became assured, realize the means of paying its own bonds in Europe, and terminate the transaction.
3d. That this interest was payable in gold, not only because at the date of the transaction all legal demands were solvable in gold only, but because, from the nature of the transaction, gold only must have been in the contemplation of the parties to it, as gold was the only medium within the fixed rate of the contract which would keep the State harmless.
That this was all so, stands to reason. The State was bound to protect her own interest and that of her people, and it must be inferred that she did not contract in a way so loose as to expose herself and them to pay $2.85, and more, when she got but $1 in return. Undoubtedly both parties thought that what the company agreed to pay would be enough to pay the interest on the State bonds; which on the construction given to the contract in the court below it never could do.
The case of Lane County v. Oregon,  involved the proper construction of the statutes of the State of Oregon, and this court decided that when the statutes of the State required the collecting officer to pay over the taxes to the State treasurer in gold, it was required by legitimate, if not necessary consequence, that the taxes should be collected in gold, though the statute imposing the taxes made no mention of the medium in which they should be payable. We refer to that case as an authority in point upon the implication of an obligation from the nature of the transaction. Now, in the case we are considering, it was well known and understood between the contracting parties that the State was to oblige itself by the tenor of its bonds, negotiable in Europe, to pay the principal and interest of the debt thus contracted in gold, and the only source provided by the same contract for such payment was a stipulated amount to be paid by the company to the State, and intended to be the equivalent of the interest payable by the State. In order to make it equivalent it is necessary to make it payable by the company in gold; and is not the implication as logically necessary in this case as it was in the Oregon case?
Messrs. J. H. B. Latrobe, Reverdy Johnson, and C. J. M. Gwinn, contra.
Mr. Justice STRONG delivered the opinion of the court.