Creditors and Debtors in the Postwar South

The Homestead Cases – Virginia, 1872 (62 Va. 266); Jacobs v. Smallwood – North Carolina, 1869 (63 N.C. 112); Hill v. Kessler – North Carolina, 1869 (63 N.C. 437)

• During the war, because times were hard and because many men were away on military service, most Confederate states passed “stay” laws limiting creditors’ rights to sue debtors or giving debtors extra time to pay before creditors could foreclose on their property.  These debtor relief laws were extended after the war.  Some states made the extensions absolute, and some made protection conditional on debtors paying as much as they could immediately.  During Reconstruction several Southern states that had not previously enacted homestead laws did so for the first time, including Virginia and North Carolina.

• Creditors vigorously challenged the stay and homestead laws as an unconstitutional impairment of their property rights.  The Virginia and North Carolina supreme court upheld their state’s homestead acts, reasoning that the acts merely altered the remedies available to creditors and not their basic right to collect what they were owed, although both courts indicated it was a close call.  In Jacobs, a divided North Carolina court struck down the state’s 1868 stay law, reasoning that it could not be applied to debts that existed before the law was passed.  But in Hill, the court took a different view of homestead laws, reasoning that they were not intended to enable debtors to escape their debts but simply encouraged home ownership.  The court adhered to its position even after the U.S. Supreme Court struck down a similar Georgia law.  Virginia’s supreme court also upheld its state’s homestead exemption, although it was considerably uneasier about the law than was the North Carolina court.   

“Probably the attempted interference in favor of one class against the other, has held out false, not to say unjust hopes, and has prevented the private adjustments which might have been made … As it is, we find that eight years of stay laws have left a considerable indebtedness, with interest and cost accumulated, and creditors and sureties impoverished, without any corresponding benefit to the principal debtors.” – Justice __, in Jacobs

Entering the industrial age:  corporate regulation in the coastal upper South

State v. Bank of Smyrna – Delaware, 1859 (7 Del. 99); Raleigh & Gaston Railroad Co. v. Reid – North Carolina, 1870 (64 N.C. 155)

• The South of necessity followed a unique legal path on civil rights after the war, but it shared many economic problems with other parts of America:  in particular, the question of how far states should go in regulating railroads and other large corporations. 

• Like other states, many Southern states created railroad commissions and railroad rate laws after the war; Virginia was one of the first to create a regulatory commission (1866). 

• A national movement to eliminate individual corporate charters with a system of general incorporation laws available equally to all incorporators, reached its peak between 1865 and 1875, and many Southern states joined in the trend. 

• Railroads challenged many of the new regulatory laws under the Dartmouth College doctrine, which held that corporations’ charters were contract with the state and that applying subsequently-enacted regulatory laws would unconstitutionally impair the corporations’ contract rights (see § __).  Many northern and eastern states had responded before the war by enacting anti-Dartmouth laws providing that in future, new corporations must agree to observe new laws as a condition of receiving their charters.  Most Southern states that had not enacted anti-Dartmouth laws before the war did so during Reconstruction. 

• Courts in the coastal upper South, like many northern counterparts, enforced the new laws liberally.  In the Smyrna case, Delaware’s supreme court applied the Dartmouth doctrine but noted that because state law provided for regular expiration and renewal of corporate charters, new regulatory laws would automatically apply to corporations after the next re-chartering.  Delaware and North Carolina also carved out an exception to the Dartmouth doctrine for tax laws:  no legislature could bind another by granting long-term tax breaks to railroads and other large corporations, because the power of taxation was central to the state’s power to survive and no state could be allowed to commit legislative suicide.