1 UC SOUTHERN REGIONAL L < < OOO oooc THE LAW OF MLNIOIPAl BONDS 1 ID 1 — 1 2 —5 ^— 1 8 1876 '^^^^^1 ^^^^^B m H' M ^^^^^^^HjKr. 1- r THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW GIFT OF Judge Leon T, David CHICAGO STAR BINDERY M S. Spring St.. L. A. T*i. Mutual 4434 (A,,<,xft-i.<^ (/A.» -cc^ «u # - ^C_JdI^l^-t--«^v^ TH"-] L/V.7 0? MmiOIPAL BOITDS, 1876. THE LAW OF MUNICIPAL BONDS BY HON. JOHN F. DILLON, Judge Eighth Judicial Circuit. Author of "Law of Municipal Corporations," Etc. ST. LOUIS: (t. L JONES AND COMPANY. 1876. Copyright, 1876. By John F. Dillon. T I ?76 THE LAW MUNICIPAL BONDS PART I. OF THE POWER TO ISSUE NEGOTIABLE BONDS. Sec. I. Extent of municipal indebtedness in this country. Comparative municipal indebtedness here and in Great Britain and Paris ; see note. Sec. 2. Effect of conferring upon municipalities the power to issue com- mercial securities for public improvements. Stimulus to ex- travagance. Abuse of power. Repudiation. Sec. 3. Scope and nature of present article — the law of Municipal Bonds as developed in the federal courts. Sec. 4. Taxation limited to public purposes. What are such. Aid to railways : bonds issued, for sale, to be paid by taxation. Sec. 5. Two great classes of municipal securities : i. Ordinary warrants; 2. Negotiable bonds. Attributes of each. Form of; mode of execution, etc. Sec. 6. As to the implied power to borrow money and issue negotiable securities. Sec. 7. Want of power to issue bonds always open as a defence. The question of power is the one of chief interest and importance. Sec. 8. Different classes of bonds. Implied and express power to issue. Recitals. Mode of pleading. Statute of limitations, etc. ; see note. Sec. 9. CoKdilicms precedent io exercise of power, such as popular vote. Effect of non-compliance. Recital of compliance. Enjoining issue of bonds. Sec. 10. Estoppel by recitals in bond to show non-compliance with con- ditions precedent. Knox Co. v. Aspinwall. Sec. h. Estoppel by recital. Failure to comply with the requirements of the act in respect to notice of election T^ifZ^U 2 THE LAW OF MUNICIPAL BONDS. Sec. 12. Condition precedent. Assent of two-thirds of resident tax- payers. Onics probandi. Estoppel by recital. Sec. 13. Estoppel by recital to set up an excessive issue of bonds in vio- lation of the enabling act. Sec. 14. Estoppel by recital of matter in pais — e. g., date of subscription — conclusive. Sec. 15. What constitutes completed subscription, or valid contract to subscribe, which cannot be legislatively impaired. Sec. 16. Same. Power may be repealed by constitutional provision or legislative enactment before rights are vested thereunder. Sec. 17. Same. Mode of subscription. When subscription complete. Sec. 18. Same. Completed subscription. Effect of consoiidaiion oi Tail- way companies on validity of subscription and bonds. Sec. 19. Must be a valid, constitutional act as basis of power. Con- struction of special powers; see note. Sec. 20. J^egisfraiioH of bonds. Effect of fraudulent a«/(?^a/'/«^ on rights of innocent holders. Sec. 21. Retrospective enactments validating defective subscriptions and bonds. Sec. 22. General summary of the doctrine of the Supreme Court of the United States concerning estoppel by recital as to compliance with conditions precedent. Sec. 23. Laches, acquiescence, payment of interest and retaining the stock or consideration as grounds of estoppel. PART II. OF THE MODE OF ENFORCING PAYMENT. Sec. 24. Mode of enforcing payment. When right to a special tax exists it cannot be legislatively impaired. Sec. 25. Remedy of bondholder is by mandamus, and not in equity. Sec. 26. Jurisdiction and course of procedure in the federal courts. Fieri facias ; demand; refusal. Sec. 27. Obstacles in way of enforcement of bonds. Resignation of mu- nicipal and local officers. Concerning the power in federal courts to appoint its own officers to levy and collect taxes. United States v. Boutwell, and Rees v. Watertown. Sec. 28. Distinction between negotiable bonds and ordinary warrants as to remedy to enforce payment. PART I. OF THE POWER OF MUNICIPALITIES TO ISSUE NEGO- TIABLE SECURITIES. Section i. Extent of Mwiicipal Indebtedness — Comparative Statement here and in Great Britain and Paris, note, — It is esti- THE LAW OF MUNICIPAL BONDS. 3 mated that the municipal indebtedness in this country has already reached the enormous sum of ^900,000,000, and it is constantly increasing.' A large portion of this indebtedness ' 'The Public, ' July 27, 1 876, page 53, where a list of the debts of sixty- two cities are given, amounting to 5618,205,488. The writer concludes his article with these admonitory observations : It " is high time to know how large a burden of indebtedness has been fastened upon the com- merce and industry of the country through municipal government. Per- haps a full knowledge of the magnitude of that burden may awaken the tax-payers to prevent its increase, either by constitutional changes, or by reforms in the methods of local government. According to the latest report of the local government board in Great Britain, the indebtedness -created for all purposes not national amounts to ;^g2,ooo,ooo, or about 5460,000,000, having increased about $100,000,000 within three years. In this country, the increase has been over $360,000,000 in six years, or •560,000,000 yearly, in only sixty-two cities and the other municipalities of two states. In the whole country, it has probably been nearly $100,- 000,000 each year. Our local indebtedness includes $382,000,000 for states, $ 180,000,000 for counties, and probably $900,000,000 for municipal- ities ; in all $1,462,000,000. It is a mortgage of about five per cent, upon the entire estimated wealth of the country. The interest exceeds six per cent, yearly. The annual tax upon industry and commerce exceeds 590,000,000 for interest on local debt alone," It thus appears that although our taxable property and resources are much les3 than those of Great Britain, our local debt is at least twice as large. Recently the city of Paris, having proposed a new loan, the Econo- miste Francaise reviewed the growth of the debt of that city, and it ap- pears that municipal extravagance is not confined to this side of the At- lantic. " The figures show," says the London Economist, alluding to the subject, " how the desire, partly to beautify the great city, and partly to give employment to its turbulent population, has led successive regimes to add extravagance to extravagance. In the first year of the rule of Napoleon as first consul, the expenditure of Paris was no more than 11,216,000 francs, or 52,223,200 ; in the last year of the first empire, the sum had grown to 33,483,000 francs, or 56,696,600. In fifteen years, that is, the expenditure of the city had trebled. The two invasions of 1814 and 181 5 imposed heavy fines and an immense outlay upon Paris, which raised the expenditure for 181 5 to the enormous sum of over 78,- 000,000 francs, or $15,600,000. " But in the first year of the Restoration, the outlay was again reduced to 36,000,000 francs ($7,200,000), or not ver>' much more than the sum spent in 18 14. The elder Bourbons and their advisers had a lively recol- lecti'.-n of the influence exerted on the Revolution by the disorder into 4 THE LAW OF MUNICIPAL BONDS. is evidenced by negotiable bonds, which are held by thousands of persons, at home and abroad, as an investment. These bonds have been issued for a great variety of purposes, such as the erecting of pubhc buildings, the making of municipal im- provements, and in payment of subscriptions for the stock of railway corporations, or as donations to aid them in the con- struction of their roads located in or near the municipality or public corporation thus extending its assistance. Sec. 2. Effect of power to issue mimicipal coimneixial secunties for public improvements — Stimulus to extravagance — Abuse of power — Repudiation. — The power conferred upon municipal and public corporations to issue cojumercial securities for such purposes is of comparatively recent origin, and it has, unde- niably, been attended with very serious, and it is perhaps not which the finances had fallen under Louis XVI, and therefore they prac- tised economy in the administration. Accordingly, we find that in the last complete year of Charles X, 1829, the expenditures had risen only to 48,000,000 francs ($9,000,000). Instead of trebling, as under the First Napoleon, in a nearly equal period of time under the Restoration the in- crease was only one-third. But with the government of Louis Philippe, we find a somewhat augmented outlay. In 1847 the expenditure had risen to 64,000,000 francs ($12,800,000), it having been no more than 40,000,000 francs ($8,000,000) in 1830. " It was, however, under the second empire that extravagance gained free scope. We all remember the great works carried out by Baron Haussmann, the disregard of all financial rule, and the mystifications practised in the accounts. Even before the rise of Baron Haussmann, however, the expenditure swelled inordinately. In 1852, including the special as well as the general funds, it had grown to 102,000,000 francs (520,400,000), or 38,000,000 francs ($7,600,000) more than in 1847. And in 1869 it had actually reached 346,000,000 francs, or $69,200,000. Thus, as under the First Napoleon, the expenditure had more than trebled in a single reign. Furthermore, we see that, during the twenty years from the accession of the first consul to the breaking out of the war with Ger- many, the expenditures of Paris had been multiplied about thirty-one times, from less than ;^45o,ooo to nearly ;i^i4,ooo,ooo sterling ($70,000,- 000). Since the restoration of order, the attention of the government has been given to the enforcement of economy. But the minor debts upon the city have allowed of only a small measure of success being at- tained. In the present year, the expenditure is estimated at 305,000,000. francs, or $61,000,000." As to coupon bonds, see Daniel on Neg. Instr. sec. i486, et seq. THE LAW OF MUNICIPAL BONDS. J Ttoo strong a statement to add, disastrous, consequences, the end of which is not yet. One of these is the stimulus which the long credit commonly provided for effectually supplies, to over-indebtedness. The bonds usually fix a time, twenty or thirty years distant, for payment of the principal. Those who vote the debt, and the councils or bodies which create it and issue the bonds, do so without much hesitation, as the burden is expected to fall principally on posterity. A learned justice of the Supreme Court of the United States has very fitly described the effect witnessed as a mania for running in ■debt for public improvements.^ It has elsewhere been char- acterized as an "epidemic insanity" inducing extravagant corporate subscriptions to public works. In many parts of the country, and particularly in the west, this mania has become general in cities, counties, townships and school districts, and large and burdensome ■debts have been thoughtlessly created. The writer has Icnown new counties in a western state, not containing ■over 10,000 inhabitants, vote, for a single railway, bonds to the amount of ;^300,ooo, drawing ten per cent, interest, payable annually, and instances are not infrequent where •bonds have been issued greater than the assessed value of all the taxable property at the time, within the municipal or territorial sub-division. No check against the incurring of over-indebtedness is so effectual as the one t/iat you must pay as you go, but this is wholly disregarded in the legislation which authorizes bonds payable at a remote pe- riod. Another serious consequence of this policy is, that even the interest on these bonds often proves to be a heavy burden upon the community, and in many instances the bonds .have been issued fraudulently by the public or municipal •officers, and no consideration, or none of value, has been, in fact, received therefor. They may, indeed, have the stock of the railway company, but in most cases, under the prevailing mode of constructing railways, the stock is utterly valueless. When the sting of taxation is felt, and when the tax-payer knows that the bonds were fraudulently issued, and even when "Mr. Justice Davis. 6 THE LAW OF MUNICIPAL BONDS. he feels that they were improvidently given, experience- shows that repudiation, or attempted repudiation, is the next stage, involving a forfeiture of the pubHc faith pledged for their payment. Occasionally it has been witnessed that the stcxte, in all its departments, has actively sympathized with the repudiating municipality, and the public faith has been re- deemed only through the coercion of the Supreme Court of the United States. In a few instances, indeed, the states have set the example of repudiating their own obligations issued in aid of railways ; and it was only last winter, in a case of this kind, that the Supreme Court at Washington felt itself bound to declare " that the faith of the state, [of Min- nesota] solemnly pledged, has not been kept; and were she amenable to the tribunals of the country, as private individ- uals are, no court of justice would withhold its judgment against her." Examples of this kind are demoralizing, and cannot safely become general or frequent. Sec. 3. Scope and nature of this paper — Thelaiv of Munic- ipal Bonds as developed in the Federal Courts. — The policy of burdening the future has been sanctioned by the legislature, and the courts have to deal with the legal rights of the mu- nicipahty on the one hand, and the holders of its obligations on the other. The determination of their legal rights in- volves enquiries as complicated as they are important. The law on this subject is substantially the growth of the last twenty-five years. The decisions in the various State and Federal courts are very numerous, and on some points con- flicting. The writer has treated the subject elsewhere,^ and does not in the present article intend to reproduce what is; there said, or refer to it, except where it will serve to illus- trate or abridge the present discussion. It is impossible,, were it even desirable, to compass within the limits of a single article all the learning, and to refer to all the cases, upon the subject of municipal securities. It will not be attempted. By reason of the greater favor with which the rights of the holders of such securities have been regarded by the Supreme 3 Municipal Corporations, chaps. 14, 20. THE LAW OF MUNICIPAL BONDS. f Court of the United States, the volume of municipal bond litigation has of late years taken place in the Federal courts. The present article will be devoted mainly to a consider- ation of the law on this subject as determined by the Supreme Court of the United States; and our object will be to show exactly the doctrines and principles which have received the sanction of that tribunal, and to illustrate, as far as needful, their application in particular instances, giving prominence to several important decisions made at the last term, not yet officially reported, and referring incidentally or for further illustration to the decisions of the State courts on the subjects or topics discussed. The Supreme Court of the United States has upheld the rights of the holders of municipal securities with a strong hand, and has set a face of flint against repudiation, even when made on legal grounds deemed solid by the State courts, by municipalities which had been deceived and de- frauded. That such securities have any general value left is largely due to the course of adjudication in respect thereto by the Supreme Court, and the reliance which is felt by the public that it will stand firmly by the doctrines it has so fre- quently asserted.* Sec. 4. Taxation limited to public purposes — What aye such — Aid to raihvays — Bonds to be paid by taxation for what pur~ poses authorized. — After the numerous decisions by courts of the highest authority, it may now be regarded as a settled doctrine of American law that no tax can be authorized by the legislature for any purpose which is essentially private: or, to state the proposition in other words, for any but ?i pub- lic purpose} What is a public purpose may not always be * As to the general tone, spirit and effect of the decisions of the Supreme Court concerning municipal securities, see Dillon, Munic. Corp. (2d Ed.) sec. 415, et seq. sLoan Asso. v. Topeka, 20 Wall. 655; Curtis v. Whipple, 24 Wis. 350; Whiting V. Fon du Lac, 25 Wis. 167; Allen v. Inhab. of Jay, 60 Maine, 124; Jenking v. Andover, 103 Mass. 94; Lowell v. Boston, ill Mass. 454; Pray v. Northern Liberties, 31 Penn. St. 69; Matter of Mayor of New York, 11 Johnson, 77 ; Camden v. Allen, 2 Dutcher, 39S ; Sharplessv. Mayor of Phila., 21 Penn. St. 147 ; Hanson v. Vernon, S THE LAW OF MUNICIPAL BONDS. easy to determine ; but when determined, it constitutes the boundary of the power of taxation. Whether taxation to aid in the building of raihvays owned by private corporations is taxation for a public purpose, is a question which has been discussed and decided by the courts of last resort in almost every state in the Union, and by the Supreme Court of the United States.^ Although the doctrine of the constitution- ality of such taxation has been vigorously resisted and com- bated, still it must be admitted that the great preponderance of the judicial judgments has been on the side of the compe- tency of such legislation, in the absence of special constitu- tional restraint. 7 And therefore the legislature may author- ize subscriptions by municipalities to the stock of railway corporations, or donations to them, and provide for the pay- ment of such subscriptions or donations by the issue and sale of the negotiable bonds of the municipality. But a statute which authorizes the issue of bonds to be paid by taxation to aid certain individuals or classes, or in aid of the inam(factur- ijig enterprise of individuals or private corporations, is void — this being within the meaning of the rule, 2^ private, as distin- guished from a public purpose, although in a remote or col- 27 Iowa, 47; Coolcy, Const. Limit., 129, 175, 48; Dillon, Munic. Corp., sec. 587, and cases cited; Cooley on Taxation, chap, iv, "where the purposes for which taxes may be laid " are enumerated, and illustrated by the adjudicated cases. *The cases are collected, Dillon's Munic. Corp. (2d Ed.), sees. 104, 105: Rogers v. Burlington, 3 Wall. 654; Supervisors v. Schenck, 5 Wall, 772, 779; Olcott V. Supervisors, 16 Wall. 678; Railroad Co. v. Otoe Co., 16 Wall. 667; Loan Asso. v. Topeka, supra; Township of Pine Grove v. Talcott, 19 Wall. dd^i. 1873. 7 In Pine Grove Township v. Talcott, 19 Wall. 666, 677, Mr. Justice Swayne says that such legislation has been sustained in nineteen out of twenty-one states. As respects legislative power, donations and sub- scriptions for stock stand on the same ground. Town of Queensbury v. Culver, 19 Wall. 83. 1873. If it be allowable to judge of a legal principle by its fruits, the dissent- ing and minority judges on this question will find much to confirm the conviction that their views were sound. But it is useless to fight that battle over again ; it has been fought and lost. All that is left is the con- templation and contrast of what might have been and what is. THE LAW OF MUNICIPAL BONDS. g lateral way the local public might be benefited thereby.^ The execution of the powers ordinarily conferred upon municipal corporations, such as improving highways and streets, constructing water works, gas works, markets, pre- serving the public health, and the like, are of course public purposes,^ and upon legislative authority being given, nego- tiable bonds may be issued therefor. What will constitute sufficient authority for the issue of such bonds will be con- sidered further on. Sec. 5- Two great classes of JMunicipal Securities : i. Ordi- nary zvarrants ; 2. Negotiable bonds — Form, execution, and ■ attribiites of each. — It is material to bear in mind the different kinds of corporate evidences of debt. These are of two gen- eral classes. First, there is the iisnal nmnicipal or county warrant or order. These are commonly drawn by one or more of the officers upon the treasurer, directing him to pay to the person named or bearer a given sum of money. The power to issue them, and the mode in which it is to be exer- cised, are usually prescribed by charter or statute. They are vouchers or " necessary instruments for carrying on the ma- chinery of municipal administration and for anticipating the collection of taxes,"'° out of which they must be paid. It is, perhaps, true that the power to issue such warrants or orders may, where not expressly conferred or denied, be implied z.^ incidental to carrying out the objects of a munici- ® Loan Asso. v. Topeka, supra. And they are incapable of mu- nicipal or legislative ratification. lb. Commercial Bank v. lola, 2 Cent. Law J. 167. Same cases below, 2 Dillon's C. C. R. 353 ; 3 Dillon's C. C. R. 376. Same principle. Lowell v. Boston, (aid to enable citizens to rebuild houses destroyed by a large fire,) in Mass. 454, 1873 I Allen v. Jay, (aid to construct mills,) 60 Maine, 124, 1871. The cases cited in this note were approved in The State etc. v. Osawkee Township, 14 Kansas, 418, 1S75, i" which the Supreme Court of Kansas held an act ■whose object was to provide the destitute with provisions and with grain ■for seed and feed, and to issue bonds for that purpose, unconstitutional, "because not issued for a public purpose. 9 Cooley on Taxation, chap. 4, p. 67, et scq.; Daniel on Nego. Instr., \ 1522, and cases cited; Dillon, Mun. Q-ox"^. passim, ^° Per Bradley. J., in The Mayor of Nashville v. Ray, 19 Wall. 46S, 477. 1S73. lO THE LAW OF MUNICIPAL BONDS. pal or public corporation. Such instruments issued by mu- nicipal and public corporations, by usage, are generally treated as negotiable in the sense of being transferrable by delivery, and in most of the states the transferee or holder may enforce payment by suit or by ina^idanuis in his own name." But it is a mistaken notion, and one which has no support in reason or policy, and but little in the adjudications, that they are either commercial paper or possess the attrib- utes of such paper. On the contrary, in whosesoever hands they may be, or at whatever time purchased, whether with or without notice,, they are always open to any defence which might have been made against the payee or original holder." The fundamen- tal idea is that they are not commercial securities, and are not governed by the rules of the law merchant in respect of negotiable instruments. Second, tlicre is the municipal bond, negotiable in form, paya- ble at a future day, intended for sale in the market, issued- under express authority of the legislature. These, notwith- standing they are under seal, are clothed with all the attrib- utes of negotiable or commercial paper, pass by delivery or endorsement, and are not subject to equities, (where the power to issue them exists,) in the hands of holders for value, before due, without notice. This has ceased to be a disputed point, and the cases adjudging or recognizing this principle in the state courts are very numerous. '3 Such bonds usually have " The cases on the point arc cited in Dillon on Munic. Corp. \ 406, note. Infra, I 28. " The Mayor etc. v. Ray, 19 Wall. 468, 477, 478 ; Dillon, Munic. Corp. sec. 406, where the cases are collected. '3 Mercer Co. v. Hacket, i Wall. 83, 1863, and other cases cited in Dil- lon on Munic. Corp., § 405, note; Daniel on Nego. Instr., ^ 1500, and cases there cited. Fonn of Bond — Condition. — Municipal bonds, in the usual form, con- taining words of negotiability, with coupons attached, are absolute, and' not conditional, promises to pay, and hence are negotiable with all the incidents of negotiability, notwithstanding they contain the following recital : "This bond is issued for the purpose of subscribing to the cap- ital stock of the Fort Scott and Allen County Railroad, and for the con- struction of the same through the said township, in pursuance of and in- THE LAW OF MUNICIPAL BONDS. I Jf coupons attached, which partake of the nature of the bond, are Hkcwise negotiable, may be detached and held separately from the bond, and the holder may sue thereon in his own name, without producing or being interested in the bonds to which they were originally attached.'* accordance with an act of the legislature of the state of Kansas, entitled 'An act to enable municipal townships to subscribe for stock in any rail- road, and to provide for the payment of the same, approved February 25, 1870 ;' and for the payment of the said sum of money and accruing interest thereon, in manner aforesaid, up07t the performance of the said' condition, the faith of the aforesaid Humboldt township, as also its prop- erty, revenue and resources, is pledged," the court holding that the con- struction of the road through the township was not a condition upon which payment was to be made. Humboldt Township v. Long, U. S. Sup. Court, Oct. Term, 1875, 3 Cent. Law Jour. 494. In giving its judgment, the court says : " Relying upon this clause of the certificate the township contends that the construction of the railroad through the township was a condition upon which the payment was agreed to be made. We think, however, this is not the true construc- tion of the contract. The construction of the road as well as the sub- scription for stock were mentioned in the recital as the reasons why the township entered into the contract, not as conditions upon which its per- formance was made to depend. It was for the purpose of subscribing,, and to aid in the construction of the road, that the bond was given. The words, ' upon the performance of the said condition,' cannot, then, refer to anything mentioned in the recital, for there is no condition there. A much more reasonable construction is that they refer to a former part of the bond, where the annual interest is stipulated to be payable at a banker's, ' on the presentation and surrender of the respective interest coupons.' Such presentation and surrender is the only condition men- tioned in the instrument. But that stipulation presents no such contin- gency as destroys the negotiability of the instrument. It is what is al- ways implied in every promissory note or bill of exchange, that it is to be presented and surrendered when paid. As well might it be said that a note payable on demand is payable upon a contingency, and therefore non-negotiable, as to affirm that one payable on its presentation and sur- render is, for that reason, destitute of negotiability." See, also, Hotch- kiss v. National Bank, 21 Wall. 354, 1874. As to form of bonds, seal, place of payment and delivery, see cases cited Daniel on Neg. Instr., \\ 1492-1499. Power to substitute other bonds. Lynde v. County, 16 Wall, 6; Mc- Kee v. Vernon Co., 3 Dillon C. C. R. 210. '•* Thompson v. Lee Co., 3 Wall. 327 ; Dillon on Munic. Corp. \ 405, note ; Kennard v. Cass Co., 3 Dillon C. C. R. 147, 1S74 ; Daniel on Neg^ J 2 THE LAW OF MUNICIPAL BONDS. Sec. 6. As to the implied power to borrozu money and issue comvioxial or negotiable paper. — Much conflict of opinion has existed in the American courts touching the implied power of pubhc and municipal corporation to issue commercial or negotiable ijistruments, that is, instruments free from equities in the hands of innocent holders for value. In respect of public or quasi corporations, such as counties, etc., as distin- guished from municipal corporations proper, the general cur- rent of authority is against the proposition that, as ordinarily- organized, they possess any such implied power. And the power is not incident to the authority to make specified ex- penditures or improvements, but it may be implied, where there is nothing to rebut it, from other powers, such as the express power to borrow money.'s But in view of the more complex and diversified powers Instr., \ 1509, and cases cited. The proposition of the text is not a dis- puted one, and coupons, when disconnected from the bonds, have an independent existence. Clark v. Iowa City, 20 Wall. 586 ; Daniel on Neg. Instr., \ 1510. Coupons — Form of Instrument. — Maker suable thereon in assumpsit, where the bonds are made by the defendant corporation and refer to the coupon, though the latter, signed by the agents of the corporation, is in the form of an order or check on a bank named therein. Town of Queensbury v. Culver, 19 Wall. 83, 1873. Cases as to the form of cou- pons, sec Daniel on Neg. Instr., II 1492-1496. May be made payable beyond limits of the state, unless specially restrained by statute. Lynde V. County, 16 Wall. 6. How signed. — The coupons, where the bonds are properly signed and sealed, may be signed by a printed fac simile of the maker's autograph, adopted for the purpose, although there is no statute authorizing it. Pen- nington V. Baehr, (Sup. Court of Cal.,) 2 Cent. Law Jour. 92. See McKee V. Vernon Co., 3 Dillon C. C. R. 210; Lynde v. County, 16 Wall. 6. '5 Police Jury v. Britton, 15 Wall. 566, 1872. The ordinary powers possessed by counties, as agencies of the state in the administration of public affairs, do not give the incidental power to issue negotiable bonds and coupons. " It would be an anomaly, justly to be deprecated, for all our limited territorial boards, charged with certain objects of necessary local administration, to become fountains of commercial issue, capable of floating about in the financial whirlpool of our large cities." Id.^ Sec. 13. Estoppel by recital to set up defence of an over- issue contrary to the enabling act. — Among the limitations, or attempted limitations, upon the exercise of the power to issue bonds, one not unfrequently provided is, that the amount voted or issued shall not exceed a specified proportion of the taxable property of the municipality, or such a sum as will require a greater levy of taxes than a specified rate on the taxable property to pay the annual interest on the bonds. The effect of a disregard of this limitation by the officers en- trusted by the statute with the exercise of the power, came for the first time before the Supreme Court at the October term, 1875, in a case arising under the legislation of Kansas.^? sees. 418, 419, is approved. The case, Venice v. Murdock, is so im- portant in overturning, so far as the Federal courts are concerned, the judgment of the Court of Appeals of New York, and as respects the prop- osition it establishes, that we reproduce the additional reasons given by the Supreme Court in support of its judgment: "It is very obvious," says Strong, J., " that if the act of the legislature which authorized an issue of bonds in aid of the construction of the railroad on the written assent of two-thirds of the resident tax-payers of the town intended that the holder of the bonds should be under obligation to prove by parol evidence that each case of the two hundred and fifty-nine names signed to the written assent was a genuine signature of the person who bore the name, the proffered aid to the railroad company was a delusion. No sane person would have bought a bond with such an obligation resting upon him whenever he called for payment of principal or interest. If such was the duty of the holder, it was always his duty. It could not be performed once for all. The bonds retained in the hands of the company would have been no help in the construction of the road. It was only because they could be sold that they were valuable. Only thus could they be applied to the construction. Yet it is not to be doubted the leg- islature had in view and intended to give substantial aid to the railroad company, if a sufficient number of the ta.\-payers assented. They must have contemplated that the bonds would be offered for sale, and it is not to be believed they intended to impose such a clog upon their salable- ness as would rest upon it if every person proposing to purchase was required to enquire of each one whose name appeared to the assent whether he had in fact signed it." 33Marcy v. Township of Oswego, MSS. U. S. Sup. Cotnt, Oct. term, 1^75, 3 Cent. Law Jour. 3S9. The legislative provision is essential to an accurate understanding of the judgment and view of the court. The act of the legislation under which the bonds purported to have been issued.. 30 THE LAW OF MUNICIPAL BONDS. The bonds were duly executed, and contained a recital of the act, and that they were issued "zV/ virtue of and in ac- -cordajicc " with it, and " in pursuance of aiid in accordance with the vote of three-fifths of the legal voters of the town- -ship, at an election to be held on " a specified day. The plaintiff was a bo7ia fide holder for value, without notice. The defence was that they were voted and issued at one time, as one act, and in payment of one subscription in excess of the amount authorized by the statute. The circuit justice of the United States for the circuit distinguished the case from Knox County v. Aspinwall, before referred to, on the ground that the statute imposing the limitation, the order for the election, the proposition submitted, the order for the issue of the bonds and the latest assessment roll were not, properly, matters in pais, but were all public, all open and all accessible, and all of record, and if consulted by the pur- chaser would have shown the bonds to have been voted and issued in violation of the express limitation upon the power •contained in the statute. But the judgment of the circuit court was reversed, three judges dissenting, and the defence held unavailing. The case was considered to fall within the principle of the previous decisions. Mr. Justice Strong, speaking for the court, after stating the facts, as wc have was passed February 25, 1870. Laws of Kansas, 1870, p. 189. The first section enacted that whenever fifty of the quahfied voters, being freeholders, of any municipal township in any county should petition the board of county commissioners of such county to submit to the quali- fied voters of the township a proposition to take stock in the name of such township, in any railroad proposed to be constructed into or through the township, designating in the petition, among other things, the amount of stock proposed to be taken, it should be the duty of the board to cause an election to be held in the township to determine whether such subscription should be made ; provided, that the amount of bonds voted by any township should not be above such a sum as would require a levy of more than one per cent, per annum on the tax- able property of such township to pay the yearly interest. The second section directed the board of county commissioners to make an order for holding the election contemplated in the preceding section, and to specify therein the amount of stock proposed to be subscribed, and also to pre- scribe the form of the ballots to be used. The fifth section enacted that THE LAW OF MUNICIPAL BONDS. 31 [given them, observed: "In view of these facts, and of the -decisions heretofore made by this court, the question can not be considered an open one. We have recently reviewed the subject in the case of The Town of Coloma v. Evans, {supra, sec. lo,) and re-asserted what had been decided before, namely, that where legislative authority has been given to a munici- pality to subscribe for the stock of a railroad company, and to issue municipal bonds in payment of the subscription, on the happening of some precedent contingency of fact, and where it may be gathered from the legislative enactment that the officers or persons designated to execute the bonds were if three-fifths of the electors voting at such election should vote for the subscription, the board of county commissioners should order the county clerk to make it in the name of the township, and should cause such bonds as might be required by the terms of the vote and subscription to be issued in the name of such township, to be signed by the chairman of the board, and attested by the clerk under the seal of the county. In Marcy v. Township of Oswego, supra, bonds to which the coupons were attached contained the following rt'6■/A^/.• " This bond is executed and issued by virtue of, and in accordance with, an act of the legislature of the said state of Kansas, entitled ' An act to enable municipal town- ships to subscribe for stock in any railroad, and to provide for the pay- ment of the same, approved February 25th, 1870,' and in pursuance of and in accordance with the vote of three-fifths of the legal voters of said township of Oswego, at a special election duly held on the 17th day of May, A. U. 1870." Each bond also declared that the board of county commissioners of the county of Labette, of which county the township of Oswego is a part, had caused it to be issued in the name and in behalf of said township, and to be signed by the chairman of the said board of county commissioners and attested by the county clerk of the said county, under its seal. Accordingly, each bond was thus signed, at- tested and sealed. The bonds were registered in the office of the state auditor, and certified by him in accordance with the provisions of an act of the legislature. His certificate on the back of each bond declared that it had been regularly and legally issued; that the signatures thereto were genuine, and that it had been duly registered in accordance with the act of the legislature. The defence to the bonds was that there had been an over-issue, con- trary to the statute. The bond, it will be observed, contains no state- ment on this point, but it was held by the Supreme Court that the recital in the bonds estopped the township from making this defence against a bona fide holder. The case of Marcy v. Township of Oswego was cited and approved in 32 THE LAW OF MUNICIPAL BONDS. invested with power to decide whether the contingency had happened, or whether the fact existed which was a necessary condition precedent to any subscription or issue of the bonds, their decision is final in a suit by the bona fide holder of the bonds against the municipality, and a recital in the bonds that the requirements of the legislative act have been complied with is conclusive. And this is more emphatically true when the fact is one peculiarly within the knowledge of the persons to whom the power to issue the bonds has been conditionally granted. "34 Humboldt Township v. Long, decided at the same term, the court observing: "There is no essential difference between this case and that: The as- sessment rolls of the township may have been proper evidence for the consideration of the board of county commissioners when they were enquiring what the value of the taxable property of the township was, but the bonds are not invalid in the hands of a bona fide holder by reason of their having been voted and issued in excess of the statutory limit, as shown by the rolls. Whatever maybe the right of the township, as against those who issued the bonds, it cannot be set up against a bona fide holder of the bonds that the amount issued was too large, in the face of the decision of the board, and their recital that the bonds were issued pursuant to and in accordance with the act of 1870." See supra,. sec. II and note. 34 In the dissenting opinion of Mr. Justice Miller, (with whom concurred. Davis and Field, JJ.,) the view of the court is strongly combatted. A few extracts will show the opinion of the dissentients, and bring into clearer relief the views of the court: " In the cases under consideration," says Miller, J., "this provision of the statute was wholly disregarded. I am not sure that the relative amount of the bonds, and of the taxable property of the towns, is given in these cases with exactness, but I do know that in some of the cases tried before me last summer in Kansas, it was shown that the first and' only issue of such bonds exceeded in amount the entire value of the tax- able property of the town, as shown by the tax list of the year preceding the issue. This court holds that such a showing is no defence to the bonds, notwithstanding the express prohibition of the legislature. It is therefore clear that so long as this doctrine is upheld, it is not in the power of the legislature to authorize these corporations to issue bonds under any special circumstances, or with any limitation in the use of the power, which may not be disregarded with impunity. It may be the wisest policy to prevent the issue of such bonds altogether. But it is not for this court to dictate a policy for the states on that subject. The result THE LAW OF MUNICIPAL BONDS, 33 These cases afford, perhaps, a more striking illustration than any previously decided by that court, that the purchaser may implicitly rely upon the recitals in the bonds made by the proper officers, that the authority to issue them has arisen, of the decision is a most extraordinary one. It stands alone in the con- struction of powers specifically granted, whether the source of the power be a state constitution, an act of the legislature, a resolution of a corpor- ate body, or a written authority given by an individual." * * * * " No such principle has ever been applied by this court, or by any other court, to a state, to the United States, to private corporations or to indi- viduals. I challenge the production of a case in which it has been so applied. In the Floyd Acceptance Cases, 7 Wall. 666, in which the sec- retary of war had accepted time drafts drawn on him by a contractor, which, being negotiable, came into the hands of dojia fide purchasers before due, we held that they were void for want of authority to accept them. And this case has been cited by this court more than once with- out question. No one would think for a moment of holding that a power of attorney made by an individual cannot be so limited as to make any- one dealing with the agent bound by the limitation, or that the agent's construction of his power bound the principal. Nor has it ever been con- tended that an officer of a private corporation can, by exceeding his au- thority, when that authority is express, is open and notorious, bind the corporation which he professes to represent. The simplicity of the de- vice by which this doctrine is upheld as to municipal bonds is worthy the admiration of all who wish to profit by the frauds of municipal oflfi- cers. It is, that whenever a condition or limitation is imposed upon the power of those officers in issuing bonds, they are the sole and final judges of the extent of those powers. If they decide to issue them, the law pre- sumes that the conditions on which their powers depended existed, or that the limitation upon the exercise of the power has been complied with ; and especially and particularly if they make til false recital of the fact on which the power depends in the paper they issue, this false recital has the effect of creating a power which had no existence without it. This remarkable result is always defended on the ground that the paper is ne- gotiable, and the purchaser is ignorant of the falsehood. But in the Floyd Acceptance Cases, this court held, and it was necessary to hold so there, that the enquiry into the authority by which negotiable paper was issued was just the same as if it were not negotiable, and that if no such authority existed, it could not be aided by giving the paper that form. In county bonds it seems to be otherwise. In that case the court held that the party taking such paper was bound to know the law as it affected the authority of the officer who issued it. In county bond cases, while this principle of law is not expressly contradicted, it is held that the paper, though issued without authority of law, and in opposition to its express 34 THE LAW OF MUNICIPAL BONDS. and that he is under no obligation to consult the records of the municipality, and is not charged with constructive notice of their contents ; and this, too, it will be observed, where the recital in the bond was general, and not specific in its nature, and where the facts which would have shown the issue of the bonds to have been illegal were matters appearing upon the public records of the township. provisions, is still valid. There is no reason in the nature of the condi- tion on which the power depends in these cases why any purchaser should not take notice of its existence before he buys. The bonds in this case were issued at one time, as one act, of one date and in pay- ment of one subscription. All this was a matter of record in the town where it was done. " So, also, the valuation of all the property of the town for the taxation of the year before the bonds were issued is of record both in that town and in the office of the clerk of the county in which the town is located. A purchaser had but to write to the township clerk or the county clerk, to know precisely the amount of the issue of bonds and the value of the taxable property within the township. In the matter of a power depend- ing on these facts, in any other class of cases, it would be held that before buying these bonds, the purchaser must look to those matters on which their validity depended. They are all public, all open, all acces- sible, — the statute, the ordinance for their issue, the latest assessment roll. But in favor of a purchaser of municipal bonds, all this is to be dis- regarded, and a debt contracted without authority, and in violation of express statute, is to be collected out of the property of the helpless man who owns any in that district. I say helpless advisedly, because these are not his agents. They are the officers of the law ; appointed or elected without his consent, acting contrary, perhaps, to his wishes. Surely if the acts of any class of officers should be valid only when done in conformity to law, it is those who manage the affairs of towns, counties and villages, in creating debts which not they, but the property owners, must pay." * * * " It is easy to say, and looks plausible when said, that if municipal corporations put bonds on the market, they must pay them when they become due. But it is another thing to say, that when an officer created by the law exceeds the authority which that law con- fers upon him, and in open violation of law issues these bonds, the owner of property lying within the corporation must pay them, though he had no part whatever in their issue and no power to prevent it. This latter is the true view of the matter. As the corporation could only ex- ercise such power as the law conferred, the issuing of the bonds was not the act of the corporation. It is a false assumption to say that the cor- poration put them on the market. If one of two innocent persons must THE LAW OF MUNICIPAL BONDS. 35 Sec. 14. Estoppel by recital of matter of fact, e. g., date of subscription. — The effect of recitals in the bonds, and of state- ments in the records of the county which issued the bonds, is considered in The Town of Concord v. Portsmouth Savings Bank. 35 A controlHng question in the case was whether the power to subscribe for stock and issue bonds therefor, given by the act March 26, 1869, was annulled by the new consti- tution of the state (which took effect July 2, 1870) before the subscription was made or a valid contract to subscribe was completed. The court held that, in point of fact a legal and binding subscription was made, or agreed to be made, in De- cember, 1869, and hence the defence of want of legal power failed; and it then proceeded to view the case as affected by estoppel, the plaintiff being a bona fide holder for value with- out notice of any defence. The court held that a recital in the bonds that the subscription was made in December, 1869, being the recital of a matter of fact, and a fact, too, pecu- liarly, if not exclusively, within the knowledge of the board of supervisors, estopped the county to set up that the sub- scription was not made until after July 2, 1870, when their authority to subscribe had expired.^^ sufifer for the unauthorized act of the township or county officers, it is clear that he who could, before parting with his money, have easily as- certained that they were unauthorized, should lose, rather than the property-holder, who might not know anything of the matter, or if he did, had no power to prevent the wrong." 35 Concord v. Portsmouth Savings Bank, U. S. Sup, Court, Oct. Term, 1S75. 3* Town of Concord v. Portsmouth Savings Bank, Sup. Court U. S. Oct. Term, 1875. The point is so material that we subjoin the opinion — de- livered by Strong, J., — on this point. He says: "There is, however, another consideration that is worthy of notice. The findings of the court are that the plaintiff below is a purchaser of the bonds for a valuable consideration, having purchased them before their maturity and without notice of any defence. They were executed by the president of the board of supervisors and the county clerk. They recite that they are issued by the county of Moultrie, ' in pursuance of the subscription of the sum of eighty thousand dollars to the capital stock of the Decatur, Sulli- van and Mattoon Railroad Company, made by the board of supervisors of said county of Moultrie, iyi December, A. D., iS6g, in conforjtiity to the provisions of an act of the general assembly of the state of Illinois, ap- $6 THE LAW OF MUNICIPAL BONDS. Sec. 1 5 . What constitutes completed sicbscription or contract to subscribe. — Interesting questions have arisen as to what constitutes a subscription on the part of a municipahty or other pubhc corporation, or a vaHd contract to subscribe, to the stock of a railroad company, and when rights are vested thereunder which cannot be legislatively impaired without the consent of the parties in interest. Where a precedent popular vote is required, and upon such vote authority is proved March 26, A. D., 1869.' Now, if it be supposed that the pur- chaser of bonds with such recitals was bound to look further and enquire what was the authority for the issue, where was he to look ? Had he looked to the act of the general assembly of March 26, 1869, he would have found plenary authority for a stock subscription and for the issue of bonds in payment thereof. If he was bound to know that the consti- tutional provision terminated that authority after July 2, 1870, he knew that any subscription made before that time continued binding notwith- standing the constitution, and that bonds issued in payment of it were, therefore, lawful. If, then, he had enquired whether a subscription had been made before July 2, 1870, at the only place where enquiry should have been made, namely, at the records of the board, he would have found an order to subscribe, equivalent to a subscription made, in De- cember, 1869, corresponding with the assertions of the recitals, and de- clared by them to have been a subscription. He could have made enquiry nowhere else with any prospect of learning the truth. Every Step he could have taken assured him that the recitals were true. How, then, can the county be permitted to set up against a bona fide holder of the bonds, that the authority to make a subscription, with all its legiti- mate consequences, had expired before the subscription was made, in the face of the recitals and of the county records ? Whether it had ex- pired was a matter of fact, not of law, and it was peculiarly, if not exclusively, within the knowledge of the board of supervisors. After having assured a purchaser that their subscription was made in Decem- ber, 1869, when they had power to make it, it would be tolerating a fraud to permit the county to set up, when called upon for payment, that it was not made until after July 2, 1870, when their authority expired." Purchaser not affected by statements in county records contrary to re- citals in the bonds issued by the county. Nicolay v. St. Clair County, 3 Dillon, C. C. R. 163, 1874. In AUer v. Cameron, lb. 198, the defend- ant town was held estopped to set up against a holder of its bonds for value, that it was not legally incorporated. Effect ofrecitalhy authorized officers. See also Chambers County v.. Clews, 21 Wall. 317, 321; Grand Chute v. Winegar, 15 Wall. 355;. Lynde v, County of Winnebago, 16 Wall. 6 ; Railroad Co. v. Otoe ■THE LAW OF MUNICIPAL BONDS. ^ given to subscribe for the stock, the vote without more does not constitute a contract between the municipahty thus authorized to subscribe and the railroad company.^? Sec. 1 6. Stvnc — Poivct may be anmdlcd by constitutional provision or legislative action before lights become vested. — As illustrating the necessity of a continued existence of the poiver to issue the bonds, and as showing what did 7iot amount to a completed contract before the power was re- pealed by a constitutional provision, tlie case of The Town of Concord v. Portsmouth Savings Bank may usefully be referred to.^^ Chronologically stated, the facts were these: The bonds were issued under the act of March 7, 1867, and so recited. The act enacted that certain incorporated towns and cities, and towns acting under the township organization law, (among which it was conceded the town of Concord was one,) should be and were severally authorized to appropnate such sum of money as they might deem proper to the Chi- cago, Danville and Vincennes Railroad Company, to aid in the construction of the road of said company ; to be paid to County, 16 Wall. 667; Mercer County v. Hacket, 1 Wall. 83 ; Woods v. Lawrence County, i Black, 386; Gelpcke v. Dubuque, i Wall. 175; Meyer v. Muscatine, lb. 384; Kennicott v. Supervisors, 16 Wall. 464.-^ 37Aspinwall v. County of Jo Daviess, 22 How. 364. Supra, sec. 14; infra, sees. 16, 17; Town of Concord v. Portsmouth Savings Bank, in- fra; Harshman v. Bates County, 3 Dillon, C. C. R. 150, 162, note ; S. C. affirmed in Supreme Court, October Term, 1875. Dillon, Munic. Corp. (2d Ed.) sec. 42 and cases cited. The rights of a municipality as a stockholder in a railroad company, and whose stock has been paid for by the bonds of the municipality, are no greater than the rights of other stockholders, and unless specially authorized by the legislature, the railroad company has no power, when receiving the subscription and bonds, to agree to put the municipality in a better position than other stockholders, as, for example, by agreeing to pay a fixed rate of interest on such stock, equivalent in amount to the interest on the municipal bonds issued in payment therefor. Pittsburgh etc. R. R. Co. V. Alleghany County, Sup. Court Pa. Nov. 15, 1S74, 3 Cent. Law Jour. 204. Instance in which there was legislative authority for such a contract, see case of the Pittsburgh and Connelsville R. R. Co., 13 P. F. Smith, (Pa.), 126. 3« Concord v. Portsmouth Savings Bank, U. S. Sup. Court, Oct. Term, S875 ; see infra sec. 17. 38 THE LAW OF MUNICIPAL BONDS. the company as soon as the track of said road should have been located and constructed through said city, town or township respectively. To this was attached the following proviso : " Provided, however, that the proposition to appro- pyiate moneys to said company shall be first submitted to a vote of the legal voters of said respective townships, towns or cities, at a regular annual or special meeting, by giving at least ten days' notice thereof; and a vote shall be taken thereon by ballot at the usual place of election, and if the majority of votes cast shall be in favor of the appropriation, then the same shall be made ; otherwise not." The second section empowered and required the authorities of said mu- nicipalities to levy and collect a tax, and make such provis- ions as might be necessary for the prompt payment of the appropriation under the provisions of the law. The town voted on the 20th day of November, 1869, that it would make a donation, provided the company would run its railroad through the town. On the 20th of June, 1870, the company gave notice of its acceptance of the donation^ On the 2d day of July, 1870, the new constitution of the state went into operation, by which it was ordained that " no city, town, township or other municipality shall ever become subscribers to the capital stock of any railroad or private cor- poration, or make donation to, or loan its credit in aid of, such corporation. Provided, however, that the adoption of this article shall not be construed as affecting the right of any such municipality to make such subscriptions ^ where the same have been authorized under existing laws, by a vote of the people of such municipalities prior to such adoption." On the 9th day of October, 1871, the bonds in suit were executed and delivered as a donation to the railroad com- pany, and the question was whether there was then any ex- isting authority to make the donation and issue the bonds. The Supreme Court, after pointing out that the authority given to the town of Concord by the act of March 7, 1867, {supra) was, not to subscribe for stock, but to make an ap- propriation or donation, which distinction is also taken in the provision of the constitution above quoted, held that no. THE LAW OF MUNICIPAL BONDS. 39 donation could be made, under the act of 1867, until after the completion of the location and construction of the road through the town: that the vote of November 20, 1869, in favor of an appropriation was not an appropriation or dona- tion ; that the power to make such donation was annulled by the constitution on July 2, 1870, and that there was at that date no contract in esse between the town and the railroad company which stood in the way of the operation of the con- stitutional prohibition. As to the effect of the vote of the town, of November 20, 1869, and the acceptance of the rail- road company, of June 20, 1870, (both of which, it will be observed, were before the constitution went into operation,) the court observed : " But the town was not empowered to make the donation until the road was located and constructed through the town. It had no authority to make a contract to give. And the acceptance was an undertaking to do noth- ing which the company was not bound to do before the authority of the town to make a donation, or to engage to make a donation, came into existence. What is called the acceptance of the railroad company cannot be construed as an engagement to locate and build the railroad through the town. It amounted to no more than saying, * If we build our road through your town, we will receive your gift/ There was, therefore, no consideration for the town's promise to give, even if the popular vote can be considered a prom- ise. There was no contract to be impaired. A contract should be clearly proved before it invokes the protection of the federal constitution. We conclude, then, that at the time the donation was made, there was no authority in the municipality to make a donation to the railroad company, and consequently no authority to issue the bonds. It follows that the bonds and coupons are void," Sec, 17, Same — Mode of subscription — ]Vhcn subsciiption complftc. — Power by legislative act to the board of super- visors of a county to subscribe an amount not exceeding a given sum to the stock of a specified railroad company, and to issue bonds in payment therefor, without requiring the sanction of a popular vote, but with a proviso that the bonds 40 THE LAW OF MUNICIPAL BONDS. shall not be issued until the road is open for traffic, gives complete authority to the county to subscribe for the stock, or to make a binding agreement to subscribe therefor pre- paratory to a final subscription. The proviso that the pay- ment of the subscription should be postponed until the rail- road should be opened does not limit the power to subscribe or to enter into an agreement to make the subscription be- fore the road is completed. And it was held that a resolution of the board of super- visors, made when the power to subscribe existed or had arisen, that the county subscribe a given sum to aid in the construction of the road of the company, without any sub- scription on the books of the company, amounted to a sub- scription, or, at all events, to a legal undertaking to subscribe, which, when assented to or accepted by the company, be- .^ came a binding contract, which the county could not revoke, and which could not be impaired by any subsequent pro- hibition of the constitution or the legislature, without the assent of the railroad company.^? But before any subscription is made, or before any con- tract to subscribe is completed, the authority to subscribe may be repealed or taken away by legislative or constitu- tional provision. And if the authority to subscribe depends upon a precedent vote of the people, the vote, without a sub- scription or an agreement to subscribe, does not create a contract, nor preclude the repeal of the authority to make the subscription.'*^ 39 Town of Concord v. Portsmouth Savings Bank, U. S. Sup. Court, Oct. Term, 1875. Compare supra, sec. 16, '♦^ Aspinwall v. County of Jo Daviess, 22 How. 364, 1859; U- P. R. R. Co. V. Davis Co., 6 Kansas, 256, 1870; Dillon on Munic. Corp. sees. 42, 696. note, and cases there cited ; Harshman v. Bates County, 3 Dillon, C. C. R. 162, note. The law on this subject is thus stated and the cases referred to and distinguished, by Mr. Justice Strong, in The Town of Concord v. Portsmouth Savings Bank, supra : " This case [although between the same parties] differs very materially from the case of The Town of Concord v. The Portsmouth Savings Bank, No. 43, of this term. [Supra, sec. 16.] In that, we held that the bonds were void because the legislative authority to issue them as a do- THE LAW OF MUNICIPAL BONDS. 4I Sec. 18. Same — Completed siibscription — Effect of consolida- tioJt of railivay companies on validity of subscription. — The authority to make a subscription and to issue bonds in pay- ment therefor may, if it has never been executed, be revoked by any event which has the legal effect to extinguish the power. Thus where the power to subscribe depends upon a precedent popular vote, and the vote is had in favor of Com- pany A, which under a general law of the state consolidated with ComjDany B, and formed thereby a new company, C, which consolidation was effected before any subscription or contract for subscription was made, and the only subscription nation to the railroad company had been annulled by the constitution of the state before the donation was made." * * * " But a subscription on the books of the company was unnecessary, for that which amounted to a subscription had been made in December, i86g. The authorized body of a municipal corporation may bind it by an ordinance, which, in favor of private persons interested therein, may, if so intended, operate as a contract, or they may bind it by a resolution, or by vote clothe its officers with power to act for it. The former was the clear intention in this case. The board clothed no officer with power to act for it. The resolution to subscribe was its own act; its immediate subscription. Western Saving Fund Society v. The City of Philadelphia, 31 Penn. St. 174; Sacramento v. Kirk, 7 Cal. 419 ; Logansport v. Blakemore, 17 Ind. 318. In The Justices of Clarke County Court v. The Paris, Winchester and Kentucky River Turnpike Co., 11 Ben. Monroe, 143, it was ruled that an order of the county court, by which it was said the court sub- scribed, on behalf of Clarke county, for fifty shares of stock in the turn- pike company, if concurred in by a competent majority of the magis- trates, was itself a subscription, and bound the county. There was no subscription on the books of the company, but the court of appeals said, ' We cannot, therefore, regard this order as a mere offer or pledge to subscribe the fifty shares in this particular road, but as actually taking, and in substance and legal effect subscribing for that number of shares. So in Nugent v. The Supervisors of Putnam County, 19 Wall. 241, it was said that to constitute a subscription by a county to stock in a railroad company, it is not necessary that there be an act of manual subscribing on the books of the company. These cases lead directly to the conclu- sion that the action of the board of supervisors in December, 1S69, was in substance and in legal effect a subscription. And if this conclusion ■could not be reached, it would make but little difference to the present case, for it could not be doubted that the action of the board was at least Jin undertaking to subscribe, and this was assented to or accepted by the 42 THE LAW OF MUNICIPAL BONDS. made was to the consolidated company, without any new election, it was held that the subscription was unauthorized^ and that the bonds which recited these facts were void, even in the hands of a bo7ta fide holder for value. The ground of the decision was that the authority to make the subscription ceased by the extinction of the company in whose favor the vote was had, such extinction being the legal consequence of the consolidation.'*^ This case differs from Nugent v. The- railroad company. The resolutions were entered of record by the clerk; and president of the railroad company, and the company made an ap- propriation of the bonds to be received in payment of the subscription^ by a contract made on the isth of April, 1870. In either aspect of the case, therefore, there was an authorized contract existing between the county and the railroad company when the new constitution came intO' operation. No matter whether the contract was a subscription or an. agreement to subscribe, it was not annulled or impaired by the prohibi- tions of the constitution. The delivery of the bonds was no more than performance of the contract. For these reasons, it is in vain to appeal to the decisions made in Aspinwall v. The County of Daviess, 22 How.. 364, and The Town of Concord v. The Savings Bank, decided this term. In neither of those cases was there any contract made before the author- ity to make one was annulled. We do not assert that the constitutional, provision did not abrogate the authority of the board supervisors to make a subscription for railroad stock. On the contrary, we think it did. But: we hold that contracts made under the power while it was in existence were valid contracts, and that the obligations assumed by them con-^ tinued after the power to enter into such contracts was withdrawn. The operation of the constitution was only prospective. Indeed, it is ex- pressly ordained in its schedule that ' all rights, actions, prosecutions^ claims and contracts of the state, individuals, or bodies corporate, shall continue to be as valid as if this constitution had not been adopted.* It is hardly necessary to say that, under the act of the general assembly, the authority to make a subscription was coupled with an authority and. a duty to issue county bonds for the sum subscribed. No action of the board was needed after the subscription was made." 4' Harshman v. Bates County, Sup. Court U. S. Oct. Term, 1875, 3, Cent. Law Jour. 367. The grounds of the judgment of the court on this point arc thus succinctly stated by Bradley, J.: "Another objection to the validity of the subscription for which the bonds were given in this case is, that the township voted a subscription to one company and the county court subscribed to another. This is sought to be justified on the ground that the former company became consolidated with another, thereby forming a third, to whose stock the THE LAW OF MUNICIPAL BONDS. 45 Supervisors of Putnam County/- in the material circumstance that in that case the subscription to one of the constituent companies was before the consoHdation, while in this one it was aftcnvards. In this case there was nothing but a bare vote before the consolidation, which, without more, creates no contract between the municipality and the railroad com- pany; while in the Putnam county case there was a sub- scription in addition to the vote, before the consolidation, and the right, having become vested in the railroad company, may be transferred to another on an authorized consolidation being effected. And where the consolidation is provided for or contemplated by the legislation of the state in force when the subscription is made, a subsequent consolidation, in pur- suance of the enactment, does not have the effect to invali- date the subscription. This principle was distinctly settled subscription was made. This consolidation was effected under a law of Missouri authorizing consolidations, and declaring that the company formed from two companies should be entitled to all the powers, rights, privileges and immunities which belong to either ; and it is contended that this provision of the law justified the county court in making the subscription without further authority from the people of the township. But did not the authority cease by the extinction of the company voted for ? No subscription had been made. No vested right had accrued to the company. The case of the State v. Linn County Court, 44 Mo. 504, only decides that if the county court refuses to issue bonds after making a subscription, a matidamus will lie to compel it to issue them. There the authority had been executed and a right had become vested. But so long as it remains unexecuted, the occurrence of any event which creates a revocation in law will extinguish the power. The extinction of the company in whose favor the subscription was authorized worked such a revocation. The law authorizing the consolidation of railroad companies does not change the law of attorney and constituent. It may transfer the vested rights of one railroad company to another, upon a consolida- tion being effected ; but it does not continue in existence powers to sub- scribe for stock given by one person to another, which, by the general law, are extinguished by such a change. It does not profess to do so, and we think it does not do so by implication. As sufficient notice of these objections is contained in the recitals of the bonds themselves to put the holder on enquiry, we think that there was no error in the judg- ment of the circuit court; and it is, therefore, affirmed." Same case in circuit court, 3 Dillon, C. C. R. 150. ♦'Nugent V. The Supervisors of Putnam County, 19 Wall. 241. 44 THE LAW OF MUNICIPAL BONDS. in the Putnam county case just cited/3 and such existing leg- islative authority to change the organization controlled the decision and constituted, in the judgment of the court, the ground of distinction between that case and the oft-cited case of Marsh v. Fulton County.'*'^ Sec. 19. Must be a valid act as the basis of the power — Con- struction of special poivers, see note. — A purchaser of municipal bonds is bound, as has already been incidentally shown, to take notice of any provisions of the constitution or legislation of the state relating to the /' ex- penses orders or warrants payable to bearer, and are liable to be sued upon them. The statute limited the power of the county authorities " for ordinary' county revenue " to the levy *5 Jordan v. Cass County, 3 Dillon, C. C. R. 185, 1874. ** Supervisors etc. v. United States, 18 Wall. 71. 62 THE LAW OF MUNICIPAL BONDS. each year of " not more than four mills on the dollar." It made no provision (as the statute was construed by the su- preme court of the state, whose construction was regarded by the Federal courts as binding on them) for the levy of a special tax to pay judgments obtained on such warrants. The judgment-creditor in the Federal court claimed that he was entitled to the levy of a special tax to pay his judgment. But the Supreme Court of the United States held otherwise, and decided that a return to an alternative writ of mandamus by the county authorities, that they had already levied a four- mill county tax for the current year (that being the maximum, amount allowed by statute) was a sufficient return.^7 ^7 Supervisors etc. v. United States, i8 Wall. 71. The text sufficiently states the principle established by this case. -In respect of the local stat- ute of Iowa, (sec. — of the Iowa Revision,) the court distinguished and explained the case of Butz v. Muscatine, 8 Wall. 575, — perhaps it ought to be said it overruled it on this particular point. The circuit court of the United States for the Eastern District of Ar- kansas, April Term, 1876, in conformity with the doctrines of the text, upon a review of the legislation of that state touching the indebtedness of counties on warrants, and the provisions of the new constitution on the subject of county indebtedness, declared the following propositions : 1. That the county court, in case the county is indebted, owes a legal duty to the creditor or warrant-holder to exert the power of levying taxes to the maximum limit allowed by law, if necessary to pay the outstanding indebtedness of the county. The maxim7t?n rate can in no event be ex- ceeded. Dillon on Munic. Corp. sec. 689, and cases there cited. 2. That a creditor who has obtained a judgment in this court against a county may, after proper demand on the county court to discharge its duty in this regard, and a neglect or refusal on the part of the court to comply with such demand, have a mandainus to compel the performance of such duty. There must be such a demand or averment of facts of such a nature as will dispense with the demand. 3. Under the new constitution, (Art. xiv, sec. 9,) as to indebtedness then existing, there is a duty, which creditors may enforce, resting on the county court to levy a tax not exceeding one-half of one per cent. Such tax when levied and collected cannot " be used for any other pur- pose" than the payment of such indebtedness, (Art. xvi, sec. il,) and must, according to our present impression, although the court does not hold itself concluded on the point, be collected in money, and not in other warrants. A judgment-creditor of a county in Missouri whose judgment is based THE LAW OF MUNICIPAL BONDS. 63 nipon municipal bonds secured by the right to a special tax, who has re- ceived under a mandamus a county warrant therefor, which is refused payment, may have another 7na7idamus to enforce the judgment, and is not bound to take his turn among ordinary county warrant-holders. This ruling coincides with the distinction pointed out in the text. United States v. Vernon County, (Western District of Missouri,) 2 Cent. Law Jour. 771. John F. Dillon. Davenport, Iowa, September, 1876. Note. The Town of Concord v, Portsmouth Savings Bank, No. 43, is now reported in 3 Cent. Law Jour. 318. Town of Concord v. Portsmouth etc. is now reported in 3 Cent. Law Jour. 349. tf^. LAW ubuaf:^ UC SOUTHERN REGIONAL LIBRARY FACILITY AA 000 802 124 ^■%i % ^^ 'yP '^ •^1 41^ M •I: -. .-4 c iivt ■"'. .>t ^^if^ :