Case ID: njl_39/html/0394-01.html
Source: Caselaw Access Project
Author: {"author": "Depue, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

KNAPP v. MAYOR AND COUNCIL OF HOBOKEN.
    1. Bonds and other securities issued by municipal corporations under •legislative authority, as a 'means of raising money on a credit, and designed to be put in the market, and go into circulation by commercial usage, have obtained the quality and attributes of commercial paper, in respect of their transfer, among which is immunity, in the ■hands of bona fide holders, from defences to which they would be subject in the hands of the original parties.
    '•2. But ordinary corporation orders, warrants, and certificates of indebtedness, which are merely evidences of indebtedness or obligations to pay, are not within this .principle. -If negotiable in form, they are negotiable in character, so far as to enable the holder to sue in his own name, but they are not commercial or negotiable paper in the hands of holders, so as to exclude inquiry into the legality of their issue, or preclude defences thereto.
    3. A municipal corporation has no-power to invest its obligations with 'the character and incidents of commercial paper, so as -to render them unassailable by defences to which they would be subject in the hands of the immediate parties, unless such power is conferred by legislative authority, either express or clearly implied.
    4. A plea containing matters occurring before suit brought, should not be pleaded as a plea puis darrein ■continuance, though filed by way of amendment, by permission of the court. An averment in such plea, that “the plaintiff' ought not further to maintain his action,” is informal.
    In debt. On motion .to strike out pleas.
    Argued at February Term, 1877, before Justices Deptje, Van Syokel and Scudder.
    For the motion, James Flemming.
    
    
      Contra, J. W. Vroom and R. Gilchrist.
    
   The opinion of the court was delivered by

Depue, J.

The plaintiff’s declaration contains thirteen counts, the first six of which are upon improvement certifi'cates of indebtedness under seal, issued by -the city to pay the cost of improving Thirteenth street. The remaining counts are the ordinary common counts on an indebtedness for work done, money laid out and expended, &c.

To this declaration, the defendant pleaded nineteen pleas. The plea of non est factum to the first six counts, and of nil debit to the remaining counts, were properly pleaded. The other seventeen pleas are special pleas to the first six counts. These the plaintiff moves to strike out as irregular, defective, and so framed as to prejudice or embarrass a fair trial of the action.

The counts in the plaintiff’s declaration, which are framed on the improvement certificates, are each, in substance, as follows: that the defendants being indebted to the said James Coughlin and Michael Callahan, on the 25th day of Februruary, in the year 1871, in and by virtue of the powers vested in them, made, executed, and delivered under the seal' of the said city of Hoboken, a certain bond or obligation, in writing, commonly called an improvement certificate, sealed with the seal of said city, the, sealing whereof is attested by the signature of the mayor of said city and the clerk of the said city, and the said defendants thereby certified that the .said James Coughlin and Michael Callahan were entitled to receive from the treasurer of said city of Hoboken, and said ■defendants did covenant and bind themselves to pay to them, by the name of Coughlin & Callahan, or to the holder thereof, the sum of $5000, for work and materials on Thirteenth street, from Clinton street to the Hill, with interest thereon, to be computed from a date thirty days after the confirmation of the assessment for said improvement, in such amounts of money on the said assessment as should come to the hands of the treasurer; and it was further provided that said certificate or obligation should be receivable in payment of the assessment aforesaid, and should be transferable by endorsement. And the said defendants did, in and by said certificate or obligation, bind themselves and their successors to use due diligence in making and collecting the said assessment ; and in case the said assessment should not be collected to meet the said certificate, then the said defendants did bind themselves and their successors to pay the said sum of $5000, within two years from the date of the confirmation of said assessment for said improvement, to the holder of said certificate, with interest at the rate of seven per cent, per annum, upon thirty days’ notice of default in collection of the assessment.

The assignment of these certificates, respectively, to one Theophilus Butts, and by him tO' the plaintiff, was duly averred in each of said counts.

An averment is also made in each of said counts, of the making and the confirmation of the assessment of the costs of said improvement on the 20th of February, 1871.

' The breaches assigned are, (1) non-payment after thirty days from the expiration of two years from the confirmation of the assessment and notice, &c., and (2) failure to use due diligence in the collection of the assessment.

The validity of the certificates and the sufficiency of the plaintiff’s declaration thereon, were adjudged by the court on demurrer to the declaration. Knapp v. Hoboken, 9 Vroom 371.

The third plea (which is the first of the pleas to which this motion is directed), is based upon allegations of fraud in inducing the city to undertake the improvement, and in the letting of the contract for the improvement to Coughlin and Callahan, and in the execution of the work in payment of which the certificates were issued.

The plaintiff contends that this entire defence, in all its parts, is inadmissible as against him, for the reason that the plea contains no averment that the plaintiff was a participant in the fraud, or that he became -the holder in bad faith, with notice of the fraud which infected the transaction, and without consideration. In actions by the assignee, or transferee, upon instruments negotiable in the broadest sense, such as bills, notes and ordinary commercial paper, where the contract is invalid as between the parties to it,’for fraud, as distinguished from mere failure of consideration, a defendant need not prepare the way for putting in his defence, by showing the infirmity of the plaintiff’s title. Fraud in the inception of the instrument being established, the burden is laid on the plaintiff to build up a title in himself better than that of the original party, lie can recover only in virtue of the merits of his own title, arising from the consideration he has paid, and the circumstances under which it came to his hands, Duncan v. Gilbert, 5 Dutcher 521 ; Holcomb v. Wyckoff, 6 Vroom 35 ; Dresser v. M. & I. R. R. Co., 93 U. S. (3 Otto). 92.

But a defence of this character is admissible as against the holder of securities of this kind, on broader grounds. The instrument is assignable, so as to enable the assignee t<3 sue in his own name, but the assignee takes subject to the equities between the original parties. It was so held by the Supreme Court in this case, when it was before the court on a former occasion. Knapp v. Hoboken, supra. Bonds and other securities issued by municipal corporations under legislative authority, as a means of raising money on a credit, and designed to be put upon the market, and to go into circulation, by commercial usage have obtained .the quality and attributes of commercial paper, in respect of their transfer, among which is immunity, in the hands of bona fide holders, from defences to which they would be subject in the hands of the original parties. Boyd v. Kennedy, 9 Vroom 146, and cases cited. But ordinary corporation orders, warrants and certificates of indebtedness, which are merely evidences of indebtedness or obligations to pay, are not within this principle. If negotiable in form, they, are negotiable in character so far as to enable the holder to sue in his own name; yet they are not commercial or negotiable paper in the hands of holders, so as to exclude inquiry into the legality of their issue, or preclude defences thereto. 1 Dillon on Mun. Corp, § 406 ; Dillon on Mun. Bonds, § 5. This distinction between the effect of the two classes of obligations issued by municipal corporations, is supported by the great weight of authority, and is founded on correct principle. An interesting discussion of the powers of such corporations to create such paper,.and clothe it with immunity from defences when in the hands of subsequent holders, will be found in the opinions of Mr. Justice Bradley, in The Mayor v. Ray, 19 Wall. 468, and of Chief Justice Beasley, in Toimi of Hackettstown v. Swackhamer, 8 Vroom 191. In both these opinions ground is taken decidedly against the power of municipal corporations to invest their obligations with the character and incidents of commercial paper, so as to render them, in the hands of bona fide holders, unassailable by defences to which they would be subject in the hands of the immediate parties, unless such power is conferred by legislative enactment, either express or clearly implied. The securities sued on in this case are not shielded from such defences by any legislative authority, either expressly granted or arising from an implication derived from the purpose for which they were issued. They are only certificates of indebtedness, mere obligations to pay, not intended for circulation in the market, and only designed as the liquidation of a debt due from the city to the persons to whom they were issued.

The defence of fraud, in the instruments sued on, is available as against the plaintiff, if the fraud be such as would afford a defence to an action by the original parties, and it is properly pleaded.

The plea is wanting in that conciseness which is an essential quality of pleading. It occupies sixteen closely-printed pages in the book, and contains a statement of the evidence by'which the defendants expect to prove the defence, rather than a statement of the grounds of the defence. For that reason alone the plea would be liable to be struck out. This ■defect might be easily remedied. But the plea is defective .in another respect that cannot be cured by amendment. The ■certificates sued on were issued to Coughlin & Callahan, for work done by them under a contract with the city. The work was done and the certificates issued for the contract price. It is admitted in the plea that the city derived a benefit therefrom in the improvement of lands in the city, liable to assessment therefor, to the amount of $31,068. The complaint is, that by fraudulent practices, to which the contractors were parties, the city was induced to make a contract for the improvement, and to pay the contractors $74,441.43 for work previously estimated to cost only $23,478.35, and which, in fact, enured to the benefit of the city only in the amount of $31,068. The defence is of only a partial failure of consideration. Such a defence may be made at the trial in reduction of the quantum of recovery, but cannot be pleaded in bar of the action. It was so decided by the Court of Errors in Lord v. Brookfield, 8 Vroom 552. "Whether the facts set forth in the plea will make out a defence to that limited extent, must be left for decision at the trial. We are not called upon to express an opinion on that subject on this motion.

The ninth, tenth and eleventh pleas specially deny that the mayor was authorized to sign, or the clerk to seal, the certificate, and that it was issued by authority emanating from the defendants. These pleas may stand. The twelfth, thirteenth and fourteenth pleas tender an issue as to the power of the corporation to issue securities of this character, which should be raised by demurrer, and was decided when this case was before the court on a demurrer.

The seventeenth plea was intended as a traverse of the second of the breaches assigned. As a traverse, it is too large. It is struck out.

The eighteenth plea was intended to present the question whether an assessment made, which was illegal, and was, therefore, set aside on legal grounds, was such an assessment as was contemplated by the parties as the condition on which the money was made payable. This question is one of too much importance to be decided on this motion. The plaintiff, if he desires to moot that question, may do so by demurrer. This plea must stand.

The remaining pleas either tender issues on immaterial matters or on averments in the declaration, which are mere matters of inducement, or are in denial of the legal effect of the certificates, and of the extent or sufficiency of the considoration. So far as the subject matter of these pleas is material, it will be available to the defendant under the plea of non est factum. These pleas are struck out.

It may be remarked that in several of these pleas the-prefatory averment that the plaintiff ought not further to-maintain his action,” is made. This is proper in form where matters occurring after the commencement of the suit are pleaded puis darrein continuance. But the matters contained in these pleas all arose before suit was brought, and, therefore, the pleas are not pleas puis darrein continuance, though they were filed by way of amendment, by permission of the court, after the defendant had pleaded to the declaration. The error is one of form, and was the result of inadvertence-in the pleader, and requires nothing more than mere mention by the court.

Both parties succeeding on the motion, there will be no costs allowed.