Case Name: GERMAN INS. CO. OF FREEPORT, ILL., v. CITY OF MANNING, IOWA
Court: United States Circuit Court for the Southern District of Iowa
Jurisdiction: United States
Decision Date: 1899-07-25
Citations: 95 F. 597
Docket Number: No. 3,588
Parties: GERMAN INS. CO. OF FREEPORT, ILL., v. CITY OF MANNING, IOWA.
Judges: 
Reporter: Federal Reporter
Volume: 95
Pages: 597–614

Head Matter:
GERMAN INS. CO. OF FREEPORT, ILL., v. CITY OF MANNING, IOWA.
(Circuit Court, S. D. Iowa, C. D.
July 25, 1899.)
No. 3,588.
1. Muntoipat, Bonds — Indebtedness of Corporation at Time of Issuance Vapidity oe Prior Issue.
The. test of the validity of municipal bonds, for the purpose of determining whether they are to be included as a part of the outstanding indebtedness of the municipality at tlie time a. subsequent issue was made, is not whether they were recognized as valid by the officers of the corporation, but whether they were legally enforceable; and where the indebtedness of the corporation exceeded the constituíional limit when they were issued, they at no time constituted a legal indebtedness, though they may have been afterwards paid, and while their validity had not been, questioned.
2. Federal Courts — Following State Decisions.
A single decision of the supreme court of a state, construing a state statute, becomes the settled law of the state, to he followed by federal courts, where it has been acquiesced in for years by the courts of the state and its legislative department.
3. Municipal Bonds — Power of Corporation to Issuf- — Iowa Statute.
Code Iowa 1873, § 500, providing that “loans may be negotiated by any municipal corporation in anticipation of the revenue thereof,” does not confer authoritj on such corporations to issue negotiable bonds in payment of such loans. Heins v. Lincoln, 71 N. W. 189, 102 Iowa, 69, followed.
4. Same — Rights of Purchaser of Void Bonds.
While a municipal corporation may in some cases be liable for the consideration received for its negotiable bonds, which are void for want of legal authority to issue them, such liability in no case arises on the instruments themselves, which are void for all iiurposes; and a transferee of such bonds, issued by a town In payment for property, who has no relation to the consideration which passed between the original parties, is not subro-gated, by his purchase, to any right of action against the town for its recovery, and cannot, by treating the bonds as merely nonnegotiable evidences of indebtedness incurred by the town for the property purchased, maintain an action thereon.
5. Municipal Corporations — Passage of Resoi-ution — Record of Yeas and Nats.
The requirement of Code Iowa 1873, § 493 (as amended by Laws 18th Gen. Assem. c. 146), that “on the passage or adoption of * * * every resolution or order to enter Into a contract by' any council of any. municipal corporation the yeas and nays shall he called and recorded,” is fully met where the record states that such a resolution was “carried by the following vote,” followed by the names of every member of the council. •
6. Municipal Bonds — Exceeding Limit of Lawful Indebtedness — Computation of Indebtedness.
Under the provision of Const. Iowa, art. 11, § 3, that no municipal corporation shall he allowed to become indebted in any manner to an amount in the aggregate exceeding 5 per centum on the value of the taxable property within such corporation, warrants outstanding at the time bonds are issued do not constitute an indebtedness when there is money in the treasury to meet them; and the burden rests upon the corporation, which asserts the invalidity of the bonds on the ground that the indebtedness thereby created, together with the outstanding warrants, exceeded the constitutional limit, to prove that such warrants exceeded the cash in the treasury available for their payment, and by what amount, — the presumption being in favor of the validity of the bonds.
This was an action on negotiable bonds issued by the defendant,, the city of Manning, Iowa.
Berryhill & Henry, for plaintiff.
B. I. Salinger and A. B. Cummins, for defendant.

Opinion:
WOODSON, District Judge.
This case is now presented on the merits. Upon the legal question tendered in petition, a decision was handed down in 1897, and is found in 78 Fed. 900. That decision overruled the demurrer- interposed by defendant to the original petition. The plaintiff is a citizen of the state of Illinois, and defendant is a citizen of the state of Iowa. The action is based upon five negotiable bonds, severally dated October 23, 1884, for $1,000 each, with interest from date at 8 per cent, per annum, payable semiannually; the bonds maturing October 14, 1894. Interest on these bonds was regularly paid to the date of maturity thereof; so that, if the bonds are valid, there is due thereon to plaintiff the principal, with interest from October 14, 1894, at the rate of 8 per cent, per annum, payable semiannually. The defendant is a municipal corporation, being an incorporated town, according to the classiiication of municipal corporations in force in the state of Iowa at the date of said bonds and yet in force. The defendant, for its defense herein, while admitting that the papers in suit were signed by its officers, as exhibited, and that plaintiff, before the maturity thereof and for value, became, and is now, the holder and owner thereof, and that nothing lias been paid thereon, except interest up to date, including the installment covering October 14, 1894, nevertheless, for the reasons below slated, denies its liability thereunder: (1) Said bonds are void, because defendant liad not legal authority to execute same under the Code of Iowa then in force. (2) Denies defendant ever issued or authorized the issue of said bonds. (3) That at the date said bonds are claimed to have been issued, defendant was indebted in a sum largely exceeding the limitation contained in the constitution of the state of Iowa, to wit, in excess of 5 per cent, on the value of the taxable property within such defendant corporation, as ascertained by the last state and county tax lists preceding the issue of said bonds. It is proper here to state that in the agreed statement of facts tiled herein the second ground of defense above slated is waived, by the agreed fact that defendant did issue said bonds. In its reply, plaintiff avers that what is set out in answer of defendant under its third above-stated defense, as an indebtedness of defendant ouislanding at the time the bonds in suit were issued (and which, if valid, would invalidate the bonds in suit), was not a valid indebtedness; but (hut the bonds which evidenced or constituted such alleged outstanding indebtedness were not valid, in that, at the date of their issue, the aggregate indebtedness then outstanding of the defendant exceeded 5 per centum of the value of the taxable property within the limits of defendant corporation, as ascertained by the last state and county tax lists previous to the issuance of said bonds.
It is due to counsel herein that the findings of the court shall be sufficiently comprehensive to permit a thorough review in the appellate court. This court has been favored by counsel on either side with exhaustive briefs, supplementing the oral argument. While perhaps not actually required, in view of the present decision herein reached, yet counsel may properly expect that the findings of the courl will cover substantially all the material issues raised by the pleadings.
1. As to the contention of defendant that the bonds in suit are invalid, because, at date of their issue, the aggregate indebtedness of defendant, in violation of the constitutional limitation, exceeded 5 per centum of the taxable property within the defendant corporation, as ascertained by the last preceding state and county tax list: If the fact claimed is sustained by the evidence, the conclusion claimed must follow. The limitation prescribed in the constitution of (he state of Iowa is correctly given in this contention, and the evidence is undisputed that at the date of issuance of bonds in suit there were outstanding bonds, issued in 1882 by defendant, which, if included in the then existing aggregate indebtedness of defendant, make such aggregate in excess of the constitutional limitation. It is practically conceded that such 1882 bonds (the bonds in suit were issued in 1881) were themselves, at date of their issue, obnoxious to the above-quoted constitutional limitation. They were, however, treated by defendant as a valid indebtedness, and previous to the institution of the present action had been paid in full. They were thus treated by defendant when the bonds in suit — issue of 1881 — were issued.
Defendant contends that, since defendant treated them as valid, and has paid them out of the ordinary revenues of the defendant, the spirit of the constitutional limitation does not apply, and especially so as they were so treated by defendant, and were being so paid, when the bonds in suit were issued. But to my mind the fact that the defendant elected to pay, while the law did not require it to pay, does not convert into an indebtedness that which the law does not recognize as an obligation to pay. There may exist, from the standpoint of mere morals, an obligation which the law does not regard as an' obligation enforceable in the courts. The constitutional limitation uses the term "indebted" as meaning an indebtedness which the law will recognize, and by its process enforce. Such a test may readily be applied. The process is simple and uniform. Given the facts, will the law, applied thereto, compel payment? If so, there is an indebtedness. But if the will of the corporation, -the mood of its governing officials, is to be the test, there can be no certain or reliable and permanent knowledge as to whether an enforceable indebtedness exists. To-day the officials recognize, and are discharging by payment, a "debt" which the courts would not enforce. Additional bonds, now issued, are obnoxious to the constitutional limitations, because of the former "debt." A month later new officials are installed. They do not recognize the "debt" which their predecessors were paying off, and refuse payment of same. Will the additional bonds, issued as above suggested, no longer be obnoxious to the constitutional limitation, but thus become valid? Or, take the converse: A series of bonds, issued yesterday, are beyond the constitutional limitation and invalid. Hence a series of bonds issued to-day are valid, because the former issue is not, in law, an outstanding indebtedness. Next month a new set of city officials recognize as valid, by paying off, the first set of bonds just above suggested. Does their payment of these bonds, thus rendering them valid, now make this former issue an outstanding indebtedness, and therefore the latter issue thereby become invalid? And what shall be said when the same officials change the course of the corporation during their own administration? These difficulties increase if we accept as the test the will of the corporation in place of the force of the law.
If it be claimed that, because the corporation has paid off such bonds, therefore what the law would not have compelled the corporation to pay has become, because of voluntary payment, an indebtedness, we are yet further than before from an acceptable test; for such "debt," though not recognized as such by the law, is capable at any time of being paid off, and thus a new bond issue cannot be safely made while the old issue is outstanding. If the fact ot payment is to be substituted as a test, in place of the obligation which the law recognizes and enforces, then the validity of a new bond issue would depend, not on the facts existing at the time of the issue, and thus capable of being then ascertained, but on the whim or conclusion of the corporation officials, which may come into existence long after such new bond issue, and which could only be ascertained at time of such issue by one having the gift of prophecy.
The result here reached is, therefore, that if the bond issue of 1882 was invalid, because obnoxious at time of issue to the constitutional limitation, it will not be included when determining the aggregate indebtedness of defendant at time of the issue (1884) of the bonds in suit; and, thus examining, the bonds in suit, so far as this ground of defense is concerned, are valid.
2. Had defendant, at the time these bonds in suit were issued, authority, and was that authority duly exercised, to issue the bonds sued on herein? Plaintiff, as a part of its case, brings into court the bonds, which on their face assert they were issued under section 500 of the Iowa Code of 1873. Said section 500, so far as material herein, is as follows: "Loans may be negotiated by any municipal corporation in anticipation of the revenues thereof. " The question now under consideration was before this court on demurrer to the petition, and was decided adversely to defendant. 78 Fed. 900. Counsel on both sides have reargued the question on the present hearing. I have given it extended consideration and reexamination, in the light of the present argument and the additional cases cited by counsel.
In the former decision herein, reached on demurrer, the judgment of the court on the main question involved was with the defendant, and to the effect that, as a principle of general municipal law, (1) a municipal corporation is not authorized to issue negotiable bonds for loans relating to current expenses, unless the power to issue such bonds was expressly conferred on such corporation; (2) that a loan negotiated in anticipation of revenues, a "borrowing" of money where no delegation of power was by the statute conferred, except the power "to borrow," would not authorize the issuing of negotiable bonds, such as those in suit herein. But the court held the bonds iii suit were validly issued, under said section 500, in accordance with the construction of such section theretofore announced by the supreme court of Iowa, and that this court was bound by that con,-straction of the section which the highest court of the state had adopted. This conclusion was reached largely because the only construction of this section by such court was that which I have indicated, and because, in the many years which had passed since such decision was reached, the lawmaking department of the state had made no change therein, but by silence had acquiesced in the force of the statute as thus construed by the supreme court, and such construction had remained unchallenged in such supreme court since the time (1882) of the deliverance of the decision (City of Sioux City v. Weare, 59 Iowa, 95, 12 N. W. 780) on which the former decision on demurrer herein was based.
The present contention of defendant recognizes the force of the quotations in the former opinion herein from Douglass v. Pike Co., 101 U. S. 677:
"As a rule, we treat tbe construction wbicb the highest court of a state has given the statute of that state as part of tbe statute, and govern ourselves accordingly."
And:
"This court must recognize this decision of tbe supreme court of tbe state as an authoritative construction of tbe statute, made before tbe bonds were issued, and to be followed by.this court."
It is unnecessary to attempt citations of the many cases wherein the supreme court of the United States have reaffirmed the principle embodied in these* quotations.
Defendant, however, insists that the decision given in-City of Sioux City v. Weare, supra, is not applicable here, because it is "mere dictum." This court cannot so declare. Apparently there lay directly in the path necessarily to be traveled by the court the very question now under consideration, viz. whether loans negotiated by a city "in anticipation of revenues" could be validly evidenced by negotiable bonds. This point was presented in the pleadings, and the claim thereon made that the bonds were invalid, because of want of power -in the city to validly issue same. There was no dispute that the bonds in controversy had been issued under said section 500 of the Iowa Code, in the progress of and as evidencing "loans negotiated" by the municipal corporation "in anticipation of its revenues." If the supreme court had sustained the contention of the defendant therein, viz. that said section 500 did not confer the power to issue negotiable bonds,- then it would seem that the defendant therein was entitled to judgment; for said defendant, apparently, could not be held, under the petition in that suit, unless the delivery of these bonds was a payment of the claim against the city. Whether the supreme court of the state might have reached the same conclusion, viz. right of action by the city, by some other process of reasoning, is wholly immaterial here. It had the right to select the grounds on which it would reach and base its conclusions. That which the court had declared material, by making the same the material basis of its decision, this court cannot regard or accept as not material, but must take the decision as it finds it. Again, the court cite, as sustaining the conclusion reached in that opinion, Rogers v. Burlington, 3 Wall. 654. Row the only point in apparent agreement between the case then in progress of decision and the Rogers-Burlington Case is that which is above stated as the basis of the decision in City of Sioux City v. Weare, supra.
Defendant further contends that the principle thus decided in City of Sioux City v. Weare, supra, is not "the settled law of the state." Counsel say: This extract from defendant's brief may be accepted as stating the correct rule. How is it to be here applied? Before the decision of City of Sioux City v. Weare, supra, said section 500 had not been construed by the supreme court of the state. After the decision of that case, and until the former decision filed herein, that court had not again had under consideration the said section in the point thus involved in City of Sioux City v. Weare. Certainly, then, that eminent tribunal liad given no conflicting decisions on that point. It will scarcely be claimed that a single decision, squarely presented, may not become settled law by acquiescence of years. Surely it is not necessary, in law, any more than in liquids, that a repeated agitation or stirring up is essential to an abiding settlement. Once settled, it so remains until in some manner it is disturbed; and here we had silent acquiescence during 15 years, by supreme and nisi prius courts of the state, as well as of the lawmaking department of the state.
"In order to warrant tire circuit court of tire United States in subordinating tbe decision of tbe supreme court of tbe United States to that of a state tribunal, it must be found that tbe construction has developed into a settled rule; that is to say, it must have been accepted and received as tbe true meaning of tbe statute."
Since the handing down of the former opinion herein, the supreme court of Iowa have had under consi ruction substantially the point heretofore under consideration from said section 500. Heins v. Lincoln, 71. N. W. 189, 102 Iowa, 69, was an action in equity to restrain the issuance of bonds by the city of Cedar Rapids. One point involved is expressly stated (71 N. W. 189, 102 Iowa, 71) to be that "the issue of the bonds is also claimed to be void because not authorized by ilie city charter." Cedar Rapids was acting under a special charter. That charter (section 51) provides:
"The city couucil is hereby authorized to borrow money for any object or purpose in. (heir discretion, and to pledge the faith of the city for the payment :hereof, provided [here follow provisions for submitting question of borrowing to voce of ('lectors of the city]; and if a majority decided in favor of said loan, then the city council shall by ordinance establish a sinking fund to provide the means io pay off any indebtedness created by virtue of the authority granted in this section."
In that case i:he bonds were to be issued "to pay or redeem its outstanding general warrants." The supreme court (page 191, 71 N. W., and page 76, 102 Iowa) say:
"The real question is, does this section confer on the city the right to pay its current debts, which are evidenced by city warrants, by issuing long-time, interest-bearing bonds therefor?"
After considering with a good deal of fullness, the general principles governing or prescribing the powers of municipal corporations, that eminent tribunal considers, with much of detail, the authority of the city to issue' bonds, in the absence of express statutory authority Iherefor. Its conclusion is thus stated (page 191, 71. N. W., and page 78, 102 Iowa):
"We do not understand that the power to borrow money vested in a municipal corporation authorizes such corporation to issue bonds in payment therefor, in the absence of express authority to that effect."
The (íjtii)ion continues:
"We know that some courts have so held, but we are not prepared to assent io the correctness of such holdings."
After quoting from Merrill v. Monticello, 138 U. S. 673, 11 Sup. Ct. 441, that part of the opinion which sustains the above-quoted proposition, the opinion proceeds:
"So, in tiie case at bar, no express power is given to issue bonds, and none can be implied, because it is not necessary to carry out the objects and purposes of the municipality. It is a familiar rule that all doubts as to the existence of authority of a municipal corporation to do an act must be resolved against it."
After citing various cases, it proceeds (page 192, 71 N. W., and page 79, 102 Iowa):
"Some language used in the case of City of Sioux City v. Weare, 59 Iowa, 98, 12 N. W. 786, may seem to conflict with the views herein expressed, but the facts in that case are different; nor do we think the court intended to adopt the broad rule that, if a municipal corporation had the power to borrow money, it would necessarily follow that it had the power to issue its negotiable bonds therefor, in the absence of express authority so to do."
It would have- proven instructive had the learned court stated wherein they regarded the facts in City of Sioux City v. Weare as materially different — that is, a difference so controlling as to lead to a different decision upon this point — from those involved in the Cedar Eapids Case. True, in the latter there was express statutory authority and direction to the city to "establish a sinking fund to provide means to pay" the indebtedness. Such express authority or direction was wholly wanting in the Sioux City Case. It would seem that, if the facts .in the Sioux City Case could have sustained therein the decision as we have construed it, there would appear to be no escape from a fortiori conclusion, in the Cedar Eapids Case, that the bonds must be declared valid on the strength of the Sioux City decision, since in the Cedar Eapids Case the statute provided for and compelled the establishment of a sinking fund. It cannot be denied, as confessed by the court, that "some language used" in the Sioux City Case "may seem to conflict with the views" expressed in the Cedar Eapids Case. Except for the above-quoted statement from the opinion delivered in the Cedar Eapids Case, the latter decision would naturally be accepted as an overruling of the former on the point under,consideration.
Regarding the Cedar Rapids Case as stating the law of this state, and as modifying the opinion given in the Sioux City Case, the question is presented as to the effect such later (Cedar Rapids) decision must have in the case at bar. Had the latter expressly overruled the former decision, this court would have maintained its ruling heretofore reached on demurrer herein. The legal status of the bonds in suit herein, such bonds having been issued before such overruling, would have been determined with reference to the decision in force at the time of such issuance. With much hesitation, I have concluded that I must accept the Cedar Rapids decision, as construing the force to which the Sioux City decision is entitled. While unable satisfactorily to harmonize the announcement of the supreme court of the state as given in these two decisions, I am impressed with the fact that, except for the Sioux City decision, these bonds can.have no valid standing herein. The utterances of the supreme court of the United States as to sueli bonds, issued under the circumstances herein shown, are positive, and admit of no doubt. Tested by such utterances, as applicable to municipal bonds generally, the bonds in suit are invalid, because they were issued by a municipality as negotiable bonds, under the power to negotiate» loans, i. e. to "borrow money," and without express delegation of power to issue negotiable bonds. Unless there is found in the legislation of this state; statutory authority for the issuance by said city of these municipal bonds in their present negotiable form, plaintiff is not entitled to judgment against Ihe defendant; and it is conceded that the only statute, existing at time of ilieir issuance, under which claim can be made for their valid issuance, is section 500 of the Code of Iowa of 1873, above quoted. It is also conceded that that section does not expressly authorize the issuance of negotiable bonds, and that such aulhorify to issue is found, if at all,-in the construction given by the supreme court of the state to said section 500. Before this court is justified in deciding that the bonds in suit are not within the general rules announced by the supreme court of the United States, but are exceptions thereto, I must find that the settled law of this state places thorn without sueli announced rules. The acceptance of the later utterance of the supreme court of the state as to the force, effect, and intent of its earlier decision compels me to hold, contrary to the holding upon demurrer herein, which was made before; such later utterance had been given, that section 500 of tin; Code of Iowa of 1873 did not authorize a municipality, when borrowing- money in anticipation of its revenues, to issue negotiable bonds. This decision necessitates a finding herein for defendant.
1 confess (hat I am not satisfied with this conclusion. The defendant corporation contracted for a system of waterworks for its use and operation. In payment for such system it issued these bonds, it issued them in payment for such waterworks, and as a valid issue, and those entitled to receive payment for the waterworks furnished by them to the city took these bonds, believing them to be valid. During the 10 years between issuance of the bonds and then-maturity, the defendant corporation annually paid the interest thereon, without in any manner- objecting to their validity. To mi; it is a matter of great regret that the judgment of this court apparently results in permitting the repudiation by the corporation of what manifesily was by it intended to be, and what was certainly accepted by those; furnishing the waterworks as being, the valid obligation of the corporation to pay for its system of waterworks. I shall be heartily pleased if. in appellate proceedings, the judgment herein entered shall be reversed, and good morals and good law go hand in hand in this case, and what was at the time intended to be, and accepted as, the valid obligation of the defendant, as evidenced in the bonds in suit, declared capable of enforcement.