Court Opinion

ID: 8853297
Source: CourtListenerOpinion
Date Created: 2022-11-26 17:21:36.442427+00
Date Added: 2024-06-11T17:05:34.634266
License: Public Domain

CALDWELL, Circuit Judge
(dissenting). It is obvious that no recovery can be had on the bonds in suit if we apply to the facts of this case the well-settled rules of law relating to the power of municipal corporations to issue bonds, and the rules which determine when such corporations are, and when they are not, precluded from availing themselves of meritorious defenses to such obligations.
Some of the rules on this,subject are well summarized by the supreme court in the case of Barnett v. Denison, 145 U. S. 135, 12 Sup. Ct. 819. ■ In this case, Mr. Justice Brown, spealdng'for the court, said:
“It is tile settled doctrine of this court that municipal corporations are merely agents of the state government for local purposes, and possess only such powers as are expressly given, or implied, because essential to carry into effect such as are expressly granted (1 Dill. Mun. Corp. § 89; Ottawa v. Carey, 108 U. S. 110, 2 Sup. Ct. 361); that the bonds of such corporations are void, unless there be express or implied authority to issue them (Wells v. Supervisors, 102 U. S. 625; Claiborne Co. v. Brooks, 111 U. S. 400, 4 Sup. Ct. 489; Concord v. Robinson, 121 U. S. 165, 7 Sup. Ct. 937; Kelley v. Milan, 127 U. S. 139, 8 Sup. Ct. 1101); that the provisions of the statute authorizing them must be strictly pursued; and that the purchaser or holder of such bonds is chargeable with notice of the requirements of the law under which they are issued (Ogden v. County of Daviess, 102 U. S. 634; Marsh v. Fulton Co., 10 Wall. 676; South Ottawa v. Perkins, 94 U. S. 260; Northern Bank v. Porter Tp., 110 U. S. 608, 4 Sup. Ct. 254; Hayes v. Holly Springs, 114 U. S. 120, 5 Sup. Ct. 785; Merchants’ Exch. Nat. Bank v. Bergen Co., 115 U. S. 384, 6 Sup. Ct. 88; Harshman v. Knox Co., 122 U. S. 306, 7 Sup. Ct. 1171; Coler v. Cleburne, 131 U. S. 162, 9 Sup. Ct. 720; Lake Co. v. Graham, 130 U. S. 674, 9 Sup. Ct. 654).”
In tbe case of Brenham v. Bank, 144 U. S. 173, 12 Sup. Ct. 559, the supreme court said:
“It is easy for the legislature to confer upon a municipality, when it is constitutional to do so, the power to issue negotiable bonds; and, under the well-settled law that any doubt as to the existence of such power ought to be determined against its existence, it ought not to be held to exist in tlie present ease.”
And the court held that express authority conferred on a city by its charter to borrow money did not authorize it to issue negotiable bonds for the money borrowed, and that a bona Me holder of such bonds could not recover thereon against the city.
In Hill v. Memphis, 134 U. S. 194, 10 Sup. Ct. 562, the supreme court, speaking by Mr. Justice Field, said:
“The inability of municixral corporations to issue negotiable paxrer for their indebtedness, however incurred, unless authority for that purpose is expressly given or necessarily implied for the execution of other express powers, has been affirmed in repeated decisions of this court.”
*953In Merrill v. Monticello, 138 U. S. 673, 11 Sup. Ct. 441, the court said:
"It is admitted that the power to borrow money or to incur indebtedness carries with it the power to issue the usual evidences of indebtedness, by the corporation, to the lender or other creditor. Such evidences may be in the form of promissory notes, warrants, and perhaps, most generally, in that of a bond. But there is a marked legal difference between the power to gire a note to a lender for the amount of money borrowed, or to a creditor for the amount due, and the power to issue for sale, in open market, a bond, as a commercial security, with immunity, in the hands of a bona fide holder for value, from equitable defenses. The plaintiff in error contends that there is no legal or substantial difference between the two; that the issuing and disposal of bonds in market, though in common parlance, and sometimes in legislative enactment, called a ‘sale,’ is not so in fact; and that the so-called ‘purchaser’ who takes the bond, and advances his money for it. is actually a lender, as much so as a person who takes a bond payable to him in ids own name. * * * It does not follow that, because the town of Monticello had the right to contract a loan, it liad therefore the right to issue negotiable bonds, and put them on the market as evidences of such loan. To borrow money, and to give a bond or obligation therefor which may circulate in the market as a negotiable security, freed from any equities' that may he set up by tlio maker of it, are, in their nature and in their legal effect, essentially different transactions. In the present case, all that can he contended for is that the town liad the power to contract a loan, under certain specified restrictions and limitations. Nowhere in the statute' is there any express xiower given to issue negotiable bonds as evidence of such loan. Nor can such power lie implied, because the existence of it is not necessary to carry out any of the purposes of the municipality. It is (me that there is a considerable number of cases, many of which are cited in tin' brief of counsel for plaintiff in error, which hold a contrary doc-, trine. But the view taken by this court in the cases above cited and others seems to us more in keeping with the well recognized and settled principles of the law of municipal corporations.”
Let aj (plication be made of these well-settled doctrines to the facts of this case.
At an early date in the history of the state of Kansas, issuing negotiable municipal bonds seems to have been one of the leading industries of the state. Under authority from the legislature, counties, cities, towns, school districts, and townships engaged in the business on an extensive scale, and issued their bonds to aid in building railroads, courthouses, jails, bridges, schoolhouses, and for other purposes. The business was carried on to an almost incredible extent.
Mr. Justice Miller, in his opinion in the case of Marcy v. Township of Oswego, 92 U. S. 637, says:
“In the case under consideration, this provision of the statute was wholly disregarded. I am not sure that the relative amount of the bonds and of tlic taxable property of the towns is given in these cases wiili 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 taxable property of the town, as shown by tile tax list of the year preceding the issue.”
The acts authorizing the issue of these bonds commonly imposed conditions upon their issuance intended for the security and protection of the municipalities against an illegal or fraudulent exercise of the ¡lower; hut notwithstanding these conditions, either through the ignorance or dishonesty of the officers of the municipalities intrusted with the exercise of this power, a large percentage of the bonds issued *954under these acts were illegally or fraudulently issued. In very many cases the taxpayers received no consideration whatever for the bonds thus issued. A bond honestly issued for a full consideration was the exception, and not the rule. The acts referred to authorized the issue of negotiable bonds which, under the operation of the rule of decision of the supreme court of the United States, became fixed liabilities on the municipalities issuing them, notwithstanding no consideration was received for them. These liabilities were greater than the taxpayers of the municipalities affected could pay. A compromise and scaling of these obligations became a necessity. The act of March 10, 1879, was the result of this necessity. Profiting by past experience, the legislature sought to surround the power to issue these compromise bonds by every possible safeguard. The one essential thing to prevent frauds was accomplished by not making the bonds negotiable. The power of each of the municipalities named to issue bonds was restricted to the issue of bonds “to compromise and refund its matured and maturing indebtedness of every kind and description whatsoever.”
The third section of the act provides that:
“When a compromise has been agreed upon, it shall be the duty of the proper officers to issue such bonds at the rate agreed upon to the holder of such indebtedness, in the manner prescribed in this act; but no bonds shall be issued under this act until the proper evidence of the indebtedness for which the same are to be issued shall be delivered up for cancellation: provided, that no compromise by any township or school district shall be of any validity unless assented .to by the legal voters of such township or school district, at an election or school meeting called for such purpose; of which election or school meeting at least ten days’ notice shall be given.” Laws March 10, 1879, c. 50, § 3.
Tbe fourth section provides that:
“A record shall be kept by the different county clerks of all bonds issued in such counties under this act, showing the date, number, and amount thereof, to whom and on what account issued, and when the same become due; and all bonds or other evidences of indebtedness refunded under this act shall have the words ‘Paid in full’ marked in a plain manner across the face of each bond and coupon so refunded, and such canceled obligations shall be carefully preserved in the office of the county clerk, or destroyed by the county commissioners; a register of the number, amount and date of issue of the same having first been made by the county clerk.” Laws March 10, 1879, c. 50, § 4.
It will be observed (1) that under this act bonds can only be issued for the purpose of compromising previously existing indebtedness; (2) that the bonds issued for this purpose are to be issued “to the holder of such indebtedness”; and (3) that a record is to be kept by the county clerk of all bonds issued under the act, “showing the date, number, and amount thereof, to whom, and on what account issued, and when the same become due.”
The object of these requirements, as was said by the supreme court in Hoff v. Jasper Co., 110 U. S. 53, 3 Sup. Ct. 476, was to provide “additional guaranties against fraudulent and irregular issues.” Much of the old indebtedness of these municipalities represented no value received whatever, but had been fastened on municipalities by the fraudulent issue of negotiable bonds under acts which authorized the issue of such bonds, and it is morally certain the legislature never *955intended to afford to the officers of every county, city, town, school district, and township in the state an opportunity to repeat the frauds by again empowering them to issue negotiable bonds. The act expressly requires that the new bonds shall be made payable to the holder of the old indebtedness without words of negotiability. That this is the proper construction of the act is rendered absolutely certain by the requirements that the new bonds shall be issued “to the holder of such indebtedness,” and that the registration of the bonds by the county clerk shall show “to whom and on what account” the bonds were issued. It is obvious that such registration is impossible where the bonds on their face do not show “to whom and on what account” they are issued. These requirements of the act are not directory, but mandatory. They were intended to protect municipalities from precisely such frauds as this case discloses. Authority to issue bonds in the name of the holder of prior indebtedness does not confer on the officers of the municipality authority to issue bonds payable to bearer. If the legislature had intended that the bonds issued under* this act should be “negotiable,” that term would have been used in describing the bonds, or the requirement that the bonds should he made payable to the holder of old indebtedness would have been followed by words of negotiability. The legislature was evidently striving to pass an act that would preclude the officers of these municipalities from perpetrating the frauds upon the taxpayers which had been common under other acts which did authorize the issue of negotiable bonds. To prevent the perpetration of fraud, the act required the bonds to be payable to the holders of the old indebtedness without words of negotiability, and also required that they should be registered in the county clerk’s office and that such registration should, show “to whom and on what account” the bonds were issued. Bonds issued under this act are not complete or perfect instruments until they are registered in the clerk’s office in the manner required by the act. By necessary implication, the duty of having this registration made is imposed upon the officers of the municipality issuing the bonds. But, conceding that one to whom the bonds were issued might procure the registration to he made, that could only be done when the bonds on their face disclosed the facts essential to enable the clerk to make the registration required by the act. To do this the bonds must be made payable to some person by name, and they must state on their face on what account they were issued. These requirements of the act were disregarded in the issue of the bonds in suit. A copy of the bond as issued is here given in the note.1 *956These bonds could never be registered as required by law, because no payee was named therein, and the account upon which they were issued is not stated.
To escape the force of the argument founded on the requirements of the act quoted, the majority opinion states:
“It is a complete answer that the record of the township clerk, which in this case shows, as it should show in every case, the facts the county clerk is bound to record, is the best evidence of those facts,—the evidence upon which the county clerk is bound to rely in preference to the floating bonds, many of which may never be presented to him.”
It is a sufficient answer to this suggestion to say that the act requires this record to be kept by the county clerk, and not by the township clerk, and that any recox'd of the township clerk, so far as relates to the requirements of the act under which the bonds were issued, is extra-official, and has no legal sanction whatever.
In Barnett v. Denisoxx, supra, the supreme court say:
“It is certainly a reasonable requirement that the bonds issued shall express upon their face the purpose for which they were issued. In any event, it was a requirement of which the purchaser was bound to take notice, and. if it appeared upon their face that they were issued for an illegal purpose, they would be void. If they were issued without any purpose appearing at all upon their face, the purchaser took the risk of their being issued for an illegal purpose; and, if that proved to be the ease, they are as void in his hands as if he had received them with express notice of their illegality. Ordinarily, the recital of the fact that the bonds were issued in pursuance of a certain ordinance would be notice that they were issued for a purpose specified in such ordinance (Hackett v. Ottawa, 99 U. S. 86), and the city would be estopped to show the fact to be otherwise (Ottawa v. National Bank, 105 U. S. 342). But, where the statute requires such purpose to be stated upon the face of the bonds, it is no answer to say that the ordinance authorized them for a legal purpose, if in fact they were issued without consideration, and for a different purpose.”
In Anthony v. County of Jasper, 101 U. S. 698, the court say:
“There can be no doubt that it is within the power of the state to prescribe the form in which municipal bonds shall be executed in-order to bind the public for their payment. If not so executed, they create no legal liability. Other circumstances may exist which will give the holder of them an equitable right to recover from the municipality the money which they represent, but he cannot enforce the payment or put them on the market *957as commercial paper. * * *• Dealers in municipal bonds are charged.with notice of the laws of the state granting power to make the bonds they find on the market. This wo have always held.”
Every purchaser of these bonds was bound to take notice of the requirements of the act under which they purported to be issued. No recitals in the bonds could absolve him from this obligation. The form of the bonds was not such as the act required, and therefore no holder thereof can claim to be a bona fide purchaser, no matter what recitals ajjpear on the face of the bonds. Anthony v. Jasper Co., supra; Nesbit v. Independent Dist., 144 U. S. 610, 12 Sup. Ct. 746.
In construing the act, every provision of it must be considered and given effect, and if must be construed in the* light of the legislative history of the state bearing on the subject, and the result of that legislation and the evil sought to be cured by the new act. When so construed, it is obvious that it'is not the purpose of the legislature to open anew this Pandora’s box. But, if it was doubtful whether the legislature intended the bonds to be issued under this act should be negotiable, the doubt, as we have; seen, must be resolved against their negotiability. Brenham v. Bank, supra.
One of the reasons assigned why the court should strain a point to hold bonds issued by municipal corporations negotiable, and thereby cut oil' all defenses, is that they “are made 1o raise money by their sale, and this object would be defeated,” and their “ready salability and market value” impaired, by holding them nonnegotiable. But this argument has no application to this case. Under the act we are considering, bonds cannot be issued for borrowed money or for sale, but can only be lawfully issued in compromise of indebtedness existing prior to the passage of the act. The well-settled rule, as we have seen, is that a municipal corporation cannot issue negotiable paper “unless authority for that purpose is expressly given or necessarily implied for the execution of other express powers.” Hill v. Memphis, supra. It is conceded the power is not expressly given by this act, and it is equally clear that its exercise is notnecessaryto the; execution of the express power granted, which is merely to give a new evidence of debt in compromise of an old debt. It is a well-known fact that no reputable dealer in municipal securities will buy municipal bonds or put them upon the market until he has made inquiry into the legality and honesty of their issue. Not one of the principal cities in this circuit could sell its bonds to any dealer in such securities until lie had examined, or caused to be examined, the statutes of the state and the ordinances and records of tin* city relating to their issue, and satisfied himself that the city not only had the power to issue the bonds, but that they were issued for a lawful and honest purpose. It is therefore only dishonest and corrupt officers and disreputable dealers, who divide with them the proceeds of their frauds, that profit by the business of issuing fraudulent municipal bonds. If bonds are honestly issued, fora legal purpose, they are good and valid, with or without recitals. Even where bonds are irregularly or illegally issued, if they were intended to evidence a legal and valid indebtedness, the debt may be collected from the municipality, although the bond itself is void, and the holder of the void bond will be sub*958rogated to the rights of the original creditor. It is apparent, therefore, that the only office performed by recitals in municipal bonds in any case is to give validity and effect to bonds issued without consideration and fraudulently. . And the effect of the doctrine of the majority of the court in this case is to give validity to fraudulent bonds, and encourage their issue. Under the ruling of the majority of the court, the old industry of issuing fraudulent bonds will probably be revived in this state, and an act designed exclusively to afford reliéf against previous burdens of that character, and to prevent a repetition of such frauds, will be used, not only to increase such burdens, but, as in this case, to impose them where none ever existed before. To sum up: Under a carefully guarded act, which bears evidence in its every line of a settled purpose on the part of the legislators to limit the powers of the officers acting thereunder to the issue of nonnegotiable bonds in compromise of the then-existing indebtedness of the municipalities of the state, the majority of the court hold that it is open to the officers of every county, city, town, school district, and township in the state of Kansas to issue the negotiable bonds of the public corporations named, without any consideration, and for all manner of illegal purposes, and to any amount, and make them binding obligations by simply inserting in them the false recital that they were issued under the act mentioned; and that the purchasers of such bonds are not chargeable with notice of the requirements of the act under which they purport to be issued, nor with notice of what the records of the municipality disclose in relation to their issue. This is going much further than the supreme court of the United States has ever gone, and is in palpable conflict with the later decisions of that court which are cited in this opinion. The judgment of the circuit court should be reversed.

 No. 1. United States of America. §1,000.00
West Plains Township Refunding Bond.
West Plains Township, County of Meade,
State of Kansas.
Know all men by these presents, that the township of West Plains, in the county of Meade, state of Kansas, acknowledges itself indebted to the bearer in the sum of one thousand dollars, lawful money of the United Status of America, to be paid in thirty years from the first day of July, A. I). 1889, with interest thereon at the rate of six per cent, per annum, payable semiannually, on the first days of January and July, in each year, upon the *956presentation of the coupons hereto attached as they become due; both principal and interest being payable at the Fiscal Agency of the state of Kansas, in the city oí New York. This bond is one of a series oí fifteen bonds of one thousand dollars each, and issued by virtue of and in accordance with the provisions of sections one, two, and tln-ee of chapter fifty of the Law^s of 1879; being an act of the legislature of the state of Kansas, entitled “An act to enable counties, municipal corporations, the board of education of any city and school districts to refund their indebtedness,” which said act took effect March 10th, 1879. And it is certified and recited that all acts, conditions, and things required to be done precedent to and in the issuing of said bonds have been done, happened, and performed in regular and due foi*m, as required by law. In testimony whereof, this bond lias been issued and signed by the township trustee, attested and registered by the township clerk, and countersigned by the townships treasurer of said township of West Plains, in the county of Meade, state of I-Cansas, this 2nd day of November, A. D. 1889. W. S. Hopkins, Township Trustee.
Attested and registered: M. S. Parsons, Township Clerk.
Countersigned: K. E. Turner, Township Treasurer.