Lytle v. Lansing - 147 U.S. 59 (1893)
U.S. Supreme Court
Lytle v. Lansing, 147 U.S. 59 (1892)
Lytle v. Lansing
Argued December 6-7, 1892
Decided January 3, 1893
147 U.S. 59
When negotiable bonds of a municipality issued in aid of a railroad company are void as between the railroad company and the municipality, the burden is upon the holder to show that he, or someone through whom he obtained title to them, was a bona fide purchaser for a valuable consideration.
The settled rule in equity that a purchaser without notice, to be entitled to protection, must not only be so at the time of the contract or conveyance, but also at the time of the payment of the purchase money, applies to the purchase of negotiable municipal bonds.
It is the duty of one who purchases municipal bonds, knowing that the municipality is contesting its liability on them, to make inquiries, and the failure to do so will be held to be a willful closing of his ears to information.
The several holdings of the bonds which form the subject of this litigation since they passed out of the railroad company examined, and held to be either as collateral for a debt which has been paid, or as fictitious, for a real owner who is affected with notice of their invalidity.
This was an appeal from a decree requiring the appellant to surrender for cancellation 75 bonds, of $1,000 each, purporting to have been executed by the Town of Lansing, and dismissing a cross-bill filed by Lytle to compel the payment of the overdue coupons attached to such bonds.
By an act of the legislature of New York, passed in 1869, it was provided that whenever a majority of the taxpayers of any municipal corporation, owning or representing a majority of the taxable property, should make application to the county judge, stating their desire that
such corporation should issue its bonds to an amount not exceeding twenty percent of the taxable property, and invest the same in the stock or bonds of such railroad company as might be named in the petition, it became the duty of such county judge to order a notice of such petition to be published, and to take proof as to the number of taxpayers joining in the petition, and the amount of taxable property represented by the petitioners. In pursuance of this act, in December, 1870, petitions of certain taxpayers of the Town of Lansing were presented to the county judge of Tompkins County, who caused the proper notice to be published, proceeded to take proofs, and on March 20, 1871, adjudged and determined that the petition was duly signed by a majority of the taxpayers of the Town of Lansing; that the petitioners represented a majority of the taxable property; that the sum of $75,000, mentioned in the petition, did not exceed twenty percent of the whole taxable property of the town, and that all the requirements of law respecting the issuing of town bonds to the amount of $75,000, and for the investment of the same in the stock or bonds, or both, of the "Cayuga Lake Railroad Company," had been fully complied with. He thereupon appointed three freeholders and taxpayers of said town as commissioners, whose duty it would be to execute such bonds and to discharge all such other duties as should be required of them as such commissioners. On March 27, 1871, a writ of certiorari was sued out of the supreme court to review these proceedings, and in May, 1872, the general term of such court ordered and adjudged that all the proceedings in relation to the issuing of these bonds should be reversed, annulled, and held for naught for the reasons that the Cayuga Lake Railroad Company was not a legal corporation; that the articles of association failed to state the name of each county through or into which the road was intended to be made; that no valid charter was produced before the county judge; that the petition did not direct whether the money was to be invested in stock or bonds, and that it was not shown that a majority of the taxpayers had signed the petition. People v. Van Valkenburgh, 63 Barb. 105.
In some way, though exactly how did not clearly appear, the railroad company induced the commissioners to issue and deliver to them these bonds, for which they received a certificate for an equivalent amount of railroad stock. The allegation of the bill in this connection was that the officers of the railroad company fraudulently and by false pretenses procured the commissioners to deliver the bonds by representing and inducing them to believe that their action would not in any way injure or affect the town, and also by presenting to them an undertaking of the company to indemnify and save them harmless from the consequences of their act. It was further alleged that the stock of the company received in exchange for these bonds was of no value, that the company had ceased to do business and was insolvent, and that the town was ready to deliver up the stock in exchange for the cancellation of the bonds.
It appears that these bonds, when delivered to the railroad company, were pledged by it to Leonard, Sheldon & Foster, a banking firm in New York city, as collateral security for a loan of $50,000 to the railroad company; that this loan was afterwards transferred to Elliott, Collins & Co., bankers at Philadelphia, to whom the bonds were also turned over as collateral; that this latter company also had authority from the railroad company to sell them for the company at the price of from seventy to eighty cents on the dollar, and that in February, 1873, the firm sold them, deducted from the proceeds the amount of their loan, and left a balance of $4,745.83 to the credit of the railroad company. It did not appear to whom Elliott, Collins & Co. sold the bonds, but subsequently an action was brought in the United States circuit court against the town upon these bonds by one John J. Stewart, in which action a verdict was rendered on December 19, 1878, for the defendant. The judgment in favor of the town was afterwards, and on June 30, 1882, affirmed by this Court. Stewart v. Lansing, 104 U. S. 505. In February, 1882, the bonds appear to have been sold by Stewart to one Brackenridge, who afterwards, and in May, 1884, sold them to Lytle, the plaintiff in this suit, for an interest in a ranch.
This action was begun by the Town of Lansing in the Supreme Court of the State of New York in May, 1887, for the purpose of obtaining the annulment and cancellation of the bonds, compelling the defendant, Lytle, to deliver them up for cancellation, and also enjoining him from transferring them pending the suit. Lytle removed the action to the circuit court of the United States, and filed a cross-bill to compel the payment of the bonds. In March, 1889, the court rendered a decree in favor of the Town of Lansing, 38 F. 204, from which Lytle took an appeal to this Court.