Loan Association v. Topeka
87 U.S. 655

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U.S. Supreme Court

Loan Association v. Topeka, 87 U.S. 20 Wall. 655 655 (1874)

Loan Association v. Topeka

87 U.S. (20 Wall.) 655

Syllabus

1. A statute which authorizes towns to contract debts or other obligations payable in money implies the duty to levy taxes to pay them unless some other fund or source of payment is provided.

2. If there is no power in the legislature which passed such a statute to authorize the levy of taxes in aid of the purpose for which the obligation is to be contracted, the statute is void, and so are the bonds or other forms of contract based on the statute.

3. There is no such thing in the theory of our governments, state and national, as unlimited power in any of their branches. The executive, the legislative, and the judicial departments are all of limited and defined powers.

4. There are limitations of such powers which arise out of the essential nature of all free governments; implied reservations of individual rights, without which the social compact could not exist, and which are respected by all governments entitled to the name.

5. Among these is the limitation of the right of taxation, that it can only be used in aid of a public object, an object which is within the purpose for which governments are established.

Page 87 U. S. 656

6. It cannot, therefore, be exercised in aid of enterprises strictly private, for the benefit of individuals, though in a remote or collateral way the local public may be benefited thereby.

7. Though the line which distinguishes the public use for which taxes may be assessed from the private use for which they may not, is not always easy to discern, yet it is the duty of the courts, where the case falls clearly within the latter class, to interpose when properly called on for the protection of the rights of the citizen, and aid to prevent his private property from being unlawfully appropriated to the use of others.

8. A statute which authorizes a town to issue its bonds in aid of the manufacturing enterprise of individuals is void, because the taxes necessary to pay the bonds would, if collected, be a transfer of the property of individuals to aid in the projects of gain and profit of others, and not for a public use, in the proper sense of that term.

9. And in a suit brought on such bonds or the interest coupons attached thereon, they are properly declared void.

10. The fact that the town authorities paid one installment of interest on the bonds, by means of a levy of taxes, does not alter the case. It works no estoppel.

The Citizens' Savings and Loan Association of Cleveland brought their action in the court below, against the City of Topeka, on coupons for interest attached to bonds of the City of Topeka.

The bonds on their face purported to be payable to the King Wrought-Iron Bridge Manufacturing and Iron-Works Company, of Topeka, to aid and encourage that company in establishing and operating bridge shops in said City of Topeka, under and in pursuance of section twenty-six of an act of the Legislature of the State of Kansas, entitled "An act to incorporate cities of the second class," approved February 29, 1872; and also of another

"Act to authorize cities and counties to issue bonds for the purpose of building bridges, aiding railroads, water power, or other works of internal improvement,"

approved March 2, 1872.

The city issued one hundred of these bonds for $1,000 each, as a donation (and so it was stated in the declaration), to encourage that company in its design of establishing a manufactory of iron bridges in that city.

The declaration also alleged that the interest coupons first due were paid out of a fund raised by taxation for that purpose,

Page 87 U. S. 657

and that after this payment the plaintiff became the purchaser of the bonds and the coupons on which suit was brought, for value.

A demurrer was interposed by the City of Topeka to this declaration.

The section of the Act of February 29, on which the main reliance was placed for the authority to issue these bonds, reads as follows:

"SECTION 76. The council shall have power to encourage the establishment of manufactories and such other enterprises as may tend to develop and improve such city, either by direct appropriation from the general fund or by the issuance of bonds of such city in such amounts as the council may determine, provided that no greater amount than one thousand dollars shall be granted for any one purpose, unless a majority of the votes cast at an election called for that purpose shall authorize the same. The bonds thus issued shall be made payable at any time within twenty years, and bear interest not exceeding ten percent per annum."

It was conceded that the steps required by this act prerequisite as to issuing the bonds were regular, as were also the other details, and that the language of the statute was sufficient to justify the action of the city authorities, if the statute was within the constitutional competency of the legislature.

The single question, therefore, for consideration raised by the demurrer was the authority of the legislature of the State of Kansas to enact this part of the statute.

The court below denied the authority, placing the denial on two grounds:

1st. That this part of the statute violated the fifth section of Article XII of the Constitution of the State of Kansas, a section in these words:

"SECTION 5. Provision shall be made by general law for the organization of cities, towns, and villages; and their power of taxation, assessment, borrowing money, contracting debts, and

Page 87 U. S. 658

loaning their credit, shall be so restricted as to prevent the abuse of such power."

[The argument here was that the section of the Act of February 29, 1872, conferring the power to issue bonds contained no restriction as to the amount which the city might issue to aid manufacturing enterprises, and that the failure of the legislature to limit and restrict the power so as to prevent abuse, violated the fifth section of Article XII of the constitution above referred to.]

2d. That the act authorized the towns and other municipalities to which it applied, by issuing bonds or lending its credit, to take the property of the citizen under the guise of taxation to pay these bonds, and use it in aid of the enterprises of others which were not of a public character; that this was a perversion of the right of taxation, which could only be exercised for a public use, to the aid of individual interests and personal purposes of profit and gain.

The court below accordingly, sustaining the demurrer, gave judgment in favor of the defendant, the City of Topeka, and to its judgment this writ of error was taken.

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