1. The act of the Legislature of West Virginia, of Dec. 15,
1868, c. 118, authorizing the City of Parkersburg to issue its
bonds for the purpose of lending the same to persons engaged in
manufacturing, is invalid, and the bonds issued under it are, as
against the city, void.
2. As the consideration for bonds to the amount of $20,000,
issued by the city to M. under that act, he, to secure the payment
to the City of the semiannual interest on $20,000, and of annual
installments on the principal, conveyed to J., as trustee, certain
real estate and personal property, with a power of sale in case of
default. The bonds were payable to M. or order. He endorsed them in
blank and sold them to A. and B., who bought them for value, in
good faith. M. paid one installment of interest on them to the
city. The latter made five payments of interest. It then took into
its possession the property, and refused to make further payments.
A suit in equity was instituted by the holders of the bonds against
the city, but was not brought to a hearing for nearly three years.
M., although a party thereto, made no defense. The bill prayed for
a receiver of the property, but none was applied for, and the city
having been allowed
Page 106 U. S. 488
to control and manage the property meantime, acted in good faith
and with reasonable discretion, in taking care of it and disposing
of some of it.
Held:
1. The bonds are void because the necessary amount to pay them
and the interest thereon was to be raised by taxation, which, not
being for a public object, the constitution of the state did not
authorize, and the legislature had no power to pass the act.
2. Neither the payment of interest on the bonds by the city, nor
the acts of its officers or agents in dealing with the property,
operate, by way of estoppel, ratification, or otherwise to render
the city liable on the bonds.
3. M. had a right to reclaim the property and to call on the
city to account for it, in disaffirmance of the illegal contract,
the transaction being merely
malum prohibitum, and the
city being the principal offender. Such right passed to the
complainants as an incident to the bonds.
4. This Court orders a decree to be entered declaring that the
city exceeded its lawful powers in issuing the bonds, and that they
cannot be enforced as its obligations, and providing for a sale of
the remaining property, and for an account, wherein the city is to
be credited with the sums it had in good faith paid for the
acquisition, protection, preservation, and disposition of the
property, and for insurance and taxes, and for interest on the
bonds, and to be charged with what it had received, but not with
any sum for loss of, or damage to, or depreciation of, the
property, and ordering the distribution among the complainants of
the net proceeds of the sale and the net amount of money, if any,
remaining in the hands of the city, received from M. or from the
sales by it of any of the property.
The case is stated in the opinion of the Court.
MR. JUSTICE BLATCHFORD delivered the opinion of the Court.
On the 15th of December, 1868, the Legislature of West Virginia
passed an act which provided as follows, c. 118:
"SEC. 1. That the Mayor and Council of the City of Parkersburg
are hereby authorized and empowered to issue the bonds of said
city, to an amount not exceeding $200,000, for the purpose of
lending the same to manufacturers carrying on business in or near
the said city, in the said County of Wood. The said bonds shall run
twenty years, and bear interest at the rate of six
Page 106 U. S. 489
per centum per annum, and they shall be issued upon the
recommendation of the following-named persons, who shall be
considered the trustees of said loan; that is to say, . . . who
shall have power to fill all vacancies that may occur in their
number. They shall have power to make loans of said bonds to good,
solvent companies or individuals on the following terms; that is to
say, when persons engaged in manufacturing business shall have
invested in their business thirty-five (35) percent of the amount
proposed to be employed in the business of manufacturing, clear of
all liabilities, to be shown to said trustees by affidavits of the
applicants, or by other satisfactory evidence, and when such proof
is furnished, then said trustees, five members concurring, may lend
to such applicants such amounts of said bonds as they may deem
proper and judicious, not, however, to exceed sixty-five percent of
the capital proposed to be used in manufacturing by the applicant,
provided, however, when such loans shall be made, the
interest thereon shall be paid by the borrower semiannually to the
treasurer of said city, and five percent of the principal shall be
paid annually to the said city by the borrower, to be placed to the
account of the sinking fund of said city, until the several loans
are paid in full. The said loans shall be secured by deed of trust
or mortgage on real estate, or by other satisfactory security,
sanctioned by said trustees.
And provided also that no
bonds shall be issued under this section until a majority of the
qualified voters of said city concur in the same, by voting for or
against the same at an election to be held for that purpose."
On the 17th of April, 1869, an election was held in the City of
Parkersburg, under authority of an ordinance passed by the mayor
and city council of said city,
"upon the proposition to authorize the said city council to
issue bonds of the said city to the amount of $200,000, to be
loaned to manufacturers under the provisions of said law and said
ordinance."
At said election, 441 votes were cast in favor of said
proposition, and 19 against it.
On the 6th of September, 1870, a communication having been
received by the city council from M. J. O'Brien & Bro. in
regard to the erection of a manufacturing establishment and marine
railway within the city limits, it was
"Resolved that the council agree, when the trustees of the
improvement loan certify that the Messrs. O'Brien & Bro. have
satisfactorily
Page 106 U. S. 490
secured the bonds loaned to them, and complied with the act of
the legislature authorizing the loan of said bonds, that they will
release said parties from city taxation on their property, to the
amount of bonds invested in the same, not exceeding $20,000,
provided, however, the release shall extend so long as the
said property shall be used or operated as a manufacturing
establishment and marine railway, but not, in any event, to exceed
twenty years."
Nothing further was done on the subject until after section 8 of
article 10 of the new Constitution of West Virginia went into
operation on the 22d of August, 1872, which was as follows:
"8. No county, city, school district, or municipal corporation,
except in cases where such corporations have already authorized
their bonds to be issued, shall hereafter be allowed to become
indebted, in any manner, or for any purpose, to an amount,
including existing indebtedness, in the aggregate exceeding five
percent on the value of the taxable property therein, to be
ascertained by the last assessment for state and county taxes
previous to the incurring of such indebtedness, nor without at the
same time, providing for the collection of a direct annual tax
sufficient to pay, annually, the interest on such debt, and the
principle thereof, within, and not exceeding, thirty-four years
provided, that no debt shall be contracted under this section,
unless all questions connected with the same shall have been first
submitted to a vote of the people, and have received three-fifths
of all the votes cast for and against the same."
On the 22d of April, 1873, the city council adopted the
following resolution:
"Be it resolved by the Mayor and Council of the City of
Parkersuburg, that, in the event of the firm of M. J. O'Brien &
Bro. taking from the city a loan of twenty thousand (20,000)
dollars of its bonds, authorized under former resolution, dated
September 6, 1870, for manufacturing purposes, and paying
punctually the interest thereon and five percent (5) of the
principal for sixteen years, the said firm be released from any
further payments, and the balance of said bonds be paid by the
city, and the said M. J. O'Brien & Bro. are released from
making a marine railway. "
Page 106 U. S. 491
At a meeting of the city council on the 13th of May, 1873, the
trustees of said loan made a report, showing that they had adopted
the following resolution:
"Whereas, M. J. O'Brien and W. S. O'Brien, composing the firm of
M. J. O'Brien & Bro., are desirous of obtaining a loan of the
bonds of the city, under and by authority of an act of the
Legislature of West Virginia, passed December 15, 1868, for
manufacturing purposes, to the amount of $20,000, for the purpose
of aiding them in the erection of a foundry and machine works in
the City of Parkersburg, and whereas, for the purpose of erecting
these works, they have bought of Mrs. Joanna Wait, widow of Walton
Wait, deceases, and also from her as the guardian of Bettie C.
Wait, infant heir of Walton Wait, deceased, lot No. 80 in said City
of Parkersburg, on Kanawha Street, being 85 by 170 feet, and have
received a conveyance from her of said lot, both as the widow of
said Walton Wait and as the guardian of said Bettie C. Wait, and
whereas, it appears, by a schedule of personal property of said M.
J. O'Brien & Bro., verified by affidavit, and now in the hands
of the city attorney, that said M. J. O'Brien & Bro. are the
owners of $15,000 worth of personal property in their works at
Volcano, free of encumbrance, we therefore recommend to the city
council of the City of Parkersburg, upon the said M. J. and W. S.
O'Brien and their wives executing a deed of trust to the said city
on the said $15,000 worth of personal property, as well as upon the
said lot No. 80, the city council to take from Mrs. Joanna Wait, or
some one for her, bank stock, with power of attorney to dispose of
the same, or solvent bonds, to the amount of $15,000, as security
that said Joanna Wait, guardian, will obtain from the circuit court
of Wood county, within two years, authority to convey to M. J. and
W. S. O'Brien the said lot No. 80, for and on behalf of said ward,
and when said authority is obtained, and said deed made, said stock
or bonds to be given up, then the city council may deliver to said
M. J. and W. S. O'Brien, upon the deposit of the aforesaid
collaterals, $10,000 of said city bonds, and when said M. J. and W.
S. O'Brien have put a building or buildings on said lot ready for
the roof, costing not less than $8,000 when completed, shown by
bills rendered and authenticated for same to the council, and when
said Joanna Wait, guardian of said Bettie C. Wait, by the authority
of the said circuit court of Wood county, has conveyed for and on
behalf of her said ward the said lot No. 80, free of encumbrance,
to said O'Brien & Bro., or made a further deposit of bank stock
or
Page 106 U. S. 492
bonds to the amount of $8,000, under the conditions aforesaid,
as security that she will obtain such authority within two years
from the date hereof, and make said conveyance, which shall be held
by said city as security for the payment of said bonds and interest
until said deed is made by authority of said court, then said city
council may deliver to said M. J. O'Brien & Bro. the remaining
$10,000 of said bonds, and said city council shall take as a
further security for the payment of said bonds and interest, from
said M. J. O'Brien & Bro., to be deposited with the city
treasurer, their insurance policies, amounting to $14,500,
transferred to the said city, on their machinery, stock, etc. at
Volcano, and when their buildings on said lot are completed, and
the machinery thereon erected, then the said M. J. O'Brien &
Bro. shall have the whole insured to the amount of $15,000, and
keep the same so insured for the benefit and security of said city
on account of said loan."
At the same time, the city attorney presented to the council a
trust deed executed by "said O'Brien & Bro.," which was
accepted, and it was resolved
"that, upon the execution of the trust by M. J. O'Brien &
Bro., the clerk is authorized to issue immediately $10,000, part of
city bonds, as agreed upon by the resolution of the 22d of April,
1873."
The trust deed, which was executed by the two O'Briens and their
wives, and acknowledged by them on the 13th of May, 1873, and
recorded on the eighteenth of June, 1873, was in these words:
"This deed, made the 13th day of May, A.D. 1873, by M. J.
O'Brien and P. F. O'Brien, his wife, and W. S. O'Brien and Jane
C.C. O'Brien, his wife, parties of the first part, and Okey
Johnson, trustee, party of the second part, witnesseth, that for
and in consideration of one dollar in hand paid by the said trustee
to the parties of the first part, the receipt whereof is hereby
acknowledged, the said parties of the first part hereby grant unto
the party of the second part all, etc., of the following property,
to-wit: all that certain lot of ground situate on Kanawha Street,
in the City of Parkersburg, known as lot No. 80 on the plat of said
town, and being the same lot conveyed by Joanna M. Wait, guardian
of Betty C. Wait, and Joanna M. Wait in her own right, to the said
parties of the first part, by deed dated the 12th day of May, 1873,
and all the personal property mentioned in Schedule A, and hereunto
annexed
Page 106 U. S. 493
and made part and parcel of this deed, said property now
situated at Volcano, in the County of Wood, and valued at
$15,040.38, which said last-named property is permitted to remain
in the possession of the parties of the first part, and to be
removed from Volcano aforesaid and placed in the building or
buildings to be erected by said parties on the lot aforesaid, until
the same shall be required by the parties of the second part, upon
being made as hereinafter specified; that is to say, whereas an act
passed December 15, 1868, by the Legislature of West Virginia,
authorizing the Mayor and City Council of the City of Parkersburg
to lend its bonds for manufacturing purposes, to which act
reference may be had for a more explicit understanding of the
provisions, and whereas the parties of the first part have
negotiated with the said city for a loan of its bonds to the amount
of $20,000, according to the provisions set forth in an ordinance
passed by the said city council the 22d day of April, 1873, whereby
it is, among other things, provided that if the parties of the
first part shall punctually pay the interest on the aforesaid sum
of $20,000, and five percent of the principal for sixteen years,
the said parties of the first part shall be released from any
further payment, which said ordinance was authorized under a former
ordinance, dated September 6, 1870, to both of which ordinances
reference may be had for a fuller understanding thereof, and are
made part hereof, which negotiation for the aforesaid loan of
$20,000 of the bonds of the said city is made on the part of said
city pursuant to a recommendation in writing made by the trustees
of said loan, as provided in said of the legislature, to which
recommendation in writing reference may be had for a fuller
understanding thereof, and is made part hereof, in trust to secure
the faithful performance by the parties of the first part in their
payment of the aforesaid interest on said $20,000, and the payment
of the five percent of the principal, as specified in the aforesaid
ordinance passed the 22d day of April, 1873. And if any default
shall be made herein, then the party of the second part, as trustee
aforesaid, shall proceed to sell the property hereby conveyed
pursuant to the provisions of chapter 72 of the Code of West
Virginia, and the acts amendatory thereto."
Exhibit A, annexed to the trust deed, contained a list by items
of the personal property, with a valuation opposite each item, the
same being principally machinery and tools. Attached to it was an
affidavit made by M. J. O'Brien, setting
Page 106 U. S. 494
forth that M. J. O'Brien & Brother owned all the property
free of encumbrance, and that each item was worth the sum set down
opposite to it, and that the whole was then worth $15,000.
On the 10th of June, 1873, an order was adopted by the council,
reciting the statute, and the election, and the prior proceedings
of the trustees of the loan and of the council, and the
presentation of the deed of trust and the deposit of the $5,000
security, and of the insurance policies before provided for, and
then ordered that the said security was satisfactory, and that
$10,000 of the bonds of the city be delivered to M. J. O'Brien
& Brother "forthwith, under the conditions of and in accordance
with" the said act
"and the orders made September 6, 1870, and April 22, 1873, made
and intended to be made by authority of said act of legislature,
and to be controlled by and construed according to its
provisions,"
and further ordered that when Mrs. Wait should make the deed to
lot No. 80, the $5,000 security should be given up. Thereupon
$10,000 of the bonds were delivered to the O'Briens. Each bond was
a certificate of indebtedness for $500, payable to M. J. O'Brien
& Brother, or order, dated June 1, 1873, sealed with the seal
of the city and signed by the mayor and the clerk, payable June 1,
1893 at Parkersburg, with interest at the rate of six percent per
annum, payable semiannually, June 1st and December 1st, in the City
of New York. Coupons payable to bearer for each payment of interest
were attached. Each bond contained this statement: "This
certificate is issued by authority of the act of the General
Assembly of the State of West Virginia, passed December 15,
1868."
On the 9th of September, 1873, the city council passed the
following order:
"It appearing to the satisfaction of the council that M. J.
O'Brien & Brother have their buildings, which, when completed,
will cost more than $8,000, now up and ready to be roofed, and have
therefore complied with the recommendation of the manufacturers'
loan, and the former orders of the council in that respect, it is
ordered that as soon as Mrs. Joanna Wait, or some one for her,
shall deposit with the city treasurer bonds to the amount of
Page 106 U. S. 495
$8,000, or bank stock, with power of attorney to dispose of the
same, as collateral security that she will obtain within two years
from the 13th of May, 1873, the authority from the circuit court of
Wood County to make for and on behalf of her ward, Bettie C. Wait,
a deed to said M. J. O'Brien & Brother, for lot No. 80 in the
City of Parkersburg, that the Mayor of the City of Parkersburg is
directed to deliver, properly signed by himself and attested by the
clerk of the council, the remaining ($10,000) ten thousand dollars
of the bonds of the City of Parkersburg, as provided for by former
orders of this council."
The second lot of $10,000 of the bonds were thereupon issued to
M. J. O'Brien & Brother, the bonds being in the same form as
the others. No other proceedings of the city council appear as to
the issuing of the bonds.
The bonds were all of them endorsed in blank by M. J. O'Brien
& Brother, and were sold by them at 80 cents on the dollar,
$10,000 in June, 1873, and $10,000 in September, 1873. The
appellees are the owners of the entire $20,000 of bonds, and are
bona fide holders of them. The O'Briens paid to the city
the $600 of interest falling due December 1, 1873, and the city
paid the coupons due that day. The O'Briens paid no more. The city
paid the coupons which fell due in June and in December, 1874, and
in June and December, 1875. It paid no more.
The coupons which fell due June 1 and December 1, 1876, not
having been paid, the plaintiff, Isabella Brown, owning $5,000 of
the bonds, filed this bill on behalf of herself and all other
holders of the bonds who should unite in the suit, setting forth
the said Act of December, 1868, the election, the action of the
trustees of the loan and of the city council, the giving of the
security, the execution and recording of the deed of trust, and the
issuing of the first $10,000 of bonds. Her $5,000 of bonds are part
of those bonds. The bill sets forth the proceeding for the issuing
of the rest of the bonds and their actual issue. It avers that the
holders of all of the bonds are
bona fide holders for
value. The defendants in the suit are the City of Parkersburg, the
two O'Briens and their wives, and the assignee in bankruptcy of the
O'Briens.
In November, 1873, the O'Briens and their wives executed
Page 106 U. S. 496
to said Johnson a deed for said lot No. 80 and for another lot,
in trust to secure one Leach for his endorsement of a promissory
note of the O'Briens for $3,000, with power to sell the land in
case the note should not be paid. On the 9th of November, 1874,
Johnson sold lot No. 80 and its appurtenances at auction, under
said last-named trust deed, to the City of Parkersburg, and on the
eighth of December, 1874, executed to the city a deed of it, which
recited that the sale of the lot was "subject to a trust thereon in
favor of the City of Parkersburg for $20,000," and that the sale
was for $300, and conveyed the lot and its buildings and
appurtenances to the city, "subject to the lien of the said city
aforesaid."
The bill sets forth said sale and conveyance, and avers that the
city has, since said purchase, claimed said real estate as being
its property, and has rented it, and is now claiming it and
exercising to some extent rights of ownership over it; that after
the deed from the O'Briens to Johnson was executed they were
adjudged bankrupt, and their assignee in bankruptcy was permitted,
without objection on the part of the city, to take possession of
the movable tools and machinery covered by said deed; that said
chattels were sold by said assignee to various purchasers, and
became scattered and deteriorated in value; that some were sold
subject to the claim of the city, and others without such
reservation; that the city continued to pay the interest on the
bonds until the maturity of the coupons, which became due June 1,
1876, when it refused to pay them, and has paid no more, and
refuses to recognize the obligations of the bonds and coupons, on
the ground that they were issued by the city without lawful
authority, and that the city has neglected the real estate and the
improvements and fixed machinery on it, and the buildings are
unoccupied and unprotected, lying open to the weather and to
depredations, and no care is used in protecting the buildings and
the machinery, and many valuable parts of the machinery have thus
been lost. The bill alleges that the deed of trust to the city was
executed for the purpose of securing the holders of the bonds and
coupons, and they are the parties beneficially interested in the
same, and the city is a trustee of all the property mentioned in
the deed, for the holders of the bonds; that the city was
Page 106 U. S. 497
bound to care for the property and protect the title to it for
the benefit of the
cestuis que trust, and especially as it
had induced them to purchase the bonds, as well in reliance on the
deed as on the credit of the city; that the city was, as trustee,
bound to interpose to prevent the sale of the chattels by the
assignee in bankruptcy, and to place the property in the charge of
a responsible custodian, and protect it from depredation, and that,
in failing to exercise such care and in permitting such sale, the
city has violated the duties assumed by it from its acceptance of
the deed, and has become liable to account to the holders of the
bonds for all the loss and injury which has occurred to said real
estate and chattels by reason of such neglect, and that the owners
of the bonds are entitled to the interposition of a court of equity
for the care and protection of the property, and to a decree for
the sale of such of it as remains upon the premises mentioned in
the deed to the city, and for the sale of the real estate, and a
decree against the city requiring it to account for and pay over to
the holders of the bonds all such moneys as have been lost to them
from such neglect, and to pay to them any balance which may remain
due to them after applying all sums which may result from such
sales and accounting. The prayer of the bill, as originally filed,
is for the appointment of a receiver to take charge of the
property, and the appointment of a trustee to make sale of it, and
the distribution of the proceeds of sale among the owners of the
bonds and coupons, and that the city account for and pay over to
them the value of the chattels so lost or sold, and for such loss
as has resulted by reason of such neglect of duty on the part of
the city in the care of the property, and the rents and profits
received by the city from the property, and that the city and the
O'Briens pay to the owners of the bonds any deficiency in the
principal and interest thereof which may remain after the payment
of the sums resulting from the sales and accounting aforesaid.
The city answered the bill, setting up various defenses. One is
that a majority of the qualified voters of the city did not vote at
said election in favor of authorizing the issuing of bonds under
the act of 1868. Another is that the voters voted on the question
of authorizing the issue of bonds generally
Page 106 U. S. 498
under the act, and not on the question of issuing the particular
bonds. Another is that the issuing of said bonds had not been
authorized prior to the 22d of August, 1872, when said section 8 of
article 10 of the new Constitution of West Virginia became
operative; that said section governed in the issuing of said bonds,
and that they were issued in violation thereof, in that the payment
thereof was not provided for at the time of the issuing thereof, as
required by said section, and all questions connected with the same
were not first submitted to a vote of the people, as therein
required, and said bonds are void. Another is that the act of 1868
was in violation of the constitution of the state. Another is that
at the time of the passage of said act the city had, and now has,
no property out of which it could pay any such bonds, except such
funds as it is or may be authorized by law to raise by taxation.
Another is that the bonds were issued in aid of a private
enterprise, for individual profit, and not for a public purpose;
that it is in excess of the constitutional power of the legislature
of the state to authorize taxation for the purpose of paying said
bonds, unless that power was clearly conferred on it by the
constitution of the state; that no such power was conferred on it
by the constitution of the state in force at the time of the
passage of said act or the one now in force; that the said act is
void for want of power in the legislature to pass it, and that the
bonds issued under it are void. Another is that the bonds are void
because they were issued in violation of section 9 of article 10 of
the constitution of the state in force at the time they were
issued, which provides that the legislature may, by law, authorize
the corporate authorities of cities to assess and collect taxes for
corporate purposes; that said provision amounts to a prohibition
against assessing and collecting taxes for any other than a
corporate purpose, and that said bonds, being issued for a private
and not for a corporate purpose, are void. The answer alleges that
if any property covered by the deed of trust was sold by the
assignee in bankruptcy, it was sold by him subject to said deed of
trust. It denies the allegations of the bill as to the neglect of
the city to protect and care for the buildings and machinery. It
avers that it is not chargeable with the care of the property, but
that it has taken as good care of the same as
Page 106 U. S. 499
was possible under the circumstances, and has used all due
diligence to rent it. It denies that the deed of trust was executed
to secure the holders of the bonds and coupons, and denies that the
city was or is a trustee for them of the property covered by the
deed, and denies that it induced any person to take the bonds. It
avers that it is not competent for the city to act as trustee in
such a matter, wholly foreign to the purpose of its creation; that
it has paid out, as interest on the bonds and expenses attending
the issuing of them, and taxes on the property, more than it has
received from all sources on account of the property, and that the
plaintiff has a plain and adequate remedy in a court of law. It
denies the right of the complainant to any decree against it for
any sum in any event, whether the court shall deem the complainant
entitled to a sale of the property mentioned in the deed of trust
or otherwise. Finally, the answer says that if the court shall be
of opinion that it has any jurisdiction in the premises, or that
the complainant is entitled to resort to the property for the
payment of the bonds or the interest thereon, the city is willing
to submit to any order to be made by the court in relation to the
disposition of the property, upon the court pronouncing the bonds
void and the city not liable on account thereof, but it prays that
in any order to be made the city may be decreed to receive out of
the proceeds of any sale of the property the sum it has so expended
above its receipts.
The bill was taken as confessed as to all the defendants except
the city. The holders of all the bonds were made parties
complainant. Proofs were taken on both sides. The bill was then
amended so as to aver also that the city is estopped, by her
conduct, to deny the validity of her indebtedness according to the
tenor and effect of the bonds and coupons, and so as to add to the
prayer for relief the following:
"or that the said City of Parkersburg may be decreed to pay the
said bonds and coupons according to the tenor thereof, and
especially that a decree may be passed for the payment of the
overdue coupons upon the said bonds."
The bill was further amended so as to allege that even if the
city was not chargeable as trustee from the time of the execution
of the deed of trust, it is chargeable with all the duties and
liabilities of a trustee, in regard to all
Page 106 U. S. 500
of the property, from the respective times at which it actually
took possession of the same, and the grantee in the deed of trust
was made a defendant and appeared. The case was brought to a
hearing, and a decree was made, which states that the court is of
the opinion that the city is indebted for the bonds and coupons and
is responsible for their payment according to their tenor and
effect; that the $20,000 of bonds are held by the several
complainants in amounts severally specified, and that there are due
to them severally certain specified sums for interest coupons due
and unpaid upon the bonds (being interest from and including June
1, 1876, to and including June 1, 1879), with interest from the
date of the decree, and then decrees that the complainants are
entitled to have the bonds held by them respectively paid by the
city at the maturity of the same, with interest payable at the
times and in the manner stated in the interest coupons attached to
the bonds, and that the complainants respectively recover against
the city for the several sums so set out as due for interest on the
bonds, and interest on the same from the date of the decree, and
costs, and have execution therefor. From this decree the city has
appealed to this Court.
The bill, as filed, asked for equitable relief, and sought to
charge the city as a trustee and to reach the property covered by
the deed of trust. The relief granted by the decree was a simple
money judgment against the city for the interest due on the bonds
at the date of the decree, based on the legal liability of the city
to pay the bonds and coupons. For this there was a plain, adequate,
and complete remedy at law in each bondholder if the city was thus
liable. So that the decree made could not be sustained in any
event.
But we are of opinion that within the principles decided by this
Court in the case of
Loan Association v.
Topeka, 20 Wall. 655, the bonds in question here
are void. The act of 1868 authorizes the bonds to be issued as the
bonds of the city. The principal and interest are to be paid by the
city. The bonds are to be lent to persons engaged in manufacturing.
Those persons are to pay the interest on the "loans" semiannually
to the treasurer of the city, and are also to pay annually to the
city five percent of the principal, to go into the sinking
Page 106 U. S. 501
fund of the city, till the "loans" are paid in full. No fund is
provided or designated out of which the city is to pay the
principal or interest of the bonds. What the "borrower," as the
acts calls him, is to so pay to the city, is not such a fund. The
city is to pay the principal and interest of the bonds, according
to their tenor, whether the "borrower" pays the city or not. No
other source of payment being provided for the city, the
implication is that the city is to raise the necessary amount by
taxation. It has, by section 15 of the Act of March 17, 1860,
authority to levy and collect an annual tax on the real estate and
personal property and tithables in the city, and upon all other
subjects of taxation under the revenue laws of the state, which
taxes are to be for the use of the city. A legitimate use of the
moneys so raised by taxation is to pay the debts of the city.
Taxation to pay the bonds in question is not taxation for a public
object. It is taxation which takes the private property of one
person for the private use of another person. There is, in the act
of 1860, a provision that the tax shall not exceed a given
percentage of the assessed value of the property, or so much on
every tithable, but it does not appear that a tax for these bonds
would exceed the limit. Therefore the inference that it was
intended by the act of 1868 that such taxation as should be
necessary to pay the bonds should be resorted to, must remain in
full effect. There was no provision in the Constitution of West
Virginia of 1862 authorizing the levying of taxes to be used to aid
private persons in conducting a private manufacturing business.
This being so, the legislature had no power to enact the act of
1868.
There having been a total want of power to issue the bonds
originally, under any circumstances, and not a mere failure to
comply with prescribed requirements or conditions, the case is not
one for applying to the city, under any state of facts, any
doctrine of estoppel or ratification, by reason of its having paid
some installments of interest on the bonds (
Loan Association v.
Topeka, ubi supra,) or by reason of any of the acts of its
officers or agents in dealing with the property covered by the deed
of trust. No such acts can give validity to the statute or to the
bonds, however they may affect the status of the property dealt
with or the relation of the city to such property.
Page 106 U. S. 502
But it is contended by the appellees that, independently of the
original validity of the bonds, the city is liable to pay them
because it misled and prejudiced their holders and prevented them
from resorting to the security, or because it received the full
value of the bonds in consideration of paying them. It is urged
that if the bonds were void the city had no right to meddle with
the security. There has, however, never been any impediment to a
resort by the holders of the bonds to proceedings to have the
property covered by the deed of trust administered for and
appropriated to their benefit, as representing the O'Briens, in
respect to such property, and as subrogated to the rights of the
O'Briens to have the property devoted to the payment of the
principal and interest of the bonds, in view of their being void.
The only misleading or prejudice was that the holders of the bonds,
mistaking the law, supposed them to be valid obligations of the
city. As to the receipt of property by the city, it received
certain property, but it did not thereby enter into any obligation,
even if it could have done so, to pay these bonds. The evidence
shows that the city has endeavored, in proper way and with a due
regard to the interests of the O'Briens and of those interested
under the O'Briens, to preserve and protect the property and
realize from it as much as could be realized. The bill in this case
was filed in December, 1876. The case was heard in September, 1879.
The bill prayed for a receiver of the property, yet none was
appointed or applied for, so far as appears. The sales by the city
of movable property, which are complained of, took place after this
suit was brought. The plaintiffs have chosen to leave all the
property in the hands of the city up to this time. The city has
acted in good faith, and with reasonable discretion, in regard to
the property, throughout. No valuation placed upon the property,
real or personal, or any part of it, by way of estimate or opinion
at the time the city took possession of it, or at any time since,
can be taken, on the evidence in this case, as the measure of any
liability of the city on the bonds or in respect of the property.
Neither the O'Briens nor the plaintiffs interposed to control the
property, but left the city to control and manage it. There are not
about the acts of the city, in regard to the property, any elements
which can constitute
Page 106 U. S. 503
the city a trustee of the property, with the duties imposed on a
trustee. No trust arose in favor of the plaintiffs out of the deed
of trust to Johnson. The trust thereby created was one to secure
the payment by the O'Briens to the City of the interest on $20,000
and of the principal of that sum. The plaintiffs could not enforce
that trust in the place of the city. It was a void trust, because
the consideration of it was the issuing of the void bonds. Nor did
the purchase by the City of the property which it bought subject to
the trust validate the original trust or create a new one.
But notwithstanding the invalidity of the bonds and of the
trust, the O'Briens had a right to reclaim the property and to call
on the city to account for it. The enforcement of such right is not
in affirmance of the illegal contract, but is in disaffirmance of
it, and seeks to prevent the city from retaining the benefit which
it has derived from the unlawful act. 2 Com.Cont. 109. There was no
illegality in the mere putting of the property by the O'Briens in
the hands of the city. To deny a remedy to reclaim it is to give
effect to the illegal contract. The illegality of that contract
does not arise from any moral turpitude. The property was
transferred under a contract which was merely
malum
prohibitum, and where the city was the principal offender. In
such a case, the party receiving may be made to refund to the
person from whom it has received property for the unauthorized
purpose, the value of that which it has actually received.
White v. Franklin Bank, 22 Pick. 181;
Morville v.
American Tract Society, 123 Mass. 129;
Davis v. Old Colony
Railroad, 131 Mass. 258, 275, and cases there cited. The
O'Briens having endorsed and sold the bonds, the holders of the
bonds succeeded to such right of the O'Briens as an incident to the
ownership of the bonds. The O'Briens suffered the city to take
possession of and administer the property. They were made parties
to this suit originally and have made no defense to it. The right
which the plaintiffs so have to call on the city to render an
account of the property is one which can be properly adjudicated in
this suit in equity. It involves the taking of an account, the sale
under the direction of the court of what remains of the property,
and the ascertainment of the proper charges to be allowed to
the
Page 106 U. S. 504
city against the moneys it has received and against the proceeds
of sale. There can be no doubt that the city is entitled to be
credited the sums it has paid in good faith to acquire, protect,
preserve, and dispose of the property, and for insurance and taxes,
and the amount it has paid in paying the coupons it has paid, and
that it is to be charged with what it has received. But it is not
to be charged with any sum for loss of or damage to or depreciation
of the property. The remaining property must be sold under the
direction of the court below, and an account be stated on the
foregoing principles, and the net proceeds of the sale and the net
amount of money, if any, in the hands of the city, must be
distributed among the plaintiffs. The decree of the circuit court
must be reversed, with costs, and the case be remanded to that
court, with instructions to enter a decree declaring that the city,
in issuing the bonds, exceeded its lawful powers, and that they
cannot be enforced as obligations of the city, and providing for a
sale of the remaining property, real and personal, under the
direction of the court, and the taking of an account between the
city and the property on the basis stated in this opinion, and the
application in conformity with this opinion of the net proceeds of
the sale and of the net amount of money, if any, remaining in the
hands of the city received from the O'Briens, or from the sales by
it of any of the property received by it, and for such further
proceedings in the case as may be in conformity with this
opinion.
We have not deemed it necessary to consider the question whether
the bonds were void as having been issued in violation of section 8
of article 10 of the Constitution of West Virginia of 1872, or the
question whether the act of 1868 required a vote by the voters of
the city on each loan of bonds to be made, or the question whether
the act of 1868 was observed in other respects in issuing the
bonds.
Decree reversed.