The negotiable security of a municipal corporation, invalid in
the hands of the original holder by reason of an irregularity in
its issue to which be was a party, but which becomes valid in the
hands of an innocent purchaser for value without knowledge or
notice of the irregularity, remains valid when acquired by another
purchaser for value, who was no party to the irregularity, but who
at the time of his purchase has knowledge of the infirmity and of a
pending suit against the original holder and others to have the
whole issue declared invalid by reason thereof.
The litigations respecting the Scotland County bonds in the
state courts and in the courts of the United states reviewed.
In the absence of a provision to the contrary, overdue coupons
bear interest at the legal rate in the place where they are
payable.
This action was commenced in the year 1876 to recover on coupons
issued by the County of Scotland, in Missouri, in payment of a
subscription to the stock of the Missouri, Iowa, and Nebraska
Railway Company. Answer was made. In 1879, an amended complaint was
filed, and, issue being joined, such proceedings were had in the
cause that judgment was entered for the plaintiff. To this judgment
the defendant sued out a writ of error. Argument on this was had at
October term, 1884, which resulted in the remand of the cause for a
new trial (
112 U. S. 112 U.S.
183). After the remand an amended answer was filed. Issue was
joined and trial had, which resulted in a verdict for the plaintiff
for X46,944, and judgment on the verdict. To this judgment the
defendant sued out this writ of error. The case is stated as
follows by the court in its opinion:
This writ of error brings up for review a judgment against the
County of Scotland, in the State of Missouri, for the amount of
certain coupons of bonds, bearing date September 1, 1870, and
purporting to have been issued by that county to the Missouri, Iowa
and Nebraska Railway Company, a corporation
Page 132 U. S. 108
created by the consolidation of the Alexandria and Nebraska City
Railroad Company, of Missouri (formerly known as the Alexandria and
Bloomfield Railroad Company), with the Iowa Southern Railway
Company of Iowa. The coupons are payable to bearer at the Farmers'
Loan and Trust Company, New York, while the bonds are payable to
the above consolidated company, or bearer at the same place, on the
31st of December, 1895, with interest thereon from December 31,
1870, payable annually in that city at the rate of eight percent
per annum. Each bond recites that it is issued under and pursuant
to an order of the county court for subscription to the stock of
the Missouri, Iowa and Nebraska Railway Company,
"as authorized by an act of the General Assembly of the State of
Missouri, entitled 'An act to incorporate the Alexandria and
Bloomfield Railroad Company,' approved February 9, 1857."
It appeared in proof that the county court, in conformity with
the petition of taxpayers and residents, made an order on the 9th
of August, 1870, for the subscription of $200,000 to the stock of
the Missouri, Iowa, and Nebraska Railway Company, payable in coupon
bonds of the above kind, and at the same time designated an agent
with authority to make the subscription upon the books of the
company, to represent the county at the meetings of stockholders,
and to receive dividends on its stock. The order stated that the
subscription was upon certain specified terms and conditions, among
which was one providing for the delivery to the railway company of
$100,000 of the bonds when the road was
"graded, bridged, and tied, the track laid, and the cars running
thereon from Alexandria, Missouri, to a permanent depot, located
within one-half mile of the courthouse in Memphis,"
and for the delivery of the remaining $100,000 of the bonds when
the road was completed from Memphis to the west or north line of
the county, and the cars were running over it. By the same order,
the county attorney was directed to have the bonds printed, the
presiding justice of the county to sign them, and the clerk to make
proper attestation of his signature.
At the same time, Charles Mety was appointed trustee for
Page 132 U. S. 109
the county, and charged in that capacity with the duty of
receiving the bonds from the county clerk as soon as they were
issue, and of delivering them to the railway company, in exchange
for stock, upon its complying with the conditions specified in the
order for the subscription. The trustee was required to give bond
in the sum of $300,000 for the faithful performance of his
trust.
On the 11th of September, 1871 -- the road being then nearly
completed to Memphis, the county seat -- Levi Wagner and other
taxpayers and citizens brought a suit in the Circuit Court of
Scotland County to perpetually enjoin Mety from delivering the
bonds or coupons to the railway company. It was alleged as a
principal ground for such relief that the subscription made by the
county to pay which the bonds had been executed was without proper
legal authority, and therefore null and void. The defendants in
that suit were Mety, the county trustee and custodian of the bonds;
Fullerton, county treasurer; Dawson, Cooper, and Marguis, justices
of the county, and sitting as the county court at the time the
subscription was made, and the Missouri, Iowa, and Nebraska Railway
Company. A few days prior to September 20, 1871, Mety went to
Warsaw, Illinois, taking with him $100,000 of the bonds, to be
there delivered to the railway company upon completion of the road
to Memphis. He and the justices of the county court had then heard
of the institution of the Wagner suit, and he went to Warsaw, under
the direction of the members of that body, in order to evade the
service upon him of the proposed injunction. While there, he
received from Dawson and Cooper, a majority of the justices
composing the county court, an official communication, under date
of September 20, 1871, in these words:
"The iron is laid on the Missouri, Iowa, and Nebraska Railway to
the depot and the building is up. The company having complied with
all the requirements, you will please deliver them the first
hundred thousand dollars of the county's subscription and receive
stock for the same."
He complied with this order by delivering the bonds at Warsaw,
on the same day, taking from the company, as suggested by the
justices, its bond
Page 132 U. S. 110
indemnifying him against all damages, costs, expenses, etc.,
which he, as trustee for the county, might incur "by reason of
certain injunction suits now pending in the Scotland County Circuit
Court." On the 11th of December, 1871, the county court, by an
order entered upon its record, so modified the previous order of
August 9, 1870, as to authorize Mety to deliver to the company the
second installment of $100,000 of bonds, upon the execution to him,
as trustee, and to the county, of an indemnifying bond containing
certain specified provisions. Such an obligation was immediately
executed by the company, and the second installment of bonds was
thereupon delivered to it by the court while in session at the
county seat.
The Wagner suit was taken, by change of venue, to the Circuit
Court of Shelby County, Missouri, by which a final decree was
rendered on the second of June, 1874, declaring the bonds void for
the want of legal authority in the Scotland County court to make
the subscription of stock to the Missouri, Iowa, and Nebraska
Railway Company, and ordering them to be surrendered for
cancellation. This decree was affirmed by the Supreme Court of
Missouri at its October term, 1878. That judgment of affirmance
proceeded mainly upon the ground that, as the privilege given by
its charter of 1857 to the Alexandria and Bloomfield Railroad
Company (afterwards the Alexandria and Nebraska City Railroad
Company, Laws of Missouri, 1865-66, p. 222) of having municipal
subscriptions without a previous vote of the people was not
exercised prior to the formation, by consolidation, in 1870, of the
Missouri, Iowa, and Nebraska Railway Company, such privilege
passed, if at all, to the consolidated company, subject to the
prohibition in the state constitution of 1865 against municipal
subscriptions to corporations or companies, except upon the
previous sanction of two-thirds of the qualified voters at a
regular or special election for that purpose.
Wagner v.
Meety, 69 Mo. 150. That ruling, the court said, was in harmony
with its previous decision in
State v. Garroutte, 67 Mo.
445.
Page 132 U. S. 111
MR. JUSTICE HARLAN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
The question of power in the county court to subscribe to the
stock of the Missouri, Iowa, and Nebraska Railway Company without a
previous vote of the people, and to issue bonds in payment of its
subscription, was directly presented and determined, upon full
consideration, in
County of Scotland v. Thomas,
94 U. S. 682,
decided in 1876. The coupons there in suit were of the same issue
of bonds as those from which the coupons in the present suit were
detached. It is true that that case was determined upon demurrer to
the complaint. But that fact does not weaken the force of the
decision so far as it bears upon the question of legal authority in
the county court to make the subscription. The record and opinion
in that case show that it was stipulated between the parties that
the question of subscribing to the stock of the Missouri, Iowa, and
Nebraska Railway Company had never been submitted to a vote of the
qualified voters of Scotland County, and that, in determining the
demurrer, the Court should consider that fact as if it had been
averred in the complaint. It was also agreed that the Court should
consider as facts admitted the articles of consolidation between
the Iowa Southern Railway Company and the Alexandria and Nebraska
City Railroad Company, and the above orders of the County Court of
Scotland County. It was held that the privilege given to the
Alexandria and Bloomfield Railroad Company, by its charter of 1857,
of receiving county subscriptions, was not extinguished by the
subsequent consolidation in 1870 of that company with other
companies, but passed with its other rights and privileges into the
new condition of existence arising from such consolidation; that in
making the subscription in that case, which is the identical
subscription here in question, the county court acted
"as the representative authority of the county itself,
officially invested with all the discretion necessary to be
exercised under
Page 132 U. S. 112
the change of circumstances brought about by the
consolidation;"
that the subscription was binding upon the county, and that the
bonds issued in payment were valid obligations. It was also
distinctly ruled, in accordance with
County of Callaway v.
Foster, 93 U. S. 567, and
with previous decisions of the Supreme Court of Missouri, that the
prohibition in the state constitution of 1865 of municipal
subscriptions to the stock of, or loans of credit to, companies,
associations, or corporations, without the previous assent of
two-thirds of the qualified voters at a regular or special election
had the effect to limit the future exercise of legislative power,
but did not take away any authority granted before that
constitution went into operation. The doctrines of that case were
reaffirmed in
County of Henry v. Nicolay, 95 U. S.
619,
95 U. S. 624
(1877);
County of Schuyler v. Thomas, 98 U. S.
169,
98 U. S. 173
(1878);
County of Cass v. Gillett, 100 U.
S. 585,
100 U. S. 592
(1879); and
County of Ralls v. Douglass, 105 U.
S. 728,
105 U. S. 731
(1881) -- all cases arising in the State of Missouri and relating
to municipal bonds issued under legislative authority granted
before the adoption of the Constitution of 1865.
See also
Menasha v. Hazard, 102 U. S. 81;
Green County v. Conners, 109 U. S. 104, and
Livingston County v. Portsmouth Bank, 128 U.
S. 102. In
County of Ralls v. Douglass,
attention was called to
State v. Garroutte, 67 Mo. 443,
and
State v. County Court, 72 Mo. 329, holding views
different as well from those announced by this Court in the cases
above cited, as those previously announced by the state court in
State v. Macon County Court, 41 Mo. 453;
Kansas City
&c. Railroad Co. v. Alderman, 47 Mo. 349;
Smith v.
Clark County, 54 Mo. 58, 70, and
State v. County Court of
Sullivan County, 51 Mo. 522. But this Court declined to
reconsider its former decisions to the prejudice of
bona
fide holders of bonds issued prior to the change of decision
in the state court. The bonds the coupons of which are here in suit
were all issued in 1871 at which time the highest court of Missouri
held that the above constitutional provision as to municipal
subscriptions, or the loaning of municipal credit to corporations
without a previous vote of the people was intended
Page 132 U. S. 113
(to use the language of County of
Ralls v. Douglass)
"as a limitation on future legislation only, and did not operate to
repeal Enabling Acts in existence when the Constitution took
effect."
We pass to the consideration of the controlling question in the
case, namely, whether Hill's rights, as a holder of these coupons
for himself and others, are affected by the final decree in the
suit instituted in the state court by Wagner and others.
At the first trial of the present action, the county offered to
read in evidence the record of the Wagner suit in support of its
plea averring, among other things, that Hill and each previous
holder of these coupons, and full actual notice of the institution
and object of that suit. It also offered to read in evidence the
indemnifying bond of September 21, 1871, and also to prove by Mety,
the trustee of the county, that he had actual notice of the
pendency of the Wagner suit at the time he delivered the bonds to
the Missouri, Iowa, and Nebraska Railway Company. There was also an
offer to prove that the railway, company "and each subsequent
holder" received the bonds with actual notice of the pendency of
that suit. The circuit court excluded all of this evidence. This
Court held that such exclusion was improper, and for that reason
the judgment was reversed and the cause remanded for a new trial.
Scotland County v. Hill, 112 U. S. 183.
Chief Justice Waite, delivering the opinion of the Court,
said:
"The suit was about the bonds and the liability of the company
thereon. The decree was in accordance with the prayer of the bill,
and certainly concluded both Mety and the railroad company. After
the rendition of this decree, the company could not sue and recover
on the bonds, because, as between the company and the county, it
had been directly adjudicated that the bonds were void, and of no
binding effect on the county. But it is equally well settled that
the decree binds not only Mety and the company, but all who bought
the bonds after the suit was begun, and who were chargeable
Page 132 U. S. 114
with notice of its pendency, or of the decree which was
rendered. The case of
County of Warren v. Marcy,
97 U. S.
96, decides that purchasers of negotiable securities are
not chargeable with
constructive notice of the pendency of
a suit affecting the title or validity of the securities, but it
has never been doubted that those who buy such securities from
litigating parties, with
actual notice of the suit, do so
at their peril, and must abide the result the same as the parties
from whom they got their title. Here, the offer was to prove
actual notice not only to the plaintiff when he bought,
but to every other buyer and holder of the bonds from the time they
left the hands of Mety, pending the suit, until they came to him.
Certainly if these facts had been established, the defense of the
county, under its fourth plea, would have been sustained, and this,
whether an injunction had been granted at the time the bonds were
delivered by Mety or not. The defense does not rest on the
preliminary injunction, but on the final decree by which the rights
of the parties were fixed and determined."
The Court also said:
"It is a matter of no importance whether the decision in the
Wagner suit was in conflict with that of this Court in
Scotland
County v. Thomas, supra, or not. The question here is not one
of authority, but of adjudication. If there has been an
adjudication which binds the plaintiff, that adjudication, whether
it was right or wrong, concludes him until it has been reversed or
otherwise set aside in some direct proceeding for that purpose. It
cannot be disregarded any more in the courts of the United States
than in those of the state."
It appears from the bill of exceptions taken at the last trial,
resulting in the judgment now before us for review, that the county
sought by evidence introduced in its behalf to support the charge
of actual notice of the Wagner suit upon the part as well of Hill
as of each previous holder of the bonds, the coupons of which are
here in suit. There was proof by the plaintiff tending to show that
the bonds delivered by Mety to the railroad company were passed by
that corporation to the company that built the road, in payment for
construction, and that they were sold, for value, by the latter to
various parties in different parts of the country, who had no
notice whatever
Page 132 U. S. 115
of the institution or object of the Wagner suit. There was also
evidence tending to show that the parties owning the coupons
immediately before they were delivered to Hill for himself, and for
others whom he represented, were all purchasers for value, without
notice of the injunction suit, or of any infirmity in the
bonds.
The county asked an instruction to the effect that
"if at the time or times of making purchases of either of the
coupons in this suit declared upon, William Hill the plaintiff, had
actual knowledge of the pendency of or judgment in case of Levi J.
Wagner
et al. v. Charles Mety et al., and if the jury so
find, they are instructed that as to any such coupon purchased by
plaintiff, whether for himself or as agent for other persons, no
recovery of judgment can be herein had."
The court refused to so instruct the jury, but instructed them
in substance that the ownership of the coupons by any prior holder,
under such circumstances as would protect that holder against any
defense by the county, entitled Hill to recover even if he, when
afterwards purchasing for himself or others, had knowledge of the
pendency of the Wagner suit. That this was the meaning of the court
is quite clear from the following extracts from its charge to the
jury:
"This paper is valid in the hands of a party who received it for
value without actual notice of the pendency of the suit of Wagner
and others; but if he and each intermediate party, from the first
delivery of these bonds and coupons, also had notice of such suit
or other infirmity, then no recovery can be had. . . . If the
obligations sued on were duly executed, as above mentioned, and
delivered by said Mety, and were thereafter purchased for value by
the plaintiff from persons who had acquired the same for value
without notice of said suit, or of any fraud in the execution and
delivery of the same, as above stated, then, as to such
obligations, the plaintiff is entitled to recover. On the other
hand, if the plaintiff, and each of the persons through whom he
derived title, had actual notice of said Wagner suit, or of the
delivery of said obligations by Mety to escape said suit, known to
be about to be instituted, then, as to such of said obligations,
there can be no recovery. . . . One link broken in the chain breaks
the chain. "
Page 132 U. S. 116
As there was no evidence tending to show that Hill was a party
to the scheme devised by the county officers and the railway
company for the delivery of the bonds to the latter before the
injunction suit should be ripe for a decree, we are of opinion that
the court did not err in its instructions to the jury.
The bonds were delivered to the railway company at the office of
the bank in Warsaw, Illinois, of which Hill was president. And it
is perhaps true that Hill had then heard of the Wagner suit, and
knew or suspected that Mety's purpose in bringing the bonds to
Warsaw was to deliver them to the company before the injunction
could be served upon him. But he had no connection with the
conspirators, nor did he or any of the parties represented by him
have at that time, any interest in the coupons. It is said that the
construction company received the bonds with actual notice, upon
the part of one of its chief officers, of the injunction suit. But
there can be no claim that any of the holders of the coupons
intermediate between the construction company and Hill had any such
notice. Be that as it may, the question as to such notice was
properly submitted to the jury.
The principles of law by which this question must be determined
are well settled. In
Commissioners of Douglas County v.
Bolles, 94 U. S. 104, which
involved the rights of parties claiming to be
bona fide
holders of certain municipal bonds issued to a railroad
corporation, and by it passed to the contractor who built its
track, the Court, after observing that the plaintiffs could call to
their aid the fact that their predecessors in ownership were
bona fide purchasers, said:
"And still more, the contractor for building the railroad
received the bonds from the county in payment for his work, either
in whole or in part, after his work had been completed. There is no
pretense that he had notice of anything that should have made him
doubt their validity. Why was he not a
bona fide purchaser
for value? The law is undoubted that every person succeeding him in
the ownership of the bonds is entitled to stand upon his
rights."
In
Cromwell v. County of Sac, 96 U. S.
51,
96 U. S. 59, it
was said that, with some exceptions that have no relevancy
here,
"the rule has been too long settled to be
Page 132 U. S. 117
questioned now that whenever negotiable paper has passed into
the hands of a party unaffected by previous infirmities, its
character as an available security is established, and its holder
can transfer it to others with the like immunity. His own title and
right would be impaired if any restrictions were placed upon his
power of disposition."
So, in
Roberts v. Lane, 64 Me. 108, 111, it was said
that
"if any intermediate holder between the plaintiff and defendant
took the note under such circumstances as would entitle him to
recover against the defendant, the plaintiff will have the same
right, even though he may have purchased when the note was overdue,
or with a knowledge of its infirmity, as between the original
parties."
See also Montclair v. Ramsdell, 107 U.
S. 147,
107 U. S. 159;
Porter v. Pittsburg Steel Co., 122 U.
S. 267,
122 U. S. 283;
Mornyer v. Cooper, 35 Ia. 257, 260;
Kost v.
Bender, 25 Mich. 516; Byles on Bills 119, 124.
It is objected that there was error in allowing interest at the
rate of seven percent upon the coupons after their maturity. Such
allowance was proper for the reason that the coupons (which, as
well as the bonds, were silent as to the rate of interest after
maturity) were made payable in New York, where the rate as then
established by law was seven percent. Rev.Stats. N.Y. 771, Part 2,
c. 4, Title 3, § 1; Act of June 20, 1879, Laws of 1879, c. 538, p.
598. In
Bank of Louisville v. Young, 37 Mo. 398, 407, the
rule was recognized that "interest is to be paid on contracts
according to the law of the place where they are to be performed;
where interest is expressly or impliedly to be paid."
Andrews v.
Pond, 13 Pet. 65,
38 U. S. 73,
38 U. S. 77-78;
Story's Conflict of Laws § 291. In respect to interest on the
amount for which judgment was rendered, we are of opinion that the
law of Missouri governs, and the judgment must bear only six
percent interest. 1 Rev.Stats.Missouri 1879, §§ 2723, 2725.
The judgment of the court below is affirmed, to bear
interest from the date of its rendition at the rate of six percent
per annum. The objection that some of the coupons included in the
present judgment were in fact included in former judgments against
the county is without foundation.
