The implied power of a municipal corporation to borrow money to
enable it to execute the powers expressly conferred upon it by law,
if it exists at all, does not authorize it to create and issue
negotiable securities to be sold in the market and to be taken by a
purchaser freed from equities that might be set up by the
maker.
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 be set up by the maker of it, are essentially
different transactions in their nature and legal effect.
A municipal corporation in Indiana issued its negotiable bonds
having ten years to run, to the amount of $20.000, the proceeds to
be used to aid in the construction of a school house, and sold them
in open market. When they matured, a new issue of like bonds to the
amount of $21,000 was made, which were sold in open market, and a
part of the proceeds converted by a trustee of the corporation to
his own use.
Held that the new issue was void for want of
authority, and that the municipality was not estopped from setting
up that defense.
This was an action at law by Abner L. Merrill, a citizen of
Massachusetts, against the Town of Monticello, in the State of
Indiana, upon certain bonds and coupons issued by the town and
purchased by the plaintiff in open market. The bonds and coupons
were in form like the following:
"
United States of America"
"
No. 1 State of Indiana $100"
"
Funding Bond of the Town of Monticello"
"Ten years after date, the Town of Monticello, in the County of
White, State of Indiana, promises to pay to the bearer at the
Importers' and Traders' National Bank, New York, one hundred
dollars in gold, with interest thereon at the rate of seven percent
per annum, payable annually, in gold at the same place, upon
presentation of the proper coupon hereto
Page 138 U. S. 674
attached, without any relief whatever from the valuation or
appraisement laws of the State of Indiana. The principal of this
bond shall be due and payable at the option of the holder, on the
nonpayment, after due presentation, of any of said coupons, for
ninety days after the maturity thereof. This bond is one of a
series of $21,000, authorized by the said town by an ordinance
passed by the board of trustees thereof on the thirteenth day of
May, 1878, for the purpose of funding the indebtedness of the said
town."
"In witness whereof, the Board of Trustees of the Town of
Monticello have caused this bond and the coupons thereof to be
signed by their president and clerk, and the seal of the town to be
affixed hereto at the said Town of Monticello, this twentieth day
of May, 1878."
"R. W. CHRISTY,
President"
"Attest: F. BOSINGER,
Clerk"
"
[Copy of coupon]"
"The Town of Monticello, Indiana, will pay the bearer, in gold
coin, seven dollars, without relief from valuation or appraisement
laws of the State of Indiana at the Importers' and Traders'
National Bank, New York, on the twentieth day of May, 1880, being
one year's interest on bond No. 1."
"R. W. CHRISTY,
President"
"Attest: F. BOSINGER,
Clerk"
The coupons numbered 2, attached to each bond, having been
presented for payment when due at the place specified therein, and
payment having been refused, the plaintiff, as the holder of 143 of
the bonds with coupons attached, elected to declare the principal
sum due, in accordance with the terms of the bonds, and
accordingly, on the 1st of July, 1881, brought this action to
recover that amount.
A demurrer to the defendant's answer having been sustained, it
filed an amended answer, in substance as follows: At the time the
bonds in suit were issued, the defendant was, and still is, a
municipal corporation or town, duly organized under the laws of
Indiana, in pursuance of a statute of that state passed June 11,
1852. On the 24th of June, 1869, a petition was presented to the
board of trustees of the town by
Page 138 U. S. 675
the school trustees praying for the issue of the bonds of the
town to aid in building a schoolhouse, and on the same day the
trustees of the town passed an ordinance directing that there be
issued to the school trustees $20,000 worth of coupon bonds, of the
denomination of $100 each, bearing ten percent interest, payable
annually, which bonds, running ten years, were issued by the town
May 1, 1869, and were afterwards sold in open market. The principal
of them had not been paid, and they constituted the only
indebtedness of the town, when, on the 11th of May, 1878, the
following petition, signed by the owners of taxable property in the
town, was presented to the town trustees:
"We, the undersigned, citizens of the Town of Monticello,
Indiana, and owners of the taxable property therein, respectfully
petition that you, as trustees of said town, contract a loan for
said town for the purpose of paying the indebtedness thereof in the
sum of twenty-one thousand dollars."
On the same day, the board of town trustees passed and entered
of record the following ordinance:
"Be it ordained by the board of trustees of the Town of
Monticello, Indiana, that said town issue bonds in the sum of
twenty-one thousand dollars, in denominations of one hundred
dollars, bearing interest at the rate of seven percentum per annum,
payable in gold, to provide the means with which to pay the
indebtedness of said town. And be it further ordained that when
said bonds are issued, they be placed in the hands of J. C. Wilson,
a member of the board of trustees, for negotiation and sale. And be
it further ordained that said bonds shall not be sold at a price
less than ninety-four cents on the dollar."
In pursuance of this ordinance, on the 20th of May, 1878, there
were issued coupon bonds of the town to the amount of $21,000,
bearing 7 percent interest, payable annually, and due in ten years,
being the same bonds, a large amount of which are involved in this
action. After the bonds were issued, they were delivered to said J.
C. Wilson, who sold them, and converted the proceeds thereof to his
own use, the town not receiving any benefit therefrom.
Page 138 U. S. 676
The answer further allege that on the 20th of May, 1878, when
these bonds were issued, there was no law of the State of Indiana
which authorized the trustees of an incorporated town in that state
to issue its bonds for the purpose of funding its indebtedness, or
to issue its bonds for negotiation and sale for the purpose of
paying its indebtedness, or of raising money to pay its
indebtedness, and that at the date last above mentioned the
defendant was an incorporated town, organized under the general law
of the state for the incorporation of towns having a population of
twelve hundred inhabitants.
A general demurrer to the amended answer, as not stating facts
sufficient to constitute a good defense to the complaint, was
overruled by Judge Gresham in December, 1882, 14 F. 628, and the
plaintiff then filed a reply, that part of it material to this
consideration being, in substance, as follows: after admitting the
main facts stated in the answer respecting the issue and sale of
the bonds of 1869, and also as to the issue of the bonds of 1878,
here in suit, it was alleged that the bonds in suit were legal,
having been authorized by an act of the state legislature passed
March 3, 1873; that the town was without means to pay its
indebtedness except by the issue of its bonds, the tax levies
permitted by law being insufficient for that purpose; that J. C.
Wilson, as the agent of the town, under and by virtue of the
authority conferred upon him by the aforesaid ordinance, negotiated
the bonds in open market, and received from their sale the sum of
$19,680.17, a part of which sum, to-wit, $6,618.10, he deposited in
a bank in that town, and absconded with the remainder; that the
town, by suit instituted for that purpose, recovered the aforesaid
amount which had been deposited in the bank, and appropriated it to
its own use, and that the plaintiff, in July, 1878, purchased 143
of the bonds (those in suit) in open market in Boston at par, for
cash, without any notice or knowledge on his part that Wilson had
not accounted to the town for the money received by him from the
sale of the bonds.
A demurrer to the reply was overruled by Judge Woods, holding
the circuit court. 22 F. 589. The case was
Page 138 U. S. 677
then tried before Judges Gresham and Woods upon the merits,
under a written stipulation waiving a jury, judgment being given in
favor of the defendant.
Plaintiff afterwards made a motion for a new trial, which was
overruled by Judge Woods at the November term of the court, 1886.
At the same time, plaintiff again made a motion for a new trial,
setting up, in substance, the following: that he had prepared a
bill of exceptions setting forth all the evidence in the case, all
of which, it was alleged, tended to support the declaration and the
reply; that he was desirous of bringing the case to this Court by
writ of error, but, under the rules and practice here and the
statutes of the United States, he would not be able to present the
questions involved to this Court without a special finding of facts
upon the evidence adduced at the trial; that a manifest hardship
and injustice had been done him in the case, which occurred in the
manner following: the judge who heard the case on demurrer to the
answer held the answer sufficient, while another judge of the
court, who heard the case on demurrer to the reply, pronounced the
reply sufficient, and at the final hearing plaintiff, relying upon
the evidence which supported and proved his reply, did not require
or ask a special finding of facts, supposing, of course, that, his
reply having been proved, there would be a certificate of division
in opinion between the judges who tried the cause, or that, if not
so, he would have saved to him by the record the questions of law
in some other proper manner; that the entry of the judgment took
him wholly by surprise, and he had not saved the legal questions as
he should have done by requesting beforehand a special finding of
facts because, having had his replication sustained, he had no
doubt of the final judgment of the court being favorable to him,
and that he was fearful he would be remediless to present to this
Court the questions involved in the case unless the judgment should
be set aside and a special finding of facts made by the court.
This motion was sustained by Judge Woods over the objection of
the defendant, and a new trial was granted. The case was again
tried by Judge Woods without a jury, who at plaintiff's request
made and filed the following finding of
Page 138 U. S. 678
facts, and entered judgment thereon in favor of the
defendant.
"1st. At the time hereinafter mentioned the defendant was a
municipal corporation organized and existing under and by virtue of
the laws of the State of Indiana, and situate in the County of
White in the said state."
"2d. That upon the 24th day of January, 1869, a petition was
presented to the board of trustees of said town by the school
trustees thereof praying for the issue of the bonds of said town to
aid in the building of a schoolhouse in said town, which said
petition was granted, and in pursuance thereof the trustees of said
town did pass and adopt an ordinance directing that there should be
made and issued to the said school trustees of said town twenty
thousand dollars of coupon bonds of said town, of the denomination
of one hundred dollars each, with interest at the rate of ten
percent per annum, payable annually, and afterwards, to-wit, on the
1st day of May, 1869, the said town executed the said bonds under
said ordinance to the amount of $20,000, maturing in ten years
after the date thereof, which bonds were sold and delivered to
certain persons, who then and there became the purchasers thereof,
and which bonds at the times hereinafter mentioned were
outstanding, unpaid, and valid obligations of the said town."
"3d. On the 11th day of May, 1878, a petition was presented to
the board of trustees of the defendant, signed by citizens, owners
of taxable property in said town, praying for the issue of bonds of
said town to the amount of $21,000; which petition (omitting the
names of the signers thereto) is in the words following, to-wit
[then follows the petition as set out in the answer, and heretofore
quoted]."
"4th. That upon the 20th day of May, 1878, in pursuance of the
said petition and ordinance, the said defendant town made and
executed its 210 coupon bonds payable to bearer, of the
denomination of $100 each, bearing interest at the rate of seven
percentum per annum, which bonds and coupons are in the words and
figures following, to-wit
Page 138 U. S. 679
[then follows a copy of a bond and a coupon heretofore set out
in full]."
"5th. That the said bonds were put in the hands of the said J.
C. Wilson, in pursuance of said ordinance, for sale, and that
$14,300 of the said bonds, being the same as those now in suit,
were sold to Claypool and Stoddard, of Indianapolis, Indiana, for
which the said firm of Claypool and Stoddard paid to the said
Wilson the sum of $12,918.40, which said last-named sum was paid to
said Wilson in the following manner: on or about April 14, 1879,
said Claypool and Stoddard, by the direction of said Wilson, paid a
draft drawn by G. A. Ivers, of Chicago, for $6,000; on the same
day, said Claypool and Stoddard paid said Wilson, by their check on
the First National Bank of Indianapolis, the further sum of $5,000;
that on the 13th day of May, 1879, the said Claypool and Stoddard
paid to said Wilson, by their check on the First National Bank of
Indianapolis, the further sum of $1,840.30, and within a few days
after the last-named date said Claypool and Stoddard, for the
balance of the said sum of $12,918.40, paid to him the sum of
$78.17."
"6th. That the board of trustees of said town required and
exacted from their said agent, J. C. Wilson, a bond, with sureties,
to secure the money which he might realize from the sale of said
bonds."
"7th. That the said Wilson, after the sale of said bonds, failed
to turn over the proceeds thereof to the treasurer of the said
town, and fled the country."
"8th. That at the time the said Wilson fled the country, he had
a large sum of money on deposit in the First National Bank of
Monticello, Indiana, to his credit as 'trustee;' that suit was
instituted by the defendant town against said bank to recover the
same, upon the ground that such money was the proceeds of the sale
of said bonds so made by the said Wilson; that judgment was
rendered in favor of said town, and against said bank, for the sum
of $6,988.43; that thereupon the receiver of the said bank appealed
to the Supreme Court of Indiana, and thereupon said judgment was
affirmed by said supreme court --
Bundy, Receiver, &c. v.
Town of
Page 138 U. S. 680
Monticello, 84 Ind. 119 -- and said town recovered the
sum of $6,988.43."
"9th. That the said town instituted a proceeding upon the bond
so given by the said Wilson to the said town to secure the money
which he might realize from the sale of said bonds, and in a court
of competent jurisdiction recovered judgment against the sureties
and the said Wilson on the said bond for the full amount of the
proceeds arising from the sale of said bonds, and from which
judgment an appeal was taken to the Supreme Court of Indiana, and
reported in 85 Indiana Reports at page 10, and which said judgment
was reversed and remanded by said supreme court for another trial,
and afterwards the said suit was dismissed by the said town, and
that the said town has received nothing on account of said
bond."
"10th. That at the time of the issuing of the bonds in suit,
there was in the town Treasury $3,047.85, and no more, received
under the taxing act of the legislature of Indiana, under which the
bonds were issued, as a special fund for the payment of the $20,000
ten percent bonds then outstanding, and that under the laws of the
State of Indiana, a sum sufficient to pay said bonds could not have
been raised before maturity of the same on the amount of taxable
property in said town."
"11th. That the plaintiff is a resident of Newton, in the State
of Massachusetts, and that he bought the bonds in suit in open
market in the City of Boston as an investment, and paid therefor a
valuable consideration, without any notice of any irregularity as
to their issue or any claim to that effect."
"And the court further finds that the principal of the bonds
sued on is wholly unpaid, and that the interest upon the same
accrued is wholly unpaid from the 20th day of May, 1880."
"And the court further finds, as a conclusion of law upon the
foregoing facts, for the defendant. "
Page 138 U. S. 681
MR. JUSTICE LAMAR, after stating the facts as above, delivered
the opinion of the Court.
The decisive question presented by the record in this case is
did the Town of Monticello have authority under the laws of Indiana
to issue for sale in open market negotiable securities in the forms
of the bonds and coupons on which recovery is here sought?
Chancellor Kent, in his Commentaries, vol. 2, pp. 298-299,
referring to the strictness with which corporate powers are
construed, irrespective of the distinction between public and
private corporations, uses the following language:
"The modern doctrine is to consider corporations as having such
powers as are specifically granted by the act of incorporation or
as are necessary for the purpose of carrying into effect the powers
expressly granted, and as not having any other. The Supreme Court
of the United States declared this obvious doctrine, and it has
been repeated in the decisions of the state courts. . . . As
corporations are the mere creatures of law, established for special
purposes, and derive all their powers from the acts creating them,
it is perfectly just and proper that they should be obliged
strictly to show their authority for the business they assume, and
be confined in their operations to the mode and manner and subject
matter prescribed."
Judge Dillon, in his work on Municipal Corporations, § 89,
says:
"It is a general and undisputed proposition of law that
a
municipal corporation possesses and can exercise the following
powers, and no others: first, those granted in express words;
second, those
necessarily or fairly implied in or
incident to the powers expressly granted; third, those
essential to the declared objects and purposes of the
corporation -- not simply convenient, but indispensable. Any fair
reasonable doubt concerning the existence of power is resolved by
the courts against the corporation, and the power is denied."
In
Hopper v. Covington, 118 U.
S. 148,
118 U. S. 151,
this Court, in passing upon the power of incorporated towns in
Indiana under laws which we will have to consider and pass upon in
this case, said, MR. JUSTICE GRAY delivering the opinion:
"When
Page 138 U. S. 682
the law confers no authority to issue the bonds in question, the
mere fact of their issue cannot bind the town to pay them, even to
a purchaser before maturity and for value.
Marsh v. Fulton
County, 10 Wall. 676;
East Oakland v.
Skinner, 94 U. S. 255;
Buchanan v.
Litchfield, 102 U. S. 278;
Dixon County
v. Field, 111 U. S. 83;
Hayes v. Holly
Springs, 114 U. S. 120;
Daviess
County v. Dickinson, 117 U. S. 657."
In
Gause v. Clarksville, 5 Dillon 165, the court, in an
able discussion of the inherent and incidental authority of
municipal corporations, holds that whether a municipal corporation
possesses the power to borrow money and to issue negotiable
securities therefor depends upon a true construction of its charter
and the legislation of the state applicable to it.
In order to determine the question before us, recourse must be
had to the statutory enactments applicable to the subject that were
in force at the time the bonds in this suit were issued in May,
1878. These enactments are contained in sections 3333, 3342, 3344,
3345, 4488, and 4489 of the Revised Statutes of Indiana of 1881.
Section 3333 is a section of the act of 1852 for the incorporation
of towns in that state, and contains the usual grant of municipal
powers. Section 3342, which was also section 27 of the same act of
1852, provides as follows:
"No incorporated town under this act shall have power to borrow
money or incur any debt or liability unless the citizen owners of
five-eighths of the taxable property of such town, as evidenced by
the assessment roll of the preceding year, petition the board of
trustees to contract such debt or loan. And such petition shall
have attached thereto an affidavit verifying the genuineness of the
signatures to the same. And for any debt created thereby, the
trustees shall add to the tax duplicate of each year, successively,
a levy sufficient to pay the annual interest on such debt or loan,
with an addition of not less than five cents on the hundred
dollars, to create a sinking fund for the liquidation of the
principal thereof."
The other sections contain the provisions of certain statutes
passed in 1867, 1869, and 1873. It is only necessary to quote here
sections 4488 and 4489, as they embody the provision of the act of
1873, which is itself the statute of 1869 rewritten
Page 138 U. S. 683
in order to extend to other purposes not material to this
inquiry.
"SEC. 4488. Any city or incorporated town in this state which
shall, by the action of its school trustees, have purchased any
ground and building or buildings, or may hereafter purchase any
ground and building or buildings, or has commenced, or may
hereafter commence, the erection of any building or buildings for
school purposes, or which shall have, by its school trustees,
contracted any debts for the erection of such building or
buildings, or the purchase of such ground and building or
buildings, or such trustees shall not have the necessary means with
which to complete such building or buildings, or to pay for the
purchase of such ground and building or buildings, or pay such debt
-- may, on the filing by the school trustees of said city or town
of a report, under oath, with the common council of such city or
the board of trustees of such town showing the estimated or actual
cost of any such ground and building or buildings, or the amount
required to complete such building or buildings, or purchase such
ground and building or buildings, or the amount of such debt, on
the passage of an ordinance authorizing the same by the common
council of said city, or the board of trustees of such town, issue
the bonds of such city or town to an amount not exceeding, in the
aggregate, fifty thousand dollars, in denominations not less than
one hundred nor more than one thousand dollars, and payable at any
place that may be designated in the bonds (the principal in not
less than one year nor more than twenty years after the date of
such bonds, and the interest annually or semi-annually, as may be
therein provided) to provide the means with which to complete such
building or buildings, or to pay for the purchase of such ground
and building or buildings, and to pay such debt. Such common
council or board of trustees may from time to time negotiate and
sell as many of such bonds as may be necessary for such purpose in
any place and for the best price that can be obtained therefor in
cash,
provided that such bonds shall not be sold at a
price less than ninety-four cents on the dollar."
"SEC. 4489. The proceeds of the sales of such bonds shall
Page 138 U. S. 684
be paid to the said school trustees to enable them to erect or
complete such building or buildings and pay such debt. But before
payment to them, such school trustees shall file with the county
auditor a bond, payable to the State of Indiana, in a sum not less
than the full amount of the said money so to be paid to them, and
with security to be approved by said auditor, conditioned for the
faithful and honest application of such money to the purpose for
which the same was provided, and such trustees, and their surety or
sureties, shall be liable to suit on such bond for any waste,
misapplication, or loss of such money, in the same manner as now
provided for waste or loss of school revenue."
We have given these sections in full to show the entire
legislation of the state in 1878 upon the subject of the power of
towns to borrow money, contract loans, incur debts, and issue bonds
so that it may be the more clearly determined whether it anywhere
expressly confers upon incorporated towns of the state the general
power of issuing, for sale in open market, negotiable securities,
in the form of bonds and coupons, which, in the hands of
bona
fide purchasers before maturity, will be subject to no legal
or equitable defenses in favor of the maker. In our opinion, no
such express power is given by these sections, either for the
purpose of raising money or funding a previous indebtedness.
Obviously it cannot be found in sections 4488 and 4489, for they
relate specifically and exclusively to bonds for school buildings,
school grounds, and school debts, and prescribe the mode by which
bonds may be issued by towns for those specified objects -- a mode
confessedly not followed or even attempted to be followed in
issuing the bonds in this suit. We are confirmed in this conclusion
by the view taken in
Hopper v. Covington, supra:
"The averment that the defendant is a municipal corporation
under the laws of Indiana, 'with full power and authority, pursuant
to the laws of said state, to execute negotiable commercial paper,'
if understood as alleging a general power to execute negotiable
commercial paper, is inconsistent with the public laws of the
state, of which the courts of the United States take judicial
notice. "
Page 138 U. S. 685
The laws of Indiana referred to are those we are now
considering. The court also says: "The general statute of May 15,
1869, authorized towns to issue bonds for the purchase and erection
of lands and buildings for school purposes only." But the bonds in
suit were not issued for either of the purposes named, but to
retire and pay off the bonds of 1869. The town had no power to pay
off those bonds in this way,
viz., by the issue of new
bonds, or it could perpetuate a debt forever. Bonds once issued for
a lawful purpose must be paid by taxation. This is manifest from
the provision which requires a tax to be levied each year
"sufficient to pay the annual interest, with an addition of
not
less than five cents of the hundred dollars to create a
sinking fund for the liquidation of the principal." When bonds are
once issued for a lawful purpose, the town is
functus
officio as to that matter. To argue that the old bonds are a
debt for school purposes which may be liquidated by new
bonds is a refinement of construction which the sound sense of the
law rejects.
The plaintiff in error relies mainly upon the ground that the
authority in question arises by necessary implication from the
power to make certain expenditures, from the character of the
objects to be accomplished by those authorized expenditures, from
the necessity of providing the means for paying a previous
indebtedness lawfully incurred in such expenditures, and from other
powers expressly granted. The line of his counsel's argument, and
that of the district judge to whose opinion our attention has been
especially called, is this: while section 3342 (the same as section
27 in the Act of May, 1852) is not in itself a substantive grant of
power, it clearly evinces the legislative intent and understanding
that the right to borrow money or otherwise incur any debt or
liability might be implied as incidental to the express power given
in that or any subsequent act containing not inconsistent
provisions, and includes a case like this, where the power is
necessary to prevent a default of payment of a previous debt which
it was authorized to create. It is insisted further that it is the
settled doctrine in Indiana that corporations take, by implication,
all the reasonable modes of executing their express or
substantive
Page 138 U. S. 686
powers which a natural person may adopt, and that, in the
absence of positive restrictions, a corporation has the power to
borrow money as an incident to such power.
Section 119, Dillon on Munic. Corp., lays down the Indiana law
on this subject substantially as is contended for by the plaintiff
in error. That section is as follows:
"In Indiana, the doctrine is that corporations, along with the
express and substantive powers conferred by their charters, take by
implication all the reasonable modes of executing such powers which
a natural person may adopt. It is a power incident to corporations,
in the absence of positive restriction, to borrow money as means of
executing the express powers."
A large number of cases from the Supreme Court of Indiana are
cited in a note to support the doctrine of the text. We think the
proposition that under the laws of Indiana a town has an implied
authority to borrow money or contract a loan under the conditions
and in the manner expressly prescribed cannot be controverted.
But this only brings us back to the question, does the implied
power to borrow money or contract a loan carry with a further
implication of power to issue funding negotiable bonds for that
amount, and sell them in open market as commercial paper? Let us
see. Section 3342 is unquestionably a limitation upon the power to
borrow money. Its very language is that of mandatory negation: "No
incorporated town shall have the power to borrow money, or incur
any debt," unless certain conditions precedent are complied with.
The conditions which the statute prescribes the statute means to be
performed. There can be no legal borrowing unless the statute is
strictly followed. What does it prescribe? That there must be first
a petition to the town trustees, which shall be signed by the
citizen owners of at least five-eighths of the taxable property of
the town, whose signatures shall be verified by an affidavit to the
petition. The prayer of the petition is required to be that the
board of trustees shall contract such debt or loan. The board could
not depart in its action from this legally required prayer of the
petition without transcending its authority and acting
ultra
vires. But the board did
Page 138 U. S. 687
depart from the prayer, for it did not borrow money nor contract
a loan, but it ordained in so many words that the town issue bonds
for negotiation and sale at not less than 94 cents on the
dollar.
We think the words of Chief Justice Marshall in
Head v.
Providence Ins. Co., 2 Cranch 127,
6 U. S. 169,
aptly characterizes this transaction, and bear upon the points
which are the subject of this controversy. Speaking of bodies
corporate which have only a legal existence, he said:
"The act of incorporation is to them an Enabling Act. It gives
them all the power they possess. It enables them to contract, and,
when it prescribes to them a mode of contracting, they must observe
that mode or the instrument no more creates a contract than if the
body had never been incorporated."
See also New York Firemen's Ins. Co. v. Ely, 5 Conn.
560;
McCracken v. City of San Francisco, 16 Cal. 619.
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 give 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 his own name.
We think the case of
Police Jury v.
Britton, 15 Wall. 566, is directly and absolutely
conclusive against the position of the plaintiff in error on this
point. It was an action upon coupons of certain bonds issued by the
police jury of Tensas Parish, Louisiana, the validity of which the
defendant denied
Page 138 U. S. 688
upon the ground that they were issued without the authority of
any law of that state. It appeared that the police jury had no
express authority to issue the bonds in question, and, if they had
any authority of the kind, it must be implied from the general
powers of administration with which the said police jury was
invested. The question therefore directly presented in that case
was precisely the question directly presented in this case,
viz., whether the trustees or representative officers of a
parish, county, or other local jurisdiction, invested with the
usual powers of administration, in specific matters, and the power
of levying taxes to defray the necessary expenditures of the
jurisdiction, have an implied authority to issue negotiable
securities, payable in future, of such a character as to be
unimpeachable in the hands of
bona fide holders, for the
purpose of raising money or funding a previous indebtedness.
The opinion of the Court, delivered by MR. JUSTICE BRADLEY,
clearly illustrated the fundamental distinction between issuing
bonds merely as evidence of a debt or loan and issuing bonds for
negotiation and sale generally with respect to the powers of a
municipal corporation. It said:
"That a municipal corporation which is expressly authorized to
make expenditures for certain purposes may, unless prohibited by
law, make contracts for the accomplishment of the authorized
purposes, and thereby incur indebtedness and issue proper vouchers
therefor, is not disputed. This is a necessary incident to the
express power granted. But such contracts, as long as they remain
executory, are always liable to any equitable considerations that
may exist or arise between the parties, and to any modification,
abatement, or rescission, in whole or in part, that may be just and
proper in consequence of illegalities or disregard or betrayal of
the public interests. Such contracts are very different from those
which are in controversy in this case. The bonds and coupons on
which a recovery is now sought are commercial instruments, payable
at a future day, and transferable from hand to hand. . . . The
power to issue such paper has been the means, in several cases
which have recently been brought to our notice, of imposing upon
counties and other local jurisdictions burdens of a most
fraudulent
Page 138 U. S. 689
and iniquitous character, and of which they would have been
summarily relieved had not the obligations been such as to protect
them from question in the hands of
bona fide holders. . .
. It seems to us to be a power quite distinct from that of
incurring indebtedness for improvements actually authorized and
undertaken, the justness and validity of which may always be
inquired into. It is a power which ought not to be implied from the
mere authority to make such improvements."
Pp.
82 U. S.
570-571.
The plaintiff in error quotes from the opinion in that case, to
support his contention, the following:
"We do not mean to be understood that it requires in all cases
express authority for such bodies to issue negotiable paper. The
power has frequently been implied from other express powers
granted. Thus, it has been held that the power to borrow money
implies the power to issue the ordinary securities for its
repayment, whether in the form of notes or bonds payable in
future."
We think the significance of these sentences, as applicable to
the facts of this case, can be clearly discerned from the following
concluding sentences of the paragraph:
"But in our judgment, these implications should not be
encouraged or extended beyond the fair inferences to be gathered
from the circumstances of each case. It would be an anomaly justly
to be deprecated for all our limited territorial boards, charged
with certain objects of necessary local administration, to become
the fountains of commercial issues capable of floating about in the
financial whirlpools of our large cities."
The same doctrine is presented most forcibly in the case of
The Mayor v.
Ray, 19 Wall. 468. In
Claiborne County v.
Brooks, 111 U. S. 400,
111 U. S. 406,
it was held that the statutes of Tennessee which conferred upon
counties in that state the power to erect a courthouse, jail, and
other necessary county buildings did not authorize the issue of
commercial paper as evidence of or security for a debt contracted
for the construction of such a building. Referring to the view of
the court below in that case, which held that, as the county had
power to erect a courthouse, that power implied the power to
contract out the work, and to issue negotiable bonds of a
commercial
Page 138 U. S. 690
character in payment thereof, MR. JUSTICE BRADLEY, who delivered
the opinion of the Court, said:
"We cannot concur in this view. The erection of courthouses,
jails, and bridges is amongst the ordinary political or
administrative duties of all counties, and from the doctrine of the
charge it would necessarily follow that all counties have the
incidental power, without any express legislative authority, to
issue bonds, notes, and other commercial paper in payment of county
debts and charges, and if they have this power, then such
obligations issued by the county authorities, and passing into the
hands of
bona fide holders, would preclude the county from
showing that they were issued improperly, or without consideration,
or for a debt already paid, and it would then be in the power of
such authorities to utter any amount of such paper, and to fasten
irretrievable burdens upon the county without any benefit received.
Our opinion is that mere political bodies constituted, as counties
are, for the purpose of local police and administration and having
the power of levying taxes to defray all public charges created,
whether they are or are not formally invested with corporate
capacity, have no power or authority to make or utter commercial
paper of any kind unless such power is expressly conferred upon
them by law or clearly implied from some other power expressly
given, which cannot be fairly exercised without it,"
citing
Police Jury v.
Britton, 15 Wall. 566;
The Mayor
v. Ray, 19 Wall. 468.
In
Young v. Clarendon Township, 132 U.
S. 340,
132 U. S. 347,
many of the decisions bearing on this question were referred to,
and the Court said:
"Even where there is authority to aid a railroad and incur a
debt in extending such aid, it is also settled that such power does
not carry with it any authority to execute negotiable bonds except
subject to the restrictions and directions of the Enabling
Act,"
citing
Wells v. Supervisors, 102 U.
S. 625;
Claiborne County v. Brooks,
111 U. S. 400;
Kelley v. Milan, 127 U. S. 139. In
Hill v. Memphis, 134 U. S. 198,
134 U. S. 203,
it was held that the power conferred by statute on municipal
corporations to subscribe for stock in a railway corporation did
not include the
Page 138 U. S. 691
power to create a debt and issue negotiable bonds in order to
pay for that subscription. In delivering the opinion of the Court,
MR. JUSTICE FIELD said:
"Whilst a municipal corporation, authorized to subscribe for the
stock of a railroad company or to incur any other obligation, may
give written evidence of such subscription or obligation, it is not
thereby empowered to issue negotiable paper for the amount of
indebtedness incurred by the subscription or obligation. Such
papers in the hands of innocent parties for value cannot be
enforced without reference to any defense on the part of the
corporation, whether existing at the time or arising subsequently.
Municipal corporations are established for purposes of local
government, and, in the absence of specific delegation of power,
cannot engage in any undertakings not directed immediately to the
accomplishment of those purposes. Private corporations created for
private purposes may contract debts in connection with their
business, and issue evidence of them in such form as may best suit
their convenience. The inability of municipal corporations to issue
negotiable paper 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."
All of the cases we have cited above were referred to in the
opinion in that case as sustaining the doctrine therein laid
down.
The logical result of the doctrines announced in the above-cited
cases, in our opinion, clearly shows that the bonds sued on in this
case are invalid. It does not follow that because the Town of
Monticello had the right to contract a loan, it had 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 be set up by
the maker of it, are, in their nature and in their legal effect,
essentially different transactions. In the present case, all that
can be contended for is that the town had the power to contract a
loan under certain specified restrictions and limitations. Nowhere
in the
Page 138 U. S. 692
statute is there any express power given to issue negotiable
bonds as evidence of such loan. Nor can such power be implied,
because the existence of it is not necessary to carry out any of
the purposes of the municipality.
It is true that there is a considerable number of cases, many of
which are cited in the brief of counsel for plaintiff in error,
which hold a contrary doctrine. 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, for, as is said in Dillon's Munic. Corp. (third ed.)
§ 507:
"The frauds which unscrupulous officers will be enabled
successfully to practice if an implied and unguarded power to issue
negotiable securities is recognized, and which the corporation or
the citizen will be helpless to prevent, is a strong argument
against the judicial establishment of any such power. And the
argument is unanswerable when it is remembered that in ascertaining
the extent of corporate powers, there is no rule of safety but the
rule of
strict construction, and that such an implied
power is not necessary, however convenient it may be at times, to
enable the corporation to exercise its ordinary and usual express
powers or to carry into effect the purposes for which the
corporation is created. We regard as alike unsound and dangerous
the doctrine that a public or municipal corporation possesses the
implied power to borrow money for its ordinary purposes,
and,
incidental to that, the power to issue commercial
securities. The cases on this subject are conflicting, but the
tendency is toward the view above indicated. The opinion of MR.
JUSTICE BRADLEY in a case before referred to (
The Mayor v.
Ray) evinces a thorough comprehension of the whole question,
and, in our judgment, is sound in every proposition it advances,
and must become the law of this country. This view is confirmed by
the almost invariable legislative practice in the states to confer,
when it is deemed expedient, upon municipalities and public
corporations, in
express terms, the power to borrow money
or to issue negotiable bonds or securities."
In the case before us the power in question is not, in our
Page 138 U. S. 693
opinion, indispensable to the exercise of the express or implied
powers conferred upon the town by law. The utmost that can be said
is that it was deemed more convenient or expedient to issue the
bonds in that form than in the mode prescribed.
We think that the fact that the Legislature of the State of
Indiana, by the acts of 1867, 1869, and 1873, above referred to,
expressly authorized towns in the same class as the defendant in
error to issue bonds for certain specified purposes, under proper
safeguards and limitations, is indicative of the legislative
understanding that, without some such express statutory provisions,
no power existed in the town to issue negotiable bonds and sell
them in open market. The same may be said of the act of the
legislature of that state which took effect August 24, 1879,
expressly conferring upon the towns in that state power to fund
their indebtedness by issuing bonds and negotiating them for that
purpose under certain specified terms, restrictions, and
limitations.
We are not unmindful that in several of the cases in the Supreme
Court of Indiana cited by counsel for plaintiff in error there may
be found abstract propositions susceptible of a construction in
support of the position he seeks to maintain, but we think this
case is distinguishable from them all in essential features which
except it from those general propositions and leave the conclusion
which we have reached in harmony with them.
It is contended that the bonds sued on were issued practically
for the purpose of taking the place of the prior bonds, outstanding
and unpaid, which represented a debt for the erection of a school
building, and were therefore authorized by section 4488. This
position is untenable. It cannot be reasonably contended that the
bonds were issued under any of the sections relating to the
negotiation and sale of bonds for school purposes. It is not even
pretended that they were issued in accordance with the clearly
defined conditions and restrictions imposed by those sections.
Nor do we think the fact that the town actually received a
portion of the money arising from the sale of the so-called bonds
(or, in legal contemplation, perhaps all of it, as it was
Page 138 U. S. 694
paid to the agent of the town) estops the corporation from
pleading a want of authority in the municipality to issue the
instruments sued on. The original act of issuing the bonds for sale
was not only unauthorized by law, but in disregard of its
requirements, and no subsequent act of the town trustees could make
it valid. Whether it could be a circumstance in favor of the
equitable right of the holders of the bonds to recover from the
municipality the money which they represent is a question not here
for consideration. The suit was upon the bonds themselves, and for
the reasons above stated, we hold that there can be no recovery
upon them.
Judgment affirmed.
MR. JUSTICE BROWN was not a member of the Court when this case
was argued, and took no part in its decision.
THE CHIEF JUSTICE and MR. JUSTICE BREWER were not present at the
argument, and took no part in the decision.
