Bonds were issued by the City of Brenham, in Texas, in July,
1879, payable to bearer, to the amount of $15,000, under the
assumed authority of an Act of Texas, passed in 1873, incorporating
the city and granting its council authority to borrow, for general
purposes, not exceeding $15,000 on the credit of the city.
Held that the city had no authority to issue negotiable
bonds, and that therefore even a
bona fide holder of them
could not recover against the city on them or their coupons.
Power in a municipal corporation to borrow money not being
nugatory although unaccompanied by the power to issue negotiable
bonds therefor, it is easy for the legislature to confer upon the
municipality the power to issue such bonds, and under the well
settled rule that any doubt as to the existence of such power ought
to be determined against its existence, it ought not to be held to
exist in the present case.
The cases on this subject reviewed, and
Ropers v.
Burlington, 3 Wall. 654, and
Mitchell
v. Burlington, 4 Wall. 270, held to be
overruled.
This was an action against a municipal corporation to recover
upon coupons cut from negotiable bonds issued by it. Judgment below
for plaintiff, to which this writ of error was sued out. The cause
was first argued on the 14th of December, 1891. On the 26th of
January, 1892, a reargument was
Page 144 U. S. 174
ordered which was had March 17. The case is stated in the
opinion.
MR. JUSTICE BLATCHFORD delivered the opinion of the Court.
This is an action at law brought November 8, 1886, in the
Circuit Court of the United States for the Western District of
Texas by the German-American Bank, a New York corporation, against
the City of Brenham, a municipal corporation of the State of Texas,
to recover $4,175 and interest, on 504 coupons, amounting to
$4,175, being 280 coupons for $2.50 each, 125 coupons for $5 each,
84 coupons for $25 each, and 15 coupons for $50 each, cut from 50
bonds for $50 each, 25 bonds for $100 each, 14 bonds for $500 each,
and 3 bonds for $1,000 each, being all the bonds of the issue,
$15,000 in amount. The bonds read as follows, except as to number
and amount, and had the proper coupons annexed:
"
United States of America"
"
State of Texas City of Brenham"
"
City of Brenham Bonds"
"
No. ___ $100"
"
Bonds for general purposes, $15,000"
"Twenty years after date, for value received, the City of
Brenham promises to pay to bearer one hundred dollars, with
interest at the rate of ten percent per annum from date, payable
semi-annually, on the first days of September and March of each
year, upon presentation of the proper coupon hereto annexed, both
principal and interest payable at the office of the Treasurer of
the City of Brenham. This bond is redeemable by the City of Brenham
after the expiration of ten years
Page 144 U. S. 175
from date hereof. This bond is authorized by an ordinance of the
City of Brenham approved June 7th, A.D. 1879. In witness whereof
the Mayor and Secretary of the City of Brenham hereunto set their
hands and affix the seal of the City of Brenham this 31st day of
July, A.D. 1879."
"[L.S.] M. P. KERR,
Mayor"
"C. H. CARLISLE,
City Secretary"
The ordinance referred to in the bonds is set forth in the
margin.
*
Page 144 U. S. 176
The original petition of the plaintiff alleged that the bonds
and coupons were issued, executed, sold, and delivered and put in
circulation under authority of the ordinance referred to.
The defendant, by its original answer, protested against the
jurisdiction of the court and raised the question of the
bona
fide ownership by the plaintiff of the coupons sued on,
alleging that they were owned by one Mensing, a citizen of Texas,
and that the transfer of them by him to the plaintiff was colorable
only, and for the purpose of giving the court jurisdiction. The
defendant at the same time demurred to the petition, specifying
grounds of demurrer, and put in an answer to the merits, setting
forth that the city had a population of less than 10,000
inhabitants, and was incorporated February 4, 1873, with powers
limited by its charter and the constitution of the state; that it
had no power, on June 7, 1879, to pass ordinances repugnant to the
constitution and laws of the state; that, under the constitution of
the state of 1876, and prior to the passage of the ordinance of
June 7, 1879, cities and towns with a population of 10,000
inhabitants or less had authority to collect an annual tax to
defray only the current expenses of local government, and were
without power to borrow money, issue negotiable bonds therefor, and
collect taxes for the payment of the same; that the city council
had no power on June 7, 1879, to pass the ordinance of that date;
that no bonds or coupons issued in pursuance thereof constituted
any legal liability against the city; that the bonds were issued in
violation of the ordinance, in that the ordinance
Page 144 U. S. 177
authorized the issuing of the bonds payable twenty years after
the date thereof, and to be redeemable at the option of the
defendant at any time after five years from their date; that § 4 of
article 11 of the constitution provided that no municipal
corporation should become a subscriber to the capital stock of any
private corporation or association, or make any appropriation or
donation to the same, or in any wise loan its credit; that $3,000
of the $15,000 of the bonds were for the benefit of the fire
department of the city, and the remaining $12,000 were in aid of
the Gulf, Colorado & Santa Fe Railroad Company, in providing
for the purchase of the right of way over the streets of the city
and the purchase of depot ground, to secure the construction of
said railroad through the city; that $12,000 of the bonds were sold
by the city, $5,000 to one Mensing, and $7,000 to two other
persons, and Mensing also became the owner of those $7,000 of
bonds, and he and the other two purchasers bought the bonds with
actual knowledge of the purpose for which they were issued, as well
as record notice of such illegal purpose, as disclosed by the
public records and minutes of the city council, and that the
plaintiff, if it became the owner of the bonds and coupons,
purchased the coupons after their maturity, and with knowledge of
all the facts attending their issue, well knowing that they were
issued to raise money to enable the defendant to purchase the said
right of way and depot ground for the said railroad company.
Afterwards the defendant put in the amended answer, amending its
former demurrers and answer but not varying the material
allegations of fact contained in its former answer.
The plaintiff then filed a supplemental petition demurring to
the answers and excepting thereto by special allegations, and also
alleging matters of fact in response to the answers, and averring
that the defendant was authorized to issue the bonds in question,
and that, if their proceeds were misappropriated by the city
council or the agents of the city, such misappropriation ought not
to affect the rights of the plaintiff; that the bonds were sold by
the lawfully authorized agents of the city, and it received full
value for them; that the parties from whom the plaintiff received
the bonds were
bona fide
Page 144 U. S. 178
purchasers of them before maturity, having paid a valuable
consideration therefor, and that the defendant was estopped by the
fact that it paid interest on the bonds without objection for three
years after they were issued, and in 1884 published a statement of
its financial condition, in which it included said $15,000 of bonds
as part of its legal liabilities, all of which was made known to
the plaintiff before it became the owner of the bonds.
The defendant then filed a supplemental answer demurring to the
supplemental petition, and specially excepting to parts of it and
raising an issue of fact as to its allegations.
The plea in abatement or to the jurisdiction of the court was
tried by a jury, which found for the plaintiff, and afterwards the
issues of fact on the pleadings were tried by a jury, which found a
verdict for the plaintiff for $5,510.10, and the court entered a
judgment overruling the general and special demurrers and
exceptions of the defendant, and the general demurrer and
exceptions of the plaintiff, and the special exceptions and
demurrers of the defendant to the plaintiff's supplemental
petition, and a judgment for the plaintiff was entered for
$5,510.10, with interest and cost. To review this judgment the
defendant has brought a writ of error.
On the 4th February, 1873, an act was passed by the Legislature
of Texas, (Special Laws of Texas of 1873, c. 2, p. 2),
incorporating the City of Brenham. By article 3, § 2, of that act
(p. 14), it is provided as follows: "Sec. 2. That the city council
shall have the power and authority to borrow for general purposes
not exceeding ($15,000) fifteen thousand dollars on the credit of
said city;" also by article 7, § 1, (p. 23), as follows: "Sec. 1.
Bonds of the corporation of the City of Brenham shall not be
subject to tax under this act."
At the date of the incorporation of the city and of the passage
of the ordinance in question, the city had a population of over
4,000 and less than 10,000 inhabitants.
On the 28th of March, 1881, one Dwyer instituted a suit in the
District Court of Washington County, Texas, against one Hackworth,
assessor and collector of taxes of the City of Brenham, to enjoin
the collection of certain taxes levied by
Page 144 U. S. 179
the city council of the city, and assessed against Dwyer,
including as a part thereof one-eighth of one percent to pay
interest and provide a sinking fund on the bonds of the city, the
bonds so referred to being the identical bonds which are involved
in this suit. That case went to the Supreme Court of Texas, and is
reported as
Dwyer v. Hackworth, 57 Tex. 245.
Various points are taken by the defendant as assignments of
error, but we consider it necessary to discuss only one of them,
the decision of which will dispose of the case.
The court charged the jury, among other things, 35 F. 185, that
the power in the city to borrow money carried with it the authority
to issue the bonds, and that the defendant had capacity to issue
the bonds in question as commercial paper and bind itself to pay
them and the coupons. The defendant, by its demurrer to the
plaintiff's petition, stated as ground of demurrer that it did not
appear from the petition that the defendant was authorized by the
Constitution and laws of Texas to issue the bonds and coupons. The
court overruled such demurrer, and by a bill of exceptions it
appears that the defendant excepted to such ruling. The defendant
demurred also to the plaintiff's supplemental petition on the
ground that that petition failed to show any authority in the
defendant to issue the bonds and coupons. This demurrer was
overruled, and it appears by a bill of exceptions that the
defendant excepted to the ruling. It also appears by a bill of
exceptions that the defendant to excepted to the charge that the
power of the city to borrow money carried with it authority to
issue the bonds, and that the city had the capacity to issue the
bonds as commercial paper, the ground of the exception being stated
to be that under the Constitution of Texas, the expense of carrying
out the general governmental purposes of the defendant was to be
defrayed by the levying of a tax, and not by issuing bonds, and
that the bonds issued were not authorized to be clothed with the
incidents of commercial paper.
The principal contention of the part of the defendant is that it
was without authority to issue the bonds, and that they were void
for all purposes and in the hands of all persons.
Page 144 U. S. 180
This point is presented with reference to the charter of 1873,
considered apart from the provisions of the constitution of 1876,
and also with reference to the effect which the constitution had
upon the power claimed under the charter.
Article 11, sections 3 to 7, inclusive, of the Constitution of
Texas of 1876 provided as follows:
"SEC. 3. No county, city, or other municipal corporation shall
hereafter become a subscriber to the capital of any private
corporation or association, or make any appropriation or donation
to the same, or in anywise loan its credit, but this shall not be
construed to in any way affect any obligation heretofore undertaken
pursuant to law."
"SEC. 4. Cities and towns having a population of ten thousand
inhabitants or less may be chartered alone by general law. They may
levy, assess, and collect an annual tax to defray the current
expenses of their local government, but such tax shall never exceed
for anyone year one-fourth of one percent, and shall be collectible
only in current money. And all license and occupation tax levied,
and all fines, forfeitures, penalties, and other dues accruing to
cities and towns, shall be collectible only in current money."
"SEC. 5. Cities having more than ten thousand inhabitants may
have their charters granted or amended by special act of the
legislature, and may levy, assess, and collect such taxes as may be
authorized by law, but no tax for any purpose shall ever be lawful
for any one year which shall exceed two and one-half percent of the
taxable property of such city, and no debt shall ever be created by
any city unless at the same time provision be made to assess and
collect annually a sufficient sum to pay the interest thereon and
create a sinking fund of at least two percent thereon."
"SEC. 6. Counties, cities, and towns are authorized, in such
mode as may now or may hereafter be provided by law, to levy,
assess, and collect the taxes necessary to pay the interest and
provide a sinking fund to satisfy and indebtedness heretofore
legally made and undertaken, but all such taxes shall be assessed
and collected separately from that levied, assessed, and collected
for current expenses of municipal government,
Page 144 U. S. 181
and shall when levied specify in the act of levying the purpose
therefor, and such taxes may be paid in the coupons, bonds, or
other indebtedness for the payment of which such tax may have been
levied."
"SEC. 7. All counties and cities bordering on the coast of the
Gulf of Mexico are hereby authorized, upon a vote of two-thirds of
the tax payers therein, to be ascertained as may be provided by
law, to levy and collect such tax for construction of sea-walls,
breakwaters, or sanitary purposes as may be authorized by law, and
may create a debt for such works and issue bonds in evidence
thereof. But no debt for any purpose shall ever be incurred in any
manner by any city or county unless provision is made at the time
of creating the same for levying and collecting a sufficient tax to
pay the interest thereon and provide at least two percent as a
sinking fund, and the condemnation of the right of way for the
erection of such works shall be fully provided for."
There is nothing in the charter of the defendant which gives it
any power to issue negotiable interest-bearing bonds of the
character of those involved in the present case. The only authority
in the charter that is relied upon is the power given to borrow,
for general purposes, not exceeding $15,000 on the credit of the
city. The power given to the defendant by § 4 of article 11 of the
constitution, the defendant having a population of less than 10,000
inhabitants at the date of its charter and at the date of the
ordinance, was only the power to levy, assess, and collect an
annual tax to defray the current expenses of its local government,
not exceeding, for anyone year, one-fourth of one percent
That in exercising its power to borrow not exceeding $15,000 on
its credit for general purposes the city could give to the lender,
as a voucher for the repayment of the money, evidence of
indebtedness in the shape of nonnegotiable paper, is quite clear;
but that does not cover the right to issue negotiable paper or
bonds, unimpeachable in the hands of a
bona fide holder.
In the present case, it appears that Mensing bought from the
defendant $5,000 of the bonds at 95 cents on the dollar, and that
other $7,000 of the bonds were sold by
Page 144 U. S. 182
the city of the same price, it thus receiving only $11,400 for
$12,000 of the bonds, and suffering a discount on them of $600. The
city thus agreed to pay $12,000, and interest thereon, for $11,400
borrowed. This shows the evil working of the issue of bonds for
more than the amount of money borrowed.
It appears by the record that the depot grounds in, and the
right of way through, the City of Brenham were bought for the Gulf,
Colorado and Santa Fe Railroad Company with money realized from the
sale of bonds issued under the ordinance of June 7, 1879, and that
$3,000 of such bonds were used by the city for fire department
purposes.
The power to borrow the $11,400 would not have been nugatory
unaccompanied by the power to issue negotiable bonds therefor.
Merrill v. Monticello, 138 U. S. 673,
138 U. S. 687;
Williams v. Davidson, 43 Tex. 1, 33-34;
City of
Cleburne v. Railroad Company, 66 Tex. 461; 1 Dillon on
Municipal Corporations, 4th ed. § 89, and notes; § 91, note 2; §
126, note 1; §§ 507, 507
a.
The confining of the power in the present case to a borrowing of
money for general purposes on the credit of the city limits it to
the power to borrow money for ordinary governmental purposes, such
as are generally carried out with revenues derived from taxation,
and the presumption is that the grant of the power was intended to
confer the right to borrow money in anticipation of the receipt of
revenue taxes, and not to plunge the municipal corporation into a
debt on which interest must be paid at the rate of ten percentum
per annum, semi-annually, for at least ten years. It is easy for
the legislature to confer upon a municipality, when it is
constitutional to do so, the power to issue negotiable bonds, and
under the well settled rule that any doubt as to the existence of
such power ought to be determined against its existence, it ought
not to be held to exist in the present case.
A review of the cases on this subject in this Court will be
useful.
In
Rogers v
Burlington, 3 Wall. 654,
70 U. S. 666,
in 1865, it was held that the statutory power granted to the City
of Burlington,
Page 144 U. S. 183
Iowa, "to borrow money for any public purpose" gave authority to
the city to borrow money to aid a railroad company in building a
road for public travel and transportation, and that, as a means of
borrowing money to accomplish such object, the city might issue its
bonds to be sold by the railroad company to raise the company.
Bonds were issued and loaned to the company. They were coupon bonds
in the usual form, and were secured by first mortgage bonds of the
company. Suit was brought by a
bona fide holder for value
to recover against the city on the coupons, and the case came up on
a demurrer to the petition. The demurrer was sustained by the
circuit court, and judgment rendered for the city, but this Court
reversed that judgment. In the opinion of this Court as to the
power to issue the negotiable bonds, it was said:
"Common experience shows that the issuing of bonds by a
municipal corporation as material aid in the construction of a
railroad is merely a customary and convenient mode of borrowing
money to accomplish the object, and it cannot make any difference,
so far as respects the present question, whether the bonds, as
issued by the defendants, were sold in the market by their officers
or were first delivered to the company and were by their agents
sold for the same purpose."
Chief Justice Chase and Justices Grier, Miller, and FIELD
dissented. JUSTICE FIELD delivered a dissenting opinion, in which
his three associates concurred, and which stated, as to the
authority of the city to issue the bonds, that there was no such
authority, either in the charter of the city or in any other
legislation of the state; that the authority conferred was to
borrow money; that no money was borrowed, but the bonds of the city
were loaned, and that "borrowing money" and "loaning credit" were
not convertible terms.
In
Mitchell v.
Burlington, 4 Wall. 270, the case of
Rogers v.
Burlington, supra, was affirmed.
But in
Police Jury v.
Britton, 15 Wall. 566, when Justices Wayne, Nelson,
and Grier had left the bench and Justices Strong, Bradley, and Hunt
had come upon it, Chief Justice Chase and Justices Clifford,
Swayne, Miller, Davis, and FIELD
Page 144 U. S. 184
remaining, it was held that 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
powers of levying taxes to defray the necessary expenditures of the
jurisdiction, have no 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. In the
opinion of the Court, delivered by Mr. Justice Bradley, it is
stated that the police jury of the parish of Tensas, Louisiana,
which issued the negotiable bonds in question in that case, had no
express authority to issue them; that the power could not be
implied from the ordinary powers of local administration and police
which were conferred upon the boards and trustees of political
districts; that it was one thing for county and parish trustees to
have the power to incur obligations for work actually done in
behalf of the county or parish, and to give proper vouchers
therefor, and a totally different thing to have the power of
issuing unimpeachable paper obligations, which might be multiplied
to an indefinite extent, and that, although the authority for such
bodies to issue negotiable paper might be implied in some cases
from other and express powers granted, those implications should
not be extended beyond the fair inferences to be gathered from the
circumstances of each case.
In
Claiborne County v. Brooks, 111 U.
S. 400, it was held that the power to issue commercial
paper was foreign to the objects of the creation of the political
divisions of counties and townships, and was not to be conceded to
such organizations unless by virtue of express legislation or by
very strong implication from such legislation, and that the power
conferred by statutes of Tennessee upon a county 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. The
opinion in the case was delivered by Mr. Justice Bradley, and the
case of
Police Jury v.
Britton, 15 Wall. 566, was cited and approved,
although the unsuccessful
Page 144 U. S. 185
party cited as authority the case of
Rogers v.
Burlington, 3 Wall. 654.
In
Concord v. Robinson, 121 U.
S. 165, it was held that a grant to a municipal
corporation of power to appropriate moneys in aid of the
construction of a railroad, accompanied by a provision directing
the levy and collection of taxes to meet such appropriation and
prescribing no other mode of payment, did not authorize the issuing
of negotiable bonds in payment of such appropriation. The opinion
of this Court was delivered by MR. JUSTICE HARLAN, and the case of
Claiborne County v. Brooks, 111 U.
S. 400, was cited and approved.
In
Kelley v. Milan, 127 U. S. 139, and
Norton v. Dyersburg, 127 U. S. 160, it
was held that the power granted to a municipal corporation to
become a stockholder in a railroad company did not carry with it
the power to issue negotiable bonds in payment of the subscription
unless the latter power was expressly or by reasonable implication
conferred by statute. In the opinion in the case of
Norton v.
Dyersburg, the case of
Claiborne County v. Brooks,
111 U. S. 400, was
cited with approval.
In
Young v. Clarendon Township, 132 U.
S. 340, it was held to be settled law that a
municipality has no power to issue its bond in aid of a railroad,
except by legislative permission, and in the opinion of the Court,
delivered by MR. JUSTICE LAMAR, the cases of
Claiborne County
v. Brooks and of
Kelley v. Milan were cited and
approved.
In
Hill v. Memphis, 134 U. S. 198,
134 U. S. 203,
the opinion of the Court being delivered by MR. JUSTICE FIELD, it
was held that the power conferred by a statute on a municipal
corporation to subscribe for the stock of a railroad company did
not include the power to issue negotiable bonds representing a debt
in order to pay for that subscription, and it was said that that
rule was well settled. It was added:
"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,"
and the cases of
Police Jury v. Britton,
Page 144 U. S. 186
Claiborne County v. Brooks, Kelley v. Milan, and
Young v. Clarendon Township were cited with approval.
In
Merrill v. Monticello, 138 U.
S. 673,
138 U. S. 687,
138 U. S. 691,
it was held that the implied power of a municipal corporation to
borrow money to enable it to execute the powers expressly conferred
upon it by law, if existing at all, did not authorize it to create
and issue negotiable securities to be sold in the market and to be
taken by the purchaser freed from the equities that might be set up
by the maker, and that to borrow money, and to give a bond or
obligation therefor which might circulate in the market as a
negotiable security, freed from any equities that might be set up
by the maker of it, were essentially different transactions in
their nature and legal effect. In the opinion of the Court, which
was delivered by MR. JUSTICE LAMAR, the cases of
Police Jury v.
Britton, Claiborne County v. Brooks, Kelley v. Milan, Young v.
Clarendon Township, and
Hill v. Memphis were cited
with approval. It was added:
"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."
The opinion then stated that the logical result of the doctrines
announced in the five cases which it cited clearly showed that the
bonds sued on in the case of
Merrill v. Monticello
Page 144 U. S. 187
were invalid, and added:
"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 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."
We therefore must regard the cases of
Rogers v.
Burlington and
Mitchell v. Burlington as overruled,
in the particular referred to, by later cases in this Court.
See 1 Dillon on Municipal Corporations, 4th ed., §§ 507,
507a.
The case of
Dwyer v. Hackworth, 57 Tex. 245, is relied
upon by the plaintiff. In that case, Dwyer, a tax payer, brought
suit against Hackworth, assessor and collector of taxes of the City
of Brenham, to enjoin the collection of certain taxes assessed
against Dwyer, to pay the interest on the bonds involved in the
present suit. In the District Court of Washington County, Texas, in
which the suit was brought, the defendant had judgment, sustaining
the legality of the taxes and dismissing the plaintiff's suit. The
case was carried by the plaintiff to the Supreme Court of Texas,
and in the opinion of that court it is said that the City of
Brenham had authority under its charter to borrow money for general
purposes, "and did so borrow by selling its bonds to the amount
Page 144 U. S. 188
of $15,000." This expression is urged by the plaintiff as
recognizing the lawfulness of the issue of the bonds, but the
court, while reversing the judgment below, said that it could not
enjoin the collection of the taxes on the ground of the invalidity
of the bonds without making the holders of those bonds parties to
the suit, citing
Board v. Railway Co., 46 Tex. 316. There
was therefore no adjudication in that case as to the validity of
the bonds, and the remark of the court that the city borrowed money
by selling its bonds to the amount of $15,000 is of no force on the
question of the validity of the bonds.
Lewis v City of
Shreveport, 108 U. S. 282,
108 U. S.
287.
It is also to be remarked that the ordinance of June 7, 1879,
provided that the city should have the right to redeem the bonds
"at any time after five years from date," while each bond on its
face states that it is redeemable by the city "after the expiration
of ten years from date hereof." The officers of the city had no
power to depart from the terms of the ordinance by varying the time
limited for redemption.
We see nothing in the provisions of the Constitution of Texas of
1876, before cited, to aid the power of the city to issue these
negotiable bonds.
We cannot regard the provision in the charter of the city that
bonds of the corporation of the city "shall not be subject to tax
under this act" as recognizing the validity of the bonds in
question. Whatever that provision may mean, it cannot include bonds
unlawfully issued.
As there was no authority to issue the bonds, even a
bona
fide holder of them cannot have a right to recover upon them
or their coupons.
Marsh v. Fulton
County, 10 Wall. 676;
East Oakland v.
Skinner, 94 U. S. 255;
Buchanan v. Litchfield, 102 U. S. 278;
Hayes v. Holly Springs, 114 U. S. 120;
Daviess County v. Dickinson, 117 U.
S. 657;
Hopper v. Covington, 118 U.
S. 148,
118 U. S. 151;
Merrill v. Monticello, 138 U. S. 673,
138 U. S.
681-682.
As the action here is directly upon the coupons, and there is no
right of recovery upon them, the judgment must be
Page 144 U. S. 189
Reversed, and the case remanded to the circuit court with a
direction to sustain the defendant's general demurrer and special
demurrer and exceptions to the plaintiff's original petition and to
sustain the special exceptions and demurrers of the defendant to
the plaintiff's supplemental petition and to enter judgment thereon
in favor of the defendant and dismissing both of said petitions,
with a general judgment for the defendant.
*
"
An ordinance to provide for the issue and sale of fifteen
thousand dollars"
"
in coupon bonds of the city, to borrow money for general
purposes"
"Be it ordained by the City Council of the City of Brenham:"
"SEC. 1. That the mayor be, and is hereby, authorized and
empowered to have printed coupon bonds of the City of Brenham to
the amount of fifteen thousand dollars."
"SEC. 2. Said bonds shall be three (3) of the denomination of
one thousand dollars, ($1,000.00), fourteen(14) of the denomination
of five hundred ($500.00) dollars, twenty-five (25) of the
denomination of one hundred ($100.00) dollars, and fifty of the
denomination of fifty ($50.00) dollars."
"They shall be made payable to bearer twenty years after date at
the office of the Treasurer of the City of Brenham, with interest
from date until paid at the rate of ten percent per annum, payable
semi-annually, on the first days of September and March at the
office of the Treasurer of the City of Brenham, but the city shall
have the right to redeem said bonds at any time after five years
from date."
"SEC. 3. Said bonds shall be dated and interest begin to run on
the first day of _______, A.D. 18__, provided that should any of
said bonds be sold at a subsequent date the amount of interest then
due shall be endorsed as a credit on the coupons first due."
"SEC. 4. Said bonds shall be signed by the mayor and
countersigned by the city clerk, and the seal of the city shall be
affixed, and they shall be numbered and registered as series 2, No.
___, giving the number of the bond issued, commencing with No.
1."
"SEC. 5. Coupons shall be attached to each of said bonds for
each semi-annual installment of interest, which said coupon shall
have printed thereto the signature of the mayor and the city clerk,
and shall be received for general
ad valorem taxes of the
city."
"SEC. 6. Said bonds shall be negotiated and sold by the mayor
and the finance committee of the city as the same may be required
for general purposes, but in no case shall they be sold at a
greater discount than five percent, and the proceeds thereof shall
be placed in the treasury of the city to the credit of the general
fund."
"SEC. 7. That there be, and is hereby, appropriated out of the
general
ad valorem tax of the city one-eighth of one
percent, or so much thereof as may be necessary, on the assessed
value of the taxable property of the city, as a special interest
and sinking fund with which to pay the interest on said bonds and
liquidate the same, and said fund shall be kept separate from the
other funds of the city, and shall be used for no other
purpose."
"SEC. 8. That this ordinance go into effect and have force from
and after its passage."
"Approved June 7, 1879 M. P. KERR,
Mayor"
"Attest: C. H. CARLISIE,
Secretary"
MR. JUSTICE HARLAN, with whom concurred MR. JUSTICE BREWER and
MR. JUSTICE BROWN, dissenting.
MR. JUSTICE BREWER, MR. JUSTICE BROWN, and myself being unable
to concur in the opinion just rendered, the grounds of our dissent
will be stated.
The charter of the City of Brenham, granted in 1873, provided
that "the city council shall have the power and authority to
borrow, for general purposes, not exceeding fifteen
thousand dollars, on the credit of said city;" also that the
"
bonds of the corporation of the City of Brenham shall not
be subject to tax under this act." Special Laws of Texas, pp. 14,
23.
Under the authority conferred by this charter, the city council
in 1879 passed an ordinance, entitled "An ordinance to provide for
the issue and sale of fifteen thousand dollars in coupon bonds of
the city, to
borrow money for general purposes." Bonds,
negotiable in form and to the full amount authorized by the
ordinance, were issued by the city in 1879, and the coupons held by
the German-American Bank were from the bonds so issued. The Court
does not hold that the issuing of these bonds was in violation of
the Constitution of Texas adopted in 1876. But it does hold that
while the city, under its power to borrow, could give to the lender
nonnegotiable paper as a "voucher" for the repayment of the money
borrowed, it could not legally issue negotiable instruments or
bonds as evidence of the loan. This view is conceded to be in
conflict with
Rogers v.
Burlington, 3 Wall. 654, and
Mitchell
v. Burlington, 4 Wall. 270. But it is said that
later
Page 144 U. S. 190
adjudications of this Court have in effect overruled those
cases. We cannot give our assent to the doctrine announced in the
present case. Nor, we submit with some confidence, is that doctrine
sustained by any decision of this Court which has been cited.
What was the case of
Rogers v. Burlington? Besides the
general powers appertaining to municipal corporations, the City of
Burlington had
express power, by its, charter, "to borrow
money for any public purpose," the matter being first submitted to
popular vote. The people having voted, by the requisite majority,
in favor of issuing and lending $75,000 in the bonds of the city to
a particular railroad company, bonds for that amount, negotiable in
form, were issued. The Court held the construction of a railroad to
be a public purpose within the meaning of the charter of the city,
and that it made no difference whether the bonds were sold in the
market by the officers of the municipality or were first delivered
to the company and sold by its agents for the same purpose.
"Technically speaking," the Court observed,
"it may be said that the transaction, as between the company and
the defendants, was, in form, a contract of lending; but as between
the defendants and the persons who purchased the bonds in the
market, it was undeniably a contract of borrowing money, and the
same remark applies to the transaction in its practical and legal
effect upon all subsequent holders of the securities who have since
become such for value, and in the usual course of business."
The minority dissented not upon the ground that an express power
in a municipal corporation to borrow money did not give authority
to execute negotiable instruments for the money borrowed, although
that question was upon the very face of the case, but upon the
ground that the transaction was not one of borrowing money. MR.
JUSTICE FIELD, speaking for the minority, said:
"Here the authority conferred is to
borrow money; yet
no money was borrowed, but the bonds of the city were lent.
'Borrowing money' and 'lending credit' are not convertible terms.
The two things which they indicate are essentially distinct and
different."
Mr. Justice Miller,
Page 144 U. S. 191
in a separate dissenting opinion, called attention to the fact
that the Supreme Court of Iowa had then recently held the bonds
involved in that suit to be void upon the ground that the
transaction "was a loan of credit, and not a borrowing of money."
The principle announced in
Rogers v. Burlington was
applied in
Mitchell v.
Burlington, 4 Wall. 270.
The cases decided since
Rogers v. Burlington which have
been cited in the opinion of the Court as announcing the doctrine
that an express power given to a municipal corporation to borrow
money does not authorize the execution of negotiable instruments
for the money so borrowed are
Police Jury v.
Britton, 15 Wall. 566,
82 U. S.
570-572;
Claiborne County v. Brooks,
111 U. S. 400,
111 U. S. 406;
Concord v. Robinson, 121 U. S. 165,
121 U. S. 167;
Kelley v. Milan, 127 U. S. 139,
127 U. S. 150;
Norton v. Dyersburg, 127 U. S. 160,
127 U. S. 175;
Young v. Clarendon Township, 132 U.
S. 340;
Hill v. Memphis, 134 U.
S. 198,
134 U. S. 203,
and
Merrill v. Monticello, 138 U.
S. 673,
138 U. S.
686-687.
In
Police Jury v. Britton, it appeared that a police
jury in a parish of Louisiana charged with the supervision and
repair of roads, bridges, causeways, dikes, levees, and other
highways was prohibited by statute from contracting any debt or
pecuniary liability without fully providing in the ordinance
creating the debt the means of paying the principal and interest of
the debt so contracted. And the question arose as to whether it
could rightfully issue negotiable bonds to take the place of
certain orders previously given by it for work done on levees in
the parish. The case involved no question as to the scope and
effect of an
express power in the parish
to
borrow money. Mr. Justice Bradley, speaking for the Court,
after observing that the police jury had no express authority to
issue bonds and that, if it existed, it must be
implied
from the general powers of local administration with which they
were invested, said:
"We have therefore the question directly presented in this case
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
Page 144 U. S. 192
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."
This question was answered in the negative. But to prevent any
possible misapplication of the principles announced, the Court
said:
"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."
It thus appears that
Police Jury v. Britton distinctly
declares that case not to be within the rule that an express power
to borrow money carries with it authority to issue negotiable
securities for the amount borrowed.
In
Claiborne County v. Brooks, the question was whether
the power in a county to contract for the erection of a courthouse
implied authority to issue negotiable bonds of a commercial
character in payment for the work. The Court, speaking again by Mr.
Justice Bradley, held that it did not, and said:
"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 and 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 by fairly exercised without
it,"
referring to the same clauses in the opinion in
Police Jury
v. Britton, above quoted, as embodying a distinct expression
of the views or the Court.
In
Concord v. Robinson, it was decided that
"the grant to a municipal corporation of power
to
appropriate moneys in aid of the construction of a railroad,
accompanied by a provision directing the levy and
collection of taxes to meet
such appropriation, and prescribing
no other mode of payment,"
did not imply authority to issue negotiable bonds on account of
such
Page 144 U. S. 193
appropriation; in
Kelley v. Milan, that
"a municipal corporation, in order to exercise the power of
becoming
a stockholder in a railroad corporation, must
have such power expressly conferred upon it by a grant from the
legislature, and that even the power to subscribe for such stock
does not carry with it the power to issue negotiable bonds in
payment of the subscription unless the power to issue such bonds is
expressly
or by reasonable implication conferred by
statute;"
in
Norton v. Dyersburg that
"the mere authority given to a municipality to subscribe for
stock in a railroad company did not carry with it the implied power
to issue bonds therefor, especially where, as in the present case,
special provisions were made for paying the subscription by
taxation;"
in
Young v. Clarendon Township, authority to make the
municipal bonds there involved was conceded, and the case turned
upon the question whether their execution was not subject to the
restrictions and directions of the act which authorized them to be
issued, and in
Hill v. Memphis, that "the power
to
subscribe for stock does not of
itself include the
power to issue bonds of a town in payment of it," and that
"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 approved in
repeated decisions of this Court."
It thus appears that in no one of the above cases decided since
Rogers v. Burlington was there any question as to
negotiable securities' being issued under an
express power
to
borrow money, and that some of them concede that such a
power carries with it authority to give a negotiable paper for
money borrowed.
The case which seems to be much relied upon to support the
present judgment is
Merrill v. Monticello. But we submit
that it does not sustain the broad doctrine that negotiable
securities may not be issued in execution of an
express
power to
borrow money. What could or could not be done
under such a power was not a question involved in that case. The
question was whether authority in the Town of Monticello to issue
negotiable bonds could be
implied, not from an express
Page 144 U. S. 194
but from an
implied power to borrow money. After
observing that under the laws of Indiana, the proposition that a
town has an
implied authority to borrow money or contract
a loan under the conditions and in the manner expressly prescribed
was not to be controverted, the Court, speaking by MR. JUSTICE
LAMAR, said:
"But this only brings us back to the question does the
implied power
to borrow money or contract a loan
carry with it
a further implication of power to issue
funding negotiable bonds for that amount and sell them in open
market?"
The question in that case, as framed by the Court, clearly shows
that it was only considering whether an authority in a municipal
corporation to issue negotiable securities could be
implied from a power to borrow which was
itself
to be
implied from other powers granted. This also appears
from the following clause in the opinion:
"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."
And it is further shown by the fact that the opinion, referring
to the clause in
Police Jury v. Britton, above quoted,
which states that authority in a municipal corporation to issue
negotiable securities may be implied from an
express power
to
borrow money, states that it has no application to the
case then before the Court, in which the attempt was made to
imply authority to issue negotiable bonds simply from an
implied power
to borrow money.
Another case in this Court, not referred to, is very much in
point. It is
City of Savannah v. Kelly, 108 U.
S. 184,
108 U. S. 190.
A railroad corporation whose principal and beginning point was that
city issued its negotiable bonds upon which to raise money to pay
debts for construction and for future improvements. The city,
owning some of the capital stock of the corporation, guaranteed the
payment of those bonds. The bonds, so guaranteed, were put upon the
market and sold. The question was as to the authority of the city
to make this guaranty under the power conferred upon it by an act
of the legislature,
Page 144 U. S. 195
"to obtain money on loan, on the faith and credit of said city,
for the purposes of contributing to works of internal
improvements." Mr. Justice Matthews, speaking for the Court, said
that the fact that the money
"was not advanced directly to the city, but, upon its assurance
of repayment, to the railroad company is not a departure even from
the letter of the law, much less from its meaning; nor does the
fact that the money was advanced partly on the credit of the
railroad company diminish the presumed reliance of the purchaser
upon that of the city, with which it was joined. It is difficult to
conceive of language more comprehensive than that employed to
embrace
every form of security in which the faith and credit of
the city might be embodied, and that in such cases it is not
important to the character of the transaction that the money is
obtained in the first instance by the railroad company, upon the
credit of the city, was directly ruled in
Rogers v.
Burlington, 3 Wall. 654, and affirmed in
Town
of Venice v. Murdock, 92 U. S. 494."
Of course, if the City of Savannah, having the power "to obtain
money on loan," could guaranty negotiable bonds issued by the
railroad company for the purpose of raising money to be contributed
to works of internal improvement in which the city was interested,
the city could have made the loan directly upon its own negotiable
bonds.
It is perhaps proper to say that our views find support in the
admirable commentaries of Judge Dillon on the Law of Municipal
Corporations. The Court refers to sections 507 and 507
a of
those commentaries. But those sections do not in any degree support
the conclusion reached in this case. The doctrine which the learned
author declares in those sections to be alike unsound and dangerous
is
"that a public or municipal corporation possesses the
implied power to borrow money for its ordinary purposes,
and as
incidental thereto the power to issue commercial
securities -- that is, paper which cuts defenses when it is in the
hands of a holder for value acquired before it is due."
But Judge Dillon, while agreeing that the power to issue
commercial paper, unimpeachable in the hands of a
bona
fide holder, is not among the ordinary
incidental
powers of a public municipal corporation, and must be conferred
Page 144 U. S. 196
expressly or by fair implication, says, after a careful review
of the authorities:
"
Express power to borrow money, perhaps in all cases
but especially if conferred to effect objects for which large or
unusual sums are required, as for example subscriptions to aid
railways and other public improvements, will ordinarily be taken,
if there be nothing in the legislation to negative the inference,
to include the power (the same as if conferred upon a corporation
organized for pecuniary profit) to issue negotiable paper with all
the incidents of negotiability."
1 Dillon's Mun.Corp. § 125, 4th ed. It is eminently just to
apply that rule in the present case, because the act giving the
City of Brenham authority to borrow not exceeding $15,000 for
general purposes expressly provided that its
bonds should
not be subject to tax under that act. Such a provision could have
had reference only to negotiable bonds, which would be put upon the
market for the purpose of raising money.
It seems to us that the Court in the present case announces for
the first time that an express power in a municipal corporation to
borrow money for corporate or general purposes does not under any
circumstances carry with it by implication authority to execute a
negotiable promissory note or bond for the money so borrowed, and
that any such note or bond is void in the hands of a
bona
fide holder for value. There are perhaps few municipal
corporations anywhere that have not, under some circumstances and
within prescribed limits as to amount, express authority to borrow
money for legitimate corporate purposes. While this authority may
be abused, it is often vital to the public interests that it be
exercised. But if it may not be exercised by giving negotiable
notes or bonds as evidence of the indebtedness so created -- which
is the mode usually adopted in such cases -- the power to borrow,
however urgent the necessity, will be of little practical value.
Those who have money to lend will not lend it upon mere vouchers or
certificates of indebtedness. The aggregate amount of negotiable
notes and bonds executed by municipal corporations for legitimate
purposes under express power to borrow money simply, and now
outstanding in every part of the country, must be
Page 144 U. S. 197
enormous. A declaration by this Court that such notes and bonds
are void because of the absence of
express legislative
authority to execute
negotiable instruments for the money
borrowed will, we fear, produce incalculable mischief. Believing
the doctrine announced by the Court to be unsound upon principle
and authority, we do not feel at liberty to withhold an expression
of our dissent from the opinion.