The transactions with the County of Mercer, which resulted in
the delivery of the bonds of the county to the railroad company,
were had in the utmost good faith.
Barnum v. Okolona, 148 U. S. 393,
reaffirmed to the point
"that municipal corporations have no power to issue bonds in aid
of railroads except by legislative permission; that the
legislature, in granting permission to a municipality to issue its
bonds in aid of a railroad, may impose such conditions as it may
choose, and that such legislative permission does not carry with it
authority to execute negotiable bonds except subject to the
restrictions and conditions of the Enabling Act."
But when the good faith of all the parties is unquestionable,
the courts will lean to that construction of the statute which will
uphold the transaction as consummated.
The provision in the act authorizing the issue of Mercer County
bonds to the Louisville Southern Railroad Company, when its railway
should have been so completed "through such county that a train of
cars shall have passed over the same" was fully complied with when
the railroad was so completed, from the northern line of the county
to Harrodsburg, that a train of cars passed over it; but even if
this construction be incorrect, it must be held that when the
trustee in whose hands the county bonds were placed in escrow
adjudged that the condition prescribed for their delivery had been
complied with and delivered the bonds to the railroad company, the
company took such a title as, when the bond was transferred to a
bona fide holder, would enable him to recover against the
county even if the condition had in fact not been performed.
On May 15, 1886, the General Assembly of the Commonwealth of
Kentucky passed an act
Page 170 U. S. 594
entitled "An act to authorize the County of Mercer to subscribe
aid to the Louisville Southern Railroad Company," the first section
of which is as follows:
"SEC 1. That the County of Mercer may subscribe to the capital
stock of the Louisville Southern Railroad Company as hereinafter
provided, and may pay therefor in the negotiable coupon bonds of
said county, payable not more than thirty years after date and
bearing interest at a rate not to exceed six percentum per annum,
payable semi-annually, and which bonds and interest shall be
payable at a place designated therein."
The second and third sections contain provisions in detail in
respect to a vote of the people of the county, the subscription to
the stock of the company, and the execution of the bonds. The
fourth section reads:
"SEC. 4. The said bonds shall not be binding or valid
obligations until the railway of the said company shall have been
so completed through such county that a train of cars shall have
passed over the same at which time they shall be delivered to said
railroad company in payment of the subscription of such county, and
the county shall thereupon be entitled to receive certificates for
the stock subscribed, and the county judge of such county shall
order that such bonds shall be deposited with a trustee or trust
company, to be held in escrow, and delivered to the said railroad
company when it shall become entitled to the same by the
construction of its road through such county,
provided
however that such trust company or trustee shall, before
receiving such bonds, give bond, with good surety, approved by the
county judge, for the faithful performance of his or its duty in
the premises,
and provided further that no such
subscription shall be binding unless such railroad shall pass to or
through the corporate limits of the Town of Harrodsburg."
In pursuance of this act, an election was held in the county,
resulting in favor of making the subscription and issuing the
bonds. The subscription was made, and the bonds executed. The bonds
were, omitting a provision for repayment, in the following
form:
Page 170 U. S. 595
"
United States of America"
"
$1,000 No. 105"
"
Louisville Southern Railroad Aid Bonds"
"
County of Mercer, Kentucky"
"The County of Mercer, in the State of Kentucky, hereby
acknowledges itself indebted and promises to pay to the Louisville
Southern Railroad Company, or bearer, the sum of $1,000 on or
before the tenth day of January, A.D. 1917, at the Louisville
Banking Company in the City of Louisville, Kentucky, with interest
thereon at the rate of five percent per annum, payable semiannually
at said bank on the tenth days of July and January after date,
respectively, in each year, on presentation and surrender of the
annexed coupons representing such interest. This bond is one of a
series of one hundred and twenty-five bonds of even date herewith,
all of the same denomination and tenor, and numbered consecutively
from one to one hundred and twenty-five, the same having been
issued pursuant to the authority conferred upon the said county by
an act of the legislature of Kentucky entitled 'An act to authorize
the County of Mercer to subscribe aid to the Louisville Southern
Railroad Company,' approved May 15, 1886, and pursuant to an order
entered by the county judge of said county in conformity with said
act subscribing in behalf of said county for the capital stock of
the Louisville Southern Railroad Company in the sum of $125,000,
which order was entered of record in said court on January 10, A.D.
1887."
"
* * * *"
"In witness whereof, the County of Mercer, by John W. Hughes,
county judge thereof, has, in the name and on behalf of said
county, subscribed and executed this bond, and the same has been
attested by the county clerk of said county, with his official seal
affixed hereto, and the interest coupons attached thereto have been
signed by the said clerk."
"Done on the tenth day of January, A.D. 1887."
"The County of Mercer [Seal.]"
"By John W. Hughes,
County Judge"
"Attest: Ben C. Allin,
Clerk "
Page 170 U. S. 596
On February 7, 1887, the county court appointed D. L. Moore
trustee, as prescribed by section 4 of the act. Moore accepted the
trust, and gave bond with good surety, as required, and on March 3,
1887, the bonds were deposited with him.
Prior to June 1, 1888, the railroad was completed from
Louisville, in Jefferson county, via Shelbyville, in Shelby County,
and Lawrenceburg, in Anderson County, south through Mercer County
to the depot of the Southwestern Railroad in Harrodsburg, the
county seat. There it connected with a short line of road
constructed by the Southwestern Railroad Company, and extending
from Harrodsburg to Burgin, on the Cincinnati Southern Railroad.
The Southern Company owned all the stock of the Southwestern
Company, had possession of its road, and subsequently the two
companies were consolidated, and the latter merged in the former
company. On said first day of June, 1888, a train of cars, moved by
an engine, passed over the road from Louisville through Harrodsburg
to Burgin, and then returned to Louisville, and from that time, the
railroad from Louisville to Burgin has been continually operated as
the Louisville Southern Railroad. The distance from the northern
line of Mercer County to Harrodsburg is fifteen miles; from
Harrodsburg to Burgin, 4.72 miles. Burgin is three miles from the
south line of Mercer County and 4.74 miles from the east line. The
nearest point that the road runs to the south line of Mercer County
is 2 miles.
On July 3, 1888, Moore resigned his position as trustee, and
Isaac Pearson was appointed in his place. He gave security to the
county, as required by the act, and received from the prior trustee
all the bonds and coupons in his hands. About the first of June,
1888, the time of the passage of a train of cars from Louisville to
Burgin and back, as hereinbefore stated, there arose a question
whether the condition precedent to the delivery of the bonds had
been complied with by the railroad company, and it was in view of
this difference of opinion and the doubts of the trustee, Moore,
that he resigned his position. This question was publicly and
generally discussed, and while the discussion was going on, and
before Pearson, the trustee, had determined that the condition
precedent had been performed,
Page 170 U. S. 597
and that he would deliver the bonds, the railroad company
prepared to extend its road towards and to the Town of Danville, in
Boyle County, which was 7.47 miles distant from Harrodsburg, and,
with one exception, acquired all the rights of way to the southern
line of Mercer County. A movement was made in the county to have
the court of claims of the county instruct the trustee as to his
duty in the premises, and that court, consisting of the county
judge and the justices of the peace of his county, met on June 26,
1888, and the question was fully discussed before them. After
argument, they declined to instruct the trustee as to his action,
but, upon motion of one of the justices, passed and spread upon the
records this resolution:
"At a county Court of Claims for Mercer County at the courthouse
in Harrodsburg, on Tuesday, the 26th day of June, 1888."
"Present: John W. Hughes, J.P.M.C.C. and M. Cummins, C. B.
Connor, James Yeast, Sr., A. S. Hendrew, John W. Reed, E. R.
Norton, R. L. Mullins, E. I. Massie, N. Harris, G. J. Johnson, B.
O. Jones, A. Johnson, J. C. McIntire, and John T. Pankey, justices
of the peace of Mercer County."
"G. J. Johnson, as justice of the peace of this county, offered
into court the following motion, which is ordered to be noted of
record, and is as follows:"
" The members of this Court do not believe that they have any
right to enter an order directing the trustee to deliver the bonds
of this county to the Louisville Southern Railroad, but as
individuals they are of the opinion that such delivery should be
made, and the construction of the railroad not forced to the Boyle
County line."
"And, said motion being seconded, the ayes and nays were taken,
and resulted as follows:"
"Ayes, 12, as follows: M. Cummins, C. B. Connor, James Yeast,
Sr., A. S. Hendrew, John W. Reed, E. R. Norton, R. L. Mullins, n.
Harris, G. J. Johnson, B. O. Jones, J. C. McIntire, and John T.
Pankey."
"Nays, none. Not voting, two, as follows: E. I. Massie and A.
Johnson. "
Page 170 U. S. 598
After this, Pearson, the trustee, decided that the conditions
had been performed, and on the _____ day of August, 1888, in the
presence of the county judge of the county, delivered the bonds,
first cutting off and burning the past-due coupons. At the same
time the Louisville Southern Railroad Company delivered to the
county its certificate for an equal amount of its capital stock.
The stock was accepted by the county, and voted by the county judge
at a stockholders' meeting on at least two occasions -- one on
December 18, 1888, and another on May 26, 1890 -- and the stock
certificate is still held by the County of Mercer, and has never
been tendered to the railroad company, or any one representing it.
At these two meetings, Mercer County voted its shares in support of
certain resolutions materially affecting the business affairs of
the railroad company, and also accepting a legislative amendment to
its charter, as well as in the election of directors. The county
regularly levied an annual tax to meet the semiannual interest on
the bonds, and paid such interest for the years 1889, 1890, 1891,
and January 1, 1892. Since then, it has paid no interest. The
Provident Life and Trust Company is a
bona fide purchaser
of $100,000 of the bonds, and on default in payment of the coupons,
it commenced this action on November 3, 1892, in the Circuit Court
of the United States for the District of Kentucky. The pleadings
having been perfected, the case was tried before the court without
a jury. Special findings of facts were made, and upon them judgment
was on April 30, 1895, rendered in favor of the plaintiff. From
this judgment the county took the case on error to the court of
appeals for that circuit. That court, on March 3, 1896, filed an
opinion holding the bonds void, 72 F. 623, and entered a judgment
reversing the judgment of the circuit court and remanding the case
with instructions to enter a judgment in accordance with the
opinion. Thereupon, on October 20, 1896, the case was brought to
this Court on certiorari.
Page 170 U. S. 599
MR. JUSTICE BREWER, after stating the facts in the foregoing
language, delivered the opinion of the Court.
No one can read the facts above stated, as found by the circuit
court, without being impressed that the transactions between the
county and the company, culminating in the delivery of the bonds to
the latter, were had in the utmost good faith. There was no
misrepresentation, concealment, or fraud. The work done by the
company in constructing the railroad was obvious and satisfactory.
The question whether that work was a compliance with the terms of
the subscription was publicly discussed, and was fully considered
at a meeting of the county court of claims, whose opinion was, and
was so expressed, that the contract had been fully complied with,
and that the bonds ought to be delivered. Prior to the time that
such conclusion was reached, the company, in view of the question,
commenced its preparations to construct the road to the south
county line, and had obtained, with a single exception, the
necessary right of way therefor. When advised by the opinion of the
court of claims that the construction of the additional two miles
of road was unnecessary, and the judgment of the trustee was
announced that he considered the contract of subscription fully
complied with, the company desisted, and took the bonds. The county
accepted the stock issued by the company, voted upon it at
stockholders' meetings, and has ever since retained it. For three
years and a half, it paid the interest on the bonds without
questioning their validity. So that, if good faith on the part of
all concerned was the sole condition of the validity of these
bonds, no question could be made concerning it.
We do not mean to imply that good faith is the only requisite,
or that a condition plainly prescribed by the legislature can be
ignored by a county, even with the best of intentions. On the
contrary, we reaffirm the proposition laid down in
Barnum v.
Okolona, 48 U. S. 393,
48 U. S.
395:
Page 170 U. S. 600
"That municipal corporations have no power to issue bonds in aid
of a railroad except by legislative permission; that the
legislature, in granting permission to a municipality to issue its
bonds in aid of a railroad, may impose such conditions as it may
choose, and that such legislative permission does not carry with it
authority to execute negotiable bonds except subject to the
restrictions and conditions of the Enabling Act, are propositions
so well settled by frequent decisions of this Court that we need
not pause to consider them.
Sheboygan Co. v. Parker, 3
Wall. 93,
70 U. S. 96;
Wells v.
Supervisors, 102 U. S. 625;
Claiborne Co.
v. Brooks, 111 U. S. 400;
Young v.
Clarendon Township, 132 U. S. 340,
132 U. S.
346."
At the same time, when the good faith of all the parties is
unquestionable, the courts will lean to that construction of the
statute which will uphold the transaction as consummated.
Especially will that be so in a case in which, the question of
construction having been raised, the one party commences
preparations to perform work which will put the matter beyond
question, and desists therefrom only upon the representations of
the other party that it is satisfied the work has been completed
according to the terms of the contract. As said in
Andes v.
Ely, 158 U. S. 312,
158 U. S.
321:
"While courts may properly see to it that proceedings for
casting burdens upon a community comply with all the substantial
requisitions of a statute in order that no such burden may be
recklessly or fraudulently imposed, yet such statutes are not of a
criminal character, and proceedings are not to be so technically
construed and limited as to make them a mere snare to those who are
encouraged to invest in the securities of the municipality. These
considerations are appropriate to this case. The proceedings on the
part of the town and the railroad company were carried on in
evident good faith. No one questioned their validity; no effort was
made to review the action of the county judge; the bonds were
issued; more than $100,000 was spent within the limits of the town
in the construction of the road, and years went by, during which
the town paid the interest and part of the principal, before any
question was made as to their validity. "
Page 170 U. S. 601
See also Mercer Co. v.
Hacket, 1 Wall. 83;
Van
Hostrup v. Madison City, 1 Wall. 291;
Ray v.
Vansycle, 96 U. S. 675.
With these preliminary observations, we pass to a consideration
of the questions presented, and, in the first place, it must be
noticed that no matter of constitutional limitation is involved.
The only inquiry is whether the conditions prescribed in the
statute have been fully complied with, and, if not, whether the
county is in a position to avail itself of the noncompliance. The
statute in terms authorizes the issue of negotiable bonds. The
bonds are negotiable, and issued by the proper county officers;
carry on their face recitals that they have "been issued pursuant
to the authority conferred" by an act of the legislature, which is
named, and "pursuant to an order entered by the county judge of
said county in conformity with said act subscribing in behalf of
said county for the capital stock" of the railroad company. By a
long series of decisions, such recitals are held conclusive in
favor of a
bona fide holder of bonds that precedent
conditions prescribed by statute and subject to the determination
of those county officers have been fully complied with. For
instance, whether an election has been held, whether at such an
election a majority voted in favor of the issue of bonds, whether
the terms of the subscription have been complied with, and matters
of a kindred nature, which either expressly or by necessary
implication are to be determined in the first instance by the
officers of the county, will, in favor of a
bona fide
holder, be conclusively presumed to have been fully performed,
provided the bonds contain recitals similar to these in the bonds
before us.
See, among other cases,
Coloma v.
Eaves, 92 U. S. 484;
Warren County v. Marcy, 97 U. S. 96;
Buchanan v. Litchfield, 102 U. S. 278;
Northern Bank v. Porter Township, 110 U.
S. 608;
Bernards Township v. Morrison,
133 U. S. 523;
Citizens' Savings Ass'n. v. Perry County, 156 U.
S. 692;
Andes v. Ely, 158 U.
S. 312.
But it is said that the recitals in this case can be held
conclusive only as to matters transpiring before the placing of the
bonds in the hands of the trustee, such as the election,
Page 170 U. S. 602
etc., because, by section 4 of the statute, the bonds, when
executed, were to be deposited with a trustee, to be held in
escrow, and delivered only upon the performance of a certain
condition -- a condition to be performed subsequently to the
execution of the bonds. Assuming, without deciding, that such
limitation must be placed upon the recitals, we pass to inquire
whether that condition was in fact performed, and, if not, whether,
after delivery by the trustee, the county can be permitted to raise
the question as against
bona fide holders. That condition
is that the bonds shall not be binding "until the railway of the
said company shall have been so completed through such county that
a train of cars shall have passed over the same." It is contended
that the word "through" means clear through the county -- from one
end of the county to the other, and that, while the railway enters
the north line of the county, and runs within the county limits a
distance of nearly twenty miles, it does not touch the south county
line, nor come within a nearer distance of it than two miles. So it
is said the railway does not run through the county, and therefore
the condition upon which the bonds could become binding and valid
obligations did not and does not exist. It is true, the primary
meaning of the word "through" is from end to end, or from side to
side, but it is used in a narrower and different sense. Its meaning
is often qualified by the context. Thus, if one should say that he
had spent the summer traveling through New England, it would not be
understood as carrying an affirmation that he had been from one
side clear to the other or from one end clear to the other, but
that his travels had been within the limits of New England. That
book which is said to have had a wider circulation than any except
the Bible, Bunyan's Pilgrim's Progress, opens with this sentence:
"As I walked through the wilderness of this world, I lighted on a
certain place where there was a den, and laid me down in that place
to sleep." Does the writer mean that he passed from one end of the
wilderness to the other, and at the further end found the den, or
simply that as he traveled in the wilderness, he lighted on the
den? Obviously, the latter. Many similar illustrations might
Page 170 U. S. 603
be cited. They show that "through" does not always mean from end
to end, or from side to side, but frequently means simply "within."
Now the language here is "so completed through such county that a
train of cars shall have passed over the same." Obviously, the
primary thought is not the extent of the line, but the extent to
which the work shall be completed. In other words, the principal
thing is not that a railroad shall be partially completed from one
end of the county to the other, but that a railroad shall be so
completed within and substantially through the county that a train
of cars passes over it. It may well be believed that, inasmuch as
the company's road was to commence at Louisville, on the northern
border of the state, and its principal city, the purpose was to
connect the county with that city, and that the road should be so
fully completed as to permit the moving of trains over it --
i.e. be in a condition for actual use -- and not that a
road, no matter how far constructed, should be extended from one
end of the county to the other. This view of the intent of the
legislature is sustained by the last clause of the section, which
provides "that no such subscription shall be binding unless such
railroad shall pass to or through the corporate limits of the Town
of Harrodsburg." This contemplates that the line coming from the
north shall enter the county and pass through it so far as to reach
the corporate limits of the Town of Harrodsburg, that town being
the county seat. The proviso is not that the road, in passing
through the county, shall touch or pass through the Town of
Harrodsburg, but simply that it shall pass to or through that town,
and either is sufficient. It seems not an unreasonable construction
of this statute that the condition of subscription was fully
complied with when the railroad was so completed from the northern
line of the county to Harrodsburg, the county seat, that a train of
cars passed over it. If that be the correct construction, then, of
course, we need inquire no further, and, on the other hand, if,
though not correct, it be not an unreasonable construction, the
courts should, in view of the unquestioned good faith of both
parties, of the fact that it was adopted by the authorities of the
county, and that
Page 170 U. S. 604
by reason thereof the company desisted from further work,
accept, if possible, the interpretation placed by the parties as
correct. This view is certainly persuasive.
But if the true -- the only permissible -- construction be
otherwise, and the demand of the statute is that the road be
actually constructed from the north to the south line of the
county, and so constructed that a train of cars shall have passed
over it, then the question arises as to the effect of the decision
of the trustee that the condition had been complied with, and of
his delivery of the bonds, and their subsequent purchase by a
bona fide holder. It is said that the bonds were placed in
escrow, and that, when an instrument is so placed, there can be no
valid delivery until the condition of the escrow has been
performed, and if, without performance, the instrument passes out
of the hands of the one holding the instrument in escrow, it is not
enforceable against the maker, and that, in a suit on the
instrument, the inquiry is always open whether the condition of the
escrow has been performed. Whatever may be the rule in case the
instrument so placed in escrow be a deed or nonnegotiable contract,
we are of opinion that a different rule obtains when the instrument
is a negotiable obligation.
"It is generally agreed that a delivery of negotiable paper left
in escrow, contrary to the terms upon which it was to have been
delivered, will pass a good title to the
bona fide
transferee for value and before maturity."
Long Island Loan and Trust Co. v. Columbus &c.
Railway, 65 F. 455, 458.
In
Fearing v. Clark, 16 Gray 74, 76, Chief Justice
Bigelow thus states the law:
"The rule is different in regard to a deed, bond, or other
instrument placed in the hands of a third person as an escrow, to
be delivered on the happening of a future event or contingency. In
that case, no title or interest passes until a delivery is made in
pursuance of the terms and conditions upon which it was placed in
the hands of the party to whom it was entrusted. But the law aims
to secure the free and unrestrained circulation of negotiable
paper, and to protect the rights of persons taking it
bona
fide without notice. It therefore makes the consequences which
follow from the negotiation
Page 170 U. S. 605
of promissory notes and bills of exchange through the fraud,
deception, or mistake of those persons to whom they are entrusted
by the makers to fall on those who enabled them to hold themselves
out as owners of the paper
jure disponendi, and not on
innocent holders who have taken it for value, without notice."
In
Burson v. Huntington, 21 Mich. 415, 433, it is
said:
"If the maker or endorser, before delivery to the payee, leave
the note in the hands of a third person as an escrow, to be
delivered upon certain conditions only, . . . and the person to
whom it is thus entrusted violate the confidence reposed in him,
and put the note into circulation, this, though not a valid
delivery as to the original parties, must, as between a
bona
fide holder for value and the maker or endorser, be treated as
a delivery, rendering the note or endorsement valid in the hands of
such
bona fide holder."
See also Vallett v. Parker, 6 Wend. 615, 620;
Bank
v. Faurot, 149 N.Y. 532;
Graff v. Logue, 61 Ia.
704.
Within these authorities, it must be held that when the trustee
adjudged that the condition had been complied with, and delivered
the bonds, the railroad company took such a title as, transferred
to a
bona fide holder, enabled him to recover against the
county, notwithstanding the condition had in fact not been
performed. That the trustee was the agent of the county, and
responsible to it for the manner in which he discharged this duty
is obvious from the provision in the statute that he shall give
"bond, with good surety, approved by the county judge, for the
faithful performance" of his duty. If, in case the condition was
not performed, the county had a perfect defense to the bonds, even
in the hands of a
bona fide holder, there were little need
of requiring the trustee to give any security.
Another significant feature in this connection is the fact that,
by statute, the bonds were to be negotiable. Counsel for the county
suggest that this provision of the statute can be satisfied by
giving to the bonds the benefit of negotiability as between
successive holders, but we know of no reason why the general
significance of the word "negotiable" should be
Page 170 U. S. 606
so limited. The third of the three peculiar and distinguishing
characteristics of negotiable instruments, as stated in 1 Daniel on
Negotiable Instruments, sec. 1, is respecting the consideration,
and the author says:
"As between immediate parties, the true state of the case may be
shown, and the presumption of consideration rebutted. But when a
bill of exchange or negotiable note has passed to a
bona
fide holder for value, and before maturity, no want or failure
of consideration can be shown. Its defects perish with its
transfer, while, if the instrument be not a bill of exchange or
negotiable note, they adhere to it in whosesoever hands it may
go."
To hold that by this provision the legislature intended that the
quality of negotiability should inhere in the instruments only as
between the successive holders, and not between the maker and any
bona fide holder, cannot be justified by any reasonable
construction of the language used.
It follows from these considerations that these bonds in the
hands of the life and trust company, a
bona fide holder,
must be adjudged the valid obligations of the county.
The judgment of the court of appeals is therefore reversed,
and the judgment of the circuit court is affirmed.
