1. The Court reaffirms its former decisions that where, after a
preliminary proceeding, such as a popular election, a county had
lawful authority to issue its bonds, and they were issued, bearing
upon their face a certificate by the officer, whose primary duty it
was to ascertain the fact, that such proceeding had taken place, a
bona fide holder of them for value before maturity has a
right to assume that such certificate is true.
2. The bonds are not, in the hands of such a holder, rendered
invalid by the fact that such proceeding was so defective that a
suit to prevent their issue should be, and, on appeal to the
supreme court of the state, ultimately was, sustained against the
county officers, nor by the fact that they were issued after such a
suit had been brought, and were by him purchased during its
pendency.
3. The rule that all persons are bound to take notice of a suit
pending with regard to the title to property, and that they, at
their peril, buy the same from any of the litigating parties, does
not apply to negotiable securities purchased before maturity.
4. The considerations which exclude the operation of that rule
to such securities apply to them, whether they were created during
the suit or before its commencement, and to controversies relating
to their origin or to their transfer.
This was an action brought in the court below by George O.
Marcy, the defendant in error, against the County of Warren, to
recover the amount of certain coupons, originally attached to
certain bonds of the said county, bearing date Jan. 25, 1871. These
bonds were in the following form:
"
UNITED STATES OF AMERICA -- STATE OF ILLINOIS"
"
No. ___ County of Warren $1,000"
"On the first day of July, in the year of our Lord one thousand
eight hundred and ninety, the County of Warren, and State of
Illinois, promises to pay to the Rockford, Rock Island, and Saint
Louis Railroad Company, or bearer, the sum of $1,000, and interest
thereon, at the rate of eight percent per annum, payable annually,
on the first day of July in each year, on presentation to the
treasurer of said Warren County of the respective interest coupons
which are hereto severally adjoined. "
Page 97 U. S. 97
"This bond is issued in conformity with the vote of the electors
of said county, cast at an election held on the twenty-third day of
September, A.D. 1869."
"In testimony whereof, and pursuant to the authority granted by
law, and upon the order of the Board of Supervisors of said Warren
County, passed at an adjourned session thereof, begun on the
twenty-fifth day of January, A.D. 1871, I, clerk of the county
court of said county, have hereunto signed my name as such clerk,
and affixed the seal of said county court, this twenty-fifth day of
January, A.D. 1871."
"WARREN COUNTY COURT"
"ILLINOIS, SEAL"
"W. G. BONE"
"
Clerk of the County Court of Warren County"
A jury being waived, the court made a special finding of the
facts, and thereupon found generally for the plaintiff, and
rendered judgment in his favor. The county then brought the case
here.
The principal facts of the case, as found by the court, are as
follows:
The Rockford, Rock Island, and St. Louis Railroad Company,
having been chartered by an act of the Legislature of Illinois,
approved Feb. 16, 1865, a supplement to said charter was passed and
approved on the 4th of March, 1869, whereby, amongst other things,
it was enacted (by sec. 6) that any incorporated city, town,
village, or county, through which said railroad might pass, or
which might be situated on or near the line thereof, might
subscribe to the capital stock of the company any sum not exceeding
$100,000, and might issue coupon bonds, not to run more than thirty
years. To this enactment was appended the following proviso:
"
Provided that before said stock shall be subscribed,
an election shall be held, in conformity to the laws in regard to
ordinary state, city, county, or town elections, thirty days'
notice first having been given, by publication in at least one
newspaper in the county, and six public notices, printed or
written, having been posted in six of the most public places
therein during the time above named, and returns to be made in the
usual way, at which election a majority of the legal voters, voting
on the question, shall have voted in favor of said subscription,
and to this end, the . . . board of supervisors . . . may from time
to time order elections, specifying the amount proposed to be
subscribed. "
Page 97 U. S. 98
On the 25th of March, 1869, another act was passed and approved,
entitled "An Act to authorize certain counties and towns therein
named to subscribe stock in railroad companies."
The first section of this act authorized the Counties of Rock
Island, Mercer, Warren, McDonough, Schuyler, Cass, Scott, and
Greene to purchase or subscribe for shares of the capital stock in
any railroad company already organized, or thereafter to be
organized, which should pass in whole or in part through the said
counties, or any or either of them, to such an amount as any of
said counties, or either of them, should determine and deem proper.
The second section provided that such subscriptions might be made
by an agent appointed by the board of supervisors, in counties that
might adopt township organization (which it was conceded Warren
County had done), upon such terms and conditions as the corporate
authorities of any such county might prescribe; and for the payment
of such stock, the board were authorized to borrow money at
interest not exceeding ten percent, or to pay for the same in the
bonds, orders, or warrants of the county, in sums not less than
$100, to run not exceeding twenty years, at interest not exceeding
ten percent per annum. The fourth section directed that all such
bonds, &c., should be issued by the clerk of the county court,
under the seal of his office, upon the order of the county
authorities, and the county clerk to make registration thereof, and
certify the same on the bonds. The tenth section declared that no
such subscription to stock should be made, unless the same was
submitted to a vote of the people of such county, and should
receive a majority of the votes cast, and that the question should
be submitted in such manner as the county authorities might
determine.
It is claimed by the defendant in error that the County of
Warren derived authority to issue the bonds in question under the
last-mentioned act. The road of the Rockford, Rock Island, and St.
Louis Railroad Company was partially built north and south of
Warren County before the election hereafter mentioned was held, and
it was declared by the company that it would go through that
county, and it is not disputed that it was, in fact, afterwards
laid through the same as proposed.
Page 97 U. S. 99
The proceedings of the board of supervisors and county officers
which resulted in the issue of the bonds were as follows:
On the 23d of August, 1869, the board called an election of the
people of the county to be held on Sept. 23, 1869, for the purpose
of determining the question of a county subscription of $200,000 to
the stock of said railroad company, including the $100,000
previously voted to the St. Louis, Alton, and Rock Island Railroad
Company, claimed to have been transferred to the former company by
virtue of an act of assembly passed in 1869. Notices of the
election were not published until Aug. 27, 1869 (less than thirty
days prior thereto), and some of those posted were not posted for
the full period of thirty days, and in one township none were
posted at all; but in all the others, notices were published for
periods varying from twenty to thirty days. The election was held
pursuant to notice on the 23d of September, 1869, and one thousand
seven hundred and seventy-five votes were cast for the
subscription, and nine hundred and seventy-five against it, the
total vote of the county at the last previous general election
being four thousand seven hundred and thirty-one. The vote was duly
canvassed, and filed in the clerk's office; and on the 16th of
March, 1870, the board declared that the election had resulted in
favor of the subscription, and ordered its chairman to make the
same accordingly.
On the 18th of July, 1870, one Harding, a taxpayer and citizen
of the county, filed a bill in chancery, on behalf of himself and
all other taxpayers, against the county officers and the railroad
company, in the Circuit Court of Warren County, asking for an
injunction to prevent the subscription of stock and the issue of
bonds therefor, and that the proceedings of the board be set aside
and declared void. The bill set forth the foregoing facts, and a
temporary injunction was granted, but was subsequently dissolved on
the 23d of January, 1871. The complainant prayed an appeal from the
order dissolving the injunction, which was not granted, and the
cause went to final hearing on the 2d of February, 1871, when the
bill was dismissed. Thereupon the complainant appealed to the
supreme court of the state. The cause having been heard at the
first
Page 97 U. S. 100
term thereafter, the decree of the circuit court was reversed in
1873, and the cause remanded with directions to enter a decree for
the complainant, according to the prayer of the bill. In accordance
with these directions, a decree was duly entered in the circuit
court.
Meantime, pending these proceedings, after the dissolution of
the temporary injunction by the circuit court, and on the 25th of
January, 1871, the bonds in question, to the amount of $200,000, in
the form above set forth, were executed under the hand of the clerk
of the board of supervisors of Warren County, by order of a
majority of the board, at a meeting held on that day. They were
then delivered by the clerk, as directed by the board, to the
Rockford, Rock Island, and St. Louis Railroad Company, in payment
of a subscription to the stock of said company, which purported to
be made in March, 1870, in the name of the county, by the chairman
of said board, in pursuance of the order of the board, before
stated. They were registered in the office of the Clerk of Warren
County, and so certified by him Jan. 25, 1871, and were registered
Jan. 27, 1871, in the office of the state auditor of public
accounts, and so certified by him on the bonds.
The defendant in error subsequently became a purchaser of the
coupons in question for value, before maturity, and without any
actual notice of their alleged invalidity, or of any suit in
relation thereto.
Page 97 U. S. 102
MR. JUSTICE BRADLEY, after stating the case, delivered the
opinion of the Court.
It is insisted by the plaintiff in error that the bonds and
coupons were void, for want of authority in the board of
supervisors to issue them, in consequence of insufficient notice of
the election. It must be conceded, however, that if the case is to
be governed by the Act of March 25, 1869, there was no defect in
the proceedings. But it is insisted that the Act of March 4,
Page 97 U. S. 103
1869, which prescribed a notice of thirty days by publication in
a newspaper was still binding, and was not abrogated by the Act of
March 25, the tenth section of which provided that the question
should be submitted in such manner as the county authorities might
determine.
This was the very question raised before the state court in
Harding v. Rockford, Rock Island, & St. Louis Railroad
Co., 65 Ill. 90, and the Supreme Court of Illinois decided
that the provisions of the Act of March 4 were binding and that the
election was void for want of such published notice of thirty
days.
The court considered that the object of the Act of March 25 was
to remove the limitation as to the amount of the subscription and
to change the time for the maturity of the bonds, as imposed by the
Act of March 4, but not to change the time or manner of giving
notice of the election, and they conclude their opinion in the
following words:
"We are of opinion that the proviso to section six (6) of the
Act of 4th of March is not abrogated by section ten (10) of the
subsequent act. Their reconciliation in the manner we have
attempted will best subserve the public good, and the validity of
both, thus reconciled, will make the legislation more in accordance
with reason, shield the legislature from an absurdity and prevent
serious consequences."
"As the election was invalid for want of sufficient notice,
there was no power to make the subscription, and none was conferred
by the vote to issue the bonds."
If we accept this as the true construction of these statutes,
the question then arises whether, the bonds having been issued and
acquired under the circumstances shown by the special findings of
the circuit court, the defendant in error is entitled to recover.
Is the county bound to pay the coupons in question to one who
purchased them for value before maturity, and without any actual
knowledge of the facts relied on to invalidate them or of the
pendency of the suit brought to have the proceedings declared
void?
This involves two question:
1. Are the bonds so absolutely void as against the county as to
be invalid under all circumstances, even in the hands of a
bona
fide holder for value?
2. If
Page 97 U. S. 104
not, was the commencement and pendency of the suit for having
the proceedings of the supervisors declared void, and preventing
the issue of the bonds, such notice to all persons of their
invalidity, as to defeat the title of a purchaser for value before
maturity, having no actual notice of the suit, or of the objection
to the bonds?
The first question is to be viewed in the light of the former
decisions of this Court. We have substantially held that if a
municipal body has lawful power to issue bonds or other negotiable
securities, dependent only upon the adoption of certain preliminary
proceedings, such as a popular election of the constituent body,
the holder in good faith has a right to assume that such
preliminary proceedings have taken place, if the fact be certified
on the face of the bonds themselves, by the authorities whose
primary duty it is to ascertain it.
Commissioners of Johnson
County v. January, 94 U. S. 202;
Commissioners of Douglass County v. Bolles, 94 U. S.
104, 108;
Town of Coloma v. Eaves, 92 U. S.
484, 488;
Lynde v. The
County, 16 Wall. 6. Now that is the case here. The
bonds are executed by the board of supervisors, or, which is the
same thing, by their clerk under their order and direction. They
certify on their face that they are issued in conformity with the
vote of the electors of said county, cast at an election held on
the twenty-third day of September, 1869. This, according to the
cases, is a sufficient authentication of the fact that an election
was duly held to protect a
bona fide holder for value.
A similar defense, that the bonds were absolutely void for want
of authority (and so declared by the State tribunals) in
consequence of irregularity in the preliminary proceedings was set
up in the case of
Lee County v.
Rogers, 7 Wall. 181. That case arose in Iowa. A
county election had been held to determine on the subscription of
stock to a railroad, and the issue of bonds in payment thereof. A
bill in equity was filed to prevent such subscription and issue,
and was successful. The legislature then passed a healing act, and
the bonds were issued. A year after this, another bill was filed to
have both the act and the bonds declared void, but was dismissed.
Two years after this dismissal, a bill of review was filed to
reverse the last decree, and it was reversed and the bonds and the
healing act
Page 97 U. S. 105
itself were declared void. This Court held that notwithstanding
all this, the
bona fide holder of the bonds was entitled
to recover upon them. It being contended that he was bound to take
notice of the
lis pendens for avoiding the bonds, the
Court held otherwise on the ground that there was no continuous
litigation. The first suit was determined before the issue of the
bonds, and the second was not commenced until after they had been
issued. No suit was pending when they were issued.
This case is an authority for the position that bonds of this
sort may be valid in the hands of a
bona fide holder
notwithstanding the fact that the preliminary proceedings requisite
to their issue may have been so defective as to sustain a direct
proceeding against the county officers to annul them or prevent
their issue.
This brings us to the second question -- namely whether the
pendency of the chancery suit for vacating the proceedings of the
supervisors and preventing the issue of the bonds, in this case,
was in itself constructive notice to all persons of their
invalidity or of the objections raised against them. This question
has an important bearing upon the case, for whilst the bonds may be
valid in the hands of a
bona fide purchaser before
maturity and without notice of any defect or vice in their origin,
this cannot be said in reference to one who has such notice, or who
is chargeable therewith.
It is a general rule that all persons dealing with property are
bound to take notice of a suit pending with regard to the title
thereto, and will on their peril purchase the same from any of the
parties to the suit. But this rule is not of universal application.
It does not apply to negotiable securities purchased before
maturity, nor to articles of ordinary commerce sold in the usual
way. This exception was suggested by Chancellor Kent in one of the
leading cases on the subject in this country, and has been
confirmed by many subsequent decisions.
The learned chancellor gave the history and grounds of the
general doctrine of
lis pendens in 1815, in the case of
Murray v. Ballou, 1 Johns. (N.Y.) Ch. 566, which is the
leading American case on the subject and deserves the careful study
of every
Page 97 U. S. 106
student of law. The fundamental proposition was stated in these
words:
"The established rule is, that a
lis pendens, duly
prosecuted, and not collusive, is notice to a purchaser so as to
affect and bind his interest by the decree; and the
lis
pendens begins from the service of the subpoena after the bill
is filed."
P. 576. That case related to land, with regard to which the
doctrine is uniformly applied.
In the subsequent case of
Murray v. Lylburn, 2
id. 441, decided in 1817, the same doctrine was held to
apply to choses in action (in that case, a bond and mortgage)
assigned by one of the parties
pendente lite. But the
chancellor, with wise prevision, indicated the qualification to
which the rule should be subject in such cases. Speaking of the
trustee, whose acts were in question, he said:
"If Winter had held a number of mortgages, and other securities,
in trust, when the suit was commenced, it cannot be pretended that
he might safely defeat the object of the suit, and elude the
justice of the court, by selling these securities. If he possessed
cash, as the proceeds of the trust estate, or negotiable paper not
due, or perhaps movable personal property, such as horses, cattle,
grain, &c., I am not prepared to say the rule is to be carried
so far as to affect such sales. The safety of commercial dealing
would require a limitation of the rule; but bonds and mortgages are
not the subject of ordinary commerce; and they formed one of the
specific subjects of the suit against Winter, and the injunction
prohibited the sale and assignment of them, as well as of the lands
held in trust."
Here we have the whole law on the subject. Subsequent cases have
only carried it out and applied it. We shall cite only a few of the
most important.
In
Kieffer v. Ehler, 18 Pa.St. 388, decided in 1852, it
was held that, although a promissory note not due is liable to
attachment under the Pennsylvania statute of 1836, relative to
executions; yet such attachment is unavailable against a
bona
fide holder for value of a negotiable note, where it was
obtained after the attachment was served on the maker of the note
as garnishee, and after its return, but before the maturity of the
note, and without actual notice of the attachment. Mr. Justice
Lowrie, in that case, speaking of such instruments,
Page 97 U. S. 107
says:
"They have a legal quality that renders the hold of an
attachment upon them very uncertain. Unlike all other property,
they carry their whole evidence of title on their face, and the law
assures the right of him who obtains them for valuable
consideration, by regular endorsement, and without actual notice of
any adverse claim, or of such suspicious circumstances as should
lead to inquiry. To hold that an attachment prevents a subsequent
bona fide endorser for value from acquiring a good title,
would be almost a destruction of one of the essential
characteristics of negotiable paper."
He admits that the negotiation of such paper by a defendant
after he had notice of the attachment would be a fraud upon the
law, but he suggests the remedy, namely, that the court should
exert its power to prevent it, by requiring the instrument to be
placed in such custody as to prevent it from being misapplied -- a
remedy analogous to that of injunction and sequestration by a court
of chancery.
In a subsequent case in Pennsylvania, that of
Diamond v.
Lawrence County, 37
id. 353, it is true, the same
court held the purchaser of county bonds
pendente lite to
be affected with constructive notice; but placed its decision
specially on the ground that, in Pennsylvania, such bonds are not
deemed negotiable securities.
The case of
Winston v. Westfeldt, which came before the
Supreme Court of Alabama in 1853, 22 Ala. 760, is directly in
point, and was decided upon great consideration and after
exhaustive arguments by counsel. The note sued on, at the time of
its purchase by the plaintiff, was the subject of controversy in
the chancery court, and the question was whether the proceedings
operated as notice to him, "or, in other words," says the court,
"does the doctrine of
lis pendens apply to negotiable
paper?" And the decision was that it does not. The arguments of the
counsel as well as the judgment of the court in this case are very
instructive, but we forbear to accumulate further quotations.
Suffice it to say that the same doctrine is held and adjudged in
Stone v. Elliott, 11 Ohio St. 252;
Mims v. West,
38 Ga. 18;
Durant v. Iowa County, 1 Woolw. 69; and
Leitch v. Wells, 48 N.Y. 585, overruling same case in 48
Barb. 637. The case of
Page 97 U. S. 108
Durant v. Iowa County was decided by Mr. Justice Miller, and
related to coupons attached to county bonds, being parallel to the
case now under consideration except that the coupons had been
issued before the
lis pendens was instituted. Justice
Miller in this case meets the objection that the rule may operated
to defeat the action of the court by withdrawing from its
jurisdiction the subject matter of the controversy. He says:
"It is insisted that, in this view, proceedings to enjoin the
transfer of such securities are futile. Not so. An injunction will
prevent the transfer of the securities during the pendency of the
suit, and a decree that they be delivered up to be cancelled, if
enforced at once, will protect the parties. A neglect to take out
the injunction or to enforce the decree is the fault of the
plaintiff, not of the law."
In the present case, an injunction was issued, and, so long as
it was in force, was obeyed by the board of supervisors. The
circuit court saw cause to dissolve the injunction, it is true, and
eventually dismissed the bill, and it was not till two years
afterward that the supreme court reversed this decree. Whether the
circuit court did right in dissolving the injunction without
dismissing the bill (which was emphatically an injunction bill), or
whether the complainant ought not at once to have submitted to a
dismissal, taken an appeal, and adopted the necessary proceedings
for a continuance of the injunction it is unnecessary now to
inquire. It cannot be said that the court was destitute of power to
maintain its own jurisdiction and protect its suitors. If it did
not choose to exert this power and any failure of justice ensued,
it is to be attributed to that inherent imperfection to which the
administration of all human laws is liable. At all events, the evil
is no greater than that which would befall the innocent purchasers
of the bonds if the loss should be made to fall upon them. From
this dilemma there is no escape unless we abrogate the privileges
of commercial paper and make it the duty of those who take it to
inquire into all its previous history and the circumstances of its
origin. This would be to revolutionize the principles on which the
business of the commercial world is transacted, and would require a
new departure in the modes and usages of trade.
Page 97 U. S. 109
The only thing calculated to raise any doubt in the present case
is the fact that the bonds in question were not in existence when
the suit to prevent their issue was brought. But we see no good
reason for limiting the exception to paper or securities previously
in existence. The court, as we have seen, has ample power by
injunction to prevent their execution, and the reason of the
exception is as applicable to the one class as to the other. Its
object is to protect the commercial community by removing all
obstacles to the free circulation of negotiable paper. If, when
regular on its face, it is to be subject to the possibility of a
suit's being pending between the original parties, its
negotiability would be seriously affected and a check would be put
to innumerable commercial transactions. These considerations apply
equally to securities created during, as to those created before
the commencement of, the suit, and as well to controversies
respecting their origin as those respecting their transfer. Both
are within the same mischief and the same reason.
This very question was involved in
City
of Lexington v. Butler, 14 Wall. 283. In that case,
irregularities had occurred in the preliminary proceedings, and the
city authorities refused to issue the bonds. A mandamus was applied
for by the railroad company, for whose use the bonds were intended,
and a judgment of mandamus was rendered to compel the city to issue
them, and it issued them accordingly. Subsequently this judgment
was reversed by the Court of Appeals of Kentucky and an injunction
was obtained to prevent the railroad company from parting with the
bonds. The injunction was not obeyed; the bonds were negotiated
whilst proceedings were still pending, and were purchased by the
plaintiff for value before maturity, without any knowledge of these
circumstances. This Court held that the bonds were valid in his
hands. The point in question received no discussion in the opinion
of the Court, it is true, but it appeared on the pleadings, was
made in the argument, and must have been passed upon in arriving at
the judgment.
Whilst the doctrine of constructive notice arising from
lis
pendens, though often severe in its application, is on the
whole a wholesome and necessary one and founded on principles
Page 97 U. S. 110
affecting the authoritative administration of justice, the
exception to its application is demanded by other considerations
equally important as affecting the free operations of commerce and
that confidence in the instruments by which it is carried on which
is so necessary in a business community. The considerations that
give rise to the exception apply with full force to the present
case.
We think that the result reached by the circuit court was
correct.
Judgment affirmed.
MR. JUSTICE MILLER, MR. JUSTICE FIELD, and MR. JUSTICE HARLAN
dissented.
NOTE -- In
County of Warren v. Post and County of Warren v.
Portsmouth Savings Bank, error to the Circuit Court of the
United States for the Northern District of Illinois, which were
argued at the same time and by the same counsel as was the
preceding case, MR. JUSTICE BRADLEY, in delivering the opinion of
the Court, remarked: "These cases are in all respects similar to
that of
County of Warren v. Marcy, and must have the same
result."
The judgments therein are respectively
Affirmed.
MR. JUSTICE MILLER, MR. JUSTICE FIELD, and MR. JUSTICE HARLAN
dissented.
