Getz v. City of Harvey

• Decision Date: 07 April 1941
• Docket Number: No. 7411,7481.,7411
• Citation: 118 F.2d 817
• Parties: GETZ v. CITY OF HARVEY et al. GETZ v. CITY OF HARVEY.
• Court: U.S. Court of Appeals — Seventh Circuit

118 F.2d 817 (1941)

GETZ v. CITY OF HARVEY et al. GETZ v. CITY OF HARVEY.

Nos. 7411, 7481.

Circuit Court of Appeals, Seventh Circuit.

February 28, 1941.

Rehearing Denied April 7, 1941.

COPYRIGHT MATERIAL OMITTED

Samuel K. Markman, Thomas C. Donovan, and John P. Sullivan, all of Chicago, Ill. (Henry O. Nickel, of Chicago, Ill., of counsel), for John G. Getz, Jr.

John J. Dowdle, of Chicago, Ill., for City of Harvey.

Before SPARKS and KERNER, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

In 7411, the plaintiff and, in 7481, the defendant, City of Harvey, appeal from a judgment rendered in an action wherein plaintiff, claiming to be the owner of water fund certificates issued by the City of Harvey, a municipal corporation, in the face amount of $243,000, sought an accounting for diversion and misapplication of funds applicable to the certificates, an injunction restraining defendant from further depletion of such funds and restoration of all illegally diverted. Answering, defendants denied validity of the certificates and asserted in the alternative that, if valid, they should be held subject to a trust in their behalf by virtue whereof the city had the right to compel surrender of plaintiff's certificates upon payment of what the brokerage firms of A. C. Allyn & Company and Stifel, Nicolaus & Company had paid for them, namely, 70 cents on the dollar. This purchase had been made, as defendants claimed, in pursuance of a contract with the city, whereby A. C. Allyn & Company was bound to deliver such certificates as it might purchase to the city at the price at which it might acquire them. Defendants averred further in this connection that the certificates are not, under the laws of Illinois, negotiable instruments and that plaintiff, a subsequent purchaser, was bound to take notice of the alleged rights of the city. Plaintiff, in his reply, denied knowledge of any alleged conspiracy or implied trust and asserted that the bonds had been purchased by his immediate assignor at 100 per cent of their par value and that he, as a bona fide purchaser, had succeeded to all the right and title therein and thereto, subject to no defense. He replied also that the certificates had been issued properly and constituted binding obligations according to their terms and provisions.

Upon hearing the report of the master, to whom the cause had been referred, the District Court on May 23, 1940, entered judgment, directing that plaintiff deposit, within thirty days, certificates of the par value of $243,000, with the clerk, and that the city deposit, also within thirty days, the sum of $173,300 the amount actually expended by Allyn & Company and its associates in the purchase of these certificates and sufficient funds to satisfy the interest upon this purchase price, the aggregate amount being $203,795.19, for the use and benefit of plaintiff. The court further ordered that if the city should fail to comply, judgment be entered against it in favor of plaintiff for the latter sum.

From this judgment plaintiff appeals, insisting that the proof shows that defendants were guilty of wrongfully depleting the assets of the water department in the sum of $343,523.07 and of diverting moneys from that department in the amount of $146,973.31; that it was the city's duty as trustee to distribute promptly the funds, as collected, to the certificate holders; that the alleged contract between the city and one O'Brien, agent, as defendants claim, for Allyn & Company, for refunding these and other certificates, was unauthorized and illegal; that the city had no right to purchase certificates in the market; that the court wrongfully ordered plaintiff to surrender his certificates upon payment of 70 per cent of their face value plus interest; that any equities arising out of contracts of the city with O'Brien or Allyn & Company, being unknown to plaintiff, affect in no way his rights; that the alleged contract for refunding never became effective; that if the certificates were improperly issued, the city is estopped to complain, and that the court erred in failing to direct restorement of the diverted funds and payment of plaintiff, according to his statutory rights and priorities, and in various other respects.

In 7481 the city appeals, averring that the city was without legislative power to issue the certificates involved and is not estopped to assert this defense. The questions presented upon the two appeals will be disposed of in one opinion.

It is important, first, to ascertain plaintiff's rights and the effect of the alleged equities of the city against him. In 1924 the city purchased the then existing water plant from the Public Service Company of Northern Illinois for the sum of $200,000 and provided for payment of the same by issuance of certificates in an equivalent amount, bearing interest at the rate of 5 per cent, maturing over the period from September 15, 1925 to September 15, 1944, secured by a mortgage upon the system and payable out of the water funds collected by the city.

In September, 1926, the city, finding the existing system inadequate, enacted an ordinance approving plans and specifications for an extension or enlargement to be known as System No. 2, and on January 31, 1927, passed another ordinance authorizing issuance of water fund certificates in the amount of $350,000, bearing interest at the rate of 5½ per cent, payable over a period of years beginning August 1, 1927, out of water funds and secured by a mortgage upon the extension. Each mortgage was executed as provided in the respective ordinances.

On April 20, 1936, one O'Brien, a broker in municipal securities, proposed to the city that, inasmuch as principal and interest of approximately $100,000 upon water certificates were past due and refunding was desirable, he would (1), "lend" his "best efforts toward refinancing" all certificates of each issue outstanding, thereby placing "the water department on a sound financial basis"; (2) pay all costs incidental to securing deposit of outstanding certificates, and (3) "purchase at par and accrued interest the new bonds (certificates) issued, to bear interest at the rate of 4¾ per cent" and for such services charge 5 per cent of the par value of the new certificates. This proposal purported to be accepted in behalf of the city on April 21, 1936, by the Mayor, the Commissioner of Finance and the Commissioner of Public Property, the municipality being under the commission form of government. Apparently the negotiations progressed no further until September 8, 1936, when O'Brien further proposed that, in view of the total indebtedness of the water department of $464,000, he would deliver to the city for cancellation $464,000 par value of outstanding certificates and procure cancellation of interest in addition thereto. For doing this, he proposed that the city deliver to him $452,000 par value legally issued refunding certificates bearing interest at 4 per cent. The difference of $12,000 represented certificates then held by the city. The municipality was to adopt an ordinance necessary to effectuate the refunding to the satisfaction of O'Brien's attorney and to enact such other ordinances as his attorney might deem desirable "to provide additional security." The amount of certificates maturing each year was to be agreed upon by the city and himself. The final paragraph of his proposal recited that the agreement was "dependent upon my ability to deliver the above described water revenue certificates under the conditions and terms set forth." An acceptance in behalf of the city was signed September 8, 1936, by the Mayor and the Chairman of the Finance Committee.

After April 20, 1936, O'Brien, acting for himself or Allyn & Company, who furnished the money, purchased $211,000 par value certificates of the 5½ per cent issue at the rate of 70 cents on the dollar. Some $30,000 in addition were purchased in the same manner from other bondholders at various prices. The proposal dated September 8, 1936, which was to expire in 90 days, was never formally renewed. O'Brien testified that in the purchase of the certificates he acted as an independent broker and eventually found himself unable to purchase the remainder of the outstanding certificates and never got in position to deliver them to the city; that he was able to procure certificates aggregating only $243,000, and that he did not and could not complete his proposal because it was impossible to procure the other outstanding certificates. He testified also that the city never tendered him any refunding certificates. After it became apparent that O'Brien's undertaking could not be completed, the city employed another brokerage company in an attempt to effectuate refunding.

There were various trades in the securities among Allyn & Company, Stifel, Nicolaus & Company and others between October 15, 1936 and November 15, 1937, at prices ranging from 70 cents to par. Eventually on August 18, 1937, Stifel, Nicolaus & Company sold to one Mott in Detroit, Michigan, $222,000 and on November 17, 1937, $21,000 in certificates, all at par. Mott paid cash and entered into no arrangement for repurchase by the seller. The securities were sold to him without recourse and for cash. Thereafter Mott sold them to plaintiff at par. Plaintiff executed his note for the full amount and deposited the certificates as collateral security for its payment.

We are first confronted with the question of whether plaintiff, in the situation he finds himself, is bound by any alleged latent equity in the favor of the city as against O'Brien and Allyn & Company. The master found, and the court agreed, that plaintiff stood in the shoes of Allyn & Company. But the evidence discloses that plaintiff is a purchaser for value and had no knowledge of any dealings between the city and O'Brien or Allyn & Company.

Under the Illinois law, the certificates, being payable solely from the...