142 U.S. 366 (1892), District Tp. of Doon v. Cummins

Citation:142 U.S. 366, 12 S.Ct. 220, 35 L.Ed. 1044
Case Date:January 04, 1892
Court:United States Supreme Court

Page 366

142 U.S. 366 (1892)

12 S.Ct. 220, 35 L.Ed. 1044




United States Supreme Court.

January 4, 1892

In error to the circuit court of the United States for the northern district of Iowa, Reversed.


The original action was brought by Theron Cummins, a citizen of Illinois, on coupons attached to negotiable bonds issued by the defendant, a district township of Iowa, under the statute of Iowa of 1880, c. 132, the material provisions of which are copied in the margin. [1]

The defendant denied the validity of the bonds, on the ground that they were issued in violation of the constitution of Iowa of 1857, art. 11, § 3, likewise copied in the margin. [2]

A jury was duly waived, and the case was submitted to the circuit court, which found the following facts:

The defendant is a school-district in Lyon county, Iowa, having power to contract in its corporate name, and to issue [12 S.Ct. 220] negotiable bonds. From the date of its organization its affairs have been badly managed, and, through fraud and incompetency on the part of the officers of the district, indebtedness to a very large extent has been created against the district, part of which was evidenced by bonds of the district, part by judgments against it, and part by warrants or orders drawn on its different funds.

On July 9, 1881, the board of directors of the district unanimously adopted a resolution to issue, 'for the purpose of funding the outstanding bonded indebtedness of the district,' bonds to an amount not exceeding $25,000, in accordance with the statute aforesaid, to run for 10 years and payable after 5 years, at the pleasure of the district, and bearing interest at the annual rate of 7 per cent., with interest coupons attached; and appointing one Richards 'refunding agent to negotiate said bonds,' to take up the aforesaid indebtedness, and to report his doings to the district.

In pursuance of this resolution, 25 bonds were prepared and signed by the proper officers of the district, dated July 11, 1881, for the sum of $1,000 each, having the statute aforesaid printed upon them, and containing the following recital: 'This bond is executed and issued by the board of directors of said school-district in pursuance of and in accordance with chapter 132, Laws 18th Gen. Assem. Iowa, is in accordance with the laws and constitution of the state of Iowa, and in conformity with a resolution of said board of directors passed in accordance with said chapter 132 at a meeting thereof held 9th day of July, 1881.'

Ten of these bonds were sold on July 25, 1881, and ten others on August 11, 1881, for their par value in cash, by Richards to the plaintiff, who, at the time of his first purchase, knew that it was the defendant's purpose to issue bonds to the amount of $20,000 at least, or $25,000 if necessary. The remaining five bonds were sold by Richards on December 20, 1881, to another party.

At the time of issuing the bonds in question, the total valuation of the taxable property within the district, as shown by the next preceding state and county tax-lists, was $131,038. The evidence failed to show the exact amount of bonds of the defendant outstanding on July 11, 1881, but the amount of such bonds, with interest, exceeded $20,000. Large amounts of warrants had been issued by the district from time to time for various purposes, a portion, at least, of which was fraudulent; and there were outstanding unsatisfied judgments against it for $11,700. Many frauds had been perpetrated by the officers of the district, and thereby the amount of indebtedness evidenced by its bonds and by judgments against it had been fraudulently increased. But the evidence failed to show that any of those bonds had been issued in violation of the above provision of the constitution of Iowa, or that a successful defense could have been interposed by the defendant against the holders of any of them.

Of the proceeds of the sale of the new bonds, the sum of $19,174 was paid out by Richards at various times from July 30, 1881, to March 4, 1882, in discharging bonds, coupons, judgments, warrants, and orders drawn on the teachers', contingent, and school-house funds, and the balance of $6,485.79 was paid to the defendant's treasurer. His report, which was made part of the findings of fact, showed that, of the sum of $19,174, less than $6,000 was applied to the payment of outstanding bonds and coupons, $875 in paying interest on the new bonds, and the rest to the other purposes above mentioned.

The defendant regularly paid interest on the new bonds until and including July, 1885, and this action was brought on the coupons falling due in 1886, 1887, 1888, and 1889.

On these facts the court gave judgment for the plaintiff for $6,462.40, being the amount of the coupons sued on, with interest. 42 F. 644. The defendant sued out this writ of error.


Page 369

B. F. Kauffman, for plaintiff in error.

J. H. Swan, for defendant in error.


Page 370

Mr. Justice GRAY, after stating the case as above, delivered the opinion of the court.

The constitution of Iowa, art. 11, § 3, ordains as follows: 'No county, or other political or municipal corporation, shall be allowed to become indebted in any manner, or for any purpose, to an amount in the aggregate exceeding 5 per centum on the value of the taxable property within such county or corporation, to be ascertained by the last state and county tax-lists, previous to the incurring of such indebtedness.'

Page 371

The scope and meaning of this provision of the fundamental and paramount law of the state are clear and unmistakable. No municipal corporation 'shall be allowed' to contract debts beyond the constitutional limit. When that limit has been reached, no debt can be contracted 'in any manner or for any purpose.' The limit of the aggregate debt of the municipality is fixed at 5 per cent. of the value of the taxable property within it; and that value is to be ascertained 'by the last state and county tax-lists,' which are public records, open to all, and of the contents of which all are bound to take notice. The prohibition is addressed to the legislature as well as to all municipal boards and officers, and to the people, and forbids any and all of them to create, or to give binding force to, any debts of the corporation in excess of the limit prescribed. The prohibition extending to debts contracted 'in any manner, or for any purpose,' it matters not whether they are in every sense new debts, or are debts contracted for the purpose of paying old ones, so long as the aggregate of all debts, old and new, outstanding at one time, and on which the corporation is liable to be sued, exceeds the constitutional limit. The power of the legislature in this respect being restricted and controlled by the constitution, any statute which purports to authorize a municipal corporation to contract debts in any manner or for any purpose [12 S.Ct. 222] whatever in excess of that limit is to that extent unconstitutional and void.

By the terms of the statute of Iowa of 1880, c. 132, under which the bonds in question were issued, any independent school-district or district township, having a bonded indebtedness outstanding, is authorized to issue negotiable bonds for the purpose of funding that indebtedness; and 'the treasurer of such district is hereby authorized to sell the bonds provided for in this act at not less than their par value, and apply the proceeds thereof to the payment of the outstanding bonded indebtedness of the district, or he may exchange such bonds for outstanding bonds, par for par.'

There is a wide difference in the two alternatives which this statute undertakes to authorize. The second alternative, of

Page 372

exchanging bonds issued under the statute for outstanding bonds, by which the new bonds, as soon as issued to the holders of the old ones, would be a substitute for and an extinguishment of them, so that the aggregate outstanding indebtedness of the corporation would not be increased, might be consistent with the constitution. But under the first alternative, by which the treasurer is authorized to sell the new bonds, and to apply the proceeds of the sale to the payment of the outstanding ones, it is evident that, if (as in the case at bar) new bonds are issued without a cancellation or surrender of the old ones, the aggregate debt outstanding, and on which the corporation is liable to be sued, is at once and necessarily increased, and, if new bonds equal in amount to the old ones are so issued at one time, is doubled; and that it will remain at the increased amount until the proceeds of the new bonds are applied to the payment of the old ones, or until some of the obligations are otherwise discharged.

It is true that if the proceeds of the sale are used by the municipal officers, as directed by the statute, in paying off the old debt, the aggregate indebtedness will ultimately be reduced to the former limit. But it is none the less true that it has been increased in the interval; and that, unless those officers do their duty, the increase will be permanent. It would be inconsistent alike with the words, and with the object, of the constitutional provision, framed to protect municipal corporations from being loaded with debt beyond a certain limit, to make their liability to be charged with debts contracted beyond that limit depend solely upon the discretion or the honesty of their officers.

There could be no better illustration of the reasonableness, if not the necessity, of this construction, in order to secure to municipal corporations the protection intended and declared by the constitution of the state, than is afforded by the facts of the present case. The total valuation of the property of the district, as shown by the last state and county tax-list before it...

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