Chelsea Sav. Bank v. City of Ironwood

• Decision Date: 21 May 1904
• Docket Number: 1,255.
• Citation: 130 F. 410
• Parties: CHELSEA SAV. BANK et al. v. CITY OF IRONWOOD et al.
• Court: U.S. Court of Appeals — Sixth Circuit

130 F. 410

CHELSEA SAV. BANK et al. v. CITY OF IRONWOOD et al.

No. 1,255.

United States Court of Appeals, Sixth Circuit.

May 21, 1904

William Alden Smith, Taggart, Denison & Wilson, and John C. Coombs for appellants.

Belmont Waples, for appellee city of Ironwood.

Before LURTON and RICHARDS, Circuit Judges, and CLARK, District Judge.

RICHARDS Circuit Judge.

This is an appeal from a decree dismissing the bill of the appellants (complainants below). The case arose out of the following facts: On February 24, 1893, an act was passed to reincorporate the city of Ironwood, Mich. (Loc. Acts Mich 1893, No. 235, p. 36), under which a new council was to be elected April 3, 1893. The act provided that the new city should succeed to the debts and liabilities of the old. The old council, which was continued in office until the new should be elected, by resolution submitted to the electors on April 3, 1893, the question whether the city as reincorporated, should issue $150.00 of bonds 'for the purpose of paying its floating indebtedness and making certain public improvements. ' The act reincorporating the city authorized the issue of bonds for these purposes upon a popular vote. The citizens having voted for the bonds the new city officers on August 1, 1893, issued, and on October 23, 1893, sold, 150 bonds, of $1,000 each, to Coffin & Stanton, brokers, of New York City, under a contract providing for the payment of $25,000 on the delivery of the bonds, and the balance in installments; the entire purchase price, of $145,275, to be paid by May, 15, 1894. Coffin & Stanton paid the $25,000 cash, took the bonds, and, for value received, in the due course of business, and before maturity, assigned and negotiated them to the complainants and others. A question soon arising as to the validity of these bonds, no further installments of the purchase price were paid, nor did the city liquidate any of the coupons. As a result, a suit was brought by the Manhattan Company, as holder, against the city, on certain bonds, in which this court in May, 1896, affirmed the judgment of the court below, holding the bonds were invalid, not because they were issued for an illegal purpose, or in excess of the city's power to incur indebtedness, but because the old city council was not authorized to submit the question of issuing them to the people. Manhatton Co. v. Ironwood, 74 F. 535, 20 C.C.A. 642. Coffin & Stanton having failed to pay the balance of the purchase price, on September 19, 1894, the city brought suit in the Supreme Court of the state and county of New York against the firm and others, in which the city tendered $30,000, being the $25,000 paid it, with interest, and sued to recover back the $150,000 of bonds delivered to the firm, alleging their issue was illegal. To this action, Coffin & Stanton, in addition to general denials, specifically denied that at the time of the commencement of the suit they had any bonds whatever remaining in their possession. While this suit was at issue, on July 12, 1896, in an action by Stanton against Coffin, one Thomas P. Wickes was appointed receiver of the firm property. On February 19, 1897, Wickes, intervening, became a party to the suit of the city against Coffin & Stanton, and on April 30, 1897, recovered by default a judgment against the city for $25,000, with interest from October 23, 1893. Prior to the filing of the bill in this case, November 10, 1900, the receiver had brought suit in the court below to recover upon this judgment.

Substantially the foregoing facts were set out in the bill below, in which the complainants, suing on behalf of themselves and the other bondholders, alleged they had succeeded to the right of Coffin & Stanton to recover back from the city the money paid it for the bonds; asserted the receiver had no equitable interest in the judgment recovered, other than that necessary to secure him for his services and expenses in recovering it; and prayed that the city be adjudged indebted to the complainants in the amount of the judgment, or, if the judgment be held invalid, in the sum of $25,000, with interest from October 23, 1893, and for general relief. The answer of the city, while denying the validity of the judgment recovered by the receiver, alleged that, if anything was due in the premises, it was due to the receiver, and not to the bondholders, while the answer of the receiver insisted upon the validity of the judgment, and the exclusive rights of the receiver therein. The decree of the court below dismissing the bill was made July 8, 1902. Subsequently, on January 6, 1903, affidavits were filed showing that on December 16, 1902, the Supreme Court of the city and county of New York, in the suit brought by the city against Coffin & Stanton, upon the filing of a bond by the city in the sum of $40,000, had set aside the judgment of $30,381.43 in favor of the receiver against the city, and sent the case to a referee for hearing and report. 77 N.Y.Supp. 907.

1. This is a case for the application of the settled rule that a city may be compelled to pay back money which it has received for bonds illegally issued, when the purpose of the loan was lawful, and the creation of the debt not prohibited by law (Hitchcock v. Galveston, 96 U.S. 341, 24 L.Ed. 659; Louisiana v. Wood, 102 U.S. 294, 26 L.Ed. 153; Parkersburg v. Brown, 106 U.S. 487, 1 Sup.Ct. 442, 27 L.Ed.238; Chapman v. Douglas County, 107 U.S. 348, 2 Sup.Ct. 62, 27 L.Ed. 378; Read v. City of Plattsmouth, 107 U.S. 568, 2 Sup.Ct. 208, 27 L.Ed. 414; Logan County Bank v. Townsend, 139 U.S. 67, 11 Sup.Ct. 496, 35 L.Ed. 107; Aldrich v. Chemical Nat. Bank, 176 U.S. 618, 20 Sup.Ct. 498, 44 L.Ed. 611), and does not come with the exception exempting a city from liability where it has never received the benefit of the money, or the loan itself was in excess of its authority to create a debt (Litchfield v. Ballou, 114 U.S. 190, 5 Sup.Ct. 820, 29 L.Ed. 132; Aetna Life Ins. Co. v. Middleport, 124 U.S. 534, 8 Sup.Ct. 625, 31 L.Ed. 537; Hedges v. Dixon County, 150 U.S. 182, 14 Sup.Ct. 71, 37 L.Ed. 1044). This court has applied both the rule and the exception-- the former in the cases of City of Gladstone v. Throop, 71 F. 341, 18 C.C.A. 61, and Andrews v. Youngstown, 86 F. 585, 596, 30 C.C.A. 293, and the latter in the case of Travellers' Ins. Co. v. Johnson City, 99 F. 663, 40 C.C.A. 58, 49 L.R.A. 123. In the last case mentioned there is a careful review of the authorities up to that time.

In the present case it is conceded that the bonds were for a lawful purpose--to raise money 'for paying the floating indebtedness of the city and making public improvements. ' The money was paid to the city, and the city has had the benefit of it ever since. Coffin & Stanton having failed to comply with the terms of purchase, the city on September 19, 1894, recognizing its obligation to account for what had been paid it by mistake, tendered the $25,000, with interest, and brought suit to recover back the bonds. Coffin & Stanton, having negotiated the bonds before that time, were unable to return them.

Subsequently in the Manhattan Case, the bonds were held illegal, and since that time the real question for decision has been, who is entitled to the money which the city got for its invalid bonds, and which it has offered to return? It is not a case where the city loaned its credit to a railroad, or where it exceeded its charter powers in creating the debt. It had the right to borrow this money for the purposes named. It made a mistake, however, in submitting the question of issuing the bonds to a vote of the people through the old council. It should have waited for the new council to act. The old council was without power in the...