City of Huron v. Second Ward Sav. Bank, 980.

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Citation: 86 F. 272
• Docket Number: 980.
• Parties: CITY OF HURON v. SECOND WARD SAV. BANK.
• Decision Date: 21 March 1898

86 F. 272

CITY OF HURON
v.
SECOND WARD SAV. BANK.

No. 980.

United States Court of Appeals, Eighth Circuit.

March 21, 1898

[86 F. 273]

This is an action brought by the Second Ward Savings Bank, the defendant in error, against the city of Huron, the plaintiff in error, upon coupons cut from 16 funding bonds of $500 each, which that city issued on August 15, 1889. The defense was (1) that the bonds were issued to pay, and that their proceeds were devoted to the payment of, void warrants, which the city had issued to promote its selection as the capital of the state of South Dakota; (2) that these bonds created a debt in excess of the limitation prescribed by the organic act of the territory of Dakota; and (3) that the city had no power to issue funding bonds. The case was tried by the court. Objections were interposed to the complaint, to the bonds, coupons, and all the evidence for the defendant in error, and to the findings and judgment of the court upon the grounds outlined in this defense. The court made special findings, and rendered a judgment against the city. This was the case: The legislature of the territory of Dakota granted a special charter in 1883 to the city of Huron, which provided: 'Sec. 7. The city council shall have power: * * * Part 28. To admit and allow all just claims against the city and direct the payment of such as are allowed. Part 29. To appropriate money and provide for the payment of the expenses and the indebtedness of the corporation. * * * Part 31. To levy and collect taxes not exceeding five mills on the dollar, for the purpose of providing a sinking fund with which to pay any future-bonded indebtedness of the corporation, and not exceeding ten mills on the dollar for all other municipal purposes in any one year, on all the property, real or personal, within the city limits, taxable according to the laws of the territory. Part 32. To borrow money, and for that purpose, to issue the bonds of the city in such denominations, for such length of time, not to exceed twenty years, and bearing such rate of interest, not to exceed seven per cent. per annum, as the city council may deem best, said bonds to express upon their face, under what authority and for what purpose they are issued, and may have interest coupons attached:' provided that such bonds may be issued only after an election at which a majority vote for their issue, and that they may not be sold for less than their par value. Act March 8, 1883 (Laws Dak. p.--). The organic law of the territory of Dakota, which was enacted in 1886, provided that no municipal corporation should ever become indebted exceeding 4 per centum [86 F. 274] on the value of the taxable property within such corporation, to be ascertained by the last assessment for territorial and county taxes previous to the incurring of such indebtedness, and that all bonds or obligations in excess of such amount should be void. Comp. Laws Dak. p. 34, Sec. 112. Four per centum of the value of the taxable property in the city of Huron, according to the last assessment previous to the issue of these bonds, was $62,920.99; and at the time of their issue the city was indebted in the sum of $70,698.99, $54,500 of which was evidenced by bonds, and the remainder by warrants. The public records of the city showed the amount of taxable property and the amount of this indebtedness of the city. In 1887 the legislature of the territory of Dakota had passed a general law, which provided that any city in that territory might, upon a majority vote of its electors, incur a bonded debt which should not increase its total indebtedness above 4 per centum of the taxable property therein, for the purpose of erecting school buildings, purchasing fire apparatus, putting in waterworks, sinking public wells or cisterns, and putting in sewers, and improving streets. This law, however, contained this proviso: 'And provided, that this act shall not be construed to limit or restrict the powers already conferred by any special charter upon the council of any city or municipal corporation. ' Id. p. 257, Secs. 1149, 1150. Pursuant to an election held under its charter on April 2, 1889, at which a majority of the qualified electors of the city of Huron voted to authorize its city council to issue bonds to the amount of $25,000, for the purpose of funding the floating indebtedness of the city, the 16 bonds from which the coupons here in suit were cut were issued by the city council, and were sold in 1889 to Farson, Leach & Co. for $8,140. The ostensible purpose of these proceedings was to fund the floating debt of the city; but the real purpose, which was known to the citizens and officers of the city, was to raise money to pay the void warrants which the city had issued to carry on a political campaign to elect itself the capital of the state of South Dakota. The $5,140 was actually used by the city to pay these warrants, and none of it was so used until 20 days after it had been paid into the city treasury by Farson, Leach & Co. Each of these 16 bonds was signed by the proper officers of the city, and sealed with its seal, and each contained these words: 'The city of Huron, ten years after date, for value received, will pay to bearer the sum of $500, at the American Exchange National Bank, New York, with interest thereon at the rate of six per cent. per annum, payable semiannually, according to the terms of the annexed coupons. Issued pursuant to an election held April 2, 1889, by authority granted by article 32, section 7, of the charter of the city of Huron, said charter approved by the legislative assembly of the territory of Dakota, March 8th, 1883. Issued for the purpose of funding the floating indebtedness of the city of Huron. ' The defendant in error purchased these bonds in the ordinary course of business from Farson, Leach & Co. The city paid the first four coupons upon them, but declined to pay more.

A. W. Wilmarth, for plaintiff in error.

Rollin B. Mallory, for defendant in error.

SANBORN, Circuit Judge, after stating the facts as above, .

The first contention of counsel for the plaintiff in error in this case is that the bonds and coupons in controversy are void, although the former recite upon their face that they were 'issued for the purpose of funding the floating indebtedness of the city of Huron,' because they were in fact issued, and their proceeds were actually used, to pay city warrants which constituted no debt, but which the city of Huron had emitted in violation of its charter and of the organic act of the territory of Dakota. This proposition is without novelty. It presents the old questions which have often been answered by this and other courts: May a municipal corporation certify on the face of its bonds that it has issued them for a lawful purpose, and after the bonds have been bought by an innocent purchaser for value, in reliance upon this certificate, defeat them by the plea that the certificate was [86 F. 275] false, and that they were actually issued for an unlawful purpose? May a city defeat the innocent purchaser of its bonds by diverting their proceeds without his knowledge, from the lawful object for which it certified that it issued them? The plaintiff in error has had our answer to these questions.

In National Life Ins. Co. v. Board of Education of Huron, 27 U.S.App. 244, 255, 10 C.C.A. 637, 644, and 62 F. 778, 784, the citizens and officers of this city, with the intention of using the proceeds of bonds for the unlawful purpose of persuading the people of South Dakota to select that city as their capital, took the necessary steps to issue them for the lawful purchase of a school site and the erection of a school building, certified that they were issued for that purpose, and then diverted their proceeds to the illegal object, and undertook to defeat the bona fide purchasers of the bonds of the plea of their own wrong. This court answered that plea in these words:

'It is no defense for this corporation, as against bona fide purchasers, that during all this time it intended to use and has since used, the money it raised from these bonds for the unlawful purpose of conducting a campaign for the state capital. * * * Such a plea cannot be entertained in a court of justice. The corporation is estopped from denying that these bonds were issued to raise money for a school site and school building.'

In Re West Plains Tp. v. Sage, 32 U.S.App. 725, 733, 16 C.C.A. 553, 557, 69 F. 943, 946, the township, with the intention of using the proceeds of its bonds for the unlawful purpose of paying town scrip issued to purchase a sugar factory, took the necessary steps to issue, and certified that it has issued, the bonds to refund its indebtedness, then used the proceeds to take up the void scrip, and pleaded its own iniquity as a defense to its bonds. This court said:

'It is no defense for this township, against the action of an innocent purchaser who has invested his money in these bonds, that the township board, and the voters of the township who authorized the board to issue them, knew that the township had no indebtedness to refund, and that all these records and declarations were made to evade the law. Against a bona fide purchaser, the township is estopped from denying that these bonds were issued to refund its outstanding indebtedness.'

In Board v. Howard, 49 U.S.App. 642, 27 C.C.A. 531, and 83 F. 296, this court again held that a municipal corporation which had recited in its bonds that they were issued 'to refund its matured and maturing indebtedness heretofore legally created by said county' could not be heard to say to an innocent purchaser that a part of the indebtedness so refunded was void.

In Jasper Co. v. Ballou, 103 U.S. 745, the supreme court held that where the people of a county, at an election held under a refunding act, voted to issue new bonds to exchange for old ones, such a...