German Ins. Co. of Freeport, Ill., v. City of Manning, Iowa

• Decision Date: 25 July 1899
• Docket Number: 3,588.
• Parties: GERMAN INS. CO. OF FREEPORT, ILL., v. CITY OF MANNING, IOWA
• Court: U.S. District Court — Southern District of Iowa

95 F. 597

GERMAN INS. CO. OF FREEPORT, ILL., v. CITY OF MANNING, IOWA

No. 3,588.

United States Circuit Court, S.D. Iowa, Central Division.

July 25, 1899

Berryhill & Henry, for plaintiff.

B. I Salinger and A. B. Cummins, for defendant.

WOOLSON District Judge.

This case is now presented on the merits. Upon the legal question tendered in petition, a decision was handed down in 1897, and is found in 78 F. 900. That decision overruled the demurrer interposed by defendant to the original petition. The plaintiff is a citizen of the state of Illinois, and defendant is a citizen of the state of Iowa. The action is based upon five negotiable bonds, severally dated October 23 1884, for $1,000 each, with interest from date at 8 per cent per annum, payable semiannually; the bonds maturing October 14, 1894. Interest on these bonds was regularly paid to the date of maturity thereof; so that if the bonds are valid, there is due thereon to plaintiff the principal, with interest from October 14, 1894, at the rate of 8 Er cent. per annum, payable semiannually. The defendant is a municipal corporation, being an incorporated town, according to the classification of municipal corporations in force in the state of Iowa at the date of said bonds and yet in force. The defendant, for its defense herein, while admitting that the papers in suit were signed by its officers, as exhibited, and that plaintiff, before the maturity thereof and for value, became, and is now, the holder and owner thereof, and that nothing has been paid thereon, except interest up to date, including the installment covering October 14, 1894, nevertheless, for the reasons below stated, denies its liability thereunder: (1) Said bonds are void, because defendant had not legal authority to execute same under the Code of Iowa then in force. (2) Denies defendant ever issued or authorized the issue of said bonds. (3) That at the date said bonds are claimed to have been issued, defendant was indebted in a sum largely exceeding the limitation contained in the constitution of the state of Iowa, to wit, in excess of 5 per cent. on the value of the taxable property within such defendant corporation, as ascertained by the last state and county tax lists preceding the issue of said bonds. It is proper here to state that in the agreed statement of facts filed herein the second ground of defense above stated is waived, by the agreed fact that defendant did issue said bonds. In its reply, plaintiff avers that what is set out in answer of defendant under its third above-stated defense, as an indebtedness of defendant outstanding at the time the bonds in suit were issued (and which, if valid, would invalidate the bonds in suit), was not a valid indebtedness; but that the bonds which evidenced or constituted such alleged outstanding indebtedness were not valid, in that, at the date of their issue, the aggregate indebtedness then outstanding of the defendant exceeded 5 per centum of the value of the taxable property within the limits of defendant corporation, as ascertained by the last state and county tax lists previous to the issuance of said bonds.

It is due to counsel herein that the findings of the court shall be sufficiently comprehensive to permit a thorough review in the appellate court. This court has been favored by counsel on either side with exhaustive brief, supplementing the oral argument. While perhaps not actually required, in view of the present decision herein reached, yet counsel may properly expect that the findings of the court will cover substantially all the material issues raised by the pleadings.

1. As to the contention of defendant that the bonds in suit are invalid, because, at date of their issue, the aggregate indebtedness of defendant, in violation of the constitutional limitation, exceeded 5 per centum of the taxable property within the defendant corporation, as ascertained by the last preceding state and county tax list: If the fact claimed is sustained by the evidence, the conclusion claimed must follow. The limitation prescribed in the constitution of the state of Iowa is correctly given in this contention, and the evidence is undisputed that at the date of issuance of bonds in suit there were outstanding bonds, issued in 1882 by defendant, which, if included in the then existing aggregate indebtedness of defendant, make such aggregate in excess of the constitutional limitation. It is practically conceded that such 1882 bonds (the bonds in suit were issued in 1884) were themselves, at date of their issue, obnoxious to the above-quoted constitutional limitation. They were, however, treated by defendant as a valid indebtedness, and previous to the institution of the present action had been paid in full. They were thus treated by defendant when the bonds in suit--issue of 1884-- were issued.

Defendant contends that, since defendant treated them as valid, and has paid them out of the ordinary revenues of the defendant, the spirit of the constitutional limitation does not apply, and especially so as they were so treated by defendant, and were being so paid, when the bonds in suit were issued. But to my mind the fact that the defendant elected to pay, while the law did not require it to pay, does not convert into an indebtedness that which the law does not recognize as an obligation to pay. There may exist, from the standpoint of mere morals, an obligation which the law does not regard as an obligation enforceable in the courts. The constitutional limitation uses the term 'indebted' as meaning an indebtedness which the law will recognize, and by its process enforce. Such a test may readily be applied. The process is simple and uniform. Given the facts, will the law, applied thereto, compel payment? If so, there is an indebtedness. But if the will of the corporation, the mood of its governing officials, is to be the test, there can be no certain or reliable and permanent knowledge as to whether an enforceable indebtedness exists. To-day the officials recognize, and are discharging by payment, a 'debt' which the courts would not enforce. Additional bonds, now issued, are obnoxious to the constitutional limitations, because of the former 'debt.' A month later new officials are installed. They do not recognize the 'debt' which their predecessors were paying off, and refuse payment of same. Will the additional bonds, issued as above suggested, no longer be obnoxious to the constitutional limitation, but thus become valid? Or, take the converse: A series of bonds, issued yesterday, are beyond the constitutional limitation and invalid. Hence a series of bonds issued to-day are valid, because the former issue is not, in law, an outstanding indebtedness. Next month a new set of city officials recognize as valid, by paying off, the first set of bonds just above suggested. Does their payment of these bonds, thus rendering them valid, now make this former issue an outstanding indebtedness, and therefore the latter issue thereby become invalid? And what shall be said when the same officials change the course of the corporation during their own administration? These difficulties increase if we accept as the test the will of the corporation in place of the force of the law.

If it be claimed that, because the corporation has paid off such bonds, therefore what the law would not have compelled the corporation to pay has become, because of voluntary payment, an indebtedness, we are yet further than before from an acceptable test; for such 'debt,' though not recognized by such by the law, is capable at any time of being paid off, and thus a new bond issue cannot be safely made while the old issue is outstanding. If the fact of payment is to be substituted as a test, in place of the obligation which the law recognizes and enforces, then the validity of a new bond issue would depend, not on the facts existing at the time of the issue, and thus capable of being then ascertained, but on the whim or conclusion of the corporation officials, which may come into existence long after such new bond issue, and which could only be ascertained at time of such issue by one having the gift of prophecy.

The result here reached is, therefore, that if the bond issue of 1882 was invalid, because obnoxious at time of issue to the constitutional limitation, it will not be included when determining the aggregate indebtedness of defendant at time of the issue (1884) of the bonds in suit; and, thus examining, the bonds in suit, so far as this ground of defense is concerned, are valid.

2. Had defendant, at the time these bonds in suit were issued, authority, and was that authority duly exercised, to issue the bonds sued herein? Plaintiff, as a part of its case, beings into court the bonds, which on their face assert they were issued under section 500 of the Iowa Code of 1873. Said section 500, so far as material herein, is as follows: 'Loans may be negotiated by any municipal corporation in anticipation of the revenues thereof, * * *' The question now under consideration was before this court on demurrer to the petition, and was decided adversely to defendant. 78 F. 900. Counsel on both sides have reargued the question on the present hearing. I have given it extended consideration and reexamination, in the light of the present argument and the additional cases cited by counsel.

In the former decision herein, reached on demurrer, the judgment of the court on the main question involved was with the defendant, and to the effect that, as a principle of general municipal law, (1) a municipal corporation is not authorized to issue negotiable bonds for loans relating to current expenses, unless the power to issue such bonds was expressly conferred on such corporation; (2) that a loan negotiated in...