Appeal of Whelen

Chief Justice Mercur. delivered the opinion of the court October 5th, 1885. This bill was filed by citizens and tax-payers of the city of Pittsburgh to enjoin against the performance of a contract, entered into between a sub-committee of the finance committee of the councils of said city of the one part, and the appellants of the other part, bearing date the 14th May, 1881. The former agreed thereby to sell to the latter certain bonds to be issued, to the amount of $6,000,000. The learned judge enjoined the city against delivering the bonds to the appellants under the terms of said agreement. The validity of this decree depends on the proper construction of the Acts of Assembly authorizing the making and-negotiating of the bonds. A reference to the Acts, and a brief statement of some of the important facts, are necessary to a correct understanding of the case. The Act of 9th May, 1879, authorizes, inter alia, the councils of any city of the second class, of which Pittsburgh is one, by ordinance to make, execute and negotiate its bonds, to an amount not exceeding six millions of dollars, the • proceeds thereof to be used in paying or retiring bonds previously issued by the city for the purpose of improving the streets and avenues thereof, and also Temporary Loan Bonds issued to meet the interest on said Street Bonds, and for no other purpose whatever. The bonds to bear a rate of interest not exceeding six per centum per annum, and be payable thirty years from the date thereof, and be exempt from all taxation for city and county purposes, and be known as “ Improvement Bonds.” The third section of the Act declares “ the}' shall be sold at not less than par with accrued interest; ¡but the said councils may allow a reasonable compensation for the sale or negotiation of the said bonds.” . Supplementary Acts of the 11th of March, 1881, and 15th April, 1881, respectively, were passed. As however they do not profess to change those portions of the Act of 1879, which in our opinion control the decision in this case, we refrain from passing on their validity. On the 12th January, 1880, the city of Pittsburgh passed’ an ordinance authorizing an issue of bonds, substantially in the words of .the Act of 1879, and declared they should not be sold at less than par and accrued interest; but provided that the finance committee, or sub-committee thereof, might — 196 — allow a reasonable compensation for the negotiation, sale or exchange thereof. On the 3d of April following the sub-committee entered into an arrangement with the appellants, Whelen and McCandless, whereby, in consideration of services to be performed, by the latter in the negotiation, sale or exchange of said loan, in the funding of the street and temporary loan indebtedness of said city, they were to be allowed, first, for the sale or exchange of new six per cent, thirty years loan free from taxation, a commission of one per cent.; second, for the sale or exchange of new five per cent, thirty years loan free free from taxation, an additional compensation of one per cent. It was, however, agreed that the six per cent, loan should not be placed unless it was found impracticable to place a new five per cent, loan within ninety days of the maturity of the bonds to be funded, and in that event due notice in writing should be given to the sub-committee; and in case the appellants failed to provide for the payment of the maturing loans by the sale or exchange of said improvement loan, as therein provided for, the contract should cease and determine. This contract having failed to effect the desired object, a second agreement was entered into between the same parties, on the 23d day of March, 1881. After reciting the Act of 11th of March, 1881, and the city ordinance passed to give effect thereto, both of which had been procured in pursuance of agreement between the parties, it proceeded to declare that the new five per cent, bonds should be made payable in thirty years, and be issued to the appellants in exchange for “ all Temporary Loan Bonds ” presented by.them, at par and accrued. interest; and it was therein further stipulated that all bonds purchased by the appellants under the provisions of the original and this supplementary contract should be furnished to them at par and accrued interest. This contract like the former one failed to effect its intended purpose. Then a third and- final one was entered into on the 14th May, 1881. It refers to and recites the previous legislation, and the previous contracts between the parties, and ratifies the latter subject to the modifications contained in said agreement of the 14th Majr. It then declares the city of Pittsburgh “ sells at par and accrued interest ” to the appellants “ §6,000,000 of its Improvement Loan Bonds, authorized by Act of 9th May, 1879, and its several supplements and ordinances of councils.” It further provides that the appellants “ shall be allowed a commission of one per centum upon all bonds purchased or exchanged by them under the provisions of this agreement, the said commission to be allowed in adjustment of accrued — 197 — interest or paid by the city warrant, if such accrued interest should not be sufficient to meet the said commission.” It has thus been shown that the original Act, which authorized the issue and negotiation of the bonds, expressly stipulated that they should be sold for not less than par with accrued interest, permitting only a reasonable compensation to be paid for the sale or negotiation thereof. That restriction was not removed by any supplementary legislation. The first agreement does not contemplate any sale of the bonds to the appellants, but merely their employment as agents to sell the same for the benefit of the city. The next agreement does not affirm a present sale, but assumes the right of the appellants to purchase the bonds; and in case they do, then the bonds are to be furnished to them at par and accrued interest. The last agreement stipulates and declares “ the city of Pittsburgh sells at par and accrued interest ” to the appellants the whole six millions of dollars of bonds which it was authorized to issue, and allows them a commission of one per cent, on all bonds purchased or exchanged by them under the agreement. The main question arises under this last agreement. Is it practically and substantially an agreement to sell the bonds to the appellants for less than par and accrued interest? If so, the sale is not authorized by the statute, and the contract therefor may be avoided. In Dillon on Municipal Corporations, § 89, it is declared to be an unquestioned rule of law that a municipal corporation does not possess and cannot exercise any other powers than these, to wit: first, those granted in express words; second, those necessarily or fairly implied in, or incident to, the powers expressly granted; third, those essential to the declared objects and purposes of the corporation — not simply convenient but indispensable. Any fair, reasonable doubt as to the existence of power is resolved by the courts against its existence in the corporation, and therefore denied. It is-equally well settled that the agents, officers, or city council of a municipality, cannot bind the corporation by any contract not within the scope of its powers. Id. § 457. The rule is said to grow out of the nature of such institutions, and to rest on just and solid grounds. The inhabitants are the corporators. The officers are only the public agents of the corporation. Their powers and their duties are prescribed by the charter or by statute. All persons dealing with them are bound to know the extent of those powers. Any rule or practice which permits municipal officers to transcend their powers is clearly contrary to public policy, and fraught with such mischievous and injurious effect to the tax — 198 — payers of the municipality, that it should receive judicial condemnation. It is not claimed that the power to issue and sell these bonds is given by the charter of the city, or that it is incident to,-or necessarily flows from, any power, therein contained. On the contrary it is conceded that the power claimed arises solely under the statutes cited. What then is the true character of the final contract ? A clear distinction exists between an agency to sell bonds for the city and a contract to buy them of the cit}'-. The former is a transaction which is to give the city the full.benefit of the sum for which they may be sold.-less the reasonable compensation agreed to be paid for effecting the sale. The latter wholly deprives the city of any of the excess above .par for which the appellants may sell them, however large it may be. In the one case the appellants are bound to act in good faith, and to endeavor to obtain for the city the highest market value for its bonds. In the other the bonds are to become the property of the appellants, so they may dispose of them as they see proper and enjoy the proceeds thereof. The relation between agent and principal is so essentially different from that which exists between vendee and vendor, that .it is useless to further elaborate the distinction. Was not this transaction undoubtedly a sale? The parties to the contract called it a sale. It had all the incidents of one. The price to be paid by the appellants was definitely fixed. The city was not to derive any profit- from a sale by the appellants at a.higher price, nor to suffer any loss in case of a sale by them at a lower price. The appellants alone would enjoy the profits of their sale, and suffer the loss, if any. In fact, however, it is shown .that-at the date of this contract the bonds were worth more than par, yet practically the city was to receive only ninety-nine per cent, of their par value. The credit of the city of Pittsburgh was bad during several years prior to 1879. It had once disputed the validity of its bonds to the amount of over five millions of dollars; but they had been adjudged to be valid. The general business prosperity of the country had increased and the credit of the city had improved, yet the actual market value of the bonds does not appear to have been known to the officers of the city in the spring of 1881. The bill does not charge any intentional fraud, nor pray that -the contract be set aside on that ground. The Master finds as a fact, and we think correctly, that no actual fraud has been proved on. the part of any one in the procurement or execution of the contract 14th May, 1881; Previous contracts — 199 — having failed to enable the city to realize on the bonds, it very naturally was induced to enter into some other arrangement to provide for its maturing indebtedness, on some of which it had paid seven per cent. The method, however, which was adopted, overlooked the restricted authority of the city to negotiate these bonds, under the statute. It cannot correctly be said that this transaction in effect is the same as if the appellants had been authorized to sell the bonds at par, and were to be paid a commission of one per cent, for making the sale. In such ease they would have been entitled to the one per cent. only. Under this contract of sale, as the evidence discloses, they may realize a profit of five per cent. If they 'had acted as agents the larger portion of this would enure to the benefit of the city. It is urged to now enjoin against a further execution of the contract will destroy the validity of the bonds already delivered, amounting to over one and a half million of dollars, and which are in the hands of third persons. This argument overlooks the fact that the city was authorized to make, issue and sell the bonds. The authority to sell was a separate and distinct power. The restriction imposed on the sale related only to the price at which the city should sell them. Having in consideration of nearly their value actually sold and -delivered them, and having thereby caused them to pass into the hands of good faith purchasers, the rights of the latter eailnot be affected by a decree enjoining .against any further delivery of bonds under the contract, and a cancellation of the unexecuted portion thereof. Many questions were argued which we deem unnecessary to discuss further than they are answered by what we have already said, as they do not change the conclusion at which we have arrived. We are not willing to adopt all the reasons assigned by the learned judge to sustain his decree, nor the decree itself to its full extent. We must therefore reverse portions thereof, in order to modify its terms in accordance with this opinion. . And now, October 5th, 1885, it is ordered that the appeal be dismissed at the costs of the appellants, and that the third paragraph of the decree relating to the payment of costs by the appellants be affirmed, that the residue of the decree be. reversed, and in lieu thereof it is further ordered, adjudged and decreed that the treasurer of the city of Pittsburgh be perpetually enjoined and restrained from receiving from the said Henry Whelen, Wilson McCandless and John D. Scully, or any or either of them, under the arrangement or arrange'rnents dated respectively April 3d, 1880, March 23d, 1881, and May 14th, 1881, any money for the redemption of,the — 200 — Street Bonds of said city, in said bill mentioned; and that the mayor of the city of Pittsburgh, the controller of said city, and the city of Pittsburgh, jointly and severally, be perpetually enjoined and restrained from delivering to said Henry Whelen, Wilson McCandless and John T. Scully, or any or either of them, or to any person o'r persons for them, or to be delivered to them or anjr or either of them, any bonds of said city under said arrangement or arrangements, either for cash or in exchange for any Street Bonds of said city; and that said arrangements be hereby annulled, avoided and cancelled.