Holderman v. Hidalgo County Water Control & Improvement Dist. No. 12

HUTCHESON, Circuit Judge. Brought by plaintiff, claiming to be an innocent purchaser of interim bonds of Hi [793] dalgo County Water Control and Improvement District No. 12, this suit involving part of the bond issue dealt with in Laycock v. Hidalgo County Water Control and Improvement District No. 12, et al., 5 Cir., 142 F.2d 789, this day decided, was tried along with Laycock’s case and on the same record. While in Laycock’s case, coupons attached to some of the bonds had been put in judgment, and the suit was on that judgment to enforce it; in this case, the suit is on the bonds. Fully recognizing that the bonds have been declared to be, and are, invalid and that unless he is entitled to protection as an innocent holder, he cannot prevail, Holderman’s whole efforts have been directed to establishing that he was bona fide holder for value, and as such is entitled to protection. The district judge found that Holderman had no actual notice of the facts which render the bonds void and of the circumstances surrounding their disposal, but that, taking into consideration the recitals in the bonds and the other facts which he knew, he was put on inquiry, which inquiry if pursued would have led to notice of all the facts. He found also: that the bonds and the resolution authorizing them showed on their face that they were issued not under the statute in force at the time they were voted but under the amended statute and without a vote; and that, the Texas courts having held that their issuance under the amended statute without a vote made them illegal and void on their face, Holderman was in law charged with notice of this invalidity and could not recover. Here appellant recognizes that, since more bonds were issued than were authorized under the statute in force when the vote was taken, $550,000 authorized and $650,000 issued, no bond can be enforced for its full amount. He insists though that, under Citizens’ Bank v. Terrell, 78 Tex. 450, 14 S.W. 1003, City of Laredo v. Looney, 108 Tex. 119, 185 S.W. 556, and Rockwall County v. Roberts County, 103 Tex. 406, 128 S.W. 369, the issued bonds must be considered valid in the amount authorized by the statute and invalid only as to the excess, each bond to be scaled proportionately, and that plaintiff should have had a judgment on his bonds not for their face, but for 55/65ths thereof. He particularly insists that the court erred in finding him not an innocent purchaser for value without knowledge of the fraud which had attended the issuance and floating of the bonds. Appellees, urging that the district judge was right throughout, insist that, since the Texas courts have held that the issuance of the bonds, under the amended statute, without a vote, renders them void and that they show on their face that they were so issued, there can be no question here of innocent purchase or of scaling. We agree with appellees. The law is settled that while an innocent purchaser of bonds holds them free of the consequences of defects not apparent on the face of the record, he takes them with all their disclosed imperfections on their head, and if it is determined as matter of law that the bonds are invalid on their face, he cannot shelter behind his own lack of knowledge of the law, or legal opinions to the contrary. The rule of scaling invoked by appellant has no application here. That principle applies to bonds whose only defect is that in issuing them debt limits have been exceeded. It operates to cure that defect by scaling the bonds back to the allowed amount. The defect asserted here is not that the debt limit has been exceeded, but that bonds, legal and valid only if authorized by vote, were issued without a vote. It is quite clear that the courts of Texas have held: (1) That the bonds were issued under the amended statute; (2) that to be valid under that statute they must have been voted since its enactment; and (3) that, not having been so voted, they are void and no person can take valid title to, or recover on, them. The Supreme Court, in State ex rel. Abney v. Miller, 133 Tex. 498, 128 S.W.2d 1134, 1137, flatly held that interim bonds of the issue under attack here were not “authorized by the voters” and that, because they were not, they were not valid. The court said: “We do not hold that Article 7880—84a, as amended, authorizing the issuance of ten year interim bonds * * * is unconstitutional * * *. What we hold is that the amendment may not be given retroactive effect, but is applicable only to bonds voted after its effective date. The validity of interim bonds, as of all other bonds, must be tested by the law as it existed when their issuance was authorized.” In Miller v. State, 155 S.W.2d 1012, the Court of Civil Appeals rejected the same contention urged here, that the bonds were [794] invalid only to the extent of their excess over the amount authorized by the statute in force when they were voted and that the defect could be cured by scaling. It said at page 1018 of 155 S.W.2d, “For the reasons before indicated,1 we do not think the interim bonds as issued ever had any potential validity, either in whole or in part, for any purpose whatsoever.” The judgment was right. It is affirmed. Footnotes [1] “Since the interim bonds in controversy were issued under the provisions of Article 7880—84a of Vernon’s Ann.Civ.Stat., as amended, * * * which amendment became effective on April 9, 1930, without such proposition having been first submitted to the voters of the District for their adoption, we hold that said bonds are invalid and void because issued in violation of the plain provisions of the Oonstitution. * * * Such, as we understand, is the clearly expressed holding of the Supreme Court in its opinion on the former appeal of this cause.” 155 S.W.2d at page 1017.