Town of Klamath Falls v. Sachs

Mr. Chief Justice Wolverton, after making the foregoing statement of the facts, delivered the opinion of the court. It is alleged that at the date of the signing and sealing of said bonds they were delivered to the defendant E. R. Reames (who was then a member of the board of trustees of the town, and a stockholder in the Klamath Falls Light & Water Company), in trust, to carry out the provisions of said Ordinance No. 46, and not otherwise; that neither Gates nor his assigns ever became entitled, under the provisions of said ordinance, to receive said bonds, and that the delivery thereof to Gates was unauthorized by any act of said board. At the trial, however, it was admitted in open court that they were delivered to him by Reames; that he sold the same, but failed to account to the town for the proceeds ; and that the defendant Lipman Sachs purchased said interest warrants or coupons for a valuable consideration, before maturity, without knowledge of the conditions and circumstances under which they were issued, delivered, and negotiated, except such as he is bound to take cognizance of from the face of the bonds. 1. It is first insisted that the powers vested in the town by the charter must be distinguished from such as are vested in the board of trustees, and that in the one case they must be exercised by the inhabitants and in the other by the board. To illustrate : It is enacted that the “town may incur an additional indebtedness of ten thousand dollars and issue bonds therefor, for the purpose of lighting the town and furnishing it with a water system ;” while, on the other hand, the board is authorized “to provide for lighting the streets, roads, — 336 — and alleys, and public buildings of the town, and furnishing the town with electric or other lights, and also to provide for the furnishing of water for the said town,” etc. It is maintained that, as the inhabitants were incorporated as the town, they alone can exercise the power delegated by the former clause of the charter, while it is competent for the board to exercise such as is delegated by the latter. Reasoning from this hypothesis, it is urged that the board should have called an election, and submitted the question of the issuance of these bonds to a vote of the electors of the town. This concedes, for the present purpose, that the town is authorized to issue the bonds in question, but challenges the mode and manner of their issuance. The conclusion reached is hardly a logical deduction from the premises. The electors of the town do not comprehend all the inhabitants thereof, and just why the board of trustees should be required to submit the question to a vote of the electors because the inhabitants of the town are incorporated is not quite apparent. There is no authority or direction under the charter empowering or requiring the board, before proceeding to the issuance of the bonds, to submit the question to a vote of the people; nor is there any such a limitation put upon its powers as it respects the issuance thereof. It is very true the trustees, if they had seen fit, could have submitted the ■ question to a vote of the electors as an advisory matter for their guidance, but they were not compelled or required to do so by any provision of the charter. They are the agents of the town in the exercise of all powers accorded it by the legislature, and the town acts through them in the transaction of all public business. A corporation, unlike an individual, cannot perform its functions directly, but must do so through an agent or some intermediary instrumentality ; and it is in this capacity that the board of trus — 337 — tees acted in the issuance of the bonds in controversy. If, therefore, the town has been clothed with the power to issue, the board has authority to proceed in the exercise thereof. 2. It is next insisted that the language of the charter does not authorize or empower the town or its board of trustees to issue bonds negotiable in form and character, such as were attempted to be issued in the present instance; in other words, that the power accorded to “issue bonds” is not commensurate or adequate to the purpose of issuing negotiable bonds. It has been held that the implied power of a municipal corporation to borrow money to enable it to execute the powers expressly conferred upon it does not authorize the municipalty to issue negotiable securities, capable of being sold in open market, and thereby freed from equities that might be set up by the maker; and, further, that the power to borrow money on the credit of the municipality for general municipal purposes limits the power to borrow for ordinary governmental purposes, such as are generally carried out with revenues derived from taxation, the presumption being that the grant of power was intended to confer the right to borrow money in anticipation of the receipt of revenue taxes, and that there is no implied power to issue negotiable securities, unimpeachable in the hands of innocent purchasers, for the money borrowed : Merrill v. Town of Monticello, 138 U. S. 673 (11 Sup. Ct. 441) ; City of Brenham v. German-American Bank, 144 U. S. 173 (12 Sup. Ct. 559). So, in Ashuelot Nat. Bank v. School Dist. No. 7, Valley County, 5 C. C. A. 468, 56 Fed. 197, it was held that there is no implied power to issue negotiable bonds from the express .delegation of power and authority to borrow money to pay for the site of school houses, to erect buildings — 338 — thereon, and furnish the same, dependent upon a majority vote of the qualified electors of the district, And, in Merrill v. Town of Monticello, 138 U. S. 673 (11 Sup. Ct. 441), it is said by Mr. Justice Lamar, speaking for the court, that: “To borrow money, and to give a bond or obligation therefor, which may be circulated in the market as a negotiable security, freed from any equities that may be set up by the maker of it, are, in their nature and in their legal effect, essentially different transactions. In the present case all that can be contended for is that the town had the power to contract a loan under certain specific restrictions and limitations. Nowhere in the statute is there any express power given to issue negotiable bonds as evidence of such loans. Nor can such power be implied, because the existence of it is not necessary to carry out any of the purposes of the municipality.” These cases are mainly relied on by plaintiff in support of its position, and we do not question their soundness, but their application to the present controversy may well be doubted. In City of Cadillac v. Woonsocket Inst, for Savings, 7 C. C. A. 574, 58 Fed. 935, under a statute which contains, among others, the following provisions, viz. : “For any loans lawfully made the bonds of the city may be issued, bearing a legal rate of interest. * * * When deemed necessary by the council to extend the time of payment, new bonds may be issued in the place of former bonds falling due, in such manner as merely to change but not increase the indebtedness of the city,” — it was held that bonds negotiable in form were authorized. Lurton, J., speaking for the Circuit Court of Appeals, says : “That this contemplates, and by necessary implication authorizes, the issue of negotiable bonds, we have no doubt. The general power to issue ‘bonds’ must be taken to authorize ‘bonds’ in the usual form of such well-known — 339 — commercial obligations. That usual form embodies a contract and obligation negotiable in its terms.” He continues: “The case of City of Brenham v. German-American Bank, 144 U. S. 173 (12 Sup. Ct. 559), has'no bearing upon this question. Nothing more is there decided than that an act empowering the city to borrow, for general purposes, not exceeding $15,000, on the credit of the city, did not authorize the issuance of negotiable obligations for the money so borrowed. Here the power to issue obligations, by necessary implication, in ’ the usual commercial form of ‘bonds,’ is expressly given. But one meaning can be fairly deduced from the terms of the act. The question now presented was not discussed in the Brenham Case, and we have no doubt whatever as to the conclusion we have announced.” The doctrine of this case has been expressly followed in several subsequent decisions by the federal courts, all of which distinguish Merrill v. Town of Monticello, 138 U. S. 673 (11 Sup. Ct. 441), and City of Brenham v. German-American Bank, 144 U. S. 173 (12 Sup. Ct. 559). In Ashley v. Board of Supervisors, 8 C. C. A. 455, 60 Fed. 55, power was given to issue bonds bearing interest, running for a long period of time ; and, it appearing on the face of the act that they might be put on the market and sold, it was held that, by strong implication, bonds negotiable in form were intended to be and might lawfully be issued and sold, under the authority granted. In West Plains Tp. v. Sage, 16 C. C. A. 553, 69 Fed. 943, it was held that a statute providing “that every county, every city of the first, second and third class, the board of education of any city, every township, and every school district, is hereby authorized and empowered to compromise and refund its matured and maturing indebtedness of every kind and description whatsoever, upon such terms as can be agreed upon, and to issue new bonds, with — 340 — semi-annual interest coupons attached, in payment for any sums so compromised,” by implication authorized the township to issue new bonds, without any restriction as to their negotiability, and that the grant of power to a municipal body to issue bonds must be interpreted to give that body power to issue municipal bonds in the usual form of such securities. And in Howard v. Kiowa County, 73 Fed. 406, it was concluded that statutory power to issue bonds includes power to make them negotiable, unless restricted by positive enactment. The learned judge in this case cites with approval the federal authorities above referred to. The implied power is largely — perhaps exclusively — a matter of legislative intendment, and we are impressed that a reasonable construction of the charter providing for the issuing of these bonds empowers the town, through its board of trustees, to issue and put upon the market bonds negotiable in form, and which would not be subject to equities in favor of the town in the hands of innocent purchasers. It will be noted that the first clause of section 11 of the charter provides that the town shall never borrow money, contract debts, or loan its credit to a greater amount than five per cent, of its taxable property, and that all warrants drawn against the town creating an indebtedness in excess of that sum shall be absolutely void, and it shall be so stated upon each and every warrant so drawn. Thus it will be seen that the intendment of the charter is that the ordinary warrants may be issued in liquidation of the town’s indebtedness, within the limit designated; but, if it exceeds the limit, then that the warrants shall be invalid, and the fact shall be indicated upon the face thereof, which would impart direct notice and information of their illegality to every person dealing with them. A subsequent clause empowers the town to issue another and a different kind of voucher or obli — 341 — gation “for the purpose of lighting the town and furnishing it with a water system.” For the additional indebtedness thus incurred it may ‘ ‘issue bonds. ” Manifestly, a distinction was intended to be made between the two kinds of vouchers or obligations, and it was designed, no doubt, that one should possess more of value to the holder than the other, else why should the different kinds of obligations be designated in the selfsame section of the charter? Now, a non-negotiable bond is no more serviceable to the holder than the ordinary warrant, the usual voucher issued in liquidation of ordinary expenditures of the municipality; and, if we would endow it with an enlarged value, the only manner by which it could be done is to give it negotiability, so as to impart to it the quality of commercial paper, and thereby cut off equities in the hands of innocent holders for value; so that, if we must make a distinction, it must be that which distinguishes the ordinary warrant, or non-negotiable, from the negotiable municipal bond, which cuts off equities. We conclude, therefore, that the bonds authorized by the charter are those possessing the greater commercial value, issued in the usual commercial form, with protection to innocent purchasers. Thayer, J., who rendered the opinion in Ashuelot Nat. Bank v. School Dist. No. 7, Valley County, 5 C. C. A. 468, 56 Fed. 197, wrote a concurring opinion in West Plains Tp. v. Sage, 16 C. C. A. 553, 69 Fed. 943, basing the power to issue the negotiable form and quality of bonds upon a construction of the statute, wherein, considering the intent of the legislature, he concluded that the language of the act was adequate to the purpose, notwithstanding the decisions in Merrill v. Town of Monticello, 138 U. S. 673 (11 Sup. Ct.441), and Brenham v. CermanAmerican Bank, 144 U. S. 173 (12 Sup. Ct. 539). To the same purpose is Ashley v. Board of Supervisors, 8 C. C. A. — 342 — 455, 60 Fed. 55. So it is in the case at bar. The character of the bonds authorized to be issued is established by legislative intendment, and it was competent to give them the quality of negotiability. 3. The bonds having recited that they were issued in pursuance of the provisions of the charter and Ordinance No. 46, it is vigorously contended that the purchaser is bound to take cognizance of the provisions both of the -charter and the ordinance , and, in that view, it is further maintained that the ordinance is such as the board of trustees had no warrant, under the charter, to adopt, in that it does not provide for lighting the town and furnishing it with a water system ; hence, that the bonds were issued for a purpose not contemplated by the charter, and therefore void in the hands of all holders thereof. Answering these propositions, defendants assert that, the charter having invested the board of trustees with power to issue bonds, and the bonds themselves bearing upon their face recitals to the effect that they were issued by authority of the charter and Ordinance No. 46, and that all acts and things required to be done precedent to and on the issuance thereof have been done and performed in regular and due manner and form, as required by law, the town is effectually estopped to controvert the truth of such recitals as against a bona fide holder. In legal effect, adequate recitals contained in negotiable municipal bonds are equivalent to a representation, or warranty, or certificate on the part of the officers, that everything necessary by law to be done has been done, and every fact necessary by law to have existed did exist, to make them legal and binding. It is well understood, of course, that such recitals do not cover matters of law, as all parties are equally bound to know the law, so that a certificate reciting actual facts, and that thereby the bonds were conformable to law, when, judicially speaking, they — 343 — are not, does not work an estoppel upon the municipality to claim the protection of the law; otherwise, it would be in the power of every municipal body, whether it had the authority or not, to usurp it by declaring that its assumption was within the law. This would be an exercise of legislative power, and would put corporate bodies above the law itself. The estoppel, therefore, extends only to matters of fact, and the statement thereof must be qualified and circumscribed so as to comprise such only as the officers intrusted with the power of issuing the bonds have express or implied authority to ascertain and determine touching their existence. In such a case, Mr. Justice Matthews, in Dixon County v. Field, 111 U. S. 83 (4 Sup. Ct. 315), says : “The meaning of the law granting power to issue bonds is that they may be issued, not upon the existence of certain facts, to be ascertained or determined whenever disputed, but upon the ascertainment and determination of their existence by the officers or body designated by law to issue the bonds upon such a contingency.” The gist of the rule is aptly stated by Mr. Justice Strong, in Town of Coloma v. Eaves, 92 U. S. 484, as follows : “Where it may be gathered from the legislative enactment that the officers of the municipality were invested with the power to decide whether the condition precedent had been complied with, their recital that it has been, made in the bonds issued by them, and held by a bona fide purchaser, is conclusive of the fact, and binding upon the municipality ; for the recital is itself a decision of the fact by the appointed tribunal. ’ ’ Hence it may be stated, as a general rule, that recitals in bonds which functionaries of a municipality have been empowered to issue, respecting the existence of specified facts, and the performance of the requisite conditions which are within their appropriate functions or province to — 344 — ascertain and determine, will estop the municipality to assert or maintain anything to the contrary as against the claim of innocent holders. We have little doubt but • that the statement on the face of the bonds that they were issued by virtue of Ordinance No. 46, giving the date and the full title of such ordinance, is such an apposite and significant reference thereto as to put persons dealing in them upon inquiry touching the provisions and exact legal purpose of the ordinance, and whether it was such an one as had the sanction of the charter in its enactment. The trend of authority, so far as we have been able to discover, is to that effect: Risley v. Village of Howell, 57 Fed. 544; Hachett v. Ottawa, 99 U. S. 86 ; Barnett v. City of Denison, 145 U. S. 135 (12 Sup. Ct. 819). Such being the legal effect of the statement or reference to the ordinance, the recital that the bonds were issued in pursuance of the charter could not validate it, or give it effect, if void or inoperative. This would be equivalent to saying : “Indeed, you have given us the true condition of the ordinance, and it is such that the town had no authority to adopt; but, nevertheless, you assert upon the face of the bonds that all was done in pursuance of the charter, hence that we are at liberty to assume, in utter disregard of the truth, that an ordinance was not only adopted, but that, in legal contemplation, it was amply sufficient to authorize and support the bonds, and that we may therefore purchase in absolute reliance on their validity. ’ ’ That would be an anomaly, and would result in making a void ordinance, of the condition of which all parties have had ample notice, valid, by the simple assertion that it was adopted in accordance with law. 4. This brings us to a consideration of the ordinance itself, and we are to determine whether it is such an one as the board of trustees was empowered to adopt, and such — 345 — as will support the bond issue. It is urged that the bonds awarded are, in effect, a bonus to be paid to Gates for constructing the water system and supplying the town with water. A careful analysis of the ordinance will suffice to determine this question. In the first place, the town grants to Gates, his successors or assigns, a privilege to construct and maintain a system of water works for supplying it and its inhabitants with water. Primarily, this privilege is limited to ten years. Gates, by an acceptance of the ordinance, agrees and undertakes to build, construct and maintain the system in accordance with particular provisions of the ordinance, and is required to maintain it during the full period for which the privilege is granted. Thereupon it is provided that the town shall have the option to purchase the system at a certain fixed rate, capable of being definitely determined at any time it may desire to conclude the purchase. In consideration of the option, it is stipulated that the town shall execute and deliver to Gates its bonds for the sum of $10,000, and, whenever^it shall conclude the purchase, these bonds are to be considered a first payment upon the purchase price. The ordinance provides that the town shall have an interest in the water works to the extent of $10,000, but that Gates and his successors and assigns shall also retain an interest therein until the town has completed the purchase, upon the consummation of which the franchise shall terminate. Gates is to receive the rents and profits of the water service to the inhabitants, and even to the town, except for ten hydrants, which he is required to furnish and maintain in part consideration for the franchise until the same is terminated; and provision is made for the renewal of the franchise, which contemplates as well a renewal of the option from time to time for a period of five years, so that the parties shall be continued in practically the — 346 — same relations. These are, in brief, the principal characteristics of the ordinance, which became effective as a contract when accepted by the grantee in the manner indicated. "Whatever might be said of the ordinance, it does not provide for a bonus to "Gates, in the sense that it is a mere gratuity, as he has contracted for and has given something of value to the town in return for the bonds and his limited franchise. 5. But the cardinal inquiry is whether what has been done has culminated in furnishing the town with a water system, within the meaning of section 11 of the charter. It is argued that it was the purpose and intent of the charter that the town should be or become the absolute owner of a perfect water system, freed from all liens, or incumbrances which may have effect as such, either directly or indirectly; in other words, that the town is empowered merely to purchase and own a perfect, unincumbered water system, at a cost not to exceed $10,000. The effect of section 11 is that the town shall not create an indebtedness exceeding five per cent, of the taxable property ; but, for the purpose of lighting the town and furnishing it with a water system, it is authorized, to incur an additional indebtedness of $10,000, which latter amount we interpret not to constitute a limitation upon the cost of the water system ; and it would be adequate for the town to contract or provide for the construction of a system which might cost a sum equal to five per cent, of the taxable property in excess thereof, provided there was no other indebtedness of the town, and it could issue therefor $10,000 in bonds, and its warrants for the balance. Thus far the way seems perfectly clear. It must be admitted that the town has not become the absolute owner of the water system ; but it has an interest therein to the extent of $10,000, and, under the ordinance, it may retain this at all events, and may even — 347 — tually become the owner of the whole by a supposed additional expenditure. "We find from the testimony that the entire system, including the electric light plant, cost Gates something like $17,000. But this is not the measure of the ultimate cost to the town. It may be more, and yet it may be less. The assessments of taxable property in 1895 exceeded $125,000, so that, if the board had incurred a liability or obligation to the full amount of the cost to Gates, it would exceed but slightly the limitation under the charter unless the town had other outstanding obligations. The board, however, has only incurred a present obligation of $10,000, and at the end of ten years it is quite probable it can assume the additional obligation, if it does not provide a fund in the meantime for the payment of the bonds in full or in part, without overreaching the charter limitation of indebtedness. Careful provisions are made whereby the town may eventually own the system, and it would seem that the legitimate intendment of the ordinance is that the contract thereby consummated with the assent of Gates should, in good faith, be carried out in every detail, and fully and conscientiously executed. The ordinance has so provided that neither Gates nor his successors or assigns can ever acquire the absolute franchise without the assent of the town (and without the franchise they could not operate the system); nor can the town be deprived of its right to finally acquire the entire ownership .of the system without an abandonment thereof. The town entered bona fide into a contract, and we cannot say that, it is unreasonable or unbusinesslike, for that is largely a legislative matter for the board of trustees, whereby, upon the observance of its terms and conditions, it might eventually acquire the water system, and, apparently, without the necessity of exceeding the limit of indebtedness as set by the charter; and we are very — 348 — strongly impressed that it is such an one as the board had the power to make, looking to the acquirement of the water system, and, while it is yet executory in its nature, and the town has not become the absolute owner, such is the legitimate intendment that it shall at a future date become such owner; hence, we hold that it has not exceeded its powers in the premises. 6. "We have reasoned this case so far as if the board of trustees had been dealing with the water system alone, because it has seemed that we might be better understood. The plaintiff argued that it was necessary, under the charter, that the board should provide for lighting the town, and at the same time furnish it with a water system, thus combining the two, and that it was incompetent for the town to provide for the one without the other. This argument is not well founded, as it is apparent that the intendment of the charter is that the board might provide for one or the other separately, or for both at the same time ; but, if we are wrong in this interpretation, we find that the board has in fact undertaken to provide for a combination of both. While the ordinance providing for the lighting of the town is not referred to in the bonds, yet the matter of constructing an electric system in conjunction with the water works is referred to in Ordinance No. 46 in such manner as it may be fairly concluded that the purpose of the board was to furnish the town with a system for lighting, as well as for a water supply. Ordinance No. 46 being, as we have heretofore ascertained, within the power of the board of trustees to enact, the town is estopped by the recital in the bonds to the effect that all acts and things required to be done precedent to and on the issuance thereof have been done and performed in regular and due manner and form, as required by law, to deny that Gates — 349 — or Ms assigns have not complied with the terms and conditions of his undertaking, or that he has not fully completed the system, as required by the ordinance. . The issue is raised that the bonds were delivered without the authority of the board of trustees. But touching this there is no evidence in the record showing the manner of their delivery by Reames. The complaint alleges no fraud in the delivery, but simply that the bonds were turned over to Gates contrary to the conditions of the ordinance. But the burden of proof regarding this matter was with the plaintiff to establish, and, not having done so, we must conclude that the fact is otherwise than as alleged, and that the bonds came rightfully into the hands of Gates. These considerations affirm the decree of the court below, and it is so ordered. Affirmed .