Board of Com'rs v. Cornell University

THAYER, District Judge, after stating the case as above, delivered the opinion of the court. To make good the defense that these bonds are void even in the hands of an innocent purchaser for value, the county endeavors to establish, and must establish, the following propositions: First. That the Denver, Memphis, & Atlantic Eailway only had authority to construct and operate a narrow-gauge railroad, when the proposition to take stock in that company, and to issue bonds therefor, was proposed to, and was accepted by, Kingman county. Second. That after the passage of the act of March 3, 1877, relative to granting aid to narrow-gauge railroads, such roads could only be aided by counties and municipalities of the state of Kansas, in the mode prescribed by that act, — that is to say, by exchanging county bonds for second mortgage bonds of the railroad at the rate of $4,000 per mile. Third. That the so-called curative act of February 3, 1886, authorizing and confirming a change of gauge in certain cases, contravenes the constitution of the state of Kansas, and is therefore void and of no effect. And finally the county must maintain that, in view of the foregoing propositions, there was such an utter want of power to issue the bonds in controversy that the county is not estopped from denying their validity in a suit by an innocent purchaser for value. As the last of these propositions is, in our judgment, the most important, we shall first consider it. It will be observed that from the standpoint occupied by the county — that is to say, admitting all of its premises — the sole defect in the bonds is the supposed want of power in the Denver, Memphis & Atlantic Eailway to construct and operate a standard-gauge railroad at the time it undertook such construction, and at the time the bonds were voted by the inhabitants of the county. In no other respect does it appear that there was any such want of power attending the issuance of the bonds-as will serve to render them void. It is not questioned that the county had ample authority, under the laws of the state, to aid in the construction of standard-gauge roads by taking stock in railroad companies which proposed to construct such roads through or into the county, and to issue its bonds in payment for such stock subscription; and it is not denied that the road proposed to be built by the railway company, when "the bonds in suit were voted, was a standard-gauge road, and that such a road was actually built, and has been in operation through the county for the past seven years. Fairly stated, therefore, the defense interposed by the county is simply this: that it entered into a contract with the railway company to build a particular kind of road, which the company did not at the time have the charter authority to construct, and that the bonds which it issued and delivered are utterly void, notwithstanding the fact that the road has been built in exact compliance with the terms of the contract, and notwithstanding the fact that the county had a general power to issue bonds in aid of the construction of such a road as it bargained for, and has in fact received. [153] In view oí the authorities, we feel justified in holding that, without reference to the recitals, the county is not at liberty at this time To plead as a defense to the bonds that the railway company exceeded its powers in constructing a standard-gauge road. The position occupied by the county is very different from what it would be, if it had agreed to issue the bonds in payment for stock, on condition that the railway company would build a naiTow-gafige road, and if such a road had in fact been built. In that event it might, be plausibly argued that the bonds were utterly void because the county had undertaken to aid in building a narrow-gauge road in a manner not authorized by law; but that argument is not tenable, on the facts disclosed by the present record, for the reason that the road constructed was of standard gauge, and aid was extended to the enterprise in the very manner contemplated by the statute». The want of power alleged is not a want of power in the county to aid in the work that was actually undertaken, or in the mode» of granting such aid, but is merely a want of power in the railway company to construct a standard-gauge road. Furthermore, tin; act of the railway company in undertaking to build a standard-gauge road, was simply in excess of its charter powers, and was not otherwise contrary to law or illegal, and the contract between the county and the i*ailwav company is now fully executed. On the one hand, the road has been built, and the stock has been delivered. and, on the other, the bonds of the county have been issued, and have passed into tlie hands of innocent third parties. We repeat. then, that, in view of all (he circumstances, we feel justified in holding that the county is not at liberty at this time to interpose the plea of ultra, vires as a defense to the bonds. The general doctrine is that where a contract or undertaking which has been entered into by a corporation is simply in excess of its charter powers, and the same lias been fully executed, the defense of ultra vires cannot be successfully pleaded in a suit to enforce negotiable securities or other obligations which have issued out of the original transaction. In such cases the state is entitled to restrain the offending corporation from exercising powers that do not belong to it, or to oust it of its franchises, in a proper proceeding brought for that purpose, but it is ordinarily held that in collateral suits between private litigants the plea of ultra vires is not available as a defense. Bank v. North, 4 Johns. Ch. 370; Bank v. Matthews. 98 U. S. 621; Gold Min. Co. v. National Bank, 96 U. S. 640; Whitney Arms Co. v. Barlow, 63 N. Y. 62; Bradley v. Ballard, 55 Ill. 417; Ditch Co. v. Zellerbach, 37 Cal. 543; Argenti v. City of San Francisco, 16 Cal. 255; Allegheny City v. McClurkan, 14 Pa. St. 81; Wood’s Field, Corp. §§ 230-235. ' But we do not find it necessary, in this case, to rest onr decision solely on the ground last indicated. The bonds in controversy are now held by a corporation which purchased them for value on the faith of their recitals, and without any actual notice of the matter relied upon as a defense, i. e. that the original articles of association of the Denver, Memphis & Atlantic Railway declared that the [154] company intended to construct and operate a narrow-gauge railroad. The bonds do not show on their face that the railway company is a narrow-gauge road, or that it was organized to build a road of that character. Under the laws of Kansas, all railroad corporations are organized under, and pursuant to the same law relative to coi*porate organization, and the statute in question does not, in terms* require a railroad corporation to state in its articles of association whether its track is to be of a standard or of a narrow gauge. Furthermore, the bonds contain recitals showing that they were issued under laws existing in the state of Kansas, which conferred upon the county ample power to issue bonds for the purpose for which they purport to have been issued. In the case of County of Macon v. Shores, 97 U. S. 272, it appeared that county aid had been granted to a railroad company in the form of a stock subscription and by an issuance of bonds, although the company had not accepted its charter and become organized as a corporation within the time limited by law for such acceptance of the charter, and for organization thereunder. In a suit against the leounty upon the bonds, it was held that a plea that the company had not become organized within the time limited by law constituted no defense, as against an innocent purchaser of the securi[ties. The same ruling was repeated in the case of County of Ralls v. Douglass, 105 U. S. 728, and in the latter case it was also .held, that it was not competent for the county to show by way of ^defense, as against an innocent purchaser of its bonds, that when they were executed a person was acting as presiding judge of its ¡county court who was not de jure a member of the court. It seems, ¡to be settled by these decisions that a purchaser for value of railroad aid bonds is not required to ascertain and to determine, at his peril, whether the railway corporation to whom they were voted 'and issued was at the time duly and regularly constituted; and, within this rule, we think that it may be safely affirmed that a pur1 chaser of th,e bonds in suit was under no obligation to ascertain if the railway corporation to whom they were voted had the requisite-charter authority to construct a standard-gauge road. That was a matter which did not so affect the power of the county to issue the bonds, as to make it the duty of the bondholder to institute inquiries. We hold, therefore, that, as there was nothing on the face of the bonds to indicate that the Denver, Memphis & Atlantic Bailway was only authorized to construct a narrow-gauge railroad, a purchaser of the bonds was not affected with notice of that fact, and, furthermore, that the county is estopped from pleading such fact as a defense, in view of the recital, that everything had been-“complied with and performed,” which was “necessary * * *" to the lawful issue of the bonds.” And, finally, we are not .able to assent to the second proposition of counsel, which is stated at the beginning of this opinion,, that the act of March 3, 1877, deprived counties of the state of .Kansas-of the power to aid in the construction of narrow-gauge roads otherwise than by exchanging municipal bonds for second mortgage155 railroad bonds at the rate of $4,000 per mile. It admits of no doubt, we think, that prior to the passage of that act no distinction was made in that state between railroads of a standard and narrow gauge. They were organized then, as now, under the same law, and prior to March 3, 1877, undoubtedly possessed the same powers, franchises, and privileges, including the right to receive county aid in the form of a stock subscription or a loan of credit. But prior to March 3,1877, counties in that state could not exchange their own bonds for second mortgage railroad bonds. That was a new feature added to the railway legislation of that state, and it was only made applicable to companies proposing to build narrow-gauge reads, and was most likely added with a view of holding out special inducements for their construction. We have not been able to discover anything in the provisions of the act in question which evidences an intention on the part of the legislature to withdraw from counties or other municipalities the power which they previously possessed to extend aid to narrow-gauge roads, but, on the contrary, the concluding section of the act of March 3, 1877, expressly declares that it shall not be construed "as repealing or changing any provision of any law of the state * * authorizing counties * * to issue bonds to aid in building railroad^” Our conclusion is, therefore, that the act of March 3, .1877, is cumulative in its character, and that it enlarges the previous power of counties in the state of Kansas to aid in the construction of narrow-gauge roads. The view which we have thus taken of the several questions already considered is decisive of the case, and renders it unnecessary to consider the other propositions, heretofore cited, which -have been discussed by counsel. The; judgment of the circuit court is manifestly for the light party, and it is hereby affirmed. .