Salmon v. Rural Independent School Dist. of Allison

SHIRAS, District Judge (after stating the facts as above). The first question presented for determination in this case is whether the action in the name of the plaintiff can be maintained on the bonds which are the property of Mrs. Cora Andrews, it being claimed on part of the defendants that the provisions of section 3459 of the Code of Iowa, declaring that actions must be prosecuted in the name of [241] the real party in interest, forbids bringing a suit in the name of an agent. In Abell Note Co. v. Hurd, 85 Iowa, 559, 52 N. W. 488, the state Supreme Court, in construing this section of the Code, declared the law to be “that the party holding the legal title of a note or instrument may sue on it, though he be an agent or trustee, and liable to account to another for the proceeds of the recovery, but he is open in such case to any defense which exists against the party beneficially interested.” The fact, therefore, that the plaintiff in this case is the agent of the beneficial owner does not prohibit bringing the action in his name, and the delivery to him of the possession of the bonds, which in effect are payable to bearer, with the authority to enforce the collection thereof, clothes him with sufficient title to maintain the action in his own name. Village of Kent v. Dana, 100 Fed. 56, 40 C. C. A. 281; O’Brien v. Smith, 68 U. S. (1 Black) 99, 17 L. Ed. 64. The second count in the petition is based upon bond No. 32, for $500, dated April 1, 1881, and which by its terms came due on April 1, 1891. As this action was not begun until June 19, 1901, more than 10 years had elapsed after the maturity of the bonds before the bringing of the suit, and the bar of the state statute of limitations, pleaded by the defendants, defeats recovery thereon. With the exception of bond No. 62, dated February 15, 1882, tbe remaining bonds sued on were those which were obtained in exchange for other bonds owned by the Citizens’ National Bank and by James A. Chapman under the circumstances detailed in finding No. 21. Would these bonds be valid in the hands of the original owners thereof? It is certainly clear from the evidence that when Carpenter, as the agent of the Citizens’ National Bank and James A. Chapman, undertook to bring about the exchange of bonds, these parties well knew that the amount of bonds held by each party was in excess of 5 per cent, of the taxable property in the independent school district of Riverside, and therefore knew that the bonds to be issued to them under the contract of exchange would be in excess of the constitutional limit of 5 per cent, on the assessed value of the property in the district. As shown by the valuations of property within the district as set forth in finding No. 3, the district could not in the years 1880, 1881, or 1882 incur an indebtedness equal to $3,500 without exceeding the constitutional limit; and certainly when Chapman, acting in his own behalf and on behalf of the Citizens’ National Bank, of which he was a director, arranged with Carpenter that the latter should take the bonds owned by himself and the bank, which amounted to $8,000, exclusive of interest, and exchange them for new bonds, he,knew, as a matter of fact, that the bonds to be exchanged represented an amount largely in excess of the legal limit of indebtedness, and he well knew that if the proposed exchange was carried through the amount of bonds to be issued to himself and the bank would be largely in excess of the constitutional limit, and therefore it is not open to Chapman or to the bank to claim that they in good faith took the bonds in suit relying on the recital therein contained that they were issued in accordance with the Constitution of the state. [242] Furthermore, in procuring the issuance of these bonds, Carpenter acted as the agent of the parties owning the bonds, and he well knew that the amount of bonds he was purposing to obtain was largely in excess of the limit of indebtedness prescribed by the Constitution, and, furthermore, that the bonds already issued in the name of the district greatly exceeded the legal limit. Under these circumstances, it would not be open to the bank or to Chapman to claim that they took the bonds in suit in good faith, and relying on the recital therein contained that the same were in accordance with the Constitution of the state. They knew that this recital was not true, and it was by their own procurement that this recital was placed in the bonds, and therefore it would not validate the bonds in their hands. If it be said that in fact the bonds sued on were exchanged for the other bonds held by the bank and Chapman, and therefore did not increase the indebtedness of the district, the question is whether it is shown that the bonds originally held by these parties were valid and enforceable against the district. The evidence shows that these bonds were, in amount, in excess of the legal limit of indebtedness; that they did not contain any recital to the effect that they were in accordance with the Constitution of the state; that the district had not received any consideration therefor ; and that, in effect, they were illegally and fraudulently issued. If the present action had been brought by the bank and James A. Chapman on the bonds originally held by them, a recovery could not have been had thereon under the evidence adduced in this case, for the reasons (i) that the amount of bonds held by each of the parties was in excess of the limit imposed by the Constitution of the state upon the debt creating power of the district, and the bonds contained no recitals estopping the district from relying upon this defense; and (2) that the evidence showed that the bonds were issued without consideration, and were in fact illegal in their inception, thus casting the burden on the holders of the bonds of showing that they were in fact innocent holders thereof for value. Under the settled rule, the parties were bound to take notice of the constitutional limitation upon the power of the district to create indebtedness, and of the amount of the taxable property within the district as shown by the tax lists; and, as the bonds taken and held by them were in excess of the legal limits, they could not be held to be valid and enforceable unless a state of facts were proven which would except them out of the constitutional prohibition, and this has not been done. Furthermore," as the bonds held by them were in fact without consideration and fraudulently issued, the burden would be shifted to them of proving that they were innocent holders for value thereof. Thus, in Collins v. Gilbert, 94 U. S. 758, 761, 24 L. Ed. 170, the rule is stated to be that, “if it be alleged and proved that the instrument had its inception in illegality or fraud, a presumption arises from that proof that the plaintiff took it without value; or, in other words, it'SO far shifts the burden of proof that, unless the plaintiff gives satisfactory evidence that he gave value for the same, the defense will prevail.” [243] The evidence fails to show with clearness what the consideration was, if any, for the original transfer of the bonds, and therefore it must be held that if this action was in the name of the Citizens’ National Bank and James A. Chapman upon the bonds exchanged for those in suit, a recovery thereon could not be had for the reasons stated. The fact, however, that the bonds sued on would be invalid and nonenforceable if sued by the original holders does not necessarily defeat the suit as it now stands, provided it be shown that the present holders of the bonds, or either of them, are innocent holders for value of the bonds owned by them. Being bonds issued in exchange for other bonds, the municipality issuing them is estopped from pleading the constitutional inhibition against an innocent purchaser for value, this being the rule established by the repeated decisions of the Circuit Court of Appeals for this circuit. Independent School District v. Rew, 111 Fed. 1, 49 C. C. A. 198, 55 L. R. A. 364; Fairfield v. Rural Independent School Dist., 116 Fed. 838, 54 C. C. A. 342. With respect to the bonds owned by Mrs. Cora Andrews, it is not shown that she paid value for them, or that she ever purchased them; the inference from the evidence being that she inherited them from her father, James A. Chapman. The exact date of his death is not proven, and it may be the fact, therefore, that the title or right to these bonds, which were issued in 1881 or 1882, and matured in 10 years from their date, did not pass to Mrs. Andrews until after their maturity. It not appearing that she became the owner of the bonds before they became due, and it not appearing that she paid value therefor, it cannot be held that she is an innocent holder for value of the bonds in question, and therefore the same defenses are available against her as would be open to the defendants if the action was in the name of James A. Chapman, and, as already held, he could not, if living, maintain the action thereon, and therefore there can be no recovery on the bonds and coupons belonging to Mrs. Andrews. With respect to the bonds owned by Charles B. Salmon, and sued on in his own right, the evidence shows that he became the owner thereof before maturity and for value; and, although in amount those bonds exceeded the constitutional limit of 5 per cent, of the taxable property in the school district, yet as they were issued as refunding bonds, and recite that they were issued under the provisions of chapter 132, p. 127, of the Acts of the 18th General Assembly of the state, I am compelled to hold, under the rulings of the Circuit Court of Appeals in the cases already cited, that a recovery thereon can be had upon the bonds, and also upon all coupons maturing since June 19, 1891, as the statute of limitations bars recovery on all the coupons coming due more than 10 years before this action was commenced. The total amount now due on the bonds and coupons owned by the plaintiff is the sum of $8,154.35, and for two-thirds of this amount, being $5,436.22, judgment will be entered in his favor against the rural independent district of Allison, and of this judgment $3,066.66 will bear interest at the contract rate of 7 per cent., and $2,369.56 at 6 per cent. For the remaining one-third of the total sum due on the bonds and coupons, being the sum of $2,718.11, judgment in favor [244] of the plaintiff will be entered against the rural independent school district of Jackson, of which amount $1,533.66 will bear interest at the contract rate of 7 per cent., and $1,284.41 at 6 per cent. Of the total taxable costs, one-half is adjudged against the plaintiff, two-sixths against the rural independent district of Allison, and one-sixth against the rural independent district of Jackson.