Merrill v. Monticello

after stating the case as above reported, delivered, the opinion, of the court.

The decisive question presented by the record in this case is, did the town of Monticello have authority, under, the laws of Indiana, to issue for sale in open market negotiable securities in the forms of the bonds and coupons on which recovery is here sought? Chancellor Kent, in his Commentaries, vol. 2, 298, 299, referring to the strictness with which corporate powers are construed, irrespective, of the distinction between public and private corporations, uses the following language: •“ The modern doctrine is, to consider corporations as having such powers as are specifically granted by the act of incorporation, or as are necessary for the purpose of carrying into effect the powers expressly granted, and as not having any other. The Supreme Court of the United States declared this obvious doctrine,' and it has.'been repeated in the decisions of the state courts. ... As corporations are the mere creatures of law, established for special purposes, and derive all their powers.from the acts-creating them, it is perfectly just and proper that they should be obliged strictly to show their authority for the business they assume, and be confined, in their operations, to the mode and manner and subject matter' prescribed.”

Judge Dillon, in his work on Municipal Corporations,-§ 89, says: “It is a general and undisputed proposition of law that ■a municipal corporation possesses and can exercise the following powers and no others: First, those granted in express words ; secorid, 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 concerning the existence of power is resolved by the courts against the corporation, and the power is denied.”

In Hopper v. Covington, 118 U. S. 148 , 151, this court, in passing upon the power of incorporated towns in Indiana, under laws which we will have to consider and pass upon in this case, said, Mr. Justice Gray delivering the opinion : “ Whqn

In Cause v. Clarksville, 5 Dillon, 165, the court, in an able .discussion of the inherent and incidental authority of municipal corporations, holds, that whether a municipal corporation possesses the power to borrow money, and to issue negotiable securities therefor, depends upon a true construction of its-charter and the legislation of the State applicable to it.

In order to determine the question before us, recourse must'be had to the statutory enactments, applicable to the subject, that were in force at -the time the bonds in this suit were issued, in May, 1878. ‘ These enactments are contained in sections 3333, 3342, 3344, 3345, 4£88 and 4489 of the Revised Statutes of Indiana of 1881. Sec; 3333 is a section of the act of 1852 for the incorporation of towns in that State, and contains the usual grant of municipal powers. Sec. 3342, which was also section 27 of the same act of 1852, provides as follows r “No incorporated town under this act shall have power to borrow money or incur any debt or liability, unless the citizen-owners of five-eighths of the taxable property of such town, as evidenced by the assessment roll of the preceding year, petition the board of trustees to contract such debt or loan. And such petition shall have attached thereto an affidavit verifying the genuineness of the signatures to the same. And for any debt created thereby, the trustees .shall add to the tax duplicate of each year, successively, a levy sufficient to pay the annual interest on such debt 6r loan, with an addition of not less than five cents on the hundred dollars, to create a sinking fund for the liquidation of the principal thereof.”

The other sections contain the provisions of certain statutes passed in 1867, 1869 and 1873. It is only necessary to quote here sections 4488 and 4489, as they embody the provision of the act of 1873, which is itself the statute of 1869 rewritten

“ Sec. 4488. Any city or incorporated town in this State which shall, by the action of its school trustees, have purchased any ground and building or buildings; or may hereafter purchase any ground and building or buildings; or has commenced, or' may hereafter commence, the erection of any building or buildings for school purposes; or which shall have, by its school trustees, contracted any debts for the erection of such building or buildings, or the purchase of such ground and building or buildings; or such trustees shall not have the necessary means with which to complete such building or buildingSj^or to pay for the purchase of such ground and building W-buildings, or pay such debt, — may, on the filing, by the school trustees of said city or town, of a report, under oath, with the common council; of such city, or the board of trustees of such town, showing the estimated or actual cost of any such ground and building or buildings, or the amount required'' to complete such building or buildings, or purchase such ground .and building or buildings, or the amount of such debt, on the passage of an ordinance authorizing the same by the common council of said city, or the board of trustees of such town, issue the bonds of such city or town to an amount not exceeding, in the aggregate, fifty thousand dollars, in denominations not less than one hundred nor more than one ..thousand dollars, and payable at any place that may be desig- - nated in the bonds (the principal in not less than one year nor more than twenty years .after the date of such bonds, and the interest annually or semi-annually, as may be therein provided) to provide the means with which to complete such building or buildings, or to pay for the purchase of such ground and building or buildings, and to pay such debt. Such common council or board of trustees may, from time to time, negotiate and sell as many of such bonds as may be necessary for such purpose, in any place and for the best price that can be obtained therefor in cash: Provided, Thát such bonds shall not be sold at a price less than ninety-four cents on the dollar.

“Sec. 4489. The proceeds of the sales of such bonds shall

¥e have given these sections in full to show the entire legislation of the State in 1878, upon the subject of the power of towns to borrow money, contract loans, incur debts and issue bonds, so that it may be the more clearly determined whether it anywhere éxpressly-confers upon incorporated towns of the State the general power of issuing, for sale in open market, negotiable securities, in the form of bonds and coupons, which, in the hands of bona fide purchasers before maturity, will be subject to no legal or equitable defences in favor of the maker. In our opinion no such express power'is given by these sections, either for the purpose of raising money or funding a previous indebtedness. Obviously, it cannot be found in sections 4488 and 4489, for they relate specifically and exclusively to bonds for school buildings, school grounds and school debts, and prescribe the mode by which bonds may be issued by towns for those specified objects — a mode confessedly not followed, or even attempted to be followed, in issuing the bonds in this suit. "We are confirmed in this conclusion by the view taken in Hopper v. Covington, supra: “ The averment, that the defendant is a municipal corporation under, the laws of Indiana, ‘ with full power and authority, pursuant to the laws of said State, to execute negotiable commercial paper,’ if understood as alleging a general power to execute negotiable commercial paper, is inconsistent with the public laws of the State, of which the courts of the United States take judicial notice.”

The plaintiff in error relies mainly upon the ground that the authority in question arises, by necessary implication, from the power to make certain expenditures; from the character of the objects to be accomplished by those authorized expenditures ; from the necessity of providing the means for. paying a previous indebtedness lawfully incurred in such expenditures -t and from other powers expressly granted. The line of his counsel’s argument, and that of the district judge to whose opinion our attention has been especially called, is this: Whilst section 3342 (the same as section 27 in the act of May, 1852) is not in itself a substantive grant of power, it clearly evinces the legislative intent and understanding that the right to borrow money or otherwise incur any debt or liability might be implied as incidental to the express power given in that or any subsequent act containing not inconsistent provisions, and includes a case like this, where the power is necessary to prevent a default of payment of a previous debt, which it was authorized to create. It is insisted farther that it is the settled doctrine in Indiana that corporations- take, by implication, all the reasonable modes of executing their express or substantive

Section 119, Dillon on Munie. Corp. 3d ed.', lays down the Indiana law, on this subject,- substantially as is contended for by the plaintiff in error. That section is as follows: “In Indiana¡, the doctrine is that corporations, along with the. express and substantive powers conferred by their charters, take by implication all the reasonable modes of executing such powers which a natural person may adopt. It is a power incident to corporations, in t¿e absence of positive restriction, to borrow money as means of executing the power.” A large number of cases from the Supreme Court of Indiana are cited in a note to support the.doctrine, of the text. We think the proposition that, under the laws of Indiana, a town has an implied authority to borrow money, or contract a loan, under the conditions, and in the manner expressly prescribed, cannot be controverted.

But this only brings us back to the question, Does the implied power to borrow money or contract a loan carry with it a farther implication of power to issue funding negotiable' bonds, for that amount, and sell them' in open market, as Commercial paper ? Let us see. Sec. 3312 is unquestionably a limitation upon the power to borrow money. Its very language is that of mandatory negation. “ No incorporated town shall have the power to borrow money, or incur any debt,” unless certain, conditions precedent are complied with. The conditions which the statute prescribes the statute means to be performed. There can be no legal borrowing, unless the statute is strictly followed. What does it prescribe ? That there must be first a petition to- the town trustees, which shall be- signed by the citizen-owners of at least five-eighths of the taxable property of the town, whose signatures shall be verified by an.affidavit to the petition. The prayer of the petition is required to be that the board of trustees shall contract such debt or loan. The board could not depart, in its action, from this legally required prayer of the petition without transcending its authority, and acting ultra vires. But the board did

It is admitted that the power to borrow money, or to incur indebtedness, carries with it the power to issue the usual evidences of indebtedness, by the corporation, to the lender or other creditor. Such evidences may be in the form of promissory notes, warrants and, perhaps, most generally, in that of a bond. But there is a marked legal difference between the power to give a note to a lender for the amount of money borrowed, or to a creditor for the amQunt due, and the power to issue for sale, in open market, a' bond, as a commercial security, with immunity, in the hands of- a bona fide holder for value, from equitable defences. The plaintiff in error contends that there is no legal or substantial difference between the two ; that the issuing and disposal of bonds in market, though in common parlance, and sometimes in legislative enactment, called a sale, is not so in fact; and that the so-called purchaser who takes the bond and advances his money for it is actually a lender, as much so as a person who takes a bond payable to him in his own name.

We think the case of Police Jury v. Britton, 15 Wall. 566 , is directly and absolutely conclusive against the position of the plaintiff in error, on this point. It was an action upon coupons of certain bonds issued by the Police Jury of Tensas Parish, Louisiana, the validity of which the defendant derriba,

The opinion of the court, delivered by Mr. Justice Bradley, clearly illustrated the fundamental distinction between issuing bonds merely as evidences of a, debt or loan and issuing bonds for negotiation and sale generally, with respect to the powers of a municipal corporation. It said: “ That a municipal corporation which is expressly authorized to make expenditures for certain purposes may, unless prohibited by law, make contracts for the accomplishment of the authorized purposes, and thereby incur indebtedness, and issue proper vouchers therefor, is not disputed. This is a necessary incident to the express power granted. But such contracts, as long as they remain executory, are always liable to any equitable considerations that may éxist or arise between the parties, and to any modification, abatement or recission in whole or in part that may be just and proper in consequence- of illegalities, or disregard or betrayal of the public interests. Such contracts are very different from those w-hieh are in .controversy in this case. The bonds and coupons on which a recovery is now sought are commercial instruments, payable at a future day and transferable from hand to hand. . . . The power to issue such paper has been the means, in several cases which have recently been brought to our -notice,, of imposing upon counties and other local jurisdictions burdens of a most fraudulent

The plaintiff in error quotes from the Opinion in that case, to support his contention, the following: “ We do not mean to be understood that it requires, in all cases, express authority for such bodies to issue negotiable paper. The power has frequently been implied from other express powers granted. Thus, it has been held that the power to borrow money, implies the power to issue the ordinary securities for its repayment, whether in the form of notes or bonds payable in future.” We think the significance, of these sentences, as applicable to the facts of this case, can be clearly discerned from the following concluding sentences of the paragraph: “ But in our judgment these implications should not be encouraged or extended beyond the fair inferences to be gathered from the circumstances of each case. It would be an anomaly, justly to be deprecated, for all our limited territorial boards, charged with certain objects of necessary local administration, to become the fountains of commercial issues, capable of floating about in the financial whirlpools of our large cities.”

The same doctrine is' presented-onost forcibly in the case of The Mayor v. Ray, 19 Wall. 468 . In Claiborne County v. Brooks, 111 U. S. 400 , 406, it was held’ that the statutes of Tennessee, which conferred upon counties in that State the power to erect a court-house, jail and other necessary. - imty buildings, did not authorize the issue of commercial paper as evidence of or security for a debt contracted for the construction of such a building. Referring to the view of the court below in that case, which held that, as the county had power to ei’ect a court-house, that power implied the power to contract out the work, and to issue negotiable bonds of a commer

In Young v. Clarendon Township, 132 U. S. 340 , 347, many of the decisions bearing on this question were referred to, and the court said: “ Even where there is authority to aid a railroad, and incur a debt in extending such aid, it is also settled that such power does not carry with' it any authority to execute negotiable boilds, except subject to the restrictions and directions of the enabling act;” citing Wells v. Supervisors, 102 U. S. 625 ; Claiborne County v. Brooks, 111 U. S. 400 ; Kelley v. Milan, 127 U. S. 139 .

In Hill v. Memphis, 134 U. S. 198 , 203, it was held that the power conferred by statute on municipal corporations to subscribe for stock in a railway corporation did not include the

The logical result of the doctrines announced in the above cited cases, in our opinion, clearly shows that the bonds sued on in this case are invalid. It does not follow that, because the town of Monticello had the right to contract a loan, it had, therefore, the right to issue negotiable bonds and put them on the market as evidences of such loan. To borrow money, and to give a bond or obligation therefor which may circulate 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 specified restrictions and limitations. Nowhere in the

It is true that there is a considerable number of cases, many of which are cited in the brief of counsel for plaintiff in error, which hold a contrary doctrine. But the view taken by this court in the cases above cited and others seems to us more in keeping with the well recognized and settled principles of the law of municipal corporations. For, as is said in Dillon’s Munic. Corp., (third ed.',) § 507: “ The frauds which unscrupulous officers will be enabled successfully to practice, if an implied and unguarded power to issue negotiable securities is recognized, and which the corporation or the citizen will be helpless to prevent, is a strong argument against the judicial éstablishment of any such power. And the argument is unanswerable, when it is remembered that in ascertaining the extent of corporate powers there is no rule of safety, but the rule of strict construction, and that such an implied power is not necessary, however convenient it may be at times, to enable the corporation to exercise its ordinary and usual express powers, or to carry into effect the purposes for which the cor-, poration is created. We regard as alike unsound, and dangerous the doctrine-that a public or municipal corporation possesses the implied power to borrow money for its ordinary purposes, and, incidental to that, the power to issue commercial securities. The cases on this subject are conflicting, but the tendency is towards the view above indicated. The opim ion of Mr. Justice Bradley, in a case before referred to, (The Mayor v. Ray,) evinces a thorough comprehension of the whole question, and, in our judgment, is sound in every proposition it advances, and must become the law of this country. This view is confirmed by the almost invariable legislative practice in the States to confer, when it is deemed expedient, upon municipalities and public corporations, in express terms, the power to bórrow money or to issue negotiable bonds or securities.”

Tft the case before us the power in question is hot, in our

We think that-the fact that the legislature of the State of Indiana, by the acts of 1867, 1869 and 1873, above referred to, expressly authorized towns in the same class as the defendant in error to issue bonds for certain specified purposes, under, proper safeguards and limitations, is indicative of the legislative understanding that, without some such express statutory provisions, no power existed in the town to issue negotiable bonds, and sell them in open market.

The same may be said of the act of the legislature of that State which took effect August 24, 1879, expressly conferring upon the towns in that State power to fund their indebtedness by issuing bonds and negotiating them for that purpose, under certain specified terms, restrictions and limitations.

We are not unmindful that in several of the cases in the Supreme Court of. Indiana, cited by counsel for' plaintiff in error, there may be found abstract propositions, susceptible of a construction in support of the position he seeks to -maim tain. But we think this case is distinguishable from them all, in essential features, which except it from those general propositions, and leaves the conclusion which we have reached in harmony with them.

It is contended that the bonds sued ón were issued practically for the purpose of taking the place of the prior bonds outstanding and unpaid, which represented a debt for the erection of a school building, and were, therefore, authorized by section 4488. This position is untenable. It cannot 'be reasonably contended that the bonds were issued under any of the sections relating to the negotiation and sale of' bonds for school purposes. It is. not even pretended that they were issued in accordance with the clearly defined conditions and restrictions imposed by those sections.

Nor do we think the fact'that the town' actually received a portion of the money arising from the sale of the so-called bonds (or, in legal contemplation, perhaps all of it, as it was

Judgment affirmed.

Mr. Justice Brown was not a member of the court when this case was argued, and took no part in its decision.

The Chief Justice and Mr. Justice Brewer were not present at the argument, and took no part in the decision.