Fidelity Trust & Guaranty Co. v. Fowler Water Co.

113 F. 560, 1902 U.S. App. LEXIS 4794, 1902 WL 47124

• Court: U.S. Circuit Court for the District of Indiana
• Decided: January 21, 1902
• Docket: No. 9,677
• Status: Published

Opinion

BAKER, District Judge

(after stating the facts). Whether or not any of the exceptions ought tp be sustained must be resolved by the consideration and determination of three principal questions : First. Is the ordinance rendered invalid, as to the holders of the bonds, by what appears on its face, taken in connection with the recitals in the record of the board of trustees of the town of Fowler at and before the adoption of the ordinance, and its acceptance by the water company? Second. Is the ordinance rendered invalid by the subsequent purchase of the waterworks by the town of Fowler pursuant to the option reserved therein, or by any other subsequent act or acts of the board of trustees of said town ? Third, if the ordinance, as between the holders of the bonds and the town of Fowler, is valid, may the court determine the amount now owing by the town of Fowler for hydrant rentals, and decree that said town pay the same to the complainant ?

i. On June 17, 1895, pursuant to the petition of 171 freeholders therefor, the board of trustees of the town of Fowler caused an election to be held by the qualified voters of the town to determine whether or net the town should construct, own, and operate,a system of waterworks. At the election there were cast .283 voles for, and 9 votes against, the construction of the proposed works to be erected and owned by {he town. The board of trustees advertised for bids for said waterworks, and three bids were received for their construction, as follows: One for $37,800, one for $35,300, and one for $34,985. On consideration, all the bids were rejected; the hoard of trustees deciding that the town was not financially able to construct the waterworks. The board, on further consideration, determined and resolved that there was urgent need for a system of waterworks, and thereupon resolved to negotiate a franchise for their construction on the best terms obtainable. These are the only facts shown by the. record of the board of trustees prior to the adoption of the ordinance. The. water company on September 2, 1895, pursuant to the ordinance, issued 60 negotiable bonds, of $500 each, bearing interest coupons; the bonds and coupons payable to bearer at different times, as specified in said bonds and coupons, beginning June 1, 1896, and ending June 1, 1915. On the back of each bond was printed the list of payments of hydrant rentals to be made as provided in the ordinance, with the statement “that the town of Fowler, by an ordinance passed by its board of trustees, and approved August' 9, 1895, agreed and bound itself to pay semiannually, on June first and December first of each year, rentals for forty-nine hydrants on the waterworks plant of the Fowler Water Company, in said town,” in the sums specified in the ordinance. On the back of each bond was also indorsed the following statement:

“Such hydrant rentals to be paid by said town directly to the Fidelity Trust and Guaranty Company of Buffalo, New York, trustee, to be applied to the payment of the principal and Interest of the series of first mortgage bonds of the Fowler Water Company, aggregating $30,000, of which series the within bond is one.”

This last recited statement was attested on each bond by the signatures thereunder of the president and clerk of the board of trustees of the town of Fowler. The complainant and the holders of the bonds are chargeable with notice and knowledge of the foregoing facts.

But the fact that the town was financially unable to construct a system of waterworks did not disable it from granting a franchise to a water company for the construction by it of such system. This doctrine is too firmly settled in this state to be longer open to debate. City of Valparaiso v. Gardner, 97 Ind. 1, 49 Am. Rep. 416; Crowder v. Town of Sullivan, 128 Ind. 486, 28 N. E. 94, 13 L. R. A. 647; City of South Bend v. Reynolds, 155 Ind. 70, 57 N. E. 706, 49 L. R. A. 795, and cases therein cited. No inference of fraud or wrongdoing can be drawn from the fact that the town, being financially unable to construct a system of waterworks, granted a franchise to the Fowler Water Company, authorizing it to erect such system for the benefit of the town and its inhabitants. It had, incontestably, the right to adopt an ordinance granting a franchise to the Fowler Water Company for that purpose, if it chose to do so, in the absence of fraud. Having, then, the right to adopt the ordinance, does the ordinance contain anything within its four corners showing a violation of the constitution or laws of this state? We will first examine the ordinance, omitting for the present the consideration of section 11. By a long line of decisions, beginning with City of Valparaiso v. Gardner, 97 Ind. 1, 49 Am. Rep. 416, and continuing unquestioned to City of South Bend v. Reynolds, 155 Ind. 70, 57 N. E. 706, 49 L. R. A. 795, it has been uniformly held that an agreement by a city or town to pay, for water, light, or other thing pertaining to its ordinary and necessary expenses, a certain sum, annually oj* semiannually, out of its revenues to be raised by an annual tax levy, does not create a debt, within the true construction of article 13 of the constitution of this state. It is said in City of South Bend v. Reynolds, supra:

“It is settled in this state that if a city contracts for water, light, or other thing which pertains to its ordinary and necessary expenses, and agrees to pay for the same annually or monthly as furnished, such contract does not create an indebtedness for the aggregate sum of all the annual or monthly payments, because the debt for each year or month does not come into existence until it is earned.”

The hydrant rentals agreed to be paid would not become an indebtedness until they had been earned. The evidence shows that the annual revenues of the town, if the tax levy had been made as it was agreed that it should be, would have been in excess of the amount of the semiannual hydrant rentals agreed to be paid. If the hydrants put in were no more than the needs of the town required, and if the rentals agreed to be paid therefor were reasonable, no rea'son is perceived why the town and the water company might not arrange the time, and amount of such payments as would best sub-serve the interests of either party. It is said that the amount to be paid differs in different years, and that some of the semiannual payments are larger than others. That was a matter within the discretion of the board of trustees of the town, provided the rentals agreed to be paid did not exceed the revenues which might lawfully be ap~ plied to their payment. Within these limits, the discretion of the board of trustees is uncontrollable by the court, in the absence of fraud or an abuse of discretion so gross as to evince bad faith. The power given to municipal corporations to contract for water is purely a business power, and the method of its exercise is discretionary. City of Valparaiso v. Gardner, supra. The law is firmly settled, that discretionary powers vested by law in municipal corporations are not subject to judicial control, except in cases where fraud is shown to exist, or the discretion is being grossly abused, to the oppression of the citizen. Seward v. Town of Liberty, 142 Ind. 551, 42 N. E. 39. The making of a contract for the supply of water was a matter delegated to the board of trustees of the town of Fowler, to be exercised according to its discretion; and in the absence of fraud, or of an 'abuse of discretion so gross as to evince bad faith, its action, while within the authority delegated to it, is not subject to review by the courts. City of Vincennes v. Citizens’ Gaslight Co., 132 Ind. 114, 126, 127, 31 N. E. 573, 16 L. R. A. 485.

The special master has found that more hydrants were rented than die needs of the town required, so as to create a fund .sufficient to pay the mortgage indebtedness, and that this was a mere device to evade the constitutional prohibition against creating a debt in excess of 2 per cent, of the value of the taxable property of the town. The court has read the evidence, and is of opinion that it does not war rant the special master’s conclusion. The question of how many hydrants were needed by the exigencies of the town was one to be determined by the board of trustees according to its judgment, in the absence of fraud. There is no evidence of, fraud, nor does the evidence show any gross abuse of discretion. The most that can be gathered from the evid, nee is that there was a difference of opinion on this question. The same observation is true as to the amount agreed to be paid for hydrant rentals. In the case of Seward v. Town of Liberty, supra, it was shown that the board of trustees of the town had entered into a contract agreeing to take and pay for gas three times the amount for which the same company furnished gas to its private consumers, and it was held that this neither showed fraud, nor such gross abuse of discretion as would justify judicial interference. No such case of abuse of discretion is shown here. Indeed, as appears from an examination of the answer, no charge of fraud is made against the board of trustees; nor is there shown to have been any abuse of discretion, having regard to the present and future needs of the town. The amount agreed to be paid for hydrant rentals is shown to be about, the same as was paid in other towns at the time the ordinance was adopted. In the opinion of the court, nothing is found in the ordinance to invalidate it, unless it be found in section 11, and in what was done under and pursuant to that section.

And, first, did the section, prior to the exercise of the option, render the ordinance invalid and unenforceable? At the time the ordinance was adopted, as well as at the time when the option was exercised, the town of Fowler had no authority or power to purchase the waterworks subject to the incumbrance of $30,000. If the town had owned the waterworks free of incumbrance, it could not have executed a valid mortgage upon them. No municipal corporation has any power or authority to incumber its property by mortgage, in the absence of legislative authority so to do. If a municipal corporation should accept a conveyance of property subject to a mortgage, it must pay off the mortgage debt, or lose the property. The purchase of the waterworks by the town of Fowler, subject to the incumbrance created by the deed of trust, would create an indebtedness to the full extent of such incumbrance. Mayor, etc., v. Gill, 31 Md. 375; Waterworks Co. v. Trebilcock (Mich.) 58 N. W. 371; Earles v. Wells, 94 Wis. 285, 68 N. W. 964, 59 Am. St. Rep. 886; Brown v. City of Boston (Mass.) 60 N. E. 934. It is apparent that the town of Fowler on August 9, 1895, as well as on November 9, 1895, was constitutionally disabled to purchase the waterworks from the Fowler Water Company. Did such disability render the other provisions of the ordinance invalid and unenforceable, prior to the exercise of such option? This is a question of municipal power, to be determined by the constitution and laws of this state.

, It is settled by the decision of the supreme court in City of South Bend v. Reynolds, 155 Ind. 70, 57 N. E. 706, 49 L. R. A. 795, and authorities there cited, that an option to purchase, contained in an ordinance granted by a city indebted at the time to an amount which disabled it to purchase, does not impair the validity of the ordinance in other respects. In this case the city of South Bend, by an ordinance duly accepted, entered into a contract with James Oliver which provided that he should erect a suitable building for a city hall, at a cost not exceeding $75,000, upon a lot owned by the city. The building, when completed, was to be leased to the city for 12 years, with a right of renewal, at an annual rental of $7,200, which the city agreed to pay annually. Oliver gave and the city reserved an option to purchase the building at the termination of the lease, or at any time during the term. Reynolds, a taxpayer, brought suit against Oliver and the city to enjoin them from carrying the ordinance into effect. It was held that the contract for the payment of rent was valid. The court said:

“The only contract of the city Is to pay an annual rent of $7,200, which is admitted to be only a fair rental value for said building. * * * Under said contract the city is under no obligation whatever to pay anything for the erection of said building, or to purchase the same when erected. If it should attempt to exercise its option to purchase said building, but cannot do, so without violating the constitutional limitation as to becoming indebted, it may be enjoined from exercising such option. No facts are alleged in the complaint showing that the current revenues of the city will not be sufficient to pay the indebtedness for rent under said contract each year when the same comes into existence, including all other expenses for which the city is liable. The allegations of the complaint do not show, therefore, that said contract creates any indebtedness in violation of the constitution.”

The same doctrine is maintained by other courts of high authority. In Stedman v. City of Berlin (Wis.) 73 N. W. 57, the ordinance contained an option authorizing the city to purchase the system of waterworks within six months after its completion, and provided that the ^amount to be paid should be the amount of the bonded indebtedness of the water company, and, in addition thereto, the amount which the enlargement of the plant should cost in excess of stsch. bonded indebtedness. In a suit brought by a taxpayer of the city to enjoin the carrying out of the contract, and to set aside the ordinance on the ground that it was beyond the power of the city to enact the same, because thereby a debt was created in excess of the constitutional limit, it was held that the contract to pay rent for the hydrants was valid and enforceable, notwithstanding the option reserved. After deciding that the contract for the payment of annual hydrant rentals did not create a debt, but was, only a current expense to be paid as the water was furnished, the court held that the option clause in the ordinance created no liability and imposed no obligation. The court said;

“It is clear tliat the city has not exceeded its constitutional limit to contract indebtedness. The city is under no obligation to buy the waterworks constructed under the franchise in question. It has simply stipulated for an option to buy the same on the terms stated, as it, may find it prudent or advantageous for it to do so or not. It may decline to purchase, whenever the proper time for that purpose arrives, and this will put an end to the entire matter.”

To the same eflcct is the case of Water Co. v. Woodward, 49 Iowa, 58. There, as here, it was insisted that the stockholders of the water company were not required to pay anything; that the waterworks were in fact constructed with bonds, or the proceeds thereof; and that, the water company did not contribute anything for the purpose of construction. It was further urged there, as here, that the ordinance attempted to do by indirection what could not be done directly, and thus to evade the constitutional limitation on the power of the town to create an indebtedness. Wc say, as was said by the supreme court of Iowa:

• “If this be conceded, and yet by the means adopted no debt is incurred or obligation assumed by the city which is illegal, it is difficult to see why the means adopted are unconstitutional.”

It follows, therefore, that the reservation by the town of an option to buy the waterworks within 30 days after tlieir completion and acceptance did not render the ordinance invalid or unenforceable.

Nor is there anything disclosed on the face of the bonds, or in the indorsement on their back, which would impart notice of the invalidity of 1 lie ordinance or of the, trust deed or of the bonds. Such negotiable bonds, in a certain sense, are the representatives of money, and freely pass by delivery in the markets of all commercial countries. To accomplish this purpose, the holder of a perfected bond must be deemed to be the true owner, and be able to invest an innocent purchaser for value and before maturity with an unimpeachable title. The title of a bona fide holder of such bond ought to stand on as secure a foundation as that of a person who receives a bank note in the ordinary course of business. Any oilier doctrine would undermine the very structure of commercial law, and shake the foundations of such paper credits.

The certificate of the president and clerk of the town of Fowler indorsed upon the bonds constituted a-representation of the validity of the contract to pay rent, and that such rent would be applied to the payment of the principal and interest of the bonds. The town ought not now, after money has been paid to the waterworks company on such bonds, on the faith of such representations, to be permitted to repudiate them. Goodman v. Simonds, 23 How. 343, 15 L. Ed. 934.

2. Is the ordinance rendered invalid, in so far as the town of Fowler has contracted to pay semiannual hydrant rentals, by the subsequent purchase of the waterworks pursuant to the option reserved, or by other subsequent acts of its board of trustees? The only act set up in the answer subsequent to the adoption and acceptance of the ordinance, material to be considered, in addition to the purchase of the waterworks, is the passage of an ordinance by the board of trustees of the town on August 27, 1897. This ordinance provided for the issue of $9,000 of funding bonds for the purpose of raising money with which to discharge the outstanding indebtedness of the town incurred in the payment of the cost of constructing, acquiring, extending, and equipping the waterworks. The bonds were executed and delivered to Farson, Leach & Co. at their office in .Chicago, where the same were executed by the board of trustees of the town of Fowler, who were there present for that purpose; and said bonds were then and there sold to Farson, Leach & Co. for their par value, and the purchase price was received by said town. So far as the rights of the bondholders of the water company are concerned, this transaction is wholly immaterial. Nothing could be done by the board of trustees after the bonds had been issued and had gone into the hands of innocent holders for value which could affect or impair their validity. The purchasers of the bonds were not bound to look beyond the ordinance and the records of the town leading up to its adoption. The town is estopped to set up any secret contract or understanding between it and the water company dehors the ordinance and the records of the town relating to its adoption. The purchasers of the bonds had the right to act on, the faith that the ordinance spoke the truth, and that no undisclosed fraudulent plan or scheme lurked in ambush to entrap the unwary investor. No evidence was admissible to show that there existed between the board of trustees and the water company some secret and corrupt plan or scheme outside of the ordinance. To permit such evidence against innocent purchasers of negotiable bonds would be to offer a premium on fraitd, and open wide the door to successful swindling.

Nor does the exercise of the option by the town to buy the waterworks, when the. constitution forbade it, invalidate' the contract or the grant contained in the ordinance. In Hynds v. Hays, 25 Ind. 31, 36, 37, it is said:

“It is, we believe, well settled that when a party has contracted to perform anything, and an illegal act is included therein, that he shall nevertheless be held to perform so much of his contract as it is lawful to perform, if it can be separated from that part which is illegal. In other words, so far as the contract is lawful it will be supported, but beyond that the parties will be left without aid. But if the contract be of such a nature that no separation can be made between the legal and illegal ■stipulations, then the whole will be held void, and no action can be maintained upon It.”

In the present case the contract to pay the hydrant rentals is perfectly valid and legal, and is in no wise dependent upon or connected with the exercise of the option to buy the waterworks. _ It is entirely practicable to separate the contract to pay rentals, which was lawful, from the option to buy, which was vicious. It is difficult to see how a contract valid and enforceable before the exercise of the option to buy can be rendered invalid by the unlawful act of the town in attempting to purchase. The bondholders had the right to assume that the town would exercise the option to buy in good faith, and would not attempt to do so when it knew the constitution prohibited it from making a lawful purchase. It may be that, as between the town and the water company, the conveyance would not be set aside by a court of equity-, at the suit of the water company, on the ground that each party was in pari delicto. The complainant and the bondholders, however, are in no wise implicated in the unlawful act, and they have a right to have the conveyance of the waterworks adjudged illegal. 'The town of Fowler can claim no- advantage or benefit, as against the complainant and the bondholders, by reason of its receiving a conveyance of the waterworks pursuant to the option reserved in the ordinance.

3. May the court in this sail ascertain and determine the amount of the hydrant rentals due and owing by the town of Fowler to the complainant, and decree the payment of the same? It is contended that the right to the rentals grows out of contract, and that their recovery must be sought in an action at law. As a general proposition, this contention is well founded, but is it applicable here? The title of the waterworks stands of record in the town of Fowler. The town is in the actual possession of the tangible property covered by the deed of trust. It is therefore not only a necessary, but an indispensable, party to a suit for the foreclosure of the trust deed. A decree of foreclosure against the water company alone would not enable the purchaser at the foreclosure sale to obtain possession of the waterworks without further litigation against the town. The complainant was therefore under a necessity to make the town of Fowler a party defendant to the bill to procure an effective decree of foreclosure; and in such case it is according to the established course of procedure, in order to avoid multiplicity of suits and to prevent expense and delay to the parties, to proceed and give such final relief as the circumstances of the case may demand. It is not to be overlooked that the town covenanted to pay the hydrant rentals directly to the complainant. In Tayloe v. Insurance Co., 9 How. 390, 13 L. Ed. 187, an agreement to insure had been entered into between the parties, but the policy had not been issued by the company. Upon the happening of a loss the assured filed a bill praying that the company be decreed to pay the loss, or for such other relief as the complainant might be entitled to. The court maintained jurisdiction, saying:

“No doubt, a count could have boon framed upon the agreement to insure so as to bare maintained an action at law. But tlie proceedings would have been more complicated and embarrassing than upon the policy. The party, therefore, had a right to resort to a court of equity to compel the delivery of the policy either before or after the happening of the loss; and, being properly in that court after the loss had happened, it is according to the established course of proceeding, in order to avoid delay and expense to the parties, to proceed and give such final relief as the circumstances of the case demand.”

In the case of Ober v. Gallagher, 93 U. S. 199, 206, 23 L. Ed. 829, 831, it is said:

“Having obtained rightful jurisdiction of the parties and the subject-matter of the action for one purpose, the court will make its jurisdiction effectual for complete relief.”

See, also, Sunflower Oil Co. v. Wilson, 142 U. S. 313, 12 Sup. Ct. 235, 35 L. Ed. 1025.

This court having acquired rightful jurisdiction of the town of Fowler and of the subject-matter, it will make that jurisdiction effectual by granting complete relief, and will not remit the complainant to an action at law.

The exceptions of the complainant to the findings and conclusions of the special master are sustained. A decree may be prepared in conformity with this opinion.