U.S. Supreme Court
Ottawa v. Carey, 108 U.S. 110 (1883)
Ottawa v. Carey
Decided March 19, 1883
108 U.S. 110
1. Municipal corporations, being created only to aid the state government in the legislation and administration of local affairs, possess only such powers as are expressly granted, or as may be implied because essential to carry into effect those which are expressly granted.
2. Bonds issued by a municipal corporation, but not under either a general authority to borrow for corporate purposes or a special legislative authority to borrow for purposes within the power of the legislature to confer, are void in the hands of a person who is not an innocent bona fide holder without notice. chanroblesvirtualawlibrarychanroblesvirtualawlibrary
3. A municipal corporation authorized by its charter "to borrow money on the credit of the city and to issue bonds therefor," and by special act to borrow a named sum "to be expended in developing the natural advantages of the city for manufacturing purposes," is not thereby authorized to issue bonds by way of donation to an individual to aid in developing the water power of the city, and is not liable to an action upon such bonds by one who takes them with notice of the facts.
Suit to recover upon bonds of the City of Ottawa, issued to develop the water power near the city, and given to the owners of the power.
Article IV, section 5, of the Constitution of 1848 of the Illinois, which was in force when the rights of the parties to the controversy were fixed, was as follows:
"The corporate authorities of counties, townships, school districts, cities, towns and villages, may be vested with power to assess and collect taxes for corporate purposes."
In 1853 the corporation of Ottawa was incorporated as a city with the following among other powers:
"ART. 5. SEC. 1. The city council shall have power and authority to levy and collect taxes upon all property, real and personal, within the limits of the city, not exceeding one-half of one percent per annum upon the assessed value thereof, and may enforce the payment of the same in any manner to be prescribed by ordinance not repugnant to the Constitution of the United States, and of this state."
"ART. 5. SEC. 3. The city council shall have power to establish, support and regulate common schools, to divide the city into school districts, to borrow money on the credit of the city, and to issue bonds therefor, and pledge the revenue of the city for the payment thereof, provided that no sum or sums of money shall be borrowed at a greater interest than at ten percent per annum."
"ART. 10. SEC. 20. No money shall be borrowed by the city council until the ordinance passed therefor shall be submitted to, and voted for, by a majority of the voters of said city, attending an election held for that purpose."
In 1851, one Cushman and his associates were empowered by chanroblesvirtualawlibrarychanroblesvirtualawlibrary
the Legislature of Illinois to organize a corporation to be known as the Ottawa Manufacturing Company, to construct a dam across the Fox River for the purpose of creating a water power, and in 1865 this corporation, having been organized, was further empowered to construct a dam across the Illinois River, and to introduce the waters of that river into the Fox River above their dam on the latter.
In 1867, the legislature empowered the city to subscribe $100,000 to the stock of this company, but the subscription was never made. On the 15th day of June, 1869, the City of Ottawa adopted the following ordinances:
"SEC. 1. Be it ordained by the city council of the City of Ottawa that the mayor of the city be and he is hereby authorized to borrow in the name of the city at a rate of interest not exceeding ten percent, the sum of $60,000, for the use of said city, to be expended in developing the natural advantages of the city for manufacturing purposes, and that bonds of the city be issued therefor in the sum of $500.00, with interest payable annually, said bonds to be payable one-third in five years, one-third in ten years, and one-third in fifteen years after the date thereof, provided that no application shall be made of the proceeds of said bonds except for the purpose aforesaid, and in pursuance of an ordinance to be passed for that purpose by the city council, nor until the faithful application of the proceeds of such bonds to the purpose aforesaid shall be fully secured to the city."
"SEC. 2. Be it ordained that a sufficient sum to pay the interest on said loan shall be annually provided by taxation, and set apart as a separate fund, and to be applied to the payment of the interest on said bonds, and for no other purpose."
"SEC. 3. This ordinance shall be submitted to the voters of the city to be voted for or against at an election to be held for that purpose on the 20th day of July, 1869. The manner of the determination shall be by depositing ballots upon which shall be written or printed 'For the loan ordinance' or 'Against the loan ordinance.'"
Under the ordinance of June 15, an election was had at which a majority of the voters of Ottawa voted in favor of issuing the bonds, and on the 30th July, 1869, the corporation chanroblesvirtualawlibrarychanroblesvirtualawlibrary
framed a further ordinance, entitled "An Ordinance to carry into effect an ordinance of June 15th, 1869," by which the mayor was authorized to deliver the bonds to Cushman, to be used by him in "developing the natural resources and surroundings of the city."
The bonds were delivered to Cushman, under a contract which it is not necessary to recite. The municipality received no money, stock, or other equivalent for them. Cushman delivered them to the manufacturing corporation, and the manufacturing company sold them to one Eames, who knew of the proceedings of the common council in regard to the issue of the bonds, and that they were to be used as a gift, but had never heard their validity questioned. The city paid interest on them up to August 2, 1871, but not thereafter. In November, 1879, Eames sold to Carey, the defendant in error, who knew all the foregoing facts.
Carey brought this suit in the court below to recover on the bonds held by him. The court gave judgment for the plaintiff, and the writ of error was sued out to reverse that judgment.
On the 30th of October, 1882, the judgment below was reversed, and MR. JUSTICE HARLAN delivered the opinion of the Court, in which, after reciting some of the foregoing facts, he said:
"The court below, by consent of parties, tried the case without the intervention of a jury, and found, among other facts:"
" That the city made no subscription of stock in the Ottawa Manufacturing Company, but issued the bonds as a donation for the purposes indicated in the contract with Cushman, the latter being the sole consideration it received for the bonds; that on the 11th day of March, 1871, Cushman delivered the bonds to the Ottawa Manufacturing Company, of which he was one of the corporators, and of which at the time he was a director, to be used by it for the purpose of making the improvement hereinbefore menas one of the corporators, and of which at the time he was a director, to be used by it for the purpose of making the improvement hereinbefore menas one of the corporators, and of which at the time he was a director, to be used by it for the purpose of making the improvement hereinbefore mentioned, without further consideration; that the company at once entered upon the work of reconstructing the dams and races, and partially constructed the same under the powers granted to it . . . and completed said work, so that some water power was created, but that said dam was carried away by a freshet in 1872 or 1873,
and has never been reconstructed; that in June, 1871, the company sold and delivered the bonds in suit to Lester H. Eames, a citizen of Ottawa, for their full value, and part of the interest which had accrued after August, 1870; that at the time Eames purchased the bonds he read their recitals, and had never heard their validity questioned, although the policy of issuing them, and the legal authority to do so, was the subject of discussion by the press and people of the city at about the time of their being issued; that Eames had knowledge of the proceedings of the council in reference to the issue of the bonds, knew that they were issued for the purpose of being used as a donation to aid in the completion of the contemplated improvement, and knew of the contract between Cushman and the city with reference to the bonds, and that in November, 1879, after the bonds had matured, Eames sold and delivered them to the defendant in error, a citizen of Missouri, for value, the latter knowing when he purchased substantially all that Eames knew touching the history of the bonds, and the purposes for which they had been applied."
"We have seen that the general object which the city sought to accomplish was the development of its natural resources and advantages for manufacturing purposes. That end it proposed to obtain by the construction of dams and races in such manner as to bring into practical and permanent use, in the city and its immediate vicinity, all the available power of both the Illinois and Fox Rivers. Consequently, the ordinances passed by the city council, and Cushman's contract, alike required the construction of good, substantial, and sufficient dams and races. Now it is impossible to resist the conclusion that as to the work done, and as to the manner in which it was performed, there was a substantial, if not an entire, failure upon the part of Cushman and those whom he employed to meet the terms of the agreement under which he, Cushman, received the bonds. The dams and races were, according to the facts found, only partially constructed. The work was completed only to the extent that some water power was created, and the dam erected, so far from being 'good, substantial, and sufficient,' to secure the practical and permanent use of the water power, was carried away in 1872 or 1873, by a freshet, and has never been reconstructed. Under these circumstances, the city, as between it and Cushman, was entitled to demand a return of all the bonds, or their value, and to be saved harmless on account
of them. If Cushman still held them, and had himself sued the city, the defense of the latter would be complete. Is Carey, the present holder, in any better position, as against the city, than Cushman would be, had he sued? This question must receive a negative answer, because Carey and his immediate vendee, Eames, were well aware at the time of their respective purchases, as well of the terms of the ordinance, in pursuance of which the bonds were issued, as of the contract between the city and Cushman, and also because, as the special finding sufficiently indicates, the same facts were known to the Ottawa Manufacturing Company when it received the bonds from Cushman, one of its corporators and directors. Neither Carey nor Eames nor the company were bona fide holders, entitled to the benefit of the rule announced in Hackett v. Ottawa, 99 U. S. 86, and Ottawa v. First Nat. Bk. of Portsmouth, 105 U. S. 342. The work done was not of a character, as to extent, sufficiency or permanency, to entitle Cushman, had he sued, as against the city, to the payment of any of the bonds, and consequently, for the reasons given, the city is, not liable to Carey."
"This conclusion renders it unnecessary to notice other questions raised by counsel, some of which relate to the authority of the city to issue the bonds under any circumstances, especially by way of donation."
"After this case had been under submission, our attention was called to a recent decision of the Supreme Court of Illinois in Wilson v. Ottawa Manufacturing Company. That case is relied upon as authority for the proposition that the city had legal power to issue the bonds in question. In view of the ground upon which our conclusion in this case rests, it is needless to discuss that question in the different aspects in which it is presented."
On the 15th January, 1883, the judgment entered on the 30th day of the previous October was rescinded and annulled, and a rehearing ordered.
On the 6th March, 1883, the case was resubmitted. chanroblesvirtualawlibrarychanroblesvirtualawlibrary