US SUPREME COURT DECISIONS

A city corporation the charter of which gave to it the usual powers formerly given to such corporations but which did not give to it the power to borrow money, being and for some time having been pecuniarily embarrassed, issued its checks, in form negotiable and drawn by the mayor and recorder of the city on the city treasurer. The checks were presented to the city treasurer and by him endorsed with his name and the date of his endorsement, it being the practice of that officer, in the then embarrassments of the city, thus to endorse checks when the city was not in funds to pay them, in order that the checks might thereafter draw interest, as it was understood that they would do. The checks were then taken by the holder, and, according to a then prevalent custom to pay them for taxes, were paid to the treasurer of the board of education of the city in discharge of school taxes. This officer (again, according to a then prevalent custom) sold them to A. (selling them for eighty cents on the dollar), and with the money discharged the salaries due by the city to the teachers of its public schools.

On suit by A. against the city, the court below excluded evidence tending to show fraud and want of consideration and authority to make them in the issue of the notes, and held that under its charter, the city could issue promissory notes, and that if signed by the proper officers and given for a good consideration, they would be legal and obligatory; that a usage to reissue such securities was good, and that though upon their face overdue, they were payable chanrobles.com-red

Page 86 U. S. 469

so as to let in defenses against a subsequent holder, until the lapse of a reasonable time for making demand; that the reissue, if made with the sanction of the city authorities, would be valid, and that such sanction might be presumed from circumstances. It gave judgment accordingly.

On the case's coming here, the judgment was reversed, five judges only out of eight of which the court was then composed concurring in the judgment of reversal.

Four of these judges placed the judgment on the broad grounds:

1. That municipal corporations have not the power, without legislative authority expressly or clearly implied, to borrow money or to issue notes, bills, or other securities of a commercial character free from equitable defenses in the hands of bona fide holders.

2. That such corporations are of a public character, instituted for purposes of local government, and constitute part of the domestic government of the state; that the power of taxation is given to them for the purpose of raising the means of carrying on their functions, and that the creation of such special power is exclusive of others.

3. That the officers of such a corporation cannot, like the officers of a private corporation, create by their acts an estoppel against the corporation, its taxpayers, or people so as to render illegal issues of ordinary city drafts or vouchers (not authorized by law) valid in the hands of holders for value; that such holders are affected with notice of the illegality.

4. That certificates of debt, city warrants, orders, checks, drafts, and the like used for giving to the public creditors evidence of the amount of their claims against the city treasury are valid instruments for that purpose, and may be transferred from hand to band, but that they are not commercial paper in the sense of creating an absolute obligation to pay them, free from legal and equitable defenses, and that the holder takes them subject to such defenses.

These judges admitted, however, and as of course, that when power to borrow money and to issue bonds or other securities of a commercial character therefor is given to a municipal corporation, such securities will possess the usual qualities attaching to like securities issued by private corporations.

The remaining one of the five justices -- not agreeing to all thus declared and holding that the city, unless clearly forbidden by its charter, could issue negotiable notes to pay its debts and that such notes would be subject to the law governing negotiable paper, and holding especially that the corporation, having received and still holding the money for the notes, could not repudiate its contract to pay -- put his concurrence in the reversal on the narrower grounds:

1. That the judge erred in charging that though the checks had been presented for payment and payment had been refused, and though the time of such presentation and refusal had been noted on them, the checks were not to be deemed dishonored so as to let in defenses between the corporation and a subsequent holder. chanrobles.com-red

Page 86 U. S. 470

2. That the plaintiff being thus not a holder bona fide, the court erred in excluding the offers to show fraud, corruption, or want of authority in the issue of the checks.

3. That it erred in charging that if it was the usage of the corporation to reissue its securities by sale in the market after such securities had been fully paid and satisfied, such reissued securities were obligatory upon the corporation.

Ray sued the Mayor and City Council of Nashville to recover the amount of nineteen corporation drafts or orders, ranging from a few dollars in amount to over $1,000, and together amounting, with interest, to over $9,000. In form, they were drawn by the mayor and recorder upon the city treasurer, payable to some person named, or bearer, and were impressed with the city seal. The following is one of the orders, and shows the form of them all.

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This was the form in which all city dues were usually paid. The endorsement by the treasurer was made when the orders were presented to him. Evidence was given by the plaintiff tending to show that it had been the custom for many years, when the treasurer failed to pay such checks on presentation, for him to write his name on the back, with the date of presentation, and afterwards, in the payment of such checks, to allow interest from that date, and that it was usual to present such checks for endorsement to draw interest when it was known there were no funds for their payment; also, that it was the well known custom of the chanrobles.com-red

Page 86 U. S. 471

proper collecting officers of the corporation to receive such checks for taxes and other dues of the corporation; that at the time these checks were issued and at the time they were bought by the plaintiff, the city was largely involved in debt, and that many such checks were outstanding unpaid, and were bought and sold in the market, and that nearly all the city taxes were paid therewith; that for some time before the plaintiff purchased the checks in question, the taxes for the support of public schools were collected and paid over to the treasurer of the board of education in such checks; and for about five months before, it had been the practice of such treasurer to sell such checks and to use the proceeds in payment of teachers; also that all the checks sued on (except one for $1,000 payable to Julius Sax), were so received for taxes, and paid to the said treasurer of the board of education, and by him sold soon after receiving them to one McCrory as agent of the plaintiff to buy the same at the rate of eighty cents on the dollar, and the proceeds paid to teachers; that the check payable to Sax was purchased from him by McCrory, as the plaintiff's agent, for $800, being one of sixteen checks of $1,000 each, issued by order of the chairman of the finance committee of the city council without any order of the council, and hypothecated with Sax as security for a loan of $12,000, payable in four months (half of which was made in city checks), power being given in the loan note to sell the hypothecated checks, if the loan was not paid when due. Sax sold the check in question to the plaintiff within a week after receiving it. The plaintiff also offered the evidence of the city recorder to show that the checks sued on were made in the usual course of business of the corporation and for corporation purposes; also evidence tending to show that the city collector, in collecting checks for taxes, was in the habit, in making change, of paying out checks previously collected, and that the mayor and council were informed of the practice pursued by the collector of reissuing checks which he had received in payment of taxes by paying a portion of them over to the board of education, and knew of the practice chanrobles.com-red

Page 86 U. S. 472

of issuing and hypothecating checks for loans and selling them for money.

The defendant introduced proof tending to show that McCrory, the agent of the plaintiff, when he purchased the eighteen checks, had notice that they had been received by the tax collector and reissued by him to the treasurer of the board of education (the evidence showing that the presentation and neglect to pay had in most instances been made nearly two months before, and in one instance nearly four months); also that the city council had no knowledge of the manner of making checks on the mere order of the chairman of the finance committee and their hypothecation and sale for money; and that some of them had no knowledge of the reissue of checks by the collector.

The charter and ordinances of the city were put in evidence, and were referred to on the argument before this Court.

The former was couched in the usual form of such charters, conferring upon the corporation power to receive, hold, and dispose of property, to levy taxes, appropriate money, and provide for the payment of the debts and expenses of the city; to establish hospitals, schools, waterworks, markets, and erect buildings necessary for the use of the city; to open, regulate, and light the streets; to establish a police, night watch &c., and to pass all ordinances necessary to carry out the intent of the charter.

It contained, however, no express power to borrow money. But former laws (which were superseded by the charter) had authorized the issue of specific city bonds for that purpose; and such securities were outstanding in 1868, as appeared by an act of the legislature, passed March 16 of that year, by which it was provided that the taxes necessary to pay the coupons and interest on the bonds and funded debt of the city should be kept distinct and should be payable only in legal currency, and no checks or orders of the city were to be received therefor. It was also enacted by the same statute that the amount necessary to be raised by tax for the sinking fund for paying said bonds, and for the support of the public schools, should be paid in the same manner. chanrobles.com-red

Page 86 U. S. 473

The public ordinances of the city were published in a book, and by these it was, among other things, provided that there should be a committee of improvements and expenditures, and that all propositions for improvements, or the expenditure of money, or the incurring of any liability, should be referred to this committee, who were to report to the city council, and that no liability should be incurred unless authorized by existing laws or by order of the city council, and that no check should be issued by the recorder upon the treasurer, unless by authority of the city council, or in pursuance of existing laws of the corporation.

The defendant offered proof tending to show that there was no evidence of any authority having ever been given by the city council for the issue or reissue of checks in the manner in which the checks in question were issued and reissued; and that one of them (specified) had been issued in virtue of a corrupt contract with a member of the council. The proof was rejected under the defendant's exception.

The court charged in substance as follows: that the charter of Nashville authorized the corporation to issue promissory notes and other securities for lawful debts; that the instruments in question, if signed by the proper officers and given for a good consideration, were in effect promissory notes, legal and obligatory; that by long usage, the corporation had sanctioned the authority of the officers to issue such instruments; that the purchasers thereof were authorized to presume that they were properly issued; that if it was the usage to reissue these securities by sale in the market, they would, when so sold, be obligatory on the corporation; and though upon their face overdue, they would be in law payable on demand, and not to be deemed dishonored so as to let in defenses against a subsequent holder of the paper until after the lapse of a reasonable time for making demand; that the reissue and sale of the securities in question by the treasurer of the board of education, if done by the consent and sanction of the mayor, aldermen, and council, made them valid obligations against the city; and that chanrobles.com-red

Page 86 U. S. 474

such consent and sanction might be presumed from the publicity of the transactions, the want of other resources to support the schools, and the other circumstances of the case, without any formal official action taken on the subject; and that the common usage of the finance committee, to pledge the city checks as security for its notes, if known to the corporation, was binding upon it, and that the checks so pledged would be valid in the hands of a purchaser before maturity, not having notice of a premature sale or other irregularity in their issue.

This charge was excepted to in all its parts, and upon these exceptions the case was argued before this Court in reference to the following points:

1. Has a municipal corporation the power, without express legislative authority, to borrow money for any of the purposes of its incorporation?

2. Has it the power, without express legislative authority, to issue its paper clothed with all the attributes of negotiability?

3. Conceding the affirmative of these two queries, can the executive officers of a municipal corporation borrow money, or issue negotiable securities for the corporation, so as to bind it, without "ordinance;" that is to say, without express authority from the legislative department of the corporate government in its collective official capacity? [Footnote 1]

The case was elaborately argued, both upon principle and authorities, on these points by Messrs. W. F. and H. Cooper for the plaintiff in error and by Messrs. G. F. Edmunds and R. McP. Smith, contra, the latter counsel referring specially to Adams v. Memphis & Little Rock Railroad Company, in the Supreme Court of Tennessee, [Footnote 2] in which state the transactions now in question arose. chanrobles.com-red

Page 86 U. S. 475