Summary
In Horton v. Town of Thompson, 71 N.Y. 513, decided January, 1878, the Court of Appeals of New York held, that as the taxpayers had only consented to an issue of bonds, the proceeds of the sale of which should be invested in stock, it was beyond the power of the legislature to validate bonds, which, in violation of the act under which they were issued, were not sold, but were directly exchanged for stock, of which fact all purchasers had notice from the recitals of the bonds themselves.
Summary of this case from Thompson v. PerrineOpinion
Argued March 21, 1877
Decided January 15, 1878
T.F. Bush, for appellant.
John J. Linson, for respondent.
The act under which the bonds in question in this action were issued (Laws of 1868, chap. 553, amended by chap. 96 of Laws of 1869), required, among other things, that before contracting the debt or issuing the bonds, the written consent should be obtained of a majority of the tax-payers, stating the amount of money authorized to be raised, and the railroad company in the stock of which such money should be invested. The commissioners to be appointed under the act were thereby authorized to borrow the money on the credit of the town. They were authorized to dispose of the bonds, but for not less than par, and the money to be thus raised was required to be invested in the stock of such company — meaning evidently the company named in the consent. The act further required that such money be applied to the construction of the railroad, and to no other purpose. These provisions were intended to secure the application to the construction of the road for whose aid the bonds were to be issued, of the full amount of money for which the tax-payers should consent that the credit of the town be pledged, without deduction or discount.
This consent was indispensable to the validity of the bonds. This court decided in the case of the People v. Batchellor ( 53 N.Y., 128), that a municipal corporation could not be compelled without its consent, or that of its taxable inhabitants, to become a stockholder in a railway corporation, or to incur a debt in its behalf, and that a mandatory statute requiring it to issue its bonds without such consent, and to invest the proceeds of the sale thereof in the stock of a railroad corporation, was unconstitutional. While the opinion in that case recognizes the power of the Legislature to authorize or enable a town or other municipality, acting through its officers or taxable inhabitants, to contract a debt in aid of the construction of a railroad by a private corporation, it confines the power of the Legislature to conferring such authority, and requires that the contracting of the debt be the voluntary act of the municipality, or that it be done with the consent of the taxable inhabitants, and the case itself is an express adjudication that the Legislature cannot impose such a debt upon the municipality, without such consent.
In the present case no action on the part of the town in its corporate capacity, or on the part of any of its officers, was required by the act, or was taken. The money was to be borrowed, and the bonds issued by commissioners to be appointed in the manner prescribed by the act. These commissioners were in no sense town officers, nor did they represent the town. ( Sheboygan County v. Parker, 3 Wall., 96.) The only warrant for their action was the consent of the taxable inhabitants required by the act. That consent is the foundation upon which the bonds must rest, and unless the bonds were issued in pursuance of it, they had no validity, and it was beyond the power of the Legislature to impose them as a debt upon the town.
It is found as a fact, in this case, that a consent of a majority of the tax-payers was obtained, which consent stated on its face that it was given in accordance with the provisions of the act of 1868, before referred to, and authorized the commissioners appointed thereunder, for the town of Thompson, to borrow upon the faith and credit of said town the sum of $148,000, and to do and perform the other things necessary to carry into effect the provisions of the said act.
This consent was fatally defective in not naming the railroad company, to the construction of which the fund should be applied. Inasmuch, however, as the consent was sufficiently comprehensive in its terms to embrace the road in question, and the Legislature might legally have authorized it to be in the form in which it was actually given, the validating act of 1871 probably cured the defect in its form. But passing that question, I proceed to the one which is, in my judgment, clearly decisive of this case.
The only authority given to the commissioners by this consent was to proceed according to the provisions of the act of 1868 — that is, to borrow money by disposing of the bonds at not less than par, and to invest the money so raised in the stock of a railroad company. They were not authorized to issue bonds in exchange for the stock of any railroad company. Such a proceeding was wholly unauthorized, and was in substance prohibited by the act referred to in the consent, and would defeat one of its most important objects. As is said by GROVER, J., in the case of People v. Batchellor: "Under the act of 1867 (which contained the same provision as the act now under consideration), care was taken that the bonds should not be issued for less than their par value in cash; thus there would, in case the town were bonded, be secured for the construction of the road, cash equal to the principal of the bonds. If the bonds are delivered to the company on the receipt of stock, pursuant to the act of 1870, the bonds become the property of the railroad company and may be sold upon the market, much below par, and thus much less money accrue therefrom for the construction of the road. It is obvious that the consent given does not embrace such a transaction."
The same point was adjudged in Starin v. The Town of Genoa ( 23 N.Y., 439), and Gould v. The Town of Sterling (23 id., 459). And it was held in those cases that no recovery could be had upon bonds thus issued in violation of the provisions of the act authorizing them.
In the present case it appears, from the findings, that the $148,000 of bonds authorized by the consent were executed by the commissioners on the 1st of May, 1869. None of them were sold nor was a dollar of money raised upon them by the commissioners or paid to the company. They were all delivered by the commissioners to the railroad company, between the months of May and October, 1869. The particular bond now in suit was thus delivered on the 10th of August, 1869, to the railroad company, and was purchased by the plaintiff February 1st, 1870, but from whom does not appear. It appears only that he paid full value.
The bonds state upon their face that they are issued under the act of 1868, referring to it, and are executed by the commissioners appointed under said act. They do not purport to be issued by any town officer. They are payable to bearer, and recite that they are given "for value received in the stock of the Monticello and Port Jervis Railway Company." It thus appears, on the face of the bonds themselves, that they were issued not for money, but for stock in violation of the act and of the consent given thereunder. No one taking them could allege ignorance of this important fact. Neither could he aver ignorance of the terms of the authority under which they were issued. A person dealing with a corporation, especially in a matter outside of its ordinary purposes, is bound to inquire into the authority of the agent through whom the transaction is made. Surely he cannot plead ignorance of the terms of the act of the Legislature under which the corporate liability was sought to be created. It is, therefore, unnecessary to discuss the question whether the law in relation to bona fide holders of negotiable paper would aid the plaintiff in the present case. These bonds must have been taken on the erroneous assumption that the commissioners had the power under the act to issue them in exchange for stock.
It is claimed, however, that the town, by accepting and retaining the stock received in exchange for the bonds, has ratified their issue and waived any irregularity therein. To this position there are several answers. In the first place, it is not conceded that even the commissioners have retained the stock since the judgment in the case of People ex rel. Kilbourne v. Benedict, entered November, 1872, and before the commencement of this action, which, as is found by the referee, stands unappealed from and unreversed, adjudging that all of the bonds were issued by the commissioners, without authority in law, and were void, and that the certificates of stock issued by the railroad company in exchange for said bonds should be delivered up and canceled. To that action the town of Thompson, the railroad company and the commissioners holding the stock were parties, with others. Even if the commissioners still hold physical possession of the certificates of stock, it is not easy to comprehend how, in the face of that judgment, they or the town could claim any benefit therefrom.
Secondly. The commissioners are not the town; they are not officers of the town, nor representatives appointed by it; they are mere instruments created by the Legislature to carry into effect the provisions of the act of 1868, and have no powers other than those contained in that act. No action on the part of the town was contemplated by the act of 1868, except the consent of the tax-payers to the issue of the bonds, and none other was had. The town is not, therefore, bound by the acts of the commissioners beyond or in contravention of the act of 1868, and the consent given thereunder; and thirdly, if they were officers of the town, or if officers of the town had acted in the matter, it was no part of their general duties, and they had no power to contract this debt, except in the manner prescribed in the act, and could not do by what is attempted to be called ratification of their own acts that which they had no power to do directly. If they had become illegally possessed of stock, they could be compelled to give it up, and that is all. They could not impose a debt to be paid by taxation by wrongfully retaining the stock.
It appears to me quite clear that, under the adjudications already had in this State, these bonds have no validity, and no recovery can be had thereon unless the act of 1871, chapter 809, gives them validity.
By that act it is enacted that the acts of the commissioners in issuing the bonds and exchanging them for the stock of the company are ratified and confirmed, and that no bond purporting to have been issued under the act of 1868, and held by any person in good faith, or for a valuable consideration, shall be void or voidable by reason of any defect in the consents of tax-payers, or by reason of such consents not stating the name of the railroad company, etc., etc. At the time of the passage of this act the plaintiff was the holder of the bond in question. It was void for the reasons already stated, and constituted no debt against the defendant. But it is claimed on the part of the plaintiff that this act made it a debt against the town.
I think this was beyond the power of the Legislature, and was precisely what it was decided in the case of People v. Batchellor, could not be done. The bond not having been originally issued in conformity with the consent of the tax-payers, and that being the only action on the part of the town toward the contraction of the debt, the Legislature had no power to validate that bond unless they had power to authorize or direct the commissioners originally to contract the debt without any consent or action on the part of the town. This, as we decided in the Batchellor case, they had no power to do, and it necessarily follows that this confirmatory act cannot aid the plaintiff's case. It was not, in this respect, merely curative of an irregularity in the exercise of a power which had been conferred, but it undertook to give validity to an act which had been done without the consent of the town, and in violation of law, and which the Legislature had no power to authorize to be done without such consent.
Another point is insisted on by the defendant on this branch of the case, viz.: That the act of 1871 contains a proviso, that no action pending at the time of its passage shall be in any way affected by it, but may proceed to judgment as if the act had not been passed. The action of People ex rel. Kilbourne v. Benedict, was then pending. That action was commenced before the bond in question was purchased by the plaintiff or had passed from the company, and it is claimed that the plaintiff purchased subject to this lis pendens and is bound by the judgment, and that the act of 1871 saves this judgment. I have not discussed this point, nor various other points taken on the part of the defendant, as I think the grounds before stated sufficient to dispose of the case.
The judgment should be reversed and a new trial ordered, costs to abide the event.
CHURCH, Ch. J., ALLEN and FOLGER, JJ., concur. ALLEN and FOLGER are also for reversal, on the ground that the plaintiff purchasing the bond pedente lite, was estopped by the judgment in People v. Benedict, setting aside and annulling the bonds, full effect being given to that judgment as against every one by the act of 1871.
ANDREWS, MILLER and EARL, JJ., dissent.
Judgment reversed.