The Town of Middleport having, in pursuance of a statute of
Illinois, voted an appropriation to the Chicago, Danville and
Vincennes Railroad Company, to be raised by a tax on the property
of the inhabitants of the town, issued bonds, payable with interest
to bearer, for a sum large enough to include interest and the
discount for which they could be sold, and delivered them to the
railroad company, and they were accepted by that company, and sold
and delivered to plaintiff.
Held:
(1) That the purchase of these bonds by plaintiff was no payment
of the appropriation voted by the town to the railroad company.
(2) That, the bonds having been held to be void in a suit
between the plaintiff and the town, this did not operate as a
subrogation of the plaintiff to the right of the company, if any
such existed, to enforce the collection of the appropriation voted
by the town.
(3) The doctrine of subrogation in equity requires, 1, that the
person seeking its benefit must have paid a debt due to a third
party before he can be substituted to that party's rights; and, 2,
that in doing this, he must not act as a mere volunteer, but on
compulsion, to save himself from loss by reason of a superior lien
or claim on the part of the person to whom he pays the debt, as in
cases of sureties, prior mortgagees, etc. The right is never
accorded in equity to one who is a mere volunteer in paying a debt
of one person to another.
This is an appeal from a decree of the Circuit Court of the
United States for the Northern District of Illinois dismissing on
demurrer the bill of the Aetna Life Insurance Company, the present
appellant. The substance of the bill is that the complainant is the
owner of fifteen bonds of one thousand dollars each, issued by the
Township of Middleport, in the State of Illinois, dated February
20, 1871, and delivered to the Chicago, Danville and Vincennes
Railroad Company. These bonds were payable to bearer, and were
bought of the railroad company by the complainant, who paid value
for them.
Page 124 U. S. 535
The bill recites that this railroad company was incorporated in
1865 under the laws of the State of Illinois, with power to
construct a railroad from a point in Lawrence County, by way of
Danville, to the City of Chicago; that an act of the legislature of
that state passed March 7, 1867, authorized cities, towns, or
townships, lying within certain limits, to appropriate moneys and
levy a tax to aid the construction of said road, and
"that said act authorized all incorporated towns and cities, and
towns acting under township organization, lying wholly or in part
within twenty miles of the east line of the State of Illinois, and
also between the City of Chicago and the southern boundary of
Lawrence County in said state, to appropriate such sums of money as
they should deem proper to the said Chicago, Danville and Vincennes
Railroad Company to aid it in the construction of its road, to be
paid as soon as the track of said road should be laid and
constructed through such cities, towns, or townships, provided
however that a proposition to make such appropriation should first
be submitted to a vote of the legal voters of such cities, towns,
or townships at a regular, annual, or special meeting, of which at
least ten days' previous notice should be given, and also provided
that a vote should be taken on such proposition, by ballot at the
usual place of election, and that a majority of the votes cast
should be in favor of the proposition. And your orator further
avers that said act authorized and required the authorities of such
cities, towns, and townships to levy and collect such taxes and to
make such other provisions as might be necessary and proper for the
prompt payment of such appropriations so made."
It is then alleged that on the 8th day of June, 1867, after due
publication of notice according to law, a meeting of the legal
voters of said Town of Middleport was held at which they cast their
votes by ballot upon the proposition to levy and collect a tax of
$15,000 upon the taxable property of the inhabitants of the town to
aid in the construction of said railroad, provided Watseka, a city
in the County of Iroquois, situated in or near the south line of
said town, should be made a point in said road; that it appeared,
on counting the votes,
Page 124 U. S. 536
that 323 were in favor of and 68 were against such tax, and that
thereupon the proposition was duly declared carried, the
proceedings relating to the meeting and vote duly attested by the
town clerk and the moderator of the meeting, and by said clerk duly
recorded in the town records.
The bill further avers that the railroad company accepted this
vote and appropriation of the township and, relying upon such vote
and the good faith of said town, accepted the condition of the
appropriation and constructed and completed its track through said
town; that on the tenth day of February, 1871, the board of town
auditors adopted a resolution of which the following is a copy:
"Whereas the Township of Middleport did on the eighth day of
June, 1867, vote aid to the Chicago, Danville and Vincennes
Railroad Company to the amount of fifteen thousand dollars, and it
appearing that said township is unable to pay such amount in money,
therefore resolved by the board of auditors of said township that
bonds issue to said Chicago, Danville and Vincennes Railroad
Company to the amount of fifteen thousand dollars, together with a
sufficient amount to cover the discount necessary on said bonds in
negotiating the same, to-wit, one thousand five hundred dollars,
said bonds to be dated February 20, A.D. 1871, and to bear interest
at the rate of ten percent from date per annum."
In pursuance of this resolution, it is alleged that on the 24th
day of March. 1871, the supervisor and town clerk of Middleport
executed the fifteen bonds which are the subject of this suit;
that
"the said bonds were numbered one to fifteen, inclusive, and
were delivered to the said railroad company, upon the fulfillment
of the conditions of said vote, in payment of ninety cents on the
dollar of the appropriation made to said company by said vote, both
parties believing that said bonds were fully authorized by law, and
were legal, valid, and binding on said town, and also believing
them to be legal evidences of the debt in favor of said company
incurred by said town in voting said appropriation."
It is then alleged that on or about the 26th day of June,
Page 124 U. S. 537
1876, the Town of Middleport, which up to that time had paid the
interest upon the bonds, filed a bill in equity in the Circuit
Court for the County of Iroquois against the complainant
corporation as the holder of said bonds and certain other
persons
"alleging in substance the making and issuing of said bonds, as
herein stated, that the same were delivered to your orator, that
your orator was the holder thereof, and that the same were made and
issued without authority of law, and were invalid, and praying the
court so to decree, and to enjoin your orator from collecting the
same, and for other relief, as by the record in the cause, upon
reference thereto, will fully appear."
It is averred that the circuit court dismissed the bill, but
that upon appeal to the Supreme Court of Illinois, the decree
dismissing it was reversed, that court holding that these bonds
were void as issued without authority of law, and the case was
remanded to said circuit court for further proceedings, whereupon
it passed a decree in conformity with the opinion of said supreme
court adjudging the bonds void, and enjoined their collection. The
bill then charges that said supreme court, while holding the bonds
to be void, did not deny but impliedly admitted the validity of the
appropriation by the town, and insists that by the issue and
delivery of said bonds to the railroad company and their sale by
that company to the present complainant, it is thereby subrogated
to the rights of action which that company would have on the
contract evidenced by the vote of the town, and the acceptance and
fulfillment of the contract by the railroad company. It is also
alleged that no part of the principal sum named in the bonds, or
any part of said appropriation, has ever been paid, but that, on
the contrary, the Town of Middleport denies all liability therefor;
that ever since the purchase of said bonds, the complainant has
continued to hold and now holds the same, and has been and now is
the holder of all rights which the railroad company or its assigns
had against said town by reason of the premises.
A decree is then prayed for that the Town of Middleport shall
pay to complainant the amount found due, and shall
Page 124 U. S. 538
without delay levy and collect all taxes necessary for such
payment; also that the court will enforce the rights of complainant
by writs of mandamus and such other and further orders and decrees
according to the course of equity as shall be necessary and proper,
and also prays that W. H. Leyford, in whose hands as receiver the
Chicago, Danville and Vincennes Railroad Company has been placed by
the court, it being insolvent, may be made a party defendant
thereto.
Page 124 U. S. 544
MR. JUSTICE MILLER delivered the opinion of the Court.
In the argument of the demurrer before the circuit court,
several objections to the bill were taken. The defendant in error,
however, relies here upon three principal grounds of defense:
first, it denies the right of subrogation, upon which rests the
whole case of the complainant; second, it relies upon the statute
of limitations of five years; and third, it asserts that the former
decree in the state court is a bar to the action here. The circuit
court held that the statute of limitations was a bar to the present
suit, and dismissed the bill on that ground.
But we regard the primary question -- whether the complainant is
entitled to be substituted to the rights of the railroad company
after buying the bonds of the township -- a much more important
question, and are unanimously of opinion that the transaction does
not authorize such subrogation.
The bonds in question in this suit were delivered by the agents
of the Town of Middleport to the railroad company, and by that
company sold in open market as negotiable instruments to the
complainant in this action. There was no endorsement, nor is there
any allegation in the bill that there was any express agreement
that the sale of these bonds carried with them any obligation which
the company might have had to enforce the appropriation voted by
the town. Notwithstanding the averment in the bill that the intent
of complainant in purchasing said bonds and paying its money
therefor was to acquire such rights of subrogation, it cannot be
received as any sufficient allegation that there was a valid
contract to that effect. On the contrary, the bill fairly presents
the idea that by reason of the facts of the sale the complainant
was in equity subrogated to said rights, and entitled to enforce
the same against the Town of Middleport.
The argument of the learned counsel in the case is based
entirely upon the right of the complainant to be subrogated
Page 124 U. S. 545
to the rights of the railroad company by virtue of the
principles of equity and justice. He does not set up any claim of
an express contract for such subrogation. He says:
"The equity alleged in the plaintiff's bill is, as I have said,
the equity of subrogation. Before proceeding to call the attention
of the court to the facts from which this equity arises, it may be
useful to advert to the instances in which the right of subrogation
exists, and to the principles on which it rests."
He founds his argument entirely upon the proposition that when
the complainant purchased these bonds, he thereby paid the debt of
the Town of Middleport to the railroad company, as voted by it, and
that because it paid this money to that company on bonds which are
void, it should be subrogated to the right of the company against
the town.
The authorities on which he relies are all cases in which the
party subrogated has actually paid a debt of one party due to
another, and claims the right to any security which the payee in
that transaction had against the original debtor. But there is no
payment in the case before us of any debt of the town. The purpose
of the purchase as well as the sale of these bonds, and what the
parties supposed they had effected by it, was not the payment of
that debt, but the sale and transfer of a debt of the town from one
party to another, which debt was evidenced by the bonds that were
thus transferred. Neither party had any idea of extinguishing by
this transaction the debt of the town. It was very clear that it
was a debt yet to be paid, and the discount and interest on the
bonds was the consideration which induced the complainant to buy
them.
The language of this Court in
Otis v. Cullum,
92 U. S. 447, is
very apt, and expresses precisely what was done in this case. In
that case, Otis & Company were the purchasers of bonds of the
City of Topeka from the First National Bank of that place. These
bonds were afterwards held by this Court to be void for want of
authority, just as in the case before us. A suit was brought
against the bank, which had failed and was in the hands of a
receiver, to recover back the money paid to it for the bonds. After
referring to the decision
Page 124 U. S. 546
of
Lambert v. Heath, 15 Meeson & Welsby 486, this
Court said:
"Here also, the plaintiffs in error got exactly what they
intended to buy, and did buy. They took no guarantee. They are
seeking to recover, as it were, upon one, while none exists. They
are not clothed with the rights which such a stipulation would have
given them. Not having taken it, they cannot have the benefit of
it. The bank cannot be charged with a liability which it did not
assume. Such securities throng the channels of commerce, which they
are made to seek and where they find their market. They pass from
hand to hand like banknotes. The seller is liable
ex
delicto for bad faith and
ex contractu there is an
implied warranty on his part that they belong to him, and that they
are not forgeries. Where there is no express stipulation, there is
no liability beyond this. If the buyer desires special protection,
he must take a guarantee. He can dictate its terms and refuse to
buy unless it be given. If not taken, he cannot occupy the vantage
ground upon which it would have placed him."
Nor can this case be sustained upon the principle laid down in
this Court in
Louisiana v. Wood, 102 U.
S. 294. That was a case in which the City of Louisiana,
having a right by its charter to borrow money, had issued bonds and
placed them on the market for that purpose. These bonds were
negotiated by the agents of the city, and the money received for
their sale went directly into its treasury. It was afterwards held
that they were invalid for want of being registered. Afterwards the
parties who had bought these bonds brought suit against the city
for the sum they had paid on the ground that the city had received
their money without any consideration, and was bound
ex aequo
et bono to pay it back. The Court said:
"The only contract actually entered into is the one the law
implies from what was done, to-wit, that the city would, on demand,
return the money paid to it by mistake, and, as the money was got
under a form of obligation which was apparently good, that interest
should be paid at the legal rate from the time the obligation was
denied."
In the present case, there was no borrowing of money.
Page 124 U. S. 547
There was nothing which pretended to take that form. No money of
the complainants ever went into the treasury of the Town of
Middleport; that municipality never received any money in that
transaction. It did not sell the bonds, either to complainant or
anybody else. It simply delivered bonds which it had no authority
to issue to the railroad company, and that corporation accepted
them in satisfaction of the donation by way of taxation which had
been voted in aid of the construction of its road.
The whole transaction of the execution and delivery of these
bonds was utterly void, because there was no authority in the town
to borrow money or to execute bonds for the payment of the sum
voted to the railroad company. They conferred no right upon
anybody, and of course the transaction by which they were passed by
that company to complainant could create no obligation, legal or
implied, on the part of the town to pay that sum to any holder of
these bonds.
Litchfield v. Ballou, 114 U. S. 190,
sustains this view of the subject. That town had issued bonds for
the purpose of aiding in the construction of a system of
waterworks. In that case, as in
Louisiana v. Wood, the
bonds were so far in excess of the authority of the town to create
a debt that they were held by this Court to be void in the case of
Buchanan v. Litchfield, 102 U. S. 278.
After this decision, Ballou, another holder of the bonds, brought a
suit in equity upon the ground that, though the bonds were void,
the town was liable to him for the money which he had paid in their
purchase. This Court held that there was no equity in the bill on
the ground that if the plaintiff had any right of action against
the city for money had and received, it was an action at law, and
equity had no jurisdiction. It was also attempted in that case to
establish the proposition that, the money of the plaintiffs having
been used in the construction of the waterworks, there was an
equitable lien in favor of the plaintiffs on those works for the
sum advanced. This was also denied by the Court.
One of the principles lying at the foundation of subrogation in
equity, in addition to the one already stated, that the person
seeking this subrogation must have paid the debt, is that he
Page 124 U. S. 548
must have done this under some necessity, to save himself from
loss which might arise or accrue to him by the enforcement of the
debt in the hands of the original creditor; that, being forced
under such circumstances to pay off the debt of a creditor who had
some superior lien or right to his own, he could for that reason be
subrogated to such rights as the creditor whose debt he had paid
had against the original debtor. As we have already said, the
plaintiff in this case paid no debt. It bought certain bonds of the
railroad company at such discount as was agreed upon between the
parties, and took them for the money agreed to be paid
therefor.
But even if the case here could be supposed to come within the
rule which requires the payment of a debt in order that a party may
be subrogated to the rights of the person to whom the debt was
paid, the payment in this case was a voluntary interference of the
Aetna Company in the transaction. It had no claim against the Town
of Middleport. It had no interest at hazard which required it to
pay this debt. If it had stood off and let the railroad company and
the town work out their own relations to each other, it could have
suffered no harm and no loss. There was no obligation on account of
which, or reason why, the complainant should have connected itself
in any way with this transaction or have paid this money, except
the ordinary desire to make a profit in the purchase of bonds. The
fact that the bonds were void, whatever right it may have given
against the railroad company, gave it no right to proceed upon
another contract and another obligation of the town to the railroad
company.
These propositions are very clearly stated in a useful monograph
on the Law of Subrogation by Henry N. Sheldon, and are well
established by the authorities which he cites. The doctrine of
subrogation is derived from the civil law, and
"it is said to be a legal fiction, by force of which an
obligation extinguished by a payment made by a third person is
treated as still subsisting for the benefit of this third person,
so that by means of it one creditor is substituted to the rights,
remedies, and securities of another. . . . It takes place for the
benefit of a person who, being himself a creditor, pays
Page 124 U. S. 549
another creditor whose debt is preferred to his by reason of
privileges or mortgages, being obliged to make the payment either
as standing in the situation of a surety or that he may remove a
prior encumbrance from the property on which he relies to secure
his payment. Subrogation, as a matter of right, independently of
agreement, takes place only for the benefit of insurers, or of one
who, being himself a creditor, has satisfied the lien of a prior
creditor, or for the benefit of a purchaser who has extinguished an
encumbrance upon the estate which he has purchased, or of a
co-obligor or surety who has paid the debt which ought, in whole or
in part, to have been met by another. Sheldon on Subrogation
§§ 2, 3."
In § 240, it is said:
"The doctrine of subrogation is not applied for the mere
stranger or volunteer who has paid the debt of another without any
assignment or agreement for subrogation, without being under any
legal obligation to make the payment and without being compelled to
do so for the preservation of any rights or property of his
own."
This is sustained by a reference to the cases of
Shinn v.
Budd, 14 N.J.Eq. 234;
Sandford v. McLean, 3 Paige
117;
Hoover v. Epler, 52 Penn.St. 522.
In
Gadsden v. Brown, Speer's Eq. 37, 41, Chancellor
Johnson says:
"The doctrine of subrogation is a pure, unmixed equity, having
its foundation in the principles of natural justice, and from its
very nature could never have been intended for the relief of those
who were in any condition in which they were at liberty to elect
whether they would or would not be bound, and so far as I have been
able to learn its history, it has never been so applied. If one
with a perfect knowledge of the facts will part with his money, or
bind himself by his contract in a sufficient consideration, any
rule of law which would restore him his money or absolve him from
his contract would subvert the rules of social order. It has been
directed in its application exclusively to the relief of those that
were already bound, who could not but choose to abide the
penalty."
This is perhaps as clear a statement of the doctrine on this
subject as is to be found anywhere.
Page 124 U. S. 550
Chancellor Walworth, in the case of
Sandford v. McLean,
3 Paige 122, said:
"It is only in cases where the person advancing money to pay the
debt of a third party stands in the situation of a surety or is
compelled to pay it to protect his own rights that a court of
equity substitutes him in the place of the creditor as a matter of
course, without any agreement to that effect. In other cases, the
demand of a creditor, which is paid with the money of a third
person and without any agreement that the security shall be
assigned or kept on foot for the benefit of such third person, is
absolutely extinguished."
In
Memphis & Little Rock Railroad v. Dow,
120 U. S. 287,
this Court said:
"The right of subrogation is not founded on contract. It is a
creation of equity, is enforced solely for the purpose of
accomplishing the ends of substantial justice, and is independent
of any contractual relations between the parties."
In the case of
Shinn v. Budd, 14 N.J.Eq. 234, the New
Jersey chancellor said:
"Subrogation as a matter of right, as it exists in the civil
law, from which the term has been borrowed and adopted in our own,
is never applied in aid of a mere volunteer. Legal substitution
into the rights of a creditor for the benefit of a third person
takes place only for his benefit who, being himself a creditor,
satisfies the lien of a prior creditor, or for the benefit of a
purchaser who extinguishes the encumbrances upon his estate, or of
a co-obligor or surety who discharges the debt, or of an heir who
pays the debts of the succession. Code Nap. book 3, tit. 3, art.
1251; Civil Code of Louisiana, art. 2157; 1 Pothier on Oblig., part
3, c. 1, art. 6, § 2. 'We are ignorant,' said the Supreme
Court of Louisiana,"
"of any law which gives to the party who furnishes money for the
payment of a debt the rights of the creditor who is thus paid. The
legal claim alone belongs not to all who pay a debt, but only to
him who, being bound for it, discharges it."
"
Nolte and Co. v. Their Creditors, 9 Martin 602;
Curtis v. Kitchen, 8 Martin 706;
Cox v. Baldwin,
1 Miller's Louis R. 147. The principle of legal substitution, as
adopted and applied in our
Page 124 U. S. 551
system of equity, has, it is believed, been rigidly restrained
within these limits."
The cases here referred to as having been decided in the Supreme
Court of Louisiana are especially applicable, as the Code of that
state is in the main founded on the civil law from which this right
of subrogation has been adopted by the chancery courts of this
country. The latest case upon this subject is one from the
appellate court of the State of Illinois --
Suppiger v.
Garrels, 20 Bradwell App.Ill. 625 -- the substance of which is
thus stated in the syllabus:
"Subrogation in equity is confined to the relation of principal
and surety and guarantors; to cases where a person, to protect his
own junior lien, is compelled to remove one which is superior, and
to cases of insurance. . . . Anyone who is under no legal
obligation or liability to pay the debt is a stranger, and, if he
pays the debt, a mere volunteer."
No case to the contrary has been shown by the researches of
plaintiff in error, nor have we been able to find anything
contravening these principles in our own investigation of the
subject. They are conclusive against the claim of the complainant
here, who in this instance is a mere volunteer, who paid nobody's
debt, who bought negotiable bonds in open market without anybody's
endorsement, and as a matter of business. The complainant company
has therefore no right to the subrogation which it sets up in the
present action.
Without considering the other questions, which is unnecessary,
the decree of the circuit court is
Affirmed.
-----
These principles require also the affirmance of the decrees in
the cases of
Aetna Life Insurance Co. v. Belmont, No.
1135, and
Aetna Life Insurance Co. v. Milford, No.
1136.
It is ordered.
