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
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.
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.
image:a
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
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
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.
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
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.
Page 86 U. S. 475
MR. JUSTICE BRADLEY delivered the judgment of the Court, and the
opinion of himself and JUSTICES MILLER, DAVIS, and FIELD, MR.
JUSTICE HUNT concurring in the judgment.
A municipal corporation is a subordinate branch of the domestic
government of a state. It is instituted for public purposes only,
and has none of the peculiar qualities and characteristics of a
trading corporation instituted for purposes of private gain except
that of acting in a corporate capacity. Its objects, its
responsibilities, and its powers are different. As a local
governmental institution, it exists for the benefit of the people
within its corporate limits. The legislature invests it with such
powers as it deems adequate to the ends to be accomplished. The
power of taxation is usually conferred for the purpose of enabling
it to raise the necessary funds to carry on the city government and
to make such public improvements as it is authorized to make. As
this is a power which immediately affects the entire constituency
of the municipal body which exercises it, no evil consequences are
likely to ensue from its being conferred, although it is not
unusual to affix limits to its exercise for any single year. The
power to borrow money is different. When this is exercised, the
citizens are immediately affected only by the benefit arising from
the loan; its burden is not felt till afterwards. Such a power does
not belong to a municipal corporation as an incident of its
creation. To be possessed, it must be conferred by legislation,
either express or implied. It does not belong as a mere matter of
course to local governments to raise loans. Such governments are
not created for any such purpose. Their powers are prescribed by
their charters, and those charters provide the means for exercising
the powers, and the creation of specific means excludes others.
Indebtedness may be incurred to a limited extent in carrying out
the objects of the incorporation. Evidences of such indebtedness
may be given to the public creditors. But they must look to and
rely on the legitimate mode of raising the funds for its payment.
That mode is taxation.
Page 86 U. S. 476
Our system of local and municipal government is copied in its
general features from that of England. No evidence is adduced to
show that the practice of borrowing money has been used by the
cities and towns of that country without an act of Parliament
authorizing it. We believe no such practice has ever obtained.
Much less can any precedent be found (except of modern date and
in this country) for the issue, by local civil authorities, of
promissory notes, bills of exchange, and other commercial paper. At
a period within the memory of man, the proposal of such a thing
would have been met with astonishment. The making of such paper was
originally confined to merchants. But its great convenience was the
means of extending its use, first to all individuals and afterwards
to private corporations having occasion to make promises to pay
money. Being only themselves responsible for the paper they issue,
no evil consequences can follow sufficient to counterbalance the
conveniences and benefits derived from its use. They know its
immunity, in the hands of a
bona fide holder, from all
defenses and equities. Knowing this, if they choose to issue it, no
one is injured but themselves. But if city and town officials
should have the power thus to bind their constituencies, it is easy
to see what abuses might, and probably would, ensue. We know from
experience what abuses have been practiced where the power has been
conferred. Fraudulent issues, peculations and embezzlements, and
the accumulation of vast amounts of indebtedness without any
corresponding public benefit have been rendered easy and secure
from merited punishment. The purpose and object of a municipal
corporation do not ordinarily require the exercise of any such
power. They are not trading corporations, and ought not to become
such. They are invested with public trusts of a governmental and
administrative character; they are the local governments of the
people, established by them as their representatives in the
management and administration of municipal affairs affecting the
peace, good order, and general well being of the community as a
political society and district, and invested
Page 86 U. S. 477
with power by taxation to raise the revenues necessary for those
purposes. The idea that they have the incidental power to issue an
unlimited amount of obligations of such a character as to be
irretrievably binding on the people, without a shadow of
consideration in return, is the growth of a modern misconception of
their true object and character. If in the exercise of their
important trusts the power to borrow money and to issue bonds or
other commercial securities is needed, the legislature can easily
confer it under the proper limitations and restraints and with
proper provisions for future repayment. Without such authority, it
cannot be legally exercised. It is too dangerous a power to be
exercised by all municipal bodies indiscriminately, managed as they
are by persons whose individual responsibility is not at stake.
Vouchers for money due, certificates of indebtedness for
services rendered or for property furnished for the uses of the
city, orders or drafts drawn by one city officer upon another, or
any other device of the kind, used for liquidating the amounts
legitimately due to public creditors, are of course necessary
instruments for carrying on the machinery of municipal
administration, and for anticipating the collection of taxes. But
to invest such documents with the character and incidents of
commercial paper, so as to render them in the hands of
bona
fide holders absolute obligations to pay, however irregularly
or fraudulently issued, is an abuse of their true character and
purpose. It has the effect of converting a municipal organization
into a trading company, and puts it in the power of corrupt
officials to involve a political community in irretrievable
bankruptcy. No such power ought to exist, and in our opinion no
such power does legally exist unless conferred by legislative
enactment, either express or clearly implied.
There are cases undoubtedly in which it is proper and desirable
that a limited power of this kind should be conferred, as where
some extensive public work is to be performed, the expense of which
is beyond the immediate resources of reasonable taxation and
capable of being fairly
Page 86 U. S. 478
and justly spread over an extended period of time. Such cases,
however, belong to the exercise of legislative discretion, and are
to be governed and regulated thereby. Where the power is clearly
given, and securities have been issued in conformity therewith,
they will stand on the same basis and be entitled to the same
privileges as public securities and commercial paper generally.
But where the power has not been given, parties must take
municipal orders, drafts, certificates, and other documents of the
sort at their peril. Custom and usage may have so far assimilated
them to regular commercial paper as to make them negotiable -- that
is, transferable by delivery or endorsement. This quality renders
them more convenient for the purposes of the holder, and has
undoubtedly led to the idea so frequently, but, as we think,
erroneously, entertained that they are invested with that other
characteristic of commercial paper -- freedom from all legal and
equitable defenses in the hands of a
bona fide holder. But
every holder of a city order or certificate knows, that to be valid
and genuine at all, it must have been issued as a voucher for city
indebtedness. It could not be lawfully issued for any other
purpose. He must take it, therefore, subject to the risk that it
has been lawfully and properly issued. His claim to be a
bona
fide holder will always be subject to this qualification. The
face of the paper itself is notice to him that its validity depends
upon the regularity of its issue. The officers of the city have no
authority to issue it for any illegal or improper purpose, and
their acts cannot create an estoppel against the city itself, its
taxpayers, or people. Persons receiving it from them know whether
it is issued and whether they receive it for a proper purpose and a
proper consideration. Of course they are affected by the absence of
these essential ingredients, and all subsequent holders take
cum onere and are affected by the same defect.
We consider these principles to be so sound and fundamental as
to make it a matter of some surprise that a different view should
have been taken by some jurists of eminent ability. The cases on
the subject are conflicting and irreconcilable.
Page 86 U. S. 479
It could not serve any useful purpose to make an elaborate
review of them. We have endeavored clearly and explicitly, though
briefly, to state the views which we entertain and in accordance
with which we think the questions in this case must be decided.
Much stress has been laid upon the decision of the Supreme Court
of Tennessee, in the case of
Adams v. Memphis & Little Rock
Railroad Company. [
Footnote
3] The Mayor and Common Council of the City of Memphis, under a
charter similar to that of Nashville, had mortgaged certain
property belonging to the city, called the navy yard property,
which had been given to it by the United States for the use and
benefit of the city to secure the payment of $300,000 of the bonds
of the Memphis and Little Rock Railroad Company. The road of this
company extended from a point opposite the city to Little Rock, in
Arkansas, and was deemed of great advantage to the City of Memphis.
The rents and profits of this property were also appropriated by
the mortgage to the payment of the interest on the bonds thus
secured and to the raising of a sinking fund to meet the principal
when due, and authority was given to the trustees of the mortgage
to enter and lease, or sell in case of default in the payment of
interest or principal. The court held that the general power
contained in the city charter to sell, lease, and dispose of the
property of the corporation for the use and benefit of the city
authorized this transaction and that the purpose for which the
mortgage was given was a proper corporation purpose within the
meaning of the charter. Other doctrines were propounded in the
opinion of the court in reference to the implied powers of
municipal corporations, which were not necessary to the decision of
the case and need not be adverted to here. The decision itself does
not, in our apprehension, necessarily conflict with the views which
we have stated above. We proceed, therefore, to the consideration
of the particular facts of this case.
Page 86 U. S. 480
The eighteen checks purchased of the treasurer of the board of
education will be first considered. In the absence of proof to the
contrary, it may be presumed that they were properly issued at
their inception. Evidence was offered by the defendants, it is
true, tending to show that they had not been issued in accordance
with the laws and ordinances of the city. But the view which we
have taken of their reissue and sale by the treasurer of the board
of education renders it unnecessary to consider that aspect of the
case. It is conceded that they had been received by the collector
in payment of taxes due to the city. As evidences of indebtedness,
where this was done, they were
functus officio. They were
paid and satisfied. They ceased to have any validity. They could
not be reissued without the authority of the city council.
Certainly the treasurer of the board of education had no authority
thus to reissue them or sell them. Such an authority would render
him controller and dispenser of the city credit. If he had
authority to sell them for one price, he had authority to sell them
for another, and there is no limit to which he would thus have
power to involve the city in debt. Nor can the purchaser waive his
claim to recover the amount of the checks and demand a
reimbursement of the money which he actually paid. Considered as a
money transaction, and not as a purchase of the paper, it would
amount to a loan and borrowing of money on the city account. And
where can authority be found for the treasurer of the board of
education to borrow money on account of the city? The city council
may no doubt assume the responsibility of the transaction and make
proper provision, as perhaps in equity ought to be done, for the
repayment of the money so advanced. But the transaction had not the
support of legal authority, and hence the money cannot be recovered
in this action.
The remaining check of $1,000, purchased from Sax, was pledged
or hypothecated, with fifteen others of like amount, to Sax as
collateral security for a loan of $12,000, payable in four months.
This loan was secured by a note given at the same time, which
recited the pledge or hypothecation of the
Page 86 U. S. 481
sixteen checks, and gave Sax power to sell them if the note was
not paid at maturity. Sax, instead of waiting to see if the note
would be paid, sold the checks thus pledged, or at least the one in
question, within a week after the loan was effected. This, of
course, was not only an unauthorized, it was a dishonest
transaction, and could give no title to the purchaser as against
the city. In the first place, the finance committee, or its
chairman, had no legal authority thus to pledge the evidences of
city indebtedness and give to the pledgee the power of selling the
same for any price he could get. In this way, an untold amount of
debt could be piled up against the city without any adequate
consideration received therefor, and all the evil consequences
before adverted to would be liable to follow the exercise of such a
power. This very instance forcibly illustrates the mischievous
results that would follow from inferring an incidental power in a
municipal corporation to issue commercial securities. The check in
question has the same form and appearance as all the other checks
which the city officers are in the habit of issuing for ordinary
city indebtedness. It must be subject to the same general rule of
being valid or otherwise according as it was properly or
improperly, lawfully or unlawfully, issued. And the subsequent
holder, whether purchaser or otherwise, takes it with all the
original defects of title.
The judgment must be reversed and a venire de novo
awarded.
[
Footnote 1]
There was no regular assignment of errors in the case, such as
is required by the 21st Rule (11 Wall. ix), and the Court was at
first indisposed to hear the case. However, by a careful inspection
of the brief of the plaintiff in error, the three points here
mentioned were considered as being, in substance, assigned, and on
them alone the oral argument was made.
[
Footnote 2]
2 Coldwell 645.
[
Footnote 3]
2 Coldwell 645.
MR. JUSTICE HUNT:
I concur in the judgment of this Court reversing the judgment at
the circuit, and remanding the case for further proceedings. I do
not, however, concur in some of the grounds upon which the reversal
is placed in the opinion delivered by MR. JUSTICE BRADLEY, and as
my concurrence is necessary to the rendering of the judgment, there
is a manifest propriety in an expression of the grounds of my
concurrence.
I am of the opinion that the judge erred in charging and
deciding that if the checks
"are, upon their face, overdue
Page 86 U. S. 482
at the time of such sale (that is their reissue and sale), they
will be in law payable on demand, and are not to be deemed
dishonored so as to let in defenses between the company and a
subsequent holder of the paper until after the lapse of a
reasonable time after their reissue for the making of such
demand."
All of the checks in question had been presented for payment.
Payment was not made, but the time of presentation was noted in
each instance and interest was allowed upon the check from that
date. The presentation and neglect to pay had been made in some
instances nearly four months before such purchase, and the time of
such presentation was noted upon the check by the city treasurer,
and it bore interest from that date. A check requires no
presentment for acceptance as distinguished from presentment for
payment. If once presented and payment refused, it is dishonored.
[
Footnote 2/1] To constitute a
bona fide holder of a note or check it is necessary:
1. That it should have been received before maturity,
2. That a valuable consideration should have been paid for it,
and
3. That it should have been taken without knowledge of the
defenses sought to be made.
Whatever defenses could properly be made to these checks in the
hands of the original holder could be made while they were in the
plaintiff's hands. He was not a
bona fide holder.
Evidence to show fraud or corruption or want of authority in
their issue should have been received at the circuit, and in
excluding the offers made on that subject and in the charge in
reference to the evidence given, I think there was error. Thus, the
Sax check, it was alleged, had been issued without authority,
hypothecated to secure a note of the city made without authority,
and sold in violation of the terms of the hypothecation. It was
open to this defense in the hands of the plaintiff.
In the case of another check, it was offered to be proved that
it was issued without authority and upon a corrupt contract, but
the evidence was excluded.
Page 86 U. S. 483
The court in another place charged the jury that "if it is the
usage to reissue the securities by sale in the market, they will,
when so sold, be obligatory upon the corporation." I cannot think
that it is lawful for a municipal corporation to issue its checks,
pay them, reissue them, and repeat this operation as often as its
convenience requires. This comes too near the character of a bank
of issue and deposit.
In the particulars following, my views are different from those
expressed in the opinion of JUSTICE BRADLEY.
I hold it to be well established by the authorities that a
municipal corporation may borrow money for the legitimate use of
the corporation, and that it may issue its notes for the same
unless expressly prohibited by its charter or by statute from so
doing. The proposition that it cannot borrow money unless by its
charter expressly authorized to do so is, in my opinion,
unsustained by sound authority. [
Footnote 2/2]
That the securities thus issued by municipal corporations are
subject to the rules of commercial law when held by a
bona
fide holder has been repeatedly held by this Court. Every
recent volume of its reports contains authorities to this effect.
The authorities of the State of Tennessee sustain these general
views. [
Footnote 2/3]
Checks of the city were issued for the payment of particular
debts, and when paid should, no doubt, under ordinary
circumstances, have been cancelled. A reissue of a paid check is an
extraordinary proceeding. If done by an officer without the
authority of the common council, it is a gross violation of duty.
If with the authority, it is a loose practice, liable to abuse.
Whether such reissue would be an act of positive illegality,
ultra vires merely, or a bad practice simply, it is not
necessary to decide. In neither case can the city repudiate the
transaction. It is upon this point
Page 86 U. S. 484
chiefly that I desire to express my dissent from the opinion
just delivered. As to all the checks in question, the record shows
that they were paid over by the collector of city taxes to the
treasurer of the board of education, that they were by him sold to
McCrory at eighty cents on the dollar, and that the proceeds of
such sales were applied to the uses of the city by an immediate
payment of the wages due to the teachers in the public schools of
the city. The city received this money upon the reissue of its
checks. So far as McCrory is concerned or the plaintiff who
succeeds to his rights, the city now has the money in its
treasury.
It is a general rule, applicable to all persons and
corporations, and is a dictate of plain honesty, that whoever,
knowing the facts of the case, retains and uses money received by
an agent for his account cannot repudiate the contract on which it
is received. [
Footnote 2/4] Putting
this transaction most strongly against the plaintiff by assuming
that this reissue was not
ultra vires merely, but was
positively prohibited by law, the city is still responsible to the
holder of the checks for the money it has received and still
retains. Conceding the illegal contract to be void as forbidden by
the legislature, it is to be remembered that the prohibition is
upon the city only, and not upon the person dealing with it; the
illegality is on the part of the city, and not of the person
receiving the checks. The contract may well be void as to the city,
and its officers punishable for the offense of making it, and yet
it may stand in favor of innocent persons not within the
prohibition. Such was the decision in
Tracy v. Talmage,
[
Footnote 2/5] in
Curtis v.
Leavitt, [
Footnote 2/6] and in
Oneida Bank v. Ontario Bank. [
Footnote 2/7] The latter case was briefly this: the
general banking law of New York prohibited the issuance by a bank
of a certificate of deposit payable on time. The cashier of the
Ontario Bank received $5,000 in cash from one Perry, and delivered
to him a certificate of deposit post-dated about four weeks, for
the purpose of raising funds for the bank.
Page 86 U. S. 485
This draft Perry transferred to the Oneida Bank, who brought
suit upon it. It was held, assuming this draft to be void, that the
party making the contract could reject the security and recover the
money or value which he advanced on receiving it. It was held
further that the right of action to recover this money passed to
the Oneida Bank upon the transfer of the certificate to them. The
plaintiff recovered the money advanced to the bank upon the illegal
certificate. Both of these principles were held with equal
distinctness in
Tracy v. Talmage, supra.
They seem to me to be decisive of the right of the plaintiff to
recover upon the checks, regarding them in their most unfavorable
aspect, the amount of money advanced to and yet held by the
city.
For the reasons thus presented, I concur in the reversal of the
judgment.
[
Footnote 2/1]
Chitty on Bills 272, m.
[
Footnote 2/2]
Whitewater Valley Canal
Company v. Vallette, 21 How. 424,
and see
1 Dillon on Municipal Corporations § 82, 83 and notes, where
the authorities are collected both from the state courts and from
this Court.
[
Footnote 2/3]
Adams v. Memphis & Little Rock Railroad Company, 2
Coldwell 645.
[
Footnote 2/4]
Bissell v. City of
Jeffersonville, 24 How. 300; Sedgwick on Statutory
and Constitutional Law 90.
[
Footnote 2/5]
14 N.Y. 162.
[
Footnote 2/6]
15
id. 9.
[
Footnote 2/7]
21
id. 490.
MR. JUSTICE CLIFFORD, dissenting:
I dissent from the opinion and judgment in this case chiefly
upon two grounds: (1) because I think the opinion restricts quite
too much the powers of municipal corporations, and (2) because the
doctrines of the opinion, as applied to negotiable securities of a
commercial character, are repugnant to the well settled rules of
law established by the repeated decisions of this Court.
MR. JUSTICE SWAYNE and MR. JUSTICE STRONG also dissented.
