Davis v. Kendallville

It is not disputed that under the statute the city had the right to borrow money and subscribe for stock in- the railroad company, and to issue bonds for stock. I assume, then, that the city had this power. This being so, and the bonds bearing upon their face the declaration that they were issued in aid of the railroad company, and authorized by a majority of the freeholders of the city, they were prima facie issued in conformity with the law.

Various defenses háve been- set up in the case, but they all depend on a state of facts, substantially as follows: There had been a subscription to the stock of the railroad company by certain individuals, citizens of Ken-dallville and the adjoining country, through Mr. Samuel Hanna, the president of the company, to the amount of $83,000; and by an arrangement between the railroad company and the city, it was understood that these private subscriptions should be taken up, and the shbscription of the city substituted in their place by consent. All the defenses proceed upon this agreement as a basis, and that it was the consideration and motive which induced the city to subscribe for the stock. In some of the pleas it is averred that this was the only consideration or inducement for the subscription by the city.

It seemed to be taken for granted diming the argument, by defendant’s counsel, that if the individual subscriptions were surrendered and the subscription by the city substituted in their place, that this ipso facto would be a defense. I am not prepared to admit this without qualification. There might be circumstances which would render such a subscription by the city illegal, and be an answer to the action, but they should be such as would show that some unfair advantage had been- taken of the city or the citizens in the transaction.

If there were certain stock subscriptions of the citizens of Kendallville made in aid of this railroad, it would seem there could be no objection to the company’s releasing these private subscriptions if all parties consented. No one could well make complaint in such case, and if the city should then subscribe for stock in the company, and if the subscription of the city was in fact substituted for the private subscription, and the citizens agreed to it, no one would be injured. If there was some secret trick by which the citizens were deceived, and the matter had been so arranged that the citizens had voted or petitioned for the subscription under a misconception of the facts, it might be inoperative. But if the facts were well known, and all parties understood it, I cannot see any objection to a subscription by the city on such a basis.

So, in examining the defenses, in addition *133to what has been stated, I must consider that if the matter was understood all around there could be no fraud or wrongful act in mating the subscription. And in view of the many cases decided by the supreme court Of the United States on the question of the validity of municipal bonds, I have to assume this as the settled law—that where bonds bear upon their face that they have been issued in pursuance of law, and under the contingencies required by the law, and which have been left to the local officers to determine, and the bonds or coupons have come into the hands of a holder for value, it is not necessary for him to go back and examine all of the intermediate steps taken, to see whether, there has been any flaw or irregularity. The only question is one of power, and if the power is given under certain circumstances, I must assume after the bonds are issued and held bona fide, that they were rightfully issued. It follows, then, that the special defenses should allege something more than the surrender and substitution already mentioned. For when the stock was issued and the city clothed with the rights of a stockholder, it is not enough to say that these were the motives upon which the subscription was made and the bonds issued. A party is not presumed to have notice of everything which takes place before the issuing of the bonds, and it is not enough to say that the proceedings of the city council were spread upon the records of the city. The averment ought to be that the plaintiff had actual knowledge of matters which might constitute the defense.

The first plea is the general denial, which presents a proper issue.

The second plea avers that Mr. Hanna had procured these individual subscriptions of citizens, which were afterwards canceled, and the city issued its bonds as set forth in the record, a copy of which is attached to the pleas, and of which therefore we can take notice; that plaintiff took the coupons after they became due, and therefore had notice, etc.

This defense does not go far enough. It may be true, and yet the subscription by the city be legal. The record of the proceedings clearly shows a subscription by the city, by resolution of the council and approval of the mayor, to the stock of the company. Some, objection is taken in the argument that this does not show a subscription. Why not? What more solemn step in the matter could the city take than that set forth in the resolutions and ordinances adopted by the council?

The third defense is similar, and alleges notice by the city’s record, which is insufficient. In fact; all the pleas numbered five, six, seven, eight and nine are defective for a similar reason.

The fourth plea avers notice, but does not aver facts sufficient to constitute a defense. I hold there must not only be the substitution of one subscription for another, but there must also be some deceit practiced upon the citizens, for if they do it with their eyes open no one can make any objection.

If there were a plea that this agreement was the only consideration for the bonds; that the city made no subscription and received no stock; and that plaintiff had notice,—it might be good. But here the fourth plea in fact admits, by not denying it, that the city received the stock of the company in exchange for the bonds, which stock became its property. This stock was a valuable consideration. The plea is therefore insufficient; and it may be added that the averment in one of the pleas, that the plaintiff took the coupons after they were due, is not enough without the other averment that some fraud or deceit had been prac-. ticed upon the citizens or the city. It is said that the city bonds would be more available to the railroad company than the private subscriptions of the citizens, and this may well be true, and yet if the citizens, knowing all the facts, did not at this time complain, they can not now be heard.

The tenth plea is held to be bad for the reasons given by the court in the case of Payson v. Withers [Case No. 10,864],

The demurrers of plaintiff to the second, third, fourth, fifth, sixth, seventh, eighth; ninth and tenth pleas of the defendant are therefore sustained. If the defendant's counsel think they can make the pleas sufficient by amendment they may take reasonable time to do so, but it may be a serious question whether the city’s liability is not fully fixed by its records.