INHABITANTS OF TOWN OF HARMONY, ME., v. TRUMAN, 212 F. 4

DODGE, Circuit Judge. The appellee (hereinafter called plaintiff) holds 17 bonds, each for $500, in all $8,500, purporting to have been issued by the appellant town (hereinafter called defendant) on August 1, 1896. The defendant has refused to pay either the interest or the principal, and denies their validity.

The plaintiff’s bill, filed February 12, 1912, alleges that he can maintain no action at law upon the bonds, because at the date of their issue it was not in the power of the town to incur indebtedness to the amount of $8,500; that amount, together with its previous outstanding indebtedness, exceeding the limit of town indebtedness imposed by the Constitution of Maine by several thousand dollars. The relief he asks is that the bonds may be declared valid and enforced in equity to the extent of that amount for which the town could lawfully have bound itself at the time.

This is the relief which the decree below purports to grant. The plaintiff alleges that the bonds were issued pursuant to votes passed by the defendant town on June 20, 1895, May 11, 1896, and July 13, 1896. The defendant denies that the bonds were issued pursuant to the votes referred to, or either of them, and alleges that the bonds were issued notwithstanding that conditions of issue imposed by the votes had never been complied with. 1.

The question thus raised is the first question to be considered. Ás to the terms of the votes referred to and the circumstances under which each was passed there is no controversy.

They were as follows: The vote of June 20, 1895, was passed at a lawful special meeting, and was, in substance: To raise $8,500 to aid in the construction of a railroad from Hartland to Harmony village; To authorize the selectmen to contract that said railroad should be built; To subscribe for stock in the railroad company as soon as it should be organized; To issue bonds of the town to the railroad company for $8,500 at such time and rate of interest as the selectmen should deem advisable; “On these conditions”: That the party with whom the selectmen should contract— “give a guaranty to the satisfaction of a committee to be chosen by said town, that the balance of the money over and above ($S,500) necessary for the construction and completion of said road and appurtenances to said Harmony village shall be subscribed and furnished, said road equipped and operated.

If, however, said railroad company prefer they need not give any guaranty to build said railroad. But the selectmen may issue said bonds and take stock in said railroad as above upon the completion of said road to Harmony village if within one year from date of this meeting.” Immediately after the vote a committee of four was chosen to act with the selectmen. That ..the contemplated railroad company was afterward organized under the name of Sebasticook & Moosehead Railroad Company seems to be assumed by -both parties, but the record does not show the' date of its organization.

By a stipulation in the record, however, filed May 8, 1913, it appears that' this railroad company recorded a trust mortgage, dated October 1, 1895, for $250,000, to secure bondholders. The record does not show that the selectmen ever subscribed for any stock in the road, although, as hereinafter stated, a certificate of stock was later delivered to them. May 11, 1896, at another special meeting, the town passed a vote by a majority of 81 to 45, to— “change the contract as entered into with the S. & M. R. R.

Co. by the selectmen of Harmony, by extending the time from June 20, 1896, to August 20, 1896.” The record nowhere shows what this contract was, nor does it even show affirmatively any contract made at any time between the selectmen and the railroad company; but that there was some such contract seems to be assumed. This meeting and vote, however, are of no consequence, because, as the plaintiff’s brief states and the District Court has found, the vote was not passed by the two-thirds majority required by statute. Neither party has relied upon it as in any way material for the purposes of the case.

The vote of July 13, 1896, was passed at a special meeting and purported to be, in substance, as follows: That all the acts and doings of the meeting of June 20, 1895, whereby said town voted to aid the Sebasticook & Moosehead Railroad Company and to issue the bonds of the town for such purpose to the amount of $8,500, “also to see if the town will ratify the doings of a special meeting of said town held May’ll, 1896, for the purpose of extending the time within which said railroad should be built is hereby ratified and confirmed. “And said town is hereby authorized to subscribe for and receive stock of said railroad company to the amount of [$8,500]. “And the sum of [$S,500] is hereby voted to said railroad company for the said stock and for the building and completion of said railroad to Harmony village. “And the selectmen and treasurer of said town are hereby authorized to issue the bonds of the town to such an amount at a rate of interest not exceeding four per cent, per annum in such denominations time and form as they may deem to the advantage of said town and hereby authorize to sell . and deliver said bonds for the purpose of aiding said (S. & M.

R. R. Co.). “And the selectmen are hereby authorized, upon receiving a sufficient guaranty that the railroad will be completed and operated to Harmony village within six months from date to deliver said bonds or the proceeds thereof as they may deem expedient to said railroad company upon receiving sucl guaranty.” At this meeting of July 13, 1896, however, the town was wholly without power to pass the above or any vote relating to the subject.

Having voted at its legal meeting of June 20, 1895, “upon a question of loaning its credit, or taking stock in, or in any way aiding” a corporation, it was forbidden by the express terms of a Maine statute (1883, c. 51, § 138), to vote again upon the same subject.except at an annual meeting, which the meeting of July 13, 1896, was not. The vote, therefore, being in direct violation of the statute, was wholly null and void.

It had no effect either to ratify the vote of June 20, 1895, or to authorize a subscription by the town for stock in the railroad, or to appropriate $8,500, either for buying the stock or for building the road. Nor did it give the town officers any authority to issue any bonds, or to sell and deliver any for the purpose of aiding the. railroad, or to deliver any to the railroad company, whether upon receiving the guaranty provided for, or upon any other terms.

The selectmen and treasurer proceeded nevertheless, on August 1, 1896, to sign and issue 17 ten-year, 4 per cent, bonds, each for $500, purporting to be bonds of the town.

In each was their recital that the bond was one of the series described, and was— “issued for the purpose of aiding the Sebasticook & Moosehead Railroad Company and in conformity to the vote of said town passed at a special meeting, held July 13, 1896, which vote is recorded in the town records of said town of Harmony.” All the bonds thus issued were immediately delivered together, by the selectmen, to officials of the railroad company, but without receiving any guaranty whatever, from the railroad or from any one else.

These were the bonds now held by the plaintiff, who took them in the following November as security for a loan; and, by' the failure of the borrower to pay, he has since become the owner of them. Except by the recital in the bonds, the evidence does not charge him with knowledge of any irregularities attending their issue, and he stands as a bona fide purchaser.

It is to be noticed that the issuance and delivery of the bonds without guaranty was no less in violation of the requirements imposed by the valid vote passed June 20, 1895, than of the requirements of the void vote on July 13, 1896, according to which they purported to have been issued.

The valid vote required, not merely a sufficient guaranty that the road should be completed and operated within six months, but a guaranty that the necessary money in excess of $8,500 had been actually subscribed and furnished for its completion; and the sufficiency of that guaranty was not left to the selectmen, but was to be passed on by the committee chosen for the purpose. Or if a guaranty were dispensed with, and the bonds issued for stock in the railroad company without guaranty, this was only to be done upon the actual completion of the road within one year from June 20, 1895.

The selectmen, as is assumed, received stock in the railroad company to the par value of $8,500 when they issued the bonds as above on August 1, 1896; but the road had not then been completed, nor was it ever completed by that company, which discontinued all work upon it soon afterward. Creditors attached the company’s property, its equity therein was levied upon, and the mortgage it had given was foreclosed. The town offers in its answer, filed September 2, 1912, to return the $8,500 of stock, alleging it to be worthless; and, of course, on that date it was worthless.

We agree with the learned Judge of the District Court that if the bonds had been in fact issued in conformity with the terms of the vote of June 20, 1895, they could not be held void merely because they recited the void vote of July 13, 1896, as the authority for their issue. Wilkes Co. v. Coler, 180 U. S. 506, 21 Sup. Ct. 458, 45 L. Ed. 642; s. c., 190 U. S. 107, 23 Sup. Ct. 738, 47 L. Ed. 971.

The vote of June 20, 1895, having been the only lawful vote ever passed by the town relating- to an issue of' its bonds in aid of this railroad, the question is how far the selectmen’s recital in the bonds issued concludes the town in the plaintiff’s favor on the question of compliance or noncompliance with’the conditions which that, vote imposed upon the contemplated issue. The general result of the decisions of the Supreme Court cited in his opinion by the learned Judge of the District Court, the earliest being Colonia v. Eaves, 92 U. S. 484, 23 L. Ed. 579, and the latest Evansville v. Dennett, 161 U.

S. 434, 16 Sup. Ct. 613, 40 L.

Ed. 760, is, as his opinion states, that: “Where a statute confers power upon a municipal corporation, upon performance of certain precedent conditions, to execute bonds in aid of the construction of a railroad, * * * and imposes upon certain officers * * * the responsibility of issuing such bonds when certain conditions have been complied with, recitals by such officers that the bonds have been issued in conformity with the statute have been held, in favor of bona fide purchasers for value, to import full compliance with the statute and to preclude inquiry as to whether the precedent conditions had been performed before the bonds were issued.” The same principles no doubt govern when the question is not as to conformity with a statute, but as to conformity with a vote of the municipality imposing precedent conditions.

But in order to enable a bona fide purchaser to invoke them, it must appear that the officers upon whose recital he relies were the officers having authority to determine whether the conditions covered by their recital had been performed or not, and their recital must also have been such as would import compliance with the conditions in all substantial respects. In School District v. Stone, 106 U. S. 183, at page 187, 1 Sup. Ct. 84, at page 87 (27 L.

Ed. 90), one of the decisions relied on as above by the District Court, it is said, after stating the above general rule: “But in all such eases, as a careful examination will show, the recitals fairly imported a compliance, in all substantial respects, with the statute giving authority to issue the bonds. We are unwilling to enlarge or extend the rule, now established by numerous decisions. Sound public policy forbids it.

Where the holder relies for protection upon mere recitals, they should, at least, be clear and unambiguous, in order to estop the municipal corporation, in whose name such bonds have been made, from showing that they were issued in violation, or without authority, of law.” The selectmen’s recital in these bonds, therefore, can conclude the town in the plaintiff’s favor only so far as the selectmen were the officers vested with authority to determine whether the conditions of the vote of June 20, 1895, had been satisfied or not, and as to those conditions regarding which they were vested with such authority only so far as the terms of the recital in the bonds import compliance with them.

If this recital had been that the issue was in conformity with the lawful vote of June 20, 1895, it might perhaps have been true, that vote being valid and unrevoked, that compliance with its conditions was sufficiently recited. Instead of reciting that the bonds were issued in conformity with the lawful vote of June 20, 1895, the recital was- only that they were in conformity with the unlawful vote of July 13, 1896, with a reference to that vote as it appeared on the town records; and the question is whether this can be regarded as importing compliance, in all substantial respects, with the earlier lawful vote.

We are unable to agree with the learned Judge of the District Court that the terms of the invalid vote were substantially the same as the terms of the valid one, and that the bonds may, for that reason, be regarded as substantially reciting a compliance with the provisions of. the vote of June 20, 1895. As has appeared, they differed in respects which we cannot regard as immaterial. By the former vote any guaranty was to be passed upon by the independent committee, whereas, according to the latter illegal vote, it was to be passed on by the selectmen alone.

The former vote, if stock was to be taken, required stock in a completed railroad, free from debt, and, having sufficient stock subscribed for, to construct, equip, and operate it. The latter illegal vote, omitting these material and vital requirements, purported to authorize the issue of the bonds for the stock and for the building, and completion of an uncompleted railroad; that is, upon conditions whereby the town’s interests were by no means so carefully protected as they had been in the lawful vote.

Although the unlawful vote purported to ratify and confirm the lawful one, it was inconsistent with the lawful vote in respect of the conditions imposed. Neither because of the attempted ratification, which was void, nor because of any supposed conformity between the two votes, can we hold that reciting the unlawful vote of July 13, 1896, fairly imported substantial compliance with the vote of June 20, 1895.

The vote of June 20, 1895, was neither mentioned nor expressly referred to in the recital, and it is only through reference to the town records and to the unlawful vote of July 13, 1896, as it there appears, that it can be brought in so as in any way to support or aid the recital. The recital expressly describes the vote of July 13, 1896, as passed at a special meeting, and refers to the town records for its terms.

As it appeared on those records, it showed, by the attempted ratification contained in it, that the town had already voted upon the question involved, could not therefore lawfully vote upon it again at any special meeting, and thus that the recited vote was unlawful.

We are unable to believe that a recital by town officers, which thus afforded a purchaser the means of knowledge that the vote recited as authority for their issue was void and of no effect, can estop the town from asserting that fact, or any fact disclosed by the record of the vote so recited as authority, showing noncompliance with conditions which the town had in fact prescribed.

The plaintiff, when he acquired these bonds, had the means of knowledge from them, and the town records referred to in them, that the conditions of - the recited vote were inconsistent with those imposed by the vote of June 20, 1895, and also that the ratification attempted by the recited vote could not operate as a ratification.

He has to rely upon the recited illegal vote if he seeks, by means of the ratification attempted in it, to extend and enlarge the scope of the recital in the bonds so as to include any of the terms of the earlier vote. .Without examination of the illegal vote, he could not have known that it had attempted any ratification, and examination would have shown him, either that it was void, and therefore no ratification, or that, if-valid, it repealed instead of ratifying the conditions of the former vote.

We are unable to hold that the plaintiff, in taking the bonds, had the right to assume, either from the recital they contained or from the purported vote therein mentioned, that they had been issued in conformity with the only lawful vote of the town upon the subject, so as to preclude the town from showing that in fact there had never been any such compliance. A presumption in his favor, as a bona fide purchaser, that he took the bonds without notice of any circumstances impeaching their validity may be conceded. But, on the facts which appear, we think the town may and does overcome that presumption. 2.

Unless the plaintiff has the right to treat' the bonds as lawfully authorized except so far as their amount is concerned, the relief sought in his bill cannot be granted. Whether or not, if he had that right, the bonds could be adjudged valid and enforced for that proportion of their total amount, with.interest, for which the town might lawfully have bound itself at the time, is a question which would have to be answered' in the negative if, as in Hedges v. Dixon County, 150 U. S. 182, 14 Sup. Ct. 71, 37 L.

Ed. 1044, the appropriation made and the issue of bonds to the amount appropriated must be regarded as one indivisible transaction. In that case the county had voted to issue its bonds to the amount of $87,000 as a donation to a railroad company, without any consideration whatever to the county, whether in the shape of stock or otherwise. The county was at the time allowed by the state Constitution to issue bonds for such a purpose, only to the amount of 10 per cent, of its. assessed valuation — an amount much less than $87,000 — and the bonds were void at law for that reason.

It was held that what the county authorized and carried into execution was one entire transaction; that to reform it so as to curtail the entire issue to such an amount as was within the constitutional limit would involve the making of a different donation from what the county .voted and intended to make, and that there was no jurisdiction in equity so to modify it.

In the present case the issue of bonds was neither intended nor voted as a donation; the bonds, whether duly guaranteed or issued upon completion of the road, were to be issued in exchange for an equivalent amount of stock; and the town got stock to the amount contemplated by the vote, though not in a completed railroad or a road having money enough subscribed for its completion. This stock, it is true, afterward turned out to be worthless; but there is nothing in the record which proves that it was absolutely without value when the town took it, or that it was then so regarded by the parties.

The bonds, though issued together, bore successive numbers from 1 to 17, inclusive. If, in view of all these facts, the transaction need not necessarily be regarded _ as so far entire and indivisible that to adjudge the bonds valid in a proportion of their amount, as prayed for, would be to make for the parties a contract wholly different from that which the town intended and voted, there is authority, not to be lightly disregarded, for saying that the relief which the plaintiff asks might be granted. Dillon, Municipal Corporations (5th Ed.) § 203, and cases cited.

The learned Judge of the District Court regarded the case, in this aspect, as not within the decision in Hedges v. Dixon County, and granted the relief. The view we have taken of the case renders it unnecessary for us to determine whether or not his decree might have been upheld had we been able to agree with him in holding ,the issue of the bonds valid for any purpose in the plaintiff’s favor. The decree of the District Court is reversed, and the case is remanded to that court, with directions to dismiss the bill; and the appellant recovers its costs in both courts.