CITY OF SANTA CRUZ v. WAITE, 98 F. 387

ROSS, Circuit Judge. The constitution of California provides for the classification of municipal corporations. The plaintiff in error (defendant in the court below) is, and was at all the times mentioned in the record, a municipal corporation of the fifth class, organized and existing under and by virtue of a statute of the state of California, approved March 31, 1806 (St. 1865-66, p. 547), entitled “An act to incorporate the town of Santa Cruz,” and

an act supplemental thereto, approved March 11, 1878, entitled “An act to reincorporate the city of Santa Cruz” (St. 1878, p. 189). The present is an action at law to recover the amount alleged to be due on 9 refunding bonds and 282 interest coupons attached to the same and to other refunding bonds, alleged to have been issued by the city of Santa Cruz on the 16th day of April, 1894, under and by virtue of

an act of the state of California approved March 1, 1893, and entitled “An act to amend

an act entitled

An act to authorize the common council, board of trustees, or other governing body of any incorporated city or town, other than cities of the first class, to refund its indebtedness, issue bonds therefor, and provide for the payment of the same,’ approved March 15, 1883” (St. 1893, p. 59). While the suit directly involves only the amount alleged to be due upon the bonds and coupons mentioned, it necessarily involves the validity of the entire issue under that act, consisting of 360 bonds of f1,000 each, purporting to have been issued at the same time.

It appears from the findings of the court below that on February 26,1894, the city of Santa Cruz had an outstanding bonded indebtedness of $271,000, or thereabouts, and was also the owner of certain waterworks, and necessary appurtenances thereto, including land, water rights, etc., theretofore purchased by it from the City Water Company of Santa Cruz, a private corporation.

The waterworks and appurtenant property were subject to a mortgage, which had been placed thereon by the City Water Company of Santa Cruz for the purpose of securing an outstanding bonded indebtedness of that corporation in the sum of $89,000 and interest thereon.

On the said 26th day of February, 1894, the common council of the city, deeming it for the best interests of the city to refund its bonded indebtedness under the provisions of the act of March 1, 1893, adopted an ordinance, which was duly approved by the mayor, providing for a special election to be held in the city of tíanta Cruz on the 13 th day of March, 1894, at which there should be submitted to its qualified electors the question of refunding the outstanding bonded indebtedness of the city.

The indebtedness which it was thus proposed to refund was described in the ordinance as consisting not only of certain bonds of the city, amounting to the sum of $271,000, but also “eighty-nine (89) first mortgage bonds (with interest thereon from November 1, 1893) of the corporation, the City Water Company of Santa Cruz, heretofore issued by said corporation, the City Water Company of Santa Cruz, which bonds bear date May 1, 1890, and are of the denomination of one thousand ($1,000) dollars each, and bearing interest at the rate of six (6) per cent, per annum, payable semiannually, and are secured by a mortgage or deed of trust upon the property known as the ‘City Waterworks of Santa Cruz,’ executed by the City Water Company of Santa Cruz, as party of the first part therein, to the Holland Trust Company of New York, as trustee, party of the second part therein; and which said bonds outstanding were, at the time of the conveyance by the City Water Company of Santa Cruz to the City of Santa Cruz of the property known as the ‘City Waterworks,’ and now are, a valid lien and charge upon the said property known as the ‘City Waterworks,’ and became thereby a part of the bonded indebtedness of the city of Santa Cruz.” More than two-thirds of the qualified electors of the city voted at the special election thus (tailed in favor of the proposition to refund the I hen outstanding bonded indebtedness, as described in the ordinance, and thereafter, to wit, on March 26,1894, the common council of the city passed, and its mayor approved, an ordinance for the purpose; of carrying into, effect the will of the electors as expressed at the election.

This ordinance provided for the issuance of 360 interest-bearing bonds of the city of the denomination of §1,000 each, and also directed that said bonds should he signed by the mayor and city clerk, and should contain the following recitals: “Tliis bond is one of a series of bonds of like date, tenor, and effect, issued by the said city of Santa Cruz for the purpose of refunding the bonded indebtedness of said city, and issuing bonds therefor, and providing for the payment of the same under, and in pursuance of. and in conformity with the provisions of

an act of the legislature of the state of California, ‘An act to amend

an act entitled “An act authorizing the common council, board of trustees, or other governing body of any incorporated city of town, other than cities of the first class, to refund its indebtedness, issue bonds therefor, and provide for ¡he payment of the same” (approved March 15, 1883),’ approved March 1, 1893. and in pursuance of and in conformity with the constitution of the state of California and the ordinances of the city of Santa Cruz, and in pursuance of and in conformity with a vote of more than two-thirds of all the qualified electors of said city of Santa Cruz voting at a special election duly and legally called and held and conducted in said city, as provided under said act, on Tuesday, the thirteenth day of March, 1894, notice thereof having been duly and legally given and published in the manner as required by law, and after the result of said election had been duly canvassed, found, and declared in tbe manner and a» required by law; and it is hereby certified and declared that all acts, conditions. and things required by law to be done precedent to and in the Issue of said bonds have been properly done, happened, and performed in legal and due form, and as required by law.” The ordinance further directed that such bonds should, after public notice inviting bids therefor, be sold to the highest bidder, for not less than their face value, in United States gold coin, to be paid on delivery at the city treasurer’s office in the city of Santa Cruz.

The bonds were offered for sale, but there were no bidders for them; and on April 16, 1894, the date to which the common council of the city had regularly adjourned, there were present William T. Jeter, ■ assuming to act as mayor, and J. Howard Bailey, F. J. Hoffman, E. G. Green, and P. W. Lucas, assuming to act as the common council, of the city. At this meeting, a proposition, theretofore made by the firm of Coffin & Stanton, to take all of the bonds, was accepted, upon condition that satisfactory security for its faithful performance by Coffin & Stanton be furnished.

This proposition was dated February 27,1894 (the day after the adoption of the ordinance calling the election), and was, in substance, one by which Coffin & Stanton were to purchase the refunding bonds at par value, less 3 per cent., without the payment of any money at the time of their delivery, or giving any other consideration therefor than their promise to take up the outstanding bonds which were to be refunded, and forward the same, “from time to time, to the city, for cancellation.” On April 23, 1894, the said Jeter, assuming to act as mayor, and the said Bailey, Hoffman, Green, and Lucas, assuming to act as the common council, of the city, publicly met, pursuant to adjournment, and without protest from any one accepted and approved a bond presented by Coffin & Stanton for the faithful performance by them of the agreement contained in the proposition mentioned, and thereupon directed the city clerk of the city to deliver to that firm the entire issue of the refunding bonds referred to.

The bonds were, in accordance with this direction, delivered to Walter Stanton, of the firm of Coffin & Stanton, on April 24,1894, and thereafter Coffin & Stanton sold the same to various parties, from some of whom the plaintiff below (defendant in error here) claims title to the bonds and coupons sued on. The plaintiff is only the nominal owner of these bonds and coupons, the same having been assigned to him for the purpose of collection only.

Coffin & Stanton never complied, in whole or in part, with the agreement under which the bonds were delivered to them, and the city of Santa Cruz never received any benefit whatever from their sale; the entire proceeds thereof having been appropriated by Coffin & Stanton, who are insolvent. The bonds are under the seal of the defendant city, contain the recitals set out, and are signed: “Wm, T. Jeter, Mayor of the City of Santa Cruz. Attest: O. J. Lincoln, City Clerk.” They were so signed on the 16th day of April, 1894, on which day Jeter’s successor to the office of mayor duly qualified.

The court below held — and rightly held — that the act of March 1, 1893, afforded no authority for the issuance by the city of Santa Cruz of any bonds for the purpose of refunding the indebtedness of the City Water Company, which was a private corporation.

The court further held that, as the bonds issued by the city under that act for that purpose were in no way segregated from others of the same issue, the plaintiff could only be permitted to recover by sustaining his contention that he was a bona fide purchaser without notice of this infirmity in the bonds, and as such was protected by the recitals contained therein. This contention the court below sus-tamed, and accordingly gave judgment for the plaintiff. (C. C.) 89 Fed. 619.

The federal courts have always protected with a firm hand the rights of bona fide creditors of municipal corporations, uniformly holding' that the bonds issued by such corporations under granted power, negotiable in form, are valid in the hands of a bona fide holder, notwithstanding irregularities in their issue, or even in the nonperformance of prior conditions, where the determination of the facts of such performance are by the law left to the determination of the municipal officers, and they incorporate in the bonds which are put upon the market proper recitals of such performance.

The obvious reason for this is that, where the law under which such securities are authorized to he issued commits to the municipal representatives the determination of the conditions precedent, and those representatives recite upon the face of the bonds such performance, common honesty demands that the municipality be estopped to deny the truth of the recitals as against the bona fide purchaser of the bonds.

But it is equally well settled that where the power to issue such bonds did not exist, or whore the law under which they are issued requires certain facts to he made a matter of record, open to the inspection of every one, there can he no implication that it was intended to leave such facts to be determined by the officers charged with the duty of issuing the bonds, aud conclude by their recitals contrary to the facts so recorded. Sutliff v. Commissioners, 147 U. S. 230, 13 Sup. Ct. 318, 37 L. Ed. 145; Dixon Co. v. Field, 111 U. S. 83, 4 Sup. Ct. 315, 28 L. Ed. 360.

It is, as a matter of course1, not denied that every purchaser of a municipal bond is charged with notice of the law1 under and by virtue of which it is issued. In the present case that law is found in the statute of March 1, 1893 (St. 1893, p. 59), the first and second sections of which are as follows: “Section i.

That whenever any incorporated city or town, other than cities of (lie first class, in this siate, has an outstanding indebtedness, evidenced by bonds and warrants thereof, the common council, board of trustees, or otiles* governing body thereof, shall have power to submit 1» the qualified electors of such city or town, at an election to bo held for that purpose, the question of refunding such indebtedness. ¡&¡id election, shall be called and lield in the same manner in which other elections are held in such city or town.

The notice of such election shall recite the indebtedness to be refunded, together with the denomination, character, time of payment, rate of interest, as well as all other details of the bonds proposed to be issued. Such bonds shall be of the character known as ‘serials,’ one fortieth of the principal being payable each year, together with interest due on all sums unpaid.

Said bonds may he Issued in denominations not to exceed one thousand dollars, nor loss than one hundred dollars; principal and interest being payable ⅛ gold coin or lawful money of the United States, and either at the office of treasurer of such city or town, or at a designated bank situated in the cities of San Francisco, New York, Boston, or Chicago. Interest upon the same shall not exceed six per cent, per annum, and may be payable semi-annually.

Said bonds shall be sold in the maimer provided by such -city council, or oilier governing body, to the highest bidder, for not less than ¡heir face value, in the same character of money in which they were payable. The proceeds of such sale shall he placed in tile treasury to the credit of the funding fund, and shall be applied only for the purpose of refunding ilie indebtedness for which they have been issued.

Said common council or other governing body, shall, at the time of fixing the general tax levy for each year, and in ihe same manner for such tax levy provided, levy and collect annually, each year, sufficient money to pay one fortieth part of the principal of such bonds, and also the annual interest upon the portion remaining unpaid. “See. 2.

Whenever sufficient money is in the funding fund, in the hands of the treasurer, to redeem one or more of the outstanding bonds proposed to be refunded, he shall publish once a week for two weeks in some newspaper of general circulation published in such city or town, if there be any, a notice to the effect that he is prepared to pay such bond 'or bonds (giving the number thereof), and if the same are not presented for redemption within thirty days after the first publication of such notice, the interest on such bonds will cease.

He shall, at the same time, deposit in the post office a copy of such notice, inclosed in a sealed envelope with the postage paid thereon, addressed to the owner or owners of such bond or bonds at the post office address of such owner or owners, as shown by the record thereof kept in the treasurer’s office. If such bond or bonds are not presented within the time specified in such notice, the interest thereon shall then cease, and the amount due be set aside for the payment of the same, whenever presented.

All redemption of bonds shall be made according to the priority in the order of their issuance, beginning at the first number. Whenever such outstanding bonds are surrendered and paid, the treasurer shall proceed to cancel the same by indorsing on the face thereof the amount for which they are received, the word ‘Cancelled,’ and the date of cancellation.

He shall also keep a record of such bonds so redeemed, and shall make a report of the same to the common council, or other governing body of such city dr town, at least once a month, accompanying the same therewith by the bonds which have been taken up and cancelled.” It will be noticed that there is in this act no express grant of power on the part of the municipal authorities to issue any bonds.

There is an implied power; but the implication is, not to issue bonds for any and all purposes, but refunding bonds, with which to take up the outstanding bonds and warrants of the city, provided a majority of the qualified electors of the city should so vote upon the submission of the question to them in the mode described by the_ act.

Whether the then outstanding indebtedness of the city should be refunded or not was not left to the determination of the municipal authorities, but they were, by the statute, empowered to submit that question to a vote of the qualified electors of the city, specifying in the notice of election the indebtedness to be refunded, together with all details of the proposed issue. The power thus conferred on the mayor and council could only be exercised at a meeting of the municipal board. Such bodies can only act by order, ordinance, or resolution, as every one is bound to know. Wesson v. Saline Co., 20 C. C.

A. 227, 73 Fed. 919; 15 Am. & Eng. Enc. Law, pp. 1028-1030, and cases there cited. In the present instance the action of the mayor and council was by ordinance, as appears from the findings of the court below. Such ordinance was a part of the public records of the city, which, by its charter, are required to be kept “in large, well bound, uniform, and suitable books.” St. 1875-76, p. 203.

The indebtedness of the city, thus evidenced by its outstanding bonds and warrants, and proposed to be refunded by the issuance of other bonds, the act of March 1, 1893, authorized the mayor and common council of the city to- specify, together with the details of the proposed issue, and submit the question refunding the specified indebtedness, upon the designated terms, to the qualified electors of the city for determination.

In the event the majority of the votes should be in favor of the proposition, then the municipal authorities were impliedly empowered to issue refund-mg bonds therefor, but for no other purpose. The public record which the act of March 1, 1893, taken and read, as it must be, in connection with the charter of the city, required to be made by order, ordinance, or. resolution, disclosed to all the world the specific indebtedness that it was proposed by the municipal authorities i.o refund, and in respect to which the qualified electors of the city were called upon to vote.

The officers impliedly charged with the issue of such refunding bonds were not in any manner authorized to make any certificate or representation to prospective purchasers in respect to the character of the indebtedness evidenced by outstanding bonds or warrants of the city in lieu of which the refunding bonds were authorized to be issued.

On the contrary, the statute itself was (dear notice to every person that upon tiie records of the governing body of the city was required to be entered the specific indebtedness proposed to be refunded, together with the details of fhe proposed issue of refunding bonds, and that it was only for such specified indebtedness that any refunding bonds could be issued. To that record every purchaser was referred by the very act under which alone the bonds in suit were issued.

The notice of election directed by this act to be prescribed by the mayor and common council of the city occupies substantially the same position that the resolution did in the case of Lehman v. City of San Diego, which was lately before this court, and is reported in 27 C. C. A,. 668, 83 Fed. 669. The present case is, we think, clearly within the doctrine of that ease and of Sutliff v. Commissioners, supra, «and Dixon Co. v.

Field, supra, and kindred cases, and must be ruled by them. entertaining these views, it is not necessary to decide any other point made and argued by counsel, except that as to the jurisdiction of the court. We have no doubt of the existence of jurisdiction.

Tn support of the point made on behalf of the plaintiff in error against it, it is argued that the action is substantially .a proceeding in the nature of an application for a writ of mandamus to compel the officers of the city to perform the duty of levying and collecting the necessary taxes for the payment of the bonds, which, without the issuance of such writ, and judgment in favor of the plaintiff, could not be enforced. The action is one at law upon certain bonds and coupons containing a promise on the part of the defendant to the suit “to pay to the bearer, for value received,” so many dollars.

The amount in controversy exceeds $2,000, and the requisite diverse citizenship is alleged and found to exist. Conceding that under the constitution and laws of California the bonds and coupons sued on could only be paid out of the special fund provided for by the act under which they were issued, if the act and bonds be valid — queslions raised and contested in the suit, — -no presumption can be indulged that there are no moneys in the fund provided for.

On the contrary, if the act be valid, the presumption is the other way, to wit, that the taxes provided for were levied by the officers charged with the duty of levying them, and that the moneys so raised were in the fund. It was not, therefore, as argued by counsel for the plaintiff in error, necessary that the complaint should show the levy of such taxes, and the existence of moneys in the special fund.

In such cases, where the plaintiff recovers, and there are no moneys in the fund out of which an execution issued upon the judgment can be satisfied, and this because of the refusal of the proper officers to levy the taxes, the federal courts will issue a writ of mandamus in aid of its already acquired jurisdiction. This is quite distinct from an original proceeding for the issuance of a writ of mandamus, which it is well settled cannot be maintained in the federal courts. Heine v. Commissioners, 19 Wall. 655, 22 L. Ed. 223; Bath Co. v. Amy, 13 Wall. 244, 20 L. Ed. 539; Board v. Aspinwall, 24 How. 376, 16 L.

Ed. 735; Von Hoffman v. City of Quincy, 4 Wall. 535, 18 L. Ed. 403; Riggs v. Johnson Co., 6 Wall. 166, 18 L. Ed. 768; Walkley v. City of Muscatine, 6 Wall. 481, 18 L. Ed. 930; Board v. McMaster, 15 C. C. A. 353, 68 Fed. 177; Keene Five-Cent. Sav. Bank v. Lyon Co. (C. C.) 90 Fed. 523; Wilson v. Knox Co. (C. C.) 43 Fed. 481; Shepard v. Irrigation Dist. (C. C.) 94 Fed. 1. The judgment is reversed, and cause remanded to the court below, with directions to enter judgment for the defendant on the findings