CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE NINTH CIRCUIT
Fuller, Harlan, Gray, Brewer, Brown, Shiras, Jr., White, Peckham, McKenna
MR. JUSTICE HARLAN delivered the opinion of the court.
This action was brought in the name of Waite, a citizen of Massachusetts, against the city of Santa Cruz, a municipal corporation of California of the fifth class, to recover the principal and interest of certain negotiable bonds, nine in number, and
certain negotiable coupons thereof, two hundred and eighty-two in number, issued April 16, 1894, in the name of the defendant city.
Each bond, signed by "Wm. T. Jeter, Mayor of the city of Santa Cruz," and attested by "O. J. Lincoln, City Clerk," contained these recitals:
"And for the payment of the principal sum [$1000] herein named, and the interest accruing thereon, the said city of Santa Cruz is held and firmly bound, and its faith and credit and all the real and personal property of said city are hereby pledged for the prompt payment of this bond and interest at maturity.
"This 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, entitled 'An act to amend an act entitled "An act authorizing the common council, board of trustees, or other governing body of any incorporated city and 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),' 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 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 canvassed, found and declared in the manner and as 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, as required by law. This
bond ceases to bear interest when due, unless presented for payment."
The parties having by written stipulation waived a jury, the case was determined in the Circuit Court upon a special finding of facts. The result was a judgment against the city for the full amount of the bonds and coupons held by the plaintiff, except as to three coupons transferred to him by the Northern Counties Investment Trust Company. 89 Fed. Rep. 619. That judgment was reversed in the Circuit Court of Appeals with directions to enter judgment for the city. 98 Fed. Rep. 387. The case is here upon writ of certiorari granted upon the application of the plaintiff Waite.
The propositions advanced on behalf of the city are numerous, but most of them are involved in the general contention that there was a want of power in the city to issue the bonds in question, and that nothing occurred that could estop it from disputing its liability even to those who may have purchased them in good faith and for value.
The circumstances under which the bonds were executed should be first set forth. That being done, we will take up such of the questions raised by the assignments of error as are necessary to be determined.
On the 16th day of September, 1889, the City of Santa Cruz entered into a contract with certain persons doing business under the name of Coffin & Stanton, which recited that the former desired to acquire, and the latter desired to furnish, a waterworks system for the city -- the city agreeing to grant to Coffin & Stanton a franchise for the construction of waterworks in Santa Cruz and that firm agreeing to construct or cause to be constructed a waterworks system in conformity with specifications theretofore made by the city engineer. The city agreed to purchase the waterworks after they were constructed and pay for them the sum of $320,000. It was also stipulated that Coffin & Stanton should cause to be organized a corporation to be known as the City Water Company of Santa Cruz, to which the above franchise should be assigned. It was further provided that the Water Company should execute a first mortgage upon all its properties, rights, titles and franchises, then owned or thereafter
acquired, for the payment of bonds (not exceeding $400,000 in amount, except as provided in the contract) to be issued to Coffin & Stanton as the work of construction progressed, they to make all necessary cash advances. The contract provided: "And when said Water Company shall have fully completed said waterworks, then said Water Company shall convey absolutely to said city of Santa Cruz all its property, rights, titles and franchises, to have and to hold forever, subject only to the mortgage and to the deed of trust or deed of trust or escrow hereinbefore mentioned. . . . And said Water Company shall commence operations on the construction of said waterworks as soon as practicable, and shall have the whole completed within one year of such commencement."
Pursuant to the above agreement the city, by ordinance, granted to Coffin & Stanton a franchise and right of way to construct the waterworks, and such franchise and right were assigned by them to the City Water Company, incorporated September 27, 1889.
Under date of May 1, 1890, the Water Company, pursuant to that agreement, executed a mortgage or deed of trust to secure the payment of four hundred bonds of $1000 each. That was done in order to obtain money for the construction of the proposed waterworks.
Subsequently, March 29, 1892, the Water Company executed a deed to the city, which recited that the waterworks had been fully completed to the satisfaction of the city and had been accepted by it. By that deed the Water Company conveyed its entire property, rights, power, privileges and franchises to the city, to have and to hold the same, "subject, however, to said mortgage or deed or trust, and all the obligations thereby imposed, which bonds, mortgage or deed of trust, and obligations, the party of the second part [the city] agrees to pay and perform."
When the act of March 1, 1893, referred to in the bonds was passed, as well as at the time the bonds were issued, the constitution of California provided that "no county, city, town, township, board of education or school district shall incur indebtedness or liability in any manner, or for any purpose, exceeding
in any year the income and revenue provided for it for such year, without the assent of two thirds of the qualified electors thereof, voting at an election to be held for that purpose, nor unless, before or at the time of incurring such indebtedness, provision shall be made for the collection of an annual tax sufficient to pay the interest on such indebtedness as it falls due, and also to constitute a sinking fund for the payment of the principal thereof within twenty years from the time of contracting the same. Any indebtedness or liability incurred contrary to this provision shall be void." § 18, Article XI, Constitution 1879.
The ordinance referred to in the bonds -- the one of the 26th day of February, 1894, (No. 314) calling a special election of the qualified electors of the city to determine the question of refunding "the bonded indebtedness of said city and issuing bonds therefor, and providing for the payment of the same" -- stated that "the outstanding indebtedness evidenced by bonds of said city," which "it is proposed to refund," consisted of (1) 450 bonds, of $500 each, issued in 1889, the proceeds of which had been used "in the purchase and construction of the city waterworks;" (2) 89 first mortgage bonds of the Water Company, of date May 1, 1890, "which said bonds outstanding were, at the time of the conveyance by the City Water Company to the City of Santa Cruz of the property known as the city waterworks, and now are, a valid lien and charge upon the property known as the city waterworks, and become thereby a part of the bonded indebtedness of the city;" and (3) 65 municipal improvement bonds of $500 each, dated September 23, 1887, and 26 municipal improvement bonds of $250 each, of like date.
The ordinance provided for an issue of 360 bonds of $1000 each, payable to bearer, and carrying four per cent interest, payable annually, and which should be of the character known as "serials."
The same ordinance provided for a special election on the question of refunding the above bonds, and prescribed the form of the refunding bonds. That form contained the same recitals, word for word, that appear in the extract from the bonds found
at the beginning of this opinion. The ordinance thus concluded: "§ 12. If, upon the canvass of the returns of said election, it shall be found that two thirds of the voters thereat have voted in favor of refunding said indebtedness, issuing bonds therefor and providing for the payment of the same, then and thereafter said indebtedness shall be refunded, bonds issued therefor and provision made for the payment of the same in the manner herein and as by law provided."
On the same day the city council passed an ordinance, No. 315, which provided for notice of the special election so ordered, such notice to describe fully the indebtedness to be refunded. The required notice was given and contained the same description of the city indebtedness proposed to be refunded as was given in ordinance No. 314. The election was held on the day fixed by the ordinance and notice. The result was that 538 votes were cast in favor of and 57 votes against the proposed refunding of the city's indebtedness. So that more than two thirds of the qualified electors voting were in favor of refunding the then "bonded indebtedness of the said city," including the above 89 first mortgage bonds issued by the Water Company and which the city had assumed to pay when it purchased and took the deed for the waterworks.
On the 26th day of March, 1894, the city passed ordinance No. 320, which provided for refunding the indebtedness and issuing bonds therefor in accordance with the will of the voters at the special election.
That ordinance provided that each bond should contain the same recitals as those set forth in ordinance No. 314 and in the above notice of the special election, as well as this further recital: "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."
By the same ordinance provision was made for giving notice by publication of the purpose of the mayor and common council to sell the bonds to the highest bidder, and inviting sealed bids from purchasers, and for levying and collecting an annual tax for forty years to pay such bonds and coupons -- the moneys
so collected to constitute a sinking fund for the ...