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The Liability of Municipal Corporations upon Instruments of Debt.
This is a subject of more than ordinary interest in Tennessee, from the action of some of our corporate organizations in issuing large amounts of municipal obligations, a portion of which would probably be held at least partially defective in point of consideration in a suit between the original payee and the holders. The finances of nearly every municipality of considerable size in our country, have been greatly mismanaged, and instruments issued constituting obligations upon them, the consideration of which, in the last analysis, would be found to be more or less inequitable. Especially has this been the case in regard to the bonds of counties and cities issued by railroad companies in many of the States of the Northwest and in portions of Pennsylvania, which were emitted often in flagrant disregard of the condition precedent imposed by the acts of their Legislatures authorizing the issues. And thus the subject is one of very general interest. We propose to cast a cursory glance over the field, and allude to some of the more pronounced decisions which we have met with.
The various accounts against cities and counties, constituting what is termed their floating debt, are usually settled with city and county warrants, being merely an order from one officer to another to pay to the parties entitled, the proper amounts. Usually the warrant is required to be countersigned by another corporate functionary. Thus, what were familiarly termed in Nashville “corporation checks," were orders drawn by the Recorder upon the Treasurer and countersigned by the Mayor. In some of the county cases, the orders have been drawn by the Clerk on the Treasurer and countersigned by the Chairman. These instruments are held by all the authorities to be corporate promissory notes. See Story on Promissory Notes, section 16; Clark vs. Des Moines City, 19 Iowa, 24; Campbell vs. Polk County, 3 Iowa, 470; 15 N. Y., 337; 23 N. Y., 570; 3 Manning & Gra., 576; 6 McLean, 447; Kelly vs. Mayor, &c., of Brooklyn, 4 Hill, 263, etc., etc. Sometimes an effort has been made to treat such words on the face of the document as, "on account of street department," &c., as restricting the payment to a particular
fund, and as, therefore, taking the instrument out of the category of promissory notes. But the courts have never sustained such a position. In Clark vs. Des Moines City, already cited, some of the warrants sued on, were drawn, "payable out of any monies in the Eastside Road fund not otherwise appropriated,” etc. And here the charter of the city provided that the moneys collected for road purposes on either side, should be expended where collected. But even here the court held that the reference to the particular fund did not concern the creditor of the city, but was merely conducive to the proper keeping of accounts between the different departments. It has sometimes been contended that the warrants could not be notes, because the charter of the corporation no where conferred the power to make a note. But it has generally been held that, independently of express statutory provisions, a corporation may issue negotiable paper for a debt contracted in the course of its legitimate business. Indeed, it is well settled that a corporation may adopt any means conducive to carry out a legitimate end. The difference between an individual and a corporation in this respect, has reference to ends not means. An individual may seek any end not forbidden by law. A corporation may seek only those ends contemplated by its charter. But the end sought being within the scope of the charter, all the means which would be open to an individual seeking the same end, are equally open to a corporation—that is, unless a particular means be expressly withheld. In Union Bank vs. Jacobs, 6 Humphreys, 515, our Supreme Court asserted this doctrine in broad language. And in 2 Coldwell, 655, the doctrine of this case was applied to municipal corporations by the same court. A legion of authorities might be cited to the same effect. Mr. Parsons, in his work on Bills and Notes, p. 164, thu3 sums up the result: “In this country it may be regarded as settled that the power of corporations to become parties to bills and notes is co extensive with their power to contract debts. Whenever a corporation is authorized to contract a debt, it may draw a bill or give a note in payment. Every corporation may, therefore, become a party to bills and notes for some purposes. Thus a mere religious corporation may need fuel for its rooms, and, as an economical measure, may buy a cargo of coal, and give its note for it; and such a note would undoubtedly be valid in this country.” The instruments in question, then, are clearly promissory notes. A distinction has frequently been attempted to be made between the rules of law applicable to municipal and private corporations, but the overwhelming current of authorities is to the contrary. There are indeed, in the New England States, and in some of the Northwestern States—deriving their system of polity from themwhat are called quasi corporations, touching which it is said that they are so feebly endowed with corporate life, and so hampered, controlled and directed in the exercise of the powers they possess,
that they are sometimes spoken of as nondescript in character, and as occupying a position somewhere between that of a corporation and a mere voluntary association of citizens. They are said to be called qursi corporations, to distinguish them from corporations in general, which possess more completely the functions of an artificial entity. Chief Justice Parker of Massachusetts, in speaking of school districts, said: “They may be considered under our institutions as quasi corporations, with limited powers, co-extensive with the powers imposed upon them by statute or usage, but restrained from the general use of authority which belongs to these metaphysical persons by the common law.” One peculiarity of this exceptional character is, (7 Mass., 187,) that having no common funds and no legal means of obtaining any, each corporator is liable to satisfy any judgment obtained against the corporation. In School District vs. Wood, 13 Miss., 192, the court say that these entities are not strictly corporations, but only m'inicipal boʻlies, and that it will not do to apply to them in all cases, the law of corporations. These limited corporations are not held to so strict a liability for acts of their agents, as others in the possession of a full corporate life under a charter. Says Judge Cooley, in his work on Constitutional Limitations, p. 247: “The reason which exempts these public bodies, etc., does not apply to villages, boroughs and cities, which accept special charters from the State. The grant of the corporate franchise in these cases, is usually made only at the request of the citizens to be incorporated, and it is justly assumed that it confers a valuable privilege. Larger powers of self-government are conferred than are confided to towns or counties, larger privileges in the acquisition and control of corporate property, etc." The author adds that, in regard to the liability of these chartered municipalities for the use of their franchises, they stand on the same footing as private corporations, which, having accepted a valuable franchise, are held to contract by the acceptance for the performance of these duties. He further adds: “In regard to all those powers which are conferred upon the corporation not for the benefit of the general public, but of the corporators, as to con
struct works, to supply a city with water or gas works, or sewers, and the like, the corporation is held to a still more strict liability. So that the cases which might be accumulated from the States, in which these qursi corporations exist, in which in regard to these corporations, distinctions have been taken between them and private corporations, do by no means establish that any distinctions exist between municipal corporations with charters, or counties distinctly made corporations by law, as is the case in our State, and perhaps in most other States; since we see that the distinction taken, when taken at all, is between these quasi corporations and determinate municipal corporations, such as villages, boroughs and cities.
It will be found that the text books upon corporation law, in support of every principle, draw their cases indiscriminately from municipal and private corporations. For instance, in reference to the principle that an express authority is not necessary to confer upon a corporation the power to deal in credit, or become drawer, indorser or acceptor of a bill of exchange, Angell and Ames, section 257, cite irliscriminately both classes of cases. In support of the principle that corporations are bound by the acts of their agents though not empowered under the corporate seal, and that they may be bound by implication from the acts of their agents, the same indiscriminate citations are made: See section 237. Some of these, indeed, seem to be cases of the nondescript quasi corporations we have been considering. So also, in regard to the principle that not only estoppels technically so called, but estoppels in pais, operate both for and against corporations: See note 3, sec. 238, same authors. Similarly as to the binding force of the agent's representations as to his authority, the Court of Appeals of New York, in Gould vs. The Town of Stirling 23 N. Y., 456, cite Farmers and Mechanics' Bank vs. Butchers and Drovers' Bank, 16 N. Y., 125. And the Supreme Court of the United States, in what is perhaps the leading case upon the subject, in our national jurisprudence, Commissioners Knox County vs. Aspinwall, 21 How., 545, cite and apply the decision of the Court of Queen's Bench in the case of British Royal Bank vs. Tarquand, 6 Ellis and Blackburn, 327. In truth, for many purposes, municipal corporations are regarded as private corporations. This is clearly set forth in Briley vs. Mayor, &c., of New York, 3 Hill, 531. Here the court said that those powers granted for public purposes belonged to the corporation in its character of a government. But that in regard to those which were granted for the purposes of private advantage and emolument, the corporation quoad hoc was to be regarded as a private company. That, as to these, it stood upon the same footing as an individual or body of persons on whom the like special franchises had been conferred. Similarly, in 1 Brown's Chancery, the case of Moodalay vs. Erst In lia Company, is cited, as showing that for some purposes, this august semi-sovereign body was to be regarded as a mere private corporation. The same views were enounced in Detroit vs. Corey, 9 Mich., 165; Stoors vs. Utica, 17 N. Y., 104; 5 Cal., 306, and in Lloyd ve. Mayor, &c., of New York, 5 N. Y. Reports. In the last mentioned case, the principle is thus tersely expressed: “The corporation of the City of New York possesses two kinds of powers, one governmental and public, and to the extent they are held and exercised, is clothed with sovereignty ;-the other private, and to the extent they are held and exercised is a legal individual. The former are given and used for public purposes, and the latter for private purposes. While in the exercise of the former the city is a municipal government; and while in the exercise of the latter, a corporate, legal individual.” The probability is that by far the larger portion of city municipal action has reference to matters with regard to which the city is to be viewed as a private person.
The courts do not now lean towards the defense of ultra vires upon the part of a corporation. There is some plausibility in the argument metaphysically considered. For if a corporation is the creature of its charter, it would seem to follow that no action whatever outside of the charter-ultra vires--can be regarded as corporate action. But this doctrine would go too far. It would exempt a corporation from all liability for a tort, since the charter never anthorizes the tort. It is now settled that a corporation may be indicted not merely for non-feasonce, but also for misfeasance; 2 Gray, 339; 27 Vt., 103; 9 Q. B., 315.
In Bank Chilicothe vs. Chilicothe, 7 Ohio, 358, the town relied upon its want of power to borrow as a defense against a suit for borrowed money. The Court made use of the following language: “Although corporations have existed for centuries, we have found no case where inability to contract has been set up to avoid payment of their debts. There are, it is true, many cases where the powers of partic
, ular corporations bave been investigated, and they have been held to have exercised powers not granted to them, in consequence of which their acts were void. But these have been cases where the corporations themselves have been striving to set up or enforce powers; not