City of Tyler v. L. L. Jester & Co. ( 1904 )

Defendants in error sued the city of Tyler to recover upon seven notes, being numbers 2, 3, 4, 5, 6, 7 and 8 of a series of ten notes, each dated on the 20th day of August, 1897, payable to the Tyler National Bank or bearer at respectively one to ten years from date, according to the number of the note. Each of the notes bore 6 per cent interest, payable semiannually on the 20th days of February and August of each year until the maturity thereof, and was for the sum of $1700, aggregating $17,000. Coupons were attached representing each installment of interest which might become due to the time of maturity of the note. Each note contained the following paragraph: "This note is number Two and is one of a series of ten notes of like tenor and date numbered from one to ten respectively, all of which ten notes are issued in lieu of certain notes, warrants and city scrip issued by the city of Tyler in payment of current debts of said city, a list of which is embodied in an ordinance, passed by the city council of the city of Tyler, Texas, on the 20th day of August, 1897, and this note is authorized by said ordinance. If the city of Tyler should fail to pay as many as two of said coupons as they become due successively, that is, if any two of said coupons should remain unpaid at any one time, then this note shall, at the option of the holder, become due and payable, the maturity date, hereinbefore provided, to the contrary notwithstanding, and should this note be placed in the hands of an attorney for collection because of failure to pay same when due, then the city of Tyler agrees to pay all costs of collection including ten per cent on the principal and interest then due for collection fees."

From the conclusions of fact found by the Court of Civil Appeals we copy the following:

"The city of Tyler is a municipal corporation organized and acting under the general laws of the State. Said city did not at the time of the execution of the notes sued on, nor did it ever at any time, contain as many as ten thousand inhabitants. On April 28, 1887, the appellant city for a cash consideration of $12,500 sold its water works system to L.B. Fish and associates and granted to said vendees and their assigns the exclusive privilege of establishing and maintaining a system of waterworks for the purpose of supplying water to said city and its inhabitants. The ordinance authorizing this sale and granting this franchise provides for the extension and enlargement of the waterworks plant; regulates the manner in which the streets are to be used by the water company; reserves the right in the city to require additional extension; fixes the rate to be charged the city for rental of fire hydrants at $50 a year for each hydrant, payable in quarterly installments on the first day of February, May, August and November of each year, and agrees that the city shall rent such a number of fire hydrants to each mile of extension as the city council may designate for thirty years, and that it will pay legal interest on all sums that may become due the company if same are not paid at maturity. The Tyler Water Company became the assignee of the property and franchise granted to Fish, and on June 12, 1889, made a contract with the city which was approved by the city council to furnish 100 fire hydrants for the use of the city, to be paid for under the terms of the ordinance granting the original franchise except that the payments accruing for the first year were not to be collected before December 31, 1890. This contract was to continue during the life of said franchise. The notes and warrants in extension of which the notes sued on were given are thus described in the ordinance authorizing the issuance of the new notes:"

Here follows a particular statement of the notes funded to the amount of $17,000.77.

"Several items of indebtedness evidenced by these notes and warrants are shown to have originated as follows: The six notes for $500 and the note for $560 were given in lieu and in extension of a note for $3000 executed by appellant in favor of Tyler Water Company in January, 1893, and payable on May 1, 1894, as shown by the following entry in the minutes of the city council:

"`On motion the finance committee, mayor and secretary were authorized to take up and cancel a note for $3000 given Tyler Water Company in January, 1893, for one year's water, and due May 1, 1894, and issue therefor six notes of $500 each and one for interest at the rate of 8 per cent per annum.'

"These notes all bear date May 4, 1895, and are payable to the Tyler Water Company on or before May 4, 1896, with interest from date at the rate of 8 per cent per annum, and recite that they were authorized by an order of the city council entered of record May 3, 1895. No ordinance or resolution of the city council is shown authorizing the issuance of the $3000 note. The debt represented by the notes of $1299.60 and $585 respectively originated as follows: On January 8, 1894, the city issued to the Tyler Water Company four warrants for water furnished in 1893, numbered and in the following amounts:"

Here follows a description of four warrants aggregating $1884.60.

"The following is the only entry on the minute book covering these warrants: `The bills and salaries were read and ordered paid.' This entry appears in the minute book of the first meeting of the city council in January, 1894.

"The two constituent notes substituted for these warrants were executed October 11, 1894, and payable October 11, 1895, with 6 per cent interest from date, and each recited that it was executed under an order of the city council passed on October 5, 1894. The minutes of the city council of date October 5, 1894, contain the following entry:

"`H.H. Rowland came before the city council asking that the city give him a new note in lieu of one given January 1, 1893, for $2762.50 for water for 1892. On motion it was ordered that the note be renewed for one year, at 8 per cent interest, and ordered that the secretary issue 6 per cent notes for amounts held by the members of the water company in the settlement for 1893.'

"The notes No. 1360 for $500, No. 1316 for $500, and No. 1315 for $548.48, were given in lieu of the following warrants issued by the appellant." The detailed statement is omitted.

"The remaining indebtedness of $345.10, which went to make up the $1548.48 covered by these notes, was evidenced by warrants the origin and amounts of which are not shown. These notes were each executed March 10, 1894, and were payable to bearer on or before January 1, 1895, with 6 per cent interest from January 1, 1893, and each refers to the others and recites that it is one of a series of three notes given in satisfaction of an aggregate existing indebtedness of $1548.48 evidenced by scrip or warrants theretofore issued by the city of Tyler, the number of said warrants being set out in each note. No ordinance, resolution or order of the city council authorizing the execution of these notes is shown.

"The note for $3410.42 was executed October 11, 1894, and was given in substitution of a note for $2762.50 given by the city to the water company for water furnished in 1892. The minutes of the city council of date October 5, 1894, contain the following entry:

"`H.H. Rowland came before the council asking that the city give him a new note in lieu of one given on January 1, 1893, for $2762.50 for water for 1892. On motion it was ordered that note be renewed for one year at 8 per cent interest, and ordered that the secretary issue 6 per cent notes for amounts held by the members of the water company in the settlement for 1893.'

"This note recites that its execution was authorized by order of the city council entered on October 5, 1894, and the amount for which it is executed was evidently obtained by adding 8 per cent interest to the $2762.50 from January 1, 1893, and upon the sum thus obtained adding an additional 8 per cent from the date of the note to October 11, 1895, the date of its maturity, as it only bears interest from maturity. The note for $1500 was executed July 1, 1894, and is payable to the Tyler Water Company or bearer, one day after date, and was given in settlement of amount due by the city for hydrant rental from January 1 to July 1, 1894. This note was authorized by an ordinance of the city council, which appears in the minute book, but is not shown to have been copied into the ordinance book. The minutes of the meeting of the city council at which this ordinance was passed are not signed by the mayor, and are not shown to have been approved at any subsequent meeting of the council. The two notes for $775 each were executed on the 7th day of April, 1894, and payable on the 7th day of April, 1895 and 1896, respectively, and were given in part payment of the purchase money for a tract of 101 acres of land purchased by the city for cemetery purposes. This land was sold to the city by C.L. Caspary and W.G. Human on December 10, 1888. The deed recites a consideration of $3300, for which amount the city issued five warrants for $680, payable on the 1st day of February, 1890, 1891, 1892, 1893 and 1894, respectively, with 8 per cent interest. These drafts were payable out of the cemetery fund. At the time these warrants were issued the city was maintaining a cemetery fund by the levy of a tax of .03 on the $100 valuation of property in the city. Caspary testified he would have taken vendor's lien notes for the land, but was informed by the city council when he went to deliver the deed that the city did not want a lien retained on the land, as it desired to sell a portion of same and a lien would prevent such sale. He further testified that he was assured by the council that the cemetery fund would be maintained by special taxation, and he understood same would be sufficient to pay the warrants at maturity. These warrants were all paid except the last two, for which the notes above mentioned were substituted. These notes recite that their execution was authorized by an order of the city council entered of record on April 6, 1894, but no such order is shown on the minute book nor on the ordinance record. No provision was made for the payment of the warrants nor of the notes at the time they were executed. All of the remaining warrants mentioned in the ordinance authorizing the notes sued on are either shown to have been barred by limitation at the date of the ordinance or are not shown to have been issued for current debts of the city legally incurred, except the two items of $3 each, which were shown to have been for salary due R.T. Dorough as alderman and for which warrants were issued in February, 1894. (At the time of the execution of the notes sued on and at the time of the execution of the several notes and warrants before described, in satisfaction of which the notes sued on were executed, the appellant had exhausted its power to levy special taxes to provide for the payment of interest and the creation of a sinking fund to pay the indebtedness thereby created, the 25 cents on the $100 valuation of property within the city which it was authorized to levy having been previously levied to provide for the payment of outstanding bonds.)

"On December 10, 1894, the city council of appellant city passed a resolution directing the mayor to take the necessary steps to secure a special charter for the city at the next session of the Legislature, and to that end he was authorized to employ some suitable person to take the census of the city. In pursuance of this resolution the mayor appointed the city secretary, John M. Adams, census enumerator, and directed him to proceed to take a census of the inhabitants of the city. No report of such census is found in the records of the city and the minute book of the city council contains no further mention of same. Adams testified that he took a census of the city and made a written report to the council, which was adopted by resolution of the council, and that this report shows that the city had 10,119 inhabitants. He further testified that he filed a copy of this report in the office of the Comptroller, and attaches to his deposition a copy of the report so filed. He also attaches a copy of the resolution of the city council adopting his report, which he says he made at the time the resolutions were passed, and which is as follows:

"`Whereas, John M. Adams who was heretofore authorized and directed to take the census of the city and to ascertain the number of inhabitants of this city, has made his report to the city council; and whereas, said report shows that on March 1, 1895, the city of Tyler contained 10,119 inhabitants and over, the said report being duly verified and the council having heard the evidence to support the said report, finds the same true and correct, and finds that the city of Tyler has now over ten thousand inhabitants, therefore,

"`Be it resolved by the city council of the city of Tyler, Texas, that said city of Tyler has over ten thousand inhabitants, and that said city do hereafter operate as a city of over ten thousand inhabitants.'

"He does not know what became of the original resolutions.

"In an ordinance passed by the city on September 26, 1896, providing for the issuance of $35,000 funding bonds, the city of Tyler is declared to be a city of over ten thousand inhabitants.

"Bonds were issued in pursuance of this ordinance for the purpose of compromising and funding the outstanding indebtedness of the city, including the original warrants and the notes evidencing the indebtedness claimed in this suit. The Tyler National Bank, in anticipation of the payment of said indebtedness out of the proceeds of the sale of said bonds, bought up said notes and warrants. The bonds issued as provided for in said ordinance were sold by the city, but before the notes and warrants were taken up the bank in which the money derived from the sale of the bonds was deposited failed, and a large portion of the money was lost, and the city was thereby rendered unable to pay said indebtedness.

"The appellee was the cashier of the Tyler National Bank and acted for it in the purchase of the notes and warrants. He knew of the issuance of the funding bonds and that the ordinance providing for their issuance recited that the city contained over ten thousand inhabitants and testified that before buying the notes and warrants he had an investigation made as to the financial condition of the city and satisfied himself that the papers were legal and had been passed upon by the Attorney-General and approved by him in his approval of the $35,000 funding bonds, and that if he had not been advised of the proceedings taken by the city council to issue the funding bonds he would not have purchased the paper.

"After the loss of the money realized from the sale of the funding bonds appellee, as cashier of the Tyler National Bank, went before the finance committee of the city council, which committee approved $17,000 of the notes and warrants held by said bank as valid claims against the city, and council thereafter passed the ordinance authorizing the issuance of the notes sued on.

"On the 31st of December, 1898, the Tyler National Bank went out of business and appellee became its successor and took its assets including the notes sued on.

"The first of the ten notes issued to the bank was paid by the city and the last two notes were sold by the bank prior to acquisition by appellee of the bank assets.

"The court below instructed the jury that the notes and warrants issued for hydrant rental were valid obligations at the time they were merged into the notes sued on and that plaintiff was entitled to recover seven-tenths of the amount of same, being the sum of $9162.58 with 6 per cent interest thereon from January 20, 1899. The jury were further instructed to return a verdict for the defendant as to the two notes of $775 each executed for the purchase of the cemetery property. As to the remaining indebtedness set out in the ordinance authorizing the execution of the notes sued on, the question of its validity and the liability of appellant therefor was submitted to the jury."

The application presents twenty-one grounds of error which embody the following propositions:

1. That the obligations sued upon are bonds within the meaning of the laws of the State.

2. That the contract under which the constituent debts accrued was void, because it created a monopoly.

3. That the making of the several obligations sued upon created a debt within the meaning of the Constitution, and, no provision being made to pay the interest and sinking fund, they are void.

4. That the funded debts were for current expenses of the city for different years, and, there being no fund out of which they are entitled to be satisfied, the courts can not enforce them.

5. That no officer of the city could execute contracts for the city, except by authority of an ordinance, and the execution of the original notes was not so authorized and they are void.

6. That this suit was instituted upon the obligations issued by the city of Tyler on the 20th day of August, 1897, and not upon the debts for which they were given, therefore the Court of Civil Appeals erred in rendering judgment for the constituent debts.

7. That the constituent debts were barred by the statute of limitation.

Article 465 of the Revised Statutes confers power upon the city council: "To pass all necessary ordinances to provide for funding the whole or any part of the existing debt of the city, or of any future debt, by canceling the evidences thereof, and issuing to the holders or creditors notes, bonds or treasury warrants, with or without coupons, bearing interest at any annual rate not to exceed ten per cent." This statute authorizes the city council to issue either notes or bonds for the purpose of funding its outstanding indebtedness, and the council in this case, by its ordinance, directed that notes should be made and delivered in lieu of the said outstanding indebtedness; the obligations made in pursuance of that ordinance recited that they were notes. The obligations in suit have some of the characteristics of bonds, but they are more like promissory notes. It is evident that the parties to this transaction intended to issue notes, and having power to do so, their intention must be given effect. The instruments are not bonds within the meaning of the statutes regulating the issuing of bonds.

The obligations sued upon were executed by the city for the purpose of funding its outstanding indebtedness. Granting that the water contract was void, as charged, nevertheless the city must be held liable for what it received under the contract. Brenham v. Water Co.,67 Tex. 566. The parties agreed on the value of the water furnished, so the right to recover does not depend upon that instrument. The execution of these notes did not increase the indebtedness of the city, because when they were delivered the old debts were taken up and extinguished, and the the new notes did not create a debt against the city, which required the levy of taxes to provide for the interest and sinking fund. Doon Township v. Cummins, 142 U.S. 372; City of Valparaiso v. Gardner, 97 Ind. 8; McNeal v. Waco, 89 Tex. 83; Corpus Christi v. Woessner, 58 Tex. 462. The character of the debt was the same after the new notes were given as before.

The Court of Civil Appeals found that the current expenses of the city of Tyler for the year 1889 exceeded its revenue, and plaintiff in error, under the thirteenth assignment in the application, makes a statement showing the revenue for 1889 was not sufficient to discharge the current expenses for that year; but under no one of the assignments does the plaintiff in error raise the question, that, for the years in which the water was used by the city of Tyler, the current expenses were greater than the current revenue. The making of a contract for water for a number of years, to be delivered in the future, did not create a debt against the city, but the liability of the city arose upon the use by it of the water during each year. Valparaiso v. Gardner, before cited. It is therefore immaterial that the current expenses for 1889 were greater than the current revenue of the city of Tyler, and we shall not further discuss that phase of the question.

It appears from the findings of fact made by the Court of Civil Appeals, that the debts upon which recovery was allowed were contracted for the current expenses of the city of Tyler for the several years mentioned in the said statement, and the presumption will be indulged that the current revenue for each year was sufficient, if it had been collected and properly applied, to have liquidated the current expenses. McNeal v. Waco, before cited. It appears that the parties to the contract intended that the sum should be paid out of the current revenue for the year, and there is nothing to indicate that they did not act in good faith with reasonable ground to believe that the current revenue would be sufficient for that purpose. McNeal v. Waco, 89 Tex. 88. The water contract provided that the payments should be made quarterly during each year, and we see no reason to believe that the parties intended that it should be other than a contract payable during the year for which it was contracted. If it were held that a city could not make a binding contract, unless at the time it had revenue sufficient to discharge all of its current expenses, and that every person who should deal with it must do so at his peril, taking the chance of a deficit in revenue, it would be absolutely destructive of the power of every city in the State to carry on its ordinary governmental affairs, for it is well known that the business of a city is conducted upon the basis of credit and depends entirely upon the collection of taxes from time to time with the claims for current expenses running over from one month to another. We believe that such a contract, though not paid off during the year for which it was made, remains a valid debt against the city, which it may and should discharge out of the revenues for future years in excess of its current expenses. Corpus Christi v. Woessner, before cited; article 465, before quoted. In the case of Corpus Christi v. Woessner, debts, contracted for several different years, not being paid, had gone over to succeeding years, and the city had diverted its fund from the payment of its debt to other purposes. In order to defeat the enforcement of the claims against the surplus of current revenue for subsequent years, the city passed an ordinance practically refusing to pay any claim which was contracted prior to a given date, including the claim sued upon, and our Supreme Court sustained a general judgment against the city. The terms of article 465, Revised Statutes, confer authority upon the city council, "to provide for funding the whole or any part of the existing debt of the city, or of any future debt," showing that it was contemplated by the Legislature that the indebtedness of cities might not be liquidated by the revenues for each year, but would accumulate against such corporations, and to enable them to fully liquidate their debts, the power was given to fund all such indebtedness. Article 466 of the Revised Statutes confers upon cities, organized under the general laws, authority "to appropriate so much of the revenues of the city, emanating from whatever source, for the purpose of retiring and discharging the accrued indebtedness of the city." This is direct and positive authority for the city to use its revenues both from its ordinary sources of taxation and any other source of income that it might have for the purpose of liquidating and discharging accrued indebtedness, which must mean debts of previous years and not of the current year, hence it can not be that current expenses not paid each year become void. The Court of Civil Appeals did not err in holding that the debts contracted for the current expenses, lawful at the time that they were contracted, continued to be lawful after the expiration of the year for which they were made and afforded sufficient basis for rendering judgment against the city which might be enforced if it should become possessed of property or funds subject to the payment of such debts.

There is no provision of law which requires a city to enact an ordinance to enable its officers to execute contracts for current charges of the administration of its affairs. The Court of Civil Appeals excluded all debts for which authority was not found in the minutes of the council, which was the proper test to be applied.

This suit was based upon the notes executed by the city with the alternative prayer, that in case recovery could not be had upon the notes, then the plaintiff might recover upon the constituent indebtedness, but the Court of Civil Appeals entered judgment upon the notes executed under the ordinance of the 20th day of August, 1897, and not upon the debts for which those notes were given. The court entered into an examination of the consideration upon which the notes sued on were issued and determined that a number of the claims which were embraced were illegal, giving to the defendant a credit for all such claims as were barred by limitation or improperly embraced for any other reason. The court properly computed limitation upon the original debts up to August 20, 1897, when they were funded.

We find no error in the judgment of the Court of Civil Appeals, which is affirmed.

Affirmed.