Opinion
No. 28309
Decided July 15, 1942.
Municipal corporations — Mortgage revenue bonds — Good in hands of bona fide purchasers, when — Taxpayer estopped from asserting mere irregularities, when — Bonds contained recital of conformity with legal and statutory requirements.
In an action brought to invalidate and cancel municipal mortgage revenue bonds which are not void and substantially all of which are in the hands of bona fide purchasers for value before maturity, a taxpayer-plaintiff is estopped from asserting mere irregularities in the bond proceedings, by a recital in such bonds "that all acts, conditions and things necessary to be done precedent to and in the issuing of these bonds in order to make them the legal, valid and binding obligations of the village in accordance with their terms, and in authorizing the execution and delivery of the indenture securing these bonds, have been done and performed and have happened in regular and due form as required by law; that the fiscal officer of the village of Amherst has, on its behalf, received payment in full for said bonds, and that said bonds are not governed by or subject to any constitutional, statutory or other limitation upon the amount of the bonded indebtedness prescribed by law for the village."
APPEAL from the Court of Appeals of Lorain county.
This is a taxpayer's suit in which the taxpayer seeks to enjoin the use of funds, derived from the sale of mortgage revenue bonds in the amount of $80,000 issued to build a generating plant in the village of Amherst, Ohio, and further seeks a decree setting aside and cancelling such bonds.
The action was instituted in the Court of Common Pleas of Lorain county, Ohio, on July 24, 1939. On trial there was a judgment against the plaintiff who then took an appeal to the Court of Appeals on questions of law and fact. In that court the cause was tried de novo upon an agreed statement of facts.
The village of Amherst had its own electrical distribution system and purchased the electricity which it used for street lighting and distribution to consumers.
Desiring to build its own generating plant at an estimated cost of $145,000, the village secured a grant from the Federal Emergency Administration of Public Works on or about October 28, 1938, in an amount not exceeding $65,250, being forty-five per cent of the cost of the project. The grant was accepted by the village on November 3, 1938.
On November 15, 1938, the council of the village passed an ordinance declaring the necessity for such generating plant and containing the following provision: "That said improvement shall be financed by means of a grant from the Federal Emergency Administration of Public Works of a portion of the costs, and the issuance of mortgage bonds for the balance thereof, under the provisions of Section 12 of Article XVIII of the Constitution of the state of Ohio." The ordinance contained no information as to the amount of the proposed bond issue.
Thereafter, on December 16, 1938, an ordinance was passed calling for a special election with provision as to what should be printed on the ballots but nothing therein showed what the amount of the proposed bond issue was to be. The form of ballot provided for merely submitting to the voters the question of whether the ordinance of November 15, 1938, should be adopted. The submission of such ordinance resulted in its approval or adoption by a vote of 705 to 457.
Under ordinances authorizing transfer of funds an electrical generating plant construction fund was created in which was placed approximately $10,000 and a site was purchased for $4,000 from this fund.
At a meeting of the council held on July 8, 1939, no notice of which was given to the general public, an ordinance was passed authorizing the issuance of $80,000 of mortgage revenue bonds to be a lien on the site purchased, the generating plant and the revenues of the utility, with the provision that in the event of foreclosure the purchaser should be permitted to operate, for a period of time not exceeding twenty years, the plant and distributing system under franchise, the terms of which were defined in the ordinance.
On the same day the council considered the written offer of the defendant Van Lahr, Doll Isphording, Inc., to purchase such bonds at private sale and immediately accepted the same, the offer being dated July 6, 1939. The amount paid by this purchaser was par plus $708.33, which latter amount represented premium and accrued interest. The bonds were not advertised for sale and the ordinance was not published in any newspaper or publicly posted. The bonds bore interest at the rate of 3 3/4 per cent, payable semi-annually. They were issued, paid for and the mortgage recorded at 11:05 a. m. of the day of sale, or two hours and five minutes after the hour of the meeting at which the ordinance authorizing them had been passed. We quote from the agreed statement as follows:
"On July 11, 1939, Van Lahr, Doll Isphording, Inc., sold all of said bonds as follows:
"To Retirement Board of State Teachers' Retirement Fund $34,000 principal amount, for $36,602.81 plus accrued interest.
"To Herold Northcutt, agent, $6,000 principal amount, for $6,521.26 plus accrued interest.
"To BancOhio Securities Company, $40,000 principal amount, for $42,374.82 plus accrued interest.
"On July 13, 1939, BancOhio Securities Company sold said $40,000 principal amount of said bonds to The Ohio National Bank of Columbus, and bonds in said amounts are now owned and held by defendants, Retirement Board of the State Teachers' Retirement Fund, Herold Northcutt, agent, and The Ohio National Bank of Columbus.
"Said bonds were issued in the form set forth at pages 2 and 3 of the mortgage trust indenture, exhibit B to the petition. Said purchaser received from Van Lahr, Doll Isphording, Inc., a copy of the opinion of Thomas Miller, attorney for Van Lahr, Doll Isphording, Inc., copy of which is attached hereto marked 'Exhibit 1' and made a part hereof.
"At the time said bonds were purchased and paid for by Retirement Board of the State Teachers' Retirement System, it had no actual knowledge of any of the facts herein stated or any other facts with respect to the authorization, issuance and sale of said bonds and said mortgage trust indenture, other than as recited in said bonds and as appearing in said opinion of Thomas Miller and in the transcript of proceedings referred to in paragraph 17 hereof.
"At the time of purchase and payment for said $40,000 principal amount of said bonds, BancOhio Securities Company and The Ohio National Bank of Columbus had no knowledge, except as may be imputed by law, of any of the facts herein stated or any other facts with respect to the authorization, issuance and sale of said bonds and said mortgage trust indenture, other than as recited in said bonds and as appearing in said opinion of Thomas Miller."
The written opinion by Thomas M. Miller, attorney at law, above referred to, was dated July 8, 1939, and contained the statement in substance, that he had examined the transcript of the proceedings and the law covering the subject, and held the view that the mortgage was a first lien as it purported to be.
The Court of Appeals found for the defendant and dismissed the petition of the plaintiff.
Messrs. Resek Cook and Messrs. Welles, Kelsey, Cobourn Harrigton, for appellant. Mr. J.J. Smythe, village solicitor, and Mr. Milton Friedman, for appellee, village of Amherst and others.
Mr. Thomas M. Miller, for appellees, Van Lahr, Doll Isphording, Inc., the Provident Savings Bank Trust Company and Herold Northcutt, agent.
Mr. Kenneth B. Johnson, for appellee, The Ohio National Bank of Columbus.
Mr. Thomas J. Herbert, attorney general, and Mr. Robert J. Odell, for appellee, Retirement Board of State Teachers' Retirement System.
In our judgment the decision of this case hinges on the question of estoppel. Assuredly the bonds and mortgage were not absolutely void. On the other hand several irregularities are claimed but all but two may be dismissed without further consideration. The two that must be noticed are: (a) The method by which the bonds were sold and (b) the issuance thereof before the lapse of thirty days after the passage of the ordinance on July 8, 1939, authorizing them, which period must transpire before the ordinance could become effective. City of Middletown v. City Commission, 138 Ohio St. 596, 37 N.E.2d 609.
But these irregularities could not prevail to defeat the validity of the bonds in the hands of bona fide purchasers for value before maturity if the recital in the bonds was such as would work an estoppel. Nearly all, if not all, of the bonds are in the hands of purchasers of that kind. We must, therefore, look to the recital in the bonds which reads as follows: "It is hereby certified and recited that all acts, conditions and things necessary to be done precedent to and in the issuing of these bonds in order to make them the legal, valid and binding obligations of the village in accordance with their terms, and in authorizing the execution and delivery of the indenture securing these bonds, have been done and performed and have happened in regular and due form as required by law; that the fiscal officer of the village of Amherst has, on its behalf, received payment in full for said bonds, and that said bonds are not governed by or subject to any constitutional, statutory or other limitation upon the amount of the bonded indebtedness prescribed by law for the village."
Since mortgage revenue bonds are not amenable to the Uniform Bond Act ( City of Middletown v. City Commission, supra) much that is stated in State, ex rel. Alden Corp., v. Village of Solon, 132 Ohio St. 362, 7 N.E.2d 550, is inapposite. However some of the authorities cited in the latter case bear generally upon the question of estoppel by recital because in the absence of statute one must look to the common law.
At the outset it should be borne in mind that if the village is estopped the plaintiff taxpayer is likewise estopped. Warfield v. Anglo London Paris Natl. Bank, 202 Cal. 345, 260 P. 881; New Orleans v. New Orleans Waterworks Co., 142 U.S. 79, 35 L.Ed., 943, 12 S.Ct., 142; Fahey v. City of Bloomington, 268 Ill. 386, 109 N.E. 292. So we must carefully consider the action taken by the village and its effect.
The village council had authority to inquire into the facts covered by the recital and, even though the facts recited later proved inaccurate, there was nothing in the bonds themselves to disclose the irregularities. The recitals were calculated to justify the belief to an innocent purchaser that the bonds were regularly issued. Now, a general recital that bonds are issued in conformity to legal and statutory requirements and that all things have been done, prior to and in issuance thereof, necessary to make them valid, is sufficient to afford protection to bona fide purchasers for value before maturity, provided the municipal officers causing the bonds to be issued have express or implied authority to issue them, and provided further the defects are merely irregularities which do not render the bonds void. See 86 A. L. R., 1084, annotation V D, and cases cited.
We are therefore of the opinion that the plaintiff is estopped from asserting such irregularities to defeat the bonds.
The judgment of the Court of Appeals is therefore affirmed.
Judgment affirmed.
WEYGANDT, C.J., TURNER and ZIMMERMAN, JJ., concur.
MATTHIAS and HART, JJ., dissent.
BETTMAN, J., not participating.