City of Lexington v. Butler
THE 11th section of the Judiciary Act enacts:
'The Circuit Court shall have original cognizance of all suits . . . between a citizen of the State where the suit is brought and a citizen of another State.'
It is enacted by the same section:
'That no Circuit Court shall have cognizance of any suit to recover the contents of any promissory note or other chose in action, in favor of an assignee, unless such suit may have been prosecuted in such court to recover the said contents, if no assignment had been made, except in cases of foreign bills of exchange.'
The 12th section, however, of the same act enacts:
'That if a suit be commenced in any State court against an alien or by a citizen of the State in which the suit is brought against a citizen of another State, . . . and the defendant shall at the time of entering his appearance in such State court file a petition for the removal of the cause for trial into the next Circuit Court, . . . and offer good and sufficient surety for his entering in such court on the first day of its session copies of said process against him, and also for his there appearing . . . it shall then be the duty of the State court to accept the surety and proceed no further in the cause; . . . and the said copies being entered as aforesaid in such court of the United States, the cause shall there proceed in the same manner as if it had been brought there by original process.'
By a statute of March 2d, 1867, this right of removal was extended to controversies in any State court, between a citizen of the State where the suit is brought and a citizen of another State, in cases where either party-plaintiff or defendant-shall, any time before final hearing,
'Make and file in such State court an affidavit stating that he has reason to and does believe, that from prejudice or local influence, he will not be able to obtain justice in such State court.'
With these statutes in force the city of Lexington, Kentucky, acting under the authority of an act of the legislature of Kentucky, issued in 1853 to the Lexington and Big Sandy Railroad Company, one hundred and fifty bonds, each for $1000, having thirty years to run, and bearing an interest of 6 per cent. per annum, payable semi-annually, for which coupons were annexed to the bonds. The coupons were payable 'to bearer.'
The bonds bore the corporate seal of the city and were signed by the mayor, and countersigned by the city clerk. They were payable to the Lexington and Big Sandy Railroad Company or order at the Bank of America, New York, and were indorsed and assigned by the railroad company to bearer. They recited upon their face that—
'This certificate is used in part payment of a subscription of $150,000 by the city of Lexington to the capital stock of said Lexington and Big Sandy Railroad Company, by order of the mayor and council of said city, as authorized by a vote of the people taken in pursuance of an act of the General Assembly of the Commonwealth of Kentucky incorporating said railroad company, approved the 9th of January, 1852.'They were sold in market overt by the railroad company, and being by the indorsement made payable to bearer, circulated by delivery from hand to hand. J. C. Butler, a citizen of Ohio, became the owner of four of them. The coupons for a number of years being unpaid, he brought suit in a court of the State of Kentucky for the recovery of the amount of them. Before the trial came on, he removed the cause into the Circuit Court of the United States for the District of Kentucky, for trial, under the already-quoted act of Congress of March 2d, 1867, and on bringing the transcript of the cause into the Circuit Court, he filed a declaration in debt in that court, in conformity with the rules of proceeding in causes removed from the State court. To this declaration the city of Lexington filed two pleas in bar.
First plea. That the city was authorized to make the subscription of the $150,000, on condition that a majority of the qualified voters of the city should cast their votes in favor of the subscription, and that without such a vote the city had no authority to make the subscription; that the vote was cast in favor of the subscription, but only on the condition that it should not be obligatory until $1,000,000 should be first subscribed by others; that the $1,000,000 not having been subscribed, the city refused to make the subscription or to issue the bonds; that the company thereupon obtained a judgment of mandamus to compel the city to make the subscription and execute the bonds; and that the city was compelled by that judgment, and did so make the subscription and issue the bonds; that the Court of Appeals of Kentucky, however, reversed this judgment; that a rule was then made upon the company to redeliver the bonds in order to be cancelled; but that the company refused to redeliver them; that before the company had negotiated the bonds sued upon, the city obtained an injunction against the issue, and an order that the bonds be deposited with a receiver; that these orders, although process was duly served on the company, were not obeyed; and that both actions were still pending.
The plea then alleged that it was after all these proceedings and with these actions pending, that the company transferred and delivered the bonds to Butler; and that Butler had notice of the proceedings aforesaid before said bonds were transferred to him.
Second plea. As to the coupons the city pleaded a statute of limitations, applicable to debts not under seal; a statute of five years;-fifteen years being the statutory bar in regard to sealed instruments.
To the first plea the plaintiff replied, traversing the notice and denying all knowledge of any facts set out in the plea when he took the bonds.
To the second plea he demurred.
To the plaintiff's replication to the first plea (the replication denying notice of the proceedings about the bonds) the city demurred.
The court below on the whole case gave judgment for the plaintiff; and the city now brought the case here.
The questions, of course, were:
1st. Whether under the restriction of the 11th section of the Judiciary Act and under the act of March 2d, 1867, the court below had jurisdiction.
2d. Whether the fact that Butler had no notice of the proceedings about the bonds, set up to rebut his bona fides and destroy his right to sue (which fact of want of notice was of course admitted by the city's demurrer to his replication), made him, presumably, a bon a fide holder for value, and entitled to sue.
3d. Whether the statutory bar of five years was applicable to coupons to bonds under seal, and where to the bonds themselves nothing less than fifteen would by statute be a bar, or whether the coupons partook of the qualities of the bond in such a way as to be subject to the law which governed them?
Mr. J. F. Fisk, for the plaintiff in error:
1. The court below had no jurisdiction. The bonds sued on were made by a corporation or citizen of Kentucky, and were payable to the order of the railroad company, another citizen or corporation. If no assignment had been made then certainly under the 11th section the Circuit Court would have had no jurisdiction, the suit being between citizens of the same State. It is only in virtue of the assignment which was made by the indorsement that Butler, a citizen of Ohio, has any rights. But the same 11th section says that the Circuit Court shall not have cognizance of any suit to recover any chose in action in favor of an assignee, unless the suit could have been prosecuted in the same court if no assignment had been made.
2. The facts alleged in the plea other than that of notice which is the only part of the plea traversed-are sufficient to bar the action. The allegation of notice was not necessary. Butler was bound to take notice of the proceedings. The rule of lis pendens applies; a rule than which none has been established on higher authority or with more uniform sanction, one also peculiarly applicable to negotiable paper.
3. The court held the bonds negotiable and yet held that the statute of limitations governing promissory notes did not apply. This was plain error. Even if the bonds which were sealed did not come within the statute of five years, the coupons, which were not sealed-mere ordinary promises, did.
Mr. J. W. Stevenson, contra:
1. As to the jurisdiction. The whole argument of the other side on this point has no foundation. Since the case of Bushnell v. Kennedy,  in which it was decided that the restriction of the 11th section as to the right to sue on choses in action assigned, not being found in the language of the 12th, and the reasons for its being in the 11th not existing for its being in the 12th, 'it is not to be considered as applying to cases transferred from State courts to the Circuit Courts under this latter section.' The decision applies equally to cases transferred under the act of March 2d, 1867.
2. As to the demurrer of the city to the replication. The plea, to which this replication was filed, went on to set forth a state of facts from which it was to be inferred the bonds were issued without authority of law. In the face of bonds which recite that they were issued by authority of law, such a plea would be bad, unless it also showed that Butler was not an innocent holder for value. The law presumes in favor of the holder: (1) that he took the bonds before they were due; (2) that he paid a valuable consideration for them; and (3) that he took them without notice of any latent defect which would render them invalid.  The plea did not dispute the first two points, to wit: That Butler took the bonds before they were due and paid a valuable consideration for them. Hence these two presumptions stood in his favor, notwithstanding the plea. It did, however, aver that at the time he took the bonds he had notice of the facts set forth in the plea and relied on as rendering the bonds invalid. It was this averment of notice alone that rendered the plea good.
The replication traversed the averment of notice, and denied all knowledge or notice of any of the facts set out in the plea at the time the plaintiff took the bonds.
By demurring to the replication the city confessed Butler's denial of notice to be true, and thereby confessed away an allegation in its plea which was absolutely necessary to render it good.
3. As to Butler's demurrer to the second plea. This plea is an attempt to rely upon the statute of limitation of five years, in force in Kentucky, to actions on simple contracts. But the obligation to pay this interest is embodied in the bond itself, which is a specialty, under seal, and of a higher nature than simple contracts. Therefore no lapse of time, short of fifteen years, would bar an action on the bond, that being the period of limitation to actions upon specialties by the statute of Kentucky. That bonds of this character are specialties, and that the coupons attached to them partake of their character and are governed by the same term of limitation as governs the bond itself, was ruled by this court in The City v. Lamson. 
Mr. Justice CLIFFORD delivered the opinion of the court.
^1 9 Wallace, 387.
^2 Bronson v. La Crosse, 2 Wallace, 283; Woods v. Lawrence, 1 Black, 386; Alexander v. Springfield Bank, 2 Metcalfe, 534; Nelson v. Cowing, 6 Hill, New York, 339.
^3 9 Wallace, 477.