Mercer County v. Hacket
By act of Assembly, passed in 1852, the legislature of Pennsylvania authorized the commissioners of Mercer County in that State to subscribe to the stock of the pittsburg and Erie Railroad, which road, if built, would pass through their county and benefit it. The act, however, contained this proviso:
'Provided, that the subscription shall be made subject to the following restrictions, limitations, and conditions, and in no other manner or way whatever, viz.: all such subscriptions shall be made by the county commissioners, and shall be made by them after, and not before, the amount of such subscription shall have been designated, advised, and recommmended by a grand jury of said county; and such bonds shall in no case, or under any pretence, be sold, assigned, or transfered by the said Railroad Company at less than the par value thereof: And provided, further, that the acceptance of this act by the said company shall be deemed also an acceptance of the provisions of the act passed the 11th day of March, 1851, entitled An act fixing the gauges of railroads in the County of Erie.'
Rightly or wrongly-with authority or without it-the bonds to the extent of several thousands of dollars were issued. The instruments were elegantly engraved, with such external indications as were calculated to arrest the eye, and through it to inspire confidence. They were signed by the commissioners of Mercer County, attested by their clerk, and authenticated by the county seal conspicuously put. At the head of the bonds it was announced that they were issued for stock in the Pittsburg and Erie Company, and were payable in twenty years from their date in the city of New York. The words in the obligatory part of the instrument were as follows:
'Know all men by these presents, that the County of Mercer, in the Commonwealth of Pennsylvania, is indebted to the Pittsburg and Erie Railroad Company in the full and just sum of one thousand dollars, which sum of money said county agrees and promises to pay, twenty years after the date hereof, to the said Pittsburg and Erie Railroad Company, or bearer, with interest, at the rate of six per centum per annum, payable semi-annually on the first Monday of January and July, at the office of the Ohio Life Insurance and Trust Company, in the city of New York, upon the delivery of the coupons severally hereto annexed: for which payments of principal and interest, well and truly to be made, the faith, credit and property of the said County of Mercer are hereby solemnly pledged, under the authority of an act of Assembly of this Commonwealth, entitled A supplement to the act incorporating the Pittsburg and Erie Railroad Company, which said act was approved the 21st day of April, A. D. 1846, and which said supplement became a law on the 4th day of May, 1852.'A number of the bonds having got, bon a fide and for value paid, into the possession of one Hacket, a citizen of New Hampshire, and the coupons,-themselves also payable to bearer, being due and unpaid, he sued the County of Mercer upon them, in the Circuit Court for the Western District of Pennsylvania. Having put the bonds and coupons in evidence, the county now offered to prove that no such recommendation as was required by the act was made by the grand jury, but that the jury signed a paper, in which they state that they 'would recommend the commissioners of Mercer County to subscribe to the capital stock of the company to such an amount, and under such restrictions as may be required by the act of Assembly authorizing them to subscribe stock to said road, to an amount not exceeding $150,000.' The county proposed further to prove, that while by the provisions of the act the railroad company was required to accept 'an act fixing the gauges of railroads in Erie County,' before it should be entitled to the benefit of said act authorizing counties to subscribe to the capital stock of said company, the company, by a resolution of the stockholders, had refused to accept those provisions, and had declared it to be inexpedient to accept subscriptions made by counties. All this being offered for the purpose of showing that the commissioners of Mercer County acted illegally in making the subscription, and in issuing bonds in payment thereof; and that they issued the same without authority of law; so that the bonds are not binding upon the county. The county proposed to prove further, 'that the bonds issued were paid out by the railroad company to contractors at about sixty-six and two-thirds cents on the dollar; all this for the purpose of showing that the bonds were procured from the County of Mercer by misrepresentation and fraud, and were not binding upon her, and after being thus obtained were disposed of at less than their par value, in violation of the provisions of the act authorizing the county to subscribe and issue bonds; and also for the purpose of showing want and failure of consideration.'
The court below refused to let such evidence be given; and the suit having accordingly gone against the county, the correctness of the ruling was the point now considered here.
Mr. Stewart for the county: If the bonds were not issued in accordance with the requirements of law, which authorized the commissioners to make a subscription and issue bonds in payment therefor, they are void. In Mercer County v. The Railroad Company,  where the subscription to this same road by this same county came in question, the Supreme Court of Pennsylvania decided that there was such a failure on the part of the grand jury to perform the duty imposed upon it by the act of the legislature, passed the 4th day of May, 1852, as rendered the act of the commissioners, in making the subscription and issuing the bonds, illegal. The court accordingly rescinded the subscription, and ordered the bonds in possession of the railroad company to be surrendered. In that case it is decided, that by a proper and necessary construction of the act all discretionary power was vested in the grand jury and withheld from the commissioners, and that the grand jury not having designated, advised and recommended the amount to be subscribed, the commissioners had no authority to make a subscription,-the performance of the duty enjoined upon the grand jury having been a prerequisite to vest authority in the commissioners. The act of Assembly requiring certain things as conditions precedent to the issue of the bonds, and of course to their validity, is specifically referred to by name and date in the face of the instruments. This is the same as if it was set out at length.
If the bonds were issued without legal authority, no subsequent transfer can render them valid. Even a note, strictly negotiable, made by an assumed agent who acts without authority, acquires no increased obligation upon the principal by passing from hand to hand. There was no authority proceeding from the principal to put it upon its course, and be it long or short, it imparts to it no increased virtue. The inquiry always addresses itself to every one, Is it the contract of the party whose name it bears? The responsibility of a correct reply to this inquiry is imposed upon every one who gives it currency.
Bonds were never recognized by the lex mercatoria as commercial paper. The distinction between specialties and simple promises is defined by the common law. The remedies for their enforcement have always been different, and these lines of distinction have never been obliterated by any general system of jurisprudence, in this or any other country, with which we have any juridical comity, either as to their nature or the means of enforcing them. The same equities which exist between the original parties remain and follow specialties into whatever hands they may go, without regard to supervening equities. In no State has this ancient and salutary rule of law become so fixed as in Pennsylvania. Diamond v. Lawrence County  is a strong case, and almost in point. The bonds apparently were in the hands of bon a fide holders for value. But the court adverts to the shocking frauds which had prevailed in obtaining the issue, and declared that the county was not bound for more than the railroad had received. The law of the place where the contract is made, and the obligation there assumed, govern its construction. Every one making a contract is presumed to make it with reference to its legal effect, whether direct or incidental, in the State where it is made; and if this court were to act on any other principle, our system, political and judicial alike, would be deranged.
Mr. Loomis for the bondholder: All the elegance of the engraver's art, all the plighted 'faith, credit and property,' of modern finance, all the strength and assurances of language, have here been used to allure the purchaser. Reference is made on the face of the bond to an act of Assembly-not to put him on his guard, lest the preliminary requisition may not have been complied with-but to attract him by evidence that the instrument is issued under the highest sanction. It had that effect, and the paper passed readily into the hands of a confiding holder in the distant State of New Hampshire, as a safe and secure investment. How can the county now, with the proceeds of the bond in its treasury-with riches which the railway will bring to its people in enjoyment-set up the defence it does, and proclaim to the nations, 'Base is the slave who pays?'
The recommendation of the grand jury was sufficient to warrant the subscription. If it were not, the county is concluded by Commissioners of Knox County v. Aspinwall, decided in this court,  from denying the sufficiency. The act, no doubt, required the amount to be designated by the grand jury. But the jury signed a paper in which they stated that they 'would recommend' the commissioners to subscribe 'to such an amount and under such restrictions as may be required by the act of Assembly authorizing them to subscribe stock to said road to an amount not exceeding $150,000.' This is a substantial compliance. Even if there were an irregularity in not designating the precise amount to be subscribed, no decided case renders the subscription void. This question was before the Supreme Court of Pennsylvania, in Mercer County v. The Railroad Company, and was left undecided; Woodward, J., concurring in the opinion given by Lewis, J., that a subscription made, without any designation by the grand jury, was without competent authority and therefore void, Lowrie, J., not concurring, Knox, J., dissenting, and Black, C. J., absent. This case is not an authority for anything. The controversy was between the county and the railroad company only. The court directed the bonds ($84,900), remaining in the possession of the company, to be surrendered to the county. The remaining $65,100 having been paid to Johnson & Co., on account of work under their contract, the court refused to take action in relation to these bonds, a portion of which was purchased and are now held by the plaintiff. It declares that it leaves undisturbed the question how far innocent holders of the bonds already negotiated might be protected. In the County of Lawrence v. The Northwestern Railroad Company,  a subscription made by the county to the stock of the Northwestern Railroad Company, was annulled and set aside, 'without prejudice, however, to any rights which third persons may have lawfully acquired as purchasers of the bonds issued on payment of the said stock.' And this ground is tenable. It is that which the Federal court for the second circuit (Grier, J.) has always taken. It has said (i), that it could not understand on what ground the constitutionality of acts authorizing these subscriptions could be maintained. But that the State court had maintained it, and that this was enough; (ii), that though the courts might, from a variety of causes, restrain an issue not yet made, still when the bonds were once issued and in the hands of innocent holders for value, that the county was bound to pay them. The distinction is one entirely obvious.
The bonds in this case import upon their face a compliance with the law. According to Commissioners of Knox County v. Aspinwall, the purchaser was not bound to look further for evidence of a compliance with the conditions of the grant of the power. The security was sold in a distant market. To require the purchaser to ascertain, at his peril, from an examination of the records of the county, whether facts authenticated by its proper officers and the seal of the county were true or not, would involve him in unreasonable trouble and expense, greatly impair the value and diminish the currency of such securities.
The act of Assembly did not require the company to accept the provisions of the gauge law at all. It simply declared in a proviso, 'that the acceptance of this act (May 4th, 1852) by the said company shall be deemed also an acceptance of the provisions of the act fixing the gauge of railroads in the County of Erie.' The acceptance was not made a condition precedent to the right to receive the benefit of the act authorizing counties to subscribe, but the acceptance of the act of 1852 involved an acceptance of the gauge law. The act of 1852 was accepted by the company's receiving the subscription of the county and the bonds issued in payment reciting a full compliance with the requirements of the law. This would have involved an acceptance of the provisions of the gauge law, had that law continued in force. It was, however, repealed before the construction of the railroad was commenced. A particular fact here requires to be stated: The report of Mercer County v. The Railroad Company, shows that I was of counsel for the company. On the trial of a subsequent cause against the company, I asserted that the case was decided upon a mistake of fact; the gauge law having been accepted by the company, evidence of which was before the court at the time the decision was made, and I read from the paper book before the court at the time of the decision, and furnished by the counsel of Mercer County, a resolution adopted at said meeting of stockholders, of the 24th of December, 1851, which proved what I asserted.  When that resolution was read, one of the judges, Mr. Justice James Thompson, who resided at Erie, where the meeting of stockholders was held, and who had a profoundly intimate knowledge both of the facts and the law of these cases, remarked, that there was no doubt about the acceptance of the gauge law. The remaining judges acquiesced in silence. And thus the only support upon which the decision in that case rested was withdrawn. That case, having been so decided, is not an authority for anything.
It is true that in Diamond v. Lawrence County the Supreme Court of Pennsylvania declared, 'We have said, on several occasions, that we will not treat these bonds as negotiable securities.' The court admits, however, that 'on this ground we stand alone. All the courts, English and American, are against us.' No reader of modern law will question the truth of the sentences italicized.  But that case was exceptional. The community, in a state of intoxication about railroad subscriptions, had become wild. The voices of men of sense were not heard in an hour where madness ruled. The court determined to withstand this folly; the ardor civium prava jubentium. In taking a position, the judge, it is true, gives a 'flash of his cimeter' sufficiently alarming. But he did not mean to place his court in opposition to all the tribunals which the world most respects; nor, construing his announcement in a reasonable way, does he do so. At the moment when the transfer of the bond in suit was made there was a bill in equity pending, to restrain the transfer of all bonds of that sort; and his chief reliance was on this fact.  Bona fides was scarce predicable in law of the transaction involved. And the language of the judge himself, in one part of his opinion, shows how little the dictum relied on by the other side entered into the grounds of the decree. It was but an answer to the argument, too much pressed at the bar, of what some courts in other States had done, and it meant no more than that the Supreme Court of Pennsylvania would not decree plain injustice upon the example of any or of all the courts of Christendom. After all, however, the court did not declare the bonds void. It allowed a recovery for what the railway company had actually received. The disrespect wrongly supposed to have been here expressed for precedent, and the apparent disregard of vested interests, destroyed with the profession everywhere the value of a case which, if the assumption of the court that bona fides did not exist was true, was itself rightly decided. The case was not well received in Pennsylvania when it was reported, and the clearer sense of the court is expressed in subsequent decisions, which, if Diamond v. Lawrence County decided what some have supposed, certainly overrule it. In the case of The Commonwealth v. The City of Pittsburg,  it was declared that 'the holder of bonds, made payable to bearer, has a right to presume that they were issued and transferred in the mode agreed upon by the original parties; that he is not affected by any agreement between the obligor and obligee, that the latter should provide for the payment of the interest thereon.' This case goes almost the length of that of Commissioners of Knox County v. Aspinwall, as to the presumptions that arise in favor of the holder of this species of paper.
Why shall such instruments not be regarded as having the qualities of negotiable paper? When issued by corporations, as they always are, they are necessarily under seal; but they do not from that fact alone become specialties. A corporation, if speaking or acting in form, can speak or act only by the medium of a seal. It is the way in which as an artificial person it acts, or expresses itself; as natural ones express themselves by handwriting simply.
Mr. Justice GRIER delivered the opinion of the court:
^1 27 Pennsylvania State, 389.
^2 37 Pennsylvania State, 358.
^3 21 Howard, 545.
^4 32 Pennsylvania State, 152.
^5 The resolution was thus:
'Resolved, That the stockholders of the Pittsburg and Erie Railroad Company here convened, do hereby accept, and do hereby agree to be bound by the provisions of the act aforesaid, being an act fixing the gauge of railroads in the County of Erie, approved the 11th day of March, 1851.'
^6 See 1 American Leading Cases, note to Overton v. Tyler; 1 Smith's Leading Cases, note to Miller v. Race.
^7 'It is manifest from this statement,' says Woodward, J., in giving that part of the opinion which is at p. 355, 'that the bond now in suit was transferred by the company in contempt of the authority of this court. After the service of the subpoena in the equity suit, the company had no authority, under any pretence whatever, to part with a bond. . . .. Considering the extraordinary notoriety which attended the equity suit against the railroad company, we think the rule is applicable here without that limitation. And according to that rule, the suit was notice to all the world, of all the facts alleged in the pleadings; so that this plaintiff stands in no better situation for enforcing the bond against the county than the company themselves would stand.' Diamond v. Lawrence County, 37 Pennsylvania State, 353.
^8 34 Pennsylvania State, 496; and see Commonwealth v. Commissioners of Alleghany County, 37 Id., 237; Same v. Same, 32 Id., 218.