187 F. 20 | 7th Cir. | 1911
Lead Opinion
(after stating the facts as above). The decree from which the city of Eaporte appeals grants foreclosure relief in favor of the appellees, as trustees, under a mortgage made by Eaporte Water Supply Company, an Indiana corporation, securing bonds issued by such corporation; and the relief is limited in terms to the tangible property owned by the mortgagor, as described in the mortgage and bill, without adjudication “as to the validity of so much of the ordinance contract” therein referred to as purports to bind the city of Laporte to pay “the hydrant rentals in said ordinance specified.”
(1) That the ordinance referred to “was a mere'sham, invented by the city officers and Wheeler & Co.,” contractors for the work, “to hide the illegality of the transactions, and by indirection do what the laws and Constitution of Indiana prohibited,” with “incorporation and use of the Supply Company” as a mere “dummy.”
(2) That an adjudication accordingly, which appears in a suit commenced by taxpayers before the mortgage was made, is conclusive of such invalidity, as against the appellees.
(3) That “the machinery and appliances were put in as an enlargement and extension and as a part of the city waterworks plant, to be used and are in use by the city, and are not subject to be sold and torn out of the plant.”
The mortgagor, Lapor.te Water Supply Company, is a corporation organized pursuant to the general laws of Indiana, for the purposes named in its articles, which embrace the establishment and operation of “a waterworks system in and near the city of Laporte” and authority “to vend water to the city”; and its incorporation was plainly within the provisions of the statute referred to, conferring the usual powers to acquire, hold, and convey corporate property. The contentions, therefore, of want of authority to construct and operate the works described in the decree, must rest on the alleged invalidity of the ordinances referred to and transactions thereunder, and not upon the further objection urged on behalf of the appellant that the plant thus provided was “merely an extension and enlargement of the city’s own waterworks system,” and that the statutes “do not authorize a corporation to be created to operate as a part of” such systems. It is settled by the findings that the works were constructed and used by the Water Supply Company as a “waterworks plant,” to furnish a supply of potable water, for distribution by and through the_ waterworks system owned and operated by the city; and we believe its ownership and operation by the company, as an auxiliary plant for
The mortgage in suit, covering the plant so constructed, was executed by the Water Supply Company, securing its negotiable bonds, which were marketed and the proceeds applied in performance of the construction contract; and the foreclosure decree involves only disposition of such property. Unless the facts in evidence disprove ownership of this property, in whole or in part, by the mortgagor company, and establish ownership in the city of Laporte, as of the date when the mortgage was delivered, we bélieve the mortgagees, to be entitled to the equitable relief awarded by the decree. Eor reversal, however, the appellant contends, in substance, that the ordinances and proceedings throughout were fraudulent means, devised and carried out between the common council and city officials, as one party, and Wheeler & Co. (bidders and contractors for the work), as the other party, to build the works for and on the credit of the city — in violation of the constitutional provision against incurring municipal indebtedness— with the Water Supply Company incorporated and serving as a cloak or dummy for the city and having no actual interest in the undertaking, and that such fraud and invalidity are established, either “(a) resadjudicata, in the case of Scott v. City of Laporte et al., or (b) under the undisputed circumstances in evidence. Thus the issue raised is not whether the ordinance provisions are enforceable against the city, nor whether the proceedings referred to were invalid in so far as they attempted to impose obligations upon the city, but it is limited to the inquiry whether contract relations and collusion between the parties to the undertaking are established, which affect and invalidate, in whole or in part, the mortgage of the plant, so issued by the Water Supply Company.
The defense of res adjudicata rests on a decree obtained by Scott and other taxpayers in their suit against the city of Laporte and executive officials thereof and the Water Supply Company, which was commenced August 26, 1899, after the adoption of the ordinance and before the Water Supply Company let the contract for the work or made the mortgage involved in the present suit. The original complaint alleged, in substance, a fraudulent scheme devised by the city officials and Wheeler & Co. to evade the constitutional inhibition referred to, through the ordinances of August 7th and incorporation of the Water Supply Company; that the city was to pay in $30,000 and the Supply Company was to issue bonds secured by mortgage for the remaining amount of the cost; that the Supply Company was not a bona fide water corporation, but was created merely for the purpose of constructing the work, without bona fide subscription for stock; and that the entire purpose was to construct the works for and on the credit of the city and create municipal liability both for its bond issue and for the amount of the bonds and mortgages made by the Supply Company. Its prayer is to have the ordinances and all contracts there
“That it was not the intention of the common council nor of the firm of W. II. Wheeler & Co. and the incorporators of the I Aporte Water Supply Company or any one of them at the time of the acceptance of the proposal of said firm, the passage of said ordinance of August 7. 1899, and the acceptance of the terms thereof by said company, nor at any time, that said company or any of its incorporators should, nor did they nor any of them, provide, pay, or in any way contribute any money, pay for any stock subscribed by them, or provide any means in aid of the construction of said supply plant, or in any way maintain the waterworks of said city or supply it or its citizens with water otherwise than as contractors for the construction of said plant.
“That the said Laporto Water Supply Company was organized in furtherance of the combined purpose of said IV. H. Wheeler & Co. and the common council of said city to evade the constitutional restriction upon the city to become indebted in a sum ill excess of two per cent, of its taxable property, and its relation to said city was and over has been that of its agent and servant acting under the direction of its oilieers and common council and committees. and as such agent and as trustee took and held the title of the land and right of way of said city on which said supply plant, was constructed and installed for the purpose of incumbering the same by the issuing of bonds in the name of said company and executing a mortgage or trust deed securing the said bonds.”
The judgment thereupon reads as follows:
“It is therefore considered and adjudged that the ordinance of defendant city of August 7, 1899. referred to in the complaint and findings herein, is null and raid; that the defendants, their officers, agents and servants, and each*28 of them he and are hereby severally, perpetually enjoined from paying or making any payments upon, or appropriating, demanding or receiving money for the payment of, the bonds or interest thereon of the Laporte Water Supply Company, described in the finding and -being an issue of $05,000.00 par value, dated -r- day of -, or the debt hereby- attempted to be secured ; and that said defendant city, its officers, agents and servants are hereby further perpetually enjoined from granting, giving or paying any money or thing of value to, or placing any of its funds at the disposal of, or paying any bills incurred, audited or authorized by' the defendant Laporte Water Supply Company or its officers, agents or servants; and said defendant Laporte Water Supply Company, its officers, agents and servants are enjoined from in any manner making any demand upon the defendant city for money, property or thing of value whatsoever.” . . .
The conclusiveness of this adjudication of the issue, as against the defendants there sued, is unquestionable. As the mortgage was issued by the Water Supply Company after the litigation was commenced, the mortgagees (appellees) were alike concluded thereby, under the common-law doctrine of lis pendens, unless their interest is exempt from such rule, either through the statutes of Indiana providing for lis pendens notice, or through the recognized exceptions from the rule at common law. The force of the judgment, therefore, hinges on the interpretation of one or both of these lis pendens rules; but, before passing to their consideration, two special objections raised by the appellees are overruled, namely: (a) That the above-mentioned suit was not prosecuted with diligence, after denial of the temporary injunction, and such delay, together with conduct referred to on the part of Scott, were indicative of abandonment of the litigation; and (b) that the original complaint was insufficient to authorize the findings or give notice of such purpose of the suit. We believe neither of these propositions to be tenable; that neither unreasonable delay appears in the prosecution of the suit, nor circumstances tending to-impair its force — the denial of the injunction not being appealable un.der the Indiana practice — and that the amended and supplemental complaints were both authorized and competent for all such purposes, if it be assumed that the original averments were defective.
Is the statutory provision in Indiana for lis pendens notice applicable to the case ? For answer to this inquiry it is conceded that article 73 of the chapter on “Civil Procedure” (1 Burns’ Ann. Ind. St. 1894, § 327) contains' the only provision on which such application may be predicated. It reads:
“Whenever any person shall have commenced a suit to enforce any lien upon, right to, or interest in any real estate upon any claim not founded upon an instrument executed by the party having the legal title to such real estate, as appears from the proper records of such county, and recorded as by law required, it shall be the duty of such person to file a written notice [as provided].”
We believe neither of the above terms of the' statute to embrace, in any sense, the nature or subject-matter of the Scott suit, which is filed on behalf of taxpayers, for injunctional relief against proceedings alleged to be invalid attempts to increase the municipal indebtedness, which must be borne by the taxpayers; and no decision thereunder is brought to our attention to sanction any interpretation to that effect. In conformity with the general rule in reference to like statu
The general rule is well established and unquestioned “that all persons dealing with property are bound to take notice of a suit pending with regard to the title thereto, and will, on their peril, purchase the same from any of the parties to the suit.” County of Warren v. Marcy, 97 U. S. 96, 105, 24 L. Ed. 977. Its expositions by Chancellor Kent, in Murray v. Ballou, 1 Johns. Ch. (N. Y.) 566, 573 (as applicable to realty), and in Murray v. Lylburn, 2 Johns. Ch. (N. Y.) 441, 442 (as applicable to a bond and mortgage or other personal property), have been accepted in this country, wherever the common-law rule obtains. As thus recognized and as upheld in County of Warren v. Marcy, supra, an exception is made to the rule in cases of “negotiable securities purchased before maturity and articles of ordinary commerce sold in the usual way.” In Murray v. Lylburn, supra, it was held that “bonds and mortgages are not the subject of ordinary commerce,” and are within the rule; and like doctrine is expressly pronounced and applied in Union Trust Co. v. Southern Nav. Co., 130 U. S. 565, 570, 9 Sup. Ct. 606, 32 L. Ed. 1043, and Mellen v. Moline Iron Works, 131 U. S. 352, 364, 370, 9 Sup. Ct. 781, 33 L. Ed. 178.
The appellees contend, however, that the mortgage in suit is entitled to exemption from the rule, notwithstanding these decisions, for the reason that it is made by a public service corporation, as security for the corporate bonds; that, under present day conditions, such issues are marketed and held, not only as negotiable securities, but as “articles of ordinary commerce,” and should be so classed within the . exceptions above stated; and that, were the harsh rule of lis pendens notice applied to such securities, it would destroy their inestimable value and importance in the trade of the country. For this distinction from the early rule of Murray v. Lylburn, counsel cites Railway Co. v. Lynde, 55 Ohio St. 23, 39, 52, 44 N. E. 596, and Farmers’ L. & T. Co. v. Toledo, etc., R. R. Co., 54 Fed. 759, 772, 4 C. C. A. 561. The first-mentioned case appears to support the contention; and the opinion in the other case mentions that “a bona fide holder of negotiable corporate bonds is not subject to the general doctrine of lis pendens,” but we do not understand the decision in the case to be predicated on that view. We are impressed with the importance of the basic question, whether securities thus issued and marketed, either individual or corporate, should be subjected to the lis pendens rule, but we do 'not believe the distinction above sought, in favor of securities issued by so-called public service corporations, authorizes exemption from the rule, under the established doctrine which must govern the case at bar.
The settled rule in reference to the immunity of negotiable notes and bonds in the hands of bona fide holders before maturity from matters of defense between the maker and payee does not affect the
The exemption from lis pendens notice of negotiable notes and bonds involved in a suit, either left in circulation or permitted to issue without restraint, and of “articles of ordinary commerce” which are the subject-matter of litigation, is well recognized as resting on grounds of public policy, with no applicability, as we believe, to the mortgaged property in question, nor to a suit involving right or title thereto. Immunity of the above-mentioned classes of personal property is due to their transitory nature, requiring either custodia legis or injunctional relief to preserve liability or status quo, while no such requirement or rule (in the absence of statute) is applied to real estate or fixed chattels and interests therein. In reference to such interests, we believe -the doctrine to be established by the Supreme Court — directly in Union Trust Co. v. Southern Nav. Co., supra, and Mellen v. Moline Iron Works, supra, and inferentially under all the earlier cases — that lis pendens is binding upon a purchaser or mortgagee of the property, when the grantor or mortgagor is party to a suit which involves his right or title thereto; that no form of transfer by the party can affett the jurisdiction of the court over the subject-matter, whether the instrument is made to secure negotiable paper, or upon other considerations ; and that the exception above' referred to in favor of commercial paper is not applicable to a mortgage so made.
We are of opinion, therefore, that the general tests-of lis pendens liability are applicable to the case at bar, namely, (a) the character of the mortgaged-property, and (b) the issues involved in the pending-suit. ior the one test, the property described in the mortgage and decree, constituting a water supply plant, is plainly within the rule, as uniformly defined by the authorities. It consists of two portions— one of real estate outside the limits of the city, purchased and held in the name of the mortgagor, with wells, pumps, appliances, and water
Under the conclusion above stated, it is not needful to review the evidence introduced in the present record, in support of like averments' of collusion and fraud in the procurement and purposes of the ordinances and proceedings referred to, nor these contentions of appellees thereupon: (a) That the alleged fraudulent purposes are not disclosed in the terms of the ordinances or proceedings of record on the part of the city; and (b) that the mortgagees are not chargeable with notice of evidence aliunde showing such purpose and its consummation. With the lis pendens notice thus operative, it becomes immaterial whether the mortgagees are alike chargeable under, other evidence. ■
The premise of fact is thiis established: That the contracting parties undertook — the officers of the city to obtain, and the bidders, Wheeler & Co. to construct — the water supply plant, in despite of the recognized condition, that the city was prohibited by the Constitution of Indiana to incur indebtedness for the cost of such work; that they united in the scheme to incorporate the Water Supply Company as a holding concern, to be invested with an ordinance franchise and become the contractor for and nominal owner of the plant, and issue a mortgage to raise $65,000 required for the work, in excess of about $40,000 to be furnished by the city, within its powers; that the funds so provided by the city were to take the form of payments for capital stock in the Water Supply Company, with no payments made thereon by the incorporators, representatives of Wheeler & Co., and the city of Eaporte was to become sole owner of the capital stock when the work was completed. These arrangements were carried out and the city (in such guise) entered into control of the plant, thus incumbered by the mortgage in suit, having contributed to the use of Wheeler & Co. — nominal stockholders and contractors for the work — the amount so applied as payment for stock. We believe the ordinance adopted for such purposes to be invalid, not only as res judicata, but under the settled doctrine in Indiana, in reference to like schemes to evade the constitutional limitation (see Voss v. Waterloo Water Co., 163 Ind. 69, 83, 71 N. E. 208, 66 L. R. A. 95, 106 Am. St. Rep. 201, and cases cited, and Eddy Valve Co. v. Town of Crown Point, 166 Ind. 613, 76 N. E. 536, 3 L. R. A. [N. S.] 684), and as well in other States (see Earles v. Wells, 94 Wis. 285, 293, 68 N. W. 964, 59 Am. St. Rep. 886; Water Works Co. v. City of Ironwood, 99 Mich. 454, 455, 58 N. W. 371; Browne v. Boston, 179 Mass. 321, 324, 60 N. E. 934) having like restrictions. As pointed out in these authorities, the
The effect, therefore, of invalidity of the ordinance, under which the plant was constructed, in reference to the relief sought and granted against the mortgaged property, remains to be ascertained; and its solution in the foregoing view is not free from difficulty. The plant is unitary in respect of its construction and service, as an auxiliary means of water supply for the pre-existing waterworks system of the city. For the present consideration, however, it requires apportionment into the two parts, having respectively several locations and •sources of title. The engines, structures, and water pipes within the city are affixed to real estate, either owned by the city or constituting highways thereof, with no property right in such real estate vested in the mortgagor company, otherwise than through the invalid ordi-. nance. On the other hand, the wells, pumps, water pipes, and other structures outside the city are located on lands purchased and held in the name of the mortgagor company, so that title to such portion does not rest on any grant or provision of the ordinance, although constructed and placed in conformity with its purposes.
1. In reference to the property so affixed within the city, we believe these propositions must be upheld: The mortgagor entered as a party to the collusive arrangement between the assumed representatives of the city and the bidders for the work, for adoption and acceptance of the ordinance, all having actual or presumptive knowledge of the facts which rendered such action on the part of the city officials both unauthorized and void. Thus the terms of the ordinance (section 4) purporting to confer right of entry upon and use of the lands within the city was not only without force as against the city, but all parties were in pari delicto thereunder; and for the purposes of the present inquiry it is immaterial whether the purported grant be defined as an easement or otherwise. With no other muniment of title, no right of entry or use in other form, for placing the works thereon, all parties engaged in the transactions were without color of right and mere trespassers. We believe, therefore, that neither the mortgagor, nor the mortgagees chargeable with notice (as before stated), have equities in the premises, under the facts as adjudged, to authorize the decree in their favor. In substance it assumes to confer a right of re-entry (for enforcement of the decree), both upon the streets of the city, to excavate and remove the water pipe and other appliances therein, and upon the lands and buildings owned by the city, to dismantle and remove the other fixtures described in the decree. While the general doctrine is settled that the participants in violation of like constitutional provisions are not entitled to relief in equity against municipal property thus created (Litchfield v. Ballou, 114 U. S. 190, 194, 5 Sup. Ct. 820, 29 L. Ed. 132, 10 Notes U. S. Rep. 1048; Gamewell Fire Alarm Tel. Co. v. Laporte, 102 Fed. 417, 419, 42 C. C. A. 405), we do not rest our conclusion thereupon. At common law the rule is established in reference to permanent improve
2. The remaining provision for foreclosure sale of the property held in the name of the mortgagor outside the limits of the city does not fall within the last-mentioned" rule. It is contended, however, that the general doctrine above referred to is nevertheless applicable thereto in the twofold view (a) of the established relations of the parties to the transactions, and (b) the unitary character ot the water supply works; and we are impressed with the seriousness of this objection under the settled facts. The insidious method which ultimately appears in the scheme for vesting in the city all property rights in the plant as an entirety, through its ownership of all the capital stock, marks the entire transactions as violative of the constitutional provision, alike with various methods of direct conveyance to the municipality of such property, subject to a mortgage, which are thus condemned by the authorities above referred ío; and no doubt is entertainable that the parties to the arrangement — “participes criminis” therein (Litchfield v. Ballou, ante) — may rightly be excluded from relief in equity for enforcement thereof in any form. But assuming that the mortgagor, Water Supply Company, incorporated between such parties to issue the stock and hold the property thereunder, thereby becomes a party, alike subject to condemnation and disability, we are not _ satisfied that its exclusive corporate ownership and possession of the real estate, wells, and fixtures in question could be disturbed and taken, either in law or equity, for the benefit of the city. None of the authorities cited thus extends the effect of such participation, and we do not understand the adjudication in the Scott Case to charge any equities therein in favor of the city, nor that equities appear in this record which would justify such charge, to deprive even the mortgagor-corporation of its several ownership in favor of the city — laying aside such rights as may have accrued through its subsequent purchase of the capital stock. Although the findings in the Scott Case and as well in the case at bar show that the city paid in (for its original purchase of stock) $30,000 proceeds of the issue of city bonds, and that $65,000 was contributed by the sale of the present issue of Water Supply Company bonds, there is no finding in either case which is directed to or tends to prove that the. real estate so purchased and improved by the company should be.
Whatever may appear to be the present relation and status of the mortgagor in the premises, however, we believe the mortgagees to be entitled to foreclosure relief in respect thereof, as granted by the decree. While they are bound, as we believe, by the adjudication against the validity of the ordinance, as unconstitutional in its purpose, and are thus left without title or equity in the property within the city predicated thereon, their rights in the other portion do not rest in any sense upon the ordinance. The real estate was purchased from the several owners for the Water Supply Company, and the title stands so vested in the mortgagor, with no right or interest possessed by the city, legal or equitable, apart from such rights as may be conferred by its purchase and ownership of the corporate stock; and the wells, pumps, pipe lines, and other fixtures were provided and placed thereon by such owner of the fee. So the complete property right thus vested in the mortgagor was conveyed under the mortgage, and the recording acts protect the mortgagees from adverse claims, except to the extent of the lis pendens notice. Neither that notice nor the ultimate decree therein (as before stated) purports to set aside the title thus acquired, and no disturbance thereof was made by the decree, beyond its in junctional provisions against payment by or demand of the city on account of the bonds and mortgage, and other liabilities attempted to be imposed. The invalidity of the ordinance is expressly adjudged, and in effect all obligation on the part of the city, express or implied under the scheme, are annulled; and that the pleadings in the Scott suit were interpreted by the Supreme Court as so limited, without force otherwise as against the mortgagees, ap
“A corporation lias in fact been croa toil, which has negotiated its securities, and it is not alleged that the purchasers or the holders of such securities had any notice of the option agreement of August 21, 1S!)0, which it is to be borne in mind was not of record. We shall therefore assume that whatever the city was endeavoring to do in the use that it was making of the Laporte Water Supply Company those who invested in the bonds of the city or the bonds of the Water Company had no notice of such purpose.”
Moreover, without the statutory lis pendens notice (which would seem applicable to disturbance of such title), we believe no extension of the decree thereto would be authorized in any view of the scope of the supplemental averments. The adjudication, therefore, should be construed in conformity with such opinion, as directed to avoidance of the purported property rights conferred by the ordinance, together with all provisions in any form for obligation on the part of the city for use of the plant, without affecting the above-mentioned title to the other property.
It is true that both portions of the works were provided in conformity with the purposes of the ordinance, to be united for an auxiliary water supply to the city system, and that each became useless for such object when severed, so that both depreciation of their value and loss to the city of such means of water supply must result from severance, while the city is forbidden to contract for purchase or use of that source of supply. The city cannot, directly or indirectly, be charged with liability to take and assume payment for works so provided by the unlawful scheme entered into between its officers and the contractors, but, without other equities than appear in the record, we believe sequestration or other taking of this portion of the works from the mortgagees, for the benefit of the city, would be inequitable and unauthorized. The amount paid in by the city was within the constitutional limit, although the purpose was adjudged unlawful. If entitled, in any view, to he made an equitable lien or charge upon such portion, as against the mortgagor, it was not so made under the lis pendens, and the mortgagees (and bondholders) acquired the title without notice thereof otherwise. We believe, therefore, that the decree rightly grants foreclosure relief in respect of thé property so held outside the city of Eaporte.
The decree appealed from must be reversed for correction in conformity with the foregoing opinion, and the cause is remanded to the Circuit Court, with direction to modify and enter decree accordingly.
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to dato, & Rep’r Indexes
Dissenting Opinion
(dissenting). Agreeing, of course, that the pipes can physically be cut in two at the point where they cross the city limits, I do not see liow that bears upon either the physical fact of the present integrality of the supplemental plant or the legal fact of the unsplitable nature of the taxpayers’ asserted cause of action and the final decree thereon.
Plans for the construction of the new system as an entirety were agreed upon between the city officials and the contractors. Realizing that a direct contract between them would be futile, they determined
Before a step had been taken in the physical work, taxpayers filed a suit for injunction. This was an assertion tftat they were the true representatives of the city, and that the city officials had abandoned their .posts and were about to trespass upon the city’s rights. The charge in substance and effect was that the city officials and the contractors were about to attempt under cover what they could not do openly; that they had devised a scheme under which they would try to evade the. Indiana Constitution; that the scheme consisted of organizing a corporation to act as agent and trustee of the city, of the corporation’s never having funds in its treasury except what were to be obtained from the city treasury and what were to be borrowed by it as agent and trustee of the city, of the corporation’s acquiring the naked legal title to a right of way from the wells to the city’s water station and holding such title and possession thereunder as agent and trustee of the city as the real owner and possessor, of the contractors’ building on such right of way the system according to the original plans and their original bid, of the contractors’ stepping aside after receiving their money partly from the city treasury and the balance from a loan to be obtained by the corporation as the city’s agent and trustee, of the corporation’s securing the loan by executing as the city’s agent and trustee a mortgage of the system as an entirety and then leaving the city as the actual owner, possessor, and operator of the plant and the real paymaster of the borrowed money; that the scheme had progressed to the point of organizing the corporation, passing the ordinance, and making the contract for the work; and that the entire scheme, unless enjoined, would be carried out to completion.
The facts being so, the decree, if rendered promptly instead of after years of litigation, would have stopped the scheme before a cent of the taxpayers’ money was taken from the city treasury to put into an unlawful enterprise.
The final decree was that of the Raporte circuit court. Regarding the quoted expression from the Indiana Supreme Court, it suffices to say that the mortgagees were not before that court; that no party then before it did or could present an issue as to that suit’s being or not being effective as lis pendens against the mortgagees; and that in the proceedings then before it the Indiana Supreme Court found error and remanded the cause for trial de novo. Thereupon it became the duty of the Raporte circuit court to hear the evidence, find the facts, draw conclusions of law, and enter a decree. The Raporte circuit court may well have concluded, the question of lis pendens not being
When the Laporte circuit court came to formulate its final decree, it had to pass upon the original complaint and the supplemental complaint as well. The latter document made no change in the taxpayers’ asserted cause of action. It merely exhibited a change in circumstances under which the injunction as originally prayed for would he ineffective. It charged in substance and effect that pending the suit the scheme had been executed; that money from the city treasury had been taken and used to buy the well site-and right of way outside the city in the name of the corporation, but for the city as the real owner; that the contractors had completed the plant and stepped aside after getting the amount of their original bid partly out of city funds and the balance out of a loan procured by the corporation as agent and trustee of the city; that the corporation as agent and trustee of the city had mortgaged the plant as an entirety to secure the loan and had turned the plant over to the city subject to the mortgage. The allegations of the original and supplemental complaints were found to be true. The final decree therefore had to be framed to protect under the changed circumstances the taxpayers’ rights as originally asserted. With findings of the fraudulent scheme as an entirety, of the fact that the formal corporation had been used throughout merely as a cover for the operations of the city officials and contractors, of the fact that the naked legal title to the right of way within the cit]^ and of the right of way outside the city (purchased with $600 or $700 of funds from the city treasury) was held by the corporation as trustee of the city, and of the fact that not a dollar ever went into the plant outside of $40,000 taken from the city treasury and $65,000 indirectly borrowed by the city through the corporation as its agent, it seems clear that a decree perpetually enjoining the corporation “from in any manner making any demand upon the defendant city for money, property or thing of value whatsoever” would forever preclude the corporation (no matter who should hold the stock thereof) from setting up any claim upon the water or other revenues of the city and also from disturbing the city in its ownership, possession, and operation of the plant as an entirety.
“Pendente lite nihil novetur” is a maxim of imperative policy. It therefore must override the individual’s plea of hardship. If a defendant to an injunction suit (the res litigiosa being of the kind that is within the maxim) changes the status, even though there be no temporary injunction, he is- in contempt of the court’s jurisdiction. Such a course can earn him no rights; at most, it can only change the form of what would have been thé final decree. An innocent investor, whether he takes his conveyance before or after decree, equally suffers if deprived of his investment; and the hardship is of the same kind, lesser only in degree, if but half is stripped from him. But if the suit is of the class, and the subject-matter of the kind, in which the max
Among the suits of which the world must take notice is the injunction suit that seeks to prevent acts affecting any kind of property except commercial paper or ordinary articles of commerce in the usual course of trade. Union Trust Co. v. So. Nav. Co., 130 U. S. 565, 9 Sup. Ct. 606, 32 L. Ed. 1043; Diamond v. Lawrence County, 37 Pa. 353, 78 Am. Dec. 429; Murray v. Lylburn, 2 Johns. Ch. 441.
“Lis pendens is notice of every fact contained in the pleadings and apparent on the face thereof, and of those other things of which the facts so stated necessarily put the purchaser on notice.” Jones v. McNarrin, 68 Me. 334, 28 Am. Rep. 66; Lockwood v. Bates, 1 Del. Ch. 435, 12 Am. Dec. 121; and other cases cited in 25 Cyc. 1476.
The members of this court are in agreement that the mortgagees were bound to know that the Water Supply Company had no right to take money from the city or from them and put it into the construction of the water system on the right of way easement within the city, the legal title to which stood in the name of the Water Supply Company. But what were the infirmities of which the mortgagees had actual or constructive knowledge? Not that the Water Supply Company did not have a good charter from the state; nor that it was wanting in corporate power to take a grant from the city “to erect, maintain and operate a waterworks system in, and near the city of Laporte,” and a grant from the city of a right of way within the city, and a grant from others of a right of way outside the city. The infirmities were that, although those things might be done in a proper case, in this case everything done or threatened to be done was an indispensable element of an illegal scheme which had for its sole aim the erection of the plant as an entirety and the turning over of it to the city subj ect to the mortgage; that the title to the easement within the city, though standing in the name of the Water Supply Company, was the .city’s title and would merge into the city’s original title; that the needed right of way outside the city was to be bought with the city’s money, and that the title, though standing in the name of the Water Supply Company, would be the city’s title; that the city’s money, to the extent of $30,000 or so, was first to be expended in putting a unitary system upon such lands; and that the city, through its agent, was to mortgage the plant for enough to finish it. The mortgage, when tendered to appellees, showed both the unity of the system and the unity of the plan by -which the money was to be raised. The physical situation itself was notice of the integrality of the system.
If the complaint was notice to the defendants that any attempt by them to construct the system would be in contempt of the court’s jurisdiction, then it was notice to anyone who was bound to take notice at all that no greater rights than the defendants would have could be obtained in the proposed system. If the decree is a final adjudica
1 admit, of course, that the Water Supply Company, solely by virtue of its franchise from the state to be a corporation, independently of its franchise from the city to build a waterworks system in and near the city, had the legal capacity to go out and buy lands with its own funds and place, thereon a valid mortgage. The franchise from the city was just as valid on its face as the franchise from the state. But the actual physical undertaking, the proffered mortgage itself, and particularly the taxpayers’ complaint were notice that it was the franchise from the city that was about to be exercised.
If, before the taxpayers’ complaint was filed, the execution of the scheme had progressed to the point where the city’s money had been used to buy the outside right of way in the name of the Water Supply Company, the taxpayers might have had to file the statutory lis pen-dens notice. But, if the complaint as filed gave the court jurisdiction of the res litigiosa and of all persons then interested in the res (the threatened exercise of the franchise from the city), no action of a defendant ill contempt of that jurisdiction could diminish the court’s authority on the original complaint to render a final decree that would forever conclude the defendants and all persons who were hound to take notice of the facts alleged in the original complaint.
The decree of this court strikes me as being of the same character as that of the Circuit Court. That decree, no less anxiously than this, professed to relieve the city of all liability, professed to enforce in favor of the taxpayers the constitutional prohibition of subversive efforts of city officers and all contracting parties to create liability. That decree eliminated the mortgage of the water rentals and the city’s taxes, expressly excluded every demand against the city, and confined itself to ordering the sale of the tangible property into which the mortgagees’ money had gone. Why was that decree, explicitly shutting out all personal liability on the part of the city, not permitted to stand? On account of the compulsive force of the situation. Because the only way the taxpayers could protect their underlying $30,-000 or $40,000 tied up in the unitary plant would be to pay off the superimposed mortgage. The present, decree is coercive in exactly the same way and nearly to the same extent. It puts into the mortgagees’ hands the sword that Solomon held over the child. The onlv method by which the taxpayers can protect their underlying $30,000 or $40,000 (and the $22,000 paid on the mortgage by the city officers in the face of the taxpayers’ suit) is to pay off the superimposed mortgage to the extent that the situation compels. The part within the city, if not used in a waterworks system, has onfy a junk value. To preserve the present value of the part: within the city the taxpayers will be forced to pay to the mortgagees (before or at or after the judicial sale) an amount substantially equal to what it would cost them to pur in new wells, pumps, and -[jipes to the city limits.
What more can taxpayers do to protect themselves against faithless municipal officers and eager contractors than to put into the state’s
