3. SAME-COMPROMISE OF CITY DEBT.

A committee of a city council, appointed to consider the city indebtedness, made a report containing a statement of the assets and liabilities of the city, and including among the latter a certain issue of bonds called M. bonds. The report further proposed a plan of compromise to be made with the holders of city bonds, the proposal being made in the form of a circular, which the committee recommended to be sent to each person holding city bonds, except M. bonds, as to which we make no report." The circular, by its terms, purported to be addressed "to each person holding bonds of the city," and requested "each bondholder to express his views fully." The city council adopted the report of the committee and ordered the circular to be sent to the holders of the city bonds; and it was so sent to holders of bonds other than M. bonds, but not to holders of the latter. Held, that neither the note nor the circular was an acknowledgment of the M. bonds as a debt of the city, so as to take them out of the statute of limitations.

4. PRACTICE-TRIAL BY COURT-SPECIAL FINDINGS-REVERSAL OF JUDGMENT.

Where a circuit court of the United States, on the trial of an action at law before it, on the waiver of a jury, makes a special finding of facts on all the issues raised by the pleadings, and gives an erroneous judgment thereon, which this court reverses, it is proper for this court to direct such judgment to be entered by the circuit court as the special finding requires.

In Error to the Circuit Court of the United States for the District of Kansas.

J. D. McCleverty, for plaintiff in error. 8. E. Brown, for defendant in

error.

BLATCHFORD, J. This is an action brought by the defendant in error in the circuit court of the United States for the district of Kansas against the city of Fort Scott, in the state of Kansas, to recover the amount of principal and interest due on 27 bonds for $500 each, issued by that city, 12 of which, became due on July 1, 1873, and 15 on July 1, 1874. The bonds are coupon bonds, with interest payable annually on the first of July at the rate of 10* per cent. per annum, and are dated July 1, 1871. Each bond contains the heading, "Special Improvement Bond of the City of Fort Scott, Kansas," and this statement: "Issued in accordance with sections 16 and 17 of an act of the legislature of the state of Kansas, entitled 'An act relating to the powers and government of cities of the second class, and to repeal certain sections of chapter 19 of the General Statutes of 1868, approved March 8, 1871,' and in pursuance of an ordinance of the city of Fort Scott, entitled 'An ordinance ordering the grading and macadamizing, etc., of certain streets and parts of streets, approved May 19, 1871.' Countersigned by the city treasurer, this twentieth day of September, 1871." The suit was commenced July 1, 1880, and was tried by the circuit court without a jury. As to 11 of the 12 bonds that court found that all the coupons on them had been paid on and before July 1, 1873, but no payment of principal or interest had been made upon any of them since that date, except as stated in its fourth finding. As to the 15 bonds it found that all the coupons on them were paid on and before May 16, 1875, but no payment of principal or interest had been made upon any of them since that date, except as stated in its fourth finding. The remaining findings were as follows:

4. The court further finds, that, as to the remaining bond sued on herein, being bond number 78, it became due, by its terms, July 1, 1873, and on and prior to that date all the interest coupons thereon had been paid; that, on November 8, 1875, a payment was made on said bond number 78, of the sum of $290, and the balance of said bond remained due and unpaid at the time of the commencement of this action; that said payment upon bond 78 was made by Donnell, Lawson & Co., fiscal agents of the state of Kansas, upon the authority of certain letters sent them by J. H. Randolph, city treasurer of the defendant, written by him in the usual routine of his official duties, but without any special instruction or knowledge on the part of the city council of said city; which said letters are as follows, to-w10.

152

*"FORT SCOTT, KANSAS, June 10, 1875.

"Mess. Donnell, Lawson & Co., New York-DEAR SIRS: Yours of the second inst. at hand. The coupons of our special improvement bonds are all retired except bonds Nos. 97 and 107 to 113; the last coupon on these Nos. (all past due) is not yet in; will give you statement of am't and Nos. of these bonds due and unpaid by next mail. You may redeem any one of these bonds whenever this fund in your hands is sufficient to do so. My remittance of May 26th, of $245, was all to apply on coupons of bonds issued to the M., K. & T. R. R. Co., and not $70 of it for special im. fund, as you state you have credited, in your letter of June 1st. The Nos. of the bonds to which these coupons belong are 1 to 7, inclusive. You will please make the transfer of the $70 to your Fort Scott City coupon acc't. About what would our city funding bonds bring in your market, bonds running 10 years, int. payable s. a. at 10 per cent. p'r annum?

"Resp❜y, yours,

J. H. RANDOLPH, City Treasurer.

"FORT SCOTT, Kansas, August 6, 1875. “Mess. Donnell, Lawson & Co., New York-GENTLEMEN: I give you below the Nos. of our special improvement bonds now unpaid. Nos. 6 to 15, 17 to 22, 24, 30 to 39, 53 to 58, 60 to 80, 83 to 85, 97, 98, 99, and 104 to 115, in all 70 bonds of $500 each, all past due. I will be in New York last of this month, and will call and explain to you the situation in regard to these bonds, so you may understand the reason why they are not paid, and that owners of the same may govern themselves accordingly.

"Very resp'y yours,

J. H. RANDOLPH, City Treasurer.

"FORT SCOTT, KANSAS, August 11, 1875. "Mess. Donnell, Lawson & Co., New York-GENTLEMEN: I inclose you herewith d'ft for $500 to apply on interest, due on Fort Scott City special improvement bonds.

"If not convenient to apply on interest use to pay on bonds.

"Resp'y yours,

On November 8, 1875, said fiscal agents paid bond 77 of *this series, and said $290 on said bond 78, they being the only bonds presented to that date, which payments exhausted the funds in the hands of said fiscal agents. That the official accounts of the treasurer of said city contain the following entry of credit to himself: "August 11, 1875. By Donnell, Lawson & Co., to pay interest on special improvement bonds, $500," which was the moneys remitted by said treasurer in the letter of August 11, 1875. Said payments were reported by the city treasurer in his annual report and approved by the city council.

J. H. RANDOLPH."

(5) The court further finds that in July, 1878, the defendant, the city of Fort Scott, Kansas, by its city council, referred the matter of its financial condition to the finance committee of said council, which committee made a report in writing to said council on the twenty-first day of August, 1878, which report was duly adopted and spread in full on the records of the minutes of said council and is as follows, to-wit:

"COUNCIL PROCEEDINGS, AUGUST 21, 1878.

"Adjourned regular meeting. Mayor Cohen in the chair. The report of the finance committee on the matter of the city indebtedness was read, and on motion adopted and ordered placed on file. It is as follows:

"To the Hon. Mayor and Councilmen of the City of Fort Scott, Kansas: We, your committee on city indebtedness, met with and consulted B. P. McDonald, D. P. Lowe, J. S. McCord, J. D. McCleverty, and also J. D. Hill, W. J. Bowden, W. A. Cormany, members of the board of education of this city, whom the committee thought should be invited; and, after careful consider

ation, the joint committee unanimously agreed on the plan of compromise sct forth in the following circular letter, which we recommend be sent to each person holding city and school-district bonds, except Macadam bonds, about which latter we make no report:

1870,

1871,

1872,

1873,

1874,

* 1875,

*"CITY CLERK'S OFFICE, FORT SCOTT, KANSAS, Sept. 3, 1878. "DEAR SIR: The city council of Fort Scott address this to each person holding bonds of the city of Fort Scott, Kansas, with a view to bring about such an amicable adjustment of the indebtedness of our city, if possible, as will be fair to the bondholders in view of our circumstances, and at the same time be such an one as the city can reasonably expect to be able to meet. Nearly all of our county, city, and school-district indebtedness was incurred at or about the year 1870, which was what would be called our times flush, when money was plenty and property of ready sale at good figures. In 1870 the assessed valuation of all kinds of property in the city was $1,445,730, as shown by the tax-roll, while our assessed valuation for the year 1878 is only $814,457, being a decline in valuation of $631,273, or nearly one-half, a decline which cannot be accounted for upon the basis of the general decline in values, but is doubtless largely attributable to the excessive burden of our debt and taxation. For the year just past our levy for all funds in the city was 5.25 per cent., while, this year, had an adequate levy been made, it would have been nearly 7 per cent., and this, too, without making any levy for sinking-fund purposes to meet our railroad bonded indebtedness. A careful examination of our financial condition convinced us that to meet our indebtedness in its present form, including our share of the county and school-district indebtedness, would, within two or three years, require a levy of 10 per cent., and, should the extreme decline in our assessed valuation continue, the rate would exceed that figure. Our assessed valuation of all kinds of property in the city, beginning with the year 1870, as shown by the tax-roll, is as follows:

1876,

1877,

1878,

City railroad debt,

City school-district bonds,

City bridge and funding bonds,

City special improvement bonds and accrued interest,

Other sundry indebtedness, about

Total,

$1,445,730 1,421,682

1,382,950

1,233,624

1,386,294 1,071,834

958,896 904,368 814,457

"The increase in valuation in 1874 is explained by the fact that nearly 250 acres of outlying additions were that year annexed to the city. In the face of this great decline in value our indebtedness is rapidly maturing, and is yet to be provided for. The indebtedness of our county in railroad bonds is $300,000, of which $150,000 are in litigation, and upon which there is nearly $40,000 of an accumulation of unpaid interest, and all may yet be adjudged a valid indebtedness. The assessed valuation of the county, including the city, this year is $3,509,164; the valuation of the city being about one-fourth of that, places one-fourth of the county's burden upon the city. A statement of our indebtedness, then, upon that basis is as follows:

One-fourth Co. debt,

*155

$ 85,000

100,000

37,500

41,500

45,000

6,000

$315,000

*156

157

"From this statement it will be seen that the ratio of our total indebtedness to our assessed valuation is about 40 per cent. Of our indebtedness, our school-district, bridge, and funding bonds bear ten per cent. interest, and for these the city has had something in the shape of value received. In the matter of our railroad 7 per cent. bonds, however, both county and city, the universal sentiment of our people is that we have not been rightly treated. Each of the railroad companies promised that their machine shops should be built and located in Fort Scott. The M., K. & T. made a written contract to that effect, and the city railroad debt of $100,000, and a county railroad debt of $150,000, was created. The bonds were delivered, but the railroad companies have built their shops elsewhere. The M., K. & T. Railroad, after receiving $100,000 of city and $150,000 of county bonds, not only failed to comply with its contract, but started a new town, built its machine shops there, and has since lent every effort of its great power to foster a rival town within fifty miles of this place. Had the railroad companies fulfilled their pledges, Fort Scott nor Bourbon county would not now be asking leniency at the hands of their creditors; our debts would not have been out of proportion to our valuation, our people would have been satisfied, our town and county prosperous.

Both

"We have incurred the debt; we have failed to receive the benefits. of the railroad companies are bankrupt, and we are without remedy or hope of redress. A strong sentiment has always existed in favor of utterly repudiating our railroad debt, and now that the time approaches for levying a sinking-fund tax to pay that debt, this sentiment increases. The present bondholders may be blameless as to the bad faith of the railroad companies, but the result to us is all the same, and our debt burden in nowise relieved by that fact. Our inability to pay such a debt seems apparent, and sooner or later we know that we must fail. An increase in taxation means a decrease in value, the refusal of the tax-payer to pay, the driving out of capital already invested, and the turning away of those who would otherwise settle here. Realizing this, we have this year omitted to make a levy for debt purposes, either principal or interest, and hope, by a statement of the facts and of our circumstances, together with the safeguards which we propose for the future, to effect a compromise, which, while burdensome still to us, yet we know we can meet, and at the same time give to the bondholder as high a marketable value as he now has in the paper he now holds. We feel, however, that a difference ought to be made in the two classes of bonds, and hence we propose to refund the city and school-district debt upon the following terms: The city railroad and machine shop 7 per cent. bonds to be refunded, at 50 cts. on the dollar, into a 30-year 5 per cent. bond, payable at any time after 10 years, and the school-district funding and bridge 10 per cent. bonds to be refunded into a like bond, at the rate of 75 cts. on the dollar of the present amount of bonds outstanding. This would make the amount of our city and school-district debt about 20 per cent. of our valuation, leaving out of consideration our proportion of the county indebtedness, which, if considered, would still leave our debt about 30 per cent. of the valuation.

"To effect this compromise we will need new legislation, and, in obtain. ing this, we propose and suggest the following provisions of law, as a protection to the holders of the compromise bonds against a subsequent overissue, which might compel a new compromise, to-wit: A tax levy for interest, to be made annually, sufficient to pay the interest then due. At the end of 10 years one-twentieth, or five per cent., of the principal to be collected, and for each year thereafter, until the whole refunded debt is paid or liquidated. Making any officer who shall prevent such levy personally liable to any bondholder for the amount then due, to be recovered in a civil action; making it a misdemeanor, punishable by fine and imprisonment, for any officer to divert any portion of the funds so collected to any other purpose than the payment

of these bonds and interest, the fine to be not less than the sum so diverted; making a provision that the aggregate amount of our bonded indebtedness, when the now proposed compromise is effected, shall never be exceeded, until the entire amount of the compromise bonds shall be fully paid, and making any bonds that might be issued in excess of that amount absolutely null and void. The bonds issued under such a law as this would be absolutely protected against an overissue in the future, and, with this safeguard, would sell, in the aggregate, for more dollars and cents than the entire amount of our present bonded indebtedness.

"In response to this, we ask each bondholder to express his views fully, stating the amount and kind of bonds he holds; and we sincerely hope that a compromise can be fully agreed upon by the time our legislature meets in January next, so that the proper legislation may be obtained, and the refunding bonds issued in time for the making of a levy in 1879.

666

939

446 By order of the city council of the city of Fort Scott, September 3, 1878. City Clerk.' At said meeting of August 21, 1878, said city counsel also adopted the following motion, as appears by said records:

"On motion, the city clerk was instructed to have one hundred copies printed of the circular letter, with the report of the finance committee on our indebtedness, as the city attorney may direct, to be sent to the holders of our city bonds."

(6) That, under date of September 3, 1878, the city clerk of said city caused to be printed 100 copies of said circular letter, each being printed with a dotted head-line in which to write the name of the person addressed, and sent a copy of the same to each of the holders of the bonds of said city, except to the holders of said special improvement or Macadam bonds, but did not send said circular to this plaintiff, nor to any agent or representative of his, nor to any other holder of said special improvement or Macadam bonds. The reason why said city clerk did not send any of said circulars to any of the holders of said special improvement or Macadam bonds was because of the directions to that effect made in the adopted report of the finance committee of said city council, as set forth in finding No. 5 herein. Each of the circulars so sent out by said city clerk were signed by him in writing, and had the name of the person to whom sent written in the dotted head-line thereof. Some persons holding bonds of said city, other than said special improvement or Macadam bonds, did receive copies of said circular in which no name was written in said dotted head-line, but were signed by said city clerk.

(7) That, in 1878, and after September 3d, one Thomas W. Marshall, of Westchester, Pennsylvania, where plaintiff resided, who held some of the bonds of said city other than said special improvement or Macadam bonds, received one of said circulars, which he showed to plaintiff, which was signed by said city clerk in writing, over the words "city clerk" at the end, and one H. Burkhalter, at Westchester, Pennsylvania, who also held some of the bonds of said city other than said special improvement or Macadam bonds, received one of said circulars in 1878, which he gave to plaintiff. Said circular was also received by other persons residing at Westchester, Pennsylvania, who held bonds of said city other than said special improvement or Macadam bonds.

(8) That the class of bonds sued on herein are described on their face as "special improvement bonds," but were commonly called "Macadam bonds" by the holders thereof, and by the officers of said city, and were issued by said city in payment for macadamizing certain streets in said city.

On the foregoing findings of fact the court held, as matter of law, that the plaintiff was entitled to recover on the bonds $26,385.23, and to have judgment accordingly, and judgment was entered for that amount, to bear in