City of Memphis v. Brown/Opinion of the Court

[Syllabus from pages 289-291 intentionally omitted]

APPEAL from the Circuit Court for the Western District of Tennessee; the case, as appeared from a master's report, and otherwise, having been thus:

By a general incorporation act of the State of Tennessee, all cities of the State have full power to provide for the paving of streets, alleys, and sidewalks.

The charter of the city of Memphis, in the State just named, enacts that 'the board of mayor and aldermen shall have power to improve, preserve, and keep in good repair the streets, sidewalks, public landings and squares of the city.'

It enacts also, that the city may require lot-owners to improve the streets fronting their lots, and that 'should any owner fail to comply with any ordinance requiring him to repair, grade, and pave the same, the mayor and board of aldermen may contract with some suitable person for repairing, grading, and paving the same, and pay therefor,' and collect the amount from the lot owner.

It enacts also that the city may issue its bonds 'for the construction and pavement of the principal streets of the city;' and an act amendatory of the charter authorizes the issue of bonds 'for any public improvement.' Nothing was said as to the rates at which it might sell these bonds.

The ordinances of the city require that 'the city attorney' should prosecute all suits to which the city might be a party, or in which it might be interested.

These provisions of law and this ordinance being in force, the city of Memphis, in the year 1866, being desirous to have certain of its streets paved with what is known as the Nicholson pavement, passed an ordinance directing the mayor to advertise for twenty days for paving the whole or parts of them according to the plans and specifications of the engineer's office, and further authorized the mayor and the finance committee to make and enter into contract or contracts with the lowest responsible bidder, as to payments and time of completion, with such restrictions as they might think best.

'The city civil engineer shall forthwith proceed to make a plat of said streets and a plat of the lots bounding and abutting the same; and shall be actual measurement ascertain the number of feet front on each lot bounding and abutting the said streets; and shall mark upon his plat the names of the owners of such lot and the number of feet belonging to each. . . . He shall also prepare and lay before the board of mayor and aldermen at their first meeting after a contract shall have been made by them for the grading, constructing, and paving of the street, upon which such lots front, an estimate of the entire cost of said improvement under the contract aforesaid, as shall be opposite the respective lot or lots, and shall mark upon said lot the amount thereof; and such amounts are hereby declared to be a special tax upon such lots respectively, and a debt due by the owners thereof in such instalments as the board of mayor and aldermen may determine; and he shall make out and deliver to the attorney for the city a list of the owners and the amounts due respectively, with the number of the lot and time of payment, and the attorney shall proceed to collect the same, and in case the owner shall fail to pay on demand, to enforce the lien against the lots given by the charter of the city.'

The advertisements and surveys directed were made, and bids put in by different parties. Among the bids were one by Taylor, McBean & Co., and another by Forest, Mitchell & Co. These two bids were accepted.

Accordingly, on the 11th of March, 1867, the city entered into a contract with Taylor, McBean & Co. for the paving, in sections, certain streets. The contract said:

'Upon the completion of each section, the contractors shall receive from the owner or owners of lots fronting upon said section one-half of the price of the same in cash, the remaining half to be paid by the said owner or owners in thirty, sixty, and ninety days, they giving their notes for the same, with the lien fixed by the city charter retained in said notes.

'The accounts for said pavement will be made out upon the completion of each section, by the city engineer, against the property owner or owners and delivered to the contractors for collection, and if not paid according to the terms above specified, within ten days after said payment becomes due, said accounts shall be placed in the hands of the city attorney for collection under the city charter.

'The city of Memphis will and does hereby guarantee to the contractors the payment of said accounts, as so assessed against the property owner or owners for the pavement.'

This contract was called 'the cash contract.'On the 16th of July, 1867, the city entered into another contract, this one being with Forest, Mitchell & Co., for paving, in like sections, certain other streets. This contract said:

'Upon the completion of each section the contractor shall receive from the city the whole amount due under the conditions of this contract for said section; the same to be paid in Memphis city paving bonds, payable in five, ten, and fifteen years, in equal proportions, with six per cent. coupons attached, payable semi-annually. Principal and interest guaranteed and provided for by a sinking fund set aside for that purpose. Bonds to be taken at par.'

This contract was called 'the bond contract.'

As the reader will observe, there was no provision in this contract for assessment, nor any reference to property owners, or guarantee of payment. The contract was, however, subsequently modified as to the amount to be paid for certain portions of the work and as to the form of payment, with a provision for assessment and collection of certain portions thereof, as had been made in the cash contract.

Both of the contracting firms above named were unable to perform what they had contracted to do, and with their consent and that of the city, a new firm, that of Brown & Co., was substituted in their places; succeeding to their obligations and to their rights. Brown & Co. paved the streets according to the contract.

The property-holders of the streets paved did not pay for the paving opposite to their respective lots; and this failure of theirs producing embarrassment on the part of Brown & Co., these last sought relief by an application to the city. To give this relief the city, in August, 1868, lent to Brown & Co. its bonds to the nominal amount of $99,000. The bonds were worth at the time not more than fifty cents on the dollar, and they were lent with the understanding that they might be sold for what they would bring, and that other bonds might be bought to replace them when they should mature. Early in November, 1868, another application of the same character was made for $175,000 of the city bonds; and a resolution was passed on the 18th, by the city councils, and an agreement signed on the 20th of November by the city of the first part and Brown & Co. of the second. The agreement recited:

'That, whereas the party of the first part, in session on the 18th day of November, 1868, did pass the following resolution, to wit:

"Resolved, &c., That the city will loan Messrs. Brown & Co., the contractors of the Nicholson pavement, one hundred and seventy-five thirty-year $1000 pavement bonds for eighteen months, upon condition that said contractors will place in the hands of the city attorney paving bills against the property holders to the amount of the face value of said bonds; and upon the further consideration that said contractors WILL release the city from all liabilities upon said paving contract, unless it should be decided by the courts of least resort that the property holders are not liable for said pavement. The interest upon said bonds shall be paid by the said Brown & Co., and at the end of said eighteen months said bonds shall be returned to the city, principal and interest, unless said interest has been previously paid:'

'Which said resolution embraces all the conditions of said loan, and is accepted by the parties of the second part.'

'It is further agreed by said parties that the city will furnish said bonds as rapidly as they can be executed, and that as said bonds are delivered to the said Brown & Co., the said Brown & Co. will deliver to the city attorney the collaterals to secure the same. This agreement is in no wise to affect or modify the terms and obligations of the original contracts for paving the streets of Memphis with the Nicholson pavement, as now existing between the parties, or the owners of the lots abutting on the streets, except when said contracts are changed and modified by the above resolution of the board of mayor and aldermen and this agreement.'

The city did not comply with this contract. The master thus set forth the facts:

'Brown & Co. received, with much delay in their issue, $140,000 in city bonds. The remainder of the loan ($35,000) was wilfully withheld by the then acting representatives of the city, and applied to payment of interest on the general funded debt of the city, the city getting about fifty cents on the dollar for the bonds thus withheld. The mayor had given to Brown & Co. a letter (called by the city an acceptance, but which does not possess a single quality of a commercial acceptance), stating that Brown & Co. should be entitled to receive $35,000 of Memphis city bonds so soon as they could be signed and ready for delivery. But they were never signed, or if signed, never delivered, and in that particular the city did not comply with the stipulations whereby it received an agreement for release from its guaranty of the cash payments by property holders. The greatest and apparently most inexcusable neglect and delay were exhibited by the city government in the delivery of the bonds promised to Brown & Co. under their loan contracts.'

The following was the form of one of the papers termed acceptances:

'MEMPHIS, August 27th, 1868.

'MESSRS. BROWN & CO.: As soon as it is possible for me to sign them I will issue to you, or your order, ten $1000 bonds of the city of Memphis, the same being a part of the number you are entitled to by a recent order of the board. You may use this in any negotiation necessary to accomplish your purpose, and the bonds can be delivered to your order on return of this letter.

'W. LEFTWICH, Mayor.'

Brown & Co. and the city not being able to arrange matters between them, Brown & Co., in 1869, brought a suit at law to recover from the city $600,000, which the firm asserted the city now owed it upon the two contracts for paving. The city set up the agreement of November 20th, 1868, as an accord and satisfaction, and full performance was averred.

At a subsequent date, to wit, in November, 1870, the city filed a bill in equity against Brown & Co., alleging various matters of equitable defence, and asking that the firm be restrained from proceeding in a suit at law. To this bill Brown & Co. made answer, and also filed a cross-bill against the city.

In November, 1870, all proceedings in the suit at law were ordered to be stayed, to the end that the matters in controversy be determined in the equity suit; and in that same month, Brown & Co. moved for an order of reference, upon the following notice:

'Come, Brown & Co., by solicitors, and move the court in this cause to order an interlocutory decree of reference to the clerk of this court, as master, to find and report to the court, at a future day in this term, or so soon as practicable, of and concerning the following matters:

'1. That he state an account of all the labor done, and materials furnished, and the value thereof, at the agreed prices under all the contracts set out and referred to in the bill and cross-bill herein, distinguishing the value of that paving done opposite the lots of private owners from the remainder and also of all payments made on account of _____, distinguishing the payments as above in the paving; and also finding how such payments were made, and under what agreement, if any.

'2. That he find how many bonds the city of Memphis loaned Brown & Co.; and whether such bonds had a market value, and what that value was at the date of the loans; also, at the date of the maturity of the loans; also, at the bringing of this suit, also, how much, if any, the city of Memphis was indebted to Brown & Co. at the date of such loans.

'3. That he find and report how many of the city's bonds were delivered under the contracts dated July 16th and November 13th, 1867, in payment, as therein provided; and also the value of such bonds when delivered; and the average value of such bonds in this market and New York, since delivery, to the bringing of this action; also, the value, at such times, in Memphis and New York, of such bonds having the payment of the principal and interest secured by a sinking fund set aside for that purpose.

'4. That he find and report whether any, and if so how much work was done by such contractors for the city, additional to that provided.'

In April following, no exception being filed, this motion was granted, and an order entered reciting that the action at law involving an accounting and adjudication of questions arising thereon was by consent joined with the present action, and the cause being at issue and coming on for hearing, it was ordered that it be referred to Mr. Mitchell as master in chancery to take proof, hear, and report to the court the proof, and his conclusions upon twenty-seven items specified, of which the final was, 'that he state an account between the plaintiff and defendant, embracing therein all the matters in the cause of the bill and cross-bill herein, and showing in the result the aggregate balance of debt of the debtor party to the other.'

Under this order the master entered upon his office, and evidence was taken before him by the parties.

As already said, the owners of lots along the streets paved, did not in the majority of instances pay the special charges assessed for the paving against the lots. Brown & Co. accordingly put the claims (which the city ordinance had made liens against the lots) into the hands of the attorney of the city. But in addition to this, other attorneys were employed to assist him in enforcing these special assessments or liens for paving, and as appeared, Messrs. Humes and Poston, lawyers of Memphis, were paid for prosecuting between four and five hundred suits through the courts, $10,000, and other attorneys for collecting them without the judicial process, $25,000.

It did not appear that this employment of special counsel was authorized by the city councils, or by any committee intrusted by them with the collection of the liens, though the evidence tended to show that the mayor of the city and the city attorney knew and approved of what was done.

Mr. Waddel, one of the attorneys at law, employed by Brown & Co. to collect the special assessments, testified:

'As to specific directions given by the mayor, city attorney, or other officers of the corporation, I do not know that I ever heard of any; but I do know that the mayor and city attorney were apprised of the extraordinary efforts we were making to effect collections without suits, and approved the same, and urged us to make all possible. In several visits which I made to the mayor, he generally expressed his anxiety for us to effect collections in the manner we were pursuing, his idea being to get as much as possible without suit. My recollection is that the city attorney advised the same course.'Brown, himself, testified:

'Both the mayor and city attorney requested that every effort should be made to collect bills without suit by turns and trades, exchanges and discounts, and putting a large collection force at work, and making every effort to work as many of the bills into the paving of the streets as possible. Their advice and direction was followed. After it became evident it was necessary to sue, the city authorities advised suits to be brought, and to employ counsel to aid the city attorney in the examination of titles, drafting papers, and the work of suing. The city attorney took us to the office of Humes and Poston, saying that the city business outside of this was so large that it would be impossible for him to bring these suits; that he must have assistance, and preferred them. The mayor said substantially the same thing, and under their direction I retained Humes and Poston, who brought about four hundred suits.'

The testimony of one Ballard, a sub-contractor, and who was with Brown in his interview with the mayor and city attorney, showed exactly the same facts; and that of the city engineer was to about the like effect.

The city attorney, as the evidence showed, did little in the matter, except show himself in court when the cases were tried, and assist more or less with general counsels.

The 'bond contract,' as it was called, bound the contractors, as the reader will remember, to take the bonds 'at par,' and on the other hand, the city engaged that the principal and interest of the bonds should be 'guaranteed and provided for by a sinking fund set aside for that purpose.'

No sinking fund was ever set aside for the purpose of paying either principal or interest of the bonds. The interest was not paid; and the bonds would bring in the market only about fifty cents on the dollar. Brown & Co. adduced four bankers or stockdealers in Memphis, to testify what the same bonds would have been worth, had the city kept its contract in this particular, and had the bonds, principal and interest, been 'guaranteed and provided for by a sinking fund set apart for that purpose.'

One of them, Mr. Elder, testified that the market value in Memphis of bonds and stocks was governed by the New York market; that the range of value of Memphis city thirty-year six per cent. bonds, in Memphis, from the 1st day of January, 1868, to 1st January, 1871, had been from forty-six to fifty-two cents on the dollar; that personally he knew nothing of the New York price, but that the price in Memphis would be regulated by the price there; that the value of the bonds had been depressed by the failure to pay the interest; that his opinion was, that if a sinking fund had been actually provided, and placed in the hands of a trustee, the market value, in Memphis and in New York-between the dates just named, of Memphis city short bonds, running five, ten, and fifteen years in equal proportions, with six per cent. coupons attached, payable semi-annually, principal and interest guaranteed, and provided for by a sinking fund set aside for that purpose-would have been from eighty-five to ninety cents on the dollar.

Another witness, Mr. Murphy, president of the Memphis Bank, testified that in his 'opinion,' had the city guaranteed and provided for the payment of the bonds, principal and interest, by a sinking fund set aside for that purpose-'had such fund been actually collected and placed in the hands of trustees of known integrity, and had that fact been generally known by the community, in Memphis and in the Eastern cities-such bonds would be readily sold from eighty to ninety cents on the dollar.'

Mr. Barrett, 'dealer in stocks and securities,' gave the same estimates. Mr. Tobey, a banker, one slightly higher, eighty-five to ninety cents on the dollar.

On the 6th of June, 1871, the counsel of the respective parties having announced that they had no further evidence to present, submitted to the master's determination the matters which had been referred to him. The master having considered the cases, thus reported:

1. He charged Brown & Co. with the market value, say fifty cents on the dollar, of all the bonds that the city had lent them and which they had sold with a purpose to replace them before maturity.

2. He held that the city not having furnished to Brown & Co. the full $175,000 of bonds, as it had contracted by its contract of June 20th, 1868, to do, the city was not released by the said contractors from all liabilities on the contract, even though the courts of last resort had not decided that the property-owners were not liable for the pavement put before their lots.

3. He held that under its charter, the laws of Tennessee and the city ordinances, the city had a right to bind itself by guaranty to the payment of the cash contracts, and had done so.

4. He held, that the modifications of the bond contract bound the city.

5. He held that the city was liable to Brown & Co.

for all damage suffered by failure of the city to

guarantee and provide for the payment of paving

bonds as stipulated; the master herein estimating, that

had the sinking fund been provided, the bonds would

have been worth eighty-five cents on the dollar,  $115,

reasonable value of the services of attorneys

employed to prosecute special assessments, by request

of the city,10,

7. And bound to pay further the value of services

in the collection of special assessments or paving

bills, without process of law, by request of the

city,      25,