debt of the municipality exceeded its constitutional limit when the refunding bonds were issued does not invalidate them. But bonds Burr v. Carbondale, 76 Ill. 455; Kane v. Charleston, 161 Ill. 179; Powell v. Madison, 107 Ind. 106; Sioux City v. Weare, 59 Iowa, 95; Edmundson v. School Dist., 98 Iowa, 639; Thompson v. School Dist., 102 Iowa, 94; Heins v. Lincoln, 102 Iowa, 69; Cedar Rapids v. Bechtel, 110 Iowa, 196; Marion County v. Harvey County, 26 Kan. 181, 201; Gaulbert v. Louisville (Ky.), 97 S. W. Rep. 342; Opinion of the Justices, 81 Me. 602; Hotchkiss v. Marion, 12 Mont. 218; Palmer v. Helena, 19 Mont. 61; Poughkeepsie v. Quintard, 136 N. Y. 275; Barnum v. Sullivan County, 137 N. Y. 179; Blanton v. McDowell County, 101 N. Car. 532; Morris v. Taylor, 31 Oreg. 62; Hirt v. Erie, 200 Pa. St. 223; McCreight v. Camden, 49 S. Car. 78; In re State Warrants, 6 S. Dak. 518; Western Town Lot Co. v. Lane, 7 S. Dak. 599; Shannon v. Huron, 9 S. Dak. 356; Lawrence County v. Meade County, 10 S. Dak. 175; Mitchell v. Smith, 12 S. Dak. 241; Nat. Life Ins. Co. v. Mead, 13 S. Dak. 37; Hyde v. Ewert, 16 S. Dak. 133; Ewert v. Mallery, 16 S. Dak. 151; Williamson v. Aldrich, 21 S. Dak. 13; 108 N. W. Rep. 1063; Tyler v. Jester (Tex. Civ. App.), 74 S. W. Rep. 359; aff'd 97 Tex. 344; Tyler v. Tyler Bldg. & Loan Assoc. (Tex. Civ. App.), 82 S. W. Rep. 1066; Miller v. School Dist., 5 Wyo. 217. See also Maish v. Arizona, 164 U. S. 599. The case of County of Hamilton v. Montpelier Savings Bank and Trust Co., 157 Fed. Rep. 19, decided by the United States Circuit Court of Appeals for the Seventh Circuit, April, 1907 (before Groscup, Baker, and Seaman, JJ.), is one of the most recent affirmations and applications of the principle stated in the text, that an authorized issue of funding bonds for existing legal liabilities does not create or increase the aggregate of indebtedness, but only changes its form, and does not therefore violate the constitutional debtlimit provision, even though the funding bonds exceed the constitutional limit. Seaman, J., says: "The constitutional limitation relates solely to the creation of indebtedness thereafter, and neither authorizes repudiation nor affects the making of terms for the payment of existing legal liabilities. The funding of such liabilities, there fore, authorized by statute, and the vote, was unaffected by the [constitutional] limitation, and the fact alone that the issue of funding bonds thereupon exceeded that limit neither implies nor amounts to violation of the constitutional provision. So, without impeaching the recitals [in the bonds], that 'binding, subsisting legal obligations of said county' were thereby funded, no infringement of the Constitution appears in this issue of bonds." More fully as to refunding bonds and of estoppel by recital as to the validity of the debt refunded, see infra, § 204, and also post, chapter on Municipal Bonds. "Issuing new bonds to provide at their par value for the payment of an old debt, or the substitution of new evidences of a pre-existing debt, is not in any legal or proper sense the creation of a new indebtedness. Nor is the funding of interest already due, or the executing of coupons for the payment of interest which will thereafter accrue upon a pre-existing indebtedness, either the creation of a new debt or in legal contemplation an increase of such preexisting indebtedness." Powell v. Madison, 107 Ind. 106, 114. In Com'rs of Sinking Fund of Louisville v. Zimmerman, 101 Ky. 432, the city proposed to issue bonds dated and bearing interest from April 1, 1897, to refund, by exchange direct or by sale of the new bonds and payment of the old bonds, certain bonds that were not due until July 1, 1897, and August 1, 1897. The city was without power to contract new debt. It was held that the refunding bonds could not be made to bear interest from any date prior to the maturity of the old bonds, as otherwise the indebtedness of the city would, to that extent, be increased. Hughes County v. Livingston, 104 Fed. Rep. 306; Lake County v. Standley, 24 Colo. 1. Where municipal warrants were issued for ordinary, necessary, and current expenses, which, together with other like expenses, were within the limit of the current revenues and such special taxes as the city might legally and in good faith have intended to levy therefor, the issue of bonds for the funding of such warrants does not create indebtedness within the meaning of the constitutional provision, since such bonds do not increase the or debts which are void for the lack of the power of the city to issue or incur them cannot, in the absence of estoppel, constitute the basis of valid refunding bonds.1 In refunding existing obligations it is apparent that the refunding may be effected either by the direct exchange of the refunding bonds for the antecedent obligation or by the sale of the refunding bonds and the application of the cash received in satisfaction of the precedent debt. A distinction has been drawn between these two transactions in applying the provision of the Constitution limiting the power to incur debt. The Supreme Court of the United States has adopted the view that if refunding bonds are not exchanged for existing evidences of indebtedness but are sold on the open market, and the proceeds paid into the municipal treasury for the purpose of being applied in the payment and satisfaction of the original obligations, and such proceeds are not so applied, indebtedness is incurred thereby within the meaning of the constitutional provision, and if in such case the amount of the refunding bonds, added to the already existing debt, outstanding and uncancelled, exceeds the limit prescribed by the Constitution, the issue of the refunding bonds under the facts stated in the note is unauthorized. It is probable that the indebtedness of the city. Cedar Rapids v. Bechtel, 110 Iowa, 196. The court says: "It is true there was a misappropriation of a part of the current revenue of the years 1894 to 1898 inclusive; but such wrongful act on the part of the officers of the city cannot, under the agreed facts in this case, affect the validity of these warrants. They were issued and received in good faith for the ordinary, necessary, and current expenses of the city, for purposes authorized and required, and within the limit of the revenue of the city for each year respectively. The warrants were valid when issued, and hence the bonds which the city proposes to issue to fund them will not increase the indebtedness of the city and will be valid." Under the provision of the Constitution of Texas prohibiting the creation of debt unless provision is made for a tax to pay interest and create a sinking fund, the city cannot, on the renewal of an existing debt, provide for the payment of attorneys' fees, increase the rate of interest, or renew a debt barred by the statute of limitations, without a previous vote. Tyler v. Jester (Tex. Civ. App.), 74 S. W. Rep. 359; aff'd 97 Tex. 344. Tyler v. Tyler Bldg. & Loan Asso. (Tex. Civ. App.), 82 S. W. Rep. 1066; Millerstown v. Frederick, 114 Pa. St. 435. But the validity of a bond issued under a funding act in exchange for a valid county warrant is not affected by the fact that other bonds of the same series were issued in exchange for invalid warrants. Lake County v. Standley, 24 Colo. 1. 2 Doon Township v. Cummins, 142 U. S. 366. In this case the refunding bonds were issued under a statute which authorized the treasurer of a school district to sell the refunding bonds, and apply the proceeds to the payment of the outstanding bonded indebtedness or to exchange the bonds for outstanding bonds at par. Bonds to the amount of $25,000 were issued, and the agent of the school district sold twenty of the bonds at their par value to the plaintiff for money. The remaining five bonds were sold to another party. Of the proceeds of the sale, less than $6,000 was applied to the payment of outstanding bonds and coupons, the balance being used for the payment of other indebtedness of the district. The court held that this transaction was the incurring of indebtedness on the part of the municipality, and that as the refunding debt when added to the pre general proposition that the funding or refunding of an existing indebtedness does not incur debt within the meaning of the Constitution, was applied in many cases involving a refunding through a sale of the refunding bonds and the application of the proceeds in satisfaction of the original debt without considering the distinction adopted by the Supreme Court of the United States.' Under the rule laid down by the Supreme Court of the United States, it does not follow, we think, that if the proceeds of the sale of the refunding viously existing debt exceeded the tion. But under the first alternative, constitutional limit, the refunding by which the treasurer is authorized to bonds in the absence of estoppel were sell the new bonds and to apply the void. In its opinion the court says: proceeds of the sale to the payment of "The prohibition extending to debts the outstanding ones, it is evident that contracted 'in any manner, or for any if (as in the case at bar) new bonds are purpose,' it matters not whether they issued without a cancellation or surrenare in every sense new debts, or are der of the old ones, the aggregate debt debts contracted for the purpose of outstanding, and on which the corporapaying old ones, so long as the aggre- tion is liable to be sued, is at once and gate of all debts, old and new, outstand- necessarily increased, and, if new bonds ing at one time, and on which the cor- equal in amount to the old ones are so poration is liable to be sued, exceeds issued at one time, is doubled; and that the constitutional limit. The power of it will remain at the increased amount the legislature in this respect being re- until the proceeds of the new bonds are stricted and controlled by the Consti- applied to the payment of the old ones, tution, any statute which purports to or until some of the obligations are authorize a municipal corporation to otherwise discharged. It is true that if contract debts in any manner, or for the proceeds of the sale are used by the any purpose whatever, in excess of that municipal officers, as directed by the limit, is to that extent unconstitu- statute, in paying off the old debt, tional and void. By the terms of the the aggregate indebtedness will ultistatute of Iowa of 1880, chap. 132, mately be reduced to the former limit. under which the bonds in question But it is none the less true that it has were issued, any independent school been increased in the interval, and district or district township, having a that unless those officers do their duty, bonded indebtedness outstanding, is the increase will be permanent. It authorized to issue negotiable bonds would be inconsistent alike with the for the purpose of funding that indebt- words and with the object of the conedness; and the treasurer of such dis- stitutional provision, framed to protect trict is hereby authorized to sell the municipal corporations from being bonds provided for in this act at not loaded with debt beyond a certain less than their par value, and apply the limit, to make their liability to be proceeds thereof to the payment of the charged with debts contracted beyond outstanding bonded indebtedness of that limit depend solely upon the disthe district, or he may exchange such cretion or the honesty of their officers." bonds for outstanding bonds, par for See also Holliday v. Hildebrandt, 97 par.' Iowa, 177; Reynolds v. Lyon County, 121 Iowa, 733; Birkholtz v. Dinnie, 6 N. Dak. 511; Shaw v. Riverside School Dist., 62 Fed. Rep. 911; Coffin v. Indianapolis, 59 Fed. Rep. 221; Etna Life Ins. Co. v. Lyon County, 44 Fed. Rep. 529. In Taylor v. School District, 97 Fed. Rep. 753, the court applied the principle stated in the text to a case of exchange of bonds. "There is a wide difference in the two alternatives which this statute undertakes to authorize. The second alternative, of exchanging bonds issued under the statute for outstanding bonds, by which the new bonds, as soon as issued to the holders of the old ones, would be a substitute for and an extinguishment of them, so that the aggregate outstanding indebtedness of the corporation would not be increased, might be consistent with the Constitu See Miller v. School Dist., 5 Wyo. 217; Palmer v. Helena, 19 Mont. 61. bonds had been actually applied to the payment of the outstanding bonds and coupons, although not simultaneously with the issue of the refunding bonds, the refunding bonds would have been, or ought to have been, held invalid.' The practical effect of the distinction is that careful investors in refunding bonds will take the precaution to see to the actual application of the proceeds of the refunding bonds to the payment of the debt to be refunded, and in this way prevent the outstanding of two evidences of indebtedness for the same debt. The distinction itself has been criticised as more nice than real. And in some cases the State courts have refused to follow the alleged distinction, and have held that if the original indebtedness is valid refunding bonds do not create indebtedness within the meaning of the Constitution, whether they are exchanged for the existing debt or are sold and the proceeds applied in satisfaction thereof.3 In Heins v. Lincoln, 102 Iowa, 69, provision under discussion was designed the city council passed an ordinance to confine municipal indebtedness providing for the exchange of new within prescribed limits, but it could bonds for old bonds and of warrant hardly have been intended or expected bonds for outstanding warrants. To to prevent embezzlement or misappro effectuate the exchange the council appointed a bank as the agent of the city, and placed all the bonds duly executed in the hands of its agent in trust, with power to deliver new bonds when the old bonds had been delivered to it and cancelled, and to deliver warrant bonds when the warrants had been delivered to it. The trust was accepted by the bank. It was rightly held that under this arrangement no obligation was created against the city until the bonds were delivered by the trustee, which delivery was not to take place until the old bonds or warrants were received by it and cancelled, and that the plan adopted created no additional debt. 2 "The distinction seems to be more nice than real, and in view of the vigorous dissent recorded with the opinion we may be permitted to doubt whether it will ever be made again." Huron v. Second Ward Savings Bank, 86 Fed. Rep. 272. The distinction has the merit or effect of tending to prevent fraudulent or careless duplication or over-issues of securities. See also Pierre v. Dunscomb, 106 Fed. Rep. 611, 615. 3 Taylor v. School District, 97 Fed. 753; Los Angeles v. Teed, 112 Cal. 319, 327; National Life Ins. Co. v. Mead, 13 S. Dak. 37; Poughkeepsie v. Quintard, 136 N. Y. 275. In National Life Ins. Co. v. Mead, 13 S. Dak. 37, the court said: "Doubtless the constitutional priation of public funds. In extending its scope and purpose, courts are not required to assume that municipal officers are always or even usually dishonest. The contrary should be presumed. Where the proceeds of funding bonds are properly applied, the transaction may in form be a borrowing of money, but in substance it is not different from what it wou d be had there been an exchange of bonds or other evidences of indebtedness. The contemplated purpose and actual result are the same. The municipal liability is not increased, but merely suffered to remain." In Poughkeepsie v. Quintard, 136 N. Y. 275, the city's power to incur debt was limited by its charter. It was authorized by statute to refund existing indebtedness. The refunding might be effected either by an exchange of old for new bonds or by the sale of new bonds applying the proceeds to the cancellation of the old ones. It was held, in an action to enforce a contract with the city for the sale of refunding bonds, that either form of refunding did not violate the charter limitation upon the power to incur debt. Finch, J., said: "It must be conceded that the transaction in form may be a borrowing of money, but in substance it is the very different case of refunding an existing debt. There is a new creditor and a reduced rate of interest, but the § 203. Partial Validity of Obligation. If the city has not reached the constitutional limit of its indebtedness at the time when the obligation is incurred, but has so nearly approached the limit that only a part of the amount agreed to be paid is within the limit and the remainder beyond, the question arises to what extent the obligation is valid. If the debt is evidenced by bonds which are issued and delivered at different dates, the bonds first issued and delivered are valid, although the remainder of the issue may exceed the constitutional limit. If, however, the bonds are issued at the same time, or 1 same old debt. The municipal liability is not increased, but merely suffered to remain, and not a dollar of new or added indebtedness raised. The transaction is no different from what it would have been if there had been an exchange of bonds. There it is conceded there would have been no borrowing of money and merely an extension of credit." In Opinion of the Justices, 81 Me. 602, the court said with respect to the power of the State to refund a valid indebtedness exceeding its constitutional limit: "If the new bonds be exchanged for the old, bond for bond, it would literally be a renewal and extension of the debt, and if the new bonds are sold to obtain means with which to liquidate the old it will in all essential respects amount to the same thing. The same result will be reached as far as the State is concerned." In Lawrence County v. Jewell, 100 Fed. Rep. 905, the court had under consideration the provisions of the Act of Congress of 1886, known as the "Harrison Act," limiting the amount of municipal indebtedness in the Territories. By section 3 of that act after specifying the purposes for which any territorial legislature may authorize debt to be contracted, it is declared: "Nothing in this act shall be construed to prohibit the refunding of any existing indebtedness of such territory or of any political or municipal corporation, county, or other subdivision therein." By section 4 municipalities are prohibited from becoming indebted in any manner or for any purpose in excess of four per cent of the value of taxable property within the municipality. It was contended that in refunding operations all that the act permitted was the exchange of new bonds for the old, dollar for dollar, and that under the prohibition contained in section 4 the county could not sell refunding bonds for the purpose of obtaining cash with which to pay In In Daviess County v. Dickinson, 117 U. S. 657, bonds in aid of a railroad company to the amount of $250,000 were authorized payable in blocks in five, ten, fifteen, and twenty years. Bonds were issued in each class in excess of the right to issue and delivered at different times. Each class had distinct letters and were numbered in series. The over-issue was declared void, and in determining which were valid and which invalid the court said that the test was "Which were the first delivered?" The bonds first delivered up to the amount authorized without regard to classification were held to be valid. The remainder were held to be void. In Crogster v. Bayfield County, 99 Wis. 1, the action was by a taxpayer to set aside an issue of bonds by the county in aid of a railroad amounting to $240,000. The proposition submitted to and accepted by the |