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FARMERS' LOAN AND TRUST COMPANY v. GALESBURG.

decided: January 27, 1890.

FARMERS' LOAN AND TRUST COMPANY
v.
GALESBURG.



APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS.

Author: Blatchford

[ 133 U.S. Page 158]

 MR. JUSTICE BLATCHFORD delivered the opinion of the court.

The city of Galesburg, Illinois, a municipal corporation, by an ordinance of its city council, passed May 12, 1883, and approved by its mayor May 17, 1883, entitled "An ordinance providing for a supply of water to the city of Galesburg and its inhabitants, authorizing Nathan Shelton or assigns to construct and maintain water works, securing protection to said works, contracting with said Nathan Shelton or assigns for a supply of water for public use, and giving said city an option to purchase said works," granted a franchise to Shelton and his successors or assigns, for thirty years from the passage of the ordinance, to construct and maintain, within and near the city, water works for supplying it and its inhabitants and those of the adjacent territory "with water for public and private uses, and to use the streets, alleys, sidewalks, public grounds, streams, and bridges of the City of Galesburg, within its present and future corporate limits, for placing, taking up and repairing mains, hydrants, and other structures and devices for the service of water."

Section 2 of the ordinance provided that there should be two pumping engines, having a specified capacity, a standpipe, and not less than eight miles of mains for the distribution of water, of a sufficient size to furnish all the water required for the wants of the city and its inhabitants, and limited the range in size of the mains. It also provided for a specified test of the mains at their place of manufacture, and for the character of the fire hydrants to be rented by the city, and that there should be a test of the capacity of the water works on their completion, when Shelton or his assigns should "cause to be thrown from any six hydrants six simultaneous streams, each through fifty feet of two-and-one-half inch hose and a one-inch nozzle, to a height of one hundred feet."

[ 133 U.S. Page 159]

     Section 4 provided that "the water supplied by said works shall be good, clear water, and the source of supply shall not be contaminated by the sewerage of said city."

Maximum rates for charges for water to consumers by Shelton or his assigns were specified.

Section 7 reserved to the city the right to purchase the water works, on certain conditions, at any time after the expiration of fifteen years from the passage and approval of the ordinance.

By section 8 it was provided that in consideration of the benefits which would be derived by the city and its inhabitants from the construction and operation of the water works, and in further consideration of the water supply thereby secured for public uses, and as the inducement to Shelton or his assigns to accept the provisions of the ordinance and contract and to enter upon the construction of the water works, the franchises thereby granted to and vested in Shelton or his assigns should remain in force and effect for thirty years from the passage of the ordinance; and that, for the same consideration and as the same inducement, the city thereby rented of Shelton or his assigns, for the uses thereinafter stated, eighty fire hydrants of the character thereinbefore described, for the term of thirty years from the passage of the ordinance, and agreed to locate them promptly along the lines of the first eight miles of mains within the city limits, under direction of the city council, as soon as Shelton or his assigns should have located the line of the mains under the direction of the city engineer. The city further agreed to pay rent for the eighty hydrants, to Shelton or his assigns, at the rate of $100 each per year, and to pay rent at the same rate for any additional fire hydrants, up to one hundred, directed by the city council to be erected, and certain specified rates for additional hydrants over one hundred, such rent to be paid in half-yearly instalments, in January and July of each year, beginning from the date when each of the hydrants should be in successful operation, and to continue during the thirty years, unless the city should sooner become the owner of the water works, provided that it should not be liable for any hydrant rents for such

[ 133 U.S. Page 160]

     time as the works should not be able to supply the required amount of water.

It was also provided, by section 13, that the ordinance should become binding, as a contract, upon the city, on the filing with the mayor of Shelton's written acceptance of its terms and conditions, and that, after such acceptance, the ordinance should constitute a contract, and should be the measure of the rights and liabilities of the city and of Shelton or his assigns.

On the 16th of May, 1883, Shelton and John C. Stewart, then mayor of the city, executed the following contract: "It is agreed that Nathan Shelton shall purchase of the city of Galesburg all the ten and six-inch water mains now laid in the streets of said city that he can use in the water works he proposes to build in said city, at the price that it will cost him to buy and lay new mains, less the depreciation in value of said pipes, which depreciation is to be determined by Mr. Shelton and the finance and water committee of the council of said city, and less the cost of relaying, recaulking and repairing said mains, should they have to be taken up, relaid, recaulked or repaired, and less the cost of recutting for cross-connections, and the city agrees to sell to Mr. Shelton, in case he shall erect his proposed water works as above, and deduct the pay for the same from the first hydrant water works rent accruing from said city to said Shelton. This agreement for the sale of water mains does not include any mains that are imperfect. It is further agreed that said mains now in use shall not be disturbed further than shall be necessary to cut and make connections with said pipes, until the pipes are laid and ready for use in the adjacent streets."

On the 17th of May, 1883, the mayor signed the ordinance, and on the 19th of May, 1883, at the meeting of the city council, the following communication from Shelton was received and ordered to be filed: "Hon. John C. Stewart, mayor of the city of Galesburg: I hereby accept the terms and conditions of the ordinance of said city, entitled 'An ordinance providing for a supply of water to the city of Galesburg and its inhabitants, authorizing Nathan Shelton or assigns to

[ 133 U.S. Page 161]

     construct and maintain water works, securing protection to said works, contracting with said Nathan Shelton or assigns for a supply of water for public use, and giving said city the option to purchase said works,' passed by the city council of said city May 12th, 1883, to all intents and for the purposes as by the 13th section of said ordinance I am to do. Nathan Shelton." The contract between Shelton and the mayor for the purchase by Shelton of the water mains from the city was thereupon approved by the city council.

Shelton then organized a joint-stock corporation, under the general law of the State of Illinois, under the name of the Galesburg Water Company, with a capital stock of $150,000, of which stock Shelton owned the amount of $147,500. Shelton became its president, and on the 20th of July, 1883, by an instrument in writing, assigned to it all the franchises, rights, privileges, contracts and agreements granted to or made with him by the city by the aforesaid ordinance, and authorized the company to receive all rentals to become due from the city for fire hydrants pursuant to the ordinance, as well as all other profits which might accrue from the erection of water works thereunder.

On the 20th of June, 1885, the city of Galesburg filed a bill in equity against the Galesburg Water Company in the Circuit Court of Knox County, Illinois, making the following averments: Prior to the 30th of April, 1883, the city had established a system of water works for its protection from fire, and for that purpose had purchased and laid down water mains in certain specified streets, which mains were supplied with water for fire purposes by two manufacturing companies, each of which had its pumps and machinery for furnishing water connected with the mains. Such system was at that date in full operation and able at all time to supply ample protection for the city in case of fire. The ordinance before mentioned was passed and approved, the contract of May 16, 1883, was made, and the acceptance of the ordinance by Shelton was received and filed. The Galesburg Water Company was created and organized, and Shelton assigned to it his rights under the ordinance. The company erected engine-houses,

[ 133 U.S. Page 162]

     placed boilers and engines therein, erected a stand-pipe and sunk a well. On the 1st of December, 1883, the city received notice from Shelton of his assignment to the company of his rights under ordinance, and also a like notice from the company, with a further notice that the hydrants were in successful operation and ready for use; and the city council thereupon ordered a test to be made of the water works on the 6th of December, 1883. On that day Shelton Caused to be turned on six streams of water simultaneously, each through fifty feet of hose with a nozzle attached thereto, to a considerable height in the main street of the city. Afterwards, and on the same day, the city council passed the following resolution: "Whereas the water works have been completed according to contract, and the test required by the ordinance concerning water works, passed May 12, 1883, has this day been satisfactorily made by the Galesburg Water Company: Therefore, resolved, that the city accept said water works from said company." The company thereafter made various efforts to supply the city with water in the quantity and of the quality called for by the ordinance, but failed to do so, although full opportunity therefor was afforded by the city. The water furnished was filthy in character, polluted by drainage from slaughter-houses and other offal, stagnant and wholly unfit for use, unhealthy and dangerous to life. On the 1st of June, 1885, an ordinance was passed by the city council in the following terms: "Section 1. That the ordinance entitled 'An ordinance providing for a supply of water to the city of Galesburg and its inhabitants, authorizing Nathan Shelton, or assigns, to construct and maintain water works, securing protection to said works, contracting with said Nathan Shelton, or assigns, for a supply of water for public use, and giving said city an option to purchase said works,' passed May 12th, 1883, be, and hereby is, repealed. All rights and privileges therein granted or thereby permitted are null. This ordinance shall take effect and be in force from and after its passage." That ordinance was approved by the mayor on the 10th of June, 1885, and on the next day a copy of it was served on the company, with a notice that all privilege of purchasing the water mains belonging

[ 133 U.S. Page 163]

     to the city was considered by the city to be at an end, and that it claimed the right and title to the mains.

The bill waived an answer on oath, and prayed for a decree that the contract contained in the ordinance of May 12, 1883, and the agreement of May 16, 1883, be set aside; that all rights conferred by the ordinance and contract upon Shelton, his assigns, or the company, be decreed to be annulled; and that all right to purchase the water mains from the city be cancelled.

The company answered the bill, setting up facts in justification of its acts and denying the right of the city to relief. The answer also set up that, on the 1st of August, 1883, the company executed to the Farmers' Loan and Trust Company of the city of New York, a New York corporation, a mortgage to that company, as trustee for the holders of one hundred and twenty-five bonds of the water company, each for $1000 bearing that date, the principal payable in thirty years, with semiannual interest at the rate of six per cent per annum, covering all the water works, franchise, contract, machinery, mains, and appurtenances belonging to the water company; that the mortgage was duty recorded in the proper county; that the bonds were bought by parties on the faith of the mortgage and the acceptance of the works by the city, subsequently to such acceptance; that such mortgage was a valid and subsisting lien on the contract between the city and the water company; and that the Farmers' Loan and Trust Company and the bondholders were necessary parties to the suit.

Under a petition filed in the court February 12, 1886, by the Farmers' Loan and Trust Company, an order was made allowing it to be made a party; and on the 24th of February, 1886, it filed a petition for the removal of the cause into the Circuit Court of the United States for the Northern District of Illinois. The cause was removed and thereafter proceeded in the said Circuit Court.

On the 22d of April, 1886, the Farmers' Loan and Trust Company filed an answer to the bill, setting up, among other things, that the amount found to be due to the city for the water mains ...


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