Municipal Security Co. v. Baker County

Mr. Justice Moore,

after stating the facts, delivered the opinion of the court.

1. The trial court, in rendering the decree complained of, held, as we understand, that the statute of limitations had run against the right to recover the shelving, and that the demand for a reconveyance of the land could not be split up, assuming that the remaining warrants issued for the purchase price were outstanding ; but, if paid, that the organic law of the state, Art. XI, § 9, prohibited the county from becoming a tenant in common in respect to the ownership of the land. When the constitutional limit of a county’s indebtedness has been reached, its capacity to make contracts is suspended, and remains dormant until its voluntary obligations are reduced below. *399 the prescribed limit. Any voluntary agreement entered into by a county, involving it with liabilities after the boundary of its power to make contracts has been reached, is .ultra vires, and the receipt of benefits by it affords no ground for invoking even an implied liability to pay any compensation therefor : Municipal Sec. Co. v. Baker County, 33 Or. 338 ( 54 Pac. 174 ). Notwithstanding the incapacity of a municipal corporation, under such circumstances, renders its contracts unenforceable, those who have parted with their property in dealing with it during its interval of quiescence are not wholly remediless ; for, when such property can be identified', the party entitled thereto may recover it by placing the other in statu quo, — the rule being that neither party will be heard to allege the invalidity of a transaction which is simply ultra vires, while holding the fruits thereof: Manchester & L. R. Co. v. Concord R. Co. 66 N. H. 100 ( 20 Atl. 383 , 9 L. R. A. 689, 49 Am. St. Rep. 582 ).

Thus, in Chapman v. Douglas County, 107 U. S. 348 (2 Sup. Ct. 62), the plaintiff executed to the defendant a warranty deed of two tracts of land, containing ten and one hundred and sixty acres, respectively, in consideration of $2,000 in county orders and four promissory notes, of $1,500 each, payable in one, two, three, and four years, respectively, issued in the name of the county by its commissioners, who in the same manner purported to execute a mortgage on the premises to secure the payment thereof. The county took immediate possession of the real property, which it used as a poor farm, expending in the improvement thereof the sum of $30,000 ; but the title to the smaller tract failed. The notes and mortgage having been assigned, the holder thereof commenced a suit in the state court to foreclose the same; but a demurrer, interposed on the ground that the notes and mortgage were void ab initio for want of authority to execute them, *400 having been sustained, the suit was dismissed without prejudice, and a similar suit, instituted in the Circuit Court of the United States for the District of Nebraska, was dismissed in the same manner for a like reason. Thereupon Chapman .was joined with the holder of the notes and mortgage, for the benefit of the latter, in a suit in said circuit court to rescind the contract of sale and to recover the land, and it was held that, as the notes and mortgage were invalid for want of authority to execute them, the holder thereof was entitled to the relief demanded, upon the surrender of the void securities, and decreed that the county execute a deed to the premises, unless within a reasonable time it paid the amount found to be due, making a proper allowance for the failure of the title to a part of the land. Mr. Justice Matthews, speaking for the court in rendering the'decision, says: “The conveyance by Chapman to the County of Douglas passed the legal title, but upon a condition in the contract which it was impossible in law for the county to perform. There resulted, therefore, to the grantor the right to rescind the agreement upon which the deed was made, and thus to convert the county into a trustee, by construction of law, of the title for his benefit, according to the often-repeated rule, as stated by Hill, Trust. 144, that ‘whenever the circumstances of a transaction are such that the person who takes the legal estate in property can not also enjoy the beneficial interest, without necessarily violating some established principle of equity, the court will immediately raise a constructive trust and fasten it upon the conscience of the legal owner, so as to convert him into a trustee for the parties who, in equity, are entitled to the beneficial enjoyment.’ Upon this principle the vendor of real estate is treated as trustee of the title for the purchaser, and the mortgagee, having the legal title, after payment of the mortgage debt is a *401 trustee for the mortgagor. The analogy is complete between these and every case, of which the present is one, where the holder of the legal title is under a dutyto convey to another.”

So, too, in Parkersburg v. Brown, 106 U. S. 487 (1 Sup. Ct. 442), the plaintiff in error, a municipal corporation, in pursuance of an act of the legislative assembly of West Virginia, loaned its bonds to the amount of $20,000 to persons engaged in manufacturing, taking as security therefor a conveyance of the latter’s real estate and personal property to a trustee, who was authorized to sell the same upon default in the payment of the semiannual interest or of the annual installments of the principal. The persons to whom these bonds were loaned were adjudged bankrupt, and the assignee of their estate, having taken possession of the property so conveyed to the City of Parkersburg, sold the tools and machinery belonging thereto ; and the trustee under the original deed, having been also named as trustee in a subsequent deed given to secure a debt, upon default in the payment thereof, conveyed the said real property to the plaintiff in error. The bonds so loaned were assigned to the defendants in error, and, no part of the principal thereof having been paid, and default having been made in the payment of the interest, a suit was instituted which sought to charge the city as trustee ;' and it was held that no authority existed for the issuance of the bonds, and that the assignment thereof passed its interest in the security to the defendants in error, who were entitled to the proceeds arising from the sale of the property so hypothecated. See, also, Hitchcock v. Galveston, 96 U. S. 341 ; Willis v. Board of Com’rs, 86 Fed. 872 ( 30 C. C. A. 445 ).

2. The real property conveyed and the personal prop *402 erty delivered to Baker County being capable of identifi-. cation, the duty to restore it, upon a surrender of the warrants issued in consideration thereof, is manifest; and the only questions involved are whether this suit was instituted in time to recover the personal property, and does the constitution of the state prohibit a county from being a tenant in common of real property? The theory of plaintiff’s counsel upon the first inquiry is that, although the shelving was delivered July 13, 1891, the county did not repudiate the contract of purchase until January 18,1897, when compelled to that course by mandate of this court (Stuller v. Baker County, 30 Or. 29 , 474 Pac. 705 ), and, this suit having been commenced within six years from that time, the plaintiff should be permitted to recover the specific property so delivered (Hill’s Ann. Laws, § 6; subd. 4); while the theory of defendant’s counsel is that, the purchase of the shelving having been voluntary, and the county, at the time thereof, having reached the limit of its indebtedness under the constitution, the latter was powerless to make any contract in respect thereto, so that plaintiff’s right to rescind accrued eo instante, but, not having instituted a suit therefor within six years from that time, its right to recover the specific property is barred by the statute of limitations. In Chapman v. Douglas County, 107 U. S. 348 ( 2 Sup.Ct. 62 ), upon which plaintiff’s counsel rely, it was held that, although the right of the claimant to rescind the contract and demand a reconveyance accrued at the date of the deed, he was not bound to exercise the right, and his cause of action did not accrue until he had manifested his election. In that case the contract of purchase by the county was not ultra vires, the only irregularity being the giving of promissory notes payable at stated times and the execution of a mortgage as. security therefor. In the case at bar, however, the county having reached the *403 limit of its indebtedness,it maybe said that, as to voluntary contracts incurring liabilities, it lmd no existence (7 Am. & Eng. Ency. Law [2 ed.] , 930 ; Municipal Sec. Co. v. Baker County, 33 Or. 338 , 54 Pac. 174 ), and in consequence of this incapacity the contract for the purchase of the shelving ivas void and incapable of ratification (1 Dillon, Mun. Corp. § 457 ; 1 Beach, Pub. Corp. § 217 ; Sutro v. Pettit, 74 Cal. 332 , 5 Am. St. Rep. 442 , 16 Pac. 7 ). Rescission is the act of annulling or canceling a voidable contract (21 Am. & Eng. Ency. Law [1 ed.] , 26); but, as the county could not legally assent to the purchase of the shelving the contract therefor was void, and, neither party being bound thereby, no election to rescind could be exercised by either. The cause of suit, therefore, accrued when the shelving was delivered, and, as more than six years intervened from that time until the complaint was filed, the right to recover the specific personal property was barred by the statute of limitations, and hence no error was committed in sustaining the demurrer to the second cause of suit.

3. Considering the other question, the plaintiff alleges its ownership of county warrants to the amount of $1,250, issued to Chambers and assigned to it, and claims a conveyance of an undivided five eighths of the premises conveyed by Chambers to the county. The ownership of the remaining warrants issued in consideration of the poor farm is not averred, but the opinion of the trial court recites that it was admitted at the argument that all the other warrants, not held by the plaintiff, have been redeemed by the county. We shall treat the inquiry, therefore, as if the complaint had stated that fact. The organic law of the state, Art. XI, § 9, is as follows : “No county, city, town, or other municipal corporation, by vote of its citizens or otherwise, shall become a stock *404 holder in any joint stock company, corporation, or association whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association.” In Ampt v. City of Cincinnati, 56 Ohio St. 47 ( 46 N. E. 69 , 35 L. R. A. 737, with note on the right of a municipality to be a part owner of property), the defendant owned a system of waterworks which it sought to enlarge in pursuance of an act of the legislative assembly of Ohio empowering the governor to appoint commissioners, who were authorized to contract in the name of the city with any person, firm, or corporation for the enlargement of its waterworks. The addition to the existing works was to be owned by the persons or corporations making it, and leased to the city, which was to operate it as an entirety. The contract having been entered into by the commissioners, which, if executed, would have united the public funds and private capital in an enterprise to be managed and conducted by the city, the plaintiff, a taxpayer, instituted a suit to enjoin the outlay by the city necessarily incident thereto ; and it was held, under a clause of the constitution of that state almost identical with ours in that respect, that a city must be the sole proprietor of the property in which it invests its funds, and it can not unite its property with the property of individuals or corporations, so that, when united, both together form one property. Mr. Justice Burket, in interpreting the clause adverted to, says: “This section of the constitution not only prohibits a 1 business partnership,’ which carries the idea of a joint or undivided interest, but it goes further, and prohibits a municipality from becoming the owner of part of a property which is owned and controlled in part by a corporation or individual. The municipality must be the sole owner and controller of the property in which it invests its public funds. A union of public and private *405 funds or credit, each in aid of the other, is forbidden by the constitution. There can be no union of public and private funds or credit, nor of that which is produced by such funds or credit. The whole ownership and control must be in the public. The city may lease from an individual or corporation any property of which it may need the use, or, having property the use of which it does not need, it may lease the same to others; but it can not engage in an enterprise with an individual or corporation for the construction or erection of a property which-, as a completed -whole, is to be owned and controlled in part by the city and in part by an individual corporation.”

The trial court having rested its decree upon the decision in that case, the question to be considered is whether the clause of our constitution prohibits a county from becoming a tenant in common in respect to real property. The use to which the premises are subjected by the county can have no bearing upon the inquiry; for, if the organic law of the state interdicts the unity of possession, the prohibition is alike applicable to any and all real property. We can not believe that the language of our constitution hereinbefore quoted is susceptible to the construction given to a similar clause by the Supreme Court of Ohio, nor yield our consent to the reasons assigned for the decision there rendered. It is the duty of the court, in interpreting a constitution, which is a limitation and not a grant of power, to consider the existing evil intended to be avoided by the prohibition. The establishment of manufacturing industries, where labor finds profitable employment, generally .tends to the happiness of the workmen, thereby augmenting the wealth and increasing the importance of the city, town, or village in which they settle, resulting from their home building and the inauguration of various *406 trades that spring into existence and are supported by their patronage. So, too, the construction and operation of railways have brought the producer and consumer into closer relations, to the advantage of each, resulting in the rapid development of the country through which the trains pass, and benefiting the stations at which they halt. A knowledge of the advantages that usually attend the establishment of manufactories and the benefits that generally follow the construction of railways has prompted enterprising citizens to burden their property with excessive taxation to secure these returns ; but in many instances the hopes of those who have mortgaged the future to advance the interests of the present have not been realized, and the disappointment incident thereto has in many states prompted' the people, in the exercise of their sovereign right, to incorporate in their constitutions such clauses as have been adverted to. The wisdom of this rule is apparent, but we do not think it can be invoked, except in instances similar to those here enumerated ; and, the reason failing, the rule is inapplicable. To allow Baker County to pay off one or more of the warrants issued in consideration of a deed to the land, and insist that, notwithstanding it could not consummate a valid contract of purchase at the time the conveyance was executed, it could by such payment prevent a recovery, would be to permit it to take advantage of its own wrong; for, as was said by Mr. Justice Mitchell, in Bass F. & M. Works v. Board of Com’rs, 115 Ind. 234 ( 17 N. E. 593 ), “the doctrine of ultra vires does not absolve municipal corporations from the principles of common honesty.” In the case at bar, if the relief demanded were granted, the county would not thereby . become a stockholder in any joint stock company, corporation, or association whatever ; nor would it be raising money for, or loaning its credit to or in aid of, any *407 such company, corporation, or association. The decree will therefore be reversed, the demurrer overruled as to the first cause of suit, and the cause remanded for such further proceedings as may be necessary, not inconsistent with this opinion. Reversed.