City of Fergus Falls v. Fergus Falls Hotel Co. , 50 L.R.A. 170 ( 1900 )

LEWIS, J.²

Action by respondent city to foreclose a mortgage upon certain hotel property in the city of Fergus Falls. Defense, that the city cannot maintain an action to enforce securities' taken on a loan, the same being void; against public policy, and ultra vires. The action was tried by the court without a jury, and resulted in an order for judgment in favor of respondent. Defendant appeals from an order denying its motion for a new trial.

The trial court found that in 1890 one Bell and wife executed and delivered to the First National Bank of Fergus Falls their promissory note for $10,000, due five years from date, with interest at two per cent., and at the same time, to secure the note, executed and delivered a mortgage upon certain premises in Fergus Falls known as the “Grand Hotel property.” This mortgage was duly recorded, and contained the usual covenants for foreclosure upon default of payment. The amount of the consideration of the mortgage — $10,000—was paid to Bell by certain officers of the city of Fergus Falls out of the city funds as a loan to him from the city. The bank had no interest in the mortgage, but simply held it in trust for the city, and afterwards, in 3896, executed and delivered to the city a declaration of trust to that effect. In 1898 the bank duly assigned the mortgage to the city, which assignment was duly recorded. After executing the mortgage, in 1891, Bell and wife deeded the property to one George Duryee, and finally the premises were conveyed to defendant in 1892. On the question of notice of the mortgage by defendant when it purchased the property the court found as follows:

“That said defendant, the Fergus Falls Hotel Company, at the time of the making and delivery of said last-described deed, and at all times thereafter, had actual notice and knowledge of the existence of said mortgage, and at all times prior to the beginning of this action, in all its dealings with plaintiff in reference thereto, said defendant recognized and admitted said mortgage as a valid and subsisting lien upon the property therein described; that said mortgage was fully considered land taken into account by said defendant in its negotiations for the purchase of said premises and in arriving at the purchase price to be paid therefor.”

The court further found that the property was sold for the 1893, 1894, and 1895 taxes, and that respondent was forced to pay $1,847 to protect the property from loss under tax judgments; that the taxes of 1897 were not paid, and the property was sold for the same in May, 1899. It is further found that on April 30, 1895, the principal was extended for the period of five years, at request of appellant. The interest was paid by appellant up to September 23, 1896. As conclusions of law: That defendant was indebted to the plaintiff in the full amount of the principal, interest, and taxes paid, and that the property be sold to satisfy the same.

1. Sp. Laws 1883, c. 1, sube. 5, § 31, provides:

“No money shall be paid out of the city treasury, except for principal or interest on bonds, unless such payment shall be authorized by a vote of the city council, and shall then be drawn out only upon orders signed by the mayor and countersigned by the city clerk, which orders shall specify the purpose for which they were drawn, and the fund out of which they are payable, and the name of the person in whose favor they may be drawn, and may be made payable to the order of such person.”

The order upon which the city treasurer paid out the money (Exhibit 5) is as follows:

“Fergus Falls, Minn., Sept. 23, 1890.

Please pay to O. D. Wright ten thousand dollars out of the permanent improvement fund belonging to the city of Fergus Falls.

E. Shaver, Acting Mayor.

Wm.. Hoefling, Clerk pro tern.

To F. J. Evans, City Treasurer. $10,000.”

Defendant objected to the introduction of this order in evidence upon the ground that it was void on its face, not showing the purpose for which the order was drawn. The objection was overruled, and the order received. This ruling is assigned as error.

Counsel for the appellant take the position that the order was void for the reason assigned, that it would afford the city treasurer no protection if he paid out the city’s money on such an order, and for that reason the city cannot predicate any rights upon it. Admitting that the officials of the city council issued a void order, and would be liable for so doing, and that the city treasurer paid out the money without authority, and that the order would not protect him, this only goes to show that the money was obtained from the city by-an indirect and illegal manner, through the acts of its officers. The main issue to be determined in this case was whether the city had loaned the money,.and could call into action the powers of the courts to enforce the collection of the debt. It is immaterial whether the money was obtained upon an order void upon its face or regular upon its face. Neither is it material whether the officers were acting in good faith, as, no doubt, they were. The only purpose of introducing the order was to show that the money was paid out of the city treasury, and it was properly received.

2. Appellant claims that there was no evidence to justify the finding that the city ever loaned the money to Bell, conceding that he received the benefit of it. The argument is based upon two propositions: (1) That, the order being void, the city treasurer had no right to pay it, and charge the amount to the city. The act being void, no money of the city passed. (2) That the money coming to the treasurer was deposited in the bank in open account, subject to the treasurer’s check; that the city had no money on deposit, but had parted with its title to the bank, upon the theory that the bank acquired title to the money deposited on open account. This may be technically true as a result, of the method of bookkeeping; nevertheless, by means of the order, and a check drawn on the city funds in the bank, $10,000 of the city’s money was drawn out, and paid over to the use of Bell. This was the ultimate fact found by the court, and the evidence is conclusive.

3. Again, it is urged that the city, having no power to make the loan, cannot invoke the powers of the courts in collecting it.

The city certainly had no authority to loan this money. The act was not within its charter powers; but it does not follow that the city cannot recover it. ■ It is true that the doctrine of ultra vires is, and ought to be, rigidly enforced in favor of a municipal corporation in order to protect its taxpayers from being plundered by the unlawful acts of its officers. But when, as in this case, a municipal corporation is seeking to have restored to its treasury money taken therefrom under color of an ultra vires contract, it does not lie in the mouth of the beneficiary of the wrongful act, or of his assignee with notice, to say that a lien securing the payment or return of the money is void because the money was obtained by virtue of a void contract; otherwise, the wrongdoer would be permitted to take advantage of his own wrong to the injury of innocent taxpayers. There can be no question about the city’s power to collect from Bell if he were alive and solvent, under the decision in City of Chaska v. Hedman, 53 Minn. 525, 55 N. W. 737, and there is no distinction in principle between that case and this. That decision rests upon the theory that the contract on the part of the city by which it paid $500 for the establishment of a shoe factory was void, being beyond its powers. The corporation, as such, had no power to make it, and its officers had no power to bind it. The money having been paid without authority, its payment was not a corporate act, and the corporation could recover the money. The principle applied in that case is not changed by the effect of Penal Code, §§ 136, 369, 370 (G. S. 1894, §§ 6421, 6663, 6664). Those sections apply to public officers, but can have no application to the city as such.

The general rule that the law leaves the parties to an illegal transaction where it finds them, has no application. The officers of the city are not the city. The city cannot be bound by the unlawful acts of its officers in paying out its money. And, if the city may recover the money from those0 who receive it, why may it not foreclose the mortgage, it being impossible to secure the money, or any part of it, in any other way? There is no difference in principle between the two remedies. The city is only recovering what it can of the funds illegally taken from its treasury. The defendant cannot complain. It bought the property with notice of the city’s claim and lien. It is in no worse position than if the loan had been made by a private party. And it.would be inequitable to permit it to benefit by the illegal act of the city officials under such circumstances. This right of a municipal corporation to enforce its claims under such circumstances has been recognized or applied in the following cases: Deering & Co. v. Peterson, 75 Minn. 118, 77 N. W. 568; National Bank v. Matthews, 98 U. S. 621; City v. Balcom, 134 N. Y. 532, 32 N. E. 7; Hay v. Alexandria & W. R. Co. (C. C.) 20 Fed. 15.

Order affirmed.

2 LOVELY, J., absent, took no part.