Merchants National Bank v. Escondido Irrigation District

The plaintiff is trustee in two deeds of trust, made to it by the defendant, June 12, 1894, and April 15, 1895, as additional security for the payment of two series of bonds of date January 1, 1894, and April 15, 1895, for the aggregate sums of $250,000 and $100,00. The deeds purport to convey to the trustee the whole water system of the district, including its reservoirs, water-ditches, and water-rights, and, generally, all of its property, real and personal, then owned or afterwards to be acquired. The trustee is now in possession of the property conveyed, having taken possession of it before the commencement of the suit, for default in the payment of interest, as it was authorized to do by the deeds. The suit was brought for the foreclosure of the lien and sale of the property. The pleadings consist of the complaint — to which a demurrer was interposed; the cross-complaint of the defendant praying for the restitution of the property; and the demurrer and answer of the plaintiff thereto. The demurrer to the complaint was sustained, the demurrer to the cross-complaint overruled, and, upon the motion of the defendant, judgment was entered in its favor on the cross-complaint and answer, as prayed for, which is the judgment appealed from. The deeds of trust were made under the supposed authority of section 17 of the Wright Act, as amended March 11, 1893, (Stats. 1893, p. 175;) which — indicating by italics the new provisions added to the original section — reads as follows: —

"Section 17. Said bonds and the interest thereon shall be paid by revenue derived from an annual assessment upon the real property of the district; and all the real property in the district shall be and remain liable to be assessed for such payments as hereinafter provided. And as additional security forthe payment of all said bonds, and interest thereon, the board ofdirectors shall have power to pledge, by mortgage, trust-deed, orotherwise, all property of the district situate within or without the district, whether real, personal,or mixed, of whatsoever kind, including all its rights andprivileges held or possessed at the time of the issue of saidbonds, or which may hereafter be acquired under the provisions ofthis act." (Stats. 1893, p. 175.)

It was held by the lower court, in effect, that this provision was unconstitutional; and whether this position be correct, or otherwise, is the principal question to be determined. The contrary is maintained by the appellant's counsel on two grounds, based, respectively, on several different and inconsistent constructions of the statute: The one, that the act merely "authorizes a change in the custodian of the public use," leaving the use itself and the rights of the landowners of the district to the use of the water unaffected; the other, that the legislature has the constitutional power to dispose absolutely of the property of all public or municipal corporations.

But the former construction is manifestly untenable. The pledge or hypothecation of the property of the district, in the absence of qualifying expressions, necessarily implies the right of foreclosure and sale in the ordinary way, — that is to say, in such manner as to convey to the purchaser the whole property in the land hypothecated, legal and equitable. (Civ. Code, secs.2931, 3000.) And this construction is confirmed by the consideration that the conveyance of the mere legal title would not serve as additional security, as intended by the act; and that to convey, in addition to the legal title, the statutory powers of the board to the possession and management of the water system and other property of the district would be in contravention of section 13 of article XI of the constitution, which forbids the delegation of such powers. Which provision, it can hardly be doubted, must (with section 12 of the same article) be construed as applying equally to public or municipal corporations of this character, as to ordinary municipalities or cities. For not only is this construction required by the reason, and consequently by the presumed intention, of the constitutional provision, but the term municipal, as commonly used, is appropriately applied to all corporations exercising governmental functions, either general or special; and, indeed, this must be taken as the definition of a public or municipal corporation. (Civ. Code, sec. 284; Board of Education v. Board of Trustees etc., 129 Cal. 604; Hewes v. Ewing, 93 Cal. 417; Irrigation Dist. v. Lappe,79 Cal. 354; In re Madera Irrigation Dist., 92 Cal. 308, 316 319 et seq.¹) Hence, accepting the ordinary division of corporations into public and private (1 Dillon on Municipal Corporations, sec. 52), corporations of the kind under consideration do not fall wholly within the one or the other class; but with regard to their public functions, are to be classed with the former, and with regard to the private rights of the individual landowners, with the latter.

The other position of the appellant is equally untenable. The state, indeed, has a large, though not an unlimited, power of disposition over the property of ordinary municipalities; which is commonly held in trust for the public generally, or for the limited public of the municipality. (Cooley on Constitutional Limitations, 342 et seq.; I Dillon on Municipal Corporations, secs. 27, 66, 67.) But here, the corporation in question is distinguished from ordinary municipal corporations by the fact that "the legal title," only of the property of the corporation is vested in the district, "in trust for the uses and purposes set forth in [the] act"; and that the beneficiaries of the trust — who, upon familiar equitable principles, are to be regarded as the owners of the property — are the landowners in the district with whose funds the property has been acquired (Civ. Code, sec.853); and in whom, indeed, is vested by the express provisions of the statute, in each, the right to the several use of a definite proportion of the water of the district, and in all, in common, the equitable ownership of its water-rights, reservoirs, ditches, and property generally, as the means of supplying water. (Stats. 1887, pp. 34, 35, secs. 11, 13.) Such rights as these cannot be distinguished in any way from other private rights, and therefore clearly come within the protection of the provision of section 13 of article I of the state constitution — that "no person shall be . . . deprived of . . . property without due process of law," — and of the similar provision of section 1 of the fourteenth amendment to the constitution of the United States.

The act is also, we think, in conflict with the provision of section 10 of article I of the federal constitution prohibiting the enactment by the state of any "law impairing the obligation of contracts." The act providing for the organization of the district, and the organization of the district under the provisions of the act by the vote of its electors, cannot be otherwise regarded than as a contract between the state and the individuals whose property was thereby affected. The contract, indeed, lacks one of the ordinary elements of contracts — namely, the actual consent of all the parties to it; but by the provisions of the statute the majority of the electors were empowered to act and consent for the individual proprietor; and unless this were a legitimate exercise of the powers of the state, the statute itself would be invalid. Hence the consent of all the parties to the contract was in fact given either personally or by their authorized agents; and there was thus created a complete contract between the parties by the terms of which the property-owners in the district consented to the burden imposed upon their property by the provisions of section 17 of the original act and to no other. The burden thus imposed was, that the bonds issued under the act should "be paid by revenue derived from an annual assessment upon the real property of the district," and that their lands should "be and remain liable" for such assessment; and this implied that this should be the extent of the burden. But by the amendatory act the board of directors is authorized, without the consent, or even the knowledge, of the landowners, to pledge or hypothecate the property acquired by their contributions — that is to say, acquired with their money — and thus to subject them to the liability of losing entirely the property thus acquired; which is not only their property, but by the express provision of the statute (sec. 13) has been "dedicated and set apart to the uses and purposes set forth in the original act"; which would leave them only the liability for continued assessments until the balance of the bonds shall be paid. We have no doubt, therefore, that in this respect also the legislature went beyond its constitutional powers.

We advise that the judgment appealed from be affirmed.

Harrison, C., and Gray, C., concurred.

For the reasons given in the foregoing opinion the judgment appealed from is affirmed.

Henshaw, J., McFarland, J., Lorigan, J.

¹ 27 Am. St. Rep. 106.