Warfield v. Anglo & London Paris National Bank

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] This is an action brought by a taxpayer of the city and county of San Francisco, on behalf of said municipal corporation, to compel the defendants, other than the municipal corporation, to pay into the treasury of the municipality $2,888,537 because of their purchase from the city and county of San Francisco of certain bonds known as "water bonds," of the par value of $21,826,000, for a purchase price of $18,937,463 at a public sale held on or about August 1, 1921. The contention of appellant is that the sale was illegally made, and that the defendants have converted the bonds and should be liable for their par value. In reaching this conclusion, appellant urges a construction of the law governing the sale of these bonds, which would have prevented their sale at the date named, when the bond market was depressed, and also urges that a charter amendment permitting the sale of the bonds below par was unconstitutional. While the questions raised by these contentions are very interesting and intricate, we are of the opinion that it is unnecessary to determine them upon this appeal, because of our concurrence in the view of the learned trial judge that the complaint shows on its face such a delay in the enforcement of the asserted claim as to amount to laches and bar the right of recovery, if it ever existed.

After alleging that the plaintiff was a citizen, resident, and taxpayer in the city and county of San Francisco, California, at the time of the sale of said bonds and thereafter, until the date of the action, July, 1924, the incorporation of the defendants and the fact that the city and county of San Francisco had refused to join as plaintiff and was made a defendant because of that fact, plaintiff alleged:

"That on the 14th day of January, 1910, the qualified electors of the said city and county of San Francisco, by a vote of more than two-thirds of those voting thereon, voted in the affirmative to issue bonds in amount of forty-five million dollars for the purpose of furnishing money to construct a water supply system for the people of said San Francisco, which said system is commonly known as the ``Hetch Hetchy' system, and thereafter such bonds were executed in proper form, and in denominations of one thousand dollars each, and were designated and known as ``Water Bonds' and each of said bonds was dated July 1st, 1910. The aggregate amount of such bonds of said denomination and value being the said sum of $45,000,000. And upon such execution of said bonds, they were deposited in the treasury of the city and county of San Francisco, to be sold by the Board of Supervisors of said City and County of San Francisco from time to time as money was needed to pay for the work of the construction of said water supply system as such work progressed.

"That during the year 1920, the said city and county of San Francisco determined to construct an adequate part of said water supply system and thereupon it entered into a contract in writing with defendant Construction Company of North America, said contract being numbered 77c, and in and by said contract the said city and county of San Francisco agreed to pay for all of the labor and material performed and used in the work of the construction of said aqueduct, and it hired and employed said defendant Construction Company of North America, to superintend and manage said work of said construction for it, for a percentage of the total cost of said work which was estimated to be the sum of eight million dollars, and there was thereupon set aside by said city and county of San Francisco, from the water bonds hereinbefore mentioned, bonds in amount of eight million dollars to pay for the said work, and in and by said contract the said Construction Company of North America agreed to purchase sufficient of said bonds at par plus accrued interest at the commencement of each fiscal year while said work was progressing to pay for the work that would be done on said aqueduct during said fiscal year according to the estimate for such work that should be made by the City Engineer of said San Francisco prior to the commencement of such fiscal year, and said Construction Company of North America commenced such work of superintendence during the said year 1920, and was in the employ of the said city and county of San Francisco during all of the times hereinafter stated.

"That on or about the 13th day of May, 1921, M.M. O'Shaughnessy, who was then and there the regularly appointed, qualified and acting City Engineer of the city and county of San Francisco, made an estimate of the amount of said bonds it would be necessary to sell to carry on the work of constructing said Hetch Hetchy water project for the fiscal year 1921-22, which estimate was the sum of $4,000,000, and in said estimate computed that the amount of said bonds that it would be necessary to sell to carry on the work of said aqueduct under said contract 77c, was the sum of $2,750,000, and communicated such estimate to the Board of Supervisors of the said city and county of San Francisco, on or about said date.

"That on the 1st day of July, 1921, the said city and county of San Francisco had in its treasury or in banks for it available for the work of the construction of said water project, including the said aqueduct, all the proceeds of the sale of said water bonds or from income derived from operating parts of said project the sum of about $6,479,677.29, without the sale of any of the bonds so estimated by said City Engineer as necessary to be sold, and the expenditures for the whole of said water project to-wit, its construction including the amounts expended under contract 77c for the fiscal year 1921-1922, was the sum of $6,681,580.04, which was expended in average monthly amounts during said fiscal year, and the purchase of said water bonds in amount $2,750,000 by defendant Construction Company of North America would have left in the treasury of said city and county of San Francisco the sum of $2,548,097.20 or thereabouts available for the construction of said water project on the 1st day of July, 1922.

"That for some two or three years prior to the 1st day of August, 1921, the value of bonds of every description throughout the United States was temporarily depreciated in the selling markets, but it was a matter of common knowledge that such depreciation was but temporary and on or about said 1st day of August, 1921, bonds of all characters throughout the United States began to appreciate in value, and all bonds and the water bonds hereinafter mentioned were salable at par long prior to the time the city and county of San Francisco was required to sell any thereof other than the said amount of $2,750,000 worth under said contract 77c, and it was a matter of common knowledge on said 1st day of August, 1921, that said water bonds could be sold at par prior to the first day of July, 1922, to-wit the whole of the said water bonds hereinafter mentioned.

"That on the 1st day of August, 1921, the city and county of San Francisco aforesaid, was the owner of, in possession of and entitled to the possession of 21,826 of said water bonds then unsold of the total par value of $21,826,000, said bonds being of the par value of $1,000 each, which the defendants in the caption hereof named excepting only the city and county of San Francisco, converted to their own use in the manner following, to-wit:

"That prior to the 1st day of August, 1921, the Board of Supervisors of said city and county of San Francisco, advertised for bids for the purchase of said water bonds, which bids were to be received and acted upon by said Board of Supervisors on the said 1st day of August, 1921, and upon that day the defendant Construction Company of North America tendered a bid for the purchase of 21,826 water bonds at the average price of about $851.78 for each of said $1,000 bonds, and thereupon the said Board of Supervisors entered into a contract in writing under and by which it agreed to sell the whole of said water bonds to said Construction Company of North America under said contract, it being a single contract, at the said tendered price of $851.78 for each of said bonds, and thereafter the whole of said 21,826 water bonds were delivered to said Construction Company of North America, between the 16th day of August, 1921, and the 17th day of November, 1921, the delivery thereof all being under said contract of sale so made by said supervisors and said board of supervisors and the delivery thereof being made by said city and county of San Francisco at the said Anglo London Paris National Bank for the said Construction Company of North America, and the whole of said transaction with said city and county of San Francisco was conducted by said the Anglo London Paris National Bank with said city and county of San Francisco, for said Construction Company of North America, and the said city and county of San Francisco took from the said Anglo London Paris National Bank and the said Construction Company of North America, United States bonds of the par value of $16,750 for said water bonds and $2,187,468 in money for said water bonds so delivered but neither the whole nor any part of the sum of $2,888,537, the remaining part of the par value of said 21,826 water bonds has been recovered by said city and county of San Francisco, or paid.

"That the bonds aforesaid which the said Construction Company had agreed to buy at par plus accrued interest in the extent of $2,750,000 were included in the 21,826 sold as aforesaid for the price of $851.78 each.

"That by reason of the premises the said city and county of San Francisco and the taxpayers thereof have been damaged in the sum of $21,826,000 less the sum of $18,937,463 so recovered by it, but neither the whole nor any part of the said remaining sum of $2,888,537 has been paid.

"That the market price of the bonds so converted during the greater portion of the year 1922 on the bond market in the said city and county of San Francisco, State of California was in excess of the sum of $1040 for each of said one thousand dollar bonds, and at about the close of the year 1922, defendant Anglo London Paris National Bank offered to re-sell some of said bonds to the said city and county of San Francisco at the then market price on said bond market, the said price being in excess of the sum of $1040 for each of said $1000 bonds.

"That the said city and county of San Francisco cannot be induced to commence or prosecute an action to recover the said sum of money herein sought to be recovered as is shown by the following facts:

"It has neglected to commence any action to recover said sum and no action relating to said bond transaction other than this action has ever been commenced.

"That about the month of August, 1922, one James B. McSheehy who was then and there a regularly elected member of the Board of Supervisors of said city and county of San Francisco, and duly qualified and acting, requested said Board of Supervisors to investigate said sale of bonds and all matters in connection therewith, and after some months of delay and great difficulty on his part in getting said Board of Supervisors to act thereon, it finally at about the month of January, 1923, approved said sale, declared it was for the best interests of said San Francisco that it should have been made and that it was a legal and proper sale, and the said Board of Supervisors now and at the time of the commencement of this action was composed of members more than a majority of which acted as above.

"That James Rolph, Junior, is now and for more than ten years last past has been the regularly elected, qualified and acting Mayor of the City and County of San Francisco, and he approved of such sale of said bonds at the time it was made and at the time of the said deliveries thereof, and on or about the 5th day of December, 1922, he publicly stated at a meeting of said Board of Supervisors, that everything that was done about the sale of said bonds was right and that if he had to do it over again he would favor the sale under the same conditions.

"That the said Mayor has at other times and places that plaintiff cannot specify reiterated the same sentiments and neither he nor a majority of the members of said Board of Supervisors have changed their erroneous opinions on said matter but are still in the same frame of mind.

"That George Lull has been the regularly elected, qualified and acting City Attorney of the said City and County of San Francisco, State of California, for more than five years last past, and is now such, and he approved of said bond sale and has taken no action to recover the said sum of money sought to be recovered herein either by suit brought in the name of said City and County or at all, and on the 7th day of March, 1925, plaintiff served a demand on him in this action in the words and figures following to-wit":

After setting forth the demand, the complaint continues:

"That the said City Attorney signed a receipt for said demand, but failed to signify his intention to comply therewith nor has he complied therewith in any particular.

"That during the month of January, 1923, two voluntary unincorporated associations of persons, each being composed of members residing in said city and county of San Francisco, one being named the ``Taxpayers Association of San Francisco,' and the other being named ``Caravan No. 6, Order of Camels,' requested a Grand Jury of said city and county of San Francisco, then sitting after having been regularly impanelled, to instruct the District Attorney of said city and county of San Francisco, to institute suit to recover the money sought to be recovered in this action, but the said Grand Jury after holding such request for some months refused to so instruct or order said District Attorney to institute such action and no such order has ever been given by any grand jury, and no such action has ever been instituted, the request of such voluntary associations having been made to said grand jury on behalf of said city and county of San Francisco and the taxpayers thereof.

"That the vote of the people of the said city and county of San Francisco, State of California, taken on the 14th day of January, 1910, as hereinbefore mentioned, was taken at a special election held on said day for the purposes of voting on said bond question, and the proposition submitted to the voters at said election was to create a bonded indebtedness to finance said water project, said bonds to bear interest at a rate not exceeding five per cent per annum, and the whole of said bonds were executed and deposited in the treasury of said city and county of San Francisco to be sold and issued and on their face expressed that the rate of interest to be paid thereon was four and one-half per cent per annum, and thereafter and on the 2nd day of November, 1920, the said Board of Supervisors of the said city and county of San Francisco, State of California, at a general election held on said date submitted a proposed amendment to the charter of said city and county of San Francisco, proposing to amend article XII of said charter by adding thereto a section to be known as section 10b, the said proposed amendment being found in the Statutes of California, for the year 1921, at page 1786, and at said general election 74,652 electors voted in favor of said proposition, and 45,979 of such electors voted against the same, but thereafter and on the 21st day of January, 1921, the legislature of the state of California approved said proposition, and all of said water bonds that were sold and issued prior to the 1st day of August, 1921, were sold at their par value and to bear a rate of interest of four and one-half per cent per annum, over $20,000,000 of such bonds having been so sold and issued prior to the said 1st day of August, 1921.

"That plaintiff did not discover the facts constituting the foregoing cause of action until about the month of May, 1924, and brings this action for the benefit of himself and all taxpayers of said city and county of San Francisco, and all persons legally interested in the recovery of the money sought to be recovered herein, and further alleges that the said Construction Company of North America entered into said contract of August 1, 1921, to purchase the bonds aforesaid, with the full knowledge, consent and approval of the defendant the Anglo London Paris National Bank, and the last named corporation participated in the conversions hereinbefore complained of from the time of the last delivery of said water bonds and the delivery of said United States bonds by said the Anglo London Paris National Bank, to said San Francisco, each of said deliveries of such United States bonds being a part of the said sale of bonds herein complained of."

There is nothing to indicate in the foregoing allegations that the sale of the bonds was not in entire good faith on both sides, nor does it appear that the city and county of San Francisco could have disposed of the bonds at a higher price. [1] It is a well-known fact, of which this court may take judicial notice, that municipal securities during and after the war could not be marketed in large quantities at par unless the usual interest rate thereon was considerably increased. [2] The matters pleaded by plaintiff have all been matters of common knowledge, yet the city authorities and the taxpayers in general have acquiesced in the transaction and the plaintiff himself has acquiesced in it for three years. It is also obvious that the position of the defendants has been altered during this period of delay. If the transaction had been attacked with reasonable promptness and diligence, the bonds might have been returned and the purchase price thereof invested in other bonds which were at that time also greatly depressed in value and which would have appreciated with the rising market as did the bonds which were purchased from the municipality. It appears from the complaint, and the matters judicially noticed, that during the period of delay, which was operating to the disadvantage of the purchaser in the manner before stated, the city and county of San Francisco has been receiving the benefit of the purchase price of the bonds and of the increased value of the United States government bonds taken as a part of such purchase price.

The complaint also reveals additional circumstances which would estop the city and county of San Francisco from asserting a right to rescind this contract at this late date, in its recitals relating to the actions of the mayor and board of supervisors, as well as the grand jury, duly impaneled, all of whom, expressly or impliedly, approved of the purchase and sale and lulled the purchasers into security and thus justified them in proceeding to change their position in reliance upon the validity of the contract.

The delay in this case is particularly inexcusable in view of the speculative elements involved in the transaction. A long period of delay, such as occurred in the instant case, enables a litigant to await changes in the market value of securities, and act only if the change is to his advantage.

[3] It is settled that the plaintiff can assert no better cause of action on behalf of the municipality than that corporation could have asserted upon its own behalf. (Cathers v. Moores, 78 Neb. 17 [14 L.R.A. (N.S.) 302, 113 N.W. 119];New Orleans v. New Orleans Water Works Co., 142 U.S. 79, 93 [35 L.Ed. 943, 12 Sup. Ct. Rep. 142, see, also, Rose's U.S. Notes].) And we think that the foregoing recitals show an inexcusable delay upon the part of the municipality in asserting any right which it might have had.[4] "If, in the course of an inexcusable delay in the assertion of a right, changes occur in the subject matter of the transaction in suit or in the relative positions of the parties thereto, as a result of which it is impossible to place the parties in statu quo, and the enforcement of the right would work inequity, relief will be denied because of laches." (21 C.J. 231.) "A marked appreciation or depreciation, according to circumstances, in the value of the property involved, where the right might have been asserted before such change, and the granting of relief would in consequence of the change work inequity, is ordinarily fatal to plaintiff's case." (21 C.J. 233.) "If the property involved is of a speculative or fluctuating character, more than ordinary promptness is required of a claimant." (21 C.J. 225.)

[5] To meet the claim of laches raised by the defendants, the plaintiff and appellant asserts that this equitable doctrine may not be invoked by one who does not come into court with clean hands, and that the defendants are precluded by their conduct from raising this defense. In reply, we repeat that the complaint contains no allegation of bad faith nor of fraud, but, on the contrary, alleges facts from which it appears that both parties to the sale acted in good faith, in view of the conditions existing at the time, and, therefore, the principles contended for by appellant can have no application in a ruling on demurrer.

[6] The defense of laches was properly raised by the demurrer filed to the complaint. (Marsh v. Lott, 156 Cal. 643 [105 P. 968]; Superior California Co. v. Grossman, 32 Cal.App. 357 [162 P. 1046]; 21 C.J., pp. 257, 435.) It is well established that equity will not relieve against culpable negligence or inexcusable laches. (Tynan v. Kerns, 119 Cal. 447 [51 P. 693]; Blethen v. Pacific Mutual L.I. Co.,46 Cal.App. 765 [236 P. 360].) "Nothing can call a court of chancery into activity but conscience, good faith and reasonable diligence. Where these are wanting, the court is passive and does nothing." (Blethen v. Pacific Mutual L.I. Co., supra.) [7] The application of the doctrine of laches is not dependent upon a delay of sufficient duration to call into operation the statute of limitations. (Boone v.Templeman, 158 Cal. 290 [139 Am. St. Rep. 126, 110 P. 947];Shiels v. Nathan, 12 Cal.App. 604, 619 [108 P. 34];Blethen v. Pacific Mutual L.I. Co., supra.)

The judgment appealed from is affirmed.

Curtis, J., concurred.