Nelson v. McAllister District Improvement Co.

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] Action by N.J. Nelson against the McAllister District Improvement Company and others. Decree was for the plaintiff against the named defendant only, and the plaintiff appeals.

REVERSED. Plaintiff is the holder in due course of four bonds made payable to bearer for $1,000 each, which were issued on August 1, 1918, by the McAllister District Improvement Company, a corporation organized and existing under and pursuant to chapter 172, Laws 1911, as amended by chapter 101, Laws 1917. The title to this act reads as follows:

"To enable landowners to incorporate themselves for the purpose of irrigation or drainage, defining their corporate powers, regulating the manner of issuing bonds, making the debts of said corporation a lien on the land of said owners and fixing the organization and annual license fees of such corporation."

Under this act, any three or more owners of land desiring to improve their lands by irrigation or drainage may form a district improvement corporation for the irrigation or drainage of such lands and subject the same to a common lien for all the debts of the corporation incurred in the accomplishment of such purpose. The corporation so formed is expressly authorized to issue and sell bonds and the holder or holders of such bonds, like all other creditors of the corporation, are given a lien upon all the lands included in the district for the amount due thereon. This lien, under the express terms of the statute, is not personal but runs with the land and every person subsequently acquiring title to any part of said lands, under the express provisions of the act, takes the same subject to such lien.

In order to form such a corporation and to include his lands within the district, which is wholly voluntary upon the part of every landowner, the statute provides that every owner of the lands to be included within the district shall be one of the incorporators and that he shall make, subscribe and acknowledge articles of incorporation in triplicate, stating his name and a description of the lands by legal subdivisions as near as possible, and the total number of acres to be included within the district, and that one copy of such articles shall be filed in the office of the secretary of state, one copy in the office of the county clerk of the county where the lands are situated, and the other copy retained by the corporation. The statute further provides that:

"If at any time after the filing of said articles of incorporation, or any amendment thereof, the owners of all the land described in said articles of incorporation, or amendment thereto, shall desire to subject said land to the indebtedness incurred by said corporation, the owners of all such land described in the articles of incorporation, or amendment thereto, shall make, subscribe and acknowledge before some person authorized to take acknowledgment of deeds, a notice to whom it may concern, which notice shall contain a description of the land with the same particularity as is provided for in the articles of incorporation, that the land described in said articles of incorporation, or any amendment thereto, and described in the said notice, will be improved by irrigation or drainage or both, by said corporation, under the provisions of this Act, and that said land shall be subject to any indebtedness incurred by said corporation. Said notice shall be recorded in the office where deeds and other instruments affecting the title to real property are recorded, of the county or counties where the land is situated. From and after the recording of said notice all the debts and obligations of said corporation theretofore or thereafter created shall be a lien upon the land described in said notice prior to every lien attaching to said land subsequent to the date of the recording of said notice, except State, county and school taxes, whether such debt or obligation of said corporation be in existence at the time of the latter lien attaching or be created afterward, and such lien shall not be personal, but shall be an obligation upon the land and shall run with the land."

The act further provides:

"Every owner of land described in said articles of incorporation is a member of said corporation, and said membership is lost or gained through the respective sale or purchase of any of said land as the case may be."

It will thus be seen that, under the express provisions of this act and upon a compliance with its terms, every person who made and subscribed to the articles of incorporation and the notice and every person who subsequently acquires title to said land are, by virtue of their ownership and by force of the statute, members of the corporation and entitled to share in common with all other owners of land situated within the district all the privileges of such membership and hold their land subject to the lien of every creditor of the corporation for all its debts and obligations then due and owing to such creditor, and that such lien or liens are prior to any lien subsequently attaching to any particular tract of land within the district except liens for state, county and school taxes.

Before referring more particularly to the questions involved here, it should be borne in mind that corporations organized under this act are not to be confused with irrigation districts which are organized and exist in this state under a different law. The distinction between the two was pointed out by Mr. Justice BEAN in Rathfon v. Payette-Oregon Slope Irr. Dist.,76 Or. 606 (149 P. 1044), and need not again be repeated other than to say that the inclusion of land within a district organized under this act can result only from the affirmative voluntary act of its owner and not by the coercion of a majority vote as may happen in the case of an irrigation district, which distinction is of importance upon the question of estoppel of landowners under this act.

The facts here are as follows: The McAllister District Improvement Company was organized prior to August 1, 1918, by some seven landowners whose lands required irrigation and, upon the trial of this cause, it was stipulated that each of said then landowners joined in the incorporation of the McAllister District Improvement Company and in the execution of a notice to all whom it may concern that their lands, which were particularly described in said articles of incorporation and in said notice, should thereafter be subject to a lien for the debts and obligations of said corporation.

Without referring more particularly to said stipulation, it is only necessary to say that it was stipulated that all the requirements of the statute, in so far as the formation of the corporation and the execution and recording of said notice are concerned, were strictly complied with, and the lands of the answering defendants herein are those which were specified in the articles of incorporation and in the notice above referred to.

It was also stipulated that, after the formation of said corporation and the recording of said notice and on or just prior to August 1, 1918, the corporation borrowed from F.G. Atkinson the sum of $3,600 and applied the same in the construction of a corporate irrigation system for the irrigation of said lands and, under an agreement with him, issued and sold to him the four bonds above referred to in consideration of said sum of $3,600 on that day paid by him to the corporation. It was further stipulated that Atkinson later and before maturity of said bonds transferred and delivered them to the plaintiff and that plaintiff purchased them for value and without notice of any infirmity in said bonds and is a holder in due course; that there is now due and owing on said bonds the sum of $4,000 with interest thereon from November 1, 1932, at the rate of 6 per cent per annum, less the sum of $105 paid on May 1, 1933.

So far as the record discloses, no other bonds were ever issued by the corporation and there are no other outstanding debts or obligations owing by the corporation.

To enforce his lien, plaintiff brought this suit, praying that the amount due under the bonds be adjudged and decreed to be a lien upon all the lands within the district. He joined as defendants in the suit all persons owning lands within the district and all persons having or claiming to have some right, title or interest in such lands, and alleged in the complaint that plaintiff's lien was prior to all other liens upon any particular tract of land within the district. The cause was tried upon an agreed statement of facts. Most of the defendants were in default for want of an answer. Certain of them answered, setting up that the bonds were invalid because of the failure of the district to comply with a certain other provision of the statute to which we have not yet referred. The cause was tried on the facts stipulated and a decree was entered awarding a judgment in favor of the plaintiff and against the defendant McAllister District Improvement Company for the amount due on the bonds, and dismissing the suit as to the remainder of the defendants. From this decree, the plaintiff has appealed.

One of the facts stipulated and which was claimed as a defense by all the answering defendants was that prior to the borrowing of the money and the issuance of the bonds, the corporation had failed to employ a competent engineer to investigate and prepare plans and estimates and submit them with his report to the landowners, which failure, it is contended, invalidates the bonds. The particular provisions of this statute relied upon by the defendants are as follows:

"* * * After the making and recording of said notice by all owners of land described in said articles of incorporation, or any amendment thereof, as provided in Section 9 thereof, said members at any meeting of said corporation may adopt a resolution designating and authorizing the expenditure of a certain amount of money for preliminary investigation and report upon the plans and cost of construction of the irrigation or drainage system as the case may be. The directors shall then secure a competent engineer who shall make such investigation, and draw detailed plans and specifications and make a report upon the same, including an estimate of the probable cost of construction. Such plans and specifications and report shall be submitted to a meeting of the members of said corporation for adoption. Such adoption must be made by resolution passed by a two-thirds vote of all the votes to which the members may be entitled. If said plans, specifications and report are adopted, said meeting shall then pass a resolution authorizing the issue of bonds in a certain sum. Said sum designated shall not be less than one hundred twenty per centum of the estimated cost of construction as shown by said adopted report. A certified copy of said resolution shall be recorded in the office of the county or counties in which the land is situated, where deeds to real property are recorded. Being so authorized, the board of directors may issue and sell bonds of the corporation at such times and in such amounts as may be necessary not exceeding the total authorized amount. Said bonds shall be in denominations of Five Hundred Dollars and One Thousand Dollars. They shall bear interest from date of issue at not more than six per centum per annum, payable semi-annually on the first day of May and November of each year, and shall run for such time or times as the corporation may fix and determine, not to exceed fifty years, and said corporation may provide that bonds or any of them may be retired at the option of the corporation on any interest paying date after the expiration of ten years. Said bonds shall not be sold for less than ninety per centum of their face value."

While it is true that the stipulation shows that no engineer was employed, it was stipulated that, before the issuance of these bonds, a resolution was passed and adopted, not by a two-thirds vote as provided in the statute, but by the unanimous vote of every person who then owned any of the lands within the district and that this resolution was recorded in the office of the county clerk of Deschutes county where said lands are situated. Moreover, these bonds are payable to bearer and are negotiable instruments and plaintiff is a holder in due course, all of which facts are admitted either by the pleadings or by the stipulation. A copy of the bonds was attached to the complaint as an exhibit in the case and it was admitted by all the answering defendants in their answers that the copy attached to the complaint was a true and correct copy of the bonds in question. Each of these bonds contains the following recital:

"This bond is one of a series of four One Thousand Dollar bonds of like date, issued for the purpose of paying the cost of making certain improvements and enlargements in said McAllister Ditch, and under and by authority of, and in full compliance with the provisions of the constitution and laws of the State of Oregon, and by authority of the vote of more than two-thirds of the owners of property within the McAllister District Improvement Company, and of the vote of more than two-thirds of the members of said McAllister District Improvement Company, and in pursuance of the orders duly made and entered by resolution at a meeting of the members of the said McAllister District Improvement Company held July 23, 1918, and it is hereby declared that provision has been made in accordance with law by said McAllister District Improvement Company for the levy and collection of assessment sufficient to pay the interest upon this bond as the same matures in accordance with the laws of the State of Oregon, and that all of the acts and conditions and things required to be done, and that all things required by law to be done for the issuing of this bond, has been performed in regular and proper form pursuant to chapter 172 of the Laws of the State of Oregon, for 1911, and chapter 101 of the Laws of the State of Oregon for 1917."

It is manifest from the language of that part of the act last quoted that the directions contained in the act as to the employment of an engineer and the acts to be performed by him preliminary to the issuance of the bonds were intended as a protection to the landowners, and that if all such landowners decided to waive such protection and save the expense of employing an engineer they ought to be permitted to do so without invalidating the bonds. The situation presented here would be different if there had been a single landowner who objected to the adoption of the resolution or failed to vote for its adoption, but, since it is stipulated that the adoption of the resolution was passed by the unanimous vote of every landowner and a copy thereof was duly recorded in the office of the county clerk, there can be no valid reason for holding that the bonds, because of such failure, are invalid.

It was also stipulated that Atkinson, when he paid the money to the corporation and received the bonds, had no knowledge of any irregularity and took them in entire good faith. Under these circumstances, we think that all the parties present at that meeting and all persons in privity with them are estopped to assert this defense.

Again, as stated, the plaintiff is the holder in due course of bonds negotiable in form which, on their face, recite that every provision of the statute upon which their validity depended had been complied with before the bonds themselves were issued. Furthermore, if the bonds were invalid because of said irregularity, it would not affect plaintiff's lien only to the extent of the difference between the $3,600 paid by Atkinson and the face value of the bonds, since, under the express provisions of the statute, whether bonds are issued or not, any indebtedness of the corporation confers the right to a lien. For this reason, we think it was error for the court to hold that, because of such alleged irregularity, the bonds were invalid, and that plaintiff had no lien upon any of the lands within the district for the moneys borrowed by the corporation and expended in the improvement and enlargement of its irrigation system.

In the Rathfon case, supra, it was held that a district improvement company is a quasi-public corporation. The act itself expressly provides that the persons appointed in its articles of incorporation as directors and their successors in office, associates and assigns, by the name assumed in such articles, shall thereafter be deemed a body corporate with power, among other things, to sue and be sued, contract and be contracted with, have and use a corporate seal, purchase real and personal property, exercise the powers of eminent domain, appoint subordinate officers, establish rules and regulations, charge and collect rates and tolls, and levy and collect assessments. A corporation so organized and possessing such powers is at least a quasi-municipal corporation and, since the act expressly grants to such corporation the power to issue bonds, the rules applicable to the negotiability of municipal bonds would apply. One of such rules is that the power to issue bonds implies the power to make them negotiable and, being negotiable, they are generally subject to the uniform negotiable instrument law. In the hands of a holder in due course, who purchased them before maturity for value and without notice, they are not subject to the defense sought to be imposed here. Moreover, the recitals contained in these bonds are representations as to matters of fact as distinguished from those of law and relate to the performance or existence of conditions precedent and were made by persons who were charged by law with the determination of those facts before being authorized to issue the bonds. These facts bring them within the rules stated in Klamath Falls v. Sachs,35 Or. 325 (57 P. 329, 76 Am. St. Rep. 501), where the court said:

"In legal effect, adequate recitals contained in negotiable municipal bonds are equivalent to a representation, or warranty, or certificate on the part of the officers, that every thing necessary by law to be done has been done, and every fact necessary by law to have existed did exist, to make them legal and binding."

This also affords another ground for holding that these bonds, in the hands of a holder in due course, are free from any defect of title of prior parties and from defenses which would be available to prior parties among themselves, as provided by section 57-407 of our Code.

Again, it is obvious that not only the McAllister District Improvement Company but also the answering defendants in this suit are and should of right be estopped to deny the validity of these bonds. This estoppel arises from the admitted fact that, before the issuance of these bonds, all owners of land within the district voted unanimously in favor of the adoption of a resolution authorizing the officers of the corporation to issue and sell these bonds to Atkinson, and, since all the answering defendants hold title to their lands by mesne conveyances from those particular persons, they are in privity with them and, because of such privity, are likewise estopped.

One of the answering defendants, the Oregon State Land Board, sets up as a defense that long after the issuance and sale of these bonds it loaned various sums of money belonging to the irreducible school fund to the then owners of four parcels of land within the district and accepted, as security for said loans, mortgages on the land; that all said mortgages being in default, it was compelled to and did foreclose some of said mortgages and became the purchaser thereof at the foreclosure sale, and, as to the other of said mortgages, it was compelled to accept deeds from the owners thereof, and that it is now owner of said parcels of land. It contends that it holds title to these parcels of land freed from plaintiff's lien.

This contention can not be maintained. The agents of the State Land Board loaned these moneys with constructive notice of whatever the public records of Deschutes county disclosed in respect to the title of said mortgaged lands and, hence, its title is subject to plaintiff's lien. The transactions referred to are within the rule announced in State Land Board v. Davidson, 147 Or. 504 (34 P.2d 608), where it was held that bonds and other obligations of an irrigation district, prior in time to a mortgage of the State Land Board, have priority over a later mortgage given to the State Land Board.

C.E. Livesay, one of the answering defendants, alleges as a defense that, since the bonds were issued, he has acquired title to a tract of land within the district by virtue of a sale of the property for state, county and school taxes. This, he contends, discharges his land from the lien of the bonds.

If this contention can be maintained, then the statute affords no security to a bondholder since, by the simple device of not paying the taxes assessed against the lands within the district, the landowners, by having their lands sold for taxes and bid in by some person acting in their behalf, can extinguish all liens. We think that the statute is not capable of that construction. It merely provides that the lien of a corporation creditor which attaches to all the lands within the district is subject to the lien attaching to any particular tract of land for state, county and school taxes. It does not provide nor is there any language contained in the act indicating an intention that the lien of a corporate creditor will be extinguished by the creation or existence of a tax lien or by the sale of the property for taxes. Under section 69-722, Oregon Code 1930, the taxes assessed upon real property become a lien thereon from and including the first day of March in the year in which they are levied until paid and, since taxes are not always paid promptly, it is only fair to assume that tax liens may frequently exist against the lands within the district without in any way impairing the lien of a corporate creditor other than, for the time being, to subject the latter to the priority of the tax lien which, when paid, will cease to be a lien upon the land.

But it is argued that, regardless of the provisions of this statute, a tax sale of lands within the district vests title in the purchaser free from all equities and incumbrances existing prior to the sale upon the title of the previous owner, as is the rule in ordinary cases. In order to give that effect to this statute, it would be necessary to ignore and absolutely disregard the provision contained in the act that every owner of land described in the articles of incorporation is a member of said corporation and "said membership is lost or gained through the respective sale or purchase of any of said land as the case may be". Under this provision, when Livesay acquired title to his land, he became a member of the corporation the same as if the delinquent tax had been paid by the former owner of the land and the land had then been conveyed to Livesay. He thereby became entitled to all the privileges of such membership and to use, for the irrigation of his land, the water appurtenant thereto. That such was the intention of the act is obvious from the fact that all waters used for irrigation purposes on the land are appurtenant to the land and belong to the water users and not to the corporation. A conveyance, therefore, of a particular tract of land within the district, whether voluntarily or involuntarily made, by force of the statute itself, vests in the purchaser not only the title to the land but also the right to use the water appurtenant thereto and to have the same delivered to him by the corporation.

Moreover, this statute expressly provides that the lien of a corporate creditor shall attach to all the lands within the district and shall run with the land which would not be the case if a tax sale of lands within the district would extinguish the lien upon the land sold.

It was also contended that plaintiff's sole remedy is by writ of mandamus to compel the officers of the district to levy assessments for the payment of these bonds. If this were an ordinary municipal corporation, the contention would have to be sustained for, in that case, the property of the corporation would not be subject to levy and sale under execution and the creditor of such corporation would have no lien on lands privately owned within the municipality. For those reasons alone, the creditor would have no remedy other than by mandamus to compel the proper officers to levy a tax for the payment of his claim. In the instant case those reasons do not apply with the single exception that the McAllister District Improvement Company owns no property subject to levy and sale under execution and, hence, the reason for the application of the rule requiring mandamus proceedings to be brought by a creditor of a municipal corporation does not exist in this case.

Again, this statute now under consideration is sui generis in that, unlike all other municipal or quasi-municipal corporations, it expressly grants to every creditor of the corporation a lien upon all the lands privately owned within the district for the indebtedness due such creditor.

Section 6-501 of the Code provides that:

"A lien upon real or personal property, other than that of a judgment or decree, whether created by mortgage or otherwise, shall be foreclosed, and the property adjudged to be sold to satisfy the debt secured thereby by a suit."

Section 8-302 of the Code, which authorizes the issuance of a writ of mandamus, expressly provides that:

"* * * The writ shall not be issued in any case where there is a plain, speedy, and adequate remedy in the ordinary course of the law."

And, since, under section 6-501, the plaintiff has a plain, speedy and adequate remedy in the ordinary course of the law by a suit to foreclose his lien as authorized by section 6-501, the issuance of a writ of mandamus is expressly forbidden by section 8-302.

The argument advanced in support of said contention that no case can be found wherein a creditor of a municipal or quasi-municipal corporation has been permitted to foreclose a lien for a debt owing by such municipality fails when it is remembered that no statute, other than the one now being considered, ever granted a lien to such creditor or gave to such creditor a lien upon all lands privately owned within the municipality or district. However, the case of Williams v.Allen, 32 N.J. Eq. 485, is a somewhat analogous case wherein a lien for unpaid assessments of a drainage district was foreclosed upon the lands of the delinquent landowners under circumstances similar in many respects to those involved here.

Under the decree appealed from, the trial court gave plaintiff, as his sole remedy, a judgment against the McAllister District Improvement Company which, if it could be enforced at all, could only be enforced against some property belonging to the district. This resulted in depriving plaintiff of any remedy. The McAllister District Improvement Company is not a corporation organized for profit. Its functions are those of a mutual water service company which furnishes water to the owners of lands within the district without profit to the corporation. As such, it has no property subject to levy and sale under execution:Eldredge v. Mill Ditch Co., 90 Or. 590 (177 P. 939); In reWaters of Walla Walla River, 141 Or. 492 (16 P.2d 939); andState v. Blake (Utah), 20 P.2d 871. Also see, 2 Wiel on Water Rights (3d Ed.), p. 1252.

We can find no ground upon which the decree appealed from can be sustained. The decree will, therefore, be reversed and the cause will be remanded to the court below with directions to enter a decree in accordance with what is here said.

BEAN and BELT, JJ., concur.

BAILEY, J., dissents.