Abrams v. City of Seattle

I dissent. It seems to me that the result of the majority holding simply permits the city council to give away $189,000 of public funds.

The facts of the case, as I read them, are these: At various times prior to January 21, 1930, the city of Seattle had acquired by purchase, at a total cost of $407,280, several lots making up the entire half block fronting on Third avenue between Madison and Spring streets, in that city. The object in acquiring the site was to erect a substation for the lighting department of the city.

In 1929, pursuant to council resolution, the city had advertised the real estate for lease, and in response thereto one L.A. DeCou submitted his bid for the concession. On January 21, 1930, the city council passed ordinance No. 58836, relating to the acceptance of DeCou's bid and the authorization of a lease to be executed with respect thereto. Section 3 of the ordinance provided that it should not take effect until it had been submitted to the people at a general municipal election and by them approved. The bid and proposed lease were approved at such general election held March 11, 1930, and on April 29, 1930, the lease was formally executed. Thereafter, the lease was assigned by DeCou to a corporation organized for that purpose by him and his associates on May 17, 1930, and known as City Light Building Company. That corporation was purely a private concern, and, despite its name, had no legal connection with the city itself.

The lease, which was for a term of fifty years, provided that the lessee should construct on the premises, at his sole cost and expense, a building suitable for use as a substation of the municipal light and power plant and to be completed within one year from date of the execution of the lease; it also provided that the lessee should, at his sole cost and expense, construct above the substation, within eighteen months, a twenty-four-story office building to cost not less than $1,750,000. The title to the land and substation was to remain vested in the city, while the title to the portion of the building above the substation was to be in the lessee during the term of the lease.

There was a further provision in the lease that the lessee should keep the premises free and clear of liens, and in no event was the real estate to be liable for any expense connected with the cost of construction. Upon default for a period of sixty days of any covenant or agreement to be performed by lessee, the city was to have the right, upon thirty days' notice in writing, to enter upon the premises and take possession thereof, and thereafter all improvements were to become forfeited to the city. According to the lease the lessee was not to pay any rent, the consideration to the city being the erection of the building under the conditions above set forth.

Following the execution of the lease, ordinance No. 59789, passed July 28, 1930, authorized the city to enter into a lease with the City Light Building Company for the occupancy by the city of certain space in the proposed building for a term of twenty years, the total rent to be paid therefor amounting to $92,395 per annum.

The City Light Building Company, which will hereafter be referred to as the "lessee" or else as "the building company," having no funds of its own with which to construct the building, sought to raise the money by securing an agreement or commitment from Mercantile Commerce Company of St. Louis to loan approximately $1,250,000 upon the security of the leasehold interest, dependent upon the lessee first raising approximately $500,000 from the sale of its preferred stock, or otherwise. The major sum is designated as the "primary financing," and the minor sum as the "junior financing." The building company engaged one Earl W. Morrison as architect and the Sound Construction Company as the contractor, in the construction of the building.

The work of construction actually began about October 24, 1930. The construction work was carried on by means of funds realized from the "junior financing," that is, the sale of the building company's preferred stock. This financing was done through the Mortgage Investment Company of Portland under a plan whereby that company was to take the preferred stock on the basis of eighty dollars per share and sell it on the basis of one hundred dollars per share. About $105,000 worth of preferred stock was sold by the Mortgage Investment Company to small investors, many of whom were employees of the city light department, and the total amount realized by that company from such sales, so far as they went, was actually paid over to the contractor.

On April 26, 1931, the work of construction ceased because, as found by the trial court,

". . . the City Light Building Company was financially unable to continue the same because of inability to make further sale of its stock; that it was insolvent at the time and ever since has been and now is insolvent and unable to pay its obligations in the ordinary course of business."

However, it still remained in possession of the property and kept watchmen thereon.

At the time of cessation of the work, the substation was not completed, and, of course, nothing had been done toward erecting the twenty-four-story office building. Financial assistance from the St. Louis and Portland institutions could no longer be realized upon, the latter being unable to respond and the former flatly refusing to do so because the conditions precedent had not been performed. The building company sought an extension of time within which to refinance the proposition and to complete the work, but the city council emphatically declined to grant the request.

On April 22, 1931, just four days before the work of construction entirely ceased, the building company entered into a contract with one George Nelson to take over the construction work. Nelson's contract was to complete the building on the basis of a construction cost of $1,624,876.05, but was conditioned upon the advancement by the St. Louis concern of the $1,250,000 originally agreed to be advanced by it. Inasmuch as that company never advanced the money, Nelson's contract never became of any binding force or effect, nor was anything ever done thereunder.

After the work had ceased, liens, including those of the architect and of the contractor, aggregating in all $137,000, were filed. With the full situation well known to all parties concerned, the city council concluded to terminate the contract, and the building company was advised of that conclusion, although it must be admitted that the formal notice in writing was not given by the city. The city's method in terminating the contract and its action upon such termination form the basis of this suit. On October 25, 1931, which was just three days before the expiration of the time allowed for the completion of the building, the city council passed ordinance No. 61679, which contained a recital to the effect that the fair value of the structure, so far as it had been completed (consisting only of the substation), was $189,000, and appropriated that amount from the light department construction fund to be paid as follows: $84,000 to the architect and the contractor, and $105,000 to the holders of the preferred stock. This action seeks to enjoin the payment of those funds.

As stated in the majority opinion, the appellant makes two contentions: (1) that the lease to DeCou was ultra vires — that the city had no power to erect an office building; and (2) that, conceding, for argument's sake, that the lease was valid, it had been abandoned by the lessee and was subject to forfeiture at the time that the attempted settlement was made, and consequently there were no legal claims which could be the basis of a compromise.

That the first contention of appellant must be upheld, it seems to me is without question. The whole venture was one where the city was virtually trading in property acquired for the use of a municipally owned system for an interest in a wholly private enterprise which, to say the least, was speculative in its nature. There is no statutory warrant for such venture by the city, and in the absence of statutory warrant, no obligation could arise against the city thereon, and any attempt to so obligate it would be wholly invalid and illegal. State ex rel.Hill v. Port of Seattle, 104 Wash. 634, 177 P. 671, 180 P. 137.

The majority opinion is based upon two theories. The first is that, conceding that the original lease was void, the city may not escape payment of the reasonable value of what it actually received. Reliance is placed upon the following cases: Green v.Okanogan County, 60 Wash. 309, 111 P. 226, 114 P. 457;Mallory v. Olympia, 83 Wash. 499, 145 P. 627; Besoloff v.Whatcom County, 133 Wash. 109, 233 P. 284; Strong McDonaldv. King County, 147 Wash. 678, 267 P. 436; O'Connor v.Murray, 152 Wash. 519, 278 P. 176.

The cases relied on by the majority, however, are inapplicable here, for the reason that, in those cases, the municipality had the statutory power to make the particular contract. Here, under the law, and by the concession of the majority opinion, the city had not. A legal liability against the city can not arise upon a contract which itself is illegal and which the city had no right to make. The majority opinion justifies itself by the statement that the city had the power to erect a substation. That would be true if the city had proceeded with a purely municipal venture, but here it became virtually a partner in what was a private enterprise. This can not be done, nor can legal liability be predicated upon its abortive attempt.

But a stronger answer to the reasoning of the majority is that, even if the contract were legal, the city never contracted to pay for the substation, and that is all that it got. What the building company was to receive from the city was the right to erect and use the twenty-four-story office building. That has never been built. The city is therefore paying for something that it was never intended that it should pay for in money, but only by granting a license to build a superstructure above its substation.

So far as the claims of the architect and contractor are concerned, the evidence shows completely that they knew of the conditions of the lease and were entirely familiar with the plan under which the building company was promoting the enterprise. They knew that no lien in their favor could attach to the land or to the substation (1) because the contract so provided, and (2) because such is the law anyway. They knew also that no bond was being exacted, nor intended to be exacted of the building company by the city, yet, with this knowledge, they extended credit to the building company alone, relying upon their having a lien upon the superstructure when built.

The object of the statute requiring the city to exact a bond in public construction work is to protect persons who, in good faith, furnish labor and material in the construction of a public building, upon the supposition that the principal contractor and the municipality have complied with the law relative to the giving of a bond. That is not the situation here at all. Neither the architect nor the contractor performed any labor or furnished any material upon the faith or credit of any bond to be exacted by the city, for they both knew that none was to be furnished; they relied wholly upon the credit of the building company and the liens which they might have upon the office building when completed.

With reference to the preferred stockholders, there is even less reason, in law, for recognizing any claims on their part. In fact, I think that there is no reason at all. Undoubtedly, they were innocent investors who were about to lose their entire investment, not through the fault of the city, for it had done all that it agreed to do, but through the fault of the building company. While it may exhibit a charitable disposition on the part of the council to guard the public against loss resulting through the purchase of stock, I can see no reason for passing that loss on to the city, unless we accept it as a principle of law that the city ought to pay because it is better able to pay, and that the taxpayer will never feel it, or perhaps will never know it. How the preferred stockholders could ever compel payment by the city, I am at a loss to understand.

The second theory of the majority opinion, meeting the appellant's second contention, is that a municipality has the power to compromise claims. That theory, I think, is also untenable. Here the claims were wholly illegal, and the council could not by resolution or ordinance resolve them either into valid claims or into doubtful claims, thereby giving support to a compromise. The council is, or at least is supposed to be, the conservator of the public's money, and it is not for it either to give it away or to compromise it away. In either event, it is gone.

Again, the majority opinion attempts to justify itself by a statement to the effect that, even though the time for completing the building had expired, a court of equity would have lent a willing ear to the lessee, had it resisted a forfeiture. As the trial court found, the building company was wholly insolvent. It had reached the end of its rope, so far as financial aid was concerned. Its only hope was in the contract that it subsequently made with Nelson, and that hope failed of its expectancy in its very inception. However willing an ear a court of equity might have lent, what relief could the court have extended with the facts of the case before it? And how could the council base a compromise upon a speculative prejudgment of what the court might do?

The sum and substance of the whole matter, as I see it, is that the building company agreed to do a specific thing, and failed. At the time of its failure, it was wholly insolvent, and without possible ability to proceed. What the city received it was entitled to. Having complied with its part of the contract, it was in no sense obligated to pay $189,000 for what it had not agreed to pay a cent.

I therefore dissent.