Petters & Co. v. Town of Rock River

Metz, District Judge.

This is an action by plaintiff, Petters and Company, against the Town of Rock River, Wyoming,- to recover upon two city warrants, each dated September 21, 1922, for the sums of $5,000 and $5,059.23 respectively, each made payable to the First National Bank of Rock River, Wyoming.

A short time thereafter, these warrants were fully endorsed by the First National Bank and sold to the plaintiff for $9,707.16. The petition of the plaintiff alleges ownership of the warrants, and presentment for payment and refusal on the part of the town to pay the same. The answer of the town alleges the warrants were unlawfully issued and fraudulently obtained from the town by the bank, and that the town never received any consideration for the same, etc.

The reply pleads an estoppel, and asserts, among other things, that the town is estopped to deny: First, the validity of the warrants; second, want of consideration for the same; and third, estopped to deny the acts of its officers from issuing the warrants, and also alleges that the town is estopped to plead and allege fraud in the obtaining of the warrants.

It is admitted that the plaintiff is the owner of the warrants, and paid a valuable consideration for the same, and that they have not been paid.

The trial consumed several days in time and a great deal of testimony was taken in the case. During the first trial, one of the jurors died, thus making it necessary that the ease be re-tried. And on tbe second trial, tbe jury returned a general verdict in favor of tbe defendant, and judgment was accordingly entered by tbe court in favor of tbe defendant.

Tbe findings by tbe jury and tbe evidence introduced in tbe trial, clearly indicate to us tbe following facts and circumstances to bave existed, to-wit:

That tbe Town of Rock River was a municipal corporation tbat was continuously in need of money; tbat its city council was dominated by a man named L. C. Butler, wbo was not only mayor of tbe town, but was vice president and cashier of the First National Bank of Rock River— tbe payee of tbe warrants sued upon in this case; tbat no books or records of any consequence were kept by tbe town of its council meetings, and those tbat were kept were of a very meager description and tbe minutes very indefinite; tbat tbe bank was in tbe habit and did buy tbe town warrants continuously, and, at a regular meeting of tbe town council on September 8,1922, Butler represented to tbe council tbat tbe First National Bank — of which be was vice president and cashier — -was bolding some old city warrants known as numbers 77, 78, 79 and 80, totalling $10,059.23; tbat these warrants were getting old and tbat tbe board of directors of tbe bank wanted them renewed and desired tbat tbe council renew tbe old warrants by issuing two new warrants, one for $5,000 and one for $5,059.23, to take up tbe old warrants numbering 77, 78, 79 and 80.

Tbe council, pursuant to Butler’s request, authorized tbe clerk to issue two new warrants — Nos. 127 and 128 sued upon in this case — one to be for $5,000 and one for $5,059.23. Tbe council also at tbat meeting instructed tbe city clerk to bold these two new warrants, and not to deliver them to tbe bank until tbe bank turned over to tbe clerk tbe four old warrants above mentioned.

The clerk, a short time after this council meeting, went to the bank to see Butler, and took with him these two new warrants, Nos. 127 and 128 for $10,059.23, and, instead of Butler giving him the four old warrants that he had represented the bank held and would exchange for the new warrants, he gave to Nelson, the clerk, the following receipt :

“THE FIRST NATIONAL BANK Rock River, Wyo.

Sept. 21, 1922.

Received this date from the Town of Rock River, the following warrants:

#127 First Nat’1 Bank 9-21-22 $5,059.23

■ #128 do 9-21-22 5,000.00

which are to take the place of the following warrants which we are now holding:

#77 10- 8-21 First Nat! Bank $3,739.23

#78 10- 8-21 do 2,760.00

#80 10-26-21 J. S. Schwartz 1,560.00

2,000.00

THE FIRST NATIONAL BANK, ROCK RIVER,

By Lewis C. Butler,

Cashier. ’ ’

The bank did not have the four old warrants but had sold them long before to other banks and bond houses. Wilcox and Son of Denver had purchased from the bank and was then holding warrants Nos. 77, 78 and 80, and the American National Bank of Cheyenne had purchased and was then holding warrant No. 79, for $2,000.

The First National Bank did not deliver the four warrants to the town. The bank, through Butler, then attempted to sell the two new warrants, Nos. 127 and 128, to the plaintiff herein, and finally made the sale to the plaintiff by furnishing the plaintiff a certificate of the city treasurer as to their validity, and a contract of repurchase on the part of the bank. The bank received from the plaintiff in the neighborhood of $10,000 for these two warrants and never paid the money to the town and never delivered the four old warrants to tbe town, as it represented that it would do.

The other members of the city council never knew that the warrants Nos. 127 and 128 had been sold by the bank to the plaintiff, and never knew that the bank did not deliver the old warrants to the clerk, as provided and specified at its council meeting- of September 8, 1922, until after the bank’s failure. Later on the bank, through Butler, prevailed upon the city council to float a bond issue for the purpose of taking up some of the indebtedness and to buy a water system. At about this time, 'Wilcox and Son, who held warrants Nos. 77, 78 and 80, insisted upon the bank taking these warrants back from them, under their original repurchase-contract with the bank, which the bank did. The American National Bank of Cheyenne held warrant No. 79 for $2,000. In order to sell warrants Nos. 77, 78 and 80 again, and the First National Bank being in hard circumstances, Butler prevailed upon the International Trust Company of Denver to send an agent to Rock River to buy the bonds that the city was. issuing, and after the agent arrived on March 14-, 1923, and after the agent had contracted with the city for the-bonds, Butler, before he would allow the International Trust Company to buy the bonds, insisted that the International Trust Company buy from the bank warrants Nos. 77, 78 and 80, and authorized the International Trust Company to deduct from the bond issue, when the money was forthcoming, the amount of these three warrants-which they were then buying from the bank.

It further appears that Petters and Company knew nothing about the representations of Butler to the city council, and the International Trust Company knew nothing about the dealings of the First National Bank, and Butler and the council. The International Trust Company deducted the amount of the three warrants from the bond issue and returned the warrants to the town the following: fall, along with tbe balance due on tbe bonds. Tbe city then paid tbe American National Bank for warrant No. 79.

It will tbus be seen that Bntler, by tbis manipulation, arranged for three warrants — Nos. 77, 78 and 80, — to be returned to tbe town by having their amount deducted from tbe bond issue by tbe Trust Company; and tbus it will be seen that tbe First National Bank of Rock River was getting paid for three of tbe old warrants from tbe Trust Company and for warrant No. 79 from tbe American National Bank, and was also paid for tbe two new warrants from Petters and Company. Then in April, 1923, tbe bank failed, and tbe town woke up, "poorer but wiser,” and started an investigation by appointing an auditing committee. Tbis committee soon found that a “J. Rufus Wallingford” bad been operating in their midst.

Charges were preferred against Butler and be was tried and convicted in tbe Federal Court for misappropriation of funds, and sentenced to tbe penitentiary.

Butler appeared and" testified in behalf of tbe plaintiff but tbe jury, after bearing tbe other witnesses, apparently did not take much stock in bis testimony.

Thompson, tbe city treasurer, was in tbe court room and each side declined to call him on tbe stand. Nelson, tbe clerk, did not testify.

From what has been said, we have tbe following questions of law to deeide:

When an innocent purchaser for value, of city or town warrants, sues thereon to recover from tbe town, can tbe town successfully set up as a defense:

First — Fraud on tbe part of tbe original payee in securing said warrants from tbe town ?

Second — Tbe want of consideration passing from tbe original payee to the city ?

Third — Tbe illegality of tbe warrants'?

To each and all of these questions we must answer in the affirmative, and in thus answering these questions, we say further that the city is not estopped from pleading the defenses above mentioned.

In 2 Dillon on Municipal Corporations, page 1295, it is said:

“The question whether there is any implied power in the officers of a town, county, or city corporation to issue warrants or orders which shall be free from equities in the hands of holders has been disposed of by a long line of decisions which denies to those warrants or orders the principal attribute of negotiability, viz., freedom in the hands of bona fide transferees from equities in favor of the municipality. This result is arrived at as much by reason of the purpose or object intended to be attained by these instruments as by a consideration of the lack of power, inherent or implied, on the part of municipalities to make and issue negotiable instruments without clear statutory authority therefor. Such warrants or orders, drawn for ordinary municipal expenses, are not intended to have the qualities of commercial paper, but are instruments authorized for convenient use in conducting the current and ordinary business of the corporation and as a means of anticipating its ordinary revenue. It would overwhelm municipalities with ruin to hold that such warrants or orders have the qualities of negotiable paper, especially that quality which protects an innocent holder for value from defences of which he has no notice, actual or constructive. All holders of such warrants or orders, even when payable to order or bearer, stand in the shoes of the payee, and their rights and remedies are often essentially different from those of the holder of authorized negotiable municipal bonds. Such is the sound doctrine, and such is the doctrine of the authorities without exception.”

A county, city or town warrant is a non-negotiable paper, and the very fact of its being non-negotiable is a sign of warning to a prospective purchaser, and places him on his guard; hence, they are not within the protection of the rule which guards commercial paper. The bolder must take it subject to tbe risk that it bas been lawfully and properly issued and for a consideration; tbe fact of tbe paper itself is notice to bim that its validity depends upon tbe regularity of its issue and delivery. Tbe word “warrant” does not mean dond or note, and thus claim tbe protection of tbe negotiable instrument law. In 2 Dillon on Municipal Corporations, see. 857, it is said:

“A municipal corporation is not estopped, after a warrant upon its treasury bas been issued, to set up tbe de-fence of ultra vires, or fraud, or want or fa/ilure of consideration.”

1 Abbott on Municipal Corporations, sec. 235, p. 537; 5 McQuillin on Municipal Corporations, sec. 2249, p. 4761; 2 Dillon on Municipal Corporations, sec. 856, p. 1295; Field v. Park, 141 Mich. 69, 104 N. W. 393; American Bridge Co. v. Wheeler, 35 Wash. 40, 76 Pac. 535; Gilman v. Township, 8 N. Dak. 627, 80 N. W. 889; State v. Cook, 61 N. W. 694, 43 Nebr. 318; Bank v. Oklahoma City, 32 Okla. 432, 122 Pac. 644; Jack v. Nat’l Bank of Wichita, 17 Okla. 430, 89 Pac. 219; Vawter v. Gates, 66 Kans. 505, 72 Pac. 207; Trust Co. v. City, 19 Wash. 150, 52 Pac. 1015; Bardsley v. Sternberg, 17 Wash. 243, 49 Pac. 499; Bank v. Bartlett, 78 Cal. 301, 20 Pac. 682; School District v. Western Tube Co., 5 Wyo. 185, 38 Pac. 922.

Counsel for tbe plaintiff argue that tbe town should be estopped from denying its liability on its warrants when in tbe bands of an innocent purchaser for value; and cites a number of cases where certificates of stock have been assigned in blank and delivered to a stock broker, who later unlawfully sold them to innocent purchasers for value, and kept tbe money — -the courts bolding that tbe purchaser would be protected in bis purchase.

They cite other cases where tbe stock is assigned in blank and placed in a bank for safe keeping and is stolen by a clerk and sold or hypothecated, and tbe court held that the purchaser should be protected, on the ground that where one of two innocent parties must suffer a loss, the one that made the unlawful act first possible should suffer the loss and bear the responsibility.

We believe that principle is not applicable but that the policy of the law, clothing municipalities with the protective rule aforesaid, is of greater importance than the innocent purchaser rule above mentioned and contended for; otherwise a few dishonest officials or even one could bankrupt a town, without the town receiving any benefits from the issuing of its warrants. The decisions involving city, town and county warrants relied on by plaintiff, applying the principle of estoppel, are where the public corporation has received the money or other benefits, of equal or corresponding value. Scott County, Arkansas v. Advance-Rumley Thresher Co., 288 Fed. 739, 36 A. L. R. 937.

In the case of Mayor v. Ray, 19 Wall 468, 22 L. Ed. 164, the court has this to say, in part:

“But to invest such documents with the character and incidents of commercial papers, so as to render them in the hands of bona fide holders absolute obligations to pay, howevqr irregularly or fraudulently issued, is an abuse of their true character and purpose. It has the effect of converting a municipal organization into a trading company, and puts it into the power of municipal officers to involve political communities in irretrievable bankruptcy. No such power ought to exist, and, in our opinion, no such power does legally exist, unless conferred by legislative enactment, either express or clearly implied. ’ ’

To give legal sanction to acts such as occurred in this case would encourage crookedness and put a premium on shady deals by city officials.

Warrants under the law were never intended to be used for the purpose of borrowing money, but were intended as an order by one official on another for current expenses. City bonds are in a different class entirely, and are negotiable instruments. Tbey are not issued until tbe citizens are advised of tbe reasons for, and tbe amount of tbe issue and given an opportunity to object to tbe issue. But warrants, because of tbe nature of tbeir creation, tbe purposes for wbicb issued, tbe informal manner of tbeir issue, tbe danger of mistakes, fraud, want of consideration, etc., are not given tbe protection of negotiable instruments.

In tbe case of tbe Continental Trust Co. v. Butts County, 148 Ga. 623, 97 S. E. 679, decided in 1918 by tbe Supreme Court of Georgia, tbe facts are nearly identical witb tbis case. There tbe County Commissioner issued new warrants to take up old warrants, on tbe representation of one Tuggle that tbe old warrants would be surrendered. Tbe old warrants were not surrendered and the new warrants were sold by Tuggle to innocent purchasers. In a suit on tbe new warrants by tbe innocent purchaser it was held by tbe court that tbey had no action against the county, and could not enforce tbeir payment.

It will be found on an examination of tbe authorities and text books on tbe questions involved herein that it is held by the great weight thereof, that a city or town may raise any defence either legal or equitable, that it might have, as against tbe original payee; that an innocent purchaser stands in tbe shoes of tbe original payee; and especially is tbis so when tbe city does not receive tbe consideration for tbe warrants.

Tbis being tbe law, bow can tbe defendant be estopped from raising tbe defences of fraud, want of consideration, and illegality of their issue ¶

In tbis case tbe bank represented through Butler, its vice president and cashier, at tbe council meeting, that it —tbe bank — bad tbe old warrants and wanted new warrants issued to take care of tbe old ones and tbey would be turned over to tbe city for tbe new warrants. Butler knew at that time that tbe bank did not have tbe old warrants, and not only that, Butler, for tbe bank, refused at numerous times to return these old warrants.

Butler admitted on tbe witness stand that neither he nor the bank ever took up the warrants Nos. 77, 78, 79 and 80 with the proceeds of the sale of warrants Nos. 127 and 128, but claimed that he, for the bank, took up some warrants in the eight hundred series, all of which was denied by the other town officials who testified.

One of the main questions settled by the jury was whether or not there was any consideration passing from the bank to the city for these two new warrants.

The jury were instructed that if they found that the proceeds from the warrants Nos. 127 and 128 were used to take up outstanding obligations of the town, even though not used to take up warrants Nos. 77, 78, 79 and 80, the plaintiff was entitled to recover, but if the town did not receive any valuable consideration for the warrants Nos. 127 and 128, then they should find for the defendant : Thus the jury had the question of consideration or benefits fairly before it and decided upon the facts against the plaintiff.

We find no error in the record, and the judgment of the District Court is accordingly affirmed.

Affirmed.

Potter, J., and Rinek, District Judge, concur.