Summary
holding city becomes trustee on behalf of warrant holders of special improvement district
Summary of this case from Samson v. StateOpinion
No. 7,593.
Submitted October 24, 1936.
Decided November 6, 1936.
Cities and Towns — Action to Recover on Registered Warrant — Misapplication of Special Improvement District Fund — Liability of City — City Treasurer Agent of City not Warrant Holder — Statute of Limitations — Trusts. Cities — Special Improvement District Fund — Misapplication of Fund by City Treasurer — Treasurer not Agent of Warrant Holders. 1. In an action by the holder of a registered city special improvement warrant against the city to recover thereon on the ground that, but for the fact that the city treasurer paid a previously registered warrant twice, there would have been sufficient money in the fund to pay plaintiff's warrant, contention that in making double payment the treasurer acted as the agent of the warrant holders and hence there was no liability on the part of the city, held not tenable. Same — City Treasurer Servant of City — City Responsible to Holders of Registered Improvement Warrants Where Funds Misapplied by Treasurer. 2. The office of city treasurer is a continuing one, regardless of the person who may occupy it at any particular time; the treasurer is the servant of the city, and where he misapplies trust funds, such as moneys collected under a levy for special improvement purposes, the municipality is liable to the warrant holders. Same — What not Defense to Action by Warrant Holder to Recover on Warrant Where Fund Misapplied by Treasurer — Constitutional Law. 3. In an action such as the above (par. 1), the city sought to be held liable for misapplication of trust funds by its treasurer will not be heard to defend on the ground that, if it be held liable to the complaining warrant holder, the judgment would require it to lend its credit to the payment of the improvement warrants in violation of section 1, Article XIII, Constitution, nor on the ground that the culpable treasurer in making double payment of a city warrant was acting in a governmental capacity. Same — Action to Recover on Registered Warrant — When Statute of Limitations Commences to Run. 4. The statute of limitations does not begin to run against registered city warrants (or bonds) until the city treasurer calls them for payment, or until the holder had an immediate cause of action. Same — Action to Recover on Registered Warrant — Circumstances Under Which Plea of Statute of Limitations not Available. 5. Where a registered city special improvement warrant was never called for payment by the city treasurer and there was no repudiation of it nor any indication that it would not be paid, but on the contrary, when demand for payment was made, the claim was approved but payment postponed until such time as there should be sufficient money in the fund to meet it, and plaintiff received interest thereon until 1934, when he commenced suit, the plea of the statute of limitations had no merit. Same — Special Improvement District Moneys Constitute Trust Funds — Statute of Limitations — Rule Relating to Trust Applicable. 6. Since a fund in a city treasury derived from a special levy, such as for the payment of special improvement warrants, constitutes a trust fund, the rule that as between the trustee and beneficiary of an express and continuing trust, the statute of limitations does not begin to run until the trust has been repudiated and the beneficiary has received notice of such repudiation, may reasonably be applied in such a case as that set forth in paragraph 5, supra.
Appeal from District Court, Lincoln County; J.E. Rockwood, Judge.
Messrs. Walchli Korn, for Appellant, submitted a brief; Mr. Hans Walchli argued the cause orally.
Messrs. Blackford Blackford and Mr. E.M. Child, for Respondent, submitted a brief; Mr. James M. Blackford argued the cause orally.
At the outset it must be kept in mind that in making the double payment of warrant No. 39, the city treasurer was not, in any sense, acting as the agent or servant of the city, but was acting rather as the agent or servant of the warrant holders, and when acting in that capacity the city is not liable for his acts. It is a well-settled rule that a superior is liable only for the acts of an inferior when the inferior is the agent or servant of the superior. No such agency exists here. To be true, there is much conflict in the authorities on this question. A full and complete annotation of the cases will be found in the note to 38 A.L.R. 1271, and supplemental note 51 A.L.R. 973. This latter note is an annotation to the case of Gagnon v. City of Butte, 75 Mont. 279, 243 P. 1085, 51 A.L.R. 966. That case holds distinctly that in handling the funds of special improvement districts, the city treasurer acts in the capacity of an agent of the warrant holders, rather than of the city, and follows the Idaho decision of Broad v. City of Moscow, 15 Idaho, 606, 99 P. 101. The Gagnon Case is cited with approval in Moore v. Nampa, 18 F.2d 860 (Idaho), affirmed 276 U.S. 536, 48 Sup. Ct. 340, 72 L.Ed. 688, and State ex rel. Southern Surety Co. v. Armstrong, 158 Okla. 290, 13 P.2d 198. That the city is not liable is expressly held by the following additional decisions: Severns Paving Co. v. Oklahoma City, 158 Okla. 182, 13 P.2d 94; Reed v. Bartlesville, 108 Okla. 62, 234 P. 642; Life Cas. Ins. Co. v. City of Floralla, 63 F.2d 195; Stockholders Inv. Co. v. Brooklyn, 216 Iowa, 693, 246 N.W. 826; Rottger v. Union City, (Ind.App.) 196 N.E. 355; see, also, 19 R.C.L. 1116, sec. 396.
The city is not liable because the duties of the treasurer are purely statutory. An examination of the statutes will show that the duty of the city treasurer in this case is entirely defined by statute. He is exclusively governed thereby and neither the mayor nor the city council have any control over him in connection with the performance of his duties or in connection with the disbursement of the money. The city could not change the statutory duties, even if it so desired.
The city is not liable because the treasurer was acting in a governmental capacity. We appreciate that there has been much controversy over the question as to when an officer of a city is acting in the so-called governmental or public capacity on the one hand or in the proprietary or private capacity on the other hand. The rule is, of course, well established that when acting in the former capacity, the city is not liable. ( Griffith v. City of Butte, 72 Mont. 552, 234 P. 829.) The controversy rages over the question as to the particular capacity in which an officer was acting in the particular instance. The following cases illustrate this feature: Stanley v. Jeffries, 86 Mont. 114, 284 P. 134, 70 A.L.R. 166; State ex rel. Brooks v. Cook, 84 Mont. 478, 276 P. 958; Campbell v. City of Helena, 92 Mont. 366, 16 P.2d 1; State ex rel. City of Missoula v. Holmes, 100 Mont. 256, 47 P.2d 624; State ex rel. Kern v. Arnold, 100 Mont. 346, 49 P.2d 976. None of those cases foreclose the contention in the case at bar that the city treasurer, in making the payment, was, in fact, acting in his governmental capacity. ( Stanley v. Jeffries, supra; 19 R.C.L. 1116, sec. 396; Municipal Bond Co. v. City of Riverside, 138 Cal.App. 267, 32 P.2d 661.)
Statute of limitations: We contend that section 9033, subdivision 1, Revised Codes, covering a liability created by statute, is the one applicable in this case. This is "an action upon a liability created by statute other than a penalty or forfeiture" and which prescribes a period of two years for the commencement of the action. If this statute is applicable, the time begins to run from the date of the violation of the statutory duty on the part of the treasurer. All of the duties of the city treasurer are prescribed by statute and neither the city council nor the mayor has any control whatsoever over him in the collection of these assessments, their keeping or their disbursements. His duties in that regard, therefore, are purely statutory. That this is so and that the two-year statute "upon a liability created by statute" applies seems to be expressly held by this court in the case of Gallatin County v. United States F. G. Co., 50 Mont. 55, 144 P. 1085. (See, also, City of Butte v. Goodwin, 47 Mont. 155, 134 P. 670, Ann. Cas. 1914C, 1012; Canyon County v. Moore, 34 Idaho, 732, 203 P. 466; County of Calaveras v. Poe, 167 Cal. 519, 140 P. 23; 37 C.J. 900.) "The phrase "liability created by statute' means a liability which would not exist but for the statute." (37 C.J. 783.)
While it may be true that the statute does not begin to run until the plaintiff can bring suit in this case, there is no reason why the plaintiff could not have brought a suit immediately upon the diversion of the funds. This was a special fund and payment of his warrant had to be made out of this fund. Therefore, he had an interest in every portion of the fund. As soon as this money was diverted, his fund was impaired and he certainly had an immediate right of action. He did not have to wait for contingencies to see whether his warrant might be paid or not. Plaintiff contends that the statute of limitations covering questions of fraud or mistake are applicable, and therefore no doubt would contend that the section which is applicable to this case is subdivision 4 of section 9033, requiring that an action for relief on the ground of fraud or mistake must be brought within two years from the time of the discovery of fraud or mistake. In his complaint he expressly alleges that the plaintiff had no knowledge or notice of the diversion, prior to 1932. This allegation the answer denies, and that question therefore becomes an issue, and should this statute be held applicable, the question cannot be decided on demurrer, but will have to be decided upon the issue of the facts as they may be developed at the trial.
This is an action begun in the district court of Lincoln county against the city of Libby, and prosecuted to recover the sum of $582.10 expended in paying for the second time city special improvement district warrant No. 39. This second payment so depleted the district funds that insufficient money remained with which to pay warrant No. 33, drawn for the sum of $500 and held and owned by plaintiff Blackford.
On August 30, 1922, defendant city of Libby created improvement district No. 15 for the purpose of constructing a sewer. The work was performed and warrants, in the form prescribed by law, were issued on October 1, 1922, in full payment of the contract price and expenses incurred. The warrants were payable only out of the improvement district fund; the general credit of the city was not pledged. Among the warrants so issued were one numbered 39, and others numbered 32 and 37, inclusive, each for $500. The last-mentioned warrants were registered in the order of their numbers, but they were preceded in time of registration by warrant No. 39. Ever since November 9, 1922, plaintiff has been the holder and owner of warrants Nos. 33 and 35. The interest on the warrants was payable annually, but the warrants themselves were payable in the order of their registration and at such times as there should be funds in the city treasury for that purpose; when the city treasury held sufficient money for their payment, the warrants were callable by the city treasurer.
Against the district property was made a levy sufficient for an amount with which to pay all warrants and interest in full. If all taxes had been paid as levied and as they became due, the fund would have been completed by December, 1930; many delinquencies, however, occurred. Warrant No. 39, paid in full by the city treasurer on December 31, 1923, was paid again by his successor in office on December 30, 1925, in the sum of $500 principal and $30 interest. Because of the erroneous payment of warrant No. 39 a second time, the fund in 1930 contained only sufficient money with which to pay warrants registered up to and including warrant No. 32. Warrant No. 33 would have been next in order of payment. If warrant No. 39 had not been paid a second time, sufficient funds would have remained on hand in 1930 with which to pay warrant No. 33 in full. Down to December 31, 1932, interest was paid yearly on all outstanding warrants; the last interest payment was made on August 29, 1934. At no time in the future will there be a sufficient amount in the special improvement fund with which to pay warrant No. 33.
Plaintiff filed his original complaint on May 24, 1932, and his second amended complaint, upon which the cause was tried, on March 20, 1934. He set out the facts recited above, and defendant admitted them all. Plaintiff alleged that he had no knowledge or information of the second payment of warrant No. 39 until February 10, 1932; defendant denied this. In addition defendant pleaded as a bar to the action the statute of limitations. Plaintiff interposed a demurrer to this defense, and the court sustained it. Defendant refused to plead further and stood upon its answer.
The cause was tried to the court without a jury. Plaintiff adduced evidence in support of his allegations; defendant offered no evidence, because the demurrer had already been sustained to its special defense — the statute of limitations. The court took the matter under advisement and later found in favor of plaintiff. Judgment was entered in his favor for the sum of $582, plus interest and costs of suit. From that judgment defendant has appealed.
The appeal presents only two questions: (1) Is the evidence sufficient to sustain the judgment against the defendant? And (2) did the court err in sustaining the demurrer to the defense of the statute of limitations pleaded by defendant?
Defendant contends that "the city cannot be held liable for three reasons: 1. In making the payment of the second warrant, the city treasurer was acting as agent for the warrant holders, and not for the city and the payment was from a special fund, and not the funds of the city. 2. The duties of the city treasurer in that regard are defined by statute and the council has no control over him. 3. In making the payment, the treasurer was performing a governmental function."
In support of its contention that the city treasurer in paying [1, 2] the warrants was acting as agent of the warrant holders, defendant cites and relies upon the case of Gagnon v. City of Butte, 75 Mont. 279, 243 P. 1085, 1088, 51 A.L.R. 973; that case, however, does not sustain the proposition for which defendant contends. It holds merely that the city was not liable for failure of its treasurer to make collections from delinquent property owners in improvement districts. The same is true of the annotations in 38 A.L.R. 1271 and 51 A.L.R. 973, cited by defendant. At the beginning of the annotation in 38 A.L.R. 1271, it is said: "The annotation also excludes questions arising from alleged misappropriation, diversion, or withholding of funds collected by or paid to it on account of the improvement." The proposition so excluded embraces the very thing involved here.
Also, in the case of Broad v. City of Moscow, 15 Idaho, 606, 99 P. 101, and other cases cited by defendant, liability was sought to be imposed upon the city because of the failure of its officers to take steps necessary to collect the tax. In the case at bar no question arises about enforcing collection of the tax; on the contrary, the question concerns the misappropriation of funds collected in pursuance of the tax levies. The case of Gagnon v. City of Butte, supra, recognized such a distinction, and therein the court quoted with approval from 2 Dillon on Municipal Corporations, fifth edition, section 827, as follows: "Upon the receipt of the assessment the city becomes liable to the contractor as for money received to his use."
In the recent case of State ex rel. Clark v. Bailey, 99 Mont. 484, 44 P.2d 740, 744, this court also considered a situation very similar to that presented here. In the course of that opinion the court said: "The office of city treasurer is a continuing one, regardless of the person who may occupy it at any particular time, and the contention that the defendant in this action was not the person who held the office when the funds embezzled were received is not material. The city must answer for the illegal acts of its servants. * * * The city, and not the treasurer, is liable to the bondholder here." Again, in the same case, the court stated that: "A fund that is derived from a special levy or one created for a specific purpose is in the hands of municipal officials in trust. The municipality is merely a custodian, and its duties relative to such funds are purely ministerial. It may not use or divert them."
In the case of Potter v. New Whatcom, 20 Wn. 589, 56 P. 394, 395, 72 Am. St. Rep. 135, the court said: "If no assessment had been made under the contracts for the local improvements, and no money collected, the action would not lie; but, as the money has been collected and misapplied by the city, it can be recovered by the warrant holder." After money of that kind has been collected it is tax money in the possession of the city. (Compare Thomas v. City of Missoula, 70 Mont. 478, 226 P. 213.)
In the light of the foregoing authorities, it is manifest that in paying the warrants the city treasurer was not, as defendant contends, acting as the agent of the warrant holders.
Defendant suggests that to hold the city liable in this case [3] would cause it to lend its credit to the payment of the special improvement warrants, and would result in a violation of section 1 of Article XIII of the Constitution of Montana. If this were a case in which the improvement district had not paid out, and an attempt had been made to require the city to reimburse the warrant holders out of the general fund, that constitutional provision might apply. It does not apply here, because the city is charged with having received the money for the use of the warrant holders. When it so received that money, it became a trustee. Now it is being sued for negligence on account of its violation of that trust. The city must answer for its negligence in handling the trust funds. (See State ex rel. Clark v. Bailey, supra; Potter v. New Whatcom, supra; Northwestern Lumber Co. v. Aberdeen, 44 Wn. 261, 87 P. 260.)
We are likewise of the opinion that no merit inheres in the contention that the city is not liable because the treasurer was acting in a governmental capacity and because the duties of the treasurer were purely statutory. What we have already said with reference to the contention that the treasurer was agent of the warrant holders is largely determinative of the propositions thus advanced. In this case these matters certainly offer no greater obstacle to holding the city to liability than they did in the case of State ex rel. Clark v. Bailey, supra, In that case we said: "We are not impressed by the argument that `the city of Red Lodge did not receive this money' when the record shows, and the defendant admits, that O.J. Simmons, a former city treasurer, regularly received from the county treasurer $2,000 for the credit of special improvement district No. 27, gave his receipt therefor as such city treasurer, and by embezzlement of funds and manipulation of his books failed to have his books show the additional credit of $2,000. The contention that the city did not receive the funds is not entitled to serious consideration. If the $2,000 was not in the custody and possession of the municipality when it was regularly lodged in the possession of the city treasurer, what other act was necessary to perfect such custody? No other official or board had any legal right to receive or retain possession of city funds, and no other city official could be held responsible for the safe-keeping of such funds." And so we say here, as we did in the case of State ex rel. Clark v. Bailey, supra, that "the city must answer for the illegal acts of its servants."
This brings us to the question raised concerning defendant's [4, 5] plea of the statute of limitations. Defendant takes the position that plaintiff had at all times an interest in the fund created by the taxes levied upon the special improvement district, and that in 1925, when warrant No. 39 was paid a second time, plaintiff had such an interest in this fund and had an immediate right of action. In other words, defendant contends that the statute of limitations began to run from the time the warrant was wrongfully paid a second time, or at least from the time plaintiff had notice of such second payment. Plaintiff, on the other hand, contends that it is immaterial whether he had knowledge of the wrongful second payment of warrant No. 39 or not; that even if he had actual knowledge of the misappropriation at the time it occurred, still he could not have had a cause of action until December, 1930, a time within any statutory period pleaded by defendant. In this connection plaintiff points out that the city was collecting money into the fund as late as December, 1930, and that the last assessment was made in 1930. The record also discloses that if no delinquencies had occurred in the payment of the special improvement district taxes, plaintiff's warrant No. 33 could have been paid in spite of the fact that warrant No. 39 had been paid twice. Hence plaintiff argues that he was not bound to anticipate that delinquencies would occur, and that he had no immediate cause of action until it finally became apparent that his warrant could not be paid.
We think the position taken by plaintiff in this regard is sound. It is sustained by the language of this court in the case of State ex rel. Clark v. Bailey, supra, in which the court said: "The city treasurer is the custodian of all city funds, including those in special improvement districts, and he is charged by the statutes with the duty of calling such warrants (or bonds) as those involved here when funds are available. When the date of payment is uncertain and dependent on the call of the city treasurer, the statute of limitation does not begin to run until the `call of the treasurer, or until the holder had an immediate cause of action.'" The record in this case discloses that plaintiff's warrant No. 33 was never called by the city treasurer; and that prior to 1930, at least, there had never been a disavowal or a repudiation of warrant No. 33, or an indication that that warrant would not be paid. Indeed, within a time as late as the year 1932 a claim, presented to defendant by plaintiff for payment of warrant No. 33, was approved and "laid on the table until such time as there" should be "sufficient funds in improvement district No. 15 to pay the warrant." Thus it is clear that up to that time the defendant made no repudiation of or refusal to pay the warrant. Moreover, it appears that up to 1934 plaintiff continued to receive interest upon the warrant.
As we have already indicated, the fund as it was accumulated [6] was held by the city as a trust fund for the warrant holders. While it was not in the strict sense of the word an express trust, the rule, we think, with respect to the running of the statute of limitations in such cases has a reasonable and practical application. It has been very generally held that, as between the trustee and the beneficiary of an express and continuing trust, the statute of limitations does not run until the trust has been clearly and unequivocally repudiated, and until notice of such repudiation has been received by the beneficiary. ( Mantle v. Speculator Min. Co., 27 Mont. 473, 71 P. 665; MacMullan v. Kelly, 19 Cal.App. 700, 127 P. 819. See, also, notes in 13 Ann. Cas. 1165 and 3 Ann. Cas. 200.) This we consider merely an additional reason for holding that plaintiff's action herein was not barred by any of the statutes of limitation pleaded by defendant. As we have already indicated, the language of this court in the case of State ex rel. Clark v. Bailey, supra, is itself sufficient to dispose effectively of defendant's contentions regarding the application of the statute of limitations.
No error can be predicated upon the court's action in sustaining the demurrer. It follows from what we have said that under the facts and circumstances disclosed in this case, the city may be held liable for the wrongful second payment of warrant No. 39. The judgment must be, and it is hereby, affirmed.
ASSOCIATE JUSTICES ANDERSON and MORRIS concur.
MR. CHIEF JUSTICE SANDS and MR. JUSTICE MATTHEWS, being absent, did not hear the argument and take no part in the above decision.