Capital Bank v. School District No. 53

Corliss, C. J. The plaintiff, seeking judgment in the court below, based its claim upon four alleged warrants, signed by defendant’s clerk and director, and drawn in the usual form upon defendant’s treasurer. When these papers were received in evidence they created a presumption of liability against the defendant and in favor of plaintiff, assuming that plaintiff had established its title to them. This apparent liability defendant claims to have overthrown by undisputed evidence, and the trial court so held directing a verdict in favor of defendant. Defendant’s successful defense was the illegality of the pretended warrants for want of power to contract the indebtedness which they represented. If the uncontroverted facts justify the conclusion against the defendant’s power to incur the debt, then the warrants are void. Their issue adds nothing to the force of the original claim. They create no new debt. No estoppel can rest upon them. Their negotiation for value before maturity will not confer any greater. rights upon the purchaser. All who deal with them, either originally or by subsequent purchase, are affected by every defense to the pretended debt they represent. Bank v. Willow Lake Tp., ante p. 26, 44 N. W. Rep. — 485 — 1002, and cases cited. The view we take of the law renders the statement of only a few facts important. The assessed valuation of the district at the time the warrants were issued and the contract on which they rest was made was $18,305. These pseudo warrants were given to Sargent & Germain on a contract between them and the defendant’s school board to erect a school house for the district for $6,000, which contract was fully performed by them. It does not appear that the district board was ever empowered to build any particular school house, or, indeed, any school house at all. The authority must come from the inhabitants at a district meeting. The minutes of ■such meeting disclose merely that a motion was made and carried to ballot to build a school house. The school-board was appointed a building committee, and a tax of ten mills was levied for that purpose; but it nowhere appears that the inhabitants actually balloted to erect such a building or any school house, or in any manner authorized its construction. Nor does it appear that any site was ever selected, either by the inhabitants or by the district board. It was undisputed that the district never had any title to the land on which the house was erected; nor were any proceedings ever taken by the district for the purpose of acquiring title to the land, or to secure the right to build the school house-thereon. That the action of the district board in making the contract to construct the building was wholly unauthorized and void cannot well be disputed. See Farmers, etc., Bank v. School District, No. 53, (Dak.) 42 N. W. Rep. 767. The power to designate a site and to authorize the building of a school house is vested exclusively in the inhabitants. But it is urged that although not originally binding upon the district, the contract has been ratified by the conduct of the inhabitants since the erection of the school house, and the issuing of the warrants representing the alleged contract price therefor. While we do not wish to be considered as assenting to this view of the evidence, we will assume for the purpose of this opinion that there was sufficient evidence of ratification to submit to the jury. Still we think the court would have been justified in rendering judgment for defendant. Nay, we hold it would have been the duty of the court to give such — 486 — judgment. Ratification is equivalent only to original authority, and we are of opinion that the inhabitants under the statute had no authority to direct the building of a schoolhouse whose cost would exceed the funds provided for that purpose. We hold that this contract was void, not only for want of power in the district to make it, but because prohibited by the spirit and necessary implication of the statute. The sections of the act essential to the solution of this question are as follows: “§ 29. The inhabitants qualified to vote at a school district meeting lawfully assembled shall have power * * * (4) to designate by vote a site for a school house; (5) to vote a tax annually not exceeding one per cent, on the taxable property of the district as the meeting shall deem sufficient to purchase or lease a site, and to build, hire, or purchase a school house, and to keep the same in repair.” “§ 56. The district board shall purchase or lease such site for a school house as shall have been designated by the voters at a district meeting, in the corporate name thereof, /and shall build, hire, or purchase such school house as the voters of the district in a district meeting shall have agreed upoii out of the funds provided for that purpose.” Laws 1879, c. 14. The manifest purpose of this legislation is to prevent the district, unless bonds are issued under chapter 24 of the laws of 1881, from either mortgaging the future resouraes, or increasing beyond one per cent, of the assessed valuation the present burden of the inhabitants of the district. The inhabitants, in meeting lawfully assembled, select a site, direct the building of the school house, and levy 1 per cent, tax to pay for the same. It is out of the funds provided for that purpose that the board is to build and pay for the house. The funds provided for that purpose are those on hand, or subject to collection for that purpose, and, in addition, the amount which can be raised by a levy of a tax of not exceeding 1 per cent, on the assessed valuation of the district; and the tax must be levied before it can be said that the funds are provided. The inhabitants cannot in any one year levy this maximum tax for any number of years in advance. No funds can be deemed as provided for that purpose which the district has not then on hand for that purpose, or subject to collection, or — 487 — which it has not levied a tax to raise. As to future levies, the fund cannot be said to be a fund provided, but is a fund to be provided in the future. The contract price for the school house in question was $6,000, or over 30 per cent of the assessed valuation of the district. If this contract were valid, those inhabitants who were not willing that such an expense should be made would be forced to pay over 30 times the maximum tax that can be levied for that purpose in any one year, or the future taxing power of the district for that purpose would be anticipated and destroyed for years to come. The evils of an indebtedness in the form of warrants to be paid in the remote future is illustrated in this case. These warrants were sold at seventy cents on the dollar; and every contracter with a district who expects pay in warrants all of which cannot possibly be paid until after the lapse of years, and who is faced with the necessity of raising money upon them by a sale at a discount, must, to save himself, charge the district, in excess of what he would otherwise charge it, enough to make good his loss and in this way the loss becomes the loss of the district. Moreover, such warrants bear a higher rate of interest than bonds which can be sold usually at par, bearing a moderate rate of interest. That this evil was intended to be prevented by this statute, and that our interpretation of the statute is in harmony with the will of the legislature, is evinced by chapter 24 of the laws of 1881, which authorizes school districts to bond for the building of a school house. This act was doubtless passed to enable a school district to raise immediately for that purpose a sum which in many districts could be brought together only after years of maximum taxation. # And this act contains a positive restriction against every district not in a town or city containing more than 1,000 inhabitants, limiting its authority to bond to the amount of $1,500. No other district can bond for more than 5 percent, of its assessed valuation. Why this limitation, if every district could build a school house costing many times the sum limited, and create a valid indebtedness for such amount by the issue of warrants ? These warrants in this case, if valid, created when issued a present liability, which could have been put in judgment to hang over the district as an incubus, forever in the absence of — 488 — legislative relief; for the annual interest upon this debt — $600 —(10 per cent, on $6,000) would exceed yearly by over $400 the maximum tax which could be levied to apply thei’eon. The increase in the assessed valuation might ultimately enable the district to discharge the annual interest, but the payment of the principal must await a change in the law. An evidence of indebtedness, whose interest cannot for years ■ be paid, whose principal can be discharged only in the event of legislative interference, must have but little 'value in the market, and will inevitably bring to the treasury of the district much less than its face value. The inhabitants of 'the district in any one year were not to be permitted thus to 'waste the property of future inhabitants, and create burdens, in 'excess of the benefits received, to be thereafter imposed upon •property and values which should subsequently come under the taxing powers of the district. Our views find support in the 1 decision of the territorial supreme court in Farmers’, etc., Bank v. School-Dist. No. 53, (Dak.) 42 N. W. Rep. 767. We find nothing in Capital Bank v. School Dist. No. 85, id. 774, decided by-the same court at the same term, at war with the other decision. It is true that in the first case the court, while favoring the construction we adopt, limited the scope of its decision to the denial of the right to create a present indebtedness by the issue of warrants payable immediately in excess of the amount of tax that could be levied during the year the debt was contracted. This is the doctrine of Minnesota under a similar statute, but we cannot give it our assent. If the contract to build the school house is valid, we see nothing in the statute to prevent the issuing of warrants to' pay the contract price therefor, payable immediately, and such warrants the creditor is entitled to. If, as we hold, the policy of the law condemns the extravagant debt, it is of no importance whether the debt is payable at once or in the future. It is, in fact, payable in the future, although the warrant is due immediately, for a judgment recovered upon such warrant can be satisfied only from an insufficient tax to be levied for years before full payment can be made. We do not believe that the legislature intended that these municipal corporations, intrusted with so few duties, possessing such — 489 — meager powers, so dwarfed in their stature that they bear but faint resemblance to the more perfect forms of municipalities, should possess authority to mortgage their taxing power so heavily that the interest of the debt could not be fully discharged; that the principal itself must remain forever unpaid. Especially strong are we in this view when we consider that the same corporations have been given authority to borrow on district bonds a limited sum of money for the very purpose of building school houses. This act provides fully for the payment of the interest on the bonds and the extinction of their principal by the creation of a sinking fund to be derived from a tax of two mills. No means of paying the warrant indebtedness or the interest thereon are designated, and this points strongly against the power to create such an indebtedness. It ■is true that a tax of five mills may be levied for the purpose, among other things, of discharging any debts of the district lawfully incurred, but only little, if any, of this could ever be available to apply on the interest and principal of such warrants, as this is all the tax there can be levied to furnish the furniture and necessary apparatus for the school house of the district. The language of the supreme court of Wisconsin in Kane v. School-Dist. No. 3,52 Wis. 502, 9 N. W. Rep. 459, meets our full approval: “We entertain very grave doubts whether the board and the voters of the district combined can make a contract payable out of funds not intended to be voted or raised by taxation during the current year, except by taking such proceedings in the particular cases authorized, as are necessary, under the statute, to make a loan in behalf of the district. If they can, then it would be wholly unnecessary to make any loans on behalf of a district, and the district might during any current year incur such an amount of indebtedness, to be charged upon the funds of succeeding years, as to absorb all the taxes which could be lawfully collected in such years, and leave the district wholly without resources, except by a repetition of the same system of mortgaging the future for the necessities of the present. Either this result would follow, or, if such liabilities were held to be debts lawfully incurred by the district, then the tax-payers of the district could be compelled to raise.the neces — 490 — sary amount to pay the same at the time agreed upon for their payment, notwithstanding such sum might exceed the limit fixed by the statutes for raising money by taxation for the purposes for which the debt was incurred. It seems to be the policy of the laws of this state to restrict the expenditures of the towns, cities, counties, and school districts within certain specified limits; and in the case of school districts it has put a very effectual restraint upon such expenditures by fixing a limit to the amount which can be lawfully collected from the tax-payers of the district for school purposes in any one year. To give proper force to these legislative restrictions it would seem necessary to restrain the district, as well as its officers, from contracting debts drawing interest, which can become a lawful charge upon the future resources thereof.” The district could not estop itself from setting up this plea of ultra vires by any act on its part, nor could it ratify what it had no power originally to do, nor can it be made liable for the value received. The contract out of which the warrants grew was not merely beyond the power of the corporation; it was prohibited by the spirit and policy of the law. An express prohibition would not, as we construe the statute, add any strength to this view of the case. The law will not imply a promise to pay against its own prohibitions, nor will the courts suffer a policy once declared to be defeated by the receipt of the benefits of a contract which that policy condemns. The spirit of the legislation we have been considering is that these small and feeble corporations shall keep within very narrow bounds in their expenditures; and an implied liability for an amount in excess of that limit — -perhaps enormously in excess — because of value received, would bring the wisdom and strength of a salutary policy to naught. The sovereign power, by limiting the capacity of the inhabitants of this as well as of other districts to contract indebtedness, determined to save them from the evil effects of temporary extravagance. This court is now ashed by its judgment nevertheless to visit the consequences of such extravagances upon their heads. The doctrine that there is no implied liability against the law’s prohibition or policy is sound on principle, is supported by numerous prece — 491 — dents, and the question is not open to' debate in this jurisdiction. Bank v. Willow Lake School Tp., (N. D.) 44 N. W. Rep. 1002. This controversy illustrates the wisdom of the rule we enunciate. This contract, if valid, would mortgage the entire property of the district for one-third of its assessed value, and the equivalent for this enormous incumbrance would be only a school house. Place no limit upon the power of the inhabitants and it would be easy for corrupt men to secure and wield the controlling power in sparsely settled districts, and create obligations binding upon the district so appalling in amount as to drive out its inhabitants, and prevent others from settling within its borders. It is gratifying that in this case law and justice go hand in hand. The question of legal- fraud is not before us, .but he indeed must be obtuse who cannot find corruption in the conception and consummation of this school house project. No community, without being the victim of fraud, would ever burden itself to build a school house with a debt equal to one-third of its entire wealth. The loss may fall upon one guiltless of any participation in or actual knowledge of that fraud; but, had the plaintiff made those inquiries touching the purpose for which these warrants were issued, and respecting the assessed valuation of the district, which the law’s behests and common businesss prudence required, suspicion of fraud must have been aroused. The judgment of the district court is affirmed. All concur.