Crane & Ordway Co. v. Sykeston School District No. 11

Bibdzell, J. This is an action brought upon a warrant issued to-the plaintiff by the defendant school district. By stipulation the action was tried in the district court of Wells county, without a jury, and upon an agreed statement of facts. A judgment was entered in the trial court, dismissing the action and ordering a surrender of the warrant for cancelation. From this judgment the plaintiff appeals. The material facts are as follows: In May, 1913, one John Rude contracted with the defendant for the installation of a heating and ventilating plant in the school building owned by defendant, for the sum of $2,198. The contractor was not required to give the statutory bond conditioned for the faithful performance of the contract, including the payment for all materials and labor required in its performance. During the summer the defendant paid Rude one half of the contract price, and after the completion of the work, in March, 1914, upon the259 representation by Rude that his contract was fully completed and that all materials and labor were paid for, the defendant issued its warrant for $1,000. This warrant, which is the subject of this action, was, at Rude’s request, made payable to the plaintiff, the Crane & Ordway Company. Thereafter the Kellogg Mackay Company sued and obtained a judgment against the members of the school board of the defendant, on account of the materials supplied to Rude in connection with -the performance of his contract with the defendant district, the action having been predicated upon the statutory liability of the defendants, who had failed to require of Rude that he furnish the statutory bond. . The judgment debtors paid this judgment out of the school district treasury, and they seek to protect their own interests and the interests of the district by defending this action brought upon the warrant. The only question arising on the foregoing facts is as to the right of the defendant to rescind the warrant issued at Rude’s request in payment of an obligation owing to him which warrant was made payable to the plaintiff. Rude’s representation that all materials and labor had been paid for was false, and when made must have been known by him to have been false. In view of the inquiry made and of the fact that no bond had been exacted from or given by him, he must have known that such representation would operate as an inducement leading the defendant to issue its warrant. The right to rescind a contract for fraud is elementary, and a discussion of the legal principles upon which it rests would serve no good purpose. See Comp. Laws 1913, §§ 5849-5934. A contract induced by fraud is voidable because the consent of one contracting party was. not freely given, and it is not essential that pecuniary damage has been sustained. Beare v. Wright, 14 N. D. 26, 69 L.R.A. 409, 103 N. W. 634, 6 Ann. Cas. 1057; Raymond v. Edelbrock, 15 N. D. 231 — 235, 107 N. W. 194; Guild v. More, 32 N. D. 432-454, 155 N. W. 44. The contract evidenced by the warrant is clearly subject to be rescinded', as to Rude, and it only remains to be considered whether it could be rescinded as to the plaintiff. Erom the stipulated facts it appears, that Rude, in having the warrant made payable to the Crane & Ordway Company, was merely perfecting an assignment, or transfer of his right against the district. This right was but a mere chose in action, and the assignment of it to the Crane & Ordway Company placed the assignee [260] in no better position, as regards defenses which the school district could urge, than Rude himself occupied. The warrant is non-negotiable, and the Crane & Ordway Company sustains no different relation to.the school district than it would had the warrant been made payable originally to Rude. Section 7396 of the Compiled Laws of 1913 provides that, “in the case of an assignment of a thing in action, the action by the assignee shall be without prejudice to any set-off or other defense.” There can be no doubt that the Crane & Ordway Company is a mere assignee of the right of Rude against the district, and it is equally clear that -the district might urge against the Crane & Ordway Company any defense that it could urge against Rude. Owing to Rude’s fraud, the defendant has a right to rescind the transaction, and to be placed in statu quo. The strongest position that the Crane & Ordway Company can occupy with reference to the warrant in suit is that of beneficiary of the contract or arrangement between Rude and the district, whereby it was made payee of the warrant. It is well established that the beneficiary of a contract takes his rights thereunder, subject to any assault that the obligor or debtor can make upon its validity. The Crane & Ordway Company can thus derive no rights in this transaction superior to Rude’s. See Ellis v. Harrison, 104 Mo. 270-278, 16 S. W. 198; Arnold v. Nichols, 64 N. Y. 117-119; Green v. Turner, 80 Fed. 41-43, 30 C. C. A. 427, 59 U. S. App. 252, 86 Fed. 837; Maxfield v. Schwartz, 45 Minn. 150, 10 L.R.A. 606, 47 N. W. 448. While the foregoing discussion disposes of the question that goes to the foundation of the plaintiff’s right to recover upon the warrant, it may not be out of place to refer to some of the arguments advanced .by the appellant. The appellant argues that § 6832 of the Compiled Laws of 1913, which makes it the duty of public officers and boards to take bonds from contractors for the benefit of laborers and materialmen, and which renders such officers personally liable in case of their failure to do so, has the effect of making the contract in question the personal contract of the members of the school board. It is, of course, as much the duty of the contractor to give the required bond as of the officials of the district to exact it. The-statute does not purport to require of school ■ boards that they shall exact bonds from contractors which the contractors are under no obligation to give. It is made the duty of the [261] boards to take sucb bonds “before entering into any sucb contract,” but in our opinion this provision, so far as time is concerned, is directory merely. So long as tbe contract was unfulfilled, and so long as there were outstanding obligations for labor and material, tbe district bad just as legitimate an interest in seeing that tbe labor and materials were paid for, as it bad at the time tbe contract was entered into; and it was as much tbe official duty of tbe members of tbe board to safeguard tbis interest as it ever bad been. Tbe essence of tbe duty of tbe officials under whose direction sucb work is undertaken and carried out is, as regards materialmen and laborers, that they shall take sucb steps as will prevent tbe district profiting at tbe expense of those whose contributions are indispensable to tbe consummation of tbe improvement. Tbis duty continues to tbe end, and tbe personal liability which tbe statute imposes upon.the school officers who neglect to perform it in the manner provided by the statute is substituted for the lien which' would exist were the work not of a public character. This personal liability imposed by the statute, § 6833 of the Compiled Laws of 1913, is “for all bills, claims, and demands” tbe payment of which would have been secured by tbe bond. But the law does not purport to make the original contract the individual contract of the members of tbe board, nor does it evidence any intention to deprive the members of tbe board, who might be called upon to answer personally for materials supplied to tbe district, of tbe position which they would naturally occupy as involuntary sureties of tbe contractor. Tbe debts which, tbe members might be personally called upon to pay, such as tbe Kellogg-Mackay Company judgment in tbis case, are nevertheless primarily tbe debts of tbe contractor. They would have the right, as against Rude, to be exonerated from such liability to tbe materialmen, and, in enforcing this right of exoneration, they could resort to any remedies that would be available to contractors’ bondsmen where bonds are given. Since Bude’s contract evidenced by tbe warrant is subject to rescission for his fraud, and since his rights against the district are qualified by bis obligation to pay or secure materialmen and laborers, he could not, in the face of bis fraud, recover against tbe district; neither could bis assignee or beneficiary. It is urged by tbe appellant that tbe Crane & Ordway Company should recover in tbis case because tbe disbursement of school-district [262] funds in payment of tbe individual judgments against the members of the school board was unlawful, unauthorized, and void, and hence could not be the subject of a counterclaim against the plaintiff. As we view the case, it is it a matter of no concern to the Crane & Ordway Company that the school district has paid the personal judgments obtained against the members of the board, which judgments resulted from their personal liability for materials supplied by the KelloggMackay Company in the absence of a contractor’s bond. The fact that the school board might have misapplied the funds of the district does not in any way enlarge the rights of the Crane & Ordway Company as assignee of Rude. If any money has been unlawfully expended or appropriated by the members of the board, they are, of course, liable for its return to the treasury; but we fail to see how the Crane & Ordway Company could recover any part of it upon a warrant fraudulently obtained from the district. ...... Finding no error, the judgment is affirmed.