Case ID: ohio-st_41/html/0504-01.html
Source: Caselaw Access Project
Author: {"author": "Martin, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Board of Education v. Sinton.
    A board of education being authorized by a special act (66 Ohio L., 402) to issue its bonds to an amount not to exceed the sum of $20,000, issued the same to the full extent of its authority, payable to-- or bearer ; and thereafter took up and paid certain of such bonds and loft them with its treasurer, who was a member of such board, with instructions to cancel them, which he failed to do, but negotiated them, before maturity to S., as collateral security for a loan made to him by S., who made no inquiry in regard to them. Held:
    
    1. The payment of the bonds by the board extinguished them, and they were incapable of being re-issued.
    2. There was no negligence on the part of the board in not seeing that its treasurer complied with its instructions to cancel the bonds.
    3. S. was guilty of contributory negligence in taking the bonds without inquiry.
    Ebbok to the District Court of Hamilton County.
    . Sinton was plaintiff below, and his action was founded on thirty coupon bonds, each for $100, alleged to have been given by the defendant, a board of education of the separate school district of the village of Westwood. The defenses were a general denial and payment. Sinton recovered judgment. A motion for new trial having been overruled a bill of exceptions covering the testimony was allowed. In the district court the judgment was affirmed. The object of this proceeding is to procure a reversal of the affirmance.
    It appears that the board was organized under the act for the formation of separate school districts from sub-districts of a township, passed April 9, 1867, (64 Ohio Laws, 117). The board consists of three members who, when the transactions under review occurred, were William E. Davis, John D. Minor and Thomas Morgan. Davis was treasurer of the board from April, 1874, to his death in April, 1877. He was a man of repute and prominence, and held other public trusts. The board was authorized by a special act of the legislature, passed May 7,1869 (66 Ohio Laws, 402), to purchase a site and build a school house at a cost not exceeding $20,000; and for the purpose of providing funds therefor to issue and sell at par value its bonds in sums of not less than $50, nor greater than $500, with interest at 8 per cent, per annum, payable semi-annually, for an amount not exceeding in the aggregate the sum of $20,000, and payable at any time, not exceeding ten years, from the time of issue. It was also authorized to levy an annual tax for the payment of the same, and to sell the old school house and lot, and apply the proceeds toward the erection of the new building.
    On September 1, 1869, the board accordingly issued two hundred bonds, each for the sum of $100, payable September 1, 1879. The bonds in suit are of this number, and were sold and delivered by the board, and were at various times thereafter, and before June, 1875, redeemed and lifted by the treasurer for the board, and with its funds; and on report made by him he was ordered by the board to cancel them by punching or defacing the signatures. He did not cancel them; but on November 4, 1876, having procured a favorable introduction to Sinton, he delivered them as collateral security for a loan then.made to him by Sinton. Sinton had no previous acquaintance with Dayis,. and supposed he wms the owner of the bonds, and did not know that he was or had been treasurer of the board. He made no inquiry as to the custody of, or title to the bonds.
    The bonds were separately numbered and of this form ;
    State oe Ohio, County oe Hamilton.
    SEPARATE SCHOOL DISTKICT OE VILLAGE OE WESTWOOD 100 Dollars.] EIGHT PEB CENT. LOAN [Certificate No.
    Eon Purchase of Site and Erection of School House.
    By virtue of an Act' of the General Assembly of the State of Ohio, passed the 7th day of May, 1869, the Board of Education of Separate School District of the Village of Westwood, in the County of Hamilton, and State of Ohio, do hereby acknowledge that the Separate School District of the Village of Westwood, owes and promises to pay to --or bearer, the sum of One Hundred Dollars, on the first day of September, eighteen hundred and seventy-nine, with interest thereon at the rate of eight per centum per annum, from the date hereof, the said interest to be paid semi-annually, on the first day of March, and the first day of September, on presenting the proper coupon for the same at the Bank of the Ohio Valley, Cincinnati, O.
    In witness whereof, we, the Directors of the Separate School District of the Incorporated Village of Westwood, have hereunto set our hands, and. affixed the seal of the said Incorporated Village, this first day of September, in the year 1869.
    Wm. E. Davis, ) Board [seal.] John D. Minor, > of Thomas Morgan, ) Education.
    
    
      King, Thompson and Maxwell, for plaintiff in error.
    I. In no event can the defendant be liable upon these bonds. The board had exhausted its authority by its original issue of §20,000 and could not bind the corporation, even by a voluntary issue of additional bonds.
    The board had no power, except as specially conferred by the legislature, to issue negotiable securities. 1 Daniels on Negotiable Instruments, §§ 420-423, and cases cited. Bank v. Inhabitants of Winchester, 8 Allen, 109 ; Cummings v. Fitch, 40 Ohio St., 56; Williamson v. City of Keokuk, 44 Iowa, 88; Sikes v. Mayor, 55 Miss., 115; Marsh v. Fulton County, 10 Wall., 676; Treadwell v. Commissioners, 11 Ohio St., 183 ; Bank of Chillicothe v. Swayne, 8 Ohio, 257; Straus v. Eagle Insurance Co., 5 Ohio St., 59; Town of South Ottawa v. Perkins, 94 U. S., 260; McClure v. Township of Oxford, Id., 429.
    It is of course immaterial whether the unauthorized issue be by reissuing forms already printed and signed, or by using new bonds. The Mayor v. Ray, 19 Wall., 468.
    The case, as at bar, of absolute want of power, must not be confounded with those of its irregular exercise, such as in State v. Board of Education, 27 Ohio St., 96, and numerous cases in the supreme court of the United States. DilIon on Mu. Corp., § 546; 92 Ill., 25; 19 Wall., 469; 7 Id., 676.
    II. Now, these bonds never were, in fact, reissued by the board. Davis, in delivering them to Sinton, did not assume to act, nor did Sinton understand that he was acting, as an officer of the board. On both sides it was understood to be an individual transaction. There is no room, therefore, for invoking any principal of agency, whereby to construe Davis’ delivery to Sinton as a reissue by the board.
    So that, assuming our defense of ultra vires to be untenable, the question is, whether as against Sinton, the board is estopped to deny a reissue at some time prior to his purchase from Davis. 93 U. S., 326; McKinzie v. Steele, 18 Ohio St., 38, 41; 1 Story’s Eq., § 391.
    III. The bonds got out, without any intention on.the part of the board. The estoppel, if any, must, therefore., proceed upon the ground of negligence.
    Upon that ground it fails.
    (1.) Because there was no negligence in fact.
    Davis was a man of very high reputation, occupying, at the time, the position of Assistant United States Treasurer at Cincinnati. He was a member of the board, and its treasurer. It was not negligence in the board to entrust him, as its proper officer, with the custody of the bonds for purposes of cancellation; certainly not such gross negligence as is equivalent to fraud or bad faith — the degree essential to work ' an estoppel. Arnold v. Cheque Bank, 1 C. P. D., 578; Chipman v. Tucker, 38 Wis., 43; 29 Ohio St., 364, 369; 41 N. Y., 521; 123 Mass., 196.
    (2.) The estoppel fails because it was not the defendant’s alleged negligence, but Davis’- crime, which was the proximate cause of the plaintiff’s injury. Lowery v. Western Union Telegraph Co., 60 N. Y., 198; 30 Ohio St., 555; 94 U. S., 469, 475; Bank of Ireland v. Evans' Charities, 5 H. L. C., 410; Baxendale v. Bennett, 3 Q. B. D., 525.
    (3.) The estoppel fails because the plaintiff was guilty of contributory negligence. The bond showed Davis to be a member of the board. He was in fact its treasurer. He presented himself to the plaintiff with an instrument which disclosed on its face that he was a trustee, claiming to own trust property. The plaintiff accepted it from him without inquiry. Wharton on Agency, § 187; 95 U. S., 557; Claflin v. Bank, 25 N. Y., 293.
    
      Lloyd & Taft, for defendant in error.
    I. David Sinton was a bona fide purchaser- of the bonds for value before'their maturity. ,
    Delivery of negotiable instruments as collateral security for a contemporaneous debt, is a transfer of them for a valuable consideration. Roxborough v. Messick, 6 Ohio St., 448.
    The purchase was made in 1876, three years before the bonds fell due, Mr. Sinton knew nothing of the facts of the purchase by the board, or the circumstances which followed. The fact that Wm. E. Davis’ name appeared asoné of the signers of the bond, in his official capacity, as member of the school board was not a circumstance to put him on his guard. It would be quite natural for Davis to have invested in the bonds and there was nothing illegal or suspicious in his having done so. Beside, the bonds had been issued seven years before, and Davis’ possession after the bonds had been issued so long a time, was not a fact that even the most careful could regard as suspicious. Sinton did not know that Davis was treasurer or custodian of the bonds, and there was nothing on the face of the bonds to indicate that he was. Davis was introduced to Mr. Sinton in an ordinary business way, as a gentleman of good standing in the community. Johnson v. May, 27 Ohio St., 374.
    The fact that the name of the payee is left blank when the bonds are payable to-or bearer, is not suspicious: Daniels on Neg. Inst., § 1496; White v. R. R. Co., 21 Howard, 575; Preston v. Hull, 23 Gratt., 613.
    The rules of law applying to commercial paper govern bonds like these: Dillon on Mu. Corp., § 405.
    II. By the purchase of the bonds before maturity, the rights which the board acquired, were neither greater nor, less than those of any other purchaser. If the bonds, at the time the board purchased them, had been bought by some other person, say a corporation, and the treasurer of that body had embezzled the bonds and sold them to Sinton under the same circumstances, the corporation, thus losing them, could not recover them in a suit from Sinton, or prevent his recovering the money on them from the board, whenever they fell due, on the ground that it, the corporation, had not delivered them. See Consolidated Association of Planters v. Avegno, 28 La. Ann., 552; City of Elizabeth v. Force, 29 N. J. Eq., 587; Burbridge v. Manners, 3 Campb., 194; Morley v. Culverwell, 7 Meeson & Wellsby, 174; Harmer v. Steele, 4 Exch., 1; 25 L. J. Exch., 244; 2 Daniels on Neg. Inst., § 1233; Thompson on Bills, 246.
    III. But even if it is held, that such a purchase constitutes payment, the board is liable on the bonds, because the delivery to their agent for any purpose, even for cancellation, is sufficient delivery to constitute a re-issue, and give vitality to the bonds in the hands of a bona fide purchaser for value however fraudulently the agent may have abused the board’s confidence. Bank v. Neal, 22 Howard (U. S.), 107; Fullerton v. Sturges, 4 Ohio St., 535; Merrick v. Bank 16 Id., 307.
    IY. The board of Education is estopped to deny its liability on the bonds, because of their negligence in not cancel-ling the bonds when they had them in their possession, on the ground that where one of two innocent parties must suffer a loss from the default of a third, the* loss must be borne by the party who by trusting the third person has put into his hands the means of causing the loss; provided that the confidence reposed, was the proximate cause of the loss. In the present case the extraordinary confidence reposed by the board in Davis was the proximate cause of the loss, which must fall either on the board or on Sinton: Ross v. Doland, 29 Ohio St., 479; Decamp v. Hanna, 29 Id., 471; Ingham v. Primrose, 7 C. B. (U. S.) 82; Young v. Grote, 4 Bing., 253; Bank v. Wentworth, 5 Ex. Ch. D. L. R., 96.
    The English cases in which the court refused to apply the principle we contend for, are all distinguishable from the case at bar.
    
      V. The defense of ultra vires in the re-issue, of these bonds is'not tenable.
    First. Because it did not increase the issue beyond twenty thousand dollars, the limit of the law.
    Second. Because purchase by the board before maturity •was not authorized by the law and a re-issue has only brought the board within the law.
    Third. Because the board is ¿stopped to deny the validity of the bonds which on their face purport to have been issued in September, 1869, as part of the original issue of $20,000.'
   Martin, J.

It is admitted that the board had issued bonds to the full amount authorized by the statute before Davis delivered the bonds in suit to Sinton. It is also admitted that the bonds in suit had been previously redeemed and lifted by the board with intent thereby to extinguish them. If the board is still liable upon them, it must be because of their continued vitality since the original issue, or because their delivery to Sinton was under such circumstances as to amount in law to a re-issue. For delivery or its equivalent is essential to every obligatory instrument. The important facts are, that when redeemed by the board, and when delivered to Sinton, the bonds were not due; that they were then uncanceled, and that they were accepted by Sinton from Davis as private owner and without inquiry.

Payment by anticipation, it is claimed, did not extinguish them, and produced no other effect than that of a discount or purchase by a stranger. Reliable authorities in support of this, as a general proposition, are cited by counsel. It must be conceded that notwithstanding the purchase or redemption of his own note by the maker before maturity he may re-issue it, o.r so conduct himself in respect to it that he will be estopped to defend as against an innocent purchaser. But the statute, by providing for an annual tax, and the sale of the old school property, and the application of the fund of an uncertain amount to the erection of the new building, fairly contemplates payment in advance, and therefore authorizes it. But as we understand the doctrine, it has no application to the' facts of this case. A natural person has unrestricted power to issue and re-issue. Such is not the case with this board. In State v. Powers, 38 Ohio St., 54, McIlvane, J., defines school districts under our system “as mere subdivisions of the state for political purposes, as mere agencies of the state in the administration of public laws.” And again he says: “ The district is organized as a mere agency of the state in maintaining its public schools, and all its functions are of a public nature.” In the same connection that eminent Judge further remarks: “ Many of the powers and franchises of municipal corporations are of a private and local character, essentially different from those of mere political subdivisions of the state, commonly called quasi corporations.”

By general statute school boards are authorized under precise limitations and conditions precedent to issue bonds for certain specific purposes. That power was not invoked in this instance. And the only authority is that recited in the bond, viz: the special act of May 7th, 1869. By that act they were authorized to issue bonds not exceeding in the aggregate $20,000. In September, 1869, they had issued to the full amount. Their authority was then exhausted. There can be no pretence of any further or other authority to issue. In executing this authority an incidental re-issue would of course be unimportant. The same paper could serve successive turns whilst the authority was in existence; but when the sales in the aggregate reached the prescribed limit the authority was at an end; and the board then had no greater right than a stranger to create an indebtedness by bond or otherwise under the statute. It follows that when the bonds were redeemed in 1874 tti^y" were extinguished and incapable of re-issue. No new bond could be issued for want of authority; and for the same reason a retired bond could not be re-issued, and payment by antiei'pation was extinguishment in law. Of the authorities ¡referred to, some relate to corporations at common law, whose powers rest in prescription, others to trading corporations, whose capacity within the general scope of their business is about as free as that of a natural person; and others again relate to municipal corporations in exceptional situations, or when the power to contract the debt is conceded, and the right to give a commercial security therefor is questioned. They throw but little light on the question under consideration. The general rule, however, is well settled that such power must be conferred and strictly pursued. Other cases relating to the irregular exercise of the power are not in point. This view disposes of the case. But if this conclusion is wrong, the case presents another view which we consider as controlling. - The only ground which can plausibly be suggested for a recovery is the alleged negligence of the board in not seeing to it that the bonds were canceled. It is supposed to rest on the maxim that whenever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it; The claim is, that by reason of that neglect the board is estopped to deny a reissue of the bonds. In McKinzie v. Steele, 18 Ohio St., 38, Judge. Welch lays down the rule as follows: “ To work an estoppel there must be prejudice to the party setting it up, and also fraud or bad faith — or their equivalent, gross negligence — in the party to be estopped.” At the outset we are met by the obvious objection that an estoppel concerning an alleged dereliction of a public officer is a novel mode of supplying a total want of statute power for purely public purposes. Waiving this objection we fail to discover in this record the slightest evidence of any negligence on the part of the board. In 1874 the treasurer reported the redemption of the bonds, and the board by formal order required him to canceFthem by punching or defacing the signatures. He was the accredited custodian of the paper. So far as known at that date his fitness, both as to character and com petency, was above suspicion. He was presumably the equal of his associates, and it was especially appropriate to intrust him with .that duty. As a matter of probability before the fact, there was no ground to suspect any irregularity, much less a meditated embezzlement and criminal use of the paper. To require such unreasonable suspicion as between public officers in the discharge of routine duties would prove impracticable; and to declare it a legal duty, with the consequences claimed by counsel, would be to entail on taxpayers onerous liabilities for the private frauds and the crimes of delinquent officials. But grant there was some omission or negligence on the part of the board, was it of such a gross character, the equivalent of bad faith or fraud, as to bring it within the rule? Clearly not. Again, it was not the proximate cause of Sinton’s loss. His loss did not result as the natural and probable consequence of the alleged omission of duty. The direct and only cause was Davis’ crime. And in committing it he did not pretend to act as treasurer or director, or in any manner as agent of the board; nor did he so act. He acted, and professed to act solely for himself, and for his own advantage. And Sinton so understood it and trusted him accordingly.

But a conclusive answer to this claim of estoppel is found in the fact that Sinton is not an innocent holder. The bonds disclosed on their face that Davis was one of the directors; and as such might well have possession of the-paper without the right to dispose of it on his private account. Under these circumstances the duty of inquiry was put upon Sinton. And having taken the bonds without inquiry he was guilty in law of contributory negligence, and is not entitled to the position of an innocent purchaser. He dealt for his own gain with Davis alone, and trusted him at his peril; and we know of no principle of law that entitles him now to look to the taxpayers for reimbursement. 'In this connection I refer to the remarks of Judge Dickman in Strong v. Strauss, 40 Ohio St., 89, and of Judge Banter in Moores v. Bank, 15 Fed. Rep., 121.

Judgment reversed.