Title: Security State Bank of Wishek v. State

State: north-dakota

Issuer: North Dakota Supreme Court

Document:

181 N.W.2d 225 (1970) SECURITY STATE BANK OF WISHEK, Plaintiff and Respondent, v. STATE of North Dakota, doing business as the Bank of North Dakota, Defendant and Appellant. Civ. No. 8663. Supreme Court of North Dakota. October 30, 1970. Rehearing Denied December 4, 1970. *226 Helgi Johanneson, Atty. Gen., and Robert A. Birdzell, Special Asst. Atty. Gen., Bismarck, for defendant and appellant. Vogel, Bair & Brown, Mandan, for plaintiff and respondent. ERICKSTAD, Judge. The State of North Dakota, doing business as the Bank of North Dakota, as defendant in this action, appeals to this court from a judgment of the district court of Burleigh County entered May 29, 1970, in favor of the plaintiffs, Security State Bank of Wishek, a domestic banking corporation, and Walter R. Sayler, in the sum of $89,401.80. The State demands a trial de novo in this court. This litigation arises out of the sale by the Bank of North Dakota to the Security State Bank of Wishek of Cass County Industrial Development Revenue Bonds for $80,000 (the face value of the bonds), plus interest which had accrued on those bonds at the rate of 5 percent per annum from February 1, 1967, to December 22, 1967, in the sum of $3,566.67. The coupons maturing on February 1, 1968, and August 1, 1968, were clipped and collected by the plaintiffs, and no problems arose over the sale until the Bank of North Dakota contacted Mr. Sayler, the president of the Bank of Wishek, by telephone in Arizona early in 1969, when it became apparent that the County was about to default in the payment of the principal and interest on some of its bonds, in an effort to secure the agreement of the Bank of Wishek to a so-called moratorium whereby all of the purchasers of the bonds were to agree to permit an extension of the maturity date of said bonds and to permit a deferment in the payment of interest thereon. It is Mr. Sayler's contention that it was on this occasion that he first learned that the bonds which his bank had purchased *227 were not general obligation bonds of the County and thus were not guaranteed by the County, and that on learning this he returned the very next day and made a demand of the Bank of North Dakota that it accept a return of all of the securities and that it refund to the Bank of Wishek the purchase price of the securities. It is Mr. Sayler's further contention that when there was no compliance with this request, he brought this action to recover the entire purchase price of the bonds. Mr. Sayler also asserts that it was the same date on which he conferred with the officials of the Bank of North Dakota, and made the demand above referred to, that he later visited with the State Bank Examiner, who informed him that the Bank of Wishek was in violation of Section 40-57-10, N.D.C.C., in that the stated capital of the Wishek bank was only $50,000 and that it was thus prohibited from owning bonds of this type in excess of 5 percent of the stated capital, or $2,500 of such bonds. Section 40-57-10 reads: North Dakota Century Code. The material allegations of the plaintiffs' complaint follow: WHEREFORE, plaintiffs pray: The State denied the material allegations of the complaint and in addition asserted affirmative defenses, the material parts of which read: The district court, as indicated by its memorandum opinion, relying on Jarski v. Farmers' and Merchants' State Bank of Hankinson, 53 N.D. 470, 206 N.W. 773 (1925) and on Smith v. Rennix, 52 N.D. 938, 204 N.W. 843 (1925), and upon the provisions of Section 40-57-10, N.D.C.C., required the State to accept return of bonds of $77,500 face value and to pay the face value of the same plus accrued interest which the Bank of Wishek had paid, plus other interest. The State on appeal asserts that Smith and Jarski merely hold that the alleged rights of plaintiffs in those cases were unenforceable and the result was that the court left the parties where it found them. The State contends that this is the correct result where the underlying consensual fabric is void. The State asserts that it is doubtful that our Legislative Assembly had any intention to burden or discourage reasonable efforts to finance new industrial ventures in the state, and that public policy, as indicated in the Municipal Industrial Development Bond Act and in many other products of the legislative process, favors liberality in such financing. It argues that the prohibition, if any, in Section 40-57-10, N.D.C.C., as amended, is inferential, the language used being in the form of a grant of power as a corporate charter is a grant of power, and that any purchase in excess of and beyond the scope of such granted power is ultra vires rather than void. In support of its position that the Wishek bank is entitled to recover nothing from the State in this case, notwithstanding the provisions of Section 40-57-10, N.D.C.C., the State refers us to the case of Anderson v. First National Bank of Grand Forks, 5 N.D. 451, 67 N.W. 821 (1896). In Anderson this court in 1896, speaking through Judge Corliss, held a bank responsible for its acts as an agent, although the law prohibited it from functioning as an agent. We quote the pertinent parts of that decision. The State points out that the result of the Anderson litigation after four appeals to the Supreme Court of North Dakota and the appeal in 172 U.S. 573, 19 S. Ct. 284, 43 L. Ed. 558, was that the bank was liable on its ultra vires transaction. The U. S. Supreme Court in that case, relying on its earlier decision of Logan County Nat. Bank v. Townsend, 139 U.S. 67, 11 S. Ct. 496, 35 L. Ed. 107 (1891), said: We are persuaded by the argument of the State and accordingly conclude that neither the cases relied on by the trial court nor the provisions of Section 40-57-10, N.D.C.C., provide a basis for the plaintiffs' recovery from the State. We must next inquire whether the plaintiffs have proved any other basis for recovery from the State of the purchase price of the bonds plus interest. The respondents assert in their brief that the Cass County Industrial Development Revenue Bonds are not municipal securities and that therefore on the basis of breach of an express warranty that they were "municipal securities", or on the basis of misrepresentation, or on the basis of mutual or unilateral mistake, the contract *231 for the purchase of the securities is subject to rescission. The trial court was not convinced by this argument and accordingly required the plaintiffs to retain the bonds not in excess of 5 percent of the capital of the Bank of Wishek. Mr. Sayler contends that as a result of the recommendation of one of the representatives of the State Examiner's Office that his bank could use about $120,000 in additional municipal bonds, he called the Bank of North Dakota and in speaking to Mr. Christie Bantz, the manager of the securities department of the bank, told him that the bank was interested in purchasing between $100,000 and $150,000 in municipal securities, and that he asked Mr. Bantz to send him a list from which a choice could be made. Apparently in response to Mr. Sayler's telephone request, Mr. Bantz sent Mr. Sayler a letter on December 8, 1967, which commenced as follows: The letter then described Cass County Industrial Development Revenue Bonds of 1967, Hunter Refunding Improvement Bonds of 1959, Lehr Street Improvement District #2 Warrants, and Lignite Gas Utility Revenue Bonds. Mr. Sayler asserts that on receipt of this letter, he again called the Bank of North Dakota, talked to Mr. Bantz, and purchased $80,000 worth of the Cass County Industrial Development Revenue Bonds and $21,000 worth of the Lehr Street Improvement Warrants. He instructed Mr. Bantz to "debit our account in his bank for the bonds." By letter dated December 22, 1967, Mr. Bantz informed Mr. Sayler, as president of the Security State Bank of Wishek, as follows: Mr. Sayler testified that those bonds were delivered in early January 1968 to the Security State Bank of Wishek at Wishek, while Mr. Sayler was in Phoenix, Arizona, for his health, and that they were merely accepted by the cashier and placed in the vault of the bank where neither he nor any of the other officers of the bank examined them until the County defaulted in the interest payments. The form of the bond is very illuminating. Had anyone on behalf of the Bank of Wishek examined the bonds he would have been struck immediately with the realization that the bonds were not general obligations of the County of Cass. The bonds are described in large letters as "Cass County Industrial Development Revenue Bond." The most pertinent part of the bond relative to this issue, however, is that paragraph which reads as follows: The plaintiffs contend, however, that for a period of fifteen to eighteen years they had been buying bonds through the Bank of North Dakota and that in all instances they had purchased municipal bonds which were general obligations of the municipalities involved, and that accordingly they had a right to assume when the Bank of North Dakota described bonds as municipal bonds or municipal securities that these bonds or securities were guaranteed by the municipality and were therefore general obligations of the municipalities. On the other hand, the State asserts that neither the Bank of Wishek nor its president, Mr. Sayler, had a right to assume that revenue bonds, and the bonds were clearly described as revenue bonds both in the letter to Mr. Sayler of December 8, 1967, and in the form of the bonds themselves, were guaranteed by the municipality. It is regrettable that the Cass County Industrial Development Project, which had as its object the production of sugar from corn, failed, but this failure can in no way be resorted to as a justification for a rescission of the contract. Section 40-57-03, N.D.C.C., provides for the powers of municipalities, and Subsection (2) thereof permits municipalities to issue revenue bonds such as the Cass County Industrial Development Revenue Bonds. The bonds were municipal securities under that statute, notwithstanding that they were not general obligations of the municipality. It is difficult for us to believe that the president of the Bank of Wishek, with his many years of experience, did not know what he was buying; but in the event that he did not know what he was buying, we believe that his lack of knowledge resulted from his own negligence or carelessness in the purchase of these bonds, rather than from any misrepresentation or warranty on the part of the Bank of North Dakota. Plaintiffs assert that they are entitled to a rescission of the contract under Section 9-09-02, N.D.C.C. They say that a unilateral mistake of fact is sufficient to justify rescission and in support thereof they refer us to Fedorenko v. Rudman, 71 N.W.2d 332 (N.D.1955) and Beatty v. Depue, 78 S.D. 395, 103 N.W.2d 187, 1 A.L.R. 3d 531 (1960). Said section reads as follows: North Dakota Century Code. We find no basis in facts of this case for the application of Section 9-09-02, N.D.C.C. *233 We have also read the decisions above referred to and find in them no help to the plaintiffs in this case. In Fedorenko this court in 1955, speaking through Judge Johnson, referring to Corpus Juris Secundum as authority, stated the rule that a unilateral mistake may entitle a party affected thereby to rescind the contract. It is interesting to note, however, that the court did not apply that rule to the plaintiffs' benefit, but actually denied the plaintiffs the right of rescission on the ground of waiver through unexcused delay. In the instant case, if the plaintiffs are to recover on the basis of mistake, they must come within the provisions of Section 9-03-13, N.D.C.C., relating to mistakes of fact, or the provisions of Section 9-03-14, N.D.C.C., relating to mistakes of law. North Dakota Century Code. If it could be contended that the Bank of Wishek was mistaken in the type of securities that it purchased and that this mistake was a mistake of fact, we think that the bank is deprived of any recovery on the basis of a mistake of fact, for the reason that its mistake of fact was caused by its neglect of a legal duty to carefully ascertain the type of securities offered before it purchased them. The title of the bonds, which contained the word "revenue", should have alerted the plaintiffs to the type of bonds they were purchasing, and beyond the title of the bonds, the language of the bonds should have indicated that the bonds were not general obligation bonds of the County. Even in Beatty, the case relied upon by the plaintiffs, the South Dakota court in construing a statute similar to ours said: We do not believe that the plaintiffs exercised reasonable diligence in this case. In a recent case our court, speaking through Judge Strutz, said: We are of the opinion that the conduct of the Bank of North Dakota in no way contributed to or induced the mistake. We are also of the opinion that the Bank of North Dakota will reap no unconscionable advantage. Had it not sold these securities to the plaintiff, it might well have sold them to others who wanted revenue bonds and who were not subject to the restrictions of Section 40-57-10, N.D.C.C. If it could be contended that the plaintiffs in failing to be cognizant of the limitation contained in Section 40-57-10, N.D.C.C., committed a mistake of law, they still cannot prevail. Nothing in the record indicates that the Bank of North Dakota, the other party to the contract, was aware of the restriction upon purchases of this type of security by banks of this state, and thus Subsection (2) of Section 9-03-14 does not apply. As for the possible application of Subsection (1) of Section 9-03-14, N.D.C.C., we find no misapprehension of the law by all the parties. Even if neither the seller of the securities nor the purchaser of the securities was cognizant of the restriction contained in Section 40-57-10, N.D.C.C., such a fact could not justify a rescission of the contract under Subsection (1), as such a fact would not constitute a misapprehension or a misunderstanding by the parties of the meaning of any particular law. It might instead constitute an ignorance of the law. If we were to permit a rescission based upon ignorance of the law, we would set a precedent which could completely upset the business community of this state. We believe that the plaintiffs have shown no basis for a recovery from the State of North Dakota in this case and accordingly, for the reasons stated in this opinion, the judgment of the district court is reversed. TEIGEN, C. J., and PAULSON, KNUDSON and STRUTZ, JJ., concur.