Case Name: Capital Bank of St. Paul, Plaintiff and Appellant, v. School District No. 53, Barnes County, D. T., Defendant and Respondent
Court: North Dakota Supreme Court
Jurisdiction: North Dakota
Decision Date: 1890-11-29
Citations: 1 N.D. 479
Docket Number: 
Parties: Capital Bank of St. Paul, Plaintiff and Appellant, v. School District No. 53, Barnes County, D. T., Defendant and Respondent.
Judges: All concur.
Reporter: North Dakota Reports
Volume: 1
Pages: 479–497

Head Matter:
Capital Bank of St. Paul, Plaintiff and Appellant, v. School District No. 53, Barnes County, D. T., Defendant and Respondent.
1. School Districts — Contract Ultra Vires — Ratification.
A contract, authorized by the inhabitants of a school district at a district meeting, to build a school house for an amount in excess of funds on hand or subject to collection for that purpose, and the amount that could be realized from the maximum tax which could be levied by the inhabitants for the current year and used for that purpose, is void.. Therefore, held, that such a contract, void because the district board had no authority to make it, could not be made binding upon the district by subsequent ratification by the inhabitants. Whether there was sufficient evidence of such ratification not decided.
2. Same — Receipt of Fruits of Contract Creates 3io Liability.
Such contract being impliedly prohibited by statute, the receipt by the district of the fruits thereof creates no liability either under the contract or for the value received.
3. Same — Warrant Creates lío liew Liability.
A warrant creates no greater liability than the debt it represents, whether in the hands of the original party or of a purchaser before maturity and for value.
(Opinion Filed November 29, 1890.)
APPEAL from district court, Stutsman county; Hon. Roderick Rose, Judge.
White & Hewit and Bartlett Tripp, for appellant.
Mr, Tripp argued as follows: The court below directed the verdict as appears from the abstract upon the ground that “the district exceeded its authority in issuing orders for a greater amount than could be raised by the levy of a tax in one year,” and was governed no doubt by the language of the supreme court of Dakota Territory in Farmers & Merchants Nat. Bank v. School District No. 53, 42 N. W. 767. One of the essential distinctions between that case and the case at bar, which seems to have been overlooked by the lower court, or which was deemed by it not to apply, was “that the inhabitants of the district did not direct the making of or make the contract, and had never in any way ratified the acts of the school board in issuing such warrants.” In this case we say there was evidence of ratification on the part of the inhabitants of the district of the acts of the board. The court below seems to have been of the opinion that such evidence was immaterial, the inference being from the act of directing the verdict, that the learned judge was of the opinion that the district could not ratify such unauthorized acts of the board; that the district could not do indirectly what it had not power to do directly. We think the court below has misconstrued and extended the meaning of the language used by the court in Farmers & Merchants Nat. Bank v. School District No. 53 supra. It is true that a hasty reading of this decision alone would seem to give the impression that the court intended to hold in all cases, where the warrants or orders exceeded the amount of the tax levy of that year, they were absolutely void. This the court did not and could not intend to hold. The language of the court must be applied to the facts of that case. What was in fact determined in that case, and how far it is authority in the case at bar can best be determined by an examination of the companion case submitted with it at the same time and the opinion in which is written by the same judge, to-wit: The Capital Bank of St. Paul v. School District N o. 85, 42 N. W. R. 774. In this last case the supreme court says: “they expended more than could legally have been collected by tax on the property of the district in one year;” yet affirms a judgment against the district for the full amount of the warrants and interest, while in the case against district 53, where the board had done the same thing, the court holds the warrants void, and affirms a judgment in favor of the district. The only -difference between the two cases so far as this question is involved was, that in the former case the action of the board was ratified, in the latter it was not. The courts in such case, because of the action of the inhabitants in ratifying such contract, will construe it as one to be paid out of the revenues from year to year to be obtained under the statutes providing for and limiting taxation. The territorial supreme court reached the conclusion that the district may make a contract — at least by ratification — incurring a liability greater than can be provided for by tbe taxation of the year in which it is made. Applying the results of that decision to the facts of this case it is decisive of it. We say there was abundant evidence tending to show that the district had ratified the acts of the district board in building this house and issuing these orders. See, also, Sullivan v. School District 39, 18 Pac. JR. (Kans.) 287; Everts v. District Township Rose Grove, 41 N.W. 478; Andrews et al v. School District No. 4, 33 N. W. 217; Sherman et al v. Pitch, 98 Mass. 59; City of Conyers v. Kirk et al, 3 S. E. Rep. (Ga.) 442; Pisher et al v. Inhab. School District No. 17,58 Mass. 496; Keyser v. School District, 35 N. H. 477; Kimball v. School District, 28 Yt. 8; Jordan v. School District, 33 Me. 170; Coney v. Somerset, 44 N. Y. S. 445; Banks v. Albany, 92 N. Y. 363; Read v. Plattsmouth, 107 U. 8. 568; Corwin v. Wallace, 17 Iowa 374; Humphrey v. Association, 50 Iowa, 607; Pinches v. Church, 55 Ct. 183; Brown v. Atchison, 17 Pac. R. 465.
Again, the school district having accepted the fruits of the contract, and thereby having made the contract its own, will not be heard to say that it had no power to make such contract and is not bound thereby. Corporations neither private nor muni eipal are longer permitted to use tlie doctrine of ultra vires as a sword, but only as a shield in defense of their corporate rights. I think it may be safely said from a review of the modern decisions of the courts that the line of distinction is now well drawn between contracts made without or in excess of authority, and those declared to be illegal or expressly prohibited by statute. The doctrine of ultra vires was at first permitted to ,b© set up by or against corporations upon the theory that public policy demanded that these artificial persons should be kept strictly within the limits of the powers granted them; it was soon found however that this rule worked a great hardship to parties dealing with such persons in ignorance of their chartered powers, and that the interests of the people would be best subserved by ■estopping them from denying their power or the authority of their agents to make such contracts, the same as in case of individuals, leaving the government to withdraw or annul their charter in case of its violation, and no good reason would seem to exist why a corporation should be permitted to say that its agent, who made the contract had no authority so to do, while it knowingly and willingly accepts its results and retains its proceeds, while an individual, who under such circumstances has ratified the unauthorized act of his agent is held liable as principal to the same extent as if it had been made by himself. I think the courts have so far receded from the position oi’iginally taken on this question that it may be safely said they are quite unanimous now in not permitting a corporation, which has received and retained the benefit of an unauthorized contract, unless it be a contract malum inse, to retain the benefits of such contract and successfully interpose the plea of ultra vires; and X may further say with equal safety that the great weight of authority now denies to the corporation, in case of an executed contract which is neither malum in se nor malum prohibitum, the right to retain its proceeds and interpose this plea when sued upon the contract, and that the few remaining courts which still deny the right to sue upon the contract permit a recovery .as for money had and received or some similar action. Bank of Augusta v. Earle 18, Pet. 519; Zabriskie v. By. Co. 23 How. 391; By. Co. v. McCarthy,96 U. S. 258; Hitchcock v. Galveston, 96 U. S. 341; Gold Mining Co. v. Nat. Bk., 96 U. S. 640; Nat. Bk. v. Matthews, 98 U. ¡3.621. The great majority of the state courts are now in line with the decisions of the Supreme Court of the U. S., at least so far as contracts made without authority merely, are concerned. Perkins v. By. Co., 47 Me. 575; Ossipee Mfg. Co. v. County, 54 N. H. 295; By. Co. v. Proctor, 29 Yt. 93; Dill v. Wareham, 7 Mete. 438; Monumental Nat. Bank v. Globe Works, 101 Mass. 57; Attleborough Nat. Bank v.Bogers, 125 Mass. 339; Phil. Loan Co. v. Towner, 13 Ct. 249; Hood v. By. Co., 22 Ct. 1; Converse v. Bailway Co., 33 Ct. 166; Silver Lake Bank v. North, 4 John. Ch. 370; Third Av. Savings Bank v, Dimock, 24 N. J. Eq. 26; Allegheny City v. McOlurken, 14 Pa. St. 81; Penn. Del. etc. Co. v. Dandridge, 8 Gill & J., 248; Boyce v. Trustees M. E. Church, 46 Md. 359; Bank v. Hammond, IBich, Law, 281; City Eire Ins. Co. v. Carrugi, 41 Ga. 660; Screven Hose Co. v. Philpot 53 Ga. 625; Hazlehurstv. Savannah B. B. Co., 43 Ga. 13; So. Life Ins. Co. v. Lanier, 5 Ela, 110.
Upon the right to recover in this action for money lent and advanced, see Bicknell Adm’r v. Widner, 73 Ind. 501; Tracy v. Talmage, 14 N. Y. 162; Custer v. Leavitt, 15, N. Y. 9.
F. H. Remington, John S. Watson and C. M. Hertig for respondent.
Mr. Bemington argued: If the district had not the power to make, or to direct the making of the contract, it is obvious that it had not power to ratify. Hodges v. City of Buffalo, 2 Denio 110; 1 Dillon, Mun. Cor. § 463, 3d Ed. This will undoubtedly be conceded.
The supreme court of the territory expressly held in the case of F. & M. Nat. Bank v. School District 53, supra, that neither the school board nor the school district had power to incur the indebtedness, because it exceeded the maximum of taxes that could be levied and collected in any one year. The decision in the companion case, Capital Bank v. School District 85,42 N. W. Bep. 774, is in entire harmony with that view. The latter case simply holds that inasmuch as the taxes which could have been levied between the date of the warrants and the date of ratification would have been sufficient to pay the warrants, the district at the date of ratification had the power to ratify. No such facts appear in the case at bar. Not only are the Dakota cases against the power of the voters of the district to make or authorize the contract that was made, but the cases of Kane v. School District No. 3, 52 Wis. 502, and School District v. Stough, 4 Neb. 357, also hold the same doctrine.
The statement of appellant’s counsel as to the progressive limitation of the doctrine of ultra vires is true as to private but not as to public corporations. Zottman v. San Francisco, 20 Cal. 96; Clark v. City, 19 Iowa 199; Mayor v. Bay, 19 Wall. 468; Dillon on Mun. Cor. (3d Ed.) § 504; School Dist. v. Stone, 106 U. S. 183; Dartsmouth Savings Bank v. School Dist., 43 N. W. 822; Bank v. School Tp., ante p. 26.
A rehearing having been granted the case was argued by Messrs. Jones and McLaren, for appellant, and by Mr. Bemington for respondent. The opinion handed down after the rehearing was filed March 16,1891.

Opinion:
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. 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 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 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 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 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 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 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.