Opinion ID: 1755180
Heading Depth: 1
Heading Rank: 12

Heading: Taxpayer's Equitable Right to Recover Illegal Expenditures

Text: Myers contends that the investment contracts were void when made because the WG Trading partnership contract violated the prohibition in § 72-1247 against buying options, buying on margin, and engaging in speculative investments. He argues that because the contracts were void, he has an equitable right to recover on the contracts. This court first discussed a taxpayer's equitable rights to recover from public officials almost 100 years ago in Cathers v. Moores, 78 Neb. 17, 113 N.W. 119 (1907). The Cathers court held that a resident taxpayer of a municipal corporation has an equitable right to maintain an action against its officers who have squandered or dissipated its funds, or paid them out for an unlawful or unauthorized purpose, to recover such funds . . . where its proper law officer neglects and refuses to prosecute such an action. 78 Neb. at 18-19, 113 N.W. at 120. But the Cathers court also held that before a taxpayer can maintain an equitable action to recover money expended by the officers of a [governmental entity], it must appear that the city itself could have maintained such action in the first instance. Id. at 23, 113 N.W. at 122. In Cathers, the Legislature had passed an act creating a new charter for the city of Omaha, which mandated that specified employees would not receive compensation before the mayor and city council had fixed their compensation. The city failed to comply with this charter provision, and a taxpayer brought an action to force city officials to refund the payroll funds paid under void transactions. The taxpayer's right to recover on behalf of the city hinged on the distinction between a contract that is void ab initio and a contract that is unenforceable. See, Restatement (Second) of Contracts § 8 (1981); 1 Samuel Williston, A Treatise on the Law of Contracts § 1:21 at 51 (Richard A. Lord ed., 4th ed. 1990) (there is a class of agreements which, though not enforceable by ordinary legal remedies, may nevertheless produce certain legal consequences for the parties to them). In discussing this difference, the court in Cathers stated: There is a clear distinction between contracts outside of the powers conferred upon municipal corporations and contracts within the general scope of the powers conferred, but which have been irregularly exercised. Contracts falling entirely outside of powers delegated to the corporation are absolutely null and void, and no right of action against the corporation can be founded upon them. The rule with reference to the liability of the corporation on contracts within the general scope of the powers granted, but which have been irregularly exercised, is well stated in 2 Dillon, Municipal Corporations (4th ed.), sec. 936, as follows: `A municipal corporation, as against persons who have acted in good faith and parted with value for its benefit, cannot . . . set up mere irregularities in the exercise of the power conferred, as, for example, its failure to make publication in all of the required newspapers of a resolution involving the expenditure of moneys.' The action of the [defendant officials] was not ultra vires in the proper sense of that term, and we are of [the] opinion that the city would be estopped to set up the irregularities complained of as a defense to an action brought against it by the employees to recover the value of their services. Cathers v. Moores, 78 Neb. 17, 21-22, 113 N.W. 119, 121 (1907), quoting Rogers v. City of Omaha, 76 Neb. 187, 107 N.W. 214 (1906) (holding that city was liable in quantum meruit for value of contractor's street grading despite city's failure to comply with statute requiring it to obtain consent from landowners and make damage assessments before grading streets). In Cathers, this court stated that the city unquestionably had the power to contract for the services at issue even if it may be said that its authority was so irregularly exercised as to render the proceedings illegal. 78 Neb. at 21, 113 N.W. at 121. We further stated that the city had received the benefit of the employees' services and that the trial court had found that none of the defendant city officials had interests in the contracts. Thus, we held that a taxpayer could not recover from the city because the city would be estopped from relying upon the alleged statutory violation as a defense in an action to recover the value of the services rendered. This court reached the same conclusion in Scheschy v. Binkley, 124 Neb. 87, 245 N.W. 267 (1932), a taxpayer action against a school district's treasurers and officers. The taxpayer alleged that the officers had violated a statute providing that `[n]o school officer shall be a party to any school contract for building or furnishing supplies, except in his official capacity as a member of the board.' Id. at 90, 245 N.W. at 268. The officers had paid school board members for services and materials for constructing temporary buildings before the brick schoolhouse was constructed. This court concluded that a taxpayer could not recover against the officers except for fraud or unreasonable charges. Id. We reasoned that it would be unconscionable to permit the school district to retain the benefits and allow it to avoid payment. Thus, even though the officers violated a statute that limited its power to make contracts between the school district and its officers, the taxpayer could not recover funds expended in violation of the limiting statute. These cases illustrate that a taxpayer has no equitable right to recover funds from public officers merely because they violated a statute. The cases cited by Myers are distinguishable. It is true that if a statute explicitly prohibits a governmental entity from entering into a contract and avoids the obligation made in violation of the contract, then the contract is void ab initio and funds paid out under the contract may be recovered in suit by the governmental entity or by a taxpayer suing on its behalf. See, Arthur v. Trindel, 168 Neb. 429, 96 N.W.2d 208 (1959); Heese v. Wenke, 161 Neb. 311, 73 N.W.2d 223 (1955); Neisius v. Henry, 142 Neb. 29, 5 N.W.2d 291 (1942); Village of Bellevue v. Sterba, 140 Neb. 744, 1 N.W.2d 820 (1942). Similarly, when a governmental entity is wholly without statutory authority to make a contract, the contract is void ab initio and a taxpayer may recover funds paid out under the public contract: In a situation . . . where the action is ultra vires and no power exists to act in the premises at all no liability may be imposed upon the statutory creature. Fulk v. School District, 155 Neb. 630, 643, 53 N.W.2d 56, 63 (1952). Thus, our case law shows that a taxpayer can only recover on behalf of a governmental entity if the public contract is void ab initio such that the party providing services or materials could not recover the value of those services in a quantum meruit action. See, Scheschy v. Binkley, supra ; Fulk v. School District, supra . The difference between a contract that is unenforceable against the State and a contract that is void ab initio is also present in nontaxpayer actions against the State brought by contracting parties to recover for goods or services. For example, in Capital Bridge Co. v. County of Saunders, 164 Neb. 304, 83 N.W.2d 18 (1957), we held that a seller of lumber could recover from a county when the county had authority to purchase lumber for a bridge, despite the county's failure to comply with a statute requiring the purchase to be made from the lowest bidder. We stated: [I]n the present case the statute does not avoid the obligation of a contract made in a manner contrary to the provisions of the statute. In such a situation the rule in this state is: Where a contract has been entered into in good faith by a [governmental entity], which contract was within the power of the [governmental entity] to make but was void for failure to comply with statutory requirements, an action in quantum meruit for the service performed or the material furnished may be maintained. Id. at 310, 83 N.W.2d at 22-23. Myers argues that the investment contracts are void ab initio and that the State is entitled to equitable relief because (1) the contracts violated § 72-1247, (2) the contracts constituted an impermissible delegation of the NIC's duties, (3) Westridge breached its implied fiduciary duty under the contracts to ensure that the State made only legal investments, and (4) the contracts were unconscionable.