PROVIDENT LAND CORPORATION v. ZUMWALT

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District Court of Appeal, Third District, California.

PROVIDENT LAND CORPORATION v. ZUMWALT et al.†

Civ. 5870.

Decided: September 13, 1937

Louis Bartlett, of San Francisco (W. S. McGuire, of San Francisco, of counsel), for appellant. Rutledge & Rutledge, of Colusa, for respondent Zumwalt. George R. Freeman, of Willows, for other respondents.

The amended complaint in this action sought to recover of and from the defendants, and restore to the treasury of the Provident Irrigation District, the sum of $10,000 alleged to have been unlawfully paid by the directors of the district to certain bondholders. To this complaint the defendants filed a general demurrer which, being sustained, and plaintiff declining further to amend, judgment was entered in favor of the defendants. From this judgment the plaintiff appeals.

The complaint alleges the corporate existence of the plaintiff, and then alleges the organization of the Provident Irrigation District as having taken place on or about the 6th day of May, 1918. The second paragraph of the complaint names the officers of the district at the time of the transactions complained of. Paragraph IV of the complaint alleges the issuance by the Provident Irrigation District of bonds in the sum of several hundred thousand dollars; that of the bonds so issued $152,000 are and were past due as principal, and at the time of the beginning of the action, and during the time of the proceedings complained of, there was also due upon said bond issue, and unpaid, interest coupons in the sum of $225,000. Paragraph IV further alleges that the plaintiff is the owner of bonds of said district of the face value of $86,000; that said bonds are past due and unpaid; and that plaintiff is the owner of unpaid and past–due interest coupons in the sum of $125,000, and was such owner and holder at the time of the transactions complained of herein. Paragraph V of the complaint alleges the presentation of payment of past–due bonds, and also of past–due and unpaid interest coupons, and that no part thereof was or has been paid. Paragraph VI of the complaint alleges that on the 7th day of January, 1936, there was in the general fund of the Provident Irrigation District the sum of $10,000; that said district disbursed said $10,000 in the purchase of fifty bonds of the district, with coupons attached as follows: From the Capital National Bank of Sacramento, bonds of the face value of $17,000; from I. G. Zumwalt, bonds of the face value of $16,000. Paragraph VI of the complaint further alleges that prior to January 7, 1936, the district held title, by collector's deeds issued to it, to over 10,000 acres of land within the district. Such deeds were issued on account of delinquent assessment sales of said lands for assessments levied thereon for the payment of interest and payment of bonds of said district. That, after alleging the amount received on account of leases of said land, it is further alleged in paragraph VI that the $10,000 referred to in the complaint as having been expended in the purchase of certain bonds, the whole of said sum came from the proceeds of leases upon the lands just referred to. That the $10,000 was paid out as aforesaid while the district was in default in the sum of about $360,000 on account of past–due and unpaid bonds and past–due and unpaid interest coupons.

Paragraph VII of the complaint alleges that on r about the 7th day of January, 1936, the board of directors declared that, of the proceeds just mentioned, there was then in the general fund the sum of $10,000. This sum was declared by resolution to be a surplus, and was thereupon set aside for the purchase of bonds of the district. The paragraph further alleges that on the 4th day of February, 1936, the board of directors, by resolution, provided for the purchase of the face value of $50,000 worth of said bonds, with coupons attached, for the sum of $10,000, as hereinbefore stated. And it is further alleged in the paragraph that none of the bonds were past due and registered by the treasurer of the district prior to the registration of past–due and registered bonds and coupons owned by plaintiff; that the resolution adopted by the board of directors did not name or otherwise specify the day, hour, and place of such proposed purchase of bonds, nor was any notice given of such proposed purchase by publication, nor was any notice given inviting sealed proposals, or stating that sealed proposals would be received by the board at their office for the purchase of bonds, nor were any sealed proposals received therefor.

It is further alleged that the board did not give any notice to any bondholders, other than those mentioned in the complaint, that it would receive proposals for the sale and purchase of bonds; that the said board, instead of publishing notice, had previously agreed with Zumwalt, Benoit, and the Capital National Bank to purchase from each of said persons the number of bonds mentioned in the complaint at 20 per cent. of the face value thereof; that there was paid thereon by the district to the defendant Zumwalt the sum of $3,400. The prayer of the complaint is that the attempted sale to the district by said Zumwalt of seventeen bonds and coupons attached be declared void; and that judgment be entered for the return of $3,400 to the treasurer of the district, so unlawfully paid out by the officers of the district, and unlawfully received by the defendant Zumwalt.

To this complaint the defendants interposed a general demurrer as follows: (1) That there is a misjoinder of parties–defendant in this, that the said I. G. Zumwalt is not a proper person defendant in said action, and that said complaint does not state facts sufficient to constitute a cause of action against the defendant Zumwalt; (2) that said amended complaint does not state facts sufficient to constitute a cause of action.

At the time of the issuance of the bonds mentioned herein, section 52 of the California Irrigation District Laws (St.1897, p. 272, as amended by St.1919, p. 667), among other things, provided as follows: “Whenever the bond fund contains ten thousand dollars in excess of the amount necessary to pay all bonds and interest coupons of the district that have matured or that will mature before the time when any part of the next annual assessment to be levied in the district will become delinquent, the board of directors may advertise, in the manner hereinbefore provided for the sale of bonds, for the receipt of sealed proposals for the delivery to the district for redemption of any of its bonds not due. Said advertisement shall state the amount which may be used for the redemption of such bonds. Any such proposals shall be opened by the board in open meeting at the time named in said advertisement, and the offer or offers of such bonds at the lowest rate or rates shall be accepted.”

In 1931 (Stats.1931, p. 172), section 52 of the California Irrigation District Laws was amended so as to omit all of the foregoing in relation to the redemption of bonds, and in place thereof the following was inserted: “Whenever there is in any fund of the district money in excess of that required for the purposes of such fund up to the time when any part of the next annual assessment levied in the district will become delinquent, the board of directors of the district may purchase with such surplus money, or any part thereof, any of its bonds not then due, and may cancel the bonds so purchased or hold the same as a part of its assets until such time as the board may determine that it is for the best interests of the district that such bonds or any of them be sold, or shall cancel the same at their date of maturity.”

From the allegations contained in the complaint, which upon demurrer are admitted to be true, it is apparent that the board of directors of the Provident Irrigation District, without regard to the rights of different bondholders of the district, and without notice to any of them, selected a few of the bondholders and negotiated with them for the redemption of bonds, thus giving preferential privileges and opportunities to a selected few of the bondholders.

While there was a due and unpaid indebtedness of the district in the sum of $360,000 on account of bonds and interest coupons, the passing of a resolution that there was a surplus in the sum of $10,000 for the redemption of bonds did not change the fact that such surplus did not exist.

Section 67a of the California Irrigation District Laws (St.1897, p. 254, as added by St.1917, p. 769) provides that, whenever an object for which money has been specifically provided by assessment, or by bond issue, has been accomplished, and any money provided therefor remains unexpended, the same shall, in the discretion of the board of directors, be transferred to the general fund, and thereafter be available for any of the purposes of the act.

It will be observed that section 67a, supra, refers, specifically to money which has been realized on account of assessments theretofore levied, and has of course been earmarked in the proceedings leading up to and culminating in the assessment. Section 67 of the act as amended in 1931 (Stats.1931, p. 173) provides for the creation of a bond principal fund, bond interest fund, construction fund, and general fund. The $10,000, the validity of the expenditure of which is challenged in this proceeding, was not realized or obtained by way of an assessment, but was and is moneys realized from the leasing of lands, the title to which had become vested in the district by reason of failure of the owners thereof to pay assessments theretofore levied upon such lands.

That the law as it existed at the time of the issuance of the bonds entered into and became a part of the contract which could not thereafter be changed by an act of the Legislature is clearly shown and fully discussed in the case of Hershey et al. v. Cole, 130 Cal.App. 683, 20 P. (2d) 972, and need not be repeated herein; and that the Legislature has no power to give a preference to one bondholder over another bondholder is likewise fully considered and discussed in the case of Rivers Farm Co. v. Gibson, 4 Cal.App.(2d) 731, 42 P.(2d) 95, and a reference thereto we deem sufficient without repeating the language used therein or again citing the authorities there relied upon.

The amendment to section 52, supra, purports to limit the power of the district to purchase “any of its bonds not then due,” attempting to give a preference prohibited by section 21 of article 1, of the Constitution, which inhibits the Legislature from granting to any citizen or class or citizens privileges or immunities which shall not be granted to all citizens.

While the Legislature has power under the authorities to alter the remedy for the enforcement of a contract, it does not under the authorities possess the power to so alter the remedy for the enforcement of a contract as to exclude any of the contracting parties from privileges and immunities granted to other parties. Nor has the Legislature authority to so amend acts under which bonds are issued and sold so as to exclude any method of redemption which has been provided for in the act under which the bonds have been issued and sold, and any such legislation is inoperative and ineffective as to bonds issued prior to the legislative act taking away such provision.

The complaint further alleges that the defendants had knowledge of all the matters alleged in the complaint showing the illegality of the transaction. We do not need to cite authorities to the effect that an irrigation district and its board of directors possess only such powers as are specified in the irrigation laws, and that those powers must be exercised in the mode prescribed therein. With these preliminaries we will take up the different points urged by the respondents against the sufficiency of the amended complaint to state a cause of action.

It is first contended that the allegation in the complaint that the district had duly and legally issued its 6 per cent. series coupon bonds is a conclusion of the pleader. This contention was squarely answered by this court in its opinion in the case of Jordan v. Williams Irrigation District, 13 Cal.App.(2d) 465, 57 P.(2d) 566. It was there held that such an allegation was sufficient as against the general demurrer. To the same effect is the case of Frasch v. London, etc., 213 Cal. 219, 2 P.(2d) 147.

The respondents rely mainly upon the case of Noble et al. v. Provident Irrigation District et al., 10 Cal.App.(2d) 284, 51 P.(2d) 896. There the action sought to compel the conveyance to the district of lands alleged to be in default in the payment of delinquent assessments for more than three years. That was an action in invitum, and this court held that, in order to determine the right to the relief demanded, an investigation of the proceedings leading up to a tax sale would have to be made and should be set forth in the complaint. That case is readily distinguishable from the pleading in the instant case. Here, the pleading is governed by the provisions not alone of the cases which we have cited, but also by section 459 of the Code of Civil Procedure, where it is said: “In pleading the performance of conditions precedent under a statute or an ordinance of a county or municipal corporation, or of a right derived therefrom, it is not necessary to state the facts showing such performance, but it may be stated generally that the party duly performed all the conditions,” etc.

Following the case of Jordan v. Williams Irrigation District, supra, it must be held that the objections urged on demurrer to the complaint in this particular are not well taken.

It is next contended that the complaint is in the nature of a creditor's claim, and that the bondholders of an irrigation district have no lien on any of the property of the district or the lands in the district, and are merely creditors, citing section 33 of the California Irrigation District Laws (St.1897, p. 265, as amended by St.1935, p. 1589) which reads: “Said bonds and the interest thereon shall * * * be paid from revenue derived from an annual assessment upon the land within the district, and all the land within the district shall be and remain liable to be assessed for such payments, as hereinafter provided.” It may be stated that the cases cited in support of the contention of the respondents do not establish the fact that this is an action in the nature of a creditor's claim. While the cases cited do show that the bondholders may, under the California Irrigation District Laws, compel certain actions, this is not an action to recover a certain sum of money and have it specifically applied to the payment of any particular claim or bond or interest coupon owned by the plaintiff. It is an action to recover for the benefit of the district moneys alleged to be illegally expended. Speaking generally, we conclude that it is the right of every bondholder to insist in a court of equity that the moneys of the district be expended legally, and that any moneys illegally expended be recovered for the benefit of the district.

It may be further stated that this is not an action to discover and apply property in payment of a judgment of creditors' claim, but is simply an action to enforce the refunding of money alleged to be illegally and improperly disbursed.

Again, all the property belonging to the district, including the proceeds derived from the leases of lands which have been conveyed to the district, constitute trust properties. Thus, as stated in substance in 65 C.J. p. 936, where trust funds have been diverted, they may be followed, and, if identified, recovered. Equity will follow trust funds wherever they may be found. The cases are so numerous in support of the foregoing statements that we do not need to cite them.

Again the respondents call our attention to the provisions of section 47 of the California Irrigation District Laws (St.1897, p. 270, as amended by St.1935, p. 482), which specifies that, where property has been sold to the district and a deed has been given to the district as a purchaser, such district shall have the same rights thereto, and to the rents, issues, and profits thereof, as a private purchaser, and that the title so acquired by the district may be conveyed by a deed executed and acknowledged by the president and secretary of the board of directors, etc. This does not change the character of the property; this does not relieve the property from the trust imposed upon it that the property shall be used for the benefit of all persons interested in the district. In other words, while it may not be urged that property so acquired is held exclusively in trust for the benefit of the bondholders, it may, we think, be properly urged that such property is held, as well, in trust for the benefit of the bondholders, as for any of the other purposes mentioned in the California Irrigation District Laws.

Section 29 of the California Irrigation District Laws (St.1897, p. 263, as amended by St.1935, p. 463) reads in part: “The legal title to all property acquired under the provisions of this act shall immediately and by operation of law vest in such irrigation district and shall be held by such district in trust for and is hereby dedicated and set apart to the uses and purposes set forth in this act.” The purposes of the act, among many other provisions, do specifically mention the payment of its bonded indebtedness and of the interest coupons, as well as the general expenses of conducting the operations of the district.

In this particular our attention is called to some of the cases which state that under the California Irrigation District Laws bondholders have the right to enforce their demands solely by an annual assessment on the lands of the district, etc. It is true that the Irrigation District Laws, in mentioning the remedies of bondholders, include nothing further, by express provisions, than the right to enforce the levy of assessments. But as a necessary corollary thereto the right to enforce collection would necessarily follow.

The contention of the respondents that such is the only remedy of a bondholder would, if carried to its ultimate conclusion, result in the complete effacement of the bondholders. Thus, if all of the lands were allowed to go delinquent on account of assessments, to pay interest coupons or bonds falling due, and by sale and purchase become vested in the district, a complete elimination of the bonded indebtedness would be effected if the proceeds of the lands so reverting to the district are beyond the reach of the bondholders. We think this statement, which shows how the argument of the respondents would lead to a complete repudiation of the bonded indebtedness of the district, is a complete answer to the statement that equity will not lend its aid to enforce the rights of the bondholders as against the proceeds of lands which have gone delinquent and the title to which has been vested in the district for and on account of assessments levied to pay the bonded indebtedness of the district.

The same principles which this court followed in the case of Rivers Farm Co. v. Gibson, 4 Cal.App.(2d) 731, 42 P.(2d) 95, 100, are applicable here. This court there said: “Assessments collected are public funds, impressed with a trust in favor of bondholders.” The exception which we have noted is to the effect, as set forth in section 29, supra, that the moneys in the hands of the board of directors of an irrigation district, arising as proceeds of leased lands, are impressed with a trust in favor of all of the purposes mentioned in the act, which necessarily includes the payment of the bonded indebtedness of the district. We do not need to cite other authorities than 65 C.J. p. 690, that the rents, issues, and profits derived from trust properties follow the corpus and become a part of the trust funds.

Section 29, supra, we think brings the instant case squarely within the provisions of Rivers Farm Co. v. Gibson, supra. In that case the court was considering what constitutes trust property, and there said: “The section of the Code and the cases which we have just cited we think clearly establish the following propositions: First. That the trust consists of all moneys regularly paid upon installment calls; second, all moneys derived from the sales of land on account of delinquencies, including all moneys received on account of redemptions therefrom; third, all moneys derived from the resale of lands purchased by the treasurer as trustee for the bond fund, or as trustee for the district; fourth, the land itself, or the corpus of all parcels or tracts bought in by the county treasurer, and subsequently deeded to himself under the title of trustee for the district.” All that is needed to make this language applicable to the instant case is the substitution of the proper officers in the place of the officers referred to in the Gibson Case. The principle is exactly the same, save and except as the property is held in trust for somewhat more extensive purposes. In this particular we may also cite the case of Shouse v. Quinley, 3 Cal.(2d) 357, 45 P.(2d) 701.

The mere fact that the board of directors of the district placed the proceeds derived from the leased premises in the general fund instead of in the bond fund did not render such proceeds surplus funds or make such funds available for the purchase of bonds, without any attempt to comply with the provisions of the California Irrigation District Laws, setting forth the mode and the measure of the powers of the board in the purchasing of bonds.

Section 39a of the California Irrigation District Laws (St.1897, p. 254, as added by St.1917, p. 765) provides that, when the assessments are collected, the moneys paid into the district treasury shall be apportioned to the proper funds. In the instant case the delinquency occurred in the failure to pay that portion of the assessment which had been levied for the purposes of paying the indebtedness of the district, evidenced by the bonds and the interest coupons thereon, and the board of directors could not, by disregarding this fact, place the whole sum in what was called the general fund, and call it surplus, and then disburse the same as alleged in the complaint. If such sum is not available as trust funds for the payment of interest coupons long due, then, as we have stated heretofore, the door is opened for the repudiation of the bonded indebtedness of the district.

All of the parties engaged in the illegal transaction relative to the sale and purchase of the bonds referred to in the complaint are necessary parties to the action and are liable for any illegal diversion of the funds of the district.

As against the general demurrer, we think the amended complaint states a cause of action.

The judgment of the trial court is reversed, with directions to overrule the demurrer interposed by the defendants and allow the defendants to file answers, if so advised, within such reasonable time as the court may fix.

Mr. Justice PLUMMER delivered the opinion of the court.

We concur: PULLEN, P. J.; THOMPSON, J.