BOND v. CITY OF PASADENA (1935)

The question presented on this appeal concerns the right of a municipality to refuse payment of money admittedly due on account of street improvements to the assignee of a contractor, upon the ground that the assignor is indebted to the city upon a judgment in its favor upon a claim arising out of other street improvement contracts . The facts are undisputed.

In 1926, Ducey & Breitenstein entered into contracts with the city under the provisions of the Municipal District Improvement Act of 1915 (Stats. 1915, p. 99), for the improvement of certain streets. After the work was completed and they had been paid the amount fixed by the contracts for the work, the city commenced an action against them to recover overpayments and double payments alleged to have been made. In this action judgment was entered in favor of the city for the sum of $43,156.18 and interest.

After the work under these contracts was completed and accepted and before the judgment was secured against them, Ducey & Breitenstein were awarded a contract by the respondent city for the improvement of Lake avenue under the provisions of the Improvement Act of 1911. Deering's Gen. Laws, 1931 Ed., Act 8199. The contract was made on June 12, 1929, and on August 26, 1929, appellants took an assignment thereof as security for loans and advances and to carry into effect a purchase contract for the assessments and bonds to be thereafter issued.

Under the charter of the respondent city, the cost of improving street intersections is not assessed against property owners, but is paid out of its general or other appropriate fund. After the work was completed and accepted, the city delivered to the appellants its warrant, assessment, and diagram under which the amount payable by the city for the work at intersections was determined to be the sum of $13,213.01. Appellants duly filed with the city their demand for this amount, which demand was rejected upon the ground that appellant's assignors were indebted to the city in an amount more than the demand. Whether or not appellants are entitled to payment under these circumstances is the sole question to be determined.

The charter of the respondent city provides: “No demand shall be approved by the City Controller [Auditor] in favor of any person or officer, or the assignee of any person or officer, who is indebted to the city without first deducting the amount of such indebtedness.” Stats. 1901, p. 884, as amended; Pasadena City Charter (1933) art. 11, § 5 (St. 1933, p. 2782, § 5). An ordinance of the city of Pasadena (No. 1924) requires all demands upon the city treasury to be presented to the city controller, whose duty it is to verify the same as to validity and accuracy. Appellants contend that these provisions are not applicable to them in the present situation because their claim is payable from the general funds of the city, while the judgment rendered in its favor against their assignors was obtained by the city in a trustee capacity and may not be set off against it for that reason.

The Municipal District Improvement Act, supra, provides that: “Any portion of a municipality incorporated under the laws of this state may be formed into a municipal improvement district for the purpose of creating an indebtedness, to be represented by bonds of said district, the proceeds from the sale of which shall be used for the acquisition or construction therein of any public improvement work or public utility which such municipality is authorized by law to acquire or construct.” Section 1. It also provides that such a district may be formed upon petition of the electors residing in the territory proposed to be formed into the district; that the municipal legislative body shall thereupon call an election for the purpose of submitting the formation of the district to them; and that if the proposal is approved, the work shall be done under contract made with and under the supervision of that body. Under the act the legislative body is authorized to issue and to sell the bonds of the district, “and the proceeds of the sale of such bonds shall be placed in the treasury of such municipality to the credit of the proper district fund and shall be applied exclusively to the purposes and objects mentioned in the ordinance or resolution ordering the holding of the bond election as aforesaid.” St. 1915, p. 103, § 8.

It is a fundamental principle of law that the streets of a city are held by it in trust for the public. The measure of authority of the respondent city over its streets is to be found in its charter. “But whatever rights the city may have over its streets, by virtue of constitutions or statutes, its powers are essentially those of a trustee for the benefit of the cestui qui trust (the public), liberally construed for its benefit, strictly construed to its detriment.” McQuillin on Municipal Corporations (2d Ed.), vol. 1, p. 638. This is particularly true where the city is acting in behalf of an improvement district formed under the provisions of the act referred to. Under it the city does not initiate the proceeding, but acts at the pleasure of and for the benefit of the citizens and property owners within the district. The proceeds of the sale of the bonds authorized to be issued for the work must be used exclusively for the payment of the public work undertaken, and, as such, constitute a trust fund. Any amount received by the city in satisfaction of the judgment would become a part of such fund. The indebtedness represented by the judgment is, therefore, due to the respondent city as trustee for the benefit of the property owners within the municipal improvement districts.

While not entirely controlling, it may be observed that the city sued Ducey & Breitenstein in the capacity of trustee. In the complaint upon which it secured judgment it alleged: “That as to the public improvement proceedings herein set forth, and as to the supervision over and payment for the performance of the said contract No. 1203, the City of Pasadena was and now is trustee and has acted and now acts as trustee for the owners of the taxable property within the said Municipal Improvement District No. 3 in so far as such owners have become burdened with the obligation of the bonds of the said district issued and sold as hereinbefore alleged.” It is the judgment based upon these allegations which it now seeks to set off against plaintiff's claim.

The essential basis of the right to set-off is mutuality. “Not only the parties but the debts must be mutual. The principle of mutuality requires that the debts should be due to and from the same persons, in the same capacity.” 23 Cal. Jur. 262; see, also, 24 R. C. L. 858. “In order to warrant a set-off, ‘the debts must be mutual, and the principle of mutuality requires that the debts should not only be due to and from the same person, but in the same capacity.’ 19 Cyc. 894. The trustee in bankruptcy held these stock liabilities, as above stated, as trust funds for the benefit of creditors. They are not held by him in the same capacity as would be the case if the corporation was not insolvent and had itself sued the stockholder for his subscription, hence a set-off is not permitted.” Kaye v. Metz, 186 Cal. 42, 49, 198 P. 1047, 1049. The city admits that such is the general rule, but takes the position that it cannot apply in this case because of the language of its charter that “no demand shall be approved * * * in favor of any person * * * or the assignee of any person * * * who is indebted to the city.” However, the city cannot by its charter provisions take away property of an individual by refusing to pay its just debts, where no right of set-off exists.

The judgment is reversed, and as respondent city has admitted by its answer that its board of directors by resolution authorized the payment of the sum of $13,213.01, and that plaintiff has duly presented its claim therefor, the trial court is directed to enter judgment in favor of the plaintiff for said sum.

PER CURIAM.