CO. (S. Ct. 1902). CITY OF NORTHPORT, Respondent,
vs.
NORTHPORT TOWNSITE COMPANY, Appellant
No. 4006
SUPREME COURT OF WASHINGTON
27 Wash. 543, 68 P. 204
March 10, 1902, Decided
Appeal from Superior Court, Stevens County. -- Hon. WILLIAM E.
RICHARDSON, Judge.
CONTRACTS -- AGAINST PUBLIC POLICY -- INTEREST OF OFFICER IN CITY
CONTRACT.
The interest of a councilman in a contract entered into by the
city for the improvement of a street is established when it
appears that such councilman was at the time a large stockholder
and business manager of a lumber company, and that as such
business manager he sold to the contractor the material to
construct the improvement under an agreement to receive the
improvement warrants in payment therefor.
CONTRACTS -- ENFORCEMENT OF ASSESSMENT FOR STREET IMPROVEMENT --
ESTOPPEL -- VALIDITY OF CONTRACT.
The fact that a property owner stood by and allowed the city to
improve a street upon which his property abutted, without raising
any objection to the letting of the contract or the levy of the
assessment would not estop him in an action to enforce the
assessment from setting up the illegality of the contract by
reason of the interest of a member of the city council therein,
since, under Bal. Code, § 968, which forbids city officers from
being interested in city contracts, and provides that "any claim
for compensation for work done, or supplies or materials
furnished, in which any such officer is interested, shall be
void, and, if audited and allowed, shall not be paid by the
treasurer," such contract is shorn of all equitable features, and
the duty imposed on the court of declaring the contract void,
whenever its illegality appears from the evidence.
CONTRACTS -- RULE APPLICABLE TO STOCKHOLDER.
The interest of a stockholder of a corporation in corporate
contracts brings such stockholder within the reason of the rule
prohibiting a city officer from being interested as an individual
in the city's business.
C. S. Voorhees, Reese H. Voorhees and D. H. Carey, for appellant.
J. C. Harkness and J. A. Kellogg, for respondent.
REAVIS, C.J. DUNBAR, WHITE, HADLEY, ANDERS and MOUNT, JJ.,
concur. REAVIS
{*544} Suit by plaintiff city to enforce a local assessment lien
levied for sidewalk improvements along certain streets in the
city of Northport. The local assessments seem to have been duly
levied for the improvements made, and upon the abutting property
owned by the defendant. The complaint sets out the facts showing
the regularity of the proceedings and the validity of the
assessment, and demands the foreclosure of the assessment lien.
The answer does not deny the regularity of the assessment, but,
for defense, alleges that a member of the city council (W. S.
Rose) was interested in the contract for the improvement made
between the city and the contractor, A. K. Ogilvie. Judgment was
for the plaintiff.
The court, among other things, found that there was no agreement
or understanding existing between the said A. K. Ogilvie, when
the contract for the improvements hereinbefore set forth was
awarded by the city council of plaintiff city, and W. S. Rose,
that the profits arising from said contract should be divided
between the said Ogilvie and the said Rose, and, further, that
there was no agreement or understanding between the said Ogilvie
and the said Rose whereby the said Rose was or became interested,
directly or indirectly, in the contract entered into between
{*545} plaintiff city herein and the said A. K. Ogilvie, and that
there was no agreement or understanding between the said A. K.
Ogilvie and the said W. S. Rose that, in the event of the
contract hereinbefore referred to being awarded to the said A. K.
Ogilvie, the said Ogilvie should purchase the lumber to be used
in the work done under said contract from the Crown Lumber
Company. These findings were excepted to by defendant. The court
found, in substance, that there was but one bid made for the
construction of the improvements, and but one bid considered
before the council, and that Ogilvie was the only bidder; that it
was provided in the contract for the payment of Ogilvie that he
should accept city warrants in payment for the work; that the
council consisted of seven members, one of whom was W. S. Rose;
that there were only four members present when the contract was
awarded, and that Rose, as one of the four, voted to accept the
bid and let the contract to Ogilvie, and that the improvements
were made under said contract; that at the time the bid was
accepted, and the contract let under which the improvements were
made, said W. S. Rose, a member of the council, was the manager
of the Crown Lumber Company, a corporation engaged in the lumber
business in the city of Northport, and was also a stockholder in
such corporation to the extent of 1,600 shares out of a total
capital stock of 10,000 shares, and that he was such manager and
stockholder for at least four months prior to the execution of
the contract with Ogilvie; that there were only two other
stockholders in said corporation, and that the three stockholders
of the company, including Rose, were desirous of supplying the
lumber necessary to be used in making the improvement; that the
stockholders, including Rose, met together frequently to discuss
the sale of lumber by the corporation to be used in {*546} the
improvements, and said Rose, as manager of the corporation, did
sell for the company to Ogilvie, all of the lumber needed for and
used in the making of the improvements at a price of $ 11.60 per
thousand feet, being in the aggregate $ 2,180.26; that said Rose,
as manager of the corporation, agreed to and did receive in
payment for said lumber from Ogilvie the warrants of the city of
Northport issued under the contract for improvements, and
received by Ogilvie in payment for said improvements; that the
Crown Lumber Company was the only dealer located in the city
engaged in the sale of lumber at and prior to the time the
contract was executed; that, prior to the bidding for the
construction of the improvement, Ogilvie and Rose had at least
two conversations relative to the sale of the lumber needed to be
used in the improvements, and it was understood and agreed that
the Crown Lumber Company would sell lumber to Ogilvie for said
improvement in the event Ogilvie's bid should be accepted, and
that the lumber company would accept warrants of the plaintiff
city from Ogilvie in payment for the lumber, and it was further
agreed between Rose and Ogilvie, prior to the bid made by
Ogilvie, that the price at which the company should sell the
lumber of Ogilvie was $ 11.60 per thousand, as required for said
improvements; that, at the time of the allowance of the claim to
Ogilvie for the construction of the improvements under his
contract with the plaintiff city, W. S. Rose was still manager of
the Crown Lumber Company, and a stockholder therein, as before
mentioned, and was a member of the council of the plaintiff city.
Section 968, Bal. Code, relating to municipal contracts, is as
follows:
"No officer of such city shall be interested, directly or
indirectly, in any contract with such city, or with any of {*547}
the officers thereof, in their official capacity, or in doing any
work or furnishing any supplies for the use of such city or its
officers in their official capacity; and any claim for
compensation for work done, or supplies or materials furnished,
in which any such officer is interested, shall be void, and if
audited and allowed, shall not be paid by the treasurer. Any
wilful violation of the provisions of this section shall be a
ground for removal from office, and shall be deemed a
misdemeanor, and punished as such."
In view of the issue presented by the defense as stated in the
answer, it is not material to specially review the findings of
fact excepted to by the defendant. The evidence has been
examined, and we are satisfied that the findings of fact made by
the superior court negativing any interest of councilman Rose in
the contract for the local improvement cannot be approved. The
salient fact mentioned, and found by the court, that Rose, while
a member of the city council, was also a large stockholder and
was business manager of the Crown Lumber Company, and that as
such business manager he sold to Ogilvie, the contractor, the
material to construct the improvement under the contract, and
made the agreement to receive the improvement warrants in payment
therefor, is sufficient to establish the fact that the councilman
was interested in the contract, and the evidence in the record
amply sustains such conclusion.
It is urged by counsel for respondent that defendant ought not to
be permitted to urge this as a defense to the payment of the sum
justly charged against its property for the improvement,
especially as it did not at any time object to the contract, or
to the proceedings for the assessment and the issuance of the
warrants in payment for the improvement; that, in equity,
defendant should now be estopped from showing the illegality of
the contract; that, remaining passive until the property was
improved, defendant {*548} should not now be allowed to relieve
itself from the payment for benefits received by it. A number of
authorities are submitted by counsel to support this view of the
case. Among them are Grand Island Gas Co. v. West, 28 Neb. 852
(45 N.W. 242); Currie v. School District, 35 Minn. 163 (27 N.W.
922); Pickett v. School District, 25 Wis. 551 (3 Am. Rep. 105);
Lucas County v. Hunt, 5 Ohio St. 488 (67 Am. Dec. 303); Argenti
v. San Francisco, 16 Cal. 256; Call Pub. Co. v. Lincoln, 29 Neb.
149 (45 N.W. 245); Mayor, etc., v. Huff, 60 Ga. 221. In the
Nebraska cases mentioned, the interpretation seems to have been
given to the statute of that state which was before the court,
that contracts in which a public officer was interested were not
absolutely prohibited, but were left optional for the
municipality to affirm or repudiate at its pleasure, and that, if
affirmed, and property or things of value were received under the
contract, and retained for the benefit of the municipality,
reasonable compensation should be made therefor. In the Wisconsin
case no statutory prohibition against such contracts is
mentioned. The reasons stated in most of the opinions in the
cases mentioned are founded upon the construction of the rule of
public policy involved. The general public policy upon which the
statute (§ 968, Bal. Code) is founded is of ancient origin, and
has been inexorably enforced by the courts throughout the history
of the common law. It is that principle which requires the
trustee to always occupy a position that shall be free from the
dictates of any interest that may conflict with the obligations
of his trust. It is said by Judge DILLON (1 Dillon, Municipal
Corporations [4th ed.] § 444):
"The principle generally applicable to all officers and directors
of a corporation is that they cannot enter into {*549} contracts
with such corporation to do any work for it, nor can they
subsequently derive any benefit personally from such contract."
See, also, Michoud v. Girod, 4 How. 503, and Marsh v. Whitmore,
21 Wall. 178. Our statute declares this policy, and, in plain
terms, absolutely prohibits such contract. The statute is plainly
punitive. It declares such contract void, not merely voidable,
and further declares that any claim for compensation for work
done or supplies and materials furnished shall be void, and that,
even if audited and allowed, it shall not be paid. The statute
seems to have shorn such a contract of all equitable
considerations, when it declares that compensation shall not be
paid by the treasurer. It is, then, not a question of any right
of the defendant to challenge the validity of the contract; but,
under the statute, the duty is imposed upon the court, at its own
instance, when the facts appear, to inquire into the legality of
the contract, and, if it falls within the inhibition, to declare
it void.
Long experience has taught law makers and courts the innumerable
and insidious evasions of this salutary principle that can be
made, and therefore the statute denounces such a contract if a
city officer shall be interested not only directly, but
indirectly. However devious and winding the chain may be which
connects the officer with the forbidden contract, if it can be
followed and the connection made, the contract is void. It would
seem that the interest of a stockholder of a corporation brings
such stockholder within the reason of the rule prohibiting an
officer from being interested in the city's business. San Diego
v. San Diego & L.A.R.R. Co., 44 Cal. 106; 1 Greenleaf, Evidence
(14th ed.), § 333; Mechem, Public Officers, 839; Currie v. School
District, supra; People v. Township Board, 11 Mich. 227.
{*550} But what was the interest of the councilman in the case at
bar? His company was to furnish the material to construct the
improvements. This arrangement was virtually made before the
contract was let. The councilman was a stockholder and the
manager of the lumber company. He received his proportion of the
profits of the purchase price of the material sold to the
contractor, and, further, he took his pay in these improvement
warrants. It is not necessary to further pursue the discussion of
his interest than to observe that he was a party beneficially
claiming the payment of the warrants. It is not to be supposed
that he would have been unaffected as a member of the council
when the validity and amount of the claims for the construction
of the improvement were submitted to the council for approval. In
fine, the councilman was placed in an attitude where his personal
interests might conflict with his fiduciary relations. This
attitude, as has been observed, the law prohibits, and the
penalty is visited upon all connected with the transaction. A
very pertinent and well-considered decision is that of Hunnings
v. Williamson, 11 Q.B. Div. 533. There the defendant's brother
entered into a contract to do work for a vestry, when the
brother, being in need of funds to carry out the contract,
borrowed money from the defendant, and, by way of security,
assigned the benefit of the contract to him. The defendant was at
the time a member of the vestry. To the objection that the
defendant was not interested in the contract, the court answered:
"A third objection urged was that there was no sufficient
evidence, that the defendant was 'interested' in a contract made
with the vestry. Under s. 54, in order to render the defendant
liable, he must have been 'concerned or interested in' some
'contract or work made with or executed for such . . . vestry.'
In the present case {*551} we have to consider whether the
defendant was interested in a contract within the meaning of s.
54. It has been contended that as the defendant merely lent money
to his brother in order to enable him to carry out the contract,
and merely took an assignment of it by way of security for
repayment of his loan, he was not 'interested' in the contract;
but surely it was much to the defendant's 'interest' to promote
the fulfillment of the contract, in order that he might obtain
repayment of the money which he had advanced. I think that the
defendant was 'interested' in the contract within the meaning of
s. 54."
The judgment is reversed, with directions to the superior court
to enter judgment for the defendant.
DISPOSITION
Reversed.
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