Tulare Irrigation District v. Shepard

Messrs. George H. Maxwell, John Garber, Calvin L. Russell, G. W. Zartman, and R. M. F. Soto for plaintiffs in error.

Mr. S. F. Leib for defendant in error.

Statement by Mr. Justice Peckham:

This is a writ of error to the circuit court of the United States for the southern district of California, sued out for the purpose of reviewing a judgment of that court in favor of the defendant in error in an action brought by him against the irrigation district only, to recover interest due on certain coupons attached to bonds issued by the district for the purpose of raising money to build its irrigation works. It appeared from the complaint that the plaintiff was a resident of Michigan, and that the Tulare irrigation district had at all times since September 2, 1889, been a corporation duly incorporated under the laws of the state of California, and since that time had been acting as such corporation; that under the laws of such state the irrigation district duly issued its bonds for the amount of $500,000, with coupons attached; that the plaintiff was a bona fide purchaser and holder of certain of those coupons, and that he had paid full value for the same, in the usual course of business, and before any of them were due or dishonored, and in good faith and without any notice of any defect or invalidity of the same or any of them. Judgment for $13,185 and interest was demanded. The defendant demurred to the complaint, the demurrer was overruled (94 Fed. 1), and the defendant then answered.

The answer, among other things, set up which occurred in the attempted formation of the irrigation district, on account of which, as contended, the corporation never was legally formed and never had power to issue bonds, and whatever bonds may have been issued were for those reasons void. The individual defendants at this stage applied to the court for an order permitting them to intervene in the action as parties therein, and to unite with the defendant corporation in resisting the claims of the plaintiff in this action. The court thereupon ordered that the petitioners' complaint in intervention should be filed without prejudice to the plaintiff's motion to strike out the same. They then filed what they termed their complaint in intervention in this action (which is nothing more than an answer to the complaint), in which they set up that the defendant Kelly was a citizen of the United States and a resident of the state of Massachusetts, and that ever since January 1, 1889, he had been, and was at the time of the commencement of the suit, the owner of the land which is described, and which was situate within the boundaries of the county of Tulare, California, and within the boundaries of the alleged Tulare irrigation district; that Jauchius, the other defendant, was a citizen of the United States and a resident of the state of California, and that he, ever since January 1, 1889, had been the owner of certain tain other described real property also situate in the district, and they alleged that they were interested in the subject-matter of the action and in the success of the defendant; that if the bonds and coupons mentioned in the plaintiff's complaint were adjudged valid claims against the district, then the property of interveners in the district would be assessed and taxes levied thereon to pay the claim of the plaintiff. They then set up substantially the same defenses that were pleaded by the irrigation district in its answer; also, that to permit the collection of the bonds would take defendants' property without due process of law and in violation of the Federal Constitution.

The chief defect as set up in both pleadings and specially argued here was in regard to the organization of the district, the defect being an alleged insufficiency of the notice of the intended presentation of the petition to the board of supervisors, by reason of which, as averred, no legal notice was given, and, therefore, all subsequent proceedings were void and of no effect. Subsequently to the service of the answer Jauchius died, and his executor was made a party in his place.

The case came to trial upon a stipulation to waive a jury, was submitted upon an agreed statement of facts, and thereafter the court made its general findings in favor of the plaintiff, assessed his damages at the sum of $13,185, and ordered judgment against the irrigaton district for that sum.

It was stipulated that any of the facts contained in the statement might be offered in evidence by any party to the action, and when so offered the party not offering the same might object to such facts or any of them upon legal grounds which might exist against their admissibility. The statement of facts contained twenty-one paragraphs. The first twelve were offered in evidence on the part of the plaintiff, and received by the court under the defendant's objection and exception. The facts thus admitted showed that under the provisions of the irrigation act of the state of California, approved March 7, 1887, an effort was made in the county of Tulare to form an irrigation district to be known as 'Tulare irrigation district,' and such proceedings were had in that behalf that what purported to be a certified copy of an order of the board of supervisors of that county was duly filed with the county recorder on September 14, 1889; that order recited that the board of supervisors of Tulare county, state of California, met as a board of canvassers on Monday, September 2, 1889, for the purpose of determining the result of the special election held in Tulare county on August 24, 1889, to vote upon the subject of the organization of the Tulare irrigation district and officers therefor, by which it appeared that there were 484 votes cast in favor of forming the district, and 7 against it. The order then continued as follows: 'And we further declare the territory embraced in the following described limits, to wit: [describing territory] an irrigation district duly organized under the name and style of 'Tulare irrigation district,' being situate in the county of Tulare, state of California.' This declaration was made in accordance with § 3 of the act to form irrigation districts. The order further declared the election of the directors in the various divisions of the district.

The material sections of the act under which the attempt to form the district was made are to be found set forth in the case of ''Fallbrook Irring. Dist. v. Bradley'', 164 U.S. 112, 116, 17 L. ed. 369, 370, 17 Sup. Ct. Rep. 56.

The persons declared by the order of the board of supervisors to have been elected as officers of the district immediately thereafter assumed to organize as such officers, and thereupon entered upon their duties the same as though said district had been legally organized and as though they had been legally elected as such officers, and they and their successors in office have ever since continued to act as such officers and to maintain the name of 'Thlare irrigation district,' and in its name have caused the defendant to act as though it was in every respect legally organized as an irrigation district under the act of the legislature, and in that behalf it has at all such times had the name 'Tulare irrigation district' printed upon a sign above a door in front of an office in which the archives and papers of said defendant are kept; and its board of directors have met from time to time in such room from the time of such purported organization thereof until the present weekly and sometimes oftener, averaging twice a month. In June, 1890, pursuant to the provisions of the statute, an election was held within the district to determine whether its bonds should be issued, resulting in favor of issuing the same, and in the years 1891, 1892, 1893 its board of directors purported to issue bonds of such Tulare irrigation district in the sum of $500,000, being 1,000 bonds of the face value of $500 each, and levied assessments on the property embraced in said district, purporting to act in so doing under the act of the legislature, and previous to July 1, 1896, it assessed, levied, and collected taxes upon the lands in such district of over $100,000, and paid the same out through its treasurer as interest upon such bonds; the proceeds arising from the sale of the bonds have been used by the district in constructing a system of canals, ditches, and laterals through the lands of the district, by means of which such lands have been irrigated; it has engaged in litigation as plaintiff in suits before the issuing of such bonds, and therein alleged that it was a corporation under the provisions of the act of the legislature, and from the time of its purported organization until the present time, whatever it has done and performed, it has done and performed in the same manner as if it had been legally organized as such district, in full compliance with the law, and so continues to act and hold itself out as a corporation organized under that law. No one ever brought suit or took any action to prevent the issuing of any of the bonds, nor was any suit or action ever brought to annul or cancel or have declared void any of the bonds until after the year 1896. No action in the nature of a quo warranto was ever commenced, nor any other proceeding, to test the validity of the organization of the district.

The plaintiff at the commencement of the action was the holder and owner of the coupons upon which action was brought, and became the holder of the coupons on whch he brought his action under the circumstances detailed in the agreed statement of facts, showing that he was a bona fide holder for value without notice.

The plaintiff also offered, and the same was received, in evidence, the judgment roll in the Matter of Tulare Irrigation District, in the superior court of Tulare county, which was a proceeding under what is called the California confirmation act in regard to irrigation districts, and which is mentioned in Tregea v. ''Modesto Irrig. Dist.'' 164 U.S. 179, 181, 41 L. ed. 395, 396, 17 Sup. Ct. Rep. 52. The proceedings under this confirmation act showed a judgment of the court confirming the validity of the organization of the district. This was duly objected to, and received under the exception of the defendants. After some oral evidence had been given in regard to the execution of the bonds by the officers of the district, the plaintiff rested.

The defendants then offered separately each of the remaining paragraphs from thirteen to twenty-one, both inclusive, in the agreed statement of facts, and each, under the objection of the plaintiff and exception of the defendants, was excluded. From the facts thus offered it appears that a petition addressed to the board of supervisors of Tulare county was on July 1, 1889, filed with the board at a regular meeting; that this petition was printed and published prior thereto for two weeks during the month of June, 1889, and in a newspaper printed and published in Tulare county. The petition contained a statement that the petitioners were freeholders owning land within the district which was described in the petition, and that it was all situated within Tulare county, and that the petitioners desired to provide for the irrigation of the same; that the proposed district as described was susceptible of one mode of irrigation from a common source and by the same system of works, by conveying the waters of Kaweah river by means of dams thereon and by main and distributing canals therefrom. The petitioners prayed that the district described in the petition be organized into an irrigation district under the act of the legislature of California approved March 7, 1887. The petition then gave the boundaries of the proposed district, and asked that it be designated as the Tulare irrigation district. The petition was signed at the end thereof, each petitioner stating the number of acres owned by him. Following these signatures was a paper like this:

Notice.

Pursuant to the statutes in such cases made and provided, notice is hereby given that the above and foregoing petition will be presented to the board of supervisors in and for the county of Tulare, at their first regular meeting in the month of July, 1889, to wit, on Monday the 1st day of July, 1889, at which time any person or persons desiring so to do may present their objections, if any they have, why said petition should not be granted.

The signatures to the petition were not repeated at the end of the notice. This notice was in the same type as the petition, and in the newspaper it was inclosed, with the petition, between two black lines across the column, the first at the head of the petition and the last at the end of the notice.

The alleged defect in this publication consists in the fact that although the petition was printed in full and the names of the signers with the number of acres owned by them follow the petition, yet as the notice of the presentation of the petition follows the signatures to such petition, and the notice is not signed by the petitioners, it lacks those essential signatures, and for that reason is not a valid notice, and becomes in law no notice whatever.

The defendants also offered in evidence a second judgment in the Matter of the Tulare Irrigation District, setting aside the former judgment of confirmation and refusing to confirm the validity of the organization of the district. The judgment was excluded upon the objection of the plaintiff. All these offered facts having been excluded, the court made a general finding in favor of the plaintiff. The individual defendants now contend that the court, in granting judgment for the plaintiff, did in effect permit the taking of their property without due process of law, in violation of the Constitution of the United States.

Mr. Justice Peckham, after making the foregoing statement of facts, delivered the opinion of the court: It is agreed in the statement of facts in this case that the moneys received from the sale of the bonds in suit were applied to building and constructing the irrigation works now in use by the defendant corporation. It has, therefore, received the full consideration for which the bonds were issued, has built its works with the proceeds, and uses such works for the purposes intended. Notwithstanding these facts, it now refuses to pay the bonds or the interest thereon, and, while acting as a corporation, at all times, still sets up that it was never legally organized, and hence had no legal right to issue any bonds.

In the case of Douglas County v. Bolles, 94 U.S. 104, 110, 24 L. ed. 46, 48, a case involving facts somewhat similar, this court said: 'Common honesty demands that a debt thus incurred should be paid.' That sentiment has lost no force by the lapse of time, and we think it applies in its full strength to this case. Unless there be some settled rule of law which prevents a recovery in this action, the judgment under review sould be affirmed.

The sole ground of defense which has been urged at the bar has been an alleged defect in the notice of the intended presentation of the petition to form the district, to the board of supervisors, the defect consisting in the omission to add at the end of the notice the names of the signers to the petition which immediately precedes it.

Section 2 of the act approved March 7, 1887, commonly called the 'Wright act' of the California legislature, provides that the petition for the organization of an irrigation district shall be presented to the board of supervisors of the county in which the lands are situated, signed by the required number of freeholders mentioned in the 1st section, which petition must describe the proposed boundaries of the district, and pray that the same may be organized under the provisions of the act. The petition must be presented at a regular meeting of the board of superivisors, and be published, for at least two weeks before the time at which the same is to be presented, in some newspaper printed and published in the county where the petition is to be presented, 'together with a notice stating the time of the meeting at which the same will be presented.' In this case a proper petition complying with the provisions of the act was made and signed by the requisite number of freeholders. The petition, with the signatures of such freeholders appended, was published in the proper newspaper, together with a notice as provided for in the act, but the signatures of the freeholders which were appended to the petition were not reproduced at the end of the notice. The petition, signatures, and notice were published in the same column and as one entire proceeding, separated from the rest of the contents of the newspaper by a black line across the column immediately preceding the petition, and another black line across the column at the end of the notice. In this way it was separated from all other matter in the paper. It is now urged that this failure to reprint the signatures to the petition at the end of the notice rendered it of no effect in law, and that the result was the same as if no notice at all had been published. It is therefore argued that the action of the board of supervisors when the petition was in fact presented and proof taken in regard to the facts stated therein, in accordance with the published notice, was without legal effect, and the determination of the board of supervisors, after a hearing before it, that some of the lands described in the petition would be benefited by irrigation, including those of the individual plaintiffs in error, was wholly without validity, because the board acquired no jurisdiction over the subject on account of the absence of notice; the board, having no jurisdiction, could make no valid determination as to the organization of the district; the district could issue no valid bonds; and the fact of the absence of notice could be shown as a defense to bonds that were issued, no matter under what circumstances the defense should arise. It was then contended that to permit a recovery would result in the takingof the property of the individual defendants by means of an assessment and without due process of law.

It is not urged here that the plaintiff below was not a bona fide purchaser for full value without notice of any defective organization or want of power in the corporation to issue the bonds. Upon the stipulation of facts no such defense could prevail. The whole force of the defense rests, therefore, upon this alleged defective notice because of the failure to reprint the names of the signers to the petition at the end of such notice. Is this such a defect as to practically amount to an absence of notice so that the board of supervisors could acquire no jurisdiction upon presentation of the petition? Certainly the notice could mislead no one. It gave full and detailed information in regard to the time and place at which the petition would be presented to the board of supervisors. It cannot be claimed that the notice itself did not give all the information provided for by the statute, and it warned all persons who might desire so to do to present their objections, at the time and place named, why the petition should not be granted. Anyone on reading the notice obtained thereby all necessary knowledge to enable him to attend at the time and place mentioned and present any objection that he might have against the granting of the petition. The petition which preceded the notice was signed by a sufficient number of landowners, and the notice which followed the signatures to the petition evidently formed part of the proceeding inaugurated by the signers to the petition to take the necessary steps to organize an irrigation district. The whole thing, petition, names of signers thereto, and notice, was published the statutory time and also posted as required. As published, it evidently formed but one proceeding, and the notice was part thereof. Could anyone fairly misunderstand the fact that the notice was part of the action of the signers to the petition, and, when precisely in accordance with the terms stated in the notice, the petition was publicly presented to the board of supervisors, was not the statute sufficiently complied with to give jurisdiction to that body to proceed to determine the facts in accordance with the provisions of the statute? Was not the notice fairly and substantially authenticated as a notice given by the signers to the petition?

In the case of ''Re Central Irrig. Dist. Bonds'', 117 Cal. 382, 49 Pac. 354, the supreme court of that state has held that the publication of a notice similar to this, unsigned and unauthenticated, was invalid, and the defect could not be cured by proof of actual notice or knowledge on the part of those to be affected thereby. It is urged that this decision of the supreme court of the state should be followed by us, because it is in effect the construction given by the state court to a statute of the state. We are not entirely persuaded that this claim is well founded. It might, on the contrary, be urged with much force that the decision was based upon principles of general law as to whether a notice presupposes by its very terms, and makes absolutely necessary in all cases, a signature at the end thereof, and it might be claimed that the case came within the principle decided in Venice v. Murdock, 92 U.S. 494, 23 L. ed. 583, where this court refused to follow the prior decisions of the court of appeals of the state of New York made in cases arising upon a New York statute and under a similar state of facts, on the ground that those decisions did not present a case of statutory construction. See also Thompson v. Perrine, 103 U.S. 806, 26 L. ed. 612. And again, the bonds in question here were issued not later than 1893, while the decision of the California state court was not made until June, 1897, and there being no other decision of the state court upon the particular point it might be reasonably maintained that the matter should be regarded as open to be decided in accordance with our own views of the subject.

We do not deem it necessary to decide the question here, because there are other facts upon which we can base our judgment without impugning the decision of the state court. Assuming, therefore, for the purpose of this case, though not deciding, that the notice was insufficient, and did not fully comply with the statute, it will be seen that the case above referred to does not decide that the question of the defective organization could be raised as against bona fide holders of bonds issued by the district. The action in that case was commenced under a California statute providing for the taking of proceedings to confirm the validity of the organization of an irrigation district, and although the statute under which an irrigation district is to be formed provides for a determination of the fact of due organization by the board of supervisors, yet the proceedings under the confirmation act are expressly directed to be had to review the determination of that board, so that there is express statutory authority to go behind that determination in that proceeding.

But assuming that the failure to sign the notice resulted in a failure to organize a de jure irrigation district, and that in a direct proceeding, such as is provided for by the confirmation act, or in a quo warranto action, the determination of the board of supervisors could be reviewed, it does not follow that such determination could be reviewed in a collateral action on the part of a bona fide holder of bonds to recover the principal or interest thereon. In the case spoken of, the supreme court of California, while deciding upon the invalidity of the organization, refused to pass upon the question whether the bonds of the district were void for the reason that proper notice was not given; and the court in refusing to decide the question remarks that 'it is not proper because some of the bonds (it is insisted) had been sold and had passed into the hands of bona fide purchasers before the institution of this proceeding. . . . After the issue and before the sale of any bonds it may well be of advantage to the district and to intending purchasers that the judgment of a court should be invoked to pass upon the regularity of the action of the district officers, but after sale different questions present themselves. The bonds are negotiable; public corporations are estopped from setting up many defenses of irregularity against the innocent holders of such negotiable securities. Whether or not the holder be an innocent purchaser and a purchaser without notice is itself a question which cannot be determined in this proceeding. From all these considerations, and others which will readily suggest themselves, it is proper, in cases where bonds of a district have been actually sold before institution of confirmation proceedings, to refuse consideration to questions of the regularity of such sales, leaving their determination to that forum before which appropriate action may be brought to test the questions, for it is only in such an action before such a court that there will be found full and unquestioned jurisdiction of the subject-matter, and of all the necessary parties, as well as power to determine all objections and defenses.' We may therefore proceed to the inquiry as to the liability of the corporation to a bona fide holder of its bonds, without further reference to the above case.

The supreme court of the state has held that irrigation districts were public municipal corporations (Central Irrig. Dist. v. De Lappe, 79 Cal. 351, 21 Pac. 825; Re Madera Irrig. Dist. Bonds, 92 Cal. 296, 14 L. R. A. 755, 28 Pac. 272, 675; Quint v. Hoffman, 103 Cal. 506, 37 Pac. 514, 777), and the statute providing for their creation has been held to be one that should be liberally construed. 79 Cal. 351, 21 Pac. 825, supra. The supreme court of California and this court have also decided that the irrigation act is a valid statute, and that it violates neither the state nor the Federal Constitution. Fallbrook Case, 164 U.S. 112-159, 41 L. ed. 369-388, 17 Sup. Ct. Rep. 56, and cases cited.

Even though the irrigation district failed to become organized as a de jure corporation, it may still have been acting as a corporation de facto. That there may be such a corporation cannot be doubted. Baltimore & P. R. Co. v. Fifth Baptist Church, 137 U.S. 568, 571, 34 L. ed. 784, 786, 11 Sup. Ct. Rep. 185; Shapleigh v. San Angelo, 167 U.S. 646, 655, 42 L. ed. 310, 313, 17 Sup. Ct. Rep. 957; see also cases decided by the Federal courts in California, Miller v. ''Perris Irrig. Dist.'' 85 Fed. 693, again reported in 99 Fed. 143; Herring v. ''Modesto Irrig. Dist.'' 95 Fed. 705; also Lamming v. Galusha, 81 Hun, 247, 30 N. Y. Supp. 767, affirmed by the court of appeals on the opinion of the court below in 151 N. Y. 648, 45 N. E. 1132; Stout v. Zulick, 48 N. J. L. 599, 7 Atl. 362; Snider's Sons Co. v. Troy, 91 Ala. 224, 11 L. R. A. 515, 8 So. 658; American Salt Co. v. Heidenheimer, 80 Tex. 344, 15 S. W. 1038; Taylor, Corp. 4th ed. § 146.

From the authorities, some of which are above cited, it appears that the requisites to constitute a corporation de facto are three: (1) A charter or general law under which such a corporation as it purports to be might lawfully be organized; (2) an attempt to organize thereunder; and (3) actual user of the corporate franchise. The case at bar contains these requisites. There was a general valid law under which a corporation such as the defendant is claimed to be could be formed, there was undoubtedly a bona fide attempt to organize thereunder, and there has been actual user of the corporate franchise. In the progress of the attempt to organize the district the determination of the board of supervisors was made, under the provisions of the statute, declaring the body to be a duly organized irrigation district. Subsequently officers were elected and took office and have ever since discharged the duties thereof under the statute, and a special election was held to determine the question of issuing bonds, and the bonds were issued pursuant to the result of such election, and suits have been commenced in the name of the corporation. In brief, if anything can constitute a de facto corporation, the defendant herein constitutes one.

The case of Norton v. Shelby County, 118 U.S. 425, 30 L. ed. 178, 6 Sup. Ct. Rep. 1121, contains no doctrine in opposition. In that case the state court of Tennessee had held that the so-called board of commissioners of Shelby county, organized under the act of March 9, 1867, had no lawful existence; that it was an unauthorized and illegal body, and its members were usurpers of the functions and powers of the justices of the peace of the county; that their action in holding a county court was void, and that their acts in subscribing to the stock of the Mississippi Railroad Company and issuing bonds in payment therefor were void. Those acts the bondholders had endeavored to sustain by claiming that they were the acts of de facto officers, and that under such circumstances it was not material whether the board of commissioners had a lawful existence or not. This court held there could be no de facto officer where the office itself had no legal existence. If there be no office to fill, there can be no officer either de jure or de facto, and as the act attempting to create the office never became a law, the office itself never came into existence; it was a misapplication of terms to call one on officer who holds no office, and a public office could exist only by force of law.

In the case now before us there was a valid law providing for the creation of just such a corporation as the defendant claimed to be. There was a bona fide attempt to organize under it, and there had been a user of the franchise, and within the authorities already cited a corporation de facto was thereby constituted.

Being a de facto corporation, the general rule is that none but the state can call its existence in question. The courts of California agree that such is the rule. People v. Montecito Water Co. 97 Cal. 276, 32 Pac. 236; Quint v. Hoffman, 103 Cal. 506, 37 Pac. 514, 777, supra; see also Cooley, Const. Lim. 4th ed. p. 312; Swartwout v. Michigan Air Line R. Co. 24 Mich. 389, 393. The rule as stated by Cooley is as follows:

'In proceedings where the question whether a corporation exists or not arises collaterally, the courts will not permit its corporate character to be questioned, if it appear to be acting under color of law, and recognized by the state as such. . . . And the rule, we apprehend, would be no different if the Constitution itself prescribed the manner of incorporation. Even in such a case, proof that the corporation was acting as such, under legislative action, would be sufficient evidence of right, except as against the state, and private parties could not enter upon any question of regularity. And the state itself may justly be precluded, on the principle of estoppel, from raising such an objection, where there has been long acquiescence and recognition.'

It was held in Shapleigh v. San Angelo, 167 U.S. 646, 42 L. ed. 310, 17 Sup. Ct. Rep. 957, supra, that none but the state could impeach the validity of the creation of a municipal organization, and that if it acquiesced therein the corporate existence could not be collaterally attacked. The court, through Mr. Justice Shiras, said: