Curb and Gutter Dist. No. 37 v. Parrish

• Decision Date: 22 April 1940
• Docket Number: No. 11544.,11544.
• Citation: 110 F.2d 902
• Parties: CURB AND GUTTER DIST. NO. 37 OF CITY OF FAYETTEVILLE, ARK., et al v. PARRISH.
• Court: U.S. Court of Appeals — Eighth Circuit

110 F.2d 902 (1940)

CURB AND GUTTER DIST. NO. 37 OF CITY OF FAYETTEVILLE, ARK., et al v. PARRISH.

No. 11544.

Circuit Court of Appeals, Eighth Circuit.

April 2, 1940.

Rehearing Denied April 22, 1940.

COPYRIGHT MATERIAL OMITTED

Clifton Wade and O. E. Williams, both of Fayetteville, Ark., for appellants.

Henry L. Fitzhugh, of Fort Smith, Ark. (Charles D. Atkinson, of Fayetteville, Ark., and Wallace Townsend, of Little Rock, Ark., on the brief), for appellee.

Before WOODROUGH and THOMAS, Circuit Judges, and NORDBYE, District Judge.

NORDBYE, District Judge.

This appeal involves the validity of two companion municipal improvement districts of the City of Fayetteville, Arkansas — Paving District No. 36 and Curb and Gutter District No. 37 — and the right of the trustee to maintain the suits in the United States District Court and to obtain judgment against the District on the bonds. The parties will be referred to as below. It was stipulated that the disposition of the issues on this appeal would control the determination of the companion case, Paving District No. 36.

The District contends that the court erred in overruling its motion to dismiss the trustee's bill of complaint as amended for the reasons that (1) (a) the trustee is a mere nominal party suing in a representative capacity and that the citizenship of the bondholders, and not of the trustee, determines the question of diversity, and (b) that the appointment of the plaintiff as substitute trustee was a fraudulent scheme and fictitious arrangement for the purpose of creating a spurious ground for federal jurisdiction; (2) that the court erred in refusing to sustain the District's plea of res judicata; (3) that the bonds were invalid because of a jurisdictional defect, in that there was an insufficient number of property holders as signers to the petition for the creation of the District; and (4) that the court erred in holding that the assessors of said District made and filed assessments of benefits therein.

This proceeding involves the validity of $21,500 five per cent bonds, issued by the District to improve the streets of the City of Fayetteville, Arkansas. The execution and sale of the bonds are admitted. Further, it is not controverted that the District has received the funds for which the bonds were sold and that the money has been used for the improvements contemplated. The bonds in suit were issued pursuant to procedure which was regulated by the Arkansas statutes. On June 6, 1927, a petition signed by seventeen purported property owners requested the formation of the District. An ordinance of the City of Fayetteville stating the boundaries and the purpose of the District was passed by the City Council and thereafter published in a local newspaper. On or about June 13, 1927, a second petition was filed by the same property owners. The abstracter's certificate which was filed in connection with this petition showed the total assessed value of all property in the District and the value of the property owned by the signers to the petition. Notice was thereafter given of the filing of the second petition by publication, and on July 11, 1927, at a hearing before the City Council, the said Council determined that the signers of the petition constituted a majority in value of the owners of the property within said District and appointed three persons as a Board of Improvement for said District. No suit was brought in Chancery Court of Washington County, Arkansas, within the thirty days' limitation for review of the action of the City Council. Section 5652, Crawford and Moses' Digest, Statutes of Arkansas. The Board of Improvement, according to the records, took oath of office as required by the statute and the same was filed with the City Clerk. Estimate of costs was procured, assessors were appointed, and assessments of benefits were apparently returned and filed. In April, 1928, the City Council passed an ordinance assessing benefits and published the same as required by statute. Thereafter, the Commissioners of the District issued a series of bonds aggregating. $21,500, with interest at five per cent per annum, maturing serially on November 1st of the years 1928 to 1937, both inclusive. These bonds were secured by a pledge or mortgage pledging the future credit, assessed benefits, and other resources of the District. The American Southern Trust Company of Little Rock was named trustee, and the pledge was duly filed in the office of the Circuit Clerk.

The District offered the bonds to M. W. Elkins & Company, of Little Rock, which, prior to the purchase, submitted a duly certified transcript of the proceedings before the City Council and the Commissioners to its counsel, an experienced firm of bond attorneys, who rendered an opinion approving the bonds, and thereafter Elkins & Company paid the full amount of the purchase price, which was not less than that allowed by law. The bonds were thereafter sold to the public before maturity in the due course of business and the purchasers of said bonds are bona fide holders for value. It appears that the bonds are in the usual form and on the face contain the following covenant: "* * * The said Curb and Gutter District Number 37 hereby covenants that the said district has been duly organized in accordance with Section 5647 to 5743 of Crawford & Moses' Digest of the Statutes of the State of Arkansas, and the acts amendatory thereof, under ordinances duly passed by the City Council of the said City of Fayetteville for that purpose; that the real property in said district has been duly assessed as required by law for the making of the improvement aforesaid, that said assessment of benefits has been duly pledged for the security of this bond; and that all conditions and things required to be done precedent to and in the issuing of this bond have been done, have happened and have been performed as required by law."

The court found that the Commissioners and the property owners knew of the creation of the District and the objects and purposes thereof; that they knew of the sale of the bonds and that the proceeds of the sale were used to defray the expenses in connection with the improvements. No person questioned the validity of the District, or of the bonds, until long after the improvements were made. Some $7,083 had been collected on the assessments and applied on the bonds prior to any attack on the validity of the proceedings.

On July 12, 1931, after default in the payment of the bonds, an action was commenced in the Washington County Chancery Court in the name of the Commissioners of said District against the owners of delinquent land in said District for the purpose of collecting assessments alleged to be due on said lands. One E. M. Ratliff was one of the Commissioners and also one of the land owners. An answer was interposed denying the existence of a legal District and alleging other irregularities. This action lay dormant until 1934. The attorney who had instituted the suit on behalf of the Commissioners withdrew before trial in that the District apparently had no funds with which to pay him, and a Mr. Townsend and a Mr. Atkinson thereafter assumed the representation of the Commissioners in that proceeding. On October 19, 1934, a decree was rendered in Chancery Court sustaining the position of the property owners. The court held that the bonds were invalid because the original petition of the property owners had an insufficient number of qualified signers, and that no assessment of benefits had been made or filed. It determined that the assessment was void. No appeal was perfected from this decree.

It was on November 15, 1930, that the American Southern Trust Company, the trustee, became insolvent. No successor trustee was appointed until March, 1936, when H. E. Parrish, an officer of the Citizens National Bank, Fort Scott, Kansas, which bank owned a bond of the District, was appointed. Parrish did not participate in the state court litigation, and in December, 1936, as trustee, he instituted the present action on the bonds and for mandamus to enforce their payment. This proceeding was commenced in the United States court. The District defended, contending that the jurisdiction of the federal court was fraudulently invoked; that the Chancery Court decree was res judicata; that an insufficient number of property owners had signed the original petition; and that the assessors never filed an assessment of benefits. The trial court determined all these issues in favor of the bondholders, and this appeal followed.

The amount in controversy exceeds $3,000, and the trustee and the District are of diverse citizenship. That the citizenship of the trustee, and not of the bondholders, is determinative of diversity seems free from doubt. The plaintiff, a citizen of Kansas, was appointed in the place and stead of the original trustee, which had become incapacitated by reason of insolvency. The appointment of the successor trustee was properly made and recorded, all in accordance with the provisions of the pledge. No lengthy discussion is necessary to demonstrate that this is an active trust and not a dry or passive one; that is, the trustee is clothed with certain definite and exclusive powers, such as the right to bring mandamus proceedings and to require the levying of the assessment of benefits. It is his duty to enforce the bond obligation due the bondholders and to bring suit for such purpose. The pledge, in reciting the duties of the trustee, contains the following:

"Said district further agrees that if default is made in the payment of any bond or coupon, the said trustee may declare the entire debt or any part thereof due and shall do so on request of a majority in amount of the holders of the bonds secured by this pledge and may institute in any court having chancery jurisdiction, a proceeding for the foreclosure of this pledge, and in such proceeding it is agreed that such court shall, at...