Manker v. American Sav. Bank & Trust Co.

• Decision Date: 21 November 1924
• Docket Number: 18570.
• Court: Washington Supreme Court
• Parties: MANKER v. AMERICAN SAV. BANK & TRUST CO. et al.

230 P. 406

131 Wash. 430

MANKER v. AMERICAN SAV. BANK & TRUST CO. et al.

No. 18570.

Supreme Court of Washington, En Banc.

November 21, 1924

Appeal from Superior Court, King County; Neal, Judge.

Suit by Frank Manker against the American Savings Bank & Trust Company and City of Seattle. Judgment for first-named defendant, and plaintiff appeals. Reversed.

Parker J., dissenting.

Alex Stewart and Robert D. Hamlin, both of Seattle, for appellant.

Stratton & Kane, Thomas J. L. Kennedy, and Walter B. Beals, all of Seattle, for respondent.

Peters & Powell, of Seattle, and Guy B. Groff and William Hatch Davis, both of Spokane, Amici Curiae.

MACKINTOSH J.

In April, 1923, the appellant was the owner of two local improvement bonds issued by the city of Seattle, payable out of funds to be raised by a special assessment in local improvement district No. 3032. These bonds were in that month stolen from the appellant's safety deposit box in a bank at Vashon, Wash., and thereafter came into the possession of the respondent bank, which purchased the same in the due course of business. The respondent city of Seattle has the funds on hand to pay these two bonds and has called for their payment, and this litigation concerns only the question whether the appellant or the respondent bank is entitled to such payment. The ultimate question is whether these bonds are negotiable instruments.

The bonds provide that the holders shall have no claim against the city, 'except from the special assessment made for the improvement for which such bond was issued.' Another provision is that:

'The city of Seattle * * * hereby promises to pay * * * or bearer * * * out of the fund established by ordinance No 36562 of said city, and known as local improvement fund district No. 3032, and not otherwise.'

And further, that:

'The holders or owners of this bond shall look only to said fund for the payment of either the principal or interest on this bond.'

The Negotiable Instruments Act provides, in section 3392 (Rem. Comp. Stat.) that:

'An instrument to be negotiable must conform to the following requirements * * * (2) must contain an unconditional promise or order to pay a sum certain in money.'

Section 3394 provides that:

'An unqualified order or promise to pay is unconditional within the meaning of this act, though coupled with----

'1. An indication of a particular fund out of which reimbursement is to be made * * * but an order or promise to pay only out of a particular fund is not unconditional.'

It would seem that, under the plain provisions of the Negotiable Instruments Act, these bonds, by their terms, do not contain an unconditional promise to pay, for they explicitly state that the payment is to be made only out of a particular fund.

The Negotiable Instruments Act, as has been often stated, is but a re-enactment of the law merchant, with certain modifications. Under the law merchant, a promise to pay out of a particular fund is not an unconditional promise to pay, and an instrument thereunder was therefore nonnegotiable. 2 Dillon on Municipal Corporations (5th Ed.) § 893, states this rule:

'Respecting the question of the negotiability of these instruments, it has been held that, because the bonds are not payable unconditionally and at all events, but only out of a special fund created for and pledged to the payment, which may or may not prove adequate to meet the obligations in full, they do not have that certainty of payment which is essential to negotiability, and that they are not negotiable instruments within the law merchant. Being deprived, according to these decisions, of the characteristics of negotiability by the uncertainty of payment, improvement bonds of this nature have been held to be mere choses in action, and, in the hands of a purchaser for value without notice, subject to all the defenses to which they are subject in the hands of the contractor or person to whom they were originally issued.'

McQuillin on Municipal Corporations, vol. 5, § 2305, dealing with the same matter, says:

'On the other hand, municipal bonds, like other instruments, must contain every essential requisite of negotiability, in order to be negotiable, and hence a bond payable on a contingency which may never happen is not negotiable, nor is a bond payable only out of a specified fund.'

And in section 2269 of the same work is this statement:

'Statutes in many states authorize the issuance of bonds to pay for public improvements, and such bonds are generally payable only from special assessments on the property benefited, as they are collected from time to time. These statutes have been held to be constitutional, and the bonds are not invalid, because the method provided by statute or ordinance for assessing the cost of the improvements against the abutters is illegal. Such bonds, where payable only from a special fund, have been held not negotiable, because there is no certainty as to payment, and hence any defense may be set up against them, in the hands of bona fide purchasers, which could have been set up, if they had remained in the hands of the persons to whom originally issued.'

Section 3394, Rem. Comp. Stat., modifies the rule of the law merchant by providing that, where the promise to pay was out of a particular fund, such promise was nevertheless unconditional, but that, where a particular fund only was to be looked to for the payment, such payment was conditional, and therefore the instrument containing it was nonnegotiable. Although the bonds in controversy here meet all the other requirements of negotiability set out in section 3392, Rem. Comp. Stat., the fact that they contain no unconditional promise to pay makes them nonnegotiable instruments, and the appellant from whom they were stolen would be entitled to the bonds as against the respondent bank, which came into possession of them through a chain of transfers from the thief.

Attention has been called, however, to decisions of this court which, it is urged, have placed the stamp of negotiability upon paper such as this. An examination of the authorities discloses that in none of them was the Negotiable Instruments Act, especially sections 3392 and 3394, referred to, and yet, as will be noted when considering these cases seriatim, they are not really in conflict with the opinion which we have already stated.

The first case called to our notice is Fidelity Trust Co. v. Palmer, 22 Wash. 473, 61 P. 158, 79 Am. St. Rep. 953, which held that a city warrant is covered by the laws applicable to negotiable paper, and where such warrant is sold to a bona fide purchaser by its apparent owner such purchaser acquires full title. This case was decided one year after the enactment of the Negotiable Instruments Act, but does not refer to the act. The facts, as disclosed by an examination of the record in that case, show the case was properly decided, for they bring it within the provisions of section 3394, supra, for the reason that the warrant merely indicated a particular fund out of which the payment was to be made, and did not provide that that was to be the only fund to be looked to, and therefore the promise was unconditional and the instrument containing it negotiable. The facts in that case were that the city of Tacoma had issued a warrant, which provided that the treasurer of the city would pay 'from the general fund' the sum of $429.75. This was merely an indication of the particular fund, as we have already said, and as a matter of fact the particular fund designated was the general fund of the city out of which all payments could be made, and therefore that case in no wise conflicts with the opinion which we are rendering in the instant case, though there is language in the opinion indicating a different view.

The next case cited is Marcus v. Ofner, 103 Wash. 478 175 P. 31, which in turn makes no reference to the Negotiable...