Marriott Financial Services, Inc. v. Capitol Funds, Inc.

Citation217 S.E.2d 551,288 N.C. 122,77 A.L.R.3d 1036
Decision Date27 August 1975
Docket NumberNo. 97,97
Parties, 77 A.L.R.3d 1036 MARRIOTT FINANCIAL SERVICES, INC. v. CAPITOL FUNDS, INC. and Lawyers Title Insurance Corporation.
CourtUnited States State Supreme Court of North Carolina

Manning, Fulton & Skinner by Howard E. Manning and John B. McMillan, Raleigh, for plaintiff-appellant Marriott Financial Services, Inc.

Maupin, Taylor & Ellis by Armistead J. Maupin and Thomas W. H. Alexander, Raleigh, for defendant-appellee, Capitol Funds, Inc.

Poyner, Geraghty, Hartsfield & Townsend by John L. Shaw and Cecil W. Harrison, Jr., Raleigh, for defendant-appellee Lawyers Title Ins. Corp.

BRANCH, Justice.

Marriott assigns as error the holding of the Court of Appeals that the trial judge correctly refused to conclude that rescission should be allowed on grounds that the conveyance was illegal because Capitol had not complied with Section 20--5(a) of the Subdivision Standards Ordinance of the City of Raleigh, which provides:

Before any real property located within the city or located outside the city within two (2) miles in any direction of the corporate limits shall be subdivided and offered for sale, and before any plat thereof shall be recorded in the registry of Wake County, the subdivision plat thereof shall be approved by the city council, and such approval entered in writing on the plat by the city clerk and treasurer, after first having been submitted to the city planning commission in accordance with the provisions of this chapter.

Section 20--11 provides that the Register of Deeds shall not file or record a plat of a subdivision of land within the territorial jurisdiction of the City without the approval of the city council and makes the Filing or recording of a non-approved plat void. Chapter 921 of the 1955 Session Laws is the enabling act pursuant to which the City Ordinance was adopted. Section 4 of that Act provides:

Any person who, being the owner or agent of the owner of any land located within the platting jurisdiction granted to the municipality, thereafter transfers or sells such land by reference to a plat which was not recorded in the office of the Register of Deeds of Wake County, showing a subdivision of such land before such plat has been approved by said legislative body, Shall upon conviction be guilty of a misdemeanor. (Emphasis supplied.)

The general rule is that an agreement which violates a constitutional statute or municipal ordinance is illegal and void. Cauble v. Trexler, 227 N.C. 307, 42 S.E.2d 77; Phosphate Co. v. Johnson, 188 N.C. 419, 124 S.E. 859; 17 Am.Jur.2d Contracts § 165 at 521; Restatement of Contracts § 580(1). However, there is also ample authority that the statutory imposition of a penalty, without more, will not invariably avoid a contract which contravenes a statute or ordinance when the agreement or contract is not immoral or criminal in itself. In such cases the Courts may examine the language and purposes of the statute, as well as the effects of avoiding contracts in violation thereof, and restrict the penalty for violation solely to that expressed within the statute itself. Price v. Edwards, 178 N.C. 493, 101 S.E. 33; Hines v. Norcott, 176 N.C. 123, 96 S.E. 899; Courtney v. Parker, 173 N.C. 479, 92 S.E. 324; Ober v. Katzenstein, 160 N.C. 439, 76 S.E. 476; 17 Am.Jur.2d Contracts § 166 at 523. See generally Annot., 55 A.L.R.2d 481, for cases applying these principles.

The holdings of this Court demonstrate a remarkable divergence in results in cases presenting the question of illegality of contracts because of violation of statutory provisions. The cases generally follow the rule that where certain acts are expressly made illegal, contracts based on such acts are void. See, e.g., Kessing v. Mortgage Corp., 278 N.C. 523, 180 S.E.2d 823 (limited partnership agreement formed as a part of a usurious loan transaction declared void); Glover v. Insurance Co., 228 N.C. 195, 45 S.E.2d 45 (insurance company not allowed to vary the statutory requirements for a standard fire insurance policy); Courtney v. Parker, supra (One who violates a statute prohibiting the conduct of business under an assumed name may not enforce against a third party a contract made in the course of such business.); Sharp, Administrator v. Farmer, 20 N.C. 255 (No action can be based upon an agreement among heirs to pay debts of the decedent and distribute the shares of personal property without taking out letters of administration as required by statute.).

On the other hand, the Court has refused to extend the terms of a penal statute to avoid a contract unless such a result is within the intent of the legislative body. See, e.g., Price v. Edwards, supra, (A statutory provision requiring filing of a certificate with the Clerk of Superior Court showing names and addresses of all partners of a partnership operated under an assumed name does not apply between parties who are presumed to possess this information, the purpose of the statute being to prevent fraud upon those who ignorantly deal with the partnership.); Hines v. Norcott, supra; Annuity Co. v. Costner, 149 N.C. 293, 63 S.E. 304 (The plaintiff executed notes for payment of premiums for life insurance policies and defended his refusal to pay the notes upon a contemporaneous execution of a rebate contract which was made illegal by statute. The Court allowed recovery.).

Hines v. Norcutt, supra, is analogous to instant case. There, plaintiff used for rent under a lease executed on 13 November 1913 for certain commercial buildings. Defendant denied liability on the ground that the lease was rendered illegal by the adoption in April, 1914, of the following city ordinance:

. . . Whereas the maintenance and use of surface and dry privies in the town of Greenville is or may become a menace to the public health of the town: Now, therefore, be it ordained by the Board of Aldermen of the Town of Greenville in regular meeting assembled on 2 April, it shall be unlawful for any person, firm, or corporation to erect, maintain, or use any surface or dry privies upon any lot or premises in said town, abutting on any street wherein a sewer-pipe has been laid; and that all owners of said property shall connect with said sewer on or before 1 June, 1914. Any person violating the provisions of this ordinance shall be fined $5 for each offense, and each day said violation shall continue shall constitute a separate offense.

At trial the judge instructed the jury that the question of the plaintiff's violation of the ordinance was 'a question between him and the town authorities' and had no bearing upon the lawsuit between the plaintiff and the defendant. This Court also rejected the defendant's contention that there could be no recovery because the lease was rendered illegal by failure to comply with the ordinance. The Court treated the question as one dpending upon determination of legislative intent, I.e., 'whether it was the purpose to avoid the contract alleged to be contrary to its provisions, or whether it was intended that the penalty alone should be a sufficient punishment.' We quote a portion of that opinion:

. . . The imposition of a penalty for not doing an act which is required to be done may of itself render the doing of the same illegal; but still, if upon a fair construction of the statute it appears to have been the intention of the legislative body to confine the punishment or forfeiture to the penalty prescribed for a violation of it, that intention will be enforced. And the same may be said as to the prohibition of an act, but it does not follow in either case that the illegal act will vitiate a contract which is connected with it only incidentally because it relates to property affected, in some degree, by the statute or ordinance prohibiting or enjoining the act and annexing a penalty for its violation. This ordinance was intended to forbid the 'erection, maintenance, or use of surface or dry privies' in the town, and required, in order to prevent any injury to the public health, that they should be connected with sewerpipes laid in a street adjoining the premises. The lease in this case did not refer at all to the subject-matter of the ordinance, and especially did not stipulate that no such connection should be made, or that such privies should or might be used on the premises. The town council, in passing the ordinance, surely did not have in mind the prohibition of a lease or sale of the premises, but only the punishment by way of penalty for the violation of its ordinance. . . . It cannot be supposed, upon a proper reading of this evidence, that the council intended to invalidate leases and sales of property merely because the owner of the premises had failed to make the sewer connections. . . . (Emphasis supplied.)

In reaching its decision, the Court relied heavily on the landmark case of Harris v. Runnels, 53 U.S. (12 How.) 79, 13 L.Ed. 901. There, the action was based on a promissory note given for slaves brought into Mississippi and there sold in violation of a statute regulating the importation of slaves into the state and prescribing a one-hundred-dollar penalty for each violation thereof. The Supreme Court of the United States, rejecting the defendant's defense of illegality, noted that prior decisions on point had been 'fluctuating and counteracting,' observed that the purpose of the statute was to exclude from Mississippi all slaves who were tainted with crime, and, Inter alia, stated:

. . . (W)e have concluded, before the rule can be applied in any case of a statute prohibiting or enjoining things to be done, with a prohibition and a penalty, or a penalty only for doing a thing which it forbids, that the statute must be examined as a whole, to find out whether or not the makers of it meant that a contract in contravention of it should be void, or that it was not to be so. In other words, whatever may be the structure of the statute in respect to prohibition and penalty, or penalty alone,...

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