Mitchell v. Stephens
| Decision Date | 27 December 1922 |
| Docket Number | F-97. |
| Citation | 285 F. 756 |
| Parties | MITCHELL v. STEPHENS et al. |
| Court | U.S. District Court — Southern District of California |
Morfoot & McCroskey and John W. Hart, all of Los Angeles, Cal., for plaintiff.
U.S Webb, Atty. Gen. of California, and Robt. W. Harrison and John W. Maltman, Deputy Attys. Gen., for defendants Stephens and others.
Lilienthal McKinstry & Raymond of San Francisco, Cal., for Anglo & London-Paris Nat. Bank.
Joe Crider, Jr., of Los Angeles, Cal., for AEtna Casualty & Surety Co. and others.
In 1919, the state of California by constitutional amendment issued $40,000,000 in bonds for the construction of state highways. Article 16, Sec. 2, Cal. Const.; Stats. 1921, p. lxi. It was appropriately provided in said amendment that said bonds should bear interest at the rate of 4 1/2 per cent. per annum and that when sold no bid should be accepted 'less than the par value of the bond plus the interest which has accrued thereon between the date of sale and the last preceding interest maturity date. ' Early in 1920, pursuant to an effort to complete the highway system of the state and precedent thereto to make sale of appropriate bonds, it was ascertained, apparently, by those authorized to act for the state, that at that time the bonds, bearing interest at the rate of 4 1/2 per cent., could not be sold at par under existing market conditions. Acting presumably in entire good faith in the premises, but with a sincere desire to effect a sale of sufficient bonds to conclude existing or immediately contemplated highway work, $3,000,000 worth of said bonds were purchased at par by the state board of control, an agency of the state authorized to invest its funds, and immediately thereafter resold at the then prevailing market price to the Anglo & London-Paris National Bank of San Francisco, one of the defendants above named. This sale entailed a net loss to the state of $222,160.50. This net loss to the state thus occasioned, occurring in the highway fund thereof, was met and offset by a transfer of the like amount to that fund from another fund in the custody of the state treasurer, consisting of moneys paid to the state of California by the government of the United States under the United States Federal Aid Road Act of 1916 (Comp. St. Secs. 7477a-7477i). In other words, moneys coming from the government of the United States and constituting federal aid in the construction of rural roads, etc., were diverted from the general or some other special fund of the state to the state highway fund in order to offset the loss occasioned by the sale of the bonds above mentioned at market value instead of par value as provided by law.
The plaintiff above named is a citizen and resident of the state of Arizona and 'a property owner in and a taxpayer to the state of California and also the owner and holder of shares of stock in the Farmers' Bank of Imperial, which is a banking corporation, duly organized and existing under and by virtue of the laws of the state of California, and said bank is a resident of said state of California and conducting herein a general banking business, and pays taxes directly to said state. ' He now brings suit in this court in equity against William D. Stephens, the Governor, and certain other officers of the state, their bondsmen as such, and the bank above named, the purchaser of the bonds hereinabove referred to, alleging somewhat in detail the facts hereinabove adverted to and particularly the net loss suffered by the state in the amount hereinabove specified; that the appropriate officers of the state whose duty it is to institute and prosecute all claims, demands, or suits for the recovery of money into the state treasury in spite of written demand in that particular behalf, 'failed, neglected and refused to commence any action to obtain an accounting and payment to the said state of California of said sum or any part thereof by these defendants, or any of them. ' 'Wherefore plaintiff prays that a judgment be rendered against defendants and each of them, jointly and severally, directing them to account for and pay into the treasury of the state of California, for the use and benefit of and to the credit of the proper highway funds of said state, the sum of $222,160.50, together with interest thereon at the rate of 7 per cent. per annum from the 1st day of March, 1920, and that they pay to the plaintiff herein his costs incurred,' etc.
It is a further fact of materiality that the people of the state of California, on November 2, 1920, long after the transaction involved herein had been consummated, adopted an amendment to the Constitution (article 16, Sec. 3) providing substantially for the issuance from time to time of new bonds in lieu of bonds provided for in the act of 1919 (Const. art. 16, Sec. 2), to bear interest 'according to the then prevailing market conditions but shall at no time exceed 6 per cent. per annum,' etc., and also that all of the bonds of the $40,000,000 issue hereinabove referred to, 'which shall have heretofore been sold, shall be and constitute valid obligations of this state. ' It stands as conceded, in view of the holdings of the Supreme Court of the state of California in Ellis v. Stephens, 185 Cal. 720, 198 P. 403, and Stephens v. Richardson, 184 Cal. 721, 195 P. 651, that the sale of the bonds hereinabove described under the circumstances entailed therein, was ultra vires and void. It is equally clear, however, from the language of the amendment to the Constitution adopted in 1920, that such bonds as were actually so sold should be and remain 'valid obligations' of the state.
Several motions to dismiss the bill of complaint have been filed by the respective defendants. The questions raised therein are substantially that the bill of complaint does not state facts sufficient to constitute a valid cause of action, in equity against any of the defendants; that this court...
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