Speckels v. Baldwin

• Decision Date: 16 March 1993
• Docket Number: No. 17987,17987
• Parties: Jerome Edward SPECKELS, Plaintiff and Appellant, v. Gerald M. BALDWIN, Individually, Edward A. Himrich, Individually, and Home Corporation, Defendants and Appellees, and City of Custer City, a municipal corporation, Annella Wright, in her capacity as Mayor of the City of Custer City, State of South Dakota, in their official capacity as Members of the Common Council for the City of Custer City: Rob Schilling, Roger Behlings, Kevin Jenniges, Sam Boettcher, Blaine Foss, and Lee Sutton, Defendants. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 171

512 N.W.2d 171

Jerome Edward SPECKELS, Plaintiff and Appellant, v. Gerald M. BALDWIN, Individually, Edward A. Himrich Individually, and Home Corporation, Defendants and Appellees and City of Custer City, a municipal corporation, Annella Wright, in her capacity as Mayor of the City of Custer City State of South Dakota, in their official capacity as Members of the Common Council for the City of Custer City: Rob Schilling, Roger Behlings, Kevin Jenniges, Sam Boettcher Blaine Foss, and Lee Sutton, Defendants.

No. 17987.

Supreme Court of South Dakota.

Considered on Briefs March 16, 1993.

Reassigned Nov. 16, 1993.

Decided Feb. 16, 1994.

Rehearing Denied March 29, 1994.

Wayne F. Gilbert of Johnson Huffman, Rapid City, Timothy J. Vander Heide of Bakewell, Hauge & Vander Heide Custer, Ronald W. Banks of Banks, Johnson & Colbath, Rapid City, for plaintiff and appellant.

Edward D. Carpenter of Costello, Porter, Hill, Heisterkamp & Bushnell, Rapid City, for defendants and appellees Baldwin, Himrich and Home Corp.

HENDERSON, Justice (on reassignment).

PROCEDURAL HISTORY/ISSUES

Taxpayer Jerome Speckels sought to declare null and void a lease-purchase agreement between the City of Custer City (City) and Homes, Inc., a for-profit corporation which included the Custer City Attorney, Gerald Baldwin, as one of its principals. Following trial on January 3, 1992, Findings of Fact and Conclusions of Law were entered by the trial court upholding the contract. On appeal, we consider the following issues:

I. Does SDCL 6-1-1 apply to the lease-purchase agreement herein?

II. Does SDCL 6-1-1 apply to Baldwin?

III. Does the lease-purchase agreement violate public policy?

IV. Is this action barred by the statute of limitations?

Whereas this transaction was subject to the mandates of SDCL 6-1-1 and is violative of public policy, we reverse and remand.

FACTS

In an effort to place a nursing home in the Custer community, on August 5, 1963, the City of Custer conveyed a parcel of land, Lot E, to Custer Manor, Inc. (a non-profit corporation comprised of several local business people) for its appraised value of $20,000. Not so coincidentally, City appropriated out of its general funds the same amount to Custer Manor as a donation.

Baldwin moved to Custer in 1965 and began practicing law. The following year, he was appointed Custer City Attorney. In March, 1967, Baldwin and co-defendant Edward A. Himrich, along with others, formed Homes, Inc. (a/k/a Home Corporation), a for-profit entity. Within five days of its inception, Homes, Inc. had met with Custer's Common Council seeking a bond issue to finance the nursing home's construction. Baldwin, as city attorney, drafted the ordinance calling for a public vote on the question. Although the bonds were approved by voters in May, 1967, the bonds never sold.

In March of 1969, Custer Manor executed a warranty deed granting Lot E to Homes, Inc., however, the deed was not recorded. At a Common Council meeting in September, 1970, Himrich, a member of the city planning commission from October 7, 1968 through 1972, proposed new plans to build a nursing home for the community. Although the minutes of the meeting reflect that Himrich was representing Custer Manor, Baldwin, who served as city attorney during this meeting, testified that the minutes were incorrect because Himrich was actually representing Homes, Inc. On October 21, 1970, another bond election was held and passed. The following day, Baldwin recorded the warranty deed obtained from Custer Manor back in March of 1969.

After approval by the Common Council, City executed a lease-purchase agreement with Homes, Inc. conveying Lot E to City, which in turn leased it to Homes, Inc. for twenty years. After expiration of the twenty years, Homes, Inc. would have the option of extending the lease for two consecutive ten-year terms or purchase the land for one dollar ($1.00). That same day, Homes, Inc. sublet the property to CM Corporation (CM). Lease payments would be used for retiring the revenue bonds. Because City was the recorded fee owner, the interest on the bonds was free from federal taxes. CM operated the nursing home as subtenant of Home, Inc. which paid taxes on the monthly rent payments as ordinary income. Baldwin was active in the management of the nursing home since its opening.

By September, 1986, all revenue bonds had been retired. Per the lease agreement, all future rent payments made by CM, thereafter, were remitted directly to Baldwin and Himrich, the only remaining investors in Homes, Inc. whose corporate status had since lapsed.

Two months shy of the expiration of the lease-purchase, Speckels, a citizen of Custer, filed this action seeking to (1) void the agreement between Homes, Inc. and City, (2) have the monthly lease payments from October, 1986 forward paid to City, and (3) recover attorney fees.

DECISION

I. SDCL 6-1-1 applies to this agreement.

Under SDCL 6-1-1, ^* it is unlawful for a city officer to have a personal interest in a contract wherein the city purchases real estate. Trial court relied upon expert testimony and held that this statute is not applicable because City's lease-purchase agreement was merely a legal mechanism by which the city acted as a conduit for a tax-exempt investment to facilitate construction of a nursing home with revenue bonds and does not constitute the purchase of public property. While it is within the broad discretion of the trial court to accept expert testimony, Stormo v. Strong, 469 N.W.2d 816 (S.D.1991), this finding is clearly erroneous as a matter of law. Permann v. Dept. of Labor, 411 N.W.2d 113 (S.D.1987). It is contrary to a prior decision of this Court concerning the same piece of real estate. Petition of CM Corp., 334 N.W.2d 675 (S.D.1983). Therein, a unanimous court, cognizant of the lease-purchase agreement, noted, "Under the stipulation of facts ... the City of Custer is the owner of the nursing home property." CM Corp., 334 N.W.2d at 677. We are bound by that holding, and so is the trial court.

City claims the purchase of the property was in name only; however, it was a purchase of real property by city officers nonetheless. By failing to apply SDCL 6-1-1 to this transaction, we are definitely and firmly convinced that a mistake has been made by the trial court. Chamberlain Livestock Auction v. Penner, 462 N.W.2d 479, 482 (S.D.1990).

II. Baldwin acted as a city officer.

In 1966, Baldwin was appointed city attorney for Custer--a municipal officer under SDCL 9-14-1--and received a $100 per month retainer until 1971, just prior to the city's lease-purchase agreement with Homes, Inc., a corporation which Baldwin essentially controlled.

Aware of the potential conflict of interest, Baldwin asked not to be sworn in as city attorney in 1970. Nevertheless, he continued to perform city attorney duties, compensated at an hourly rate. As established in the minutes published by the Common Council, Baldwin acted in the capacity of city attorney at all times relevant to this cause of action. Although other attorneys purportedly handled the various aspects of the bond election and related transactions, Baldwin, the only city attorney of record, drafted, and at city meetings read aloud, legal documents and ordinances pertaining to this transaction between Custer and his corporation. He acted as a city officer per SDCL 9-14-1, thus subjecting the transaction to SDCL 6-1-1.

Local government officers and employees are not to be interested, directly or indirectly, in any contract of their government. McGhee v. Glenn, 244 Ark. 1000, 428 S.W.2d 258 (1968); Millbrae Ass'n v. City of Millbrae, 262 Cal.App.2d 222, 69 Cal.Rptr. 251 (1968). As stated in the first issue, it is unlawful for a city officer to have an interest in a contract wherein the city purchases real estate. SDCL 6-1-1. Baldwin's work on the bond election proposal, which inured to his personal benefit, highlights the very conflicts which SDCL 6-1-1 was enacted to prevent. See also Dodaro v. Commonwealth, State Ethics Comm'n, 527 Pa. 539, 594 A.2d 652 (1991); People v. Scharlau, 141 Ill.2d 180, 152 Ill.Dec. 401, 565 N.E.2d 1319 (1990), cert. denied, --- U.S. ----, 113 S.Ct. 1945, 123 L.Ed.2d 651 (1991); Place v. Bd. of Adjust. of Saddle River, 42 N.J. 324, 200 A.2d 601 (1964). This constituted a conflict of interest, and Baldwin knew it. The City of Custer knew it. However, both attempted to side-step the conflict by appointing and retaining Baldwin, yet skipping the administering of his oath of office as required by SDCL 9-14-6. We scrutinize these facts with great care and condemn those actions which indicate corruption or favoritism in a public office. Van Itallie v. Borough of Franklin Lakes, 28 N.J. 258, 146 A.2d 111 (1958); 2A Antieau's Local Government Law Sec. 22.62 (rev. ed. 1992). In light of these proceedings, the City of Custer's deliberate failure to administer the oath of office to Baldwin gives credence to such an indication.

In fact, Baldwin testified he was "an employee doing legal work of the City;" yet he countered, "I do not believe that I was an officer of the City as City Attorney may be." It is impossible to stand up in a meeting, prepare an ordinance as city attorney, read a resolution as city attorney, be paid as city attorney, and then deny that you are the city attorney. Now, using parol evidence, both Baldwin and the City have attempted to contradict, deny, and supplement the very documents and minutes on file at city hall. This cannot be done. Lewis v. Bd. of Educ. of Johnson County, 348 S.W.2d 921 (Ky.App.1961); 5 McQuillin Mun. Corp. Sec. 14.07 (rev. 3d ed. 1989).

Local government officers and employees have a duty to serve their government and the people, uninfluenced by adverse motives and interests. State v. Weleck, 10 N.J. 355, 91 A.2d 751 (1952). "Such required conduct demands undivided loyalty and compels public officers to refrain from outside activities which...