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Aetna Casualty & Surety Co. v. Kishwaukee Special Drainage Dist.

May 20, 1944


Appeal from the District Court of the United States for the Northen District of Illinois, Eastern Division; Wm. J. Campbell, Judge.

Author: Major

Before EVANS, MAJOR, and MINTON, Circuit Judges.

MAJOR, Circuit Judge.

This is an appeal from a summary judgment, entered April 16, 1943, upon plaintiff's motion, in the amount of $22,913.24. The judgment rests solely upon plaintiff's right of subrogation to seven named judgment creditors (herein referred to as the Masterson creditors), who obtained their judgments against the defendant in the Circuit Court of DeKalb County, Illinois, March 12, 1923. The judgment in the instant case requires, in the event no funds are available for its satisfaction, that defendant "by its officers, agents and servants, shall proceed forthwith to levy a Special Assessment against the lands within said District" for an amount sufficient to pay the judgment, together with interest thereon from the date of its enrry.

The judgment is attacked upon numerous grounds, but we are of the view that the important and controlling questions are: (1) Was plaintiff entitled to be subrogated to the rights of the Masterson judgment creditors? and (2) Even so, was it as such subrogee entitled to a judgment, satisfaction of which could be forced by a special assessment levy?

Defendant was organized as a special drainage district under the provisions of the Illinois "Farm Drainge Act," Chap. 42, Sec. 134 et seq., Ill. Rev. Stats. 1941. Under the Act, the affairs of the district are conducted by three commissioners elected by the landowners, the county clerk of the county in which the land is located is exofficio clerk of the district, and the county treasurer is ex-officio trasurer thereof. On July 1, 1908, the district issued its bonds made payable solely out of special assessments to be collected. These assessments were collected but not used in payment of the bonds. (The record fails to disclose for what purpose such assessments were used). On March 12, 1923, the Masterson creditors, being bondholders of the 1908 issue, obtained the judgments to which plaintiff was awarded subrogation. No execution was issued upon such judgments and they were not satisfied of record until October 1942.

On October 1, 1923, another special assessment was levied against the landowners of the district, purportedly for the purpose of repairing ditches. Bonds were issued in anticipation of the collection of such special assessments, which also were payable solely from such assessments to be collected. Interest on such bonds was paid until January 1, 1924, but neither principal nor interest was paid thereafter. On October 25, 1923, this second bond issue was sold and delivered to W. W. Armstrong Co., and the proceeds thereof deposited by one Decker, the treasurer, to the credit of the district. On October 29, 1923, from the funds thus realized, the treasurer paid the 1908 bonds (those upon which the Masterson judgments were predicated). The bonds thus sold to Armstrong were subsequently acquirted by a group of persons referred to as the Adamson creditors.

These latter creditors, on August 22, 1929, filed an equity suit in the United States District Court, Cause No. 9306, naming the defendant, its treasurer Decker, and three commissioners as parties defendant, wherein they sought to recover the purchase price paid for such bonds on the ground that the proceeds thereof had been unlawfully and illegally used in payment of the Masterson bonds (issue of 1908). A decree in this case was entered January 29, 1932 by Judge Wilkerson, in which the Adamson creditors were awarded judgment against defendant in the sum of $5,237.49, and against the treasurer Decker and the commissioners in the amount of $18,758.06. The judgment against defendant was paid from the proceeds on hand from the sale of the second bond issue. (As already noted, the balance of the proceeds of this issue had been diverted to the payment of the Masterson creditors).The treasurer Decker having defaulted on the judgment against him, the Adamson creditors, on June 7, 1932, filed suit in the District Court against him and his surety (plaintiff in the instant suit). Judgment was entered against such defendants, and on October 14, 1934, plaintiff paid the sum which had theretofore been found in Cause No. 9306 due and owing from the tresurer to the Adamson creditors. Thus the judgment in Cause No. 9306 was fully satisfied, by the district as to the judgment against it and by the surety company as to the judgment against Decker.

On July 17, 1937, plaintiff instituted the present action against Decker to recover the amount it had been forced to pay on his account. On November 25, 1938, an additional count was filed against the instant defendant, by which plaintiff sought to be subrogated to the claims of the Masterson judgment creditors whose bonds, as heretofore related, had been paid and cancelled on October 29, 1923, although the judgments predicated thereon remained unsatisfied. This appeal, as already shown, comes from the summary judgment entered upon plaintiff's cause as stated in this additional count.

We find ourselves in some difficulty attempting to understand plaintiff's theory as to its right of subrogation. Under any ordinary accepted meaning of this equitable doctrine, plaintiff, upon paying the judgment in favor of the Adamson creditors in Cause 9306, was subrogated to the rights of such creditors. Defendant, however, as already shown, paid the judgment, or the portion of the judgment, which was rendered against it, and plaintiff's liability was confined solely to the judgment against its principal, Decker. True, it is contended by the plaintiff that the rights of the Adamson creditors against defendant were not adjudicated in Cause 9306. The record refutes such contention. Defendant in the instant suit was a defendant there, and not only does the decree award a judgment in a specific amount against it (limited to the unexpended proceeds realized from the sale of the Adamson bonds), but the court specifically concluded that the defendant (drainage district) "lacks authority and warrant in law to levy an additional tax or assessment for the purpose of supplying a sufficient fund in its treasury to pay and discharge the residual balance due on the indebtedness above stated." This judgment, unappealed from is a final adjudication that the district had no further liability to the Adamson creditors. The rights of the latter against the district having thereby been extinguished, plaintiff acquired no rights against it by paying the judgment against Decker.

Plaintiff advances the theory that the Adamson creditors were subrogated to the rights of the Mesterson creditors in the judgments obtained by the latter and that such rights were included in those which it acquired from the Adamson creditors. This theory embraces the novel idea that plaintiff took from Adamson by subrogation a right which Adamson took from Masterson by the same process. It involves subrogation upon subrogation. We are cited no authority and we find none where the principle has been thus extended. Furthermore, such a theory if accepted would avail the plaintiff nothing, for the reason, as already pointed out, that the claims of the Adamson creditors against the district had been reduced to judgment and paid. Therefore, they had no further rights against the district by subrogation or otherwise.

Plaintiff has another theory, more plausible perhaps but equally as novel, which it evolves from the fact that it became liable to the Adamson creditors because the proceeds realized from the Adamson bonds were wrongfully diverted to the payment of the Masterson bonds. Thus in legal effect, so it is argued, its funds and not those of the district have been utilized in payment of the Masterson creditors. This appears to have been the basis for the judgment appealed from. At any rate, the decree gives plaintiff the right to be subrogated directly to the rights of the Masterson creditors. As already pointed out, the Masterson bondholders wre paid in 1923, and plaintiff discharged its liability to the Adamson creditors October 14, 1934. While it may be true that plaintiff would not have become liable except for the wrongful diversion of funds for the purpose of paying the Masterson creditors, it does not follow that its funds were used for that purpose.Furthermore, plaintiff was in no sense involved in or related to any transaction between the Masterson creditors and the district or its officers, not did it sustain any relation of privity to such parties.None of the elements existed upon which subrogation could be predicated. Cf. Dunlap v. Peirce, 336 Ill. 178, 190, 168 N.E. 277, 66 A.L.R. 181. If it acquired any rights in the claims of the Masterson creditors, it must have been via the Adamson creditors for whose benefit it was required to pay.As already shown, however, there was nothing it could acquire by the latter route for the reason that the Adamson claims agaisnt the district were reduced to judgment and satisfied. Again, no authority is cited in support of this direct subrogation theory and, in our judgment, it cannot be accepted.

Assuming, however, that plaintiff is entitled to be subrogated to the rights of the Masterson creditors, it is still confronted with an insurmountable barrier. If plaintiff is entitled to such right, the question inevitably arises as to what rights it acquired thereby, the answer to which is dependent upon the rights of the Masterson creditors against the district. The several judgments in favor of the Masterson creditors were general in nature and predicated upon special assessment bonds which contained a specific provision that they were a lien solely upon special assessments to be collected thereafter. Could these judgment creditors have enforced such judgments against the district? If not, they could not have been enforced by plaintiff as subrogee. Plaintiff appears to think that any discussion of these judgments amounts to a collateral attack upon their validity, which is not permissible. While the circumstances under which they were entered give rise to a fair inference that they amounted to a fraud upon the district, we need not consider or decide their validity. Assuming their validity, the judgment creditors acquired an empty right unless such judgments were susceptible of enforcement, or, in other words, unless the district could be compelled by legal process to satisfy them.

A drainage district organized under the Act in question is authorized to raise funds only by special assessment. The landowners of this district had once been assessed for the purpose of paying the bonds upon which these judgments rest, and it is settled law of Illinois, so we think, that such landoweners cannot again be assessed for the same purpose. This court so decided in Turner v. Hunt Drainage District, 7 Cir., 87 F.2d 167, wherein, page 168, we stated:

"When lands have been once assessed for the benefit that will accrue to them by virtue of an improvement, they cannot be re-assessed for the same improvement, regardless of whether the money arising from the assessment was used for that improvement or some other improvement or purpose."

Again, on page 169 of 87 F.2d it was said:

"The law required that their land be subjected to an assessment sufficient to pay the cost of the improvements, including the bridges. That was done. Bonds were issued and sold for a sufficient amount to cover the assessments, and the money was placed in the hands of the commissioners of the district. Through theft, or some other more dignified form of felonious conduct which the record does not disclose, the money has disappeared. Under these circumstances, neither the law nor good morals obligates the land owners of the district to be subjected to the payment of twice the amount of their benefits."

The law is aptly stated in Badger v. Inlet Drainage District, 141 Ill. 540, page 545, 31 N.E. 170, 171, wherein the court stated:

"Although we have held that a drainage district is to be classed as a municipal corporation, (Commissioners v. Kelsey, 120 Ill. 482, 11 N.E. 256,) yet we have also held that such a district is organized merely for a special and limited purpose; that its powers are restricted to such as the legislature has deemed essential for the accomplishment of such purpose; and that it is only authorized to raise funds for the specific object for which it is formed; and that it can do that in no other mode than by special assessments upon the property benefited, which can, in no case, exceed the benefits to the lands assessed."

See also Elmore v. Drainage Commissioners, 135 Ill. 269, 25 N.E. 1010, 25 Am.St.Rep. 363; Ahrens v. Minnie Creek Drainage District, 170 Ill. 262, 48 N.E. 971; Drainage Commissioners v. Kinney, 233 Ill. 67, 84 N.E. 34; ...

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