It is remarkable that the trial court concluded as a matter of law that section 39 of Article V of the Constitution has no application to a case of this character. There is no dispute as to the facts. This court by its decisions has settled the policy of Montana under the constitutional provision invoked. InSanderson v. Bateman, 78 Mont. 235, 253 P. 1100, it said: "The state could not remit, release or diminish those taxes directly or indirectly, and what the Constitution prohibits the state from doing it cannot authorize its creature the county to do. The manifest intent of section 39 of Article V is to prohibit the county, a political subdivision of the state for governmental purposes, from doing the things forbidden when the state cannot do them." (Shull v. Lewis Clark County, 93 Mont. 408,19 P.2d 901.) The word "postpone" used in the constitutional provision was thoroughly defined in State ex rel. DuFresne v.Leslie, 100 Mont. 449, 50 P.2d 959, 101 A.L.R. 1329. The constitutional provision forbidding it, the note required of appellant by the county commissioners, postponing the debt, was invalid and is unenforceable. (8 C.J. 244; Commonwealth v.Tilton, 23 Ky. Law 753, 111 Ky. 341, 63 S.W. 602, Louisville v. Louisville Ry. Co., 111 Ky. 1, 63 S.W. 14, 98 Am. St. Rep. 387; Delta County v. Blackburn, 100 Tex. 51, 93 S.W. 419;Bland v. Orr, 90 Tex. 492, 39 S.W. 558; State v. Foster,5 Wyo. 199, 38 P. 926, 63 Am. St. Rep. 47, 29 L.R.A. 226.) *Page 468
We can hardly believe the trial court was persuaded by the contention of learned counsel below that sometimes, and under some circumstances (not present here), the other party to an illegal contract is precluded from asserting its invalidity, because the prohibition was made for the benefit of the other party. Such principle has never been applied except to recover from the other party something which was paid to him and which he should not retain. The rule is one of estoppel, and the exceptions to the rule are as numerous as the instances where applied, as is well and fully set forth in 21 C.J. 1205, sec. 206; see, also, 21 C.J. 1207, sec. 208. One of the important exceptions is stated in 21 C.J. 1210, as follows: "An important exception to the rule usually recognized is that where the contract is void as against public policy, a person who has accepted a benefit thereunder will not be estopped to defend against the contract when it is sought to be enforced against him."
In section 1099, 2 Elliott on Contracts, it is said: "Thus in case the contract violates a rule of law which has for its object the protection of one class of men from the oppression and imposition of another class of men, the really guilty party is never allowed any relief under the statute or permitted to set up the statute as a defense to relief sought by the other party. That which was intended as a shield for one of the parties will not be converted into a sword with which to work his destruction." One well-annotated case on this point should suffice: Mobile O.R. Co. v. Dismukes, 94 Ala. 131,10 So. 289, 17 L.R.A. 113.
Again in 13 C.J. 506, sec. 453, the rule is stated: "An agreement void as against public policy cannot be rendered valid by invoking the doctrine of estoppel."
Here the county seeks to enforce an executory contract, based upon a contract contrary to public policy, and to recover moneys from appellant.
In 44 C.J. 120, sec. 2221, it is said: "As in the case of other contracts, municipal contracts involving in their execution or enforcement a violation of public policy, are void." *Page 469 And in 13 C.J. 507, sec. 456, the text reads: "The fact that the party seeking to enforce executory provisions of an illegal contract, although they consist only of promises to pay money, has performed the contract on his part, and that unless the other party is compelled to perform he will derive a benefit therefrom will not induce the court to enforce such provisions."
In Glass v. Basin Bay State Min. Co., 31 Mont. 21,77 P. 302, a case involving a contract both ultra vires and illegal on the ground of malum prohibitum, the court said: "The general principle is well established that a contract founded on an illegal consideration, or which is made for the purpose of furthering any matter or thing prohibited by statute, or to aid or assist any party therein, is void. This rule applies to every contract which is founded on a transaction malum in se or which is prohibited by statute, on the ground of public policy." (Secs. 7501, 7553, Rev. Codes).
Section 646, 2 Elliott on Contracts, says: "If the object of a contract is in fact illegal, it is immaterial whether such agreement is forbidden by the Constitution of the United States, or of a state, by statutory enactment, state or federal * * * or whether the thing forbidden is malum in se or malumprohibitum." Where the prohibition is found in the Constitution, it is effective. (Garms v. Jensen, 103 Cal. 374, 37 P. 337;Oakland Paving Co. v. Hilton, 69 Cal. 479, 11 P. 3.)
Directly covering all that can be contended as to the alleged right of Fergus county to recover on the theory advanced in support of some cases that an innocent party may recover back money or property parted with from the other party who acquired it, is Central Transportation Co. v. Pullman's Palace CarCo., 139 U.S. 24, 11 Sup. Ct. 478, 35 L. Ed. 55. In every instance where the illegal promise is to pay money, that promise cannot be enforced.
In Baltimore Process Co. v. Red Lodge Brew. Co., 66 Mont. 407,213 P. 798, this court refused to compel the payment of money on an executory contract contrary to public policy, and adopted the language of a California case as follows: "`A contract *Page 470 in its inception must possess the essentials of having competent parties, a legal object, and a sufficient consideration. Lacking any one of these, no binding obligations result; hence a contract which contemplates the doing of a thing which is unlawful at the time of the making thereof is void.'"
The following further cases support the rule that executory promises to pay money, invalid because contrary to public policy, cannot be enforced. (Chicago etc. R. Co. v. Wabash etc. R.Co., 61 Fed. 993, 9 C.C.A. 659; Kelly v. Burke, 132 Ala. 235,31 So. 512; Brown v. Raisin Fertilizer Co., 124 Ala. 221,26 So. 891; Funk v. Gallivan, 49 Conn. 124, 44 Am. Rep. 210; Goodrich v. Tenney, 144 Ill. 422, 33 N.E. 44, 36 Am. St. Rep. 459, 19 L.R.A. 371; Gleason v. Chicago etc. R. Co., (Iowa) 43 N.W. 517; Dillon v. Allen, 46 Iowa, 299, 26 Am.Rep. 145; Myers v. Meinrath, 101 Mass. 368, 3 Am. Rep. 368;Johnson v. Owen, 72 Neb. 477, 100 N.W. 945; Richardson v.Scott's Bluff County, 59 Neb. 400, 81 N.W. 309, 80 Am. St. Rep. 682, 48 L.R.A. 294; Edgerly v. Hale, 71 N.H. 138,51 A. 679; Arnot v. Pittston etc. Coal Co., 68 N.Y. 558, 23 Am.Rep. 190; Clippinger v. Hepbaugh, 5 Watts S. (Pa.) 315, 40 Am. Dec. 519; Buckeye Marble etc. Co. v. Harvey, 92 Tenn. 115,20 S.W. 427, 36 Am. St. Rep. 71, 18 L.R.A. 252; Powers v.Skinner, 34 Vt. 274, 80 Am. Dec. 677; Capehart v. Rankin,3 W. Va. 571, 100 Am. Dec. 779.)
We respectfully submit that the constitutional provision of Montana invoked has application to the set of facts involved in this case, and that the court erred in holding under the facts of this case that there was a liability on the note. It will be noticed that the constitutional provision referred to in the appellant's brief is a prohibition against the postponement of an obligation or liability owed, held or owned by the state or any municipal corporation therein, and we admit that the county being a part of the state falls under this prohibition of the Constitution. Yet, in spite of the constitutional provision and the prohibitions therein contained, we contend that it is the settled principle of law in this county that the appellant in this case cannot take advantage of the said prohibition and that only the respondent has a right to raise the question in a proper action. This theory has been maintained as a general rule in cases affecting the operations of banks throughout this country. (See 7 C.J. 832, sec. 797; 9 C.J. 1220, sec. 664; Fremont County v. Warner, 7 Idaho, 367,63 P. 106; Camp v. Land, 122 Cal. 167, 54 P. 839; GrangersBusiness Assn. of California v. Clark, 67 Cal. 634,8 P. 445; Rossi v. Jedlick, 115 Cal. App. 230, 1 P.2d 1065;Savings Bank v. Burns, 104 Cal. 473, 38 P. 102; Smith v.Bach, 183 Cal. 259, 191 P. 14; Machado v. Bank of Italy,67 Cal. App. 769, 228 P. 369; Blochman Commercial Sav. Bank v. F.G. Investment Co., 177 Cal. 762, 171 P. 943; Bay CityBldg. Loan Assn. v. Broad, 136 Cal. 525, 69 P. 225;Webster Mfg. Co. v. Byrns, 207 Cal. 630, 280 P. 101;Dougherty v. California Kettleman Oil Royalties, 9 Cal. 2d 58,69 P.2d 155; Brollier v. Bankers Mfg. Co.,137 Kan. 298, 20 P.2d 817; Brown v. Capps, 164 Okla. 91,22 P.2d 1008; First Nat. Bank of Seattle v. Henrich, 186 Wash. 499,58 P.2d 827; Merchants Nat. Bank of San Francisco v.Weston, 34 Cal. App. 693, 168 P. 587; Shawnee Nat. Bank v.Purcell etc. Co., 34 Okla. 34, 124 P. 603, 41 L.R.A. (n.s.) 494; Organ et al. v. Winnemucca State Bank Trust Co.,55 Nev. 72, 26 P.2d 237; Power County v. Evans Bros. Land Livestock Co., 43 Idaho, 158, 252 P. 182; United Bank TrustCo. v. Joyner, 40 Ariz. 229, 11 P.2d 829; LathamMercantile Commercial Co. v. Harrod, 71 Kan. 565,81 P. 214.) *Page 472 The First National Bank of Fergus County became insolvent and suspended business December 10, 1923. It had on deposit at that time funds of Fergus county of approximately $700,000, secured by a depository bond executed by a number of individuals, of whom defendant was one. His liability on the bond was expressly limited to $30,000. Through moneys received from the receiver and property turned over by the bank the liability of the bondsmen was reduced by 62 per cent., leaving 38 per cent. still due. The county commissioners then adopted a resolution purporting to release any bondsmen who would pay to the county a sum in cash equal to 38 per cent. of his bond liability, or, in lieu of cash payment, upon such bondsmen giving a promissory note for such sum upon such terms and conditions and security as would be satisfactory to the county. Pursuant to that resolution defendant was requested to, and did on September 11, 1928, sign a promissory note in the sum of $11,400, payable May 1, 1932, bearing two per cent. interest until maturity, and eight per cent. thereafter. Thereafter defendant paid $400 on the principal of the note, and paid the interest up to December 31, 1929.
This action was brought to recover on the note. The defense asserted is that the note was based upon an illegal and void consideration, in that it was an attempt to postpone an obligation or liability contrary to the provisions of section 39, Article V of the Constitution. It was also alleged that no action was ever brought on the bond, and that action thereon is now barred by section 9029, Revised Codes. The reply in effect alleges that defendant is estopped from asserting the defense relied on.
The cause was tried to the court without a jury. The court found for plaintiff, and defendant has appealed from the judgment. *Page 473
The court found that section 39, Article V of the Constitution, has no application to the facts of this case and that, if that section did apply, defendant is not estopped from setting up the illegality of the note. If the conclusion of the[1] trial court is correct, then the judgment must be affirmed, even though the court may not have given the correct reason for its conclusion. (Whitcomb v. Beyerlein, 84 Mont. 470,276 P. 430; Dubie v. Batani, 97 Mont. 468, 37 P.2d 662.)
Section 39 of Article V provides: "No obligation or liability[2] of any person, association or corporation, held or owned by the state, or any municipal corporation therein, shall ever be exchanged, transferred, remitted, released or postponed, or in any way diminished by the legislative assembly; nor shall such liability or obligation be extinguished, except by the payment thereof into the proper treasury."
In considering the correctness of the court's conclusion we shall assume that the taking of the note in question constituted an unlawful postponement of the obligation or liability under the bond. It will be observed that section 39 prescribes no penalty for its violation. It simply declares a policy. It does not make it unlawful for the state or a subdivision thereof to become the payee of a promissory note. It does prohibit the postponement of an obligation, and for the purpose of this case we shall consider the note in question here, which gave defendant until 1932 to pay the obligation, as coming in conflict with section 39, Article V.
The provisions of that section are designed for the benefit of taxpayers by protection of the obligations and liabilities held or owned by the state and municipal corporations. Under the facts here, if payment on the note cannot be enforced, then no recovery can be had at all because the statute of limitations has run against the liability under the bond and the constitutional provision which was intended to protect the taxpayer will be used to defeat justice and accomplish a legal wrong. It will operate to extinguish the obligation of defendant otherwise than by payment thereof into the proper treasury, contrary *Page 474 to the terms of the very section of the Constitution relied upon by defendant.
While generally a party to an illegal contract will not be[3] permitted to enforce it, yet there is an exception to the rule which has been so uniformly accepted by the courts that it is no longer regarded as an exception, but has itself become a general rule. It is succinctly stated in the Restatement of the Law of Contracts, section 601, as follows: "If refusal to enforce or to rescind an illegal bargain would produce a harmful effect on parties for whose protection the law making the bargain illegal exists, enforcement or rescission, whichever is appropriate, is allowed." Cases most frequently applying the rule are those wherein a national bank makes a loan or other contract expressly prohibited by law and wherein the law does not otherwise prescribe the consequences that flow from a violation of its terms. The courts are practically unanimous in holding that such contracts are enforceable and binding. Among the cases so holding are the following: Union Gold Min. Co. v. RockyMountain Nat. Bank, 96 U.S. 640, 24 L. Ed. 648; Union Nat. Bankof St. Louis v. Matthews, 98 U.S. 621, 25 L. Ed. 188;Thompson v. Saint Nicholas Nat. Bank, 146 U.S. 240,13 Sup. Ct. 66, 36 L. Ed. 956; Third Nat. Bank of Buffalo v. BuffaloGerman Ins. Co., 193 U.S. 581, 24 Sup. Ct. 524, 48 L. Ed. 801;Kerfoot v. Farmers' Merchants' Bank, 218 U.S. 281,31 Sup. Ct. 14, 54 L. Ed. 1042; Schneider v. Thompson, (8 Cir.)58 F.2d 94; Lucas v. Federal Reserve Bank, (4 Cir.)59 Fed. 2d 617; Camp v. Land, 122 Cal. 167, 54 P. 839; Machado v. Bank of Italy, 67 Cal. App. 769, 228 P. 369; 9 C.J.S., Banks and Banking, p. 1220, sec. 664; 7 C.J. 832.
In Rossi v. Jedlick, 115 Cal. App. 230, 1 P.2d 1065, the court stated the rule which has application here, as follows: "Where a class of contracts is prohibited for the protection of particular parties thereto, the adverse parties cannot take advantage of the illegality of such contracts. * * * The inhibitions of the Corporate Securities Act are designed for the protection of the purchasers of stock in corporations, and *Page 475 the finest of technicalities should not be indulged in to enable the promoters of such corporations to escape their obligation to the various persons whom the statute was designed to protect."
Mr. Williston, in his revised edition on Contracts, volume 5, section 1632, states the rule as follows: "In some cases where a refusal to enforce an agreement would produce the very effect which the law seeks to guard against, a corporation is allowed to enforce it, although it was particularly prohibited and made illegal. Thus, for the security of depositors and others, banks are prohibited from entering into certain kinds of loans or purchases. When a transaction of this sort has been entered into, however, should the corporation be refused a right of recovery the result would be the impairment of the assets of the bank, — the very result which the law seeks to prevent, and, therefore, the bank is allowed to recover." Many cases are cited to support the text.
Here the defendant reaped the benefit of the note in question.[4] By it he reduced the legal interest rate on the obligation from 8 per cent. to 2 per cent. He obtained a release of his bond obligation, resulting in an extension of time of more than three years to pay his obligation during which time the statute of limitations has run against the bond obligation. He recognized the note as valid by making some payments thereon. He will not be permitted to say that the note is invalid and unenforceable and thus defeat the very purpose of section 39 of Article V, which, among other things, prohibits the extinguishment of an obligation or liability except by payment into the proper treasury.
The judgment is affirmed.
MR. CHIEF JUSTICE JOHNSON and ASSOCIATE JUSTICES STEWART, ANDERSON and MORRIS concur.
Rehearing denied January 27, 1939. *Page 476