HOSPITAL DISTRICTS ‑- PROMISSORY NOTES ‑- AUTHORITY TO TAKE AS EVIDENCE OF INDEBTEDNESS FOR SERVICES RENDERED

HOSPITAL DISTRICTS ‑- PROMISSORY NOTES ‑- AUTHORITY TO TAKE AS EVIDENCE OF INDEBTEDNESS FOR SERVICES RENDERED

1. A hospital district may accept a promissory note as evidence of an indebtedness due it for services rendered.

2. A hospital district has no authority to discount at a bank "with recourse" a promissory note received by it for services rendered.

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                                                                  March 29, 1955

Honorable Patrick McCabe
Prosecuting Attorney
Garfield County
Pomeroy, Washington                                                                                                                Cite as:  AGO 55-57 No. 47

Dear Sir:

            We acknowledge your request for an opinion received in this office February 28, 1955 on the following questions:

            1. May hospital districts accept notes or other evidences of indebtedness for hospital services?

            2. May hospital districts negotiate notes received for hospital services at discount and "with recourse"?

            3. May the commissioners delegate the authority to one member of the board to execute necessary endorsements on such notes?

            We answer your first question in the affirmative, your second question in the negative, and our negative answer to your second question obviates an answer to the third.

                                                                     ANALYSIS

            1. The pertinent statutory provisions, insofar as applicable to your questions,  [[Orig. Op. Page 2]] are the following:

            RCW 70.44.010

            "Municipal corporations, to be known as public hospital districts, are hereby authorized and may be established within the several counties of the state to own and operate hospitals and to furnish hospital service for the residents of the district and other persons."

            RCW 70.44.060

            "A public hospital district shall have power:

            "(5) To contract indebtedness or borrow money for corporate purposes on the credit of the corporation or the revenues of the hospitals thereof, and issue bonds therefor, bearing interest at a rate not exceeding six percent per year, payable semiannually, the bonds not to be sold for less than par and accrued interest."

            In accepting a promissory note as evidence of a valid claim for services rendered, the district is in no way impairing its obligation.  On the contrary, it is exercising ordinary and very recognized business practices in reducing its open account to an instrument capable of simplified proof in the event of suit, as well as assuring the district of costs and expenses otherwise payable by it.

            2. We perceive both practical and legal objections, however, to a procedure which would permit the hospital district to endorse and discount promissory notes so received ‑ particularly "with recourse."

            In the first place, a municipal corporation has only those powers specifically granted by statute, or which are necessarily implied therefrom.  In our opinion, the statutory authority (RCW 70.44.060) "to borrow" money cannot be construed to extend to include the discounting and endorsing of negotiable  [[Orig. Op. Page 3]] instruments.  And our examination of the hospital district law (RCW 70.44) does not disclose any provision which could be construed to permit the practices in question.

            A promissory note accepted by the hospital is not a debt of the hospital district but is merely further evidence of an undisputed debt, for hospital services reduced to this form.  And where endorsed "with recourse," it has the effect of binding the credit of a municipal corporation to the obligation of the individual.  For the hospital district not only takes less than the face value of its claim, but also, by its endorsement, guarantees the debt to the full face value, plus interest and attorneys' fees and costs.

            We citeFarnsworth v. Wilbur, 49 Wash. 416, although not exactly in point, still, in our opinion determinative of the question herein involved.  The court said, in holding that the city could not accept less than the face of its judgment:

            "* * * It is true the council has the exclusive management of the fiscal affairs of the town, and must be accorded a somewhat wide discretion as to the manner in which it will conduct such affairs, yet we think this power does not enable them to give up to third persons the actual property of the town.  No doubt the town council may legally compromise doubtful or disputed claims where they act in good faith and with ordinary discretion, but they cannot under the guise of a compromise surrender up valuable rights or claims over which there is no longer room for a substantial controversy.  Such an attempt is a gift rather than a settlement of a doubtful or disputed claim, and gifts to private individuals are beyond the powers of the town."

            Even assuming that the hospital district might have power to issue negotiable paper of its own, this power "does not include power to execute a guaranty of a promissory note.  A city cannot guarantee the payment of bonds or other obligations.  Nor can a city become an accommodation indorser [[endorser]]or surety without legislative authority."  (McQuillin, Municipal Corporations (3rd Ed.) § 39.10).

             [[Orig. Op. Page 4]]

            From the foregoing, it follows that where a hospital district has no power to execute a guaranty of a promissory note, it cannot discount the promissory note of one of its patients given for services rendered to a bank "with recourse."

            3. Our answer to the second question, being in the negative, obviates an answer to the third, since the question presupposes an affirmative answer.

            We hope the foregoing analysis will prove helpful to you.

Yours very truly,

DON EASTVOLD
Attorney General

MITCHELL DOUMIT
Assistant Attorney General