State Ex Rel. Murphy v. Cherry , 188 Ark. 664 ( 1934 )

Appellant, Francis A. Murphy, a large landowner and taxpayer within the limits of Big Creek Drainage District No. 15 of Craighead County, hereinafter called the district, brought this action for mandamus against appellee, Edward O. Cherry, as collector of revenue of Craighead County, to compel the collector to accept and receive overdue bonds and interest coupons of the district for the annual installment of drainage assessments due against his lands, and to issue his official receipt for said taxes. The district was made a party respondent to the petition. Appellees responded, denying the right of appellant to the writ, which the court sustained, and this appeal is from that order. The court found from the evidence adduced that the present market value of the lands embraced in the district, 47,421.62 acres, is less than the amount of outstanding indebtedness of the district on account of drainage improvement. This finding is supported by substantial evidence. A total of $310,000 in bonds was issued and sold by the district, hearing date January 2, 1918, with interest payable semiannually at 5 1/2 per cent. per annum. Total assessment of benefits were made against the lands in the district of $801,789.43, which bears interest at 6 per cent. Only $46,000 in principal of the bonds has been paid, leaving a balance in principal of $264,000 and interest still unpaid. The district has been in default of its maturities, of both principal and interest, since 1928. Delinquencies in tax payments have increased greatly since 1927, and at this time approximately three-fourths of the lands in the district are delinquent for district taxes, and a large amount thereof has forfeited to the State for the nonpayment of State and other general taxes.

The Legislature of 1931 passed act 156, which provides: "The commissioners or collectors for drainage, levee and other improvement districts are authorized to and shall accept, at their face value, past-due bonds or past-due interest coupons issued by said improvement district as full payment for taxes or assessments as they accrue, and shall be accepted by the commissioners and collectors in payment for lands or other property belonging to the district that may have been forfeited to the district for the nonpayment of taxes due on the same. Provided, however, that past-due bonds or past-due interest coupons may be accepted as part payment for taxes or assessments or forfeited property; the balance to be paid in cash, provided, further, that no bondholder, by tender of bond or bonds can purchase any land from the said district in smaller quantity than as described in any call at the time said land is originally assessed."

The validity of this act is the basis of the principal contention in this case and this question has given us a great deal of concern. Appellee contends that it impairs the obligation of the contract between the district and its bondholders, and denies to the latter due process of law. in violation of both the State and Federal Constitutions, whereas appellant contends to the contrary, and that the right of set-off existed under the statute prior to 1918.

The county court, pursuant to the drainage statute, on December 30, 1918, [Crawford Moses' Digest, 3589] made an order providing for the issuance of bonds, times of payment, etc. Paragraphs E and F of this order are as follows: "E. It is further considered, ordered and adjudged that, in order to meet the interest upon the said bonds and pay the principal thereof as it matures, there is hereby appropriated for that purpose, and set aside out of the first moneys received from the collection of each installment of the said tax assessed against the real property, including lands, railroads and tramroads within said drainage district, a sum sufficient to pay the interest and principal of the bond issue maturing during the year in which that installment of the said tax is due and payable, in accordance with and as shown on the schedule hereinbefore set out, or any bonds and coupons that may have already matured and yet remain unpaid.

"F. It is further considered, ordered and adjudged that no part of the funds arising from the collection of any of the said installments shall be applied or used for any other purpose than the payment of the interest and principal of the said bonds until there has been deposited with the St. Louis Union Trust Company, in the city of St. Louis, and the State of Missouri, an amount sufficient to pay the interest and principal maturing during the year in which the installment is due and payable, as well as all other bonds and coupons already matured and remaining unpaid." The bonds themselves provided that principal and interest should be payable in gold.

The sections of the order above quoted are a part of the contract between the district and its bondholders. Section E appropriates from the first moneys received from the collection of each installment of tax, which had previously been assessed by order of the county court against the real property, a sum sufficient to pay bond maturities and interest of that year, or any past-due bonds and coupons. Section F goes still a step further and prohibits the use of said funds for any purpose, except the payment of principal and interest of said bonds, until there has been deposited with the St. Louis Union Trust Company a sum sufficient to pay principal and interest of bonds maturing during the year as well as past-due bonds and coupons. We think the necessary effect of the order was to require the payment of bonds and coupons maturing during the taxable year, and all overdue bonds and coupons pro rata; that is, if the amount collected in any year should be insufficient to pay current and past-due bonds and coupons, the funds on hand should be applied thereto without discrimination. The undisputed fact is that the district is in default on bonds falling due from 1928 down to the present, and that the collections fall far short of yielding an amount sufficient to discharge bonds and coupons overdue. Therefore, if appellant is permitted to use overdue bonds and coupons to pay his assessment or tax on assessed benefits, he will receive a preference over bondholders who are not landowners or taxpayers in the district, which, as we have already shown, is violative of the terms of the contract. Past-due bonds and coupons, being on a parity with bonds and coupons maturing during any taxable year, are entitled to share ratably in the proceeds of collections made during such year. This is impossible if some of the landowners are permitted to pay taxes with such bonds or coupons. A bondholder; who is not a landowner, is entitled to the same rights as a bondholder who is also a landowner.

Less than fifty per cent. of the land in the district is improved and in cultivation. The remainder is of very little value. If past-due bonds and coupons may be used to pay taxes, it is reasonable to presume that the valuable lands will be protected and the worthless lands allowed to become delinquent. In which event, the bonds left outstanding would be practically without security.

Viewed in any light, act 156 of 1931 permits the working of an inequality among bondholders, and therefore permits the impairment of the obligation of the contract between the district and its bondholders. In re Cranberry Creek Drain. Dist., 202 Wis. 64, 231 N.W. 588; see also Rorick v. Bd. of Commr's of Everglades Dr. Dist., 57 F.2d 1048. In Oliver v. Western Clay Drain. Dist., 187 Ark. 539, 61 S.W.2d 442, we held that: "Taking a sufficient amount of assessments to replace the money wrongfully taken from the construction fund and paid to the purchasers of the bonds will not prevent the bondholders from getting their money. It will be simply taking from the assessments the amount of money paid to them that should have been paid to the contractors, and will not deprive them of anything to which they were entitled under the law. They still have a lien on all the assessments, and there is ample provision in the law to compel the collection of the assessments. Taking this fund (judgment against the district for construction work) out of the assessments collected will simply be returning to the construction fund the amount wrongfully taken from it, and will in no way reduce the amount that the bondholders are entitled to under the law." This holding is no authority for a bondholder-landowner to pay his taxes with past-due bonds.

Nor can we agree there was any right of set-off under existing law prior to 1918 as contended by appellant. Section 1197, Crawford Moses' Digest, provides that: "A set off may be pleaded in any action for the recover of money and may be a cause of action arising upon contract or tort." This is not an "action for the recovery of money." It is a mandamus action.

Many other arguments have been advanced by learned counsel for appellant, all more or less ancillary to the matters discussed. We find it unnecessary to review them as those herein considered are decisive of this case.

It follows from what we have said that act 156 of 1931 is unconstitutional and void, and that the judgment of the circuit court is correct, and must be affirmed. It is so ordered.

JOHNSON, C.J., and MEHAFFY, J., dissent.