Yoakum County Water Control & Improvement District No. 2 v. First State Bank , 13 Tex. Sup. Ct. J. 59 ( 1969 )

HAMILTON, Justice.

This suit was brought by the First State Bank of Silverton, Respondent, to collect ten $1,000 bonds issued by the Yoakum County Water Control and Improvement District No. 2, defendant in the trial court. Two groups of petitioners, the Gueterslohs and McFalls, were made parties defendant because of their alleged attempts to interfere with the assessment and collection of taxes needed to liquidate the bonds upon maturity. Petitioners sought by collateral attack to show that the bonds were void, alleging that the bond issuance was not authorized by an election as required by Art. 16, Sec. 59(c) of the Texas Constitution, Vernon’s Ann.St. The trial court ordered a summary judgment for the respondent Bank. The Gueterslohs and McFalls appealed, resulting in the Court of Civil Appeals affirmance of the summary judgment. 433 S.W.2d 200.

The primary issue here is whether or not a bond issuance can be collaterally attacked. If a collateral attack is proper, then the trial court and Court of Civil Appeals erred. However, we hold that a bond issuance cannot be collaterally attacked; rather a bond issuance can be attacked only through a procedure prescribed by statute. As will be seen in the discussion below, this procedure was not followed by petitioners here.

On December 8, 1955, seven persons who had contracted for the purchase of the land for which the Water District was formed filed the petition for organization of the district. The seven purchasers received title to the surface interest in the land on December 12, 1955. The Gueter-sloh petitioners purchased the surface interest in January, 1962, allegedly without notice that the Water District had issued any bonds. The McFall petitioners had owned the mineral interests since 1927. The McFall petitioners claim no knowledge of the existence of the District nor issuance of any bonds until July, 1963, more than six years after the District was organized and the bonds issued.

After the District was organized, three of the seven purchasers of the land and two of their wives, became the directors of the District. There are apparently some conflicts of facts and lack of information concerning the elections, qualifications of the election judges, eligibility of the voters, and records and minutes of the directors’ meetings. The petitioners allege that there was no election to approve the issuance of bonds and assessment of taxes, although the records of the District state that such an election was held on April 14, 1956, and the results of such election.

No taxes were ever collected and when respondent’s bonds matured but remained unpaid, respondent filed this suit. Respondent purchased its ten $1,000 bonds in January, 1961, allegedly in good faith. Some of the money received by the District from the sale of bonds was used for drilling wells and for the purchase of irrigation equipment, which has since disappeared. The remainder of the bond proceeds has also disappeared.

The petitioners first allege that their land should not be taxed for the purpose of liquidating the Water District’s bonds because the District has no valid existence due to infirmities in its organization. These alleged infirmities include the fact that a majority in number of the landowners did not sign the petition of organization; the persons who did sign the petition did not, at the time of signing, own land within the District; the election judges were not qualified; and the voters were not eligible. However, the transcript on its face reveals that all these legal organizational procedures were followed.

The establishment of a Water District in Texas is governed by Art. 7880, Vernon’s Tex.Civ.Stat., which in summary provides for the following procedural steps:

(1) The petition for the organization of a District shall be signed by a majority in number of the landowners and the owners of a majority in value' of the land. (Art. 7880-10).

(2) The petition shall be filed in the office of the county clerk in the county in which the land is situated. (Art. 7880-12).

(3) The county judge shall order the date of hearing of the petition by the county commissioner’s court. The county clerk shall issue a notice of such hearing. (Art. 7880-14).

(4) At such hearing, any person whose land is included in or affected by the creation of the District may appear and contest such creation. (Art. 7880-17).

(5) Any person who signed the petition of organization or any person who appeared before the commissioner’s court and contested such organization may appeal to the district court. (Art. 7880-18).

(6) If the commissioners’ court approves the petition, it shall appoint five directors. (Art. 7880-20).

(7) Such directors shall order an election for the purpose of confirming the organization of the District. (Art. 7880-23).

(8) If a majority of the voters favor the organization of the District, then such organization is finally confirmed and ratified. (Art. 7880-24).

The petitioners’ contentions relating to the validity of the district itself, regardless of their merit, cannot be raised in this suit. Art. 7880-25a states:

“It is the intent hereof that Sections 18 and 19 of this Act * * * shall afford all interested persons adequate and exclusive opportunity to protest the creation of a district, and thereafter, save as hereinafter provided, no suit shall be permitted to be instituted in any court of this State contesting the validity of the formation and boundaries of a district created hereunder, or contesting any bonds or other obligations created hereunder * * *; It is expressly provided, however, that all such matters may be judicially inquired into and determined in any suit brought by the State of Texas, through the Attorney General, upon his own motion, or upon the motion of any person affected by the existence or plans of the district, upon good cause shown * *

Hence, there are only two ways in which to raise the question of the validity of the District itself:

(1) Appeal to the district court from the commissioner’s court.

(2) Suit by the State of Texas through the Attorney General.

The petitioners did not use either of these two methods. Because the statute provides for these two methods exclusively, the petitioners are therefor precluded from using any other method of contesting the District’s validity. In Walling v. North Central Texas Municipal Water Authority, 162 Tex. 527, 348 S.W.2d 532 (1961), this Court stated:

“When a body has acted and has been dealt with as a corporation after attempting to comply with the requirements of a valid statute authorizing its creation as such, only the State may question its corporate existence on the ground that the law was not followed.”

There also exists an independent ground for the validity of the District. The 55th Legislature at its Regular Session in 1957 enacted in Ch. 310, Sec. 2, the following :

“All organizational proceedings of water control and improvement districts, * * * wherein an election has been held for the confirmation of the district and a majority of those participating in the election voted in favor of the confirmation of the district, are hereby in all things validated, ratified and confirmed and the organization of such districts is hereby declared to have been accomplished and completed.”

Hence, since there was a confirmation election held and since a majority of the voters favored the organization of the district, the Legislature thereby gave full validity to the District, regardless of its alleged infirmities.

Petitioners’ next allegation is that there was no bond election. Art. 16, Sec. 59(c)-of the Constitution of Texas requires that the Legislature shall not authorize the issuance of bonds by a district “* * * unless such proposition shall first be submitted to the qualified property tax-paying voters of such district and the proposition adopted.” This provision is also incorporated into Art. 7880-9. Petitioners allege there was no such election; because the constitution requires that an election be held, petitioners claim that the bonds are void; otherwise, their constitutional due process right would be abridged.

Petitioners overlook the fact that the Legislature has the power to determine how such bond elections shall be conducted and what body has jurisdiction to determine if the correct procedures have been followed or if there has been an election at all. Art. 16, Sec. 59 of the Texas Constitution provides:

“The Legislature shall authorize all such indebtedness as may be necessary to provide all improvements and the maintenance thereof requisite to the achievement of the purposes of this amendment, and all such indebtedness may be evidenced by bonds of such conservation and reclamation districts, to be issued under such regulations as amy [may] be prescribed by law * * [Emphasis added.]

The Legislative procedures concerning the election for the issuance of bonds are contained in Art. 7880 and, in brief, state :

(1) Whenever a district has been organized, has adopted a plan of improvements and has approved an engineer’s report, then the directors of the District may order an election to authorize the issuance of bonds. (Art. 7880-78).

(2) The directors shall name the polling places and appoint election judges and clerks. (Art. 7880-27).

(3) Notice of such election shall be given by publishing the notice once a week for four consecutive weeks. (Art. 7880-80).

(4) The election officers shall prepare the returns in triplicate: one to be delivered to the District president, one to the District secretary and one retained by the election Judge. The directors shall canvass the election returns. (Art. 7880-29).

(5) Before such bonds are sold, a record of all proceedings of the issuance of the bonds shall be filed with the Attorney General who shall examine same and give his opinion thereon.

“When such record is approved said bonds shall be issued or duly executed and shall be submitted to the Attorney General for approval. If he shall find that same have been issued in accordance with the provisions of law and that such bonds are valid, binding obligations upon the district he shall so officially certify and execute a certificate thereof which shall be filed in the office of the State Comptroller and be recorded in a record kept for that purpose.” (Art. 7880-34).

The parties have stipulated that the records of the District, on their face, show that all the statutory requirements had been met, including the notice of election, the holding of the election and the final approval by the Attorney General. The approval of the bond issue was given by the Attorney General on April 19,1957.

The bond issue procedures having been approved by the Attorney General and the bonds having been registered in the office of the State Comptroller on April 19, 1957, the petitioners are therefore precluded from questioning the validity of the bonds as a defense in this suit. Art. 7880-34 further provides:

“Such bonds after being approved [by the Attorney General] and registered [with the State Comptroller] shall be held in any suit or proceeding in which their validity may be questioned to be valid, binding obligations of such district, provided, however, that any party interested therein may file a suit thereon at any time prior to the registration of same by the State Comptroller, but not thereafter. Said bonds shall not be so registered in the office of the State Comptroller until twenty days after the date of the election authorizing the issuance thereof.”

The Legislature has herein delegated to the Attorney General the duty of determining the validity of the bonds which necessarily includes a determination of whether a bond election was held and such determination is conclusive unless the contestant files suit before the bonds are registered with the State Comptroller.

Art. 7880 provides only two methods for contesting a bond issue:

(1) Suit filed by the contestant prior to registration of the bonds with the State Comptroller. (Art. 7880-34).

(2) Quo warranto proceedings by the State of Texas, through the Attorney General upon his own motion or upon the motion of any other person if good cause is shown. (Art. 7880-25a).

These two methods are exclusive of all others. Since the petitioners did not follow the prescribed procedure for contesting the bond issue or bond election, they are thereby precluded from raising the “no election” defense in this suit. In Slater v. Ellis County Levee Improvement District No. 9, 120 Tex. 272, 36 S.W.2d 1014 (1931), the petitioners denied that there had been a legal issuance of bonds because there had been no legal election, although there may have been some form of an election wherein none of the voters nor election officials were qualified (in effect, no election was held for the qualified voters). The court said, “The remedy given by the statutes * * * for contesting elections of this character for irregularities or fraud is exclusive of all others.”

Supporting the “no election” allegation, petitioners rely primarily on Miller v. State ex rel. Abney, 155 S.W.2d 1012 (Tex.Civ.App.1941) writ ref’d. However, this case is inapplicable here because petitioners here have not followed the proper procedure for contesting the election or for alleging that there was no election; whereas in the Miller case, the proper procedure was followed, that is, the suit was a quo warranto proceeding through the Attorney General provided for in Art. 7880-25a.

Petitioners next allege that they were not given proper notice of the bond election. The District gave notice by publication as required in Art. 7880-80. Petitioners claim that such notice by publication was insufficient, citing City of Houston v. Fore, 412 S.W.2d 35 (Tex.1967) and Mullane v. Central Hanover Bank and Trust Co., 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950). These cases, however, involved beneficiaries of a special tax assessment based on benefit and beneficiaries of a trust, respectively, rather than persons subject to an ad valorem tax plan as the District here had adopted. The Court in the Mullane case admitted that “[pjersonal service has not in all circumstances been regarded as indispensable to the process due to residents * * In City of Houston v. Fore, supra, this Court specifically limited the requirement of notice by mail to instances “* * * where the legislature, instead of prescribing an inflexible formula, authorizes an administrative determination of the lands benefitted and the amount of benefits accruing to each tract.” The District’s ad valorem tax plan is not such as is governed by the City of Houston v. Fore. Petitioners have not cited any cases, in this State or any other state, where it has been held that notice by publication was not sufficient notice for the holding of an election for the issuance of bonds which were to be paid through the levy of an ad valorem tax. We are unable to find such a case. Notice by publication is the universal method of notice for such a bond election. Therefore, we are not prepared to hold that failure to give personal notice violates the constitutionally required due process.

Hence, since petitioners have not followed the proper Legislative procedures for contesting the organization of the District and the bond election, they are therefore precluded from contesting same here. As a result, this Court need not consider the petitioners’ other allegations, such as the inapplicability of estoppel by recital, the good faith test required for a holder in due course, etc.

The judgment of the Court of Civil Appeals is affirmed.

Dissenting opinion by POPE, J., in which SMITH and REAVLEY, J., join.