Kendrick v. City of Birmingham

This is a proceeding instituted in a court of law, under the Declaratory Judgment Act, now §§ 156-168, inclusive, Code of 1940, Title 7, by a citizen and taxpayer of the city of Birmingham against said city and others, asserting that said municipal corporation has no authority to vote and issue general obligation bonds to refund revenue bonds issued under and in pursuance of the Kelly Act and its amendments, brought forward in the Code of 1940, as subdivision 3 of Article 2, Tit. 37, §§ 308 to 340, inclusive. Said revenue bonds were issued to fund a "WPA Project", to acquire lands, rights of way and construct, with aid furnished by the United States through WPA, an Industrial Water System for Birmingham and vicinity. Also questioning the validity of the ordinance under § 222 of the Constitution of 1901, calling the election in said city for authority to issue general obligation bonds to refund revenue bonds, and also bonds to provide funds for building a boosting system as an adjunct to the Industrial Water System, to accelerate the water flow.

Sundry reasons are stated in the last paragraph of the petition, as mere conclusions of law, to sustain the petitioner's contentions.

The defendants, without testing the sufficiency of the petition's averments, filed an answer admitting the truth of said averments, but denied the pleader's conclusions of law, and the controversy was submitted to the circuit court on the admitted averments of the petition, without evidence, as the bill of exceptions states.

The averments of the petition, therefore will be construed liberally in favor of the petitioner, and legitimate inference arising from the facts stated will be taken into account in disposing of the controversy.

The project was completed in 1938, and the revenue bonds were issued in pursuance of said act in the aggregate sum of $4,000,000, and the funds acquired thereby, together with from five to six million dollars furnished by the Works Progress Administration, were used in completing said project. The bonds draw interest at the rate of 4% per annum, payable semiannually, and mature, respectively, on the 1st of April of each year, beginning with April 1, 1941, up to April 1, 1981, and are held and owned by the United States through the Reconstruction Finance Corporation. These bonds are secured by a pledge of the entire revenue arising from the operation of said Industrial System, and a "statutory mortgage" on the plant as contemplated and authorized by said Kelly Act. Embodied in each of said bonds is the following paragraph: "Neither this nor the other Bonds of this issue constitute an indebtedness ofthe City of Birmingham within any constitutional provision or statutory limitation of the State of Alabama, nor are they 'bonds' within the meaning of Section 222 of the Constitution of Alabama. It is hereby recited, certified and declared that no property or funds of the City of Birmingham have been used in connection with the Project costs, and the City of Birmingham has undertaken no obligation to complete the Project or to contribute any property or services or to pay any cost in connection therewith except from the proceeds of this and the other Bonds of this issue." (Italics supplied.)

The Industrial System is owned and operated by the City of Birmingham in accordance with said Kelly Act. The water impounded and controlled by said system is rendered unfit for human consumption, and is furnished to industrial plants, firms and corporations, on rates fixed and charged by the city. Among such privately owned industries, supplied in part, is the Birmingham Water Works, a privately owned corporation, which purifies and furnishes water to the citizens of Birmingham for domestic and other uses. It owns its own supply system but purchases from the Industrial System under a non-competitive agreement, within the spirit of the Kelly Act. Code of 1940, Tit. 37, § 308.

The defendant municipality has defaulted in some of its payments of principal and interest, and the owner of the bonds has agreed to allow redemption by the payment of principal and interest without the penalty of 3% provided in the bonds as a condition to the right of the payor to call the same.

It has been consistently ruled here that revenue bonds issued under the Kelly Act, the presently pertinent provisions of which are embodied in §§ 312, 325 and 334 of Tit. 37, Code of 1940, are not a debt of the municipality issuing the same, and that such obligation must be payable solely out of revenues arising from the operation of systems, the acquisition or construction of which are herein provided for. The statutes so expressly provide. Oppenheim v. City of Florence, 229 Ala. 50,155 So. 859; Bankhead v. Town of Sulligent, 229 Ala. 45,155 So. 869, 96 A.L.R. 1381; Smith v. Town of Guin et al., 229 Ala. 61,155 So. 865; Code of 1940, Tit. 37, § 312.

The statute also expressly provides that refunding bonds issued to refund such previously issued revenue bonds under said act "shall be payable solely from the revenues derived from the operation of the combined system." Code of 1940, Tit. 37, §§ 312, 325.

Nor can such authority be found in subdivision 1 of article 2, Tit. 37, embracing §§ 275 to 292 et seq., for issuing general obligation bonds to refund revenue bonds issued under the provisions of the Kelly Act. This subdivision deals with "Public Improvement Bonds."

Section 275, provides: "The governing body of any municipality in this state may order elections to be held in such municipality, voting upon and deciding the question as to whether or not the bonds of such municipality shall be issued for such purposes as are authorized by law, whenever such governing body deems this necessary." (Italics supplied.)

Said subdivision 1 deals with the debt contracting powers of municipalities. Section 276, enumerates the obligations for which the municipality may issue bonds, specifying among others: "For the funding of floating debts; for the funding of interest on debts whether such debts are represented by bonds, notes, interest coupons, or other obligations; for the funding of such amount or portion of any judgment rendered against the municipality as represents either principal or interest or both principal and interest of any bonded or other indebtedness of the municipality, together with any unpaid interest then accrued on such amount or such portion of such judgment." Code of 1940, § 276, p. 517, Tit. 37.

The section of said subdivision 1 of article 2, which provides for the issuance of refunding bonds, contains the following: "The provisions of this section shall not apply to revenue bonds issued under this title." Code of 1940, Tit. 37, § 287.

Appellee, municipality, rests his case upon the "General Provisions" embodied in Chapter 6, Article 1, Tit. 37, embracing §§ 251 to 273 et seq.; and more especially, § 253, which deals with "Refinancing Indebtedness" and provides, inter alia; "The governing body of any county, city, or town which shall authorize the issuance of refunding or funding bonds may exercise all powers deemed necessary by such governing body for the execution and fulfillment of any plan or agreement for the settlement, adjustment, refunding or funding of the indebtedness of such county, city or town, not inconsistentwith the provisions of law relating to the issuance of refunding or funding bonds."

As clearly appears this statute deals specifically with the indebtedness of the county, city or town, and not with obligations that are not debts and are payable out of revenues arising from the operations of a particular project or system. To apply these powers to refunding revenue bonds issued under the Kelly Act would be inconsistent with the provisions of said act.

The conclusion therefore is that the proposed issue of refunding bonds is not authorized by law and is ultra vires the city's corporate power.

The ordinance calling the election presents two proposals to the electorate; first, shall the municipality issue general obligation bonds for the sum of $4,120,000, to refund revenue bonds issued under the Kelly Act dealt with above; and, second, shall the municipality issue general obligation bonds to purchase and install equipment for boosting the flow of the water through the Industrial System?

The idea of industrial water system or waterworks, as appellee recognizes, was introduced into our law by the Kelly Act which provides: "The term 'industrial' when used herein to describe a waterworks or water system means a waterworks or water system designed to supply water primarily for use other than human consumption." Code of 1940, Tit. 37, § 308.

The Industrial Water System about which we are concerned here is in the class first mentioned, and as before stated is owned by the City of Birmingham.

The revenue bonds issued to establish it are secured by a pledge of the revenues arising from its operation and a statutory mortgage which can not be foreclosed so as to sell the system and deprive the municipality of its ownership. Such mortgage and the pledge of the revenues can only be enforced by the appointment of a receiver by a court of equity to operate the system, collect the revenues and apply the same to the payment of the revenue bonds. Code of 1940, Tit. 37, §§ 313, 314 and 315; Bankhead v. Town of Sulligent, supra.

Section 251, Code of 1940, Tit. 37, dealing with "Power of municipal corporations to secure payment of bonds for school buildings, waterworks, gas, etc., plants," provides: "Any city or town of the State of Alabama that may hereafter construct or purchase school buildings, a waterworks plant, gas plant, electric light plant, or other light and power plant, or extend or enlarge a waterworks plant, or light and power plant, then owned by such city or town, may, by its board of mayor and aldermen, or other governing body of such city or town, execute a mortgage on the school buildings, the waterworks plant, or light and power plant, purchased or constructed by such city or town, to secure the bonds and indebtedness, and interest on such bonds and indebtedness created in the purchase, construction, extension, or enlargement of such school buildings, waterworks plant, or light and power plant, such mortgage to be signed by the mayor, and countersigned by the clerk of said city or town or by such other person or persons as the mayor and aldermen, or the governing body of such city or town may direct by appropriate resolution. If, in the judgment of said board of mayor and alderman, or the governing body of said city or town, it is desirable that such mortgage be executed before such school buildings or plant is constructed, and if it is so executed, for the purpose of providing money to construct such plant, the fact that such mortgage is executed before the construction of such buildings and plant shall not render such mortgage invalid."

This section deals with domestic waterworks plants, designed to furnish water for domestic use and human consumption. Prior to the Kelly Act, the Legislature, and we add the Constitution makers, to adopt the language of the New York court in People v. Hamilton, 227 A.D. 356, 238 N.Y.S. 81, 82, "When the Legislature has used the word 'Waterworks' it has been in relation to the supply water for domestic and drinking purposes of cities, villages, towns, and water supply districts." Said section does not authorize the issuance of bonds, secured by contract mortgage, and subject to foreclosure by sale of the property, for additions to the Industrial Waterworks System, brought into existence in pursuance of the provisions of the Kelly Act. Code of 1940, Tit. 37, §§ 308-340.

Section 324 of said subdivision 3 (the Kelly Act) authorizes the issuance of "additional bonds" for "improving, enlarging, extending, or repairing any such system or combined system pursuant to the provisions of this subdivision." Fuller v. City of Cullman, 240 Ala. 309, 199 So. 2.

The refunding bonds, the issuance of which was approved, in Lang v. City of Mobile et al., 239 Ala. 331, 195 So. 248, 253, it was shown by evidence and found as a fact "That the facilities which the city proposes to lease to the Department of State Docks and Terminals would in themselves produce revenues yearly sufficient to pay the proposed rental and in addition would produce a revenue for the state as a part of its general operating revenue; that the use of the said facilities to be acquired under the proposed lease would effect economies and increase the efficient operation of the existing state-owned facilities; and that the annual rentals to be paid under the proposed lease will be sufficient to amortize the refunding bonds as they mature, both as to principal and interest; and that the rentals will be paid out of the revenues to be derived from this operation of leased facilities, or from the general gross operating revenue derived by the state from the state-owned marine terminals." Such revenues being pledged to the payment of said refunding bonds.

If the United States acting through the Works Progress Administration had invisioned that the City of Birmingham would, within three years from the completion of this Industrial Waterworks System, undertake to so incumber it by mortgage or other general obligations that it might eventually be sold into the hands of private interest, I doubt not that it would have refused to invest six million dollars therein to aid in its construction.

I concur in the majority holding that the ordinance does not violate § 222 of the Constitution by distinctly submitting two propositions to be voted for in one election. On the other questions I respectfully dissent for reasons stated in the foregoing opinion.