Scougale v. Page

The majority opinion sets out in detail the history of this litigation. It quotes from act No. 11 of 1934, and copies the salient parts of acts 130, 151 and 278, of 1937.

If full effect is given to act 278, rights heretofore created in certain creditors of the state will be impaired in that funds pledged to an account in which these creditors have an interest will be diverted to other purposes.

As set out in the majority opinion, the state's credit was at low ebb when the Forty-ninth General Assembly convened in January, 1933. Default in payment had occurred, and further default threatened. Act 167, approved March 28, 1933, was ineffective as an emergency measure because bondholders declined to refund under its provisions. The state of Pennsylvania filed suit against Arkansas in the United States Supreme Court, in which judgment against the state was asked. A suit by holders of highway bonds was brought in the United States district court at Little Rock, as a result of which the State Treasurer was temporarily restrained from disbursing highway funds under act 167 and acts making appropriations in pursuance of the program therein provided for. A three-judge court sitting in Little Rock made the temporary order permanent. See Huble v. Leonard, 6 F. Supp. 145. By consent, this permanent order was modified to permit payment of current expenses for highway maintenance.

With the state upon the one hand threatening to carry its fight to the supreme court of the United States, and with the bondholders on the other hand in control of a favorable decision which did not give them access to the state treasury or afford immediate means of realizing upon their advantage, conferences were entered into which resulted in promulgation of act 11, approved February 4, 1934.

Importance of the negotiations leading to enactment of this legislation should not be minimized. The result may be classified as a stupendous financial transaction — the state's greatest single venture in consolidating obligations. Refunding involved approximately one hundred and fifty million dollars in principal alone. Creditors then holding the state's bonds were asked to, and did, meet with representatives of the commonwealth and promises were given and assurance received affecting securities held by investors in virtually all of the forty-eight states. Savings accumulated through long years of economy; trust funds held by institutions for widows and orphans; bonds purchased by insurance companies with money pledged to the payment of death benefits — these and other interests were included in a program sanctioned by the state.

In meeting the issues squarely, bondholders made substantial concessions, particularly in refunding road improvement district obligations. These concessions, however, in view of prevailing economic conditions, were no more than the state had a right to ask, and the attitude of the state was not that of a supplicant begging to have its debts forgiven. On the contrary, it was admitted that during the easy period, so appropriately referred to as the "Fool's Paradise," promises had been too freely given, and the state's resources were not sufficient to discharge its debts in the order of their creation and in harmony with their terms. The state asked for time — a breathing spell — an opportunity to rearrange and reclassify its fiscal functions: in other words, a day of grace. The bondholders, both wisely and generously, acquiesced in the request — not as a matter of charity, but, rather, as an incident to changed conditions and business evolution.

We told our creditors, in all seriousness, and in all good faith, that the commitments made around the conference tables and later enacted into solemn law would remain inviolate — a monument to the fidelity of a people then striving to maintain the state's independence and its credit.

Section 44 of act 11 of 1934 makes that refunding measure a contract between the state and its creditors, and the solemn pledge is there given that the terms of the contract shall not be impaired by subsequent legislation.

One of the pledges made in that law was that any balance remaining in the bond refunding fund, after certain privileged payments had been made, would be transferred to the state highway fund created by 2 of the act. With respect to this balance 39 provides that "It shall, together with all moneys deposited in the bond refunding fund since December 31, 1933, be transferred by the treasurer of state to the state highway fund." The balance now identified as being in the bond refunding fund is $382,783.46. Although the promised transfer has not been made, equity, regarding that as done which ought to have been done, will treat this balance as standing to the credit of the highway fund.

By 2 of act 11 of 1934 the first charge upon the state highway fund is maintenance of the state highway system to the extent of 25 per cent. of highway revenue. The section then provided for certain transfers to be made from the state highway fund. Remainder of the highway revenue in excess of the maintenance fund and transfer items was next to be applied to the payment of interest upon the obligations authorized to be issued. Any remaining balance was to be credited to several special accounts, specifically set out in said section, for use by the state in purchasing highway obligations tendered under the terms of act 11 of 1934. It was further enacted that the special accounts "are hereby declared to be trust funds held in the state highway fund pledged exclusively to the payment or redemption of the principal and interest of the respective obligations described in such accounts and shall be applied solely as provided in this act."

It is first claimed that if effect is given to 4 of act 130 and to 3 of act 278, both of 1937, rights created and given under the provisions of act 11 of 1934 will be destroyed in violation of 10 of article 1 of the federal constitution, and, 17, Art. 2, of the State Constitution. This contention should be sustained.

Act 130 of 1937, after providing for issuance of general refunding bonds, directs the treasurer of state, from and after the date of the sale or exchange of any general refunding bonds, and during each year while said bonds remain outstanding and unpaid, "to credit and pay to the special account hereby created in the state highway fund to be known as the general refunding bond redemption account and to charge against the state highway fund an amount equal to the annual savings and interest effected by the issuance of general refunding bonds thereunder, and likewise to credit and pay to the aforesaid general refunding bond redemption account and to charge against the particular redemption account from which those certain bonds refunded would otherwise be payable according to the provisions of aforesaid act 11 which created such account the portion of the total amount of the revenues pledged by said act 11 to the payment of principal of those certain bonds refunded."

Section 3 of act 278 of 1937 contains the following direction: "For the purpose of paying expenses in connection with refunding operations the state comptroller is directed and authorized to cause a transfer to be made to the general refunding bond redemption account of any balance to the credit of the bond refunding fund and allocated under the provisions of 39 and 50 of said act 11 aforesaid, and of such additional sums as may be necessary from the appropriation made in 1 hereof." Section 1 of act 278 of 1937 provides that "All proceeds of the sale of general refunding bonds shall be deposited in the state treasury to the credit of the general refunding bond redemption account and there is hereby appropriated out of any moneys which may be so deposited the sum of $150,000,000 or so much as may be necessary to effectively, efficiently and speedily refund or refinance the obligations provided for." This section refers to and identifies acts 130 and 151 of 1937 and undertakes to the the three enactments together.

The majority opinion disregards the fact that by 4 of act 130 an amount equal to the difference in the interest rate of the new bonds and the refunded bonds, and a part of the sinking fund created by 2 of act 11 of 1937, will be transferred from the highway fund to the general refunding bond redemption account.

If any money is transferred (as provided for in 4 of act 130 of 1937) before all of the obligations issued under act 11 of 1934 are redeemed or retired, the holder of bonds will be deprived of substantial rights in violation of 10, article 1, of the federal constitution and 17 of article 2 of the State Constitution.

Section 3 of act 278 of 1937 authorizes and directs the transfer to the general refunding bond redemption account of any balance to the credit of the bond refunding fund as allocated under the provisions of 39 and 50 of act 11 of 1934. The amount standing to the credit of the bond refunding fund has been pledged in trust to the payment of the bonds issued under act 11 of 1934. The transfer and use of this balance for any purpose other than as specified in act 11 is an impairment of the contract between the state and the holders of outstanding bonds.

The majority opinion holds, in effect, that even though this balance may be a trust fund, pledged to the state's creditors, the state's culpability is slight because the ratio of $382,783.46 to $150,000,000 shows a diminishing degree of importance.

The philosophy of appropriation seems to be that if Peter must part with his worldly possessions to prepare a place for Paul, it may be presumed that Peter's lamentations will not be heard at a great distance when he grasps the explanation that the amount taken in comparison with the remainder is not sufficient to render him a bankrupt.

The supreme court of the United States in the case of Bank of Minden v. Clement, 256 U.S. 126,65 L.ed. 857, speaking of the degree or extent of impairment of contract, said: "One of the tests that a contract has been impaired is, that its value has by legislation been diminished. It is not, by the Constitution, to be impaired at all. This is not a question of degree or manner or cause, but of encroaching in any respect on its obligations — dispensing with any part of its force." (See also cases cited in the opinion.)

The General Assembly does not possess the constitutional power to take any part of the trust funds created and dedicated by 2 of act 11 of 1934, or to take $382,783.46 from a, fund dedicated to the state's creditors in trust. If such conduct is to be approved because economies may be effected, then it would seem that salvation is being purchased at too great a price: the result is that honorable dealings are being sacrificed at the whim of expediency.

But, it is argued that there is no violation of either the state or federal constitutions because the term "impair" means "to make worse, to diminish in quality, value, excellence or strength, or to deteriorate." Therefore, say proponents of abrogation, the arbitrary taking of nearly $400,000, contrary to the provisions of an expressed trust, does not impair the obligations because it is the intent, immediate or remote, of those charged with administrative duties, to strengthen the security of bondholders, to improve the quality of their holdings, to increase existing values, and to endow with attributes of excellency in contradistinction of impairment.

This argument would have more merit if those with whom we entered into contractual relationship were parties to the change. In the absence of acquiescence it may be suggested that the state is abandoning its status as trustee of highway funds for a trusteeship of the conscience and business judgment of bondholders who thought at least that act 11 of 1934 was not susceptible of the strange construction to which it is now being subjected that all advantage of the hour may be attained.

It is next contended by appellants that the appropriation of funds attempted by 3 of act 278 of 1937 violates 29, Art. 5, of the state constitution. This contention should also be sustained. This section of the Constitution reads as follows: "No money shall be drawn from the treasury except in pursuance of specific appropriations made by law, the purpose of which shall be distinctly stated in the bill and the maximum amount which may be drawn shall be specified in dollars and cents and no appropriation shall be for a longer period than two years."

The appropriation made by 3 of act 278 of 1937 does not specify in dollars and cents the maximum amount that may be used for the purpose of paying expenses of refunding. The majority opinion says: "When the bill, which later became an act, was first prepared, the author, realizing there would be a fluctuation of the balance in the bond refunding fund at that time, and at the time of the approval of the act (several weeks later), of course, could not name the exact amount."

The language clearly indicates that the legislature did not fix in dollars and cents the maximum amount that might be used for expenses of refunding; yet, notwithstanding that fact, and in opposition to 29, Art. 5, of the Constitution, the stamp of approval has been put upon the appropriation.

The case of Grable v. Blackwood, 180 Ark. 311,22 S.W.2d 41, is cited in the majority opinion. A study of the Grable case discloses that instead of being an authority supporting the results in the instant case, it is authority to the contrary.

The Grable case recognizes the force and effect of 29, article 5, of the Constitution. The court held that the maximum amount that might be expended under the act attacked in the Grable case and under act 18 of 1937 was specifically fixed at $7,500,000.

In the case at bar the legislature has authorized an expenditure (1) for the purpose of purchase and redemption of bonds issued under act 11 of 1934, and (2) for the payment of expenses of refunding under act 130 of 1937. That expenditure is the definite sum of $150,000,000 plus an unknown and indefinite amount to be transferred from, the bond refunding fund. There is a provision that no part of the $150,000,000 shall be used for expenses until after the indefinite and unknown amount is exhausted. The sum of a known and unknown amount is unknown.

The appropriation made by 3 of act 278 of 1937 does not comply with 29, article 5, of the Constitution.

It is conceded that $150,000,000 appropriated by 1 of act 278 of 1937 is legally appropriated. If this were the only appropriation contained in acts 130, 151 and 278 of 1937, and if there had been a provision that expenses of refunding should be paid from this appropriation under the rule announced in the Grable case, the appropriation would be constitutional, but the appropriation made by 3 of act 278 of 1937 operates upon a balance in the bond refunding fund and this balance was not definitely fixed by the legislature.

Appellants next contend that even though the appropriation made by act 278 of 1937 is valid, no part thereof can be disbursed for salaries, fees or commissions to those assisting in the refunding program. This contention should also be sustained.

Section 4 of article 16 of the Constitution reads as follows: "The General Assembly shall fix the salaries and fees of all officers of the state and no greater salary or fee than that fixed by law shall be paid to any officer, employee or other person, or at any rate other than at par value, and the number and salaries of the clerks and employees of different departments of the state shall be fixed by law."

In Nixon v. Allen, 150 Ark. 244, pages 257-258,234 S.W. 45, this court said: "The power to fix the salaries and fees of all officers in the state and the number of their clerks and employees and their salaries is a function which, within the limitation of the Constitution, is lodged in the supreme law-making power of the state — the legislature. The General Assembly cannot delegate this legislative power to any individual officer or board." The court, in Pulaski County v. Caple, 191 Ark. 340,86 S.W.2d 4, reaffirmed the rule announced in the Nixon case.

The majority opinion, however, says that all employee of the refunding board is not within the restrictions found in 4, article 16, of the Constitution. The reference is to those departments into which the powers of the government of the state are divided by 1, article 4, of the Constitution, where it is provided that all the powers of the government of the state of Arkansas are divided into legislative, executive and judicial departments.

If the bonds to be issued are to be obligations of the state of Arkansas, their issuance must be exercised by some governmental power, and this power must be exercised by someone employed in one of the three departments of state. Issuance of bonds will be an administrative function and such duties will necessarily fall within the executive powers of the government. See Farrell v. Oliver, 146 Ark. 599, 604, 226 S.W. 529.

If it be admitted, for the sake of argument, that an employee of the board of finance is not an entity in one of the departments of state, even then such employee could not be paid a salary in excess of that fixed by the legislature, because 4, article 16, of the Constitution prohibits the payment of any greater salary or fee "to any officer, employee or other person" than that fixed by law. Those engaged in refunding, if arbitrarily excluded from a departmental classification, would at least attain the dignity of "employees or other persons." Since the legislature has not fixed the salaries or fees of those who will be engaged in refunding, no funds can be legally paid from the appropriations made by acts 130, 151 and 278 of 1937 for salaries, commissions, fees, or personal services even though the appropriations were valid. If a construction to the contrary is adopted, then an important safeguard against treasury-tapping has been removed.

It is the view of the writer of this opinion, concurred in by Mr. Justice BUTLER and Mr. Justice BAKER:

(1) That the balance of $382,783.46 standing to the credit of the bond refunding fund is properly a credit to the highway fund created by act 11 of 1934.

(2) That such balance is a trust fund and that its diversion to any purpose inconsistent with the trust would impair the obligation of the contract between the state and its creditors and such diversion is, therefore, prohibited by both the federal and state Constitutions.

(3) That the transfer of any moneys from any of the accounts created in the state highway fund by 2 of act 11 of 1934 to the general bond refunding account as provided in 4 of act 130 of 1937 would impair the obligation of the contract between the state and its creditors, and such transfer is, therefore, prohibited by both the federal and state Constitutions.

(4) That the relief prayed for by appellants and the methods provided for its procurement are not suits against the state, but on the contrary they are suits by taxpayers for the benefit of all taxpayers similarly affected, and to that extent are suits by the state and not against it.

(5) That the state has no interest in any unconstitutional enactment of the General Assembly, and such enactment should not be enforced by any officer or other agent of the state; therefore, injunction will lie to prevent an exercise of nonexistent authority.

(6) That act 278 of 1937 is not unconstitutional as to the appropriation of $150,000,000, nor is it unlawful for the state comptroller to transfer funds from the general refunding bond redemption account for use in any constitutional manner; provided, no part of the principal arising from the sale of bonds is transferred; and provided, further, that in no event can any part of the item of $382,783.46 be transferred or used except as authorized in 39 and 50 of act 11 of 1934.

(7) That no part of the funds appropriated by any the acts mentioned can be used for the purpose of paying salaries, fees, or commissions to persons engaged in the furtherance of the refunding plan because such salaries, fees and commissions have not been fixed by the legislature as required by 4 of article 16 of the Constitution.