Baker v. Carter

Chapter 34, art. 6, S. L. 1931, purports to authorize the issuance and sale of "Oklahoma Agricultural and Mechanical College Dormitory Bonds" in the amount of $450,000, the proceeds of which are to be used for the construction of dormitories on the campus of the A. M. College at Stillwater.

Statutory provision is sought to be made for the interest and principal of the bonds by the creation of a fund to consist of the net profits derived from the rentals of the rooms of the dormitories. There is no provision, however, that the principal and interest are to be paid exclusively from said profits. These bonds are to be tax exempt; to be signed and issued by the State Auditor, upon application of the State Board of Agriculture, with the approval of the Governor. They are to be registered by the State Treasurer, and examined and approved by the Attorney General. The proceeds are to be placed in the state treasury to be expended upon warrants issued by the State Auditor.

Under the provisions of section 8 of the act, any officer having charge of any sinking fund of the state, county, city, town, township, or school district of the state of Oklahoma is authorized to invest such sinking fund in said bonds.

A decisive question presented is whether these bonds will constitute an obligation of the state. If so, their issuance and sale are specifically prohibited by section 23, art. 10, Constitution of Oklahoma:

"The state may * * * contract debts, but such debts, direct and contingent, singly or in the aggregate, shall not, at any time, exceed $400,000. * * *"

If these bonds, when issued, will constitute a debt of the state in the amount sought to be issued, they are prohibited by the highest of mandates and void, and, in that event, issuance and sale of the bonds should be enjoined.

The A. M. College is an institution corporate, created and existing under the laws of this state. Section 143, Stats. 1893, sec. 7244, O. S. 1931. But the corporation has never been granted power to sue or to be sued. The status of the corporation, and property belonging to it, in relation to the state of Oklahoma, is substantially the same at this instant as it was prior to statehood in relation to the territory of Oklahoma. This status was definitely defined in the decision of Oklahoma Agricultural Mechanical College v. Willis,6 Okla. 593, 52 P. 921. Therein it was determined:

"The Agricultural and Mechanical College which is strictly a public or quasi corporation created and existing under and by virtue of the laws of the territory of Oklahoma, cannot, in the absence of express statutory authority therefor, be sued, and no such authority exists in this territory, hence said institution cannot be sued."

It was further held:

"That defendant is a public corporation under the laws of the territory of Oklahoma, there can be no doubt."

Public corporations are such as are founded by the government for public purposes and where the whole interests belong to the government. Concurring opinion: Dartmouth College Case, 4 Wheat. (U.S.) 518.

Such is the recognized rule in this jurisdiction.

"The obligations of the defendant in the case at bar are the obligations of the territory, * * * and to the territory its creditors must look for payment. * * *" Oklahoma A. M. College v. Willis, supra.

I have omitted from the above quotation the phrase "where there is no fund appropriated for the payment of their claims" for the reason that where such a situation exists, where there is such a fund, it is settled and stated in the cited case that mandamus is the remedy of a creditor as against the officer (not the public corporation), whose duty it is to audit and allow a just claim against a fund. Such an action is not a suit against the public corporation nor against the state.

The reason underlying the rule that an action may not be maintained against a state or a public corporation, without express provisions of law allowing the same, is the fact that the sovereign is one of the contracting parties. The public corporation is a portion of the state government. As against the sovereign, there are no remedies except such as the sovereign accords. The sovereign may not be annoyed, interrupted, impeded, or destroyed by her creatures, either instrumentalities of government, such as courts, or citizens. Her creditors must rely solely upon her good faith as to time, mode, and measure of payment.

It is futile to waste time to argue that public educational institutions are a part of the sovereignty — some things are too plain to require argument.

Now, if the state is one of the contracting parties, if this public corporation is a part of the state then obligations of this public corporation are obligations of the state.

The contrary view sustains "the special fund theory," which is to say that the obligation so elaborately to be expressed in these proposed bonds is on nobody, but only of the special fund itself, derived from the net profits expected from the rent of bedchambers to be constructed within these dormitories, which of necessity is derived from property to belong to the state. Suffice it to say the special fund theory has been definitely and most recently rejected by this court. Zackary v. City of Wagoner, 146 Okla. 268, 22 P. 345. And in consideration of practically all the cases supporting the rejected rule: Winston v. City of Spokane, 12 Wn. 524, 41 P. 888; Faulkner v. City of Seattle, 19 Wn. 320, 53 P. 365; Joliet v. Alexander,194 Ill. 457, 62 N.E. 861; East Moline v. Pope, 224 Ill. 386, 79 N.E. 587, and other cases. Therein we said:

"We are not unmindful of the rule followed in some jurisdictions that the purchase of property does not create an indebtedness if the purchase price is to be paid out of the income therefrom, * * * but we cannot follow such holding. * * * The reasoning in support thereof is the ingenious argument by which such attempts have ever been supported. * * * The agreement to pay * * * creates an indebtedness no matter from what source the funds are to be derived. * * *"

Can words or rule be plainer? To further paraphrase: Section 23, art. 10, supra, "contain nothing that limits (their) application to indebtedness to be paid from funds derived from an ad valorem tax levy. They (the provisions limiting debts) are general in their terms and they will be applied by this court to all manner of indebtedness, no matter how created or from what source the indebtedness is to be paid. As well might a public corporation (municipality) contend that an indebtedness was not an indebtedness because it was to be paid from receipts from * * * other sources of income. * * * We cannot give our approval to such theory of law." Can logic be sounder?

The statement contained in the majority opinion in reference to the decision in the City of Wagoner Case, that "a portion of the corpus of the lighting system of the city created by an ad valorem tax was utilized to feed the special fund provided for the payment of the Diesel engines," is not exactly borne out by the record. Therein the net profit derived from the savings contemplated by the use of property so sought to be purchased was the special fund pledged to the payment of the debt; consequently the income created by the corpus of the plant owned by the city was merely the base from which the savings contemplated by modern machinery was the special fund sought to be pledged to pay for the Diesel engine. Just as in the instant case the net profits derived from use of the dormitories resting on state-owned land is the fund pledged for payment of the debt.

These bonds are to be tax exempt securities. Does not that provision of law contemplate that they are obligations of the state or one of its indivisible counterparts? Surely specific exemption from tax of a private corporation would not be sustained. Was it ever contemplated that a board of control of any public corporation, such as a state educational institution, would possess power to become involved in debt without limitation, or that so-called bonds masquerading under the guise of state securities could depreciate the good faith and credit of the state, or one of its creatures whose interests, burdens, and obligations are in fact its own? I think not. Unquestionably, these buildings when erected will become the property of the state, for they are to be located upon state owned land. The bondholders cannot maintain an action against the college or against the state to enforce the obligation. Nor, under the rule heretofore adopted by this court, are the obligations of the bonds limited to special fund. Hence the obligation is upon the state, as much as it could ever be, to supplement the inadequacy of the special fund by general appropriation. It is a state debt.

Inadequacy of the special fund pledged is not assumed. The public record discloses, and it is commonly known, that other dormitory bonds have heretofore been issued by the authorities of the state, and that similar special fund revenues have failed by from $6,000 to $9,000 annually to provide a sufficient fund to pay the annual accruals thereon.

It may be inqired, with some reason, why should the public interest be concerned with this loss to investors? The answer is contained in section 8 of the act. Just as water seeks its level, so will these pseudo securities (which might in all seriousness be designated bedroom bonds) seek the investment of the least wary, who is not banker or the financier, but the elected public servant who is authorized by the act to invest therein, not his own money, but the money of the sinking fund of the government, intrusted to his care.

These are what are commonly known to the vernacular as "wildcat bonds." Shortly after the World War this state experienced an epidemic in such public finance, including the investment of sinking funds in such wildcat bonds. Apparently again the cycle is reached.

Assuming, then, the investment of sinking funds of state and municipal subdivisions, authorized by the act, in these bonds, assuming, then, the inadequacy of the special fund pledged to meet the obligation of the bond (judges cannot be blind to that which everyone knows); or, as an alternative, assuming the general obligation of the bonds in view of this court vigorous denial of the special fund theory, the inevitable result will be that the state and municipal subdivision will be obliged to replenish the failed sinking fund investments in these bonds.

The majority view is:

"If such investment of the sinking fund is made by any officer in charge of such sinking fund and a loss is incurred by reason of such investment in the bonds proposed to be issued, the taxpayers of such municipality or state will be called upon to replenish the fund so lost by such investment.

"It cannot be fairly said that the loss of an investment of a sinking fund is the same as the creation of an indebtedness in excess of limitations within the meaning of aforesaid constitutional provisions."

I proclaim with all the power attained by words within my command that this statement is fallacious, refuted by its own words, unsupported by authorities, subject and likely to being damned by the designated victim and butt of its involved words, the overburdened, unsuspecting taxpayer.

It is to say:

(1) Investment of public sinking funds in the bonds is authorized.

(2) If loss occurs by reason of the inadequacy of the specific fund pledged, the taxpayer must pay the loss by taxation.

(3) But this taxation necessary with which to pay the loss is not a debt.

The words used indicate that the taxpayer will be obliged to "replenish the fund" lost. The result is that he pays doubly pro tanto the obligation for which the sinking fund was created.

In determining the question of the constitutionality of an act of the Legislature, the test is not what has been done under it, but what the law authorizes to be done. 12 C. J. 786; 1 Sutherland Stat. Const., par. 107; State ex rel. Holliday v. O'Leary (Mont.) 115 P. 204.

The palpable racket authorized by section 8 of the act, i e., the investment of public sinking funds in these bonds — a species of diversion of a public sinking fund into a building fund — contrary to the provision of sections 4, 17, and 19, of art. 10, Constitution of Oklahoma, should impel this court to declare at least that portion of the act unconstitutional and void.