Fjeldsted v. Ogden City

I dissent. There are two cases, Fjeldsted v. Ogden City and Wadsworth v. Santaquin City (Utah) 28 P.2d 161, the latter following the former in the published reports. The original prevailing opinion of the former was filed in March, 1933, but on petition for a rehearing was reheard and reconsidered in conection with the subsequent hearing of the Santaquin Case. The views thus expressed here apply to both cases and as dissents to both.

As I view the matter, the determinative factor in both cases involves the question of whether what the municipalities proposed to accomplish constitutes the creation of a "debt" or "indebtedness" within the meaning of sections 3 and 4, art. 14 of our state Constitution referred to in the prevailing opinions. If it is, the writ in both cases should be made permanent. If not, the alternative writ in both should be dismissed. Whether the effect of what the municipalities proposed and undertook to do is the creation of a "debt" or "indebtedness" within the meaning of the constitutional provisions is dependent upon the further question of whether what is known as the "special fund doctrine" is to be applied and followed or not. We all recognize the conflict of judicial authority on the subject. Many courts, I think the trend of modern authority and by the great weight of it, approve the special fund doctrine, and in effect hold that borrowing money as proposed and undertaken by the municipalities and by issuing bonds payable exclusively out of separate or special funds derived from net revenues or income from systems of waterworks or electric light plants, etc., and without resort to taxation either special or general or in any manner rendering the bonds or loans chargeable to the general fund of the municipality and without creating any lien on the system itself or otherwise, except on the net revenues of the system, does not constitute the creation of a "debt" or "indebtedness" within constitutional provisions similar to our Constitution. Other courts repudiating and declining to follow the special fund doctrine hold to the contrary.

Though it be conceded that much may be said on both sides of the subject, yet in the case of Barnes v. Lehi City, 74 Utah 321,279 P. 878, this court, as I think committed itself to the special fund doctrine. The case is so regarded alike by the bench and bar and by annotators. By the prevailing opinion in the Ogden and in the Santaquin Cases, the Barnes Case, especially in the former, is attempted to be distinguished chiefly on the ground that in the Barnes Case the obligation contracted and promised to be paid was substantially from revenues derived from the purchased improvements and installations, while in the Ogden Case the proposed bonds were to be payable, not alone from the net revenues derived from or by reason of the improvements and betterments to be created with the borrowed money, but from the net revenues or income derived from the whole system; and in the Santaquin Case, that an arbitrary and not a proper segregation was made of such net revenues. When the facts in the Barnes Case and as shown by the opinion therein are fully considered and proper effect given them, I think there is no basis for such distinguishment. In the Barnes Case, Lehi City owned and operated, so the opinion recites, "a municipal electric light and power plant, but the capacity of its plant is not sufficient to supply enough electricity to light the streets of the city and at the same time permit the city to sell light or power to its inhabitants for use while the street lights are burning. To overcome this condition, and provide sufficient facilities to permit the city to furnish light and power to its inhabitants, while the street lights are being used," the city "made and adopted certain plans whereby it is proposed to enlarge the capacity of the present plant by purchasing a new 180-horse power Fairbanks-Morse Diesel engine generating unit, complete with accessories, together with transmission system" from Fairbanks, Morse Co., "and to have that company install the same." The plan further provided that the city was to pay the company a stated price in installments "for the machinery and the labor incident to its installation * * * out of a special fund created by appropriating and setting aside all the proceeds derived by the city from the product or service of the plant," the city agreeing to adopt resolutions providing for the "creation of a special fund into which all receipts for the product or service of said plant shall be deposited."

The contract entered into or which was to be entered into between the city and the company provided that the deferred installments of the purchase price were not "a general obligation of the said municipality payable from taxes or its general funds, but only a special obligation payable from the net revenues of the light and power plant of the municipality," defining net proceeds to be the balance "of the gross receipts of the municipality's light and power plant, after payment of the legitimate and necessary expenses of the operation of the said plant," the municipality to operate the plant in an efficient and economical manner and to maintain rates which would produce sufficient revenue to provide for the payments called for by the contract. The proposed contract further provided that the city agreed to operate the plant as a municipal plant until the obligations specified in the contract were discharged and that the company retained title and ownership in the machinery and material specified in the contract, until the purchase price was fully paid.

It thus is seen that in the Barnes Case the city owned and operated an electric light and power plant, but, finding that it was not of sufficient capacity to supply all the needs of the city and of its inhabitants, the city "proposed to enlarge the capacity of the present plant" by purchasing and having installed the machinery and improvements referred to and providing for the payment thereof exclusively out of the net proceeds of the whole plant. There, as here, it was contended that such proposed plan constituted the creation of a "debt" or an "indebtedness" forbidden by the constitutional provisions referred to, and about all the legal questions were there raised and presented as are raised and presented in the Ogden Case. As stated in the opinion, the Barnes Case was elaborately briefed by counsel for both parties and by counsel amici curiae. By the opinion, the legal points involved were rather exhaustively treated, many cases there reviewed and considered, and the court, by an unanimous opinion adopting and following the special fund doctrine, reached the conclusion that the proposed plan did not constitute the creation of a debt or indebtedness forbidden by the Constitution.

Turning now to the Ogden Case, the city there likewise was the owner of and operated a waterworks system which, because of alleged needed repairs and replacements of worn-out and defective conduits and pipe lines, was inadequate to supply the city and its inhabitants with needed waters, and caused irreparable loss in the carriage and distribution of them. As recited by the board of commissioners in the ordinance adopted by it, "There is immediate and pressing need of raising funds to the aggregate of $645,000.00 for the purpose of making repairs, improvements and extensions of the waterworks system," and to provide for public safety, general welfare, and convenience of the inhabitants of the city. The city already had a bonded indebtedness of about $1,500,000, the proceeds of which had gone in the purchase and construction of the system. But that bonded indebtedness was payable from general taxes to be levied for such purposes. No part of it was payable out of revenues or income derived from the system or out of any special fund. It was an obligation to be met by general taxes, and the city had obligated itself to levy taxes for such purposes. It further was made to appear in the Ogden Case that the city for the last six years had obtained a gross revenue from its waterworks system amounting in excess of $1,000,000, and that for such period the operating expenses of the system were about $300,000, leaving a net revenue of about $745,000," or an annual net revenue of about $124,000. But it was the custom and practice of the city to divert the whole of the revenues derived from the waterworks system and fund to the general fund of the city, and apply them to expenses of operation and maintenance of the system and in payment of retired waterworks bonds as they matured and interest on such outstanding bonds which the city had agreed and was obligated to pay by the levy and collection of taxes, and from $55,000 to $90,000 each year were thus applied in payment of general corporate obligations chargeable to and payable out of the general fund of the city; and, by so doing, no fund, at least no sufficient fund, was provided to take care of repairs and improvements as now found necessary and contemplated to be made to replenish and preserve the system. During such period no tax levy was made to pay either principal or interest on any outstanding waterworks bonds, including the outstanding bonds of $1,500,000 expressly made payable by the levy of taxes and not out of revenues derived from the waterworks system, nevertheless such obligations were met by the use of such revenues. It further is represented in the Ogden Case that, if all the net revenues derived from the waterworks system, after payment of costs and expenses of operation, be reserved and kept in a separate and special fund, there would be a sufficient fund to take care of all the waterworks bonded indebtedness, including the issue of bonds for the contemplated loan of $645,000. The city by ordinance passed in 1915 required the revenues derived from the waterworks system to be kept in a separate fund known as the waterworks fund, and to be kept separately from other public moneys; that all costs and expenses of maintenance and operation of the system were to be paid out of such fund and the board of commissioners given power to make payment out of such net revenue fund on any principal or interest falling due upon any bonded indebtedness created in connection with the waterworks system, extensions, improvements, or betterments, and also to provide a sinking fund or funds or surplus within such waterworks fund for the purpose of providing means to discharge any such bonds and to provide priorities of any such payments, and to pay the cost of any extension to or betterments of any such water supply system which the board may order paid therefrom. But the terms and intent of such ordinance for a period of six years and more was not complied with. The revenues derived from the operation of the system were not kept separately in a waterworks fund as provided by the ordinance and not separately from other public moneys of the city, but the whole thereof was put in the general fund, and during such period, without providing any sinking fund, from $55,000 to $90,000 each year were diverted from such special fund to the general fund of the city and applied in payment of corporate obligations of the city chargeable to and payable out of its general fund.

The contemplated purpose of the proposed loan in the Ogden Case of $645,000 is to construct pipe line conduits, an additional reservoir, installations of pipe lines replacements, and the installation of meters. By ordinance and by the proposed bonds themselves it is expressly provided that such loan is to be repaid by the issue of bonds of various denominations, $15,000 maturing in 1934, and the remainder on different dates between 1934 and 1953, both principal and interest of the bonds to be paid solely from net revenues derived from the operation of the waterworks system after payment of reasonable costs and expenses of operation and maintenance of the system, and not from any other funds or revenues of the city, and without incurring any obligation of the city to repay the loan by taxation or otherwise, except from the net revenues derived from the waterworks system. The proposed bonds on their face so provide. By the proposed plan the city covenanted that, so long as any of such bonds remained outstanding and unpaid, to charge and collect sufficient reasonable rates for the use of water from the system for the payment thereof, the bonds themselves until paid to be a lien on the net revenues from the waterworks system, prior to any lien thereon which may be given to any other bonds or other obligations subsequently issued by the city. No lien for the payment of any such bonds or loan was to be given or contemplated on the waterworks system itself, or on any part thereof or otherwise, except on the net revenues derived from the operation of the system.

It thus is seen that in the Barnes Case the machinery and improvements were to enlarge the capacity of the plant owned and operated by the city, the purchase price thereof and the obligation of the city to be paid not only out of the increased net revenues derived from such improvements but from net revenues derived from the whole plant. In the Ogden Case the proposed loan and bonds to be issued were payable, not only from increased net revenues derived from the proposed improvements to be created with the proceeds of the loan, but also from the net revenues derived from the whole waterworks system. In each case the city obligated itself to charge and collect sufficient reasonable rates to meet such payment. In each, if the city failed to do so, it no doubt by proper judicial proceedings could be required so to do. The provision in the contract in the Barnes Case that the title and ownership of the installed improvements should remain in the company until paid for in no sense prevented such judicial action. In neither case was the obligation a lien on the plant or waterworks system itself, or payable by taxation or out of the general fund of the city or otherwise than out of the special fund of net revenues derived from the operation of the plant or system.

But in the Ogden Case, and adhered to in the Santaquin Case, barriers by way of restrictions and limitations are urged against the special fund doctrine, especially on authority of the case ofGarrett v. Swanton, 216 Cal. 220, 13 P.2d 725, 728, known as the Santa Cruz Case. The court there recognized and approved, as does the prevailing opinion in the Ogden Case, the special fund doctrine. Says the California court:

"This so-called ``special fund' doctrine finds ample support in the decisions of other jurisdictions where constitutional debt limit provisions similar to the one here involved exist. It seems to be the majority rule in other jurisdictions that a limitation upon municipal indebtedness is not violated by an obligation which is payable out of a special fund, if the municipality is not liable to pay the same out of its general funds should the special fund prove to be insufficient, and the transaction by which the indebtedness is incurred cannot in any event deplete the resources of the municipality."

Texts and numerous cases from different jurisdictions, including the Barnes Case, are cited in support thereof, and cases from Idaho which refuse to follow the "special fund" doctrine. Further said the California court: "The recent decisions of this court would seem to leave no room for doubt that the ``special fund' doctrine has been adopted in this state," citing Shelton v. City of Los Angeles, 206 Cal. 544,275 P. 421, and In re California Toll Bridge Authority, 212 Cal. 298,298 P. 485.

However, the court then in the Santa Cruz Case further proceeds on the theory that, inasmuch as the contemplated improvements were not payable exclusively out of net increased revenues or net revenues derived alone from the improvements, but from net revenues derived from the whole plant, and inasmuch as by ordinance (referred to in the opinion) moneys derived from the waterworks system were required to be used in payment of general obligations of the city, the conclusion was reached that the city either directly or indirectly would be required to "feed the special fund" from other revenues or sources of the city whereby the taxpayers either directly or indirectly became liable to pay the obligation incurred by the levy of taxes for such purpose, and hence the obligation incurred was a debt forbidden by the Constitution. With respect to the ordinance the court said:

"By the very terms of the ordinance relied upon, as above quoted, the revenue from the water plant is likewise to be used to pay the interest and principal on the bonds, which are general obligations of the city. If this fund is depleted, the obligation to feed the fund will fall upon the taxpayer. Respondents state: ``The money in the special fund cannot be placed in the general fund, nor used for charges to be met from tax-raised funds.' Such a contention is directly in the face of the terms of the ordinance relied on by respondents, because that ordinance specifically states that the money in the water fund shall be used to pay a general obligation of the city; namely, the interest and principal on the bonds."

In support of the conclusion reached in the Santa Cruz Case imposing a restriction or limitation on the special fund doctrine, cases chiefly are cited which either repudiate the special fund doctrine or question the soundness of it and endeavor to get away from it. Whatever room there may be for different opinions as to the correctness of the result reached in the Santa Cruz Case, the reasons there stated and which influenced the decision do not, as I think, apply to the Ogden nor to the Santaquin Case. In neither was the city required or obligated to use "money in the water fund to pay a general obligation of the city." In neither is there any "feeding" or the requirement of any "feeding" of the special fund by taxation or from other revenues of the city. Indeed, the opposite is true, especially in the Ogden Case. There, as has been seen, for many years from $55,000 to $90,000 each year were diverted from the net revenues of the special fund and put in the general fund of the city to defray and pay general corporate obligations of the city, thus "feeding" the general fund with revenues from the special fund. There lies the rub. The petitioners desire such custom and practice to continue, fearful that, if the general fund no longer is "fed" from moneys of the special fund, the former may be required to be augmented by general taxes, licenses, or from other revenues or sources of the city. Let it be assumed that, notwithstanding the ordinance of 1915 creating a special waterworks fund and requiring such fund to be kept separately from other public moneys of the city, it was competent for the city temporarily to loan or transfer money from one fund or department to another, yet whether the city could properly do so to pay general corporate obligations of the city without returning an equivalent amount of moneys to the special fund from which it was diverted may for various apparent reasons present another question. Annotations, 70 A.L.R. 431. But we need not now bother about that, for it certainly was competent for the city to create such special fund from the waterworks system and even provide that the whole thereof be applied to maintenance and operation of the system and to obligations created in connection therewith.

In the next place, by the plan proposed in the Ogden Case and upon the face of the bonds themselves, it is expressly provided that the bonds are payable both as to principal and interest solely from revenues derived from the operation of the waterworks system, after payment of costs and expenses of operation and maintenance, and not from any other funds or revenues of the city. And holder of any of the proposed bonds for payment of either principal or interest was required to look alone to the net income of such special fund, and, if not sufficient for such purpose, the city, neither by taxes nor from any other source or revenue, was required to "feed" the special fund. It, however, is urged that at the time of the proposed plan and loan there was in connection with the waterworks system a bonded indebtedness or obligation of $1,500,000, and, if there were not sufficient net funds derived from the waterworks system to pay the proposed $645,000 loan and the principal and interest as they became due of the prior bonded obligation of $1,500,000, the city would be required to levy taxes to pay such prior obligation. But let it not be overlooked that such prior obligation was expressly payable by the levy of taxes and out of the general fund of the city, and not out of revenues derived from the waterworks system. Such existing obligation would not in any manner be enlarged or diminished nor affected by the proposed plan. What the petitioners contend, if the loan is permitted, is not that the special fund or net revenues of the waterworks system would require to be "fed" by taxes or from other revenues of the city, but that the city would be deprived from using moneys of the special fund to apply in payment of general obligations chargeable to its general fund, and hence the city might be required to resort to taxes or other sources to augment its general fund. In other words, it in effect is urged that the loan be not authorized and the city permitted to continue to fix and collect rates from water users and consumers, not only to defray the costs and expenses of operation and maintenance and meet obligations created in connection with the system payable out of such revenues, but also to provide a fund with which to pay, or apply on general or other corporate obligations of the city, and thus continue "to feed" the general fund from moneys of the special fund.

But further as to this. If the loan is not made and the revenues derived from the waterworks system wholly applied to the cost and expenses of the operation and maintenance of the system and the surplus set aside for a sinking fund with which to make the contemplated repairs, improvements, and replacements as fast as such surplus will admit, and the interest and principal as they mature on the $1,500,000 bonded obligation met by taxation as the city prior to the proposed plan lawfully had agreed and obligated itself to do, and none of the surplus of the special fund diverted to the general fund for general corporate purposes, I do not well see on what legal ground taxpayers could complain, when as here made to appear that the conduit and pipe lines and other structures of the system through long usage had become in such worn-out and defective condition as to require replacement and repair to economically distribute the waters of the system to water users and consumers, and thereby avoid the great loss and waste of waters now resulting from the present condition of the system. If the surplus of such special fund may be so used, as I think it may, without creating any debt or indebtedness forbidden by the Constitution, I see no valid legal reason why such surplus may not also be used by the proposed and contemplated plan without incurring a debt or indebtedness forbidden by the Constitution. To say that in the one method no debt or obligation is created, while in the other a debt is created, begs the question, for in both methods the making of the improvements, repairs, and replacements is accomplished solely with moneys from net revenues of the special fund without resort to taxes or other funds or revenues of the city, and thus is in accordance with the essential and underlying principles upon which the supecial fund doctrine is founded.

The limitation or restriction placed on the special fund doctrine in the Ogden Case has its initiative in the case ofJoliet v. Alexander, 194 Ill. 457, 62 N.E. 861, followed in the case of Schnell v. City of Rock Island, 232 Ill. 89,83 N.E. 462, 14 L.R.A. (N.S.) 874, and followed and relied on inGarrett v. Swanton, supra, and in about all the cases including the Ogden Case applying such limitation or restriction. But the Joliet and the Schnell Cases were overruled by subsequent Illinois cases [Maffit v. City of Decatur, 322 Ill. 82,152 N.E. 602; Ward v. City of Chicago, 342 Ill. 167,173 N.E. 810; City of Jerseyville, Ill., v. Connett (C. C.A.) 49 F.2d 246] and thus no longer are binding authority in that jurisdiction. Said the New Mexico court in the very recent case of Seward v. Bowers, 37 N.M. 385, 24 P.2d 253, 259, where the special fund doctrine by elaborate opinions and on a review of numerous cases there cited was considered, and where the limitation or restriction put upon the doctrine in the Ogden Case was repudiated, that: "It is worthy of mention that the Joliet Case from Illinois, the first to sense and promulgate this distinction in and limitation on the right to pledge revenues, has since been definitely rejected on this point in the jurisdiction which gave it birth" citing Ward v. City ofChicago, supra, Maffit v. City of Decatur, supra, and Cityof Jerseyville, Ill., v. Connett, supra.

Further said the New Mexico court, after a review of the decisions: "So that, for clearcut holdings sustaining the distinction, so far as my research discloses, we are confined to the courts of California, Missouri, and the United States Circuit Court of Appeals of the Eighth Circuit. Against this line of decisions we find arrayed the courts of the following jurisdictions, to wit: Winston v. City of Spokane, 12 Wash. 524,41 P. 888; Griffin v. City of Tacoma, 49 Wash. 524,95 P. 1107; Barnes v. Lehi City, 74 Utah 321, 279 P. 878; Lang v. City of Cavalier, 59 N.D. 75, 228 N.W. 819; City of BowlingGreen v. Kirby, 220 Ky. 839, 295 S.W. 1004; Jones v. Cityof Corbin, 227 Ky. 674, 13 S.W.2d 1013; Ward v. City ofChicago, 342 Ill. 167, 173 N.E. 810, 812; Searle v. Town ofHaxtun, 84 Colo. 494, 271 P. 629; City of Jerseyville, Ill., v. Connett (C.C.A. 7th Cir.) 49 F.2d 246, 249; and apparently also Brockenbrough v. Board of WaterCommissioners, 134 N.C. 1, 46 S.E. 28, 34."

In harmony with and supporting such last cited cases may also be added the following cases: Underwood v. Fairbanks, Morse Co. (Ind. Sup.) 185 N.E. 118; Mississippi Valley Power Co. v.Board of Improvement, Water Works Dist. No. 1, of Van Buren,185 Ark. 76, 46 S.W.2d 32; McCutchen v. Siloam Springs,185 Ark. 846, 49 S.W.2d 1037; Kelly v. Minneapolis, 63 Minn. 125, 65 N.W. 115, 30 L.R.A. 281; Williams v. Kenyon, 187 Minn. 161, 244 N.W. 558;Carr v. Fenstermacher, 119 Neb. 172, 228 N.W. 114; Kasch v.Miller, 104 Ohio St. 281, 135 N.E. 813; Butler v. Ashland,113 Or. 174, 232 P. 655; and in effect, State v. Portage,174 Wis. 588, 184 N.W. 376.

There, of course, are cases, including the Idaho and other courts, which repudiate the special fund doctrine entirely and decline to follow it. However, since the special fund doctrine is not, as claimed, repudiated in its entirety by the Ogden Case, only a limitation or restriction put upon it, the citation of cases which wholly repudiate the doctrine has no application to the matter in hand. Other courts have refused to apply the doctrine where the loan or bonds by mortgage or otherwise are made a lien on the corpus of the entire plant or system or on other property of the city and not merely a lien on the special fund derived from the net revenues of the plant or system, a feature not here present, for no lien of any kind is given or contemplated on the corpus of the plant or system or on any part thereof, only a lien on the net revenue derived from the operation of the plant or system which, by the great weight of authority, may be done without offending constitutional provisions similar to our Constitution. Notes, 72 A.L.R. 697 and cases heretofore cited.

I think there is an irreconcilable conflict of the opinions in the Ogden Case and in the Barnes Case. The matter was so regarded by most of the nine or ten counsel appearing for the parties and as friends of the court in the presentation and arguments in the Santaquin Case and reargument of the Ogden Case, some urging that the Barnes Case should be overruled, others that it be followed and the opinion of the Ogden Case reversed, and a few contending there is no conflict. I am of the opinion that the Barnes Case should be adhered to; that the special fund doctrine should be applied and followed without the limitations or restrictions imposed in the Ogden Case; that by the great weight of modern authority the plan proposed and contemplated by both cities is not the creation of a debt or an indebtedness forbidden by the constitutional provisions referred to; and hence that the alternative writs issued in both cases should be dismissed.

Having reached such conclusion, it is unnecessary to express any opinion concerning the so-called "Granger Act" (Laws 1933 [2d Sp. Sess.] c. 22) nor the recent constitutional amendment referred to in the prevailing opinion in the Santaquin Case. It is apparent that the Granger Act, passed since the filing of the opinion in the Ogden Case, but still pending and undetermined on petition for rehearing, is but a legislative struggle in an attempt to devise some means whereby the special fund doctrine, notwithstanding the Ogden decision, may be rendered applicable and operative under circumstances and conditions involved in that case, or an effort to curtail the effect of the decision and still permit the municipality and other municipalities under similar conditions to go forward with a plan or plans similar to that proposed in the Ogden Case. I do not think that the Granger Act gives any aid to the situation, for, if the proposed plan creates a debt or an indebtedness within sections 3 and 4 of article 14 of the Constitution which are not affected by the recent amendment to the Constitution, not anything the Legislature may do can overcome the effect thereof, and, if the proposed plan is not a debt or indebtedness forbidden by the Constitution, the Granger Act adds nothing to it but confusion, for whether the proposed plan creates such a debt or indebtedness or not is, as stated in the prevailing opinion, a judicial and not a legislative question. And whichever way that question is judicially determined determines the issue in both cases. I further am of the opinion that much that is said in the Santaquin Case concerning the powers of municipalities in view of the recent amendment to the Constitution is unnecessary and gratuitous, and ought not to be regarded of binding effect when and if in future cases such questions as there considered are presented and involved. Nor if the opinion in the Ogden Case with respect to the limitation or restriction put upon the special fund doctrine shall prevail and become the rule of this court, I do not concur in the conclusion reached nor the reasons given therefor in the Santaquin Case on the subject or method of segregation of revenues derived from the waterworks system, and, further, I do not see how the making of such segregation is practicable or within any degree of certainty, and in the Ogden Case it in effect was represented and conceded that it was impracticable, if not impossible, if the improvements were made, and the plant operated with them, to determine what of the net revenues derived from the system were attributable to or occasioned by the improvements and what from other portion or portions of the system. No matter what method be adopted, the determination of the segregation to a large extent must be made arbitrarily or conjecturally. Seward v. Bowers, supra;Searle v. Town of Haxtun, 84 Colo. 494, 271 P. 629.