stating that "in cases knocking at our door for certification, the refusal of a motion to certify, even if the same legal question is decisively involved, does not furnish an adjudication of the question by this court as an established precedent for future cases"Summary of this case from Avis Rent, LLC v. City of Dayton
Decided April 11, 1934.
Municipal corporations — Contract with private corporation for purchase of machinery invalid, when — Municipality cannot own or unite property with private enterprise — Lending public credit to private corporation — Section 6, Article VIII, Ohio Constitution.
A village owning a distribution system for electric current, contracted with another to supply generating machinery for its system for the sum of $24,960.00, payable partly in cash and partly in deferred installments from the net revenues derived from the plant's operation. The title to the machinery was to remain in the seller until paid for, but the purchase price installments were not to be the general obligation of the village or payable from taxes. Upon its part the village agreed to provide housing for the machinery, to pay $5000.00 in cash upon arrival of the equipment and to pay the deferred installments out of the net revenues in sixty consecutive installments after erection. Held: The foregoing transaction between the village and the seller of the machinery contemplates the union of the property of the village with that of the seller in a common pool, from which the net earnings of the joint enterprise would be paid to the seller. To the extent that the village devoted the whole of its own property to secure the seller, to that extent did it loan its financial credit to and in aid of the seller in violation of Section 6, Article VIII, of the Ohio Constitution.
ERROR to the Court of Appeals of Stark county.
In the course of this opinion, for the purpose of brevity, Fairbanks, Morse Co., an Illinois corporation, will be referred to as the contractor, and the other defendants, the village of Brewster, the board of trustees, and the treasurer, will be referred to as the village.
This action originated in the Court of Common Pleas, and was brought by Hill, as a taxpayer, against the defendants, seeking to enjoin them from doing any acts in pursuance of a certain contract between the village and the contractor calling for the furnishing of machinery and equipment for the construction and operation of an electric light plant in the village. The Common Pleas Court denied the injunction and dismissed the taxpayer's petition. Appeal was taken to the Court of Appeals, which heard the case de novo and granted the taxpayer's injunction as prayed for.
The history of the case is largely comprised of the resolution and ordinances of the village council, together with a certain contract entered into between the village authorities and the contractor. On December 13, 1932, the village board of trustees passed a resolution declaring it necessary to erect, construct and operate an electric light and power plant in the village, the power to be supplied to the village and its inhabitants, and declaring it necessary to purchase machinery for that purpose. The resolution further provided that the entire cost was to be paid solely from the revenues derived from the utility's operation above the legitimate and necessary expense of operation, and that it should not become a general obligation of the village. The resolution passed by a vote of two to one. On the same date, to-wit, December 13, 1932, the village council adopted an ordinance, called Ordinance No. 217. This ordinance, after reciting the aforesaid resolution, provided that, for the purpose of constructing and operating a power plant, it was necessary to purchase and install certain machinery.
Section 3 of the ordinance is as follows: "Section 3. That the entire cost thereof shall be paid solely from the revenue of said utility after the payment of all legitimate and necessary expenses of the operation thereof, but not from any other fund whatsoever nor shall the obligation become a general obligation of the village of Brewster except to pay for said machinery from the revenues as herein set forth, and the sum of Thirty Thousand Dollars ($30,000.00) being the amount estimated as necessary for such purposes, as well as a sufficient amount to take care of the interest on the deferred payments herein referred to, be and are hereby appropriated from the Electric Light and Power Fund and from the revenues from said utility after the payment of the legitimate and necessary expenses of the operation thereof."
Under this ordinance the deferred payments were to bear 6 per cent. interest from the date of the completion of the installation of the machinery, the interest to be paid semi-annually and evidenced by coupon revenue certificates signed by the village, and expressly providing that the certificates should be payable "only from the revenues of the Electric Light and Power System of the Village of Brewster, Ohio, after the payment of the legitimate and necessary expenses of the operation of said plant and not from any other fund whatsoever." The village ordinance directed its trustees to advertise for bids and authorized the trustees to enter into a contract with the lowest and best bidder. Bids were advertised for, and that of the defendant contractor was declared to be the lowest and best bid and was accepted. The board of trustees authorized its president and clerk to enter into a contract for the furnishing of the electrical machinery and equipment. On April 12, 1933, this contract was signed by the parties. The contract is lengthy and we shall refer only to its material points.
The contractor proposed to furnish the machinery for the sum of $24,960, the sum of $1500 was payable in cash with the order, and $3500 upon the arrival of the principal parts of the equipment at the village; the balance, $19,960, was payable in sixty equal consecutive monthly installments; payments to begin thirty days after installation. By the terms of the contract it was agreed that the "Municipality shall erect the proper and necessary foundations and buildings and shall furnish all needed common labor," etc., that the deferred installments of the purchase price, and the revenue certificates, were not to be "general obligations of the said Municipality payable from taxes or its general funds but only special obligations payable from the net revenues of the * * * plant of the Municipality." The revenues were defined as representing the balance of the gross receipts of the plant "after the payment solely of the legitimate and necessary expenses of the operation of said plant." Under the contract the village covenanted to operate the plant in an efficient manner, and so far as it was permitted by law to maintain rates of service which would provide sufficient revenues for the payments called for by the contract, the village also agreeing to operate its plant until all the obligations due under the contract had been discharged, and "until such time shall not dispose of said plant in any manner so as to deprive the Company of its title to or interest in said machinery or materials without providing for the payment to the Company of all amounts then unpaid under this contract." The contract further provided that the title to the machinery should remain in the contractor until final payment of all sums due which had not been paid. It also provided that in the event there were any outside deferred payments unpaid, or in the event any judgment should be taken on account of said sums, the title of the machinery should not pass until such revenue certificates or judgment were fully paid in money and satisfied.
On April 12, 1933, the village Council passed Ordinance No. 220. This ordinance was in substance a ratification of its previous Ordinance No. 217, and it authorized the village and contractor to enter into the contract aforesaid. Ordinance No. 220 also required the revenue from the plant to be kept in a separate fund which should be applied exclusively to the payment of the legitimate, necessary expenses for its operation and to the payment of the purchase price of the machinery and the deferred payments thereon. It also provided that until such payments and interest thereon were made a sinking fund should be established therefor.
There is an agreed stipulation stating that at the time the village ordinances were passed and the contract entered into there was between nine and ten thousand dollars in the electric light fund of the village; and that on April 12, 1933, the village treasurer delivered to the contractor a check drawn upon the fund for $1500 as an initial payment on the contract.
Mr. C.B. McClintock, for the village of Brewster and its officials.
Messrs. Bulkley, Hauxhurst, Inglis Sharp; Messrs. Andrews, Hadden Burton and Messrs. Poppenhusen, Johnston, Thompson Cole, for Fairbanks, Morse Company, plaintiffs in error.
Messrs. Hart, Drukenbrod McHenry and Mr. Charles N. Hostetter, for defendant in error.
The village of Brewster is a small village embracing between fifteen hundred and two thousand inhabitants. At and prior to the time this contract was entered into with the village, the latter owned a distribution system which furnished current obtained from the Ohio Public Service Company. The village deemed it best to manufacture its own current, and, with that purpose in view, the two ordinances were adopted and negotiations had between the contractor and the village whereby the former proposed to furnish certain generating machinery equipment for the local village plant for the sum of $24,960, payable as follows: $1500 in cash with the order; $3500 upon the arrival at the plant of the principal parts of the equipment, and the balance to be paid in sixty monthly payments bearing interest at 6%. The contract in controversy was one which the village terms a conditional sale, the title remaining in the seller until paid for in cash or by deferred installments payable out of the net revenues of the plant; and it was agreed such installments were not in any way to be general obligations of the municipality payable from taxes or out of its general funds. The title to the machinery was to remain in the contractor until final payment of the purchase price. In support of its claim sustaining the validity of the contract the village contends that it is acting within its proprietary capacity, since it proposed to furnish electric current to its inhabitants; and that in so acting the village occupied a relation similar to that of private companies, and therefore had ample authority to pass the ordinances and make the contract challenged in this suit. Travelers Ins. Co. v. Wadsworth, 109 Ohio St. 440, 142 N.E. 900, 33 A. L. R., 711. The second proposition of the syllabus reads as follows: "The power to establish, maintain, and operate a municipal light and power plant, under the Constitution and statutes aforesaid, is a proprietary power, and in the absence of specific prohibition, the city acting in a proprietary capacity may exercise its powers as would an individual or private corporation."
Conceding, however, that the village is acting in a proprietary capacity, yet, in the domain of finance, where its debt incurring or taxing power is involved, the constitution and laws of this state have placed municipalities under legislative control. If either the constitution or the state law has prohibited the execution of contracts such as are here involved, or if the law has provided other methods controlling their execution, the law must be followed.
One of the major, important questions in this case is whether the contract negotiated by the village contravenes any of the provisions of the Ohio constitution; if the village is prohibited by the constitution from acting directly it has no power to act indirectly. Taylor v. Commissioners of Ross County, 23 Ohio St. 22. Tho Court of Appeals in its opinion gave no consideration to Article VIII, Section 6 of the Constitution, which reads as follows: "No laws shall be passed authorizing any county, city, town or township, by vote of its citizens, or otherwise, to become a stockholder in any joint stock company, corporation, or association whatever; or to raise money for, or to loan its credit to, or in aid of, any such company, corporation, or association * * *."
The plan adopted by the village and contractor is generally referred to as the "pledge of receipts plan," whereby the machinery sold is to be paid entirely from the net revenues of the village plant. Contracts of a similar character have been before the various courts of this country and have given them some tribulation. Among other cases cited by counsel for plaintiffs in error are the following: Carr v. Fenstermacher, 119 Neb. 172, 228 N.W. 114; Lang v. City of Cavalier, 59 N.D. 75, 228 N.W. 819; Williams v. Kenyon, 187 Minn. 161, 244 N.W. 558; Kentucky Utilities Co. v. City of Paris, 248 Ky. 252, 58 S.W.2d 361; Kelly v. Merry, 262 N.Y. 151, 186 N.E. 425. Counsel for the defendant in error cite among others the following cases: Bell v. City of Fayette, 325 Mo., 75, 28 S.W.2d 356; Schnell v. City of Rock Island, 232 Ill. 89, 83 N.E. 462; Hesse v. City of Watertown, 57 S.D. 325, 232 N.W. 53.
While in the main the contracts in some of the cases above mentioned are similar to the one in the case at bar, the divergence of opinion arises because of the construction of constitutional and statutory provisions in the various states where the decisions are made. We have been unable to find any case which bottomed its conclusion upon a constitutional provision such as we have in Article VIII, Section 6 of our Constitution. That section has been construed by this-court a number of times, and it has uniformly been held that a financial transaction, entered into by a city, whereby it either directly or indirectly attempts to raise money for or loan its credit to or in aid of any company, is constitutionally invalid. Taylor v. Commissioners, supra; Alter v. City of Cincinnati, 56 Ohio St. 47, 46 N.E. 69, 35 L.R.A., 737; Markley v. Village of Mineral City, 58 Ohio St. 430, 51 N.E. 28, 65 Am. St. Rep., 776; State, ex rel. Campbell, Pros. Atty., v. Cincinnati, St. Ry. Co., 97 Ohio St. 283, 119 N.E. 735; City of Cincinnati v. Harth, 101 Ohio St. 344, 128 N.E. 263, 13 A. L. R., 308. In the Alter case, supra, the first and second propositions of the syllabus read:
"1. Under section six of article eight of the constitution, a city is prohibited from raising money for, or loaning its credit to, or in aid of, any company, corporation, or association; and thereby a city is prohibited from owning part of a property which is owned in part by another, so that the parts owned by both, when taken together, constitute one property."
"2. A city must be the sole proprietor of property in which it invests its public funds, and it cannot unite its property with the property of individuals or corporations, so that when united, both together form one property."
It appears from that case that the city owned its existing water works, and that its enlargements, after construction, were to be owned by the person constructing them. It is thus stated on page 65 of the opinion: "When the enlargements, extensions, improvements and additions shall be thus made, completed and connected with the existing water-works so owned by the city, the enlargements, extensions, improvements and additions, together with the existing works, all taken together, will constitute one complete whole — one water-works system, one water-works — owned in part by the city, and in part by the individual or corporation, and thereby the union of public and private capital and funds in one enterprise will become complete. * * *
"* * * It is this close connection and dependence one upon the other that constitutes both together as a single whole, and makes a union of public and private funds and credit. The existing works are to be connected with the new improvements, and are thereby to lend aid to the person, company or corporation making and owning such new improvements."
In the Markley case, supra, Spear, J., on page 438 of his opinion, stated that the interdict of Section 6, Article VIII of the Constitution, "applies as well to the case of an individual, as to the aggregations named, * * *. It is intended to prevent the union of public and private capital in any enterprise whatever."
The constitutional section under consideration provides that no laws shall be passed authorizing any city or town to raise money for or in aid of any company or association; or to loan its credit to or in aid of any such company. In order to ascertain whether the negotiations culminating in the proposed contract amounted to a union of the village property with that of the contractor, and thus fall within the condemnation of Section 6, Article VIII of the Constitution, it becomes necessary to consider the councilmanic legislation and the contract executed in conformity therewith. As heretofore stated the village was a small one, possessing its own distribution system when these negotiations were had. The record does not disclose how extensive this village system was or what was its probable value. However, it was stated in oral argument that the valuation of this distribution system was in the neighborhood of $60,000. The contractor was to furnish machinery for the generation of electric power for the sum of $24,960; $5000 to be paid in cash by the time of its arrival at the village plant and the balance of the purchase price to be paid in sixty equal consecutive installments, commencing thirty days after the completion of erection. Upon its part the village was to erect the necessary foundations and buildings for the installation of the machinery. The machinery after its installation was to be joined to the distribution system of the village, and thus form one complete system for the furnishing of electricity to the village and its inhabitants. While it is true that the net revenues derived from the joinder of the properties were not to be realized from general taxes, but from the income from the plant; it is also true that the village's distribution system must originally have been raised by taxation. If such be a fact it follows that, by the contribution of the two properties, a part by the village and a part by the contractor, these properties were placed in a common pool from which the net earnings were to be paid to one member of the pool until its purchase price should be paid under the agreement. Let us assume that the village's distribution system has a value of $60,000, as indicated by counsel. Had the village advanced that amount in cash or credit, from which the net earnings of the joint enterprise would be first paid to the contractor in liquidation of his purchase, as stated by Johnson, J., on page 308 of his opinion in State, ex rel., v. Cincinnati, supra, it would be "in effect a lending of the city's [village] credit in aid of the company" [contractor]. To the extent that the village devoted the whole of its own property to secure the contractor, to that extent did it loan its financial credit to and in aid of the contractor.
In support of their contention counsel for the village cite the case of Nichol v. Tolhurst, Village of Amherst, decided by the Court of Appeals of Lorain county in a pro forma opinion, on October 6, 1933, where the appellate court sustained a contract for the purchase of machinery under village legislation very similar to the case at bar; and since we overruled a motion to certify in the Lorain county case, counsel argue that to secure uniformity of judicial decision we should overrule the Court of Appeals in the instant case.
We have heretofore announced that, in cases knocking at our door for certification, the refusal of a motion to certify, even if the same legal question is decisively involved, does not furnish an adjudication of the question by this court as an established precedent for future cases. Upon a full consideration of the case on its merits we are of the opinion that a contract of this character made by a municipality contravenes the spirit, if not the letter, of our constitution as outlined in the former decisions of this court when construing the constitutional section above named.
A large portion of the briefs of counsel has been devoted to the question whether or not the second ordinance adopted by the village council was subject to a referendum. The conclusion that we have reached as to the invalidity of this contract makes it unnecessary to decide that question; nor, for the same reason, is it necessary to decide whether, under the Ohio law, proposals for bids require payment to be made in "cash" or whether they may be paid out of the net receipts derived from the operation of the utility.
The judgment of the Court of Appeals will be affirmed.
WEYGANDT, C.J., STEPHENSON, MATTHIAS and BEVIS, JJ., concur.
ALLEN and ZIMMERMAN, JJ., not participating.