Opinion
No. 13,647.
Decided June 15, 1936.
Suit on municipal bonds. Judgment for plaintiff.
Reversed.
1. MUNICIPAL CORPORATIONS — Bonds — Validity. While section 8 article XI of the Constitution exempts debts of municipalities from the special limitations therein contained, it does not prevent the legislature from otherwise prescribing conditions, and legislation having been enacted, bonds representing such indebtedness must be issued in strict compliance with statutory provisions, failing which, they will be held void.
2. Special Improvement Bonds — General Municipal Obligations. Municipal bonds purporting on their face to be for the payment of "water main extension improvements" in a special district will not be considered to be general obligation bonds of the municipality. Bonds, to be such general obligations, must be so declared by the city authorities in their discretion under applicable statutory provisions, but this discretion, when exercised, is binding on the courts.
3. Special Improvement Bonds — General Municipal Obligations. While special improvement bonds issued by a municipality as such cannot be held to be general obligations of the city, still, they are valid as local improvement bonds if issued in compliance with the requirements of law relating to the issuance of such bonds.
4. Special Improvement Bonds — Municipal Guaranty — Constitutional Law. A guaranty of special improvement bonds by the municipality in which the improvement district is located is, in effect, the lending of the credit of the city in aid of persons who are defaulting taxpayers, and chapter 180, S. L. '23, purporting to authorize such guaranties is clearly in violation of section 1, article XI, of the state Constitution.
5. TOWNS AND CITIES — Special Assessment Bonds — Municipal Guaranty — Constitutional Law. Section 33, chapter 180, S. L. '23, authorizing a city council to guarantee the payment of special assessment bonds is unconstitutional because in violation of the prohibition against lending or pledging the credit or faith of a municipality in aid of third persons.
Error to the District Court of Adams County, Hon. Samuel W. Johnson, Judge.
Messrs. HARRISON HARRISON, Messrs. ALTER UPTON, for plaintiff in error.
Messrs. VAN CISE ROBINSON, Mr. J. E. ROBINSON, for defendant in error.
Mr. ADDISON M. GOODING, Mr. FRED A. VIDEON, Mr. WILLARD J. ALLEN, Messrs. GRANT, ELLIS, SHAFROTH TOLL, Mr. MYLES P. TALLMADGE, Mr. CHARLES W. SHELDON, Jr., Mr. WILLIAM E. HUTTON, amici curiae.
KRAUSS sued the city (formerly town) of Aurora to recover judgment on thirteen one thousand dollar bonds owned by him, payment of which was in default. For a first cause of action he alleged the bonds to be general obligations of the city. In a second cause of action, plaintiff alleged the liability of the city for payment of the bonds by reason of "guaranty certificates" endorsed thereon. The city denied the allegations, setting up numerous defenses in its answer. Plaintiff recovered judgment for the face of the bonds and interest. The city assigns error.
December 7, 1925, the town board of trustees adopted and approved an ordinance by virtue of chapter 180, Session Laws of 1923, "An Act Relating to Local Improvements in Cities and Towns." This ordinance created an improvement district in the town of Aurora, known as Water District No. 3, ordered the construction therein of water extension mains, and provided for the issuance of bonds of the district, in payment for said improvements; also provided for guaranteeing payment of the bonds by the town. Acting under the above statute, the board previously had found and declared that there existed a necessity for the creation of Water District No. 3, "and the construction therein of certain water extension main improvements." The district having been created, opportunity was regularly afforded owners of real estate therein liable to assessment, to make objections if they so desired. It is admitted that the district comprises less than one-fourth of the city territory. The proposed improvements consisted of water extension mains, fire hydrants and incidentals, and the ordinance provided that pursuant to the provisions of the mentioned statute, local improvement bonds of the town be issued for the purpose of paying for the district improvements. The bonds, as further provided, were payable six years after date, "out of the moneys collected on account of the assessments made for said improvements." The ordinance set out the form of the bond, which is usual for local improvement bonds, the pertinent parts of which are:
"Town of Aurora. Aurora Water District Number Three.
"The town of Aurora * * *, for value received, acknowledges itself indebted and hereby promises to pay to the bearer hereof the sum of one thousand dollars * * * this bond is issued for the purpose of paying the cost of water main extension improvements in Aurora Water District. No. 3 * * *. This bond is payable out of the proceeds of a special assessment to be levied upon real estate, situate in the town of Aurora, Colorado, in said Water District No. 3, specially benefited by said improvements, and the amount of the assessments * * * is * * * made a lien upon said real estate * * *." Attached to each bond were interest coupons and the "Guaranty Certificate," provisions of the latter here pertinent being as follows: "Payment of the within bond is guaranteed by the town of Aurora * * * by ordinance * * * adopted, duly approved and made a law of said town * * * by a two-thirds vote of all the members of the board of trustees * * *." This "guaranty certificate" was signed by the mayor and attested by the town clerk.
July 6, 1926, the board adopted an ordinance approving the whole cost of the improvements for the district, approving the apportionment of said cost to each lot or tract of land in the district and prescribing the method for collecting and payment of said assessments. This ordinance recites that the whole cost, including inspection, collection, incidentals and interest, is the sum of $19,180 and that of this sum the Town of Aurora is to pay the cost of street intersections and fire hydrants amounting to $1,944.59.
The city alleged as additional defenses that the purchase and erection of water works was not authorized by the majority of taxpaying electors at an election, and therefore, the bonds are void because of failure to comply with subparagraph sixty-seven, section 8987, Compiled Laws of 1921; that the bonds are void because issued in violation of the express provisions of sections 1 and 2, article XI of the state Constitution in that they constitute a lending of the credit of the municipality securing payment of obligations of a local improvement district; that the bonds were issued contrary to section 8, article XI of the state Constitution and subparagraphs six and sixty-seven of section 8987, Compiled Laws of 1921; that the bonds, upon their face, disclose that the city was acting as agent for the special improvement district created within its limits and that the bonds were to be paid from the collection of special assessment taxes upon real estate within the improvement district specially benefited; that the act relating to improvements, known as chapter 180, Session Laws of 1923, is unconstitutional because in violation of the provisions of section 21, article V of the state Constitution. For a first answer and defense to the second cause of action, based upon the guaranty of the city, it is contended that the guaranty is without consideration and not a binding obligation of the city.
Defendant offered to prove the total assessed valuation of all property in the city for the year 1925, for the purpose of presenting the fact that an excessive debt was created contrary to section 8, article XI of the Constitution; that there was no general or special election held at which the question of the issuance of these bonds was submitted to the electors for approval; that the general property owners were given no notice of, and afforded no opportunity to object to, the creation of improvement districts or assessments to be levied; that the created district did not include the entire city, but embraced less than one-fourth of the territory within the limits thereof; that the question of purchasing or erecting the water works, if the improvements herein involved should be held to be such, was never submitted to the taxpaying electors at a general or special election; that while some of the special assessments here involved are delinquent, the total special assessments are sufficient in amount, if paid, to discharge and fully pay this indebtedness; that the laying of the mains throughout said district was to supply the inhabitants of the district with water purchased direct from the City and County of Denver by the consumers in said district and so much thereof as is used by the city is paid for by the city; that none of such consumers purchase water from the city and that the city receives no revenue therefrom. There was a further offer to prove that the total outstanding unpaid indebtedness of the city of Aurora at the time of the issuance of these bonds was $48,649.94.
Plaintiff objected to these offers of proof, and they were rejected upon the theory, as stated by the court: "That these bonds come under the authority given the cities to provide water for its inhabitants," and therefore comes within the exception contained in section 8, article XI of the state Constitution. This provision is as follows: "Debts contracted for supplying water to such city or town are excepted from the operation of this section." In other words, the court held that the city, in this instance, was not required to observe the general provisions of the Constitution therein contained relating to the contracting of a debt by the city.
The trial court undoubtedly misapprehended the limitations otherwise surrounding the issuance of bonds by a municipality, even though they be issued to pay a debt incurred for supplying water to its inhabitants. While we think otherwise, even if it be conceded that the bonds in question were general obligations for "supplying water," and specifically exempt by section 8, article XI, from the operation of the Constitution as applied to the "contracting of a debt by loan in any form," still they must be issued according to statutory prescription. The exemption prescribed in this section of the Constitution does not mean that there are no limitations whatever upon an indebtedness which may be incurred even for water supply, and that such an unlimited debt would be a general obligation of the city. If this were so, then debts to be paid from general taxation could be created in such amounts and payable in such short limits of time as to be confiscatory of property. While this section of the Constitution exempts debts incurred for supplying water to the city from the special limitations therein, it does not prevent the legislature from otherwise prescribing conditions. This was done, as is made evident by the provisions of subparagraph sixth, and subparagraph sixty-seventh, section 8987, Compiled Laws 1921, which confers the only power given to towns and cities to incur indebtedness in such cases. This incurrence must be by ordinance, irrepealable until the debt is paid, there being a provision for levying of a tax sufficient to extinguish the debt within the limits of its maturity, which must be not less than ten nor more than fifteen years. It was so said in the case of Sauer v. Town of Gillett, 20 Colo. App. 365, 78 Pac. 1068. The bonds in question in the case now before us matured in six years, and therefore are void upon their face as general obligations, because not in compliance with the law controlling the issuance thereof.
[2, 3] The bonds are no more than their face wording tell us they are, that is, "For the purpose of paying the cost of water main extension improvements in Aurora Water District No. 3." They were issued under authority of chapter 180, S. L. 1923, which includes, "water mains" as a local improvement. Nowhere does this act, which relates solely to local improvements, say anything about "supplying water." It may be said that the improvements here made benefited the entire municipality and were such as could have been made at the expense of all the owners of property in the municipality. To be such, it must be so declared. Such a declaration rested in the discretion of the town board, and if it declared otherwise, that is, that the improvements were a local necessity specially benefiting certain property to be assessed, then the exercise of that discretion is binding on the court to the end that we should not say to the contrary. Not being general obligation bonds as we now have determined, still they are valid local improvement bonds, if there has been a compliance with all requirements of law relating to the issuance of such bonds. It is not contended that there has been a noncompliance in this respect, and there can be no such tenable contention in view of the following recitals contained in the bonds:
"This bond is issued for the purpose of paying the cost of water main extension improvements in Aurora Water District No. 3, in the Town of Aurora, by virtue of and in full conformity with an Act of the General Assembly of the State of Colorado, entitled, `An Act relating to local improvements in cities and towns,' approved April 9, 1923 * * *.
"This bond is payable out of the proceeds of a special assessment to be levied upon real estate situate in the Town of Aurora, Colorado, in said Water District No. 3, specially benefited by said improvements, and the amount of the assessments to be made upon the real estate in said district for the payment thereof, with accrued interest, is by the aforesaid act, made a lien upon said real estate in the respective amounts to be apportioned to said real estate and assessed by an ordinance of said town, and it is hereby certified and recited * * * that every requirement of law relating to the creation of said water District No. 3, the making of said local improvements, and the issue of this bond, has been fully complied with * * *."
The judgment against the city for general liability, if it is upon the first cause of action, cannot stand unless it is determined that the guaranty of the city, herein set out, created a present general liability in all events.
These bonds are debts, by limited contract classified by district, of the specially benefited property owner, in the making of which he had a voice, if only by minority protest. It was the guaranty of his debt that was desirable to the bondholder. The fact that it was considered necessary and permissible to add a guaranty by the town officials, is an acknowledgment that another or a principal, first owed the debt. If the guaranty is to be considered as transforming the bond from a limited contract or local improvement bond into a general obligation of the city, and enforceable as such, then the constitutional and statutory protection is withdrawn from the external taxpayer who is not within the limits of the improvement district, without due process, in fact without process at all; and the internal taxpayer who has paid his special taxes according to the contract is likewise subjected upon a limited process. It may be considered as conceded that no notice was given, or to be given, to a general taxpayer who thus became ultimately affected. The moral, legal and constitutional obligation resting upon the city to respect the rights of such taxpayers has been disregarded and the power — regardless of Constitution or statute — to burden the taxpayers with debt, is left solely with the governing town authorities. The guaranty here in question, if given force and effect, compels the taxpayer to assume payment of an obligation which is in default through no deficiency of his. Fundamentally, all rights in this controversy are entirely on the side of the taxpayer not in default and yet to be heard. It is inescapable that the bondholder has no greater rights, and in fact no right, other than that given him as appears on the face of the contract. Knowledge of this right was accessible to him from the face of the bond and the law therein cited as authority for its issuance. The bond is a primary obligation between the specially benefited taxpayer and the holder thereof, and the guaranty here attempted to be made could in no wise make it even a secondary general obligation of the municipality. So far as the Constitution is concerned there is no distinction between primary and secondary obligations. If an amortization period of payment of not less than ten nor more than fifteen years was necessary in the issuance of a primary general obligation bond, then it is always necessary before the obligation could have that effect, and this would be true even if the guaranty gives the bond the effect of a contingent liability, as such was declared to be the effect of a guaranty in the case of Deter v. Delta, 73 Colo. 589, 217 Pac. 67.
Section 1, article XI of the Constitution of the state of Colorado, is as follows:
"Neither the state, nor any county, city, town, township or school district shall lend or pledge the credit or faith thereof, directly or indirectly, in any manner to, or in aid of, any person, company or corporation, public or private, for any amount, or for any purpose whatever; or become responsible for any debt, contract or liability of any person, company or corporation, public or private, in or out of the state."
The guaranty provided by chapter 181, S. L. 1923, if followed through to its mandatory provision requiring that "such city or town shall cause taxes to be levied upon all the taxable property of the city or town, sufficient to pay said warrants," is clearly in effect the lending of the credit of the city in aid of persons who are defaulting taxpayers and renders the city responsible for their debt, in plain violation of the above constitutional provision. "This section [ § 1, Art. 11, Colo. Const.] is to be construed as prohibiting a town or city by its own voluntary corporate act from pledging its credit to, or becoming responsible for, any debt, contract or liability in aid of a third party." Mayor v. Shattuck, 19 Colo. 104, 34 Pac. 947. There has been much discussion concerning the character of the water district here involved, as to whether or not it is an entity separate and apart from the city. A determination of this question is unnecessary in this case. The district, as such, whatever its character, is not in default and is not being aided; it is the defaulting taxpayer in the district, and since the Constitution prohibits the city from in any way becoming responsible for his debts, it follows that the legislature cannot by statute make it so liable.
Considering that the taxpayer may ultimately appeal to the court as the guardian of his constitutional and statutory rights, we think and so hold, that the pecuniary interest of the bondholder as disclosed by this unconstitutional guaranty, is subversive of the constitutional rights of the unbenefited general taxpayer, and the specially benefited taxpayer within the district who has paid his obligation. Such taxpayers would, by the guaranty, be subjected to double taxation, and it necessarily follows that section 33, chapter 180, S. L. 1923, is unconstitutional, as in violation of the prohibition against lending or pledging the credit or faith of a municipality in aid of third persons. In ultimate effect, the guaranty is meaningless because nothing is added to the bond thereby, beyond the statutory duty imposed upon the town officials to use the means provided for collection of the taxes specially levied, and the enforcement of the lien in favor of the bondholder upon the property specially benefited. The judgment herein entered against the city, based upon a misconception of the bonds as general obligations, must be and is reversed, and the bondholder left to such remedy as the law provides.
Judgment reversed.
MR. JUSTICE BUTLER and MR. JUSTICE BOUCK concur in part and dissent in part.