Iowa Southern Utilities Co. v. Cassill

• Decision Date: 05 March 1934
• Docket Number: No. 9713.,9713.
• Parties: IOWA SOUTHERN UTILITIES CO. v. CASSILL, Mayor, et al.
• Court: U.S. Court of Appeals — Eighth Circuit

69 F.2d 703 (1934)

IOWA SOUTHERN UTILITIES CO. v. CASSILL, Mayor, et al.

No. 9713.

Circuit Court of Appeals, Eighth Circuit.

March 5, 1934.

Donald Evans, of Des Moines, Iowa (Carr, Cox, Evans & Riley, of Des Moines, Iowa, on the brief), for appellant.

William L. Hassett, of Des Moines, Iowa (Poppenhusen, Johnston, Thompson & Cole, of Chicago, Ill., on the brief), for appellees.

Before GARDNER and WOODROUGH, Circuit Judges, and MARTINEAU, District Judge.

GARDNER, Circuit Judge.

Appellant, as plaintiff below, brought this suit to enjoin the defendants, constituting the town of Lenox, Iowa, the mayor and councilmen thereof, and Fairbanks, Morse & Co. as contractor, from carrying out a contract entered into between the town of Lenox, Iowa, and Fairbanks, Morse & Co., by the terms of which Fairbanks, Morse & Co. agreed to sell to the town materials, and to construct a plant for the generation and distribution of electrical energy. For the materials, machinery, equipment, and services involved in constructing a completed plant, the town agreed, in the manner provided in the contract, to pay appellant the sum of $71,600.

For convenience, the parties will be referred to as they were designated in the lower court.

Plaintiff is a public utility company, organized under the laws of Delaware, owning, operating, and maintaining an electric light and power plant in various communities in Iowa, including the town of Lenox, and is the owner of a franchise authorizing it to distribute and sell electrical energy to the citizens of Lenox. At the time the bill of complaint was filed, June 13, 1932, plaintiff's franchise or permit had an unexpired period of about ten years.

Plaintiff was and is the owner of property in the town of Lenox, and is, hence, a taxpayer therein. It bases its right to an injunction on the charge that the contract for the materials and services entering into the construction, maintenance, and operation of the plant by the municipality is illegal, in that it is violative of both statutory and constitutional provisions of the state of Iowa, and that plaintiff is entitled to protection, not as the holder of an exclusive franchise, but against unlawful competition.

The facts, aside from those admitted by the pleadings, were stipulated in writing, and the court in effect adopted the facts so stipulated as its findings in the case, and from such facts concluded that the plaintiff was not entitled to the relief demanded, and entered decree dismissing the suit on its merits. From the decree so entered, plaintiff has appealed, urging that: (1) The contract is void because it violates the terms of the statute pursuant to which it was executed; and (2) the contract is void because it constitutes a debt and is in excess of the constitutional debt limitation.

The right of plaintiff to maintain the suit as the owner of a permit or franchise to distribute electrical energy to the inhabitants of the town of Lenox, and hence, entitled to protection against unlawful competition, is not subject to controversy. City of Campbell, Mo., v. Arkansas-Missouri Power Co. (C. C. A. 8) 55 F.(2d) 560; Frost v. Corporation Commission, 278 U. S. 515, 49 S. Ct. 235, 73 L. Ed. 483.

The power of the defendant city to enter into the contract is bottomed on the following statutes:

Section 6128, Code of Iowa 1931: "They (cities and towns) may grant to individuals or private corporations the authority to erect and maintain such works or plants for a term of not more than twenty-five years, and may renew, amend, or extend the terms of the grant; but no exclusive franchise shall be granted, amended, extended, or renewed."

Section 6134-d1, Code of Iowa 1931: "Contract authorized. They shall have power to pay for any such plant, improvement or extension thereof out of the past earnings of the plant and/or out of the future earnings and/or may contract for the payment of all or part of the cost of such plant, improvement or extension out of the future earnings from such plant, and may secure such contract by the pledge of the property purchased and the net earnings of the plant."

Section 6134-d2, Code of Iowa 1931: "Nature and requirements of contract. Such contract shall not constitute a general obligation or be payable in any manner by taxation. Such contract shall specify the maximum rate that may be charged the consumers, including the municipality, and the city shall not increase or fix any rate beyond such maximum. Under no circumstances shall the city be in any manner liable by reason of the failure of the net earnings being sufficient for the payments provided in the contract. Such contract shall also specify the rate of interest to be charged."

These statutes were passed in 1931. Prior to their adoption, the Supreme Court of Iowa had held that municipalities, under the general power vested in them by the then existing statutes, had no authority to enter into a contract pledging the future earnings of the plant itself for the payment of the purchase price. Van Eaton v. Sidney, 211 Iowa, 986, 231 N. W. 475, 71 A. L. R. 820. Apparently these statutes were adopted for the purpose of granting such authority.

The contract here involved contains the following provision: "The said Municipality upon its part agrees to purchase said machinery, equipment and materials for the price and upon the terms above set out, and to pay any balance of said purchase price not paid in cash as above set out solely out of the net earnings of the Electric Light and Power Plant of said municipality, it being understood and agreed that such agreement to pay the purchase price out of the net earnings of the plant shall not constitute a general obligation of said Municipality or be payable in any manner or under any circumstances by taxation but shall be payable solely out of the net earnings of said electric light and power plant. And it is further understood and agreed that under no circumstances shall the said Municipality be in any manner liable by reason of the failure of the net earnings being sufficient to meet the payments provided for in this contract."

It is conceded that if this contract creates a debt, then it is void, as the debt thus created would be in excess of the constitutional limitation of indebtedness of the town of Lenox (Const. Iowa, art. 11, § 3).

It is contended by plaintiff that the contract is void, even though it may not create an indebtedness, and this contention is based upon a provision in the contract which defines "net earnings" as "the balance of the gross receipts from the electric light and power plant of said municipality after the payment solely of legitimate and necessary expenses of the operation and maintenance of said plant." It is urged that the term "net earnings" has a definite legal, as well as a practical, significance, and that properly defined, it constitutes the balance of receipts remaining after deducting all proper operating and maintenance expenses and charges, and in addition thereto a proper charge for depreciation of the plant and materials which may become worn out or obsolete. In support of this contention it is pointed out that it was stipulated in the lower court that it is generally recognized by accountants, engineers, and businessmen, that a charge for depreciation of physical property should be made for the purpose of providing a fund to replace facilities that may be retired on account of use and obsolescence. In the case of an electric light plant of the kind specified in the contract here involved, it is stipulated that a charge of 5 per cent. of the original cost would be appropriate. It is, therefore, urged that the contract pledges more than the net earnings properly defined, and hence is not authorized by the Iowa statutes, because it creates an indebtedness in excess of the constitutional limitation.

Numerous authorities are cited as supporting plaintiff's contention. An examination of these authorities discloses that the issue before the court was either one of rates or taxation. They do not purport to deal with the expression "net earnings." The inquiry was as to net earnings from invested capital, and, generally, in calculating net earnings from invested capital, an allowance for depreciation of the plant in which the capital is invested should be made. Thus, in Knoxville v. Knoxville Water Company, 212 U. S. 1, 29 S. Ct. 148, 152, 53 L. Ed. 371, it is said: "A water plant, with all its additions, begins to depreciate in value from the moment of its use. Before coming to the question of profit at all the company is entitled to earn a sufficient sum annually to provide not only for current repairs, but for making good the depreciation and replacing the parts of the property when they come to the end of their life."

And in United States v. Ludey, 274 U. S. 295, 47 S. Ct. 608, 610, 71 L. Ed. 1054, also cited by plaintiff, the court said: "The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that by using up the plant a gradual sale is made of it."

From these and similar authorities, it is earnestly contended that the term "net earnings," as used in the statute under consideration, must be construed to mean the balance remaining after paying the expenses of operation and maintenance, plus depreciation.

It must be borne in mind that the municipality has no capital invested in this plant, but the capital invested has been furnished by the...