Audit Co. of New York v. City of Louisville

• Decision Date: 07 February 1911
• Docket Number: 2,059.
• Citation: 185 F. 349
• Parties: AUDIT CO. OF NEW YORK v. CITY OF LOUISVILLE et al.
• Court: U.S. Court of Appeals — Sixth Circuit

185 F. 349

AUDIT CO. OF NEW YORK v. CITY OF LOUISVILLE et al.

No. 2,059.

United States Court of Appeals, Sixth Circuit.

February 7, 1911

The Louisville Water Company, a private corporation, was the source of water supply for the city. The city invested some of its sinking fund accumulations in the stock of the Water Company, and later, in the same manner, became the owner of all the stock of the Water Company. This last situation had continued for 16 years, when, in 1906, the Legislature passed an act providing for the creation of a water department in the city government, and the taking over of the property of the corporation. Acts 1906, c. 16. Pending such taking over and on August 27, 1907, the city's general council, which is composed of two houses, a board of aldermen and a board of council, passed, in each, a joint resolution directing an investigation of and report upon the affairs of the Water Company, and for that purpose authorizing the mayor to appoint a commission of two members and to employ clerical accounting, and expert assistants. On September 3, 1907 (but with the recited date, August 31st), the mayor and the two commissioners appointed by him entered into a contract in writing with the Audit Company, by which it was employed to make such in investigation and report. It agreed to do the work rapidly by employing a large number of assistants, and by the contract it was to receive a stated per diem for each one of its employes engaged; the per diem varying according to the position of the person employed. It was also to receive the traveling and hotel expenses of its employes. The Audit Company began its work on September 3d, and by the mayor's direction its investigation covered a period of 17 years. It employed therein an assistant manager and a chief accountant and a force of 35 accountants and stenographers. They worked continuously, night and day, in shifts, and completed their investigation and report on November 10th.

For these services and some later items, the Audit Company rendered an itemized bill of about $38,000, made up of about $27,000 for the per diems, and about $11,000 expenses. The city, upon the grounds hereinafter stated, refused to pay and the Audit Company filed its bill asking to reform the contract by changing the stated date, August 31st, to the true date, September 3d, and asking, in connection with such reformation, a money decree for the amount claimed. On final hearing, the bill was dismissed, and complainant appeals.

J. S. Auerbach, Charles H. Tuttle, and W.W. Crawford, for appellant.

C. B. Blakey, for appellees.

Before SEVERENS and KNAPPEN, Circuit Judges, and DENISON, District judge.

DENISON District Judge (after stating the facts as above).

The subject of the jurisdiction of a court of equity should not pas without notice. It might seem that, in an action at law upon the contract, the true date could be shown, and so the legal remedy would be adequate. District of Columbia v. Camden, 181 U.S. 453, 461, 21 Sup.Ct. 680, 45 L.Ed. 948. It was complainant's theory that the date was not, as often, immaterial, but was an important and perhaps controlling fact, because August 31st and September 3d were in different fiscal years, and obligations incurred during one year must be within the tax limit for that year. Defendant, by general demurrer, raised the point that the 'bill was without equity,' but not specifically that the legal remedy was adequate. The district judge, overruling the demurrer, considered the importance of the true date as bearing on the right to reform in equity, but did not consider, and, apparently, did not have brought to his notice, the more determinative question whether the true date could not be shown at law just as well as in equity. In the final decree, the court declared the existence and the materiality of the mistake and a reformation of the contract. In this court, defendant has not, by brief or oral argument, urged the lack of equitable jurisdiction as any ground of supporting the decree dismissing the bill.

The reason of the rule, which requires the objection of adequate legal remedy to be raised before proceedings have been had which would be unnecessary if the objection was good, would seem also to require it to be maintained at every stage of the case where it might be controlling, and we regard the defendant's action here as tantamount to a waiver; nor is the case so 'plainly unsuitable to the exercise of the jurisdiction of a court of equity' nor so wholly without 'color of equitable jurisdiction' as to justify this court, after such waiver, and on its own motion, in affirming the decree upon this ground. Toledo, etc., Co., v. Computing, etc., Co. (Sixth Circuit) 142 F. 919, 923, 74 C.C.A. 89; Warmath v. O'Daniel (Sixth Circuit) 159 F. 87, 91, 86 C.C.A. 277, 16 L.R.A. (N.S.) 414.

Before considering the city's various reasons for denying liability, it is to be noted that the contract was one which the general council had full power to make. No question of ultra vires, in the broad sense of that phrase, is involved. The objections to be considered go only to the manner of exercising or the conditions precedent to exercising an admitted power.

It also becomes important to classify the joint resolution as being, on the one hand, governmental, or, on the other hand, proprietary, because different rules of validity are applied to the two classes of municipal action. The general rule is well established that, where a city is exercising governmental powers, it is closely limited, and clear authority for each such action must be found in the controlling general or special law of the state, but that, when it is exercising the rights of a proprietor in the management of its property, its council and officers resemble the directors and officers of a private corporation, and, in large degree, the powers of these agents and the responsibility of the city for their acts are governed by the rules applicable to private corporations. South Carolina v. U.S., 199 U.S. 437, 462, 26 Sup.Ct. 110, 50 L.Ed. 261; Pike's Peak Co. v. Colo. Spgs. (Eighth Circuit) 105 F. 1, 11, 44 C.C.A. 333; Henderson v. Young, 119 Ky. 224, 83 S.W. 583.

Whatever may be the situation since the city, in 1908, formally took over the Water Company, and made it a city department, the city's action of 1907, now under consideration, was clearly of the proprietary character. As a proprietor, it had owned, for 17 years, the capital stock of a private corporation, and it was considering changing the form of management. It desired to have full information about its property, in order to know the present value and to learn what, if any, special facts in its history, required action. For this purpose, it desired an investigation and audit, and employed experts for this purpose. We find nothing whatever governmental in this action, and whether it be treated as an investigation of property which the city had long owned, or an inquiry into property the purchase of which was under consideration, in either case it was the act of a proprietor with regard to his present or prospective property, and has no other aspect.

The Court of Appeals of Kentucky has passed upon the very question, and has directly held that, in its ownership and control of this property, through the ownership by the Sinking Fund Commission of the Water Company's capital stock, the city of Louisville was acting in its private, and not in its governmental, character. This conclusion has been stated in three cases, one of which considered the act of 1906. Clark v. Louisville Water Co., 90 Ky. 522, 14 S.W. 502; Louisville v. McAteer, 81 S.W. 698, 26 Ky.Law.Rep. 425, 1 L.R.A. (N.S.) 766;

Bell v. Louisville, 32 Ky.Law.Rep. 700, 106 S.W. 862.

The fact that the money to be expended was money raised by taxation cannot be controlling. We are concerned with the character, private or governmental, of the disbursing act. Every contract by a city to buy property which is not needed for governmental purposes involves the expenditure of tax money, yet in such cases the act of purchase is none the less proprietary. The present case furnishes an illustration, as the money invested by the Sinking Fund Commission in the Water Company's stock must have been public tax money, and this investment has been, in the above cases, held to have been the act of a proprietor not of a government.

We proceed then to consider the contract in question from the view point that it was within the power of the council and that it pertained to the management of the city's nongovernmental property, and, from that view point, to examine the city's objections separately.

1. The first objection is that the joint resolution undertook to delegate to the mayor or to the mayor and commission nondelegable powers, and the rule of Lowery v. Lexington, 116 Ky. 157, 75 S.W. 202, and Bowling Green v. Gaines, 123 Ky. 562, 96 S.W. 852, is urged in support of the objection. These cases both involved matters pertaining to governmental functions, one to the collection of taxes, the other to the construction of sewers; and to a delegation of such powers by a municipal corporation the strict rule of prohibition applies. On the other hand, duties of an administrative character, and especially when pertaining to the management of the city's privately held property, are not within the rule nor the reason of the rule that forbids delegation. Dillon on Munic. Corp. (4th Ed.) vol. 1, p. 156; and see cases cited above re distinction between classes of powers. On these principles, we see no reason why the council could not authorize the mayor alone, or with associates, to employ clerical or expert help for the purpose in question.

This objection is further answered by an...