Beaumont v. Faubus

• Decision Date: 11 October 1965
• Docket Number: No. 5-3718,5-3718
• Citation: 239 Ark. 801,394 S.W.2d 478
• Parties: E. E. BEAUMONT, Appellant, v. Orval E. FAUBUS, Governor, et al., Appellees.
• Court: Arkansas Supreme Court

Page 478

394 S.W.2d 478

239 Ark. 801

E. E. BEAUMONT, Appellant, v. Orval E. FAUBUS, Governor, et al., Appellees.

No. 5-3718.

Supreme Court of Arkansas.

Oct. 11, 1965.

Gene Worsham, Little Rock, for appellant.

Bruce Bennett, Atty. Gen., Smith, Williams, Friday & Bowen, by Herschel H. Friday and John C. Echols, Little Rock, for appellees.

JOHNSON, Justice.

This case challenges the validity of Act No. 35 of the First Extraordinary Session of the Sixty-Fifth General Assembly of the State of Arkansas, approved June 9, 1965. Appellant, a citizen, resident and taxpayer of Arkansas, and the holder of both serial and term bonds of the State Highway Refunding Bonds dated April 1, 1941, issued under the authority of Act No. 4 of the Acts of Arkansas of 1941, prayed for a decree declaring Act No. 35 unconstitutional and enjoining appellees from taking any action pursuant to Act No. 35. This is a class action on behalf of the citizens, residents and taxpayers of the state and on behalf of the holders of the bonds authorized by Act No 4. Appellees are the members and secretary of the State Board of Finance.

There are presently outstanding $43,063,000 in principal amount of Act No. 4 bonds, constiting of serial bonds maturing annually on April 1, 1966 to 1972, inclusive, and term bonds maturing April 1, 1972. The serial bonds are not callable prior to maturity, but the term bonds are callable prior to maturity to the extent of $1,000,000 on April 1 in each of the years 1966 to 1971, inclusive. The Act 4 bonds bear interest at the rates of 3% and 3 1/4% per annum and are general obligations of the State of Arkansas. There is pledged to these outstanding bonds 70% of the first $10,250,000 of highway revenues collected each year, and there are presently being maintained in the State Treasury a highway bond and interest fund for the purpose of meeting the debt service requirements of the outstanding bonds and a debt service reserve fund consisting of collections in excess of debt service requirements. The debt service reserve fund currently contains cash and investments in direct obligations of the United States in an amount in excess of $7,800,000.

Act No. 35 authorizes appellees to issue and sell general obligation bonds of the state to be known as State Highway Refunding Bonds in the amount of $43,063,000, maturing serially in each of the years 1966 to 1972, inclusive, for the purpose of accomplishing the advance refunding of the outstanding Act 4 bonds. The entire proceeds of the sale of the refunding bonds are to be deposited in the reserve fund and appellees are required to invest the necessary amount of money in the reserve fund in United States government securities having such maturity dates and bearing interest at rates as will make available sufficient moneys to meet the debt service requirements of the outstanding Act 4 bonds as they become due (including the annual redemption of term bonds to the maximum permissible amount). The United States government securities would then be deposited with a bank or trust company under an irrevocable trust agreement whereby the principal and interest received on the securities would be used solely for paying the outstanding bonds. The remaining balance in the reserve fund (which will be at least $7,800,000) will be used for constructing and reconstructing highways and bridge in the state highway system.

The trial court disposed of the case on the pleadings by sustaining appellees' demurrer to the complaint and after appellant declined to plead further, dismissed the complaint with prejudice. This appeal followed.

For reversal appellant relies on six points.

I. Appellant urges that Act No. 35 impairs the obligation of the contract between the state and the holders of the outstanding bonds.

When the outstanding Act 4 bonds were issued and delivered, a contract was made between the state and the bondholders with the provisions of Act No. 4, the covenants and pledges executed pursuant thereto and the bonds themselves constituting a part of this contract. W. B. Worthen Co. ex rel. Board of Com'rs of Street Imp. Dist. No. 513 of Little Rock, Ark. v. Kavanaugh, 295 U.S. 56, 55 S.Ct. 555, 79 L.Ed. 1298; City of Little Rock v. Community Chest of Greater Little Rock, 204 Ark. 562, 163 S.W.2d 522, 142 A.L.R. 1072; Oliver v. Western Clay Drainage Dist., 187 Ark. 539, 61 S.W.2d 442. If Act No. 35 and the action that will be taken by appellees thereunder do impair the obligation of the contract with the outstanding bondholders, it is in violation of Article I, Section 10 of the Constitution of the United States, Amendment No. 14 thereto, and Article II, Section 17 of the Constitution of the State of Arkansas. Scougale v. Page, 194 Ark. 280, 106 S.W.2d 1023. Clearly Act No. 35 contemplates a change in the terms of the contract between the state and the Act 4 bondholders. However, not every change that affects a contract constitutes an impairment. Seibert v. United States, 122 U.S. 284, 7 S.Ct. 1190, 30 L.Ed. 1161; Miller Levee Dist. No. 2 v. Evers, Collector, 200 Ark. 53, 137 S.W.2d 915. The contract clauses of both the Federal and Arkansas Constitutions are designed to preserve practical and substantial rights, not to maintain paper rights and abstract theories. Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502, 62 S.Ct. 1129, 86 L.Ed. 1629. Every unilateral change in a contract may amount to a technical breach of that contract, but not every breach is an impairment of the contractual obligation. Morgan Construction Co. v. Pitts, 154 Ark. 420, 242 S.W. 812. We are dealing here with constitutional law--a limitation on the exercise of the sovereign power by a state in a matter of vital public concern (Veix v. Sixth Ward Bldg. & Loan Asso. of Newark, 310 U.S. 32, 60 S.Ct. 792, 84 L.Ed. 1061)--not just ordinary principles of contract law. 'This principle of harmonizing the constitutional prohibition with the necessary residuum of State power has had progressive recognition in the decisions of [the Supreme Court of the United States].' City of El Paso v. Simmons, 379 U.S. 497, 85 S.Ct. 577, 13 L.Ed. 446.

'The inescapable problems of construction have been: What is a contract? What are the obligations of contracts? What constitutes impairment of these obligations? What residuum of power is there still in the States, in relation to the operation of the contracts, to protect the vital interests of the community? Questions of this character, 'of no small nicety and intricacy, have vexed the legislative halls, as well as the judicial tribunals, with an uncounted variety and frequency of litigation and speculation.' Story on the Constitution, § 1375.' Home Building & Loan Asso. v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413.

When there is a change in the method of enforcement of a contractual obligation, the test for determining whether the obligation has been impaired is whether the new procedure is as 'adequate and efficacious' as the old, State of Louisiana ex rel. Southern Bank v. Pilsbury, 105 U.S. 278, 26 L.Ed. 1090, or stated differently, whether the contracting party receives a substantial equivalent of what he has been required to give up. Woodruff Elecric Coop. Corp. v. Ark. Public Service Commission, 234 Ark. 118, 351 S.W.2d 136. No mechanical yardstick can be established, but each case must be decided on its own merits. Seibert v. United States, supra; Faitoute Iron & Steel Co. v. City of Asbury Park, supra; Scougale v. Page, supra. As stated in Scougale v. Page, supra, (194 Ark. 280, 106 S.W.2d 1023):

"Impair' means to make worse, to diminish in quality, value, excellence or strenght; to deteriorate. (Citing cases).'

The real obligation, from the standpoint of impairment of contractual considerations in the case of bond issues, is the obligation of the issuing authority to pay the bonds, principal and interest, when due. This is the matter that is of vital significance to the bondholders. Faitoute Iron & Steel Co. v. City of Asbury Park, supra; Tipton v. Smythe, 78 Ark. 392, 94 S.W. 678, 7 L.R.A.,N.S., 714; Fulkerson v. Refunding Board of Arkansas, 201 Ark. 957, 147 S.W.2d 980. Bondholders necessarily expect and have a right to be paid, but payment does not always have to be made from a particular fund or source. Metropolitan Water Dist. of Southern California v. Toll, 1 Cal.App.2d 421, 35 P.2d 519; City of Fort Lauderdale v. State, 125 Fla. 89, 169 So. 584; Oliver v. Western Clay Drainage Dist., supra. As was stated by this court in Morgan Construction Co. v. Pitts, supra,

'There is a distinction between the breach of a contract and the impairment of the obligation of a contract, and where the state enacted a statute which had the effect of annulling or breaking the contract, but contained a provision for payment of the obligation, it does not constitute an impairment of the obligation of the contract. Caldwell v. Donaghey, 108 Ark. 60, 156 S.W. 839, 45 L.R.A. (N.S.) 721; Morgan Engineering Co. v. Cache River Drainage District, 115 Ark. 437, 172 S.W. 1020.'

It follows, therefore, that any change involving a substitution of security which does not diminish the prospects of, or adversely interfere with, expected payment does not constitute a contractual impairment.

With these principles in mind, we turn to the case at bar. Here, insofar as the basic right of payment is concerned, the bondholders will have obligations of the United States of America in the full amount necessary to pay their bonds, principal and interest, when due, substituted for a limited amount of cash and similar securities (approximately $7,800,000, but far less than the full amount necessary to pay the outstanding bonds) and a claim against the State of Arkansas primarily secured by highway revenues to be received over the years between now and date of payment. This substitution will leave the bondholders with government securities backed by the faith and credit of the...