Canal Nat. Bank v. School Administrative Dist. No. 3

• Decision Date: 14 October 1964
• Docket Number: No. 3,3
• Citation: 160 Me. 309,203 A.2d 734
• Court: Maine Supreme Court
• Parties: CANAL NATIONAL BANK et al. v. SCHOOL ADMINISTRATIVE DISTRICT

Page 734

203 A.2d 734

160 Me. 309

CANAL NATIONAL BANK et al. v. SCHOOL ADMINISTRATIVE DISTRICT

No. 3.

Supreme Judicial Court of Maine.

Oct. 14, 1964.

Verrill, Dana, Walker, Philbrick & Whitehouse, by Roger A. Putnam, Portland, for plaintiff.

George A. Wathen, Augusta, for S. A. D. 3 and Directors.

Judson Jude, Newport, for Town of Brooks.

David A. Nichols, Camden, for Town of Liberty.

Richard J. Dubord, Waterville, for Towns of Brooks and Liberty.

John W. Benoit, Asst. Atty. Gen., Augusta, for State of Maine and State Board of Education.

WILLIAMSON, Chief Justice.

On appeal. The plaintiff banks are holders of bonds issued by School Administrative District No. 3 (SAD No. 3). The defendants are SAD No. 3, its officers and directors, the inhabitants of the eleven constituent towns, the State Board of Education and its members, the Commissioner of Education and the Attorney General. The plaintiffs sought and obtained a declaratory judgment holding P. & S.L.1963, c. 175, 'AN ACT to Provide for the Reorganization of School Administrative District No. 3' (the 1963 Act) by which Liberty, Brooks and Monroe (the 'three towns' or 'the withdrawn towns') the appellants, were removed from SAD No. 3, unconstitutional and void in that it impaired the obligation of the bonds, and also injunctive relief to prevent action under the 1963 Act.

The bonds in question were part of a $730,000 issue duly authorized under the statutes relating to school administrative districts. R.S. c. 41, § 111-K. References to sections are to R.S. c. 41 unless otherwise indicated. The residents of and the territory within the eleven towns of Brooks, Freedom, Jackson, Knox, Liberty, Monroe, Montville, Thorndike, Troy, Unity and Waldo comprised 'the body politic and corporate' (Sec. 111-F) known as SAD No. 3 when the bonds were issued and there has been no change in this respect apart from the 1963 Act.

The decisive issues are: (1) Does the 1963 Act impair the obligation of the bonds, and (2) if so, may the provisions relating to operation of schools be severed from the offending provisions and given effect?

The position of the three withdrawn towns that the plaintiff banks were neither holders in due course of the bonds nor creditors of the district entitled to a declaratory judgment is without merit. The record shows the bonds were duly authorized and issued under the laws then existing. Bond counsel in their legal opinion incorrectly stated that each bond should bear the authenticating certificate of Bank A, when in fact Bank B, duly authorized, authenticated the bonds. The validity of the bonds, and the rights of the plaintiffs to proceed with their complaint do not turn, as the three withdrawn towns suggest, on such an inconsequential error.

We turn to the constitutionality of the 1963 Act. (1) What was the obligation of the bonds, i. e., the contract? (2) What changes in the bonds were made by the 1963 Act? (3) Did the changes impair the obligation of the bonds? (4) If so, may the bad be severed from the 1963 Act and the remainder be given effect?

I. The Bonds

The bonds in question, $730,000 in amount, payable $35,000 each year from 1964 through 1983, and $30,000 in 1984, were authorized and issued under Sec. 111-K. They were issued '[t]o procure funds for capital outlay purposes,' were within the applicable debt limit, and were 'in such form subject to sections 111-A to 111-U-1 * * *,' that is to say, the sections relating specifically to school administrative districts. 'Said * * * bonds * * * shall be legal obligations of said district, which is declared to be a quasi-municipal corporation within the meaning of chapter 90-A, section 23, and all the provisions of said section shall be applicable thereto.' The bondholder is thus given the right on judgment against the district to levy on all personal property of the residents of and on all real estate within the district. For convenience we may sometimes refer to this right as the right to direct levy. R.S. c. 90A, § 23, as amended, reads:

'The personal property of the residents and the real estate within the boundaries of a municipality, village corporation or other quasi-municipal corporation may be taken to pay any debt due from the body corporate. The owner of property so taken may recover from the municipality or quasi-municipal corporation under section 32 of chapter 118.'

See also R.S. c. 118, §§ 30, 31 and 32, as amended.

Section 111-L provides for the financing of school administrative districts. It is not necessary that we review the steps in preparation and approval of the annual budget. For our purposes it is sufficient to note that by mandate of the Legislature the amount required for payment of bonds falling due and interest shall be included in the total assessment for all purposes, including operational expenses and debt service.

The assessors of each participating municipality are required annually by warrant of the directors of the district 'to assess upon the taxable polls and estates within said municipality an amount in proportion to the total sum required each year as that municipality's state valuation bears to the total state valuation of all the participating municipalities,' and to commit the assessment to the tax collector. Available gifts and trust funds may be used to reduce the assessment in any municipality. The town treasurer 'shall pay the amount of the tax' within stated times to the district. On failure to pay there is a mandatory provision for 'levy by distress and sale on the real and personal property of any of the residents of said administrative district living in the municipality where such default takes place.'

We have discussed the statutory provisions relating specifically to capital outlay bonds, such as the bonds held by the plaintiff, in some detail that we may see the insistence of the Legislature on the payment of the bonds and interest through taxation.

In brief, the bonds when issued where the legal obligation of SAD No. 3, a quasi-municipal corporation, comprising the residents of and territory within eleven participating municipalities, with payment by SAD No. 3 secured through taxation within each municipality on a proportional basis and with payment further secured by the right of the bondholder ultimately to levy on the personal property of the residents and the real estate within the entire district.

II. The 1963 Act

The Act may be summarized as follows:

SAD No. 3 is reorganized to comprise eight towns. The Towns of Liberty, Brooks and Monroe 'are removed and withdrawn' from SAD No. 3 and 'from the effective date of this act shall revert to their prior status as independent municipalities for all school and educational purposes * * *.' Sec. 1. The towns comprising SAD No. 3 as reorganized are constituted SAD No. 3 and all proceedings in the eight towns relating to the eleven town SAD No. 3 are validated under Sec. 2.

We do not concur with the view of the single Justice that SAD No. 3 was dissolved and a new SAD No. 3 created. The intent of the Legislature in our opinion is that SAD No. 3 should be reorganized without loss of its corporate body. The purpose of the Act is to detach the residents of and the territory within the three withdrawn towns from SAD No. 3, to restore responsibility for education to the three towns, and to adjust property and contract rights and obligations equitably among SAD No. 3 and the departing towns. See for example Sec. 4--responsibility for education; Sec. 5--payments by towns removed; Sec. 6--distribution of property to towns removed; Sec. 7--teachers' contracts; Sec. 11--arbitration between SAD No. 3 and school committees of withdrawn towns.

Sec. 10 of the Act quoted below specifically affects and alters the statutes touching the bonds. It must be considered of course with other sections of the Act and in particular with Sec. 1 and Sec. 2 whereby SAD No. 3 was reduced from eleven to eight towns.

'Sec. 10. School Administrative District No. 3, as reorganized, bond issue validated. The prior action relative to school construction and the issuance of $730,000 in bonds or notes is hereby declared to be valid and effective, any provisions of the law to the contrary notwithstanding, and any bonds or notes issued thereunder are hereby deemed to be a valid and binding indebtedness of School Administrative District No. 3 as herein reorganized, provided however that said bonds or notes shall in no way be construed as an indebtedness or liability of any of the Towns of Liberty, Brooks or Monroe, except as a contingent liability in the event of default on said bonds or notes if payment in full of the same is not made after levy on all of the assets of said School Administrative District No. 3, as hereby reconstituted, in accordance with the terms and conditions of said notes and bond indenture, and said contingent liability shall be in the same proportion as it would have been had the Towns of Liberty, Brooks and Monroe remained within School Administrative District No. 3 prior to its reorganization.'

Under the proviso a contingent liability 'in payment in full of the same [meaning the bonds] is not made after levy on all of the assets of * * * [the eight town SAD No. 3],' is placed upon the three withdrawn towns. This liability, in our view, is in full substitution (1) for the power and duty of SAD No. 3 hitherto to raise by taxation within the three towns a proportionate share of the bonds falling due and interest, and (2) for the unlimited right of the bondholder on judgment against SAD No. 3 to levy directly on property within the towns. Thus the bondholder under Sec. 10 with reference to the three withdrawn towns retains only the right of direct levy after exhaustion of all of the assets of the eight town SAD No. 3. 'Assets' in this context we construe to mean the personal property of the residents and the real estate within the boundaries of the eight town SAD No. 3. The...