Carruthers v. Port of Astoria

Citation249 Or. 329,438 P.2d 725
PartiesEben H. CARRUTHERS, Appellant, v. PORT OF ASTORIA, a municipal corporation, and Albert E. Rissman, J. Frank Hoagland, James T. Campbell, Howard B. Johnson, Russell Fluhrer, constituting the Board of Commissioners of the Port of Astoria, Respondents.
Decision Date20 March 1968
CourtSupreme Court of Oregon

Leo Levenson, Portland, argued the cause and filed the briefs for appellant.

Thomas J. White, Portland, and George C. Fulton, Astoria, argued the cause for respondents. With them on the brief were Anderson, Fulton & Lavis, Astoria, E. Wayne Cordes and White, Sutherland & Gilbertson, Portland, William H. Cannon and Nixon, Mudge, Rose, Guthrie, Alexander & Mitchell, New York City.

Herbert M. Schwab, Gerard K. Drummond and Rives & Schwab, Portland, filed a brief for Oregon State Public Port Authorities Association as amicus curiae.

Geo. A. Rhoten, Acting Sp. Asst. Atty. Gen., Salem, filed a brief in behalf of Oregon Department of Commerce--Economic Development Division as amicus curiae.


LANGTRY, Justice pro tem.

This case tests the validity of action of the Port of Astoria, a municipal corporation, to effect the sale of $142,000,00 1 in revenue bonds to finance building, within the area of the port district, wharves, conveyors and plant to be used generally in reducing aluminum ore to aluminum. The state statutes authorizing such action also are tested in this proceeding. The facilities would be constructed to specifications of Northwest Aluminum Company, a Delaware corporation, which has committed itself to lease and operate the entire plant for a period of 25 years, with an option to purchase it for $50,000 at the end of that period. Consideration for the lease would be rentals in a sum to insure repayment of the revenue bonds and interest thereon over their life span, which also is to be 25 years.

The bonds will specify the same restrictions as those contained in the enabling act. They are in pertinent part:

ORS 777.130. 'Any port may:

'(15) Construct (a plant) * * * suitable for use by any industry for the manufacturing, refining, processing or assembling of any * * * mining or other products * * * with full power to lease and sell the same * * * and * * * pledge or mortgage such buildings, improvements or properties, including any land * * * for the benefit of the holders of revenue bonds issued therefor.'

ORS 777.560. 'For the purpose of carrying into effect all or any of the powers granted to ports, and to provide funds * * * for industrial uses and purposes, ports may * * * issue and sell revenue bonds without * * * voters * * * authorizing * * *. Such revenue bonds shall not in any manner or to any extent be a general obligation of the port issuing the bonds nor a charge upon the tax revenues of such port, nor a charge upon any other revenues or property * * * not specifically pledged thereto.'

ORS 777.565. '* * * (W)ith respect to revenue bonds issued to finance a facility * * * authorized by subsection (15) of ORS 777.130, the board (of the port) * * * may only pledge or mortgage such (improvement and land) for the benefit of the holders of revenue bonds issued therefor * * *.'

Bache & Co., Inc., a New York Wall Street investment corporation, is associated with Northwest Aluminum Company, Inc. in this venture and has agreed to underwrite the bond issue when the bonds are found to be marketable. See note 1, supra. The obligation of Northwest Aluminum to pay rentals will be unconditional until the bonds are paid in full or adequate provisions are made for payment 'notwithstanding that the project is never completed, is totally destroyed, or never produces alumina or aluminum.'

The challenge to the proposed proceedings seeks a judgment holding that the action of the port, and the above statutes authorizing it, are in violation of §§ 7 and 9, Art. XI of the Oregon Constitution, and also that a public purpose is not involved. Such a proceeding is authorized under ORS ch. 27, which provides for the determination of such questions in controversy without action or suit. Judgment of the circuit court rejected the challenge in all respects and plaintiff has appealed therefrom.

Section 7, Art. XI of the Oregon Constitution forbids the state to lend its credit except in certain restricted ways.

Section 9, Art. XI of the 1859 Constitution provided:

'No * * * municipal corporation * * * shall * * * raise money for, or loan its credit to, or in aid of any * * * company, corporation or association.'

In 1917, without changing the above language, a regularly adopted addition to § 9 authorized port districts, pursuant to statute, to 'raise money and expend the same in the form of a bonus to aid in establishing water transportation lines * * *.'

Since the start of the 20th Century, it has been settled that public funds cannot be expended for other than a public purpose. Hunter v. City of Roseburg, 80 Or. 588, 156 P. 267, 157 P. 1065 (1916); Churchill v. City of Grants Pass, 70 Or. 283, 141 P. 164 (1914); Note, 59 Colum.L.Rev. 618, 622--23 (1959); Note, 66 Harv.L.Rev. 898, 900--01 (1953).

If it be conceded that the language of the statutes, the bonds, the lease, and the procedural ordinances of the port accomplish the stated purpose of unconditionally limiting the repayment of the revenue bonds to the proceeds of the lease of the project they finance, it would appear Northwest Aluminum's purpose in this financing procedure is to obtain a low interest rate on borrowed money. 2

The interest income from municipal bonds is exempt from federal income taxation. Therefore, the holders of such bonds, not being required to pay income taxes on the interest they receive, buy the bonds even though they return a lesser interest rate than other investments. 3 3 Thus the ultimate result is to reduce the cost of borrowing money to private firms such as Northwest Aluminum.

This method of financing industrial plants frequently is used in other states; the motives being the same--an interest saving on financing money to the industry on the one hand, and an expansion of industry and economy of the area which lends its taxsaving advantage on the other. See Note, 47 Yale L.J. 1412 (1938). (This article in 1938 correctly forecast proliferation of the plan.); Armstrong, 'Municipal Inducements'--The New Mexico Commercial and Industrial Project Revenue Bond Act, 48 Calif.L.Rev. 58 (1960); Note, 59 Colum.L.Rev. 618, 629 (1959); Comment, 48 Ia.L.Rev. 213 (1962); Notes and Comments, The 'Public Purpose' of Municipal Financing for Industrial Development, 70 Yale L.J. 789 (1961).

In the 19th Century, to induce railroads and sometimes canal companies to build to or through them, many municipal corporations gave them tax money, credit or other valuable advantages. Economic disaster frequently followed when the railroad failed in its obligations. The obligations of the municipalities were general in character, and the general taxpayers were required to pay for the defaults. Restrictive provisions such as §§ 7 and 9, Art. XI of the Oregon Constitution were enacted to protect the public credit against such raids. They were placed in constitutions in order that pressures of the moment could not overwhelm legislatures, municipal governing boards and councils, and even local elections. Where restrictive provisions were not placed in constitutions, similar restrictions were enforced by the courts through the device of restricting use of public money or credit to public purposes. Notes, 59 Colum.L.Rev. and 66 Harv.L.Rev., supra.

Financing of industry or proprietary functions of local government by restricted revenue bonds at that time was an unusued and virtually unknown device. See Foley, Revenue Financing of Public Enterprise, 35 Mich.L.Rev. 1 (1935); The Public Use of Private Capital: A Discussion of Problems Related to Municipal Bond Financing, 35 Va.L.Rev. 285, 289 (1949); Note, 59 Colum.L.Rev. 618, supra. The appendices of the Foley article show that revenue bond authority for public enterprises, except for very isolated instances, began to show up in the late 1920's and became common in the 1930's. They authorized revenue or special fund financing of projects such as housing authorities, educational institution dormitories, municipallyowned public utilities, toll bridges, public market buildings, etc. These presented no problem as to 'public purpose,' and were held not to violate the constitutional prohibition. Morris v. City of Salem, et al., 179 Or. 666, 671, 174 P.2d 192 (1946); Johnson v. School Dist. No. 1 etc., 128 Or. 9, 270 P. 764, 273 P. 386 (1928).

It was probably inevitable, the way having been shown to revenue financing that kept inviolate the general taxation, that there would be an attempt to enlarge the concept of 'public purpose' to include within this method financing of industries in order to induce them into area. Heavy federal income taxes, coupled with the exemption already noted for the income from municipal securities, supplied a substantial incentive for industry to try to finance by this method. State after state has authorized one or more classes of its municipalities to offer this financing method to private industries until now it appears that it is accepted as valid in at least 22 states.

Constitutional provisions like these of §§ 7 and 9, Art. XI, supra, have been construed, with few exceptions, as no obstacle. Newberry v. City of Andalusia et al., 257 Ala. 49, 57 So.2d 629 (1952); DeArmond v. Alaska State Development Corporation, 376 P.2d 717, 721 (Alaska 1962); Roan v. Connecticut Industrial Building Commission, 150 Conn. 333, 189 A.2d 399, 404 (1963); Green v. City of Mt. Pleasant, 256 Iowa 1184, 131 N.W.2d 5 (1964); Faulconer v. City of Danville, 313 Ky. 468, 232 S.W.2d 80 (1950); Hebert v. Police Jury of West Baton Rouge...

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