Citrus Growers' Development Ass'n v. Salt River Valley Water Users' Ass'n

• Decision Date: 25 June 1928
• Docket Number: Civil 2760
• Citation: Citrus Growers' Development Ass'n v. Salt River Valley Water Users' Ass'n, 268 P. 773, 34 Ariz. 105 (Ariz. 1928)
• Parties: CITRUS GROWERS' DEVELOPMENT ASSOCIATION, INC., a Corporation, and THOMAS J. PRESCOTT, Appellants, v. SALT RIVER VALLEY WATER USERS' ASSOCIATION, a Corporation, F. A. REID, F. C. HENSHAW, H. C. GILBERT, E. RAY COWDEN, OBED M. LASSEN, F. O. WEEKS, H. M. WELBORN, JAMES MINOTTO, D. V. FOUNTAIN, RAY SAYLOR and W. T. TWEEDY, Appellees
• Court: Arizona Supreme Court

268 P. 773

34 Ariz. 105

CITRUS GROWERS' DEVELOPMENT ASSOCIATION, INC., a Corporation, and THOMAS J. PRESCOTT, Appellants, v. SALT RIVER VALLEY WATER USERS' ASSOCIATION, a Corporation, F. A. REID, F. C. HENSHAW, H. C. GILBERT, E. RAY COWDEN, OBED M. LASSEN, F. O. WEEKS, H. M. WELBORN, JAMES MINOTTO, D. V. FOUNTAIN, RAY SAYLOR and W. T. TWEEDY, Appellees

Civil No. 2760

Supreme Court of Arizona

June 25, 1928

APPEAL from a judgment of the Superior Court of the County of Maricopa.Joseph S. Jenckes, Judge.Judgment affirmed.

Messrs Baker & Whitney, for Appellants.

Messrs Kibbey, Bennett, Gust, Smith & Lyman, for Appellees.

Mr John W. Ray, Amicus Curiae.

OPINION

LOCKWOOD, J.

This action was originally brought by Citrus Growers' Development Association, a corporation, hereinafter called plaintiff, to enjoin the Salt River Valley Water Users' Association, hereinafter called the association, from selling and disposing of a certain proposed bond issue of $5,100,000, and from executing a trust deed and levying assessments upon the lands owned by shareholders of the association to secure the payment of said bonds.Thos. J. Prescott was granted leave to intervene and file a complaint in intervention.Both the amended complaint of plaintiff and the complaint in intervention were demurred to, and the trial court having sustained both demurrers, and plaintiff and intervener having elected to stand on their pleadings, judgment was rendered dismissing the complaints, from which judgment plaintiff and intervener have taken this appeal.

The association is a corporation organized under the laws of the territory of Arizona, February 9, 1903, for the purpose of providing an adequate supply of irrigation water for certain lands lying in what is commonly known as the Salt River Project.The situation existing at the time of incorporation was highly complicated, and as a result the articles of incorporation, which were worked out jointly by the owners of the land to be benefited and the officials of the United States Reclamation Service whose duty it was to administer the Reclamation Law which provided the funds for the original reservoirs and canals necessary to be constructed, are voluminous and were probably at that time at least unique in character.It was organized under the law relating to private corporations; its charter contains all the provisions required by law for such corporations, its bonds have been treated as those of a private corporation so far as the federal income tax is concerned, and this court has impliedly, at least, recognized that its charter could not be amended without its own consent.

On the other hand, its affairs are conducted in many respects as are those of a municipal corporation, its purposes are those generally found only in organizations such as irrigation districts and other similar institutions, which are considered as municipal corporations for most purposes, and it has been given the right to exercise many powers similar to those usually conferred only on branches of the government.It can probably be best described as a private corporation with a public purpose, and having quasi governmental powers.

Membership in the association was limited to the owners of irrigable land lying within the project, each acre of land entitling the owner to one share of stock in the corporation.Its management was vested in a bicameral body chosen by a system more resembling the election of a legislature than the ordinary one used in selecting the officers of private corporations, one division being called a council, and consisting of thirty members, empowered generally to enact by-laws and make rules and regulations for the government of the corporation; the other division, a board of governors of eleven members, including the president of the association, whose duty it was to administer its affairs, subject to the articles of incorporation and by-laws.No provision existed in the charter for the ordinary shareholders' meeting generally found in private corporations, any action by them being taken at an election conducted much like the ordinary political one.Revenue for corporate purposes was raised by levying assessments on the shareholders, which assessments, like taxes, became a lien upon their lands until payment, and following the requirements of the then existing statute, the indebtedness of the association was limited to an amount not exceeding two-thirds of the capital stock, which was fixed at $3,750,000.Amendments to the charter were covered, so far as the association was concerned, by article 18 thereof, which reads as follows:

"These articles of incorporation can only be amended by the shareholders at a regular annual election or at a special election called for that purpose.No proposed amendment shall be submitted to the shareholders until it shall have first received the approval of two-thirds of the members of the council at a regular or duly called session thereof, nor shall any such proposed amendment be so submitted until it shall have been published in full at least once in each week for four consecutive weeks in at least three newspapers published and of general circulation within the territory described in article IV, of these articles, the last of which such publications shall be not less than 10 nor more than 20 days before any such election."

At the time of organization of the association, the only statutory provision expressly authorizing amendments of the charter was paragraph 770, Revised Statutes of Arizona of 1901, which read, so far as material for our consideration, as follows:

"The capital stock of any corporation organized hereunder may be increased or decreased and the articles may be amended in any of the particulars mentioned in section 6 of this title by the affirmative vote of a majority of the stockholders. . . ."

Section 6, therein referred to, did not contain any provisions regarding limitation of corporate debts.Section 7 of paragraph 767, Revised Statutes of Arizona of 1901, however, read in part as follows:

". . . Such articles of incorporation must specify the highest amount of indebtedness and liability, direct or contingent, to which the corporation is at any time to be subject, which must in no case exceed two-thirds of the amount of the capital stock."

And this continued substantially to be the law until 1923, when the statute was amended so as to allow corporations to increase their indebtedness in certain cases beyond the two-thirds limitation above referred to, and the association has since from time to time amended its charter in conformity with that statute so as to permit it to increase its total indebtedness greatly beyond the amount of two-thirds of its capital stock.

In the spring of 1928, the association was indebted to the extent of approximately $14,000,000.Of this nearly half was the amount remaining unpaid to the United States for the original construction charges of the project; $1,800,000 was for bonds issued for the construction of what is known as the "Mormon Flats Development"; $4,400,000 was for bonds for the "Horse Mesa Development"; $1,000,000 was for bonds issued to cover operation and maintenance expenses; and about $650,000 was general liabilities.The charter had been amended from time to time so as, on its face, to authorize all the above indebtedness.Thereafter and during the month of March, 1928, there were submitted to the shareholders of the association, at a special election, a number of propositions which, if approved by the shareholders and the State Corporation Commission, would on their face authorize the association to issue $4,100,000 of the bonds and to levy part of the assessments complained of in this proceeding, for the purpose of constructing what was designated as the "Stewart Mountain Developement."Some of the propositions failed to receive the statutory majority, and thereafter on the eighth day of May of the same year these same propositions were again submitted to the shareholders at another special election, at which time they received the majority required by law and the charter, and the board of governors were proceeding to sell the bonds in the amount authorized by the vote of the shareholders aforesaid, together with other bonds in the sum of $1,000,000 (to which last bonds we shall refer hereafter), when this proceeding was commenced to stop the sale.

There is no dispute as to the facts of the case, and the questions presented to us are solely legal in their nature.We will take them up in their order.The first is that at the date of organization of the association there was no act of Congress nor any law of the territory reserving to the state the right to amend charters of corporations adopted under the law then in force; that the statute authorizing voluntary amendment of its charter by the corporation was not broad enough to cover amendments in regard to the amount of corporate debts allowed, and therefore the charter created a contract between the state, the corporation, and its shareholders, limiting the amount of such debts, which limitation under article 1, section 10, of the federal Constitution, was not subject to amendment by any subsequent legislation, nor could the corporation itself make such a change, except by consent of all of its shareholders.

That the articles of incorporation were a contract, and that they cannot be amended by action on behalf of the state in the absence of a reserved power, is unquestioned.Dartmouth College v. Woodward,4 Wheat. 518, 4 L.Ed. 629;Hammons v. Watkins,33 Ariz 76, 262 P. 616;Herndon v. Hammons,33 Ariz. 88, 262 P. 620.Nor did such reserved power exist at the time the articles were adopted.Hammons v. Watkins, supra;Herndon v....