City of Gaylord v. Beckett

• Decision Date: 24 August 1966
• Docket Number: No. 1,1
• Citation: 378 Mich. 273,144 N.W.2d 460
• Parties: CITY OF GAYLORD, a Michigan municipal corporation, Plaintiff, v. Gladys BECKETT, Defendant.
• Court: Michigan Supreme Court

Page 460

144 N.W.2d 460

378 Mich. 273

CITY OF GAYLORD, a Michigan municipal corporation, Plaintiff, v. Gladys BECKETT, Defendant.

No. 1.

Supreme Court of Michigan.

Aug. 24, 1966.

[378 Mich. 286]

Boyd C. Baird, Gaylord City Atty., Gaylord, for plaintiff; Miller, Canfield, Paddock & Stone, Detroit, of counsel

Walsh & O'Rourke (Daniel F. Walsh) Gaylord, for defendant Gladys Beckett.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Eugene Krasicky, Asst. Atty. Gen., James J. Wood, Asst. Atty. Gen., Lansing, for intervenor.

Before the Entire Bench.

ADAMS, Justice.

On May 8, 1963, the legislature enacted P.A.1963, No. 62 (C.L.1948, § 125.1251 et seq. (Stat.Ann.1965 Cum.Supp. § 5.3533(21) et seq.)), described[378 Mich. 287] as the 'industrial development revenue bond act of 1963.' It permits Michigan municipalities to issue tax exempt municipal bonds to finance acquisition of industrial buildings.

The city council of Gaylord approved such a bond issue. It contracted with United States Plywood Corporation for it to purchase land and construct an industrial plant. Gaylord is to finance purchase of

these facilities by selling 'City of Gaylord, Michigan, Industrial Building Revenue Bonds.' The facilities are then to be sold to the city with a lease back to the corporation for 25 years at a rental sufficient to pay principal and interest on the bonds. At the end of 25 years, the corporation has the option of purchasing the facilities for $1. The bonds are to recite

'This bond and the interest thereon are payable solely from the revenues derived from the Facilities * * * and does not (in any way) * * * obligate * * * the City to levy * * * any form of taxation whatever for the payment of such principal and interest.'

Because section 103 of the internal revenue code of 1954 (U.S.C.A. Title 26, § 103(a)(1)) grants a tax exemption to the income from municipal bonds, the net result of this transaction is that the city of Gaylord lends its tax-free status to the corporation so that the interest on what would otherwise be a private bond issue becomes tax-free.

The plywood plant has been built, but defendant city clerk refused to complete the transaction. The city brought mandamus to compel performance. The case was certified directly to this Court, by virtue of GCR 1963, 797, at the request of Governor George Romney. The questions are stated in this opinion as certified to us by the circuit judge. ¹

[378 Mich. 288] I.

Is Act 62 of 1963 unconstitutional because its title is deficient under the terms of Article IV, Section 24, of the Michigan Constitution?

Defendant contends that Act No. 62 violates Article IV, § 24, of the Michigan Constitution of 1963, which provides:

'No law shall embrace more than one object which shall be expressed in its title.'

Justice Thomas M. Cooley has stated the principle to be followed in applying this section:

'* * * it ought to be construed reasonably, and not in so narrow and technical a sense as unnecessarily to embarrass legislation.' Ryerson et al. v. Utley, 16 Mich. 269, 277, citing People ex rel. Drake v. Mahaney, 13 Mich. 481, 494.

The object of Act No. 62 is to enable municipalities to attract industry by acquiring and financing industrial facilities through revenue bonds. The title reads:

'AN ACT relating to industrial development; to authorize municipalities to acquire industrial buildings and sites; to provide for the financing of such buildings by the issuance of revenue bonds; to provide the terms and conditions of such bonds; and to prescribe the powers and duties of the municipal finance commission.'

The title informs the reader of the object of the act. '(T)he title to an act is good if it fairly indicates the general subject matter covered by the act.' City of Bay City v. State Board of Tax Administration, 292 Mich. 241, 249, 290 N.W. 395, 398.

[378 Mich. 289] II.

Are the improvements for which bonds are to be issued works of internal improvement for private purposes prohibited by Article III, Section 6, of the Michigan Constitution?

Article III, § 6, of the Michigan Constitution provides:

'The state shall not be a party to, nor be financially interested in, any work of internal improvement, nor engage in carrying on any such work, except for public internal improvements provided by law.'

The reasons for section 6 have been fully documented. ² Briefly, in 1835 the people of Michigan sought a prosperity they thought could be brought about by improved lines of communication. They directed the legislature to engage in 'Internal improvement * * * in relation to roads, canals and navigable waters.' Constitution of 1835, Article XII, § 3. Shortly afterward, the nation underwent a financial crisis. Oppressive taxation to service the State debt resulted from many bond issues that had been floated to finance 'internal improvements.' Article XIV, § 9, of the Constitution of 1850 provided:

'The state ³ shall not be a party to, nor interested in, any work or internal improvement.'

This prohibition, with modifications in language, was carried into the 1908 and 1963 Constitutions. Article X, § 14 [378 Mich. 290] (1908 Const.); Article III, § 6 (1963 Const.). It has been repeatedly held, however, that it does not include self-liquidating bonds because they do not obligate the general taxing power. Gilbert v. City of Traverse City, 267 Mich. 257, 260, 261, 255 N.W. 585; Attorney General, ex rel. Eaves, v. State Bridge Commission, 277 Mich. 373, 383, 269 N.W. 388, 270 N.W. 308, Oakland County Drain Com'r v. City of Royal Oak, 306 Mich. 124, 142, 10 N.W.2d 435; City of Dearborn v. Michigan Turnpike Authority, 344 Mich. 37, 74, 75, 73 N.W.2d 544.

The law of these cases was brought to the attention of the delegates to the 1961 convention by a member of the committee that drafted section 6. He stated:

'Neither the state nor any local unit of government is prohibited by Section 14 of Article X (1908 Constitution) from engaging in self liquidating projects. These projects, of course, are defined, generally speaking, as projects which must be paid for out of the revenue which the project itself produces, such as is established by revenue bond that I am sure practically all of the delegates in this convention are familiar with. This section, of course, does not prohibit engaging in that type of activity.' 2 Official Record, Constitutional Convention of 1961, p. 2311.

A sponsor of a minority amendment which later was substantially adopted by the convention as section 6 stated:

'Now, let us look upon its operation (Article X, § 14 (1908 Const.)) as a prohibition against government ventures in, hopefully, self supporting and self liquidating projects. One, it is no longer very effective in this direction.' 2 Official Record, supra, p. 2317.

Whether the exception as to revenue bonds was approved or disapproved, it was a recognized fact. [378 Mich. 291] The delegates froze that exception into section 6 by their retention of substantially the same language which, in prior Constitutions, had been construed to allow it. See Article XIV, § 9, Constitution of 1850; Article X, § 14, Constitution of 1908.

Defendant insists that we look at the plain language of the Constitution. It prohibits not only direct financial involvement by the State but also prohibits the State from being a 'party' to works of internal improvement. The State, through the city of Gaylord, is a 'party' but the prohibition against the State being a 'party' was present when this Court found an exception as to self-liquidating bonds. Article XIV, § 9, Constitution of 1850; Article X,

§ 14, Constitution of 1908. Since that exception was known to the delegates, in the absence of some specific limitation by them of the same, it must be considered still valid

This project might also escape classification as an internal improvement as not being an artery of commerce. See OAG 1963--1964, pp. 75, 76--78. Whether the meaning of 'internal improvement' should be so limited need not be decided in light of our holding as to self-liquidating bonds.

III.

Will the issuance of bonds under Act 62 of 1963 constitute the granting of the credit of the City of Gaylord, as agency of the State, for unauthorized purposes as prohibited by Article IX, Section 18, and Article VII, Section 26, of the Michigan Constitution?

Article IX, § 18, of the 1963 Constitution provides:

'The credit of the state shall not be granted to, nor in aid of any person, association or corporation, public or private, Except as authorized in this constitution.' (Emphasis supplied.)

[378 Mich. 292] Article VII, § 26, provides:

'Except as otherwise provided in this constitution no city or village shall have the power to loan its credit for any private purpose or, Except as provided by law, for any public purpose.' (Emphasis supplied.)

An exception permitted by section 18 ⁴ is contained in section 26. We confine our inquiry to section 26. Defendant admits that this Court has, on several occasions, held that self-liquidating projects do not involve a granting of credit. Attorney General, ex rel. Eaves, v. State Bridge Commission, supra; Oakland County Drain Com'r v. City of Royal Oak, supra. She seeks to delimit this line of cases, however, by pointing out that each involved a clear, undisputed public purpose. Under section 26, if the bond issue is not a loan of credit, the question of public purpose is not reached.

Defendant cites the banking laws of Connecticut, Massachusetts, and New York ⁵ to the effect that Any default by a municipality for a fixed period of years preceding a bond issue shall bar banks and financial institutions in those States from buying the general obligation bonds of that municipality. Defendant also contends that if the municipality is negligent in issuing the bonds it may be held in breach of an implied covenant of good faith (see Armstrong, 'Municipal Inducements'--The New Mexico Commercial and Industrial Project Revenue ...