City of Santa Cruz v. Wykes

• Decision Date: 13 January 1913
• Docket Number: 2,088.
• Citation: 202 F. 357
• Parties: CITY OF SANTA CRUZ v. WYKES et al.
• Court: U.S. Court of Appeals — Ninth Circuit

202 F. 357

CITY OF SANTA CRUZ v. WYKES et al.

No. 2,088.

United States Court of Appeals, Ninth Circuit.

January 13, 1913

Up to July 2, 1888, the city of Santa Cruz was served with water for municipal and household purposes by private enterprise but on that date the common council of the city passed an ordinance declaring that public necessity required the construction and acquisition of a system of waterworks by the city. On September 6th a bonded indebtedness was authorized by the electorate of the city to the extent of $300,000, the bonds to bear interest at the rate of 5 per cent. The vote upon the proposition was nearly unanimous. The city entered at once upon the acquisition of water rights and a reservoir site, and of the authorized bond issue expended $30,000.

On March 19, 1889, the Legislature of the state of California adopted an act limiting the bonding power of municipalities to 5 per cent. of the assessed value of the property within their limits. Prior to the adoption of this act there was no limitation of the power of cities to incur indebtedness. The assessed valuation of the property within the city of Santa Cruz for that year was $3,245,060, and its borrowing capacity therefore $162,253. This sum fell largely below the estimated expenditures for providing the water system contemplated. Effort was made to dispose of the balance of the city bond issue, namely, the $270,000 thereof, but without avail. Having thus failed in the project of itself constructing a waterworks system, the city on September 16, 1889, entered into a contract with Coffin & Stanton, a firm composed of William Edward Coffin, Walter Stanton, Charles Hervey Jackson, and Charles F. Street, to construct and equip a waterworks system, which recites that: 'Whereas, the city of Santa Cruz desires to acquire a waterworks system for said city, and whereas, Coffin & Stanton desire to furnish such a waterworks system: Now, therefore, for and in consideration of the sum of one dollar, paid in hand this 16th day of September, 1889, to said city of Santa Cruz by said Coffin &amp Stanton, the receipt of which is hereby duly acknowledged and other valuable considerations, the following contract has been entered into.' In purport the city agrees to grant to Coffin & Stanton a franchise for the construction of the waterworks, and Coffin & Stanton agree to construct or cause the same to be constructed in conformity with certain specifications prepared by the city's engineer. The city agrees to purchase the waterworks when completed, and to pay therefor the sum of $320,000 in manner specified, Coffin & Stanton being accorded the privilege of assigning the contract and all rights granted by the city to whomsoever they might elect. Coffin & Stanton agree to organize, or cause to be organized, a corporation under the name 'City Water Company of Santa Cruz,' to which the franchise shall be assigned. The Water Company is to cause to be issued a first mortgage on all properties, rights, titles, and franchises owned or to be acquired for an amount not to exceed $400,000, the bonds to bear interest at a rate not to exceed 6 per cent., and to mature in not more than 30 years, and to issue to Coffin & Stanton at various times during the progress of the work such number of first-mortgage bonds as shall be required for construction purposes, Coffin & Stanton making all necessary cash advances, but not in excess of $320,000, except in the event of changes or additions to the waterworks system, when the Water Company may issue a sufficient number of first-mortgage bonds at 90 cents on the dollar to pay for such changes or additions, and also issue, at a price not below 90 cents on the dollar, a sufficient number of such bonds to pay the interest on any of its outstanding bonds, except such outstanding bonds as are held in escrow as later provided for. When Coffin & Stanton shall have received all of said $320,000 of bonds, and when the Water Company shall have completed the waterworks, then Coffin & Stanton are to deposit with the American Loan & Trust Company of New York, or such other trust company as may be agreed upon, $270,000 of such bonds, which shall be held in trust by such trust company to secure a like amount, namely, $270,000, of 5 per cent. bonds of the city, which said bonds it is recited the city has 'heretofore sold to said Coffin & Stanton,' the deed of trust or escrow to provide that, when any of the annual installments of said 5 per cent. bonds shall be paid by the city, the trust company shall cancel a similar amount of first-mortgage bonds, and so continue until all of said Water Company bonds deposited with it are canceled. On default in payment of principal or any installment of interest of the city 5 per cent. bonds, and a continuance of such default for a period of six months on the part of the city, the trust company shall be authorized to deliver said water bonds to the holders of the 5 per cent. city bonds, and provisions to that effect are stipulated to be contained in the deed of trust or escrow. The Water Company, when the waterworks shall have been fully completed, is to convey to the city all its property, rights, titles, and franchises to have and to hold forever, subject only to the mortgage and deed of trust or escrow before mentioned.

The city further agrees to set aside from the gross revenues derived from the waterworks an amount sufficient to pay the interest on said first-mortgage bonds outstanding, except those in escrow, and after five years an amount sufficient to form a sinking fund for the redemption of said outstanding bonds at maturity, except those so held in escrow. The Water Company is to commence construction as soon as practicable, and to have the waterworks completed within one year thereafter, provided that neither the Water Company nor Coffin & Stanton shall be held responsible for unavoidable delays, and provided, further, that the city shall convey to the Water Company clear and unincumbered rights to at least three-quarters of the riparian rights to Laguna creek, the proposed source of supply for said waterworks, or at least three-quarters of such water, also a clear right of way throughout the entire system for laying all necessary pipes or mains, and a clear title to all lands necessary for reservoir sites, or to such other lands as may be found necessary for the effective operation of said waterworks, all of which said transfers of rights or water rights and reservoir sites are to be subject to the legal and equitable rights of the city to the performance of the contract. The Water Company is not to be called upon to begin work until such properties shall have been conveyed to it and the title examined and approved by its counsel. Coffin & Stanton guarantee the performance of all the acts of the Water Company specified to be performed by it, and agree to pay $50,000 as liquidated damages in case of failure to perform.

On September 23, 1889, the parties entered into a further agreement, which, after reciting, 'Whereas, Coffin & Stanton have purchased two hundred and seventy thousand dollars five per cent. bonds of the city of Santa Cruz, and have entered into an agreement under date of the sixteenth day of September, 1889, with the city of Santa Cruz, for the sale to said city of certain waterworks, named therein, and whereas, it is desired that the proceeds of the sale of said bonds shall be used solely for the purpose of said works or the redemption of said bonds,' provides, in effect, that the city shall deposit with Coffin & Stanton the sum of $245,000 of the proceeds of the sale of said bonds, to be placed to the credit of the city on the books of Coffin & Stanton, for the use of the City Water Company, which fund Coffin & Stanton agree to use in carrying out the contract aforementioned; in the event of the failure of the city to acquire the waterworks in accordance with said contract the fund to be applied by Coffin & Stanton to the retirement and redemption of the $270,000 5 per cent. city bonds, and for the repayment to the city of any payments it may have made on said bonds, or said Coffin & Stanton to be personally liable for the full amount. Liquidated damages for nonperformance are provided for in the sum of $300,000. And it is further agreed that when the contracts are awarded for construction, if awarded by the Water Company, Coffin & Stanton shall take security from the contractors in the amount of $150,000 as additional security for the fulfillment of this agreement and the contracts referred to.

These agreements were signed by G. Bowman, mayor of the city, and attested by O. J. Lincoln, city clerk. No ordinance is shown authorizing their execution. The City Water Company was incorporated September 30, 1889, as contemplated by the agreement. Prior to November 20, 1889, the city acquired certain lands, rights of way, and water rights, including the right to the use of the waters of Laguna creek, together with a reservoir site for the storage of such water, a large part of which was purchased with the proceeds of the bonds issued by the city. All these lands, water rights, privileges easements, reservoir site, and other property so acquired were on that date conveyed by deed of the city executed through G. Bowman, its mayor, to the City Water Company. This deed was authorized by Ordinance No. 192, adopted on the same day. By the terms of the deed the grant was upon the express condition that the agreement made with the city on the part of Coffin & Stanton, under the contracts of September 16 and 23, 1889, should be strictly performed by the Water Company as well as by Coffin & Stanton. In the meantime the city had granted to Coffin & Stanton, by Ordinance No. 188, a franchise for constructing the...