George v. City of Asheville, NC

• Decision Date: 13 November 1935
• Docket Number: No. 3919.,3919.
• Citation: 103 ALR 568,80 F.2d 50
• Parties: GEORGE et al. v. CITY OF ASHEVILLE, N. C., et al.
• Court: U.S. Court of Appeals — Fourth Circuit

103 ALR 568, 80 F.2d 50 (1935)

GEORGE et al. v. CITY OF ASHEVILLE, N. C., et al.

No. 3919.

Circuit Court of Appeals, Fourth Circuit.

November 13, 1935.

COPYRIGHT MATERIAL OMITTED

David M. Wood, of New York City (W. M. Hendren and B. S. Womble, both of Winston-Salem, N. C., on the brief), for appellants.

Robert R. Williams, of Asheville, N. C., for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

PARKER, Circuit Judge.

This is an appeal in a suit instituted by holders of bonds of the city of Asheville, N. C., against that city, its mayor, its city manager, and the members of its city council. Some of the bonds held by complainants are waterworks bonds issued subsequent to the passage of the North Carolina Municipal Finance Act of 1917 (Laws 1917, c. 138); some are waterworks bonds issued prior to the passage of that act; some are sewerage bonds issued to provide for the construction or extension of sewers used as a part of the city's waterworks system; some are bonds refunding water and sewer bonds theretofore issued; some are improvement bonds, definite portions of the proceeds of which were used for water and sewer purposes; and some are bonds of West Asheville, Biltmore, and Kenilworth, the proceeds of which were used in whole or in part in the construction of water and sewer systems, which were incorporated in the system of the city of Asheville when that city absorbed these three municipalities and assumed the payment of their bonds. Complainants alleged that under the provisions of the Municipal Finance Act the net revenue derived from the operation of the waterworks system of the city of Asheville should be applied on the outstanding water and sewer bonds of the city; that the operation of the waterworks system had for several years resulted in net revenues within the meaning of the act; and that the defendants, although often requested to do so, had refused to apply such net revenues as required by law, but had diverted them to other purposes and threatened to continue to do so. Bill was filed by complainants in behalf of all persons holding bonds of like character as theirs, as well as in their own behalf; and the principal relief asked was that injunction be granted restraining defendants from diverting these net revenues to purposes other than those allowed by the Municipal Finance Act. Other relief was asked, however, to much of which complainants were obviously not entitled. See City of Mobile v. Marx & Co. (C.C.A. 5th) 75 F.(2d) 569.

The judge below dismissed the bill on the motion of defendants on the grounds: (1) That no demand in writing had been made upon the city in accordance with section 1330 of the Consolidated Statutes of North Carolina and the provisions of the city charter, requiring such written demand as prerequisite to action upon "any claim or demand whatsoever of any kind or character" against the city; and (2) that the waterworks system of the city was not a revenue producing enterprise within the meaning of the section of the Municipal Finance Act relied upon by complainants.

As to the first of these grounds, we do not think that a bill in equity seeking to enjoin the diversion of a fund in which complainants allege that they have an interest is an action upon a claim or demand against the city within the meaning of either section 1330 of the Consolidated Statutes or the provision of the city charter upon which defendants rely. The purpose of both of these statutes was to give the municipality an opportunity to pass upon and pay a claim involving a money demand before it could be subjected to the burden and expense of litigation. They manifestly have no application to suits in equity the object of which is to protect and preserve the rights of complainant as against threatened action by the city or its officers. 44 C.J. 1465; 19 R.C.L. 1042; Sammons v. Gloversville, 175 N.Y. 346, 67 N.E. 622; Kiser v. Douglas County, 70 Wash. 242, 126 P. 622, 41 L.R.A.(N.S.) 1066, Ann.Cas. 1914B, 721; note in 52 A.L.R. at pages 640 and 659-663 and cases there cited. The case of Virginia Trust Co. v. City of Asheville, 207 N.C. 162, 176 S.E. 257, relied upon by defendants, was an action to recover on a claim for damages to real estate, not a suit for an injunction.

And, as to the second ground, we think there was error in holding that the waterworks system of the city was not a revenue-producing enterprise within the meaning of the Municipal Finance Act of 1917. The applicable section of that act is brought forward into the Consolidated Statutes of North Carolina as section 2959, as amended by Laws 1921, Ex.Sess. c. 106, § 1, which for convenience, is copied in the margin.^*

It is clear from a reading of this statute that the Legislature intended that, where bonds were issued to enable a municipality to carry on a revenue producing enterprise, the net revenue derived from such enterprise should be applied to the payment of the interest and principal of such bonds; and it is quite significant that, by another section (C.S. § 2943, as amended by Laws 1921, Ex.Sess., c. 106, § 1), bonds in aid of the ordinary revenue-producing enterprises of a city, i. e. enterprises for furnishing water, gas, electric light, or power, were exempted from the debt limitation of the statute. This shows that it was thought that, while the credit of the municipality would be pledged for bonds of this character, they would not be a charge upon the taxing power of the city but would be taken care of by the revenues of the enterprises for which they were issued.

A revenue-producing enterprise defines itself. It is manifestly one which produces revenue, not necessarily one which produces profit or net revenue, although this distinction is not material here, as it is only net revenue which is to be applied upon the interest and principal of the bonds under the direction of the statute. As the waterworks system produces revenue, it is a revenue-producing enterprise; and, if net revenues are derived from it, after paying all expenses of operating, managing, maintaining, repairing, enlarging, and extending such system, the statute requires that they be applied to the payment of the principal and interest due on the bonds issued "for such enterprise." The bill of complaint alleges that there are net revenues after making these payments; and, if so, complainants are entitled to have them applied as the statute directs, and defendants should be enjoined from using them for other purposes.

We agree with defendants that it was not the intention of the Legislature, by the provision in question, to interfere with the discretion of the city authorities in operating, managing, maintaining, repairing, enlarging, or extending the waterworks system of the city, in making expenditures therefor, or in fixing the rates to be charged for the services which it renders. This discretion is vested in them by section 30 of the city charter and by section 2808 of the Consolidated Statutes as amended by chapter 353 of the Public Laws of 1933; and the requirement that net revenues after paying the expenses of operation shall be applied on bonds does not mean that this discretion is in any wise limited. And we do not think that, under the guise of protecting from diversion the net revenues of the waterworks system, the courts would be justified in taking the control of that system out of the hands of those to whom the law has entrusted it, or in attempting by judicial order to control the exercise of the discretion which the law has vested in them. City of Mobile v. Marx & Co., supra (C.C.A.) 75 F. (2d) 569, 575. It is for the governing body of the city to manage and control the system, to fix rates, and decide upon repairs, extensions, etc. Only in the event that there are net revenues remaining after these things have been done, do the holders of waterworks bonds have the right to the application of such net revenues upon the principal and interest of their bonds, although they have the right, of course, to insist that in the meantime the net revenues be not dissipated by application to other purposes. In other words, the governing body of the city may make such use of the gross revenues of the system as in the bona fide exercise of their discretion they may think wise for maintaining, repairing, enlarging, or extending the system, and may fix such rates as they may deem proper; but they may not divert its revenues to other purposes so as to dissipate the net revenues, which the law requires to be applied on the principal and interest of waterworks bonds.

With respect to the bonds entitled to share in the net revenues of the waterworks system, we think that the statute clearly intended that such net revenues should be applied on the principal and interest of all bonds which were issued for the system. As the sewer system is an integral and essential part of the waterworks system and with it constitutes one revenue-producing enterprise, we think that sewer bonds should share along with waterworks bonds in the net revenues of the waterworks system. See McNeill v. Town of Whiteville, 186 N.C. 163, 119 S.E. 6; Lamb v. City of Randleman, 206 N.C. 837, 175 S.E. 293. And we think that funding and refunding bonds, to the extent that they incorporate indebtedness evidenced by waterworks or sewerage bonds which are retired, are to be counted waterworks bonds within the meaning of the statute, as it is elementary that funding and refunding bonds create no new debt. Likewise, general improvement bonds of the city, to the extent that they incorporate indebtedness incurred for the waterworks and sewerage system, are to be counted with the waterworks bonds for the purpose of sharing in the net revenue. On the same principle, bonds of Biltmore, Kenilworth, and West Asheville, issued for waterworks or sewerage systems taken over by the city of Asheville when it absorbed these municipalities and assumed the payment of their debts,...