Haugland v. City of Bismarck, 880158

• Decision Date: 20 September 1988
• Docket Number: No. 880158,880158
• Citation: 429 N.W.2d 449
• Parties: Erling HAUGLAND, Danniel W. Stuart, LeRoy Klaus, John Homelvig and Leo G. Heinz, Plaintiffs, Appellants and Cross-Appellees, v. CITY OF BISMARCK, Defendant, Appellee and Cross-Appellant, Dougherty, Dawkins, Strand & Yost, Inc., and J. Daniel Halvorson, Intervenors, Appellees and Cross-Appellees. Civ.
• Court: North Dakota Supreme Court

Page 449

429 N.W.2d 449

Erling HAUGLAND, Danniel W. Stuart, LeRoy Klaus, John

Homelvig and Leo G. Heinz, Plaintiffs, Appellants and Cross-Appellees, v. CITY OF BISMARCK, Defendant, Appellee and Cross-Appellant,

Dougherty, Dawkins, Strand & Yost, Inc., and J. Daniel

Halvorson, Intervenors, Appellees and

Cross-Appellees.

Civ. No. 880158.

Supreme Court of North Dakota.

Sept. 20, 1988.

Evans & Moench, Ltd., Bismarck, for plaintiffs, appellants and cross-appellees, argued by Dale W. Moench, Bismarck.

Beauclair & Cook, Bismarck, for defendant, appellee and cross-appellant, argued by James L. Norris, Bismarck.

Bucklin Trial Lawyers, P.C., Bismarck, for intervenors, appellees and cross-appellees, argued by David L. Graven. Appearances by Calvin N. Rolfson and John R. Green, Bismarck.

MESCHKE, Justice.

Taxpayers ask us to upset a three-step sale-leaseback-purchase financing arrangement by the City of Bismarck to fund $17,000,000 in capital improvements, using a "nonappropriation mechanism" to avoid obligating the general taxing powers of the City. The trial court approved the arrangement. We affirm.

After exploring several alternatives, the City of Bismarck selected investment underwriters, Dougherty, Dawkins, Strand & Yost, Inc. (Dougherty), to prepare a financing plan for improvements to its civic center, memorial library, and a watermain. Under the plan adopted, the City transferred the properties to a trustee for $17,000,000 and agreed to use the money to improve the properties. The trustee leased the properties back to the City for 15 years with annual lease payments sufficient to pay annual principal and interest due holders of certificates of participation issued by the trustee. The City retained the "rights and responsibilities of ownership" during the term of the lease with the right to purchase the properties for a nominal amount at the end of the lease term.

Under the "nonappropriation" clause, the leaseback was subject to cancellation by the City each year if it chose not to appropriate funds for an annual lease payment. Revenues from a city sales tax, together with a city lodging and restaurant tax, were expected to be more than sufficient to make the annual payments, but the City did After the first steps of the transaction in early October 1987, several adjustments were made. To obviate a potential real estate tax problem, the trustee reconveyed the properties to the City, conditional upon fulfillment of the lease-purchase agreement. Because of this taxpayers' suit in mid-October 1987, a Disbursement Agreement between the City and the Trustee provided that all of the funds would be held by the trustee pending the final outcome of this lawsuit.

not pledge those tax revenues; rather, the City covenanted that it would not pledge those revenues "toward any purpose other than payment of Lease Payments during the Agreement Term."

Haugland and other taxpayers of the City sued to invalidate the transaction and to enjoin it, but a preliminary injunction was not sought. After trial, the trial court ruled that the City had statutory power to enter into the transaction, that the transaction did not violate the North Dakota Constitution and that the sales tax revenues could be used for lease payments.

Taxpayers appealed, arguing that the City did not have statutory power for the transaction, that the transaction violated the North Dakota Constitution and that the City was not authorized to use sales tax revenues for the annual lease payments. The City cross-appealed, claiming that the trial court should have dismissed taxpayers' claims because of their "laches".

LACHES

The City argued, on its cross-appeal, that "laches should apply" because the City had entered into the transaction, thus changing its position, without any effort by the taxpayers to obtain a preliminary injunction. Thus, the City argued, "Haugland has not proceeded in a timely manner, nor was the proper procedure utilized."

Taxpayers pointed out that the funds are still in the hands of the trustee and have not been spent, arguing that "the City cannot make an illegal act legal simply by completing the act."

Laches is undue delay in commencing a suit which prejudices an adverse party through conditions changing during the delay. Williams County Social Services Board v. Falcon, 367 N.W.2d 170, 174 (N.D.1985). Laches is a question of fact. North Dakota State Engineer v. Schirado, 373 N.W.2d 904, 910 (N.D.1985). We do not disturb a finding of fact unless it is clearly erroneous. NDRCivP 52(a). The trial court determined that there was no evidence of delay by the taxpayers sufficient to bar their suit. We conclude that the trial court's finding that there was insufficient evidence of laches by these taxpayers, who commenced this suit in the same calendar month that the transaction was completed, was not clearly erroneous.

The City has cited some decisions from other states which have applied a form of laches and declined to invalidate municipal transactions after they have been completed. We believe that the North Dakota approach is represented by Dahl v. City of Grafton, 286 N.W.2d 774 (N.D.1980), which recognized that an individual taxpayer may be barred by laches from questioning a municipality's transaction but declined to apply laches to all taxpayers even five years after the challenged transaction.

STATUTORY POWER

The taxpayers contended that the City had no statutory power to use this three-step financing arrangement to finance the capital improvements.

In January 1986, the City adopted a home rule charter providing for imposition of a city sales and use tax dedicated to capital improvements, debt retirement and property tax reduction. The sales and use tax was referred to the voters, who approved it in a November 1986 election. The voters also approved two additional propositions:

"Shall the City of Bismarck use local sales tax monies, when available, for the expansion of the Bismarck Veterans Public Library?

"Shall the City of Bismarck use local sales tax monies, when available, for the In April 1987, the City also adopted a city lodging and restaurant tax to be spent for acquisition and maintenance of buildings and property consistent with visitor attraction and promotion under NDCC ch. 40-57.3.

expansion of the Bismarck Civic Center?"

While a home rule city can have broad powers over its property and "to control its finances and fiscal affairs" if those powers are "included in the charter and implemented through ordinances," (see NDCC 40-05.1-06) the City of Bismarck has not done so. Therefore, its powers are those bestowed by the legislature on all municipalities. NDCC 40-05-01. Five of them are involved in this case:

"40-05-01. Powers of all municipalities. The governing body of a municipality shall have the power:

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"2. Finances and property. To control the finances, to make payment of its debts and expenses, to contract debts and borrow money, to establish charges for any city or other services, and to control the property of the corporation.

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"5. Borrowing money. To borrow money on the credit of the corporation for corporation purposes and to issue bonds therefor as limited and provided by title 21.

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"50. Public buildings. To construct, operate, and maintain all public buildings necessary for the use of the municipality.

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"55. Real and personal property. To acquire by lease, purchase, gift, condemnation, or other lawful means and to hold in its corporate name for use and control as provided by law, both real and personal property and easements and rights of way within or without the corporate limits for all purposes authorized by law or necessary to the exercise of any power granted.

"56. Transfer property. To convey, sell, dispose of, or lease personal and real property of the municipality as provided by this title."

Although the taxpayers argued that the transaction was an unauthorized mortgaging of municipal property, their principal claim was that subsection 5 is the exclusive method for the City to borrow money. They contended that the City may only finance the improvements by issuing general obligation bonds pursuant to NDCC ch. 21-03, referenced by subsection 5.

Although the City argued that the power to sell municipal property implies the lesser power to mortgage municipal property, it primarily argued that it had the authority to sell any city property, to lease property and to acquire property, emphasizing subsections 55 and 56, and the "step" nature of the transaction. The City submitted:

"Since there is expressed statutory authority for a sale by the City and a lease by the City, this is all the authority necessary to provide the City with its authority for its sale of the Facilities to the Trustee and the subsequent lease by the City from the Trustee of these same assets. Section 40-05-01(55) and (56) provide the City with implied authority to combine a sale and leaseback in the same transaction."

Recognizing that this step transaction was essentially a financing transaction, the City insisted that subsection 5 is not the exclusive means for a city to borrow money, but only the specific source of power for a city to borrow money when it issues general obligation bonds. The City urged that subsection 2 is "an express authorization for the City to select alternative methods of financing capital improvements." The City's argument used the "nonappropriation mechanism" to make clear that the general taxing powers of the City are not "obligated." This mechanism was spelled out in a series of clauses in the Official Statement prepared in connection with the issuance of certificates of participation, the Trust Agreement and the Lease-Purchase Agreement:

Official Statement:

"Non-appropriation and Default: The City may terminate the Lease Agreement, at its option, if the City does not appropriate funds to make Lease Payments. In addition, the Lease...