Johns-Manville Corporation v. VILLAGE OF DeKALB, MO.

• Decision Date: 12 March 1971
• Docket Number: No. 20342.,20342.
• Citation: 439 F.2d 656
• Parties: JOHNS-MANVILLE CORPORATION, Plaintiff-Appellee, v. VILLAGE OF DeKALB, MISSOURI, et al., Defendants, Amos H. Watts et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

439 F.2d 656 (1971)

JOHNS-MANVILLE CORPORATION, Plaintiff-Appellee, v. VILLAGE OF DeKALB, MISSOURI, et al., Defendants Amos H. Watts et al., Defendants-Appellants.

No. 20342.

United States Court of Appeals, Eighth Circuit.

March 12, 1971.

R. H. McRoberts, Thomas C. Walsh, W. H. Utz, Jr., Franklin T. Thackery, St. Joseph, Mo., for defendants-appellants; Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., Smith, Utz, Litvak & Thackery, St. Joseph, Mo., of counsel.

Howard F. Sachs, Joseph J. Kelly, Jr., Gad C. Smith, Kansas City, Mo., for plaintiff-appellee, Johns-Manville Corp.; Spencer, Fane, Britt & Browne, Kansas City, Mo., of counsel.

Before GIBSON and BRIGHT, Circuit Judges, and McMANUS, Chief District Judge.

GIBSON, Circuit Judge.

This is an interlocutory appeal¹ from a declaratory judgment entered by the United States District Court for the Western District of Missouri, holding that $505,000 principal amount of waterworks revenue bonds issued and sold by the Village of DeKalb, Missouri, are "invalid, null and void, and of no force and effect."

The alignment of the parties in this case is highly unusual. The suit was commenced as a declaratory judgment action in the Circuit Court of Buchanan County, Missouri, on April 22, 1968, by plaintiff, Johns-Manville Corporation, the current holder of the DeKalb waterworks revenue bonds. Plaintiff joined as defendants the Village of DeKalb and all parties and sureties who were in any way involved with the issuance of the bonds or the construction of the waterworks. The appellants in this Court are the 30 partners of the Chicago, Illinois law firm of Chapman and Cutler. Chapman and Cutler was joined as a defendant because it had issued a legal opinion that the municipal proceedings showed lawful authority for the issuance of the bonds by the Village and that the form of the bonds revealed them to be valid and legally binding special obligations of the Village, payable from waterworks revenue only. Upon motion by defendant Chapman and Cutler, predicated on diversity of citizenship, the case was removed to the federal district court under 28 U.S.C. § 1441(c).

Plaintiff's Complaint sought a declaratory judgment as to the validity of the waterworks revenue bonds and requested specified relief against certain defendants in the event of a finding of validity and, alternatively, prayed for relief against other defendants, including Chapman and Cutler, if the bonds should be determined to be invalid. The Answer filed by the Village neither admitted nor denied the validity of the bonds. Thus, we have a bondholder challenging the validity of bonds it holds when the issuer of the bonds has not denied their validity.

The District Court severed for trial the issue of the bonds' validity, reserving all other issues for later determination. This issue was tried to the Court without a jury on June 23-24, 1969, and the Court filed its unreported Memorandum Opinion on April 24, 1970. The District Court concluded that the Village of DeKalb was without legal authority to construct, operate and own the proposed waterworks system, which was to include transmission facilities to be used for the purpose of supplying a substantial number of customers outside the corporate limits of the Village. The Court held that the validity of revenue bonds is dependent upon the validity of the project financed since it is the income from that source which will go to meet the outstanding indebtedness created by the bonds, and, consequently, concluded that the waterworks revenue bonds issued by the Village of DeKalb are invalid.

The facts surrounding the authorization and issuance of the bonds are basically not in dispute. In April 1962 a substantial number of buildings in the Village of DeKalb were destroyed by fire, primarily because the Village did not have a water system. Shortly thereafter, Village officials began to investigate the possibility of obtaining a water system for the Village. They came in contact with defendant Harold D. Audsley who offered to secure a waterworks system to supply the Village. Audsley acted as principal promoter of the project while defendant Richard C. Lamb, an engineer, served as Audsley's assistant and was responsible for the engineering and construction aspects of the project.

Research and testing indicated that a supply of good quality water in sufficient quantity did not exist in or close to the Village. The nearest adequate supply of water was located in the Missouri River bottoms immediately to the west of the Village of Rushville, a straight-line distance of approximately six miles. It was obvious that the Village of DeKalb with about 300 inhabitants could not support a system of the type needed to transport water from that low an elevation and over that distance. Due to these economic realities, engineer Lamb drew up plans for a waterworks system which would serve not only the Village of DeKalb, but also the incorporated Village of Rushville, the unincorporated communities of Sugar Lake and Winthrop, and certain adjacent farm areas. Rushville is located five miles west of DeKalb, Sugar Lake is seven miles southwest, and Winthrop is ten miles west southwest. The proposed project encompassed an area of approximately 33 square miles, contained more than 40 miles of water transmission lines and included approximately 550 potential customers² (about 300 of whom were residents of DeKalb). Another advantage to this "loop" system was to insure that in the event of a breakdown in one line of supply, the other would still be operative.³

On March 8, 1963, the Board of Trustees of the Village passed an ordinance calling an election for the purpose of voting on the question of the issuance of revenue bonds in the principal amount of $505,000 for "the purpose of constructing a waterworks to be owned exclusively by said Village." Prior to the bond election, an 8-page promotional distribution sheet bearing the title "Facts About the Proposed Water System for DeKalb and Buchanan County Residents" was circulated among the residents of the area to be served. This unsigned circular advocated passage of the ordinance and contained a map of the proposed extraterritorial system and a copy of the "Notice of Special Election" issued by the Village Clerk.

In a special election held April 2, 1963, the voters of the Village adopted the proposed ordinance. Plans for the proposed system were then submitted by Lamb to the Missouri Division of Health, which approved the project design on June 10, 1963. On January 7, 1964, the Board of Trustees, pursuant to the authority derived from the election, enacted a bond ordinance authorizing the issuance of revenue bonds in the principal amount of $505,000 "for the purpose of paying the costs of constructing a waterworks for said Village."

The Village issued and sold the bonds to Audsley on September 3, 1964, who purchased the bonds with money borrowed from defendant Merchants Produce Bank, pledging the bonds as security. At that time Audsley received certain fees in connection with his services concerning the bond sale and its financing. On September 14, 1964, a construction contract was let by the Village to the Mohawk Construction Company. On November 20, 1964, Johns-Manville purchased the entire issue from Audsley, allegedly relying upon the opinion letter issued by Chapman and Cutler on September 25, 1964, that the bonds were legally valid revenue obligations.

Construction was begun on the project but the system was never placed into operation since the bond proceeds were depleted before the project was fully completed. The Village did make several semi-annual interest payments to Johns-Manville from the bond proceeds, but at the present time interest payments on the indebtedness have been in default for several years.

When the system was 70 per cent completed and approximately $425,000 had been expended, a suit seeking a declaratory judgment on the validity of the bonds and the construction contracts was heard in the Circuit Court of Buchanan County, Missouri. The suit was brought by Elbert F. Spencer, a resident, property owner and taxpayer in the Village of DeKalb. The state trial court, relying on Taylor v. Dimmitt, 336 Mo. 330, 78 S.W.2d 841 (1934), held that the Village did not have the statutory authority to construct an extraterritorial waterworks system to supply neighboring communities, and, therefore, the revenue bonds issued to finance this system and all subsequent action taken for this purpose were in excess of its corporate power and null and void. On November 26, 1965, the State Court enjoined the Village from further construction of the waterworks system and from paying any sums on the bonds or to the construction company or the engineers. On appeal, the Supreme Court of Missouri, on November 14, 1966, reversed the trial court on the ground that the plaintiff lacked standing to sue because he did not have a legally protectible interest at stake, reasoning:

"In view of the fact that the revenue bonds in evidence provide that neither they nor the interest thereon shall be paid in whole or in part out of funds raised by taxation, the fact that plaintiff is a taxpayer is not sufficient of itself to show plaintiff could have been adversely affected by the actions of the Village of DeKalb." Spencer v. Village of DeKalb, 408 S.W.2d 78, 80-81 (Mo. 1966).

On April 22, 1968, plaintiff Johns-Manville filed the instant suit in the Circuit Court of Buchanan County, Missouri, which, as explained above, was removed under 28 U.S.C. § 1441(c) to the federal district court. The District Court found that the only water system planned at the time of the bond election, the one described above, was illegal. The Court further found that that specific water system was represented in a pre-election circular to the inhabitants of the area to be served as the system which would be built from the proceeds of the bond issue if the bond...