Karel v. City of Eldorado

• Decision Date: 18 May 1929
• Docket Number: No. 94-D.,94-D.
• Citation: 32 F.2d 795
• Parties: KAREL v. CITY OF ELDORADO.
• Court: U.S. District Court — Eastern District of Illinois

32 F.2d 795 (1929)

KAREL v. CITY OF ELDORADO.

No. 94-D.

District Court, E. D. Illinois.

May 18, 1929.

Rearick & Meeks, of Danville, Ill., and Richmond, Jackman, Wilkie & Toebaas, of Madison, Wis., for plaintiff.

Gunn, Penwell & Lindley, of Danville, Ill., Arthur W. Summers, of Eldorado, Ill., and C. A. Whiteside, of Simpson, Ill., for defendant.

LINDLEY, District Judge.

Plaintiff filed herein his bill for foreclosure of a mortgage upon the municipally owned water plant of Eldorado, Ill., securing certain water certificates issued in pursuance of the statute hereinafter mentioned. The court, upon application of the plaintiff, appointed a receiver, who has for more than a year past operated the property. In the original bill, plaintiff prayed that the court enjoin the city from receiving water service, unless the city should fix and establish adequate rates for both public and private consumption of water in not less than a minimum rate to be fixed by the court. This prayer for relief was based upon averments that the rates established by the city are not sufficient to pay the running expenses and the interest upon the certificates, and meet the sinking fund requirements. Some months later plaintiff filed its formal motion for a temporary injunction, basing same upon the averments of the bill and certain affidavits filed in connection therewith.

The city insists as a matter of law that the motion of the plaintiff should be denied, first, because the rates complained of are fixed by agreement of the parties, and hence cannot be disturbed by the court; and, second, because, if the court should find it has the power to examine the sufficiency of the rates, the plaintiff, being the representative of security holders, may not complain of alleged confiscation. Plaintiff denies the existence of any binding agreement between the parties fixing rates.

If the legislative authority to fix and enforce reasonable rates to be paid public utility corporations for the services performed by the latter be reserved, that power does not include the right to fix rates so low as to be confiscatory of the property of the utility companies. Southern Iowa Electric Co. v. Chariton, 255 U. S. 541, at page 542, 41 S. Ct. 400, 65 L. Ed. 764, and cases there cited. It is equally well settled, however, that if the public service corporations and the legislative agency dealing with them have power to contract as to rates, and carry that power into effect by agreeing upon the same, the enforcement thereof is controlled by the terms of the contract, and in such case the question as to whether such rates are confiscatory is immaterial and irrelevant. Southern Iowa Electric Co. v. Chariton, 255 U. S. 541, 41 S. Ct. 400, 65 L. Ed. 764.

As stated by Judge Wade in Muscatine Lighting Co. v. City of Muscatine (D. C.) 256 F. 929, at page 933: "It must be apparent that if the confiscatory rate is fixed, not by the municipality, but by the utility company, the state has done no act `depriving' the company of its constitutional rights. It must likewise be apparent that, if the rate is the joint act of the utility company and the city, if the utility company has consented to the rate, it has waived the constitutional right which it might otherwise assert, and I am convinced that, if a rate is fixed by agreement of the utility company, which at the time is a reasonable rate, but which thereafter becomes confiscatory, without any act of the state, but simply as a result of industrial conditions, the prohibition of the Fourteenth Amendment upon the state is not violated by the state. This is serious business, restraining the sovereign act of a state. There is no constitutional guaranty of compensatory rates. So far as income and profits are concerned, the utility corporation stands exactly in the same position as the building corporation, or the street improvement company. It may make money; it may lose money; but only when the state has acted affirmatively, to the deprivation of reasonable income upon actual investment, can constitutional guaranty be invoked; and where the utility company consents to the act of the state, there is not that `deprivation' or `denial' which the Constitution forbids."

It becomes necessary, therefore, to determine whether the city of Eldorado had power to enter into a valid contract with security holders fixing rates, and whether it did enter into such an agreement. If there is a binding contract as to rates, the court has no jurisdiction to inquire into any alleged confiscatory character of the same.

Whether the city of Eldorado possessed the power to contract as to rates depends upon the Illinois statute approved April 22, 1899, and in force July 1, 1899 (Laws 1899, p. 104), authorizing municipalities to issue certificates of indebtedness for the purchase of water utility plants, payable only out of the water fund. Section 2 of that act provides that the city shall pass an ordinance, which shall become binding (unless objected to by the public by a provided statutory method), and that "said ordinance shall fix the rates at which water is to be supplied for all private purposes, and said rates so fixed shall not thereafter be reduced until the certificates * * * and the interest thereon are fully paid." The statute further provides that the funds collected from the operation of the plant shall be paid into the special water fund and gives to the city authority to execute a mortgage to secure the certificates. Section 5 provides for foreclosure of the mortgage, and contains a further provision that the rate for the private consumer for water shall after sale remain the same as fixed in the ordinance, but that the court may fix the rate, which the city shall be required to pay, for the public use of water.

By this act the Legislature conferred upon the city the right to buy a water plant, to issue certificates for the payment therefor, to execute a mortgage securing same, and to fix water rates to produce funds, by an ordinance to be agreed to by the persons receiving the certificates. The Legislature reserved no authority over rates, and included no direction to the city council as to the exercise of its discretion in fixing and agreeing upon rates for private use. The statute amounts to a grant of a legislative power to fix rates and contract therefor. It is quite well recognized that a city, acting under state authority, may, in matters involving ownership or proprietorship of utilities, make binding agreements with those with whom it deals. Vicksburg v. Vicksburg Waterworks Co., 206 U. S. 496, 27 S. Ct. 762, 51 L. Ed. 1155; Columbus Ry., Power & Light Co. v. Columbus, 249 U. S. 399, 39 S. Ct. 349, 63 L. Ed. 669, 6 A. L. R. 1648.

The further question arises as to whether the city and the security holders, having power to fix rates by contract, did in fact do so. There is no question here as to a franchise, but merely a question as to whether or not the city and the security holders entered into a definite binding contract. The acts of the city began with the adoption of an ordinance which, in accordance with the provisions of the statute, authorizes the issuance of certificates aggregating $390,000 for the purchase of a water supply system. It provides for the purchase of the plant for the consideration of said certificates, payable out of the water fund, and authorizes the issuance of a mortgage to secure the same. In the ordinance it is provided that all water supplied to consumers shall be supplied through meters only, and "that the rates to be charged therefor are hereby fixed on the following scale." After setting forth the schedule, the ordinance proceeds as follows: "It is agreed that the foregoing rates shall not be reduced until all of said special water fund certificates and interest thereon shall have been fully paid. Nothing contained in this ordinance shall be construed as limiting the right of the city, or any other agency recognized by law, to increase water rates or charges."

In pursuance of this ordinance, authoritatively adopted, the city issued its certificates and its mortgage or deed of trust to secure the same. The deed of trust recites the adoption of the ordinance, the fact that after due notice there had been no protest upon the part of the public, the authorization of the purchase of the plant, the conveyance of the same to the city, and all the provisions of said ordinance, and proceeds to convey all of the property included in the plant to the trustee therein named, as security for the certificates. Among the numerous covenants and agreements therein contained is one by the city, identical with that contained in the ordinance, to the effect that water supplied to consumers shall be supplied through meters only, and "that the rates to be charged therefor shall be as fixed in and by the ordinance aforesaid, and that said rates shall not be reduced until all of the said special water fund certificates of indebtedness and the interest thereon shall have been fully paid." This mortgage was executed by the city, and the trustee accepted the same and became bound thereby. These documents evidence the purchase of the water plant and the payment therefor. The plaintiff is the representative of the persons...