Seward v. Bowers

• Decision Date: 30 June 1933
• Docket Number: No. 3897.,3897.
• Parties: SEWARDv.BOWERS, Mayor, et al.
• Court: New Mexico Supreme Court

37 N.M. 385

24 P.2d 253

SEWARD

v.BOWERS, Mayor, et al.

No. 3897.

Supreme Court of New Mexico.

June 30, 1933.

Appeal from District Court, Colfax County; H. A. Kiker, Judge.

Action by Fred W. Seward against S. D. Bowers, Mayor of the Town of Springer, and others. A demurrer to the complaint was sustained, and plaintiff appeals.

Affirmed, and remanded, with directions.

Revenue bonds to improve and replace municipal waterworks, payable exclusively from net revenue thereof, did not create “debt” within constitutional provision requiring vote and tax levy. Laws 1933, c. 57; Const. art. 9, § 12.

Fred C. Stringfellow, of Raton, for appellant.

F. S. Merriau, of Raton, for appellees.

ZINN, Justice.

Appellant, a resident taxpayer and water user of Springer, N. M., sought to enjoin the appellees, the mayor and board of trustees of the town of Springer, from making, executing, and delivering to the Reconstruction Finance Corporation $37,500 revenue bonds for a loan of an equal amount, the bonds to be paid exclusively from net revenues to be derived by the municipality from the operation of its municipally owned waterworks system; the money to be used in the betterment, replacement, and improvement of the present system.

The proposed bonds are to be issued pursuant to Laws 1933, c. 57. (House Com. Sub. for S. B. § 17.)

The appellees demurred to the complaint, the court sustained the demurrer, entered judgment denying the relief sought, and the case is before this court on appeal.

Considering each proposition of law as presented, we first come to the appellant's contention that the proposal to issue the bonds is the contracting of a “debt” within the meaning of N. M. Const. art. 9, § 12, and that without submitting the question to a vote of the taxpaying electors, and without a provision to levy a tax upon all taxable property within such town sufficient to pay the interest and to extinguish the principal, is contrary to N. M. Const. art. 9, § 12.

The rule applicable in the instant question is well stated in 19 R. C. L. § 281, p. 985: “It is generally held that a limitation upon municipal indebtedness is not violated by an obligation which is payable out of a special fund, if the municipality is not liable to pay the same out of its general funds should the special fund prove insufficient, and the transaction by which the indebtedness is incurred cannot in any event deplete the general resources of the municipality. But the mere fact that a special fund is created for payment is not enough to make the obligation valid. The creditor must look to the fund alone for his recompense; and if the municipality is liable generally, an indebtedness is created within the meaning of the debt limit provisions. *** When the receipts from a municipal water supply are pledged to meet an indebtedness incurred in establishing the waterworks, and the creditor has no right to look beyond this source for payment, it has been held that there is no indebtedness in the constitutional sense.”

See the following cases: Quill v. Indianapolis, 124 Ind. 292, 23 N. E. 788, 7 L. R. A. 681; City of Laporte v. Gamewell Fire Alarm Tel. Co., 146 Ind. 466, 45 N. E. 588, 35 L. R. A. 686, 58 Am. St. Rep. 359; Kelly v. Minneapolis, 63 Minn. 125, 65 N. W. 115, 30 L. R. A. 281; Vallelly v. Park Commissioners, 16 N. D. 25, 111 N. W. 615, 15 L. R. A. (N. S.) 61.

The idea of a “debt” in the constitutional sense is that an obligation has arisen out of contract, express or implied, which entitles the creditor unconditionally to receive from the debtor a sum of money, which the debtor is under a legal, equitable, or moral duty to pay without regard to any future contingency.

Keeping in mind the rule that there is no “indebtedness” in the constitutional sense unless there is either a legal, equitable, or moral obligation on the part of the town of Springer to pay the bondholders of the proposed issue out of other moneys than the net revenue from the improved waterworks system, we find that section 5 of the act under which it is proposed to issue the bonds is as follows: “It is hereby declared that revenue bonds, issued under the provisions of this Act, shall not be considered or held to be general obligations of the municipalities issuing them, shall be collectible only out of the net revenues derived from the operation of the utility whose income is so pledged, and each of the bonds of any issue of revenue bonds so issued under the provisions of this Act shall recite on its face that it is payable and collectible solely from the revenues derived from the operations of the utility, the income of which is so pledged, and that the holders thereof may not look to any general or other fund for the payment of principal and interest of such obligation.”

This section of the legislative act makes it clear that the proposed bonds are not to be considered or held to be general obligations of the municipality, are collectible only out of the net revenues derived from the operation of the utility whose income is pledged for that purpose; the bonds on their face are to recite that the principal and interest are payable and collectible solely from the revenues derived from the operation of the utility, and such recital is notice to the holder that he may not look for his recompense to any general or other fund for the payment of principal or interest. The city incurs no liability payable out of its tax or other revenues on account of the issuance of the revenue bonds, and the act negatives any such liability.

The town of Springer, as such, has no moral, equitable, or legal duty to pay out of any fund except the net revenues of the plant which is a special fund out of which the revenue bonds are to be retired. If the municipal officers discharge the duty devolved upon them by the act, namely, to maintain rates sufficient to raise revenues to pay the interest and principal on these bonds, they have fulfilled their duty. In the event of their failure to do so, an action in mandamus can be brought pursuant to section 6 of said act to compel them to perform their duty; in no event is there any financial liability created which will impose a debt upon the municipality. The debtor pledged the net revenues. The creditor knows exactly where to look for his money, and knows he cannot look elsewhere. The legal and equitable obligations are clear and well defined, and the moral obligation in this case does not go beyond the legal or equitable.

In the case of State v. Regents of University of New Mexico, 32 N. M. 428, 258 P. 571, an injunction was sought to restrain the regents of the University of New Mexico from issuing $190,000 worth of building and improvement bonds, the interest and principal of which were to be paid out of the income from University land, without mortgaging the land in any manner. It was contended that the issuance of said bonds was contrary to N. M. Const. art. 9, § 8, in that there was no provision for an annual tax levy sufficient to pay interest and provide a sinking fund, and that the creation of such debt had not been submitted to a vote of the people for approval (identical with the appellant's contention in this case, though construing a different section of our Constitution). We said: “The Legislature therefore had power to authorize the University to make such use of its income as was deemed best. This is all that is contemplated by chapter 47, Laws 1927, and all that is proposed by the University. It proposes to contract with its bondholders that it will appropriate out of its income sufficient sums of money to pay interest and provide a sinking fund for the retirement of the bonds. It does not propose to mortgage its property in specie. It simply agrees to pay out of its income. How it can be said that this will be an obligation of the state, we cannot understand. This is simply a contract of the University to pay out of a designated fund when received. It is no more an obligation of the state than would be the obligation to pay the salaries of the University faculty.” State v. Regents of University of New Mexico, 32 N. M. 428, at page 430, 258 P. 571, 572.

In purpose and effect nothing more is proposed here. The town of Springer, desiring to extend and improve its municipally owned water system proposes to issue bonds in the sum of $37,500 with which to make such extensions, betterments, and repairs, and proposes to pledge the net revenue from such water system to pay the interest and provide a sinking fund to retire said bonds, and to maintain rates sufficient to provide revenues for such purpose. That is what is authorized by Laws 1933, c. 57. In its effect it is not a “debt” of the town, simply an agreement to pay out of the net revenues of the waterworks when received, and is no more a “debt” of the municipality within the constitutional sense than would be a debt incurred to pay for the ordinary cost of repairing a water main.

The appellant contends that the statute requires the town to establish and collect water rates sufficient to cover the payments to become due, and, failing to collect sufficient to meet the interest and sinking fund requirements, the town would become generally obligated. We see no merit in such theory. The undertaking of the town of Springer is not a guaranty or pledge that the interest or the bonds will be paid, but only a pledge that the town of Springer shall establish a rate that will do so. Section 6 of the act provides that the governing body issuing the bond must establish such rates for services rendered as will create an income sufficient to pay all reasonable expenses of operation, and create a net revenue which shall be sufficient to pay interest coupons when due, and provide out of such net revenues a sinking fund which shall be adequate to discharge said bonds as and when they shall mature, and such rates must be continuously maintained until the bonds are retired, and optional at the end...