St. Charles City-County Library Dist. v. St. Charles Library Bldg. Corp.

• Decision Date: 22 December 1981
• Docket Number: No. 42292,CITY-COUNTY,42292
• Citation: 627 S.W.2d 64
• Parties: ST. CHARLESLIBRARY DISTRICT, Plaintiff-Respondent, v. ST. CHARLES LIBRARY BUILDING CORPORATION, et al., Defendants-Appellants.
• Court: Missouri Court of Appeals

Page 64

627 S.W.2d 64

ST. CHARLES CITY-COUNTY LIBRARY DISTRICT, Plaintiff-Respondent, v. ST. CHARLES LIBRARY BUILDING CORPORATION, et al Defendants-Appellants.

No. 42292.

Missouri Court of Appeals, Eastern District, Division One.

Dec. 22, 1981.

William J. Hannah, Pros. Atty., John C. Hannegan, St. Charles, for defendants-appellants.

Dale L. Rollings, St. Charles, for plaintiff-respondent.

STEPHAN, Presiding Judge.

Respondent St. Charles City-County Library District (District) sought a declaratory judgment in the court below to determine whether a lease between the Library District and the St. Charles Library Building Corporation (Corporation) violated the Missouri Constitution. The Corporation and St. Charles County (County) were defendants in the action. The circuit court held that the proposed lease was not in violation of Article VI, Section 26 of the state constitution. The County appeals. We affirm.

The facts of the case, to which the parties stipulated at trial, are as follows. At the time of trial, the District operated eight free public libraries in the County. Three were located in buildings owned by the District, and five were in buildings leased by the District, pursuant to § 182.070, RSMo 1978. The District's main source of revenue is a tax on real and personal property of the County, provided for by §§ 182.010 and 182.020, RSMo 1978.

In 1976, the District, anticipating the loss of one library branch to highway expansion, acquired a tract of land with the intention of building a library thereon. The District paid for the land in cash and owns it free and clear of all encumbrances.

Chapter 182, RSMo 1978 provides two means whereby a library district may finance the building of a new library facility. Section 182.100 provides for a tax increase, upon approval of a majority of the voters, the proceeds of which are to go solely toward building and furnishing a library. Section 182.105 authorizes the issuance of bonds, with the approval of two-thirds of the voters, to generate revenue sufficient to pay for a new building. A tax increase would be necessary to pay the interest and principal of the indebtedness incurred through the bond issue.

Once in 1976, and again in 1977, County voters defeated propositions calling for an additional tax levy for the purpose of erecting a new library building on the tract acquired in 1976.

In an effort to finance the new building without a tax increase and at interest rates comparable to or lower than existing municipal bond rates, the District devised the financing plan that is the subject of this litigation.

A not-for-profit corporation, the St. Charles Library Building Corporation, was created under Chapter 355, RSMo 1969, its sole stated purpose being to aid the District in the erection of free public library buildings. The Corporation received an exemption from federal income tax and a determination that interest paid on its obligations would be excludible from the gross income of the recipients thereof.

Armed with these favorable I.R.S. determinations, the Corporation arranged a $600,000 construction loan at 5.95% with four local banks, each participating equally. The terms call for a monthly repayment by the Corporation of just over $4,000 for five years. At the end of the fifth year, a "balloon" payment of over $500,000 is due. The banks are not required to renegotiate the loan when the balloon payment falls due; however, the parties stipulated at trial that the loan "will be renegotiated" at the end of five years.

There were agreements negotiated between the Corporation and the Library District ancillary to the construction loan. The District agreed to convey the tract of land, mentioned previously, to the Corporation in return for a promissory note of $325,000, secured by a deed of trust. The tract is to be used by the Corporation to secure the construction loan by giving the banks a deed of trust.

This financing plan further contemplates a lease agreement between the District and the Corporation whereby the District will pay monthly rent to the Corporation for use of the new library building. The amount of the rent paid by the District to the Corporation amounts to seventy cents more than the regular monthly construction loan payments made by the Corporation to the banks. The Corporation will in fact assign to the banks the rents due it from the District. The lease additionally provides for the District to assume certain responsibilities, such as insurance costs, loan and closing costs, and costs of maintenance. The District also obligates itself to pay rent equal to any interim interest, loan or other charges incurred by the Corporation prior to the District's actual occupation of the building, even during the period of construction.

The lease is for one year, with twenty-four successive options to renew for one year under the same conditions. If all the options are exercised, the District has the further option of buying the building for the sum of one hundred dollars.

Appellant County first contends that the lease-purchase agreement between the District and the Corporation violates Article VI, Section 26(a) of the Missouri Constitution, which forbids a municipal corporation, in this case the Library District, from becoming "indebted in an amount exceeding in any year the income and revenue provided for such year plus any unencumbered balances from previous years, except as otherwise provided in this Constitution." According to the County, the District is using the Corporation to funnel purchase money, disguised as "rents" due the Corporation, to the banks. Therefore, the County argues, the entire construction loan should be regarded as a present debt of the District. To incur such a large debt would clearly require an anticipation of revenues beyond the present year, in violation of Article VI, Section 26(a).

The County's view is that the District used a sham not-for-profit corporation to obtain a construction loan that the District could not lawfully obtain on its own because of the constitutional debt-limitation provisions of Article VI, Section 26(a). The Corporation could not have obtained the loan without using the tract of land as collateral. The tract of land was conveyed by the District to the Corporation, which, in the County's view, gave virtually nothing in return: a promissory note for $325,000 uncollectible for twenty-five years; and a deed of trust, which might never be recorded or which might be recorded secondarily to the deed of trust held by the bank to secure the construction loan. The County urges that these facts evince an intent on the part of the District to continue to renew the lease for twenty-four years and thereby to purchase the building. The District's intention, allegedly, is to borrow and build rather than merely to lease and occupy. Other earmarks of a "purchase," according to the County, are lease provisions under which the lessee District, rather than the lessor Corporation, is exposed to what are normally the risks of building ownership, such as risk of loss resulting from fire or flood. Further, the District will be making "rental" payments to the Corporation, and thus by assignment to the banks, during the anticipated lengthy construction period, receiving nothing of value in return at that time.

Respondent Library District's position is that § 182.070, RSMo 1978, authorizes it to lease space for its use. The present lease does not bind the District for more than one year at a time. The lease therefore creates an indebtedness only for the year following exercise of the option. Thus, under this view, the lease arguably does not violate the constitutional limitation on debt contained in Article VI, Section 26.

Lease-purchase contracts entered into by municipal corporations have engaged the attention of courts throughout this country for many years. Bulman v. McCrane, 123 N.J.Super. 213, 302 A.2d 163, 165 (1973), rev'd, 64 N.J. 105, 312 A.2d 857 (1973); Nichols, Debt Limitations and the Bona Fide Longterm Lease with an Option to Purchase, 9 Urb. Law. 403, 407-410 (1977) (hereinafter Debt Limitations). Subdivisions of state governments have frequently used lease-purchase contracts in an attempt to evade constitutional debt restrictions similar to those imposed in Missouri under Article VI, Section 26. Bulman, 302 A.2d at 165; Debt Limitations, supra, at 403; Magnusson, Lease-Financing by Municipal Corporations as a Way around Debt Limitations, 25 Geo.Wash.L.Rev. 377 (1957) (hereinafter Lease-Financing).

Missouri authority on the issue before us is sparse but furnishes guidelines, application of which, we believe, resolves the matter. See Scroggs v. Kansas City, 499 S.W.2d 500 (Mo.1973), which involved an arrangement between the City of Kansas City and the Kansas City, Missouri Public Building Authority, a non-profit corporation, for the purpose of financing a convention center. The City leased land to the Authority. This "Ground Lease" was for a term of thirty years, and required payment of the full 4 million dollar rental at the beginning of the lease term. The Authority meanwhile was to issue bonds for 25 million dollars using the proceeds to pay the City the "Ground Lease" rental and to build the convention center facility. Simultaneously with the thirty year ground lease, a "Lease and Agreement" was in effect, whereby the Authority leased to the City the same tract of land with the convention center building and all other improvements thereon. The City was to pay nearly 55 million dollars in rent, in semi-annual installments for thirty years. Under the "Ground Lease," the land and improvements were to be surrendered to the City upon expiration of the lease.

The City passed three new or increased license taxes on certain enterprises, and provided that payment of revenue therefrom would join with revenue gained from operation of the Convention Center in a special fund. ¹ The City would use...