State Coll. Dev. Ass’n. V. Nissen

• Decision Date: 05 November 1938
• Docket Number: 8238
• Citation: 281 N.W. 907,66 S.D. 287
• Parties: STATE COLLEGE DEVELOPMENT ASS’N., Respondent, v. HARRY N. NISSEN, Secretary of Board of Regents, Appellant.
• Court: South Dakota Supreme Court

66 S.D. 287

281 N.W. 907

STATE COLLEGE DEVELOPMENT ASS’N., Respondent,

v.

HARRY N. NISSEN, Secretary of Board of Regents, Appellant. South Dakota Supreme Court Appeal from Circuit Court, Brookings County, SD Hon. W.W. Knight, Judge #8238—Affirmed B.H. Schaphorst, Brookings, SD Attorney for Appellant. C.O. Trygstad, Brookings, SD Attorney for Respondent. Opinion Filed Nov 5, 1938

PER CURIAM.

The Board of Regents proposes to finance the erection of two dormitories on the campus of the State College of Agriculture and Mechanic Arts by using the net revenues of the dormitories, the legality of which arrangement is for determination in this proceeding. The State College Development Association, plaintiff herein, was incorporated for the purpose of assisting in erecting and equipping buildings on the campus of said college. The Board proposes to enter into a contract with the association and with the First National Bank and Trust Company of Sioux Falls, hereinafter called the trustee, wherein the plaintiff association would agree to furnish fifty-five percent of the amount required to construct and equip the dormitories and the Board of Regents would agree to repay the plaintiff by pledging the net revenues from the contemplated buildings. The plaintiff will undertake to advance fifty-five percent of such cost by issuing under its agreement “State College Dormitory Serial Revenue Bonds” and the Public Works Administration has tentatively agreed to grant to the State of South Dakota the balance of the cost of construction. The proceeds from the sale of the bonds are to be deposited by the plaintiff with the trustee and held as a special fund to be expended as directed by the Board of Regents. A copy of these bonds is set out in the proposed contract; it recites that it is “payable solely from the revenues received and to be received from the operation of the dormitories herein above described. This bond is not an obligation or indebtedness of the State of South Dakota, or any Department, Board, or Agency thereof.”

The Board under the terms of this proposed contract with the association would agree “(a) To operate said buildings as student dormitories under proper rules and regulations to be prescribed from time to time by the Board; (b) To collect from the students occupying rooms therein reasonable rates and charges for the facilities furnished, which, insofar as possible, shall be sufficient to pay the cost of operation and maintenance as hereinafter provided and to provide sufficient excess or net revenues to pay the principal and interest on the bonds to be issued by the Association; (c) To keep accurate accounts of the receipts and disbursements respecting the operation of said buildings; (d) To charge as operating and maintenance cost all items properly chargeable thereto, including heat, light, water, janitor, matron, and other labor charges, and such repairs and replacements to the buildings and equipment as are necessary to keep the same in first class operating conditions and as good as originally constituted, reasonable wear and tear excepted; (e) To cause all receipts from the operation of such buildings to be paid to the State Treasurer, in accordance with Section 5582 of the Revised Code, as custodian in trust for the purposes of this contract; (f) To cause all operation and maintenance charges to be paid out of the fund in the State Treasury on vouchers authenticated and approved as specified in Section 5585 of the Revised Code; (g) To cause all net revenues, as hereinafter defined, to be paid over to the Trustee as paying agent for the bonds and as Trustee for the bondholders; (h) To use its best efforts to cause the gross revenues of the buildings to be sufficiently large and the operation and maintenance charges sufficiently low so that the net revenues will be sufficient to pay principal and interest on the bonds issued as herein provided.” And it is further provided: “All the charges of operation and maintenance as herein defined shall constitute a first and prior claim against the gross revenues of said dormitories. All proceeds received from the operation of said dormitories in excess of said operating and maintenance cost shall be denominated ‘net revenues.’ Said net revenues shall be paid in amounts and at times appropriate to pay the principal and interest as it falls due to the bank designated as paying agent and trustee, and shall be used to pay the reasonable fees and expenses of such paying agent and trustee, and for the payment of the principal and interest on said bonds.” Title to the sites for the buildings, the buildings and all fixtures therein would remain the property of the State under the exclusive control of the Board of Regents and the plaintiff association is forbidden “to cause any lien, encumbrance, or charge to be placed upon any such buildings or equipment.”

The principal question before us is whether by entering into this proposed contract the State will incur an indebtedness in excess of the limit prescribed by Section 2, Article 13, State Constitution. Plaintiff contends that the contract under consideration pledging net revenues from operation of the buildings to pay the bonds, aggregating $154,000, will not impose a general obligation or debt on the State of South Dakota; and that an obligation of the State in excess of the debt limit will not be incurred.

This court has considered what constitutes a debt as this term is used in this section of the Constitution in an advisory opinion to the Governor, In re Opinion of the Judges, 649, 542. It was the opinion of the majority of the judges that the Rural Credits Act did not contemplate the incurring of an indebtedness within the meaning of this section; that the word “debt” as used therein does not include any pecuniary obligation imposed by contract which, within the lawful and reasonable contemplation of the parties thereto, is to be satisfied out of the current revenues for the year or out of some fund then within the immediate control of the State. The minority of the judges were of the opinion that the debt limit for Rural Credits purposes was impliedly repealed in 1916 by the amendment of section 1, Article 13, State Constitution, and this view was later adopted by the Court in Schaaf v. Rural Credits Board, 164 N.W. 964. The provisions of statute before the Court authorized the State to borrow money on its warrants and bonds secured by the good faith and credit of the State and provided that if at any time there should be insufficient funds in the treasury of the Rural Credits Board to pay the bonds or warrants it became the duty of the Tax Commission to make a special assessment and levy. Under the provisions of the statute there was a contingency under which a debt against the State could arise, but under the facts in the instant case no contingency could arise imposing an obligation, moral or otherwise, upon the State of South Dakota, to levy a tax or to appropriate funds to pay any loss that may result from the transactions between the Board of Regents and the plaintiff association. Title to the buildings erected on the campus of the college will be in the State from the time of their erection and no encumbrance or lien thereon will be created. The bonds will not constitute a general obligation against the State. The buildings will be made available to the State under the proposed contract enabling the State to pay for their construction and equipment from earnings accruing from their operation. It has been held in other jurisdictions that the pledge of revenues from a utility or other property in payment thereof does not constitute an indebtedness. The Supreme Court of California in the case of Garrett v. Swanton, 216 Cal. 220, 13 P. 2d 725, referring to the so-called special fund doctrine, said:

“‘The overwhelming weight of judicial opinion in this country is to the effect that bonds, or other forms of obligation issued by states, cities, counties, political subdivisions, or public agencies by legislative sanction and authority, if such particular bonds or obligations are secured by and payable only from the revenues to be realized from a particular utility or property, acquired with the proceeds of the bonds or obligations, do not constitute...