DISSENTING OPINION. "The General Assembly shall not grant to any citizen, or class of citizens, privileges or immunities which, upon the same terms, shall not equally belong to all citizens." Indiana Constitution, Art. I, § 23.
The foregoing section of our Constitution is a clear, *Page 198 understandable restriction upon the power of the General Assembly. By virtue of this section the General Assembly is utterly powerless to grant immunities to any citizen or class of citizens "which upon the same terms shall not belong to all citizens." If the section means anything at all it means that an immunity cannot be granted to a citizen or class of citizens unless the same is available to all citizens who comply with the terms upon which the immunity depends. Obviously, if the legislative act in itself and by force of its own express provisions excludes all citizens except one or a class from the possibility of enjoying the immunity, such an act violates § 23,supra.
The relief provisions of the act (Acts 1933, ch. 78, p. 488) may be summarized as follows:
I. They apply only to those persons who became obligated as freehold sureties without compensation upon the bonds of banks, banking institutions or trust companies to enable these institutions to obtain deposits of public funds deposited pursuant to the depository statute of 1907, as amended. (Acts 1907, ch. 222, p. 391, § 12611, et seq. Burns Ann. Ind. St. 1926, § 61-601, Burns 1933, § 13805, Baldwin's 1934).
II. The relief provisions are further restricted to those sureties who are sureties for banks, banking institutions or trust companies which were designated as public depositories on or after January 1, 1927.
III. The sureties are relieved from liability; (a) upon the bond, (b) upon a judgment recovered upon the bond obligation, (c) upon promissory notes or other evidence of indebtedness given in lieu of either the bond or judgment obligations.
IV. In case any surety favored by the act has made any payment or payments "within a period of one year prior to the taking effect of this act" he is entitled to receive "credit warrants" which "shall and must be accepted *Page 199 by said treasurer at any time to the amount thereof in payment of any general taxes that may be due and payable after January 1, 1934, to said municipal corporation or political subdivision from said surety or his transferee, and for no other purpose."
The following classes of sureties are excluded from the grant of relief:
I. Uncompensated freehold sureties on bonds of depositories of the municipal sinking funds.
II. Uncompensated freehold sureties on bonds of depositories of the library building and ground funds of school cities.
III. Uncompensated freehold sureties upon bonds covering public funds where such bonds were not given "pursuant" to the depository acts and under circumstances rendering the public officer liable as an insurer of such funds.
IV. All uncompensated freehold sureties who became such on the bonds of banks, banking institutions and trust companies designated as public depositories prior to January 1, 1927, but who are otherwise within the favored group.
V. Freehold and corporate sureties who received compensation for assuming the risk of surety.
VI. Those who come within the group relieved but who paid their obligations more than a year prior to the taking effect of the act are excluded from the right to demand and receive "credit warrants" for their payments.
Does the act in question grant "privileges or immunities" to any "citizen or class of citizens?" It clearly grants an immunity. The individuals benefited are legally bound to make good certain losses. These obligations are just as legally binding as any citizen's promissory note or the judgment secured thereon. The *Page 200 effect of the statute, and its declared purpose, is to grant an immunity to the small number coming within its purview, from all legal liability resulting from their promises as freehold sureties.
Does this immunity from contractual liability belong to all citizens upon the same terms upon which it is granted to the carefully selected group of sureties described in the relief act? Obviously it doesn't. No other citizen who is under contractual liability can obtain a discharge under the terms of the act. In fact only a relatively few freehold sureties out of a larger class of sureties who are under contractual liability to municipal corporations are granted immunity.
But it is contended that the classification adopted is such that it avoids the prohibition of Art. I, § 23. It is important to note that Art. I, § 23, does not forbid the granting of privileges and immunities to a citizen or class of citizens. The vice which is declared against is the exclusion of other citizens from the enjoyment of these privileges or immunities. It does not follow that every statute violates Art. I, § 23, merely because its effect is to benefit some citizen or class of citizens; to be obnoxious to Art. I, § 23, supra, it must also discriminate against other citizens in respect to the enjoyment of benefits which inure from the operation of the statute. The foregoing distinction is given practical effect through the formula of classification. This is admirably stated in the opinion in DavisConstruction Co. v. Board, etc., (1922), 192 Ind. 144, 150, 132 N.E. 629, 21 A.L.R. 557:
"And while some classification of the subjects of legislative action is necessary, and a reasonable classification based upon actual differences which inhere in the different subjects and embrace all within the class and the reason for the classification will be upheld, a classification, to be valid, must be based on substantial distinctions which make one class so different from another as to suggest the necessity *Page 201 for different legislation with respect thereto. An artificial, arbitrary, and unreasonable classification, as by designating certain individuals by name or description out of a larger number whose situation and needs do not differ from theirs, is forbidden by the constitution. Bedford Quarries Co. v. Bough (1909), 168 Ind. 671, 674, 80 N.E. 529, 14 L.R.A. (N.S.) 418; Railroad Com. v. Grand Trunk, etc., R. Co. (1913), 179 Ind. 255, 262, 100 N.E. 852; Sperry Hutchinson Co. v. State (1919), 188 Ind. 173, 181, 122 N.E. 584."
The foregoing makes clear that a classification for legislative treatment cannot avoid the prohibitive force of Art. I, § 23, if the classification results in discrimination against individuals not included within the class; and discrimination does exist when the classification is not based upon "substantial distinctions which make one class so different from another as to suggest the necessity for different legislation with respect thereto;" or when the classification takes the form of "designating certain individuals by name or description out of a larger number whose situation and needs do not differ from theirs."
In short, a statute which grants benefits to, or removes disabilities from, any group less than "all citizens" violates Art. I, § 23 unless the group selected (i.e. classified) to be affected by the act differ so much "in their situation and needs" from those excluded that the provisions of the act and the object sought therein would be inappropriate to the situation and needs of those excluded. In that case there could be no real discrimination and the advantages conferred could not in any true sense constitute "privileges or immunities" as against all other citizens.
Tested by the foregoing the sureties relief act of 1933 is a palpable violation of Art. I, § 23. Keeping in mind that the vice of a "privileges or immunities" statute is the discrimination between those who are included and *Page 202 those who are excluded from the benefits conferred, it follows that it is not material in the instant case as respects Art. I, § 23 that the obligations of the small group of sureties ran to municipal corporations. The "situation and needs" of every person in Indiana who is under a legal obligation to pay money would seem to be substantially the same as those of the sureties whom the act of 1933 purports to relieve from money obligations; and certainly the relief granted would be as appropriate to and as advantageous to all those obligors not included in the favored group.
There are thousands of personal, non-compensated sureties in Indiana on notes and other forms of indebtedness whose interest in being relieved of liability is identical with that of the sureties who are relieved by the terms of the act in question. And it is obviously impossible to phrase even a formal distinction of interest between the favored group of freehold, non-compensated personal sureties and other groups of freehold, non-compensated sureties who are obligated on bonds to secure public funds which are deposited pursuant to the legislative acts other than the act of 1907, as amended, supra.
In the opinion of the writer there is no basis for a classification which excludes compensated personal or corporate sureties from relief. It is true, as stated in the prevailing opinion, that the courts have construed the contract of suretyship more strictly against a corporate surety than against a gratuitous surety; and also have limited the effect of certain equitable defenses when invoked by a corporate surety. In construing the corporate surety's contract more strictly against the surety the courts have applied the general rule that all ambiguities in a written instrument are construed more strictly against the one who prepares it; and in the *Page 203 matter of equitable defenses the courts have recognized that the corporate surety is in a better position to protect itself against improper conduct on the part of the principal and obligee. The distinctions made by the courts have a rational basis in the actual factual differences between the situations of the typical gratuitous surety and the corporate surety. But the factual differences are not such as to supply a rational basis for a classification for the purpose of completely releasing the gratuitous surety from all liability.
The writer believes that the reasoning and result of the prevailing opinion cannot be reconciled with the decision and opinion in Davis Construction Co. v. Board, supra. In that case this court held that a certain act of the General Assembly providing for the relief of highway contractors from the obligations under their contracts, because of conditions resulting from the World War, was unconstitutional as being in violation of Art. I, § 23, of the Indiana Constitution. The opinion of the court, after pointing out various classes of contractors who were excluded from the benefit of the statute, continued as follows, p. 149:
"Without considering or undertaking to decide whether or not the legislature might have power to relieve contractors for the construction of public works from the threatened consequences of a shortage of labor and materials, caused by the war, by consenting that their contracts should be canceled and that any loss due to those conditions should be imposed on the taxpayers (as to which we decide nothing), the question remains whether or not it has power to enact a statute for the relief only of those contractors who entered into contracts with boards of commissioners for the construction of highway improvements and bridges, `under and pursuant to' certain specified sections, twenty-nine in number, of one designated statute, out of many acts which provide for building improved highways, and out of a far greater number of acts which *Page 204 provide for letting public construction work by contract.
"We think that this question must be answered in the negative. The constitution of the State of Indiana provides as follows: `The general assembly shall not grant to any citizen, or class of citizens, privileges and immunities which, upon the same terms, shall not equally belong to all citizens.' Art. 1, § 23, Constitution. . . .
"The limited number of persons and firms who had entered into contracts prior to June 1, 1917, to do a particular kind of work on highways and bridges in process of construction under the specified sections of the designated statute, and who had not yet completed that work before March, 1919, when the statute under consideration was approved, could not be more clearly pointed out if they were mentioned by name. The war had ended more than four months before the statute was enacted, and the date prior to which the contracts must have been entered into was almost two years past. But of the many persons having contracts to do grading, ditching and concrete work, on highways and elsewhere, in the State of Indiana, who were affected in the same way and substantially in the same degree as those persons and firms, by the increased cost of labor, teams, railroad freights, lumber, sand, gravel, broken stone and cement, but who did not have contracts to build highways under §§ 62-90 of the particular statute, or who took contracts under those sections, but performed them (at whatever loss) before this statute was enacted, none could possible bring themselves within the statute or obtain relief under it.
"Counsel for the appellant seek to uphold the statute against the charge of making an unreasonable classification of subjects by terming it an exercise of `police power.' But a statute which assumes to relieve a few contractors for the construction of certain kinds of public improvements ordered under particular sections of a single statute, from the obligation of their contracts entered into prior to a date named, by requiring the taxpayers of certain townships to bear the loss which would otherwise fall upon the contractors, cannot be upheld as basing its classification on reasons of public safety, public health, public morals, or public welfare, so *Page 205 as to justify a classification not otherwise permissible. State v. Wiggam (1918), 187 Ind. 159, 161, 118 N.E. 684; Cleveland, etc., R. Co. v. Schuler (1914), 182 Ind. 57, 105 N.E. 567, L.R.A. 1915A 884."
The foregoing declarations of this court respecting the contractors' relief statute of 1919 apply with equal force to the sureties relief statute of 1933. Both acts are irreconcilably in conflict with Art. I, § 23 of the Constitution of Indiana and neither can be justified as an exercise of police power.
The Constitution of Indiana also provides:
"No ex post facto law, or law impairing the obligation of contracts shall ever be passed." (Art. I, § 24).
It is well established that the ex post facto clause is limited to criminal laws; but in the opinion of the writer the surety relief act of 1933 violates the constitutional prohibition against impairment of the obligation of contracts. In respect to this question the substance of the argument of the proponents of the act is as follows:
Political subdivisions such as the county, the township, and the city or town are instrumentalities or agencies of the state, mere administrative agencies. A contract between one of these agencies and a depository of public funds and its sureties is a contract between the state as one party and the depository and its sureties as the other. The General Assembly speaks for the state and when it declares that the sureties are relieved it is merely the state cancelling an obligation due to it. Consequently, there is no legal impairment of the contract, merely a consent by the obligee to the cancellation of an obligation. The funds raised by local taxation belong to the state and neither the local municipal subdivision nor the taxpayers therein have any legal interest which can be asserted against the declared *Page 206 wish of the General Assembly speaking for the state.
If the foregoing assumptions are legally sound it follows that the General Assembly, without violating any right of the local taxing unit or the taxpayers therein, can divert funds raised by local taxation for local purposes to state purposes; and that it can use funds raised by a local levy for local needs in Indianapolis or any other municipality for any purpose for which it could raise money by a state levy.
The fundamental fallacy of the non-impairment argument is that its major premise does not exist in fact or in law. The major premise is that all counties, cities, towns and townships are mere administrative agencies of the state as a governmental unit in the principal-agent sense. Whereas the present reality, factual and legal, is that the governmental functions of Indiana are performed partly by the state as a governmental unit and partly by the local municipal corporations as independent governmental units, and not as agents of the state. When we think of state government as the sum total of all governmental functions, state and local, it is accurate to speak of local units as governmental agencies of state government; but they are not agents of the state in the sense that their acts are the acts of the state as a principal. We do have state agencies in the principal-agent sense. The State Highway Commission is a state agency; but it is also an agent of the state in the principal-agent relationship because it does in law represent the state as a political and governmental unit and binds the state within the scope of its powers.
Under our present statutes the counties, cities, towns, and townships are treated as private corporations as respects the business and financial phases of local government. In this connection it is significant that the Constitution carefully differentiates the state from local *Page 207 units in the matter of indebtedness. This is done by the following:
"No law shall authorize any debt to be contracted, on behalf of the State except in the following cases: To meet casual deficits in the revenue; . . . to repel invasion, suppress insurrection, or, if hostilities be threatened, provide for the public defense." Art. X, § 5.
". . .; nor shall the General Assembly ever, on behalf of the state, assume the debts of any county, city, town or township, nor of any corporation whatever." Art. X, § 6.
"No political or municipal corporation in this state shall ever become indebted in any manner or for any purpose to an amount in the aggregate exceeding two per centum . . ." Art. XIII, § 1.
In view of the foregoing, the business and financial affairs of political and municipal corporations, insofar as they relate to indebtedness, must be kept independent of the state and no indebtedness contracted by such corporations can become an obligation of the state. Consequently the local unit cannot be an agent of the state while entering into a contract to incur indebtedness. The burden resets upon the municipal or political corporation and must be paid out of public funds raised by local taxation. The state has no liability in the matter. Yet, according to the proponents of the relief act, if a municipal or political corporation, acting under statutory authority should incur an indebtedness, and should build up a sinking fund by local taxation to discharge the indebtedness, and if this fund should be deposited with a public depository under a contract between the corporation as one party and the depository and its sureties as the other, by the terms of which the depository and sureties agree to repay the sum deposited, the General Assembly can release the depository and the sureties from their contractual obligation without impairment of the obligation of the contract for the reason that the corporation and the taxpayers therein, *Page 208 who must make good the sum involved, have no legal interest in the contract for the repayment of the deposit.
Under the present laws of the state the municipal and political corporations exercise ordinary powers of private corporations while carrying on the financial and business affairs of local government. They have the capacity to contract and must meet their financial obligations. The usual source of income to meet local obligations is from taxation. In levying taxes for local governmental expenses and in contracting with depositories for the safety of the funds raised by local taxation for local purposes municipal boards and officers represent the municipal corporations and the people therein and not the state; and the contracts with depositories and sureties for the repayment of funds are for the benefit of the municipal corporation and to insure its ability to meet its own obligations in which the state has no interest and for which it has no obligation.
In the opinion of the writer, under the laws of Indiana, our municipal and political corporations are vested with such independent power over and interest in, the financial and business affairs of local government that an act of the General Assembly which releases third parties from their legal obligations to pay money to the corporation constitutes an impairing of the obligation of contract, when such obligation is imposed by a contract, entered into under statutory authority, for the purpose of protecting funds raised by local taxation, to meet the needs of local government.
The writer recognizes that the General Assembly can change the powers of political and municipal corporations and destroy their character of private corporations. There is nothing in the Constitution which requires the General Assembly to confer upon these corporations powers to contract, or even to levy and collect local taxes for support of local government. The General *Page 209 Assembly doubtless has the power to abolish these municipal and political corporations and to create a centralized unitary state administration and to divide the state into administrative districts with administrative agents over each district. To supplement such an arrangement it could abolish local taxes and pay all expenses of government from a state tax. When that is done the nature of the state government will be such as to support the argument that local units are mere agents of the state government and that contracts with them are contracts with the state. But as long as the General Assembly creates municipal and political corporations, as agencies of government, with powers and attributes of private corporations we must give effect to these powers.
In support of the foregoing I wish to quote the following fromLucas v. Board of Commissioners of Tippecanoe County (1873),44 Ind. 524, 531, a case which is strongly relied upon in the briefs supporting the validity of the relief statute:
"It has been said by an eminent modern law writer, that the legislative power of the state controls and disposes of the property of the state. How far it can also dispose of that of those agencies of government which it has created and endowed with corporate powers, is a question which happily there has been very little occasion to discuss in the courts. Being a mere agency of government, it is evident that the municipality cannot itself have that complete and absolute control and power of disposition of its property which is possessed by individuals over their own. For it can hold and own property only for corporate purposes, and these purposes are liable at any time to be so modified by legislation as to render the property no longer available. Moreover, the chartered rights may be altogether taken away, and in that case the legislature has reprived the corporation of its property by depriving it of corporate capacity to hold it. And in many ways in which the corporation *Page 210 holds and enjoys property, the legislature must possess power to interfere with its control at least incidentally; for the mere fact that the corporation possesses property can not deprive the State of its complete authority to mould and change the corporate organization and enlarge or diminish its powers, which it possessed before. But whether the State can directly intervene and take away the corporate property, or convert it to other uses than those for which it was procured, or whether on repealing a charter of incorporation, it can take to itself the corporate property and dispose of it at its discretion, are different questions from any raised by the indirect and incidental interference referred to. Cooley Const. Lim. 235. . . .
"Judge Cooley, in the summing up of his views on the question as to the power of the legislature over the property of municipal corporations, says, that the rule upon the subject seems to be this: when corporate powers are conferred, there is an implied compact between the State and the corporators that the property which they have the capacity to acquire under their charter shall not be taken from them and appropriated to other uses. If the State grants property to the corporation, the grant is an executed contract, which cannot be revoked. The rights acquired, either by such grants or by any other legitimate mode in which such a corporation can acquire property, are vested rights, and cannot be taken away. Nevertheless, when the corporate powers are repealed, the corporate ownership ceases; and by modification of corporate powers, the legislature may in other cases affect and divest the rights of individual corporators, so far as they can be said to have any rights in public property. And in other ways and by direct intervention, the legislature may exercise control over the disposition and use of property, subject to the restriction, that it must not be diverted to a use substantially different from that for which it was acquired."
The case of Lucas v. Board, supra, is especially relied upon as supporting the validity of the relief act. The facts and actual holding ought not to give much comfort to those relying upon it. That case arose out of the *Page 211 following facts: Under an act of the General Assembly entitled "An Act to authorize aid to the construction of railroads by counties and townships taking stock in, and making donations to railroad companies," approved May 12, 1869, Acts of 1869, p. 92, and in conformity to that act, a tax was voted and collected in Tippecanoe county in aid of a railroad. The county commissioners paid for and received certificates of stock. Later an act was passed to divest the county of the ownership of the stock. The purpose and effect of the act can be easily seen from the following, p. 528:
"The question presented is as to the constitutionality of the act which we have set out, the act of December 17, 1872. It is urged by counsel for the appellees that the legislature has not the power to pass a law to take the railroad stock from the county, after it has been subscribed and paid for by the county out of the fund raised by taxations, and transfer it to those from whom the money was collected, and in the event that they do not apply for it, to vest it in the townships for school purposes."
The following shows the inapplicability of the decision and reasoning of the court to the instant case, p. 544:
"The tax, when collected, does not go into the county treasury as such. It does not become the property of the county. It is collected for a specific purpose, and the county officers are appointed to collect and finally devote the money to the purpose for which it is raised. The commissioners may take stock in the railroad company in the name of the county, or donate the money to the company `for the purpose of aiding in the construction of such railroad.' The tax could not be collected for the mere purpose of taking the stock. But it might be for the purpose of aiding in the construction of the railroad; and as a mode of appropriating the money, the county commissioners are authorized to take stock in the name of the county, and pay the money over to the company. It does not thereby become the property of the county, in the sense that it would if purchased with county funds, and the *Page 212 primary object was the purchase of the stock for its own use. We do not think the right of the county to the stock thus taken is of such a character as to prevent the State from providing that it shall be transferred and issued to those who paid the money with which it was bought. It is equitably theirs. Their money bought and paid for it."
Reliance is also placed upon Mount, Trustee, v. The State exrel. Richey (1883), 90 Ind. 29. The facts in that case were as follows:
"William J. Richey, the relator, was the trustee of Finley township, and as such deposited, as his predecessors for a long time had done, funds of the township in a private bank of another State; the bank failed, the money was lost, and Richey reimbursed the township. The taxpayers petitioned the Legislature to refund the money to him, and, in accordance with the prayer of the petition, an act was adopted directing that the township trustee should refund it; the trustee refused, and Richey applied for and received a writ of mandate."
This court said that "reimbursing a public officer for the loss of public funds, occurring while he is engaged in discharging public official duties, cannot be deemed an appropriation to private purposes" and restricted the force of the decision as follows:
". . . we do no more than decide that the Legislature has power to direct the application of township funds to the payment of claims growing out of the discharge of official duties by the trustee, where the claims are of a public nature."
In the Mount case there was no question of impairment of contract and this court treated the appropriation as one for a public purpose. In the instant case there is nothing remotely resembling a "claim of a public nature" arising out of the discharge of official duties.
In the case of McClelland, Trustee v. The State ex rel.Speer (1894), 138 Ind. 321, 331, 37 N.E. 1089, funds in the hands of the relator as trustee of a township were *Page 213 lost. Speer replaced a portion of the lost funds and the General Assembly passed an act directing the then trustee to reimburse Speer and in the same act released Speer and his sureties from liability on a judgment which had been recovered for the balance. In respect to the return of the money which Speer had paid into the township fund the court spoke as follows:
"He had no right in law or in equity to a return of the money, and a return of it to him would amount to nothing short of a gift. Raising the funds for that purpose from the various taxpayers of Wayne township, by tax, would be, in effect, taking the property of one man to bestow it upon another. It would be a taxing of the property of the citizens of that township for a private, and not a public use."
That is, the court considered that repaying Speer out of money raised by taxation would be using public funds for a private purpose.
In respect to that part of the act which released Speer and his sureties from liability upon the judgment the court simply stated that, p. 338: "So far as the act in question attempts to release the trustee and his bondsmen from liability on account of judgment rendered against them in the Marion Superior Court, we think the act is in conflict with § 24 of the Bill of Rights which provides that `No . . . law impairing the obligation of contracts shall be passed, . . .'" A judgment is regarded as a "contract on record" and an impairment of the judgment obligation is properly treated as an impairment of a contract obligation. It is true, as pointed out in the brief in the Monroe township appeal, the statement respecting the validity of that part of the act pertaining to the release from the judgment was dictum; but it was the statement of an able judge concurred in by all members of this court.
Following the McClelland case this court, in Johnson v. TheBoard of Commissioners (1895), 140 Ind. 152, *Page 214 39 N.E. 311, held an act of the General Assembly invalid which attempted to release a county treasurer and his surety from liability for repayment of county funds which had been lost in a bank failure.
The last two cases are criticised in briefs for failure to cite authorities and to give reasons for holding that the acts in question violated the constitutional prohibition against impairment of contractual obligations. But the decisions on that point are undoubtedly sound unless as argued in this appeal local municipal corporations under the law of Indiana have no legal interest in the contracts made in their names with private individuals for the protection of the property and funds of the corporation, which property and funds represent money raised by local taxation for needs of local government.
In my opinion the Sureties Relief Act of 1933 violates Art. I, §§ 23 and 24 of the Indiana Constitution by granting a special immunity to a relatively small class of contract obligors which does not "equally belong to all citizens upon the same terms" and by impairing the obligation of the contract between Bolivar township, through its board of finance and the defendants. Nor can the act be upheld as an exercise of the state police power. A statute which grants immunity from contract obligations to a relatively small group of sureties upon depository bonds, with the result that the taxpayers of the corporations whose funds are involved must bear the loss occasioned by the grant of immunity, "cannot be upheld as basing its classification on reasons of public safety, public health, public morals or public welfare, so as to justify a classification not otherwise permissible." (Davis Construction Co. v. Board, supra). *Page 215