Speckels v. Baldwin

AMUNDSON, Justice

(dissenting).

The transaction in this case must be reviewed to determine whether it runs afoul of SDCL 6-1-1. This transaction involves revenue bonds issued pursuant to SDCL ch. 9-54. The legislature has stated that municipalities shall be entitled to issue these types of bonds to develop and stimulate general economic prosperity in the community. SDCL 9-54-1, 9-54-2. Further, when undertaking a bond issuance for such purposes, the statutes authorize revenue agreements providing for the lease and sale of the projects funded by the bonds. SDCL 9-54-8. The transaction is to be tailored so that the bonds are not a general obligation of the municipality and will be retired by revenues *177received from the bonded project. SDCL 9-54-6.

In this case, City issued bonds for the construction of a nursing home. The bond issuance was placed before the City voters. After the election, Home gratuitously conveyed Lot E to City in order to utilize the statutory authority for a lease-purchase agreement. This conveyance was necessary to convert the bonds to tax-exempt status. Pursuant to the terms of the lease-purchase agreement and SDCL 9-54-6, the bonds were retired by the revenues generated by the nursing home. These payments were given to City which then passed them on to the bondholders. City, by merely serving as a conduit for the repayment of the bonds, assisted in stimulating the construction of the nursing home without incurring any liability on the bonds.

No court has held that a lease-purchase agreement, such as this one, used in conjunction with revenue bonds constitutes the purchase of public property. In reaching its decision, the trial court considered evidence presented by Ray Woodsend (Woodsend), an expert in tax-exempt financing. As expert Woodsend testified at trial:

A. Industrial development bonds started in the late ’30’s in Missouri and there was no particular provision in the Federal Tax Code or anything dealing with those. Missouri started the process of having property transferred to the city’s name and then the city issuing bonds and when the bonds were paid off, then they were put back to the owner so that they technically were in the same name of the city for a tax exempt entity. All of the bonds were initially done throughout the country as a lease-purchase for that reason because there was a presumption that as long as the city held title that they’d be exempt for federal income tax. In the early to mid ’60’s the federal government started to get into developing regulations and going through the tax code making provisions to tax exempt finances as related to industrial development bonds and those in a generic sense include the bonds like the ones that were issued in the City of Custer. (Emphasis supplied.)

City merely served as the mechanism through which the bond repayment flowed from Home to the holders of the bonds. Woodsend testified:

Q. On the revenue bond issue, where does the money come from?
A. The money on an industrial development, when you have a lease-purchase, the lease is the city’s obligation typically through a trustee and it is the city’s obligation to get the money from the lessee because the city is then the lessor of that facility and their obligation is whatever money they receive under the lease, to pass that onto the holders of the bonds. They are just a conduit. (Emphasis supplied.)

A trial court may, in its discretion, permit expert testimony to assist it with difficult questions of law. In re Estate of Jones, 370 N.W.2d 201, 204 (S.D.1985). Further, a trial court, when also sitting as the fact finder, is the sole judge of the credibility of the witnesses and can accept or reject all or part of the experts testimony. Lawton v. McCauley, 460 N.W.2d 728 (S.D.1990). The trial court obviously concluded that Woodsend’s testimony was credible.

Moreover, the lease-purchase agreement provided that any payments made after the bond’s retirement would be given to Home.* When the lease term expired, Home could reacquire the property which it gratuitously conveyed to City when this transaction was originally structured for tax-exempt status for one dollar ($1.00). Accordingly, the lease-purchase was merely a mechanism “to develop and stimulate [City’s] general economic welfare” by constructing this project.

At first blush, the fact that Baldwin was part-time city attorney when this transaction was negotiated and executed seems to present an odoriferous situation. However, after reviewing the statutes and the transaction, it *178is clear that this transaction was not a purchase of real property belonging to a municipality. The real property involved in this transaction was placed in City’s name only to employ the benefits of SDCL 9-54-8 and is the type of transaction authorized by the legislature.

Speekels also erroneously argues that the lease-purchase agreement for the construction of the nursing home violates public policy. Speekels contends that public policy has been violated because Baldwin, the part-time city attorney, has profited from his involvement in building and successfully operating the nursing home.

Under the doctrine of public policy, a court may refuse to enforce contracts that violate public law or public policy. United Paperworkers Int’l Union, AFL-CIO v. Misco, 484 U.S. 29, 42, 108 S.Ct. 364, 373, 98 L.Ed.2d 286, 301 (1987). Speekels asserts that public policy was violated when Home was allowed to keep rents collected after retirement of the bond. However, City had no interest in these rents other than passing them along to the bondholders in order to retire the bond. City’s involvement was unnecessary once the bonds were retired. Furthermore, Home received no compensation for its services and investment in the construction, and operation of the nursing home until the bonds were retired.

I totally agree with the trial court’s analysis on this aspect of the case:

Building a nursing home upholds a valid public interest: housing and care for the aged. Government entities have long supported these projects in South Dakota and throughout the United States. Likewise, revenue bonds, lease-purchase agreements, and other devices all represent valid means toward creating and financing such facilities. Plaintiff alleges that Baldwin’s and Himrich’s positions with Custer City make their involvement with the Lease-Purchase Agreement indefensible. Yet their positions gave them no inside advantáge. Custer City has lost nothing and Baldwin and Himrich have not profited through their positions. After carefully examining the record and separating fact from allegation, considering that the burden of proof is on Plaintiff, I find no conduct to justify nullifying the Lease-Purchase Agreement nor see how the agreement offends the public’s interests.

It is beyond dispute that Baldwin was acting as part-time city attorney for Custer during the time the bond issues were submitted for a vote. While Baldwin did some clerical functions in regard to the nursing home matter, he did not render any legal services to the City on the matter. City retained independent bond counsel and independent counsel to represent it in the negotiations of the lease-purchase agreement. It is difficult to discern how Baldwin would fall within the definition of an officer of the city in this case.

In Seymour v. Western Dakota Vocational Technical Inst., 419 N.W.2d 206, 208 (S.D.1988) (citing Griggs v. Harding County, 68 S.D. 429, 431, 3 N.W.2d 485, 487 (1942)), this court defined “public officer” as coming within the ambit of SDCL 6-1-1:

It may be stated, as a general rule deducible from the cases discussing the question, that a position is a public office when it is created by law, with duties cast on the incumbent which involve an exercise of some sovereign power and in the performance of which the public is concerned, and which also are continuing in their nature and not occasional or intermittent, while a public employment, on the other hand, is a position which lacks one or more of the foregoing elements. (Emphasis supplied.)

What sovereign power was vested in Baldwin in deciding whether the bonds should be issued or the lease-purchase agreement approved and executed? The answer is none. The exercise of these executive functions was solely vested in the city council and not Baldwin as part-time city attorney. Therefore, I would hold that Baldwin was not a public officer covered by SDCL 6-1-1.

From the beginning, the record clearly shows City did not want to be involved in the ownership or operation of the nursing home because as it was experiencing difficulties in the ownership and operation of the city hospital. Now, twenty-plus years later, City will *179own this nursing home after two entrepreneurs under the free enterprise system (which I assume had always been a precept upon which this nation was founded) made it a successful business entity while serving the Custer community and surrounding area. I cannot be a part of such a harsh decision which, in essence, penalizes parties for having the guts to be risk takers. City was never at risk in this matter and the taxpayers have not been taken advantage of. This nursing home was constructed through the use of revenue bonds as authorized by our legislature.

I would affirm the decision of the trial court.

City was represented by attorney Martin Farrell during the negotiations and finalization of the lease-purchase agreement.