Reynolds v. City of Waterville

Peters, C. J.

The constitution of this State provides that no city or town shall create any debt or liability, which singly, or in the aggregate with previous debts or liabilities, shall exceed five per centum of the last regular valuation of said city or town.

In interpreting this constitutional provision we believe we would be willing to adopt the middle doctrine on which some of-the authorities stand, called by counsel for respondents the rule of reconciliation, which allows a municipal corporation, although its indebtedness has already reached the constitutional limit, to make time contracts in order to provide for certain municipal wants which involve only the ordinary current expenses of municipal administration, provided there is to be no payment or liability until the services be furnished, and then to be met by annual appropriations and levy of taxes; so that each year’s services shall be paid for by each year’s taxes; the scheme being variously denominated in the cases as a business, or cash, or pay-as-you-go transaction, and the like.

And we incline to the belief that, on this principle, a town or city may contract for the use of a hall for a term of year's, to be used for strictly municipal purposes, provided the principle be fairly applied in any case and not be abused; not however allowing a hall to be hired for the purpose of subletting either the whole or any part of it. Municipal necessities are only to be regarded.

But under the guise of the principle above stated, a municipality should not be allowed to pass off, as an agreement for renting a hall, an agreement which is not really entered into strictly for such purpose. And we feel that the transaction here in question must be repudiated upon that ground. The transaction has in some respects the semblance of a lease, but it is a misnomer to call it such. It is attempted to make it one thing in form, while in reality it is something else. It is apparent enough that the city is to have not merely the use of the building to be erected, but the building itself. It is not to get an annual service to be paid for out of annual revenues, but the city is to acquire a city hall presently, to be paid for by assessments of taxes for the long period of thirty years. It is a purchase.

It would not be a misinterpretation to say that the city of Water-ville, instead of leasing the property, undertakes to purchase or pay for it on the installment plan, and that what are called rentals for the hall are merely partial payments on its cost.

In Gross v. Jordan, 83 Maine, 380, the head-note is as follows: “ Writing an agreement in the form of a lease does not alter the character of an instrument which by its more essential terms discloses itself to be a conditional sale of personal property.” The facts of that case showed that by a paper called a lease, and sprinkled with phrases appropriate to a lease, one person received a wagon of another, agreeing to pay fifteen dollars a month for its use, and when the sums so paid amounted to one hundred and sixty-five dollars and interest thereon, such party was to receive title to the wagon. The court said: “This paper, which calls itself a lease, is a conditional sale of property, the title passing when the full price shall have been paid. Its own terms are the true test of the nature of a contract, whatever its framers may denominate it.” That case was followed by other cases in this state where agreements to convey pianos and sewing machines were attempted to be passed off and construed as leases, but the attempts did not prevail.

We need not dwell on this point, however, because our opinion is that the true nature of the transaction is rather the hiring of money by the city upon the security of city property through the intervention of a trustee, the title to the property being and remaining in the city from the beginning to the end, subject only to the lien upon it in favor of bondholders for money to be lent. This kind of agreement is so clearly and satisfactorily explained by Pomeroy in his Equity Jurisprudence, in § 995, that we here quote the entire section, as follows: “ Deeds .of Trust to Secure Debts.— A special form of trust for the benefit of creditors peculiar to the law of this country, has become quite common in several of the states, and requires a brief description. A ‘deed of trust to secure a debt ’ is a conveyance made to a trustee as security for a debt owing to the beneficiary — a creditor of the grantor, and conditioned to be void on payment of the debt by a certain time, but if not paid the trustee to sell the land and apply the proceeds in extinguishing the debt, paying over any surplus to the grantor. The object of such deeds is, by means of the introduction of trustees, as impartial agents of the creditor and debtor, to provide a convenient, cheap and speedy mode of satisfying debts on default of payment. A distinction, however, should be noted in this connection between unconditional deeds of trust to raise funds for the payment of debts, and deeds of trust in the nature of mortgages, the former being absolute and indefeasible conveyances for the purposes of the trust, while the latter are conveyances by way of security, subject to a condition of defeasance. In many states deeds of trust to secure debts are much favored, either on account of the intervention of disinterested third parties, whose position as trustees secures to the debtor fair dealing, or the absence of any necessity for the intervention of the courts ; though in some states they are required to be judicially foreclosed, and are therefore of no practical advantage. Indeed, in a majority of the states this form of security has come into general, and, in some instances, universal use. An intimate relation exists between deeds of trust to secure debts and mortgages, especially mortgages containing powers of sale ; in fact, the former are generally considered as being in legal effect mortgages. Where a mortgage is regarded as a conveyance of the legal estate, a deed of trust can be no less a conveyance of the legal estate, and where a mortgage is considered as but a mere lien, a deed of trust is generally considered as nothing more than a lien. A reconveyance, as a general rule, is not necessary on payment of the debt secured by a deed of trust, satisfaction being entered in the margin, as in the case of a mortgage. Statutes relating to the recording of mortgages embrace deeds of trust, without special mention of the latter, as also do those relating to powers of sale contained in mortgages. While a mortgage with power of sale may be assigned, in the absence of words -restricting an assignment, and the power of sale passes thereby to the assignee, a deed of trust to secure a debt, being a confidence reposed, cannot be delegated, and no assignment is possible, without an express and positive permission in the deed. The duties of the trustee of a deed of trust require the utmost good faith and impartiality as regards both the debtor and creditor. ■ He is personally liable in á suit at law for damages to the party aggrieved for a failure to use reasonable diligence,- or an abuse of his discretionary powers; and a sale may be enjoined or set aside at the instance of the injured party. It is not necessary that the person who is to execute the power in a trust deed should join in the deed, or execute any formal writing showing his acceptance of the trust: nor is it necessary that the beneficiary should signify his assent by any formal writing, for his assent is presumed since the deed is for his benefit. Where a trustee has accepted the trust, he cannot renounce it without the consent of the beneficiary, or of a court of equity; and he may be compelled to discharge the trust.”

The statutory commission in the case before us was very little more than a passive trustee, and would be entirely such when the bonds should become paid. The trust at all times was to be fastened upon the estate rather than upon the trustee, and a conveyance of the estate by the city itself, after payment of the debt, could not be repudiated by the trustee. Sawyer v. Skowhegan, 57 Maine, 500; Pom. Eq. Juris. § 988. So there was no need of inserting in the act that the commission should reconvey to the city. The learned counsel for the respondents admits that an equity of redemption reposed in the city. When therefore the debt should become paid, the new city hall would be absolutely the property of the city.

There appears upon the brief of respondents this assertion: “In many -cases, where commissioners, not being incorporated, have issued bonds, the courts have held that the city was liable, as the statutes properly construed required a holding that such unincorporated commissioners were simply agents of the city.” We can see no reason why an. incorporated commission may not act as an agent or trustee just as well. An examination of the various sections of the legislative act reveals the fact that the commission was to be but the humble trustee of the city of Waterville, and the city itself the real owner of the property.

The commission as created by the act was naked of all authority excepting in just one respect, and that was as a formal medium through which the city could secure to the bondholders its debt. It will be seen all the way along that the commission is to be under the control of the city. The commission could sue and be sued, but it had no property and was subjected to no risks. It is entitled to have certain officers, and such others “as the city may direct.” The city treasurer is to be the treasurer of the commission, but no new bond is required of him, and his sureties would not be responsible for his defaults, unless he be considered as acting for the city in what he does for the commission.

Section 2 declares that the powers and duties of the commission shall be controlled by the city. The commission is to have “such powers as are already conferred on it by the city,” and it “shall have any other 'powers and perform any other duties which may hereafter from time to time be voted and conferred upon it by the city council.” This does not sound much like the city being only a hirer and tenant of the property.

Section 3 imposes merely a clerical duty upon the commission, without the exercise of any discretionary power whatever. It is authorized to issue its bonds “ at such rates and on such times and for such amounts as the city council may approve,” not exceeding $75,000. By section 4 the city is authorized, “when its council so votes,” to convey its city hall lot and all improvements thereon, presumably of great comparative value, to the commission for the sole purpose of securing the bonds before named and for no other purpose, the commission to hold the property and the new building to be erected thereon in trust as security therefor. These ai’e all very commendable provisions, but only go to show the true relations which the city was to hold towards this city property, and indicating that the city was really to build the new hall as its own property. And does not the very mischief here arise which the constitutional amendment was designed to prevent, the city thus getting their hall in the present, and having thirty years of continuous annual taxations with which to pay for it? And it is further deducible from these and other clauses in the legislative act that the commission is virtually created and controlled by the city for its own purposes. It is a corporation formed in blank, the city filling the blanks.

Section 5, in case of a default in the payment of bonds or coupons, authorizes bondholders to petition the court to enforce their lien by appointing a receiver for the sale and distribution of the property. The petitition goes to the court, ignoring the commission. Is there any doubt, should there be an excess of assets over indebtedness, that the balance would belong to the city as the debtor and owner?

By section 6, tbe city is “authorized and required to raise annually by taxation such sum as may be necessary to pay all expenses for repairs, insurance and management of said city building, when completed, together with an annual rental of said building in a sum equal to the annual interest on the bonds issued and outstanding .... and it shall be-authorized to except said property from taxation while held in trust” .... These are exactly the burdens which the city would necessarily bear as an owner of the property, and it is nothing less than affectation to style such payments rentals instead of payments of interest on the bonds. It is indeed an ingenious provision to fix the so-called rental as just equivalent to interest on the bonds and the expenses, because it has a look of fairness on its face. But the unfairness of this proposition is exposed when we find • in section 7 a compensatory clause “authorizing and empowering the city to raise by taxation or other means such other sums as may be voted by the city council to add to the sinking fund to be provided for the purchase of the bonds and coupons issued under section 3 of this act.” It eei’tainly cannot be pretended that these occasional taxations made from time to time are rentals or in the nature of rentals, for it is expressly provided that they shall swell the sinking fund for the payment of the bonds for the benefit of the city, and of course to lessen the equitable if not legal indebtedness of the city. The language is to raise money by taxation or other means. What other means, unless it be by borrowing money? It is just here that the mischief may be apprehended which the constitution intends to prevent. The city could raise any amount of money at any time, under this general authority, without restriction as to amounts and without regard to conditions and circumstances. Absolute power is committed to the-city by the legislature. It was just this kind of domination practiced by majorities and this improvidence of legislatures that the constitutional amendment was designed to restrain. If the act in question is to be deemed constitutional, in spite of the real plan transparent in it, why may not the city of Waterville be able, under a similar scheme of so-called rentals, to obtain for itself, by legislative permission, any other expensive scheme of improvements it might see fit to undertake ?

Section 7 contains grotesque provisions: “In consideration of the rental as aforesaid the city of Waterville shall become the tenant of said city building when completed.” If that shall be taken to mean that the city may remain in possession of its property without interference of bondholders, so long as it promptly pays the interest on the bonded indebtedness and keeps the property in good preservation and repair, that idea may be easily understood. If it means, however, that the city is to be a tenant and some other party a landlord, who is such landlord ? It cannot be the constructors for they are to have their pay. Nor can it be the bondholders, for they have a lien only and must go to the court for the enforcement of any of their rights. It cannot be the Commission, for there are no words in the act investing them with any such authority. The landlord then cannot be other than the city itself, the city to be both landlord and tenant. The draftsman of the legislative act seems to have been in some confusion of mind on this point, evidently regarding the city as one party and its city council as another; especially when he declares in section 7 that the city shall become tenant “ under such provisions and directions as the city council may vote from time to time.” But it is of course difficult to keep up the landlord and tenant theory and maintain consistency at the same time. Another inconsistent thing on that theory is that the city is to pay a full rent for the property as tenant and at the same time receive only partial benefit from it, turning all the earnings to be received from subletting the hall into a sinking fund for paying the bonds issued by the Commission.

■ Section 10 in effect affirms again that the commission shall have no power excepting to act as a medium through which the city may deal with the bondholders.

Certain provisions contained in section 11 are very important as disclosing the true nature of these transactions on the part of the city of Waterville, which section is as follows: “All duties and powers necessary to be exercised with respect to the erection of said city building and the care of the same after erection, not conferred on said City Hall Commission by any existing ordinance or vote of the said city of Waterville, or by the provisions of this act, shall be vested in the city council of Waterville. The city of, Waterville, and not said City Hall Commission shall be liable for all damages which said city would have been liable for in the erection of said building or the proper care of the same, had not the trust herein provided for been created.”

By this section all duties and powers to be exercised in the construction and after-management of the hall, not already lodged in the commission by the city council or by the act, and we do not find that any are so lodged, are vested in the city itself. How inconsistent with the contention that the city is to be really a tenant paying rent! It may be admitted that it is provided it may be called a tenant. And so purely submissive an agent of the city is the commission to be,, and so thoroughly and abjectly under its control, that it is to be protected during the construction of the-hall, from all incidental risks, and the city is to assume all the same. What an unheard of proposition that a tenant is to pay a full price for his tenancy, and also be answerable for all injuries and misfortunes that may happen while the building he is to occupy is in process of construction!

But none of the features of this section' are at all inconsistent with the true nature of the transaction as the complainants claim it to be. They contend that the city is the actual party constructing the city hall; that it is to construct it itself with money to be hired upon the security of its city hall lot and all improvements and erections thereon, no other person or party contributing either money or liability thereto; that the form of the security is to be by a trust deed to a trustee upon a term of credit- of thirty years; and that the means of repaying the money borrowed is by annual installments for the same period from money collected by annual taxes assessed for the purpose and occasional taxes in the meantime, and by earnings of the hall when used for. other than municipal purposes; the city in the beginning having the title to the estate subject to the bonded indebtedness; and in the end free of all indebtedness or claim. This construction renders every section and clause of the- act sensible, consistent and clear, while any other construction renders it illogical and inconsistent throughout.

It appears from the facts that at first the city made its contract directly with the builders, and finding it illegal, afterwards annulled that contract, intending to make the same contract over again indirectly through its incorporated agent or trustee. Here were two forms, but the embodiment in each case is the same. Where is there any essential difference between the two?

Section 12 provides that all vacancies in the membership of the commission shall be filled by the city council. It constitutes its own agent or trustee at its liking.

Section 13 provides for the city’s acceptance of the act, and it accepted it. By its acceptance the city assents to all the taxations provided for, and to all the obligations imposed upon it by the act. The learned counsel for respondents sets up the contention that the true test of its liability is whether the city can or not be sued, arguing that the only remedy against it must be by mandamus. But is not mandamus a legal remedy of the most potential kind? And is there not a .clear liability where mandamus can be maintained? After the city accepted the act, were the act free from the taint 'of unconstitutionality, would not the city be under a requirement for thirty years to make at least an annual assessment of taxes whereby to make annual payments on its indebtedness ? It is the only mode of enforcing collections from municipalities in the practice of many of the states. Does not such a requirement constitute a liability ? And could not equitable if not legal proceedings be maintained against the city in some conditions that might arise ? Can there be any doubt that the bondholders could by equity process enforce the obligation expressly assumed by the city to insure the building and keep it in repair; and why may they not also enforce the city’s obligation to pay interest on the bonds either directly or by process in the name of its trustee? Or are all of these provisions merely a rope of sand?

It must be confessed that the act in question is a very dexterous attempt to accomplish one thing under the name of another thing, — as plausible as it is fallacious. It is error with truth’s clothes on. And such erroneous propositions are not always easy to answer. Dr. Whately truly said of erroneous arguments:— “ Although they are most unsubstantial, it is not easy to destroy them. There is not a more difficult feat known. than to cut through a cushion with a sword.” It is sure, however, if the plan here, intended as it is to avoid rather than uphold the law, shall prevail, the result as a precedent will shatter the constitutional amendment into pieces.

The respondents further contend that the remedy here is at law and not in equity. Such a decision would be a victory for respondents, because the city could control its common law obligations to suit the majority; while the constitutional amendment, is for the protection of the minority against the majority.

We have no doubt that the city’s own valuation, and not the valuation made by the State Board of Commissioners, is the test by which to ascertain the amount of indebtedness which settles the constitutional limit. If the city wants its valuation increased for one purpose let it increase it, by its own act, for all purposes.

Our conclusion is that the bill must be sustained, and that the deed to the City Hall Commission from the city of' Waterville must be adjudged to be illegal, null and void; and that the contract between the Commission and the firm of M. C. Foster & Son for erection of a city hall must also be adjudged to be illegal, null and void, and that an injunction must issue against all the respondents to prevent any enforcement of such contract.

Decree accordingly, and for costs against the city of Waterville.