Twichell v. City of Seattle, 106 Wash. 32 (Pa. 1919)

Mitchell, J.

This action was instituted by appellant, F. A. Twichell, as a taxpayer, to restrain the respondents, the city of Seattle and Puget Sound Traction, Light & Power Company, a corporation, from entering into a contract whereby $15,000,000 of utility bonds, payable from the revenues of the entire system, as provided for by ordinances of the city, are to be delivered to the traction company by the city in payment for the street railway system of the traction company in the city, which system the city is seeking to acquire as an addition and betterment to, and extension of, the city’s existing street railway system. He seeks further to enjoin the city from contracting for the purchase of electric energy for the operation of the street railway system, and also to enjoin the granting by the city of trackage rights to the Pacific Northwest Traction Company and the Puget Sound Electric Railway Company, called, respectively, the Everett and Tacoma interurbans, which have been operating their cars over the street railway tracks of the traction company within the limits of the city of Seattle; all things thus sought to be restrained being within and pursuant to the terms of an agreement between respondents.

To consummate its entire plan, the city passed four ordinances. The first one, No. 39,025, specifies and adopts the system or plan of additions, betterments and extensions of the city’s existing street railway system, provides for the acquisition of and payment for the street railway lines, property and equipment

of the traction company and issuing bonds in payment therefor; and creates a special fund to pay the principal and interest of such bonds. This ordinance sets out a form to be substantially followed for the bonds and coupons.

The second ordinance, No. 39,069, is the purchase contract ordinance. It provides for the making of the contract of purchase and sale between respondents whereby the traction company sells to the city its entire street car system and property in the city for the sum of $15,000,000, payable in the utility bonds provided by ordinance No. 39,025, and sets out in haec verba a copy of the proposed contract. This ordinance also provides for a contract whereby the city agrees to purchase electric power from the traction company for the operation of the city’s street railways and pay for the same for a term of years.

The third ordinance, No. 39,070, provides for the making of an agreement with the company for the operation of interurban cars and trains of the Puget Sound Electric Railway (Tacoma Interurban) over certain of the tracks of the street car system to be acquired, among other things, in protection of the traction company’s existing contract with the interurban railway company. And the fourth ordinance, No. 39,071, is similar to No. 39,070 only it relates to the Pacific Northwest Traction Company, known as the Everett Interurban.

By his amended complaint, appellant Twichell, after alleging the contract for the purchase and sale of the property of the traction company for the sum of $15,-000,000, payable in utility bonds, pleads by number, title, and date of passage and approval, each of the four ordinances hereinbefore referred to, and then sets out with particularity much of the substance and

effect of the ordinances and the plan and intentions of the respondents in support of the averment that the proposed bond issue, according to the manner and form outlined in the ordinances, is contrary to the power of the city under its charter and the laws of the state, threatening indebtedness of the city in excess of the amount permitted by the constitution of the state, and that the city intends to, and unless restrained will, issue and deliver said bonds to the traction company. He demands that the city be enjoined from issuing and delivering the bonds and that respondents be enjoined from completing the contract for the sale and purchase of the street car system and property.

To the amended complaint, the city answered with appropriate denials, and by affirmative answer and defense alleged that it already owns and operates a municipal street railway system and intends to acquire the system of the traction company to be operated in connection therewith; that, in order to adopt a plan for the acquisition of additions, and to acquire and operate the system of the traction company as an addition, betterment and extension of its present street railway system, it passed the ordinances referred to in the amended complaint, which ordinances are made a part of the city’s answer by appropriate reference and by setting them out m extenso, attached as exhibits A, B, C and D. The answer of the traction company to the amended complaint is to the same general effect as the answer of the city. To each of the affirmative answers and defenses, appellant Twichell demurred on the ground that the same, as it appears upon the face thereof, does not constitute a defense to the cause of action set out in the amended complaint.

After the filing of the answers, intervening appellant, Charles E. Horton, as a taxpayer, filed a complaint in intervention in the action. Other than the allegation that none of the provisions or plans of either of the four ordinances involved was ever submitted to the voters, and that the three ordinances other than the bond ordinance are drawn more positively and completely into the controversy, if possible, the complaint in intervention, while exhibiting more detail and particularity, may be taken, for the purposes of this case as we view it, similar to the amended complaint of Twichell. To the complaint in intervention, each respondent filed a general demurrer. The trial court sustained the demurrers of respondents to the complaint in intervention and overruled the demurrers to the affirmative answers and defenses of respondents to the amended complaint of Twichell. Appellant and intervening appellant each electing to stand upon the issues as made, the trial court entered a judgment of dismissal, from which this appeal is prosecuted by both complainants.

The principal contentions in the case center upon ordinances No. 39,025 and No. 39,069. Section 8005, Eem. Code, authorizes any incorporated city or town within the state, among other things, to construct, condemn and purchase, purchase, acquire, add to, maintain, operate or lease cable, electric and other railways within the limits of such city or town for the transportation of freight and passengers, and to fix, alter, regulate and control fares and rates to be charged thereon. Section 8006 of the code provides that, whenever the city council, shall deem it advisable that the city shall purchase, acquire or construct any public utility mentioned in § 8005, it shall provide therefor by ordinance specifying’ the system or plan

proposed and the estimated cost thereof and submit the same to the qualified voters, except in certain cases where no submission shall be necessary, as follows :

The city of Seattle has a charter, art. 4, section 18, subdiv. 15 (a) of which confers upon the city council the right, by ordinance, to exercise certain powers, ' similar to those granted by § 8005 of the code. Section 8008 of the code provides:

portion, and to issue and sell bonds or warrants bearing interest not exceeding six per centum per annum, payable semi-annually, executed in sucb manner and payable at such times and places as the common council or other corporate authorities of such city or town shall determine, but such bonds or warrants and the interest thereon shall be payable only out of such special fund or funds.”

The city, by ordinance No. 39,025, upon declaring that public interest and welfare require that the city acquire the street railway lines, property and equipment of the traction company as additions and betterments to and extensions of its existing municipal street railway system, determines and specifies the amount available for the payment out of the gross revenues into a special fund for the payment of the $15,000,000 bonds and interest; adopts and specifies, by setting forth in detail, the plan or system proposed; gives the number, amounts and dates of maturity of the bonds, bearing interest at five per cent per annum, stating:

Section 5 creates and establishes a special fund to be called “Municipal Street Railway Bond Fund, 1919,” into which the gross revenues of the municipal street railway system shall be paid for the payment of the bonds and interest; and in the form of the proposed bond set out in the ordinance it is stated that it is payable “solely out of the special fund of the city of Seattle known as the ‘Municipal Street Railway Bond Fund, 1919,’ ” created and established by the ordinance. As to the contract ordinance, No. 39,069, it requires no notice here other than to say it provides for the purchase and sale pursuant to the

plan contained in ordinance No. 39,025, and that the consideration to he paid by the city is the sum of $15,000,000 in utility bonds, as authorized by that ordinance.

Viewed in the light thus far given, appellants may not complain, for the purchase of a public utility payable from the revenues of the utility is not the creation of a,debt within the meaning of the constitution. Rem. Code, §8008; Dean v. Walla Walla, 48 Wash. 75, 92 Pac. 895; Seattle v. Stirrat, 55 Wash. 560, 104 Pac. 834, 24 L. R. A. (N. S.) 1275; Uhler v. Olympia, 87 Wash. 1, 151 Pac. 117, 152 Pac. 998.

Appellants contend, however, that because of certain provisions of the ordinances and of the statute, now to be noticed, a general indebtedness is contemplated or involved; and also, that the proposed transaction may not be consummated without the ratification of the voters. If the completion of the purchase and sale as planned would create a general debt, it would doubtless require the sanction of the voters of the city, otherwise not so. Section 8008, already referred to, in speaking of the special fund to be created by the city council, further provides:

In connection with this statutory provision, our attention is called to certain provisions of the plan or system ordinance, No. 39,025, in section 5 thereof, to the effect that the city, after providing for the special fund,

sufficient to meet the payments of interest and principal of the bonds as they fall due, stating the amounts and maturity of the same,

and the obligation of the city in the bonds to pay them with interest, although out of the special fund,

We are not persuaded by the argument of appellants in support of this contention. One will notice, from that portion of § 8008 of the code first quoted herein, that there are three methods by either of which the city council may determine the amount to set aside and pay out of the special fund for the utility bonds, viz.: (1) a fixed proportion of the gross revenues of the public utility; (2) a fixed amount out of and not exceeding a fixed proportion of such revenues; or (3) a fixed amount without regard to any fixed proportion. The latter, or third plan, is the one adopted by the city council in the present case and

manifestly, from the standpoint of power, the city council was fully authorized to prefer and adopt it. Now, having adopted that plan, it became necessary, under the directions and mandate of § 8008 of the code, in creating the special fund and specifying the amount to be set aside into it to be used in paying for the utility, to have due regard to the cost of operation and maintenance of the system as constructed or added to and to any proportion or part of the revenues previously pledged, and not to set aside into such special fund a greater amount than in the judgment of the city council will be available over and above the cost of operation and maintenance and revenues previously pledged.

The city council kept the statute in mind, for section 2 of ordinance No. 39,025 contains the following:

And further on in the same ordinance, with particularity and detail, are set out the amounts and maturity of the bonds and interest.

The “due regard” clause of the statute is a guide to point the way—a curb or limitation upon the manner in which the city council shall exercise its judgment in determining the fixed amount of the gross revenues derived from the utility to constitute the special fund for the payment of the utility. The finding, and expression of judgment of the city council in that portion of the ordinance just above set out, reflects observance of the “due regard” clause of the statute; and when the city council has thus proceeded and determined, it has exhausted its power with reference to the creation of the special fund, and the contract becomes fixed and settled as against that fund. Whether or not the ordinance and bonds provide for a preference in favor of the bonds and interest out of the gross revenues of the system is unimportant to the integrity of the obligations, as demands upon the special fund, because the latter part of § 8008 of the code covers the matter by providing as follows:

In noticing the decisions of this state, it will be borne in mind that, by the whole of § 8008 of the code, that portion thereof as to the manner of ere

ating the special fund is applicable whether the proposition has been submitted to the voters or not, provided no general indebtedness is to be incurred. In the case of Griffin v. Tacoma, 49 Wash. 524, 95 Pac. 1107, it was said:

In the case, the record of which has been examined, the opposition to the plan contended that the city was at liberty, because of the words “at least fifty per cent thereof,” to put the whole of the gross revenues into that special fund, leaving the operation and maintenance of the plant necessarily to be paid out of the general revenues of the city. However, further on in the opinion it was said:

This case has often been cited and relied on since, in this state.

The later case of Scott v. Tacoma, 81 Wash. 178, 142 Pac. 467, was a case in which the ordinance, after providing for a special fund derived from the gross revenues of the municipal railway for paying the principal and interest of the utility bonds, provided:

In the opinion the court held such plan did not create a debt, and specifically referred to and relied upon the case of Griffin v. Tacoma, supra.

The case of Schooley v. Chehalis, 84 Wash. 667, 147 Pac. 410, was a case involving two kinds of funds, one a general fund and the other a special fund, which latter was to meet the payment of interest and principal of the public utility bonds, and the ordinance provided that the latter or special fund

In the case it was contended by the party opposing the bond issue that the money the city was to pay for the purchase of the old water system, to be taken over by the new plan, would constitute an indebtedness of the city which, taken in connection with indebtedness already existing, would exceed the constitutional limit. But the court held otherwise because, by the plan of the city, the amount to be paid for the old water works was made a charge upon the revenues of the water system, following the rule announced in earlier cases in this court, including the case of Faulkner v. Seattle, 19 Wash. 320, 53 Pac. 365.

In the case of Faulkner v. Seattle, the same contention was made as is made in the case at bar (except here there is no showing or allegation as to what the expenses of operation and maintenance would be) and the court said:-

The statutes and decisions above referred to recognize a marked distinction between the creation of a debt and the creation of a condition upon which a debt might arise. In this case we have to do only with the question of the power of the city, not matters of propriety or policy. Neither the complaints nor the ordinance advise one what proportion of the anticipated gross revenues is considered sufficient to meet the obligations for the payment of the traction company’s property, and the consequent remainder for expenses of operation and maintenance. By the ordinance, one is simply told that, in the judgment of the city council, the gross revenues will be sufficient for all such purposes. In exercising that judgment, the city council exercises a legislative power over which the courts have no control. Ewing v. Seattle, 55 Wash. 229, 104 Pac. 259.

We are satisfied the proposed plan and bonds will not create any indebtedness against the city and that

the city council has authority to consummate the purchase without the sanction of the qualified voters.

What we have already said disposes adversely of another contention of appellants that, in pledging the whole of the” gross revenues of the street railway system, if necessary, to pay the bonds and interest, the city council acted arbitrarily and in disregard of the statute to have due regard for the expenses of operation and maintenance of the system. All presumptions are contrary to such claim, while the ordinances and allegations of the complaints, as already seen, are wholly wanting in the discovery or statement of any facts suggesting arbitrariness on the part of the city council.

As to the contract for electric power provided for in ordinance No. 39,069 the city finds and declares the necessity therefor, for the purpose of operating the street railway system subsequent to the additions and extensions proposed. The ordinance and contract provide:

The contract is within the power of, and its desirability within the judgment of, the city council.

As to the agreement contained in ordinance No.. 39,070, concerning the Puget Sound Electric Railway, commonly called the Tacoma Interurban, the ordinance recognizes a traffic agreement outstanding between the traction company and the interurban railway, recites that effective, regular and expeditious interurban train service is of advantage to the public, and gives the interurban the right, upon certain ex

pressed terms and conditions, to a joint user with the city of certain of the tracks of the municipal street-railway system, specifically declaring it to be “granting a mere right to the railway to operate its cars over certain portions of said system.” The ordinance further provides:

We understand this is not a lease of any of the municipal street railways necessitating the calling for bids within the contemplation of ch. 137, Laws of 1917, p. 573. The agreement provided for by the ordinance does not divest the city of dominion over the property or even relieve it of the burden of maintenance and repairs. It is but a traffic agreement, the interurban railway company paying for “trackage rights” on a “car mile” basis.

Ordinance No. 39,071, relating to the Everett interurban railway, is similar to the other and requires no other notice here.

All four of these ordinances are designed to accomplish the main purpose of the acquisition by the city of the traction company’s street railway property as an addition to, and extension of, the already existing municipally-owned street car system, according to the power and authority granted by the statutes and the city charter. All of the ordinances are closely interrelated, and each of the last three tie and refer to the plan or system ordinance No. 39,025 by containing specific reference thereto. We are satisfied the power of the city has been exercised in the manner provided by the law. That inquiry limits the province of the court.

It results that the judgment appealed from must he, and it is, affirmed.

Holcomb, Main, Fullerton, Tolman, Parker, and Mount, JJ., concur.

Chadwick, C. J., and Mackintosh, J.

(dissenting)— "We agree with the majority opinion in this:

We have no douht of the right of the city of Seattle to take over and operate as a proprietor existing street railways, but its power to acquire and operate public utilities is to be found in the statute. Beyond the statute it cannot and should not be allowed to go. We have more than once held that a statute defining the rights and powers of a municipal corporation have the same force and effect as a constitutional limitation upon the powers of the state legislature.

That it was the intent of the legislature to deny the governing body of a municipality the right to charge either the cost, or the cost of maintenance and operation of a public utility upon the general funds of a city seems too plain for argument. The power to acquire is found in § 8005. Subdivision 1 of § 8006 provides for the acquisition of public utilities for which no general indebtedness is to be incurred. Subdivision 2 provides that public utilities may be acquired under apt provisions of a city charter and for which no general indebtedness is to be incurred.

qualified voters of the said city or town voting at said election.”

It is only where no general indebtedness is to be incurred that the council or governing body may proceed without first submitting the proposition to the people. In other words, the legislature has by positive and unmistakable mandate said to the governing bodies of our municipalities, “You may acquire, maintain and operate public utilities where no charge is to be made against funds raised by general taxation, but if you intend to, or the scheme employed may, charge the general revenues you must have the sanction of a popular vote.”

To save the right of the general taxpayer and the one who may find employment in the maintenance and operation of the utility and to protect the general funds the legislature was careful to provide as follows :

The law being in intent, letter and spirit that a public utility acquired without a vote of the people shall be paid for out of the earnings of the utility, “having due regard to the cost of maintenance and operation,” it cannot be held that without a vote of

the people the city council can pledge the entire gross revenues to the payment of the initial cost. To do so strikes out and nullifies the words “proportion- or part” and the limitation that the council “shall not set aside into such special fund a greater amount or proportion of the revenue and proceeds than in their judgment will be available over and above such cost of maintenance and operation.” In other words, before the power to set aside a fund can be exercised at all the council must have due regard for, which can mean nothing else than that it shall reserve, a sum sufficient in its judgment to defray the cost of maintenance and operation.

In this case the gross revenues are set aside without reservation; they are to be paid into a special fund and the bonds and indebtedness are made a first charge against the entire fund. The traction company may take all under its contract. In the working out of this scheme the council has proceeded not with “due regard” for the “cost of maintenance and operation” but, as said by counsel for one of the appellants, in positive disregard of the statute.

The reasoning of the court that the council has proceeded under a third alternative; that is, that it may set aside “a fixed amount without regard to any fixed proportion,” is illogical. The meaning of that alternative is no more than this: That if the city council does not see'fit to set aside a certain proportion measured in percentages it may set aside a fixed amount, but it does not follow that it can do so in disregard of a sufficient amount reserved to reasonably meet the cost of maintenance and operation. If the legislature had intended that the words “fixed amount” or “greater amount” should have the same meaning as the words “gross revenues” it would have

so declared, and if it had so intended we may assume that it would have left unwritten the greater part of the act wherein it is provided, not once but many times, that the cost of maintenance and operation are a first charge and that they must be paid out of the revenues unless the people by a vote upon that question decide otherwise. But the statute defines the term “amount.” It gives it a certain meaning when it couples the words “amount” and “proportion.” The law says that the council shall not set aside a greater “amount or proportion” of the revenues and proceeds than will be available over the cost of maintenance and operation. The ordinance wilfully disregards this mandate, for there is not warrant either express or implied for the setting aside of any part of the gross revenues for the payment °of the cost exclusive of the cost of maintenance and operation. It is said that the bond buyers will not buy bonds that are not a first charge upon the gross revenues. We are not concerned with the whims of money changers. They should find their remedy at the bar of the legislature and not at the bar of the court. If the argument had any legal merit it might be answered by saying, “Men will not contribute their labor and services to maintain and operate unless they are guaranteed payment out of the gross revenues of the utility.”

The decisions of this court do not sustain the majority opinion. In Griffin v. Tacoma, 49 Wash. 524, 95 Pac. 1107, the ordinance provided that the officers of the city should set aside as a special fund from the gross revenues “at least fifty per cent thereof.” In Scott v. Tacoma, 81 Wash. 178, 142 Pac. 467, the court tolerated what seemed to be to the writer an evasion of the statute holding that the city might

make a loan from one fund to another to he paid ont of the gross revenues of the utility; the particular question of maintenance and operation was not discussed. The court did say, however, that the statute

Schooley v. Chehalis, 84 Wash. 667, 147 Pac. 410, is not in point. The ordinance in that case provided for a fund to be used for the purchase and maintenance of a water system. There was no question of the payment of maintenance and operation out of the general fund, the court assuming that the city council would, in the event that it should be found that the rates then established were insufficient to maintain the plant and pay interest and principal upon the bonds, raise its rates until the revenues would be sufficient to maintain the system and also to take care of the maturing principal and interest of the bonds.

In so far as these cases hold and the court now holds that the creation of a debt for the purchase of a public utility is not a general indebtedness, we can agree, but it is only so where the law is observed and provision is made for the maintenance of the plant out of its own revenues. If it is not so provided the charge is a debt. It is no answer to the plain mandate of the statute to say that, although the gross revenues are “irrevocably” pledged to the payment of the bonds and the interest thereon, the city council has provided that:

City of Seattle ... at the rates of transportation charged and to be charged . . . will be sufficient in the judgment of the council and of the corporate authorities of the city to meet all expenses of operation and maintenance, including operation and maintenance of the proposed additions, betterments and extensions, and to provide all proportions or parts of revenue previously pledged as a fund for the payments of bonds, warrants and other indebtedness, with interest thereon, heretofore made payable out of the revenues of the existing municipal street railway system, and to permit the setting aside in a special fund, out of the gross revenues of the entire system, amounts sufficient to pay the interest on the bonds hereby authorized to be issued, as such interest becomes due and payable, and to pay and redeem all of such bonds at maturity.”

The law requires that the judgment of the council shall be expressed in “amounts” or in “proportions,” and for the city council to so opine and at the same time irrevocably obligate and bind itself to pay into such fund the gross revenues of the municipal street railway system, “even though the balance of such gross receipts thereafter remaining may be insufficient to pay the cost of maintaining and operating said system and said additions and betterments thereto and extensions thereof,” is to deny its faith in its own “judgment.” It is but a subterfuge and a. pretense and should not be sanctioned by the courts.

The legal effect of the majority opinion is that all of the gross revenues are pledged to the payment of the purchase price; that if the one who renders labor or service as a motorman, conductor or about the tracks and barns of the railway system is to be paid he may be paid out of the general revenues; that, instead of taking his pay in a warrant which is a first charge upon the gross revenues as the law contem

plates, he may not, if the gross revenues are insufficient to meet the maturing bonds and interest, have his pay out of the earnings of the utility at all, but must take his chances with a general fund warrant which may be subject to discount and unless sanctioned by subsequent decree of this court will be of doubtful validity.

The ordinances but clumsily conceal the reserved purpose of the council to ‘‘maintain and operate” the street car system at the expense of the general fund, either by a system of loans from the general fund, or by levying a direct tax for that purpose.

It has been said that “the power to govern is the power to tax” and that “the power to tax is the power to destroy”, but our legislative bodies have wisely put limitations upon that power. They should not be lightly disregarded, for as the power of taxation is essential to government its abuse is likewise destructive of government. Tax measures or measures that may result in a general tax if their purpose be accomplished should be expressed in fair and unmistakable terms. That the power to tax should not be abused or exercised through indirect methods, the legislature wisely provided that no plan for the acquisition of a public utility which directly or indirectly made or contemplated, or in its exercise might be a charge to be met by general taxation, should be adopted without an approving vote of those who might be called upon to pay the tax.

If the council did not intend to charge the general fund it might have said so in words. It might have had “due regard for the costs of maintenance and operation” as the statute directs by reserving an “amount or proportion” of the revenues of the utility, or being mindful of a possible charge, it should

have submitted the measure to the people. The net result of the ordinances as construed by the court is that the cost of maintenance and operation has not been provided for. By the employment of an indirect method dressed for the occasion in a cloak of words the law is circumvented, and the people whose right of participation and self determination was so carefully safeguarded, have been denied the sovereign right of the franchise.

It was suggested in consultation that the council could raise the rate charged for fares, and thus meet the cost of maintenance and operation out of the revenues of the street car system. Counsel made no such suggestion, as of course they could not, for with the gross revenues of the system pledged irrevocably to the payment of the purchase price, the seller or the bondholder, as the case may be, can insist that the gross revenues belong to him, whether they are accumulated by a charge of five, seven, ten or fifty cents for a single fare.

Whether it is wise for the city of Seattle to purchase the property of the traction company, is not of our concern. That is a matter for those who live in that city. Thát they may be charged for the upkeep and operation of the street car system is not denied. Our insistence is that before we make it possible—and this is the statute as we read it—they should- be heard either in affirmation or negation of the plan.

To hold that the gross revenues of the system may be irrevocably pledged to the payment of the purchase price as a first charge and then to say that, in the judgment of the council, the gross revenues will pay the cost and the costs of maintenance and operation is to nullify the statute and put a premium on eva

sion, pretext, subterfuge, quibbling and equivocation for the expression of such opinion is not a setting aside or a reservation of an “amount or proportion” to meet these charges. In other words, in case of suit, the- city would be bound by its irrevocable promise and not by its gratuitous opinion.

The law was designed to cover not alone what is, but what may be. The plan, as outlined by the ordinances, is a corruption of the statute providing for the acquisition of public utilities, and a direct assault upon the law which provides in terms that the owner of property shall not be called upon to pay a tax upon his property unless three-fifths, or a majority, of the voters, as the case may be, shall so decree.

Believing that the ordinance was drawn with intent to, or whether with, intent it does, in legal effect, charge the general fund, or leaves the way open to levy a direct tax, thus violating the letter and spirit of the law, we are constrained to dissent.