Opinion
No. 25890
Decided March 31, 1937.
Taxation — Limitation primarily for protection of property owner — Protection not extended to municipality issuing bonds, when — Enforcement of bond obligation not defeated as exceeding debt and tax limitations, when.
1. Tax limitations are primarily designed for the protection of the property owner, but such protection will not be extended to a municipality, after sale and delivery of bonds to a holder in due course, where the proceeds of the bonds have been duly expended for public improvements and where no action was filed by a taxpayer or other qualified person to enjoin the proceedings for the issuance of such bonds before their delivery.
2. Where a municipality issued bonds on the face of which it was certified "that all acts, conditions and things necessary to be done precedent to and in the issuing of these bonds, in order to make them legal, valid and binding obligations of said village, have been done, happened and performed in regular and due form as required by law; that the faith, credit and revenue of said village are hereby irrevocably pledged for the prompt payment of the principal and interest thereof at maturity; that no limitation of indebtedness or taxation, either statutory or constitutional, has been exceeded in issuing these bonds; and that due provision has been made for levying and collecting annually by taxation an amount sufficient to pay the interest on these bonds as it falls due, and to provide a fund for the redemption of said bonds at maturity," the enforcement of the obligations of such bonds may not be defeated by the municipality by proof that statutory or constitutional debt and tax limitations have been exceeded.
IN MANDAMUS.
Relator, The Alden Corporation, is a holder in due course of a certain special assessment improvement bond issued by the respondent, the village of Solon, a municipal corporation, and files this action on behalf of itself and all other owners of the bonds of the same series.
Relator seeks a writ of mandamus to require the village of Solon to prepare its tax budget to evidence the necessary amount required to pay interest and principal charges on its bonded indebtedness due and unpaid or to become due and unpaid, and to require respondent, the Budget Commission of Cuyahoga county, to take all necessary steps, as provided by law, to revise and readjust the estimate of balances and receipts from all sources for each fund and to make proper certification to the taxing authority of the village of Solon in order that moneys may be available for the payment of interest and principal due on certain special assessment improvement bonds authorized and issued by the village of Solon in August, 1931.
Original and supplemental agreed statements of facts were filed with this court, which disclose the following: On February 4, 1929, the council of the village of Solon adopted resolutions declaring the necessity of improving a number of streets. On March 4, 1929, the council adopted ordinances to proceed with the improvements in conformity with the resolutions of necessity. On April 5, 1929, the council adopted an ordinance to issue notes in the aggregate amount of $427,300, being the estimated cost of the improvements, such notes to mature one year from date of issue. The ordinance pledged the full faith and credit of the village for the payment of the notes and interest thereon. That ordinance was later amended by reducing the amount to $350,000. On July 1, 1929, the council adopted ordinances levying the special assessments for the improvements, payable in ten annual installments. On November 17, 1930, another ordinance was adopted fixing the amount of the notes at $344,530.46. This ordinance also pledged the full faith, credit and general revenue of the village for the payment of the bonds, and interest thereon. In August, 1931, the village of Solon issued and sold bonds of the village in the aggregate amount of $362,025. The bonds were issued in anticipation of collection of special assessments theretofore levied by the village, and were to mature and become payable annually from December 1, 1933, to December 1, 1946, with an average of $26,000 becoming due each year. The faith, credit and revenue of the village were irrevocably pledged for the prompt payment of the principal and interest thereof at maturity. These bonds comprising the series set out in relator's petition are delinquent in payment of interest and principal sums maturing since the latter part of 1933.
The respondent village first filed an answer which alleged that the council of the village, pursuant to the provisions of Section 2293-65 et seq., General Code, had adopted a resolution making provision for refunding the aforesaid bonds then outstanding, and had made application to the Bureau of Supervision and Inspection of Public Offices for approval of the issuance of such refunding bonds. Afterwards an amended answer was filed which omitted the allegations about refunding the bonds.
It is claimed by the respondent village that it was wholly without power and authority to issue the bonds, the last paragraph of its amended answer being as follows: "Further answering, these defendants [respondents] say that said bonds were issued in violation of the provisions of said sections 2 and 11 of Article XII of the Constitution of Ohio, and also in violation of Sections 5625-2, 5625-23, 5625-24, and 7575 of the General Code, as said sections were in effect at the time of the issuance and sale of said bonds, and that by reason thereof, said bonds do not constitute and are not general obligations of the village of Solon."
Replies were filed to the answer and amended answer.
Mr. Fred C. Rector and Mr. R.N. Larrimer, for relator.
Messrs. Locher, Green Woods, Mr. Frank T. Cullitan, prosecuting attorney, Mr. Neil W. McGill and Mr. Ralph W. Edwards, for respondents.
The question for determination in this case is whether the respondent, the village of Solon, may avoid payment of certain special assessment improvement bonds from its general revenue fund on the ground that the village was without power under the Constitution and laws of Ohio to pledge its faith, credit and revenue for the payment thereof. It is asserted that the bonds were issued in violation of the provisions of Sections 2 and 11 of Article XII of the Constitution of Ohio, and also in violation of Sections 5625-2, 5625-23, 5625-24 and 7575, General Code, as such sections were in effect at the time of the issuance and sale of the bonds.
An examination of the pleadings and the agreed statement of facts fails to reveal any serious contention that the village of Solon is in any different financial condition than many other municipalities. It appears that the proceedings had by council and officials of the village were regular in form and followed the provisions of the statute governing same. It is not claimed that the village has made any substantial efforts to provide the funds by appropriate levies for the payment of the interest and principal of the bonds. We, therefore, have a situation where respondent, the village of Solon, admits the passage of ordinances in 1929, 1930 and 1931, first for the issuance of notes, and later for the issuance and sale of bonds, and that the proceeds of the bonds were received and used by the village for improvements as provided for in the ordinances.
The village now claims, however, that by reason of tax limitations then in force its bonds are not general obligation bonds of the village of Solon. We come, therefore, to the claim of the respondent that although council had authority to levy and pledge the special assessments, it did not have authority to pledge the general taxes. In its brief respondent village admits that regardless of the question of legality or illegality of the bonds as general obligations, they undoubtedly constitute effective pledges of the special assessments. Under somewhat similar facts in the case of State, ex rel. Stauss, v. County of Cuyahoga, 130 Ohio St. 64, 196 N.E. 890, this court held that:
"The levy of an annual tax to take care of debt charges is preferred over all other levies, even over a levy for operating expenses, at all times and under all circumstances, except when the state or a subdivision thereof undertakes to refund some part of its bonded indebtedness, in which event no levy need be made to take care of the bonds already matured, or about to mature, that are to be refunded."
The respondent village, having abandoned its former claim that it was refunding the bonds, the decision in the Stauss case, supra, is dispositive of the present case. To the same effect is State, ex rel. Southard, v. City of Van Wert, 126 Ohio St. 78, 84, 184 N.E. 12, in which it was said: "Current expenses must be secondary to levies to meet mandatory requirements, such as discharge of bonded indebtedness."
But counsel for the village here contend that by virtue of statutory and constitutional tax limitations in effect at the time these bonds were issued in August, 1931, the only funds that can be available for interest and retirement purposes must come from the collection of special assessments. That question was decided by this court in the case of State, ex rel. Bruml, v. Village of Brooklyn, 126 Ohio St. 459, 185 N.E. 841. This court there held that:
"Where a municipality has issued bonds in anticipation of special assessments for public improvements, which bonds pledged the faith, credit and revenue of such municipality for the prompt payment of the principal and interest thereof at maturity, and an insufficient amount is available from the collection of the special assessments levied for the purpose of paying at maturity the interest and principal of such bonds, a writ of mandamus will lie upon the petition of a holder in due course of such bonds, to compel the municipal authorities, upon refusal or failure so to do, to take steps, within constitutional and statutory limitations, 'for levying and collecting annually by taxation an amount sufficient to pay the interest on said bonds, and to provide a sinking fund for their final redemption at maturity,' as provided in Section 11 of Article XII of the Constitution of Ohio."
The court, in its opinion at page 463, also said:
"Bonds of political subdivisions of Ohio are general obligations, and under the law funds must be provided by the issuing subdivision for the payment of interest and principal at maturity. Bonds issued in anticipation of the collection of such assessments are not an exception to this rule, although the issuing subdivision may reduce the amount to be levied in any year by the amount available from special assessments, as provided in Section 2293-26, General Code * * *."
In the instant case the village makes the further claim that these bonds should not be regarded as general obligations for the reason that the millage then authorized by law and the Constitution would not, in connection with other bond requirements theretofore obligated, and the 4.85 mills required at the time of issuance of the bonds for educational purposes, leave or provide enough funds to retire interest and principal on the bonds herein involved. It is especially urged that this could not be done for the reason that the pledged requirements would encroach upon the operating revenue of the overlapping subdivisions of the county of Cuyahoga and the Solon Village School District.
Assuming for the purpose of this discussion that a reasonable survey of the tax duplicate, prior outstanding bonded indebtedness, millage requirements for education and other debt charges would have disclosed a rate which would have precluded the issuance of the bonds under tax limitations then in force, is the respondent village in a position to advance those defenses now? Counsel for respondent intimate in their brief that any property owner could have made a successful appeal to the court to enjoin the sale of the bonds, and could have thereby prevented the accrual of the obligation of the tax pledge. Granting that a taxpayer could have enjoined the sale of the bonds at that time, he nevertheless could not do it now for the reason that Section 2293-37, General Code, provides that such bonds "shall be incontestable unless such action or proceeding is begun prior to the delivery of such bonds." If, therefore, such action is closed to the taxpayer after the delivery of the bonds, how much more so is the respondent village precluded from defending on the same grounds after it received the proceeds and used the same for improvements duly authorized by law. If a taxpayer, who has made no certification or guarantee of validity of the bonds, and for whose express benefit tax limitations are enacted, cannot now by legal action enjoin the enforcement of the obligations, how much less can the village, whose duly elected officials executed the bonds which contained the following certification:
"And it is hereby certified and recited, that all acts, conditions and things necessary to be done precedent to and in the issuing of these bonds, in order to make them legal, valid and binding obligations of said village, have been done, happened and performed in regular and due form as required by law; that the faith, credit and revenue of said village are hereby irrevocably pledged for the prompt payment of the principal and interest thereof at maturity; that no limitation of indebtedness or taxation, either statutory or constitutional, has been exceeded in issuing these bonds; and that due provision has been made for levying and collecting annually by taxation an amount sufficient to pay the interest on these bonds as it falls due, and to provide a fund for the redemption of said bonds at maturity."
The general rule in regard to estoppel of a municipal corporation in respect to bonds in the hands of a bona fide holder in due course is well stated in the case of Independent School Dist. of Sioux City, Iowa, v. Rew, 111 F., 1, as follows:
"When a municipal body has lawful authority to issue bonds on the condition that certain facts exist or certain acts have been done, and the law intrusts the power to, and imposes the duty upon, its officers to ascertain, determine, and certify the existence of these facts at the time of issuing the bonds, their certificate will estop the municipality, as against a bona fide holder of the bonds, from proving its falsity to defeat them.
To the same effect is the case of City of Huron v. Second Ward Savings Bank, 86 F., 272, as follows:
"Where an innocent purchaser buys, of others than the municipality or its agents, negotiable bonds which recite that they were issued to fund the debt or obligations of the municipality, the purchaser may rest on the legal presumption that the legal method was adopted that the issue of the bonds did not increase the debt of the municipality, and he is not required to consider or inquire concerning the question of excessive indebtedness."
Also see Wm. N. Coler Co. v. Dwight School Township, 2 N.D. 249, 55 N.W. 587; Town of New Haven v. Weston, 78 Vt. 7, 86 A. 996, 46 L.R.A. (N.S.), 921.
It should be remembered that the indebtedness in the instant case was incurred prior to January 1, 1931, the effective date of the first tax limitation in the Constitution of Ohio. The first ordinances, providing for the original notes, were passed in 1929. The bonds thereafter issued represented the indebtedness of the notes plus unpaid interest. The funding of notes into bonds is not the creation of any new indebtedness but a continuation of the original. Commonwealth, ex rel. Keller, v. Cannon, 308 Pa. 321, 162 A. 277; State, ex rel. Industrial Commission, v. Steel, Mayor, 130 Ohio St. 90, 196 N.E. 782. The adoption of the fifteen-mill tax limitation, and later the ten-mill tax limitation, could in no wise affect the validity of the bonds for the reason that the obligation of an existing contract may not be impaired, even by a constitutional amendment.
While tax limitations are primarily designed for the protection of the taxpayer, the property owner also has an obligation to know what is going on in his municipality. If the village of Solon was in the financial condition set forth by learned counsel in their brief, at the time the bonds were issued, it would seem that a considerable portion of the electorate should have known something about it. That is especially true in this case, where the legislation, in the form of various ordinances for the notes and bonds, covered a period of approximately two years from 1929 to 1931. No one in the village during all of that time, having deemed it advisable to enjoin the proceedings, and the proceeds of the bonds having been expended for public improvements, Section 2293-37, General Code, is applicable and the municipality is not now in a position to say that what it did then was contrary to law. As heretofore held by this court ( State, ex rel. Bruml, v. Village of Brooklyn, supra) the special assessments not being sufficient to pay interest and principal of the bonds at maturity, a writ of mandamus will issue to compel the municipal authorities of the village of Solon to make due provision for levying and collecting annually by taxation an amount sufficient to pay interest and principal on the bonds at maturity.
Writ allowed.
WEYGANDT, C.J., JONES, MATTHIAS, DAY, ZIMMERMAN and WILLIAMS, JJ., concur.