Title: C.I.V.I.C. Group v. Warren

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as C.I.V.I.C. Group v. Warren, 88 Ohio St.3d 37, 2000-Ohio-265.] 
 
 
 
 
 
C.I.V.I.C. GROUP ET AL., APPELLANTS, v. CITY OF WARREN ET AL., APPELLEES. 
[Cite as C.I.V.I.C. Group v. Warren (2000), 88 Ohio St.3d 37.] 
Municipal corporations — Public debt — Section 13, Article VIII, Ohio 
Constitution — When city contributes to payment for and financing of 
residential subdivision development project, it violates Section 6, Article 
VIII, Ohio Constitution. 
Where a city contributes to the payment for and financing of a residential 
subdivision development project, the city is taking action “to raise money 
for,” and “loan its credit to, or in aid of,” private corporations in violation of 
Section 6, Article VIII of the Ohio Constitution.  The city’s actions do not 
fall within the exception contained in Section 13, Article VIII of the Ohio 
Constitution. 
(No. 98-2521 – Submitted November 2, 1999 – Decided February 16, 2000.) 
APPEAL from the Court of Appeals for Trumbull County, No. 98-T-0001. 
 
Silverlands North, Inc. (“Silverlands”) and Crossbar Realty Company 
(“Crossbar”) own a one-hundred-acre tract of land in Warren, Ohio.  The land is 
being developed as a subdivision of upscale single-family residences.  Warren has 
been economically depressed for some time, and the city government welcomed 
the project. 
 
 
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Silverlands and Crossbar approached Warren city officials.  The developers 
sought the city’s assistance in the construction of a new street, sewers, water lines, 
and other improvements to the property.  In response, the city passed several 
ordinances.  The first ordinance, Ordinance 10937/96, authorized the city to 
advertise for bids and to contract for the construction of the street and other 
improvements.  The ordinance provided that the private developers would be 
responsible for eighty percent of the construction costs.  Another ordinance, 
Ordinance 11035/97, provided for the issuance of certain bonds and promissory 
notes for the purpose of raising $300,000, to be used to pay for the construction.  
Tax revenue was pledged to pay the notes and bonds. 
 
In conjunction with the passage of Ordinance 10937/96, the city entered into 
a reimbursement agreement with Silverlands and Crossbar.  Under the terms of this 
agreement, the city promised to construct a public street off East Market Street in 
order to provide access to the subdivision, to construct sewers, water lines, and 
related improvements to serve the subdivision, and to pay a portion of the 
associated engineering costs.  The developers dedicated the street and 
improvements for public use.  In return, the two companies agreed to reimburse the 
city for eighty percent of the costs, as previously stated in Ordinance 10937/96.  
This reimbursement would not include costs for the preparation and advertisement 
for bids, costs associated with the preparation and awarding of contracts, costs 
 
 
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associated with obtaining the necessary permits, and related legal expenses.  
Additionally, the agreement provided that the two companies were obligated to pay 
a portion of this debt each time one of the single-family residences along the street 
to be built by the city was sold, but the entire debt was due in fifteen years 
regardless of how many residences were sold. 
 
Plaintiffs-appellants are the C.I.V.I.C. Group (“Citizens Involved in the 
Community”), a private association, and its members, over three hundred residents, 
taxpayers, and property owners in the city.  They filed a complaint seeking 
injunctive and declaratory relief, alleging that the ordinances and reimbursement 
agreement were unconstitutional because they constituted a loan and gift of public 
funds to private corporations in violation of Section 6, Article VIII of the Ohio 
Constitution.  Appellants named the city of Warren and several city agencies and 
officials as defendants, collectively referred to as the “city,” defendants-appellees.  
Silverlands and Crossbar became intervening defendants. 
 
After the complaint was filed, the city finalized a contract with J.S. 
Northeast, Inc. for the work at a price of $568,896.58. 
 
The trial court found that the construction at issue constituted an 
improvement of property.  The court then concluded that the improvement of 
property was for commerce and industry, and met the exception of Section 13, 
Article VIII, Ohio Constitution.  The court relied on our decision in State ex rel. 
 
 
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Lake Cty. Bd. of Commrs. v. Zupancic (1991), 62 Ohio St.3d 297, 581 N.E.2d 
1086, to reach this conclusion.  However, the court did find that Ordinance 
11035/97 was unconstitutional to the extent that it pledged tax revenue to pay the 
notes and bonds provided for in the ordinance.1  The trial court believed that if the 
ordinance was made to comply with Sections 6 and 13 of Article VIII, it would be 
constitutional.  The trial court found no other constitutional infirmities. 
 
The court of appeals affirmed.  Finding Zupancic controlling and the 
exception contained in Section 13, Article VIII applicable, the appellate court held 
that a political subdivision can loan public funds to for-profit corporations when 
the funds will be used for the construction of property improvements that will 
benefit the industry and commerce of the state.  The court found that it was the 
activities spawned by the construction that would be beneficial to industry and 
commerce.  The appellate court also found that the twenty-percent project cost 
incurred by the city was not a gift but rather “the purchase price paid by the city for 
the dedicated improvements which it will acquire from the developers.” 
 
This cause is now before the court upon the allowance of a discretionary 
appeal. 
__________________ 
 
Frank R. Bodor, for appellants. 
 
David D. Daugherty, for appellee city of Warren. 
 
 
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Barry M. Byron, Stephen L. Byron and John Gotherman, urging affirmance 
for amicus curiae, the Ohio Municipal League. 
__________________ 
 
FRANCIS E. SWEENEY, SR., J.  In this case, we are asked to construe 
Sections 6 and 13, Article VIII of the Ohio Constitution to determine whether the 
city ordinances and reimbursement agreement are constitutional.  Because we find 
that the ordinances and the reimbursement agreement violate Section 6, Article 
VIII, Ohio Constitution, and do not fit the exception of Section 13, Article VIII, 
Ohio Constitution, we reverse the judgment of the court of appeals. 
 
Section 6, Article VIII of the Ohio Constitution provides: 
 
“No laws shall be passed authorizing any * * * city * * *, by vote of its 
citizens, or otherwise, to become a stockholder in any joint stock company, 
corporation, or association whatever; or to raise money for, or to loan its credit to, 
or in aid of, any such company, corporation, or association * * *.” 
 
The history behind the adoption of this section is relevant to our 
determination today.  In the early days of statehood, Ohio’s fertile soil and 
abundance of water provided many opportunities, yet Ohioans lacked the efficient 
means to get their products to market.  Thus, Ohio’s prosperity depended on the 
construction of a transportation network. David M. Gold, Public Aid to Private 
Enterprise under the Ohio Constitution:  Sections 4, 6, and 13 of Article VIII in 
 
 
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Historical Perspective (1985), 16 U.Tol.L.Rev. 405, 407-408.  As explained in the 
editorial comment to Section 4, Article VIII (the provision prohibiting state 
activities): 
 
“Since the state’s own resources were limited (at least at first), the 
legislature relied heavily on private enterprise to build and operate roads, bridges, 
ferries, canals and railroads.  Most of the canal system was financed directly by the 
state, resulting in debts of $16 million.  In the 1830’s the state and local 
governments shifted to a policy of financing turnpike, canal and railroad 
companies by lending credit or purchasing stock.  Insofar as an effective 
transportation network sprang into being in a remarkably short time, these 
practices had the desired result.  But, they also had undesirable results: they put the 
state’s money and credit at risk in business schemes that often were risky at best, 
and the demonstrated willingness of the legislature and local bodies to use them 
was an open invitation for private interests to dip into the public till.  Many of 
these companies failed, the public debt burgeoned as a consequence, and by 1850 
the burden was more than the taxpayers could tolerate.  This section was adopted 
to put a halt to these practices.”  2 Baldwin’s Ohio Revised Code Annotated (1993) 
202. 
 
The climate of the times was agitation and anger over the imposition of tax 
burdens on the citizens for the benefit of private corporations and for the public 
 
 
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losses incurred when subsidized corporations failed.  Gold, 16 Toledo Law 
Review, at 411.  Although times may have changed, the reason for the existence of 
Section 6, Article VIII is as valid today as it was in 1851.  Its purpose is to prohibit 
private interests from tapping into public funds at the taxpayers’ expense. 
 
Cases construing Section 6 of Article VIII have found that it forbids the 
union of public and private capital or credit in any enterprise whatsoever.  Alter v. 
Cincinnati (1897), 56 Ohio St. 47, 63, 46 N.E. 69, 70; McGuire v. Cincinnati 
(App.1941), 35 Ohio Law Abs. 423, 22 O.O. 334, 40 N.E.2d 435.  It does not 
matter that the public may, directly or indirectly, benefit from the enterprise.  In 
Taylor v. Ross Cty. Commrs. (1872), 23 Ohio St. 22, this court was asked to pass 
judgment on a legislative Act that authorized the building of portions of railroads 
by local governments and the sale or lease of those portions to private railroad 
companies.  In finding the Act unconstitutional, this court stated:  “It may be that, 
without the aid of this law, projects may fail, which could, under it, have been 
prosecuted to successful and useful results.  But this consideration can have no 
influence in a judicial tribunal invested with the high trust of seeing, in the 
administration of justice, that the constitution suffers no detriment, from whatever 
quarter or in whatever shape the threatened invasion comes.”  Id. at 84-85. 
 
The ordinances and agreement in question clearly violate Section 6, Article 
VIII. The usual course of business, when developing a residential subdivision, 
 
 
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requires the private developer to put in the streets and utilities, and recover the cost 
in the price of each lot in the development.  The property owners are in effect 
assessed when the property is sold.  Here, however, there is no assessment, and the 
developers still plan to realize the profits on the lots.  Moreover, the city is paying 
twenty percent of the construction bill and financing the remainder of the private 
developers’ costs.  The city is also paying advertising costs, permit fee costs, and 
legal expenses, as well as a portion of the engineering costs.  These actions by the 
city “raise money for” and “loan its credit to or in aid of” private corporations. 
 
The city, however, does not believe that a violation of Section 6, Article VIII 
occurred.  The city argues that Section 6 is not implicated because the street and 
other improvements have been dedicated for public use and thus are city property.  
Moreover, the city contends that the construction of streets and utilities are 
traditional governmental functions and are valid pursuant to Heffner v. Toledo 
(1907), 75 Ohio St. 413, 80 N.E. 8, and R.C. Title 7. 
 
Although a municipality has the power to construct streets and 
improvements, see R.C. 715.19 and 717.01, R.C. Chapter 727 provides for 
assessing costs to abutting property owners. A special assessment levied pursuant 
to R.C. Chapter 727 is a lien against the land being assessed, which runs with the 
property.  R.C. 727.27.  Thus, when a new property owner purchases the property 
that has benefited from construction financed by a special assessment, the new 
 
 
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owner is responsible for the remaining payments.  This method ensures that in case 
of a nonpayment, the municipality has a method to recover its costs.  R.C. 727.31.  
Here, this procedure was not followed.  The reimbursement agreement and 
enabling ordinances provide that the developers will reimburse eighty percent to 
the city in thirty-two installments, on a per-lot basis, with each installment based 
on the amount of frontage of the lot.  An installment is due upon the sale of each 
lot, with any remainder of the loan due in fifteen years.  No liens will run with the 
land when title transfers from the developers to the purchasers.  If the corporations 
become insolvent, bankrupt, or otherwise unable to repay, the city is left without a 
remedy to collect on the outstanding debt.  This type of repayment scheme is not 
authorized by R.C. Chapter 727 and places taxpayers’ funds at risk.  If the project 
fails, the taxpayers are saddled with the debt.  This is what Section 6, Article VIII 
was intended to prevent. 
 
Although the court of appeals agreed that this was a loan, it found that the 
exception in Section 13, Article VIII applied. However, even the city believes that 
this was a stretch.  In fact, at oral argument, the city’s attorney admitted that the 
courts went too far in finding that Section 13 applied.  We agree. 
 
Section 13, Article VIII of the Ohio Constitution provides:  “To create or 
preserve jobs and employment opportunities [and] to improve the economic 
welfare of the people of the state, * * * it is hereby determined to be in the public 
 
 
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interest and a proper public purpose for the state or its political subdivisions * * * 
to * * * construct * * * [and] improve * * * property, structures, equipment, and 
facilities within the State of Ohio for industry, commerce, distribution, and 
research, to make or guarantee loans and to borrow money and issue bonds or other 
obligations to provide moneys for the * * * construction * * * [and] improvement * 
* * of such property * * *.” 
 
In Zupancic, we found that this exception enabled the construction of for-
profit, multiunit, low- and moderate-income rental housing where a profitable 
exchange of rent money for services takes place.  In finding that rental housing fit 
the definitions of industry and commerce, we focused on the activities that would 
occur once construction was complete rather than those occurring during the 
construction itself.  62 Ohio St.3d at 301, 581 N.E.2d at 1089, fn. 8.  The 
construction of this street containing two cul-de-sacs and related improvements 
does not meet the definitions of industry and commerce.  Once construction is 
complete, no one is benefited except the residential property owners.  We will not 
stretch the narrow exception found in Section 13, Article VIII to justify this private 
enterprise. 
 
Accordingly, we hold that where a city contributes to the payment for and 
financing of a residential subdivision development project, the city is taking action 
“to raise money for” and “loan its credit to, or in aid of” private corporations in 
 
 
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violation of Section 6, Article VIII of the Ohio Constitution.  The city’s actions do 
not fall within the exception contained in Section 13, Article VIII of the Ohio 
Constitution.  Thus, we find that the city’s financing of the construction of the 
street and reimbursement agreement and its enabling ordinances are 
unconstitutional.  We reverse the court of appeals’ judgment. 
Judgment reversed. 
 
MOYER, C.J., DOUGLAS and RESNICK, JJ., concur. 
 
PFEIFER, COOK and LUNDBERG STRATTON, JJ., dissent. 
FOOTNOTE: 
 
1. 
This ruling is not at issue in this appeal. 
__________________ 
 
Cook, J., dissenting.  I respectfully dissent.  I believe that this case is, for 
purposes of constitutional analysis, indistinguishable from State ex rel. Lake Cty. 
Bd. of Commrs. v. Zupancic (1991), 62 Ohio St.3d 297, 581 N.E.2d 1086.  I would 
hold, therefore, that the city may constitutionally enter into the financing plan at 
issue.  The street and other improvements that the city wishes to finance would be 
owned by the city—not by the private developers.  Furthermore, the improvements 
would be beneficial to commerce and industry by facilitating the construction of 
the planned housing development and, ultimately, the sale of residential properties. 
 
 
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First, I am not convinced that the city’s actions even implicate Section 13, 
Article VIII, Ohio Constitution. The court of appeals stated that the city’s 
undertaking to finance the improvements to the development and to assume twenty 
percent of the cost of construction of those improvements is, “[i]n effect, * * * the 
purchase price paid by the city for the dedicated improvements which it will 
acquire from the developers.”  But assuming Section 13, Article VIII is implicated, 
as the court of appeals held, the city’s “loan” of the funds necessary to build a 
street and related improvements comes within the Section 13, Article VIII 
exception for commerce and industry.  This court held, in Zupancic, that 
“commerce” is “ ‘[t]he exchange of goods, productions, or property of any kind’ ” 
and “industry” is “ ‘the commercial production and sale of goods and services.’ ”  
Id. at 301, 581 N.E.2d at 1089, quoting Black’s Law Dictionary (6 Ed.1990) 269 
and American Heritage Dictionary (1981) 672.  I agree with the court of appeals’ 
view that the construction and sale of residences constitutes “commerce” and 
“industry.”  As that court explained: 
 
“Although the streets and appurtenances themselves will not be a source of 
industry and commerce, the residential development and sale of the residential 
homes * * * certainly will.  These sales clearly satisfy the Zupancic definitions of 
industry and commerce.  Thus, Section 13 of Article VIII of the Ohio Constitution 
is consistent with the construction ordinance in the instant case.” 
 
 
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For these reasons, I would affirm the court of appeals. 
 
PFEIFER and LUNDBERG STRATTON, JJ., concur in the foregoing dissenting 
opinion.