Title: Allardice v. Adams County
Citation: 476 P.2d 982
Docket Number: 24601
State: Colorado
Issuer: Colorado Supreme Court
Date: November 16, 1970

476 P.2d 982 (1970) John F. ALLARDICE, Dr. Dalrie Berg, Lee F. Carlson, Arthur Karas, and Harold W. Peterson, Plaintiffs in Error, v. ADAMS COUNTY, a political subdivision of the State of Colorado, E. G. Waymire, Glen Lancaster, and Jerry Yost, as Commissioners of Adams County, and Ralston Purina Company, a Missouri corporation, Defendants in Error. No. 24601. Supreme Court of Colorado, En Banc. November 16, 1970. *984 Calkins, Kramer, Grimshaw &amp; Harring, Brooke Wunnicke, Denver, for plaintiffs in error. Dawson, Nagel, Sherman &amp; Howard, Thomas B. Faxon, Denver, for Ralston Purina Co. David Berger, Commerce City, for Adams County, E. G. Waymire, Glen Lancaster and Jerry Yost. KELLEY, Justice. Allardice, Berg, Carlson, Karas and Peterson, taxpayers of Adams County, filed this lawsuit against Adams County, its commissioners and Ralston Purina Company, a Missouri corporation, to test the validity of revenue bonds which the county proposes to issue pursuant to the terms of the Colorado Economic Development Revenue Bond Act of 1967, Cum.Supp., 1967, C.R.S.1963, 36-24-1, et seq. It is conceded that the bond proceedings comply in all respects with the provisions of the Act. The questions to be resolved, therefore, relate to the validity of certain provisions of the Act when tested primarily by provisions of the state constitution, and additionally, as to one point, by the Fourteenth Amendment to the Federal Constitution. Adams County, pursuant to the Act, adopted a resolution which authorized and approved: (1) the issuance of bonds in the aggregate principal amount of $2,000,000; (2) use of the bond proceeds to acquire an agricultural feed plant (Ralston Purina Project); (3) the execution of a Lease and Agreement with Ralston Purina Company providing that the lessee pay rent sufficient to pay all bond obligations as they become due, maintenance of and insurance on the project, and an amount in lieu of, but equal to, taxes on the project; and lessee having the option, after the bonds are paid, of buying the project for $1,000; and (4) a mortgage and indenture of trust, naming a private out-of-state trustee, covering all project properties, revenues, and the lease, to be executed by the county as mortgagor to secure payment of the bonds. Further, in conformity with a requirement of the Act, Section 7 of the Resolution states that neither the bonds nor the interest thereon shall impose any pecuniary liability on the county, nor be a charge against its general credit or taxing powers, *985 but shall be payable only out of project revenues. In addition to asking the court to declare the Act and the proceedings invalid, the Taxpayers sought to enjoin the county and its commissioners from issuing the bonds to acquire the project, and to enjoin Ralston Purina Company from executing the documents essential to carry out the proposed financing of the project. The trial court entered its judgment in favor of the county, its commissioners and Ralston Purina Company, holding that the Economic Development Revenue Bond Act is constitutional. We agree with the trial court and therefore affirm. The Act authorizes cities and counties to issue revenue bonds to finance the acquisition of real and personal properties for manufacturing or industrial enterprises; to lease, with option to purchase, such properties to private lessees for operation as projects; and, to secure payment of the revenue bonds by mortgage of the project property and by pledge of project revenues and the lease. The Taxpayers present seven basic questions for our resolution. We will consider them in the order of their significance. This is the initial challenge to reach this court as to the validity of the Economic Development Revenue Bond Act. Similar enactments have been challenged in our sister states. The employment of public revenue bonds to foster the promotion of local industry is not a new concept. See Uhls v. State ex rel. City of Cheyenne, 429 P.2d 74 (Wyo., 1967), for an analysis of cases on the subject. The weight of authority sustains the validity of such laws. DeArmond v. Alaska State Development Corporation, 376 P.2d 717 (Alaska 1962); Wayland v. Snapp, 232 Ark. 57, 334 S.W.2d 633 (1960); Green v. City of Mt. Pleasant, 256 Iowa 1184, 131 N.W.2d 5 (1964); Norvell v. City of Danville, 355 S.W.2d 689 (Ky.1962); City of Frostburg v. Jenkins, 215 Md. 9, 136 A.2d 852 (1957); Opinion of the Justices, 161 Me. 182, 210 A.2d 683, 696 (1965); City of Gaylord v. Beckett, 378 Mich. 273, 144 N.W.2d 460 (1966); Albritton v. City of Winona, 181 Miss. 75, 178 So. 799 (1938); Village of Deming v. Hosdreg Co., 62 N.M. 18, 303 P.2d 920 (1956); Gripentrog v. City of Wahpeton, 126 N.W.2d 230 (N.D.1964); Elliott v. McNair, 250 S.C. 75, 156 S.E.2d 421 (1967); Clem v. City of Yankton, 160 N.W.2d 125 (S.D.1968); Holly v. City of Elizabethton, 193 Tenn. 46, 241 S.W.2d 1001 (1951); Allen v. Tooele County, 21 Utah 2d 383, 445 P.2d 994 (1968); State ex rel. County Court of Marion County v. Demus, 148 W. Va. 398, 135 S.E.2d 352 (1964); Uhls v. State ex rel. City of Cheyenne, supra. The key issue is: Does the Act contravene Article XI, Section 1 of the Colorado constitution ? We hold that it does not. Article XI, Section 1 provides: The argument is that revenue bond financing, as authorized by the Act, constitutes the pledging of credit for a private corporation, and subjects the county to the debt, contract and liability of a private corporation in contravention of Article XI, Section 1. The Taxpayers concede that "under Colorado law, public revenue bonds do not create debt, if there is no pledge of public property. Davis v. Pueblo, 158 Colo. 319, 406 P.2d 671; Ginsberg v. City and County of Denver, 164 Colo. 572, 436 P.2d 685." The "if" is created by certain language in McNichols v. City and County of Denver, 123 Colo. 132, 230 P.2d 591. *986 In Davis v. Pueblo, supra, and in Mc-Nichols, the bond resolutions, both authorized the respective city councils not only to pledge the revenue from the parking facilities which were to be acquired from bond funds, but, also, to pledge the revenue derived from parking meters, which, but for the bond resolution, would go into the general fund of the cities. The court in those cases did not hold that such a pledge contravened the constitutional proscription against the pledging of the city's credit. The use, as part of the security mechanism, of a mortgage of the parking facility to be erected with the bond funds, prompted the court in McNichols to use this language in invalidating the bonds: The italicized portion of the quote, plus additional language which we will subsequently refer to, shows clearly that the McNichols court was not relating the pledge problem to Article XI, Section 1, but to a constitutional provision limiting the amount of municipal indebtedness. Article XI, Section 8. The court made this clear at the beginning of its discussion of the issue when, after conceding that where the bonds are payable from the operating revenues they are valid, it said: Again, to emphasize the point, the court subsequently in its opinion noted: As will appear from a further analysis of the transaction under attack here, no issue exists as to "debt limits." As already noted, the Taxpayers concede that revenue bonds per se do not violate Article XI, Section 1. We have demonstrated that the issue here was not before this court in McNichols. McNichols, therefore, does not stand for the proposition contended for by the Taxpayers. In order to determine whether the county, by the terms of the transaction here, is pledging its credit or becoming responsible for a debt or liability "of any person, company *987 or corporation, public or private," we must scrutinize the whole transaction, including the effect of the mortgage. As previously noted, the history of the bond proceedings shows literal adherence to every requirement of the Act, so that an examination of the statutes is tantamount to an examination of the bond proceedings of the county commissioners and the bonds themselves. The Act, the resolution and the bonds, all state that the bonds issued by the county shall be special, limited obligations; that the principal of and interest on such bonds shall be payable, subject to the mortgage provisions, solely from the rents of the project, 36-24-5(1); that the bonds "shall never constitute the debt or indebtedness of the county * * * within the meaning of any provision or limitation of the state constitution, * * * and shall not constitute nor give rise to a pecuniary liability of the county or municipality or a charge against its general credit or taxing powers." 36-24-5(2). Also, see 36-24-11. The bonds are secured by a pledge of the revenues, a pledge of the lease and a mortgage of the project, 36-24-7; and it is solely to this security which bondholders may look for payment of interest and redemption of their investment. This they know. Hence, they rely on the credit of the lesseeRalston Purinaand not Adams County. Finally, the Act expressly denies right or power to the county to pay out of its general fund or to otherwise contribute any part of the costs of acquiring the project or to use land already owned or in which it has an equity, 36-24-18. It is of significance in connection with consideration of this argument to note that the Act prohibits the county from using its power of eminent domain in acquiring land to be used for the project, 36-24-21. The Act was passed with full knowledge by the general assembly of the decisions of this court approving revenue bond financing, including McNichols v. City and County of Denver, supra. The legislature has left no doubt that the bondholders must look exclusively to the revenues of the project for the payment of principal and interest. The Taxpayers, regardless of the soundness (or unsoundness) and the success (or lack of success) of the project, will not be called upon to pay any part of the bonded indebtedness. The general revenues of the county cannot be used to any extent nor in any manner to pay principal or interest of the bonds. Since the project is wholly and completely financed out of the bond proceeds, the county, in the event of a default and foreclosure of the mortgage, would be in no worse situation after the foreclosure than it was prior to the initiation of the project. In fact, in all probability, it would be better off to the extent of the taxes that the project would thereafter generate. In Uhls v. State ex rel. City of Cheyenne, 429 P.2d 74 (Wyo.1967), the Wyoming Supreme Court, in testing a similar economic development statute by a constitutional provision similar to Article XI, Section 1 of our constitution, concluded that where the legislature has carefully and explicitly restricted the lending of credit, and expressly excluded any general liability on the part of the governmental entity involved, the legislature and bondholders, and not the courts, will be responsible for any untoward results from this type of financing. The court in making this point observed: The most recent expression of this court on this constitutional issue is Ginsberg v. City and County of Denver, 164 Colo. 572, 436 P.2d 685, wherein this court said: The Taxpayers contend that the revenue bond financing authorized by the Act and the resolution unlawfully creates county debt without the required election and for unauthorized purposes in contravention of Article XI, Section 6 of the constitution of Colorado. Taxpayers' position here is closely related to that discussed in Part I above and to a large measure relies upon the ruling in Mc-Nichols v. City and County of Denver, supra. The pertinent portion of Article XI, Section 6 reads: The Taxpayers argue that the "debt" created by the revenue bonds is "unlawful, because a feed manufacturing plant is not one of the designated purposes for which county debt may be incurred, nor was the project financing submitted to the electors of Adams County for their approving vote." The Taxpayers further contend that the instant case falls squarely within the holding of McNichols v. City and County of Denver, supra, and therefore, the proposed county financing cannot be consummated unless the mortgage is eliminated therefrom, or, unless the court expressly overrules the McNichols case. The Taxpayers, in arguing their point under this constitutional provision, as they did under Part I, concede that the application of the "special fund doctrine" would be sufficient to take the county's obligation out from under the proscriptions relating to "debt," were it not for the mortgage on the project property. In their brief the Taxpayers did not include the underscored (italicized) language of the constitutional provision. Without the additional language the true intent of the provision is not apparent. This is a debt limitation and not a debt proscription provision. What we said in Part I in reference to debt is applicable here; i. e., since there is no pledge of the credit of Adams County for the payment of the bonds no "debt" is thereby created. Consequently, the issuance of the bonds has no effect whatsoever on the *989 debt limitations prescribed in Article XI, Section 6. Since it is not a "debt" within the meaning of that term as used in the constitutional provision, the mechanics of securing the obligations of those who advance the funds for the project is constitutionally immaterial. The Taxpayers assert that the revenue bond financing authorized by the Act fails to serve a bona fide public purpose, and thereby deprives Taxpayers of substantive due process of law, in contravention of Article II, Section 25 of the constitution of Colorado and of the Fourteenth Amendment to the United States Constitution. Section 1 of the Fourteenth Amendment provides: The argument under the "due process" clauses of these constitutional provisions is that the proposed financing favors one private enterprise over another engaged, or wishing to engage, in the same business in the same locality. In short, the financing is for the private benefit of Ralston-Purina; there is no assurance a competitor would receive the same consideration; and consequently the project is not for a public purpose. And continuing, the Taxpayers argue that, The legislative purpose is stated in the Act, 36-24-3; it reads: Although the expressed intent of the legislature has no magical quality which validates the invalid, it is entitled to reverent weight in determining whether the Act promotes a public purpose. It has been appropriately said, the inquiry into the validity *990 of an Act of the legislature is an inquiry whether the will of the people as expressed in the law is or is not in conflict with the will of the people, as expressed in the constitution; and unless it be clear that the legislature has transcended its authority, the courts will not interfere. Every presumption in favor of the validity of questioned legislation is indulged in by courts in testing its constitutionality. People ex rel. Rogers v. Letford, 102 Colo. 284, 79 P.2d 274. A recent pronouncement by this court appears in Ginsberg v. City and County of Denver, 164 Colo. 572, 436 P.2d 685. It is of particular interest here because it involved revenue bond financing of a stadium to be leased to a private corporation. In Ginsberg, this court said: The general assembly's desire to afford a vehicle to aid in the relief of extensive unemployment, to maintain a balanced and stable economy and to promote the use of the state's agricultural products represents a valid public purpose. Wayland v. Snapp, 232 Ark. 57, 334 S.W.2d 633. Although Taxpayers rely on the Fourteenth Amendment's "due process" clause to attack the validity of the Act, the only federal authority cited in support of the argument is Loan Association v. Topeka, 87 U.S. (20 Wall.) 655, 22 L. Ed. 455. In Loan Association, the City of Topeka was being sued to recover on overdue interest coupons attached to bonds which the city had issued. The following quotation from that opinion throws further light on the facts and the ruling relied upon by Taxpayers: The italicized portion was cited by Taxpayers in support of their Fourteenth *991 Amendment argument. It has no real application to the facts in the instant case. The holding of the court, almost entirely, rested on the proposition that where "forced contributions," that is, taxes, are taken from all the people, the government cannot donate those revenues to one or a few. Elsewhere in the opinion we find this language which seems to be more appropriate to the facts in the case before us: Also, see Carmichael v. Southern Coal &amp; Coke Co., 301 U.S. 495, 57 S. Ct. 868, 81 L. Ed. 1245. Here, as noted above, the county is not authorized to (and could not under the law) use general county funds, nor is it in any manner responsible for any shortages or deficiencies which may occur as the result of the development or the operation of the project. The county is under no obligation whatsoever which can affect its tax revenues. It is giving up nothing. It is not, therefore, donating anything. Loan Association v. Topeka, supra, was decided in 1875. To the extent that it derogates from our holding, we feel that time has diminished its impact. In 1954, the same court in Williamson v. Lee Optical of Oklahoma, 348 U.S. 483, 75 S. Ct. 461, 99 L. Ed. 563, speaking through Mr. Justice Douglas, observed: We are unable to find a sufficient lack of public benefit to require us to hold that the announced legislative purpose is not a valid "public purpose." We hold that the Act successfully passes the constitutional tests raised by Taxpayers in this division of the opinion. Another argument advanced by the Taxpayers is that, To put the Taxpayers' contention in context it is necessary to have the pertinent portions of the two constitutional provisions before us: The delegations which are proscribed by Article V, Section 35 are only those which can be properly classified as the performance of "any municipal function whatever." From an examination of the Act, the lease and the mortgage we conclude that there has been no delegation of "any municipal function" to the trustee. The fact that the project is for a "public purpose" does not necessarily make its existence or its function municipal in nature. It is the effect of, or the benefits flowing from, the completed project and its operation by private enterprise that fulfills the "public purpose" requirement discussed in Part II above and not, per se, the county's participation therein. The participation as a "lessor" does not constitute a "municipal function." The trustee, under the terms of the financing documents, performs no "municipal functions" and exercises no control over a "municipal improvement" within the usual meaning of those terms. The Act prohibits county (1) operation of the project, 36-24-3 and 36-24-19; and (2) expenditures from the general fund or other contributions by the county to the acquisition of the project, 36-24-18. The Supreme Court of Kentucky, in denying a challenge similar to that of the Taxpayers, in Gregory v. City of Lewisport, 369 S.W.2d 133 (Ky.1963), observed that the provisions relating to the trustee are normal and customary details for borrowing transactions; that the local government does not, by virtue of the transaction, surrender any of its governmental powers. We agree with the Kentucky court. This court, in Fladung v. Boulder, 165 Colo. 244, 438 P.2d 688, laid to rest this phase of Taxpayers' argument, so far as the appointment of a receiver and his collection of the payments in case of default is concerned. Mr. Justice Day, in Fladung, noted: Mr. Justice Day concluded: Also, see Uhls v. State ex rel. City of Cheyenne, supra. Another argument advanced by the Taxpayers is that the proposed bond issue violates Article V, Section 38 of the Colorado constitution because, under the terms of the agreement the county assigns Ralston Purina's rent liability to the trustee, who, in turn, collects the rentals, extinguishing the lessee's liability without payment into the public treasury. *993 What we have said in Part IV, in reference to the delegation of authority, is applicable here. Particularly as to "payment thereof into the proper treasury." In addition, it is the apparent purpose of this constitutional provision to protect obligations and liabilities owned by municipal corporations. Fergus County v. Osweiler, 107 Mont. 466, 86 P.2d 410. The protection is against diminution by the general assembly. The general assembly has provided authority to create the indebtedness which is not proscribed. The Taxpayers challenge the validity of 36-24-15 which authorizes the county to grant the lessee an option to purchase the project at a stipulated price. It also authorizes the county, as lessor, and the lessee to agree that the rentals paid by the lessee prior to and at the time of the exercise of such an option be applied toward the purchase price and that such rentals shall be in full or partial satisfaction thereof. The lease and agreement grants to Ralston Purina the option to purchase the project on certain conditions, including the full payment of all principal and interest on the bonds, plus the payment of $1,000 to Adams County. The Colorado constitutional provisions relied upon by the Taxpayers are Article XI, Section 2 and Article X, Section 14. Article XI, Section 2, in material part, reads: Taxpayers' argument is that the county is paying $2,000,000 for the project and is, in effect, selling it to Ralston Purina for $1,000, thus the county is making a donation of $1,999,000. This kind of arithmetic ignores the true facts of the transaction. By the terms of the lease and agreement Adams County is agreeing at the outset to sell the project to Ralston-Purina for $2,001,000 at some future point in time. In the interim, Ralston-Purina is required to pay all interest, insurance and maintenance charges and an amount equal to and in lieu of taxes. Finally, upon the retirement of the $2,000,000 bond issue and the payment to the county of $1,000, title to the project is transferred to Ralston-Purina. The county had nothing, so far as the project is concerned, when it entered into the lease and agreement; it will not furnish any property or funds for the purchase and development of the project; it will fulfill the "public purpose" and after the "sale" of the property to Ralston-Purina it will have a substantial addition to its tax base. By no stretch of logic can it be said that the county, under these circumstances, has donated anything to Ralston-Purina. Other jurisdictions which have been confronted with a similar problem have held that the option to purchase is an appropriate and integral part of the entire transaction between the county and the lessee. Uhls v. State ex rel. City of Cheyenne, 429 P.2d 74 (Wyo.1967); Elliott v. Mc-Nair, 250 S.C. 75, 156 S.E.2d 421; Green v. City of Mt. Pleasant, 256 Iowa 1184, 131 N.W.2d 5; State ex rel. County Court of Mineral County v. Bane, 148 W.Va. 392, 135 S.E.2d 349; Darnell v. County of Montgomery, 202 Tenn. 560, 308 S.W.2d 373. Article X, Section 14, is not applicable to the factual situation here as will be apparent from a cursory examination of its provisions. It reads: *994 Section 14 is to protect private property from judgment creditors of a city. This court, in People ex rel. Rogers v. Letford, 102 Colo. 284, 79 P.2d 274, speaking in reference to this provision, said: In their final argument the Taxpayers contend that the obligation to make annual payments "in lieu of," but in the same amount as, taxes on the county-owned project violates the following constitutional provisions, which in pertinent part read: The Act was designed to fully comply with the above provisions. Section 36-24-20 of the Act makes this clear. It reads: The defendants in error, in answer to Taxpayers' arguments, suggest that, With this we agree. We also agree that the Act is constitutional when tested by each of the provisions set forth above. In an effort not to unnecessarily prolong an unduly long opinion, a brief statement as to why the Act meets the several challenges in Part VII follows: Article X, Section. 3. If the rentals "in lieu of taxes" can be considered taxes there is no lack of uniformity. Section 36-24-20 authorizes the taxing of all lessees of "projects" on the same basis. The tax on other property and the rents on municipal property for industrial uses operate equally and uniformly on all persons and corporations in like circumstances. Article X, Section 4. The property of the county, by the Act, is specifically exempted from tax. It is only the interest of the lesseethe leasehold, upon which the charge in lieu of taxes is made. See Rummel v. Musgrave, 142 Colo. 249, 350 P.2d 825. Article X, Sections 8, 9 and 10. These provisions proscribe the legislative power to impair the financial base of government operations. Section 36-24-20 imposes an obligation on a lessee (Ralston Purina) to contribute its full proportionate share of state, county, school and other governmental subdivision expenses. This is in compliance with the constitutional mandate of Sections 8, 9 and 10. The Economic Development Revenue Bond Act having successfully withstood the seven challenges of the Taxpayers, the judgment of the trial court is affirmed.