Court Opinion

ID: 9749113
Source: CourtListenerOpinion
Date Created: 2023-08-27 16:24:22.913946+00
Date Added: 2024-06-11T07:25:44.092173
License: Public Domain

Smith, J.,

dissenting:

I dissent. With apologies to Gertrude Stein, a debt is a debt is a debt is a debt.1 The attached diagram may make what is proposed here a bit more plain.
*116"Economy in government is at all times a commendable virtue; at the present it rises to a point of importance never before felt by our people. It is an essential necessity to save us from pecuniary suffering, if not from hopeless bankruptcy. But in the midst of this startling condition of things, the sad experience comes home to us that economy in the use of public money, is a virtue seldom cultivated, and still more rarely practiced.
"The hands of those controlling city affairs, judging from past records, know no restraint, and seem lost to the virtue of economy. Where the public treasury is open to the cupidity of the unscrupulous, and not guarded by moral integrity there is little hope for the tax payer.”
"The effect of public debt upon communities, is the same as debt upon individuals. It shuts the door of hope — dispirits and paralyzes their energies. A public debt is a public calamity that curses the living, and wastes the estate of the dead. Its enormity at this time in the several departments of our government, is a source of serious alarm to the prudent and thoughtful. So great is the debt of the Federal and State Governments, that when added to those of a local and municipal character, an army of agents and tax-gatherers, at great expense to the people, have to be maintained to gather from them the means to pay the interest, much less the principal. Every branch of industry feels the burthen; every transaction, great or small, has some burthen upon it; property is burthened; the earnings of toil, whether of body or mind, is visited; the home that shelters is taxed; the garments we wear are taxed; the bread that satisfies our hunger is taxed; everything is taxed. No man is so much dreaded and shunned as the tax-gatherer. The rich hide themselves to escape his inquisitorial visits. The poor meet him with sad and angry countenance. His *117presence is everywhere and among all men, like the blight that kills and the pestilence that desolates, and leaves little else than grief and suffering.”
The above is not the cry of outrage as to the high cost of government by a present day group of citizens. It is a part of the report of the Committee upon Public Works and Corporations appointed by the Constitutional Convention of 1867. See Proceedings of the State Convention of Maryland to Frame a New Constitution 546, 547-48 (1867). Thus, it represents the background for the adoption of the constitutional provision we now have before us. The committee was "instructed to investigate such of the proceedings of the Mayor and City Council of Baltimore as m[ight] be deemed necessary by said Committee, and particularly relative to the endorsement by the city of Baltimore of the Union Railroad Company’s bonds, and to the building of a new City Hall ....” Although the near bankruptcy of the State prompted limitations in the Constitution of 1851 on the State’s use of credit, no restriction as to Baltimore City such as that now before us was found in any Constitution prior to that of 1867. With that background, it is no wonder that in Baltimore v. Gill, 31 Md. 375 (1869), arising but a very short time after the adoption of the constitutional provision now before the Court, Chief Judge Bartol said for the Court:
"The Constitution is not to have a narrow or technical construction; but must be understood and enforced, according to the plain and common sense meaning of its terms.
"The plain intent of this section is to restrain the municipal government of Baltimore from borrowing money, except for the purposes and in the manner prescribed, either upon the general credit of the city, or by a pledge of its revenues or assets; thereby creating a debt, and imposing additional burdens upon the citizens, which may directly or indirectly involve increased taxation.” Id. at 390.
*118Nobody has suggested that Chief Judge Bartol’s admonition is not good law today. In Hall v. City of Baltimore, 252 Md. 416, 250 A.2d 233 (1969), Chief Judge Hammond said for the Court, "The precise holding of Gill was that a pledge or mortgage of existing municipal assets creates or constitutes a debt...Id. at 425.
I cast no aspersions upon the good intentions of those in authority in Baltimore City who have recommended this financing. Likewise, I have no reason to doubt that those responsible for what was before the Court in Gill acted in accordance with their conception of what was in the best interest of the Baltimore populace. The fact remains, however, that this Court said they went beyond permissible limits. Also, I have no reason to cast doubt upon the motivations of those legislators of the first half of the 19th century who voted all kinds of aid for railroads, canals, and the like, bringing the State to the very brink of bankruptcy. See the extensive discussion by Judge Boyd for the Court in Bonsai v. Yellott, 100 Md. 481, 498-99, 60 A. 593 (1905), concerning the restriction on loans and extension of credit as to the State contained in Maryland Constitution Article III, § 34. The constitutional provision is there, however, and we must deal with it. It is not concerned with good faith.
In a generation before the abolition of dower the Court looked at an entire transaction to determine whether or not dower attached. Thus, where property was conveyed to a husband who immediately executed a mortgage for a part of the purchase price the husband was regarded as a mere conduit and the transaction an instantaneous one to which dower did not attach, whether the mortgage was made to the vendor or to a third person furnishing the money.2 See Glenn v. Clark, 53 Md. 580, 604 (1880); Price v. Hobbs, 47 Md. 359, 382 (1877); and Rawlings v. Lowndes, 34 Md. 639, 644 (1871). Similarly, we must examine the transaction here as a whole, not its individual parts.
*119As I see it what we have here is a high-class deal which seeks to camouflage the true intent. The City owns land with a building erected upon it. It proposes to make a thirty-five year lease of the land to Culinary Associates. It also proposes to sell that corporation the building and then to lease back for a thirty year period the land and building. Through its alter ego it will loan the purchasers the money with which to buy the building. It is to be specifically noted that under the terms of the lease of the building to the City what the City pays by way of rent must at all times be an amount necessary to meet the debt service on the bonds. The new owners are a mere conduit. Moreover, if one were to examine tables for the amortization of loans such as those published by Financial Publishing Company of Boston, and regularly used by financial institutions, one would find a striking similarity between the rent payments the City is to make here to Culinary Associates for the building and such amortization tables based upon the probable interest rate involved. The ground rent proposition is a delusion. The sum due the City on the ground it has leased to Culinary Associates is $6,000 per year, the precise sum which the City is to pay Culinary Associates for its lease of the land to the City, thus making the ground rent a washout.
At oral argument I suggested from the bench that stripped of all that has been put around it this transaction was no different from that where one goes to a bank and borrows, giving a note to be amortized over a thirty year period together with such collateral, mortgage or otherwise, which the lender might require. To this counsel for the City retorted that I failed to take into consideration the five year interim between the expiration of the lease of the building by Culinary Associates to the City and the expiration of the ground lease from the City to Culinary Associates, stating that in that period the Associates could tear down the building. This impresses me not one bit. The day has long since gone when one can induce a person to tear down even a small building for the material in it. Demolition costs money. The building will not be torn down in that interim. It will revert to the City. It is perfectly true that the building may be rented *120to someone other than the City during that five year period, but the economic facts of life are that such rental probably would be on a somewhat reduced basis because of the knowledge that the entire building would revert to the City. The location would not have the same allure for a prospective tenant who knows that it is uncertain as to whether he may remain at that location at the expiration of the ground lease from the City to Culinary Associates.
I fail to see how Hall has any bearing on this case. The successful bidder there was to erect a building on City property which the City was then to lease for a specified number of years. The City had an option to buy, but there was no requirement or compulsion that it buy. The price, if it did buy, was to be determined by an appraisal of fair value at the time the option was exercised. The transaction there was not one where the rentals paid were to be applied or credited on the amount of the purchase price. We very carefully pointed out there:
"The rentals are fair and reasonable compensation for the occupancy and use of the warehouse, no part of the rent is to be applied to or credited on the purchase price (compare Beckwith Machinery Co. v. Matthews, 190 Md. 182, [57 A.2d 796 (1948),] holding a purported lease to be a sale because the option price was the same as the aggregate rental payments for which the purported lessee was given credit), the option is completely and truly non-compulsóry, and the purchase price is to be determined by appraisal of real value at the time of the exercise of the option.” Id. 252 Md. at 427.
The decision in Hall is in line with the comment by Bowers, Limitations on Municipal Indebtedness, 5 Vand. L. Rev. 37 (1951):
"The courts have insisted that such leases be true rental arrangements, not disguised purchases. Thus, if it is really a contract for an improvement, with only payment being postponed, it is invalid. *121Too, if the lease calls for conveyance of the property to the city upon termination of the lease, with little or no additional payment, it is generally considered a purchase and not merely a lease, so that a debt for the whole sum arises. A mere option to purchase does not create a debt, however.” Id. at 51-52.
The scholars have not looked with favor upon transactions such as that in the case at bar. For instance, Magnusson, Lease-Financing by Municipal Corporations as a Way Around Debt Limitations, 25 Geo. Wash. L. Rev. 377 (1957), cited by the majority opinion, states on the very first page, "Lease-financing is not really renting, but is borrowing.” The author goes on to comment in language strikingly applicable to this transaction:
"It seems apparent that lease-financing is actually borrowing by another name. To contend that the method of payment alters the fact of payment strains ratiocination. Unlike ordinary leases, these leases are in practice non-terminable, nor do the parties ever intend to terminate them. The amounts paid as 'rent’ are not the use value of the property, as true rent would be, but equal debt amortization charges on the full cost of the facility financed. Moreover, securities analysts would probably treat these charges not as current expenses, which rent would be, but as repayment of a long term debt. Nor are these 'leases’ aimed at temporary use, as is the ordinary lease, but at acquisition of title. The only variation between these 'rents’ and debt service is in the legal web woven around the transaction.” Id. at 390.
"The duty to pay future rent in a long term lease is just as 'present’ as the duty to pay each installment of debt service on the bonds back of the rent. The leases could not be terminated without the payment of damages or without being subject to injunction or mandamus to keep on paying. *122Breaches of agreements or failure to perform would be subject to having a trustee take possession and carry out the required performance.” Id. at 391.
At oral argument counsel for the City said he felt "comfortable” in issuing an opinion to the effect that the City’s obligation to pay rent here is a legally enforcible full faith and credit one. Eberhart claims, with justification I believe, that the transaction would not be economically viable were it not for the City’s legally enforcible obligation to pay rent. See also Nichols, Debt Limitations and the Bona Fide Long-term Lease With an Option to Purchase: Another Look at Lord Coke, 9 The Urb. Law. 403, 417-18, 420 (1977). Rogers, Municipal Debt Restrictions and Lease-Purchase Financing, 49 A.B.A.J. 49 (1963), comments:
"So long as debt limitation provisions are a part of the constitutions and statutory law of the various states, it would seem that lease-purchase financing will remain as an instrument of circumvention. The most logical and forthright remedy perhaps is an overhaul of municipal debt restrictions. Taxpayers frequently have shown a dismaying reluctance to approve indebtedness for desperately needed municipal facilities. Perhaps the reason that no frontal attack on overly restrictive constitutional provisions is made is a fear that voters would refuse to modify such provisions adequately to meet the need. It is submitted, however, that if overhaul is truly needed in these times of great need on the part of states, counties and cities, the most effective manner of bringing about this change is for courts to construe strictly and enforce vigorously the existing debt limitation provisions. After all, courts were constituted not to repeal provisions of the Constitution, but to construe them.” Id. at 53.
Bowers, op. cit., concludes his article by stating:
"Whatever conclusion one reaches as to the form the limitations of the future should take, there is *123little dissent from the proposition that the success or failure of a particular financing plan should not be made dependent upon how well local ingenuity succeeds in fitting it into the framework of established evasions. Indeed, one is shocked to find that the courts have been so ready to look merely to the form of the proposed plan, leaving its substance and effect to evade the debt restriction. The judicial process is not often seen in so complacent a position in other fields, even where the reasons for liberality are more impressive.” Id. 5 Vand. L. Rev. at 53-54.
In Johns Hopkins Univ. v. Williams, 199 Md. 382, 396, 86 A.2d 892 (1952), Chief Judge Marbury quoted for the Court from Jarrolt v. Moberly, 103 U.S. 580, 26 L.Ed. 492 (1880), where Justice Field said for the Supreme Court, "It would be a narrow and strict construction of the constitutional provision to hold that it prohibited the creation of indebtedness by a municipality by a direct use of its credit for the railway company, and yet permitted such creation by the indirect use of it for the same purpose.” Id. at 585-86. I would add the next sentence, "A constitutional provision should not be construed so as to defeat its evident purpose, but rather so as to give it effective operation and suppress the mischief at which it was aimed.” Id. 103 U.S. at 586.
The mischief at which this constitutional provision was aimed was the uncontrolled creation of debt by the City. The imposed restriction was to require debt to be subject to the approval of the voters of the City. Stripped of all dross, trappings and camouflage, what we have here is a municipal asset which the City is to pledge as security for money advanced to it which it is to pay back over a thirty year period. That is a debt. At oral argument the City argued, "The only thing the City has signed or executed that is an obligation is the lease itself. There are two layers of non-recourse notes, but in terms of what the City has done it has only signed the lease.... We and the City Solicitor are of the view that the thirty year lease is a full faith and binding obligation for that thirty year period ....” It is to be *124noted specifically, however, that the City’s obligation to pay is not based upon the economic worth of the building, but is to pay not less than the sum necessary to cover the debt obligation. In other words, the City’s taxpayers in the opinion of the City Solicitor are bound to pay over a thirty year period an amount not less than that required to amortize the debt. In my book a debt has been created.
We are derelict in our duty to the people of the City if we do not hold that under the constitutional provision this transaction must be submitted to the City’s voters for their approval.
Judge Digges authorizes me to say that he concurs in the views herein expressed.

. Gertrude Stein, Sacred Emily, "A rose is a rose is a rose is a rose.’

. Nevertheless, until dower and curtesy were abolished by Chapter 3 of the Acts of 1969, most careful scriveners had wives or husbands, as the case might be, join in purchase money mortgages for the purpose of releasing claims.