Court Opinion

ID: 9885247
Source: CourtListenerOpinion
Date Created: 2023-10-06 04:02:40.040336+00
Date Added: 2024-06-11T07:39:50.610857
License: Public Domain

Jim Johnson, Associate Justice, dissenting. It is regrettable when one member of the Court is unable to concur with the majority upon such an important and far reaching question as is here involved. My love for Arkansas and for future financial stability will not allow me to do otherwise. I am convinced that the majority opinion will open wider the flood gates for the enactment of future legislation based upon the Court’s stamp of approval given Act 567 of 1957, this Act being the result of the stamp of approval given a similar act which was 401 of 1955, the same being sanctioned by this Court on June 25, 1956, in the case of Halbert v. Helena-West Helena Industrial Development Corporation, 226 Ark. 620, 291 S. W. 2d 802. Unless every possible precaution is taken to resist the temptation of further expansion of the trend to deplete the State Treasury, set by the approval of these two Acts, there can be but one of two alternatives — higher taxes or bankruptcy of the State, neither of which will be attractive to new industry. Such an eventuality, of course, would defeat the original laudable intent of these very acts which was to attract industry to Arkansas in the first place. To verify the fact that states can find themselves in such a predicament, one needs only to look to the States of Michigan, Massachusetts, Minnesota, and Ohio, to name a few who are, even in these times of abundance, faced with such a catastrophe. In fact, there are still a number of people on the State payrolls who recall the earily thirties here in Arkansas when it was necessary for them to discount their meager checks or warrants in order to feed their families. Most of us are aware of the crying necessity of attracting industry to Arkansas. The fact that we are blessed with an abundant water supply, an abundant electrical and fuel supply at reasonable rates, the best climate in the country, and an abundant supply of the most competent and willing laborers in America should be enough, with the dedicated efforts of the Chambers of Commerce and other similar organizations, to attract industry. This combination standing alone is responsible for the location of the vast majority of the financially stable industries in Arkansas today. As a general rule, industry that requires subsidizing is not the most desirable citizen to be found. The Act here under consideration and its predecessor were, no doubt, a result of the legislature’s desire to speed up the industrialization process, but even the legislature must have recognized the shaky constitutional grounds these acts were on when in the same session Act 567 was passed, the 1957 General Assembly by House Joint Resolution No. 23 submitted to the people for their consideration a proposed constitutional amendment, the first section of which reads as follows: “Any city of the first or second class, any incorporated town, and any county, may issue, by and with the consent of the majority of the qualified electors of said municipality or county voting on the question at an election held for the purpose, bonds in sums approved by such majority at such election for the purpose of securing and developing industry within or near the said municipality holding the election, or within the county holding the election. ’ ’ The people, recognizing that this Amendment would give them a voice in obtaining the industry they desired to finance and place the financing of the same on a solid foundation without possible impairment to the financial stability of the State, adopted Amendment No. 49 by a substantial majority, the vote being 166,303 for and 87,793 against. There can be little argument but that this amendment more than adequately meets the need for this type of legislation in Arkansas, and completely removes the validity of any contention that Act 404 of 1955 and Act 567 of 1957 were of such a public purpose that they would justify repealing by court decision the constitutional prohibition against lending the State’s credit for any purpose. Reviewing the record and briefs in this case, I believe that even the majority will agree with me when I say that this has been, to say the least, a friendly lawsuit. The appellees wanted to win and the appellant apparently didn’t mind losing. As a result of this friendly situation the Court requested submission of Amicus Curiae briefs. We received only two responses to this request and as fate would have it both of these responses were in favor of appellee. Consequently the views expressed here are substantially my own and not particularly those of appellant. The majority opinion says that “The finance corporations are non-profit corporations, but their actions do not make liable the State or any of its subdivisions for the obligations of such corporations.” Section 24 (1) of the Act is as follows: “A development finance corporation organized under the provisions of this Act shall not lend money when credit is readily available elsewhere. Before granting a loan, the directors of the corporation shall endeavor so far as is reasonably possible to ascertain that the first opportunity to grant the loan has been given to the banks, the insurance companies, and to the other lending institutions of the State.” This section clearly provides that loans will be made only to those persons, firms or corporations who cannot obtain financing elsewhere. After they are found unworthy by established lending institutions they then become prime prospects to receive State money through these corporations which were created for the sole purpose of lending the State’s credit. If established institutions won’t lend these prospects money, how can we be assured that they will repay the money they receive from the taxpayers of Arkansas through these corporations. Therefore, the question ceases to be whether or not the State will be liable for tbe obligations of the corporations but instead becomes a question of whether or not we can get our money back. The majority answers these questions as follows: “The fact, that public spirited citizens of Arkansas have placed one million dollars of their personal funds into this Finance Corporation, certainly provides tangible evidence that this Finance Corporation is not a ‘ fly-by-night ’ concern. It has a financial base which makes its notes and bonds supported by something ‘tangible’.” Now let’s examine the Act and see just how “tangible” the million dollar financial base really is — $100,000 of this million was put up by the purchase of capital stock; $900,000 of this money was put up by the purchase of preferred stock. Section 15 of the Act is as follows: “The outstanding preferred stock of a corporation authorized and issued as provided in this Act shall be retired from time to time from the proceeds received by the corporation from the issuance and disposal of its debentures, as provided in this Act, and until all of the issued and outstanding preferred stock of the corporation shall have been retired, all proceeds of the corporation received from the issuance and disposal of its debentures must be used for the retirement of the outstanding preferred stock of the corporation. Such preferred stock shall be retired by lot, and the procedure for determining the preferred stock so to be retired and for its retirement may be provided in the by-laws of the corporation. Preferred stock of the corporation retired as herein provided shall be cancelled and shall not be re-issued.” This section of the Act provides that the preferred stockholders shall receive their $900,000 back first. When this has been accomplished, the only base left will be tbe money from tbe sale of capital stock wbicb is far from a million dollars. The gravamen of this lawsuit is whether or not Act 567 and particularly Section 19 thereof violates the provisions of Article 16, Section 1, and Amendment 13 of the Arkansas Constitution. The constitutional provision in question provides: “Neither the state nor any city, county, town or other municipality in this state shall ever lend its credit for any purpose whatever.” (This section of the Constitution was amended by Amendment No. 49 removing cities, counties, towns and municipalities from the prohibition contained therein thereby leaving it applicable only to the state.) Section 19 of Act 567 is as follows: “In addition to the securities of the character which it is now authorized to purchase and hold in the Securities Account, the State Board of Finance may, in its discretion, purchase, at a price not to exceed par and accrued interest, bonds of any development finance corporation organized under the provisions of this Act to the extent of Five Million Dollars ($5,000,000); provided, however, that after any development finance corporation organized under the provisions of this Act has issued and has outstanding its bonds in the principal amount of Five Million Dollars ($5,000,000), including any bonds purchased by the State Board of Finance as herein authorized, the State Board of Finance may, in its discretion, purchase, at a price not to exceed par and accrued interest, additional bonds of such development finance corporation issued in excess of the first Five Million Dollars ($5,000,000) of such bonds, but not to exceed fifty per cent (50%) of the principal amount of any such additional bonds issued by the development finance corporation within its limitations, as authorized in this Act. In its purchase of bonds in excess of Five Million Dollars ($5,000,000), if it shall elect to purchase any of the bonds of a development finance corporation, the State Board of Finance shall make such additional purchases only concurrently with other purchasers and only to the extent of their purchases. The State Board of Fi-. nance may not purchase any bonds of a development finance corporation in the secondary market. “Interest received on all such bonds purchased by the State Board of Finance and held in the Securities Account shall be special revenues and shall be credited to the Securities Reserve Fund. Proceeds of the sale of any such bonds by the State Board of Finance shall be available for re-investment in additional bonds of the character herein authorized. «< prior t0 the purchase of any bonds of a development finance corporation organized under the provisions of this Act, there shall be furnished to the State Board of Finance, without cost to it, the opinion of legal counsel acceptable to the Board, approving the validity of the issue and reciting that in the opinion of counsel the bonds to be purchased by the State Board of Finance are the direct general obligations of the corporation, secured by a first and valid lien on the entire assets of the corporation. ’ ’ The majority opinion places great weight on the fact that the Act provides that the State Board of Finance may, in its discretion, spend seven and one-half million dollars of the State’s money and in the same breath, in effect, concedes that if the Act had required the investment of money from the State’s Security Account in these bonds, then the conclusion would be inescapable that the Act was a lending of the State’s credit. As hard as I may try I am unable to see the logic of this reasoning. Whatever discretion the State Board of Finance has was delegated from the Legislature. The question therefore is, does the Legislature have the power to lend the State’s credit? If not, how could they delegate that power they do not possess? Does the difference in the words require and may cause the act of purchasing at all any less a lending of the State’s credit? The act of lending is the test, whether it be mandatory or permissive. Would the majority say that there is a difference in lending one dollar of the State’s money as opposed to lending seven and one-half million dollars, I am convinced that the majority would concede without hesitation that the State Board of Finance could not lend money from the State Treasury directly to Scott County Milling Company, a private corporation, yet they are saying in the majority opinion that it is alright to lend them the same money if it passes through the hands of two straw corporations before it gets to them. Certainly I say that the result of such logic, whether the words may or require are considered, permits the State to do by indirection the very thing it could not directly do, a theory which has been consistently condemned by this Court. In contending that the purchase of bonds of the First Arkansas Development Finance Corporation by the State Board of Finance, as authorized by Section 19 of Act 567 of 1957, amounts to a lending of the State’s credit and is prohibited by Art. 16, Sec. 1 of the Constitution of Arkansas, I attempt to give consideration to every aspect of the case. A “Bond”, as applied to finances and the sense in which here employed, is defined by Webster’s Dictionary (2 Ed.) as “A bond made by a government or corporation as an evidence of debt, usually for the purpose of borrowing money; also, any one of a series of instruments evidencing an integral part of such a debt, as a $1,000 Liberty bond . . .” Since a bond is nothing more than a loan of money upon a promise to pay, the question may be asked; “Is not every purchase of a bond by a state a loan of the state’s credit?” The answer is no, so long as the underlying and activating purpose of the transaction and the financial obligation incurred are for the state’s benefit. In Almond v. Day, 197 Va. 782, 91 S. E. 2d 660, where a lending of credit was under consideration it was said: “Use of the State’s funds for purchase of securities for the State’s benefit is not an extension of ‘credit’ which poses any threat to the financial security or welfare of the State. Extending its credit to aid and promote private enterprise was the evil from which the State had suffered financially. The potential danger incurred in lending credit to foster and promote the interests of those who had no rightful claim, in justice or in morals, to the State’s help or relief was the evil to be arrested. When the underlying and activating purpose of the transaction and the financial obligation incurred are for the State’s benefit, there is no lending of its credit though it may have expended its funds or incurred an obligation that benefits another. Merely because the State incurs an indebtedness or expends its funds for its benefit and others may incidentally profit thereby does not bring the transaction within the letter or the spirit of the ‘credit clause’ prohibition.” What then is the purpose for the purchase of the bonds in question? Section 13 of the Act (567 of 1957) provides: ‘ ‘ The purposes of each development finance corporation organized under the provisions of this Act shall be to promote, stimulate, develop and advance the business prosperity and economic welfare of the State of Arkansas and its citizens; to encourage and assist through loans, investments, or other business transactions, in the location of new business and industry in this State, and to rehabilitate and assist existing business and industry . . . and to provide financing for the promotion, development and conduct of all kinds of business activity in this State . . . ” In Section 29, the emergency clause, it is said: “It has been found and it is hereby declared by the General Assembly of the State of Arkansas that the State of Arkansas has had heretofore an inadequate program for financing the agricultural, industrial and economic development of the State and of its several sections, that on account of such inadequate program, the State of Arkansas has been unable to provide for its inhabitants sufficient opportunities in agriculture and industry, that on account thereof the State of Arkansas is threatened with a decreasing standard of living for its inhabitants,, that unless an adequate program for financing the-agricultural, industrial and economic development of the State be immediately undertaken, the State of Arkansas will suffer immediate and irreparable loss in population and the opportunity for agricultural and industrial expansion . . .” In determining whether the purpose of the purchase-of the bonds in question — i.e. “to provide financing for the promotion, development and conduct of all kinds of business activity in this State” — contravenes the prohibition against the lending of the State’s credit, I look to the reasons for the placing of such a constitutional limitation. In Cobb v. Parnell, 183 Ark. 429, 36 S. W. 2d 388, this Court in pointing out the evils to be avoided by the restriction said: “The State had just been liberated from the domination of alien adventurers who, under the guise of fostering the industries of the State by lending to them credit, had looted the treasury. A notable example of unwarranted and improvident loans of the State’s credit was the aid given to the building-railroads. That it was only to prevent a recurrence of this that Sec. 1, Article 16, was adopted was apparent from the fact that at the first session of the Legislature after the adoption of the Constitution of which Article 16 is a part, the Legislature passed an act providing for the issuance of bonds . . .” In Almond v. Day, supra, the Supreme Court of Virginia in pointing out the evils which brought about a similar restriction said: “Prior to adoption of Sections 12, 14 and 15 in the Constitution of 1869, the State of Virginia had freely extended its credit and aid to corporations engaged in works of internal improvement. In 1816, the General Assembly created ‘ The fund for Internal Improvement,’ and incorporated a ‘Board of Public Works’ to administer the fund. Acts 1816, ch. 17, p. 35. Subsequent acts of the General Assembly show that through this Board large sums of money were loaned or advanced by Virginia to various corporations engaged in developing and operating privately owned works of internal improvements, such as canal, turnpike and railroad companies, that held promise of public benefit. Financial obligations in vast sums were incurred by the State, and its credit was freely but often unwisely extended to foster these enterprises by purchase of their bonds and stock, or through guarantee of their obligations and indebtedness. This was done with the hope and expectation that the enterprises would thrive and bring to the areas served business prosperity and to the State at large public benefit. “The magnitude of the obligations incurred by the State, and the amount of money lost by .lending its credit and financial aid to such enterprises may be ascertained from an historic report of J. D. Imboden, entitled ‘Early History of Transportation in Virginia’ in Vol. 17, page 5. House Executive Documents, 2nd Session 49th Congress, 1886-87. At page 75 of this report it is stated that the State’s railroad losses, which included its losses incident to the James Diver and Kanawha Canal, amounted to over $26,-000,000. See also Pearson: The Deadjuster Movement in Virginia, Chapter I; McDaniel: The Virginia Constitutional Convention of 1901-1902, at page 59; and Virginia Magazine of History and Biography, Vol. 59 (1951), page 423, et seq. “This condition was not peculiar to Virginia. Decisions from other states, construing similar restrictive provisions in their constitutions, show that those states had extended aid to enterprises of like nature and that financial obligations and losses thus incurred to foster and promote works of internal improvement brought about the adoption of their restrictive constitutional provisions. Descriptive of the practices engaged in by the states and informative of the unfortunate results experienced by many is the following statement in 152 A.L.R. p. 495: “ ‘Early in the nineteenth century it seems to have been the general practice of states to encourage the building of railroads by permitting the state or a subdivision thereof to purchase stock in railroad corporations, to issue bonds or lend credit in aid of railroads, or to make outright donations to them. However, due to the large number of insolvencies of railroads, caused by frauds or economic conditions, states and subdivisions thereof found themselves largely indebted, and were themselves occasionally insolvent because of large investments in such enterprises. Therefore a reversal of policy set in. As early as 1851 Ohio adopted a constitution containing a provision prohibiting stock subscriptions or other forms of aid to corporations. In the ensuing twenty-five years most of the other states adopted similar provisions, either prohibiting aid altogether or requiring a vote of the people before a subscription to stock or other sort of aid could be made or extended. At present, at least thirty-eight states have such constitutional provisions, and several have a statutory provision on the subject.’ ” In Cobb v. Parnell, supra, this Court had before it Act No. 10 of 1931 as amended by Act No. 34 of 1931. By this legislation a board was created consisting of the Governor, the Auditor of State, the Chairman of the Highway Commission, and seven others, designated as the State Agricultural Credit Board. These acts empowered said board to issue bonds in the sum of $1,500,000, for which the full faith and credit of the State was-pledged, for the purpose of financing farmers and stock raisers for agricultural purposes. The loans were to be made by finance corporations, already organized and to be created under the supervision of the State Agricultural Credit Board according to rules prescribing the conditions under which the loans were to be made to the-farmers and the manner of repayment. A general annual tax of one-half mill was levied to pay for the bonds. After reviewing the authorities and setting out the-guiding principles as I have attempted to do herein, this question was asked? “Is the purpose and effect of the act now before us a loan by the State of its credit to foster individual enterprises, or is it one which has for its end the accomplishment of a purpose which will secure the State from a general threatened evil and promote the welfare of its citizens? In other words, is it for .a public purpose?” After reviewing the circumstances which called the -act into existence — such as the great drought that prevailed in the state throughout the entire growing season <of 1930 and the unprecedented economic depression then raging — the court speaking through Mr. Justice Butler ■said; “. . . where a law is enacted for relief from certain starvation and probable disease, certainly it, too, must be but the use of the State’s credit for a ■public purpose. This we so hold as consonant with fhe impulses of common humanity and natural justice, our conclusions finding support in the authorities we have cited and reviewed. The doctrine announced in this case has no application except in •cases where the calamity is certain and irremediable in its nature and general in its scope.” Thus when viewed in the light of the reasons for placing this constitutional restriction on the Legislature, the decisions of this and other courts, I would be compelled, with due deference to, and respect for my colleagues, to hold that Section 19 of Act 567 is void in so far as it permits the State Board of Finance to purchase bonds of the First Arkansas Development Corporation. To the same effect see: In re Opinion of the Justices, 99 N. H. 528, 114 A. 2d 514; contra, City of Frostburg v. Jenkins, 215 Md. 9, 136 A. 2d 852. I can see little difference between the public good claimed by the proponents of this legislation and that claimed by those who sought aid for the railroads, nor any supposed emergency as existed in the case of Cobb v. Parnell, supra. If the majority opinion is allowed to stand it will strike a terrific blow to private enterprise, a system under which this country has thrived and prospered. If Scott County Milling Company is permitted to borrow money from the State Treasury for the establishment of private enterprise how could the majority in the future deny the same privilege to any person or private corporation which employs or intends to employ capital or labor. Would not the merchant, the mechanic, the innkeeper, the banker or the builder be equally deserving of the favors of the state. Is it unreasonable to conclude that such lending would open the coffers of the public treasury to the importunities of two-thirds of the business men in the State? I think not.