Court Opinion

ID: 6475713
Source: CourtListenerOpinion
Date Created: 2022-06-26 22:38:36.414931+00
Date Added: 2024-06-11T15:53:58.118035
License: Public Domain

BERNSTEIN, Justice
(dissenting).
I, in this dissent make only the limited legal determinations that a properly drafted leaseback agreement would not violate any Arizona constitutional provision, that the construction of an auditorium and civic center is a public purpose, and that the requirements of the Budget Law will be met. Policy matters relating to the desirability or necessity for this project are for decision by the City Council.
The problem is the contention that the City Lease creates an indebtedness beyond the amount the City is permitted to incur because of the limitation imposed by Article 9, Sec. 8 of the Arizona Constitution. The majority relies upon American-La-France and Foamite Corp. v. City of Phoenix, 47 Ariz. 133, 54 P.2d 258 (1936). This case has little relevancy to the problem involved here. The court discussed the Budget Law, not the Constitution. It re*294fused to permit the City to acquire a fire engine under an arrangement which it regarded as the equivalent to an installment purchase. Modern security devices developed to facilitate the sale of personal property all serve the same economic end, whether they are called conditional sales, purchase money chattel mortgages, lease and purchase contracts, leases with options to purchase, bailment leases, equipment trusts • or whatever terminology is used. Where real property is involved, however, “lease” does have a precise technical meaning, as do “rent” and “debt”. A ilease of real property is a conveyance not 'a contract and the principles which govern •its construction go back to feudal times. -As thé Supreme Court of Minnesota said -in Ambrozich v. City of Eveleth, 200 Minn. 473, 274 N.W. 635, 112 A.L.R. 269:
. “ * * * It is not permissible to consider what the result would be if the base [sic] lease were considered merely as a contract, so far as concerns the unaccrued rents. See Viterbo v. Friedlander, 120 U.S. 707, 7 S.Ct. 962, 30 L.Ed. 776; 3 Williston on Contracts (Rev.Ed.) § 890; In re Barnett (C.C. A.) 12 F.2d 73; 21 Cal.L.R. 561, 562, 563; 33 Col.L.R. 213, 216, 217. Courts accept the established law applicable to leases. Illustrative of the binding effect of the settled law in this respect is Gardiner v. [William S.] Butler & Co., 245 U.S. 603, 38 S.Ct. 214, 62 L.Ed. 505, in which Mr. Justice Holmes stated that even though there were ‘plausible analogies’ for a contrary contention, the law of leases must be applied, in the following apt expression: ‘But the law as to leases is not a matter of logic in vacuo; it is a matter of history that has not forgotten Lord Coke.’ * * * Rules so well settled should be overthrown only by legislation.
“ ‘Rent’ is a sum stipulated to be paid for the use and enjoyment of land. The consideration for the rent is the occupation of the land. In re Roth & Appel, 181 F. 667, 104 C.C.A. 649, 31 L.R.A.(N.S.) 270; 16 R.C.L. 909, § 416. Rent is not a debt or liability in the generally accepted meaning of those terms, while it has yet to accrue. There is no obligation to pay until the rent is due according to the terms of the lease. Rent to be paid in the future is not a debt or liability for the recovery of which a present action will lie. The duty to pay rent may never arise by the happening of events which by the laws of property relieve a tenant from payment. Because the obligation to pay rent may never arise, it is regarded as contingent and not an absolute liability. * * * ” 200 Minn, at 482, 483, 274 N.W. at 640.
In State ex rel. Thomson v. Giessel, 267 Wis. 331, 65 N.W.2d 529 (1954) the state, *295having financed an office building through a loan from a state fund and desiring to build an addition, leased the existing building and site to the State Public Building Corporation. The corporation then issued its notes in an amount sufficient to refund the first loan and to provide money for building the addition, constructed the addition and leased the enlarged building back to the state. The land lease was for 50 years and the lease-back for 34 years. Rental was to be paid during the construction period and thereafter the monthly rental was to consist of the amounts due for principal of and interest on the notes of the corporation. The court said:
“While in one sense any contract to pay money in the future creates a debt, state and municipal governments might be unable to function except under severe handicap if all such contracts were held to create debts within the meaning of constitutional and statutory prohibitions relating to governmental indebtedness.”
******
“Historically the common-law principles governing the landlord-tenant relationship did not recognize future rent as a presently existing debt or liability. See 1 Tiffany Landlord and Tenant, p. 1010, sec. 166. As Tiffany points out, although there be a lease, which may result in a claim for rent, which will constitute a debt, yet no debt occurs until enjoyment of the land has been had. ‘The obligation to pay rent is contingent upon the lessee’s continued enjoyment of the land, * *
* * * ‡ * *
“We deem that the legislature would have the power to authorize the state to enter into leases for office space to . house state agencies performing the governmental functions of the state without contravening any constitutional' prohibition against state indebtedness. # ‡ »
In 405 Monroe Co. v. City of Asbury Park, 40 N.J. 457, 193 A.2d 115 (1963), the Supreme Court overruled a lower court judgment holding invalid the lease of 'a parking garage to the city on a “net rent” basis for a long-term period. As in this case, all taxes, assessments and insurance premiums were to be paid by the city. At the end of the lease term, title was to vest in the city for a consideration of $1.00. In spite of the fact that the lease provided that in the case of damage or destruction the rentals would not be abated, the court found it to be a true lease and not in violation of the constitutional limitation on city indebtedness, nor did it consider significant the fact that the amount of the rentals would equal the full value of the property. The court held that the parties intended a lease transaction and that there was no reason why the city could *296not proceed in that manner when it was unable to acquire the building at the outset.
The fact that the City Lease was negotiated as a lease by parties represented by counsel and familiar with the technical meaning of the terms they used is enough to persuade the majority from holding that the aggregate of the rent that may eventually fall due during the term of the lease should be totaled and treated as if it were a present indebtedness. 3A Thompson, Real Property § 1290 (1959 Replacement); Tiffany, Real Property § 166 (1912); Heberer v. Board of County Com’rs of Chaffee County, 88 Colo. 159, 293 P. 349 (1930) cases quoted above.1
Debt limitation provisions of the type found in the Arizona Constitution stem from an amendment to the Ohio Constitution in 1851. By 1910 their meaning had become definite, and it was well understood that they did not apply to rental arrangements. Debt limitations were almost universally adopted as a reaction to the abuses of railroad financing in the 19th century. Promoters induced communities to issue general obligation bonds, pocketed the proceeds, and if the railroad failed, sold it for junk. The community was left with the bonds to pay, but without the railroad. Arizona had had its experiences with this type of financing in territorial days. See Willson, Railroading on Shoestring, Arizona Days and Ways Section, Arizona Republic, June 19, 1965.
When the Arizona Constitutional Convention met in 1910, the proposed section on Public Debt Revenue and Taxation was given intensive study by a 13 man committee which met twice a week. In opening the debate on the Proposition which was to become Article 9 of the Constitution, Governor Hunt called the attention of the Convention to this work, and told the delegates that the committee had received the views of Tax Commissions from all over the country, as well as those of professors of economics from Harvard to Stanford. These reports have not been preserved, but we do have verbatim reports of the debates of the Convention. Primarily, the convention was interested in the tax provisions but with regard to debt, the Convention was most interested in what had been done in the Western states. The particular problem of this case was not discussed, nor was modern terminology of “general obligation bonds”, “revenue bonds” or “lease-back” used, but from the developments before 1910 which their studies must have revealed, it is apparent that the constitutional limitation was intended to apply to general obligation bonds, and that the word “debt” was not used in any broad sense which would include the payment of rent.
In City of Walla Walla v. Walla Walla Water Co., 172 U.S. 1, 19 S.Ct. 77, 43 L.Ed. *297341 (1898) the United States Supreme Court had authoritatively held that debt limitations of the type included in the Arizona Constitution did not include service contracts or rent due under leases such as the City Lease involved in this case. The court said:
“But we think the weight of authority, as well as of reason, favors the more liberal construction, that a municipal corporation may contract for a supply of water or gas, or a like necessary, and may stipulate for the payment of an annual rental for the gas or water furnished each year, notwithstanding the aggregate of its rentals during the life of the contract may exceed the amount of the indebtedness limited by the charter. There is a distinction between a debt and a contract for a future indebtedness to be incurred, provided the contracting party perform the agreement out of which the debt may arise. There is also a distinction between the latter case and one where an absolute debt is created at once, as by the issue of railway bonds, or for the erection of a public improvement, though such debt be payable in the future by installments. In the one case the indebtedness is not created until the consideration has been furnished ; in the other, the debt is created at once, the time of payment being only postponed.
“In the case under consideration the annual rental did not become an indebtedness, within the meaning of the charter, until the water appropriate to that year had been furnished. If the company had failed to furnish it, the rental would not have been payable at all; and, while the original contract provided for the creation of an indebtedness, it was only upon condition that .the company performed its own obligation. Wood v. Partridge, 11 Mass. 488, 493. A different construction might be disastrous to the interests of the city, since it is obviously debarred from purchasing or establishing a plant of its own exceeding in value the limited amount, and is forced to contract with some company which is willing to incur the large expense necessary in erecting water works upon the faith of the city paying its annual rentals. Smith v. Dedham, 144 Mass. 177, 10 N.E. 782; Crowder v. Town of Sullivan, 128 Ind. 486, 28 N.E. 94 [13 L.R.A. 647]; Saleno v. City of Neosho, 127 Mo. 627, 30 S.W. 190 [27 L.R.A. 769]; City of Valparaiso v. Gardner, 97 Ind. 1; New Orleans Gaslight Co. v. City of New Orleans, 42 La.Ann. 188, 7 South. 559; Merrill Railway & Lighting Co. v. City of Merrill, 80 Wis. 358, 49 N.W. 965; Weston v. City of Syracuse, 17 N.Y. 110; City of East St. Louis v. East St. *298Louis Gaslight & Coke Co., 98 Ill. 415; Grant v. City of Davenport, 36 Iowa, 396; Lott v. City of Waycross, 84 Ga. 681, 11 S.E. 558; [Burlington] Water Co. v. Woodward, 49 Iowa, 58.” 19 S.Ct. 85.
In the face of this pronouncement by the United States Supreme Court, it is inconceivable that an informed Constitutional Convention would have adopted the type of limitation on debt that it did, if it had had any wish to also impose limitations on rental contracts. This court has already adopted this doctrine. In Wise v. First National Bank of Nogales, 49 Ariz. 146, 65 P.2d 1154 (1937), we quoted with approval from the case of American Co. v. City of Lakeport, 220 Cal. 548, 32 P.2d 622, 626 (1934):
“The rule that the inhibitions of the constitutional debt limit do not apply to contingent obligations has long been settled in this state. In Doland v. Clark, 143 Cal. 176, 76 P. 958, 960, where a city by certain contracts agreed to pay for certain services for five years at a monthly rate, it was held that there was no violation of article 11, § 18, the court saying: ‘It is evident that they (the contracts) did not create any liability at the time they were executed, except a contingent future liability. * * * The amounts to become due on completion bf the contract's by appellant might never become a liability upon the city. A sum payable upon a contingency is not a debt, nor does it become a debt until the contingency happens. * * * ' There may be ample funds to pay the rental when it accrues, as provided in the contracts, if it ever should accrue.’ * * * »
Furthermore, leasing of public buildings as an alternative to the issuance bf bonds and construction by other units, had been authorized by Congress for the territories, after it had imposed limitations on their indebtedness. The present 4% limitation comes from this legislation. The leading decision describing and upholding this system was rendered by the territorial court of Oklahoma, Giles v. Dennison, 15 Okl. 55, 78 P. 174 (1904), but the legislation discussed was also applicable to Arizona.
Furthermore, the delegates to the Constitutional Convention were familiar with the Constitution and decisions of California. Much of early Arizona law was taken from California, and the California Constitutional provision, Calif.Const.Art. 11, Sec. 18 is identical in intent to the Arizona provision. As early as 1896 the California Supreme Court adopted the view that an annual payment for sewer collection services was not a debt in McBean v. City of Fresno, 112 Cal. 159, 44 P. 358, 360, 31 L.R.A. 794. The court said :
“In a certain very restricted sense it may be said that a liability is created *299by a contract such as this; but to call it a present liability for the aggregate amount of the payments in the contract contemplated thereafter to be made is not legally permissible. A liability to the city would arise upon breach of contract, but the constitution never meant to protect the city from the consequences of its own willful and tortious acts. A liability might arise against the city for the negligence of its officers, and the damages due to an individual who had suffered therefrom might be great; but such liability for a municipal wrong the constitution never meant to protect against. When it is [sic] come to consider the contractual relations between the city and appellant, it is at once seen that the city cannot be liable in any one year for more than $4,900, an amount far within the revenue derived to the sewer fund, and, further that it cannot become liable for this amount at all until faithful service rendered by the contractor each year. * * * ”
This principle was applied to a rental contract in Doland v. Clark, 143 Cal. 176, 76 P. 958 (1904). Recently, in the leading case of Dean v. Kuchel, 35 Cal.2d 444, 218 P.2d 521 (1950) the California court has reaffirmed these views in a case involving a plan for financing a municipal improvement similar in detail to that proposed for the Phoenix Civic Auditorium. This plan included a ground lease, constructed by a corporation, a lease-back on a net lease, and vesting of title to the improvements in the state on the termination of the ground lease.
Courts throughout the country have approved financing plans basically similar to that now before us in many cases in which the objection that they violated debt limitations were raised. These cases include both lease-backs and leases, with both non-profit corporations, private parties and public authorities. Among the leading cases are:
Arkansas : McArthur v. Smallwood, 225 Ark. 328, 281 S.W.2d 428 (1955).
California : Dean v. Kuchel, 35 Cal.2d 444, 218 P.2d 521 (1950); City of La Habra v. Pellerin, 216 Cal.App.2d 99, 30 Cal.Rptr. 752 (1964); City of Los Angeles v. Offner, 19 Cal.2d 483, 122 P.2d 14, 145 A.L.R. 1358 (1942).
Colorado : Heberer v. Board of County Com’rs of Chaffee County, 88 Colo. 159, 293 P. 349 (1930).
Georgia : Sheffield v. State School Bldg. Authority, 208 Ga. 575, 68 S.E.2d 590 (1952).
Illinois : Berger v. Howlett, 25 Ill.2d 128, 182 N.E.2d 673 (1962); Loomis v. Keehn, 400 Ill. 337, 80 N.E.2d 368 (1948).
*300Indiana : Protsman v. Jefferson-Craig Consolidated School Corp. of Switzerland County, 231 Ind. 527, 109 N.E.2d 889 (1953); Book v. State Office Building Commission, 238 Ind. 120, 149 N.E.2d 273 (1958).
Kansas : State ex. rel. Fatzer v. Armory Board, 174 Kan. 369, 256 P.2d 143 (1953).
Kentucky : Fiscal Court of Jackson County v. Board of Education of Jackson County, 268 Ky. 336, 104 S.W.2d 1103 (1937), aff. 269 Ky. 258, 106 S.W.2d 990.
Michigan : Walinske v. Detroit-Wayne Joint Bldg. Authority, 325 Mich. 562, 39 N.W.2d 73 (1949).
Minnesota : Ambrozich v. City of Eveleth, 200 Minn. 473, 274 N.W. 635, 112 A.L.R. 269 (1937).
Missouri : Petition of Board of Public Buildings, (Supreme Court of Missouri), 363 S.W.2d 598 (1962).
New Jersey : 405 Monroe Co. v. City of Asbury Park, 40 N.J. 457, 193 A.2d 115 (1963).
Oklahoma : Application of Oklahoma Capitol Improvement Authority (Supreme Court of Oklahoma), 355 P.2d 1028 (1960).
Pennsylvania : Kelley v. Earle, 325 Pa. 337, 190 A. 140 (1937); Greenhalgh v. Woolworth, 361 Pa. 543, 64 A.2d 659 (1949).
Utah : Bair v. Layton City Corporation, 6 Utah 2d 138, 307 P.2d 895 (1957). (sewer system contract)
Wisconsin : State ex rel. Thomson v. Giessel, 267 Wis. 331, 65 N.W.2d 529 (1954); State ex rel. Thomson v. Giessel, 271 Wis. 15, 72 N.W.2d 577 (1955).
One detail of the lease before us deserves special attention. Section 7.1 provides that in the event of default defendant may take possession of the property, re-lease for the account of the City, and the City would be unconditionally liable for any deficiency. This provision is susceptible to the construction that the City is undertaking a general obligation as guarantor, in addition to its obligations as a tenant.
If this construction is correct, the theory upon which rent is distinguished from debt may be violated' since the City may have eliminated some of the contingencies in which it might be excused from payment of rent if it does not occupy the building. The lease provides for the release of the City and the protection of defendant through insurance in the event of physical disaster, but this clause raises the problem of what *301will happen in the case of economic disaster.
I know of no case where there has been a default in a public lease-back transaction, and hesitate to construe the clause in a declaratory judgment action, where there are no facts relating to a default and no legal authorities presently available. I have found no discussion of any similar clause in a public lease, even though such clauses are common in commercial leases. In Haggerty, supra, the California Court of-Appeals was faced with the construction of a lease provision which it thought violated the Rule Against Perpetuities. There the rule of construction governing the Rule Against Perpetuities is that if under - any conceivable set of facts the rule might possibly be violated, the lease must be held invalid. Here we do not have that situation. If, in the unknown future, defendant should assert a claim against the City which would be a claim for a debt barred by the constitutional provision limiting the City debts all that would happen would be that’ defendant would not collect. I cannot say that in all events and in all possible circumstances Section 7.1 would be enforceable against the City in accordance with its apparent meaning.
I do not endorse the contention that Phoenix cannot do indirectly what it cannot do directly. To’ do so would mean that Phoenix could never have an auditorium and would outlaw needed public improvements of all kinds throughout the state. The correct rule was stated in Kelley v. Earle, 325 Pa. 337, 190 A. 140, 147 (1937):
«* * * The fact that the proposed plan might be termed an evasion of the Constitution would not condemn it unless such evasion was illegal. ‘It is never an illegal evasion to accomplish a desired result, lawful in itself, by discovering a legal way to do it.’ Tranter v. Allegheny County Authority, supra, 316 Pa. 65, at page 84, 173 A. 289, 297. The bonds of the Authority are to be paid out of its revenues. The credit of the State is not pledged or bargained away.”
The provisions of Section 7.1 go beyond the bounds of a legal method. An unconditional guarantee of rent to be paid by another, contained in an otherwise valid lease, partakes of the nature of a general obligation, even though there is no way to determine its amount. Having construed the debt provision of the constitution as limiting general obligations, it is immaterial whether the provision creating a general obligation appears in a bond or a lease.
An advantage of the Declaratory Judgment procedure is that the parties may re*302negotiate their lease in the ‘ light of the opinion of the court and the project may then go forward without delay. This procedure was used in Haggerty, supra, and I would apply it to this case.2
To avoid confusion I should also point out that, if an act of the legislature had authorized the lease provision we have condemned the remoteness of the contingency in which it would he operative, and the presumption of validity that attaches to the acts of a coordinate branch of the government, might have led me to withhold condemnation. Courts do not look for a remote possibility arising in the future where there would be a violation of debt limitation provisions of state constitutions. Banner v. City of Laramie, 74 Wyo. 429, 289 P.2d 922; Wicks v. Salt Lake City, 60 Utah 265, 208 P. 538. The presumption of validity which attaches to acts of the legislature does not apply, at least with full force, to the ordinances or leases of municipal bodies. Note, City Government in the State Courts, 78 Harv.L.Rev. 1596 (June 1965).
Judgment should be affirmed in accordance with 'this dissent.

. And cases collected in Note, 103 A.L.R. 1160 (1936).

. In an opinion addressed to the Director of the Department of Budget and Finance dated March 8, 1965, the Attorney General of Hawaii, in discussing the possibilities of adopting lease-back financing under the constitutional debt limitation provisions of Hawaii, suggested the omis- ' sion- of 'default provisions similar to Section 7.1 from the leases. He suggested:
“Omission of any provision for survival of liability for the payment • of rent or any provision for liability for damages upon the termination of the lease for nonpayment of rent. The Authority should be given only possessory remedies for default in the performance of the lessee’s obligations.”