Court Opinion

ID: 3991256
Source: CourtListenerOpinion
Date Created: 2016-07-06 10:51:07.542231+00
Date Added: 2024-06-11T14:18:32.506299
License: Public Domain

The opinion of the majority so obviously and, to my mind, unwarrantably, extends the doctrine of Griffin v. Tacoma,49 Wash. 524, 95 P. 1107, Scott v. Tacoma, 81 Wash. 178,142 P. 467, and Seymour v. Ellensburg, 81 Wash. 365,142 P. 875, and so patently disregards what was decided in Twichell v.Seattle, 106 Wash. 32, 179 P. 127, and Asia v. Seattle,119 Wash. 674, 206 P. 366, that I am unable to concur therein.
Its errors seem so apparent that I shall not attempt to follow and refute its arguments, but rather I shall treat the issues from the standpoint of the briefs and arguments as submitted to the court, for the reason that our previous holdings seem to have been misunderstood or misconstrued in a way which seems likely to work great ultimate harm, and under such conditions we ought not, except for the soundest reasons, to refuse to interpret our prior decisions.
At the outset, one or two important facts, not mentioned in the majority opinion, but which are admitted *Page 154 
or not denied, should be stated: First, that banks and business houses refused to accept or cash the warrants issued to the employees of the street railway system except at a discount which apparently would be prohibitive. Appellant, to relieve that situation, stepped in, voluntarily, and purchased warrants of the face value of $100,000 at par. Second, that appellant is the owner and holder of a $500 bond issued by the city and payableonly out of the light and power fund, and is likewise the owner and holder of a $1,000 bond similarly issued, payable only out of the water fund; and, since the call and payment of his warrants out of moneys borrowed from these special funds, over his protest, he claims the right to maintain this action as the holder of such bonds and also as a citizen and a taxpayer.
Taking up the two questions presented in the order in which the majority has treated them, let us first consider the right of the city to borrow from special funds to relieve and maintain the street railway fund. Much evidence was taken, and many figures relating to the financial condition of the street railway fund were submitted by each side; the appellant showing a falling off in receipts from operations, an increase of operating expenses and attempted to show that insufficient had been allowed for depreciation. Upon the other hand, the city showed facts and figures from which it argues that the street railway fund is solvent, on a cash basis and able to meet all of its obligations. I cannot set forth here sufficient of these facts and figures to make intelligent a discussion of the question as to which position, if either, is right. Nor do I think that necessary to a determination of the issue presented. Insolvency is a harsh term, and the condition of insolvency is not to be presumed, but must be proven by clear and convincing evidence.
If we were considering a bank or commercial enterprise, *Page 155 
then, under our well known definitions, we should be obliged to hold that insolvency was here established. But this is a far different business, and, in view of its public nature and the manifest uncertainty as to the value of its assets (depending in the main upon the ultimate outcome of its struggle for existence), while it is not unreasonable to fear that insolvency may result, yet, under all the circumstances, we cannot say that the evidence so far preponderates against the finding of the trial court on this subject as to warrant us in now holding that insolvency has been established.
Still, notwithstanding a theoretical or even an actual solvency, may the city continue to divert money from other special funds for the relief of this fund?
In approaching this question, it must always be borne in mind that a special fund is raised for, and is pledged to, a specific purpose, and that purpose forms the only basis for exacting the money from those who pay. Without that special and specific purpose, no money could be rightfully brought into the fund, and every dollar brought into the fund, whether needed immediately or not for a long time to come, is still to be sacredly set aside for the one and only purpose to which it has been devoted. If this be not true, then the city, under guise of establishing or maintaining one certain public utility, might raise a fund from the users of that utility and devote large parts of it to any foreign purpose within its municipal powers which its governing body might consider to be of advantage. For instance, water users might be, in spite of their protest, compelled to provide funds to initiate and maintain a municipal telephone system, or, as here, a municipal street railway system. Such a course is so manifestly unfair and so opposite to all legal principles as to call for condemnation by the courts.
But, says the city, these special funds are solvent. *Page 156 
It is certainly to be hoped so, but that does not in anywise affect the present question if the reasoning I have already indulged in is sound.
When the Asia case, supra, was tried it appeared that there had been borrowed from the general fund $83,000. When the issues were framed in this case, there had been borrowed $135,000 from the light fund, and $10,000 from the water fund. Later, $600,000 was borrowed from the light fund, and, at the time of the trial below, the street railway fund was indebted to the two special funds for moneys so borrowed in the sum of $900,000. Without going into unnecessary detail, it appears that never, at the times when payments were to be made on the purchase money bonds, has this fund had sufficient money for its needs, and that it has resorted to this temporary borrowing to meet its payments. After such payments were made in part, the sums borrowed have been repaid from operating receipts, but, speaking generally, a part of each temporary loan has been carried over and, if repaid at all, has been so repaid from the proceeds of a new temporary loan. As a result, at all times, the street railway system is doing business in part upon capital taken from other special funds in the guise of temporary loans.
It is said that, if the street railway fund be solvent, then, by our previous decisions, we are committed to the doctrine that such temporary loans may be made. Griffin v. Tacoma, 49 Wash. 524,95 P. 1107, is the first case relied upon. There the question was as to the right to transfer money from the general fund to a special fund, which it was urged had been done in contravention of the terms of the charter of the city of Tacoma. This court there said:
"It is not provided that moneys which have been collected for the general fund for general municipal *Page 157 
purposes may never, in the interest of expediting the city's business, be temporarily transferred to a special fund; but it is provided that no fund shall ever be diverted from the purpose for which it was originally collected. The word `diverted' is used in the sense of turning permanently from its purpose, the equivalent of appropriation for some other use. A temporary transfer from the general fund to another fund with an assured income is not an appropriation or diversion. With its outstanding credit against the other fund, the assets of the general fund remain the same, and its power to accomplish general municipal purposes has not been decreased. The city controls both funds and it is under the legal obligation to see that the general fund is seasonably reimbursed from the source of supply to the special one. Of course the city authorities must exercise common business sense in making such transfer. As a personal loan of magnitude is not ordinarily made to an individual who is insolvent, so a city should not transfer its general fund moneys as temporary loans to other funds that have not assured and certain sources of income, the collection of which is under the control of the city itself."
The next case is Scott v. Tacoma, 81 Wash. 178,142 P. 467, which follows the Griffin case. It appears in the Scott
case that moneys received as franchise taxes were to be loaned to a special fund. Presumably, money collected as franchise taxes belongs to the general fund, and, nothing to the contrary appearing, it is fair to assume that it had not been pledged to secure other particular indebtedness. At least, nothing of that kind seems to have been brought to the attention of the court. Incidentally, a strong dissenting opinion appears in the Scott
case, not differentiating that case from the Griffin case, but calling for the overruling of the Griffin case.
The only other case on the subject which has been called to our attention is Seymour v. Ellensburg, 81 Wash. 365,142 P. 875, which again followed the *Page 158 Griffin case, and which also involved a loan from the general fund to a special fund.
It can hardly be seriously contended that what was said in theGriffin case was intended to authorize what has been done in this case. The court there sanctioned a mere temporary transfer to meet an actual emergency and expressly condemned an appropriation or diversion. Here is no temporary emergency, but a continuing condition, and, by the practice indulged in, the street railway system has in effect acquired permanent capital by means of which it carries on its business.
No case is called to our attention, none is cited by the majority, and I doubt if any authority can be found, which holds that money held in trust for bond and warrant holders in a special fund can be, even temporarily, diverted or loaned to another special fund. To countenance such a proceeding would greatly enlarge the doctrine of the cases just cited, and I am now of the opinion that this court went to the extreme limit in those cases, and that any further extension of the doctrine would be unwarranted.
As to such special funds as the water and light funds of the city of Seattle, although wholly solvent, which are pledged to a specific purpose (and these funds must be so pledged, since appellant holds an obligation against each, payable only out of such fund), the city stands in the position of a trustee charged with all of the duties and responsibilities which devolve upon an individual or a private corporation who undertakes a like trust.
"A trustee holds the trust estate for the cestui que trust, and to effect the purposes and objects declared by the trust instrument, and it is incumbent on him to preserve and protect the trust property for all the beneficiaries, and to administer it strictly in compliance *Page 159 
with the terms of the trust. Failing to perform this duty, he is liable for any injury sustained by any person beneficially interested. He may be enjoined from committing a breach of trust,. . ." 26 R.C.L. 1281.
See, also, Perry on Trusts (7th ed.), §§ 427-463.
We know of nothing in the statutes of this state under which these special funds are established, that authorizes or empowers the city to deal with any of them in any manner save only to effectuate the purpose for which the particular fund is created, and since these trusts, like all others, must be administered strictly in compliance with the statutory directions which are the trust instruments, there can be no implied power to deviate. How, then, can we put the seal of approval upon the course the city is pursuing?
As we have already seen, the so-called temporary loans have been increasing in amount. Each one that has been paid has been paid in part by the proceeds of a new loan of similar character, and the result is that the street railway system is being operated upon permanent capital thus obtained. Should we approve what has already been done, the door would be opened wide to every special fund which the city has or may establish, and, by borrowing from one to pay another, the railway system might be carried on indefinitely on capital thus borrowed, and eventually the moneys of any or all such special funds might be absorbed to the loss of some, or all, of those for whose benefit the particular funds have been pledged.
In the Asia case, supra, in discussing a similar question governed by the same principle, we said:
"Here we have a special fund which owes many millions, a considerable deficit appeared almost immediately, and has steadily grown. None of the efforts of the city so far have resulted in providing an income sufficient to meet the outgo. If borrowing is *Page 160 
continued, either directly or by overdraft, the final result will inevitably be that the moneys borrowed will be permanently diverted from the fund to which they belong and appropriated to the use of the utility, just as certainly as though such an appropriation were directly made in the first place. That which may not be done directly must not be accomplished by indirection. When, as here, the court can certainly see a final unlawful result, it should enjoin the act by which the unlawful result will otherwise be accomplished."
I think that language equally applicable to the present question, and that rule still a wholesome one, hence, the attempt to emphasize by repetition.
If these views are sound, then the money used to pay the warrants held by appellant was illegally diverted from other special funds, and, as appellant was not a willing participant in the illegal act, he was not thereby deprived of his right to litigate the question. And more than that, it must be borne in mind that appellant sues also as a holder of bonds payable only out of the depleted special funds and as a citizen and a taxpayer. In either role, he is entitled to be heard upon the other question in the case. Indeed, the city argues only that his right as a citizen and a taxpayer, while otherwise existing, is cut off, because, in the Twichell case, the issues which he now presents in his first cause of action were decided adversely to his present contentions and therefore that the Twichell case isres adjudicata.
In view of the somewhat astounding interpretation which the city places upon the Twichell case, and which it seems to have impressed upon the Federal courts in the cases cited by the majority, the subject ought to be again reviewed. In passing, we may say that it is our duty and privilege to interpret our statutes, and our interpretation of our statutes is binding upon the Federal courts, not theirs on us. *Page 161 
The Twichell case was instituted, tried below, appealed and decided by this court before the city took over and began the operation of the system. There was then no operating expense, and no debt arising from operations was in existence. The sole purpose and intent of the appellants in that case was to secure a judicial determination of the question whether or no the contract under consideration created general obligations against the city which could become effective only by submission to, and approval by, the voters. This court there set forth the issue in these words:
"Appellants contend, however, that because of certain provisions of the ordinances and of the statute, now to be noticed, a general indebtedness is contemplated or involved; and also, that the proposed transaction may not be consummated without the ratification of the voters. If the completion of the purchase and sale as planned would create a general debt, it would doubtless require the sanction of the voters of the city, otherwise not so."
It is true that an argument was advanced in the Twichell
case, based upon § 5 of Ordinance No. 39025, by which the city attempted to pledge the gross revenues of the system to the payment of the purchase money bonds,
". . . even though the balance of such gross receipts thereafter remaining may be insufficient to pay the cost of maintaining and operating said system and said additions and betterments thereto and extensions thereof,"
in violation, it was urged, of the plain command of Rem. Code, § 8008.
Without unduly lengthening this dissent by setting out all that the court had to say upon that subject, it must suffice to say that the gist of the court's reasoning was to the effect that, the city council having declared that the bonds should be payable only out of the *Page 162 
special fund and that the special fund would be sufficient to pay the bonds and all of the proper charges, the courts must assume that the city council had acted fairly and honestly, and had reached a correct conclusion upon a subject which the statute submits to its discretion. The court there said:
"Now, having adopted that plan, it became necessary, under the directions and mandate of § 8008 of the code, in creating the special fund and specifying the amount to be set aside into it to be used in paying for the utility, to have due regard to the cost of operation and maintenance of the system as constructed or added to and to any proportion or part of the revenues previously pledged, and not to set aside into such special fund a greater amount than in the judgment of the city council will be available over and above the cost of operation and maintenance and revenues previously pledged. . . .
"The `due regard' clause of the statute is a guide to point the way — a curb or limitation upon the manner in which the city council shall exercise its judgment in determining the fixed amount of the gross revenues derived from the utility to constitute the special fund for the payment of the utility. The finding, and expression of judgment of the city council in that portion of the ordinance just above set out, reflects observance of the `due regard' clause of the statute; and when the city council has thus proceeded and determined, it has exhausted its power with reference to the creation of the special fund, and the contract becomes fixed and settled as against that fund. Whether or not the ordinance and bonds provide for a preference in favor of the bonds and interest out of the gross revenues of the system is unimportant to the integrity of the obligations, as demands upon the special fund, because the latter part of § 8008 of the code covers the matter: . . ."
Special attention is called to the words:
"Whether or not the ordinance and bonds provide for a preference in favor of the bonds and interest out *Page 163 
of the gross revenues of the system is unimportant to the integrity of the obligations, as demands upon the special fund, because the latter part of § 8008 of the code covers the matter,. . ."
Thus it will be seen that the court clearly recognized that the contract must be considered in the light of the statute, and that the city council had no power to go beyond the limit fixed by the legislature. In § 8008, it is provided:
"In creating any such special fund or funds the common council or other corporate authorities of such city or town shall have due regard to the cost of operation and maintenance of the plant or system as constructed or added to, and to any proportion or part of the revenue previously pledged as a fund for the payment of bonds, warrants, or other indebtedness, and shall not set aside into such special fund a greater amount or proportion of the revenue and proceeds than in their judgment will be available over and above such cost of maintenance and operation and the amount or proportion, if any, of the revenue so previously pledged."
That is a direct limitation upon the power of the city council, and any attempt to go beyond the limit so fixed by the legislature is necessarily ultra vires and void. If we did not say so in unequivocal language in the Twichell case, it was only because the question did not there arise, could not have existed under the then conditions, and nothing was before the court which would justify it in deciding a question which, if the city council was right in its conclusions as to the facts, never could arise at any time. In other words, the city council expressly found in § 2 of Ordinance No. 39025:
"The gross revenues to be derived from the operation of the municipal street railway system of the city of Seattle, including the additions and betterments to, and extensions thereof, herein provided for, at the rates of transportation charged, and to be charged, upon the entire system, will be sufficient in the judgment *Page 164 
of the council and of the corporate authorities of the city to meet all expenses of operation and maintenance, including the operation and maintenance of the proposed additions, betterments and extensions, and to provide all proportions or parts of revenues previously pledged as a fund for the payment of bonds, warrants and other indebtedness, with interest thereon, heretofore made payable out of the revenues of the existing municipal street railway system, and to permit the setting aside in a special fund, out of the gross revenues of the entire system, amounts sufficient to pay the interest on the bonds hereby authorized to be issued, as such interest becomes due and payable, and to pay and redeem all of such bonds at maturity."
This court accepted that finding, as it was then compelled to do, and could not anticipate that a conflict would ever arise as to priority between operating expenses and the purchase money bonds.
If, in spite of my demonstration to the contrary, the language of the Twichell case is thought to be ambiguous, then that ambiguity was promptly cleared up by the Asia case wherein it was said:
"There has developed from the operation a condition which establishes beyond cavil that the city council was in error when, by Ordinance No. 39,025, considered in the Twichell case, it declared that, in its judgment and in the judgment of the corporate authorities, the gross revenues from such operation would be sufficient to meet all expenses of operation and maintenance, provide for revenues previously pledged, and permit the setting aside in a special fund of amounts sufficient to meet the interest and principal of the bonds given in payment, according to the terms agreed upon; a declaration which we were then compelled to accept at its face value, and upon which the result in the Twichell case is based. . . .
"Without discussing the authorities there reviewed, or repeating the arguments of or quoting from the Twichell case, it is sufficient to say that we there held *Page 165 
that the judgment of the city council was conclusive and must be accepted by us until the contrary appeared, and therefore, by the ordinance providing for the acquisition and operation of the street railway system, no general indebtedness was created."
Just why the city persistently ignores this unmistakable language from the Asia case is incomprehensible. The Asia
case was heard En Banc, as was the Twichell case, and eight members of the court concurred therein. Notwithstanding the fact that the hand that pens this dissent, wrote the opinion of the court in the Asia case, still, by the concurrence of seven others, the opinion became the opinion of this court and will stand as such until overruled.
It is clear, then, that, by the statute and by our previous decisions, operating expenses must be paid before money is diverted to the payment of the bonds. The law of economics is no less plain. Unless operating expenses are paid, operations must soon cease, and the loss to the holders of the purchase money bonds will in that event be much greater than if they are content to receive what remains after operating expenses are paid.
It therefore is apparent that, upon the question now presented, the Twichell case is not res adjudicata.
The recipient of the bonds and those purchasing from it are presumed to know the statute law of the state and are bound thereby. Hence, we should unhesitatingly hold that the cost of maintenance and operation, together with any part of the revenue previously pledged, take priority over the purchase money bonds as the statute, by its terms, so clearly provides.
To the extent herein indicated, appellant was, in my judgment, entitled to prevail, and therefore the judgment of the trial court should be reversed with directions *Page 166 
to enter judgment against the city in harmony with these views.
PARKER, J., concurs with TOLMAN, J.