Peery v. City of Los Angeles

pro tem.—In these two cases there are three appeals: One by Herbert Peery and one- by H. W. Anderson, plaintiff and intervener, respectively, in the first of said actions, and one by H. W. Anderson, as plaintiff in the second of said actions. The same questions are presented upon each of said appeals. These actions were each instituted for the purpose of obtaining an injunction against the defendant city of Los Angeles and its officials, restraining it and them from disposing of certain municipal bonds of said city for less than the par value thereof, or upon terms which would yield to the purchaser thereof a rate of interest in excess of the rate specified in the ordinances calling the respective elections held in said city for the purpose of securing the approval of its electors for the incurring of the indebtedness to be evidenced by said bond issues; and,- also, for the purpose of having declared void a certain contract between said city and one I. H. Heilman, relative to the purchase of a certain portion of said bonds. As to the facts in each of these cases there is no dispute.

In the year 1914 the city of Los Angeles duly and regularly adopted certain ordinances providing for and calling a special election within said city for the purpose of submitting to the qualified voters thereof the proposition of incurring a bonded indebtedness in the sum of six million five hundred thousand dollars, for the purpose of acquiring' and constructing certain works for supplying the city and its inhabitants with electricity for heat, light, and power. It was provided in said ordinances that the maximum rate of interest to be paid upon said indebtedness was four and one-half per cent per annum, payable semi-annually, which rate, it was specifically provided, should not be exceeded in the issuance of bonds for said indebtedness. The election provided for in said ordinances was duly held on the eighth day of May, 1914, and resulted in a vote of more than two-thirds of the electors voting at said election approving the incurring of said indebtedness and the issuance of said bonds. Thereafter, at intervals, several issues of portions of said bonds were duly authorized and made, aggregating in all a total of four million four hundred and forty-six thousand dollars, leaving the balance of said bonds, amounting in their face value to two million and fifty-four thousand dollars, undisposed of at the time of the institution of these

During the month of May, 1919, the city of Los Angeles duly passed and adopted another set of ordinances providing for the incurring of a further bonded indebtedness in the sum of thirteen million five hundred thousand dollars for the purpose of the construction of certain other works for the further supply of electric light, heat, and power to said city and the inhabitants, and also for the acquisition of a certain electric distributing system owned by the Southern California Edison Company, situate within said city, and for the calling and holding of a special election within said city for the purpose of securing the approval of the electors therof for such bonded indebtedness. In the ordinances providing for the calling of said election it was expressly provided that the maximum rate of interest to be paid on said indebtedness was five per cent per annum, payable semi-annually, which rate should not be exceeded in the issuance of bonds for the said indebtedness. The election provided for in said ordinances was duly held on the third day of June, 1919, and resulted in a vote of more than two-thirds of the electors of said city voting at said election approving the incurring of said indebtedness and the issuance of said bonds. The entire amount of said bond issue yet remains unsold. The complaints in each of these actions allege that on or about the first day of August, 1921, I. H. Heilman made the city council of said city of Los Angeles a proposal in writing whereby he offered to purchase the entire issue of the aforesaid bonds for the sum of eleven million nine hundred and sixty-five thousand dollars and accrued interest to the date of delivery; that on the second day of August, 1921, the said city council of said city passed and adopted a resolution accepting said proposal, and now intends and threatens to sell and issue said bonds in accordance therewith, and for less than the

The answers of the defendants in each of said actions consist chiefly in the denial that any threatened or contemplated sale of the remaining unsold portion of either of said bond issues would be in violation of the constitution of the United States or of the state of California, or of law, and in that respect the defendants deny that the act of the legislature approved on June 1, 1921, relating to the disposal of the remaining unsold bonds of municipalities upon the

Upon the trial of these actions the court made its findings to the effect that substantially all of the allegations of the plaintiffs in each case and of the intervener were true, with the exception of those allegations attacking the constitutionality of the act of the legislature approved June 1, 1921, or assailing the legality of the proposed sale of the remaining unsold portion of said bonds thereunder, or upon the terms proposed by said I. H. Heilman for the purchase by him of the whole of the later issue of said bonds. The court accordingly decided that the plaintiffs and intervener were entitled to take nothing by their respective actions, and that the defendants were entitled to judgment in their favor and for their costs. Prom these judgments the plaintiffs and the intervener, respectively, have prosecuted these appeals.

In order to reach a proper understanding of the questions presented for consideration upon these appeals, it is necessary that the several constitutional and statutory provisions involved in the discussion thereof should be set forth. Section 18 of article XI of the constitution of California provides:

“No county, city, town, township, board of education, or school district shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the qualified voters thereof voting at any election to be held for that purpose. . . . Any indebtedness or liability incurred contrary to this provision . . . shall be void.”

The statute of 1901 which provided the procedure for the creation of bonded indebtedness by cities, under which the city of Los Angeles proceeded in respect to both of the bond elections and bond issues in question here, contains, in section 2 thereof, the following provision:

The act of 1901 also provides, in section 6 thereof, that such bonds should be issued and sold “for not less than their par value.” (Stats. 1901, p. 29.) The charter of the city of Los Angeles provides, in section 2, subdivision 29, that the city shall have the right and power:

“To incur indebtedness, by the issuance of bonds, for any of the purposes for which the city is authorized to provide, or for carrying out any of the powers possessed by the city; provided that, in the procedure for the creation of such bonded indebtedness, and for the issuance of such bonds, the general laws of the state of California, in force at the time such proceedings are taken, shall, so far as applicable, be observed and followed.”

The bonded indebtedness and bond issues of said city in question herein were proposed and voted for by the electors of said city in conformity with the foregoing provisions of its said charter and of the act of 1901. The ordinances proposing each of said bond issues and calling the elections for the purpose of authorizing the same expressly provided that the maximum rate of interest to be paid upon the indebtedness evidenced by the first bond issue was to be four and one-half per centum per annum, payable semi-annually,

In 1921 the legislature adopted the act relating to the sale by municipalities of unsold bonds to which reference has heretofore been made. Section 1 of said act reads as follows:

“Section 1. Any county, city and county, city, town, district or other political subdivision organized under the laws of this state may sell any bonds thereof remaining unsold, and which have heretofore been authorized by the qualified electors thereof at an election called and held as provided by law, at a price which will net the purchaser not more than the equivalent of six (6) per cent per annum, payable semi-annually, on the par value of such bonds; provided, that this act shall not apply to any such bonds which have been authorized under a law permitting the sale thereof at a price netting the purchaser more than such equivalent. ’’ (Stats. 1921, p. 844.)

[1] The main contention of the appellants is that both the statutes of the state and the charter and ordinances of the city of Los Angeles, having relation to the two bond issues involved in the instant cases, do expressly prohibit the sale of said bonds for less than their par value; and the appellants further contend that this express prohibition reaches back to the very inception of the proposition for the creation of a bonded indebtedness in each case, and enters vitally into the vote of the electors of said city, granting permission to its officials to create a bonded indebtedness and issue these bonds upon the express condition and understanding that they were not to be sold for less than their par value. The statute of 1901, under the terms of which the proceedings leading up to the creation of the municipal indebtedness evidenced by each of these bond issues were taken, does contain the express provision that municipal bonds issued, in accordance with its procedure should not be sold “for less than their par value.” The charter of the city of Los Angeles adopts the provisions of the general laws in force at the time as the procedure to be followed in providing for such indebtedness and for the issuance of such bonds. (Stats. 1911, p. 2063.) The ordinances of said

The respondents finally urge that a subsequent legislature would have power to change this requirement in the'earlier statute under which these bonds were voted, for the reason that the electors, in voting to approve the creation of the indebtedness and issue and sale of the bonds in the form and upon the terms specified in such statute, did so with the knowledge that the terms of such statute were subject to legislative change and, therefore, gave their approval of these bond issues with the understanding that such changes might be made. This argument is nothing more nor less than a seductive sophistry, since to give it the application for which the respondents contend would be to render every substantial statutory or contractual right of individuals subject to be taken away for no better reason than that they had acted or contracted in view of possible changes in the law. There is one comprehensive answer to each and all of the foregoing arguments of the respondents in support of the general proposition that the act of the legislature of 1921 has been effectual to remove the requirement of the act of 1901, that these bonds should be voted for and issued upon condition that they should not be sold for less than their par value. It is this: The constitution, by virtue of the section above quoted, gives .to the electors of a municipality the substantial right to grant or refuse their approval to the in-

In these aspects this stipulation in the statute providing for the bond election is as vital as any other provisions in it, since it goes directly to the matter of the relative amount of the burden and benefit which the electors are to agree by their votes to assume. The proposition having thus been made by the officials of a city to the voters thereof to ap

“The act providing for the organization of the district, and the organization of the district under the provisions of the act by the vote of its electors, cannot be otherwise regarded than as a contract between the state and the individuals whose property was thereby affected. The contract, indeed, lacks one of the ordinary elements of contracts—namely, the actual consent of all the parties to it; but by the provisions of the statute the majority of the electors were empowered to act and consent for the individual proprietor; and unless this were a legitimate exercise of the powers of the state, the statute itself would be invalid. Hence the consent of all the parties to the contract was in fact given either personally or by their authorized agents; and there was thus created a complete contract between the parties by the terms of which the property owners in the district consented to the burden imposed upon their property by the provisions of section 17 of the original act and to no other. The burden thus imposed was, that the bonds issued under the act should ‘be paid by revenue derived from an annual assessment upon the real property of the district,’ and that their

The authorities in other jurisdictions holding the same view are Deland v. Platt Co., 54 Fed. 823 ; David v. Timon (Tex. Civ. App.), 183 S. W. 88 ; Scott v. Forest, 174 Ky. 672 , [ 192 S. W. 691 ]; Percival v. City of Covington, 191 Ky. 337 , [ 230 S. W. 300 ]; Wullenwaber v. Dunnigan, 30 Neb. 877 , [ 13 L. R. A. 811 , 47 N. W. 420 ]; Lawson v. Kenawho Co. Court, 80 W. Va. 612 , [ 92 S. E. 786 ]. [4] We do not, however, deem it necessary to go so far in this ease as to hold that a contractual relation, in the ordinary sense of the term, has been created between the electors of the city of Los Angeles and the officials thereof by the proposal and approval of these bond issues, but we are satisfied that a status analogous to such relation was created through the exercise of the constitutional right of the electors of said city in approving the creation of the bonded indebtedness represented in these two bond issues upon the express conditions and assurances contained in the act of 1901, which may not be -changed in the manner and to the extent it is sought to be changed under the provisions of the act of 1921, without working, in effect, a fraud upon the electors through securing their votes for the approval of these bond issues upon terms and conditions which will not be kept if the attempted sale of these bonds below their par value is given the sanction of this court. In the case of Wallace v. Bell, 205 Ala. 623 , [ 88 South. 442 ], the court, in

“A majority of the voters answered by ballot ‘yes.’ Now, the legislature attempts by this act, without any clear intimation thereof in its title, to authorize these bonds sold at a discount—below par—which will net to the purchaser seven. per cent per annum on his investment. The interest on the bond is a part of the bond. If the legislature can increase the rate of interest, or sell the bonds below par after the voters authorized a sale at par and at five per cent interest, then they can take away entirely from the majority of the voters the right to have the bonds issued. The constitution gives the legislature the right to fix the mode and manner of getting the will of the qualified voters on a bond issue; and it gives to the majority of the qualified voters at the election the right to authorize the issuance of the bonds by the board of revenue. The voters having fixed by ballot the amount of the bond issue, the maximum rate of interest, and under a law stating that they must not be sold below their face value, it is then beyond the power of the legislature to authorize a higher rate of interest thereon or a sale of these bonds below par.”

In the ease, of Skinner v. City of Santa Rosa, 107 Cal. 464 , [ 29 L. R. A. 512 , 40 Pac. 742 ], which was a case wherein the officials of the city of Santa Rosa had undertaken to change the amount of interest to be paid upon certain municipal bonds of said city, after a vote of its electors approving the issue of such bonds, this court held that the provision for the payment of the added interest upon said bonds would in effect increase the amount of the indebtedness which the electors had by their votes approved, and would to that extent be a violation of the constitutional inhibition. And the court goes on to say:

“If the terms and conditions submitted to the electors may be departed from, and such election held to authorize the issuance of bonds under other terms and conditions, a door will be opened authorizing the common council to submit -a proposition so favorable as to secure beyond question a favorable vote, and then change the conditions

It is not intended by anything said in this opinion to suggest or intimate that there was any actual fraudulent intent on the part of the officials of the city of Los Angeles in seeking to take advantage of the terms of the statute of 1921 by disposing of these bond issues at less than their par value. Nevertheless, so to do either with or without the sanction of said act would be to accomplish a purpose directly violative of one of the essential conditions upon which the constitutional approval by the electors of said city of these bond issues was obtained, and in that sense a fraud would be wrought by permitting that condition to be violated by. the sale of these bonds below par. For this reason we are constrained to hold that the authorization attempted to be conferred upon said city of Los Angeles to dispose of the unsold portion of these bond issues for less than their par value by the act of 1921 is invalid, and hence that the plaintiffs and intervener in these actions were entitled to an injunction restraining such attempted or threatened sales.

The judgment is reversed.

. Waste, J., Wilbur, J., Sloane, J., Shurtleff, J., and Lennon, J., concurred.

Concurring.—I concur in the foregoing opinion.

I wish to add, however, that, in my opinion, the vote of the people, by which the city was authorized to sell the bonds at a price not less than par, constituted a part, and a material part, of the contract evidenced by the bonds, as stated in Merchants Nat. Bank v. Escondido Irr. Dist., 144 Cal. 329 , [ 77 Pac. 937 ]. The city is the nominal. obligor or promisor on the bonds. It has no authority to