Mahoney v. City & County of San Francisco

This action was inaugurated in the court below by plaintiff, Margaret Mahoney, a resident taxpayer of the City and County of San Francisco. The prayer of the amended complaint was for a decree of the court directing the delivery into court for cancellation of two certain instruments of even date purporting to be leases entered into by the Spring Valley Water Company, a corporation, and the City and County of San Francisco, upon the ground and for the reason that said instruments were in violation of article XI, section 18, state constitution, and article XVI, section 29, charter of the City and County of San Francisco, which provide generally and specifically, respectively, that said City and County shall not incur any indebtedness or liability for any purpose exceeding in any year the income and revenue provided for such year without the assent of two-thirds of the qualified electors thereof voting at an election held for that purpose, and are, therefore, null and void and wholly without legal

The major question presented by the appeal is whether the terms and provisions of the instruments before us—be they agreements of purchase or leases of real property— are violative of either the organic law of the state as expressed by article XI, section 18, state constitution, or of article XVI, section 29, charter of the City and County of San Francisco, or of the letter or spirit of the law as expressed in other provisions of said charter.

[1] Article XI, section 18, state constitution, 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

[2] Article XVI, section 29, charter of the City and County of San Francisco, provides: “When the Supervisors shall determine that the public interest requires the acquisition of any land or lands, or the construction or acquisition of any permanent building or buildings, improvement or improvements the cost of which, in addition to other expenses of the City and County will exceed the income and revenue provided for the City and County for any one year, they must, by ordinance, submit a proposition or propositions to incur a bonded indebtedness for such purpose or purposes to the electors of the City and County at a special election to be held for that purpose only. ...”

[3] The apportionment and setting apart of the city’s revenue and income into separate funds is mandatory, and the transfer of moneys from one fund to another or the use thereof for any purpose other than that for which the same were raised, except as specifically provided, is forbidden. (Article III, chapter II, charter.) Each demand must show the fiscal year within which the indebtedness was incurred and the name of the specific fund out of which it is payable and have written or printed upon it a statement that the same can only be paid out of the income and revenue provided, collected and paid into the proper specific fund in the treasury for the fiscal year within which the indebtedness was incurred. (Article III, chapter II, section 13.) [4] Again, the incurring of liabilities against the treasury which cannot be paid out of the income provided, collected, and paid into the proper fund as its proportion of the same for the fiscal year or permitting liabilities or indebtedness incurred in any one fiscal year to be a charge upon or paid out of the income or.revenue of any

With the provisions of the organic law before us, it becomes necessary, for a determination of the question as to whether or not the terms, conditions, and covenants of said instruments or agreements, or either or any of them, are violative of the state constitution and said charter, to consider in connection therewith the substance of said instruments, which are annexed to and made a part of the complaint and marked Exhibits “A” and “B,” respectively. In both instruments the Spring Valley Water Company is denominated the lessor and the City and County the lessee. For the sake of convenience we adopt the same identification references. By Exhibit “A” the lessor demises and lets unto the lessee all that certain real property situate, lying, and being in the city and county of San Francisco and described as a tract of land containing 170 acres, more or less, being a portion of that certain tract of land containing 811.13 acres of the so-called Lake Merced Ranch of the Spring Valley Water Company, adjacent to the municipal golf course as now located. The lease term is fifteen years, beginning on July 1, 1922, and terminating on June 30, 1937. The rentals for the term total $102,000 and are apportioned with reference to an ascending scale. The first installment of $2,000 became payable on July 1, 1925, and the remaining installments thereafter in gradually increasing amounts are payable on July 1st of each succeeding year, the last installment, amounting to $15,000, falling due July 1, 1936. In addition to said installments aggregating $102,000, the lessee agrees to pay annual installments equal in amount to the installments of all taxes, assessments, and other municipal or governmental charges levied upon said real property or any part thereof before the same shall become due. The leased property shall be used for a public golf links and playground only and shall be maintained for such purposes. The golf course is to be constructed according to a plan annexed to the lease and may be altered with the written approval of the lessor, except in the particular as to fairways. The construction shall include seeding to grass of all greens and fairways. The lease contemplates the construction by the lessee upon the premises of children’s playgrounds and pedestrian and equestrian

By Exhibit “B” the lessor demises and lets to the lessee a tract of land consisting of about 60 acres, situate in the City and County of San Francisco and more particularly described in an exhibit referred to but not before us. The lease term is ten years, beginning on July 1, 1922, and ending on June 30, 1932. The covenants for the payment of rent are: $24,000 upon the date of the agreement, the receipt of which is acknowledged; $36,960 on July 1, 1923. The balance of the annual installments are made payable

It will be seen upon an inspection of the instrument that Exhibit “A” is in all essential features upon its face, a hiring of real property and an agreement between the parties limiting its use to certain purposes and reserving to the lessor certain proprietary rights as to its control and maintenance in connection with its use as a part of a public utility engaged in furnishing and supplying said city and county with water for domestic, manufacturing, and general commercial and useful purposes. There is nothing appearing upon the face of the lease and agreement that would justify us in holding, as a matter of law, that Exhibit “A” is an agreement or contract for the sale and purchase of said described 170 acres. Reference is made, however, to paragraph 26 of said lease, which provides that in the event the lessee shall purchase certain tracts of real property, of which said 170 acres is a part, the lease and agreement shall terminate therewith. The total amount of rentals to be paid to the lessor, to wit, $102,000, equals $40 per acre per year during the full term. The additional sums agreed to be paid by the lessee on account of taxes, assessments and municipal and governmental charges to which the property may be subject or liable and costs and expenses by reason of enforced compliance with the comprehensive program of construction, planting of trees and shrubs, laying out playgrounds, construction of a sanitation and sewerage system and other obligations assumed by the lessee are not capable of exact calculation. The allegations of the complaint are that said rentals, costs, and expenses will run into very large amounts and exceed the revenue that was or could have been provided to meet the accruing indebtedness for the fiscal year 1922-23. No data by which the cost of the improvements, such as a clubhouse and other necessary buildings, which the city is given the permissive right to erect and which in the contemplation of the parties will be

[5] Exhibit “B” is in form a lease, but not quite as distinctly such in phraseology as Exhibit “A.” The agreement of the parties to the instrument that it should be characterized as a lease cannot change its true character. The evident intent and purpose of the makers as disclosed by the terms of the instrument must in such cases control. (In re City and County of San Francisco, 195 Cal. 426 [ 233 Pac. 965 ].) That it is in effect an agreement of purchase is impelled by the language of the instrument and the logic of the situation. This conclusion is strengthened by the plan and scheme of the projectors to acquire additional outdoor areas for recreation and amusement to those which the city now possesses. There is sufficient in each exhibit or lease to indicate that the municipality is contemplating the carrying forward of a very comprehensive plan which, from necessity, would require ultimately the ownership of practically all of the lands described in the complaint, and possibly of other lands therein referred to. The plans as disclosed by the contracts irresistibly suggest interrelation and joint operation of one area with the other in the

“Turning to the second contract [B] we find that though this is denominated a lease and the contracting parties are referred to throughout the agreement as ‘lessor’ and ‘lessee’ it is in its very nature and purpose nothing more than a contract of purchase and sale whereby the city and county by payments which are denominated in the agreement as ‘annual installments of rentals’ actually has contracted to purchase the property through the payment of installments running over a period of ten years. By the terms of this contract the sum of $24,000 was required to be paid at the time of the execution of the agreement on July 1, 1922. The full purchase price for which the option to purchase was granted was the sum of $240,000 plus interest thereon at the rate of 6% per annum from the date of the execution of the agreement. The annual payments which were specified in the contract covered a period of ten years which upon examination appear to be made up in the following manner: The' sum of $240,000 was divided into ten equal parts of $24,000 each. This was the payment required to be made upon the execution of the contract. On the first of July, 1923, the sum of $36,960 was to be paid and this sum consists of the sum of $24,000 plus $12,960, which is interest at 6% on the balance remaining due on the purchase price after the first payment had been made. On the first day of July, 1924, the sum of $35,520 was specified to be paid and this appears to be made up as follows: $24,000 on the principal and $11,520 being the interest on $192,000, the balance of the principal then remaining due. This method of computation and specification of the annual payments which are required to be made has been carried

all through the ten-year period until the total sum of $304,800 is required to be paid, which again is found to be $240,000 plus 6% per annum from July 1, 1922, on the remaining principal decreasing at the rate of $24,000 a year.

“In considering a similar contract which was also denominated a lease and which called upon the city and county to make annual payments termed rentals and which obligated the city and county to make vast expenditures of money for improvements, the Supreme Court in the so-called Marina case, 195 Cal. 426 [ 233 Pac. 965 ], held that the option to purchase the real property on the condition that all the covenants of the so-called lease had been met became ‘in effect an increasing compulsion upon it to consummate such purchase, since not to do so would result in the irrevocable loss to the municipality not only of the primary and succeeding annual payments, which it is bound to make under this agreement, but also of the entire usufruct of the property during the period of its occupation, and also of the property itself. ’ In that case the Supreme Court carefully analyzed the provisions of the agreement under consideration which were in all material respects similar to the terms of the agreement found in exhibit B and held that it must be construed to be an agreement for purchase and not merely a lease as denominated by the parties. Having thus construed the agreement and having found that the obligations incurred thereby exceeded the income and revenue of the city and county for the year in which the obligation was incurred and that no provisions had been made for meeting such indebtedness as required by section 18 of Article XI of the Constitution, the Supreme Court held that the agreement was void as in contravention of the express limitations of that section. In so holding the court relied upon Higgins v. City of San Diego, 131 Cal. 294 , 298 [ 63 Pac. 470 ]; and Chester v. Carmichael, 187 Cal. 287 [ 201 Pac. 925 ],

“The Marina case arose on a petition for a writ of mandate to compel the auditor of the city and county to audit and approve a warrant for one of the payments called for by the contract. In the course of the opinion the Supreme Court took occasion to refer to the fact that the petition for the writ was silent as to whether the creation of the liability under the agreement exceeded the income and revenue pro

vided for that year, hut the court held that inasmuch as it appeared that this was one of the grounds stated by the auditor for his refusal to audit and approve the warrant it was incumbent upon- the petitioners to show affirmatively that the objection was not founded in fact. In the amended complaint before us it is alleged affirmatively that the expenditures required by the two agreements in suit exceeded the income and revenue provided by the city for the year 1922, and that no provision was made for the payment thereof through the proceeds of bonds issued for that purpose and that the assent of two-thirds of the qualified electors of the county had not been procured before said indebtedness was incurred. It is also alleged that in addition to the specified sums required to be paid annually under the two contracts the city and county obligated itself to make certain improvements upon the two tracts of land aggregating between two and three million dollars. Though it does not appear from the complaint what portion of this sum of two or three million dollars is required to be expended under the first contract and what portion is covered by the second, that is a question which should have been raised by special demurrer. Thus it may be that the first contract is nothing more than a lease calling for annual payments of rentals in addition to the cost of improvements upon the property and that this cost is not in excess of the constitutional limits. But if this is so the complaint states a better cause of action for equitable relief in relation to the second contract as the expenditures required to be made under that contract would be the greater in excess of the constitutional limits. Thus we have the question squarely presented in the complaint that by the terms of the two agreements the city has become obligated in a sum in excess of its annual income and revenue without having provided any method of meeting payment thereof as required by section 18 of Article XI of the Constitution, and such allegation must be met by answer ... in order to take the contracts out of the inhibitions of that section of the Constitution.

“The defendants rest their case upon McBean v. City of Fresno, 112 Cal. 159 [ 53 Am. St. Rep. 191 , 31 L. R. A. 794 , 44 Pac. 358 ] , Smilie v. Fresno, 112 Cal. 311 [ 44 Pac. 556 ] , Doland v. Clark, 143 Cal. 176 [ 76 Pac. 958 ], and eases from other jurisdictions which need not be referred to. The dis

tinction between the McBean case and others just cited is pointed out in Chester v. Carmichael, 187 Cal. 287 [ 201 Pac. 925 ], approved in the Marina case ( 195 Cal. 426 , 441 [ 233 Pac. 965 ]), where it is said that the earlier case involved contracts for the furnishing to the city in the future of service, materials, etc., and that no indebtedness or liability within the meaning of the constitutional provisions was incurred until this service had been made. In the Marina case, as well as in the second contract here under consideration, the liability of the city and county is not one arising each year during the life of the contract to pay the stipulated sums due that year, but the city and county has at the outset obligated itself to make extensive improvements upon the land which the complaint alleges are far in excess of the annual income and revenue of the city and county. In the particular contract under consideration it will be noted that if the city fails to make these expenditures in accordance with the plans and specifications agreed on, then the ‘lessor’ may enter into the premises and make all the improvements called for, charging the ‘expense’ thereof to the city and county plus 10% interest. This feature of the contract, taken in view of the allegations of the complaint that the obligation thus incurred is in excess of the annual income and revenue of the city and county, is sufficient to take the contract out of the rule of McBean v. Fresno and following cases, and for that reason the demurrer to the complaint should have been overruled.”

The reasoning of counsel in an attempt to convert the contract herein into the “contingency” class, such as is discussed in Doland v. Clark, 143 Cal. 176 [ 76 Pac. 958 ], McBean v. Fresno, 112 Cal. 159 [ 53 Am. St. Rep. 191 , 31 L. R. A. 794 , 44 Pac. 358 ], Smilie v. Fresno County, 112 Cal. 311 [ 44 Pac. 556 ], State v. McCauley, 15 Cal. 429 , and others treating of similar situations, is fundamentally unsound. If the contracts in the instant case are not certain, definité, and fixed as to the mutual duties and obligations assumed by the parties thereto, it would be difficult, if indeed not impossible, to state a transaction that would be vulnerable to the remote, unusual, and unlikely contingencies suggested by appellants. Only such contingencies as might reasonably be expected to occur in the usual and ordinary course of business transactions or human relations

[6] We do not understand that the force and effect of the constitutional restrictions may be avoided—however beneficial such an avoidance may appear to be to the municipality by permitting it to carry forward its plans—that expenditures may be incurred for improvements and for other public uses for which the municipality is liable and which, though not definitely fixed or even estimated, will inevitably exceed the income and revenue provided for the fiscal year in which the contract is entered into, or any future year, because, perchance, the question of the ability of the municipality to meet its obligations is left in a state of doubt or uncertainty occasioned by the phraseology of the contract, or upon the theory that the possible occurrence of an event which in all probability will not happen may happen, or the possible failure of a condition which must from the logic of the situation be performed will not be performed. If this be the rule of construction the restriction provisions of the constitution and charter would become practically nullities and there would be no opportunity for the taxpayers to be heard as to the incurring of indebtedness or liability that would become a charge upon the future income or revenue of municipal and public corporations. It would practically put an end to bond issues as provided by the constitution with respect to the incurring of future indebtedness or liability. If a vast indebtedness or liability may be incurred by contract whereby the payment is postponed to a future year, and which would beyond question

[7] The last expression of this court upon a situation similar to the one at hand is the so-called Marina case, decided subsequent to the decision made by the trial court in the instant case. The principles of law therein announced are applicable to the facts as alleged by the amended complaint in the present case so far as Exhibit “B” is involved on the hearing of the demurrer and compel the same conclusion as was reached in that case. In other words, the city in the instant ease did not have the power, as a matter of law, to enter into the contract designated as Exhibit “B.”

[8] The allegations of the complaint tender issues of fact which ought to be considered in determining the validity of Exhibit “A.” It is alleged that the liabilities thereby assumed by the city do by both direct and indirect methods incur an indebtedness in excess of the income or revenue provided by said city and are, therefore, void as being in violation of the state constitution and city charter. In the absence of an answer denying said allegations .they must stand admitted. We do not deem it necessary to pass upon said issues at the present time as they may be more properly and orderly disposed of after the proofs have been made in accordance with the issues tendered.

Judgment reversed.

Richards, J., Curtis, J., Waste, C. J., Tyler, J., pro tem., and Preston, J., concurred.