Board of Liquidation of the City Debt v. Louisiana Lucertia

In 1890 the legislature of Louisiana enacted a law for the refunding or retirement of certain outstanding debts of the city of New Orleans, and for the further carrying out of a plan relating to a portion of the city debt, known as the premium bond plan. The act specified the debts to be refunded or retired, and provided, moreover, substantially as follows:

The board of liquidation of the city debt, which we shall hereafter refer to as the board of liquidation, which had been created by previous laws, in addition to the powers which it already possessed, was made a corporation, and was authorized to execute the refunding law. The city was directed to deliver to the board of liquidation municipal bonds not exceeding in amount $10,000,000, the series to be known as the 'constitutional bonds of the city of New Orleans.' The board of liquidation was directed to countersign and issue as many of these bonds as might be required for the refunding or retiring operations. To pay the interest on the bonds and to provide for a sinking fund, which the law directed should be accumulated, as well as for the execution of its other provisions, a special ad valorem tax of 1 per cent was directed to be levied by the municipality annually upon all the taxable property within the city of New Orleans until 'the principal and interest of the bonds herein provided to be issued are fully paid.' The proceeds of this tax were directed to be paid over to the board of liquidation day by day as collected, and the city was deprived of all control over or custody of the avails of the tax, the disbursement thereof being solely vested in the board of liquidation, subject to its duty to account to the city for the expenditure. It was recited (§ 16) 'that all of the substantial provisions of this act are hereby declared to be a contract between the state of Louisiana, the city of New Orleans, the taxpayers of said city, and each and every holder of the said constitutional bonds.' The law (§ 8), after limiting the purposes to which the funds arising from the 1 per cent tax should be primarily disbursed by the board of liquidation, contained the following:

'After making, in each year, the provisions above required, and after deducting the expenses incurred by such board, and after paying any deficiency in the interest fund of any previous year, one half of the surplus of said tax shall be passed to the credit of a special fund, to be known as the 'permanent public improvement fund,' to be disposed of as hereinafter provided. The other half of said surplus shall be paid over to the school board of the city of New Orleans, in addition to any fund appropriated by said city out of other funds, to be used in the maintenance and support of the public schools in said city.'

It was further provided (§ 10):

'That the permanent public improvement fund, above provided for, shall be used exclusively for the construction of permanent public improvements in the city of New Orleans, such as levees, canals, drainage stations, pavements, public buildings, public parks, and bridges; and an ordinance passed by the said council, to be paid out of this fund, shall first be approved by said board of liquidation, who shall not draw any check on said fund unless they are convinced, upon proper inquiry, that said ordinance covers the construction of a permanent public improvement within the purview of this act. The true intent and meaning of this clause is not to give said board any authority to say to what permanent public improvement any fund shall be applied, but only to see that said funds shall be applied exclusively to the construction of improvements that are permanent.'

The Constitution of the state of Louisiana, at the time the foregoing law was passed, contained restrictions upon the authority both of the legislature and the city of New Orleans, with which many of the provisions of the refunding law were in conflict. It was consequently provided that the main provisions of the law should not go into effect until they were ratified by the adoption of a constitutional amendment, which was submitted by an act passed at the same session at which the refunding law was adopted. This amendment to the Constitution was ratified at a general election in 1892. The amendment to the Constitution, however, was not soley confined to an approval of the refunding act, but contained a provision empowering the city of New Orleans 'to examine into and assume the payment of the claims or obligations of the board of school directors for the city and parish of Orleans due for the years 1880, 1881, 1882, 1883, and 1884, now in the hands of original owners, who have in nowise parted with their rights of ownership, or pledged the same, as may be found to be equitably due by said board for services rendered, labor performed, or materials furnished by authority of said board.' The power of the city to exercise the discretion thus conferred depended upon the adoption of the amendment to the Constitution, because the school board was a distinct corporation from the city of New Orleans, and its debts were not debts of the city; and without the amendment the legislature could not have empowered the city to assume to pay a sum which it did not owe, because the amount was soley due by another and distinct corporation.

After the adoption of the amendment the city of New Orleans contracted for various works of public improvement, and the cost of these works, it was either expressly or impliedly agreed, should be paid out of the permanent public improvement fund, to arise from one half the surplus of the 1 per cent tax, as provided in the amendment of 1892 and the refunding law.

In July, 1895, a plan for the drainage of the city of New Orleans was devised by the municipality. In 1896 a law was enacted creating the drainage commission of New Orleans, with authority to execute the aforestated plan of drainage, with such modifications as might be deemed necessary for its successful accomplishment. The law provided (§ 6), in order 'to raise funds for the purpose of doing such work speedily and on an extensive scale, said drainage commission of New Orleans shall have power to issue and dispose of its negotiable bonds to an amount not exceeding $5,000,000. . . . All moneys and funds dedicated and applied by this act to the purposes thereof are consecrated to the payment of the principal and interest on said bonds.' The funds thus referred to were enumerated in the act (§ 3), and consisted of the moneys in the hands of the board of liquidation derived from one half the surplus of the 1 per cent tax levied after January 1, 1898. In other words, as the city had, prior to 1896, contracted for public improvements payable out of the surplus, so much of the surplus fund as accrued from taxes levied prior to January 1, 1898, was not transferred to the drainage commission, but was left to be applied to the discharge of the sum due on the contracts which the city had theretofore made on the faith of the surplus fund. In addition, the act also 'dedicated and applied' to the purposes of the drainage commission 'all moneys and funds now under the control of the city of New Orleans, and hereafter to be received, arising from the sale of street-railroad franchises and other franchises.' In 1898 the law just referred to was amended in various particulars, one of these amendments reducing the amount of bonds which the drainage commission was authorized to issue from $5,000,000 to $1,500,000.

The board of liquidation received from the city of New Orleans the series of ten millions of constitutional bonds, and sold or otherwise issued $8,998,500 thereof, leaving in its hands bonds amounting to $1,001,500. There yet remained, however, certain outstanding debts subject to be refunded or retired, amounting to about $137,050.

The drainage commission, as it was authorized to do, caused to be prepared 1,500 bonds of $1,000 each. Five hundred of these bonds were sold in June, 1898, realizing $505,238. There was paid over to the commission the proceeds of the sale of certain street-railroad franchises, amounting to $579,582.12. Between May, 1897, and the 12th of May, 1898, the commission made contracts for the work of draining the city to the amount of 1,834,465.35, and prior to May 12, 1898, had paid on account of these contracts, as the work progressed, $797,363.06, leaving due the sum of $1,037,102.29, which was payable as the work proceeded.

In 1896 a convention to frame a new constitution for the state of Louisiana was assembled, and the instrument which that body adopted was, subsequent to May 12, 1898, declared to be the Constitution of the state without submitting the provisions thereof for ratification by a vote of the people. By article 314 of this Constitution the constitutional amendment adopted at the election of 1892, relating to the retirement or the refunding of the city debt, was reiterated. The discretion, however, which had been conferred upon the municipal government of the city of New Orleans by the constitutional amendment of 1892, to assume payment of certain claims against the school board, apparently not having been availed of, article 315 of the new Constitution imposed a positive duty on the city to examine specified debts due by the school board, and to issue certificates of indebtedness to the amount found to be due. These debts the Constitution provided for in article 317, as follows: 'The funds requisite to pay said claims shall be provided by said board of liquidation, by the sale of a sufficient number of the constitutional bonds of the city of New Orleans of the issue provided for by act No. 110 of the general assembly for the year 1890, and by the amendment to the Constitution of the state submitted to the people by said act and adopted at the general election in 1892.'

The city of New Orleans ascertained the amount of the claims to be $115,558.33, and issued certificates as required by the constitution. The board of liquidation, refusing to sell bonds for the payment of the certificates, proceedings by mandamus to compel it to do so were commenced. The return of the board of liquidation to the alternative rule for mandamus denied the right of the relators to the relief by them prayed, for various reasons based upon purely local and non-Federal contentions, to which we need not refer. The return thereupon specially set up and claimed that the carrying out of article 317 of the new Constitution by selling any of the constitutional bonds to provide the funds to pay the debt of the relators would bring about an impairment of the obligations of certain contracts, and therefore would cause the article of the Constitution to be repugnant to § 10, article 1, of the Constitution of the United States. The return, besides, alleged that the sale of the bonds, as required, would deprive the contract creditors of their property without due process of law, in violation of the 14th Amendment of the Constitution of the United States. The grounds upon which the protection of the Constitution of the United States was invoked were stated in the return with much elaboration. All the averments on this subject, however, are reducible to the following:

First. That under the powers conferred upon it the respondent board was qualified in every respect to enforce the rights of all the bondholders, and of each and every person having a contract claim to any portion of the 1 per cent tax.

Second. That as the refunding law and the amendment to the Constitution of 1892 had authorized a series of constitutional bonds to be issued solely for certain specified debts, the sale of any such bonds, as required by the provision of the new Constitution, to pay debts other than those originally contemplated, would impair the obligations of the contracts which had arisen from the refunding law and amendment of 1892 in favor of those to whom the constitutional bonds had already been issued, and would also impair the obligation of the contract in favor of the premium bondholders and other creditors who had not exchanged their claims for bonds of the constitutional series.

Third. That as the surplus of the 1 per cent tax had been directed to be applied, one half to the school board and the other half to a permanent public improvement fund, the issue of bonds payable out of the 1 per cent tax for any other debts than those originally contemplated would necessarily, to the extent of such issue, increase the payments to be made out of the 1 per cent tax, and therefore diminish the sum of the surplus. That this decrease in the amount of the surplus would impair the obligations of the contracts existing in favor of the following classes of creditors: First, those who had contracted with the city to execute certain works of public improvement on the faith of the surplus. Second, those bondholders who the drainage commission upon the faith of kthe drainge commission upon the faith of the surplus fund. Third, those who had contracted with the drainage commission in reliance upon the surplus fund. The return in addition alleged that the sale of the bonds as prayed would injuriously affect the sale by the drainage commission of the $1,000,000 bonds which that board had not yet disposed of, and therefore would further impair the obligation of the contracts existing in favor of all the creditors of the drainage commission, as such creditors had contracted with the commission upon the faith of the undiminished and unimpaired power to sell the bonds as originally provided for. It was besides alleged that, as one half of the surplus had been consecrated to the school board, the diminution of the surplus which would be occasioned by the sale of bonds for any other debts than those originally provided for would impair the obligations of the contract which had been engendered in favor of the school board as the result of the provision dedicating the one half of that surplus to that board.

The drainage commission intervened in the cause, and after asserting its right to protect its own interest so far as the further issue of bonds was concerned, and to champion the interest of those to whom bonds had been issued and with whom contracts had been made, specifically charged that the provision of the new Constitution was in violation of the contract clause of the Constitution of the United States and the 14th Amendment upon grounds substantially identical with those which had been alleged in the return of the board of liquidation.

After hearing, the trial court dismissed the intervention of the drainage commission, because it concluded that the commission had no capacity to stand in judgment for the purpose of protecting either its own right to further issue bonds, or in order to protect the rights of the holders of drainage bonds already issued, and those who had contracted to do the drainage work. On the merits the trial court held that the return made by the board of liquidation was insufficient, and it therefore allowed a peremptory mandamus commanding the board of liquidation to sell a sufficient quantity of the constitutional bonds to provide the means for paying the sum of the certificates held by the relators, with 5 per cent interest thereon from the date of the application for mandamus. Both the board of liquidation and the drainage commission prosecuted appeals to the supreme court of the state of Louisiana.

That court, in deciding the appeals, delivered an elaborate opinion. After holding that the school board was a distinct corporation from the city of New Orleans, and therefore the debts of the school board were not those of the city, the court, determined that it was within the power of the constitutional convention to impose the duty on the city of assuming debts of a different corporation. Having reached this conclusion, the court approached the consideration of the power of the convention to direct the board of liquidation to sell a sufficient number of constitutional bonds to pay the debt thus assumed. It considered this question, first, from the aspect of the authority of the convention over the board of liquidation and the drainage commission, without reference to the limitations imposed by the contract clause of the Constitution of the United States, and then passed on the question of contract and its impairment. In the first aspect it was decided that, as the board of liquidation and the drainage commission were but creatures of the lawmaking power of the state, both these bodies were subject to and controlled by the imperative command of the Constitution. That, albeit by the original act of refunding and the amendment which ratified it the bonds of the constitutional series were only to be issued for particular classes of debt, a subsequent constitutional requirement that certain of the bonds should be sold to pay another class of debts was paramount, and therefore must be obeyed by the board of liquidation. It was held that although the drainage commission, by the act creating it, was empowered to execute a general plan of drainage for the city of New Orleans, its duty in this regard was subject to future control, and hence that it was within the power of a subsequent legislature to modify or wholly suspend the drainage work by discontinuing the duties of the board, and, a fortiori, it was within the power of the constitutional convention to bring about the same result. Having established this premise, the learned court reached the conclusion that, even although the future execution of the drainage work, under the plan originally conceived, might be wholly impeded or seriously diminished by making other charges against the surplus than those originally contemplated, nevertheless it was the duty of the board to comply with the state Constitution, because whether or not the drainage work should be continued as first designed was a question of public policy, which the convention had a right to determine.

While laying down the foregoing, when the court considered the question of the alleged impairment of contract rights it held that the propositions which it had previously announced were all qualified and restrained by the contract clause of the Constitution of the United States, and therefore the provision of the Constitution requiring the sale of the bonds to produce the funds to pay the school debt would be relatively void if it conflicted with or impaired the contract rights of the following classes of creditors, viz.: The holders of the constitutional and of the premium bonds; those who held debts subject to be funded into constitutional bonds, but who had not yet exercised such right; those who had contracted with the city for works of public improvement on the faith of the surplus; those who held the drainage bonds issued by the drainage commission; and, finally, those who had contracted with that commission prior to the adoption of the Constitution.

In coming to consider the question of impairment the court declared that the contract which had arisen with the holders of the constitutional bonds was that no bonds of that series should be issued for any other than the debts specified in the refunding and retiring act and in the constitutional amendment of 1892; that the surplus fund contemplated by the act and the amendment was not simply the surplus arising after applying the 1 per cent tax to the payment of a ten-million issue of bonds, but was the surplus which might arise from the application of the 1 per cent tax to the payment of such amount of the ten-million issue as had been, and would be from time to time, required in the refunding or retiring of the debts specified in the act and amendment. It was therefore decided that the sale of any bonds of the series for the purpose of paying any other debts than those specified and originally contemplated would impair the obligation of the contract creditors having a right to payment out of the 1 per cent tax and of the contract creditors having a right to be paid out of the surplus fund. This impairment, however, it was held, could only arise in the event the payment of the bonds provided to be sold to pay the school debts assumed by the city interfered in any way with the funds required to discharge the claims of the contract creditors as above stated. But such interference, the court held, did not and could not arise, inasmuch as the bonds which the Constitution provided should be sold would be, when issued by the board of liquidation, subordinate to all the contract rights above stated. That is to say, that it was the duty of the board of liquidation to sell the bonds, but that when issued they would not be entitled to payment out of either the 1 per cent tax or the surplus fund until all the contract rights had been provided for, as above enumerated. Indeed, it was held that, if it was necessary for the drainage commission to sell the bonds which it was authorized to issue for the purpose of paying for the work contracted for prior to the adoption of the Constitution, these drainage bonds when thus sold would also be entitled to a priority of application of the surplus of the 1 per cent tax before any part thereof could be used to pay the bonds which the board of liquidation was directed to sell for the purpose of the retirement of the school certificates.

While it was thus decided that the bonds to be sold for the school purposes would be subordinate to all the contract rights, and therefore, in the nature of things, could not interfere with or impair such contract rights, the bonds in question were yet declared by the court to be entitled to be paid out of any of the surplus fund which might remain after the discharge of the contract claims, with the preference over any rights which might arise from contracts made by the drainage commission after the adoption of the new Constitution for the further execution of the drainage plan; this being predicated upon the conclusion that the state Constitution, while it could not impair contract rights, could yet lawfully diminish or change the plan of drainage in so far as its future execution was concerned. In the margin are excerpts from the opinion of the supreme court of Louisiana (51 La. Ann. 1849, 26 So. 679), which more elaborately state the conclusions which we have above summarized.

And all the views which the court expounded were based on a ruling by it made, that the board of liquidation, under the provisions of the statutes of Louisiana defining the powers of that board, was invested with such a relation to the contract creditors as empowered it to stand in judgment for the purpose of protecting the contracts from impairment, and hence authorized it to plead the defenses which it had asserted in its return to the rule for mandamus. The judgment of the trial court was affirmed.

The board of liquidation applied for a rehearing mainly on the ground that, although the views expressed in the opinion of the court had fully recognized the rights of the contract creditors, nevertheless the decree had deprived the contract creditors of the protection to which the opinion acknowledged they were entitled under the Constitution of the United States. This was on the assumption that, as the decree of the trial court directed the issue of bonds according to the refunding act and the amendment of 1892, therefore a compliance with its commands would compel the board to sell negotiable bonds indistinguishable from the other bonds of the same series, and hence pur those thus sold on exactly the same footing as the bonds previously issued.

The drainage commission also applied for a rehearing on grounds substantially identical with those urged by the board of liquidation, and upon the further contention that an injustice had been done it, since the court, although it in effect, in its opinion, recognized the right of the commission to intervene, had nevertheless affirmed the judgment of the trial court, which dismissed the drainage commission from the cause upon the assumption that it had no capacity to stand in judgment and champion the rights of the creditors. Both the applicants for rehearing complained of the affirmance of the decree below in so far as it directed the payment of interest on the claims of the certificate holders.

The court granted the rehearing to a limited extent, reversed the judgment below in so far as it dismissed the intervention of the drainage commission and to the extent that it allowed interest, and in other respects reiterated the affirmance. These writs of error were then prosecuted. At a previous term of this court motions to dismiss or affirm were made, and their consideration was postponed to the hearing on the merits.

Mr. Branch K. Miller for the Board of Liquidation.

Messrs. W. B. Spencer and W. W. Howe for Drainage Commission.

Messrs. Charles J. Theard, Arthur McQuirk, and Henry L. Lazarus for defendants in error.

Mr. Justice White, after making the foregoing statement of the case, delivered the opinion of the court: