Penn Mutual Life Insurance Company v. Austin

The court below sustained a demurrer to and dismissed for want of equity the bill of the complainants, by which, as citizens of the states of Pennsylvania, Maryland, and New York, respectively, they impleaded the defendants, the one a municipal corporation created by a law of the state of Texas, and its mayor and board of public works, citizens of the state of Texas, and the other a corporation organized under the authority of the general laws of the state of Texas regulating the formation of corporations, also a citizen of that state.

The bill, which was filed on January 3, 1895, alleged, in substance, as follows: That the city of Austin was in 1892 a municipal corporation, and that for many years its inhabitants and the city itself, for municipal purposes, had been supplied with water by a corporation known as the City Water Company; that in 1882, in consequence of the growth of the city, both for the health of the people of the city, the safety of its property, and the development of its manufacturing industries, a larger supply of water was absolutely needed, and that the taxpayers pr sented a petition to the city authorities asking that an arrangement, by contract or otherwise, be at once made to afford the augmented water supply which was essential; that the municipality, being fully empowered by its charter to supply water and being authorized by the general laws of the state of Texas to make a contract for so doing, on the 13th day of April, 1882, did enter into a contract with the City Water Company to the end that a more copious supply of water should be furnished; that this contract gave to the company the right to furnish water for 20 years, with the privilege on the part of the city of buying at the end of 10 years, or at any time on giving one year's notice, the water works which the contract required the company to erect; that the contract fixed a reasonable price to be paid for the use of water to be furnished by the water company, provided for the establishment of a given number of hydrants for the use of the city, and stipulated a rental therefor; that it imposed upon the corporation obligations of the most onerous character, compelling it to erect a large and costly plant, to lay extensive mains and pipes, and to extend them at any time during the life of the contract wherever the city might direct, and exacted that the company should add new hydrants for municipal uses as the city might require, giving to the water company as compensation, in addition to the rentals to be paid by the city for hydrants, as above stated, a commutation of municipal taxation.

The bill averred that the contract was in all respects advantageous to the city and beneficial to its inhabitants, and was, indeed, as to each and every obligation contained therein or resulting therefrom, reasonable and just; that the city at the time the contract was entered into was not in a position to itself erect the works without inordinately increasing its burden of taxation, and that the contract contemplated that the water company should obtain the money to erect the works by issuing its negotiable bonds, since there was therein contained a stipulation that the money to become due for the rentals of the hydrants should be paid by the city to the trustee of any bonds which might be issued by the water company, so as to guaranty the prompt payment of the interest on any such bonds; that the water company, on the faith of the contract, issued to the Farmers' Loan & Trust Company its negotiable bonds for $250,000, secured them by mortgage upon all its property, present and prospective, and with the sum thus realized and other available resources, with integrity and fidelity, and in complete compliance with every obligation resting on it, erected the desired waterworks plant, which afforded the desired supply of water; that, of the bonds thus issued to the Farmers' Loan & Trust Company, $100,000 in amount were bought for more than their face value in open market by the Penn Mutual Life Insurance Company, one of the complainants. The bill, moreover, alleged that in March, 1883, after the plant had been constructed and many miles of mains had been laid, the city, by ordinance duly enacted, accepted the work, and declared that the water company had fully performed its obligations; that subsequent to this date the city directed a very large extension of the mains and pipes to be made, which was promptly executed by the water company with money obtained from an additional issue of bonds to the Farmers' Loan & Trust Company amounting to $100,000, $10,000 of which Jacob Tome, another of the complainants, bought for full value in open market.

The bill then alleged that in 1884 the city of Austin contracted with a corporation known as the Austin Electric Light Company to build and carry on a plant required to light that city, and that this corporation issued its bonds to carry out its corporate purposes to the extent of $25,000; that in June, 1887, all the plant rights, privileges, franchises, and obligations of this electric light company, as well as those of the water company, were, ith the consent and approval of the city of Austin, transferred to a corporation known as the Austin Water, Light & Power Company, a Texas corporation, having corporate capacity both to undertake the duty of supplying water and of furnishing light to the city of Austin; that, in consequence of its assumption of all the obligations of both the aforementioned companies, the Austin Water, Light & Power Company was required by the city to make considerable additions to its water mains, and, in order to obtain the capital to execute these directions of the city, that company issued to the Farmers' Loan & Trust Company of New York $750,000 of bonds, secured by mortgage upon all its property, $375,000 of these bonds being reserved to pay the outstanding bonds (that is, the $250,000 first issue of the water company, the $100,000 second issue, and the $25,000 issue by the Austin Electric Light Company), and the remaining $375,000 being negotiated in open market for full value, the proceeds being expended in complying with the city's direction, and that $50,000 of these last bonds were purchased in open market for full value by Ogden and Robert Goelet, the last-named complainants. The bill averred that the waterworks thus originally established and extended were in every respect entirely adequate to supply every want, not only of all the inhabitants of the city of Austin, but of the municipality, and that in each and every particular the municipality was as advantageously placed with respect to a water supply as it could have been under any condition or circumstance whatever.

The bill then alleged that despite the existence of the contract, and the entire justness and fairness of each and every obligation and stipulation therein contained, and without any just reason therefor, the city of Austin, on the 31st day of March, 1890, passed an ordinance entitled 'An ordinance ordering an election to obtain the consent of the property tax paying qualified voters of the city of Austin to the extension by the city council of the bonded indebtedness of the city of Austin for the purposes of constructing a system of waterworks and furnishing lights for the city of Austin'; that this ordinance provided that an election should be held on the 5th day of May, 1890, to obtain the consent of the taxpayers for an increase of the bonded indebtedness of the city to the amount of $1,400,000 for the purpose of obtaining money to erect a system of waterworks and an electric light plant for lighting the city; that on the 5th of May, 1890, the election was held, as provided, and the taxpayers gave their assent to the proposition submitted by the ordinance, and that the city council thereafter declared the election to have been carried, and that the power to issue bonds had been sanctioned; that on July 21, 1890, the city passed an ordinance authorizing the increased issue of $1,400,000 of bonds, providing for the levy and collection each year, as long as the bonds should be outstanding, of a tax to aid in paying the same. This ordinance directed that the bonds on their face should not only contain a statement of the objects for which they were issued, but should also show that their payment was secured by all the sums to be collected for the use of the water to be furnished by the new plant, and the ordinance moreover contained a provision guarantying that the rates to be charged for the water to be furnished should be so regulated that their product would equal the sum of the interest on the bonds, and a sinking fund to provide for the retirement of the principal thereof. The money to be realized from the sale of the bonds was required to be set apart in a distinct fund, to be warranted for from time to time in payment of the work as it progressed. The character of the work to be done was, moreover, fixed by an ordinance which empowered the board of public works to construct waterworks by means of a dam across the Colorado river at a designated point, in accordance with the plans o a civil engineer who was named therein.

It was alleged that, as the purpose and necessary effect of the foregoing action of the city was to impair the contract rights of the Austin Water, Light & Power Company held by it as the assignee of the two original companies, the ordinances passed by the city, and each and everything subsequently done thereunder, was void, because repugnant to the constitution of the United States. The bill, moreover, averred that in April, 1891, the legislature of the state of Texas passed an act giving a new charter to the city of Austin, which contained an express grant of power to that city to construct for its own use a waterworks plant, and that the sole object of this new charter was to sanction the action of the municipality previously taken, and therefore the act in question was also void under the constitution of the United States, because it impaired the previous contract rights of the Austin Water, Light & Power Company.

It was averred that the board of public works had 'already expended a large sum of money in the construction of a dam across the Colorado river,' and 'are now actually laying water pipe in and along the streets of the city of Austin, and it is the avowed intention of the said city to press the construction of said rival system of waterworks to a speedy completion, and upon the completion of the same to discontinue the taking of water from the said water company, and to refuse to perform any obligation resting upon the said city as embraced in the said contract with the said city water company.' It was alleged that the tax provided by the ordinance which authorized the building of the new waterworks had been levied for the years 1893 and 1894, and that the property of the Austin Water, Light & Power Company had been assessed for this tax, and that the property of the company was thus being levied upon for a tax to used for the purpose of erecting the new works which were intended to take the place of its plant, and thereby to destroy its contract rights. Although the bill was filed by the complainants in virtue of their rights as holders and owners of the bonds issued or assumed by the Austin Water, Light & Power Company, as aforesaid, it contained no averment that either the bondholders, who were complainants, or any others, had at any previous time requested the trustee to take any action so as to prevent the accomplishment of the violation of the contract rights of the corporation and its bondholders, which it was alleged had inevitably arisen from the action of the city originating in 1890. The bill, however, contained the following averments:

'That as soon as the said city of Austin announced its intention of constructing a rival system of waterworks, and before anything was done in pursuance thereof, the said M. D. Mathers, president of the Austin Water, Light & Power Company, on behalf of the said water company and these bondholders, remonstrated with the said mayor and city council, and requested them and urged them not to violate the said contract, or to take any steps to depreciate the value of the property of the said water company, but to exercise the right which the said city has to purchase the said works at their appraised value; and the said bondholders have continued, ever since that time, to remonstrate with the said city of Austin and the officers thereof, but that the said city has entirely disregarded the said remonstrances and requests, and has openly repudiated all liability under the said contract.'

And further the bill alleged:

'That your orators and the other bondholders of the said water company have repeatedly applied to the said Austin Water, Light & Power Company, and its president and board of directors, and requested them to institute proceedings to protect the property of the said water company, and the rights therein of the said bondholders, but that the said water company has failed to comply with the request of your orators and said bondholders; but the said Austin Water, Light & Power Company, and the officers thereof, by reason of the contract relations existing between the said city of Austin and the said company, fear that the consequences of any such litigation instituted by the said water company would be exceedingly disastrous, and would precipitate adverse and hostile action by the said city of Austin.'

The relief asked by the bill is thus stated in the prayer thereof:

'That your orators may have the decree of your honorable court, adjudging and decreeing that the said ordinance and contract, so accepted and acted upon by all the parties, are in full force and effect, and that the said contract is a valid and subsisting contract, binding upon the said city as well as upon the said water company and upon the said bondholders, and that the said city must abide by and perform the same, and that until its purchase of the said existing waterworks, in the manner and upon the terms set forth in the said contract, and that the said city of Austin, its mayor and city council and board of public works, have no right or power to construct a river waterworks system to, in any way, interfere with the rights of the said Austin Water, Light & Power Company, and that it is unlawful and inequitable for the said city of Austin to levy and collect the tax upon the property of the said Austin Water, Light & Power Company to be expended in the unlawful and inequitable manner hereinbefore alleged, in the construction of a rival system of waterworks; and that a writ of injunction may issue out of this honorable court restraining the said city of Austin, its mayor and city council and board of public works, and its other officers, servants, agents, and employees, from taking a supply of water from any other source, and from proceeding in constructing and maintaining a new and distinct system of waterworks, and from taking and appropriating to its own use, except in the manner provided in said contract, any portion of the said works, so constructed at its instance and for its benefit with money furnished upon the faith of its obligation by the said Austin Water, Light & Power Company, and the said bondholders, and that your orators may have such other and further relief as the case may, in equity, require and as to this honorable court may seem proper.'

The demurrer which the lower court sustained, besides asserting that the bill disclosed no cause for equitable relief, rested upon seven grounds, which may be reduced to six, substantially as follows: (1) Because by the constitution of the state of Texas the contract made by the city of Austin with the water company was void; (2) because the contract was beyond the power of the corporation as defined in its charter and as limited by the general laws of the state of Teaxs; (3) because the commutation of taxation granted to the water company was in its essence but an exemption, and the city was without power, under the constitution of the state of Texas, to grant it; (4) because, even if an exclusive right was given to the water company, such grant, under the constitution and laws of the state of Texas, was subject to alteration, amendment, or repeal by the legislature which had exercised such reserved power; (5) because the granting of any exclusive rights was forbidden by the constitution which was in force at the time the alleged contract was made; (6) because even if the complainants had any contract rights, and if there had been an impairment thereof, full and adequate remedy was afforded by an action at law, and there was hence no reason for the interposition of a court of equity.

D. T. Watson, Skipwith Wilmer, and S. B. Huey, for appellants.

S. R. Fisher, for appellees.

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