Superior Water Light Power Company v. City of Superior/Opinion of the Court

Since 1848 the Constitution of Wisconsin has contained the following clause:

Article XI, § 1: 'Corporations without banking powers or     privileges may be formed under general laws, but shall not be      created by special act, except for municipal purposes, and in      cases where, in the judgment of the Legislature, the objects      of the corporation cannot be attained under general laws. All     general laws or special acts enacted under the provisions of      this section may be altered or repealed by the Legislature at      any time after their passage.'

Chapter 359, Private and Local Laws of Wisconsin of 1866, incorporated plaintiff in error's predecessor, the Superior Water Works Company, and empowered it to make—

'any agreements, contracts, grants and leases for the sale,     use and distribution of water as may be agreed upon between      said company and any person or persons, associations and corporations, and with the town of Superior, or neighboring      towns; or the said company itself may take and use the      surplus water for manufacturing or other purposes; which said      agreements, contracts, grants and leases shall be valid and      effectual in law.'

On October 15, 1887, in order to provide fire protection and secure pure and wholesome water, and in consideration of benefits to accrue therefrom, the village of Superior, a municipal corporation, by ordinance, granted to Superior Water Works Company, its successors and assigns, for a period of 30 years, the privilege of establishing, maintaining, and operating a complete system of waterworks. The ordinance specified the duties and obligations of the parties, and, among other things, provided that the village would abstain for 30 years from granting the right to lay water pipes in its streets to any other party and that the main source of water should be Superior Bay; but if the village at its expense should secure an indefeasible right to lay pipes across Minnesota Point in the state of Minnesota, etc., the company would take water from Lake Superior, and further that—

'at the expiration of the said thirty years, should the said     village refuse to grant to the said Superior Waterworks      Company, its successors or assigns, the right to continue and      maintain said system of water works for another term of      thirty years, upon the said terms and conditions as may exist      between the said village or city and the said Superior      Waterworks Company, at the expiration of the first thirty      years, in and upon the public grounds and streets of the said      village and to supply the said village and the inhabitants      thereof with water on reasonable terms, then and in such      case, the village shall purchase from said Superior      Waterworks Company, its successors or assigns, said system of      water works and the property connected therewith, at a fair      valuation as provided for in section XIII.' Section XIII provided for arbitrators to determine the actual value of the plant, exclusive of privileges granted by the village, not to exceed what it would cost to construct the same, etc. Section XIV:

'Within thirty days after the passage of this ordinance said     Superior Waterworks Company may file with the village clerk      its acceptance thereof, duly acknowledged before some      authorized officer and from and after the filing of said      acceptance this ordinance shall have the effect of and be a      contract between the village of Superior and the Superior      Waterworks Company and shall be the measure of the rights and      liabilities of said village as well as of said company, and      in case such acceptance is not so made and filed within      thirty days after the passage of this ordinance, the village      board shall have the right to repeal the same.'

The corporation accepted the ordinance, constructed the plant and many extensions, spent large sums in connection therewith, and long continued to operate it.

In March, 1889, the territory constituting the village of Superior was incorporated as the city of Superior. The charter declared that—

'All franchises heretofore granted, or contracts entered     into, by the village of Superior, shall continue and remain      in force in accordance with the terms thereof, as if the same      had been granted or entered into by said city of Superior.'      Chapter 152, p. 432, Laws 1889.

It further empowered the city—

'to provide for the purchase, construction, maintenance and     operation of waterworks for the supply of water to the      inhabitants of the city, and to supply such city with water      for fire protection and other purposes; and to secure the      erection of waterworks, said city may, by contract or      ordinance, grant to any person, persons, company or      corporation, the full right and privilege to build and own      such waterworks, and to maintain, operate and regulate the      same; and in doing so, to use the streets, alleys and bridges      of the city in laying and maintaining the necessary pipe      lines and hydrants for such term of years and on such      conditions as may be prescribed by such ordinance or contract; and may also, by contract or      ordinance, provide for supplying from such waterworks, the      city with water for flre protection and for other purposes,      and also the inhabitants thereof with water for such term of      years, for such price, in such manner, and subject to such      limitations as may be fixed by said contract or ordinance.'      Chapter 152, pp. 369, 370.

October 1, 1889, with the express assent of the Superior Waterworks Company and in consideration of the waiver of certain rights by the latter, the city of Superior amended section XIII Ordinance of October 15, 1887, so as to provide that, if purchased, the price to be paid for the waterworks plant should be ascertained by capitalizing the net earnings of the preceding year at 5 per centum. Sections II and III of this ordinance follow: 'Section II. This ordinance is passed upon the  consideration to the city of Superior that the said city   is hereby released and relieved from the duty, cost and   expense of procuring, for said Superior Waterworks   Company, the valid and indefeasible right to extend and   lay its pipes across the bay of Superior and across   Minnesota Point, to the shores of, and into Lake   Superior, as provided in section II of said ordinance   number one of the General Ordinances of the village of   Superior and that all that part of said section No. II,   commencing with the word 'provided' in the twentieth   line thereof, down to and including the word 'completed'   in the sixty-second line thereof, is hereby repealed. And this said ordinance is passed upon     the further consideration to the city of Superior, that by      the acceptance hereof the said Superior Waterworks Company      binds itself, its successors and assigns, to obtain at its      own expense an adequate supply of good and wholesome water      for domestic and public purposes from said Lake Superior and      to furnish the same to the inhabitants of said city and to      said city as provided in said ordinance number one as hereby      amended within two years from the acceptance of this      ordinance by said Superior Waterworks Company.

'Section III. This ordinance is passed with the consent of     the Superior Waterworks Company and upon filing a written      acceptance by it with the city clerk of the said city of      Superior the said ordinance with all other ordinances of said      city or the village of Superior granting to the said Superior      Waterworks Company any rights or franchises shall be and      become and is hereby made a binding contract as so amended      and modified.'

In compliance with the foregoint ordinance and agreement the supply lines of the water system were extended across Minnesota Point, in the state of Minnsota, and into Lake Superior. The company also acquired a parcel of land on that point and there installed wells, machinery and equipemtn which became an essential part of the system.

On November 1, 1889, the Superior Waterworks Company sold and transferred its plant with all appurtenant rights and privileges to plaintiff in error, the Superior Water, Light & Power Company. Three ordinances amended the grant of 1887 (in ways not now necessary to detail) in 1889, 1896, and 1899. Two of these provided for and received express acceptance by plaintiff in error.

In 1907 the Wisconsin Legislature enacted the Public Utility Law (chapter 499, Laws 1907; Sections 1797m-1 to 1797m-109, Wis. Stat. 1919), which created the Railroad Commission, a regulatory body, and authorized public utilities to surrender existing franchises and accept in lieu thereof 'indeterminate permits.' Chapter 596, Laws 1911, repealed the optional feature of the statute of 1907 and directed that every license, permit or franchise granted by the state or by any town, village or city to any corporation authorizing the latter to operate a plant for furnishing heat, light, water or power, etc., etc.--

'is so altered and amended as to constitute and to be an     'indeterminate permit' within the terms and meaning of      sections 1797m-1 to 1797m-108, inclusive of the statutes, *  *      * and subject to all the terms, provisions, conditions, and      limitations of said sections 1797m-1 to 1797m-108, inclusive      and shall have the same force and effect as a license,      permit, or franchise granted after July 11, 1907, to any      public utility embraced in and subject to the provisions of      said sections 1797m-1 to 1797m-108, inclusive, except as      provided by section 1797m-80.'

One of the provisions to which reference is made gives the municipality the right to purchase upon terms to be fixed by the State Railroad Commission.

The statute (section 1797m-1) declares the term—

"indeterminate permit' * *  * shall mean and embrace every      grant, directly or indirectly, from the state, to any      corporation, company, individual, association of individuals,      their lessees, trustees or receivers appinted by any court      whatsoever, of power, right or privilege to own, operate,      manage or control any plant or equipment or any part of a      plant or equipment within this state for the production,      transmission, delivery or furnishing of heat, light, water or      power, either directly or indirectly, to or for the public,      which shall continue in force until such time as the      municipality shall exercise its option to purchase as      provided in sections 1797m-1 to 1797m-109, inclusive, or      until it shall be otherwise terminated according to law.'

Plaintiff in error has not voluntarily submitted to the Public Utility Law.

On October 15, 1917, the prescribed 30-year limitation expired and plaintiff in error requested the city of Superior either to grant further right to mantain the system of water works or to purchase the same as provided by the ordinance of 1887 as amended in 1889. The city failed to make the grant, denied its obligation to purchase, and took steps under provisions of sections 1797m-1 to 1797m-109, Wisconsin Statutes, to condemn the entire plant. Thereupon plaintiff in error instituted the present cause against the city, its mayor and councilmen. The complaint sets out the foregoint facts, alleges repudiation of the obligation to purchase and the steps taken for condemnation, and asks a decree requiring the city specifically to perform its agreement, for an injunction restraining further efforts to condemn and for general relief.

The trial court overruled a general demurrer but this action was reversed by the Supreme Court (174 Wis. 257, 181 N. W. 113, 183 N. W. 254), which held that the act of 1907 (chapter 499), as amended in 1911, was permissible under the reserved power to alter, amend or repeal acts providing for formation or creation of corporations, and that it had substituted an 'indeterminate permit' for the rights granted to the plaintiff in error by the municipality. 'A new franchise was therefore granted to the defendant in lieu of its original franchise by the enactment of chapter 596, Laws 1911. Thereafter its franchise was that of the indeterminate permit, and it was subject to the provisions of the Public Utility Law. This also was its franchise on October 1, 1917, when it is claimed its original franchise expired. The Public Utility Law had superseded everything of a franchise nature embodied in the original ordinance granted to it by the village of Superior and the subsequent and succeeding amendments thereto.' And also that it was immaterial whether or not a contract between the city and the water company resulted from the clause of the original ordinance providing for extension of the grant or purchase after thirty years, because 'even though it be considered as a contract, we think it gives rise to no obligation on the part of the city to purchase the plant according to its terms.'

The court further said (174 Wis. 288, 181 N. W. 124):

'The manifest purpose of the provision was to assure the     water company one of two things: either a renewal of its      franchise for another period of thirty years or a sale of its      property in case such franchise be not renewed. The franchise     called for was one having 'the same terms and conditions as      may exist between the said village or city and the said      Superior Waterworks Company at the expiration of the first      thirty years.' The franchise which it had at that date was      the indeterminate permit. That was either its franchise or it     had none. That was a continuing franchise. It was     indeterminate as to time. It was not limited to thirty years     or any other period. Consequently there was no occasion for     the city to 'grant to the said Superior Waterworks Company,      its successors or assigns, the right to continue and maintain      said system of waterworks.' It already had that right. There     was therefore no breach of this part of the alleged contract      on the part of the city. Until there was a breach of this     provision of the contract, no obligation on the part of the      city to purchase according to the terms of the contract      arose. It seems plain that the position of the water company     is not helped by construing this provision of the ordinance      as a contract made by the city in its proprietary capacity. The conditions precedent to an obligation on the part of the     city to buy under the terms of the contract have not come to      pass, and the city has in no manner become obligated to carry      out the feature of the contract which is sought to be      enforced in this action.'

Considering the opinions of this court, it seems clear enough that a valid contract resulted from the dealings between the city of Superior and plaintiff in error whereby each became obligated to do certain specified things. The company agreed to construct, maintain and operate an adequate waterworks system. The city obligated itself to recognize the company's exclusive right to maintain and operate the system for a definite period, 30 years, and also to purchase the entire plant at a price fixed in the manner specified if at the conclusion of such period it should refuse to grant an extension. The rights so acquired by plaintiff in error were property. Pearsall v. Great Northern Ry., 161 U.S. 646, 16 Sup. Ct. 705, 40 L. Ed. 838; Detroit v. Detroit Citizens' St. Ry. Co., 184 U.S. 368, 384, 22 Sup. Ct. 410, 46 L. Ed. 592; Cleveland v. Cleveland City Ry. Co., 194 U.S. 517, 536, 24 Sup. Ct. 756, 48 L. Ed. 1102; Vicksburg v. Vicksburg Waterworks Co., 206 U.S. 496, 27 Sup. Ct. 762, 51 L. Ed. 1155; Louisville v. Cumberland Telephone Co., 224 U.S. 649, 664, 32 Sup. Ct. 572, 56 L. Ed. 934; Grand Trunk Western Ry. Co. v. South Bend, 227 U.S. 544, 556, 33 Sup. Ct. 303, 57 L. Ed. 633, 44 L. R. A. (N. S.) 405; Owensboro v. Cumberland Telephone Co., 230 U.S. 58, 73, 33 Sup. Ct. 988, 57 L. Ed. 389; Old Colony Trust Co. v. Omaha, 230 U.S. 100, 117, 33 Sup. Ct. 967, 57 L. Ed. 1410; Detroit United Ry. v. Michigan, 242 U.S. 238, 253, 37 Sup. Ct. 87, 61 L. Ed. 268; Northern Ohio Trac. Co. v. Ohio, 245 U.S. 574, 585, 38 Sup. Ct. 196, 62 L. Ed. 481, L. R. A. 1918E, 865; Columbus Ry. & Power Co. v. Columbus, 249 U.S. 399, 407, 39 Sup. Ct. 349, 63 L. Ed. 669, 6 A. L. R. 1648.

Concerning the relation between the parties the court below declared:

'The franchise of the water company, which enables it to     pursue its business of supplying water to the city of      Superior and its inhabitants, is a contract between it and      the state.'

But it held the Legislature had power to change this contract under the reservation permitting alterations, in section 1, art. 11, of the state Constitution, and that the act of 1911 did modify the contract by substituting for rights thereby secured an 'indeterminate permit.'

Through its contract with the city the water company acquired valuable property rights. They were not directly created by any statute enacted under section 1, art. 11, of the state Constitution, but were the outcome of agreement with a fully empowered corporation. They did not arise from the mere exercise of a governmental function legislative in character, but from contract expressly authorized by the Legislature. None of the decisions of the Supreme Court of Wisconsin prior to 1889 to which we have been referred construes the reservation in the state Constitution as having the extraordinary scope accorded to it below, and certainly, in the absence of some very clear and definite pronouncement, we cannot accept the view that it then had the meaning now attributed to it.

As late as 1909, in State ex rel. Northern Pacific Ry. Co. v. Railroad Commission, 140 Wis. 145, 157, 121 N. W. 919, 932, that court announced:

'The right to alter or repeal existing charters is not     without limitation when the question of vested property      rights under the charter is involved. The power is one of     regulation and control, and does not authorize interference      with property rights vested under the power granted. * *  *      The reserve power stops short of the power to divest vested      property rights, and is embodied in the state Constitution      for the purpose of enabling the state to retain control over      corporations, and must be construed in connection with the      other provision of the Constitution to the effect that      private property shall not be taken for public use without      compensation. It follows, therefore, 'that where, under power     in a charter, rights have been acquired and become vested, no      amendment or alteration of the charter can take away the      property or rights which have become vested under a      legitimate exercise of the powers granted.' Comm. v. Essex Co., 13 Gray, 239.'

See, also, Water Power Cases, 148 Wis. 124, 136, 134 N. W. 330, 38 L. R. A. (N. S.) 526.

The integrity of contracts-matter of high public concern-is guaranteed against action like that here disclosed by section 10, art. 1, of the federal Constitution, 'No state shall * *  * pass any *  *  * law impairing the obligation of contracts.' It was beyond the competency of the Legislature to substitute an 'indeterminate permit' for rights acquired under a very clear contract. Vicksburg v. Vicksburg Waterworks Co., 206 U.S. 496, 27 Sup. Ct. 762, 51 L. Ed. 1155; Detroit United Ry. v. Michigan, 242 U.S. 238, 253, 37 Sup. Ct. 87, 61 L. Ed. 268. The erroneous conclusion concerning this federal question led to the decree below. Accordingly it must be set aside and the cause remanded for further proceedings not inconsistent with this opinion.

Reversed.