Lutes v. Fayette Home Telephone Co.

Opinion of the Court by Judge Miller Affirming. In 1899 several citizens of Lexington incorporated the Fayette Telephone Company, with a capital stock of $6.000.00. The purpose of this corporation was to eon — 557 — struct and operate a telephone system in Lexignton and Fayette County. By a joint resolution approved July 17, 1899, the general council of the city of Lexington gave the Fayette Telephone Company permission to erect, maintain and operate a telephone system and exchange in the city of Lexington, and to use its streets for that purpose, providing, in' accordance with the proposition of the telephone company, that the maximum rentals for telephone service should he $30.00 per annum for business telephones, and $18.00 per annum for residence telephones._ The Fayette Telephone Company shortly thereafter disappeared as an active organization, and need not be further mentioned. In February, 1901, the Fayette Home Telephone Company was incorporated under the laws of "West Virginia, with a capital of $250,000.00, for the purpose of constructing and operating a telephone exchange in Lexington and Fayette County. The incorporators of the Fayette Home Telephone Company were principally, but not wholly, the same persons who had theretofore incorporated the Fayette Telephone Company. The capital stock of the Fayette Home Telephone Company was increased by amendment to $300,000.00, and by a subsequent amendment to $400,000.00. In referring to the new Corporation, the Fayette Home Telephone Company, we will speak of it hereafter as the Telephone Company. K franchise authorizing the construction and operation of a telephone company in the city of Lexington was, by order of its general council, sold on March 4, 1901, to the highest and best bidder. The Lexington Home Telephone Company became the purchaser at the sale. In its bid the company had proposed, among other things, and as a part of the consideration for the franchise, that it would guarantee that its rates for telephones in the city of Lexington should never exceed $30.00. per a-nmrm for business houses and offices, and $18.00 per annum for residences. The bid of the company was duly accepted by ordinance directing the Mayor to make a contract with the company in accordance with its bid, which was done. The Telephone Company complied with its contract bv erecting, at great expense, a telephone, exchange and system in the city of Lexington and Fayette County ; but after it had been in operation about three years, and — 558 — finding that it was making little or no money at the rates then charged, it applied to the city council of Lexington for an alteration in its contract of 1901, with respect to rates. In response to that request, the general council, by ordinance approved February 8, 1904, provided for a supplementary contract between the city of Lexington and the Telephone Company, releasing the guarantee of the Telephone Company as 'to the rates to be charged for telephone service. After reciting the previous ordinance and contract of 1901, and that neither party thereto had contemplated that the telephone exchange to be operated under said franchise would exceed 600 or 800 telephone subscribers; and that the company had, by that time, more than 2,000 telephones in daily use; that the cost of operating each phone is much greater in a plant of 2,000 phones than in a plant of 1,000 phones or less, while the value of the phone is correspondingly greater to the subscriber, the ordinance provided: “Section 1. That the Mayor be and he is hereby authorized and empowered for and on behalf of the city, to, enter into a supplementary contract with the Fayette Home Telephone Company, amending said former contract by releasing said company from its guarantee therein made as to the rates to be charged for telephones and for toll connections. ’ ’ In accordance with this ordinance a supplementary contract was made on February 29, 1904, where the Telephone Company was released from its guarantee made in its contract of 1901 as to the rate to be charged for the- rental of telephones, by striking out that provision in the former contract. Under this new contract the annual rates for telephone service were first raised to $42.00 for business houses and $24.00 for residences. The appellant, Keene Lutes, who was plaintiff below, applied to the Fayette Home Telephone Company for a telephone to be placed in his residence at the rate of $18.00 per annum, the rate called for by the original contract of 1901; and the company having declined to do so, Lutes instituted this action on June 6, 1907, in which he set up the foregoing facts, and prayed that the action proceed for the benefit of himself and all other persons similarly situated, for whom he sued; that a receiver be appointed to take charge of and control the Telephone Company; that the contract of 1904 between the Telephone Company and the city be declared void; and that — 559 — by a mandatory injunction tbe Telephone Company be compelled to furnish telephone service under the original contract of 1901. The petition contained many other charges, including those of fraud in obtaining the supplemental contract of 1904, and waste in the management of the corporation. The court, upon motion, struck from the petition all the allegations of fraud with reference to the procuring of the second contract of 1904; all the allegations with regard to a trust existing in favor of the telephone users, and the right to a receivership, as well as the allegations relating to the bond and stock issues of the Telephone Company, and the wasting and squandering of its corporate assets. The effect of this ruling was to leave in the original petition practically one issue only, to-wit, the validity of the act of the city council of February 4, 1904, and the execution of the supplementary contract thereunder, by which the Telephone Company was released from its guarantee as to rates. On January 20, 1908, the plaintiff filed an amended petition in which he alleged that the passage of the ordinance of February 4, 1904, was procured at the instance of the Telephone Company, and by and upon the fraudulent representations of that company as set out in the original petition. The allegation of fraud, in the original petition, had however been stricken therefrom, along with many other matters, held by the circuit judge to be irrelevant. Demurrers were filed to the original petition, but no action was taken thereon at the time. The company answered in several paragraphs, in which it set up affirmatively, many of the facts above set forth, and relied upon the validity of the supplementary contract of 1904 as authorizing its abandonment of the old rates under its contract of 1901, and the substitution therefor 'of the new rates, which it alleged were reasonable for the service rendered. Two telephone subscribers presented their intervening petition to become parties plaintiff in the action, complaining that they were being required to pay a rate in excess of that required by the original contract, and asked that they be allowed to recover on behalf of themselves and all other telephone users, the excessive rentals which the company had collected from the citizens,, which they estimated at about $100,000.00. The reply attacked the validity of the ordinance and contract of — 560 — 1904, on the ground that the city was without authority to release the company from performing its contract, or from paying the consideration which it had offered for its franchise. Upon the hearing the chancellor carried the demurrer to the answer back and sustained it to the petition, and upon the plaintiff and the intervenors declining to further plead, the petition was dismissed. From that 'order the plaintiffs prosecute this appeal. The chancellor struck out the charges of fraud upon the part of the city council in changing the contract, evidently upon the theory that the charges were not sufficiently specific to bring the case within the rule that qllows that question to be raised. In this we think he was correct. In Henderson v. City of Lexington, 132 Ky., 406 33 Ky. L. R., 703; 111 S. W., 322, we said: ’ ‘ ‘ The motives of the council in closing this alley are also assailed, and the accusation is made that their action was influenced by a desire to assist the railroad companies tliat wanted the freer and safer use of Water street. But we will not stop to inquire into the motives that prompted the council in the enactment of the ordinance in question. The record discloses that the only purpose they had was to subserve the public good. There is no evidence whatever indicating improper motive. But, aside from this, when the exercise of authority by a city council is within its power, the motives that influenced it will not be inquired into, except in rare cases, where it is manifest that a flagrant wrong had been perpetrated upon the public, and valuable rights have been surrendered ostensibly for the public good, but really for the benefit of private individuals. Anct the exceptional conditions that would authorize the courts to interfere are not in any manner presented by this record.” See, also, Slade v. City of Lexington, 121 S. W., 621. Laying aside therefore the question of fraud, the controlling question of the case relates to the power 'of the general council of the city of Lexington to make the supplementary contract of February 1904, by which it released the Telephone Company from its guarantee as to rates. Appellant insists that a municipality, after advertising and selling a franchise, as is required by séction 164 of the Constitution, cannot release the purchaser from the performance of the terms of its bid, or561 enlarge the franchise in any manner, without selling the additional privilege as required by that section. Section 164 of the Constitution reads as follows: “No county, city, town, taxing district or other municipality shall be authorized or permitted to grant any franchise or privilege, or make any contract in reference thereto, for a term exceeding twenty years. Before granting such franchise or privilege for a term of years, such municipality shall first, after due advertisement, receive bids therefor publicly, and award the same to th,e highest and best bidder; but it shall have the right to reject any or all bids. This section shall not apply to a trunk railway.” In short, the effect of this contention upon the part of appellant is, that the public acquired a vested right in the prices named in the franchise, which could not be affected, altered, or modified by a future agreement between the city and the company. If this question be determined contrary to the contention of appellant, it becomes unnecessary to consider the many other questions discussed in the briefs, since they all fall with it. Section 3061 of the Kentucky Statutes, which is a part of the charter of cities of the second class, to which Lexington belongs, provides as follows: “The general council shall have the power, to pass, modify, amend and repeal all ordinances necessary and proper for carrying into effect the powers granted by this Act.” Abbott in his work on Municipal Corporations, section 548, says: “The power to legislate carries with it by implication, except as specifically prohibited or eliminated by charter or constitutional provisions, the right to repeal or amend such legislation by subsequent action of the same body. ’ ’ In McQuillin on Municipal Corporations, Yol. 3, section 1272, the rule is laid down as follows: “By consent a municipality may modify a contract. Obviously, the municipality cannot, without the consent of the other party to the contract, modify it. The power to modify a contract on behalf of a municipality generally is vested in the officer or body authorized to make the contract. Unauthorized modifications of contracts by officers without authority will not bind the city. Generally, the common council has power, with the consent of the other party, to modify a municipal contract pre — 562 — viously entered into, so as to bind the city. Evidence of a modification need not consist ¡of express acts. The consent of the corporation to modify a contract may be inferred or implied from acts on its part relating to the performance of a contract after it formed the conclusion. ’ ’ See, also, sections 198 and 199 of the same -work. Furthermore, the question is not an open one in this State, since it has been squarely decided, in favor of the power, in the three cases of Cumberland Telephone & Telegraph Co. v. City of Hickman, 129 Ky., 229; Louisville Home Telephone Co. v. City of Louisville, 130 Ky., 626, and Gathright v. H. M. Byllesby & Company, 154 Ky., 135. In the first case, the city council of Hickman, by a new contract, waived the condition in a telephone franchise; and this court sustained the new contract. • In the second case, the Home Telephone Company’s franchise required it to pay annually to the city the sum of one dollar for each telephone or instrument in excess of six thousand, and by agreement between the Telephone Company and the city of Louisville, the provision above referred to was eliminated, and the tele-' phone rates were materially increased. It was there contended that the city and the Telephone Company Could not, even by agreement, waive a contract in the franchise which had been made for the benefit of the citizens. This - court, however, overruled that contention, and held that it was competent for the Telephone Company and the city to agree to the enactment of an-ordinance relieving the Telephone Company of the obligation in its ¡original franchise. And, in the Gathright case, recently decided, the same question was again presented and was again decided the same way. In that case the charter of the Kentucky Electric Company prohibited it from selling out to any competitor, and by a contract authorized by an ordinance of the city of Louisville, the city agreed to waive that prohibition. It was contended there, as here, that the prohibition was for the benefit of the consumers of electricity, in which they had a vested right, and that the city could not, by contract, waive this vested right. In answer to that argument, we said: “Did the City Council have the power to waive section six of the charter of the Kentucky Electric Company, which prohibited it from selling out to the Louis — 563 — ville Lighting Company, or any other competitor? If this were a case of first impression in this jurisdiction, we might be inclined to give great weight to this contention. The question, however, was put at rest, so far as this court is concerned, by the decision in Louisville Home Telephone Co. v. City of Louisville, 130 Ky., 626. In that case the Home Telephone Company’s franchise required it to pay annually to the city the sum of one dollar for every telephone or instrument in excess of 6,000. By agreement between the Telephone Company and the city of Louisville, a new franchise was offered for sale from which the provision above referred to was eliminated, and the telephone rates were materially increased. It was contended that the city and the Telephone Company could not, even by agreement, waive a contract in the franchise which has been made for the benefit of the citizens.” This court, however, overruled that contention, and held.that it was competent for the Telephone Company and the city to agree to the enactment of an ordinance relieving the Telephone Company of the obligation in its original franchise. To the same effect, see Arnold v. Pawtucket, 21 R. I., 15; Oliff v. City of Shreveport, 52 La. Ann., 1203; City of Philadelphia v. Bowman, 175 Pa., 91. This is not a case where the municipality is undertaking to change the provisions of a contract against the will of the other contracting party. In cases of that character it is universally held that the contract cannot be changed, since to do so would impair its obligation. Many of the cases relied upon by appellant belong to this latter class, and have no application to the question before us, where the contract was changed by agreement between the contracting parties. Instead of agreeing to the change, the city of Lexington could have required the Telephone Company to carry out the original contract notwithstanding it became burdensome to the Telephone Company by reason of subsequent developments. Louisville Home Telephone Co. v. City of Louisville, 149 Ky., 234. And, so long as it was in force, any citizen had the same right. Cumberland Telephone & Telegraph Co. v. City of Hickman, 129 Ky., 220. But where both parties to the contract agree to its modification, there is a new contract, which either the city or the citizen may enforce. Whatever the contract may be, either the city or the citizen can compel its execution. — 564 — That, however, is quite a different proposition from that contended for by appellant — ;that the parties cannot, even by agreement, change the contract. Appellant relies principally upon the decision of this court in Louisville & Taylorsville Turnpike Road Co. v. Boss, 19 Ky. L. R., 1959, 44 S. W., 981, in support of its contention that he had a vested right in the original service charges. So much of the opinion as apparently holds that a citizen has a vested right in the toll-rates ¡of a turnpike company after they have been fixed by the act of the Legislature creating the corporation, and that they cannot be subsequently changed by the Legislature with the consent of the corporation, was not necessary for the decision of that case, is not sustained by authority, and is overruled. The decision in the Boss case might well have been rested alone upon the failure of the act of 1880 to repeal the previous acts of the Legislature in so far as they protected the inhabitants of Jeffersontown. It was within the power of the city of Lexington and the Telephone Company to modify the contract between them. Judgment affirmed. The Avhole court sitting; Judge Carroll dissenting.