City of Centerville v. Fidelity Trust & Guaranty Co.

LOCHREN, District Judge, after stating the case as above, delivered the opinion of the court. The contract entered into between the city of Centerville and the Centerville Water Company, authorizing the water company to construct the waterworks, and granting it the rights and franchises expressed in Ordinance 207, as amended by Ordinance 208, was valid; as was also the agreement therein of the city in respect to the payment of hydrant rentals. Municipal corporations were authorized to make such contracts when “a majority of the voters of the city or town at a general or special election, by vote, approve the same.” McClain’s Code Iowa, § 639. This approving vote of a majority of the voters of a city is necessary to empower the city council to authorize the erection of waterworks; but the power to make the necessary contract and grant the necessary rights and franchises is exercised by the city council after the approval of the voters, and not directly by the voters. The approval of the voters precedes the contract made by the council, though its terms may be formulated, more or less in detail, for the information of the voters before the election. Taylor v. McFadden, 84 Iowa, 262, 50 N. W. 1070; Thompson-Houston Electric Co. v. City of Newton (C. C.) 42 Fed. 723. As it rested with the city council to make the contract for the erection of [336] waterworks after the vote approving the authorization of such' erection, it follows that the city council could rightfully make such changes in respect to details as might seem to it wise or desirable, without departing widely and radically from- the general scheme which was contemplated at the election. Changes in details might be unavoidable from hidden conditions in the ground, or appear very advantageous and desirable on further consideration and examination of other like works. The changes made by Ordinance 208 do not, so far as they relate to the construction of the works, appear to have been to the disadvantage of the city, nor indicate that the council acted in bad faith, or were misled or imposed upon by the water company or by any one. The city council was authorized by statute to contract for supply of water for the municipality, the payment of hydrant rentals, and the application of the special tax to such payment. “If the right to build, maintain and operate such works is granted to private individuals or incorporated companies by such cities or towns, and such cities or towns shall contract with said individuals or companies for a supply of water for any purpose, such city or town shall levy each year and cause to be collected, a special tax as provided for above, sufficient to pay off such water rents so agreed to’be paid to said individual or company constructing said works; provided, however, that said tax shall not exceed the sum of five mills on the dollar for any one year,” etc. McClain’s Code Iowa, § 643. The agreement on the part of the city for a supply of water and to pay hydrant rentals therefor was proper and lawful, and its further agreement that it would perform the duty imposed on it by the statute, and levy and collect the special tax for the payment of such rentals, was unobjectionable. So, also, was' its agreement to pay the hydrant rentals direct to the trustee under the mortgage to be placed, and which was placed, on the property. The raising of the money to construct the works, by mortgage security upon the works and all rights and franchises connected therewith, was contemplated. It is the usual method by which money to construct such works is obtained. The agreement to pay the hydrant rentals direct to the trustee under the mortgage would add confidence to the security and cause no trouble to the city, which would be better assured that the interest on the bonds secured by the mortgage would be paid, and defaults, which might cause foreclosure proceedings, avoided. The mortgage, as contemplated in the contract set forth in the ordinances, was executed August 1, 1895, and the bonds negotiated; and when on February 12, 1896, the waterworks were completed, tested, and accepted by the city council as complying with the contract, the •rights and obligations of the city, the water company, and the trustee under the mortgage became fixed under the then completed and fully executed contract, and it no longer mattered whether there had ever been any formal acceptance of either of the ordinances by the water company. Illinois Trust & Savings Bank v. City of Arkansas City, 22 C. C. A. 171, 76 Fed. 271, 284, 285, 34 T. R. A. 518. The option to the city to purchase the waterworks, on specified terms, within 30 days after their completion and acceptance, was a provision separate from and independent of the other provisions and stipulations of the contract. It imposed no obligation on the city, and [337] did not increase its indebtedness a farthing. The option reserved was to exercise the discretion of the city council as to whether or not it should do an act which was neither illegal nor immoral, but merely, as it is claimed, beyond its legitimate power and authority under the circumstances then existing. If so, the option while not acted on was harmless, and the presumption would be that when the time should arrive for the city council to exercise its discretion in respect to the option, if it then found that it could not lawfully make the purchase, it would refrain from attempting to do so-. We agree with the learned judge who tried this cause that it is unnecessary to determine whether by the purchase of the waterworks the indebtedness of the city was increased beyond the constitutional limit. This suit is not to recover any indebtedness based upon or arising from such purchase. The rights which complainant here seeks to enforce as trustee under said mortgage are rights which were vested in complainant as such trustee before the attempted purchase of the waterworks by the city, and are not affected by that transaction to which the trustee was not a party. The mortgage by its terms conveyed to complainant as trustee all the real and personal property forming or connected with the waterworks plant, with every franchise, right, power, and privilege held by the water company, and all its claims and demands, during the existence of the mortgage, against the city of Centerville for the rental of fire hydrants, and all its rights to any special fund out of which the same should be payable, and appointed said trustee its agent, irrevocably, to receive and receipt for all sums of money accruing from said city as rentals for fire hydrants, to be applied on the mortgage debt so long as any of it should remain. The city, by its contract with the water company as set forth in Ordinance 208, agreed to rent from the water company, its successors and assigns, for the period of 25 .years, not less than 70 hydrants, at an annual rental of $3,900, and any hydrants in excess of 70 at $50 each, the rentals to be paid on stated days by the city treasurer directly to the trustee of the bondholders, so that said rental fund shall at no time be under the control of the water company. This agreement on the part of the city was valid, and, being for a current expenditure, did not create an indebtedness of the kind contemplated by the Iowa constitution in its provision limiting indebtedness of municipalities. Creston Waterworks Co. v. City of Creston, 101 Iowa, 687, 70 N. W. 739; Fidelity Trust & Guaranty Co. v. Fowler Water Co. (C. C.) 113 Fed. 560. 0. The fund now in possession of the city, collected from the five-mill special tax authorized by section 643, McClain’s Code Iowa, should have been applied to the payment of this water rent, and cannot lawfully be diverted to any other purpose. The complainant has the right to require that it shall be so applied. As the city of Centerville has possession of the waterworks under a conveyance from the water company, it is a necessary party to this suit to foreclose the mortgage made by the last-named company; and a court of equity, having thus obtained jurisdiction of the parties and of the subject-matter, has jurisdiction to determine all matters connected with the controversy, and afford complete and effectual relief. [338] Tayloe v. Insurance Co., 9 How. 390, 13 L. Ed. 187; Ober v. Gallagher, 93 U. S. 199, 23 L. Ed. 829; Oil Co. v. Wilson, 142 U. S. 313, 12 Sup. Ct. 235, 35 L. Ed. 1025. There is no merit in the contention that because the water company, after conveying the plant to the city, ceased to supply water to the hydrants, the obligation of the city to pay the hydrant rentals also ceased. The city, by the original contract under which the waterworks were constructed, had, as has been already stated, contracted that it would pay the hydrant rentals at specified dates, for a specified period, directly to the trustee of the mortgage, which that contract contemplated should be executed by the water company to obtain the money to build the waterworks, l'he mortgage vested in the trustee the right and power, irrevocably, to receive such rentals directly from the city. No contract afterwards entered into between the water company and the city could abrogate or lessen the vested rights of the trustee; and the conveyance of the plant by the water company to the city was evidently intended to continue the hydrant rentals and the right of the trustee to receive the same. The deed from the water company to the city was expressly made, subject to the mortgage, in which that right to receive such hydrant rentals constituted an important and valuable part of the security. The ordinance of February 18, 1896, for the purchase of the waterworks, provided that as a condition of such purchase the city should maintain and operate the waterworks in compliance with the ordinance of February 18, 1895, and that the deed of conveyance to it from the water company should contain a covenant to that effect; and such covenant or condition was accordingly inserted in that deed. This condition was a substantial part of the consideration, by means of which the water company still caused the waterworks to be operated and the hydrants supplied. It was clearly the purpose and intention of both parties to this conveyance that the hydrant rentals should not cease, but should continue to be paid to the trustee; and the city continued to so pay them for some time thereafter. The case of Fidelity Trust & Guaranty Co. v. Fowler Water Co. (C. C.) 113 Fed. 560, is analagous to the present case; and the well-considered opinion in that case is in accord with the conclusions we have reached in this case. The decree appealed from is affirmed, with costs.