Ashland Waterworks Co. v. City of Ashland

DENISON, Circuit Judge (after stating the facts as above). [1] 1. The bill was said to be for specific performance. Since the main performance sought is merely the payment of motley, and since this result can be accomplished by legal remedies, the jurisdiction of equity on this ground alone would not be clear. However, the record suggests matters of accounting, and perhaps of equitable cross-conditions to be prescribed, which malee the case not wholly unfit for a court of equity to consider. The plaintiff has chosen, and the defendant lias not objected to, this forum; and under such conditions it is not required that the court of its own motion should decline a hearing in equity. [496] [2, 3] 2. It is plain enough that if the city had, in 1890, assumed a contractual duty, to be performed at the end of 20 years, the Constitution of 1891 would not interfere with its execution. Section 158 does not undertake to affect debts “authorized under laws in force prior to the adoption of this Constitution”; and section 157 cannot be permitted to impair the obligation of a contract. It is equally clear that if, when the Constitution was adopted, there was nothing but an option reserved to the city, which it might or might not exercise when the specified time came, there would be no such contract as would be protected against section 157; and whether the proviso of section 158 should be construed as contemplating such an optional liability is not important in this case, because, if the liability here existing was of a merely optional character, the 1911 purchase would be absolutely prohibited by section 157, while, if the liability was of the contractual character, no construction put upon either section could defeat it. These conclusions are sufficiently developed by the Kentucky cases hereafter cited, and by the Eighth Circuit Court of Appeals and the Supreme Court in the Denver Water Co. Case, 187 Fed. 890, 110 C. C. A. 24, 229 U. S. 123, 33 Sup. Ct. 657, 57 L. Ed. 1101. We must, therefore, examine the ordinance to ascertain the true nature of the liability resting on the city in July, 1911, when'it undertook to purchase. We must think that the ordinance of 1890 did more than give the city an option to buy at the end of the stated period; it imposed an absolute duty and liability to do at that, time one of two things — buy the plant or extend the franchise. The language is: “In case the city of Ashland shall fail or decline to exercise its option to purchase said works, the rights and privileges hereby granted to the said grantees or assigns shall be extended to said grantees or assigns for a further period of 20 years,” This contemplates that the city will then be presented with the alternatives between which it must choose. One may be burdensome, one beneficial; but which character either will have cannot be foretold. The city will select the one it deems more beneficial; but select one or the other it must. There is no escape. The option to buy, considered alone, is not a contract; the option to extend is not a contract; but the two together, presented as alternatives, one of which must be accepted, make a perfected obligation. The city agrees that after 20 years it will do one of two acts as it may then prefer; this is not an option, it is a promise. It makes no difference which branch of the alternative is first considered. The right to extend for 20 years was taken away by the Constitution of 1891 just as much as the right to buy, for section 164 forbids the granting of any franchise, except to the highest bidder. Hence we find that, if the Constitution of 1891 applies in full force to the mutual rights existing under this ordinance, it is destructive of all of them-. Unless acting in a manner not contemplated by the contract, the city cannot buy, however good a bargain it may get; it cannot demand an extension of the franchise, however favorable the existing rates may be; and the company cannot get either the sale or the extension,.upon the faith of having one or the other of which it invested its money and [497] lmilt the plant. The right of the company to have the obligation of this contract kept unimpaired is clear. It is not necessary to go into the authorities further than to say that the facts of this case exclude it from the class in which the franchise of the Denver Company was placed by the Supreme Court (229 U. S. 136-138, 33 Sup. Ct. 657, 57 L. Ed. 1101) and put it within the class where that same franchise was thought to belong by the Circuit Court of Appeals (187 Fed. 896, 897, 110 C. C. A. 24). We cannot see how it is material that the extension of the franchise will be automatic if ilic purchase is not made. It cannot make any difference in che mature of the obligation — -optional or contractual— whether the selection of one alternative or the other is to be by express words or by the agreed result of conduct. If the city let the time go by for exercising its right to buy, it thereby made its election to extend, just as perfectly as if made in express words. The character of the choice is the same, whether made by words or by implication, by action or by inaction. What we consider the precise question involved has been decided by the Kentucky Court of Appeals, and it is needless to say that, in determining whether the ordinance of a Kentucky municipality constituted a contract protected by the federal Constitution, we should differ fropn that court with great reluctance, even in cases where the matter was not so wholly one of construction that we would be bound to follow. In Benjamin v. Mayfield, 170 Ky. 446, 186 S. W. 169, the ordinance, granted before the Constitution of 1891, provided that at the end of the franchise period the city would re-rent the fire hydrants, at the stated price, or would buy the plant, at a price to be agreed on or be fixed by arbitration. At the end of the period and after the new Constitution, the city elected to buy the plant pursuant to its contract. In a careful opinion, the Kentucky Court of Appeals held that the contract-obligation to re-rent the hydrants, though contingent, could not be impaired, and that the alternative option to buy-was indissoluble from the contract to re-rent and stood upon the same basis, and hence concluded that the city’s later election and promise to buy were valid. It is sought to distinguish this case from the present one because of the affirmative form in which the obligation to re-rent was put. We think there is no distinction, cither in form or substance. In the present case, the ordinance, as it had developed, imposed upon the city an obligation to pay fire hydrant rentals of about $6,000 per year, and the right of the company to receive the rental was one of the most important, if not the chief, of the “rights and privileges” which the city agreed to extend for 20 years, if it did not buy. Certainly an extension of “rights and privileges” must extend the correlative duties, and the city would not have intended to deprive itself during the extended term of the right to have fire hydrant protection. It is equally sure that the city must pay for what the company must furnish. We can sec no substantial difference between that form of words which says that the city shall re-rent the fire hydrants or buy the plant, and that other form of words which says that if the city does not buy the plant the hydrant rentals shall be extended. [498] Our conclusion is also supported, if not required, by the earlier decision of the Kentucky Court of Appeals in Slade v. Lexington, 141 Ky. 214, 132 S. W. 404, 32 L. R. A. (N. S.) 201. The facts are somewhat variant, but the point of the case is that a municipal contract, not permissible -under the Constitution of 1891, but contemplated by an earlier ordinance, is not reached by the constitutional prohibition. The ordinance provided that at the expiration of the franchise there should be a renewal upon terms then to be agreed upon by the company and the city. It was held that to prevent the city from entering into negotiations and agreeing upon terms of an extension, if it could do so, would be to impair the obligation of the existing contract. The ordinance thus construed in the Lexington Case certainly imposed an obligation no more perfect than was created by the Ashland ordinance; indeed, the former was contingent upon the ability of the parties to reach an agreement, while, in the latter, the liability was not contingent upon anything; there was only a privilege that the city might cast its liability? in either one of two specified forms. 3. It is assumed by appellant’s counsel that all 20-year periods fixed by the ordinance of 1890 began to run from the completion of the installation, which, in the last amended bill, is said to have been shortly after December 30, 1891. We have considered the case on the assumption stated. Obviously, if the 20 years had expired before July 3, 1911, so that the 20-year extension had already taken effect and so that the action of July 3 could be interpreted only as the exercise of an option given by the ordinance of 1900, a different question would be presented. We do not see that the annually recurring option during each of the second 10 years of the term (if this recurrence survived the ordinance of 1900) affects the character of the city’s duty, as we have discussed it. [4] 4. It is urged that, even if the right of the city to elect to buy is superior to¡ the 5 per cent, limitation and the annual income limitation of the Constitution, yet that by section 157 the method of exercising the option was changed, and that the city could decide to make the purchase only by the public vote prescribed in that section rather than by the ordinary method of city action. It is said that since there was no election to buy, perfected in the only permissible method of making an election, the alternative extension of franchise took automatic effect. It is a sufficient answer to this position that, in our judgment, the two-thirds vote method of escaping section 157, prescribed by that section, was not intended to refer to cases which were not reached at all by its prohibition. [5] 5. When the waterworks company filed its original bill, it propounded the theory that the ordinance of 1890 granted a franchise of 40 years, with the privilege of purchase at the end of 20 years. Obviously, this theory is inconsistent with the basis upon which we have thought the water company’s rights depended. After the decision in the Mayfield Case, the company amended its bill and declared the theory upon which it now relies. In so doing it merely adopted the construction which the Kentucky Court of Appeals had put upon an ordinance substantially similar in this respect; and there is no element [499] of estoppel which can prevent it from changing its ground to conform to the law as declared by the court of last resort. As said by Justice Holmes in Northern Co. v. Grand View Co., 203 U. S. 106, 108, 27 Sup. Ct. 27, 51 L. Ed. 109, the first action of the company in this matter was “not an election, but an hypothesis.” [6] 6. Under the ordinance of 1890, ihe company extended a branch of its system to the village of Keys Creek, then outside the Ashland city limits, and which, though it. is said now to have been included within the city, we understand remained outside on July 3, 1911. The election to buy covered the entire system, including this branch. In this fact we see no obstacle to the exercise of any otherwise perfect power to buy. It may be conceded that as an independent question the city could not buy such extraterritorial property or engage in the business of supplying water outside the limits; but this particular extension is an incident which cannot be permitted to control the whole situation. It is to be assumed that Ihe extension was made with the approval of the city; for at least the 10 years after 1900 the city had allowed the company to understand that the election to buy covered the extension, and this branch, cut off from the stem, would he utterly worthless to the company. So far as the facts are developed, the existence of this branch and its inclusion in the purchase are not controlling. The decree of dismissal must be vacated, and the case remanded to the District Court for further proceedings.