Andres v. First Ark. Development Finance Corp.

324 S.W.2d 97, 230 Ark. 594, 1959 Ark. LEXIS 667

• Court: Supreme Court of Arkansas
• Decided: May 18, 1959
• Docket: 5-1842
• Status: Published

Opinions

Ed. F. McF addin, Associate Justice.

This is a suit brought by appellant as a citizen, resident and taxpayer, seeking, inter alia, a declaratory judgment regarding the validity of Act No. 567 of 1957, which is captioned: “An Act To Provide For Development Finance Corporations; To Define Their Functions, Powers, and Duties; And For Other Purposes”. The Trial Court held against the appellant on all points, and this appeal ensued; The defendants below (and appellees heré) are: First Arkansas Development Finance Corporation (hereinafter referred to as “Finance Corporation”), the State Board of Finance (hereinafter referred to as “Board”), and individuals composing the Board. (See Act No. 338 of 1955 and § 13-401 et seq. Ark. Stats.)

The complaint alleged, inter alia:

(a) That Finance Corporation purports to be organized and existing under provisions of Act No. 567.

(b) That, pursuant to Act No. 567, Finance Corporation proposes to lend to the Scott County Industrial Development Corporation (organized and functioning under Act No. 404 of 1955) the sum'of $130,000100 to énable the Scott County Industrial Development Corporation¹ to assist the Scott' County Milling Company (a private Arkansas corporation) to establish and operate a feed mill and broiler hatchery.

(c) That to provide funds to make said loan of $130,000.00 to the Scott County Industrial Development Corporation, the defendant Finance Corporation proposed to issue and sell to the public and to the State Board of Finance, $130,000.00 of Finance Corporation’s bonds, as authorized by the Act No. 567.

(d) That unless restrained, the State Board of Finance “. . . will be called upon under the provisions of the said Act No. 567 to purchase, pay for, and take delivery of a portion of the said bonds of . . .” Finance Corporation; and, unless restrained, will act to the great and irreparable injury of the plaintiff and others similarly situated.

(e) That the Act No. 567 is unconstitutional in whole; and if not unconstitutional in whole is unconstitutional by reason of § 19 of said Act.

(f) That Finance Corporation is not validly and legally organized and functioning.

The prayer was, inter alia, that a decree be entered holding Finance Corporation to have been illegally organized, and that Act No. 567 be held void in toto, or at least as to § 19.

The Act No. 567

Before discussing the assignments listed on appeal, we give a brief synopsis of some of the pertinent portions of the Act No. 567. Fifteen or more duly qualified citizens may organize a “development finance corporation” by filing with the State Bank Commissioner certain articles. The State Bank Commissioner, upon making inquiry and being satisfied with the standing, ability, and residence of the incorporators, may issue his certificate of preliminary approval. The incorporators may then proceed to obtain additional stockholders and the payment of stock, may elect directors, adopt by-laws and other regulations, and then submit a further report to the State Banking Board. The State Banking Board will make further investigation to ascertain whether public convenience and necessity require the finance corporation, whether the stockholders possess the requisite qualifications, whether at least $100,000.00 of common stock, and at least $900,000.00 of preferred stock have both been fully paid for, and whether the by-laws and regulations are in keeping with all laws of this State. If the State Banking Board is satisfied of all of the foregoing, then the State Bank Commissioner will issue a certificate of incorporation; and there must be included in the name the words, “Arkansas Development Finance Corporation”.

There may be any number of such finance corporations so organized. Section 13 of the Act No. 567 says in part: “The purposes of each development finance corporation organized under the provisions of this Act shall be to promote, stimulate, develop, and advance the business prosperity and economic welfare of the State of Arkansas and its citizens; to encourage and assist through loans, investments, or other business transactions, in the location of new business and industry in this State . . . and to provide financing for the promotion, development, and conduct of all kinds of business activities in this State.”

The Act further provides that the corporation shall act without profit to any of its members, shall never receive deposits from the public, but may issue bonds and debentures, and that all such obligations shall be on a parity as to security and shall be secured by a lien on the entire assets of the corporation. The Act also provides in § 19 that the State Board of Finance may purchase and hold, in its securities account, bonds of any development finance corporation as the State Board of Finance may see fit. Section 22 of the Act makes the bonds of any finance corporation eligible for investment by certain Funds. Each finance corporation organized under the provisions of this Act shall be subject to the supervision, examination, and control of the State Bank Commissioner jointly with the State Board of Finance. So much for a brief synopsis of the Act :² now we come to a discussion of the assignments made by the appellant.

I. The appellant says: “Said Act No. 567, in that it authorises the issuance of bonds for the purpose of industrial and agricultural development, is in violation of the provisions of Article 16, Section 1, of the Constitution of the State of Arkansas, as amended by Amendment 13 to the Constitution of the State of Arkansas, and is in violation of the provisions of Amendment No. 17 to the Constitution of the State of Arkansas, as amended by Amendment No. 25 to the Constitution of the State of Arkansas. Throughout the appellant’s brief there is the refrain that the Act No. 567 is entirely unconstitutional because it is in reality, but through subterfuge, a lending of the credit of the State; and in this assignment now under discussion the appellant points to the specific constitutional provisions, as mentioned. The germane portions of Article 16 of the Constitution and Amendment No. 13 thereto, as urged by the appellant, are contained in this identical language:

“Neither the State, nor any city, county, town or other municipality in this State, shall ever lend its credit for any purpose whatsoever . .

From the synopsis of the Act No. 567, as heretofore given, it is evident that the Act authorizes the organization of finance corporations under the control of the State Banking Department; and that such corporations may determine what loans and investments to make to assist in the industrial development of Arkansas. We have laws regarding State banks (§ 67-301 et seq. Ark. Stats.), which authorize State banks to make loans; but, by no stretch of the imagination can it be said that the State is “lending its credit” merely because a State bank makes a loan. We have laws regarding business corporations (§ 64-101 et seq. Ark. Stats.), which authorize business corporations to incur indebtedness; but no one could seriously urge that, because the State authorizes corporations to incur indebtedness, the State is itself liable for such debts. The Act No. 567, in allowing the organization of finance corporations, is of like effect in this regard as the State Banking Act and the Business Corporations Act. The State is not “lending its credit” merely because it authorizes the organization of a corporation which may finance industrial development corporations organized under Act No. 404 of 1955. Our holding in Halbert v. Helena, 226 Ark. 620, 29 S. W. 2d 802, is in point. We see no merit to the contention that the Act No. 567 violates Article 16 of the Constitution or Amendment No. 13 of the Constitution.

The appellant urges that the Act No. 567 violates Amendments 17 and 25 to the Constitution. The portion of these Amendments relied on by the appellant limits counties in issuing bonds; and the appellant says that these finance corporations created under the Act No. 567 occupy about the same status as the counties referred to in Amendments Nos. 17 and 25. Appellant points to our case of Williams v. Harris, 215 Ark. 928, 224 S. W. 2d 9, wherein we held that a municipal corporation could not issue bonds with the proceeds to be used for the construction of a factory building for a private corporation ; and appellant says:

“Since the public, in the form of the municipality and the county, may not aid private enterprise, the question becomes whether a private non profit corporation purporting to act for the public may do so. Act No. 567 requires that in the organization of First Arkansas each Congressional District in the State be represented by stockholders and by a director, and it must be chartered through the State Banking Department after-a finding that convenience and necessity require the existence of the corporation.

“This gives the private corporation some of the characteristics of a representative of the public acting for a public purpose. Appellant takes the position that financing a private business enterprise is not a public purpose, that a municipality or county may not support a private business enterprise, and that a private non profit corporation representing the public may not do so for them. ’ ’

This contention is easily answered. In Halbert v. Helena, etc. Industrial Development Corporation, 226 Ark. 620, 291 S. W. 2d 802, we had before us Act No. 404 of 1955, and we held that a corporation organized under that Act was a private corporation and that the Cities of Helena and West Helena were in no sense liable for the obligations of the Industrial Development Corporation. That case points to the holding here. The finance corporations authorized by the Act No. 567 are, as we have heretofore said, corporations set up to provide finances that may be loaned to development corporations organized under the Act No. 404 of 1955. The finance corporations are non-profit corporations, but their actions do not make liable the State or any of its subdivisions for the obligations of such corporations.

In the case at bar, the Scott County Industrial Development Corporation, organized under the Act No. 404 of 1955, is desirous of lending money to the Scott County Milling Company, a business corporation — just as the Helena-West Helena Industrial Development Corporation was interested in lending money to the Mohawk Rubber Company in the reported case of Halbert v. Helena {supra). In order to provide a pool or repository from which the Scott County Industrial Development Corporation, and other Industrial Development Corporations, may obtain funds to loan to business corporations — like Scott County Milling Company in the case at bar, and Mohawk Rubber Company in the reported case — the Legislature, by Act No. 567, authorized the incorporation of finance corporations — like appellee here — which, after first obtaining one million dollars of capital stock from public spirited citizens, will then be able to issue notes and bonds; and from the sale thereof are permitted to make loans to various local industrial development corporations which may qualify with worthy and worthwhile projects. The fact, that public spirited citizens of Arkansas have placed one million dollars of their personal funds into this Finance Corporation, certainly provides tangible evidence that this Finance Corporation is not a “fly-by-night” concern. It has a financial base which makes its notes and bonds supported by something “tangible”. We can see no merit to appellant’s assignment here under consideration.

II. The appellant says: “Section 19 of said Act No. 567 is in violation of the provisions of Article 16, Section 1, of the Constitution of the State of Arkansas, and is in violation of the provisions of Amendment No. 13 to the Constitution of the State of Arkansas”; and “The defendants, Orval E. Faubus, J. Vance Clayton, Jimmie Jones, Kelly Cornett,³ and Dick Simpson, Members of the State Board of Finance, may not legally purchase the bonds of the defendant, First Arkansas Development Finance Corporation.” This point in appellant’s argument brings us to the consideration of the point which caused the Court to ask for amici curiae briefs.⁴ The germane language of Art. 16 of the Constitution and Amendment No. 13 has heretofore been quoted: “Neither the State, nor any city, county, town or othei* municipality in this State shall ever lend its credit for any purpose whatsoever . . .” Section 19 of the Act No. 567 reads in part: “PURCHASE OF BONDS BY THE STATE. In addition, to the securities of the character which it is now authorized to purchase and hold in the Securities Account, the State Board of Finance may, in it discretion, purchase, at a price not to exceed par and accrued interest, bonds of any development finance corporation organized under the provisions of this Act to the extent of Five Million Dollars ($5,000,000.00); . . .” (Emphasis supplied.)

The appellant most forcibly urges that under this Section the State Board of Finance is given “carte blanche” to invest State funds in the bonds and notes issued by the Finance Corporation; and that what the State may not do directly within the inhibition of the Constitution, it certainly should not be allowed to do indirectly by “raiding” the State Treasury to provide funds for industrial development. Our attention has been called to the history of some of the States in the era of Railway Construction. The States either issued their obligations to allow the building of railroads, canals, and other projects or purchased the corporate stock of such concerns: and the effects were almost to bankrupt such States. Appellant says that it was in the light of such experience that the framers of the Constitution of 1874 used the language in the opening sentence of Sec. 1 of Art. 16, as herein involved. Our attention is called to the following classical language, contained in an annotation in 152 A. L. R. 495:

“ ‘Early in the nineteenth century it seems to have been the general practice of states to encourage the building of railroads by permitting the state or a subdivision thereof to purchase stock in railroad corporations, to issue bonds, or lend credit in aid of railroads, or to make outright donations to them. However, due to the large number of insolvencies of railroads, caused by frauds or economic conditions, states and subdivisions thereof found themselves largely indebted, and were themselves occasionally insolvent because of large investments in such enterprises. Therefore a reversal of policy set in. As early as 1851 Ohio adopted a constitution containing a provision prohibiting stock subscriptions or other forms of aid to corporations. In the ensuing twenty-five years most of the other states adopted similar provisions, either prohibiting aid altogether or requiring a vote of the people before a subscription to stock or other sort of aid could be made or extended. At present, at least thirty-eight states have such constitutional provisions, and several have statutory provisions on the subject.’ ”

Furthermore, our attention is directed to the case of Cobb v. Parnell, 183 Ark. 429, 36 S. W. 2d 388, which authorized a commission to issue bonds in the sum of $1,500,000.00 pledging the full faith and credit of the State to finance farmers and stock raisers, and it is pointed out to us that in the reported case there was language which indicated that it was a borderline emergency drouth relief proposition, or otherwise the legislation could not have been sustained. "We have carefully studied these matters; and also, we have studied the financial report of the Comptroller for the past several fiscal years⁵ to ascertain the amount in the Securities Account and the type of securities purchased by the State Finance Board.

After weighing all the factors in the matter, we reach the conclusion that the appellant’s objections, to § 19 of the Act, are not well taken. Section 19 does not require the State Board of Finance to purchase any bonds or notes of any finance corporation: it merely authorizes the Board, in its discretion, to purchase notes and bonds of a finance corporation organized under Act No. 567 if the Board decides that the securities are worthwhile. The Act says that the bonds and notes issued by a finance corporation (which has a foundation of one million dollars in cash) may be considered as securities⁶ in which the Board may invest a portion of the State’s Surplus Security Fund. In Halbert v. Helena (supra), we said:

“Whether the State Board of Finance invests the State’s surplus in one kind of bond or another is a matter for the Legislature to permit, and for the State Board of Finance to then decide in the exercise of its discretion. Certainly the Legislature can determine what kind of securities can be purchased by the State Board of Finance in its discretion,⁷ and until it is shown — and it has not been so shown here — that the State Board of Finance has abused its discretion or that such investment impairs the State’s ability to pay outstanding obligations as they mature, then no case is made by the appellants under this point.”

We reach the conclusion that the appellant cannot prevail on the assignment listed in this topic.

III. The appellant says: ‘ ‘ Defendant, First Arkansas Development Finance Corporation, is not validly organised under the provisions of Act No. 567 of- the Acts of the General Assembly of the State of Arkansas of 1957”; and “The defendant, First Arkansas Development Finance Corporation, is without authority to issue and sell bonds under said Act No. 567”. A considerable portion of the record in this case concerns these assignments, which we consider academic, as far as the appellant is concerned, since we have reached the conclusion that the Act No. 567 is valid. In answer to these allegations, the Finance Corporation has attached a list of all of its stockholders, subscribers, and directors; has filed the Certificate of the Bank Commissioner of the State of Arkansas granting the preliminary approval on July 8, 1957; the findings of the State Banking Board on August 6, 1958; and the Certificate of Incorporation issued by the State Bank Commissioner on August 6, 1958. The Finance Corporation is desirous of showing that every requirement had been carefully fulfilled in its organization, which probably is true. Our attention has not been directed to any alleged irregularity in the corporate organization. But, even so, after considerable study, we have reached the conclusion that the appellant is not in any position to raise the questions in this assignment.

The appellant has not alleged that he is a stockholder in the Finance Corporation, or has ever had any business dealings with the corporation, or that the corporation has ever made any claims of any kind against him. So we see no reason why he is entitled to a declaratory judgment as to the legality of the existence of the Finance Corporation. As a citizen, resident, and taxpayer, he could question the constitutionality of the Act; but as a citizen, resident, and taxpayer he has no right to question the corporate existence of the Finance Corporation through declaratory judgment proceedings. The usual rule is that the State may proceed by quo warranto to test corporate existence; but, in the case at bar, the Attorney General says that Finance Corporation is validly organized. In 13 Am. Jur. 206, “Corporations” § 61, the rule is stated:

“If the state, which alone can grant the authority to incorporate, remains silent during an open and notorious assertion and exercise of corporate powers, an individual will not, unless there is some powerful equity on his side, be permitted to raise the inquiry. The individual cannot create the corporation or grant, define, or limit its powers, and no grant of these by the sovereign can lessen his rights. There can consequently be no cause of complaint by the citizen, and no right to inquire whether corporate existence is rightful ele jure, or merely color-able. It would produce endless confusion and hardship, and probably destroy the corporation, if the legality of its existence could be drawn in question in every suit to which it was a party, for then no judgment could be rendered which would finally settle the question. ’ ’

Our declaratory judgment act (§ 34-2501 et seq. Ark. Stats.) was not intended to allow any question to be- presented by any person: the matters must be justiciable. In Anderson on “Declaratory Judgments” 2nd Ed. § 187, the general rule is stated as to declaratory judgments:

“Since purpose of the declaratory relief is to liquidate uncertainties and interpretations which might result in future litigation it may be maintained when these purposes may be subserved. The requisite precedent facts or conditions, which the courts generally hold must exist in order that declaratory relief may be obtained, may be summarized as follows: (1) There must exist a justiciable controversy; that is to say, a controversy in which a claim of right is asserted against one who has an interest in contesting it; (2) the controversy must be between persons whose interests are adverse; (3) the party seeking declaratory relief must have a legal interest in the controversy; in other words, a legally protectable interest; and (4) the issue involved in the controversy must be ripe for judicial determination.”

In the same authority in § 221 at page 488 the rule is stated:

“The Declaratory Judgment Statute is applicable only where there is a present actual controversy, and all interested persons are made parties, and only where justiciable issues are presented. It does not undertake to decide the legal effect of laws upon a state of facts which is future, contingent or uncertain. A declaratory judgment will not be granted unless tbe danger or dilemma of tbe plaintiff is present, not contingent on tbe happening of hypothetical future events; tbe prejudice to bis position must be actual and genuine and not merely possible, speculative, contingent, or remote.”

In tbe light of all of tbe foregoing, we conclude that tbe appellant has shown no reason for asking any court to decide the corporate status of tbe appellee. When we bold tbe Act valid — as we do — tbe appellant has obtained all tbe answers be is entitled to receive in this declaratory judgment proceeding. Accordingly, we modify tbe decree by cancelling tbe attack on the corporate existence of Finance Corporation, and we affirm tbe decree in bolding Act No. 567 of 1957 to be valid.

George Bose Smith, J., not participating. Ward, J., concurring. Bobinson and Johnson, JJ., dissenting.

1 We call attention to the fact that Act No. 404 of 1955 was for “Industrial Development”; and Act No. 567, now under consideration, is to provide finances for industrial development.

2 In the excellent briefs submitted by the amici curiae, there have been listed the statutes and decisions from various States involving legislation along the same general lines as our Act No. 404 of 1955 or the Act No. 567 here under consideration. For statutes — most of which have not experienced court testing — see:

Florida: Sections 289.01 et seq. of 1957 Statutes

Hawaii: Act No. 288 of 1957

Kansas: Chapter 144, Session Laws of 1955

Massachusetts: Chapter 671 of the Acts of 1953

Michigan: Act No. 158 of 1956

Minnesota: Chapter 896, Session Laws of 1957

New Hampshire: Chapter 254 of 1955

New York: Chapter 863 of 1955

Pennsylvania: Title 73, § 301 et seq. of Purden’s Statutes.

Rhode Island: Chapter 3045 of 1953

South Dakota: Chapter 314, Session Laws of 1957

Vermont: Act No. 151 of 1953

Wisconsin: Chapter 225 of Statutes of 1957

A reading of the various statutes indicates that none is exactly similar to Act No. 567; but the statutes show that various States have been trying to encourage industrial development, either at the State, municipal, or voluntary corporation level. Up to the present, most of the litigation on the constitutionality of aid to industrial development seems to have involved legislation which allowed counties or municipalities to grant aid, and in some of those cases the question was whether such industrial development was a “public purpose”. Some of the cases are: McConnell v. City of Lebanon (Tenn.), 314 S. W. (2d) 12; Albritton v. City of Winona, 181 Miss. 75, 178 So. 799; Dyche v. City of London (Ky.), 288 S. W. (2d) 648; and Miller v. Police Jury, 226 La. 8, 74 So. (2d) 394. Some of the other cases which we have studied are: Faulconer v. City of Danville, 313 Ky. 468, 232 S. W. (2d) 80; Opinion of the Justices, 254 Ala. 506, 49 So. (2d) 175; Newberry v. City of Andalusia, 257 Ala. 629. 57 So. (2d) 629; Holly v. City of Elizabethton, 193 Tenn. 46, 241 S. W. (2d) 1001; Village of Doming v. Hosdreg, 62 N. M. 18, 303 Pac. (2d) 920; Wilmington v. Banken (Del.), 105 A. (2d) 614; and Frostburg v. Jenkins, 215 Md. 9, 136 A. (2d) 852; State v. North Miami (Fla.) 59 So. (2d) 779; State v. York, 164 Neb. 223, 82 N. W. (2d) 269; Opinion of the Justices, 99 N. H. 528. See also article, “Municipal Inducements to Private Industry”, Minn. Law Review, May 1956, Vol. 40 p. 681 et seq. and review of the article in Law Review Digest, Vol. 6, p. 83 et seq.

3 Kelly Cornett was State Comptroller when this suit was filed and when appellant’s brief was prepared on appeal; but Kelly Cornett departed this life, and Julian Hogan has been substituted as the Acting State Comptroller.

4 In a per'curiam order of even date we have expressed appreciation to the named members of the Bar, who at our invitation .filed amici curiae briefs, all of which have proved most helpful.

5 This report is a public document, as provided by § 12-1907 Ark. Stats.

6 According to the Comptroller’s report of June 30, 1958, the Securities Account had slightly in excess of eighteen million dollars of securities already; so unless the finances of the State of Arkansas take a tremendous upturn, we can see no possibility of the State Board of Finance investing the maximum of seven and one-half million dollars in these Finance Corporation bonds.

7 For a case from another jurisdiction reaching a like conclusion in regard to discretion in investment of State Funds, see Fairbanks v. Stratton (Illinois), 152 N.E. (2d) 569.