City of Frostburg v. Jenkins

136 A.2d 852, 215 Md. 9

• Court: Court of Appeals of Maryland
• Decided: September 24, 2001
• Docket: [No. 24, September Term, 1957.]
• Status: Published

Opinions

Henderson, J.,

delivered the opinion of the Court.

This appeal is from a decree of the Circuit Court for Allegany County, restraining the appellants from holding a special election for the purpose of obtaining authority to issue municipal bonds and devote the proceeds to acquiring a site and contributing to the cost of constructing a building to be used by a privately owned manufacturing company. On a bill for declaratory decree filed March 28, 1957, by taxpayers and voters of Frostburg, the Chancellor-held that the enabling act and City ordinance were invalid and unconstitutional, on the ground that they authorized the use of public funds for a private purpose.

The Code of Public Local Laws of Allegany County, Art. 1, Sec. 248 (Everstine Ed. 1955), as enacted by Chapter 662, Sec. 103, Acts of 1953, provides:

“INDUSTRIAL DEVELOPMENT. In order to encourage industrial development in the City of Frostburg, the City of Frostburg shall have the power to purchase property and to construct or reconstruct buildings or other structures to be used by manufacturing companies agreeing to locate in Frostburg. The city shall' enter into an agreement with any such manufacturing company which shall provide that the company shall purchase the land and buildings and structures by means of installment payments over a period of years not to exceed twenty-five. Until the entire purchase price has been received by the city, the land, buildings, and structures shall remain the property of the City of Frostburg. For the purposes only of this section, the City of Frostburg shall have the power to issue bonds or other certificates of indebtedness, subject in each instance to receiving the prior approval of the voters of the city in a referendum vote. Not more than $100,000.00 in bonds or other certificates of indebtedness may be -issued and outstanding at any one time under the provisions of this section.”

On March 4, 1957, the City passed Ordinance No. 488, providing for a special election on March 30, 1957, pursuant to the enabling act, to authorize the City to issue bonds in an amount not to exceed $100,000.00, for the purpose of acquiring a site and contributing to the construction of a building to be used by the Cumberland Undergarment Company for the manufacture of lingerie and other garments and artides o£ a like nature, and providing for the cost of said special election. The Ordinance recited that the Company had agreed to operate a factory in Frostburg, if a suitable building were erected for it, to contribute to the cost of said building in excess of $100,000.00, to have the title to said building held in the name of the City until fully paid for, to enter into a contract to purchase the building within twenty-five years, “and to make annual payments under said contract which will total $100,000.00 in twenty-five years, plus interest on deferred payments”. The Ordinance contained the usual provisions for notice by the Supervisors of Election, and the manner of holding the election.

The answer admitted the facts alleged in the bill, and further alleged that the issuance of the bonds “will be for the benefit of the citizens and residents of the City of Frostburg and that the issuance of such bonds are for a public purpose and are necessary to obtain industrial sites for. the purpose of giving employment to the residents of the City of Frostburg and that by so doing, the said city will obtain income from its taxing authority and the economy of the city will be vitalized by the employment which is given to the residents thereof.” It was further alleged that “without this authority being granted, the said city will not be able to compete with other localities to obtain manufacturing sites for employment of the residents of the city who own properties therein and without such employment would become public charges and would not be able to make payment of the taxes which is the lifeblood of the city.” The case was submitted upon bill and answer, and a restraining order was passed on March 27, 1957. Thereafter, the bill was amended to pray a permanent injunction against the holding of any election under the enabling act, the answer was amended accordingly, and the Chancellor issued a permanent injunction. Under these circumstances, although the time for the election has expired and the question of the validity of this Ordinance is moot, we think the validity of the enabling act under the amended bill for declaratory relief may properly be considered. Cf. Lloyd v. Supervisors of Elections, 206 Md. 36, and Comrs. of Vienna v. Phillips Co., 207 Md. 12, 19.

It is the general rule that the public funds of municipalities cannot properly be devoted to private use, even when expressly authorized by the legislature. 15 McQuillan, Municipal Corporations (3rd ed.), § 39.19, p. 33. The exact constitutional source of the prohibition is somewhat obscure. It was once supposed to reside in the Fourteenth Amendment to the Federal Constitution, because of the broad language of Loan Association v. Topeka, 20 Wall. (87 U. S.) 655. In that case the court affirmed a judgment in favor of the city, in a suit on its bonds, which had been donated to a manufacturer to induce it to locate in the city, pursuant to statutory authorization. But Mr. Justice Holmes, in his dissent in Traction Co. v. Mining Co., 196 U. S. 239, 260, observed that the decision in the Loan Association case was not, and could not have been, rested on the Fourteenth Amendment. In Albritton v. City of Winona, 178 So. 799 (Miss.), the state court had before it the validity of a statute authorizing the use of municipal funds to finance a private manufacturing corporation. The court distinguished the case of Carothers v. Town of Booneville, 153 So. 670 (Miss.) on the ground that the legislative policy had not been clearly established in the earlier case. It squarely held that the statute did not violate the Fourteenth Amendment. An appeal to the Supreme Court of the United States was dismissed for want of a substantial federal question, 303 U. S. 627. In support of the dismissal the Supreme Court cited, among other cases, Green v. Frazier, 253 U. S. 233, and Carmichael v. Southern Coal Co., 301 U. S. 495. In those cases the Court had intimated that, except in the most extreme cases, it would not override the-judgment of the state courts and the state legislature as to-what is a public, as distinguished from a private, purpose. In the Carmichael case, supra, (p. 515) the Court said: “Whether the present expenditure serves a public purpose is. a practical question addressed to the law-making department, and it would require a plain case of departure from every public purpose which could reasonably be conceived to justify the intervention of a court.” Another decision holding that the Fourteenth Amendment is not applicable in a situation like that in the instant case, is Miller v. Police Jury of Washington Parish, 74 So. 2d 394 (La.). There a similar scheme for financing new industry was put into effect after an amendment to the state constitution had removed a prohibition against lending credit.

We have noted that the phrase “law of the land” in Article 23 of our Declaration of Rights expresses the same concept as “due process of law” in the Fourteenth Amendment, and that decisions of the Supreme Court in this field are “practically direct authorities.” Home Utilities Co. v. Revere, 209 Md. 610, 614.

Although Sections 34 and 54 of Article III of the Maryland Constitution were not relied upon below or in this Court, it was suggested in argument that they might bar the extension of credit in the instant case. The prohibition in Section 34, in terms, runs only against the State, and this construction would seem to be supported by the qualified prohibition in Section 54 in the case of the counties. See also Article XI, Section 7, applicable to Baltimore City. But in any event it seems clear since the decisions in Johns Hopkins University v. Williams, 199 Md. 382, and Melvin v. Anne Arundel County, 199 Md. 402, that the prohibitions of those sections do not bar the use of the State’s or a county’s credit to obtain funds to be used for gifts to private corporations that serve a public purpose, such as an educational institution and a hospital, respectively. We think it is also significant that in Finan v. M. & C. C. of Cumberland, 154 Md. 563, this Court, in approving the extension of municipal credit to a private hospital, did not refer to Sections 34 or 54, although these sections were discussed in the briefs. See also, Board of Education v. Wheat, 174 Md. 314, and Adams v. St. Mary’s County, 180 Md. 550, where local laws authorizing the counties to transport children to private schools were sustained without reference to Sections 34 or 54. This Court simply held there was no violation of Articles 15 or 23 of the Declaration of Rights, or of the Fourteenth Amendment “by taking money of the taxpayers for the use of private institutions”, under the circumstances. Board of Education v. Wheat, supra (p. 319); Adams v. St. Mary’s County, supra (p. 556). Cf. Everson v. Board of Education, 330 U. S. 1.

The leading Maryland case that laid down the proposition that public funds cannot properly be devoted to a private purpose is Balto. & E. S. R. Co. v. Spring, 80 Md. 510 (1895). In that case a legislative act authorized Talbot County to issue bonds and apply the proceeds to the payment of claims against an insolvent railroad for the benefit of local creditors. It was held that this was a private purpose, and a violation of Article 15 of the Declaration of Rights. The Article as it then stood was revised by Chapter 390, Acts of 1914, ratified November 2, 1915, but although it did not, and does not now, in terms limit the taxing power we think it is settled, particularly since the decision in Finan v. M. & C. C. of Cumberland, supra, that taxes by whomsoever laid or authorized, can only be imposed to raise money for public purposes. It is also recognized that, with due regard to the legislative prerogative, the courts have a duty to determine whether the particular use is within the scope of the constitutional power. Cf. Arnsperger v. Crawford, 101 Md. 247, 252. But in the application of the principle, it is agreed that “What is a public purpose for which public funds may be expended is not a matter of exact definition; it is almost entirely a matter of general acceptation.” Finan v. M. & C. C. of Cumberland, supra (p. 565). We may add that the line of demarcation is not immutable or incapable of adjustment to changing social and economic conditions that are properly of public and governmental concern. Cf. Green v. Frazier, supra. Perhaps the best illustration of change is to be found in the field of social security, until recently not considered a governmental responsibility.

The only declaration of public policy in the enabling act before us is the statement that the power is granted “in order to encourage industrial development”. The legislative purpose, however, is somewhat amplified in the allegations of the answer, which are admitted for the purpose of this case, and we might, indeed, take judicial notice of the fact that the location of new industry in a municipality furnishes employment and measurably increases the resources of the community and its financial well-being. As the Supreme Court recognized in the Carmichael case, supra, the relief of unemployment is a legitimate public purpose. The fact that incidental benefits are passed on to the locating corporation is not fatal, if there are substantial public benefits to support the action taken. Cf. Herzinger v. City of Baltimore, 203 Md. 49, 60.

In the instant case there are obvious benefits passing to the private corporation, and enuring to the benefit of its stockholders. One benefit is the financing of its building program at a favorable interest rate. It is common knowledge that municipal bonds can usually be floated at a lower yield than industrial bonds, because of the tax immunities, and because they are supported by tax revenues instead of earnings. Although interest rates are not fixed in the Ordinance, we assume that the scheme contemplates that the saving be passed on to the corporation under its contract to purchase the land and building in installments in twenty-five years. Another benefit may arise from the fact that title will remain in the City during that period. We assume that the property so held would not be subject to property taxes. But whether these private benefits outweigh the public benefits accruing from the location of the plant within the municipality seems to us to be primarily a legislative rather than a judicial problem.

The attraction of new industries to this State, by means of tax exemptions, has been recognized as within the legislative power over a long period of years. See Kimball-Tyler v. Balto. City, 214 Md. 86, 90, reciting the history of the former Baltimore City tax exemption, and Carroll County v. Shriver Co., 146 Md. 412, 418. We see no real difference between the tax exemptions there created, and that in the instant case. True, those exemptions were made applicable to all manufacturers as a class, whereas in the instant case it only applies at this time, as a practical matter, to one. Yet this is due solely to the limitation upon the funds available. The only novel feature of the present scheme is the extension of municipal credit as an aid to the financing of the building program. Such aid is not without precedent in Baltimore, in respect to port development. Marchant v. Baltimore, 146 Md. 513, 521.

Schemes for the attraction and financing of new industry have been adopted in other states, and have generally been sustained by the courts. In Faulconer v. City of Danville, 232 S. W. 2d 80 (Ky.), a city was authorized to acquire a site and erect a factory thereon, to be leased to a private corporation under a long term lease. The legislation was sustained. In that case, the city did not pledge its credit, but the bonds were to be payable out of the rents. But in Dyche v. City of London, 288 S. W. 2d 648 (Ky.), a plan calling for the issuance of municipal bonds was sustained. A similar plan was sustained in Mississippi in Albritton v. City of Winona, supra. A similar plan involving revenue bonds was sustained in Tennessee. Holly v. City of Elizabethton, 241 S. W. 2d 1001 (Tenn.). See also Halbert v. Helena-West Helena Indus. Develop. Corp., 291 S. W. 2d 802 (Ark.); Opinion of the Justices, 49 So. 2d 175 (Ala.); Newberry v. City of Andalusia, 57 So. 2d 629 (Ala.); Village of Deming v. Hosdreg Co., 303 P. 2d 920 (N. M.). Cf. Pipes v. Hilderbrand, 243 P. 2d 123 (Cal. App.) (factory at airport).

On the other hand, in New Hampshire, a scheme to provide industrial parks and other facilities to attract industry was disapproved on the narrow ground that the legislation did not contain sufficient guides or standards. In re Opinion of the Justices, 114 A. 2d 514 (N. H.). In Florida, a scheme to finance an industrial enterprise through revenue bonds was disapproved in sweeping terms. State v. Town of North Miami, 59 So. 2d 779, 785, 784 (Fla.). The court said: “The financing of private enterprises by means of public funds is entirely foreign to a proper concept of our constitutional system. Experience has shown that such encroachments will lead inevitably to the ultimate destruction of the private enterprise system. * * * Every new business, manufacturing plant, or industrial plant which may be established in a municipality will be of some benefit to the municipality. A new super market, a new department store, a new meat market, a steel mill, a crate manufacturing plant, a pulp mill, or other establishments which could be named without end, may be of material benefit to the growth, progress, development and prosperity of a municipality. But these considerations do not make the acquisition of land and the erection of buildings, for such purposes, a municipal purpose.” This decision was followed in State v. City of York, 82 N. W. 2d 269 (Neb.). We cannot accept the reasoning of these cases. The Constitution does not guarantee a static condition of society, or write into our basic law the economic doctrine of laissez-faire. So long as the legislation has a substantial relation to the public welfare and can fairly be said to serve a public purpose, it is not the courts’ function to strike it down, merely because we fear it may lead to unwise or unfortunate results. We think the legislation in the instant case is not beyond the bounds of legislative power.

Decree reversed, with costs, and case remanded for the passage of a decree in accordance with the views expressed in this opinion.