Conder v. University of Utah

257 P.2d 367, 123 Utah 182, 1953 Utah LEXIS 167

• Court: Utah Supreme Court
• Decided: April 22, 1953
• Docket: 7863
• Status: Published

Opinions

WADE, Justice.

This proceeding was brought to restrain the University of Utah acting through its Board of Regents from entering into a loan agreement with the United States Government to finance the building of two dormitories for men. The agreement which the University proposes to enter into would provide for the sale by it to- the United States Government of about $1,000,000 in revenue bonds. These bonds are to be secured by a first and exclusive lien upon the net revenue and income which will be derived from the operation of the dormitory buildings and also by a first and exclusive lien on the interest and income to which the University is entitled from the Federal Land Grants described in Sec. 5, Art. X, Constitution of Utah and known as the Land Grant Funds.

The University proposes to enter into this loan agreement under authority of Chap. 126, Laws of Utah 1947 which under- Sec. 2, provides that to pay for the buildings the Board of Regents of the University

“is authorized to borrow money on the credit of the income and revenues to be derived from the operation of the building, and on the imposition of student building fees or both, or from other sources other than by appropriations by the Legislature of the State of Utah * * * >7

It is plaintiff’s contention that if the University is permitted under the above statute to pledge its income from the Land Grant Funds as well as the income to be derived solely from the operation of the buildings sought to be constructed, then the act is unconstitutional because it will allow the University to enter into an agreement whereby a debt will be created against the state within the meaning and provisions of Sec. 2, Art. XIII and Sec. 1, Art. XIV, Constitution of Utah.

The plaintiff concedes that under our holding in Spence v. Utah State Agricultural College, Utah, 225 P.2d 18, had the University of Utah proposed to pledge funds derived solely from revenues to be obtained from the operation of the project sought to be constructed or from funds derived from students, then such a loan would not constitute a debt within the meaning of the above constitutional prohibitions. However, plaintiff contends that if Chap. 126 allows the University to pledge the income and interest from the Land Grant Funds to which it is entitled as well as student fees or revenues to be derived solely from the proposed project, then the Act violates the above constitutional provisions because it would allow the University to contract a general obligation for which the state would be liable and would be outside “the special fund doctrine” as announced by this court in the past.

For a full discussion of “the special fund doctrine” as enunciated by this court in earlier cases, the reader is referred to Spence v. Utah State Agricultural College, supra. In that case it was sought to restrain the Agricultural College from entering into a loan agreement with the United States Government under the authority given it by Chap. 126, Laws of Utah 1947. The College proposed to build a student Union Building with money to be borrowed from the United States Government. The loan was to be secured by bonds pledging the revenues to be derived from the operation of the student Union Building and from student fees. This court in holding that the bonds which were proposed to be issued would not create a debt against the State of Utah which would be in violation of Sec. 2, Art. XIII and Sec. 1, Art. XIV, Constitution of Utah, pointed out that in conformity with the Act the bonds would show on their face that neither the State, the College nor the Board of Trustees would be liable for their payment and that the holders of the bonds could only look for payment from revenues to be derived solely from the operation of the building and from student fees.. The bonds would not require the State to make or guarantee any of the payments should there be insufficient revenues from the sources pledged and payments could only be made from those special funds.

The question to be determined in the instant case is whether pledging the income and interest of the State Land Funds to which the University is entitled in addition to the revenues to be derived from the operation of the buildings would make the loan a debt which would have to be paid by the State and thereby come in conflict with the constitutional provision on debt limits.

It is plaintiff’s contention that under the “restricted special fund theory” which this court has followed in the past, the pledging of the interest and income of the State Land Funds was prohibited by the Constitutional provisions because it pledged funds other than that to be derived solely from the operation of the buildings. The “restricted special fund theory” is based on the reasoning that if any funds of the borrower other than that derived from the project for which the loan is made, is diverted to pay this loan, then the amount which is so paid out will not be available for other needs of the borrower and the funds for such needs will have to be augumented by general taxation. This was the reasoning in Fjeldsted v. Ogden City, 88 Utah 278, 28 P.2d 144. See also Wadsworth v. Santaquin City, 83 Utah 321, 28 P.2d 161. Plaintiff concedes that the Fjeldsted case, (and the same would apply to the Wadsworth case) in which this court adopted the “restricted special fund theory” is distinguishable from the instant case because it was applied to a municipality upon which there are constitutional limitations on the amount of general indebtedness it can assume in a year and there are no such limitations on the University. Plaintiff nevertheless argues that the reasoning as exemplified by the “restricted special fund theory” was used by this court in State ex rel. University of Utah v. Candland, 36 Utah 406, 104 P. 285, 24 L.R.A.,N.S., 1260, in arriving at its conclusion that the Act involved therein authorizing the University to borrow from the State Land Grant Fund to construct a building was unconstitutional because it was clear that the debt would have to be paid by the state and not by the University. The act involved in that case provided that payments were to be made from funds to be appropriated for the use of the University, which funds, of course, were to be obtained through general taxation. In arriving at the conclusion that the act was unconstitutional because it violated Sections 1 and 2 Art. 14 of the Utah State Constitution limiting state debts, this court used language which showed it believed the University, in spite of the fact that it was a corporation and therefore a legal entity, was an agency of the state incorporated for the convenience of the state in conducting that institution and any property it held belonged to the state and was merely held by the University in trust for the state. This being so, it reasoned further, that any debts the University incurred would be obligations of the state and any funds which could have been used by the University for its maintenance but which were diverted to other purposes would mean that the state would have to make up the funds so diverted by appropriations from general taxes. It is because of this reasoning that plaintiff contends that “the special restricted fund theory” in determining what is a debt under the constitutional limitations has been adopted by this court for state institutions as well as municipalities.

There would be merit to plaintiff’s argument if that reasoning had been necessary for a decision in the Candland case. However, as this court pointed out in that case it was unnecesssary to decide whether the University as a legal entity could contract debts for which it alone would be liable since the act in fact and in law contemplated that the debt should be that of the state; The facts in the instant case are entirely unlike those in the Candland case. It is not contemplated either by the Act nor by the proposed loan agreement that the state is to be the actual obligor. The payments are to be made only from funds derived from revenues obtained from the operation of the project and the income and interest from state land funds which the University has the right to use for its support and maintenance. A state cannot be sued like a municipality. In the event of a failure to pay the indebtedness the state would be under no obligation to appropriate money from general taxes to pay it. Such an obligation is not a debt in the contemplation of the constitutional limitations unless we wish to extend the reasoning of the “restricted special fund theory” which we have applied to borrowing by municipalities and say that even though the state would not be legally obligated to pay the indebtedness it would be morally so obligated and in any event it might have to make up from general taxation the amount which the University expended from its income from land grant funds for this project which could have been used for other purposes. We do not choose to extend this doctrine to obligations assumed by state institutions. As pointed out in an interesting and informative article on this doctrine entitled “Municipal Improvements as Affected by Constitutional Debt Limitations” 37 Columbia Law Review, pages 192 to 197, on page 195:

“Superficially, the restricted special fund theory has attraction. The theory concedes that constitutional limitations refer to debts payable from taxation, but maintains that an obligation the result of which may be to deprive the general municipal funds of proprietary revenue then being received is in effect a contingent burden on the taxpayer; hence it is a debt.

“The answers to this line of reasoning are both logical and practical. If the validity of the special fund doctrine be assumed, the debt affected by constitutional limitations is an obligation for the payment of which the levy of taxes may be required. It is inconsistent with that assumption to treat as debt an obligation for the payment of which taxation cannot be required.”

The above article also calls attention to the fact that the doctrine has proved unsatisfactory even as applied to municipalities and has been repudiated by some of the states which had previously adopted that theory. See also notes to that article commencing on page 209 for citation of cases on this subject. In view of the experience of other states with this doctrine we are not inclined to unnecessarily extend it.

Plaintiff also contends that the interest and income from the land grant fund cannot lawfully be used for building purposes but only for educational purposes. He concedes that whether that is true or not depends upon an interpretation of Sec. 8 of the Enabling Act which granted certain lands to the state for the establishment of the University of Utah and which provided that

“the proceeds of the sale of said lands, or any portion thereof, shall constitute permanent funds, to be safely invested and held by said State; and the income thereof to be used exclusively for the purposes of such university”

and Sec. 5, Art. 10 of the Utah State Constitution which provides that the permanent funds shall

“be safely invested and held by the State; and the income thereof shall be used exclusively for the support and maintenance of the different institutions and colleges, respectively, in accordance with the requirements and conditions of said Acts of Congress.”

Plaintiff cites some early cases from Idaho and Washington, Roach v. Gooding, 11 Idaho 244, 81 P. 642 and Sheldon v. Purdy, 17 Wash. 135, 49 P. 228, which in interpreting similar provisions held that wording therein that the income was to be used for “university purposes” and for “support and maintenance” meant that it must be used for current expenses and educational purposes and not for building purposes. However, plaintiff admits that more recent cases from other jurisdictions have held the term “support and maintenance” authorized the construction of buildings. There is nothing in the wording of the enabling act nor in Sec. 5, Art. 10 of the State Constitution which compels us to find that the income from the permanent funds can only be used for current expenses of the University. Buildings are a necessary part of a University and the terms “support” or “maintenance” do not necessarily exclude the right to repair or construct them. As stated in Arnold v. Bond, 47 Wyo. 236, 34 P.2d 28, on page 31 of the Pacific Reporter in answer to similar arguments made under provisions similar to ours:

“* * * the conclusion that the term ‘support’ excludes the right to use any part of the money for erecting buildings does not necessarily follow. The meaning of the term ‘support’ was discussed in the case of State v. Board, 8 Wyo. 104, 55 P. 451, 461, and it was held that it included the erection of buildings as well. The court speaking, through the late Chief Justice Potter, said: ‘The statutes of this state have for many years provided that there shall he levied annually a tax “for the support of the common schools.” * * *’ 26 Stat. 222. Would it he contended, in the absence of express, adverse legislative provision, that school houses could not he erected or repaired from the proceeds of the tax, or the income, or avails from the donated public lands? Is not the erection of suitable buildings as necessary a part of the support of the common schools as the employment of teachers? What feature in the support of any public institutions is more essential than providing a house in which its operations may be carried on, or in making such repairs as its condition demands?”

See also State ex rel. Blume v. State Board of Education of Montana, 97 Mont. 371, 34 P. 2d 515.

We conclude that neither the wording of our enabling Act nor that in Sec. 5, Art. 10, of our State Constitution precludes the use of the income or interest from the land grant funds by the University for erection or repairs of buildings.

We adopt Mr. Justice McDonough’s opinion on the construction of Chap. 126, L. Utah 1947 as the opinion of the court.

The peremptory writ of prohibition is denied and the Alternative Writ recalled. No costs allowed to either party.

CROCKETT, Justice concurs in the opinion of WADE, J., and also in the views expressed by Me-DONOUGH, J.