CITIES AND TOWNS ‑- DISTRICTS ‑- PUBLIC UTILITY DISTRICTS ‑- CONSERVATION ‑- CONTRACTS ‑- SALES OF CONSERVATION MATERIALS TO PUBLIC UTILITY CONSUMERS
(1) The provisions of Article VIII, § 7 of the Washington Constitution prohibit a city or public utility district from assisting its utility customers, generally, in the purchase of such conservation materials as insulation or storm windows from private suppliers by providing to the seller a guarantee of payment of part or all of the agreed upon purchase price for the conservation materials involved.
(2) The same provisions of Article VIII, § 7 of the Washington Constitution, however, do not prohibit a city or public utility district from itself purchasing and then later selling such conservation materials to its customers, generally, by means of installment contracts under which payment of the purchase price, plus a service charge, would be made by the purchasers on a periodic basis over a specified period of time.
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May 1, 1978
Honorable R. Ted Bottiger
State Senator, 2nd District
8849 Pacific Avenue
Tacoma, Washington 98444
Cite as: AGO 1978 No. 13
By letter previously acknowledged you have requested our opinion on two questions which we paraphrase as follows:
(1) Do the provisions of Article VIII, § 7 of the Washington Constitution prohibit a city or public utility district from assisting its utility customers, generally, in the purchase of such conservation materials as [[Orig. Op. Page 2]] insulation or storm windows from private suppliers by providing to the seller a guarantee of payment of part or all of the agreed upon purchase price for the conservation materials involved?
(2) Do the provisions of Article VIII, § 7 of the Washington Constitution prohibit a city or public utility district from itself purchasing and then later selling such conservation materials to its customers, generally, by means of installment contracts under which payment of the purchase price, plus a service charge, would be made by the purchasers on a periodic basis over a specified period of time:
(a) Where legal title to the materials involved is retained by the seller as security until the full purchase price is paid?
(b) Where legal title to the materials is not retained but a security interest in those materials and/or in the real property where they are being installed is obtained by the seller?
(c) Where neither of the above types of security interest is retained or obtained by the seller?
We answer question (1) in the affirmative and question (2) in the negative as qualified in our analysis.
Article VIII, § 7 of the Washington Constitution reads as follows:
"No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation."
[[Orig. Op. Page 3]]
As will readily be seen, this provision of our constitution actually contains the following four separate prohibitions which are here relevant:
(1) A prohibition against gifts of money;
(2) A prohibition against gifts of property;
(3) A prohibition against loans of money; and
(4) A prohibition against the lending of municipal credit.1/
Two exceptions to these prohibitions also should be preliminarily noted, one express and the other the product of judicial interpretation. The express exception, of course, covers aid to persons in need; i.e., the poor and infirm. See,State v. Guaranty Trust Co., 20 Wn.2d 588, 148 P.2d 323 (1944) andMorgan v. Dept. of Social Security, 14 Wn.2d 156, 127 P.2d 686 (1942). And the further exception resulting from court decisions relates to gifts or loans to other governmental agencies ‑ in other words, strictly intergovernmental transactions. SeeRands v. Clarke County, 79 Wash. 152, 139 Pac. 1090 (1914);cf.,Anderson v. O'Brien, 84 Wn.2d 64, 524 P.2d 390 (1974). For the purposes of this opinion, however, neither of these two exceptions will be deemed to be applicable since both of your questions speak of assistance to utility customers,generally, rather than to some particular class of customers.
It should also be observed at the outset that the same four prohibitions (and two exceptions) are likewise applicable to the state itself‑-but by reason of a somewhat differently worded constitutional provision; i.e., Article VIII, § 5 which reads as follows:
"The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation."
[[Orig. Op. Page 4]]
What has happened, over the years, is that this prohibition‑-although it is expressed only in terms of the lending of credit‑-has been read and applied by the court to cover gifts or loans of money or property as well. See,e.g.,Hwy. Com. v. Pac. NW Bell Tel. Co., 59 Wn.2d 216, 367 P.2d 605 (1961);Anderson v. O'Brien, supra;Morgan v. Dept. of Social Security, supra; and State v. Guaranty Trust Co., supra. As a consequence, however, while the line between the four prohibitions has generally been fairly well delineated in those cases which have involved municipal transactions under Article VIII, § 7, it has, on occasion, been somewhat blurred in comparable cases relating to state expenditures. Compare, for example,Highway Comm. v. Pac. N.W. Bell Tel. Co.,supra, withGruen v. State Tax Commission, 35 Wn.2d 1, 211 P.2d 651 (1949). Nevertheless, the line does exist and we will take care to heed it in dealing with your two specific questions:
We will deal first with your question relating to the offering of guarantees of payment in connection with the purchase of conservation materials because, in our judgment, the answer to that question is quite clear. Even in the limited sense in which the term "loan of credit" has been defined by the state supreme court inGruen v. State Tax Commission, supra, and State ex rel. O'Connell v. PUD, 2 Wn.App. 366, 469 P.2d 922 (1970),2/ it seems apparent that the legal relationship thus contemplated would involve an unconstitutional lending of municipal credit. InGruen, the Washington court followed the lead ofGrout v. Kendall, 195 Iowa 467, 192 N.W. 529 (1923), in which the Iowa court had earlier interpreted a similarly worded provision of its state constitution as having
". . . withheld from the constituted authorities of the stateall power or function of suretyship. It forbade the incurring of obligations by the indirect method of secondary liability. This is the field and the full scope of this section. It does not purport to deal with the creation of a primary indebtedness for any purpose whatever. . . ."3/ (Emphasis theirs)
[[Orig. Op. Page 5]]
And inState ex rel. O'Connell v. PUD, supra, a division of our state court of appeals likewise reiterated the same view that the constitutional prohibition against the lending of credit bars a guaranty or surety type of relationship. Clearly, therefore, that particular prohibition covers the scheme contemplated by your first question for such, obviously, is exactly what would there be involved.4/ Accordingly, as above indicated, your first question must necessarily be answered in the affirmative;i.e., the provisions of Article VIII, § 7,supra, do prohibit a city or public utility district from assisting its utility customers in the purchase of such conservation materials as insulation or storm windows from private suppliers by providing to the seller a guaranty of payment of part of all or the agreed upon purchase price for the materials involved.
[[Orig. Op. Page 6]]
When we turn, on the other hand, to the alternative approach contemplated by your second question a different situation is presented. Because the conservation materials would be purchased from the city or public utility district a valuable consideration would be present so as clearly to obviate the possibility of an unconstitutional gift. And because the role of the municipality would be that of vendor rather than guarantor or surety, the legal relationship involved would not fall within the definition of a "loan of credit" which was adopted by our state supreme court in Gruen, supra, and by the court of appeals in O'Connell v. PUD, supra.5/ The issue, accordingly, becomes that of whether a retail installment sale of goods or materials by a municipality in our state would nevertheless still run afoul of the constitution‑-either as a loan of money (which, as we have seen, is also prohibited) or as a different kind of loan of credit. Before we address ourselves directly to that issue, however, there is a threshold question which must be resolved, also involving Article VIII, § 7, supra, because of the recent decision of the Washington court inLassila v. City of Wenatchee, 89 Wn.2d 804, P.2d (1978).
In essence, the factual situation in Lassila was as follows: The City of Wenatchee, acting through its city commissioners, decided to create a community center to be located near the Columbia River and adjacent to the city's central business district. Accordingly, it commenced negotiations for the purchase of several tracts of land (then in private ownership) for this purpose and, on March 31 and April 1, 1976, it purchased and took title to what was referred to as the Wade Fruit property and the Just property. Then, only two weeks later, on April 13, 1976, the city commissioners (1) declared portions of both tracts surplus to the city's needs; (2) entered into an agreement with one Mercy covering the [[Orig. Op. Page 7]] city's right to use any theater constructed by Mercy on the surplus property; and (3) held a public hearing on a related rezone application. Thereafter, three days later, the city sold the surplus property to Mercy.
All of this, however, was promptly challenged in a taxpayer's action in the Chelan County superior court as being in violation of the constitution‑-specifically, Article VIII, § 7‑-and, from a judgment in favor of the city, the plaintiff appealed.6/ Following argument on the issue, the supreme court, on March 16, 1978, unanimously reversed, saying, in material part:
"Purchase of property by a municipality with an intent to resell it to a private party is prohibited by Const. art 8, § 7. Paine v. Port of Seattle, 70 Wash. 294, 126 P. 628, 127 P. 580 (1912). At acquisition a municipality must at very least intend a public purpose to insure that a later sale to a private party does not violate the constitutional prohibition. A municipality is absolutely prohibited from acting as a financing conduit for private enterprise.
"Since the City acquired the Wade Fruit and Just properties with the declared intention of reselling portions thereof to Mercy, there was clearly an unconstitutional loan of the City's credit. The fact that the City received value on resale does not negative the [[Orig. Op. Page 8]] unconstitutionality of thatloanofcredit.
"Receipt of value merely assures that the City did not make an unconstitutionalgift of public funds, which is an entirely different matter.
"An expected future public benefit also does not negative an otherwise unconstitutional loan. We have repeatedly held that a loan of money or credit by a municipality to a private party violates Const. art. 8, § 7 regardless of whether it may serve a laudable public purpose. Japan Line, Ltd. v. McCaffree, 88 Wn.2d 93, 98, 558 P.2d 211 (1977); Port of Longview v. Taxpayers, 85 Wn.2d 216, 231, 533 P.2d 128 (1974);State ex rel. O'Connell v. Port of Seattle,supra at 805-806. As we said inJohns v. Wadsworth, 80 Wash. 352, 354, 141 P. 892 (1914):
"The section of the constitution last quoted, in most express terms, prohibits a county from giving any money, property or credit to, or in aid of, any corporation, except for the necessary support of the poor and infirm. If the framers of the constitution had intended only to prohibit counties from giving money or loaning credit for other than corporate or public purposes, they would doubtless have said so in direct words. That agricultural fairs serve a good purpose is not questioned, but the constitution makes no distinction between purposes, but directly and unequivocally prohibits all gifts of money, property, or credit to, or in aid of, any corporation, subject to the exception noted.
"SeealsoPort of Longview v. Taxpayers, supra at 231. Unquestionably, the City's desire for a multipurpose theater adjacent to its contemplated community center is a commendable purpose. But, a salutory purpose does not validate an unconstitutional loan.
[[Orig. Op. Page 9]]
"The City contends we should liberally construe Const. art. 8, § 7 so that an expected future benefit will validate the loan. But, as we said inState ex rel. O'Connell v. Port of Seattle, supra at page 806:
"If Article 8, § 7 is too restrictive in its terms, that is a matter for the citizens of this state to correct through the amendatory process. It is not for this court to engraft an exception where none is expressed in the constitutional provision, no matter how desirable or expedient such an exception might seem."
From the standpoint of your question the threshold problem raised by this recent decision is apparent. If, truly, a municipality may not under any circumstances purchase property for the purpose of resale to a private party then the ball game here would seem to be over‑-and, furthermore, this would be so regardless of whether the sale was made for cash or by some form of installment contract. Obviously, in order to sell conservation materials to its customers, a city or public utility district is first going to have to purchase those materials and its only purpose in doing so will be that of resale. Yet, as you may know, it has been a common practice for years in our state for at least some municipal utilities to purchase (at wholesale) and sell (at retail) various electrical appliances to their electrical power customers. See,e.g., RCW 35.92.050 which provides that:
"A city or town may also construct, condemn and purchase, purchase, acquire, add to, maintain and operate works, plants, facilities for the purpose of furnishing the city or town and its inhabitants, and any other persons, with gas, electricity, and other means of power and facilities for lighting, heating, fuel, and power purposes, public and private, with full authority to regulate and control the use, distribution, and price thereof, together with the right to handle and sell or lease, any meters, lamps, motors, [[Orig. Op. Page 10]] transformers, and equipment or accessories of any kind, necessary and convenient for the use, distribution, and sale thereof; authorize the construction of such plant or plants by others for the same purpose, and purchase gas, electricity, or power from either within or without the city or town for its own use and for the purpose of selling to its inhabitants and to other persons doing business within the city or town and regulate and control the use and price thereof." (Emphasis supplied)
Likewise, RCW 59.16.040 contains a virtually identical authorization in the case of public utility districts and, although the typical if not universal practice in the past has been to sell those appliances for cash rather than on long-term retail installment contracts (most likely because of a fear of Article VIII, § 7 on that count), the constitutionality of the authority granted by these statutes has apparently never even been challenged.
The answer, at least from the standpoint of any future attempts to invoke theLassila case in opposition to RCW 35.92.050 or RCW 59.16.040, must rest on a fairly narrow but nevertheless supportable (in our judgment) distinction between what was there involved and the case at hand. InLassila, there was really but one transaction‑-a purchase, by the City of Wenatchee, of a specific parcel of real property ". . . as a mere financing conduit for Mercy's purchase of the theater site. . . ."7/ Cf.,Port of Longview v. Taxpayers, 85 Wn.2d 216, 533 P.2d 128 (1974), which we will note further below. Here, by way of contrast, the municipal utility, in the exercise of express statutory authorization,8/ would presumably first be acquiring an inventory of conservation materials (like it now does electric ranges or other appliances) without any identified retail purchasers in mind. Then, in the ordinary course of business, it would sell those materials to its customers as their needs arose. In short, two separate and independent transactions would be involved as in any case where a [[Orig. Op. Page 11]] municipality first purchases property for some legitimate, authorized public purpose and then later sells that property to other parties. That the public purpose in the case of electrical appliances is the promotion of electrical energy utilization while, with respect to installation or other conservation materials, it is conservation, should be of no constitutional consequence. The utility's purchase is constitutional because it is for a public purpose and its later sale is also constitutional for the same reason.
So much, then, for the problem of Lassila v. City of Wenatchee, supra. We now may turn, directly, to the critical task at hand which is to determine whether a constitutional distinction must be drawn between (1) a sale by a city or public utility district (whether of electrical appliances or of conservation materials) to its customers for cash and (2) a sale of such materials under an installment contract.
Three other fairly recent decisions by our state supreme court will largely serve to provide the basis for our answer to that question. In chronological order they areWn. Nat. Gas Co. v. Public Util. Dist., 77 Wn.2d 94, 459 P.2d 633 (1969);State ex rel. O'Connell v. PUD, 79 Wn.2d 237, 484 P.2d 393 (1971);9/ andPort of Longview v. Taxpayers, 85 Wn.2d 216, 533 P.2d 128 (1974),supra. First, in theWash. Nat. Gas case, the court was confronted with the constitutionality (under Article VIII, § 7,supra) of a certain plan devised by the Snohomish County PUD to induce real estate housing developers to accommodate their tracts to underground wiring and to encourage the purchase of electricity from the PUD for household purposes. As described by the court at pp. 99-100, the plan operated as follows:
". . . The PUD offers to enter into a contract with land developers engaged in developing residential tracts to install at the district's expense within the tract under development a complete underground electric distribution system and an ornamental street lighting system. The developer, in exchange, however, must agree to plat the tract into a specific number of lots, restrict each site exclusively to underground service, grant necessary easements to the PUD for installing and servicing the underground system and provide payment in advance for electrical energy utilized in street lighting. Under [[Orig. Op. Page 12]] the proffered contract, the PUD will bring the primary service lines and electricity underground to the transformer pedestal at the lot line, and the customer at the outset will be responsible for extending the wires underground from the pedestal to the residence. In other words, the developer or his purchaser must install the secondary service line from the pedestal to the house.
"The proposed contract does offer substantial financial inducements to the land developer not only to put the wiring underground but to make the houses 'total electric'‑-that is, houses which use PUD electricity for all household fuel energy except fireplace fuel. The developer agrees in the offered contract to pay $225 per lot to the PUD within 3 years of the date of the agreement with interest at 6 per cent on the unpaid balance. He need not, under the proposed contract, make this payment in cash, however, for if he erects on the lot a total electric dwelling within the 3-year period, the PUD promises to allow the developer a $150 credit or payment on this $225 contractual amount. There is another financial inducement in the contract. If the residence is made total electric, the PUD promises to buy the secondary service‑-from pedestal to dwelling‑-from the ultimate house purchaser at the price of $125, but will pay only $25 for it if the residence is not total electric.
"Under the contract, the PUD acquires a lien against the realty for all unpaid amounts due it under the contract. When the PUD pays for the secondary service, it becomes owner of both the primary and secondary service system. The contract also assures the PUD of the sale of electricity for street lighting within the development which lighting will be substantially paid for in advance."10/
[[Orig. Op. Page 13]]
Having thus described the program the supreme court then went on to hold, unanimously, that it wasnot in violation of the constitution. First, it dealt with the issue of an unconstitutional gift but had little difficulty in finding sufficient consideration (in the form of correlative benefits to the district) to overcome that hurdle. Then, the court turned to what it termed ". . . the perhaps more subtle question of loans of money and credit. . . ." Once again, however, the hurdle was surmounted in the following notable manner:
". . . In exchange for allowing the $150 credit to the developer and other consideration, the PUD will, as a measurable benefit, acquire a substantial number of total electric customers who will purchase from it greater amounts of electrical energy than ordinary customers. It will be assured of paid-in-advance 5-year sales of electricity for street lighting, and derive financial benefit from the developer's work and expenditures in helping install each secondary system and the street lights.
"Thus, even though the developer will be allowed 3 years in which to earn the $150 credit, he not only pays a reasonable interest of 6 percent on the unpaid balance, but actually delivers over to the PUD a substantial property in consideration of the agreement. There is, therefore, no lending of money or credit for permitting deferment of the payment, but rather a genuine exchange of concrete, specific, measurable consideration.
"As long as a municipality or governmental body treats all of its customers alike, makes reasonable classifications of its customers, and accords equal treatment to all who come within a particular class, constitutional prohibitions against loans of credit, property or money do not mean that the municipal corporations must be paid instanter for every unit of energy delivered. The constitution does not prohibit efficient business practices nor bar efficient service. Were it otherwise, one [[Orig. Op. Page 14]] would have to pay his light and water bill every day lest it be said that he was the recipient of the municipality's loan of credit for the next 24 hours. The municipality, we think, may, consistent with efficient management, sell and deliver electrical energy to its citizens and customers on short term credit as long as this procedure does not allow the customer to convert this concession into a profitable hypothecation of credit with third persons.
"We think a municipal corporation may similarly deal with its customers in installing and building the system for transmitting the energy. Allowing the developer a reasonable period of time in which to develop his project, sell his houses, persuade his buyers to accept all electric houses‑-during which time he pays reasonable interest on the $225 indebtedness per unit‑-is not, we think, a lending of credit or money by the PUD."11/ (Emphasis theirs)
Bearing that rationale in mind, let us next turn to the second of these recent cases above cited,State ex rel. O'Connell v. PUD,supra. There, on appeal from the earlier noted ruling of a decision of the court of appeals,12/ the court was also confronted with a constitutional challenge to a promotional program (of another type, however) which had been established by another public utility district‑- this time the Klickitat County PUD. As described by the supreme court in its opinion,13/ the essential facts relating to that program were as follows:
"Beginning in December, 1962 and continuing to the present time, the District has carried on an Installment Sales Program under which it takes assignments of sellers' interests in conditional sales contracts from [[Orig. Op. Page 15]] dealers or electrical contractors who have sold the electrical equipment covered by the contracts to customers of the District under which it acquires the seller's interest in the contract and in the chattel covered thereby. It pays to the dealers an amount equal to the balance after downpayment owing by the vendee under the contracts. . . ."
Deeming this program to involve either a loan of credit or a loan of money, the then-attorney general challenged it. The trial court, however, disagreed with the attorney general's view and the case was then taken to the court of appeals which, after first adopting the Gruen v. State Tax Commission, supra, definition of a loan of credit, affirmed, saying:
". . . The State insists, however, that the dealer, in executing these contracts,does so in reliance on the previously expressed willingness and ability, and the prior unreserved commitment, of PUD to accept the assignment. Such a position runs directly contrary to the established fact in this case that PUD reserves the right at all times not to accept the assignment. We cannot, as State urges us to, accept as a fact that PUD's commitment to accept the assignment dates from the time of its 'tentative approval.' We think the answer to this contention is best summarized by remarks of the learned trial judge at the conclusion of the trial:
"The possibility, and I feel it is only a possibility, is raised here by argument that after all certain commitments are made, Mr. Clouse deals with these people, he tells them, 'If you borrow this much over this length of time and put this installation in, we will take the contract,' but there is no instance brought to the court's attention where he ever did this without reservation, that this is not subject to final approval.
[[Orig. Op. Page 16]]
"Now, I can understand how some business could to [do] this. Occasionally it would be such that, perhaps, Mr. Clouse or the principal would be subject to some principle of the promissory estoppel or something of that nature. I can see where this could happen, but I don't see where it has happened. No evidence it ever did happen and until it does the court cannot condemn the practice. The court feels insofar as the claim of lending credit is concerned the plaintiff has failed in its proof.
"So long as it is not established that any individual sale is made by a dealerin reliance upon the credit of PUD, we cannot hold that PUD has loaned its credit to a private, non-governmental body."14/ (Emphasis supplied)
Likewise, as previously noted, the court of appeals also rejected a contention by the state that the plan was violative of the "loan of money" prohibition by the constitution, reasoning, simply that:
". . . a purchase or assignment of the seller's interest in a conditional sales contract does not constitute a loan. General Elec. Credit Corp. v. Oregon State Tax Comm'n, 231 Ore. 570, 373 P.2d 974 (1962);Dunn v. Midland Loan Fin. Corp., 206 Minn. 550, 289 N.W. 411 (1939)."
Once again, however, the state appealed‑-this time to the supreme court‑-and after due consideration, by a five‑four majority the supreme court reversed both lower courts and held the program in question to be unconstitutionalbut solely as a loan of money. In so concluding the court expressed itself, quite succinctly, as follows:
[[Orig. Op. Page 17]]
"The transaction in question is clearly a loan of the money of the respondent district. Respondentpresently pays out money in exchange for the right to receivefuture repayment, together with interest. This court said inHafer v. Spaeth, 22 Wn.2d 378, 384, 156 P.2d 408 (1945):
"The word 'loan' imports an advancement of money or other personal property to a person, under a contract or stipulation, express or implied, whereby the person to whom the advancement is made binds himself to repay it at some future time, together with such other sum as may be agreed upon for the use of the money or thing advanced. State v. Larson, 119 Wash. 259, 205 Pac. 373; Embola v. Tuppela, 127 Wash. 285, 220 Pac. 789; First Bank of Cordova v. Tjosevig, 138 Wash. 231, 244 Pac. 736; . . ."15/
This same excerpt from the supreme court's majority opinion inState ex rel. O'Connell v. PUD, in turn, served as a basis for the court's decision in the third of the three recent cases above cited,Port of Longview v. Taxpayers, supra.16/ What was there involved was the constitutionality (again under Article VIII, § 7) of certain arrangements for the financing of pollution control facilities for private industrial firms through the issuance of tax exempt municipal revenue bonds17/ either by port districts or by a county. The essential ingredients of the plan in each instance18/ were as follows: Bonds were issued in the [[Orig. Op. Page 18]] name of each municipality in amounts sufficient to cover equipment on the property of the private corporations. The bond proceeds themselves were paid by each governmental unit in a lump sum for the acquisition of a leasehold interest in the pollution control facility, thus providing the capital for the private enterprises to acquire the equipment. A sublease was then executed for a period of one day less than the original leasehold term, obligating the private user as sublessee to make "rental" payments sufficient to cover debt service payments on the underlying bonds and an additional increment to cover certain administrative costs incurred by the public issuer by reason of the transaction. Although given a security interest in the equipment itself, bondholders were afforded recourse only against the private corporate user of the facility in the event of default in bond payments. Upon termination of the leasehold interest, the private user acquired full ownership of the facility without additional payment to the municipal corporation or political subdivision in question.
As viewed by the court the critical issue was whether the lump sum payment of the bond proceeds by the municipality to the private firm‑-ostensibly for the acquisition of a leasehold interest in the pollution control facility‑-was truly a rental payment under a bona fide lease or, instead, was a loan of money by the municipality to the corporation. The court held that it was the latter, saying:
"A true lease agreement contemplates the purchase by the lessee of a possessory estate for a term in specified real or personal property. A financing agreement, on the other hand, contemplates the loan of money to another, often secured by a security interest in the property to be purchased with the loaned money, to enable to latter to acquire an interest in the property. The two roles, that of sublessor and financier, are entirely different. 1 G. Gilmore,Security Interests in Personal Property § 3.6 (1965).
". . .
"These transactions cannot be both loans and lease‑sublease agreements. Viewed as a whole, they make clear that (1) the municipalities involved had no intention of asserting a possessory interest in the leased facilities as, [[Orig. Op. Page 19]] indeed, the simultaneous sublease would have effectively prevented in any case; (2) the municipalities received nothing of value by virtue of these transactions to which they were not already by law entitled; and (3) the pollution control facilities acquired by the private corporations and constructed on their property could only be used at their individual and respective plants and could be of no separate value to the municipality. The fact that the sublease terms were drafted to expire 1 day short of the expiration of the underlying leasehold, thereby giving the municipality, technically speaking, the legal right to 1 day of exclusive possession of the pollution control facilities, merely continues theform of the transaction.
"These transactions are patent, albeit convoluted, violations of Const. art. 8, § 7. The Laws of 1972, 1st Ex. Sess., ch. 54, § 1 and Laws of 1973, ch. 132, § 4, pursuant to which these transactions were entered into, are unconstitutional.
"This is consistent with our recent holding in State ex rel. O'Connell v. PUD 1, 79 Wn.2d 237, 484 P.2d 393 (1971). There the PUD took assignments of the seller's interests in conditional sales for electrical equipment to PUD customers. We held that this practice was a violation of Const. art. 8, § 7. There we said at page 241:
"The transaction in question is clearly a loan of the money of the respondent district. Respondentpresently pays out money in exchange for the right to receivefuture repayment, together with interest. This court said inHafer v. Spaeth, 22 Wn.2d 378, 384, 156 P.2d 408 (1945):
"The word 'loan' imports an advancement of money or other personal property to a person, [[Orig. Op. Page 20]] under a contract or stipulation, express or implied, whereby the person to whom the advancement is made binds himself to repay it at some future time, together with such other sum as may be agreed upon for the use of the money or thing advanced. State v. Larson, 119 Wash. 259, 205 Pac. 373; Embola v. Tuppela, 127 Wash. 285, 220 Pac. 789; First Bank of Cordova v. Tjosevig, 138 Wash. 231, 244 Pac. 736; . . ."19/ (Emphasis theirs)
How do these three cases bear on your present question involving installment sales of conservation materials by a city or public utility district? First, in view of the definition of a "loan of money" which was adopted by the court inO'Connell and last above reiterated in thePort of Longview case, the cases readily permit us to relegate that prohibition in Article VIII, § 7, to the same inapplicable status as the two "gift" prohibitions discussed earlier. Once again, that definition is:
". . . an advancement of money or other personal property to a person, under a contract or stipulation, express or implied, whereby the person to whom the advancement is made binds himself to repay it at some future time, together with such other sum as may be agreed upon for the use of the money or thing advanced."
But quite obviously, the obligation of a purchaser of goods under an installment contract is not to repay borrowed money. Instead it is simply an obligation to pay, in installments, an agreed upon purchase price for the goods obtained pursuant to the contract‑-and thus it does not represent a loan ofmoney at all.20/
[[Orig. Op. Page 21]]
This leaves us, then, only with the question of a loan of credit‑-of a different kind, however, then the guaranty or surety situation contemplated by your first question and clearly covered by the limited definition which appears inGruen v. State Tax Commission, supra, and in the Iowa case21/ upon which the court therein relied. Clearly, although the promotional program which was involved in the first of the three cases which we have just noted, Wn. Nat. Gas Co. v. PUD, supra, was upheld the court's line of reasoning in that case manifested an understanding that something other than a guaranty or suretyship arrangement could also possibly trigger the loan of credit prohibition. And, as we have earlier seen, that possibility became a reality in Lassila v. Wenatchee, supra, when the court held that a city's purchase of land solely for the purpose of resale was an unconstitutional loan of municipal credit.22/ Nevertheless, assuming no Lassila type problem at the acquisition stage it would still seem entirely logical to conclude that at the sale stage there is no loan of credit by the vendor even under a retail installment sales contract for the simple reason that although credit most certainly is involved it is that of the purchaser and not the vendor. In other words, the vendor is not lending its credit (as in the case of a guarantor or surety) but, instead, is merely allowing the purchaser to use his own credit to buy the goods or materials covered by the contract. This approach has in fact been employed in other states‑-notably by the New Mexico Supreme Court some years ago inClovis v. Southwestern Pub. Serv. Co., 49 N.M. 270, 161 P.2d 878, 161 A.L.R. 504 (1945). There, in the face of a similar constitutional prohibition against the lending of municipal credit the court nevertheless upheld an installment sale of utility properties by the City of Clovis to a private firm known as the New Mexico Utilities Company on the following basis:
"We hold that the agreement of the New Mexico Utilities Company to pay to the City of Clovis $130,000 in twenty-four annual installments as a part of the purchase price of its light and water system does not constitute the lending or [[Orig. Op. Page 22]] pledging of the credit of the City of Clovis to any person for the benefit of the New Mexico Utilities Company, within the constitutional prohibition.
"The debts and liabilities of the City, and the burden on its taxpayers, were not increased. By such transaction it did not thereby become surety for, or guarantee the payment of, anything for which the utilities might have been liable to third persons. The credit, the ability to pay, there involved was no more than, and involved only, the credit of the utility company whereby it drew upon its credit in its agreement to pay to the City, and whereby it pledged its credit to the City, to assure such payment.
"Nothing in this phase of the transaction possessed any element of guaranty, suretyship or pledge by the City of Clovis whereby the City became liable to do or perform any act or thing, or to incur any obligation, or pay any sum of money, in behalf of, or for the benefit of, the utility company, or to become liable for, or assure the performance of, any obligation, or the discharge of any liability of the utility to any third person.
"Clearly, the City of Clovis did not 'lend or pledge its credit' to, or for the benefit of, the New Mexico Utilities Company. The most that it did was to give time to the New Mexico Utilities to pay part of its obligation under the purchase agreement; i.e., to give time to the New Mexico Utilities Company for the payment of an obligation owed by the New Mexico Utilities Company to the City of Clovis for a part of the purchase price for the light and water systems. This is an entirely different matter from the City of Clovis 'lending or pledging'its credit. This, for the obvious reason that giving time for the payment of part of the purchase price created no liability whereby the City was liable to be called upon to discharge any direct, indirect or contingent, [[Orig. Op. Page 23]] liability whatsoever. None of the contingencies which Article 9, Section 14 of the New Mexico Constitution was designed to prevent were here present."23/ (Emphasis theirs)
See also,Cincinnati v. Dexter, 55 Ohio St. 93, 44 N.E. 520 (1896), in which it was likewise held that the sale of a city-owned railway on a time payment basis was not in violation of the state's constitutional ban on the extension of credit to private corporations where the sale involved only a preexisting asset of the city which was legitimately acquired but later became surplus. On the other hand, quite in line with our own court's ruling in the Port of Longview case, supra, it is notable that the New Mexico court inClovis v. Southwestern Serv. Co., supra, took care to distinguish the factual situation before it from a cited example of something which, in its judgment, would have been afoul of the constitutional prohibition against the lending or pledging of its credit. That example was,
". . . where the city would issue its bonds for $240,000 and turn them directly over to the appellee for the purpose of construction by the appellee of privately owned utilities which sum was to be, under contract, thereafter repaid by the city." (Supra at p. 515)
Similarly, under this view, it would have been equally impermissible for the city to have used the proceeds of the bonds in order itself to acquire the subject facilities for the purpose of selling them to Southwestern. Accord,Lassila v. City of Wenatchee, supra. But why? Not because of the method of sale (cash v. installment contract) but because of the purpose of acquisition.
This brings us, once again, however, to Wn. Nat. Gas Co. v. PUD, supra, and the qualified approval of certain installment contracts between public utility districts and their customers which appears in the significant final two paragraphs of the court's opinion in that case‑-quoted above at p. 14 and here repeated for ease of reference as follows:
[[Orig. Op. Page 24]]
". . . The municipality, we think, may, consistent with efficient management, sell and deliver electrical energy to its citizens and customers on short term creditas long as this procedure does not allow the customer to convert this concession into a profitable hypothecation of credit with third persons.
"We think a municipal corporation may similarly deal with its customers in installing and building the system for transmitting the energy. Allowing the developer a reasonable period of time in which to develop his project, sell his houses, persuade his buyers to accept all electric houses (emphasis theirs) ‑-during which time he pays reasonable interest on the $225 indebtedness per unit‑-is not, we think, a lending of credit or money by the PUD." (Emphasis supplied)
What was it, in terms of a lending of credit, which was thus of concern to the Washington court? Quite definitely, the installment contract in the Clovis case, supra, also was one which bore interest ‑ as was earlier stated by the New Mexico court in its opinion.24/ Yet apparently, only our own court felt that point to be of sufficient importance to refer to it as a factor in its rationale. Be that as it may, however, what the court thus said does seem to us to make a good deal of sense for while the primary credit involved in the purchase of goods or materials under an installment contract most certainly is that of the purchaser it is also true that the seller, by permitting the purchase price to be paid in installments, is correlatively bestowing a benefit of substantial value upon the purchaser. In essence, the seller is enabling the purchaser either (a) to buy under circumstances in which he otherwise would not be financially able to purchase at all, or (b) to conserve his financial resources for other purposes while at the same time obtaining the goods or materials which he immediately desires or needs. Therefore, in that respect the "credit" of the seller is being used for the benefit of the purchaser and it thus follows that unless the purchaser is also required to pay, in one form or another, [[Orig. Op. Page 25]] "reasonable interest" on his contract indebtedness he may, as a consequence, be able (also in the words of the court) ". . . to convert this concession into a profitable hypothecation of credit with third persons." And that, it appears, would be unconstitutional‑-at least according to the Washington court inWn. Nat. Gas Co. v. PUD, supra.
Your question, as above paraphrased, anticipates this relevant factor by its inclusion of an interest factor‑-in the form of a service charge to be paid by the purchaser of such conservation materials as are involved. In addition, however, the question as framed includes another feature which, based upon the above‑cited cases and discussion, would not appear to us to be legally relevant to the constitutionality of the program described therein. Simply stated, we find nothing in either our own Wn. Nat. Gas Co. case or the City of Clovis case, supra, or any other case which suggests that either a retention of title or the acquisition of some other security interest by the seller has any bearing on the question of whether or not an installment sale constitutes a loan of credit. Moreover, although an insistence upon security from the purchaser may well be a sound business practice we, likewise, can conceive of no constitutional necessity for it.
In summary, then, for the foregoing reasons our ultimate answer to your second question is a qualified negative. Assuming that a sufficient rate of interest or service charge is imposed to avoid the problem of a potential profitable hypothecation of credit by the purchaser, the sale of previously purchased conservation materials by a municipal utility or public utility district in the ordinary course of business is not prohibited by the provisions of Article VIII, § 7 of the Washington Constitution, even if made on an installment contract basis, regardless of whether or not title is retained by the seller as security and/or some other form of security is obtained.
We trust that the foregoing will be of some assistance to you.
Very truly yours,
PHILIP H. AUSTIN
Deputy Attorney General
*** FOOTNOTES ***
1/In addition, Article VIII, § 7 contains another prohibition which is clearly not, however, relevant to your present questions; i.e., a prohibition against the ownership of corporate stock or bonds.
2/Later modified by the supreme court as further below explained.
3/195 Iowa at p. 473.
4/Furthermore, in the absence of any consideration given in return the granting of a guaranty might also, perhaps, be found to be an unconstitutional gift‑-although whether of either (a) money or (b) property is not so certain. See,e.g.,State ex rel. O'Connell v. Pt. of Seattle, 65 Wn.2d 801, 339 P.2d 623 (1965), a case involving the constitutionality of "promotional hosting" by port districts, in which the court, quoting fromBlack's Law Dictionary (4th Ed.) adopted the following definition of a gift:
"'A voluntary transfer of personal property without consideration. Gordon v. Barr, Cal.App. 82 P.2d 955, 956, 957. A parting by owner with property without pecuniary consideration. Hays' Adm'rs v. Patrick, 266 Ky. 713, 99 S.W.2d 805, 809. A voluntary conveyance of land, or transfer of goods, from one person to another, made gratuitously, and not upon any consideration of blood or money. 2 Bl. Comm. 440; 2 Steph. Comm. 102; 2 Kent. Comm. 437. Ingram v. Colgan, 106 Cal. 113, 38 P. 315, 28 L.R.A. 187, 46 Am.St.Rep. 221; Gray v. Barton, 55 N.Y. 72, 14 Am.Rep. 181; Hynes v. White, 47 Cal.App. 549, 190 P. 836, 838; in re Van Alstyne, 207 N.Y. 298, 100 N.E. 802, 804.' (p. 817)" 65 Wn.2d 801, 804.
5/In addition, your question contemplates the payment of a "service charge"‑-presumably such as is defined in RCW 63.14.010(3) for the purposes of the retail installment sales act (chapter 63.14 RCW) as follows:
"'Service charge' however denominated or expressed, means the amount which is paid or payable for the privilege of purchasing goods or services to be paid for by the buyer in installments over a period of time. . . ."
6/Although ruling in favor of the city that Article VIII, § 7 was not violated, the trial court nevertheless found:
"'That when the City of Wenatchee exercised its options to purchase the J. M. Wade Fruit Company property and the Gladys Fraser Just property described in paragraphs XXIV and XXIX herein, the City intended to sell a portion thereof to Fredrick Mercy, Jr. and Dorothy Mercy, but subject to certain terms and conditions for the use and public benefit of the City of Wenatchee, which were thereafter reduced to writing at the time of the sale to Mercys as referred to in paragraph XXXVI herein.' (Italics ours.)"
7/89 Wn.2d 804 at p. 810.
8/I.e., a yet to be enacted statute (or statutes) similar to RCW 35.92.050 and RCW 54.16.040 but designed, specifically, to cover the purchase and sale of conservation materials in order to facilitate thesaving of energy which is ever more increasingly in short supply.
9/On appeal to the state supreme court from State ex rel. O'Connell v. PUD, 2 Wn.App. 366, 469 P.2d 922 (1970),supra.
10/Wn. Nat. Gas Co., supra, at pp. 99-100.
11/Wn. Nat. Gas Co., supra, at pp. 103-104.
12/State ex rel. O'Connell v. PUD, 2 Wn.App. 366, 469 P.2d 922 (1970),supra, at p. 4.
13/Quoting from findings of fact earlier entered by the trial court.
14/Ibid at pp. 375-376.
15/State ex rel. O'Connell v. PUD, supra, at p. 241.
16/The four dissenting judges in the O'Connell case, on the other hand, were of the view that there was neither a loan of money nor a loan of credit problem presented by the plan involved in that case‑-and in so opining they relied largely on the first of those three cases, Wn. Nat. Gas Co. v. PUD,supra.
17/I.e., bonds whose interest, under federal law, is exempt from the federal income tax; see, 26 U.S.C. § 103(e).
18/In addition to the Port of Longview, the Port of Tacoma and Spokane County had entered into similar contractual arrangements with industrial users.
19/Port of Longview v. Taxpayers, supra, at p. 223-225.
20/Distinguish, in that regard, a purchase money note and mortgage.
21/Grout v. Kendall, 195 Iowa 467, 192 N.W. 529 (1923), supra.
22/Cf.,Paine v. Port of Seattle, 70 Wash. 294, 127 Pac. 580 (1912).
23/161 A.L.R. at pp. 508-509.
24/See 161 P.2d at p. 87.