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Bessemer Inv. Co. v. City of Chester and Eleven Other Cases .

June 18, 1940


Appeals from the District Court of the United States for the Eastern District of Pennsylvania; Albert Branson Maris, Judge.

Author: Clark

Before BIGGS, CLARK, and JONES, Circuit Judges.

CLARK, Circuit Judge.

It is impossible to speak of "the facts" at bar with anything approaching sufficient emphasis on the plural number. There are six cases and twelve appeals. Seventy-four serial issues of street improvement bonds are in suit. Their respective dates of issuance by the defendant city range from 1923 to 1933. Each issue is payable within ten years from a special fund - the proceeds of a corresponding special paving assessment. The assessment in turn covers a number of parcels of real estate owned by persons in (by hypothesis) varying degrees of alluence. So one issue is dissimilar from the next not only in point of time, but also with respect to the composition of the special fund; and the latter dissimilarity embraces all the multiple diversities between habitations and between their inhabitants. In addition the ten year maturity period has (as of the time action was commenced by plaintiff bondholders in 1937) expired as to some issues but not as to others. A further complication is presented by a curiously inconsistent overlap between the controlling Pennsylvania decisions and the equally controlling Pennsylvania statutes. Those statutes and decisions, moreover, lie in the none too smooth field of municipal law and economics. Therefore, in the hope of making confusion less confused, we accord more than usual emphasis to the general, before proceeding to the particular.

Municipal financing by way of special assessments, i.e.: charging the cost of public improvements against the abutting property "benefited" thereby, has been traced back to colonial times, see Rosewater, Special Assessments, 11 Studies in History, Economics, and Public Law, Columbia University, No. 3 (1893) 22. It became popular in the era of tremendous municipal expansion following the Civil War. In accordance with a custom, which soon became incidental to the system, improvement contractors would agree to accept their compensation from the proceeds of the special assessment alone, without recourse to the general credit of the city, 2 Dillon, Municipal Corporations §§ 827, 860, 893. This had at least one advantage. The city's obligation to pay from a special fund was not considered an indebtedness to be met by future taxation, and hance did not come within the scope of constitutional debt limits. See Pennsylvania Constitution of 1874, Art. 9, § 8, P.S.; Municipal Improvements as Affected by Constitutional Debt Limitations, 37 Columbia Law Review 177, 188 (comment). The next step was, of course, the crystallization (by enabling statute) of the city's obligation to the contractor into a marketable form - the improvement bond. The Pennsylvania Act of May 23, 1889 is typical. It applies to cities of the third class and reads: "In making improvements where the cost thereof is to be paid by assessments, in whole or in part, upon property abutting or benefited, the city may issue improvement bonds, based solely upon the assessments for such improvements, and imposing no municipal liability." 1889 P.L. 277, continued 1931 P.L. 932, Art. 27, § 2705, 53 P.S. § 12198 - 2705.

When such bonds are defaulted the bondholders' usual remedy is by way of mandamus to compel the levy of the underlying assessments, or their collection, or both. See Municipal Liability Upon Improvement Bonds, 44 Harvard Law Review 610, 613 (note). So only the proceeds of assessments can ever be availed of to cure the default, and the strict tenor of the improvement bond obligation is observed. The contest, in its essence, is between the bondholders and those liable to special assessment. When, however (as here), some sort of general liability is sought to be imposed on the municipality, which cannot, or may not, be satisfied from the assessments, the conflict widens and includes general taxpayers as well as special assessees. This leads to a delicate balance of interests and equities.

The general taxpayer's position is founded upon the traditional theory of special assessments. Why should his theoretically unbenefited property be charged with the cost of an improvement which has theoretically benefited the property of another? By the same token, why should a special assessee, who has paid his assessment, be forced to pay more than his fair share of the cost of the improvement in general taxes? Some courts and writers have accordingly confined their sympathies to the general taxpayers, and denied recovery dehors the assessments under any circumstances. See 2 Elliott, Roads and Streets § 765. This view is, however, open to criticism on three grounds.

In the first place, it leaves out of account the fact that improvement bond defaults are often the result of administrative bungling in the levy and collection of assessments. Analogy to the doctrine of respondeat superior requires that the general taxpayers answer for the negligence of their elected representatives. Second, the interest of general taxpayers in maintaining municipal credit is underestimated. The average investor is not apt to make fine distinctions between a city's reputation for meeting improvement bonds, and its reputation for meeting general obligations. Yet, even if such a distinction is made, the general taxpayer does not escape potential harm. As a possible future special assessee, he may have to pay the price of past improvement bond defaults in the correspondingly increased cost of improvements so financed. See Bickner, Washington's Default Bonds Not To Be Redeemed, 16 National Municipal Review 493. Third, too close a correspondence is assumed to exist between the fact of the improvement being made and the fact of a benefit to the special assessees. Emphasis on that benefit postulates a lack of unjust enrichment to the general taxpayers. But the benefit, especially of paving, is in reality often neither restricted to the special assessees nor in any way commensurate with the amount of their assessments.A learned writer on municipal finance has this to say on the subject:

"It may seem paradoxical to say that the basic assumption underlying the special assessment is at once sound and unsound. It would perhaps be more accurate to say that it is sound but has been sadly overworked, thus leading to serious errors in planning and financing improvements. If and when government expenditure on improvements creates special property value increases and this is what is really meant by benefits, then the theory is sound. Under such circumstances it is possible to levy and collect assessments to pay part, at least, of the improvement cost. It is also appropriate to do this, in view of the factors that produced the value increase.

"The difficulty has been in too great reliance, probably, upon the older assumptions with respect to land values and the effect of improvements upon them. At the same time too little attention has been given to the equalizing influences of modern transportation agencies, especially the motor vehicle. Population increase probably produces slowly rising values of strategic land sites, but it is a process which may at the same time be undermined, delayed or diffused by transportation improvements. The benefits imputed to any one section from a road or street improvement may be in fact neutralized by extending the road on to some other section. Accessibility, once the great source of advantage from street paving, loses its premium when all the streets are paved and all highways are surfaced, and when fifty miles means no more in time than five or ten miles once meant.

"The universal use of the special assessment means that some amount of value increase is always imputed or assumed. Even the courts will not contradict the assumptions of administrative officers on this point, and the consequence is that some part of the cost is always locally assessed when in fact there may be no benefit. The administrative assumption may not always be carefully considered, for the expansionist urge of various groups is always pressing on the governing body, seeking the development of new subdivisions, the widening of streets, and all of the other kinds of improvements which it is hoped will be paid for by special assessment levies." Lutz, Public Finance, Chapter 14, Administrative Revenues, 308.

Of these three grounds, the first seems to have had by far the greatest influence on the judicial mind. The decisions in many jurisdictions turn upon the question of negligence. The gist of them is well put in the Harvard Law Review article above cited: " * * * These cases agree that it is the duty of the municipality to levy effectively and to collect promptly. Drawing analogy from an individual's promise to pay from a particular source, some courts consider the duty as one arising from an implied contract.Under this theory the city is held to guarantee that it either has imposed or will impose a valid special tax, and to contract by implication to use due diligence in collection. Approached from another angle, the enabling act from which the municipal corporation derives its powers generally contains a direction to take the steps necessary to create the fund. Other courts, from this point of view, regard the action as one sounding in tort for breach of this statutory duty." Municipal Liability Upon Improvement Bonds, 44 Harvard Law Review 610, 611, 612 (note).

So the courts of Pennsylvania, proceeding upon the theory of an implied contract of diligence, have often held cities generally liable up to the unpaid face value of due improvement bonds as damages for the breach of such a contract.*fn1

The Pennsylvania Legislature, on the other hand, appears to have acted upon the second and third grounds. Validating statutes,*fn2 passed in 1929, 1931 and 1933 respectively, transmute improvement bonds theretofore issued into general obligations of the city, but only to the extent that the outstanding amount of such bonds is within the limits of indebtedness permitted by the Constitution. They remove, in short, the special fund aspect of the improvement bond. As applied to paving bonds these enactments affect the general taxpayers in precisely the same manner as the earlier enactment which authorizes the issuance of general obligation bonds to meet the cost of specially assessed street improvements, 1893, P.L. 453, 53 P.S. § 592, continued 1931 P.L. 932, 53 P.S. § 12198 - 3310. The constitutionality of the general obligation statute has never even been challenged, and that of the validating acts has been convincingly upheld whenever adjudicated.*fn3 Both saddle general taxpayers with the burden of improvements insofar as that burden is not, for one reason or another, borne by special assessments. Both by that token deny implementation to the ...

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