On appeal from the Superior Court, Law Division.
For reversal -- Chief Justice Weintraub, and Justices Wachenfeld, Burling, Jacobs, Francis and Proctor. For affirmance -- Justice Heher. The opinion of the court was delivered by Weintraub, C.J.
Plaintiffs alleged unlawful diversions of moneys raised by bond issue for a capital improvement and sought a judgment for the restoration of the fund and a restraint against further illegal inroads upon it. On cross-motions for summary judgment, judgment was entered for defendants, with, however, an injunction against any payments out of the fund for a period of six months or until the further order of the court. On our own motion, we certified plaintiffs' appeal before the Appellate Division considered it.
The facts were stipulated. By ordinance adopted and amended in 1951, defendant municipality authorized improvements relating to a sewer system and the issuance of bonds under the Local Bond Law, R.S. 40:1-1 et seq. The ordinance fixed the maximum amount of the bonds at $2,600,000.
R.S. 40:1-55 provides that "In determining the cost of an improvement or property to be financed under this article, the following items may be charged as part of the cost and be financed under this article by the issuance of obligations, but no obligations shall be issued to finance such items unless the total amount included under this section
be separately stated in the * * * municipal bond ordinance." The items thus referred to include interest for a limited period, "engineering and inspection costs and legal expenses, in which may be included a reasonable proportion of the compensation and expenses of the engineering and legal staffs of the municipality," and the cost of issuance of the obligations including printing advertising "and legal expenses." The ordinance, making specific reference to the cited section of the statute, fixed for these items "an aggregate amount of not exceeding $164,000."
The sum realized from the bond issue (including accrued interest) was $2,600,885.46. By April 1954 the expenditures totaled $2,379,257.47, leaving a balance in the capital improvement fund account of $221,627.99. Among the expenditures as of that date was the total of $194,049.72 apparently attributable to the items described in R.S. 40:1-55 for which $164,000 has been allocated in the ordinance. The breakdown in the record shows some small items which are uninformatively described but defendants appear to concede they are within the mentioned category. Hence, at this stage, $30,049.72 had been disbursed out of moneys earmarked for the capital improvement itself. Plaintiffs seek restoration of that sum.
Additional withdrawals thereafter were also challenged in this suit. They relate to the defense of another action instituted by the corporate plaintiff herein in July 1953 to recover $227,693.01, representing the retained balance of 10% on the engineer's certification of work done under contracts awarded to that plaintiff on the sewer project, plus additional claims for some $1,200,000. To defend that action and to maintain its counterclaim, the borough, without formal action expressly authorizing that course, dipped into the capital improvement fund account to the extent of $81,998.66. Of this sum, $10,500 was paid to an engineering firm and $71,498.66 to counsel specially retained for that litigation, which payments were in addition to other sums paid to counsel out of annual budget appropriations.
Promptly upon learning of these expenditures and also of the further withdrawal of $111,798.31 for purposes not disclosed in the record, plaintiffs brought this action. The borough immediately restored the sum last mentioned, but resisted the suit with respect to the sums of $30,049.72 and $81,998.66 described above. Before us, defendants conceded these disbursements from the capital improvement fund account were unauthorized. The concession is correct. Loudenslager v. Atlantic City, 80 N.J.L. 658 (Sup. Ct. 1910), affirmed, 82 N.J.L. 530 (E. & A. 1911); Heston v. State Board of Education, 89 N.J.L. 486 (Sup. Ct. 1916); 15 McQuillin, Municipal Corporations (3 d ed. 1950), § 43.68, p. 598. R.S. 40:1-55, quoted above, explicitly confines the charges which may be financed by the bond issue to the items described in that section and to the extent fixed in the ordinance, to wit, $164,000.
But defendants say that if they prevail in the action brought by the corporate plaintiff for the retained percentages and other damages (the protracted trial of that suit is still in progress), there will be no harm since all others concerned with the improvement have been paid in full. Implicit is the erroneous assumption that the excess of the funds raised over the cost of the improvement could be transferred to the general funds of the borough and be used for current expenses. After providing that the proceeds of the sale of the bonds "shall be applied only to the purposes for which such obligations are authorized," R.S. 40:1-85 (amended by L. 1953, c. 312 in respects not here pertinent) expressly directs that if any part of the proceeds are not necessary for such purposes, such excess "shall be transferred to any reserve or sinking fund for the retirement of debt or ...