Appeal from the District Court of United States for the Southern Division of the Southern District of Illinois; Louis Fitz-Henry, Judge.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
ALSCHULER, Circuit Judge.
The appeal is from a decree of foreclosure of a trust deed given by appellant, city of Jerseyville, an Illinois municipal corporation, upon its waterworks system, to secure payment of certain certificates of indebtedness of the city. To the bill of complaint, which was in usual form, the city filed its amended answer and amendment thereto to sustain its asserted defenses, mainly that the certificates so secured by the trust deed constituted a debt of the city, and created an indebtedness beyond the city's constitutional debt limit of 5 per cent. of the assessed valuation of its property, and that the certificates of indebtedness and trust deed are therefore void.
Appellee filed motions to strike those parts of the answers comprising the allegations in support of such alleged defenses, which motions the court sustained, and, no further answer being filed, the decree in question was entered.
The answers alleged, in substance, that prior to January 1, 1921, the city had built and paid for and was operating a system of waterworks, including pumping plant, water tower, reservoir, wells, pumps, and system of distribution; that on September 3, 1921, the city council approved plans and specifications for additions and extensions to the old waterworks; that an understanding was had between the officers of the city and one Hanes and one Heller whereby the city should sell its old waterworks system to Heller for $40,000, and that Hanes would make a contract for constructing and selling to the city a complete waterworks system (including the old waterworks which Heller would convey to Hanes) for the sum of $235,000, for which the city would issue its special water fund certificates for that amount; that, upon conveyance to the city of the completed plant, $40,000 of such certificates should be turned over to the city for cancellation in discharge of the consideration to the city for the old plant; that Hanes did in fact submit to the city a bid for $215,000, subject to increase by changes to a total of not exceeding $235,000, and that in said complete system there might be included the old waterworks system; that on March 27, 1922, the city passed its Ordinance No. 63 for the sale of the old waterworks system, and called for bids therefor; that Heller submitted a bid of $40,000, which the city accepted, making a deed to him accordingly; that Hanes' bid for constructing the waterworks was accepted, and that Heller conveyed to Hanes the old waterworks system; that Hanes completed the contract and received the city's special water fund certificates together with the trust deed in issue, and conveyed the entire waterworks system to the city, and that $40,000 of the certificates which the city gave Hanes were delivered to the city and canceled, whereby the consideration to the city for the sale of the old waterworks system was satisfied.
The answers charged that the conveyance of the old waterworks system to Heller, and by Heller to Hanes, and by Hanes to the city, was not a bona fide transaction, but a device for the purpose of evading the constitutional debt limit of the city as prescribed in the Illinois Constitution*fn1; that the assessed value of the taxable property of the city for the time in question was less than $1,600,000, 5 per cent. of which was the limit of indebtedness which the city might lawfully incur.
The decree, following the trust deed and the statute, provided that through the sale under foreclosure the waterworks system shall pass to such purchaser who shall agree for the least number of years, not exceeding fifty, to possess and operate the system, and who shall receive the prescribed rates for the period; and, at the expiration of the agreed term, shall return the system to the city in as good condition as when received, ordinary wear excepted.
The city relies mainly on City of Joliet v. Alexander, 194 Ill. 457, 62 N.E. 861, 863. In our consideration of this case we will assume that the transactions here respecting the sale of the old plant were a mere device for evading the constitutional debt limit, and, notwithstanding them, the old plant remained all along the property of the city.
In the Joliet Case the action was by a taxpayer to enjoin that city from issuing water fund certificates in the amount of $240,000 for extension and enlargement of its existing system, the ordinance therefor making provision for a "water fund" into which should be paid all the income, save operating expenses, from the entire waterworks system, for application to the payment of water fund certificates to be issued, and providing for a mortgage upon the entire water works system to secure payment of the water fund certificates. It was held that the giving of the mortgage upon the old system, to secure the payment of the certificates, would constitute the certificates an indebtedness of Joliet (at that time already indebted beyond its constitutional limit), and the decree of the lower court awarding the injunction was affirmed. It was also held that pledging the income of the entire waterworks system to secure indebtedness incurred for its enlargement and extension likewise made the certificates an indebtedness of the city within the purview of the constitutional limitation.
The propriety of appropriating the income from extensions alone, and of mortgaging the extensions to secure payment of the certificates, was there conceded. Just what sort of mortgage was contemplated in the Joliet Case does not appear, since the certificates and mortgage had not yet been issued. But it may be assumed that it would have been in compliance with the Act of April 22, 1899 (Laws 1899, p. 104), the same act under which the city assumed to act in the instant case, the applicable portions whereof appear in the margin.*fn2
Here the instruments had long been executed and delivered, and the transaction completed years prior to the institution of this suit.
While the instrument of security is denominated "trust deed," we do not think that it was such in essence in the sense in which that term is ordinarily employed and understood. The waterworks system, old or new, was not in fact conveyed, but only temporary possession of it, to give assurance that the income from the waterworks system (less operating expenses) would be devoted to the payment of the water fund certificates and interest. The security of the "trust deed" extended to this only. Under it the city could not lose the title to its waterworks, but, in case of foreclosure, the possession only, subject to the obligation on the part of the possessor to continue adequately to supply the city and its inhabitants with water, and at the time specified to return the waterworks system to the city.
Since the Joliet case there has intervened a condition under which the power over the property of the purchaser at such a sale, and his interest therein, has been materially modified, by the passage in Illinois of the act to provide for the regulation of public utilities, in force January 1, 1914 (Laws Ill. 1913, p. 460), and its successor, "An act concerning public utilities," in force July 1, 1921 (Laws Ill. 1921, p. 702). Thereby the state has assumed control over the reasonable conditions and rates upon which public utilities shall be operated. The ...