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Connett v. City of Jerseyville.

March 17, 1938


Appeal from the District Court of the United States for the Southern District of Illinois, Southern Division; J. Earl Major, Judge.

Author: Sparks

Before EVANS, SPARKS, and TREANOR, Circuit Judges.

SPARKS, Circuit Judge.

The questions here presented involve appellants' alleged right to require appellee to increase its water rates in order to pay certificates of indebtedness held by appellants, subsequently reduced to judgment in foreclosure, which certificates were issued and sold by appellee to pay for the purchase and construction of its water plant.

The facts out of which the controversy arises are substantially as follows: Prior to 1923, the city of Jerseyville, Illinois, was without adequate fire protection and water supply system, and the safety, health and welfare of its inhabitants made it imperative that provision for those needs be made at the earliest time practicable. At this time the city owned and operated a waterworks distribution system, supplied by artesian wells. On July 10, 1922, the city, by Ordinance No. 67, decided to construct and purchase a new water system, which would include its old system and an extension of new lines. The new plan was to be financed by the issuance of water certificates under an Act of the Illinois Legislature of April 22, 1899, which aouthorized cities, towns and villages to build, purchase or extend waterworks systems for public and domestic use, and to provide for their cost. Illinois Session Laws 1899, p. 104, Smith-Hurd Stats. c. 24, §§ 440-445 notes. The substance of the pertinent provisions of this Act are set forth in the margin.*fn1 This ordinance provided for plans and specifications, to be kept on file with the city clerk, open to inspection of the public, and for a schedule of rates for private purposes and the payment of $8.50 per month for each fire hydrant maintained by the city. It provided for publication pursuant to the Act of 1899.

On October 23, 1922, Ordinance No. 70 was passed, providing for the purchase of a water supply system, and the issuance of $235,000 of certificates of indebtedness therefor, secured by a mortgage deed of trust. It further provided for the same schedule of rates as set forth in Ordinance No. 67, and was published pursuant to the Act of 1899. No petition for a referendum was filed. Ordinance No. 70 Described in detail the form of the certificates, and each provided " * * * that the City * * * promises to pay bearer * * * solely out of the 'special water fund provided for by Ordinance No. 70'" the amount of the certificate. This ordinance further provided that the deed of trust "shall contain the customary provisions and conditions so as to fully secure the payment of installments of principal and interest of said special water fund certificates * * * in such form and containing such conditions and provisions as shall be later prescribed by the City Council."

After the passage of Ordinance No. 70, the trustee named therein declined to act, and Ordinance No. 75 was passed. It approved the form of the mortgage trust deed and authorized its execution to the Union Trust Company of East St. Louis, as trustee. The mortgage so authorized and executed contained the clause which provided that the city obligated itself to pay the certificates "solely and only out of the 'Special Water Fund' provided for in Ordinance No. 70." It specified no particular schedule of rates but provided that the water supply to consumers for private purposes should be at the rates charged therefor "as they have been fixed by and in * * * (Ordinance No. m0) and that said rates will, if it becomes necessary to do so, be increased but shall not under any circumstances be reduced until all said water fund certificates and interest thereon shall have been fully paid." Ordinance No. 75 was not published.

Thereafter, the receipts from the sale of water having proved insufficient to pay the principal and interest due on the certificates, the trustee resigned on December 15, 1927, and appellant, Connett, of St. Louis, Missouri, was appointed successor trustee. On December 29, 1927, on account of default in payment of past due certificates, he filed his bill of complaint to foreclose the deed of trust in the District Court for the Southern Division of the Southern District of Illinois. Thereupon, on December 8, 1928, a receiver was appointed to operate the plant, and that receivership is still pending. In the bill no reference was made to water rates for private uses, but among other things it was prayed that the court should fix the reasonable rates for the public users of water as provided in section 5 of the Act of 1899, Smisth-Hurd Stats. c. 24, § 444 note. The bill was answered by the city, and the decree of foreclosure was entered on October 4, 1929, in which it was found that there was due and unpaid on the certificates the sum of $230,080, plus six per cent. interest thereon from June 1, 1929. On appeal, this court sustained the validity of the mortgage and the certificates, and affirmed the decree. City of Jerseyville v. Connett, 7 Cir., 49 F.2d 246. The mandate of this court on that ruling was filed in the District Court on May 8, 1931.

On June 10, 1931, a certificate holders' agreement was entered into by which holders of the special water fund certificates deposited with the creditors' committee, appellants herein, their certificates, with authority ot the committee to take such proceedings, legal or otherwise, as it should deem necessary and proper for the purpose of protecting and enforcing the rights and interests of the holders. The committee was further authorized to purchase the mortgaged property, to apply to the Illinois Commerce Commission for authority to operate it as a public utility, and to take all necessary steps to so operate it, if it deemed it expedient.

On July 2, 1931, the Illinois Legislature passed an Act, Laws 1931, p. 376, to amend the title, and sections 1 to 6 inclusive, of the Act of 1899. The substance of this amendment is in the margin.*fn2

On November 6, 1931, the Master in Chancery offered the property for sale in accordance with the decree of foreclosure. No bids were received, and no further offer of sale has been made.

On September 17, 1936, appellant trustee, by leave of court, filed his pleading which constitutes the basis of the present proceedings. It is styled "Amended Petition and Supplemental Bill of complaint." It recites the earlier proceedings in this case, including appellee's default and the foreclosure proceedings and decree, and, in substance, alleges: That appellee's water plant was offered for sale pursuant to the foreclosure decree, that there were no bidders, and the decree remains unexecuted; that although several years have elapsed, no part of the principal debt found due by the decree has been paid; that the rents, income and profits of the plaint are insufficient to maintain a proper reserve for depreciation and to pay an appreciable part of the principal debt evidenced by the outstanding certificates, although the interest was reduced by the decree from six to five per cent; that no part of the total sum found due has been paid or satisfied; that pursuant to section 5 of the Act of 1899, and the provisions of the foreclosure decree, the rates for water furnished for public use, including public hydrant rentals, should be increased; and that it was appellee's duty to increase the rates charged for the private consumption of water either under section 4 of the Act of 1899, and the applicable provisions of the mortgage, or under section 5 of the Act of 1899, as amended in 1931.

There was a general prayer for relief, and the following specific prayer:

"That the rates to be charged for water supplied for private and public uses through said Water Supply and Distribution System of said City of Jerseyville be increased to such extent, and in such amount or amounts, and in such manner that the same shall be adequate and sufficient at all times to pay the cost of operation and maintenance, to make all necessary repairs and replacements, to provide an adequate depreciation fund, and to pay the amount found due by said decree of ...

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