|Legal Opinion: |
Text of Document: July 31, 1992
Your question is, can the Volunteer Fire Department legally participate in a fund raising project? From my reading of the fund raising proposal, the volunteer fire department enters into a contract with Holliday Portraits, Inc., under which the former sponsors the latter's sale of portrait coupons. The coupons sell for $19.95, and the city receives $500 upon the sale of the first coupon or $2.00 on the sale of each coupon, whichever is greater. The purchaser of the coupon receives a family portrait and additional small gifts. The fund raising proposal declares that "We do all the work, you do nothing." That declaration appears to accurately reflect the sponsor's active part in the contract. However, the sponsor (in this case the volunteer fire department) lends its name to Holliday's sale of portraits.
My opinion is that the volunteer fire department cannot enter into such a contract for two related reasons: neither the volunteer fire department nor the city have the authority to enter into the business of promoting portraits in general, and neither of them have the authority to enter into a contract of the kind in question. The legal status of the department itself is clear: it is as much a subordinate department of the City as is any other department, notwithstanding the fact that its membership consists of volunteers. [ Municipal Code, title 7, chapter 3]. It has no independent authority to do what the city itself cannot do.
Although there is no Tennessee statute or case directly on point, 12 McQuillen, Municipal Corporations, § 36.02 says with respect to the question of whether a municipality can engage in a particular business
The object of the creation of a municipal corporation is that it may perform certain local public functions as a subordinate branch of the state government; and, while it is invested with the full power to do everything necessarily incident to a proper discharge of those public functions, no right to do more can ever be implied. In the absence of express legislative sanction, it has no authority to engage in any independent business enterprise or occupation such as is usually pursued by private individuals.
Of course, municipalities in Tennessee (and in most other states) engage in what can be called "businesses" of various kinds. However, few, if any, such businesses are of the kind "usually pursued by private individuals," and express municipal authority to engage in such businesses as municipalities typically engage in Tennessee can invariably be found in a general statute or charter. I've read the City Charter in its entirely and see nothing in it that either expressly or impliedly gives the city authority to enter into the business of promoting the sale of portraits. Under the contract, the city may not directly engage in the business of selling portraits, but it unquestionably sells to Holliday the right to use the name of the corporate name of a city department in the promotion of its products. That sale, by any other name, puts the city in the position of engaging in a business in which it has not the authority to engage.
The limitation upon the authority of municipalities to enter into contracts is seen in 19 Tennessee Jurisprudence, Municipal Corporations, § 70, which declares that
The power to make contract, and to sue and to be sued thereon, is usually conferred in general terms in the incorporating act [of the city]. But where the power is conferred in this manner, it is not to be construed as authorizing the making of contracts of all descriptions, but only such as are necessary and usual, fit and proper, to enable the corporation to secure or to carry into effect the purposes for which it was created... [Cited from Nashville v. Sutherland & Co., 92 Tenn.335, 338 (1892)].
It would stretch beyond the breaking point the general contracting authority of the city to say that the contract with Holliday meets that standard. No doubt both the city and the volunteer fire department are strapped for funds; however, the methods by which a municipality can raise revenue are set out in general statutes and the city's charter. Those methods do not include the sale of the city's corporate name to promote goods and services of any kind, let alone portraits. The Tennessee Supreme Court said in Wilkey v. Cincinnati, New Orleans & Texas Pacific Railway Company, 340 S.W.2d 256, 259 (1960) that "Contracts of a municipality which tend to embarrass or control its legislative powers and duties or cede the rights of citizens are not looked upon with favor." Although the facts in that case are entirely different from those here, a contract between the volunteer fire department and Holliday does embarrass and control the legislative powers of the city; it bargains away the right to use the city's corporate name for totally private purposes.
The contract in question would probably be ultra vires whether entered into by the volunteer fire department or by the city. In Nashville v. Sutherland & Co., 92 Tenn. 335 (1892), the Tennessee Supreme Court, citing Dillon on Municipal Corp., § 457, declared that
...a corporation can not [sic] maintain an action on a bond or a contract which is invalid; as, where a city, without authority, loaned its bonds to a private company and took from it a penal bond, conditioned for the faithful application of the city bonds to payment for works which the city had no power to construct or assist in constructing.
The contract in question contemplates lending not the city's bonds, but its name, to a private company. It seems to me the effect is the same relative to the question of whether the contract is ultra vires. Nothing in this opinion is intended to impugn the integrity of Holiday Portraits, which may be highly ethical and moral in every respect. However, there is no question but what Holliday is bargaining for use of the name " Volunteer Fire Department" as the foundation for the selling of portraits. If anything goes wrong in the sales campaign, I'm sure it has occurred to the city that disappointed or angry buyers are going to look to the city as much as to Holliday Portraits for satisfaction. In that respect, the city in a sense is loaning its "bonds" to a private company.
The Tennessee Supreme Court had this to say about ultra vires contracts:
The general principle of law is settled beyond controversy that the agents, officers, or even city council of a municipal corporation can not [sic] bind the corporation by any contract which is beyond the scope of its powers, or entirely foreign the purposes of the corporation, or which (not being legislatively authorized) is against public policy...
Unfortunately, nothing the Court said helps the image the city or of the volunteer fire department if the deal goes sour.
It appears to me that on its face the contract in question is against public policy. It looks like one municipalities in Tennessee have no express (or even implied) authority to enter into. Moreover, it looks like one municipalities shouldn't enter into.
Sidney D. Hemsley
Senior Law Consultant