Recently you called me with several questions concerning the Industrial Development Board in your City. One of your concerns was whether the Mayor had any authority conferred upon him by the City Code in relation to the Board. In short the answer is no. Section 1-201 of the Code of the City empowers the Mayor to generally supervise all business of the City. The Industrial Development Board of the City is a independent entity governed pursuant to T.C.A. 7-53-101 et seq. This Act, commonly known as the Industrial Development Act, is extremely detailed and allows for the incorporation of an Industrial Development Corporation upon approval of a resolution by the governing body of the municipality involved and application to the Secretary of State for such incorporation under §7-53-201. Upon incorporation §7-53-301 mandates the creation of a board of directors of not less than seven members to run the corporation. This section also decrees that none of the directors shall be officers or employees of the municipality and that they shall be elected by the governing body of the municipality to staggered terms.
At no place within the Act is any manner of direct municipal control or supervision contemplated. Dissolution of the Board is allowed under Section 7-53-103 but only upon resolution of the Board itself, not any other entity. Indeed the language of this Act is very similar to the Municipal Electric Plant Act of 1935 and I suspect that it was the model for the Industrial Development Act. That Act also allowed for the setting up of a similar independent board to run local utilities. It is fairly clear from a reading of the plain language of these statutes that the Legislature intended these boards to operate in an independent capacity free from municipal oversight. In the face of such clear legislative intent it would be wrong to infer that the City Code thus empowered the Mayor to exercise any supervision over the Industrial Board. As stated in the old but still valid case of City of Memphis v. Memphis Water Co., 52 Tenn. 495 (Tenn. 1871); "[T]he modification, repeal or revocation of the powers of a municipal corporation may be directed either expressly or by necessary implication of subsequent legislation." In this situation the Act clearly implies the legislative intent to divorce the industrial boards from municipal oversight and control.
Another question of yours concerned the validity of a loan to the Industrial Board from the County Electrical Co-operative. In a resolution dated the 13th of May, 1991 the Board of Mayor and Aldermen agreed to guarantee this loan for the Industrial Board. This action presents two serious legal problems for the City. The first is whether this action is constitutional under the State Constitution. The second is whether it is legal under the Act governing Industrial Corporations.
The Tennessee Constitution Article 2 Section 29 provides that:
the credit of no County, City or Town shall be given or loaned to or in aid of any person, company, association or corporation, except upon an election to be first held by the qualified voters of such county, city or town, and the assent of three-fourths of the votes cast at election.
The strict language of this section would seemingly bar many purposes for which municipal funds are expended, however, over the years, the so called "public purpose" doctrine has arisen to prevent this harsh result. In a nutshell the "public purpose" doctrine allows the expenditure or loaning of public credit to private entities for public benefit. Broadly defined a public purpose is one which will benefit the public at large though the action may be from a private enterprise. Just what is public purpose has been the focus of much litigation over the years. Not surprisingly the "public purpose" doctrine has been applied in the area of industrial corporations founded under the Industrial Development Act. An excellent case interpreting the Act is Small World Inc. v. Industrial Development Board, 332 S.W.2d 596 (Tenn. App. 1976). In that case the Court of Appeals pointed out that the entire Act had been passed to alleviate unemployment and low wages and thus were undoubtedly public purposes under the Tennessee Constitution. Acts such as the issuance of bonds and entering of contracts pursuant to the Act were therefore clearly constitutional. It is clear then that the issuing of bonds or receiving of loans by the industrial board itself is constitutional. This leads to the second prong of this question on the constitutionality of the City agreeing to guarantee the loan of the industrial board, which is clearly a separate entity, and whether this would meet the public purpose test. West v. Industrial Development Board of City of Nashville, 332 S.W.2d 201 points out that an industrial development board is a mere agency or instrumentality of a municipality thus the use of city owned property by the board is a public use within the public purpose doctrine and as such constitutional. This more that likely means that when the city deals with an industrial board it is not helping a private enterprise as prohibited by Article 2 section 29. The case of Chattanooga-Hamilton County Hospital Authority v. City of Chattanooga, 580 S.W.2d 322 (Tenn. 1979), highlighted the proposition that the constitutional prohibition on the extension of credit must be qualified in light of the public purpose doctrine and that each case will turn on its own particular set of facts.
Another issue addressed by the Tennessee Supreme Court in West was that of "credit." The Court stated that no referendum was needed since the use of city owned property was not the loaning of "credit" as meant in the constitution. The definition of "credit" may be found in Copley v. County of Fentress, 490 S.W.2d 164 (Tenn. App. 1972).
We hold that the word "credit" as used in Article II Section 29 of the Tennessee Constitution implies the imposition of some new financial liability upon a county, city or town which in effect results in creation of a public debt for the benefit of private enterprises and this was the evil intended to be prevented by said constitutional provision.
By agreeing to act as guarantee on the note for the Industrial Board the City has at least created the chance that it may have to extend its credit if there is a default on the note. The issue is: since it is loaning its credit to a quasi-public body for public purposes, is this unconstitutional? The answer is unknown since no cases on this subject have ever been decided. Opinion of the Attorney General 86-61 indicates that no constitutional problem is created when a city expends accumulated revenues to construct industrial buildings and really doesn't infer much either way if this was to be done with a loan. In any event I believe that a very strong argument can be made for the constitutionality of the guarantee.
The clearing of the constitutional question leaves a even larger hurdle, language within the T.C.A. itself. T.C.A. §7-53-306 reads:
The municipality shall not in any event be liable for the payment of the principal of or interest on any bonds of the corporation, or for the performance of any pledge, mortgage, obligation or agreement of any kind whatsoever which may be undertaken by the corporation, and none of the bonds of the corporation or any of its agreements or obligations shall be construed to constitute an indebtedness of the municipality with the meaning of any constitutional or statutory provision whatsoever. (emphasis added)
In short this forbids the City and the Industrial Board from entering into the type of guarantee agreement they have entered into. The statute goes on to allow these type of agreements but only if they are approved by three/fourths of the voters in a referendum. By making this guarantee in a manner that is outside of the statute, the City has acted "ultra vires."
The legal doctrine of "ultra vires" decrees that when a corporation acts beyond its powers its actions are void or voidable. A municipality is a municipal corporation bound by the laws governing corporate actions and thus fall within the purview of the ultra vires doctrine. City of Lebanon v. Baird, 756 S.W.2d 236 (Tenn. 1988), shows how this is applied to municipalities. In that case the city sought the return of a $90,000 downpayment on land that had been purchased by resolution instead of ordinance as required by the city charter. As the Tennessee Supreme Court stated:
When a municipality fails to act within its charter or under the applicable statutory authority, the action is ultra vires and void or voidable. Under Tennessee law, a municipal action may be declared ultra vires ... because the action was not undertaken consistent with the mandatory provisions of its charter or a statute.
The Court then found the action ultra vires and ordered the return of the downpayment to the city. It is quite clear that this is the situation your City now faces itself. Since the Board of Mayor and Aldermen did not comply with the statutory provisions of §7-53-306 the resolution authorizing the guarantee between the City and the Electric Cooperative is ultra vires and thus unenforceable against the City. It has been indicated to me that the Industrial Board is a making payments at this time, however, if it was to ever default, the holders of the note would have no legal recourse against the City.
You also asked several questions about the City attorney's simultaneous representation of the City, Industrial Board, parties interested in leasing the Industrial Board buildings and the bank which has made some loans to the Board in the past. I see no problem with him representing both the City and the Board since the Board is considered an agency of the City. As to representing the Board in its dealings with the bank and potential lessors this is a common practice in many private business deals since it greatly speeds up the process by aiding communication among the parties and cuts down on the expense of attorneys fees and the problems bringing in various attorneys creates. It may pose some problems in the public sector since it might create the appearance of a conflict of interest to those who are unaware of how these type transactions work and thus may arouse some protest among citizens. It is my understanding that this has happened in the past and is not contemplated in any future transactions. In case the situation was to arise again, I would advise that the City attorney represent only one party so as to avoid the appearance of a conflict of interest.
I apologize for the length of this letter but due to the complicated nature of the issues involved I felt they must be explained in detail. Please feel free to contact me if I may be of any further assistance on this or any other matter.