Guadalupe-Blanco River Authority v. City of San Antonio (200 S.W.2d 989, 1947)

ALEXANDER, Chief Justice.

The City of San Antonio (City) brought this suit against Guadalupe-Bianco River Authority (GBRA) and others to cancel a contract by which the City leased to GBRA, with an option to buy, the electric generating plant located at New Braunfels, known as the Comal plant, and various tracts of real estate, electric transmission lines, transformers, easements, and other properties used in connection therewith. The trial court instructed a verdict for the defendant and entered judgment accordingly. This judgment was reversed by the Court of Civil Appeals, and judgment rendered for the plaintiff. Tex.Civ.App., 191 S.W.2d 118.

The City’s major contention is that the lease contract under consideration is void because it was an attempt by the Board of Commissioners of the City to encumber the City’s electric power system without a vote of the qualified voters in violation of the provisions of Revised Statutes, Article 1112, Vernon’s Ann.Civ.St. art. 1112. On the other hand, GBRA contends that the City had previously agreed to the lease contract as a condition to its right to acquire the property and that it acquired the property burdened with the lease, and as a consequence the contract is valid. We will discuss this major point first.

The record is very voluminous. We will state the facts as briefly as possible.

The San Antonio Public Service Company (SAPSCo) was a public service corporation engaged principally in generating, transmitting, and distributing electric energy for public consumption. It owned and operated a large steam-operated electric generating plant in New Braunfels, two hydro plants in the same vicinity, a large generating plant known as Station “B” in the City of San Antonio, various tracts of land used in connection therewith, 274 pole miles of high-power transmission lines, over 2,200 miles of primary wire lines, and sundry transformers and meters for serving over 86,000 customers. It operated in Bexar, Kendall, Wilson, Medina, Guadalupe, Comal, Caldwell, Karnes, Atascosa, Uvalde, and Bandera Counties and supplied San Antonio, Boerne, Floresville, Hondo, Poth, New Braunfels, Stockdale and the inhabitants thereof, and various urban and rural districts with electric energy for lights and power. Its stock was held by the American Light & Traction Company, a holding company. In 1941 the Securities and Exchange Commission ordered the American Light & Traction Company to dispose of its interest in SAPSCo. This it could do by (a) dividing the stock of SAPSCo among its stockholders, (b) selling the assets of SAPSCo, or (c) selling the stock of SAPSCo. It elected to pursue this latter course.

GBRA is a water conservation and reclamation district created under a special act of the Legislature to impound, conserve, and use the waters of the Guadalupe and Blanco Rivers in the manufacture and sale of electric energy. Its domicile is in New Braunfels, Comal County. Acts 1933, 43rd Leg., 1st C.S., p. 198, ch. 75, as amended by Acts 1935, 44th Leg., 1st C.S., p. 1615, ch. 410, Vernon’s Ann.Civ.St. following article 81971 Lower Colorado River Authority (LCRA) is a similar corporation created for the purpose of impounding and using the waters of the lower Colorado River. Acts 1934, 43rd Leg, 4th C.S, p. 19, ch. 7, as amended by Acts 1941, 47th Leg, p. 657, ch. 398, Vernon’s Ann.Civ.St. following article 81971

Upon learning that the assets of SAPSCo were for sale, GBRA conceived the idea of acquiring same. At first it was contemplated that LCRA would join in the enterprise, but lack of authority to issue additional bonds forced it to abandon the project. GBRA’s representative then approached the Mayor of the City and suggested that GBRA and the City cooperate in the acquisition of the properties of the SAPSCo, but was informed by the Mayor that the City did not care to join in the undertaking. Thereupon GBRA alone began to make plans for the acquisition of the properties of SAPSCo. By early May, 1942, GBRA had produced and projected a plan, and secured the approval thereof by the State Board of Water Engineers, for the issuance of revenue bonds of the Authority in the sum of 40 million dollars, the building of dams for the storage of the flood waters of Guadalupe and Blanco Rivers, the building of a hydro-electric generating plant to be operated with the water so impounded, and for the purchase of the properties of SAPSCo for use in connection with the hydro-electric plant; had arranged for the sale of its bonds; and had reached a tentative agreement with the President of the American Light & Traction Company under which the stock of SAPSCo was to be conveyed to GBRA at a stipulated price. (This agreement, however, was never approved by the stockholders of American Light & Traction Company.)

When the Mayor and Commissioners of the City learned of the steps being taken by GBRA to acquire the assets of SAPSCo they began to. take steps to defeat the efforts of GBRA and to acquire the properties of SAPSCo for the City., Then began a race between the City and GBRA in an effort to acquire the properties.

On May 27, 1942, the City Commissioners passed a resolution authorizing the Mayor to enter into negotiations for the purchase of the properties of SAPSCo, and on June 8, 1942, the City Commissioners passed another resolution in which it was recited that “the City of San Antonio has been advised * * * that said American Light & Traction Company has practically completed negotiations for the sale of said properties to Guadalupe-Bianco River Authority and that said Company expects to hold a meeting of its Board of Directors on the morning of June 10, 1942, for the purpose of consummating said sale; * * Said resolution instructed the

Mayor to begin negotiations for the purchase of the properties of SAPSCo and directed the City Attorney “to institute all such litigation in either State or Federal courts as in his opinion may be desirable to prevent acquisition of said properties or stock by Guadalupe-Bianco River Authority.” The City gave notice of intention to acquire “an electric light and power plant and system and gas distribution system serving the City of San Antonio and its inhabitants and territory adjacent to said City”; authorized the issuance of bonds in the sum of 35 million dollars for that purpose; and employed a group of investment bankers and engineers to assist the City in the sale of its bonds and in the purchase of the properties of SAPSCo. The City filed suit in Travis County to set aside the order of the Board of Water Engineers approving the plan of GBRA, and filed a condemnation suit in' Bexar County to condemn the property of SAPSCo. GBRA retaliated by filing a similar condemnation suit in the County Court of Comal County. It also filed a suit in the District Court of Hays County to condemn all of the property of SAPSCo wherever located. Lis pendens notice of this suit was filed in Bexar and other counties. The City then filed a condemnation suit in the County Court of Comal County seeking to condemn the same property. In all, 13 suits were filed. Finally, GBRA filed suit in the District Court of Comal County and secured an order enjoining the City from further proceeding-with any of the suits previously filed by it, and SAPSCo filed suit in the District Court of Bexar County against GBRA to remove cloud from the title to its property and secured an order enjoining GBRA from proceeding with the prosecution of any of the suits previously filed by it. Thus a legal impassé or stalemate was reached. Neither party could proceed with the prosecution of any of the suits filed by it without violating an injunction. The City and SAPSCo finally applied to the Supreme Court for writ of mandamus to compel the District Judge of Comal County to modify the injunction previously issued by him. However, this suit was later dismissed.

In the meantime the City had induced American Light & Traction Company to break off its negotiations with GBRA and to enter into a contract with the City for the sale of the stock of SAPSCo. It had also contracted for the sale of its bonds. Large profits were to be made by any one who could acquire the assets of SAPSCo. All parties recognized this. But the City was pressed for time. Its contract for the sale of its bonds was to expire on October 26 and the contract for the purchase of the stock of SAPSCo was to expire December 1. The City could not buy the stock unless it could sell its bonds; it could not issue and sell its bonds without the approval of the Attorney General; the Attorney General would not approve the bonds without a certificate that no litigation was pending which would affect the validity of the bonds; and the “non litigation” certificate could not be given so long as the suits previously filed by GBRA were pending. The situation was propitious for a compromise. The investment bankers recognized this. Consequently, early in September, they asked for and secured the permission of the Mayor of the City to approach the representatives of GBRA for a settlement.

By October 23, the parties had reached an agreement satisfactory to all'concerned. It is not necessary to give the details of the agreement in full. In general, GBRA was to dismiss the suits filed by it and allow the City to acquire the properties of SAPSCo subject to the lease contract in favor of GBRA. The lease contract subsequently signed by the City and GBRA in consummation of this tentative agreement recites that each of the parties had theretofore indicated its desire to acquire the properties of SAPSCo; that the City desired to confine its operations to what was designated as “the City’s service area,” which area was defined as including the City of San Antonio and all territory within a radius of 11 miles thereof, and that it would be undesirable for the City to operate the electric system outside of said area; and that the parties had determined that it would result in substantial savings in cost to the inhabitants of the City to have the Comal plant operated by GBRA in connection with the hydro-electric plant to be established by it. It further recited that it would be advantageous for the cities of Poth, Stockdale, Floresville, Boerne, Hondo, and New Braunfels to own and operate the distribution systems within their limits, respectively, and that GBRA should operate the balance of the system, including the generating plant at New Braunfels known as the Comal plant and the distribution system used in connection therewith located outside of the City service area and the cities above referred to.

It was then agreed that the City would lease to GBRA the Comal plant and the distribution system above referred to for a period of 30 years, with the option to GBRA to purchase the same at the end of the 30-year period. All rights to be acquired by the City in the properties of SAPSCo were to be subject to the rights of GBRA as evidenced by the 'lease contract. The property to be leased to GBRA was valued at approximately seven and one-half million dollars. GBRA was to pay the City an annual rental of $262,581, less certain fixed liabilities outstanding against the plant which GBRA agreed to assume and pay. The generating plant known as Station “B”, located in the City of San Antonio, was to be owned and operated by the City and was to carry the base load of the demands of the City’s electric system, but it was recognized that it would not be sufficient to supply these needs in full. Consequently, the City agreed to buy from GBRA at a stipulated price such additional current as it might need and as could be supplied by GBRA. It was further stipulated, however, that the City could enlarge the generating capacity of Station “B” and thus decrease the amount of current to be purchased from GBRA upon two years’ advance notice to GBRA of its intentions to do so, provided, however, that the City’s monthly billing demand could not be reduced below 25,000 kilowatts per month at 90⅜ per kilowatt.

The mechanics by which this was to be accomplished were as follows: The City was to issue and sell its bonds in the sum of approximately 34 million dollars and use the funds to purchase the outstanding stock of SAPSCo. The Trustees in Dissolution of SAPSCo were to convey all the assets of SAPSCo to the City. The City was to convey to Poth, Stockdale, and Flores-ville the distribution systems within those cities for a stipulated price. A new corporation known as the Guadalupe Electric Company was to be set up and the distribution systems within the cities of New Braunfels, Hondo, and Boerne were to be conveyed to that company, with an understanding that it would in turn, upon request, convey same to said cities at a stipulated price. The City was to execute a bond indenture covering the remainder of the property being acquired, including the Comal plant, and pledging the revenues of the system as security for the bonds, and at the same time was to execute the lease, with option to buy, to GBRA covering the Comal plant and the distribution system used in connection therewith. The lease to GBRA was to be non-assignable except with the consent of the City, but as a ]Dart of the compromise the City agreed that it might be assigned to LCRA. All these contracts were to be executed at the same time.

The parties were dealing at arm’s length. Neither one was willing to perform his part and trust the other to perform at a later date. Consequently, the parties all met on October 24, for the purpose of concluding the transaction at a single sitting. Representatives of the City, GBRA, LCRA, SAPSCo, Harris Trust & Savings Bank, who was a trustee named in the bond indenture, the investment bankers employed by the City to aid in making the trade, the attorneys for the bond buyers, a representative of the Attorney General’s Department, and numerous others were present. Representatives were sent to the various county seats where the suits were pending, for the purpose of having the suits dismissed at the proper time. When the parties were fully agreed, these representatives were instructed, by telephone, to dismiss the suits. As the judges entered their orders dismissing the suits, this information was relayed, by telephone, to the Mayor and when all suits had been dismissed the Mayor executed the lease in favor of GBRA. He then executed the “non litigation” certificate and delivered it to the representative of the Attorney General’s Department. The Attorney General approved the bonds and the Mayor delivered the bonds to the purchaser. The consideration was delivered to SAPSCo and its assets were conveyed to the City. All of the instruments necessary to conclude the transaction were executed and delivered. The then Mayor testified that after the papers had all been executed and the suits dismissed, “we swopped papers.” In this manner the entire matter was concluded at the same time and as a single transaction.

As previously stated, the object of this suit was to set aside the lease contract on the ground that it constituted an encumbrance on the City’s light system without the approval of the qualified voters of the City.

The City’s Board of Trustees in charge of its electric system brought a prior suit to cancel the same lease contract. The Court of Civil Appeals in-a majority opinion held that the contract was valid, but also held that the trustees were without authority to maintain the suit. Guadalupe-Blanco River Authority et al. v. Tuttle et al., Tex.Civ.App., 171 S.W.2d 520. This Court refused an application for writ of error “For Want of Merit” on the ground that the trustees had no authority to prosecute this suit, but at that time declined to pass on the validity of the contract. Tuttle et al. v. Guadalupe-Blanco River Authority et al., 141 Tex. 523, 174 S.W.2d 589.

Revised Statutes, Article 1112, relied on by the City, reads in part as follows: “No such light, water, sewer, or natural gas systems, parks and/or swimming pools, shall ever be sold until such sale is authorized by a majority vote of the qualified voters of such city or town; nor shall same be encumbered for more than Five Thousand ($5,000.00) Dollars, except for purchase money, or to refund any existing indebtedness lawfully created until authorized in like manner.” It is clear from the language of the statute that it was not intended to prohibit the acquisition of a light system subject to an existing encumbrance, nor the creation of an encumbrance as a condition to the acquisition of such property, without a vote of the qualified voters. City of Dayton v. Allred, 123 Tex. 60, 68 S.W.2d 172, par. 2.

Under the facts heretofore set out, the purchase of the property of SAPSCo by the City and the lease of part thereof— Comal plant — to GBRA constituted a single transaction. It is true the conveyance to the City and the lease to GBRA were evidenced by separate instruments, but these instruments were all executed at the same time as the" result of a common understanding to consummate one over-all transaction, and are therefore to be construed together as one contract. Howard v. Davis, 6 Tex. 174; Veal v. Thomason, 138 Tex. 341, 159 S.W.2d 472; American National Bank v. American Loan & Mortgage Co., Tex.Com. App., 228 S.W. 169; Spillman v. Hibler, Tex.Civ.App., 60 S.W.2d 1103; Rev.Stats., Art. 3713. Common Law Rules of Evidence, Rule 21, Vernon’s Ann.Civ.Stats., following article 3713.

At the very time the City acquired title to the property, it acknowledged the right of GBRA to the lease contract. In fact, the City expressly acknowledged in the lease contract that it was acquiring the property subject to the rights of GBRA as expressed therein. In this respect the lease provided: “The City of San Antonio has entered into a contract and has formulated a plan under which it proposes immediately to acquire all of said electric properties, except electric distribution properties serving the Cities of New Braunfels, Hondo and Boerne and territory immediately adjacent thereto, subject to the rights, privileges every nature received, through the operation of the system shall be deposited as received in a special fund or account to be known as * * * the ‘Revenue Fund’ ” ; that the money in the “Revenue Fund” shall be used “to pay the current expenses of operating, maintaining, and repairing the system” ; that “after the cost of the maintenance and operation have been paid from the Revenue Fund * * * the next available money therein shall be used for and are hereby pledged to the payment of the principal of and interest on the bonds * * * ” ; and that all money held in the “Revenue Fund” “shall be held as trust accounts for the benefit of the holders of the bonds.” On the other hand, the lease contract clearly contemplates that GBRA shall pay the City a stipulated sum as rental for the use of the leased property and that all revenues accruing from the operation of this property, over and above the stipulated rental, shall be retained by GBRA. The trustees named in the indenture contend, in effect, that they are entitled to have all profits earned by the lessee in the operation of the leased property paid into the “Revenue Fund” and held for the benefit of the bondholders.

Again, the indenture and lease must be construed together and their provisions harmonized if possible. At the time the transaction was closed the bond buyers and the trustees named in the indenture knew that the City was to receive a stipulated rental for the use of the leased property, and that this was the only revenue which the City was to receive for the use thereof during the term of the lease. They knew that all profits on this property, over and above the rental, were to be retained by the lessee. They consented to this arrangement. When the indenture and the lease are construed together and their provisions harmonized, we think it is clear that they mean that the City is to receive the sum stipulated in the lease as the earnings from the leased property, and that this is the revenue which is to be paid into the “Revenue Fund” as the earnings from the operation of the property. It was not contemplated that the profits made by the lessee in the operation of the leased property, over and above the stipulated rental, should also be paid into the “Revenue Fund.”

By express provisions of the lease the rights of the bondholders are superior to the rights of the lessee as against the leased property in the event of a foreclosure.

The judgment of the Court of Civil Appeals is reversed and the judgment of the trial court in denying the City any recovery in its suit to cancel the lease contract and the assignment thereof and in refusing a declaratory judgment in favor of the Board of Trustees is affirmed. The judgment of the trial court in refusing a declaratory judgment in favor of the trustees for the bondholders is reversed and judgment is here rendered construing the rights of said trustees under the indenture and lease contract as set out in this opinion.

SLATTON, Justice

(dissenting).

My views concerning the proper disposition of this case are contained in tire majority opinion of the Galveston Court of Civil Appeals, which was edited by Chief Justice Monteith. 191 S.W.2d 118. I therefore enter my dissent to the opinion of this Court.

On Motion for Rehearing.

In the original opinion we stated that the bond indenture was executed at the same time the other instruments were executed. In the motion for rehearing it is pointed out that, while the bond indenture was delivered at the same time the other instruments were executed, it was actually signed and acknowledged several days prior thereto. However, in our opinion, this is not material. As a general rule, delivery is an essential element of the ex'ecution of a written instrument. 17 C.J. S., Contracts, § 64, page 414; 10 Tex.Jur. 267; .15 Words and Phrases, Perm.Ed., page 546; Black’s Law Dictionary (De Luxe Ed.), p. 716; Thomason v. Berry, Tex.Com.App., 276 S.W. 185; Planters’ Oil Co. v. Hill Printing & Stationery Co., Tex.Civ.App., 208 S.W. 192. Prior to the time the other instruments were executed and delivered and the transaction closed, the City had not acquired the property to be covered by the indenture, and had not received the consideration to he paid therefor. Consequently, although the indenture was actually signed at a prior date, it was not intended that it should be delivered nor that it should become effective until the other instruments were executed and delivered. Therefore, for all practical purposes, we may consider that the indenture was executed at the same time the other instruments were executed and delivered.

It is strenuously insisted that, since the lease contract and the indenture were between different parties — the lease being between the City and GBRA and the indenture being between the City and the bond buyers and the trustees named therein — they should not be construed together as one instrument. It is undisputed, however, that all of the instruments were prepared and entered into in the accomplishment of a single purpose. Representatives of all of the parties — the City, GBRA, the bond buyers, and the trustees named in the indenture — met in the same room, at the same time, for the purpose of closing the over-all transaction. At that time they recognized that the City could not acquire the property to be covered by the indenture, and therefore could not issue and sell the bonds unless it would consent to execute the lease to GBRA. Consequently, it was agreed that the City should make the lease to GBRA in order to put the City in position to issue its bonds and acquire the property to be covered by the indenture. The indenture, the lease, and the other instruments were all executed and delivered with the full knowledge of all of the parties, in carrying out the agreement entered into by them. The lease expressly refers to the indenture. Under these circumstances they must be construed together, in order to ascertain the true intent of the parties. Veal v. Thomason, 138 Tex. 341, 159 S.W.2d 472; Peterson v. Miller Rubber Co., 8 Cir., 24 F.2d 59; 12 Amer.Jur. 783.

The trustees named in the indenture insist that, since Article II, Section 2, of the lease (quoted in the main opinion) provided that the provisions of the lease were subject to the terms of the indenture, and in the event of a conflict the terms of the indenture should control, the provisions of the indenture placing “the complete management and control of the system” in the hands of the City’s Board of Trustees should control over the provisions of the lease which gave the lessee the right to operate the leased property, and that the provisions of the indenture requiring the proceeds of the system to be paid into the “Revenue Fund” should control over the provision of the lease which allows the lessee to retain the profits derived from the operation of the leased property. Of course, the complete management and control of the leased property could not be in the lessee and in the City’s Board of Trustees at the same time. Neither could the profits from the leased property be retained by the lessee and at the same time be paid into the “Revenue Fund.” But a lease such as this, stripped of the right to manage the leased property and to retain the profits over and above the stipulated rental, would be no lease at all. It would be worthless. Its terms would be rendered ineffective. We must assume that the parties honestly intended that the terms of the lease contract should be effective to accomplish the purpose therein indicated. We cannot assume that the 'City, the bond buyers, and the trustees named in the indenture agreed to the execution and delivery of the lease in order to accomplish their purpose, but at the same time secretly intended that the lease should be wholly ineffective. We must attribute to them honest .motives. Consequently, we must try to reconcile the different provisions of the instruments and give effect to all of them, if possible. This can be done by holding that in the acquisition of the property all parties intended that the leased property should be burdened with the lease and that it was only the interest acquired by the City, over and above this burden, that was to be under the management and control of the City’s Board of Trustees. The same construction would give the trustees named in the indenture the right to have the stipulated lease rental paid into the “Revenue Fund” as revenue received by the City through the operation of the system, but not the profits earned by the lessee over and above the stipulated rental. Such a construction gives effect to the terms of the various instruments and it accords honesty of purpose to all the parties.

The motion for rehearing is overruled.