Hughes v. Schaefer

Rodowsky, J., delivered the opinion of the Court. Mayor and City Council of Baltimore (City), a municipal corporation and one of the appellees, makes loans, including the guaranteeing of loans made by others, for the development and redevelopment of property within the municipality. The loan program is administered by the City’s Board of Estimates 1 which is assisted by two individuals, known as the "Trustees,” both of whom act pursuant to four trust agreements with the City. Appellant, William Hughes (Plaintiff), by this taxpayer’s suit challenged the validity of the trust agreements and the role of the Trustees in the program. 2 The Circuit Court of Baltimore City declared the trust agreements to be valid in their entirety and denied injunctive relief.

This Court granted certiorari prior to consideration of Plaintiffs appeal by the Court of Special Appeals. For the reasons hereinafter stated, we find to be invalid that aspect of the trust agreements which purportedly restricts approval by the Board of Estimates to transactions recommended by the Trustees. In all other respects, we shall affirm the judgment below. ⁶⁵⁶ Plaintiff does not question the underlying authority of the City to conduct a loan and loan guarantee program for property development and redevelopment purposes. Nor does Plaintiff claim that, within the structure of the City government, the exercise of the authority to make or guarantee loans has been placed in any City officer or body, other than the Board of Estimates, by any constitutional or charter provision or by any legislative enactment.

Rather, the attack is focused on the Board’s use both of trust agreements and of the Trustees in the operation of the program. Some background is required for an understanding of the specific issues which have been raised. Each trust agreement was made between the City, the Commissioners of Finance of Baltimore City and Lawrence B. Daley and Charles L. Benton, Jr. The latter two parties are denominated "Trustees.” The Commissioners of Finance are now the Board of Finance. See Charter, Art. VII, § 16. 3 Mr. Benton is Director of Finance of the City.

Mr. Daley was Deputy City Treasurer. When Mr. Daley resigned from his City office and as a Trustee, he was replaced as a Trustee, effective December 17,1980, by Frank Baker, Jr. Mr. Baker, who holds no City office, has had extensive experience in corporate and financial affairs in private business. The two earliest trust agreements are each dated December 22,1976. Both deal with the proceeds of general obligation bonds issued by the City for residential, commercial or industrial property rehabilitation and development purposes.

Agreement No. 1 relates to loan proceeds used by the City in connection with its guarantees of loans made by third parties to borrowers who are to use the loan funds for the designated purposes, while Agreement No. 2 relates to bond proceeds used by the City to make direct loans for the designated purposes. 4 Trust Agreement No. 3, dated January 26, ⁶⁵⁷ 1977, deals with funds that the City receives from time to time in the form of grants and gifts from public, private and eleemosynary sources and that may be used for loans or guarantees for construction or rehabilitation of industrial, commercial and residential properties within the City. Funds under this agreement are primarily federal grants. 5 Trust Agreement No. 4 of July 13, 1977 deals with funds that are "derived from a variety of sources” and that "are appropriated in the Capital portion of the annual Ordinances of Estimates and/or allocated by the Board of Estimates of Baltimore City for particular and general purposes ... .” Trust Agreement No. 4 then recites: [T]he accomplishment of some of these purposes requires that interest and other earnings on the sums appropriated be accrued to the benefit of the particular purposes; and ... the duration of some of these purposes extends over a period of time exceeding one year in duration; and ... it is the desire of the City to create an orderly system for supervision of the said funds to be used for the purposes described heretobefore .... Funds involved under Trust Agreement No. 4 are, by its terms, appropriated funds. 6 Under Charter requirements and the budgetary practices of the City, the funds involved in the other three trust agreements are also appropriated funds. ⁶⁵⁸ Each trust agreement provides that the Trustees shall, from time to time, make recommendations to the Board of Estimates as to the use of the funds involved under the agreement for the particular purposes described in the trust agreement. A stipulation of facts between the parties fleshes out the procedure.

To enter into a loan or guaranty or other transaction under the Trust Agreements, the Trustees review the proposed transaction, determine its financial feasibility, advise the Board of Estimates from time to time of the status and terms of the proposed transaction, present the proposed transaction for preliminary or final approval as necessary or appropriate, complete the transaction in the final form approved by the Board of Estimates and carry out the transaction on behalf of the Board of Estimates. With respect to loan transactions, the Trustees request the prospective borrower to submit information regarding the project in much the same manner as would a banking officer when seeking to determine the feasibility of financing a project. Similarly, with respect to guarantees, the Trustees’ review of the project assesses its financial risk. All transactions which have been entered into under the trust agreements have been reviewed and approved by the Board of Estimates.

Without that approval the transactions do not proceed. Through the fiscal year ending June 30, 1980 the special fund accounts under the trust agreements were included in the annual reports of the City Department of Finance. Thereafter, quarterly financial statements of the Trustees have been submitted both to the Board of Estimates and to a review committee of the City Council. An annual report of operations is also provided by the Trustees and is subject to review both by the City auditor and by a firm of independent public accountants. ⁶⁵⁹ Each of the trust agreements contains a provision (the restricting clause) of which the following, from Trust Agreement No. 1, is typical: The Board of Estimates of the City shall not approve any contracts of guarantee or insurance of financial loans, except upon the favorable recommendations of the Trustees.[ 7 ] In some instances the Board of Estimates has approved transactions, or requested review and revision of transactions, which initially received unfavorable recommendations from the Trustees. 8 Against the foregoing background, Plaintiff advances three contentions: 1.

The Trustees could only have been created by an ordinance and not by contract with the Board; 2. The trust agreements constitute an unlawful delegation by the Board of its discretionary power to the Trustees; and 3. The trust agreements, and the role of the Trustees thereunder, violate Charter provisions dealing with advertising and competitive bidding. ⁶⁶⁰ (i) The answer to Plaintiffs first contention is found in the Charter. On the record before us, the Board exercises the discretion to approve a loan or guarantee, and the Trustees assist the Board by analyzing and negotiating the terms of a proposal and by making a recommendation to the Board.

Art. VI, § 4 (c) of the Charter provides that "[a]ll professional services contracted for by the City shall be engaged in the manner prescribed by resolution of the Board of Estimates.” Each of the trust agreements has been approved by resolution of the Board of Estimates and each provides for a form of professional service. The trust agreements are the means by which the Board of Estimates has obtained the benefit of financial expertise to assist it in making complex business decisions. 9 The position of the Plaintiff seems to be that once the Board of Estimates concluded that there should be a review by others of loan proposals, preliminary to Board consideration, the Board could not implement that decision by contract; rather, an ordinance was required. Plaintiff perceives support for this position in Charter, Art. II (General Powers), § 15A (Industrial and Economic Development). In general, that section deals with the acquisition and disposition of property by the City in connection with its industrial and economic growth.

In either instance certain determinations must first be made by the Board of Estimates "in its sole and absolute discretion.” § 15A (c). Subsection (e) then provides for the power in the City [t]o vest jurisdiction or authority to exercise or perform all or any of the aforegoing powers, except those specifically reserved to or to be exercised by the Board of Estimates, in any suitable board, commission, department, bureau or other agency of the [City] now in being or in any new board, commis ⁶⁶¹ sion, department, bureau or agency of the [City], which it is hereby empowered to create and establish for such purposes. Subsection (e) is an authorization and not a limitation. The enumeration of the powers particularized in Art. II is introduced by the following statement: The [City] shall have full power and authority to exercise all of the powers heretofore or hereafter granted to it by the Constitution of Maryland or by any Public General or Public Local Laws ... and in particular, without limitation upon the foregoing, shall have power by ordinance, or such other method as may be provided for in its Charter, subject to the provisions of said Constitution and Public General Laws [to exercise the enumerated powers], [Emphasis supplied.] It is not disputed in this case that the authority of the City to conduct a loan and guarantee program is, under current law, exercisable by the Board.

In order to obtain assistance in carrying out that function, the Board may use its Charter conferred power to contract for professional services to be rendered to the City without an ordinance having created the Trustees as a City agency for the purpose of furnishing staff support to the Board. 10 (ii) Nor do we see any unlawful delegation to the Trustees of the Board’s governmental or discretionary power. Under the trust agreements there is no power in the Trustees to approve a loan or guarantee. That power remains in the Board of Estimates. In this respect the case at hand is like Portsmouth Stove and Range Co. v. Baltimore, 156 Md. 244 , ⁶⁶² 144 A.‘ 357 (1929).

There an ordinance provided that before various types of gas appliances could be sold in the City, a sample of the appliance had to be approved by the Commissioner of Health, after it had been tested for compliance with safety standards. The Commissioner, as expressly authorized by the ordinance, required the testing to be done by the American Gas Association, a private organization. This Court held there was no unlawful delegation inasmuch as the association decided nothing. It merely furnished information to the Commissioner who retained the power to approve.

However, each of the trust agreements contains a restricting clause which, on its face, limits the Board’s exercise of the City’s power to make a loan or guarantee to proposals recommended by the Trustees. Literally, the Board has bound itself in advance not to approve an unrecommended proposal. Under the trust agreements, the Trustees are seemingly given a prior veto over the City’s power to make loans or guarantees which the Board, in its discretion, might otherwise decide should be made. This the City may not do.

Mugford v. City of Baltimore, 185 Md. 266 , 44 A.2d 745 (1945) discusses the applicable principle. When the Department of Public Works of Baltimore City entered into a collective bargaining agreement with a union representing certain City employees, a taxpayer obtained a judgment declaring the agreement to be invalid and enjoining performance by the City of its terms. The taxpayer appealed from that portion of the decree which excluded from the injunction deduction of union dues by the City from the pay of those employees who consented to the checkoff. There was no cross-appeal by the City.

This Court, nevertheless, said: Moreover, it was admitted by the [City], in argument, that the Department of Public Works could not bind the City, by contract, in any particular relative to hours, wages or working conditions, either as to union employees, or as to all employees ⁶⁶³ in the same classification. To the extent that these matters are covered by the provisions of the City Charter, creating a budgetary system and a civil service, those provisions of law are controlling. To the extent that they are left to the discretion of any City