Appellant brought this action for declaratory judgment for the purpose of testing the validity of the ordinance of the City of Idaho Falls granting an exclusive franchise for a period of thirty years to respondent, Idaho Falls Cooperative Gas Association, Inc., hereinafter referred to as the "Cooperative", to construct, maintain and operate a system for the distribution of gas to the residents of Idaho Falls and immediate vicinity. Appellant prayed for a judgment declaring such ordinance to be illegal and void. Trial of the cause was had before the court sitting without a jury, and resulted in a judgment in favor of respondents holding such ordinance to be legal and valid. From such judgment this appeal has been perfected.
The Intermountain Gas Company, a corporation, holds a certificate of convenience and necessity granted by the Public Utilities Commission for the distribution of natural gas in southern Idaho including the territory of Idaho Falls and vicinity. Such company made application to the City of Idaho Falls for a franchise to use the streets and alleys of such city for the construction and operation of a system for the distribution of natural gas. This application has been by-passed and not acted upon. The Intermountain Gas Company having an interest in the outcome of this litigation, its attorney, Mr. Claude Marcus, was permitted to appear in such cause in this court as amicus curiae. It also being made to appear that a suit similar to this action is now pending against the City of Weiser to determine the effect of a similar ordinance granting a franchise to a similar cooperative association, the attorneys for the plaintiffs in such suit, Messrs. J. N. Leggat and Harold L. Ryan, were permitted to appear as amici curiae.
Many attacks are made upon the validity of the franchise granted to the Cooperative, and many questions raised and discussed by appellant and amici curiae. These attacks fall generally into two groups. The first group of attacks is against the Cooperative. It is contended: That a cooperative cannot be organized for the distribution of gas under the provisions of Title 30, Chapter 10, I.C. That the Cooperative is a public utility subject to regulation by the Public Utilities Commission and is not a non-profit cooperative association exempted from the jurisdiction of the Commission by the provision of Section 61-104, I.C. That the Cooperative is not authorized to issue bonds for the construction and operation of a system for the distribution of natural gas. That the Cooperative is not a true nonprofit cooperative association formed and operated without profit for the use and benefit only of its members. That it is not a separate entity from the City of Idaho Falls, but, as shown by its Articles of Incorporation and By-Laws and by the franchise in question, it is an arm or instrumentality of the City of Idaho Falls, controlled and brought into being by the City for the purpose of constructing and operating a system for the distribution of gas and the issuance of bonds for financing the same whereby the City is attempting to do indirectly what it is not permitted to do directly.
The second group of challenges to the franchise is directed against the City. It is contended: That the City was obligated to grant a franchise to the Intermountain Gas Company, the holder of the certificate of convenience and necessity. That the City is not empowered to construct and operate a system for the distribution of gas. That the City cannot issue bonds for the construction of such a system. That the City cannot issue bonds for the construction of
We do not deem it necessary, expedient or practicable to discuss and determine all such questions. Some of such questions are hypothetical, some premature and some based upon an interpretation of the constitution and statutes. We will only discuss and consider those questions which we deem necessary to a disposition of this cause.
Article VIII, Section 3, of our Constitution provides:
Article XII, Section 4, of the Constitution provides as follows:
Sections 50-2801 to 50-2811, I.C., inclusive, dealing with municipal bonds, do not provide for the issuance of municipal bonds for the construction and operation of a system for the distribution of gas. Likewise, Sections 50-2812 to 50-2825, I.C., inclusive, containing the Revenue Bond Act, do not authorize the issuance of such bonds for the construction and operation of a gas distribution system.
In I Dillon, Municipal Corporations, (5th Ed.), paragraph 237, it is stated:
Neither the constitution nor statutes of this state expressly grant to municipalities the right to construct, operate and maintain a gas distribution system; or to issue bonds in payment for the construction thereof.
The contemplated system to be constructed by the Cooperative for the distribution of gas in the City of Idaho Falls provides for the laying of a pipeline from Pocatello to Idaho Falls for a distance of approximately fifty miles. It is conceded that the City of Idaho Falls does not have sufficient funds and annual revenues to pay for the construction of such a system.
The Cooperative was organized by five residents of the City of Idaho Falls as an ostensible non-profit cooperative association under the provisions of Chapter 10, Title 30, I.C. Thereafter, on March 2, 1956, the gas franchise ordinance in question was adopted and approved by the City of Idaho Falls. Such ordinance provides for the execution and filing of a contract by the Cooperative. Such contract was filed on March 16, 1956. Under date of March 6, 1956, the Cooperative entered into an agreement with R. E. Schweser & Company, a co-partnership, for the purchase by the co-partnership of bonds to be issued by the Cooperative to raise funds to construct its distribution system, such bonds to be a first lien upon all its property and revenues. On June 20, 1956, a service agreement was entered into between the Pacific Northwest Pipeline Corporation and the Cooperative for the sale by the pipeline company of natural gas from its pipeline near Pocatello to the Cooperative for resale and distribution to its customers.
The Articles of Incorporation of the Cooperative, among other provisions, contains the following:
The contract provided for by the franchise ordinance and executed by the Cooperative in accordance therewith, contains, among other things, the following:
An examination of the Articles of Incorporation and By-Laws of the Cooperative shows that its members are to be all applicants for the purchase of gas within its territory. There is no membership fee to be paid. There are no burdens to be assumed by its members other than would be assumed by the purchasers of gas from a public service corporation. In effect, the Cooperative does not have control of its membership.
The Articles of Incorporation or By-Laws do not state that it is to serve only its members. It is required to serve anyone within its territory making application for gas, that is, it is required to serve the public. It was not created for the purpose of serving only its members as distinguished from the public. The service of its members only is one of the distinguishing characteristics of a non-profit cooperative association, and was so recognized in Sutton v. Hunziker, 75 Idaho 395, 272 P.2d 1012, and Clearwater Power Co. v. Washington Water Power Co., Idaho, 299 P.2d 484.
The By-Laws of the Cooperative provide that the members shall never at any time own an interest in the Cooperative or its property. In the event of dissolution of the Cooperative, its property and assets vest in the City. The City is at all times the equitable owner of the property and assets of the Cooperative.
The Board of Directors of the Cooperative must consist, under the By-Laws, of members approved by the City of Idaho Falls. Under this arrangement the City has control of the Cooperative.
Section 6 of the ordinance provides as follows:
Section 9 of the ordinance is as follows:
In addition to an amount equal to three percent of the gross revenues to be paid to the City, the Cooperative in thirty years time contemplates making a profit for the City consisting of the entire system and assets of the Cooperative. The Cooperative under the contract agrees that it will endeavor to establish and maintain rates and charges for the use of the gas which will bring in sufficient revenue to operate the proposed distribution system and to pay off the Cooperative's bonds issued to secure finance to construct and operate same by the end of the 30-year period of the franchise.
From the foregoing, it appears that the Cooperative is not a true non-profit cooperative association, but is an instrumentality of and controlled by the City of Idaho Falls. Considered as a separate entity from the City, the Cooperative has the attributes of a public service corporation subject to regulation by the Public Utilities Commission.
In Garkane Power Co. v. Public Service Commission, 98 Utah. 466, 100 P.2d 571, at page 573, 132 A.L.R. 1490, in discussing a non-profit cooperative association, the Utah Court said:
Courts will pierce the corporate veil and look behind the form of organization to determine the true character of an organization and will disregard corporate form and consider substance rather than form. Packard Clothes, Inc., v. Director of Division of Employment Security, 316 Mass. 329, 61 N.E.2d 528; Royal Jewelers Co. of Knoxville v. Hake, 185 Tenn. 254, 205 S.W.2d 963; Appeal of MacKenzie Auto Equipment Co., 71 Idaho 362, 232 P.2d 130.
A plan to evade and circumvent the constitutional limitation on the creation of debt is not valid merely because the bonds representing the debt are declared not to be the obligations of the municipality. Hardin v. Owensboro Educational Ass'n, 244 Ky. 390, 50 S.W.2d 968; State ex rel. Public Institutional Building Authority v. Griffith, 135 Ohio St. 604, 22 N.E.2d 200; Reynolds v. City of Waterville, 92 Me. 292, 42 A. 553; City and County of San Francisco v. Boyle, 195 Cal. 426, 233 P. 965.
What cannot be done directly by the City of Idaho Falls because of constitutional limitations cannot be accomplished indirectly. That which the constitution directly prohibits may not be done by indirection through a plan or instrumentality attempting to evade the constitutional prohibition. Atkinson v. Board of Commissioners, 18 Idaho 282, 108 P. 1046, 28 L. R.A.,N.S., 412; Macallen Co. v. Commonwealth of Massachusetts, 279 U.S. 620, 49 S.Ct. 432, 73 L.Ed. 874.
In Feil v. City of Coeur d'Alene, 23 Idaho 32, 129 P. 643, 43 L.R.A.,N.S., 1095, this court discussed at length the limitations and prohibitions contained in Article VIII, Section 3, of our Constitution. The court points out the many ways that an indebtedness or liability incurred by the municipality may infringe upon the constitutional prohibition. In discussing the issuance of bonds for the purchase of a water works system, such bonds to be paid out of a special fund provided by the revenues from the water works system, this court said, 23 Idaho 32, at pages 49-50, 129 P. 643, at page 649, 43 L.R.A.,N.S., 1095:
In Miller v. City of Buhl, 48 Idaho 668, 284 P. 843, 72 A.L.R. 682, we held that city could not incur obligation for purchase of an electric generating system to be paid for from receipts from sale of power and light without complying with Article VIII, Section 3, of the Constitution. To the same effect, see Straughan v. City of Coeur d'Alene, 53 Idaho 494, 24 P.2d 321; General Hospital v. City of Grangeville, 69 Idaho 6, 201 P.2d 750; Williams v. City of Emmett, 51 Idaho 500, 6 P.2d 475; Boise-Payette Lumber Co. v. Challis Independent School District No. 1, 46 Idaho 403, 268 P. 26; Boise Development Co., Ltd. v. Boise City, 26 Idaho 347, 143 P. 531.
The creation of the Cooperative, its contracts for the purchase of gas and for the sale of its bonds to raise funds for the construction, operation and maintenance of a gas distribution system and the ordinance of the City of Idaho Falls granting an exclusive franchise for thirty years to the Cooperative with the contract provided for by such ordinance are all parts of a plan and design devised to enable the City of Idaho Falls to evade and circumvent the limitations and prohibitions of the constitution and statutes; and to exercise powers not granted to a municipality. The purpose of the whole plan is to allow the City to do indirectly what it cannot do directly, that is, to construct, operate and maintain a system for the distribution of gas; and to pay for same by the creation of indebtedness and liabilities in excess of its revenues for the current year without a vote of the qualified electors and without providing for an annual tax to retire such indebtedness.
We agree that the record is in accord with the statement in the brief of appellant that the officials of the City of Idaho Falls and the officials of the Idaho Falls Cooperative Gas Association, Inc., were at all times acting in what they thought was the best interest of the community and that they were sincere in all of their actions. There is nothing in the record challenging their good faith in their endeavor to provide a system for the distribution of gas for the City of Idaho Falls and vicinity.
We are not concerned with the merits or demerits of so-called "home rule" by municipalities whereby the law would empower a municipality to construct, operate and maintain its own system of distribution of gas as compared with a system for distribution of gas constructed, maintained and operated by a public utility holding a certificate of convenience and necessity. Such question is strictly a matter of policy for the people or the legislature and is not for consideration by the courts. This court is only concerned with
We must hold that the franchise in question granted by the City of Idaho Falls to the Idaho Falls Cooperative Gas Association, Inc., is illegal, void and of no effect. The judgment of the trial court is reversed and the cause remanded to the trial court with instructions to vacate such judgment and to enter a judgment in favor of appellant in accordance with the views expressed in this opinion. Costs to appellant.
TAYLOR, C. J., and KEETON, ANDERSON and SMITH, JJ., concur.