An Analytical View of Recent "lending of Credit" Decisions in Washington State

• Publication year: 1984

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 8, No. 2WINTER 1985

An Analytical View of Recent "Lending of Credit" Decisions in Washington State

Hugh Spitzer(fn*)

I. Introduction

Sections 5(fn1) and 7(fn2) of article VIII of the Washington State Constitution, concerning gifts or loans by the state and its subdivisions, have been a source of confusion to the courts and frustration to the sponsors of governmental programs. One recent Washington Supreme Court opinion referred to "[t]he presence of inconsistent analyses or exceptions" regarding article VIII, sections 5 and 7,(fn3) and another noted the "erratic decisions" and the "unjustified interpretation of the intent of the drafters" with respect to those constitutional provisions.(fn4)

The Washington Supreme Court and commentators recently have attempted to simplify or integrate the law concerning article VIII, sections 5 and 7, seeking to develop a single rule or formula for applying the two provisions-a flexible rule or formula that would enable the court to permit a wider range of government programs that might otherwise be barred.(fn5) Nevertheless, attempts to create a single rule or set of coherent rules for interpreting these problematical provisions are apt to fail. The constitutional language is complex, involving numerous elements, each of which must be present for the prohibition to apply.

Rather than a single formula governing the application of these provisions to every fact pattern, a uniform method of approach or analysis is required. That approach should permit the continued existence of a variety of rules that would apply to the different elements of the constitutional clauses in various factual situations. The method proposed in this Article would reduce sections 5 and 7 to their component parts, applying appropriate rules to each part while insisting that every part be present before either of the provisions would apply.

In addition to the problems created by attempts to find a single formula to resolve all government "lending of credit" cases,(fn6) a source of confusion in recent cases interpreting sections 5 and 7 has been the tendency of the court to attempt too much and to analyze more components of the constitutional provision in question than are necessary to resolve the case at bar.(fn7) This tendency leads either to troublesome dicta that return to haunt the court in later decisions, or to a confusion of theories resulting in opinions that cannot be reconciled to serve as useful guides for future interpretations.

This Article first presents an analytic framework for assessing government actions that present possible violations of article VIII, sections 5 and 7, and then analyzes five recent cases interpreting those provisions: City of Marysuille v. State,(fn8) City of Seattle v. State,(fn9) Johnson v. Johnson,(fn10) Public Employment Relations Commission v. City of Kennewick,(fn11) and Housing Finance Commission v. O'Brien.(fn12) Other writers have provided excellent reviews of the long history of these constitutional provisions.(fn13) This study, therefore, focuses on the analytic strengths and weaknesses of a limited number of recent opinions and demonstrates that those decisions made on narrow grounds-relying on a precise analysis of the applicable provision-provide more guidance to judges and lawyers. Washington cases decided during the past ninety years also provide sufficient bases for judicial approval of a wide range of government activities and programs that many have feared would be prohibited. The key is not to develop new exceptions to avoid the language of article VIII, sections 5 and 7, such as the "risk of loss" theory that has appeared in some recent cases,(fn14) but rather to approach the constitutional language strictly and rigorously, presuming from the outset that proposed actions by legislative bodies are constitutional and placing the burden on those who would challenge the constitutionality of a proposed government action.(fn15) The court should then insist that each and every element of the applicable provision be present before a prohibition will apply. This approach, a conservative method relying principally on the text of the constitution itself, ultimately may yield more flexibility in practice than will new formulas that may not be easily applied as new situations arise.

II. Reducing the Provisions to Their Component Parts

The core of the method proposed here is, first, to divide the language of the applicable constitutional provision into discrete components and, then, to insist that each component be present for the provision to apply. Article VIII, section 7 provides the best example for this approach. Section 7 is the more detailed version of the prohibition, and the court has long held that article VIII, section 5 should be interpreted in a fashion similar to article VIII, section 7, although the language of the two provisions clearly differs.(fn16)

Article VIII, section 7 may be divided for analysis as follows: (a) No county, city, town or other municipal corporation shall hereafter (b) give (c) any money, or property, (d) or loan (e) its (f) money, or credit (g) to or in aid of any individual, association, company or corporation, (h) except for the necessary support of the poor and infirm, (i) or become directly or indirectly the owner (j) of any stock in or bonds of (k) any association, company or corporation.

Each of the above eleven components plays a different role whenever a court must decide whether the prohibition applies to a government activity. This subdivision of the provision into its component parts is consistent with the court's frequent determination that the prohibition did not apply because a single component was missing.(fn17)

A. "Gifts"

The court's traditional approach is exemplified by its analyses of whether or not a "gift" has been present. Many decisions have held that money or property was not "given" when adequate consideration supported the exchange. Component (b), above, therefore was absent, and the constitutional prohibition did not apply.(fn18) A recent, typical example is Louthan v. King County,(fn19) in which the court approved county payments to landowners for the purchase of development rights to certain open spaces and farm lands so that those properties would not be developed. The court noted that "[f]or purposes of Const, art. 8, § 7, a gift is a transfer of property without consideration and with donative intent. Receipt of valuable consideration assures that a transaction is not a gift."(fn20) The court then held that development rights are valuable, and because "the County acquires a valuable right for the funds it expends, there is no merit in the contention that the expenditure of the funds for development rights is in reality a gift."(fn21) Louthan is an uncomplicated, tightly reasoned case from a long line of cases in which the court has found that article VIII, sections 5 or 7 were not violated because a single component of the prohibitory language-the gift element-was absent.(fn22)

In other cases, the court has found no gift or loan when a public entity was carrying out a "recognized public governmental function" and the benefit to private individuals or corporations therefore was incidental to the implementation of that basic governmental function. For example, in companion cases,(fn23) a car dealer challenged the restitution remedy provided by the state's consumer protection act(fn24) on the theory that such restitution is a gift to those who receive recompense. In each action the dealer also challenged the Attorney General's representation of wronged individuals on the ground that such representation is a gift to the persons who receive representation in remedying violations of that law. In Seaboard Surety Co. u. Ralph Williams' Northwest Chrysler Plymouth, Inc.,(fn25) the court found that the restitution remedy to the wronged individual was "only incidental to and in aid of the relief asked on behalf of the public."(fn26) In State v. Ralph Williams' Northwest Chrysler Plymouth, Inc.,(fn27) the court expressly stated that the public provision of legal services for misled consumers was based on the need for "protection of the public from unlawful business practices which is the primary purpose of this action initiated by the State Attorney General."(fn28) The court stated further that "[a]id to individuals is not absolutely prohibited under our law but is only improper where public money is used solely for private purposes."(fn29)

B. "Loans of Money"

The Washington Supreme Court has determined that a "loan of money or credit" did not exist when debt in its ordinary sense had not been created. In State ex rel. Graham v. City of Olympia,(fn30) the court held that deposits of city funds in interest-bearing accounts did not constitute a "loan" of public money, stating:In the interpreting of our constitution the language employed must be taken and understood in its natural, ordinary, general, and popular sense. ... In the ordinary and popular sense, a loan of money or credit is at once understood to mean a transaction creating the customary relation of borrower and lender. People take their money to banks, mutual savings banks, or savings and loan associations for deposit, and the institutions accept the money as deposit...