SACRAMENTO MUNICIPAL UTILITY DIST v. PACIFIC GAS ELECTRIC CO

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District Court of Appeal, Third District, California.

SACRAMENTO MUNICIPAL UTILITY DIST. v. PACIFIC GAS & ELECTRIC CO.

Civ. 6603.

Decided: July 16, 1941

Thos. J. Straub, and John C. Wood, both of San Francisco, for appellant. Robert L. Shinn, Marshall K. Taylor, Stephen W. Downey, John F. Downey, and Downey, Brand & Seymour, all of Sacramento, for respondent.

This action was brought under the provisions of section 526b of the Code of Civil Procedure, to recover attorney fees expended by respondent in the litigation hereinafter described. Findings were entered in favor of respondent and judgment in the sum of $9,500 was rendered against appellant. The appeal is taken from such judgment.

Respondent is a public corporation organized and existing under the Municipal Utility District Act. California Stat.1921, p. 245, as amended. Appellant is a public utility corporation organized and existing under the laws of the state of California, and owns, controls and operates plants and equipment for, and is engaged in the business of generating, transmitting and distributing electric energy within respondent's boundaries. In November, 1934, the electors within the boundaries of respondent voted to issue bonds in the sum of $12,000,000 for the purpose of acquiring works for supplying the inhabitants thereof with electric energy for light, heat and power purposes. Respondent thereafter brought an action under section 16 of said act to determine the validity of said bonds. Appellant appeared in said action and contested the validity of said bonds on the ground that taxes might be levied to pay the same, and that such taxation of its property would constitute a taking thereof without compensation and without due process of law, in violation of the fourteenth amendment to the Constitution of the United States. The State Supreme Court held (Sacramento Municipal Utility Dist. v. All Parties and Persons, 6 Cal.2d 197, 203, 57 P.2d 506) that the issue tendered thereby was premature and refused to make a finding thereon. Thereafter, when such bonds were about to be issued and sold by respondent, appellant brought an action in the United States District Court for the Northern District of California to enjoin respondent from executing, selling, issuing or delivering such bonds. Said court rendered its decision in favor of respondent. Pacific Gas & Electric Co. v. Sacramento Municipal Utility Dist., 17 F.Supp. 685. From said judgment appellant appealed to the Circuit Court of Appeals for the Ninth Circuit, which court affirmed the judgment of said District Court. 92 F.2d 365. The Supreme Court of the United States denied certiorari. 303 U.S. 640, 58 S.Ct. 610, 82 L.Ed. 1100. It was stipulated herein that no injunction either temporary or permanent, or restraining order of any kind was ever issued in said action by any of said courts of the United States. It was also stipulated that all costs incurred in said action which were taxable as costs in the several courts of the United States were taxed according to rules of such courts and were fully paid by the appellant.

The facts are undisputed, and bring the case clearly within the purview of section 526b of the Code of Civil Procedure, which reads as follows:

“Every person or corporation bringing, instigating, exciting or abetting, any suit to obtain an injunction, restraining or enjoining the issuance, sale, offering for sale, or delivery, of bonds, or other securities, or the expenditure of the proceeds of the sale of such bonds or other securities, of any city, city and county, town, county, or other district organized under the laws of this state, or any other political subdivision of this state, proposed to be issued, sold, offered for sale or delivered by such city, city and county, town, county, district or other political subdivision, for the purpose of acquiring, constructing, completing, improving or extending water works, electric works, gas works or other public utility works or property, shall, if the injunction sought is finally denied, and if such person or corporation owns, controls, or is operating or interested in, a public utility business of the same nature as that for which such bonds or other securities are proposed to be issued, sold, offered for sale, or delivered, be liable to the defendant for all costs, damages and necessary expenses resulting to such defendant by reason of the filing of such suit.”

Appellant contends that the said section is unconstitutional in that it denies the equal protection of the law to those owning or operating public utilities, and therefore offends against the fourteenth amendment of the federal Constitution, and that it violates sections 11 and 21 of article I of the Constitution of California, which read as follows:

“Sec. 11. All laws of a general nature shall have a uniform operation.”

“Sec. 21. No special privileges or immunities shall ever be granted which may not be altered, revoked, or repealed by the Legislature; nor shall any citizen, or class of citizens, be granted privileges or immunities which, upon the same terms, shall not be granted to all citizens.”

We believe that the position of appellant is sound.

It may be first noted that the said section does not purport to allow an attorney fee as part of the ordinary “costs of suit”. It creates a new liability which may be enforced by an independent action. Respondent gives the following reasons for the enactment of the statute:

“A genuine problem exists. It was necessary to devise some way to check nuisance lawsuits instituted solely to delay the effort of a public entity to enter a utility business. Such delays of course are of great profit to any private entity with which the public would eventually compete or whose business it would take over. But it is a loss to the public. A very fair plan has been arrived at to discourage such delay suits. The person bringing such suit should pay the expense to which he puts the defendant by bringing it. This is but equitable and just. If the party in fact does have a meritorious case and wins, he is subjected to no penalty. If he loses because his case is not meritorious he does no more than pay the expenses he forced the other party to incur––expenses doubtless offset many times by the profits made during the period of delay.”

We do not believe there is any substantial basis for the assumption that all or many of such actions are “nuisance lawsuits”. No evidence is presented which would afford the basis for a conclusion or finding to that effect. On the contrary, in all dealings, whether between individuals, or between public corporations and public utilities, the presumption of fair dealing obtains. If the law was designed to penalize vexatious litigation, it should have provided, as a basis for recovery, that plaintiff must prove that the action was, in reality, not commenced in good faith, but with an ulterior purpose in view. In the absence of such proof we cannot conclude that the action for the injunction was commenced for any reason other than to protect and preserve the rights of the plaintiff therein.

May the legislature say to a certain class of litigants that if you go into court to preserve or assert a right, and if you lose the case you must pay not only statutory costs, but all other damages and expenses (including attorney fees) resulting to the defendant in such action? The answer is that it can do so, without violating the fourteenth amendment or the state Constitution, provided that the classification is based upon some difference bearing a reasonable and just relation to the act in respect to which the classification is attempted. Gay v. Engebretson, 158 Cal. 21, 109 P. 876, 139 Am.St.Rep. 67; Gulf, C. & S. F. R. Co. v. Ellis, 165 U.S. 150, 17 S.Ct. 255, 41 L.Ed. 666. If, however, there is no logical basis for placing the litigant in the class where he must be thus penalized the statute clearly contravenes the said constitutional provisions. Thus it has been held that the legislature cannot require that an attorney fee be paid a lien–claimant under the Mechanic's Lien Law––chapter II, title IV, Code of Civil Procedure. Builders' Supply Depot v. O'Connor, 150 Cal. 265, 88 P. 982, 983, 17 L.R.A., N.S., 909, 119 Am.St.Rep. 193, 11 Ann.Cas. 712. In that case the court said:

“The statutory provision in question is found in section 1195, Code of Civ.Proc., and is as follows: ‘The court must also allow, as a part of the costs, * * * reasonable attorneys' fees * * * to be allowed to each lien claimant whose lien is established, whether he be plaintiff or defendant.’ It is to be noticed that this section provides for an attorney's fee to plaintiff, but not to defendant, even though the latter be successful in the action, and that attorney's fees are allowed even to plaintiff, only in actions under the mechanics' lien law; the general rule being that ‘the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties.’ Code Civ.Proc., § 1021. This provision is, in our opinion, violative both of the federal and the state Constitutions––of the 14th amendment of the former, which guaranties to every person ‘the equal protection of the law,’ and of the provisions of the state Constitution which provide that general laws shall be uniform, prohibit special laws, and declare the inalienable rights of all men of acquiring, possessing, and protecting property. A statute which gives an attorney's fee to one party in an action and denies it to the other, and allows such fee in one kind of action and not in other kinds of actions where, as in the statute here in question, the distinction is not founded on constitutional or natural differences, is clearly violative of the constitutional provisions above noticed.”

It may be said that the pronouncement in the latter case is the general rule throughout most jurisdictions. Like most rules, however, it has certain exceptions and these are relied upon by respondent as supporting the enactment, although none is directly in point. First, there are actions where an insurance company has failed to pay a claim within a definite time fixed by statute. The weight of authority is to the effect that there is no constitutional objection to the imposition of attorney's fees upon insurance companies where they refuse to pay claims within a specified period, without a like imposition of them upon unsuccessful plaintiffs. Numerous authorities supporting that view are found in 90 A.L.R., page 534. Practically all of the cases justify this unequal application of the law upon the ground that it is a necessary and proper regulation of the insurance business, and is designed to overcome vexatious delays in the payment of claims. The following excerpt from the case of Lancashire Ins. Co. v. Bush, 60 Neb. 116, 82 N.W. 313, 315, shows clearly the grounds for classifying insurance companies apart from other litigants:

“It is a matter of common knowledge that corporations engaged in the business of insuring real estate have been long accustomed to vexatiously and oppressively resist payment of claims arising under their policies. The reports of this court bear abundant evidence to the fact that no other class of litigants has so persistently endeavored to escape liability from their contract obligations by interposing technical and unconscionable defenses to actions instituted against them. The legislature was, we think, within its constitutional power in selecting this class of insurance companies from all other litigants, and subjecting them, if unsuccessful, to the payment of attorney's fees, because experience and observation had shown that the defenses upon which they generally rely are without merit, and constructed out of some of the forfeiture clauses with which their policies are thronged. The law in question was designed to repress an evil practice, to advance public interests and promote justice. It was an exercise of legislative power justified by considerations of public policy.”

The foregoing statement is typical of many others involving the question. Such opinions seem to warrant the conclusion that stricter regulation of the business of insurance is necessary. In fact, it would seem as though many of the states have seized upon this novel, but rather drastic method as a means of enforcing certain regulations.

Another instance where a similar law has been upheld is in certain actions against railway companies, arising out of losses sustained when livestock is killed, or damages resulting from fires. The classification is justified upon the ground that the imposition of attorney fees under such circumstances is in the nature of a police regulation.

Turning to the instant case, we have no circumstances present which bring appellant within the ruling laid down in the insurance cases. No criticism whatever is raised in respect to the manner in which appellant does business––particularly in respect to its relations with its customers. There is no ground for placing appellant within the insurance company class. Neither do the facts bring the case within the rule laid down in the railway cases. There is nothing in the record to justify the legislation upon the ground of general police power.

It is strongly urged by respondent that classification is primarily one for the legislature, and that the courts should not interfere unless it can be plainly seen that such classification has no basis in the facts. We have stated the rule governing this phase of the case as laid down in Gay v. Engebretson, supra. If it plainly appears that there is no reasonable basis for such classification, the courts are charged with the duty of nullifying the enactment.

Respondent devotes considerable space to some of the evils of private ownership of utilities, and the urgent necessity of curbing their opposition to competition from municipally owned utilities. This is largely an economic question, although mixed quite often with political considerations. There is nothing before the court to substantiate any of the charges made by respondent relating to the alleged common practice, on the part of private utilities, of starting litigation for the mere purpose of harassing the municipality. It cannot, therefore, be urged that the classification was made by the legislature to curb practices which are inimical to the public welfare––such practices as appeared in the insurance, railroad, and tax cases cited by respondent. In the former, it was the failure to pay losses promptly. In the railroad fence cases, it was the failure to maintain proper fences against livestock. In the tax cases, it was a penalty for failure to pay taxes when due. In all these matters the attorney fee was imposed as a penalty for failure to perform an act required by law or contract. Here, the fee is imposed, not for failing or neglecting to do any act enjoined by law or contract, but because appellant seeks to assert a right by filing an action which necessarily resulted in delaying the plans of respondent. If, as we have said, the statute provided that an attorney fee must be paid if the court found plaintiff was merely seeking to delay a bond issue, and not acting in good faith, a penalty of this character might be exacted. The fact that the attorney fee can be recovered only in the event that the injunction is finally denied, cannot justify an inference that there was bad faith in the commencement of the action. Merely because a litigant is unsuccessful does not brand him with the mark of fraud.

Respondent seeks to justify the classification upon the ground that the public has a very acute interest in public utilities. They point out such corporations have been granted the right of eminent domain. We cannot see how the grant of such power can justify legislation which penalizes a particular litigant for going into court. It may be a classification for certain purposes, but it is not one which can be the basis for the exaction of a penalty. The case of Marin Municipal Water District v. Marin Water & Power Co., 178 Cal. 308, 173 P. 469, 472, simply holds that it was no denial of the equal protection of the law for the legislature to provide that the State Railroad Commission should try all actions in eminent domain where a public corporation was seeking to take over the property of any existing utility. The court held that the state had a right to establish different rules of procedure for different classes of litigants. The following facts were held to afford a valid basis for the classification:

“Elements of peculiar complication and difficulty are often involved in the valuation of the property of a public utility. The fact that public utilities are subject to constant regulation and examination by the Railroad Commission may well have led the Legislature to conclude that that commission was best able to make a just and equitable appraisement of their property. Kennebec Water Dist. v. Waterville, supra [96 Me. 234, 52 A. 774]. So far as defendants are concerned, the classification made by the act cannot therefore be regarded as purely arbitrary.”

No such facts have been called to our attention in the instant case. Even though the courts have upheld the classification of utilities for certain purposes, it does not follow that they may be classified for any or all purposes. As respondents state: “Each statute rests on its own peculiar circumstances.”

All parties seem to agree that this section was enacted as a deterrent upon litigation, with the obvious purpose of discouraging a certain litigant from resorting to legal process in the assertion and protection of his rights. No distinction is made in the statute between actions commenced in good faith and those filed for the purpose of harassing the other party. Practically all suits for injunctive relief result in delaying some action which the defendant is about to take, and the situation here is not peculiar to public corporations. There is no legal distinction between public and private patience.

We are of the opinion that the rule quoted above from Builders' Supply Dept. v. O'Connor must govern the consideration of the statute we are here contemplating. No sound or valid reason can be advanced for the classification. The enactment definitely violates the fourteenth amendment to the federal Constitution, and also the provisions of sections 11 and 21 of the Constitution of California.

We do not deem it necessary to discuss other questions raised by appellant.

The judgment is reversed, with directions to enter findings and judgment in accordance with the views herein expressed.

PER CURIAM.