E. Liverpool v. Buckeye Water Dist. ( 2012 )

[Cite as E. Liverpool v. Buckeye Water Dist., 2012-Ohio-2821.]
STATE OF OHIO, COLUMBIANA COUNTY
IN THE COURT OF APPEALS
SEVENTH DISTRICT
THE CITY OF EAST LIVERPOOL ) CASE NOS. 11 CO 41) 11 CO 42PLAINTIFF-APPELLEE )
)
VS. ) OPINION
)
BUCKEYE WATER DISTRICT, et al. )
)
DEFENDANTS-APPELLANTS )
CHARACTER OF PROCEEDINGS: Civil Appeal from the Court of Common
Pleas of Columbiana County, Ohio
Case No. 05-CV-502
JUDGMENT: Affirmed in part. Modified and
Remanded in part.
JUDGES:
Hon. Cheryl L. Waite
Hon. Gene Donofrio
Hon. Mary DeGenaro
Dated: June 21, 2012
[Cite as E. Liverpool v. Buckeye Water Dist., 2012-Ohio-2821.]
APPEARANCES:
For City of East Liverpool: Atty. Charles L. Payne
Law Director – City of East Liverpool
617 S. Clair Avenue
East Liverpool, Ohio 43920
Atty. Thomas W. Connors
Atty. James M. Wherley, Jr.
Black, McCuskey, Souers & Arbaugh
220 Market Avenue South, Suite 1000
Canton, Ohio 44702
For Buckeye Water District: Atty. Dennis M. O’Toole
Stumphauzer, O’Toole, McLaughlin
McGlamery & Loughman Co., LPA
5455 Detroit Road
Sheffield Village, Ohio 44054
Atty. Frederick C. Emmerling
114 W. Sixth Street
P.O. Box 25
East Liverpool, Ohio 43920
For Ohio Public Works Commission: Atty. Michael DeWine
Attorney General of Ohio
Atty. William J. Cole
Atty. Keith A. McCarthy
Assistant Attorneys General
30 East Broad Street, 26th Floor
Columbus, Ohio 43215
For Ohio Water Development Authority: Atty. Shannon K. Benton
Squire, Sanders
2000 Huntington Center
41 South High Street
Columbus, Ohio 43215
[Cite as E. Liverpool v. Buckeye Water Dist., 2012-Ohio-2821.]
WAITE, P.J.
{¶1} This is an expedited appeal in a garnishment action. There are two
Appellants in this matter: the judgment debtor Buckeye Water District (“BWD”); and
the Ohio Public Works Commission ("OPWC"), which claims to have an interest in
amounts deposited in one or more of the accounts being garnished. BWD is a water
district organized under the authority of R.C. Chapter 6119. Appellee is the City of
East Liverpool (“East Liverpool”). The garnishee is CFBank (formerly known as
Central Federal Savings & Loan) in Wellsville, Ohio.
{¶2} In 1995, East Liverpool entered into a long-term contract to provide
water to Columbiana County, Ohio, and the performance of this contract was
assigned to BWD shortly thereafter. The contract required BWD to purchase a
certain minimum amount of water for the life of the contract, which was to expire in
2025. In 2005, East Liverpool filed a breach of contract action in the Columbiana
County Court of Common Pleas against BWD due to its failure to continue
purchasing the minimum amounts of water required by the water contract. In
February 2008, East Liverpool won a $9.7 million judgment against BWD. The
judgment was reduced to $4.8 million on appeal to this Court. E. Liverpool v.
Buckeye Water Dist., 7th Dist. No. 08 CO 19, 2010-Ohio-3170, appeal not accepted
for review 127 Ohio St.3d 1461, 2010-Ohio-6008, 938 N.E.2d 363 (December 15,
2010).
{¶3} East Liverpool then initiated garnishment proceedings against various
banks in which BWD was thought to have accounts in order to collect on the
judgment. One of those was CFBank. Seven accounts at CFBank were identified as
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garnishable. The accounts contained over $4.5 million. After the garnishment order
was served, all of the accounts were frozen by the court except for a general
operating account so that BWD could carry on its day to day operations. OPWC
intervened in the garnishment action to protect its interests in loans that it had made
to BWD. OPWC moved to vacate the garnishment proceedings. This motion was
dismissed. The trial court eventually overruled all objections to the garnishment
action, leading to this expedited appeal.
{¶4} There are two basic issues on appeal. BWD first argues that sovereign
immunity bars East Liverpool's garnishment action, but we find no support for that
conclusion in either Ohio caselaw or statutory law. R.C. Chapter 6119, which
governs water and sewer districts such as BWD, allows a water district to be sued on
its contracts. R.C. Chapter 2744, which provides for some types of statutorily based
governmental immunity, does not grant immunity from contract disputes. In addition,
the record reflects that BWD, as a water district, is performing a proprietary rather
than a purely governmental function, and the assets associated with this proprietary
function may be attached in garnishment.
{¶5} In BWD’s second line of argument it asserts that the funds in the
CFBank accounts are subject to revenue liens that have priority over East Liverpool’s
judgment lien. BWD argues that operation of R.C. 6119.12 created a lien on its
revenues arising from over $15 million in bonds issued by BWD to the United States
Department of Agriculture (“USDA”) in 2002 and 2008. Although we agree that such
a lien on net revenues exists, our review of the record shows that the terms of the
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lien do not prevent East Liverpool from garnishing the CFBank accounts. The 2008
pledge agreement established a litigation reserve fund of $1.2 million that is not
subject to the lien. The pledge agreements also allow for BWD’s operational
expenses to be paid first out of revenues, and the East Liverpool water contract is an
operational expense. In addition, BWD has failed to trace any funds in the CFBank
accounts to exempt sources, providing yet another reason to affirm the trial court’s
ruling. BWD has not established any other exemption or defense from garnishment
that would prohibit the bank accounts from being garnished. OPWC argues that its
debt is protected by a revenue lien, but there is no pledge agreement in the record
establishing or defining this lien. Therefore, OPWC has no superior claim to the
funds in the CFBank accounts. We find no merit in any of the assignments of error,
and the judgment of the trial court is affirmed except for a modification to clarify the
amount that is permitted to be garnished at this time. This matter must also be
remanded to the trial court to effectuate the orderly disposition of the garnishment
order.
Background to the Garnishment Action
{¶6} On December 15, 1995, East Liverpool entered into a 30-year water
service contract with the Board of Commissioners of Columbiana County. In 1996
the Board of Commissioners assigned the performance of the contract to BWD. The
contract called for BWD to purchase at least 235,000 gallons of water per day.
Starting in 2002, BWD gradually stopped purchasing the minimum amount of water
under the contract, leading East Liverpool to file a breach of contract action on May
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15, 2005. At the same time that BWD was reducing its usage of East Liverpool
water, it also began planning, financing and building a new water treatment plant
along with other major capital improvements.
{¶7} In May of 2002, BWD entered into a loan agreement with the United
States Department of Agriculture ("USDA") for $1,498,000 to finance Phase I of a
water line extension project, which included funding for the initial stages of their new
water treatment plant. The loan agreement was in the form of bonds which were
issued to the USDA on May 9, 2002. These were designated as “Water Resource
Revenue Bonds, Series 2002.” The bonds were issued in two series: “Series A” was
for $500,000, and “Series B” was for $998,000. The interest and principal on these
bonds was payable in annual installments through the year 2042. The bonds were
issued under the authority of Resolution 27-2002 of the Board of Trustees of BWD,
adopted on May 6, 2002, which stated:
The Issuer hereby grants to the owners of the Bonds from time
to time a first lien on the Revenues and the moneys and investments in
the Revenue Fund, the Bond Payment Fund, the Reserve Fund and the
Surplus Fund upon the terms set forth herein. (9/6/11 Tr., Pltf. Exh. B,
Section 10(f), p. 7.)
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{¶8} One of the terms of Resolution 27-2002 was that the principal and
interest on the bonds would be paid from funds remaining after operating costs were
paid:
WHEREAS, the Issuer [BWD] has established water rates and
charges to be charged to and collected from all persons whose
premises are served by a connection to the System (such rates and
charges, as amended from time to time, and any other moneys
received by or for the account of the System are collectively referred to
herein as the “Revenues”) which Revenues are designed and intended
to provide a surplus, after the payment of costs of operating and
maintaining the System, for the payment of the principal and interest on
obligations incurred and to be incurred in connection with the System
(including the water resource revenue bonds representing the
Government Loan) and the provision of adequate reserves; (9/6/11 Tr.,
Pltf. Exh. B, p. 2.)
{¶9} The 2002 resolution established a four-tiered list of priorities for paying
expenses from the Revenue Fund. The first priority payment was for “all reasonable
and proper expenses of operating and maintaining the System”. (9/6/11 Tr., Pltf.
Exh. B, Section 7(i), p. 5.) The second priority for revenues was to establish a bond
payment fund from which the interest and principal on the bonds would be paid.
One-twelfth of the annual payment due on the bonds was to be deposited in the bond
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payment fund each month. The third priority was the creation of a reserve fund to be
used for system repairs and to pay interest and principal if the bond payment fund
was insufficient. The minimum reserve allowed was $81,504. The remaining
revenues were then designated as surplus and could be used for any purpose.
{¶10} In 2006 and 2007, BWD borrowed $13.8 million in the form of bond
anticipation notes to create funding to build a new water tower, a raw water pump
station, a new water treatment plant, and to add to its water distribution system. On
October 10, 2008, BWD entered into another loan agreement with the USDA to
convert the $13.8 million of temporary funding into a permanent bond debt to the
USDA. Once again, the loan was to be in the form of water resource revenue bonds,
designated as “Water Resource Revenue Bonds, Series 2008.” The bonds were
issued in four series. “Series A” was for $4.2 million. “Series B” was for $3.8 million.
“Series C” was for $4.5 million. “Series D” was for $1.3 million. The interest and
principal on these bonds was payable in annual installments through the year 2048.
BWD approved the bonds in Resolution 22-2208. The definition of “revenues” in the
2008 bond resolution was different from that definition in 2002:
WHEREAS, the Issuer [BWD] has or will establish water rates
and charges to be charged to and collected from all persons whose
premises are served by a connection to the System (such rates and
charges, as amended from time to time, and any other moneys,
including the Government Grant and other grant funds, received by or
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for the account of the System are collectively referred to herein as the
“Revenues”) which are or will be designed and intended to provide a
surplus, after the payment of costs of operating and maintaining the
System, for the payment of the principal and interest on obligations
incurred and to be incurred in connection with the System (including the
Prior Bonds and the water resource revenue bonds representing the
Government Loan) and the provision of adequate reserves; (Emphasis
added.) (9/6/11 Tr., Pltf. Exh. C, p. 3.)
{¶11} The specifications of the reserve fund in the 2008 resolution were
modified somewhat from the 2002 resolution. The 2008 resolution called for the
deposit of $1,959,750 into the reserve fund. Part of this reserve fund was for “the
payment of costs related to litigation or the settlement thereof”. (9/6/11 Tr., Pltf. Exh.
C, Section 7(iii), p. 10.) The litigation reserve amount was set at $1,209,686, and
was deposited on the closing date of the bond issuance “as a reserve against
pending litigation and it is anticipated that the Additional Reserve Amount will be
released from the Reserve Fund upon the conclusion of such litigation and it does
not regard the Additional Reserve Amount as an additional source for the payment of
Debt Service on the Obligations.” (9/6/11 Tr., Pltf. Exh. D, Certificate of Purchaser.)
Resolution 22-2008 established that the remaining minimum reserve, apart from the
litigation reserve, could not be less than $750,064.
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{¶12} Prior to the issuance of the final judgment in the East Liverpool water
contract dispute, BWD had also entered into loan agreements with the Ohio Water
Development Authority ("OWDA") and the OPWC. The OWDA loans are not part of
this appeal. BWD currently owes OPWC over $1 million and is required to make
annual payments of approximately $82,300, stemming from loans obtained in 1993,
2000, 2002, 2003, 2005 and 2006.
{¶13} On May 19, 2005, East Liverpool filed a breach of contract action
against BWD and Columbiana County. On February 13, 2008, the trial court
awarded judgment in favor of East Liverpool in the amount of $9.7 million. East
Liverpool filed a judgment lien on February 15, 2008.
{¶14} The case was then appealed to this Court. On May 23, 2008, the trial
court granted a stay of the monetary judgment pending the outcome of the appeal.
On June 21, 2010, we affirmed the judgment in favor of East Liverpool, but modified
the award to $4.8 million. The case was further appealed to the Ohio Supreme
Court, which refused to accept the case for review on December 15, 2010. The
judgment became final on that date.
{¶15} On December 21, 2010, East Liverpool filed a motion to lift the stay of
execution of the judgment that the trial court had ordered on May 23, 2008. The stay
was lifted on December 22, 2010. As of the date of the lifting of the stay, BWD had
paid nothing on the judgment, had not established any payment plan to satisfy the
debt, and had not included the judgment as an obligation in its bookkeeping system.
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{¶16} On January 3, 2011, East Liverpool began garnishment proceedings in
the Columbiana County Court of Common Pleas against all of BWD’s bank accounts
at CFBank. The garnishment order against CFBank was issued on January 4, 2011.
The garnishment order was mailed to CFBank by certified mail on January 7, 2011,
and was received on January 10, 2011. The garnishment order froze approximately
$4.5 million in seven separate CFBank accounts.
{¶17} On January 13, 2011, BWD filed a motion for a temporary restraining
order, arguing that the garnishment of the CFBank accounts, and the consequent
freezing of the accounts, would immediately shut down the operations of the water
district. East Liverpool filed a reply stating that it did not wish to shut down BWD’s
operations, and that it was willing to allow BWD to have access to sufficient funds to
cover its reasonable, documented operating expenses.
{¶18} On January 20, 2011, the trial court issued a judgment entry partially
lifting the freeze on the CFBank accounts. The court, by agreement of the parties,
lifted the freeze on BWD’s general operating account (also referred to as the
“General Enterprise Fund”) ending with the digits 4209 at CFBank in order for BWD
to use this account in the normal course of business but for no other purpose. The
remaining six accounts have remained frozen during the pendency of this litigation.
The record indicates that on January 18, 2011, the General Enterprise Fund held
$829,940.47, and the remaining six accounts held $3,690,277.11, for a total of
$4,520,217.58.
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{¶19} The OWDA and OPWC filed motions to intervene in the garnishment
proceedings, and the motions were granted on February 25, 2011.
{¶20} On March 24, 2011, the trial court held a hearing to deal with various
motions and objections to the garnishment order. The only witness at the hearing
was Alfred DeAngelis, District Manager of BWD. On this same day, the OPWC filed
a motion to vacate the garnishment order. The parties examined Mr. DeAngelis, but
the remainder of the hearing was continued to a later date.
{¶21} On June 8, 2011, the trial court filed a judgment entry overruling
OPWC’s motion to vacate the garnishment order.
{¶22} The garnishment hearing continued on September 6, 2011. Testimony
was heard from Mr. Dennis Schwallie, bond counsel for BWD, and Anthony
D’Angelo, Fiscal Officer for BWD.
{¶23} The trial court issued a final garnishment order on December 13, 2011.
The court overruled all prior objections to the garnishment order. The court then
examined the various defenses being offered to prevent the garnishment of the
CFBank accounts. The evidence presented at the hearing indicated that East
Liverpool was attempting to garnish $4,216,750 of the approximately $4.5 million in
the CFBank accounts. Appellants raised a number of defenses related to
governmental immunity. The court had previously rejected any governmental
immunity defenses in a judgment entry issued on June 8, 2011, and the court
declined to revisit those arguments. The remaining arguments dealt with a series of
“reserve funds” or “reserve accounts” set up within BWD’s bookkeeping system.
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BWD argued that these reserves were committed to be paid to the USDA, OWDA,
OPWC, and others, who all had prior and superior liens on BWD’s revenues. BWD
also argued that some of the money at CFBank was part of a construction reserve
fund dedicated to a specific construction project. BWD argued that these reserve
funds could not be garnished due to the higher priority liens or prior pledged uses.
Even though the alleged “reserve funds” did not directly correspond to the depositary
accounts at CFBank, the court proceeded to examine each reserve fund to determine
whether any of the money in any of the CFBank accounts should be exempt from
garnishment.
{¶24} The court rejected BWD’s argument that all its revenues from any
source were protected by statutory revenue liens arising from the USDA bonds. The
court held that BWD’s argument did not comply with the “ ‘special fund’ exemption” to
the Ohio Constitution. The court determined that the USDA litigation reserve fund
currently held $1,144,686. This fund was not exempt because it was not earmarked
as a source for repayment of the USDA bonds. It was set aside for litigation
expenses, which includes the instant litigation, and could be used as payment for the
East Liverpool water contract litigation.
{¶25} The court determined that the USDA debt service reserve of $750,064
could be garnished because the terms of the lien held by USDA allowed for the
payment of operational expenses prior to payment of debt service. The court held
that the East Liverpool water contract was an operational expense that took priority
over the USDA lien. The court held that two other USDA reserve funds, in the
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amounts of $70,644 and $56,931, also allowed for the payment of operational
expenses prior to debt service and could be garnished.
{¶26} The court held that a construction fund of $736,456 consisted of surplus
funds and were not earmarked for construction. Since surplus funds could be used
for any legitimate purpose, the court concluded that they could be used for
operational expenses such as the East Liverpool water contract.
{¶27} The court held that an additional $551,644 claimed as construction
funds were not categorized as construction funds in BWD’s bookkeeping, and
therefore, the funds could be used for any legitimate purpose, such as paying a
judgment lien.
{¶28} The court found nothing in the record establishing that BWD had
pledged revenues or any other asset relating to the OPWC loans. Thus, the reserve
fund of $40,532 to OPWC was not protected from garnishment.
{¶29} The court determined that the money in the general enterprise account
(or general operating account) in the amount of $838,322, consisted of surplus funds
which could be used for any legitimate purpose of the water district. The court also
determined that the money in the CFBank operating account could not be traced to
any protected source that would be exempt from garnishment.
{¶30} The court found that the reserve fund of $27,468 relating to OWDA
loans was protected and was exempt from garnishment.
{¶31} After rejecting all arguments except those relating to the OWDA reserve
fund, the court overruled both the motion to modify the court’s judgment entry of
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January 20, 2011, and the motion to vacate and dismiss the garnishment order.
According to a worksheet attached to the trial court's judgment entry, the court
permitted East Liverpool to garnish $4,189,282.11 from the seven CFBank accounts.
{¶32} Two appeals immediately followed, one by BWD and one by OPWC.
These appeals have been consolidated.
Standard and Scope of Review
{¶33} No findings of fact or conclusions of law were requested from the trial
court, and therefore, the fundamental standard that applies is that a judgment
supported by some competent, credible evidence will not be reversed by a reviewing
court as against the manifest weight of the evidence. C.E. Morris Company v. Foley
Construction, 54 Ohio St.2d 279, 376 N.E.2d 578 (1978). Questions involving
statutory interpretation are reviewed de novo. Akron Centre Plaza, L.L.C. v. Summit
Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-Ohio-5035, 942 N.E.2d 1054, ¶10.
{¶34} The judgment debtor may not use garnishment proceedings to relitigate
the underlying debt. Rak-Ree Ents., Inc. v. Timmons, 10th Dist. Nos. 10AP–476,
10AP–556, 2011-Ohio-1090, ¶16. The scope of a garnishment hearing is “limited to
the judgment debtor's claims of exemption or any defense to the garnishment.”
(Emphasis sic.) Ashtabula Cty. Med. Ctr. v. Douglass, 11th Dist. No. 1311, 1988 WL
59836, at *1 (June 3, 1988).
Law governing garnishment actions
{¶35} “[S]o far as a debtor is concerned, * * * all of his property of whatever
nature is subject to the payment of his debts unless there is some express statutory
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exemption.” Marquis v. New York Life Ins. Co., 92 Ohio App. 389, 395-396, 108
N.E.2d 227 (1st Dist.1952). “Lands and tenements, including vested legal interests
therein, permanent leasehold estates renewable forever, and goods and chattels, not
exempt by law, shall be subject to the payment of debts, and liable to be taken on
execution and sold * * *.” R.C. 2329.01.
{¶36} Garnishment is a procedure whereby a creditor can obtain property of
its debtor which is in the possession of a third party. R.C. 2716.11 authorizes the
commencement of garnishment by a judgment creditor when supported by an
affidavit stating:
(A) The name of the judgment debtor whose property the
judgment creditor seeks to garnish;
(B) A description of the property;
(C) The name and address of the garnishee who may have in
the garnishee’s hands or control money, property, or credits, other than
personal earnings, of the judgment debtor.
{¶37} It has been held that:
Property held by a third party is subject to garnishment to satisfy
the debts of a judgment debtor when, at the time of the service of the
garnishment order, the judgment debtor has a right or title to the
property. * * * On the other hand, where the judgment debtor himself
has no present right to obtain the money or property from the
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garnishee, then the judgment creditor likewise has no right to the
property. Id. Toledo Trust Co. v. Niedzwiecki, 89 Ohio App.3d 754,
757, 627 N.E.2d 616 (6th Dist.1993).
{¶38} The garnishor has the initial burden to prove that the property being
garnished is the property of the judgment debtor. Davis v. Sean M. Holley Agency,
Inc., 2d Dist. No. 23891, 2010-Ohio-5278, ¶11.
{¶39} The judgment debtor may attempt to defeat the garnishment order by
establishing an exemption or other defense to garnishment. “The burden of proof on
the existence or applicability of an exemption or defense rests with the judgment
debtor.” (Emphasis sic.) Ashtabula Cty. Med. Ctr., supra, at *2, citing Hoffman v.
Weiland, 64 Ohio App. 467, 29 N.E.2d 33 (1st Dist.1940). The judgment debtor may
object to the attachment of the property and request a hearing. R.C. 2716.13(B).
“The hearing is limited to the consideration of the amount of property of the judgment-
debtor in the hands of the garnishee that can be used to satisfy all or part of the debt
owed by the judgment-debtor to the judgment-creditor.” Marinik v. The Cascade
Group, 103 Ohio Misc.2d 18, 22, 724 N.E.2d 877 (M.C.1999).
{¶40} Garnishment of bank accounts involves additional considerations not
applicable to other types of personal property. “The relationship between a bank and
its depositor is a debtor-creditor relationship. ‘* * * [M]oney deposited in a bank
becomes the property of the bank and is available for use by the bank in its business.
The depositor becomes a creditor of the bank in the amount of the deposit with the
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right to have this debt repaid in whole or in part on demand,’ 1 Natter, Schlichting,
Rice & Cooper, Banking Law (1991) 9-19, Section 9.05, subject to the terms of the
depositary agreement between the bank and the depositor, Fourth & Central Trust
Co. v. Rowe (1930), 122 Ohio St. 1, 170 N.E. 439, paragraph two of the syllabus;
Gall v. Central Trust Co. (1937), 57 Ohio App. 168, 25 Ohio Law Abs. 550, 10 O.O.
303, 12 N.E.2d 782. Thus, where the depositor is a judgment debtor and the bank is
a garnishee, the property being garnished is, strictly speaking, not the funds
themselves, but the debtor's contractual right to receive them.” Goralsky v. Taylor,
59 Ohio St.3d 197, 198, 571 N.E.2d 720 (1991).
{¶41} “[A] bank responding to an order of garnishment must determine
whether the debtor has a right to receive the funds in a joint account. If the debtor
has a right to receive the funds, the bank must remit the funds.” Ingram v. Hocking
Valley Bank, 125 Ohio App.3d 210, 219, 708 N.E.2d 232 (4th Dist.1997).
{¶42} The general test for whether a bank is required to release funds to the
garnishor is whether or not the judgment debtor could sue the bank for release of the
funds. First Bank of Marietta v. Mascrete, Inc., 125 Ohio App.3d 257, 263, 708
N.E.2d 262 (4th Dist.1998); Marquis, supra, 92 Ohio App. at 396.
{¶43} Commingled funds which belong to a third party, but which are
deposited in an account which names the judgment debtor, may be garnished:
“[E]ven though the deposits are legally the property of the
tenants, it is the name on the account that determines whose creditor
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may attach the funds in the account. By following the procedures
delineated in Chapter 2716 of the Revised Code, a judgment creditor
may garnish the property of the judgment debtor, even if that property is
in the possession of a third party, such as a bank. R.C. 2716.01(B).
When a bank receives a garnishment notice, it looks to the name on the
account to determine whether garnishment of that account is proper. “If
the judgment debtor has a contractual right to demand payment of the
funds, then those funds held for the benefit of the judgment debtor may
be subject to garnishment.” Leman v. Fryman, Hamilton App. No. C-
010056, at ¶15. Thus in garnishment proceedings, the court is not
concerned with who actually owns the property subject to garnishment
as it is with who possesses it. “A court will not ordinarily entertain
favorably a motion to discharge an attachment on the claim that the
attached property does not belong to the moving party, particularly
where the authenticity of such claim is questionable.” Rice v. Wheeling
Dollar Savings & Trust Co. (1951), 155 Ohio St. 391, 99 N.E.2d 301,
paragraph four of the syllabus. Dovi Interests, Ltd. v. Somerset Point
Ltd. Partnership, 8th Dist. No. 82788, 2004-Ohio-636, ¶12.
{¶44} “In Ohio, a judgment lien does not attach to personal property and so is
not perfected until the property is seized in execution.” Nelson Sand & Gravel, Inc. v.
Erie Shores Resort and Marina, Inc., 91 Ohio App.3d 649, 654-655, 633 N.E.2d 557-18-
(11th Dist.1993). The personal property associated with a garnishment order
attaches on the date the garnishment order is served. R.C. 2716.13(B); Bitter v.
Jones, 6th Dist. No. OT-98-022, 1999 WL 94577, *4.
BWD’S ASSIGNMENT OF ERROR NO. 1
THE TRIAL COURT ERRED IN HOLDING THAT A
JUDGMENT CREDITOR COULD GARNISH THE GOVERNMENTAL
PROPERTY OF A POLITICAL SUBDIVISION.
{¶45} The issues raised under this assignment of error deal with the
fundamental question as to whether the remedy of garnishment may be used, under
any circumstances, against an entity such as BWD. Both Appellants argue that BWD
is a political subdivision and that political subdivision immunity prevents the
garnishment of the property of a political subdivision. Appellants submit that, even
though governmental immunity may not have been a determinative issue in the
underlying contract dispute, it may be raised separately as a defense in the
garnishment action. Appellants promulgate this argument even though they
themselves have cited caselaw from this Court holding that political subdivisions are
subject to garnishment proceedings as judgment debtors, and more specifically, that
water works property owned by a political subdivision is subject to levy by creditors.
State ex rel. Baldine v. Davis, 1 Ohio App.2d 117, 204 N.E.2d 91 (7th Dist.1964).
Nevertheless, Appellants insist that some type of statutorily or judicially created
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governmental immunity exists to protect the funds that BWD has deposited with
CFBank. We will examine each of the arguments in turn.
{¶46} There is no question that a water district such as BWD is considered to
be a political subdivision in Ohio. R.C. 6119.011. Political subdivisions in Ohio had
formerly been immune from lawsuits under the judicial doctrine of sovereign
immunity. Thacker v. Bd. of Trustees of Ohio State Univ., 35 Ohio St.2d 49, 298
N.E.2d 542 (1973). The doctrine of sovereign immunity was judicially abolished in
Ohio in 1982. Haverlack v. Portage Homes, Inc., 2 Ohio St.3d 26, 442 N.E.2d 749(1982). In 1985 the Ohio legislature, as a response to the Haverlack case, adopted
R.C. Chapter 2744, which sets forth the statutorily created form of governmental
immunity that exists today. R.C. Chapter 2744, though, does not provide
governmental immunity from all lawsuits against the state or its political subdivisions.
It only protects against the types of lawsuits specifically described in the statute.
{¶47} R.C. Chapter 2744 provided no statutory immunity for contract claims
brought against a political subdivision. R.C. 2744.09(A) specifically states: “This
chapter does not apply to, and shall not be construed to apply to, the following: (A)
Civil actions that seek to recover damages from a political subdivision or any of its
employees for contractual liability[.]” R.C. 2744.09(A) has been consistently
interpreted to mean that political subdivisions cannot claim governmental immunity
for breach of contract claims. Finn v. James A. Rhodes State College, 191 Ohio
App.3d 634, 2010-Ohio-6265, 947 N.E.2d 236 ¶25 (3d Dist.); Thompson v.
Germantown Cemetery, 188 Ohio App.3d 132, 2010-Ohio-1920, 934 N.E.2d 956,
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¶16-18 (2d Dist.); Viola Park, Ltd. v. Pickerington, 5th Dist. No. 2008 CA 00052,
2010-Ohio-584, ¶41; Sullivan v. Anderson Twp., 1st Dist. No. C-070253, 2009-Ohio-
6646, ¶14; Carter v. Complete Gen. Constr. Co., 10th Dist. No. 08AP-309, 2009-
Ohio-6308, ¶16. Since there is no political subdivision immunity for the underlying
contract action that resulted in the judgment against BWD, we can find no reason
why East Liverpool should not be permitted to use the various legal mechanisms
available, such as garnishment, to collect its judgment on the breach of contract
claim.
{¶48} Furthermore, the statutes authorizing the creation of regional water and
sewer districts (such as BWD) specifically abrogate any immunity from breach of
contract lawsuits: “[S]aid district shall exercise in its own name all the rights, powers,
and duties vested in it by Chapter 6119. of the Revised Code, and, subject to such
reservations, limitations and qualifications as are set forth in this Chapter, such
district may: * * * (D) Sue and plead in its own name; be sued and impleaded in its
own name with respect to its contracts or torts * * *.” R.C. 6119.06(D). Since the
common law rule is that all property of a judgment debtor is subject to the payment of
its debts, we again find no reason why BWD’s bank accounts would not be subject to
pay the East Liverpool judgment lien. Marquis, supra, 92 Ohio App. at 395-396.
{¶49} We note that R.C. 2744.06 prohibits garnishment actions against the
real or personal property of a political subdivision when the case involves “a civil
action to recover damages for injury, death, or loss to person or property caused by
an act or omission of the political subdivision or any of its employees in connection
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with a governmental or proprietary function.” This prohibition against garnishment
does not apply here because, as stated above, R.C. Chapter 2744 does not apply to
breach of contract claims, and the garnishment action in this appeal arises from a
breach of contract claim.
{¶50} Appellants argue that only property held by a political subdivision in its
proprietary capacity is subject to garnishment. They contend that BWD owns all of its
property in a governmental capacity and not a proprietary capacity. Therefore, they
claim that no property is available for garnishment. Governmental functions are
those “imposed upon the state as obligations of sovereignty, such as protection from
crime, or fires, or contagion, or preserving the peace and health of citizens and
protecting their property[.]” City of Wooster v. Arbenz, 116 Ohio St. 281, 284, 156
N.E. 210 (1927). Proprietary functions are those voluntarily undertaken by the state
for the comfort and convenience of its citizens. Id. at 285.
{¶51} Appellants would have us rely on the reasoning set forth in State ex rel.
First Natl. Bank v. Botkins, 141 Ohio St. 437, 48 N.E.2d 865 (1943), to support the
conclusion that water district property is derived from a governmental function and as
such may not be garnished. State ex rel. First Nat'l Bank held that “[p]roperty held by
a municipality in its proprietary capacity, as distinguished from its governmental
capacity, is subject to levy and sale after judgment.” Id. at 442. Assuming arguendo
that this holding may continue to apply even after the judicial abrogation of sovereign
immunity in Haverlack, supra, we do not believe the holding supports Appellants'
position in this appeal. See, e.g., Jaegers v. City of Cleveland, 8th Dist. No. 45463,
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1983 WL 5815 (Mar. 3, 1983). Appellants' reliance on State ex rel. First Nat'l Bank is
misplaced for the simple reason that BWD, as a water district, is engaged in a
proprietary activity. Hence, its property is subject to execution, levy, attachment and
garnishment. We have previously held that: “The operation of a water works and
distribution system is generally admitted to be performed in a proprietary capacity in
this state. City of Barberton v. Miksch, 128 Ohio St. 169, 190 N.E. 387; Mahoning
County Commissioners v. City of Youngstown, 49 Ohio Law Abs. 186, 75 N.E.2d
724. In other states where this rule exists levy may be made on waterworks property.
City of Hazard v. Duff, 287 Ky., 427, 154 S.W.2d 28; see Fred Berlonti & Son, Inc. v.
Borough of Manheim Authority, 93 F.Supp. 437.” State ex rel. Baldine, supra, 1 Ohio
App.2d at 119, 204 N.E.2d 91.
{¶52} Other cases more recent than our 1964 Baldine opinion continue to
affirm the principle that the operation of a water system is a proprietary function. “It is
clear that the city of Cleveland, in the operation of its Water Department, acts in a
proprietary capacity.” Ranells v. City of Cleveland, 41 Ohio St.2d 1, 4, 321 N.E.2d
885 (1975), fn.1. See, also, November Properties, Inc. v. City of Mayfield Heights,
8th Dist. No. 39626, 1979 WL 210535 (Dec. 6, 1979); Seiler v. Norwalk, 192 Ohio
App.3d 331, 2011-Ohio-548, 949 N.E.2d 63; Franklin v. Columbus, 130 Ohio App.3d
53, 719 N.E.2d 592 (10th Dist.1998). In view of the fact that the Ohio Supreme
Court, as well as various appellate courts (including this Court), treat the operation of
water works as a proprietary function, we find no merit in Appellants’ argument that
BWD is engaged in a governmental function and its assets may not be garnished.
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{¶53} Appellants further argue that the activities of a water district are
statutorily defined as governmental, and for that reason, we should not rely on
previous caselaw defining the operation of a water department as a proprietary
function. Appellants cite R.C. 6119.40, which states:
6119.40 Exemption from Taxes.
The exercise of the powers granted by Chapter 6119. of the
Revised Code, will in all respects be for the benefit of the people and
for the increase of their prosperity and the improvement of their health
and living conditions. The operation and maintenance of public works
by the board of trustees of a regional water and sewer district constitute
the performance of essential governmental functions. Such district
shall not be required to pay any taxes or assessments upon any real or
personal property acquired, owned, used, or controlled by it under
Chapter 6119. of the Revised Code, or upon the income or gross
receipts therefrom, and the bonds and notes issued under such
sections and the transfer of income therefrom, including any profit made
on the sale thereof, shall at all times be free from taxation within the
state.
{¶54} It is apparent from the wording, context, and even the title of the statute,
that the object of R.C. 6119.40 is to exempt a water district from certain types of
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taxation, and that for purposes of taxation, a water district performs “essential
governmental functions”. The phrase “performance of essential governmental
functions” occurs 14 times in the Ohio Revised Code, and each time it refers to
exemption from taxation. R.C. 122.34; 122.61; 122.79; 351.12; 1555.16; 3706.15;
3737.948; 5531.17; 5537.20; 5540.14; 5593.22; 6119.40; 6121.16; 6123.16. In no
instance is this phrase used in reference to political subdivision immunity or in the
context of levy, execution, garnishment, attachment, or any other remedy for the
collection of a judgment or debt. Further, the Ohio Supreme Court has held that
property may be treated as public or governmental property for purposes of
exemption from taxation, but may be treated as property in service of a proprietary
function for purposes of governmental immunity. City of Columbus v. Delaware
County, 164 Ohio St. 605, 132 N.E.2d 747 (1956). We find no reason to interpret
R.C. 6119.40 in any fashion other than a tax exemption statute that has no bearing
on the issues in this case.
{¶55} Appellants' insistence that R.C. Chapter 6119 prohibits garnishment of
the assets of a water district is unwarranted as that chapter is silent as to
garnishment. Appellants raise other arguments arising out of R.C. 6119.12 and
6119.15 that relate to the issuance of water resource bonds and notes, and these
arguments will be treated under the remaining assignments of error.
{¶56} Finally, we are aware of the line of cases that hold that political
subdivisions are not subject to be named as garnishees in a garnishment action. We
agree with the principle, but it does not affect the outcome of this appeal. For
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example, in Doss v. Thomas, 183 Ohio App.3d 795, 2009-Ohio-2275, 919 N.E.2d
219 (10th Dist.), the trial court presided over a contempt action against the Franklin
County Jobs and Family Services (“FCJFS”) arising from FCJFS failing to comply
with a garnishment order. The judgment creditor sought to garnish funds held by
FCJFS that were owed to the judgment debtor, a daycare center. Thus, FCJFS was
listed as the garnishee. FCJFS failed to file an “answer of garnishee” or remit the
funds in their possession, leading to the contempt action. The Tenth District Court of
Appeals held: “Without express statutory authorization for counties and their
agencies to be summoned as a garnishee in a nonwage garnishment action under
R.C. Chapter 2716, plaintiff could not maintain the garnishment proceedings against
FCJFS. The trial court as a result had no valid basis to summon FCJFS as a
garnishee in the proceedings.” Id. at ¶18.
{¶57} The garnishee in this appeal is a CFBank, which is a private financial
institution and not a political subdivision. Nothing in Doss or the cases cited within
Doss prohibits the garnishment of a judgment debtor’s deposits in a bank account
even if the judgment debtor happens to be a political subdivision.
{¶58} None of Appellants’ arguments relating to the governmental immunity of
BWD have merit and they are overruled.
BWD’S ASSIGNMENT OF ERROR NO. 2
THE TRIAL COURT ERRED IN HOLDING THAT FUNDS
WHICH DEFENDANT-APPELLANT HAS PLEDGED TO THE UNITED
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STATES DEPARTMENT OF AGRICULTURE TO SECURE WATER
RESOURCE REVENUE BONDS ARE SUBJECT TO GARNISHMENT.
{¶59} This assignment of error raises issues related to BWD’s issuance of
bonds to the USDA in 2002 and 2008. We note at the outset that the only funds
being discussed under this assignment of error are funds related to the repayment of
debt owed by BWD to the USDA. The OPWC has filed its own assignment of error
with respect to its loan agreements with BWD.
{¶60} BWD argues that the funds in the garnished bank accounts are derived
from revenues that have been pledged to the USDA to secure two series of water
resource revenue bonds. The first series of bonds, issued in 2002, totaled
$1,498,000. The 2008 bond series totaled $13,800,000. BWD is scheduled to make
annual payments on the 2002 bonds until 2042, and will be paying on the 2008
bonds until 2048. BWD contends that USDA owns a security interest in the revenues
in the form of a revenue lien. BWD claims that BWD and the USDA perfected liens
on all of BWD’s revenues in 2002 and 2008. BWD argues that these perfected liens
are superior to any claim arising from East Liverpool's water contract, from the
judgment lien filed on February 15, 2008, or from the garnishment order served on
CFBank issued on January 10, 2011. A few preliminary comments are required,
here.
{¶61} First, although this assignment of error deals primarily with issues
relating to secured transactions, the Uniform Commercial Code (“UCC”) provisions
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dealing with secured transactions (R.C. Chapter 1309) do not govern this case. R.C.
1309.109(D)(14) states that R.C. Chapter 1309 does not apply to governments,
states, or governmental units. Thus, common law principles will be applied to the
secured transaction issues in this appeal rather than UCC provisions. We are
mindful, though, of caselaw applying UCC Section 9-322 (equivalent to R.C.
1309.322) that substantially agrees with our conclusion below that a judgment
creditor who satisfies its judgment by garnishing a bank deposit account takes the
funds in the account free of any prior security interest in the funds. Orix Fin. Serv.,
Inc. v. Kovacs, 167 Cal.App.4th 242, 83 Cal.Rptr.3d 900 (2008).
{¶62} Second, there is no indication from the record that any entity other than
BWD has control over the bank accounts at CFBank. Thus, no argument is being
raised that the USDA or OPWC has a security interest or any other defense from
garnishment arising from direct control over the accounts that were garnished.
Priority of the lien created by R.C. 6119.12
{¶63} The first argument made by BWD is that R.C. 6119.12 establishes a
statutory “super-priority” lien of revenues pledged to pay water resource revenue
bonds, such as the bonds issued to the USDA in 2002 and 2008. BWD contends
that East Liverpool cannot garnish any funds in the CFBank accounts due to the
super priority lien held by the USDA. East Liverpool agrees that R.C. 6119.12 allows
for revenue bonds to be issued that create a lien on the revenues of a water district
to pay such bonds. East Liverpool contends, though, that the terms of the lien
(including the type of revenue pledged and any exceptions to the lien) are defined by
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the wording of the pledge itself. East Liverpool argues that the 2002 and 2008
pledge agreements for the USDA bonds allow for its judgment against BWD to be
paid out of BWD’s revenues. The first matter is to decide whether there is a lien on
BWD's revenues, and the priority of that lien.
{¶64} The parties agree that, under certain circumstances, property that is
pledged to another may have a superior claim to a judgment creditor who attaches
the same property in garnishment. “As a general rule, rights of a pledgee are
superior to the rights of an attaching creditor under a subsequent attachment.” 24
Ohio Jurisprudence 3d, Creditors' Rights and Remedies, Section 477 (2012). This is
not a bright line rule, and the rights of the pledgee are affected by the terms of the
pledge and whether the pledge is absolute or conditional. Id.{¶65} In this case, the right of BWD to pledge its revenues as collateral for
revenue bonds arises from R.C. 6119.12, which states in pertinent part:
A regional water and sewer district may, from time to time, issue
water resource revenue bonds and notes of the district in such principal
amount as, in the opinion of the board of trustees of the district, are
necessary for the purpose of paying any part of the cost of one or more
water resource projects or parts thereof. * * * Except as may otherwise
be expressly provided by the district, every issue of its water resource
revenue bonds or notes shall be obligations of the district payable out of
the revenues of the district, which are pledged for such payment,
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without preference or priority of the first bonds issued, subject only to
any agreements with the holders of particular bonds or notes pledging
any particular revenues * * *. Such pledge shall be valid and binding
from the time the pledge is made, the revenues so pledged and
thereafter received by the district shall immediately be subject to the
lien of such pledge without any physical delivery thereof or further act,
and the lien of any such pledge is valid and binding as against all
parties having claims of any kind in tort, contract, or otherwise against
the district, irrespective of whether such parties have notice thereof,
except as provided in section 319.61 of the Revised Code with respect
to special assessments.
{¶66} The USDA bonds issued in 2002 and 2008 were intended to be “water
resource revenue bonds” as defined in R.C. 6119.12. We have found no prior
caselaw directly interpreting R.C. 6119.12. “When the language of a statute is plain
and unambiguous and conveys a clear and definite meaning, there is no need for this
court to apply the rules of statutory interpretation.” Symmes Twp. Bd. of Trustees v.
Smyth, 87 Ohio St.3d 549, 553, 721 N.E.2d 1057 (2000). Our reading of the plain
meaning of the statue indicates that: (1) a water district’s revenues may be pledged
to pay water resource revenue bonds; (2) a lien arises from the pledging of revenues
to pay the bonds; (3) the pledge agreement is subject to the requirements and
limitations imposed by R.C. Chapter 6119; (4) the specific parameters of the lien, as
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well as the type of revenue subject to the lien (such as gross revenue or net
revenue), are determined by the wording of the particular pledge agreement; (5) the
lien arises and is perfected on the date the pledge is made; and (6) the lien only
affects revenues received after the date of the pledge.
{¶67} We also hold that R.C. 6119.12 does not discuss or create any type of
super-priority lien. A classic example of a super-priority lien is a Medicare lien, which
is automatic, all-encompassing, and superior to practically all other interests. See,
e.g. Pallay v. Nationwide Ins. Co., 165 Ohio App.3d 242, 2005-Ohio-5932, 846
N.E.2d 58, ¶46 (7th Dist.) (“federal law gives Medicare very powerful subrogation
rights, often referred to as a Medicare lien * * * this right of subrogation is superior to
any other right, interest, judgment, or claim”.) The lien that arises from R.C. 6119.12
does not resemble a Medicare lien. The lien arising from R.C. 6119.12 is not self-
executing, but rather, is created by a pledge agreement. The terms of the lien are
defined by the pledge agreement, and are therefore also limited by the pledge
agreement. The lien arises at a specific point in time, that is, “from the time the
pledge is made”. R.C. 6119.12. Under the common law, the general rule of priority
of liens is “first in time, first in right.” Elstner v. Fife, 32 Ohio St. 358, 373 (1877);
Nelson Sand & Gravel, Inc., supra, 91 Ohio App.3d at 655, 633 N.E.2d 557; Wells
Fargo Bank v. Schwartz, 8th Dist. No. 96641, 2012-Ohio-917, ¶9. There is nothing in
R.C. 6119.12 that conflicts with the rule of “first in time, first in right.” The lien
permitted by R.C. 6119.12 is similar to most other liens created by contract, and it is
the terms of the lien agreement or pledge that defines the rights of the secured party.
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{¶68} R.C. 6119.12 also defines when the revenue lien is perfected: “Such
pledge shall be valid and binding from the time the pledge is made, the revenues so
pledged and thereafter received by the district shall immediately be subject to the lien
of such pledge * * *.” A lien arising under R.C. 6119.12 has certain advantages over
liens that need a further act to be performed prior to perfection of the security
interest. A R.C. 6119.12 lien is perfected immediately on the date of the pledge
without any other action being taken: “the revenues so pledged and thereafter
received by the district shall immediately be subject to the lien of such pledge without
any physical delivery thereof or further act, and the lien of any such pledge is valid
and binding as against all parties having claims of any kind in tort, contract, or
otherwise against the district, irrespective of whether such parties have notice thereof
* * *.”
{¶69} The date of the 2002 BWD bond resolution authorizing the bonds was
May 6, 2002, and the bonds themselves were issued on May 9, 2002. The date of
2008 BWD resolution is October 13, 2008, which is the same date the bonds were
issued. These are the relevant dates for determining USDA's perfected lien on
BWD's revenues.
{¶70} Assuming for the moment that the CFBank accounts contain BWD's
"revenues" as contemplated by R.C. 6119.12, we must now determine when East
Liverpool's rights in those revenues was perfected. Although East Liverpool obtained
its judgment on February 13, 2008, and filed its judgment lien on February 15, 2008,
these dates do not define when East Liverpool perfected its interest in the garnished
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accounts. “[A] judgment lien does not attach to personal property and so is not
perfected until the property is seized in execution.” Nelson Sand & Gravel, Inc.,
supra, 91 Ohio App.3d at 654-655. The garnishment order attaches to all property
that comes into the hands of the garnishee from the date of service of the
garnishment order. McKinney, Inc. v. Wyman Corp., 102 Ohio App.3d 648, 652, 657
N.E.2d 812 (8th Dist.1995); R.C. 2716.13(B). Service of the order perfects an
execution lien in favor of the judgment creditor on the garnished property. Marinik,
supra, 103 Ohio Misc.2d at 23. We must look to the record to discover when the
garnishment order was served.
{¶71} Service of a garnishment order on the garnishee is obtained in the
same way as a summons is served. R.C. 2716.13(B). Service was made on
CFBank by certified mail on January 10, 2011. Therefore, attachment was complete
on January 10, 2011. This date is well after the 2002 and 2008 dates that the USDA
revenue liens were perfected. Based on the “first in time, first in right” rule, the
revenue liens associated with the 2002 and 2008 USDA bond pledges have priority
over the lien imposed on the CFBank accounts arising from the East Liverpool
garnishment action in January 2011.
{¶72} Although we have established that the USDA has a higher priority lien
than East Liverpool on BWD's revenues, this conclusion does not end the discussion
as to whether East Liverpool may garnish the CFBank accounts. First, we must
decide whether the Ohio Constitution permitted BWD to pledge its revenues in the
manner argued by BWD in this appeal. The Ohio Constitution sets limits on what a
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political subdivision may do with its revenues regardless of how those revenues are
pledged. Second, we must consider the terms and conditions of the pledge
agreements and related documents. Some of BWD's revenues were reserved to pay
litigation expenses and were excluded from the lien altogether. Some of those terms
allow for the East Liverpool judgment to be paid as an operational expense prior to
any debt service on the USDA bonds. Finally, we need to address whether any of
the funds in the CFBank accounts can properly be traced as revenues that are
subject to a revenue lien.
The scope of the revenue pledges and the “ ‘special fund’ exemption”
{¶73} Having determined that, at least in some respects, the USDA does
have a higher priority lien on some aspect of BWD's revenues related to the issuance
of the 2002 and 2008 bonds, we must now attempt to isolate which revenues, if any,
are subject to the lien. BWD has argued that all of its revenues are pledged to pay
the USDA bonds, regardless of the source of the revenue. BWD insists that it did not
need to trace or isolate the source of the funds in the CFBank accounts because all
of the funds in those accounts consist of BWD’s current revenues, and thus, all of the
money in the accounts is protected by virtue of the superior lien of the USDA. The
trial court correctly recognized that BWD’s argument cannot be judicially enforced as
a defense to the garnishment action because it essentially asks the court to violate
Section 11, Article XII of the Ohio Constitution, which states:
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No bonded indebtedness of the state, or any political
subdivisions thereof, shall be incurred or renewed unless, in the
legislation under which such indebtedness is incurred or renewed,
provision is made for levying and collecting annually by taxation an
amount sufficient to pay the interest on said bonds, and to provide a
sinking fund for their final redemption at maturity.
{¶74} Section 11, Article XII of the Ohio Constitution prohibits a political
subdivision (and we have already agreed that BWD is a political subdivision) from
taking on indebtedness unless there is an annual levy and collection of taxes to pay
the interest on the indebtedness. State ex rel. City of Columbus v. Ketterer, 127 Ohio
St. 483, 493, 189 N.E. 252 (1934). In essence, the constitution prevents current
governing officials from determining future appropriations which should be left to the
wisdom of the future officials. Aldom v. City of Salem, 7th Dist. No. 83-C-36, WL
7710, *1 (May 21, 1984).
{¶75} Section 11, Article XII of the Ohio Constitution is not violated when a
political subdivision creates an indebtedness to be paid for wholly out of the income
from the property that is being acquired, created, or funded by the debt. State ex rel.
Kitchen v. Christman, 31 Ohio St.2d 64, 70, 285 N.E.2d 362 (1972), citing State ex
rel. Pub. Institutional Bldg. Auth. v. Griffith, 135 Ohio St. 604, 612, 22 N.E.2d 200(1939). This is known as the “ ‘special fund’ exemption.” Id.; see also, Kasch v.
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Miller, 104 Ohio St. 281, 135 N.E. 813 (1922); State ex rel. Allen v. Ferguson, 155
Ohio St. 26, 97 N.E.2d 660 (1951). The “ ‘special fund’ exemption” applies:
Where the entire improvement is to be paid for by the issue and
sale of bonds in the name of the state, and the principal and interest are
to be paid entirely out of the revenues derived from the improvement or
from the sale of the corpus in case of default, a state debt is not thereby
incurred within the purview of the state constitution; nor do the bonds so
issued become an obligation or pledge the credit of the state under the
express provisions of Section 412-2, General Code. Kasch, supra, 104
Ohio St. 281, 135 N.E. 813 (1922), at paragraph one of the syllabus.
{¶76} The Ohio Supreme Court has held that “a debt is not incurred by a
political subdivision where it merely incurs an obligation to apply revenue, to be
received from property being acquired by it, to payment of the cost of the property
being acquired.” State ex rel. Gordon v. Rhodes, 158 Ohio St. 129, 135, 107 N.E.2d
206 (1952). Conversely, bonds paid for by revenues generated from the political
subdivision's assets, “old as well as new, constitute a debt” and must conform to the
debt provisions of the Ohio Constitution. Griffith, supra, 135 Ohio St. at 616, 22
N.E.2d 200.
{¶77} In other words, if a political subdivision commits its general revenue
fund, including past as well as future revenues, to the payment of a bond issue, this
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would not fall under the “ ‘special fund’ exemption” and would constitute a general
debt, requiring the prior allocation of taxes to pay the debt. State ex rel. Ohio Funds
Mgt. Bd. v. Walker, 55 Ohio St.3d 1, 561 N.E.2d 927 (1990). Without the prior
allocation of taxes to cover the debt, the debt becomes unconstitutional and
unenforceable. Id.{¶78} R.C. 6119.12 requires that “the revenues so pledged and thereafter
received” are to be used to pay for bonds issued by a water and sewer district.
(Emphasis added.) This requirement of using future revenues to secure revenue
bonds is consistent with constitutional provisions described earlier. R.C. 6119.15
clarifies that the bonds issued under R.C. 6119.12 are meant to fall under the
” ‘special fund’ exemption” and are not the type of indebtedness described in Section
11, Article XII of the Ohio Constitution. R.C. 6119.15 states:
Water resource revenue bonds and notes and water resource
revenue refunding bonds issued pursuant to Chapter 6119. of the
Revised Code, do not constitute a debt, or a pledge of the faith and
credit, of the state or of any political subdivision thereof, and the holders
or owners thereof have no right to have taxes levied by the general
assembly or taxing authority of any political subdivision of the state for
the payment of the principal thereof or interest thereon, but such bonds
and notes are payable solely from the revenues and funds pledged for
their payment as authorized by such chapter, unless the notes are
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issued in anticipation of the issuance of bonds or the bonds are
refunded by refunding bonds issued under Chapter 6119. of the
Revised Code, which bonds or refunding bonds shall be payable solely
from revenues and funds pledged for their payment as authorized by
such chapter. All such bonds and notes shall contain on the face
thereof a statement to the effect that the bonds or notes, as to both
principal and interest, are not debts of the state or any political
subdivision thereof, but are payable solely from revenues and funds
pledged for their payment.
All expenses incurred in carrying out Chapter 6119. of the
Revised Code are payable solely from under such sections. Such
sections do not authorize regional water and sewer districts to incur
indebtedness or liability on behalf of or payable by the state or any
other subdivision thereof.
{¶79} If we accept BWD’s premise that all of its revenues, regardless of the
source or the timing of those revenues, are committed to pay the 2002 and 2008
USDA revenue bonds, we would need to conclude that the bonds do not fall under
the “ ‘special fund’ exemption” and therefore violate the Ohio Constitution. BWD
acknowledges that at least part of the funds in the CFBank accounts that it claims are
“reserved funds,” exempt from garnishment, are prior accumulated revenues that
were then pledged to pay the debt service for the 2008 USDA bonds. Further, the
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language of the 2008 revenue pledge also includes the pledge of “Government Grant
and other grant funds,” along with the pledge of future revenues. (9/6/11 Tr., Pltf.
Exh. C, p. 3.) This certainly appears to be a pledge of past revenues (including
revenues derived from sources unrelated to improvements funded by the USDA
bonds). If there are past revenues committed to pay the 2008 bonds, the bonds
would not fall under the “ ‘special fund’ exemption,” and we could not enforce the
bonds or the liens supporting the bonds. The very nature of BWD's argument
precludes us, on constitutional grounds, from granting relief.
{¶80} BWD argues that we should apply the “first in, first out” (FIFO) principle
to the CFBank accounts as a means to satisfy the “ ‘special fund’ exemption.” FIFO
is an accounting principle that relates primarily to valuing inventories, and contrasts
with other accounting methods such as “last in, first out.” Howard Paper Mills, Inc. v.
Lindley, 2d Dist. No. CA 6522, 1980 WL 352536. The basic principle in FIFO is that,
when funds are commingled in an account, the first items deposited are treated as
the first items withdrawn from the account. BWD contends that under FIFO
accounting, all of its revenues prior to 2002 would be treated as being the first items
withdrawn from its accounts. BWD claims that it had a cash balance of $1,553,229
prior to the issuance of the 2002 bonds. BWD contends that this balance has long
been spent, and that any money currently in its accounts consists of revenues
subsequent to the 2002 bonds, and for this reason, the accounts would not violate
the “ ‘special fund’ exemption.”
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{¶81} This argument was not presented to the trial court and is waived for
purposes of this appeal. Even if it were not waived, there is no evidence of any
deposits or expenditures from the various CFBank accounts, and therefore, we have
no evidence from which to perform a FIFO analysis. In addition, a FIFO analysis
does not solve the basic constitutional problem stemming from BWD's decision to
commit all of its revenues from whatever source to each individual bond issue,
instead of segregating revenue streams based on the projects being funded by each
bond. It is somewhat ironic that BWD wishes to be treated as a political subdivision
for some aspects of this appeal, e.g., to obtain governmental immunity, but does not
consider itself bound by the constitutional limits placed on political subdivisions with
respect to revenue bonds and raising taxes to pay for debts.
{¶82} BWD contends that East Liverpool’s argument regarding the “ ‘special
fund’ exemption” is impugning the constitutionality of R.C. 6119.12, and that the Ohio
Attorney General should have been served with a copy of the complaint in order to
defend the statute. BWD submits that we may not rule on the constitutionality of R.C.
6119.12 due to this procedural error, citing State ex rel. Republic Servs. of Ohio v.
Pike Twp. Bd. of Trustees, 5th Dist. Nos. 2006 CA 00153, 2006 CA 00172, 2007-
Ohio-2086. This argument is meritless. First, East Liverpool’s position is that BWD
has relied on an unconstitutional argument as part of its defense to garnishment, not
an unconstitutional statute. East Liverpool is attempting to enforce, not invalidate,
R.C. 6119.12. Second, the requirement to notify the Attorney General is specific to
declaratory judgment actions under R.C. 2721.12 and does not limit a court from
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otherwise reviewing the constitutionality of a statute. Cleveland Bar Assn. v. Picklo,
96 Ohio St.3d 195, 2002-Ohio-3995, 772 N.E.2d 1187. The instant appeal does not
arise from a declaratory judgment action.
{¶83} BWD has failed to convince us that it was permitted to commit all of its
revenues to secure the USDA bonds without violating the “ ‘special fund’ exemption”
and the Ohio Constitution. Therefore, we hold that a general lien on all of BWD's
revenues in favor of the USDA is unenforceable and is not a reason to exempt funds
from being garnished from the CFBank accounts.
The Litigation Reserve
{¶84} Having concluded that BWD cannot claim that all of its revenues are
exempt from garnishment under a general revenue lien without violating the Ohio
Constitution, we may now focus on individual aspects of the CFBank accounts that
may or may not be exempt. BWD describes a variety of “funds” or accounts within its
accounting system that it believes may be exempt. One of those funds is a litigation
reserve fund set up as part of the 2008 USDA bond issuance. The USDA specifically
requested this fund to be set up due to the litigation between East Liverpool and
BWD that was pending on appeal when the 2008 bonds were issued. The litigation
reserve was originally set at $1,209,686, but the record indicates that it had been
reduced to $1,144,686.20 when garnishment was ordered. The litigation reserve
served as “a reserve against pending litigation and it is anticipated that the Additional
Reserve Amount will be released from the Reserve Fund upon the conclusion of such
litigation and it does not regard the Additional Reserve Amount as an additional
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source for the payment of Debt Service on the Obligations.” (9/6/11 Tr., Pltf. Exh. D,
Certificate of Purchaser.)
{¶85} Since this fund was specifically reserved with the instant litigation in
mind, we find no reason for it to be excluded from garnishment. A final judgment has
been issued in the contract dispute between East Liverpool and BWD. At the time
that garnishment proceedings had begun, no further appeals were available in the
underlying contract case. When the case became final, the litigation reserve funds
we released back to BWD and are no longer subject to the USDA revenue lien.
USDA revenue lien excludes operational expenses
{¶86} The remaining “funds” that BWD claims are exempt from garnishment
are a USDA Debt Service Reserve Fund ($750,064), and two USDA Payment
Reserve Funds ($70,644.70 and $56,931.00). These “funds” are not bank accounts,
but rather, items listed in BWD's accounting system. Assuming arguendo that these
“funds” can be identified in the CFBank accounts, we agree with the trial court that
they are not protected due to the provisions in the lien pledges relating to the
payment of operating expenses. The record establishes that the USDA lien pledges
are net revenue pledges rather than gross revenue pledges and that BWD’s
reasonable operating expenses are required to be deducted from revenues prior to
calculating the lien. If the East Liverpool water contract judgment is a reasonable
operating expense, then it would take priority over the lien on net revenues pledged
to the USDA.
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{¶87} Revenue bonds typically are protected by liens on either gross
revenues or net revenues:
Traditionally, revenue bonds are secured by a first lien on net
revenues. This means that debt service is paid out of the net revenues,
the funds that remain after the normal operating costs have been paid.
A gross lien bond, on the other hand, is one where debt service is paid
directly from the gross revenues before the payment of operating
expenses. * * * First-lien bonds are also called senior-lien bonds. * * *
Revenue bonds can also be backed by a GO [general obligation]
pledge of the issuer. This means that the issuer does not dedicate
specific revenue to the repayment of the bonds but, rather, pledges its
general credit * * *.” (Emphasis sic.) Temel, The Fundamentals of
Municipal Bonds pp. 181-182 (5th Ed.2001).
{¶88} Both the 2002 and the 2008 bonds and their corresponding pledges
provide that the revenues being pledged are future net revenues after taking
operating costs into consideration. The 2002 bonds were authorized by BWD
Resolution 27-2002 passed on May 6, 2002. This resolution granted the USDA “a
first lien on the Revenues and the moneys and investments in the Revenue Fund, the
Bond Payment Fund, the Reserve Fund and the Surplus Fund upon the terms set
forth herein.” (9/6/11 Tr., Pltf. Exh. B, Section 10(f), p. 7.) The resolution, though,
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created a priority of payments from the Revenue Fund. The first priority payment
was for “all reasonable and proper expenses of operating and maintaining the
System”. (9/6/11 Tr., Pltf. Exh. B, Section 7(i), p. 5.) The second priority for
revenues was to establish a bond payment fund from which the interest and principal
on the bonds would be paid. The third priority was the creation of a reserve fund to
be used for system repairs and to pay interest and principal on the bond payment in
case that specific fund was insufficient. Any remaining revenues were then
designated as surplus and could be used for any purpose.
{¶89} The 2008 USDA bonds were protected by similar pledges. The 2008
USDA bonds were authorized by BWD Resolution 22-2208 passed on October 13,
2008. This resolution also pledged to pay the bond indebtedness using the revenues
deposited in the Revenue Fund. Section 7 of Resolution 22-2208 stated that: “So
long as any of the Series 2008 Bonds are outstanding, the Issuer shall continue to
deposit the Revenues and make payments therefrom as required by the Original
Resolution, and particularly Section 7 thereof”. (9/6/11 Tr., Pltf. Exh. C, Section 7, p.
9.) Based on the earlier 2002 resolution, the first priority of payments from revenues
was for the operation and maintenance of the system.
{¶90} The 2008 bonds themselves contained corresponding net revenue
provisions. For example, “Water Resource Revenue Bond, Series 2002, Series A”
states: “This Series 2002 Bond and the issue of which it is one * * * are payable
solely from the revenues derived from water rates and charges (the “Revenues”) to
be charged to and collected from all persons whose premises are served by a
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connection to the water supply, distribution and treatment system of the Issuer (the
“System”) * * * after provision only for the payment of all reasonable and proper
expenses of operating and maintaining the System.” Each series of the bonds
contains a substantially similar provision.
{¶91} BWD’s bond counsel, Mr. Schwallie, testified that operational expenses
are paid out first from revenues:
Q. So it was contemplated that payment of costs of operating
and maintaining the System would not be part of the pledged revenues;
correct?
A. No, that’s not correct. They are part of the revenues.
Q. But the intent was that they be used to pay for operation
of the Systems; correct?
A. They are in the flow funds as the first use of the revenues.
Q. Right. So by agreement, you understood and agreed that
those funds could be used for operation expense; correct?
A. Correct.
***
Q. So are you aware whether there are any limits or review
placed on the district as to how they may pay operating costs?
A. No.
***
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Q. Do you have any knowledge of the U.S.D.A. reviewing the
District’s determinations as to what are appropriate operational
expenses?
A. Not to my knowledge. (9/6/11 Tr., pp. 29-31.)
{¶92} Mr. Schwallie also testified that BWD could make the periodic payments
required by the East Liverpool water supply contract without conflicting with any of
the terms of the USDA revenue lien. (9/6/11 Tr., pp. 37-38.)
{¶93} The trial court concluded that the East Liverpool judgment lien qualified
as an operating cost for BWD that should be paid prior to payment of debt service on
the bonds. We agree. The testimony by Mr. Schwallie, cited earlier, confirms that no
restrictions were placed on the definition of “operating costs” or “operating expenses”
in the bond pledges or in actual practice by BWD. The phrase “operating expenses”
has been defined as: “Those expenses required to keep the business running, e.g.,
rent, electricity, heat. Expenses incurred in the course of ordinary activities of an
entity.” Black’s Law Dictionary 1091 (6th Ed.1990). The East Liverpool water
contract can be described as an agreement for the wholesale purchase of water by a
water district for resale to its customers. It is difficult to think of any more basic and
necessary expense for a water district than the purchase of water for resale. Such
expenses take precedence over revenue liens: “Some contract obligations have
priority over even first-lien bonds; for example, a power supply contract for a public
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utility is usually treated as an operating expense and paid before debt service on the
contracted bond.” Temel, The Fundamentals of Municipal Bonds 182 (5th Ed.2001).
{¶94} We are further persuaded that the East Liverpool water contract
judgment is a legitimate operating expense based on the USDA's clear knowledge of
the contract prior to the 2002 bond agreement, and its knowledge of the contract
dispute prior to the 2008 bond agreement. The record contains a “CERTIFICATE AS
TO PROPERTY, PLEDGE OF REVENUES AND OPERATIONS,” dated April 29,
2002, describing BWD's prior commitments that would affect the 2002 bond issue.
(3/24/11 Tr., Def. Exh. B.) Item five of this document states:
5. (a) The continued operation of the Utility is not dependent
upon any long-term supply or service contracts, and (b) such operation
is further not dependent upon any substantial easements or other rights
in land owned by other utilities, railroads or public bodies, except as
disclosed to the United States of America, as the original purchaser of
the Bonds, except for a long-term water purchase contract with the City
of East Liverpool, Ohio. (Emphasis added.)
{¶95} This document reveals that the USDA was aware of and accepted the
consequences of the East Liverpool water contract when it purchased the 2002
bonds. One of those consequences was that the water contract would be paid first
as an operating expense prior to any right USDA would have in BWD's revenues.
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{¶96} Equally significant is the fact that the USDA required a litigation reserve
fund to be set up as a condition for purchasing the 2008 bonds. The litigation
reserve was created as a direct consequence of the East Liverpool breach of contract
case that was pending on appeal when the 2008 bonds were issued. Mr. Schwallie
testified that he and the USDA were aware of the litigation between East Liverpool
and BWD when he prepared the 2008 bond documents. (9/6/11 Tr., pp. 46-47.) In
fact, the USDA specifically requested that the litigation reserve fund be included in
the bond resolution. (9/6/11 Tr., p. 47.) Once again, the USDA entered into the bond
agreement with full knowledge that the East Liverpool water contract would likely
have an effect on BWD's revenues and on USDA's rights over that revenue. We are
not inclined to exclude the East Liverpool water contract from the definition of
operating expenses in this particular case when the USDA knew about and accepted
the East Liverpool water contract as a prior obligation of BWD in both 2002 and
2008.
Failure to trace, segregate or identify the funds in the CFBank Accounts
{¶97} There is no dispute that the burden of establishing defenses to the
garnishment action rested on BWD. “The judgment debtor bears the burden of
proving that the funds in question are exempt.” Fifth Third Bank of Columbus, Inc. v.
Bowman, 10th Dist. No. 89AP-515, 1990 WL 12379, *2 (Feb. 13, 1990); see also,
Ashtabula Cty. Med. Ctr., supra, 11th Dist. No. 1331, 1988 WL 59836, *2.
{¶98} BWD, despite having the burden of establishing its defenses to
garnishment, took the position at trial that it did not need to trace or identify the
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source of the funds in any of the CFBank accounts. (3/24/11 Tr., pp. 26-27, 92-93.)
Many of BWD’s arguments on appeal, though, depend on a factual conclusion that
the accounts being garnished contain revenues that were pledged at specific times
for specific purposes, and due to those pledges, a prior and superior lien has
attached to those revenues in favor of the USDA. Since BWD did not choose to trace
any funds in the accounts at CFBank, questions that depend upon the tracing of
funds to a specific source necessarily will be ruled on in favor of East Liverpool.
{¶99} The failure to trace BWD's revenues is particularly relevant to the
constitutional question discussed earlier dealing with whether the USDA loans
conform to the “ ‘special fund’ exemption.” Under this exemption, the only revenues
that may be committed to pay for a revenue bond are revenues generated by the
bond investment itself. In our review of the record, we find no identification of prior
revenues, current revenues, or revenues associated with any specific aspect of the
BWD system. We find no identification of revenues associated with any particular
loan or bond issuance. Mr. DeAngelis, BWD’s District Manager, testified that all of
BWD's revenues are deposited in the General Enterprise account at CFBank, and
bills, debt service, and debt reserve are then paid from the general account. (3/24/11
Tr., p. 111.) Mr. D'Angelo, BWD's fiscal officer, confirmed that BWD does not
segregate revenues based on how or when the revenues are created. (9/6/11 Tr.,
pp. 93-94.) It certainly appears that BWD has committed all of its revenues, from
whatever source or time period, to the USDA bonds, in violation of Section 11, Article
XII of the Ohio Constitution. Our task in this appeal, though, is not to invalidate those
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bonds, but only to determine whether the funds in the CFBank accounts are able to
be garnished. Any enforcement of the type of general revenue lien described by
BWD would result in the enforcement of a debt in violation of the Ohio Constitution.
Since we cannot enforce the lien, at least as the lien has been defined by BWD, we
cannot use the lien as a reason to prevent East Liverpool from garnishing the
accounts.
{¶100} Because the Ohio Constitution does not allow a political subdivision to
commit all of its revenues to secure a revenue bond, BWD was required to show that
some specific and isolated stream of revenue was committed to pay the USDA
bonds. Some of the types of revenue that are crucial to BWD's arguments on appeal
and that have not been traced are: funds earmarked for specific construction
projects; funds arising from revenues generated by specific construction projects;
funds remaining after deducting operational and maintenance costs (i.e., net revenue
funds); revenues generated after the date that pledge agreements were entered into;
and funds left over from prior loans or grants. BWD has not even clearly identified
which CFBank accounts contain funds set aside only for debt service or debt reserve,
much less the source of those funds. Thus, even if BWD prevailed on the legal
issues being raised under any of its assignments of error, we are faced with the
practical problem that we could not identify the revenues that may be subject to a
revenue lien. Therefore, we must conclude that all the funds in the CFBank accounts
are subject to garnishment because they have not been traced to an exempt source.
This constitutes an independent reason to affirm the trial court’s judgment.
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USDA has no lien rights that can be enforced in garnishment
{¶101} Based on the preceding analysis, we conclude that USDA revenue liens
do not prevent East Liverpool from garnishing CFBank accounts. BWD's general
argument that all of its revenues, regardless of the source of the revenues, is
protected by the revenue lien, is rejected as it conflicts with Section 11, Article XII of
the Ohio Constitution. The litigation reserve fund of $1,144,686.20 is excluded from
the lien by the terms of the 2008 pledge agreement between BWD and the USDA.
Any remaining amounts pledged to the USDA are subordinated to BWD's operational
expenses pursuant to the terms of the pledge agreements. The East Liverpool water
contract judgment is an operational expense that may be paid prior to any claim
made by the USDA. Finally, BWD's failure to identify and segregate the source of
the funds in any of the CFBank accounts precludes us from enforcing any aspect of
the USDA lien. For all these reasons, we overrule BWD's second assignment of
error.
BWD’S ASSIGNMENT OF ERROR NO. 3
THE TRIAL COURT ERRED IN DENYING BUCKEYE WATER
DISTRICT’S MOTION TO MODIFY THE COURT’S JUDGMENT
ENTRY OF JANUARY 20, 2011 BECAUSE THE UNITED STATES
DEPARTMENT OF AGRICULTURE HAS A LIEN ON THE FUNDS IN
BUCKEYE WATER DISTRICT’S CAPITAL PROJECT FUND.
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{¶102} This assignment of error deals with funds that BWD labels as a
“construction fund” or “capital project fund,” that presumably are derived from a loan
or grant from the USDA for some type of construction project. BWD's basis for this
argument is a notation in their bookkeeping system. (9/6/11 Tr., Def. Exh. J.) BWD
claims that $1.288 million is exempt from garnishment because permission is needed
from the USDA to release these construction funds for anything other than
construction projects. There is nothing in the record that supports such a conclusion.
East Liverpool correctly points out that BWD changed its bookkeeping system after
the garnishment process began, and that their previous bookkeeping system did not
list these construction funds. (9/6/11 Tr., Pltf. Exh. Q.) East Liverpool also correctly
notes that there is no other written documentation in the record supporting the
existence of a USDA construction fund account, much less the origin or terms of the
loan generating these funds. Nor does the record explain how the original
construction fund money was spent, or how it should be spent in the future. There is
some testimony from Mr. D'Angelo, BWD's fiscal officer, vaguely describing that
sometime in 2007 or 2008 the USDA placed $800,000 in an escrow account to act as
bond for a reservoir that had not yet been approved. (9/6/11 Tr., p. 115.) When the
reservoir was approved, “then that money was released back to Buckeye Water
District and put into the construction account for a future project.” (9/6/11 Tr., p. 115.)
Another $400,000 was later added to the same account. Mr. D'Angelo admitted that
“[t]he 1,280,000 was not any revenues derived from the system”. (9/6/11 Tr., p. 118.)
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{¶103} We agree with the trial court that there is no evidence supporting any
type of superior lien or claim on $1.288 million of construction funds. The record
shows that two CFBank accounts are described as construction accounts. These
accounts contain $735,456.55 and $1,000.00, respectively, so at most, there are
$736,456.55 in purported construction funds being claimed as an exemption.
Because Mr. D'Angelo testified that these funds were not revenues from BWD's
water system, they cannot be protected with revenue liens. There is nothing else in
the record that would categorize these funds as anything other than surplus funds
available for any use by BWD. This third assignment of error is overruled.
ASSIGNMENT OF ERROR BY THE OPWC
THE TRIAL COURT ERRONEOUSLY HELD THAT BWD
FUNDS OWED AND PLEDGED TO OPWC ARE SUBJECT TO
GARNISHMENT.
{¶104} The arguments presented by OPWC under this assignment of error are
more or less repetitive of BWD's other arguments that have already been overruled.
The first issue raised by OPWC is that BWD is exempt from garnishment due to
governmental immunity. We have addressed this under BWD’s first assignment of
error. BWD is not entitled to claim political subdivision immunity as a defense to
garnishment because breach of contract disputes are not protected under the
immunity statute, R.C. Chapter 2744, and because the statute authorizing the
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creation of a water district allows a water district to be sued on its contracts. R.C.
6119.06(D).
{¶105} OPWC's second issue is an attempt to relitigate the underlying contract
dispute by implying that the contract did not conform to laws governing tax levies
under R.C. Chapter 5705. OPWC argues that the underlying contract was invalid
because it did not contain a certification of the fiscal officer of either BWD or
Columbiana County that the amount required to meet the obligation was lawfully
appropriated as required by R.C. 5705.41(D)(1), which states:
Except as otherwise provided in division (D)(2) of this section
and section 5705.44 of the Revised Code, make any contract or give
any order involving the expenditure of money unless there is attached
thereto a certificate of the fiscal officer of the subdivision that the
amount required to meet the obligation or, in the case of a continuing
contract to be performed in whole or in part in an ensuing fiscal year,
the amount required to meet the obligation in the fiscal year in which
the contract is made, has been lawfully appropriated for such purpose
and is in the treasury or in process of collection to the credit of an
appropriate fund free from any previous encumbrances.
{¶106} OPWC is aware that the funding certification requirement in R.C.
5705.41(D)(1) does not apply to contracts of a publicly operated water works when
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these contracts are to be paid through the earnings of the water works. See R.C.
5705.44. The underlying contract dispute between East Liverpool and BWD is now a
final judgment that was reviewed and affirmed on appeal, and a garnishment
proceeding does not serve to reopen the underlying case to allow new issues to be
raised to challenge the judgment. “[W]here a court of record has jurisdiction over the
subject matter before it and renders a judgment, such judgment may not be
collaterally impeached. So long as it stands unreversed, it remains conclusive as to
the matter decided.” State ex rel. Schneider v. Brewer, 155 Ohio St. 203, 205, 98
N.E.2d 2 (1951). The judgment cannot be challenged in an ancillary collection
proceeding such as garnishment or attachment. Federal Deposit Ins. Corp. v.
Willoughby, 19 Ohio App.3d 51, 482 N.E.2d 1267 (8th Dist.1984). OPWC’s attempt
to invalidate the East Liverpool water contract through a post-judgment garnishment
action on the grounds that the water contract failed to meet the requirements of R.C.
5705.41(D)(1) is rejected.
{¶107} OPWC also relies on the funding certification requirement of R.C.
5705.41(D)(1) for a third argument. In this argument, OPWC concedes that the East
Liverpool water contract was permitted to be paid through the earnings of BWD by
virtue of R.C. 5705.44, which states:
The certificate required by section 5705.41 of the Revised Code
as to money in the treasury shall not be required for contracts on which
payments are to be made from the earnings of a publicly operated
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water works or public utility, but in the case of any such contract made
without such certification, no payment shall be made on account
thereof, and no claim or demand thereon shall be recoverable, except
out of such earnings.
{¶108} OPWC assumes that the term “earnings” in this statute is distinct from
the more general term “revenues” and means net profits after all expenses are paid.
OPWC believes that BWD has no profits or “earnings” because its expenses are
greater than its income. Thus, OPWC concludes that funds in the CFBank accounts
cannot be used to pay the East Liverpool judgment because they do not represent
actual earnings.
{¶109} We disagree with OPWC’s conclusions for two reasons. First, the
record does not indicate that BWC was consistently operating at a loss or that it had
no net profits with which to pay East Liverpool. Plaintiff’s exhibit O showed a net
profit of $408,200 for 2010. Plaintiff’s exhibit L showed a net profit of $964,404 for
2008. Since BWD has at times operated at a profit, we cannot conclude that it has
no funds available to cover the East Liverpool water contract.
{¶110} Second, we disagree with OPWC’s interpretation of the word “earnings”
in R.C. 5705.44 as meaning “net profits.” In St. Marys v. Auglaize Cty. Bd. of
Commrs., 115 Ohio St.3d 387, 875 N.E.2d 561 (2007), the Ohio Supreme Court
reviewed issues dealing with both R.C. 5705.41(D)(1) and R.C. 5705.44, and as part
of that review, the high court used the term “earnings” in R.C. 5705.44 synonymously
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with the term “revenues.” Id. at ¶69. There is no indication in St. Mary’s that the term
“earnings” or “revenues” referred only to profits left over after the payment of all
expenses. The common definition of earnings is “income,” and we find no reason to
apply any other definition here. Black’s Law Dictionary 509 (6th Ed.1990).
{¶111} The longstanding interpretation of the public utility exception to the
certification requirement of R.C. 5705.41(D) (and its predecessor G.C. 5625-33), is
that all non-tax revenues of a public water works or public utility may be spent on
contractual obligations without prior certification of a fiscal officer. Cleveland Elec.
Illuminating Co. v. City of Cleveland, 50 Ohio App.2d 275, 363 N.E.2d 759 (8th
Dist.1976); Hines v. City of Bellefontaine, 74 Ohio App. 393, 57 N.E.2d 164 (3d
Dist.1943). The public utility exception has never been interpreted to refer only to the
net profits of a public utility.
{¶112} Finally, OPWC argues that it has a secured interest in $40,532.96 that
is superior to East Liverpool's judgment because those funds are pledged. The trial
court determined that there was no pledge agreement between OPWC and BWD,
and therefore, no basis to claim any type of superior lien or security interest. BWD’s
District Manager, Mr. DeAngelis, could not identify any specific agreement in which
BWD pledged its revenues to OPWC. (3/24/11 Tr., pp. 85-87.) We cannot find any
pledge agreement in the record that would protect the CFBank account purportedly
holding OPWC funds, and we defer to the trier of fact on this factual point. All of
OPWC’s arguments are therefore overruled.
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Conclusion
{¶113} Appellants have failed to show that governmental immunity has any
bearing on the present garnishment action. Both R.C. Chapter 2744 and 6119 allow
a water district to be sued on its contracts, and the garnishment action in this case
arises from a judgment entered in a breach of contract case. BWD failed to show
that a USDA lien on BWD's net revenues actually prevented East Liverpool from
garnishing the CFBank accounts. The record indicates that $1,144,686.20 in a
litigation reserve fund was being held to help pay for this specific litigation, and
therefore, is subject to garnishment. The record indicates that the East Liverpool
water contract is an operating expense, and as such, takes priority over the USDA
revenue lien under the terms of the lien pledges. BWD failed to trace the source of
any of the allegedly exempt funds, and therefore, it could not establish that any of the
CFBank accounts contained protected revenues. BWD also failed to trace the
source of the funds it identifies as protected construction funds, and without evidence
of the source of the funds we have no basis for considering those funds to be
exempt. OPWC failed to identify a pledge agreement that would give it a priority lien
superior to East Liverpool's judgment lien.
{¶114} In short, the trial court was correct that all of the seven CFBank
accounts that were garnished were available for payment of East Liverpool's
judgment, minus the amount designated for the OWDA reserve fund of $27,468.59.
The judgments of June 8, 2011 and December 13, 2011 are therefore affirmed,
except for the following clarifications with respect to the total dollar amount that is
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garnishable from the CFBank accounts. The evidence provided by East Liverpool
and cited by the trial court identified $4,216,750.70 as the amount of garnishable
funds that East Liverpool was requesting from the approximately $4.5 million in the
CFBank accounts on or about January 18, 2011. Subtracting the OWDA reserve of
$27,468.59 from $4,216,750.70 leaves a remainder of $4,189,282.11. This amount
includes BWD's operating account (General Enterprise Account) ending in the digits
4209, which was valued at $829,940.47 on January 18, 2011. This operating
account was released from the garnishment order and the freeze was lifted by the
trial court on January 20, 2011. Although the General Enterprise Account is
garnishable, we have no means of determining the amount (if any) remaining in the
account at this time since it has been in constant use by BWD. We deduct the
amount of the General Enterprise account as of January 18, 2011 from the net funds
garnishable pursuant to this Opinion. The matter is remanded to the trial court for the
orderly disposition of the entire garnishment order, including the garnishment of the
funds in the General Enterprise account if so ordered by the trial court. Subtracting
$829,940.47 from $4,189.282.11 leaves a remainder of $3,359,341.64 that may be
garnished.
{¶115} We hold that the Ohio Water Development Authority has a protected
interest of $27,468.59 in the CFBank accounts, and this amount may not be
garnished. We hold that BWD's operating account (General Enterprise Account)
ending in the digits 4209 is garnishable, but no funds shall be removed from this
account pursuant to the garnishment order until specifically ordered by the trial court.
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We hold that $3,359,341.64 may be garnished from the remaining six CFBank
accounts. The case is hereby remanded to the trial court for the orderly disposition of
the entire garnishment order and for further proceedings consistent with this Court's
Opinion.
Donofrio, J., concurs.
DeGenaro, J., concurs.