Municipal Investors Assn. v. Birmingham

Background

A bondholder association holds unpaid paving bonds issued by the Village of Birmingham in 1928. The village assessed nearby property to pay for street paving, with those assessments payable in five annual installments. Most property owners defaulted; about one hundred of 110 parcels were sold at tax sales and later acquired by the State, then resold. The bondholders asked a court to require the city to levy an additional assessment on all district property, including lots already sold for unpaid taxes, to cover the bonds’ unpaid principal and interest.

Reasoning

The central question was whether the bond contract under Michigan law as of 1928 gave bondholders a right to an additional assessment after tax sales. The Court examined the village charter and the bond language, which tied payment to a special assessment fund “when the same shall have been collected.” It concluded the charter’s authorization for an “additional pro rata assessment” did not clearly bind lots already sold for unpaid assessments. Allowing reassessment of sold lots would undermine tax sales as a remedy and could make sale for nonpayment ineffective, so no contractual reassessment right existed.

Real world impact

The Court affirmed the denial of a court order to compel reassessment and did not decide whether later 1937 Michigan statutes violated the federal Contract Clause. Practically, bondholders cannot force cities to add new assessments on properties already sold for unpaid taxes, so investors must look to tax-sale proceeds rather than reassessment for recovery. This preserves tax sales as an enforcement tool but limits recovery for municipal bond investors when many owners default.