15 A.3d 565 (R.I. 2011), 2010-400-Appeal, Moreau v. Flanders

Docket Nº:2010-400-Appeal.
Citation:15 A.3d 565
Opinion Judge:Justice FLAHERTY, for the Court.
Party Name:Charles D. MOREAU et al. v. Robert G. FLANDERS, Jr., Esq., in his capacity as appointed Receiver for the City of Central Falls et al.
Attorney:Michael A. Kelly, Esq., Providence, for Plaintiff. Theodore Orson, Esq., Providence, for Defendant.
Case Date:March 29, 2011
Court:Supreme Court of Rhode Island

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15 A.3d 565 (R.I. 2011)

Charles D. MOREAU et al.


Robert G. FLANDERS, Jr., Esq., in his capacity as appointed Receiver for the City of Central Falls et al.

No. 2010-400-Appeal.

Supreme Court of Rhode Island.

March 29, 2011

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Michael A. Kelly, Esq., Providence, for Plaintiff.

Theodore Orson, Esq., Providence, for Defendant.



Justice FLAHERTY, for the Court.

Background: A City in Distress

We are called upon to determine the constitutionality of G.L.1956 chapter 9 of title 45, in the face of a challenge by the Mayor and City Council of the City of Central Falls. Before we begin our analysis, we find it appropriate to pause and compliment the detailed, well-written, and scholarly decision of the trial justice, whose judgment we affirm completely and with confidence.

The City of Central Falls long has enjoyed the reputation of being one of America's most densely populated cities. Packed within 1.2 square miles live 19,000 people. The General Assembly created the city in 1895, partitioning it from the neighboring Town of Lincoln. Over the years, Central Falls became a bustling industrial center and the home to a variety of proud immigrant and ethnic groups. Over time, however, the city experienced financial distress, and by 1991, it no longer had the financial resources to operate its schools, resulting in a takeover by the state. In more recent years, Central Falls, like other communities, has continued to struggle financially. With the closure of several manufacturing facilities, the city's tax base dwindled, causing its fiscal woes to become exacerbated. With its largest taxpayers gone, no land to develop, and confronted with the crushing realities of a devastating local and national economy, there is no surprise that the city's leaders felt that their backs were up against the wall. And thus, believing there was no other viable solution to the city's dire financial plight, the mayor and city council in May 2010, petitioned the Superior Court for the appointment of a receiver, a petition that was granted by the court.

At the same time, however, legislation that would enact a major revision to chapter 9 of title 45 was working its way through the General Assembly. Signed into law in June that same year, the legislation prohibited municipalities from seeking the appointment of judicial receivers, but instead authorized the director of the Department of Revenue to implement a defined process to restore stability to a fiscally imperiled city or town. That process involved a tiered system of oversight, including appointments of a fiscal overseer, a budget and review commission, and finally a nonjudicial receiver.

On July 16, 2010, retired Superior Court Justice Mark A. Pfeiffer (Pfeiffer or receiver) was appointed by the director of the Department of Revenue to serve as receiver for the City of Central Falls under the terms of chapter 9 of title 45, as amended by P.L.2010, ch. 27, § 1, entitled, " An Act Relating to Cities and Towns— Providing Financial Stability" (act or Financial Stability Act).1 The City of Central Falls is a duly authorized municipal corporation that has a home-rule charter adopted in accordance with article 13 of the Rhode Island Constitution.2 The city's

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form of government includes a mayor, who serves as chief executive officer, and a five-member city council. Both the mayor and the city council are elected by the city's residents. At all times relevant to this cause of action, Charles D. Moreau (Moreau or mayor) has been the mayor. Similarly, at all times relevant to this matter, William Benson, Jr. (Benson or council president), Richard Aubin, Jr., Eunice DeLaHoz, Patrick J. Szlastha, and James Diossa 3 (collectively, city council) have been the members of the city council.

Facts and Travel

In an effort to stem the effects of its financial distress, the city council, by resolution, and the mayor authorized the filing of a verified petition for appointment of a receiver with the Providence County Superior Court on May 18, 2010. The circumstances preceding this verified petition, which named the City of Central Falls as defendant, included a June 30, 2009, independent audit, which revealed: (1) that the city had total net assets of negative $16,866,819; (2) an annual operating budget for 2010 and a proposed operating budget for 2011 just under $18 million, with anticipated shortfalls of $3 million for 2010 and $5 million for 2011; (3) municipal bond indebtedness of over $10 million; (4) the city's sale of much of its chief pension fund to satisfy current pension obligations; (5) accrued pension fund liability exceeding $35 million, supported by assets of only $4 million; (6) the city's failure to make any contributions to the pension fund in 2009, despite a requirement that it make a contribution in excess of $2.7 million for that year; (7) the fact that increasing the property tax rate by the maximum allowed under the state cap of 4.5 percent would yield additional revenues of less than $500,000; and (8) a request by Central Falls to the General Assembly to grant it the authority to file for Chapter 9 bankruptcy pursuant to Title 11 of the United States Code, providing for the adjustment of debts of a municipality.

In their verified petition to the Superior Court seeking the appointment of a judicial receiver, the mayor and the city council represented:

" Plaintiffs have determined that the City is fiscally insolvent due to revenue shortfalls and state budget cuts, along with collective bargaining agreements and pension obligations it cannot afford.

" * * *

" In the opinion of Plaintiffs, the elected leaders of the City, it is urgent and advisable that a Receiver be appointed immediately to oversee the affairs of the City to assist in balancing the City's budget through spending cuts and revenue enhancement * * *."

After a hearing on the petition, the Superior Court, on May 19, 2010, entered an order appointing attorney Jonathan Savage as temporary receiver for the City of Central Falls; a permanent receiver was to be appointed " on or before June 8, 2010." In its order, " the [c]ourt determined that [appointment of a receiver] would be in the best interest of the Defendant's taxpayers, employees, creditors, vendors, and pensioners and other interested parties * * *." The order further delineated the terms and conditions of the

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temporary receivership as well as the powers conferred on the receiver.

As a result of the petition for judicial receivership, the already precarious credit rating of Central Falls was reduced to " junk-bond" status. Even more ominously, state officials were informed by financial rating agencies that, as a result of Central Falls' receivership, capital markets would view debt financing to Rhode Island cities and towns as extremely risky, and that as a consequence such financing would become more expensive for Rhode Island municipalities. Faced with that scenario, the General Assembly determined that judicial receiverships, initiated solely at the discretion of a municipality, were not in the best interest of the citizens of Central Falls or the state, and that municipally initiated judicial receiverships threatened the financial well-being of all the state's cities and towns, and of the state itself. The General Assembly moved with alacrity, revising chapter 9 of title 45 (Budget Commissions) for the purpose of creating a more effective mechanism to identify and respond to dire financial adversity confronting municipalities. On June 11, 2010, a major revision was signed into law. Significantly, § 45-9-1, as amended by P.L.2010, ch. 27, § 1, set forth:

" Declaration of policy and legal standard. It shall be the policy of the state to provide a mechanism for the state to work with cities and towns undergoing financial distress that threatens the fiscal well-being, public safety and welfare of such cities and towns, or other cities and towns or the state, with the state providing varying levels of support and control depending on the circumstances. The powers delegated by the General Assembly in this chapter shall be carried out having due regard for the needs of the citizens of the state and of the city or town, and in such a manner as will best preserve the safety and welfare of citizens of the state and their property, and the access of the state and its municipalities to capital markets, all to the public benefit and good."

Of great significance, this revision foreclosed the right of municipalities to petition the courts for the appointment of a judicial receivership, as had been done by Central Falls.4 This was of particular relevance to Central Falls because § 4 of the act (P.L.2010, ch. 27) made the revision retroactive to May 15, 2010— four days before the order of the Superior Court that granted the mayor and city council's request for a judicial receiver.

However, any potential conflict that may have arisen because of the passage of the new act and the duties of the judicially appointed receiver was avoided when Mayor Moreau and the city council jointly sought a consent order, by a city council resolution approved June 17, 2010, requesting the dismissal of " the pending Superior Court action with prejudice after transitioning the Receivership from Superior Court to the State Department of Revenue." The council's resolution declared that city leaders were forced to seek a receiver " due to fiscal insolvency as a result of revenue shortfalls, state budget cuts, along with collective bargaining agreements and...

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