United States Trust Company of New York v. New Jersey
| Decision Date | 27 April 1977 |
| Docket Number | No. 75-1687,75-1687 |
| Citation | 52 L.Ed.2d 92,431 U.S. 1,97 S.Ct. 1505 |
| Parties | UNITED STATES TRUST COMPANY OF NEW YORK, etc., Appellant, v. State of NEW JERSEY et al |
| Court | U.S. Supreme Court |
Rehearing Denied June 13, 1977. See 431 U.S. 975, 97 S.Ct. 2942.
A 1962 statutory covenant between New Jersey and New York limited the ability of the Port Authority of New York and New Jersey to subsidize rail passenger transportation from revenues and reserves pledged as security for consolidated bonds issued by the Port Authority. A 1974 New Jersey statute, together with a concurrent and parallel New York statute, retroactively repealed the 1962 covenant. Appellant, both as a trustee for, and as a holder of, Port Authority bonds, brought suit in the New Jersey Superior Court for declaratory relief, claiming that the 1974 New Jersey statute impaired the obligation of the States' contract with the bondholders in violation of the Contract Clause of the United States Constitution. The Superior Court dismissed the complaint after trial, holding that the statutory repeal was a reasonable exercise of New Jersey's police power and was not prohibited by the Contract Clause. The New Jersey Supreme Court affirmed. Held: The Contract Clause prohibits the retroactive repeal of the 1962 covenant. Pp. 14-32.
(a) The outright repeal of the 1962 covenant totally eliminated an important security provision for the bondholders and thus impaired the obligation of the States' contract. Pp. 17-21.
(b) The security provision of the 1962 covenant was purely a financial
obligation and thus not necessarily a compromise of the States' reserved powers that cannot be contracted away. Pp. 21-25.
(c) The repeal of the 1962 covenant cannot be sustained on the basis of Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502, 62 S.Ct. 1129, 86 L.Ed. 1629, and W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 55 S.Ct. 555, 79 L.Ed. 1298, simply because the bondholders' rights were not totally destroyed. Pp. 26-28.
(d) An impairment of contract such as is involved in this case can only be upheld if it is both reasonable and necessary to serve an important public purpose, but here the impairment was neither necessary to achieve the States' plan to encourage private automobile users to shift to public transportation nor reasonable in light of changed circumstances. Total repeal of the 1962 covenant was not essential, since the States' plan could have been implemented with a less drastic modification of the covenant, and since, without modifying the covenant at all, the States could have adopted alternative means of achieving their twin goals of discouraging automobile use and improving mass transit. Nor can the repeal be claimed to be reasonable on the basis of the need for mass transportation, energy conservation, and environmental protection since the 1962 covenant was adopted with knowledge of such concerns. Pp. 28-32.
69 N.J. 253, 353 A.2d 514, reversed.
Devereux Milburn, New York City, for the appellant.
Michael I. Sovern, New York City, for the appellees.
This case presents a challenge to a New Jersey statute, 1974 N.J.Laws, c. 25, as violative of the Contract Clause 1 of the United States Constitution. That statute, together with a concurrent and parallel New York statute, 1974 N.J.Laws, c. 993, repealed a statutory covenant made by the two States in 1962 that had limited the ability of The Port Authority of New York and New Jersey 2 to subsidize rail passenger transportation from revenues and reserves.
The suit, one for declaratory relief, was instituted by appellant United States Trust Company of New York in the Superior Court of New Jersey, Law Division, Bergen County. Named as defendants were the State of New Jersey, its Governor, and its Attorney General. Plaintiff-appellant sued as trustee for two series of Port Authority Consolidated Bonds, as a holder of Port Authority Consolidated Bonds and on behalf of all holders of such bonds.3
After a trial, the Superior Court ruled that the statutory repeal was a reasonable exercise of New Jersey's police power and declared that it was not prohibited by the Contract Clause or by its counterpart in the New Jersey Constitution, Art. IV, § 7, P 3. Accordingly, appellant's complaint was dismissed. 134 N.J.Super. 124, 338 A.2d 833 (1975). The Supreme Court of New Jersey, on direct appeal and by per curiam opinion, affirmed "substantially for the reasons set forth in the (trial court's) opinion." 69 N.J. 253, 256, 353 A.2d 514, 515 (1976). We noted probable jurisdiction. 427 U.S. 903, 96 S.Ct. 3188, 49 L.Ed.2d 1197 (1976).4
A. Establishment of the Port Authority. The Port Authority was established in 1921 by a bistate compact to effectuate "a better co-ordination of the terminal, transportation and other facilities of commerce in, about and through the port of New York." 1921 N.J.Laws, c. 151, p. 413; 1921 N.Y.Laws, c. 154, p. 493. See N.J.Stat.Ann. § 32:1-1 et seq. (1940); N.Y.Unconsol.Laws § 6401 et seq. (McKinney 1961). The compact, as the Constitution requires, Art. I, § 10, cl. 3, received congressional consent. 42 Stat. 174.
The compact granted the Port Authority enumerated powers and, by its Art. III, "such other and additional powers as shall be conferred upon it by the Legislature of either State concurred in by the Legislature of the other, or by Act or Acts of Congress." The powers are enumerated in Art. VI. Among them is "full power and authority to purchase, construct, lease and/or operate any terminal or transportation facility within said district." "Transportation facility" is defined, in Art. XXII, to include "railroads, steam or electric, . . . for use for the transportation or carriage of persons or property."
The Port Authority was conceived as a financially independent entity, with funds primarily derived from private investors. The preamble to the compact speaks of the "encouragement of the investment of capital," and the Port Authority was given power to mortgage its facilities and to pledge its revenues to secure the payment of bonds issued to private investors.5
See generally E. Bard, The Port of New York Authority (1942).
B. Initial Policy Regarding Mass Transit. Soon after the Port Authority's inception, the two States, again with the consent of Congress, 42 Stat. 822, agreed upon a comprehensive plan for the entity's development. 1922 N.J.Laws, c. 9; 1922 N.Y.Laws, c. 43. This plan was concerned primarily, if not solely, with transportation of freight by carriers and not with the movement of passengers in the Port Authority district. The plan, however, was not implemented.6 The New Jersey Legislature at that time declared that the plan "does not include the problem of passenger traffic," even though that problem "should be considered in co-operation with the port development commission." 1922 Laws, c. 104. The Port Authority itself recognized the existence of the passenger service problem. 1924 Annual Report 23; 1928 Annual Report 64-66; App. 574a-575a.
In 1927 the New Jersey Legislature, in an Act approved by the Governor, directed the Port Authority to make plans "supplementary to or amendatory of the comprehensive plan . . . as will provide adequate interstate and suburban transportation facilities for passengers." 1927 Laws, c. 277. The New York Legislature followed suit in 1928, but its bill encountered executive veto. 7 The trial court observed that this veto "to all intents and purposes ended any legislative effort to involve the Port Authority in an active role in commuter transit for the next 30 years." 134 N.J.Super., at 149, 338 A.2d, at 846 C. Port Authority Fiscal Policy. Four bridges for motor vehicles were constructed by the Port Authority. A separate series of revenue bonds was issued for each bridge. Revenue initially was below expectations, but the bridges ultimately accounted for much of the Port Authority's financial strength. The legislatures transferred the operation and revenues of the successful Holland Tunnel to the Port Authority, and this more than made up for the early bridge deficits.
The States in 1931 also enacted statutes creating the general reserve fund of the Port Authority. 1931 N.J.Laws, c. 5; 1931 N.Y.Laws, c. 48. Surplus revenues from all Port Authority facilities were to be pooled in the fund to create an irrevocably pledged reserve equal to one-tenth of the par value of the Port Authority's outstanding bonds. This level was attained 15 years later, in 1946.
In 1952, the Port Authority abandoned the practice of earmarking specific facility revenues as security for bonds of that facility. The Port Authority's Consolidated Bond Resolution established the present method of financing its activities; under this method its bonds are secured by a pledge of the general reserve fund.8 D. Renewed Interest in Mass Transit. Meanwhile, the two States struggled with the passenger transportation problem. Many studies were made. The situation was recognized as critical, great costs were envisioned, and substantial deficits were predicted for any mass transit operation. The Port Authority itself financed a study conducted by the Metropolitan Rapid Transit Commission which the States had established in 1954.
In 1958, Assembly Bill No. 16 was introduced in the New Jersey Legislature. This would have had the Port Authority take over, improve, and operate interstate rail mass transit between New Jersey and New York. The bill was opposed vigorously by the Port Authority on legal and financial grounds. The Port Authority also retaliated, in a sense, by including a new safeguard in its contracts with bondholders. This prohibited the issuance of any bonds, secured by the general reserve fund, for a new facility unless the Port Authority first certified that the issuance of the bonds would not "materially impair the sound credit standing" of the Port Authority....
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