Flushing Nat. Bank v. Municipal Assistance Corp. for City of New York

• Decision Date: 30 June 1976
• Citation: 382 N.Y.S.2d 764,52 A.D.2d 84
• Parties: FLUSHING NATIONAL BANK, on behalf of itself and all other holders of notes of the City of New York maturing on or before
• Court: New York Supreme Court — Appellate Division

Page 764

382 N.Y.S.2d 764

52 A.D.2d 84

FLUSHING NATIONAL BANK, on behalf of itself and all other holders of notes of the City of New York maturing on or before June 30, 1976, Plaintiffs- Appellants, v. MUNICIPAL ASSISTANCE CORPORATION FOR the CITY OF NEW YORK et al., Defendants-Respondents State of New York, Defendant.

Supreme Court, Appellate Division, First Department.

May 4, 1976.

Simon H. Rifkind, New York City, of counsel (Robert L. Laufer, Dean B. Allison, Howard S. Veisz and Jonathan Siegfried, New York City, with him on the brief; Paul, Weiss, Rifkind, Wharton & Garrison, New York City, attys.), for respondent Municipal Assistance Corp. for City of new York.

Arthur Richenthal, New York City, of counsel (Richenthal, Abrams & Moss, New York City, attys.), for plaintiffs-appellants.

W. Bernard Richland, New York City (James G. Greilsheimer, L. Kevin Sheridan, Leonard Koerner and James Griffin, New York City, with him on the brief), Corp. Counsel, for Municipal defendants-respondents.

Shirley Adelson Siegel, New York City, of counsel (Samuel A. Hirshowitz, New York City, with her on the brief, Louis J. Lefkowitz, Atty. Gen.), for defendant-respondent New York State Emergency Financial Control Board.

Before MARKEWICH, J.P., and LUPIANO, BIRNS, CAPOZZOLI and LANE, JJ.

LANE, Justice:

This action was brought, Inter alia, to declare the invalidity of the 'New York State Emergency Moratorium Act for the City of New York' (Chapters 874 and 875 of the Laws of 1975). The further injunctive relief sought has since been rendered academic and is not the subject of this appeal.

The Emergency Moratorium Act (EMA) provides for a conditional three-year moratorium on enforcement of outstanding short-term obligations of the City of New York. The short-term City obligations involved tax anticipation notes, bond anticipation notes, revenue anticipation notes, budget notes, and urban renewal notes.

The moratorium is conditioned upon an offer having been made to exchange the short-term obligations with a replacement obligation ¹ having a date of maturity no more than 20 years after the date of maturity of the short-term obligation.

Should a short-term noteholder decline to accept the exchange offer, then payment on principal is to be suspended for a three-year period. Payment of interest thereon is provided at the rate stated in the obligation to the date of its maturity and thereafter at a rate of not less than 6% Per annum. Interest payments are to be made at least annulally. The City is not precluded from issuing other evidence of indebtedness to consenting shareholders in payment, renewal, or refunding of the short-term obligations.

The EMA legislation is alleged to be infirm in that it violates the Federal and State Constitutions. The plaintiff, Flushing National Bank, further urges that the 6% Interest rate paid after maturity of the notes is confiscatory ² and that the EMA violates the Federal Bankruptcy Act.

We must note at the outset that the EMA was not enacted by the Legislature arbitrarily or in a vacuum but is the latest in a series of legislative efforts to restore the City's financial integrity.

The first such special legislation, in June 1975, involved the creation of the Municipal Assistance Corporation (Laws of 1975, Chapter 168), which corporation was authorized to issue and sell its own bonds and notes and thereby to aid the City by purchasing City obligations or making direct payments to it.

This was followed by enactment of the New York State Financial Emergency Act in September 1975 (Laws of 1975, Chapters 868--870), which created a board to review, control and supervise the financial management of the City.

The present EMA (Laws of 1975, Chapters 874--875), enacted in November 1975, is the latest of such legislation.

In passing each item of legislation, there was a finding that the City was in need of assistance in order to maintain its essential services and financial stability, the failure of which would have grave impact Citywide and the ripples of which would be felt Statewide, and even nationwide.

The sense of urgency in these findings has become intensified as the fullness of the dimensions of the financial crisis made its impact on the Legislature.

The City's difficulties were first characterized as 'cause (for) concern' (Laws of 1975, Chapter 168, § 1, enacting Public Authorities Law, art. 10, especially § 3002), then resulted in the finding of 'a financial emergency and an emergency period' (Laws of 1975, Chapter 868, § 1), and ripened into a finding that 'the grave public emergency . . . has dramatically worsened' (Laws of 1975, Chapter 874, Section 1, Legislative Findings).

Each piece of remedial legislation enacted received great consideration, and the legislative findings published at the head of each act reveal that all involved were mindful of the dire consequences attendant upon a failure to ameliorate a fast deteriorating fiscal condition. The Legislature was similarly concerned with maintaining investor receptivity and respect for the pledge of the faith and credit of the City to payment of its obligations. Keeping this perspective in mind, it would appear that the EMA is not a '. . . Law impairing the Obligation of Contracts' violative of the United States Constitution (Art. 1, § 10).

Nothing in the EMA articulates an intent not to honor the obligation evidenced by the short-term obligations of the City, but it rather establishes a revised schedule for payment of these obligations. Traditionally, there has been a distinction drawn between the obligation of a contract and the remedies available to enforce that obligation. Modification of a remedy can obtain without impairing the obligation of a contract (Sturges v. Crowninshield, 17 U.S. (4 Wheat.), 122, 200, 4 L.Ed. 529). It has also been noted that:

'It is competent for the States to change the form of the remedy, or to modify it otherwise, as they may see fit, provided no substantial right secured by the contract is thereby impaired. No attempt has been made to fix definitely the line between alterations of the remedy, which are to be deemed legitimate, and those which, under the form of modifying the remedy, impair substantial rights. Every case must be determined upon its own circumstances' (Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.), 535, 553, 18 L.Ed. 403).

The reasonableness of the modification of the remedy must be left to the judgment and discretion of the Legislature, which discretion should not be disturbed absent palpable error (Antoni v. Greenhow, 107 U.S. 769, 775, 2 S.Ct. 91, 27 L.Ed. 468; East New York Savings Bank v. Hahn, 326 U.S. 230, 230--233, 66 S.Ct. 69, 90 L.Ed. 34).

The case at bar is dealing neither with a modification of remedy which gives no immediate payment to the creditor (W. B. Worthen Co. v. Thomas, 292 U.S. 426, 54 S.Ct. 816, 78 L.Ed. 1344), nor with holders of obligations with a divesting of property rights (Wood v. Lovett, 313 U.S. 362, 61 S.Ct. 983, 85 L.Ed. 1404) but, rather, with a mere extension of time to make full payment.

The EMA legislation has not rendered the short-term notes invalid, nor has it released or extinguished them. What it has done in the present financial emergency is afford a reason for the State's exercise of its inherent powers, which include the right to police and modify remedial processes and to safeguard the essential interests of the people of the State. Implicit in every contract or obligation is the gloss of existing laws as well as the gloss of essential sovereign powers reposed in the State (Home Building & L. Assn. v. Blaisdell, 290 U.S. 398, 434--435, 54 S.Ct. 231, 78 L.Ed. 413; Faitoute Co. v. Asbury Park, 316 U.S. 502, 511, 62 S.Ct. 1129, 86 L.Ed. 1629; East New York Savings Bank v. Hahn, cited Supra, 326 U.S. at 232, 66 S.Ct. 69; City of El Paso v. Simmons, 379 U.S. 497, 508--509, 85 S.Ct. 577, 13 L.Ed. 446).

Absent such State powers, reasonably exercised, the viability of contracts, public or private,...