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

• Decision Date: 30 June 1976
• Citation: 358 N.E.2d 848,40 N.Y.2d 731,390 N.Y.S.2d 22
• Parties: , 358 N.E.2d 848 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 Court of Appeals Court of Appeals

Page 22

390 N.Y.S.2d 22

40 N.Y.2d 731, 358 N.E.2d 848

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, Appellant, v. MUNICIPAL ASSISTANCE CORPORATION FOR the CITY OF NEW YORK et

al., Respondents, et al., Defendants.

Court of Appeals of New York.

Nov. 19, 1976.

Arthur Richenthal, New York City, for appellant.

Simon H. Rifkind, Robert L. Laufer, Dean B. Allison, Howard S. Veisz and Jonathan Siegfried, New York City, for Municipal Assistance Corporation for the City of New York, respondent.

W. Bernard Richland, Corporation Counsel (James G. Greilsheimer, L. Kevin Sheridan Louis J. Lefkowitz, Atty. Gen., Albany (Shirley Adelson Siegel and Samuel A. Hirshowitz, New York City, of counsel), for New York State Emergency Financial Control Board, respondent.

Leonard J. Koerner and James J. Griffin, New York City), for the City of New York and another, respondents.

BREITEL, Chief Judge.

This is an action by a holder of New York City short-term anticipation notes to declare unconstitutional the New York State Emergency Moratorium Act for the City of New York (L.1975, ch. 874, as amd. by ch. 875). Special Term and the Appellate Division held the act constitutional under both the Federal and State Constitutions.

There should be a reversal. The act violates the State Constitution in denying faith and credit to the short-term anticipation notes of the city. The State Constitution prohibits the city from contracting any indebtedness unless it pledges its 'faith and credit' for the payment of the principal of the indebtedness (N.Y.Const. art. VIII, § 2). Thus, the Moratorium Act, by depriving short-term noteholders of judicial remedies for at least three years, makes meaningless the verbal pledge of faith and credit. On this view the Federal questions need not be reached.

On November 13, 1975, because of the city's desperate fiscal paralysis, the Legislature, in Extraordinary Session, passed, and the next day the Governor approved, the New York City Emergency Moratorium Act (L.1975, ch. 874, as amd. by ch. 875). The act imposes a three-year moratorium on actions to enforce the city's outstanding short-term obligations, namely, tax anticipation notes (TANS), bond anticipation notes (BANS), revenue anticipation notes (RANS), budget notes, and urban renewal notes (URNS). The act provides that the moratorium will be effective only with respect to those noteholders who have been offered, and have declined, and opportunity 'voluntarily' to exchange their notes for an equal principal amount of long-term bonds issued by the Municipal Assistance Corporation for the City of New York (MAC). The act also provides that during the moratorium the noteholders who have declined to exchange their notes for MAC bonds are to be paid interest at an annual rate of at least 6%. ( § 5.)

MAC is an intermediate finance agency created to assist the city in its financial stringency (L.1975, ch. 169). Neither the faith and credit of the State nor of the city is pledged to the obligations of MAC, but only certain revenues which the city may raise or receive from the State (L.1975, ch. 169, § 1, and Governor's memorandum on approval dated June 10, 1975, McKinney's 1975 Session Laws of N.Y., at pp. 1744--1745; Public Authorities Law, § 3036; see Wein v. State of New York, 39 N.Y.2d 136, 154, 383 N.Y.S.2d 225, 235, 347 N.E.2d 586, 596 (dissenting opn.); cf. Wein v. City of New York, 36 N.Y.2d 610, 618, 370 N.Y.S.2d 550, 556, 331 N.E.2d 514, 518--519).

After defining the moratorium period as three years from the effective date of the act ( § 2, subd. 3), the core moratorium provisions read as follows:

' § 3. Enforcement of judgments and liens on account of short-term obligations suspended.

'During the moratorium period, and notwithstanding any inconsistent provisions of any law, general, special or local, or of any agreement or short-term obligation, no act shall be done, and no action or special proceeding shall be commenced or continued in any court in any jurisdiction, seeking to apply or enforce against the city, or any political subdivision, agency, instrumentality or officer thereof, or their funds, property, receivables or revenues, any order, judgment, lien, set-off or counterclaim on account of any short-term obligatio or the indebtedness or liability evidenced thereby, or seeking the assessment, levy or collection of taxes by or for the city or the application of any funds, property, receivables or revenues ' § 4. Actions upon short-term obligations suspended.

of the city on account of any such short-term obligation, or the indebtedness or liability evidenced thereby, although the payment of such short-term obligation may be due by the terms thereof or any general or special or local law or agreement.

'During the moratorium period, and notwithstanding any inconsistent provisions of any law, general, special or local, or of any agreement or short-term obligation, no action or special proceeding shall be commenced or continued upon any short-term obligation, or the indebtedness or liability evidenced thereby, although the payment of such short-term obligation may be due by the terms thereof or any general or special or local law or agreement.'

On November 14, 1975, the effective date of the Moratorium Act, approximately $5 billion in city notes were outstanding and were scheduled to mature within the following 12 months. Of the $5 billion in notes, about.$2.1 billion were held by MAC, $250 million were held by the State, and $1.049 billion were held by 11 New York clearing house banks and various city employees' pension and bond sinking funds. At about the same time, the clearing house banks and the city funds agreed to extend their notes to July 1, 1986. After two MAC exchange offers, about $1 billion in notes remain with the public, including plaintiff Flushing National Bank.

The bank contends that, in addition to various infirmities under the Federal Constitution and statutes, the Moratorium Act violates State constitutional limitations.

The State Constitution regulates closely the debt-incurring power of local governments. Key to this case is that a city may not contract indebtedness unless it has 'pledged its faith and credit for the payment of the principal thereof and the interest thereon' (N.Y.Const. art. VIII, § 2).

The faith and credit provision was added in 1938. The words 'faith and credit' offer no difficulty in understanding and therefore must be read in accordance with their univocal meaning (e.g., Matter of Sherrill v. O'Brien, 188 N.Y. 185, 207, 81 N.E. 124, 131; Matter of Tuthill, 163 N.Y. 133, 145, 57 N.E. 303, 307). Moreover, the term 'faith and credit' in its context is not qualified in any way and the records of the Constitutional Convention of 1938 reveal no analysis of the words, let alone any suggestion of a departure from their evident meaning (see Revised Record, New York State Constitutional Convention of 1938, vol. II, at p. 1076). It is significant that proposals to eliminate the faith and credit clause have been rejected (Temporary State Commission on Constitutional Convention, Local Finance, at pp. 125, 127).

A pledge of the city's faith and credit is both a commitment to pay and a commitment of the city's revenue generating powers to produce the funds to pay. Hence, an obligation containing a pledge of the city's 'faith and credit' is secured by a promise both to pay and to use in good faith the city's general revenue powers to produce sufficient funds to pay the principal and interest of the obligation as it becomes due. That is why both words, 'faith' and 'credit', are used and they are not tautological. That is what the words say and that is what courts have held they mean when rare occasion has suggested comment (State v. City of Lakeland, 154 Fla. 137, 139, 16 So.2d 924; State v. County of Citrus, 116 Fla. 676, 694, 157 So. 4; Sacramento Municipal Utility Dist. v. Spink, 145 Cal.App.2d 568, 576--577, 303 P.2d 46; see Rabinowitz, Municipal Bond Finance and Administration, at p. 53; cf. Port of N.Y. Auth. v. Baker, Watts & Co., 129 U.S.App.D.C. 173, 392 F.2d 497, 501). As stated by the Supreme Court of Florida in State v. County of Citrus (supra, 116 Fla. at p. 694, 157 So. at p. 11): '(T)he effect of such pledge of 'full faith and credit's is not to create a general or special lien or charge upon the unspecified revenues, moneys or income of the obligor not therein specifically obligated to the payment of such bonds, but is to acknowledge A 'faith and credit' obligation is, therefore, entirely different from a 'revenue' obligation, which is limited to a pledge of revenues from a designated source or fund (see New York State Temporary Commission on Revision and Simplification of the Constitution, Staff Report No. 35, 'Simplifying the Local Finance Article', at pp. 27--28; State v. City of Lakeland, supra, 154 Fla. at pp. 139--140, 16 So.2d 924). It is also in contrast to a 'moral' obligation, which is backed not by a legally enforceable promise to pay but only by a 'moral' commitment.

an indebtedness for the amount of money received as a consideration for the bonds, which indebtedness will become enforceable in an ordinary action, should the special contractual obligation as embraced in the bond itself, fail.'

The constitutional requirement of a pledge of the city's faith and credit is not satisfied merely by engraving a statement of the pledge in the text of the obligation. The last is a strange argument made by respondents. It is difficult to understand the financial value of such a commitment as contrasted with a 'moral' obligation, wisely prohibited by the Constitution for municipalities (N.Y.Const. art. VIII, § 2). Instead, by any test, whether based on realism or sensibility, the city is constitutionally obliged to pay and to use in good faith its revenue powers to produce funds to pay the...