PROGRAM ADMIN. SERVICES v. DAUPHIN CTY. GEN. AUTH.

• Decision Date: 19 May 2005
• Citation: 874 A.2d 722
• Parties: PROGRAM ADMINISTRATION SERVICES, INC., f/k/a R.D. Fowler & Assoc., Inc., Appellant v. DAUPHIN COUNTY GENERAL AUTHORITY.
• Court: Pennsylvania Commonwealth Court

874 A.2d 722

PROGRAM ADMINISTRATION SERVICES, INC., f/k/a R.D. Fowler & Assoc., Inc., Appellant v. DAUPHIN COUNTY GENERAL AUTHORITY.

Commonwealth Court of Pennsylvania.

Argued April 6, 2005.

Decided May 19, 2005.

Thomas W. Scott, Harrisburg, for appellant.

David E. Lehman, Harrisburg, for appellee.

BEFORE: COLINS, President Judge, SMITH-RIBNER, Judge, PELLEGRINI, Judge, FRIEDMAN, Judge, LEADBETTER, Judge, COHN JUBELIRER, Judge, and SIMPSON, Judge.

OPINION BY Judge SMITH-RIBNER.

Program Administration Services, Inc. (PASI) appeals from an order of the Court of Common Pleas of Dauphin County that denied PASI's motion for summary judgment and entered a declaratory judgment in favor of the Dauphin County General Authority (Authority) in PASI's declaratory judgment action under the Declaratory Judgments Act, 42 Pa.C.S. §§ 7531-7541. PASI sought a judicial determination as to whether two long-term bond administration contracts executed by PASI and the Authority in connection with the Authority's sale of two separate bond issues may be terminated other than according to the terms of the contracts.

The primary issue in this appeal is whether the trial court erred when it held that pooled school financing activities carried on by the Authority are governmental, thereby authorizing a newly appointed Authority Board of Directors to terminate existing contracts without cause and prior to their stated termination dates. An alternative issue is whether the Program Administration Agreements (Agreements) are the type of "agreements ... with others in connection with any bonds" issued by an authority that it is empowered to make for up to forty years pursuant to Section 5607(d)(12) of the Municipality Authorities Act (Act), 53 Pa.C.S. § 5607(d)(12), that bind an authority and cannot be avoided by later boards.

I

The Authority is a corporate agency of the Commonwealth created by Dauphin County under the former Municipality Authorities Act of 1945, Act of May 2, 1945, P.L. 382, as amended, formerly 53 P.S. §§ 301-322, repealed by Section 3 of the Act of June 19, 2001, P.L. 287, and continued in the current Municipality Authorities Act (Act), 53 Pa.C.S. §§ 5601-5623. The Authority's powers include authorization to issue bonds to help entities arrange financing for public projects. In 1986 the Authority launched a program to assist school districts seeking to borrow money to finance new capital improvements or to refinance existing debt. This became known as "School Pool I" (Pool I); it was the model for a second such program established in 1997 known as "School Pool II" (Pool II).¹ Under the Agreements PASI has been responsible for marketing the programs to prospective school district borrowers, assisting in their applications, calculating note payments, billing the borrower school districts and assisting the Authority in securing investments of funds on deposit with the trustee banks.

Each Agreement includes provisions that it shall terminate (1) when no portion of the bonds remains outstanding and unpaid, (2) on continuing failure of the administrator to duly observe and perform in any material respect any covenant, condition or duty for a period of 30 days after written notice or (3) upon mutual agreement. In November 2000 PASI was notified that the Authority intended to terminate the Agreements without any cause for material breach. PASI initiated this declaratory judgment action seeking a judicial determination that the contracts may not be terminated in any manner outside the terms specified in the Agreements. The Authority filed preliminary objections in the nature of a demurrer, arguing in part that its activity was governmental rather than proprietary.

The trial court (Turgeon, J.) noted the high standard for sustaining a demurrer. It first ruled that the law did not state with certainty that the Authority should prevail in light of the recent decision in Boyle v. Municipal Authority of Westmoreland County, 796 A.2d 389 (Pa.Cmwlth.), appeal denied, 571 Pa. 709, 812 A.2d 1231 (2002), in which this Court stated that municipal authorities by their very definition engage in proprietary functions only. The trial court further ruled that the issue of whether the parties' relationship was that of employer and employee could not be decided without further development of the record.

Following discovery on remand, PASI moved for summary judgment. A three-judge panel of the trial court (Kleinfelter, P.J.) first rejected the contention that PASI is an employee rather than an independent contractor. On the issue of governmental versus proprietary activity, the court concluded that the contracts here logically involve a governmental function, relying primarily upon State Street Bank & Trust Co. v. Commonwealth, Treasury Department, 712 A.2d 811 (Pa.Cmwlth.1998), and this Court's decision in Lobolito, Inc. v. North Pocono School Dist., 722 A.2d 249 (Pa.Cmwlth.1998),aff'd in part and rev'd in part, 562 Pa. 380, 755 A.2d 1287 (2000). The court opined that the sweeping language used in Boyle that municipal authorities by their very definition engage in proprietary functions only was dictum, and, if taken literally, the Boyle holding was contrary to Mitchell v. Chester Housing Authority, 389 Pa. 314, 132 A.2d 873 (1957). The court declared that the Agreement's termination clause was unenforceable against the Authority and that it could terminate the Agreement as provided in its charter.²

II

PASI first acknowledges the general rule that a government contract that exceeds the period of time when the officials making it are in office may be terminated by their successors, without cause, irrespective of the termination date or other procedures for termination set forth in the contract. Lobolito, 562 Pa. 380, 755 A.2d 1287 (2000). Nevertheless, two basic exceptions to this general rule are that it applies only to contracts involving the performance of a governmental function and that it does not apply to classes of contracts specifically exempted by the legislature to permit governments to make and acquire long-term commitments when necessary for the public good. To protect the sanctity of the vote, incoming officials must be free to make and to enforce policies and contracts affecting governmental functions. The opposite reasoning applies in regard to proprietary functions, where a governmental party provides goods and services otherwise available through the private market. Then the government entity is in competition with or acting in place of private market providers, and public policy favors holding all suppliers to the same standards of contractual responsibility.

PASI contends that the trial court's holding that the School Pool programs represent governmental functions is contrary to Boyle, where the Court also had to decide whether a municipal authority could terminate a long-term contract with an independent contractor before it expired. The decision in Boyle relied upon the analysis of municipal authorities in Southeastern Pennsylvania Transportation Authority v. Union Switch & Signal, Inc., 161 Pa.Cmwlth. 400, 637 A.2d 662 (1994), which stated that unlike municipal corporations, which have "governmental" and "proprietary" functions, authorities engage only in the latter: they are public corporations that generally are established for the purpose of financing and managing revenue producing projects of a public nature or other activities not considered to be part of core governmental activities, i.e., governmental business ventures.

In Mitchell the Pennsylvania Supreme Court held that a municipal housing authority organized pursuant to the Housing Authorities Law, Act of May 28, 1937, P.L. 955, as amended, 35 P.S. §§ 1541-1565, was performing a governmental function insofar as it exercised police powers of the Commonwealth in connection with a large part of its operation. The court held as well that a five-year employment contract given to the secretary/executive director by an outgoing board majority was intended to bind successor boards; that it was the crucial administrative position that embodied the authority's governmental function and required an intimate relationship with the board; and that successor boards should not be hamstrung by the imposition of a policy-implementing and to some extent policymaking machinery not attuned to the new body's policies. Thus the contract was unenforceable. PASI notes that Mitchell was an employment contract case.

Additionally, PASI contends that even if the Authority is capable of engaging in governmental functions, the school financing arrangements at issue are proprietary. A governmental function is one performed for public purposes exclusively in its public, political or municipal character. Boyle (citing Falls Township v. Scally, 115 Pa.Cmwlth. 56, 539 A.2d 912 (1988)). A proprietary function is one that traditionally or principally has been performed by private enterprise. State Street Bank & Trust Co. In determining whether activity is governmental or proprietary the Court will consider whether it: (1) is one that government is not statutorily required to perform; (2) also may be carried on by private enterprise; and (3) is used as a means of raising revenue. Boyle (citing County of Butler v. Local 585, Service Employees Int'l Union, AFL-CIO, 158 Pa.Cmwlth. 519, 631 A.2d 1389 (1993)).³ PASI asserts that the Authority's school financing activities meet all three prongs of the Boyle test — the Authority is not statutorily required to sell bonds, raise funds or loan those funds to school districts. Also most municipal borrowing is supplied by the private market, and the activity obviously raises money.

PASI maintains that the trial court misapplied the Supreme Court's holding in Lobolito, where the issue was whether a new school board could avoid an earlier contract to construct a new school, and the court held that the decision whether to build a school clearly...