State Street Bank & Trust Co. v. Com., Treasury Dept.
| Decision Date | 26 May 1998 |
| Parties | STATE STREET BANK & TRUST CO., Petitioner, v. COMMONWEALTH of Pennsylvania, TREASURY DEPARTMENT and Barbara Hafer, in her capacity as Treasurer of the Commonwealth of Pennsylvania, Respondents. |
| Court | Pennsylvania Commonwealth Court |
Robert L. Byer, Pittsburgh, for petitioner.
Paul M. Yatron, Reading, for respondents.
Before COLINS, President Judge, LEADBETTER, J., and LORD, Senior Judge.
Before the Court are preliminary objections filed by the Treasury Department and Barbara Hafer as Treasurer for the Commonwealth (Treasurer Hafer) to State Street Bank's (Bank) action seeking a declaration that Treasurer Hafer cannot unilaterally terminate custody and securities lending agreements between the Treasury Department and the Bank. Also before us are cross-motions for summary relief.
On November 7, 1994 the Treasury Department entered into two agreements with the Bank. The first was a two-year global custody and safekeeping services agreement (custody agreement) under which the Bank acted as custodian of specified assets for an annual fee of $250,000; the custody agreement could be terminated by either party upon 120 days written notice. The second was a two-year securities lending program contract (securities lending agreement) under which the Bank acted as exclusive agent for securities lending services for the assets held by the Bank under the custody agreement in exchange for compensation at 15 percent of the monthly gross income realized from securities lending activities. The securities lending agreement provided for termination by the Treasury Department at any time.
In 1996, at the end of then-Treasurer Knoll's term of office, the Treasury Department proposed amendments to the agreements. The parties agreed to extend the agreements for one year, effective January 1, 1997, and that the agreements would thereafter be extended for additional two-year periods if securities lending gross revenue exceeded stated goals. 1 The parties also agreed that neither party could unilaterally terminate either agreement. In accordance with the Section 204(f) of the Commonwealth Attorneys Act, 2 the Office of Attorney General approved the proposed amendments after further amending the contract termination language. 3
The $40 million revenue threshold was reached in April 1997 and as of that time the agreements were extended until December 31, 1999. However, Treasurer Hafer notified the Bank that the amendments could not lawfully extend the terms of the agreements beyond the term of office of her predecessor and that she intended to unilaterally terminate the agreements after identifying a successor custodian/lending agent. Soon thereafter, Treasurer Hafer issued a request for proposals for the services of a custodian/lending agent. In its petition to this Court, the Bank seeks a declaration to the effect that the Attorney General's approval of the agreements precludes Treasury from terminating the agreements or from asserting their illegality. Treasury filed preliminary objections, 4 and the parties then filed cross-motions for summary relief under Pa. R.A.P. 1532(b). 5
Contracts between governments and private parties are subject to legal constraints that do not apply to private agreements in that governments are subject to constitutional and statutory limitations, the contracting official must have contracting authority, and the contract must not bargain away essential government powers or unduly bind successive governments by preventing their exercise of essential powers. 6 Historically, judicial review of public contracts has established that states may not enter into irrevocable contracts that surrender sovereign right and powers and that certain essential state powers may not be contracted away. 7
The inalienable power doctrines are expressed as absolute prohibitions, but neither doctrine has ever been so interpreted. Courts have adopted several tests that refine and limit the potentially broad reach of the doctrines. The most widely adopted test distinguishes between ... governmental and proprietary activities....
A similar test based on the contract's general subject matter or the parties' contractual functions also has evolved. The judiciary has found that certain governmental activities are essential for governance or reserved for sovereign exercise alone....
In addition ... some courts have employed other policy prescriptions to determine whether ... government contracts should be enforced. These tests emphasize such factors as the fairness and reasonableness of the contract, the extent to which it is advantageous to the [government], and whether it deprives the [government] of discretion that should remain unimpaired. 8
Courts applying the governmental/proprietary test generally characterize as governmental "powers that are the sole prerogative of the sovereign, or that are deemed indispensable to the proper functioning of government[,]" such as decision-making or discretionary matters that "each body of officeholders should be able to control, free of any restrictions imposed by its predecessors." 9 These powers include functions that the state must perform and those that it can perform more economically, more efficiently, or more fairly than the private sector. 10 Proprietary activities are generally considered to be those that have traditionally or principally been supplied or performed by private enterprise; however, even some of these activities have been deemed governmental when incident to public operations. 11 Applying the governmental/proprietary test to the instant matter, we must examine the nature of the functions delegated to the Bank under the two agreements.
The executive branch of the Commonwealth includes the office of the State Treasurer, 12 the powers and duties of which are largely statutory. Section 206 of the Administrative Code of 1929 13 provides that the Treasury Department shall have as its head the State Treasurer, "who shall, either personally, by deputy, or by the duly authorized agent or employe ... exercise the powers and perform the duties by law vested in and imposed upon the department." The State Treasurer exercises the statutory powers and performs the statutory duties as custodian of various Commonwealth assets, which are paid into the State Treasury. 14
The Fiscal Code authorizes the investment of funds, and it imposes a duty of judgment and care, a duty of prudence, discretion, and intelligence, with regard to the funds' permanent disposition; the discharge of these duties requires that the Treasurer give due consideration to the investment's probable earnings and to the safety of the capital. 15 The exercise of judgment and care specifically includes "the daily investment of available investable funds necessary to maintain maximum effectiveness of the Treasury Department investment portfolio at all times." Section 301.1(h)(1) of The Fiscal Code, 72 P.S. § 301.1(h)(1). The Fiscal Code also mandates that the Treasury Department have custody of securities and their safe keeping; it authorizes the State Treasurer to contract for custodial and securities lending services and to insure against the loss of any cash or securities of which the Treasury Department or the State Treasurer is custodian. Section 303, 72 P.S. § 303.
The Fiscal Code imposes these duties with a concomitant grant of discretion to the officeholder. Although one State Treasurer may contract for services beyond his or her or term, to render such contracts enforceable against a successor with no possibility of termination would be to rob the successor of the exercise of that discretion. In the instant case, Treasurer Hafer would be precluded from exercising that discretion for the duration of her term of office.
The custodial and securities lending activities comprising the subject matter of the agreements in question are the powers and duties conferred upon the State Treasurer, as an executive officer and as head of the Treasury Department, by the state constitution and by statute. Although custodial and securities lending activities are admittedly functions frequently and principally performed by private enterprise, because the funds in question are state assets and subject to the discretion and control of the State Treasurer, we must conclude that these are functions that the Treasurer should be able to control, free of any restrictions imposed by her predecessors. The prudent management of public funds lies at the core of the constitutionally mandated duties of the Treasurer. A State Treasurer's inability to select and manage the provider of these services impairs her ability to execute policy and to discharge her duties to the Commonwealth with fidelity. The Treasurer should be free to exercise her discretion in these matters as often as she deems necessary to the discharge of her office; by the terms of these amended agreements, Treasurer Hafer is restricted by a predecessor from exercising control over the selection and management of the custodian and its securities lending activities. For these reasons, the custodial and securities lending agreements relate to the Treasurer's governmental powers and as such, the agreements made with Treasurer Knoll cannot bind Treasurer Hafer.
In a number of contexts, the courts of this Commonwealth have refused to uphold public contracts that unduly bind successor governments.
It is a mistake to suppose that, because a public official, or indeed any other agent for...
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...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.C......
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...as opposed to a "proprietary" function, the agreement is wholly invalid and unenforceable. See State Street Bank & Trust Co. v. Commonwealth, 712 A.2d 811, 815 (1998) ("It is a mistake to suppose that, because a public official ... has power to make a contract, he is authorized thereby to m......
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