Tron v. Condello

• Decision Date: 23 December 1976
• Docket Number: No. 76 Civ. 567 (WCC).,76 Civ. 567 (WCC).
• Citation: 427 F. Supp. 1175
• Parties: Emil TRON, Individually, and as President of Association of Retired Teachers of the City of New York, Inc., on behalf of retired teachers of the City of New York, Plaintiff, v. Victor F. CONDELLO et al., Defendants.
• Court: U.S. District Court — Southern District of New York

427 F. Supp. 1175

Emil TRON, Individually, and as President of Association of Retired Teachers of the City of New York, Inc., on behalf of retired teachers of the City of New York, Plaintiff, v. Victor F. CONDELLO et al., Defendants.

No. 76 Civ. 567 (WCC).

United States District Court, S. D. New York.

December 23, 1976.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Beauduy, Schramek & Hay, New York City, for plaintiff; Harold F. Hay, New York City, of counsel.

W. Bernard Richland, Corp. Counsel, New York City, for defendants: Teachers' Retirement Board, its Members; Comptroller Goldin and The City of New York; James G. Greilsheimer, Judith A. Levitt, Allen F. London, New York City, of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant, The Municipal Assistance Corporation for The City of New York; Martin Kleinbard, Max Gitter, New York City, of counsel.

Louis J. Lefkowitz, Atty. Gen., New York City, for defendants, New York State Emergency Financial Control Board; Comptroller Arthur Levitt; Samuel A. Hirshowitz, Shirley Adelson Siegel, New York City, of counsel.

CONNER, District Judge.

This action challenging investment of New York City Teachers' Retirement funds in obligations of the Municipal Assistance Corporation for The City of New York (MAC) is before this Court on motions by defendants, pursuant to Rules 12(b)(1) or 12(b)(6), F.R.Civ.P., to dismiss both of plaintiff's claims for relief. For purposes of these motions, we are required to treat the factual allegations of the complaint as true, Cruz v. Beto, 405 U.S. 319, 92 S.Ct. 1079, 31 L.Ed.2d 263 (1972), so the facts stated below either are undisputed or are taken from the complaint.

I.

Plaintiff Emil Tron was employed as a teacher by the Board of Education of the City of New York until 1967, when he retired. During his employment, he contributed to the Teachers' Retirement System of the City of New York (the Retirement System) by means of payroll deductions. Since his retirement, he has been receiving a retirement allowance from defendant Teachers' Retirement Board of the City of New York (the Retirement Board), pursuant to provisions of Chapter 20 of the Administrative Code of the City of New York. Defendants Victor Condello, James Regan, Isaiah Robinson, Harrison Goldin, Reuben Mitchell, Bernard Goldberg and Joseph Shannon are the individual members of the Retirement Board.

Tron is President of the Association of Retired Teachers of the City of New York, whose members have retired from employment by the Board of Education of the City of New York and the Board of Higher Education of the City of New York and, like plaintiff, receive retirement allowances from the Retirement Board. Plaintiff seeks to bring this action individually, as President of the Association, and as a class action on behalf of all retired teachers of the City of New York.

In the first in a series of special enactments designed to respond to New York City's financial crisis, the New York State Legislature created defendant MAC in June 1975, as "a corporate governmental agency and instrumentality of the state constituting a public benefit corporation", N.Y.Pub. Auth.Law § 3033(1) (McKinney's 1975 Supp.), "to assist the city of New York in providing essential services to its inhabitants without interruption and in creating investor confidence in the soundness of the obligations of such city". Id. at § 3031. MAC was initially authorized to issue up to three billion dollars in notes and bonds, N.Y.Pub.Auth.Law § 3033 (McKinney's 1975 Supp.); this was later increased to five billion, two hundred fifty million dollars, L.1975, ch. 891, § 1. It was also authorized to purchase and make exchanges for short term obligations of defendant City of New York. N.Y.Pub.Auth.Law §§ 3035, 3037 (McKinney's 1975 Supp.). MAC bonds are not backed by the faith and credit of the State or of the City, but by the proceeds of stock transfer and sales taxes collected within New York City by the state government, upon annual appropriations by the State Legislature.

The next step in the financial recovery program was the New York State Financial Emergency Act for the City of New York (Emergency Act), L.1975, chs. 868-70, passed by an extraordinary session of the State Legislature on September 9, 1975. The preamble set forth extensive findings of fact as to the emergency situation:

"It is hereby found and declared that a financial emergency and an emergency period exists in the city of New York. The city is unable to obtain the funds needed by the city to continue to provide essential services to its inhabitants or to meet its obligations to the holders of outstanding securities. Unless such funds are obtained the city will soon (i) fail to pay salaries and wages to employees and amounts owed vendors and suppliers to the city, (ii) fail to pay amounts due to persons receiving assistance from the city and (iii) default on the interest and principal payments due the holders of outstanding obligations of the city.

"If such failures and defaults were to occur, the effect on the city and its inhabitants would be devastating: (1) unpaid employees might refuse to work; (2) unpaid vendors and suppliers might refuse to sell their goods and render services to the city; (3) unpaid recipients of public assistance would be unable to provide themselves with the basic necessities of life; and (4) unpaid holders of city obligations would seek judicial enforcement of their legal rights as to city revenues. These events would effectively force the city to stop operating as a viable governmental entity and create a clear and present danger to the health, safety and welfare of its inhabitants.

"The difficulties of finding solutions to such events would be compounded by the likelihood that the city, as well as the municipal assistance corporation for the city of New York, would be foreclosed from seeking funds in the public markets. The elimination of the public markets as a source of funds would leave the city with no foreseeable way to refund its outstanding short-term indebtedness. Thus, the city might be unable for an extended period to cure defaults on its outstanding obligations and that event could almost permanently destroy the fiber of the city.

* * * * * *

"This situation is a disaster and creates a state of emergency. To end this disaster, to bring the emergency under control and to respond to the overriding state concern described above, the state must undertake an extraordinary exercise of its police and emergency powers under the state constitution, and exercise controls and supervision over the financial affairs of the city of New York, but in a manner intended to preserve the ability of city officials to determine programs and expenditure priorities within available financial resources." L.1975, ch. 868, § 1.

The Emergency Act created defendant New York State Emergency Control Board (Emergency Control Board), "a governmental agency and instrumentality of the state", L.1975, ch. 868, § 2 (§ 5), composed of the Governor, three gubernatorial appointees, the New York City Mayor, the New York City Comptroller (defendant Arthur Levitt). L.1975, ch. 869, § 1. The Emergency Control Board was given significant supervisory powers over all aspects of New York City's finances, see L.1975, ch. 868, § 2 (§ 7), and was required to develop, in conjunction with City officials, a three-year plan to restore the City's fiscal health. Id. at § 2 (§ 8). Further details on both MAC and the Emergency Control Board can be found in Note, The Limits of State Intervention in a Municipal Fiscal Crisis, 4 Fordham Urban L.J. 546 (1976), and Rapico, Inc. v. City of New York, Civil Case Nos. 75-6168, 75-6246 (S.D.N.Y. May 17, 1976).¹

The crucial portion of the Emergency Act for present purposes is the following:

"Section 1. Legislative findings. It is hereby found and declared that the financial emergency of the city of New York, recognized by the state, necessitates, as a matter of urgent public policy of the state, purchases of securities of the municipal assistance corporation for the city of New York by the pension and retirement systems for public employees in the city of New York and the state of New York.

"This legislature has found, declared and enacted that securities of the municipal assistance corporation for the city of New York are reasonable, prudent and proper investments for all public officers and bodies of this state and all trustees and other fiduciaries under the laws of this state.

"Section 2. Purchases of securities. The trustees of the following pension and retirement funds and systems for public employees in the city of New York and the state of New York are hereby authorized and directed to take any and all actions necessary or appropriate to cause such funds and systems to purchase the principal amounts set forth after their respective names below, of bonds of the municipal assistance corporation for the city of New York:

(a) Teachers' retirement system of the city of New York: $200,000,000;

* * * * * *

"In order to obtain the funds necessary to purchase the bonds required by this chapter, the trustees of each of the said pension funds and retirement systems in accordance with rules and regulations adopted by such trustees shall have the right to borrow an amount not exceeding the obligation incurred by such pension fund or retirement system pursuant to this chapter and to pledge as collateral therefor such assets as they may deem advisable.

"The authorization and the direction of this section are rescinded as to any such purchase if by the date of such purchase the city of New York has defaulted in the payment of any of its outstanding bonds or notes." L.1975, ch. 868, § 7 (emphasis added).²

Defendant MAC acknowledges that the Retirement Board has purchased $275 million of MAC bonds and that five City pension funds (including the Retirement System), eleven...