The opinion of the court was delivered by: GAGLIARDI
GAGLIARDI, District Judge.
These two actions challenge the constitutionality of the New York State Emergency Moratorium Act for the City of New York, 1975 McKinney Session Laws, Chapter 874 (the "Act") which was enacted November 14, 1975 at an Extraordinary Session of the New York State Legislature convened specially to deal with the impending default of New York City on full faith and credit obligations falling due in December of 1975.
The Act provides in essence that payment of principal on short-term notes issued by the City shall be suspended for three years, but that noteholders have the right either (1) to exchange their notes for longer term obligations bearing an interest rate of at least six percent per year or (2) to obtain six percent per year, plus any additional amount that may be held to be mandated under the state or federal constitutions, on their existing obligations until the principal is repaid.
In June of 1975, in an earlier attempt to alleviate the City's financial problems, the State Legislature created the Municipal Assistance Corporation for the City of New York ("MAC"), a corporate governmental agency and instrumentality of the State constituting a public benefit corporation, which is empowered to issue its own bonds to raise money for the City's benefit. On November 26, 1975 pursuant to the provisions of the Act, MAC made an exchange offer granting holders of New York City notes due and payable between December 1975 and March 1976 the right to exchange their notes for MAC bonds maturing on July 1, 1986 with an annual interest rate of 8% a year. These bonds, unlike City notes, are not secured by the full faith and credit of the City or any other governmental entity with taxing authority; rather they are obligations of MAC, which, under the applicable legislation, are backed by revenues from the New York State stock transfer tax, the City sales tax and certain state aid allocations to the City. MAC has no independent taxing power and its right to the revenue from these taxes must be renewed by successive legislatures.
Alfred Avins, pro se plaintiff in 75 Civ. 6246 a professor of constitutional law at Delaware Law School, holds New York City notes due and payable on December 11, 1975. Ropico, Inc., plaintiff in 75 Civ. 6168, is a Florida corporation that, like Avins, owns a New York City Revenue Anticipation note due and payable on the same date. Plaintiffs claim that the Moratorium Act is invalid under Federal law because (1) it impairs the obligation of contracts in violation of Article I, Section 10 of the United States Constitution, (2) it deprives the note holders of their property without due process of law in violation of the Fourteenth Amendment, (3) it closes access to the plaintiffs to the courts for claims of payment on the notes in violation of Article III and the Fourteenth Amendment, and (4) it violates Section 83(i) of the Bankruptcy Act, 11 U.S.C. § 403(i), and Article I, Section 8, Clause 4 by creating a state bankruptcy procedure in conflict with that legislated by Congress in the Bankruptcy Act.
Ropico also argues that the Act violates the Equal Protection Clause of the Fourteenth Amendment by arbitrarily discriminating against short-term City noteholders as opposed to other creditors, and the Full Faith and Credit Clause of Article IV.
Both plaintiffs seek class action
status and Avins requests the convening of a three-judge court. Although not formally consolidated, the cases have been argued together before this court.
Defendants City of New York and MAC have moved for a stay of these actions pending final resolution of a similar state court action entitled Flushing National Bank v. Municipal Assistance Corporation for City of New York, et al., Index No. 20245/75 (Sup.Ct.N.Y.Co.) (the "Flushing Bank" case). In that case the plaintiff asserts essentially the same federal constitutional and statutory attacks on the Act as the plaintiffs here, but additionally claims that the Act violates several sections of Article 8 of the New York State Constitution.
The Flushing Bank case was filed on November 17, 1975 and Justice Harold Baer rendered a decision on December 23, 1975 upholding the validity of the Act, Sup., 52 A.D.2d 84, 382 N.Y.S.2d 764. That decision was unanimously unanimously affirmed by the Appellate Division on May 4, 1976, Sup., 84 Misc. 2d 976, 379 N.Y.S.2d 978.
The defendants contend that since the Flushing Bank case raises questions as to the validity of the Act under the State Constitution, it is appropriate for this court to abstain pending resolution of the validity of the Act under state law by the State Courts. They further claim that a stay is especially appropriate in this case because the Flushing Bank case asserts on behalf of the same class of noteholders
the same federal claims asserted here. They argue that that case was filed earlier and is further advanced. The Special Term decision was rendered more than four months ago and the Appellate Division issued its decision on May 4, 1976.
Plaintiffs vigorously oppose the motion for a stay. They argue that the state constitutional questions are insubstantial and that their suits assert rights guaranteed by federal law appropriate for immediate federal court resolution. Avins further argues that since a three-judge court is necessary, a stay can only be granted by that court and not a single district judge.
The City claims that this case is not proper for a three-judge court because it does not involve a statute of state-wide application. While no case denying a three-judge court on this ground has dealt with a statute of such state-wide importance and concern as that here, the decided authorities clearly support the City's position.
Under 28 U.S.C. § 2281, a three-judge court must be convened where an injunction is sought restraining the enforcement of any state statute on the ground that it is unconstitutional. The purpose of the statute is to prevent a single federal judge from being able to paralyze the operation of a state's entire regulatory scheme or to bring an "improvident statewide doom . . . of a state's legislative policy." Moody v. Flowers, 387 U.S. 97, 101, 87 S. Ct. 1544, 1547, 18 L. Ed. 2d 643 (1967); Phillips v. United States, 312 U.S. 246, 251, 61 S. Ct. 480, 85 L. Ed. 800 (1940); Nielsen, Three-Judge Courts: A Comprehensive Study, 66 F.R.D. 495, 499 (1975). However, because the requirement that three judges hear a single case can entail a "serious drain upon the federal judicial system" Phillips v. United States, supra at 250, 61 S. Ct. at 483, the Supreme Court has consistently construed the statute as authorizing a three-judge court only "when a state statute of general and statewide application is sought to be enjoined." Board of Regents v. New Left Education Project, 404 U.S. 541, 92 S. Ct. 652, 30 L. Ed. 2d 697 (1972); Moody v. Flowers, supra; Ex Parte Collins, 277 U.S. 565, 48 S. Ct. 585, 72 L. Ed. 990 (1928); Rorick v. Board of Commissioners of Everglades Drainage District, 307 U.S. 208, 59 S. Ct. 808, 83 L. Ed. 1242 (1939).
Although the statute here is undoubtedly one of great state-wide importance and the question of its constitutionality has state-wide and even national implications, it is not a statute of state-wide application as required by the cases interpreting 28 U.S.C. § 2281. The Act is entitled "The New York State Emergency Moratorium Act for the City of New York," (emphasis added) and by its terms applies only to New York City. While it is true that it applies to holders of New York City obligations wherever they may be found, it still affects only one municipality and conditions affecting that municipality. Rorick v. Board of Commissioners of Everglades Drainage District, supra is controlling authority. There the Supreme Court found that a Florida statute affecting the financial administration of a large drainage district in South Florida was not a statute of state-wide operation despite the apparent application of the statute to all holders of the district's bonds wherever situated. There, as here, suit was brought by bondholders whose rights were affected by the plan. The Supreme Court in that case indicated that to determine whether a three-judge court is proper, the district court must look to whether the debtor to which the challenged legislation applies is a state-wide entity, and the location of the creditors affected is not the determinative factor. A three-judge court not being required, Avins' argument that only such a court can grant a stay is academic.
The defendants argue that both plaintiffs' rights are fully protected by the Flushing Bank case in the state courts. However, as a general rule litigants have a right to have substantial federal claims heard in federal court even though the rights asserted may be adjudicated in some other forum. Zwickler v. Koota, 389 U.S. 241, 248, 88 S. Ct. 391, 19 L. Ed. 2d 444 (1967); McNeese v. Board of Education for Community Unit School District 187, 373 U.S. 668, 83 S. Ct. 1433, 10 L. Ed. 2d 622 (1963); McRedmond v. Wilson, 533 F.2d 757 (2d Cir. 1976). Here plaintiffs assert that the Act is depriving them and other holders of City notes of substantial rights in violation of the federal constitution and federal statutes. In this situation a stay by this court under the judge-made doctrine of abstention can only be justified if there are special circumstances in which resolution of the federal issues is controlled by the interpretation of state laws that are susceptible to a determination by state courts that would avoid or modify the necessity of a federal adjudication. Kusper v. Pontikes, 414 U.S. 51, 54, 94 S. Ct. 303, 38 L. Ed. 2d 260 (1973); Lake Carriers Ass'n v. MacMullan, 406 U.S. 498, 92 S. Ct. 1749, 32 L. Ed. 2d 257 (1972); Harman v. Forssenius, 380 U.S. 528, 534, 85 S. Ct. 1177, 14 L. Ed. 2d 50 (1965); McRedmond v. Wilson, supra at 760. Abstention is proper only if (1) the state law is uncertain, (2) the resolution of the federal issue is dependent on the interpretation to be given state law, and (3) the state law is susceptible of an interpretation that would make resolution of the federal issue unnecessary. McRedmond v. Wilson, supra, at 761.
The defendants contend that all these prerequisites are present here. Although all parties agree that the Act itself is clear, the defendants claim that the effect of the Act under Article 8 of the New York State Constitution which deals with local indebtedness is not. They argue that the Act contains provisions which may well be in conflict with the guarantees to municipal bondholders contained in Article 8. The effect of that Article on the Act is currently being tested in the state courts in the Flushing Bank case, and a decision there finding the Act in violation of the state constitution would render a federal adjudication of the Act's validity unnecessary. They claim that the cases of Reetz v. Bozanich, 397 U.S. 82, 90 S. Ct. 788, 25 L. Ed. 2d 68 (1970), and Askew v. Hargrave, 401 U.S. 476, 91 S. Ct. 856, 28 L. Ed. 2d 196 (1971), are virtually indistinguishable from the situation involved here. In those cases the Supreme Court held that the district courts erred in not abstaining when faced with federal constitutional challenges to state statutes which possibly conflicted with state constitutional provisions that had never been definitively interpreted by the state courts. In both cases the Supreme Court found that it ...