UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
May 17, 1976
ROPICO, INC., Plaintiff,
The CITY OF NEW YORK et al., Defendants. Alfred AVINS, Plaintiff, v. The CITY OF NEW YORK and Harrison J. Goldin, Defendants
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.
I. Three-Judge Court
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.
II. The Stay
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 would be better for the federal courts to "avoid any possible irritant in the federal-state relationship" by deferring jurisdiction until the state courts had passed on the state constitutional questions. Reetz, supra, 397 U.S. at 87, 90 S. Ct. 788.
Plaintiffs on the other hand claim that there is no uncertain question of state law here. The state constitutional claims asserted in the Flushing Bank case are, according to plaintiffs, insubstantial. Rather they argue that the Flushing Bank case, like the actions brought here, asserts primarily claims arising under federal law -- i.e. that the Act is repugnant to the United States Constitution and to the federal Bankruptcy Act. Relying heavily on the Second Circuit's recent decision in McRedmond v. Wilson, supra, plaintiffs argue that the "mere possibility" that a state court might find an unambiguous state statute to violate the federal constitution is insufficient grounds for a stay of a federal action. McRedmond, supra at 764. They find this case similar to Harman v. Forssenius, supra and Kusper v. Pontikes, supra in which the Supreme Court held that district courts properly refused to abstain from hearing claims where the state statutes involved were not "fairly susceptible of a reading that would avoid the necessity of a constitutional adjudication." In those cases the Supreme Court found abstention "would amount to shirking the solemn responsibility of the federal courts to 'guard, enforce, and protect, every right granted or secured by the constitution of the United States.'" Kusper v. Pontikes, supra, 414 U.S. at 55, 94 S. Ct. at 306.
The Supreme Court decisions discussed above indicate that the key issue in determining whether a stay should be granted in this case is whether Article 8 of the New York State Constitution is "fairly susceptible of a reading that would avoid the necessity of a federal adjudication."
In considering this question, this court must weigh the desirability of permitting state courts the first opportunity to pass on the constitutionality of a state statute that is a vital part of the state's program for dealing with a significant financial crisis affecting its largest city against the possibility that by this court's abstention the plaintiffs and other holders of approximately $1.6 billion in City notes may be deprived of substantial rights guaranteed to them by federal law.
After a review of the voluminous materials submitted by all parties in the Flushing Bank action in both the Supreme Court and the Appellate Division, this court believes -- although the issue is not entirely free from doubt -- that Article 8 of the New York State Constitution is not "fairly susceptible" of a reading by the state courts that would render a federal adjudication unnecessary. The basis of the plaintiff's argument in the Flushing Bank case is apparently that Article 8, section 2 of the State constitution, pledging the City's full faith and credit to its obligations, Article 8, section 10, setting maximum restrictions on the amount of indebtedness, and Article 8, section 12, restricting the legislature's right to limit a municipality's power to pay off its debts by levying real estate taxes, all create an implied constitutional obligation to allocate all real estate tax revenues first to the payment of City debt. As no prior case has ever construed these sections directly in a situation like this and there are only a few cases dealing with the effect of any of the provisions of Article 8 in the context of the failure of a municipality to pay its obligations,
it is very difficult to say definitively that these provisions of the state constitution are not "susceptible" to a certain reading by the state courts. Nevertheless, a provision of the state constitution does not automatically become susceptible of a certain interpretation by the mere assertion of that interpretation in a suit brought in state court alleging basically federal claims. The arguments based on the state constitution in the Flushing Bank suit have now been summarily rejected by both the Special Term judge and by the five justices who considered it in the Appellate Division. An independent review of these claims indicates that the state constitutional provisions here cannot legitimately be said to be "fairly susceptible" to an interpretation that would obviate the need for a federal adjudication.
Article 8, Section 2 of the New York State Constitution, on which the plaintiff in the Flushing Bank case relies, states that:
"No indebtedness shall be contracted by any . . . city . . . unless such . . . city . . . shall have pledged its faith and credit for the payment of the principal thereof and the interest thereon."
From this language the plaintiff argues that the City has an unconditional obligation to pay all its indebtedness in full on the date it falls due. It is undisputed, however, that the faith and credit of the City was pledged to the payment of the notes subject to the moratorium, and there is no specific language in this section that requires the City to make immediate full payment on revenue anticipation notes backed by its faith and credit on the due date if it has insufficient funds to do so, and if there is a state statute permitting it to extend the maturity date of the debt. Article 8, Section 2 of the New York State Constitution does provide that municipal indebtedness other than that issued in anticipation of the collection of taxes is paid out of the first revenues received by a municipality. However, this clause specifically exempts from this first lien requirement tax anticipation notes of the type involved here.
The plaintiff in the Flushing Bank case also notes that under further provisions of Article 8, Section 2, municipal indebtedness shall be paid in annual installments, the first of which must be within two years of the date of issue. This provision, however, excepts certain short-term indebtedness including indebtedness which is to be paid "in one of the two fiscal years immediately succeeding the fiscal year in which such indebtedness was contracted." Plaintiff argues that the "fair intendment" of this exception is that short-term indebtedness -- such as the notes in question here -- must be paid within the two fiscal years following the fiscal year of issue. While this argument is undoubtedly ingenious, the Court notes that there is simply no language imposing the suggested requirement in these provisions and Flushing Bank's contention appears to ask the courts to create a substantive constitutional restriction where none exists.
Similarly the arguments based on Article 8, Sections 10 and 12 of the New York State Constitution require that a court read into the language of those sections substantive provisions that are not contained in the specific language. Article 8, Section 10 states in pertinent part:
Hereafter, in any county, city, village or school district described in this section, the amount to be raised by tax on real estate in any fiscal year, in addition to providing for the interest on and the principle of all indebtedness, shall not exceed an amount equal to the following percentages of the average full valuation of taxable real estate of such county, city, village or school district, less the amount to be raised by tax on real estate in such year for the payment of the interest on and redemption of certificates or other evidence of indebtedness described in paragraphs A and D of section five of this article, or renewals thereof . . .
The percentage applicable to New York City is 2.5%. Flushing Bank contends that this language when read in conjunction with Article 8, Section 12 of the state constitution, which precludes the legislature from restricting the power of a locality to levy taxes for the payment of interest or principal on indebtedness, imposes on the City an absolute requirement that real estate taxes sufficient to pay all indebtedness in fact be levied. However, no such explicit mandate is contained in the statutory language, and on their face these sections appear merely to limit the power of a municipality to levy real estate taxes above a certain level. Nowhere is there anything that commands the City to levy real estate taxes at the maximum rate constitutionally permitted.
A review of the briefs filed and the opinions that were handed down in the New York Courts indicates that, although these state constitutional arguments clearly were made, the Flushing Bank suit, like the suits here, basically attacks the validity of the Act under federal law. The bulk of the opinions in both the lower court and the Appellate Division discussed the question of the validity of the Act under the United States Constitution. The state constitutional arguments were rejected as without merit in one brief paragraph in the Appellate Division and received only slightly more attention in the opinion of Justice Baer at Special Term. It thus appears that the serious questions concerning the validity of the Act are solely questions arising under federal law, and not the state constitution.
Under these circumstances, this court must be guided by the Second Circuit's recent holding in McRedmond v. Wilson, supra that where the state law is clear, the federal court must perform its adjudicative duty and has no right to abstain merely because a state court decision might render a federal adjudication unnecessary. McRedmond, supra, at 761.
The state court proceeding asserts basically the same claims raised here. As the court in McRedmond noted:
In such a case the "assertion of a federal claim in federal court [need not] await an attempt to vindicate the same claim in state court." Askew v. Hargrave, supra, 401 U.S. at 478, 91 S. Ct. 856, 28 L. Ed. 2d 196; McNeese v. Board of Education, 373 U.S. 668, 672, 83 S. Ct. 1433, 10 L. Ed. 2d 622.
While the defendants here argue that the Flushing Bank case is the "more appropriate vehicle" for the assertion of these claims and that it will be a wasteful duplication of effort to have a parallel action proceeding in federal court, this court does not believe that under McRedmond it can voluntarily decline to hear serious claims asserted under federal law merely because another litigant has previously filed a similar action in the state courts.
Where the law is clear and the only significant question is whether the law violates the federal constitution or federal statutes, the "mere possibility" that the state courts might take the initiative in striking down its own law is no ground for abstention. McRedmond, supra at 761. In such cases a federal court has a duty to adjudicate every litigant's claim that is properly before it.
The motion for a stay is therefore denied.