The opinion of the court was delivered by: GAGLIARDI
GAGLIARDI, District Judge.
These two actions challenge the validity under federal law of the New York State Emergency Moratorium Act for the City of New York, 1975 McKinney Session Laws (Extraordinary Session), Chapters 874, 875 (the "Moratorium Act"). Parties in both actions have cross-moved for summary judgment. For the reasons stated below, defendants' motions to dismiss the complaint are granted.
The Moratorium Act was enacted on November 14, 1975 at an Extraordinary Session of the New York State legislature as part of a plan to avert the impending default by the City of New York on full faith and credit obligations falling due in December of 1975. The Moratorium Act provides in essence that payment of principal on short-term notes of the City otherwise due in 1975 and 1976 shall be suspended for three years, but that noteholders have the right either (1) to exchange their notes for longer term obligations of the Municipal Assistance Corporation ("MAC") bearing an interest rate of at least six percent per year or (2) to obtain six percent interest per year, plus any additional amount that may be held mandated under the federal or state constitutions on their existing obligations until the principal is repaid.
Plaintiffs are holders of New York City Revenue Anticipation notes by their original terms due and payable on December 11, 1975. Their complaints allege 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 noteholders of their property without due process in violation of the Fourteenth Amendment, (3) it denies the noteholders access to the courts to enforce claims for payment on the notes, and (4) it violates Section 83(i) of the Bankruptcy Act, 11 U.S.C. § 403(i), (now Section 83 of the Act, 11 U.S.C. § 403, P.L. 94-260 (April 8, 1976) and Article I, Section 8, Clause 4 of the Constitution by prescribing a state method of composition of indebtedness. The amended complaint of Ropico, Inc., plaintiff in 75 Civ. 6168, also claims that the Moratorium Act violates the Equal Protection Clause of the Fourteenth Amendment by arbitrarily modifying the rights of short-term City noteholders, while leaving unaffected the rights of bondholders and other City creditors, and that it violates Article IV, Section 1, Clause 1 of the Constitution, which requires that a state give full faith and credit to the "public acts" of every other state. The cases were argued together before this court and are hereby consolidated for decision pursuant to Rule 42(a), Fed.R.Civ.P.
Shortly after these actions were filed the defendants in both cases moved for a stay of further proceedings pending resolution of a state court action raising essentially these same federal claims and additional claims based on the New York State Constitution. Flushing National Bank v. Municipal Assistance Corporation for City of New York, 84 Misc.2d 976, 379 N.Y.S.2d 978 (Sup.Ct.N.Y.Co.1975), aff'd, 52 A.D.2d 84, 382 N.Y.S.2d 764 (1st Dep't 1976) (the " Flushing Bank case"). In that case State Supreme Court Justice Harold Baer held that the Moratorium Act does not violate any provision of federal law or the New York State Constitution. His decision was unanimously affirmed by the Appellate Division on May 4, 1976, and is now on appeal to the New York Court of Appeals with argument scheduled for September 7, 1976.
In a memorandum decision dated May 17, 1976, this court denied defendants' motion for a stay on the ground that the state law claims in the Flushing Bank case were not susceptible to an interpretation that would render a federal adjudication of the claims here unnecessary, and ruled that since the Moratorium Act is not a statute of statewide application, it is not properly a matter for a three-judge court. Ropico, Inc. v. City of New York et al., 415 F. Supp. 577 (S.D.N.Y.1976). The parties then cross-moved for summary judgment, and the New York State Attorney General formally intervened as a party defendant.
At the oral argument on the summary judgment motions, this court on the record denied plaintiffs' motions for class action certification
on the ground that a class action in these cases is unnecessary as a judgment favorable to the plaintiffs will affect the rights of all holders of City notes and thus inure to the benefit of all others similarly situated. Galvan v. Levine, 490 F.2d 1255, 1261 (2d Cir. 1973), cert. denied, 417 U.S. 936, 94 S. Ct. 2652, 41 L. Ed. 2d 240 (1974); McDonald v. McLucas, 371 F. Supp. 831, 833-34 (S.D.N.Y.1974), aff'd without opinion, 419 U.S. 987, 95 S. Ct. 297, 42 L. Ed. 2d 261 (1974); Tyson v. New York City Housing Authority, 369 F. Supp. 513, 516 (S.D.N.Y.1974).
The basic facts are not in dispute. The following facts, set forth in defendants' uncontested statement submitted pursuant to Rule 9(g) of the local rules of this court and other uncontested affidavits submitted by the defendants, are essential to an understanding of the legal issues involved in these lawsuits.
In March and April of 1975 the City of New York was unable to sell its securities in the public markets and thus could not refinance its large short-term debt. As a result the City faced the distinct possibility that it would have to default on its obligations.
During the last few months of the fiscal year ending June 30, 1975, the State advanced $800 million to the City. This advance consisted of funds which would not otherwise have been paid the City until the fiscal year ending June 30, 1976. In June of 1975, with the City still unable to sell its notes in the public markets, the state legislature enacted the New York State Municipal Assistance Corporation Act, Public Authorities Law § 3001 et seq. (McKinney's 1975 Supp.). That Act created MAC, a "corporate governmental agency and instrumentality of the state constituting a public benefit corporation." Public Authority Law § 3033(1).
MAC is empowered to issue its own bonds to raise money for the City's benefit. Public Authorities Law § 3012(1)(a). Unlike City obligations, which are secured by the full faith and credit of the City or any other governmental entity with taxing authority, the MAC bonds are secured by revenues from the New York State stock transfer tax, the City sales tax, and certain state aid allocations to the City.
The Legislature originally empowered MAC to sell an initial issue of $3 billion for the City through bond sales to the general investing public. MAC sold $1 billion of its bonds in early July of 1975, but subsequent efforts to sell an additional $1 billion in August faltered. On September 9, 1975 the New York State Legislature convened in Extraordinary Session and passed the New York State Financial Emergency Act for the City of New York (the "Financial Emergency Act"), 1975 McKinney Session Laws (Extraordinary Session) Chapters 868, 869, 870.
The Financial Emergency Act provides for (1) the creation of a state controlled Emergency Financial Control Board to review and supervise the management of the City and to formulate in conjunction with City officials a three-year financial plan to restore the City to a sound fiscal condition, Financial Emergency Act §§ 5-8, (2) a wage freeze on salary increases for all city employees who had not previously agreed to such a freeze voluntarily, Financial Emergency Act § 10, and (3) a purchase of $750 million of MAC bonds by the State. The Financial Emergency Act further contains provisions authorizing and directing the trustees of various city and state retirement funds and the State Insurance Fund to purchase MAC obligations.
The preamble to the Financial Emergency Act sets forth extensive findings of fact concerning the financial problems facing New York City including the following:
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.
To forestall the effects on the city and the state of a failure by the city to meet its obligations when due, the state has developed, in coordination with the municipal assistance corporation for the city of New York and certain private financial institutions located in the city, a financial program designed to infuse the city with funds needed by it during the next several months. This financial program is only a short-term means of helping the city to meet its obligations during this emergency period. For longer range success, the city must restore investor receptivity to the obligations of the city.
Thus, faced with the possibility of an imminent default on the City's obligations, the state legislature on November 14, 1975 enacted the Moratorium Act, which states in its preamble:
It is hereby found and declared that the grave public emergency found and declared to exist by the legislature in adopting the New York State Financial Emergency Act for the City of New York has dramatically worsened in the last two months. Today, not only is the City of New York threatened with default on its outstanding obligations, but financially sound agencies of the state itself are similarly threatened because of public fears about the effects of default by the city.
In the absence of the passage of the Moratorium Act approximately $3.149 billion in principal and interest would have been due short-term City noteholders other than MAC within the next year. Of this amount, $1.7 billion
was held by private individuals or corporations other than New York's eleven major clearing house banks, and certain city pension funds (the "Institutional Holders"). These Institutional Holders agreed, subject to the passage of federal legislation providing for a loan to the city in excess of $2.3 billion,
that their $849 million of city notes would be subject to the moratorium, and that after the expiration of the three-year moratorium these notes would continue to bear an interest rate of six percent per annum and would not be fully paid off until July 1, 1986. In addition, the Institutional Holders agreed to adjust the terms of the approximately $1.7 billion of city bonds which they held and the trustees of various city pension funds agreed to purchase $2.53 billion of newly issued obligations of the city and MAC.
On November 26, 1975, pursuant to the provisions of the Moratorium Act, MAC made an exchange offer granting the private noteholders the right to exchange their notes for MAC bonds maturing on July 1, 1986 with an annual interest rate of 8% a year. The MAC bonds available to the noteholders in the exchange offer also were subordinate to the approximately $3 billion of bonds previously issued by MAC. Noteholders who accepted the exchange offer were required to sign a statement waiving their rights under suits like this one challenging the validity of the Moratorium Act. Noteholders who did not accept this exchange offer were to receive full payment of interest at the stated rate until the original maturity date, and six percent per year thereafter. Non-accepting noteholders were precluded from bringing suit to obtain their principal until the expiration of the Act on November 15, 1978.
By December 29, 1975, the expiration date of the original exchange offer, approximately 30% of the noteholders had elected to ...