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Lee Bordeleau et al v. State of New York et al

November 21, 2011


The opinion of the court was delivered by: Jones, J.:

This opinion is uncorrected and subject to revision before publication in the New York Reports.

The issue before this Court is whether plaintiffs' challenge to appropriations in the New York State 2008-2009 budget, pursuant to article VII, § 8(1) of the State Constitution, can survive a motion to dismiss. We conclude that it cannot.

Plaintiffs, a group of 50 taxpayers of the State of New York, commenced this declaratory judgment action against the State, New York State Urban Development Corporation (UDC) doing business as Empire State Development Corporation (ESDC), International Business Machines Corporation (IBM), Advanced Micro Devices, West Genesee Hotel Associates, American Axle & Manufacturing, Inc., among other defendants, challenging numerous loans and grants issued by public defendants to private entity defendants and other private companies in order to stimulate economic development. Plaintiffs broadly allege that certain grants to private entities violate the constitutional ban on gifts of state monies to private firms. More specifically, they challenge the State's practice of designating state funds for the purpose of economic development as unconstitutional.

The challenged appropriations fall into two general categories. The vast majority were State appropriations to the UDC, a public benefit corporation, to fund payments to private entities for public development purposes.*fn1 Projects falling within this classification include the expansion of semiconductor manufacturing facilities at the University of Albany Nanotech Complex and the Globalfoundries U.S., Inc. (formerly Advanced Micro Devices) project in Malta, Saratoga County. The second category of appropriations listed in the complaint address funds allocated to the State Department of Agriculture and Markets to fund contracts with not-for-profit corporations for the purpose of marketing and promoting New York agricultural products. In particular, the complaint identifies appropriations designated for the New York State Apple Growers Association, New York Wine and Grape Foundation and Long Island Wine Council.

State defendants, IBM, Advanced Micro Devices, West Genesee Hotel Associates, and American Axle & Manufacturing, Inc. moved to dismiss the complaint pursuant to CPLR 3211(a)(1) as barred by documentary evidence and CPLR 3211(a)(7) for failure to state a cause of action. Supreme Court granted defendants' motion and dismissed the complaint. Plaintiffs appealed.

The Appellate Division modified Supreme Court by reversing so much thereof as granted defendants' motions to dismiss the first cause of action. The court rejected the defendants' argument that the State may grant public funds to public benefit corporations for public-private partnerships or for projects to spur economic development in the State. The court granted defendants' motion for leave to this Court and certified the following question:

"Did this Court err, as a matter of law, in modifying, on the law, the order of the Supreme Court by reversing so much of the order which granted defendants' motions to dismiss the first cause of action, and remitting the matter of the Supreme Court for further proceedings not inconsistent with this Court's decision and, as so modified, affirming the order?"

We now reverse and answer the question in the affirmative.

At the outset, we observe that plaintiffs' "burden is a heavy one" (Schulz v State of New York, 84 NY2d 231, 241 [1994] [Schulz I]). It is well established that "enactments of the Legislature -- a coequal branch of government -- enjoy a strong presumption of constitutionality" (id.). In this case, plaintiffs' burden is "exceedingly strong" because they challenge public expenditures designed in the public interest (Wein v State of New York, 39 NY2d 136, 145 [1976]). Indeed, we have recognized the need for deference involving "public funding programs essential to addressing the problems of modern life, unless such programs are 'patently illegal'" (Schulz I, 84 NY2d at 241). As such, unconstitutionality must be proven beyond a reasonable doubt.

Article VII, § 8(1) of the State Constitution broadly declares, in relevant part, "[t]he money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking." This provision contains two separate prohibitions: first, it precludes the State from giving or loaning "money" to private recipients and, second, it more broadly forbids the State from giving or lending its "credit" to private recipients or public corporations. Hence, while the State may not lend its credit to a public corporation, such as the UDC, nothing in article VII, § 8(1) prohibits the State from adopting appropriations directed to such public entities. Before addressing the specific arguments of the parties, it is helpful to briefly trace the history of article VII, § 8(1).

In 1846, the voters of the State of New York amended the Constitution to prevent the giving or lending of the State's credit to private corporations (see Wein, 39 NY2d at 143-144; see also People v Ohrenstein, 77 NY2d 38, 50 [1990]). At issue then was the State's "prior practices of subsidizing private railroad and canal companies through long-term State debt obligations" (Matter of Schulz v State of New York, 86 NY2d 225, 234 [1995] [Schulz II]). Such practices "produced a fiscal crisis for the State government" when those companies failed and the State was forced to pay their debts (Ohrenstein, 77 NY2d at 50; see also Shulz I, 84 NY2d at 241-242 ["Of particular concern, and the impetus for change, was the lending of public credit to private, 'irresponsible' corporations. Following the onset of economic depression in 1837, private railroad corporations defaulted on obligations that had been assumed on the strength of liberally granted State credit. The State assumed the liabilities, with no hope of reimbursement, and by 1845 more than three fifths of the entire State debt was the result of such loans."]). It is therefore clear that the disbursement of public funds to cover the debts of private corporations led directly to the adoption of that constitutional amendment.

The 1846 Constitution, however, did not bar gifts of State money because, as this Court recognized over a century later, the granting of state money was a one-time event that "does not bind future generations or create the same dangers of collapse, insolvency and crisis associated with the abuse of credit" (Schulz I, 84 NY2d at 246). Nevertheless, the constitutional prohibition was later expanded in the 1874 Constitution to preclude the giving and lending of public money to aid any private entity or undertaking (see Ohrenstein, 77 NY2d at 50 ["Neither the credit nor the money of the State shall be given or loaned to aid or in aid of any association, corporation or private undertaking"] [former art VII, § 9]). The purpose of that amendment was to prevent the State's practice of freely granting "public funds to railroads and to charitable associations" (People v Westchester County Natl. Bank of Peekskill, N.Y, 231 NY 465, 474 [1921]) because a concern had arisen regarding the inability of the State to "superintend the expenditure of the money, or even control it, so far as to compel its use for the purposes for which it was appropriated" (1873 NY Senate Doc No. 70, 39).

More than 60 years later, the Constitutional Convention of 1938 combined the two separate provisions dealing with gifts or loans of State money and credit into article VII, § 8(1). The 1938 Constitution also amended the scope of the prohibition against giving or lending the State's credit, for the first time making it applicable to public corporations (see Wein, 39 NY2d at 144 [explaining that the newly broadened credit provision "was intended to protect the State from the uncertain and possibly disastrous consequences of incurring future contingent liabilities easy for a current generation to project but a burden on future generations"]). The 1938 Constitution, however, did not extend the prohibition against the giving or loaning of the State's money, which continues to apply only to private recipients. The constitutional provision at issue has remained essentially unchanged since 1938.*fn2 Against this backdrop, we turn to the parties' contentions.

Defendants contend that the first category of the challenged appropriations -- those given to the ESDC to expend for its statutorily authorized purposes, including economic development -- falls outside the scope of article VII, ยง 8(1) because that provision permits gifts and loans of money to public benefit corporations. Characterizing public benefit corporations as "agencies of the State," plaintiffs counter that State defendants have given or are about to give, and that private defendants have received or are about to receive, state funds as gifts. Plaintiffs highlight certain grants designated to private corporations by the ESDC. At bottom, plaintiffs claim, and the dissent agrees, that the ...

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