Flushing National Bank v. Municipal Assistance Corp. (1975)

Flushing National Bank v. Municipal Assistance Corp. (1975)

379 N.Y.S. 2d. 978

In response to New York City’s growing financial crisis, the New York State legislature passed the Emergency Moratorium Act on November 14, 1975. The act imposed a three-year moratorium on the enforcement of some $4.7 billion in outstanding short-term city notes in order to (‘avoid destructive actions during the time the city requires to regain its financial health.” The notes involved were tax anticipation notes, land anticipation notes, revenue anticipation notes, budget notes, and urban renewal notes. Instead of receiving their principal when due, the noteholders were offered two choices: to exchange their notes for Municipal Assistance Corporation (MAC) bonds in an equal principal amount and receive an interest rate of 8 percent, as opposed to interest rates of up to 9.5 percent on outstanding notes; or to hold their notes and be paid interest until the date of maturity of the notes, at which time the notes would be converted into notes due November 15, 1978, with 6 percent interest. In effect, noteholders who had originally made one-year loans were now compelled to make additional three-year loans at a 6 percent interest rate, well below the interest rate of their original notes and the current market rate for such notes. Flushing National Bank entered New York Supreme Court for New York County and brought a class action suit charging that the Moratorium Act violated, among other provisions, the contract clause. Those portions of Judge Howard Baer’s opinion pertaining to the contract clause follow.

JUSTICE HAROLD BAER. . . .

….Does the Moratorium Act violate the United States Constitution Article 1, S 10 by impairing contracts between the City and its note holders? I do not believe there is a violation of the Constitution. The courts, Federal and State, have given priority to the public interest over strict compliance with the contract clause.

…Numerous decisions of these highest Federal and State courts long ago repudiated the notion which plaintiff here espouses that the contract clause presents a rigid bar to the protection of vital public interests, recognizing instead the power, and indeed, the duty of states to prevent the literal enforcement of contractual terms in order to protect the health, safety or welfare of their citizens. . , . Home Bldg. & Loan Ass’n v. Blaisdell, . . (1934); East New York Sav. Bank v. Hahn (1945). . . .

…This is an equity proceeding. Equity under the law is defined as the application of the dictates of conscience or the principles of natural justice to the settlement of controversies. It is a system of jurisprudence, a body of rules and doctrines serving to supplement and remedy the limitations and inflexibility of the common law. In weighing the equities in this case, we must assess, as against plaintiff’s questionable gains from a declaration of unconstitutionality, the result, not only to the defendants, but to the public at large. The plaintiff may gain a Pyrrhic victory but the public would face the unpredictable but costly results of default. Bankruptcy for the City of New York is not only a financial disaster for the city but the note holders, including this plaintiff, would lose interest on their investment and a substantial portion of the principal as well. The many services that a Municipality must provide would be so depleted as to cause danger to the health, safety and welfare of the public. The cost of strict adherence to the legalistic concept urged by plaintiff is by far outweighed by the equities in favor of the defendants. While there is no certainty that the notes of the city will be paid in three years or that MAC bonds will be paid by or before 1986, there is the distinct hope and possibility that the moratorium will aid the city to budget balancing and financial responsibility during the three years of grace allotted to it.

…The only note holders that may be hurt financially are the small individual investors. They may need the principal now. I would urge— but I do not mandate—that provision be made to pay principal as the notes mature to those individuals who have invested $10,000, or under, and who can show need for payment of their notes as they become due.

I began by urging a realistic view of this controversy. I meant no more than to urge an equitable view that would do justice to the greatest number.

For all these reasons, summary judgment is granted to the defendants and the complaint is dismissed.