Flushing National Bank v. Municipal Assistance Corp.
390 N.Y.S.2d 22, 40 N.Y. 2d 731, 358 N.E.2d 848 (1976)
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Rule of Law:
A state law that imposes a moratorium on all judicial remedies for enforcing a municipality's short-term debt obligations violates the state constitutional requirement that a municipality pledge its "faith and credit" for the payment of its debts.
Facts:
- Facing a severe fiscal crisis, New York City was unable to meet its financial obligations, including paying its outstanding short-term notes.
- The City had previously issued various short-term anticipation notes to lenders, including Flushing National Bank, as legally required by the state constitution.
- These notes contained a pledge of the City's "faith and credit" for the payment of the principal and interest.
- In November 1975, the New York State Legislature enacted the Emergency Moratorium Act in response to the City's fiscal paralysis.
- The Act suspended for three years the right of short-term noteholders to commence or continue any lawsuit to enforce payment on their notes.
- The moratorium was conditioned on the City's offering noteholders an opportunity to exchange their notes for long-term bonds from the Municipal Assistance Corporation (MAC), an offer Flushing National Bank declined.
- Under the Act, noteholders who declined the exchange offer were to be paid interest at an annual rate of at least 6% during the moratorium period.
Procedural Posture:
- Flushing National Bank filed an action in a New York trial court (Special Term) seeking a declaration that the Emergency Moratorium Act was unconstitutional.
- Special Term held that the Act was constitutional.
- Flushing National Bank appealed to the intermediate appellate court, the Appellate Division.
- The Appellate Division affirmed the trial court's ruling, also finding the Act constitutional.
- Flushing National Bank then appealed to the New York Court of Appeals, the state's highest court.
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Issue:
Does the New York State Emergency Moratorium Act, which imposes a three-year suspension of judicial remedies for holders of New York City's short-term notes, violate the "faith and credit" clause of the New York State Constitution (Art. VIII, § 2)?
Opinions:
Majority - Chief Judge Breitel
Yes, the New York State Emergency Moratorium Act violates the "faith and credit" clause of the State Constitution. A municipality's constitutionally mandated pledge of "faith and credit" is a substantive commitment to pay its debts and to use its revenue-generating powers to do so, not merely a formal statement made at the time of contracting indebtedness. By suspending all judicial remedies for three years, the Act renders the pledge of faith and credit meaningless, effectively denying the noteholders' rights. The police power of the state cannot be invoked to suspend a specific constitutional provision, especially one designed to protect creditors during the very type of difficult economic circumstances that prompted the legislation.
Dissenting - Judge Cooke
No, the Act is a constitutional exercise of the state's sovereign police power. The "faith and credit" clause was satisfied when the city made the pledge upon issuing the notes; it does not immunize the resulting contract from the state's inherent power to act in a grave public emergency. Citing federal precedents like Home Bldg. & Loan Assn. v. Blaisdell, the dissent argues that all contracts are subject to the state's authority to protect the general welfare, and the moratorium was a reasonable, temporary measure to prevent the collapse of city government and its essential services. Furthermore, the State Constitution's emergency clause (Art. III, § 25) explicitly empowers the legislature to take necessary measures to ensure the continuity of government in disasters, which includes a fiscal collapse.
Analysis:
This decision establishes that the "faith and credit" clause in the New York Constitution is a substantive and enforceable guarantee that cannot be legislatively suspended, even during a severe fiscal emergency. It significantly limits the state's ability to use its police power to impair its own or its municipalities' debt obligations when a specific constitutional command is at stake. The ruling prioritizes the constitutional mandate to honor public debt over legislative attempts to manage a crisis through moratoria, setting a high bar for any future attempts to suspend remedies for public creditors and reinforcing the security of municipal bonds.
