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McCutcheon v. State Building Authority

Decided: June 8, 1953.

GEORGE J. MCCUTCHEON, PLAINTIFF-APPELLANT,
v.
STATE BUILDING AUTHORITY, A BODY CORPORATE AND POLITIC OF THE STATE OF NEW JERSEY; THEODORE D. PARSONS, ATTORNEY-GENERAL OF THE STATE OF NEW JERSEY; WILLIAM J. DEARDEN, DIRECTOR OF THE DIVISION OF MOTOR VEHICLES OF THE STATE OF NEW JERSEY; WALTER T. MARGETTS, JR., TREASURER OF THE STATE OF NEW JERSEY; FRED V. FERBER, DIRECTOR OF THE DIVISION OF PURCHASE AND PROPERTY IN THE DEPARTMENT OF THE TREASURY OF THE STATE OF NEW JERSEY; AND PRENTICE REALTY CO. OF TRENTON. A NEW JERSEY CORPORATION, DEFENDANTS-RESPONDENTS



On appeal from the Law Division of the Superior Court, certified by the Supreme Court on plaintiff's motion.

For reversal -- Chief Justice Vanderbilt, and Justices Heher, Oliphant, Wachenfeld and Burling. For affirmance -- Justices Jacobs and Brennan. The opinion of the court was delivered by Heher, J. Jacobs, J., with whom William J. Brennan, Jr., J., joins (dissenting).

Heher

The basic question here is the constitutional integrity of chapter 255 of the Laws of 1950, as amended by chapter 224 of the Laws of 1952. L. 1950, p. 873; L. 1952, p. 760; N.J.S. 52:18 A -50, et seq.

The contention is that the act infringes Article VIII, Section II, paragraphs 1, 2 and 3 of the State Constitution of 1947, forbidding loans of the State's credit, regulating the appropriation of monies for the support of the State

Government, and prescribing a debt limitation; Article IV, Section I, paragraph 1, vesting the legislative power in the Senate and General Assembly; and Article IV, Section VII, paragraph 8, banning "private, special or local law" save on public notice.

As stated in the amended title, the act is designed "to provide additional buildings for the use" of the State "and departments, agencies, and instrumentalities of the State, in connection with the conduct of the State's business and functions and of the business and functions of such departments, agencies, and instrumentalities of the State and to establish the State Building Authority for that purpose"; and to authorize "such departments, agencies, and instrumentalities of the State to enter into leases and contracts with the State Building Authority relating to such structures, space, buildings and facilities."

There was "created and established in the Department of the Treasury" a body corporate and politic with "corporate succession," to be known as the "State Building Authority." The Authority was constituted "an instrumentality exercising public and essential governmental functions"; and it was provided that "the exercise by the Authority of the powers conferred" by the act "shall be deemed and held to be an essential governmental function of the State." Section 2. These are the specific purposes of this statutory creation: The acquisition, construction, furnishing and operation of "a State office building" in Trenton, an administrative building or buildings "for the use of the offices of the State Department of Education on the campus of the New Jersey State Teachers College" at Trenton, "motor vehicle inspection stations at a site or sites specified by the Director of the Division of Motor Vehicles and approved by the Attorney-General and the State House Commission, State Police barracks at a site or sites specified by the Superintendent of State Police and approved by the Attorney-General and the State House Commission," and "housing for employees of State Institutions operated by the Department of Institutions and Agencies at a site or sites specified by the Commissioner

of Institutions and Agencies and approved by the State Board of Control of Institutions and Agencies and the State House Commission." And the Authority "shall lease or otherwise contract for the use of space in projects or parts thereof but such leases shall be only to, and such contracts only with, the State or any departments, agencies, and instrumentalities of the State." Section 3.

The Authority consists of three members, appointed by the Governor with the advice and consent of the Senate, and removable by the Governor for cause after a public hearing. Sections 4, 6. It has capacity to sue and be sued in its own name, to contract in the performance of its duties and the execution of its powers, and to use a common seal: and it is empowered to issue bonds, and "to provide for the rights of the holders thereof as provided" in the act; to acquire, hold and dispose of personal property in the exercise of its powers and the performance of its duties, and to acquire by purchase or otherwise, or by the exercise of the right of eminent domain as therein provided, "any land and other property which it may determine is reasonably necessary for any project, including public lands, parks, playgrounds, reservations, highways," and so on, and "to hold and use the same and to sell, convey, lease or otherwise dispose of property so acquired, [when] no longer necessary" for its corporate purposes; to acquire, construct, maintain, furnish and operate "a project or projects"; to lease "any project or part thereof"; to "contract for the use" of space and "for services to be rendered" by the Authority "in connection with any project," but "such leases shall be only to, and such contracts only with, the State or any departments, agencies, and instrumentalities of the State"; to "establish, alter, charge and collect rents and other charges for the use of any project or part thereof or for any services rendered" by the Authority "in connection therewith at reasonable rates to be determined" by the Authority "for the purpose of providing for the payment of the expenses" of the Authority, "the construction, improvement, repair, equipping, furnishing, maintaining and operation of its facilities and properties;

the payment of the principal of and interest on its obligations and to fulfill the terms and provisions of any agreements made with the purchasers or holders of any such obligations"; to adopt by-laws for the regulation of its affairs and the conduct of its business, and to establish rules and regulations for the use of any project; to hire personnel and all necessary administrative and technical skills and services, and fix compensation for the same; and, subject to approval by the Governor, apply for and accept federal grants "to meet any expenses connected with the purposes" of the act. Sections 10, 11.

The departments, agencies, and instrumentalities of the State are severally empowered "by proper resolution or act, or acting by or through its director or other chief executive officer," to "enter into any lease with the Authority for any project or part thereof," or contract for the use of space in a project, or for the services to be rendered by the Authority in connection with a project, "for such period of time, specified or unlimited, and upon such terms and conditions as are deemed necessary in order to provide the space or service contemplated by such lease or contract," and undertake the payment to the Authority of "any rents or other charges" for the facility. Such department, agency or instrumentality of the State is "authorized and directed to do and perform any and all acts or things necessary, convenient or desirable to carry out and perform every such contract and to provide for the payment or discharge of any obligation thereunder in the same manner as other obligations of such department, agency, or instrumentality of the State"; and "Any such contract shall be valid and binding upon the department, agency, or instrumentality of the State, notwithstanding that no appropriation was made or provided to cover the cost or estimated cost of the contract." Section 12.

The Authority is empowered to issue its negotiable bonds "from time to time * * * for any of its corporate purposes"; and, except as may be "otherwise expressly provided by the Authority, every issue of bonds shall be general obligations payable out of any moneys or revenues of the [13 NJ Page 52] Authority, subject only to any agreements with the holders of particular bonds pledging any particular moneys or revenues." Section 17 (a), (b). The bonds shall be authorized by resolution of the Authority, and shall mature at such time or times, bear interest at such rate or rates not exceeding 6% per annum, and be subject to such terms of redemption as such resolution may provide. Section 17 (e). In order to secure the payment of its issued bonds, the Authority is given power, as a constituent part of the contract with the bondholders, these among others, to "pledge all or any part of its rents or revenues to which its right then exists or may thereafter come into existence, and the moneys derived therefrom, and the proceeds of bonds"; to "covenant against pledging all or any part of its rents or revenues, or against mortgaging all or any part of its real or personal property then owned or thereafter acquired, or against permitting or suffering any lien or [sic] such rents, revenues or property"; to "covenant with respect to limitations on its right to sell, lease or otherwise dispose of any project or any part thereof, or any property of any kind"; to "covenant as to the payment of the principal of or interest on the bonds, or any other obligations, as to the sources and methods of such payment, as to the rank or priority of any such bonds or obligations with respect to any lien or security or as to the acceleration of the maturity of any such bonds or obligations"; to "covenant against extending the time for the payment of bonds or interest thereon"; to "covenant as to the rates of rents and other charges to be established and charged, the amount to be raised each year or other period of time by rents or other revenues and as to the use and disposition to be made thereof"; to "create or authorize the creation of special funds or moneys to be held in pledge or otherwise for construction, operating expenses, payment or redemption of bonds, reserves or other purposes and to covenant as to the use and disposition of the moneys held in such funds"; to provide "for the rights and liabilities, powers and duties arising upon the breach of any covenant, condition or obligation"; to "vest in a trustee or trustees such property,

rights, powers and duties in trust for the bondholders, as the Authority may determine, which may include any or all of the rights, powers and duties of the statutory trustee appointed by the holders of bonds pursuant" to the act; and "to make such covenants to do or refrain from doing such acts and things as may be necessary or convenient or desirable in order to better secure the bonds or which, in the absolute discretion of the Authority, will tend to make the bonds more marketable, notwithstanding that such covenants, acts or things" are not enumerated therein. Section 17 (g).

Bonds may be issued "without obtaining the consent of any department, division, commission, board, bureau or agency of the State, and without any other proceeding or the happening of any other conditions or things than those proceedings, conditions or things which are specifically required by this act." Section 17 (i). The Authority is given power to "mortgage real property." Section 17 (j). And it may provide for the appointment of a "statutory trustee," in the event of a default for a period of 30 days in the payment of the principal or interest accruing on any of the issued bonds, for the pursuit of remedies therein provided -- this, among others: by civil action in lieu of prerogative writ or by any other civil action or suit, to "enforce all rights of the holders of such bonds, including the right to require the Authority to charge and collect rents and other revenues adequate to carry out any contract as to, or pledge of, such rents and revenues, and to require the Authority to carry out and perform the terms of any contract or covenant with or for the benefit of the holders of such bonds or its duties under" the act. It is also provided that the trustee "shall be entitled as of right to the appointment of a receiver of any part or parts of the project the rents or other revenues of which are pledged for the security of the bonds"; and such receiver may take possession, proceed with the construction, and operate such part or parts of the project and receive the rents subject to any pledge or agreement made by the Authority. Section 18.

The issued bonds "shall not be deemed to constitute a debt or liability of the State or of any political subdivision thereof or a pledge of the faith and credit of the State or of any such political subdivision"; and all such bonds shall be so endorsed. Section 19. But the State of New Jersey "does pledge to and agree with the holders of the bonds" that the State "will not limit or restrict the rights" thereby "vested in the Authority to maintain, construct, reconstruct and operate any project as defined" in the act, or to "establish and collect such rents, fees, receipts or other charges as may be convenient or necessary to produce sufficient revenues to meet the expenses of maintenance and operation thereof and to fulfill the terms of any agreements made with the holders of bonds authorized" by the act, "or in any way impair the rights or remedies of the holders of such bonds until the bonds, together with interest thereon, are fully paid and discharged." Section 20. The exercise of the powers granted by the act is deemed to be "in all respects for the benefit of the people of the State"; and "as the operation and maintenance of projects by the Authority will constitute the performance of a governmental function," the Authority's projects, property and income, and the bonds issued under the act and the income therefrom, are rendered immune from "any taxes or assessments." Section 21. The bonds are made legal security. Section 22. The Authority is required to make an annual report of its activities and financial operations to the Governor and the Legislature. Section 23.

In the exercise of the purported statutory grant of power, the Authority issued bonds in the aggregate sum of $675,000; and by resolution adopted December 18, 1952 it made provision for the issuance of its Revenue Refunding and Improvement Bonds Project A in the same amount for the purpose of redeeming the previous issue and to pay the cost of erecting the "Somerville Barracks" for the State Police. The Authority has entered into a "lease" with the State of New Jersey for 12 sites to be used "for Motor Vehicle stations," for a term of 20 years at an annual rental of $33,374, or an aggregate rental for the term of $667,480, "exclusive

of other charges made in said lease," i.e., "the maintenance and repair of the stations so rented and all costs incident to the ownership and operation thereof during the term including taxes, if any, and insurance premiums." And the lessee covenanted that "in the preparation of each annual budget," it would include the amount of the annual rentals "in the budget as the basis of the current appropriation to be made" to it. The Authority has also entered into "leases" with the State for the properties known as "Princeton Barracks" and "Somerville Barracks" which obligate the State to pay, in addition to the fixed rental, "all costs incident to the ownership and operation thereof during the term including taxes, if any, and insurance premium." It is stipulated that the "total aggregate rentals" of these leases, "when added to the debts and liabilities" of the State, "exceed one percent of the total amount appropriated by the general appropriation law for the year 1952."

The foregoing constitute the subject matter of the first count of the complaint.

The second count impugns the validity of a lease made September 12, 1952, between Prentice Realty Co. of Trenton and the "State of New Jersey, by the Director of the Division of Purchase and Property, on behalf of the Division of Motor Vehicles," for "the entire new building to be erected on the east side of 222 West State Street," in Trenton, "and the entire existing two-story building in the rear," for the term of ten years from March 1, 1953, at the yearly rent of $38,811, or an aggregate of $388,110. The lessor undertook to erect "a new building" and to "alter the present rear building to conform with the new structure," to provide heat, electricity, gas, water and janitor service, and so on, and "take care of all inside and outside structural repairs" and "maintain the heating, plumbing and wiring systems" during the term of the lease, all at its own expense. The State may cancel the lease after five years, by giving six months' notice in writing of its election so to do, if (1) "the new State office building will have been erected on the State-owned site on West State Street, Trenton," and (2) "the department occupying"

the demised premises shall "move into said office building." The contention is that this latter lease purports to create a State debt or liability in excess of the constitutional debt limitation, and requires appropriations in disregard of the constitutional restrictions upon the appropriation of the State's moneys. It was stipulated on the oral presentation of the cause in the Superior Court that this lease "is to be considered as part of the facts in this motion."

The Authority has prepared plans and specifications for the erection of a State office building in Trenton having a floor area of 200,000 square feet; and it is now negotiating with the State Division of Purchase and Property for the "rental" of the proposed structure. It has also prepared plans and specifications for the erection of an Administration Building on the campus of the New Jersey State Teachers College at Trenton for the use of the State Department of Education, and is now arranging for the "rental" of the building.

The complaint prayed that the Authority Act be adjudged constitutionally insufficient, and the action taken by the Authority thereunder void, and for appropriate relief accordingly. The Superior Court found no constitutional infirmity in the statute, and the proceedings taken thereunder to be valid and effectual; and there was judgment for defendants on both counts. McCutcheon v. State Building Authority, 25 N.J. Super. 171 (Law. Div. 1953).

If the course taken here be deemed an indirect pledge of the State's credit, it is yet within the State's constitutional province if not in contravention of Article VIII, Section II, paragraph 3 of the 1947 Constitution, forbidding the creation in any fiscal year of "a debt or debts, liability or liabilities" of the State, which together with any previous "debts or liabilities" shall exceed "at any time" one per centum of the total amount appropriated by the general appropriation law for that fiscal year, unless the same shall be authorized by a law "for some single object or work distinctly specified therein," and, regardless of any limitation relating to taxation in the Constitution, such law shall provide

"the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls due, and also to pay and discharge the principal thereof within thirty-five years from the time it is contracted," and be "approved" by the voters at a general election referendum. The State may consummate a project for the public good and welfare by means of an instrumentality such as we have here, supported by the State's guaranty of the payment of the bonds issued by the instrumentality to that end, if there be compliance with this constitutional directive. That would not constitute a loan of the State's credit within the interdiction of the particular limitation. There would not in that case be a pledge of the State's credit to private enterprise, but rather a debt or liability incurred by the State in the fulfillment of an essential public function by means of the body corporate created by the State itself for that very purpose. Behnke v. New Jersey Highway Authority, 13 N.J. 14 (1953).

But the statute under review does not represent an exercise of state power conformably to the cited constitutional limitation. While in form a way of providing the State with leasehold interests in building facilities for public use, in reality the design of the act is to enable the State by contracts of purchase to acquire for state use buildings possessed and constructed by the Authority by means of bond issues sustained by the State's promise to supply in the guise of rentals sufficient money to liquidate the bonds, available only through the medium of annual appropriations. And this in disregard of the constitutional debt limitation and the restraints laid by the organic law upon the appropriation process. There is no pretense of conformance with the debt limitation provision; there was no submission of the project to the electorate under Article VIII, Section II, paragraph 3. The legislation proceeds upon the hypothesis ...


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