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Fidelity Union Trust Co. v. New Jersey Highway Authority

Decided: March 2, 1981.

FIDELITY UNION TRUST COMPANY, A BANKING CORPORATION OF THE STATE OF NEW JERSEY, AS TRUSTEE UNDER THE GENERAL BOND RESOLUTION OF THE NEW JERSEY HIGHWAY AUTHORITY ADOPTED JULY 8, 1953, AS SUPPLEMENTED; FIRST NATIONAL STATE BANK OF NEW JERSEY, A NATIONAL BANKING ASSOCIATION, AS TRUSTEE UNDER THE JUNIOR BOND RESOLUTION OF THE NEW JERSEY HIGHWAY AUTHORITY ADOPTED JULY 7, 1962, AS SUPPLEMENTED, PLAINTIFFS-RESPONDENTS, AND MIDLANTIC NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AS TRUSTEE UNDER THE IMPROVEMENT BOND RESOLUTION OF THE NEW JERSEY HIGHWAY AUTHORITY ADOPTED JULY 27, 1971, AS SUPPLEMENTED, PLAINTIFF,
v.
NEW JERSEY HIGHWAY AUTHORITY, A BODY CORPORATE AND POLITIC CREATED AND EXISTING UNDER AND BY VIRTUE OF CHAPTER 16 OF THE LAWS OF 1952, AS AMENDED AND SUPPLEMENTED, AND JOHN J. DEGNAN, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, DEFENDANTS-APPELLANTS



On certification to the Superior Court, Chancery Division, whose opinion is reported at 164 N.J. Super. 246 (1978).

For reversal -- Chief Justice Wilentz and Justices Sullivan, Pashman, Clifford, Schreiber, Handler and Pollock. For affirmance -- None. The opinion of the Court was delivered by Schreiber, J.

Schreiber

[85 NJ Page 281] We are called upon to consider in this case the impact on holders of New Jersey Highway Authority bonds of an amendment to the New Jersey Highway Authority Act, N.J.S.A. 27:12B-1 et seq. (Act), which confers upon the Governor and either the state treasurer or the comptroller of the treasury the

right in effect to veto toll adjustments, their written approvals being required before tolls may be modified, L. 1973, c. 370, § 1 (amending N.J.S.A. 27:12B-4). The asserted invalidity of the amendment is primarily ascribed to the clauses in the federal and state constitutions, Art. I, § 10, and Art. IV, § VII, par. 3, respectively, prohibiting impairment of the obligation of contracts.*fn1

Fidelity Union Trust Company and First National State Bank as trustees under certain bond resolutions of the New Jersey Highway Authority (Authority) brought a declaratory judgment action against the Authority and the Attorney General seeking to invalidate the amendment.*fn2 Upon cross motions for summary judgment the trial court considered among other things various bond resolutions of the Authority and two affidavits concerning the financial effect of the amendment. It held that the requirement that tolls could not be raised or adjusted without the prior approval impaired the bondholders' contract rights in violation of the Contract Clauses of both the federal and state constitutions. 164 N.J. Super. 246 (Ch.Div.1978). The defendants, the Authority and the Attorney General, appealed. Pursuant to R. 2:12-1, we granted the Attorney General's motion for direct certification which was joined in by all parties. 82 N.J. 282 (1979). We reverse.

The Act created a body corporate known as the New Jersey Highway Authority. N.J.S.A. 27:12B-4. Its declared purposes were to construct, operate, maintain and improve "modern express highways embodying every known safety device including

center divisions, ample shoulder widths, long-sight distances, multiple lanes in each direction and grade separations at all intersections with other highways and railroads . . . ." N.J.S.A. 27:12B-2. The Authority was given specific powers to accomplish these purposes. Included were the power to fix, revise and collect tolls, N.J.S.A. 27:12B-5(i), and the authorization to issue bonds and notes to be secured by a pledge of all or any part of its tolls or revenues, N.J.S.A. 27:12B-9(a)(i). Furthermore, it was authorized to include a covenant with respect to the toll rates "to be established and charged" in a contract with the proposed security holders. N.J.S.A. 27:12B-9(a)(viii). The State pledged to all future holders of the bonds that it would not limit or restrict the rights vested in the Authority "to establish and collect such tolls or other charges as may be convenient or necessary to produce sufficient revenues to meet the expenses of maintenance and operation . . . and to fulfill the terms of any agreements made with the holders of bonds or notes . . . or in any way impair the rights or remedies of the holders . . . ." N.J.S.A. 27:12B-11. Moreover, the tolls were not to "be subject to supervision or regulation by any other commission, board, bureau or agency of the State." N.J.S.A. 27:12B-14. Some of the bonds to be issued, up to $285,000,000 in aggregate principal amount, were entitled to a state guarantee of payment of interest and principal. L. 1952, c. 17, § 1 (current version at N.J.S.A. 27:12B-20).

When first created, the Authority consisted of three members appointed by the Governor with the advice and consent of the Senate. Two members constituted a quorum and the vote of two was necessary for motions or resolutions. L. 1952, c. 16, § 4 (current version at N.J.S.A. 27:12B-4). Subsequently, the membership was increased to five, three being necessary for a quorum and action. L. 1970, c. 28, § 1 (current version at N.J.S.A. 27:12B-4). The Act was amended again to provide for seven members, four being necessary for a quorum and action. N.J.S.A. 27:12B-4 (as amended by L. 1975, c. 5, § 1).

The specific highway project which the Authority was directed to undertake was construction of "The Garden State Parkway" from Route 17 in Paramus to Cape May. N.J.S.A. 27:12B-20. The Authority issued and sold bonds of various series to finance the cost of that construction. The road was thereupon built and subsequently extended and enlarged. It has been a successful project. According to the Authority's 1977 Annual Report there were 196,390,000 toll trips in that year. Indeed bond interest and bond service (interest and principal amount due on maturing bonds) were covered 3.496 and 1.317 times, respectively. The standard toll on the Parkway since its inception more than 25 years ago has been 25 cents.

Plaintiffs, as trustees of several Authority bond issues, sought to invalidate the amendment to the Act effective January 4, 1974, a date subsequent to the issuance of the bonds. See L. 1973, c. 370, § 1 (amending N.J.S.A. 27:12B-4). That amendment reads in pertinent part as follows:

No resolution or other action of the authority providing for the issuance of bonds, refunding bonds or other obligations or for the fixing, revising or adjusting of tolls for the use of any highway projects or parts or sections thereof shall be adopted or otherwise made effective by the authority without the prior approval in writing of the Governor and at least one of the following: the State Treasurer and the Comptroller of the Treasury. The powers conferred in this section upon the Governor, the State Treasurer and the Comptroller of the Treasury shall be exercised with due regard for the rights of the holders of bonds of the authority at any time outstanding, and nothing in, or done pursuant to, this section shall in any way limit, restrict or alter the obligation or powers of the authority or any representative or officer of the authority to carry out and perform in every detail each and every covenant, agreement or contract at any time made or entered into by or on behalf of the authority with respect to its bonds or for the benefit, protection or security of the holders thereof.

A true copy of the minutes of every meeting of the authority shall be forthwith delivered by and under the certification of the secretary thereof, to the Governor. No action taken at such meeting by the authority shall have force or effect until 10 days (Saturdays, Sundays and holidays excepted) after such copy of the minutes shall have been delivered or the approval thereof by the Governor prior thereto. If, in said 10-day period, the Governor returns such copy of the minutes with veto of any action, except action to negotiate or

execute a collective negotiation agreement with a certified public employee organization representing employees of the authority, taken by the authority or any member thereof at such meeting, such action shall be null and of no effect.

It is this change, the requirement that revision of the tolls by the Authority may not be effective without the prior written approval of the Governor and the state treasurer or comptroller of the treasury, that the trustees contend violates the Contract Clauses of the federal and state constitutions.

The terms and conditions of each bond series of which the Fidelity Union Trust Company is trustee are prescribed in a General Bond Resolution adopted by the Authority on July 8, 1953 and in supplemental resolutions authorizing the particular series.*fn3 First National State Bank is the trustee of Junior

Revenue Bonds, issued pursuant to a Junior Bond Resolution and a First Supplemental Junior Bond Resolution adopted on July 7, 1962.*fn4

Article I, § 10 of the United States Constitution prohibits a state from passing any "Law impairing the Obligation of Contracts . . . ." The Contract Clause was originally intended to protect agreements entered into between private parties from state legislative interference. G. Gunther, Constitutional Law 604 (9 ed. 1975). As early as 1810, however, judicial interpretation extended the sweep of the clause to include agreements to which the state was a party. Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 3 L. Ed. 162 (1810). In the nineteenth century the United States Supreme Court use the Contract Clause more than any other constitutional provision to invalidate state legislation. B. Schwartz, A Commentary on the Constitution of the United States, Part II: The Rights of Property 268 (1965). The clause was not without its limitation for there also developed a doctrine of inalienability known as the "reserved powers" doctrine -- the concept that a state could not bargain away certain powers, such as the power of eminent domain, Contributors to the Pennsylvania Hospital v. City of Philadelphia, 245 U.S. 20, 38 S. Ct. 35, 62 L. Ed. 124 (1917), and the police power so that contracts could "not estop the legislature from enacting laws intended for the public good." Manigault v. Springs, 199 U.S. 473, 480, 26 S. Ct. 127, 130, 50 L. Ed. 274, 278 (1905); Stone v. Mississippi, 101 U.S. 814, 25 L. Ed. 1079 (1880). After 1890 the Court emphasized the Fourteenth Amendment restriction proscribing states from depriving a person of property without due process and from taking property without just compensation and the Contract Clause fell into general disuse. Schwartz, supra at

306. However, two recent Supreme Court decisions, United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977), and Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S. Ct. 2716, 57 L. Ed. 2d 727 (1978), have revived the use of the clause in determining validity of a state's economic legislation.

In United States Trust, the Port Authority of New York and New Jersey had issued bonds which contained a statutory covenant restricting the extent to which revenues could be applied to deficits created by mass transit operations. New York and New Jersey later repealed the covenant. Justice Blackmun, writing on behalf of a majority of four, held that the repeal violated the Contract Clause. After finding the statutory covenant had been integrated in the contract between the Authority and the bondholders, he concluded that "[a]s a security provision, the covenant was not superfluous; it limited the Port Authority's deficits and thus protected the general reserve fund from depletion." 431 U.S. at 19, 97 S. Ct. at 1516, 52 L. Ed. 2d at 108. This same factual conclusion had been reached by the trial court which had stated:

To the extent that the repeal of the covenant authorizes the Authority to assume greater deficits for such purposes, it permits a diminution of the pledged revenues and reserves and may be said to constitute an impairment of the states' contract with the bondholders. [134 N.J. Super. at 183]

Having found that the repeal of the covenant impaired a contractual financial obligation, Justice Blackmun questioned whether that impairment violated the Contract Clause. He noted that states have broad police powers which may affect private contracts so long as their statutes exercising those police powers serve a legitimate public purpose and the adjustment of the private parties' duties and obligations is on reasonable terms and conditions. When a state's contract is involved, the initial inquiry is whether the state had the power to create an ...


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