Summary
In Wein v Levitt (42 N.Y.2d 300), the Court of Appeals upheld as constitutionally valid that portion of the Workmen's (now Workers') Compensation Law which provided that the State shall indemnify its officers who cause the State Insurance Fund to invest in the obligations of public benefit corporations.
Summary of this case from Lilco v. MackOpinion
Argued June 9, 1977
Decided July 14, 1977
Appeal from the Supreme Court, New York County, IRVING H. SAYPOL, J.
William J. Quirk for Leon E. Wein, appellant and Leon Edward Wein, appellant pro se. Louis J. Lefkowitz, Attorney-General (Shirley Adelson Siegel and Samuel A. Hirshowitz of counsel), for respondent.
In this declaratory judgment action, the plaintiff raises a direct constitutional challenge to the legislative enactment regarding State borrowing, and seeks a declaration that a "save harmless" provision providing for indemnification of State investment officials, is illegal.
By chapter 893 of the Laws of 1975 (Workmen's Compensation Law, § 87-c) the Legislature directed that the State Insurance Fund invest in obligations of public benefit corporations known as "buildout authorities" (Housing Finance Agency, Medical Care Facilities Finance Agency, Dormitory Authority and Environmental Facilities Corporation). Section 87-c (subd 5, par a), which provides that the State Insurance Fund and the State shall, "save harmless and indemnify each and every state officer with responsibility for the custody or investment of such fund". Plaintiff brought this action on the single allegation that this indemnity provision is violative of the provisions of section 11 of article VII of the New York State Constitution which prohibits the State from contracting a debt unless the debt shall be authorized for some single work or purpose by the people at a general election.
The Justice at Special Term, dealing with plaintiff's sole allegation, found the indemnity provision valid and granted defendant's cross motion for summary relief and a declaratory judgment. Plaintiff appeals directly to this court pursuant to the provisions of CPLR 5601 (subd [b], par 2).
The Legislature's direction and mandate to the managers of the State Insurance Fund to make the prescribed investments arose out of a special session, called to deal with the financial emergency then existing. During the regular session in 1976, the Legislature passed chapter 115 which explained that the traditional markets for bonds and notes of certain public benefit corporations had dried up and the agencies were being denied access to the capital markets, threatening these corporations with default on their outstanding obligations; and that such threat required the enactment of chapter 893 at the previous special session to restore those agencies to financial health and "to ameliorate the disastrous consequences, to taxpayers, to holders of agency obligations and to residents of the state, of an inability by these agencies to meet their obligations".
With perhaps an excess of caution, the drafters of section 87-c provided not only for indemnity in subdivision 5, but also for immunity in subdivisions 3 and 4. In subdivision 3 there is a legislative declaration that "any and all obligations" of the buildout authorities "are reasonable, prudent, proper and legal investments for the state insurance fund and for all state officers with responsibility for the custody or investment of such fund or of its assets"; and subdivision 4 provides that no officer shall incur any liability by reason of such investment. While it is true that a State officer with State immunity perhaps might not be immune in an action properly brought in Federal court (Scheuer v Rhodes, 416 U.S. 232), thus warranting a further indemnity provision as enacted in subdivision 5, the prospect of such a recovery is a remote possibility at best, especially in view of the legislative declaration that any and all purchases are prudent and proper.
These layers of protection, excluding the indemnity provision, illustrate the very heavy odds against anyone ever having to be indemnified under the provision complained of by plaintiff. He has not disclosed any instance where a lawsuit is even contemplated against managers of the State Insurance Fund for section 87-c purchases, much less an instance where any "debt" has actually accrued by reason of the entry of a judgment. Upon the authority of Salzman v Impellitteri ( 305 N.Y. 414, 420) it is urged that there is a question of reviewability. Given the public importance of the issue raised, we address the merits and, in doing so, we affirm the holding of Special Term.
In any analysis of State spending at least two classifications of debt must be envisioned and categorized. For example, a purchase order for office supplies, future salary obligations, travel expenses or obligations arising out of the State's waiver of immunity under section 8 CTC of the Court of Claims Act create debts. These debts are paid out of current appropriations in the State's general fund replenished by the collection of taxes. Not even plaintiff argues that such debts, contingent or fixed, necessary for the ongoing business of State government are subject to section 11 of article VII of the State Constitution.
Then there are debts created by long-term borrowing and bond obligations. Such propositions are regularly submitted to referenda. These are examples of the debts with which section 11 is concerned. This is made clear from the history underlying article VII as very recently explained by the court in Wein v State of New York ( 39 N.Y.2d 136, 142-144). It is not necessary again to recapitulate that history except to note that the danger sought to be met by constitutional restrictions was the over-burdening of future generations by the incurring of longterm debt for capital improvements. The danger was first recognized by the practice of subsidizing canal and railroad construction only to have the transportation companies unable later to pay their debts. Consequently, the State took the loss and this prompted the safeguards incorporated in article VII (p 143).
Plaintiff argues, apparently, that a statutory obligation to indemnify State officers and employees for losses sustained as the result of liability arising out of their employment activities amounts to the second kind of debt mentioned. The main components or ingredients for such a debt, however, are lacking. There is simply no borrowing for a long term which will burden future generations. There is, in fact, no indication that there would be any borrowing at all, or that there ever has been any borrowing for purposes of fulfilling indemnity statutes already on the books. There is nothing in anything plaintiff claims and argues, or in our own research, that indicates that indemnity payments would not be a contingent cost of doing State business payable routinely out of the general fund, should the obligation arise. Consequently there is simply no basis whatsoever for the assertion that this indemnification is a debt within the meaning of article VII.
(See, e.g., Public Officers Law, § 17; General Municipal Law, §§ 50-a, 50-b, 50-c, 50-j, 50-l; Education Law, § 6308; Mental Hygiene Law, § 81.08; County Law, § 533; Public Health Law, § 14-a; Civil Rights Law, § 79-f; Corrections Law, § 24-a; Court of Claims Act, § 8-a; Executive Law, §§ 257-a, 501-a; Military Law, § 235-a; Workmen's Compensation Law, § 19-c.)
Although the dissent acknowledges that "the indemnification provision is not, by itself, a creation of debt by the State" (p 309), it is argued that indemnification of these officers for financial loss arising out of any claim for alleged negligence or breach of fiduciary duty by reason of investment in the enumerated public benefit corporations constitutes a loan of the State's credit to the public corporations. Section 8 of article VII of the Constitution prohibits, inter alia, a loan of the State's credit to any public corporation. The issue addressed by the dissent is whether the indemnification provision creates, in effect, a loan of the State's credit to the public corporations involved.
Simply stated, and as succinctly alleged in paragraph "3" of his complaint, plaintiff raises only section 11 of article VII of the Constitution, and he then adds that the Legislature, by its action has created an illegal debt of the State. This case comes to us in the nature of a motion for summary judgment and, as such, we may address only the issues articulated by the pleadings and affidavits. The record controls (6 Carmody-Wait 2d, N Y Prac, § 39.13) and in this case the papers are devoid of any constitutional challenge based upon section 8 of article VII. It is important that we not entertain or pass upon constitutional questions neither raised nor considered below (Schillawski v State of New York, 9 N.Y.2d 235, 240; E.J. Eddy, Inc. v Fidelity Deposit Co. of Md., 265 N.Y. 276, 282; Cohen and Karger, Powers of the New York Court of Appeals, §§ 55, 169; 11 Carmody-Wait 2d, N Y Prac, § 71.114; see, also, Telaro v Telaro, 25 N.Y.2d 433, 439). However, in view of the dissenters' sole reliance on section 8 of article VII we deem comment to be appropriate.
Section 11 of article VII of the New York State Constitution provides that: "Except the debts specified in sections 9 and 10 of this article, no debt shall be hereafter contracted by or in behalf of the state, unless such debt shall be authorized by law, for some single work or purpose, to be distinctly specified therein. No such law shall take effect until it shall, at a general election, have been submitted to the people, and have received a majority of all the votes cast for and against it at such election nor shall it be submitted to be voted on within three months after its passage nor at any general election when any other law or any bill shall be submitted to be voted for or against."
The section 8 prohibition against lending the State's credit "was prompted largely by the extensive and highly speculative subsidizing in the first half of the nineteenth century of private railroad and canal companies by the State's long-term debt obligations" (Wein v State of New York, 39 N.Y.2d 136, 142-143, supra). That provision seeks to prevent the State from loaning its credit to a public corporation with the concomitant possibility that the State might ultimately pay the corporation's obligations (Wein v State of New York, supra, pp 143-144). Subsidy by loan of credit was the evil sought to be eradicated. Indemnification of officials for breach of fiduciary duty is no such monster. The indemnification provision does not create an obligation, contingent or otherwise, running to the creditors of the public corporations but rather the obligation, if any arises, runs to those persons having an interest in the Insurance Fund. Indeed, if one of the public corporations falters, the indemnification does not automatically create a present debt. An obligation would arise only if investment in the public corporation is found, by a court, to be a breach of fiduciary duty but the Legislature has declared that such investments "are reasonable, prudent, proper and legal" (Workmen's Compensation Law, § 87-a, subd 2). Indemnification of State officials is not even colorably a loan to a public corporation.
The dissenters assume that because the State may incur an obligation to make good on any losses suffered by the fund as a result of default, a loan of credit to the public corporation has arisen. But it is the fund and its beneficiaries who gain by the State's responsibilities. The fact that the State may make good losses to the fund, in the event of default, is small solace to the public benefit corporations or their creditors. If the public corporations default, they will wallow in their own tragedy, without the benefit of State credit vis-a-vis the indemnification provision. The fact that the measure of State liability to the fund or its officers may relate to the amount of default is not determinative. The measure of damages does not define the obligation and in this case the obligation is purely one of indemnification of State officials. The indemnification does not run afoul of section 8 of article VII.
The authorities presented by plaintiff which deal with the question of "debt", including Levy v McClellan ( 196 N.Y. 178) in its relevant context, involve borrowing or capital expenditures. The other authorities cited have no relevance to the narrow "debt" question set forth in his complaint and dealt with below.
The judgment of Special Term should be affirmed, without costs.
I agree that the judgment of Special Term should be affirmed, and I am in accord with the reasons stated by the majority for rejecting appellant's contention that section 87-c (subd 5, par a) of the Workmen's Compensation Law (L 1975, ch 893) is unconstitutional under section 11 of article VII of our State Constitution. Because it has never been raised or addressed by the parties or considered by the court below, I would not reach the question whether chapter 893 of the Laws of 1975 (as amd by L 1976, chs 6, 32) is unconstitutional under section 8 of article VII.
This appeal involves another of the fiscal gimmicks used during the State and municipal financial stringency in 1975. Like some of the other devices used at that time, this one too falls afoul of constitutional limitations (see Sgaglione v Levitt, 37 N.Y.2d 507; Flushing Nat. Bank v Municipal Assistance Corp. for City of N Y, 40 N.Y.2d 731).
Section 87-c of the Workmen's Compensation Law, as enacted by chapter 893 of the Laws of 1975 and amended by chapters 6 and 32 of the Laws of 1976, assures State officers of indemnification, by the State, against "financial loss and expense arising out of or in connection with any claim, demand, suit, action, proceeding or judgment for alleged negligence, gross negligence, waste or breach of fiduciary duty" resulting from the statutory mandate of investment by the State Insurance Fund in new issue bonds of specified public corporations (subd 5, par a). This provision creates an impermissible "loan" of the State's credit to those corporations (NY Const, art VII, § 8).
The State Insurance Fund accumulates assets from three separate sources: premiums for workmen's compensation insurance, for disability insurance, and for medical and hospital malpractice insurance (Workmen's Compensation Law, § 76). The fund is applied to pay claimants' benefits, and to pay dividends out of excess premiums to insureds.
The State Insurance Fund is, in effect, a trust fund for the benefit of claimants and the insureds, managed by a commission and empowered to invest surplus or reserve moneys, like private trust funds, in only those securities acceptable for investment by savings banks (Workmen's Compensation Law, §§ 77, 87; Banking Law, § 235). The Commissioner of Taxation and Finance is the custodian of the fund (Workmen's Compensation Law, § 85).
Prompted by the fiscal crisis of 1975, the Legislature added to the Workmen's Compensation Law three provisions, facially similar, but critically different, purporting to compel "all state officers with responsibility for the custody or investment" of the fund to purchase new issue bonds of certain troubled public corporations and the City of Yonkers (Workmen's Compensation Law, §§ 87-a, 87-b, 87-c). Section 87-a declared by legislative fiat that "obligations of the municipal assistance corporation for the city of New York are reasonable, prudent, proper and legal investments" for the fund, and directed the officials responsible to purchase MAC bonds according to a flexible schedule (subds 1, 2). The section also provided indemnification to these officials, from the fund itself, for "financial loss arising out of any claim, demand, suit, action or judgment for alleged negligence, waste or breach of fiduciary duty" by reason of investment of the fund money in MAC obligations (subd 3). Section 87-b, in nearly identical language, directed purchase of obligations of the City of Yonkers in the amount of $15 million.
Since indemnification is out of the fund itself, and the State is not obligated to indemnify the State officers out of State funds, there is no loan of the State's credit.
At issue in this case, however, is the third provision, section 87-c, which directed the purchase by the fund, according to a schedule subject to amendment, of $283 million of obligations of one or more of four specified public benefit corporations (subd 1). These obligations, too, were declared to be "reasonable, prudent, proper and legal investments" (subd 3). The indemnification provision, however, is significantly different. It provides State officers not only with indemnification by the fund, but with indemnification by the fund and the State "jointly and severally" (subd 5, par a). It is this provision that transforms the device into an impermissible violation of the State Constitution.
Of course, the indemnification provision is not, by itself, a creation of debt by the State (see N Y Const, art VII, § 11). Involved instead is an ill-disguised loan of the State's credit to public corporations, a loan prohibited by the State Constitution (art VII, § 8, subd 1). The constitutional issue under article VII was properly raised and the issue is one of extreme public importance (Cohen and Karger, Powers of the New York Court of Appeals, §§ 55, 169).
The loan of the State's credit is, in language, indirect. Nothing explicit is said about a loan of the State's credit. The State Insurance Fund is required to purchase certain bonds. Simultaneously, State officers are indemnified against liability arising from claims challenging investment of fund moneys in the specified securities, such investment to be made with moneys obtained by the sale of United States Government securities in its portfolio (Workmen's Compensation Law, § 87-c, subd 2).
The indirection in language, however, deviously disguises the economic effect of the statutory provision. That effect would not be more direct if the State were to issue its own bonds in place of those issued by the corporations. First, the State, by statutory mandate, ensures that the bonds of these then shaky public corporations will be purchased. Then, the indemnification provision assures that if there be claims for negligence, waste, or breach of fiduciary duty by State officers, the State will assume their liability. In ultimate effect, the State has placed its guarantee, however indirect the manipulation, on the bonds of the public benefit corporations to be purchased by the State Insurance Fund. It has lent its credit into the future by way of guarantee, the very result prohibited by section 8 of article VII of the State Constitution.
Whether such claims or liabilities are likely to ensue is immaterial. What is material is that the State by its guarantee would extend its credit to "moral obligations" and thereby emburden future generations of taxpayers for future liabilities arising out of present public debts without compliance with constitutional requirements. Many have long looked askance at the proliferation of the State's attachment of "moral obligation" to securities issued by separately created public corporations in order to avoid constitutional debt limitations and required referenda on the issuance of direct State debt obligations. This case presents a newer but only slightly different artifice.
The situation is quite different from that in Wein v City of New York ( 36 N.Y.2d 610). In that case, as in an earlier case on which the court relied, there was no loan of the city's credit, but rather what was characterized as an agreement to make a gift, not prohibited when made by a city to a public corporation (id., p 616; see N Y Const, art VIII, § 1; Comereski v City of Elmira, 308 N.Y. 248, 252). The city in no way, directly or indirectly, pledged its credit to a public corporation and no action would lie for failure of the city to appropriate money for the so-called "gift". At least, so the court held.
By contrast, section 87-c explicitly provides that the State shall be liable to indemnify State officers against losses incurred through purchase of the corporate bonds. In two steps, the section adds to the limited financial security behind the bonds the credit of the State itself. First, by compelling State officers to buy the bonds, whether in truth sound investments or not, it exposes them to actions for negligence, waste, or breach of fiduciary duty. Second, by indemnifying the officers against such actions, it pledges the State's credit, not only to reimburse the State officers, but, in effect, to make good on any losses suffered by the fund as a result of default by the public benefit corporations. Such losses would, by necessary implication, be measured in large part by the amounts in default, if any. This is, therefore, a loan of the State's credit to a public corporation, and hence, should be declared unconstitutional. Nor is the infirmity measured by the likelihood of the guarantee ever being invoked. The State Constitution does not forbid only guarantees which may ripen into enforceability; it prohibits all guarantees of this sort.
The scheme challenged in this case was devised to meet a grave financial emergency. Of course, even emergencies do not justify suspension of constitutional limitations, expecially those designed to prevent or operate in emergencies (Flushing Nat. Bank v Municipal Assistance Corp. for City of N.Y., 40 N.Y.2d 731, 739, 740, supra; Sgaglione v Levitt, 37 N.Y.2d 507, 514, supra). That the State's fiscal stringency and that of the public corporations has for the time being eased, at least to some degree, does not affect the result. The constitutional limitations are needed not for the days of governmental fiscal affluence, but for the days of distress often caused by a profligacy of the past to be suffered by generations which never enjoyed the profligacy now long gone.
The fiscal practices challenged in this case, if they should become precedent as they inevitably would, can only lead the State to future financial emergencies, and, perhaps, to disaster. The limitations of article VII were designed to avert just such temptations and such problems. Judicial yielding to such evasion of the constitutional protections is not acceptable constitutional law. For that matter it is not sound economics or good political philosophy, but that is not the judicial province.
Accordingly, I dissent and vote to reverse the order of Supreme Court and declare section 87-c of the Workmen's Compensation Law invalid.
Judges WACHTLER, FUCHSBERG and COOKE concur with Judge GABRIELLI; Judge JONES concurs in result in a separate opinion; Chief Judge BREITEL dissents and votes to reverse in another opinion in which Judge JASEN concurs.
Judgment affirmed.