Title: In Re Advisory Opinion to the Governor (Depco)
Citation: 593 A.2d 943
Docket Number: N/A
State: rhode-island
Issuer: rhode-island Supreme Court
Date: June 24, 1991

593 A.2d 943 (1991) In re ADVISORY OPINION TO THE GOVERNOR (DEPCO). Jack KAYROUZ et al. v. RHODE ISLAND DEPOSITORS ECONOMIC PROTECTION CORP. By and Through its Chairman, Bruce SUNDLUN. Nos. 91-198-M.P. and 91-217-Appeal. Supreme Court of Rhode Island. June 24, 1991. *945 Sheldon Whitehouse, Providence, for Governor. Robin E. Feder, Asst. Atty. Gen., Julio C. Mazzoli, Sp. Asst. Atty. Gen., Providence, for amicus curiae, Dept. of Atty. Gen. Philip W. Noel and Gary R. Pannone, McGovern Noel Falk Pannone Procaccini &amp; O'Leary, Ltd., Providence, for amicus curiae, R.I. Central Credit Union. Peter Lawson Kennedy and Paul V. Curcio, Adler, Pollock &amp; Sheehan, Inc., Providence, for amicus curiae, Davisville Credit Union and Cent. Credit Union. Everett A. Petronio, Johnston, for amicus curiae Columbian Credit Union. Kevin A. McKenna, McKenna &amp; Fallon, Providence, for plaintiffs Jack Kayrouz, et al. MURRAY, Justice. This matter is before the Supreme Court pursuant to a formal request of the Governor of the State of Rhode Island for an advisory opinion under article 10, section 3, of the Rhode Island Constitution. On April 25, 1991, the Governor requested the opinion of this court on four questions of law regarding the constitutionality of the Rhode Island Depositors Economic Protection Act of 1991 (DEPCO act), P.L. 1991, ch. 3, §§ 1-5. On May 2, 1991, a trial justice of the Providence County Superior Court certified four essentially similar questions to this court for determination pursuant to G.L. 1956 (1985 Reenactment) § 9-24-27. These matters were consolidated, and on May 22, 1991, the court heard oral argument on them.[1] Following conference thereon, we issued an order wherein we announced our responses to the four questions propounded by the Governor. In re Advisory Opinion to the Governor (DEPCO), No. 91-198-M.P. (R.I., filed May 28, 1991). That order was issued prior to the release of this opinion because of the need for an expeditious resolution of the matter. It is well settled that a legislative enactment is presumed to be constitutional and that a party challenging the legislation has the burden of persuading the court otherwise. Brennan v. Kirby, 529 A.2d 633, 639 (R.I. 1987). The challenging party must convince the court beyond a reasonable doubt that the act is contrary to a provision either expressly stated in the State or the Federal Constitution or necessarily implied from language therein. In re Advisory Opinion to the House of Representatives, 485 A.2d 550, 552 (R.I. 1984). If the act is susceptible of more than one construction, we shall adopt that construction that avoids unconstitutionality. Id. As we stated in our earlier order, we find the DEPCO act constitutional. The act amends the receivership laws for banks and other financial institutions regulated by the Department of Business Regulation (DBR) by granting to depositors a priority in payment over other unsecured creditors upon the liquidation of such financial institutions. General Laws 1956 (1989 Reenactment) § 19-15-7, as amended by P.L. 1991, ch. 3, § 1. The act also creates the Depositors Economic Protection Corporation (corporation) to remedy the economic disaster arising from the failure of the Rhode Island Share and Deposit Indemnity Corporation (RISDIC) and the subsequent banking crisis. General Laws 1956 (1988 Reenactment) § 42-116-4, as amended by P.L. 1991, ch. 3, § 4. Thus it is a comprehensive plan enacted to deal with an overwhelming economic and human crisis. "The assent of two-thirds of the members elected to each house of the general assembly shall be required to every bill appropriating the public money or property for local or private purposes." R.I. Const. art. 6, sec. 11. The DEPCO act was passed in both the House of Representatives and the Senate by a simple majority rather than by a two-thirds vote. Therefore, the issue presented is whether the purposes for which the General Assembly enacted the DEPCO act constitute public purposes and not local or private purposes. *947 The undisputed circumstances that prompted passage of the DEPCO act are set forth in the act as legislative findings: When we consider whether an act serves a public purpose, the self-serving recitation of a public purpose contained within the legislation is not conclusive. Advisory Opinion to the Governor, 113 R.I. 586, 593, 324 A.2d 641, 645-46 (1974). Nevertheless, the General Assembly is vested with wide discretion to determine the existence of a public purpose, and such a determination is entitled to great deference by the judiciary. Id. at 593, 324 A.2d at 646. "An act of the General Assembly mandates judicial approval if, on any reasonable view, the act is designed to protect the public health, safety and welfare." Id. at 594, 324 A.2d at 646. In past cases we have analogized considerations of public purpose to those of public use. Public use is traditionally viewed as follows: The concept of public purpose, however, is not static but must be sufficiently flexible to meet the ever-changing needs of our complex society. Advisory Opinion to the Governor, 113 R.I. at 594, 324 A.2d at 646. The modern trend of authority is to expand and to construe liberally the meaning of public purpose, especially in the area of economic welfare. Id. at 595, 324 A.2d at 646-47. Although the failure of the more-than-twelve financial institutions did not create a state debt, it cannot be denied that the large number of depositors, the total number and aggregate value of the accounts involved, and the overall negative impact on the state's economy and the citizens' general welfare have created a public crisis. As stated by the General Assembly, this crisis has affected not only the depositors of those institutions but also their creditors and the people with whom they do business. Section 19-15-6(4). We would be hard pressed to imagine a scenario more deserving of public-purpose legislation. We therefore hold that the DEPCO act serves a public purpose and that passage of the act by a simple majority was constitutional. Sections 19-15-7 and 42-116-7 of the DEPCO act set forth the priority of claims and the order of distribution as follows: (1) reasonable administrative expenses, (2) unsecured claims for wages, (3) unsecured claims of depositors up to an amount insurable under the Federal Deposit Insurance Act, 12 U.S.C. §§ 1811-1832 (1988), (4) unsecured claims of depositors that exceed the amounts recoverable under the Federal Deposit Insurance Act, (5) unsecured claims of any local, state, or federal taxing agency entitled to priority under law, and (6) unsecured claims of all general creditors and depositors to the extent not accorded priority above. We note at the outset that the state has broad police powers to pass legislation promoting the health, welfare, and safety of the people. (Opinion to the Governor), 24 R.I. 603, 605, 54 A. 602, 603 (1902). As stated above, the broadest scope of that power in furtherance of a public purpose is in the area of economic welfare. Advisory Opinion to the Governor, 113 R.I. at 595, 324 A.2d at 646-47. The first constitutional challenge under this question is whether the preferences and priorities set forth in the DEPCO act constitute a law impairing the obligation of contracts in violation of the State and the Federal Constitutions. U.S. Const. Art. I, sec. 10; R.I. Const. art. 1, sec. 12. In Energy Reserves Group, Inc. v. Kansas Power &amp; Light Co., 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983), the Supreme Court announced the following three-part test to determine whether legislation *949 unconstitutionally impairs the obligation of contracts. First, has the state law in fact substantially impaired a contractual relationship? Id. at 411, 103 S. Ct. at 704, 74 L. Ed. 2d at 580. Second, if the law constitutes a substantial impairment, can the state show a legitimate public purpose behind the regulation, "such as the remedying of a broad and general social or economic problem"? Id. at 411-12, 103 S. Ct. at 704-05, 74 L. Ed. 2d at 581. Third, is the legitimate public purpose sufficient to justify the impairment of the contractual rights? Id. at 412, 103 S. Ct. at 705, 74 L. Ed. 2d at 581. Under traditional receivership law, depositors and general creditors would share in any available assets on a pro rata basis. Under the DEPCO act depositors are paid in full before general creditors receive anything. Thus the general creditors' actual recovery may be substantially affected if the available assets are inadequate. We find, however, that this new priority does not impair the contractual relationship but affects only the timing of payment. See In re Inland Dredging Corp., 61 F.2d 765, 766 (2d Cir.1932) (impairment clause allows changes in remedy but not in right), cert. denied, 288 U.S. 611, 53 S. Ct. 403, 77 L. Ed. 985 (1933). Furthermore, even if we were to find an impairment of the contractual relationship, that impairment would be sufficiently justified by the legitimate public purpose of returning funds to deposit creditors and eventually to the Rhode Island economy. The second constitutional challenge is whether the statutory preferences and priorities constitute a taking of private property for public use without just compensation in violation of the State and the Federal Constitutions. U.S. Const. Amend. V; R.I. Const. art. 1, sec. 16. It is well settled that interests in specific property created by mortgages, security interests, or liens may not be taken without just compensation. United States v. Security Industrial Bank, 459 U.S. 70, 75, 103 S. Ct. 407, 410-11, 74 L. Ed. 2d 235, 240-41 (1982). Contract rights that do not create interests in specific property, however, remain subject to alteration by paramount federal or state powers exercised for public purposes. Peick v. Pension Benefit Guaranty Corp., 724 F.2d 1247, 1275-76 (7th Cir.1983), cert. denied, 467 U.S. 1259, 104 S. Ct. 3554, 82 L. Ed. 2d 855 (1984). The private property at issue here is the pool of assets belonging to the failed financial institutions in receivership. Neither the depositors nor the general creditors have interests in any specific property of the institution; only their claims based on contractual or tort liability are affected. The Supreme Court has identified three factors that determine whether there has been an unconstitutional taking: (1) the character of the governmental action, (2) the economic impact of the regulation on the claimant, and (3) the extent to which the regulation has interfered with distinct investment-backed expectations. Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 224-25, 106 S. Ct. 1018, 1026, 89 L. Ed. 2d 166, 178-79 (1986). Applying these factors to the DEPCO act, we find as follows. First, no property has been physically invaded or appropriated for the government. The Supreme Court has stated that an unconstitutional taking may be found more readily when the property is physically invaded than "when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good." Penn Central Transportation Co. v. New York City, 438 U.S. 104, 124, 98 S. Ct. 2646, 2659, 57 L. Ed. 2d 631, 648 (1978). Second, the economic impact on creditors amounts to a mere adjustment of the timing of distribution with respect to the available assets. Third, general unsecured creditors by definition have no investment-backed expectations. Their interests are subject to such variables as changes in the law of receivership and insolvency of the institution. Accordingly we conclude that the statutory priorities do not amount to an unconstitutional taking of private property. The third constitutional challenge is whether the statutory preferences and priorities constitute a denial to any *950 person of the equal protection of the laws. U.S. Const. Amend. XIV, sec. 1; R.I. Const. art. 1, sec. 2. Although the state has wide discretion in enacting legislation, it must show that the legislation is rationally related to a legitimate state interest in order to overcome an equal-protection challenge. City of New Orleans v. Dukes, 427 U.S. 297, 303, 96 S. Ct. 2513, 2516-17, 49 L. Ed. 2d 511, 516-17 (1976). The mere fact that the legislation could have been drawn more precisely will not invalidate the statute. Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 78, 31 S. Ct. 337, 340, 55 L. Ed. 369, 377 (1911). "The constitutional safeguard is offended only if the classification rests on grounds wholly irrelevant to the achievement of the State's objective." McGowan v. Maryland, 366 U.S. 420, 425, 81 S. Ct. 1101, 1105, 6 L. Ed. 2d 393, 399 (1961). As we have discussed above, the DEPCO act serves a legitimate state purpose: it alleviates the widespread economic hardship caused by the current banking emergency. Furthermore, the statutory priorities are rationally related to this purpose by providing an orderly mechanism for restoring funds to the state's wounded economy. The provisions allowing for the payment in full of smaller claims before larger ones are neither arbitrary nor capricious but serve to further the legitimate state interest. See United Wire, Metal and Machine Health and Welfare Fund v. State Deposit Insurance Fund Corp., 307 Md. 148, 159-60, 512 A.2d 1047, 1053 (1986) (discussing rational relationship between reduction in number of accounts and reduction in costs of receivership). The DEPCO act creates a special revenue fund to which a portion of the sales tax is dedicated to be used by the corporation to secure the payment of bonds and notes in excess of $50,000. Section 42-116-31. The Rhode Island Constitution provides: We must determine, therefore, whether the bonds issued by the corporation constitute state debts. Section 42-116-4(a) of the DEPCO act creates "a public corporation of the state, having a distinct legal existence from the state and not constituting a department of the state government, with such politic and corporate powers as set forth in this chapter." These powers include the power to borrow money, issue bonds, and pledge, assign, or create security interests in assets, revenues, and funds of the corporation. Section 42-116-5. Furthermore, § 42-116-17 states: In Opinion to the Governor, 107 R.I. 651, 652, 270 A.2d 520, 520-21 (1970), we considered whether the Rhode Island Water Resources Board could issue bonds in excess of $50,000 without a vote of the people. The enabling legislation provided that the Water Resources Board "shall constitute a body politic and corporate and a public instrumentality of the state having a distinct legal existence from the state and not constituting a department of the state government." General Laws 1956 § 46-15.1-2, as enacted by P.L. 1970, ch. 304, § 1. Persuaded by the stated legal status of the board, we concluded that any debtor obligation resulting from issuance of the bonds was exclusively that of the Water Resources Board and not of the state. 107 R.I. at 655-56, 270 A.2d at 522-23. In our present case the DEPCO act expressly states that the debtor obligation resulting from issuance of the bonds is exclusively that of the corporation and not of the state. Furthermore, the language of § 42-116-4, the corporation's enabling act, is similar to the language of § 46-15.1-2, the Water Resources Board enabling act. We therefore find § 42-116-4 constitutional. We further find that the dedication of 0.5 percent of the sales-tax revenue to the special-revenue fund applies to this year only and is not binding on future General Assemblies. Although § 42-116-31 states that this percentage "will be dedicated to the special revenue fund," using apparently mandatory language, this section must be read in pari materia with other sections of the DEPCO act. Opinion to the Governor, 112 R.I. 151, 157, 308 A.2d 809, 812 (1973). For example, § 42-116-21(a) provides: It is clear, therefore, that the General Assembly intended that the payment of the proceeds of the sales tax into the special-revenue fund would be subject to annual appropriation and that each succeeding General Assembly may renew this appropriation as it sees fit. We therefore find that § 42-116-31 does not violate R.I. Const. art. 6, secs. 2 and 10. We have already provided a lengthy discussion of the public purposes served by the DEPCO act; therefore, we shall respond to this question by reference to our response under question 1. The Rhode Island Constitution's distribution of governmental powers grants specific powers to one governmental branch while prohibiting another branch from exercising that same power. Creditors' Service Corp. v. Cummings, 57 R.I. 291, 300, 190 A. 2, 8 (1937) (discussing constitutional distribution of powers). Sections 19-15-1 and 19-15.1-4 of the DEPCO act authorize the director of the DBR, an arm of the executive branch, to seek an appointment as receiver of any insolvent financial institution upon application to the Superior Court. Sections 19-15-2 and 19-15.1-5 delineate the powers of the receiver. We do not find that these sections infringe upon the authority of the court in a receivership proceeding. "It is generally considered a matter for the discretion of the court imposing the receivership to decide who should be appointed as receiver * * * and to decide, once a receiver has been appointed, whether he should be removed." Cavanagh v. Cavanagh, 118 R.I. 608, 625, 375 A.2d 911, 919 (1977). We find that the language of §§ 19-15-1 and 19-15.1-4 is discretionary, permitting the court to appoint the director as receiver or to appoint another person if the court wishes to do so. Furthermore, the powers granted to the receiver are further restricted by being made "subject to such directions as may from time to time be prescribed by the court." Sections 19-15-2, 19-15.1-5(a). Thus, the Superior Court retains ultimate control and supervision of the receivership and is empowered to make discretionary decisions, including the initial decision to place an insolvent institution into receivership. We therefore hold that these sections, as well as § 19-15-8, do not violate the distribution-of-powers requirement. These two questions concern possible conflicts of interest arising when claims of a failed financial institution are brought against the director who is also acting as receiver or when the director as receiver is obliged to assert claims against other financial institutions in receivership. "Ordinarily, only a person who is without interest in a cause and who stands indifferent between the parties may be appointed a *953 receiver therein. Therefore, a party to the cause will not ordinarily be appointed receiver unless both parties consent or there are special circumstances present which make such an appointment clearly for the best interest of all concerned." 65 Am.Jur.2d Receivers § 133 at 963 (1972). It is evident from the language of the DEPCO act that the General Assembly intended that the director of the DBR should be appointed as receiver unless the court found that this appointment would not be in the best interests of the parties. We do not find that such an appointment will inevitably lead to disastrous results. In fact, we note the high improbability that conflict will arise from claims against the state and/or the DBR based on negligent supervision of the failed institutions. Nevertheless, any claims that do arise would be based on discretionary acts of the state and would therefore be barred by the doctrine of discretionary immunity. See United States v. Gaubert, 499 U.S. ___, ___, 111 S. Ct. 1267, 1275, 113 L. Ed. 2d 335, 348 (1991) (discretionary acts include day-to-day management of banking affairs); Catone v. Medberry, 555 A.2d 328, 333 (R.I. 1989). Furthermore, the Superior Court retains the authority to cure any actual conflicts by removing and replacing the director as receiver or by appointing a coreceiver to prosecute or to defend the claim. We therefore hold that the Superior Court may constitutionally appoint the director as receiver for the failed financial institutions without violating the procedural due-process requirements of the State and the Federal Constitutions. For the foregoing reasons we are of the opinion that the DEPCO act is constitutional. The certified questions are answered in accordance with our determination. [1] We are responding to these consolidated matters in the form of an opinion; our findings shall therefore be legally binding.