Opinion ID: 2607531
Heading Depth: 1
Heading Rank: 6

Heading: The Meaning Of Liabilities As Used In Article XI, Section 7

Text: Chapter 1032 would permit at least three types of acquisitions: 1. The acquisition of personal property such as computer hardware and software, equipment, and furnishings for state buildings. Section 3(6) of chapter 1032 provides for the granting of security interests on the date the state takes possession of the personal property, or the date the lender advances money. Upon nonpayment, the secured party has the rights and remedies available to a secured party under ORS 79.1010 to 79.5070   . 2. The acquisition of land. Section 3(5) allows the state to use acquired property as security for repayment. Upon nonpayment by the state, the trustee may exclude the state from the property for the remaining portion of the lease and sublease the land to third parties. 3. The construction of improvements on real property acquired with borrowed funds or on land presently owned by the state. Section 3(5) applies to this form of acquisition as well. Upon nonpayment by the state, the Trustee, acting on behalf of the certificate holders, may exclude the state from the property for the remainder of the lease term and sublease the property. Section 3(5) provides that the state may grant leases of real property with a trustee or lender. Such leases may be for a term which ends on the date on which all amounts due under a financing agreement have been paid or provision for payment has been made, or 10 years after the last scheduled payment under a financing agreement, whichever is later. Such leases may grant the trustee or lender the right to evict the state and exclude it from possession of the real property for the term of the lease if the state fails to pay when due the amounts scheduled to be paid under a financing agrement or otherwise defaults under a financing agreement. Upon default, the trustee or lender may sublease the land to third parties and apply any rentals toward payments scheduled to be made under a financing agreement. Though this language is not as clear as it might be, we interpret Section 3(5) to mean that the state would lease the real property to the trustee or lender and take a leaseback. On nonpayment, the trustee or lender could take possession of the land and any improvements constructed thereon for the unexpired term of the lease and sublease the property to third persons. [13] At the conclusion of the term of the lease, the property, including the improvements, would return to the state. The loan agreements state that the real property lease constitutes the sole security for the capital certificates   . Do these proposed agreements create actual or potential liabilities within the meaning of Article XI, section 7? We turn again to the meaning that this court has given Article XI, section 7, in light of its purpose. A financing agreement may violate Article XI, section 7, if it presently commits the state to an expenditure which may in the future exceed the special source of funds, if any, that is committed to pay for it. Rorick v. Dalles City, supra . Thus the question is whether a provision for relinquishing a state-owned asset in case future funding does not meet the state's commitment constitutes a contingent future liability or a present transfer of a contingent interest in an existing asset. For this purpose, it is immaterial whether the encumbered asset is the asset that is purchased with the borrowed funds or another asset already owned by the state. A common lease-purchase agreement generally allows the lessee to terminate the transaction without further liability if the lessee no longer needs, wants, or can afford the leased property. This does not create a debt or liability. [14] The situation is more questionable if, upon terminating the agreement, the state stands to lose more than what remains to be paid on the acquired property, for instance, if most of the agreed price of an outright purchase, including interest, has been paid but termination will cause the state's entire valuable property (worth more than the unpaid balance) to pass into the hands of the seller or lender. In that situation, the agreement confronts future legislators with the choice between the financial cost of continueded cash payments or the financial cost of losing valuable nonmonetary property. This contingency may appear to create a liability, prohibited by Article XI, section 7. The constitution prohibits debt or liabilities. Granting a security interest in land or personal property owned by the state creates a contingent future liability  the loss of property or loss of use of the property  a liability that might well be substantial. To the extent that the state stands to lose property or lose the use of property, in an amount in excess of the unpaid balance, even if only for the unexpired term of a real property lease, a contract may violate Article XI, section 7. This is best made clear by including such provisions in the contracts  that the security interests granted by the state are valid to the extent, and only to the extent, of the unpaid balance under the contracts. The trustee or lender can recover, upon the exercise of rights granted in the agreements, no more than the amounts unpaid under the agreements at the time of foreclosure for nonpayment. Although chapter 1032 is not unconstitutional, it might be applied in an unconstitutional manner. If we attempted to anticipate and resolve all the variations possible under the statute at this time, we would stray into giving an advisory opinion. It is impossible to predict whether in fact the proposed agreements will put the successors of current legislators and taxpayers at risk to lose more than the remaining unpaid balance under the agreements. These agreements or amended agreements need not do so, for the answer may turn on unpredictable fluctuations in the price of construction or acquisition or on the values of owned or leased property. We therefore hold no more than that the participation agreements are not on their face forbidden as a future debt or liability contrary to Article XI, section 7, so long as the state stands to lose property or the use of property worth no more than the unpaid balance under the agreement.