Opinion ID: 795813
Heading Depth: 2
Heading Rank: 2

Heading: Reasonableness and Necessity

Text: 18 That a contract-impairing law has a legitimate public purpose does not mean there is no Contracts Clause violation. The impairment must also be one where the means chosen are reasonable and necessary to meet the stated legitimate public purpose. U.S. Trust Co., 431 U.S. at 22-23, 97 S.Ct. 1505; see Sanitation & Recycling Indus., 107 F.3d at 993 (A law that works substantial impairment of contractual relations must be specifically tailored to meet the societal ill it is supposedly designed to ameliorate.). If it is not, then the law offends the Contracts Clause. 19 Unless the state itself is a party to the contract, courts usually defer to a legislature's determination as to whether a particular law was reasonable and necessary. See Energy Reserves, 459 U.S. at 412-13, 103 S.Ct. 697. In this appeal, the parties committed the majority of their arguments in their briefs to discussing the appropriate level of deference our court owes to the legislature here. Therefore, before we can answer the third question of reasonableness and necessity, we first address the issue of deference.
20 Since Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 4 L.Ed. 629 (1819), it has been familiar law that the Contracts Clause applies to public contracts as well as to private contracts. Id. at 694 (recognizing that salary contracts of public officers are entitled to Contracts Clause protection) (Marshall, C.J.); see U.S. Trust Co., 431 U.S. at 17, 97 S.Ct. 1505, 52 L.Ed.2d 92. However, in analyzing public contracts courts use a different approach than that employed in analyzing private ones. When a law impairs a private contract, substantial deference is accorded, see Sal Tinnerello & Sons, Inc. v. Town of Stonington, 141 F.3d 46, 54 (2d Cir.1998), to the legislature's judgment[s] as to the necessity and reasonableness of a particular measure, U.S. Trust Co., 431 U.S. at 23, 97 S.Ct. 1505. Public contracts are examined through a more discerning lens. When the state itself is a party to a contract, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the [s]tate's self-interest is at stake. Id. at 26, 97 S.Ct. 1505. When a state's legislation is self-serving and impairs the obligations of its own contracts, courts are less deferential to the state's assessment of reasonableness and necessity. Condell v. Bress, 983 F.2d 415, 418 (2d Cir.1993). 21 The parties disagree with respect to what level of deference we should apply. Plaintiffs argue that we owe little deference to the state's decision because the Act is, in their view, self-serving to the state, while defendants insist we owe substantial deference to the legislative judgment. Of particular significance in the case at hand is the absence of a contract to which New York State is a party. Defendants contend that substantial deference is due because New York State is not a party to the contracts that are being impaired, that is, the state did not impair the obligations of its own contracts. Id. at 418. Plaintiffs concede that their contracts are with the City of Buffalo and that no state contracts or obligations run to them or to the City. But, they assert, that absence of a state contract does not preclude heightened scrutiny. The plaintiff unions urge us to focus on the alleged self-serving nature of the Act and the wage freeze. They argue that a less deferential standard applies because the wage freeze is in plaintiffs' view, self-serving insofar as it may save the state money by reducing future aid the state may feel obliged to give to the City. 22 Our initial comment is that the presence or absence of a state as a party to the contract is not determinative of the deference issue. Defendants ignore that a public contract is in fact being impaired albeit through state rather than local law. Were we to adopt defendants' reading, state legislatures could delegate to an agency the power to impair a public contract of a government subdivision that the subdivision itself would have more difficulty impairing. Lawmakers could fashion the powers delegated to the agency in a manner to insulate the agency's actions from constitutional attack. We decline to open such an end-run around Contracts Clause law. The better rule therefore calls for focusing on whether the contract-impairing law is self-serving, where existence of a state contract is some indicia of self-interest, but the absence of a state contract does not lead to the converse conclusion. 23 In other words, the absence of a contract with the state does not mean we thereby believe the wage freeze cannot be self-serving to the state. To the contrary, it can be. But, in the end, we do not think this is the sort of case in which the state legislature welches on its obligations as a matter of political expediency, see Surrogates, 940 F.2d at 773; Guido Calabresi, Retroactivity: Paramount Powers & Contractual Changes, 71 Yale L.J. 1191, 1201-02 (1962), but rather, the state was genuinely acting for the public good, see Blaisdell, 290 U.S. at 445, 54 S.Ct. 231; Calabresi, 71 Yale L.J. at 1202. For the purposes of this appeal, we need not resolve what level of deference to apply. Instead, we will assume that the lower level of deference applies because, as discussed below, the wage freeze is reasonable and necessary even under the less deferential standard.
24 As stated above, assuming the state's legislation was self-serving to the state, we are less deferential to the state's assessment of reasonableness and necessity than we would be in a situation involving purely private contracts, but what does giving less deference to the legislature actually mean? We hasten to point out that less deference does not imply no deference. See Local Div. 589, Amalgamated Transit Union v. Massachusetts, 666 F.2d 618, 643 (1st Cir.1981) (Breyer, J.) ([W]here economic or social legislation is at issue, some deference to the legislature's judgment is surely called for.); Subway-Surface, 44 N.Y.2d at 112, 404 N.Y.S.2d 323, 375 N.E.2d 384 (noting that the statement of the principle [in U.S. Trust Co.] implies that some deference at least is appropriate). Relatedly, we agree with the First Circuit that U.S. Trust Co. does not require courts to reexamine all of the factors underlying the legislation at issue and to make a de novo determination whether another alternative would have constituted a better statutory solution to a given problem. See Local Div. 589, 666 F.2d at 642. Nor is the heightened scrutiny to be applied as exacting as that commonly understood as strict scrutiny. Such a high level of judicial scrutiny of the legislature's actions would harken a dangerous return to the days of Lochner v. New York, 198 U.S. 45, 25 S.Ct. 539, 49 L.Ed. 937 (1905), overruled, see Day-Brite Lighting, Inc. v. Missouri, 342 U.S. 421, 72 S.Ct. 405, 96 L.Ed. 469 (1952), in which courts would act as superlegislatures, overturning laws as unconstitutional when they believe[d] the legislature [] acted unwisely, Ferguson v. Skrupa, 372 U.S. 726, 730, 83 S.Ct. 1028, 10 L.Ed.2d 93 (1963); see Peick v. Pension Benefit Guar. Corp., 724 F.2d 1247, 1265 (7th Cir.1983) (The danger of heightened scrutiny, and the reason it has been as sparingly applied since its heyday in the Lochner era, is that it can easily mask the imposition by a court of a philosophical and economic straightjacket on the legislature.); see also Laurence H. Tribe, Constitutional Choices 182 (1985) (equating heightened scrutiny under the Contracts Clause as backdoor to Lochner -type jurisprudence). The Lochner doctrine, of course, has long since been discarded. Skrupa, 372 U.S. at 730, 83 S.Ct. 1028. 25 Ultimately, for impairment to be reasonable and necessary under less deference scrutiny, it must be shown that the state did not (1) consider impairing the ... contracts on par with other policy alternatives or (2) impose a drastic impairment when an evident and more moderate course would serve its purpose equally well, nor (3) act unreasonably in light of the surrounding circumstances, U.S. Trust Co., 431 U.S. at 30-31, 97 S.Ct. 1505.
26 With the above standard in mind, we hold the wage freeze was reasonable and necessary. The legislature and Board did not treat the wage freeze on par with other policy alternatives. According to the Act, the Buffalo Fiscal Authority was empowered to enact the wage freeze provision only if it was essential to maintenance of the City's budget. N.Y. Pub. Auth. Law § 3858(2)(c) (McKinney Supp.2006). We read this to mean the wage freeze must have been a last resort measure. Indeed the Board imposed the freeze only after other alternatives had been considered and tried. The Board first instituted a hiring freeze pursuant to its powers under the Act. Moreover, the City had already taken other more drastic measures including school closings and layoffs; in the four years prior to the wage freeze Buffalo eliminated 800 teaching and 250 teaching assistant positions. Only after these more drastic steps were taken and a finding that the freeze was essential was made, did the BFSA institute the wage freeze. 27 This discussion dovetails with the second question of whether a more moderate course was available to remedy the fiscal crisis. As noted, the alternatives to the wage freeze consisted of elimination of more municipal jobs and school closures, alternatives which clearly are more drastic than a temporary wage freeze. Thus, in light of the surrounding circumstances, we cannot say the state or the Buffalo Fiscal Authority acted unreasonably. 28 The temporary and prospective nature of the wage freeze underscores further its reasonableness. The Supreme Court instructs that the extent of the impairment is a relevant factor in determining its reasonableness. U.S. Trust Co., 431 U.S. at 27, 97 S.Ct. 1505. Here the impairment is relatively minimal. Under the terms of the Act, the temporary wage freeze must be revisited by the Board on an on-going basis to assure the freeze's continued necessity. N.Y. Pub. Auth. Law § 3858(2)(d) (McKinney Supp.2006). Further, the wage freeze operates prospectively. In this respect the present facts are dissimilar to U.S. Trust Co., a case that represents the paradigm of the type of protection that the Contracts Clause was designed to offer: protection to those who invested money, time and effort against loss of their investment through explicit repudiation. Local Div. 589, 666 F.2d at 642 (discussing U.S. Trust Co. ). The impairment here does not affect past salary due for labor already rendered or money invested. It only suspends temporarily the two percent increase in salary for services to be rendered. 29 In sum, the prospective and temporary quality of the wage freeze convinces us of its reasonableness. See Blaisdell, 290 U.S. at 447, 54 S.Ct. 231 (finding temporary nature of an impairment to be probative of reasonableness) accord Spannaus, 438 U.S. at 242-43, 98 S.Ct. 2716; Subway-Surface, 44 N.Y.2d at 112-14, 404 N.Y.S.2d 323, 375 N.E.2d 384 (attaching significance to the prospective characteristic of a law impairing public contracts); cf. Energy Reserves Group, 459 U.S. at 418-19, 103 S.Ct. 697 (finding as probative the temporary aspect of an impairing regulation in a private contract case). 30 The unions argue the wage freeze was unnecessary because other alternatives existed. Namely, taxes could have been raised or other programs and services could have been eliminated or burdened. We cannot adopt this position for at least three reasons. First, it is always the case that to meet a fiscal emergency taxes conceivably may be raised. It cannot be the case, however, that a legislature's only response to a fiscal emergency is to raise taxes. Also, defendants have shown that Buffalo had already increased City taxes to meet its fiscal needs, and it is reasonable to believe that any additional increase would have further exacerbated Buffalo's financial condition. Second, even if the state could have raised its taxes, appellants have not shown how any monies so raised would flow to Buffalo. Finally, on the undisputed facts of this case, we find no need to second-guess the wisdom of picking the wage freeze over other policy alternatives, especially those that appear more Draconian, such as further layoffs or elimination of essential services. See Blaisdell, 290 U.S. at 447-48, 54 S.Ct. 231 (Whether the legislation is wise or unwise as a matter of policy is a question with which we are not concerned.); Local Div. 589, 666 F.2d at 643 (noting that the court could have balanced alternatives to impairment, but concluding that [a]nswering these sorts of questions ... is a task far better suited to legislators than to judges); see also Sal Tinnerello & Sons, 141 F.3d at 54 ([I]t is not the province of this Court to substitute its judgement for that of ... a legislative body.).
31 We pause here to discuss why, contrary to the plaintiffs' assertions, this case is distinguishable from Association of Surrogates & Supreme Court Reporters v. New York and Condell v. Bress. In Surrogates, New York State had allegedly impaired the labor contracts of certain judicial employees by instituting a payroll lag in which payment of their salaries would be delayed. Surrogates, 940 F.2d at 769. Condell involved a similar payroll lag that affected employees of the state executive branch. Condell, 983 F.2d at 417. Applying heightened Contracts Clause scrutiny, we held both payroll lag provisions unreasonable and unnecessary. See Condell, 983 F.2d at 418, 419-20; Surrogates, 940 F.2d 773-74. 32 The facts and circumstances of those cases nonetheless are dissimilar to those present here. In those cases we found the legislature's justifications of reasonableness and necessity to be dubious at best. That there was an emergency or dire need justifying the impairment was in doubt in those cases. See, e.g., Surrogates, 940 F.2d at 773 (assuming for argument sake only that expansion of the judiciary is an important public purpose but holding payroll lag not to be necessary to achieving that goal); Condell, 983 F.2d at 420 (implying that a fiscal crisis could be grave enough where a state might constitutionally impose a payroll lag but finding that the case before the court did not present such an emergency). For example, in Surrogates the state wanted to hire more judicial employees to help reduce the courts' back-log of cases. Surrogates, 940 F.2d 768-69. To fund this endeavor it instituted the payroll lag, rather than raise taxes to fund the additional service. Id. at 773. We determined that the lawmakers had impaired the state employees' contracts improperly, in part, on the basis of this political expediency. See id.; Condell, 983 F.2d at 420. 33 Here, no one questions the existence of a very real fiscal emergency in Buffalo. Additionally, as noted, there is no evidence in the record of an ill-motive of political expediency or unjustified welching. Contracts Clause cases involve individual inquiries, for no two cases are necessarily alike. See Blaisdell, 290 U.S. at 430, 54 S.Ct. 231 (Every case must be determined upon its own circumstances.). In the present case, we are comfortable that the wage freeze is reasonable and necessary to remedy the fiscal instability of Buffalo. 34 We point out that while the facts of Surrogates and Condell are inapposite, we find the New York state case, In re Subway-Surface Supervisors Association v. New York City Transit Authority, to be persuasive and relevant. In Subway-Surface, the New York Court of Appeals upheld the constitutionality of the New York State Financial Emergency Act for the City of New York, a state law which, like the wage freeze here, suspended wage increases of municipal workers. 44 N.Y.2d at 107-08, 404 N.Y.S.2d 323, 375 N.E.2d 384. At the time, New York City was in the midst of a financial emergency, and to address the emergency, the state froze New York City municipal wages. Id. We find the instant case similar, especially because the fact of an emergency is not contested. Our holding can be summarized simply: An emergency exists in Buffalo that furnishes a proper occasion for the state and BFSA to impose a wage freeze to protect the vital interests of the community, and the existence of the emergency cannot be regarded as a subterfuge or as lacking in adequate basis. Blaisdell, 290 U.S. at 444, 54 S.Ct. 231. Nor can the wage freeze be regarded as unreasonable or unnecessary to achieve the important public purpose of stabilizing Buffalo's fiscal position. III Takings Clause 35 Plaintiffs appeal also the district court's denial of their Takings Clause claim. While we hold that no takings violation has occurred, we do so on different grounds than those relied on by the district court. A. Physical Taking or Regulatory Taking 36 The Takings Clause of the Fifth Amendment provides that no private property shall be taken for public use, without just compensation. U.S. Const. amend. V. The clause applies to the states through the Fourteenth Amendment. See Kelo v. New London, 545 U.S. 469, 125 S.Ct. 2655, 2658 n. 1, 162 L.Ed.2d 439 (2005). 37 The law recognizes two species of takings: physical takings and regulatory takings. See Meriden Trust & Safe Deposit Co. v. FDIC, 62 F.3d 449, 454 (2d Cir. 1995). Physical takings (or physical invasion or appropriation cases) occur when the government physically takes possession of an interest in property for some public purpose. Tahoe-Sierra Pres. Council v. Tahoe Reg'l Planning Agency, 535 U.S. 302, 321, 122 S.Ct. 1465, 152 L.Ed.2d 517 (2002). The fact of a taking is fairly obvious in physical takings cases: for example, the government might occupy or take over a leasehold interest for its own purposes, see United States v. Gen. Motors Corp., 323 U.S. 373, 375, 380, 65 S.Ct. 357, 89 L.Ed. 311 (1945), or the government might take over a part of a rooftop of an apartment building so that cable access may be brought to residences within, see Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 421, 102 S.Ct. 3164, 73 L.Ed.2d 868 (1982). But when the government acts in a regulatory capacity, such as when it bans certain uses of private property, see Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 384-85, 47 S.Ct. 114, 71 L.Ed. 303 (1926), or limits the rent a landlord may charge tenants, see Fed. Home Loan Mortgage Corp. v. New York State Div. of Hous. & Cmty. Renewal, 83 F.3d 45, 47-48 (2d Cir.1996), or prohibits landlords from evicting tenants for refusing to pay higher rents, see Block v. Hirsh, 256 U.S. 135, 154, 41 S.Ct. 458, 65 L.Ed. 865 (1921), the question of whether a taking has occurred is more complex, Tahoe-Sierra Pres. Council, 535 U.S. at 323, 122 S.Ct. 1465. Such cases are considered regulatory takings because they do not involve a categorical assumption of property. See id. The gravamen of a regulatory taking claim is that the state regulation goes too far and in essence effects a taking. Meriden Trust & Safe Deposit Co., 62 F.3d at 454. 38 The district court analyzed the wage freeze as a physical taking. We believe this was in error. The wage freeze does not present the `classic taking' in which the government directly appropriates private property for its own use. Eastern Enters. v. Apfel, 524 U.S. 498, 522, 118 S.Ct. 2131, 141 L.Ed.2d 451 (1998). Rather, the interference with appellants' contractual right to a wage increase arises from [a] public program adjusting the benefits and burdens of economic life to promote the common good. Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978). The freeze therefore falls into the category of a regulatory, not physical, taking, and should have been analyzed as such. See Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224-25, 106 S.Ct. 1018, 89 L.Ed.2d 166 (1986) (analyzing Takings Clause case involving taking of contracts rights under regulatory takings jurisprudence); see also Tahoe-Sierra Pres. Council, 535 U.S. at 323-24, 122 S.Ct. 1465 (noting that physical invasion line of cases is inapplicable to regulatory takings analysis). B. Protectable Property 39 In adjudging whether the Act constituted an unconstitutional taking, we take a moment here to ask the threshold question of whether a protectable property interest is even at stake. Although the Supreme Court has held that valid contracts constitute property under the Takings Clause, Lynch v. United States, 292 U.S. 571, 579, 54 S.Ct. 840, 78 L.Ed. 1434 (1934), this is neither a blanket nor absolute rule, see Connolly, 475 U.S. at 224, 106 S.Ct. 1018 ([T]he fact that legislation disregards or destroys existing contractual rights does not always transform the regulation into an illegal taking [but][t]his is not to say that contractual rights are never property rights ....), and further it is a rule that has been called into question, Pro-Eco, Inc. v. Bd. of Comm'rs, 57 F.3d 505, 510 n. 2 (7th Cir.1995) (We read Connolly . . . as effectively overruling, if it had not already been overruled, Lynch v. United States, 292 U.S. 571, 54 S.Ct. 840, 78 L.Ed. 1434 [(1934)].); see also Ohio Student Loan Comm'n v. Cavazos, 900 F.2d 894, 900-02 (6th Cir.1990) (distinguishing Lynch and holding that contract rights are not property); Peick, 724 F.2d 1247, 1274-76 (noting distinction between property rights which are protected under Takings Clause and contract rights which are not necessarily protected). Our misgivings, however, need not detain us. We will assume for purposes of this appeal that the wage increase provisions of appellants' contracts constitute property under the Takings Clause.