Court Opinion

ID: 3596934
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:44:05.055492+00
Date Added: 2024-06-11T12:43:26.167811
License: Public Domain

I vote to reverse the orders below and to grant the injunctions asked. In my opinion the contracts about to be entered into by the city of New York, the execution of which it is the object of these actions to restrain, plainly violate the constitutional provisions restraining the power of the city to incur debt or dispose of its money, property or credit. These provisions, as found in article 8, section 10, of the present Constitution, are: "No county, city, town or village shall hereafter give any money or property, or loan its money or credit to or in aid of any individual, association or corporation, or become directly or indirectly the owner of stock in, or bonds of, any association or corporation; nor shall any such county, city, town or village be allowed to incur any indebtedness except for county, city, town or village purposes. This section shall not prevent such county, city, town or village from making such provision for the aid or support of its poor as may be authorized by law." It will be observed that here are enacted two separate and distinct prohibitions, each absolute and unqualified. Stated tersely, the first was intended to prevent the contribution of municipal capital or credit to or in connection with private capital in any scheme of public improvement; the second, to limit the devotion of municipal capital or credit to a municipal purpose of the municipality. These provisions were first incorporated into the Constitution by the amendments adopted in 1874. They were not adopted for the purpose of prohibiting the employment of public funds or credit for a private purpose, for it was the law of the state before the adoption of the amendment that municipal funds should not be applied in aid of private enterprises. In Weismer
v. Village of Douglas (64 N.Y. 91) it was held that a statute authorizing a village to subscribe for the stock of a manufacturing corporation to be located in the village and to improve a water power there situated was unconstitutional and void, because the enterprise was of a private *Page 143 
character. Therefore, the effect of the amendment, taken in connection with the previously existing constitutional restraints, was not only to limit the application of municipal funds to enterprises of a public character, but to restrict such application to a public enterprise which was peculiarly a municipal purpose, and even then to forbid the application in such a manner as would operate as a gift of any money or property, or a loan of money or credit to or in aid of any individual, association or corporation. Illustration may serve to make clear the different applications of the two constitutional provisions. The construction and operation of a railroad is a public purpose. Otherwise, under the Constitution of this state, a railroad company could not condemn a foot of its right of way. The city could build a railroad within its limits for urban travel, because such would be a city purpose (Sun Printing Publishing Assn. v. Mayor, etc., of N.Y., 152 N.Y. 257), but not a railroad to Philadelphia, because the purpose of the enterprise in the latter case, though just as public as in the case of the local subway, would not be municipal. (People exrel. Murphy v. Kelly, 76 N.Y. 475.) In other words, to save the scheme of municipal expenditure from condemnation under this constitutional prohibition, the purpose thereof must be both public and municipal.
Thus far the second constitutional limitation alone has been involved. But if, instead of the city owning and constructing the municipal railroad, the plan was that it should be constructed and owned by a private corporation, though the purpose in such case would be just as public and just as municipal as when the road was to be owned and operated by the municipality, and though the exigency for the public work might be most urgent, the city by the express provision of the Constitution would be forbidden to give or lend a dollar or a dollar's worth of property to or in aid of the corporation, or to buy a share of its stock or one of its bonds. The only question I shall *Page 144 
discuss is whether the proposed contracts which are the subject of this litigation are in conflict with this constitutional inhibition.
Before detailing the provisions of the contracts it may be well to consider two arguments made in support of their validity. They are general in their character and not dependent on the specific details of the contracts. First, it is urged that the contracts are merely leases of the property, and that the power of the city to lease the subway was distinctly declared in the case of SunPrinting  Publishing Assn. v. Mayor, etc., of N.Y. (supra). It is asked whether the lease by the city of one of its piers to a steamship company is a gift or loan of the money, property or credit of the city and, therefore, illegal. The illustration will be accepted and the answer seems plain. The legality depends on the terms of the lease. If the pier is rented for its fair rental value or in an honest effort to obtain such value, whether the rent reserved be too high or too low, of course the lease is good. But if the lease should provide that in consideration of the company's agreement to carry residents of the city of New York at half the regular rates of passage, the rent should be only one dollar a year, manifestly it would violate the constitutional provision, because giving the use of the property of the city without its marketable return is a gift of the city property. So, also, if the lease in consideration of such an agreement should provide that the company pay a reduced rental, it would be a gift of the city property pro tanto and equally illegal, for if part of the consideration of a contract be illegal, the whole contract is void. (Saratoga County Bank v.King, 44 N.Y. 87; Foley v. Speir, 100 id. 552; Trist v.Child, 21 Wall. 441; Meguire v. Corwine, 101 U.S. 108.)
The second argument presented to us, apparently seriously, seems to me very curious. It is to the effect that there can be no gift or loan of the city property by these contracts, because the title remains in the city. Under *Page 145 
the proposed contracts, even assuming them to be strictly leases, the railroads will acquire an estate in the demised premises, which is just as essentially property, surrounded by every constitutional safeguard for the protection of property, as is the reversion at the expiration of the lease. (Real Property Law, section 30.) "Such estates may be, and often are, of a far greater value than a life estate" (Averill v. Taylor, 8 N.Y. 44), and a life estate is often worth far more than the remainder in fee. The life estate of a widow or other person under fifty-one years is worth more than one-half the present value of the property, and the interest of the owner of the reversion is worth less than one-half. Therefore, the question in whom is the greater interest or ownership in a piece of real property — the tenant or the landlord — depends entirely on the length of the demised term and the rent reserved. The term proposed to be given by the city to the two railroad companies is forty-nine years, and the value of that estate if no rent is paid (and certainly it is possible, if not probable, that the city may receive no return) is, assuming an interest rate of 4%, over 85 per cent, or more than five-sixths of the value of the property, and the interest retained by the city less than 15 per cent, or one-sixth of the present value of the property. Therefore, if the city, by the terms of the proposed leases, grants the subway to the lessees for a term of forty-nine years with or without rental, or devotes what would be a rental to a purpose forbidden by the Constitution, it just as much conflicts with the Constitution as if it were to give to the railroad companies a present conveyance of five undivided sixths of the property, retaining one-sixth for itself.
This brings us to a consideration of the terms of the proposed contracts, the details of which are set forth in the opinion of my brother HISCOCK. In this opinion I shall discuss only the contract of the Brooklyn Union Elevated Railroad Company. The questions involved in *Page 146 
the two cases are in reality the same, though I am frank to say that I select that of the Brooklyn Company, because in my judgment its offense against the Constitution is more flagrant and more readily appreciated than that of the other.
The salient and controlling terms of the proposed lease to the Brooklyn Company are as follows: That company either as owner or lessee controls about 105 miles of elevated or steam railroads in the borough of Brooklyn. The city is at present engaged in the construction of two subways, one in the borough of Brooklyn, on Fourth avenue, and the other in the borough of Manhattan, connecting the termini of the bridges across the East river, aggregating in length seven and two-tenths miles, which will cost when completed, according to the estimate of the public service commission, $27,800,000. Under the contract there is to be built at the city's charge fourteen and six-tenths miles of additional subway at an estimated cost of $58,400,000. The railroad company is to construct a connecting subway of a mile and one-tenth at an estimated cost of $3,200,000. It is to extend and improve its own lines at an expense of $23,400,000, and to equip both at an estimated cost of $24,000,000. These figures of the public service commission are the lowest given in the negotiations between the parties — the railroad company estimating the cost of the improvement to be defrayed by it at $50,000,000, and the city's expenditure at over $90,000,000. When completed the city roads are to be leased (?) to the railroad company for the period of forty-nine years and both roads are to be operated by the railroad company, the receipts from all being pooled in a common fund, out of which is to be disbursed annually in the following order: 1. Operating expenses, taxes, rentals, etc. 2. Depreciation, etc. 3. To the operating company $3,500,000 annually to cover net earnings of existing elevated lines. 4. Interest on cost of extensions and equipment incurred by the company. 5. Sinking *Page 147 
fund for account of equipment and extensions of private lines. 6. Interest and sinking fund upon the investment by the city. 7. Net profits to be equally divided between the private corporations and the city. 8. If the income during any year is not ample to pay the sum fixed as net earnings of the existing elevated lines, or interest on cost of extensions and equipment, the loss is to be borne by the operating company. Interest on the investment by the city is cumulative.
That this contract creates a partnership, and a very one-sided partnership at that, between the city and the railroad company seems to me entirely clear. Indeed, it is so denominated by the railroad company in its proposals to the city. That if the agreement was between private individuals or corporations it would create a partnership is settled law, because the parties are entitled to share in the profits as such (Manhattan Brass Manfg. Co. v. Sears, 45 N.Y. 797; Burnett v. Snyder,
81 id. 500, 555; Leggett v. Hyde, 58 id. 272), though it must be conceded that the city's chance of sharing is somewhat remote. But it is contended, assuming that a partnership is created, that there is no violation of the constitutional provision. The learned judge who decided the case at Special Term has written: "The city does not give its property, it leases it; the city does not guarantee the yearly $6,335,000, for it does not pledge its credit that this amount will be realized; leasing property, even if the lease be so valuable as to enable the lessee to borrow on it, is not lending the lessor's credit to the lessee, and finally, there is no express prohibition in the Constitution against mingling public and private property, or against a partnership." I am constrained to differ with the court on each of these propositions. I have already shown that a gift of property may be as easily made by a lease as by a conveyance of a fee. It seems that there are in this state leases for 990 years at an annual rent of three peppercorns. (Trustees of Elmira v.Dunn, 22 Barb. 402.) Who is the real owner *Page 148 
of the property, the landlord or the tenant? The gift of the use for a year of a building renting for $20,000 annually is greater than the gift of the fee of a building worth only $10,000. Equally clear is it that a city may loan its money or credit to a corporation without guaranteeing its bonds or other obligations. It is urged that the constitutional inhibition is against loaning money or credit, but not against loaning property. Even that technical argument fails in this case because the agreements to spend the money to build the subway and to lease it when built are but interdependent parts of a single and entire contract. If, therefore, the terms of the lease are such that the use of the property is given in aid of the corporation, the money which the city agrees to expend to create the property is equally so given. So, also, while the word partnership is not mentioned in the constitutional inhibition, it is as clearly condemned as if named, for the inhibition is in terms so comprehensive as necessarily to include partnerships. In every partnership the credit of each partner is pledged so far as the common venture is concerned in aid of each of his copartners, except in a special partnership, and there the capital contributed by the special partner is equally pledged for the same purpose. On this last proposition authority is not wanting.
The Constitution of the State of Ohio prescribed that: "The general assembly shall never authorize any county, city, town or township, by vote of its citizens or otherwise, to become a stockholder in any joint stock company, corporation or association whatever, or to raise money for, or loan its credit to, or in aid of any such company, corporation or association." The provision is so similar to that now found at a later time in our Constitution that doubtless our provision was borrowed from it. Certainly ours is no less broad. The effect of the Ohio constitutional provision has been several times before the court of last resort in that state. The first case was that of *Page 149 Walker v. City of Cincinnati (21 Ohio St. 54), where the validity of a statute authorizing the city of Cincinnati to build a railroad to Knoxville was upheld (there being no constitutional requirement such as there is in this state which limits the application of municipal money or credit to a municipal purpose). But the court, discussing the constitutional provision, said: "The mischief which this section interdicts is a business partnership between a municipality or subdivision of the State, and individuals or private corporations or associations. It forbids the union of public and private capital or credit in any enterprise whatever. In no project originated by individuals, whether associated or otherwise, with a view to gain, are the municipal bodies named permitted to participate in such manner as to incur pecuniary expense or liability. They may neither become stockholders nor furnish money or credit for the benefit of the parties interested therein." The next case was Wyscaver v.Atkinson (37 Ohio St. 80), in which an act of the legislature authorizing a township to raise $20,000 towards the making of a line of railway was held unconstitutional and void. The court said, repeating: "The mischief which this section interdicts is a business partnership between a municipality or subdivision of the State and individuals or private corporations or associations.It forbids the union of public and private capital or credit inany enterprise whatever." Counterman v. Dublin Township
(38 Ohio St. 515) is to the same effect. In Alter v. Cincinnati
(56 Ohio St. 47) it is held that the city must be the sole proprietor of property in which it invests its public funds, and it cannot unite its property with the property of individuals or corporations, so that when united both together form one property. It was said: "The city may lease from an individual or corporation any property of which it may need the use, or having the property the use of which it does not need, it may lease the same to others, but it cannot engage in an enterprise *Page 150 
with an individual or corporation for the construction or erection of a property which, as a completed whole, is to be owned and controlled in part by the city, and in part by an individual or corporation."
The effect of this constitutional prohibition came before the Supreme Court of the United States in Pleasant Township v.Ætna Life Ins. Co. (138 U.S. 67), where a suit had been brought in the Federal courts against a town to recover on bonds issued under the statute which was condemned in the cases cited from 37th and 38th Ohio reports. That court held that as the bonds were issued before the Supreme Court of the state of Ohio had decided their invalidity, the Federal courts were not constrained to follow those decisions, but required to determine the controversy on their own judgments. Nevertheless, the Supreme Court, reversing the lower court, held the statute void, agreeing with the Supreme Court of Ohio and quoting with approval the excerpts which I have already given. Thus, there is very respectable authority that the contracts before us are bad.
But even if we were to assume that a business partnership between a municipality and a private corporation would not in all cases conflict with the Constitution, the terms of this agreement are such as necessarily condemn it. The city is to contribute over $90,000,000 of its capital. Out of the net income realized from the joint operation of the city roads and the company roads there is first to be paid to the railroad company $3,500,000, or, as stated in its letter, about 6% on the capital represented by such roads. For forty-nine years the income realized from the city's investment of $90,000,000 is pledged to secure an annual return of $3,500,000 to the railroad company. It may possibly be that the earnings from the existing lines of the railroad company, if it were practical to separate them from the common fund, will equal that amount. That, however, is immaterial. The property of the city is nevertheless pledged to secure the company that return. *Page 151 
The test is simple. If the subways should be taken from the city and the railroad company by the state under the power of condemnation, assuming that the award for the property equalled its cost, $90,000,000 of the city's money would have to be held in court for forty-nine years, or the unexpired term thereof, or its equivalent, $76,000,000, in perpetuity to make good any deficiency in the railroad company's own lines, unless, of course, the railroad company chose to make some new agreement with the city to effect the release of the fund. This statement, however, is to be modified by the right of recaption reserved by the contract which may be exercised after ten years on condition that the city pay the railroad company 15% additional on the $50,000,000 invested by the company, or $7,500,000. The value of the ten years' estate (during nine years of which the company in its proposal concedes the city can expect no return) is 32½, or the equivalent of about $29,000,000 in perpetuity, to which is to be added the $7,500,000 already mentioned. Therefore, the instant the subway is completed, under the most favorable conditions of the contract, the equivalent of $36,500,000 of the city's money or property is pledged to secure the stipulated return on the railroad company's capital. These calculations again are made on the assumption that the prevailing rate of interest is 4%. If a higher rate should be taken, the conditions imposed would be more unfavorable to the city. In this view it seems to me idle to argue that the money and credit of the city is not to be given in aid of the Brooklyn Company. If a person being applied to by a neighbor to indorse a note for $1,000 should give him a $1,000 government bond on which, as collateral, to borrow the money from some third person, it is exactly the same as if he had indorsed the note or himself loaned the maker the money.
The difference between the views of the majority of the court and myself lies here: They think that because a municipality may acquire property for a municipal *Page 152 
purpose, it may acquire it on just the same terms and conditions as might be assumed by a private corporation or individual. This I deny. The terms and conditions assumed by the city must not conflict with the constitutional provision, however indisputable the right of the city to acquire the property may be. For instance, a street railroad company might convey one of its branch lines to another company in consideration of the latter company guaranteeing the payment of the outstanding mortgage bonds of the former, or agreeing to loan it an amount of money. The city could make no such bargain, because the Constitution prohibits it. The same rule would apply to the terms of an agreement made by the city to lease a line of railroad. I am at a loss, however, to see how there can be spelled out of the proposed contract an agreement of the city to lease the lines of the Brooklyn Company, unless, possibly, on the theory that in the operation of the combined roads the city and the company are partners, which the majority opinion expressly repudiates. Equally aside from the point in issue is the analogy found in the country practice of letting a farm on shares. Assuming that the power granted to an executor or trustee to lease a testator's farm would authorize renting it on shares, it certainly would not authorize the pooling of receipts of the farm with those of several other farms and an apportionment of the common fund so realized. Yet this is what the contract requires the city to do.
I do not discuss the question whether the terms of the proposed contract are fair or unfair. The sole question is, do they violate the constitutional provision. Equally aside of the mark is all discussion of the necessity of the city for new means of transit or of the sacrifice which the contract requires the company to make, and the consideration which, under its terms, the company is to advance. As already said, the Constitution does not forbid the city doing certain things without consideration, but doing them at all with or without consideration. It may not *Page 153 
invest in the company's stock or bonds no matter how favorable the terms, nor guarantee the company's securities no matter how absolutely sufficient is its indemnity from loss by the guaranty.
The decision of this court in the case of Sun Printing Publishing Assn. v. Mayor, etc., of N.Y. (supra) does not in any degree sustain the validity of the proposed contracts. There it was held that the city might build a subway and lease it to a company for a term of years for a fixed annual rental payable in money equal to the interest on the city's outlay and also sufficient to amortize the principal invested at the expiration of the lease. In other words, what was done in that case is exactly the same as is done with piers. The city builds them; the companies hire them and pay rent, the rent being no way dependent on the profits of the steamship companies. It is the method in which the income derived from the use of the city's property is to be applied that occasions the whole controversy in these cases, with which the decision in the Sun case in no way deals.
It has been suggested that possibly a dissent in these cases may be of value, as it will check the further extension of schemes for loaning the city's money, property or credit. Those who indulge in this belief but "Listen with credulity to the whispers of fancy." It would be ungracious not to make recognition of the great skill and ability displayed by the lawyers and financiers who have formulated these contracts in their efforts to make the evasion of constitutional restrictions practicable. But their successors may be found, and even their own services may again be brought into requisition. The corporations controlling the Brooklyn and the New York railroads each holds and operates many miles of street surface railroads. After their present success they may deem it wise to obtain a guarantee of the income of such property through a pledge of city property by a scheme similar to the present one. Of course, if subway roads can be combined *Page 154 
with elevated roads, equally can they be combined with surface roads; but if we assume these companies will rest satisfied on what they now obtain, there are other railroad companies in the city of New York who, on the principle that equality is equity, will seek their chance at the city treasury. Nor do I see how the principle about to be decided can be confined to railroads. With the utmost respect for the majority of the court, I fear that the decision about to be made will lead to a practical nullification of the constitutional restraints by methods of evasion. It may, however, prove interesting to that school of publicists and political economists which has always maintained the futility of restraints imposed by the people themselves on their own extravagance in the expenditure of public moneys, on the ground that when the popular demand is not great the restraints are unnecessary, and when great they are unavailing.