Court Opinion

ID: 9766052
Source: CourtListenerOpinion
Date Created: 2023-08-29 04:30:33.470752+00
Date Added: 2024-06-11T07:30:18.869852
License: Public Domain

George Rose Smith, J., (dissenting). Almost twenty-five years ago the State, pursuant to Act 4 of 1941, refunded its bonded highway debt. The State pledged its full faith and credit to the payment- of the refunding bonds.. Some $43,000,000 worth of those bonds are still unpaid. They are secured by a pledge of certain highway revenues and of the Debt Service Reserve Fund, now amounting to more than $7,800,000, which is the cumulative excess of the pledged revenues over the amounts that have been needed to service the bonds. By Act 35, now before ns, the State is attempting to revoke its pledge of the Debt Service Reserve Fund so that those monies can be used for highway construction. The question here is whether that maneuver can be accomplished without an impairment of the State’s contract with is bondholders. I regret that I cannot agree with the majority’s conclusion that Act 35 is constitutional: Act 35 is long, but its plan for what the briefs call the “advance refunding” of the 1941 bonds really involves only four essentially simple steps: First: The State will sell $43,000,000 of new bonds for which it will again pledge its full faith and credit. Second: The proceeds from this new bond issue will be invested in $43,000,000 worth of United States Government bonds so chosen that their interest and principal payments will be sufficient to pay the interest and principal of the 1941 refunding bonds as they come due. Third: The Government bonds will be deposited with a bank under a trust agreement by which that bank will promise to use the interest and principal to pay the 1941 State bonds. Fourth: "When the first three steps have been completed, Act 35 declares that the State’s liability upon the 1941 reñmding bonds will be discharged. Thereafter the holders of those bonds will have no security except whatever rights they may have under the trust agreement. At the same time the State will make the $7,800,000 Debt Service Reserve Fund available for highway construction. Among the several attacks that are made upon Act 35 I think that at least two should be sustained under the constitutional prohibition against the impairment of contracts. One: Not the least important element in the security that was given in 1941 to the State’s bondholders was the pledge of the State’s full faith and credit. Thé pledge meant that if the specific liens upon the highway revenúes and upon the Debt Service Reserve Fund should fall short of discharging the bonded debt, the State gave its word that its other available resources would be used to make good the deficiency. By Act 35 the State admittedly repudiated its promise. (No doubt that action was taken to avoid the need for submitting the new bond issue to the voters for their approval in a state-wide election. If the State’s faith and credit had been pledged to both bond issues Amendment 20 to our constitution would have required such an election.) In my judgment the State’s unilateral decision to abrogate its promise to its creditors is on its face an impairment of the obligation of its contract with those creditors. Two: The majority justify the State’s abrogation of its 1941 agreement upon the theory that Act 35 provides the bondholders with a new form of security that is equally as good as the one they have lost. It seems to me that, to reach this conclusion, one must read a great deal into Act 35 that is actually not there. Under Act 35 the sole security for the 1941 bonds will be the trust agreement created by Section 11 of the act. What do we know about that trust agreement? At this point, almost nothing, for the act contains but a single vague sentence about the trust agreement. In essence that'sentence reads as follows: “[The following-transaction shall be effected:] The deposit with a bank or trust company that is a member of the Federal Deposit Insurance Corporation (which bank or trust company shall be selected by the [State Board of Finance]) under an irrevocable Trust Agreement by and between the Board and said bank or trust company (called “Trust Agreement”) of all of the direct obligations of the United States of America acquired under (b) above, upon such terms as shall insure that said investments and the proceeds thereof be used solely for the payment of the principal of, interest on and paying agents’ fees in connection with the outstanding- bonds, which Trust Agreement shall contain such terms and provisions as the Board shall determine necessary to insure the sole use of the investments and proceeds for the above specified purpose. ’ ’ That is all. There is no more. It is impossible for me to understand how the majority can declare that this single sentence, with its cavalier treatment of a trust fund amounting to forty-three million dollars, provides the bondholders with a measure of security equivalent to what has been taken away from them. Neither the majority members of this court nor any one else in the world knows what the trust agreement is going to provide. The Board may select as the trustee the smallest bank in the state that is a member of the FDIC- What provision will there be against the possibility that the Government bonds may be stolen or destroyed by fire? What safeguard will there be against the possibility of embezzlement by those persons in the bank who must unavoidably handle the cash derived from the Government bonds? Why is there no requirement that the trustee bank give a fidelity bond? Is it because the State is unwilling to make an appropriation for the premium upon such a huge bond? Most important of all, what assurance have the holders of the 1941 refunding bonds that the trust agreement will fairly protect their property rights? This is the one question that can be answered. The answer is: “None.” This is so because the bondholders will have no voice in the preparation of the trust agreement. That .agreement is to be between the trustee bank and the State Board of Finance. The bank, on the one side, will naturally be primarily interested in the paying agent’s fees that it will receive for handling forty-three million dollars, plus additional millions in interest. The Board, on the other side, is composed of five State officers whose loyalty is understandably and properly to their employer, the State. Thus no one concerned with the drafting of the trust agreement will have any really vital reason for seeing that the bondholders are protected as they should be. It must be remembered that when the trust agreement is finally prepared the new $43,000,000 refunding-issue will already have been sold, the State’s 1941 pledge of its full faith and credit will already have been revoked, and the holders of the 1941 bonds will already have been stripped of all their security except those rights that the trustee hank'’ and the Board may, in their uncontrolled discretion; see fit to give them. In my opinion there is no sound basis upon which this court can declare today, as the majority are doing, that Act 35 does not and cannot adversely affect the rights of the owners of our 1941 highway refunding bonds. Having that conviction, I must dissent. McFaddin and Ward, JJ., join in this dissent.