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2416 Corporation v. First National Bank

OPINION FILED OCTOBER 1, 1976.

THE 2416 CORPORATION, APPELLEE,

v.

THE FIRST NATIONAL BANK OF CHICAGO, TRUSTEE, APPELLEE. — (CHICAGO TRANSIT AUTHORITY ET AL., APPELLANTS.)



Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County; the Hon. F. Emmett Morrissey, Judge, presiding.

MR. CHIEF JUSTICE WARD DELIVERED THE OPINION OF THE COURT:

This appeal involves the construction of the trust agreement under which revenue bonds were issued to finance the establishment and initial operations of the Chicago Transit Authority (hereafter CTA), which operates the public transportation system in the city of Chicago and in certain areas beyond the limits of Chicago. The proceeding is directly related to operating deficits of the CTA. These deficits have resulted in adequate funds not being available for deposit in the revenue bond interest and bond retirement accounts of the CTA which were provided for in the trust agreement. (As will be seen, the statute creating the CTA authorized the execution of a trust agreement to secure bondholders.) No default in the payment of interest to bondholders has as yet occurred because of the availability of funds which are not concerned here.

In July 1972 the plaintiffs, Lois Beck and the 2416 Corporation, owners of CTA revenue bonds, filed separate actions in the circuit court of Cook County seeking a construction of the trust agreement with respect to certain moneys held by the CTA. That issue is not involved here, and it is sufficient to note that the court ordered the revenue bond trustee under the trust agreement, the First National Bank of Chicago (hereafter the Trustee), to apply the moneys for the purchase and retirement of outstanding revenue bonds. In doing so the court declared it was retaining jurisdiction to enable it to consider questions which might arise under its order.

Under that retention of jurisdiction the Trustee, in March of 1974, filed a complaint against the CTA for a declaratory judgment. The Trustee contended that moneys deposited in the Modernization Fund and in the Depreciation Reserve Fund under the trust agreement were available to meet interest obligations on revenue bonds and to make other payments for "debt services," such as purchasing outstanding revenue bonds, when there were not adequate funds in the accounts normally drawn upon for these purposes. The Harris Trust and Savings Bank (Harris) intervened in this action and objected, contending that such a judgment would prejudice CTA equipment trust certificate holders, for whom Harris is the trustee. (New equipment for the CTA is financed through equipment trust certificates which, inter alia, provide that title in the equipment remains in the certificate holders until the equipment has been fully paid for.)

On July 23, 1974, the circuit court entered an order that the Trustee had a right to pay interest and other debt services on revenue bonds only from "revenue or income" as defined by section 701 of the trust agreement. The appellate court reversed, holding that under the trust agreement the Trustee had the right to use moneys in the Modernization Fund, other than the proceeds of gifts, loans or grants, including moneys which were proceeds from recoveries for damages to property and proceeds from the liquidation and conversion or sale of CTA property, whenever other moneys for debt service were not available. The appellate court further held that the Trustee had the right to apply all moneys in the Depreciation Reserve Fund to the payment of interest and other debt service obligations whenever there were deficiencies in the debt service accounts. (26 Ill. App.3d 468.) We granted the petitions for leave to appeal filed by the CTA and Harris. Ill. Rev. Stat. 1975, ch. 110A, par. 315.

In 1945 the General Assembly enacted the "Metropolitan Transit Authority Act," which created the CTA as a municipal corporation. (Ill. Rev. Stat. 1975, ch. 111 2/3, par. 301 et seq.) Pursuant to the Act the CTA was vested with the power to own, operate and maintain an urban mass transit system in the metropolitan area of Cook County. Section 12 of the Act granted the CTA authority to borrow money for its establishment through the issuance of interest-bearing revenue bonds. These bonds, the Act provided, were to be payable solely from the revenues or income derived by the CTA from the operation of the transit system, and they were not to be considered an indebtedness or obligation of the State or the CTA "within the purview of any constitutional limitation or provision." (Ill. Rev. Stat. 1975, ch. 111 2/3, par. 312.) Section 12 further provided that a trust agreement could be executed to secure the payment of the bonds from the revenue or income of the system. Ill. Rev. Stat. 1975, ch. 111 2/3, par. 312.

In 1947, 1952 and 1953 the CTA issued a total of $135,000,000 in revenue bonds, of which approximately $38,000,000 are outstanding. The funds realized from the issuance and sale of the bonds have been totally expended. Three trust agreements securing the payment of principal and interest on the three bond series were executed between the CTA and the First National Bank of Chicago, as trustee, on July 1, 1947, July 1, 1952, and October 1, 1953. Although the agreements establish separate interest and retirement accounts for each series, all series are to share pro rata in any distributions made to the accounts. The July 1, 1947, agreement is controlling as to all revenue bonds issued by the CTA, as its terms were incorporated into the two subsequent trust agreements. "Trust agreement" in this opinion refers to the three trust agreements, and all section references are to the July 1, 1947, agreement.

Article 7 of the trust agreement establishes the procedure for the disbursement of all receipts of the CTA. Section 701 defines "revenue or income" as all funds received by the CTA, with these specific exclusions: gifts, loans and grants; proceeds from recoveries for damages to property; proceeds from the liquidation, conversion or sale of property, and proceeds from subway rentals. It states that proceeds from recoveries for damages to property and proceeds from the conversion or disposition of property of the CTA are to be deposited with the Trustee in the Modernization Fund. The proceeds of gifts or grants are also to be deposited in the Modernization Fund, unless there are conditions or restrictions in them providing otherwise.

Sections 702 and 703 of the trust agreement provide for certain priorities in distributing the "revenue or income" of the CTA. All of the revenue or income, including fare box receipts, is to be initially deposited with the Trustee in the Transit Revenue Fund. From this fund the Trustee is then to apply funds in amounts specified in written orders of the CTA board to the Working Cash Account to cover current operation and maintenance expenses. (Sec. 703(a).) Thereafter, to the extent that there are moneys remaining, the Trustee is to transfer the surplus under priorities set out in the trust agreement into a revenue bond interest fund (sec. 703(b)), a revenue bond maturity fund (sec. 703(c)), a revenue bond sinking fund (sec. 703(d)), a revenue bond reserve fund (sec. 703(e)), the Depreciation Reserve Fund (sec. 703(f)), the Operating Expense Reserve Fund (sec. 703(g)), the Municipal Compensation Fund (sec. 703(h)), and the Modernization Fund (sec. 703(i)). The funds or accounts created under sections 703(b) through 703(e), inclusive, concern the payment of interest on and the retirement of outstanding revenue bonds. These funds are given priority over the remaining accounts in receiving deposits from the Trustee. Section 705 of the trust agreement provides that, if moneys in the Transit Revenue Fund are not sufficient to make the deposits specified under section 703, paragraphs (b) through (e) inclusive,

"the Trustee shall use any moneys then in the Modernization Fund, other than the proceeds of gifts, loans and grants, to make the deposits specified in said subparagraphs (b) to (e), both inclusive, and in the event sufficient moneys should not then be in the Modernization Fund to make the full amount of such deposits, the Trustee shall use any moneys then in the Municipal Compensation Fund, the Operating Expense Reserve Fund and the Depreciation Reserve Fund in order to make the full amount of such deposits."

Article 8 of the trust agreement provides for the creation and use of the Modernization Fund. The preamble of section 803 of article 8 states:

"Disbursements of the moneys in the Modernization Fund shall be made or authorized by the Trustee at any time and from time to time upon the written order of the Board:"

The subparagraphs of section 803 then state for what purposes these moneys may be used. Section 803(6) provides:

"[I]f and whenever moneys in the Transit Revenue Fund may be insufficient to make the deposits specified in paragraphs (b) to (e), both inclusive, of Section 703 and Section 704 of Article Seven, the Trustee shall use any moneys then in the Modernization Fund, other than the proceeds of gifts, loans and grants, to make up such deficiencies with priority in the order in said ...


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