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MORTON ARBORETUM v. THOMPSON

United States District Court, Northern District of Illinois, E.D


November 29, 1984

MORTON ARBORETUM, PLAINTIFF,
v.
JAMES R. THOMPSON, ET AL., DEFENDANTS.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Morton Arboretum ("Arboretum"), one of the major holders of Northern Illinois Toll Highway Revenue Bonds, Series of 1955 ("Bonds"), challenges the 1984 amendment (the "Amendment," P.A. 83-1258) to the statute (the "Act," Ill.Rev.Stat. ch. 121, ¶¶ 100-1 to 100-35) creating the Illinois State Toll Highway Authority ("Authority").*fn1 Arboretum says the new provisions of the Amendment impair the terms of the Bond resolution (the "Resolution") covering the original issuance of the Bonds, in violation of Arboretum's rights under (1) the Contract Clause (U.S. Const. art. I, § 10), (2) the Fourteenth Amendment*fn2 and (3) the Illinois Constitution's version of the Contract Clause (Ill. Const. art. I, § 16).*fn3 For the reasons stated in this memorandum opinion and order, defendants' Fed.R.Civ.P. ("Rule") 12(b)(6) motion is granted and Arboretum's Complaint and this action are dismissed.

Bondholders' Rights Under the Resolution

As the name "revenue bonds" indicates, holders of the Bonds cannot look to the faith and credit or taxing power of the State of Illinois (Res. § 7.01), but only to "Revenues" of the tollway system (the "Facility," as it is termed in the Resolution). In a fashion typical of revenue bond issues, the Resolution has a number of provisions designed to protect the integrity of the Bond payment provisions:

    1. All revenues from tolls charged to users of
  the Facility and from other collateral income
  derived from the Facility (collectively
  "Revenues") are a trust fund "exclusively and
  irrevocably pledged . . . for the security and
  payment or redemption of, and for the security
  and payment of interest on," the Bonds (Res.
  § 2.04).

    2. Authority is obligated to set tolls at
  levels at least sufficient to service the
  Facility and to meet the current obligations
  (including minimum Sinking Fund requirements) on
  the Bonds (Res. § 4.01.1).

    3. No Revenues will be used for any purposes
  except those specified in the Resolution (Res.
  § 7.10).

    4. No other bonds can be issued by Authority,
  nor can it create any other lien or charge on the
  Facilities or the Revenues (Res. § 7.04).

    5. Minimum Sinking Fund requirements call for
  accelerating deposits typical of revenue bond
  issues, self-amortizing over the life of the
  Bonds (Res. § 4.03.2 (Third)). Excess Revenues must
  also be transferred to the Sinking Fund Account
  (Res. § 4.03.2(g)). All amounts in the Sinking Fund
  must be applied to payment and retirement or
  redemption of the Bonds (Res. § 5.04).

Authority has no obligation to create surpluses to accelerate retirement of the Bonds beyond the mandatory Sinking Fund requirements. Indeed Act ¶ 100-19 requires that tolls be fixed "at the lowest possible rate that will provide funds sufficient" to service the Facility and the Bonds, including Sinking Fund requirements (more of this later). Resolution § 4.01(4) specifically gives Authority the right to reduce tolls, conditioned only on (1) notice to interested parties, (2) current compliance with the funding requirements and (3) certification that the reduced rate will provide sufficient Revenues to meet the funding requirements for the next ten fiscal years.

1984 Amendment

To facilitate the construction, operation and maintenance of a new projected North-South Tollway, the 1984 Amendment provides for the issuance of Refunding Bonds for purposes of refunding the Bonds (Act ¶ 100-20.1). Under Act ¶ 100-20.1(f) all the Bonds will be "deemed paid and no longer . . . outstanding for purposes of [the] [R]esolution . . . and all rights and obligations under [the] [R]esolution . . . shall be deemed discharged . . ." upon establishment of an irrevocable trust with either:

    (a) funds adequate to meet all payment
  obligations on the Bonds; or

    (b) obligations issued or guaranteed by the
  United States government, the amount of which is
  sufficient to pay the Bonds; or

    (c) the same kinds of obligations in an amount
  that, taking into account investment earnings on
  those obligations, will be sufficient to pay the
  Bonds.

Bondholders of course will retain "an irrevocable and unconditional right to payment in full of all principal of and premium, if any, and interest on such outstanding bonds, at maturity or upon prior redemption, from the amounts on deposit in such trust" (Act ¶ 100-20.1(f)) — the difference being that they will look to the trust funds and not to the Revenues of the Facility.

Rule 12(b)(6) Principles

Last Term the Supreme Court announced the rule of Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957) was still alive and well and living in Washington. Hishon v. King & Spalding, ___ U.S. ___, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59 (1984) phrased the applicable standard as requiring that a complaint survive unless "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." But as Judge Bua of this District Court has said in Goodman v. Board of Trustees of Community College, 498 F. Supp. 1329, 1337 (N.D.Ill. 1980):

  Where, however, the plaintiff's cause of action
  arises out of a contract which has been attached
  to the complaint as an exhibit, and where such
  contract shows unambiguously on its face that the
  relief prayed for is not merited, dismissal is
  both justified and appropriate.

See Jackson Sawmill Co. v. United States, 580 F.2d 302, 311-12 (8th Cir. 1978), affirming dismissal of a Contract Clause claim by revenue bondholders, based on the insufficiency of the complaint in light of the contract document. Here Arboretum's contract rights as an owner of Bonds are defined by the Resolution — the contract whose obligations are purportedly impaired by the Amendment. This Court rejects Arboretum's invitation (Mem. 5, 7, 8) to consider a constitutional inhibition on Authority to a greater extent than the Resolution provides, simply on the strength of the Official Statement issued when the Bonds were first sold (see n. 5).

"Impairment" of the Obligations of the Resolution

Arboretum urges the Amendment is an impermissible encroachment in Contract Clause terms because:

    1. Revenues will no longer be collateral for
  the Bonds. Instead they will be available as
  collateral for the Refunding Bonds and the new
  Bonds to be issued to finance the North-South
  Tollway (Complaint ¶¶ 28(a) and (d)).

    2. Surplus Revenues will be used for the
  North-South Tollway and not for early retirement
  or redemption of the Bonds (Complaint ¶¶ 28(b) and
  (e)).

    3. There is no provision under the Amendment to
  raise additional funds if proceeds of the
  Refunding Bonds are inadequate to pay the Bonds
  at maturity (Complaint ¶ 28(c)).

    4. Bondholders are deprived of the right to
  vote on amendments to the Resolution (Complaint
  ¶ 28(f)).

    5. Refunding would jeopardize the Bonds'
  tax-exempt status (Complaint ¶ 28(g)).

Nothing in Arboretum's Memorandum suggests a basis for the last speculative argument, and Def.Mem. 18 (referring to issuance of an IRS private letter ruling to the contrary) shows it has no foundation. This opinion will therefore address only the other, more serious contentions.

Contract Clause cases disclose a nonliteral view of the "impairment" concept. Not every statutory alteration of contractual undertakings is a "law impairing [their] Obligation . . ." in the constitutional sense. Energy Reserves Group v. Kansas Power & Light Co., 459 U.S. 400, 411, 103 S.Ct. 697, 705, 74 L.Ed.2d 569 (1983) provides a definitive overview of the operative principles:

  Although the legal issues and facts in these two
  cases [United States Trust Co. v. New Jersey,
  431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977) and
  Allied Structural Steel Co. v. Spannaus,
  438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978)] differ
  in certain ways, they clarify the appropriate
  Contract Clause standard.

  The threshold inquiry is "whether the state law
  has, in fact, operated as a substantial
  impairment of a contractual relationship."
  Allied Structural Steel Co., 438 U.S., at 244 [98
  S.Ct. at 2722]. See United States Trust Co., 431
  U.S., at 17 [97 S.Ct. at 1515]. The severity of the
  impairment is said to increase the level of
  scrutiny to which the legislation will be
  subjected. Allied Structural Steel

  Co., 438 U.S., at 245 [98 S.Ct. at 2722]. Total
  destruction of contractual expectations is not
  necessary for a finding of substantial impairment.
  United States Trust Co., 431 U.S., at 26-27 [97
  S.Ct. at 1519-1520]. On the other hand, state
  regulation that restricts a party to gains it
  reasonably expected from the contract does not
  necessarily constitute a substantial impairment.

True enough a stricter standard applies where the State seeks to alter its own contractual obligations. As Energy Reserves, id. at 412-13 n. 14, 103 S.Ct. at 705-06 n. 14 put it:

  In United States Trust Co., but not in Allied
  Structural Steel Co., the State was one of the
  contracting parties. When a State itself enters
  into a contract, it cannot simply walk away from
  its financial obligations. In almost every case,
  the Court has held a governmental unit to its
  contractual obligations when it enters financial or
  other markets. See United States Trust Co., 431
  U.S., at 25-28 [97 S.Ct. at 1519-1521]; W.B.
  Worthen Co. v. Kavanaugh, 295 U.S. 56 [55 S.Ct.
  555, 79 L.Ed. 1298] (1935); Murray v.
  Charleston, [6 OTTO 432] 96 U.S. 432 [24 L.Ed. 760]
  (1878). But see Faitoute Iron & Steel Co. v. City
  of Asbury Park, 316 U.S. 502 [62 S.Ct. 1129, 86
  L.Ed. 1629] (1942). When the State is a party to
  the contract, "complete deference to a legislative
  assessment of reasonableness and necessity is not
  appropriate because the State's self-interest is at
  stake." United States Trust Co., 431 U.S., at
  26, 97 S.Ct. at 1519.

But the "threshold inquiry" remains whether there is any "substantial impairment" — whether Illinois is seeking to "walk away from its financial obligations." That threshold inquiry will be essayed first.

Arboretum and its fellow Bondholders have no vested stake in a particular remedy, for their fundamental right is to have both the interest and principal of their Bonds paid when due (in Energy Reserves terms, those are the State's "financial obligations"). As Richmond Mortgage & Loan Corp. v. Wachovia Bank & Trust Co., 300 U.S. 124, 128-29, 57 S.Ct. 338, 339-40, 81 L.Ed. 552 (1937) said, albeit in the private obligor context:

  The particular remedy existing at the date of the
  contract may be altogether abrogated if another
  equally effective for the enforcement of the
  obligation remains or is substituted for the one
  taken away.

Illinois' General Assembly has provided Bondholders with a remedy — funding of and payments from the irrevocable trust required by Act ¶ 100-20.1(f) — "equally effective" to the one afforded as a contractual matter by the original statute and the Resolution. Arboretum Mem. 5-6 speculates that Authority may not invest the Refunding Bond proceeds in United States or United-States-guaranteed securities, thus assertedly posing a fact question and precluding dismissal under Rule 12(b)(6). But that contention ignores both the statute's terms and the fundamental proposition that statutes must be construed to avoid constitutional problems. After all (as Arboretum ignores), Act ¶ 100-20.1(f) deals only with Authority's initial deposit into the irrevocable trust, for which purpose the statutory alternatives of depositing either funds or government securities make obvious sense.

How the trust fund is to be invested, and not its initial form, is the critical fact for Contract Clause purposes. Under the Act that is a matter for decision by the trustee, which must be a trust company or bank with capital and surplus of at least $100 million. Act ¶ 100-20.1(e) provides that pending the application of the Refunding Bonds' proceeds towards the purchase, retirement or redemption of the Bonds, such proceeds "may be invested" in United States or United-States-guaranteed securities. Because any arguable Contract Clause questions can be averted by giving Bondholders at least equal security to what they now have, this Court reads that provision (surely a permissible reading) as defining and limiting the authorized investment of the proceeds — as requiring investment by the trustee in such securities (that is, if Authority does not itself exercise its right to deposit such securities in the first instance). Indeed the trustee's fiduciary obligations alone should require it to comply with that standard.

Accordingly Arboretum's effort at discovery of the "particulars of the planned refunding issue" (Arb.Mem. 7) is really beside the mark. If the refunding issue produces funds sufficient to provide security of full payment of the Bonds,*fn4 the "particulars" of the refunding are irrelevant.

Arboretum's only contention really worthy of consideration is that Bondholders now have the right to have Bonds retired or redeemed out of surplus Revenues, a right that will no longer exist with the funded irrevocable trust. On that issue too Arboretum complains of the lack of discovery — this time "information concerning the extent to which, in practice, surplus revenues have existed in the past, and have been used by the Authority to retire outstanding bonds by purchase or redemption" (Arb.Mem. 8).

But the flaw in Arboretum's position is in labeling what is nothing more than an expectancy as a right — as an "obligation" of the contract. It must be remembered Authority's contractual obligations, and the correlative rights of Bondholders, were defined by the Resolution itself when it was first adopted — not by what has since happened "in practice."*fn5

Nothing in the Resolution obligates Authority, as a matter of contract law, to maintain tolls at a level that will provide ongoing accelerated Bond retirement. What controls in constitutional terms is that Authority has always had the unfettered contractual right to reduce tolls — and in fact it now has the statutory duty to keep them at the lowest level necessary for discharge of Authority's obligations, thus preventing a surplus buildup.*fn6

Finally Arboretum mischaracterizes the Amendment as impairing "the right to have all of the outstanding bonds redeemed if the Authority chooses to divert the revenues of the existing facility to another purpose" (Arb.Mem. 12). Arboretum prefers to gloss over the obvious fact that Bondholders are creditors, not shareholders (who might perhaps be entitled to rely on a contractual undertaking for continued operations, as giving them an enforceable right to require the maintenance of such operations). Bondholders' basic right is to payment, and that right to payment of revenue bonds carries with it the assurance of operations simply because such operations are the only source of payment. However bondholders (unlike equity owners) have no contractual stake in operations as an end in themselves, as contrasted with operations as being merely the means to the end of payment. Thus Arboretum cannot be said to have an independent right to the method of Authority's operation, so long as the Amendment provides (as it does) at least equivalent security for payment.

All the foregoing discussion carries with it the rejection of Arboretum's related arguments, negating any notion of contract impairment in constitutional terms. Though Bondholders' rights have been somewhat altered, they have not been "substantially impaired." Most importantly, Bondholders' right to payment — the fundamental substantive right for which all the other procedural rights were conferred by the Resolution — has been assured. See City of El Paso v. Simmons, 379 U.S. 497, 514, 85 S.Ct. 577, 586, 13 L.Ed.2d 446 (1965); Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502, 514, 62 S.Ct. 1129, 1135, 86 L.Ed. 1629 (1942). Nor is United States Trust to the contrary, for the very factor the Supreme Court found lacking there — the need for replacement of the bondholders' security by "an arguably comparable security provision" (431 U.S. at 19, 97 S.Ct. at 1516) — is afforded by the Amendment.*fn7

That really makes the second-level inquiry in United States Trust unnecessary — whether an "impairment," once established, violated the Contract Clause (see discussion 431 U.S. at 21-32, 97 S.Ct. at 1517-1523). It is nonetheless worth noting that during the course of that inquiry the Court said (id. at 25-26, 97 S.Ct. at 1519-1520):

  Of course, to say that the financial restrictions
  of the 1962 covenant were valid when adopted does
  not finally resolve this case. The Contract
  Clause is not an absolute bar to subsequent
  modification of a State's own financial
  obligations. As with laws impairing the
  obligations of private contracts, an impairment
  may be constitutional if it is reasonable and
  necessary to serve an important public purpose.
  In applying this standard, however, complete
  deference to a legislative assessment of
  reasonableness and necessity is not appropriate
  because the State's self-interest is at stake. A
  governmental entity can always find a use for
  extra money, especially when taxes do not have to
  be raised. If a State could reduce its financial
  obligations whenever it wanted to spend the money
  for what it regarded as an important public
  purpose, the Contract Clause would provide no
  protection at all.

In this case:

    1. Illinois' General Assembly has determined
  the proposed North-South Tollway "is reasonable
  and necessary to serve an important public
  purpose" (431 U.S. at 25, 97 S.Ct. at 1519).

    2. Any effective prohibition of such added
  tollways in the Resolution was not the
  substantive purpose of the Resolution, but was
  rather a protection to Bondholders against dilution
  of their security: the pledge of all Revenues from
  the original Facility.

    3. By the Amendment's requiring establishment
  of an irrevocable trust with the proceeds of
  Refunding Bonds, the State has not "reduce[d] its
  financial obligations" (431 U.S. at 26, 97 S.Ct.
  at 1519) at all. Bondholders' contractual
  security is undiluted, and perhaps even enhanced.

Thus the Amendment satisfies the Contract Clause from both perspectives exemplified by United States Trust.

Conclusion

Arboretum has therefore failed in its claim as a matter of law. And in light of the analysis in this opinion, there is no prospect of restating its Contract Clause claim by amending the Complaint. Accordingly not only the present Complaint but this action itself must be and is dismissed (without prejudice, however, to Arboretum's possible assertion of a claim under NEPA if and when such a claim may ripen into existence).

ON MOTION FOR RECONSIDERATION

Morton Arboretum ("Arboretum") has moved for reconsideration of this Court's November 29, 1984 memorandum opinion and order (the "Opinion") dismissing Arboretum's Contract Clause claim against the Illinois State Toll Highway Authority ("Authority").[fn1a] For the reasons briefly stated in this memorandum opinion and order, the motion for reconsideration is denied.

Arboretum continues to insist that Bondholders' contractual right to the application of surplus revenues to early Bond retirement has been impaired in the Contract Clause sense. And of course what the Clause prohibits is "any . . . Law impairing the Obligation of Contracts." Yet Arboretum's current Mem. 2 says (emphasis in original):

  The Arboretum has never contended that the
  Authority has an "obligation to create surpluses to
  accelerate retirement of the Bonds beyond the
  mandatory Sinking Fund requirements."

In an effort to escape that semantic dilemma, Arboretum argues (citing 3A Corbin, Contracts § 626, at 10 (1960) and Donner v. New York City Employees' Retirement System, 33 N.Y.2d 413, 353 N.Y.S.2d 428, 308 N.E.2d 896 (1974)) that "a benefit may be conditional and still be constitutionally protected." Donner, id. at 416, 353 N.Y.S.2d 428, 308 N.E.2d at 898. But that begs the real question, which is whether the conditional benefit has real or only speculative value. If the latter, there is no meaningful "impairment" and hence no constitutional violation.

Where Arboretum leaves the rails is in arguing the test is one based on the actual performance of the Facility's operations in the many years that have passed since the Bonds were first issued. Not so. Instead the constitutional inquiry is as to the obligation of the contract (here the Resolution), and that means the obligation when the contract was executed.

It may be that for one or more of a number of reasons Authority has chosen to operate in a way that in fact generates a surplus. But that is very different from saying it is obligated to do so, or even that it has no practical choice except to do so. Thus, though it may be convenient to set tolls in amounts divisible by five,[fn2a] there is no legal reason Authority must function in that manner. Its toll attendants could of course handle odd amounts, and its automatic toll machines are capable of accepting and counting pennies and being programmed for that purpose (if that is not already the case).[fn3a]

In terms of its purpose, the provision in the Resolution creating Authority's duty to use available funds in excess of specified amounts to fund early retirements is obvious: It protects Bondholders against any diversion of Revenues and against Authority's pegging rates at an inordinately high level so as to generate surplus that might be used in any impermissible way. Again the mere presence of that contractual safeguard is not the equivalent of a reasonable inference — based on factual allegations — of the substantiality of the right it creates. Though the Opinion was based on the pleadings, under circumstances entitling Arboretum to reasonable factual inferences (see Wolfolk v. Rivera, 729 F.2d 1114, 1116 (7th Cir. 1984)), Arboretum has again chosen to focus on Authority's post-contract operations rather than the expectations of the contracting parties when the Resolution was adopted.

It may be that Arboretum could craft a Complaint that could survive dismissal in the terms stated here (see n. 3). Instead Arboretum incorrectly characterizes this Court as having misunderstood Arboretum's claim. Arboretum would do better to examine the mote in its own eye. As stated at the outset of this opinion, its motion for reconsideration is denied.


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