CASES ADJUDGED

IN THE

SUPREME COURT OF THE UNITED STATES

AT

OCTOBER TERM, 1976

UNITED STATES TRUST COMPANY OF NEW YORK, TRUSTEE v. NEW JERSEY ET AL.

APPEAL FROM THE SUPREME COURT OF NEW JERSEY

No. 75-1687. Argued November 10, 1976-Decided April 27, 1977

A 1962 statutory covenant between New Jersey and New York limited the ability of the Port Authority of New York and New Jersey to subsidize rail passenger transportation from revenues and reserves pledged as security for consolidated bonds issued by the Port Authority. A 1974 New Jersey statute, together with a concurrent and parallel New York statute, retroactively repealed the 1962 covenant. Appellant, both as a trustee for, and as a holder of, Port Authority bonds, brought suit in the New Jersey Superior Court for declaratory relief, claiming that the 1974 New Jersey statute impaired the obligation of the States' contract with the bondholders in violation of the Contract Clause of the United States Constitution. The Superior Court dismissed the complaint after trial, holding that the statutory repeal was a reasonable exercise of New Jersey's police power and was not prohibited by the Contract Clause. The New Jersey Supreme Court affirmed. Held: The Contract Clause prohibits the retroactive repeal of the 1962 covenant. Pp. 14-32.

(a) The outright repeal of the 1962 covenant totally eliminated an important security provision for the bondholders and thus impaired the obligation of the States' contract. Pp. 17-21.

(b) The security provision of the 1962 covenant was purely a financial

1

obligation and thus not necessarily a compromise of the States' reserved powers that cannot be contracted away. Pp. 21-25.

(c) The repeal of the 1962 covenant cannot be sustained on the basis of Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U. S. 502, and W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, simply because the bondholders' rights were not totally destroyed. Pp. 26-28.

(d) An impairment of contract such as is involved in this case can only be upheld if it is both reasonable and necessary to serve an important public purpose, but here the impairment was neither necessary to achieve the States' plan to encourage private automobile users to shift to public transportation nor reasonable in light of changed circumstances. Total repeal of the 1962 covenant was not essential, since the States' plan could have been implemented with a less drastic modification of the covenant, and since, without modifying the covenant at all, the States could have adopted alternative means of achieving their twin goals of discouraging automobile use and improving mass transit. Nor can the repeal be claimed to be reasonable on the basis of the need for mass transportation, energy conservation, and environmental protection, since the 1962 covenant was adopted with knowledge of such concerns. Pp. 28-32.

69 N. J. 253, 353 A. 2d 514, reversed.

BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C. J., and REHNQUIST and STEVENS, JJ., joined. BURGER, C. J., filed a concurring statement, post, p. 32. BRENNAN, J., filed a dissenting opinion, in which WHITE and MARSHALL, JJ., joined, post, p. 33. STEWART, J., took no part in the decision of the case. POWELL, J., took no part in the consideration or decision of the case.

Devereux Milburn argued the cause for appellant. With him on the briefs were Robert A. McTamaney and Robert B. Meyner.

William F. Hyland, Attorney General of New Jersey, pro se, argued the cause for appellees. With him on the brief were Michael I. Sovern and Murray J. Laulicht.*

*Louis J. Lefkowitz, Attorney General, Samuel A. Hirshowitz, First Assistant Attorney General, and Daniel M. Cohen, Assistant Attorney General, filed a brief for the State of New York as amicus curiae urging affirmance.

MR. JUSTICE BLACK MUN delivered the opinion of the Court.

1

This case presents a challenge to a New Jersey statute, 1974 N. J. Laws, c. 25, as violative of the Contract Clause of the United States Constitution. That statute, together with a concurrent and parallel New York statute, 1974 N. Y. Laws, c. 993, repealed a statutory covenant made by the two States in 1962 that had limited the ability of The Port Authority of New York and New Jersey to subsidize rail passenger transportation from revenues and reserves.

The suit, one for declaratory relief, was instituted by appellant United States Trust Company of New York in the Superior Court of New Jersey, Law Division, Bergen County. Named as defendants were the State of New Jersey, its Governor, and its Attorney General. Plaintiff-appellant sued as trustee for two series of Port Authority Consolidated Bonds, as a holder of Port Authority Consolidated Bonds, and on behalf of all holders of such bonds.3

After a trial, the Superior Court ruled that the statutory repeal was a reasonable exercise of New Jersey's police power, and declared that it was not prohibited by the Contract Clause or by its counterpart in the New Jersey Constitution, Art. IV, §7, 3. Accordingly, appellant's complaint was dismissed. 134 N. J. Super. 124, 338 A. 2d 833 (1975). The Supreme Court of New Jersey, on direct appeal and by per

1 "No State shall Contracts. . . ." U. S. Const., Art. I, § 10, cl. 1.

pass any Law impairing the Obligation of

2 The name originally was "The Port of New York Authority." 1921 N. J. Laws, c. 151, p. 416; 1921 N. Y. Laws, c. 154, p. 496. It was changed to "The Port Authority of New York and New Jersey," effective July 1, 1972. 1972 N. J. Laws, c. 69; 1972 N. Y. Laws, c. 531.

3

Appellant is trustee for the Fortieth and Forty-first Series of Port Authority Consolidated Bonds, with an aggregate principal amount of $200 million. At the time the complaint was filed, appellant also held approximately $96 million of Consolidated Bonds in its own account, as custodian, and as fiduciary in several capacities. There were then over $1,600 million of Consolidated Bonds outstanding.

curiam opinion, affirmed "substantially for the reasons set forth in the [trial court's] opinion." 69 N. J. 253, 256, 353 A. 2d 514, 515 (1976). We noted probable jurisdiction. 427 U. S. 903 (1976).*

I

BACKGROUND

A. Establishment of the Port Authority. The Port Authority was established in 1921 by a bistate compact to effectuate "a better co-ordination of the terminal, transportation and other facilities of commerce in, about and through the port of New York." 1921 N. J. Laws, c. 151, p. 413; 1921 N. Y. Laws, c. 154, p. 493. See N. J. Stat. Ann. § 32:1-1 et seq. (1940); N. Y. Unconsol. Laws § 6401 et seq. (McKinney 1961). The compact, as the Constitution requires, Art. I, § 10, cl. 3, received congressional consent. 42 Stat. 174.

The compact granted the Port Authority enumerated powers and, by its Art. III, "such other and additional powers as shall be conferred upon it by the Legislature of either State concurred in by the Legislature of the other, or by Act or Acts of Congress." The powers are enumerated in Art. VI. Among them is "full power and authority to purchase, construct, lease and/or operate any terminal or transportation facility within said district." "Transportation facility" is defined, in Art. XXII, to include "railroads, steam or electric, . . . for use for the transportation or carriage of persons or property."

The Port Authority was conceived as a financially independent entity, with funds primarily derived from private investors. The preamble to the compact speaks of the "encouragement of

4 The State of New York is not a party to this case, although its Attorney General has filed a brief as amicus curiae. A challenge to the parallel New York statute has been pending in the Supreme Court of New York, County of New York, since 1974. United States Trust Co. of New York v. New York, No. 09128/74.