Admiral Realty Co. v. . City of New York

Hiscock, J. These are taxpayers’ actions brought to restrain the execution in behalf of the city of New York by its officials and the members of .the public service commission for the first district of two contracts, one with the defendant Interborough Rapid' Transit Company and the other with the Brooklyn Union Elevated Railroad Company, or whatever company may take its place, for the construction, equipment and operation of subway and elevated railroads principally to be located in the boroughs of Manhattan and Brooklyn. The complaints do not charge fraud, collusion or actual misconduct in the proposed execution of said contracts, but they attack the latter as fundamentally illegal because violating the provision of the Constitution which declares that “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, * *’ * nor shall any such county, city, town or village be allowed to incur any indebtedness except for county, city, town or village purposes.” (Art. 8, section 10.) As we shall see hereafter, the only hope for 'success in this attack must be drawn from the first clause of the provision prohibiting a gift or loan of money, property or credit. It is proposed to execute the contracts under and in accordance with authority conferred by the legislature under the so-called Rapid Transit Act (Laws of 1891, chapter 4), and its various amendments. Originally it was urged that this act was not broad enough to authorize the contracts, but since the commencnment of the actions amendments have been made which concededly meet and destroy this claim, and, therefore, the real question is whether the statute attempts to permit something *125 which is in violation of the Constitution and, therefore, is itself unconstitutional. The cases were discussed at Special Term by Mr. Justice Blacicmar in an elaborate and carefully considered opinion. It is to be be borne in mind at the outset and at every point of our discussion that this court has nothing whatever to do with the wisdom of the proposed contracts. If the municipality and the various officials acting in its behalf have the power to make them then the questions whether it is wise to do so and whether their terms are advantageous for the municipality and public are solely for the consideration and decision of those officials. After all the criticisim and discussion which have been directed at the present transit situation in New York it is only just and reasonable to assume that public officials charged with the duty of bettering that situation have entered on then’ task with care, all the wisdom and foresight at their command, and with complete devotion to the public welfare. But even if we should doubt whether they have reached the best possible solution of a great and perplexing problem, our sole and only duty still would be simply to determine whether the Constitution permits the legislation and contracts in question and there again it is to be remembered that our duty is to be so discharged if possible within fixed principles of law as to uphold rather than condemn the legislation and the proposed action of the various state and municipal authorities thereunder. As stated, the proposed contracts are two in number, and entirely distinct. It is impossible within reasonable limits to state their provisions even with approximate completeness. In the prefixed statement of facts I have attempted only briefly to summarize those more important provisions which are necessarily involved in a discussion of this appeal, and which have been called to our attention by the various counsel. Here I shall only outline their general character. *126 The contract with the Interborough Company provides for the construction and equipment of many miles of municipal subways and elevated road mainly in the borough of Manhattan, at municipal and Interborough’s expense; joint operation for forty-nine years or a shorter ■period of the same arid also of municipal subways now leased to the Interborough as a single system subject to a single five-cent fare; preferential payment to the Inter-borough Company from earnings of the entire system of (1) operating expenses; (2) principal and interest of money to be expended by the company for construction and equipment; (3) an annual sum equal to earnings of the present subways; (4) a preferential payment to the city on account of its investment; (5) division of the remainder equally between city and company. The contract with the Brooklyn Company provides for the construction and equipment of many miles of municipal subway mainly in the borough of Brooklyn at municipal expense; the extension and betterment of the system of railroads owned by the Brooklyn Company and the expenditure by the latter for that purpose arid for - equipment of $50,000,000; operation of the subways under a lease for forty-nine years or a shorter period by the Brooklyn Company in conjunction with its own railroad as a single system subject to a single five-cent fare; preferential payments to the city and company from earnings of a similar general nature to those in the case of the other contract, and division of the balance of earnings between city and company. In attacking these contracts much is said about a joint ownership of property, about the speculative partnership' between the municipality and the railroad company and about the obnoxious pooling of the proceeds derived from the joint operation of municipal and privately owned property. While these arguments indirectly are entirely pertinent and legitimate, we must not allow them to obscure the exact and only question presented to us in *127 this connection. We are not considering a constitutional provision in terms forbidding the joint operation of municipal and privately owned property, but one which condemns and prohibits any gift or loan by a municipality I of money, property or credit to or in aid of a corporation! such as these railroads, and, therefore, we must always! keep our minds fixed on this precise evil as the test of the validity of the proposed contracts. If through and by them the municipality or its representatives propose to do that which is prohibited their execution must be restrained, no matter what the particular form of procedure may he. If, on the other hand, directly and indirectly the contracts are free from this vice then they are not to be condemned under this provision of the Constitution. The provisions which are especially pointed at by the appellants as obnoxious to the Constitution and as infecting the entire contracts with illegality are those providing for the so-called preferential payments to the operating companies from the joint earnings of the new subways and the roads to he operated with them respectively before the city secures any returns. If those payments do not result in gifts or gratuities by the municipality to the operating companies, then it is safe to say that none are to be found within the provisions of the contracts. It seems to me that on a perfectly fair and just analysis of the contracts they do not effect this result, but are or will be incidents of contracts which the municipality under the authority of the legislature may lawfully make, and I shall proceed as briefly as possible with that analysis, taking up first the contract with the Inter-borough Company. Even if it had not been stated again and again without contradiction on the argument of this appeal, we might probably take judicial notice of the fact that the rapid transit facilities in the cities of New York and Brooklyn have been for a long time inadequate and unsatisfactory. Desiring to remedy this situation and meet the demands *128 of the public, the proper officials acting in behalf of the municipality of New York advertised for bids for the construction of new subways, first, with private capital, and, second, by certain' sections at municipal expense, No bids were received in answer to the first proposition. Various bids were received in answer to the second proposition but none of them were satisfactory. As the result of them, however, negotiations were had between the public service commission and municipal officials and the Interborough and other railroad companies which resulted in the present proposed contract whereby mainly in the borough of Manhattan many miles of new subway are to be constructed which will be owned by the city and towards the construction and equipment respectively of which the Interborough is to contribute sums of about fifty millions of dollars and twenty-seven millions of dollars and undertake the operation of the subways. The validity of these provisions of the contract to this point, at least standing by themselves, is established beyond any possibility of debate by the case of Sun Printing & Publishing Assn. v. Mayor, etc., of N. Y. (152 N. Y. 257). This court there decided, absolutely and conclusively, Judge Haight writing the opinion, that the construction of railroads, in that case as in this subways, by a municipality was a city purpose within the meaning of that provision of the Constitution which has been quoted, and that such construction might be made at municipal expense. It further decided that the municipality need not itself operate such railroads, but might provide for the operation thereof by some one else under a lease not in perpetuity. Therefore, we start with the incontestable proposition that the city may construct and lease new subways to the Interborough Company. But, of course, if a city may construct subways it must have the right to make a contract for their building and equipment and provide for repayment to one who furnishes construction or contributes money. This is what *129 Sit is proposed to do by one of the so-called preferential I payments which are attacked. The Interborough Company is to advance $77,000,000 for the building and equipment of subways and the city proposes that it shall secure repayment from earnings of the roads. Certainly such repayment is none the less legal because it is to be gradually made from the earnings of the property constructéd rather than directly from the treasury or from the proceeds of tax levies or bond sales. It is to be noted that there is no provision that the city shall loan its credit by guaranteeing payment of the bonds by which it is assumed the Interborough Company will raise the money which it is to expend. Then going a step further with the contract, it appears, at least the state and municipal authorities in the exercise of the judgment and discretion confided to them may say, that while the subways to be constructed under the proposed contract would to some extent relieve the transportation situation, they would not by themselves furnish such a complete system subject to a single five-cent fare as should be afforded to the inhabitants of a great city; that in order to accomplish this and subserve the general public welfare the new subways should be operated with the old ones as an entire and connected system and subject to a single fare for five cents. Have the municipal and other authorities under the legislative sanction the right to effect this purpose in the method proposed in other provisions of the contract ? The city owns the subways already constructed and which it desires to have operated in connection with the ones to be constructed. If it held them entirely free it could make a lease of old and new subways as a single system as it desires to. It has, however, made a lease of these old subways extending under possible extensions for many years and containing no provisions reserving to the municipality the right to insist upon extensions or that they shall be operated in connection with the new *130 ones for a single fare. In order to get rid of these limitations upon the enjoyment of its own property it proposes for a consideration to secure from the Interborough Company modifications of the present lease of the old subways. These modifications as already stated in the summary of the contracts are a reduction of the term for which the lessee may operate the subways, a consent that the city may exchange such sections of the new subway line on one side of Manhattan for sections of the old line upon the other side as will enable it to secure a complete line on one side, the right to retake the entire subway system at the expiration of a shorter period than is provided for the termination of the lease, and the operation of old and new subways as one system subject to a single five-cent fare. In consideration for these modifications the city agrees that the Interborough Company shall receive another of the preferential payments which has been attacked, namely, from the earnings of the entire system an amount, annually, equivalent to earnings on its present system from which, however, it must pay various charges. The question whether the city may make this arrangement with the Interborough Company seems to resolve itself into the fundamental inquiry whether a municipality haying made a contract may subsequently bargain under full legislative authority for a modification of that contract so that it will be adjustable to altered and then existing circumstances, paying an adequate consideration either for what the other party gives up or for what it secures under the modifications. It seems to me obvious that a municipality has such power. It is an ordinary incident to the power to make a contract that one who has made such a contract which through inadvertent provisions or change in conditions becomes undesirable may bargain for a modification or cancellation thereof. The power to make a contract begets the right to procure its amendment or rescission. I can see no reason why this *131 principle applicable to an individual should not be applied to a municipality in such a case as the present one and why we should not hold even without guiding authority that a municipality which had the power to make a contract for the operation of subways may secure modifications- thereof when it has become inadequate to meet existing conditions. In addition to mere reasoning there are authorities which affirm this power, to some of which reference will be made. Tocci v. Mayor, etc., of N. Y. (73 Hun, 46) was a taxpayer’s action to restrain the city of New York from contributing under legislative authority towards the expenses to be incurred in removal of the tracks of certain railroad companies from various streets in the city of New York so as to permit a fuller enjoyment of the latter by the public. I am unable to see any difference between the principle involved in that case and the one immediately under discussion. By appropriate methods which amounted to a contract the railroads had secured the right to operate their tracks in the streets in question. This arrangement had become inconsistent with the best interests of the city. Nevertheless, it could not be terminated by compulsion. Under these circumstances the suit was dismissed and it was determined that the city by bargain and for a consideration might secure a modification of the rights to which the railroads were entitled under their then existing contracts or franchises. The case of Brooke v. City of Philadelphia (162 Penn. St. 123) involved similar questions and principles. There it was held that the city might incur expense in constructing a subway for a railroad company in order to eliminate grade crossings without violation of constitutional provisions quite as broad as here on the subject of gifts by a municipality. (See, also, People ex rel. Murphy v. Kelly, 76 N. Y. 475.) Of course, if this reasoning is correct, the payment from *132 the earnings of the united subways each year to the Inter-borough Company of an amount equal to its present yearly earnings is not obnoxious to the Constitution. For if it be once decided that the municipality has the right to bargain with the Interborough Company for a modification of the latter’s lease of the old subways so as to bring them into a unified system of transportation with the new ones, the consideration to be paid for such modification, in the absence of fraud or collusion which is not charged, rests in the discretion and judgment of the public officials, and certainly as observed before^it is not. objectionable that instead of burdening the municipality with more rapid and oppressive methods of payment it is provided that this consideration shall be paid from year to year out of the earnings of the railroads^ The only remaining provisions which I shall specifically consider are those that there shall be retained for the benefit of the operator from the earnings of the entire system a sum for operating expenses, and that after deduction of all of the sums which have been discussed and certain others for the benefit of the city and which are not criticised, the balance of earnings shall be equally divided between the city and the Interborough Company. If I have been right in my reasoning thus far it follows that these provisions are entirely legal. An owner leasing property may take his compensation or rent in stated sums or by a certain proportion of the net proceeds of the property after deducting legal- and specified charges against those proceeds. There is no difference in legal principle. The owner does not become a partner with the tenant because he adopts the latter- method instead of the first. The time-honored practice of leasing a farm on shares instead of for a fixed annual rental has never been supposed or held to transform a lease into articles of copartnership. In short, if I have viewed the contract from the proper standpoint, ^there is nowhere any partnership or joint *133 operation of municipal and privately owned property sucb| as is claimed by appellants with illegal benefactions to the| private owner as resultants. The city will own all the# subways which are to be operated together. It is true that at present the Interborough Company has a separate interest in some of them as lessee. But by the proposed contract this lease is to be modified and superseded by a new agreement whereby the city becomes re-invested with a substantial control thereof and re-lets them in connection with its new subways under one contract for operation as a single and entire system. |But if this view is incorrect, and the Interborough contract is to be regarded as contemplating the joint operation of lines owned by the municipality and of lines possessed under a separate estate by the lessee, the arrangement would not be unconstitutional,! as I shall attempt to show in the case of the Brooklyn cpntract where the facts do present that phase and which I next consider. Most of the features of the proposed contract with the Brooklyn Company are so similar to those of the contract with the Interborough Company that they need not be considered in detail. The most important feature differentiating the two contracts is that while the Interborough one contemplates the operation as a single system of various subways which are all owned by the city, the Brooklyn contract contemplates the operation of subways to be constructed and owned by the city in connection with a privately-owned transit system, and. the only question which need be discussed at any length is whether this feature demands condemnation of the latter contract. For the purposes of discussion the Brooklyn territory which the city of New York desires to supply with adequate transportation facilities may be regarded as consisting of two parts. Under the contract in question the city proposes to supply one of these parts with a system of subways constructed at a municipal expense of about $100,000,000, and equipped at an expenditure of *134 about $25,000,000, and which subways will be owned by the municipality and leased to a Brooklyn company for operation. Concededly, or at least unquestionably, the municipality might accomplish its purposes of securing a complete system by constructing at an expense of perhaps as many more millions of dollars additional subways in the remaining territory. It, however, finds this latter territory occupied by a privately-ówned transit system which, being extended and bettered and operated in conjunction with the subways to be constructed as aforesaid under a single fare, will furnish a complete system for the entire territory, and the question is whether the municipality instead of building subways at an enormous expense over the entire territory may build them in part of it and then make a contract for their operation with the owner of the privately-owned system under which the latter agrees to operate its system in conjunction with the subways and subject to a single fare. It seems to me that it may thus do, and that the statement of the proposition very largely supplies the argument in its favor. The power to build and own railroads because effecting a proper municipal purpose must include the lesser power to perfect an incomplete municipal system by leasing for a limited term a privately-owned system to be operated in connection with it. The general rule is that a municipality may acquire property for proper purposes by lease as well as purchase. (Alter v. City of Cincinnati, 56 Ohio St. 47.) The power thus to lease outright a privately-owned road again must include the lesser and fairly incidental power on the part of the municipality to make a traffic or transportation contract with the owner of a private road whereby the latter will be operated in connection with the former’s road under such a.system of transfers between and fares over the two systems as the municipal representatives deem for the best interest of the public. If this reasoning is correct it covers the present case, *135 for the principle is all that concerns us; the terms are matters for the judgment of those who represent the municipality. If the latter could agree for connecting points and that a passenger starting on one system should he carried over both for a fare of ten cents to be apportioned in each case between the two, they can, so far as our powers of review are concerned, make a bargain that the fare shall be five cents instead of ten and that the aggregate of all the fares shall be divided instead of each one singly. Furthermore, if the municipality has a right to contract with the lessee of its roads that such lessee shall subject its own system to a single fare it has a right to bargain for proper compensation to be given for the privilege thus secured and for the rental which it is to receive for its own property when operated under conditions of a single fare. This covers and justifies the provision for a preferential payment from the proceeds of the entire system of an annual sum equal to the earnings now derived from the Brooklyn Company’s system under its own method of operation, and fit also covers and justifies the equal division between the municipality and the operating company of the balance of the proceeds from the operation of the entire system after making the various payments provided for. It is vigorously urged in the case of the Brooklyn contract as in the case of the Interborough one that the yearly preferential sum to be paid from earnings to the privately-owned company is excessive. That may be so. I do not pretend to know. But even if it should be believed that it is, that consideration is not within our jurisdiction. The Brooklyn Company proposes to spend at least $26,000,000 in bettering and extending its system and then subject that system to a much lower fare than it now receives.. The city requires this in the public interest. For this and other considerations, the company exacts the payment in question. It may prove so large as to be very profitable, but no one claims that in agreeing *136 to it the -public officials are acting in bad faith or that the transaction is a pretense and a fraud, and that being so we have no power to interfere with it. . I do not think that the provisions of the Brooklyn contract bring the municipality any nearer in principle to a prohibited partnership of municipality and private individual than do the provisions of the Interborough contract, and I fail to see any gift or loan of money, property or credit by the municipality to the company within the words or spirit of the Constitution as interpreted-by Judge Haight in the Sun Printing & Publishing Association case for application to such a case as this. The city constructs arid leases its subways to the company for a consideration or rental to be paid from the net earnings and it affords to its lessee an opportunity to derive profit from the lease by receipt of a like share of such earnings. There is no gift or loan in this, but an ordinary contract for a consideration just as valid in the case of a municipality as in the case of an individual. It exacts from the lessee that it shall expend large sums for bettering its .system and that it shall operate such system in connection with or in subordination to the municipal road under a reduced fare, and for these rights, in the interest of the public, over the private road, it pays a consideration. The question whether the municipality has the power to make this agreement may be the subject of debate. I have attempted to cover that. But however that may be I look in vain for what seems to me to be a gift or loan. It is not possible to review at length the authorities cited by the appellants to establish the illegality of the' proposed contracts. They are mainly made by the courts of Ohio, and in most of them the basis of condemnation is the embarkation by the municipality on some scheme clearly transcending the limits of municipal purposes or an unlawful -union of municipal and private property rights. When we keep in mind that under the Brooklyn *137 contract, most favorable for the appellants’ argument, the municipality and the private corporation each retains the title to and ownership of its property, and that the only joinder of the two is under a contract for joint operation for a limited period, we see that this comes far from presenting a situation such as was held to be illegal in Alter v. City of Cincinnati (56 Ohio St. 47) which of the Ohio decisions cited by the appellants is especially relied on. In that case the court had before it for consideration a constitutional provision not unlike that now before us as affecting the validity of a statute for the construction and extension of water works by municipalities. In brief this statute provided that a municipality and a private owner might become the joint owners of indivisible interests in a single water system, and this was condemned by the court. The court said: “ When the enlargements, extensions, improvements and additions shall be thus made, completed and connected with the existing water works so owned by the city, the enlargements, extensions, improvements and additions together with the existing works, all taken together, will constitute one completed whole — one water works system, one water works — owned in part by the city and in part by the individual or corporation, and thereby the union of public and private capital and funds in one enterprise will become complete. The provision that the works shall be operated, managed and conducted by the city does not relieve the matter, because, before the city can operate the works it must first obtain a lease upon such terms as may be agreed upon, and that puts it beyond the power of the city to operate and control the works as sole proprietor. It would be a joining of two properties owned by different parties together to make one property, the parts owned by each being necessary to the successful operation of the whole, and each owner having his say as to the terms and conditions upon which the whole should be operated. The existing water *138 works would be so tied to the extensions as to be dependent upon them, and the extensions would be so tied to the existing water works as to be of little value without them. It is this close connection and dependence one upon the other that constitutes both together as a single whole, and makes a union of public and private funds and credit. The existing works are to be connected with the new improvements, and are thereby to lend aid to the person, company or corporation making and owning such new improvements. The case is not like a city leasing a building or water works plant owned by another, because in such case the leased property would stand upon its own merits and would not, before or after the lease become merged into the other property of the city so that the whole would become one property, and make the property of the city dependent upon the leased property for its value and utility.” It remains to consider the only other objections to the contracts, one constitutional and the other statutory. • First, it is said that the Rapid Transit Act violates that section of the constitution which provides, “ The Legislature shall not pass a private or local bill in any of the following cases: * * * ■ “ Granting to any corporation, association or individual the right to lay down railroad tracks. * * * “The Legislature shall pass general laws providing for the cases enumerated in this section, and for all other cases which in its judgment, may be provided for by general laws.” (Art. 3, section 18.) The reasoning by which appellants seek to establish a violation by the statute of these provisions is as follows: The Rapid Transit Act by its terms affects only cities having a population of over one million. It depends for its execution upon the acts of the public service commission of the first district. That district includes only the counties of New York, Kings, Queens and Richmond. *139 and these counties are all included since the act of consolidation in the city of New York. It, therefore, follows that the act is limited to the city of New York and becomes a local act. This argument, even if well founded, would not apply to those provisions of the statute and contracts providing for the construction by the municipality of subways, it having been held in the Sun Printing & Publishing Association case that such subways were not of the character of railways referred to in the constitutional provision which has been quoted. The argument, however, would, if well founded, apply to those provisions of the act providing for the grant of franchises to corporations for the construction and operation of railroads in the rapid transit system. I think, however, that the statute does not come within any constitutional prohibitions of the character urged. While it is true that if we should go outside of the statute we should ascertain that at the present time it affects only the city of New York, it would also appear that even at the present time except for the Consolidation Act affecting the cities of New York and Brooklyn and passed after the Rapid Transit Act was passed, the latter would apply to two cities, and there is no conclusive presumption that it will not apply to other cities in the future. The act is general in its terms as applicable to cities of a certain size, and in that respect, subject to the consideration of another constitutional provision, is valid and not a case of local legislation. (Matter of N. Y. Elev. R. R. Co., 70 N. Y. 327; Matter of Church, 92 N. Y. 1; People ex rel. N. Y. El. Lines Co. v. Squire, 107 N. Y. 593; Matter of Henneberger, 155 N. Y. 420.) It is, however, urged that the' principles settled by the foregoing and other decisions are not applicable because of the further constitutional provision which was adopted in 1894, providing as follows: ■ “Classification of cities; general and special city laws; *140 special city laws; how passed by Legislature and accepted by cities.—§ 2. All cities are classified according to the latest state enumeration. * * * The first class includes all cities having a population of one hundred and seventy-five thousand or more * * *. Laws relating to the property, affairs or government of cities, and the several departments thereof, are divided into general and special city laws; general city laws are those which relate to all the cities of one or more classes; special city laws are those which relate to a single city, or to less than all the cities of a class.” (Art. 12, section 2.) It is said that because the Rapid Transit Act does not relate to all cities of the first class, it is a special city law which can only be passed as by the Constitution provided. Again, I disagree with the contention of the appellants. In the first place the Rapid Transit Act was passed before this constitutional provision went into effect. In the second place, the act is not one of those contemplated by the provision in question. The latter contemplates laws which relate to municipal property and affairs and which may be described, as the provision does describe them, as “ city ” laws. To come within the precise provision which is invoked here it would be necessary to hold that the Rapid Transit Act was “a special city law.” It seems to me that this term could not be regarded as a reasonable description of the statute before us. It was adopted not only for the benefit of the cities which, of course, would be affected, but of the public at large, and it confers broad powers, including that of the granting of franchises. It is a much more general law than is contemplated by the provision in question. (People ex rel. Einsfeld v. Murray, 149 N. Y. 367; Matter of Henneberger, 155 N. Y. 420.) The second objection calls for an interpretation of certain provisions of the Rapid Transit Act. It is argued that there should be a referendum before execution of the contracts. It is very doubtful whether that objection is *141 presented by the complaint in the Hopper case where alone it is argued. But assuming that it is, it cannot be sustained. The original act of 1891 did not contain any provisions for municipal construction. The municipal construction and referendum provisions were added by chapter 752 of the Laws of 1894. By this statute section 34 of the Rapid Transit Act, as amended, provided for municipal construction in case the people should so determine under the referendum provisions contained in sections 12 and 13 of the amendatory act, and section 7 of the act as thus amended provided for public sale of franchises in case the vote on referendum should be against municipal construction. The municipal construction section was frequently amended prior to 1909, but so far as I have examined these amendments they all continue the provision whereby municipal construction was made dependent on the result of the referendum. But by chapter 498 of the Laws of 1909 the Rapid Transit Act was revised. The private construction section, as amended in 1894 making private construction dependent upon a vote of the people adverse to municipal construction, was expressly repealed and a new section (section 22) was added authorizing private construction without reference to the results of referendum. The municipal construction section (theretofore section 34), as amended from time to time, was renumbered as section 26 and was further amended by the elimination of all limitation by or reference to the results of referendum. By the re-arrangement of section 65 all acts and parts of acts local or general inconsistent with the act as amended by the amendments of 1909 were expressly repealed. Under these circumstances it seems to be clear that the argument for the necessity of a referendum before execution of the proposed contracts is without foundation. The judgment in each case should be affirmed, with costs.