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A pledge of the city's faith and credit is both a commitment to pay and a commitment of the city's revenue generating powers to produce the funds to pay. Hence, an obligation containing a pledge of the city's "faith and credit" is secured by a promise both to pay and to use in good faith the city's general revenue powers to produce sufficient funds to pay the principal and interest of the obligation as it becomes due.
The City of New York passed the New York State Emergency Moratorium Act for the City of New York (Act), Pub. L. 1975, ch. 874, which imposed a three-year moratorium on actions to enforce the city's outstanding short-term obligations. Plaintiff bank, Flushing National Bank, on behalf of other holders of notes, filed an action alleging that the Act violated both the state and federal constitutions. The Appellate Division of the Supreme Court (New York) rendered the judgment granting defendant, City of New York, summary judgment and declared that the provision of the New York State Emergency Moratorium Act for the City of New York, Pub. L. 1975, ch. 874, was valid and constitutional. On appeal, the court reversed the decision.
1. Was the moratorium statute violated the State Constitution?
2. Was the moratorium statute valid and constitutional?
1. Yes. The act violates the State Constitution denying faith and credit to the short-term anticipation notes of the city.
2. Yes. The Court reversed the Appellate Division’s order; the moratorium statute was declared unconstitutional.
1. The Court held that New York Constitution Art. VIII, § 2 stated that a city could not have contractual indebtedness unless it had pledged its faith and credit for the payment of the principal thereof and the interest thereon. Thus, the Moratorium Act, by depriving short-term noteholders of judicial remedies for at least three years, makes meaningless the verbal pledge of faith and credit. On this view, the Federal questions need not be reached. Further, the court ruled that the constitutional prescription of a pledge of faith and credit was designed to protect the rights vulnerable in the event of difficult economic circumstances and that it was conclusive that the constitution permitted no escape for the municipality from performing its obligations.
2. The act is declared unconstitutional, but since, many financial transactions have occurred on the assumption that the moratorium would be constitutionally acceptable, extraordinary remedies in the nature of injunction and peremptory mandamus are not allowed at this time.