Appendix — United States Trust Co. of NY v. New Jersey
Supreme Court brief1977
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APPENDIX AUG 12 1976
IN THE
Supreme Court of the United States
OCTOBER TERM, 1976
No. 75-1687
Unitrep States Trust Company or New York, as Trustee
for The Port of Authority of New York and New Jersey
Consolidated Bonds, Fortieth and Forty-First Series, on its
own behalf and on behalf of all holders of Consolidated
Bonds of The Port Authority of New York and New Jersey
and all others similarly situated,
Appellant,
v.
THe State or New Jersty, Brenpan T. Byrne, Governor of
The State of New Jersey, and Wixu1am F.. Hyanp,
Attorney General of the State of New Jersey,
Appellees.
APPBAL FROM THE SUPREME COURT OF NEW JERSEY
VOLUME I
Pages la—528a
FILED MAY 21, 1976
PROBABLE JURISDICTION NOTED JUNE 28, 1976
' INDEX
PAGE
Docket Entries:
Superior Court of New Jersey ...... la
Supreme Court of New Jersey : 2a
Pleadings:
Complaint ™ 6a
Answer and Counterclaim 24a
Answer to Counterclaim 36a
Consent Order 4la
Affidavit of Edwin C. Landis, Jr. in Support of Con-
sent Order (attachments omitted) dta
Affidavit of J. Sinclair Armstrong, Esq., in Support
of Motion to Maintain Class Action 55a
Judgments and Opinions:
Decision of the Superior Court of New Jersey, May
14, 1975 59a
Judgment of the Superior Court of New Jersey,
May 29, 1975 130a
Decision of the Supreme Court of New Jersey, Feb-
ruary 25, 1976 132a
Other Parts of the Record:
Excerpt From Exhibit P-l1—Municipal Credit
Report dated December 28, 1961 (Admitted in
Evidence at page 44) l7la
Exeerpt From Exhibit P-2—Municipal Credit
Report dated December 14, 1962 (Admitted in
Evidence at page 44) 178a
Exhibit P-3—Memo to William H. Morton from
John F. Thompson dated February 27, i974 (Ad-
mitted in Evidence at page 85) 185a
PAGE
Excerpt from Exhibit P-4—Draft Memo—Port of
New York Authority-Mass Transportation vs.
Bondholders Security (Admitted in Evidence at
I TE secennntinsaninmnnasensitcimnengsnsenaiemantssinnnnienmnnias 190a
Exhibit P-5—Letter dated June 10, 1974 from John
F. Thompson to Norman T. Hurd (Admitted in
Evidence at page 102) .......~........--.------.eccec------ ... 194a
Exhibit P-7—Article from “The Daily Bond Buyer”,
May 17, 1974 (Admitted in Evidence at page 111) 196a
Exhibit P-10—Securities Industry Association
News Release (Admitted in Evidence at page 111) 198a
Exeerpt from Exhibit P-536—Address by Austin J.
es AAI Sy GE sciscsemnesiisienosnnisntinnniasapenniiniinantianss 200a
Exhibit P-89—Comparison Chart of Dollar Prices
Port Auth. of N.Y. & NJ. 6.0% 2/1/2006 and
Mass. Port. Auth. 6.0% 7/1/2011 (Admitted in
8 ee 209a
Exhibit P-90-—-Comparison: Port Auth. of N.Y. &
N.J. 6.0% 2/1/2006--Mass. Port Auth. 6.0%
7/1/2011 (Admitted in Evidence at page 117) -... 210a
Ixhibit P-91—Comparison Chart of Dollar Prices 212a
Exhibit P-92—Comparison: Port Auth. of N.Y. &
N.J. 6.0% 6/1/2008—Mass. Port Auth. 6.0%
7/1/2011 (Admitted in Evidence at page 132) .... 2l3a
Exhibit P-93—Explanation of Charts (Admitted in
8 en 215a
Exhibit P-94—Comparison Chart of Dollar Prices
(Admitted in Evidence at page 115) -~.........0......... 2 16a
Exhibit P-95—Comparison: Kansas Turnpike 33¢%
10/1/94—Indiana Toll 542% 1/1/94—-Port Auth.
of N.Y. & N.J. 314% 5/1/95—Port Auth. of N.Y.
& N.J. 334% 5/1/94 (Admitted in Evidence at
ED ainisitenstnsenniititiommmeigmmntnmmmtiies "17a
ili
PAGE
Excerpt from Exhibit P-202—Index—June 14, 1962,
and pp. 270-271 entitled “Hudson Tubes Finane-
ing; Certification Required by Agreement with
Bondholders” (Admitted in Evidence at page
P-203—-Letter dated March 27, 1961 from Austin J.
Tobin to Commissioners of Port Authority (Ad-
mitted in Evidence at page 816) —.....0000022..... 22 la
IMxhibit S-1—Artiecle from “The Wall Street Jour-
nal”, August 15, 1974 (Admitted in Evidence at
Sy III ie aiticeces aaah ld itabiabeniasiciaeantinibteaiadientiewesoediiteninnss 23 2a
Exhibit S-2—Article from “The New York Times”,
November 10, 1974 (Admitted in Evidence at
EES San ARS SEES RE Oe 234a
Exhibit S-3—Data Sheets: New York-New Jersey
Ports 6% 2008 40th Series and Mass. Ports 6%
2011 (Admitted in Evidence at page 171) ............ 243a
Exhibit S-4—Letter to the Editor from John F.
Thompson, May 1, 1974 (Admitted in Evidence at
8 EE A
Exhibit S-5-—Letter to the Editor from William J.
Ronan, May 9, 1974 (Admitted in Evidence at
SE SII sti cthrhctiiteniepeiniehiibanininvotiaininiatstntmnnmannstinenates 247a
Exhibit S-15—Memorandum, “The Municipal Bond
Club of New York” (Admitted in Evidence at
SE IIIT saciehadaiiriitdtelenbilaeeiiehdashabiansiesiccannratincanpiaaammniasinnan 249a
Exhibit S-16—Letter dated May 29, 1974 from John
F. Thompson to Orville H. Schell, Jr. (Admitted
_ Im Evidence at page 346) ~................-.--c..ess-ssesecseoes 21a
Exhibit S-29—Municipal Credit Report, February
4, 1972, Supplementary to Report dated October
20, 1971 (Admitted in Evidence at page 780) ...,.... 252a
Exhibit S-31—Municipal Credit Report dated June
14, 1973 (Admitted in Evidence at page 795) .... 263a
lv
PAGE
Excerpt from Exhibit S-36—Report of Consolidated
Bonds Thirty-Sixth Series (First Installment) by
Blyth & Co., Ine., November 16, 1970 (Admitted
in Evidence at page 801) 279a
ixcerpt from Exhibit S-38—Quotations of Author-
ity Bonds (Admitted in Evidence at page 823) .... 293a
Excerpt from Exhibit S-39—Quotations of Author-
ity Bonds (Admitted in Evidence at page 823) .... 293a
Excerpt from Exhibit S-40—Publication of U.S.
Government Printing Office—1961 Entitled “Hear-
ings Before Subcommittee No. 5 of the Committee
of the Judiciary, House of Representatives”, 86
Congress, 2nd Session (Admitted in Evidence at
Sh ) 294a
Exhibit S-44—Memorandum, “Port Authority of
New York and New Jersey,” dated April 22, 1974
(Admitted in Evidence at page 840) ................-.---. 380a
Exhibit S-56—Bid and Ask Quotations for Mass.
Port Auth. 434% 1998, ete. (Admitted in Evi-
Gence at page BBD) ...-....-ac-cccc-csccscesccsnsscsmnenstescenssens 38la
Excerpt from Exhibit C-3—i972 Annual Report of
The Port Authority of New York and New Jersey
(Admitted in Evidence at page 878) ..............------- 385a
Exeerpt from Exhibit C-4—1974 Annual Report
of The Port Authority of New York and New
Jersey (Admitted in Evidence at page 878) ........ 393a
Exhibit C-5—Port Authority of New York and New
Jersey Investments and Revenues (Admitted in
Evidence at page 878) ..............-----s-cscscssesesceseseeeeeseee DOVE
Exhibit C-15—Memorandum from the office of the
Governor, February 10, 1975 (Admitted in Evi-
dence at page 870) --..-.-+.c.:ss1-sseseese
Exerpt from Fxhibit C-17—Minutes of Special
Meeting of Port Authority of New York and New
Jersey held April 21, 1975 (Admitted in Evidence
TS 2. . |) Ee 404a
PAGE
Exhibit C-18—News Release from Port Authority
of New York and New Jersey, April 10, 1975
(Admitted in Evidence at page 880) .................... 405a
Excerpt from Exhibit C-19—Letter of U.S. Depart-
ment of Transportation to Port Authority
of New York and New Jersey with Enclosures
(Admitted in Evidence at page 880) ~................... 408a
Excerpt from Exhibit C-20—Modification of Toll
Rate Schedule for Vehicular’ Crossings
(Admitted in Evidence at page 880) ~................. 419a
Supreme Court of New Jersey—State’s Supple-
mental Exhibits—(Admitted in Evidence by
order dated September 2, 1975) -0.0220202...2-..--.---- 42°a
Supreme Court of New Jersey—Plaintiff’s Supple-
mental E:xhibits—(Admitted in Evidence by
order dated September 2, 1975) -....020200 ee. 449°a
Port Authority of New York and New Jersey—
Iixcerpts from Annual Report for year ended
December 31, 1975—this document is subject to
judicial notice and was added to Appendix by
Stipulation Among Counsel dated July 7, 1976 .... 508a
Port Authority of New York and New Jersey—
Excerpts from Official Statement for Forty-See-
ond Series Consolidated Bonds dated July 8,
1976—this document is subject to judicial notice
ani was added to Appendix by Stipulation
Among Counsel dated July 7, 1976 ...0000.0.00000000...... 519a
Excerpts from Stipulation Among Counsel, dated
December 20, 1974 (“Stip.” references are to
pages of the Stipulation, R-JA Vol. IV) ............ 529a
Exeerpts from Exhibit II to Stipulation Among
Counsel, dated December 20, 1974
Iixeerpts from Exhibit IIT to Stipulation Among
Counsel, dated December 20, 1974 00... 813a
Exhibit V to Stipulation Among Counsel, dated
EE 818a
Excerpts from Testimony of John F. Thompson .... 844a
vi la
PAGE Docket Entries
Exeerpts from Testimony of Lester Murphy ............ 97 4a
Excerpts from Testimony of Michael Zarin ........... 1004a SUPERIOR COURT OF NEW JERSEY
Kixcerpts from Testimony of Austin F. Fitzgerald ..1089a Brrcen County
Kixcerpts from Testimony of Gordon Fowler ........... 1108a L-26861-73
kixcerpts from Transcript of hearing, February 11, oo
TEPUTE sctecvniuisteiaainiainieddaciadiatinibliiideaabvanibiant aad Lie aatcaael 1119a
Letter dated March 10, 1975 from George B. Gelman a ree ee inti
J.S.C. to Counsel ‘1121 saad
ADL. TO VOUMSCL ..................ccceceoceecscecceseccsceccccescscesess «1a —ws—
Additional Material Added to Appendix by Stipula-
tion Among Counsel dated August 4, 1976 ............ 1123a State or New JERSEY
(Brendan T. Byrne),
Defendant.
Apr. 30 1974 Complaint $60.00
June 30 1974 Order Ex.
Time
July 16 1974 Ans. & C. CL.
Aug. 2 1974 Ans. to Cl. Cl.
Oct. 24 1974 Order for Class Action
Oct. 24 1974 Affidavit
Nov. 15 1974 Affidavit
Dee. 10 1974 Order for Consolidation (L-2642-71)
Jan. 9 1975 Notice of Deps.
Mar. 27 1975 Orderas to Deps. ete.
May 19 1975 Opinion
May 16 1975 Copy of Notice of Appeal, Meyner.
L & V 5.00
Dated: 12 July, 1976
I hereby certify that the foregoing is a true copy of the
original on file in my office.
Signature Illegible
Clerk
2a
Docket Entries
SUPREME COURT OF NEW JERSEY
From Superior Ct. Law Div.
Trial Docket #L-26861-73
Docket # 11,498
PM
United States Trust Co., of N. Y. v:
Meyner, Landis & Verdon, Esqs.
Attorneys
State of N. J., Brendan T. Byrne, Governor of N. J., etal
Murray Laulicht, Esq.
Dean Michael I. Sovern, sq.
Theodore W. Kheel, Esq.
Howard Stern, Esq.
Patrick Falvey, Esq.
5/16/75
5/16/75
5/16/75
5/28/75
5/28/75
5/28/75
Attorneys
Notice of Motion for Direct Certification &
Expedition.
Statement in lieu of Brief in Support of
Motion.
Afft. in Support of Motion-J. Sinclair Arm-
strong.
Afft. in Support of Motion-John F. Thompson
Afft. of Service; Ree’d App. Div. Opinion
Cross Motion for Certification-Atty Gen.
Checklist M-824-74 Motion for Direct Cert. is
Granted and Appellants Brief due 6-6-75
Respondents Brief due 14 days after Reply
Brief 7 days after (if any).
Motion for Certification—Shavick, Esq. $5.00
Paid and Cert. of Serv.
Checklist : M-837-74 Motion for Cross Motion
is granted (def-resp.)
M-847-74 Checklist Motion for Certification
Granted 5-0.
6/ 6/75
6/11/75
6/ 6/75
6/17/75
6/20/75
6/20/75
6/20/75
6/20/75
6/23/75
6/26/75
6/26/75
6/26/75
7/ 1/75
3a
Docket Entries
Appendix and Brief of Cross Appellant
Daniel M. Gaby, Esq.—Shavick, Esq.
Afft. Serv. Shavick, Esq.
Appellant’s Brief—Appendix 4 copies deposi-
tion of J. Sinclair Armstrong: 9 copies of
S. C. Briefs—findings of fact Meyner, Esq.
Afft. of Serv. Reiner, Esq. (Meyner, Esq.)
Brief of Def-resp. Cross App. State of N. J.,
Brendan T. Byrne—Wm. Hyland, Atty Gen.
(Murray J. Laulicht, Esq.)
Ree’d Defendant’s Trial Memorandum, Reec’d
Defendant’s Post Trial Memorandum, Ree’d
Defendant’s Proposed Findings of Fact,
Ree’d Defendant’s Reply Brief and
Appendices, (Atty Gen.) Murray J. Lan-
licht, Esq.
Transcripts—6 vol @ 4 copies each
Brief for Intervening Defendant-Respondent,
U.S. Trust Company of New York, Robert
B. Meyner, Esq.
Brief for Port ..athority Respondents,
Francis A. Mulhern, Port Auth.
Notice of Motion to Strike defendants supple-
mental exhibits or in the alternative to
supplement the record, and to supplement
the record, Meyner, Esq.
Reply Brief for Appellants and brief on cross
appeal, Meyner, Esq.
Memorandum in Support of Motion, Meyner,
Esq.
Afft. of Service—Meyner, Esq. (U. S. Trust
Co.) Gaby vs. Port of N. Y. Authority.
9/ 2/75
9/ 2/75
9/ 2/75
9/ 2/75
4a
Docket Entries
Afft. of Service—Meyner, Esq. (U. S. Trust
Co.) U. S. Trust vs. State, ete., etal.
Memorandum in Opposition to Motion, Atty
Gen.
Notice of Motion for Leave to file oversized
brief and ext. time to file reply brief, Atty
Gen.
Notice of Motion to Relax Page Limitations
Statement in Lieu of Brief in Support of
Motion—Afft. in Support, Afft. Serv., Meyner,
Esq.
Reply Brief, Lowenstein, Esq.
Plaintiffs’ Reply Memorandum—Meyner, Esq.
Notice of Motion to Suppress Points I and II
of Reply Brief of def-resp. and Cross-
Appellants.
Memorandum in support of motion.
Afft. of Serv., Meyner, Landis & Verdon,
Esqs.
Memorandum in Opposition to Motion to
Suppress Points 1 and 2 of Reply Brief—
Atty Gen.
Joint Appnx. Vol. VI—Meyner, Landis &
Verdon, Esqs.
Checklist M-1067-74 Motion to strike is denied.
Checklist M-1068-74 Mction to supplement the
record is granted.
Checklist M-1069-74 Motion for extension of
time is granted.
Checklist M-1070-74 Motion to file oversized
reply brief is granted.
Checklist M-1071-74 Motion to file oversized
brief is granted.
9/ 2/75
10/ 1/75
10/ 7/75
2/25/76
3/ 8/76
3/10/76
3/11/76
3/22/76
4/19/76
4/26/76
5/ 4/76
5/14/76
5/14/76
5/24/76
5/24/76
5a
Docket Entries
Checklist M-1072-74 Motion to suppress points
1 and 2 of reply brief is denied.
Supplemental Letter—Meyner, Landis & Ver-
don.
Afft. of Service of suppl. letter—Meyner,
Landis.
Opinion—6-1-P.C.—Affirm—8 Pg. Pashman-
Cone. Part-Diss Part.
Motion for Counsel Fees with Afft. & Brief &
Shavick, Stern, Schotz, Steiger & Croland,
Esqs. $5.
Afft. of Service on Motion for Counsel Fees—
Shavick, Stern, Schotz, Steiger & Croland,
Esgqs.
Supp. Letter to Motion for Counsel Fees—
Shavick, Esq.
Brief for Port Authority in Opposition to
Motion for Counsel Fees—Mulhern, Esq.
Response to Motion for Counsel Fees—
Mulhern.
Suppl. Letter—Howard Stern, Esq.
Motion for Counsel Fees Denied; M-925-75;
6-1.
Notice of Appeal to the U.S. Supreme Ct.
Afft. of Service—Meyner, Landis & Verdon,
Esqs.
Notice of Appeal to the U.S. Supreme Ct.
Afft. of Service—Shavick, Stern, Schotz,
Steiger & Croland, Esqs.
6a
Complaint
SUPERIOR COURT OF NEW JERSEY
Law Drvision — Bercen County
Unitrep States Trust Company or New York, as Trustee
for The Port Authority of New York and New Jersey
Consolidated Bonds, Fortieth and Forty-First Series; on
its own behalf and on behalf of all holders of Consoli-
dated Bonds of The Port Authority of New York and
New Jersey and all others similarly situated,
Plaintiff,
against
Tue Strate or New Jersey; Brennan T. Byrne, Governor
of The State of New Jersey; and Wmuiam F. Hytanp,
Attorney General of The State of New Jersey,
Defendants.
Plaintiff, United States Trust Company of New York
(hereinafter referred to as the “Trust Company”), a corpo-
ration organized and existing under the laws of the State
of New York, having its principal place of business at
45 Wall Street, New York, New York, for its complaint
against the defendants says:
FIRST COUNT
1. The Trust Company is the Trustee for The Port
Authority of New York and New Jersey (hereinafter
referred to as “The Port Authority”) Consolidated Bonds,
Fortieth and Forty-First Series, and is also the holder, for
its own account and as a fiduciary, of Consolidated Bonds
of The Port Authority.
7a
Complaint
2. Defendant The State of New Jersey along with the
State of New York, is a party to a contract with bond-
holders (including the plaintiff) made by the Legislatures
of New Jersey and New York through concurring legisla-
tion becoming effective in 1962 and set forth in N.J.S.A.
32 :1-35.55 and N.Y. Unconsol. Laws $6606, all as hereinafter
described.
3. Defendant Brendan T. Byrne is the Governor of the
State of New Jersey and in such capacity possesses the
power to appoint Commissioners, to veto any and all action
taken at meetings of The Port Authority by the Commis-
sioners appointed by the Governor and generally to estab-
lish the policy, planning, guidance and direction for the
operations of The Port Authority.
4. Defendant William F. Hyland is the Attorney General
of the State of New Jersey and in such capacity is charged
with the duty to uphold the Constitution of the State of
New Jersey and the United States Constitution.
5. The Trust Company brings this action as the Trustee
for The Port Authority Consolidated Bonds, Fortieth and
Forty-First Series, pursuant to Section 8 of the Resolution
Establishing the Fortieth Series of Consolidated Bonds,
due 2008 adopted May 10, 1973 and the Resolution Estab-
lishing the Forty-First Series of Consolidated Bonds, due
2008 adopted September 13, 1973.
6. Pursuant to such Section 8 of the respective Resolu-
tions adopted by The Port Authority the Trust Company is
“authorized to act in its discretion to assure that all of the
rights of and obligations to the holders of bonds of [such]
Series are unconditionally recognized, protected and ful-
filled.” Such Resolutions also permit the Trust Company
“to institute any action on behalf of the holders of bonds of
8a
Complaint
[such] Series against [The Port Autgority] or others which
it shall in its sole discretion deem advisable. . .”
7. The Trust Company also brings this action on its own
behalf as the holder (in its own account, as custodian and
in its several fiduciary capacities) of approximately
$96,000,00 principal amount (as of April 15, 1974) of the
Consolidated Bonds of The Port Authority and on behalf
of all of the holders of Consolidated Bonds of The Port
Authority who have an undivided interest in the revenues
of The Port Authority and the reserve funds securing such
Consolidated Bonds.
8. As of April 15, 1974, approximately $1,600,000,000
principal amount of Consolidated Bonds of The Port
Authority were outstanding and held by banks, trust com-
panies, other financial institutions, pension funds and
private individuals.
9. The members of the class of persons whose interests
will be affected by the outcome of this action are so num-
erous that joinder of all members is impracticable.
10. The questions of law and fact raised by this action
are common to ali of the members of the class and the claims
made by the Trust Company are typical of the claims of
the class.
11. The Trust Company will fairly and adequately pro-
tect the interests of the class.
12. Inconsistent or varying adjudications with respect
to individual members of the class would establish incom-
patible standards of conduct for parties opposing the class
or substantially impair or impede their ability to protect
their interests.
Complaint
13. An adjudication with respect to the issues raised by
the Trust Company will’as a practical matter be dispositive
of the interests of the other members of the class.
14. The defendants in this action have acted on grounds
generally applicable to the class, thereby making appropri-
ate declaratory and other relief with respect to the class as
a whole.
15. This Court has jurisdiction over the claims asserted
herein under N.J.S. 2A:16-50 et seq., the New Jersey Uni-
form Declaratory Judgments Act.
16. The Port Authority is a municipal corporate instru-
mentality of the State of New Jersey (N.J.S.A. 32:1-1 to
24) and of the State of New York (N.Y. Unconsol. Laws
§§6401-6423), created in 1921 by compact between the two
states with the consent of the Congress of the United States
(Public Resolution No. 17, 67th Congress, First Session
(42 Stat. 174)), pursuant to Article 1, Section 10, clause 3
* of the United States Constitution.
17. The Compact between the States of New Jersey and
New York in 1921 which created The Port Authority (the
“Port Compact”) stated that the development of the Port
“will require the expenditure of large sums of money and
the cordial cooperation of the States of New York and New
Jersey in the encouragement of the investment of capital.
...” Article VI authorized The Port Authority “to borrow
money and secure the same by bonds or by mortgages.”
Article VII provided that “[The Port Authority] shall not
pledge the credit of either state except by and with the
authority of the legislature thereof.” Article XV provided
that “Unless and until the revenues from operations con-
ducted by [The Port Authority] are adequate to meet all
expenditures,” the States would each appropriate up to
10a
Complaint
$100,000 a year to finance its operations. Thus the Port
Compact, to which Congress consented, intended The Port
Authority to be a self-supporting agency of State govern-
ment.
18. The Port Authority secures the funds necessary for
its various authorized projects primarily through the issu-
ance of bonds. Since 1952 The Port Authority has issued
41 Series of Consolidated Bonds secured by the full faith
and credit of The Port Authority, a pledge of the net rev-
enues of all existing facilities of The Port Authority, the
net revenues of new facilities financed through Consoli-
dated Bonds, a general reserve fund and a consolidated
bond reserve fund.
19. In 1962 the Legislatures of New Jersey and New
York adopted concurring legislation (the “1962 Covenant”)
providing that:
“The two states covenant and agree with each
other and with the holders of any affected bonds, as
hereinafter defined, that so long as any of such bonds
remain outstanding and unpaid and the holders
thereof shall not have given their consent as pro-
vided in their contract with the port authority, (a)
the two states will not diminish or impair the power
of the port authority (or any subsidiary corpora-
tion incorporated for any of the purposes of this
act) to establish, levy and collect rentals, tolls, fares,
fees or other charges in connection with any facility
constituting a portion of the port development pro}-
ect or any other facility owned or operated by the
port authority of which the revenues have been or
shall be pledged in whole or in part as security for
such bonds (directly or indirectly, or through the
medium of the general reserve fund or otherwise)
lla
Complaint
or to determine the quantity, quality, frequency or
nature of the service provided in connection with
each such facility; and (b) neither the states nor
the port authority nor any subsidiary corporation
incorporated for any of the purposes of this act will
apply any of the rentals, tolls, fares, fees, charges,
revenues or reserves, which have been or shall be
pledged in whole or in part as security for such
bonds, for any railroad purposes whatsoever other
than permitted purposes hereinafter set forth.
‘Affected bonds’ as used in this section shall mean
bonds of the port authority issued or incurred by it
from time to time for any of the purposes of this
act or bonds as security for which there may or
shall be pledged, in whole or in part, the general
reserve fund or any reserve fund established by or
pursuant to contract between the port authority and
the holders of such bonds, or the revenues of the
world trade center, Hudson tubes, Hudson tubes
extensions or any other facility owned or operated
by the port authority any surplus revenues of which
would be payable into the general reserve fund, or
bonds both so issued or incurred and so secured.
‘Permitted purposes’ as used in this section shall
mean purposes in connection with (i) the Hudson
tubes as authorized and limited on the effective date
of this covenant and agreement, (ii) railroad freight
transportation facilities or railroad freight terminal
facilities, (iii) the construction, installation and
maintenance of railroad tracks and related facilities
on vehicular bridges owned by the port authority and
(iv) any other railroad facility established, acquired,
constructed or otherwise effectuated by the port
authority (including but not limited to Hudson tubes
12a
Complaint
extensions) as to which the port authority shall have
first certified either that said other railroad facility
is self-supporting as hereinafter defined or, if not,
that at the end of the preceding calendar year the
general reserve fund contained an amount equal to
one-tenth of the par value of bonds of the port
authority which were outstanding at said year end
and which were legal for investment as defined in
the general reserve fund statutes and that the group
of facilities consisting of such other railroad
facility and of all prior other railroad facilities will
not produce deficits in excess of permitted deficits
as hereinafter defined. ‘Prior other railroad facili-
ties’ at the time of any certification by the port
authority hereunder shall mean all the railroad
facilities described in subdivisions (i) and (iv) of
this paragraph which were theretofore established,
acquired, constructed or otherwise effectuated by the
port authority any surplus revenues of which at such
time would be payable into the general reserve fund.
An other railroad facility shall be deemed to be
‘self-supporting’ as of the time of any certification
hereunder if the amount estimated by the port
authority for the ensuing ten years to be the aver-
age annual net income (computed without deduction
for debt service) derived from or incidental to such
facility equals or exceeds the amount estimated by
the port authority for such ten years to be the aver-
age annual debt service upon bonds for purposes in
connection with such proposed facility.
‘Deficits’ of a group of railroad facilities, as used
in this section, shall mean the amount estimated by
the port authority for the ensuing ten years to be
the average annual combined debt service upon
13a
Complaimt
bonds for purposes in connection with the railroad
facilities of such group less the amount estimated
by the port authority for such ten years to be the
average annual combined net income (computed
without deduction for debt service) derived from or
incidental to such railroad facilities or plus the
amount estimated by the port authority for such ten
years to be the average annual combined net losses
(computed without deduction for debt service) sus-
tained from or incidental to such railroad facilities;
the estimate of deficits thus arrived at shall not be
effective unless and until concurred in, in writing, by
the governors of the said two states.
‘Permitted deficits’ of a group of railroad facili-
ties as used in this section, shall mean deficits as of
the time of any certification hereunder which do not
exceed (A) such amount or amounts of deficits as
of the time of any certification hereunder for the
payment of which one or both of the two states, in
connection with the proposed other railroad facility
as to which the certification is made and in connec-
tion with prior other railroad facilites, has made
adequate, secure and effective provision for the
duration of the period for which the port authority
is liable for such deficits, plus (B) the greater of the
following two amounts: (1) an amount equal to one-
tenth of the amount in the general reserve fund at
the end of the preceding calendar year, diminished
by an amount equal to one per cent of the principal
amount of all bonds of the port authority outstand-
ing at the end of said preceding calendar year the
proceeds of which shall have been applied for pur-
_ poses in connection with the facilities of such group
or (2) an amount equal to the sum of one-tenth of the
14a
Complaint
diminished one-tenth amount calculated under clause
(1) of this sentence, plus one percent of the equity,
at the end of the said preceding calendar year, of the
port authority in its vehicular bridges and tunnels
and in all other facilities owned and operated by it
(not including railroad cars financed by state-guar-
anteed bonds) except those of the aforesaid group
of railroad facilities. Equity of the port authority
in facilities as to which any calculation of equity
shall be made shall mean the principal amount of
bonds of the port authority retired from port author-
ity revenues or reserves or both which have been
derived from the operation of its facilities and the
investment of its funds and not from governmental
or other subsidy payments, the proceeds of which
retired bonds shall have been applied for purposes
in connection with such facilities.
Each certification by the port authority hereunder
shall be made at the time of the issuance of its first
bonds for permitted purposes in connection with a
proposed other railroad facility which bonds would
be secured in whole or in part by the aforesaid
pledged rentals, tolls, fares, fees, charges, revenues
or reserves, or at such time, prior to such issuance,
as any application of such pledged rentals, tolls,
fares, fees, charges, revenues or reserves for pur-
poses in connection with such proposed other rail-
road facility would otherwise be permitted or re-
quired. Anything herein to the contrary notwith-
standing, any such certification by the port authority
hereunder shall not be effective unless and until
affirmatively concurred in, in writing, by the govern-
ors of the said two states.” N.J.S.A. 32 :1-35.55; NVY.
Unconsol. Laws § 6606.
15a
Complaint
20. The 1962 Covenant set forth in paragraph 19 of this
Complaint was enacted into law since in the early 1960’s it
was proposed that The Port Authority be authorized to
assume the responsibility for a commuter rail line by aequir-
ing the deficit generating operations of the Hudson & Man-
hattan Railroad Company (now calied, and referred to
herein as the “PATH System”). This interurban electric
railroad system has termini in Newark, Hoboken and Man-
hattan.
21. In connection with the legislation which authorized
The Port Authority to assume responsibility for the PATH
System, The Port Authority had advised the New York and
New Jersey Legislatures that the credit of The Port
Authority would be impaired by such an undertaking of an
anticipated continuing deficit facility unless the States
would enter into an enforceable contract with The Port
Authority bondho'ders which would protect bondholders
against dilution of already pledged revenues and reserves
by any additional passenger rail deficits beyond those of
the basic PATH System. The 1962 Covenant was the legis-
lation finally adopted.
22. The Port Authority advised potential investors of
the existence of and protection afforded by the 1962 Cove-
nant in Official Statements distributed in connection with
each of the following Consolidated Bond financings:
a) $35,000,000 Consolidated Bonds Twentieth Series,
Due 1993 (First Installment) April 24, 1962;
b) $25,000,000 Consolidated Bonds Twenty-First Series,
Due 1993 (First Installment) October 3, 1962;
ec) $25,000,000 Consolidated Bonds Twenty-Second
Series, Due 1993 (First Installment) December 12, 1962;
16a
Complaint
d) $25,000,000 Consolidated Bonds Twenty-Third Series,
Due 1994 (First Installment) May 7, 1963;
e) $25,000,000 Consolidated Bonds Twenty-Fourth Series,
Due 1994 (First Installment) October 16, 1963;
f) $30,000,000 Consolidated Bonds Twenty-Fifth Series,
Due 1965-1984, February 13, 1964;
g) $35,000,000 Consolidated Bonds Twenty-Sixth Series,
Due 1995 (First Installment) May 26, 1964;
h) $25,000,000 Consolidated Bonds Twenty-Seventh
Series, Due 1995 (First Installment) November 10, 1964;
i) $25,000,000 Consolidated Bonds Twenty-Eighth Series,
Due 1996 (First Installment) January 11, 1965;
Jj) $25,000,000 Consolidated Bonds Twenty-Ninth Series,
Due 1996 (First Installment) May 27, 1965;
k) $25,000,000 Consolidated Bonds Thirtieth Series, Due
1998 (First Installment) October 27, 1965;
1) $100,000,000 Consolidated Bonds Thirty-First Series,
Due 2002 (First Installment) March 22, 1967;
m) $100,000,000 Consolidated Bonds Thirty-Second
Series, Due 2003 (First Installment) February 26, 1968;
n) $100,000,000 Consolidated Bonds Thirty-Third Series,
Due 2003 (First Installment) July 31, 1968;
0) $100,000,000 Consolidated Bonds Thirty-Fourth
Series, Due 2003 (First Installment) December 17, 1968;
p) $100,000,000 Consolidated Bonds Thirty-Fifth Series,
Due 2005 (First Installment) August 26, 1970;
q) $50,000,000 Consolidated Bonds Thirty-Sixth Series,
Due 2005 (First Installment) November 24, 1970;
17a
Complaint
r) $100,000,000 Consolidated Bonds Thirty-Seventh
Series, Due 2006 (First Installment) February 18, 1971;
s) $100,000,000 Consolidated Bonds Thirty-Eighth Series,
Due 2006 (First Installment) October 13, 1971;
t) $150,000,000 Consolidated Bonds Thirty-Ninth Series,
Due 2007 (First Installment) February 2, 1972.
23. The Port Authority’s advice to potential investors
described in paragraph 22 of this Complaint, was substan-
tially equivalent to the following disclosure, contained in
the Official Statement for the Thirty-Ninth Series Consoli-
dated Bonds:
“Tn connection with the legislation which author-
ized the Port Authority to assume responsibility for
the Hudson Tubes System, the Port Authority had
advised the Legislatures of both States that the
credit of the Port Authority would be impaired by
such an undertaking of an anticipated perpetual defi-
cit facility unless the States would enter into an
enforceable contract with the Port Authority bond-
holders which would grant assurances against dilu-
tion of already pledged revenues and reserves by any
additional passenger rail deficits beyond those of the
basic Hudson Tubes system. The legislation as
finally adopted includes such statutory covenants.
The covenants are between the two States and with
the holders of certain described ‘affected’ bonds
which include all Consolidated Bonds including those
of the present offering. The contract prohibits the
application of any revenues or reserves pledged to
such bonds (which includes all existing revenues,
other than rentals under the New York State’s Com-
18a
Complaint
muter Railroad Car Program described on pp. 18-19,
and all existing reserves) for any additional pas-
senger railroad purpose beyond the basic Hudson
Tubes, as defined, without the consent of the holders
of such affected bonds as provided in their contract
with the Authority unless the Port Authority shall
have first certified the eligibility of such additional
railroad, whether it be a Hudson Tubes extension, as
defined, or new railroad facility. To be eligible the
Port Authority must determine either that the pro-
posed additional passenger railroad facility is self-
supporting or, if not, that at the end of the preceding
calendar year the General Reserve Fund contained
the full statutory amount and that for the ensuing ten
years the estimated average annual deficits from the
proposed additional passenger railroad facility and
any then existing Port Authority passenger railroad
facility (including the basic Hudson Tubes) would
not in the aggregate exceed an amount equal to one-
tenth of the amount in the General Reserve Fund at
the prior year end. Certain adjustments to this fig-
ure are provided by the statute. For example, the
amount equal to one-tenth of the General Reserve
Fund is to be diminished by an amount equal to 1%
of the principal amount of Port Authority bonds the
proceeds of which shall have been applied for passen-
ger railroad purposes; this prevents the enlargement
of deficit capacity by bonds issued in connection with
a deficit passenger railroad facility. Furthermore, if
at some time in the future the adjusted 10% of the
General Reserve Fund should he exceeded by an
amount equal to 1% of the Port Authority’s equity,
as defined in the statutes, augmented by 1/10 of that
19a
Complatnt
adjusted 10%, then the augmented 1% of the equity
may be used as the limiting figure instead of the per-
centage of the General Reserve Fund. Section 6 of
the 1962 legislation (See Appendix ITI) should be
studied for the exact terms of the statutory cov-
enant.”
24. Purchasers of Consolidated Bonds of The Port
Authority following enactment of the 1962 Covenant relied
on the 1962 Covenant in making their purchase.
25. The legislation embodying the 1962 Covenant was
amended effective May 10, 1973 by the States of New
Jersey and New York (Ch. 208, Laws of New Jersey 1972,
Ch. 1003, Laws of New York 1972, Ch. 318, Laws of New
York 1973), to limit the application of the 1962 Covenant
to obligations of The Port Authority issued before May 10,
1973. Since Consolidated Bonds issued prior to that date
have varying maturity dates from 1993 to 2007, the 1962
Covenant remains binding on The Port Authority, and,
thereby, affords protection through 2007 for the bonds of
the Fortieth Series and subsequent issues even though it
does not specifically apply to such bonds.
26. The Port Authority advised potential investors of
the existence of and continued protection afforded by the
1962 Covenant in Official Statements distributed in connec-
tion with the Fortieth and Forty-First Series of Consoli-
dated Bonds as follows:
“The statutory covenant against dilution of
pledged revenues and reserves by additional passen-
ger railroad facilities, which is discussed in the para-
graph quoted above, remains in effect with respect
to affected bonds, and remains binding on the
Authority although it does not apply to the bonds
20a
Complaint
of the present offering. The legislation which
authorized the Port Authority to assume respon-
sibility for the Hudson Tubes system was amended,
effective May 10, 1973, by the States of New York
and New Jersey (Ch. 1003, Laws of New York 1972,
Ch. 318, Laws of New York 1973; Ch. 208, Laws of
New Jersey). The New Jersey amendment, when
introduced in the New Jersey Assembly, was accom-
panied by a statement that the bill was intended to
preclude the application of the covenant to holders
of bonds newly issued after its effective date, while
maintaining in status quo the rights of the holders
of the bonds issued after March 27, 1962 (the effec-
tive date of the covenant legislation) but prior to
the effective date of the amendment.”
27. Purchasers of Consolidated Bonds of The Port
Authority following the prospective repeal of the 1962
Covenant relied on the continued protection afforded by the
1962 Covenant in making their purchase.
28. On April 30, 1974, defendant Byrne signed into law
an Act of the Legislature of the State of New Jersey
(Assembly Bill No. 1304) (the “Act”).
29. The Act purports to repeal the 1962 Covenant retro-
actively to the date of its enactment, to be effective upon
the passage of concurring legislation by the State of New
York.
30. Although effectiveness of the Act is conditioned
upon concurring action by the State of New York, as a
result of the expressed intent of defendant Byrne and the
Legislature of the State of New Jersey to pass the Act and
as a result of the passage of the Act the contract between
the States of New York and New Jersey and holders of
2la
Complaint
Consolidated Bonds has been impaired and the secondary
market for Consolidated Bonds of The Port Authority has
been and will continue to be adversely affected to the detri-
ment of the Trust Company and all holders of Consolidated
Bonds of The Port Authority.
31. The 1962 Covenant constitutes a contract as that
term is used in Article 4, Section 7, paragraph 3 of the New
Jersey Constitution.
32. The passage of the Act alleged in paragraph 28 of
this Complaint constitutes an impairment of the contract
among the States of New Jersey and New York and all
holders of Consolidated Bonds of The Port Authority, in
violation of Article 4, Section 7, paragraph 3 of the New
Jersey Constitution. ’
SECOND COUNT
1. The Trust Company repeats and realleges para-
graphs 1 through 30 of the First Count of this Complaint
as if set forth fully herein.
2. The 1962 Covenant constitutes a contract as that term
is used in Article 1, Section 10, Clause 1 of the United
States Constitution.
3. The passage of the Act alleged in paragraph 28 of
this Complaint constitutes an impairment of the contract
among the States of New Jersey and New York and all
holders of Consolidated Bonds of The Port Authority, in
violation of Article 1, Section 10, Clause 1 of the United
States Constitution.
THIRD COUNT
1. The Trust Company repeats and realleges para-
graphs 1 through 30 of the First Count of this Complaint
as if set forth fully herein.
22a
Complaint
2. The 1962 Covenant is property as that term is used
in Article 1, paragraphs 1 and 20 of the New Jersey
Constitution.
3. The passage of the Act alleged in paragraph 28 of
this Complaint constitutes a taking of property of the
holders of Consolidated Bonds of The Port Authority for
public use without just compensation in violation of Article
1, paragraph 1 and Article 1, paragraph 20 of the New
Jersey Constitution.
FOURTH COUNT
1. The Trust Company repeats and realleges para-
graphs 1 through 30 of the First Count of this Complaint
as if set forth fully herein.
2. The 1962 Covenant is property as that term is used
in the Fifth and Fourteenth Amendments to the United
States Constitution.
3. The passage of the Act alleged:in paragraph 28 of
this Complaint constitutes a taking of private property of
the holders of Consolidated Bonds of The Port Authority
without just compensation in violation of the Fifth Amend-
ment and the Fourteenth Amendment to the United States
Constitution.
Wuererore, The Trust Company demands:
(a) A declaratory judgment that the enactment of
Assembly Bill No. 1304 was in violation of Article IV, Sec-
tion 7, paragraph 3 of the New Jersey Constitution and that
as a consequence thereof Assembly Bill No. 1304 was not
lawfully enacted, is void and is of no consequence or effect.
(b) A declaratory judgment that the enactment of
Assembly Bill No. 1304 was in violation of Article I, Section
23a
Complaint
10, Clause 1 of the United States Constitution and that as a
consequence thereof Assembly Bill No. 1304 was not law-
fully enacted, is void and is of no consequence or effect.
(c) A declaratery judgment that the enactment of
Assembly Bill No. 1304 was in violation of Article I, para-
graphs 1 and 20 of the New J ersey Constitution and that as
a consequence thereof Assembly Bill No. 1304 was not law-
fully enacted, is void and is of no consequence or effect.
(d) A declaratory judgment that the enactment of
Assembly Bill No. 1304 was in violation of the Fifth and
Fourteenth Amendments to the United States Constitution
and that as a consequence thereof Assembly Bill No. 1304
was not lawfully enacted, is void and is of no consequence
or effect.
(e) Such other and further relief as the Court may deem
just and proper.
Dated: Newark, New Jersey
April 30, 1974
Meyner, Lanpvis & VERDON
Attorneys for Plaintiff
By Rosert B. Meyner
Robert B. Meyner
Of Counsel:
Carter, Lepyarp & MrsuKn
2 Wall Street
New York, New York 10005
24a
Answer and Counterclaim
SUPERIOR COURT OF NEW JERSEY
Law Drivistlon—Bercen Count
——
Unirep States Trust Company or New York, etc.,
Plaintiff,
—7T §—
Tue State or New Jersey, et als.,
Defendants.
——EE ee
Defendants, answering plaintiff’s complaint, say:
FIRST COUNT
1. They admit that The Trust Company is The Trustee
for the Fortieth and Forty-First Series of Port Authority
Consolidated Bonds and they deny knowledge or informa-
tion sufficient to form a belief with respect to the truth of
the allegation that The Trust Company is the holder of
Consolidated Bonds of The Port Authority.
2. They deny the allegations of paragraph 2, except
that they admit that the concurring legislation referred to
therein was enacted by the respective Legislatures of New
Jersey and New York.
3. They deny the allegations of paragraph 3, except that
they admit that defendant Byrne is the Governor of the
State of New Jersey and in such capacity possesses the
power to appoint six Commissioners of The Port Authority
by and with the advice and consent of the Senate of New
Jersey and to veto action taken by the Commissioners
appointed from New Jersey and recited in minutes of Port
Authority meetings.
25a
Answer and Counterclaim
4. They admit the allegations of paragraph 4.
5. They admit that plaintiff purports to bring this
action on the basis alleged.
6. They admit the allegations of paragraph 6.
7. They deny knowledge or information sufficient to
form a belief with respect to the truth of the allegations
of paragraph 7, except that they admit that the plaintiff
purports to bring this action on the basis alleged.
8. They deny knowledge or information sufficient to
form a belief with respect to the truth of the allegations
of paragraph 8.
9. They admit the allegations of paragraph 9.
10. They admit that the questions raised by this action,
including the counterclaim, are common to ali members of
the class or classes and that the claims made by plaintiff
are typical of the claims of the class or classes.
11. They admit on information and belief the allega-
tions of paragraph 11.
12. They admit the allegations of paragraph 12.
13. They admit on information and belief that adjudica-
tion with respect to the issues raised by the complaint and
counterclaim will as a practical matter be dispositive of the
interests of the other members of the class or classes.
14. They admit the allegations of paragraph 14.
15. They admit the allegations of paragraph 15.
16. They admit the allegations of paragraph 16 and they
allege that the consent of the Congress was also given pur-
suant to Article 1, Section 8, Clause 3 of the Constitution
of the United States.
26a
Answer and Counterclaina
17. They admit that the Compact contains the provi.
_ sions alleged in the first four sentenecs contained in para-
graph 17, but they refer to the entire Compact for <ne full
terms and legal effect thereof. They deny the last sentence
of paragraph 17.
18. They deny the first sentence of paragraph 18 and
admit the second sentence of paragraph 18.
19. They admit the allegations of paragraph 19.
20. They deny the first sentence of paragraph 20 and
admit the second sentence of paragraph 20.
21. They deny the allegations of paragraph 21, except
that they admit that the advice alleged therein was given
to the Legislatures of New York and New Jersey by certain
members of the then management of The Port Authority
and they refer to the entire testimony for the full terms
and effect thereof.
22. They deny the allegations of paragraph 22, except
that they admit that the Official Statements listed therein
refer to the 1962 Covenant and they refer to the entire
Official Statements for the full terms and effect thereof.
23. They deny the allegations of paragraph 23, except
that they admit that a statement similar in substance to the
alleged statement was contained in the Official Statements
referred to in paragraphs 22 and 23 and they refer to the
entire Official Statements for the full terms and effect
thereof. ,
24. They deny the allegations of paragraph 24.
25. They deny the allegations of paragraph 25.
26. They deny the allegations of paragraph 26, except
that they admit that the Official Statements referred to
27a
Answer and Counterclaim
therein contained the statement quoted therein and they
refer to the entire Official Statements for the full terms
and effect thereof. Further answering paragraph 26, they
allege that the Official Statements referred to therein ex-
plicitly stated that the staterfitnt quoted in paragraph 23
of the complaint “does not apply to bonds of the present
offering” (emphasis in original).
27. They deny the allegations of paragraph 27.
25. They admit the allegations of paragraph 28.
29. They deny the allegations of paragraph 29.
30. They deny the allegations of paragraph 30, except
that they admit that the effectiveness of the Act (Chapter
25 of the Laws of New Jersey 1974, hereinafter “the
1974 Act”) is conditioned upon concurring action by the
State of New York and they allege that New York has
taken such concurring action by enacting Chapter 993 of
the Laws of New York 1974, which is substantially identical
to the 1974 Act.
31. They deny the allegations of paragraph 31.
32. They deny the allegations of paragraph 32.
SECOND COUNT
1. They repeat and reallege, as if set forth herein at
length, their answer to paragraphs 1 through 30 of the
First Count.
2. They deny the allegations of paragraph 2.
3. They deny the allegations of paragraph 3.
28a
Answer and Counterclaim
THIRD COUNT
1. They repeat and reallege, as if set forth herein at
length, their answer to paragraphs 1 through 30 of the
First Count.
2. They deny the allegations of paragraph 2.
3. They deny the allegations of paragraph 3.
FOURTH COUNT
1. They repeat and reallege, as if set forth herein at
length, their answer to paragraphs 1 through 30 of the
First Count.
2. They deny the allegations of paragraph 2.
3. They deny the allegations of paragraph 3.
FIRST SEPARATE DEFENSE
The complaint fails to state a claim for relief against
Governor Byrne or Attorney General Hyland.
SECOND SEPARATE DEFENSE
The 1974 Act constitutes a reasonable exercise of the
police powers of the State of New Jersey to protect the
health, safety and welfare of its citizens. These police
powers are fundamental to the sovereignty of the State
and cannot be abdicated.
THIRD SEPARATE DEFENSE
1. Pursuant to the Interstate Commerce and Interstate
Compact clauses of the Constitution of the United States,
Congress consented to the Port Authority Compact and
Comprehensive Plan.
29a
Answer and Counterclaim
2. The Preamble to the Port Authority Compact, to
which Congress consented, provided:
“It is confidently believed that a better coordina-
tion of the terminal, transportation and other facili-
ties of commerce in, about and through the port of
New York, will result in great economies, benefiting
the nation, as well as the states of New York and
New Jersey.”
3. Subparagraph b of the 1962 Covenant (which was
repealed by the 1974 Act) violated the provisions of the
Port Authority Compact because it substantially precluded
participation by The Port Authority in the field of pas-
senger railroad operations other than the PATH system
and thereby impeded the ability of The Port Authority to
effect “a better coordination of the terminal, transportation
and other facilities of commerce in, about and through the
port of New York”.
4. Subparagraph b of the 1962 Covenant was unconsti-
tutional and invalid because Congress never consented to
the limitations imposed by this provision upon The Port
Authority or the burden imposed by this provision upon
interstate commerce in the Port District.
FOURTH SEPARATE DEFENSE
1. The 1974 Act repealed only that part of the 1962
Covenant (subparagraph b) which substantiaily precluded
The Port Authority’s participation in passenger railroad
operations other than the PATH system.
2. The 1974 Act does not purport to repeal or impair
the primary obligation of The Port Authority to its bond-
holders, which is to pay interest and principal when due.
30a
Answer and Counterclaim
3. The 1974 Act does not purport to repeal or impair
that part of the 1962 Covenant (subparagraph a) which
provides that the States of New Jersey and New York
“will not diminish or impair the power of the port
authority (or any subsidiary corporation incorpo-
rated for any of the purposes of this act) to estab-
lish, levy and collect rentals, tolls, fares, fees or
other charges in connection with any facility consti-
tuting a portion of the port development project or
any other facility owned or operated by the port
authority of which the revenues have been or shall
be pledged in whole or in part as security for such
bonds (directly or indirectly, or through the medium
of the general reserve fund or otherwise), or to
determine the quantity, quality, frequency or nature
of the service provided in connection with each such
facility.”
4. The 1974 Act does not purport to repeal or impair
Section 3 of the Consolidated Bond Resolution (prohibiting
the issuance of Consolidated Bonds unless revenues are at
least 1.3 times debt service) or Section 7 of the Resolutions
authorizing specific series of Consolidated Bonds (prohibit-
ing the issuance of bonds secured by the General Reserve
Fund for any additional facility unless the Authority certi-
fies that the issuance “will not ... materially impair the
sound credit standing of the Authority or the investment
status of Consolidated Bonds or the ability of the Author-
ity to fulfill its commitments .. . including its undertakings
to the holders of Consolidated Bonds”).
5. The 1974 Act does not, therefore, impair the obliga-
tion of a contract or take property within the meaning of
the Constitutions of the United States or New Jersey.
3la
Answer and Counterclaim
FIFTH SEPARATE DEFENSE
1. Bonds isued by The Port Authority do not refer to
the 1962 Covenant. Rather, the bonds state that they are
issued “in conformity with the Compact... and the various
statutes of [New Jersey and New York] amendatory
thereof and supplemental thereto.”
2. Article VII of the Port Authority Compact, as
approved by the Congress, provides:
“The port authority shall have such additional pow-
ers and duties as may hereafter be delegated or
imposed upon it from time to time by the action of
the legislature of either state concurred in by the
legislature of the other.”
3. Port Authority bonds were purchased with notice
that the Legislatures of New Jersey and New York
reserved the powers to impose additional duties upon The
Port Authority.
4. The 1974 Act constitutes a permissible exercise by
the States of New Jersey and New York of their specifically
reserved powers to impose additional duties upon The
Port Authority.
SIXTH SEPARATE DEFENSE
1. The Port Authority’s powers and responsibilities
pursuant to the Port Authority Compact include provision
of passenger transportation facilities within the Port Dis-
trict. In exercising those powers and responsibilities to
date, The Port Authority has been principally concerned
with providing facilities for vehicular traffic. Such vehicu-
lar traffic has occasioned and is integrally related to
health, energy, environmental, traffic, and transportation
32a
Answer and Counterclaim
crises within the State of New Jersey and the Port District
generally.
2. Because of these crises, the Legislature of the State
of New Jersey concluded that The Port Authority must
undertake larger responsibilities for alternative modes of
transportation, to assure balanced transportation within the
Port District. That legislative determination was both rea-
sonable and in no way prohibited by the 1962 Covenant
which purported to limit Port Authority activity as to pas-
senger railroads only.
3. In light of the aforesaid legislative judgment, and the
paramount importance of transportation to the health,
economic vitality and environment of the citizens of the
State, it was reasonable for the Legislature further to
determine, as it did in adopting the 1974 Act, that the deci-
sion as to what transportation systems and combinations
thereof are best suited to relieve the crises referred to in
paragraph 1 ought not be prejudiced by the preclusion of
further Port Authority financing for passenger railroad
systems.
SEVENTH SEPARATE DEFENSE
1. The 1962 Covenant was enacted as part of substan-
tially identical New Jersey and New York statutes entitled
“An Act to provide for the financing and effectuation by the
Port of New York Authority of a port development project,
consisting of the Hudson tubes, the Hudson * bes exten-
sions and a world trade center, for co-ordinating, facilitat-
ing and promoting the transportation of persons and the
flow and exchange of trade and commerce in and through
the Port of New York District, and agreeing with the State
of New York with respect thereto.”
33a
Answer and Counterclaim
2. Pursuant to the 1962 legislation, The Port Authority
assumed for the first time a significant role in the operation
of a passenger railroad facility (now the PATH system)
and embarked upon the development, construction and
operation of the World Trade Center.
3. Since the adoption of the 1962 legislation, including
the Covenant contained therein, The Port Authority has
accumulated considerable experience in the operation of
a passenger railroad facility, construction of the
World Trade Center (at a total projected cost of about
$850,000,000) has been substantially completed and The
Port Authority has completed many other projects, includ-
ing substantial redevelopment projects at the Authority’s
three major airports. These developments have materi-
ally increased the assets, reserves and revenues of The
Port Authority from what they were in 1962.
4. Since 1962, New Jersey and New York generally, and
the Port District in particular, have experienced severe
health, energy, environmental, traffic and transportation
crises resulting from excessive use of motor vehicles that
were not foreseen when the 1962 legislation, referred to in
paragraph 1, was enacted. These crises were particularly
acute in the latter part of 1973 and the first quarter of 1974
—-immediately prior to the adoption of the 1974 Act—as a
result of the extreme shortage of motor gasoline, which
seriously impaired the physical and economic stability of
the Port District.
5. By reason of the changed conditions since 1962
referred to in paragraphs 3 and 4, the Legislature of the
State of New Jersey could reasonably have concluded that
the continued prohibition, embodied in subparagraph (b)
of the 1962 Covenant, of further participation by the Port
Authority in passenger railroad facilities and operations
. B4a
Answer and Counterclaim
had become contrary to the public policy of this State and
that this part of the 1962 Covenant should be repealed, as it
was by the 1974 Act.
Wuenrerore, defendants demand judgment dismissing the
complaint.
COUNTERCLAIM
Defendant The State of New Jersey, counterclaiming
against plaintiff and the class of Port Authority bond-
holders represented by it, says:
1. This is a counterclaim for a declaratory judgment
that Chapter 25 of the Laws of New Jersey 1974 (the 1974
Act challenged herein by plaintiff) and the substantially
identical Chapter 993 of the Laws of New York 1974 are
in all respects valid and constitutional.
2. This counterclaim is brought as a class action against
plaintiff and the class or classes represented by it, con-
sisting “of all of the holders of Consolidated Bonds of The
Port Authority who have an undivided interest in the reve-
nues of The Port Authority and the reserve funds secur-
ing such Consolidated Bonds.” Class action treatment of
this counterclaim is appropriate for the reasons alleged
in paragraphs 8 through 14 of the complaint and the
answer thereto, which are incorporated herein by
reference.
3. Defendant repeats and realleges, as if set forth
herein at length, each of the allegations of the Second
through the Seventh Separate Defenses of the answer.
4. The statutes referred to in paragraph 1 of this
counterclaim do not impair the obligation of any contract
with or take the property of plaintiff or the class or classes
35a
Answer and Counterclaim
represented by it and do not otherwise violate any pro-
vision of the Constitutions of the United States, New
Jersey or New York.
Wuenerore, the State of New Jersey demands:
(a) A declaratory judgment that Chapter 25 of the Laws
of New Jersey 1974 and Chapter 993 of the Laws of New
York 1974 are in all respects valid and constitutional; and
(b) Such other and further relief as the Court may deem
just and proper.
Wim F. Hyianp
Attorney General of the
State of New Jersey
Attorney for Defendants
By: Michael I. Sovern
Murray J. Laulicht
Harold Edgar
Special Counsel for
Defendants
Dated: July 15, 1974
[Certificate of service omitted in printing]
36a
Answer to Counterclaim
SUPERIOR COURT OF NEW JERSEY
Law Drvision—Bercen County
ro
Unrrep States Trust Company or New York, as Trustee
for The Port Authority of New York and New Jersey
Consolidated Bonds, Fortieth and Forty-First Series; on
its own behalf and on behalf of all holders of Consoli-
dated Bonds of The Port Authority of New York and
New Jersey and all others similarly situated,
Plaintiff,
vs.
Ture Strate or New Jersey; Brenpan T. Byrne, Governor
of the State of New Jersey; and Wimxmm F. Hytanp,
Attorney General of the State of New Jersey,
Defendants.
i
Plaintiff, United States Trust Company of New York,
by way of Answer to the Counterclaim of defendant, The
State of New Jersey, says:
1. Plaintiff denies that Chapter 25 of the Laws of New
Jersey 1974 is valid and constitutional. Plaintiff further
denies that this Court has jurisdiction to determine the
validity of Chapter 993 of the Laws of New York 1974.
9. Plaintiff admits that it represents a class consisting
“of all of the holders of Consolidated Bonds of The Port
Authority who have an undivided interest in the revenues
of The Port Authority and the reserve funds securing such
Consolidated Bonds” and that class action treatment of
this counterclaim is appropriate.
37a
Answer to Counterclaim
3. As to the allegations of the Second through Seventh
Separate Defenses repeated and realleged by defendant
The State of New Jersey in Paragraph 3 of its Counter-
claim plaintiff says:
As To Tue Seconp Separate DerensE
1. Plaintiff denies the allegations contained therein.
As To Tue Tuiep Separate Derense
1. Plaintiff admits that Congress consented to the Port
Authority Compact and Comprehensive Plan pursuant to
the Compact Clause of the Constitution of the United
States. Plaintiff denies that Congressional consent was
required or given pursuant to the Interstate Commerce
Clause of the Constitution of the United States.
2. Plaintiff admits that the Preamble to the Compact
contains the provision as set forth by the defendant but
refers to the entire Preamble and the entire Compact for
their full terms and legal effect.
3. Plaintiff denies the allegations contained in Para-
graph 3 of the Third Separate Defense.
4, Plaintiff denies the allegations contained in Para-
graph 4 of the Third Separate Defense.
As To Tue Fovurts Separate Derense
1. Plaintiff denies the allegations contained in Para-
graph 1 of the Fourth Separate Defense but admits that the
1974 Act repealed only Subparagraph b of the 1962
Covenant.
2. Plaintiff denies the allegations contained in Para-
graph 2 of the Fourth Separate Defense.
38a
Answer to Counterclaim
9 Plaintiff admits the allegations contained in Para-
graph 3 of the Fourth Separate Defense and refers to the
1974 Act for its terms and legal effect.
4. Plaintiff admits the allegations contained in Para-
graph 4 of the Fourth Separate Defense and refers to the
1974 Act for its terms and legal effect.
5. Plaintiff denies the allegations contained in Para-
graph 5 of the Fourth Separate Defense.
As To Tue Firra Separate DEFENSE
1. Plaintiff refers to the bonds issued by the Port
Authority, the Official Statements published by the Port
Authority, the Compact and the various statutes of New
Jersey and New York amendatory thereof and supplemen-
tal thereto for their terms and legal effect.
9 Plaintiff admits that Article VII of the Port Author-
ity Compact contains the provision as set forth by the
defendant but refers to the entire Compact and amendatory
and supplemental legislation for their full terms and legal
effect.
9 Plaintiff denies the allegations contained in Para-
graph 3 of the Fifth Separate Defense.
4. Plaintiff denies the allegations contained in Para-
graph 4 of the Fifth Separate Defense.
As To Tae Sruxra Separate Derense
1. With respect to the first sentence of Paragraph 1 of
the Sixth Separate Defense, plaintiff refers to the Compact
for its full terms and legal effect. Plaintiff denies the
allegations contained in the second sentence of Paragraph 1
of the Sixth Separate Defense. Plaintiff denies knowledge
39a
Answer to Counterclaim
or information sufficient to form a beli i
ef with respect to th
allegations contained in the third s ~s 1
entence of P
of the Sixth Separate Defense. _—
2. Plaintiff denies the allegati i :
gations contained
graph 2 of the Sixth Separate Defense. = vo
3. Plaintiff denies the allegati i i
gations contained ara-
graph 3 of the Sixth Separate Defense. si
As To Txe Seventn Separate DErense
1. Plaintiff admits the allegations contained in Para-
graph 1 of the Seventh Separate Defense and refers to the
said statutes for their terms and legal effect.
2. Plaintiff admits that the 1962 legislatio i
the Port Authority to embark upon = yas
struction and operation of the World Trade Center and to
assume @ significant role in the operation of a passenger
railroad facility (now the PATH system) but denies knowl-
edge or information sufficient to form a belief as to whether
this legislation was the first time that the Port Authority
assumed a significant role i ,
railroad facility. e in the operation of a passenger
3. Plaintiff denies knowledge or information sufficient
to form a belief with respect to the allegations contained
in Paragraph 3 of the Seventh Separate Defense
4. Plaintiff denies knowledge or information sufficient to
form a belief with respect to the allegations contained in
Paragraph 4 of the Seventh Separate Defense.
5. Plaintiff denies the allegati ; ,
gations contained
graph 5 of the Seventh Separate Defense. a eae
4. Plaintiff denies the all i ; :
egations contain ara
graph 4 of the Counterclaim. 7 oe
40a
Answer to Counterclaim
AFFIRMATIVE DEFENSES TO COUNTERCLAIM
Fimst AFFIRMATIVE DEFENSE
The State of New Jersey is estopped from challenging
the validity of the 1962 Covenant since during the twelve
years subsequent to the enactment of this legislation over
one billion dollars of Port Authority obligations were
issued by the Port Authority pursuant to the provisions
of the 1962 Covenant and were purchased by plaintiff and
the class it represents based upon the Covenant.
Seconp AFFIRMATIVE DEFENSE
The State of New Jersey is barred from attacking the
validity of the 1962 Covenant based upon laches due to its
failure to assert its claim for twelve years.
Turep AFFIRMATIVE DEFENSE
The State of New Jersey is barred from attacking the
validity of the 1962 Covenant based upon waiver.
Mezyner, Lanpis & VERDON
Attorneys for Plaintiff
Ropert B. Meyner
Robert B. ki -yner
Of Counsel:
Carrer, Lepyarp & Musurn, Esgs.
2 Wall Street
New York, New York 10005
[Certificate of Service omitted in printing. ]
4la
Consent Order
SUPERIOR COURT OF NEW JERSEY
Law Drvision—Bercen County
Ee
Unirep States Trust Company or New York, as Trustee
for the Port Authority of New York and New Jersey
Consolidated Bonds, Fortieth and Forty-First Series; on
its own behalf and on behalf of all holders of Consoli-
dated Bonds of the Port Authority of New York and New
Jersey and all others similarly situated,
Plaintiff,
vs.
Tue State or New Jersey: Brenpan T. Byrne, Governor of
the State of New Jersey; and Wiiu1am F. Hytanp, Attor-
ney General of the State of New Jersey,
Defendants.
el
This matter being opened to the Court by Meyner, Landis
& Verdon, attorneys for the United States Trust Company
of New York (Trust Company) ; and the Court having con-
sidered the Affidavits of J. Sinclair Armstrong and Edwin
C. Landis, Jr.; and it appearing to the Court that the Trust
Company, Trustee for the 40th and 41st Series of Consoli-
dated Bonds of the Port Authority of New York and New
Jersey (Port Authority), is also the holder of a signficant
amount of all Series of Consolidated Bonds of the Port
Authority; and it further appearing to the Court that the
Trust Company presents claims and defenses which are
typical of the class of holders of Consolidated Bonds of the
Port Authority and that the Trust Company and its coun-
sel are fully competent to fairly and adequately protect the
42a
Consent Order
interests of the class; and the Court having reviewed the
provisions of R. 4:32-3(b) and other due process considera-
tions; and the Court having noted the widespread publicity
given to this action and the absence of intervening bond-
holders; and it appearing that all parties have consented to
this order, it is
OrpereD that this action shall be maintained and
defended as a class action under Rule 4:32-1(b)(1) and
(b)(2) by the Trust Company as representative on behalf
of a class consisting of all holders of all Series of Consoli-
dated Bonds of the Port Authority; and it is
FurtHer Orperep that notice of this class action be
deemed to have been given to members of the class of bond-
holders via the media publicity given to this class action.
Grorcz B. GeLmMan,
J.8.C.
Dated: October 24, 1974
43a
Consent Order
The within Order is hereby consented to as to form and
substance.
Meyner, Lanpis & VERDON
Gateway I—Suite 2500
Newark, New Jersey 07102
By: Rosert B. Meyner
Carter, Lepyarp & MirpurN
Two Wall Street
New York, New York 10005
By: Derverevx Misurn
Attorneys for plaintiff,
U. S. Trust Company
Wituiam F. Hytanp
Attorney General of the
State of New Jersey
By: MicHarx L. Sovern
By: Murray J. Laviicut
By: Hanroip Epnaar
Attorneys for defendants,
State of New Jersey,
Brendan T. Byrne, and
William F. Hyland
44a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
SUPERIOR COURT OF NEW JERSEY
Law Drvision—Bercen County
[Titte OmITTED In Printine]
State or NEw JERSEY
County oF Essex
Epwin C. Lanois, Jr., of full age, being duly sworn
according to law, upon his oath, deposes and says:
1. Many newspaper and other periodical reports and
comments regarding this lawsuit have been published since
the complaint was filed on April 30, 1974. I have assem-
bled those listed below and attach them as indicated.
a. “For Mass Transit’—New York Post, New York
City, New York, April 30, 1974
b-1. “Bondholders Counter Byrne Transit Bid”—Post,
Paramus, New Jersey, May 1, 1974
b-2. “Byrne signs bill lifting PA bonding restriction”—
The Record, Hackensack, New Jersey, May 1, 1974
b-3. “Byrne signs PA transit-$ pact in Jersey; NYC
bank files suit to block move”—Long Island Press, Jamaica,
New York City, New York, May 1, 1974
b-4. “Byrne signs Port legislation”’—The News Tribune,
Woodbridge, New Jersey, May 1, 1974
b-5. “Byrne Signs Transit Legislation”—Paterson
News, Paterson, New Jersey, May 1, 1974
b-6. “Covenant repealer now law”’—The Herald-News,
Passaic, New Jersey, May 1, 1974
45a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
b-7. “Jersey Sued Over Agreement”—Paterson News,
Paterson, New Jersey, May 1, 1974
b-8. “Law Dismays Municipal-Bond Dealers”—New
York Times, New York City, New York, May 1, 1974
b-9. “New York Bank challenges P.A. move”—The Star
Ledger, Newark, New Jersey, May 1, 1974
b-10. “N.Y. transit action awaited by Byrne”—Burling-
ton County Times, Willingboro, New Jersey, May 1, 1974
b-11. “PA Mass Transit Bill Becomes Law”—The Daily
Register, Red Bank—Middletown, New Jersey, May 1, 1974
b-12. “Port Panel Backs Move On Transit”—New York
Times, New York City, New York, May 1, 1974
b-13. “Suit attacks Port Authority legislation”—The
Jersey Journal, Jersey City, New Jersey, May 1, 1974
b-14. “Suit Is Filed Over Use Of Port AuthorityFunds”
—The Wall Street Journal, New York City, New York, May
1, 1974
b-15. “US Trust Seeks to Void NJ Threat to Bonds”—
American Banker, New York City, New York, May 1, 1974
e-l1. “Albany Votes Bill to Free Port Unit for Mass
Transit”—New York Times, New York City, New York,
May 2, 1974
e-2. “Clearing the Tracks”—Asbury Park Evening
Press, Asbury Park, New Jersey, May 2, 1974
e-3. “Hunterdon Legislators Support PA Repealer”—
Hunderdon County Democrat, Flemington, New Jersey,
May 2, 1974
46a
_ Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
e-4. “The Predicted Consequences”—Daily News, New
York City, New York, May 2, 1974
e-5. “The state welshes”’—The Herald-News, Passaic,
New Jersey, May 2, 1974
e-6. “Wilson Gets Bill to Have PA Pay for Mass Trans-
it’—Daily News, New York City, New York May 2, 1974
d. “Transit turnabout”’—The Citizen Register, Ossi-
ning, New York, May 3, 1974
e. “Port Authority’s Future: Will It Be In Mass
Transit?”—New York T.mes, New York City, New York,
May 5, 1974
f-1. “Dishonest, too”—The Herald-News, Passaic, New
Jersey, May 6, 1974
f-2. “PA on the Right Track”-The Dispatch, Union
City, New Jersey, May 6, 1974
f-8. “Word and Bond”—Barron’s National Business and
Financial Weekly, New York City, New York, May 6, 1974
g-1. “Set Pretrial Session In PA Transit”’—The Dis-
patch, Union City, New Jersey, May 7, 1974
g-2. “Suit Aims to Kill PATH Law”—Paterson News,
Paterson, New Jersey, May 7, 1974
h. “PATH Hearing In July”—Paterson News, Pater-
son, New Jersey, May 8, 1974
i. “The Editor’s Corner”—The Daily Bond Buyer, New
York City, New York, May 13, 1974
j. “Keeping Faith With Investors”—The Journal of
Commerce, New York City, New York, May 15, 1974
47a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
k. “Municipal Forum Fights Repeal of PA Covenant”—
American Banker, New York ‘ity, New York, May 8, 1974
1. “Wilson Is Urged To Sign Repeal of PA Bond Cove-
nant”—The Daily Bond Buyer, New York City, New York,
May 29, 1974
m. “Club opposes auto tax... and joins N. J. AAA in
toll rate protest’—New York Motorist, New York City,
New York, May 1974
n. “Freeing the P.A.”—New York Times, New York
City, New York, June 1, 1974
o. “P.A. rule hinges on Wilson”—Sunday Star Ledger,
Newark, New Jersey, June 2, 1974
p. “GREEN LIGHT: Wilson signs bill putting P.A. on
mass transit track”—Sunday Star Ledger, Newark, New
Jersey, June 16, 1974
q-1. “Bank’s N.Y. Suit Would Bar P.A. Aid for Mass
Transit”—Paterson News, Paterson, New Jersey, June 17,
1974
q-2. “Looks Like Big Wait for Transit Aid From PA”
—Daily News, New York City, New York, June 17, 1974
q-3. “N.Y. bank is filing suit as Wilson frees PA funds”
—The Record, Hackensack, New Jersey, June 17, 1974
q-4. “New York Governor Signs Port Authority Mass-
Transit Measure”—The Wall Street Journal, New York
City, New York, June 17, 1974
q-5. “Plans Suit to Upset Transit Role by PA”—The
Dispatch, Union City, New Jersey, June 17, 1974
48a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
q-6. “PA TRANSIT LAW FACES 2d SUIT, Big Bond-
holders to Sue On PA Transit Action”—Daily News, New
York City, New York, June 17, 1974
q-7. “Sue To Halt PA Shift’—The Daily Journal,
Elizabeth, New Jersey, June 17, 1974
q-8. “Wilson, Dubious of Effect, Signs Port-Bond
Measure”—New York Times, New York City, New York,
June 17, 1974
r-l. “VIEWPOINT—Grudging Approval”—The Star
Ledger, Newark, New Jersey, June 18, 1974
r-2. “PA Mulls Assistance For Transit”—The Dispatch,
Union City, New Jersey, June 18, 1974
r-3. “Suit filed to keep P.A out of transit”—Staten
Island Advance, Staten Island, New York, June 18, 1974
r-4, “U.S. Trust Files Suit Over Port Authority’s Mass-
Transit Funding’—The Wall Street Journal, New York
City, New York, June 18, 1974
r-5. “U.S. Trust Sues to Void N.Y. Repeal of PA Cove-
nant; Wilson Concedes Law Overturns State’s Pledge”—
The Daily Bond Buyer, New York City, New York, June 18,
1974
s. “Closer and closer”—The News Tribune, Woodbridge,
New Jersey, June 19, 1974
t-l. “Hearing scheduled for P.A. Joly 25 on mass
transit”—The Jersey Journal, Jersey City, New Jersey,
June 20, 1974
t-2. “Opposing Sides on PA Covenant Will Debate July
25 in N.J. Court”—The Daily Bond Buyer, New York City,
New York, June 20, 1974
49a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
u. “Suits to test PA transit covenant’—The Herald-
News, Passaic, New Jersey, June 26, 1974
v. “N.J. Judge Revises Dates For Arguments and Briefs
on 2 PA Covenant Suits”—The Daily Bond Buyer, New
York City, New York, June 28, 1974
w. “Columbia dean to argue P.A. bond suit”—Sunday
Star Ledger, Newark, New Jersey, June 30, 1974
x. “Hyland Calls for Help”—The Dispatch, Union City,
New Jersey, July 1, 1974
y-l. “N.J. answers suit, defends repeal of PA bond
covenant”—The Herald-News, Passaic, New Jersey, July
16, 1974
y-2. “PA covenant repeal defended”—The Daily Regis-
ter, Shrewsbury, New Jersey, July 16, 1974
y-3. “PA Says Bond Move Legitimate”—Asbury Park
Evening Press, Asbury Park, New Jersey, July 16, 1974
y-4. “State answers suit on P.A. pact repealer”—Star
Ledger, Newark, New Jersey, July 16, 1974
y-5. “State Argues For Repeal Of PA Ban”—Paterson
News, Paterson, New Jersey, July 16, 1974
z. “PA contradicts commitment to mass transit’”—The
Record, Hackensack, New Jersey, July 17, 1974
aa. “Pesin to Byrne: Act on P.A. in transit”—The Jer-
sey Journal, Jersey City, New Jersey, July 18, 1974
bb. “Standard operating procedure”—The Sunday Rec-
ord, Hackensack, New Jersey, July 21, 1974
ec. “Port Authority Defends Legal Fees for Trustee”—
The Daily Bond Buyer, New York City, New York, July 22,
1974
50a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
2. The ABC circulation figure cited for each following
newspaper is the figure from the Audit Bureau Circulation
Report of September 30, 1973.
3. The Asbury Park Evening Press is a newspaper pub-
lished daily in Asbury Park, New Jersey, and has an ABC
circulation list of 89,764 Monday through Saturday and
110,173 for Sunday. It is distributed throughout Monmouth
and Ocean Counties.
4. Barron’s National Business and Financial Weekly is a
newspaper published weekly in New York City, New York,
and has an ABC circulation list of 221,321. It is distributed
nationally.
5. The Burlington County Times is a local newspaper
published daily in Willingboro, New Jersey, and has an
ABC circulation list of 37,132 Monday through Saturday
and 24,807 for Sunday.
6. The Citizen Register is a local newspaper published
Monday through Saturday in Ossining, New York, and has
an ABC circulation list of 9,068. It is distributed only in
Ossining and several small surrounding towns.
7. The Daily Bond Buyer is a newspaper published
Monday through Friday, in New York City, New York. It
is distributed nationally throughout the community of pur-
chasers and sellers of bonds.
8. The Daily Journal is a newspaper published Monday
through Saturday in Elizabeth, New Jersey, and has an
ABC circulation list of 66,063 Monday through Friday and
60,540 for Saturday. It is distributed throughout three
New Jersey counties: Essex, Middlesex, and Union.
5la
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
9. The Daily News is a newspaper published daily in
New York City, New York, and has an ABC circulation list
of 2,120,549 Monday through Saturday and 2,933,182 for
Sunday. It is circulated throughout the Northeast region
of the United States.
10. The Daily Register is a newspaper published Mon-
day through Friday in Shrewsbury, New Jersey, and has an
ABC circulation list of 31,202. It is distributed throughout
northern Monmouth County.
11. The Hudson Dispatch is a local newspaper published
Monday through Saturday in Union City, New Jersey, and
has an ABC circulation list of 53,576.
12. The Herald-News is a newspaper published Monday
through Saturday in Passaic, New Jersey, and has an ABC
circulation list of 93,372 Monday through Friday and
93,338 for Saturday. It is distributed throughout the entire
northern New Jersey area.
13. The Hunterdon County Democrat is a newspaper
published weekly in Flemington, New Jersey, and has an
ABC circulation list of 19,160.
14. The Jersey Journal is a newspaper published Mon-
day through Saturday in Jersey City, New Jersey, and has
an ABC circulation list of 86,368 Monday through Friday
and 81,382 for Saturday. It is distributed throughout
Hudson County, New Jersey.
15. The Journal of Commerce is a financial newspaper
published Monday through Friday in New York City, New
York, and has an ABC circulation list of 23,296. It is dis-
tributed nationally.
52a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
16. The Long Island Press is a newspaper published
daily in Jamaica, New York City, New York, and has an
ABC circulation list of 355,046 Monday through Saturday
and 335,127 for Sunday. It is distributed throughout the
Long Island area.
17. The New York Motorist is a newspaper published
by the Automobile Club of New York in New York City,
New York. It is published monthly and distributed through-
out the more than 416,500 members of the AAA club of
New York for the fourteen southern-most counties.
18. The New York Post is a newspaper published daily
excluding Sunday and has an ABC circulation list of
626,713 Monday through Friday and 375,607 for Saturday.
It is distributed nationally.
19. The New York Times is a newspaper published daily
in New York City, New York, and has an ABC circulation
list of 4,505,949. It has wide national and international
distribution.
20. The News Tribune is a newspaper published Mon-
day through Saturday in Woodbridge, New Jersey, and has
an ABC circulation list of 54,153. It is distributed through-
out Middlesex and Monmouth Counties.
21. The Paterson News is a local newspaper published
Monday through Saturday in Paterson, New Jersey. It
has an ABC circulation list of 29,581 Monday through Fri-
day daily, 44,638 Monday through Friday evening, and
69,627 for Saturday. It is distributed in the Paterson area
of Passaic County.
22. The Post is a local newspaper published on Sunday
and Wednesday in Paramus, New Jersey, and has an ABC
53a
Affidavit of Edwin VU. Landis, Jr.
Sworn to October 23, 1974
circulation list of 9,572 for Sunday and 28,009 for Wednes-
day. It is distributed throughout North Bergen County.
23. The Record is a newspaper published daily, exclud-
ing Saturday, in Hackensack, New Jersey, and has an ABC
circulation list of 152,140 Monday through Friday and
181,995 for Sunday. It is distributed mainly throughout
Bergen County, with some distribution in Passaic County,
New Jersey, and Rockland County, New York.
24. The Star-Ledger is a newspaper published daily ia
Newark, New Jersey, and has an ABC circulation list of
356,306 Monday through Friday, 335,839 for Saturday, and
560,261 for Sunday. It is circulated throughout the entire
New Jersey area.
25. The Staten Island Advance is a newspaper pub-
lished daily in Staten Island, New York, and has an ABC
circulation list of 68,690 Monday through Friday, 64,440
for Saturday, and 69,086 for Sunday. It is distributed
principally in Staten Island.
26. The Wall Street Journal is a financial newspaper.
Four editions of this newspaper are published daily,
excluding Saturday and Sunday. The Eastern edition is
published in White Oak, Maryland; South Brunswick, New
Jersey, and Chicopee Falls, Massachusetts; and has an
ABC circulation list of 515,824. The Midwest edition is
published in Chicago and Hyland, Illinois, and Cleveland,
Ohio, and has an ABC circulation list of 390,711. The
Pacific Coast edition is published in Riverside and Palo
Alto, California, and has an ABC circulation list of 223,417.
The Southwest edition is published in Dallas, Texas, and
has an ABC circulation list of 121,592. The articles noted
above as appearing in the Wall Street Journal in fact
d4a
Affidavit of Edwin C. Landis, Jr.
Sworn to October 23, 1974
appeared in each of the four editions except the June 18th
article which did not appear in the Midwest edition.
27. I am advised by the Port Authority of New York
and New Jersey that of the approximately $1,600 million
in outstanding Consolidated Bonds of all series, approxi-
mately $76 million are held in registered form. I am fur-
ther advised that the balance of approximately $1,524
million are held in bearer form by owners unknown to the
Port Authority or its paying agents. I am further advised
that the list of owners of registered bonds contains
approximately 2800 names, some of which are duplications.
Epwrn C. Lanois, Jr.
(Sworn to October 23, 1974.)
[Jurat and attachments omitted in printing. ]
55a
Affidavit of J. Sinclair Armstrong
Sworn to October 24, 1974
SUPERIOR COURT OF NEW JERSEY
Law Drvision—Bercen County
[Title omitted in printing]
State or New York
County or New York
J. Smvcuarr Armstrone, being duly sworn, deposes and
says:
1. I am an Executive Vice President of Unrrep States
Trust Company or New York, a New York corporation
(the “Trust Company”), with its principal office at 45 Wall
Street, New York, New York. I am fully familiar with the
matters set forth in this affidavit.
2. The Trust Company instituted this action as the
Trustee for The Port Authority Consolidated Bonds, For-
tieth and Forty-First Series, pursuant to Section 8 of the
Resolution Establishing the Fortieth Series of Consoli-
dated Bonds, due 2008 adopted May 10, 1973 and the Reso-
lution Establishing the Forty-First Series of Consolidated
Bonds, due 2008 adopted September 13, 1973.
3. Pursuant to such Section 8 of the respective Resolu-
tions adopted by The Port Authority the Trust Company
is “authorized to act in its discretion to assure that all of
the rights of and obligations to the holders of bonds of
_ [such] Series are unconditionally recognized, protected
and fulfilled.” Such Resolutions also permit the Trust
Company “to institute any action on behalf of the holders
of bonds of [such] Series against [The Port Authority] or
others which it shall in its sole discretion deem advis-
able...”
56a
Affidavit of J. Sinclair Armstrong
Sworn to October 24, 1974
4. The Trust Company also brings this action on its
own behalf as the holder (in its own account, as custodian
and in its several fiduciary capacities) of approximately
$96,780,000 principal amount (as of July 13, 1974) of the
Consolidated Bonds of The Port Authority and on behalf
of all of the holders of Consolidated Bonds of The Port
Authority who have an undivided interest in the revenues
of The Port Authority and the reserve funds securing such
Consolidated Bonds.
5. As of July 13, 1974, approximately $1,600,000,000
principal amount of Consolidated Bonds of The Port
Authority were outstanding and held by banks, trust com-
panies, other financial institutions, pension funds and pri-
vate individuals.
6. As of July 13, 1974 the Trust Company held (in its
own account, as custodian and in its several fiduciary
capacities) the following Consolidated Bonds issued by The
Port Authority of New York and New Jersey in the follow-
ing amounts:
Name of Bond Issue Principal Amount
First Series Consolidated Bonds $ 1,120,000
Second Series Consolidated Bonds 778,000
Fourth Series Consolidated Bonds 1,498,000
Fifth Series Consolidated Bonds 811,000
Sixth Series Consolidated Bonds 1,848,000
Seventh Series Consolidated Bonds 1,011,000
Eighth Series Consolidated Bonds 1,912,000
Ninth Series Consolidated Bonds 55,000
Tenth Series Consolidated Bonds 1,545,000
Eleventh Series Consolidated Bonds 896,000
Twelfth Series Consolidated Bonds 15,000
Thirteenth Series Consolidated Bonds 390,000
57a
Affidavit of J. Sinclair Armstrong
Sworn to October 24, 1974
Name of Bond Issue
Fourteenth Series Consolidated Bonds
Fifteenth Series Consolidated Bonds
Sixteenth Series Consolidated Bonds
Seventeenth Series Consolidated Bonds
Eighteenth Series Consolidated Bonds
Nineteenth Series Consolidated Bonds
Twentieth Series Consolidated Bonds
Twenty-First Series Consolidated Bonds
T'wenty-Second Series Consolidated Bonds
Twenty-Third Series Consolidated Bonds
Twenty-Fourth Series Consolidated Bonds
Twenty-Fifth Series Consolidated Bonds
Twenty-Sixth Series Consolidated Bonds
Twenty-Seventh Series Consolidated Bonds
Twenty-Eighth Series Consolidated Bonds
Twenty-Ninth Series Consolidated Bonds
Thirtieth Series Consolidated Bonds
Thirty-First Series Consolidated Bonds
Thirty-Second Series Consolidated Bonds
Thirty-Third Series Consolidated Bonds
Thirty-Fourth Series Consolidated Bonds
Thirty-Fifth Series Consolidated Bonds
Thirty-Sixth Series Consolidated Bonds
Thirty-Seventh Series Consolidated Bonds
Thirty-Eighth Series Consolidated Bonds
Thirty-Ninth Series Consolidated Bonds
Fortieth Series Consolidated Bonds
Forty-First Series Consolidated Bonds
Principal Amount
$1,045,000
199,000
680,000
195,000
600,000
860,000
1,071,000
933,000
531,000
1,231,000
1,067,000
682,000
986,000
925,000
868,000
242,000
1,201,000
5,005,000
5,045,000
6,150,000
5,175,000
9,685,000
3,500,000
6,380,000
10,405,000
11,410,000
3,710,000
5,120,000
7. Under Section 2 of each of the Agreements of Trust
between the Port authority and the Trust Company, the
Port Authority is obligated to pay to the Trust Company
58a
Affidavit of J. Sinclair Armstrong
Sworn to October 24, 1974
“reasonable compensation for extraordinary services and
reimbursement for such reasonable expenses, charges,
counsel fees and other disbursements previously incurred
by the Trustee for which provision is made for payment
in Section 8 of the Resolution and for which payment has
not been made by the Authority”. Section 8 of the
Resolutions establishing Series 40 and Series 41 provides
that, among other things, the Port Authority shall pay to
the Trustee from time to time reasonable compensation
for all services rendered and shall also pay to the Trustee
all of its reasonable expenses, charges, counsel fees and
other disbursements incurred in the performance of its
powers and duties under the Resolution. One of the duties
of the Trustee under the Resolution is to institute lawsuits
on behalf of bondholders if it deems such lawsuits advisable
in order to protect their interests.
Section 6-7 of the Model Debenture Indenture promul-
gated by the American Bar Foundation similarly provides
for the payment to a trustee by an obligor of reasonable
compensation for services rendered and the reimbursement
of a trustee by an obligor for all reasonable expenses,
including the compensation and expenses of its counsel.
Accordingly, the payment of compensation to the Trust
Company and the reimbursement of its expenses, including
counsel fees, by the Port Authority in connection with the
prosecution of the above-captioned lawsuit is in consonance
with the usual and customary arrangement and practice
between an obligor and trustee under a trust agreement.
The Trust Company has initiated, prosecuted and will con-
tinue to prosecute this lawsuit independently of the Port
Authority.
J. Suvctark ARMSTRONG
(Sworn to October 24, 1974.)
[Jurat omitted in prin.ing. ]
59a
Decision of the Superior Court of New Jersey,
Law Division, Bergen County
UNITED STATES TRUST COMPANY OF NEW YORK, ETC.,
PLAINTIFF, v.. THE STATE OF NEW JERSBY, ET AL.,
DEFENDANTS .
DANIEL M. GABY, PLAINTIFF, v. THE PORT OF NEW YORK
AUTHORITY, ET AL., DEFENDANTS.
Superior Court of New Jersey
Law Division
Argued April 8, 9, 1975—Decided May 14, 1975.
SYNOPSIS
Consolidated actions were brought concerning constitu-
tional validity of legislation creating, and later repealing,
a covenant between the States of New Jersey and New York
and holders of bonds issued by the Port Authority of New
York and New Jersey. Defendants filed counterclaim for
declaration of validity of repealing legislation. The Su-
perior Court, Law Division, Gelman, J. S. C., held that
legislative enactments, such as the 1962 covenant whereby
the States and Authority were precluded from applying Au-
thority revenues and reserves for passenger railroad pur-
poses unless permitted by criteria set forth in the covenant,
can constitute a contract within meaning of the contract
clauses of the State and Federal Constitutions, that not
every impairment of a contract obligation or security for its
performance runs afoul of the contract clause, that a State’s
inherent power to protect the public welfare may be validly
exercised under the contract clause even if it impairs a con-
tractual obligation so long as it does not destroy it, and
that in view of emergent problems of air pollution, crises
in mass transit and energy problems repeal legislation was a
reasonable and valid exercise of the State’s police power
and was not prohibited by the contract clause of either the
Federal or State Constitution.
Complaints dismissed; judgment for defendants on coun-
terclaim.
60a
Mr. Robert B. Meyner and Mr. Devereux Milburn (of
the New York Bar) for plaintiff United States Trust Com-
pany (Messrs. Meyner, Landis & Verdon, attorneys; and
Messrs. Carter, Ledyard & Milburn, attorneys; and Mr.
Donald J. Robinson (of the New York Bar) Messrs. Haw-
kins, Delafield & Wood, attorneys).
Mr. Michael I. Sovern (of the New York Bar) and Mr.
Murray J. Laulicht, special counsel for defendants (Mr.
William F. Hyland, Attorney General of New Jersey, attor-
ney; Mr. Harold S. H. Edgar (of the New York Bar) on
the brief).
Mr. Theodore W. Kheel (of the New York Bar) and Mr.
Howard Stern for plaintiff Daniel M. Gaby (Messrs. Battle,
Fowler, Stokes & Kheel, attorneys, and Messrs. Shavick,
Stern, Schotz, Steiger & Croland, attorneys).
Mr. Joseph Lesser (of the New York Bar) for defendant
Port Authority of New York and New Jersey (Mr. Francis
A. Mulhern, attorney); and Mr. Patrick J. Falvey (of the
New York Bar), Vs. Isobel E. Muirhead, Mr. Arthur P.
Berg (of the New York Bar), (Mr. Vigdor D. Bernstein,
of counsel).
Getman, J. S. C. These are consolidated actions which
have as their common subject matter the constitutional va-
lidity of legislation of this State creating, and later repeal-
ing, a covenant between the States of New Jersey and New
York and the holders of bonds issued by the Port Author-
ity of New York and New Jersey (Port Authority).’ The
iUnder the terms of the Compact of 1921 creating the Port Author-
ity, WN. J. 8. A. 32:1-1 et seg., legislative action taken by one state
134 N.J.Super.—9
6la
first legislative act in question, chapter 8 of the Laws of
1962, N. J. 8. A. 32:1-85.50 (the 1962 covenant), author-
ized the Port Authority to construct the World Trade Cen-
ter and to acquire and operate the Hudson & Manhattan
Railroad Company. As part of the 1962 legislation the two
States enacted a statutory covenant with each other and
with the holders of certain Port Authority bonds whereby
the States and the Port Authority were precluded from ap-
plying the Authority’s revenues and reserves for passenger
railroad purposes unless permitted by the criteria set forth
in the statute. N. J. 8. A. 32:1-35.55.
The. 1962 covenant was repealed by chapter 25 of the
Laws of 1974.2 The complaint filed by the United States
Trust Company challenges the constitutionality of the re-
peal act of 1974, and the Gaby complaint attacks the va-
lidity of the 1962 covenant. We turn, then, to the proce-
dural history of these actions and the issues projected by
the respective pleadings.
Procedural History
1. The Gaby Action
On May 16, 1972 plaintiff Daniel Gaby filed a class
action complaint for a declaratory judgment that the 1962
covenant violated the Federal and State Constitutions. The
complaint named as defendants the Port Authority, its com-
missioners and executive director, and the then Governor of
New Jersey, William T. Cahill. On October 25, 1972, on
affecting the powers and duties of the Port Authority is not effective
until concurred in by the legislature of the other. N. J. 8. A. 82:1-8.
Statutory citations in this opinion will be limited to the applicable
New Jersey statutes unless the context otherwise requires.
2In 1972 the Legislature had repealed the 1962 covenant as to all
bonds of the Authority issued after the effective date of the act.
L. 1972, ¢. 208; N. J. 8. A. 82:1-85.55a. The act became effective
upon the adoption of concurrent legislation by the State of New
York on May 10, 1978. Laws of NW. Y. 1978, o. 818. The validity
of this legislation is not in issue in these proceedings.
62a
the motion of the Attorney General of New Jersey, the
complaint was dismissed as to former Governor Cahill. The
Attorney General also moved to dismiss the complaint for
failure to name as an indispensable party the Port Author-
ity’s bondholders. No disposition appears to have been made
of the motion at that time.
The Gaby complaint alleges, among other things, that
the residents of the State of New Jersey are dependent
upon mass transit facilities and are adversely affected by
the deterioration of such facilities within the District ser-
viced by the Port Authority (the Port District). It is al-
leged that the Port Authority was created by the Compact
of 1921 and consented to by the United States Congress*®
to assure “cooperation of the two states in the future develop-
ment” of transportation facilities within the Port District,
and that by virtue of the 1962 covenant, restricting the
Port Authority’s power to acquire or operate passenger rail
transit facilities, the two states entered into a new “Com-
pact” without the consent of Congress and in violation of
U. 8. Const., Art. 1, § 10. The complaint further alleges:
that the 1962 covenant constitutes an unconstitutional sur-
render by the State of its sovereign powers “to protect the
health, general welfare and safety of the people,” and that
it has impaired and obstructed existing facilities for the
transportation of goods in interstate commerce, in viola-
tion of U. S. Const., Art. 1, § 8.
Gaby asks for multifarious relief. Aside from seeking a
declaration as to the unconstitutionality of the 1962 cov-
enant, he asks the court to declare the covenant to be sub-
ject to repeal, and to direct the Port Authority to formu-
late and submit to the court a plan for the development of
mass transit facilities within the Port District.
The Gaby action was pretried on February 22, 1973, at
which time it was stipulated that the action could proceed
3Pub. Res. No. 17, 67th Cong., 1st Sess. (42 Stat. 174).
68a
as a class action without formal notice to the class repre-
sented by plaintiff. Thereafter both sides moved for sum-
mary judgment, and oral argument on the motions was
heard on September 26, 1973. At the conclusion of the ar-
gument the court directed the parties to submit further
briefs on the constitutional issues and on the question
whether the bondholders were necessary parties to the Gaby
action. Following conferences between counsel and the
court, it was agreed the United States Trust Company
should be permitted to intervene in the Gaby action as a
party defendant to represent the interests of the bondholders
in that action. An order to such effect was entered on De-
cember 18, 1973, and arguments were rescheduled on the
motions for summary judgment.
Prior to the date fixed for the argument the prospects
for the adoption of the repeal act became apparent, and
further action in the Gaby case was stayed pending future
legislative developments.
2. The United States Trust Company Action
The New Jersey Legislature completed action on the
repeal act on April 22, 1974, and Governor Brendan T.
Byrne signed the bill into law on April 30, 1974. On the
same day United States Trust Company (U. S. Trust)
filed its complaint on behalf of itself as the holder of Port
Authority bonds, as trustee for certain designated issues of
Port Authority bonds, and on behalf of all holders of con-
solidated bonds issued by the Port Authority. The com-
plaint names as defendants the State of New Jersey, Gov-
ernor Byrne and the Attorney General of New Jersey, and
seeks a declaratory judgment that the repeal act violated
the Federal and State Constitutions.
U. S. Trust alleges that it is the holder (for its own ac-
count and in a fiduciary capacity) of $96,000,000 of con-
solidated bonds issued by the Port Authority; that the
Port Authority was intended, under the terms of the Com-
pact approved by Congress, to be a self-supporting public
64a
agency whose obligations were to be and are payable from
its net revenues and certain reserve funds; that the 1962
covenant was enacted to protect the Port Authority’s ex-
isting and future bondholders from the diversion of pledged
revenues and reserves to finance deficit mass transit facili-
ties and further to preserve the Port Authority’s credit
standing; that the Port Authority notified prospective pur-
chasers of its bonds of the existence of the 1962 covenant
and purchasers relied on the covenant in purchasing bonds
issued by the Port Authority, and that the secondary mar-
ket for the Port Authority consolidated bonds has been ad-
versely affected by the repeal act.
The complaint alleges that the repeal act violates the
“impairment” and “taking” provisions of the Federal Con-
stitution, U. S. Const., Art. IT, § 10 and Amends. V and
XIV, and the equivalent provisions of the New Jersey Con-
stitution, N. J. Const. (1947), Art. IV, § VII, par. 3;
Art. I, pars. 1 and 20.
The answer filed by defendants asserts several defenses
among which the following may be briefly noted: (1) the
repeal act constitutes a reasonable exercise of the police
power by the State; (2) the 1962 covenant itself violated
the Federal Constitution because of lack of congressional
consent; (3) the repeal act does not constitute an “im-
pairment” of the contract since the obligation of the Port
Authority to pay its bondholders remains intact; (4) the
hondhoiders were on notice of the reserved powers of the
State to repeal the 1962 covenant, and (5) the repeal act
was adopted as a police power measure to meet a transpor-
tation crisis affecting the health, safety and welfare of per-
sons residing within the District. Finally, the answer as-
serts a counterclaim for a declaratory judgment that the
repeal act is constitutional.
A consent order was entered pursuant to R. 4:32-1 in
the U. S. Trust action directing that the action be main-
tained and defended as a class action by U. S. Trust on
TF - a
65a
behalf of all holders of consolidated bonds of the Port Au-
thority, and that notice to the class be deemed to have been
given by means of the media publicity which was dis-
seminated when the action was instituted. On December 10,
1974 the Gaby and U. S. Trust actions were consolidated
by order of the court.
The parties to the U. S. Trust action have filed a 366-
page stipulation of facts, accompanied by exhibits covering
all phases of the case with the exception of two issues: (1)
whether the purchasers of consolidated bonds issued by the
Port Authority after the adoption of the 1962 covenant re-
lied in fact upon the existence of the covenant, and (2)
whether the repeal of the 1962 covenant adversely affected
the secondary market for Port Authority bonds. These is-
sues were the subject of a trial on February 4, 5, 6, 7 and
11, 1975, and the court’s findings on the issues will be set
forth infra.
The Formation, Facilities and Financial Structure
of the Port Authority.
1. Formation and Facilities.
In 1917 the States of New Jersey and New York estab-
lished the New York, New Jersey Port and Harbor De-
velopment Commission (the Commission) to study the fa-
cilities and problems of the Port of New York and to rec-
ommend a plan for the future development of the Port.‘
The Commission filed its Report’ on December 16, 1920
4The enabling legislation directed the commissioners to negotiate
and agree upon a joint report recommending a policy for the states
“to the end that said port shall be efficiently and constructively
organized and furnished with modern methods of piers, rail and water
and freight facilities * * *.” The Commission was to work out “a
comprehensive and adequate interstate and Federal port policy, to
meet commercial needs in times of peace and the protection of the
harbor and adjacent localities in times of war.” L. 1917, ¢. 130.
SJoint Report with Comprehensive Plan and Recommendations,
New York, New Jersey Port and Harbor Development Commission,
1920 (hereafter cited as the Report).
66a
setting forth its findings, conclusions and recommendations.
The core recommendation of the Commission was the cre-
ation by the two states of a common public agency by means
of which the states would cooperate in the future develop-
ment of the facilities of the Port in accordance with the
comprehensive plan recommended by the Commission.* Re-
port at 436. In discussing the legal precedents for the es-
tablishment by the States of an agency having a substan-
tial impact on interstate commerce, the report stated:
Permissive or restrictive, as the case may be, the power of Congress
over the instrumentalities of interstate traffic is exclusive, when in
a specific case it has been exercised. But this latter limitation,
coupled with the broad police power of the State and its control of
intrastate commerce, has left to New York and New Jersey a broad
field within which they may act without express Federal consent. It
is hoped, of course, by securing congressional approval of any plan
which may be adopted, to avoid future conflict with the Federal
authority over interstate unification and control of the Port. But
for the present the States may act alone. [Report at 446]
Prophetically the Commission noted that
{o]ur port problem is primarily a railroad problem. * * * There-
fore the comprehensive plan to evolve which this Commission was
created is essentially a railroad plan. With the proper network of
rail facilities, the development of other terminal facilities can follow
along rational lines * * *. A complete reorganization of the railroad
system is the most fundamental physical need of the Port of New
York. [Report at 3]
However, the railroad problem upon which the Commis-
sion focused was not that of passenger transit but the hand-
ling and distribution of freight and cargo into and out of
the Port District, and the comprehensive plan recommended
by the Commission addressed itself exclusively to the trans-
portation and distribution, not of persons but of freight
6The recommendation for a Compact between the States was
originally contained in the Commission’s preliminary report sub-
mitted in 1918.
ae
67a
and cargo by rail, and to a lesser extent by ship and motor
truck. In its 474 pages plus appendices the only signifi-
cant discussion of passenger traffic in the Report is con-
tained in the section dealing with ferries and vehicular tun-
nels. After noting that the bulk of interstate passenger
traffic was accommodated by the Hudson River ferries and
that the impact of the Holland Tunnel (started in 1920)
could not be forecast, the Report opined:
Vehicular tunnels offer little promise as a means of conveying pas-
sengers, and the one rapid-transit facility in existence between the two
States, while operated to near capacity, is not sufficiently profitable
to warrant optimism that others will be built. [Report at 330)
Following the submission of the Commission’s Report,
the Port of New York Authority’ was created pursuant to
an interstate compact, signed April 30, 1921, between the
States of New Jersey and New York. WN. J. S. A. 32:1-1
et seg. The consent of Congress “to each and every part and
article” of the Port Authority Compact was obtained effec-
tive August 23, 1921. Pub. Res. No. 17, 6%th Cong. Ist
Sess. The preamble of the Port Authority Compact states
that “a better coordination of the terminal, transportation
and other facilities of commerce in, about and through the
port of New York, will result in great economies, benefiting
the nation, as well as the states of New York and New Jer-
sey,” and that “the future development of such terminal,
transportation and other facilities of commerce will require
the expenditure of large sums of money, and the cordial
co-operation of the States of New York and New Jersey in
the encouragement of the investment of capital, and in the
formulation and execution of the necessary physical plans.”
Article I of the Compact contains the agreement and
pledge by the two states of their “faithful co-operation in
7The name of the Port of New York Authority was changed to
the Port Authority of New York and New Jersey on July 1, 1972.
N. J. 8. A. 32:1-4.
68a
the future planning and development of the port of New
York, holding in high trust for the benefit of the nation the
special blessings and natural advantages thereof”. Article
II defines the Port of New York District, comprising an
area of about 1500 square miles in both states within a
radius of about 25 miles from the Statue of Liberty. Ar-
ticle III establishes the Port Authority as “a body cor-
porate and politic, having the powers and jurisdiction here-
inafter enumerated, and 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.” Article VI vests in the Port Author-
ity “full power and authority to purchase, construct, lease
and/or operate any terminal or transportation facility
within [the Port] district”; to make charges for the use
of such facilities, and “to borrow money and secure the
same by bonds or by mortgages upon any property” held by
the Port Authority. Article VII provides that the Port
Authority “shall have such additional powers and duties
as may hereafter be delegated to or imposed upon it from
time to time by the action of the legislature of either state
concurred in by the legislature of the other,” and mandates
that the Port Authority shall not pledge the credit of either
State except with the consent of its legislature. Article XI
requires the Port Authority to make plans for the develop-
ment of the Port District supplementary to or amendatory
of any plan theretofore adopted, and Article XII authorizes
the Port Authority to “make recommendations to the legis-
latures of the two states or to the congress of the United
States, based upon study and analysis, for the better con-
duct of the commerce passing in and through the port of
New York.”
Article XXII of the Compact defines “transportation fa-
cility” to include “railroads, steam or electric * * * and
every kind of transportation facility now in use or hereafter
designed for use for the transportation or carriage of per-
69a
sons or property”, and defines “railroad” as “includ[ing]
railways, extensions thereof, tunnels, subways, bridges, ele-
vated structures, tracks, poles, wires, condxi‘s, power houses,
substations, lines for the transmission of power, car barns,
shops, yards, sidings, turnouts, switches, stations and ap-
proaches thereto, cars and motive equipment.”
In 1922 the states, with the consent of Congress, adopted
a Comprehensive Plan for the development of the Port of
New York. N. J. 8. A. 32:1-25 et seg.; Pub. Res. No. 66,
67th Cong., 2d Sess. The Comprehensive Plan seta forth
the development program initially envisioned by the Com-
mission for implementation by the Port Authority.
In the Plan, like the Report upon which it was based,
unification of terminal operations and facilities, consolida-
tion of shipments, adaptation and coordination of existing fa-
cilities, improvement of commercial rail, truck and water fa-
cilities and other freight handling improvements are set
forth as principles to govern the development of the Port
Authority. The Comprehensive Plan proposed to establish
direct rail freight connections between New Jersey and Man-
hattan to furnish “the most expeditious, economical and
practical transportation of freight especially meat, produce,
milk and other commodities comprising the daily needs of
the people.” NW. J. §. A. 32:1-29. Section 8 of the "22
Comprehensive Plan statute denies to the Authority the
power to levy taxes or assessments, and provides that the
bonds or other securities issued by the Port Authority shall
at all times be free from texation by either state. N. J. 9. A.
32 :1-33. Finally, it should be noted that the power was re-
served to the states to add to, modify or change any part of
the Plan. NW. J. S. A. 32 :1-26.
Pursuant to the Compact, the Comprehensive Plan and
subsequent amendments and supplements thereto, the Port
Authority operates all of the interstate vehicular tunnels
and bridges in the Port District, which include the Holland
70a
Tunnel’, the Lincoln Tunnel, the George Washington Bridge,
the Bayonne Bridge and the Arthur Kill Bridges. In addi-
tion, the Port Authority owns and/or operates the following
facilities: Newark International Airport, Teterboro Airport,
LaGuardia Airport, John F. Kennedy International Airport
and two heliports; Port Newark, the Hoboken Port Author-
ity Marine Terminal, the Elizabeth Port Authority Marine
Terminal, the Columbia Street Marine Terminal, the Erie
Basin Port Authority Marine Terminal and a Mid-Man-
hattan Consolidated Passenger Ship Terminal; the Port
Authority Bus Terminal, the George Washington Bridge Bus
Station and the Newark and New York Union Motor Truck
Terminals; the Port Authority Trans-Hudson system (op-
erated for the Port Authority through its wholly-owned sub-
sidiary, the Port Authority Trans-Husdon Corporation) and
the World Trade Center.
Excluding the 1921 Compact and the 1922 Comprehensive
Plan, the Legislatures of New Jersey and New York have
adopted 39 separately enacted, concurrent statutes authoriz-
ing the construction and financing of the foregoing facilities,
the issuance of bonds and notes by the Authority, the regula-
tion of suits against it, and the establishment of a general re-
serve fund for the payment of the Authority’s obligations.
None of these 39 statutes received specific Congressional con-
sent.
2. The Financial Structure of the Port Authority
Under the terms of the Compact the power to levy taxes
or to pledge the credit of either state was expressly withheld
from the Authority. From its inception, with the exception
of monies advanced as loans by the states, the Authority was
8The Holland Tunnel had been constructed by state commissions
pursuant to a compact between the states which received the con-
sent of Congress. In 1930 the Holland Tunnel was transferred to
the Port Authority in order to enable it to honor its obligations to
bondholders in the face of deficits incurred in connection with the
Arthur Kill, George Washington and Bayonne Bridges. L. 1980,
c. 247.
7la
required to finance its facilities solely with money borrowed
from the public and to be repaid out of the revenues derived
from its operations. By reason of these financial limitations
two concepts initially emerged which have played an im-
portant role in the realization of the purposes for which the
Authority was created: first, the specific projects under-
taken by the Authority should be self-supporting, +. ¢., the rev-
enues of each should be sufficient to cover its operating ex-
penses and debt service requirements; and second, since the
Authority is a public agency over which its creditors have no
direct control, the bondholders should be protected by
covenants with the Authority and with the states which have
ultimate control over its operations.
The first facilities constructed by the Authority were ve-
hicular spans linking Staten Island and New Jersey — the
Arthur Kill Bridges — which were opened to traffic in 1928.
A third Staten Island-New Jersey crossing, the Bayonne
Bridge, was placed in operation in 1931. In that same year
the George Washington Bridge was opened to traffic. With
respect to each of these facilities the Port Authority was au-
thorized to and did issue bonds in separate series to pay for
the cost of acquisition of lands and construction. The reve-
nues and tolls from each facility were statutorily pledged as
security for the repayment of the series bonds issued in con-
junction with the specific facility involved. N. J. 8. A. 32:1-
39, 62, 86. The States of New Jersey and New York advanced
additional moneys to pay for the costa of construction, and
the funds so advanced were accorded a subordinated status
to the funds raised by the Authority from the sele of its own
bonds to the public. NW. J. 9. A. 32:1-60, 63, 81, 87. The
statutory authorizations for each project and its funding
were declared to be “a contract or agreement between the two
states for the benefit of those lending money to the port au-
thority.” N.J. 8. A. 32:1-65, 89.
The first bonds issued to the public by the Authority were
“closed-end” bonds based on the estimated costs of each
facility, and the Authority was prohibited from issuing more
72a
bonds than the amount initially authorized for the project.
See Goldberg, A History of the Port of New York Authority
Financial Structure (1964), at 3 (hereafter cited as Gold-
berg). The gross revenues from each bridge were applied
first to the payment of expenses of operation and maintenance
of the bridge, then to the payment of debt service on its
bonds, and the surplus, if any, was to be deposited in a
separate reserve fund available only to the bondholders of
that series. Goldberg, at 4.
As noted earlier, the initial facilities were not self-sustain-
ing, and in 1930 the states transferred the control, operation
and the revenues of the Holland Tunnel to the Port Au-
thority to help place the Port Authority on a self-sustaining
basis. N. J. 8. A. 32:1-119. Simultaneously, the states en-
acted legislation, commonly called the General Reserve Fund
Act, N. J. 8. A. 32:1-142, and by the terms of that act the
surplus revenues derived by the Authority from all facilities
built with the proceeds of sale of its bonds are pooled so as to
create a general reserve fund in an amount equal to 10%
of the par value of all bonds issued by the Authority. The
act pledges the general reserve fund as security for the
payment of interest and principal on all bonds theretofore or
thereafter issued by the Authority. Surplus moneys of the
Authority in excess of the general reserve fund requirements
may be used for any purpose authorized by the states.
The general reserve fund thus becomes available to bond-
holders to pay the debt service requirements of facilities which
were not self-supporting. By this device the surplus revenues
of the Holland Tunnel were used to pay the debt service re-
quirements of the Arthur Kill and Bayonne Bridges and the
George Washington Bridge. The general reserve fund was
also envisioned as a security device to induce the public
to invest in future facilities such as the then contemplated
Lincoln Tunnel project. See Goldberg, at 7.
Following the enactment of the General Reserve Fund Act
the Port Authority issued additional series of bonds to finance
the construction of the Inland Terminal Building and to repay
73a
the states for the amounts expended by them to construct
the Holland Tunnel. Goldberg, at 5. In 1935 the Authority
commenced the issuance of a new series of bonds, known as
general and refunding bonds, the proceeds of which were used
to refund all of the original bridge bonds issued by the Au-
thority and to finance the initial construction of the Lincoln
Tunnel. These bonds were secured by a pledge of the net
revenues of all of the Authority’s then existing facilities and
by the general reserve fund. Under the terms of the resolu-
tion authorizing the issuanr* of general and refunding bonds
the Authority also contract... to create a special reserve fund
into which would be paid all net revenues in excess of those
required to pay the operating expenses of the Authority’s fa-
cilities, the debt service requirements for the general and re-
funding bonds, and to maintain the general reserve fund at
its prescribed level. Goldberg, at 11. The authorizing resolu-
tion imposed limitations on the use of the special reserve fund
for the benefit of the bondholders.
In 1947 the Authority commenced the issuance of air
terminal and marine terminal bonds, the proceeds of which
were used for the acquisition and construction of various
airport and marine terminal facilities. These bonds were
secured by a pledge of the revenues of the specific facilities
financed thereby, as well as by a call upon the general re-
serve fund to the extent that revenues from the facilities were
insufficient to pay operating expenses and debt service re-
quirements. As in the case of the general and refunding
bonds, the air and marine terminal bond resolutions provided
for their own special reserve funds for the benefit of the bond-
holders of each of these series.
In 1952 the Commissioners of the Port Authority embarked
upon a new scheme for future financing which abandoned
the practice of earmarking specific facility revenues as se-
curity for its bonds. On October 9, 1952 the Authority adop-
ted the Consolidated Bond Resolution (the CBR), authoriz-
ing the issuance of consolidated bonds to serve as the medium
for financing its activities in furtherance of any purpose for
74a
which the Authority is authorized to issue bonds secured by
a pledge of the general reserve fund. Consolidated bonds con-
stitute general obligations of the Authority, and all such
bonds are equally and ratably secured by a pledge of the net
revenues of all existing facilities and any 2 ditional facilities
which may be financed in whole or in part by the issuance of
consolidated bonds.!®
With the adoption of the CBR the “self-supporting” fa-
cility concept which had governed earlier authority financing
ceased to have the significance previously attached to it; for
under the CBR the Authority’s financial structure is based
on a unitary enterprise concept and all revenues from all fa-
cilities are pooled. Undividual facilities are not financed in-
dependently of the rest of the Authority. The facilities con-
tribute their revenues for debt service on all Authority bonds
according to their earning power and withvu' regard to the
amount of bonds issued for the construction of any particular
facility.
While some facilities may not yield sufficient revenues to
pay operating expenses and/or debt service requirements,
what is of paramount concern to bondholders under the CBR
is whether the total revenues of the Authority are sufficient to
satisfy all of its obligations to bondholders. And in order
to ensure that the abandonment of the “facility-by-facility”
approach woul. not lead to a dilution of pledged revenues
and reserves, the CBR co.» ~ «»venants with the bondhold-
ers with respect to futur. erations and activities of the Au-
thority and the issuance of bonds secured by a r edge of its
revenues and reserves.
®The Authority covenanted, by the CBR, that no additional general
end refunding, air terminal or marine terminal bonds shall be issued.
10As noted infra, although g-neral and refunding, air and marine
terminal bonds are still outstanding, the Authority has fully funded
its obligations to those bondholde~s and the consolidated bonds
presently have a first call upon ell -venues of the Authority.
15a
One of the principal protections afforded bondholders by
the CBR is the so-called “1.3 test” contained in section 3."
The 1.3 test prohibits the issuance of new consolidated bonds
unle.s the best one-year net revenues of all of the Port Au-
thority’s facilities equal or are greater than 1.8 times the
prospective debt service for the calendar year during which
the debt service of all outstanding and proposed new bonds
secured by a pledge of the general reserve fund would be at a
maximum.’* The 1.3 test is thus an equation in which one
component consists of the Authority’s net revenues from all
facilities, and the other component is the maximum annual
debt service required to be paid on all Authority bonds, in-
cluding the new bonds to be issued. The maximum annua!
debt service component is readily calculable from tne require-
ments set forth in the resolutions authorizing the bond issues.
[1] The annual net revenue component of the equation con-
sists of the Authority’s historical net revenues from existing
facilities'* plus the estimated average annual net revenues of
the facility to be acquired or constructed with the issuance
11While section 8 of the CBR provides alternate conditions for the
issuance of consolidated bonds, in practice the 1.3 test described
above is the least restrictive and has been the only one employed by
the Port Authority since the adoption of the CBR. Goldberg, at 19.
12There is a dispute between the p.rties to this litigation whether
a projected operating deficit of a facility to be acquired by the issu-
ance of consolidated bonds must be deducted from net reverue for the
purpose of determining whether the 1.3 test has been .ne~ Under
the terms of the CBR, if the facility to be acquired has be. . in op-
eration for at least 36 months prior to the ‘ssuance of “« .solidated
bonds, the annual operating deficit of the iacility would .« deducted
from historical Authority net revenues in applying the 1.5 test. How-
ever, according to an Authority witness, if the facility to be ac-
quired has not been in operation for at least 36 months, its projected
operating deficit can be ignored. This view is contrary to the posi-
tion of the Authority in statements made and testimony given to
the Farley Committee. See infra, pages 152, 155-156.
18For this purpose the Authority is permitted to select any con-
secutive 12-month segment out of the 36-month period preceding the
date of issuance of new consolidated bonds.
76a
of new bonds.’ While the 1.3 test speaks only of estimated
net revenues and not of “deficits,” it is evident from the pur-
pose of the 1.3 test as well as Authority practice in arriving
at historical net revenues that the estimated average annual
deficits of a new facility must be charged against historical
revenues in determining whether the 1.3 test has been met.
The purpose of the 1.3 test is to protect existing bondholders
against dilution of pledged revenues and reserves; if consol-
idated bonds are issued to acquire or construct a substantial
deficit operation whose drain on Authority revenues is not in-
cluded in the earning’s component, the 1.3 test would be
meaningless. Further, it is to be noted that in calculating
historical net revenues of existing facilities the Authority
arrives at one pooled figure which takes into account the defi-
cits of such facilities.
Section 5 of the CBR directs the application of the pledged
revenues to the payment of debt service upon all consolidated
bonds, with the remaining balance to be paid into the con-
solidated bond reserve fund except to the extent necessary to
be paid into the general reserve fund to maintain it at the
level prescribed by statute.
Section 6 of the CBR provides that the payment of debt
service upon all consolidated bonds “shall be further secured
equally and ratably by the General Reserve Fund.” Moneys in
the general reserve fund may not be used for any purpose
if there are other moneys of the Port Authority available
for that purpose, unless there are sufficient funds available to
the general reserve fund to pay debt service upon outstanding
bonds during the ensuing 24 months, in which event such ex-
cess moneys could be used for any purpose permissible under
the General Reserve Fund Act, whether or not other moneys
were available for that purpose.
Section 7 of the CBR establishes a consolidated bond re-
serve fund into which all net revenues pledged as security
14The estimated average annual net revenue is based on estimated
revenues for the first 36 months of operation of the new facility.
134 N.J.Super.—10
Tle
for consolidated bonds (after payment of debt service on all
consolidated bonds and of amounts necessary to bring the
general reserve fund to its statutory level) are required to be
paid. The moneys in the consolidated bond reserve fund
may be used only for the payment of: (a) consolidated
bonds at maturity, retirement or redemption; (b) debt ser-
vice upon outstanding consolidated bonds; (c) the deficit of
any facility the net revenues of which were pledged as
security for consolidated bonds, and (d) “any other addi-
tional purposes for which the Authority is now or may
hereafter be authorized by law to expend the revenues
of its facilities.” The pledge of the net revenues of the
Authority and of the moneys in the Consolidated bond re-
serve fund is subject to the right of the Authority to apply
the revenues and the reserve fund as provide “2 section 7,
and the right to issue bonds, other than consolidated bonds,
secured by the reserve fund if such other bonds “are issued
solely to fulfill obligations to or for the benefit of the hold-
ers of consolidated bonds and if such other bonds are also
secured by a pledge of the General Reserve Fund.”
Since the adoption of the CBR, capital expenditures of
the Authority have been financed by the issuance of 41
series of consolidated bonds and short term notes. New
facilities and improvements to existing ones have been
funded without regard to the individual project’s ability
to generate income. This has enabled the Port Authority
to undertake projects which would not be financially fea-
sible alone but are possible because of the surplus revenues
generated by its other facilities..° New projects undertaken
since 1952 include the acquisition and/or construction
of two heliports, the Brooklyn, Erie Basin, Elizabeth and
Hoboken Marine Terminals, the Port Authority Trans-Hud-
15For the calendar year 1978, of the 22 facilities operated by the
Authority, 14 were operated at a deficit, i.¢., the gross revenues were
not sufficient to cover operating expenses and debt service require-
ments.
78a
son (PATH) System, a bus terminal and the World Trade
Center.
With respect to each series of consolidated bonds issued,
the Authority adopts an authorizing resolution. Section 7
of each series resolution prohibits the issuance of any ad-
ditional consolidated bonds or any other bonds to be secured
by a pledge of the general reserve fund with respect to any
facility or group of facilities as to which the Authority
has not previously issued bonds unless
* © * the Authority shall certify at the time of issuance its opinion
that the issuance of such Consolidated Bonds or that such pledge of
the General Reserve Fund as security for such bonds other than
Consolidated Bonds will not, during the ensuing ten years or during
the longest term of any of such bonds proposed to be issued (whether
or not Consolidated Bonds), whichever shall be longer, in the light
of its estimated expenditures in connection with such additional
facility or such group of additional facilities, materially impair the
sound credit standing of the Authority or the investment status of
Consolidated Bonds or the ability of the Authority to fulfill its com-
mitments, whether statutory or contractual or reasonably incidental
thereto, including its undertakings to the holders of Consolidated
Bonds; and the Authority may apply monies in the General Reserve
Fund for purposes in connection with those of its bonds and only
those of its bonds which it has theretofore secured by a pledge of the
General Reserve Fund in whole or in part.
Each consolidated bond states that it “is issued pursuant
to and in full conformity with the Compact between the
States of New York and New Jersey creating the Author-
ity, and the various statutes of said two States amendatory
thereof and supplemental thereto, for purposes provided in
said Compact and statutes”. No specific statute is men-
tioned in the bonds.
On December 31, 1970 the Authority placed in trust
with the First National City Bank, as trustee, $60,749,000
from the Authority’s special reserve fund, air terminal re-
serve fund and marine terminal reserve fund to secure fully,
unconditionally and absolutely the Authority’s obligation to
provide for the redemption as scheduled and the payment of
interest until redemption on the Authority’s outstanding
79a
general and refunding bonds, air terminal bonds and marine
terminal bonds. After the establishment and during the
maintenance of these trusts no further payments are re-
quired to be made into such reserve funds. As a result the
pledge of Authority revenues and reserves to secure repay-
ment of consolidated bonds is no longer subject to the prior
lien in favor of the earlier series of bonds. The maintenance
of the reserve funds in trust permits the application of all
net revenues and reserves of the Authority to the payment
of the consolidated bonds.
As of December 31, 1974 the issued and outstanding con-
solidated bonds of the Authority totaled $1,668,584,000,'¢
the general reserve fund contained $173,487,000 and the
consolidated bond reserve fund $46,800,000. Gross and net
operating revenues for 1974 were $410,412,000 and
$156,118,000, respectively. After debt service and sinking
fund requirements were met the Authority had available
for transfer to its reserve funds $67,018,000, resulting in a
net increase in its reserves of $18,293,000 for the year.**
The Legislative History of the 1962 Covenant.
So far as the record reveals, the history of New Jersey’s
involvement with mass transit begins with the enactment of
chapter 104 of the Laws of 1922. The Legislature there es-
tablished the North Jersey Transit Commission’® to study
16This total includes $200,000,000 of bonds issued as the 40th and
41st series following the pros)..-tive repeal legislation of 1973, which
are not “affected bonds” and hence not covered by the terms of the
1962 covenant.
1TAs at December 31, 1974 the Authority owed to various banks
on short term loans $255,000,000. During 1974 the banks were re-
paid $40,000,090, plus interest, from the consolidated bond reserve
fund, which accounts for the difference between the amount available
for transfer to tie reserve fund and the actual increase in the reserve
fund balance at the end of the year.
18The preamble to the North Jersey Transit Commission Act of
1922, see infra, notes that the Port Authority Comprehensive Plan
80a
and report upon plans for providing a comprehensive scheme
of rapid passenger transit’® between northern New Jersey
communities and New York City. In its 1925 and 1926 re-
ports this Commission noted both the urgent need for and
complexity of a rapid transit plan for the northern New
Jersey area which would furnish direct access to the mid-
town New York City area.
In 1927 the New Jersey Legislature authorized and di-
rected the Port Authority to make plans to provide for
rapid passenger transit between the states and within the
Port District. Similar legislation was adopted in New York
but was vetoed by Governor Alfred E. Smith, who in his
veto message noted his unwillingness to have the Port Au-
thority diverted from its principal objective of solving the
freight distribution problems within the District. Governor
Smith’s veto to all intents and purposes ended any legisla-
tive effort to involve the Port Authority in an active role
in commuter transit for the next 30 years.”°
The years between 1928 and 1958 were devoted to largely
fruitless efforts by numerous groups, agencies and commis-
sions to devise a solution for mass transit within the metro-
politan New York-New Jersey area. No useful purpose
would be served in cataloging their failures — which were
not failures of purpose, effort or imagination, but the failure
to find the source of funds required to implement any plan.
In the meantime the financial position of existing com-
“does not include the problem of passenger traffic in the territory
covered by said port development plan.” L. 1922, c. 104.
19For the purpose of this opinion the term “rapid passenger transit”
has reference to transportation of passengers by railroad and will
be used interchangeably with the terms “commuter transit” and
“mass transit,” although the latter terms conceivably could involve
means of conveyance other than by railroad.
20In 1936 the states requested the Port Authority to report on
interstate and suburban passenger transportation. Jt. Res. No.
Laws of 1936. The Port Authority filed its report in 1937, which
disclaimed its financial ability to undertake a solution to the transit
problems of the District.
8la
muter transit facilities continued to deteriorate. By 1955
the Hudson and Manhattan Railroad had filed a petition for
reorganization under the federal bankruptcy laws,”! and the
private railroads were petitioning the Interstate Commerce
Commission for permission to abandon ferry service across
the Hudson and to discontinue various passenger services
because of substantial operating deficits.?*
In 1958 the Metropolitan Rapid Transit Commission”
issued a report to the states of New Jersey and New York
setting forth a proposal for the construction of a trans-
Hudson loop commuter transit system at, an estimated capi-
tal cost of almost $500,000,000. The report noted the need
te coordinate and to achieve a balance between highway and
rail transportation systems. The Commission pointed out:
That balance does not exist today. The automobile drivers and the
bus operators make use of roadways, tunnels, bridges and central
area terminals which are tax free and are either publicly maintained
or publicly developed out of user taxes and user fees. Private rail-
road companies must raise the capital (and pay the interest on it) to
build their rights-of-way and provide the operating facilities, and
must maintain them and pay taxes on them. Since 1930, billions of
public dollars have been spent, and are still being spent, by federal,
state and local governments in the development of highways, bridges
and other facilities for vehicular traffic, but no public funds whatever
have been spent during the same period in promoting or improving
21As of this date the four private companies which operate com-
muter railroad services in New Jersey are all being reorganized under
federal bankruptcy laws.
22By 1959 the four commuter railroads operating in northern New
Jersey sustained a total passenger operating deficit of $58,300,000.
The New York commuter railroads had an aggregate deficit from com-
muter operations estimated at between $10,000,000 and $15,000,000
for 1960. The Staten Island Ferry operated at a loss of about
$6,000,000 for the year, and the New York City Transit System had
an operating deficit of $20,000,000, exclusive of debt service charges
of $87,000,000.
28The New Jersey Metropolitan Rapid Transit Commission was
created pursuant to L. 1952, c. 194 and was consolidated with its
New York counterpart by L. 1954, c. 44.
82a
mass transportation by rail between the New York and New Jersey
portions of the Metropolitan Area.
The imbalance has resulted in a constant and relentless deteriora-
tion of suburban rail service. Ferries are being abandoned, train
service is reduced, petitions are filed for abandonments, cars are
getting older without being replaced. Repeated increases in fares
in an effort to match rising costs and to establish earnings which
can be used to improve the properties are resisted by public regu-
latory bodies. The result is more constriction of service by railroads,
with consequent further congestion of highway facilities. One very
grave consequence has been the creation of a stupendous cycle of
traffic congestion in the streets, constantly calling for still further
enormous expenditure of public funds for still further vehicular
traffic.
Obviously, the people and the governments within this New York-
New Jersey Metropolitan area are now face to face with this looming
crisis, and can no longer avoid it by conveniently looking the other
way.
Capital for the construction of the trans-Hudson loop must be
raised by a public agency and bonds issued by it must have some
measure of public guarantee to be saleable. Revenue bonds for transit
purposes have a bad reputation in the bond market because of the
financial history and condition of transit systems. While it would be
desirable that the users of the loop would pay through fares the full
capital and operating cost all experience conclusively demonstrates
otherwise. On the other hand, the public interest requires that the
fares be established at a level to foster maximum usage and utility
of the system and provisions must be made for possible deficits. In
addition, it must be recognized that capital for construction and equip-
ment cannot be secured merely by evidence that revenues will equal
costs.
A study which had been prepared for the Commission on
the financial structure of the proposed commuter transit
system had suggested the “financing would not be available
from any of the existing public authorities since this action
would in some cases impair the obligations of the authori-
ties’ covenants with bondholders and would seriously affect
the ability of the authorities to discharge the responsibilities
for which they were established.” Nevertheless, during the
1958 session of the New Jersey Legislature a bill was in-
troduced (Assembly Bill No. 16) which provided that the
Port Authority take over and financially develop, improve
and operate interstate passenger rail transportation between
83a
New Jersey and New York. The Port Authority submitted
a statement to the Legislature in response to this bill in
which it said, among other things:
This opposition is based on the conclusion of the Commissioners
that: (1) It is legally, financially and contractually impossible for
the Port Authority to assume the railroads’ increasingly heavy deficits
from commuter operations or the cost of developing a new and com-
prehensive rail rapid transit system; and (2) The assumption of
rail transit deficits by the Port Authority, the self-supporting agency
of the two States, would immediately cripple and very quickly destroy
the program of the two States now under way for the continued de-
velopment of their essential public port and harbor facilities, air-
ports, and interstate arterial systems.
o & @ eo
s a * e
In addition to the General Reserve Fund, various special reserve
funds have been created as a result of contractual commitments
with bondholders in support of the various issues of Port Authority
bonds. As in the case of the General Reserve Fund, the Authority
may apply moneys in the Special Reserve Funds for purposes relat-
ing only to those of its bonds secured by a pledge of the General
Reserve Fund, including purposes relating to facilities financed by
such General Reserve Fund Bonds.
All Port Authority revenues not applied to operation and main-
tenance and debt service must be paid into one or another of these
reserve funds. There are no excess revenues which are free of this
contractual commitment to bondholders.24 [Emphasis supplied]
In its statement to the 1958 Legislature the Authority
suggested that even if it were possible to ignore legal re-
strictions on the use of Authority net revenues to finance
commuter rail deficits, such a course of action would im-
pair the Authority’s credit standing and adversely affect
the ability of the Authority to carry out its then existing
programs. To reinforce this view the Authority solicited
and included in its statement similar expressions of opin-
ion from members of the investment banking community.
In January 1959 a joint report was issued on Assembly
Bill No. 16 by the New Jersey Assembly Committees on
24In view of recent developments it should be noted that in its
statement the Authority also opposed an increase in tolls for the
Hudson River crossing since this would constitute an “unfair tax”
upon motorists to subsidize rai] transit.
S4a
Highways, Transportation and Public Utilities, and on Fed-
eral and Interstate Transportation. This report concluded
that the Port Authority could not be called upon to under-
take the entire rail passenger transit obligation because (1)
no one could estimate the size of the deficit operation the
Authority would be undertaking, and (2) while the Au-
thority could absorb some deficit, its operations, taken as
a whole, must be self-supporting.
Pressures for financial aid to and Port Authority in-
volvement in commuter transit continued to mount, and in
1960 the New Jersey Senate created a committee (known
as the Farley Committee) to study the financial structure
and operations of the Authority. Ome of the principal sub-
jects investigated by the Farley Committee was the Au-
thority’s role in commuter transit. At the time the Com-
mittee’s hearings commenced its immediate concern was to
find a means to continue the operations of the bankrupt
Hudson & Manhattan Railroad (H & M). The bankruptcy
reorganization proceedings involving the H & M had reached
the point where, in 1959, the District Court had left the
H & M with sufficient cash for operations to continue for
only two years. See In re Hudson & Manhattan Railroad
Co., 174 F. Supp. 148 (S. D. N. Y. 1959), aff’d sub nom.
Spitzer v. Stichman, 278 F. 2a 402 (2 Cir. 1960). The
Authority’s Executive Director, Austin Tobin, testified be-
fore the committee concerning his discussions with New Jer-
sey Highway Commissioner Dwight Palmer to have the
Port Authority acquire and operate the H & M. Tobin
testified in September 1960:
Faced with these legal and contractual commitments [to the
Authority’s bondholders], which are the whole basis of the Author-
ity’s credit, Commissioner Palmer and the Port Authority have been
examining, beginning with our initial exploration of the possibility
on last February 15, whether bi-state legislation could be fashioned
under which the Authority might even acquire and finance the bank-
rupt and deficit-ridden Hudson & Manhattan properties and finance
its modernization by the Port Authority as a new Port Authority
facility.
85a
In other words, could any legal and financial plan be worked
out that would meet the foregoing contracts with investors and, from
the standpoint of maintaining the Port Authority's credit, guarantee
that the Authority would not thereupon become generally or further
involved in the deficits of the commuter railroads, both in. New York
and in New Jersey? Obviously, unless such a covenant could be es-
tablished no Port Authority bonds could be sold either for the
acquisition of the Hudson & Manhattan properties or for any other
Port Authority purpose.
Thus the core of the problem is whether or not the two States
could, to use a phrase about it, ‘build a statutory fence around’ the
Hudson & Manhattan by guaranteeing to investors that the Author-
ity would not and could not become involved in the large and in-
creasing deficits of the New York and New Jersey commuter rail-
roads, which with the New York subways total a deficit of some-
thing like $150,000,000 a year.
In January 1961 Commissioner Palmer appeared before
the Farley Committee and expressed his conclusion that the
Port Authority should purchase and operate the H & M
provided limitations were placed upon the Authority’s role
in mass transit. On this subject he testified:
The Port Authority in my opinion must make money and accumu-
late reserves for the rainy day if it is to be equipped to meet the
needs of our two states of New York and New Jersey. It does not
have general taxing powers. ‘Its only taxes are the tolls it collects
from the users of its facilities. Its shareholders are the public, you
and I, and the institutions that buy’ thé bonds. Since the cost of
financing often determinés the feasibility of a project it stands
to reason that you and I get more for our toll dollar in the way
of modern and safe facilities if we make certain ‘that the credit rat-
ing of the Authority remains intact.
Now most of us realize that the matter of credit is not an exact
science. The credit of an organization ‘depends on quite a few fac-
tors; past performance, efficient management and calibre of personnel
and markets for the product the institution has to sell; and last
but not least — what investors think of the. operation, as a financial
risk. It is, in the final analysis, the practical asgessment of being
repaid money that they lend to it. - .
Relating specifically to what ultimately became the 1962
covenant, Senator Wayne Dumont questioned Commissioner
Palmer as follows:
86a
Q. Commissioner, when the Port Authority made its proposal in
September, at our hearings then, to take over the Hudson & Man-
hattan Tube, they surrounded their proposal with certain restric-
tions which, so far as I could tell w.re designed to eliminate any
real obligation on the part of the Port Authority beyond taking over
the Hudson & Manhattan Tubes, at least so far as the railroad field
was concerned. Do you consider those restrictions that they sur-
rounded this proposal with as reasonable ones? A. Yes, I do. And
I have so stated in my proposal and I do it purely on the basis of
what experience I may have had in the field of finance and industry,
and of what we are hoping to obtain and acquire in the future in
the expansion of facilities that the Port can supply.
° e es a o a o °
And it seems impossible, from all of my direct — and not through
any other channels — direct contacts, to observe that money could
be loaned for even the acquisition of the H&M in the event there was
not some assurance that this just wasn’t one bite of the cherry and
that further transportation business was all to be pulled together.
I think it’s simply a question of whether the investor says yes or
no, and at the present time my observation is the investor says no
unless he has that limitation.
The following day the Port Authority’s Vice-Chairman,
James C. Kellogg, III, testified concerning the Authority’s
H & M plans. He emphasized that only by adopting what
became the 1962 covenant could the Port Authority acquire
and rehabilitate the H & M.
There is, of course, no possibility whatsoever that either the Port
Authority or any one else could operate the H&M on a self-support-
ing basis. The bankrupt H&M has not paid a dividend since 1932;
it has not been able to meet the interest on its bonded indebtedness
and has been in receivership since 1954.
e @ 6 oe @ oe eo °
On this estimate of the H&M losses [$5 million annually], and
if we are able to satisfy prospective investors by statutory assurances
that this proposal will not involve the Authority’s General Reserve
Fund in any other or further commuter deficit operations, we be-
lieve we can conscientiously certify, as we must under our indentures,
that this financing will not impair the Port Authority’s credit. On
the other hand, if we are not in a position to cite such statutory
assurances to those from whom we will have to borrow the money,
and therefore, we are not in a position to make such a certification,
we obviously would not be in a position to borrow money for the
acquisition, let alone the improvement, of the H&M.
¢ oe ea eo eo s es e
All Port Authority revenues not applied to operation and mainte-
nance and debt service must be paid into one or another of these
87a
reserve funds. There are no excess revenues which are free from
this contractual commitment to bondholders.
The most important pledges that the Port Authority has made to
its bondholders are those relating to the issuance of bonds for new
projects. These pledges were necessary since otherwise the security
could be diluted, not only through the raiding of revenues and re-
serves, but just as disastrously by the unlimited issuance of bonds
which have such revenues and reserves as their primary source of
repayment.
It is because of this that the Port Authority had to covenant with
its bondholders not to issue Consolidated Bonds supported by the
General Reserve Fund for any new facility unless it can be demon-
strated that, including the new facility, net revenues will be suf-
ficient to cover by at least 1.3 times the maximum interest and prin-
cipal payments due in any future year. Furthermore, bonds for a
new faciilty cannot be issued with a pledge of the General Reserve
Fund unless the Port Authcrity Commissioners certify that the issu-
ance of the new bonds will not materially impair the sound credit
standing of the Authority, the investment status of the Authority's
bonds, or the ability of the Authority to fulfill its commitments and
undertakings. Such protections for investors under open-end revenue
bond issues are not uncommon.
Applied to the H&M proposal, I would like to make it clear that
the question of whether or not we can borrow the $83,500,000 which
is required, is not simply a question of whether or not we would
have to pay a higher rate of interest on these funds. We can only
submit to you the unanimous view of the Commissioners of the Port
Authority that there is no possibility whatsoever of borrowing the
money at all without a statutory assurance to investors that any
future Port Authority responsibilities in the field of commuter rail
transport over and above the present and existing interstate Hudson
and Manhattan railroad system will not involve a pledge of the Port
Authority’s General Reserve Fund.
I say to you as a New Jersey Commissioner, and with all the
sincerity that I can command, that there is nothing arbitrary or
doctrinaire about this conclusion. It simply represents the Port
Authority’s credit. My business is investment financing and I say
to you gentlemen that I could not sell a single Port Authority bond
without such an assurance. If my responsibility were on the other
side of the table, I would not buy a Port Authority bond that did
not contain such an assurance. [Emphasis supplied]
Following Kellogg’s prepared statement he was questioned
by Senators Farley and Cowgill as to the binding effect
88a
which the proposed covenant legislation could have on a sub-
sequent legislature. The questioning proceeded as follows:
BY SENATOR FARLEY:
Q.. Mr. Kellogg, I noticed in the latter part of your statement,
you said you must be given assurance by the Legislature that if
they directed the Port to proceed to purchase this property, they
must make a pledge to the bondholders there be no further projects
involving rail. Now I appreciate that if the Legislature directs you
to enter into a contract involving the issuance of bonds, there will
be no impairment of obligations of contract, but I must call to your
attention and the members of your Commission that one Legislature
cannot bind a subsequent Legislature involving policy. If, perchance,
may I ‘illustrate — ten, fifteen, twenty years from now the respective
legislatures of New York and New Jersey importune your Port
Authority Commission to do something in addition involving public
service, one legislature cannot bind another involving policy. Do
you follow me? A. I do.
Q. I appreciate the legal end of it involving obligation of con-
tract, but in your statement that you be given assurance that no
further services should be required of you involving rail forever here-
after — and how this legislature could bind a subsequent legislature
I do not know. A. We'd have to say that to the bondholders, the
ones that were going to purchase the new bonds, that we as Com-
missioners believe that this would not endanger the 1.3 ratio.
r a o e oe eo so ¢
BY SENATOR COWGILL:
Q. I want to clear one thing up. I got a little confused there for
a minute on that policy business — in the event that the H&M were
acquired on the basis of statutes passed by New Jersey and New
York, they would not be called upon, that is, the Port Authority
would not be called upon, to go into any further commuter problems
of other roads. If bonds were issued under such legislation, you
would not be able to issue any further bonds for anything else unless
you were willing to certify that it would not — A. That’s correct.
It wouldn’t say that the bonds couldn’t be issued with a state guar-
antee later on for something else or something of that type, freight or
anything else.
Q. It seems to me on that basis, that you enter a contract on the
basis of legislation passed, that contract is going to stand and some
later legislature is not going to be able to change it. A. That’s right.
SENATOR FARLEY:
My question, Senator, was — and I appreciate we cannot impair
obligations: In effect, would any commitment with the present legis-
89a
lature estop or attempt to estop any legislation involving public
needs in the future? [No answer was given at this point].
Commissioner Clancy of the Port Authority followed Com-
missioner Kellogg to the stand and the following colloquy
took place directed to the same point:
SENATOR FARLEY:
I say to you as a commissioner representing New Jersey we too
have a responsibility of making sure that this is done thoroughly,
intelligently and in a way that would be feasible and practical. It
was testified today by Mr. Kellogg that the Port should not be bound
by any other demand from the State Legislature relative to rail
service. I pointed out to him — and may I say to you as a lawyer
— we well appreciate that any direction we give you by enacting
legislation, we could not impair any obligation such as contracts of
bond issues. Likewise, you as a lawyer know that one legislature
cannot bind the other involving policy five, ten, or twenty years
hence. A. I appreciate that.
Q. So that when this Committee makes its report, we are not
exonerating the Port from any responsibility for any demand for
future public service by either the New York or New Jersey legis-
lature. I want you to appreciate that fact. A. I appreciate that
fully and I am aware of the fact if a situation such as that would
arise in the f
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