Amicus Curiae Brief — San Antonio Independent School Dist. v. Rodriguez

7 2 JUL 21 72

Supreme Court of the United States

OCTOBER TERM, 1972 | Miche RDT IA. e

No. 71-1332

SAN ANTONIO INDEPENDENT SCHOOL DisTRICT, et al.,

Appellants,

V.

DEMETRIO P. RODRIGUEZ, et al.,

Appellees.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

— — ——— ____________________

BRIEF FOR REPUBLIC NATIONAL BANK OF DALLAS,

FIRST CITY NATIONAL BANK OF HOUSTON, MER-

CANTILE NATIONAL BANK AT DALLAS, BANK OF

TEXAS, AND SECURITIES INDUSTRY ASSOCIATION,

INC. AS AMICI CURIAE

LAWRENCE E. WALSH

1 Chase Manhattan Plaza

. New York, New York 10005

212 422-3400

VICTOR W. BouLDIN

2100 First City National

Bank Building

Houston, Texas 77002

713 225-2411

CLIFFORD W. YOUNGBLOOD

Of Counsel

Attorneys for Amici Curiae

TABLE OF CONTENTS

PT CE Ore TTT OTS

Tnterest of Anstol Curiae ... occ ccc ccccvccccces

— m! mx ð . wham RS

1. The Nature of Texas School Distriet Bonds

2. The District Court’s Clarification of Orig-

UN MI ²² a oh oss cae ks bess

8. Judicial Protection of Outstanding and In-

terim-Issued Bonds in Other Jurisdictions

— | ee ·˙

ARGUMENT:

I—This Court Should Reaffirm the District

Court’s Protection of Outstanding and In-

// ⁰ oo•HÄ Q ccwicce xcs

II— This Court’s Decisions Establish That the

District Court’s Holding Should Not Be

Applied Retrospectively ................

III— Retrospective Application of the District

Court’s Holding Would Offend the Prin-

¢iples Embodied in the Contract Clause and

the Due Process Clause

13

14

15

20

22

ii

TABLE OF AUTHORITIES

Cases

PAGE

Atchison, T. & S. F. Ry. v. Public Util. Comm’n, 346

U.S. 346 (195hÿ2ͤꝛ:ttir:ʒtʒ : 20-21

Burruss v. Wilkerson, 310 F. Supp. 572 (W.D. Va.

1969), aff'd mem., 397 U.S. 44 (1970) ......... 17-18

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971) ..... 17-19

Cipriano v. City of Houma, 395 U.S. 701 (1969) . . . 18,16

City of Phoenix v. Kolodziejski, 399 U.S. 204

„„ arene rn rea 13, 16-17

City of Waco v. Mann, 133 Tex. 163, 127 S.W.2d 879

PPTP. · 0 cheung sake 6

Desist v. United States, 394 U.S. 244 (1969) 18

Erie R. R. v. Tompkins, 304 U.S. 64 (19389) 19

Gelpcke v. City of Dubuque, 68 U.S. (1 Wall.) 175

PUPPTPV(!(Ä „f A vas 19

Hollins v. Shofstall, Ariz. Super. Ct., Maricopa

County, No. C-253652, June 1, 1972 ........... 12

Laconia Bd. of Educ. v. City of Laconia, 285 A.2d

TOG GORE: SPEED 6nd banc ceTidenc ce ceeacwesos 11

Linkletter v. Walker, 381 U.S. 618 (1965) ........ 18, 19

Love v. City of Dallas, 120 Tex. 351, 40 S.W.2d 20

rr ˙ ] ̃ʃͤ1Ä— 1! 6

Melnnis v. Shapiro, 293 F. Supp. 327 (N. D. III.

1968), affd mem. sub nom. McInnis v. Ogilvie,

nnen... 17-18

McPhail v. Tax Collector, 280 S. W. 260 (Tex. Civ.

h ĩ˙ imm 6

Morley Construction Co. v. Maryland Cas. Co., 300

U.S. 185 (1987y0˙7)•öD7ennrũꝗO eee eee 14

Nashville, C. & S.L. Ry. v. Walters, 294 U.S. 405

„ „ „ 666660 21

iii

PAGE

National Surety Corp. v. Friendswood Ind. School

Dist., 433 S.W.2d 690 (Tex. Sup. Ct. 1968) 6

Robinson v. Cahill, 118 N.J. Super. 223, 287 A.2d

„ . . 11-12, 18

Rodriguez v. San Antonio Ind. School Dist., 337 F.

Supp. 280 (W.D. Tex. 1971) ............ 6, 7, 8, 14, 18

Serrano v. Priest, 5 Cal. 3d 584, 487 P. 2d 1241, 998

Cal. Rptr. 601 (19717777777. 9-10

Spano v. Board of Educ., 68 Misc. 2d 804, 328

N. Y. S. 2d 229 (Sup. Ct. Westchester County 1972) 15

Swarb v. Lennow, 405 U.S. 191 (1972) 14

Sweetwater County Planning Committee v. Hinkle,

491 P. 2d 1234 (Wyo. 1971), 493 P. 2d 1050 (Wyo.

PPTP T!wͤã ³ KO od cdnce 10-11

Van Dusartz v. Hatfield, 334 F. Supp. 870 (D. Minn.

„ pew edewakieweceue R 10

Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.)

535 (186600ů . 20

Walz v. Tax Comm’n, 397 U.S. 664 (1970) 21

Sup. Ct. Rule 4ꝶiwjijijijijii ..

Texas Const., Art. 7, 8 ũ iii.. 5,

Texas Educ. Code § 12.2ù·0ũuu

Texas Educ. Code § 18.102 ....................

Texas Educ. Code § 18.107 ....................

Texas Educ. Code § 20.01 ................ e 5,

Texas Educ. Code § 20.04 iii

Texas Educ. Code § 20.06 ......................

Texas Educ. Code § 28.28 ......................

Texas Educ. Code § 28.76 ......................

Wyo. Const., Art. 16,§5 ......................

Wyo. Stat. § 21.1-258 ¶ .

A222 to

— —

iv

Other Authorities

American Banker, Nov. 11, 1971 ................

Comment, The Evolution of Equal Protection: Edu-

cation, Municipal Services, and Wealth, 7 Harv.

Civ. Rights—Civ. Lib. L. Rev. 103 (1972) ......

Daily Bond Buyer, Nov. 15, 1971 ................

Moore, Local Nonproperty Taxes for Schools, in

Johns, Alexander & Stollar, eds., Status and Im-

pact of Educational Finance Programs (National

Educational Finance Project, Volume 4) (1971)

Slawson, Constitutional and Legislative Considera-

tions in Retroactive Lawmaking, 48 Calif. L. Rev.

% „.

U.S. Bureau of the Census, G~-ernmental Finances

in 1969-70 (Series GF. %, No. 5) (1971) ......

U.S. Department of Hes ich, Education, and Welfare,

Bond Sales for Publie School Purposes 1970-71

(DHEW Publication No. (OE) 72-68) (1972) ..

15

IN THE

Supreme Court of the United States

October Term, 1972

No. 71-1332

a

*

SAN ANTONIO INDEPENDENT SCHOOL DisrRior, et al.,

Appellants,

v.

DEMETRIO P. RODRIGUEZ, et al.,

Appellees.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

dp.

*

BRIEF FOR REPUBLIC NATIONAL BANK OF DALLAS,

FIRST CITY NATIONAL BANK OF HOUSTON, MER-

CANTILE NATIONAL BANK AT DALLAS, BANK OF

TEXAS, AND SECURITIES INDUSTRY ASSOCIATION,

INC. AS AMICI CURIAE

Amici curiae, four Texas banks which hold more than

$100 million in principal amount of Texas school district

bonds and the Securities Industry Association, Inc. (herein-

after “SIA”), many of whose members are underwriters

of Texas school district bonds, submit this brief to urge

this Court, if it should affirm the decision of the District

Court, to make clear that its decision should only be applied

prospectively from the ultimate determination of the action,

and should not affect the enforceability of Texas school

district bonds outstanding at the time of the District

2

Court’s decision (hereinafter “outstanding bonds”) and

bonds authorized and issued prior to the ultimate disposi-

tion of this action (hereinafter interim- issued bonds”).

Counsel for all parties have given written consent to the

filing of this brief pursuant to Rule 42 (2).“

Question Presented

The amici banks and the SIA do not wish to, and do not,

take any position with respect to the District Court’s basic

holding that the present Texas system of financing public

education denies equal protection. This brief is addressed

solely to the following question:

Should any restructuring of the system of financing

public education in the State of Texas pursuant to

this Court’s decision on the present appeal protect the

continuing collectibility of property taxes levied to

pay the principal and interest on outstanding and

interim-issued Texas school district bonds?

The District Court in its Clarification of Original Opinion

dated January 26, 1972 held that this question should be

answered in the affirmative, and we support this holding.

* The amici banks and the SIA were denied leave to intervene of

right in the District Court, and appealed directly to this Court from

this denial in order to establish their right to participate as parties and

to present two issues not then fully presented by the existing parties,

(1) the need to assure the continuing enforceability of outstanding

and interim-issued bonds, and (2) the need to allow the states broad

flexibility in framing any new system of financing public education.

Republic Nat'l Bank v. Rodriguez, Oct. Term, 1971, No. 71-1339.

This Court dismissed the appeal for want of jurisdiction, but granted

leave to file the jurisdictional statement as a brief amici curiae in con-

nection with the jurisdictional statement on the present appeal pur-

suant to Rule 42(1). 40 U.S.L.W. 3575 (June 7, 1972). This brief

is limited to the first issue presented in the earlier appeal, because we

believe that the need for flexibility has now been adequately presented

by the earlier jurisdictional statement and by other amici.

3

Interest of Amici Curiae

About $3 billion in principal amount of Texas school

district bonds were sold during the 25 years 1946-1971 (R.

199, 2"), of which over $2 billion are still outstanding (R.

184, 3-4). About $250 million in principal amount of Texas

school district bonds were sold in 1971 alone (R. 200, Ex.

F). Members of the SIA, a voluntary national organization

of more than 700 securities firms and banks, served as un-

derwriters for the great majority of these bonds (R. 199,

1-2) and intend to continue to underwrite Texas school

district bonds (R. 204, Masterson Aff., 2). Many SIA

members also hold outstanding Texas school district bonds

as investments (ibid.), and the four amici banks hold over

$100 million in principal amount of Texas school district

bonds (almost five per cent of the total outstanding) for

their own account and as trustees for various charitable,

testamentary, and other trusts.**

Any impairment of the continuing collectibility of the

property taxes levied to pay the Texas school district bonds

held by the amici banks and other SIA members would

adversely affect their value and their status as legal invest-

ments for fiduciaries, and would jeopardize the market-

ability of future issues of Texas school district bonds.***

Thus the interest of the amici banks and the SIA in the

continuing enforceability of outstanding and interim-

issued Texas school district bonds is immediate and

substantial.

* Citations in the form “R. 199, 2” refer to page 2 of document 199

of the record on .

2 R. 204, Roberts Aff., 1-2, Rogers Aff., 1, Lyne Aff., 1-2, Hazard

.

ee R. 204, Roberts Aff., 2, Rogers Aff., 2, Lyne Aff., 2, Hazard

a 3

4 *

The members of the SIA have a similarly direct and sub-

stantial interest in outstanding school district bonds

throughout the nation, all of which would be affected by

this Court’s decision in this case. Approximately $50

billion of public school bonds were issued in the United

States during the 25 years 1946-1971, and at least 90%

of these bonds were underwritten and distributed by SIA

members (R. 204, Masterson Aff., 1). $3.9 billion of pub-

lic school bonds were sold in 1970-1971 alone.* The national

total of public school bonds outstanding on June 30,

1970 was more than $31.5 billion.** It is estimated that

95% of these bonds have remaining maturities ranging

from one to twenty years, and 57% have remaining maturi-

ties ranging from five to twenty years.*** The continuing

collectibility of the property taxes which support these

bonds will thus remain of vital importance for years to

come.

* U. S. Department of Health, Education, and Welfare, Bond

Sales for Public School Purposes 1970-71 (DHEW Publication No.

(OE) 72-63), at 11 (1972).

** UJ. S. Bureau of the Census, Governmental Finances in 1969-70

(Series GF-70, No. 5), at 28 (1971).

* According to estimates based on SIA data for state and local gen-

eral obligation bonds as a whole (which include virtually all public

school bonds), the distribution of the time remaining at December 31,

1971 until maturity of such bonds was as follows:

1-4 Years .....-0000e0- $39.4 Billion (37.2%)

5-9 Vers $31.3 Billion (29.6%)

10-14 Years ........... $17.3 Billion (16.4%)

15-19 Years ..........- $11.9 Billion (11.2%)

20 Years or More $ 5.9 Billion (5.6%)

5

Statement

1. The Nature of Texas School District Bonds

Article 7, §3 of the Texas Constitution authorizes the

Texas Legislature to establish school districts and to permit

them to levy and collect ad valorem property taxes. Pur-

suant to this authorization, the Legislature has authorized

Texas school districts to issue negotiable coupon bonds “for

the construction and equipment of school buildings in the

district and the purchase of the necessary sites therefor,”

provided that both the issuance of the bonds and the levying

of the property taxes necessary to pay them are authorized

by the voters of the district in a special bond and tax

election. Texas Educ. Code §§ 20.01, 20.04. Before such

bonds may be issued, they must be approved as properly

authorized by the Attorney General of Texas and registered

by the Comptroller of Public Accounts,

“and after such approval and registration such

bonds shall be incontestable in any court, or other

forum, for any reason, and shall be valid and bind-

ing obligations in accordance with their terms for all

purposes.” Texas Educ. Code § 20.06.

General bond market practice also conditions the sale

of school district bonds to investors upon the unqualified

approving opinion of recognized bond counsel (R. 199, 7-8).

Both the Attorney General of Texas and bond counsel

require as a condition of their approval a “no-litigation

certificate” by the issuing school district that it knows of

no pending or threatened litigation in any manner ques-

tioning the validity of the bonds or the levying of property

taxes to pay them (R. 199, 6-7, Ex. B). The certificate of

the Comptroller of Public Accounts attesting the approval

6

of the Attorney General and, in most cases, the approving

opinion of bond counsel are set forth in full on the bonds

themselves (R. 199, Ex. A).

Texas school district bonds are payable solely from ad

valorem taxes levied on property within the district. See

Texas Educ. Code § 20.01. A specific rate of property tax

is levied each year to pay each specific issue of bonds, and

the funds collected therefrom become trust funds for the

benefit of the bondholders and may not lawfully be expended

for any other purpose. Love v. City of Dallas, 120 Tex.

351, 367-68, 40 S.W.2d 20, 27 (1931); McPhail v. Tax

Collector, 280 S.W. 260, 265 (Tex. Civ. App. 1926). If the

bonds are not paid, the bondholders’ only remedy is by

mandamus to compel the school district to levy the specific

property tax to pay the principal and interest on the

defaulted bonds. City of Waco v. Mann, 133 Tex. 163, 174,

127 S.W.2d 879, 885 (1939). The property of a Texas

school district has been held not to be subject to execution

or garnishment. National Surety Corp. v. Friendswood Ind.

School Dist., 433 S.W.2d 690, 694 (Tex. Sup. Ct. 1968) .*

* The principle that an obligation of a Texas school district may

not be enforced by execution or garnishment applies to all school dis-

trict obligations, not merely to school district bonds. For this reason,

the District Court’s Clarification ion of Original Opinion in the present

case protects any outstanding or interim “contractual obligation in-

curred by a school district in Texas for public school purposes”.

Rodriguez v. San Antonio Ind. School Dist., 337 F. Supp. 280, 286

(W.D. Tex. 1971). The need to protect outstanding and interim-

issued school district bonds is especially acute, however, for two rea-

sons: (1) such bonds, unlike other obligations, are negotiable instru-

ments backed by an express pledge of tax revenues whose

validity is certified by the Attorney General of Texas and upon which

bond purchasers rely; and (2) such bonds are of much longer dura-

tion than other contractual obligations of school districts. Texas school

district bonds may have maturities of up to forty years, Texas Educ.

Code § 20.01, while other contractual o igations are limited to shorter

periods. See, e. g., Texas Educ. Code §§ 12.29(a) (textbook adoption

—

7

Most public school bonds elsewhere in the nation are

likewise supported by local property taxes and other local

taxes. Thus an affirmance of the District Court without

making clear that outstanding and interim-issued bonds

will be protected would have severe repercussions not only

in Texas but throughout the country.

2. The District Court’s Clarification

of Original Opinion

On December 23, 1971 the three-judge District Court

issued its decision in the present case holding that the

present Texas system of financing public education denies

equal protection and enjoining (after a two-year stay) the

enforcement of Article 7, § 3 of the Texas Constitution,

the State constitutional basis for all Texas school district

property taxes. Rodriguez v. San Antonio Ind. School Dist.,

337 F. Supp. 280, 285-86 (W.D. Tex. 1971). The question

of the continuing enforceability of outstanding and interim-

issued Texas school district bonds had not been raised by

any party, and the District Court’s decision was silent on

this question. For this reason it had a devastating impact

upon Texas school district bonds.

contracts; six years), 13.102 (teachers’ probationary contracts; three

years), 13.107 (teachers’ continuing contracts may be terminated at

end of any year “because of necessary reduction of personnel”),

23.28(b), (c) (employment contracts; three or five years), 23.76

(depository banks; two years).

* Putting aside revenue bonds, over 90% of the public school bonds

sold in 1970-1971 were sold by school districts and other local bodies.

See U. S. Department of Health, Education, and Welfare, Bond Sales

for Public School Purposes 1970-71 (DHEW Publication No. (OE)

72-63), at 6, 14 (1972). Property taxes are estimated to comprise

97 to 98% of all local school tax revenues. Moore, Local N onproperty

Taxes for Schools, in Johns, Alexander & Stollar, eds., Status and

Impact of Educational Finance Sp ge (National Educational Fi-

nance Project, Volume 4), at 209-10 (1971).

8

Neither the Attorney General of Texas nor bond counsel

for issuers were able to approve Texas school district bonds

issued after the decision (R. 199, 7-10). The sale of such

bonds halted abruptly (R. 199, 10), and only resumed

after the District Court’s Clarification of Original Opinion

was issued on January 26, 1972. The value of outstanding

Texas school district bonds fell immediately after the deci-

sion (R. 199, 10).

Defendants, joined by the SIA as amicus curiae and by

other amici, urged the District Court to clarify its decision

to specify that it was not intended to affect the continued

collectibility of property taxes levied to pay outstanding

and interim-issued bonds (R. 184, 192, 199). The SIA took

no position on the merits of the District Court’s decision.

The SIA explained that in order to safeguard the value

and marketability of outstanding and interim-issued bonds

it was necessary to insure the collectibility of property

taxes to be levied to pay such bonds after the ultimate

disposition of the action (R. 199, 10-11). The District

Court’s Clarification of Original Opinion dated January 26,

1972 expressly insured such continuing collectibility.

Rodriguez v. San Antonio Ind. School Dist., 337 F. Supp.

280, 286 (W.D. Tex. 1971).

The purpose of the present brief is to urge this Court,

if it should affirm the District Court, to make clear that

the District Court acted rightly in issuing its Clarification

of Original Opinion to protect outstanding and interim-

issued Texas school district bonds.

3. Judicial Protection of Outstanding and Interim-

Issued Bonds in Other Jurisdictions

All of the courts which have held that the present system

of financing public education denies equal protection have

assured bond investors that this holding does not under-

ww

9

mine the enforceability of outstanding and interim-issued

school district bonds. This assurance has taken diverse

forms, but in all three cases which have gone to final

judgment—the present case and the cases in Arizona and

New Jersey—it has taken the form of an express provision

in the final judgment safeguarding the continuing collecti-

bility of property taxes levied to pay outstanding and

interim-issued bonds.

California. On August 30, 1971 the California Supreme

Court held that the present California system of financing

public education denies equal protection under the Federal

and State Constitutions. Serrano v. Priest, 5 Cal. 3d 584,

487 P.2d 1241, 96 Cal. Rptr. 601 (1971). There was

widespread concern that the Serrano decision might be

construed as affecting outstanding and interim-issued

bonds, and many school bond issues across the country

were withdrawn or postponed indefinitely.*

On October 21, 1971, in response to this concern, the

California court issued a Modification of Opinion adding

the following paragraph to its original opinion:

“In sum, we find the allegations of plaintiffs’

complaint legally sufficient and we return the cause

to the trial court for further proceedings. We

emphasize, that our decision is not a final judgment

on the merits. We deem it appropriate to point out

for the benefit of the trial court on remand (see

Code Civ. Proc. § 43) that if, after further pro-

ceedings, that Court should enter final judgment

determining that the existing system of public

school financing is unconstitutional and invalidat-

ing said system in whole or in part, it may properly

* E.g., American Banker, Nov. 11, 1971, p. 1; Daily Bond Buyer,

Nov. 15, 1971, p. 1.

10

provide for the enforcement of the judgment in

such a way as to permit an orderly transition from

an unconstitutional to a constitutional system of

school financing. As in the cases of school desegre-

gation (see Brown v. Board of Education (1955)

349 U.S. 294) and legislative reapportionment (see

Silver v. Brown (1965) 63 Cal.2d 270, 281), 4

determination that an existing plan of govern-

mental operation denies equal proteetion does not

necessarily require invalidation of past acts under-

taken pursuant to that plan or an immediate imple-

mentation of a constitutionally valid substitute.

Obviously, any judgment invalidating the existing

system of public school financing should make clear

that the existing system is to remain operable until

an appropriate new system, which is not violative

of equal protection of the laws, can be put into

effect.” 5 Cal. 3d at 618, 487 P.2d at 1266, 96

Cal. Rptr. at 626.

Minnesota. In a Memorandum and Order filed on Octo-

ber 12, 1971 the United States District Court for the Dis-

trict of Minnesota denied defendants’ motion for summary

judgment and held that the present system of financing

public education in Minnesota violates the Equal Protection

Clause. Van Dusartz v. Hatfield, 334 F. Supp. 870 (D.

Minn. 1971). The court made clear that it did not intend

its holding to have any immediate effect upon school financ-

ing; it did not direct any affirmative relief, but deferred to

the action of the Minnesota Legislature. 334 F. Supp.

at 877.

Wyoming. On December 14, 1971 the Supreme Court of

Wyoming adopted the Serrano principle. Sweetwater

County Planning Committee v. Hinkle, 491 P.2d 1234

(Wyo. 1971), 498 P.2d 1050 (Wyo. 1972). The Wyoming

court stated, however, that In] o invidious discrimination

11

will be involved if bonds are voted by any school distriet for

eapital improvements, and if special levies are made within

the district to retire such bonds.” 491 P. 2d at 1238. Since

school bonds may be issued in Wyoming only for capital

improvements, see Wyo. Const., Art. 16, 8 5; Wyo. Stat.

§ 21.1-253, this statement obviated any question as to the

continuing validity of Wyoming school bonds.

New Hampshire. The New Hampshire Supreme Court

held on December 23, 1971 that a city council was required

to furnish the board of education with funds required to

meet state minimum standards. Laconia Bd. of Educ. v.

City of Laconia, 285 A.2d 793 (N. H. 1971). It refused

to consider a belated argument that such a holding would

violate the Serrano principle, in part on the ground that

Serrano was not made retroactive:

“Thirdly, it is doubtful that any consideration of

this contention would have any retroactive effect

‘whatever result was reached. See October 21, 1971

modification of opinion in Serrano v. Priest supra

reported in 40 U.S.L.W. 2339 where it was stated

that the ‘existing system of school financing is to

remain in effect until it has been found unconstitu-

tional and replaced by an appropriate new system’.”

285 A.2d at 796-97.

New Jersey. On January 19, 1972 the New Jersey Su-

perior Court held that the present system of financing

public education in New Jersey violates the Equal Protec-

tion Clauses of the Federal and State Constitutions and

the Education Clause of the State Constitution. Robinson

v. Cahill, 118 N.J. Super. 223, 287 A.2d 187 (1972). It

made clear, however, that

“this declaration shall operate prospectively only

and shall not prevent the continued operation of the

‘selGol system and existing tax laws and all actions

12

taken thereunder. This declaration shall not invali-

date past or future obligations (such as school

bonds, anticipation notes, ete.) incurred under the

provisions of existing school laws and tax laws.

Said laws shall continue in effect unless and until

specific operations under them are enjoined by the

court.” 118 N. J. Super. at 280, 287 A.2d at 217.“

Arizona. On June 1, 1972 the Arizona Superior Court

entered a declaratory judgment that the present Arizona

system of financing public education violates the Federal

and State Equal Protection Clauses. Hollins v. Shofstall,

Ariz. Super. Ct., Maricopa County, No. C-253652, June 1,

1972. On June 6, 1972 the court issued a Supplemental

Memorandum making clear that it intended to protect the

continued enforceability of outstanding and interim-issued

bonds throughout their entire life:

“Notwithstanding anything to the contrary stated

in the memorandum and order of June 1, 1972, it is

the intention of the court that general obligation

bonds heretofore or hereafter issued by school dis-

tricts shall enjoy full and complete security afforded

by the applicable bond-enabling statute, and the

bondholder shall have recourse to the levy of an ad

valorem tax upon all taxable property within the

district to compel the payment of the principal of

and interest on such bonds, throughout their entire

life and as the same shall bécome due, in the event

that funds for the payment of such bonds are not

lawfully available from other sources.”

* Paragraph 7 of the Judgment entered on February 4, 1972 in

Robinson v. Cahill provided even more explicitly that “nothing herein

shall be deemed to limit, impair or affect any bonds heretofore or here-

after issued or authorized for public school purposes, or any notes or

other obligations at any time authorized or issued in anticipation of

such bonds, or any taxes levied or required to be levied with respect

to any such bonds, notes or other obligations wy

13

Summary of Argument

1. As no appeal has been taken from the portion of the

District Court’s judgment which protects outstanding and

interim-issued bonds, it is therefore not actually before this

Court for review. Nevertheless, if the Court affirms the

decision of the District Court, we respectfully submit that

the Court should make clear that the decision will not

affect outstanding and interim-issued bonds, in order to

prevent the disruption of school bond markets throughout

the nation which might otherwise result.

2. This Court’s decisions, especially Cipriano v. City of

Houma, 395 U.S. 701, 706 (1969) (per curiam), and City

of Phoenix v. Kolodziejski, 399 U.S. 204, 213-15 ( 1970),

which are almost exactly in point, establish that the District

Court’s decision should not be retrospectively applied. Ret-

rospective application is wholly unnecessary to achieve the

purpose of the District Court’s holding, and would be strik-

ingly unjust in light of bondholders’ reliance upon express

legal opinions and representations by the issuers that the

bonds are supported by valid and enforceable property

taxes.

3. Retrospective application of the District Court’s hold-

ing would also offend the constitutional valties embodied in

the Contract Clause and the Due Process Clause. The Equal

Protection Clause should not be unnecessarily applied in a

manner which brings it into conflict with these coordinate

constitutional values.

A

14

ARGUMENT

This Court Should Reaffirm the District Court’s

Protection of n and Interim-Issued

nds

The District Court’s Clarification of Original Opinion

issued on January 26, 1972 stated that its decision and

order of December 23, 1971 in no way affected the continu-

ing collectibility of property taxes levied to pay outstanding

bonds and interim-issued bonds issued and delivered before

December 23, 1973, by which time the District Court anti-

cipated that the present system of financing public educa-

tion in Texas would be replaced by a constitutional system.*

Rodriguez v. San Antonio Ind. School Dist., 337 F. Supp.

280, 285-86 (W.D. Tex. 1971).

Defendants have not appealed from this portion of the

District Court’s order, and plaintiffs have taken no ap-

peal.** It follows that the portion of the District Court’s

order which protects outstanding and interim-issued bonds

may not be disturbed in this Court. See, e. g., Swarb v.

Lennox, 405 U.S. 191, 201-08 (1972) ; Morley Construction

Co. v. Maryland Cas. Co., 300 U.S. 185, 191-92 (1937).

* We have spoken in this brief of the need to protect interim-issued

bonds issued and delivered prior to the ultimate disposition of this

action, rather than interim-issued bonds issued and delivered before

December 23, 1973, for two reasons: (1) the transitional

period, if the District Court’s holding is affirmed, will differ from state

to state and may be longer or shorter than two years; and (2) while

the District Court’s judgment requires the State of Texas to act before

December 23, 1973, final judicial approval of a new system of public

school financing might not take place until a later date.

** Indeed, plaintiffs represented to the District Court, in order to

induce it to deny the motion made by the SIA and the four amici

banks for permission to intervene, that they would not seek to over-

turn the District Court’s clarification insuring the continuing enforce-

ability of outstanding and interim-issued bonds (R. 207, 28-29).

15

We nonetheless respectfully urge the Court, if it should

affirm the decision of the District Court, to make clear that

its decision should only be applied prospectively from the

ultimate determination of the action, and should not affect

the continued collectibility of property taxes to be levied to

pay outstanding and interim-issued school district bonds.

Otherwise, especially in view of the numerous similar cases

now pending in many jurisdictions,* this Court’s decision

might have the same sharply disruptive effect upon school

bond markets throughout the nation as the initial decision

of the District Court had in Texas, and would draw into

question the rights of holders of more than $31.5 billion in

outstanding public school bonds. Such a disruptive shock,

even if later corrected, might permanently lessen public

confidence in the security of public school bonds.**

This Court’s Decisions Establish That the

District Court’s Holding Should Not Be

Applied Retrospectively

The District Court’s holding that its decision should be

applied only prospectively is squarely Supported by two

decisions of this Court, also involving local government

* A partial summary of these cases, listing 24 cases in 15 states,

is given in Comment, The Evolution of Equal Protection: Education,

Municipal Services, and Wealth, 7 Harv. Civ. Rights—Civ. Lib. L.

Rev. 103, 200-13 (1972).

It is to avoid such adverse consequences that the courts which

have held that existing school financing systems deny equal protection

have assured bond investors that this holding does not affect outstand-

ing and interim-issued bonds (see pp. 8-12 supra). Similarly, a New

York trial court declined to anticipate the decision of this Court on the

basic equal protection issue in order to avoid “placing the sword of

mocles over school bond financing in this State for the next several

years.” Spano v. Board of Educ., 68 Misc. 2d 804, 808, 328 N.Y.S.2d

229, 234 (Sup. Ct. Westchester County 1972).

16

bonds and the Equal Protection Clause, which are almost

exactly in point. In Cipriano v. City of Houma, 395 U.S.

701, 706 (1969) (per curiam), this Court ruled that the

franchise in a municipal revenue bond election cannot con-

stitutionally be limited to property taxpayers, but held that

this decision should be given prospective effect only:

“Significant hardships would be imposed on cities,

bondholders, and others connected with municipal

utilities if our decision today were given full retro-

active effect. Where a decision of this Court could

produce substantial inequitable results if applied

retroactively, there is ample basis for avoiding the

‘injustice or hardship’ by a holding of non-retro-

activity. Great Northern R. Co. V. Sunburst Oil &

Refining Co., 287 U.S. 358, 364 (1982). See Chicot

County Drainage Dist. v. Baxter State Bank, 308

U.S. 371 (1940). Cf. Linkletter v. Walker, 381 U.S.

618 (1965). Therefore, we will apply our decision

in this case prospectively.”

Just as in Cipriano, a decision retrospectively wiping out

the sole security for Texas school district bonds would im-

pose “significant hardships” and “produce substantial in-

equitable results”. As in Cipriano, such an injustice should

be avoided by a holding of nonretroactivity.

In City of Phoeniæ v. Kolodziejski, 399 U.S. 204, 213-15

(1970), this Court extended Cipriano to voting on muni-

cipal general obligation bonds, and likewise held that its

decision should be given prospective effect only. The Dis-

trict Court’s holding of nonretroactivity in the present case

is identical to Cipriano and Kolodziejski, except that the

District Court made its decision prospective from Decem-

ber 23, 1973, by which time the District Court anticipated

that a new system of financing public education would be

i

17

instituted. This difference is a practical necessity because

the pressing capital needs of school districts must continue

to be met by the issuance of bonds under the present system

until another system has been finally approved by the Leg-

islature and the Courts.

This Court recently summarized the three key factors

bearing on the question whether a new decision should be

applied retroactively in Chevron Oil Co. v. Huson, 404 U.S.

97, 106-07 (1971): (1) whether the effect of the decision

is to “establish a new principle of law, either by overruling

clear past precedent on which litigants may have relied,

. . or by deciding an issue of first impression whose reso-

lution was not clearly foreshadowed”; (2) whether retro-

active application of the decision would further or retard

its purpose; and (3) whether retroactive application would

produce substantial inequitable results. All three of these

factors argue strongly against retrospective application of

the District Court’s decision in the present case.

Although, as already stated, the SIA and the amici banks

do not wish to and do not take any position with respect to

the merits of the present appeal, there can be no question

that a decision by this Court affirming the judgment of the

District Court would “establish a new principle of law”.

So far as we are aware, no action challenging the validity

of existing systems of financing public education under the

Equal Protection Clause was ever brought until 1968.

When such cases were brought, this Court twice sustained

existing systems against equal protection attacks. See Mc-

Innis v. Shapiro, 293 F. Supp. 327 (N.D. Ill. 1968), aff'd

mem. sub nom. McInnis v. Ogilvie, 394 U.S. 322 (1969);

Burruss v. Wilkerson, 310 F. Supp. 572 (W. D. Va. 1969),

affd mem., 397 U.S. 44 (1970). We recognize that the

18

District Court-held McInnis and Burruss to be distinguish-

able from its decision, Rodriguez v. San Antonio Ind.

School Dist., 337 F. Supp. 280, 283-84 (W.D. Tex. 1971),

and take no position with respect to the validity of the dis-

tinction on the merits; but we respectfully submit that,

even accepting the distinction, the District Court’s deci-

sion was not “clearly foreshadowed” by any decision of

this Court.

The second factor recognized in Chevron Oil Co. v.

Huson is the purpose of the new decision. See also Desist

v. United States, 394 U.S. 244, 249-50 (1969) ; Linkletter v.

Walker, 381 U.S. 618, 636-37 (1965). The purpose of the

District Court’s holding—removing disparities in educa-

tional expenditures arising from disparities in taxable

wealth—does not require the elimination of the property

taxes needed to pay outstanding and interim-issued bonds.

It merely requires that, without altering school districts’

duty to levy property taxes to pay outstanding and interim-

issued bonds as they have solemnly contracted to do, the

State adjust the allocation of remaining State and school

district educational funds to insure that any constitution-

ally mandated balance of educational expenditures is

achieved.* The thrust of Serrano and the decisions that

have followed it, including the decision of the District

Court, is to condemn the end result of the school financing

system, not any specific component of the collective source

of funds.

* Some courts have held that the Serrano principle serves the addi-

tional purpose of equalizing the property tax burden on taxpayers in

different school districts. See, e. g., Robinson v. Cahill, 118 N.J.

Super. 223, 276-80, 287 A.2d 187, 215-16 (1972). This purpose can

likewise be met by statewide redistribution of educational funds with-

out disturbing the property tax security for outstanding and interim-

issued bonds.

19

Finally, it is plain that retrospective application of the

District Court’s decision would produce substantial inequit-

able results, the third factor identified in Chevron Oil Co.

v. Huson. Investors acquired outstanding Texas school

district bonds in reliance upon express representations by

the issuers and legal opinions of bond counsel and the

Attorney General of Texas that the bonds were valid obli-

gations supported by an enforceable duty to levy ad

valorem taxes on property within the issuing school dis-

trict. These opinions, indeed, were commonly printed on

the face of the bonds themselves, which are fully negotiable.

Without these opinions, the bonds could not have been

sold. In reliance upon these opinions, the bonds have been

accepted as investments not only by numerous individuals

but also by the amici banks and many other institutions for

their own account and as trustees for charitable, testa-

mentary, and other trusts. Under these circumstances, to

apply the District Court’s decision retroactively so as to

wipe out the property tax security for the bonds would

be strikingly unjust. The District Court correctly made

clear that it intended no such result.*

This Court recognized the injustice of retroactively invalidatin

bonds as early as Gelpcke v. City of Dubuque, 68 U.S. (1 Wall.) 175,

205-07 (1863), which held that bonds whose validity had been upheld

by the highest State court would be recognized in a federal court de-

spite an overruling decision by the State court. Although the precise

holding of Gelpcke v. City 3 has probably been overruled

by Erie R. R. v. Tompkins, U.S. 64, 69 n.1 (1938), its underlying

principle was discussed with approval in Linkletter v. Walker, 381

U.S. 618, 624-25 (1965).

20

Retrospective Application of the District Court’s

Holding Would Offend the Principles Embodied

in the Contract Clause and the Due Process Clause

Retrospective application of the District Court’s holding

to outstanding and interim-issued bonds would contravene

the principle of governmental good faith embodied in the

Contract Clause. This Court has long held that a State

may not, under the Contract Clause, withdraw a power to

tax which has been made the basis for bonds which are still

outstanding. E. g., Von Hoffman v. City of Quincy, 71 U.S.

(4 Wall.) 535, 554-55 (1866). Under this principle the

District Court’s holding could not be utilized as a ground

for legislative repeal of the property taxes supporting

school district bonds, because such invalidation is not neces-

sary to achieve the purpose of the District Court’s holding,

and the decisions of this Court establish that governmental

obligations may not be repudiated unless “the extent of the

repudiation is only that which is reasonably necessary to

effectuate a valid objective”. Slawson, Constitutional and

Legislative Considerations in Retroactive Lawmaking, 48

Calif. L. Rev. 216, 244 (1960).

Retrospective application of the District Court’s holding

would also run counter to the values embodied in the Due

Process Clause. It would drastically change the nature of

the bondholders’ contracts because of a constitutional prob-

lem which they did not cause and from which they derived

no benefit. If it were sought to be legislatively imposed, such

an imposition of a burden upon a group which did not cause

or benefit from the underlying problem would deny due

process of law. Cf., e. g., Atchison, T. & S. F. Ry. v. Public

—

21

Util. Comm’n, 346 U.S. 346, 352-53 1953) ; Nashville, C.

4 S. L. Ry. v. Walters, 294 U.S. 405, 428-32 (1935).

The principles embodied in the Contract Clause and the

Due Process Clause are of coordinate dignity with the prin-

ciple of equality embodied in the Equal Protection Clause.

Wherever possible, such coordinate constitutional principles

should be accommodated, as this Court has observed, for

example, with respect to the Establishment and Free Exer-

cise Clauses of the First Amendment. E. g., Walz v. Tax

Comm’n, 397 U.S. 664, 668-72 (1970). This consideration

strongly supports the conclusion of the District Court that

its decision should not be retrospectively applied.

O

CONCLUSION

For the reasons given above, Republic National Bank of

Dallas, First City National Bank of Houston, Mercantile

National Bank at Dallas, Bank of Texas, and Securities

Industry Association, Inc., respectfully urge the Court, if

it should affirm the decision of the District Court, to make

clear that the District Court correctly held that its decision

should in no way affect the continuing collectibility of prop-

erty taxes to be levied to pay the principal and interest on

Texas school district bonds outstanding at the time of the

District Court’s decision or authorized and issued prior to

the ultimate disposition of this action.

Dated: July 21, 1972

Respectfully submitted,

LAWRENCE E. WALSH

1 Chase Manhattan Plaza

New York, New York 10005

212 422-3400

RICHARD B. SMITH

Guy M. STRUVE

Of Counsel

Victor W. BouLDIN

2100 First City National

Bank Building

Houston, Texas 77002

713 225-2411

CLIFFORD W. YOUNGBLOOD

Of Counsel

Attorneys for Amici Curiae