Maryland Industrial Development Financing Authority v. Helfrich

Singley, J., delivered the opinion of the Court. The proliferation of the programs by which states, counties and municipalities in the United States have endeavored to attract industry is one of the more remarkable of the economic developments of the past three decades. The phenomenon has been the subject of a financial study by Nechner, Industrial Aid Financing (Goodbody & Co., 1965) and legal considerations have been reviewed by Heins, Constitutional Restrictions Against State Debt (Univ. of Wisconsin Press, 1963) and in The Constitutionality of Industrial Development Acts, 35 Univ. of Colo. L. Rev. 556 (1963).

While the schemes adopted by the several states are variously structured, and may be financed by the issuance of general obligation bonds, by the sale of revenue bonds, by guarantees of debt, or in some other fashion, they all share the common purpose of attempting to attract new industries to underdeveloped areas in the hope of providing employment, increasing consumer buying power and ultimately of making substantial additions to the tax assessment rolls. These ends are usually accomplished by the construction of plants or the acquisition of facilities by either the state, a county or a municipality or by a non-profit development corporation. The plant or facility is then leased to an industrial concern at an annual rent sufficient to cover interest charges and amortization of all or substantially all of the principal amount of the debt during the initial term of the lease. The lease usually accords the lessee the option of purchasing the plant or the facilities for a nominal consideration at the end ⁶⁰⁵ of the term of the lease, or at an earlier date, if the principal amount of the debt is prepaid and interest has been paid to the date of prepayment.

In some instances, the plant is not subject to the payment of property taxes or of full property taxes while owned by the state, county or municipality; in others, an annual payment in lieu of taxes is added to or incorporated in the rent reserved. State-sponsored industrial development took its first faltering step in Mississippi in 1936 under that state’s BAWI plan (Balance Agriculture With Industry) 1 when an $85,000 general obligation bond issue was sold to finance the construction of a factory in the town of Durant for Realsilk Hosiery Mills. 2 The Mississippi idea took hold slowly, being followed by Kentucky in 1948; by other states, including Alabama and Tennessee, in 1951; and by still others, including Arkansas by 1958. 3 By 1965, more than 30 American states had adopted some form of industrial development financing, 4 and statistics assembled by the Investment Bankers Association (the I.B.A.), ⁶⁰⁶ which do not purport to be complete, show that the annual volume of industrial development bond issues, which averaged a mere trickle of $8,000,000 during the years 1951-57, had, by 1965, become a mighty torrent of $200,000,000 per year. 5 At that time, of the some $700,000,000 of industrial development bonds known to be outstanding by the I.B.A., more than $500,-000,000 had been generated by the programs sponsored by Mississippi, Alabama, Tennessee, Arkansas and Kentucky. 6 General obligation bonds, in which the faith and credit of the state or municipality had been pledged to the payment of the principal of and interest on the debt incurred, accounted for some 20% of the $700,000,000 known to be outstanding; the balance consisted of revenue bonds, where the income from the project was pledged to debt service, or of other forms of contingent or indirect obligations. 7 By the end of 1966, 35 states had authorized industrial development bonds, and in that year there were over $500,000,000 in new public issues. In 1967, this grew to 40 states with over $1 billion in new issues. Privately placed issues may amount to more than twice these amounts. 8 In 1965, when the Maryland Legislature first entered the field of industrial development financing on a state level, the issuance of revenue bonds for industrial development purposes had come under attack in the financial community 9 and the exemption of the interest on the bonds from federal income tax was being restricted by the Internal Revenue Service. 10 Whether for this, or for some other reason, the General Assembly chose to plot a more conservative course.

By Chapter 714 of the Laws of Maryland of 1965, later ⁶⁰⁷ amended by Chapter 222 of the Laws of 1966 and Chapter 642 of the Laws of 1967, (Maryland Code 1957, 1965 Replacement Volume and 1967 Supp.) art. 41, §§ 266 J to 266 CC (the Act) the General Assembly created the Maryland Industrial Development Financing Authority (the Authority), consisting of five members appointed by the Governor, a “body corporate and politic’’ and a public instrumentality of the State. The Authority is charged with the responsibility of filling the need which exists “for new and expanded industrial enterprises to provide enlarged opportunities for gainful employment by the people of Maryland and thus to ensure the preservation and betterment of the economy * * * in the interest of the public welfare.” The Authority has been previously characterized by us as “one of three statutory stimuli to industrial development,” Md. Indus. Devel. v. Meadow-Croft, 243 Md. 515 , 221 A. 2d 632 (1966), another being found in Maryland Code (1957, 1965 Replacement Volume, 1967 Supp.) art. 41, §§ 266 A to 266 I, which permits the issuance of revenue bonds (a pledge of the full faith and credit of the county or municipality is prohibited by § 266 D) by county and municipal governments for the construction of industrial buildings and port facilities to be leased to private tenants, Frostburg v. Jenkins, 215 Md. 9 , 136 A. 2d 852 (1957). For other cases involving the issuance of revenue bonds by instrumentalities see Lerch v. Md. Port Authority, 240 Md. 438 , 214 A. 2d 761 (1965) (international trade center); Castle Farms Dairy Stores, Inc. v. Lexington Mkt.

Authority, 193 Md. 472 , 67 A. 2d 490 (1949) (public market) and Wyatt v. State Roads Comm’n., 175 Md. 258 , 1 A. 2d 619 (1938) (toll bridge). The third stimulus referred to in Meadow-Croft is found in Code (1957, 1966 Replacement Volume) art. 23, §§ 412-429, creating Development Credit Corporation, which makes direct loans to industries. Development Credit v. McKean, 248 Md. 572 , 237 A. 2d 742 (1968). The Act is patterned after a similar plan adopted by Rhode Island in 1958, R. I. Gen.

Laws (1956 Edition and 1967 Supp.) 42.34.1 to 42.34.18, Meadow-Croft, supra, 243 Md. at 524 , and our comparison of the Rhode Island act with the law ⁶⁰⁸ which set up Maine’s Industrial Building Authority in 1957 shows them to be virtually identical. 11 The Maine, Rhode Island and Maryland plans contemplate that the impetus to the financing of industrial development will come from the Authority’s guarantee of mortgage loans and that the loan funds themselves will be provided by banks and insurance companies. This was selected as an alternative to revenue bonds, on the one hand, which are seldom issued in the field of industrial financing in amounts large enough to be advantageously marketed; and to general obligation bonds, on the other, which have a direct impact on the credit of the state. The Maryland Act requires that the mortgagor must be a county or municipality of the State, or a development corporation organized under the law of and operating within Maryland; that such mortgages, if secured by real property, must be for a term not longer than 25 years, and if secured by machinery and equipment, must have a maturity not greater than 15 years, and in no event shall be for a term longer than the period for which such property, machinery or equipment is leased. All such mortgages must be first liens; must not exceed 90% of the cost of the project (70% in the case of machinery and equipment), nor the amount of $4,000,000 for any one project, nor an aggregate of $30,000,000 for all such projects.

The mortgagor, if a county or municipality, is prohibited by § 266 W of the Act from pledging its full faith and credit for the repayment of the mortgage debt. It is anticipated that the rent reserved under the lease of the mortgaged property must, during the initial term, be in an amount sufficient to provide for the payment of interest and the complete amortization of the mortgage debt. § 266 U requires that the lease also provide for the payment of an insurance premium by the borrower to the Authority, in an amount not to exceed three percent of the principal obligation, which shall be deposited in a revolving ⁶⁰⁹ fund from which the Authority shall pay its expenses and meet any obligation which it may incur in the operation of its insurance program. In addition, the Legislature makes an annual appropriation of $100,000 to the fund. As originally enacted, the Act contained two sections, which were before us in Md. Indus.

Devel. v. Meadow-Croft, 243 Md. 515 , 221 A. 2d 632 (1966). § 266 L initially provided : “The Maryland Industrial Financing Authority is authorized to insure the payment of mortgage loans secured by industrial projects, and to this end the faith and credit of the State are hereby pledged, consistent with the terms and limitations of the terms of this subtitle.” (Emphasis supplied) As originally adopted, § 266 Z read: “If from time to time in the opinion of the Authority the addition of moneys to the mortgage insurance fund is required to meet obligations, the Authority in writing shall request the Governor to provide sufficient moneys for this purpose. The Governor may submit this request to the next regular session of the General Assembly, as an item of appropriation in the budget bill.” (Emphasis supplied) In Meadow-Croft, supra, we found § 266 L invalid because, if the language “consistent with the terms and limitations of the terms of this subtitle” were read in conjunction with § 266 Z, which provided, “[t]he Governor may submit this request to the next regular session of the General Assembly” (emphasis supplied), the obvious conclusion was that the pledge of credit contained in § 266 L, as the lower court characterized it, was “meaningless, and indeed misleading.” 243 Md. at 521 . In an effort to meet the thrust of Meadow-Croft , the General Assembly, by adopting Chapter 642 of the Laws of 1967, amended both § 266 L and § 266 Z. As amended, § 266 L now reads: “Section 266 L. Credit of state pledged. The Maryland Industrial Development Financing ⁶¹⁰ Authority is authorized to insure the payment of mortgage loans secured by industrial projects, and to this end the faith and credit of the State are hereby pledged to the extent of thirty million dollars ($30,000,000).” (Emphasis supplied) It will be noted that the italicized phrase was substituted for the phrase “* * * the faith and credit of the State are hereby pledged, consistent with the terms and limitations of the terms of this subtitle,” which appeared in the 1965 Act.

It will be recalled that § 266 Z of the 1965 Act contained the permissive language, “[t]he Governor may submit this request to the next regular session of the General Assembly * * *” (emphasis supplied), which we found objectionable in Meadow-Croft . In its stead, the 1967 amendment substituted the following : “Section 266 Z. Additions to Mortgage Insurance Fund; State Industrial Development Loan Fund. (a) Request to Board of Public Works. If from time to time in the opinion of the Authority the addition of moneys to the mortgage insurance fund shall be required, the Authority in writing shall request the Board of Public Works to provide sufficient moneys to maintain its reserve at a level deemed adequate by the Authority, and upon receipt of such request, said Board may pay over the amount so requested from its emergency fund.

(b) Issuance of State loan; maximum amount. In the event the Board of Public Works does not have sufficient funds available to meet the request or elects not to make payment from the emergency fund, the Board shall issue a State loan in the amount sufficient to meet all obligations undertaken by the Authority in the insurance of mortgages pursuant to this subtitle, such State loan to be known as the ‘State Industrial Development Loan Fund’ not to exceed in the aggregate the sum of thirty million dollars ($30,000,000).” ⁶¹¹ These amendments had the effect oí bringing the Maryland Act into conformity with those previously adopted in Maine and Rhode Island, by making the supplementation of the mortgage insurance fund mandatory. This, then, was the way matters stood on 27 May 1968. On that day, the Authority wrote to the secretary of the State’s Board of Public Works, advising him that the Authority had already insured mortgages in the aggregate principal amount of some $555,000; had committed itself to insure additional mortgages amounting to $3,558,890; and had under consideration other projects which would involve insuring an additional $7,000,000 of debt.

The letter pointed out that counsel for two banks which had been approached for mortgage loans had questioned the validity of the purported pledge of the State’s credit; that without being able to make the representation that agreements insuring such mortgages were, in fact, backed by a pledge of the State’s credit, there would be a deterioration in the ability of counties and municipalities to negotiate mortgage loans on an advantageous basis; and that the banks had indicated that it would be desirable for the Authority to expand its reserve funds, which as the result of annual appropriations by the Legislature and the receipt of insurance premiums then totalled some $400,000, to an amount equal to 20% of the mortgages then insured or to be insured, or $3,000,000 in reserve funds. This would involve the issuance and sale of bonds in the aggregate principal amount of $2,600,000, the proceeds of which when added to the reserve fund, would support the insuring of mortgages aggregating $15,000,000 in principal amount. Helfrich, the appellee here and complainant below, instituted a taxpayer's action in equity in the Circuit Court of Baltimore City against the Authority and the Board of Public Works, the appellants here, seeking declaratory and injunctive relief; a declaration: (1) holding the Act and the transactions proposed by the Authority to be unconstitutional and void ; (2) holding § 266 L of the Act to be unconstitutional and void; ⁶¹² (3) holding § 266 L of the Act to be invalid, void and of no effect because it erroneously declares that the faith and credit of the State would be pledged by the Act to the payment of the principal of and interest on mortgages insured under the Act; (4) holding § 266 Z of the Act to be unconstitutional and void; and (5) construing § 266 Z of the Act and determining the effect, if any, of its provisions, and an injunction: (1) forbidding appellants to represent in any way that the faith and credit of the State are pledged to the payment of the principal of and interest on mortgages insured under the Act ; (2) forbidding appellants to take any action pursuant to the purported authority of the Act; (3) forbidding any payment from the State’s Emergency Fund or the issuance of State bonds by the Board of Public Works, pursuant to the purported authority of the Act; and (4) directing the Board of Public Works to order the Comptroller and the Treasurer to withdraw all moneys committed to the mortgage insurance fund under the purported authority of the Act. The chancellor entered a decree declaring § 266 L of the Act an unconstitutional pledge of the State’s credit in contravention of § 34 of art.

Ill of the Maryland Constitution, and therefore of no force and effect; declaring subsections (b) through (i), inclusive, and the second sentence of subsection (k) of § 266 Z of the Act (which contained technical language providing for the issuance and sale of bonds) unconstitutional on the ground that the subsections implemented the unconstitutional pledge provided for by § 266 L; declaring that subsection (a) of § 266 Z of the Act validly authorized the Board of Public Works to pay money from the State’s Emergency Fund to the mortgage insurance fund maintained by the Authority pursuant to § 266 S of the Act; and declaring all other provisions of the Act constitutional and valid. The decree also enjoined the Authority from representing that the faith and credit of the State was pledged to the insurance of the payment of principal of and interest on mortgages created pursuant to §§ 266' J-266 CC of art. 41 of the Code, ⁶¹³ and the Board of Public Works was enjoined from taking any action pursuant to the authority granted them by subsections (b) through (i) of § 266 Z of art. 41. It is from this decree that the present appeal was taken. Helfricli entered a cross appeal from that portion of the decree which failed to grant him the other relief prayed.

Maryland Constitution, art. Ill, § 34 provides : “The credit of the State shall not in any manner be given, or loaned to, or in aid of any individual association or corporation * * The history of this prohibition, which first appeared in the Constitution of 1851, and was carried over, virtually unchanged, to the Constitutions of 1864 and 1867, has engaged the attention of this Court in Development Credit v. McKean, supra; Maryland Ind. Dev. v. Meadow-Croft, supra; Lerch v. Maryland Port Authority, supra; Johns Hopkins Univ. v. Williams, 199 Md. 382 , 86 A. 2d 892 (1951) and need not be extensively recounted here. It is sufficient to point out that the constitutional limitation was adopted in Maryland, as in other states, as a reaction to the excesses of the early nineteenth century, when the reckless guarantee of the obligations of privately owned canals and railroads had brought the states, Maryland included, to the verge of bankruptcy.

But, says the Authority, in effect, reason is the life of the law, 12 and we should not permit twentieth century development to be fettered by strictures imposed a century or more ago, the reasons for which have long since disappeared. In support of this proposition, the Authority cites the opinion of this Court in Johns Hopkins Univ. v. Williams, supra, where Chief Judge Marbury, who filed the opinion for the Court, after discussing the constitutional prohibition against a loan of the State’s credit, said: “The unquestionable