Maryland Industrial Development Financing Authority v. Meadow-Croft

Oppenhbimpr, J., delivered the opinion of the Court. This appeal involves the validity of the provisions of the statute creating the Maryland Industrial Development Financing Authority under Section 34 of Article III of the Maryland Constitution; it turns on whether the faith and credit of the State have in fact been pledged and, if not, whether the section of the Act which refers to such a pledge is misleading. The statute before us is Code (1965 Repl. Vol.), Article 41, Sections 266J to 266CC (the Act) as enacted by Chapter 714 of the Laws of Maryland of 1965.

The Act creates the Maryland Industrial Development Financing Authority (the Authority) as “a body corporate and politic” and a public instrumentality of the State, consisting of five members appointed by the Governor. The declared purpose of the Act is that “a need exists for new and expanded industrial enterprises to provide enlarged opportunities for gainful employment by the people of Maryland and thus to insure the preservation and betterment of the economy * * * in the interest of the public welfare.” The Authority is one of three statutory stimuli to industrial development. Previous enactments, codified in Articles 23 and 41, permit the issuance of revenue bonds by county governments for the purpose of building industrial facilities for lease to private tenants. There is also a semi-private corporation, known as the Development Credit Corporation; it makes loans to industries operating in the State, not only for the erection of buildings, but also to provide working capital.

The Authority may insure payments under a first mortgage on industrial projects provided the mortgage does not exceed 90 percent of the cost of the project and does not exceed $4,000,000. The total amount of insured mortgages may not exceed, at any one time, $30,000,000. The mortgagor must be either a county or municipality or a local development corporation organized under the law of, and operating within, the State of Maryland. Mortgages secured by real property may not exceed 25 years in duration.

The mortgages secured by a ⁵¹⁸ pledge of machinery and equipment may not exceed 15 years. In no event, however, shall the mortgage run beyond the initial term of the lease between the mortgagor and the tenant for which the project was constructed or acquired. The mortgagor, if a county or municipality, is prohibited, by Section 266W, from pledging its full faith and credit to the repayment of the mortgage; the lease must provide for the complete amortization of the mortgage during its initial term. The lease must also require the payment of the insurance premium the Authority requires as a condition to insuring the mortgage which shall not be more than three percent of the outstanding principal obligation.

These premiums are deposited in a nonlapsing revolving fund to be used by the Authority to meet its expenses and to pay any obligations it is required to assume pursuant to its insurance program. Sections 266L and 266Z read respectively as follows: “The Maryland Industrial Development 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.” “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:” On February 18, 1966, the members of the Authority resolved to approve the application of Lycoming Steel Corporation, a Pennsylvania corporation, for the insurance under the Act of the principal and interest payments of a mortgage to be executed by the County Commissioners of Washington County in order to finance the construction of an industrial project for lease to Lycoming. The appellee, a property owner in and taxpayer of the State, filed a petition for injunction and declara ⁵¹⁹ tory relief in the Circuit Court No. 2 of Baltimore City against the Authority and its members, asking a declaration that the Act and the transactions proposed by the Authority are unconstitutional and void because they violate Section 34 of Article III of the Maryland Constitution.

In the alternative, the petition asks that Section 266N be declared invalid 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, and the issuance of a permanent injunction forbidding the Authority and its members to represent in any way that the credit of the State would be so pledged. The appellants answered, and a hearing was held in which testimony was taken. Thereafter, in a written opinion followed by a decree, Judge Cullen found that Section 266N of the Act is invalid, void and of no effect and granted the injunction prayed. He found the remainder of the Act constitutional and valid.

In the argument before us, counsel agreed that if we affirm Judge Cullen’s finding that Section 266N contains an erroneous statement and is misleading, and that the appellee is to be enjoined from representing that the credit of the State is pledged under the Act to the payment of the principal of and interest on the insured mortgages, no other question of the constitutionality of the remainder of the Act under Section 34 of Article III of the Maryland Constitution is involved. If the purported pledge of the State’s credit in Section 266N is of no legal effect, the Act can be administered to insure mortgages without reliance on the State’s faith and credit; only the sale to the public of insured mortgages or interests therein would be involved, and no questions such as those which have been before the Court in connection with the sale of revenue bonds would be presented. See Lacher v. Board of Trustees of the State Colleges, 243 Md. 500 , 221 A. 2d 625 (1966), and Waring v. Board of Trustees of St. Mary’s College of Maryland, 243 Md. 513 , 221 A. 2d 631 (1966); Lerch v. Md. Port Authority, 240 Md. 438 , 214 A. 2d 761 (1965); Castle Farms Dairy Stores, Inc. v. Lexington Mkt. Authority, 193 Md. 472 , 67 A. 2d 490 (1949); and Wyatt v. State Roads Comm’n, 175 Md. 258 , 1 A. 2d 619 (1938). ⁵²⁰ In each of these cases, the act providing for the revenue bonds and the bonds themselves expressly stated that the credit of the State was not pledged for their payment.

The question before us is the meaning of Section 266N. Judge Cullen found that Section “unquestionably purports to pledge the State’s faith and credit * * * [A] pledge of the State’s faith and credit to the payment of the Mortgage imports an unconditional obligation of the State to pay the principal of and interest on the Mortgage as the same become due—such payments to be made, if necessary, from the general resources of the State.” The pledge is made “consistent with the terms and limitations of the terms of the subtitle.” Section 266Z sets forth terms which, in effect, provide that the State is not obligated to pay anything on default of a mortgage and after insurance funds have been exhausted. It may choose to pay, but if it does, that is a voluntary act, not the fulfilment of an obligation. The State may also choose not to pay, and such a choice, under the wording of Section 266Z, is not a breach of an obligation, for no obligation exists.

Judge Cullen, in his opinion, clearly and pungently analyzed the conjunctive impact of the two Sections, as follows: “[Wjhen the Act is examined, it does not provide for payment of the Mortgage in all events. In the event of a default on the Mortgage, the Authority could exhaust the insurance fund created by Section 266S of the Act. Of course, this fund may be insufficient since Section 266BB only provides for appropriations of $500,000 over a period of five years and the Act permits the insurance of $30,000,000 principal amount of mortgages. If the fund is insufficient, Section 266Z provides that the Authority shall ‘requesf the Governor for funds and that the Governor ‘may submit this (the Authority’s) request to the next regular session of the General Assembly.’ “Thus, there are three contingencies that may preclude timely payment of the Mortgage: (i) the Governor may refuse to submit the Authority’s request to the General Assembly, (ii) the General Assembly ⁵²¹ may not be in session or may not go into session in time to provide funds when due, and (iii) the General Assembly may refuse to meet the request and appropriate the funds.

It is clear that the pledge of the faith and credit and the express provisions of the Act are in conflict. “The Attorney General argues that Section 266L pledges the faith and credit subject to these provisions of the Act. However, the evidence as to the expectation of investors makes Section 266E a trap for even sophisticated investors. A pledge of the State’s faith and credit to a request for funds that may be refused is meaningless, and indeed misleading.” The Authority contends the two Sections are not in conflict because Section 266L, taken in conjunction with Section 266Z, amounts only to an insurance agreement by the State under which it promises, in exchange for a premium, to pay money upon the happening of certain contingencies, as contrasted with an unconditional promise to honor a general obligation of a governmental instrumentality. These contingencies, the Authority argues, are the finding of the Authority that the addition of moneys to the mortgage insurance fund is required to meet obligations, and the submission of this request by the Governor to the next regular session of the General Assembly.

The Authority, and the County Commissioners of Cecil County in their brief as amicus curiae, refer to the general principle of statutory construction that where two provisions of an act appear to be inconsistent or contradictory, it is the duty of the court to endeavor to reconcile them so as to effectuate the legislative purpose. The principle is sound, St. Joseph Hospital v. Quinn, 241 Md. 371 , 216 A. 2d 732 (1966) and Department of Tidewater Fisheries v. Sollers, 201 Md. 603, 611 , 95 A. 2d 306 (1953) and cases therein cited, but there is involved here, not only the interpretation of a statute, but the meaning of the Maryland Constitution. The faith and credit provision of Section 34 of Article III has been substantially unchanged since the adoption of the Constitution of 1851. The clause was inserted in that Constitution to re-establish and preserve the State’s ⁵²² credit after a period of deep financial troubles during which Maryland’s fiscal standing was seriously affected.

Bonsal v. Yellott, 100 Md. 481, 497-98 , 60 Atl. 593 (1905) ; Hanna, A Financial History of Maryland (1789-1848), 105-125. 1 Since the adoption of that constitutional provision, as the record below evidences, the credit of the State has been strong and unimpaired. See Md. State Debt & Finance Comm’n Report (1955) and Md. State Planning Comm’n, Management & Limits of the State Debt (1953). The record