## Facts

- New York City financed operations through short-term obligations, including tax, bond, revenue anticipation notes, and other budget-related notes.
- By 1975, the City faced a severe fiscal crisis and difficulty meeting short-term debt as it matured.
- The Legislature enacted the New York City Emergency Moratorium Act, which imposed a three-year bar on actions to enforce specified short-term City obligations.
- The moratorium applied to holders of notes maturing on or before June 30, 1976, unless holders “voluntarily” exchanged the notes for long-term bonds issued by the Municipal Assistance Corporation (MAC).
- The Act provided that non-exchanging noteholders would receive interest during the moratorium at an annual rate of at least 6%.
- MAC was a separate public authority created to assist the City; its bonds were not backed by the faith and credit of either the State or the City, but instead by specified revenue sources.
- Flushing National Bank, holding covered City notes, sued for declaratory and injunctive relief, arguing the Act unlawfully impaired creditor rights and effectively negated the constitutionally required “faith and credit” pledge for City indebtedness.
- The trial court and the Appellate Division upheld the Act; the Court of Appeals reviewed.

## Issues

1. Whether the Moratorium Act violated N.Y. Const. art. VIII, § 2 by effectively denying the City’s required “faith and credit” pledge for payment of principal and interest on its short-term indebtedness.
2. Whether federal constitutional objections (including Contract Clause claims) required invalidation of the Act.

## Decision

- The Court of Appeals reversed and held the Moratorium Act unconstitutional under the New York Constitution.
- The court concluded that a three-year prohibition on enforcement actions deprived noteholders of meaningful judicial remedies and rendered the City’s “faith and credit” pledge ineffective.
- The court declined to decide the federal constitutional issues after resolving the case on state constitutional grounds.
- The matter was remitted for further proceedings, including determination of interest consequences following invalidation of the moratorium.

## Legal Principles

- N.Y. Const. art. VIII, § 2 requires a city incurring indebtedness to pledge its “faith and credit” for payment of principal and interest; this obligation carries substantive, enforceable meaning.
- A legislative measure that bars enforcement of matured municipal debt for a substantial period is not merely a procedural adjustment; it can amount to a denial of the remedies that give content to the constitutional pledge.
- A creditor cannot be forced, through loss of enforcement rights, to accept a substitute obligation lacking the constitutionally required backing of the original municipal debt.
- Fiscal emergency does not authorize suspension of an explicit state constitutional limit on municipal debt obligations.
- When a state constitutional ground is dispositive, a court may refrain from deciding federal constitutional questions.

## Conclusion

The court invalidated New York City’s three-year moratorium on enforcement of specified short-term notes because it stripped creditors of enforcement rights essential to the City’s constitutionally mandated “faith and credit” pledge, and it remitted for further proceedings on resulting relief, including interest.


Flushing Nat’l Bank v. Mun. Assistance Corp., 40 N.Y.2d 731, 358 N.E.2d 848 (1976)