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City’s Extension of Credit to Purchase Ferry Service Was Not Illegal

The Appellate Division Fourth Department dismissed a challenge to the City of Rochester using its credit to purchase a ferry service. In Matter of Summers v. City of Rochester, the court dismissed the claim on the grounds of laches but then went on to analyze the City’s actions under the N.Y Constitution and Local Finance Law and found its action valid.

When a private ferry service between Rochester and Toronto was a discontinued the City formed a limited liability company, the Rochester Ferry Company LLC (RFC) owned solely by the City, for the purpose of acquiring and operating the ferry. In 2005, the City entered into a guarantee and indemnity agreement (guarantee) with a third party, Export Finance, in order to guarantee the issuance of a mortgage for RFC to purchase the ferry. In 2006, the new Mayor discontinued the service and the City assumed the debt of RFC, dissolved RFC and sold the ferry leaving a debt to Export Finance of 19.4 million dollars.

Plaintiff, who was originally a proponent of the ferry service, then commenced this action seeking to prevent the City from paying the debt on the grounds that to do so would violate Article VIII section 1 of the N.Y. Constitution which prohibits a municipality from loaning “its credit to or in aid of any individual, or public or private corporation or association, or private undertaking.” Alternatively, Plaintiff claimed the agreement violated the Constitution Article VIII section 2 and Local Finance Law section 11.00 by contracting indebtedness for longer than the period of probable usefulness and Constitution Article X section 5, because the City did not obtain a special act of the State Legislature before forming RFC.

Initially, the court held that the claims are barred by the doctrine of laches. Noting that the Plaintiff was aware of and was actually a proponent of the City operating the ferry service in January, 2005, the court found that the Plaintiff delayed until August, 2007 to commence the action. The court held that the City established it would be harmed by not carrying out the agreement to pay the loan as its only choice would then be to default in paying the loan, resulting in damage to the City’s credit. But after reaching the conclusion that the case should be dismissed, the court took the somewhat unusual step of analyzing the underlying legal issues.

The Court concluded that there was no violation of the Constitution or the Local Finance Law. It found that as “the City was the sole member of RFC, it did not lend its credit to others in violation of that constitutional provision.” It further held that the loan was for a period well within the useful life of the ferry. Finally, the Court determined that a special act of the legislature was not required, stating instead that public corporations must be created by special act of the legislature but there is “nothing in the Limited Liability Company Law prohibiting municipalities from creating an LLC…”. Thus, it appears the Court has created a loophole in the constitutional requirement that municipalities must obtain authorization from the State Legislature to create a public corporation.