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Exhibit 99.6
[FORM OF SIDLEY AUSTIN LLP OPINION]
___________, 2007
To Each of the Persons Listed
on Schedule A Attached Hereto
Re: FPL Recovery Funding LLC Senior Secured Bonds, Series
A--Impairment and Takings under the Federal Constitution
Ladies and Gentlemen:
We have acted as special counsel to Florida Power & Light Company, a
Florida corporation ("FPL"), and FPL Recovery Funding, LLC, a Delaware limited
liability company (the "Issuer"), in connection with:
(i) FPL's sale to the Issuer of FPL's rights and interests in and to
the Storm-Recovery Property as defined in and created under the order
issued on May 30 as amended on rehearing by order issued on July 21, 2006
(the "Financing Order"), in Docket No. 060038-EI, of the Florida Public
Service Commission (the "Commission"), including the right to impose and
collect Storm-Recovery Charges (as defined in the Financing Order),
pursuant to a sale agreement dated as of ____________, 2007; and
(ii) the concurrent issuance of debt securities (the "Bonds") by the
Issuer, pursuant to the Indenture, dated as of __________, 2007 (the
"Indenture"), between the Issuer and The Bank of New York, as trustee (in
such capacity, the "Indenture Trustee"). Under the Indenture, the
Indenture Trustee holds, among other things, certain rights as described
below as collateral security for the payment of the Bonds.
The Rights consist of "storm-recovery property" (the "Rights") as defined
in Section 366.8260 of the Florida Statutes (the "Act"). The Rights were created
in favor of FPL, pursuant to the Financing Order issued by the Commission, and
the Rights were assigned to the Issuer pursuant to the Storm-Recovery Property
Sale Agreement dated as of [______________], 2006 (the "Sale Agreement") between
FPL and the Issuer in consideration for the payment by the Issuer to FPL of the
proceeds of the sale of the Bonds, net of issuance costs. The Rights include the
right to impose and receive certain "nonbypassable" storm-recovery charges as
described in the Financing Order (the "Charges"). The Charges may be
periodically adjusted, in the manner authorized in the Financing Order, in order
to enhance the probability that the revenues received by the Issuer from the
Charges are sufficient to (i) amortize the Bonds pursuant to the amortization
schedule to be followed in accordance with the provisions of the Bonds and the
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Indenture, (ii) pay interest thereon and related fees and expenses and (iii)
maintain the required capital reserve for the payment of the Bonds.
Section 366.8260(11) of the Act,(1) contains the following undertaking
(clause (b) of which we refer to as the "State Pledge") from the State of
Florida (the "State") :
"(a) For purposes of this subsection, the term "bondholder" means a
person who holds a storm-recovery bond,
(b) The state pledges to and agrees with bondholders, the owners of
the storm-recovery property, and other financing parties that the state
will not:
1. Alter the provisions of this section which make the
storm-recovery charges imposed by a financing order irrevocable, binding,
and nonbypassable charges;
2. Take or permit any action that impairs or would impair the value
of storm-recovery property; or
3. Except as allowed under this section, reduce, alter, or impair
storm-recovery charges that are to be imposed, collected and remitted for
the benefit of the bondholders and other financing parties until any and
all principal, interest, premium, financing costs and other fees,
expenses, or charges incurred, and any contracts to be performed, in
connection with the related storm-recovery bonds have been paid and
performed in full.
Nothing in this paragraph shall preclude limitation or alteration if
full compensation is made by law for the full protection of the
storm-recovery charges collected pursuant to a financing order and of the
holders of storm-recovery bonds and any assignee or financing party
entering into a contract with the electric utility.
(c) Any person or entity that issues storm-recovery bonds may
include the pledge specified in paragraph (b) in the bonds and related
documentation."
All capitalized terms used herein and not otherwise defined shall have the
meaning specified in the Indenture unless the context clearly indicates
otherwise.
Questions Presented
You have requested our opinion as to:
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(1) We refer you to the opinion of Squire, Sanders & Dempsey L.L.P., delivered
this day, as to the validity and constitutionality of the Act, and the
validity and irrevocability of the Financing Order.
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(a) whether the State Pledge creates a contractual relationship
between the State and the holders of the Bonds (the "Bondholders");
(b) whether the Bondholders could challenge successfully under the
"contract clause" of the United States Constitution (Article I, Section
10; and herein the "Federal Contract Clause") the constitutionality of any
legislation passed by the Florida legislature or voted by the people of
Florida as a constitutional amendment(2) or any action of the Commission
exercising legislative powers ("Legislative Action") that alters, impairs
or reduces the value of the Storm-Recovery Property so as to impair (i)
the terms of the Indenture or the Bonds or the Charges or (ii) the rights
and remedies of the Bondholders (or the Indenture Trustee acting on their
behalf) (any impairment described in clause (i) or (ii) being referred to
herein as an "Impairment") prior to the time that the Bonds have been paid
in full or full compensation made by law for the full protection of the
Bondholders;
(c) whether preliminary injunctive relief would be available under
federal law to delay implementation of legislation that limits, alters,
impairs or reduces the value of the Rights so as to cause an Impairment
pending final adjudication of a claim challenging such Legislative Action
under the Federal Contract Clause and, assuming a favorable final
adjudication of such claim, whether relief would be available to prevent
permanently the implementation of the challenged Legislative Action; and
(d) whether, under the Fifth Amendment to the United States
Constitution, made applicable to the State by the Fourteenth Amendment to
the United States Constitution, which provides in part, "nor shall private
property be taken for public use, without just compensation" (the "Federal
Takings Clause"), the State could repeal or amend the Act or take any
other action in contravention of the State Pledge without paying just
compensation to the Bondholders, as determined by a court of competent
jurisdiction, if doing so would (a) constitute a permanent appropriation
of a substantial property interest of the Bondholders in the
Storm-Recovery Property or deny all economically productive use of the
Storm-Recovery Property; (b) destroy the Storm-Recovery Property other
than in response to emergency conditions; or (c) substantially reduce,
alter or impair the value of the Storm-Recovery Property so as to unduly
interfere with the reasonable expectations of the Bondholders arising from
their investments in the Bonds (a "Taking").
Based upon our review of relevant judicial authority, as set forth in this
letter, but subject to the qualifications, limitations and assumptions
(including the assumption that any Impairment
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(2) Propositions adopted by popular vote get no special deference under the
Federal Contract Clause. Cont'l. Ill. Nat'l Bank v. Washington, 696 F.2d
692 (9th Cir. 1983), appeal dismissed, 103 S. Ct., 1762 (1983), rehearing
denied, 461 U.S. 950 (1983). References herein to legislation or
legislative action include possible amendments voted by the people under
Article XI of the Florida constitution.
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would be "substantial") set forth in this letter, it is our opinion that a
reviewing court of competent jurisdiction, in a properly prepared and presented
case:
(i) would conclude that the State Pledge constitutes a contractual
relationship between the Bondholders and the State;
(ii) would conclude that, absent a demonstration by the State that
an Impairment is necessary to further a significant and legitimate public
purpose, the Bondholders (or the Indenture Trustee acting on their behalf)
could successfully challenge under the Federal Contract Clause the
constitutionality of any Legislative Action, in any case determined by
such court to alter, impair or reduce the value of the Rights or the
Charges so as to cause an Impairment prior to the time that the Bonds are
fully paid and discharged or full compensation is made by law for the full
protection of the Charges and the Bondholders;
(iii) should conclude that permanent injunctive relief is available
under federal law to prevent implementation of Legislative Action
hereafter adopted determined by such court to limit, alter, impair or
reduce the value of the Rights or the Charges so as to cause an Impairment
in violation of the Federal Contract Clause; and although sound and
substantial arguments support the granting of preliminary injunctive
relief, the decision to do so will be in the discretion of the court
requested to take such action, which will be exercised on the basis of the
considerations discussed in subpart B of Part II below; and
(iv) would conclude that the State would be required to pay just
compensation to Bondholders if the State's repeal or amendment of the Act
or taking of any other action in contravention of the State Pledge (a)
constituted a permanent appropriation of a substantial property interest
of the Bondholders in the Storm-Recovery Property or the Charges or denied
all economically productive use of the Storm-Recovery Property; (b)
destroyed the Storm-Recovery Property or the Charges other than in
response to emergency conditions; or (c) substantially reduced, altered or
impaired the value of the Storm-Recovery Property or the Charges so as to
unduly interfere with the reasonable expectations of the Bondholders
arising from their investments in the Bonds.
Our opinion in the immediately preceding paragraph (i) is based upon our
evaluation of existing judicial decisions and arguments related to the factual
circumstances likely to exist at the time of a Federal Contract Clause challenge
to a Legislative Action; such precedents and such circumstances could change
materially from those discussed below in this letter. Accordingly, such opinion
is intended to express our belief as to the result that should be obtainable
through the proper application of existing judicial decisions in a properly
prepared and presented case.
We also note, with respect to such opinion, that existing case law
indicates that the State would have to establish that any Impairment is
necessary and reasonably tailored to address a significant public purpose,
such(3) as remedying or providing relief for a broad, widespread
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economic or social problem. The cases also indicate that the State's
justification would be subjected to a higher degree of scrutiny, and that the
State would bear a more substantial burden, if the Legislative Action impairs a
contract to which the State is a party (which we believe to be the case here),
as contrasted to a contract solely between private parties.
It is also our opinion that the Act is constitutional in all material
respects under the United States Constitution.
Discussion
I. Protection of State Pledge Under the Federal Contract Clause
Section 366.8260(11) of the Act provides:
The state pledges to and agrees with bondholders, the owners of
storm-recovery property, and the other financing parties that the
state will not alter the provisions of this section which make the
storm-recovery charges imposed by a financing order irrevocable,
binding, and nonbypassable charges; take or permit any action that
impairs or would impair the value of storm-recovery property; or,
except as allowed by Section 366.8260, reduce, alter, or impair the
storm-recovery charges to be imposed, collected, and remitted for
the benefit of the bondholders and financing parties, until any and
all principal, interest, premium, financing costs and other fees,
expenses or charges incurred, and any contracts to be performed in
connection with the related storm-recovery bonds have been paid and
performed in full.
As authorized by the foregoing statutory provision and the Order, the language
of the State Pledge has been included in the Indenture and in the Bonds. Based
on our analysis of relevant judicial authority, as set forth below, it is our
opinion, subject to all of the qualifications, limitations and assumptions
(including the assumption that any Impairment would be "substantial") set forth
in this letter, that, absent a demonstration by the State that an Impairment is
necessary to further a significant and legitimate public purpose, a reviewing
court would conclude that the State Pledge provides a basis upon which the
Bondholders (or the Indenture Trustee acting on their behalf) could challenge
successfully, under the Federal Contract Clause, the constitutionality of any
Legislative Action determined by such court to reduce, alter, or impair the
value of the Rights or the Charges so as to cause an Impairment prior to the
time that the Bonds are fully paid and discharged or full compensation is made
by law for the full protection of the Charges.
Article I, Section 10 of the United States Constitution prohibits any
state from impairing the "obligation of contracts," whether among private
parties or among such state and private
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parties.(3) The general purpose of the Federal Contract Clause is "to encourage
trade and credit by promoting confidence in the stability of contractual
obligations."(4) The law is well-settled that, under the Fourteenth Amendment to
the United States Constitution, "the [Federal] Contract Clause limits the power
of the States to modify their own contracts as well as to regulate those between
private parties."(5) Although the Federal Contract Clause appears literally to
proscribe any impairment, the United States Supreme Court has made it clear that
the proscription is not absolute: "Although the language of the [Federal]
Contract Clause is facially absolute, its prohibition must be accommodated to
the inherent police power of the State `to safeguard the vital interests of its
people.'"(6)
In recent cases, the United States Supreme Court has applied a three-part
analysis to determine whether a particular legislative action violates the
Federal Contract Clause:(7)
(1) whether the legislative action operates as a substantial
impairment of a contractual relationship;
(2) assuming such an impairment, whether the legislative action is
justified by a significant and legitimate public purpose; and
(3) whether the adjustment of the rights and responsibilities of
the contracting parties is reasonable and appropriate given
the public purpose behind the legislative action.
The first inquiry contains three components:(8)
(a) does a contractual relationship exist;
(b) does the change in law impair that contractual relationship;
and
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(3) Article I, Section 10, provides, in relevant part, "No State shall . . .
pass any bill of attainder, ex post facto law, or law impairing the
obligation of contracts, . . . ." U.S. Const. art. I, ? 10. Please see
opinion of Squire, Sanders & Dempsey, L.L.P., of even date herewith, with
respect to the Contract Clause in the Florida Constitution.
(4) See United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 15
(1977) ("U.S. Trust").
(5) Id. at 17.
(6) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410
(1983) ("Energy Reserves") (quoting Home Bldg. & Loan Ass'n v. Blaisdell,
290 U.S. 398, 434 (1934) ("Blaisdell")).
(7) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400,
411-12 (1983). See also Toledo Area AFL-CIO Council v. Pizza, 154 F.3d
307, 323 (6th Cir. 1998) (stating the three-part analysis).
(8) General Motors Corp. v. Romein, 503 U.S. 181, 186 (1992).
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(c) is the impairment substantial?
In addition, to succeed with a claim under the Federal Contract Clause, a
party must show that the contractual relationship is not an invalid attempt to
restrict or limit a state's "reserved powers."(9)
The following three subparts address: (i) whether a contract exists
between the State and the holders of the Bonds; (ii) if so, whether such
contract violates the "reserved powers" doctrine, which would render such
contract unenforceable; and (iii) the State's burden in justifying an
Impairment. The determination of whether particular Legislative Action
constitutes a substantial impairment of a particular contract is a fact-specific
analysis, and nothing in this letter expresses any opinion as to how a court
would resolve the issue of "substantial impairment" with respect to the Order,
the Rights or the Bonds vis-a-vis a particular Legislative Action. Therefore, we
have assumed for purposes of this letter that any Impairment resulting from the
legislative action being challenged under the Federal Contract Clause would be
substantial.(10) We have also assumed, for purposes of our analysis of the
Federal Contract Clause that the legislative action being challenged does not
also provide for "full compensation" and for the "full protection" of the
Charges and of the Bondholders within the meaning of the State Pledge. In the
final subpart of this Part I, we address what relief would likely be granted if
a Federal Contract Clause challenge were successfully asserted.
A. Existence of a Contractual Relationship
The courts have recognized the general presumption that, absent some clear
indication that a legislature intends to bind itself contractually, "a law is
not intended to create private contractual or vested rights but merely declares
a policy to be pursued until the legislature shall ordain otherwise."(11) This
presumption is based on the fact that the legislature's principal function is
not to make contracts, but to make laws that enact and advance legislative
policies. Thus, a person asserting the creation of a contract with the State
must overcome this presumption.
This general presumption can be overcome where the language of the statute
indicates an intention to create contractual rights. In determining whether a
contract has been created by
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(9) See discussion under subpart B of this Part I.
(10) We note, however, that in U.S. Trust the United States Supreme Court found
a substantial impairment where the States of New York and New Jersey
repealed outright an "important security provision" securing repayment of
bonds without any form of compensation to the bondholders, even in the
absence of a finding of the extent of financial loss suffered by the
bondholders as a result of the repeal. 431 U.S. 1, 19 (1977). See also
Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 429-35 (1934).
(11) National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470
U.S. 451, 466 (1985) ("Nat'l R.R.") (quoting Dodge v. Board of Educ., 302
U.S. 74, 79 (1937) ("Dodge")).
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statute, "it is of first importance to examine the language of the statute."(12)
The courts have ruled that a statute creates a contractual relationship between
a state and private parties if the statutory language contains sufficient words
of contractual undertaking.(13) The United States Supreme Court has stated that
a contract is created "when the language and circumstances evince a legislative
intent to create private rights of a contractual nature enforceable against the
State."(14)
In U.S. Trust, the United States Supreme Court affirmed the trial court's
finding, which was not contested on appeal, that a statutory covenant of two
states for the benefit of the holders of certain bonds gave rise to a
contractual obligation between such states and the bondholders.(15) The covenant
at issue limited the ability of the Port Authority of New York and New Jersey to
subsidize rail passenger transportation from revenues and reserves pledged as
security for such bonds. In finding the existence of a contract between such
states and bondholders, the Court stated "[t]he intent to make a contract is
clear from the statutory language: `The 2 States covenant and agree with each
other and with the holders of any affected bonds. . . .'"(16) Later, in Nat'l
R.R., the Court discussed the U.S. Trust covenant and noted: "[r]esort need not
be had to a dictionary or case law to recognize the language of contract" in
such covenant.(17)
Similarly, in Brand, the United States Supreme Court determined that the
Indiana Teachers' Tenure Act created a contract between the state and specified
teachers because the statutory language demonstrated a clear legislative intent
to contract. The Court based its decision, in part, on the legislature's use of
the word "contract" throughout the statute to describe the legal relationship
between the state and such teachers.(18)
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(12) Dodge v. Board of Educ., 302 U.S. 74, 78 (1937).
(13) See Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 104-05 (1938)
("Brand") (noting "the cardinal inquiry is as to the terms of the statute
supposed to create such a contract"); United States Trust Co. of New York
v. New Jersey, 431 U.S. 1, 18 (1977).
(14) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 18 n.14
(1977).
(15) Id. at 18.
(16) Id. at 17. Although the issue of whether a contract existed between such
states and the bondholders was never disputed on appeal, the Court
reviewed the language of the covenant and the circumstances surrounding
the covenant, and stated, "[w]e therefore have no doubt that the 1962
covenant has been properly characterized as a contractual obligation of
the two States." Id. at 18.
(17) See National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co.,
470 U.S. 451, 470 (1985).
(18) Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 105 (1938). However, the
mere use of the word "contract" in a statute will not necessarily evince
the requisite legislative intent. As the Court cautioned in Nat'l R.R.,
the use of the word "contract" alone would not signify the existence of a
contract with the government. National R.R. Passenger Corp. v. Atchison,
Topeka & Santa Fe Ry. Co., 470 U.S. 451, 470 (1985). In Nat'l R.R., the
Court found that use of the word "contract" in the Rail Passenger Service
Act defined only the relationship between the newly-created
nongovernmental corporation (Amtrak) and the railroads, not the
relationship between the
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Like the language of the covenant considered in U.S. Trust, the language
of the State Pledge plainly manifests the Legislature's intent to bind the
State.(19) Indeed, the biggest difference between such language and the U.S.
Trust statute is the use of the verb "pledge," rather than "covenant," but that
difference is not, in our view, material. The definition of the Legislature's
term - "pledge" -- is "to bind by a promise."(20) Accordingly, this slight
variation between the State Pledge and the language contained in the U.S. Trust
statute appears inconsequential and not to provide a basis for distinguishing
the wording of the two statutes. The Act provides that the State "pledges to and
agrees with bondholders". Unlike the statute construed in Nat'l R.R., the State
Pledge expressly includes the words "pledges" and "agrees with bondholders" and
authorizes the State Pledge to be included in the storm-recovery bonds and
related documentation. The language unambiguously indicates the State's intent
to be bound to the holders of the Bonds and supports the conclusion that the
State Pledge constitutes a contractual relationship between the State and the
Bondholders.
In summary, the language of the State Pledge supports the conclusion that
it constitutes a contractual relationship between the State and the Bondholders.
We are not aware of any circumstances surrounding the Act suggesting that the
Legislature did not intend to bind the State contractually by the State Pledge.
B. Reserved Powers Doctrine
The "reserved powers" doctrine limits the State's ability to bind itself
contractually in a manner which surrenders an essential attribute of its
sovereignty.(21) Under this doctrine, if a contract limits a state's "reserved
powers" -- powers that cannot be contracted away -- such contract is void.(22)
Although the scope of these "reserved powers" has not been precisely defined by
the courts, case law has established that a state cannot contract away its
police powers(23) or its
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United States and the railroads. The Court determined that "[l]egislation
outlining the terms on which private parties may execute contracts does
not on its own constitute a statutory contract." Id. at 467.
(19) It could be contended that the factual situation in the U.S. Trust case is
distinguishable from the factual situation surrounding the issuance of the
Bonds. In U.S. Trust, the bonds were issued by the Port Authority -- a
governmental agency -- while the Bonds are being issued by a private
entity. However, storm-recovery property can only be created pursuant to a
financing order issued by the Commission -- a governmental agency --
pursuant to the Act. The Commission's authority to issue such an order
rests with the State and therefore the issuance of the Bonds is
State-sanctioned in a manner closely analogous to the situation in U.S.
Trust.
(20) WEBSTER'S NEW WORLD DICTIONARY 573 (2d ed. 1982).
(21) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 23 (1977).
(22) Id. See generally United States v. Winstar Corp., 518 U.S. 839, 888-90
(1996) ("Winstar").
(23) Stone v. Mississippi, 101 U.S. 814, 817 (1880).
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power of eminent domain.(24) In contrast, the United States Supreme Court has
stated that a state's "power to enter into effective financial contracts cannot
be questioned."(25)
Under existing case law, the State Pledge does not, in our view, limit
any "reserved powers" of the State. The State Pledge does not purport to
contract away, or constitute a waiver of, the State's power of eminent domain or
otherwise restrict the State's ability to legislate for the public welfare or to
exercise its police powers. Through "financing orders" (such as the Financing
Order), the State will authorize electric utilities to issue "storm-recovery
bonds" (such as the Bonds) and pledges not to take or permit any action that
impair or would impair the value of the "storm-recovery property" (such as the
Rights) securing such instruments. In other words, the State Pledge constitutes
an agreement made by the State not to impair the financial security for
storm-recovery bonds in order to foster the capital markets' acceptance of such
bonds, which are expressly authorized and will be issued to facilitate
storm-recovery in the State. The State Pledge is clearly an inducement offered
by the State to investors to purchase the Bonds. As such, we believe that the
State Pledge is akin to the type of "financial contract" involved in U.S. Trust,
a promise that revenues and reserves securing the bonds at issue there would not
be depleted beyond a certain level.(26)
C. State's Burden to Justify an Impairment
Any substantial impairment by a state of contractual rights which
cannot be upheld under the "reserved powers" doctrine must be justified as a
legitimate exercise of the state's police powers in order to be successfully
defended against a challenge pursuant to the Federal Contract Clause.(27) In
Blaisdell(28), referred to by the United States Supreme Court in U.S. Trust as
"the leading case in the modern era of [Federal] Contract Clause
interpretation,"(29) the Court found that the economic exigencies of the time
(the Depression) justified a Minnesota law which (i) authorized county courts to
extend the period of redemption from foreclosure sales on mortgages previously
made "for such additional time as the court may deem to be just and equitable,"
subject to certain limitations, and (ii) limited actions for deficiency
judgments.(30) The Court
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(24) West River Bridge Co. v. Dix, 47 U.S. 507, 525-26 (1848).
(25) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 24 (1977).
(26) Id. at 25.
(27) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400,
411-12 (1983).
(28) Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398 (1934).
(29) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 15 (1977).
(30) The mortgagor was required to continue to pay the reasonable income or
rental value of the property, as determined by the court, toward payment
of taxes, insurance, interest and principal. The law stated that it was to
remain in effect only during the current emergency and no later than May
1, 1935; no redemption period
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stated that the "reserved powers" doctrine could not be construed to "permit the
state to adopt as its policy the repudiation of debts or the destruction of
contracts or the denial of means to enforce them."(31) On the other hand, the
Court also indicated that the Federal Contract Clause could not be construed(32)
to prevent limited and temporary interpositions with respect
to the enforcement [of contracts] if made necessary by a great
public calamity such as fire, flood, or earthquake. The
reservation of state power appropriate to such extraordinary
conditions may be deemed to be as much a part of all contracts
as is the reservation of state power to protect the public
interest in other situations to which we have referred. And,
if state power exists to give temporary relief from the
enforcement of contracts in the presence of disasters due to
physical causes such as fire, flood, or earthquake, that power
cannot be said to be non-existent when the urgent public need
demanding such relief is produced by other and economic
causes.
In upholding the Minnesota law, the Court relied on the following: (1) an
economic emergency existed which threatened the loss of homes and lands which
furnish those persons in possession with necessary shelter and means of
subsistence; (2) the law was not enacted for the benefit of particular
individuals but for the protection of a basic interest of society; (3) the
relief provided by the law was appropriate to the emergency, and could only be
granted upon reasonable conditions; (4) the conditions on which the period of
redemption was extended by the law did not appear to be unreasonable; and (5)
the law was temporary in operation and limited to the emergency on which it was
based.(33) In 1983, the United States Supreme Court stated in its Energy
Reserves opinion that "a significant and legitimate public purpose" is required
to justify a substantial impairment of contract.(34) Similarly, the Court had
earlier stated that, to be justifiable, an impairment must deal with "a broad,
generalized economic or social problem."(35)
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could be extended beyond the expiration of the law. Home Bldg. & Loan Ass'n v.
Blaisdell, 290 U.S. at 415-18.
(31) Id. at 439.
(32) Id. at 439-40.
(33) Id. at 444-47. Contemporaneous cases in which the United States Supreme
Court struck down laws passed in response to an economic emergency
reinforce the notion that, to be justified, the impairment must be a
reasonable and specific response to the conditions. See Treigle v. Acme
Homestead Ass'n, 297 U.S. 189 (1936); W.B. Worthen Co. v. Kavanaugh, 295
U.S. 56 (1935) ("Worthen"); W.B. Worthen Co. v. Thomas, 292 U.S. 426
(1934).
(34) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411
(1983).
(35) Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 250 (1978)
("Spannaus").
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The deference to be given by a court to a legislature's determination of
the need for a particular impairment depends on whether the contract is purely
private or the state is a contracting party. In a 1987 decision evaluating a
state statute under the Federal Contract Clause, the United States Supreme Court
noted that it has repeatedly held that, unless a state is a contracting party
(which we believe to be the case here), courts should defer to legislative
judgment as to the necessity and reasonableness of a particular action.(36) Both
the Energy Reserves and Spannaus opinions noted, however, that when a state is a
contracting party the "stricter standard" of justification set forth in the U.S.
Trust opinion is applicable.(37) The Energy Reserves Court also noted that "[i]n
almost every case, the Court has held a governmental unit to its contractual
obligations when it enters financial or other markets."(38)
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(36) Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470 (1987)
("DeBenedictis"). The decision involved a 1966 Pennsylvania law that
authorized a state agency to revoke a coal mine operator's mining permit
if removal of the coal caused damage to a structure or area protected by
the law and the operator had not within six months taken certain remedial
action. Several mine operators claimed that the law impaired their rights
to enforce contractual waivers by the owners of the affected surface
rights of any claims for liability due to surface damage. While agreeing
that the 1966 law operated as a substantial impairment of the operators'
contracts, the Court held that the state had a strong public interest in
preventing the damage caused by underground mining, "the environmental
effect of which transcends any private agreement between contracting
parties." 480 U.S. at 505. Since 1966, the operators had conducted mining
operations under approximately 14,000 structures protected by the law. The
Court noted the "devastating effects" of subsidence caused by underground
mining, including substantial damage to foundations, walls and other
structural members, and the integrity of houses and buildings; sinkholes
which made land difficult or impossible to develop or farm; and loss of
groundwater and surface ponds. Id. at 474-75. The Court concluded that the
law "plainly survives scrutiny under our standards for evaluating
impairments of private contracts." Id. at 505-06.
(37) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400,
412-13 n.14 (1983); Allied Structural Steel Co. v. Spannaus, 438 U.S. 234,
244 n.15 (1978). See also United States v. Winstar Corp., 518 U.S. 839,
876 (1996) (noting "heightened Contract Clause scrutiny when States
abrogate their own contractual obligations").
(38) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 412
n.14 (1983) (citing United States Trust Co. of New York v. New Jersey, 431
U.S. 1 (1977); W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935); and
Murray v. Charleston, 96 U.S. 432 (1878) ("Murray")). In Worthen, the
United States Supreme Court reversed a decision of the Arkansas Supreme
Court upholding the validity of legislative enactments which, in the words
of the former, take "from the mortgage [securing bonds issued by municipal
improvement districts pursuant to state law] the quality of an acceptable
investment for a rational investor" by making it much more difficult and
time consuming to foreclose upon the collateral posted as security for the
mortgage. 295 U.S. at 60. Such enactments were accompanied by a
legislative "declaration of an emergency, which was stated to endanger the
peace, health, and safety of a multitude of citizens." Id. at 59. In
Murray, the United States Supreme Court reversed a judgment of the Supreme
Court of South Carolina upholding an ordinance of the City of Charleston
which permitted the City to withhold, as a tax, a portion of the interest
that was otherwise payable with respect to bonds issued by the City. This
"tax" was held to violate the Federal Contract Clause: "no municipality of
a State can, by its own ordinances, under the guise of taxation, relieve
itself from performing to the letter all that it has expressly promised to
its creditors." 96 U.S. at 448. The principal exception, if it is an
exception, is Faitoute v. Asbury Park, 316 U.S. 502, 511 (1942), discussed
further below ("Impairment of an obligation means refusal to pay an honest
debt, it does not mean contriving ways and means for paying it.").
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In U.S. Trust, the United States Supreme Court stated that an impairment
of a contract with a state "may be constitutional if it is reasonable and
necessary to serve an important public purpose."(39) The Court further stated,
however, that "complete deference to a legislative assessment of reasonableness
and necessity is not appropriate."(40) The "public purposes" advanced as
justifications for the contractual impairment were the promotion of mass
transportation, energy conservation and environmental protection, and
encouragement of the use of public transportation rather than private
automobiles.(41) The Court rejected those justifications because repeal of the
covenant was "neither necessary to achievement of the plan nor reasonable in
light of the circumstances."(42) The Court stated that a modification less
drastic than total repeal would have permitted the states to achieve their plan
to improve commuter rail service, and, in fact, the states could have achieved
that goal without modifying the covenant at all.(43) For example, the states
"could discourage automobile use through taxes on gasoline or parking . . . and
use the revenues to subsidize mass transit projects."(44)
The U.S. Trust Court contrasted the legislation under consideration with
the statute challenged in El Paso v. Simmons,(45) which limited to five years
the reinstatement rights of defaulting purchasers of land from the state. For
many years prior to the enactment of this statute, defaulting purchasers had
been allowed to reinstate their claims upon written request and payment of
delinquent interest, unless the rights of third parties had intervened. In the
judgment of the U.S. Trust Court, this older (19th century) statute "had effects
that were unforeseen and unintended by the legislature when originally adopted,"
i.e., "speculators were placed in a position to obtain windfall benefits," and
therefore adoption of a statute of limitations was reasonable to restrict
parties to gains reasonably expected from the contract when the original statute
was adopted.(46) In contrast, the U.S. Trust Court stated that the need for mass
transportation was not a new development and the likelihood that publicly owned
commuter railroads would produce substantial deficits was well known when the
covenant was adopted.(47)
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(39) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 25 (1977).
(40) Id. at 26.
(41) Id. at 28-29. The Court noted that when the bills to repeal the covenant
were pending "a national energy crisis was developing." Id. at 13-14.
(42) Id. at 29.
(43) Id. at 30.
(44) Id. at 30 n.29.
(45) El Paso v. Simmons, 379 U.S. 497 (1965).
(46) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 31 (1977).
(47) Id. at 31-32.
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Although, the Court noted, public perception of the importance of mass transit
undoubtedly grew between 1962, when the covenant was adopted, and 1974, when it
was repealed, "these concerns were not unknown in 1962, and the subsequent
changes were of degree and not of kind. . . . [and did not cause] the covenant
to have a substantially different impact in 1974 than when it was adopted in
1962."(48)
The U.S. Trust Court also distinguished its earlier decision in Faitoute
Iron & Steel Co. v. City of Asbury Park,(49) which, according to the Court, was
the "only time in this century that alteration of a municipal bond contract has
been sustained."(50) Faitoute involved a state municipal reorganization act
under which bankrupt local governments could be placed in receivership by a
state agency. Pursuant to that act, the holders of certain municipal revenue
bonds received new securities bearing lower interest rates and later maturities.
According to the Court in U.S. Trust, the earlier decision rejected the
dissenting bondholders' Federal Contract Clause claims on the theory that the
"old bonds represented only theoretical rights; as a practical matter the city
could not raise its taxes enough to pay off its creditors under the old contract
terms," and thus the plan "enabled the city to meet its financial obligations
more effectively."(51) The U.S. Trust Court further quoted Faitoute to the
effect that the obligation in that case was "discharged, not impaired" by the
plan.(52)
The Court's opinion in Winstar, even though not a Federal Contract Clause
case, is consistent with U.S. Trust in imposing a more rigorous standard of
justification where the government is a contracting party. One issue in Winstar
was whether the contract claim was barred by the "sovereign acts" doctrine,
i.e., the government's "public and general" acts cannot amount to a breach of
contract. Although the legislation alleged to constitute a contractual breach
had as its purposes "preventing the collapse of the [thrift] industry, attacking
the root causes of the crisis, and restoring public confidence",(53) the Court
held a "sovereign acts" defense was unavailable: "[w]hile our limited enquiry
into the background and evolution of the thrift crisis leaves us with the
understanding that Congress acted to protect the public in the FIRREA
legislation, the extent to which this reform relieved the Government of its own
contractual
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(48) Id. at 32.
(49) Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502 (1942)
("Faitoute").
(50) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 27 (1977).
(51) Id. at 28.
(52) Id. (quoting 316 U.S. at 511).
(53) United States v. Winstar Corp., 518 U.S. 839, 856 (1996).
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obligations precludes a finding that the statute is a `public and general' act
for purposes of the sovereign acts defense."(54)
We note that existing case law indicates that the State would have to
establish that any Impairment is necessary and reasonably tailored to address a
significant public purpose, such as remedying or providing relief for a broad,
widespread economic or social problem. The cases also indicate that the State's
justification of an Impairment would be subjected to a higher degree of
security, and that the State would bear a more substantial burden, if the
Legislature's actions impair a contract to which the State is a party (the case
here), as contrasted to a contract solely between private parties.
Thus, the relevant case law demonstrates that a state bears a substantial
burden when attempting to justify an impairment of a contract to which it is a
party. A mere recitation that the impairment is in the public interest is
insufficient. Instead, a specific and significant state interest must be
established, and the impairment must be necessary to further that interest.
Furthermore, "a state is not free to impose a drastic impairment when an evident
and more moderate course would serve its purposes equally well."(55)
II. Relief Granted in a Federal Contract Clause Challenge
A. Permanent Injunctive Relief
In a Federal Contract Clause challenge to a Legislative Action alleged to
cause an Impairment, the remedies which the plaintiff would be expected to seek
are (i) a declaration of the invalidity of such Legislative Action and (ii) an
order permanently enjoining State officials from enforcing the provisions of
such law; a claim for money damages against the State would appear less likely.
Whether such a declaration of invalidity could be obtained will depend on
application of the principles discussed in Part I, as well as a demonstration
that such law effected a substantial impairment. If such a declaration were
obtained, the plaintiff would then have to meet several requirements in order to
obtain a permanent injunction. Florida law would govern the requirements for
issuance of a permanent injunction if the case were brought in State court,(56)
while federal law would govern those requirements if the case were brought in
federal court.(57) The following discussion relates to federal law only.
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(54) Id. at 903.
(55) United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 31 (1977).
(56) Please see the Squire, Sanders & Dempsey LLP opinion, of even date
herewith, for an analysis of Florida law and permanent injunctive relief.
(57) However, if the case is brought to federal court via diversity
jurisdiction, it is possible that the federal court would use state law in
deciding whether or not to issue an injunction.
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Federal case law applies the following test in determining whether to
grant permanent injunctive relief: (i) success on the merits of the claim;(58)
(ii) a demonstration of irreparable harm; (iii) a showing of the inadequacy of
legal remedies; and (iv) a determination that granting the injunction will not
disserve the public interest.(59) The first requirement, a showing of likely
success on the merits of the claim, will have been satisfied by obtaining the
aforementioned declaration of the invalidity of such law.(60) The party seeking
a permanent injunction must also establish that it has no adequate remedy at
law, for example, money damages. It seems doubtful that the Bondholders (or the
Indenture Trustee acting on their behalf) could obtain adequate money damages
from the State or its officials.(61) Such party must further show that without
permanent injunctive relief, it would suffer irreparable harm. The "irreparable
harm" and "inadequate legal remedies" tests are closely related. However, one
way to distinguish the two tests is to interpret the "irreparable harm"
requirement to mean that the wrongful act be of a continuing nature, as opposed
to a one-time denial of rights.(62) It appears to us that any substantial
Impairment would, in all likelihood, constitute a transgression of a continuing
nature supporting the grant of permanent injunctive relief. For example, the
Eleventh Circuit (including the Fifth Circuit prior to the time the Fifth
Circuit was subdivided to create the Eleventh Circuit) has acknowledged that a
federal court may enjoin state officials from enforcing an unconstitutional
statute under certain "unusual" circumstances that require equitable relief. In
Let's Help Florida v. McCrary,(63) the Fifth Circuit (at the time that federal
courts in Florida were part of the Fifth Circuit) upheld the issuance of an
injunction against enforcement of two statutes limiting political contributions
because the timing of the next election, which was to be held a few weeks later,
meant that the plaintiffs would suffer an irreparable loss of their First
Amendment rights if they were barred from making contributions that they were
constitutionally permitted to make. Had the court refused to provide equitable
relief while awaiting a trial on the
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(58) Klay v. United Health Group, Inc., 376 F.3d 1092, 1097 (11th Cir. 2004);
Florida Keys Citizen Coalition, Inc. v. United States Army Corps of
Engineers (Florida Keys), 374 F.Supp.2d 1116, 1128 (S.D. Fla. 2005).
(59) Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-07 (1959); Siegel v.
LePore, 234 F.3d 1163, 1176 (11th Cir. 2000).
(60) A Choice for Women v. Butterworth, 54 F.Supp.2d 1148, 1158 (S.D. Fla.
1998).
(61) Examples of hurdles to the receipt of such damages might include, but are
not limited to, State sovereign immunity to suit in a particular forum,
State administrative procedures for filing claims, legislative refusal to
appropriate funds to pay a damages award, and the limited funds available
to State officials.
(62) United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953); Siegel, 234
F.3d at 1176-77.
(63) 61 F.2d 195, 199 (5th Cir. 1980) ("A federal court may enjoin state
officials from enforcing an unconstitutional statute. . . . An injunction
is proper in this case because no legal remedy could correct the
irreparable injury to plaintiffs' first amendment rights, important for an
election only weeks away."); but see Cmty. Action Group v. City of
Columbus, 473 F.2d 966, 973 (5th Cir. 1973) (The "possible
unconstitutionality of a statute 'on its face' does not in itself justify
an injunction against good faith attempts to enforce it" absent "any
showing of bad faith, harassment, or any other unusual circumstance that
would call for equitable relief.") (quoting Younger v. Harris, 401 U.S.
37, 54 (1971)).
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merits, the plaintiffs would have permanently lost their opportunity to affect
the outcome of that election through their contributions. The court ruled that
such a situation constituted the necessary unusual circumstances that could
justify equitable relief. For the reasons stated above, we believe that a
substantial Impairment in this case would constitute the unusual circumstances
that are required for the grant of permanent injunctive relief from a court
sitting in the Eleventh Circuit.
B. Preliminary Injunctive Relief
Whether a preliminary injunction delaying implementation of Legislative
Action being challenged under the Federal Contract Clause as a substantial
Impairment could be obtained by the Bondholders (or the Indenture Trustee acting
on their behalf) pending an adjudication on the merits of such claim will depend
on several considerations. As noted in subpart B of this Part II with respect to
the availability of permanent injunctive relief, an action challenging such
Legislative Action, and therefore an accompanying request for preliminary
injunctive relief, could be brought in either a Florida court or a federal
court, and Florida law or federal law, respectively, would provide the basis for
determining whether such relief should be granted.(64) The following discussion
relates to federal law only.
The function of preliminary injunctive relief is to preserve the latest
uncontested status quo prior to the action which is the subject of the legal
challenge.(65) The latest uncontested status quo with respect to the Bonds prior
to the enactment of the challenged Legislative Action would appear to be the
continued effectiveness of the Order and the validity of the Rights and Charges.
The factors considered by federal courts in ruling on a request for preliminary
injunctive relief are: (i) the party seeking relief must show a substantial
likelihood of success on the merits; (ii) such party will suffer a substantial
threat of irreparable injury if the preliminary injunction is not granted; (iii)
the threatened injury to the plaintiff outweighs the injury the injunction would
cause to the defendant; and (iv) the injunction must not be adverse to the
public interest.(66) The third part of the test, the balancing of hardships, is
often done on a "sliding scale" basis: the showing
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(64) Once again, if the case enters federal court via diversity jurisdiction,
the federal court may use Florida law in deciding whether to issue an
injunction.
(65) University of Texas v. Camenisch, 451 U.S. 390, 395 (1981) ("The purpose
of a preliminary injunction is merely to preserve the relative positions
of the parties until a trial on the merits can be held."); Alabama v.
United States Army Corps of Engineers, 424 F.3d 1117, 1134-35 (11th Cir.
2005) ("[T]he purpose of a preliminary injunction is `merely to preserve
the relative positions of the parties until a trial on the merits can be
held.'" (quoting United States v. Lambert, 695 F.2d 536, 539 (11th Cir.
1983)); United States v. DBB, Inc., 180 F.3d 1277, 1282 n5 (11th Cir.
1999).
(66) Schiavo ex rel. Schindler v. Schiavo, 403 F.3d 1223, 1225-26 (11th Cir.
2005); Siegel, 234 F.3d at 1176.
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of hardship required by a party seeking relief is inversely related to the
strength on the merits of such party's claims.(67)
Assuming that the injunction is not adverse to the public interest, that
the Federal Contract Clause claim appears to the court to be meritorious (based
on the application of the principles discussed in Part I), and further assuming
that the challenged Legislative Action effects a substantial Impairment, the
requirement of likelihood of success on the merits should be met. However,
decisions in several federal courts have found that a delay in the receipt of
payments until final judgment is not the type of "irreparable harm" which a
preliminary injunction seeks to prevent, absent countervailing circumstances --
such as the possibility that such delay could result in the insolvency or the
destruction of the business of the party seeking the preliminary injunction or
could result in the other party's insolvency (thereby rendering a judgment
worthless).(68) Notwithstanding these decisions, there are arguments why payment
delays on the Bonds should be accepted as "irreparable harm," and why the
Bondholders would experience greater harm if preliminary injunctive relief were
denied than any other party would suffer if it were granted. For example, if
imposition and collection of the Charges, and accordingly payments to the
Issuer, were stopped or reduced, the ratings on the Bonds would likely be
downgraded, causing a loss of value in the Bonds and possibly causing
institutional Bondholders to sell their Bonds at depressed market prices, and
Bondholders could experience delays or omissions in the receipt of payments of
interest or principal on their Bonds. In addition, any such loss on sale or
additional interest due the Bondholders as the result of the payment
interruption probably could not be recovered from the likely defendant (the
State) in the proceeding on the merits.
III. Federal Takings Clause
A. Analysis
The Federal Takings Clause --- "nor shall private property be taken for
public use, without just compensation" --- is made applicable to state action
via the Fourteenth Amendment. Webb's Fabulous Pharmacies v. Beckwith, 449 U.S.
155, 160 (1980). The Federal Takings Clause covers both tangible and intangible
property. Ruckelshaus v. Monsanto Co., 467 U.S.
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(67) Texas v. Seatrain International, S.A., 518 F.2d 175, 180 (5th Cir. 1975)
("[the inability to prove with certainty eventual success on the merits]
does not foreclose the possibility that temporary restraint may be
appropriate. . . . the importance and nature of the requirement can vary
significantly, depending upon the magnitude of the injury which would be
suffered . . . and the relative balance of the threatened hardship faced
by each of the parties. . . . [N]one of the four prerequisites has a fixed
quantitative value. Rather, a sliding scale is utilized, which takes into
account the intensity of each in a given calculus."); DelMonte Fresh
Produce Co. v. Dole Food Co., Inc., 148 F.Supp.2d 1326, 1335 (S.D. Fla.
2001) ("The standard is not rigidly applied by assigning a fixed
quantitative value to each of the four factors. Rather, the court must use
a flexible scale which balances each consideration and arrives at the most
equitable result given the particular circumstances").
(68) See, e.g., Centurion Reinsurance Co. v. Singer, 810 F.2d 140 (7th Cir.
1987); Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 386 and n.1
(7th Cir. 1984).
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986, 1003(69). Rights under contracts can be property for purposes of the
Federal Takings Clause. Lynch v. United States, 292 U.S. 571, 577 (1934), but
legislation that "disregards or destroys" contract rights does not always
constitute a taking. Connolly v. Pension Benefit Guaranty Corporation, 475 U.S.
211 (1986) at 224. Where intangible property is at issue, state law will
determine whether a property right exists. If a court determines that an
intangible asset is property, a court will next look to whether the owner of the
property interest had a "reasonable investment-backed expectation" that the
property right would be protected.(70)
The United States Supreme Court has suggested that the Federal Takings
Clause may be implicated by a diverse range of government actions, including
when the government (a) permanently appropriates or denies all economically
productive use of property(71); (b) destroys property other than in response to
emergency conditions(72); or (c) reduces, alters or impairs the
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(69) The Monsanto case involved a federal law requiring disclosure of certain
data related to Monsanto products. The Supreme Court was asked to
determine whether Monsanto had a property interest in this information as
a trade secret and whether that property interest was protected under the
Takings Clause. One focus of the Supreme Court's analysis was whether
Monsanto had a reasonable investment-backed expectation in the privacy of
this property. The Court concluded that at most times prior to the
enactment of the law and at all times after the enactment of the law,
Monsanto did not have and would not have a reasonable expectation that its
information would be kept private. However, the Court noted for a six year
period from 1972 to 1978, federal law had provided that an entity
submitting information to the government could designate such information
as a trade secret and that federal law guaranteed such information would
be kept a secret. Accordingly, the Court concluded that with respect to
such information designated as a trade secret from 1972 to 1978, Monsanto
had a property interest that was protected by the Takings Clause.
(70) Rotunda and Nowack, Treatise on Constitutional Law: Substance and
Procedure, 3d Edition (1999), Volume 2 page 702.
(71) Connolly v. Pension Benefit Guaranty Corporation, 475 U.S. at 225 (noting
that in that case the government did not "permanently appropriate" any of
the employer's assets for its own use); Palazzolo v. Rhode Island, 533
U.S. 606, 607 ("regulation which `denies all economically beneficial or
productive use of land' will require compensation under the Takings
Clause") (citing Lucas v. South Carolina Coastal Council, 505 U.S. 1003,
1015 (1992), which notes that for personal property, however, some
regulations that limit use of personal property may not be compensable
takings given the state's "traditionally high degree of economic control
over commercial dealings"; U.S. v. Security Industrial Bank, 459 U.S. 70,
77 (1982), citing Armstrong v. U.S., 364 U.S. 40, 48 (1960) ("The total
destruction by the Government of all values of these liens, which
constitute compensable property, has every possible element of a Fifth
Amendment `taking' and is not a mere `consequential incidence' of a valid
regulatory measure"); See also Lingle v. Chevron USA, 544 U.S. 528, 538
(2005) (noting that regulatory action will be deemed a per se taking of
property if it requires an owner to suffer a "permanent" physical invasion
of property or completely deprives the owner of all economically
beneficial use of such property). The Supreme Court has also held that
legislation that terminates a property interest can be considered a taking
for which compensation is due. Hodel v. Irving, 481 U.S. 704 (federal law
escheating certain fractional interests in tribal property to an Indian
tribe was a compensable taking). See also Rotunda and Nowack, Volume 2,
746.
(72) The emergency exception to the just compensation requirement of the
Federal Takings Clause appears in several Supreme Court decisions. See
generally Rotunda and Novack Volume 2 at 738. Several of these decisions
involve the government's activities during military hostilities. See for
example, United States v.
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value of property so as to unduly interfere with reasonable investment-backed
expectations.(73) In determining what is an undue interference, a court would
consider the nature of the governmental action and weigh the public purpose
served thereby against the degree to which it interferes with legitimate
property interests and distinct investment-backed expectations of the
Bondholders.
There is no general rule as to what constitutes a taking, particularly in
circumstances where no physical taking of property is involved. In Lingle v.
Chevron USA, 544 U.S. 528 (2005), the Supreme Court identified two categories
where regulatory action constitutes per se takings - regulations that involve a
permanent physical invasion of property and regulations that deprive the owner
of all economically beneficial use of the property - plus a third category of
other regulatory takings. In cases in this third category, the Supreme Court has
eschewed any set formula and has relied instead on ad hoc, factual inquiries
into the circumstances of each particular case. Connolly v. Pension Benefit
Guaranty Corp., 475 U.S. 211, 224 (1986); Penn Central Transportation Co. v. New
York, 438 U.S. 104, 124 (1978). According to the Connolly decision, a regulation
constitutes a taking if it denies a property owner "economically viable use" of
that property, which is determined by three factors: (i) the character of the
governmental action; (ii) the economic impact of the regulation on the claimant;
and (iii) the extent to which the regulation has interfered with distinct
investment-backed expectations. Penn Central, 438 U.S. at 124.
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Caltex, Inc., 344 U.S. 149 (1952), rehearing denied 344 U.S. 919 (1953)
(no compensable taking when Army destroys property to prevent enemy forces
from obtaining it); United States v. Central Eureka Mining Co., 357 U.S.
155 (1958), rehearing denied 358 U.S. 858 (1958)(no compensable taking
when government forces gold mines to cease operations to conserve
resources for war effort); National Board of Young Men's Christian
Associations v. United States, 395 U.S. 85 (1969) (no compensable taking
where private property destroyed when US troops take shelter there).
Compare United States v. Pewee Coal Co., 341 U.S. 114 (1951)(compensable
taking when occupation is physical rather than regulatory, emergency
notwithstanding). The emergency exception is not limited to wartime
activities, however. See for example Miller v. Schoene, 276 U.S. 272
(1928)(no compensable taking where trees destroyed to prevent disease from
spreading to other trees); Dames & Moore v. Regan, 453 U.S. 654 (1981) (no
compensable taking resulting from executive order nullifying attachments
on Iranian assets and permitting those assets to be transferred out of the
country). The emergency exception is not limited to the physical
destruction of property by the government, see Central Eureka Mining, 357
U.S. at 168, but the Supreme Court has suggested it does not apply to
physical occupation of property, see Pewee, 341 U.S. at 116-17, or
permanent appropriation, see Lingle, 544 U.S. at 538, both of which
constitute a per se taking. Moreover, we believe that a permanent
appropriation of property by the government would be generally
inconsistent with the concept of an "emergency". See Central Eureka, 357
U.S. at 168 (describing wartime restrictions as "temporary in
character")..
(73) Connolly v. Pension Benefit Guaranty Corporation, 475 U.S. at 225 (nothing
that one point of Federal Takings Clause analysis is "the extent to which
the regulation has interfered with distinct investment-backed
expectations")) (citing Penn Central Transportation Co., 438 U.S. at 124);
United States v. Central Eureka Mining Co., 357 U.S. 155 (1958), rehearing
denied 358 U.S. 858 (1958) (no compensable taking when government forces
gold mines to cease operations to conserve resources for war effort).
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The first factor described above requires the court to examine "the
purpose and importance of the public interest reflected in the regulatory
imposition" and "to balance the liberty interest of the private property owner
against the Government's need to protect the public interest through imposition
of the restraint." Loveladies Harbor, Inc v. U.S., 28 F.3d 1171, 1176 (Fed. Cir.
1994); see Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470 (1987).
The second factor described above incorporates the principle enunciated by
Justice Holmes: "Government hardly could go on if to some extent values incident
to property could not be diminished without paying for every such change in the
general law." Penn Coal Co. v. Mahon, 260 U.S. 393 (1922); Loveladies, 28 F. 3d
at 1176-77. "Not every destruction of injury to property by governmental action
has been held to be a `taking' in the constitutional sense"; Armstrong v. U.S.,
364 U.S. 40, 48 (1960). Diminution in property value alone, thus, does not
constitute a taking; there must be serious economic harm.
The third factor described above is "a way of limiting recovery under the
Federal Takings Clause to owners who could demonstrate that they bought their
property in reliance on a state of affairs that did not include the challenged
regulatory regime." Loveladies, 28 F. 3d at 1177. The burden of showing such
interference is a heavy one. Keystone, 480 U.S. at 493. Thus, a reasonable
investment-backed expectation "must be more than a `unilateral expectation or an
abstract need." Monsanto, 467 U.S. at 1005. Further, "[l]egislation adjusting
rights and burdens is not unlawful solely because it upsets otherwise settled
expectations." Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976). "[T]he
fact that legislation disregards or destroys existing contractual rights does
not always transform the regulation into an illegal taking....This is not to say
that contractual rights are never property rights or that the Government may
always take them for its own benefit without compensation." Connolly, 475 U.S.
at 223-24. In order to sustain a claim under the Federal Takings Clause, the
private party must show that it had a "reasonable expectation" at the time the
contract was entered that it "would proceed without possible hindrance" arising
from changes in government policy. Chang v. U.S., 859 F. 2d 893 (Fed Cir. 1988).
With respect to this third factor, we note that the Act expressly provides for
the creation of Storm-Recovery Property upon issuance of the Order and transfer
of such property to the Issuer in connection with the issuance of the Bonds, and
further provides that the Order, once final, is irrevocable. Moreover, through
the State Pledge, the State has pledged, "for the benefit [and protection] of
financing parties" not to impair the value of such Storm-Recovery Property.
Given the foregoing, we believe it would be hard to dispute that Bondholders
have reasonable investment expectations with respect to their investments in the
Bonds.
We are not aware of any case law which addresses the applicability of the
Federal Takings Clause in the context of the proper exercise by a state of its
police power to abrogate or impair contracts otherwise binding on the state. The
outcome of any claim that interference by the State with the value of the
Storm-Recovery Property without compensation is unconstitutional, would likely
depend on factors such as the state interest furthered by that interference and
the extent of financial loss to Bondholders caused by that interference, as well
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as the extent to which courts would consider that Bondholders had a reasonable
expectation that changes in government policy and regulation would not interfere
with their investment.
B. Conclusion
Based on our analysis of relevant judicial authority, as set forth above,
it is our opinion, subject to all of the qualifications, limitations and
assumptions set forth in this letter, that, under the Federal Takings Clause, a
reviewing court would hold that the State would be required to pay just
compensation to Bondholders if the State's repeal or amendment of the Act or
taking of any other action in contravention of the State Pledge (a) constituted
a permanent appropriation of a substantial property interest of the Bondholders
in the Storm-Recovery Property or denied all economically productive use of the
Storm-Recovery Property; (b) destroyed the Storm-Recovery Property other than in
response to emergency conditions; or (c) substantially reduced, altered or
impaired the value of the Storm-Recovery Property so as to unduly interfere with
the reasonable expectations of the Bondholders arising from their investments in
the Bonds. As noted earlier, in determining what is an undue interference, a
court would consider the nature of the governmental action and weigh the public
purpose served thereby against the degree to which it interferes with the
legitimate property interests and distinct investment-backed expectations of the
Bondholders. There can be no assurance, however, that any such award of just
compensation would be sufficient to pay the full amount of principal of and
interest on the Bonds.(74)
* * * * *
This letter is limited to the federal laws of the United States of
America. We note that judicial analysis of issues relating to the Federal
Contract Clause, and the retroactive effect to be given to judicial decisions
has typically proceeded on a case-by-case basis and that the court's
determination, in most instances, is usually strongly influenced by the facts
and circumstances of the particular case. We further note that there are no
reported controlling judicial precedents of which we are aware directly on
point. Our analysis is necessarily a reasoned application of judicial decisions
involving similar or analogous circumstances. Moreover, the application of
equitable principles (including the availability of injunctive relief or the
issuance of a stay pending appeal) is subject to the discretion of the court
which is asked to apply them. We cannot predict the facts and circumstances
which will be present in the future and may be relevant to the exercise of such
discretion. The foregoing opinions are based upon our evaluation of existing
judicial decisions and arguments related to the factual circumstances likely to
exist at the time of a Federal Contract Clause or Federal Takings Clause
challenge to a Legislative Action; such
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(74) We express no opinion as to whether any court would have or exercise
jurisdiction to hear such a Federal Taking Clause challenge, when such a
challenge would be ripe, or whether the State would be entitled to assert
sovereign immunity in a particular forum. As to the question of sovereign
immunity, to the extent that there is a taking without just compensation
and just compensation is unavailable through state or federal procedures,
Bondholders (or the Indenture Trustee on their behalf) or the Issuer could
seek to enjoin enforcement of the state action by suing individual officers
under Ex Parte Young, 42 U.S.C. 123 (1908) and 42 U.S.C. ss.1983.
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precedents and such circumstances could change materially from those discussed
below in this letter. Consequently, there can be no assurance that a court will
follow our reasoning or reach the conclusions which we believe current judicial
precedent supports. None of the foregoing opinions is intended to be a guaranty
as to what a particular court would actually hold; rather each such opinion is
only an expression as to the decision a court ought to reach if the issue were
properly prepared and presented to it and the court followed what we believe to
be the applicable legal principles under existing judicial precedent. The
recipients of this letter should take these considerations into account in
analyzing the risks associated with the subject transaction.
This letter is being delivered solely for the benefit of the persons to
whom it is addressed; accordingly, it may not be quoted, filed with any
governmental authority or other regulatory agency or otherwise circulated or
utilized for any other purpose without our prior written consent. We hereby
consent to the filing of this letter as an exhibit to the Registration Statement
and to all references to our firm included in or made a part of the Registration
Statement. In giving the foregoing consents, we do not thereby admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act or the related rules and regulations of the Securities and
Exchange Commission. As noted above, this opinion is based on existing law in
effect as of the date hereof, and we assume no obligation to update or
supplement this letter to reflect any facts or circumstances which may hereafter
come to our attention with respect to the opinions or statements expressed
above, including any changes in applicable law which may hereafter occur.
Very truly yours,
SCHEDULE A
FPL Recovery Funding LLC
700 Universe Boulevard
Juno Beach, FL 33408-0420
Florida Power & Light Company
700 Universe Boulevard
Juno Beach, FL 33408-0420
Moody's Investors Service, Inc.
99 Church Street
New York, New York 10007
Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc.
55 Water Street
New York, New York 10041
Fitch Ratings
One State Street Plaza
New York, New York 10004
__________________________, as Representative
of the Purchasers named in the Bond Purchase Agreement
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