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Pierce v. Ducey

United States District Court, D. Arizona

March 26, 2018

Michael Pierce, Plaintiff,
v.
Douglas A. Ducey, in his capacity as Governor of the State of Arizona, Defendant.

          ORDER

          Neil V. Wake Senior United States District Judge

         Table of Contents

         I. THE ARIZONA ENABLING ACT AND THE 1998 STATE CONSTITUTIONAL AMENDMENT TO THE FORMULA FOR SPENDING INCOME FROM THE TRUST FUND............ 4

         A. The New Mexico-Arizona Enabling Act of 1910 ................................................... 4

         B. The 1998 Changes to the State Constitution ........................................................... 7

         II. THE 1999 CONGRESSIONAL CONSENT TO THE 1998 ARIZONA CONSTITUTIONAL CHANGES DID NOT SILENTLY REPEAL THE NEED FOR CONGRESSIONAL CONSENT TO FUTURE AMENDMENTS .... 9

         A. The text of the Enabling Act Amendment consents only to the state constitutional amendments as written. . .......... 9

         B. The State presented to Congress specific terms for approval and did not ask for release from the need for consent to future changes. . ........................................... 12

         C. There is no indication in the history of the 1999 Enabling Act Amendments that Congress thought it was abrogating its future trust oversight authority. . ............. 14

         D. The amendment to New Mexico's Enabling Act demonstrates that Congress did not relinquish its control over that state's trust lands either. . ................................ 16

         III. PROPOSITION 123 .................................................................................................. 18

         A. Prelude: The 2012 Amendment to the Distribution Formula ................................ 18

         B. The Substantive Changes in Proposition 123 ........................................................ 20

         IV. PLAINTIFF PIERCE HAS STANDING TO BRING THIS ACTION .................... 21

         A. A trustee's monetary breach is actionable by beneficiaries. . ................................ 22

         B. The citizens of Arizona are the beneficiaries of the trust, of which the State is only the trustee .................. 24

         C. A beneficiary has standing and a case or controversy in federal court to remedy a breach of trust on its own. . ........ 26

         D. Pierce and all citizen trust beneficiaries suffered an injury in fact. . ..................... 27

         E. This Court has federal question jurisdiction .......................................................... 30

         V. REMEDY FOR PAST VIOLATIONS AND FURTHER BRIEFING ..................... 31

         This is an action by Plaintiff Michael Pierce against Defendant Douglas A. Ducey, Governor of Arizona, to enjoin the spending of monies from the State's school land trust fund. Pierce alleges that the State is in breach of the trust established in the Arizona Enabling Act. The case is pending before the Court on the State's Motion to Dismiss (Doc. 54), Governor Ducey's Motion to Dismiss (Doc. 56), and the Defendants' Joint Motion to Dismiss (Doc. 62) largely on grounds of lack of subject matter jurisdiction due to Plaintiff Pierce not having standing to bring this action. It is also before the Court for decision on the merits based originally on Plaintiff's Motion for Preliminary Injunction (Doc. 45), which was converted to a final trial. The parties agreed at the hearing that the case was appropriate for final judgment on the briefs and evidence submitted on those motions. The dispositive facts are undisputed. (Doc. 102 at 5-8.) See Fed. R. Civ. P. 56(a)(2) (“Before or after beginning the hearing on a motion for a preliminary injunction, the court may advance the trial on the merits and consolidate it with the hearing.”).

         Three days ago the case took on a new character when Congress enacted in the Consolidated Appropriations Act a consent to the 2016 amendments to the Constitution of Arizona:

Congress consents to the amendments to the Constitution of the State of Arizona proposed by House Concurrent Resolution 2001 of the 52nd Legislature of the State of Arizona, First Special Session, 2015, entitled “A Concurrent Resolution Proposing an Amendment to the Constitution of Arizona; Amending Article X, Section 7, Constitution of Arizona; Amending Article XI, Constitution of Arizona, by Adding Section 11; Relating to Education Finance”, approved by the voters of the State of Arizona at the special election held on May 17, 2016.

H.R.1625 - Consolidated Appropriations Act, 2018: Title IV-Consent of Congress to Amendments to the Constitution of the State of Arizona, at pages 1893-94, https://www.congress.gov/115/bills/hr1625/BILLS-115hr1625eah.pdf.

         The case can be narrowed considerably at this time. The pending motions to dismiss for lack of standing will be denied. The Motion for Preliminary Injunction can be terminated as having been consolidated with trial on the merits. The case is now moot to the extent of school land trust fund distributions from this time forward. But as discussed below, the dispositive inquiry now becomes whether the past excess trust fund distributions before the March 23, 2018 congressional consent are still remediable or are now validated retroactively and therefore moot also. Further briefing will be necessary on those newly arisen and last remaining questions.

         By virtue of state constitutional amendments in 2012 and 2016 Arizona unilaterally expended monies well beyond what Congress had approved in 1999. Arizona invaded the principal of the trust to the detriment of future Arizona school children, who were supposed to have the benefit of a perpetual, undiminished trust fund from which only the income could be spent by any generation. Invading the principal was not necessary for the State's unilateral action to be illegal at the time; it merely made it more illegal.

         The State contends that in 1999 Congress repealed its future Enabling Act control on how much the State can spend when it consented to the terms of an Arizona constitutional amendment then before it for approval. The text and the history of the 1999 Enabling Act amendments refute that contention. Arizona asked Congress to approve only the changes then proposed. It did not ask Congress to repeal the Enabling Act provision requiring congressional approval of future changes to the trust. The text of the congressional consent does not extend to repeal of the consent requirement. The history and records of the Enabling Act Amendments repeatedly and unqualifiedly describe and approve only the specific changes then requested.

         If the case is not moot in its entirety, Plaintiff Pierce has standing to maintain this action. Section 28 of the Enabling Act provides, “Nothing herein contained shall be taken as in limitation of the power of the State or of any citizen thereof to enforce the provisions of this act.” 310 Stat. at 575. That term preserves the rights of citizens, not just the State, to enforce the trust under state trust law. There are constitutional limits on how widely Congress can empower ordinary citizens with standing to sue in federal court to enforce federal statutes that affect them the same as everyone else. But Congress did not create a federal private right of action to enforce the Act. It created property. That property, expressly denominated as a trust in land and the rents and sale proceeds thereof, has the citizens of Arizona as beneficiaries and the state government as trustee. Congress expressly confirmed the State as trustee and the citizens as beneficiaries, retaining the rights they have under state law to relief against violations of the terms of the trust. That includes beneficiary rights against the State and its legislature, which Congress repeatedly identified as the main threat to the trust. Pierce is suing as a beneficiary of a trust to remedy dissipation of monies in breach of trust terms.

         As a matter of local law, which applies to all property, including federally created property, beneficiaries of trusts may sue to restrain and remedy monetary breaches of trust, no matter how numerous the wronged beneficiaries are. There is no principle of trust law, in Arizona or anywhere, that exempts defalcations of funds that are too big and that hurt too many people. By making Arizona citizens trust beneficiaries and explicitly preserving their rights under state law, Congress assured the beneficiary-citizens would not have to rely on state officers as the policemen of their own misconduct. Congress knew from history how pervasive that misconduct had been in other states and was unwilling to leave the new states' officers on the honor system. The history of our State and our sister state New Mexico's frequent runs on the school trust funds shows how critical it was to vest the citizens with beneficiary rights against the doings of their own legislature. Congress intended and said exactly that and achieved it under ancient principles of property law. Pierce has standing to remedy by injunction the subsisting violations of trust property rights at the hands of the State itself, if they have not been cured by Congress.

         Therefore, the case now narrows to the meaning and scope of the March 23, 2018 congressional consent. The discussion that follows shows why that meaning and scope is now the last and dispositive question in this case.

         I. THE ARIZONA ENABLING ACT AND THE 1998 STATE CONSTITUTIONAL AMENDMENT TO THE FORMULA FOR SPENDING INCOME FROM THE TRUST FUND

         A. The New Mexico-Arizona Enabling Act of 1910

         When Congress has admitted new states to the Union, it has given federal lands to new states in trust for certain purposes since admitting Ohio in 1803. Timothy M. Hogan and Joy E. Herr-Cardillo, 100 Years of Keeping the Trust: The Historic Role of the Judiciary in Protecting Arizona's State Land Trust, 44 Ariz. St. L. J. 589, 590 (2012). Conditions frequently “restrict how states [can] use the lands granted to them by the federal government.” Eric Biber, The Price of Admission: Causes, Effects, and Patterns of Conditions Imposed on States Entering the Union, 34 Am. J. L. Hist. 119, 129 (2004).

         The New Mexico-Arizona Enabling Act of 1910, Pub. L. No. 61-219, 36 Stat. 557 (1910) (the “Enabling Act”), granted to the new states “large tracts of land . . . for the support of public education and other critical public institutions.” Hogan and Herr-Cardillo, 44 Ariz. St. L. J. at 589-90. Arizona received roughly 10 million acres of land to hold in trust. Id. at 590. Congress granted trust lands for twelve categories of beneficiaries, including penitentiaries, charitable institutions, technical colleges, and hospitals for disabled miners. Id. at 590-91. The “vast majority” of the land, however, was granted “for the support of common schools.” Id. at 590.

         The House bill was similar to earlier states' enabling acts as to trust lands. But Senator Albert J. Beveridge, Chairman of the Senate Committee on Territories, discussed in the Senate report how and why the Senate went a different, much more restrictive, way. S. Rep. No. 61-454), at 1 (1910). Many of the Senate changes were “of much importance.” Id. One important change was the Senate bill's “careful and rigid” restrictions on trust lands. Id., at 18.

         Arizona's Enabling Act is much more restrictive than previous states' acts. See Murphy v. State, 65 Ariz. 338, 350, 181 P.2d 336, 344 (1947) (“[T]he Enabling Act for . . . Arizona marked a complete and absolute departure from the enabling acts under which other states were admitted to the Union.”). Describing the “sad experience of Congress” with older states, the Murphy court explained that the legislatures of other states had left their trust lands and monies “so poorly administered, so unwisely invested and dissipated, ” that it “left a scandal in virtually every state.”[1] Id. In evaluating admission conditions to impose on Arizona and New Mexico, Congress took note of one such instance of abuse in New Mexico itself. The Territory had unlawfully disposed of timber on lands granted to it by the federal government in 1898, resulting in a series of lawsuits by the Justice Department. S. Rep. No. 61-454, at 20. In short, “[b]ecause of a history of fraud and abuse[, ] . . . the trust created for Arizona was deliberately strict regarding expenditures of trust funds.” Hogan and Herr-Cardillo, 44 Ariz. St. L. J. at 591.

         Congress thus meticulously crafted the Enabling Act. Senator Beveridge pointed to “the extreme care that should be taken with every provision of a bill like this.” S. Rep. 61-454, at 33. “Every other law Congress can enact can be repealed, amended, modified-but not a statehood bill. Therefore every line of it should be wrought out with painstaking care not required of any other form of legislation.” Id., at 34. Once the state was admitted, it would be nigh impossible for Congress to unilaterally strengthen the protections of trust lands and funds. “The experience of the past caused the Congress of the United States to lose confidence in the effectiveness of legislative control and handling of granted land.” Murphy, 65 Ariz. at 352, 181 P.2d at 344. The bill as passed included the Senate's additions and amendments.

         Crucially, the Enabling Act creates a trust for the federally granted lands:

Sec. 28. That it is hereby declared that all lands hereby granted, including those which, having been heretofore granted to said Territory, are hereby expressly transferred and confirmed to the said State, shall be by the said State held in trust, to be disposed of in whole or in part only in manner as herein provided and for the several objects specified in the respective granting and confirmatory provisions, and that the natural products and money proceeds of any of said lands shall be subject to the same trusts as the lands producing the same.
Disposition of any of said lands, or of any money or thing of value directly or indirectly derived therefrom, for any object other than for which such particular lands, or the lands from which such money or thing of value shall have been derived, were granted or confirmed, or in any manner contrary to the provisions of this Act, shall be deemed a breach of trust.

36 Stat. at 574 (emphases added).

         The State Constitution mirrored Section 28 of the Enabling Act:

Section 1. [The federally granted lands] shall be by the State accepted and held in trust to be disposed of in whole or part, only in manner as in the said Enabling Act and in this Constitution provided, and for the several objects specified in the respective granting and confirmatory provisions.
Section 2. Disposition of any of said lands, or of any money or thing of value directly or indirectly derived therefrom, for any object other than that for which such particular lands (or the lands from which such money or thing of value shall have been derived) were granted or confirmed, or in any manner contrary to the provisions of the said Enabling Act, shall be deemed a breach of trust.

Ariz. Const. art. 10, § 7 (1910) (emphases added.)

         The Enabling Act put teeth into that trust. It required the State to lease or dispose of those lands only to support permanent investment funds for the corresponding trust purpose. 310 Stat. at 575. It forbade mortgages and required sales and leases to the highest bidder at public auction after advertisement unless the leases were short term. Id. at 574. The Act further commanded that any “sale, lease, conveyance, or contract of or concerning any of the lands hereby granted or confirmed . . . not made in substantial conformity with the provisions of this Act shall be null and void, ” and it required the Attorney General of the United States to enforce the Act. Id. at 575.

         Section 20 of the Enabling Act required Arizona to write the trust land protections into the state constitution itself and to “positively preclude the making by any future constitutional amendment of any change or abrogation . . . in whole or in part without the consent of Congress.” See Id. at 569, 571. Any investments of proceeds from sales of trust lands could be made only in “safe interest-bearing securities.” Id. at 575. The proceeds from sale of trust lands were to “be used as a ...


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