August 31, 2017

Subject:    Public Benefit Provisions in DPL Lease Agreement

Opinion of the Attorney General

I. QUESTIONS PRESENTED

Can DPL legally require a potential or existing lessee to construct homestead infrastructure or create a deposit in escrow that will provide funding for future homestead infrastructure?

II. SHORT ANSWERS

The public benefit provisions are problematic from a legal stand point. As the Mariana Public Land Corporation’s (MPLC) predecessor, DPL holds public lands in trust for people of Northern Marianas Descent (NMDs). Dep’t of Public Lands v. Commonwealth, 2010 MP 14 ¶ 12. All revenue generated from public lands goes to the Marianas Public Land Trust (MPLT). Id. ¶ 34. Prioritizing public benefit provisions to the detriment of rent would amount to a violation of fiduciary duty. Ultimately, public benefit clauses are legitimate if securing the public benefit does not result in lower rent.

III. LAW

The Commonwealth Supreme Court considered DPL’s role in the Commonwealth’s constitutional framework in Dep’t of Public Lands v. Commonwealth, 2010 MP 14. Under the original constitution, MPLC held public lands in trust for NMDs, and all revenue from public lands was transferred to MPLT. Id. ¶ 6.  After existing for 12 years, MPLC was dissolved and its functions were transferred to the executive branch. Id. ¶ 11. The current incarnation is DPL.

In 2009, the Commonwealth passed PL 16-31, which required land compensation judgments to be paid out of revenues generated from public lands. Id. ¶ 13. The Secretary of DPL contested the constitutionality of the measure, and a certified question between DPL and the Commonwealth was presented to the Supreme Court. Id. ¶ 1. DPL argued that under Commonwealth Article XI, § 5(g), DPL’s budget was submitted to the legislature for “informational purposes only,” and thus could not be used to pay land compensation. The Commonwealth argued that the limitations under § 5(g) expired when the functions of MPLC were transferred to the executive branch, and thus the revenue could be used for land compensation.

The Court disagreed with both parties, holding that PL 16-31 infringed on MPLT’s function of collecting revenues generated from public lands to hold in trust for NMDs. The Court explained that “the revenues generated from the management and disposition of public lands are trust funds that must go to [MPLT] to be held for the benefit of people who are of Northern Marianas descent.” Id. ¶ 34. Therefore, by directing these trust funds to land compensation instead of to MPLT, PL 16-31 violated the Constitution.

While the holding of Dep’t of Public Lands v. Commonwealth is narrow, its reasoning can be applied to the issue at hand.

IV. OPINION

Public benefit clauses are constitutional so long as the addition of a public benefit clause does not compromise or impair the ability of DPL to negotiate the best rent from the lease of public lands. Dep’t of Public Lands v. Commonwealth considered a situation in which revenue already collected would be diverted away from MPLT. Under similar reasoning, any lease term that unnecessarily results in a diminution of rent would impair MPLT’s function of collecting and investing the revenue from public land. First, this situation presents an inverse of the situation the Court confronted in Dep’t of Public Lands v. Commonwealth: reducing revenue in exchange for a public benefit clause would impair MPLT’s function of collecting revenue from public land. Second, DPL holds public land in trust, and the funds generated from public land are trust funds. It would be a breach of fiduciary duty to reduce the rent received in exchange for public benefit clauses.  This is not to say that the purpose of this public benefit clause, i.e., providing homestead infrastructure, would not benefit NMDs. Rather, the decision as to how the trust funds should be invested and used is constitutionally vested in MPLT. Importantly, however, any public benefit clause that can be agreed without impairing the ability of DPL to negotiate the best rent from the lessee is constitutional because it would not impair the functions of MPLT.

Furthermore, a discussion of the fiduciary duties of DPL and the Secretary of DPL is necessary.  DPL’s enabling statute provides that the Secretary “shall be held to strict standards of fiduciary care.”  1 CMC § 2802.

Black’s Law Dictionary defines the word “fiduciary” as:

1. Someone who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, loyalty, due care, and disclosure.
2. Someone who must exercise a high standard of care in managing another’s money or property

Black’s Law Dictionary (10th ed. 2014). Public land is held in trust by DPL for the benefit of NMDs. Under this arrangement, DPL is a fiduciary that owes a high standard of care to NMDs in managing their property (i.e., public lands). Under the Restatement (Third) of Trusts, a trustee owes a duty of prudence to the beneficiaries:

1. The trustee has a duty to administer the trust as a prudent person would, in light of the purposes, terms, and other circumstances of the trust.
2. The duty of prudence requires the exercise of reasonable care, skill, and caution.
3. If the trustee possesses, or procured appointment by purporting to possess, special facilities or greater skill than that of a person of ordinary prudence, the trustee has a duty to use such facilities or skill.

Restatement (Third) of Trusts § 77 (2007). Therefore, DPL and the DPL Secretary are bound to use best practices and sound business judgment to manage and dispose of public land in a way that maximizes revenue without committing waste.

Applying these principles to leases of public land, DPL and the Secretary’s primary consideration is, first and foremost, maximizing the rental value of the trust property. Public benefit provisions which require a lessee to agree to other obligations are a consideration of much lower priority. The primacy of rental value is apparent from DPL’s enabling statutes: 1 CMC § 2808 sets out extensive requirements regarding rental price of public lands that DPL must adhere to. However, DPLs enabling statutes do not mention public benefit provisions at all. DPL and the Secretary cannot reduce the rental value of the property in order to secure a public benefit. Likewise, DPL and the Secretary cannot compromise or imperil lease negotiations by insisting on a public benefit provision which imposes other obligations rather than maximizing the rental value of the property.

Public benefit provisions are acceptable if the rental price or the lease negotiations are not imperiled by the public benefit provisions and are voluntarily entered into by the lessee. Conversely, over insistence on public benefit obligations to the detriment of the rental price or the lease negotiation itself is extremely problematic, and under certain circumstances could be considered a violation of the fiduciary duty to NMDs or abuse of public office. Therefore, a good rule of thumb is that public benefit provisions are unacceptable as they may diminish the true value of the trust land when they are forced on a lessee or become a major stumbling block in lease negotiations.

V. CONCLUSION

Public benefit clauses are legal so long as the public benefit can be secured without reducing the rent received from the property. DPL holds public lands in trust for NMDs and the revenue generated from public lands are trust funds that must be remitted to MPLT. A public benefit clause that is negotiated in return for a lower rent violates the constitution under this framework.

EDWARD MANIBUSAN
Attorney General

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February 8, 2017

Subject:     Municipal corporations and the executive branch, the constitutionality of P.L. 12-20 and P.L. 18-16, and the treatment of revenues derived from public lands within free-trade zones

Opinion of the Attorney General

I. QUESTIONS PRESENTED

1. Are municipal corporations within the executive branch of the Commonwealth government?

2. Are P.L. 12-18 and P.L. 18-16 constitutional?

3. Are revenues derived from public lands within free-trade zones required to be remitted to the Marianas Public Land Trust (“MPLT”).

II. SHORT ANSWERS

1. No. Municipal corporations are not within the executive branch of the Commonwealth government.

2. No. P.L. 12-18 and P.L. 18-16 are unconstitutional to the extent that they grant mayors administrative powers that include the authority to sale, lease, and grant other interests in public lands.

3. Yes. Revenues generated from public lands within free-trade zones are required to be remitted to the MPLT.

III. BACKGROUND

The purpose of P .L. 12-20 is to establish free trade zones “to encourage the establishment of new business, [and] industrial and commercial activities in order to diversify the Commonwealth economy.” P.L. 12-20 § 2. In drafting P.L. 12-20, the Legislature found it was in the Commonwealth’s best interests to make public lands available for lease at reasonable rates and “provide incentives in the form of tax relief for desirable businesses establishing operations within the free trade zones.” ld. Section 4(e) of Public Law 12-20, as amended by P.L. 18-16, requires the Department of Public Lands to designate public lands “to be administered by the respective mayors in accordance with this subsection . . . and not withstanding whether such land is designated a Free Trade Zone …. ” P.L. 18-16 § 2.

IV. ANALYSIS AND APPLICATION

A. Municipal Corporations are not Part of the Executive Branch.

Both the organization of the CNMI Constitution and the Commonwealth Code suggest that municipal corporations are not within the executive branch of the Commonwealth Government. The NMI Constitution addresses “Local Governments” and the “Executive Branch” in different articles. Compare NMI CONST. art. VI (addressing “Local Governments”) with NMI CaNST. art III (addressing “Executive Branch”). See Greclz v. Clayton County, Ga., 335 F.3d 1326, 1352-56 (11th Cir. 2003) (taking into consideration the structure of the state’s constitution in determining whether sheriffs were county or state officials). Likewise, the Commonwealth Code supports the conclusion that municipalities are not within the executive branch, because the legislature has identified the offices, agencies, and instrumentalities within the executive branch in Title 1, Division 2, Part I of the Commonwealth Code, which provides the “Organization of the Executive Branch,” and Part 1 is distinct from the statutes governing local government, which are found in Title 1, Division 5 of the Commonwealth Code.

Further, dicta in U.S. v. Borja also indicates that the chartered municipality form of government is not within the executive branch. CV-02-0016-ARM, (D.N. Mar. Is. Dec. 12, 2003) (Order on Motion to Dismiss First Amended Complaint). There, the CNMI sought dismissal pursuant to FED. R. Clv. P. 12(b)(6), arguing “that the First Amended Complaint and attached documents did not show that the CNMI was a party to the joint funding agreements such as to obligate the CNMI to the United States for any monies still due.” /d. at 4-5. In response, the United States argued that the mayor of Tinian and Aguigan was an agent of the executive branch of the CNMI government and bound the CNMI when he signed the joint funding agreements. /d. at 5-6. The NMI District Court stated that the mayor is not “a member of the executive branch exercising executive power at the local government” and supported its conclusion by noting that NMI CONST. art. III,§ l, vests the executive power of the CNMI in the governor, the constitutional sections providing for mayors are grouped in the same article as the sections establishing municipal councils and the chartered municipality form of government-“entities clearly not related to the executive branch”-and that mayors and municipal councils exercise their powers solely for their designated jurisdictions. /d. at 8-9.

Because the organization of the CNMI Constitution and the Commonwealth Code suggest that municipal corporations are not within the executive branch of Commonwealth Government and the District Court for the Northern Mariana Islands has stated that the chartered municipality form of government is “clearly not related to the executive branch,” it is likely that if this joint petition for certified question is submitted to the CNMI Supreme Court, the Court will hold that municipal corporations are not within the executive branch.

B. P.L.12-20 and P.L. 18-16 Are Unconstitutional.

Public Law 12-20 and 18-16 violate NMI CONST. art. XI, § 4, because NMI CONST. art. XI, § 4(f), requires that the functions of the Marianas Public Land Corporation (“MPLC”) be transferred to the executive branch, one function of MPLC is the leasing of public land, and P.L. 12-20 and 18-16 authorize mayors, who are not within the executive branch, to lease public lands. Article XI, Section 4(t) of the NMI Constitution states that after the dissolution of the MPLC, “its functions shall be transferred to the executive branch of government.” Those functions include the management and disposition of public lands. Dept. of Pub. Lands v. Commonwealth, 2014 MP 14 ¶ 18. The Analysis of the Constitution of the Commonwealth of the Northern Mariana Islands states that the management of public lands includes “the preservation, improvement and use of the public lands,” and defines the term “disposition” as the “sale, lease, and granting of easement or other interests in the public lands.” Analysis of the Constitution of the Commonwealth of the Northern Mariana Islands 146 (1970) (cited with approval in Dept. of Pub. Lands, 2010 MP 14 ¶ 18). Therefore, if provisions ofP.L. 12-20 or P.L. 18-16 transfer the management and disposition of public lands to entities outside the executive branch, then those provisions are unconstitutional. See Dept. of Pub. Lands, 2010 MP 14 ¶¶ 23-24 (“The legislature and executive branch are therefore free to set the policies for the body tasked with the management and disposition of public lands as they see fit, provided that they do so within their constitutional limitations …. The legislature cannot exceed its constitutional authority; it cannot pass a law that conflicts with the Commonwealth Constitution.” (citing Commonwealth v. Tinian Casino Gaming Control Comm ‘n, 3 NMI 134, 147-48 (1992))).

Section 4(e) of Public Law 12-20 requires the Board of Public Lands¹ to designate thirty hectares of public land on Rota and thirty hectares of public land on Tinian “to be administered by the respective mayors … notwithstanding whether such land is designated a Free Trade Zone or not.” Public Law 12-20 does not explicitly define the mayors’ administrative powers; however, it does require administration be made in accordance with§§ 4(e)(l)-(5).² Moreover,§ 4(e)(5) authorizes the mayors to lease designated public land in a Free Trade Zone. Because Article XI, Section 4(f) of the NMI Constitution requires the disposition of land be transferred to the executive branch and mayors are not within the executive branch, see supra analysis of Question 1, Public Law 12-20 is unconstitutional to the extent it grants mayors administrative powers that include the authority to sale, lease, and grant other interests in public lands. Likewise, P.L. 18-16 is unconstitutional because it only amends 4 CMC § 51102(e), which is the codification of P.L. 12-20, by granting administrative power to the mayor of the Northern Islands.

¹ ‘The Board of Public Lands, which succeeded the Marianas Public Lands Corporation, was abolished by PL 12-71, § 2 (a) and replaced with the Marianas Public Lands Authority without conforming amendments to other sections of the act as enacted by PL 12-33. Sec comment to I CMC § 2801 regarding other technical deficiencies contained in PL 12-71. PL 15-2, which was enacted on February 22, 2006, abolished the Marianas Public Lands Authority and created a Department of Public Lands in its place.” I CMC § 2801 Commission Comment.

² Sections 4(e)( I) provides that “[s]uch land may be put to municipal uses or leased for commercial purposes,” and exempts from the Attorney General’s review “leases, contracts, or other instruments employed in the mayor’s administration of the designated lands …. “Section 4(c)(2) grants mayors the authority to enter into agreements with government agencies for assistance in the administration of the designated lands. Section 4(e)(3) states that I CMC § 2674(i) “shall not be construed as applying to any public benefit contribution under any public lease now.” Section 4(c)(4) authorizes the mayor to reduce minimum rental requirements up to fifty percent from the amounts otherwise mandated by law. Section 4(c)(5) authorizes the mayors to lease designated public land in a Free Trade Zone on any terms conforming with Section I O(k) of P.L. 12-20, which grants the Commonwealth Free Trade Zone Authority the power and duty to represent the interests of free trade zone licensees and actual and prospective occupants in negotiating the terms of a lease with the entity controlling the property within the free trade zone.

C. Revenues from Public Lands Within a Free-Trade Zone Must Be Remitted to MPLT.

Revenues received from public lands within a free-trade zone should not be treated differently than revenues generated from other public lands because NMI CONST. art. XI, § 1, which identifies the public lands, does not distinguish public lands within a free-trade zone from other public lands. In other words, because there is no distinction between public lands within a free-trade zone and public lands identified within § 1, there should be no distinction between the revenues each public land generates. Therefore, because revenues generated from public lands identified under § I are required to be remitted to MPLT pursuant to NMI CONST. art. XI, § 6, revenues generated from public lands within a free-trade zone are also required to be remitted to MPLT. See Dept. of Pub. Lands, 2010 MP 141)( 33 (“[R]evenues generated from the management and disposition of public lands are trust funds that must go to the Public Land Trust …. “).

In interpreting the NMI Constitution, the CNMI Supreme Court examines the constitutional text and applies its plain meaning. Dept. of Pub. Lands, 2010 MP 14 ‘( 17 (citing Camacho v. N. Marianas Ret. Fund, 1 NMI 362, 368 ( 1990)). Article XI, Section I of the NMI Constitution identifies the “public lands” as the lands transferred under Secretarial Order 2969, the lands transferred under Secretarial Order 2989, the lands transferred under the Covenant, and all submerged lands off any coast of the Commonwealth. See also Analysis of the Constitution, supra at 141. In identifying the public lands, NMI CONST. art. XI,§ 1, does not indicate that public lands later classified as within a free-trade zone are not covered under § 1. Indeed, the Analysis of the Constitution identifies land not covered under § I as land acquired from sources other than the Trust Territory, Resident Commissioner, or the United States. Analysis of the Constitution, supra at 144 (“[Article XI, Section 1 of the NMI Constitution] does not cover lands that the government purchases or leases from private owners or acquires by eminent domain after the establishment of the Commonwealth.”). Because the NMI Constitution does not indicate that public lands within a free-trade zone are distinct from public lands under NMI CONST. art. XI, § I, it logically follows that revenues generated by public lands within a free-trade zone should be treated identically to revenues generated by public lands in general. In Dept. of Pub. Lands, the CNMI Supreme Court held that “revenues generated from the management and disposition of public lands are trust funds that must go to the Public Land Trust lo be held for the benefit of people who are of Northern Marianas descent.” Because revenues generated by public lands within a free-trade zone should be treated identically to revenues generated by public lands, revenues generated from public lands within free-trade zone areas are required to be remitted to MPLT pursuant to NMI CONST. art. XI, § 6.

EDWARD MANIBUSAN
Attorney General

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