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Fourth Circuit dismisses lawsuit over municipal bonds used to finance city golf course

June 7, 2019
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The Vista Links golf course in Buena Vista, Va. Jacobson Golf Course Design, via The Bond Buyer.

The Fourth Circuit ruled in February that a city and its recreational facilities authority were not in breach of their bond financing agreements relating to the development of amunicipal golf course, because all of the documents expressly limited their obligations to the extent of the city’s annual appropriations for the payment of the golf course debts. ACA Fin. Guar. Corp. v. City of Buena Vista, 917 F.3d 206 (4th Cir. 2/21/19).

The City of Buena Vista, Virginia began developing a municipal golf course in 2002 and financed the project in part through a loan undertakenbya local public authority known as the Public Recreational Facilities Authority. The city and the Authorityrefinanced the golf course loan several years later, which they accomplished by issuing about $9 million in municipal bonds and using the proceeds to pay off the existing loan. The Authoritythen leased the golf course property to the city and allocated its rent payments to be used for the debt service on the bonds. Although the city’srent payments were the “financial linchpin” of the transaction, the city’s obligations under the lease were limited to the extent of the city’s annual appropriations, and the Authority’sobligations under itsbond agreementswerelimited to the extent of the payments it received from the city.

The city failed to appropriate sufficient funds for the golf course rent in 2010 and 2011, and as a result the Authoritywas unable to meet its debt service obligations. The parties then entered into a forbearance agreement, which relaxed some of the payment deadlines but continued to require full repayment of the bond debt bythe city and the Authority.Nevertheless, the city decided again in 2015 not to make any appropriation for rent payments on the golf course, and the Authority ceased making its bond paymentsshortly thereafter. The bank thencommenced this lawsuit to enforce itsrights as creditor.

Thebank’sfirst argument was that itwas entitled tothird party beneficiary rights with respect to the lease agreement between the city and the Authority. As the court explained, however, the language of the lease agreement was clear that the city was only responsible for rent payments “subject to and dependent upon appropriations being made from time to time by the City Council for such purpose.” What this meant was that “if the City did not appropriate funds, which it did not, the City had no obligation to make the rent payments.” In other words, the city’s failure to make rent payments when no appropriations had been made was technically not a default.Accordingly,even if the bank could qualifyasa third party beneficiary, it still wouldn’t have any cause of action for breach of the city’s lease obligations. For similar reasons, the court found that the Authority‘sfailure to pay its debt servicewasn’ta breach of its bond obligations, sincelanguage in thebond agreementsmade the Authority’sobligations dependent on the city paying rent. “Aside from the rent payments from the City, the Authority had no independent contractual obligation to make the bond payments,” the court concluded.

The court also dismissed the causes of action alleging breach of thedeeds of trust issued by the city and the Authority,as well as breach of the forbearance agreement. The court emphasized again that the terms of theseagreementslimited the Authority‘sresponsibility for debt service payments to the extent that it was paid rent by the city, and the city’s responsibility for its rent payments was limited to the extent that funds were appropriated each year for such payments. “In the face of those clear contractual terms,” the court explained, “the counts alleging violations of the Deeds of Trust fail to state a claim for which relief can be granted.” The cause of action for breach of the forbearance agreement was similarly unavailing because the same provisionswere included in that contractmaking the debt service and rent payments dependent on the city’s annual appropriations.

The bank next claimed a breach of the implied covenant of good faith and fair dealing, arguing that the “subject to appropriations”languagewasambiguous and that the city acted arbitrarily and unreasonably by refusing to appropriate sufficient funds to comply with its obligations. But the court denied this claim as well, first, because there were no allegations in the complaint regarding the city’s allegedly unreasonably conduct, and second, because the “subject to appropriations” clauses were not actually ambiguous. The court emphasized that the bank and its insurer were “sophisticated commercial entities” and it would not “save them” from the undesirable consequences of contractterms thatthey voluntary agreed to.

Finally, with respect to the deeds of trust that gave the bank a right to possess and foreclose on the city’s buildings and the golf course property, the court declined to grant the bank’s request for declaratory relief because the city and the PRFA conceded that it had the right to enforce these remedies.

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Links roundup—featuring corporate subsidy and corruption concerns

April 24, 2019
24pennstation-ast-13-superJumbo

A view of New York’s old Penn Station, sometime around 1910, from a column in the New York Times.

Federal authorities

  • The federal oversight board that was created to deal with Puerto Rico’s troubled finances is taking a lot of heat for authorizing more than a billion dollars in management restructuring contracts with McKinsey and other private consulting firms. “Already the island is an object lesson in what happens when the logic of capitalism overtakes the structure of government. It is an article of faith at McKinsey that the same management theory that makes businesses run more profitably can be applied to further the public interest…. Of course, that assumes that what advances the modern economy advances the common good — a proposition currently under siege from both the right and the left.” [NY Intelligencer] [see also Nonprofit Quarterly]
  • The Eighth Circuit held in April that the FDIC had authority to create a public-private entity to manage assets from a failed bank. [Reuters] [Radiance Capital Receivables Eighteen, LLC v. Concannon]

New York State

  • The New York State Legislature passed a bill that gives the Authorities Budget Office the power to suspend local authority board members and staff for failing to comply with financial reporting requirements. The legislation has yet to be signed by Gov. Cuomo. [Times Union] [A00220]
  • Also in New York, the state’s Olympic Regional Development Authority is being sued by one of its former financial officers for allegedly refusing to comply with Freedom of Information Law requests in order to cover up various financial misdealings. The same former official doesn’t exactly have clean hands though; while claiming that it’s all part of the same cover up, he just accepted a plea deal related to his allegedly personal use of the authority’s funds. [Adirondack Daily Enterprise]
  • The New York City Housing Authority is facing a lawsuit over its 99-year lease deal with a private developer and the city’s plan to exempt the project from normal zoning requirements. [Patch]

Economic Development 

  • Corporate tax breaks and other economic development financing schemes are facing intense scrutiny in New Jersey following the release of a troubling audit of the state’s Economic Development Authority. As The Nation explains: “Here’s what the state’s audit found: Nearly 3,000 “jobs” were created by the programs that couldn’t be verified as actually existing. At least $179 million was given out via one program that shouldn’t have been according to the program’s own guidelines. One company was a year late filing its necessary follow-up reports for the tax breaks it got, and the state economic-development agency didn’t even know until the auditor pointed it out. Another company received $11.2 million for jobs it didn’t actually create, but no one bothered to check in later to ensure those jobs existed, so the company just kept the money.” [The Nation][NJ Comptroller’s Audit of Selected State Tax Incentive Programs]
  • The City of Charleston, SC and its local development corporation are involved in a legal feud over the repayment of economic development funds. [Nonprofit Quarterly]

Ethics and corruption

  • Prosecutors in Detroit have secured guilty pleas against two of the people allegedly involved in a demolition bid-rigging scheme dating to 2010. The bribery and corruption scandal has embroiled the city’s building authority and landbank, and while the federal criminal investigation appears to be ending, officials continue to press for increased oversight and transparency. [Detroit News]
  • Transparency and ethics reforms have been proposed in Maryland amidst the backlash to revelations of self-dealing among the University of Maryland Medical System board of directors. [Baltimore Sun]

Economic development corporations aren’t entitled to sovereign immunity, according to the Texas Supreme Court

April 19, 2019

The Texas Supreme Court ruled in March that local development corporations aren’t entitled to claim sovereign immunity. The issue arose in the context of a contract dispute involving the Rosenberg Development Corporation (RDC) and a performance agreement it entered into with Imperial Performing Arts, a nonprofit performing arts organizationThe RDC challenged the court’s jurisdiction to hear any of Imperial’s claims, contending that it was immune from liability for damages under the Texas Local Government Code. The court, however, didn’t agree. Rosenberg Development Corporation v. Imperial Performing Arts, Inc., 2019 Tex. LEXIS 242, 2019 WL 1090918(3/8/19).

The court first explained that the Texas Development Corporation Act authorizes municipalities to create local economic development corporations like the RDC, noting the legislature’s findings that establishing and funding economic development corporations is “in the public interest” and “serve[s] a public purpose.” Significantly, while the Development Corporation Act requires economic development corporations to comply with open meetings and public records laws, it classifies economic development corporations as nonprofit corporate entities with “the powers, privileges, and functions of a nonprofit corporation.” The law further specifies that economic development corporations are not “political subdivisions” and it prohibits municipalities from granting them any “attributes of sovereignty.”

Next, the court discussed the doctrine of sovereign immunity, which protects the states and their agencies from liability for damages. In Texas this immunity takes two forms: “(1) immunity from suit even when the sovereign’s liability is not disputed and (2) immunity from liability even though the sovereign has consented to the suit.” As the court explained: “Immunity from suit recognizes the judiciary’s limited authority over its sovereign creator and thus implicates the courts’ subject-matter jurisdiction to resolve a dispute against the state. In comparison, immunity from liability only protects the state from money judgments, is not jurisdictional, and must be raised as an affirmative defense rather than by jurisdictional plea. As a common-law doctrine, the judiciary determines whether immunity exists in the first instance, and if it does, we defer to the Legislature to waive or abrogate it.” The court also explained that “political subdivisions” such as municipalities are not stand-alone sovereigns and therefore are not generally entitled to sovereign immunity, but under the doctrine of governmental immunity they’re deemed to share the state’s immunity whenever they act in the performance of state functions. As the court cautioned, however, “governmental immunity extends ‘as far as the state’s [immunity] but no further,'” and thus “no immunity exists for acts performed in a proprietary, non-governmental capacity.”

In determining that the RDC was not entitled to immunity from suit under the governmental immunity doctrine, the court emphasized that economic development corporations were not the sort of “political subdivision” typically eligible for this type of immunity. Rather, the Development Corporation Act “explicitly rejects an economic development corporation’s political-subdivision status.” The court also declined to find any implied legislative intent in the nature of economic development corporations that would be sufficient to grant them governmental immunity, and it distinguished an earlier case involving a self-insurance fund on the basis that the self-insurance fund, unlike economic development corporations, was specifically defined as a “local government.” While the RDC emphasized that economic development corporations aren’t “ordinary” nonprofit entities because they’re subject to open meetings and public records laws, as well as other restrictions and requirements not usually applied to private nonprofits, the court found this argument unpersuasive. As it noted, “heavily regulating an entity does not equate to conferring governmental-entity status.”

The court also emphasized that governmental immunity is a common law rule “exclusively for the judiciary to define,” and thus even if economic development corporations were defined as “political subdivisions” this might not be sufficient for immunity to attach. In this respect, the court explained that “granting immunity to economic development corporations is not necessary to satisfy the political, pecuniary, and pragmatic policies underlying our immunity doctrines. Governmental immunity benefits the public by preventing disruptions of key governmental services, but economic development corporations are not tasked with performing essential services. Rather, these entities are authorized for the limited purpose of promoting and developing enterprises to encourage employment and the public welfare.” The court similarly found that immunity wouldn’t be justified on the basis of public fisc concerns, noting that “sovereign immunity is ‘designed to guard against the unforeseen expenditures associated with the government’s defending lawsuits and paying judgments.'” Economic development corporations simply do not present this sort of risk of unforeseen governmental expenditures, the court explained, since they typically operate by developing projects in accordance with prearranged plans and performance agreements, and because the statutory scheme contains other restrictions on liability and financial exposure.

“Governmental immunity,” the court concluded, “does not extend like ripples from a pebble tossed into a pond but, instead, is limited to those entities acting as an arm of state government. Despite fulfilling public purposes, economic development corporations do not exist quite like an arm of the state government, imbued with aspects of sovereignty such as immunity from suit. Moreover, the fundamental purposes of governmental immunity do not countenance immunizing economic development corporations like RDC from suit nor does the Development Corporation Act purport to contemplate the same.”

NY Court of Appeals affirms ABO’s separate reporting requirement for IDA and affiliated LDC

March 27, 2019

The New York Court of Appeals released an opinion last week dealing with public authority reporting requirements. The case, Madison County IndustrialDevelopmentAgency v. NYAuthoritiesBudget Office, involved the ABO’s determination that separate annual reports had to be filed by the Madison County IDA and a local development corporation that it was closely affiliated with. The court affirmed the ABO’s determination, finding that it wasn’t arbitrary or capricious, and it also discussed some broader issues related to the ABO’s powers and the classification of LDCs as “affiliated” or “subsidiary” public authorities. While the court emphasizes how narrow its holding is, the discussion of LDCs is still pretty significant give that the Court of Appeals has only considered LDCs in two previous cases (one holding that they’re subject to FOILand the other dealing with property taxes).

The court noted at the outset that Madison County IDA is a local public authority, which makes it subject to the reporting requirements in the Public Authorities Law. The LDC involved in this case was the Madison Grant Facility Corporation (“MGFC”), which the IDA had incorporated to administer certain grant funds and limit its liability for any violations of the grant conditions caused by third-party contractors. This “affiliation” between the IDA and the MGFC was enough to classify the MGFC as a local public authority, but its certificate of incorporation also expressly acknowledged its status as a local authority under the Public Authorities Law. When the ABO sent a notification to the MGFC that it was required to submit annual financial reports, however, the IDA responded by claiming that the MGFC was its “subsidiary” and requesting permission to file consolidated reports. The IDA didn’t provide any legal basis for this sort of exception from the reporting requirements, and the ABO explained in a subsequent letter that it had concerns about the “loss of transparency and accountability” implicit in this sort of consolidated reporting. The ABO was also skeptical about the IDA’s ability to create “subsidiary” corporations, and the Attorney General issued a formal opinion upon referral of the matter that confirmed the ABO’s suspicion that IDAs have no legal authority to create “subsidiaries.”

Despite the ABO’s concerns and the questions raised by the Attorney General’s findings, the Madison County IDA nevertheless filed consolidated reports in 2015 with the MGFC. It explained in a letter to the ABO that the MGFC had no financial activities due to delays in the grant funding, and it also referenced the FAQs on the ABO’s website, which explained that in some circumstances subsidiaries would be permitted to file consolidated annual reports. The ABO did not agree, and it sent an final letter determination at this point and denied the IDA’s request for consolidated reporting. The ABO’s decision was subsequently affirmed by both the Supreme Court and the Appellate Division.

The Court of Appeals also affirmed the ABO’s determination as reasonable and neither arbitrary nor capricious in light of the statutory reporting requirements for public authorities, which apply to “each” and “[e]very” state and local authority. More persuasively, the court also emphasized that the statutory reporting requirements had to be interpreted in light of the purposes of the Public Authorities Law to provide financial transparency and public oversight. The court specifically recognized the importance of the the Public Authorities Accountability Act of 2005, which was intended to “”promote public confidence in the financial and operating integrity of these institutions” by expanding the information required to be disclosed to the government and public.” The court also noted that additional reforms were enacted in the Public Authorities Reform Act of 2009, which expanded the powers and resources of the ABO so that it could “better “police” state and local public authorities. As the court, explained, “the ABO was given broad authority to “request and receive from any state or local authority… such… information, books, records, other documentation and cooperation as may be necessary to perform its duties.” In light of this context, the ABO’s insistence on separate reporting was reasonable and fully consistent with its statutory grant of power.

The court also concluded that ABO’s decision was not ultra vires, as it limited its denial to the narrow issue of separate reporting requirements and if did not make any final determination as to whether MGFC was a “subsidiary” or not. While the ABO explained in its letter determination to the IDA that it would not treat the MGFC as a subsidiary for purposes of its consolidated reporting request, the court explained that this decision fell far short of making any specific determination that the IDA “lacked authority” to incorporate the MGFC as a subsidiary. As the court explained: “a local development corporation such as MGFC, which is “affiliated” with a local IDA, is also a local authority subject to the PAAA and, as such, has reporting obligations. Regardless of whether MGFC is also a subsidiary, it is clearly an “affiliate” of MCIDA within the meaning of the statute. The PAAA does not contain a reporting exception for subsidiaries of local authorities, and petitioners have not identified any other statute or regulation that excused MGFC from its obligation to separately report.”

See also:

Links Roundup: NYS IDAs

November 4, 2016

Taxed Off: Millions in breaks for IDAs, but few jobs

Press & Sun-Bulletin

… Rochelle Industrial Development Agency that has them paying a combined … An analysis by the New York State Authorities Budget Office found “little … “Very few projects of any significance are done in New York, completed in …

Mixed-Use Development Supports Downtown New Rochelle

Hudson Valley News Network

Additionally, the New Rochelle Industrial Development Agency provided an exemption from sales tax on … construction loan and a SONYMA-insured permanent loan through the New York State Common Retirement Fund (CRF).

Notable tax-exempt land in New York

The Journal News | LoHud.com

Stegner pointed to New York state law, which provides property-tax … the land over to the New York City Industrial Development Agency, which in turn …

Fulton County pushing tech park

The Daily Gazette

… Executive Director of the FUlton County Industrial Development Agency. … The Tryon Tech Park already has one tenant, Vireo Health of New York, …

NYSEDC hosts Technology-based conference

Corning Leader

… director of the Steuben County Industrial Development Agency (SCIDA). … NYSEDC represents 900 member throughout New York to promote the …

MVCC Foundation names board officers

The Central New York Business Journal

Zogby is also a member of the Oneida County Industrial Development Agency board, president of the board of Central New York Health Home …

After Decades as a New York City Landlord, the Port Authority is Going Back to Its Roots

Commercial Observer

“There were times when they saw themselves as an industrial development agency,” said Barry Hersch, a clinical associate professor at the NYU …

Federal Suit Challenges NY Nuclear Subsidies

RTO Insider

Despite its best efforts to avoid litigation, the New York Public Service … The suit, filed in U.S. District Court for the Southern District of New York in … said Gary Toth, vice chair of the County of Oswego Industrial Development Agency

Senator Schumer announces $17 mil unlocked

WGRZ.com

… loan funds that exist through the Erie County Industrial Development Agency. That money will be used for projected throughout Western New York

The Agency breaks ground on construction of new headquarters, business-development center

The Central New York Business Journal

The Agency is the rebranded name of the Broome County Industrial Development Agency (IDA). Its board of directors oversees both the IDA and the …

Michaelle Solages to represent New York’s 22nd Assembly District

Newsday

In response to outrage over the Hempstead Industrial Development Agency’s tax break for the Green Acres Mall, she wants to hold the IDA more …

Expansion, 160 new jobs coming to Coast Professional in Geneseo

The Livingston County News

Bill Bacon, director of the Livingston County Industrial Development Agency, confirmed news of the expansion and estimated new job figures Monday …

Bartlett Dairy deal to develop site near JFK

Queens Chronicle

A 24-page cost/benefit analysis prepared by the New York City Industrial Development Agency said Bartlett would receive just over $15 million in city …

Utica council: Hire local

Utica Observer Dispatch

The city of Utica Common Council recently approved a resolution urging the city’s Industrial Development Agency to consider a policy where project …

MVCC Foundation names board officers

The Central New York Business Journal

Zogby is also a member of the Oneida County Industrial Development Agency board, president of the board of Central New York Health Home …

NYSEDC hosts Technology-based conference

Corning Leader

… director of the Steuben County Industrial Development Agency (SCIDA). … NYSEDC represents 900 member throughout New York to promote the …

After Decades as a New York City Landlord, the Port Authority is Going Back to Its Roots

Commercial Observer

“There were times when they saw themselves as an industrial development agency,” said Barry Hersch, a clinical associate professor at the NYU …

Federal Suit Challenges NY Nuclear Subsidies

RTO Insider

Despite its best efforts to avoid litigation, the New York Public Service … The suit, filed in U.S. District Court for the Southern District of New York in … said Gary Toth, vice chair of the County of Oswego Industrial Development Agency

 

Public Authorities

November 4, 2016

Public authorities ‘must consider trade-offs’ before setting Internet of Things regulation

PublicTechnology.net

The government must proceed with caution when considering regulation of the Internet of Things and realize a one-size-fits-all approach may not be …

Digital Economy Bill lacks clarity on data sharing, experts say

ComputerWeekly.com

The changes to be introduced cover a number of aspects of data management, including plans to allow public authorities to share personal data with …

Privatizing, partnerships future of public transit

Toronto Sun

In 1951, public authorities took control of Montreal’s transit system by municipalizing the private company that was until then offering transit services

Digital Republic Bill Uses Crowdsourcing To Promote Data Protection, Net Neutrality And …

Techdirt

… policy to include public and private entities, public service concession holders or entities whose activities are subsidized by the public authorities.

How much should we know about Jayalalithaa’s health?

Daily News & Analysis

… are of sound mental and physical health, isn’t it in the ‘interest of the public’ to ask the same of public authorities whose decisions impact the nation?

Links Roundup: NYS LDCs

November 4, 2016

SEC Fines Firm for ‘Fraudulent’ Audits of Ramapo, Ballpark

Patch.com

The SEC announced fraud charges back in April against Ramapo, its local development corporation, and four town officials, alleging that they cooked…

SEC Brings Two Proceedings Naming Auditors

JD Supra (press release)

The firm served as the outside auditors for the Town of Ramapo, New York and the Ramapo Local Development Corporation, established to engage in…

SEC settles with auditor in NYC suburb’s bond fraud case

Reuters

By Jonathan Stempel | NEW YORK … the town of Ramapo, New York, and its local development corporation, which were charged with fraud in April…

BRIEF-GE, Baker Hughes deal has $1.3 billion breakup fee-exec

Reuters

… issued fraudulent audit reports in connection with municipal bond offerings by the town of Ramapo, New York, and its local development corporation …

Broome funding more temporary Willow Point staff

Press & Sun-Bulletin

EIC is a New York State nonprofit local development corporation funded in part by the New York State Energy Research and Development Authority …

RE: Draft Environmental Impact Statement for the Redevelopment of the “East Parcel”

River Journal Staff

This statement is submitted pursuant to the provisions of the New York State … SEQRA, New York’s Environmental Impact Assessment legislation, … that the Sleepy Hollow Local Development Corporation (“LDC”) and Village Board …

CWC awards stormwater funds

Oneonta Daily Star

The CWC is a non-profit, local development corporation responsible for … economic development and education programs in the New York City …

The Agency breaks ground on construction of new headquarters, business-development center

The Central New York Business Journal

… the IDA and the Broome County Local Development Corporation (LDC). … National Development Council and the New York Business Development …

Ceresney Warning: Expect Continued SEC Enforcement Activity Regarding Municipal Securities

The National Law Review

On April 14, 2016, the SEC brought civil fraud charges against Ramapo, New York, its local development corporation and four town officials, alleging …

Broome funding more temporary Willow Point staff

Press & Sun-Bulletin

EIC is a New York State nonprofit local development corporation funded in part by the New York State Energy Research and Development Authority …

County Exec Mahoney’s scathing response to Syracuse mayor: Good riddance

Syracuse.com

In today’s letter, Mahoney accused Miner of reneging on an agreement not to form a local development corporation to compete with the Onondaga … the $500 million that Central New York won in the Upstate Revitalization Initiative.