WASHINGTON -- The Virginia Supreme Court has withdrawn its April 19 ruling that declared unconstitutional all lease- and appropriation-backed securities issued without voter approval.
The move lifts a cloud of legal questions that has been hanging over $2.3 billion of outstanding securities within the state. But securities attorneys cautioned that the court's action does not give a green light to new lease- and appropriate financings.
In an order issued Tuesday, the state court said it vacated its decision, pending a rehearing, in Dykes v. Northern Virginia Transportation District Commission. In that case, it found that lease-backed securities are the same as general obligation debt and illegally circumvent the state constitution's requirement that voters must approve debt offerings.
The rehearing is expected in September.
Petitioners requesting a rehearing said the decision had thrown the legality of up to $2.3 billion of Virginia state and local securities into question while causing a virtual halt of new lease offerings within the state. It also hd prompted credit alerts by the rating agencies, and several jurisdictions said they feared they might be downgraded.
The court's unusual decision to withdraw the April ruling should have the effect of "pulling back the penumbra" and "dispelling the shadow that Dykes cast," said Stephen Chapple, the assistant attorney general of Virginia.
An amicus curiae brief by Attorney General Mary Sue Terry on behalf of Gov. Douglas Wilder and other prominent state officials was one of an armload of such briefs filed in support of the petition.
The withdrawal has strong "symbolic" significance, Mr. Chapple said. "It's as if the decision never existed." But bond attorneys are likely to continue to be cautious about issuing opinions on lease-backed securities in Virginia until the case is finally settled, he said.
"Dykes is going to be hard to ignore. But the bond community should be quite comforted, just as we are, by the fact that the court acted so quickly and decisively to try to remove the cloud," he said.
William Strickland, a lawyer with McGuire, Woods, Battle & Boothe, which represented the transportation commission in the case, agreed that bond attorneys should "proceeds with a good deal of caution in the next few months." The court's decision to vacate the April ruling does not give a green light to new lease and appropriation-backed financings, he said.
State Treasurer Eddie Moore said the state will continue to be cautious about lease financings, but he is optimistic the withdrawal order would at least permit the state to proceeds with a $31 million equipment lease offering that had been held up by the Dykes decision.
The rating agencies may still decline to rate the equipment offering, he said, but if they agree with state attorneys that it passes constitutional muster, it likely will go to market next week.
All of the officials said they were relieved at having at least a temporary reprieve from the court.
In the rehearing, petitioners will ask the court to reverse its April ruling, or at least to narrow the ruling so that it does not endanger so many planned financings and does not apply retroactively to outstanding debt.
They will urge the court to go back to its prior stance in a 1982 case, Baliles v. Mazur, when it "held that obligations secured by discretionary appropriations do not pledge or commit the full faith and credit of the government," according to the attorney general's brief.
That case, which was overturned by a 6-1 margin in the April decision, had put the Virginia court firmly in line with the majority of other state courts that have ruled that lease securities do not constitute debt because the issuer has a legal right to cancel a lease contract and not appropriate payments.
As to why the court overturned the 1982 case, one official, who asked not to be identified, said it may have been "offended" by the loose structure of the $330 million revenue bond issue for a parkway at question in the Dykes case.
James Falk Jr., attorney for the taxpayers who originally challenged the financing, described it as a municipal "junk bond" offering designed to circumvent voters. He also said it provided few protections for investors, since it was not secured by a separate revenue stream and offered no collateral like traditional lease financings.
Several officials said they believe the court did not foresee the broad consequences of the April decision on state finances and the bond markets. The stifling effect of the decision also was not anticipated by much of the state's bond community, which was slow to react to the ruling.
"Nobody though the decision would be so broad-based" because the parkway financing was not structured like a traditional lease deal, said Melissa Garmon, a broker with Ferris Baker Watts.
