CHICAGO -- Bondholders of defaulted Chicago-Calumet Skyway debt lost their latest round of litigation earlier this month when a federal judge ruled against their claim that the city of Chicago breached its fiduciary duty by allowing employee thefts of toll revenues.
However, Chief Judge James Moran of the U.S. District Court in Chicago left open a second bondholder claim that the city also breached its duty by depositing skyway revenues in non-interest bearing accounts.
Moran ruled that bondholders "cannot recover for the city's alleged toleration of employee theft and failure to maintain sufficient internal controls over revenues and expenses."
In his order, Moran wrote that the employees stole the money for their own benefit -- not the city's -- and that an employer cannot be held liable for an employee's action committed solely for the employee's benefit.
Bondholders estimated that $13 million of toll revenues were lost to theft over an 18-year period ending in 1988. The lawsuit charged that city officials were aware of the theft "but responded to that problem with a pattern of benign neglect or indifference."
In a press release, Susan S. Sher, Chicago's corporation counsel, said Moran's decision "protects the taxpayers from having to pay millions of dollars in unsubstantiated claims by the bondholders." The release also says that there is now "virtually no opportunity" for toll thefts due to technological and accounting safeguards placed on the skyway.
Both the theft claim and the loss of interest claim were part of a 1992 lawsuit filed against Chicago by skyway bondholders.
The suit was put on hold earlier this year when Moran directed city officials and attorneys for bondholders to discuss a possible settlement to the default. However, the discussions broke down in April when an acceptable agreement failed to materialize for holders of $90.2 million of outstanding skyway revenue bonds.
At the time, attorneys for bondholders returned to court to press for a ruling on the charges filed in 1992.
Ken Purcell, an attorney at Winston & Strawn, which is representing bondholders,said the judge's ruling leaves only the bondholders' charge that Chicago benefited from placing skyway revenues in non-interest bearing accounts.
In his order, Moran said that evidence exists that the city did receive "favorable treatment" for its other accounts by placing the skyway revenues in accounts that paid no interest. He also pointed to evidence that "the city did not exercise diligence or perfect good faith in investing trust property and thus breached its fiduciary duty to the bondholders."
Bondholders charged that up until 1987, the city had deposited the funds in non-interest bearing, accounts at American National Bank in Chicago, losing an estimated $544,000 of interest.
Moran said he will not rule on the charge until he receives further information from the city and bondholders. Purcell said Moran has scheduled a meeting with the two sides for Wednesday.
In September, Moran rejected another bondholder petition that asked the court to order the city to hire an independent inspector to examine the structural needs of the skyway. Moran ruled that the expenditure of $230,000 for the inspector was not warranted at this time. However, he said that a future assessment of the toll road's needs may be necessary because "it can have an impact on bond retirement."
Bondholders have been in court since 1972 seeking to force the city to cure the 1963 default on $101 million of bonds sold in the 1950s to build the 7.8-mile toll road connecting the southeast side of Chicago with the northwest comer of Indiana. Bondholders have been successful in recent years in getting the court to order a toll increase and the redemption of $10.8 million of bonds.