CHICAGO -- The Indiana Supreme Court last week validated a local building authority's plan to invest sinking fund money without providing an immediate redemption of outstanding bonds.
The high court overturned a Dec. 28, 1993, state appellate court ruling in a case brought against the Evansville-Vanderburgh County Building Authority on behalf of bondholders by the Chicago securities firm of Hutchinson, Shockey, Erley & Co.
The earlier ruling sided with bondholders, who contended that the authority was investing sinking fund money for its own benefit instead of using the funds to redeem bonds.
In a four-to-one decision a week ago, the state Supreme Court affirmed the Gibson County Circuit Court's 1992 ruling that the indenture for the bonds sold in 1966 allowed the authority to invest $12.1 million of sinking fund money without providing an immediate redemption of outstanding bonds.
A bond and interest sinking fund was created by the authority in 1966 in conjunction with the issuance of $19.3 million of 40-year, lease-revenue bonds to help finance construction of the Evansville Civic Center complex. Lease payments from the city of Evansville, Vanderburgh County, and the Evansville-Vanderburgh County Building Authority were deposited in the sinking fund to be used solely for the payment of principal and interest on the bonds.
In 1990, the authority determined it had collected enough money in the sinking fund to meet all future debt service payments on the bonds. It proposed investing the sinking fund money in government obligations to be held in a trust account that would allow the authority to implement an escrow-to-maturity plan to defease the bonds. That plan would allow the authority to use the trust account to pay debt service until the bonds were scheduled to mature.
The plan would eliminate the sinking fund and terminate the bond indenture, freeing the city and county from the obligation of making lease payments to retire the bonds.
In addition, the authority would use an investment account to gain an estimated $9 million in income from the difference between the interest paid on the bonds and the interest earned from investments in government obligations.
Victor Maddox, an attorney representing bondholders, expressed disappointment over the Supreme Court's decision and said the bondholders might petition for a rehearing before the court.
Maddox said the decision "seems inconsistent with the language of the indenture," adding that it could undermine investor confidence in Indiana bonds.
"Despite their assurances to investors, [the decision] ought not give investors in Indiana bonds much comfort," Maddox said.
In its decision, the court stated that it was "convinced that the bondholders have received every benefit for which they bargained ... we are confident that investors will continue to place their trust in the high security of Indiana municipal bonds," the decision continued.
F. Wesley Bowers, an attorney representing the authority, said his client is pleased with the high court's decision and is "happy the matter is laid to rest."
He pointed out that the authority had been supported in court by other municipal market players, including associations representing school boards, cities, towns, and counties in Indiana.
Jeff Lewis, a partner at the Indianapolis law firm of Ice Miller Donadio & Ryan, which served as bond counsel for the 1966 bond issue and which signed off on the escrow-to-maturity plan, said the high court's decision brings the state's bond world "back to normal."
Lewis said if the court went along with the appellate court's decision it would have made it difficult to defease bonds in the state and might have "emboldened people to try to loot escrows" for the redemption of bonds once their underlying security is released.
Lewis said he expects the authority to fully implement the escrow-to-maturity plan early next year.