CHICAGO - The Minnesota Court of Appeals on Friday rejected an appeal by Hennepin County to dismiss a lawsuit filed by holders of $124.5 million of bonds that were redeemed before a 1996 optional call date.

One attorney said the court's rejection of the appeal will probably send the case back to a lower court for trial.

The appeals court upheld part of a Hennepin County District Court rulling that said bondholders could take their case to court before presenting it to the county board.

The bondholders' suit was filed shortly after the county allowed a letter of credit on the bonds to expire Oct. 15, 1992, causing a mandatory redemption of $124.5 million of bonds before an Oct. 1, 1996 optional call date. County officials have said that allowing the letter of credit to expire saved the county about $41 million in bond premiums and interest. The proceeds from the original $129 million of bonds, issued in 1986, financed the construction of an incinerator.

The suit alleged that Hennepin County and the Hennepin Energy Resource Company L.P., which operated the incinerator, wrongfully prevented the renewal of the letter of credit.

In another move that favored bondholders, the appeals court also reversed part of the district court decision that dismissed bondholders' claims that the county breached covenants in the bond indenture.

The appeals court said the documents are ambiguous as to whether the county has a right to force a redemption by refusing to renew the letter of credit.

"We conclude that the bond documents are ambiguous with respect to the county's duties concerning renewal of the letter of credit and whether the county's conduct constituted a breach of such duties," the appeals court said.

The appeals court said that "although termination of the letter of credit triggers a mandatory redemption under the bond documents, the county's refusal to renew the letter of credit effectively transforms this provision into an optional redemption provision."

In addition, the appeals court said that the bond documents are ambiguous because a loan agreement between the county and the Hennepin Energy Resource, indicates that the county did not have the option of renewing the letter of credit. The option belonged to the partnership and the banks that provided the letter of credit, the appeals court said.

"The express language of the bond documents does not indicate that the parties intended to grant the county the option of nonrenewal," the appeals court said.

Robert Levy, an attorney for the bondholders, said that the "strong" appeals court decision most likely means that the suit will go to trial in Hennepin County District Court, where the case was first heard.

"It was a clean sweep and we won the appeal," Levy said.

Levy said that the decision is a wake-up call for the county to deal fairly with bondholders.

The county "is going to have to deal with this. Up until now, they haven't taken it seriously. I think they have to now," Levy said.

Levy said that the county can still petition the state Supreme Court to hear the case.

Attorneys for the county did not return phone calls.

Though the appeals court decision was handed down on Friday, it was not released to the public until yesterday, Levy said.

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