The Virginia Supreme Court, on a narrow 4-to-3 vote Friday, reversed its controversial April decision that invalidated lease- and appropriation-backed bonds, lifting a pall that had hung for months over $2.3 billion of financings within the state.

In an opinion written by Justice Elizabeth Lacy, who changed her vote since the April 19 decision, the court ruled that a lease financing does not create debts as defined under the state constitution, as long as the lease contains a clause giving the issuer the right to terminate the lease and not appropriate lease payments.

In overturning its earlier antogonistic stance toward lease financings, the court cast aside a key argument in the April decision that held that lease issues have the practical effort of creating debt because bondholders and rating agencies expect issuers to appropriate lease payments.

"The understandings and expectations of bondholders, county officials, or bond rating agencies- . . . while significant in determining the investment-grade or credit worthiness of the bonds," do not impose a legal obligation on the issuer to pay, the court ruled in Dykes v. Northern Virginia Transportation District Commission.

State officials proclaimed Friday's decision a "victory" and a "vindication" of a decades-old method of financing in Virginia. "Right now, I'm euphoric. But I need a lawyer to interpret every word for me before I do cartwheels," said State Treasurer Eddie N. Moore Jr., shortly after the decision was announced.

Attorneys for the state and counties -- former Attorney General William Broaddus and William Strickland, both with McGuire Woods Battle & Boothe -- said the opinion was as "clear" as it possibly could be in validating leasing. It brings the state high court "back in line" with its own rulings on lease obligations prior to the April decision, as well as with the majority of courts in other states that have found lease financing to be constitutional, they said.

Standard & Poor's Corp. also celebrated the court decision by issueing a statement affirming the ratings on all of the state's leasebacked bonds.

But the strong and sharp dissent of three of the justices who formed the majority in April's 6-to-1 decision, led lawyers for the opposition to warn that the case leaves many questions unsettled even as it seeks to put the issue of leasing's validity to rest. Two of April's majority who voted against leasing have since left the bench and been replaced by justices who joined the majority in the latest vote for leasing.

"This is not a stabilizing opinion," said James Falk Sr., attorney for taxpayer litigant Marcia Dykes. He predicted that the court's flipflop would provoke continued opposition from citizens groups and could prompt moves to restrict leasing in the state and local legislatures.

"The last word has not yet been heard. I'm sure this will be an issue in the General Assembly and a political issue around the state," he said. "Voters should have the right to vote on projects" like the $330 million Fairfax County parkway financing that was validated by the decision, he said.

Mr. Falk said it was "unlikely," however, that Ms. Dykes would attempt to carry the case any further and press for another rehearing by the high court. The court already took the unusual step of granting a rehearing after the April decision and is unlikely to repeat that move, the attorneys said.

But Mr. Falk noted that a change of only one vote would be needed to produce yet another reversal by the court, so lease opponents would be watching for an opportunity to raise the issue again in one of the next bond validation proceedings entertained by courts.

In a strenuous dissent from Friday's opinion, Justice Henry Whiting, who penned the April decision, commented cryptically that "no matter how the new majority phrases it, the present decision is simply an approval of an end run around the constitutional requirement of voter approval before a county can be saddled with longterm indebtedness."

A separate and even more vehement dissent by Justice Roscoe Stephenson stated, "Never before has this court validated a bond issue like the one in question. I find the scheme employed by the county to be a shocking, patent attempt to circumvent and nullify the requirement of voter approval."

From an investor's viewpoint, Justice Stephenson wrote, the decision enables the state and localities to "default without fault," adding that "we should not validate such a scheme."

He too predicted that the decision would generate political controversy since it goes against a referendum decision a year ago to prevent counties from issuing pledged-revenue bonds for transportation projects without voter approval. "Today, the majority, in effect, has sanctioned what the voters rejected," while it has "nullified" the constitution's debt proscriptions "by judicial fiat," he wrote.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.