Appellate arguments in Missouri court fight over appropriation pledge set for this week

Bonds

Lawyers for a bond trustee and a Missouri county will square off Wednesday before an appellate court over the legal enforceability of the county’s pledge to cover shortfalls on a $32 million industrial development bond issue.

Platte County leaders decided in 2018 not to cover a $765,000 shortfall in tax revenues generated in the Zona Rosa shopping center that had been pledged to repay the 2007 Platte County Industrial Development Authority issue. The decision cost the county its investment-grade rating.

The county said bond trustee UMB Bank NA’s demand that the shortfall be covered and the threat of litigation prompted their decision in November 2018 to file a lawsuit seeking to secure a legal determination that it is not legally required to make up the difference.

A state judge in a May 2019 agreed with Platte County that it’s not on the hook to cover gaps in project revenues to repay the remaining $29 million of debt sold through the county’s industrial development authority for the Zona Rosa Shopping Center project. UMB appealed last October.

The two sides laid out their positions in recent briefs and the Missouri Court of Appeals for the Western District will hear arguments in case number WD83232 at 11 a.m. Aug. 5 Central Time through WebEx, a remote web-based platform that permits attendance by computer or by telephone.

The lower court erred “by holding the financing agreement imposed only a moral obligation when the county made conditional promises to appropriate and pay that legally enforceable” after a review of county finances, bond trustee UMB contends in filings.

“Moral obligation financing is the creation of the municipal finance industry, not the legal system. The phrase moral obligation itself is a misnomer, because the arrangement does not impose any actual payment ‘obligation’ on the county,” Platte County’s attorneys argue.

The county successfully argued the pledge provided on the bonds was not a promise to pay, despite the trustee’s assertions the obligation was part of financing agreements. The county’s only obligation stems from a requirement that the auditor submit the request as part of the budget with the county commission deciding on an annual basis.

“There is no promise or requirement in the financing agreement that the county commission must accept the auditor’s proposed budget and appropriate for a potential payment,” Platte County Circuit Court Judge James Van Amburg ruled on the county’s request for a summary judgment. “Under the terms of financing agreement, Platte County is not liable on the bonds issued by the Development Authority.”

The trustee argues the financing agreement provides an enforceable mechanism based on contract rules. Its position doesn’t confer the unconstitutional status of a GO pledge because the pledge to make the shortfall is conditional, depending on an annual review of the county’s financial position. A cornerstone of the county’s position is that a firm obligation to pay would give the bonds a general obligation-like backing, which under state law would have required voter approval.

“The county made a conditional promise to pay the shortfall of the Zona Rosa bonds. The financing agreement was carefully drafted to ensure its promise complies with Missouri law. Yet, the county disregards the parties’ intention and conflates its conditional promise with general obligation bonds to insert doubt about enforceability,” the trustee, which is represented by Spencer Fane LLP attorneys Kersten Holzhueter, Scott Goldstein, and Joseph Bednar Jr., wrote in briefs.

Platte County stresses language in the offering documents that “there can be no assurance that such appropriation” to cover a shortfall and that the county commission “is not legally obligated to do so.” The moral obligation was provided solely as a means to assist the bonds by enhancing their credit rating and marketability. “The consequence to Platte County for not appropriating or making a voluntary payment is the possibility of an adverse credit action against Platte County,” county lawyers Todd P. Graves and Dane C. Martin of Graves Garrett LLC wrote.

Moody’s Investors Service cut the county’s rating — then at Aa2 — to junk in September 2018 after learning of the commissioners’ comments and after the May ruling. Moody’s warned in a special report lease appropriation ratings could be at risk if the market saw a contagion effect. Moody’s rates the county Ba3 with a negative outlook.

UMB reported in a June 5 notice that it made the June 1 debt service interest payment for $724,750 — no principal was due — in full with tax revenue forwarded by the district and a $171,189 draw from the debt service reserve.

The financing agreement that outlined repayment of the bonds issued in 2007 to refund 2003 debt sold to finance parking facilities at the Zona Rosa retail complex in suburban Kansas City required the county to submit in its annual budget a debt service appropriation.

The county warned it could not afford the expense that could reach $40 million to make good on the bonds that mature in 2032.

The situation has cast a pall over Missouri appropriation pledges, a popular structure in a state that imposes strict voter approval rules on GO borrowing.

The Zona Rosa bonds are repaid with a dedicated 1% sales tax in Zona Rosa. S&P Global Ratings stripped the Zona Rosa bonds of their investment-grade rating in September 2018 after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution.

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