St. Paul Port Authority, Lawyers Argue Over Use of Pledged Assets

CHICAGO — The St. Paul Port Authority and lawyers for a group of 876 fund bondholders squared off in Ramsey County district court Monday over whether the agency has misused revenue generated from assets pledged to bondholders.

The fate of $51 million of outstanding bonds backed by the struggling economic development fund is at the center of the litigation filed by both the bondholder group and the Minnesota authority.

The bondholder group filed its latest complaint in June asking the court to appoint a receiver. The group also wants an injunction against the authority’s use of any 876 revenues for administrative or attorney costs, a harbor maintenance fund, or the diversion of funds from the sale of any facilities pledged to the fund. The court granted a temporary restraining order last month.

The authority filed a counterclaim in July asking the court to free up $22 million being held in escrow to allow the authority to get caught up on interest payments and then proceed with a tender offer that would provide the remaining 2,600 bondholders with a discounted payout.

The fund’s reserves were drained in 2004 and principal and interest payments have fallen short since then. The bonds mature in 2022 and the authority believes investors with $35 million of later-maturing bonds will never receive any principal repayment if no action is taken.

Ramsey County District Court Judge Robert Awsumb on Monday heard testimony from Perry Feders, the authority’s chief financial officer during the 1980s.

Feders said revenue generated from facility leases pledged to the 876 fund were used during his tenure for third-party costs but only after bondholders were paid. He believes bondholders must first be paid with the revenues.

The authority amended its 876 leases in 1996 to allow revenue to be diverted directly to cover third-party costs — including legal and administration fees and harbor maintenance. In the past, the revenues first flowed into the 876 fund.

The agency contends the move was legal under the original 1974 bond resolution that says 876 revenue can be used to ensure an ongoing revenue stream. It argues that if it did not spend the money on harbor maintenance, it could lose the leases that generate revenue for the fund.

Third-party costs total about $285,000 annually, including $185,000 for harbor maintenance. Leases pledged to the 876 fund generate $2.2 million annually. A total of $5 million is owed annually in interest on the bonds. “The resolution gives us the authority to use these revenues,” said current CFO Laurie Hansen.

The bondholder group disputes that. “The authority has wrongfully taken money out of the bond fund that should go to bondholders,” said Keith Broady of Lommen, Abdo, Cole, King & Stageberg, attorney for the objecting bondholders, who hold $18 million of the 876 bonds.

Awsumb has 90 days to issue a ruling on the injunction. Other motions filed by each side will be heard at a later date.

The hearing marked the latest development in a lengthy saga that the Port Authority had hoped to end after devising a plan in 2006 to liquidate the fund and sell off its revenue streams to provide partial benefits for all bondholders. The bondholder group successfully challenged the liquidation through litigation.

“We want this to end. We are an economic development agency and this issue is a major distraction,” posing both a financial and time-consuming burden, said authority president Louis Jambois.

While the authority is pursuing a plan that allows for an equitable payment for all bondholders, officials fear the litigation could drag on and affect the agency’s operating budget. If the objecting bondholders prevail, the agency could be forced to increase its tax levy to generate the revenues needed to cover its third-party costs.

The agency issued $428.8 million of revenue bonds between 1974 and 1991. Many of the projects failed and pledged project revenues have failed to cover debt service since 1991.

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