CHICAGO — The St. Paul Port Authority and lawyers for a group of investors who hold some of its 876 Fund economic development bonds will return to court Nov. 1 as litigation over the fate of $51 million of defaulted outstanding debt moves towards a trial date.
A group of bondholders who hold about $20 million of the remaining $51 million of bonds issued for projects under the 876 Common Revenue Bond Fund — a long-struggling economic development fund established in 1974 — filed its latest complaint in June alleging the authority has misused assets pledged to bondholders.
The agency filed a counterclaim in July asking the court to free up $22 million being held in escrow to allow it 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.
In a ruling last month, Ramsey County District Court Judge Robert Awsumb sided in part with the bondholders and issued a temporary injunction that requires the authority to hold in escrow proceeds from the sale of any of its properties or facilities. No sales are pending. The bondholders contend they are entitled to any sale proceeds.
But Awsumb rejected bondholders’ request to bar the authority from using various fleeting and tonnage fees to cover riverfront maintenance expenses or administrative and legal expenses. In the ruling, he ordered both sides to court on Nov. 1 to set dates for other motions to be heard and to set a date for an accelerated trial. The objecting bondholders are represented by Keith Broady of Lommen, Abdo, Cole, King & Stageberg.
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 Port Authority believes investors with $35 million of later-maturing bonds will never receive any principal repayment if no action is taken. Agency officials want a resolution that allows for an equitable solution for all bondholders.
The bondholders counter that the authority has shortchanged the fund and they are entitled to property-sale proceeds and other revenues. While the original 876 Bond Fund Resolution, established in 1974, is clear that revenues generated by non-876 Fund properties are pledged to bondholders, it is less clear regarding sale proceeds.
In previous testimony, the agency’s former chief financial officer said proceeds of sales prior to 1991 went into the 876 Fund as stipulated under a 1986 letter from the authority’s bond counsel. The agency has presented a 1978 letter from the same bond counsel saying it is free to use the profits from the sale of non-876 properties as it wishes.
The authority’s former chief financial officer also previously testified that before 1996 the authority covered various maintenance fees from general operating funds and that tonnage and fleeting fees flowed directly into the 876 Fund.
In 1996, the St. Paul agency amended its 876 leases to create a separate fund for maintenance and diverted some fleeting and tonnage fees to cover the costs, a move it claims does not violate the original bond resolution. The court found that if bondholders eventually prevailed on its claims, the authority could afford to reimburse the funds diverted for maintenance, administrative and legal fees, but that it might have a harder time coming up with the funds from asset sales.
“The court finds that plaintiffs have identified that it is likely they will suffer irreparable harm if facilities are sold,” the court’s ruling read.
While the authority is pursuing a plan that allows for an equitable payment for all bondholders, officials say they fear the litigation could drag on and affect the operating budget, possibly even forcing a tax levy increase. 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.
