Lord Abbett, Trustee File Suits to Protect 'Bingo' Bonds

BRADENTON, Fla. — Nearly five years after former Alabama Gov. Bob Riley waged war to eliminate what he called illegal casino-like slot machines operating as electronic charity bingo games, bondholders who helped finance a bingo facility are still in court fighting to salvage their investments.

Numerous federal lawsuits have been filed, including by the conduit issuer of $28.3 million of tax-exempt bonds, the Cooperative District of Houston County, bondholders the Lord Abbett Municipal Income Fund Inc., and bond trustee U.S. Bank.

The suits are an outgrowth of “political intrigue” in Alabama that appears to impinge on some of the steps taken to ensure that the debt and the revenue stream backing it were legal, according to a person familiar with the situation.

Those steps included getting court validation of the bonds and obtaining opinions from the state attorney general stating that the bingo games were legal before issuing bonds.

Fees from electronic bingo games provided a source of revenue, along with property assessments, that backed bonds sold in 2009 and 2012 to pay for public infrastructure at an entertainment facility in Dothan known as Country Crossing.

Lord Abbett purchased the bonds for three of its funds, and though debt service has been paid so far, sources said a payment default is likely now that circumstances have changed in Alabama.

Jumping through legal hoops doesn’t ensure that a bond deal is economical, said attorney Mark Schwartz who represented the Harrisburg, Pa., City Council during its debt crisis in 2011 and 2012.

If state policy regarding the use of electronic bingo games changed, and applied to bonds retroactively, that could be a questionable issue, Schwartz said.

At least three federal complaints are currently pending by U.S. Bank and Lord Abbett, which purchased the Country Crossing bonds for its High Yield Municipal Bond Fund, Intermediate Tax Free Fund, and National Tax-Free Income Fund.

“It’s unfortunate that the politics of greed have interfered with the investment expectations of bondholders and the investors in our funds,” a Lord Abbett spokesman said in a statement.

“As stewards of our clients’ assets, it’s incumbent upon us to take the actions necessary to protect the investment interests of our shareholders.”

Court records and documents from Alabama Attorney General Luther Strange’s office said that several prior Alabama attorneys general opinions supported electronic bingo, which began to proliferate in some counties in the early to mid-2000s.

Gambling has been the subject of numerous lawsuits in Alabama, including a federal class action filed two weeks ago by elected officials and local leaders in Macon County and the city of Tuskegee.

The Macon suit alleges that white political leaders entered into a “scheme” with Mississippi and Alabama Indian casino operators in an effort eliminate competition from non-Indian gambling.

The Indian tribes funneled political contributions through several organizations, the suit said.

Counties were allowed to permit charity bingo if they received legislative approval to amend the state constitution, and the approval of their local voters. The same process was followed in Houston and Macon counties.

In December 2008, then-Governor Riley issued an executive order creating a task force to investigate gambling operations and to eliminate “illegal activity, including slot machines disguised as electronic bingo,” his office said at the time.

The task force seized the first bingo machines in Lowndes County in March 2009, which led to a lengthy legal review of the devices before the Alabama Supreme Court.

Former Attorney General Troy King, who served during Riley’s administration, disagreed with the governor and issued opinions supporting electronic bingo, including one in September 2008 for Houston County, where Country Crossing is located.

The Houston County opinion rendered by King was incorrect, and has been withdrawn, said Joy Patterson, spokeswoman for Strange, who ousted King in the 2010 Republican primary and won the general election that November.

King’s opinion “was contrary” to Alabama legal precedents and the statute on gambling, she said.

“Slot machines have always been illegal in Alabama and the Alabama Supreme Court has been very consistent in its rulings on this matter,” said Patterson.

“The former attorney general refused to enforce the law, leading to confusion and prosecutions for public corruption,” she said. “The people of Alabama replaced him with an attorney general who would enforce the law.”

In October 2009, the Circuit Court of Houston County validated the bonds for the Country Crossing project.

According to the Alabama code, if a court validates debt “the issuance of the obligations shall be forever conclusive as to the validity of such obligations” as well as “the taxes, revenues or other means provided for their payment and of any pledge, covenant or provision for the benefit of said obligations.”

Validation means the debt and its security “shall never be called in question in any court in this state,” said the code.

“A court validated these bonds but that doesn’t mean that the court blessed them,” Schwartz said. “That just goes to something procedural, and it’s like Harrisburg’s bogus debt that the state approved.”

Schwartz represented the Harrisburg City Council in a case involving cost overruns for an incinerator retrofit project that left the city with $310 million of bond debt that it could not pay. He resigned in July 2012 saying that he had not been paid by the council.

“I’m quite sure no court would get into the substance of whether [the Country Crossing] bonds were a good deal or bad deal,” said Schwartz.

The fact that some bingo facilities in Alabama operated by virtue of constitutional amendments, and without legal interference for years is an interesting issue as it relates to change in state policy, he said.

“What happens when you have validated bonds and basically take away the ability to have legal bingo,” Schwartz said. “You can’t ex-post facto make something illegal that was previously legal. It raises a question about whether [political policy change] is after the fact.”

Joy Patterson said the attorney general had no comment on the validated Country Crossing bonds.

“Investors should always carefully evaluate the sources for repayment of bonds before purchasing the bonds,” she said, pointing to a Nov. 13, 2009 letter from Baker Donelson Bearman, Caldwell & Berkowitz PC.

At the time, Baker Donelson represented County Crossing developer Ronnie Gilley and provided an updated 20-page legal opinion before the bonds were sold to Lord Abbett.

The letter, describing the bingo environment in Alabama as being “charged” more than ever, recounts the history of bingo, actions by the governor to bring the issue to the state Supreme Court, and numerous other legal circumstances that could impact bingo operations.

Baker Donelson said its opinion about the bonds was based on state attorneys general opinions, Houston County’s constitutional amendment, and other local regulations permitting electronic bingo.

“Though the issues are not free from doubt … we believe that it is not unreasonable to conclude that Amendment 569 allows electronic bingo in the county,” Baker Donelson’s letter said.

In November 2011, U.S. Bank notified Country Crossing bondholders that defaults had occurred for failing to provide financial statements and failure to levy certain special assessments to pay for operations and debt service.

In July 2012, officials with the attorney general’s office raided Country Crossing and seized more than 600 electronic games and cash. Country Crossing has reopened and now is called Center Stage, where less lucrative paper-based bingo games are now played.

To date, bondholders have been paid with proceeds of a letter of credit and reserves, though a payment shortage could occur in the near future because of fewer revenues associated with the paper games, according to a source knowledgeable about the situation.

Gambling led to a scandal in Alabama after some developers were accused of bribing state lawmakers to pass bills that would legalize gambling.

In late 2010, four legislators, several lobbyists, and two gaming operators, including Gilley, were arrested for either buying or selling votes.

Only a handful were convicted or took plea deals. Gilley accepted a plea and went to jail late last year.

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