Illinois lays out arguments in GO lawsuit appeal

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An Illinois judge acted properly when he dismissed a taxpayer complaint that challenged repayment of $14.3 billion of state general obligation bonds after concluding the case lacked legal merit, Illinois Attorney General Kwame Raoul’s office argues in an appellate filing.

“The circuit court’s judgment denying petitioner leave to proceed on his complaint should be affirmed because he failed to establish a reasonable ground to pursue his claim to enjoin further payments on the 2003 and 2017 bonds based on his theory that the laws authorizing them violated the State Debt Clause,” reads the brief filed Feb. 14 by Raoul’s office.

“That claim lacked merit for several reasons. And the circuit court was not required, as petitioner contends, to let his case go forward even if doing so was ultimately futile as a matter of law,” the brief continued.

The filing marked the latest salvo in the case watched closely by market participants that dates back to last summer when Illinois Policy Institute head John Tillman sought to file a lawsuit blocking repayment of the state’s $10 billion 2003 GO pension obligation issue and $6 billion 2017 GO bill backlog borrowing. About $14.3 billion remains outstanding.

Tillman, who as head of the conservative IPI is a frequent critic of state fiscal policies, argues the bonds violated the state constitution and therefore should be voided. A hedge fund that originally was named as a potential plaintiff is no longer named in any filings.

Illinois Attorney General Kwame Raoul's office filed its brief responding to John Tillman's appeal of a circuit court decision denying the filing of a taxpayer action blocking repayment of $14.3 billion of state GOs.

The circuit court denied Tillman’s request to file the complaint. Tillman’s lawyers appealed to the Fourth Judicial District.

Tillman’s appeal brief argued that Sangamon County Circuit Court Judge Jack D. Davis II erred in denying the taxpayer lawsuit by going beyond the legal test for whether it could proceed which Tillman contends is limited to whether it was “frivolous” or filed for “malicious” purpose and should not yet consider the merits.

The AG argued that the judge correctly looked at whether reasonable grounds existed for the filing. "The circuit court here properly considered the legal merits of petitioner’s complaint in connection with its ruling that he had not established a reasonable ground for being allowed to file it,” the AG brief reads.

The brief goes further outlining the debate over the merits, arguing that Tillman acted too late.

“Had petitioner timely sought and obtained an injunction against issuance of the bonds, the state could have made different financial arrangements. In that case, bondholders would not now be needlessly placed in peril, and the state would not now be facing the risk of a potentially serious downgrade in its credit rating based on a court ruling forcing the state into a de facto default on bonds backed by its full faith and credit,” the AG brief reads.

The brief further argues the bonds met the legal test for issuance required under state law and that bondholders should have been named in the lawsuit, given the harm they would suffer if payments were halted, and so should have a voice as a party to the litigation.

Many market participants thought the challenge was a long shot given the state’s bond review process and the wide latitude of the statutory language, but secondary market spreads on Illinois paper widened by about 35 basis points after the filing.

State spreads narrowed after the judge denied the filing and have steadily narrowed due to the state’s near-term rating stability and market conditions that reflect strong inflows and a thirst for higher-yielding paper like Illinois due to record low interest rates. Illinois is rated in the triple-B category with two rating it just one notch above junk.

In the appeal, Tillman’s lawyers argue that the trial court went too far. “At the petition stage, the trial court was tasked with determining solely whether these arguments are ‘frivolous or malicious,’ or ‘otherwise unjustified,’” the appeal said.

The lawsuit would have argued the bonds violated state debt guidelines on the use of proceeds and the authorizing statutes lacked sufficient information as to the “specific purpose” for their issuance.

The circuit court rejected the arguments, finding the bond issues did offer specific enough language to pass constitutional muster and said that to allow the case to proceed would result in the improper interference with the application of public funds.

“This court finds the legislature stated with reasonable detail the specific purposes for the issuance of the bonds and assumption of the debt as well as the objectives to be accomplished by enactment of the legislation,” Davis wrote in the Aug. 29 judgment denying Tillman’s petition.

The judge’s order outlined the high bar for granting taxpayer lawsuits. Taxpayer actions by a citizen and taxpayer of the state can move forward if the courts grant leave to restrain and enjoin the defendant or defendants from disbursing the public funds of the state.

The court must believe there is reasonable ground for the filing of such action, or it can grant leave to file the complaint as to certain items, parts or portions of any appropriation act sought to be enjoined and mentioned in such complaint, and may deny leave as to the rest.

The decision noted that while Tillman is an Illinois resident, the hedge fund Warlander Asset Management LP did not meet that description. The firm is a holder of $25 million of state GO bonds and it argued repayment of alleged illegal bonds would impair the market value of its holdings of uncontested bonds. By dropping Warlander from the appeal, the lawsuit addressed one issue the judge questioned.

The firm disclosed in the courtroom that it stood to benefit if the bonds were ruled illegal because of credit default hedges it had entered into involving the challenged bonds. Nuveen Asset Management LLC and AllianceBernstein LP put forth the claim in support of Illinois’ position that the bonds were legally issued and should continue to be paid.

Tillman named Gov. J.B. Pritzker, state Treasurer Michael Frerichs, and Comptroller Susana Mendoza as defendants in the July petition and complaint. Tillman is represented by Webber & Thies and White & Case LLP. Both Tillman and the AG briefs request oral arguments.

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