CHICAGO - The Summit County Port Authority in Ohio yesterday sued to recover $4.4 million after a borrower stopped making payments on a bond-funded loan earlier this year because it was unhappy with the project financed with the bond proceeds.
The lawsuit comes after Twinsburg Township earlier this year stopped making payments to the SCPA on its three-year-old town hall lease. After voting in January not to renew its $475,000 annual lease appropriation, the township's three-member board stopped making payments after March and moved out of the town hall - at the request of the Port Authority - at the end of April.
Since then the authority has made monthly payments out of its own account, separate from the bond fund reserves, towards debt service payments, and negotiated with a potential buyer to purchase the building. The lawsuit comes after the deal to sell the building fell through as the buyer was unable to secure financing.
"I was pretty content to make the payments as long as we knew we had a buyer," said Chris Burnham, the SCPA's president and executive director. "It's unfortunate that we're in this situation. We're doing everything we can to protect ourselves.
Reached yesterday morning, Carol Gasper, Twinsburg's chairwoman, said officials had not yet reviewed the lawsuit. A phone call to the township's attorney, Jack Morrison, was not returned.
A bigger issue than the payments, according to the Port Authority, is the moral obligation underlying public finance contracts.
"Usually you don't have one government try to stick another government with its obligations," said the SCPA's bond counsel, George Sarkis, an attorney at Roetzel & Andress. "Particularly when the township asked the Port Authority to issue the bonds on their behalf."
Located in north Summit County near Cleveland, Twinsburg is one of the larger borrowers in the Port Authority's bond fund, which consists of 13 other borrowers.
The authority in 2005 issued $5.59 million of fixed-rate revenue bonds at 5.125% interest on behalf of Twinsburg, using the proceeds to purchase the building and renovate it into a town hall. The debt is secured by the township's annual appropriation to make the lease payment, which itself is backed by a first mortgage lien and security interest on the 70,000-square-foot building. After the 20-yar lease expired, the contract stipulated that the township would own the building outright.
As of Nov. 15, the balance of the loan is $5.26 million, according to the Port Authority. The $4.4 million named in the complaint is the outstanding balance less a reserve account and unspent proceeds.
Since Twinsburg stopped making its payments, the SCPA has been making monthly payments that total $276,000. The payments have come from a supplemental fund that's separate from the bond fund reserves, an attempt to protect the bond fund program itself from default.
Starting this month, the authority also began to make an additional $15,000 monthly payment to cover principal owed on the bonds to trustee, U.S. Bank NA. The payments are coming from an unspent proceeds account which holds $740,000. The SCPA will continue to make the monthly interest payments of $25,000 out of the supplemental account holds about $800,000, according to Burnham.
"We haven't touched the bond fund itself," Burnham said. "We're buying some time, and we can do this a long time."
If the lawsuit takes a while to wind its way through the court system, the issue could eventually limit the Port Authority's ability to finance other deals.
"If there's no settlement for a protracted period, then we run the risk of putting bond fund at risk - but that's pretty far down the road," Burnham said.
Fitch Ratings recently affirmed its BBB-plus rating with a stable outlook on the bond fund program.