Up Next: Securities Suits Against Municipalities?

dandodiary@gmail.com (Kevin LaCroix) — Mon, 28 Sep 2009 09:42:15 GMT

Among the many firms and entitles struggling with the effect of the global economic downturn are a host of municipalities, many of whom face diminished tax revenues, unfunded pension and health care liabilities and aging infrastructure. A number of these municipalities also labor under a burden of debt undertaken when times were flush. Financial woes have already forced credit rating downgrades on some issuers’ bonds and others are flirting with default. Among other things, these kinds of problems can lead to securities litigation, and recent developments in one securities suit involving a municipality raise the question whether there could be more suits to come.

Municipalities traditionally have various levels of exemptions from securities registration and reporting requirements, although these exemptions have evolved over time (about which refer here). But municipalities have always been subject to the antifraud provisions of the securities laws. Over the years the SEC has pursued a number of high profile enforcement actions in connection with municipal bond offerings. A lengthy list of the SEC’s enforcement actions against municipalities between 2003 and 2008 can be found here, including actions against issuers, public officials, and offering underwriters. Earlier cases can be found here and here.

Perhaps the most high-profile SEC enforcement action in recent months involving a municipality is the securities fraud complaint filed against five former San Diego city officials. As described in the SEC’s April 7, 2008 press release (here), the SEC alleged that the five officials, who allegedly played key roles in connection with inadequate municipal securities disclosures in 2002 and 2003, had "failed to disclose to the investing public buying the city’s municipal bonds that there were funding problems with its pension and health care obligations and these liabilities had placed the city in serious financial jeopardy."

As reflected in the SEC’s San Diego complaint (here), the five officials were the former City Manager, the former City Treasurer, the former City Auditor and Controller, the former Deputy City Manager, and the former Assistant Auditor and Controller. The complaint sought to enjoin the officials from further violations and to require the officials to pay a civil penalty.

The SEC’s actions clearly are designed to enforce the securities laws and to vindicate the principles they represent. However, the SEC’s actions in and of themselves will do little directly for the investors who were harmed by the alleged misrepresentations.

To be sure, investors are not precluded from initiating their own action to seek damages to redress their injuries. In at least one recent action involving the city of Alameda, California and related municipal entities, investors have filed a civil action seeking to recover damages for alleged violations of the securities laws.

As reflected in its Amended Complaint in the Alameda case (here), the plaintiff alleges that earlier in this decade with the City of Alameda issued certain municipal revenue anticipation notes, it knew the funding mechanism was never going to achieve the results needed, because the funding mechanism "was not economically feasible" for multiple reasons, "all of which were known to the City." The project was "not risky, but rather a surefire loser." The complaint is not filed as a class action, but a separate counterclaim brought by the Nuveen fund family raising substantially the same allegations against the City has also been filed in the same district.

The plaintiff in the Alameda case alleges violations of both the federal and California securities laws. The municipal defendants filed a motion to dismiss the California state securities law claims, based on statutory sovereign immunity.

In an August 11, 2009 order (here), Judge Susan Illston held that the statutory immunity provisions were not intended to provide local governments with immunity from securities fraud, and that the state securities law claims against the municipal entities may proceed.

As noted in a September 24, 2009 Daily Journal article entitled "The Newest Securities Litigators?" (here, subscription required), by Richard Gallagher of the Orrick, Harrington & Sutcliffe law firm, Judge Illston’s ruling is "a matter of first impression" under California law. As Gallagher further observes, Judge Illston’s ruling in the Alameda case is only one of several recent developments, including current SEC initiatives to provide greater regulatory oversight, that could further subject municipalities to litigation alleging securities law violations.

These developments, Gallagher comments, could not come at a worse time for municipalities, since many cities and counties around the country are dealing with record budget deficits and other financial difficulties. These public entities are in many instances struggling to meet debt obligations and are contending with problems arising from credit downgrades and even defaults.

These financial woes are producing significant bondholder losses, which could in turn lead to investor lawsuits like those filed against Alameda. Indeed, rulings such as that entered by Judge Illston, in which she held that municipal entities lacked statutory immunity from state securities laws claims, might embolden disappointed investors to pursue these kinds of claims.

The problem is that the financially troubled public entities can ill afford expensive, high-stakes securities litigation. Even if, as Gallagher notes, the municipalities would have substantial defenses for these kinds of claims, the defense costs alone could be staggering for financially strapped municipalities.

Readers of this blog may well wonder whether there are insurance products that could protect municipalities from these kinds of risks. Certainly, Public Official Liability Insurance includes liability protection not only for individual public officials but also for the public entities themselves. But many of these policies include an express exclusion precluding coverage for claims arising out of any debt financing. There may well be public entities that have procured insurance designed to provide protection for these kinds of claims, but the typical municipality has not, even if it otherwise purchases public official liability insurance.

The poor financial condition of defaulting public entities and the absence of insurance among other concerns do raise the question of what the investor plaintiffs’ litigation objectives may be – the beleaguered taxpayers of the troubled municipality hardly qualify as an attractive target, whatever wrongs the investors may allege.

Perhaps the motivation of investor plaintiffs in these kinds of cases may be understood from the lineup of the defendants in the Alameda case. The defendants named in that case include not only the various municipal entities, but also the offering underwriters that sponsored the city’s note offering, authored the offering documents, and sold the notes to the public.

The plaintiff’s complaint in the Alameda case alleges that the offering underwriter knew, "as the City did, that the project was not economically feasible," or in the alternative, that the underwriter "failed utterly in its duty to undertake due diligence to unearth the City’s misrepresentations and omissions of material fact." The plaintiff purchased $8.5 million of the city’s notes from the offering underwriter, which the plaintiff further alleged has been "an Advisor in which the Plaintiff reposed trust and confidence."

Thus, while Judge Illston’s ruling that municipalities lack statutory immunity from state securities law claims may be significant, the municipal defendants in the Alameda case may or may not even be the central targets.

Other aggrieved municipal bond investors may also seek to pursue similar claims against the outside professionals that advised the issuer municipalities. These gatekeeper kinds of claims could face substantial hurdles of their own, including with respect to the federal securities claims the U.S. Supreme Court’s 2008 ruling in the Stoneridge case that there is no private right of action for scheme liability or aiding and abetting under the federal securities laws.

These hurdles and the disincentives to pursuing financial trouble municipalities could discourage some prospective litigants from pursuing these kinds of claims. Nevertheless, the prospect of further municipal bond defaults and developments such as Judge Illston’s ruling in the Alameda case could encourage some claimants to proceed.

There may, in fact, be specific reasons why municipalities may be particularly vulnerable to securities suits, notwithstanding all of the contrary considerations noted above. That is, as Gallagher notes in his article, "municipal issuers may lack procedures for achieving consistent disclosure goals, leaving them vulnerable to securities suits." The provision of "incomplete financial information regarding the issuer’s financial affairs" could "present some serious litigation risks."

As Gallagher concludes, municipalities could find themselves for the first time in coming years defending themselves from securities fraud claims, particularly with respect to state law-based allegations.

Very special thanks to Richard Gallagher for providing a copy of his article and a copy of Judge Illston’s opinion.

How to charge for stormwater management

Mon, 27 Jul 2009 11:03:03 GMT

Can and should municipalities charge for stormwater management on an area basis? How would be the winners and losers?

Post from: Saxe Environmental Law News

New Waste Management Policies The Ministry of the Environment made two significant waste management...
Municipalities recovering spill costs In 2005, the Environmental Protection Act was amended to allow...
Carbon Management Centre It’s great to see that, after years of apparent indifference,...

Interested in how municipalities can and should charge for their stormwater management systems? Rain Check is my article on the issue, published in Canadian Water Treatment. Enjoy!Popular Posts:

Post from: Saxe Environmental Law News

New Waste Management Policies The Ministry of the Environment made two significant waste management...
Municipalities recovering spill costs In 2005, the Environmental Protection Act was amended to allow...
Carbon Management Centre It’s great to see that, after years of apparent indifference,...

How to charge for stormwater management

admin@envirolaw.com (Dianne Saxe) — Mon, 27 Jul 2009 11:03:03 GMT

Can and should municipalities charge for stormwater management on an area basis? How would be the winners and losers?

Post from: Saxe Environmental Law News

New Waste Management Policies The Ministry of the Environment made two significant waste management...
Municipalities recovering spill costs In 2005, the Environmental Protection Act was amended to allow...
Carbon Management Centre It’s great to see that, after years of apparent indifference,...

Interested in how municipalities can and should charge for their stormwater management systems? Rain Check is my article on the issue, published in Canadian Water Treatment. Enjoy!Popular Posts:

Post from: Saxe Environmental Law News

New Waste Management Policies The Ministry of the Environment made two significant waste management...
Municipalities recovering spill costs In 2005, the Environmental Protection Act was amended to allow...
Carbon Management Centre It’s great to see that, after years of apparent indifference,...

Thumbprints Are Coming

abrandt@fgpp.com (FGPP) — Fri, 20 Mar 2009 20:11:39 GMT

The Sun-Times has a short piece today on SB 0456 which became Public Act 95-0998. We first reported on this bill back in May of 2008. The Sun-Times’ article reflects that the bill will go into effect on June 1. If you scroll down to Sec. 3-102(h), you’ll see that the failure of the notary to get the fingerprint as part of the record doesn’t mean much outside an allegation of fraud:

(h) The failure of a notary to comply with the procedure set forth in this Section shall not affect the validity of the Residential Real Property transaction in connection to which the Document of Conveyance is executed, in the absence of fraud.

Also, if you’re a property owner with some reason to worry about providing your thumbprint, the act has a provision regarding how and when these records will be disclosed:

(i) The Notarial Record or other medium containing the thumbprint or fingerprint required by subsection (c)(6) shall be made available or disclosed only upon receipt of a subpoena duly authorized by a court of competent jurisdiction. Such Notarial Record or other medium shall not be subject to disclosure under the Freedom of Information Act and shall not be made available to any other party, other than a party in succession of interest to the party maintaining the Notarial Record or other medium pursuant to subsection (d) or (e).

The weirdest part about the whole act is that most of the changes will be nullified by the statute’s own language on July 1, 2013 unless the legislature acts by then to amend the law:

(k) Subsections (a) through (i) shall not apply on and after July 1, 2013.

Shovel-Ready Illinois

abrandt@fgpp.com (FGPP) — Wed, 18 Feb 2009 17:48:50 GMT

Stimuluswatch.org is reporting on the stimulus package and the projects proposed for Illinois. A link to the Illinois projects is here. The database is searchable and includes the localities, descriptions of the projects and the amounts proposed.

Municipalities Will Not Pay For State Police Patrols

fmcrivelli@crivellilaw.com (Frank Crivelli) — Mon, 27 Oct 2008 11:14:13 GMT

The Associated Press recently reported that a state council on Wednesday, October 22, 2008, struck down New Jersey's plan to have rural towns pay for the state police coverage that they receive due to the fact that the town’s do not have their own police force. The New Jersey Council on Local Mandates effectively voided a plan contained in Gov. Jon Corzine's budget that would have charged small towns who don't have their own police force but instead are provided with public safety coverage by the New Jersey State Police. Corzine has stated that this loss of revenue would have to be absorbed by further cuts in municipal aid.

The Council, which is an independent body created to review the constitutionality of state laws and regulations, said the requirement to force towns to pay for state police was an illegal unfunded mandate. Under New Jersey's Constitution, the Council's decision is final.

Seventy-six New Jersey towns get full-time state police patrols free, while 13 get free part-time patrols, regardless of size, population, taxes and wealth.

This is an interesting proposition as it could be an integral part of the continued push to consolidate municipal services and benefits. As a tax saving measure the Governor’s office has already started an initiative to consolidate smaller school districts within the state. Public services will certainly follow. While a reduction of officers on the road is unlikely, it is not too speculative to state that the suggestion of sharing administrative duties between departments may be viewed as a feasible cost saving measure. As the budget gets tighter, taxes go higher, and there is a continual cry from the public for assistance; we may see novel propositions that can have an effect upon the employment of public safety officers and the administrators of public safety departments. Let’s keep an eye on this one.

NH Municipal Law: Supreme Court Establishes Official Immunity for Police Officers and Police Departments in New Hamsphire

Wed, 24 Sep 2008 14:37:53 GMT

In Everitt v. Town of Hooksett, et al. 156 N.H. 202 (2007), the New Hampshire Supreme Court recognized for the first time that police officers and police departments are entitled to "official immunity" for state law claims brought against them, including negligence, and that municipal employers are also entitled to vicarious qualified immunity for the officers' conduct.

An article by Attorney Charles P. Bauer details the ruling at:
Supreme Court Case Establishes Official Immunity for Police Officers and Police Departments in New Hampshire

In 2008, the Superior Court (Maguire, J) granted summary judgment and dismissed the police officers and their municipal employer utilizing the newly created “official immunity” law in New Hampshire. Official immunity for state law claims is similar — and theoretically broader — than "qualified immunity" for police officers sued for federal law claims such as excessive force and wrongful arrest under 42 U.S.C. 1983.
The New Hampshire Supreme Court held that:

“Municipal police officers are immune from personal liability for decisions, acts, or omissions that are: (1) made within the scope of their official duties while in the course of their employment; (2) discretionary, rather than ministerial; and (3) not made in a wanton or reckless manner.”

For more information, see the full article.

Judge Applies “But For” in Slip and Fall Case

Wed, 06 Aug 2008 13:27:05 GMT

In Cartner v. Burlington (City), a recent slip and fall action, Mr. Justice Michael Quigley found for the plaintiffs. In doing so, he applied the “but for” test of causation that was endorsed by the Supreme COurt of Canada in Resurfice v. Hanke. The case involved a slip and fall accident in Burlington, Ontario in which [...]

In Cartner v. Burlington (City), a recent slip and fall action, Mr. Justice Michael Quigley found for the plaintiffs. In doing so, he applied the “but for” test of causation that was endorsed by the Supreme COurt of Canada in Resurfice v. Hanke.

The case involved a slip and fall accident in Burlington, Ontario in which the plaintiff, a 52 year-old woman, broke her leg and was unable to return to work. She slipped on a “muddy concrete slurry substance” that had pooled on the city sidewalk. She claimed that the substance had originated with “Crystal Shoes”, a nearby store, and sued the owners, who were husband and wife. She also sued the City of Burlington as it had been responsible for the maintenance of the sidewalk. Justice Quiqley found both defendants to be liable for the damages and apportioned 80% of the liability to Crystal Shoes and 20% to the City of Burlington.

Justice Quigley relied on the decision in Resurfice Corp v. Hanke, 2007 SCC 7 (CanLII), [2007] 1 S.C.R. 333, when dealing with the issue of causation. In that decision, the Supreme Court of Canada reaffirmed that the “basic test” for determining causation is the “but for” test and that this test applies to multi-cause injuries. It is only in special circumstances, in other words, where it is impossible to apply the “but for” test because of factors out of the plaintiff’s control, that a “material contribution” test can be applied. Justice Quigley said this was not the case here but he went on to say that even using the material contribution test he would have reached the same conclusion.

With respect to liability, the husband who co-owned Crystal Shoes testified at trial and was found not to be credible and it was stated that much of his evidence had “no air of reality”. Justice Quigley found his evidence to be “largely contrived, internally contradictory, and “cooked up”". On other evidence, including testimony and photographs, it was concluded that the obvious and evident source of the concrete slurry substance was the owner of Crystal Shoes who used a hose to wash concrete residue off of his property and onto the City’s sidewalk the day before the accident. Justice Quigley found the owner of Crystal Shoes liable in both negligence and nuisance. The co-owner of Crystal Shoes, the wife, who did not testify and was not involved in the proceedings despite being a defendant, was found to be severally and jointly liable.

As for the liability of the City, it took the position that it did not know and could not have known about the concrete slurry, a fact which was admitted by the plaintiff. Given this fact, the City’s liability had to be based on the physical state of the sidewalk itself. Justice Quigley stated that while the City is not an insurer of pedestrians and it is not required to maintain its sidewalks in a perfect condition, it did have obligations under section 284(1) of the Municipal Act. It was found that the City breached its statutory obligation to maintain the sidewalk and that this state of non-repair was a cause of the plaintiff’s injuries. Justice Quigley said that the plaintiffs did not need to prove that the state of non-repair of the sidewalk was the cause only that it was acause but for which the accident would not have happened. The City did not satisfy the court that it had taken reasonable steps to maintain the sidewalk in a state of repair or that it could not have known that the sidewalk was in a state of non-repair and therefore the court held that it had not met its required standard of care. Justice Quigley found that the sidewalk was constructed improperly, and while the City undertook remedial work a few years prior to the accident, it was inadequate, leaving the sidewalk in a state of non-repair on the day of the accident. The non-repair created a sidewalk condition that permitted the concrete slurry to become trapped when it pooled on the sidewalk. This accumulation of the slurry which was caused by the condition of non-repair caused the plaintiff to slip and fall making the City liable. In this case, the City could not escape liability by claiming it could not reasonably know of the state of repair of the sidewalk or that it took reasonable steps to prevent the disrepair. Justice Quigley found that the City knew of the state of non-repair, that its system of inspection was inadequate and that even if it was adequate, the City failed to comply with it.

Justice Quigley accepted the evidence of the plaintiff and her medical experts regarding her injuries and inability to work and awarded $120,000 in general damages. He awarded the plaintiff’s husband $20,000 for his loss of care, guidance and companionship under the FLA. The plaintiff’s past and future loss of income was fixed at $171,000 after a 10% reduction had been made because despite a recommendation from her family doctor, the plaintiff had failed to seek sedentary work.

Counting on TIF Funding… Not So Fast

Mon, 21 Jul 2008 22:52:36 GMT

Malec v. City of Belleville (5^th Dist., Doc. No. 05-07-0456) is a case worth noting. The City of Belleville adopted a group of ordinances in 2006 that provided for the formation of a tax-increment-financing district (TIF) pursuant to the TIF Act. The city also adopted an ordinance creating a business district, approved a redevelopment plan, tax increment allocation financing for the Developers, a tax within the created business district and authorized the use of general sales tax revenues to reimburse the Developers for project development costs. A complaint filed by the plaintiff alleges that these ordinances were to help finance a Wal-Mart, Lowe’s, housing development and some other businesses.

Plaintiff, a taxpayer, brought suit challenging the city’s enactment of the taxes under the TIF Act. The district court dismissed the plaintiff’s claim, finding that he lacked standing to bring his action as a taxpayer. The 5^th District reversed and found that if the actions of the city in creating the TIF and business district did affect the general revenue of the city, then a taxpayer would have standing. The court also held that the taxpayer could challenge the creation of the TIF through claiming that the areas that had been created did not meet the criteria of being “blighted” as the Act required (under the act “blighted” is a term of art that requires a area meet a myriad of factors in order to qualify for the TIF districting). See 74.4-3(a) of the Act. The argument was that the areas would have developed as business districts on their own, and as such, the creation of the special districts to generate revenue that would be paid to the developers affected the general revenue of the city because the city would have generated the revenue for itself and would therefore have no need to pay developers to do it. (No mention of the timing was made, i.e., whether an argument that a development district would create business in a matter of a year as opposed to a naturally occurring district developing over, say, ten years).

While the case is not a blow to the creation of the districts for development, it does lend individuals another form of suit which could be used to slow down any form of development relying on TIF funding and is a case we’ll keep an eye on.

The Chicago Province of the Society of Jesus v. Clark and Dickens, LLC (1st Dist. Doc. No. 1-07-0960)

Wed, 11 Jun 2008 18:09:21 GMT

This is a case from the first district about the collapse of a building in Chicago. The Chicago Province of the Society of Jesus (a Jesuit organization) had a building and demolition work adjacent to the building went awry causing the collapse of the Jesuit’s structure.

The parties (and there are many) sued each other and some of the defendants decided to settle. In total, the Jesuits sought close to $3 Million in damages from the defendants on theories of negligence, violation of the Adjacent Landowner’s Excavation Protection Act and violation of the Illinois Municipal Code. Six of the defendants offered a total of $1,185,000 to settle the claims made against them.

In Illinois, parties can seek a “good faith finding of settlement” under the Illinois Joint Tortfeasor Contribution Act allowing a party that settled to be discharged not only in settlement with the plaintiff, but also from all liability to any other party that might be pointing a finger in their direction.

Here, some of the parties that did not settle objected to the attempts by the settling defendants to obtain a good faith finding because that finding would mean that the non-settling defendants could not seek any more contribution from the settling defendants and would be left paying for whatever damages might be assessed down the road.

In addressing the matter, the court provided a decent summary of the relevant case law and standards regarding “good faith” findings of settlement and upheld the trial court’s determination that the settlements were made in good faith. Effectively allowing the settling defendants to have their liability capped and be removed from the case.

Recent Articles tagged municipalities from LexMonitor

Up Next: Securities Suits Against Municipalities?

How to charge for stormwater management

How to charge for stormwater management

Thumbprints Are Coming

Shovel-Ready Illinois

Municipalities Will Not Pay For State Police Patrols

NH Municipal Law: Supreme Court Establishes Official Immunity for Police Officers and Police Departments in New Hamsphire

Judge Applies “But For” in Slip and Fall Case

Counting on TIF Funding… Not So Fast

The Chicago Province of the Society of Jesus v. Clark and Dickens, LLC (1st Dist. Doc. No. 1-07-0960)