On the morning of Friday, May 26, 2018 the Honorable Chancellor Walter L. Evans ruled on a Motion to Dismiss for Mootness in the case of Melton, et.al. vs. City of Lakeland and the Industrial Development Board (IDB). The ruling was in favor of the defendants and the case was therefore dismissed. The chancellor stated that since the Lakeland Board of Commissioners (BOC) and the IDB had rescinded their resolutions to issue the Series 2017 bonds that the case is now moot.
The original complaint was filed on December 8, 2017 by a group of Lakeland citizens in Chancery Court. It was in response to the resolutions passed by the BOC and IDB to issue $60 Million in Lease Revenue bonds. The bond proceeds were to be used to fund the addition of a high school and the refinancing of the debt on the middle school from a 12-year to a 30-year loan. Acquisition of the bonds involved a complex scheme that was clearly devised to thwart the ability of the citizens to vote on the single largest debt issuance in the city’s history. Had the City, instead, issued General Obligation bonds – as is normal for the construction of schools – the citizens would have been capable of forcing a vote on the borrowing/spending – but the BOC wouldn’t let that happen for fear of it being defeated AGAIN. Here is the complex scheme they devised:
- The School Board would transfer the Middle School and other real property to the IDB.
- The IDB would issue bonds and own the high school upon completion of construction.
- The IDB would lease the middle school and high school buildings and school property to the City.
- The City would impose a Direct Tax to fund the lease payments.
- The City’s lease payments would generate the needed ‘Revenue’ by the IDB to repay the bond debt.
- The City would then sublease the school and school property to the School Board to operate the high school and the middle school.
The chancellor’s decision, based on mootness, is not an outright victory for the City of Lakeland nor an outright defeat for the plaintiffs. Technically speaking it’s neither a victory nor a defeat for either side. The issue is simply being dissolved - as if it never happened. Unfortunately, with this outcome there will be no ruling by the chancellor on the legality of the bond transactions set forth in 2017 by the BOC and the IDB.
The City had tried twice previously to get the case dismissed on merit (not on mootness). Their motion to dismiss was filed in Chancery Court on December 10, 2017 (three days after the plaintiff’s case was filed). On December 19th the Court listened to more than three hours of oral arguments and upon conclusion Chancellor Evans denied the defendants motion to dismiss. Then on January 5th the City filed an appeal in the Appellate Court. On January 29th their motion to dismiss was denied by the Appellate Court. The City’s attempts to get this case thrown out was denied not once, but TWICE!
And may it be noted that the City of Lakeland enlisted twelve (12) attorneys vs. the plaintiff’s two (2). You’d have thought that their huge team of attorneys would have been able to get the case dismissed if it were as frivolous as the Mayor and the BOC want you to believe. And one must question why they felt the need to enlist such a large number of attorneys including the former Memphis and Shelby County Mayor, A.C. Wharton? Just think about that for a minute. Talk about your David vs. Goliath scenario… and they still couldn’t prevail in getting the case thrown out.
It was only after the City’s two failed attempts to get the case thrown out that the BOC and IDB decided to rescind their respective resolutions to borrow the $60 Million, thus creating the situation of mootness that they used to get the case dismissed. Their subsequent actions after the courts TWICE refused to dismiss the case DO NOT NEGATE the fact that they tried to push a bond through in violation of TN state law. They tried to break the law with a convoluted bond scheme which was only necessary because the normal process for borrowing that money would have been at risk of being put to a vote. Despite what you may be hearing elsewhere the lawsuit had merit and plaintiffs should be praised for preventing the Lakeland BOC and IDB from proceeding unchecked. The plaintiffs believe that if the case hadn’t been dismissed on mootness that the courts would have ultimately decided in their favor.
This is a disappointing outcome for the many, many citizens who felt that the BOC and IDB had acted unlawfully in their hurried efforts to push this bond through. During the hearing the city attorneys stated over and over that the City was no longer pursuing the bond, thus forming the basis for the case being dismissed for mootness. And so now we wait to see if they stay true to their word. However, based on recent statements made by Mayor Wyatt Bunker we believe the City is going to pursue another bond as expeditiously as possible. They will likely wiggle around their statements in court about “no longer pursuing that bond” by pursuing Series 2018 bonds instead of the mooted Series 2017 bonds.
If they do indeed employ this tactic it will mark a new low point for Lakeland. It will be proof-positive that our city leaders are willfully ignoring the voice of the people. Most will recall that just three short years ago Lakeland voters defeated by a 60/40 margin an attempt by the BOC to borrow $50 Million for the high school. That was a clear up-and-down vote on this topic – and so how is it now that the BOC feels that the citizens support them in borrowing even more money - $60 Million! It’s simply too much debt for a city of our size.
A few things to remember:
- Had the City simply allowed a vote on this debt issuance – the largest in the city’s history – the lawsuit would not have been needed. The BOC refused to allow a vote.
- Lease Revenue bonds are rarely – if ever – used to finance schools. Schools do not generate revenue. The normal route is to use General Obligation bonds.
- Why didn’t the City take the normal route? Because citizens can force a vote on General Obligation bonds, that’s why. Just as they did back in 2015 when the BOC tried to borrow $50 Million. That vote resulted in a 60/40 defeat for the pro-debt group. They know it will be defeated again.
- The City hired twelve (12) attorneys to defend this case. Why?
- The Mayor and the BOC would like you to believe this case was frivolous. However, both the Chancery Court and the Appellate Court denied the defendants’ motions to dismiss. This case had merit.
- If the IDB and BOC try the same scheme with Series 2018 bonds they will likely find themselves in court again.
For those who are interested in further details of plaintiff’s complaint:
The complaint centered around (1) the legality of the bonds being issued by the IDB and (2) the violation of Sunshine Laws (i.e. the Open Meetings Act) by the Lakeland Board of Commissioners (BOC). The plaintiffs claimed that the City and the IDB violated state statutes TCA § 7-53-302(b) and 7-53-306, which work in harmony to limit the taxing authority of the IDB. TCA 7-53-302(b) states that the IDB does not "have the power to pledge at any time or in any manner the general credit or taxing power of the municipality except as provided in § 7-53-306."
The obvious conflict in their scheme was that the Industrial Development Board (IDB), a corporation made up of seven (7) volunteer citizens appointed by the BOC, was acting as a taxing authority for the City. However, per TN state law the IDB does not possess that power. Only the BOC can authorize obligating the City (and thus the taxpaying citizens) for the debt incurred to build the high school. To get around that pesky detail they came up with the convoluted scheme discussed above whereas the City taxes the citizens, then the City pays the bond principal and interest through lease payments to the IDB. Don’t lose sight of the fact that the IDB, a volunteer group of citizens – a corporation – not elected officials – would be borrowing $60 Million that they have no ability to repay other than through the City coffers.
In their scheme the payment of the bond principal and interest was being pledged to the bondholders with the full faith and credit of the City of Lakeland. The BOC tried to contend that the city was simply making lease payments on the building, not pledging the full faith and credit of the City (i.e. the taxpayers) for the obligations incurred by the IDB.
Section 4.01(a) of the Lease Agreement provides that:
"The City shall pay the Base Rentals and the Additional Rentals for use of the Leased Property in the amount, at the time and in the manner set forth herein, said amounts constituting in the aggregate the total of the annual Lease Payments payable under this Lease. The City shall levy and collect the Direct Tax and shall pay Lease Payments from proceeds of the Direct Tax, which is hereby pledged to the payment of all Lease Payments hereunder. Lease Payments are additionally payable from, but not secured by, any other legally available funds of the City."
Section 4.03 of the Lease Agreement provides, in part, that:
"It is understood and agreed that all Base Rentals Payable under Section 4.01 (a) hereof by the City are assigned to the Trustee pursuant to the Indenture. The City consents to such assignment, and hereby agrees that its obligation to pay the Base Rentals from Lease Payments shall be absolute and unconditional .... "
Any rational person can see that the City is paying the bond principal and interest, not the IDB. If the IDB defaults on the bond repayments the City of Lakeland (i.e. the taxpayers) will have to make those payments due to their absolute and unconditional obligation.
But now it’s not against the law for the city to pay the obligations of a corporation. That’s not the case at all. If three-fourths of the citizens vote for it then it is absolutely okay. TCA § 7-53-306 states that:
“The governing body of the municipality may by resolution propose the pledging of the full faith and credit and unlimited taxing power of the municipality as surety to the payment of the principal of and interest on the bonds. After securing a certificate of public purpose and necessity as provided in § 7-53-307, the governing body may direct the county election commission to hold an election for the registered voters of the municipality to determine whether the full faith and credit of the municipality shall be so pledged. Should three fourths (¾) of the voters cast their vote in favor of lending the municipality's credit by pledging the full faith and credit of the municipality to the payment, as surety, of the principal and interest of such bonds…”
The City can pledge its full faith and credit for the debt of a corporation but if – and only if – 75% of the voters approve. And so this is exactly why you have heard concerned citizens pleading with the BOC for the past six months for a vote on this bond issuance. State law requires that if the City is to be held responsible for the debt of a corporation then the citizens get a vote. And may it be noted that in a moral sense this should especially be true when the debt being covered is the largest in the city’s history.
At the end of the day the court did not rule on whether the BOC and IDB broke the statutes stated above. That question remains unanswered. We strongly encourage each citizen to do their own research and decide for themselves. Citizens must stand and unite against leadership that denies them their lawful right to vote.