Lawsuits Shake Up the Municipal Bond Market Across the Southwest

The municipal bond market in the southwestern United States is facing a flurry of legal challenges, with cases emerging in Arizona, Oklahoma, Texas, and Utah. These lawsuits are driven by a range of issues, including defaults, bankruptcy, environmental concerns, and state laws targeting financial firms' stances on fossil fuels. The outcomes of these cases could have far-reaching implications, determining the ability to issue bonds, assigning blame for defaulted debt, and testing the constitutionality of state-level bans on municipal underwriters.

Navigating the Legal Landscape of Municipal Bonds in the Southwest

Texas Tackles Fossil Fuel Boycotts

In Texas, the state Comptroller and Attorney General have a Friday deadline to respond to a lawsuit challenging a 2021 state law that prohibits governmental business with investment banks and other financial firms that "boycott" the fossil fuel industry. The American Sustainable Business Council, which filed the lawsuit in federal court in Austin, claims the law violates free speech and association rights protected under the First and Fourteenth Amendments of the U.S. Constitution.The law, along with another aimed at companies that "discriminate" against the firearm industry, has led to the blacklisting of 19 financial firms, including municipal bond underwriters, for purposes of state and local government contracts and divestment of public pension and other assets. This case has become a "more interesting test case" according to legal experts, as it involves an industry and actual economic benefits, unlike the previous Supreme Court case that focused on boycotts of Israel.

Oklahoma's Pension Benefit Challenges

In Oklahoma, the enforcement of a similar law was permanently halted in July by an Oklahoma County District Court judge, who found it violated a state constitutional requirement for public pension benefits. The state Supreme Court has since issued a procedural ruling in the case, but the legal battle continues.Oklahoma Treasurer Todd Russ has placed seven companies, including bond underwriters Barclays, Bank of America, JP Morgan, and Wells Fargo, on a list of fossil fuel "boycotters." This move has further complicated the state's municipal bond landscape, as these firms are now restricted from participating in state and local government contracts.

Arizona's Bond Financing Fallout

In Arizona, a second lawsuit was filed against key participants in the bond financing of a participant sports venue in Mesa that resulted in defaults and bankruptcy. Municipal bond funds from Vanguard, AllianceBernstein, and Voyageur sued bond underwriter B.C. Ziegler, bond counsel Gust Rosenfeld, and others, alleging "fraudulent statements and omissions in offering documents" for $284 million of mostly tax-exempt, unrated revenue bonds issued in 2020 and 2021.The lawsuit was spurred by the fallout from Legacy Cares' May 2023 Chapter 11 bankruptcy, which led to a federal court-sanctioned sale of the 320-acre Legacy Park for $25.7 million in cash. Bondholders were allocated only $2.4 million in cash along with an 11% equity stake in the venue's purchaser, leading to significant losses.Both Ziegler and Gust Rosenfeld have denied the allegations and vowed to vigorously defend themselves in court. The limited offering memorandum for the 2020 bonds had an extensive section on risk factors and warnings that potential investors are solely responsible for evaluating the bonds' merits and risks.

Utah's Environmental Concerns and Bond Financing

In Utah, environmental concerns have spurred lawsuits brought by the Center for Biological Diversity and others against a proposed bond-financed crude oil-transporting railway and the bond-issuing Utah Inland Port Authority. These lawsuits claim that the financial tools being used to fund these projects are creating substantial public harm that impacts human health and ecosystem health, particularly in the context of the crisis facing the Great Salt Lake.The litigation filed in Salt Lake County District Court seeks to reverse decisions taken by the Utah Inland Port Authority since state lawmakers restructured its leadership in 2022 after the agency's only bond issuance. The lawsuit alleges that the authority "unconstitutionally" formed 10 project areas that jeopardize ecosystems, property values, and public health, safety, and recreation.Additionally, the Tooele Valley Public Infrastructure District, which was created by the authority in March to attract economic development, is preparing to issue up to $80 million of tax differential bonds and up to $19.665 million of special assessment bonds. The Center for Biological Diversity and Utah Physicians for a Healthy Environment have advised the district that the bond process must be restarted under state law to allow the public to review "critical financial documents" and other information that has not been disclosed.

Austin's Light Rail Project Faces Legal Hurdles

In Austin, Texas, a $150 million bond issuance for a multi-billion-dollar light rail project remains on hold as the state's 15th Court of Appeals weighs whether a corporation created by the city and its mass transit agency to spearhead the project has standing to bring a petition for expedited court validation of the debt. A decision could come at any time, according to Bill Aleshire, an attorney for city taxpayers, who filed a lawsuit last year challenging the city's use of revenue from a voter-approved hike in the maintenance and operations property tax rate for debt service.