Edwards Angell Palmer & Dodge won an unusual victory on a motion for rehearing and clarification in the Florida Supreme Court. Eleven days after EAPD filed the motion for Escambia County, the Court withdrew its September 6, 2007 opinion in Strand v. Escambia County, and issued a revised opinion, before our opponent responded. Even rarer was the Court’s decision to hold oral argument on the motion after it had revised its opinion. Justice Fred Lewis noted that Strand marked the first time the Court had held oral argument on a motion for rehearing.
The national and statewide impact of the Strand opinion merited the Court’s attention. In its September 6, 2007 opinion, the Court invalidated the bond issuance that Escambia County planned to use to widen a roadway. However, the Court not only reversed the judgment of the trial court validating the bonds, it also receded from more than fifty years of precedent, by imposing a retroactive referendum requirement on tax increment financings (“TIFs”) that had not been validated. Moreover, the Supreme Court implied that a referendum retroactively would be required for unvalidated certificate of participation/lease financings (“COPs”) and cast a cloud over the status of COPs that had been validated but not issued.1
TIFs are the financing mechanism community redevelopment agencies in Florida most often use to rebuild blighted areas. School boards frequently use COPs to build and/or enlarge schools, in order to comply with the constitutional mandate for smaller class sizes. Because bond validation litigation is expensive and time-consuming, most governmental entities patterned their TIF and COP issues after existing case law and statutes. Governments and their financial and legal advisors believed that these obligations would withstand challenge as long as the local government followed statutes and existing case law.
Billions of dollars in revenue bonds were issued in accord with Florida law, but not validated. Thus, when the Strand opinion called the validity of these bonds into question, the financial markets were roiled. As a direct result of Strand, Standard & Poor’s placed all TIFs and COPs in Florida on Credit Watch with a negative outlook.2 Moreover, Fitch Ratings placed $164.2 million of TIFs on Rating Watch Negative. Although Fitch but did not take action on COPs, it noted that “even if existing COPs are deemed constitutional, future issuances may be jeopardized.”3
More than thirteen billion dollars ($13,000,000,000.00) in COPs and TIFs in Florida were adversely affected. Thousands of holders of billions of dollars in unvalidated securities were exposed to enormous tax liability. The Internal Revenue Service takes the position that invalid state or local government securities never constituted a “state or local bond” for purposes of the Federal income tax exemption and are, therefore, taxable obligations. Accordingly, holders of such debt faced not only the devastating loss of their investments, but also Federal income tax liability for prior tax years.4
Equally troubling was the opinion’s impact upon governmental operations. For example, school construction projects, nearly all of which are financed by COPs, were brought to a halt or substantially delayed by uncertainty about the validity of issued and planned COPs. Because school systems throughout the state must increase the number of classrooms to comply with the class size reductions required by the Florida Constitution, the impact of the opinion was significant. Similarly, redevelopment projects addressing urban blight, substandard housing and neighborhood renewal pursuant to Florida’s Community Redevelopment Act (“CRA”), were halted or delayed by the uncertainty about the validity of unvalidated TIFs.
Concerned about the instability and unpredictability the Strand opinion caused, Escambia County filed a motion for rehearing and clarification, the only post-appeal vehicle available for challenging the opinion. The Securities Industry and Financial Markets Association (“SIFMA”) sponsored EAPD’s participation as new, post-appeal co-counsel to Escambia County.
After reviewing EAPD’s motion, a unanimous Florida Supreme Court substantially re-wrote its controversial September 6, 2007 opinion. It removed the shadow of invalidity from more than $13 Billion in outstanding COPs for schools and paved the way for more than $8 Billion of new school funding. It also made clear that the opinion was not retroactive in application, thereby calming the roiling financial markets and anxious investors.
At oral argument, Escambia County argued that it had complied with the Florida Constitution, case law and statutes and that the validation of its bond issuance should be affirmed. Alternatively, it sought a narrow ruling based only on the validity of its bond issuance, urging the Court to honor the doctrine of stare decisis by not receding from its own case law precedent.
On September 18, 2008, the Court granted the County’s motion for rehearing, withdrew its revised opinion, and issued an opinion in which it affirmed the County’s home rule powers, upheld decades of precedent approving the issuance of TIFs without a public referendum and affirmed the final judgment validating Escambia County’s bonds. This is a victory not only for Escambia County and EAPD, but also for the financial markets in Florida, the governmental entities in Florida that depend on tax increment financing to rehabilitate dilapidated neighborhoods, build schools and repair roads, the revenue bond holders whose investments were put at risk by the Court’s initial opinion, and the citizens of the State of Florida.
Click here to view the Court’s opinion.