NATIONAL ASSOCIATION OF BOND LAWYERS
Voice from the Past
Chapter 12
The recent death of my old friend and partner George
Ramspeck led me to reminisce
about our work together on industrial development bonds over
thirty years ago. George came
from the corporate side of Chapman and Cutler and I from the
municipal side. To begin with, he
drafted the leases (State statutes then required leases; they did
not permit loan agreements nor
documents openly called sale agreements) and I the indentures.
I had worked on bond issues for port facilities that were
supported by lease rentals, and
when I had asked my senior partner about a form of lease, he
said, "Just let the parties prepare
whatever sort of lease they want, and make sure that the lessee
is required to pay enough to retire
the bonds no matter what." This attitude was appropriate to the
very earliest industrial
development bonds that were voted general obligations, but I
wondered whether a longer and
more complicated document should be used for industrial
development revenue bonds. Now I am
glad that all those bonds have matured and that the huge number
of contingencies covered by
more recent lease agreements didn't mature into problems that
anyone brought to my attention.
George brought a new form of lease to the deals, one that was
known for a few months as
the "Dewey Ballantine" form. It became the model for all the
financing leases I worked with for
many years. This was in the days when some State supreme courts
still held that even revenue
bonds for industrial development involved unconstitutional loans
of credit to the lessees; we had
to examine every clause in every section to make sure that
nothing would give a court an
opportunity for such a holding. This done, I considered the form
properly purified and often used
it in my own deals.
In those days we had to get a State supreme court decision
upholding an issue of industrial
development bonds, even revenue bonds, before we could approve
such bonds of an issuer in that
State. Several States, including Texas and Florida, initially
held against such financing. It was a
welcome day, from the State constitutional law viewpoint, when
the Michigan Supreme Court
upheld an issue of IDB's with an opinion declaring that the
issuer was a mere "conduit" to bestow
federal income tax exemption on the interest on a private
borrowing: having no independent
liability on the bonds, the issuer would not violate that State's
Constitution by issuing them. This
was the first time I had seen the word "conduit" officially used;
it was helpful in elucidating to
other State courts the true nature of such obligations. It was
not so helpful when it came to the
Internal Revenue Service and Congress. But their actions were
several years in the future.
On at least one deal in Louisiana, we were told to draft the
documents so that the issuer
was in charge of building the facility being financed pursuant to
plans and specifications furnished
by the company. The issuer let the contracts and directed
payments out of the construction fund
when approved by the issuer's representative (who just happened
to be an official of the
company). The purpose of this exercise was to take advantage of
the issuer's exemption from
State sales taxes on the building materials and equipment. If I
found out whether it worked, I
have now forgotten. This practice had the problem that if the
issuer really was the owner and
builder, then the laws pertaining to public advertisement for
construction bids applied. Further,
there was the question about State laws requiring that
construction workers on publicly owned
projects be paid the "prevailing wage," a wage that was often
determined by reference to local
construction trade unions.
Those days were busy, indeed hectic. For each of the early
deals, George and I both went
to an initial meeting, usually in New York, with the underwriter
and the company. Then there was
a meeting with the issuer in its home territory. Drafting
sessions were held in either of those
places or sometimes in our offices in Chicago. The sale of the
bonds occurred locally. Signing
the bonds at the Signature Company and delivery occurred in New
York. Sometimes bonds were
delivered in Chicago after being signed at the office of a
Chicago printer that had a signature
machine of less capacity than the Signature Company's. The bonds
were always issued in coupon
form, and we always examined executed bond number one. This
involved not only reading the
text of the printed bond against the form prescribed by the
indenture, and checking the signatures
and seal, but also making sure that the coupons were in the
right amounts falling due on the right
dates and bearing the facsimile signatures of the people who
signed the bonds.
Sometimes an issuer's clerk with a name like Aloysius Montgomery
Jones would provide
specimen signatures bearing his full name for printing the
coupons and then, after looking at the
huge stacks of $5,000 denomination bonds he had to sign manually,
would sign them A.M. Jones.
Then he would sign the signature identification certificate
Aloysius M. Jones. One of us would
have to prepare a special certificate at the pre-closing or the
closing for him to certify that all
three were his true and genuine signature and that he used them
interchangeably. With virtually
all bonds now in fully registered or book entry form, newer bond
lawyers don't realize all the
exciting fun they are missing.
When Congress enacted the initial laws eliminating the federal
tax exemption for interest
on industrial development bonds (with exceptions for certain
small issues, pollution control bonds,
exempt facilities bonds, and the like), the amount of IDB's being
issued fell to a trickle. There
was not enough work for both George and me, and I went back to
working on conventional
bonds, including advance refunding bonds. George, however,
continued working on most of
whatever IDB's were being done by our firm. The small issue,
pollution control, and exempt
facility business then prospered; he hired more lawyers and
eventually developed one of the major
departments of the firm. Wisely, George retired before the Tax
Reform Act of 1986 decimated that business.
Manly W. Mumford