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“A policy paper masquerading as a complaint”

Wednesday, Jul 24, 2019

* Yvette Shields at the Bond Buyer

A lawsuit that seeks to void $14.3 billion of Illinois’ outstanding general obligation debt amounts to nothing more than a policy statement masked under a legal guise that lacks any merit, Illinois Attorney General Kwame Raoul’s office argues in the state’s first official legal response.

The complaint seeking taxpayer action status from the court claims the state violated its constitution when it sold $10 billion of GO pension obligation bonds in 2003 and again in 2017 with a $6 billion borrowing to pay down its unpaid bill backlog.

About $14.3 billion is still owed on the two issues, according to the complaint filed by the Illinois Policy Institute’s leader John Tillman, acting as a taxpayer, and the New York-based hedge fund Warlander Asset Management LP, a state bondholder. […]

Market analysts have voiced skepticism about the case’s legal merits, based on the approval granted by bond lawyers and the state attorney general and their read of state debt rules that give the state broad issuance powers as long as it names a general purpose for the bonds, method of repayment, and approval by a three-fifths legislative majority. […]

Those beliefs didn’t stop the market from driving state yield penalties up in trading and there’s an expectation now that the state may get stuck paying more to borrow during the course of the lawsuit if not resolved quickly.

* AG Raoul’s filing is brutal

Nearly two decades after the State issued General Obligation bonds backed by the full faith and credit of the State and applied their proceeds to the Illinois retirement systems, Petitioner seeks leave to institute an action requesting the Court declare the State a profiteering purveyor of worthless bonds and order it to default on billions of future bond payments after cashing the proceeds from selling the bonds. Petitioner similarly seeks to invalidate billions of already applied bonds issued in 2017 to pay an extraordinary backlog of unpaid vouchers, which were then accruing interest at rates greater than the subsequently issued bonds. Petitioner did not bring his suit to enjoin the issuance of the allegedly unlawful bonds before they were issued. Instead, Petitioner seeks to call back ships put to sea years ago, many of which are nearing their decommission date, to maximum detrimental effect. Petitioner does so without naming any holder of the bonds for a proper adjudication of their rights, instead advancing the interests of one noncitizen investor in different bonds against other bondholders, and attempting to elevate certain appropriations over others.

This extraordinary request for relief rests entirely on a single, erroneous premise that the General Assembly may incur State debt only for “projects in the nature of capital improvements,” subject to only narrow exceptions. Fused with this incorrect statement of law is a policy paper masquerading as a complaint, positing that Illinois has not been wise in its fiscal decisions. The wisdom of that fiscal philosophy is a matter for the People of Illinois to determine. The Court has no role to play in that debate.

Because there is no cause of action stated in the proposed complaint and no judicial work for the Court to do in relation to the remaining allegations, and because equity firmly stands against granting the extraordinary relief requested therein, the Petition should be denied as an unjustified interference in the application of public funds.

* As we’ve discussed before, the plaintiffs rely on a provision in the Illinois Constitution which does not actually exist. From the AG’s filing

As explained above, Petitioner’s theory of bond invalidity turns entirely on his unfounded assertion, contained in paragraph 27 of his proposed complaint, that the term “specific purposes” in the State Debt Clause means “projects in the nature of capital improvements.” But Petitioner does not cite any authority for this conclusion, and he does not even draw the Court’s attention to the single, controlling case interpreting “specific purposes” in the context of article IX, section 9

* Ah, but there’s more

In this case, Petitioner seeks to unscramble eggs that were cracked, cooked, and eaten sixteen and two years ago, with no explanation as to why he did not bring suit before breakfast hit the pan. Had Petitioner timely sought and obtained an injunction against issuance of the bonds, the State could have made different arrangements to fund its obligations, and bondholders 12 of 22 19-CH-235 would not now be needlessly placed in peril. Petitioner’s inexplicable delay in bringing this challenge maximizes the potential fallout, creating an “unjustified interference[]” in the application of public funds that warrants denying the Petition.

Raoul’s office also claims the statute of limitations has passed and that the hedge fund has no legal standing.

- Posted by Rich Miller        

  1. - OutOfState - Wednesday, Jul 24, 19 @ 1:16 pm:

    Seems like the AG’s office saw the ridiculous lawsuit and decided to have a little fun.

    “unscramble eggs that were cracked, cooked, and eaten”

    “seeks to call back ships put to sea years ago, many of which are nearing their decommission date”

  2. - Linus - Wednesday, Jul 24, 19 @ 1:21 pm:

    “Masquerading” is a term that might apply to every single thing the IPI says or does.

  3. - Shytown - Wednesday, Jul 24, 19 @ 1:28 pm:

    Mic. Drop.

  4. - Left Leaner - Wednesday, Jul 24, 19 @ 1:33 pm:

    Makes me hungry.

  5. - JS Mill - Wednesday, Jul 24, 19 @ 1:35 pm:

    Interesting react from the bond market. Was that the intent of the petitioner? If so are they now attempting to manipulate the bond market either for their financial gain or as a vindictive act to cost the state money? I am willing to bet that is a crime.

  6. - lakeside - Wednesday, Jul 24, 19 @ 1:46 pm:

    “He no longer dreamed of storms, nor of women, nor of great occurrences, nor of great fish, nor fights, nor contests of strength, nor of his wife. He only dreamed of places now and of the lions on the beach. They played like young cats in the dusk and he loved them as he loved the boy.”

  7. - Homer Simpson's Brain - Wednesday, Jul 24, 19 @ 1:55 pm:

    I do so love flowery prose embedded within legal papers. I’m sure the judge will react as Bender does in the clip below:

  8. - Soccermom - Wednesday, Jul 24, 19 @ 1:57 pm:

    This was GREAT.

  9. - OutOfState - Wednesday, Jul 24, 19 @ 2:26 pm:

    ===Raoul’s office also claims the statute of limitations has passed and that the hedge fund has no legal standing.===

    So to summarize, the AG’s office is saying to the petitioners:

    - You’re not allowed to bring the lawsuit

    - Even if you could, it’s too late to do anything

    - Even if it wasn’t too late, the courts can’t decide what’s good fiscal policy

    - And speaking of good fiscal policy, accepting your claims would be disastrous for the State of Illinois, so it would be stupid for the courts to accept your claims.

    - Oh and don’t think we didn’t notice that you would benefit from this, while other bondholders would suffer

  10. - Dotnonymous - Wednesday, Jul 24, 19 @ 2:28 pm:

    Another court may have issued sanctions for wasting the court’s time…frivolously.

  11. - Huh? - Wednesday, Jul 24, 19 @ 2:32 pm:

    Hmm, (scratching head) what is this term … “eggs” … or this other one … “ship” … can’t find either one in my legal dictionary … (flipping the page) …

  12. - RNUG - Wednesday, Jul 24, 19 @ 2:35 pm:

    If the court doesn’t want to waste a lot of time on it, my guess is they will. dismiss it stating no legal standing.

  13. - Pick - Wednesday, Jul 24, 19 @ 2:41 pm:

    The rest of IX ILCON 9, speaks to using bonds for other purposes such as operational deficits that must be paid within the year; these at issue were for 2003 and 2017.

    -not a high hurdle to find a reasonable basis to allow the suit to be filed…despite fearfully yelling that couldn’t put Humpty back together again

  14. - Rich Miller - Wednesday, Jul 24, 19 @ 2:44 pm:

    ===not a high hurdle to find a reasonable basis to allow the suit to be filed===

    Yes it is for multiple reasons, including that taxpayer lawsuits are only rarely allowed, even if the suit had a constitutional basis, which it doesn’t.

  15. - revvedup - Wednesday, Jul 24, 19 @ 4:02 pm:

    Some background on the details of taxpayer suits demonstrating the hurdles:
    Martini v. Netsch
    650 NE 2d 668, 272 Ill. App. 3d 693, 208 Ill … - Ill: Appellate Court, 1st Dist. 1995

  16. - Anono - Wednesday, Jul 24, 19 @ 5:51 pm:

    So if this court case (regardless of its merits) is causing a swing in prices… has anyone checked to see who is profiting from that swing?

    Are Tillman and Warlander or someone they know making money off this?

Sorry, comments for this post are now closed.

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