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The Role of Bond Counsel in Municipal Finance Transactions The Role of Bond Counsel in Municipal Finance Transactions

The Role of Bond Counsel in Municipal Finance Transactions

Most bond issuances have a number of parties participating in the transaction: the issuer, the underwriters, a financial advisor, perhaps a conduit borrower and bond counsel. The function of these parties is to collaborate in order to successfully issue bonds and produce proceeds for the issuer (or borrower) for a project. However, without the opinion of bond counsel as to the validity, enforceability and tax status of the issuer's bonds, a successful closing and sale of the bonds cannot occur. This article focuses on the history and evolution of bond counsel, the modern function of bond counsel and the responsibilities of bond counsel.

Historical Perspective

During the industrial revolution, state and local governments issued well over $250 million in order to aid the construction of railroads.[1] During this era, railroad promoters would appeal to the public for aid, and the counties or other municipalities would issue bonds in exchange for shares of railroad stock.[2] Often the county or municipal officials were bribed to issue these bonds, and the railroad was then not built or built somewhere else.[3] Litigation emerged regarding the enforceability of these bonds and sometimes resulted in determinations that statutory requirements for the issuance of such bonds had not been met.[4] As a result, investment in this type of municipal bonds was viewed as speculative, and often the bonds would be held by large east coast investors with enough money to bring suit to enforce any non-payment.[5] This fact provided the Supreme Court with jurisdiction to review lower federal court cases, which arose from a diversity of citizenship.[6] 

In order to remove risk to bondholders of subsequent litigation after bonds had been purchased, underwriters or purchasers began engaging lawyers with the expertise and independence to render opinions regarding the validity of bonds.[7] With an objective opinion of a lawyer with expertise, the bonds were more readily accepted by the market. Initially, bond lawyers were hired to retroactively review a transcript of proceedings and base an opinion upon such review.[8] Engagement of lawyers to render such opinions became prevalent by the 1900s, and the opinion of bond counsel remains a primary function of bond counsel's engagement today.[9] Perhaps due to the objective nature of the bond opinion, bond counsel was often viewed as "counsel to the transaction" or counsel to the eventual bondholders.[10]

Bond Counsel Today

Today, bond counsel's role remains one in which the primary function is to render an objective legal opinion with respect to the validity and enforceability of the bonds and underlying documents, as well as to opine on the treatment of interest on the bonds. However, with the promulgation by the American Bar Association of the Model Rules of Professional Conduct (the "Model Rules") in 1983, bond counsel found it was no longer workable to be "counsel to the transaction" because of duties of confidentiality, privilege, communication and consent.[11] Rather, under the Model Rules, it is necessary for bond counsel to represent a client in the transaction. Oftentimes, the client of bond counsel is the issuer of the bonds.

Whatever the circumstances may be which dictate who is the client of bond counsel, the bond opinion which is rendered must be "unqualified" in that it does not contain the typical exceptions seen in a corporate or commercial transaction opinion.[12] To be "unqualified" the opinion can only be limited by those assumptions, limitations and qualifications which are customary and "not otherwise 'explained.'"[13] It should be noted however, that an opinion is not a guarantee of result or outcome and is an expression of professional judgment. In fact, most bond counsel opinions will state as much and likely state the same in any applicable disclosure document. The unqualified opinion of bond counsel must be given on the basis that bond counsel is "firmly convinced (also characterized as having a 'high degree of confidence') that, under the law in effect on the date of the opinion, the highest court of the relevant jurisdiction, acting reasonably and properly briefed on the issuers, would reach the legal conclusions stated in the opinion."[14]
In addition to providing the bond opinion, bond counsel may undertake several other additional functions during the course of a transaction, including (1) preparing the underlying bond documents and necessary approvals and proceedings, (2) rendering tax advice throughout different stages of the transaction in order to arrive at the best and proper structure, (3) reviewing offering and disclosure documents, (4) interacting with rating agencies, (5) assisting in negotiations with a liquidity facility or credit facility provider, (6) reviewing the terms of an interest rate swap agreement, (7) developing post-issuance compliance procedures and (8) aiding the issuer in continuing disclosure obligations, among an array of possible other responsibilities. 

For more information about municipal securities, contact Tyler J. Kalachnik or another member of Ice Miller’s Municipal Finance Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
[1] L.A. Powe, Jr., Rehearsal for Substantive Due Process: The Municipal Bond Cases, 53 Tex. L. Rev 738 (1976).
[2] 27 Am. L. Rev. 393-94 (1893). 
[3] Id.
[4] The Function and Professional Responsibilities of Bond Counsel, National Association of Bond Lawyers, page 3 (2d. ed., 1995); Powe, at 740.       
[5] Powe, at 740-41. 
[6] Powe, at 741.
[7] The Function and Professional Responsibilities of Bond Counsel, at 5.
[8] Id. at 9.
[9] Id.  at 5.
[10] Id. at 9.
[11] Id.
[12] See Model Bond Opinion Report, National Association of Bond Lawyers Committee on Opinions, page 1 (2003 ed.). 
[13] Id. at 7. 
[14] Id.
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