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Counties, school districts and other local governments that issue bonds are entitled to the extra interest that accrues after the bonds mature and have not been redeemed, the majority of a sharply divided en banc Commonwealth Court panel has ruled. The decision in Delaware County v. First Union Corp. clears the way for a class action by government entities covered under the Local Government Unit Debt Act to proceed in the Delaware County Court of Common Pleas, said Marc L. Ackerman of Brodsky & Smith in Bala Cynwyd, Pa. Still to be decided in the case is how much First Union may owe to municipalities and school districts around Pennsylvania. Ackerman said while the amount owed to any single government entity may not be significant, the aggregate amount owed across the class is likely to be large. The suit against First Union is one of two parallel class actions initiated in 2001 alleging that banks designated to maintain sinking funds for the repayment of municipal bonds had improperly withheld funds to which the county and others were entitled. Also named as defendants are eight banks to which First Union became a successor in interest in 1998. A claim against PNC Bank, J.P. Morgan Chase and Mellon Bank was resolved earlier this year. According to the Commonwealth Court opinion, the banks also filed a third-party complaint against the Treasury Department, which was dismissed on the department’s preliminary objections. A spokeswoman for the department declined to comment on the appeal. Under the Debt Act, a bank must hold unredeemed bond payments in a sinking fund for two years before releasing them to the entity that issued the bonds. After five years, the funds revert to the state under the Unclaimed Property Act. Delaware County claimed it had been improperly deprived of the use of the funds during the five years before it was required to escheat them to the commonwealth. The 4-3 majority, in an opinion by Judge Dan Pellegrini, first rejected the banks’ contention the claim should be dismissed because it came after the two-year statute of limitations had run. The county argued that it is exempt from the statute of limitations under the doctrine of nullum tempus occurrit regi – literally meaning, “Time does not run against the king.” Citing City of Philadelphia v. Lead Industries Association Inc., the majority noted the doctrine applies when the government’s claims accrue in a governmental capacity and when they seek to enforce an obligation under law rather than one entered voluntarily by the defendant. The banks argued that the county is not seeking to enforce public rights because the county is only seeking damages on the basis of the banks’ failure to comply with an obligation imposed by the Debt Act, that the money belongs to the bondholders and is not public and that the decision to issue bonds is discretionary. “While a municipality may have discretion to issue bonds to raise revenue, once that decision is made, the agreement entered into between the local government and the bank is one that is controlled not by a voluntary agreement, but by statute . . . to ensure the bond payments are reimbursed to the local municipality,” Pellegrini wrote. Even if the funds belong to bondholders, the Unclaimed Property Act kicks in to ensure the safety of the funds, Pellegrini wrote. “Specifically, because the county is seeking damages based on the banks’ failure to comply with the Debt Act, that is even more of a reason to prove that the county was involved with a strictly public right rather than a private right,” Pellegrini wrote. Next, the majority rejected the banks’ contention that the county did not suffer damages arising from the failure to turn over the unclaimed funds because any interest the county earned would also have been subject to escheatment. “Contrary to the banks’ contention, the money which must escheat to the commonwealth under the Unclaimed Property Act is limited to the county’s contractual obligation,” Pellegrini wrote. “The contractual obligations underlying the bonds do not require the county to pay interest to bondholders after the bonds mature.” He also wrote the Debt Act is clear that investment income earned on sinking fund deposits are for the use of the local government. Pellegrini rejected the banks’ reference to New Jersey v. Elsinore Shore Associates for the holding by the appellate division of the New Jersey Superior Court that interest accrued on unclaimed casino funds had to be escheated with the principle amount. “That case dealt with casino funds being held by the Casino Control Commission for payment of unredeemed gaming chips, not interest on unclaimed bond funds, which involved a contract between the banks and the bondholders,” Pellegrini wrote. Judges Doris A. Smith-Ribner, Rochelle S. Friedman and Renee Cohn Jubelirer joined in the majority opinion. Judge James Gardner Colins penned a concurring and dissenting opinion in which he agreed with the majority’s analysis of the statute of limitations issue but rejected the notion the county may be able to collect damages for the bank’s improper retention of the sinking fund proceeds. Colins wrote that based on the definitions of property in the Unclaimed Property Act, the banks had the duty to turn over to the state the amount owed to bondholders under the terms of the bond contract and any interest that had accrued since the bonds matured. “This result comports not only with the straightforward language of the statute, but also with the long-standing principle the majority rejects – that interest follows principle,” Colins wrote. While expressing respect for the majority’s position that interest should follow only the core property, Colins wrote he believes the intent of the authors of the Unclaimed Property Act was to ensure property, including interest, is held for its owner. “In the case of these missing bondholders, whose unclaimed property is the source of the interest or accretion, they (or their heirs) have lost the potential use of their money, albeit for reasons for which they are responsible,” Colins wrote. “Had they (or their heirs) claimed their property at an earlier time, they, rather than the county, could have reaped the reward of additional income from reinvestment.” President Judge Bonnie Brigance Leadbetter and Judge Mary Hannah Leavitt joined in Colins’ opinion. Ackerman, who represents Delaware County and others in the class, said the litigation stemmed from investigations started after similar litigation against Bank of America in California. While he couldn’t say how the statutory requirement at issue was overlooked in Pennsylvania, he said. “We hope that this litigation has served as something of a wake-up call that the requirement exists.” Thomas W. Dymek of Stradley Ronon Stevens & Young in Philadelphia represented First Union. He declined to comment on the decision. (Copies of the 15-page opinion in Delaware County v. First Union Corp. , PICS No. 07-1161, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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