301 F.3d 401 (6th Cir. 2002), 00-6646, Steele v. Industrial Development Bd of Metropolitan Government Nashville

Docket Nº:INDUSTRIAL DEVELOPMENT BOARD OF METROPOLITAN GOVERNMENT NASHVILLE (00-6648); Metropolitan Government of Nashville (00-6646); David Lipscomb University (00-6647); Nationsbank (00-6649); Nationsbank/Tennessee (00-6649), Defendants-Appellants.
Citation:301 F.3d 401
Party Name:Harold E. STEELE; Don Peterson; Rev. David Maynard; Harmon Wray; Rev. Tom Baker, Jr., Plaintiffs-Appellees, v.
Case Date:August 14, 2002
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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301 F.3d 401 (6th Cir. 2002)

Harold E. STEELE; Don Peterson; Rev. David Maynard; Harmon Wray; Rev. Tom Baker, Jr., Plaintiffs-Appellees,


INDUSTRIAL DEVELOPMENT BOARD OF METROPOLITAN GOVERNMENT NASHVILLE (00-6648); Metropolitan Government of Nashville (00-6646); David Lipscomb University (00-6647); Nationsbank (00-6649); Nationsbank/Tennessee (00-6649), Defendants-Appellants.

Nos. 00-6646 to 00-6649.

United States Court of Appeals, Sixth Circuit

August 14, 2002

Argued: Feb. 1, 2002.

Joseph Howell Johnston (briefed), Nashville, TN, David Randolph Smith (argued and briefed), David Randolph Smith & Associates, Nashville, TN, for Plaintiffs-Appellees.

Bobby D. Davis (briefed), Davis & Baggott, Madison, TN, Paul D. Krivacka, Metropolitan Legal Dept., Nashville, TN, James L. Charles (argued and briefed), Metropolitan Dept. of Law, Nashville, TN, Amber K. St. John (briefed), Nashville, TN, Bradley A. MacLean (argued and briefed), Stephen H. Price (briefed), Alexandra

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T. MacKay (briefed), Stites & Harbison, Nashville, TN, Robert J. Warner, Jr. (briefed), Watkins, McGugin, McNeilly & Rowan, Nashville, TN, for Defendants-Appellants.

Betty Lee Dunkum (briefed), Christian Legal Society, Annandale, VA, Nathan A. Adams IV (briefed), L. Martin Nussbaum (briefed), Rothgerber, Johnson & Lyons, Colorado Springs, CO, Lee Boothby (briefed), Boothby & Yingst, Washington, DC, for Amici Curiae.

Lowell V. Sturgill, Jr. (briefed), Robert M. Loeb (briefed), U.S. Dept. of Justice, Civil Div., Appellate Section, Washington, DC, for Defendant-Amicus Curiae.

Before NORRIS and CLAY, Circuit Judges; SARGUS, District Judge.[*]

SARGUS, D.J., delivered the opinion of the court, in which NORRIS, J., joined. CLAY, J. (pp.— - —), delivered a separate dissenting opinion.


SARGUS, District Judge.

Defendants have appealed the district court's order granting summary judgment to Plaintiffs and issuing a permanent injunction prohibiting the Industrial Development Board ("Board") and the Metropolitan Government ("Metro") from issuing additional tax-exempt bonds to David Lipscomb University ("Lipscomb University") or bonds to any other pervasively sectarian institution. (J.A. 1027-28). Metro and Lipscomb University also appeal the court's denial of their separate motions for summary judgment. For the reasons that follow, we REVERSE the district court's grant of summary judgment for plaintiffs and REVERSE the district court's denial of summary judgment as to Metro and Lipscomb University.


The background of this case is well set forth by the district court which described Lipscomb University and its redevelopment project as follows:

David Lipscomb University, founded in 1891, describes itself as a "liberal arts university." It is located in Nashville, Tennessee, and has an enrollment of approximately 2,500 students. It is affiliated with the Churches of Christ, and its primary mission has been to integrate Christian faith and practice with the pursuit of academic excellence.

During the early 1990s, Lipscomb undertook a major redevelopment project on its campus. To finance the project, Lipscomb sought a $15 million, low-interest loan from the Industrial Development Board. The Industrial Development Board approved the loan and financed it by issuing tax-exempt industrial development bonds worth $15 million.

Steele v. Indus. Dev. Bd. of Metro. Gov't of Nashville and Davidson County, 117 F.Supp.2d 693, 694 (M.D.Tenn.2000).

The district court then described the bonds the Board issued to Lipscomb University as those "typical of industrial revenue bonds that are commonly issued for educational or industrial purposes." The Board issued the bonds pursuant to its authority under state law for the financing of projects for "[a]ny nonprofit educational institution in any manner related to or in furtherance of the educational purposes of such institution, including but not limited to classroom, laboratory, housing, administrative,

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physical education, and medical research and treatment facilities." Tenn. Code Ann. § 7-53-101(1l)(A)(vii) (1990 Supp.).

This case was filed in the district court on May 30,1991, challenging the validity of the Board's action in issuing the tax-exempt revenue bonds for the benefit of Lipscomb University. The plaintiffs are state and local taxpayers residing in the Nashville area. They contend that the issuance of tax-exempt revenue bonds for Lipscomb University provides an impermissible benefit to a pervasively sectarian institution, thereby violating the Establishment Clause of the First Amendment to the United States Constitution. Such aid, they argue, has the impermissible effect of advancing religion because a substantial portion of Lipscomb University's functions are subsumed in its religious mission. The plaintiffs objected to the issuance of the bonds on this basis at public hearings and meetings of the Board on April 16, 1990, May 30, 1990, and January 22, 1991. The decision was made to issue the bonds, which is the basis of this case.

As to the ability of the plaintiffs to bring this suit, the district court explained that the plaintiffs were found to have standing to bring this suit as municipal taxpayers who have an interest in preventing their local government from subsidizing religious institutions. The plaintiffs argued that tax dollars were being expended on behalf of a pervasively religious institution because the tax base of the state and local governments was reduced by the tax-exempt bonds. They asserted that, if tax-exempt bonds had not been issued, Lipscomb University would have financed all or part of the project through taxable bonds, which would have provided significant revenue for the city coffers.

The tax exempt bonds do not constitute an indebtedness of either the Board or the Metropolitan Government. Neither the Board nor the Metropolitan Government can be held liable to pay any portion of the principal or interest on the bonds or any costs incident to their issuance. TENN. CODE ANN. § 7-53-306 (1985). No state or local government tax revenues have been or will be spent as a result of the issuance of the bonds.

The district judge originally assigned to this case found that, even if no tax money is spent, taxpayer status is proper grounds for an Establishment Clause challenge to policies that affect the city's general revenue fund. Summary judgment was denied on those grounds and, on interlocutory appeal, the Sixth Circuit Court of Appeals upheld the district court's decision as to standing. Steele v. Indus. Dev. Bd. of Metro. Gov't of Nashville and Davidson County, 39 F.3d 1182 (6th Cir. 1994) (unpublished table decision), cert. denied, 515 U.S. 1121, 115 S.Ct. 2275, 132 L.Ed.2d 279 (1995).

With regard to the mechanics of the bonds at issue, the district court's decision again provides a thorough summary:

Under 26 U.S.C. § 103 [Internal Revenue Code], gross income does not include interest on any state or local bonds that are both private activity bonds and qualified under 26 U.S.C. § 141. See 26 U.S.C. § 103(a)(b)(1) (1994). A private activity bond is defined, in relevant part, under 26 U.S.C. § 141 as any bond that is part of an issue which meets the "private loan financing test." 26 U.S.C. § 141(a)(2) (1994). The "private loan financing test" is met where "the amount of the proceeds of the issue which are to be used (directly or indirectly) to make or finance loans . . . to persons other than governmental units exceeds the lesser of (A) 5 percent of such proceeds, or (B)

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$5,000,000." 26 U.S.C. § 141(c)(1) (1994).

In order for the interest on the bonds to be exempt from federal taxation, the private activity bonds must also be qualified under 26 U.S.C. § 141(e) (1994). There are three criteria that a bond issuance must meet under this section. First, the bond must fall within one of the enumerated categories: "(A) an exempt facility bond, (B) a qualified mortgage bond, (C) a qualified veterans' mortgage bond, (D) a qualified small issue bond, (E) a qualified student loan bond, (F) a qualified redevelopment bond, or (G) a qualified 501(c)(3) bond." 26 U.S.C. § 141(e)(1) (1994). Second, the bond issue must meet the volume cap requirements of section 146. 26 U.S.C. § 141(e)(2) (1994); see also 26 U.S.C. § 146 (1994). Finally, the bond issue must meet the requirements of each applicable subsection of section 147. 26 U.S.C. § 141(e)(3) (1994). Under the public approval requirement of section 147(f), in order to be a qualified bond a private activity bond must be approved by both the governmental unit issuing the bond and the governmental unit that has jurisdiction over the area in which the facility receiving financing through the bond proceeds is located. See 26 U.S.C. § 147(f)(2)(A) (1994).

A bond that meets each of these criteria will be designated as a qualified private activity bond under 26 U.S.C. § 103. Where the bonds issued are qualified private activity bonds, the interest from the bonds will be exempt from federal taxation. 26 U.S.C. § 103 (1994).

Steele, 117 F.Supp.2d at 698 (emphasis added).

In the instant case, the bonds were issued for the benefit of Lipscomb University, a private educational institution. The bonds were issued for the purpose of renovating facilities on Lipscomb University's campus. This meets the "private loan financing test" of section 141(c) because the entire amount of bond proceeds loaned to Lipscomb University exceeded the statutory minimum loan amount. Therefore, the bonds may be characterized as private activity bonds under 26 U.S.C. § 141(a) (1994). Further, the Loan Agreement between the Board and Lipscomb University specifically prohibits it from using any bond-financed facilities for religious purposes.1 The bonds in question meet the technical requirements of 26 U.S.C. § 103.

For the bonds to be qualified as tax exempt, they...

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