Cherokee County, Kansas Health Care Facility Revenue Bonds, In re

• Decision Date: 19 September 1997
• Docket Number: No. 76184,76184
• Citation: 946 P.2d 83,262 Kan. 941
• Parties: In re CHEROKEE COUNTY, KANSAS HEALTH CARE FACILITY REVENUE BONDS.
• Court: Kansas Supreme Court

Page 83

946 P.2d 83

262 Kan. 941

In re CHEROKEE COUNTY, KANSAS HEALTH CARE FACILITY REVENUE BONDS.

No. 76184.

Supreme Court of Kansas.

Sept. 19, 1997.

Syllabus by the Court

1. A revenue bond is one that is payable exclusively from revenues derived from tolls, charges, or rents paid by those who use the facilities constructed with the proceeds from the bonds. Revenue bonds are distinguished by the single source of payment, as opposed to general obligation bonds, which pledge the full faith and credit of the issuer for repayment.

2. Revenue bonds constitute a contract between the obligor and the obligee. The contractual rights and duties of all parties are set forth in the bond contract (indenture). The payment of bonds is governed by the law in effect at the date of their issuance, and such law forms a part of the bond contract.

3. On appeal, a written instrument or contract may be construed and its legal effect determined by the appellate court regardless of the construction made by the trial court.

4. A general rule referred to as the "United States Rule," applied in cases of private debt, provides that in the absence of an agreement or statute to the contrary, in applying partial payments to an interest-bearing debt which is due, the payment should first be applied to the interest due.

5. Unlike a private debt, public revenue bonds are payable exclusively from revenues derived from rents paid by those who use the facilities constructed with the proceeds from the bonds. Moreover, the rights and obligations of the parties involved in the issuance of revenue bonds are governed by statute and written contract (indenture). Generally, the United States Rule would have limited application in a case of a public bond issue. However, where Kansas statutes, the bond indentures, and Kansas case law provide no guidance, the United States Rule, by analogy, is helpful in resolving the narrow question involved.

6. Upon default, where the bond indenture and state law are silent as to repayment, and where there is a means through which all the bondholders may be paid in full, as where the bond fund may be replenished by the exercise of an unexhausted power of taxation, a bondholder who exercises a higher degree of diligence than others is entitled to have payment in full even though the fund, at the time, is insufficient to pay all the bonds which have matured. In such a case, the rule of first come, first served, is applied.

James T. McIntyre, of Law Offices of James T. McIntyre, Chartered, Wichita, argued cause and was on brief for appellant Glenn Mumma.

Donald G. Reinsch, Clark, Mize & Linville, Chartered, Salina, argued cause and was on brief for appellee Sunflower Bank.

Patrick H. Thompson, of Thompson & Heidrick, Salina, guardian ad litem, argued cause for unrepresented bondholders.

DAVIS, Justice:

Cherokee County, Kansas, issued revenue bonds for construction of an adult care facility. All bonds were issued on parity secured by the facility. The tenant of the facility defaulted on rent owed, which constituted the sole source of bond repayment. The defendant Glenn Mumma's $50,000 bond matured after default. The trustee appointed by the county sought a declaratory judgment, asking among other things that moneys accumulated in the principal and interest account be paid pro rata on past due interest payments to all bondholders before payment on Mumma's principal indebtedness. The trial court agreed with the trustee and certified Mumma's appeal under the provision of K.S.A. 60-254(b). We affirm.

The facts are not in dispute. Pursuant to K.S.A. 12-1740 et seq., the Board of Cherokee County Commissioners (County) issued revenue bonds to fund construction of a nursing home and assisted living facility, as well as for the purpose of paying the cost of issuance and the interest on the bonds during the construction period. The bonds were issued in the following series, years, and principal amounts: Series A, 1991: $1,575,000; Series B, 1991: $175,000; Series A, 1993: $300,000; and Series B, 1993: $150,000.

The Series A and B, 1991 bonds are secured by the project and certain other funds to be deposited and held under a special contractual agreement collectively comprised of the trust indenture dated December 1, 1991, and the first supplemental trust indenture, dated on the same date, by and between the County and the trustee appointed by the County to manage the property on behalf of the bondholders, the Sunflower Bank, formerly First National Bank and Trust of Salina.

The Series A and B, 1993 bonds are secured on a parity basis with the 1991 bonds under a contractual amendment by the original parties to the trust indenture, and the first supplemental trust indenture, which amendment takes the form of a second supplemental trust indenture, dated February 1, 1993. Section 209(a) of the 1991 trust indenture states that "[a]dditional Bonds may be issued under and equally and ratably secured by this Indenture on a parity with the Series A, 1991 Bonds and any other Additional Bonds Outstanding at any time and from time to time." Section 203 of the 1991 first supplemental trust indenture provides:

"Additional Bonds may be issued under and equally and ratably secured under the Indenture on a parity with the Series A, 1991 Bonds and the Series B, 1991 Bonds and any other Additional Bonds Outstanding at any time and from time to time, upon compliance with the conditions and for any of the purposes provided in the Series A, 1991 Bonds."

The 1993 second supplemental trust indenture provides that "[t]he 1993 Bonds are on a parity and co-equal in all respects with the 1991 Bonds." Section 201 of that same document provides in part that "[t]he 1993 Bonds and the interest thereon shall be limited obligations of the Issuer payable on a parity and co-equally with the 1991 Bonds, solely and only from the Trust Estate created pursuant to the [Trust] Indenture." (Emphasis added.)

The nursing home and assisted living facility was, and is, operated by the Cherokee County Health Care Corporation (CCHCC), a not-for-profit Kansas corporation which qualifies under § 501(c)(3) of the Internal Revenue Code as a tax-exempt organization. In order to secure payment of the bonds, CCHCC entered into a lease agreement which provided for rental payments in amounts and for a period sufficient to retire the bonds through regular monthly payments. The rent was to be deposited into a principal and interest payment account (P & I account) from which bondholders would be paid interest and principal as due. CCHCC also signed a guaranty that a separate account, the bond reserve account, would maintain a minimum balance of $150,000 and that CCHCC would deposit funds should the balance drop. The lease and guaranty, along with the facility buildings and property, were pledged by the County to secure full payment to the bondholders.

The bonds were purchased by Chapman Securities, Inc., and resold to bondholders Prior to December 1, 1993, CCHCC defaulted on the payment of rent. The parties stipulated that as a result of the tenant's default, the trustee was unable to make the scheduled payments due the bondholders as of December 1, 1993, from the P & I account. Additionally, as of December 1, 1993, the bond reserve account contained funds of only $75,908.75, substantially below the $150,000 required minimum balance.

across the country. Mumma is an equitable owner of a Series B, 1991, bond registered of record in the name of DBM Company, c/o Security Bank. Mumma's bond, in the principal amount of $50,000, matured on December 1, 1993.

No principal payments have been made on any outstanding bonds. Based on the record before this court, three scheduled principal amounts of Series B, 1991 bonds have matured and remain unpaid: $50,000 as of December 1, 1993; $60,000 as of December 1, 1994; and $65,000 as of December 1, 1995. None of the semiannual interest payments that were due to the bondholders pursuant to the 1991 bonds and the 1993 bonds have been paid. The total amount of funds on deposit in the P & I account is insufficient to pay the matured principal and the past due interest payments.

Remedies on default are provided for in the trust indenture under Article IX, sections 901, 902, 903, and 904 provide as follows:

"Section 901. Acceleration of Maturity in Event of Default.

"(a) If an Event of Default shall have occurred and be continuing, the Trustee may, and upon the written request of the Owners of not less than 51% in aggregate principal amount of Bonds then Outstanding shall, by notice in writing delivered to the Issuer and the Tenant, declare the principal of all Bonds then Outstanding and the interest accrued thereon immediately due and payable, and such principal and interest shall thereupon become and be immediately due and payable.

"(b) If, at any time after such declaration, but before the Bonds shall have matured by their terms, all overdue installments of principal and interest on the Bonds, together with the reasonable and proper expenses of the Trustee, and all other sums then payable by the Issuer under this Indenture shall either by paid or provision satisfactory to the Trustee shall be made for such payment, then and in every such case the Trustee shall, but only with the approval of the Owners of not less than 51% in aggregate principal amount of the Bonds Outstanding, rescind such declaration and annul such default in its entirety.

"(c) In case of any rescission, then and in every such case the Issuer, the Trustee and the Bondowners shall be restored to their former position and rights hereunder respectively, but no such rescission shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.

"Section 902. Exercise of Remedies by the Trustee.

"(a) If an Event of Default shall have occurred and be continuing, the Trustee shall pursue and exercise any available remedy at law...