Hutchinson, Shockey, Erley & Co. v. Evansville-Vanderburgh County Bldg. Authority

Decision Date20 December 1994
Docket NumberNo. 26S01-9412-CV-1239,EVANSVILLE-VANDERBURGH,26S01-9412-CV-1239
Citation644 N.E.2d 1228
CourtIndiana Supreme Court
PartiesHUTCHINSON, SHOCKEY, ERLEY & CO., Appellant-Defendant, v.COUNTY BUILDING AUTHORITY, Appellee-Defendant, and The National City Bank of Evansville, Appellee-Plaintiff.

Victor B. Maddox, David Tachau, Michael Q. Murray, Brown, Todd & Heyburn, Louisville, KY, for appellant Hutchinson, Shockey, Erley & Co.

F. Wesley Bowers, David E. Gray, Cedric Hustace, Bowers, Harrison, Kent & Miller, Evansville, for appellee Evansville-Vanderburgh County Building Authority.

David J. Emmert, Indianapolis, for amici curiae Indiana School Boards Ass'n.

J. Christopher White, Indianapolis, for amici curiae Indiana Bankers Ass'n and Peoples Bank & Trust Co.

Jane A. Seigel, Indianapolis, for amici curiae Indiana Ass'n Cities & Towns and Ass'n of Indiana Counties.

Terry E. Harris, Crawfordsville, for amici curiae South Montgomery School Corp.

SULLIVAN, Justice.

We hold that holders of the Bonds issued in 1966 to finance construction of the Evansville Civic Center Complex are not entitled to receive payment before the stated maturity date of their bonds. We therefore grant transfer, vacate the decision of the Court of Appeals, Hutchinson, Shockey, Erley & Co. v. Evansville-Vanderburgh County Bldg. Auth. (1993), Ind.App., 626 N.E.2d 551, reh'g denied, and affirm the decision of the trial court in this case. Ind.Appellate Rule 11(B)(3).

Background

The facts, taken largely from the opinion of the Court of Appeals, are as follows. In May, 1966, the Evansville-Vanderburgh County Building Authority (the "Authority") executed a Trust Indenture with The National City Bank of Evansville as Trustee, governing the sale of $19,250,000 in municipal revenue bonds to finance construction of an Administration and Safety Building, Courts Building and School Corporation Building, known as the Evansville Civic Center Complex. The Authority entered into a 40-year Governmental Buildings Lease ("Lease") with the City of Evansville, the Board of Commissioners of the County of Vanderburgh and the Evansville-Vanderburgh County School Corporation ("Lessees"), beginning on the date the buildings were completed and ready for occupancy. As security for payment of the bonds and interest thereon, the Authority pledged and assigned the fixed annual rentals and other income from the Lease on the buildings to the Trustee.

As is customary with trust indentures of this kind, rental income from the Lease was payable to the Trustee for deposit in a Bond and Interest Sinking Fund pledged to, and to be used solely for the payment of, the interest and principal of the bonds issued under the Indenture. The bonds were scheduled to mature serially each year from 1970 through 2006. They carried interest rates ranging from 1% to 4%. Interest on the bonds is exempt from federal and state taxation.

In 1990, the Authority determined that it had accumulated sufficient revenue in the Sinking Fund to pay the $12,050,000 in principal then outstanding on the bonds at maturity and accrued interest on the bonds when and as interest became due. However, once the Authority had accumulated sufficient funds to pay the bonds to maturity, the Authority anticipated that the State Board of Tax Commissioners would not approve property tax levies by the Lessees to pay the fixed annual lease rentals on the buildings as required in the Lease. In response, the Authority proposed to accomplish a "bond defeasance," that is, to terminate, release and discharge the lien and operation of the Indenture securing the bonds, including the Lease on the buildings. To assure that the Bondholders would receive their principal and interest when due, the Authority proposed to invest the Sinking Fund in government obligations held in a Trust Account to be established under a new "Escrow Agreement" with Old National Bank in Evansville as the paying agent and Escrow Trustee. The Authority describes this substitution of collateral arrangement as an "escrow to maturity." The Escrow Agreement would provide for the timely payment of principal and interest on the bonds according to the original bond schedule under the Indenture. Any funds accumulated in the Trust Account, including interest earned on the government obligations, not needed to pay the principal or interest on the bonds, would be deposited in the Authority's depreciation reserve account and used for repair and renovation of the buildings. Under this plan, after January 1, 1991, no further tax levy would be required for fixed rentals to pay the bonds, and the Authority would use the Trust Account to earn an estimated $9 Million in additional income from the difference between the interest paid on the bonds and interest earned from investing the moneys in the Trust Account.

To activate the Escrow Agreement, the authority requested the Trustee to execute a Release of Trust Indenture acknowledging that the obligations under the Indenture had been satisfied, terminated and discharged, thereby defeasing the bonds. The Release would have authorized the transfer of funds from the Sinking Fund for deposit with the Escrow Trustee, "in an amount at least equal to the principal of and interest to be paid on all outstanding bonds to maturity and sufficient to pay the principal of and interest on all outstanding bonds when due and payable."

In early 1991, after learning that the Trustee held sufficient funds in the Sinking Fund on deposit to redeem all the bonds, Hutchinson, Shockey, Erley & Co. surrendered $100,000 in bonds nominally due in 2005 to the Trustee for immediate redemption prior to maturity.

Trial Court Disposition

Because of its concern whether the Indenture authorized the Authority's proposed bond defeasance and escrow to maturity plan, and confronted with conflicting demands from the Authority and Bondholders, the Trustee initiated this interpleader action seeking a declaratory judgment of its obligations under the Indenture. The Authority and the Bondholders filed answers to the Trustee's complaint. The Bondholders also filed counterclaims against the Trustee for breach of its fiduciary duty in wrongfully withholding funds available for redemption of the bonds, and filed cross-claims against the Authority, for demanding the Trustee's wrongful release and discharge of the Indenture securing the bonds while withholding funds from the Bondholders available to redeem the bonds. In these various pleadings the Bondholders denied the Trustee's authority to release and discharge the lien of the Indenture without providing for the immediate redemption of the bonds.

After discovery, including numerous depositions, extensive production of documents, and numerous hearings, on November 10, 1992, the trial court granted summary judgment for the Authority. The Bondholders appealed from that judgment.

Court of Appeals Disposition

The Court of Appeals reversed the trial court, holding that the Bondholders were entitled to payment for their Bonds. Hutchinson, Shockey, 626 N.E.2d at 559. The Court of Appeals based its decision on two separate lines of analysis.

First, it analyzed the language of the Indenture itself and concluded that there was no language

in the Indenture to support the conclusion that actual payment and redemption upon surrender of the bonds, at or prior to maturity, can be postponed by an escrow once defeasance has occurred and the moneys are available on deposit with the Trustee for such payment. Such an arrangement would violate the pledge of security provisions and other affirmative covenants of the Authority found elsewhere in the Indenture.

Id. at 558.

Second, the Court of Appeals analyzed the County Building Authority Statute in effect in 1966, which provided that the maturities of municipal revenue bonds "shall not extend over a period longer than the period of the lease of the building or buildings on account of which said bonds are issued." Ind.Code Ann. § 26-2516 (Burns 1960) (enacted 1953 Ind.Acts, ch. 54, § 16) (current version at Ind.Code § 36-9-13-30 (1993)). The Court of Appeals concluded that this provision requires "that when the leases for the government buildings are terminated and, thus, the security for the bonds is released, the bonds must be eligible for redemption.... The Indenture as written does not provide for such an option, and neither can it lawfully be construed in that manner." Id. at 558-59.

Based on these two lines of reasoning, the Court of Appeals held that

before the Authority can lawfully defease the bonds and implement its escrow to maturity plan, it is required to obtain the consent of the holders of two-thirds of the bonds to modify the Indenture. Absent such consent, the terms and covenants of the Indenture do not authorize the Authority to defease the bonds without also providing for immediate redemption. Thus, when the lien of the Indenture on the obligations which secure the bonds is terminated and released, the bonds are defeased, and the Bondholders are entitled to surrender and redeem their bonds, whether at or prior to maturity.

Id.

We disagree with the Court of Appeals in both respects.

Analysis of Indenture Provisions

The parties have conflicting views of the meaning of the Indenture and so we construe its meaning. The primary purpose in the construction of contracts is to ascertain and give effect to the mutual intention of the parties. Western & Southern Life Ins. Co. v. Vale (1938), 213 Ind. 601, 610, 12 N.E.2d 350, 354. In the Indenture, the Authority made the following undertakings--"the pledge of security and affirmative covenants" referred to by the Court of Appeals--relevant to this dispute:

1. The Authority pledged all amounts paid to the Bond and Interest Sinking Fund and all rent and other income from the Authority's buildings to the Trustee to secure the payment of the principal and redemption price of and interest on the...

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