Investors' lawsuit accuses Harvey, Cook County of underpaying millions owed on bonds for city projects

By Scott Holland | Sep 10, 2018

Bondholders have filed a lawsuit against the city of Harvey, as well as municipal and county officials, saying the city has fallen $2.5 million behind in repaying bonds issued in 2007 and blaming an inadequate tax collection rate for the problem.

Investors represented by two Oppenheimer Rochester funds and Susquehanna Government Products filed their complaint Sept. 4 in Cook County Circuit Court against the city, Mayor Eric Kellogg and Treasurer Gloria Morningstar, as well as Cook County Treasurer Maria Pappas and Cook County Clerk David Orr. The plaintiffs say they are owed more than $1.2 million at present and expect that total to increase unless the court orders corrective action.

The breach of contract complaint centers on the issuance of $32 million in general obligation bonds in June 2007, which the city said would be repaid from property tax collections to be deposited by the county officials into a designated escrow account, with excess collections sent to the city only after it met each year’s interest and principal requirements.

According to the complaint, the plaintiffs collectively hold almost $17 million of the principal for the general obligation bonds, which the city issued to refund prior bond issues and pay for water and sewer system improvements, among other projects. The interest rate was to be capped at 8 percent and the money would be repaid over 25 years.

Harvey Mayor Eric Kellogg   City of Harvey

The bondholders said money intended to repay the bonds is instead being distributed to the city before the escrow amount is fully funded. In so claiming, they note the ordinance authorizing the bond sale also directs the levy of additional taxes for the “purpose of providing the fund required to pay principal of and interest on the bonds.”

They say the county clerk is responsible for determining the rate needed to produce the levied amount, and provided a table showing $4.5 million levied annually from 2007 through 2034, balanced against the amount of taxes abated and then an “exact amount of taxes required to be extended pursuant to ordinance” ranging from $1.9 million in 2007 through $3 million in 2031.

As allowed, the city created a separate escrow account to repay the bonds, but the bondholders maintain that account has been routinely underfunded as the county collected less in property taxes than the ordinance should have required.

The bondholders say they sent a May 9, 2017, written demand to Kellogg and Morningstar — and repeatedly since then — asking them to take corrective action. They also reached out to Pappas and Orr on Dec. 11, 2017, asking for the money to be deposited properly into the escrow account. The county officials said they are waiting on city action, according to the complaint.

The complaint said that on Jan. 31, 2018, the county collected only about $1.6 million of the $2.5 million levied, roughly 63 percent of the total expected intake — which includes the additional 5 percent built into the levy to account for a loss in collection. The last payment on the principal and interest missed the June 1, 2017, due date, and payments due Dec. 1, 2017, and June 1, 2018, remain outstanding, the investors asserted.

The plaintiffs want the court to find the city in breach of contract and to force it to pay the interest, principal and premiums due, as well as damages.

Representing the bondholders in the matter are lawyers from Bryan Cave Leighton Paisner LLP, of Chicago.

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Bryan Cave, Llp Circuit Court of Cook County City of Harvey

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