On June 22, 2016, the Pennsylvania Commonwealth Court decided the case of Township of Millcreek v. Angela Cres Trust of June 25, 1998, 1725 C.D. 2015, which decided whether 42 Pa.C.S. § 5505 applies to eminent domain cases.  Section 5505 provides, in pertinent part, “[e]xcept as otherwise provided or prescribed by law, a court upon notice to the parties may modify or rescind any award within 30 days of its entry…except as otherwise provided or prescribed by law.”  Such a provision would typically apply to, for example, a party’s request that a trial order be modified to include attorneys’ fees, when such fees were not ascertainable until after the trial.  Practitioners have become accustomed to the provisions of the judicial code automatically applying to almost all cases.  So why was there any question whether 42 Pa.C.S. § 5505 applies to eminent domain cases?

In Millcreek, the Township of Millcreek filed a Declaration of Taking to condemn a portion of the property of the Angela Cres Trust of June 25, 1988 (the “Trust”) as part of a project to improve the Township’s storm water management system. The Trust filed preliminary objections to the declaration of taking pursuant to what is now Section 306 of the Pennsylvania Eminent Domain Code, 26 Pa.C.S. § 306.[1] (Recall, that preliminary objections in the context of eminent domain, as set forth in Section 306, are different than preliminary objections in a typical civil action under Pennsylvania Rule of Civil Procedure 1028.)  The Trust utilized the preliminary objections under Section 306 to argue that the improvement of the Township’s storm water management system was not a permissible basis for a condemnation under the Second Class Township Code.  The Court of Common Pleas of Erie County agreed with the Trust, and on appeal, the Commonwealth Court affirmed the lower court’s decision.  The Pennsylvania Supreme Court denied allocatur on October 12, 2012.

Over a year later, on October 23, 2013, the Trust filed a petition seeking reimbursement of its fees, costs, and expenses by the Township.  The Trust relied on paragraph (g) of Section 306, which states: “If preliminary objections which have the effect of terminating the condemnation are sustained, the condemnor shall reimburse the condemnee for reasonable appraisal, attorney and engineering fees and other costs and expenses actually incurred because of the condemnation proceedings.”  The Township responded by asserting the petition was untimely because, under 42 Pa.C.S. § 5505, the Trust only had 30 days after the trial court’s order sustaining the preliminary objections to file the petition.  The Erie County Court of Common Pleas disagreed, and awarded the Trust $517,868 in attorneys’ fees and $164,000 in expert fees.  The Township appealed to the Commonwealth Court.[2]

The Commonwealth Court affirmed the trial court’s decision.  In affirming the decision, the Commonwealth Court pointed out that Section 102(a) of the Eminent Domain Code specifically provides that the Code is the “complete and exclusive procedure and law to be followed in condemnation proceedings.” Because Section 306(g) does not prescribe a time period when a fee and cost petition must be filed, the Trust’s petition was timely.  The Court specifically rejected the assertion that 42 Pa.C.S. § 5505 applies to eminent domain proceedings.

In addition to providing guidance on when a condemnee must file a fee/cost petition, Millcreek also gives a glimpse into how the Court will view the application of other provisions of the judicial code to eminent domain proceedings.

Dana W. Chilson is the chair of McNees Wallace & Nurick LLC’s Insurance Group, as well as a member of the Public Sector, Litigation, Financial Services, and Injunction groups. She can be reached at 717-237-5457 or dchilson@mcneeslaw.com

[1]           At the time Millcreek was filed, the Eminent Domain Code had not yet been amended.  The provisions relevant to this case, however, remain the same but have been renumbered and reordered under the current version of the Code.  To avoid confusion, this article will reference the current citations to the applicable provisions.

[2]           The Trust also filed a cross-appeal, asserting that the trial court erred by not awarding the full amount of its requested damages.

Municipalities have been looking for new ways to “monetize” publicly owned assets to help fund pension obligations and relieve budgetary pressures. Especially attractive is the transfer of a municipal water or wastewater system to a private operator.

Such a transfer may be accomplished by entering into a long-term lease with a private operator, under what is known as a “concession” agreement. A public sector entity instead might opt for an outright sale of assets. Too often, though, parties jump into a deal unaware of serious title defects with the real estate underlying the facilities in question.

Before a private operator can close on a concession, it will need to obtain a commitment for title insurance covering the real estate to be transferred. To be insurable, however, municipalities may have to resolve a web of title defects allowed to grow unchecked through a series of acquisitions by donation, dedication or condemnation. Moreover, the sheer number of properties that support a typical water or wastewater system greatly increases the odds that such defects are present.

Standards for resolving defects tend to be set by the insurance underwriter. For example, a title company may require a municipality to obtain quitclaim deeds, deeds of dedication or even to bring actions for declaratory judgment or to quiet title where there is no clear record of public dedication or acceptance. As with private property, public assets are not insurable without a record of ownership.

Even where ownership is undisputed, a vesting deed may contain restrictions causing defects as to insurability for a private entity. If a property was acquired by donation, the vesting deed may limit land use to a specific purpose—a purpose which may not be compatible with the intended use of a private operator. Such a deed would need to be amended to eliminate the restriction. But depending on other conditions in the deed, court approval may be required to do so.

When representing a municipality or other public entity in a sale or concession, attorneys should be prepared to track down past builders, developers, lenders and homeowner associations to obtain approvals, releases or any other remedy that may be required by the title company. However, being able to negotiate alternatives with the underwriter—and knowing what options are available—can help save a public client significant time and money.

The Pennsylvania Supreme Court recently announced its decision in the case of Kuren, et al. v. Luzerne County, et al., 57 MAP 2015 and 58 MAP 2015, finding that indigent defendants can be “constructively” denied counsel where underfunding of the Public Defender’s Office creates “widespread, systematic deficiencies” that “deprive indigent defendants of the traditional markers of legal representation.” Slip op.  p. 47. The Court’s decision is expected to result in similar cases filed against other Pennsylvania Counties, putting Counties at risk of being compelled by the courts to increase funding for Public Defender’s Offices.

The Sixth Amendment to the United States Constitution guarantees that “[i]n all criminal prosecutions, the accused shall…have the Assistance of Counsel for his defense.” U.S. Const. Amend VI. A right to counsel is similarly outlined in Article I, Section 9 of the Pennsylvania Constitution. The Supreme Court, in Gideon v. Wainwright, 372 U.S. 335, 342 (1963), held that this right extended not only to federal court proceedings, but also to state court proceedings, and required the states to provide counsel to all criminal defendants who cannot afford to pay for an attorney. Pennsylvania has addressed this obligation by passing the Public Defender Act, 16 P.S. §9960.3, which requires every County to maintain a Public Defender’s office for purposes of compliance with Gideon.

The creation and general operation of a public defender’s office, according to Justice Wecht on behalf of the Court, constitutes a facial attempt to comply with the mandate in Gideon. However, the Court in Kuren found that these offices are “chronically underfunded and understaffed, and are hard-pressed to meet the baseline demands of the Sixth Amendment, raising the disconcerting question of whether counties are complying with Gideon.” Slip op at p. 2. The Plaintiffs’ overarching allegation was that the limited time and resources that the Luzerne County Office of the Public Defender could devote to each case resulted in representation that failed to meet constitutional norms. Slip op. p. 10.

In particular, the Plaintiffs contended that: (1) the OPD could not sufficiently train its employees so that they had adequate knowledge of the relevant areas of the law and therefore attorneys lacked proficiency in relevant areas of the law, (2) limited staffing prevented the office from assigning attorneys to assist clients at initial arraignments, (3) limited staffing along with heavy caseloads and inadequate resources resulted in attorneys routinely postponing hearings or having inadequate time to meet fully with clients before significant case decisions had to be made, (4) time constraints prevented rigorous investigation and review of case materials or witness investigations necessary to challenge the facts alleged by the Commonwealth against the indigent defendants, (5) lack of resources impeded public defenders from being able to maintain regular and sustained contact with the client or conduct meaningful discussions about cases beyond brief interactions immediately prior to hearings, and (6) workloads prevented the performance of work with reasonable diligence and promptness. Slip op. pp. 12-14.

While normally a denial of counsel claim is pursued in a post-conviction motion for ineffective assistance of counsel, requiring proof of failures to file motions, interview witnesses and similar deficiencies, the Supreme Court noted that many courts have held that indigent defendants are entitled to prospective relief as well, given that the right to counsel is relevant at almost every single stage of the criminal case. Slip op. pp. 34-36. Deficiencies that do not meet the “ineffectiveness” standard can nonetheless violate the right to counsel even where they did not affect the outcome of the trial, because a defendant may suffer a prolonged pretrial detention, potentially meritorious motions are not filed, and the like. Slip op. p. 47. For the Court, the presence or absence of prejudice at issue in post-conviction right to counsel cases is only relevant because that impacts a particular remedy – the right to a new trial – rather than speaking to the occurrence or non-occurrence of a violation of the right to counsel. Slip op. p. 37, 46.

The Court upheld the right of indigent defendants to bring such a claim for constructive denial of counsel, with the remedy for a meritorious claim being an injunction to force a county to provide increased funding to a public defender’s office, if they can demonstrate “the likelihood of substantial and immediate irreparable injury, and the inadequacy of remedies at law.” To prove this “likelihood of substantial and immediate irreparable injury”, the Court advised that indigent defendants must focus on: “(1) when, on a system-wide basis the traditional markers of representation – such as timely and confidential consultation with clients, appropriate investigation, and meaningful adversarial testing of the prosecution’s case – are absent or significantly compromised; and (2) when substantial structural limitations – such as severe lack of resources, unreasonably high workloads, or critical understaffing of public defender offices – cause that absence or limitation in representation.” Slip op. p. 48.

For the Kuren Plaintiffs, the Court held that the allegations of their amended complaint were sufficient to overcome the preliminary objections filed by the County. Slip op. p. 55. The Court’s decision therefore does not find that there was a constructive denial of counsel by Luzerne County, but rather remands the matter to the trial court for discovery and trial on those issues and in accordance with the test announced by the Court. Slip op. p. 53.

The Court’s recognition of a cause of action against Counties for “underfunded” public defender offices will likely result in additional litigation against Counties, a fact that the Court acknowledged in its decision. However, the Court believed that“the burden of this litigation cannot outweigh the Commonwealth’s obligations to provide counsel to indigent defendants as explained by Gideon.” Slip op. p. 56.

In the wake of the Kuren decision and as Counties begin to consider their budgets for 2017, Counties should consider carefully the requests and recommendations made by their Public Defender’s Offices. Reports of staffing challenges, increasing caseloads, the challenges of funding for experts and investigators, and in particular commentary on the cost and burden of capital cases, all will become fodder for potential class actions for denial of the right to counsel – particularly if those reports go uninvestigated or unaddressed within the budget process. With the DA’s office and national standards the likely comparison points in litigation, Counties would do well to begin looking at those issues sooner rather than later.

While it’s clear that there will be repercussions for Counties as a result of the Supreme Court’s decision, the Supreme Court’s decision suggested that the Commonwealth may have some exposure as well. Noting that Pennsylvania is the only state where public defenders are funded exclusively at the local level and not by the state, the Court stated:

This funding structure necessarily leads to variations in the availability and quality of indigent representation from one county to the next. At the most fundamental level, compliance with Gideon should not – cannot – depend upon the county in which a crime is alleged. It is no surprise that statewide funding is “at the core of nearly every reform recommendation” pertaining to improving the quality of indigent defense.

Slip op. p. 57. With this admonition from the Court, it would not be surprising to see increased discussion about such reforms.

In the first federal jury trial against a municipality for securities law violations, the U.S. Securities and Exchange Commission (SEC) on September 14, 2016 successfully obtained a verdict against the City of Miami and a former city official for violations of various anti-fraud provisions of  US securities laws.  The SEC is seeking injunctive relief and award of civil monetary penalties against the defendants.

The case in the U.S. District Court for the Southern District of Florida, Securities and Exchange Commission v. City of Miami, et al., 1:13-cv-22600, was brought by the SEC in July 2013 against the City and its then budget director as a result of various temporary inter-fund transfers of funds in the approximate amount of $37.5 million from restricted city accounts to the City’s General Fund during the period 2007-2009.  The SEC alleged that these transfers constituted a “shell game” intended to conceal from bond investors the deteriorating financial condition of the City and to maintain the financial reserves required by the City Commission.  The City was previously subject to a cease and desist order entered by the SEC in March 2003 as a result of alleged anti-fraud violations in connection with a 1995 bond issue, which the SEC claims has now been violated by the City.

Specifically, the SEC alleged, and the jury agreed, that the transferred monies, which were subsequently returned to the original capital funds, constituted restricted monies dedicated to specific city capital projects and, consequently, the transfers were illegal; the transfers to the General Fund did not comply with applicable government accounting standards; the transfers were not adequately disclosed in the offering documents for three series of bonds in excess of $150 million issued by the City during the period in question, to the rating agencies or in the City’s on-going financial reporting to existing bondholders; the budget director misled the City’s outside auditors regarding the transfers; and the transfers allowed the City to obtain more favorable bond ratings, and consequently financing terms, than would have been possible if the true financial condition of the City had been properly disclosed.

The former budget director had unsuccessfully argued, on interlocutory appeal to the Eleventh Circuit Court of Appeals, that he was immune from personal liability on the SEC claims by reason of the qualified immunity available to public officials.  The Eleventh Circuit, while recognizing the defense in cases where damages are sought in a private lawsuit, found that such immunity does not extend to public officials in governmental enforcement actions seeking punitive civil monetary penalties for wrongful actions.

A ruling by the Court on the specific injunctive relief and civil penalties to be imposed is pending further submissions by the SEC.

The Internal Revenue Service, in Revenue Procedure 2016-44, has loosened the restrictions on safe harbors for management contracts entered into by governmental issuers of tax-exempt bonds in connection with facilities financed by such bonds. The revenue procedure, which will be published in the Internal Revenue Bulletin on September 6, 2016, is a welcome development for issuers considering a management contract, especially in connection with a public-private partnership, although restrictions still remain.

Rev. Proc. 2016-44 follows on several prior official publications from the IRS on the topic of management contracts, and significantly, dispenses with the rigid, formulaic rules set forth in the prior official guidance, instead applying a “principles-based approach” that is focused on the following factors: (1) issuer control over projects, (2) issuer bearing of risk of loss, (3) the economic lives of managed projects, and (4) consistency of tax positions taken by the service provider.

In addition, the management contract must continue to satisfy compensation requirements that have long been a hallmark of official IRS guidance on this topic; and the service provider also must not have a role or relationship with the issuer that limits the issuer’s ability to exercise its rights under the management contract.

A management contract that satisfies each of these safe harbor requirements is deemed to not create “private business use” of the tax-exempt bond-financed property. However, the mere failure of a contract to qualify for the safe harbor does not automatically lead to a finding that private business use has occurred. Rather, the contract must be further tested under the general private business use rules in the Code and regulations to determine whether private business use has occurred – and if so, whether that private business use will result in the tax-exempt bonds that financed the property being declared taxable private activity bonds.

Under Rev. Proc 2016-44 a management contract must provide that the issuer retain a “significant degree of control over the use of the managed property.” The IRS explains that this requirement is met if the contract requires that the issuer approve the annual budget, capital expenditures, dispositions of property, rates charged, and the types of services provided.

The management contract must also provide that the issuer bear the risk of loss if the managed property is damaged or destroyed. The issuer can, however, obtain insurance against such loss, and impose penalties on the service provider if the provider failed to meet the standards set forth in the contract, resulting in the loss.

The “economic lives” requirement is perhaps the most noteworthy aspect of Rev. Proc. 2016-44. This requirement is met if the contact has a term (including all renewal options) no greater than the lesser of (1) 30 years, or (2) 80% of the economic life of the managed property. Prior IRS guidance only outlined safe harbors for contracts of up to 15 years. The ability to enter into contracts of up to 30 years and still qualify for a safe harbor will be especially attractive in public-private partnerships, which generally have much longer terms than other management contracts.

The management contract also may not permit the service provider to take a tax position that is inconsistent with its role as a service provider. This restriction appears intended to prevent the service provider from realizing tax benefits generally reserved to property owners, such as depreciation.

In addition to these general principles set forth in Rev. Proc. 2016-44, the restrictions on compensation seen in prior guidance remain. Most importantly, these contracts still may not permit compensation based on net profits – or shift responsibility for net losses to the service provider. Compensation may include incentive payments for meeting service goals (although such goals cannot be tied to net profits or net losses). Of course, fixed fee compensation based on services provided remains permissible.

Finally, the service provider must not have a role or relationship with the issuer that limits the issuer’s ability to exercise its rights under the management contract, based on all of the facts and circumstances. This rule substantially limits circumstances in which the service provider and issuer may have common ownership or control.

The rules announced in Rev. Proc. 2016-44 apply equally to governmental issuers of tax-exempt bonds and qualified 501(c)(3) organizations that have availed themselves of tax-exempt bonds to finance their facilities. The new rules announced in the revenue procedure apply to any management contract entered into on or after August 22, 2016; issuers may elect to apply the new rules to any contract entered into prior to that date. If an issuer still wishes to apply the safe harbor rules in prior guidance, it may do so for any contract entered into before February 18, 2017.

Issuers and 501(c)(3) organizations that are considering a management contract should consult counsel to determine the tax implications of the contract before signing it.

The SEC announced today enforcement actions against 71 municipal issuers of bonds in connection with the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.  The enforcement actions follow previous announcements from the agency, charging 72 municipal underwriting firms with similar violations discovered through voluntary reporting under MCDC.

The MCDC Initiative was announced by the SEC in 2014 and offered municipal issuers and underwriters the opportunity to receive favorable settlement terms if they voluntarily self-reported that they had made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.

Municipalities swept up in the enforcement action represented 45 states, with four Pennsylvania municipal entities agreeing to settlement orders. Violations reported for which settlement orders were entered include material misstatement of prior compliance with continuing disclosure responsibilities, as well as the failure to disclose prior instances of noncompliance.

The municipal settlements agreed to by the SEC did not include monetary penalties, in contrast to the settlements entered in connection with the charges brought against municipal underwriting firms. Underwriters were required to pay fines, which varied based on the volume of underwriting conducted by the firm and the bond size of the offering, to settle their cases.

The municipal settlements instead focused on ensuring future compliance with municipalities’ continuing disclosure obligations. Per the announcement:

The parties settled the actions without admitting or denying the findings and agreed to cease and desist from future violations.  Pursuant to the terms of the initiative, they also agreed to undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC.

The SEC noted that, in agreeing to the settlements, it gave credit to the municipalities for their participation in the MCDC Initiative – suggesting that municipalities that did not participate in the MCDC Initiative may not be afforded the same leeway.

While these settlements must be disclosed in the affected issuers’ future offering documents, it seems unlikely that the settlements will have an impact on credit ratings. S&P recently released a report in which it indicated that its expectation was that the settlements would have very limited credit impact. However, S&P did state that the existence of the settlement will be considered in its analysis, as an issuer’s disclosure practices are an important aspect of its ratings methodology.

The SEC did not clarify whether it will pursue enforcement actions against other municipal issuers that participated in MCDC, or whether it is finally ready to close the book on the MCDC Initiative.

I recently published an article in The Legal Intelligencer titled, “Real Estate Matters in Monetizing Municipal Assets.” From the article:

Municipalities under financial pressure from rising budgetary costs and long-term obligations are increasingly looking for options to “monetize” publicly owned assets through transfers to private entities. Especially attractive are municipal water and wastewater systems. With the delivery of water and wastewater utility services becoming increasingly complex and subject to more and more regulation each year, municipalities have an additional incentive to sell or lease such assets beyond any expected financial windfall.

Monetization is usually accomplished by entering into a long-term lease with a private operator, under what is known commonly as a “concession” agreement. Municipalities might instead opt for an outright sale of assets. Whatever the process, it almost always involves the conveyance of significant real estate interests necessary to support the facilities in question. Too often, however, public sector entities jump into deals before undertaking thorough due diligence and without resolving thorny real estate issues to ensure a smooth transition.

You can read the entire article here (no paywall).

Following its July 27-28, 2016 quarterly board meeting, the MSRB has announced that it will not pursue “at this time” new regulations to mandate disclosure of bank loan information by municipal securities issuers.  However, the MSRB continues to stress the importance of voluntary disclosure of information about bank loans, and is working to institute changes to its website (EMMA) to make the process to disclose such information easier for issuers.

Municipal securities issuers should consult their legal counsel and financial advisor before making any voluntary disclosure of bank loan information through EMMA.  Our advice on this topic over a year ago still rings true: there are significant issues in voluntarily disclosing such information, and municipal securities issuers may be opening themselves up to liability under the securities laws in connection with such disclosures where none previously existed.

Nearly two years after Harrisburg Mayor Eric Papenfuse first proposed it, the Harrisburg School District has approved a new, ten-year tax abatement program for residential and commercial development in the city.

As reported by The Patriot News:

The program would provide a 100-percent tax break for 10 years to improvements on residential properties citywide. It also would provide at least a 50-percent tax break for improvements or new construction for commercial properties for a decade. Depending on the number of permanent jobs created, commercial developers could earn a higher tax break of up to 100 percent.

The tax abatement program that is being considered in Harrisburg is authorized under the Local Economic Revitalization Tax Assistance Act, or LERTA. LERTA is available to municipalities throughout the Commonwealth and is intended to spur the development and redevelopment of qualified parcels of real estate by offering targeted real estate tax exemptions on new construction. The program only exempts from taxation the value of the new construction; the owner continues to pay all existing real estate taxes. No other taxes (federal, state or local) are affected by the program.

To take advantage of the program, each taxing authority in the jurisdiction must separately designate the particular area as a LERTA zone. For Harrisburg, that means the City, the School District, and the County governmental bodies each much approve it. It’s not an all-or-nothing proposition; each taxing authority is autonomous and exercises independent authority in determining whether to create a LERTA zone. Thus, to achieve complete tax abatement of a particular property in the City, all three of the taxing bodies must separately approve the creation of a LERTA zone that includes the property.

The ten-year abatement being considered in Harrisburg is the longest-term benefit that can be granted under LERTA – although shorter terms can be used.  The governmental bodies can also provide for any portion of the new construction to be exempt. The most common exemption schedules include: a complete, 100% exemption for each year of the LERTA designation; or a staggered “phase in” of the taxes on the value of the new construction (e.g., 100% exempt in year 1, 90% exempt in year 2, etc.).

With the School District’s approval of Papenfuse’s 10-year abatement plan, all that remains now is for the Dauphin County Commissioners to approve it.  The abatement program could start as early as 2017.

The Borough of New Cumberland recently signed an agreement to sell its sewer system to Pennsylvania American Water.

The deal is reportedly for $23 million.  Per The Patriot News:

The sale will eliminate $16 million in debt the borough has. Pa. American Water also agreed to invest $2 million in wastewater and other improvements in New Cumberland over the next five years.

Leaving aside the question of whether the Borough violated Pennsylvania’s Sunshine Law when it voted to approve the sale, did the Borough leave money on the table by fast-tracking a sale to PAWC? At least one other interested party thinks so:

Tom Rafferty, of Aqua, said that Aqua would have surpassed the bid the council accepted from Pennsylvania American Water, if the council offered an extension for the bidding process.

It was reported that the bidding period set by the Borough was only one month. At least one other interested party, Capital Region Water, the municipal authority responsible for delivering water and wastewater service primarily in the City of Harrisburg, also expressed concern about the short time-frame for bidding.

While $23 million sounds great, $25 million (or $27 million, or $29 million, etc.) is better. Unfortunately for the residents of New Cumberland, after a fast-tracked bidding process that failed to give adequate time for true competition in the bids, they’ll never know just how much the Borough left on the table with PAWC.