Appellate Ruling Could Change Local Finance Game; Publish It

A recent unpublished Appellate Division decision, National Loan Acquisitions v. Bridgeton Municipal Port Authority, has important consequences for the credit of New Jersey's municipalities and should therefore, we think, be approved for publication. In it, the court instructs the Local Finance Board that it may not simply throw up its hands when an independent municipal authority fails, but must provide for payment of its debts, possibly imposing them on the taxpayers of the municipality.

National Loan Acquisitions arose from an abandoned development project. To insulate itself from the risks, the city of Bridgeton formed an independent municipal port authority. The authority borrowed $800,000, bought property, and defaulted when the project was abandoned. The mortgage lender foreclosed, but the Appellate Division held that a statute barred foreclosure against municipal property. The judgment was bought at a deep discount by a speculative investor, who sought a mandamus compelling the authority to pay and obtained a consent judgment for a lesser amount plus interest. However, the authority had no assets other than the property, and an attempted sale fell through. The trial court refused to order the property conveyed to the creditor. Thereafter, the creditor applied for relief to the Local Finance Board, which has authority under the Local Fiscal Authorities Control Law to dissolve the authority with provision for payment of its debts. The board ruled that, while dissolution would be in the public interest, it could not figure out a solution and simply encouraged the creditor, the authority, and Bridgeton to work something out. The creditor appealed.

The Appellate Division remanded the case to the Local Finance Board with directions. It held that the board had both the power and the duty to find a plan of liquidation that would provide for paying the authority's debts, and it told the board to consider whether it could compel Bridgeton to assume those debts.

Municipal authorities are a familiar device by which local governments can finance revenue-producing facilities, or at least facilities intended to produce revenue, while insulating local taxpayers from operating deficits and debt service. By requiring the Local Finance Board to consider municipal assumption, the court has now intimated, without deciding, that when an authority fails financially, the parent municipality could be responsible for the debts of its creation. In the context of this case, it may be that the prospect of municipal assumption is just an incentive to sell the mortgaged property or transfer it to the creditor. But in a broader perspective, both municipalities and bond buyers have been told that local taxpayers may find themselves on the hook for a failed authority project. Publishing the decision would make that clear; leaving it unpublished and hence nonprecedential creates uncertainty for borrowers and lenders that should be resolved.

Editorial Board member Virginia Long recused from this editorial.