An attorney or firm of attorneys, frequently retained by the Issuer but sometimes by another party to the transaction, to render an opinion in a bond financing as to the validity and enforceability of the bonds and the treatment of the interest on the bonds under the code and applicable state law.
Bond Counsel Opinion
A written opinion of nationally recognized Bond Counsel, delivered to the Issuer at the Closing, addressing the validity of the Bonds and whether and to what extent Interest on the Bonds is exempt from federal income taxes and from income or other taxes, if any, imposed by the state.
Components of the Bond Counsel Opinion
Bond Counsel’s Opinion typically addresses the following matters: (1) that the Bonds have been duly authorized, executed and delivered by and are valid and binding obligations of the Issuer; (2) the source of payment or Security for the Bonds; and (3) federal and state income tax issues, including whether and to what extent Interest on the Bonds is exempt from federal income taxes and from income or other taxes, if any, imposed by the state in which the Bonds are issued and whether the Bonds are “qualified tax-exempt obligations” within the meaning of Section 265(b)(3) of the Code (“bank qualified”) or qualified for other purposes. Each of these are state law specific matters or matters that hinge on state law analysis.
Bond Counsel is traditionally engaged to provide an objective legal opinion as to validity and enforceability (i.e., whether the Bonds are valid obligations of the Issuer and whether the holder of the Bonds could sue in court to enforce the Issuer’s promise to timely pay the Principal and Interest on the Bonds), which is determined under applicable state law. Because validity is the essential first step to both tax-exempt status and federal securities law exemption for the Bonds, the validity opinion is essential to the overall Bond Counsel Opinion. There have been significant cases holding that borrowings which are determined to be invalid are void and unenforceable. Accordingly, bondholders rely on the Bond Counsel Opinion to ensure validity and enforceability of the Bonds.
In addition, most Bond Counsel Opinions address the inclusion or exclusion of Interest on the Bonds with respect to taxation under the laws of the state in which the Issuer is located. Inclusion of this component of the opinion may be less important, or entirely absent, in those states where there is no state income tax. In other states, the tax treatment under state law is tied to the treatment under federal tax law.
While some states will broadly provide that Interest on Bonds is exempt from taxation within the state of the Issuer, the state may include Interest on the Bonds in the measure of corporate excise or franchise taxes. If the Interest is or may be includable in the measure of corporate excise or franchise taxes, the Bond Counsel Opinion generally includes a reference to such effect to avoid any confusion.
Bond Counsel Opinion Due Diligence
It is critical for Bond Counsel to know all of the applicable federal and state laws related to a Bond transaction. This is because Bond Counsel is expected to deliver an unqualified approving legal opinion in accordance with the “NABL Standard.” The NABL Standard provides that Bond Counsel must be “firmly convinced” that under the law in effect on the date of the opinion, the highest court of the relevant jurisdiction, if reasonable and properly briefed, would reach the legal conclusions stated in the opinion.
Bond Counsel must take many steps in its analysis of state law considerations to become “firmly convinced” of its opinion conclusions. Areas of review could include:
- Bond Issuance Approval Process:
- Is the Issuer and the Borrower, if any, properly in existence? Have they made necessary filings under state law to remain in good standing under state law?
- Is the Issuer authorized to issue the Bonds and is the Borrower (if applicable) authorized to borrow the Bond proceeds?
- What are the relevant state constitutional and statutory requirements for the issuance of the Bonds, and have they been met?
- Is the proposed financing structure authorized under state law? Is the Pledge of Security for the repayment of the Bonds authorized under state law? What state/local/issuer specific requirements must be satisfied prior to issuing the Bonds?
- Debt Limits and Exceptions:
- Use of Bond Proceeds:
- In addition to performing the analysis under the Code and Treasury Regulations, is the proposed use of the Bond proceeds permitted under state law and within the scope of the authorizing documents?
- Are the Bond proceeds to be used for a proper public purpose? The public purpose concept restricts public funding to activities that serve the interests of the public at large and generally precludes governmental participation in activities that solely benefit private interests. Even if this concept is not explicitly stated in a particular state constitution, courts have often inferred its existence.
- Does the Bond Issue satisfy any applicable state laws that may prevent a state or local government from guaranteeing the repayment of the Bonds of a private entity (e.g., lending its credit) or using its public funds (e.g., Bond proceeds) for private purposes?
Evidence of the borrowing by an issuer and a debt instrument for tax purposes.
Dive Deeper on State Law Matters
Learn more about the various aspects of state laws and how they intersect with municipal securities.
Get it in Writing
Learn more about the various documents involved in a municipal securities transaction.