Voice from the Past
Chapter 11

The length of bond counsel's opinion changed greatly during my practice. When I started, most were written on a single sheet of 8.5 by 11 inch paper, double-spaced in the case of general obligation bonds and single-spaced for revenue bonds. And this was beneath the letterhead that displayed the names of all partners and associates who were with the firm the last time stationery was printed. In the days before computers, it was common for an entire issue to bear the same rate of interest; the dealers would make their profits by selling the earlier maturities at a premium, and, if they had to, would discount the last maturities. More often we'd see two or three interest rates for an issue, and our opinion referred to the serial numbers of the bonds bearing each rate of interest in text, not in a table. The phrase "due serially on January 1 of each of the years 1955 to 1974, inclusive," covered the maturity schedule. All this, with the name of the issuer and the name of the bond issue appeared in the first paragraph.

The other paragraph, in the case of general obligation bonds, read, "We have examined executed bond number one of said issue, and, in our opinion, said bonds are valid and legally binding general obligations of said [name of issuer] payable from taxes to be levied on all taxable property in said [type of issuer] without limitation as to rate or amount." In the case of revenue bonds it took a few more words, and often referred to reliance on the opinion of title of some local lawyer, and to the status of any prior lien bonds and to parity bonds outstanding or that could be issued later.

There was no more but the firm signature, and a scrivener's mark showing the initials of the lawyer who signed the opinion. Some firms did not even show those initials, and I often wondered how they would defend against a forged opinion -- I suppose they would have to get every lawyer who was in the firm at the time to testify that he did not sign it. (I use "he" advisedly; there weren't any female bond lawyers to my knowledge). This was one of the things I used to worry about that never happened.

I remember asking why we didn't express the opinion that interest on the bonds was exempt from federal income taxation. The answer was that everyone knew municipal bonds were tax exempt, and there was no need to clutter up the opinion with matters of common knowledge.

Paul Cutler used to address his opinions to the underwriters, but none of the rest of us did. We considered the bonds valid and didn't care who knew it. Paul thought we got a measure of protection from the practice of addressing opinions, but didn't explain. Eventually we got around to addressing opinions because the underwriters requested it. They considered it good advertising.

There was a time when litigation over the constitutionality of financing schools by local school districts that had disparate tax bases made it necessary to add to opinions on school bonds some reference to that litigation, but that was temporary.

When the Federal Government started passing laws to restrict the tax exempt status of industrial development bonds and arbitrage bonds, it then became necessary to add a short sentence to the effect that interest on an issue was not subject to federal income taxation. Sometimes this, with other factors, made it necessary to add a second page to the opinion.

I still remember a call from a man at a major institutional investor that had just bought much of an issue of bonds that were approved by another bond firm; he asked about a strange paragraph in the opinion that said something about bankruptcy. Since that was not what he was used to, he wondered if it was a qualification of an opinion on bonds that the investor had bought subject to an unqualified opinion. My answer was that this was not a qualification, it was just a statement that if the issuer goes bankrupt you may not get paid -- a fact that he knew already. I avoided putting bankruptcy exceptions in my opinions as long as I could get away with it because I feared that a jury might hold such a phrase to be misleading. My imagination showed me on the witness stand in a suit over bonds that were not paid when due but of which the issuer was not in bankruptcy. Plaintiff's counsel was asking why my opinion did not cover whatever it was that caused the bonds not to be paid, when it did cover non-payment for reasons of bankruptcy, thus leading his client to believe that bankruptcy was the only reason he might not be paid. My response, "All the other bond lawyers do it," wasn't what I cared to hear myself say. Another item of worry about something that never happened.

When underwriters' counsel wanted 10b(5) opinions, I successfully kept them out of the bond opinion on the ground that the bond opinion stayed with the bonds throughout their lives, and an opinion that we found nothing misleading in the offering statement was temporary. Events next year might make the OS wrong. I still had to give the 10b(5) opinion, but felt that I had won an aesthetic victory in keeping it out of the "real" opinion.

Another fruitless worry was about the requirement of underwriters' counsel that the bond opinion cover enforceability of the covenants securing revenue bonds. A covenant to shut off water service to premises where the water bills were in arrears is enforceable most of the time, but not all the time. For example, if the local hospital didn't pay its water bill, I doubt that a court would permit water service to be shut off. There was a District of Columbia case in which the court refused to allow water to be denied a new tenant who agreed to pay for water delivered in the future, but not for water delivered to a prior tenant who left without paying. I finally convinced myself to give an enforceability opinion on the theory that such covenants are enforceable with exceptions that are not "material." The phrase "mostly enforceable" would not do.

Many years ago I considered that a bond opinion could be expressed in two letters: OK. This is what the bondholder wants to know, and the rest (except for identifying the bonds) is surplus. I wonder if all the language showing what the opinion covers and what it does not will help in defending a malpractice action over bonds that should not have been approved. I also wonder if an issue should be approved by a lawyer who tries to protect himself from liability over legal problems short of the illegality of the bonds that nevertheless prevent them from being paid. Who, if not bond counsel, is responsible for those problems?

Manly W. Mumford