Voice from the Past
Chapter 3

Once upon a time, so long ago that Willis Ritter was still a young lawyer with the IRS, I was asked by an underwriting firm in Louisville to work on an industrial development bond issue for the Louisville and Nashville Railroad. The project was a railroad bridge across the mouth of the Bay of Biloxi, in Mississippi, and the issuer was to be a development authority that was trying to develop an industrial park on that bay. The industrial park would not succeed unless large ships could get to it, and they couldn't because the Louisville and Nashville's bridge was too low, or had some other defect that inhibited ship traffic. The railroad was willing put in a new bridge, and had scheduled it several years in the future, but would require help on the financing to build it ahead of schedule. The development authority was willing to issue industrial development bonds for the purpose and the deal seemed relatively straightforward at first.

It turned out that Mississippi law permitted development authorities to finance some railroad facilities in connection with industrial parks, but it was not absolutely certain that this included the main line of a railroad that did not even serve the park. On the other hand, this authority had broad powers to do various things to develop such a park, and between the two I decided that I could in good faith approve the bonds in reliance on judicial validation which was iron clad in that State.

So I drafted the documents, including an indenture and a lease agreement and various proceedings of the authority's governing body, submitted them for comments and suggestions for change by the Railroad, the authority and the underwriter, and proceeded with the transaction. I also attended a meeting in Biloxi, a city where I enjoyed the magnificent live oaks and the feeling that this was a place where I need not fear that events might overtake me. The documents were adopted by the governing body and turned over to the State's Bond Attorney who successfully proceeded to have them validated by the court.

At the outset I had concluded that a ruling would be necessary to determine whether interest on the bonds would be tax exempt under the primitive IDB regulations then in effect. This was not the usual case where the facility to be built was inside the boundaries of the issuing authority (it was not) and would be used directly to furnish employment to nearby residents (only passengers and freight NOT going to or from the industrial park would be going over the bridge). I asked my partner David Nelson to work on a ruling request and he did a superb, and successful, job. The part I remember especially was where he directed the Service's attention "not to the doughnut but to the hole." He told me that this was a little corny, but sometimes the corny is effective. It was.

After the ruling came down, it was time to start preparing for the sale. I remembered from law school that railroads whose bonds had been approved by the Interstate Commerce Commission did not have to register them with the Securities and Exchange Commission. To make sure there were no surprises in that law or in decisions under it, I checked and found that it had been recently repealed by an act relating to railroads generally. Therefore the bonds would have to be registered or else sold in a private placement. With a little help from my SEC partners I dug into the requirements for private placements and worked out a procedure under which the underwriter might sell unregistered bonds to a limited number of sophisticated investors.

Then it was not an auspicious time for the Railroad to go ahead with the deal and it was postponed for a few months. At the end of that time, the underwriter was not able to consummate the sale and the railroad got a new underwriter from New York. That underwriter wanted to use Mudge Rose as bond counsel.

After my anger cooled a little, I started thinking, and called whoever at Mudge Rose was to work on the deal and suggested that they might want to recommend that the Railroad compensate Chapman and Cutler for the time spent on the transaction, since they would probably like to use our work product -- especially the IRS ruling. The man at Mudge Rose agreed. I don't know how much of the rest of our work product they used, but we were compensated by the Railroad for our time.

Later, over a period of decades, the Louisville bond dealer, the Louisville and Nashville Railroad, and even Mudge Rose went out of business. I suspect that the new bridge over the mouth of the Bay of Biloxi is still there, and that railroad trains are still running over it carrying freight to and from other places; and that ships are still going under that bridge, carrying cargo to and from the industrial park on the shore of that bay.

Manly W. Mumford