When bond counsel' render their legal opinion approving the issuance and delivery of a municipal obligation, one of the opinions traditionally expressed is that the obligation is "valid and legally binding according to its terms." Significant, here, are the words "valid" and "binding." The validity of a municipal obligation can usually be determined by straightforward observation. Bond counsel must be satisfied that (1) the issuer has statutory and sometimes constitutional authority to borrow and incur indebtedness (2) the funds borrowed are to be used for a public purpose and (3) the issuer has complied with the preconditions to issuing debt obligations and incurring indebtedness. Two recent cases, Flushing National Bank v. Municipal Assistance Corp. and United States Trust Co. of New York v. New Jersey, suggest that the pledge of security to the holders of municipal obligations is something more than a mere promise to pay principal and interest assuming tax or enterprise revenues are presently available or could be raised. The holdings of these cases clearly point to a new judicial direction favoring strict construction of the terms binding the issuer to the obligation holders. The general result of these cases is to enhance substantially an obligation holder's creditor interest in municipal obligations against competing claims for public funds.
Kenneth W. Bond,
Enhancing the Security Behind Municipal Obligations: Flushing and U.S. Trust Lead the Way,
6 Fordham Urb. L.J. 1
Available at: http://ir.lawnet.fordham.edu/ulj/vol6/iss1/1