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Having been the trial judge,3 I had the opportunity to observe
William Rosenberger (executive director of the Housing Authority
and the person charged with responsibility for the issuance of the
Bonds) testify. I am convinced that he, as well as the other
Housing Authority officials, reasonably expected that the Bond
proceeds would be used for the construction of housing for low-to-
moderate-income families and that the GIC's would be held by the
MCFC companies as unrelated guarantors of the bond payments. I am
further convinced that at no relevant time did he or other Housing
Authority officials have any reason to suspect that Unified and the
MCFC companies would divert the Bond proceeds from the construction
of housing to the purchase of GIC's, which in turn would be used to
pay the debt service on the Bonds.4
3 The majority opinion has adopted my findings of fact.
See majority op. p. 4.
4 In basic bond financing, bond proceeds are disbursed
directly to the developer in exchange for the developer's note,
which is secured by a lien on the underlying project (including
the anticipated revenue stream). In many instances, a credit
enhancement instrument, such as a letter of credit, is obtained.
The bond issue in this case involved a form of "black box"
structure. Theoretically, in such a structure, the bond proceeds
are disbursed to the developer pursuant to an unsecured loan
agreement with the issuer. The developer then invests the bond
proceeds with a financial institution. Simultaneously, the
developer procures a letter of credit to secure repayment of the
bonds from another institution (the L/C provider) in exchange for
a mortgage on the project. The L/C provider simultaneously sells
the project mortgage to the financial institution where the bond
proceeds are invested. Finally, and also simultaneously with the
other transactions, the L/C provider purchases a GIC from an
insurance carrier and hypothecates it to secure the interest and
principal payments on the bonds. Thus, in theory, the black box
structure makes bond proceeds available to a developer for
construction on a credit enhanced and rated basis.
(continued...)
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