Stockbridge municipal bondholder sues to stop Eagle’s Landing cityhood

One of the nation’s biggest issuers of municipal bonds is suing the state of Georgia and Henry County to put the brakes on this fall’s vote for Eagle’s Landing cityhood.

Capital One Public Funding — the municipal bonding arm of banking giant Capital One — has filed a lawsuit in U.S. District Court seeking an injunction to keep the creation of what could be Henry’s fifth city off the ballot in November.

The firm says the referendum is unconstitutional because it fails to pass on to Eagle's Landing the financial obligations of Stockbridge, which would be de-annexed so that half of its territory could be used to form part of the new city. Stockbridge owes Capital One about $11.75 million from municipal bonds floated in 2005 and 2006.

“The de-annexation acts fail to attach to the land and property that will be de-annexed from Stockbridge and annexed into Eagle’s Landing any of the financial obligations secured by the lost Stockbridge tax base,” the bond issuer wrote in its lawsuit, which was filed Friday. “Thus, the new Eagle’s Landing municipality would be completely freed from any obligation to service Stockbridge’s valid and underlying financial commitments.”

The litigation comes as city of Stockbridge officials say they are preparing a federal lawsuit that, in part, will argue the same issues as Capital One, but also claim that the referendum violates the Voting Rights Act and is discriminatory against African Americans. Stockbridge leaders said they hoped to file that lawsuit late Monday and were planning a press conference to provide more details Tuesday.

“It only validates one of the things we have been saying all along,” Stockbridge City Attorney Michael Williams said about the Capital One lawsuit. “The legislation unconstitutionally impairs the city’s contract obligations which secure the bond obligations which financed City Hall.

Today, the City has filed its own federal lawsuit on those grounds and others,” he said. “We are hopeful that the court will agree with us.”

Capital One Public Funding — a municipal bond arm of banking giant Capital One — is suing the state to stop a referendum on Eagle’s Landing citythood. LEON STAFFORD/AJC

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Economists and bond watchers said Monday they were not surprised by the legal action on bonding. Because Georgia has traditionally created cities by cobbling together unincorporated communities, the legal ramifications are well known. De-annexing a city to create another is unchartered waters.

“We always think about what implications there are for the citizens and the businesses in a new municipality,” said Kennesaw State University economist Roger Tutterow. “But in this case, there are third parties that have contractual relationships that can be impaired.

“It will be an interesting legal question about where the obligation rests,” he said. “Does it follow the people in the new municipality or not?”

The Capital One litigation comes almost a month after Henry County Superior Court Judge Arch McGarity denied an injunction requested by city of Stockbridge to scuttle the Nov. 6 vote. The judge said the city's attorneys, who also called into question the constitutionality of the cityhood legislation, failed to prove their argument. Stockbridge filed an appeal of McGarity's decision to the Georgia Supreme Court in early August.

In its lawsuit, Capital One said Stockbridge could lose as much as $379 million in taxable property value if Eagle’s Landing becomes a city. That could impair the ability of Stockbridge to repay its bonds, which are to be repaid by 2031.

“Allowing de-annexation without apportionment (or other equitable relief) for validly issued financial obligations of Georgia municipalities is contrary to the public interest because, among other things, it diminishes the collateral and security originally promised to the holders of such obligations and deprives them of existing contractual obligations,” the company wrote.