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Federal judge rules sovereign immunity bars claims related to industrial development bonds

March 7, 2014

Thompson Coburn recently secured a dismissal with prejudice for its clients, the City of Moberly and its Industrial Development Authority (IDA), from litigation filed against them arising out of Mamtek, Inc., a failed economic development project in Moberly, Mo. The case drew national attention as a significant ruling on the issue of how the doctrine of sovereign immunity applies to municipal industrial development bonds.

The IDA issued $39 million in bonds to finance the construction of a factory that would produce sucralose, an artificial sweetener, and create 650 new jobs. However, Mamtek failed to complete the project and defaulted in its payments due to the City. The bonds then fell into default. Mamtek’s president was indicted in 2012 and is awaiting trial on criminal charges arising out of the failed development. 

Two groups of bondholders then sued several defendants, including the bond underwriter and the underwriter’s counsel. One suit was filed in Cole County (Missouri) Circuit Court. Judge Patricia Joyce in that case dismissed the bondholders’ claims against the City and the IDA on sovereign immunity grounds in April 2013. The underwriter sought a writ of prohibition against that ruling. Those plaintiffs then settled with the City and IDA last December while the writ proceeding was pending in the Missouri Supreme Court.  

The other lawsuit was filed in the U.S. District Court for the Western District of Missouri. The bondholders in that case did not sue the City or the IDA. The underwriter, however, filed a third party complaint alleging that the City and the IDA should be liable for all or part of any liability on the part of the underwriter. The City and the IDA moved to dismiss the third party complaint on sovereign immunity grounds. On February 24, 2014, U.S. District Judge Nanette Laughrey granted the motion, finding that because economic development projects “serve an essential public and governmental purpose,” claims against the City and the IDA were barred by sovereign immunity.