On May 20, 2021, the Illinois Supreme Court finally put to rest
a long-simmering challenge to the validity of around $14 billion of
Illinois general obligation bonds.¹  The Supreme
Court unanimously affirmed, albeit on different grounds, a trial
court’s August 2019 order² denying a petition
by a prominent political activist to file a lawsuit challenging
those bonds.  In affirming the trial court’s decision, the
Supreme Court also reversed an intermediate appellate court’s
August 2020 decision³ permitting the challenge to
go forward. 

The original 2019 trial court decision had ruled on the
underlying issue of whether the challenged bonds violated a
provision of the Illinois Constitution requiring long-term debt to
be issued only for a “specific purpose.”  However,
the Supreme Court intentionally avoided that constitutional issue,
instead holding that the activist’s petition was barred by the
equitable doctrine of laches, which prevents the
filing of lawsuits where unreasonable delay and a lack of due
diligence has resulted in prejudice to another party.  The
Supreme Court found that the activist’s delay of 2 to 16 years
in challenging the relevant bonds constituted a lack of due
diligence, and found that the State of Illinois would be prejudiced
by this delay if the activist’s suit were permitted to go
forward, particularly if the suit resulted in damage to the
State’s credit rating.  The Supreme Court also clarified
the standard for denying a petition to bring a taxpayer action
under Illinois law, holding that such a petition may be denied not
only where it is “frivolous” or “malicious,”
but also where it is “otherwise unjustified” for any
reason, including because the State has a viable affirmative
defense, such as laches.

The Supreme Court’s decision is broadly consistent with the
traditional view that government debt generally cannot be
retroactively invalidated once issued, at least where there has
been a significant lapse of time since the issuance of the
debt.  The decision also suggests that protecting a
state’s credit rating is likely to be an overriding
consideration for many state supreme courts, meaning that legal
challenges that would result in defaults or downgrades seem
unlikely to succeed if they reach the highest state courts,
whatever legal rationale those courts may devise for defeating such
challenges.

However, by avoiding the underlying issue of whether the
challenged bonds were valid under the “specific purposes”
clause of the Illinois Constitution, the Supreme Court left
municipal bond markets without any clear guidance as to the meaning
of that clause, or the meaning of similar clauses limiting the
issuance of long-term debt in other state constitutions.  The
decision therefore leaves open the possibility that future
litigants could make renewed, more timely attempts to challenge
bonds under that or similar constitutional provisions.  

In addition, because the meaning of the “specific
purposes” clause remains unresolved, the meaning of that
provision could potentially reemerge as a key issue in any future
restructuring of Illinois’s debt.

Background

Under Illinois law, private citizens have standing to bring
actions in their capacity as taxpayers to enjoin the disbursement
of public funds for improper
purposes.  See 735 ILCS 5/11-303. 
Before bringing such an action, however, a private citizen must
first file a petition seeking leave from a
court.  Id.  The court may grant such a
petition if the court “is satisfied that there is reasonable
ground for the filing of [the taxpayer]
action.”  Id.

On July 1, 2019, a prominent political activist, John Tillman
(“Tillman”), filed such a
petition in his capacity as an Illinois taxpayer.  The
proposed complaint attached to the petition also identified hedge
fund Warlander Asset Management, L.P.
(“Warlander”) as a plaintiff in
the proposed action.  The complaint primarily alleged that
Illinois’s 2003 and 2017 general obligation (or “GO”)
bond issuances violated a provision of the Illinois Constitution
that requires long-term debt to be for a “specific
purpose” (Ill. Const. art. IX, § 9), arguing that
“specific purposes” include only “specific projects
in the nature of capital improvements, including roads, buildings,
and bridges.”  Specifically, the complaint alleged that
Illinois’s 2003 issuance of “Pension Funding Bonds”
failed to satisfy this “specific purposes” requirement,
because it allocated bond proceeds to be used to reimburse the
State’s General Fund for past contributions to the State’s
retirement systems.  The complaint similarly alleged that
Illinois’s 2017 issuance of “Income Tax Proceed
Bonds” failed to satisfy this “specific purposes”
requirement, because it allocated bond proceeds to be used to pay
past due bills related to general operating expenses. 

The Illinois Attorney General opposed the petition on behalf of
the government officer defendants, which included the Governor,
Treasurer, and State Comptroller.  These defendants argued
that Tillman failed to establish reasonable grounds for filing his
taxpayer complaint because his constitutional claims lacked
merit.  Alternatively, they contended that Tillman’s
complaint was barred by laches because he waited
to file his action until years after the statutes authorizing the
bonds were enacted and the bonds were issued.

In addition, two holders of challenged bonds, Nuveen Asset
Management, LLC and AllianceBernstein, L.P., filed
an amicus brief in which they alleged that
Warlander had an “ulterior purpose” for joining the
litigation because it had purchased credit default swaps that would
pay off if the litigation caused Illinois to default on its
debt.

Trial Court Decision

In August 2019, Sangamon County trial court Judge Jack D. Davis,
II, denied Tillman’s petition by ruling on the underlying
merits of Tillman’s proposed complaint, holding that the
challenged bonds satisfied the “specific purposes”
requirement in the Illinois Constitution because the legislation
authorizing the bonds “stated with reasonable detail the
specific purposes for the issuance of the bonds.”  Judge
Davis therefore treated the “specific purposes” provision
as merely requiring that the legislature identify the purposes for
which bond proceeds would be used, rather than requiring that the
intended purposes themselves be “specific” (such as
capital improvements) as opposed to “general” (such as
general operating expenses).

Judge Davis also held broadly that allowing Tillman to file the
complaint “would result in an unjustified interference with
the application of public funds.”  He stated that Tillman
was asking the Court “to address a non-justiciable political
question and substitute its judgment for the Illinois Legislature
some two decades after it occurred,” thereby violating
“the separation of powers.”  His decision therefore
suggested that the validity of the debt might be effectively immune
from legal challenge. 

Judge Davis did not address the
defendants’ laches argument or their other
affirmative defenses.

Appellate Court Decision

Tillman appealed to the Illinois Fourth District Appellate
Court, which reversed Judge Davis’s order, holding that the
trial court erred by denying Tillman’s
petition.⁴ 

Citing the Illinois Supreme Court’s “seminal case”
of Strat-O-Seal Manufacturing Co. v. Scott, 190
N.E.2d 312 (1963), the appellate court explained that the purpose
of requiring a petition for leave prior to the commencement of a
taxpayer action was to “provide a check upon the
indiscriminate filing of such suits.”  Absent such a
check, taxpayers could bring such suits for “an ulterior or
malicious purpose” and thereby “seriously embarrass the
proper administration of public affairs.”  The appellate
court concluded that under Strat-O-Seal, the relevant
standard for granting leave is simply “whether the facts
alleged in the petition and proposed complaint, taken as true,
disclose a reasonable ground for the filing of a
suit.” 

Applying this standard to Tillman’s petition, the appellate
court concluded that “nothing in the record indicates that the
proposed complaint was frivolous, filed for a malicious purpose, or
is otherwise unjustified.”  Specifically, the court
concluded that “Tillman’s complaint sets forth a colorable
reading of the Illinois Constitution that does not appear to be
frivolous on its face.”

While the appellate court framed its decision as a
straightforward application of the Strat-O-Seal 
standard, its application of that standard arguably lowered the bar
for granting leave to file taxpayer actions, as the appellate court
focused specifically on whether the proposed complaint was
“frivolous” or “malicious” and on whether the
petitioner’s claims were merely “colorable,” rather
than placing the burden squarely on the petitioner to establish
that reasonable grounds existed for filing the suit.

Unlike the trial court, the appellate court expressed “no
opinion on the ultimate merits of Tillman’s claims,” but
“concluded that the petition and complaint state reasonable
grounds for filing suit.”  The appellate court also
declined to opine on the strength of the defendants’
affirmative defenses, including laches.  

Supreme Court Decision

The State Attorney General appealed the appellate court’s
decision to the Illinois Supreme Court, which reversed the
appellate court’s decision and affirmed Judge Davis’s
original trial court order denying Tillman’s petition, albeit
based on a finding of laches rather than on
Judge Davis’s original assessment of the merits of
Tillman’s complaint.  In the process, the Supreme Court
also clarified the standard for denying petitions to bring a
taxpayer action under Illinois law.

Standard for Denying Petition for Leave to File a Taxpayer
Action

The Supreme Court began by addressing the standard for denying a
petition to file a taxpayer action, concluding that “the
appellate court’s holding that the trial court is limited to
addressing whether a proposed complaint is frivolous or malicious
when deciding whether to allow a . . . petition [is]
incorrect.”  Instead, the Supreme Court concluded that a
petition could also be denied when it was “otherwise
unjustified,” including because a valid affirmative defense
existed to the underlying complaint.

To reach this conclusion, the Supreme Court initially focused on
the meaning of the phrase “reasonable ground” in the
governing statute, which provides that a court may grant a petition
to file a taxpayer action if the court “is satisfied that
there is reasonable ground for the filing of [the taxpayer]
action.”  735 ILCS 5/11-303.   The
appellate court’s overly narrow interpretation of the phrase
“reasonable ground” stemmed, in the Supreme Court’s
view, from a misreading of the
seminal Strat-O-Seal  case.  In that case,
the Illinois Supreme Court permitted a taxpayer action to go
forward after stating that “[w]e find nothing in the present
record to indicate that the purpose is frivolous or malicious, or
that a filing of the complaint is otherwise
unjustified.” 

Based on the Strat-O-Seal court’s
consideration not only of whether the petition in that case was
frivolous or malicious, but also of whether it was
“otherwise unjustified,” the Supreme Court
concluded that a petition to file a taxpayer action could be denied
for reasons other than that it is frivolous or malicious.  In
particular, the Supreme Court concluded that “the statute does
not expressly preclude the reviewing court from examining the legal
merits of the complaint or addressing what are ordinarily
considered to be affirmative defenses.”

The Doctrine of Laches

The Supreme Court’s conclusion that the standard for denial
of a petition to file a taxpayer action can include consideration
of affirmative defenses set the stage for the remainder of its
opinion, in which it proceeded to affirm the denial of
Tillman’s petition based on just such an affirmative defense,
namely the equitable doctrine of laches.  As the
Supreme Court explained, laches is an equitable
defense asserted against a party “who has knowingly slept upon
his rights” and shown a lack of “due diligence” by
“failing to institute proceedings before he did.”
 Laches is therefore somewhat similar to a
statute of limitations in that it penalizes a party for delay in
bringing an action.  Whereas a statute of limitations
“forecloses an action based on a simple lapse of time,”
however, laches  is based on the idea that it
would be inequitable to allow a party to bring an action after
there has been “some change in the condition or relation of
the property and parties.”  As the Supreme Court further
explained, the doctrine is based on the notion that courts should
not “come to the aid of a party who has knowingly slept on his
rights to the detriment of the opposing party.”

The State Attorney General had
asserted laches as a defense as early as the
trial court briefing, but neither the trial court nor the
intermediate appellate court had engaged with or relied on this
defense in their respective opinions.  The Supreme Court
nonetheless emphasized that it was free to “sustain the
[trial] court’s judgment on any ground supported by the record,
even a ground not relied on by that court.”  The Supreme
Court also indicated that it was choosing to focus
on laches specifically in order
to avoid engaging with the larger constitutional
issues raised by the case, citing the so-called canon of
constitutional avoidance, which holds that “cases should be
decided on nonconstitutional grounds whenever possible, reaching
constitutional issues only as a last resort.”

The Supreme Court identified two “fundamental
elements” of laches, namely (1) “lack of
due diligence by the party asserting the claim” and (2)
“prejudice to the opposing party.”  It analyzed each
of these elements in turn. 

Lack of Due Diligence

With respect to the “lack of due diligence” element
of laches, the Supreme Court found it relevant that
Tillman had delayed for years in filing his petition despite having
notice of the relevant bond issuances.  Specifically, Tillman
filed his petition around 16 years after the 2003 “Pension
Funding Bonds” had been issued, and around 2 years after the
2017 “Income Tax Proceed Bonds” had been issued. 
The Supreme Court found this delay to be unreasonable, citing prior
Illinois precedents where taxpayer petitions had been denied under
the doctrine of laches based on delays ranging
from 1 to 4 years.  The Court also presumed that Tillman had
had sufficient notice to file his petition earlier, because the
statutes authorizing the bond issuances were matters of public
record.  

Prejudice to the State

With respect to the “prejudice” element
of laches, the Supreme Court cited to Illinois
precedents establishing that the prejudice element is satisfied
where the plaintiff waits to file suit until after the defendant
has (i) expended large sums of money or (ii) made irrevocable
transactions rendering it impossible to return to the status
quo.  The Supreme Court found both forms of prejudice to be
present in Tillman’s case, because Illinois had issued the
challenged bonds, applied the bond proceeds as specified in the
applicable statutes, and made payments on the bonds for years
before Tillman filed his petition.  Perhaps getting to the
heart of what the Court viewed as the main prejudice to the State,
the Supreme Court also specifically noted that “granting
relief to petitioner would amount to a de facto 
default on outstanding bonds that are backed by the full faith and
credit of the State,” and would therefore “have a
detrimental effect on the State’s credit
rating.”⁵

Based on its conclusion that both of the necessary elements
of laches had been satisfied, the Supreme Court
reversed the judgment of the intermediate appellate court and
affirmed Judge Davis’s original trial court order denying
Tillman’s petition to file a taxpayer action.

Conclusion

As noted in prior updates on
the Tillman case,⁶ the dominant
view in modern public finance is that government debt generally
cannot be invalidated retroactively once issued.  This view
makes sense from a policy perspective, because the threat of
retroactive invalidation could destabilize the bond markets,
increase borrowing costs for government issuers, or even make it
impossible for states and municipalities to borrow at
all. 

The Illinois Supreme Court’s ruling
in Tillman is generally consistent with this
traditional view.  By basing its decision on a fact-specific
analysis of laches rather than on a per
se rule that debt cannot be retroactively invalidated,
however, the Supreme Court did leave some room for future litigants
to attempt to challenge public debt under circumstances that are
less likely to give rise to a finding of laches, such
as by bringing a challenge immediately following the issuance of
new bonds, or even in the period between the time bonds are
authorized and the time they are issued. 

Another often-articulated principle of public finance is that
long-term debt should generally be issued only to fund capital
improvements rather than annual operating expenses.  By
consciously choosing to avoid interpreting the “specific
purposes” clause in the Illinois Constitution, however, the
Supreme Court left unresolved the question of whether this
traditional limitation on the use of long-term debt is actually
legally enforceable in Illinois or in other states with similar
provisions in their state constitutions.  The Supreme
Court’s decision to avoid this substantive issue again leaves
the door open for future litigants to try their hand at enforcing
the “specific purposes” clause of the Illinois
Constitution or similar restrictions in other state constitutions,
either because they are ideologically opposed to government
borrowing, as appears to have been the case with Tillman, or
because they are pursuing a particular investment strategy, as
appears to have been the case with Warlander.

In addition, the Supreme Court’s decision leaves the $14
billion of GO bonds challenged by Tillman in place as one component
of Illinois’s substantial debt burden, which has given Illinois
one of the lowest credit ratings among the states.  In the
event Illinois were at some point to pursue a restructuring of its
debt load, the Supreme Court’s decision not to address the
“specific purposes” question could allow the
“specific purposes” issue to reemerge as one potential
basis for negotiating or litigating the treatment of particular
bond issuances based on how susceptible such issuances are to a
“specific purposes” challenge.  As such,
the Tillman case may have provided more a
preview-than a resolution-of some of the key issues that may come
into play in any future negotiations or litigations over
Illinois’s debt.  

Footnotes

1 Tillman v. Pritzker, 2021 IL 126387 (Ill.
May 20, 2021).  Of the approximately $16 billion of original
issuance amount of the challenged bonds, approximately $14 billion
remains outstanding.

2 See Tillman v. Pritzker, Case No.
2019-CH-000235 (Cir. Ct. Sangamon Cnty., Ill. Aug. 29,
2019).

3 See Tillman v. Pritzker, Case No.
4-19-0611 (Ill. App. Ct. 4th Dist. Aug. 6, 2020).

4 Warlander did not participate in the
appeal.

5 The Supreme Court also rejected an argument by Tillman
that the State would not suffer any prejudice from his delay
because he did not seek to undo past payments already made on the
bonds and instead sought only to enjoin future payments.  In
rejecting this argument, the Supreme Court cited past Illinois
precedents where laches  was found to bar
taxpayer actions that sought to enjoin even future bond issuances
or payments.

6 See “Illinois Judge Holds That
Courts Cannot Rule Retroactively on Validity of State Debt,”
September 5, 2019, available at https://www.cadwalader.com/resources/clients-friends-memos/illinois-judge-holds-that-courts-cannot-rule-retroactively-on-validity-of-state-debt;
“Illinois Appeals Court Reignites GO Bond Challenge,”
August 11, 2020, available at https://www.cadwalader.com/resources/clients-friends-memos/illinois-appeals-court-reignites-go-bond-challenge.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.