The Handbook of Municipal Bonds

CHAPTER 8

The Role of the Municipal Bond Trustee

James E. Spiotto Partner Chapman and Cutler LLP

 

 

 

The administration of a municipal bond issue presents unique challenges for the financial institution serving as bond trustee. Because of the pivotal role of the bond trustee in representing the municipal bondholders postissuance, an understanding of the bond trustee’s duties and obligations generally and with respect to specified functions is instructive.

THE NATURE OF THE BOND TRUSTEE’S DUTIES AND RESPONSIBILITIES

Historical Overview

The role of the municipal bond trustee can be traced, in large part, to the development of the corporate indenture trustee. In the United States, the use of indenture trustees evolved from basic common law roots regarding paying agents and the ability to hold or act on behalf of others. The turning point in the use of indenture trustees came in the middle of the 1800s, when the United States Supreme Court was asked to review the issue of whether certain bondholders of a mortgage railroad bond issue could foreclose on the mortgage absent 100% of the holders.¹⁸⁶ The Supreme Court held that, without all the bondholders, the mortgage could not be foreclosed, since each bondholder should be present to defend his own claims and protect his own interests.¹⁸⁷ This brought about the necessity of having an entity hold the mortgage for the benefit of the bondholders. At first, the railroads thought it wise to appoint one of their employees to act as the ...