FRIDAY, NOVEMBER 14, 2008

AIG woes hit CTA

by REJournals Reports
Chicago

The Chicago Transit Authority has entered into a legal case to keep the Green Line out of default, which "would cripple the CTA's entire public transportation system" according to court documents.

In 1998, the CTA entered into a trust agreement with EntreCap that would sublease certain properties back to the CTA. This included real property, railway tracks and trains stations for the CTA's Green Line, which connects downtown Chicago to the city's south side.

A stipulation to this agreement requires that the CTA obtain financial participants that hold a certain credit rating. The CTA entered into contracts with three firms whose parent and guarantor is American International Group Inc. (AIG entities). The credit rating of AIG has recently been downgraded.

EntreCap has demanded that the CTA obtain a replacement for the AIG Entities within 30 business days. The firm asserts that this 30-day period expired on November 12, 2008.

However, given the current freeze on credit it has been impossible for the CTA to find a replacement for the AIG Entities.

Consequently, EntreCap, as the beneficiary of the trust, threatened to declare an "Event of Default" under the Transaction Documents and immediately assert its remedies. Potential remedies included terminating the sublease of the Green Line to the CTA, imposing a liquidating damages penalty which may total an estimated $76 million.

According to court documents, the CTA is required to make payments to the trust pursuant to the sublease agreement. Up until the time of the lawsuit, the CTA has made timely payments.

The CTA is seeking a declaration that an "Event of Default" has not occurred and that the default is void and unenforceable. The CTA also seeks a TRO to prevent EntreCap from declaring an "Event of Default"; taking action to terminate the CTA's rights under the Sublease and Transaction Documents; and prevent EntreCap from imposing the liquidated damages penalty.

The suit claims that if EntreCap is not prevented from carrying out these actions that it "would cripple the CTA's entire public transportation system."

Todd A. Rowden, attorney with Thompson Coburn LLP in Chicago, filed the suit on behalf of the CTA.

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