(a) General rule.--In all cases in which the approval of the department is required by this subpart prior to the issuance of bonds or notes or the execution of a lease, guaranty, subsidy contract or other agreement evidencing lease rental debt, in the case of small borrowings evidenced by notes in respect of which compliance with the conditions of section 8109 (relating to small borrowing for capital purposes) is required, and in the case of tax anticipation notes in respect of which compliance with the conditions of sections 8126 (relating to certification as to taxes and revenues to be collected), 8127 (relating to sale of tax anticipation notes) and 8128 (relating to condition precedent to validity of tax anticipation notes) is required, if the bonds or notes or the lease or other instrument is sold, or executed, and delivered prior to receipt of actual or deemed approval under section 8204 (relating to certificate of approval of transcript) or 8206 (relating to effect of failure of timely action by department) or, as the case may be, without compliance with applicable conditions of issuance, or prior to a required filing with the department, the bonds, notes, lease or other instrument shall be invalid and of no effect in the hands of or for the security of the holder of the bonds or notes or of the obligations secured by the lease or other instrument, except to the extent provided in this section.

(b) Bona fide purchasers.--If the bonds or notes or the obligations secured by the lease or other instrument are held by a bona fide purchaser, other than an initial purchaser or member of an underwriting or selling group, for value without actual notice of a lack of such prior approval, filing or compliance as the case may be, and such bonds, notes or other obligations contain a recital that such prior approval, filing or compliance was received, made or observed, then the bonds, notes, lease or other instrument shall be valid and enforceable in accordance with their terms, and any applicable debt limits shall be deemed increased to the extent necessary to validate and keep valid the bonds, notes, lease or other instrument, but not for the purpose of reducing the liability of any person under this section.

(c) Recovery of interest, principal and other amounts.--The local government unit may recover all interest and principal or other amounts payable thereon from the initial purchasers and the individuals, including the officers of the local government unit, responsible for making the unapproved or unauthorized delivery. Notwithstanding the invalidity of the instruments as to them, the initial purchasers and such individuals shall be entitled to credit in any action determining the invalidity or for the recovery provided by this subsection for the amount of the following:

(1) Any proceeds of the sale of the instruments still held unexpended by the local government unit.

(2) The lesser of the following:

(i) The cost or fair market value, whichever is the lesser, of any capital project or part thereof or interest therein acquired by the local government unit by an expenditure of a portion or all of the proceeds of the bonds, notes or other obligations.

(ii) The remaining nonelectoral borrowing capacity of the local government unit.

Cross References. Section 8208 is referred to in section 8109 of this title.