First United Bank v. Phase II, 01-252.

CourtSupreme Court of Arkansas
Writing for the CourtJim Hannah
Citation69 S.W.3d 33,347 Ark. 879
PartiesFIRST UNITED BANK, Trustee, v. PHASE II, Edgewater Addition Residential Property Owners Improvements District No. 1 of Maumelle, Arkansas, et al., Appellees, and DeHaven, Todd & Co., et al., Appellees/Cross-Appellants.
Docket NumberNo. 01-252.,01-252.
Decision Date07 March 2002

Friday, Eldredge & Clark, by: Elizabeth R. Murray, Larry W. Burks, and Harry A. Light, Little Rock, for appellant.

Richard L. Lawrence, North Little Rock, for appellees.

Pike & Bliss, P.A., by: George Pike, North Little Rock, for appellees/cross-appellants.

JIM HANNAH, Justice.

This case involves two appeals. First, Appellant First United Bank, Trustee ("the Trustee"), appeals the chancery court's decision to award attorney's fees to Appellees Phase II Edgewater Addition Residential Property Owners Improvement District No. 1 ("Edgewater"), Maumelle Heights Planned Residential Property Owners Improvement District No. 1 ("Maumelle Heights"), Waterside Addition Municipal Property Owners Multi-Purpose Improvement District No. 6 ("Waterside"), and West Pointe Addition Municipal Property Owners Multi Purpose Improvement District No. 7 ("West Pointe") (collectively referred to as the "Districts"). Second, Cross-appellant DeHaven, Todd & Co., DeHaven Todd Limited Partnership, John W. "Jay" DeHaven, and Michael J. Todd (collectively referred to as "DeHaven") appeals the chancellor's decision dismissing them from the case in their counterclaim against the Trustee.

This action stems from three lawsuits, two of which resulted in these appeals. First, there was the initial underlying lawsuit filed by the Trustee against the Districts, DeHaven, and other defendants, which was dismissed by the Trustee during the pendency of that action after the trial court decided a threshold issue in the Districts' favor. Second, the Districts and DeHaven each filed counterclaims in that underlying lawsuit, which are the subject of this appeal.

In June 1995 and May 1996, Citizens Bank & Trust of Carlisle, Arkansas, the original Trustee, and the four development Districts in Maumelle, Arkansas, entered into an agreement for the reissuance and sale of bonds to the public to help finance the Districts' improvements. Each District executed a Pledge and Mortgage and pledged to the Trustee certain income from the sale and operation of the lots in order to finance the repayment of the bonds. These Pledge and Mortgage agreements, which were nearly identical for each District, pledged several sources of funding including:

1. The assessment of benefits on property within each District;

2. Special taxes levied against the property within each District;

3. Other revenues, including:

A. Revenues derived from certain escrow agreements;

B. Proceeds from the sale of District-owned lots;

C. Prepayment of all special taxes and redemption premiums (the "Lot Purchase Price") associated with each purchaser's acquisition of a lot within a District.

The revenues from certain escrow agreements stem from five separate escrow agreements, which covered several promissory notes executed by lot purchasers in favor of DeHaven, the original developer of the property. Payments made by purchasers under these escrow agreements were credited to the escrow accounts, and some of this money was used as a source of income for the bond accounts to pay the Special Taxes. Citizens Bank & Trust was succeeded by First United Bank as the indenture trustee following the creation of these agreements.

The impetus for these actions arose in late 1996 when DeHaven asked the Trustee to sign a certificate relating to the Edgewater and Maumelle Heights bond issues to facilitate financing being obtained by one of DeHaven's entities. This action apparently caused the Trustee some concern because the Trustee then consulted with its attorneys, the Friday, Eldredge & Clark Law Firm, regarding this certificate and other concerns about the financial condition of the Districts' bond obligations. The Trustee's main concerns were its belief of an apparent under-funding of the Debt Service Reserve funds, which did not total the required $250,000 for each District when the agreements were signed, the periodic use of Debt Service Reserve funds to meet debt service payments, the unpredictable inflows of money into the Districts' bond accounts, and the smaller payments received than those projected in the Official Statements of the bond issues.

Due to its concerns, the Trustee refused to sign DeHaven's certificate and informed the Districts about these possible problems. In early 1997, the Trustee requested a "cash flow analysis" showing how the bonds would be repaid and the Debt Services Funds would be fully funded. In January 1997, David Paes, an accountant for DeHaven, acknowledged by letter that without the payments for lot releases, Edgewater, for example, would be in default, and that the lot release money from the sale of certain lots had been used to pay the debt service rather than reduce the principal on the bonds. Based on this information and its failure to receive any additional "cash flow" information of funds, the Trustee notified the Districts by letter on February 19, 1997, that it was preparing a notice to bondholders about the shortages in the Debt Service Reserve funds, foreclosure suits, and the need to increase the special taxes to cover the debt service.

On March 21, 1997, the Trustee and its counsel and the Districts' counsel, John Thurman, met and agreed to defer taking action until an independent accountant retained by the Trustee and the Districts could review the financial status of each of the four bond issues. In the meantime, Thurman wrote a letter to DeHaven requesting immediate action because DeHaven was in default under its contracts to purchase lots, and DeHaven had not paid the general taxes or special improvement assessments.

The Trustee and the Districts hired Gary Burris, a certified public accountant with Rasco, Burris & Winter (RBW), in September 1997, and Burris presented his preliminary findings and reports on October 17, 1997, to the Trustee and the Districts. According to Burris's initial findings, while Maumelle Heights's bonds were estimated to be fully paid by 2003, the three other Districts were underfunded. Burris continued to evaluate the bond funds with supplemental information, but the Trustee threatened not to call the bonds if the Districts did not indemnify the Trustee. The Districts, through counsel, responded that the Trustee was required to call bonds from excess funds. Furthermore, DeHaven indicated that it was willing to buy the District lots and pay some of the taxes, but that it wanted the Trustee's and Districts' respective counsels to resign, in part because of DeHaven's belief that the two were siding only with the Trustee's position.

During this time, lots within the districts were being sold. In order to be relieved of liability of the special taxes, property owners could prepay the Lot Release Price, as defined in paragraph 9 of the Pledge and Mortgage agreements, to the Trustee, and the Trustee would then release the lot from the obligation of the special taxation. The Trustee's release of the lot was mandatory, as indicated by the use of the word "shall" in the Pledge and Mortgage agreements. However, in early April 1998, the Trustee received several requests to release lots that had delinquent special taxes, but the Trustee refused to release those lots even though the Lot Release Price had been paid. Many of these lots were purchased by builders or individual homeowners who wished to own the lots free of the lien imposed by the bond issues. Bond counsel, Heartsill Ragon, had earlier opined to the Trustee that delinquent special taxes need not be paid if the Lot Release Price was paid. However, the Trustee would not release the deeds despite the fact that substantial money had been paid, and the Trustee deposited the payments into the various bond funds.

On April 29, 1998, Burris presented his revised cash-flow projections based on information received as of August 31, 1997. These revised projections indicated that Edgewater, Maumelle Heights, and West Pointe would not be underfunded, but that Waterside would be. The projections indicated that Edgewater would retire its bonds in early 2009, Maumelle Heights in early 2002, and West Pointe in early 2007. Waterside, however, would be underfunded in 2017. Burris indicated that these projections were based on some unmet assumptions. Soon thereafter, DeHaven notified the Trustee on May 7, 1998, that it would sue if the Trustee did not release the deeds on the lots for which the Trustee had received the Lot Release Price. DeHaven then wrote a letter on May 29, 1998, to the Trustee enclosing Paes's cash-flow projections (which Paes later admitted were incorrect), and DeHaven followed with a letter to RBW accusing Burris of violating his fiduciary duties to the Districts and the commissioners and distributing false data. The Trustee responded that it wanted to meet with the parties to attempt to reach an agreement about resolving the situation.

In early June 1998, the Trustee directed its employee Tammy Bracewell to prepare financial schedules for each of the four districts. Bracewell prepared two schedules, "Bracewell 1" and "Bracewell 2." The Trustee directed Bracewell to include in "Bracewell 1" only the Special District Taxes and to omit all other sources of revenue that had been pledged in the Pledge and Mortgage agreements. This schedule also failed to include funds that the Trustee had actually received prior to the preparation of the report. Understandably, "Bracewell 1" concluded that all the bonds would soon default. The "Bracewell 2" schedule, however, included all sources of income, including the monies that had been received, and predicted that Edgewater and Waterside would retire their bonds early, West Pointe would retire its bonds as...

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