In the lawsuit, Fiddler's Creek Community Development District 2 alleges U.S. Bank improperly spent bond money on its own legal fees and other expenses.
U.S. Bank contends the Community Development District owes the bank "tens-of-millions of dollars" and that its actions are justified because of the lack of payments.
NAPLES — It's a battle over bonds.
One of two community development districts for Fiddler's Creek has sued U.S. Bank National Association, saying the bank misspent bond money meant for construction and other improvement projects at the resort community east of Naples.
In the lawsuit, filed in Collier Circuit Court in late 2011, Fiddler's Creek Community Development District 2 alleges the bank improperly spent bond money on its own legal fees and other expenses. Earlier this month, the case was moved to federal court in Fort Myers.
The bank's attorney has filed a motion to dismiss the case, describing the lawsuit as "highly dubious, if not downright frivolous."
U.S. Bank is the trustee for the so-called "dirt bonds." Dirt bonds help developers finance roads, utilities and other needs in master-planned communities. District 2 issued various bonds in 2003, 2004 and 2005 for projects, totaling more than $83 million.
"The vast majority of the money had been spent, but some of the projects weren't completed," said Andrew Sanford, a portfolio manager for ITG Holdings LLC in Naples and a holder of District 2 bonds.
In the lawsuit, the development district alleges U.S. Bank took $765,000 out of construction accounts to pay various law firms and other legal costs related to a bankruptcy case involving the namesake developer of Fiddler's Creek.
"U.S. Bank tapped the money to reimburse or pay for the cost of the protection of the beneficial interests of the bondholders. That is probably the best way to describe it," Sanford said.
In its case against U.S. Bank, District 2 alleges a breach of contract and has demanded an accounting of how the bank has spent the money in the construction accounts. The district also has demanded an injunction to restrict the bank's use of the money in those accounts going forward.
The bank has refused to provide detailed documents supporting its expenses, according to the district's lawsuit.
In court filings, the bank's attorneys argue there's no need for an injunction and that the bank has the right to spend the money in the construction accounts for the "enforcement of the payment" of the bonds.
In 2010, Fiddler's Creek LLC filed for Chapter 11 bankruptcy protection under a mound of debt. A bankruptcy judge approved a reorganization plan in July, which has created a new company to continue the development of the luxury golf community off Collier Boulevard, near Marco Island.
U.S. Bank has appealed the judge's order affirming the reorganization plan, partly based on the treatment of the bond debt.
The reorganization plan put the bondholders last in line to get their money.
Bondholders didn't get to vote on the plan because they were creditors of the two community development districts, not the developer. Both districts, which had a vote, supported the plan.
In its appeal, U.S. Bank contends there are errors in the reorganization plan because the assessment methodology wasn't followed before the bankruptcy was filed. The bonds are repaid through special assessments collected from property owners in the district, including the developer.
The bonds are in default. The community's developer, a major land holder, didn't pay the assessments on its land. As a result, the district didn't make its required payments to U.S. Bank.
The bank contends the district owes the bank "tens-of-millions of dollars" and that its actions are justified because of the lack of payments.
In a court filing, Fiddler's Creek LLC said the relief sought by U.S. Bank in its appeal would require a "wholesale dismantling" of numerous transactions that have happened since the reorganization plan was confirmed, which includes sales of lots to other builders.
Millions of dollars already have been paid to creditors and liens have been lifted. Undoing all of this, the developer's attorneys argue in a court filing, would "create an unmanageable situation for the bankruptcy court."
As a bondholder, Sanford said he doesn't want to see the reorganization plan unwind, but he hopes for a clarification on which bonds go with which debtors. There are multiple reorganization plans for multiple debtors tied to the development, which affect when each of the bonds get repaid.
"The plan is the plan," Sanford said. "It's done. It has been ruled on. Did the bondholders object to it during the process? Yes. Do I have a problem with what the ruling was? No. I understand what the judge thought."
He noted that over the past few weeks, big blocks of the district's bonds have traded. He's not sure why.
"You really can't tell who the investors are," he said. "But they are all new investors and kind of at the same price."
— Connect with Laura Layden at www.naplesnews.com/staff/laura_layden.