EAST NAPLES — A battle over bond money at Fiddler’s Creek has landed back in state court.
In late 2011, one of two community development districts for the community east of Naples sued U.S. Bank National Association, saying the bank misspent bond money meant for future construction projects.
Early last year, the case moved to federal court in Fort Myers, but it was returned to Collier Circuit Court after the addition of new allegations and new defendants. In the original suit, Fiddler’s Creek Community Development District 2 alleged the bank improperly spent bond money on its own legal fees and other expenses related to a bankruptcy case involving the namesake developer of Fiddler’s Creek.
An amended complaint added unjust enrichment and other claims against two bondholders, plus new allegations that U.S. Bank has refused to make required payments for construction projects.
U.S. Bank is the trustee for the so-called community development bonds, often 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.
“When the suit was filed, the trustee did not continue to take money from the construction fund to pay legal fees. However, it has taken money from other accounts to pay legal fees,” said Ricardo Reyes, the Boca Raton attorney who represents the district.
On top of that, the bank has refused to pay for any construction projects, he said.
“Right now the construction is not proceeding and that is a real concern for those residents in the district. This construction needs to be done, so that development can continue in the district,” Reyes said.
There’s no legitimate reason for the bank not to pay for the construction with the bonds, and it appears to be retaliation for the original suit, he said.
Nicole Garrison-Sprenger, a spokeswoman for U.S. Bank, said the company doesn’t comment on pending litigation.
In February, Collier Circuit Judge Cynthia Pivacek approved a preliminary injunction, ordering U.S. Bank to pay past-due and future construction draw requests certified by the community development district’s engineer. The bank appealed the decision, so no payments are being made while the challenge is under review. In court filings, U.S. Bank’s attorney, William Spivey, with Greenberg Traurig in Orlando, described the request for an injunction as an “extraordinary and disfavored remedy.”
A few weeks ago, Pivacek denied U.S. Bank’s motion to dismiss the case, saying the amended complaint properly states causes of action against the trustee for allegations of breach of fiduciary duty, constructive fraud and conversion.
As the market recovers, homes are once again coming out of the ground at Fiddler’s Creek, an expansive luxury golf community off Collier Boulevard, near Marco Island. The community has started a new chapter with new builders after its development company emerged from Chapter 11 bankruptcy in 2011.
The ongoing legal challenge hasn’t slowed home construction, but it has the potential to if community projects can’t be completed on time, Reyes said. There is a threat that permits for some of those projects could expire before they’re started.
A little less than $1.2 million was taken from the construction fund to pay for legal fees, but there’s still plenty of money left for needed projects, Reyes said.
The other two defendants in the case are ITG Fund II LLLP and OppenheimerFunds Inc., which the district alleges improperly advised U.S. Bank to use the construction account to pay legal fees to fight the confirmation of the Fiddler’s Creek bankruptcy reorganization plan, which they opposed, he said.
“We believe they are liable along with the trustee for the misuse of funds in the construction accounts,” he said of the bondholders.
Andrew Sanford, a portfolio manager for ITG Holdings LLC in Naples, which invested millions in the district’s bonds through an affiliate, said he had no comment about his company being added as a defendant.
Kristina Ferrari Baldridge, a spokeswoman for Oppenheimer, another large investor in the bonds, said her company tends not to comment on such legal matters.
After a bankruptcy judge approved a reorganization plan, creating a new company to continue the development of Fiddler’s Creek, U.S. Bank appealed the order, partly based on the treatment of the bond debt. The 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.
U.S. Bank appealed the confirmation of the bankruptcy plan, but then later voluntarily dismissed its complaint.
On April 5, Pivacek ruled to dismiss some of the claims made against ITG, including unjust enrichment and constructive fraud, saying the complaint failed to distinguish between the company and the other defendant, Oppenheimer. But she left the door open to amend the lawsuit.
“They are still in the case,” Reyes said. “The amendment will be minor and technical.”
Oppenheimer also filed a motion to dismiss, but the judge hasn’t ruled on it yet.
In federal court filings, U.S. Bank argued bondholders were added as defendants as a legal maneuver to get the case out of federal court. The district contends that’s not true and that the bondholders were added on the advice of their new attorney after more information came to light in the case.
U.S. District Judge Virginia Hernandez Covington sided with the community development district, ruling there was nothing improper in its attempts to amend the complaint and that there was no federal interest at stake so the case should return to state court.
“We believe it should have been in state court irrespective of adding additional parties,” Reyes said.