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Debt-Service Fund Vanishes in Texas

DALLAS — Bondholders are trying to find out what happened to a $200,000 debt-service reserve fund discovered missing when a north Texas issuer defaulted on $4 million of bonds used to purchase three retirement facilities.

The underwriter on the 2008 deal, J.P. Turner & Co., claims that the Bank of Texas, which was the trustee, breached its fiduciary duty by failing to set up the debt-service reserve fund for the Tarrant County Cultural Education Facilities Finance Corp.’s 2008B subordinate-lien bonds. The bank denied it was at fault through its parent company, BOK Financial Corp./ Bank of Oklahoma.

“Bank of Texas does not have the funds in question,” said Jesse Boudiette, spokeswoman for BOK. “The bank handled the funds as directed by the issuer and underwriter and their respective counsel who, thus far, have declined to assume their respective responsibilities in the matter.”

Philadelphia-based J.P. Turner has written letters to the U.S. comptroller of the currency and others in an attempt to resolve the issue.

“Investors relied on this reserve fund as a condition of their willingness to purchase the bonds,” James Friar, J.P. Turner vice president for public finance, wrote in the April 22 letter. “The failure by the trustee to establish the DSRF is a material fact of which investors are now very aware of and very upset about.”

One bondholder, Bernard Miskiv of Kissimmee, Fla., described the missing reserve fund as “stolen.” He said the problem came to his attention when the borrower failed to make a scheduled $8,000 interest payment in September 2009 on his $200,000 of bonds.

Miskiv began contacting state and federal investigators in Texas and Oklahoma, including the attorneys general for the two states, the Securities and Exchange Commission, the Internal Revenue Service, and the comptroller of the currency. He has spent months writing letters and making phone calls.

So far, Miskiv said, the attorneys general and state bank regulators have told him they do not regulate the Bank of Texas because it is federally chartered. And none of the federal agencies has acknowledged that the matter is under investigation.

“As far as I’m concerned, it’s a stolen $200,000,” Miskiv said. “The bank made a mistake. The bank has to get the money back.”

The unrated Series B bonds were issued along with $23.9 million of Series A bonds with triple-A ratings insured by the U.S. Housing and Urban Development Department. The most recent default on Series B came in February with a missed interest payment. Trading at less than 35 cents on the dollar, the bonds bearing an 8% coupon maturing in 2028 had yields of 23.791%.

The borrower, WGH Heritage Inc., said revenues fell short because of changes in Texas policy for Medicare payments that reduced headcounts at the three assisted-living facilities. Doug Sweeney, president of the nonprofit WGH Heritage in Fort Worth, said that Bank of Texas received the money at closing on the unrated bonds and forwarded it to mortgage lender Capmark Finance Inc., which is no longer in business.

“I brought this to everyone’s attention in March of ’09, and so far nothing’s been done,” Sweeney said.

The funds were forwarded from the Bank of Texas to the title company, but there wasn’t enough left over afterward to establish the reserve fund, according to a Feb. 14 e-mail that Miskiv received from Frederick Dorwart, general counsel for the Bank of Texas.

“The reserve funds may have funded the March 2009 payment on the Series B bonds … leaving only approximately $60,000 available for payment of the September 2009 interest payment,” Dorwart’s e-mail said. “To the extent that Bank of Texas is responsible for your failure to receive interest on your bonds Bank of Texas will honor that responsibility. It is not at all clear at this point of the extent of that responsibility, if any, but our investigation is continuing.”

In a reply to Dorwart, underwriter’s counsel Jorge Albala of Kutak Rock disputed that there were any instructions to forward money from the reserve fund to the lender.

“At the closing in August 2008, I was unaware of any such instruction and personally would have objected to funds designated for use as a reserve for the B bonds to have been transferred to the loan servicer,” Albala wrote.

In an Aug. 4 letter to Friar, attorney C. Harold Brown, who was issuer’s counsel at Brown Pruitt Peterson & Wambsganss PC, said: “We are aware of the controversy and are of the opinion that the issues need to be resolved by the trustee and the underwriter. Resolving those issues are not our responsibility.”

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