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U.S. Bank Sued By Florida CDD

BRADENTON, Fla. — U.S. Bank NA on Friday notified the market that it was sued by Fiddler’s Creek Community Development District 2 in South Florida.

The suit alleges that the bank is in breach of its contract for removing $765,000 from bond-funded construction accounts and improperly spending the funds for legal fees and expenses.

U.S. Bank is trustee for $101.25 million of unrated and uninsured tax-exempt, land-secured bonds issued in 2003, 2004 and 2005 to finance infrastructure improvements for a 4,000-acre master-planned community near Naples and Marco Island.

The developer emerged from Chapter 11 bankruptcy in late August.

The bonds were sold by Fiddler’s Creek Community Development Districts 1 and 2, which are run by separate boards.

CDD 2, which encompasses about 1,000 acres and issued $83.15 million of the original bonds, filed a three-count lawsuit in Collier County Circuit Court on Nov. 30.

“The trustee’s removal and use of money from the construction accounts to pay its legal fees and expenses is a material breach of the provisions of the master indenture and supplemental indentures,” said a portion of the suit filed on behalf of CDD 2 by attorney Robert DeMarco with Treiser Collins PL.

The suit also claims that the trustee has “complete control” of the construction funds and that various projects to be financed with bond proceeds have not been completed.

DeMarco also said that the trustee refused to provide an accounting of how funds have been used.

On Dec. 8, DeMarco filed a motion for preliminary injunction asking that U.S. Bank be enjoined from using any more funds from the construction accounts.

The court has not ruled in the case.

U.S. Bank could not be reached for comment by press time and had not filed a response to the lawsuit or the request for a preliminary injunction.

However, recent minutes of CDD 2 meetings indicate that the trustee’s attorneys denied any misuse of bond proceeds on several occasions.

Fiddler’s was planned for 6,000 residences, though fewer than 2,000 homes are built or are under construction.

Work started on the development in 2002 but was severely hindered in the recession.

The bonds, secured by assessments on the land, are in default.

The developer, Fiddler’s Creek LLC  — whose president is Aubrey J. Ferrao — filed for Chapter 11 bankruptcy in 2010.

Judge K. Rodney May confirmed the reorganization plan in late August, and accepted the developer’s argument that CDD bondholders should not be considered creditors and had no legal standing in the case.

That ruling enabled the developer to propose a reorganization plan that restructured the municipal debt and pushed back payments.

Market participants said the case could set a precedent for other developers that used so-called dirt bonds to finance infrastructure, to the detriment of investors in Florida community development districts.

Billions of dollars of the bonds are in default across the state.

Fiddler’s is the first known bankruptcy case in Florida in which bondholders were not considered creditors, though the security for the bonds sold to finance infrastructure is tied to assessments on the land.

The bonds technically were issued by the districts and their boards, which ultimately supported the developers’ reorganization plan to change methods on which land assessments are used to repay the debt and delay payments.

The bankruptcy judge allowed U.S. Bank to actively participate in the developer’s case, which spanned nearly two years.

However, May would not allow the trustee to have a say in the developer’s reorganization plan.

In September, U.S. bank appealed certain portions of the final bankruptcy ruling.

In a court filing last week, the bank said that it “does not seek to unwind the [developer’s] reorganization plans or overturn the confirmation order in its entirety.”

The bank said its appeal centers on “errors” in the plan resulting from “the incorrect implementation of the assessment methodologies applicable to the bonds.”

The developer has filed a motion that seeks to dismiss the appeal, which is pending.

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