A Florida district’s short-lived bankruptcy case comes to an end
A Florida community development district’s Chapter 9 promised to be a test case for seeking protection from creditors without getting the governor’s consent first.
That test won’t come to fruition.
The Clearwater Cay CDD dismissed its bankruptcy case before a federal judge could rule on its eligibility during a hearing that had been scheduled for Dec. 13.
U.S. Bankruptcy Judge Catherine Peek McEwen agreed with the CDD and dismissed the case on Nov. 21. It had been filed June 4 in Tampa.
Had the hearing been held, McEwen would have heard arguments on objections to the CDD’s eligibility to file for bankruptcy by the district’s bond trustee, U.S. Bank NA, and two municipal investment funds owned by Invesco Oppenheimer Rochester. They sought to dismiss the case because the CDD had not obtained Gov. Ron DeSantis’ permission to file for bankruptcy.
State records obtained by The Bond Buyer also show that CDD officials hadn’t contacted the governor. Florida is among a dozen states that requires the governor’s endorsement to file for Chapter 9.
Tampa attorney Robert Soriano, who represented the Clearwater Cay CDD in bankruptcy court, said he was prepared to argue that the governor’s permission wasn’t necessary because his client’s case didn’t deal with a financial emergency as defined by Florida’s statutes.
“We were going to try the issue of eligibility,” Soriano told The Bond Buyer in an interview Monday. “I was comfortable with it.
“In our case, we argued that this is not per say an issue of finances, it is the legality of the assessments,” he said, referring to charges homeowners pay that secure a CDD’s bond debt.
Soriano said that during an October hearing, McEwen had signaled that she believed some issues emerging in the bankruptcy case should be decided in an ongoing lawsuit in the Florida’s sixth judicial circuit in Pinellas County, where the CDD is located. That led the CDD to file a motion to dismiss the Chapter 9 case on Nov. 15.
The dispute over assessments has raged since 2016 when the Grand Venezia Condominium Owners’ Association within the CDD filed a lawsuit in state court alleging that the district charged more in assessments than the condo receives in benefits. The district is about 23 miles west of Tampa.
Soriano said there were some mechanisms in the bankruptcy code he thought might help move the dispute over assessments and bond payments forward, including mediation that McEwen ordered in July to be held between the debtor, the bond trustee, the bondholders and the Grand Venezia COA.
The mediator filed a report with the federal court Nov. 19 saying that all parties met, “no agreement was reached and an impasse was declared.” Soriano said details about the mediation are confidential, but that offers to settle the case were made and rejected.
When Clearwater Cay filed for bankruptcy, the district said it was insolvent and that it had about $13.9 million of Series 2006A bonds outstanding. The bonds have been in default since 2009.
“We can’t pay the bonds because the assessments were declared arbitrary and capricious,” said Soriano, referring to a ruling in Grand Venezia lawsuit.
In a CDD, special non ad valorem assessments are placed on the property tax bills of homeowner’s and landowners to pay for debt service, operations and maintenance. A tax bill that includes CDD assessments must be paid in full, or a lien will be placed on the property.
The Clearwater Cay CDD bankruptcy generated interest from various corners, in part because of the dispute between the district and bondholders over assessments and because of the salacious nature of the district’s origins.
Clearwater Cay was the first CDD in Florida to file for reorganization under Chapter 9, according to James Spiotto, a municipal restructuring expert and managing director at Chapman Strategic Advisors.
“In order to file for a Chapter 9 in Florida the municipality must be authorized by the governor and so far there has been no authorization by the governor of Florida for a CDD to file Chapter 9, including Clearwater,” Spiotto said.
While other CDDs have filed for reorganization, those cases were filed by CDD developers under Chapter 11 for corporations.
Before Clearwater Cay, Spiotto said there have been four Chapter 9 cases in Florida since 1980, the year the law creating community development districts was passed by the Legislature.
Ben Watkins, director of the Florida Division of Bond Finance, said the state offers distressed municipalities and districts the opportunity to apply for assistance from the state through the financial emergency assistance program. It provides expert financial oversight, but not funding.
“It’s been the long-standing policy not to grant permission for local governments to file for bankruptcy. I do not anticipate that will change,” said Watkins. “It has been policy since I have been here and that goes way back to 1995.”
Watkins said he didn’t know how many entities may have requested permission to file Chapter 9 cases during his tenure, which has encompassed six gubernatorial administrations of both parties, because those requests go to the governor’s office. He also said the policy of denying such requests is unwritten and that he hasn’t discussed it with DeSantis.
“There’s a whole statutory scheme dealing with local governments that are in financial distress that provides for a remediation [as opposed to] the nuclear solution, which is bankruptcy,” he said. “The real policy reason behind it is everyone, all local governments in Florida, would end up paying the price because of the uncertainty caused by the bankruptcy risk.”
If the governor asked for his recommendation about a bankruptcy filing, Watkins said he would advise against approving it because of his "instinct and understanding of how investors think, which is if there’s uncertainty there’s a price.”
Florida’s position makes sense, Spiotto said, and its one reason the state has “real credibility” in the bond market because of its “perceived” bankruptcy policy. He also said bond investors study states to determine which ones have a significant number of Chapter 9 filings and which ones don’t.
There’s an increase in market risk if municipalities can file for bankruptcy without some state oversight, he said, adding, “Anything states do to require approval significantly reduces the risk.”
According to court filings, the Clearwater Cay CDD has failed to make debt service payments since November 2009, except for a payment in 2013 for about $1.5 million toward previously unpaid debt service interest payments.
Donald Dwyer, the assistant secretary for the Clearwater Cay CDD who owns a unit at the Grand Venezia, said multiple problems have prevented the district from paying its bond debt over the years.
Those problems include the fact that the former landowners, David W. Schwarz and Fred Davis Clark Jr., are serving 40-year federal prison sentences for bank and tax fraud, he said.
According to federal court records, Schwarz and Clark operated luxury resorts in the Florida Keys, Clearwater, Orlando, Las Vegas, and elsewhere.
In 2004, the men began their clubs with “fraudulent sales of Cay Clubs units to insiders, using money from Cay Clubs bank accounts to fund the cash to close for purchases, while obtaining mortgage financing from lending institutions,” according to Department of Justice press releases in 2016 and 2017.
“These fraudulent sales were used in marketing materials to falsely show demand for Cay Clubs units and to inflate prices, as Cay Clubs was in reality purchasing units from itself,” the DOJ said. “Proceeds of these sales were diverted to Schwarz and Clark.”
The Ponzi scheme, as some people have called it, led to their convictions by a federal jury in 2017.
Dwyer said the district defaulted on its bonds “because the crooks made off with some of the money and we don’t know how much.”
When the first payment default occurred in 2010, a material event notice posted on EMMA to bondholders said: “The trustee has been made aware that the district's failure to make such payment arises from landowners' failure to make payment on the special assessments.”
Since he became a member of the CDD board of supervisors in November 2018, Dwyer said the district has requested a detailed financial accounting of how the original bond proceeds, $34.8 million issued in 2006, were spent.
Dwyer also said the Grand Venezia COA sued the district in 2016 “to have the CDD dissolved or otherwise contracted such that the unit owners in the Grand Venezia are no longer burdened with special assessments levied by the CDD,” according to the third amended complaint in the litigation.
In the Grand Venezia case, Circuit Court Judge George Jirotka wouldn’t allow the district to be dissolved, but Dwyer said he ordered a new assessment methodology to be prepared. Since then, the district hired new financial experts who prepared a new assessment plan.
“We know we have to defend it in state court,” he said. “It pays what we believe we owe. It pays what we believe is payable and justifiable.”
Soriano, who is not participating in the Grand Venezia lawsuit, said parties in the state court case are preparing for a trial.