WASHINGTON – Bank of Oklahoma Financial is disputing bondholders’ claims in a class action that it was subject to certain duties outside its trust indentures while serving as trustee for transactions financing senior housing projects in which proceeds were allegedly illegally commingled and used.
BOKF’s filing is the latest in a class action pending before Judge John Dowdell of the U.S. Court for the Northern District of Oklahoma in Tulsa. The 10 named class action participants are seeking more than $5 million in compensatory damages after they said BOKF kept material facts from investors, such as draws on debt service reserve funds, failures to replenish those funds, and the commingling of bond revenues pledged to specific facilities.
BOKF first defended itself in a motion to dismiss the charges in April, saying the complaint ignored the fact that the bank was only bound by its trust indentures for the six muni bond issues in question. The bank also maintained that it sent notices to bondholders and took actions in a timely way to protect the bondholders’ interests.
The class members then responded that their complaint is based on the “extra-contractual duties” that the law imposed on BOKF as indenture trustee, including the duty to avoid conflicts of interest and the duty to perform basic non-discretionary, ministerial tasks with due care like: obtaining and reviewing the borrowers’ financial information; ensuring compliance with the terms of the documents; and notifying investors of any noncompliance.
BOKF, in its most recent response in June, said that “while the alchemy by which [the] plaintiffs attempt to transmute its six tort claims into two alleged ‘implied extra-contractual’ duties … is admirable, the conversion fails.” The class members’ argument is “a confused mass of case law,” BOKF added.
The senior housing projects underlying the plaintiffs’ claims are tied to Christopher Brogdon, an Atlanta-based businessman the Securities and Exchange Commission charged with committing fraud in financings for at least 43 nursing homes and other entities he owned or controlled. The projects also are tied to Dwayne Edwards, who the SEC found purchased a number of Brogdon’s facilities and continued Brogdon’s financial conduct. The SEC found that Brogdon commingled investor funds that were supposed to be used for the projects and used the money for personal expenses and business ventures.
BOKF settled with the SEC in September 2016 for $1.6 million without admitting or denying the SEC’s findings that it helped to conceal numerous problems and red flags from the holders of the various conduit bonds linked to Brogdon while it was acting as trustee.
The bondholders in the class action argue that BOKF’s conflict of interest is tied to the bank agreeing to be indenture trustee for the Edwards offerings to protect the fraudulent scheme and ensure it would receive future trusteeships. They also allege that BOKF aided Brogdon’s and Edwards’ fraudulent conduct “in hopes that the proceeds from the Edwards offerings would pay off Brogdon’s outstanding bonds and conceal the past misdeeds.
BOKF is arguing that the class action participants are unable to claim a breach of a conflict of interest or failure to perform a ministerial duty under the law because the case law says the duty to avoid conflicts of interest and the duty to perform ministerial functions “can only be pleaded in the complaint as negligence claims.” That presents a problem for the plaintiffs, according to BOKF, because BOKF’s trust indentures explicitly freed BOKF from any negligence liability other than gross negligence.
BOKF lays out several legal reasons why gross negligence is not warranted for the conflicts of interest allegation including that: allegations of personal benefit that are unproven and only conclusory don’t support a cause of action; there isn’t proof that the bank benefitted from the alleged conduct; and the prospect of future business not creating a conflict on its own.
The arguments about ministerial tasks also fail, BOKF said, because the tasks alleged must be non-discretionary but some of the tasks the plaintiffs point to, like ensuring compliance with documents, were explicitly exempted from the trust indenture meaning BOKF did not have to do them.
“If BOKF does not have a duty to take the implied action, that action would be, by definition, discretionary and thus non-ministerial,” BOKF said in its response.
The bank additionally said that duties to monitor the borrower of the bonds or otherwise protect the trust assets are complicated and could not be classified as basic non-discretionary ministerial duties as the plaintiffs do in their argument.