WASHINGTON – Colorado lawmakers have passed legislation designed to validate previous elections of special districts and protect them from legal challenges to their "qualified electors" who vote to create the districts and authorize issuances of tax-exempt bonds.

The legislation was unanimously passed by the House and Senate of the state General Assembly during the last two weeks. If signed by the governor as expected, it will clear the way for a total of about $500 million of new tax-exempt bonds to be issued over the next six months. The bond issuances were authorized by elections in special districts on or before May 3.

Bond lawyers have been reluctant to deliver clean opinions in bond issues that special districts and their elections were valid and enforceable because of uncertainty created by a state appeals court ruling on April 21.

The ruling stemmed from a case in which developer Zachary Davidson fraudulently created the Marin Metropolitan District to include unsuspecting nearby condominium owners, issued roughly $35 million of bonds, and then taxed the condo owners to pay off bonds without their knowledge. Davidson stole some of the bond proceeds for his personal use.

Davidson and five associates became "qualified electors" of the district who vote to create it authorize the issuance of future bonds by entering into option contracts for the purchase of an undivided 1/20th interest in a 10 foot by 10 foot parcel. They were the only individuals who received notices of elections and the only ones who voted on anything, including the bond issuance.

It has been fairly common in Colorado for roughly 40 years for individuals to use option contracts to become qualified electors of special or metropolitan districts. They buy an option to purchase a certain amount of property at a certain price and agree to pay property taxes on it for as long as they hold the option contract. The process allows the electors to authorize the issuance of bonds which will be used to finance infrastructure so that homeowners or businesses can later move in and become electors.

But Davidson and his associates never made any down payments or paid any taxes on the property they optioned to buy.

Davidson was eventually indicted by an Arapahoe County, Colo., grand jury, eluded law enforcement for months, and ultimately committed suicide by hanging himself from a tree in a state forest in Florida at age 46.

The Landmark Towers Association of condo owners sued the metropolitan district and other parties connected to the scheme, including Colorado Bondshares, a tax-exempt mutual fund that bought the bonds. A district court judge ruled in favor of Landmark and all most all of its claims. But he ruled the challenge to the election and qualified electors of the district were time-barred or filed too late. Under state laws such challenges must be brought within a certain number of days of the creation of the district.

Colorado Bondshares and other defendants appealed that ruling to the Colorado Court of Appeals.

The appeals court judges also agreed with most of Landmark's claims. But they ruled that the challenges to the election and electors of the district were not time-barred. The judges said the option contracts that Davidson his affiliates used to become qualified "electors" of the special district were sham agreements based on seven factors, including that none of the six made down payments or paid taxes, and that the parcel of land was too small to have any beneficial use.

The ruling made bond lawyers in the state reluctant to give clean opinions when bonds were issued that the special district elections and electors were valid. Some feared that other lawyers in the state would go out and recruit taxpayers in special districts to invalidate elections that had already happened, perhaps even years ago, to avoid paying taxes.

"It was bringing into question prior elections for the way the metropolitan districts were formed in certain circumstances when there were option contracts," said May Kay Hogan, director of government affairs for R&R Partners.

The bond lawyers banded together to get state legislators to adopt the legislation to apply to special districts created on or before May 3, taking into account electors that were qualified before the April 21 ruling but not put on local ballots until May 3. Under the Taxpayer Bill of Rights, special district elections occur every November and also in May of every even year such as 2016.

"When the governor signs this, the market will open" and there will be a significant number of bond issues for special districts, said Sam Sharp, managing director of D.A. Davidson & Co. in Denver.

Meanwhile both Hogan and Sharp said there will probably be an effort next year to work on legislation to protect special district elections and electors in the future.

"There is some appetite for looking at how we treat these elections going forward," said Hogan.

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