Why Florida’s first Chapter 9 filing by a CDD may be dismissed
The first Chapter 9 case filed by a Florida community development district may soon be dismissed.
U.S. Bankruptcy Judge Catherine Peek McEwen will hold a hearing Friday to hear arguments on a motion to terminate the Clearwater Cay CDD’s bankruptcy case, which was filed in Tampa on June 4. The district said it is insolvent and that it has about $13.9 million of Series 2006A bonds outstanding.
The bondholders, Invesco Oppenheimer Rochester AMT-Free Municipal Fund and Oppenheimer and Rochester High Yield Municipal Fund, along with the trustee U.S. Bank NA, contend that Clearwater Cay failed to cite in its petition a crucial portion of Florida law and the case must be dismissed.
While Clearwater Cay cited the portion of Florida’s law that authorizes a governmental debtor to seek reorganization, Oppenheimer and U.S. Bank argue the district failed to include another portion of the law requiring Chapter 9 filings to first be approved by the governor.
According to court filings, the district 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.
Clearwater Cay is the first CDD in the state 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.
Gov. Ron DeSantis’ office received a public record request from The Bond Buyer on July 11 seeking copies of letters or other communications from the Clearwater Cay CDD asking for approval to file for Chapter 9, and the governor’s response.
Since then DeSantis’ office has acknowledged twice that the public records request had been received — most recently on Sept. 4 — and that the office is “working diligently to process all public records requests and respond within a reasonable time frame.”
On Friday, Judge McEwen will also hear arguments from Oppenheimer and U.S. Bank, which filed an emergency motion for relief from the automatic stay saying that they want to take legal action against Clearwater Cay for breach of contract.
The bondholder and trustee said Sept. 5 that they want to protect their interests in the special assessments pledged as security for the 2006A bonds “against the debtor’s unilateral, arbitrary and unlawful efforts to reduce such assessments below the principal amount presently outstanding.”
Clearwater Cay hasn’t filed a response to the bondholders’ allegation that the district intends to levy new special assessments in an amount substantially less than what would support the outstanding bonds, to $4.84 million from $6.72 million.
CDD assessments are placed on residents’ tax bills to pay debt service as well as maintenance and operational costs of the district.
Clearwater Cay is about 23 miles west of Tampa. The CDD includes the Grand Venezia and its condominium owner’s association, which has been waging a legal battle for years alleging that the district is charging more in assessments than the condo receives in benefits.
According to published reports, Grand Venezia homeowners say the bonds and the assessments levied to repay them are the result of a Ponzi scheme that put the developer in federal prison for fraud.
Before Clearwater Cay’s bankruptcy filing, 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.
Water & Sewer District A in Pasco County filed in 1987; Lake Grady Road and Bridge District in Hillsborough County filed in 1987 while the Lake Grady Road and Bridge District, Extension No. 1 filed in 1989; and the Lake Apopka Natural Gas District filed for bankruptcy in 1995 but the case was ultimately dismissed.