Former Bondholder Says Stuttgart Bank Scuttled Bonds

by Mark Friedman  on Monday, Apr. 23, 2001 12:00 am  

A California man who invested in Maumelle improvement district bonds claims in a lawsuit that First United Bank at Stuttgart deliberately caused the bond price to tumble.

F.K. "Bill" Mittry of Solvang, Calif., is seeking class-action status for the lawsuit he filed April 5 against BankcorpSouth Inc. of Tupelo, Miss. Last fall BankcorpSouth acquired First United Bancshares Inc. of El Dorado, which was the holding company of First United Bank at Stuttgart.

Mittry sold his bonds after a lawsuit First United filed against the four improvement districts and developers DeHaven Todd & Co. convinced him that the bonds were in danger of default. A Pulaski County Chancery Court judge eventually ruled in favor of the districts and DeHaven Todd & Co., but not before Mittry lost nearly $60,000 by selling his bonds for 67-68 cents on the dollar.

Mittry said in his lawsuit that First United breached its contract and fiduciary duties, and the filing of the lawsuit constituted gross negligence.

"First United intentionally pursued a course of conduct for the purpose of causing damage," he said in the lawsuit filed in Pulaski County Circuit Court.

Sam Perroni of Little Rock, who is representing Mittry, said he doesn't know how much bondholders lost.

"We had limited access to actual documentation concerning who the individual bondholders were," Perroni said.

Perroni claims that First United intended to damage John W. "Jay" DeHaven, a principal in DeHaven Todd & Co. Perroni represented DeHaven in a criminal trial in federal court in 1994, where he was acquitted of fraud.

Robert Koch, president, CEO and director of First United, referred all questions to the bank's attorney, Larry Burks of Friday Eldredge & Clark of Little Rock. Burks did not return calls.

Beginnings

About $16 million worth of bonds were issued in the late 1980s to build streets and supply utilities for the four districts, which represented about 500 acres in Maumelle.

In 1995, the property owners in two of the districts, Maumelle Heights and Edgewater II, refinanced the bonds with Citizens Bank & Trust at Carlisle. In 1996, bonds for the Waterside and West Point districts also were refinanced with Citizens Bank & Trust. The total amount outstanding on the bonds was $8.3 million at that time, DeHaven said.

In addition to receiving a lower interest rate on the bonds, lot owners got a new formula to pay off the amounts they owed, said Richard Lawrence, an attorney who represented the districts.

"Everything was fine. The revenue was flowing; the bonds were being retired way ahead of schedule," DeHaven said.

Then Citizens Bank & Trust, which was the trustee, was bought by First United Bank of Stuttgart.

"Within 30 days of that transaction, we immediately began to have problems with that trustee [First United Bank]," DeHaven said. "They hired the Friday law firm to review the bond issues."

The trustee and the districts jointly hired Gary Burris, a Little Rock certified public accountant, to determine the financial status of each of the four bond issues.

According to court documents, Burris' initial report on Oct. 17, 1997, estimated that the Maumelle Heights bonds would be fully paid in June 2003. But the Edgewater II, Waterside and West Pointe bonds were underfunded by $229,200, $598,427 and $200,532.

Because of the projections, the trustee threatened not to call bonds, which were subject to call on Oct. 31, 1997, unless the districts would indemnify the trustee, according to court documents.

When more information became available, Burris revised his projection and determined that all the bonds would retire, except Waterside, which would be underfunded in 2017.

And while the bank was receiving money from lot owners to pay off the liens, it was not releasing the lots.

"The title companies, which had been closing routinely, the way that it always had been done, realized they were not going to get these releases," DeHaven said. "They had already issued title policies, and people started to build homes."

On June 12, 1998, First United, fearing the bond issues would default, filed a lawsuit against the district, seeking instructions from the court on a repayment formula for the owners who wanted to pay off their share of the bond issue early. The bank wanted the district's formula voided and replaced by a formula First United developed, Lawrence said.

Two weeks later, the bank amended its complaint and also named DeHaven Todd & Co. and the law firms and underwriters who were involved in the bond issue as defendants.

The bank wanted an injunction preventing the district from levying taxes, and it alleged fraud, negligence, malpractice and violations of the Arkansas Securities Act.

At the time the trustee filed the lawsuit, none of the bond issues was in default, all the required interest and principal payments had been made as scheduled, and some bonds had been retired earlier than scheduled, Pulaski County Chancery Court Judge Robin Mays found.

"The trustee put out news releases and ... that got to the bondholders, driving the price of the bond down," DeHaven said.

Mittry received the information from the bank and sold his bonds.

The districts and DeHaven Todd & Co. responded by filing a counterclaim against the trustee, alleging breach of contract.

"[First United's] documents give them no authority other than to collect money and distribute money," DeHaven said.

After the trial on First United's issues, Mays ruled that the district's formula for paying off the bonds early was valid and ordered the trustee to release the lots.

"Although the projections indicated West Pointe and Waterside might be underfunded, the court determined that, since any defaults were not predicted until after 2010, the commissioners of those district had not had a reasonable opportunity to take appropriate actions," Mays said.

While the case was making its way through court, First United was draining the bond fund by using the money to pay its attorney.

On July 1, 1999, Mays ordered First United not to release any more money without a court order. That same day, the bank paid its attorney, Larry Burks, $187,083 and the districts' attorneys fees of $5,129, Mays said.

"The court believes the actions of the trustee are significant to address because they demonstrate the continued disregard by the trustee of its duties and responsibilities," Mays said in her ruling.

As a result of the attorney payments, the bond funds were transferred to the successor trustee with a zero balance, Mays said.

"Remarkably, one of the primary complaints of the trustee regarding the necessity to pursue this litigation was the underfunding of the Debt Service Reserve Funds," Mays said. "It placed the successor trustee in the same position about which it complained."

Counterclaim

In a trial held last April, Mays dismissed DeHaven's counterclaims, saying "there was no evidence that showed any breach of a contractual, much less a fiduciary, duty to the DeHaven Todd & Co. by the trustee and that there was no evidence presented to establish any damages sustained by the DeHaven Todd & Co. by any actions of the trustee," she said.

But Mays ruled that when First United refused to release the lots for which it had received money, it breached the contract with the districts by going ahead with the lawsuit based "upon erroneous and unreasonable projections," Mays said.

Mays also said that the bank's legal expenses were not reasonable. She awarded the districts $381,437 for the amount of money the bank had taken out of the debt service fund to pay attorney fees and awarded attorney's fees for litigation expenses after April 1, 1998.

The bank appealed the ruling, which is still pending.

First United resigned as trustee in 1999 and Community First Trust Co. in Hot Springs was appointed.

DeHaven said First United squandered the district's money almost to the point of bankruptcy.

"And those bonds are still trading at a substantial discount to par, because of this craziness," he said. "It's a tragedy that we had to take this kind of hit and suffer for two years ... What's the reason behind it? That's what we would like to know. None of it makes any sense, unless someone wanted to destroy those bond issues."

 

 

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