Bank OZK of Little Rock is involved in a court battle over a landfill purchase that has generated opposing circuit court rulings and raised questions about whether Arkansas taxpayers can be required to bail out holders of revenue bonds.
The case has resulted in the bank being held in contempt of court and an attorney for taxpayers being threatened with contempt charges.
The conflict goes back more than a decade, when the Ozark Mountain Solid Waste District defaulted on $12 million in bonds it used to buy a landfill in Baxter County in 2005.
Now lawyers face opposing orders from various circuit judges on what to do with $2.3 million collected from taxpayers in six north Arkansas counties, money originally earmarked to pay bondholders and repay the state for the cost of cleaning up the landfill.
Six circuit courts in north Arkansas have ruled that the money was collected illegally from taxpayers and should be returned to them. But a Pulaski County Circuit Court judge ruled that the money belongs to the bondholders.
“When you have inconsistent injunctions, you have a real problem,” said Joshua Silverstein, a professor at the Bowen School of Law at the University of Arkansas at Little Rock. “There’s nothing you can do but appeal and get the appellate court to figure out what the answer is.”
The attorney for the taxpayers, Matt Bishop of Fayetteville, told Arkansas Business he fears that if the ruling favoring the bondholders stands, then every Arkansas taxpayer will be on the hook to revenue bondholders if the property bought with bonds fails to pay off. General obligation bonds hold taxpayers accountable, but those bonds require voter approval in an election.
“The thing about revenue bonds is any governmental entity can issue them simply by a vote of the board of that entity,” Bishop said. “And so they should have more risk than say a school bond which we all vote on.”
He said tax money could end up paying for bonds that “a lot of little entities out there” initiated and that “no taxpayer ever voted on. I think that’s an unconstitutional position.” Bank OZK, through attorney Lance Miller of Wright Lindsey & Jennings of Little Rock, declined to comment.
At the heart of the dispute is the Nabors Landfill in Baxter County, which closed in 2012. The Arkansas Department of Environmental Quality sued the Ozark Mountain Solid Waste District in 2013 for violating environmental laws at the landfill. A year later, the district filed for bankruptcy protection, only to be refused because it didn’t qualify.
The ADEQ, which has since been renamed the Arkansas Department of Energy & Environment’s Division of Environmental Quality, said in 2020 that it would no longer seek the money for the cleanup.
But Bank OZK, trustee of the bondholders, has been pursuing the money for its clients. Last month, a Carroll County Circuit Court judge held Bank OZK in contempt for not returning the money to taxpayers.
The $2.3 million Bank OZK is holding accumulated when tax collectors in the six counties applied an $18 annual “service fee” per property owner for the 2017 and 2018 tax years.
On Sept. 1, Pulaski County Circuit Judge Tim Fox ordered Bishop, who was seeking refunds to the taxpayers, to stop trying to collect the money or face contempt charges or other sanctions. Bishop’s wife, Wendy Howerton, is also an attorney for the taxpayers.
Bank OZK and Bishop have appealed the orders against them to the Arkansas Court of Appeals to sort out the competing rulings.
But the receiver for the district said in court filings that the board was “statutorily authorized to levy a service fee.”
Source of the Dispute
The Northwest Arkansas Regional Solid Waste Management District decided to buy Nabors Landfill in 2005. The district, later named Ozark Mountain Solid Waste District, at the time comprised Baxter, Boone, Carroll, Marion, Newton and Searcy counties and was governed by a 14-member board made up of county judges and mayors. (Carroll County left the district in 2019.)
The district used bonds underwritten by Crews & Associates Inc. of Little Rock to pay for the landfill and waste-hauling equipment.
Bruce Maloch, a former state senator, recalls hearing a pitch for Farmers Bank & Trust of Magnolia to buy the bonds. Maloch is the bank’s vice chairman and general counsel.
“It was presented to me as a solid waste district where all of these counties had committed through interlocal agreements to use that landfill,” Maloch told Arkansas Business recently. “Everybody’s got to have a place to go with their solid waste. And if all of those counties were committed to that, then it appeared to be a reasonable investment,” he said, because the revenue from fees in all the counties would have covered the bond payments.
But it turned out that those “interlocal agreements weren’t as solid or enforceable as I had understood them to be,” Maloch said.
Soon counties that had been committed to using the landfill were taking their trash to other, cheaper landfills, cutting off those sources of revenue. The bank bought some bonds, but Maloch declined to say how much they were worth.
And that was just one of the district’s problems.
The landfill was “filled beyond capacity” when the bonds were issued, wrote the district’s bankruptcy attorney, Jill Jacoway of Fayetteville, in a 2014 bankruptcy filing.
The district also owed the ADEQ millions of dollars for cleaning up the landfill. The ADEQ and bondholders urged the district to levy service fees on residents, Jacoway wrote in her filing. But the district declined, saying that the fees could only apply if it provided waste-hauling services, which it didn’t offer.
The district was responsible for managing the repository landfill site, she said.
“Hence were Debtor to attempt to levy fees on individual residences in the manner the creditors urged, it was feared that the District would be subject to immediate suit for illegal exaction,” Jacoway wrote.
Jacoway also said that the district could have increased service rates, but mandatory rate hikes would have been “extremely unpopular politically.”
So the district defaulted on the bond payments in 2012, an indicator of the problems to come.
In January 2014, the district filed for Chapter 9 bankruptcy protection. At that time, the ADEQ was owed more than $8 million and Bank OZK, as trustee for the bondholders, was owed $12.3 million, according to the district’s filing.
But U.S. Bankruptcy Judge Ben Barry found that the district wasn’t the type of entity eligible for bankruptcy, and it should have charged the service fee to residences in an “attempt to resolve its financial straits prior to seeking chapter 9 protection,” he wrote.
“The service fee would have afforded the District an influx of revenue each month, but it opted not to exercise its statutory right to collect the fee — largely because the board members believed that imposing the service fee would be unpopular with the counties in the district and would result in the board members failing to be reelected to their respective county positions.”
Bank OZK Sues District
In December 2014, about four months after the case was dismissed from bankruptcy court, the trustee for the bondholders, Bank OZK, sued the district in Pulaski County Circuit Court, asking that a receiver be appointed.
The bank recommended Geoffrey Treece, an attorney at Quattlebaum Grooms & Tull of Little Rock. His job was to develop a reorganization plan for the district.
In 2016, Treece unveiled his plan in a filing to Judge Fox for the district to repay the bonds — without interest — and pay off the debt owed to the ADEQ related to cleaning up the landfill.
Treece said in his report that the district’s board “is statutorily authorized to levy a service fee on each residence or business for which the board makes solid waste collection or disposal services available.”
The plan called for placing an $18 annual charge, called a “service fee,” on about 72,000 homes and businesses in the district, a fee that was expected to last for more than 20 years.
The money generated from the fee would pay $11 million to Bank OZK for bondholders and more than $16 million to ADEQ for the estimated cost of the landfill cleanup.
Fox approved Treece’s plan, which had generated no objections, in 2017. The tax collectors in the district’s six counties added the $18 service fee to tax bills.
In 2018, residents in the six north Arkansas counties were surprised to see the $18 service fee when they received their property tax bills.
Some taxpayers contacted Bishop, who agreed to challenge the fees in six separate lawsuits in each of the north Arkansas counties.
The taxpayers wanted an order saying the fee was an illegal exaction and the money collected returned.
Bishop argued in his lawsuit that the district wasn’t providing any waste-hauling or disposal services.
“It is a fee solely designed to bail out the bondholders who chose to take the risk of investing, and to benefit ADEQ, which already has the funds it needs to service Nabors Landfill,” Bishop wrote.
In a March 2020 bench trial in Carroll County Circuit Court, Bishop criticized the receiver’s plan for the district to pay the bondholders with taxpayers’ money.
The solid waste bonds “are now the most profitable bonds in America, … better than Treasury bills,” he said.
Bishop also said that if the receiver won, investors couldn’t lose their principal amount.
“They’re saying the Arkansas Legislature has created, just for regional solid waste districts, a bond that is so good you can get 4.5% to 7% and never risk losing your principal ‘because we can always go get it from the taxpayers under the guise of a service fee,’” Bishop said at the trial.
“‘In fact, we can even get it from taxpayers who are not part of our district.’ That is a ridiculous interpretation of the law,” he said.
Attorney Mary-Tipton Thalheimer of Little Rock, representing the receiver for the district, argued that what the taxpayers wanted was in “direct conflict with Judge Fox’s order, which says the receiver shall cause the service fee to be assessed.”
She also said that one circuit court doesn’t have the authority to invalidate or disregard an order from another circuit judge.
“In other words, if the Court enters the order that the plaintiffs are asking, the receiver’s going to have to decide whether to be in contempt of your order or Judge Fox’s,” Thalheimer said.
Carroll County Circuit Judge Charles Scott Jackson said from the bench that the charge “is an improper tax and not a proper service fee.”
The circuit courts in the five other north Arkansas counties also ruled in the taxpayers’ favor and said the $18 fee was an illegal exaction and the money collected should be returned to the taxpayers.
The district received more good news in June 2020 when the Division of Environmental Quality told Judge Fox that it wasn’t going to make a claim on the $2.3 million generated from the proceeds of the $18 fee. And better news followed: The $18 fee wasn’t going to be collected anymore. The money collected in 2020 was returned to taxpayers.
Also in October, Treece, the receiver for the district, submitted his final report to Fox and was released from his duties.
Now the race was on by the taxpayers and the bondholders to get control of the $2.3 million.
Back in Pulaski County Circuit Court, Bishop asked that the $2.3 million in the court’s registry be transferred to the registries in the courts in north Arkansas.
Fox denied the request after holding a bench trial in May 2022.
“There was not any testimony or evidence presented that the assessment of the $18 fee would exceed the statutorily authorized amount necessary to retire the principal, interest, and related costs and expenses of the issued bonds,” Fox wrote in a June 9, 2022, order.
He also said that his court “now has, and has always had, jurisdiction” in the case and the orders from the other courts were void.
He said the taxpayers should have become a part of the case in Pulaski County. And the circuit courts in the other counties should have transferred the cases to his court.
Bishop wanted to appeal Fox’s decision, but he couldn’t because the order wasn’t yet an appealable order.
But in April, Bishop said he was checking on the court’s docket in Pulaski County and discovered that a check had been issued in March to Bank OZK for $2.3 million. Bishop then filed papers in the north Arkansas circuit court to get the bank’s money and return it to the taxpayers.
In June, Jackson, the Carroll County Circuit Court judge, ordered Bank OZK to deliver $434,000, the portion of the $18 fee that was collected from Carroll County taxpayers, to Bishop.
When it didn’t, Jackson, on Aug. 15, held the bank in contempt and said it would be fined $500 a day starting on Aug. 16 until the money was delivered. Bank OZK appealed the order. That appeal is pending.
Bishop was in the process of collecting the money from circuit courts when Judge Fox ordered him on Sept. 1 to stop collection efforts or he would be in contempt or face other sanctions.
Bishop has appealed that order.
Meanwhile, a representative for one bondholder isn’t holding his breath that he will get the money back. “We have totally charged those bonds off years ago,” said Maloch, of Farmers Bank & Trust. “And they’re not on our books anymore.”