Colo. Court Case Puts Spotlight on Special Districts That Issue Munis | The Bond Buyer
"A broad ruling by the Colorado Court of Appeals in a case of a developer's egregious fraud has sent lawyers to the state's General Assembly for legislation to protect existing special districts that issue tax-exempt bonds...The case involves a high-profile developer, Zachary Davidson, who used sham contracts to make him and five associates organizers or "eligible electors" who formed a special metropolitan district in Greenwood Village, Colo. that issued almost $35 million of bonds now in default. Davidson included nearby condominium purchasers in the district and obligated them to pay taxes to help pay off the bonds, even though the condo owners were unaware they were in the district or that bonds had been issued. Davidson stole millions of dollars of bond proceeds for his personal use and was eventually indicted on 20 felony counts by an Arapahoe County, Colo. grand jury. He eluded law enforcement for months and ultimately committed suicide by hanging himself from a tree in Withlacoochee State Forest in Florida at age 46. After several years of litigation, the Colorado Court of Appeals issued a ruling on April 21 favoring the condo owners' Landmark Towers Association, Inc., ruling in part that Davidson used sham contracts to give him and his associates control of the special district and the bond issue."
Here is a link to the opinion. The court ruled, "In sum, because the TABOR election was conducted illegally —with the participation of ineligible voters and without constitutionally required notice to eligible voters — the District’s taxes to pay the bonds were levied illegally. Pursuant to TABOR’s refund provision, the District must refund all illegal taxes paid with ten percent annual simple interest. Id. at § 20(1). The Landmark buyers are also entitled to an order enjoining the District from levying any further taxes without proper voter approval."
So now the lawyers and people buying these special district muni bonds are afraid that other people will head for court to unwind the tax obligations imposed on them by these special districts. They want the Colorado state legislature to save them from more litigation. As I have written before in connection with Florida's special districts, some of these arrangements are so undemocratic and autocratic that they make HOAs look like the Golden Age of Pericles.
And the Colorado special district debacle has the potential to shift the national picture on these "dirt bond" districts: "The Treasury and IRS are now proposing rules to expand that test to add two new requirements. Under rules they proposed February, a political subdivision that can issue tax-exempt bonds, would also have to serve a governmental purpose and be governmentally controlled "with no more than an incidental private benefit. The proposed rules have met with a firestorm of criticism from muni lawyers who have warned they would threaten existing special districts and potentially millions of dollars of bonds."
Stay tuned--this sort of thing flies under the public's radar, so you never know what a state legislature will do with it.