Williams v. Bank of The Ozarks as Trustee

          APPEAL FROM THE BENTON COUNTY CIRCUIT COURT [NO. 04CV-15-476] HONORABLE XOLLIE DUNCAN, JUDGE

          Reece Moore Pendergraft LLP, by: Timothy C. Hutchinson, for separate appellants Larry Williams and Gregory Peck.

          Keith, Miller, Butler, Schneider & Pawlik, PLLC, by: Mason L. Boling, for separate appellant Netzel Joint Trust.

          Millar Jiles, LLP, by: Mike Millar and Nikki L. Cox, for appellee.

          BART F. VIRDEN, JUDGE

         In December 2000, the Benton County Property Owners' Improvement District No. 7 (the "District") issued $4.4 million in special-assessment bonds to fund the construction of infrastructure improvements for the proposed Sugar Creek subdivision in Benton County. Appellants Larry Williams, Gregory Peck, and Pete Netzel, who were investors in the development company that made the improvements to the land, each executed guaranty agreements in which they guaranteed payment of the principal and interest due on the bonds at maturity.^[1] The bonds matured ten years later with an unpaid principal balance of $3.48 million. Special-assessment taxes, which the District pledged as security for repayment of the bonds, were also delinquent. Appellee Bank of the Ozarks (the "Bank"), as trustee for the bondholders, sued the appellants for breach of contract when they failed to pay the unpaid balance according to the terms of their guaranty agreements. The circuit court granted summary judgment in favor of the Bank. The appellants now appeal the circuit court's order. We affirm.

         I. Factual Background

         In 2000, several property owners in Benton County petitioned the county court to form an improvement district for the purpose of creating a residential subdivision. The court granted the petition and formed the District for the purpose of making the infrastructure improvements typical of a subdivision, including the construction of waterworks and the paving of streets and sidewalks. The court also appointed three persons named in the petition to the District's board of commissioners.

         Shortly thereafter, the District hired an engineer to prepare plans for the subdivision, including the specifications for the infrastructure and improvements. The District also hired an assessor to calculate the "assessed benefit," or the difference between the current value of the property and its increased value with the proposed improvements, for each parcel in the district.

         The District used the assessed benefit to calculate a special tax, which constituted a lien on the property and was due annually to the county tax collector. The District issued an order on November 3, 2000, that levied the tax, and on December 1, 2000, it entered into a pledge-and-mortgage agreement in favor of the Bank.

         The pledge and mortgage provided, in pertinent part, that the maturity date of the bonds was December 1, 2010, and the District pledged the proceeds of the special tax to the Bank "for the purpose of securing the payment of the [b]onds and the interest thereon as they severally mature[.]" The pledge and mortgage further provided that the special tax "shall be levied and collected annually until the principal of and interest on all outstanding [b]onds are paid in full[, ]" and it defined the term "bonds outstanding" as "[b]onds of the District which have not matured." It declared, moreover, that a default occurred when, inter alia, there was a "default in the payment of the principal of or interest on any [b]ond when due[.]"

         The pledge and mortgage also addressed how the Bank was to apply the tax proceeds once it received them from the District. First, the Bank was required to deposit money into a "Bond Fund" to "pay all principal of, interest on, and [t]rustee's fees in connection with the [b]onds which will mature or become due" in the following year. Second, the Bank was to make deposits into a "Debt Service Reserve Fund" whose assets "shall be applied to pay [t]rustee's fees, interest on the [b]onds, and principal of the [b]onds to the extent moneys in Bond Fund are insufficient for that purpose."

         The appellants, who were investors in Sugar Creek, LLC, the developer and principal owner of the property in the proposed subdivision, thereafter executed identical guaranty agreements "as [an] inducement to the purchase of the bonds." The agreements provided that in the event of a default, each appellant agreed "to pay the principal and accumulated interest on the [b]onds at maturity or earlier redemption," and the appellants' obligations as guarantors arose "absolutely and unconditionally when the [b]onds [were] issued, sold, and delivered by the District." (Emphasis added.)

         The appellants apparently expected that the bonds would be redeemed well before the maturity date, as each lot sold to buyers who could pre-pay the special tax associated with each lot at the time of purchase. Sales apparently did not go as expected, however, and according to the appellants, "in 2010, there was a realization that the bonds would not be paid off when [they] matured on December 1, 2010." As a result, the appellants-who had been paying the special taxes on the unsold lots-did not pay the 2010 special-assessment tax when it became due on October 10, 2010, because, as the appellants admitted below, "default on the bonds was imminent."

         Indeed, the bonds matured on December 1, 2010, with an outstanding balance of $3.48 million. On January 4, 2011, the Bank brought an action to foreclose on the pledge and mortgage securing the bonds.^[2] The appellants and other guarantors were originally named as defendants to the lawsuit, but they were later dismissed without prejudice. On February 7, May 2, and July 14, 2012, the Bank was awarded partial judgments granting foreclosure on the real property in the subdivision. The property was later sold to the Bank for credit bids totaling $1, 492, 000, leaving an outstanding principal balance of $1, 988, 000 due on the bonds.

         On February 29, 2012, shortly before the first foreclosure sale, James McCord, the attorney for the District, wrote a letter to the Benton County Collector that the appellants would later assert was evidence of a coordinated effort-with the Bank-to have the special tax removed before the Bank purchased the property in foreclosure (whereupon, the appellants say, the Bank would have been liable to pay the special tax). In the letter, Mr. McCord erroneously told the collector that "the [b]onds sold by the District matured on February 1, 2010," and he requested that she "have the records in the Benton County Collector's Office reflect that the tax levied by the District is not delinquent on any lot or parcel in the District for years 2010 or 2011." Mr. McCord also told the collector that "[n]o taxes are due the District for 2012 or ...