Dee Wisor
Attorney, Butler Snow LLP, Denver
A recent decision of the Colorado Court of Appeals concerning the Marin Metropolitan District formed in connection with the Landmark development in Greenwood Village has sent tremors through the real estate, financial and legal communities. It has resulted in legislation being introduced in the waning days of the General Assembly to address some aspects of the decision and may result in changes in the ways developers form districts for new developments or redevelopment of existing properties.
A real estate developer caused the district to be formed to finance infrastructure for a new a development called European Village. To make the numbers work, the developer included in the district the Landmark Towers condo project, which an entity controlled by the developer was developing adjacent to European Village. In order to qualify electors for the district organizational election, the developer entered into option contracts with six individuals. The contracts were for the purchase of an undivided one-twenteith interest in a 10-by-10-foot parcel. The contracts obligated the organizers to pay taxes on the parcel. While the condos were being developed, the developer entered into purchase and sale contracts (which did not obligate the buyers to pay taxes until closing) with about 130 buyers. On Nov. 6, 2007, the election was held. The six voters approved the organization of the district, the initial board of directors and the issuance of debt and the levy of taxes. No notice of the district or the election was provided to the contract purchasers of the condos. The closings of the sale of the condos occurred after the election. In 2008, the district issued $30.49 million of bonds. About $8 million was initially released for use by the district but a portion of the proceeds was misused by the developer. The Towers received no benefit from the bond issue. The condo owners association brought an action to recover taxes paid during the last four years and to enjoin the levy of future taxes. The court ruled in favor of the owners.
There are two principal holdings in the decision. First, the contracts which the developer entered into with the six individuals to qualify them to vote at the election were sham contracts and thus insufficient to qualify them to vote. The court held the contracts were a sham for the following reasons: The parcel size was so small as to not have any beneficial use; the obligation to pay taxes was illusory since the contracts waived any right to seek specific performance or to seek damages; there was testimony that the organizers agreed that no one would have to pay taxes; none of the organizers paid the down payment; none of the organizers paid property taxes; and none of the contracts were recorded. The second principal holding was that the contracts with the 130 condo purchasers were sufficient to qualify them to vote even though the contracts did not obligate the purchasers to pay property taxes until the closings on the condos, at which time the property taxes for the year were pro rata. As a result, the court held that the election was not validly held because ineligible voters participated and the constitutionally required notice of the election was not given to the condo purchasers.
The court’s decision is not limited to the unique and bad facts of the Landmark case. The concern that many in the real estate, financial and legal communities have with the decision is that many districts have been formed over the years by a developer or property owner qualifying electors through the use of purchase and sale contracts which have some of the characteristics to the contracts used in the Landmark case. As a result, there has been concern that the elections held in many districts could be invalid as well.”
The court’s decision is not limited to the unique and bad facts of the Landmark case. The concern that many in the real estate, financial and legal communities have with the decision is that many districts have been formed over the years by a developer or property owner qualifying electors through the use of purchase and sale contracts which have some of the characteristics to the contracts used in the Landmark case. As a result, there has been concern that the elections held in many districts could be invalid as well.
Immediately after the court’s decision was published April 21, the market for metropolitan district bonds essentially shut down. There were at least six transactions scheduled to close in the days following April 21 that did not close. There were also many transactions being readied to come to market, which were put on hold.
In response to the decision, a group of concerned professionals in the legal, real estate and financial sectors began work on a legislative solution to at least part of the concerns with the breadth of the court’s decision. This resulted in the introduction in the General Assembly of Senate Bill 211. The bill validates the qualifications of all persons who have voted at previous district elections (except where such qualifications are currently the subject of litigation) and it validates the qualifications of persons who have previously been appointed to or elected to serve on a district board (except where such qualifications are currently the subject of litigation). This bill has been approved by the General Assembly and is awaiting the governor’s signature. Once the bill becomes law, the market for special district bonds will again begin to function. Lawyers involved in such transactions will, however, perform extra diligence to determine that at the time of the relevant election there was no one like the Landmark 130 condo contract purchasers who could assert that they were denied the right to vote at the election.
For elections conducted in the future, lawyers will likely find ways to qualify electors that differ from the contracts used in the Landmark case. It is also possible that there may be legislation in the next session of the General Assembly to make changes to laws on elector qualifications for district elections. And it is possible that the defendants in the Landmark case will appeal to the Supreme Court.
