Prospect homeowners file response to Town and developer’s lawsuit

Claim “phantom directors” saddled homeowners with private debt

The Prospect Subdivision’s Financing District is pushing back against a lawsuit brought against them by the town of Mt. Crested Butte and the subdivision’s developer that seeks to stop a group of homeowners from raising property taxes and fees to pay for the District’s independent legal counsel. 

In his “answer and counterclaims” to the developer’s lawsuit, filed March 19, Prospect Financing District attorney James Bailey argues that the developer, which is essentially Crested Butte Mountain Resort, went about forming the districts all wrong. As a result, he says, the agreements between the districts and the town are null and void.
The town and the developer filed their lawsuit in February after the Financing District, led by a group of unhappy homeowners, levied a 3-mill tax to pay for legal counsel to help them establish some separation between the homeowners and the developer. The extra tax pushed the overall mill levy past a 50-mill limit set in a consolidated service agreement signed between the town and the developer more than 20 years ago.
Also in the service agreement, the developer established two districts, consistent with what new developments were doing at the time in other towns across the state. A Control District was charged with managing the subdivision’s affairs and a Finance District was created to finance those affairs. Both were the developer’s creation, necessary for getting the development off the ground.
The trouble the Financing District is having with the developer’s lawsuit lay in their belief that Prospect’s governance is built on shaky legal ground.
In the counterclaims, Bailey calls into question the legitimacy of the Control District, which is governed by the developer’s employees. Bailey claims that in addition to being a legal extension of the developer, the Control District, which technically resides on a parcel of land less than an acre in size, without infrastructure or services, cannot be a district at all.
According to the counterclaims, the Control District, known as Reserve No. 1, “doesn’t meet the statutory definition of a metropolitan district,” because of its size and lack of infrastructure or essential services. As a result, Bailey says Reserve No. 1 cannot be considered a Control District for the Financing District, which is where all of Prospect’s residents live.
And because the Control District’s board of directors is occupied by the developer’s employees, Bailey calls into question the validity of the board that went about developing infrastructure inside the subdivision and amassing debt in the process.
Some of that debt, Bailey says, was passed onto homeowners who had signed purchase contracts that “committed the developer entities to construct infrastructure at their own cost and expense.”
But the cost was ultimately borne by the entire Financing District, which issued $18.4 million in bonds in 2008 to pay off $10.4 million that remained of a 2005 bond issue and continue development of the Prospect Subdivision.
Bailey also claims that $6.1 million in proceeds from the 2008 bond went to pay a promissory note to Prospect and “reimburse infrastructure costs in Reserve No. 2 … including infrastructure costs in the Wildhorse Subdivision,” which is separate from Prospect.
Early in his characterization of the situation, Bailey starts referring to the “phantom board” that made the decisions and entered into agreements that the current Financing District is living with, including what remains of the bond issue.
“Reserve No. 1’s phantom board of directors consisted of the same Prospect Directors [for Reserve No. 2] who lacked statutory qualifications to sit on Reserve No. 1’s board of directors,” he says.
The actual counterclaims filed by Bailey and the Financing District go through the General Allegations in the developer’s lawsuit paragraph by paragraph and address each one, shedding some light on where the two sides are in conflict.
In the counterclaims, the Financing District “denies that the proponents of the development sought to create public infrastructure.” More than once, they ask the court to dismiss the developer’s characterization of the Service Plan, saying it “speaks for itself.”
And while the developer’s suit charges the Financing District with ignoring the Consolidated Service Agreement by going ahead with the 3 mill levy without authorization from the town, the counterclaim states that the consolidated service agreement “cannot validly limit the core legislative functions of Reserve No. 2’s board of directors.” Bailey says those functions include “management, control, and supervision of all the business and affairs of Reserve No. 2.”
In its claim for relief, Bailey and the Financing District ask the court to rule on the validity of the service agreement and then, if the agreement is deemed valid, specify the limits of the Control District’s authority.
Second, the Financing District is hoping the court will agree that the arrangements entered into by the Control District board of directors on behalf of the Financing District was a breach of “fiduciary duty” that “harmed and continues to harm Reserve No. 2.”
Related to the 2005 bond issue, Bailey wants the court to acknowledge that the Financing District attorneys “breached their duty of care” when they advised the Financing District board of directors to take on the debt. According to the counterclaim, the attorneys from White, Bear & Ankele “failed to alert Reserve No. 2, as reasonably careful attorneys would do, that as a result of the 2005 Bonds, public money was used to pay for private obligations, the infrastructure costs that Prospect and its predecessor had agreed by contract to pay at their own cost and expense.”
Bailey also wants to see the court acknowledge the same “negligence regarding the payment of private obligations through the 2008 note,” and see the Financing District’s previous legal counsel reprimanded for what Bailey sees as giving their clients bad advice.
In all there are 12 claims for relief in the 35-page answer and counterclaim, which can be viewed by the public at the Gunnison District Court.