New lawsuit against Prospect developer claims fraud, collusion

Asks court to rescind purchase agreements and award money

The string of lawsuits related to the Prospect subdivision in Mt. Crested Butte continued in Gunnison District Court Tuesday, April 2, with a complaint filed by a group of property owners claiming they were saddled with a debt the developer promised to pay.

In the complaint, lawyers for the 16 plaintiffs in the case detail elements of what they call “a very sophisticated fraud” carried out by Prospect Development Company, Triple Peaks LLC and a dozen other entities or individuals named as defendants in the suit.
The suit asks the court to decide if the developers of Prospect “through collusion and abject disregard” for the law “manipulated two government entities, over which they had absolute control,” into taxing citizens to pay off debt they had promised to pay off themselves.
Among the plaintiffs’ claims about the developer’s wrongdoings are three violations of the state’s constitution; fraud; negligent misrepresentation; illegally transferring public money into private hands; and breach of contract.
Over the last several years, discontent at Prospect has been growing, spawning something of a revolt among a group of homeowners who want to create some separation between themselves and the developer. Last year, a group of homeowners calling themselves the Prospect Owners Alliance pushed back against the developer and sought independent legal counsel, ultimately spreading the cost of that counsel across all Prospect properties through a fee – or as the town sees it, a tax.
In response to this fee, in February the Prospect Development Company, along with the Town of Mt. Crested Butte, sued Prospect Reserve District 2, which is comprised of Prospect property owners, for exceeding a property tax cap imposed by the town. Since then there has been a steady stream of claims and counter-claims made in Gunnison District Court about the way the subdivision was carried out at the start and the conduct of the developer since then.
Part of the conflict stems from an overlap in the leadership among the groups managing Prospect’s affairs. Within the subdivision, there is a Control District and a Finance District. The Control District, also called District 1, handles the subdivision’s business. The Finance District, or District 2, raised the money to pay the bills. In the lawsuit, this is referred to as the “Master-Slave” arrangement.
Until last year, the board of directors for both District 1 and District 2 consisted of mostly the same people, who were all the developer’s employees. During their tenure, the boards made some commitments on behalf of the subdivision’s homeowners that the homeowners themselves have recently called into question.
But in this latest lawsuit, the plaintiffs are claiming the developer flat-out made promises to property buyers about those commitments it never intended to honor.
Because of a perceived conflict of interest, Crested Butte Mountain Resort vice president and general manager Ethan Mueller, CBMR public relations and communications manager Erica Mueller (Reiter) and CBMR vice president for real estate and development Michael Kraatz, as well as Tim Mueller, who all served on the Prospect’s various boards of directors at crucial times in the past, are all named as individual defendants in the suit.
According to the lawsuit, the town required the developer to provide people interested in purchasing property in Prospect with “a detailed written disclosure summarizing the anticipated mill levy obligations of the Reserve Metro Districts … so that purchasers can make an informed decision to acquire any property within the Reserve Metro Districts.”
But by the time it came to disclosures, the complaint says, the language actually given to buyers made it seem as though the developer would cover the costs of infrastructure.
Parts of the Property Reports provided to potential buyers are included in the complaint, showing the developer claimed responsibility for “completing the construction of the roads within the Subdivision at our expense,” and “completing the construction of the water distribution mains in front of or adjacent to the lots and will pay the cost of such construction and extension.”
The Property Report quoted in the complaint says property owners “will not be responsible for” costs related to the construction of a central sewer system, extension of electrical service, natural gas or telephone lines to each property.
“That promise permitted Prospect Development to sell its lots at a premium over what it would have received had it told the truth,” the lawsuit says. “Without this promise, one or more of Prospect Development’s sales would have fallen through altogether.”
Eventually, however, the cost of the infrastructure did trickle down to the homeowners, the plaintiffs say, and property taxes in Prospect started to rise.
On one property for which a tax history was available, taxes in 2002 were just over $1,200 a year. After the developer passed along payment of a $10 million bond to the property owners in 2005, taxes increased to almost $13,000 a year. By 2008, the developer had racked up $18.4 million in debt to pay off old debt and reimburse himself for infrastructure improvements in the subdivision. As a result, records show, taxes on the property swelled to more than $21,000 a year.
“The purpose of this action is to wrest the lucre from the clutches of the Defendants and to restore, to the extent possible, public confidence in the inner working of a local government orchestrated for private gain,” the lawsuit says.
“It takes a large canvas to paint the full picture of Defendants’ misconduct, which includes not only fraud, breaches of numerous contracts, and breaches of several state and federal laws, but also official misconduct, violation of the public trust, breaches of fiduciary duties and indifference to the unambiguous requirements of the Constitution of the State of Colorado.”
According to long-time local attorney David Leinsdorf, who has represented many subdivisions through the county and has represented some of the plaintiffs in the suit, developers generally assume the cost of installing the infrastructure and recoup that money through lot sales. He also says the arrangement by which the developer passes on the cost of the infrastructure to the owners through a property tax has led to a tax burden on Prospect properties that is much higher than similarly situated subdivisions in Mt. Crested Butte.
In addition to the plaintiffs’ claims about getting misinformation about who would be responsible for the infrastructure costs, the complaint takes issue with the way the Control District and the Financing District were formed and operated early on.
Additionally, the $18.4 million bond issue of 2008 to pay off old debt and reimburse Prospect Development for work that had already been done, according to the lawsuit, violates at least three parts of the state’s constitution meant to keep public entities, like Reserve District No. 1, from “transferring public funds to a private company or corporation without receiving any consideration in return.”
As judgment against Prospect Development, the plaintiffs ask the court to award them an amount of money to be determined by the court for the claims of fraud, violations of two consumer protection acts, breach of contract and negligent misrepresentation. Along with the money, the plaintiffs ask for an order “compelling the Development Group to provide public infrastructure to Prospect at no cost to Plaintiffs,” and another “rescinding the Purchase Contracts and requiring restitution.”
The plaintiffs also ask the court for an order declaring the contracts or actions carried out by District 1 or District 2 to be void and an award of the attorney’s fees amassed by the plaintiffs during the suit.
Against the individuals named as defendants in the suit, the plaintiffs are asking for an undetermined amount of money for a breach of fiduciary responsibilities and a violation of the public trust.
No deadline is set for the court’s ruling in the lawsuit.