Amended complaint: Court filing sheds new light on $18 assessment

Friday, July 5, 2019

By Scott Loftis

CarrollCountyNews@cox-internet.com

Attorneys representing a Berryville man in a class-action lawsuit aimed at stopping the assessment of an annual $18 fee on Carroll County taxpayers in connection with a failed landfill have filed an amended complaint.

Fayetteville attorneys Matt Bishop and Wendy Howerton filed the amended complaint Monday in Carroll County Circuit Court on behalf of plaintiff Paul Summers of Berryville.

Defendants in the Carroll County lawsuit are the solid waste district and Carroll County tax collector Kay Phillips.

Background

The $18 assessment is included on the 2018 tax statements for property owners in Carroll, Baxter, Boone, Marion, Newton and Searcy counties — the six counties that composed the solid waste district. After filing suit in Carroll County, Bishop and Howerton have since filed similar complaints in each of the other five affected counties.

Pulaski County Circuit Judge Tim Fox issued an order imposing the fee on April 21, 2017, following the recommendation of Geoffrey Treece, an attorney with the Little Rock firm of Quattlebaum, Grooms and Tull who was appointed by Fox to act as a receiver for the solid waste district.

Treece recommended that the fee be imposed to recoup bondholders who purchased $12,340,000 in bonds issued by the solid waste district in October 2005 to finance the purchase of the North Arkansas Board of Regional Sanitation (NABORS) Landfill in Baxter County. The $18 assessment, which is likely to continue for 30 years or more, also is intended to repay up to $16.5 million that the Arkansas Department of Environmental Quality (ADEQ) is expected to spend cleaning up the site of the landfill.

The solid waste district defaulted on its bond payments in 2012 and closed the landfill that same year. ADEQ sued the solid waste district in 2013 in Baxter County Circuit Court and was granted an order of summary judgment to take possession of bank accounts and certificates of deposit held by the solid waste district. The order also said that ADEQ was entitled to pursue additional money related to the cleanup and closure of the landfill.

In January 2014, the solid waste district filed a voluntary petition for Chapter 9 bankruptcy. Bank of the Ozarks (now Bank OZK) acting as a trustee for the bondholders, filed a motion asking the court to dismiss the bankruptcy petition and U.S. Bankruptcy Judge Ben Barry granted the motion in an order issued Aug. 4, 2014. Bank of the Ozarks filed a complaint in Pulaski County Circuit Court in December 2014, seeking Treece’s appointment as the receiver for the solid waste

district. The court entered a consent order appointing Treece as the receiver in May 2015. Among his court-ordered duties were to evaluate the solid waste district’s operations and make recommendations to the court regarding alternatives for the solid waste district to generate additional income and revenue that could then be used to repay the bonds. Treece filed his report and recommendations with the court in November 2016.

Attorneys for Bank of the Ozarks, ADEQ and the solid waste district raised no objections to Treece’s recommendations, and Fox issued his order establishing the $18 service fee on April 21, 2017.

New details

The 28-page amended complaint includes facts uncovered in documents obtained by Bishop and Howerton during the discovery process and in a series of depositions taken by the attorneys that shed new light on the timeline and background of the case.

Witnesses who have been deposed by Bishop and Howerton are Treece, ADEQ managing attorney Michael McAlister, Ozark Mountain Solid Waste District executive director Melinda Caldwell Walter “Butch” Lomax III, a compliance officer with Crews and Associates, the underwriter for the bonds issued by the solid waste district.

Before being purchased by the solid waste district, the NABORS Landfill was owned by a company known as RLH Inc., according to the amended complaint. The solid waste district is governed by a board of directors comprising, in part, mayors and county judges from the six counties within the district, but at the time of the landfill’s purchase, the district’s daily operations were managed by the Northwest Arkansas Economic Development District, headquartered in Harrison.

The amended complaint notes that before purchasing the landfill, the solid waste district hired consultants to analyze the purchase. One of those consultants, IESI Corp., warned the waste district against making the purchase in a February 2004 letter in which it “forecast the exact predicament OMSWD is now in,” the amended complaint says.

In part, the IESI letter says: “This is an incredible financial windfall for the current owners of RLH with financing and risk assumed by a publicly funded authority.”

The letter goes on to describe the landfill purchase as “an unfortunate decision for your constituents that will likely bring economic harm to them in the very near future.”

The amended complaint notes that Crews and Associates marketed the bonds to “sophisticated investors.” Crews is the investment banking arm of First Security Bancorp, a privately held company that is headquartered in Searcy and operates 75 First Security Bank locations across Arkansas. Crews’ marketing materials included an “Official Statement” which noted that “investors should … understand that investments pose a risk of a loss of principal.”

“Despite these warnings in the Official Statement, OMSWD’s Receiver has now testified that it is his position there is no possibility for investors in these bonds to lose their principal and these are in effect free investments with respect to the principal,” the amended complaint says.

The amended complaint also notes that an audit eventually discovered a shortfall of more than $500,000 in the solid waste district’s finances.

“This shortfall was the result of NWAEDD transferring funds from the solid waste account to its general account for its own use,” the amended complaint says. “This amount has never been repaid to OMSWD, and the Receiver has made no effort to collect it.”

According to the amended complaint, the bondholders and ADEQ “began pushing OMSWD to impose a charge upon the residences in the six counties” composing the district.

The solid waste district knew that imposing such a charge “was not an option” and said as much in its pleadings to the bankruptcy court, the amended complaint says.

The amended complaint notes that “while the bondholders were secured by certain assets, ADEQ had no basis for recovery from OMSWD at that time.”

That changed with the state Legislature’s passage of the 2014 ADEQ appropriations bill, Act 274. That legislation “bestowed a gift upon ADEQ and the bondholders,” the amended complaint says, in the form of special language added by then-state Sen. Johnny Key of Mountain Home and then state-Sen. Jeremy Hutchinson of Pulaski County. Key is now director of the Arkansas Department of Education. Hutchinson, a nephew of Gov. Asa Hutchinson, resigned from his Senate seat after being indicted on federal charges of wire fraud and filing false tax returns. He pleaded guilty in federal court last week to accepting multiple bribes and committing tax fraud.

The special language included in the 2014 ADEQ appropriations bill created a mechanism for the agency to sue other governmental entities to recover funds expended from the Landfill Post-Closure Trust Fund — “In effect authorizing ADEQ to replace taxpayer money with taxpayer money,” the amended complaint says.

The amended complaint goes on to say that the amendment including the special language “delivered exactly the bailout the bondholders and ADEQ had been seeking for years.” It adds that the provision has been renewed as part of the ADEQ appropriations bill every year since 2014, “despite the express outrage and promised legislative fixes made by various members of the General Assembly whose districts overlap with OMSWD.”

“… As Mark Twain quipped,” the amended complaint says, “no man’s life, liberty or property are safe while the legislature is in session.”

After the solid waste district’s bankruptcy petition was dismissed in August 2014, the bondholders and ADEQ “began to put their ‘service fee’ plan into action,” the amended complaint says. A Bank of the Ozarks attorney initially contacted Treece about serving as a receiver for the solid waste district in October 2014, approximately two months before the bank filed suit on behalf of the bondholders.

Treece was ultimately appointed as the receiver in May 2015 and within three weeks, “ADEQ and the bondholders via Bank of the Ozarks were advocating for the taxpayers to bail them out,” the amended complaint says, with an ADEQ attorney approaching Treece with a plan for the “service charge.”

Treece began circulating drafts of his proposed report to two Bank of the Ozarks attorneys and to Lomax in March 2016, although Crews and Associates was not a party to the litigation, the amended complaint says.

“By April 2016, Mr. Lomax was demanding quicker action by the Receiver,” and a meeting was held between Lomax, Treece and at least one of the Bank of the Ozarks attorneys, according to the amended complaint.

In late May, the amended complaint says, Treece met with McAlister — the ADEQ attorney — and ADEQ Director Becky Keogh. In that meeting, “it was made clear to the Receiver that ADEQ was ‘hell-bent’ on recovering every dime it spent on OMSWD issues.”

“The Receiver, to meet these demands, went back to the drawing board on how best to impose the fee on the taxpayers,” the amended complaint says, and in July emailed the details of his plan to attorneys for the solid waste district and for Bank of the Ozarks, as well as to Lomax.

By early August, Crews & Associates “was getting frustrated, and began pushing the Receiver for faster action,” according to the amended complaint.

“At the time of his deposition in May 2019, Mr. Lomax was unsure as to whether Crews & Associates or its parent company First Security Bank owned any bonds, so the reason for his eagerness remains unknown,” the amended complaint says. “In what is no doubt merely a coincidence, Mr. Lomax’s employer Crews & Associates, its parent company First Security Bank, and Bank of the Ozarks have all strenuously objected to disclosing any information they may have about the identity of the bondholders and filed multiple motions to quash discovery on the subject.”

The amended complaint goes on to note that the solid waste district is still operational, in fact generating net revenues of more than $200,000 a year. The district’s day-to-day operations are managed by a contractor (Caldwell), the amended complaint points out, although “there is no evidence her company’s contract has been voted on for the past five years.”

Meanwhile, the amended complaint says, McAlister has testified that “ADEQ is not seeking any relief from the taxpayers at this time, but rather did not object to the Receiver’s plan to pay them.” Despite what Treece described as Keogh’s insistence that ADEQ collect on all its expenditures related to the solid waste district, the agency declined to intervene in the Summers lawsuit, according to the amended complaint.

“This change of heart the Receiver testified he attributes to the governor’s office becoming ‘weak-kneed’ in the face of the political blowback” from the $18 assessment, the amended complaint says.

Allegations

Summers’ lawsuit alleges that the $18 annual assessment constitutes a tax on property owners in the six counties and is an “illegal exaction,” that the solid waste district does not have the authority to impose a tax, that there is no statutory basis for the assessment, that the assessment is barred by Amendment 65 (adopted in 1986) to the state constitution, that the solid waste district is statutorily barred from charging the $18 fee to pay bondholders, that the ADEQ appropriations bills are unconstitutional, that a court cannot impose a tax and that the solid waste district’s board of directors did not approve the $18 charge.

Relief sought

The suit asks the court to declare that the $18 charge is an illegal exaction and that the ADEQ appropriations bills are unconstitutional, to enjoin the defendants from levying or collecting the $18 charge and to refund any amounts already paid, and to award reasonable attorneys’ fees “to be paid from the sums illegally exacted.”

No hearing date on the amended complaint has been scheduled.

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