A Subsequent Developer has no Ability to Force a Public Body to Call an Abandoning Developer’s Performance Bonds for Infrastructure Improvements.

The Arizona Court of Appeals decided on July 22, 2014 that a developer cannot compel a public entity to call its performance bonds to complete infrastructure improvements on a construction project that a prior developer abandoned due to bankruptcy.

Ponderosa Fire Dist. et al. v. Coconino County et al., 1 CA-CV 13-0545, concerned the fate of a residential community in Coconino County called Flagstaff Meadows.  The community was broken into three Units including completed single-family homes and townhomes (Units 1 and 2) and a new development of single-family homes and multiple-family residences (Unit 3).  After the Coconino County Planning and Zoning Commission approved the plan for Unit 3, the original developer, Empire, acquired about $4 million in subdivision performance bonds from a surety.  Empire finished a minor portion of the Unit 3 improvements, received correspondingly minimal bond funds, declared bankruptcy and abandoned the project.

A new developer, Bellemont, purchased Unit 3 at the bankruptcy trustee’s sale.  Bellemont applied for a permit to finish the project and asked the County to call the rest of the bond funds to complete the Unit 3 improvements.  Bellemont believed, apparently due to the adverse financial circumstances surrounding Bellemont’s acquisition of Unit 3, that the County should have to front the infrastructure costs and call the bonds.  The County disagreed and refused to do so.

Bellemont took the dispute to Coconino County Superior Court.  Among other things, Bellemont sought declaratory and mandamus orders compelling the County to call the bonds.  When the smoke cleared at Superior Court, Bellemont succeeded at obtaining a writ of mandamus.  The County complied with the writ and passed a resolution to call the bonds, but the County immediately appealed.  On appeal, three judges unanimously agreed to reverse the writ and to remand the case to the Superior Court.

The appeal focused primarily on statutory interpretation of Arizona revised Statutes § 11-821(C), which required the posting of bonds for the Unit 3 improvements.  Bellemont knew it could not stand in the shoes of the County as Obligee on the bonds.  Thus, Bellemont argued instead that it was “beneficially interested” as the developer to compel the County to call bond funds necessary to complete the Unit 3 improvements.  This was essentially a standing argument advanced further by Bellemont’s position that Section 11-821(C) imposed a ministerial (or mandatory) duty to call the bonds.  Section 11-821(C) did not, on the other hand, give the County discretion to decide when to call the bonds.  Bellemont also argued that when the bonds were posted, the subdivision plan was approved and Empire defaulted, the County assumed all obligations to complete the infrastructure.  Bellemont argued, in other words, that the obligation to complete the improvements was transferred from the developer to the County.

The Court of Appeals quickly disposed of the latter argument by quoting from Section 11-821(C) and its requirement for the streets to be “fully completed” before ownership obligations are transferred to the County.  Since the streets were not “fully completed,” Bellemont inherited from Empire the obligation to finish the improvements first.

As to Bellemont’s first argument surrounding the County’s mandatory obligation to act and call the bonds, the Court of Appeals disagreed because Section 11-821(C) did not impose a specific time for a public entity to call the bonds.  The statute was silent on the timing for calling the bonds.  The conclusion was, therefore, that “the County’s decision not to call the bonds at this time was a proper exercise of its necessary and implied power under A.R.S. § 11-821(C).”  The County’s decision was discretionary and not ministerial.  The writ of mandamus was, accordingly, not a proper remedy.

Also noteworthy was the Court of Appeals’ discussion of the “absurd results” that would occur if abandonment by the developer could trigger a mandatory duty to call the statutory bonds.  Public entities like the County would have “an open-ended obligation” to call the bonds and complete the infrastructure improvements without having any discretion as the Obligee.  This was not only inconsistent with the statutory scheme set forth in A.R.S. § 11-821, it would also run afoul of surety law.

The dispute in Ponderosa Fire was obviously driven by the $4 million risk to getting Unit 3 back on track.  Bellemont believed that it purchased a subdivision that included no risk of completing the improvements—that Bellemont could rely on the bonds to fund the infrastructure up front.  On the contrary, the County believed that Bellemont purchased Unit 3 with all risk to complete the improvements.  Bellemont would start in the same position as Empire when it defaulted.  It remains to be seen why this risk was not made clear at the trustee’s sale and whether Bellemont will see $4 million as enough to take the issue up with the Arizona Supreme Court.

The Court’s opinion can be found here.

Rick Erickson is a Partner in Snell & Wilmer’s Phoenix office focusing his practice in construction law, commercial litigation and military law.  His profile and contact information can be found here.

This entry was posted in Arizona, Bonds, Infrastructure, Infrastructure, Performance Bonds and tagged , , , , , , , , , , .

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