APPROVED BY DCFWSD 1-B October 16, 2012
Developer reimbursement litigation:
Denton County Fresh Water Supply District No. 1-B (“District 1-B“) is a defendant in a lawsuit initially filed by Castle Hills Development Corporation (“CHDC“), the alleged successor to Bright Farm Partnership, the original developer of Castle Hills (the “Developer Reimbursement Litigation“).
The Developer Reimbursement Litigation arises out of an Agreement for the Construction and Purchase of Utility Facilities and Reimbursement for Costs Between Denton County Fresh Water Supply District No. 1 and Bright Farm Partnership (the “CPR Agreement“). District 1-B assumed responsibility for a portion of the CPR Agreement as of November 1996, after District 1-B was formed by dividing District No. 1 into Districts No. 1-A and No. 1-B.
According to District 1-B financial statements, during the fiscal year ending September 30, 2002, District 1-B reimbursed Bright Farm Partnership a total of $1,303,937.00. The question of further reimbursements to the developer arose again several years later, and, in November, 2008, District 1-B engaged McCall, Gibson & Company, PPLC (“McCall“), at that time the auditor for District 1-B and District 1-A, to perform agreed-upon procedures regarding the amounts potentially subject to a claim by the developer for reimbursement. McCall delivered a final AUP report dated as of October 2009. That report showed the developer had advanced or otherwise incurred an additional $1,312,522.34 that was subject to possible reimbursement by District 1-B. This amount was in addition to the $1,303,937.00 reported to have been reimbursed in 2002 and in addition to District 1-B’s share of an additional amount the developer had advanced to District 1-A and, once paid, that District 1-A would reimburse to the Developer.
District 1-B also retained Jacobs Engineering Group, Inc. (“Jacobs“) to perform an analysis of the potential reimbursement amounts, including a comparison of the items subject to potential reimbursement with the requirements of the Texas Commission on Environmental Quality (“TCEQ“) Chapter 293—Water Districts. In February 2010, Jacobs issued a report that divided the potential reimbursement amount into three categories:
- Category 1 – $765,000.33 (items commonly reimbursed under TCEQ regulations and eligible for reimbursement);
- Category 2 – $508,102.72 (items that might be reimbursed with TCEQ approval, but required further review); and
- Category 3 – $39,418.30 (items that would not be reimbursed under TCEQ regulations).
In March and August, 2010, District 1-B reimbursed CHDC $600,000.00 from available funds. District 1-B also had discussions with CHDC regarding additional potential reimbursements and otherwise attempted to settle the matter. In November 2010, CHDC filed suit against District 1‑B asserting a right to an additional $689,189.21 in reimbursements, as well as interest and attorneys’ fees.
In September 2011, District 1-B reimbursed CHDC an additional $161,130.77. Effective March 31, 2012, District 1-B and CHDC entered into a Partial Settlement Agreement that resolved all of the matters in dispute in the Developer Reimbursement Litigation with the exception of CHDC’s request to be reimbursed $262,270.28 for letter of credit fees paid by the developer to a bank (and for interest and attorneys’ fees). In May 2012, CHDC notified the Court that CHDC’s claim had been assigned to Castle Hills Holding Corporation (“CHHC“), and in June 2012, CHHC filed a Fourth Amended Petition to reflect the Partial Settlement Agreement and the limitation of the remaining issue in dispute to the letter of credit fees, interest, and attorneys’ fees.
On October 3, 2012, the Court granted the parties’ Agreed Motion to Abate Proceedings Pending Settlement. Pursuant to the Order presented by the parties and entered by the Court, further proceedings in the case are on hold until April 1, 2013, to allow the parties to pursue a potential final settlement of all remaining issues in the case.
With respect to the potential final settlement, the parties have reached an agreement on the business terms of a Final Settlement Agreement. District 1-B has signed the Final Settlement Agreement, and Plaintiff CHHC is expected to sign the agreement in the near future. The information below regarding the terms of the proposed Final Settlement Agreement is only a summary of some of the terms of the agreement, a copy of which is posted here Developer Lawsuit(Cause No.2010-60368-393) – Final Settlement. You are referred to the posted document for further information about other material terms and conditions that are not summarized below.
Under the terms of the Final Settlement Agreement (once signed by CHHC), District 1-B conditionally agrees to pay to CHHC the total sum of $262,270.28 in four installments, in the amounts, on the dates, and on the terms and conditions shown below, and subject to a potential extension of these dates under certain circumstances:
- First Payment: September 30, 2013 — $50,000.00;
- Second Payment: September 30, 2014 — $75,000.00
- Third Payment: September 30, 2015 — $75,000.00;
- Fourth Payment: September 30, 2016 — $62,270.28
Among other conditions to the making of these payments (the “Payments”), and to the effectiveness of the Final Settlement Agreement, is a response from the Texas Commission on Environmental Quality to the following question:
“Assuming for purposes of this request that District 1-B believes there was a benefit to the District from the payment of the Letter of Credit Fees, then District 1-B would like to use funds such as easement franchise revenues (but excluding funds from maintenance and operation tax revenue, bond proceeds, bond anticipation note proceeds, and tax anticipation note proceeds) to reimburse the developer’s successor, CHHC, for the Letter of Credit Fees; recognizing that the TCEQ previously denied a pay application related to the Letter of Credit Fees as shown in the attached letter and application [attach prior denial letter and application], does the TCEQ have any objection to District 1-B entering into an agreement with CHHC to make such payments as described above?”
If on or before April 1, 2013, the TCEQ, in writing, does one of the following, then this condition precedent to District 1-B making the Payments will be satisfied: (a) approves the Payments by District 1-B to CHHC; (b) states that the TCEQ has no objection to the Payments; or (c) advises 1-B that TCEQ approval is not required for 1-B to make the Payments. The TCEQ will be deemed to have advised District 1-B that TCEQ approval is not required for the Payments if the TCEQ states that is does not have jurisdiction to approve or deny the Payments under this Final Settlement Agreement. If the Final Settlement Agreement becomes effective, then the Developer Reimbursement Litigation will be dismissed with prejudice, and mutual releases between the parties will become effective.
On the other hand, if, on or before April 1, 2013, the TCEQ tells the parties that TCEQ approval of the Payments is required and fails to give such approval, or if the TCEQ has not responded to the Parties’ inquiry by April 1, 2013, then this Final Settlement Agreement will be null and void and of no further force or effect. In that event, the Developer Reimbursement Litigation will be reinstated, and, among other deadlines, the case will be set for trial the week of August 26, 2013.
As of September 30, 2012, District 1-B has incurred attorneys’ fees and expenses in the Developer Reimbursement Litigation totaling $91,678.44. Of that amount, one of District 1-B’s insurance companies has reimbursed District 1-B $48,610.16, and District 1-B expects the insurance company to reimburse District 1-B an additional approximately $11,933.68 of the $91,678.44. After the expected reimbursement, this would leave the net direct cost to District 1-B for attorneys’ fees and expenses related to the Developer Reimbursement Litigation as of September 30, 2012 at $31,134.60.