SOURCE: Fiddler's Creek Community Development District #2

May 05, 2016 13:19 ET

Fiddler's Creek CDD #2: Florida Court Allows U.S. Bank to Be Sued for Misappropriation of Trust Funds

NAPLES, FL--(Marketwired - May 05, 2016) - A Collier County circuit judge has denied U.S. Bank National Association's motions to dismiss a lawsuit involving allegations of misappropriation of trust funds.

In the case, Fiddler's Creek Community Development District #2, a special-purpose local government entity, sued U.S. Bank after discovering that U.S. Bank had removed approximately $1.25 million from construction trust accounts without consent. U.S. Bank used the funds for payment of legal fees, which the lawsuit contends was an improper purpose.

The ruling allows the Fiddler's Creek CDD #2 to pursue claims of damages against U.S. Bank, both as trustee and individually, for breach of fiduciary duty, conversion, constructive fraud, and conspiracy.

Fiddler's Creek CDD #2 has also been permitted to pursue a claim of punitive damages against U.S. Bank, as the trustee under a trust agreement with the CDD. The court found that Fiddler's Creek CDD #2 had made a sufficient evidentiary showing -- through expert testimony given by former SEC Chairman Harvey Pitt -- for a jury to find that U.S. Bank's actions fell below the prudent trustee standard and allowed the punitive damages claim.

In the April 16, 2016, ruling, the court found that U.S. Bank could be sued for more than a simple breach of contract, stating, "Florida Courts impose tort liability for improper self-help to funds as a matter of law." Additionally, the court made the following comments in holding that U.S. Bank could be sued individually, not just in its capacity as trustee:

"CDD2 seeks to impose individual liability against U.S. Bank for its actions as [trustee]. Contrary to U.S. Bank's arguments, no additional facts must be alleged showing wrongful conduct undertaken individually. Rather, it is accepted that a trustee may be held personally liable for conduct undertaken as trustee if he fails to exercise the care and skill of a prudent man in the protection of the trust, as matter of law. A breach of trust or fiduciary duty supports an award of damages against the trustee personally. Accordingly, U.S. Bank may be sued individually…[citations omitted]."

Fiddler's Creek CDD #2 is responsible for infrastructure construction costs associated with residential development pursuant to Florida Statutes; the CDD issued tax-free bonds to pay for the construction costs and collected assessments from landowners to repay the bonds. Bond proceeds were earmarked solely for construction and placed in trust accounts administered by U.S. Bank as trustee. Instead of using the funds for construction, U.S. Bank used the money to pay for legal costs incurred in an earlier legal proceeding; the lawsuit followed.

With these victories, Fiddler's Creek CDD #2 will continue to pursue all claims against U.S. Bank, as trustee and individually, to recover compensatory and punitive damages.

The court's opinions do not purport to make any findings of ultimate fact but rather lay out the legal precepts by which the case will be governed. While Fiddler's Creek CDD #2 still must prove the case once at trial, the CDD is highly confident the evidence will result in a favorable decision, including punitive damages, based on the law as outlined by the court's decisions.

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