LOS ANGELES -- In a closely watched case, a California appellate court ruled last week that the payment of special taxes securing Mello-Roos bonds in Oxnard, Calif., takes priority over payments to trust deed holders.

Officials in Oxnard said the ruling will allow them to proceed with a foreclosure aimed at resolving the city's default last year on a $14.77 million Mello-Roos issue.

In a unanimous ruling on the case, Oxnard v. Oxnard Town Center, a three-judge panel overturned a Feb. 2 ruling by Ventura County Superior Court Judge John J. Hunter.

Hunter effectively placed Mello-Roos bondholders in a subordinate position to trust deed holders in a decision that, had it been upheld by the higher court, could have had negative repercussions for some other Mello-Roos issues now outstanding.

A total of $5.04 billion of Mello-Roos bonds have been issued since 1983, according to the California Debt Advisory Commission. The bonds are issued by local governments under the Mello-Roos Community Facilities Act of 1982, and they are frequently used by developers to fund infrastructure for housing developments.

In a 21-page opinion issued last Tuesday, the California Court of Appeals in Ventura County ordered Hunter to vacate a summary judgment on behalf of Bank of A. Levy, and to file a new order denying summary judgment to the bank.

The Oxnard-based independent bank held a second trust deed on a major portion of the defaulted Oxnard Town Center property.

Steven Ray Garcia, an attorney with Knapp, Petersen & Clarke in Glendale, Calif., the lead attorney representing Bank of A. Levy, said last Wednesday that a decision had not been made on whether to ask the state Supreme Court to review the case.

Bond counsel firms that had widely questioned the lower court's ruling were quick to praise the appellate court decision.

Lewis G. Feldman of Cox, Castle & Nicholson, which represented Oxnard, said, "It is a good result; it sends the right message."

Dan Bort, an attorney with Orrick, Herrington & Sutcliffe, said the decision was important because the trial court ruling seemed "to defy the law and logic," and there was "this fear that if it happened once, it may happen again."

He added that the ruling "should eliminate the possibility that similar meritless but nevertheless bothersome arguments will be raised in foreclosure actions in the future. That can only help the bond market."

The specter of an unfavorable ruling by the appellate court "had the potential to be an embarrassment to the bond market and [cause] needless investor jitters," Bort added.

An adverse ruling would have meant "the Mello-Roos bondholders were in a junior position when they thought they were in a senior position," said Gary L. Gillig, Oxnard city attorney, who added that he was "thrilled" by the decision.

State law "supports our position, and I am delighted the court of appeal agrees," Gillig added.

He noted, though, that the appellate court declined to certify its decision for publication, meaning "it cannot be cited elsewhere in litigation of this kind throughout the state" unless the state Supreme Court agrees to have it certified. He added that the city is considering petitioning the high court for certification.

The Oxnard case focuses on a legal requirement for an issuer to record a document called a notice of special tax authorization before it authorizes the issuance of Mello-Roos bonds. Oxnard attorneys argued that the city passed a resolution in 1988 that noted the document creating the lien to secure the levy of taxes was properly recorded.

While acknowledging that the city did record the notice of special tax authorization, "they did not record it properly -- it was not properly indexed in the public records," Garcia said.

Judge Hunter agreed with Bank of A. Levy, saying "they do not have a lien," Garcia added. "The case was as simple as that."

The appellate court, however, found that under the state revenue and taxation code, issuers have other tax lien levying abilities which applied to the Oxnard Mello-Roos bonds, Garcia said.

Following last week's decision, some bond counsel attorneys believe there is even less likelihood that the legal issues that prompted the Oxnard case will be raised elsewhere in the

Several lawyers said that in 1988 the state legislature enacted certain amendments, which took effect in January 1989, requiring a Mello-Roos bond issuer to record a "notice of special tax lien" document that secures taxes to pay bondholders.

Orrick's Bort said any Mello-Roos district formed after January 1989 "isn't going to have this [Oxnard] problem at all."

Moreover, he said, a Mello-Roos district formed prior to 1989 can also "eliminate that possibility" by simply recording the notice of special tax lien.

Oxnard's legal troubles trace back to its issuance in September 1988 of $14.77 million of unrated Mello-Roos special tax bonds to fund infrastructure improvements in Community Facilities District No. 88-1, also known as Oxnard Town Center.

The bonds were secured by Mello-Roos special taxes. About 85% of the taxes were supposed to be paid by the Oxnard Town Center limited partnership, which intended to build offices and stores on the 181-acre site. The remaining 15% of special taxes have been paid by two unrelated parcel owners.

Proceeds were used to build infrastructure, such as roads, sewers, and storm drains. They also funded a $1.5-million debt service reserve fund.

But Oxnard Town Center investors failed to make their December 1991 special tax payment. As a result, the reserve fund was first tapped to make a bondholder payment due April 1, 1992.

The reserve fund was tapped again to make payments due Oct. 1, 1992, and April 1, 1993. On Oct. 1, 1993, the remaining money in the reserve fund -- $121,000 -- was paid to bondholders, but that came up short of the total $670,000 payment due, and Oxnard defaulted on the bonds.

Oxnard also failed to make a $591,000 payment due to bondholders on April 1, and a $706,000 payment due Oct. 1.

"We owe about $1.856 million to bondholders," Oxnard financial analyst Jim Fabian said. Delinquent special taxes total $6.5 million.

Fabian said that in the wake of the appellate court decision, the city plans to ask that a Venture County superior court move to foreclose on the delinquent Oxnard Town Center parcels.

The property sale had been "in limbo" pending the appeals court ruling, he said.

If a foreclosure sale is able to recoup the entire $6.5 million in delinquent taxes, a portion of the money would be used to pay back the bondholders and replenish the $1.5 million reserve fund, Fabian said.

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