U.S. Supreme Court Denies Challenge to Mello-Roos LienPriority.

OXNARD, Calif.--(BUSINESS WIRE)--Nov. 13, 1998--The United States Supreme Court has rejected a challenge to a California Court of Appeal decision that confirmed the validity of legislation that makes a Mello-Roos special tax lien superior to the liens of pre-existing deeds of trust. The High Court's decision is the culmination of a complex legal proceeding by the City of Oxnard and Community Facilities District No. 88-1 to foreclose on property delinquent in the payment of special taxes levied pursuant to California's Mello-Roos Community Facilities Act of 1982.

Lewis G. Feldman, Head of Public Finance for Cox, Castle & Nicholson LLP in Los Angeles, has led the team of lawyers representing the City of Oxnard and Community Facilities District 88-1 since 1992. "The High Court's decision to deny the appeal lays to rest the legal assault on special tax lien priority," said Feldman. "It should enable the District's bondholders, who haven't received a bond payment in several years, to remain confident that they will realize on their collateral at long last."

A decade ago, the Oxnard Town Center infrastructure project was funded with $14 million in Mello-Roos bonds secured by special taxes levied on the property within the community facilities district. Beginning in 1990, Oxnard Town Center Partners, one of the property owners in the district, failed to pay the installments of special taxes levied against its property and caused an eventual default on the bonds. The City and District sought to collect special taxes due as a result of the delinquency of the Oxnard Town Center by foreclosing on the delinquent property. The Donlon family of Ventura County owned a large promissory note secured by a trust deed on the special tax delinquent property which was recorded before formation of the District. Because the Mello-Roos law provides that a lien for special taxes is superior to any private lien on the same property, the Donlons were named as a defendant in the foreclosure action. The Donlons challenged the foreclosure by arguing that the family's trust deed was superior to the special tax lien that secured the bonds.

Earlier this year, the California Court of Appeal upheld the superior position of the City's special tax lien despite the earlier creation of the lien of the Donlon's deed of trust. The California Supreme Court denied the Donlons' request for review of the Court of Appeal's decision. The Donlons appealed to the United States Supreme Court, and the High Court denied the Donlon appeal.

Kenneth B. Bley, a senior partner at Cox, Castle & Nicholson LLP who specializes in appellate matters, handled all appeals on behalf of the City and District. "The High Court's decision," according to Bley, "means that all attempts over this very long time period to invalidate the Mello-Roos law as a mechanism for financing infrastructure supporting private development has failed. The investment community must, however, view Oxnard's lengthy foreclosure process as a wake-up call for rigorous adherence to procedural requirements and stepped up legislative efforts to eliminate frivolous defenses to foreclosure proceedings on tax-defaulted property."

Though the long-standing impediment to foreclosure has been removed with the Supreme Court's denial of the Donlons' appeal, the foreclosure action on the Oxnard Town Center property has been stayed following a Donlon family member's bankruptcy, which currently prevents the District from selling the tax-defaulted property. The City will continue in its efforts to have the stayed lifted so that the District may proceed to sell the property for back taxes.