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MHI Partnership, Ltd. v. City of League City

Court of Appeals of Texas, Fourteenth District

April 18, 2017

MHI PARTNERSHIP, LTD. AND MAG CREEK PARTNERS, LP, Appellants
v.
CITY OF LEAGUE CITY, TEXAS, KARI LYNN BOWEN-ZILKENAT, ETAL., Appellees

         On Appeal from the 56th District Court Galveston County, Texas Trial Court Cause No. 14-CV-0340

          Panel consists of Chief Justice Frost and Justices Brown and Jewell. [12]

          OPINION

          Kem Thompson Frost Chief Justice

         Claimants to refunded special assessments under a municipal statute appeal the trial court's judgment in an interpleader action. They challenge both the sufficiency of the evidence to support various fact findings and the methodology the trial court used to determine which claimants were entitled to the refunds. We sustain both challenges and conclude that the trial court erred in ordering refunds distributed to current property owners under a title-holder methodology rather than to the payers of the assessments on a pro rata basis. We reverse and remand.

         I. Factual and Procedural Background

         In 1997 appellee/plaintiff City of League City, Texas (the "City") established the League City Public Improvement District Number One (the "District") for the development of a subdivision known as the Magnolia Creek Master Planned Community (the "Magnolia Creek Subdivision"). The District funds improvements, such as street lights, drainange facilities, and sidewalks, on certain defined properties within the District through an assessment levied on those properties. Typically, a developer arranges for these improvements at the developer's expense, and the District then reimburses the developer using funds obtained from levying the assessments on the properties.

         The Levy of Assessments

         In April 2001, the City adopted Ordinance 2001-10, in which the City approved a "Service and Assessment Plan" for the District. This plan provided an estimate for improvement costs and for assessing these costs to property owners within each phase of the development. In the Ordinance, the City levied a special assessment for Phase 1 of the Magnolia Creek Subdivision. The City set this assessment at the rate of $1.32 per square foot, levied equally on 2, 087, 376 square feet of property located in the District and consisting of 184 single-family lots and approximately 254, 000 square feet of commercial property. The City calculated this rate based on $2.76 million in estimated costs to construct the improvements in Phase 1. The special assessment was payable in installments due on January 31 of each year beginning in 2002 and running through 2017, incorporating an interest rate of 7.25% per year. Each assessment was secured by a lien against the property assessed and constituted a personal liability of the owners of that property. The owner of any assessed property at any time could avoid paying future interest by paying the principal amount of the assessment along with accrued interest.

         The following year, in October 2002, the City adopted Ordinance 2002-46, in which the City levied a special assessment for Phase 2 of the Magnolia Creek Subdivision. The City set this assessment at the rate of $1.68 per square foot, levied equally on property located in the District consisting of 134 single-family lots. The rate was calculated based on $2.25 million in estimated costs to construct the improvements in Phase 2. Each assessment was secured by a lien against the property assessed and constituted a personal liability of the owners of the property. At any time, the owner of any assessed property could avoid paying future interest by paying the principal amount of the assessment along with accrued interest.

         The Appellants' Special-Assessment Payments

         Appellants/defendants MHI Partnership, Ltd. and Mag Creek Partners, LP[1](collectively, the "MHI Parties") purchased and developed various residential lots located within the Magnolia Creek Subdivision. The MHI Parties ultimately sold these properties to third parties, but during their ownership of these properties, the MHI Parties made special-assessment payments.

         The City's Reassessment and the Claims Process

         Following completion of the improvements in Phases 1 and 2 of the Magnolia Creek Subdivision and reimbursement to the developer, the City commissioned a public accounting firm to conduct an audit to reconcile the actual cost of Phase 1 and Phase 2. The results of the audit showed that the actual cost for Phase 1 was only $1.881 million, and the actual cost for Phase 2 was only $1.785 million. The City had more than $1.7 million in excess funds after the developer had been reimbursed in full.

         In August 2013, the City adopted Ordinance 2013-38, in which the City made a reassessment pursuant to Local Government Code section 372.020. Under this reassessment, the City revised the rate for the Phase 1 special assessment from $1.32 per square foot to $0.90 per square foot, and the City changed the rate for the Phase 2 special assessment from $1.68 per square foot to $1.11 per square foot. In this ordinance, the City stated that the District would no longer collect assessments on Phase 1 or Phase 2 properties. The City also provided that "[t]here currently exists a balance of Phase 1 and Phase 2 excess PID assessments in the fund of [the District] that will be administered and refunded to parties having an interest in such funds."

         After completing the reassessment, the City attempted to administer a refund process for property owners. The City commissioned a title examination on the affected properties within Phase 1 and Phase 2 and hired a title company to administer the claims process. The City allocated the excess funds back to the individual property accounts based upon square footage of the property, applying the same method used for levying the special assessments. The City then determined a maximum available refund for each property within the District.

         The City notified everyone in the chain of title for the affected properties and gave them an opportunity to submit a claim form to the title company. The City received competing claims from 515 claimants affecting 259 of the properties in Phase 1 or Phase 2 of the of the Magnolia Creek Subdivision. The City determined that only $1, 286, 653.86 of the excess funds (hereinafter the "Disputed Funds") related to the 259 properties with multiple claims. The City consulted the city attorney to resolve the competing claims, but the City was unable to determine who was legally entitled to the funds.

         The City's Interpleader Lawsuit and the Trial Court's Judgment

         The City filed its "Petition in Interpleader" in the trial court in March 2014, naming the 515 claimants who submitted competing claims as defendants. The MHI Parties were among the named defendants. The City alleged that it was subject to rival claims to the Disputed Funds and sought interpleader relief so that the trial court could determine to whom the refund payments should be made and in what amounts. The trial court granted the City's "Motion to Deposit Funds" and ordered the Disputed Funds deposited into the court registry in a non-interest-bearing account.

         Following service of process, approximately 270 defendants, including the MHI Parties, filed answers to the City's petition. Some defendants filed only an answer without asserting any claim to the Disputed Funds. Many other defendants answered and asserted claims to the Disputed Funds. Some defendants attached to their answers claim forms and other documents they previously had submitted to the title company. Some defendants referred to their claim documents but did not attach them to their answer. Some defendants asserted a claim to the Disputed Funds but did not refer to or attach any claim documents. Seven individuals who were not named defendants also filed answers to the City's petition.[2]

         The record does not reflect that the trial court signed a pre-trial order granting the City interpleader relief and discharging the City. Nor does the record reflect that the trial court established a procedure for the defendants to present or prove their claims to the Disputed Funds. Instead, the trial court set the entire case[3] for a bench trial.

         Before trial, the MHI Parties filed a brief asking the trial court to order the that the Disputed Funds be allocated for each property to the owners who made one or more special-assessment payments based upon a pro rata formula, taking into account the proportionate amount paid by each owner against the entire amount of special-assessment payments made for each property.

         At the bench trial that followed, the City and seven defendants appeared.[4]The only witness who testified at trial was the City's Director of Finance, Rebecca Underhill. The trial court admitted into evidence a copy of the 2001 and 2002 ordinances, a spreadsheet showing the aggregate amount of the excess assessments, and a spreadsheet showing the competing claims to the Disputed Funds. The trial court did not state that it was admitting into evidence or deeming in evidence at trial any documents submitted in the City's claims process or attached to the defendants' answers or the parties' other pre-trial filings. At trial, no defendant offered any evidence in an attempt to prove any claim to the Disputed Funds. The MHI Parties and appellees/defendants Dona and Dordon Burke appeared and argued that the refund payments should be made on a pro rata basis. Appellee/defendant James Nebout also argued to the court during trial.

         After trial, the trial court rendered a final judgment ordering that the funds available for each property (with one property excepted[5]), be distributed to "the legal title owner(s) of [each property] appearing of record as of [the date of the trial court's judgment]." The trial court thus decreed that the refund amount that the City had calculated for each property with competing claims be paid to the person or persons holding record title to each property as of the date of the trial court's judgment. The trial court ordered the City to submit a final statement showing who owned record title to each property and the amount allocated by the City to each property. The court stated that, with that information, the court clerk then would ...


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