Investor efforts to recoup losses in five Chicago-area affordable housing bond deals are moving to civil courts as bankruptcy cases involving $170 million of municipal debt draw to a close.
As a final payout looms on the last of the Better Housing Foundation’s portfolios, one lawsuit filed in a Missouri state court against St. Louis-based bond underwriter Stifel Financial Corp. could accelerate with the potential for other suits against the deals’ participants to follow.
Lawyers representing Troy, Alabama-based Troy Bank and Trust Co., holder of bonds in a $19 million issue for the BHF's Ernst portfolio, will ask St. Louis County Judge Thomas C. Albus to certify class action status for their case filed last year against Stifel alleging negligence in its role as underwriter.
Troy’s lawyers believe discovery in the case that is headed for a 2023 trial could now accelerate with the bankruptcy paper trail finalized.
“Given that the history and underlying facts are fairly well known and public, that should speed up the litigation,” said Joseph Kronawitter, an attorney at Horn Aylward & Bandy LLC, which represents Troy Bank. Stifel underwrote all of the BHF issues.
The not-for-profit Ohio-based Better Housing Foundation issued nearly $170 million of investment grade bonds through the Illinois Finance Authority between 2016 and 2018 to acquire three Chicago portfolios and two suburban portfolios. All were in default by 2019.
Bankruptcy filings disclosed that the deals had drawn the scrutiny of the
The law firm Davis & Ceriani PC is continuing discussions with institutional buyers of the various portfolios to assess potential litigation. Trustee UMB Bank NA connected the firm with holders who were pressing the pursuit of participants on securities fraud in the deals due to the meteoric unraveling of the bonds. Investors could also pursue deal participants with a law firm of their choosing.
Whether that leads to a lawsuit or suits likely hinges on the participation of major institutional holders, a source said.
UMB told holders on investor calls that a pursuit of such claims was out of its purview given its role as representative of the trust estate with its role limited to resolving defaults and that securities litigation would need to be pursued on a separate track.
All five of the portfolios entered bankruptcy last year to clear the decks for property auctions free of debts, with the first in January 2020 and the last entering Chapter 11 in December. The trustee has
All suffered haircuts at varying levels based on each portfolio's condition, other secured debts that had piled up, and competition for the properties at auction.
The bonds were originally sold through the conduit Illinois Finance Authority, many with triple-B to single-A ratings from S&P Global Ratings.
The bond proceeds financed the acquisition and some rehabilitation costs for dozens of apartment buildings with about 2,000 units across the five portfolios. The Chicago-based portfolios stumbled out of the gate with reports of code violations, dwindling occupancy, and the loss of Chicago Housing Authority voucher payments. Many remained uninhabitable and Chicago eventually stepped in and sought housing court receivers.
The pending lawsuit only names Stifel, accusing the firm of negligence and misleading negligence for allegedly failing to conduct proper due diligence leading to an offering with material misrepresentations and facts omitted in violation of state and federal securities law.
One source said it’s unusual to go after only one participant as it leaves open the argument for the defendant to blame other participants in the deal such as the properties’ appraiser or other advisors or borrower.
Troy purchased $200,000 of the $15.3 million senior series in the $19 million Ernst issue sold in 2018, which was rated A-minus by S&P.
Soon after, the trustee learned and disclosed of previously undisclosed city housing violations and the poor condition of properties that led to city sanctions and the loss of federal housing vouchers, covenant and eventual payment defaults. A 2019 trustee notice offered holders the first glimpse of how deep the problems ran.
“The bonds went into default because of fiscal irresponsibility and lack of financial acumen by BHF and Integrus [property manager], which Stifel knew about, or reasonably should have known about after reasonable investigation and before selling the bonds to plaintiffs and the series A bondholders,” the lawsuit charges.
The lawsuit also lays out the connections between the BHF’s original operators and the management companies that allowed them to allegedly reap financial profits from the transactions as well as problems that led to Ohio-based BHF losing its tax-exempt status, the lawsuit says.
“The materials facts misrepresented and omitted by Stifel negatively impacted the value of the Bonds. Stifel’s negligent underwriting caused Plaintiff and the Class Members to suffer damages including the loss of their investment and investment income,” the lawsuit reads.
Stifel denies the accusations and argues for dismissal of the case arguing it comes past a two-year statute of limitations on the discovery of the facts alleged in the lawsuit and that Troy is a sophisticated investor knowledgeable of the risks with such deals.
“Plaintiff’s claims are barred because Stifel acted at all times with reasonable care in accordance with industry standards in underwriting and selling the bonds at issue. Stifel underwrote the Ernst municipal bond issuance with the utmost prudence and care using Standard & Poor’s stringent rating criteria,” Stifel’s response filing says. “Plaintiff’s claims are barred because no material fact was misrepresented nor was any material fact omitted from plaintiff or any putative class member in connection with the Ernst issuance.”
The Chicago-based Shoreline, Icarus, and Ernst portfolios defaulted in June 2019. The suburban Windy City and Blue Station portfolios were in better shape with healthy occupancy rates but they too were dragged into BHF’s financial struggles as the borrower lost its tax-exempt status so was required to pay some taxes. The
The brewing Chicago problems were detailed in an August 2018
All five portfolios entered Chapter 11 under section 363 of the code that allows for the sale of assets free and clear of liens, claims and interests. Judge Jack B. Schmetterer, who presides in the Northern District’s Eastern Division in Chicago, has overseen the cases.
Shoreline
BHF borrowed $13.6 million for the Shoreline portfolio. The final bond claim was set at $14.8 million and the trustee made a
Lindran Properties LLC, an affiliate of BHF that served as owner of the Shoreline portfolio, filed Chapter 11 in January 2020 after reaching agreement with stalking horse bidder PRE Holdings 14 LLC, which offered $3.9 million for the 13 buildings with 260 units. No other bidders stepped forward and the court approved a distribution plan last fall and the case closed in November 2020.
Icarus
BHF borrowed $51.8 million for the Icarus portfolio in Chicago of 45 buildings with 545 units. The final bond claim was set at $56.7 million. After payment of the trustee expenses, $8.16 million was
Icarus
At an October 2020 auction the portfolio received a high
bid of $18.6 million from Longwood Development Corp. and Atlas Asset Management Services Corp. The court approved the sale later that month.
Ernst
BHF borrowed $19 million for the Ernst portfolio that includes 17 buildings with 182 units in Chicago. The final bond claim was set at $20.6 million and a
BHF reached a sale agreement with PRE Holdings 15 LLC to serve as a stalking horse with a $4.5 million bid and Chapter 11 was filed in September 2020.
At the Nov. 5, 2020 auction, five bids were received with the top one for $8.75 million submitted by BHF Acquisition LLC. The court approved the sale Nov. 17.
Windy City
BHF sold $60 million of bonds for the suburban Chicago Windy City portfolio of more than 500 units in various western suburbs with properties lumped into several individual groups managed by BHF.
A final bond claim was set at $65.3 million, including $54 million of senior bonds and $8.5 million of subordinate bonds.
The trustee made an initial distribution of $34.5 million in March with most applied to senior bonds and $312,434 applied to the subordinate bonds.
An additional distribution of $4.7 million followed in April and a third and final distribution for $415,000 followed in August to senior holders, according to a trustee notice.
The various entities filed Chapter 11 in October 2020. BHF reported a stalking horse bid of $39 million from ACG Iowa Acquisitions LLC. At a Dec. 4 auction, a top bid of $42 million came from the firm Second City.
Blue Station
BHF sold $25 million of bonds for the 345-unit Blue Station portfolio in south suburban Blue Island. A final bond claim was set in court at $26.3 million including $23 million owed on senior bonds. A first distribution of $13.1 million was made to senior holders and $218,528 to subordinate holders in June and a second and final distribution is expected this year.
BHF struck a sale agreement Nov. 19, 2020 with Kinzie Assets LLC that paved the way for a Chapter 11 bankruptcy filing in December. Kinzie had offered $15.1 million and served as a stalking horse bidder.
No other bidders stepped forward and the sale closed March 16 generating net sale proceeds of $12.55 million. An additional $665,000 of funds are held by BHF bringing the total pot to $13.2 million but bondholders won’t receive all of it.
