Local governments that float Marks-Roos bonds have a fiduciary responsibility to the investors who hold the bonds – but not to the property owners who provide the revenue to make the bond payments, the Third District Court of Appeal has ruled. The issue was raised by prominent Sacramento-area developer Marvin L. "Buzz" Oates. He claimed that the City of Lincoln's decision to refinance eight bond issues under the Marks-Roos bond pooling law constituted an unconstitutional taking of his property. He claimed that the refinancing raised his assessments and increased the length of time he must pay. But the Third District ruled against him. Oates purchased property in 1989 in Lincoln's Nicolaus Road Assessment District, which had floated $5.8 million in bonds in 1986 to provide infrastructure to the area. At the time the bonds were issued, $580,000 – 10% of the proceeds – was placed in a reserve fund for the benefit of bondholders. Establishing this reserve fund is a customary practice in public finance. Upon his purchase, Oates began paying assessments that helped to retire the bonds, which were due to come to maturity this year. However, in 1994 the city combined eight different outstanding bond issues, including Nicolaus Road, into one comprehensive refinancing under the Marks-Roos bond pooling act. The city found that the Nicolaus Road reserve fund still contained $551,000, which was used to reduce the outstanding principle. After refinancing, the interest rate dropped. In conducting the refinancing, the city made three findings required by Streets & Highways Code § 9525: (1) that the estimated annual amount of repayment would be less; (2) that the number of years to maturity would remain unchanged; and (3) that the principal amount owed by each subdivision of land in the district was less after the refinancing. Oates sued, claiming constructive fraud and an unconstitutional taking and calling for an accounting of the reserve fund – apparently because he believed the reserve fund had not been used to pay down the principal before the refinancing. Placer County Superior Court Judge Frances Kearney ruled in favor of the city, concluding that evidence existed that the reserve fund had paid down the principal. Oates's appeal turned on the question of whether the city had a fiduciary responsibility to him as a property owner who pays assessments that are used to pay back the bonds. Oates's main piece of evidence came from expert witness Robert W. Doty, who concluded that "the local government holds the reserve fund not only for the benefit of bondowners (in the event private property owners fail to pay assessments) but also as the foundation for the credit to or reduction in assessments on the private parcels (in the event that private property owners do make payment of their assessments) … Thus, the local government holds the reserve fund if it is not needed to pay bondowners, specifically for the benefit of property owners." The city responded that the possibility of refund or credit to property owners such as Oates is contingent on Oates paying the entire assessment and never defaulting. The Third District agreed. "Unless and until the bondholders were satisfied, property owners possessed no interest in the reserve fund, only a possible future interest dependent on future events," wrote Justice Vance Raye. "Until satisfaction of this obligation to the bondholders, no interest resides in the property owners." Raye also rejected Oates's argument that interpreting the law in this way opens the city to self-dealing and manipulation. The court also rejected Oates's argument that the reserve fund was improperly used in the refinancing. "Oates's dissatisfaction with the costs of the refinance does not translate into noncompliance," Raye wrote. Finally, the court rejected Oates's argument that the refinancing amounted to constructive fraud against him because the city did not have a fiduciary responsibility to him. "Again, this argument overlooks the contingent quality of any interest that the property owners possess," Raye wrote. The Case: Oates v. City of Lincoln, No. C035975, 01 C.D.O.S. 9155. Issued October 24, 2001. The Lawyers: For Marvin L. Oates: Edward R. Brenner, (916) 925-3113. For City of Lincoln: G. Richard Brown, McDonough, Holland & Allen, (916) 444-3900