Maverick County cited for Default on Maverick County Detention Center’s $42.2 Million Bonds
By: Jose G. Landa, Copyright 2014, Eagle Pass Business Journal, Inc.
Maverick County Commissioners Court approved on October 21, 2013 that the Maverick County Sheriff’s Department under Sheriff Tom Schmerber take over the daily operations of the Maverick County Detention Center (MCDC) effective November 1, 2013 in order to save over 120 jobs in the community after The Geo Group, Inc. withdrew from operating the over 625 bed prison facility at 11:59 P.M. on October 31, 2013. The MCDC was financed by the creation of a non-profit corporation named the Maverick County Public Facility Corporation (MCPFC) which issued $42,255,000 Million in Bonds to construct and furnish the prison facility under former County Judge Jose A. Aranda, Jr.’s administration secured by a Deed of Trust and Security Agreement. These bonds were purchased by investors now known as Bondholders. The Bondholders leased with an option to purchase the MCDC to Maverick County. Maverick County had previously contracted with The Geo Group, Inc. to manage and operate the prison facility. Since November 1, 2013, the Maverick County Sheriff’s Department under Sheriff Tom Schmerber have overseen the management and operation of the prison facility. Maverick County has contracted with the United States Marshal’s Service to detain and house pre-trial inmates facing trial at the U.S. District Court for the Western District of Texas, Del Rio Division. Maverick County has expended over $1.9 Million of its 2013-2014 Fiscal Year Budget’s general funds to operate the prison facility and is awaiting payment of these $1.9 Million from the federal government, causing a severe financial crunch on Maverick County’s general operating funds for the 2013-2014 budget.
On May 16, 2014, the Trustee of the $42,255,000 Bondholders, U.S. Bank Corporate Trust Services of Los Angeles, California issued a Notice of Event of Default and Bondholders Call to Maverick County and the MCPFC for several events of Default. According to the Trustee’s Notice of Event of Default and Bondholder Call to Maverick County, U.S. Bank advises Maverick County that several events of Default have occurred and continuing under the indenture.
The Trustee’s Notice of Default states that “it has come to the attention that Maverick County recently intercepted approximately $919,275 of Project revenues and has refused to deliver such intercepted funds to the Trustee, which constitutes a violation of the County’s obligations under the Lease agreement, according to information from the bondholders of the facility.”
The Notice of Default states “Under the terms of the Lease, including Section 6.4 thereof, all Project revenues have been pledged as security for the Bonds and the County is obligated to cause all Project revenues to be delivered directly to the Trustee (U.S Bank) for proper disbursement to its corresponding entity.”
The Notice of Default further states that “the County has indicated that it intends to submit a proposal for Bondholders to consider in where the County would ask for some level of principal or interest collection forbearance that would allow the County to recover their advances to the project. Under the terms of the Lease, all Project revenues must be delivered directly to the Trustee and are to be used to pay Rental Payment Deposits first, prior to using such revenues to pay Project operating costs and expenses. Section 12.1(a) of the Lease provides that failure by the County to make a Rental Payment, Rental Payment Deposit or any other payment required to be paid under the Lease constitutes an Event of Default. The County’s failure to deliver intercepted funds to the Trustee for application towards the Rental Payment Deposits has caused an Event of Default under Section 12.1(a) of the Lease, which also constitutes an Event of Default under Section 7.01(c) of the Indenture.”
The Trustee’s Notice of Default also states that the County has also not provided the Trustee (U.S Bank) with various deliverables required under the Lease, including evidence of maintaining various levels of insurance with respect to the Project and annual audits of the Project’s operations during the 2012 and 2013 Fiscal Years as required by Section 2.1(l) of the Lease. By notice dated April 10, 2014 (the “Cure Notice”), the Trustee notified the County of such defaults and requested that the County deliver all overdue items within 30 calendar days of the Cure Notice. To date, the County has delivered only the 2012 Fiscal Year ended Financials but has failed to deliver such the remaining overdue items to the Trustee, which constitutes an additional Events of Default under Section 12.1(b) of the Lease, and also under Section 7.01(c) of the Indenture.”
The Trustee (U.S. Bank) further states that “a principal payment was not made as required on February 1, 2014 pursuant to the terms of the Indenture, on February 1, 2014, $1,330,000 in principal amount of the Bonds were to be redeemed pursuant to the mandatory sinking fund redemption. In light of GEO’s termination of its operating agreement with the County, and the uncertainty of the Project’s future operations, the February 1, 2014, mandatory sinking fund redemption was not made. The Trustee currently holds sufficient funds to redeem $1,330,000 in principal amount of the Bonds but would like Bondholder input regarding the distribution of such funds.
“The Trustee intends to schedule a telephonic meeting of Bondholders to discuss the Bondholders desire in making the mandatorysinking fund redemption, the above-described Events of Default and the next steps going forward. A large Bondholder has requested that the Trustee retain an independent consultant to work with the Sheriff in monitoring the operations at the Project and to increase the marketing to possible users of the Project.”
“The Trustee is currently holding $3,705,268 in the Debt Service Reserve Fund, $2,578,944 in the Project Rental Fund and $74,179 in the Project Operating Fund. It has not collected the full monthly principal and interest due monthly because of the described revenue interceptions by the County. In addition to advances the County is seeking recovery on, the prior Operator is claiming to be owed reimbursements due prior to their leaving the Project on October 1, 2013.”
“The County has advised that certain holdbacks against the prior Operator should be considered for deferred maintenance items before settling up with the prior Operator. The County, at this point, has not quantified the amount of holdback and detail of what the holdback claim is for.”
“U.S. Bank National Association (“U.S. Bank”) serves as trustee (in such capacity, the “Trustee”) under that certain Trust Indenture dated as of July 1, 2007 (as amended or supplemented, the “Indenture”), by and between it, as Trustee, and Maverick County Public Facility Corporation, as issuer (the “Issuer”), pursuant to which the above-referenced bonds (the “Bonds”) were issued. The Issuer used the proceeds of the Bonds to finance its acquisition, construction and equipping of a detention facility (the “Project”) located in Maverick County, Texas (the “County”). The Issuer leased the Project to the County pursuant to that certain Lease Agreement (with Option to Purchase) dated as of July 1, 2007 (the “Lease”), between the Issuer, as lessor, and the County, as lessee. The Lease has been assigned to the Trustee. Rental Payments and Rental Payment Deposits made by the County under the Lease support debt service payments on the Bonds. Payments on the Bonds are further secured by a mortgage on and a security interest in the Project pursuant to that certain Deed of Trust and Security Agreement dated July 1, 2007 (the “Deed”), granted by the Issuer for the benefit of the Trustee.”
At a June 26, 2014, Maverick County Commissioners Court special meeting, Commissioners Court discussed the $1.9 Million owed to Maverick County by the U.S. Marshal’s Service and the use of County general funds to operate and manage the MCDC. During the presentation of the Maverick County Treasurer and Auditor’s monthly reports it was stated that Maverick County’s cash flow levels are running low as County general funds are currently being used in the sustainability and maintenance of the Maverick County Detention Center. At the June 26th meeting, Commissioners Court noted that Maverick County has used $1.9 Million in the operation of the MCDC and that the county is currently awaiting to be reimbursed or be paid by the federal government and/or Bondholders.
Maverick County taxpayers are not liable for the $42,225,000 bonds, but rather the Maverick County Public Facility Corporation which issued these bonds. The Bondholders stand to lose their investment if the MCDC closes and the Maverick County Public Facility Corporation defaults on the bonds. The Bondholders may foreclose on their Deed of Trust and Security Agreement on the Maverick County Detention Center but would either have to contract with a third party to operate the prison facility or close it down. The Bondholders have the risk of losing their financial investment in the project. The Bondholders stand to lose the most if the project is not successful. The Bondholders have been working with the Maverick County Public Facility Corporation, Maverick County Commissioners Court, Maverick County Sheriff Tom Schmerber, and all interested parties in attempting to make the Maverick County Detention Center successful for the benefit of all concerned parties. It is unknown what action the Trustee and the Bondholders will take after issuing the Notice of Default to Maverick County and the MCPFC.
The Maverick County Public Facility Corporation Board of Directors include President Roberto Ruiz, Vice-President Jesus “Chuy” Sanchez, Secretary Asalia Casares, Treasurer Jose Luis Rosales, Board members County Judge David R. Saucedo, Gerardo “Gerry” Morales, and Sheriff Tom Schmerber.
At an April 7, 2014, MCPFC Board of Directors meeting, General Counsel Poncho Nevarez advised the Board that Maverick County Financial Consultant Roberto Rodriguez and him were in negotiations with the Trustee and Bondholders in attempting to reach an amicable settlement agreement of the parties’ responsibilities and obligations.
