A bankruptcy case involving an Arizona participant sports venue could be dismissed amid allegations by a U.S. trustee of “dishonesty, incompetence, or gross mismanagement,” as well as the possible misuse of bond proceeds on the part of its nonprofit owner.
Legacy Cares Inc. filed the Chapter 11 bankruptcy in Arizona federal court May 1 after defaulting on $284 million of mostly tax-exempt, unrated revenue bonds it sold in 2020 and 2021 through the Arizona Industrial Development Authority (AZIDA), which has a growing list of troubled conduit deals.
In a June 28 filing, U.S. Trustee Ilene Lashinsky, who is monitoring the case, asked the court to appoint an independent Chapter 11 trustee to assume control over Legacy Cares’ assets and operations or dismiss the case.
In her argument for a trustee, Lashinsky said Legacy Cares “has been evasive and unforthcoming in advising bondholders and creditors of material facts concerning the financials, receivables, and expenditures,” and it would be imprudent and unfair to creditors to presume the gross mismanagement that occurred before the bankruptcy filing “will suddenly cease.”
“A trustee will unquestionably act as a true fiduciary to all creditors to preserve, protect, and pursue all assets of the estate,” the filing stated, adding the trustee would be in a position to pursue actions against the venue’s former operator, Legacy Sports and others to ensure all potential assets are recovered.
The filing claims there were pre- and post-bankruptcy petition misdeeds on the part of Legacy Cares, including loans made to Legacy Sports and other third parties, with Lashinsky contending some of the money likely came from bond proceeds — a practice prohibited under a loan agreement with the AZIDA.
“It is unclear whether the debtor was ever repaid the loans and other receivables from Legacy Sports and, thus, whether these are current assets of the bankruptcy estate,” according to the filing.
The U.S. trustee also claimed Legacy Cares falsely certified in 2022 it was in compliance with the loan agreement even though it failed to file an annual audit and was the target of mechanics liens now totaling over $33 million. Concerns were raised about Elite Sports Group, which in April took over the management of the 320-acre Legacy Park in Mesa that opened in January 2022.
U.S. Bankruptcy Court Judge Daniel Collins set a July 20 deadline for parties to respond or object to the U.S. trustee’s motion ahead of a July 27 hearing.
Legacy Cares called the motion “unnecessary and reckless,” contending it will “set the record straight” when it files its formal response.
“The U.S. Trustee was given the opportunity to speak with Legacy Cares’ chief financial officer, but she declined that opportunity,” it said in a statement. “Instead, she hastily wrote a motion that undermines Legacy Cares’ efforts to sell the park and maximize recovery for the creditors.”
In its latest disclosure notice posted on the Municipal Securities Rulemaking Board’s EMMA website, Legacy Cares said investment banking firm Miller Buckfire continues preliminary marketing of the property although there is no assurance it will sell or at what price.
The notice also cited a June 15 bankruptcy court order approving financing for operations and bankruptcy-related costs that may be funded with money held by the bond trustee in the debt service reserve fund.
Last year, bond trustee UMB Bank declared events of default because Legacy Cares failed to make scheduled monthly payments toward the revenue fund that supports debt service on the venue, which was built to host youth and amateur competitions in sports including soccer, basketball, volleyball and pickleball.
A bond payment default occurred in January when only $2.68 million was available in the bond fund to make a $10.3 million interest payment.
In February, bondholders rejected a plan to refinance the bonds and generate funds to settle claims from contractors and others.
Bell Bank, which held naming rights to what had been known as Bell Bank Park, announced in April it had terminated the 2021 naming rights agreement.
Legacy Cares’ high-profile financial woes have subjected AZIDA to increased scrutiny. Arizona Gov. Katie Hobbs in March informed Executive Director Dirk Swift the agency must disclose details about borrowers, including past projects and experience, existing financings, past defaults, debt-to-income ratio over the past 12 months, and business plans.
The agency was asked to direct its bond issuances to certain priority areas listed by the governor that included affordable housing, broadband infrastructure, and renewable energy.
AZIDA, which has been serving as a conduit bond issuer for out-of-state projects, was also told that each Tax Equity and Fiscal Responsibility Act submission to the Democratic governor’s office must address how the proposed project benefits the state of Arizona, particularly its underserved and historically excluded communities, and how it advances the governor’s project priorities.
At least two letters of support from a current federal, state, or local elected official representing the project area will be required, according to Hobbs’ March letter. Swift did not respond to emailed questions concerning Hobbs’ directives, the Legacy Cares bankruptcy, and a September 2022 Arizona Auditor General report recommending more oversight of the AZIDA by the Arizona Finance Authority (AFA) board.
The performance audit found “the AFA Board had not implemented internal controls for managing and overseeing some AZIDA activities, such as its conduit bond program which issued approximately $2 billion in conduit bonds in fiscal year 2022, resulting in increased risk for errors and fraud.”
Defaults have popped up in other AZIDA conduit deals.
The most recent impairment involves nearly $199.7 million of nonrated, taxable revenue bonds sold in 2022 for New Life Forest Restoration to finance an expansion of its wood products manufacturing facilities in the state. The bonds were dubbed sustainability-linked due to a forest restoration component.
In May, the company, the majority senior bondholder, and the bond trustee entered into a limited duration forbearance agreement, according to a disclosure on EMMA. Last month, Series A cash-paying interest bonds were converted to payment-in-kind bonds, according to Municipal Market Analytics, which considers the move a default.
The AZIDA board on June 15 approved a plan, presented by the company and an attorney for bond trustee UMB Bank with the support of senior bondholders, to incur up to $55 million in additional debt to complete the project, according to draft meeting minutes.
A default occurred in 2021 for $22 million of bonds AZIDA sold in 2019 for Harvest Gold Silica to finance facilities to remediate mine solid waste into silica-based products on leased land in Congress, Arizona.
Some AZIDA deals that financed projects in other states are also troubled.
On June 30, S&P Global Ratings downgraded the rating on $380 million of revenue bonds the authority sold in 2019 for Great Lakes Senior Living Communities by two notches to CCC-minus with a negative outlook, citing a projected shortfall in funds available for debt service. Bond proceeds were used to acquire eight senior living facilities in Michigan and Ohio.
A short-term forbearance agreement ends July 31.
The most recent event disclosure on EMMA for the $31.2 million of revenue bonds that were privately placed in 2019 for Elevate Housing Foundation was a default notice in December 2021. Proceeds were earmarked for acquiring and improving three senior living and healthcare facilities in Illinois and Indiana.