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ACA Financial Guaranty Corp. v. City of Buena Vista

United States District Court, W.D. Virginia

February 8, 2018

ACA Financial Guaranty Corporation and UMB Bank, N.A., Plaintiffs,
v.
City of Buena Vista, Virginia, ET AL., Defendants.

          MEMORANDUM OPINION

          NORMMAN K. MOON SENIOR UNITED STATES DISTRICT JUDGE

         This case is about soured financing for a municipal golf course in the City of Buena Vista, Virginia. Through agreements in 2005, the City procured funds to renovate and service debt on the golf course. For initial purposes, one can conceptualize these agreements as creating a mortgage. The City and its recreational authority (“Authority”) received cash from a bank. In return, the City pledged, “subject to appropriations, ” to repay the loan. The golf course property served as security to protect the bank from nonpayment. But the City also pledged unusual collateral: City Hall, the police department, and the local courthouse (collectively, “City Hall”).

         Since 2015, the City has refused to make payments. But the plaintiffs here (the bank and the loan insurer) do not currently seek foreclosure on the secured properties. Rather, they filed this suit seeking damages under various contract, quasi-contract, and tort theories.

         In truth, the story is much more complex. It involves a lease agreement, a trust agreement, two deeds of trust (one of which the City asserts is void), a forbearance agreement, and municipal bonds. And these documents frequently cross-reference each other. To orient the reader with the basic features of this case, a rough summary of the structure of the 2005 agreements follows. A diagram is attached as an appendix to this opinion.

         The golf course.

         The Authority leased the golf course to the City in exchange for long-term rent payments.

         The money and the bonds.

         But the Authority-through a Trust Agreement- immediately assigned those long-term rent payments to Plaintiff UMB Bank (actually, its predecessor in interest SunTrust, but henceforth “UMB Bank”). It did so to repay UMB Bank, because UMB Bank had agreed to purchase municipal bonds offered by the Authority, thus immediately injecting the outside cash (over $9 million) into the golf course project.

         The collateral.

         To entice UMB Bank to provide this financing (and to protect it if the City failed to pay rent), both the City and the Authority executed deeds of trust for the benefit of UMB Bank. The Authority Deed of Trust offered the golf course property as collateral, and the City Deed of Trust listed city hall, the police department, and the courthouse as security.

         The insurer.

         Finally, as added protection from nonpayment by the City, UMB Bank insured the bonds through Plaintiff ACA Financial Guaranty Corporation (“ACA”). So, if the City reneged on its rent (which, recall, effectively operated as loan repayments), ACA would pay off the bonds, and UMB Bank would not be left holding the bag. In return, ACA was made a third-party beneficiary of the Trust Agreement between the Authority and UMB Bank, thus giving ACA certain rights and remedies it otherwise lacked.

         So, the possibility the City might balk at its payments was widely contemplated. It now having done so, Plaintiffs sued for damages. Defendants assert that the Complaint fails to state a claim.[1] Two points suffice to resolve most of the motion to dismiss.

         First, contrary to the City's contention, its deed of trust is not void under Article 7, Section 9 of the Virginia Constitution, because the deed of trust is not a “sale” of the City's property. This conclusion negates the claims Plaintiffs pled in the alternative-i.e., those contingent upon a finding of the deed of trust's invalidity.

         Second, to the extent the contracts here purport to create obligations of payment, they do so expressly “subject to appropriations” by the City. Under Virginia law, this proviso makes the obligations only moral ones that are not legally enforceable and cannot support damages. Consequently, Plaintiffs cannot show a breach due to nonpayment.

         Plaintiffs' sundry other theories of breach do not hold up against scrutiny. Nor are Plaintiffs seeking in this lawsuit a judicial foreclosure on the properties covered by the operative deeds of trust. Accordingly, this case will be dismissed with prejudice.

         STANDARD OF REVIEW

         To determine whether a Complaint states a legal claim, the Court must accept as true all well-pled allegations, draw reasonable inferences in favor of the plaintiff, disregard the Complaint's legal conclusions and arguments, and ensure the plaintiff offers more than a formulaic recitation of the elements. See generally Ashcroft v. Iqbal, 556 U.S. 662 (2009). The Court also considers the operative contract documents attached to the Complaint. Leichling v. Honeywell Int't, Inc., 842 F.3d 848, 851 (4th Cir. 2016).

         The Complaint includes extensive allegations characterizing the terms of the agreements underlying this lawsuit. The Court includes these allegations in recounting the Complaint to help familiarize the reader with this lawsuit and the full scope of the contentions. The Court does not defer to these characterizations when undertaking its legal analysis, as legal conclusions-unlike properly pled facts-do not bind the Court. See Beck v. McDonald, 848 F.3d 262, 271 (4th Cir. 2017); SD3, LLC v. Black & Decker, Inc., 801 F.3d 412, 422 (4th Cir. 2015).

         FACTS AS ALLEGED

         The Authority owns the golf course, which it leased (and apparently continues to lease) to the City. (Complaint ¶ 8). Although intended to boost the local economy, the golf course allegedly flopped. (Id. ¶ 9). So the Authority needed money to refinance the course and make improvements. (Id. ¶ 10). The City Council hence passed a resolution on April 4, 2005 “which outlined the basic parameters for a bond financing transaction” valued at over $9 million. (Id.).

         The 2005 Resolution

         The resolution (which passed by a 4-0 vote, with three councilmembers absent) allegedly approved various “Financing Documents” for the golf course project. These documents included the Authority-City lease of the golf course, a trust agreement between the Authority and UMB Bank, and two deeds of trust securing UMB Bank-one from the Authority with the golf course as security, and the other from the City with the “existing City Hall building and police station as security.” (Dkt. 1-2 (Resolution), Recitals (a)-(d)).

         The Trust Agreement (between UMB Bank and the Authority) and the Bonds

         Bonds were issued as contemplated by the Trust Agreement. (See Complaint ¶ 13). Plaintiff UMB Bank was identified as the Trustee. The Trust Agreement assigned to UMB Bank (among other things) the Authority's right to receive the City's rent payments for the golf course due under the City-Authority Lease Agreement. (Id. ¶ 14; Trust Agreement §§ 101(a), 102(a)). Functionally, then, the City would finance the bonds (issued by the Authority to fund the golf course) by paying the trustee (UMB Bank, who provided cash by initially purchasing the bonds) the City's rent over time (which otherwise would have been paid to the Authority).

         Plaintiff ACA also factored in: It insured the bonds, and the Trust Agreement made it a third-party beneficiary to both the Trust Agreement and, ostensibly, the “Basic Agreements”- i.e., the City/Authority Lease, the City Deed of Trust, and the Authority Deed of Trust. (Trust Agreement, § 1606 & Definitions).

         The City's Deed of Trust

         As security for bond payments and the City's lease obligations, the City executed a deed of trust for the benefit of UMB Bank. (Complaint ¶ 19). The City agreed to “pay all indebtedness secured by this Deed of Trust . . . at the times and in the manner and amounts set forth in the Bonds, this Deed of Trust, and the Trust Agreement.” (Id. ¶ 20 (citing § 1.1)). The City also agreed to comply with all federal, state, and local rules and regulations governing the “Secured Property.” (Id. ¶ 21 (citing § 1.11)). The security offered by the City Deed of Trust included city hall, the police department, and the local courthouse facilities. (Id. ¶ 23).

         Upon an event of default (as defined in Article III of the City Deed of Trust), UMB Bank could immediately accelerate “all sums due on or by reason of the Trust Agreement, the Bonds or this Deed of Trust, ” and take possession of “all or any portion of the Secured Property and sell” it at auction. (Complaint ¶ 24 (citing Article IV)). The Deed of Trust also permitted UMB Bank to enter onto, take possession of, and operate the Secured Property without a court order. (Id. ¶ 25 (citing §§ 4.4, 4.5)). The City acknowledged the possibility of being evicted from City Hall in an Essentiality Certificate. (Id. ¶ 26). The City Deed of Trust, however, excluded foreclosure on the courthouse facilities, on the grounds that state law vested local judges with ultimate control over those facilities. (Id. ¶¶ 27 (citing Article IV)).

         The Authority's Deed of Trust

         The Authority also executed a Deed of Trust naming UMB Bank as the beneficiary. And again, the document was meant in part to secure compliance with the terms of the “Bonds, this Deed of Trust, the Lease Agreement, and the Trust Agreement . . .” (Complaint ¶ 30). The provisions of the Authority Deed of Trust are largely the same as the City's. The secured property for the Authority Deed of Trust, however, is the golf course.

         Citing both the City's and Authority's Deeds of Trust, Plaintiffs allege that, to induce them into providing the bond financing and insurance, the Authority and City granted them “a comprehensive bundle of express assurances and security interests to protect [them] in the event the Bonds were not timely and fully repaid.” (Complaint ¶ 37).

         The Opinion Letters

         Plaintiffs allege that opinion letters from April 14, 2005 by the City's and Authority's attorneys “provided further . . . assurances” that the Financing Documents are valid. (Complaint ¶ 55). A letter from the City Attorney asserted that the April 4th resolution, the Lease Agreement between the City and the Authority, and “the consummation by the City of the transactions contemplated by them” are lawful, valid documents. (Complaint ¶ 56 (quoting Kearney Letter)). The letter emphasized that the “City Resolution was duly adopted by the City Council of the City [sic] and is in full force and effect.” (Kearney Letter ¶ 2).

         As special counsel for the City, law firm LeClair Ryan also wrote an opinion letter regarding the City Deed of Trust. The firm opined that the City Deed of Trust created a valid security interest; was “duly authorized, executed and delivered[;] constitutes the valid and binding obligation of the City[;] and is enforceable in accordance with its terms” regarding the City Hall property. (Complaint ¶ 57 (quoting LeClair Ryan Letter for City ¶¶ 1, 2)). LeClair Ryan further opined on other Financing Documents, similarly affirming the validity and enforceability of those agreements. (Complaint ¶ 58 (quoting Second LeClair Ryan Letter ¶ 1)). But the letter stated that the City's obligation to pay rents under the Lease Agreement “is subject to and dependent upon the City Council making annual appropriations for such purpose.” (Id.).[2]

         The Forbearance Agreement

         In 2010 and 2011, the City allegedly failed to make rent payments under the Lease Agreement sufficient to service the bond payments, and it appropriated only a portion of the rent payments for 2012. (Complaint ¶ 38). Defendants requested Plaintiffs forbear their rights under the Financing Documents. (Id. ¶ 39).

         The City, the Authority, and ACA consequently executed the Forbearance Agreement on July 1, 2011, allegedly permitting the City to service 50% of its debt over five years and the other 50% five years after the bonds' maturity date. (Id. ¶ 40). In the event of additional nonpayments, ACA allegedly had the right to terminate the Agreement and exercise any rights it had under the Financing Documents. (Id. ¶ 41). In entering into the Forbearance Agreement, both the City and the Authority ratified and reaffirmed “the validity and binding nature” of the original Financing Documents. (Id. ¶ 42 (citing Forbearance Agreement § 6)).

         The City's Subsequent Nonpayment

         The City Council voted in January 2015 to cease payments altogether and has not made any since. (Complaint ¶ 43). Plaintiffs, “upon information and belief, ” contend that the City can afford to make payments, but that “for political or other reasons-perhaps recognizing, in retrospect, that” the golf course was a bad idea-it refuses to make appropriations. (Id. ¶¶ 44- 45).

         According to Plaintiffs, the City has asserted prior to initiation of this lawsuit that the City Deed of Trust is void ab initio because only four of seven councilmembers voted on and for it. (Complaint ¶ 48). Plaintiffs alleged that the operative documents and other facts belie this assertion. (Id. ¶¶ 49-50).

         Based on the foregoing allegations and the Financing Documents, Plaintiffs assert ten claims noted below, most of which sound in contract.[3]

         ANALYSIS

         I. Procedural and Threshold Matters

         Before turning to the core claims presented by this case, the Court clears out some underbrush. By way of summary, Counts 1, 8, 9, and 10 will be dismissed.

         Count 1 seeks a declaratory judgment regarding the validity of the Financing Documents. But a declaratory judgment is a remedy, not a substantive claim. Moreover, the only Financing Document whose validity is in question is the City Deed of Trust. The Court must already pass upon its validity as a threshold question in assessing Count 3, alleging a breach of that deed. So it serving no purpose, the declaratory judgment count will be dismissed as explained further below.

         The Court will then turn to the parties' arguments regarding the validity of the City Deed of Trust. Ultimately, the Court concludes that it is not void.

         Next, Plaintiffs lodged claims for fraudulent constructive inducement (Count 9) and unjust enrichment/quantum meruit (Count 10). These claims were pled alternatively in the event that the City Deed of Trust was void. Since it is not void, Counts 9 and 10 warrant dismissal.

         And Count 8, seeking appointment of a receiver over the golf course, involves a discretionary judicial remedy governed by federal common law and is not a freestanding, substantive, state law claim. So it too will be dismissed.

         A. Declaratory Judgment (Count 1)

         In their first count, Plaintiffs ask the Court to “declare that the Financing Documents are valid and enforceable.” (Complaint ¶ 71). The City observes that Plaintiffs already have six counts alleging various breaches of the Financing Documents, which will require actual resolution of their validity. (Dkt. 9 at 23). It contends Count 1 “will not serve a useful purpose in clarifying the legal relations or afford relief from the controversy, ” because the “validity of the Financing Documents is [already] an element that must be proven to establish Plaintiffs' breach claim.” (Id. at 25). The Court agrees.

         The Declaratory Judgment Act, 28 U.S.C. § 2201, creates a remedy, not a substantive cause of action. Its operation “is procedural only. Congress enlarged the range of remedies available in the federal courts but did not extend their jurisdiction.” Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671 (1950); see CGM, LLC v. BellSouth Telecommunications, Inc., 664 F.3d 46, 55 (4th Cir. 2011). Put differently, a declaratory judgment is simply the remedial procedural vehicle by which a court can declare the rights of the parties as to an underlying legal dispute over which jurisdiction is otherwise proper. See 10B Wright & Miller, Fed. Prac. & Proc. Civ. §§ 2751, 2754, 2756, 2766 (4th ed.). Its purpose is to allow “prospective defendants to sue to establish their nonliability, ” not create a substantive tack-on claim for an already- existing plaintiff who is adjudicating an already-live legal issue. See Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 504 (1959); Discover Bank v. Vaden, 396 F.3d 366, 371 (4th Cir. 2005) (Under the Declaratory Judgment Act, “a party which traditionally would be a defendant can bring a preemptive suit in federal court, thus accelerating the claim against it.”).[4]

         Thus, to the extent Plaintiffs wish to obtain a judgment establishing the validity of the contracts, they would do so by proving their substantive contract claims.[5] One cannot, after all, succeed on a breach of contract claim without first establishing that a valid contract exists. See Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 154 (Va. 2009).

         In sum, Count 1 is not a freestanding claim, and the issue it raises is already a part of what is squarely presented in this ...


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