United States District Court, W.D. Virginia
ACA Financial Guaranty Corporation and UMB Bank, N.A., Plaintiffs,
City of Buena Vista, Virginia, ET AL., Defendants.
NORMMAN K. MOON SENIOR UNITED STATES DISTRICT JUDGE
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”).
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.
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.
Authority leased the golf course to the City in exchange for
long-term rent payments.
money and the bonds.
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.
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
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.
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. Two points suffice to resolve most of the
motion to dismiss.
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.
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
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.
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
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).
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.).
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),
Trust Agreement (between UMB Bank and the Authority) and the
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).
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).
City's Deed of Trust
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).
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)).
Authority's Deed of Trust
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.
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 ¶
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).
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
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).
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 §
City's Subsequent Nonpayment
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. ¶¶
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).
on the foregoing allegations and the Financing Documents,
Plaintiffs assert ten claims noted below, most of which sound
Procedural and Threshold Matters
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.
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.
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.
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.
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.
Declaratory Judgment (Count 1)
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.
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
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. 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.
Count 1 is not a freestanding claim, and the issue it raises
is already a part of what is squarely presented in this ...