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City failed to appropriate funds for golf course rent.

Byline: Virginia Lawyers Weekly

Where a public authority's obligation to repay bonds was conditioned of its receipt of rent from the city, and the city's payment of that rent was conditioned on the appropriation of funds that were not, ultimately, appropriated, neither the city nor the authority could be sued for breach of contract.

Background

In 2003, at the request of the City of Buena Vista, the Public Recreational Facilities Authority took out a loan to finance the construction of the Vista Links Golf Club. In 2005, the city and the authority sought to refinance the loan. The authority issued over $9 million in bonds and entered into a trust agreement with SunTrust Bank that described how the bonds would be issued and repaid and set forth the rights of the parties if the bonds were not repaid. The authority used the bond proceeds to pay off the existing loan.

To have a source of revenue to repay the bonds, the authority leased the golf course to the city. Under the lease agreement, the city agreed to make rent payments and the authority agreed to use those payments to repay the bonds. The city's obligation to make the rent payments was subject to funds being appropriated for that purpose.

The city and the authority both entered into deeds of trust with the bank, pledging certain properties as security for the bonds and providing the bank with creditor rights to the collateral in the event the bonds were not repaid. The bank also retained ACA Financial Guaranty Corp. to provide insurance on the bonds. ACA agreed to pay off the bonds if there was a default in repayment and, if required to do so, ACA would then assume the bank's rights to receive rent payments and enforce other creditor rights.

In 2010 and 2011 the city failed to appropriate enough money to fully pay the rent due on the golf course lease and, as a result, the authority was unable to repay the bonds. The parties entered into a forbearance agreement wherein the ACA agreed to make up the shortfall and temporarily forgo exercising its creditor rights and the city and the authority agreed to reimburse the ACA for the payments and continue repaying the bonds from rent payments. The city's obligation to pay rent was again subject to such funds being appropriated.

In January 2015, the city voted not to appropriate funds for the rent. The city has not made any rent payments since that time, rendering the authority unable to repay the bonds. ACA and the bank then filed this action in federal court. The city and the authority subsequently moved to dismiss the complaint. The court granted their motion and this appeal followed.

Analysis

The crux of the lawsuit is whether the city has an enforceable obligation to make rent payments. The lease agreement makes clear that this obligation is wholly dependent on the appropriation of funds for that purpose and specifically states that a failure to make rent payments because funds were not appropriated does not constitute a breach of the agreement. Since funds were not appropriated, the cause of action for breach of the lease agreement must fail.

As the authority's obligation to make bond payments under the trust agreement was similarly conditioned on the city's payment of rent and the authority had no independent obligation to make bond payments in the absence of the city's payment of rent, the cause of action for breach of the trust agreement must also fail.

The deeds of trust are governed by the terms of the trust agreement. There is no independent cause of action for violations of the deeds of trust. As neither the trust agreement nor the lease agreement was breached, the cause of action alleging violations of the deeds of trust fails to state a claim for which relief can be granted.

Like the lease agreement, the forbearance agreement also conditioned rent payments on the city's appropriation of funds. As such, there can be no cause of action for breach of the forbearance agreement.

The "subject to appropriation" language contained in the agreements is not ambiguous. As sophisticated commercial entities, ACA and the bank are bound by the plain and ambiguous terms of their contracts. The claim alleging breach of the implied covenant of good faith and fair dealing is nothing more than an attempt by ACA and the bank to save themselves from the consequences of the express terms of the agreements.

ACA and the bank are likewise unable to recover under the doctrines of restitution, quantum meruit and unjust enrichment because the underlying financing documents are enforceable.

While ACA and the bank requested leave to amend in their opposition papers, they never indicated what amendments were being sought and they never identified the fact or causes of actions they sought to include. As such, these requests were properly denied.

Affirmed.

ACA Financial Guaranty Corp. v. City of Buena Vista, Case No. 18-1268, Feb. 21, 2019. 4th Cir. (Quattlebaum), Appeal from WDVA at Lynchburg (Moon). Scott Carlton Ford and Brian Aaron Richardson for Appellants; Kevin M. Rose for Appellees. VLW 019-2-061. 20 pp.

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Title Annotation:ACA Financial Guaranty Corp. v. City of Buena Vista, U.S. Court of Appeals for the 4th Circuit
Publication:Virginia Lawyers Weekly
Date:Mar 8, 2019
Words:866
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