NORMAN K. MOON, SENIOR 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.
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.
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.
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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (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
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 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)).
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).
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
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).
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.).
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
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.
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.
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
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, 70 S.Ct. 876, 94 S.Ct. 1194 (1950); see CGM, LLC v. Bell-South 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, 79 S.Ct. 948, 3 L.Ed.2d 988 (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.").
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.
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 case. Accordingly, it will be dismissed.
Turning to that squarely presented issue, as a defense to Count 3 the City asserts that its deed of trust covering City
The City's argument comes up short at the second step. A deed of trust is an encumbrance on real property akin to a mortgage; it is not a sale. Black's Law Dictionary (10th ed. 2014) (explaining that deed of trust "resembles a mortgage"); Maryland Nat. Mortg. Corp. v. Albanese, 26 Va. Cir. 362, 1992 WL 12033445, at *1-2 (Arlington Cnty. Cir. Ct. 1992) (rejecting argument that deed of trust is a "sale"). Such has been the law of Virginia for over a century.
As far back as 1902, the Supreme Court of Virginia explained that a "mortgage or deed of trust is simply security for the debt." Augusta Nat. Bank v. Beard's Ex'r, 100 Va. 687, 42 S.E. 694, 696 (Va. 1902). In more recent times, Virginia has reaffirmed the longstanding view that "the essence of a mortgage or deed of trust is that it creates a lien on property to secure a debt." Deutsche Bank Nat. Tr. Co. v. Arrington, 290 Va. 109, 117, 772 S.E.2d 571 (Va. 2015) (quoting Interstate R.R. Co. v. Roberts, 127 Va. 688, 105 S.E. 463, 464 (Va. 1920)); see id. at 118, 772 S.E.2d 571 (holding that "fundamental nature of a deed of trust" creates a debtor-creditor relationship); High Knob Assocs. v. Douglas, 249 Va. 478, 484 n.4, 457 S.E.2d 349 (Va. 1995) ("A deed of trust merely creates a lien on property to secure a debt."). And Virginia courts have consistently held in the statutory context that the holder of a deed of trust is not an "owner," as one would expect if a deed of trust were a sale. Williams v. Fairfax Cty. Redevelopment & Hous. Auth., 227 Va. 309, 314, 315 S.E.2d 202 (Va. 1984); Loyola Fed. Sav. & Loan Ass'n v. Herndon Lumber & Millwork, Inc., 218 Va. 803, 805, 241 S.E.2d 752 (Va. 1978); Fonticello Mineral Springs Co. v. City of Richmond, 147 Va. 355, 368-69, 137 S.E. 458 (Va. 1927).
Relatedly, the "grantor [in a deed of trust] retains his ability to deal with the encumbered property as its owner." High Knob, 249 Va. at 484 n.4, 457 S.E.2d 349; see Black's Law Dictionary (10th ed. 2014) (observing that encumbrances like liens and mortgages do not defeat subsequent transfers but endure after them). This point further establishes that a deed of trust is not a sale.
Hale v. Horne, 62 Va. 112, 122 (Va. 1871).
The case law, common sense, and ordinary usage of language all indicate the same result. A deed of trust, like a mortgage, is not a "sale" of real property, but a method of encumbering the property to secure a debt. And that's precisely what the parties set out to do. Moreover, because a grantor of a deed of trust retains power to sell the property in question (subject only to the lien created by the deed of trust), the deed of trust cannot itself be a sale.
As an alternative to its constitutional voidness argument, the City posits a statutory one based on Va. Code § 15.2-1800(B), but it too falls flat. The statute grants a locality the power to "dispose of its real property" through the "sale" or "pledge" of it, as well as several other methods. That authorization is "[s]ubject to any applicable requirements of Article VII, Section 9." (emphasis added). The City (over)reads this language as imposing the three-fourths requirement in Article VII, Section 9 throughout the entirety of § 15.2-1800(B). From this, the City then assumes that a deed of trust is a "pledge," and thus its deed of trust is suddenly subject to the three-fourths requirement.
The flaw with this view is that the constitutional three-fourths requirement applies only to property "sold" by a locality, Va. Const. Art. VII, § 9, and the statute's grant of power is limited only by the "applicable" requirements of the constitutional provision. As a result, the only transaction in § 15.2-1800(B) governed by the constitutional three-fourths requirement is the sale of a locality's "real property."
Plaintiffs pled Count 9 (fraudulent inducement) and Count 10 (unjust enrichment,
Count 8 seeks appointment of a receiver for City Hall, the police department, and the golf course under § 4.5 of both Deeds of Trust. (Compliant ¶¶ 133-34). The parties do not discuss whether federal or state law applies to the appointment of a receiver. As it turns out, a receivership is an issue of federal procedural and common law.
Federal procedural rules "govern an action in which the appointment of a receiver is sought or a receiver sues or is sued." Fed. R. Civ. P. 66. A "district court has within its equity power the authority to appoint receivers and to administer receiverships." Gilchrist v. Gen. Elec. Capital Corp., 262 F.3d 295, 302 (4th Cir. 2001).
The logical corollary of that principle is that a receivership is not a substantive cause of action. See Kelleam v. Md. Cas. Co. of Baltimore, 312 U.S. 377, 381, 61 S.Ct. 595, 85 S.Ct. 899 (1941) ("A receivership is only a means to reach some legitimate end sought through the exercise of the power of a court of equity. It is not an end in itself."); Canada Life, 563 F.3d at 843 ("the appointment of a receiver does not directly affect the outcome of the underlying
These authorities reveal that Count 8 should be dismissed because "appointment of a receiver" is a not an independent legal claim.
Turning to the heart of this matter, the parties presume Virginia substantive law governs this diversity case, and the Court concurs. A breach of contract claim has three elements: (1) an enforceable obligation, e.g., a contract, (2) violation of the obligation, and (3) damages caused by that violation. Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 154, 671 S.E.2d 132 (Va. 2009). With the exception of the City Deed of Trust, which the City asserts is void, the parties do not contest the existence of a contract, but rather dispute the meaning of the various contracts' terms.
The Lease giving the City possession of the golf course in exchange for rent to the Authority was the lynchpin of the project financing, as it was those payments that Plaintiffs argue they are entitled to. Accordingly, the Court begins with the Lease.
Because Plaintiffs were not signatories to the Lease, they "must show that the parties to [it] clearly and definitely intended to confer a benefit upon" them. MNC Credit Corp. v. Sickels, 255 Va. 314, 320, 497 S.E.2d 331 (Va. 1998). Section 9.4 of the Lease "explicitly recognized" Plaintiff ACA, the bond insurer, "as being a third-party beneficiary of this Lease Agreement," hence satisfying the intent requirement.
As for UMB Bank, § 8.1(a) of the Lease acknowledged that the Authority would, through the Trust Agreement, simultaneously "assign[] all of [the Authority's] rights in and to this Lease Agreement ... to the Trustee [i.e., UMB Bank] for the benefit of the bond holders. The City consented to that assignment and agreed "to make all payments due to the Authority under this Lease Agreement directly to" UMB Bank. Id. Accordingly, the City and Authority agreed that "[a]ll references"
A central issue that transcends several Counts is whether the City was under a legally enforceable obligation to make the rent payments. The City contends it was not, because the relevant agreements made the rent payments "subject to appropriations" by the City Council. This language, the City says, created only an unenforceable "moral obligation" to pay rent, rather than a legally binding debt.
In Dykes, the Supreme Court of Virginia considered "whether [a] county will incur a long-term debt proscribed by Article VII, § 10(b) of the Constitution of Virginia." 242 Va. at 361, 411 S.E.2d 1. The Supreme Court decided upon rehearing in the negative. It focused on contractual language in financing and trust agreements stating that the county's payments were "subject to" and "contingent" upon annual appropriations by the board of supervisors. Id. at 361-62, 373, 411 S.E.2d 1. The Court stated bluntly: "`Subject to appropriation' financing does not create constitutionally cognizable debt because it does not impose any enforceable duty or liability on the County." Dykes, 242 Va. at 375, 411 S.E.2d 1.
Plaintiffs proffer no cases interpreting the "subject to appropriation" language differently. Rather, they say Dykes is distinguishable because it involved whether there was a debt in a constitutional sense. (Dkt. 17 at 30-31). That is a distinction without a difference. The "rationale" underlying Dykes — that contracts with "`subject to appropriation' financing in which the legislative body is not legally obligated to make the appropriation" do not create "a legal obligation" that "can be
Returning to the contracts here, the Lease plainly makes the City's rent payments subject to the City's later decision to make future appropriations. Section 4.5 recognizes — perhaps as a nod to Section 10 of the Virginia Constitution — that the "City is not empowered to make any binding commitment to make [rent payments] beyond the current Fiscal Year" (although the City's "intent" at the time was to make the payments). Moreover, § 4.5 unambiguously provides that, "[n]otwithstanding anything in this Lease Agreement to the contrary," the City's payment obligations under the Lease and Trust Agreements, "including without limitation its obligation to pay all [rents], shall be subject to and dependent upon appropriations being made from time to time by the City Council for such purpose...."
But the same stipulations apply to the 2011 Forbearance Agreement between ACA, the City, and the Authority. While the Forbearance Agreement created a new payment schedule after the City's first refusal to appropriate rent, that schedule remained "subject to annual appropriation." (Forbearance Agreement, §§ 5.1, 5.3). Section 5.4 made the point doubly certain, stating that the City's obligations to make the adjusted and deferred rent payments were "subject to annual appropriation by the City Council of amounts sufficient to make such payments." (Id.). Close scrutiny reveals that Plaintiffs' arguments to avoid this language, dkt. 17 at 28-30, are unavailing and unsupported by the Forbearance Agreement.
Plaintiffs then quote the last sentence of § 2 as reading that the City "will continue to make all payments due under the Financing Documents in accordance with the terms of such documents." (Dkt. 17 at 28). What the sentence actually says is: The City "will continue to make all payments due under the Financing Documents in accordance with the terms of such documents,
Upon default for nonpayment, § 5.1 of the Forbearance Agreement — setting the schedule of adjusted rent payments themselves subject to annual appropriations — is "of no further force and effect," and "the City shall be obligated to make" rent payments. (Forbearance Agreement, § 8(ii)). However, such payments are made only "on such terms set forth in the Lease." (Id.). But recall that § 4.5 of the Lease admits that the City lacks authority to make future commitments of rent and thus payments are "subject to and dependent upon appropriations being made from time to time by the City Council." The upshot, then, is that § 8(ii) of the Forbearance Agreement incorporates the payment terms of the Lease, which itself — in § 4.5 — makes payments subject to appropriations.
This same dynamic holds true of § 8(iii), providing reimbursement to ACA for insurance payouts it made to service the bond debt. However you slice it, any so-called obligations are still subject to appropriations.
Start with § 4 of the Forbearance Agreement. It requires, as per the bond insurance policy, ACA to make payments to cover shortfalls caused by the City's failure to pay rent. "All such payments made by ACA shall be reimbursed to ACA as deferred [rent] under the Lease, as set forth in [§] 5.4" of the Forbearance Agreement, which once more includes the "subject to appropriations" limitation. (Id. §§ 4, 5.4).
Now turn back to § 8(iii). If the City fails to pay, "all amounts paid by ACA pursuant to [§] 4 shall become immediately due and payable to ACA, as assignee of the Authority, as Basic Rent under the Lease." (emphasis added). Section 8(iii), in other words, says that the City should reimburse ACA for its insurance payouts, but those reimbursements are both subject to § 5.4 (which makes them "subject to annual appropriations") and treated as rent under the Lease.
This loops us back to the Lease, leading yet again to the "subject to appropriations" condition. Page 3 of the Lease defines "Basic Rent" as "payments payable by the City pursuant to Section 4.2(a)." In turn, § 4.2(a) states that the "City shall pay the Basic Rent to the Trustee on
So, all roads of the Forbearance and Lease Agreements lead to the "subject to appropriations" condition.
There remains, however, a residuum of Counts 5 and 6. Aside from the nonpayment theory, Plaintiffs identified only one other alleged breach of the Lease and Forbearance Agreements in response to Defendants' motions to dismiss. (See dkt. 17 (Pls' Br. against City) at 30, 33; dkt. 18 (Pls' Br. against Authority) at 9). The theory is that — because §§ 2.2(c), (e), (i), and 6.1(a)(2) of the Lease, and §§ 6 and 7(i) of the Forbearance Agreements included representations affirming the validity of the City Deed of Trust, and because the City claims the Deed of Trust is void — the supposed voidness of the Deed of Trust establishes a breach of the Lease and Forbearance Agreements. As explained earlier, the City Deed of Trust is not void, so this theory does not prevail.
Count 2 asserts a breach of the Trust Agreement by the Authority. In response to the Authority's motion to dismiss, Plaintiffs advanced two theories of this Count. Neither succeeds.
Citing §§ 1001(c) and 1101, Plaintiffs first say "that the Authority breached the terms and conditions of the Trust Agreement by failing to make interest and principal payments on the Bonds." (Dkt. 18 at 4). That single sentence is the extent of Plaintiffs' "argument." They do not quote the Trust Agreement's text, discuss its meaning, or undertake any analysis explaining how the facts satisfy the contractual provisions. This failure alone justifies finding the matter conceded, and
In any event, the theory is incorrect. Section 1001(c) does covenant that the Authority will "promptly pay the principal and premium, if any, and interest on the Bonds."
At this point, it is useful to keep in mind the overarching structure of the financing transactions: Recall that the Authority was simultaneously assigning to UMB Bank the golf course rent it received from the City. (Trust Agreement, § 101). Thus, § 1001(c) made bond payments due from the Authority only to the extent that the money came from (1) rent payments made by the City, or (2) the secured property (i.e., the golf course secured by the Authority Deed of Trust, and City Hall secured by the City Deed of Trust).
This reading — and resulting nonliability of the Authority for failure to make bond payments if such failure stemmed from the City's failure to make rent payments — is confirmed by § 1003. It commands that the "Authority shall have no obligation or liability to the Trustee [i.e., UMB Bank] or the Bondholders with respect to the payment of the [rent] by the City when due or with respect to the performance by the City of any other covenant made by it in the Lease Agreement." See also id. § 1703. As the Authority puts it, "if the City fails to pay rent, the Authority is not in breach for failing to make [bond] payments" (dkt. 20 at 2), since the Authority's money simply comes from the City's rent payments.
"Additionally," Plaintiffs write, "the Authority failed to (a) ensure that the City complied with its obligations under the Lease Agreement, (b) cancel the Lease Agreement once the City defaulted on its rent obligations, and (c) exclude the City from possession of the golf course." (Dkt. 18 at 5). Once again, other than appending to this assertion a few citations to the record, Plaintiffs make no effort to expound or elaborate upon it. Their contentions are therefore ineffectually raised. See
From what the Court can divine from these assertions, they fail on the merits as well. Section 1001(e) of the Trust Agreement states, in pertinent part, that the Authority "will require to City to perform its duties and obligations under the Lease Agreement and that it will not agree to any abatement, reduction, abrogation, waiver, diminution or other modification of the obligation of the City to make rental payments and to meet any of its obligations under the Lease Agreement." So to breach this provision, the Authority had to fail to force the City to do something that the Lease required the City to do.
To the extent this theory turns upon nonpayment of rent, § 6.1(c) reveals that nonpayment is not an event of default triggering the actions under § 6.2(b). Section 7.1 would instead apply, and while it grants the Authority "the right" to terminate the Lease, it does not require the Authority to do so.
To the extent this theory relies on a non-rent obligation of the City, § 6.2 does not require the Authority to take action, and it indeed permits Plaintiffs — of their own accord — to perform the acts they complain the Authority has failed to take.
(emphasis added). The Authority only "may" — not must — act upon Plaintiff UMB Bank's direction. It only "shall" act upon direction from Plaintiff ACA. The Complaint does not allege, and Plaintiffs have not argued, that either of these preconditions to action by the Authority have occurred. So it hardly could be a breach for the Authority to have failed to act.
Of course, if Plaintiffs wanted to take over the golf course, § 6.2 allows them to do so upon their own agreement. See also id. §§ 8.1(a), 9.4. ACA could even do so unilaterally, by simply "direct[ing]" UMB Bank.
Counts 3 and 4 posit that Defendants breached the terms of their respective deeds of trust. But these counts also do not state a claim.
Section 1.14.3 of the Authority Deed of Trust and § 1.15.3 of the City Deed of Trust require, under certain circumstances, Defendants to conduct an environmental study if reasonably requested by Plaintiff UMB Bank. The Complaint contained a single reference to these provisions, which is nothing more than a legal conclusion as to its content. (Complaint ¶¶ 22, 33). Despite nominally requesting injunctive relief on this score against only the City, id. at Prayer for Relief (m), the Complaint contains no facts supporting this theory (such as whether a request for a study has even been made), and Plaintiffs' brief does not defend it. (See dkt. 18 at 7-9). Therefore, the Court finds the theory conceded.
Turning to § 1.11 of both deeds of trust, paragraphs 21 and 32 of the Complaint similarly contain solitary, conclusory references to its content, characterized by Plaintiffs as requiring Defendants to comply with all federal, state, and local laws, including the Americans with Disabilities Act (ADA). To defend this theory, Plaintiffs only meekly refer to their cursory legal conclusion that the Authority did not comply with federal law. (Dkt. 18 at 8-9). This is insufficient under Twombly and Iqbal. As the Complaint contains no facts supporting a breach of § 1.11, this theory will be dismissed.
Plaintiffs quote their Complaint's own legal conclusion that the Authority breached its Deed of Trust "in a number of material ways, including, but not limited to, by breaching the covenant to faithfully observe and perform all the covenants in the Authority Deed of Trust." (Dkt. 18 at 7 (quoting Complaint ¶ 97)). That is, Plaintiffs
The substance of these "other covenants" remains a mystery. Plaintiffs merely refer to portions of the Deed of Trust, and parenthetically characterize them as defining a default as any failure of the Authority's covenants, duties, or warranties (or any event of default under the other financing agreements) — all without ever identifying the substantive content of whatever duty, warranty, representation was supposedly transgressed. This is little more than a shell game: Plaintiffs assert that the Authority Deed of Trust contains unspecified obligations intrinsic and extrinsic to it, but they never put a finger on what those supposed obligations are, or how they were violated. They do not craft an argument or advance a legal theory, but instead assert a bald conclusion. It is not the Court's role to do the former for Plaintiffs, and the Court declines the invitation to adopt the latter on faith.
Plaintiffs next recycle the argument that Defendants owe them payments. (Dkt. 17 at 25-26; dkt. 18 at 7-8). This is so under the Deeds of Trust, they claim, because these agreements incorporate the bond payment obligations in the Trust Agreement. As explained earlier, the Trust Agreement (and the Lease or Forbearance Agreements, for that matter) do not contain a binding obligation on the Authority to make payments.
Lastly, Plaintiffs block quote sections of the City Deed of Trust in hopes of establishing an entitlement to payment. (Dkt. 17 at 25-27). Those quotations are accompanied by Plaintiffs' pattern of exerting no effort to identify an actual legal theory of their claim, explain why the contract entitles them to relief, or otherwise analyze the text of the operative documents. It "is not this court's responsibility to ... construct the parties' arguments," Spath v. Hayes Wheels Int'l-Indiana, Inc., 211 F.3d 392, 397 (7th Cir. 2000), or "a legal theory on a plaintiff's behalf." Whitney v. New Mexico, 113 F.3d 1170, 1173-74 (10th Cir. 1997). This is especially so when a plaintiff is represented by counsel. United States v. Smith, 26 F.3d 739, 743 (7th Cir. 1994). "District judges are not mind readers," the Fourth Circuit has said, and are not required "to anticipate all arguments that clever counsel may present in some appellate future." Beaudett v. City of Hampton, 775 F.2d 1274, 1278 (4th Cir. 1985). To demand otherwise would "transform" a court "to the improper role of an advocate seeking out the strongest arguments and most successful strategies for a party." Id.; see Liberty Corp. v. NCNB Nat. Bank of S.C., 984 F.2d 1383, 1390 (4th Cir. 1993) (quoting with approval principle that waiver applies to "[a]rguments raised in the District Court in a perfunctory and underdeveloped manner").
That some actual analysis is needed here is shown by even a cursory effort to grapple with the text. Both provisions that Plaintiffs rely on, §§ 4.6 and 4.10, are contingent on an "Event of Default." In turn, an event of default under the City Deed of Trust is defined as any one of six, specified events. See §§ 3.1-3.6..
But that's not all. One of those six events of default itself further incorporates whatever qualifies as an "Event of Default under the Trust Agreement, Bonds or any other Basic Agreement," the latter of which includes the Lease. Id. § 3.1 & p.2 (defining "Basic Agreements"); see also id. § 1.1 (securing whatever amount of indebtedness is "set forth in the Bonds, this Deed of Trust, and the Trust Agreement"). In other words, the matter is hardly resolvable by simply quoting §§ 4.6 and 4.10.
Yet Plaintiffs do not engage with this thorny entanglement. They do not specify which event(s) of default allegedly occurred under the City Deed of Trust, or
Notwithstanding waiver, it appears that Plaintiffs — even if they had tried — could not develop a theory entitling them to payment. For one, the portions they quote do not impose a freestanding obligation to pay on the City. Section 4.6 explains only that UMB Bank may, upon default, "institute" a lawsuit to seek "collection of sums so due and unpaid" before seeking foreclosure. That is unremarkable. In plain English, UMB Bank can file a lawsuit to seek money owed without having to first foreclose. But § 4.6 does not establish what, if anything, UMB Bank is actually owed. Similarly, § 4.10 makes cumulative whatever rights and remedies UMB Bank has, but it does not create or define the contours of those rights and remedies.
Additionally, the documents cross-referenced in these provisions do not establish a binding obligation on the City to pay. Section 4.6 refers to defaults under "the Bonds, this Deed of Trust or the Trust Agreement," and § 4.10 refers to securing the Bonds and obligations "under the Basic Agreements" (meaning the City Deed of Trust, the Trust Agreement, the Bonds, and the Lease Agreement). As explained throughout this opinion, those documents do not contain a legally enforceable obligation against the City to appropriate rent payments. The Bonds are the only such documents not discussed above. But unsurprisingly and in congruence with the other agreements, the Bonds make clear that the City is not obliged to make appropriations and that the Authority is not liable for the City's failure to appropriate. (Dkt. 103 at ECF 59-60, 63, 68-69, 72).
So, to refresh, Plaintiffs cannot establish that the City had anything more than a moral obligation to repay them. Subjected to detailed examination, Plaintiffs' theory is like a defective Rube Goldberg device — a confounding, complicated web of contractual cross-references that ultimately fails to accomplish its goal. Its confusing framework does not justify a fishing expedition undertaken to establish leverage in negotiations. See Hr'g Tr. at 83 (Plaintiffs' counsel: "[Y]ou deny the motion to dismiss, you let us go through our discovery, you let me kick the tires, you let me open up the
A good faith/fair dealing claim sounds in contract. Charles E. Brauer Co. v. NationsBank of Virginia, N.A., 251 Va. 28, 33, 466 S.E.2d 382 (Va. 1996). The duty of good faith and fair dealing "cannot be the vehicle for rewriting an unambiguous contract in order to create duties that do not otherwise exist." Ward's Equip., Inc. v. New Holland N. Am., Inc., 254 Va. 379, 385, 493 S.E.2d 516 (1997). The Court has already explained that, under the plain language of the financing documents, Defendants had no enforceable contractual duty to appropriate payments, so Ward's Equipment requires rejection of this count, insofar as it rests on Defendants' failure to pay.
Plaintiffs claim that they alleged the City unfairly induced them "to defer the exercise of their rights under the Forbearance Agreements." (Dkt. 17 at 34 (citing Complaint ¶ 126)). Plaintiffs do not explain what rights they had under the Forbearance Agreement that they deferred. (Id.). Moreover, the Complaint does not contain facts identifying what conduct Defendants undertook after the 2011 Forbearance Agreement that unfairly forestalled action by Plaintiffs.
Finally, Plaintiffs complain that the City has "unfairly and belatedly challenged the validity" of unspecified Financing Agreements (by which they must mean the City Deed of Trust), notwithstanding legal opinions to the contrary provided by the City to Plaintiffs. (Id. (citing Complaint ¶ 127)). Plaintiffs cite no authority (much less controlling Virginia precedent) for the proposition that making legal arguments to defend one's position is a breach of good faith, and the Court has found none. Cf. Shibata v. Lim, 133 F.Supp.2d 1311, 1321 & n.4 (M.D. Fla. 2000) (finding "no basis in [Florida] law for" a "broad extension of the good faith covenant" to cover assertions of legal positions or the litigation of contract claims and defense). Their position would both deter the resolution of bona fide disputes and gin up additional litigation, because it risks turning any good-faith (but ultimately mistaken) assertion of a legal position into a separate breach of contract.
What's more, Virginia law placed the onus on Plaintiffs to themselves confirm that the agreements they signed with the City were within its lawful authority, so they cannot now complain of the City's assertion that the Deed of Trust is void. Since at least the nineteenth century, it has been "a general and fundamental principle of law that all persons contracting with a municipal corporation must at their peril inquire into the power of the corporation or of its officers to make the contract." Am.-LaFrance & Foamite Indus. v. Arlington Cty., 164 Va. 1, 9, 178 S.E. 783 (Va. 1935) (quoting City of Winchester v. Redmond, 93 Va. 711, 25 S.E. 1001 (Va. 1896)) (emphasis in original).
Count 7, then, will be dismissed.
There is no enforceable obligation that requires Defendants to pay Plaintiffs. As for the real estate seemingly secured by the deeds of trust, Plaintiffs have not sought foreclosure in this case. Complaint, Prayer for Relief; see Hr'g Tr. at 7 (contending that trustees are unnecessary because this lawsuit does not presently involve foreclosure). And Defendants have not contested that nonpayment triggers Plaintiffs' ability to foreclose, if Plaintiffs ultimately decide to. Hr'g Tr. at 28, 48-49, 57. In any event, the point is that the issue of foreclosure is not presented in this case, so the speculative prospect of it does not avert dismissal.
Having spent several pages deep in the weeds, it is helpful to pan out to the wider landscape. These are sophisticated parties: a national bank; an insurance company; municipal entities represented by in-house counsel and a prominent regional law firm. They entered into complicated (yet entirely rational) agreements, with calculated risks and benefits to each side.
Through a bond purchase, a bank loaned several million dollars to a municipality for a golf course, to be repaid through "rent" payments (in truth, municipal appropriations) and backed by municipal property as collateral. The bank further protected itself from the danger of municipal nonpayment with bond insurance.
The bond insurer received premiums from the bank but agreed to be on the hook for servicing the bonds if municipal appropriations ceased.
Finally, the municipality got an infusion of cash for its golf course, with an unenforceable "moral" obligation to repay the funds, but one backstopped by the threat of the bank and insurer coming after its property.
The parties' central arguments in this case would upset the delicate balance created by these interlocking agreements. Ultimately, the Court does not agree with Plaintiffs' position that the agreements imposed on Defendants a legally enforceable repayment obligation. But the Court also does not agree with Defendants' position that the City Deed of Trust is void. For those reasons and the additional ones set forth above, this case will be dismissed. An appropriate order will issue.
As for unjust enrichment/quantum meruit, it fails when, as here, there is an express contract — "there is no need to imply one because the parties have already negotiated an agreement." Mongold v. Woods, 278 Va. 196, 204, 677 S.E.2d 288 (Va. 2009) (citing Nedrich v. Jones, 245 Va. 465, 477, 429 S.E.2d 201 (Va. 1993)); see Raymond, Colesar, Glaspy & Huss, P.C. v. Allied Capital Corp., 961 F.2d 489, 491 (4th Cir. 1992) (applying Virginia law); Lion Assocs., LLC v. Swiftships Shipbuilders, LLC, 475 Fed.Appx. 496, 503 (4th Cir. 2012) (same).
One tradeoff of this arrangement is that the would-be creditor of a moral obligation debt exposes itself to significantly greater risk of nonpayment. But that risk can be offset with other steps, e.g., securing real property as collateral or a higher interest rate. See dkt. 9 (City's Br.) at 11 n.3 (arguing that "moral obligation bonds carry a higher interest rate" because "the lender insists upon a high rate to compensate it for the increased risk of nonpayment").
First, as the Court has painstakingly detailed, the Forbearance Agreement, e.g., §§ 2, 5.1, 5.3, 5.4, expressly includes the "subject to appropriations" language, not mandatory payment obligations.
Second, these provisions in no way conflict with the Lease. They are in fact consistent with it, having incorporated by reference the Lease, which also is subject to appropriations.
Third, even if there was a conflict, the Forbearance Agreement, § 10, contains an express "no novation" clause. See Honeywell, Inc. v. Elliott, 213 Va. 86, 89-90, 189 S.E.2d 331 (Va. 1972) (requiring clear intention to establish novation, which is never presumed, and finding evidence lacking); Johnston v. Lamson Co., 159 Va. 666, 678-80, 167 S.E. 417 (Va. 1933) (same).
Plaintiffs' brief neither mentioned § 1001(g) nor raised this point, see dkt. 18 at 4-7, so it is not properly before the Court. Walker, 575 F.3d at 428-29, n.* (waiver when "argument" is simply a conclusory assertion of legal violation); Williams, 716 F.3d at 809 n.12.
Moreover, the Complaint (¶ 52) includes a single conclusory legal assertion about § 1001(g), and is devoid of facts showing, e.g., how the Authority failed to cooperate; how such failure caused Plaintiffs any damage; what steps Plaintiffs would have had the Authority take vis-à-vis the City; how those steps would have made any difference to, for instance, the City's steadfast refusal to pay money it had no enforceable obligation to pay; or why anything the Authority (which is simply a creature of the City, see Complaint ¶ 4) said or did would have sway over the City's decisionmaking.
