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Fourth Circuit dismisses lawsuit over municipal bonds used to finance city golf course

June 7, 2019

The Vista Links golf course in Buena Vista, Va. Jacobson Golf Course Design, via The Bond Buyer.

The Fourth Circuit ruled in February that a city and its recreational facilities authority were not in breach of their bond financing agreements relating to the development of amunicipal golf course, because all of the documents expressly limited their obligations to the extent of the city’s annual appropriations for the payment of the golf course debts. ACA Fin. Guar. Corp. v. City of Buena Vista, 917 F.3d 206 (4th Cir. 2/21/19).

The City of Buena Vista, Virginia began developing a municipal golf course in 2002 and financed the project in part through a loan undertakenbya local public authority known as the Public Recreational Facilities Authority. The city and the Authorityrefinanced the golf course loan several years later, which they accomplished by issuing about $9 million in municipal bonds and using the proceeds to pay off the existing loan. The Authoritythen leased the golf course property to the city and allocated its rent payments to be used for the debt service on the bonds. Although the city’srent payments were the “financial linchpin” of the transaction, the city’s obligations under the lease were limited to the extent of the city’s annual appropriations, and the Authority’sobligations under itsbond agreementswerelimited to the extent of the payments it received from the city.

The city failed to appropriate sufficient funds for the golf course rent in 2010 and 2011, and as a result the Authoritywas unable to meet its debt service obligations. The parties then entered into a forbearance agreement, which relaxed some of the payment deadlines but continued to require full repayment of the bond debt bythe city and the Authority.Nevertheless, the city decided again in 2015 not to make any appropriation for rent payments on the golf course, and the Authority ceased making its bond paymentsshortly thereafter. The bank thencommenced this lawsuit to enforce itsrights as creditor.

Thebank’sfirst argument was that itwas entitled tothird party beneficiary rights with respect to the lease agreement between the city and the Authority. As the court explained, however, the language of the lease agreement was clear that the city was only responsible for rent payments “subject to and dependent upon appropriations being made from time to time by the City Council for such purpose.” What this meant was that “if the City did not appropriate funds, which it did not, the City had no obligation to make the rent payments.” In other words, the city’s failure to make rent payments when no appropriations had been made was technically not a default.Accordingly,even if the bank could qualifyasa third party beneficiary, it still wouldn’t have any cause of action for breach of the city’s lease obligations. For similar reasons, the court found that the Authority‘sfailure to pay its debt servicewasn’ta breach of its bond obligations, sincelanguage in thebond agreementsmade the Authority’sobligations dependent on the city paying rent. “Aside from the rent payments from the City, the Authority had no independent contractual obligation to make the bond payments,” the court concluded.

The court also dismissed the causes of action alleging breach of thedeeds of trust issued by the city and the Authority,as well as breach of the forbearance agreement. The court emphasized again that the terms of theseagreementslimited the Authority‘sresponsibility for debt service payments to the extent that it was paid rent by the city, and the city’s responsibility for its rent payments was limited to the extent that funds were appropriated each year for such payments. “In the face of those clear contractual terms,” the court explained, “the counts alleging violations of the Deeds of Trust fail to state a claim for which relief can be granted.” The cause of action for breach of the forbearance agreement was similarly unavailing because the same provisionswere included in that contractmaking the debt service and rent payments dependent on the city’s annual appropriations.

The bank next claimed a breach of the implied covenant of good faith and fair dealing, arguing that the “subject to appropriations”languagewasambiguous and that the city acted arbitrarily and unreasonably by refusing to appropriate sufficient funds to comply with its obligations. But the court denied this claim as well, first, because there were no allegations in the complaint regarding the city’s allegedly unreasonably conduct, and second, because the “subject to appropriations” clauses were not actually ambiguous. The court emphasized that the bank and its insurer were “sophisticated commercial entities” and it would not “save them” from the undesirable consequences of contractterms thatthey voluntary agreed to.

Finally, with respect to the deeds of trust that gave the bank a right to possess and foreclose on the city’s buildings and the golf course property, the court declined to grant the bank’s request for declaratory relief because the city and the PRFA conceded that it had the right to enforce these remedies.

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