Construction Law Insights

ACA Fin. Guar. Corp. v. City of Buena Vista, 917 F.3d 206 (4th Cir. 2019)

In 2002, the Commonwealth of Virginia created the Public Recreational Facilities Authority (the “Authority”) to construct, operate, and maintain public recreational facilities for the City of Buena Vista (the “City”). In 2003 the Authority, at the City’s request, took out a loan to finance the construction of a municipal golf course called the Vista Links Golf Club (the “Golf Course”). In 2005, the City and Authority sought to refinance the Golf Course loan and issued over $9 million in bonds. The Authority and SunTrust Bank (the “Bank”) entered into a Trust Agreement, which described how the bonds would be issued and repaid. To repay the bonds, the Authority leased the Golf Course to the City and the rent payments were used to repay the bonds, but the City’s obligation to make rent payments was subject to its decision to appropriate funds each year. The City issued a Deed of Trust to the Bank pledging the existing City Hall building and police station as security and another Deed of Trust pledging the Golf Course as security (collectively, the “Deeds of Trust”). The Bank retained ACA Financial Guaranty Corporation (“ACA”) to provide insurance on the bonds.

In 2010 and 2011, the City failed to appropriate enough money to pay the rent due on the Golf Course lease. The Authority, therefore, could not repay the bonds. Thus, the parties entered a Forbearance Agreement where ACA agreed to make up the shortfall and temporarily forego exercising its creditor rights and remedies and the City and Authority agreed to reimburse ACA for any payments it made and agreed to repay the bonds over a longer period of time. The Forbearance Agreement made clear that the obligation to make the rent payments was subject to annual appropriations by the City. In 2015, the City voted to not appropriate funds for the rent payments and stopped making payments. The Authority, therefore, failed to repay the bonds. In response, the ACA and the Bank filed a complaint. The City and Authority filed a motion to dismiss the complaint. The district court granted the motion to dismiss, finding that the complaint failed to state a cause of action. ACA and the Bank appealed.

The Fourth Circuit Court of Appeals affirmed the district court’s decision, finding that the City’s obligation to make rent payments was not legally enforceable when the obligation was expressly subject to the City’s annual decision to appropriate funds. First, the Bank and ACA were not parties to the Golf Course lease between the Authority and the City. Second, the Golf Course lease provided hat the City’s failure to make rent payments when no appropriations are made does not constitute an event of default. Therefore, the claim that the City breached its obligations to the Authority under the Golf Course Lease fails to state a claim because there was no breach. Under the Trust Agreement, the Authority’s obligation to make the bond payments was dependent on the City paying rent. As such, the Authority did not breach the Trust Agreement because the City stopped making rent payments and the Authority’s obligation to make bond payments was dependent on the City making rent payments.

Next, the City and Authority did not breach the Deeds of Trust because the Deeds of Trust required the City and Authority to comply with the Trust Agreement, but did not modify the Authority’s contingent obligation to make bond payments in the Trust Agreement. For similar reasons, the Court found that neither the City nor the Authority breached the Forbearance Agreement, which similarly conditioned the City’s obligation to make rent payments on the City’s appropriation of funds. The Court also found that the Bank and ACA failed to state a cause of action for breach of the implied covenant of good faith and fair dealing because the complaint did not allege the City acted arbitrarily and unfairly by failing to make appropriations when it could afford to appropriate, both the Bank and ACA are sophisticated commercial entities, and the contract language was unambiguous. The Court found that the restitution/unjust enrichment/quantum meruit count failed because there was an express and enforceable contract governing the rights of the parties.

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