By: Rob Harris
In a case we have been following for almost two years, a federal judge has rejected claims that the City of Buena Vista, Virginia is in default for failing to make rental payments for the golf course the city was leasing.
The lawsuit was brought by ACA Financial Guaranty Corp., who pursuant to an insurance policy paid a bank for losses it suffered for loans in made which were to be paid by the golf course rental payments. Having stepped into the shoes of the bank, ACA Financial Guaranty brought suit against the city to collect the rental payments.
Significantly, ACA Financial Guaranty had alternative routes it could have pursued. Specifically, the contractual documents designated Buena Vista’s city hall, police department, and the courthouse as security for the obligations.
Perhaps recognizing the public relations problem of seeking to foreclose on the city’s key administrative buildings, ACA Financial Guaranty sued only for money damages, i.e. the golf course rent payments.
In a lengthy opinion, however, the federal court dismissed the lawsuit. The court explained as follows:
“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.”
Since the City Council failed to make the necessary appropriations, the failure to pay rent did not constitute a contract breach. As for the obvious question–why would a creditor agree to such an arrangement?–the court answered as follows:
“One may wonder: why structure transactions like that? The intricacies of Virginia law
governing localities may provide an answer… [T]he City’s charter requires that ‘any bonded indebtedness shall be by referendum and passed by a majority of the qualified voters voting in the referendum.’… Thus, structuring a bonded debt as only a moral obligation avoids the additional (and perhaps politically challenging) task of referendum approval.”
“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.”
This last point, of course, brings the discussion back to Buena Vista’s city hall, police department, and courthouse–and the appetite that ACA Financial Guaranty might have for seeking to foreclose on them. Commenting on this, the court noted:
“As for the real estate seemingly secured by the deeds of trust, Plaintiffs have not sought foreclosure in this case… And Defendants have not contested
that nonpayment triggers Plaintiffs’ ability to foreclose, if Plaintiffs ultimately decide to… 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.”