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ACA Financial Guaranty Corp. v. City of Buena Vista

United States Court of Appeals, Fourth Circuit

February 21, 2019


          Argued: October 31, 2018

          Appeal from the United States District Court for the Western District of Virginia, at Lynchburg. Norman K. Moon, Senior District Judge. (6:17-cv-00013-NKM-RSB)


          Scott Carlton Ford, Brian Aaron Richardson, FORD RICHARDSON, PC, Richmond, Virginia, for Appellants.

          Kevin M. Rose, BOTKINROSE PLC, Harrisonburg, Virginia, for Appellees.

         ON BRIEF:

          Michael W. Sharp, BOTKINROSE PLC, Harrisonburg, Virginia; Brian J. Kearney, W. Wayne Heslep, HESLEP & KEARNEY PC, Lexington, Virginia, for Appellees.

          Before GREGORY, Chief Judge, and THACKER and QUATTLEBAUM, Circuit Judges.


         In this appeal, we review an order dismissing a complaint that arose from a troubled bond transaction involving a municipal golf course in the City of Buena Vista, Virginia (the "City"). Bonds were issued to refinance debt on the golf course and the repayment of the bonds depended on the City making payments on the lease of the golf course. When it failed to do so, this litigation ensued. The primary question on appeal is whether the City's obligation to make rent payments is legally enforceable when the obligation is expressly subject to the City's annual decision to appropriate funds. Finding that the answer is no, we affirm the district court's dismissal of the complaint.


         Plans for a golf course in the City date back to 2002. In that year, the Commonwealth of Virginia created the Public Recreational Facilities Authority (the "Authority") to construct, operate and maintain public recreational facilities for the benefit of the City. In 2003, the Authority, at the request of the City, took out a loan to finance the construction of a municipal golf course called the Vista Links Golf Club (the "Golf Course").[1]

         In 2005, the City and the Authority sought to refinance the loan on the Golf Course. To accomplish this, the Authority 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, how they would be repaid and the rights of the parties in the event the bonds were not repaid.[2] The Authority used the bond proceeds to pay off the existing loan on the Golf Course.

         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 as well as maintain and operate the Golf Course. The Authority agreed that the rent payments would be used to repay the bonds. The rent payments from the City, therefore, were the financial linchpin of the transaction. Critically, however, the City never made an absolute commitment to make the rent payments. Under the Lease Agreement and the other financing documents, the City's obligation was subject to its decision to appropriate funds each year.[3]

         Other documents in the bond transaction gave the Bank rights as a creditor in the event the bonds were not repaid. The City issued a Deed of Trust to the Bank where the City pledged its existing City Hall building and police station as security. Similarly, the Authority issued a Deed of Trust to the Bank where the Authority pledged the Golf Course as security. Both the City Deed of Trust and the Authority Deed of Trust (collectively "Deeds of Trust") along with the Trust Agreement contain provisions outlining the Bank's creditor rights to this collateral.

         The Bank retained ACA Financial Guaranty Corporation ("ACA") to provide insurance on the bonds. Through this arrangement, ACA received insurance premiums, and, in return, agreed to pay off the bonds if there was a default in repayment. In such a situation, ACA would front the costs of paying off the bonds and then assume the Bank's rights to receive rent payments and to 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. As a result, the Authority could not repay the bonds. After discussions and negotiations, the parties entered into the Forbearance Agreement. Under the Forbearance Agreement, ACA agreed to make up any shortfall resulting from the City's failure to make rent payments. It also agreed to temporarily forego exercising its creditor rights and remedies. The City and the Authority agreed that ACA would be reimbursed for any payments it made and agreed that the bonds would still be repaid from rent payments, although the payment plan was extended over a longer period of time. Significantly, the Forbearance Agreement also makes clear that the obligation to make the rent payments is subject to annual appropriations by the City.

         In January 2015, the City voted not to appropriate funds for the rent payments and has not made any payments since that time. As a result, the Authority once again failed to repay the bonds.

         In response, ACA and the Bank filed a ten-count complaint in federal court against the City and the Authority. The City and the Authority filed a motion to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The district court granted the motion to dismiss finding that all ten counts in the complaint failed to state claims for which relief could be granted. ACA and the Bank appealed all but one of the counts. We have jurisdiction for this appeal pursuant to 28 U.S.C. § 1291.


         This Court reviews a motion to dismiss de novo. Nemet Chevrolet, Ltd. v., Inc., 591 F.3d 250, 253 (4th Cir. 2009). In so doing, we follow the well-settled standard for considering a motion to dismiss under Rule 12(b)(6).

         A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the claims pled in a complaint. To sufficiently plead a claim, the Federal Rules of Civil Procedure require that "[a] pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief . . . ." Fed.R.Civ.P. 8(a). This pleading standard does not require detailed factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). However, "it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Id. Labels, conclusions, recitation of a claim's elements, and naked assertions devoid of further factual enhancement will not suffice to meet the Rule 8 pleading standard. Id.

         To meet the Rule 8 standard and survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007)). To contain sufficient factual matter to make a claim plausible, the factual content must "allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

         While we must accept the factual allegations in the complaint as true, we need not accept a complaint's legal conclusions. Id. Thus, simply reciting the cause of actions' elements and supporting them by conclusory statements does not meet the required standard. Id. The Supreme Court noted that while Rule 8 departed from the hypertechnical code-pleading requirement of a prior era, it did not ...

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