For a third time, an 18-hole golf course will drive a small Virginia city into court to place its moral obligation pledge on trial.
The city is steadfast in its refusal to honor the pledge, though it may lose its city hall in the process.
The latest legal challenge stems from an appeal of U.S. District Judge Norman Moon’s
At issue is the Vista Links golf course, for which Buena Vista and its Public Recreational Facilities Authority issued $9.2 million of lease-revenue bonds in 2005. The deal used city hall, the city's the police station and the golf course as collateral.
After the city defaulted on the bonds in 2015, insurer ACA Financial Guaranty Corp. and bond trustee UMB Bank NA filed suit in state court and then in federal court. The latter was dismissed by Moon last month.
ACA and UMB took the case to the Fourth Circuit Court of Appeals last week.
“We expected them to appeal,” Buena Vista City Attorney Brian Kearney said Tuesday.
The city, he said, cannot afford to pay the golf course’s bonds, nor should it be required to in light of Moon’s ruling concluding that the debt is a moral – not legal – obligation. Kearney also said the city council, whose current members had nothing to do with approving the golf course deal, have vowed to concentrate on “core” government functions.
“This is not a city obligation,” Kearney said, adding that officials are happy with Judge Moon’s ruling. “This is the authority’s obligation. If you check the authority’s balance sheet will find they have a zero balance.”
Under the bond deal's structure, the city was supposed to send lease payments to the authority.
While the golf course’s lease-revenue bonds are in default, the city has continued to make payments on $417,240 in general obligation bonds, $4 million in revenue bonds, and $4.8 million of leases and loans, according to its 2017 comprehensive annual financial report.
The city had $3.4 million in cash and cash equivalents and a $2.7 million unassigned fund balance as of June 30, 2017.
Buena Vista’s “selective payment default on its $9.2 million ACA-wrapped lease-revenue bonds is perhaps a worst-in-class example of erosion in issuer willingness to pay bondholders,” municipal analyst Matt Fabian, a partner at Municipal Market Analytics, said in his March 5 Weekly Outlook column.
“Buena Vista’s default can no longer be blamed on weak local budget or economic conditions,” Fabian said. “Rather, the city is currently choosing neither to pay nor negotiate with bondholders because the pledged appropriation security permits this to occur.”
The decision sets the stage for an unnecessary confrontation with lenders, he added.
The city defaulted on bond payments in 2015, after a five-year forbearance agreement with ACA ended.
The contracts between the city, ACA and UMB create a payment obligation “expressly subject to appropriations by the city,” Moon ruled. “Under Virginia law, this proviso makes the obligations only moral ones that are not legally enforceable and cannot support damages.”
Buena Vista, near the scenic Blue Ridge Mountains, is home to 6,650 residents.
The city had hoped its Rick Jacobson-designed golf course would be a profitable economic development project, but it hasn’t been self-sustaining. Since 2004, the city has infused $4.15 million into the course’s operations, according to the 2017 CAFR.
“The city has gotten back to doing the core infrastructure and development projects that make communities strong,” the CAFR said, adding that the city is working to assist in the development of small business and has increased marketing efforts to help attract new businesses and families.
The city council entered a forbearance agreement with ACA amid the recession in 2010, allowing the city to make half its required bond payments for five years.
Near the end of the agreement in 2015, the city chose not to appropriate funds to resume full debt payments and has been in default since, relying on bond insurance.
ACA filed its first lawsuit in state court in 2016, seeking a default judgment against Buena Vista and an order requiring the city to comply with its lease agreement. The case was later withdrawn and moved to federal court.
In 2017, ACA filed a new suit seeking a receiver for the municipal facilities, immediate payment of the debt, and damages in the U.S. District Court for the Western District of Virginia.
In his ruling dismissing the case, Judge Moon said that ACA and UMB cannot establish that the city had anything more than a moral obligation to repay the debt.
“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,” Moon wrote.
In alleging that the city breached its deed of trust for the collateral property, Moon said various documents supporting the bond deal cited by ACA and UMB were “like a defective Rube Goldberg device - a confounding, complicated web of contractual cross-references that ultimately fails to accomplish its goal.”
“There is no breach of the lease or forbearance agreements for the city’s refusal to appropriate rent payments, because the city was not legally (as opposed to morally) obligated to make those payments in the first place,” Moon said. “All this comports with what these sophisticated parties would have understood at the time, especially against the backdrop of the Virginia Constitution’s prohibition on future financial commitments by municipalities.”
Although the city also asserted that its deed of trust covering the collateral properties was void under Virginia’s Constitution, Moon said a deed is an encumbrance on real property akin to a mortgage. It is not a sale and it is not void.
“We are pleased that the judge ruled that the city deed of trust is valid, paving the way for us to take possession of city hall and the police station, in addition to the golf course,” ACA said in a statement to The Bond Buyer. “However, we are disappointed with the judge’s decision that the city can default on its debts even when it has the money to pay.”
ACA also said, “We believe our legal arguments have merit and have appealed the decision. In the meantime, we will continue to press the city to meet its promise to pay on these bonds, which would be in the best interests of the municipality, and ultimately its taxpayers, and the citizens of the commonwealth of Virginia, so that Buena Vista can recover its ability to borrow as needed in the future.”
Fabian said Buena Vista made payments toward all of its other outstanding debt obligations – but not the golf course bonds – while ending with a general fund balance.
For the city to annually service the debt owed on the ACA-insured bonds and continue to grow its fund balance, Fabian said the city would need to reduce general fund expenditures by less than 5% or increase property taxes by less than 11%.
“These are not easily managed totals, but they are also not so onerous to preclude further negotiation with lenders or incent the city to repudiate its bonds,” Fabian said. “In other words, the city has adopted an unnecessary and highly adversarial attitude vis-à-vis its lenders, making foreclosure actions more likely and creating a potential spectacle of the local sheriff foreclosing on his own office.”
According to court filings, ACA has said more than $11 million is owed on the city’s debt, including $7.77 million of outstanding principal, $140,179 in interest, and $228,068 for trustee fees and expenses.
Kearney, the city attorney, said Buena Vista officials are willing to talk with the insurer, although the city hasn’t been at the negotiating table since 2015.
“Obviously, their position is we’re not being reasonable,” he said, adding that in the past ACA has placed “pre-conditions” on negotiating further. “They want everything paid. The only thing they are talking about is stretching out the time for when the bonds will be paid off. That’s unrealistic given the judge’s ruling.”
Judge Moon ruled for the city except on the deed of trust, which will be questioned by the city in the appeal, Kearney said.
“At this point and time, the court has made it very clear that what [ACA and UMB] have are three parcels of real estate and nothing more. If they’d like to sit and talk we’d be glad to,” Kearney said. “Beyond that there is no obligation for the city to make any payments, that’s very clear.”
