Contract - City failed to appropriate funds for golf course rent.

Byline: North Carolina Staff Reporter

Where a public authority's obligation to repay bonds was conditioned of its receipt of rent from the city, and the city's payment of that rent was conditioned on the appropriation of funds that were not, ultimately, appropriated, neither the city nor the authority could be sued for breach of contract.

Background

In 2003, at the request of the City of Buena Vista, the Public Recreational Facilities Authority took out a loan to finance the construction of the Vista Links Golf Club. In 2005, the city and the authority sought to refinance the loan. The authority issued over $9 million in bonds and entered into a trust agreement with SunTrust Bank that described how the bonds would be issued and repaid and set forth the rights of the parties if the bonds were not repaid. The authority used the bond proceeds to pay off the existing loan.

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 and the authority agreed to use those payments to repay the bonds. The city's obligation to make the rent payments was subject to funds being appropriated for that purpose.

The city and the authority both entered into deeds of trust with the bank, pledging certain properties as security for the bonds and providing the bank with creditor rights to the collateral in the event the bonds were not repaid. The bank also retained ACA Financial Guaranty Corp. to provide insurance on the bonds. ACA agreed to pay off the bonds if there was a default in repayment and, if required to do so, ACA would then assume the bank's rights to receive rent payments and 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 and, as a result, the authority was unable to repay the bonds. The parties entered into a forbearance agreement wherein the ACA agreed to make up the shortfall and temporarily forgo exercising its creditor rights and the city and the authority agreed to reimburse the ACA for the payments and continue repaying the bonds from rent payments. The city's obligation to pay rent was again subject to such funds being appropriated.

In January 2015, the city voted not to appropriate funds for the rent. The city has not made any rent payments since that time, rendering the authority unable to repay the bonds. ACA and the bank then filed this...

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