Present: Carrico, C.J., Lacy, Hassell, Keenan, Koontz, and
Kinser, JJ., and Compton, Senior Justice
DAVID L. CAUDILL, ET AL.
OPINION BY
v. Record No. 990891 SENIOR JUSTICE A. CHRISTIAN COMPTON
April 21, 2000
COUNTY OF DINWIDDIE, ET AL.
FROM THE CIRCUIT COURT OF DINWIDDIE COUNTY
William L. Wellons, Judge Designate
In this public finance case, the simple issue that has
evolved, in a complicated bond deal used in connection with a
plan to convert a county's trash to mulch, is whether the
parties to one of the contracts involved could change a
provision relating to the release of funds, to the alleged
prejudice of bondholders.
This controversy arises from an unsuccessful attempt to
provide a new system of solid waste disposal in Dinwiddie
County. In July 1997, David L. Caudill and other individual
plaintiffs (the bondholders), and Signet Trust Company, as
Trustee under an Indenture of Trust, filed the present action
seeking damages and declaratory relief. Named as defendants,
among others, were the County of Dinwiddie; the County
Administrator; the Industrial Development Authority of Dinwiddie
County, Virginia; several entities comprising the underwriter of
the bonds and some of the entities' officers (collectively, the
Carter Kaplan defendants); Virginia Bio-Fuel Corporation (VBC);
and two of VBC's officers.
Responding to a seven-count complaint, the defendants filed
demurrers and other pleadings. By agreement of the parties, 105
separate documents comprising over 1300 pages, including
documents originally attached as exhibits to the motion for
judgment, were deemed a part of the motion for judgment for
purposes of demurrer.
Following briefing and argument, the trial court issued an
exhaustive letter opinion. In a January 1999 order
incorporating the opinion by reference, the court sustained the
demurrers and dismissed the motion for judgment as it related to
six of the seven counts. The plaintiffs appeal.
We shall recite the factual allegations of the motion for
judgment as if they are true, because a demurrer admits the
truth of all properly pleaded material facts. A demurrer,
however, does not admit the correctness of the pleader's
conclusions of law. Ward's Equip., Inc. v. New Holland N. Am.,
Inc., 254 Va. 379, 382, 493 S.E.2d 516, 518 (1997). Moreover,
we will consider, as did the trial court, not only the
substantive allegations of the motion for judgment but also the
documents stipulated by the parties to be a part of the
declaration for the purpose of ruling on the demurrer. See
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Flippo v. F & L Land Co., 241 Va. 15, 17, 400 S.E.2d 156, 156
(1991).
In 1991, Dinwiddie County operated a landfill for the
disposal of municipal solid waste generated by County citizens.
During the Spring of 1991, County officials began discussions
with, among others, VBC regarding a new, integrated, and
comprehensive plan of solid waste management for the County. A
plan was developed under which recyclable materials would be
sorted from waste and sold, bio-degradable waste would be mixed
with sewage sludge to create mulch, and the remaining waste
would be shipped to a landfill outside the County.
In order to implement the plan, the County entered into
three contracts with VBC in 1992: A Closure Contract for
closure of the existing landfill; a Construction Contract for
building a materials recycling and a co-composting facility; and
an Operations Contract for operation of that facility.
According to the Operations Contract, the County would,
upon commencement of the operation of the recycling and co-
composting facility, pay VBC $29.50 per ton for each ton of
waste processed by that facility. The date for commencement of
payment by the County was to be established by the issuance of a
Certificate of Commencement Date as set forth in the contract.
The certificate merely stated the commencement date and provided
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that it would not be valid unless initialed by representatives
of the County and VBC.
The Operations Contract and the Construction Contract set
forth criteria for issuance of the Certificate of Commencement
Date. The criteria included a 60-day test period following the
completion date (the date the facility received all regulatory
permits and was in full operation), and an evaluation by an
Operations Committee. The County was required to pay for the
processing only after the criteria had been met.
The project was financed by means of bonds issued by the
defendant Industrial Development Authority. Two of the bond
issues were intended to finance closure of the landfill and the
construction of the building that would house the facility.
Those two bond issues, not the subject of this dispute, were
backed by the full faith and credit of the County.
This controversy involves $3 million in Equipment Bonds
issued by the Authority to finance the purchase and installation
of the equipment for the recycling and co-composting facility.
The Carter Kaplan defendants, underwriter for the bond issue,
purchased the bonds from the Authority for resale to the general
public. These bonds were sold by means of an Offering Statement
that was approved by the Authority and VBC, and distributed to
prospective purchasers.
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The funds received by the Authority from the sale of the
Equipment Bonds were loaned by the Authority to VBC under the
terms of a Loan Agreement and a $3 million Promissory Note
executed by VBC and payable to the Authority. The Note was
secured by the equipment pursuant to a security agreement
between the Authority and VBC. This Note was assigned to Signet
Trust Company, as Trustee for the benefit of the bondholders.
As additional security for payment of the Equipment Bonds,
VBC, through a document entitled Assignment of Revenues,
assigned to the Authority VBC's right to receive "tipping fees"
from the County for processing waste. Then, with the County's
consent, the Authority assigned the right to this income to the
Trustee, by a Consent and Estoppel Agreement, for payment of the
Equipment Bonds.
The Authority and the Trustee entered into an Indenture of
Trust dated April 15, 1993. The Indenture provided that
proceeds from the sale of the Equipment Bonds were to be
deposited in an Equipment Fund held by the Trustee. Monies from
the Equipment Fund were to be used to pay the cost of
acquisition and installation of the equipment necessary to
operate the facility. According to the Indenture, only the
liquidation value of the equipment was to be released to VBC
upon receipt of requisition forms prior to receipt of the
Certificate of Commencement Date. The Indenture further
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provided that the disposition of the balance in the Equipment
Fund was to be released only when the Trustee "shall have
received" a copy of the duly authenticated Certificate of
Commencement Date. The Indenture defined "Commencement Date" as
"the date established in Exhibit D of the Operations Contract."
A Bond Book, given to all Equipment Bond purchasers,
contained copies of the Offering Statement, Indenture, Consent
and Estoppel Agreement, Assignment of Revenues, security
agreement, Loan Agreement, Note, and Operations Contract.
Upon the request of VBC and with agreement of the County's
Board of Supervisors, the County and VBC entered into an Escrow
Agreement on March 4, 1994. In this document, the parties
agreed that the County and VBC would certify that the
"Commencement Date" had occurred upon receipt of a certificate
from an engineering firm, retained by VBC, that the project had
been constructed in accordance with the plans and specifications
set forth in the Construction Contract. As the trial court
pointed out, "The Escrow Agreement effectively modified the
Operations and Construction Contracts by substituting the
engineer's certificate for the evaluation criteria and other
prerequisites to issuance of the Certificate of Commencement
Date contained in the original Operations Contract."
On March 4, VBC, pursuant to the Escrow Agreement,
submitted its fifth and final requisition against the Equipment
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Fund to the Trustee. Attached to the final requisition was a
copy of the first page of the Escrow Agreement and a copy of the
Certificate of Commencement Date, Exhibit D, initialed on behalf
of the County and VBC, which read, in part: "The Commencement
Date is March 4, 1994."
The Trustee then disbursed the balance in the Equipment
Fund of approximately $l.7 million to various individuals and
entities in the amounts directed by VBC. The plaintiffs allege
that by procuring the disbursement of the balance of the
Equipment Fund, the County, VBC, and other defendants avoided
provisions of the Indenture, which provided that the Equipment
Bonds were subject to mandatory redemption on July 15, 1994 if
final disbursement from the Equipment Fund had not occurred by
May 31, 1994.
On September 27, 1994, VBC informed the County that it was
unable to fulfill its outstanding obligations under the Closure,
Construction, and Operations Contracts, and that it would
promptly cease doing business. VBC never was able to operate
the equipment successfully and ceased business operations at the
site on October 5, 1994.
Subsequently, VBC defaulted on payment of the Equipment
Bonds, and the County refused the Trustee's demand that the
County cure the default. The present action is part of ongoing
litigation that ensued in federal and state courts beginning in
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1995. See, e.g., Gasner v. Board of Supervisors, 103 F.3d 351
(4th Cir. 1996).
On appeal, the plaintiffs argue that the Indenture had a
two-part mechanism to protect the bondholders if the facility
did not work. First, they note, the bondholders had a security
interest in the equipment; until the facility was operational,
only the liquidation value of the equipment ($l.3 million) could
be paid to the borrower, VBC, from the Equipment Fund. Second,
they say, the remainder of the bondholders' money in the
Equipment Fund ($1.7 million) could be paid to VBC only if the
facility was tested and actually worked. According to the
plaintiffs, "Once it worked, VBC and the County could issue a
Certificate of Commencement Date and present it to the Trustee.
Then and only then would the rest of the Equipment Fund be
disbursed."
Continuing, the plaintiffs state that just over a year
after the bondholders invested in the project, the facility
failed to work and was abandoned, the Equipment Bonds were in
default, and their money held in trust was released. The
plaintiffs ask, "Why?", and answer, "Because when County
officials, VBC and other Defendants learned that the Facility
would and could not work, they acted to save themselves and
sacrifice the Bondholders' security. They issued a Certificate
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of Commencement Date regardless of whether the Facility worked
or not."
Elaborating, the plaintiffs state the defendants "did this"
without notice to the bondholders and even presented a "false"
certificate to the Trustee. And, the plaintiffs assert, "The
Trustee had no idea that it was being tricked into believing
that the Facility had been tested and actually worked.
Consequently, over one and a half million dollars was released
to VBC and its creditors, even though all Defendants knew that
the Facility had not been tested and did not work."
The plaintiffs, arguing that the trial court erred in
sustaining the demurrers, advance on appeal a number of theories
of recovery that were set forth in the several counts of the
motion for judgment. Principally, they assign error to the
trial court's rulings that the motion for judgment, supplemented
by the documents, failed to set forth facts sufficient to
support claims based on breach of contract, third-party
beneficiary, assignment, actual and constructive fraud, taking
of property for public use without just compensation,
conversion, and conspiracy or aiding and abetting.
However, during oral argument of the appeal, the plaintiffs
correctly state that the "key issue" is whether the defendants
could change "with impunity" the definition of "Commencement
Date" in the Operations Contract "so as to affect the rights of
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the Bondholders and Trustee under the Indenture, and if they
could not, do the plaintiffs have any recourse against the
defendants to get their money back?"
Also during argument, the defendants more appropriately
state the sole question to be decided. They say that the case
"has come down to one issue: Could the Operations Contract be
amended by the parties to that contract?" The defendants
correctly observe that if that query is answered in the
affirmative, all other claims of the plaintiffs fail. We
respond to that question in the affirmative.
The Operations Contract between the County and VBC, to
which the plaintiffs were not parties, expressly reserved to the
County and VBC the right to amend that agreement. Section 5.2
titled "Amendments to Contract," provided, as pertinent, "This
Contract shall not be amended or supplemented unless in writing
by the parties after approval of the same by resolution adopted
by the Board of Supervisors of the County. . . ." Therefore,
the County and VBC were free to disregard the testing provisions
and issue the Certificate of Commencement Date upon receipt of
the engineering firm's certificate that the facility had been
built in accordance with the plans and specifications, although
it was not operational.
Furthermore, contrary to the plaintiffs' contention, the
mention of "Commencement Date" in the Indenture, which could not
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be amended without the bondholders' consent, does not
incorporate by reference the Indenture into the Operations
Contract. Those two documents were executed by different
parties at different times addressing different subject matter.
Two such totally dissimilar documents cannot be construed as one
contract.
Nonetheless, the plaintiffs contend that they are third-
party beneficiaries of the Operations Contract testing
provisions and that their consent should have been required
prior to any change of any obligations of the parties to the
contract. They argue that the County and VBC breached a duty to
them by amending the Operations Contract and signing the
Certificate of Completion Date prior to compliance with the
evaluation criteria thereby inducing the Trustee to release the
funds before VBC had demonstrated that the facility would
operate effectively. Because of this alleged breach, the
plaintiffs assert, the balance in the Equipment Fund was
released and was not available to partially reimburse the
bondholders for their loss.
We have enforced a third-party beneficiary's claim when the
third party establishes that the parties to the underlying
contract clearly and definitely intended to confer a benefit
upon the alleged beneficiary. MNC Credit Corp. v. Sickels, 255
Va. 314, 320, 497 S.E.2d 331, 334 (1998); Levine v. Selective
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Ins. Co., 250 Va. 282, 286, 462 S.E.2d 81, 83 (1995); Ward v.
Ernst & Young, 246 Va. 317, 330, 435 S.E.2d 628, 634 (1993).
See Code § 55-22.
However, there is no provision, express or implied, of the
Construction Contract or the Operations Contract that clearly
and definitely shows an intent to confer a benefit upon the
bondholders or Trustee as third-party beneficiaries of those
contracts. Indeed, the Trustee and bondholders did not even
exist when those contracts were executed.
Additionally, the plaintiffs contend they had a right to
object to modification of the Operations Contract because they
were assignees of the substantive provisions of that contract by
virtue of the Assignment of Revenues. There is no merit to this
contention.
Under the Assignment of Revenues, there was merely an
assignment of the right to receive revenues; there was no
assignment of other rights or obligations under the Operations
Contract. The Assignment, between VBC and the Authority,
provided, "The parties agree that the Authority shall be
entitled to receive payment of the Revenues but shall not
otherwise have any obligation to perform any of the duties of
Assignor [VBC] under the Contract."
Clearly, the terms of the Assignment and the Estoppel
Agreement demonstrate that the parties intended to assign VBC's
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right to receive "tipping fees" as additional security for
payment of the Note. "Tipping fees" were the revenues received
for solid waste delivered to and treated at the recycling and
co-composting facility. The limited assignment was the
assignment of only the future right to receive payments from the
County when and if the facility became operational. The mere
assignment of a future contingent right to proceeds or to a
future stream of income does not confer other rights on the
assignees. See BAII Banking Corp. v. UPG, Inc., 985 F.2d 685,
696 (2nd Cir. 1993); United States ex rel. Henry Walke Co. v.
Van de Riet, 316 F.2d 912, 915 (4th Cir. 1963).
Moreover, as the trial court observed, "if the Trustee was
relying on the testing provisions of the Operations Contract in
accepting the Assignment of Revenues as security for the Note,
it could have insisted on the inclusion of a provision in the
Assignment to that effect requiring that VBC and the County not
amend those provisions." However, the Trustee did not include
such provisions in either the Assignment or the Consent and
Estoppel Agreement, even when Section 5.2 of the Operations
Contract permitted, without limitation, modification of that
contract by the parties.
Consequently, because the parties to the Operations
Contract had the absolute right to modify its terms and because
the plaintiffs had no right as third-party beneficiaries or
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assignees to object to the modification, the motion for judgment
is wholly insufficient to state a claim for which relief can be
granted based upon breach of contract in Equipment Fund
disbursement.
Inasmuch as the "key issue" on appeal has been decided
against the plaintiffs, their other theories of recovery, which
we have considered and reject, fail, as we already have said.
Therefore, we hold that the trial court correctly sustained
the demurrers, and the judgment below will be
Affirmed.
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