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CAUDILL, et al.
DINWIDDIE, et al.
April 21, 2000
Record No. 990891
DAVID L. CAUDILL, ET AL.
COUNTY OF DINWIDDIE, ET AL.
FROM THE CIRCUIT COURT OF DINWIDDIE COUNTY
William L. Wellons, Judge Designate
Present: Carrico, C.J., Lacy, Hassell, Keenan,
Koontz, and Kinser, JJ., and Compton, Senior Justice
OPINION BY SENIOR JUSTICE A. CHRISTIAN COMPTON
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
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
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
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.
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 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
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
On March 4, VBC, pursuant to the Escrow
Agreement, submitted its fifth and final requisition against the
Equipment 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 $l.7 million to various
individuals and entities in the amounts directed by VBC. The
plaintiffs allege that by procuring the disbursement of the
balance of the Equipment Fund, the County, VBC, and other
defendants avoided provisions of the Indenture, which provided
that the Equipment Bonds were subject to mandatory redemption on
July 15, 1994 if final disbursement from the Equipment Fund had
not occurred by May 31, 1994.
On September 27, 1994, VBC informed the County
that it was unable to fulfill its outstanding obligations under
the Closure, Construction, and Operations Contracts, and that it
would promptly cease doing business. VBC never was able to
operate the equipment successfully and ceased business operations
at the site on October 5, 1994.
Subsequently, VBC defaulted on payment of the
Equipment Bonds, and the County refused the Trustee’s demand that
the County cure the default. The present action is part of
ongoing litigation that ensued in federal and state courts
beginning in 1995. See, e.g., Gasner v. Board of
Supervisors, 103 F.3d 351 (4th Cir. 1996).
On appeal, the plaintiffs argue that the
Indenture had a two-part mechanism to protect the bondholders if
the facility did not work. First, they note, the bondholders had
a security interest in the equipment; until the facility was
operational, only the liquidation value of the equipment ($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
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 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 the Bondholders and
Trustee under the Indenture, and if they could not, do the
plaintiffs have any recourse against the defendants to get their
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
Furthermore, contrary to the plaintiffs’
contention, the mention of "Commencement Date" in the
Indenture, which could not 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 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 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
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 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