On December 5, 2013, the Minnesota District Court entered summary judgment for Quinlivan & Hughes client Lake County on a $5 million claim related to the sale of county revenue bonds. ORIX Public Finance, LLC, a Texas-based investment group, sued Lake County when Lake County could not perform on a bond purchase agreement.
The case arose out of Lake County’s attempt to provide broadband internet services to its residents. The County obtained a $66 million loan and grant from the Rural Utility Service (“RUS”) a federal agency, on the condition that it provide $3.5 million in matching funds—funds that would cover costs the federal loan and grant could not cover. The County planned to provide the matching funds by selling revenue bonds. The bond purchase agreement provided that the County would sell ORIX $5.6 million in revenue bonds at a very high (15%) interest rate.
As it turned out, the County could not sell the bonds and provide the matching funds in this manner because the RUS would not approve the financing on the terms stated in the bond purchase agreement. When the RUS would not approve the financing, the County decided to fund the match by taking money from its own reserves. ORIX then sued, claiming approximately $5 million in damages.
The case presented some interesting challenges. Ordinarily, the bond purchase agreement would contain language that would allow the County to back out of the agreement if the federal funds were not available. But a drafting error made this argument difficult. Additionally, the RUS, wanting to stay out of the fray, refused to state its position in writing or allow its employees to give depositions, a prerogative allowed by federal law.
The key to the defense of the case was the doctrine of “frustration of purpose,” which applies when the fundamental purpose of a transaction has been frustrated so as to excuse a party from performing a contract. Lake County argued that there was no purpose to the bond transaction, given that without the federal funds there was no need for matching funds because there was nothing to match. ORIX argued that the RUS had never formally rejected the bond purchase agreement and that it was therefore entitled to $5 million in damages.
Alain Baudry and Maslon, Edelman, Borman & Brand LLP associated with Quinlivan & Hughes on the briefing. Quinlivan & Hughes attorney Kenneth Bayliss argued the case before Minnesota District Court Chief Judge Michael Davis on October 9.
Judge Davis’s opinion found that the case was one where the doctrine of frustration of purpose applied. The decision first rejected ORIX’s assertion that witness statements about what RUS representatives said in a key phone conference were hearsay. The court noted that the RUS statements about its rejection of the revenue bond financing were not hearsay, but “verbal acts” or “words of independent legal significance.” The court went on to find that even if the statements were hearsay they would be admissible hearsay.