Email Summarizing Conference Call with 3d Party = Business Record — Regional Disapproval of Local Project = Verbal Act and Is Admissible for Impact on Locality and under Residual Exception — Handwritten Notes of Call = Present Sense Impression
Orix Public Fin., LLC v. Lake Cnty., MN, 2013 U.S. Dist. LEXIS 171547 (D. Minn. Dec. 5, 2013):
In 2009, Defendant Lake County, Minnesota ("Lake County" or "the County") learned that it was eligible to participate in a federal loan and grant program that provides funding for the construction of broadband cable service networks. (Huddleston Decl. ¶¶ 1-2.) The Broadband Initiatives Program, available through the Rural Utilities Service ("RUS"), a division of the United States Department of Agriculture, assists rural communities with broadband project funding. (Id. ¶ 2.) Lake County applied for an RUS loan and grant. (Id. ¶ 3.) That first application was denied by RUS in February 2010 based on concerns about technical feasibility. (Id. ¶ 4.) The County then applied for a second round of RUS funding and sought $66 million in loans and grants. (Huddleston Decl. ¶ 5.) To obtain RUS funding, the County had to meet certain requirements, including that the broadband project ("Project") would be "'substantially completed' within two years of the date of the issuance of the award and fully complete within three years of the date of the award." (Huddleston Decl., Ex. A, Notice of Funds Availability at 3826.) Also, to qualify for the RUS funding, the County had to provide local matching funds to cover certain expenses that could not be covered by the RUS loan and grant. (Huddleston Decl. ¶ 5.) Lake County was required to "include with the application evidence of all funding, other than the RUS award, necessary to support the project." (Notice of Funds Availability at 3827-28.)
RUS also required that Lake County prove to RUS that the Project was financially feasible. (Notice of Funds Availability at 3828.) If Lake County failed to obtain the local matching funds specified in its application or to fulfill any other pre-award condition, RUS would not disburse funds to Lake County and would withdraw the award. (Id. at 3833.)
In early 2010, Lake County submitted its second RUS application for a $56,413,705 loan and a $9,955,359 grant. (Huddleston Decl., Ex. B, Round 2 Application at 12-13.) The application stated that the County would satisfy the local matching fund requirement by issuing $3.5 million in revenue bonds. (Id. at 13.) Lake County decided to issue revenue bonds to avoid putting public funds at risk: the revenue bonds would be repaid solely from subscription fees paid by users of the broadband network. (Huddleston Decl. ¶ 7.)
On September 10, 2010, RUS formally notified Lake County that its application had been approved, subject to the County's satisfaction of RUS conditions contained in the Loan/Grant and Security Agreement between Lake County and RUS ("LGSA"). (Huddleston Decl. ¶ 8; Huddleston Decl., Ex. D, Award Letter; Huddleston Decl., Ex. C, LGSA.) The award letter stated: "Please note that any proposed modifications to these legal agreements at this point may result in withdrawal of the offer by RUS." (Award Letter.) Lake County accepted RUS's offer on September 14, 2010. (Id.)
2. The Loan/Grant and Security Agreement
Under the LGSA, RUS required the County to satisfy the following conditions, as determined by RUS in its sole discretion, in order to receive the approximately $66 million loan and grant: all legal matters incident to consummating the loan and grant shall be satisfactory to counsel for RUS (LGSA § 4.1(a)); Lake County "shall enter into an indenture, in form and substance satisfactory to RUS, for the $3,500,000 pledged by [Lake County] toward this Project as required under Section 4.2(d), which indenture shall secure such funds with a subordinate priority to the RUS on the Revenues of the Telecommunications System" (id. § 4.1(j); id., Schedule 1, Art. IV(1)(a)); and Lake County shall not incur additional indebtedness without prior written consent of RUS, with certain limited exceptions (LGSA § 7.4).
3. Lake County Seeks Funding for the $3.5 Million Local Match
Once the County received its award letter from RUS, it began to seek funding for the $3.5 million in local matching funds. (Huddleston Decl. ¶ 12.) RUS provided the County a November 23, 2010 deadline to provide evidence that it had matching funds in place. (Id.) The County retained Northland Securities, Inc. ("NSI") to locate an investor willing to buy revenue bonds to fund its local match. (Id.)
On November 12, 2010, NSI contacted Plaintiff ORIX Public Finance, LLC ("ORIX"), an investment group. (Huddleston Decl. ¶ 13; Rosow Aff., Ex. 22; Bayliss Decl., Ex. E.) NSI represented that Lake County would receive approximately $66 million from RUS and that it needed to obtain $5 million in matching funds as a condition of the RUS loan. (Rosow Aff., Ex. 22; Dinan Aff. ¶¶ 2-3.) ORIX expressed interest, and, on November 15, 2010, NSI sent ORIX a "pitch book," which included, among other things, a summary of the Project and a copy of the LGSA. (Huddleston Decl. ¶ 13; Bayliss Decl., Ex. A, Dinan Dep. 26.)
On November 22, 2010, Lake County's bond counsel sent ORIX's in-house counsel, John Dinan, a complete copy of the LGSA, which Dinan reviewed. (Bayliss Decl., Ex. D, Dep. Ex. 75; Bayliss Decl., Ex. A, Dinan Dep. 26, 68.) ORIX expressed its desire to purchase the revenue bonds. (Huddleston Decl. ¶ 13.)
4. Negotiation of the Bond Purchase Agreement
Lake County's bond counsel, attorneys at the Duluth law firm of Fryberger, Buchanan, Smith & Frederick, P.A., drafted the first version of the bond purchase agreement between the parties. (Skala Decl. ¶¶ 2-4; Maddy Decl. ¶ 2.) Mary Francis Skala was lead bond counsel and attorney Daniel Maddy assisted in the preparation of the agreement. (Skala Decl. ¶¶ 2-4; Maddy Decl. ¶ 2.) Maddy avers that he made the final revisions to the first draft of the bond purchase agreement. (Maddy Decl. ¶ 2; Second Rosow Aff., Ex. 1, Skala Dep. 10, 24.)
Skala and Maddy both aver that it is standard for bond purchase agreements to have conditions precedent to each party's obligation to close. (Skala Decl. ¶ 4; Maddy Decl. ¶ 3.) It is also standard that the purchaser be entitled to waive the conditions precedent to its obligations to purchase the bonds and that the seller be entitled to waive the conditions precedent to its obligations to issue the bonds. (Skala Decl. ¶ 4; Maddy Decl.¶ 3.) The draft agreement that Maddy used as a template for drafting contained a Section 3, entitled "Conditions of the Purchase Obligation of Purchaser," which explicitly provided that the obligations of the Purchaser to purchase the bonds "are subject to . . . conditions, compliance with any of which may be waived . . . by the Purchaser." (Maddy Decl. ¶ 5; Maddy Decl., Ex. A.) Maddy proceeded to draft the reciprocal Section 4, relating to conditions precedent to the Issuer and Borrower's obligations. Maddy avers that he intended that the conditions precedent to the Issuer and Borrower's obligation to sell the bonds in Section 4 would be waivable by the Issuer or Borrower, but he inadvertently made a typographical error and provided that the conditions precedent to the Issuer's and Borrower's obligations to close were waivable by the Purchaser, ORIX. (Maddy Decl. ¶¶ 2, 5-6.) Maddy declares that this error occurred because he cut and pasted the entirety of Section 3 into the new Section 4 that governed the conditions precedent to the closing obligations of the Issuer and Borrower. (Maddy Decl. ¶ 5.) However, Maddy neglected to change the identity of the party that could waive the conditions from "Purchaser" to "Issuer and Borrower," as he should have. (Id.) Skala avers that the resulting waiver language in Section 4 is nonsensical. (Skala [*8] Decl. ¶ 5.)
The language allowing ORIX to waive the Section 4 conditions precedent appeared in the first draft of the bond purchase agreement emailed by Skala to ORIX on November 17, 2010. (Skala Decl. ¶¶ 6-8; Dinan Aff. ¶ 4; Rosow Aff., Ex. 25.) At that time, there had been no negotiations between the Fryberger law firm and ORIX about the bond purchase agreement, including Section 4. (Skala Decl. ¶ 7; Maddy Decl. ¶ 8.) (See also Bayliss Decl., Ex. F, Nguyen Dep. 9-10; Bayliss Decl., Ex. G, Dep. Ex. 87; Bayliss Decl., Ex. A, Dinan Dep. 96.)
ORIX and Lake County's counsel then had negotiations over the telephone. (Dinan Aff. ¶ 4.) ORIX negotiated certain changes to Section 3 of the bond purchase agreement so that ORIX's performance would be conditioned on a number of conditions precedent. (Id.) On November 21, 2010, Lake County's counsel sent a new draft of the bond purchase agreement and a redline showing changes from the first draft. (Dinan Aff. ¶ 4; Rosow Aff., Ex. 27.)
5. Pari Passu Funding
The initial drafts of the bond purchase agreement provided that the County would issue the revenue bonds to ORIX at 12% interest and gave ORIX a security interest and right to receive revenue from the Project pari passu with the rights held by RUS. ... In late November 2010, RUS refused to approve the pari passu funding and extended the deadline to provide proof of matching funds to December 30, 2010. (Id.) Because it could not obtain pari passu funding and the bonds would be subordinate to RUS's payment rights, ORIX required more favorable economic terms, including a 15% interest rate and a standby letter of credit from the Project's contractor that would replenish the debt service reserve in the amount of $1.5 million if there was a draw on the debt service reserve. (Huddleston Decl. ¶ 15.) These changes increased the size of the bond from $3,500,000 to $5,630,000. (Skala Decl. ¶ 10.)
6. Terms of the Final Bond Purchase Agreement
On December 21, 2010, Lake County, ORIX, and Defendant Lake County Housing and Redevelopment Authority ("LCHRA") (the entity that would issue the bonds) signed the final Bond Purchase Agreement ("BPA"). (Huddleston Decl. ¶ 16; Huddleston Decl., Ex. E, BPA.)
Section 3 provides that ORIX will not have to perform under the BPA unless the listed conditions occur. Section 4 provides that the County will not have to perform under the BPA unless the listed conditions occur. However, as written, both sections provide that ORIX could waive performance of the conditions. In other words, as written, ORIX can waive its own compliance with the requirements set forth by the County, such as the requirement that ORIX has performed all of its material obligations under the BPA.
8. RUS's Rejection of the BPA
On February 2, 2011, the County participated in a telephone conference with RUS; participating were Lake County Administrator Matthew Huddleston, Lake County Board Chair Rick Goutermont, Lake County bond counsel Mary Frances Skala, assistant bond counsel John Gasele, RUS Administrator Jonathan Adelstein, Director of RUS's Broadband Division Kenneth Kuchno, RUS legal counsel Gary Badway, and an aide from Senator Klobuchar's Office. (See, e.g., Second Huddleston Decl., Ex. 1, Feb. 2, 2011 Email by Huddleston; Goutermont Decl. ¶ 4.) RUS first wanted to discuss the subordinate revenue bond. (Second Huddleston Decl., Ex. 1.) The County told RUS that the Board was going to entertain a resolution on February 8 to use County reserves in place of the bond but that it still wanted to discuss the bond. (Id.) RUS attorney Badway stated that the BPA was unacceptable to RUS for many reasons including: the 15% interest rate was too high; the amount of the bond was more than the $3.5 million identified in the County's application; the amount of the bonds threatened the financial viability of the Project; the BPA would not close until after RUS funding; and the BPA called for payments through the general contractor by way of a line of credit, which RUS believed would give ORIX priority. (Id.; Gasele Decl. ¶ 6; Huddleston Decl. ¶ 22; Skala Decl. ¶ 14; Goutermont Decl. ¶ 5.) RUS stated that it was non-negotiable that it would not deviate from the $3.5 million funding amount stated in the County's application. (Skala Decl. ¶ 15; Gasele Decl. ¶ 9; Huddleston Decl. ¶ 23; Second Huddleston Decl., Ex. 1.) RUS stated that "it would not negotiate" with Lake County concerning the BPA; that if the County proceeded with the BPA, RUS would formally not approve the loan; and that the County should "get funding elsewhere." (Huddleston Decl. ¶ 24; Goutermont Decl. ¶ 6; Gasele Decl. ¶¶ 7-9; Skala Decl. ¶¶ 14-17.) RUS did not formally reject the BPA, which would have consisted of RUS pulling Lake County's award. (Rosow Aff., Ex. 3, Huddleston Dep. 118-19.)
Skala asked RUS to put its concerns in writing, but RUS refused. (Huddleston Decl. ¶ 25; Gasele Decl. ¶ 10; Skala Decl. ¶ 18.) RUS refused to offer evidence in this case or allow its employees to testify, citing to federal regulations. (Bayliss Decl., Ex. C.) However, according to Skala, RUS did review and approve a letter from Skala to ORIX, dated on April 15, 2011, which stated: "The Issuer and Borrower provided the Bond Purchase Agreement to the RUS staff for review in good faith. In informal discussions, the RUS staff indicated that if the Bond Purchase Agreement were formally submitted, the RUS would reject, in full cloth, the transaction described in the Bond Purchase Agreement as a means of providing the Matching Funds, resulting in the loss of the Loan and the Grant." (Skala Decl. ¶ 20; Skala Decl., Ex. C.)
9. Lake County's Decision to Self-Fund
After RUS stated that it would deny the loan if the County proceeded with the BPA, the County decided that it could not fund the Project through revenue bonds. (Huddleston Decl. ¶ 26; Goutermont Decl. ¶ 7; Skala Decl. ¶ 19.) If it proceeded with the BPA, there would be no funds from RUS to build the Project and, thus, no revenues to repay the bonds. (Id.)
On February 8, 2011, the Lake County Board authorized using $3.5 million of County reserves to meet the local match requirement. (Huddleston Decl. ¶ 26; Huddleston Decl., Ex. I, Feb. 8, 2011 County Board Minutes; Goutermont Decl. ¶ 7.) That afternoon, the County informed RUS of this action. (Rosow Aff., Ex. 16.) The County also issued a press release that day, stating its decision to self-fund; however, the County did not inform ORIX before issuing the press release. (Dinan Aff. ¶ 8)
ORIX read the press release and requested a conference call with Lake County. (Rosow Aff., Ex. 24; Dinan Aff. ¶ 8; Gupta Aff. ¶ 3.) During the February 10, 2010 conference call, Lake County confirmed that it did not intend to issue the bonds to fund the Project. (Dinan Aff. ¶ 8.)
On February 23, 2011, Skala sent ORIX a letter which stated that Lake County was not in a position to perform the BPA. (Skala Decl. ¶ 20; Second Skala Decl., Ex. 1.) On April 15, 2011, Skala sent ORIX a revised letter, which had been reviewed and approved by RUS, stating the same. (Skala Decl. ¶ 20; Skala Decl., Ex. C.)
As of September 2012, the County and RUS had commenced the Project, and RUS has approved the first advance of the RUS loan and grant. (Rosow Aff., Ex. 3, Huddleston Dep. 140-41.)
B. Procedural History
Initially, ORIX filed a complaint against LCHRA and Lake County in Texas state court. Defendants removed the case to federal court where it was dismissed for lack of personal jurisdiction. ORIX Pub. Fin., LLC v. Lake County Housing & Redevelopment, Civil Action No. 3:11-CV-0678-D, 2011 U.S. Dist. LEXIS 91857, 2011 WL 3628958 (N.D. Tex. Aug. 16, 2011). On November 3, 2011, Plaintiff filed suit against the same Defendants in this Court. Plaintiff then sought leave to amend its Complaint, which was granted. The First Amended Complaint ("FAC") alleges Count One: Breach of Contract; and Count Two: Declaratory Judgment.
Plaintiff alleges that the BPA is an existing and enforceable contract and that Defendants anticipatorily and materially breached it by refusing to perform before performance was due. *** Additionally or alternatively, Plaintiff argues that it is entitled to a termination fee pursuant to § 11 of the BPA. (Id. ¶ 38.) Plaintiff seeks a declaratory judgment determining whether Defendants repudiated and/or breached the BPA, whether the BPA has been terminated, and whether Plaintiff is entitled to a termination fee under Section 11 of the BPA. (Id. ¶ 41.)
On November 1, 2012, the Court denied Defendants' motion to dismiss. [Docket No. 53] The parties have now filed cross motions for summary judgment, and Plaintiff has also filed a Daubert motion. ORIX requests that the Court find that Lake County anticipatorily repudiated the BPA and is liable to ORIX for damages of close to $5 million. Defendants request that the Court dismiss all of Plaintiff's claims and grant summary judgment in Defendants' favor.
B. Plaintiff's Hearsay Objections
Before addressing the merits of the parties' summary judgment motions, the Court must address Plaintiff's claim that key pieces of evidence relied upon by Defendants are inadmissible hearsay. Hearsay is an out-of-court statement offered into evidence to prove the truth of the matter asserted in the statement. Fed. R. Evid. 801(c).
1. RUS's Statement that It Would Deny the Loan and Grant if the County Proceeded with the BPA
ORIX argues that there is no admissible evidence that RUS rejected the BPA during the February 2, 2011 telephone conference because RUS's statement is hearsay. The Court concludes that RUS's rejection of the BPA is not hearsay and, even if it were, it is admissible under multiple hearsay exceptions.
a) Non-hearsay Verbal Act
First, RUS's statement that it would not approve the BPA is admissible as a verbal act. Verbal acts, "in which the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights," are not hearsay. Mueller v. Abdnor, 972 F.2d 931, 937 (8th Cir. 1992) (citation omitted).
A verbal act is an utterance of an operative fact that gives rise to legal consequences. Verbal acts, also known as statements of legal consequence, are not hearsay, because the statement is admitted merely to show that it was actually made, not to prove the truth of what was asserted in it. For example, the hearsay rule does not exclude relevant evidence as to what the contracting parties said or wrote with respect to the making or the terms of an agreement.
Lorraine v. Markel American Ins. Co., 241 F.R.D. 534, 567 n.50 (D. Md. 2007). Verbal acts "have relevance simply because they were made." Id. at 566.
RUS's statement that it would not approve the BPA was a nonhearsay verbal act — the statement has legal significance simply because it was made. See Brewer v. Am. Power Source, Inc., 517 F. Supp. 2d 881, 888, 888 n.3 (N.D. Miss. 2007), aff'd 291 Fed. App'x 656 (5th Cir. 2008). RUS's statement that it would not give approval to the BPA had legal significance — under the LGSA, in order for the Project to proceed, RUS had to approve the BPA. Also, under the BPA, RUS's approval of the BPA was a condition precedent to ORIX's obligation to perform, and RUS's release of the first loan amount, which was predicated upon RUS's approval of the BPA, was a condition precedent to both ORIX's and the County's obligations to perform. Simply because RUS did not "formally" reject the BPA and pull the award does not mean that this was an act without legal significance. The undisputed testimony is that RUS stated it would not negotiate with the County, would not approve the BPA, and would pull the award if the County continued with the BPA.
b) Explanation for Why the County Did not Perform under the BPA
Furthermore, RUS's statement denying approval for the BPA is also not hearsay because it is also admitted to explain its effect on the County and why it acted as it did to self-fund. See, e.g., Katzenmeier v. Blackpowder Prods., Inc., 628 F.3d 948, 951-52 (8th Cir. 2010) (holding out-of-court statements were not hearsay when they were not offered "for the truth of what the [third party] said, but rather to demonstrate the reasons for the [defendant's] [actions]"). The fact that RUS unequivocally stated that it would formally reject the BPA explains why the County was justified in repudiating the BPA and self-funding. Thus, RUS's statement is not hearsay.
c) RUS's Then-Existing State of Mind
Moreover, RUS's statement that it would not approve the BPA also falls within the exception to the hearsay rule for a "statement of the declarant's then-existing state of mind (such as motive, intent, or plan)." Fed. R. Evid. 803(3). This exception permits admission of a declarant's statement of intent to act a certain way in order to show RUS's intent. See United States v. Barraza, 576 F.3d 798, 805 (8th Cir. 2009). RUS's statement during the February 2, 2011 conference call that it would not approve the loan and grant if the County proceeded with the BPA was contemporaneous with RUS's then-existing state of mind and is admissible to show RUS's intent.
d) Residual Exception to the Hearsay Rule
Finally, even if none of the aforementioned reasons applied, RUS's statement would be admissible under Federal Rule of Evidence 807(a)....
Rule 807 allows the Court to admit evidence that is "necessary, highly probative, and carrie[s] a guarantee of trustworthiness equivalent to or superior of that which underlies the other recognized exceptions" to the hearsay rule. United States. v. Thunder Horse, 370 F.3d 745, 747 (8th Cir. 2004) (citation omitted).
Four separate witnesses aver that RUS made the February 2 statement, and the statement was contemporaneously documented long before the litigation. The statement also is bolstered by earlier documentary evidence that RUS expressed concern about the BPA and that, after RUS received the BPA to review, it warned the County not to move forward while it was still reviewing the BPA. The fact that RUS refuses to provide testimony in this case shows that there is no other way to ascertain the truth of what occurred, and the admission of RUS's statement is vital to the determination of the claims in this case. ORIX has no evidence whatsoever that RUS did not make the claimed statement. Finally, the admission of the statement serves the general purposes of the rules of evidence and the interests of justice.
2. Documents and Testimony Repeating RUS's Statement
ORIX further argues that multiple documents and deposition testimony recounting RUS's statement are inadmissible because they contain hearsay within hearsay. The Court concludes that there is no hearsay within hearsay problem. First, as the Court has explained, RUS's statement is not inadmissible hearsay.
a) Huddleston Email
The email from Lake County Administrator Matthew Huddleston to the broadband project working group on February 2, 2011, that summarizes for the working group the conference call with RUS held earlier that day (Second Huddleston Decl., Ex. 1) falls within the business records exception to the hearsay rule. Federal Rule of Evidence 803(6)....***
Huddleston participated in the RUS conference call and then wrote the email the same day, "just after the call." ... He wrote the email in the course of his regularly conducted duties as County Administrator, and writing emails to members of project groups was a regular practice in his duties as County Administrator. (Id.) There is no indication that the email or its author are untrustworthy. Thus, the email is admissible.
b) Letters from Skala to ORIX
On February 23, 2011, and April 15, 2011, Skala wrote letters to ORIX recounting RUS's statement. Skala has firsthand knowledge of the contents of the RUS conference call, as a participant in that call, and she wrote the letters in the course of her regularly conducted duties as an attorney for the County. (Second Skala Decl. ¶2.) Writing such letters is a regular practice in her duties as an attorney serving as bond counsel and there is no indication that the letter or Skala are untrustworthy. (Id. ¶ 2.) Moreover, the Skala letters are not hearsay because they are verbal acts - according to ORIX they constitute anticipatory repudiation.
c) Gasele Notes
Notes of the RUS conference call taken by the County's bond counsel, John Gasele, during the call itself (Gasele Decl., Ex. A), are admissible under the present sense impression exception to the hearsay rule for "[a] statement describing or explaining an event or condition, made while or immediately after the declarant perceived it." Fed. R. Evid. 803(1). See also United States v. Beck, 122 F.3d 676, 681-82 (8th Cir. 1997). The notes describe the RUS conference call and were made while Gasele listened to the call.
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