Cygnus Newport-Phase 1B, LLC v. City of Portsmouth

• Decision Date: 22 September 2016
• Docket Number: Record No. 151702
• Citation: 790 S.E.2d 623
• Parties: Cygnus Newport–Phase 1B, LLC, et al. v. City of Portsmouth, et al.
• Court: Virginia Supreme Court

790 S.E.2d 623

Cygnus Newport–Phase 1B, LLC, et al.

v.City of Portsmouth, et al.

Record No. 151702

Supreme Court of Virginia.

September 22, 2016

Kimberly A. Taylor (Kepley Broscious & Biggs, on briefs), for appellants.

E. Rebecca Gantt, Norfolk (Robert L. Hodges, Richmond; Solomon H. Ashby, Jr., City Attorney; Jeffrey S. Miller, Assistant City Attorney; McGuireWoods, on brief), for appellees.

PRESENT: All the Justices

OPINION BY JUSTICE STEPHEN R. McCULLOUGH

We consider two issues in this appeal. First, we examine whether a special assessment lien has priority over a deed of trust that was recorded before the special assessments were imposed, or whether the special assessment lien is instead extinguished by the foreclosure of the deed of trust. Second, we must determine whether the new owners of property subject to a special assessment lien may have such a lien declared void years after the lien has been agreed to by the prior owner and after bonds have been issued in reliance on those assessments. We conclude that a special assessment lien has priority over a deed of trust that was recorded before the special assessments, and that the belated challenge to the assessments cannot succeed.

BACKGROUND

The prior owner of the property, Portsmouth Venture One, LLC, acquired title on July 22, 2004, to a 176 acre parcel located in Portsmouth, Virginia known as tax parcel number 5240010. On that same date, the prior owner granted a deed of trust on the property to Bank of America to secure two notes. The deed and the deed of trust were recorded on August 11, 2004.

The prior owner petitioned the City of Portsmouth for the formation of a community development authority, or CDA. In 2005, the City acquiesced and enacted an ordinance creating the New Port Community Development Authority. The boundaries of the CDA's district included tax parcel number 5240010.

As permitted by the special assessment ordinance, the CDA entered into a Special Assessment Agreement with the prior owner. The Agreement was signed by the City, the prior owner, and the CDA. Under the Agreement, the special assessments were to be apportioned and paid each year, and the payments were pledged to repay the bonds. The prior owner agreed that the special assessment “does not exceed the peculiar benefit to the Assessed Property [including tax parcel number 5240010] ... resulting from the Improvements” and that successors would be bound by the Agreement.

In January 2006, the CDA adopted a resolution authorizing the issuance of special assessment bonds. A certified copy of the resolution was filed with the Circuit Court for the City of Portsmouth on May 8, 2006. The CDA also signed an agreement with the City on February 15, 2006, and the prior owner authorizing an issuance of bonds up to $16,951,000 to fund improvements, including road improvements, utilities, and lighting.

The City enacted an ordinance in February 2006 that established special assessments on properties in the CDA district. The ordinance designated how the assessments would be apportioned, and imposed the special assessments as a lien on the properties. The ordinance approved the Special Assessment Agreement. The CDA docketed an abstract of this ordinance in the circuit court on March 23, 2006.

On April 27, 2006, the prior owner and the CDA signed a Declaration of Notice of Special Assessment, which was recorded in the circuit court on May 4, 2006. The declaration states that its provisions “shall run with the land (including all improvements thereon) and bind any and all who may now or hereafter own or acquire any right, title, estate or interest in or to any of such property.” In this Declaration, the prior owner also stated that the special assessment lien “does not exceed the peculiar benefit to the Assessed Property.”

Bonds were issued in May 2006 in the amount of $16,240,000. These bonds are payable from “revenues derived from special assessments levied on taxable property” within the CDA boundaries. Unless retired earlier, some bonds will be outstanding until repaid in 2036.

The CDA placed approximately 75 percent of the proceeds at the disposal of the prior owner, who used the funds to construct infrastructure improvements within the district. From May 2005 to December 2011, the prior owner subdivided tax parcel number 5240010 and sold individual lots.

On December 22, 2011, Bank of America sold the notes it held to Cygnus VA, LLC, and assigned it the deed of trust. Following the prior owner's default, Cygnus VA, LLC instructed the trustee to foreclose on the property. Following a foreclosure sale, Cygnus VA, LLC was the successful bidder. Cygnus VA, LLC conveyed the property to Cygnus Newport, LLC, which in turn allocated the foreclosed property to the current owners.¹

Cygnus filed the present suit, claiming that the special assessment lien was extinguished by the foreclosure sale. Cygnus also alleged that the special assessments were void because although the parcels acquired through the foreclosure sale are largely unimproved and undeveloped, no CDA bond funds remain to construct additional improvements. Cygnus argued that the special assessments grossly exceeded the peculiar benefits of the improvements to the remaining portion of tax parcel number 5240010, and should be declared “void except to the extent that the peculiar benefit of the abutting [i]mprovements increased the value” of the property. The CDA and the City filed a motion to dismiss, a demurrer, and four pleas in bar. After briefing and argument, the circuit court issued a letter opinion dated July 29, 2015, granting the City and the CDA's third and fourth pleas in bar and dismissing Cygnus' complaint with prejudice. On August 10, 2015, the circuit court entered a final order incorporating its letter opinion, and this appeal followed.

ANALYSIS

This case presents issues of law and, accordingly, we review de novo the judgment below. City of Richmond v. Sun T rust Bank , 283 Va. 439, 442, 722 S.E.2d 268, 270 (2012).

I. The special assessments have priority over a deed of trust recorded before the imposition of special assessments.

Special assessments are nothing new. See Norfolk City v. Ellis , 67 Va. (26 Gratt.) 224 (1875). The Constitution of Virginia authorizes localities to impose special assessments to fund public improvements. Va. Const. art. X, § 3. Code § 15.2–2404 permits a locality to impose “taxes or assessments” upon owners of abutting property for the purpose of building or improving infrastructure such as sidewalks and street lights. The General Assembly has also authorized localities to create community development authorities. Code § 15.2–5155. A CDA is an entity that provides a locality with an additional means to finance infrastructure associated with development in an authority district. 2006 Op. Atty. Gen. 89, 90; see also Code § 15.2–5158.

As one would expect, disputes over the priority of special assessments are likewise nothing new. Courts have developed extensive precedent adjudicating the extent to which a special assessment lien has priority over other liens. As a general proposition, under the “race notice” statute, Code § 55–96(A)(1), the first to record an interest in real estate has priority over those who subsequently record. With respect to the priority of special assessment liens, one writer notes that

Practically every case in which the reviewing court has discussed the question supports the doctrine that to give a special or local assessment lien superiority over an earlier private lien or mortgage it is not essential that the statute imposing the special lien declare its superiority in express terms. Even those few cases which on their face appear to take a contrary view have either been explained away or repudiated by later decisions.

V. Woerner, Annotation, Superiority of Special or Local Assessment Lien Over Earlier Private Lien or Mortgage, Where Statute Creating Such Special Lien is Silent as to Superiority , 75 A.L.R.2d 1121, § 2 (1961 & 2016 rev.). Our review of Virginia law leads us to conclude that a special assessment lien has priority over a previously recorded deed of trust.²

City of Richmond v. Williams & Bowe , 102 Va. 733, 47 S.E. 844 (1904) sets forth some background principles. In that case, the City of Richmond had imposed a special assessment on property after a deed of trust was recorded. Id. at 734–35, 47 S.E. at 844. This Court examined whether the deed of trust, recorded before the special assessment was imposed, had priority over the special assessment. Id. at 735, 47 S.E. at 844. In reversing the circuit court's judgment that the previously recorded deed of trust had priority over the special assessment, we noted that no statute “expressly declare[d] that the lien of the assessment is paramount to all other liens.” Id. at 742, 47 S.E. at 847 (quoting Morey v. City of Duluth , 75 Minn. 221, 77 N.W. 829, 830 (1899) ). Nevertheless, relying on persuasive authority from other courts, we concluded that the special assessment lien had priority over other liens “by necessary implication.” Id. at 743, 47 S.E. at 847 (quoting Morey , 77 N.W. at 830 ). We observed that special assessment liens do not “stand upon the footing of an ordinary incumbrance.” Id. at 741, 47 S.E. at 846 (quoting Osterberg v. Union Trust Co. , 93 U.S. 424, 428, 23 L.Ed. 964 (1877) ). Such liens secure funding for improvements that operate to “the benefit of all interests in the land, for that of the lienholder as well as that of the fee owner, and necessarily the lien of the assessment for the improvement must be co-extensive with the estate benefited and assessed.” Id. at 743, 47 S.E. at 847 (quoting Morey , 77 N.W. at 830 ). We concluded that unless otherwise directed by statute, a special assessment lien is “paramount to all other interests therein, including prior mortgages or other liens thereon,” and “is not displaced by a sale of the property under a preexisting judgment or decree.” Id. at 742–43, 47 S.E....