Hennepin County 1986 Recycling Bond Litigation, In re

• Decision Date: 09 November 1995
• Docket Number: C4-93-2253 and C6-93-2254,Nos. C0-93-2251,s. C0-93-2251
• Citation: 540 N.W.2d 494
• Parties: In re HENNEPIN COUNTY 1986 RECYCLING BOND LITIGATION.
• Court: Minnesota Supreme Court

Page 494

540 N.W.2d 494

In re HENNEPIN COUNTY 1986 RECYCLING BOND LITIGATION.

Nos. C0-93-2251, C4-93-2253 and C6-93-2254.

Supreme Court of Minnesota.

Nov. 9, 1995.

Syllabus

When the County voluntarily triggered provisions for mandatory redemption of the County's tax-exempt bonds, bondholders stated a claim upon which relief could be granted regarding their express breach of contract claims, and claims for breach of an implied covenant of good faith and fair dealing against defendants.

William Z. Pentelovitch, David F. Herr, Susan D. Holappa, Minneapolis, for Hennepin County.

Allen W. Hinderaker, Cecilia M. Michel, Denise M. Ellis, Minneapolis, for Hennepin Energy Resource Co.

Richard Voelbel, Jeff Ross, Thomas Darden, Robert Levy Jon Hopeman, Ann Sanford, Karl Cambronne, Stuart Bear, Minneapolis, Mark Reinhardt, Gavin Wilkinson, St. Paul, for respondent.

Hubert H. Humphrey, III, Attorney General, Christie B. Eller, Assistant Attorney General, St. Paul, for Amicus Curiae, State of Minnesota.

Richard H. Martin, Robyn Hansen, Gregory Poe, Minneapolis, for Amici Curiae, City of St. Paul, City of Minneapolis, Metropolitan Council, Minneapolis Community Development Agency, the Association of Minnesota Counties and the Minnesota County Attorneys' Association.

Heard, considered, and decided by the court en banc.

OPINION

STRINGER, Justice.

This class action arose when defendants Hennepin County (County) and Hennepin Energy Resource Co., Limited Partnership (HERC) (collectively, defendants) triggered mandatory redemption of over $124,000,000 in revenue bonds by declining to seek renewal of a Letter of Credit backing the bonds. We granted review to determine whether plaintiff bondholders (hereinafter, bondholders) properly stated claims for breach of express and implied contract provisions in bond agreements between the bondholders and defendants. We conclude that the bondholders' claims for breach of express and implied contract provisions are sufficient to withstand defendants' motions to dismiss pursuant to Minn.R.Civ.P. 12.02(e). Accordingly, we affirm in part and reverse in part the decision of the court of appeals, and remand for further proceedings in accordance with this opinion.

On October 1, 1986, the County issued $129,250,000 in tax-exempt, long-term revenue bonds known as the Hennepin County Solid Waste Resource Recovery Refunding Revenue Bonds Series 1986A (recycling bonds) to finance construction of a solid waste disposal and resource recovery facility near downtown Minneapolis. Defendant HERC (also referred to as Company in the Loan Agreement), a limited partnership, contracted with the County to own, construct, and operate the recycling facility. An underwriting syndicate purchased and offered the bonds to the public pursuant to an Official Statement on October 1, 1986.

The County issued the recycling bonds pursuant to several documents including the bond certificates, the Official Statement, a Loan Agreement between the County and HERC, and a Trust Indenture between the County and the Trustee. The Loan Agreement and Trust Indenture were entered into simultaneously on October 1, 1986 (collectively, bond agreements), and the bond certificates expressly incorporate these agreements.

The recycling bonds were secured by a Letter of Credit issued by Banque Indosuez and Credit Lyonnais (banks) on October 8, 1986, scheduled to expire on October 15, 1992.

The bonds matured on various dates between 1995 and 2010, but the Trust Indenture and the Official Statement gave the County the right to redeem the bonds before maturity upon payment of a two percent premium if redemption occurred on October 1, 1996, the earliest date redemption could occur. Premium payments scaled down one-half percent each year thereafter until October 1, 2000, the first date the bonds could be redeemed without the County paying a premium to the bondholders. The bonds had a triple-A credit rating.

On December 20, 1989, HERC sold the recycling facility to the United States Trust Company of New York (USTC) and simultaneously leased back the facility pursuant to a lease agreement (Lease Agreement). At the same time, the County, HERC, and USTC entered into the County Assumption, Assignment and Amendment Agreement (Assumption Agreement), consenting to the terms of the Lease Agreement.

On January 7, 1992, the County's financial advisor, noting a dramatic decline in market interest rates, recommended that the County refinance its obligations with respect to the recycling facility by permitting the Letter of Credit to expire and issuing new, lower interest-rate bonds. On July 31, 1992, apparently persuaded that this was a prudent course of action, the County notified the banks that it would not approve an extension of or a replacement for the existing Letter of Credit. On approximately September 8, 1992, the County permitted the Letter of Credit to expire, an event triggering mandatory redemption of the bonds pursuant to Section 4.07 of the Loan Agreement and Section 3.01(e) of the Trust Indenture. The Trustee thereupon sent the bondholders a Notice of Redemption with an effective date of October 9, 1992.

By October 9, 1992, the bondholders had surrendered their bonds and the County redeemed them at par plus interest through October 9, 1992. No premium was paid. The Letter of Credit backing the bonds expired on October 15, 1992.

In the fall of 1992, the bondholders filed three separate class action complaints against defendants. A consolidated, amended class action complaint was filed in April 1993, alleging breach of contract, breach of an implied covenant of good faith and fair dealing, various fraud and securities claims, and seeking future interest and premiums lost as a result of the redemption.

Both defendants filed motions to dismiss pursuant to Minn.R.Civ.P. 12.02(e), with respect to the breach of contract claims and the claims for breach of an implied covenant of good faith and fair dealing. Defendants also asserted several procedural bases for dismissal, including lack of subject matter jurisdiction, and moved to dismiss the securities and fraud claims. The procedural claims and the securities and fraud claims are not before the court on this appeal.

The district court concluded that the bond agreements imposed no express duty upon defendants to seek renewal of the Letter of Credit. The district court also found that although HERC agreed to use "best efforts to renew or extend" the Letter of Credit in the Lease Agreement of December 20, 1989, HERC contracted with USTC, not with the bondholders, and the Lease Agreement was not identified as an amendment to the bond agreements. Accordingly, the district court concluded that the Lease Agreement did not amend the bond agreements and declined to construe clauses in the Lease Agreement for the benefit of the bondholders. The district court dismissed the bondholders' express breach of contract claims, but permitted the bondholders to maintain their claims for breach of an implied covenant of good faith and fair dealing. ¹

Both the bondholders and defendants appealed. The County challenged the court's subject matter jurisdiction, and both the County and HERC challenged whether the bondholders properly stated a claim for breach of an implied covenant of good faith and fair dealing. The bondholders challenged whether the district court erred in dismissing their express contract claims.

Reversing the district court's resolution of the motions to dismiss, the court of appeals held that the bond agreements were ambiguous with respect to defendants' duties concerning renewal of the Letter of Credit, and with respect to whether defendants' conduct constituted a breach of those duties. In re Hennepin County 1986 Recycling Bond Litigation, 517 N.W.2d 63, 67 (Minn.App.1994). The court further held that the 1989 Lease Agreement effectively amended the earlier Loan Agreement because, according to the court of appeals, the "best efforts" provision of the Lease Agreement became an operational part of the bond agreements, thus defining HERC's duties. Id. at 68. The court of appeals declined to reach the implied covenant issue. Id. This appeal followed. ²

The bondholders urge us to review this case as an appeal from summary judgment rather than an appeal from a dismissal pursuant to Minn.R.Civ.P. 12.02(e) because they provided the district court with an expert affidavit. Generally, the court may not consider extrinsic evidence on a motion to dismiss pursuant to Minn.R.Civ.P. 12.02(e). Rule 12.02 provides: "If, on a motion asserting the defense that the pleading fails to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment * * *." Consistent with Rule 12.02, the district court did not consider in its order the expert affidavit and other matters extraneous to the pleading offered by the bondholders, and thus was not required to treat the motion as one for summary judgment.

The bondholders also contend that the dismissal should have been treated as summary judgment because the district court considered the bond agreements in their entirety, rather than merely the provisions cited in the bondholders' amended complaint. In deciding a motion to dismiss, however, the court may consider the entire written contract when the complaint refers to the contract and the contract is central to the claims alleged. See Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir.1993); Teagardener v. Republic-Franklin Inc. Pension Plan, 909 F.2d 947, 949-50 (6th Cir.1990), cert. denied, 498 U.S. 1027, 111 S.Ct. 678, 112 L.Ed.2d 670 (1991). Accordingly, we review this matter as an appeal from a dismissal pursuant to Minn.R.Civ.P. 12.02(e).

We turn first to the question whether the bondholders stated a claim upon which relief can be granted relating to their...