The Virginia Supreme Court has reinstated Fluvanna County, Va.’s lawsuit against Davenport & Co. LLC, which seeks damages for state and federal security law violations the county claims the firm committed while serving as its financial advisor.

The seven-member court ruled unanimously on April 18 that the Circuit Court of Fluvanna County was wrong to side with Davenport, which argued the Commonwealth’s constitutional separation of powers prevented the circuit court from ruling based on the motives of a legislative body like the county’s board of supervisors.

The board had argued in a suit filed in September 2011 that it relied on Davenport’s services when issuing bonds and making other financial decisions, and that the FA breached its fiduciary duty and committed fraud. The board alleged that Davenport, which had served as the county’s FA for 15 years, made knowingly false statements to convince the board to issue $67.5 million of stand-alone bonds for a new high school rather than participate in a pool bond issue.

The county’s board claims Davenport recommended the standalone deal because, as FA, it would receive more compensation than for the pool deal, where it was one of four underwriters. The board claims Davenport began pushing for a refunding even before the issuance, a transaction from which it would also make money. The board also said Davenport gave a presentation that downplayed the interest rate of a potential stand-alone deal while inflating the interest rate the pool deal would likely net, and also claimed that pool bonds could not be refunded.

The board’s suit seeks a jury trial and $18.5 million in compensatory damages, $350,000 in punitive damages, disgorgement of all fees it paid Davenport, interest, and recovery of attorneys’ fees and other costs.

Davenport denies it ever misled the board and claims it did not breach any duty owed to the county. The circuit court granted Davenport’s demurrer and refused to allow the board to amend its complaints so the suit could be re-filed, but the ruling by the state’s high court will send the case back to the circuit court for another trial.

The opinion, penned by Justice Leroy F. Millette Jr., states that the separation of powers doctrine should not apply because the board knowingly gave up its legislative immunity from civil liability. That immunity was designed to give lawmakers the freedom to act without fear of having to defend their motives in a legal proceeding. Millette said the board did as required to waive their protection and allow a court to examine its legislative reasoning and how Davenport may have influenced it.

“The board filed suit against Davenport and voluntarily undertook a course of action that will require the board to address issues concerning motivation of the legislators,” he wrote.

Justice Elizabeth McClanahan agreed with the court’s decision, but said in a separate opinion that separation of powers is a factor in the case. She reasoned that the suit does not ask the court to do anything normally reserved for the legislative branch.

“In short, because the board does not seek to invalidate its bond resolution, the circuit court would not be exercising legislative powers in violation of the separation of powers doctrine by adjudicating the claims asserted in the board’s complaint,” she wrote.

Frederick Payne, an attorney with Payne & Hodous LLP representing the county, said McClanahan’s opinion more closely matches his client’s contention than Millette’s, but that the court still reached the right decision. “I think it’s fair to say the court agreed with our position,” Payne said, adding, however,

“That impressed me as an unusual position.”

Payne said it is unclear when a new trial will occur, but that it will likely be no more than six months. He said Davenport could still try to use other demurrers mentioned in the earlier case, including the firm’s contention that the county did not file within the two-year statute of limitations.

Davenport officials remained confident of their position despite the high court ruling.

"The decision by the Supreme Court of Virginia on Thursday, April 18, 2013, addressed only the preliminary question of whether Fluvanna County could bring an unusual suit like this," said Kathleen Holman, Davenport's chief administrative officer. "It still remains that the County's case has substantial legal and factual deficiencies. Davenport continues to stand behind the advice given to the County and is confident it will prevail in the lawsuit."

 

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