Jayhawk Racing Props., LLC v. City of Topeka

56 Kan.App.2d 479

432 P.3d 678

JAYHAWK RACING PROPERTIES, LLC, and Heartland Park Raceway, LLC, Appellants,

v.CITY OF TOPEKA, Kansas, Appellee.

No. 118,035

Court of Appeals of Kansas.

Opinion filed November 2, 2018.

Wesley A. Weathers, Patricia E. Riley, and Cynthia J. Sheppeard, of Goodell, Stratton, Edmonds & Palmer, LLC, of Topeka, for appellants.

Thomas V. Murray, Catherine P. Logan, and Mark A. Samsel, of Lathrop Gage LLP, of Overland Park, for appellee.

Before Arnold-Burger, C.J., Hill and Buser, JJ.

Hill, J.:

This lawsuit is an example of what can happen when a municipal government changes directions. Jayhawk Racing Properties, LLC, sued the City of Topeka for breach of contract when the City failed to pay the company, as promised in their contract, almost $2.4 million for its reversionary interest in the land where Heartland Park Raceway is located. When the City refused to issue bonds to pay for the sale, Jayhawk Racing sued, and the City moved to dismiss the action. With the agreement of the parties, the district court treated the motion as one for summary judgment and granted the motion, thus dismissing Jayhawk Racing's lawsuit.

We reverse the court's dismissal, finding the court, in granting summary judgment, ignored the fundamental purpose of the contract—to purchase an interest in real estate. This is a proprietary contract. Simply put, the City was buying all interests in a racetrack. Instead, the district court, in a carefully drafted opinion, improperly limited its view of the contract to a contingency promise made by the City to issue Sales Tax and Revenue (STAR) Bonds. Basically, in dismissing the case, the court ruled the City's promise to finance the purchase with this method of financing was beyond its legal authority. In the court's view, this provision is an illegal attempt by one council to bind future city councils, thus making the entire contract unenforceable. But actually, this contract was more than a promise to finance, and that promise is not the purpose of the agreement. We hold the City was not entitled to judgment as a matter of law. We remand for further proceedings.

After a brief restatement of the oft-repeated rules of summary judgment, we will review the cases that deal with contracts made by local units of government and explore how the old cases hold them to be unique under our law. Some are enforceable, some are not. After that, we examine the contract here and show how the district court, by limiting its review to a contingency promise, mischaracterized this agreement. We hold this is a proprietary contract and the court erred when it ruled otherwise. The questions of good faith and fair dealing and damages remain for future proceedings in district court. We conclude by rejecting the City's alternative arguments on the Cash-Basis Law and the Budget Law.

The parties agree on the facts.

Heartland Park is a multi-purpose motorsports facility in Topeka. In 2006, the City issued over $10 million in Sales Tax and Revenue Bonds, known as STAR bonds, to fund improvements to Heartland Park. These STAR bonds allow cities to finance the development or redevelopment of major commercial, entertainment, and tourism districts to stimulate economic growth. When the City issued the STAR bonds, it owned Heartland Park in fee simple for a term of years, subject to Jayhawk Racing's reversionary interest. When the sales tax revenue collected within the STAR bond district was not satisfying the debt associated with Heartland Park, the City became concerned. Thus, the City planned to expand the STAR bond district and acquire Jayhawk Racing's reversionary interest in the land.

A "Memorandum of Understanding" and "workout agreement" are pertinent.

In June 2014, the City, Jayhawk Racing, Visit Topeka, Inc., and the Kansas Department of Commerce entered into a Memorandum of Understanding. At its beginning, the parties identified their interests and their aims:

"Whereas, the parties have concluded that it is in the best interest of the City of Topeka, and the State of Kansas for the City to own both the fee simple interest in the property and the reversionary interest owned by Jayhawk; and accordingly the City desires to purchase from Jayhawk all right, title and interest of Jayhawk ... including the reversionary interest, and Jayhawk desires to sell its reversionary interest ....

"Whereas, in connection with the purchase of Jayhawk's reversionary interest and cancellation of the Management Agreement, the City will commence the process of expanding the District, amend the project plan, seek approval of the Secretary of Commerce for the issuance of the additional Star Bonds and issue bonds sufficient to acquire Jayhawk's reversionary interest and pay certain security interests."

We cannot ignore the purpose of this contract was the City's intent to buy the racetrack. The Memorandum of Understanding also listed details of price, method, and timing of payment and a pledge of cooperation:

"3. Purchase Price. The City agrees to purchase and Jayhawk agrees to sell its reversionary interest to the City for the sum of $2,392,117.00 (‘Purchase Price’) to be paid on the date of closing.

"4. Payment, Obligations of Parties. In connection with the above proposed transaction the City agrees to pay, as of the date of closing, the balance of the indebtedness listed in Exhibit B, including principal and interest and associated costs. ...

"5. Date of Payment of Purchase Price. The City agrees to pay Jayhawk the purchase price by February 1, 2015 or within 90 days of the approval by the Topeka City Council of the Star Bond Project Plan. In the event of a protest under the provisions of K.S.A. 12-17,169, payment shall be made within 60 days of the approval of the Plan by a majority of the voters of the City of Topeka.

....

"8. Agreement Contingency. The parties acknowledge that this Agreement is contingent on fulfillment of the current contract between NHRA and Jayhawk and increasing the size of the Star Bond district to include the area shown on Exhibit ‘C’, the approval of the Secretary of Commerce of the State of Kansas approving the redevelopment project plan for the Heartland Park of Topeka Major Motorsports complex and authorization by the City of the issuance of Star Bonds in an amount equal to the financial obligations set forth in this Agreement including all costs associated therewith. It is estimated that approximately $4.8M-$5.5M of Star Bonds will be issued to cover the acquisition and associated costs of issuance.

....

"10. Parties Cooperation. The City and Jayhawk agree that they will make commercially good faith reasonable efforts to accomplish the objectives set forth in paragraph 8 of this Agreement in a cooperative manner and the City further agrees to comply with the requirement of good faith and fair dealing."

The Memorandum of Understanding makes it clear that the City's obligation to acquire Jayhawk Racing's reversionary interest in Heartland Park depended on the occurrence of several events, including the approval of the STAR bond project plan by the Topeka City Council and the Kansas Secretary of Commerce, and the City's issuance of STAR bonds.

Along with the Memorandum of Understanding, the City, Jayhawk Racing, CoreFirst Bank & Trust, and others entered into what they called a "workout agreement." This agreement acknowledged that Jayhawk Racing was in default on some loans it had received from CoreFirst, and it required Jayhawk Racing and the City to sign and then place in escrow deeds conveying their interests in Heartland Park to CoreFirst. In exchange, CoreFirst agreed not to collect the loans or record the deeds until February 28, 2015—the anticipated deadline for issuing the STAR bonds contemplated in the Memorandum of Understanding, although the date could be extended with CoreFirst's consent.

In June 2014, the City Council approved both the Memorandum of Understanding and the workout agreement. The City Council passed Resolution No. 8637, which set a public hearing on the City's proposal to amend the Heartland Park redevelopment plan and to issue additional STAR bonds for the redevelopment of Heartland Park.

The City Council adopts an ordinance approving the plan.

After a public hearing, the City Council adopted Ordinance No. 19915, providing that the existing STAR bond district "shall be expanded" subject to approval of Shawnee County, and adopted and approved the STAR bond plan for the expanded redevelopment district. The ordinance authorized issuing STAR bonds in the estimated amount of $5 million. The ordinance authorized the City Manager "to apply to the Secretary for STAR bond issuance authority to issue additional STAR bonds in an amount in excess of the amount previously approved by the Secretary in relation to the Project." The ordinance included the required notice of the 60-day protest period. This ordinance has never been formally amended, repealed, rescinded, or vacated by the City.

The Secretary of the Kansas Department of Commerce conditionally approves issuing STAR bonds .

The Secretary of the Kansas Department of Revenue approved the City's request to expand the existing STAR bond district and conditionally approved the City's application to issue additional STAR bonds.

A citizen petitions the City to repeal Ordinance No. 19915 or submit a repeal question to the voters.

In October 2014, Christopher Imming filed with the City Clerk a petition signed by many residents, seeking to repeal Ordinance No. 19915 or to submit repeal to the voters at a municipal election. In response, the City filed an action in the Shawnee County District Court requesting a declaratory judgment that the Imming petition was an invalid attempt at initiative and referendum. Jayhawk Racing intervened in the litigation. The district court denied the contentions that Imming's petition was technically invalid. But the court did rule in the City's favor by finding that Ordinance No. 19915 is administrative in character and...