Jayhawk Racing Props., LLC v. City of Topeka, 118,035

484 P.3d 250

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

v.CITY OF TOPEKA, Kansas, Appellee.

No. 118,035

Supreme Court of Kansas.

Opinion filed April 9, 2021.

Cynthia J. Sheppeard, of Goodell, Stratton, Edmonds & Palmer, LLP, of Topeka, argued the cause, and Wesley A. Weathers and Patricia E. Riley, of the same firm, were with her on the briefs for appellants.

Catherine P. Logan, of Lathrop Gage LLP, of Overland Park, argued the cause, and Thomas V. Murray and Mark A. Samsel, of the same firm, were on the briefs for appellee.

Amanda L. Stanley, general counsel, of League of Kansas Municipalities, amicus curiae.

The opinion of the court was delivered by Rosen, J.:

The City of Topeka entered into an agreement with private owners to assume full ownership of a motor speedway, the rights to which would be paid through Sales Tax and Revenue (STAR) bonds. The City subsequently decided not to fulfill the terms of the agreement. The private owners filed suit seeking damages for breach of contract. Holding that the agreement was an exercise of a governmental function and not binding on successive City Councils, the district court granted the City's motion to dismiss. The Court of Appeals reversed, holding that the agreement was an exercise of an administrative function, and remanded for proceedings on the breach of contract action. This court granted the City's petition for review.

We disagree with the analysis by the Court of Appeals for the reasons set out below.

The History and the Litigation of the Topeka Raceway Development Projects

Jayhawk Racing Properties, LLC (Jayhawk) and Heartland Park Raceway, LLC (Heartland) are Kansas limited liability companies. Heartland is a multipurpose motorsports facility located in Topeka, Kansas (the City). Heartland Park Raceway was constructed in 1988, with the expectation that the park would become a major race and entertainment facility generating revenue for the City. Use of Heartland did not develop as hoped, and it went into bankruptcy and was closed in the fall of 2002. The assets and management agreement were purchased in the spring of 2003 by Raymond Irwin. Disrepair had taken its toll, however, necessitating public funding for capital improvements.

In 2005, the raceway was designated a "major motorsports complex," and the City established the Heartland Park Redevelopment District. The following year, it issued more than $10 million in STAR bonds. The City took ownership of the raceway real property for a term of years, while Jayhawk retained a reversionary interest.

Because of insufficient sales tax revenues, the City began to contribute to the debt service on the bonds from general revenue. In response to this shortfall, the City developed a plan to expand the STAR bond district. In 2014, the City Council approved a Memorandum of Understanding (MOU) and a Workout Agreement with Jayhawk. Under the MOU and agreement, the City agreed to purchase Jayhawk's reversionary interest for about $2.4 million. The City also agreed to make commercially good-faith reasonable efforts to carry out the objectives of the MOU. On August 12, 2014, the City Council adopted Ordinance No. 19915, which provided for the expansion of the existing STAR bond district, subject to approval by Shawnee County and approval of the STAR bond plan. The Ordinance authorized issuing $5 million in additional STAR bonds.

In October 2014, a taxpayer, Christopher Imming, filed a petition seeking repeal of or a voter referendum on the Ordinance. The City, later joined by Jayhawk, sought declaratory judgment that Imming's petition was not a legitimate means of attacking the Ordinance because, among other reasons, the Ordinance was an exercise of proprietary authority, not governmental authority. The district court agreed, and Imming appealed. The Court of Appeals held that the Ordinance was governmental in nature but that the STAR bonds statute had a separate and specific protest petition process that exempted the Ordinance from the voter referendum process that Imming utilized. City of Topeka v. Imming, 51 Kan. App. 2d 247, 261-69, 344 P.3d 957, rev. denied 302 Kan. 1008 (2015).

In April 2015, four new members were elected to the City Council for four-year terms. The City then underwent a change of its municipal heart and decided not to pursue the sale of bonds as envisioned by the MOU and the Ordinance. Following demand letters and e-mail messages with the City, Jayhawk and Heartland filed suit in Shawnee District Court seeking damages for breach of contract. The City responded with a motion to dismiss, alleging a failure to state a claim on which damages could be awarded. The plaintiffs then amended their petition to add a third count involving stormwater utility charges, a count essentially independent from their breach of contract claim.

The district court granted the City's motion to dismiss the breach of contract claims. In a thorough and well-reasoned decision, the district court found that the City's actions in negotiating and agreeing to buy the reserve interests and issue bonds was an exercise of its governmental or legislative function, and one city council therefore could not bind a subsequent city council to carry out its policies.

The plaintiffs then moved for certification for appeal under K.S.A. 2016 Supp. 60-254(b) (court may direct entry of a final judgment as to one or more, but fewer than all, claims or parties if court expressly determines there is no just reason for delay). The district court denied the plaintiffs' motion on the grounds that the gain in judicial economy would not outweigh the disadvantages of piecemeal appeals. The parties thereupon agreed to stipulate to the dismissal of the third count with prejudice. All claims having then been disposed of, the plaintiffs filed a timely notice of appeal on July 12, 2017.

In a published opinion, the Court of Appeals disagreed with the district court, held the government action was proprietary, and reversed and remanded the case for further proceedings. Jayhawk Racing Properties v. City of Topeka , 56 Kan. App. 2d 479, 493, 502, 432 P.3d 678 (2018). The City filed a petition for review. This court granted review with respect to all issues presented.

Governmental or Proprietary Function

City revenue projects may be divided into those that serve a "governmental" or "legislative" function on the one hand, and those that serve a "proprietary" or "administrative" function on the other hand. Courts tend to use these alternative nomenclatures freely without a distinction in meaning. See KPERS v. Reimer & Koger Assocs ., Inc ., 262 Kan. 635, 658, 941 P.2d 1321 (1997) ; 2A McQuillin Mun. Corp. § 10:5 (3d ed.). While it is possible that a subtle distinction exists among the terms, under the facts and issues of this appeal, "governmental" and "legislative" functions are treated as equivalent concepts, as are "proprietary" and "administrative" functions. In a general sense, governmental or legislative powers are exercised for administering the affairs of the political jurisdiction and to promote the public welfare at large, whereas proprietary or administrative powers are exercised to carry out private corporate purposes in which the public is only indirectly concerned and where the municipality may be considered a legal individual. See KPERS , 262 Kan. at 658, 941 P.2d 1321 (quoting International Ass'n of Firefighters v. City of Lawrence , 14 Kan. App. 2d 788, Syl. ¶ 3, 798 P.2d 960 [1990] ); 2A McQuillin Mun. Corp. § 10:5 (3d ed.).

The district court ruled that issuing STAR bonds is a governmental function that the City could not assume an obligation to perform. The Court of Appeals reached a different conclusion: that the City had entered into an agreement to perform a proprietary undertaking, and such an agreement is enforceable at law. The question before this court, then, is whether the MOU described a governmental or a proprietary function. The answer to that question bears strongly on the enforceability of the MOU.

After defining and distinguishing between governmental and proprietary functions, we conclude that the present case involves the exercise of governmental policy-making powers, including the policies of whether to promote economic growth through the mechanism of a revitalized speedway and whether to fund such revitalization through particular revenue-raising mechanisms. We further conclude that such government functions cannot be contracted away and that one legislative body cannot bind a successor legislative body to its policy commitments.

Standard of Review

The enforceability of a bond contract may be construed and its legal effect determined de novo by the appellate courts regardless of the construction by the trial court. See In re Cherokee County Revenue Bonds , 262 Kan. 941, 950, 946 P.2d 83 (1997). The interpretation and legal effect of written instruments are matters of law, and an appellate court exercises unlimited review. Born v. Born , 304 Kan. 542, 554, 374 P.3d 624 (2016).

Whether a district court erred by granting a motion to dismiss for failure to state a claim is a question of law subject to unlimited review. The appellate court views the facts derived from the pleadings in a light most favorable to the plaintiff and assumes as true those facts and any inferences reasonably drawn from them. If those facts and inferences state any claim upon which relief can be granted, then dismissal is improper. Cohen v. Battaglia , 296 Kan. 542, 545-46, 293 P.3d 752 (2013).

Discussion

K.S.A. 2020 Supp. 12-17,169 provides for special obligation bonds and full faith and credit tax increment bonds. K.S.A. 2020 Supp. 12-17,169(b)(1) empowers cities to issue full faith and credit tax increment bonds to finance the undertaking, establishment, or redevelopment of any major motorsports complex. The statute sets out general conditions for issuing such bonds, which include preliminary studies and approval by the Secretary...