Mainstreet Property Group, LLC Mainstreet Realty, LLC and 7105 E SR 334, LLC v. Pam Pontones, in her official capacity as Interim Commissioner of the Indiana State Department of Health , 97 N.E.3d 238 ( 2018 )

FILED
Mar 13 2018, 5:25 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANTS ATTORNEYS FOR APPELLEE
James Bopp, Jr. Curtis T. Hill, Jr.
Courtney Turner Milbank Attorney General
The Bopp Law Firm, PC
Terre Haute, Indiana Frances Barrow
Andrea E. Rahman
Deputy Attorneys General
Indianapolis, Indiana
ATTORNEYS FOR AMICI CURIAE
THE INDIANA HEALTH CARE
ASSOCIATION, HOOSIER OWNERS
& PROVIDERS FOR THE ELDERLY,
AND LEADINGAGE INDIANA
Mark J. Crandley
Barnes & Thornburg, LLP
Indianapolis, Indiana
Randall R. Fearnow
Quarles & Brady, LLP
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Court of Appeals of Indiana | Opinion 29A02-1704-MI-871 | March 13, 2018 Page 1 of 29
Mainstreet Property Group, March 13, 2018
LLC; Mainstreet Realty, LLC; Court of Appeals Case No.
and 7105 E SR 334, LLC, 29A02-1704-MI-871
Appellants-Plaintiffs, Appeal from the Hamilton Circuit
Court
v. The Honorable Paul A. Felix,
Judge
Pam Pontones, in her official Trial Court Cause No.
capacity as Interim 29C01-1604-MI-3748
Commissioner of the Indiana
State Department of Health;[1]
Terry Whitson, in his official
capacity as Assistant
Commissioner of the Indiana
State Department of Health,
Health Care Quality and
Regulatory; and Matt Foster, in
his official capacity as Director
of the Indiana State Department
of Health, Long Term Care
Division,
Appellees-Defendants
Crone, Judge.
Case Summary
[1] Mainstreet Property Group, LLC (“Mainstreet Property Group”), Mainstreet
Realty, LLC (“Mainstreet Realty”), and Mainstreet Asset Management, LLC
(“Mainstreet Asset Management”) (collectively “Mainstreet”) are entities under
1
Kristina Box was appointed Commissioner of the Indiana State Department of Health in September 2017.
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common control based in Carmel, Indiana. Mainstreet develops transitional
care properties, which are classified and regulated as comprehensive care health
facilities under Indiana law. In January 2015, a bill was introduced in the
Indiana General Assembly for a moratorium (“Moratorium”) on the licensure
of comprehensive care health facilities by the Indiana State Department of
Health (“ISDH”). The bill contained an exception for projects for which
complete construction design plans had been submitted to ISDH by March 1,
2015. The March 1 deadline was added to the bill on March 9, at which point
Mainstreet had nine ongoing projects for which they had not submitted the
requisite plans. In four of those projects, Mainstreet Realty had executed
contracts to purchase land, including from 7105 E SR 334, LLC, in Zionsville,
but no real estate closings had been held. The bill became law in May 2015 and
went into effect in July 2015. As a result of the Moratorium, Mainstreet Realty
canceled all four contracts and did not execute purchase agreements or leases
for the five remaining projects.
[2] Mainstreet Property Group, Mainstreet Realty, and 7105 E SR 334 (collectively
“Appellants”) filed a complaint for declaratory and injunctive relief against
ISDH officials (“Appellees”), alleging that the Moratorium’s retroactive
deadline violated Indiana’s vested rights doctrine as well as the contract and
due process clauses of the United States and Indiana Constitutions. The trial
court granted Appellees’ motion to dismiss the contract and due process clause
claims and, after a hearing, entered judgment for Appellees on the vested rights
claim.
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[3] Appellants now challenge the trial court’s rulings on the contract clause and
vested rights claims. We hold that the Moratorium did not impair any
contractual obligations or vested rights, and therefore we affirm.
Facts and Procedural History2
[4] Mainstreet Property Group, Mainstreet Realty, and Mainstreet Asset
Management perform specific roles in the development of transitional care
facilities, which are classified and regulated as comprehensive care health
facilities under Indiana law.3 Mainstreet Asset Management’s employees
manage the operations of both Mainstreet Realty, which acquires property for
development, and Mainstreet Property, which develops the properties. 4
Mainstreet Realty and Mainstreet Property pay Mainstreet Asset Management
for services that it provides to them on each project. Mainstreet has a five-stage
development process consisting of (1) market analysis and selection, (2) site
2
We heard oral argument on February 13, 2018. We thank the parties for their presentations.
3
Indiana Code Section 16-28-2.5-3 defines a comprehensive care health facility as “a health facility that
provides: (1) nursing care; (2) room; (3) food; (4) laundry; (5) administration of medications; (6) special diets;
and (7) treatments; and that may provide rehabilitative and restorative therapies under the order of an
attending physician.”
4
According to Appellants’ complaint, Mainstreet Realty “is used as a holding company by Mainstreet
Property Group.” Appellants’ App. Vol. 2 at 30.
When a transitional care property is considered, [Mainstreet] Realty enters into a purchase
agreement with a seller. [Mainstreet] Realty then holds the legal right to the property while
additional steps of the development process are taken. Once all necessary steps are satisfied and
the site is deemed usable, [Mainstreet] Realty transfers or assigns their rights to a wholly owned
Mainstreet [Property Group] subsidiary.… [Mainstreet] Realty is bound by legal agreement to
assign all rights it holds or acquires to the properties to be developed to Mainstreet [Property
Group] or its wholly owned subsidiary.
Id. (citation omitted).
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selection, (3) due diligence, (4) entitlements and design, and (5) permits and
land.
[5] In January 2014, a bill was introduced in the General Assembly for a
moratorium on ISDH’s licensure of comprehensive care health facilities until a
certain statewide care bed occupancy level was reached, with an exception for
facilities under development as of June 30, 2014. See Senate Bill 173 (2014).
The relevant portions of the bill were slated to become effective July 1, 2014,
but the bill did not become law.
[6] In January 2015, another bill was introduced for a moratorium on ISDH’s
licensure of comprehensive care health facilities, with limited exceptions,
including for facilities “under development” as of July 1, 2015. Ind. Code § 16-
28-2.5-6(b)(1); see Senate Bill 460 (2015) (currently Ind. Code ch. 16-28-2.5).5
The bill defined “under development” in pertinent part as referring to a health
facility license application that meets all the following:
(A) Funding to construct the comprehensive care health facility
has been secured and is actively being drawn upon or otherwise
used to further and complete construction.
(B) Zoning requirements have been met.
5
The Moratorium also applies to “[t]he certification of new or converted comprehensive care beds for
participation in the state Medicaid program” unless the statewide care bed occupancy rate is more than
ninety-five percent and to the “[t]ransfer between any comprehensive care facilities of licensed
comprehensive care beds or comprehensive care bed certifications for participation in the state Medicaid
program.” Ind. Code § 16-28-2.5-6(a). Appellants do not focus on these provisions in their briefs.
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(C) Complete construction design plans for the comprehensive
care health facility have been submitted to [ISDH] and the
[Indiana Department of Homeland Security’s] division of fire
and building safety not later than March 1, 2015. The construction
design plans must be an accurate and true depiction of the
comprehensive care health facility that the applicant intends to
construct. However, the construction design plans may be
modified to make technical changes, correct errors and
omissions, or comply with zoning or other requirements from a
governmental entity.
(D) Active and ongoing construction activities progressing to
completion of the project are occurring at the project site.
Ind. Code § 16-28-2.5-5 (emphasis added). The March 1 deadline was added to
the bill on March 9; thus, unlike the grandfather clause in Senate Bill 173, the
grandfather clause in Senate Bill 460 was retroactive at its inception. The bill
became law without the governor’s signature on May 12 and went into effect on
July 2.6
[7] On March 9, Mainstreet had nine projects in various stages of development for
which it had not submitted the requisite plans by March 1. Between January 9
and February 18, Mainstreet Realty had executed land purchase agreements for
four of those projects – located in Zionsville, Jeffersonville, Fort Wayne, and
New Haven7 – but no real estate closings had been held. For the five remaining
6
The Moratorium was originally set to expire on June 30, 2018; in 2017, it was extended to June 30, 2019.
Ind. Code § 16-28-2.5-8.
7
According to the complaint, the Zionsville and Jeffersonville projects were in the permits and land phase of
development, and the Fort Wayne and New Haven projects were in the entitlements and design phase.
Appellants’ App. Vol. 2 at 44.
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projects – located in Hobart, Warsaw, Gary, Evansville, and Muncie8 –
Mainstreet Realty had not executed any purchase or lease agreements by March
9. Mainstreet Realty had not selected land parcels for the Evansville and
Muncie projects and had not issued a letter of intent to a landowner for the
Gary project. Between March 17 and April 29, Mainstreet submitted
construction design plans for the Zionsville, Jeffersonville, Fort Wayne, New
Haven, Hobart, and Warsaw projects, but ISDH did not act on them. As a
result of the Moratorium, Mainstreet Realty canceled the four existing purchase
agreements and did not execute purchase or lease agreements for the five
remaining projects.
[8] In April 2016, Appellants filed a complaint for declaratory and injunctive relief
against Appellees, alleging that the Moratorium violated Indiana’s vested rights
doctrine with respect to Mainstreet Property Group9 and also violated the
contract and due process clauses of the United States and Indiana
Constitutions.10 Pursuant to Indiana Trial Rule 12(B)(6), Appellees filed a
motion to dismiss the complaint for failure to state a claim upon which relief
8
According to the complaint, the Hobart and Warsaw projects were in the entitlements and design phase of
development, and the Evansville, Gary, and Muncie projects were in the site selection phase. Appellants’
App. Vol. 2 at 44.
9
See Appellants’ App. Vol. 2 at 49 (Appellants’ complaint, which refers to Mainstreet Property Group as
Mainstreet: “Mainstreet’s rights were vested when they expended considerable resources to their substantial
detriment relying in good faith on the law existing at the time their Projects began and/or on the original text
of the legislators’ introduced bill. The Moratorium impairs those vested rights and should be declared
inapplicable to the aforementioned Projects in Indiana.”). On appeal, Appellants refer to all three Mainstreet
entities and 7105 E SR 334 as Mainstreet, whereas Appellees refer to Appellants as Mainstreet.
10
The contract clause claims appear to encompass all three Appellants, although only Mainstreet Realty and
7105 E SR 334 were parties to any of the contracts at issue.
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can be granted. The trial court summarily denied the motion as to the vested
rights claim and granted it as to all other claims. The trial court consolidated
the preliminary injunction hearing with a trial on the merits on the vested rights
claim and entered judgment for Appellees, finding that Appellants had failed to
establish “by a preponderance of the evidence that they acquired vested rights in
any of the nine projects.” Appealed Order 2 at 13.11 Appellants now challenge
the trial court’s rulings on the contract clause and vested rights claims.
Additional facts will be provided below.
Discussion and Decision
Section 1 – Appellants failed to establish that the Moratorium
impaired any of their contractual obligations.
[9] Appellants contend that the trial court erred in granting Appellees’ motion to
dismiss the contract clause claims for failure to state a claim upon which relief
can be granted.12 Such motions test the legal sufficiency of the claim, not the
facts supporting it. Kitchell v. Franklin, 997 N.E.2d 1020, 1025 (Ind. 2013).
Therefore, we review the trial court’s ruling de novo. Id. We view the
pleadings in the light most favorable to the nonmoving party, with every
11
Appellants included copies of exhibits in their appendix in contravention of the appellate rules. See Ind.
Appellate Rules 50(F) (“Because the Transcript is transmitted to the Court on Appeal pursuant to Rule 12(B),
parties should not reproduce any portion of the Transcript in the Appendix.”) and 2(K) (defining Transcript
as “the transcript or transcripts of all or part of the proceedings in the trial court or Administrative Agency
that any party has designated for inclusion in the Record on Appeal and any exhibits associated therewith.”)
(emphasis added).
12
Appellants focus their arguments exclusively on Mainstreet Property Group and Mainstreet Realty and do
not specifically address 7105 E SR 334’s situation. As stated above, Mainstreet Realty was the only
Mainstreet entity that was a party to the contracts at issue.
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reasonable inference construed in that party’s favor. Id. “If a complaint states a
set of facts that, even if true, would not support the relief requested, we will
affirm the dismissal. And we may affirm the grant of a motion to dismiss if it is
sustainable on any theory.” McPeek v. McCardle, 888 N.E.2d 171, 174 (Ind.
2008) (citation omitted).
[10] Article I, Section 10 of the United States Constitution provides that no state
shall pass any law impairing the obligations of contracts. Similarly, Article 1,
Section 24 of the Indiana Constitution provides that no law impairing the
obligation of contracts shall ever be passed. “[E]very statute stands before us
clothed with the presumption of constitutionality until clearly overcome by a
contrary showing.” Abernathy v. Gulden, 46 N.E.3d 489, 493 (Ind. Ct. Ap.
2015). The party challenging the constitutionality of the statute bears the
burden of making that showing, and all doubts are resolved against that party.
Id.
[11] “It long has been established that the Contract Clause limits the power of the
States to modify their own contracts as well as to regulate those between private
parties.” U.S. Tr. Co. of New York v. New Jersey, 431 U.S. 1, 17 (1977). “Yet the
Contract Clause does not prohibit the States from repealing or amending
statutes generally, or from enacting legislation with retroactive effects.” Id.
The first inquiry in addressing a contract clause claim is “whether, and to what
extent, the state law operated as a substantial impairment of a contractual
relationship ….” Clem v. Christole, Inc., 582 N.E.2d 780, 783 (Ind. 1991) (citing
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978), in addressing
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Indiana constitutional claim). Appellants’ complaint is vague about the
contractual obligations allegedly impaired by the Moratorium, asserting only
that Mainstreet Realty was “prevented from continuing under the terms of [its]
contracts because of [its] subsequent inability to develop the land under the
Moratorium.” Appellants’ App. Vol. 2 at 53. But the Moratorium did not
prevent Mainstreet Realty from buying the land or prevent the various
landowners from selling it, which were the essential obligations of the contracts.
Mainstreet Realty’s contract with 7105 E SR 334 was the only contract attached
to Appellants’ complaint. There is no indication that the other contracts differ
in any material respect. That contract allowed Mainstreet Realty to terminate
the agreement and “immediately” receive its earnest money if it was satisfied
that it would not be able to obtain governmental approval of its proposed
development of the property for its intended use. Id. at 77. The trial court’s
order on Appellants’ vested rights claim indicates that is exactly what
happened. The contracts did not obligate the landowners to grant Mainstreet
Realty a license to develop a comprehensive care health facility; that obligation,
if any, lay with ISDH, which was not a party to the contracts. At most, then,
the Moratorium may have implicated Indiana’s vested rights doctrine, which
we address below. Because Appellants have failed to show that the
Moratorium impaired any of their contractual obligations, we affirm the trial
court’s dismissal of the contract clause claims and need not delve further into
Appellants’ argument.
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Section 2 – Appellants failed to establish that Mainstreet
Property Group had vested rights in any of the projects.
[12] Appellants also contend that the trial court erred in concluding that they failed
to establish that they had any vested rights in the nine projects at issue.13 The
record indicates that the trial court asked the parties to submit proposed orders
on its own motion. See Appellants’ App. Vol. 2 at 10 (chronological case
summary entry for Feb. 13, 2017).
When a trial court has entered specific findings on its own
motion, the specific findings control only as to the issues they
cover, and the general judgment controls as to the issues upon
which the court has not made findings. The specific findings will
not be set aside unless they are clearly erroneous and we will
affirm the general judgment on any legal theory supported by the
evidence. A finding is clearly erroneous when there are no facts
or inferences drawn therefrom which support it. In reviewing the
trial court’s findings, we neither reweigh the evidence nor judge
the credibility of the witnesses.
Hanson v. Spolnik, 685 N.E.2d 71, 76-77 (Ind. Ct. App. 1997) (citations omitted),
trans. denied. Rather, we consider only the evidence and reasonable inferences
drawn therefrom that support the judgment. Id. at 77. To the extent the issues
raised are questions of law, we review them de novo and owe no deference to
the trial court’s legal conclusions. Staggs v. Buxbaum, 60 N.E.3d 238, 245 (Ind.
13
As stated above, Appellants’ complaint specifically alleged that the Moratorium violated Indiana’s vested
rights doctrine as to Mainstreet Property Group. Appellants’ App. Vol. 2 at 49. The trial court’s order and
Appellants’ briefs do not differentiate among the Mainstreet entities, and Appellants make no specific
arguments regarding 7105 E SR 334.
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Ct. App. 2016), trans. denied. “Where, as here, the party who had the burden of
proof at trial appeals, he appeals from a negative judgment and will prevail only
if he establishes that the judgment is contrary to law.” Fowler v. Perry, 830
N.E.2d 97, 102 (Ind. Ct. App. 2005). “A judgment is contrary to law when the
evidence is without conflict and all reasonable inferences to be drawn from the
evidence lead to only one conclusion, but the trial court reached a different
conclusion.” Id.
[13] A relatively recent line of cases exploring the contours of Indiana’s vested rights
doctrine originates with our supreme court’s opinion in Metropolitan Development
Commission of Marion County v. Pinnacle Media, LLC, 836 N.E.2d 422 (Ind. 2005)
(“Pinnacle I”), clarified on reh’g, 846 N.E.2d 654 (Ind. 2006) (“Pinnacle II”), appeal
after remand, Pinnacle Media, LLC v. Metropolitan Development Commission, 868
N.E.2d 894 (Ind. Ct. App. 2007) (“Pinnacle III”), trans. denied. Pinnacle was
informed by the City of Indianapolis that the City’s zoning ordinance did not
cover interstate highway rights-of-way. Pinnacle leased land in those rights-of-
way, applied for and received permits from the Indiana Department of
Transportation (“INDOT”), and erected two billboards without seeking
approval from the City. The City subsequently amended the zoning ordinance
to encompass the rights-of-way and stopped Pinnacle from erecting a third
billboard. Pinnacle sought a declaration that the amendment was inapplicable
to ten planned billboards for which INDOT permit applications were pending
when the amendment was proposed and passed. The trial court entered
summary judgment in Pinnacle’s favor.
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[14] On appeal, our supreme court observed that the question of whether the
billboards were subject to the zoning ordinance amendment “implicate[d] two
disparate lines of Indiana cases[,]” both of which
employ the term “vested rights” and generally stand for the
proposition that a person’s “vested rights” are protected against
retroactive application of a change in law. But each line takes a
quite different approach to defining or determining when a
“vested right” exists, and these approaches can lead to different
results.
Pinnacle I, 836 N.E.2d at 425. The court noted that,
[a]s a general proposition, the courts have been willing to hold
that the developer acquires a “vested right” such that a new
ordinance does not apply retroactively if, but only if, the
developer “(1) relying in good faith, (2) upon some act or
omission of the government, (3) … has made substantial changes
or otherwise committed himself to his substantial disadvantage
prior to a zoning change.”
Id. at 425-26 (quoting John J. Delaney & Emily J. Vaias, Recognizing Vested
Development Rights as Protected Property in Fifth Amendment Due Process and Takings
Claims, 49 WASH. U.J. URB. & CONTEMP. L. 27, 31-35 (1996)).
[15] The court approved of a line of cases suggesting that “‘there can be no vested
rights’ where ‘no work has been commenced, or where only preliminary work
has been done without going ahead with the construction of the proposed
building ….’” Id. at 428 (quoting Lutz v. New Albany City Plan Comm’n, 230 Ind.
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74, 81, 101 N.E.2d 187, 190 (1951)).14 The court then rejected a line of cases
holding that merely filing a building permit “creates a vested right that cannot
be overcome by a change in zoning law ….” Id. (overruling Knutson v. State ex
rel. Seberger, 239 Ind. 656, 160 N.E.2d 200 (1959)).15 The court held that the
zoning ordinance amendment was applicable to Pinnacle, noting that Pinnacle
had not started construction before the amendment was proposed or enacted
and did not receive the requisite INDOT permits to erect the billboards until
after the amendment was enacted. Consequently, the court reversed and
remanded with instructions to enter summary judgment for the City.
[16] Pinnacle petitioned for rehearing. In response to the argument of Pinnacle’s
amici that “the ‘mere filing’ for a permit … invokes the expenditure of a
tremendous amount of time, effort and money” and that a property owner “is at
the whim of the legislative or administrative body until such time as he actually
starts construction[,]” the court clarified that
the focus is on whether or not vested rights exist, not whether
some filing has been made with a government agency, a filing
that might be purely ministerial and represent no material
expenditure of money, time, or effort. We acknowledge, as
perhaps our original opinion should have, that vested rights may
well accrue prior to the filing of certain applications. (We saw no
14
Lutz involved a nonconforming use, i.e., “a use of property that lawfully existed prior to the enactment of a
zoning ordinance that continues after the ordinance’s effective date even though it does not comply with the
ordinance’s restrictions.” Pinnacle I, 836 N.E.2d at 425.
15
The Knutson line of cases “trace[d] its origin in Indiana law to zoning law but … over the years [was]
invoked more generally when a person [had] an application for a government permit pending at the time a
law governing the granting of the permit [changed].” Pinnacle I, 836 N.E.2d at 426.
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evidence of vested rights having accrued in the facts of this case
and indeed it was Pinnacle’s position that under Indiana law
“mere application for a permit … grant[s] an applicant a vested
right to have its application construed in accordance with
existing law.”) It is beyond the scope of this opinion, and unfair
to future litigants, to respond to the hypothetical scenarios set
forth in the amici brief, but we believe our original opinion
establishes a basic framework for such analysis in future cases
that will protect vested rights to the full extent the Constitution
requires.
Pinnacle II, 846 N.E.2d at 656-57 (citation omitted).
[17] On remand, Pinnacle unsuccessfully sought to amend its complaint “to assert
claims that it allege[d] did not exist prior to the Supreme Court’s decision in
Pinnacle I.” Pinnacle III, 868 N.E.2d at 899. On appeal, Pinnacle argued that its
amended complaint would “assert exceptions to the ‘new rule that an applicant
for a building permit does not obtain a vested right unless and until construction
is commenced.’” Id. at 900 (citation omitted). Another panel of this Court
opined that Pinnacle
misconstrues the holding in Pinnacle I. There is no bright-line
rule that construction must have commenced in order to show a
vested right.… [In Pinnacle II, our] Supreme Court reiterated that
the existence of a vested right is fact-dependent, and the court
noted that there is no evidence in the record to show a vested
right in this case.
Id. The court affirmed the denial of Pinnacle’s motion to amend on res judicata
grounds, holding that
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the issues Pinnacle asserts in its proposed amended complaint
seeking to establish that it had a vested right were, or could have
been, determined in the original action. Our Supreme Court’s
opinion in Lutz and its progeny have been in existence for more
than fifty years. Pinnacle opted to rely on Knutson, but Pinnacle
could have also made arguments based on Lutz. Pinnacle might
well have presented evidence other than the permit application to
show a vested right.
Id. In a footnote to that paragraph, the court stated, “Expenses incurred before
a permit application may typically include the costs associated with leases,
options, and land purchases, as well as surveying, engineering, site planning,
and rezoning.” Id. at n.1.
[18] The Pinnacle cases resurfaced in City of New Haven v. Flying J, Inc., 912 N.E.2d
420 (Ind. Ct. App. 2009), trans. denied. Flying J owned over seventeen acres of
land in New Haven that it wanted to develop into a travel plaza with a service
station. Flying J ultimately prevailed in litigation with the City’s board of
zoning appeals (“BZA”) regarding whether its proposed uses for the land were
permitted by the City’s zoning ordinance. During the litigation, the City
amended the ordinance to restrict service stations to a maximum of two acres.
Unaware of the amendment, Flying J submitted its development plan to the
BZA, and the zoning director rejected it based on the amended ordinance. The
BZA affirmed that decision, but the trial court ruled in Flying J’s favor.
[19] On appeal, another panel of this Court addressed “whether the amended zoning
ordinance is applicable to Flying J’s planned travel plaza” by analyzing the
Pinnacle opinions. Id. at 424. The BZA argued that “because Flying J had not
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yet begun construction on its travel plaza, Flying J had no vested right to
develop the travel plaza pursuant to the original zoning ordinance.” Id. at 425.
The court replied, “If Pinnacle I were the only case we considered, we might
well agree with the BZA that Flying J had no vested right because it had not yet
begun construction on the travel plaza.” Id. In light of the subsequent
decisions, however, the court
read the Pinnacle cases to mean that, while construction definitely
does establish a vested right, mere preliminary work, including
filing of a building permit, does not. In situations falling between
these two extremes, courts must engage in a fact-sensitive
analysis to determine whether vested rights have accrued prior to
application for a building permit or construction.
Id. at 426.
[20] Focusing on the aforementioned footnote in Pinnacle III, Flying J noted that it
had spent over $4,000,000 “prior to the commencement of construction[,]”
including over $3,700,000 to purchase the property, over $194,000 in legal fees,
over $45,000 for engineering and surveying, and over $8600 in travel expenses.
Id. The BZA challenged many of the expenditures, “especially the real estate
purchase price, legal fees, and travel expenses, claiming that such are
preliminary expenses inadequate to establish a vested right.” Id. The court
replied,
[E]ven were we to agree with the BZA’s argument regarding
these particular expenses, Flying J’s other proved expenses,
including tens of thousands of dollars on engineering and
surveying, constitute more than mere “preliminary” work or
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expenses akin to merely applying for a building permit. Rather,
these are the sort of expenses we referred to in Pinnacle III when
we listed expenses that could give rise to a vested right. This is
especially so in light of the status of the continuing litigation
between the parties when the BZA amended the zoning
ordinance at issue.
Id. at 426-27 (citation to Pinnacle III omitted). In light of the fact-sensitive
nature of a vested rights determination, the court gave deference to the trial
court’s findings and affirmed its ruling that “the amendments to the zoning
ordinances were subject to Flying J’s vested right in the property and that the
amended zoning ordinance was not applicable to Flying J’s planned travel
plaza.” Id. at 427.
[21] This case differs from the Pinnacle and Flying J cases in two obvious respects.
One, we are concerned here with a statute prohibiting state licensure of health
care facilities, rather than a zoning ordinance terminating a nonconforming use;
neither side argues that different or additional considerations should apply in
our vested rights analysis, and we can think of none. Two, unlike the aggrieved
parties in the Pinnacle and Flying J cases (and the relevant cases cited therein),
neither Mainstreet Realty nor Mainstreet Property Group had a possessory
interest in the properties when the Moratorium became effective.
[22] Appellants argue that “[n]othing in Pinnacle or its progeny … stands for the
proposition that a separate possessory interest sufficient to support a takings
challenge is a prerequisite of vested rights.” Appellants’ Reply Br. at 29.
Appellants quote from the law review article cited in Pinnacle I to press their
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point, without acknowledging that the article’s stated purpose is to
“demonstrate that a landowner possessing vested development rights under state
law has a property interest and reasonable expectations which are entitled to
great weight when determining the viability of the landowner’s Fifth
Amendment takings claim or substantive due process claim.” Delaney & Vaias
at 28 (emphases added) (footnote omitted); see also id. at 31 (“Generally, the
black-letter rule for acquisition of vested rights provides that a landowner will be
protected when: (1) relying in good faith, (2) upon some act or omission of the
government, (3) he has made substantial changes or otherwise committed
himself to his substantial disadvantage prior to a zoning change.”) (emphasis
added). Appellants also disregard the Pinnacle I court’s mention of the
constitutional due process and takings clauses. See 836 N.E.2d at 425 (“In
[situations involving a nonconforming use], it is often said that the landowner
had a ‘vested right’ in the use of the property before the use became
nonconforming, and because the right was vested, the government could not
terminate it without implicating the Due Process or Takings Clauses of the
Fifth Amendment of the federal constitution, applicable to the states through
the Fourteenth Amendment.”) (emphasis added).
[23] To be sure, isolated phrases in the Pinnacle and Flying J cases could be read to
suggest that a party with no possessory interest in property may nevertheless
acquire vested rights in its use or development by expending sufficient money,
time, or effort. See Pinnacle II, 846 N.E.2d at 656 (“We acknowledge, as
perhaps our original opinion should have, that vested rights may well accrue
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prior to the filing of certain applications.”); Pinnacle III, 868 N.E.2d at 900 n.1
(“Expenses incurred before a permit application may typically include the costs
associated with leases, options, and land purchases ….”); Flying J, 912 N.E.2d
at 426 (agreeing for argument’s sake with BZA’s claim that real estate purchase
expense is inadequate to establish a vested right). But we could find no Indiana
case that specifically holds this, and Appellants have cited no cases from any
jurisdiction for this proposition. Without definitive guidance from our supreme
court, however, we decline to adopt a bright-line rule that a possessory interest
in property is a prerequisite for acquiring vested rights to use or develop that
property in a particular manner. At the very least, a possessory interest should
be a significant factor in determining whether vested rights exist; the absence of
a possessory interest may not necessarily be dispositive, but it would certainly
militate toward a finding of no vested rights.
[24] With the foregoing in mind, we consider the vested rights issue as addressed in
the trial court’s judgment. The trial court referred to Mainstreet’s five-stage
development process and found that most of the work in the market analysis
and site selection phases (which had been reached in all nine projects) had been
performed by Mainstreet entities. The court found that Mainstreet had
submitted construction design plans to ISDH for five of the projects but had not
begun construction on any of the projects. The court also found that only
“[f]our projects had executed land contracts in place.” Appealed Order 2 at 4.
Furthermore, the court found that Mainstreet had not established that it had
lost any earnest money, that Mainstreet received no funds pursuant to any
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financing agreement, and that the legal expenses associated with canceling such
agreements were incurred in-house.
[25] The trial court made the following specific findings regarding Mainstreet’s
alleged expenditures for certain projects and its reliance on governmental acts:
34. Mainstreet contends that it spent $52,000 for each of the
Evansville, Muncie and Gary projects.[16] However, these alleged
expenditures are for “internal time, resources, expenditures, and
the development fee….” The “development fee” is purportedly
an “internal fee” paid by Mainstreet Property to Mainstreet Asset
Management.
35. Mainstreet did not have the land parcel selected for the
Evansville project. No letter of intent was ever issued.
36. No letter of intent was ever issued with respect to the Gary
project. Plaintiffs did not obtain any financing with respect to the
Gary project.
37. Mainstreet did not have the land parcel selected for the
Muncie project. No letter of intent was ever drafted. Mainstreet
did not obtain any financing with respect to the Muncie project.
38. Any “financing fee” listed on Exhibit 10 is paid by
Mainstreet Property to Mainstreet Asset Management, which are
under common control.
39. Mainstreet relies on Exhibit 10 to show the substantial outlay
[of] resources on developing these projects prior to the
Moratorium going into effect. Exhibit 10 shows that Mainstreet
16
This figure comes from the deposition testimony of Mainstreet Asset Management Vice President of
Development Douglas Pedersen, which was admitted as an exhibit at trial.
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incurred and committed millions of dollars for each of the nine
projects. The Exhibit shows the following total “expenditure” by
Mainstreet for each project:
a. Zionsville ---- $1,670,415
b. Fort Wayne ---- $1,645,018
c. Hobart ---- $1,693,435
d. New Haven ---- $1,623,874
e. Warsaw ---- $1,535,448
f. Jeffersonville ---- $1,243,677
40. However, those “commitments” listed in Exhibit 10 have not
been paid by the Plaintiffs.[17]
41. The “cost of preferred equity” listed in Exhibit 10 has been
identified by Plaintiffs as “cost of equity investment return”
rather than an outlay of funds.[18]
42. Plaintiffs have not presented evidence of exactly how much
was paid for the projects listed on Exhibit 10. This is a
substantial void in the evidence. It appears that Mainstreet
intended to confound the actual expenditure of funds to external
service providers with funds that Mainstreet simply transfers
back-and-forth between its own entities.
43. When looking at the only column in Exhibit 10 that appears
17
Pedersen testified that commitments are the balance of unpaid contractual obligations to third parties. Ex.
Vol. 3 at 106. For example, Exhibit 10 shows that Mainstreet Property Group incurred $822,385 in third-
party costs for the Zionsville project and had commitments totaling $330,578. Pedersen testified that he did
not know whether “any third parties [were] demanding that the commitments be paid with respect to the
Zionsville property[.]” Id. at 108.
18
Pedersen testified that the cost of equity investment return is “estimated off 18 months of interest on the
equity from committed equity investors” and that Mainstreet Property Group was “still obligated to pay the
equity investors” despite that “construction never occurred with respect to the six properties listed” in finding
39. Ex. Vol. 3 at 148. According to Exhibit 10, the total cost of preferred equity for the six projects is
$2,850,608. Id. at 238.
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to show an actual expenditure of funds to external service
providers, it appears that, at best, Mainstreet has only actually
expended about 10% of what it claims it has incurred and
committed.
….
56. …. In the instant case, Plaintiffs had no property interest in
any of the sites related to the projects and performed no material
improvements or actions on the property.[19]
57. Additionally, this court does not believe Plaintiffs cannot
[sic] use “internal” costs, which are merely transfers under the
“Mainstreet umbrella” to attempt to show the Court that they
made material expenditures of money with respect to the
projects.
58. Moreover, any claim of a vested right must surmount the
requirement that the developer relied in good faith on some
action of the government.
59. No action by the legislature created any such good faith
reliance in this case. As a matter of fact, the Legislature had
shown its intention a year earlier to create a moratorium on the
development of health care facilities. The Moratorium had been
proposed in 2014 and 2015, and Plaintiffs knew that the
Moratorium bill was going through the legislature. While the
Moratorium bill did not pass in 2014, it did pass in 2015.
Mainstreet’s decision to push forward with additional projects
while the Legislature was in the middle of deciding whether to
prevent such projects is a business risk. There is nothing wrong
with a business taking a risk; businesses should do that.
19
We reject Appellants’ assertion that this conclusion “necessarily suggests that the trial court thinks that
construction must occur at the site for vested rights to accrue.” Appellants’ Br. at 62.
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However, when the risk does not pan out, they cannot then say
they relied in “good faith” on the current status of the law.
60. Providing comprehensive care services is a heavily regulated
industry in which the participants are typically aware of proposed
changes in the law before they occur.
61. For two consecutive years, the proposed moratorium had
been the subject of extensive debate within the comprehensive
care industry and by the legislature, and Mainstreet even “spoke
on the bill itself.”
62. The Court believes that the issue of “good faith reliance” is a
legal hurdle that Mainstreet cannot clear. In all the cases cited to
the court regarding vested rights, such as the Pinnacle line,
Knutson, Lutz, and Flying J, the one element that is different is
that the developers had no reason to suspect the development of
their project, whether it be billboards, a neighborhood, a gas
station, or a fueling center, would be denied.
….
67. Along with the court’s determination that the Plaintiffs have
not met their burden regarding proving good faith reliance, the
Court also believes that the facts do not show that Plaintiffs have
made substantial changes or otherwise committed themselves to
a substantial disadvantage prior to a zoning change.
68. Based on the foregoing, Plaintiffs have not met their burden
by a preponderance of the evidence that they acquired vested
rights in any of the nine projects.
Id. at 6-13 (record citations omitted).
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[26] Appellants first contend that the trial court misconstrued good faith reliance.
According to Appellants,
[r]elying in good faith means that a developer believes that the
current state of the law permits the development and that the
developer pursues the project on that belief. So in this case, good
faith reliance would mean that at the time Mainstreet started and
pursued a project, it believed that the current state of the law
permitted them to complete that project. This, of course, was the
case here.
Appellants’ Br. at 52-53. Appellants argue that “Mainstreet expects the
industry to be regulated, but it does not expect the industry to be regulated
retroactively.” Id. at 54. They claim that, “[u]nder the trial court’s holding,
Mainstreet should have immediately ceased all activity in the State of Indiana
in 2014. But if businesses had to cease activity every time there was a proposed
law or possible change, economic activity would come to a standstill.” Id. at
55.
[27] Appellants’ argument on this point is well taken. The proposed moratorium in
Senate Bill 173 put Mainstreet on notice that the legislature was giving serious
thought to capping the number of comprehensive care health facilities at the
end of June 2014, six months after the bill was introduced. But once that bill
failed to become law, it would have been unreasonable to expect Mainstreet to
shelve its existing projects or avoid starting new projects until the next
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legislative session20 on the off chance that a similar moratorium would be
proposed and successfully enacted. As it turned out, the Moratorium in Senate
Bill 460 was significantly and unexpectedly different because it was retroactive
at its inception on March 9, 2015, and therefore did not give Mainstreet (or
anyone else) an opportunity to submit construction design plans for projects
that were already in the pipeline. We agree with Appellants that businesses
should “not be forced to anticipate an unforeseen subsequent change in the
law.” Appellants’ Reply Br. at 31. Consequently, we disagree with the trial
court’s conclusion that Mainstreet failed to establish that it relied in good faith
on existing law.
[28] Next, Appellants assert that the trial court erred in finding that they had not
“presented evidence of exactly how much was paid for the [six] projects listed
on Exhibit 10.” Appealed Order 2 at 7.21 They claim that the “expenditures
include the exact items that were sufficient for rights to vest in City of New
Haven, including, inter alia, surveying, geotechnical investigations, civil
engineering services, structural engineering services, schematic designing.”
Appellants’ Br. at 59. Unlike the detailed evidence presented by Flying J in City
of New Haven, see 912 N.E.2d at 426 (list of thirteen separate costs), neither
Exhibit 10 nor the supporting deposition testimony of Mainstreet Asset
Management Vice President of Development Douglas Pedersen provided
20
We note that 2014 was an election year.
21
Pedersen testified that the expenditures for the Gary, Evansville, and Muncie projects were purely internal.
Court of Appeals of Indiana | Opinion 29A02-1704-MI-871 | March 13, 2018 Page 26 of 29
specifics regarding how much money was spent on each project for any of those
items. Moreover, there was no evidence that Mainstreet would have to pay any
of the almost $2,000,000 in outstanding contractual commitments to third
parties, and the stated cost of preferred equity for each project did not include a
breakdown of the investors’ principal (which did not come out of Mainstreet’s
pocket) and the return on investment (if any).
[29] Appellants also complain that the trial court erred “when it failed to consider
the significant expenditures of money, time, and effort, made by Mainstreet
itself.” Id. at 60.22 Pedersen testified generally about the stages of Mainstreet’s
development process, but Appellants provided no detailed evidentiary basis
(such as actual time spent or hourly rates) for the development and financing
fees that were charged from one Mainstreet entity to another. We may not
second-guess the trial court’s apparent belief that those fees were more of an
accounting stratagem than an indication of actual expenditures of money, time,
and effort. Moreover, Appellees point out that the foregoing precedent “[does]
not say that internal costs may be considered in determining whether a
developer’s expenses are of such an extent that it has a vested right in a
project.” Appellees’ Br. at 53-54.
22
Appellants claim that “[t]he total combined internal expenditures for all of Mainstreet’s pending projects
was $3,946,368.” Appellants’ Reply Br. at 9 (citing Appellants’ App. Vol. 3 at 187, 192, 195, 241-42). That
total appears to be based on the development and financing fees for the six projects listed in Exhibit 10 and
Pedersen’s testimony regarding the expenditures for the Gary, Evansville, and Muncie projects.
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[30] In sum, Appellants’ evidence regarding the expenditure of money, time, and
effort could be characterized as normal business efforts expended to investigate
future business opportunities. “[T]he existence of a vested right is fact-
dependent[,]” Pinnacle III, 868 N.E.2d at 900, and we must defer to the trial
court’s factual findings on this issue. With respect to the Hobart, Warsaw,
Gary, Evansville, and Muncie projects, Mainstreet Realty did not have a
contractual interest, let alone a possessory interest, in any property. In light of
all this, we cannot say that the trial court erred in finding that no vested right
existed as to these projects.
[31] The Zionsville, Jeffersonville, Fort Wayne, and New Haven projects present a
closer call, in that they were further along in the development process, and
Mainstreet Realty had executed land purchase agreements. But Mainstreet
Realty had not acquired a possessory interest in the target properties,23 and the
evidence regarding the expenditure of money, time, and effort on those projects
could, as above, be characterized as the exploration of future business
opportunities. Any commercial development project involves an element of
financial risk, and we agree with the trial court’s assessment that “the facts do
not show that [Appellants] have made substantial changes or otherwise
committed themselves to a substantial disadvantage” so as to create a vested
right. Appealed Order 2 at 12-13. Therefore, we affirm the trial court’s
judgment for Appellees on Appellants’ vested rights claim.
23
As mentioned earlier, all earnest money for these contracts was returned to Mainstreet Realty.
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[32] Affirmed.
Robb, J., and Bradford, J., concur.
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