El Dorado Land Company, L.P. v. City of McKinney , 56 Tex. Sup. Ct. J. 415 ( 2013 )

IN THE SUPREME COURT OF TEXAS
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NO . 11-0834
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EL DORADO LAND COMPANY, L.P., PETITIONER,
v.
CITY OF MCKINNEY, RESPONDENT
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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS
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Argued January 9, 2013
JUSTICE DEVINE delivered the opinion of the Court.
The issue in this inverse condemnation lawsuit is whether a reversionary interest, consisting
of the grantor’s right to purchase real property on the occurrence of a future event, is a sufficient
property interest to support an inverse condemnation claim. The trial court concluded it was not and
dismissed the case. The court of appeals affirmed the trial court’s judgment, holding that the
grantor’s retained right was not a compensable property interest under the Takings Clause of the
Texas Constitution. 349 S.W.3d 215, 216, 218 (Tex. App.—Dallas 2011) (citing TEX . CONST . art
I, § 17). Because we conclude that the reversionary interest here is a compensable property interest,
we reverse and remand to the trial court.
I
In 1999, El Dorado Land Company sold several acres of land to the City of McKinney for
use as a park. El Dorado’s special warranty deed provided that the conveyance was “subject to the
requirement and restriction that the property shall be used only as a Community Park.” If the City
decided not to use the property for that purpose, the deed further granted El Dorado the right to
purchase the property. The deed labeled this right an option and set the option’s price at the amount
the City paid or the property’s current market value, whichever was less. El Dorado also had the
right to inspect the property and to close on the purchase within ninety days after inspection.
Ten years after acquiring the property, the City built a public library on part of the land. The
City did not offer to sell the property to El Dorado or otherwise give notice before building the
library. After learning about the library, El Dorado notified the City by letter that it intended to
exercise its option to purchase. El Dorado’s letter further asked the City within ten days to
acknowledge its obligations under the deed and to suggest an acceptable closing date.
After the City failed to acknowledge El Dorado’s rights under the deed, El Dorado sued for
inverse condemnation. The City responded with a plea to the jurisdiction. In its plea, the City
argued that El Dorado’s claim did not involve a compensable taking of property but a mere breach
of contract for which the City’s governmental immunity had not been waived. The trial court agreed,
sustaining the City’s plea and dismissing El Dorado’s lawsuit. The court of appeals similarly agreed
and affirmed the trial court’s judgment. 349 S.W.3d 216.
2
II
The dispute here continues over the nature of El Dorado’s interest in this land. El Dorado
argues that its right to purchase this property is a real property interest, in the nature of a reversionary
interest, and more particularly described as a right of reentry. The City, on the other hand, contends
that El Dorado’s option is not a real property interest but a mere contract right. As such, the City
argues that the option is unenforceable against it absent an express waiver of the City’s governmental
immunity.1 Because the Legislature has not chosen to waive governmental immunity for this
particular type of contract claim,2 the City concludes that the court of appeals correctly affirmed the
dismissal of El Dorado’s claim.
The court of appeals similarly reasoned that the deed restriction and option were merely
contract rights that were not compensable against a governmental entity under the Texas
Constitution. See 349 S.W.3d at 218 (observing that inverse condemnation claims have
“traditionally involved interests in real property and not the alleged taking of property interests
created under contract”). The court accordingly “reject[ed] El Dorado’s argument that, pursuant to
the deed provision, it held a reversionary interest or the ‘possibility of reverter’ in the property.” Id.
1
See, e.g., Gen. Servs. Comm’n v. Little-Tex Insulation Co., 39 S.W .3d 591, 597 (Tex. 2001) (noting “that
there is but one route to the courthouse for breach-of-contract claims against the State, and that route is through the
Legislature”).
2
The Legislature has waived a municipality’s immunity to suit for contract claims involving goods and services.
T EX . L O C . G O V ’T C O D E §§ 271.151(2), (3)(A), 271.152.
3
While we agree that the deed did not create a possibility of reverter, we disagree that El Dorado did
not retain another type of reversionary interest in the property.
El Dorado refers to its reversionary interest as a right of reentry. A right of reentry is a
“future interest created in the transferor that [may] become possessory upon the termination of a fee
simple subject to a condition subsequent.” RESTATEMENT (THIRD ) OF PROPERTY : WILLS AND
OTHER DONATIVE TRANSFERS § 25.2 cmt. b (hereafter RESTATEMENT (THIRD ) OF PROPERTY ); see
also Davis v. Vidal, 151 S.W. 290, 292–93 (Tex. 1912) (describing a right of reentry as “a contingent
reversionary interest in the premises resulting from the conveyance of an estate upon a condition
subsequent where there has been an infraction of such condition”).
Under the deed, El Dorado’s possessory interest was contingent on the property’s use. If the
City violated the deed restriction, El Dorado retained the power to terminate the City’s estate.3 The
deed referred to this power or right as an option, but it effectively functioned as a power of
termination, or as El Dorado labels it, a right of reentry. El Dorado’s deed conveyed a defeasible
estate (“a fee simple subject to a condition subsequent”)4 to the City with El Dorado retaining a
conditional future interest—the power to terminate the City’s defeasible estate on the occurrence of
3
This power, referred to in the deed as the option to purchase, is also known at common law by other names,
such as a right of entry for condition broken, a right of reentry for breach of condition subsequent, or a power of
termination. See 3 R IC H A R D R. P O W ELL , P O W ELL O N R EAL P ROPERTY § 20.01[1] (2000) (“The term ‘power of
termination’ is used by the Restatement and by some courts, but most courts and most lawyers employ the term ‘right
of entry for condition broken.’”); see also 34 T EX . J U R . 3 D Estates § 8 at 546 (2010) (noting that “a future interest” may
be “characterized as a right of reentry for breach of condition subsequent or, in other words, an estate subject to a power
of termination”).
4
R ESTATEM ENT (T H IR D ) O F P RO PERTY § 25.2 cmt. b.
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a condition subsequent.5 We have previously equated this right to an estate or interest in land.
Davis, 151 S.W. at 293; see also RESTATEMENT OF PROPERTY § 153(1)(a) & cmt. a (noting that the
term future interest includes an interest in land which “may become a present interest” and is
“sufficiently broad to include . . . powers of termination”).
Contrary to the court of appeals, we conclude that El Dorado retained a reversionary interest
in the property. We likewise disagree with the court of appeals’ analysis of El Dorado’s claim as a
contract right dependent on a statutory waiver of the City’s governmental immunity. A statutory
waiver of immunity is unnecessary for a takings claim because the Texas Constitution waives
“governmental immunity for the taking, damaging or destruction of property for public use.” Steele
v. City of Houston, 603 S.W.2d 786, 791 (Tex. 1980).
El Dorado’s claim is that the City took or destroyed its reversionary interest in the property
by refusing either to convey the property or to condemn El Dorado’s interest. The issue then is
whether El Dorado’s reversionary interest can support a takings claim under the Texas Constitution.
TEX . CONST . art. I § 17. El Dorado submits that it can under our decision in Leeco Gas & Oil Co.
v. Nueces County, 736 S.W.2d 629 (Tex. 1987).
III
Leeco, like this case, involved a restricted conveyance of land to a governmental entity that
later sought to avoid the deed restriction. The land in that case was donated to Nueces County for
5
See R ESTATEM EN T OF P RO PERTY § 155 (defining a power of termination as “the future interest created in the
transferor . . . by a transfer of either an estate in land or an analogous interest in a thing other than land, subject to a
condition subsequent”).
5
use as a park, and the deed included a restrictive covenant requiring that use. Leeco, 736 S.W.2d at
630. The grantor retained a reversionary interest, described as a possibility of reverter,6 in the event
the land was not used as a park. Id.
Nueces County subsequently decided to use the land for another purpose and sought to
condemn the grantor’s reversionary interest. Although the land was worth millions of dollars, the
trial court awarded only nominal damages for the grantor’s reversionary interest, and the court of
appeals affirmed that award. Id. We reversed and remanded, concluding that the grantor’s
reversionary interest was worth more than nominal damages. Id. at 631–32.
Relying on the Restatement of Property, we observed that a possibility of reverter was a
protected property interest, the value of which depended upon the imminence of possession. Id. We
explained that a nominal valuation would be appropriate for the government taking such property
only “when the event upon which the possessory estate in fee simple defeasible is to end is not
probable within a reasonably short period of time.” Id. at 631. Conversely, we explained that
nominal damages would be inappropriate if the defeasible event was reasonably certain to occur in
the near future or had already occurred. Id. Under those circumstances, we said the compensable
value of the reversionary interest should be measured by the amount “the value of the unrestricted
fee exceeds the value of the restricted fee.” Id. at 631–32. Leeco thus recognizes that a future
interest in real property is compensable under the Takings Clause, TEX . CONST . art. I, § 17, and that
6
A possibility of reverter is a term of art for a future interest retained by a grantor that conveys a determinable
fee; “it is the grantor’s right to fee ownership in the real property reverting to him if the condition terminating the
determinable fee occurs.” Luckel v. White, 819 S.W .2d 459, 464 (Tex. 1991).
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the owner of such an interest is entitled to a condemnation award. Id. at 631 (citing RESTATEMENT
OF PROPERTY § 53).
The court of appeals’ opinion does not directly address Leeco, but arguably attempts to
distinguish the decision by observing that the deed in this case did not include a possibility of
reverter. 349 S.W.3d at 218. While we agree it did not, as previously explained, we do not accept
the court’s further conclusion that El Dorado’s deed did not create a reversionary interest. See id.
(rejecting El Dorado’s argument that “it held a reversionary interest or the ‘possibility of reverter’
in the property”). As El Dorado argues, the deed restriction and option created in El Dorado a right
of reentry, which is a reversionary interest, albeit of a different type than the possibility of reverter
reserved in Leeco.
The City argues that Leeco is distinguishable on this ground because a possibility of reverter
is materially different from the right or option reserved by El Dorado. At oral argument, the City
elaborated on the distinction, explaining that Leeco’s reversionary interest was different because it
was self-executing, whereas the right retained by El Dorado was not. While we agree that Leeco’s
possibility of reverter and El Dorado’s right of reentry are different types of reversionary interests,
it is not apparent why their technical differences make one a compensable property interest and the
other a worthless right. In both, the termination of the possessory estate rests on the occurrence of
a condition subsequent imposed upon the conveyance. That a right of reentry requires its holder to
make an election does not make it any less a property right, particularly where as here the holder has
made the required election.
7
Historically, the law divided future interests into five types: (1) remainders, (2) executory
interests, (3) reversions, (4) possibilities of reverter, and (5) rights of entry. RESTATEMENT (THIRD )
OF PROPERTY § 25.2 cmt. a. Remainders and executory interests are future interests created in
persons other than the grantor. 3 RICHARD R. POWELL, POWELL ON REAL PROPERTY § 20.01[2]
(2000). Reversions, possibilities of reverter, and rights of entry are interests that remain with the
grantor. Id.; see also RESTATEMENT (THIRD ) OF PROPERTY § 25.2 cmt. b (noting their classification
“as reversionary future interests, because they were retained by the transferor”). Collectively, the
types of future interests that remain with the grantor are reversionary interests7 and may be viewed
“as claims to property that the grantor never gave away.” POWELL ON REAL PROPERTY § 20.02[1].
The latest Restatement dispenses with the historical parsing of future interests, recognizing
only reversions and remainders. RESTATEMENT (THIRD ) OF PROPERTY § 25.2. It thus abandons
distinctions that previously differentiated a possibility of reverter from a right of entry because, in
its view, no legal consequences attach to such distinctions. See id. § 25.2 cmt. a (“Today, no legal
consequences depend upon placing a future interest in one category or another.”).
We likewise see no reason to distinguish between the reversionary interest in Leeco and the
one in this case. Under Texas law, the possibility of reverter and the right of reentry are both freely
7
The distinctions between reversionary interests rest largely on the form of the conveyance. Thus, a
“reversion” is “a future interest retained by the transferor that could become possessory upon the termination of a life
estate or a term of years”; a “possibility of reverter” is “a future interest retained by the transferor that could become
possessory upon the termination of a fee simple determinable”; and a “right of entry” is “a future interest created in the
transferor that could become possesory upon the termination of a fee simple subject to a condition subsequent.”
R ESTATEM EN T (T H IR D ) O F P RO PERTY § 25.2 cmt. b.
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assignable like other property interests. James v. Dalhart Consol. Indep. Sch. Dist., 254 S.W.2d 826,
829 (Tex. Civ. App.—Amarillo 1952, writ ref’d). And, although the earlier Restatement individually
identified automatic reversions and other interests, like El Dorado’s power of termination or right
of reentry, it nevertheless grouped them as reversionary interests. See RESTATEMENT OF PROPERTY
§ 153 cmt. a. Simply put, both the possiblity of reverter and the right of reentry are future interests
in real property. See LEWIS M. SIMES & ALLAN F. SMITH , THE LAW OF FUTURE INTERESTS § 1 (2d
ed. 1956) (defining a future interest as “an interest in land or other things in which the privilege of
possession or of enjoyment is future and not present”). And Leeco recognizes that a future interest
in real property is compensable under the Takings Clause. 736 S.W.2d at 631–32 (citing
RESTATEMENT OF PROPERTY § 53). We accordingly reject the City’s argument that Leeco is
distinguishable merely because it involved a different type of reversionary interest.
The City next argues that Leeco is distinguishable because of public policy concerns unique
to that case. The park land in Leeco was donated to the county, whereas the land in this case was
sold, at least in part, to the City for use as a park.8 In Leeco, we lamented about the unfairness of
permitting the government to avoid the restrictions attached to a gift by paying nominal damages and
suggested in passing that the failure to recognize Leeco’s reversionary interest as a compensable
property interest under the Takings Clause might adversely affect future donations. Leeco, 736
S.W.2d at 631. The City submits that this public policy concern is not implicated here because it
8
A city ordinance applicable to El Dorado’s residential development required it to donate about fifteen acres
for park purposes. In negotiations with El Dorado, the City was able to purchase an adjoining seventeen acre tract. Both
tracts were included in a single deed to the City.
9
paid El Dorado for the land. In the final analysis, however, the viability of the takings claim in Leeco
did not turn on the donor’s benevolence but, instead, on the reservation the donor included in the
deed. The Restatement makes no distinction between gifts and sales, and it is not apparent why the
compensable nature of a future interest should rest on donative intent rather than the donor’s intent
to retain a contingent future interest in the property conveyed.
Finally, the City argues that Leeco is procedurally distinguishable because the county initiated
the condemnation proceedings, whereas in this case El Dorado commenced an inverse condemnation
case. The City suggests that we merely assumed that Leeco’s reversionary interest was compensable
because no one disputed it. But had we not viewed Leeco’s future interest as a vested compensable
property interest, there would have been no point to our taking the case. We would have simply let
the award of nominal damages stand. Moreover, the procedural distinctions between condemnation
and inverse condemnation cases are generally immaterial. See City of Dallas v. Stewart, 361 S.W.3d
562, 567 (Tex. 2012) (noting that although the actions differ based on who initiates, rules of
evidence and measure of damages to property are “substantially similar” in both kinds of cases).
When private property is taken for a public purpose, our constitution requires that the
government compensate the owner. TEX . CONST . art I, § 17. A condemnation proceeding is the
formal process by which that compensation is determined. But when the government takes private
property without paying for it, the owner must bring suit for inverse condemnation. Westgate, Ltd.
v. State, 843 S.W.2d 448, 452 (Tex. 1992). The action is termed “inverse” because it is initiated by
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the private property owner instead of the government, but its purpose and procedure are generally
no different. Stewart, 361 S.W.3d at 567.
***
In summary, we conclude that the reversionary interest retained by El Dorado in its deed to
the City is a property interest capable of being taken by condemnation. We express no opinion,
however, on whether a taking has occurred in this case. We reverse and remand to the trial court for
it to determine whether the City violated its deed restrictions by building a public library on a part
of the land dedicated for use as a community park and, if so, to what extent the City has taken El
Dorado’s interest in the restricted property.
______________________________
John P. Devine
Justice
Opinion Delivered: March 29, 2013
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