Happy Valley LLC v. Madison County Board of Commissioners

FILED
Sep 18 2019, 7:35 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEES
Kevin S. Smith Jonathan W. Hughes
Church, Church, Hittle & Antrim Kristina K. Wheeler
Fishers, Indiana Christina M. Bruno
Bryan H. Babb
Theodore F. Smith, Jr.
Bose McKinney & Evans LLP
Theodore F. Smith, Jr., P.C.
Indianapolis, Indiana
Anderson, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Happy Valley LLC, September 18, 2019
Appellant-Defendant/Counterclaim Court of Appeals Case No.
Plaintiff, 18A-CC-2581
Appeal from the Hamilton
v. Superior Court
The Honorable Steven R. Nation,
Madison County Board of Judge
Commissioners, et al., Trial Court Cause No.
Appellees-Plaintiffs/Counterclaim 29D01-1710-CC-9988
Defendants.
Bailey, Judge.
Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019 Page 1 of 15
Case Summary
[1] In order to provide housing for minimum security jail detainees, the Madison
County Board of Commissioners (“the Commissioners”) executed a four-year
lease (“the Lease”) to occupy property owned by Max Howard (“Howard”)
and managed by Happy Valley, LLC (“Happy Valley”). The Madison County
Attorney notified Howard in writing that the Lease was to be terminated two
years early, pursuant to Section 6 of the Lease, a provision regarding funds
availability. The Commissioners and the Madison County Community
Corrections Advisory Board (at times, collectively referred to as “Madison
County”) sought a declaratory judgment that the Lease was effectively
cancelled. Happy Valley counterclaimed for unpaid rent, and requested judicial
review as an aggrieved party under the Indiana Public Purchasing Act, Indiana
Code Section 5-22-1-0.1 et seq. (“the Purchasing Act”). The trial court issued a
declaratory judgment in favor of Madison County. Happy Valley appeals,
presenting a single, consolidated issue: whether the declaratory judgment is
contrary to law.1 We affirm.
Facts and Procedural History
[2] Beginning in 1999, Happy Valley leased to Madison County one building to
serve as the Madison County Work Release Center and a second building to
1
We held oral argument in this case on August 23, 2019 at Greensburg Community High School. We thank
the school for its hospitality and thank the parties for their able oral advocacy.
Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019 Page 2 of 15
house minimum security detainees. The final lease for the minimum security
facility was executed on December 23, 2014, for a four-year term, with monthly
rent of $18,400.00. By this time, the Commissioners had voted to purchase real
estate located on Jackson Street in Anderson, to be remodeled to use for a work
release facility. In 2015, a feasibility study suggested there would be significant
cost efficiency if the project was expanded to include housing for minimum
security detainees. Madison County decided to proceed with the recommended
dual facility expansion.
[3] On September 22, 2016, the Executive Director of the Madison County
Community Corrections Justice Center (“the Executive Director”) presented to
the Madison County Council (“the Council”) an estimated 2017 budget for
incarceration alternatives. The Director had included a budget line item for
rent pursuant to the Lease; however, the Council “zeroed it out.” (Tr. Vol. II,
pg. 171.)
[4] Commissioner John Richwine directed the Madison County Attorney to notify
Howard of that budgetary action. On September 30, 2016, the attorney drafted
a letter addressed to Howard, as the registered agent for Happy Valley,
providing in relevant part:
Please let this letter serve as notice that Madison County will be
terminating the Real Estate lease it entered into with Happy
Valley, LLC on or around December 23, 2014 as, pursuant to
section 6 of that lease, the Commissioners of Madison County
have determined that funds are not available to support the
continued performance of the lease.
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(App. Vol. II, pg. 63.) On December 19, 2016, Howard drafted a letter to
Madison County stating in part: “Happy Valley LLC does not accept the
cancellation of the December 23, 2014 lease.” Id. at 65.
[5] Madison County continued to house detainees at Happy Valley’s facility until
late 2016. After December of 2016, Madison County made no additional
payments pursuant to the Lease. On December 22, 2016, Madison County
filed a declaratory judgment complaint naming Happy Valley as the defendant.
Madison County sought a declaration that the Lease was cancelled pursuant to
the September 30, 2016 attorney letter.
[6] On February 15, 2017, the Commissioners passed a Resolution to confirm that
funds had not been appropriated for the Lease or, alternatively, to cure any
defect for alleged non-compliance with the Indiana Open Door Law, Indiana
Code Section 5-14-1.5-1 et seq. Specifically, the Resolution included language
that “owing to the purchase of a new Madison County Community Correction
Center, that funds are neither appropriated nor available for the continued
performance of the Real Estate Lease with Happy Valley, LLC executed on
December 23, 2014.” Id. at 88. Madison County then filed an amended
complaint, seeking a declaration that the Lease was cancelled pursuant to either
the attorney letter or the Resolution.2
2
Indiana Code Section 36-1-4-16 provides that a governmental unit may ratify an action of the unit or its
officers or employees “if that action could have been approved in advance.”
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[7] On March 2, 2017, Happy Valley filed a counterclaim. Happy Valley, claiming
entitlement to unpaid rent, requested judicial review of the funding decision
under Indiana Code Section 5-22-19-2.3 Happy Valley articulated as affirmative
defenses: (1) Madison County was not entitled to cancellation of the Lease
because it had not acted in good faith as required by Indiana Code Section 5-22-
3-1; (2) preconditions of cancellation (specific request to the Council for funding
and a written determination) were not met; and (3) the September 30, 2016
letter was non-compliant with the Open Door Law. Madison County
responded to the counterclaim and raised as affirmative defenses: estoppel,
unclean hands, failure to state a claim upon which relief could be granted, and
frivolity.
[8] The trial court conducted a two-day hearing on April 11 and 12, 2018. On
September 27, 2018, the trial court issued its Findings of Fact, Conclusions, and
Judgment, finding in favor of Madison County. The court concluded that a
public meeting was not necessary to cancel the Lease or authorize the
September 30, 2016 letter (an administrative act) and accordingly, there was no
violation of the Open Door Law. The trial court treated the affirmative defense
of failure to act in good faith as a free-standing tort claim and observed that
3
Indiana Code Section 5-22-19-2 provides that a person aggrieved by a determination under the Purchasing
Act may file a petition for judicial review. The review is limited. Relief may be granted only if a person has
been substantially prejudiced by a determination that is “arbitrary, capricious, an abuse of discretion or
otherwise not in accordance with law; contrary to constitutional right, power, privilege, or immunity; in
excess of statutory jurisdiction, authority, or limitations, or short of statutory right; without observance of
procedure required by law; or unsupported by substantial evidence.”
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Happy Valley had failed to file a timely Notice of Tort Claim. The court found
this omission to be fatal to Happy Valley’s defensive claim of bad faith. 4
Observing that the Council and Commissioners are different branches of local
government, the trial court found it “clear the County Council refused to
appropriate funding for the 2015 Lease.” Appealed Order at 26. Happy Valley
now appeals.
Standard of Review
[9] Madison County sought a declaratory judgment that its contract with Happy
Valley was cancelled as of December 2016. Indiana’s Declaratory Judgment
Act provides:
Any person interested under a deed, will, written contract, or
other writings constituting a contract, or whose rights, status, or
other legal relations are affected by a statute, municipal
ordinance, contract, or franchise, may have determined any
question of construction or validity arising under the instrument,
statute, ordinance, contract, or franchise and obtain a declaration
of rights, status, or other legal relations thereunder.
I.C. § 34-14-1-2.
4
The trial court found laches applicable because eighty days lapsed before Howard responded to the county
attorney’s letter. Madison County did not, in its pleadings or argument before the trial court, raise laches or
failure to file a Notice of Tort Claim. We need not address the affirmative defense of laches in disposing of
this appeal.
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[10] The trial court entered findings of fact and conclusions thereon pursuant to
Indiana Trial Rule 52(A). In reviewing findings made pursuant to Trial Rule
52, we first determine whether the evidence supports the findings and then
whether findings support the judgment. K.I. ex rel. J.I. v. J.H., 903 N.E.2d 453,
457 (Ind. 2009). On appeal, we “shall not set aside the findings or judgment
unless clearly erroneous, and due regard shall be given to the opportunity of the
trial court to judge the credibility of the witnesses.” Id. A judgment is clearly
erroneous when there is no evidence supporting the findings or the findings fail
to support the judgment. Id. A judgment is also clearly erroneous when the
trial court applies the wrong legal standard to properly found facts. Id.[11] Here, the salient facts were not in dispute. Madison County and Happy Valley
entered into the Lease, having a stated four-year term; Madison County
purchased property for housing of minimum security detainees and moved the
detainees; rent was paid for days that detainees were housed; thereafter,
Madison County paid no additional rent to Happy Valley. A 2017 budget was
presented to the Council including future payments under the Lease but the
Council deleted that item. Two actions were taken to clarify the County’s
position that rent was not due for the final two years of the Lease term:
issuance of a Madison County attorney letter to Howard and the
Commissioners’ adoption of a Resolution.
[12] Happy Valley alleges that Madison County violated the Purchasing Act and the
Open Door Law. Madison County denies any statutory violation and
maintains that the Lease was properly cancelled. Statutory interpretation is
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reviewed de novo as it presents a pure question of law. Gardiner v. State, 928
N.E.2d 194, 196 (Ind. 2010). Interpretation and construction of contract
provisions are questions of law. John M. Abbott, LLC v. Lake City Bank, 14
N.E.3d 53, 56 (Ind. Ct. App. 2014). Cases that present mixed issues of fact and
law are reviewed under an abuse of discretion standard. Daisy Farm Ltd. P’ship
v. Morrolf, 886 N.E.2d 604, 606 (Ind. Ct. App. 2008), trans. denied.
Discussion and Decision
Cancellation of Public Purchasing Contracts
[13] “[S]tates and local governments have a legitimate interest in their own efficient
and effective operation.” City of Indianapolis v. Armour, 946 N.E.2d 553, 560
(Ind. 2011). In 1899, the Indiana Legislature enacted the County Reform Act
and thereby established a system for appropriations of county funds by the
county council.5 The power of making appropriations was given exclusively to
the county council with the apparent intent that the exercise of powers by the
county council would benefit taxpayers by providing a check on the expenditure
of public money. Warrick Cty. Comm’rs v. Warrick Cty. Council, 706 N.E.2d 579,
580 (Ind. Ct. App. 1999) (citing Snider v. State ex rel. Leap, 206 Ind. 474, 190
N.E. 178, 180 (1934)).
5
Black’s Law Dictionary defines “appropriation” to include “a legislative body’s or business’s act of setting
aside a sum of money for a specific purpose” and “the sum of money so voted.” (11th Ed. 2019).
Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019 Page 8 of 15
[14] In an Indiana County not having a consolidated city, such as Madison County,
the county council is the “fiscal body.” Ind. Code § 36-1-2-6. The fiscal body is
required to hold a regular meeting annually “to adopt the county’s annual
budget and tax rate” and may hold special meetings. I.C. § 36-2-3-7(b)(2).
Monies for contracts will be appropriated annually. “There are good public
policy reasons for requiring municipalities to appropriate all necessary funds
before entering into contracts,” among them, enabling public comment and
involvement, “shedding needed sunlight onto municipalities as they decide how
to spend their funds,” and preventing “one administration from binding the
next administration in perpetuity.” City of Lawrenceburg v. Franklin Cty., No.
19A-PL-263, slip op. at 13 (Ind. Ct. App. Aug. 28, 2019).
[15] The county commissioners function as the executive branch of local
government and execute the directives of the fiscal body. I.C. § 36-2-2-2.
Accordingly, county commissioners enter into contracts with vendors in
furtherance of local government purposes and objectives. Nonetheless, “money
may be paid out of the treasury only under an appropriation made by the fiscal
body, except as otherwise provided by law.” I.C. § 36-2-5-2(b).
[16] Pursuant to Indiana Code Section 5-22-1-1, the Purchasing Act is, in general,
applicable to “every expenditure of public funds by a governmental body.” The
act specifically defines a “purchase” to include “lease” or other acquisition.
I.C. § 5-22-2-24(a). It provides protection to taxpayers in that, when the fiscal
body determines in writing that funds are unavailable, a contract may be
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cancelled. It protects parties willing to contract with a governmental body by
requiring good faith in the performance of all public contracts.
[17] The good faith requirement, Indiana Code Section 5-22-3-1, provides:
All parties involved in the negotiation, performance, or
administration of contracts under this article shall act in good
faith.
[18] Indiana Code Section 36-1-10-5(2) prescribes a “procedure” to “be followed
whenever a lease does not contain an option to purchase,” that is, [t]he lease
must provide that the lease is subject to annual appropriation by the appropriate
fiscal body.” The enforcement mechanism is found in Indiana Code Section 5-
22-17-5, which provides:
(a) When the fiscal body of the governmental body makes a
written determination that funds are not appropriated or
otherwise available to support continuation of performance of
a contract, the contract is considered canceled.
(b) A determination by the fiscal body that funds are not
appropriated or otherwise available to support continuation of
performance is final and conclusive.
[19] Here, the Lease was in-artfully drafted; Section 6.01 referenced a power of
cancellation in the Commissioners as opposed to the Council.6 Section 6.01
6
Because the Commissioners were not empowered in this instance to cancel the Lease, their attempts to do
so are not relevant to disposition of this controversy. We have no reason to disagree with the trial court’s
determinations that the September 30, 2016 letter was an administrative act not encompassed by the Indiana
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does not accomplish what it purports to accomplish. But despite this
shortcoming, and the evidentiary focus at the hearing upon the conduct of the
Commissioners, we must acknowledge that a public contract is invalid in the
absence of an appropriation of “funds on hand.” See Union Sch. Tp. of St. Joseph
Cty. v. Moon, 162 N.E. 61, 87 Ind. App. 536 (1928). The Purchasing Act
requires that the determination as to lack of appropriation or unavailability of
funds be made in writing and in good faith by the fiscal body, here the Madison
County Council. Because it is the Council’s conduct that is relevant, we look to
the trial court’s findings of fact and conclusions thereon in this regard.
[20] The trial court entered findings of fact as follows. The Council determined it
was feasible to construct a minimum security facility on the Jackson Street
property purchased by the county. At a public meeting on September 22, 2016,
the Executive Director presented to the Council a budget inclusive of $220,800
in future Lease payments but the Council “voted to remove it.” Appealed
Order at 10. The findings have evidentiary support. The trial court ultimately
concluded that the Council had made a determination, as a matter of public
record, that additional payments under the Lease would not be made. The
response to the budgetary request, albeit minimalist, made plain the Council’s
funding decision: consistent with Indiana Code Section 5-22-17-5, “funds are
Open Door Law or that the February 15, 2017 Resolution commemorating a historical event was not a
violation of the Open Door Law. See Lake Cty. Trust Co. v. Advisory Plan Comm’n, 904 N.E.2d 1274, 1279
(Ind. 2009) (recognizing that the Open Door Law has as its objective assurance that government business will
be conducted openly in order that the general public may be fully informed, but clarifying that administrative
actions taken by delegated representatives of governing bodies are not subject to the Open Door Law).
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not appropriated or otherwise available to support continuation of [contract]
performance.”
Good Faith
[21] Happy Valley alleged, as an affirmative defense, that Madison County could
not obtain declaratory relief because it had sabotaged its own contract, thereby
failing to comply with the good faith requirement of Indiana Code Section 5-22-
3-1. As we have previously stated, the Purchasing Act, made applicable to a
political subdivision, I.C. § 5-22-2-13(4), embodies a good faith requirement.
“All parties involved in the negotiation, performance, or administration of
contracts under this article shall act in good faith.” I.C. § 5-22-3-1.
[22] Rather than directly address bad faith on the part of Madison County in
creating its own budgetary shortfall, the trial court concluded that Happy Valley
was required to file a tort claim notice and failed to do so. Because the instant
dispute arises from a contract and not injury or death of a person or damage to
property, it is not a tort claim.7 Happy Valley was permitted to raise a good
faith argument notwithstanding the lack of a Tort Claims Notice. The court
went on to say that the “good faith claim still fails for other reasons.” Appealed
Order at 24. The “other reasons” were: Howard knew of the Jackson Street
7
Indiana Code Section 34-13-3-8, a provision of the Indiana Tort Claims Act, provides that, generally, a
claim against a political subdivision is barred unless notice is filed within 180 days after a loss occurs.
Compliance with the notice provision of the Indiana Tort Claims Act is a condition precedent to filing a tort
suit against a qualified political subdivision. Weaver v. Elkhart Cmty. Sch. Corp., 95 N.E.3d 97, 101 (Ind. Ct.
App. 2018). A “loss” is “injury or death of a person or damage to property.” I.C. § 34-6-2-75.
Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019 Page 12 of 15
property purchase; there were no plans to include the minimum security facility
when the Lease was executed; the Council (as opposed to the Commissioners)
decided to fund the new minimum security facility; and the Council – not the
Commissioners – removed the Lease payments from the budget. Appealed
Order at 26.
[23] As for good faith required under the Purchasing Act, there is no specific
definition and there are no appellate cases discussing the meaning of “good
faith” in this context. We start with the premise that a governmental entity
must operate within the bounds of the law and will be held liable for an abuse.
For example, the Home Rule Act provides that “[i]f there is a constitutional or
statutory provision requiring a specific manner for exercising a power, a unit
wanting to exercise the power must do so in that manner.” I.C. § 36-1-3-6(a).
We find instructional the language of Indiana Code Section 5-22-19-2, which
provides for judicial review for a person aggrieved by a determination under the
Purchasing Act. Relief is available only if a person has been “substantially
prejudiced” by a determination that is “arbitrary, capricious, an abuse of
discretion or otherwise not in accordance with law; contrary to constitutional
right, power, privilege, or immunity; in excess of statutory jurisdiction,
authority, or limitations, or short of statutory right; without observance of
procedure required by law; or unsupported by substantial evidence.”
[24] At the hearing, Happy Valley asserted that good faith contract performance by
a governmental subdivision should be nothing less than that required of private
contracting parties, and argued that the Hamlin doctrine should be adopted as a
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good faith standard for public contracts. See Hamlin v. Steward, 622 N.E.2d 535,
540 (Ind. Ct. App. 1993). A doctrine which came to be known as the Hamlin
doctrine was discussed in Aquasource, Inc. v. Wind Dance Farm, Inc., 833 N.E.2d
535 (Ind. Ct. App. 2005). Distilled to its essence, the doctrine provides that a
party to a contract may not rely on a failure of a condition precedent to excuse
that party’s nonperformance where the party’s inaction caused the failure and
there exists an implied obligation to make a reasonable and good faith effort to
satisfy the condition. See id. at 539. A good faith effort is what a reasonable
person would consider a diligent and honest effort under the same facts and
circumstances. Id.[25] This doctrine does not squarely fit with the instant circumstances, having arisen
in the context of non-performance of a condition precedent in a contract
between private parties. However, it evinces a general proposition that a party
to a contract should make a reasonable good faith effort to avoid failure of the
contract’s purpose and a party should not sabotage one’s own contract. The
trial court entered findings and conclusions thereon, specifically finding the
Hamlin doctrine inapplicable to cancellation of the Lease.
[26] The trial court observed that the Council had changed course based upon the
feasibility study. The Council, not the Commissioners, were positioned by law
to decide whether or not to appropriate funds to continue the lease for another
year. Ultimately, the trial court concluded that there was “no intent to sabotage
the 2015 Lease with Happy Valley by either the Commissioners or the County
Council. All decisions were based on financial reasons – what was in the best
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economic interest of the County and its citizens.” Id. at 28-29. Our review of
the evidence reveals uncontroverted testimony that taxpayers stood to benefit
financially from the consolidation of housing for low-risk detainees. In short,
there is ample evidence that economic reality as opposed to personal animus
against Howard or Happy Valley motivated the funding decision made by the
Council. The trial court did not clearly err in so finding. And – lacking funding
– a party simply cannot enforce a provision of a contract that is contrary to law.
Conclusion
[27] Section 6.01 of the Lease is a nullity. Nonetheless, applicable law provides that
the Council is empowered to appropriate county funds and county leases are
subject to annual appropriation. Happy Valley cannot bind Madison County to
fulfill the Lease without the Council’s appropriation of funds. The trial court’s
findings, conclusions, and order in this regard are not clearly erroneous.
[28] Affirmed.
Baker, J., and Najam, J., concur.
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