Jayhawk Racing Props., LLC v. City of Topeka

No. 118,035
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
JAYHAWK RACING PROPERTIES, LLC, and HEARTLAND PARK RACEWAY, LLC,
Appellants,
v.
CITY OF TOPEKA, KANSAS,
Appellee.
SYLLABUS BY THE COURT
1.
The rules of summary judgment are discussed and applied.
2.
Cities are municipal corporations created by law. Thus, cities can only exercise
powers conferred by law.
3.
Cities may purchase and hold real and personal property, and make all contracts
and do all other acts in relation to the property and concerns of the city.
4.
The powers of the city are exercised by the governing body of the city.
5.
The Legislature has expressly given cities the power to acquire certain property
and to issue Sales Tax and Revenue (STAR) Bonds for the financing of STAR bond
projects.
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6.
Municipal corporations have dual capacities—governmental and proprietary. In
the governmental capacity, they serve as an arm of the state and are sovereign. In the
proprietary capacity, they exercise powers as any corporation does.
7.
To procure what is needed for public improvements, cities contract with those
people and companies that sell what is needed to do the job. When cities act in such a
capacity, their actions are proprietary and are governed by the same legal rules that would
govern a private corporate transaction.
8.
In deciding whether a city is carrying on a proprietary or governmental function a
court must consider whether the activity is for the state as a whole or for a special local
benefit; whether the activity arises out of a statutory duty or a privilege that has been
granted to it; whether the activity is normally done by private entities; and whether the
city's actions were commercial in nature.
9.
The details of financing public projects may, at times, be proprietary and not
governmental.
10.
Issuing bonds is not necessarily a governmental function.
11.
Issuing bonds under the permissive authority given to the city by statute to finance
the acquisition of real estate, construction of a facility, and leasing of the facility to a
private for-profit business constitutes proprietary conduct.
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12.
Where general power is given to a city to manage and control property, it has the
power to create a contract concerning such property that extends beyond the terms of the
members of the governing body of that city if such contract is reasonable and not
contrary to a public policy.
13.
If a contract entered into by a city's governing body involves the exercise of the
city's business or proprietary powers, the contract may extend beyond the term of the
contracting governing body and is binding on successor governing bodies if, at the time
the contract was entered into, it was fair and reasonable and necessary or advantageous to
the municipality. If the contract, however, involves the legislative functions or
governmental powers of the city, the contract is not binding on successor boards or
councils.
14.
A covenant of good faith and fair dealing is implied in municipal contracts.
15.
The Kansas Cash-Basis Law makes it unlawful for the governing body of any
municipality to create any indebtedness in excess of the amount of funds actually on hand
in the treasury of such municipality at the time for such purpose unless provision has
been made for payment by the issuance of bonds.
16.
The Kansas Budget Law provides that creation of indebtedness more than the
budget is unlawful unless provision has been made for payment by the issuance of bonds.
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Appeal from Shawnee District Court; TERESA L. WATSON, judge. Opinion filed November 2,
2018. Reversed and remanded.
Wesley A. Weathers, Patricia E. Riley, and Cynthia J. Sheppeard, of Goodell, Stratton, Edmonds
& Palmer, LLC, of Topeka, for appellants.
Thomas V. Murray, Catherine P. Logan, and Mark A. Samsel, of Lathrop Gage LLP, of Overland
Park, for appellee.
Before ARNOLD-BURGER, C.J., HILL and BUSER, JJ.
HILL, J.: This lawsuit is an example of what can happen when a municipal
government changes directions. Jayhawk Racing Properties, LLC, sued the City of
Topeka for breach of contract when the City failed to pay the company, as promised in
their contract, almost $2.4 million for its reversionary interest in the land where
Heartland Park Raceway is located. When the City refused to issue bonds to pay for the
sale, Jayhawk Racing sued, and the City moved to dismiss the action. With the agreement
of the parties, the district court treated the motion as one for summary judgment and
granted the motion, thus dismissing Jayhawk Racing's lawsuit.
We reverse the court's dismissal, finding the court, in granting summary judgment,
ignored the fundamental purpose of the contract—to purchase an interest in real estate.
This is a proprietary contract. Simply put, the City was buying all interests in a racetrack.
Instead, the district court, in a carefully drafted opinion, improperly limited its view of
the contract to a contingency promise made by the City to issue Sales Tax and Revenue
(STAR) Bonds. Basically, in dismissing the case, the court ruled the City's promise to
finance the purchase with this method of financing was beyond its legal authority. In the
court's view, this provision is an illegal attempt by one council to bind future city
councils, thus making the entire contract unenforceable. But actually, this contract was
more than a promise to finance, and that promise is not the purpose of the agreement. We
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hold the City was not entitled to judgment as a matter of law. We remand for further
proceedings.
After a brief restatement of the oft-repeated rules of summary judgment, we will
review the cases that deal with contracts made by local units of government and explore
how the old cases hold them to be unique under our law. Some are enforceable, some are
not. After that, we examine the contract here and show how the district court, by limiting
its review to a contingency promise, mischaracterized this agreement. We hold this is a
proprietary contract and the court erred when it ruled otherwise. The questions of good
faith and fair dealing and damages remain for future proceedings in district court. We
conclude by rejecting the City's alternative arguments on the Cash-Basis Law and the
Budget Law.
The parties agree on the facts.
Heartland Park is a multi-purpose motorsports facility in Topeka. In 2006, the City
issued over $10 million in Sales Tax and Revenue Bonds, known as STAR bonds, to fund
improvements to Heartland Park. These STAR bonds allow cities to finance the
development or redevelopment of major commercial, entertainment, and tourism districts
to stimulate economic growth. When the City issued the STAR bonds, it owned
Heartland Park in fee simple for a term of years, subject to Jayhawk Racing's
reversionary interest. When the sales tax revenue collected within the STAR bond district
was not satisfying the debt associated with Heartland Park, the City became concerned.
Thus, the City planned to expand the STAR bond district and acquire Jayhawk Racing's
reversionary interest in the land.
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A "Memorandum of Understanding" and "workout agreement" are pertinent.
In June 2014, the City, Jayhawk Racing, Visit Topeka, Inc., and the Kansas
Department of Commerce entered into a Memorandum of Understanding. At its
beginning, the parties identified their interests and their aims:
"Whereas, the parties have concluded that it is in the best interest of the City of
Topeka, and the State of Kansas for the City to own both the fee simple interest in the
property and the reversionary interest owned by Jayhawk; and accordingly the City
desires to purchase from Jayhawk all right, title and interest of Jayhawk . . . including the
reversionary interest, and Jayhawk desires to sell its reversionary interest . . . .
"Whereas, in connection with the purchase of Jayhawk's reversionary interest and
cancellation of the Management Agreement, the City will commence the process of
expanding the District, amend the project plan, seek approval of the Secretary of
Commerce for the issuance of the additional Star Bonds and issue bonds sufficient to
acquire Jayhawk's reversionary interest and pay certain security interests."
We cannot ignore the purpose of this contract was the City's intent to buy the racetrack.
The Memorandum of Understanding also listed details of price, method, and timing of
payment and a pledge of cooperation:
"3. Purchase Price. The City agrees to purchase and Jayhawk agrees to sell
its reversionary interest to the City for the sum of $2,392,117.00 ('Purchase Price') to be
paid on the date of closing.
"4. Payment, Obligations of Parties. In connection with the above proposed
transaction the City agrees to pay, as of the date of closing, the balance of the
indebtedness listed in Exhibit B, including principal and interest and associated costs. . . .
"5. Date of Payment of Purchase Price. The City agrees to pay Jayhawk the
purchase price by February 1, 2015 or within 90 days of the approval by the Topeka City
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Council of the Star Bond Project Plan. In the event of a protest under the provisions of
K.S.A. 12-17,169, payment shall be made within 60 days of the approval of the Plan by a
majority of the voters of the City of Topeka.
....
"8. Agreement Contingency. The parties acknowledge that this Agreement is
contingent on fulfillment of the current contract between NHRA and Jayhawk and
increasing the size of the Star Bond district to include the area shown on Exhibit 'C', the
approval of the Secretary of Commerce of the State of Kansas approving the
redevelopment project plan for the Heartland Park of Topeka Major Motorsports complex
and authorization by the City of the issuance of Star Bonds in an amount equal to the
financial obligations set forth in this Agreement including all costs associated therewith.
It is estimated that approximately $4.8M-$5.5M of Star Bonds will be issued to cover the
acquisition and associated costs of issuance.
....
"10. Parties Cooperation. The City and Jayhawk agree that they will make
commercially good faith reasonable efforts to accomplish the objectives set forth in
paragraph 8 of this Agreement in a cooperative manner and the City further agrees to
comply with the requirement of good faith and fair dealing."
The Memorandum of Understanding makes it clear that the City's obligation to
acquire Jayhawk Racing's reversionary interest in Heartland Park depended on the
occurrence of several events, including the approval of the STAR bond project plan by
the Topeka City Council and the Kansas Secretary of Commerce, and the City's issuance
of STAR bonds.
Along with the Memorandum of Understanding, the City, Jayhawk Racing,
CoreFirst Bank & Trust, and others entered into what they called a "workout agreement."
This agreement acknowledged that Jayhawk Racing was in default on some loans it had
received from CoreFirst, and it required Jayhawk Racing and the City to sign and then
place in escrow deeds conveying their interests in Heartland Park to CoreFirst. In
exchange, CoreFirst agreed not to collect the loans or record the deeds until February 28,
2015—the anticipated deadline for issuing the STAR bonds contemplated in the
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Memorandum of Understanding, although the date could be extended with CoreFirst's
consent.
In June 2014, the City Council approved both the Memorandum of Understanding
and the workout agreement. The City Council passed Resolution No. 8637, which set a
public hearing on the City's proposal to amend the Heartland Park redevelopment plan
and to issue additional STAR bonds for the redevelopment of Heartland Park.
The City Council adopts an ordinance approving the plan.
After a public hearing, the City Council adopted Ordinance No. 19915, providing
that the existing STAR bond district "shall be expanded" subject to approval of Shawnee
County, and adopted and approved the STAR bond plan for the expanded redevelopment
district. The ordinance authorized issuing STAR bonds in the estimated amount of $5
million. The ordinance authorized the City Manager "to apply to the Secretary for STAR
bond issuance authority to issue additional STAR bonds in an amount in excess of the
amount previously approved by the Secretary in relation to the Project." The ordinance
included the required notice of the 60-day protest period. This ordinance has never been
formally amended, repealed, rescinded, or vacated by the City.
The Secretary of the Kansas Department of Commerce conditionally approves issuing
STAR bonds.
The Secretary of the Kansas Department of Revenue approved the City's request to
expand the existing STAR bond district and conditionally approved the City's application
to issue additional STAR bonds.
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A citizen petitions the City to repeal Ordinance No. 19915 or submit a repeal question to
the voters.
In October 2014, Christopher Imming filed with the City Clerk a petition signed
by many residents, seeking to repeal Ordinance No. 19915 or to submit repeal to the
voters at a municipal election. In response, the City filed an action in the Shawnee
County District Court requesting a declaratory judgment that the Imming petition was an
invalid attempt at initiative and referendum. Jayhawk Racing intervened in the litigation.
The district court denied the contentions that Imming's petition was technically invalid.
But the court did rule in the City's favor by finding that Ordinance No. 19915 is
administrative in character and thus exempt from the initiative and referendum law in
Kansas. The court also decided that because there is a method in the STAR bond statute
for filing a protest petition and obtaining a referendum election on issuing STAR bonds,
then Ordinance No. 19915 could not be the subject of initiative and referendum because
it was subject to a different kind of election. In other words, this ordinance was one of the
statutory exceptions to the initiative and referendum statute.
A panel of this court affirmed the district court, holding that the law permitted a
referendum election only when a protest petition was filed and Imming's petition was not
a protest petition. See City of Topeka v. Imming, 51 Kan. App. 2d 247, 265, 344 P.3d 957(2015). In April 2015, Imming filed a petition for review with the Kansas Supreme Court
and Jayhawk Racing filed a cross-petition for review.
The City Council passes a resolution to sell STAR bonds.
Meanwhile, the City Council passed Resolution No. 8658, proclaiming its intent to
sell STAR bonds at public sale:
"That it is hereby determined to be necessary and it is hereby authorized, directed
and ordered, that Taxable Full Faith and Credit STAR Bonds, Series 2014-A (Heartland
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Park), (the 'Bonds') of the City of Topeka, Kansas (the 'City') shall be sold at public sale
and in the manner provided by law, on Tuesday, December 16, 2014, at 9:30 a.m. C.S.T.
The Bonds shall be in the maximum principal amount of Five Million Dollars
($5,000,000) and shall be dated on or about December 30, 2014."
The remaining sections of Resolution No. 8658 authorized and directed various officers
and representatives of the City to take the actions necessary to issue lawfully the bonds.
The City was not prohibited by the Imming petition or the later Imming litigation from
proceeding with the sale of the bonds, and the City Council was made aware of this fact
at its meeting on December 2, 2014.
The City has sold no STAR bonds under the Memorandum of Understanding, City
Ordinance No. 19915, or City Resolution No. 8658 at any time.
After a municipal election, the City decides not to proceed with the STAR bond sale.
Members of the Topeka City Council are elected to staggered four-year terms. At
the regular local election on April 7, 2015, four new members were elected to the City
Council. A new breeze was blowing in the City's Council Chambers.
But while the petition and cross-petition for review in the Imming case were
pending in the Supreme Court, the City Council considered a resolution that would have
authorized the City to proceed with the amended Star Bond project plan, including steps
toward issuing the STAR bonds. After long debate and taking public comment, the City
Council voted 6-4 against the resolution. In other words, the council decided not to
proceed with the project. With no new STAR bonds, there would be no funding for the
purchase of the reversionary interest in Heartland Park.
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Eventually, CoreFirst acquired title to Heartland Park by recording the deeds
placed in escrow by the City and Jayhawk Racing. On October 7, 2015, the Kansas
Supreme Court denied the petition and cross-petition for review in the Imming case.
Jayhawk Racing sues for breach of contract.
Jayhawk Racing sued the City seeking a declaration of its rights under the
Memorandum of Understanding, as well as alleging breach of contract. Later, the City
moved to dismiss the first two counts of the petition.
The district court treated the motion to dismiss the first two counts as one for
summary judgment and granted the motion. The court held "the City's promise to issue
STAR Bonds [in the Memorandum of Understanding] is ultra vires and void and cannot
be enforced." The court reasoned that issuing STAR bonds was a governmental, rather
than a proprietary function and the City's governing body lacked the power to bind its
successors to issue STAR bonds to finance the purchase of Jayhawk Racing's
reversionary interest in Heartland Park.
Jayhawk Racing appeals the dismissal of its claims.
In its appeal, Jayhawk Racing focuses on three areas. First, the company contends
the district court erred when it ruled that Topeka could not be bound to comply with the
agreement because it required a good-faith effort to issue STAR bonds to purchase an
interest in real property. Second, the Memorandum of Understanding dealt with a
proprietary function and not a governmental function and was, thus, enforceable. Finally,
in Jayhawk Racing's view, a city can bind itself to act in the future even if that action may
occur after the next municipal election.
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For its part, the City is happy with the court's ruling, maintaining that it correctly
held that Jayhawk Racing had no valid claims for a breach of the Memorandum of
Understanding since the contract depended expressly on the approval and issuance of
STAR bonds—an event that did not happen. The City contends that Jayhawk Racing's
claim that the City breached its covenant of good faith and fair dealing cannot prevail
when its enforcement would oblige the City to take governmental action. The City has
also tacked on two additional claims not made to the district court. In its view, if the
Memorandum of Understanding requires the City to issue STAR bonds, it violates the
Kansas Cash-Basis Law and the Kansas Budget Law.
We pause here to reflect on the rules of summary judgment. Both parties agree
that the district court properly treated the City's motion as one for summary judgment.
Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show that there is no
genuine issue about any material fact and show that the moving party is entitled to
judgment as a matter of law. The trial court must resolve all facts and inferences which
may reasonably be drawn from the evidence in favor of the party against whom the ruling
is sought. Armstrong v. Bromley Quarry & Asphalt, Inc., 305 Kan. 16, 24, 378 P.3d 1090(2016).
When opposing a motion for summary judgment, an adverse party must come
forward with evidence to establish a dispute about a material fact. To preclude summary
judgment, the facts subject to the dispute must be material to the conclusive issues in the
case. On appeal, we apply the same rules and when we find reasonable minds could differ
about the conclusions drawn from the evidence, summary judgment must be denied.
Armstrong, 305 Kan. at 24. With no factual dispute, as it is here, appellate review of an
order on summary judgment is de novo. Martin v. Naik, 297 Kan. 241, 246, 300 P.3d 625(2013).
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Units of government must honor their proprietary contracts.
In democracies, changes in public policy are a fact of life. The law places on local
governments, such as the City Council of Topeka, the burden to decide what is good for
all in the city. But life and governments are seldom static. What was once thought
prudent and profitable can, with experience, or as a result of an election, be considered
unworthy—even detrimental. Issues once held to be important, even vital, can fade with
the replacement of those who make these decisions. Such changes in the goals of
government often come after the elections of those responsible for making these
decisions. Thus, an issue seen as vital to one council can become insignificant to the
council that follows. Such a change in direction is what happened here.
This constant flux means those who deal with such units of government must be
aware of the possibility of dramatic changes in the course taken by city councils and
other units of government. Many of the old cases on these issues warn those who do
business with local units of government of the very real potential for change.
These cases warn that some contracts will be enforced, some will not.
"All parties dealing with a sovereign power . . . in the exercise of governmental power . .
. do so knowing it cannot contract away the power conferred for self-protection or self-
preservation.
"The rule, therefore, that the legislature can pass no law impairing the obligation
of contracts does not apply to parties dealing with a department of government
concerning the future exercise of powers conferred for public purposes by legislative
acts, where the subject-matter of the contract is one which affects the safety and welfare
of the public." Board of Education v. Phillips, 67 Kan. 549, 552, 73 P. 97, 98 (1903).
Topeka is a municipal corporation. Municipal corporations are creations of law
and can exercise powers conferred only by law. Yoder v. City of Hutchinson, 171 Kan. 1,
13
8, 228 P.2d 918 (1951). K.S.A. 12-101 expressly states that cities have the power to
"[p]urchase . . . and hold, real and personal property," and "[m]ake all contracts and do all
other acts in relation to the property and concerns of the city." The powers of the city are
exercised by the governing body of the city—here, it is the mayor and city council.
K.S.A. 12-103; K.S.A. 12-104.
In particular, cities are expressly given the power "to acquire certain property and
to issue sales tax and revenue (STAR) bonds for the financing of STAR bond projects."
K.S.A. 2017 Supp. 12-17,160.
Uniquely, municipal corporations have dual capacities—governmental and
proprietary. "In one capacity they serve as an arm of the state and partake of sovereignty.
In the second capacity they exercise powers as an individual corporation." Krantz v. City
of Hutchinson, et al., 165 Kan. 449, Syl. ¶¶ 1-2, 196 P.2d 227 (1948).
By understanding their dual capacities, we can see that these contract cases seem
to fall into two categories. The first category focuses on property, the second set looks at
policy. The cases distinguish between things and exercise of governmental power. The
cases refer to this distinction as proprietary versus governmental contracts. We agree with
the district court's observation that these are old cases and the statements within them are
sometimes not so clear, but they do point us in the right direction. We look first at
proprietary contracts.
In some ways, local governments are like any other consumer. Cities buy
materials, tools, equipment, and labor like anyone else. Public improvements are not built
from air. To procure what is needed, the local units of government contract with those
people and companies that sell what is needed to do the job.
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Three cases show proprietary actions. In Newman Mem. Hospital v. Walton
Constr. Co., 37 Kan. App. 2d 46, 64, 149 P.3d 525 (2007), a county hospital brought
breach of contract and breach of implied warranty claims against architects who designed
a medical building. The architects raised a statute of limitations defense. The county
argued the construction of the medical building was a governmental function and thus the
statute of limitations did not apply. This court found that the construction and lease of a
medical building was a proprietary function.
Significantly, the Newman court recognized several factors that Kansas courts
have used to distinguish a city's activities:
"Factors which have been utilized by Kansas courts in determining whether a
governmental entity is carrying on a proprietary or governmental function include (1)
whether the activity is for the state as a whole or special local benefit (in our case, the
economic benefit of the medical office building flows to Newman and Lyon County); (2)
whether the activity arises out of a statutory duty or a privilege granted (in our case, it
was a permitted and not a mandated duty); (3) whether the activity is normally done by
private entities (in our case, Newman charges market rates and normally makes a gross
profit—indicia of a proprietary business); and (4) whether the entity's actions were
commercial in nature (in our case, the leasing of a building is a commercial act). These
factors all point to requiring a holding that the actions of Newman in this case were
proprietary in nature." 37 Kan. App. 2d at 64.
This view was based largely on Krantz, cited previously. In Krantz, to determine
whether the city was immune from suit, the court held that the city's construction of a
dike outside the city to divert flood waters from their natural course to prevent flood
damage to property within the city was a proprietary function. 165 Kan. at 457.
This view is carried forward to International Ass'n of Firefighters v. City of
Lawrence, 14 Kan. App. 2d 788, 795-96, 798 P.2d 960 (1990). There the court held that
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negotiating an employment agreement was an exercise of proprietary or administrative
power, rather than governmental or legislative power. The agreement did not concern the
general public welfare, but the relationship between the municipality as an employer and
its employees. The agreement was binding on the city. We move now to governmental
contracts.
Several cases show governmental actions. In Phillips, the court determined that
the maintenance of public schools is a governmental function. 67 Kan. at 551, 73 P. at 98.
Along a similar line, in Whitlow v. Board of Education, 108 Kan. 604, 609-10, 196 P. 772(1921), where the board of education made a contract to sell a tract of school ground, but
later changed its mind and rescinded the contract, the Supreme Court affirmed the district
court's refusal to compel specific performance of the contract. That case relied on an
earlier case, Construction Co. v. Sedgwick County, 100 Kan. 394, 396, 164 P. 281 (1917),
when the court found:
"It does not follow that where the controlling body of a public corporation, in the exercise
of its judgment as to governmental policy, sees fit to refuse to proceed with a contract to
which it has committed itself, preferring to answer in damages for any resulting loss to
the contractor rather than to carry out a course which it has determined not to be for the
best interests of the community, it can be compelled to perform specifically its
engagements by a writ of mandamus."
In other words, it is up to the board of education to determine what is necessary for the
education of the children, not the courts.
In more recent times, in In re Tax Protests of Midland Industries, Inc., 237 Kan.
867, Syl. ¶ 3, 703 P.2d 840 (1985), the court held that the collection of taxes was a
governmental function. In State ex rel. Stovall v. Meneley, 271 Kan. 355, 384, 22 P.3d
124 (2001), to determine whether a suit was barred by the statute of limitations, the court
held that a quo warranto proceeding seeking ouster of a public official was a
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governmental function. In KPERS v. Reimer & Koger Assocs., Inc., 262 Kan. 635, Syl. ¶
9, 648, 941 P.2d 1321 (1997), to determine whether a suit was barred by the statute of
limitations, the court held that the investment of KPERS funds was a governmental
function because it was necessary to promote the public welfare generally. The increase
in funds from KPERS's investments reduces the taxes required to fund KPERS's liability
to its beneficiaries.
Importantly, the details of financing public projects may, at times, be proprietary
and not governmental. For example, issuing bonds is not necessarily a governmental
function. In Brown-Crummer Investment Co. v. Arkansas City, 125 Kan. 768, Syl. ¶ 1,
266 P. 60 (1928), the court held valid a contract by the city to deliver bonds to pay for the
construction of a sewer. The court wrote:
"It must be granted that the construction of a sewer being a provision to conserve the
public health is a governmental or public function rather than a private or proprietary one.
. . . [But] it does not necessarily follow that the contract for the sale of the bonds to
plaintiff is subject to rescission or repudiation by the city. The contract for the delivery of
bonds was something apart from the contract to build the sewer." 125 Kan. at 772-73,
266 P. at 62.
The city entered into a contract with a contractor to build a sewer. The city later
contracted with the plaintiff, who had agreed to finance the contractor, to deliver the
bonds to plaintiff for payment of the sewer. The court found that the contract made with
the plaintiff for delivery of the bonds was a different transaction and that delivery of the
bonds was not a governmental function, but a private or administrative one. 125 Kan. at
773-74, 266 P. at 63.
Along the same line of reasoning the court in Woods v. Homes & Structures of
Pittsburg, Kansas, 489 F. Supp. 1270, 1300 (D. Kan. 1980), held that whether the city's
acts were governmental or proprietary was ultimately to be made at trial, but that issuing
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industrial revenue bonds under the permissive authority given to the city by statute to
finance the acquisition of real estate, construction of a facility, and leasing of the facility
to a private for-profit business constituted proprietary conduct.
In order to illustrate the contrast, we point out that in Cromeans v. Morgan Keegan
& Co., Inc., 1 F. Supp. 3d 994, 999-1001 (W.D. Mo. 2014), the Missouri court held that a
municipality's issuance of bonds for a project was a governmental function when the
legislature expressly stated that the bonds were to serve "an essential public and
governmental purpose," the benefit was not limited to the city's residents, and the city
obtained no profit or benefit from the construction of the facility, except for job creation
and other general economic stimulation. Economic stimulation is "an essential public and
governmental purpose." 1 F. Supp. 3d at 999-1000. The court distinguished Woods
because it involved the application of Kansas law. 1 F. Supp. 3d at 1001.
Then, moving on to secondary sources of the law, McQuillin's Law of Municipal
Corporations states that the "right to issue bonds . . . has been characterized as neither a
political nor governmental power, but a private corporate power conferred for local
purposes." 15 McQuillin Mun. Corp. § 43:20 (3d ed. 2016).
A panel of this court has previously in Imming considered whether Ordinance No.
19915 was an "administrative" or a "legislative" matter to determine whether the
ordinance was subject to the initiative and referendum petition process under K.S.A. 12-
3013(e)(1). The Imming court found:
"[W]e cannot see this as a subject of statewide concern as contemplated by the
McAlister test. The acquisition of a racetrack by the City is clearly a local concern.
"We agree with the district court that the centerpiece of Ordinance No. 19915 is
the acquisition of the Heartland Park Raceway. This overriding purpose of the ordinance
simply outweighs the procedural details that are necessary to obtain STAR bonds. It does
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not appear that Ordinance No. 19915's administrative characteristics outweigh the general
purpose of the ordinance, which is the purchase of a race track.
"We reject the City's (joined by Jayhawk Racing) assertion that simply because
this project is to be financed by STAR bonds, then this is automatically an administrative
ordinance beyond the reach of initiative and referendum." 51 Kan. App. 2d at 258-59.
That analysis is not flawed and reinforces our view that this is a proprietary contract to
buy the racetrack mentioned in the Ordinance listed above.
We examine the district court's holding.
The district court focused on the City's promise to issue STAR bonds, stating that
"Plaintiffs paint with too broad a brush" when discussing the City's promise to purchase
the racetrack. The court then reasoned that issuing STAR bonds was a governmental
function because of the express language in K.S.A. 2016 Supp. 12-17,160 et seq., stating
that the purpose of the STAR Bonds Financing Act was to benefit the general and
economic welfare of the state as a whole, and issuing STAR bonds is something only a
government can do.
But the transaction described in the Memorandum of Understanding contains both
governmental and proprietary elements, thus we take a broad view of this action at issue.
See Reimer & Koger, 262 Kan. at 666-67. The Memorandum of Understanding was a
purchase agreement. The City agreed to purchase Jayhawk Racing's reversionary interest
in the racetrack and pay off its debts. The purchase was part of a plan that included
increasing the size of the existing "STAR bond district" to divert state and local sales tax
revenues from the businesses in the expanded district to pay off the original and new
STAR bond debt, and to save Heartland Park from foreclosure. While it is true that the
parties recognized that their agreement was contingent on the City getting necessary
approval to expand the STAR bond district and issuing STAR bonds to pay for the
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acquisition, we see no real distinction between these facts from those in Brown-Crummer
Investment Co.
We now look at Jayhawk Racing's second issue.
Jayhawk Racing contends that its agreement with the City is enforceable even
though it bound the City to future good-faith efforts because it did not deprive the City of
its ability to exercise any of its core governmental functions either now or in the future.
The City contends that the City Council could not bind a later City Council to issue
STAR bonds and purchase Jayhawk Racing's reversionary interest because each City
Council must have absolute discretion. The City contends that "the ability of the City's
taxpayers to elect new council members that might approve a course of action different
from that contemplated in the [agreement] is the cornerstone of the democratic process."
We are not so convinced. That argument seems to lead us to a conclusion that no contract
with a city could ever be enforced if a new council wanted to repudiate it. The cases do
not seem to adopt such a view.
We note some fundamental principles at this point. "Where general power is given
to an administrative board to manage and control property it has the power to make a
contract concerning such property extending beyond the term of the members thereof, if
such contract is reasonable and not contrary to public policy." Fisk v. Board of Managers,
134 Kan. 394, Syl. ¶ 1, 5 P.2d 799 (1931) (upholding contract where Board leased farm
to plaintiff for five-year term to supply milk to a state soldiers' home). The term would
exceed the term of those on the city council.
Kansas courts have often upheld contracts that extend beyond the term of the
governing body's members when the contract was in the interest of the public health and
welfare, and the courts have held such contracts invalid only when the contract interfered
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with the governing body's ability to protect the public health, safety, and welfare. The
cases below are in chronological order.
We review the cases that have examined the enforceability of municipal contracts.
We begin with Phillips, where the owner of bonds issued by the school board
sought an injunction restraining the school board from issuing additional bonds to
purchase a site to build a school as authorized by a current act of the Legislature. The
owner argued the school board was contractually obligated not to issue bonds until the
outstanding bonds were paid in full. The court found that the "maintenance of public
schools is an exercise of governmental power in the interest of public morals and the
general welfare of the people." 67 Kan. at 551, 73 P. at 98. The court found that "the
plaintiff in purchasing the bonds did so knowing that the board could not contract away
its power to exercise in the future the authority conferred upon it by the state for the
administration of its public affairs." 67 Kan. at 553, 73 P. at 98. Supervision of the public
health and public morals by the government is continuing in nature and "'are to be dealt
with as the special exigencies of the moment may require. Government is organized with
a view to their preservation, and cannot divest itself of the power to provide for them.'"
67 Kan. at 553, 73 P. at 98.
Next, we consider State, ex rel. v. Linn County, 113 Kan. 203, 213 P. 1062 (1923).
In December 1922, the board of county commissioners entered into contracts for the
construction of three bridges. In January 1923, there was a change in board membership
and the new board declared that the contracts were not binding. The bridges were to be
situated on a highway, part of a federal-aid road improvement project. Without much
analysis, the court held that there were situations and types of contracts that would not be
binding on the new board, but it was "quite obvious" that a contract of this character was
binding on the county and the board of county commissioners "as a continuing body
representing the county, notwithstanding any changes in its membership." 113 Kan. at
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211, 213 P. at 1066. Obviously, in that case one board bound following boards by signing
an enforceable contract.
Again dealing with roads, the court in Verdigris River Drainage Dist. v. State
Highway Comm., 155 Kan. 323, 125 P.2d 387 (1942), held that the board of county
commissioners had authority to bind the county beyond the term of office of the board
members to a contract to maintain a floodgate draining a county road. "Were it not so no
comprehensive program of road building could ever be carried out." 155 Kan. at 331. The
court said:
"'[I]f a board of county commissioner[s] has express power to make a particular contract
at any time during its term of office, a contract made by such board, in accordance with
the law, a short time before the expiration of its term of office is not contrary to public
policy, and, in the absence of fraud, is valid and binding upon an incoming board of
commissioners, although it extends far into their term of office. The ground upon which
this rule is based is that a board of county commissioners is a continuously existing
corporation, and, consequently, while the personnel of its membership changes, the
corporation continues unchanged. Its contracts being the contracts of the board and not of
its members, it follows that those contracts extending beyond the term of service of its
then members are not invalid for that reason. It has been said that to hold contracts
invalid because part or all of a board cease to exercise public functions would be to put
these corporations at an enormous disadvantage in making the contracts which are
essential to the safe, prudent, and economical management of the affairs of a county. The
members of a board of county commissioners cannot, however, contract in reference to
matters which are personal to their successors.'" 155 Kan. at 330.
Similarly, in Edwards County Comm'rs v. Simmons, 159 Kan. 41, Syl. ¶ 6, 151
P.2d 960 (1944), the court looked at whether the contract commitment was reasonably
necessary for the protection of public property:
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"In determining the question of validity of a contract made by a board or other
governmental agency extending beyond the official term of the contracting board or
officials, one test generally applied is whether the contract is an attempt to bind
successors in matters incident to such successors' administration and responsibilities, or
whether it is a commitment of a sort reasonably necessary for protection of the public
property, interests or affairs being administered. In the former case the contract is
generally held to be invalid and in the latter case valid."
We note here that the protection of Heartland Park was an express interest of the Topeka
City Council when it signed the Memorandum of Understanding.
Then, the Simmons court held that a contract between the county board of
commissioners and an attorney to represent the county in litigation that would span the
terms of several boards was binding on later boards of commissioners. 159 Kan. at 54-55,
151 P.2d at 968-69.
The district court relied upon State, ex rel. Hawks v. City of Topeka, 176 Kan. 240,
270 P.2d 270 (1954). In Hawks, Topeka, by ordinance, authorized issuing revenue bonds
to pay for the acquisition, improvement, and other costs of two parking sites. The city
contracted with Park and Shop, Inc. to lease certain parking facilities to be later acquired
by the city for the operation, management, and control of the city-owned parking lots.
The lease was to run for 30 years and gave Park and Shop the first right and option to re-
lease the parking facilities under the same terms after the lease's expiration. The contract
also provided that if any of the parking facilities were destroyed or damaged beyond use,
the city would rebuild or restore the premises.
The Hawks court held that a city could not bind its successors to lease to Park and
Shop all future acquired parking facilities. 176 Kan. at 252. Additionally, the court ruled
that the present governing body could not bind future bodies to rebuild and repair the
facilities in that way. The future governing body may decide that the facilities no longer
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serve a public use and it would not help to repair. Ultimately, the court held that the
contract was invalid. 176 Kan. at 252-53.
Again, dealing with streets, the court in State, ex rel. Cole v. City of Garnett, 180
Kan. 405, 408-09, 304 P.2d 555 (1956), held valid the board of county commissioners'
grant of an easement to the city to widen the street around the courthouse. It rejected any
objection that the easement tied the hands of future boards of commissioners.
The court in Landau v. City of Leawood, 214 Kan. 104, Syl. ¶ 5, 108, 519 P.2d
676 (1974), held that a covenant by a private sewer company limiting the amount that
could be charged to users of the sewer system was unenforceable. It could not be
enforced against the city that later acquired the sewer system because enforcement would
render it impossible for the city to operate the system that was essential to the health,
safety, and welfare of the community.
A contract that extended beyond the term of the county commissioners concerning
the disposal of solid waste was held to be valid by the court in Zerr v. Tilton, 224 Kan.
394, 400, 581 P.2d 364 (1978). The court held that a contract between the county and a
private individual for the collection of solid waste was valid because solid waste disposal
was an ongoing problem that vitally concerned the public health and welfare.
Police powers cannot be contracted away by a local government. In Red Dog
Saloon v. Board of Sedgwick County Comm'rs, 29 Kan. App. 2d 928, 930-31, 33 P.3d
869 (2001), the Sedgwick County Board of Commissioners entered into a contract with
Red Dog Saloon, agreeing that it would repeal a resolution that prohibited nudity in
establishments which served alcohol, and the contract would bind its successors
accordingly. The court held that the Board lacked authority to enter into a contract that
effectively contracted away exercise of its police powers or bind its successors
accordingly.
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For a quick review, we note that the Phillips case supports the City's position. The
government must supervise the public interest "'as the special exigencies of the moment
may require.'" 67 Kan. at 553, 73 P. at 98. That case recognizes that a government entity
may need to change course if the public interest so requires. But Verdigris River
Drainage Dist. supports Jayhawk Racing's and Heartland Park's position. If the City
Council members could not bind future members to act in good faith to obtain approval
to purchase property and issue STAR bonds, then no comprehensive STAR bond project
could ever be carried out. See Verdigris River Drainage Dist., 155 Kan. at 330.
As stated above, the test found in Simmons is still usable. A contract that "is an
attempt to bind successors in matters incident to such successors' administration and
responsibilities" is invalid, but a contract that "is a commitment of a sort reasonably
necessary for protection of the public property, interests or affairs being administered" is
valid. 159 Kan. 41, Syl. ¶ 6. Here, the contract's purpose was to prevent foreclosure of
Heartland Park and to provide economic benefit for the City. Under the Simmons test, the
Memorandum of Understanding is a valid contract.
If we look at secondary authority, the test found in McQuillin guides us to look at
the subject matter of the contract:
"If the term of the contract in question extends beyond the term of the governing
members of the municipality entering into the contract, the validity of the contract is
dependent on the subject matter of the contract. The general rule is that, if the contract
involves the exercise of the municipal corporation's business or proprietary powers, the
contract may extend beyond the term of the contracting body and is binding on successor
bodies if, at the time the contract was entered into, it was fair and reasonable and
necessary or advantageous to the municipality. However, if the contract involves the
legislative functions or governmental powers of the municipal corporation, the contract is
not binding on successor boards or councils." 10A McQuillin Mun. Corp. § 29:103 (3d
ed. 2018)
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Under this test, if the City was acting in its proprietary capacity, the contract is valid.
We distinguish the cases relied upon by the district court.
The district court found that Red Dog, Landau, and Hawks dictated its result. All
three cases are distinguishable. First, Red Dog is distinguishable because in that contract
the city tried to limit the exercise of its police power—a core governmental function.
Here, the agreement involved no police powers. Next, Landau is distinguishable because
there it was shown that enforcing the contract would render it impossible for the city to
operate its sewer system. Again, this centers on the city's need to provide for the public
welfare—another governmental function. Here, the City has not shown how enforcing its
agreement with Jayhawk Racing would harm the public welfare.
We find Hawks to be distinguishable from this case and certainly not controlling.
First, Hawks deals with the operation and repair of public parking facilities—city assets.
The contract here is for the purchase of the complete title and interest in a racetrack. Put
simply, the first contract deals with the management of a public asset, the second deals
with the acquisition of a public asset. Second, the parking garage contract is an ongoing
enterprise while the acquisition of Heartland Park is a single event. The party, Park and
Shop, may prove to be deficient in the future in making repairs to the city's asset, its
parking garage. Addressing such an issue would be up to the future city council in that
event. Therefore, it makes good sense that the contract which tied the hands of future
councils for 30 years would be ruled invalid.
The district court also cited two out-of-state cases. In Marco Dev. Corp. v. City of
Cedar Falls, 473 N.W.2d 41, 42-43 (Iowa 1991), the Iowa Supreme Court found that a
city could not contractually obligate itself to widen a street because the proposed street
widening was a governmental function. In Pippenger v. City of Mishawaka, 119 Ind.
App. 397, 88 N.E.2d 168 (1949), the city contracted with a railroad company to vacate
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and close 10 public streets that crossed the railroad's path without cost to the railroad and
the city agreed not to assess the railroad's property for any of the benefits derived from
the closing of the streets. The Indiana appellate court held that the contract was void. The
city could not contract away its statutory duty to assess the benefits to the railroad's land
or surrender its discretion in the performance of a public duty. The city must "retain its
freedom of judgment up to the very moment it was required to act so that its decision
when finally made would be influenced only by a regard for public welfare." 119 Ind.
App. at 403. We do not find those cases helpful.
Both Marco and Pippenger contrast with the Linn County, Verdigris River
Drainage Dist., and City of Garnett cases where Kansas courts upheld contracts for road
improvements. "Were it not so no comprehensive program of road building could ever be
carried out." Verdigris River Drainage Dist., 155 Kan. at 331. Pippenger is also
distinguishable because there, the city agreed not to assess the railroad's property in
violation of a statutory duty. Here, the City did not contract away a statutory duty.
The City contends that the agreement with Jayhawk Racing contracts away the
City's "discretion to manage its financial affairs and control its budget by demanding
more favorable interest rates, repayment terms, or other provisions before STAR Bonds
with the City's full faith and credit backing would be issued and approved" thus
contracting away the City's "'power conferred for self-protection and self-preservation.'"
We do not read that language into the contract as the City does. We remain unpersuaded.
We see no language in the contract that limits the City's right to demand more
favorable interest rates, repayment terms, or other terms on the STAR bond issuance. The
City has only agreed to refrain from acting unreasonably or in bad faith. The City agreed
to "make commercially good faith reasonable efforts" to obtain the approvals to expand
the STAR bond district and issue the bonds, and agreed to abide by a duty of "good faith
and fair dealing."
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The City also contends that it could not contract to "make commercially good faith
reasonable efforts" to take governmental action or impose on itself a duty of "good faith
and fair dealing" because these concepts are for private contracts. But if the City was
acting in its proprietary capacity, rather than its governmental capacity, then the City is
held to the same standard as a private corporation. And McQuillin's Law of Municipal
Corporations states that a covenant of good faith and fair dealing is implied in municipal
contracts. 10A McQuillin Mun. Corp. § 29:124. Here, the City cannot escape the fact that
it was buying a racetrack. In our view, buying a racetrack is proprietary, not
governmental.
We have taken a broader view of this contract than the district court. Following
the guidance of the cases, we look at the subject matter of this contract and not just how
the contract might be financed. The City wanted to buy all remaining interests in
Heartland Park and contracted with Jayhawk Racing to do so. Therefore, we conclude
this contract deals with property, not policy.
The district court erred when it confined its view of this agreement to a contingent
promise of possibly selling STAR bonds to finance this purchase. That portion of the
agreement did not transform this contract into policy or a governmental function such as
the exercise of policy powers. A city may decide to embrace a public project or abandon
it. When it changes direction, however, that does not mean all contracts previously made
concerning that project are rescinded.
This agreement fits an exception to both the Cash-Basis and Budget Laws.
The City, in the alternative, contends that the Memorandum of Understanding
violates the Kansas Cash-Basis Law, K.S.A. 10-1101 et seq. The Kansas Cash-Basis Law
makes it unlawful "for the governing body of any municipality to create any indebtedness
in excess of the amount of funds actually on hand in the treasury of such municipality at
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the time for such purpose." K.S.A. 10-1112. Any contract that violates the Cash-Basis
Law is void. K.S.A. 10-1119.
The City also contends that the agreement violates the Kansas Budget Law, K.S.A.
79-2925 et seq. The Kansas budget law provides that creation of indebtedness more than
the budget is unlawful. Any such indebtedness is void. K.S.A. 79-2935.
But there are exceptions to both laws. One exception is that payments made with
the proceeds of bonds do not violate either law. K.S.A. 2017 Supp. 10-1116(a) provides:
"The limits of indebtedness prescribed [under this act] may be exceeded when: . . . (2)
provision has been made for payment by the issuance of bonds." K.S.A. 79-2935
provides: "indebtedness may be created in excess of the total amount of the adopted
budget of expenditures for the current budget year only when . . . provision has been
made for payment by the issuance of bonds." According to the Memorandum of
Understanding, the City's financial obligations in the agreement depended on issuing
STAR bonds. Thus the agreement does not violate either of the laws, and neither of these
claims support the grant of summary judgment to the City.
Reversed and remanded for further proceedings.
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