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Jayhawk Racing Properties, LLC v. City of Topeka

Court of Appeals of Kansas

November 2, 2018

Jayhawk Racing Properties, LLC, and Heartland Park Raceway, LLC, Appellants,
City of Topeka, Kansas, Appellee.


         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.

         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.

         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.

          Appeal from Shawnee District Court; Teresa L. Watson, judge.

          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 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.

          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 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 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 ...

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