Court Opinion

ID: 4439246
Source: CourtListenerOpinion
Date Created: 2019-09-18 15:04:20.271947+00
Date Added: 2024-06-11T09:37:08.230771
License: Public Domain

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.

      Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019       Page 3 of 15
      (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.”

      Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019                           Page 4 of 15
[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.”

      Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019                              Page 5 of 15
      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.

      Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019                              Page 6 of 15
[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

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019      Page 7 of 15
       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

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019    Page 9 of 15
       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

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019                         Page 10 of 15
       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).

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019                          Page 11 of 15
       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

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019   Page 13 of 15
       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

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019   Page 14 of 15
       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.

       Court of Appeals of Indiana | Opinion 18A-CC-2581 | September 18, 2019   Page 15 of 15