Court Opinion

ID: 6103913
Source: CourtListenerOpinion
Date Created: 2022-01-15 01:02:23.87504+00
Date Added: 2024-06-11T08:53:41.571969
License: Public Domain

Case: 21-50389     Document: 00516168204          Page: 1    Date Filed: 01/14/2022

           United States Court of Appeals
                for the Fifth Circuit                                United States Court of Appeals
                                                                              Fifth Circuit

                                                                            FILED
                                                                     January 14, 2022
                                   No. 21-50389                        Lyle W. Cayce
                                                                            Clerk

   Preston Hollow Capital, L.L.C.,

                                                            Plaintiff—Appellant,

                                       versus

   Cottonwood Development Corporation; The City of
   Hutto,

                                                         Defendants—Appellees.

                  Appeal from the United States District Court
                       for the Western District of Texas
                            USDC No. 1:20-CV-978

   Before Higginbotham, Smith, and Ho, Circuit Judges.
   James C. Ho, Circuit Judge:
          Preston Hollow Capital, L.L.C. contends that the city of Hutto and
   the Cottonwood Development Corporation committed an unconstitutional
   taking of private property when they failed to return $15 million that Preston
   Hollow loaned to Cottonwood for the city’s benefit.
          We decline this invitation to constitutionalize what amounts to
   nothing more than a contract dispute. “[W]hen a municipality acts in a
   contractual or proprietary capacity, actions such as contract termination or
   detention of property under the contract that would constitute a simple
Case: 21-50389      Document: 00516168204          Page: 2   Date Filed: 01/14/2022

                                    No. 21-50389

   breach of contract when a non-governmental entity is involved do not
   become a constitutional violation simply because the contracting party is a
   municipality.” Massó-Torrellas v. Mun. of Toa Alta, 845 F.3d 461, 468 (1st
   Cir. 2017). We agree and accordingly affirm.
                                         I.
          In April 2019, the city of Hutto announced that it would be the site of
   the new headquarters for Perfect Game Incorporated. It unveiled plans for a
   253-acre mixed-use development in anticipation of the company’s relocation.
   And it tasked Cottonwood, a Texas non-profit local government corporation,
   with facilitating the project.
          Preston Hollow is a finance company that funds economic
   development and infrastructure projects for municipal governments and
   development corporations. So the city asked Preston Hollow to identify
   potential financing options to support the project.
          In January 2020, the city, Cottonwood, and Preston Hollow reached
   an agreement in principle on a $35 million public finance deal. Preston
   Hollow and Cottonwood executed a Loan Agreement, Promissory Note, and
   First and Second Lien Deeds of Trust. Under the Loan Agreement, Preston
   Hollow was obligated to initially disburse $15 million. Preston Hollow
   disbursed the $15 million in two parts. It sent $12,445,038.24 to Cottonwood
   through an escrow agent—funds that Cottonwood used to acquire two
   parcels of land from the city for the project, cover the costs associated with
   issuance of the loan, and settle a pending lawsuit between the city and a
   former developer. Preston Hollow also sent $2,554,961.76 to an escrow
   company “to be held . . . until such time as [Cottonwood] satisfies the
   conditions of disbursement.”
          Trouble ensued.       Preston Hollow alleges that, in April 2020,
   Cottonwood insisted that the escrowed funds be disbursed, even though it

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   had not yet complied with the conditions of disbursement. In Preston
   Hollow’s view, Cottonwood’s conduct made it clear that the city and
   Cottonwood were not going to comply with the Loan Agreement, and that
   Preston Hollow therefore had no choice but to assert its contractual rights,
   declare default, and foreclose on the secured parcels of land.
          Accordingly, Preston Hollow sent Cottonwood a Notice of Default,
   asserting that certain conditions of the Loan Agreement had not been
   satisfied, and that Preston Hollow was therefore exercising its right to
   accelerate the Promissory Note. Preston Hollow then requested that the
   escrow company return the escrowed funds.            Finally, Preston Hollow
   invoked its right to nonjudicial foreclosures on the parcels of land secured for
   the project, and informed Cottonwood of its intent to initiate foreclosure
   proceedings.
          The city and Cottonwood responded with a letter from counsel
   outlining various reasons that the Loan Agreement, Promissory Note, and
   other documents cited by Preston Hollow were in fact void or voidable under
   state law. In response, Preston Hollow sent another written demand for the
   disbursed funds in May 2020. Neither Cottonwood nor the city acceded to
   that demand. Cottonwood’s board passed a resolution stating that its
   arrangement with Preston Hollow was based on “a legally defective
   transaction.”
          Preston Hollow filed this action against Cottonwood and the city,
   asserting a single claim under 42 U.S.C. § 1983, theorizing that Defendants’
   refusal to return the loaned funds violated the Takings Clause.           Both
   Cottonwood and the city moved to dismiss the complaint on the grounds that
   it failed to state a takings claim, and Cottonwood asserted various state law
   counterclaims against Preston Hollow.

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            The magistrate judge determined that Preston Hollow’s takings claim
   was not facially plausible, and thus recommended that the motion to dismiss
   be granted for failure to state a claim. The district court agreed and dismissed
   the suit after declining to exercise supplemental jurisdiction over
   Cottonwood’s state law counterclaims.
            We review a district court’s dismissal de novo. Stratta v. Roe, 961 F.3d
   340, 349 (5th Cir. 2020). When the alleged jurisdictional defect is that no
   federal question has been plausibly pled, “the factual and jurisdictional issues
   are completely intermeshed [and] the jurisdictional issues should be referred
   to the merits, for it is impossible to decide the one without the other.”
   McBeath v. Inter-Am. Citizens for Decency Comm., 374 F.2d 359, 363 (5th Cir.
   1967).    Because the jurisdictional question of whether Preston Hollow
   plausibly pled a takings claim is “completely intermeshed” with the merits
   of that claim, it was appropriate for the district court to resolve Defendants’
   motion under Rule 12(b)(6). See M.D.C.G. v. United States, 956 F.3d 762,
   768–69 (5th Cir. 2020).
                                           II.
            The Fifth Amendment, as incorporated against state and local
   governments under the Fourteenth Amendment, forbids the taking of private
   property for public use without just compensation. U.S. Const. amend.
   V. As courts have recognized, however, “[t]aking claims rarely arise under
   government contracts because the Government acts in its commercial or
   proprietary capacity in entering contracts, rather than in its sovereign
   capacity.” Hughes Commc’ns Galaxy, Inc. v. United States, 271 F.3d 1060,
   1070 (Fed. Cir. 2001). As the Supreme Court has repeatedly reminded us,
   “[t]he two characters which the government possesses as a contractor and as
   a sovereign cannot be . . . fused; nor can the [government] while sued in the
   one character be made liable in damages for [its] acts done in the other.”

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   Horowitz v. United States, 267 U.S. 458, 461 (1925) (quoting Jones v. United
   States, 1 Ct. Cl. 383, 384 (1865)). See also Massó-Torrellas, 845 F.3d at 468
   (collecting cases); Braden v. Texas A & M Univ. Sys., 636 F.2d 90, 93 (5th Cir.
   1981) (“Just as Section 1983 does not create a cause of action for every state-
   action tort, it does not make a federal case out of every breach of contract by
   a state agency.”) (citations omitted).
          Preston Hollow contends that the Supreme Court’s recent decision in
   Knick v. Township of Scott, 139 S. Ct. 2162 (2019), calls these principles into
   question. But this contention badly misreads Knick.
          In Knick, the Supreme Court overruled its longstanding rule from
   Williamson County Regional Planning Commission v. Hamilton Bank of Johnson
   City, 473 U.S. 172 (1985). Under that rule, a takings claim was not considered
   ripe, and thus could not be brought in federal court, until after “a property
   owner [has] pursue[d] state procedures for obtaining compensation.” Knick,
   139 S. Ct. at 2173. Knick abolished that rule, holding instead that “‘a property
   owner has a claim for a violation of the Takings Clause’ cognizable in federal
   court ‘as soon as a government takes his property for public use without
   paying for it.’” Bay Point Props., Inc. v. Mississippi Transp. Comm’n, 937 F.3d
   454, 456 (5th Cir. 2019) (quoting Knick, 139 S. Ct. at 2170), cert. denied, 140
   S. Ct. 2566 (2020).
          In sum, Knick concerns when a takings claim becomes ripe as a
   procedural matter—not what constitutes a “taking” as a substantive matter.
          Preston Hollow nevertheless contends that it has stated a plausible
   takings claim because “rights that arise independently from the contract may
   be brought through a takings action.” In particular, Preston Hollow asserts
   that the property right it is seeking to vindicate—its interest in the $15 million
   it disbursed—somehow predated the Loan Agreement because Preston
   Hollow “had a pre-existing title to its own money.”

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          But Preston Hollow exchanged that “pre-existing title” for various
   rights laid out in the Loan Agreement, including (1) a promissory note from
   Cottonwood; (2) deeds of trust on the tracts of land purchased for the project
   with loan funds; and (3) an indemnification agreement from Cottonwood. So
   Preston Hollow cannot seriously claim that “the right at issue is not governed
   by the terms of the parties’ contract.” Allegre Villa v. United States, 60 Fed.
   Cl. 11, 18 (2004). See Massó-Torrellas, 845 F.3d at 468.
          Alternatively, Preston Hollow claims that Defendants have left it with
   no “viable alternative” to a takings claim under the Constitution. But even
   if it were true that there were no contractual or other claims under state law
   that Preston Hollow might have pursued against Defendants—an issue on
   which we of course express no position here—that does not change the fact
   that a government must be acting in its sovereign capacity to effect a taking.
   See Hughes Commc’ns Galaxy, 271 F.3d at 1070. The fact remains that none
   of the actions identified by Preston Hollow—not the letter from counsel
   regarding the potential invalidity of the Loan Agreement, not the various
   pretrial statements regarding the Loan Agreement, and not the resolution
   adopted by Cottonwood—qualifies as sovereign acts. See Massó-Torrellas,
   845 F.3d at 469 (concluding there were no “plausible allegations that the
   Municipality was acting in a sovereign capacity” when “[t]here [wa]s no
   allegation in the Complaint that the Municipality acted pursuant to a statute,
   ordinance, or regulation” at the time “it terminated the contract . . . and
   temporarily detained [the plaintiff’s] property”).
          Because all of the misconduct alleged in the complaint involves
   “commercial” and not “sovereign” acts, “any claim that [Preston Hollow]
   may have asserted should be a breach of contract claim, not a taking claim.”
   St. Christopher Assocs., L.P. v. United States, 511 F.3d 1376, 1385 (Fed. Cir.
   2008). Of course, “a plaintiff may plead, in the alternative, both a breach of
   contract claim and a takings claim in the same complaint.” Century Expl.

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   New Orleans, Inc. v. United States, 103 Fed. Cl. 70, 77 (2012). But when a
   plaintiff brings only a takings claim, and that claim “sound[s] in contract,”
   dismissal of the takings claim is appropriate. See, e.g., Griffin Broadband
   Commc’ns, Inc. v. United States, 79 Fed. Cl. 320, 323–24 (2007), aff’d, 287 F.
   App’x 108 (Fed. Cir. 2008).
          Accordingly, we affirm. 1

          1
             We do not address what effect, if any, this dismissal might have on potential
   claims that are not before us.

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