City of Lebanon v. Baird

• Decision Date: 15 August 1988
• Citation: 756 S.W.2d 236
• Parties: CITY OF LEBANON, Tennessee, Plaintiff-Appellant, v. Edward B. BAIRD, Defendant-Appellee. Edward B. BAIRD, Counter-Plaintiff-Appellant, v. CITY OF LEBANON, Tennessee, Counter-Defendant-Appellee.
• Court: Tennessee Supreme Court

Page 236

756 S.W.2d 236

CITY OF LEBANON, Tennessee, Plaintiff-Appellant, v. Edward B. BAIRD, Defendant-Appellee.

Edward B. BAIRD, Counter-Plaintiff-Appellant, v. CITY OF LEBANON, Tennessee, Counter-Defendant-Appellee.

Supreme Court of Tennessee,

at Nashville.

Aug. 15, 1988.

R. David Allen, Allison B. Humphreys, Lebanon, for City of Lebanon.

James H. Kinnard, Lebanon, Robert H. Jennings, Jr., Nashville, for Edward B. Baird.

OPINION

DROWOTA, Justice.

Rule 11, T.R.A.P., Applications for Permission to Appeal were granted in this case to determine whether a contract entered into between Plaintiff, the City of Lebanon, and Defendant, Edward B. Baird, was ultra vires because it was not authorized by ordinance, as required by the Charter of the City of Lebanon. If not ultra vires, the issue becomes whether the City of Lebanon acted in good faith and with due diligence within the meaning of the terms of the contract, but if ultra vires, then whether an estoppel or an implied contract arose between the parties.

I.

The events culminating in the execution of the contract between the parties are essentially undisputed. In 1977, Edward B. Baird (Defendant) owned approximately 135 acres of land situated within the city limits of the City of Lebanon (City). This tract was zoned as residential property and Defendant had it platted for future subdivision development but had not yet placed any part of the property on the market for sale. During the summer of 1977, which was the last year of the administration of Mayor Jack Lowery, the City decided to develop a recreational park and officials of the City approached Defendant about purchasing some portion of the 135 acre tract owned by him. Defendant agreed to sell only the entire tract and was advised by the City that it planned to apply through the State of Tennessee, Department of Conservation, for a grant from the Bureau of Outdoor Recreation, United States Department of Interior, to assist the City in the acquisition of the property. In accordance with State and Federal regulations guiding park land acquisition, the price for Defendant's property was determined through the services of an independent appraiser; Defendant did not participate in the appraisal in any way. The appraiser determined that the price for the property was $365,000.

On July 30, 1977, the City Council adopted Resolution No. 77-506, which authorized the mayor to apply for a Bureau of Outdoor Recreation Grant in the amount of $250,000 and appropriated funds not to exceed an additional $250,000 from the City's Revenue Sharing Fund to match the grant and to acquire the Baird property for development as a park. This resolution was adopted at a regularly scheduled meeting of the City Council upon one reading, but no notice was given to the public by any form of publication. The application was submitted to the State and on September 21, 1977, the City received notice from State Conservation Commissioner B. R. Allison that a grant application would be submitted by the State on behalf of the City to the Bureau of Outdoor Recreation, but that due to the limited availability of Federal funds and the State's need to allocate these funds to assist as many projects as possible, the application would be reduced from $250,000 to $182,500, which equaled one-half the purchase price of the proposed park property. This letter did not constitute approval of the grant but merely informed the City of its eligibility to receive Federal funds if the State obtained the funds from the Bureau of Outdoor Recreation for this purpose. No problem was foreseen with eventually obtaining such funds, however.

On December 27, 1977, the City Council adopted Resolution No. 77-524, authorizing the mayor to purchase the Baird property for development as a park using funds to be obtained from a grant by the Bureau of Outdoor Recreation and from the unappropriated funds of the City. The resolution recited that the park was to be developed on a ten-year plan and that the purchase price of the property was $365,000. No notice to the public was given. Defendant's attorney drafted the contract on terms agreed to by the parties. On January 2, 1978, the parties executed a contract styled Option Agreement. This contract contained a recital that $90,000 was paid by the City to the Defendant upon execution and stated the terms and conditions of the sale of the property, including the grant of an exclusive option to the City under which the City had 90 days from the date of the agreement within which to exercise the option to purchase. One of the clauses of the contract provided:

"DEFAULT BY PURCHASER. It is agreed and understood that the purchaser is securing grant money to fund the purchase of this land from the State of Tennessee by means of a grant from the Department of Interior, Bureau of Outdoor Recreation of the Federal government and it is further agreed that the City will continue in its efforts to secure the said money and act in good faith and diligence to continue this project which is the development of a park and recreation area. In the event the grant money is not secured through no fault of the City then this agreement is null and void except that the City will be required to pay all legal, accounting and professional fees attendant thereto.

"In the event the City does not use due diligence in continuing its efforts to secure the money or does not act in good faith the ninety thousand dollars ($90,000.00) paid at the execution of this agreement shall be forfeited."

The contract also provided that the property would be conveyed to the purchaser at the closing by a warranty deed. A check for $90,000 was delivered by the City to the Defendant.

Shortly after the execution of this contract, a new administration, that of Mayor Willis Maddox, was inaugurated in January, 1978. This successor administration took no further action to secure the grant from the State. Rather, in assessing the ability of the City to fund the long-term park development project, the Maddox Administration concluded that the City did not have sufficient revenues to dedicate to carry out the planned park project. It also determined that a portion of the land was unsuited for park development. ¹ On March 30, 1978, Jerry Dillehay, Chief of Planning and Grants, State Department of Conservation, communicated with Mayor Maddox to inquire whether the City intended to proceed with its grant application, stating that while the City was ranked first among eligible applicants and that the State would commit $182,500 of Federal funds for the City's proposed acquisition, "[a]t the present time [the application] has not been officially approved [by the Federal Government]." Mr. Dillehay requested the City to notify the State as to its intentions by April 15, 1978, so that the funds could be reappropriated should the City's application be withdrawn. The next day, on March 31, 1978, the mayor and City commissioner of finance and revenue wrote to Defendant, informing him that on March 27, 1978, the City Council had considered the exercise of the option and had determined that, at the current rates of taxation, available revenue would be inadequate to fund the development of the proposed park and also provide sufficient City services. The City demanded return of at least part of the $90,000 paid to Defendant and suggested that Defendant consider the ramifications of the City's decision on his 1978 tax position. On April 14, 1978, the City notified Mr. Dillehay that the City Council had met in special session on March 23, 1978, and had voted to end negotiations for purchase of the Baird property for several reasons, including lack of funds and long-term fiscal inability to sustain the park development as planned.

Relying on the DEFAULT OF PURCHASER provision of the contract, Defendant refused to return any portion of the $90,000 to the City. On his 1978 Federal income tax return, the Defendant reported this $90,000 as ordinary income because no transfer of the property had occurred, precluding Defendant from taking advantage of the capital gains provisions of the tax code. The difference between the rate of taxation on the $90,000 as ordinary income, as compared to that for capital gains, increased Defendant's tax liability by $48,000. The City continued to demand reimbursement of the $90,000 but failed to bring suit to recover the money until December 21, 1983, when it filed the instant action in the Chancery Court for Wilson County. The City's theories of recovery were that the contract was ultra vires and, alternatively, that the City acted in good faith and with due diligence in failing to exercise the option to purchase. Defendant asserted counter-claims, including breach of contract.

After much pretrial pleading and discovery, the case finally came to trial on July 14 and 15, 1986, and reached conclusion on July 21, 1986. The Chancellor entered his Memorandum Opinion on August 14, 1986. Finding that the parties had entered into an option contract, the Chancellor held that the failure of the City to enact an ordinance authorizing the contract pursuant to the requirements of the Charter of the City of Lebanon made the contract ultra vires and therefore void. The trial court specifically found that neither of the two resolutions was adopted with any of the required formalities of an ordinance under the City Charter. The trial court also found that the City had acted in good faith when it determined that it could not afford to develop the Baird property as a park and that Defendant had sustained no damages to his property or business interests as a result of the City's actions. Because the contract was void and unenforceable, the Chancellor ordered Defendant to reimburse the $90,000 paid by the City for the option; however, due to the City's delay in litigating the issue, no award of prejudgment interest, as pled by Plaintiff, was made by the trial court. An Order of...