El Dorado Land Co. v. City of McKinney

• Decision Date: 29 March 2013
• Docket Number: No. 11–0834.,11–0834.
• Citation: 56 Tex. Sup. Ct. J. 415,395 S.W.3d 798
• Parties: EL DORADO LAND COMPANY, L.P., Petitioner, v. CITY OF McKINNEY, Respondent.
• Court: Texas Supreme Court

395 S.W.3d 798

56 Tex. Sup. Ct. J. 415

EL DORADO LAND COMPANY, L.P., Petitioner,

v.CITY OF McKINNEY, Respondent.

No. 11–0834.

Supreme Court of Texas.

Argued Jan. 9, 2013.

Delivered March 29, 2013.

Ernest Walter Leonard, Friedman & Feiger, L.L.P., Robert B. Gilbreath, Hawkins Parnell Thackston & Young LLP, William V. Dorsaneo III, SMU School of Law, Dallas, TX, for Petitioner.

Kent S. Hofmeister, Mark E. Goldstucker, Brown & Hofmeister LLP, Richardson, TX, for Respondent.

Justice DEVINE delivered the opinion of the Court.

The issue in this inverse condemnation lawsuit is whether a reversionary interest, consisting of the grantor's right to purchase real property on the occurrence of a future event, is a sufficient property interest to support an inverse condemnation claim. The trial court concluded it was not and dismissed the case. The court of appeals affirmed the trial court's judgment, holding that the grantor's retained right was not a compensable property interest under the Takings Clause of the Texas Constitution. 349 S.W.3d 215, 216, 218 (Tex.App.-Dallas 2011) (citing TEX. CONST. art I, § 17). Because we conclude that the reversionary interest here is a compensable property interest, we reverse and remand to the trial court.

I

In 1999, El Dorado Land Company sold several acres of land to the City of McKinney for use as a park. El Dorado's special warranty deed provided that the conveyance was “subject to the requirement and restriction that the property shall be used only as a Community Park.” If the City decided not to use the property for that purpose, the deed further granted El Dorado the right to purchase the property. The deed labeled this right an option and set the option's price at the amount the City paid or the property's current market value, whichever was less. El Dorado also had the right to inspect the property and to close on the purchase within ninety days after inspection.

Ten years after acquiring the property, the City built a public library on part of the land. The City did not offer to sell the property to El Dorado or otherwise give notice before building the library. After learning about the library, El Dorado notified the City by letter that it intended to exercise its option to purchase. El Dorado's letter further asked the City within ten days to acknowledge its obligations under the deed and to suggest an acceptable closing date.

After the City failed to acknowledge El Dorado's rights under the deed, El Dorado sued for inverse condemnation. The City responded with a plea to the jurisdiction. In its plea, the City argued that El Dorado's claim did not involve a compensable taking of property but a mere breach of contract for which the City's governmental immunity had not been waived. The trial court agreed, sustaining the City's plea and dismissing El Dorado's lawsuit. The court of appeals similarly agreed and affirmed the trial court's judgment. 349 S.W.3d 215.

II

The dispute here continues over the nature of El Dorado's interest in this land. El Dorado argues that its right to purchase this property is a real property interest, in the nature of a reversionary interest, and more particularly described as a right of reentry. The City, on the other hand, contends that El Dorado's option is not a real property interest but a mere contract right. As such, the City argues that the option is unenforceable against it absent an express waiver of the City's governmental immunity. ¹ Because the Legislature has not chosen to waive governmental immunity for this particular type of contract claim,² the City concludes that the court of appeals correctly affirmed the dismissal of El Dorado's claim.

The court of appeals similarly reasoned that the deed restriction and option were merely contract rights that were not compensable against a governmental entity under the Texas Constitution. See349 S.W.3d at 218 (observing that inverse condemnation claims have “traditionally involved interests in real property and not the alleged taking of property interests created under contract”). The court accordingly “reject[ed] El Dorado's argument that, pursuant to the deed provision, it held a reversionary interest or the ‘possibility of reverter’ in the property.” Id. While we agree that the deed did not create a possibility of reverter, we disagree that El Dorado did not retain another type of reversionary interest in the property.

El Dorado refers to its reversionary interest as a right of reentry. A right of reentry is a “future interest created in the transferor that [may] become possessory upon the termination of a fee simple subject to a condition subsequent.” Restatement (Third) of Property: Wills and Other Donative Transfers § 25.2 cmt. b (hereafter Restatement (Third) of Property); see also Davis v. Vidal, 105 Tex. 444, 151 S.W. 290, 292–93 (1912) (describing a right of reentry as “a contingent reversionary interest in the premises resulting from the conveyance of an estate upon a condition subsequent where there has been an infraction of such condition”).

Under the deed, El Dorado's possessory interest was contingent on the property's use. If the City violated the deed restriction, El Dorado retained the power to terminate the City's estate.³ The deed referred to this power or right as an option, but it effectively functioned as a power of termination, or as El Dorado labels it, a right of reentry. El Dorado's deed conveyed a defeasible estate (“a fee simple subject to a condition subsequent”) ⁴ to the City with El Dorado retaining a conditional future interest—the power to terminate the City's defeasible estate on the occurrence of a condition subsequent.⁵ We have previously equated this right to an estate or interest in land. Davis, 151 S.W. at 293;see alsoRestatement of Property § 153(1)(a) & cmt. a (noting that the term future interest includes an interest in land which “may become a present interest” and is “sufficiently broad to include ... powers of termination”).

Contrary to the court of appeals, we conclude that El Dorado retained a reversionary interest in the property. We likewise disagree with the court of appeals' analysis of El Dorado's claim as a contract right dependent on a statutory waiver of the City's governmental immunity. A statutory waiver of immunity is unnecessary for a takings claim because the Texas Constitution waives “governmental immunity for the taking, damaging or destruction of property for public use.” Steele v. City of Houston, 603 S.W.2d 786, 791 (Tex.1980).

El Dorado's claim is that the City took or destroyed its reversionary interest in the property by refusing either to convey the property or to condemn El Dorado's interest. The issue then is whether El Dorado's reversionary interest can support a takings claim under the Texas Constitution. Tex. Const. art. I § 17. El Dorado submits that it can under our decision in Leeco Gas & Oil Co. v. Nueces County, 736 S.W.2d 629 (Tex.1987).

III

Leeco, like this case, involved a restricted conveyance of land to a governmental entity that later sought to avoid the deed restriction. The land in that case was donated to Nueces County for use as a park, and the deed included a restrictive covenant requiring that use. Leeco, 736 S.W.2d at 630. The grantor retained a reversionary interest, described as a possibility of reverter,⁶ in the event the land was not used as a park. Id.

Nueces County subsequently decided to use the land for another purpose and sought to condemn the grantor's reversionary interest. Although the land was worth millions of dollars, the trial court awarded only nominal damages for the grantor's reversionary interest, and the court of appeals affirmed that award. Id. We reversed and remanded, concluding that the grantor's reversionary interest was worth more than nominal damages. Id. at 631–32.

Relying on the Restatement of Property, we observed that a possibility of reverter was a protected property interest, the value of which depended upon the imminence of possession. Id. We explained that a nominal valuation would be appropriate for the government taking such property only “when the event upon which the possessoryestate in fee simple defeasible is to end is not probable within a reasonably short period of time.” Id. at 631. Conversely, we explained that nominal damages would be inappropriate if the defeasible event was reasonably certain to occur in the near future or had already occurred. Id. Under those circumstances, we said the compensable value of the reversionary interest should be measured by the amount “the value of the unrestricted fee exceeds the value of the restricted fee.” Id. at 631–32.Leeco thus recognizes that a future interest in real property is compensable under the Takings Clause,Tex. Const. art. I, § 17, and that the owner of such an interest is entitled to a condemnation award. Id. at 631 (citing Restatement of Property § 53).

The court of appeals' opinion does not directly address Leeco, but arguably attempts to distinguish the decision by observing that the deed in this case did not include a possibility of reverter. 349 S.W.3d at 218. While we agree it did not, as previously explained, we do not accept the court's further conclusion that El Dorado's deed did not create a reversionary interest. See id. (rejecting El Dorado's argument that “it held a reversionary interest or the ‘possibility of reverter’ in the property”). As El Dorado argues, the deed restriction and option created in El Dorado a right of reentry, which is a reversionary interest, albeit of a different type than the possibility of reverter reserved in Leeco.

The City argues that Leeco is distinguishable on this ground because a possibility of reverter is materially different from the right or option reserved by El Dorado. At oral argument, the City elaborated on the distinction, explaining that Leeco's reversionary interest was different because it was self-executing, whereas the right...