Johnson Intern., Inc. v. City of Phoenix

• Decision Date: 03 February 1998
• Docket Number: No. 1,CA-CV,1
• Citation: 192 Ariz. 466,967 P.2d 607
• Parties: JOHNSON INTERNATIONAL, INC., an Arizona corporation, Plaintiff-Appellant, v. CITY OF PHOENIX, a municipal corporation; City of Phoenix Parks and Recreation Board, a duly appointed board of the City of Phoenix, Defendants-Appellees. 97-0215.
• Court: Arizona Court of Appeals

Page 607

967 P.2d 607

192 Ariz. 466

JOHNSON INTERNATIONAL, INC., an Arizona corporation, Plaintiff-Appellant, v. CITY OF PHOENIX, a municipal corporation; City of Phoenix Parks and Recreation Board, a duly appointed board of the City of Phoenix, Defendants-Appellees.

No. 1 CA-CV 97-0215.

Court of Appeals of Arizona,

Division 1, Department B.

Feb. 3, 1998.

Redesignated as Opinion and Publication

Ordered Nov. 9, 1998.

Review Denied Nov. 17, 1998. ^*

Jennings, Strouss & Salmon, P.L.C. by James M. Ackerman, Phoenix, and Mohr, Hackett, Pederson, Blakley, Randolph & Haga, P.C. by Michael W. Wright, Phoenix, for Plaintiff-Appellant.

Ryley, Carlock & Applewhite, P.A. by N. Warner Lee, Phoenix, for Defendants-Appellee.

OPINION

PATTERSON, Judge.

¶1 Plaintiff-Appellant, Johnson International, Inc. (Johnson), appeals from the superior court's entry of judgment dated March 28, 1997, dismissing Counts I-III of Johnson's original complaint and dismissing Counts I, II, III, V, VI, and VII of Johnson's First-Amended Complaint against Defendant-Appellee, City of Phoenix (City) pursuant to Rule 12(b)(6) of the Arizona Rules of Civil Procedure. For the following reasons, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

¶2 In December 1986, City entered into a fifty-year land use agreement (Bureau Agreement) with the Bureau of Reclamation (BOR), a division of the federal government, to use a tract of land known as "Reach 11" for public recreational development. Reach 11 contains approximately 1,500 acres of land in northeast Phoenix. Under the Bureau Agreement, any third-party agreements involving Reach 11 must be reviewed and approved by the BOR. The Bureau Agreement further states that such third-party contracts will not be effective until the approval of BOR is received.

¶3 In November 1990, City issued a Request for Developer Qualifications and Proposals (RFP) seeking proposals from developers to develop and manage a golf course and recreational area on Reach 11. The RFP identified the Bureau Agreement and stated that any agreements entered into pertaining to Reach 11 would require the approval of BOR. The RFP stated that acceptance of a proposal "does not constitute an agreement by the City that any contract will actually be entered into by the City of Phoenix." Further, the RFP stated: "Negotiations may be terminated for failure to reach mutually acceptable terms. Compensation will not be provided to the developer if agreement cannot be reached."

¶4 Johnson submitted a proposal in which it would develop Reach 11 into two eighteen-hole golf courses and other public recreational facilities. The proposal provided that Johnson would pay for such development and share with City the revenues derived from the golf courses for a period of time, at the end of which the rights to use the land would revert to City. In exchange, the City would extend to Johnson a long-term right to operate and earn profits from the golf course. City accepted Johnson's proposal.

¶5 In February 1993, Johnson and City executed a Memorandum of Understanding (MOU). The MOU contained the parties' understanding and intentions and identified elements of a potential agreement for development of Reach 11. The MOU also contained the following language:

This memorandum is not intended to be the final agreement or to include all of the material terms, which shall be subject to further negotiations, and it shall not be binding on either party.

¶6 The MOU further required that all terms of any future agreements meet the conditions of the Bureau Agreement and in some cases approval by BOR. Closing language of the MOU provided:

IN WITNESS WHEREOF, the parties have executed this Agreement through their representatives duly authorized to execute this document and bind their respective entities to the terms and obligations herein contained on the day and year first written above.

After signing the MOU, Johnson began expending substantial sums of money to develop the design and plans for the Reach 11 project.

¶7 The parties negotiated for the next two and one-half years to reach the final draft agreements for the project. Two draft agreements were the result of the negotiations, a Development and Use Agreement and an Operator Use Agreement. ¹ The Use Agreements contained provisions relating to the alignment of 56th Street and 64th Street which cross Reach 11. Maintaining the alignment of the streets was essential to the golf course plans. ²

¶8 The Use Agreements were approved by the City of Phoenix Parks and Recreation Board (Parks Board) in June 1994. In July 1994, the Phoenix City Council (City Council) adopted a formal ordinance (Ordinance No. S22236) approving the Use Agreements and authorizing the City Manager to execute the Use Agreements.

¶9 In August 1994, the draft Use Agreements were submitted to BOR for approval. One year later, BOR submitted approximately fifty comments on the Use Agreements. One of the requirements of BOR was for Johnson to obtain an Environmental Inspection Assessment, something he was required to do but did not. Johnson agreed to work with BOR to meet its fifty concerns. However, shortly thereafter, L.B. Scacewater, the Assistant Director of the City Parks Board, submitted a proposal at a September 26, 1995 Parks Board meeting that was directly contrary to and inconsistent with the Use Agreements. At that time, City cancelled negotiations with Johnson. The Parks Board terminated the Use Agreements and on November 1, 1995, the City Council repealed Ordinance No. S22236.

¶10 Earlier in 1995, while the BOR review was pending, the City realigned 56th Street across Reach 11. Knowing the development of two golf courses would no longer be possible, Johnson proposed that it develop only one golf course and the other half would be recreational facilities. With this proposal, Johnson requested a covenant not to compete or the right of first refusal for another golf course that would be built in the area. City agreed to the development of only one golf course, but rejected Johnson's offer regarding a covenant not to compete or the right of first refusal.

¶11 Johnson sued the City, the Parks Board and various individual city representatives for breach of contract. Johnson alleged: breach of contract (Count I); promissory estoppel (Count II); breach of covenant of good faith and fair dealing (Count III); and interference with advantageous business opportunity (Count IV-against individual defendants only).

¶12 City filed a motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Arizona Rules of Civil Procedure and argued that no contract existed between it and Johnson and thus, all of the breach allegations failed to state a claim upon which relief can be granted. City argued that both the MOU and the Use Agreements were at all times subject to BOR approval and no contract would be formed absent such authority.

¶13 Further, City argued that promissory estoppel claims against a municipality are rarely allowed and should be allowed only where the municipality has the authority to enter into the agreement. Without BOR approval, City had no such authority. Finally, City argued that Johnson failed to allege sufficient business expectancy and failed to establish interference with a third-party contract to satisfy the elements for interference with advantageous business opportunity.

¶14 The trial court granted City's motion to dismiss on Counts I-III finding that no contract existed between Johnson and the City. The court found that the MOU was the only executed document and it contained clear non-binding language. Johnson's Motion to Reconsider was denied and Johnson amended its complaint.

¶15 In its first-amended complaint, Johnson recharacterized the MOU as a "letter of intent" and thus containing good faith obligations. Johnson realleged Counts I-IV and added three new counts. Count V alleged the breach of the MOU as a letter of intent. Count VI alleged the breach of the Use Agreements as final agreements which bound the City to negotiate in good faith and to cooperate with Johnson to cure any BOR objections to the plan. Count VII alleged that City's restructuring of 56th Street breached the provision in the Use Agreements that the street not be realigned.

¶16 City moved to strike the first-amended complaint or in the alternative to dismiss the new claims and the realleged claims. City did not repeat its request to have Count IV dismissed. City argued that Counts I-IV were identical to the first complaint and the court had already handled those claims. Further, Count V merely realleged the claim that City breached the MOU and the alleged duty to negotiate in good faith accompanying that agreement. Counts VI and VII were asserting the same breach of contract claim on the facts asserted in the original complaint.

¶17 Johnson responded arguing that characterizing the MOU as a letter of intent attaches new legal significance, citing cases from other jurisdictions. The trial court disagreed with Johnson's new theory of liability and again dismissed all counts except for Count IV, interference with advantageous business opportunity against the individual defendants which remained from the original complaint. ³ The court entered a judgment in favor of the City. Johnson appeals from that entry of judgment. We have jurisdiction pursuant to Arizona Revised Statutes Annotated (A.R.S.) section 12-2101(B) (Supp.1996).

ISSUES

¶18 The issues are as follows:

I. Whether the Use Agreements or the MOU constituted a binding contract between Johnson and City.

A. Whether Johnson's Amended Complaint stated a claim for breach of the Use Agreements.

B. Whether Johnson's Amended Complaint stated a claim for breach of the MOU.

II. Whether Johnson's Amended Complaint stated a claim for breach of implied covenants of good faith and fair dealing.

III. Whether Johnson's Amended Complaint stated a claim for promissory estoppel.

IV. Whether...