Mid-American Waste Systems, Inc. v. City of Gary, Ind.

• Decision Date: 20 March 1995
• Docket Number: 94-3729,Nos. 94-3602,MID-AMERICAN,s. 94-3602
• Parties: 25 Envtl. L. Rep. 20,700 WASTE SYSTEMS, INC., and Mid-American Waste Systems of Indiana, Inc., Plaintiffs-Appellants, Cross-Appellees, v. CITY OF GARY, INDIANA, et al., Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 286

49 F.3d 286

25 Envtl. L. Rep. 20,700

MID-AMERICAN WASTE SYSTEMS, INC., and Mid-American Waste Systems of Indiana, Inc., Plaintiffs-Appellants Cross-Appellees, v. CITY OF GARY, INDIANA, et al., Defendants-Appellees, Cross-Appellants.

Nos. 94-3602, 94-3729.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 18, 1995.

Decided Feb. 22, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied March

20, 1995.

Steven R. Crist (argued), Michael D. Sears, Marilyn R. Holscher, Patrick B. McEuen, Singleton, Crist, Patterson, Austgen & Lyman, Munster, IN, for Mid-American Waste Systems, Inc., Mid-American Waste Systems of Indiana, Inc.

Gilbert King, Jr., CC, MacArthur Drake (argued), Hamilton L. Carmouche, Margaret L. Felton (argued), City of Gary Law Dept., Gary, IN, for City of Gary, Thomas Barnes, Marvin Exom, Douglas Wright, Gardest Gillespie, Gerald Hayes, Frank Ballard, Cleveland

Rouster, Cleo Wesson, Leon Hamilton, Roy Pratt, Charles Hughes, Dorothy Allen.

Before COFFEY and EASTERBROOK, Circuit Judges, and McDADE, District Judge. ^*

EASTERBROOK, Circuit Judge.

The status of the Gary Landfill has been the subject of continuous litigation since Indiana's pollution control officials ordered its closure in 1977. Throughout the 1980s the City of Gary continued to operate the landfill, sometimes in violation of both administrative and judicial orders. An agreement in 1988 permitted the City to continue operating the landfill until mid-1991 on condition that it engage a responsible firm to stop the seepage and operate the landfill. See State ex rel. Prosser v. Lake Circuit Court, 565 N.E.2d 751 (Ind.1991), after remand, 603 N.E.2d 181 (Ind.App.1992). The City chose Mid-American Waste Systems. A lease between the City and Mid-American was approved by the court in June 1990, and Mid-American took over the landfill. It has since made at least $10 million in capital improvements; Mid-American says that the total is $19 million. Early in 1994 the City began to limit Mid-American's ability to deposit waste, on occasion sending police to turn trucks away. Relations deteriorated, with police officers escorting the City's own dump trucks into the landfill so that they could deposit garbage without paying Mid-American, and on October 26, 1994, the City barred all of Mid-American's trucks from the property.

Mid-American believes that its lease runs until the Gary Landfill is full, an event that it believes lies many years in the future. The City asserts that, because the lease lacks a definite term of years, it may be canceled at will--which the City says it has now done in order to conserve remaining space in the landfill for local residents. In September 1994 Mid-American filed this suit under 42 U.S.C. Sec. 1983, contending that the lease transferred to it all of the air rights over the landfill, and seeking an injunction against the City's interference with its access to these air rights. Mid-American characterized the air rights (and its leasehold interest as a whole) as "property," with which the City could not interfere except by due process of law. Sending armed police to back up your side of a contract dispute is a far cry from due process of law, Mid-American told the court. On October 27, the day after the City forbade all entry to Mid-American's trucks, the district court issued a temporary restraining order providing:

The City of Gary, all Defendants in this case, and all other City of Gary officials and employees are ordered to cease and desist from interfering with Mid-American Waste's operation of the Gary Landfill unless said action is based upon a valid state statute or city ordinance. Mid-American Waste is to continue accepting the City of Gary's garbage for free, and the City of Gary will allow Mid-American Waste to accept garbage from transfer trucks up to the specified tonnage limits in the agreement.

The italicized language was added on October 28. It had no effect. The City did not permit Mid-America's trucks to enter the landfill on October 27, 28, 29, 30, or 31, and the court convened a hearing on November 1 to decide whether the City and its top officials, including the Mayor, should be held in contempt of court. It heard evidence, concluded that the City had defied the order (it refused Mid-American access even as the hearing continued), and on November 4 ordered defendants to pay fines of $25,000 per day until it restored Mid-American's access under the lease. Gary argued that its actions were justified under the proviso allowing it to enforce valid ordinances because the landfill was out of compliance with state and city health codes, but the judge found "that this 'reason' for terminating the contract ... was concocted after the fact and is pretextual." The fine was retroactive to October 31, a day chosen to avoid any possibility of a penalty for actions before the TRO had been widely circulated.

The same day he held Gary in contempt of court and imposed the fines, the judge began a hearing on Mid-American's motion for a preliminary injunction. This had a happier outcome for defendants. On November 15, 1994, the judge declined to order any further relief and dismissed the action with prejudice, ruling that Mid-American lacks a "property" interest in the contract. Although Mid-American may well be right that the City interfered with its leasehold and air rights, the court held, these are mere contract rights. Only contracts creating a protected status establish the sort of "property" with which the due process clauses of the fifth and fourteenth amendments are concerned. Both sides have appealed: Mid-American insists that the contract establishes full-blooded "property," and defendants ask us to vacate the fines. We start with Mid-American's arguments.

Mid-American reminds us that many of this circuit's cases define "property" by reference to a formula such as: property is whatever is "securely and durably yours ... as distinct from what you hold subject to so many conditions as to make your interest meager, transitory, or uncertain". Reed v. Village of Shorewood, 704 F.2d 943, 948 (7th Cir.1983). See also, e.g., Wallace v. Robinson, 940 F.2d 243, 246-47 (7th Cir.1991) (en banc). If you have a legal entitlement, you have "property." O'Bannon v. Town Court Nursing Center, 447 U.S. 773, 788 n. 21, 100 S.Ct. 2467, 2477, 65 L.Ed.2d 506 (1980); Upadhya v. Langenberg, 834 F.2d 661, 665 (7th Cir.1987). If not, not. Perry v. Sindermann, 408 U.S. 593, 602 n. 7, 92 S.Ct. 2694, 2700, 33 L.Ed.2d 570 (1972); Miller v. Crystal Lake Park District, 47 F.3d 865 (7th Cir.1995). These are among the many efforts to implement the conclusion of Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972), that "property" depends on "a legitimate claim of entitlement", a formula that leads us to the terms of state laws and regulations--and contracts.

Many contracts establish "legitimate claims of entitlement." How could they not? Courts routinely enforce them, awarding damages against those who go back on their word. The Constitution itself protects them; Art. I Sec. 10 cl. 1 provides that "[n]o State shall ... pass any ... Law impairing the Obligation of Contracts". If the state confiscates a leasehold interest, it must pay "just compensation" under the takings clause of the fifth amendment--a provision that has been applied to the states through the due process clause of the fourteenth amendment, Chicago, Burlington & Quincy R.R. v. Chicago, 166 U.S. 226, 233-41, 17 S.Ct. 581, 583-86, 41 L.Ed. 979 (1897), a step that is possible only if leaseholds are "property." Yet the conclusion that all contract rights are property rights does more than protect them from interference under the contracts clause and require compensation under the takings clause; it has the potential to move ordinary contract litigation between private parties and state actors into federal court, despite the lack of diversity jurisdiction, by making every breach of contract case a federal issue. If the plaintiff is right that its contract creates a particular entitlement, the case belongs in federal court; but if the defendant is right, and it is entitled to act as it did, then the case belongs in state court. On this understanding Mid-American is entitled to litigate in federal court only if its leasehold continues till the Gary Landfill is jam packed; if the lease is terminable at will, then Mid-American lacks a "legitimate claim of entitlement" and the case should be dismissed. To decide the threshold question of the existence of "property," the judge must resolve the case on the merits.

Courts have resisted the implication that every government-contract case belongs in federal court. At least three circuits have held that only contracts creating a special status (employment, for example) count as "property." Other contracts--these courts call them "mere" contracts--do not create property and therefore must be enforced in state court. See S & D Maintenance Co. v. Goldin, 844 F.2d 962 (2d Cir.1988); Unger v. National Residents Matching Program, 928 F.2d 1392, 1397-1400 (3d Cir.1991); San Bernardino Physicians' Services Medical Group v. County of San Bernardino, 825 F.2d 1404 (9th Cir.1987). Federal courts using this approach eject business contract cases without regard to the strength of the plaintiff's claim on the merits. The district court, citing Unger, concluded that Mid-American and Gary have a "mere" contract and therefore declined to decide whether the City has broken its promise.

Reconciling cases such as Unger with the positivist model of Roth is hard to do given the Supreme Court's rejection of Justice Rehnquist's bitter-with-the-sweet approach. Cleveland Board of Education v. Loudermill, 470 U.S. 532, 105 S.Ct. 1487, 84 L.Ed.2d 494 (1985); Arnett v. Kennedy, 416 U.S. 134, 94 S.Ct. 1633, 40 L.Ed.2d 15 (1974). If a contract creates rights specific enough to be enforced in ...