State ex rel. Hecht v. City of Topeka

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IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 102,731

STATE OF KANSAS, ex rel. ROBERT D. HECHT, DISTRICT ATTORNEY
THIRD JUDICIAL DISTRICT,
Appellee,

v.

THE CITY OF TOPEKA, KANSAS; NORTON BONAPARTE, CITY MANAGER OF THE CITY OF
TOPEKA; MUNICIPAL SERVICES GROUP, INC.; LAWSON SOFTWARE AMERICAS, INC.;
Appellees,


and SCHREIB-AIR, INC.,
Appellant.


SYLLABUS BY THE COURT

1.
In general, the cash-basis law, K.S.A. 10-1101 et seq., prohibits municipalities
from creating indebtedness in excess of funds actually on hand in the treasury of the
municipality. Contracts entered into by municipalities in violation of the cash-basis law
are void.

2.
When a city signs a contract that it is not legally allowed to enter into, the contract
is ultra vires, void and unenforceable.

3.
If a contract was made in express violation of the law, it is unenforceable and not
even estoppel may save the agreement.

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4.
One contracting with a municipal corporation is bound at his or her peril to know
the authority of the municipal body with which he or she deals.

5.
One of the few authorized exceptions to the proscription against a municipality
creating indebtedness in excess of funds actually on hand in its treasury is a lease-
purchase agreement. But in order for a lease-purchase agreement to be valid under the
cash-basis law, it must be approved by a majority vote of all members of the governing
body of the municipality.

Appeal from Shawnee District Court; LARRY D. HENDRICKS, judge. Opinion filed February 1,
2013. Affirmed.

Thomas M. Rhoads, of Glaves, Irby and Rhoads, of Wichita, argued the cause and was on the
brief for appellant.

Robert J. Perry, special prosecutor, argued the cause, and Chadwick J. Taylor, district attorney,
was with him on the brief for appellees.

The opinion of the court was delivered by

Per Curiam: The City of Topeka attempted to purchase a new police helicopter.
The State filed an action seeking a declaratory judgment that the agreement between the
City and Schreib-Air, Inc. (Schreib-Air), the helicopter dealer, was "invalid, void ab
initio, and ultra vires" in violation of the Kansas cash-basis law, K.S.A. 10-1101 et seq.
The State also requested a writ of quo warranto stating that the City and the city manager
acted without valid and lawful authority and that any agreements entered into as a result
were invalid, unlawful, and void. Ultimately, the district court granted summary
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judgment in favor of the State. Schreib-Air appealed. We transferred the case from the
Court of Appeals to this court pursuant to K.S.A. 20-3018(c). We now affirm.

FACTS

The facts of this case are largely undisputed. On June 26, 2007, the Topeka City
Council adopted Resolution No. 7972 authorizing a lease-purchase agreement between
the City and Municipal Services Group, Inc. (MSG) to finance the purchase of a
Robinson helicopter. That resolution, however, was vetoed by the mayor on July 2, 2007.
The council members in favor of the resolution attempted to override the veto on July 24,
2007, but failed to acquire the necessary six votes to do so.

On December 4, 2007, the council approved by a five-to-three vote a
"communication" authorizing the city manager to enter into a lease-purchase agreement
for the purpose of purchasing the Robinson helicopter. The communication authorized
two contracts: one with Schreib-Air to purchase the helicopter and one with MSG to
finance the purchase. The communication identified the purchase price, the interest rate
for financing the purchase, the total to be paid over 5 years broken down into principal
and interest ($820,371.90: $740,000 principal and $80,371.90 interest), the annual
payment amount ($164,074.38), and the funding source—Topeka Police Department's
operating budget.

The city manager subsequently signed the contract with Schreib-Air on December
6, 2007. Under the terms of that contract, the City agreed to purchase a helicopter from
Schreib-Air for the price of $740,000. The contract also stated that the City would pay a
deposit of $74,000 upon execution of the lease-purchase agreement which could be
retained by Schreib-Air as liquidated damages should the City fail to fulfill the terms of
the contract.
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After the lease-purchase agreement was signed, the mayor vetoed the
communication on December 11, 2007. Despite the veto, on January 4, 2008, Schreib-Air
billed the City for the $74,000 deposit, which the city manager authorized MSG to pay.
Although it is not clear why, in April 2008, the council adopted—by a five-to-four vote—
Resolution No. 8052 authorizing a lease-purchase agreement with MSG to finance the
lease purchase of the Robinson helicopter. Not surprisingly, that resolution was again
vetoed by the mayor.

The State filed suit in Shawnee County District Court seeking a declaratory
judgment that the agreement between the City and Schreib-Air was "invalid, void ab
initio, and ultra vires" because the lease-purchase agreement failed to comply with the
cash-basis law. See K.S.A. 10-1101 et seq. The State also requested a writ of quo
warranto based on its contention that the City and the city manager acted without valid
and lawful authority and that any agreements entered into as a result were invalid,
unlawful, and void.

While the City filed a motion to dismiss, claiming that the issues were moot
because the helicopter was never actually purchased, the district court held that one
issue—whether the City had any obligation to Schreib-Air or MSG—was still viable. In
granting summary judgment in favor of the State, the district court held that the
transactions with Schreib-Air and MSG violated the cash-basis law. Accordingly, the
court ordered that any money given to MSG or Schreib-Air related to the helicopter
purchase was to be returned immediately.

Schreib-Air filed a motion to alter or amend the district court's decision, arguing
that its contract with the City was valid at the time it was signed and that any violations
of the cash-basis law related to the City's financing agreement with MSG, not the contract
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for purchase. Additionally, Schreib-Air argued that the payment it received was from
MSG, not the City; therefore, Schreib-Air had no obligation to the City to return the
deposit. Instead, it suggested that the City's obligation, if any, was to MSG alone.
Schreib-Air maintained that the sale of the helicopter was a valid and lawful agreement
"regardless of any alleged failure by the City and MSG to fund the purchase legally [and]
[t]he fact that the City was unable to obtain the financing it preferred [did] not render the
contract invalid." The district court found Schreib-Air's arguments disingenuous. The
court reasoned that knowledge that the authorization for purchase could be vetoed by the
mayor based on the mayor's prior veto and the city ordinances regarding the city
manager's power to contract was imputed to Schreib-Air.

Schreib-Air timely appealed the district court's decision.

ANALYSIS


On appeal, Schreib-Air argues that the district court erred in granting summary
judgment in favor of the State based on its conclusion that Schreib-Air's lease-purchase
agreement with the City for the sale of the helicopter violated the cash-basis law and was
thus ultra vires. Schreib-Air contends that its agreement with the City was a distinct and
valid contract at the time of its execution on December 6, 2007, and that any possible
violations of the cash-basis law were attributable only to the City's financing contract
with MSG. Accordingly, Schreib-Air argues that it is entitled to keep the $74,000 deposit
it received pursuant to the lease-purchase agreement with the City.

Our standard of review for a district court's grant or denial of a motion for
summary judgment is well established:

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"Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law. The trial court is required to resolve all facts and inferences which may
reasonably be drawn from the evidence in favor of the party against whom the ruling is
sought. When opposing a motion for summary judgment, an adverse party must come
forward with evidence to establish a dispute as to a material fact. In order to preclude
summary judgment, the facts subject to the dispute must be material to the conclusive
issues in the case. On appeal, we apply the same rules and where we find reasonable
minds could differ as to the conclusions drawn from the evidence, summary judgment
must be denied." Miller v. Westport Ins. Corp., 288 Kan. 27, Syl. ¶ 1, 200 P.3d 419
(2009).

Furthermore, "[t]he interpretation and legal effect of a written contract are matters
of law over which an appellate court has unlimited review. [Citation omitted.] Regardless
of the district court's construction of a written contract, an appellate court may construe a
written contract and determine its legal effect. [Citation omitted.]" Shamberg, Johnson &
Bergman, Chtd. v. Oliver, 289 Kan. 891, 900, 220 P.3d 333 (2009).

In general, the cash-basis law prohibits municipalities from creating indebtedness
in excess of funds actually on hand in the treasury of the municipality. K.S.A. 10-1112.
Contracts entered into by municipalities in violation of the cash-basis law are void.
K.S.A. 10-1119; State ex rel. Tomasic v. Unified Gov't of Wyandotte County/Kansas City,
265 Kan. 779, 803, 962 P.2d 543 (1998). When a city signs a contract that it is not legally
allowed to enter into, the contract "is ultra vires in the sense that it is not within the power
of the municipality to make." Genesis Health Club, Inc. v. City of Wichita, 285 Kan.
1021, Syl. ¶ 7, 181 P.3d 549 (2008). If a contract was made in express violation of the
law, the contract is unenforceable and not even estoppel may save the agreement.
Genesis, 285 Kan. 1021, Syl. ¶ 9; cf. Petty v. City of El Dorado, 270 Kan. 847, 854, 19
P.3d 167 (2001) (contracts in contravention of public policy are generally void and
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unenforceable). Finally, "[o]ne contracting with a municipal corporation is bound at his
or her peril to know the authority of the municipal body with which he or she deals."
Genesis, 285 Kan. 1021, Syl. ¶ 8.

In December 2007, the City agreed to purchase a helicopter from Schreib-Air for
$740,000. The City would pay Schreib-Air a deposit of $74,000 at the time of signing
and pay the remaining $666,000 upon delivery of the helicopter. The contract provided
that Schreib-Air could keep the $74,000 deposit as liquidated damages should the City
fail to fulfill the terms of the contract.

Notably, Schreib-Air does not contend, and there is nothing in the record to
suggest, that the City had more than $740,000 in its treasury on December 6, 2007, for
the purpose of purchasing the helicopter. Accordingly, unless the City incurred the
indebtedness contemplated in the Schreib-Air contract pursuant to an exception to the
cash-basis law, the contract was entered into in violation of the law, rendering it void and
unenforceable. See K.S.A. 10-1112 ("Unless otherwise provided in this act, it shall be
unlawful . . . for the governing body of any municipality to create any indebtedness in
excess of the amount of funds actually on hand in the treasury of such municipality at the
time for such purpose . . . ."); K.S.A. 10-1119 ("Any contract entered into between the
governing body of any municipality and any person, which violates the provisions of this
act, shall be void, and any order, warrant, check or other evidence of indebtedness drawn
on the treasurer of any municipality in violation of the provisions of this act shall be
void.").

There are a few authorized exceptions to the proscription against a municipality
creating indebtedness in excess of funds actually on hand in its treasury. One of those
exceptions is a lease-purchase agreement. K.S.A. 10-1116b states:

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"Nothing in the provisions of K.S.A. 10-1101 et seq., and amendments thereto,
shall prohibit a municipality from entering into . . . (3) a lease-purchase agreement, if any
of such agreements specifically state that the municipality is obligated only to pay
periodic payments or monthly installments under the agreement as may lawfully be made
from (a) funds budgeted and appropriated for that purpose during such municipality's
current budget year or (b) funds made available from any lawfully operated revenue
producing source. For the purpose of this act, a lease-purchase agreement shall include a
lease with an option to buy or an installment-purchase agreement."

The parties agree that the City's contract with MSG to finance the purchase of the
helicopter was a lease-purchase agreement. But in order for such an agreement to be valid
under the cash-basis law, it must be approved by "a majority vote of all members of the
governing body." (Emphasis added.) K.S.A. 10-1116c(a). The compilation of charter
ordinances appended to the Topeka City Code clearly defines the governing body as a
"ten (10) member body consisting of nine (9) district Council members and one (1)
Mayor." Appendix A—Compilation of Charter Ordinances, Sec. A2-21(a). Additionally,
section A2-30(c) requires there be approval by a majority vote of more than five council
members if statutorily required. Thus, under the plain language of K.S.A. 10-1116c and
the City Code six affirmative votes from the governing body were needed to authorize the
agreement with MSG.

The facts clearly show that the lease-purchase agreement with MSG was never
approved by six affirmative votes. The city council could only muster five votes in favor
of the lease-purchase agreement with MSG, and the mayor repeatedly vetoed the
agreement. Accordingly, the agreement with MSG was never validly authorized under
the cash-basis law, rendering that agreement void. Consequently, without a valid means
of financing the purchase of the helicopter, the City's agreement with Schreib-Air was
ultra vires, void, and unenforceable due to the agreement being entered into in violation
of the cash-basis law. See K.S.A. 10-1112; K.S.A. 10-1119.
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We reached a similar conclusion in Genesis. In that case, a health club claimed a
breach of contract and asserted the doctrine of promissory estoppel against the City of
Wichita when the city failed to issue certain bonds and tax abatements pursuant to a letter
of intent issued by the city to the health club. This court determined that the city's failure
to comply with a statutory notice requirement prevented the city's letter of intent to issue
the bonds and tax abatements from being considered an enforceable agreement.
Specifically, the court reasoned that where the notice requirement was unmet, the city
had no power to issue the bonds and, thus, no power to approve a letter of intent.
Accordingly, we concluded that the agreement was ultra vires, a failing that could not be
overcome by promissory estoppel despite the fact that the health club had spent more
than $1 million in reliance on the letter of intent. Genesis, 285 Kan. at 1029, 1041-43.

Like the letter of intent contemplated in Genesis, Schreib-Air's agreement with the
City was void when entered into because the City failed to satisfy the statutory conditions
that would allow it to purchase the helicopter. Specifically, the City was either required to
have at least $740,000 in its treasury for the purpose of buying the helicopter, see K.S.A.
10-1112, or it was required to secure financing for the purchase of the helicopter in
compliance with the cash-basis law. Because neither of these conditions was met prior to
the City entering into the agreement with Schreib-Air, the contract was made in violation
of the cash-basis law and, consequently, the contract is unenforceable. See Genesis, 285
Kan. 1021, Syl. ¶ 6 ("If a municipal corporation enters into a contract it has no power to
make, it is ultra vires and unenforceable and no further inquiry into the contract's validity
is necessary.").

Affirmed.


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MORITZ, J., not participating.
DANIEL A. DUNCAN, District Judge, assigned.
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1
REPORTER'S NOTE: District Judge Duncan was appointed to hear case No. 102,731
vice Justice Moritz pursuant to the authority vested in the Supreme Court by Art. 3, § 6(f)
of the Kansas Constitution.