23 F.4th 550
5th Cir.2022Background
- Hutto partnered with Cottonwood (a local development corporation) to attract a corporate headquarters and planned a 253-acre mixed-use project; Preston Hollow was engaged to arrange financing.
- The parties agreed in principle to a $35 million financing; Preston Hollow funded an initial $15 million in two disbursements ($12,445,038.24 to Cottonwood and $2,554,961.76 held in escrow pending conditions).
- Disputes arose when Cottonwood sought escrow disbursement before conditions were satisfied; Preston Hollow declared default, sought return of funds, and threatened nonjudicial foreclosure on secured parcels.
- Cottonwood and the city responded that the loan documents were void or voidable under state law and refused to return funds; Cottonwood’s board passed a resolution calling the transaction legally defective.
- Preston Hollow sued under 42 U.S.C. § 1983, alleging a Fifth Amendment taking; the district court dismissed for failure to state a plausible takings claim, and the Fifth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether refusal to return the $15M is a Fifth Amendment taking | The withholding is a taking of Preston Hollow’s property rights in its money | The conduct was contractual/commercial (not sovereign) and any dispute is breach of contract | Court: Conduct was commercial; claim sounds in contract; dismissal affirmed |
| Whether Knick altered substantive takings law to transform contract claims into takings | Knick allows takings suits in federal court and undermines the government-contract distinction | Knick addressed ripeness (procedural), not what qualifies as a taking (substantive) | Court: Knick is procedural only; it does not convert contract breaches into takings |
| Whether Preston Hollow retained an independent pre-existing property right in the funds | Preston Hollow had pre-existing title to its money, so the taking predates the contract | Preston Hollow exchanged that title for contractual rights (note, promissory note, liens, indemnity) | Court: Rights are governed by the contract; no independent pre-contract property interest |
| Whether lack of state-law remedies permits a takings claim | Absence of viable state remedies leaves takings as the only federal option | Availability of remedies is irrelevant; government must act in sovereign capacity to effect a taking | Court: Even if remedies were lacking, alleged acts were commercial, not sovereign; not a taking |
Key Cases Cited
- Knick v. Township of Scott, 139 S. Ct. 2162 (2019) (holds ripeness rule changed: takings claims cognizable in federal court immediately)
- Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985) (former ripeness rule requiring exhaustion of state remedies)
- Massó-Torrellas v. Municipality of Toa Alta, 845 F.3d 461 (1st Cir. 2017) (municipal contract terminations/detentions are not takings absent sovereign action)
- Horowitz v. United States, 267 U.S. 458 (1925) (government’s distinct contractual and sovereign characters cannot be conflated)
- Hughes Commc’ns Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001) (government acts in commercial/proprietary capacity when contracting)
- Braden v. Texas A & M Univ. Sys., 636 F.2d 90 (5th Cir. 1981) (Section 1983 does not convert every state-agency contract breach into a federal claim)
- St. Christopher Assocs., L.P. v. United States, 511 F.3d 1376 (Fed. Cir. 2008) (when government’s acts are commercial, relief lies in contract law, not takings law)