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Turken v. NPP CityNorth, L.L.C. - 1/25/2010

Arizona Supreme Court Holds that Courts May Not Consider Indirect, Non-Contractual Public Benefits in Determining Whether the Public Benefit to be Obtained from a Private Entity Under a Public Contract Is So Far Exceeded by the Consideration Paid by the Public that the Agreement Violates the Arizona Constitution’s Gift Clause.

Taxpayers sued the City of Phoenix, seeking to enjoin payments to a developer under an agreement with the City (“the Parking Agreement”).  The Parking Agreement provided for the City’s use of certain parking spaces at a planned mixed-use commercial and residential development project, in exchange for payments of as much as $97.4 million over more than eleven years.  The superior court granted summary judgment for the defendants, finding that the Parking Agreement did not violate the Arizona Constitution’s Gift Clause because the payments to the developer (1) served a public purpose and (2) were not excessive in view of the expected public benefit, including anticipated tax revenues from the development.

The Court of Appeals reversed, finding the Parking Agreement violated a third prong of the required test for alleged Gift Clause violations because it unduly promoted private interests.  The City and developer petitioned for review, which the Arizona Supreme Court granted.

The Supreme Court vacated the Court of Appeals’ opinion, holding that the third prong of the Court of Appeals’ Gift Clause analysis was not appropriate under the applicable test, set forth by Wistuber v. Paradise Valley Unified Sch. Dist., 141 Ariz. 346, 687 P.2d 354 (1984).  The Court also held, however, that courts applying the Wistuber test should not factor in any indirect, non-contractual public benefits, such as anticipated increased tax revenues, in determining whether the consideration to be paid by the public is grossly disproportionate to the public benefit received in exchange.  When conducting this analysis, courts should instead consider the objective value of only the specific consideration promised by the developer under the agreement – in this case, the parking spaces.    

Although the Court did not overrule any of its prior decisions, it determined that its ruling should apply prospectively only because the Court’s Wistuber test had been subject to contrary interpretation and was widely misunderstood.  The Court affirmed the superior court’s dismissal of the Gift Clause claim and remanded to the Court of Appeals for consideration of other constitutional arguments not previously decided.

Justice Hurwitz wrote the opinion for the unanimous Court.

Posted By: Mark P. Hummels 

Posted On: 1/26/2010