Contract, Not Takings: Fifth Circuit Holds Municipal Refusal to Extend a Development Agreement Is Commercial (Non‑Sovereign) Conduct

Introduction

In Mesquite Asset Recovery Group, L.L.C. v. City of Mesquite, Texas, the United States Court of Appeals for the Fifth Circuit affirmed dismissal of developers’ federal takings and declaratory-judgment claims arising from a public-private development arrangement for floodplain property in Mesquite, Texas. The core dispute centered on the City’s refusal to extend a Master Development Agreement (MDA) that contained a five-year automatic-termination clause tied to permitting milestones, including a FEMA-related CLOMR requirement the City later insisted upon. When the developers could not satisfy the MDA conditions before expiration, the City treated the MDA as terminated, which also ended any reimbursement obligation.

The developers sued, alleging inverse condemnation under the federal and Texas constitutions, breach of contract, and violations of Texas’s Vested Rights Statute, and sought declaratory relief. The district court dismissed the federal takings and declaratory-judgment claims and remanded the remaining state claims. On appeal, the Fifth Circuit agreed that the City’s conduct “sounded in contract,” not in sovereign action, and therefore could not support a Fifth Amendment takings claim. The court also held the district court acted within its discretion to decline declaratory relief under the federal Declaratory Judgment Act because the remanded state case would resolve the parties’ rights.

Summary of the Opinion

• The Fifth Circuit affirmed dismissal of the federal takings claim, holding the developers did not plausibly allege the City acted in a sovereign capacity rather than its commercial, contracting capacity. A dispute over whether a municipality will honor, extend, or renegotiate contractual terms is a contractual dispute, not a constitutional taking.
• The court declined to apply a rigid “contract-first” sequencing rule in evaluating alternative breach-of-contract and takings theories where plaintiffs sought no contract damages—explaining constitutional avoidance and damages-efficiency concerns did not compel addressing the contract claim first, and the initial inquiry for both claims effectively merged.
• The court affirmed dismissal of the federal Declaratory Judgment Act claim, concluding the district court acted within its discretion to decline declaratory relief in light of the remanded, parallel state action that would fully resolve the same contract and state-law issues.

Case Background

The developers acquired 60.31 acres, mostly within a flood zone. They obtained from the City a variance that waived the obligation to secure a FEMA Conditional Letter of Map Revision (CLOMR), an advisory assessment often costly and time-consuming. The parties later updated their arrangements in 2018 through an MDA and a linked Reimbursement Agreement with the City and the Mesquite Medical Center Management District. The MDA acknowledged completion of a bridge project and contemplated reimbursement but included a strict five-year automatic-termination clause unless specified conditions precedent (including permits and inspections) occurred; termination would end reimbursement obligations.

As the five-year date neared, the City asserted an ordinance enacted after the variance now required a CLOMR. The developers claimed they lacked time to obtain one and sought an extension. The City Council declined to alter the MDA. The City notified the developers in June 2023 that the MDA had terminated. The developers sued for inverse condemnation (federal and state), breach of contract, declaratory relief (including under the Texas Declaratory Judgments Act), and attorneys’ fees, as well as under the Texas Vested Rights Statute. After removal, the district court dismissed the federal takings claim and the now-federal declaratory-judgment claim, and remanded the state claims. The Fifth Circuit affirmed.

Detailed Analysis

1. Precedents Cited and Their Influence

• Preston Hollow Capital, L.L.C. v. Cottonwood Dev. Corp., 23 F.4th 550 (5th Cir. 2022): The Fifth Circuit reiterated Preston Hollow’s core principle: when a government enters contracts in a commercial/proprietary capacity, disputes over its performance are treated as ordinary contract matters; they do not morph into takings claims simply because the counterparty is a municipality. The court relied on Preston Hollow’s “sounds in contract” framing to determine the threshold characterization of the dispute.
• Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001): Quoted for the proposition that government contracting in a commercial capacity is not acting in its sovereign capacity; remedies lie in contract, not takings. The Fifth Circuit imported this long-standing Federal Circuit approach to the contract/takings divide.
• Massó-Torrellas v. Municipality of Toa Alta, 845 F.3d 461 (1st Cir. 2017): Cited for the idea that breaches that would be ordinary breaches for private parties remain ordinary breaches for municipal entities; they do not become constitutional deprivations merely because a municipality is involved.
• Century Exploration New Orleans, Inc. v. United States, 103 Fed. Cl. 70 (2012), and Stockton East Water District v. United States, 583 F.3d 1344 (Fed. Cir. 2009), reh’g in part, 638 F.3d 781 (Fed. Cir. 2011): The court recounted the Federal Claims/Federal Circuit practice of addressing breach-of-contract claims first when breach and takings are pleaded in the alternative, primarily to avoid unnecessary constitutional rulings and duplicative damages. Here, however, those prudential reasons did not compel contract-first sequencing.
• Pathfinder Oil & Gas, Inc. v. Great Western Drilling, Ltd., 574 S.W.3d 882 (Tex. 2019): Cited to note that under Texas law a breach-of-contract claim first requires a valid contract. The Fifth Circuit observed that in this case the threshold issues for both breach and takings analyses effectively converge around the nature of the alleged wrong (contractual versus sovereign).
• Kopplow Development, Inc. v. City of San Antonio, 399 S.W.3d 532 (Tex. 2013): The developers’ primary counter-authority. The Fifth Circuit distinguished Kopplow: there, the plaintiff had no relevant contract with the city; the city’s flood-plan change was purely regulatory (sovereign) conduct with potential takings implications. Here, by contrast, the acts complained of were refusals to alter contractual obligations and enforcement of a contract’s automatic-termination feature.
• Pleading and review standards: Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard); Cody v. Allstate Fire & Casualty, 19 F.4th 712 (5th Cir. 2021), and Mayfield v. Currie, 976 F.3d 482 (5th Cir. 2020) (de novo review of Rule 12(b)(6)).
• Declaratory judgment discretion: Wilton v. Seven Falls Co., 515 U.S. 277 (1995) (broad discretion to decline declaratory relief); Rowan Cos., Inc. v. Griffin, 876 F.2d 26 (5th Cir. 1989), and St. Paul Ins. Co. v. Trejo, 39 F.3d 585 (5th Cir. 1994) (factors guiding dismissal); Sherwin-Williams Co. v. Holmes County, 343 F.3d 383 (5th Cir. 2003) (parallel state proceedings and state-law predominance support dismissal); Orix Credit Alliance, Inc. v. Wolfe, 212 F.3d 891 (5th Cir. 2000) (broad discretion emphasized).

2. The Court’s Legal Reasoning

a. The “Sovereign versus Commercial” Threshold

The linchpin of the Fifth Circuit’s analysis is the capacity in which the City acted. A takings claim requires the government to act in its sovereign capacity—exercising public authority to appropriate or regulate property. When the government is merely a market participant, entering or enforcing agreements, it is treated like a private contracting party. Here:

• The developers’ alleged injuries arose because the City declined to “honor” a prior variance by insisting upon a CLOMR and declined to extend or change the MDA’s terms when the developers could not meet conditions by the five-year deadline.
• Those choices were embedded in, and inseparable from, the parties’ contract—especially the MDA’s self-executing termination clause and reimbursement provisions. Refusing to renegotiate or extend a contract is commercial behavior.
• The fact that only a governmental body can alter ordinances or floodplain regulation does not convert all actions that affect contract performance into sovereign takings. What matters is the nature of the alleged wrong: here, it was the City’s refusal to change its contract and its reliance on an automatic termination provision.

By contrast, in settings where a government changes a regulatory framework and thereby imposes a burden independent of any contract, the action may be sovereign (as in Kopplow). But this case, as pleaded, did not present such a freestanding regulatory injury. It presented a failed effort to secure contract relief.

b. Sequencing of Alternative Contract and Takings Claims

Ordinarily, when plaintiffs plead breach-of-contract and takings claims in the alternative, courts address the contract claim first to avoid unnecessary constitutional adjudication and damages overlap, drawing from Federal Claims/Federal Circuit practice. The Fifth Circuit explained it did not need to take that path here because:

• The developers sought only declaratory relief and attorneys’ fees on the contract side—not contract damages—so overlapping compensation concerns were not implicated.
• Constitutional avoidance did not drive the analysis because the threshold inquiry (does the controversy sound in contract or sovereignty?) is essentially the same gatekeeping question for both claims.

The court thus proceeded directly to the takings claim and concluded it failed because the City’s conduct was commercial/contractual.

c. Declaratory Judgment Discretion

Upon removal, the state declaratory-judgment claim became a federal Declaratory Judgment Act claim. The district court declined to entertain it, reasoning that the remanded state action (addressing the contract and state-law claims, including the Texas Vested Rights Statute) would resolve the parties’ rights. The Fifth Circuit affirmed under the Wilton/Brillhart framework:

• Federal courts have “broad discretion” to decline declaratory relief when parallel state proceedings will resolve the same predominantly state-law issues.
• The “core issues”—existence, enforceability, and breach of the MDA; and state vested-rights contentions—are quintessentially state-law questions that can be fully adjudicated in the remanded case.
• The district court did not abuse its discretion by dismissing the declaratory-judgment claim in favor of the state forum.

3. Impact and Forward-Looking Consequences

a. Government Contracts and Inverse Condemnation

Mesquite underscores and clarifies a durable boundary: disputes arising from public improvement agreements or development agreements—especially refusals to extend deadlines, modify conditions precedent, or adjust reimbursement terms—“sound in contract,” not in takings. Parties cannot convert a failed renegotiation and automatic termination into a constitutional claim for just compensation simply because the counterparty is a city or because background municipal regulations change.

Practically, developers challenging municipal actions tied to a development agreement must:

• Identify an independent sovereign act that appropriates or substantially burdens property rights apart from contractual performance (e.g., new regulation directly restricting use or access unrelated to the contract’s terms); and
• Show a cognizable property interest impacted by sovereign action that is not merely the loss of a contractual expectancy or reimbursement right due to a contract’s own termination mechanism.

b. Litigation Strategy for Alternative Claims

The opinion also signals flexibility in sequencing when both contract and takings are pleaded. If a plaintiff seeks only non-monetary contract remedies (declaratory relief/fees), a court may proceed to the takings analysis first when the threshold characterization overlaps. That cuts against any assumption that a “contract-first” protocol is obligatory in the Fifth Circuit, and it cautions plaintiffs that reconfiguring a dispute as a takings claim will be scrutinized at the pleadings stage for sovereign—as opposed to commercial—conduct.

c. Municipal Practice and P3/Development Agreements

Municipalities retain strong protection against takings liability when they act as contracting parties—denying extensions, enforcing deadlines, and invoking automatic termination provisions. To minimize litigation risk:

• Agreements should clearly state conditions precedent and automatic-termination consequences, and expressly link reimbursement obligations to satisfaction of those conditions.
• Variances or waivers (e.g., of CLOMR) should be integrated or cross-referenced in the contract with precise survival, modification, or revocation terms, clarifying whether later ordinances affect prior waivers and how conflicts are resolved.

For developers, Mesquite is a reminder to negotiate robust vesting, force majeure, reopener, and extension clauses to accommodate potential regulatory shifts in long-horizon projects—especially those in floodplains or other heavily regulated contexts.

d. Federal Declaratory Judgment Practice after Removal

The decision reinforces that federal courts may—and often will—decline declaratory relief when parallel state proceedings predominate and are fully capable of resolving the parties’ dispute. Parties who seek federal declarations tied to contract and state-law issues should anticipate Wilton/Brillhart abstention, particularly when a state case is already pending or is being remanded.

Complex Concepts Simplified

• Inverse Condemnation: A claim that the government has effectively taken private property for public use without formally exercising eminent domain, requiring “just compensation” under the Fifth Amendment (applied to states via the Fourteenth). The plaintiff must identify a government act in its sovereign capacity that appropriates or unduly burdens a protected property interest.
• Sovereign vs. Commercial/Proprietary Capacity: When government regulates, legislates, or otherwise acts with public authority, it acts “sovereignly.” When it enters and performs contracts (buying, selling, hiring, agreeing), it acts “commercially,” like a private party. Breaches or refusals to renegotiate contracts are remedied in contract, not via takings.
• CLOMR (Conditional Letter of Map Revision): A FEMA advisory assessment of a proposed project’s effect on floodplains and floodways. Obtaining a CLOMR can be time-consuming and costly; local governments may require it as a prerequisite to development.
• Master Development Agreement (MDA) with Conditions Precedent: A contract governing development obligations. Conditions precedent are milestones that must occur before certain duties (like reimbursement) arise. If an MDA includes an automatic-termination clause upon failure to meet conditions by a deadline, the contract may self-terminate, extinguishing dependent obligations.
• Texas Vested Rights Statute (Tex. Local Gov’t Code ch. 245): Provides that development projects are generally governed by regulations in effect at the time of the first permit application (subject to exceptions). In Mesquite, those state-law claims were remanded and were not decided by the Fifth Circuit.
• Federal Declaratory Judgment Act Discretion (Wilton/Brillhart): Federal courts may decline to issue declarations when parallel state proceedings can fully resolve the issues, especially when state law predominates and federal interests are minimal. After removal, state declaratory claims are treated under the federal Act, and discretionary dismissal remains available.

Conclusion

Mesquite Asset Recovery Group v. City of Mesquite reaffirms a critical boundary between contract law and constitutional takings doctrine: a municipality’s refusal to extend or renegotiate the terms of a development agreement, and its enforcement of an automatic-termination clause, is commercial conduct that “sounds in contract,” not sovereign action that can ground a federal takings claim. The Fifth Circuit also clarified that it need not apply a rigid “contract-first” sequencing rule in all cases where breach and takings are pleaded in the alternative, particularly when plaintiffs do not seek contract damages and the threshold inquiry overlaps.

For practitioners, the decision underscores the importance of pleading a sovereign act independent of the contract when asserting inverse condemnation in the context of government agreements. It also highlights the federal courts’ broad discretion to decline declaratory relief in favor of ongoing state proceedings addressing contract and state-law issues. Going forward, Mesquite will be a touchstone in the Fifth Circuit for distinguishing regulatory takings from garden-variety contract disputes in public-private development projects.