Background
Beginning in 2017, developer Justin Mandelbaum and his entities (collectively, “the Developers”) entered into a Development Agreement with the City of Des Moines to construct a mixed-use urban project in downtown Des Moines: a parking garage, a forty-story residential tower with a hotel, and an upscale dine-in movie theater complex. The City facilitated the deal through forgivable loans, tax incentives, and bond financing. Disputes over design changes and amendment negotiations caused repeated delays throughout 2018 and 2019, with the City informally deferring default notices while pressing the Developers to accept increasingly onerous amendment terms, including a $4–5 million escrow requirement and a receivership mechanism the Developers characterized as a “shakedown.”
In March 2020, the COVID-19 pandemic struck. The Developers timely invoked the Development Agreement’s force majeure clause (Section 10.4), citing the pandemic’s collapse of financing markets. The City disputed the applicability of the force majeure provision and refused to rescind default notices it issued in June 2020 for the Developers’ failure to begin Tower or Theater construction by the October 31, 2019 deadline. The City’s default notices triggered a crisis with the Developers’ construction lender, Bankers Trust, which refused to extend its loan absent compliance with the Development Agreement. The loan matured on August 31, 2020, the Bank commenced foreclosure, and the City ultimately purchased the parking garage through receivership proceedings, extinguishing the Developers’ debt but also foreclosing their ability to earn a development fee or retain construction savings.
The Developers sued the City for breach of contract and tortious interference with their bank loan. The City counterclaimed for fraud, breach of contract, and other relief, and brought a third-party claim against Justin Mandelbaum personally. After a bench trial, the district court entered judgment for the Developers on breach of contract and tortious interference, while rejecting the remaining claims of both sides. Both parties appealed.
The Court’s Holding
The Iowa Supreme Court affirmed the district court’s breach of contract judgment against the City and upheld the damages award of $4,353,677. Applying a deferential standard of review, the court found substantial evidence supporting the trial court’s factual findings that the City breached the Development Agreement. The court also affirmed the district court’s rejection of the parties’ additional claims, including the City’s counterclaims against the Developers and Justin Mandelbaum personally.
However, the court vacated the district court’s judgment on the Developers’ tortious interference with contract claim. While the breach of contract liability and corresponding damages survived, the tort claim could not stand alongside or in addition to the contract remedy on the record presented.
Key Takeaways
- A city that issues default notices under a development agreement—when force majeure conditions exist and cure rights have not been afforded—can face breach of contract liability as if it were a private party, consistent with the agreement’s express terms waiving governmental immunity for contract breaches.
- The COVID-19 pandemic, depending on the contract’s force majeure language and the parties’ notice and mitigation conduct, can constitute an “enforced delay” excusing performance obligations under real estate development agreements.
- Tortious interference claims do not automatically survive alongside breach of contract judgments; where a tort claim is grounded in the same conduct as the breach, courts may vacate the tort recovery even while sustaining the contract damages.
- Trial court factual findings in bench-tried cases are binding on appeal if supported by substantial evidence, viewed in the light most favorable to the judgment—a standard that significantly limits appellate reversal of fact-intensive commercial disputes.
Why It Matters
This decision is a significant reminder to Iowa municipalities that development agreements containing explicit waivers of governmental immunity for contract breaches will be enforced against the city just as against any private counterparty. Cities that leverage default-notice authority as a negotiating tool—particularly when a pandemic or other force majeure event is in play—risk substantial money-damages liability if a court finds the defaults were wrongfully declared or the cure process was not followed.
For developers and their lenders, the case illustrates how a municipality’s refusal to rescind contested default notices can cascade into loan maturity crises, receivership, and total project loss. It also underscores the importance of timely and detailed force majeure notices and diligent mitigation documentation, since the court’s analysis turned heavily on the factual record compiled at trial.