© 2015 The Texas Lawbook.
By Janet Elliott
AUSTIN (March 30) – A $19 million mineral lease fight between the city of Dallas and Trinity East Energy could be impacted by a pair of appeals pending before the Texas Supreme Court that question a municipality’s immunity from breach of contract suits.
Lawyers for Dallas and the oil and gas producer have filed amicus briefs in the two cases heard by the Supreme Court earlier this year. One issue before the court is whether a government that engages in activity that could be deemed proprietary – a function that a private entity could perform – waives a municipality’s immunity. The issue has divided the state’s intermediate courts of appeals.
City officials say their ability to raise an immunity defense in breach-of-contract claims allows them to predict the maximum financial exposure of any given contract. Entities that contract with cities say blanket immunity could make it more difficult and expensive for cities to find qualified contractors willing to risk the danger that the city could default on terms of a contract.
The first case, which was heard by the justices on Jan. 14, involves a lease for property located on Lake Jacksonville in East Texas. The second case centers on a dispute over attorney fees in a long-running lawsuit over work on a power plant owned by San Antonio’s public electric utility.
In the property case, Wasson Interests Ltd. sued the city for terminating its lease following a dispute over its use of the property for short-term rentals. The 12th Court of Appeals upheld a summary judgment ruling in favor of Jacksonville. The Tyler court said the Supreme Court has never held that the proprietary-governmental distinction that has been applied in tort cases also applies to breach-of-contract claims.
Craig Enoch, who represents San Antonio’s City Public Service Board, or CPS, said there is a lot of interest in the cases because the Texas Legislature has limited sovereign immunity in some contract cases.
Court Looks to Proprietary Dichotomy for 130 Years
Enoch said that it might make sense to waive immunity in tort cases because it makes little difference to someone who is injured whether their car was hit by a truck owned by the city or a private party.
“In the contracting sphere, you can choose whether to contract with a government or not, so that dichotomy doesn’t make sense,” said Enoch, a former justice who is now in private practice with Enoch Kever.
C. Thomas Kruse, a Houston partner in BakerHostetler, represents Wheelabrator Air Pollution Control Inc., which in 2004 entered into a design and construction contract for work on a power plant. The company claims that CPS owes it $4.1 million plus attorneys’ fees that have mounted into hundreds of thousands of dollars.
Kruse said that Texas courts, for more than 130 years, have used the distinction between whether a function was proprietary or governmental in deciding whether a city should be immune from suit.
“The legal rule the court should adopt is that CPS as a proprietary function municipality does not enjoy default immunity for breach of contract and attorney fees,” Kruse said.
In a first appeal decided in 2012, San Antonio’s 4th Court of Appeals determined that a proprietary function waiver did not apply to the contract claim. On remand, the trial court granted the city’s jurisdictional plea and dismissed Wheelabrator’s claims for attorneys’ fees that the company says have mounted into hundreds of thousands of dollars.
In November 2014, the court of appeals, relying on its opinion in Wheelabrator, reasoned that because the Texas Legislature expressly addressed the proprietary-governmental dichotomy for tort claims, the Legislature’s silence on contract claims means that the proprietary function doctrine does not apply.
Parties in Dallas Mineral Lease Dispute File Briefs
Wheelabrator and Wasson are supported by Trinity East Energy, which filed a lawsuit in 2014 against Dallas over a mineral lease agreement. The company said it paid the city $19 million in 2008 for the lease only to have the city council later reject Trinity’s drilling permit. The city has claimed immunity from the suit.
If a city cannot be held liable for its proprietary actions, “municipalities will not be able to find qualified parties to contract with because the default risk will be too high” and the expense of municipal contracts will greatly increase, Trinity East said in an amicus brief filed by Art Anderson, a Winstead Dallas shareholder.
Dallas officials, in amicus briefs supporting CPS and Jacksonville, said cities tailor contracts to ensure predictability of liability for the services or goods procured.
“The Texas constitution and statutes acknowledge the need for certainty through the treatment of governmental immunity for contract claims and the prohibition of unfunded debts by local governments,” the brief states.
The cases are Wasson Interests Ltd. v. City of Jacksonville, No. 14-0645 and Wheelabrator Air Pollution Control Inc. v. City of San Antonio, No. 15-0029.
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