On August 27, 2010, the Texas courts released two opinions related to water utilities. Since I am spending more time in Texas now and believe the state’s water resource laws and policies will be changing rapidly in the coming years and deserve attention, I plan to provide periodic updates of Texas water law via this blog.

Kirby Lake Development

The first opinion was the Texas Supreme Court decision in Kirby Lake Development, Ltd. v. Clear Lake City Water Authority, Case No. 08-1003 (2010), which hopefully will resolve a dispute that has been percolating through the courts since 1999. The case relates to prefunding agreements for construction of water utility infrastructure between four development companies and the Clear Lake City Water Authority (CLCWA), located in the Houston metropolitan area. Under those agreements, the developers agreed to construct all water infrastructure needed to serve their respective projects, in exchange for CLCWA assuming water utility service obligations.

The parties acknowledged that CLCWA had no funds available at the time to reimburse the developers for water infrastructure, and that funds could only be raised through the issuance of bonds following voter approval. Therefore, the agreements provided that the developers would lease all water utility infrastructure to CLCWA free of charge until CLCWA had raised the purchase funds.  CLCWA agreed to submit the issuance of  bonds to the voters as a ballot measure in “any bond election it does hold subsequent to the effective date of” the agreements. If the voters approved the issuance of bonds, then CLCWA would purchase the water infrastructure from the developers.

Pursuant to the agreements, CLCWA submitted the issuance of bonds to voters on three occasions, but it asserted that only once was required under the agreements. During the last election, board members at CLCWA actively campaigned against passage of the bonds, and, unsurprisingly, the measures failed each time. The developers sued, claiming that CLCWA had breached its contracts by refusing to place the bond measures on the ballot in every bond election held by the district. Thus, the dispute came down to whether the word “any” as used in these agreements meant a single election or every election following execution of the agreements. As the Court stated, “[w]ater lies beneath the surface of today’s case, yet our holding is based on a rule of grammar, not capture.”

In its decision, the Court noted that the word “any” can be used in different contexts to mean either singular or plural instances. While the agreements do not provide unambiguously how “any” should be interpreted, the Court held that their overall structure and purpose was to construct facilities that CLCWA would ultimately purchase from the developers and own as part of its water system. In addition, the Court held that unless CLCWA were required to continue submitting bond measures to the voters, the developers would have essentially forfeited their interest in facilities they built and paid for, and Texas law disfavors such forfeitures. (Having practiced in other states as well, I note that not every state court would be as likely to protect the interests of private parties versus local government.)

The Court also held that:

• CLCWA’s government immunity from suit had been waived for the agreements pursuant to Texas Local Government Code § 271.152, which allows parties to a government contract to bring suit to enforce the contract;
• The agreements did not violate the reserved powers doctrine by binding the discretion of future boards of directors of CLCWA; and
• CLCWA’s actions did not amount to inverse condemnation of the developers’ property, since the developers voluntarily entered into the agreements, and a government’s action to withhold property or money in a contract dispute typically does not implicate takings jurisprudence.

While this decision does not implicate the philosophical water policy issues that are pending before the Texas Supreme Court in other cases this term (see, e.g., Edwards Aquifer Authority v. Day, Case No. 08-0964), it provides practical guidance to both water districts and developers when entering into prefunding agreements, which have been commonly used to meet the water infrastructure requirements of new land development projects. Both districts and developers (and particularly the latter) should be aware of the potential disputes that can arise after execution of such agreements, and make sure that the agreements are properly drafted to eliminate ambiguous obligations by either party.

Flagship Hotel

The second opinion was in the case of City of Galveston v. Flagship Hotel, Ltd., Case No. 03-10-00094-CV (Tex.App.-Austin 2010), which concerned a dispute over water utility billing. The Flagship Hotel is owned by the City of Galveston and leased to Flagship Hotel, Ltd., and the parties were disputing amounts owed by Flagship to the city for water service to the hotel, pursuant to the lease agreement. The substantive issues are irrelevant, as the entire case concerns the jurisdiction of the Texas Commission on Environmental Quality (TCEQ) and the procedural history of the dispute. The results are a comedy of errors.

Flagship first brought suit against the city in Galveston County, resulting in a decision by the Court of Appeals in Houston that exclusive jurisdiction over the dispute lay with the Texas Natural Resource Conservation Commission (TNRCC), the predecessor agency to TCEQ.  See City of Galveston v. Flagship Hotel, Ltd., 73 S.W.3d 422 (Tex.App.-Houston 2002). The only problem was that employees at the TNRCC claimed the agency had no jurisdiction. Another appeal resulted in the same decision by a different Court of Appeals. See Flagship Hotel, Ltd. v. City of Galveston, 117 S.W.3d 552 (Tex.App.-Texarkana 2003). This time, Flagship requested from TCEQ a formal determination that the agency did not have jurisdiction over the dispute, which would ostensibly allow the company to pursue its claims in the courts. After TCEQ issued a final ruling consistent with Flagship’s request, Flagship filed suit in Travis County seeking reversal of the TCEQ’s determination of no jurisdiction.

In addressing this morass of legal process, the Court of Appeals in Austin held that Flagship was not a person “who is aggrieved by a final decision in a contested case” pursuant to the Administrative Procedure Act section 2001.171, for the simple reason that Flagship got from TCEQ exactly what it had asked for. The practical lesson is that parties approaching the agencies or the courts should figure out exactly what they want, in case they actually get it. More importantly, this case makes me ask two questions: (1) “How many Courts of Appeals does it take to determine the jurisdiction of the TCEQ?” (apparently, the answer is “three”); and (2) “Just how big was that water bill?”