In the Courts

Water Cases

In re Downstream Addicks and Barker (Tex.) Flood-Control Reservoirs, No. 17-9002, 2020 WL 808686, (Fed. Cl. Feb. 18, 2020).

Hurricane Harvey poured 33.7 inches of rain over a four-day period across Harris County and the Houston metropolitan area. As a result, parties filed hundreds of cases against the Federal Government alleging unconstitutional takings under the Fifth Amendment. The cases were consolidated under a master docket, In re Addicks and Barker (Texas) Flood Control Reservoirs, which was subsequently split into two sub-master dockets—one for upstream cases and one for downstream cases.
In the January 2020 issue of The Lone Star Current, we covered a decision (In Re Upstream Addicks and Barker (Texas) Flood-Control Reservoirs) regarding the upstream claimants, in which the U.S. Court of Federal Claims ruled that certain government action relating to the Addicks and Barker Damns, and the flooding of certain properties that occurred during and after Hurricane Harvey, constituted a Fifth Amendment taking. In arriving at that conclusion, the Court found that it was not a matter of if flooding would occur, but a matter of when and how often. Since flooding of the upstream properties was foreseeable to an objectively reasonable person, sufficient foreseeability and causation were found to support the takings claim.

Two months after the Court issued its decision in that case, the same Court issued its decision regarding the downstream plaintiffs, which we summarize here.

Like the upstream case, residents of Harris County sued the U.S. Army Corps of Engineers (“Corps”) under the Fifth Amendment for allegedly taking property downstream from the Addicks and Barker Reservoirs (“Reservoirs”) without just compensation during Hurricane Harvey. However, unlike the upstream cases, the Court found that the downstream damage was not caused by a foreseeable flooding event. Rather, the Court found that Hurricane Harvey, an unforeseeable “Act of God,” was the sole cause of damage to the downstream properties. The Court found that the impounded stormwater exceeded the Reservoirs’ controllable capacity, and thereby caused the Corps to open the Reservoirs’ gates to prevent additional flooding. The same court that found foreseeable causation in the upstream docket found no such intervening cause in the downstream docket. Therefore, the Court held that there is no property right to perfect flood control against waters resulting from an “Act of God” under state or federal law, and as such, no unconstitutional taking occurred.

City of Austin v. Kinder Morgan Tex. Pipeline, LLC, No. 1:20-CV-138-RP, 2020 WL 1324071 (W.D. Tex. Mar. 19, 2020).

Local governmental entities, the Barton Springs Edwards Aquifer Conservation District, and landowners sought injunctive relief with respect to Kinder Morgan’s construction of a natural gas pipeline through the Central Texas Hill Country. Plaintiffs argued that Kinder Morgan and the U.S. Fish and Wildlife Service (“FWS”) manipulated the Endangered Species Act’s consultation process to sidestep the incidental take permitting process, specifically the environmental review requirement under the National Environmental Policy Act. Kinder Morgan sought verification of authorization of certain impacts to waters of the United States under Nationwide Permit (“NWP”) 12 for Utility Lines. The Army Corps of Engineers (“Corps”) conducted a biological assessment, and then initiated a formal consultation process with FWS. FWS issued a biological opinion (“BiOP”) and found the project would not jeopardize the continued existence of local protected species. However, this conclusion was expressly predicated on implementation of avoidance and mitigation measures, including Kinder Morgan taking all necessary measures to avoid any potential contamination due to leaks within the recharge zone of the Edwards Aquifer. The Corps issued verification letters under NWP 12, but conditioned the authorization upon compliance with the mandatory terms of the BiOP and incidental take statement. Kinder Morgan violated these mandatory terms. The court ultimately denied the request for a preliminary injunction because Plaintiffs failed to show either imminent or reasonably certain irreparable harm.

Hatchett v. W. Travis Cty. Public Util. Agency, No. 03-18-00668-CV, 2020 WL 1161108 (Tex. App.—Austin Mar. 11, 2020).

The Hatchetts entered into an agreement with Masonwood Development to develop their land, leaving Masonwood with title to a portion of the property and the remainder owned by the Hatchetts. West Travis County Public Utility Agency (“PUA”) granted Masonwood’s service extension request (“SER”), seeking water service for the property, in 2013. In 2016, the Hatchetts submitted a second SER for the remainder property, but were denied. In 2018, the PUA amended its tariff, which required the Hatchetts to comply with certain impervious cover rules in order to obtain service to their remainder property.

At trial, the Hatchetts sought declaratory judgments that (i) the PUA’s rules limiting density and impervious cover on the property violate the PUA’s statutory and constitutional authority, and (ii) under the Texas Local Government Code’s (“TLGC”) vested rights protections, the PUA’s rules enacted after Masonwood’s SER cannot be applied to the remainder property. The trial court, which dismissed the Hatchetts’ claims, held that the Hatchetts had no standing under the Uniform Declaratory Judgment Act (“UDJA”) or the TLGC’s vested rights protection provision, and that—at any rate—the PUA enjoyed governmental immunity from such claims.

On appeal, however, the Appellate Court found that the Hatchetts did have standing to sue under the Local Government Code’s vested-rights protection provision because, according to the facts alleged in the Hatchetts’ petition, they owned the property at issue. The Appellate Court also found that the Hatchetts had standing to sue under the UDJA, because the question of whether the PUA acted beyond the scope of its statutory authority by denying the Hatchett’s SER constitutes a justiciable controversy over which the trial court had jurisdiction.

With regard to the PUA’s claim of immunity under the TLGC’s vested- rights protection provisions, the Court held that the case did not fit within the “utility connection” exception to the TLGC vested-rights protection provision’s express waiver of immunity. According to the Court, “utility connection” means something narrower than the provision of water service. Therefore, the PUA did not have governmental immunity. However, the Court did affirm that the PUA enjoyed immunity under the UDJA. By alleging that the PUA’s rules exceeded its authority, the Hatchetts made a quintessential ultra vires claim. Therefore, the Uniform Declaratory Judgment Act did not waive the PUA’s immunity. Thus, the Court affirmed the trial court’s dismissal of the Hatchetts’ UDJA claims, but reversed the trial court’s dismissal of their TLGC vested-rights claims and remanded for further proceedings.

Petition of the Cities of Garland, Mesquite, Plano and Richardson Appealing the Decision By N. Tex. Mun. Water Dist. Affecting Wholesale Water Rates, Docket No. 50382, 2020 WL 757950 (Tex. P.U.C. Feb. 27, 2020).

The North Texas Municipal Water District (“NTMWD”) provides water, wastewater, and solid waste services to 13 member cities. In December 2016, four NTMWD member cities filed a petition with the Public Utility Commission of Texas (PUC) alleging that NTMWD’s 2017 wholesale water rates were unreasonably preferential, prejudicial, and discriminatory.

On February 27, 2020, in an unprecedented move, the Public Utility Commission (“PUC”) determined that NTMWD rates were adverse to the public interest. The petitioning cities state that under their existing contract with NTMWD, they have paid substantial sums of money for water that residents did not use. NTMWD states that the contract requires each city is to pay for the amount of water it consumed in its highest-usage year, even if residents use less water in subsequent years.

This is the first time since the 1994 court decision in Texas Water Commission v. City of Fort Worth that a state agency has found a wholesale water rate to be adverse to the public interest. In Fort Worth, the court found that the Texas Constitution’s prohibition against state impairment of contracts restricts the state’s exercise of jurisdiction over wholesale rates, and that rates set by contracts can only be reviewed where the public interest requires it. The PUC has remanded the docket to the State Office of Administrative Hearings to conduct a cost-of-service determination to set new rates.

Bonin v. Sabine River Auth., No. 1:19-CV-00527, 2020 WL 614032 (E.D. Tex. Feb. 10, 2020).

The Sabine River forms the border between Texas and Louisiana, beginning at the southern base of the Toledo Bend Reservoir and ultimately flowing into the Gulf of Mexico. Texas and Louisiana property owners sued the Sabine River Authority of Louisiana (“SRA-L”) and the Sabine River Authority of Texas (“SRA-T”) (collectively, the “Defendants”) alleging a taking of their property during the March 2016 Sabine River flood when the Defendants opened nine spillway gates in response to water levels rising above 172.5 feet. However, plaintiffs claimed that this was merely the last straw in a series of deliberate actions the Defendants took prior to the flooding, including (i) renewing its license to operate the facility knowing there was substantial certainty downstream flooding would occur; (ii) operating the reservoir at the upper bounds of their 168 to 172 feet allowance, despite its authority to release more water than it actually released in February 2016; and (iii) operating only one of the two hydroelectric generators in the months leading up to the flood, when operating both would have caused water levels to be much lower at the time of the flood.

The Court considered SRA-L’s motion to dismiss, which claimed Eleventh Amendment sovereign immunity. Applying the 5th Circuit’s six-factor sovereign immunity test from Clark v. Tarrant Cty., the court found that—for purposes of the Eleventh Amendment—SRA-L was not an arm of the state, and therefore could not take shelter under the Eleventh Amendment sovereign immunity clause. Specifically, the Court found that (i) state law characterized SRA-L as an arm of the state; (ii) SRA-L was mainly self-funded; (iii) SRA-L had considerable local autonomy; (iv) SRA-L was focused on local issues rather than statewide problems; (v) SRA-L could sue and be sued; and (vi) SRA-L could hold property in its own name. Noting that case law is scarce, and considering whether a local or regional government is an arm of the state or merely a political subdivision, the Court weighed those factors that favored a finding that SRA-L was an arm of the state against those that favored a finding that SRA-L was not. Ultimately the Court concluded that SRA-L could not claim Eleventh Amendment immunity because it was not an arm of the State of Louisiana.

Litigation Cases

In this issue of In the Courts, we will spend some time talking about contracts, because that’s what the Supreme Court has wanted to talk about over the past few months.

But first, let’s talk about bond validation, and specifically the bond-validation procedure set forth in the Expedited Declaratory Judgments Act, Tex. Gov’t Code ch. 1205 (EDJA).

SCOTX Speaks on EDJA After Years of Silence.

For the first time in nearly four decades, the Texas Supreme Court has issued an opinion concerning the EDJA. Almost all EDJA cases go through the Austin Court of Appeals, and the Supreme Court has typically been satisfied with that court’s EDJA jurisprudence. So the Supreme Court’s willingness to even consider this case represents a departure.

The EDJA is a vital legal mechanism for issuers of public securities to resolve disputes impacting their bonds and related public security authorizations on a final, binding, and expedited basis. Here, the Court answered two questions: (1) whether the EDJA permits a declaration of the legality and validity of rate amounts set under a contract when the resulting revenues are pledged to pay off bonds and (2) whether the EDJA allows for a declaration of whether a party complied with a contract in setting specific rates. In both cases, and for similar reasoning, the answer is “no.”

City of Conroe v. San Jacinto River Auth., No. 18-0989, 2020 WL 1492411 (Tex. Mar. 27, 2020).

The San Jacinto River Authority sells water to cities and other customers under the terms of various contracts, and the revenue from those contracts is pledged to pay off SJRA’s bonds. In response to accusations of violating its underlying contracts after a rate increase, SJRA filed suit under the EDJA.

Alleging that the rate increase was justified, SJRA sought four declarations: (1) that SJRA had the authority to set such rates under the contracts (the Authorization Declaration); (2) that SJRA complied with the underlying contracts in setting their rates (the Compliance Declaration); (3) that the rates and contract were legal and valid (the Validation Declaration); and
(4) that a city’s refusal to pay the rate increase was a breach of the underlying contract (the Breach declaration). The Cities argued that SJRA’s declarations were outside the EDJA’s statutory authority to declare “the legality and validity” of a “public security authorization” and further argued they were protected from SJRA’s suit by governmental immunity.

At the outset, the Texas Supreme Court clarified that the scope of the EDJA is confined to an “authorization” in connection with a “public security.” An “authorization” in the public-security context includes the initial actions or approvals needed to ensure the proper issuance of the public securities. Ordinarily, a public-security authorization will occur before or close in time to the public security’s issuance.

Using that reasoning, the Court found that the Authorization Declaration (i.e., that SJRA has authority to set such rates under the contract) was within the scope of the EDJA because it concerned the “legality and validity” of the contracts and “contracts must be properly executed to be valid.”

But the Court concluded that the Compliance Declaration (i.e., that SJRA complied with the contracts in setting its rates) was not within the scope of the EDJA because it lacked “an authorizing connection with the public securities.” The Court observed that the rates were established six years after the contracts were entered into and the bonds were authorized. The Court used these two contrasting declarations to emphasize its ultimate conclusion: that the EDJA allows for the adjudication of a party’s contractual authority to set rates but not compliance with an underlying contract in doing so.

The Court applied this reasoning to the Validation Declaration, holding that the EDJA confers jurisdiction to declare whether the contracts (as public security authorizations) are legal and valid, but it does not extend to declaring whether a specific rate amount set in a particular rate order is valid. The Court also emphasized the EDJA’s applicability to in rem declarations concerning property rights and not to any in personam rights and liabilities, and affirmed the court of appeals’ holding that the Breach Declaration (i.e., that a City’s action constituted a breach of contract) was outside the scope of the EDJA.

Lastly, the Court held that governmental immunity does not apply to the EDJA because it adjudicates in rem rights that do not implicate the “costs and consequences” governmental immunity is designed to protect against.

Although it doesn’t change what we thought we knew about the EDJA, this case provides new clarity as to the scope of bond-validation actions. The EDJA remains a powerful tool to adjudicate governmental entities’ authority to take various actions associated with their bonds, including entering into the contracts that will go to repay the bonds and the expenditure of the money generated from the bonds’ sale. But if a party allegedly breaches that contract (for example, either with respect to the customer’s payment or the utility’s rate-setting under the contract), then the claim is one for breach and can’t be brought under the EDJA.

SCOTX Clarifies When Emails are a “Meeting of the Minds.”

As our society moves toward more electronic communication, those communications also tend to become more informal. When do those informal email communications create a “formal” contract? This is a question that courts have been struggling with for the last 30 years.

Chalker Energy Partners III, LLC v. Le Norman Operating LLC, No. 18-0352, 2020 WL 976930 (Tex. Feb. 28, 2020).

The latest decision to wade into this murky area is Chalker Energy, an opinion delivered by Chief Justice Hecht, in which the court set out to decide whether an email exchange between the parties reflected a meeting of the minds, which is required in the formation of a contract.

Chalker Energy—the “sellers” in the case—were a group of owners of working interests referred to by the Court as “the assets.” Chalker Energy had agreed amongst themselves to develop and sell the assets. Le Norman Operating LLC (LNO) bid on the assets, and its bid was rejected. After some negotiation, LNO’s representative sent a counteroffer to the sellers via email, offering to buy 67% of the assets for a particular price and setting a time at which the offer would expire. Before the stated deadline, Chalker Energy responded to the offer via email, stating that they were “on board to deliver 67% subject to a mutually agreeable PSA.” Id. at *5. However, a few days later, a different bidder stepped forward with a better offer, and Chalker Energy accepted the new offer. LNO sued for breach of contract, arguing that a contract of sale had been formed through the email communications.

The court of appeals held that whether bidding procedures were followed and if the seller intended to be bound were fact issues which precluded summary judgment. The Supreme Court reversed, emphasizing the ability to include conditions precedent to contract formation is essential to freedom of contract.

In order to submit a bid, LNO signed a confidentiality agreement which included a No-Obligation Clause. This clause stated that, unless a definitive agreement had been executed and delivered, there was no contract between the parties. By agreeing to this clause, the parties made the execution of a definitive agreement a condition precedent to contract formation. LNO argues that the email exchange raises an issue of fact regarding the existence of a definitive agreement; however, the Court concluded that Chalker Energy’s inclusion of the phrase “subject to a mutually agreeable PSA,” makes clear that no definitive agreement had been reached, and that the emails were more akin to a preliminary agreement, such as a letter of intent. Accordingly, the Court concluded that there was no definitive agreement as required by the No Obligation clause.

This case creates an important pathway for contract negotiators to follow to ensure that they do not inadvertently agree to a contract by email. A memorandum—even an informal one contained in an email—exchanged at the outset of negotiations that (1) email communications will not constitute agreement to contract terms, and (2) the execution of a formal written contract is a condition precedent to any contract may avoid this danger.

Copano Energy, LLC v. Bujnoch, 18-0044, 2020 WL 499765 (Tex. Jan. 31, 2020).

Bujnoch alleged that an email chain constituted a valid and enforceable contract for Copano Energy to receive an easement in exchange for developing a pipeline on Bujnoch’s land. After negotiation via email, no formal agreement was ever formed, and Copano never built its pipeline.

Because the easement is an interest in land, an agreement must be in writing. The writing need not be a single document, but the essential elements of the agreement must be evident from the writing, and there must be no need to resort to oral testimony.

The Supreme Court held that the emails did not satisfy the requirement for a writing, in large part because of the phrasing of the emails, which included phrases like “pursuant to our conversation earlier,” and “in reliance on your representation.” Though one of the emails clearly contained an offer and an acceptance, what was being offered and accepted was not apparent from the writings themselves. Instead, they specifically referred to oral agreements. And while other emails laid out terms of an agreement, the Court found that there was no intent to be bound.

The Court held that it was impossible to piece together from the emails one agreement with clear essential terms and an intent to be bound by those terms; thus, the Court concluded that the claim was barred by the statute of frauds.

For a lot of us, email introductory phrases such as “following up on our conversation this afternoon” are boilerplate. But in negotiations for contracts that must be in writing (e.g., contracts for land, contracts that cannot be performed within one year), such references may undermine the requirement of a writing.

SCOTX Takes up Liquidated Damages.

Governmental contractors often use liquidated-damages provisions to meet the “balance due and owed” requirement of the Texas Local Government Contracts Claims Act. But liquidated damages cannot be punitive; they must reflect the actual value or loss. Evaluating liquidated-damages provisions under that requirement has been a longstanding problem.

Atrium Med. Ctr., LP v. Houston Red C LLC, No. 18-0228, 2020 WL 596873 (Tex. Feb. 7, 2020).

Houston Red contracted with Atrium to provide healthcare laundry service. After Atrium suffered financial difficulties, it cancelled the contract, which triggered a liquidated-damage provision. That provision required Atrium to pay “40 percent of the greater of (i) the initial ‘agreement value’ and (ii) the current invoice amount, multiplied by the number of weeks remaining in the agreement’s term.”

The court of appeals held that Houston Red was entitled to the weekly value of the contract for the remainder of the contract term. It further held that, at the time of contracting, determining the Respondent’s actual damages was almost impossible due to the uncertainty of Atrium’s needs. This is further supported by the fact that the weekly value of the contract was estimated at $2,500 at the time of contracting, but in practice, the actual weekly value was around $8,000. The court explained that the 40% figure in the contract was a “reasonable forecast” of the harm that the Respondent would suffer due to Atrium’s cancellation.

The Supreme Court agreed, and explained that contract damages must be “just compensation” for loss or for the damage actually sustained. Liquidated damages therefore must reflect the actual damages or loss to avoid functioning as a penalty. The Court explained that, in order to show that a facially reasonable liquidated damage provision is unreasonable, there must be an “unbridgeable discrepancy” between the liquidated damage provision and the damage actually suffered by Respondent. Atrium offered no evidence of an unbridgeable discrepancy.

This case sets forth a model for an enforceable liquidated-damages pro-vision. When encountering such a provision in contract drafting/negotiations, match the provision up to the value of the contract to ensure that the non-breaching party does not get a windfall.

Texas Supreme Court Declines to Reinstate $535M Judgment.

The terminal at Cushing is not just a cornerstone of the oil-and-gas industry, it is an outdated one. And moving oil from Cushing to the Gulf Coast is big business. The oil industry knew that a new pipeline solution was necessary. But first a contract needed to be formed. And that requires definite terms and the performance of all conditions precedent. Without those things, there is no contract.

Energy Transfer Partners, L.P. v. Enter. Products Partners, L.P., 17-0862, 2020 WL 622763 (Tex. Jan. 31, 2020).

In 2011, the energy industry faced a lack of necessary infrastructure to move oil south from Cushing, Oklahoma to the Texas Gulf Coast. Several oil companies, including Enterprise and ETP, sought to meet this need by converting an existing pipeline owned by ETP and leased by Enterprise into a line capable of moving oil south.

The parties signed three agreements by which they agreed not to be bound until each company’s board approved a formal contract. By May 2011, the companies formed an integrated “Double E” team, attempting to solidify sufficient shipping commitments. Over the next few months, the companies marketed the project to potential customers as a “50/50 JV.” However, the project failed to meet the necessary shipping commitments, and Enterprise ended its relationship with ETP. Enterprise subsequently worked with a different company to open a new pipeline.

ETP sued Enterprise on the theory that, despite the written agreements, the parties had formed a partnership to market and pursue the pipeline through their conduct. The jury found that a partnership had existed and that Enterprise had breached its duty of loyalty by pursuing the new pipeline, awarding a $535,000,000 judgment. The appellate court reversed, holding that companies could contract for conditions precedent to the formation of a partnership, as they did here, by requiring a definitive agreement and board approval. The court noted that, in order to prevail, ETP had to conclusively prove waiver of these conditions, or secure a jury finding that the conditions were waived, which it did not.
The Supreme Court agreed. The court observed that parties can contractually create conditions precedent to the formation of a partnership under the Business Organizations Code. The court went on to explain that an agreement not to be partners unless certain conditions are met will ordinarily be conclusive on the issue of partnership.

However, an agreement of this kind can be waived. The Court clarified the only kind of evidence that can be considered when evaluating if a condition has been waived is evidence directly tied to the condition precedent, such as a direct disavowal of the signed agreement. A signed partnership agreement is not relevant in the absence of evidence that the precedent had been waived. Because ETP presented no evidence that the condition had been waived or Enterprise had acted inconsistently with the agreement, there could be no partnership under Texas law.

Aside from the massive amount of money involved, this case is notable for recognizing the place of conditions precedent in contract formation. Board approval is a common condition precedent. But there can be many others. Contract negotiators/drafters should be wary of such conditions precedent lurking in their contracts that may prevent the document from ever becoming an actual contract.

Air and Waste Cases

Government of Guam v. United States of America, 950 F.3d 104 (D.C. Cir. 2020).

The D.C. Circuit Court of Appeals recently ruled that Guam waited too long to file a Superfund claim for the cleanup of a landfill on the island, known as the Ordot Dump, where the U.S. Navy disposed of dangerous munitions and chemicals for decades, including agent orange and DDT. The Navy began using the landfill in the 1940s and throughout the Korean and Vietnam Wars. The landfill was unlined and released contaminants into nearby rivers flowing into the Pacific Ocean.

In 2002, EPA sued Guam as the site owner for violating the Clean Water Act for discharging pollutants into the Waters of the U.S., leading to a consent decree into 2004.

In turn, Guam sued the Navy in 2017, seeking to recoup its landfill-closure and remediation costs, which it estimated would exceed $160 million.

The D.C. Circuit Court ruled that the 2004 consent decree triggered a three-year statute of limitations for Guam to pursue a Superfund Contribution Claim; therefore, Guam’s claims against the Navy were time-barred.

“In the Courts” is prepared by Cole Ruiz, an Associate in the Firm’s Districts and Water Practice Groups; Lindsay Killeen, an Associate in the Litigation Practice Group; and Samuel Ballard, an Associate in the Air and Waste Practice Group. If you would like additional information, please contact Cole at 512.322.5887 or cruiz@lglawfirm.com, Lindsay at 512.322.5891 or lkilleen@lglawfirm.com, or Sam at 512.322.5825 or sballard@lglawfirm.com.

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