Hanover Ins v. Binnacle Development ( 2023 )

Case: 21-40662 Document: 00516608761 Page: 1 Date Filed: 01/12/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
January 12, 2023
No. 21-40662
Lyle W. Cayce
Clerk
The Hanover Insurance Company,
Plaintiff—Appellee,
versus
Binnacle Development, L.L.C., formerly known as
Binnacle Development and Construction, L.L.C.; Lone
Trail Development, L.L.C.; SSLT, L.L.C.,
Defendants—Appellants.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 3:19-CV-111
Before Higginbotham, Southwick, and Higginson, Circuit
Judges.
Leslie H. Southwick, Circuit Judge:
An insurer sued three developers for reimbursement of expenses. The
developers seek to reduce their obligation through a damages clause they say
is permissible for “district contracts” under the Texas Water Code. The
relevant contracts, though, were not executed by a district. Summary
judgment for the insurer is AFFIRMED.
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No. 21-40662
FACTUAL AND PROCEDURAL BACKGROUND
This dispute involves three construction projects (the “Projects”) in
Galveston County, Texas. Hanover Ins. Co. v. Binnacle Dev., LLC, 493 F.
Supp. 3d 585, 587 (S.D. Tex. 2020). The defendants, Binnacle
Development, Lone Trail Development, and SSLT, are land developers. Id.All three are controlled by Jerry LeBlanc, Jr.
Each developer contracted with R. Hassell Properties, Inc. to
complete paving and infrastructure projects in Galveston County Municipal
Utility District (“MUD”) No. 31.1 Id. The three Hassell contracts were
form MUD contracts created by MUD attorneys. Each contract stated that
it was “for Galveston County Municipal Utility District No. 31.”
Hassell won the contracts after a public bidding process mandated by
statute. See TEXAS WATER CODE § 49.273(d). Hassell submitted bids to the
Galveston County MUD and was ultimately awarded the contracts. Though
the Galveston County MUD managed the public bidding process and
1
A MUD is a form of water district authorized by the Texas Constitution. Save
Our Springs All., Inc. v. Lazy Nine Mun. Util. Dist. ex rel. Bd. of Dirs., 198 S.W.3d 300, 308
(Tex. App. — Texarkana 2006). They are created either “by the Texas Commission on
Environmental Quality (TCEQ) or by a specific act of the Texas Legislature.” Id. The
purpose of a MUD is “to provide services such as water, sewer, and drainage to areas where
those services do not exist.” David Bumgardner & Keyavash Hemyari, Dodging Mud
Slingers: An Analysis and Defense of Texas Municipal Utility Districts, 21 TEX. REV. L. & POL.
377, 388–89 (2017). “MUDs are reimbursement vehicles.” Id. at 390. Typically, a
developer pays for infrastructure up front and assumes all the risk until homes are
constructed on a development. Id. Once the developer has completed construction, the
MUD sells municipal bonds and uses the proceeds to purchase the infrastructure from the
developer. Id. The MUD then levees a tax on the homeowners residing in the district to
service the bonds. Id.2
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planned to purchase the infrastructure after completion, it was not a party to
any of the Hassell contracts.
At Hassell’s request, Hanover “issued payment and performance
bonds as a surety in favor of the [developers] for” the Projects. Hanover Ins.
Co., 493 F. Supp. 3d at 587. As part of the surety arrangement, Hanover and
Hassell entered into an indemnity agreement. Id. Under that agreement,
Hanover would be assigned the contract balances for the Projects in the event
that Hassell defaulted. Id.
Hassell ultimately failed to complete construction on the Projects and
defaulted. Id. Hanover then took over the contracts and completed the
Projects after the contract deadlines.
Hanover subsequently sued the developers in federal court to recover
the contract balances on the Projects. The parties agreed that — absent any
offsets, described below — Hanover was entitled to approximately $575,000
for the Projects. The developers, however, raised an affirmative defense
seeking an offset based on a liquidated-damages provision in each contract
charging $2,500 for each day completion was delayed. It is a fairly detailed
provision, with standard language about time being of the essence, and both
parties agree the measure of harm would be difficult to determine. The
money language is this:
5. LIQUIDATED DAMAGES FOR DELAY/ECONOMIC
DISINCENTIVE . . . Therefore, the Contractor and the
Owner agree that for each and every calendar day the Work or
any portion thereof shall remain uncompleted after the
expiration of the time limit(s) set in the Contract, or as
extended under [other contract provisions] . . . Contractor shall
be liable to Owner for liquidated damages in the amount of
$2,500 for each such calendar day, which sum the parties agree
is a reasonable forecast of the damages the Owner will sustain
per day that the Work remains uncompleted and in no way
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constitutes a penalty. Said $2,500 per day shall also be
considered an “economic disincentive for late completion of
the Work” pursuant to Section 49.271(e), Texas Water Code.
Section 49.271 of the Water Code authorizes “economic disincentives
for late completion of [] work” to be imposed in a “district contract.” TEX.
WATER CODE § 49.271(e). The liquidated-damages clause here would, if
enforced, amount to an offset of $900,000. Hanover Ins. Co., 493 F. Supp.
3d at 588.
Both parties moved for summary judgment. Id. The district court
addressed two issues: “(1) Whether the Texas Water Code applies to the
parties’ contracts, and (2) if not, whether the liquidated-damages clauses
constitute unenforceable penalties under Texas common law.” Id. at 588–89.
On the first issue, the court analyzed the Texas Water Code. Id. at 589–90.
It concluded that because no district is a party to the contracts at issue, the
economic disincentive provision from the Water Code does not apply. Id. at
590. On the second issue, the court found that the damages clauses in the
contracts constitute an unenforceable penalty. Id. at 592. The court granted
summary judgment for Hanover. Id. The developers appealed.
DISCUSSION
Summary judgment is proper when “there is no genuine dispute as to
any material fact.” FED. R. CIV. P. 56(a). We review its grant de novo.
Nationwide Mut. Ins. Co. v. Baptist, 762 F.3d 447, 449 (5th Cir. 2014).
“In Texas, the construction of a contract presents a question of law.”
Balfour Beatty Constr., L.L.C. v. Liberty Mut. Fire Ins. Co., 968 F.3d 504, 509
(5th Cir. 2020). This court “review[s] de novo questions involving the
construction or interpretation of contracts.” L & A Contracting Co. v.
Southern Concrete Servs., Inc., 17 F.3d 106, 109 (5th Cir. 1994). Similarly,
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“[t]he construction of a statute is a question of law which the Court reviews
de novo.” Grigg v. C.I.R., 979 F.2d 383, 384 (5th Cir. 1992).
The developers make two arguments here. The first is that the
Hassell contracts are district contracts, with their liquidated-damages
provisions validated by the Water Code’s authorization of economic
disincentives in contracts. The second is that even if the provisions are not
protected by the Water Code, the liquidated-damages provisions are
enforceable because they are not a penalty.
I. District contracts
We first consider whether Chapter 49 of the Water Code applies to
the Hassell contracts. Even if it does, the second issue is whether the Water
Code authorizes the terms of the liquidated-damages provision. We
conclude the Water Code does not apply and end our analysis there.
Chapter 49 of the Water Code is titled “Provisions Applicable to All
Districts” and applies to “all general and special law districts.” TEX. WATER
CODE § 49.002(a). The relevant statute here, Section 49.271, provides:
(a) Any contract made by the board for construction work shall
conform to the provisions of this chapter.
...
(e) A district contract for construction work may include
economic incentives for early completion of the work or
economic disincentives for late completion of the work.
The “board” refers to the “governing body of a district.” § 49.001(a)(3). It
appears that no Texas appellate court has construed Section 49.271.
Hanover sees this as a straightforward case. Section 49.271 begins by
noting its limited applicability: “Any contract made by the board for
construction work shall conform to the provisions of this chapter.”
(emphasis added). The plain language of Section 49.271, Hanover argues,
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forecloses its application to contracts between two private parties. Hanover
contends that legislative history reiterates this conclusion. That history
demonstrates that Section 49.271 “authorize[s] districts to include economic
incentives for early completion of construction contracts.” H. Research Org.
Bill Analysis, Tex. H.B. 1541, 78th Reg. Sess., at 4 (2003) (emphasis added).
“[I]f a statute is unambiguous,” courts must “adopt the
interpretation supported by its plain language unless such an interpretation
would lead to absurd results.” TGS-NOPEC Geophysical Co. v. Combs, 340
S.W.3d 432, 439 (Tex. 2011). The text of Section 49.271 certainly supports
that the “economic disincentives” language is relevant only to a contract
“made by the board” of a district. TEX. WATER CODE § 49.271(a), (e). The
developers seek to overcome that seemingly natural reading with several
arguments. We address each of them.
First, the developers argue that because Section 49.271 is not, like
some other sections, limited “only to a district,” it does not require a district
to be a contracting party. We disagree with the premise, as Section 49.271(a)
limits its applicability to contracts “made by the board,” and boards govern
districts. Still, we examine the developers’ examples. We find the cited
sections to limit their applicability to specific types of districts. One example
is a section which “applies only to a district that is located wholly within the
boundaries of a municipality with a population of more than 1.5 million.”
Section 49.052(h). Other sections contain similar qualifications, often
according to a district’s location or population.
Though some sections in Chapter 49 are limited only to certain types
of districts, that does not support that Section 49.271, which lacks identical
language, should apply regardless of whether a district is involved. In fact,
we find the opposite conclusion more reasonable. Chapter 49 is titled
“Provisions Applicable to All Districts.” The structure of Chapter 49
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suggests that the chapter, as a whole, applies only to districts unless a section
narrows its application to certain types of districts.
Next, the developers argue that Section 49.278 of Chapter 49, which
is entitled “Nonapplicability,” does not limit Section 49.271’s application
only to districts. Such limiting language is not there, but it is elsewhere in the
chapter. Because Section 49.271 already limits its application to contracts
“made by the board” of a district, further exclusion would be redundant.
Third, the developers argue that Chapter 2253 of the Texas
Government Code provides that district contracts need not include a district
as a contracting party. Chapter 2253 governs performance and payment
bonds on public works projects. See TEXAS GOV’T CODE § 2253.001. It is
incorporated into the Water Code through Section 49.275, which states that
“[a]ny person, firm, partnership, or corporation to whom a contract is let
must give good and sufficient performance and payment bonds in accordance
with Chapter 2253, Government Code.” Here, the surety bonds stated they
complied with Chapter 2253 of the Texas Government Code.2
The developers argue Chapter 2253 contemplates that a “public
works contract” can include a contract between a prime contractor and a
subcontractor, which are two private parties. Thus, the developers reason,
Chapter 49’s incorporation of Chapter 2253 indicates the former also applies
to a contract between two private parties.
Whether Chapter 2253 even applies is unclear due to the absence of
any public entity in the Hassell contracts. The section of Chapter 2253 that
prescribes bonding requirements applies only when a “governmental entity []
makes a public work contract with a prime contractor.” TEXAS GOV’T CODE
2
Hanover contends that Chapter 2253 was erroneously mentioned on the bonds
because form bonds were used. We have no need to decide if that is so.
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§ 2253.021(a) (emphasis added). Furthermore, even were Chapter 2253 to
apply, we do not find it inconsistent to conclude that Section 49.271 applies
only to contracts “made by the board” of a district. See TEX. WATER CODE
§ 49.271(a). We conclude that Chapter 2253’s incorporation into the Water
Code does not convert the contracts here into “district contracts.”
Fourth, the developers argue that the definition of “district facility”
under the Water Code favors a broad reading of “district contract.”
“District facility” is defined, in part, as “any plant [or] equipment . . .
supplied for . . . the business or operations of a district.” TEX. WATER CODE
§ 49.001(a)(10). The developers assert that this definition means that any
contract that results in construction “for . . . the operations of a district” can
be a district contract, regardless of whether a district is a signatory party.
The developers are correct that the Hassell contracts were “for
Galveston County Municipal Utility District No. 31.” Further, the
Galveston County MUD planned to purchase the infrastructure upon
completion. There is, though, no need to explore other sections of the Water
Code when the relevant section here prescribes its own scope. As we stated
earlier, Section 49.271(a) states that it applies to contracts “made by the
board” of a district. The “district facility” definition does not alter that
requirement.3
Finally, the developers argue, in the alternative, that even if the
Hassell contracts are not district contracts, they incorporate the economic
disincentive provision of Section 49.271. The developers assert that there is
nothing in Chapter 49 of the Water Code that prohibits contractors engaged
3
We are mindful that the contracts here were “for” the Galveston County MUD.
At other times, though, there is direct contracting between a MUD and developer. See,
e.g., N.P., Inc. v. Turboff, 111 S.W.3d 40, 41 (Tex. 2003); Marhaba Partners Ltd. P’ship v.
Kindron Holdings, LLC, 457 S.W.3d 208, 210–11 (Tex. App. — Houston [14th Dist.] 2015).
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in public works to adopt Section 49.271’s right to include an economic
disincentive clause. The defendants analogize to the Federal Arbitration Act
(“FAA”), 9 U.S.C. ch. 1, which allows contracting parties to incorporate the
right to arbitration.
The comparison to the FAA is imaginative but inapt. The text of
Section 49.271 limits it to “district contracts.” There is no text to support
that private parties may rely on, or indeed are protected by, Section 49.271
where there is no contract executed by the district board. The better analogy
is based on the fact that the FAA applies to contracts involving foreign and
interstate commerce. See 9 U.S.C. § 1–2; Hanover Ins. Co., 493 F. Supp. 3d
at 590. Similarly, as we just noted, Section 49.271 states that it applies to
“district contract[s].” TEX. WATER CODE § 49.271(e). The developers are
trying to make the Water Code apply to contracts between private parties
that one day may be assumed by a district. That expansion of the statute
ignores its clear wording.
We hold that Section 49.271 allows “economic disincentive” clauses
only in contracts where a district is a contracting party. Because no district
is party to the Hassell contracts, they cannot incorporate “economic
disincentive” clauses permitted under the Texas Water Code.
II. Liquidated damages analysis
Even though the Water Code is inapplicable, that does not
automatically invalidate the damages clause here. In Texas, liquidated
damages cannot “function[] as a penalty” and “must not be punitive,
neither in design nor operation.” Atrium Med. Ctr., LP v. Houston Red C
LLC, 595 S.W.3d 188, 192 (Tex. 2020). The developers understandably do
not try to make that standard apply. Instead, they seek to avoid it altogether
by contending the damages clause is not a liquidated-damages provision but
one that limits liability. The damages clause, they say, is meant to “reduce
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or offset any amount owed, as opposed to being used as an affirmative claim
to recover liquidated damages.” Therefore, the argument goes, the damages
clause is not subject to Texas’s liquidated-damages jurisprudence.
To decide what this provision is, we are guided by the need to “look
to the substance of the contract’s terms to determine if [a] provision
constitutes ‘liquidated damages.’” Sunbelt Servs., Inc. v. Grove Temp. Serv.,
Inc., No. 05-05-01090-CV, 2006 WL 2130144, at *3 (Tex. App. — Dallas
Aug. 1, 2006).
The damages clause is entitled “LIQUIDATED DAMAGES FOR
DELAY/ECONOMIC DISINCENTIVE” and expressly provides for
“liquidated damages in the amount of $2,500 for each [] calendar day” of
delay. This provision does not, in substance, set a mere limitation of liability
or delimit damages to “an agreed maximum.” 24 WILLISTON ON
CONTRACTS § 65:6 (4th ed.). Rather, the clause provides that Hassell is
liable for the liquidated damages of $2,500 for every day the Projects are late.
Looks like a liquidated-damages provision to us.
Moreover, the damages clause bears little resemblance to recognized
limitation of liability clauses. In one of our decisions, for example, we found
a limitation of liability clause where the contract stated that “[i]n no event
shall the liability of either party . . . exceed $500,000.” Global Octanes Texas,
L.P. v. BP Expl. & Oil Inc., 154 F.3d 518, 521 (5th Cir. 1998). In another
opinion, a Texas Court of Appeals concluded that a provision stating
“liability is and shall be limited to the sum of . . . $350.00” was a limitation
of liability clause. Arthur’s Garage, Inc. v. Racal-Chubb Sec. Sys., Inc., 997
S.W.2d 803, 809–10 (Tex. App. — Dallas 1999, no pet.). The damages
clause here, by contrast, does not set a ceiling on liability but prescribes a per
diem damages amount. That is a liquidated-damages clause.
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Because the developers do not contend that the damages clause
survives a liquidated-damages analysis, we need not consider that possibility.
See Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994). We do not disturb
the district court’s finding that the clause is an unenforceable penalty under
Texas law.
AFFIRMED.
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