ECO Resources, Inc. v. City of Austin ( 2001 )

Menu:

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-00-00353-CV
ECO Resources, Inc., Appellant

v.

City of Austin, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT
NO. 98-02861, HONORABLE PAUL R. DAVIS, JR., JUDGE PRESIDING
In this case, we determine whether five contracts for services are enforceable against the City of Austin ("the City"). After the City annexed the territories served by five municipal utility districts ("MUDs"), it terminated contracts that the MUDs had executed with appellant ECO Resources, Inc. ("ECO"). ECO filed suit against the City for breach of contract. The district court granted the City's motion for summary judgment and denied ECO's motion. ECO appeals. Because we conclude that the contracts are not enforceable against the City, we affirm the district court's judgment.

FACTS
A MUD is a political subdivision of the state that stands on the same footing as counties and other political subdivisions established by law. See Bennett v. Brown County Water Improvement Dist. No. 1, 272 S.W.2d 498, 500 (Tex. 1954) (citing Harris County Flood Control Dist. v. Mann, 140 S.W.2d 1098 (Tex. 1940)). MUDs are created under the authority of the Texas Constitution and the Texas Water Code. Tex. Const. art. XVI, § 59; Tex. Water Code Ann. § 54.011 (West 1972). In section 54.012 of the Water Code, the Texas Legislature expressly delineates the purposes for which MUDs are created. Tex. Water Code Ann. § 54.012 (West 1972).⁽¹⁾
This section reflects the purposes enumerated in section 59 of article XVI of the Texas Constitution.⁽²⁾ Compare Tex. Const. art. XVI, § 59(a), with Tex. Water Code Ann. § 54.012. By statute, MUDs are governed by boards of directors who are authorized to contract for the services of general managers to carry out these duties. Tex. Water Code Ann. §§ 49.051, .056 (West 2000).
As of January 1, 1997, Circle C MUD Nos. 1, 2, 3, and 4 (collectively "the Circle C MUDs") and Northwest Travis County MUD No. 2 ("the Northwest MUD") were providing services to consumers under five written service contracts with ECO. Each of the MUDs was operating under a three-year contract with ECO, which was terminable at will. While the Circle C MUDs were required to give ECO thirty-days' notice of their intent to terminate the contract, the Northwest MUD's contract had a sixty-day notice provision. According to the express terms of each contract, ECO was appointed "as general manager and operator" within the MUD's territory. Each MUD is situated adjacent to the City's boundaries.
The City has assumed home-rule status as provided in section five of article XI of the Texas Constitution. Austin, Tex., Code, City Charter, ed. note to preamble (2000); Quick v. City of Austin, 7 S.W.3d 109, 122 (Tex. 1999). As a home-rule municipality, the City has the full power of local self-government. Tex. Loc. Gov't Code Ann. § 51.072 (West 1999). The City has adopted a city council and city manager form of government. Austin, Tex., Code, City Charter, art. I, § 2 (2000). The City also has the power to annex adjacent territory. See Tex. Loc. Gov't Code Ann. § 43.021 (West 1999); City of Houston v. State ex. rel. W. Univ. Place, 176 S.W.2d 928, 931 (Tex. 1943).
The City first alerted the MUDs that it was contemplating annexation of their territories when it requested information concerning the assets and obligations of each MUD. The Northwest MUD received six requests from the City between August 5 and November 14, 1997. The City sent two similar requests on October 20 and November 20, 1997 to the Circle C MUDs. The City initiated proceedings to annex the Northwest MUD and the Circle C MUDs in their entirety on September 11 and October 23, 1997, respectively.
One month after the City began the process of annexing the Northwest MUD, the board of directors for that district renewed its expired three-year contract with ECO. In renewing the contract, ECO and the Northwest MUD modified the terms to replace the terminable-at-will provision with a clause that provided for a term of five years with termination only for cause in instances of material breach. Similarly, six weeks after the City commenced annexation of the Circle C MUDs, the boards of directors for these districts amended their unexpired contracts with ECO. Three Circle C MUDs extended the terms of their contracts to five years to expire in 2002, with one of these MUDs also increasing the base fee to ECO. The fourth Circle C MUD contract was for a term of three years. Like the Northwest MUD, all of the Circle C MUDs incorporated provisions that rendered the contracts terminable only for cause in instances of material breach.
The City continued with its annexation process, which requires publishing notices in local newspapers, conducting public hearings, and presenting an annexation ordinance to the city council for a vote. Austin, Tex., Code, City Charter, art. I, § 6 (2000). In accordance with section 43.056 of the Local Government Code, the City also made service plans available. Tex. Loc. Gov't Code Ann. § 43.056 (West 1999). Each service plan acknowledged that the City would exercise its right to provide water and wastewater services to the annexed districts. By enacting city ordinances nos. 971204-H and 971218-B, the Austin City Council approved annexation of the Northwest MUD and the Circle C MUDs in December 1997. Annexation of the Circle C MUDs was effective on December 19, 1997; the official date of the annexation of the Northwest MUD was December 31, 1997. In March 1998, the City formally notified ECO that it was terminating the service contracts and that it planned to assume management of the utilities in the annexed territory the following day. The City terminated the contracts over ECO's objections.
In its suit against the City, ECO sought a declaratory judgment that its contracts with the MUDs were binding and enforceable as against the City. ECO filed a motion for partial summary judgment on all issues except damages and fees. In response, the City moved for summary judgment on all the issues. Subsequently, both parties entered into a stipulation that reads, "[T]he summary judgment evidence presented by the parties . . . shows that, except as to the amount of damages, if any, there is no genuine issue as to any material fact." In the stipulation, the City and ECO also agree that "either . . . [party] is entitled to judgment on the undisputed facts as a matter of law." When it granted the City's motion for summary judgment, the district court also denied ECO's motion for partial summary judgment. ECO appeals the district court's judgment.
DISCUSSION
Because the propriety of a ruling on a motion for summary judgment raises a question of law, we review this matter de novo. See Natividad v. Alexsis, Inc., 875 S.W.2d 695, 699 (Tex. 1994). The proper inquiry on appeal is whether the defendant, in seeking summary judgment, fulfilled its initial burden of establishing that no genuine issue of material fact exists and that judgment should be granted as a matter of law. City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 675-79 (Tex. 1979). Evidence is viewed in the light most favorable to the non-movant. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548-49 (Tex. 1985).
Similarly, all reasonable inferences are indulged and any doubts resolved in favor of the non-movant. Id. at 549.
When both parties have filed motions for summary judgment and the district court has granted one motion and denied the other, we review the summary judgment proof presented by the parties, determine all questions presented, and "render such judgment as the trial court should have rendered." Commissioners Court v. Agan, 940 S.W.2d 77, 80 (Tex. 1997). "[W]hen there are multiple grounds for summary judgment and the order does not specify the ground on which the summary judgment was granted, the appealing party must negate all grounds on appeal." State Farm Fire & Cas. Co. v. S.S. & G.W., 858 S.W.2d 374, 381 (Tex. 1993); accord Carr v. Brasher, 776 S.W.2d 567, 569 (Tex. 1989). If the appellant fails to negate each ground on which the judgment may have been rendered, we must uphold the summary judgment. See Carr, 776 S.W.2d at 569.
In this case, both parties have filed motions for summary judgment and the district court granted the City's motion. Because the trial court did not specify the grounds on which it rendered judgment, we must affirm the judgment if any of the grounds advanced in the City's motion are meritorious.
Section 43.075 of the Texas Local Government Code governs the abolition of water-related special districts, including MUDs, that become part of only one municipality. Tex. Loc. Gov't Code Ann. § 43.075 (West 1999). Subsection (d) of this section reads as follows:

(d) If all the area in the district becomes a part of the municipality, the municipality:

(1) shall take over all the property and other assets of the district;

(2) assumes all the debts, liabilities, and obligations of the district; and

(3) shall perform all the functions of the district, including the provision of services.

Id. § 43.075(d). This section also requires the Austin City Council to pass an ordinance, designating the date on which the duties and the assumption will take effect. See id. § 43.075(e). The underlying purpose and the intended effect of this provision is "to prevent a duplication of functions by the annexing city and the annexed districts." State ex. rel. Richmond Plaza Civic Ass'n v. City of Houston, 270 S.W.2d 235, 239 (Tex. Civ. App.--Galveston 1954, writ ref'd n.r.e.); accord Jefferson County Water Control & Improvement Dist. No. 5 v. City of Port Arthur, 327 S.W.2d 415, 416 (Tex. 1959).
While it is undisputed that section 43.075 applies to the City's annexation of the MUDs and requires the City to assume all of the MUDs' obligations,⁽³⁾ the City argues that this requirement extends only to valid obligations. We agree.
In its cross-motion for summary judgment, the City argues that the contracts, as amended, are invalid because they (1) constitute improper delegations of governmental authority, (2) interfere with the City's ability to exercise its police powers, and (3) are not supported by consideration. ECO responds that its contracts for services are valid because the contracts did not give rise to a surrender of a governmental function and that the modified contracts are supported by consideration. We conclude that the contracts are not valid and may not be enforced against the City.⁽⁴⁾
No governmental entity can "by contract or otherwise, bind itself in such a way as to restrict its free exercise of . . . [its] governmental powers, nor could it abdicate its governmental functions,⁽⁵⁾ even for a 'reasonable time.'" Clear Lake City Water Auth. v. Clear Lake Utils., Co., 549 S.W.2d 385, 391 (Tex. 1977) (citing City of Brenham v. Brenham Water Co., 4 S.W. 143, 149-52 (Tex. 1887) ("[W]e do intend to be understood to hold that such [municipal] corporations have no power to make contracts continuous in character . . . by which they will be, in effect, precluded from exercising from time to time any power, legislative in character, conferred upon them by law.") and City of Beaumont v. Calder Place Corp., 183 S.W.2d 713, 715 (Tex. 1944)) (footnote added).
In Clear Lake City Water Authority v. Clear Lake Utilities, the Texas Supreme Court considered whether a contract between the parties gave the private utility company an exclusive right to provide water and sewer services to certain landowners. Clear Lake City Water Auth., 549 S.W.2d at 387. The court reasoned, "Unless the contract is treated as terminable at will, it would have this impermissible effect [restricting the free exercise of governmental powers] and would . . . be void ab initio . . . ." Id. at 391. In addition, the court acknowledged that in Fidelity Land & Trust Co. v. City of West University Place an agreement was held to be unenforceable because it "operated to inhibit the municipality in its discretionary control over a governmental function." Id. (citing Fidelity Land & Trust Co. v. City of W. Univ. Place, 496 S.W.2d 116, 118 (Tex. Civ. App.-- Houston [14th Dist.] 1973, writ ref'd n.r.e.) ("To uphold this agreement would be tantamount to allowing a private individual to inhibit the necessary exercise of discretion by the municipality over a governmental function.")). While recognizing that not every municipal contract relating to governmental functions violates the rule in Clear Lake City Water Authority, the Court of Appeals for the Fifth Circuit determined that "the ultimate test concerns whether the contract at issue will, as a matter of law, 'potentially control or embarrass the City in the exercise' of these powers." Hidden Oaks Ltd. v. City of Austin, 138 F.3d 1036, 1047 (5th Cir. 1998) (quoting Cibolo Creek Mun. Auth. v. City of Universal City, 568 S.W.2d 699, 702 (Tex. Civ. App.--San Antonio 1978, writ ref'd n.r.e.)).
ECO maintains that its service contracts do not entail a surrender of governmental functions as ECO acted under the direction of each MUD's board of directors and would also act under the City's direction. Furthermore, ECO asserts that, in some instances, it was required to obtain prior approval from a MUD's board of directors, and more recently, from the Austin City Council. We are not persuaded by ECO's argument.
MUDs, as political subdivisions of the state, can only perform governmental functions. See Clear Lake City Water Auth., 549 S.W.2d at 387; Bennett, 272 S.W.2d at 500. Such districts are created to provide and to operate a variety of services for the benefit of the residents within their territories. Tex. Water Code Ann. § 54.201 (West 1972 & Supp. 2001) (authorizing municipal utility districts to operate and to maintain water, wastewater, storm sewer or drainage, irrigation, and parks systems). Both parties agree that it is commonplace for a MUD to enter into contracts to provide services within the district's territory. Here, the Northwest MUD and the Circle C MUDs contracted with ECO to operate and maintain water and wastewater systems, among other services, on their behalf. Each of the five contracts names ECO as the general manager and operator. The dispute over these contracts arises primarily from the clauses that provide the contracts are terminable only for cause in instances of material breach.
Home-rule cities have an exclusive right to own, maintain, and operate a water works system. Tex. Loc. Gov't Code Ann. § 402.017(a) (West 1999); see also Calder Place Corp., 183 S.W.2d at 715. Moreover, as the annexing party, the City is required, by statute, to provide services to annexed areas. Tex. Loc. Gov't Code Ann. § 43.056 (West 1999). Shortly after the City announced its intent to annex the MUD territory, ECO modified its contracts with the MUDs to no longer allow the contracts to be terminated at will, but rather, for termination only for cause in instances of material breach. These amended contracts would impair the City's full control and supervision of a water works system and its ability to exercise discretionary power with respect to this system. See Calder Place Corp., 183 S.W.2d at 715 (holding deed reservations, which conveyed the right to use water lines, storm sewers, and sanitary sewer lines to make future connections to furnish these services, to be void "because they have the potential effect to take from petitioner its full control and supervision of the system and to interfere materially with the usual exercise of its police power").
ECO's continued performance under these contracts would also result in duplicated efforts to provide utility services to the City's inhabitants. This would create the very circumstance that the Legislature sought to prevent by enacting section 43.075, the duplication of services.
ECO further argues that the City waived its complaints regarding these service contracts when it passed the annexation ordinances. ECO contends that the City expressly assumed all of the MUDs' obligations despite having full knowledge of the terms of the contracts. We conclude that ECO may not avail itself of the equitable doctrine of estoppel.
It is well established that "'when a unit of government is exercising its governmental powers, it is not subject to estoppel . . . .'" Bowman v. Lumberton Indep. Sch. Dist., 801 S.W.2d 883, 888 (Tex. 1990) (quoting City of Hutchins v. Prasifka, 450 S.W.2d 829, 835 (Tex. 1970) (recognizing two exceptions to the general rule, including in circumstances where justice requires it and when it will not interfere with the exercise of governmental functions)); accord City of San Angelo v. Deutsch, 91 S.W.2d 308, 311 (Tex. 1936). Providing water and wastewater services constitutes an exercise of governmental power. Clear Lake City Water Auth., 549 S.W.2d at 391; Calder Place Corp., 183 S.W.2d at 713. Consequently, we reject ECO's argument asserting estoppel.
We hold that ECO's contracts, as modified, constitute improper delegations of government authority because the amended contracts would affect the City's ability to exercise a governmental function, namely, the City's exclusive right to operate and to maintain a water works system. We conclude that ECO's service contracts are void ab initio and therefore are not enforceable against the City.

CONCLUSION
Accordingly, we affirm the district court's judgment, granting the City's motion for summary judgment and denying ECO's motion for partial summary judgment.

Jan P. Patterson, Justice
Before Chief Justice Aboussie, Justices B. A. Smith and Patterson
Affirmed
Filed: January 11, 2001
Do Not Publish
1. Section 54.012 of the Texas Water Code reads as follows:

A district shall be created for the following purposes:

(1) the control, storage, preservation, and distribution of its storm water and floodwater, the water of its rivers and streams for irrigation, power, and all other useful purposes;

(2) the reclamation and irrigation of its arid, semiarid, and other land needing irrigation;

(3) the reclamation and drainage of its overflowed land and other land needing drainage;

(4) the conservation and development of its forests, water, and hydroelectric power;

(5) the navigation of its inland and coastal water;

(6) the control, abatement, and change of any shortage or harmful excess of water;

(7) the protection, preservation, and restoration of the purity and sanitary condition of water within the state; and

(8) the preservation of all natural resources of the state.

Tex. Water Code Ann. § 54.012 (West 1972).
2. Section 59 of article XVI of the Texas Constitution provides in relevant part:

(a) The conservation and development of all of the natural resources of this State, including the control, storing, preservation and distribution of its storm and flood waters, the waters of its rivers and streams, for irrigation, power and all other useful purposes, the reclamation and irrigation of its arid, semi-arid and other lands needing irrigation, the reclamation and drainage of its overflowed lands, and other lands needing drainage, the conservation and development of its forests, water and hydro-electric power, the navigation of its inland and coastal waters, and the preservation and conservation of all such resources of the State are each and all hereby declared public rights and duties; and the Legislature shall pass all such laws as may be appropriate thereto.

Tex. Const. art. XVI, § 59(a).
3. In accordance with section 43.075 of the Local Government Code, city ordinance nos. 971204-H and 971218-B expressly provide that "the City shall take over all the property and other assets of the District and shall assume all the debts, liabilities, and obligations of the District." Austin, Tex., Ordinances 971204-H, 971218-B (Dec. 18, 1997).
4. In light of our disposition of the City's first issue, we need not reach the City's alternative argument that the amended contracts are not supported by consideration.
5. "A 'governmental function' is an activity that is carried out as an arm of the State for the purpose of serving the general public. The distinction between proprietary and governmental functions does not apply to counties or other political subdivisions of the State." Loyd v. ECO Res., Inc., 956 S.W.2d 110, 122 n.4 (Tex. App.--Houston [14th Dist.] 1997, no pet.) (citations omitted).

e requires it and when it will not interfere with the exercise of governmental functions)); accord City of San Angelo v. Deutsch, 91 S.W.2d 308, 311 (Tex. 1936). Providing water and wastewater services constitutes an exercise of governmental power. Clear Lake City Water Auth., 549 S.W.2d at 391; Calder Place Corp., 183 S.W.2d at 713. Consequently, we reject ECO's argument asserting estoppel.
We hold that ECO's contracts, as modified, constitute improper delegations of government authority because the amended contracts would affect the City's ability to exercise a governmental function, namely, the City's exclusive right to operate and to maintain a water works system. We conclude that ECO's service contracts are void ab initio and therefore are not enforceable against t