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Tejas Litigation: How to Sue the State and Win Under a
Privatization Contract
Consider this Christmas Eve 1994 -- Initial Client Interview.(1)
My name is Bob Miller. I am the President of both Systems
Control, Inc. ("SCI") and its 90% owned subsidiaries Tejas Testing
Technology One and Tejas Testing Technology Two, L.C. ("Tejas") With
me are Brad Laughlin and Darrell David, Vice Presidents of the Tejas
entities and Project Managers in Tejas' Dallas and Houston operations
respectively. Their company, Laughlin/David Partnership, owns 10% of
each Tejas company. In the Spring of last year (1993), the two Tejas
companies were the successful bidder for a major government contract
with the Texas Natural Resource Conservation Commission's ("TNRCC")
predecessor, the Texas Air Control Board. Tejas, whose bid was rated
highest for quality and lowest for cost, won the right to provide
federally mandated emissions tests to every car and truck in the
Dallas/Fort Worth Metroplex and the Houston/Galveston/Beaumont/Port
Arthur area for a term of seven years. The Program is authorized by
and grounded in federal statute and regulation, as well as state
statute and regulation. Tejas' sales volume is absolutely guaranteed.
No car in those two areas can receive a renewal license tag without
coming to a Tejas facility and submitting to and passing a roughly
$20.00 test. The system we contracted to build and run is what is
known as a "centralized" system. Testing cars is our only business.
Car dealers and repair shops are not allowed to test cars in a
centralized program. The EPA prefers centralized systems. In
reliance on this very predicable revenue stream, the Tejas entities
obtained over $100 million in financing to build and equip 65
high-tech emissions testing locations in the two metropolitan areas.
All locations came on line to the TNRCC's satisfaction two weeks ago,
ahead of schedule. At the TNRCC's request, we also opened to the
public ahead of schedule. We have hired subcontractors (known as
Operating Contractors)to actually operate the locations for us. Tejas
and the Operating Contractors have trained over 2,000 employees. We
have fully performed our construction phase obligations under the
contract, and the State does not dispute that. Official testing
begins on January 2, 1995. Trial period testing has gone great, and
the TNRCC is effusive in their praise of our documented, full
performance. We have done the hard part, and it is now time to
efficiently run these 65 locations, to retire our debt, and to enjoy
the fruits of our contract. SCI's management (along with others)
bought the company in a leveraged buy-out last summer, adding over $20
million to our debt load. Total debt at all company levels now
exceeds $120 million.
Since the November 1994 Congressional elections, we have been
concerned that support for centralized emissions testing may be
waning. We have just picked up a rumor that the TNRCC is studying
unilateral cancellation of our program, but may wait for legislative
input in that regard. Obviously, having our car volume and our
revenue stream drop in any material way will be devastating to our
business. What can you do to help us?
Thus began a 38-month odyssey with the greatest clients,
co-counsel, and support staff imaginable.
I. PROBLEM EVALUATION AND THE PASSAGE OF S.B. 19
When Mr. Miller, Mr. Laughlin, and Mr. David came to see us, there
was a classic conflict among the courts of appeal concerning
"contractual" sovereign immunity. All courts agreed that the mere
entry into a contract by the State with a private citizen waived
immunity from LIABILITY. However, the courts of appeal
were sharply divided on whether the mere entry into a contract waived
immunity from SUIT. Some cases held that when the State
contracts with a private citizen, it waived immunity from
liability but retained immunity from suit,
absent either a general or a specialized legislative enactment waiving
liability from suit. More specifically, the Houston
First Court, the Austin Court, the Fort Worth Court, the Houston 14th
Court, the El Paso Court, and the Corpus Christi Court had written
opinions indicating that absent a legislative enactment waiving
immunity from suit, the plaintiff government contractor
could not even get into court.(2)
However, other cases had held that the State waived its immunity even
from suit whenever it contracted with private citizens.
Such opinions had come from the Dallas Court, the El Paso Court, and
the Austin Court.(3) Notice that El
Paso and Austin were represented in both camps. Given the large sums
of money involved, we planned conservatively from the outset and
assumed that rule of law then most recently stated in Green
International, Inc. v. State, 877 S.W.2d 428, 432-433 (Tex. App.
--- Austin, 1994 writ ultimately dism'd by agreement) would obtain and
that we would have any breach of contract claim dismissed by a Travis
County District Court absent a legislative enactment authorizing suit
and/or some other plausible sovereign immunity waiver argument.
Before 1994 was over, we found three legislative enactments that we
believed amounted to a legislative authorization of
suit. They were Texas Health & Safety Code §
382.032 and Texas Water Code §§ 5.351 and 5.352. These statutes
specifically authorized a party aggrieved by an action of the TNRCC to
file suit within 30 days in a District Court of Travis County
challenging such aggrieving actions. While not employing actual sue
or be sued language, we always believed that these statutes would be
sufficient, even if the Texas Supreme Court adopted the view expressed
in the more restrictive line of courts of appeal cases. We further
satisfied ourselves that if our clients' contract rights were taken or
impaired unconstitutionally, sovereign immunity would not be a bar to
a claim for substantial money damages.
Having satisfied ourselves that we could probably obtain a
contract-based judgment for our client employing both contract and
constitutionally based theories, we next considered what mechanisms
would be available to collect that judgment. Our research
regarding collecting State judgments over the objection of a
non-appropriating Texas Legislature was both surprising and
disappointing. At that time, a very large whistle blower judgment in
favor of George Green had gone unpaid for at least one full
legislative session after becoming final. The Texas Supreme Court had
summarily denied Green's Motion for Leave to File Writ of Mandamus
seeking to compel Comptroller Sharp to pay the final judgment.
See Green v. Sharp, 37 Tex. Sup. Ct. J. 1227 (Sept.
29, 1994). In a footnote in Texas Education Agency v.
Leeper, 893 S.W.2d 432, 448, Justice Gonzalez described a rule of
law in which a prevailing plaintiff must always "request a legislative
appropriation to collect damages awarded him ...." Uncertainty
concerning whether and by what procedure the State Comptroller could
be mandated to pay an unsatisfied final judgment against the State
arising from a contractual obligation remained unsettled throughout
the pendency of the Tejas case and remains unsettled today.
Mandating payment from the State Treasuer appeared to be a better
developed concept when a federal court judgment was involved. Two
Fifth Circuit cases and one Ninth Circuit case actually described
situations in which a federal judge compelled state fiscal officers by
mandamus to pay civil rights judgments. In Gates v. Collier,
616 F.2d 1268 (5th Cir. 1980), modified on other grounds, 636
F.2d 942 (5th Cir. 1981), the Fifth Circuit affirmed a Mississippi
District Court order the Fifth Circuit described as follows: "[The]
Order directs that Mississippi's Auditor and Treasurer be added as
defendants and that the other defendants submit a requisition to the
Auditor for the issuance of a warrant upon the Treasurer to satisfy
the judgment out of funds appropriated for the operation of Parchman
[prison] or out of any other funds subject to control of the
Treasurer." 616 F.2d at 1270. A Mississippi statute on the books
at the time prohibited the satisfaction of judgments against the State
except by legislative appropriation. The Fifth Circuit in
Gates ruled, notwithstanding the Mississippi statute, that
the trial court entered an appropriate order. At the time we were
evaluating our clients' posture, the Fifth Circuit, the Seventh
Circuit, and the Ninth Circuits had all followed Gates.
Probably by Ground Hogs Day 1995 and certainly by Valentine's Day
1995,(4) we knew that should our
clients' contract be breached, or its contract rights be legislatively
taken or impaired, we had a good chance of getting into court in the
state system, could not point to well established collection methods
for a state court judgment, felt surviving the immunity hurdle in
federal court was more difficult, but collection of a federal
judgment would be based on more established precedent.
On January 31, 1995, Governor George W. Bush signed his first bill
into law. The legislation, Tex. S.B. 19, suspended the State's
centralized vehicle emissions testing program for 90 days and funded
an $8.8 million loan to the Tejas companies to compensate Tejas for
its 90 days of lost revenue. The $8.8 million loan was a last minute,
floor addition to the legislation. Earlier versions of the statute
simply shut down the program and destroyed Tejas' revenue stream for
90 days, without any compensation whatsoever. The business deal
behind the $8.8 million loan fully contemplated that centralized
emissions testing would be resumed after 90 days. Senate Bill 19 made
sense for the Tejas companies only if cars that were not tested during
February, March, and April 1995 were required to be tested by the end
of the 1995 to the 1997 state biennial budget period. Such was
specifically discussed, and Tejas had high hopes that centralized
testing would restart three months later in a slightly scaled down
fashion. In response to earlier versions of the bill that did not
provide for any sort of compensation, we prepared a breach of
contract, impairment of contract, and takings original petition and
request for temporary restraining order. Filing such did not become
necessary because the $8.8 million "tide over" was added at the last
minute. From February through April 1995, various emissions testing
bills were filed and began to work their way through the legislative
committee system. Tejas remained confident that while some of its
legislatively contracted for monopoly might be lost, its program would
continue in substantially similar form and any slight losses would be
compensated. On May 1, 1995, the full weight of the Tejas State
Capitol was dropped on the Tejas companies in the form of Tex. S.B.
178.
II. S.B. 178 AND THE LONG MARCH TO TRIAL
Texas Senate Bill 178 (among many other anti-Tejas provisions)
expressly made ILLEGAL the very technology that Tejas had
contracted to provide and accelerated the due date of Tejas' $8.8
million loan from August 31, 1997 to September 1, 1995. With one
stroke of a pen, the commercial demand for Tejas' testing network and
business disappeared. Prior to the passage of S.B. 178, one could not
operate a car or light truck in the Metroplex or in Houston,
Galveston, Beaumont, or Port Arthur without paying for a Tejas test
every other year. Once S.B. 178 passed, no one needed a Tejas
administered test and, therefore, nobody sought out such tests. There
was no demand for Tejas' product and no other way for it to generate
revenue. As a practical matter, it was out of business.
Within 12 hours of the Governor's signature on S.B. 178, suit was
filed in the District Court of Travis County. Informal negotiations
aimed at obtaining TNRCC's agreement that Tejas would not be declared
in default under its contracts for failure to reopen after the 90-day
suspension (at a time when S.B. 178 reduced demand to zero) were
unsuccessful. The State would not even agree that Tejas was relieved
of the obligation to keep open 65 locations that were expensive to
operate, but for which there was now no demand. A restraining order
was sought and obtained. Pertinent excerpts from the Emissions
Testing Contracts are in the Appendix. As § 3.12 indicates, Tejas was
obliged to present its money damage claim in the first instance to the
TNRCC. It served out the appropriate notice letters on May 1, 1995.
It submitted a detailed $187 million dollar claim in August 1995 and
the TNRCC rejected that claim in its entirety on October 23, 1995. On
August 31, 1995, Tejas obtained a fairly well publicized temporary
injunction enjoining the State's efforts to call the $8.8 million loan
two years early. This was Tejas' first opportunity to submit the
impact of S.B. 178 on it to a Judge. The outcome of the temporary
injunction hearing supported Tejas' firmly held view that it was
treated not only unfairly, but in a manner that could be redressed by
the courts, notwithstanding a sovereign immunity argument.
On September 12, 1995, the Tejas companies were forced to file
Chapter 11 bankruptcy. Their only source of revenue had been
legislated away. In November 1995, an actual money damages lawsuit
was filed in the District Court of Travis County. It was that second
case filed for money damages that was ultimately tried in January
1997. The second lawsuit was necessary because the immunity waiver
statutes from the Texas Health and Safety and Texas Water Codes upon
which Tejas relied required "filing suit" within 30 days of TNRCC's
decision. Immunity waiver statutes are strictly construed.
Accordingly, amending the earlier filed lawsuit for an injunction was
just too risky.
By the end of 1995, Tejas had sought and obtained two injunctions
to maintain the status quo, had pursued its contractual administrative
remedies with the TNRCC unsuccessfully, and had filed suit for breach
of contract, for impairment, and for takings. Negotiations aimed at
finding a role for the Tejas Testing network in a new State program
proved unsuccessful. By early 1996, Tejas had lost the wherewithal to
keep its network in place and had only one asset--its lawsuit against
the State of Texas and its agencies.
Tejas' goal for 1996 was simple and straightforward. It wanted to
get over the sovereign immunity hurdle and obtain a trial court
judgment (somewhere) before the legislature returned in January 1997.
Failing that, it certainly wished to have the matter resolved through
the trial court level before the legislature recessed sine die on June
2, 1997. It anticipated (correctly) two aspects of the State's
defense strategy. The State obviously much preferred state court to
federal, viewed sovereign immunity and the Legislature's perceived
discretion not to pay a judgment as its primary defenses, did not
really dispute that it had failed to perform the emissions testing
contracts, and really did not relish the outcome of a trial on the
merits.
III. THE REMOVAL TO FEDERAL COURT, ELEVENTH AMENDMENT IMMUNITY, AND
THE FEDERAL CLAIMS FOR AN INJUNCTION
An affiliate of Snap-On Incorporated ("Snap-On"), a New York Stock
Exchange company, had owned Tejas' parent company until July 1994.
After the company's LBO sale, Snap-On stayed on as a guarantor of
Tejas' $100 million plus construction debt. As a $100 million
creditor, it felt it had some interest in a positive outcome of Tejas'
claim. It manifested that interest by intervening in the earlier
filed state court injunction lawsuit and by removing it to the
bankruptcy court in December 1995. The case was later transferred to
federal district court when the bankruptcy "reference" was withdrawn.
Apparently, implicit in this action was the notion that the tougher
sovereign immunity hurdles in federal court were more than offset (in
Snap-On's view) by the better developed collection line of cases. It
then fell primarily to Tejas to maintain federal jurisdiction over one
of its two lawsuits against the state entities. This led to some very
interesting litigation pursuant to § 106(b) of the Bankruptcy Code.
To make a long story short, Tejas convinced a United States
District Judge that a letter from the State to Tejas reminding Tejas
that it still owed the State $8.8 million amounted to a "informal
proof of claim" stripping the State of its 11th Amendment and
sovereign immunity. The Court's opinion was based in large measure on
an unpublished North Carolina case styled Department of
Transportation v. AerAerotron. The State of Texas parties
appealed the ruling to the Fifth Circuit, and the Tejas/State
settlement prevented Fifth Circuit resolution of the matter.(5) In addition to obtaining this ruling
that the State had waived its immunity from money damage claims in
federal court, Tejas pursued in the federal court claims for
declaratory and injunctive relief aimed at enjoining the State's new
emissions testing program. There, Tejas argued that S.B. 19 and S.B.
178 violated the Federal Constitution's contract and takings
clause, along with various other federal claims. The Federal District
Court overruled the State's motion to dismiss on immunity grounds and
the State took a second interlocutory appeal to challenge that
ruling.(6) All told, the State
attempted to stay the federal court trial at least six times before
successfully doing so on December 20, 1996. Undeterred, Tejas
announced ready for trial in state court on January 13, 1997.
IV. THE STATE COURT TRIAL AND JUDGMENT
On January 15, 1997 (after a two-day ice storm delay), all parties
announced ready for trial before The Honorable Joseph H. Hart. Earlier
in January, Judge Hart had orally communicated to the parties that he
did not find the State's summary judgment motion based on sovereign
immunity persuasive.(7) For a case that
ended in a $208 million judgment, the trial was amazingly straight
forward. Although testimony proceeded over two trial weeks, a
construction of no more than three provisions of the emissions testing
contract were at the root of the decision. Section 9.3 of the
emissions testing contract (excerpts of both §§ 9.3 and 9.5 are
included in the Appendix) was the "no fault" termination provision of
the contracts. It could be invoked by the TNRCC only if "the
[emissions testing] Program is repealed or substantially
amended." (emphasis supplied) Tejas argued and Judge Hart agreed that
Program is a defined term and related to the State's implementation
plan ("SIP") on file with the EPA. It was undisputed that the State
had not, before it stopped performing the Tejas contract, jumped
through the administrative law hoops necessary to repeal or
substantially amend the SIP on file with the EPA. Had the facts
supported a more proper § 9.3 invocation, the argument that TNRCC's
obligation to Tejas would have been to do no more than ask the
legislature for money might have been more persuasive. Judge Hart
determined that § 9.5 rather than 9.3 of the contract governed.
Section 9.5 (entitled Termination Based on TRNCC's default) provides
that "payment by the TACB [now the TNRCC] to the managing
contractor of the amount set forth in § 9.3 will constitute full
satisfaction of all claims of the managing contractor arising from the
default." (emphasis supplied) Judge Hart concluded the TNRCC had
breached the contract in at least the following particulars:
- Since January 1, 1995, the TNRCC has failed to insure that "all
cars shall be tested at Tejas' facilities, in violation of § 4.4 of
the Contracts.
- Since January 1, 1995, the Defendants have failed to condition
vehicle registration on presentment of a vehicle emissions certificate
obtained from a Tejas facility, in violation of § 10.1 of the
Contracts.
- The Defendants decided to cease testing prior to final EPA action
amending (or deciding not to amend) the State's I/M program, in
violation of a § 4.4 of the Contracts.
- The TNRCC failed to fix Tejas' damages in September 1995, in
violation of § 3.12 of the Contracts, thus proximately causing Tejas'
inability to maintain control of its testing network.
- The TRNCC failed to mediate this dispute as required by § 3.12 of
the Contracts.
- The TNRCC failed to pay all sums owed pursuant to § 9.5 of the
Contracts.
- The TNRCC requested an amount from the Legislature obviously less
than that contemplated by § 9.3.
Based on these conclusions, he held that § 9.5 governed and that a
money judgment could be issued rather than just a court directive that
the TNRCC ask the legislature for an appropriation. Judge Hart
further concluded that Senate Bill 178's language, including but not
limited to the language actually rendering illegal the very technology
Tejas was contracted to provide, amounted to impairments of contract,
a retroactive law, and an unconstitutional taking. Judge Hart's
Letter Opinion is included in the Appendix. Judge Hart awarded to
Tejas actual damages in the amount of $139,869,441, prejudgment
interest totaling $28,724,000, for a total of $168,593,441. Judge
Hart also awarded Tejas $40 million in attorney's fees for a total of
$208,593,441. Pursuant to contingency fee agreements, Tejas had
contracted to pay the Minton firm about $3.2 million and the
Bickerstaff firm $10 million at these levels of recovery. However,
Tejas' uncontradicted attorneys fees proof at trial (fully compliant
with the Texas Supreme Court's then one week old decision in
Arthur Andersen & Co. v. Perry Equipment Corp., 945
S.W.2d 812 (Tex. 1997)) fixed the usual, reasonable, and customary fee
at $40 million. Court awarded offsets reduced the judgment to about
$179,000,000. Judge Hart also authorized Tejas to petition the Texas
Legislature for a return on its investment valued by the Court at
$53,864,000. Tejas' Operating Contractors ("OCs") were awarded $16.7
million in damages and over $7 million in attorneys' fees.(8)
V. POST-TRIAL MATTERS--HANDSHAKE SETTLEMENT AND THE PASSAGE OF H.B. 1898
After Judge Hart issued his letter opinion on April 4, 1997, but
before he even signed a Final Judgment consistent therewith on April
21, settlement discussions began in earnest. By May 18, a handshake
deal was made--the State would pay $140 million (with no offsets) in
five installments with 10% interest on unpaid amounts. In other
words, the State was agreeing to pay 93 cents on the dollar if one
reduced the legal fees from the awarded $40 million to the contracted
for $13.2 million. Assuming the full $40 million awarded, Tejas was
receiving about 85 cents on the dollar. Bankruptcy proof indicated
such would be enough to pay Tejas' creditors and investors in full.
On May 28, the Texas House (after lively debate) passed H.B. 1898,
appropriating around $115 million, enough to fund the first three
yearly payments. Payments four and five carry over to the next
biennial budget period. The Legislative Budget Board ("LBB") and
TNRCC will include those sums in the next biennium's base budget.
Tejas and its creditors testified in the Bankruptcy Court that they
believe fully in the honor of the TNRCC and the Legislature regarding
payments four and five and believe the last installments will be paid.
If they are not, established Bankruptcy precedent holds that the
damages will revert to the uncompromised amounts.
VI. BEFORE A SETTLEMENT AGREEMENT IS SIGNED, THE SUPREME COURT DECIDES
FEDERAL SIGN ON JUNE 20, 1997
The settlement agreement between Tejas and the State was not signed
until July 22, 1997 and not funded until Friday, February 13, 1998.(9) The lag from handshake to signing was
required so that the State could come to terms with Tejas on certain
nonmonetary aspects of the settlement. The July to February lag was
required so that the Tejas Bankruptcy Court (and various appellate
courts) could pass on the settlement's wisdom pursuant to Bankruptcy
Rule 9019.
The Supreme Court's June 20, 1997 opinion in Federal Sign v.
Texas Southern University, 951 S.W.2d 401 (Tex. 1997) bore on the
two issues with which Tejas had been grappling since December
1994--could it uphold a Judgment against the State through the appeal
process and if so, could it then collect that Judgment? As to Tejas
(reading between the lines and as a strongly biased advocate), the
Supreme Court answered the first question yes and the second question
probably/maybe. Federal Sign was a 2-4-3 decision. Justice
Baker wrote for a six judge majority joined by Chief Justice Phillips
and Justices Gonzalez, Hecht, Cornyn, and Owen. Four of those six
(Hecht, Phillips, Cornyn, and Owen) wrote or joined in a Hecht
concurrence including vastly limiting language. Three Justices
(Enoch, Spector, and Abbott) dissented and were fully prepared to
scrap contractual sovereign immunity now. We characterized the
opinion then (and now) as 2-4-3 because only Justices Baker and
Gonzales were in the majority, but did not join the four concurring
Justices in limiting and explaining the holding. The two Justice
"majority" handed down precisely the opinion for which Tejas had been
planning for 31 months; namely, in a straight contract case,
Legislative waiver of immunity from suit must exist even
though the mere act of contracting waives immunity from
liability. From the May 1995 petition filed just 12
hours after S.B. 178 passed, we were prepared for this holding. Our
client had entered into a government contract, the government breached
the contract, and we had three state statutes (along with our
constitutional claims) authorizing suit. The two member "majority"
held.
Therefore, when the State contracts with private citizens, the
State waives immunity from liability. However, a private
citizen must have legislative consent to sue the State on a breach of
contract claim. The act of contracting does not waive the State's
immunity from suit. Accordingly, we expressly overrule any
cases that hold to the contrary."
951 S.W.2d at 408.
Even these two Justices stated in the text and in a footnote that
their opinion was narrow. In reciting the facts of the case, the
majority stressed that Federal Sign had prepared to perform
but had tendered no performance. That recitation gave a fully
performing contractor like Tejas great relief.
The four member concurrence went further:
[A]t the time of TSU's breach (as found by the jury), Federal Sign
had not performed. To be sure, Federal Sign purchased equipment for
the contract that it could not otherwise use and lost profits it had
bargained for. But Federal Sign never tendered performance, never
performed services on T's property, and never delivered TSU any
materials. Would the result be different if Federal Sign had already
installed the scoreboards and TSU refused to pay the agreed price? Or
if TSU refused to pay in order to force Federal Sign to make a
concession on another contract? We do not attempt to decide such
hypotheticals today, but they do suggest that the State may waive
immunity by conduct other than simply executing a contract, so
that it is not always immune from contract suits.(10)
951 S.W.2d 412 (emphasis supplied).
On appeal, Tejas would have pointed to its status as an
acknowledged, fully performing and horribly treated,
contractor and asked the four concurrers, three dissenters, and even
the two member "majority" to answer the reserved question in Tejas'
favor. Tejas would have argued it was the perfect "waiver by conduct"
Plaintiff. Now, we will never know if Tejas would have been
successful in that argument.
Just as the concurrence gave contract claimants some hope of
obtaining a Judgment, the concurrence was not so generous in
terms of collecting nonconstitutional claims,
a waiver of immunity would not provide the full redress the
dissent contends is essential for a contract with the State to be
enforceable. Even if the State is held liable in a suit for breach of
contract, it cannot be forced to pay the judgment. The Legislature
may simply refuse to appropriate the funds. There is no reason
why requiring legislative consent to sue makes a contract
unenforceable but requiring legislative consent to collect does not.
951 S.W.2d 415 (emphasis supplied).
Of course, Tejas would have argued that the impairment and takings
underpinnings of its Judgment created a situation in which the
Legislature could not constitutionally refuse to appropriate
funds necessary to satisfy its Judgment after all appeals had been
exhausted.(11)
VII. CONCLUSION
It was a wild and unforgettable ride. Undecided at this time is
whether the Courts and the Legislature will soon express that
the State of Texas is a contracting party on whom individuals and
businesses may confidently rely. We hope they will and think they
should.
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