ECO Resources, Inc. v. City of Austin

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