ACCEPTED 03-14-00510-CV 4243321 THIRD COURT OF APPEALS AUSTIN, TEXAS 2/23/2015 10:52:08 AM JEFFREY D. KYLE CLERK No. 03-14-00510-CV FILED IN 3rd COURT OF APPEALS IN THE COURT OF APPEALS AUSTIN, TEXAS FOR THE THIRD COURT OF APPEALS DISTRICT 2/23/2015 10:52:08 AM AUSTIN, TEXAS JEFFREY D. KYLE Clerk

NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. LEIGHTY, JAD L. DAVIS AND HOLLY CLAUSE, Appellants and Cross-Appellees, v. TRACY D. STRANDHAGEN, Appellee and Cross-Appellant.

ON APPEAL FROM THE 353RD JUDICIAL DISTRICT COURT OF TRAVIS COUNTY, TEXAS HON. ORLINDA NARANJO, PRESIDING; CAUSE NO. D-1-GN-13-002811

APPELLEE’S BRIEF

Daniel H. Byrne Texas Bar No. 03565600 [email protected] FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, Texas 78701 Telephone: (512) 476-2020 Telecopy: (512) 477-5267 IDENTITY OF PARTIES AND COUNSEL APPELLEES APPELLANTS Tracy D. Strandhagen Noah S. Bunker, Paul Carrell, Everett Brew Houston, Jr., W.

Andrew Buchholz, Scott J. Leighty, Jad L. Davis, and Holly Clause Trial and Appellate Counsel: Appellate Counsel: Daniel H. Byrne Amanda G. Taylor Texas Bar No. 03565600 [email protected] [email protected] Texas Bar No. 24045921 Lessie Fitzpatrick MARTENS, TODD, LEONARD, TAYLOR Texas Bar No. 24012630 & AHLRICH [email protected] 301 Congress Avenue, Suite 1950 Christine E. Burgess Austin, Texas 78701 Texas Bar No. 00793428 Tel: (512) 542-9898 [email protected] Fax: (512) 542-9899 FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Blvd., Suite 2000 Austin, Texas 78701 Tel: (512) 476-2020 Fax: (512) 477-5267 Trial Counsel: Kelly McDonald [email protected] Carla Garcia Connolly [email protected] CARLS, MCDONALD & DALRYMPLE, LLP South MoPac Expressway Barton Oaks Plaza Building 1, Suite 280 Austin, Texas 78746 Tel: (512) 472-4845 Fax: (512) 472-8403

i TABLE OF CONTENTS IDENTITY OF PARTIES AND COUNSEL ......................................................... i TABLE OF CONTENTS ....................................................................................... ii INDEX OF AUTHORITIES ................................................................................. iv STATEMENT OF THE CASE ............................................................................. ix RECORD ABBREVIATIONS................................................................................x ISSUES PRESENTED ........................................................................................... xi I. NO REQUEST FOR ORAL ARGUMENT ................................................1 II. STATEMENT OF FACTS ...........................................................................1 A. DR. STRANDHAGEN SOUGHT A DECLARATION THAT THE CONTRACTUAL PROVISION PURPORTING TO REQUIRE PAYMENT OF $500,000 IS AN UNENFORCEABLE PENALTY ...................................................1 B. TRIAL COURT PROCEEDINGS..........................................................................4 III. SUMMARY OF THE ARGUMENT ...........................................................6 IV. ARGUMENT..................................................................................................8 A. STANDARD OF REVIEW ....................................................................................8 B. THE DISTRICT COURT DID NOT ERR BY GRANTING THE SUMMARY JUDGMENT .......................................................................................................8 1. Dr. Strandhagen carried her burden of proving that the $500,000 Termination Penalty Clause is an unenforceable penalty. ........................................................................................................9 a. Dr. Strandhagen need only prove that the $500,000 Termination Penalty Clause was not a reasonable forecast of just compensation. .................................................................................9 ii b. As matter of law, the $500,000 Termination Penalty Clause was not a reasonable forecast of just compensation on its face because the penalty amount was the same if Dr. Strandhagen terminated her employment on day one or after she performed for 99% of the employment contract term. ...................12 (1) A party challenging the enforceability of a purported liquidated damages clause based on its facial unreasonableness as a forecast of just compensation at the time the contract was made need not address actual damages. ............................................................................................12 (2) Dr. Strandhagen has proven that the Termination Penalty Clause is facially invalid. .................................................................15 2. Appellants’ modification argument fails. ..............................................20 C. THE TRIAL COURT HAD JURISDICTION BECAUSE AN ACTUAL CONTROVERSY EXISTS BETWEEN THE PARTIES, AND IT IS RIPE FOR ADJUDICATION ..............................................................................................24 V. PRAYER .......................................................................................................29 CERTIFICATE OF SERVICE AND COMPLIANCE ......................................31

iii INDEX OF AUTHORITIES Am. Nat’l Ins. Co. v. Cannon, 86 S.W.3d 801 (Tex. App.—Beaumont 2002, no pet.) ...........................................28 Baker v. Int’l Record Syndicate, Inc., 812 S.W.2d 53 (Tex. App.—Dallas 1991, no writ.) ..........................................10, 12 Bd. of Water Eng’rs v. San Antonio, 283 S.W.2d 722 (Tex. 1955)....................................................................................25 Cal. Prods., Inc. v. Puretex Lemon Juice, Inc., 334 S.W.2d 780 (Tex. 1960)....................................................................................25 Carter v. Dripping Springs Water Supply Corp., Cause No. 03-03-00753-CV, 2005 Tex. App. LEXIS 461 (Tex. App.—Austin, Jan. 21, 2005, no pet.) ............................................................25 Commercial Union Ins. Co. v. La Villa Indep. Sch. Dist., 779 S.W.2d 102 (Tex. App.—Corpus Christi 1989, no writ)..................................17 Community Dev. Serv., Inc. v. Replacement Parts Mfg., Inc., 679 S.W.2d 721 (Tex. App.—Houston [1st Dist.] 1984, no writ) ...............15, 16, 20 Continental Holdings, Ltd. v. Leahy, 132 S.W.3d 471 (Tex. App.—Eastland 2003, no pet.) ............................................21 County of Cameron v. Brown, 80 S.W.3d 549 (Tex. 2002) ....................................29 Eberts v. Businesspeople Personnel Servs., Inc., 620 S.W.2d 861 (Tex. Civ. App.—Dallas 1981, no writ) .................................11, 17 Farmers Ins. Exch. v. Rodriguez, 366 S.W.3d 216 (Tex. App.–Houston [14th Dist.] 2012, pet. denied) ................................................29 FPL Energy, LLC v. TXU Portfolio Mgmt. Co., L.P., 426 S.W.3d 59 (Tex. 2014) ................................... 8, 9, 10, 11, 12, 13, 14, 15, 18, 20

iv Garden Ridge, L.P. v. Advance Int’l, Inc., 403 S.W.3d 432 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) ............................10, 13, 16, 19 GPA Holding, Inc. v. Baylor Health Care Sys., 344 S.W.3d 467 (Tex. App.—Dallas 2011, pet. denied) ...................................10, 12 Great Am. Prods. v. Permabond Int’l, 94 S.W.3d 675 (Tex. App.—Austin 2002, pet. denied) ...................................................................22 Hamilton v. Tex. Prop. and Cas. Ins. Guar. Ass’n, No. 03-98-00355-CV, 1999 Tex. App. LEXIS 3163 (Tex. App.—Austin Apr. 29, 1999, no pet.) ............................................................21 Hampden Corp. v. Remark, Inc., No. 05-13-00529, 2014 Tex. App. LEXIS 6900 (Tex. App.—Dallas Oct. 10, 2014, pet. denied) ......................................................22 Healix Infusion Therapy, Inc. v. Bellos, No. 11-02-00346-CV, 2003 Tex. App. LEXIS 9027 (Tex. App.—Eastland Oct. 23, 2003, no pet.) ...................................................12, 15 Hirschfeld Steel Co., Inc. v. Kellogg Brown & Root, Inc., 201 S.W.3d 272 (Tex. App.—Houston [14th Dist.] 2006, no pet.) ..........................28 Hoover Slovacek, LLP v. Walton, 206 S.W.3d 557 (Tex. 2006) .............................23 In re City of Dallas, 977 S.W.2d 798 (Tex. App.—Fort Worth 1998, orig. proceeding)....................................................25 In re Dow Corning Corp., 419 F.3d 543 (6th Cir. 2005)....................................11, 13 In re Kasschau, 11 S.W. 3d 305 (Tex. App.—Houston [14th Dist.] 1999, orig. proceeding) .....................................23 In re OC, Inc., 552 F.3d 413 (5th Cir. 2008) ............................................................21 In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) ..........................................23 Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462 (Tex. 1998)....................................................................................21

v Khan v. Meknojiya, No.03-11-00580-CV, 2013 Tex. App. LEXIS 7976 (Tex. App.—Austin June 28, 2013, no pet.) ......................................................10, 12 Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985)...................................................................................15 LHR Enters., Inc. v. Geeslin, No. 03-05-00176-CV, 2007 Tex. App. LEXIS 8849 (Tex. App.—Austin Nov. 7, 2007, pet. denied) ................................................26, 29 Mayfield v. Hicks, 575 S.W.2d 571 (Tex. App.—Dallas 1978, writ ref’d n.r.e.) ...........................................13, 16, 18, 19 MBM Fin. Corp. v. The Woodlands Operating Co., L.P., 292 S.W.3d 660 (Tex. 2009)..............................................................................27, 28 McFadden v. Fuentes, 790 S.W.2d 736 (Tex. App.—El Paso 1990, no writ) .............................................19 McGinnis v. Union Pac. R.R. Co., 612 F. Supp. 2d 776 (S.D. Tex. 2009) .....................................................................28 Murphy v. Cintas Corp., 923 S.W.2d 663 (Tex. App.—Tyler 1996, writ denied) .........................12, 14 18, 19 Nexstar Broad., Inc. v. Gray, No. 09-07-00364, 2008 Tex. App. LEXIS 4736 (Tex. App.—Beaumont June 26, 2008, no pet.) ...............................................11, 29 Patterson v. Planned Parenthood of Houston & Se. Tex., Inc., 971 S.W.2d 439 (Tex. 1998)....................................................................................25 Paulsen v. Tex. Equal Access to Justice Found., 23 S.W.3d 42 (Tex. App.—Austin 1999, pet. denied) ............................................27 Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991) ........................9, 10, 13, 14, 16, 20 Robinson v. Parker, 353 S.W.3d 753 (Tex. 2011) ..................................................29 vi Rowan Cos., Inc. v. Griffin, 876 F.2d 26 (5th Cir. 1989) .........................................28 Rusk State Hosp. v. Black, 392 S.W.3d 88 (Tex. 2012) ..........................................29 Southern Union Co. v. CSG Sys., Inc., No. 03-04-00172-CV, 2005 Tex. App. LEXIS 564 (Tex. App.—Austin Jan. 27, 2005, no pet.) ...........................................10, 12, 15, 20 Southwestern Bell Tel. Co. v. Delanney, 809 S.W.2d 493 (Tex. 1991)....................................................................................23 SP Terrace, L.P. v. Meritage Homes of Tex., LLC, 334 S.W.3d 275 (Tex. App.—Houston [1st Dist.] 2010, no pet.) ............................. 9 State v. Margolis, 439 S.W.2d 695 (Tex. Civ. App.—Austin 1969, writ ref’d n.r.e.) .....................................................28 Stewart v. Basey, 245 S.W.2d 484 (Tex. 1952) .....................................10, 15, 16, 20 Tex. Ass’n of Business v. Tex. Air Control Bd., 852 S.W.2d 440 (Tex. 1993) ...............................................................................................................27 Tex. Dep’t of Pub. Safety v. Moore, 985 S.W.2d 149 (Tex. App.—Austin, 1998, no pet.) ..............................................25 Transcontinental Realty Investors, Inc. v. Orix Capital Markets, LLC, 353 S.W.3d 241 (Tex. App.—Dallas 2011, pet. denied) .........................................29 Transport. Ins. Co. v. WH Cleaners, Inc., 372 S.W.3d 223 (Tex. App.—Dallas 2012, no pet.) ...........................................8, 28 Triton 88, L.P. v. Star Elec., LLC, 411 S.W.3d 42 (Tex. App.—Houston [1st Dist.] 2013, no pet.) ........................10, 15 Urban Television Network Corp. v. Creditor Liquidity Solutions, LP, 277 S.W.3d 917 (Tex. App.—Dallas 2009, no pet.) ...............................................17 Valence Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005)......................................................................................8 vii WesternGeco, LLC v. Input/Output, Inc., 246 S.W.3d 776 (Tex. App.—Houston [14th Dist.] 2008, no pet.).........................25 RULES: Tex. R. Civ. P. 94 .....................................................................................................22 TEX. R. CIV. P. 166a(c)...............................................................................................8 Tex. R. App. P. 43....................................................................................................30 STATUTES: Tex. Civ. Prac. & Rem. Code §37.002 ....................................................................24 Tex. Civ. Prac. & Rem. Code §37.004 ........................................................24, 25, 28 OTHER AUTHORITIES: RESTATEMENT (SECOND) OF CONTRACTS §208 ........................................................24 RESTATEMENT (SECOND) OF CONTRACTS §356 ............................................14, 19, 23

viii STATEMENT OF THE CASE This appeal arises from Dr. Tracy D. Strandhagen’s request for a declaration that the $500,000 lump sum “liquidated damages” provision set forth in the parties’ contract is an unenforceable penalty. The trial court held that it had jurisdiction to determine such matter, and granted summary judgment declaring the purported “one size fits all” liquidated damages provision an unenforceable penalty.

Appellants appeal these decisions.

ix RECORD ABBREVIATIONS For the sake of simplicity, Dr. Strandhagen will use the same citation forms as the Appellants: • “CR” refers to the primary Clerk’s Record, pages 1-286, filed with this Court on 10/15/2014.

• “Sealed.CR” refers to the sealed document (Dr. Strandhagen’s Employment Agreement), filed under seal with this Court on 12/22/2014. Because the district clerk did not assign separate “record pages” to this document, cites are to the original page numbers.

• “RR” refers to the Reporter’s Record, pages 1-29, filed with this Court on 9/25/2014.

x ISSUES PRESENTED 1. Did the trial court err by granting summary judgment declaring the $500,000 purported liquidated damages provision to be an unenforceable penalty?

2. Did the trial court err by determining it had jurisdiction over Dr. Strandhagen’s cause of action?

xi Appellee Tracy D. Strandhagen (“Dr. Strandhagen”) submits the following brief: I. NO REQUEST FOR ORAL ARGUMENT Dr. Strandhagen believes that the issues in this appeal are straightforward and can be determined without oral argument. Of course, if this Court grants Appellants’ request for oral argument, Dr. Strandhagen respectfully requests that she be granted the opportunity to present her position and respond to Appellants’ arguments at any oral argument of this matter.

II. STATEMENT OF FACTS A. DR. STRANDHAGEN SOUGHT A DECLARATION THAT THE CONTRACTUAL PROVISION PURPORTING TO REQUIRE PAYMENT OF $500,000 IS AN UNENFORCEABLE PENALTY Dr. Strandhagen is a licensed anesthesiologist with more than fifteen years of experience. She was among about 60 anesthesiologists, along with Appellants Noah S. Bunker, Paul Carrell, Everett Brew Houston, Jr., W. Andrew Buchholz, Scott J. Leighty, Jad L. Davis, and Holly Clause, who were partners in Austin Anesthesiology Group, LLP (“AAG”). CR.160. In October of 2011, AAG entered into a transaction (the “Buyout”) whereby its operations were sold to American Anesthesiology of Texas, Inc. (“AAT”). Id. At the time of the Buyout, Dr. Strandhagen and the other AAG-affiliated physicians entered into separate employment agreements with AAT (almost all for a seven year term), wherein the

physicians agreed to work for AAT. See id.; CR.167, 173-78.1 Contemporaneously, these same physicians entered into the Advisory Board and Internal Operations Agreement (the “Physicians’ Agreement”). CR.162-83. The Physicians’ Agreement created an “Advisory Board” to provide “binding advice and guidance” to the medical director elected under the agreement. CR.162.

Appellants were the current members of that Advisory Board at the time this suit was initiated in 2013.

The Physicians’ Agreement also contains a section entitled “Physician Obligations,” which contains a purported liquidated damages clause. CR.167-68.

Pursuant to this clause, the physicians purportedly agreed that if their employment with AAT ceased at any time before their individual employment agreements expired for any reason other than termination by AAT without cause, 2 the physician who ceased to be employed by AAT became obligated to pay the non- terminated physicians their pro rata share of a lump sum amount labeled as “liquidated damages,” plus interest at 10% (the “Termination Penalty Clause”).

Appellants state that the period of time each physician agreed to be employed by AAT was tied to the amount of monetary compensation received from the Buyout. Appellants’ Brief at 5. Like several assertions made in Appellants’ Brief, this statement is not supported by the record citations provided. Id. (citing CR.144, 167-68). Nor did Appellants raise this immaterial issue in the trial court. In the case of Dr. Strandhagen, she was not provided any justification for the compensation paid to her in the Buyout or the rationale for the liquidated damage provision at issue here, as she was (like her other partners were) presented the Physicians’ Agreement on a take-it-or-leave-it basis.

There were also certain other limited exceptions such as death and other causes beyond Dr. Strandhagen’s control not applicable here.

CR.168 §5(b). For the vast majority of physicians, including Dr. Strandhagen, the lump sum amount was immutably fixed at $500,000. Id.3 The amount of this Termination Penalty Clause is the same whether Dr. Strandhagen’s employment terminated on day one of her employment with AAT (October 6, 2011) or day 2,554 (October 5, 2018); on its face the clause assesses the same damage amount for a physician that performs 99.96% of that doctor’s employment contract as for one who breaches with 99.96% of the contractual obligation unfulfilled. See id.; Sealed.CR.12, §VIII.A (term of Employment Agreement was seven years from effective date).

Dr. Strandhagen’s employment terminated in July 2013. See CR.161 ¶5; CR.141. AAT claimed that Dr. Strandhagen was terminated for cause, and Dr. Strandhagen claimed that she was terminated without cause.4 CR.141-45. In the

Appellants claim that the few variations in the lump sum “liquidated damages” amounts were “presumably” tied to shorter lengths of time of for some physician’s post-Buyout employment agreements with AAT. Appellants’ Brief at 6. There is no evidence in the record to support this “presumption.” Again, this is a new, immaterial factual assertion by Appellants, which was not made in the trial court.

In December of 2012, an employment dispute (which has since settled) arose between Dr. Strandhagen and AAT which eventually resulted in her filing a gender discrimination report to AAT. CR.39; see CR.85-87, 91-102. Dr. Strandhagen asserted that she was discriminated against because of her gender and that she was constructively discharged in July 2013. CR.91- 102, 141-143; see CR.85-87. Although immaterial to the issues on this appeal, Dr. Strandhagen points out that Appellants incorrectly assert that the Buyout occurred “just two months” before Dr. Strandhagen complained about the discrimination. Appellants’ Brief, p. 9 (citing to CR.93, 144). In fact, she reported the discrimination in response to an incident which occurred more than a year after the Buyout. See CR.144 (stating date of employment agreement in November 2011); CR.93 (first report of discrimination in February 2013).

fall of 2013, Dr. Strandhagen learned that Appellants took the position that she was terminated for cause, and her contention that they were planning to seek enforcement of the Termination Penalty Clause by soliciting other physicians to join in a lawsuit against her remains unrefuted.5 CR.40. Rather than awaiting this lawsuit, Dr. Strandhagen opted to file suit seeking a declaration that the Termination Penalty Clause is an unenforceable penalty as a matter of law. CR.40- 41.

B. TRIAL COURT PROCEEDINGS Appellants filed an Amended Plea to the Jurisdiction and Plea in Abatement (the “Plea to the Jurisdiction”), seeking dismissal of Dr. Strandhagen’s claims based on lack of jurisdiction. CR.77-84. After considering the Plea to the Jurisdiction and Dr. Strandhagen’s response (CR.109-45), the trial court dismissed Dr. Strandhagen’s request for a declaration that she was terminated without cause, but retained jurisdiction over her request for a declaration that the Termination Penalty Clause was an invalid and unenforceable penalty. CR.184.

Despite many opportunities to do so, Appellants have never denied that they were taking steps to file suit to enforce the Termination Penalty Clause against Dr. Strandhagen, nor—until this appeal—have they even claimed to have been undecided about whether to pursue such a claim against her. See generally, CR.77-83 (no claim that Appellants were not intending to sue Dr. Strandhagen or that they were undecided on this course of action); contrast to Appellants’ Brief, p. 38 (citing to CR.79-80, which does not support this point). Instead, they have repeatedly equivocated, contending only that no justiciable controversy existed because they had not yet confronted Dr. Strandhagen with their demands. CR.79.

Dr. Strandhagen later filed a Motion for Summary Judgment, with supporting evidence, seeking a determination that the Termination Penalty Clause is an unenforceable penalty. CR.154-83. Appellants filed their response to that motion, arguing that the Termination Penalty Clause is not an unenforceable penalty. CR.186-93. Appellants did not raise the issue of modification in their summary judgment response, nor did they plead modification in their answer. Id.; CR.74-76. Dr. Strandhagen filed a reply in support of her motion for summary judgment, see CR.194-201, and Appellants filed additional supplemental briefing.

CR.202-11. After a full briefing on the issues, a hearing and post-hearing submissions, the trial court found that the “$500,000 purported liquidated damages clause” is an unenforceable penalty, and entered judgment accordingly. See CR.212. The trial court did not further specify the grounds for its judgment. Id. The Appellants filed a Motion for New Trial, (1) asking the Court to reconsider its conclusion that the Termination Penalty Clause is an unenforceable penalty, (2) arguing for the first time that even if it is an unenforceable penalty, the Court should somehow re-write the penalty clause, and (3) asking the Court to reconsider its earlier determination that it had jurisdiction to decide whether the Termination Penalty Clause is an unenforceable penalty. CR.213-50. Dr. Strandhagen urged the trial court to reject all of Appellants’ arguments, and she specifically argued that the newly raised modification argument should be rejected

both because it was untimely (and thus waived) and because it lacked merit.

CR.254-70. After full briefing on the issues and a hearing, the trial court denied Appellants’ Motion for New Trial without specifying the grounds for such determination. CR.271.

III. SUMMARY OF THE ARGUMENT The only claim before the trial court when it issued the Summary Judgment was Dr. Strandhagen’s request to have the $500,000 lump sum Termination Penalty Clause declared an unenforceable penalty. This request was primarily predicated on the fact that on its face the amount required to be paid was not a reasonable forecast of just compensation at the time the contract was made as a matter of law. Alternatively, Dr. Strandhagen argued that the Termination Penalty Clause was an unenforceable penalty because it purported to render Dr. Strandhagen liable to Appellants for damages for her alleged breach of a contract (her employment agreement with AAT) to which Appellants are neither parties nor third-party beneficiaries. The trial court properly granted summary judgment (the “Summary Judgment”) declaring the Termination Penalty an unenforceable penalty as a matter of law on May 20, 2014. CR.212.

Appellants attack the Summary Judgment on multiple grounds. These attacks fail because Dr. Strandhagen met her burden to conclusively negate an essential element of any enforceable liquidated damages provision, since on its

face the Termination Penalty was not a reasonable forecast of just compensation for breach at the time it was made as a matter of law. The Court must disregard Appellants’ illogical and legally unsupportable suggestion that Dr. Strandhagen had the burden to negate both elements necessary to enforce such clauses; once she negated the “reasonable forecast” element there was no need for her to address the “difficulty of estimation” element. Appellants’ newly fabricated argument that if the Termination Penalty is an illegal penalty, then the trial court erred by failing to re-write it instead of simply holding it to be unenforceable, was clearly waived by their failure to raise, plead or present evidence of this affirmative defense in any way before the Summary Judgment was rendered. 6 Finally, Appellants attack the court’s Order Granting in Part and Denying in Part Defendants’ Amended Plea to the Jurisdiction (the “PTJ Order”), arguing that the trial court had no jurisdiction to decide whether the Termination Penalty Clause was an unenforceable penalty. Their jurisdictional challenge must be rejected because Dr. Strandhagen has shown (and Appellants effectively concede) that there is an actual controversy among the parties regarding the enforceability of the Termination Penalty Clause, as amply illustrated by the very vigorous briefing presented to this Court.

If this Court somehow finds it appropriate to address the merits of Appellants’ untimely modification argument, it should reject Appellants’ faulty interpretation of this clause on the merits.

IV. ARGUMENT A. STANDARD OF REVIEW The trial court’s grant of summary judgment will be reviewed de novo.

Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). The Summary Judgment must be affirmed if there is no genuine issue as to any material fact and Dr. Strandhagen is entitled to judgment as a matter of law. See TEX. R. CIV. P. 166a(c). Likewise, the trial court’s denial of the Plea to the Jurisdiction will be reviewed de novo. Transport. Ins. Co. v. WH Cleaners, Inc., 372 S.W.3d 223, 227 (Tex. App.—Dallas 2012, no pet.).

B. THE DISTRICT COURT DID NOT ERR BY GRANTING THE SUMMARY JUDGMENT As the Texas Supreme Court reiterated last year, The basic principle underlying contract damages is compensation for losses sustained and no more; thus, we will not enforce punitive contractual damages provisions. In Phillips v. Phillips, we acknowledged this principle and restated the two indispensible findings a court must make to enforce contractual damages provisions: (1) the harm caused by the breach is incapable or difficult of estimation, and (2) the amount of liquidated damages called for is a reasonable forecast of just compensation.

FPL Energy, LLC v. TXU Portfolio Mgmt. Co., L.P., 426 S.W.3d 59, 69 (Tex. 2014) (internal quotations and citations omitted; emphasis added) (hereinafter, “FPL Energy”). Unquestionably, if either of these two elements (difficulty of estimation or reasonable forecast) is negated, a liquidated damages provision is

unenforceable as a penalty. Here, the trial court did not err in determining that the Termination Penalty Clause is an unenforceable penalty because Dr. Strandhagen established as a matter of law that it was not a reasonable forecast of just compensation at the time the contract was made.

1. Dr. Strandhagen carried her burden of proving that the $500,000 Termination Penalty Clause is an unenforceable penalty.

Enforceability of a liquidated damages clause is a question of law for the court to decide. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). The burden of proving that a liquidated damages clause is an unenforceable penalty is on Dr. Strandhagen since she is the party seeking to invalidate the clause. SP Terrace, L.P. v. Meritage Homes of Tex., LLC, 334 S.W.3d 275, 287 (Tex. App.— Houston [1st Dist.] 2010, no pet.). Dr. Strandhagen met her burden to prove that the Termination Penalty Clause is an unenforceable penalty by proving that the clause was not a reasonable forecast of just compensation.

a. Dr. Strandhagen need only prove that the $500,000 Termination Penalty Clause was not a reasonable forecast of just compensation.

Appellants fundamentally misstate the legal standard for determining when a liquidated damages clause is an unenforceable penalty. In an argument that borders on the frivolous, they state incorrectly that Dr. Strandhagen must negate each of the two elements necessary to enforce a liquidated damages clause in order to prevail. See Appellants’ Brief, pp. 17-22. This argument is fallacious—since both elements must be present for the clause to be enforced, it logically and necessarily follows that if either element is negated, the clause is an unenforceable penalty. As noted above, recent Texas Supreme Court precedent verifies this.

FPL Energy, 426 S.W.3d at 70-72.

The two-part Texas common law test for enforceability of a purported liquidated damages clause is repeatedly and consistently described as requiring two indispensible elements. Only if both of the following elements are present, may such a clause be enforced: (1) the harm caused by the breach is incapable or difficult of estimation, and (2) the amount of liquidated damages is a reasonable forecast of just compensation. FPL Energy, 426 S.W.3d at 69; Phillips, 820 S.W.2d at 788.7 If one must establish two elements to prove a clause is enforceable, it logically follows that if either element is missing, the clause is unenforceable. Therefore, a liquidated damages provision is unenforceable if either of the liquidated damages elements set forth above is negated. Requiring a

E.g., Stewart v. Basey, 245 S.W.2d 484, 486 (Tex. 1952) (“All agree that to be enforceable as liquidated damages the liquidated damages must be uncertain and the stipulation must be reasonable”) (emphasis added); Khan v. Meknojiya, No. 03-11-00580-CV, 2013 Tex. App. LEXIS 7976, *7 (Tex. App.—Austin June 28, 2013, no pet.); Southern Union Co. v. CSG Sys., Inc., No. 03-04-00172-CV, 2005 Tex. App. LEXIS 564, *12 (Tex. App.—Austin Jan. 27, 2005, no pet.); Triton 88, L.P. v. Star Elec., LLC, 411 S.W.3d 42, 62 (Tex. App.—Houston [1st Dist.] 2013, no pet.); Garden Ridge, L.P. v. Advance Int’l, Inc., 403 S.W.3d 432, 439 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) (hereinafter “Garden Ridge”); GPA Holding, Inc. v. Baylor Health Care Sys., 344 S.W.3d 467, 475 (Tex. App.—Dallas 2011, pet. denied); Baker v. Int’l Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.—Dallas 1991, no writ). litigant to negate both essential elements to prevail would be absurd, which helps explain why no Texas court has ever so held.

The Texas Supreme Court confirmed that only one of these elements needs to be negated in FPL Energy, 426 S.W.3d at 70-72. In this 2014 case, the court found that the first element of the enforceability test—difficulty of estimation of the actual harm caused by breach of the contract (the element Appellants complain that Dr. Strandhagen failed to negate)—was satisfied. Id. at 70. It nevertheless held the clause unenforceable because the amount of liquidated damages called for was not reasonable. Id. at 70-72. There, as here, even where damages were difficult of estimation (which the trial court below was required to assume in the context of Dr. Strandhagen’s summary judgment motion), the absence of the second necessary element was fatal to the clause’s enforceability. Texas jurisprudence is replete with similar examples. 8

E.g., In re Dow Corning Corp., 419 F.3d 543, 550, 553 (6th Cir. 2005) (under Texas law, party challenging liquidated damages clause had burden to negate one of elements necessary to prove clause enforceable; where one element is negated, it is unenforceable penalty); Nexstar Broad., Inc. v. Gray, No. 09-07-00364, 2008 Tex. App. LEXIS 4736, *7-8 (Tex. App.— Beaumont June 26, 2008, no pet.) (holding liquidated damages provision unenforceable where it was unreasonable forecast of just compensation without any discussion of whether harm was difficult to estimate); Eberts v. Businesspeople Personnel Servs., Inc., 620 S.W.2d 861, 863-65 (Tex. Civ. App.—Dallas 1981, no writ) (liquidated damages provision unenforceable where amount was not reasonable forecast of just compensation, even if the harm was difficult to estimate).

Appellants’ reliance on what can most charitably be described as dicta9 in lower Texas appellate court cases cannot overcome the longstanding Texas common law test, Texas Supreme Court precedent, or common sense. To prove the Termination Penalty Clause’s unenforceability, Dr. Strandhagen was only required to negate one of the two elements needed to enforce a purported liquidated damages clause. Consequently, the Final Judgment must be affirmed since she showed that the Termination Penalty Clause was not a reasonable forecast of just compensation.

b. As matter of law, the $500,000 Termination Penalty Clause was not a reasonable forecast of just compensation on its face because the penalty amount was the same if Dr. Strandhagen terminated her employment on day one or after she performed for 99% of the employment contract term.

(1) A party challenging the enforceability of a purported liquidated damages clause based on its facial No case that Appellants cite for the proposition that Dr. Strandhagen must negate both elements of the test for enforceability so holds; never in the history of Texas common law has a court enforced a liquidated damages provision that was not a reasonable forecast of just compensation at the time it was made. Appellants’ cases are readily distinguished. See Khan, 2013 Tex. App. LEXIS 7976, at *9-10 (holding lease provision at issue not a liquidated damages clause at all, so penalty analysis inapplicable); Southern Union Co., 2005 Tex. App. LEXIS 564, at *13-20 (enforcing liquidated damages provision where party challenging provision failed to show either that harm was difficult to estimate or that the liquidated damages were an unreasonable forecast of loss); GPA Holding, Inc., 344 S.W.3d at 476 (same); Healix Infusion Therapy, Inc. v. Bellos, No. 11-02-00346-CV, 2003 Tex. App. LEXIS 9027, *5-7 (Tex. App.— Eastland Oct. 23, 2003, no pet.) (same); Murphy v. Cintas Corp., 923 S.W.2d 663, 665-66 (Tex. App.—Tyler 1996, writ denied) (liquidated damages provision enforceable where evidence showed that the harm was difficult to estimate and challenging party failed to show that the amount was unreasonable); Baker, 812 S.W.2d at 55-56 (liquidated damages provision for loss of damage to photos enforceable where evidence showed both that the harm was difficult to estimate and the amount not unreasonable). unreasonableness as a forecast of just compensation at the time the contract was made need not address actual damages.

Importantly, since it is a “forecast,” the reasonableness of the damage forecast is measured at the time of contracting. FPL Energy, 426 S.W.3d at 71.

Thus, there is no necessity for a party like Dr. Strandhagen who is challenging the purported liquidated damages clause as facially unreasonable at the time of contracting to show actual damages, and no need for the Court to even evaluate the actual damages that were eventually sustained. See, e.g., Phillips, 820 S.W.2d at 788-89 (no fact issue regarding amount of actual damages where liquidated damages provision challenged on its face—not based on argument that actual damages incurred were much less than amount contracted for); In re Dow Corning Corp., 419 F.3d at 552-53 (where party showed purported liquidated damages clause not reasonable estimate of just compensation for anticipated damages at time of contract, no need to consider whether such damages disproportionate to actual damages because burden already met) (applying Texas law); Mayfield v. Hicks, 575 S.W.2d 571, 575-76 (Tex. App.—Dallas 1978, writ ref’d n.r.e.) (liquidated damages provision that is the same whether breach is trivial or major is penalty on its face, even if breach at issue in suit is major breach); see also Garden Ridge, 403 S.W.3d at 438 (recognizing that “one way a party can show that a liquidated damages provision is unreasonable is by showing that the actual

damages incurred were much less than the amount contracted for,” but party may also show unreasonableness on the face of a provision).10 Dr. Strandhagen chose to challenge the facial reasonableness of the purported liquidated damages clause at the time of contracting, rather than pursuing the alternative of showing that the clause was unreasonable “in light of actual damages.” See FPL Energy, 426 S.W.3d at 72 (citation omitted); Phillips, 820 S.W.2d at 788 (noting that one way to show liquidated damages provision is unreasonable is to show actual damages were much less than amount contracted for). As such, she had no burden to show such actual damages. 11 None of the

Neither of the two authorities relied upon by Appellants in support of this argument actually supports their contention that a challenge to the reasonableness of the Termination Penalty Clause required Dr. Strandhagen to prove her actual damages. The first, Murphy v. Cintas Corp. does not support this assertion. See Murphy, 923 S.W.2d at 664-66 (stating that party challenging clause failed to prove that it was not difficult to estimate damages and failed to explain why clause was not reasonable forecast of just compensation). The second, Section 356 of the Restatement (Second) of Contracts, has been interpreted by the Texas Supreme Court to stand for the proposition that “the time of making a contract as the moment to evaluate the reasonableness of a liquidated damages clause.” FPL Energy, 426 S.W.2d at 70 n. 2. To the extent that §356 could be interpreted to only permit unreasonableness to be measured retrospectively in comparison to actual damages, it is contrary to Texas law, and as such unpersuasive.

Contrast to Phillips, 820 S.W.2d at 788 (party challenging reasonableness of liquidated damages clause as grossly disproportionate to actual damages assumes burden to show actual damages); cf. FPL Energy, 426 S.W.3d at 71-72 (although clauses in question reasonably forecast damages “on their face,” still unenforceable because not reasonable in comparison to actual damages eventually sustained). cases cited by Appellants requires a party challenging the reasonableness of a purported liquidated damages clause on its face to show actual damages. 12 (2) Dr. Strandhagen has proven that the Termination Penalty Clause is facially invalid.

The fundamental flaw evident on the face of the Termination Penalty Clause is its “one size fits all” approach to remediating an alleged breach. Such clauses are simply unenforceable under Texas law when the same remedy is provided for breaches of obviously varying magnitude. In other words, a liquidated damages clause is unenforceable as “a penalty if it provides for unreasonable damages for trivial breaches as well as reasonable damages for major breaches.” Community Dev. Serv., Inc. v. Replacement Parts Mfg., Inc., 679 S.W.2d 721, 727 (Tex. App.—Houston [1st Dist.] 1984, no writ); e.g., Stewart, 245 S.W.2d at 672 (when purported liquidated damages provision provides same damages for trivial breaches as for material ones, it was unenforceable penalty); see also Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1290 (7th Cir. 1985) (liquidated damages provision constitutes a penalty if the amount required to be paid is “invariant to the gravity of the breach”). This is because such “one size fits all”

See Triton 88, L.P., 411 S.W.3d at 62 (party challenging reasonableness of liquidated damages clause failed to show either that the clause was facially unreasonable at time of contract or grossly disproportionate to actual damages); Southern Union Co., 2005 Tex. App. LEXIS 564, at *16-18 (holding two-to-one ratio of liquidated to actual damages is not per se unreasonable); Healix Infusion Therapy, Inc., 2003 Tex. App. LEXIS 9027, at *6 (party challenging reasonableness of liquidated damages clause on the ground that it was disproportionate to actual damages must prove actual damages). provisions are not based on the injured party’s likely damages but are intended to be punitive. See FPL Energy, 426 S.W.3d at 69 (policy is to compensate for “losses sustained and no more”); Phillips, 820 S.W.2d at 788 (party has no right to have court enforce liquidated damages provision that violates principle that party should be awarded “neither less nor more than his actual damages”). For these reasons, courts consistently strike down “one size fits all” clauses as unenforceable. E.g., Stewart, 245 S.W.2d at 486 (striking down provision that provided same amount of damages for both trivial and materials breaches of a lease); Garden Ridge, 403 S.W.3d at 441-42 (contract provision permitting chargeback of 100% of merchandise cost for any unauthorized substitution of ordered product unreasonable forecast of damages); Community Dev. Serv., Inc., 679 S.W.2d at 727 (court held liquidated damages provision in contract to purchase lots unenforceable penalty because amount was same for trivial and material breaches); Mayfield, 575 S.W.2d at 575-76 (liquidated damages provision that is the same whether breach is trivial or major is penalty, even if breach at issue in suit is major breach).

Here, the Physicians’ Agreement purports to require Dr. Strandhagen to pay $500,000 to Appellants (and other physicians) if her Employment Agreement with AAT is terminated at any time during its seven-year term. This amount is the same whether Dr. Strandhagen’s employment with AAT ended the day after the

Physicians’ Agreement was signed or many years later. Appellants’ actual damages (if any)—which they identify as arising from the impact of Dr. Strandhagen’s early departure on their abilities to earn annual bonuses, loss of her experience and goodwill, Appellants’ Brief, pp.3-4—would obviously be greater the earlier Dr. Strandhagen stopped working at AAT. 13 This principle was recognized by the Dallas Court of Appeals in Eberts v. Businesspeople Personnel Servs., Inc., 620 S.W.2d at 864. In that case, an employment agency sued its former job counselor employee for violation of a non-compete covenant in his employment contract. Id. at 862. The employment contract contained a $10,000 liquidated damages clause for breach of the covenant. Id. at 863. The court held that the $10,000 liquidated damages provision could not be a reasonable estimation of damages for breach of non-compete covenant where the same amount applied whether the breach continued for one day or two years. Id. at 864-65. Contrast to e.g., Urban Television Network Corp. v. Creditor Liquidity Solutions, LP, 277 S.W.3d 917, 918-19 (Tex. App.—Dallas 2009, no pet.) (upholding liquidated

In an argument that again defies common sense, Appellants suggest that their damages would be the same no matter when Dr. Strandhagen left the practice. Appellants’ Brief, pp. 26- 27. If the Appellants are damaged (as they suggest) in the form of their reduced abilities to earn annual bonuses, this would be because Dr. Strandhagen made the practice more profitable. See Sealed.CR.Annex A & B. Under that theory of damages, they would obviously suffer more damage if she stopped contributing to the success of the practice seven years early than they would if she left one day early. Similarly, if Appellants are indeed damaged as they suggest because Dr. Strandhagen takes her good will and experience with her when she leaves, then they would suffer more damage the longer they were deprived of such experience and good will. damages clause that required payment that varied based on how much time was left on breached contract); Murphy, 923 S.W.2d at 665-67 (upholding liquidated damages clause designed to decrease amount of damages assessed over time); Commercial Union Ins. Co. v. La Villa Indep. Sch. Dist., 779 S.W.2d 102, 107 (Tex. App.—Corpus Christi 1989, no writ) (upholding liquidated damages provision in construction contract that required payment of $100 for every day late).

Appellants attempt to salvage their facially invalid penalty by arguing that even if the Termination Penalty Clause may have been an unreasonable forecast of damages for some breaches, it is still enforceable in this case because Dr. Strandhagen failed to prove retrospectively that it was unreasonable in relation to the loss actually incurred here. Appellants’ Brief, pp. 28-30. As noted above, Texas law imposes no such burden on a party asserting facial invalidity.

Moreover, even if by happenstance a facially invalid liquidation provision might result in an outcome that is not unreasonable in a given circumstance, that eventuality does not salvage the enforceability of the clause. For example, in Mayfield v. Hicks, the parties had agreed to purported liquidated damages clauses in two equipment leases, which provided for the same damages whether the breach of the leases were material or minor. 575 S.W.2d at 575. The court rejected the lessors’ argument that the provisions should not be treated as penalties because the

actual breaches at issue were material: “it is immaterial that the actual breach [was a major one]. A provision is a penalty if it provides for unreasonable payments for a minor breach.” Id.; see also FPL Energy, 426 S.W.3d at 70 & n. 2 (citing Mayfield with approval for the proposition that the test for reasonableness of just compensation is “from the perspective of the parties at the time of contracting.”).

Appellants’ authorities to the contrary are unpersuasive. 14 Because the Termination Penalty Clause attempts to require payment of the same liquidated damages amount—$500,000—whether the breach of contract is a material breach or a trivial one, 15 it cannot have been a reasonable forecast of any Comment b and Illustration 2 to Section 356 of the Restatement (Second) of Contracts are not persuasive because they are contrary to Texas common law as set forth above. This is not surprising because Section 356 was patterned on the liquidated damages provisions in the UCC. RESTATEMENT (SECOND) OF CONTRACTS §356, Reporters Note. Texas courts have consistently recognized that the legal standards for evaluating enforceability of UCC liquidated damage provisions are “significantly different,” since unlike Texas common law, even a facially unreasonable UCC-governed clause can be enforced under some circumstances. Garden Ridge, 403 S.W.3d at 447 (Frost, J., concurring); e.g., Phillips, 820 S.W.2d at 788 (reciting legal standard from Texas common law and then differentiating UCC Section 2.718(a)); McFadden v. Fuentes, 790 S.W.2d 736, 737-38 (Tex. App.—El Paso 1990, no writ) (holding that legal standard for sales of goods under Section 2.718(a) is different from legal standard under Texas common law).

Murphy is not persuasive because it is inapposite on this point: Nowhere in the opinion is it suggested that the court determined that the liquidated damages clause at issue would have been an unreasonable forecast in some instances but that it was valid because the materiality of the breach at issue made it reasonable in the circumstances. Murphy, 923 S.W.2d at 665-67.

Appellants attempt to avoid this result by pointing out that the Physicians’ Agreement permits certain “early departures” without penalty. Appellants’ Brief, p. 27; see CR.168-169, §§5(b) & (c) (penalty does not apply to physicians who die, are severely disabled and certain other exceptions). These narrow exceptions do not transform the $500,000 Termination Penalty Clause into an enforceable, customized damage estimate; for those to whom it applies it remains an enforceable “one size fits all” penalty. damages the parties to the Physicians’ Agreement were likely to suffer if Dr. Strandhagen breached her employment contract with AAT. Instead, the purpose of the Termination Clause Penalty was intended to penalize Dr. Strandhagen if she left AAT’s employment even one day before the end of the term. For this reason, the Court properly granted summary judgment declaring that the purported liquidated damages clause is an unenforceable penalty. 16 2. Appellants’ modification argument fails.

Appellants argue that the trial court erred by declaring the Termination Penalty Clause unenforceable even if Strandhagen properly proved that the Termination Penalty Clause was not a reasonable forecast of damages because the clause should have been modified by the trial court. Appellants’ Brief, pp. 33-35.

This argument fails for three separate reasons: (1) Appellants waived this

Appellants’ reliance on standard contractual recitations about the reasonableness of the damage clause at issue (Appellants’ Brief at 30-32) is unavailing. Boilerplate contractual language reciting that the Termination Penalty Clause is “liquidated damages” as opposed to a penalty has no bearing on whether that the provision is in fact a penalty. E.g., FPL Energy, 426 S.W.3d at 66-67, 71-72 (striking “liquidated damages” clause negotiated by sophisticated parties, despite stipulation by parties that clause was not a penalty); Stewart, 245 S.W.2d at 485-87. Nor does it matter that Dr. Strandhagen “voluntarily” entered into the agreement. See Phillips, 820 S.W.2d at 788 (“The right of competent parties to make their own bargains is not unlimited. . . .

A party has no right to have a court enforce a [contract term] that violates” the prohibition on penalties.); see, e.g., Community Dev. Serv., Inc., 679 S.W.2d at 727 (in contract to purchase lot, liquidated damages provision was unenforceable penalty, even though parties supposedly intended the provision to estimate their damages in event of breach, because damages were same for material and trivial breaches and thus unreasonable). This Court’s opinion in Southern Union Co. does not suggest a different outcome. See 2005 Tex. App. LEXIS 564, at *18-20 (simply rejecting argument that sliding scale liquidated damages clause that reduced the amount due depending on when the breach occurred was per se unreasonable). argument, (2) even if Appellants had timely raised it, they failed to raise a fact issue on each element of this affirmative defense in their summary judgment response, and (3) the trial court could not have modified the Termination Penalty Clause even if it had been timely asked to do so. Appellants did not raise this argument in their answer or in their response to Dr. Strandhagen’s Motion for Summary Judgment.17 CR.186-93; see also CR.202- 11. By failing to timely raise this argument, they deprived the trial court of the opportunity to timely consider it, resulting in waiver, addressing it in their motion for new trial clearly was too late. 18 Appellants’ decision not to ask the trial court to modify the Termination Penalty Clause until after the court had granted the Summary Judgment demonstrates precisely why the doctrine of waiver exists:

Appellants attempted to raise modification for the first time in their Motion for New Trial, and Dr. Strandhagen argued that it was too late for Appellants to raise the issue. CR.267- 69; see also RR.18-19.

See, e.g., Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 467 (Tex. 1998) (reinstating summary judgment in favor of insured and holding that insurer waived its argument that particular section of policy excluded coverage because insurer failed to raise that argument until its motion for new trial); Continental Holdings, Ltd. v. Leahy, 132 S.W.3d 471, 474 (Tex. App.—Eastland 2003, no pet.) (party’s failure to raise issue of conclusive effect of arbitrators’ award in response to motion for summary judgment constituted waiver of issue even though raised in motion for new trial); Hamilton v. Tex. Prop. & Cas. Ins. Guar. Ass’n, No. 03-98- 00355-CV, 1999 Tex. App. LEXIS 3163, *13 (Tex. App.—Austin Apr. 29, 1999, no pet.) (plaintiffs’ failure to raise estoppel in responses to motion for summary judgment constituted waiver even though later raised in motion for new trial); see also, e.g., In re OC, Inc., 552 F.3d 413, 423 (5th Cir. 2008) (rejecting argument that lower court erred by failing to sever or modify illegal provision from contract pursuant to severability and modification clauses because argument not raised in lower court).

litigants should give the trial court the opportunity to consider and resolve all errors before judgment is entered.

Appellants also failed to plead this affirmative defense 19 or offer any evidence to support it. See generally CR.186-93; CR.74-76. If Appellants sought to have the trial court modify the Physicians’ Agreement, they bore the burden to plead and provide evidence to support each element of such defense. See, e.g., Hampden Corp. v. Remark, Inc., No. 05-13-00529, 2014 Tex. App. LEXIS 6900, *17 (Tex. App.—Dallas Oct. 10, 2014, pet. denied)(party asserting contract modification bears burden of proof). They failed to meet this burden. See generally CR.186-93.

Finally, even if this Court were to consider Appellants’ new argument, it fails to provide valid grounds to reverse the Summary Judgment granted here. The trial court did not hold that the entire Physicians’ Agreement is invalid; instead, it found that the $500,000 Termination Penalty Clause was unenforceable. CR.212.

Appellants argue that instead of striking this illegal penalty from the Physicians’ Agreement, the trial court should have modified the Termination Penalty Clause to some unspecified (and presumably lesser, reasonable) amount. Appellants’ Brief,

This constitutes an affirmative defense because it seeks to avoid the outcome sought even if Dr. Strandhagen is correct that the Termination Penalty Clause as written is unlawful. See TEX. R. CIV. P. 94 (party must affirmatively plead “any other matter constituting an avoidance”); Great Am. Prods. v. Permabond Int’l, 94 S.W.3d 675, 683 (Tex. App.—Austin 2002, pet. denied) (affirmative defense is by nature one of avoidance, “which seeks to establish independent reason why the plaintiff should not prevail”). pp. 33-35. Appellants fail to cite to a single case that engages in such reformation of an illegal penalty clause, and their cases are readily distinguished. E.g., In re Poly-America, L.P., 262 S.W.3d 337, 353, 356-57, 360 (Tex. 2008) (striking limitation of liability clause as unconscionable while stating in dicta that an arbitrator might choose to “modify” a provision that has not yet been proven to be unconscionable); In re Kasschau, 11 S.W.3d 305, 313 (Tex. App.—Houston [14th Dist.] 1999, orig. proceeding) (illegal provision that constituted incidental promise in contract may be severed by court). Instead, the courts routinely hold illegal provisions to be unenforceable in their entirety, even while leaving the remainder of the contract intact, as it did here. E.g., Hoover Slovacek, LLP v. Walton, 206 S.W.3d 557, 565 (Tex. 2006) (striking illegal termination fee provision and holding remainder of agreement, including contingent fee provision, enforceable); Southwestern Bell Tel. Co. v. Delanney, 809 S.W.2d 493, 497-98 (Tex. 1991) (assuming, if clause were found to be unconscionable, court would hold it unenforceable in its entirety) (Gonzales, J., concurring). There is no practical need for judicial modification here because the effect of striking an invalid liquidated damages clause is to simply require the non-breaching party to prove whatever actual damages have been sustained.20

The Restatement (Second) of Contracts likewise envisions that unenforceable contractual penalties should simply be excised from the contract. See RESTATEMENT (SECOND) OF CONTRACTS §356 (“A term fixing unreasonably large liquidated damages is unenforceable on C. THE TRIAL COURT HAD JURISDICTION BECAUSE AN ACTUAL CONTROVERSY EXISTS BETWEEN THE PARTIES, AND IT IS RIPE FOR ADJUDICATION After spending pages defending their position that Dr. Strandhagen is wrong to contend that the Termination Penalty Clause is unenforceable, Appellants argue that there is no real controversy for the Court to adjudicate because they had neither actually sued Dr. Strandhagen for breach of contract nor made a formal demand. Appellants’ Brief at 38-43. However, neither a lawsuit nor a formal demand letter is a prerequisite to a suit for declaratory relief under a contract—the issue is whether there is a genuine controversy about its meaning and enforceability.

The Texas Declaratory Judgments Act (the “Act”) is a remedial statute whose purpose is “to afford relief from uncertainty and insecurity with respect to rights, status and other legal relations.” TEX. CIV. PRAC. & REM CODE § 37.002(b).

It is to be “liberally construed and administered.” Id. Section 37.004 of the Act provides that a person interested under a contract may have determined “any question of construction or validity arising under the . . . contract . . . and obtain a declaration of rights, status, or other legal relations thereunder.” Id. at § 37.004(a).

The Act specifically permits courts to construe a contract “either before or after” grounds of public policy as a penalty.”); contrast to RESTATEMENT (SECOND) OF CONTRACTS §208 (if term is unconscionable, court may refuse to enforce entire contract, refuse to enforce unconscionable term, or “may so limit the application of any unconscionable term as to avoid any unconscionable result”). breach. Id. at § 37.004(b); In re City of Dallas, 977 S.W.2d 798, 805 (Tex. App.— Fort Worth 1998, orig. proceeding) (“The Declaratory Judgments Act expressly authorized a party to ask the trial court to construe the party’s rights under a written contract before a breach of the contract occurs.”) (emphasis in original).

A declaratory judgment is appropriate if: (1) a justiciable controversy exists as to the rights and status of the parties; and (2) the controversy will be resolved by the declaration sought. Tex. Dep’t of Pub. Safety v. Moore, 985 S.W.2d 149, 153 (Tex. App.—Austin, 1998, no pet.). This Court has jurisdiction as long as the controversy involves a genuine conflict of tangible interest, as distinguished from a contingent or theoretical dispute. Id. at 153; WesternGeco, LLC v. Input/Output, Inc., 246 S.W.3d 776, 781 (Tex. App.—Houston [14th Dist.] 2008, no pet.); Carter v. Dripping Springs Water Supply Corp., Cause No. 03-03-00753-CV, 2005 Tex. App. LEXIS 461, *11-15 (Tex. App.—Austin, Jan. 21, 2005, no pet.).

The ripeness inquiry focuses on whether the case involves uncertain or contingent future events that may not occur as anticipated or may not occur at all.

See Patterson v. Planned Parenthood of Houston & Se. Tex., Inc., 971 S.W.2d 439, 442 (Tex. 1998). As part of this analysis, courts consider whether the declaratory judgment sought would actually settle the controversy between the parties. See Cal. Prods., Inc. v. Puretex Lemon Juice, Inc., 334 S.W.2d 780, 783 (Tex. 1960); Bd. of Water Eng’rs v. San Antonio, 283 S.W.2d 722, 724 (Tex. 1955).

Thus, for example, in one of the cases cited by Appellants in their Brief, the Third Court of Appeals found that it had no jurisdiction to issue a purely advisory opinion where the parties seeking a declaratory judgment had already obtained a final ruling in their favor in an administrative proceeding resolving their controversy with the Department of Insurance. LHR Enters., Inc. v. Geeslin, No. 03-05-00176-CV, 2007 Tex. App. LEXIS 8849, *8, *13-14 (Tex. App.—Austin Nov. 7, 2007, pet. denied). In rejecting the argument that a justiciable controversy remained, the Court focused on whether the parties seeking a declaratory judgment would be impacted in some concrete way in the future. Id. No such uncertain, hypothetical, or contingent events are presented here, and so this case is ripe. Appellants admit as much in their brief to this Court, both by arguing so extensively about the supposed error by the trial court, and as further illustrated when they acknowledge that Dr. Strandhagen’s employment was terminated five years early, under circumstances where they contend she “would be liable for payment of liquidated damages.” Appellants’ Brief at 8. Dr. Strandhagen contends that the Termination Penalty Clause (which purports to require her to pay $500,000 within 5 business days of termination if her employment terminated for any reason other than “without cause”) is unenforceable as a matter of law, regardless of the circumstances surrounding her termination. Before she filed suit, Dr. Strandhagen learned that Appellants were

planning to pursue her for collection of their share of the $500,000 Termination Penalty, and her pleading to that effect was never denied by Appellants. 21 CR.40, ¶16. Rather than dispute her contention that suit against her was imminent, Appellants coyly declined to address this contention, instead suggesting that Dr. Strandhagen’s failure to develop proof to support these contentions deprives the court of jurisdiction. Appellants’ Brief, pp. 38-43. This argument misconstrues the law, and the threshold for justiciability is easily met in this case. Texas law does not impose an “imminent litigation” requirement, 22 only that there be a genuine controversy. Parties are permitted to seek declarations of non-liability under a contract, and there need not even be a pending breach of that contract. See MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660, 668-69 (Tex. 2009) (also recognizing that declarations of non-liability under a contract have In determining whether they have jurisdiction over claims, “Texas appellate courts construe the pleadings in favor of the plaintiff and look to the pleader’s intent.” Tex. Ass’n of Business v. Tex. Air Control Bd., 852 S.W.2d 440, 446 (Tex. 1993) (internal citations and quotations omitted).

Appellants cite language in Paulsen v. Tex. Equal Access to Justice Found., 23 S.W.3d 42, 46 (Tex. App.—Austin 1999, pet. denied) to support this “imminent litigation” threshold contention. In that case, this Court was asked to declare whether an attorney was subject to professional discipline for failure to participate in the Texas IOLTA program, pending definitive resolution of that program’s constitutionality. Id. at 45. The Paulsen court recognized that it was faced with no real justiciable controversy since all of the parties to the suit actually agreed that an attorney could ethically participate in the IOLTA program, but the plaintiff’s declaratory judgment was premised on the possibility that a third party might someday challenge the program. Id. at 45. Not surprisingly, the court found it did not have jurisdiction to issue such an advisory opinion without “the assertion of adverse interests.” Id. at 45-47. Here, there is no suggestion of collusion among the parties to create jurisdiction; they clearly have adverse interests and a true dispute about the enforceability of the Termination Penalty Clause. been among the most common suits filed under the Act); Rowan Cos., Inc. v. Griffin, 876 F.2d 26, 28 (5th Cir. 1989) (“The declaratory judgment vehicle . . . is intended to provide a means of settling an actual controversy before it ripens into . . . a breach of a contractual duty.”). 23 To hold that a justiciable controversy is dependent on a threat of litigation would make the ripeness inquiry entirely and inappropriately “dependent on the subjective state of mind and intention of one party.” Transport. Ins. Co., 372 S.W.3d at 231.

Here, there is no question that Appellants maintain that Dr. Strandhagen is liable to them for their share of liquidated damages, and she disagrees. In cases where the operative facts have been much less certain than those here, Texas courts have nevertheless found an actual controversy to exist. 24 None of the cases cited

See also, e.g., Rowan Cos., Inc., 876 F.2d at 27-28 (rejecting injured employee’s argument that no justiciable controversy existed because he had not made any formal or informal demands for continued payment); McGinnis v. Union Pac. R.R. Co., 612 F. Supp. 2d 776, 796-97 (S.D. Tex. 2009) (rejecting argument that no substantial controversy, and so no justiciable claim, exists where, among other things, insured had not been sued by anyone injured in the accident and there was no other pending litigation); contrast to State v. Margolis, 439 S.W.2d 695, 697-98 (Tex. Civ. App.—Austin 1969, writ ref’d n.r.e.) (holding absence of bona fide threat of prosecution of Texas anti-trust laws against companies meant no justiciable claim; appellees “may not compel the Attorney General to exercise his [prosecutorial] discretion by filing” DJA suit). Appellants’ “imminent litigation” argument cannot be reconciled with section 37.004(b) of the Act which permits courts to construe a contract before breach even occurs (and therefore when it would be impossible for litigation to be “imminent”). See TEX. CIV. PRAC. & REM. CODE § 37.004(b); see also MBM Fin. Corp., 292 S.W.3d at 669 & n. 50.

See Hirschfeld Steel Co., Inc. v. Kellogg Brown & Root, Inc., 201 S.W.3d 272, 278-279 (Tex. App.—Houston [14th Dist.] 2006, no pet.) (determining that a declaratory judgment action regarding a the enforceability of a ten year warranty was ripe even though no warranty claims had yet been made); Am. Nat’l Ins. Co. v. Cannon, 86 S.W.3d 801, 806-807 (Tex. App.— Beaumont 2002, no pet.) (employed plaintiff had justiciable interest in determining whether upon leaving the company, the plaintiff would be required to comply with non-compete provisions). by Appellants even suggest a different result. 25 For these reasons, the trial court did not err in entering the PTJ Order, and it should be affirmed. 26 V. PRAYER Appellee Dr. Strandhagen requests this Court to affirm the Summary Judgment and the Order Granting in Part and Denying in Part Appellants’ Amended Plea to the Jurisdiction. If either of the trial court’s rulings is reversed, The cases cited by Appellants do not stand for the proposition that there must be a formal demand or an actual lawsuit on file before a case is ripe for adjudication, or that an injury must have already occurred for a claim to be ripe, nor do they hold that a court has no jurisdiction to issue a declaratory judgment on whether a liquidated damages provision is an unenforceable penalty. For example, in Transcontinental Realty Investors, Inc. v. Orix Capital Markets, LLC, 353 S.W.3d 241, 245 (Tex. App.—Dallas 2011, pet. denied), where no payment was due under a guaranty unless a pending appeal resulted in affirmance and the party primarily liable defaulted, the court concluded that exercise of jurisdiction to construe the guaranty was premature. See id. at 243-245. The language Appellants cite from Nexstar Broad., Inc., 2008 Tex. App. LEXIS 4736, at *4, simply confirms the well-established principle that a court lacks jurisdiction over a “mirror image” counterclaim for declaratory judgment that merely denied the plaintiff’s pending cause of action for breach of contract. See also, e.g., LHR Enters., Inc., 2007 Tex. App. LEXIS 8849, *10-11 (“a person seeking declaratory relief need not have yet incurred an actual injury of the sort for which consequential relief might be granted. Instead, the Act is intended to provide a means to determine, before any wrong has actually occurred, the rights of parties . . .”) (internal citations omitted); Farmers Ins. Exch. v. Rodriguez, 366 S.W.3d 216, 223, 229 & n. 6 (Tex. App. –Houston [14th Dist.] 2012, pet. denied) (third-party indemnity claim against home insurer not ripe where homeowner insurance policy contained “no action” provision and no final determination of indemnitee’s liability yet made, but court did have jurisdiction over declaratory action against same indemnitee’s automobile insurance coverage).

If for some reason this Court were to determine that Dr. Strandhagen did not adequately plead or prove jurisdiction in the trial court, Dr. Strandhagen requests this Court to remand the case for further proceedings to give her a full and fair opportunity to present evidence to show jurisdiction. See Rusk State Hosp. v. Black, 392 S.W.3d 88, 96 (Tex. 2012) (remand appropriate if pleadings and record neither demonstrate jurisdiction nor conclusively negate it); County of Cameron v. Brown, 80 S.W.3d 549, 559 (Tex. 2002) (remanding case to trial court when pleadings failed to show jurisdiction but did not affirmatively demonstrate incurable jurisdictional defect); see also Robinson v. Parker, 353 S.W.3d 753, 755 (Tex. 2011) (“a claim is not required to be ripe at the time of filing,” and suggesting that party need only “demonstrate a reasonable likelihood that the claim will ripen soon”). then this Court should remand to the trial court for further proceedings. Dr. Strandhagen further requests that this Court tax all costs against Appellants and award her such other and further relief, at law or in equity, to which she may be justly entitled. TEX. R. APP. P. 43.4.

Respectfully submitted, FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, Texas 78701 Telephone: (512) 476-2020 Telecopy: (512) 477-5267 By: /s/ Daniel H. Byrne Daniel H. Byrne Texas Bar No. 03565600 Christine E. Burgess Texas Bar No. 00793428 [email protected] Lessie G. Fitzpatrick Texas Bar No. 24012630 [email protected] Attorney for Appellee Tracy D. Strandhagen

CERTIFICATE OF SERVICE AND COMPLIANCE I certify that on February 23, 2015, I served a copy of the foregoing Appellee’s Brief on the counsel listed below by email. I also certify that according to the computer programs used to prepare this document, the word count is 8,639, excluding any parts exempted by Tex. R. App. P. 9.4(i)(1).

Amanda G. Taylor [email protected] MARTENS, TODD, LEONARD & TAYLOR Congress Avenue, Suite 1950 Austin, Texas 78701 Facsimile: (512) 542-9899 Attorney for Appellants/Cross-Appellees /s/ Daniel H. Byrne Daniel H. Byrne

APPENDIX INDEX

A. Strandhagen Declaration B. Physicians’ Agreement C. Defendants’ First Amended Answer D. Defendants’ Response to MSJ E. Defendants' Reply to Supplemental Briefing in Support of MSJ F. Summary Judgment Order G. Letters H. Plaintiff’s First Amended Petition I. Defendants’ Amended Plea to the Jurisdiction J. Authorities CAUSE NO. D~ I ~GN-13-002811

TRACY D. STRANDHAGEN, § IN THE DISTRICTCOURT § PLAINTIFF. § § v. § § NOAH S. BUNKER, PAUL CARRELL, § EVERETT BREW HOUSTON, JR., § TRAVIS COUNTY, TEXAS W. ANDREW BUCHHOLZ, SCOTT J. § LEIGHTY, JAD L. DAVIS, and § HOLLY CLAUSE, § § DEFENDANTS. § 353rd JUDICIAL DISTRICT DECLARATION OF TRACY D. STRANDHAGEN I. My name is Tracy D. Strandhagen. I am over 18 years of age and am fully competent and authorized in all respects to make this Declaration. I have personal knowledge of all the facts stated herein, and they are all true and correct This declaration is submitted in connection with Plaintiffs Motion for Summary Judgment filed in the above-styled litigation.

2. I am a licensed anesthesiologist v.ith more than fifteen years of experience practicing medicine.

3. In 20 II, I was a partner in Austin Anesthesiology Group, LLP ("AAG"). I entered into the Advisory Board and Internal Operations Agreement (the '~Physicians' Agreement") with the other anesthesiologists who had also sold their interests in American Austin Anesthesiology Group, LLP ("AAG'"') to American Anesthesiology of Texas, Inc. C'AAT'') (the "Buyout"). A true and correct copy of that agreement is attached to this declaration as Exhibit 1-A.

4. At the time of the Buyout, I entered into an employment agreement with AAT (the "Employment Agreement"). The document filed under seal with the Court in this case at a hearing on January 10, 2014 is a true and correct copy of the Employment Agreement.

EXHIBIT 5. My employment with AAT was tem1inated iu2013.

My name is Tracy D. Strandhagen, my date ofbirth is December 30, I 967, and my address is 600 Riders Trai!Austin, Texas 78733. As authorized by section 132.001 of the Texa'l Civil Praclice and Remedies Code, I declare under penalty o.fperjury that the foregoing is true and correct.

Executed in Travis County, Texas, on the 9th day of January, 2014.

ADVISORY BOARD AND INTERNAL OPERATIONS AGREEMENT This ADVISORY BOARD AND INTERNAL OPERATIONS AGREEMENT (this "Agreement") is made and entered into this _. . day of October 2011, by and among the undersigned physicians who are employed by American Anesthesinlogy of Texas, Inc. (such employed physicians being ref~rr~d to herein as the "Physicians''), a Texas non profit corporation certified as a lieahh care organi7.ation by the Texas State Board of Megical Examiners (the "Company"), Noah Bunker, M.D., the Corporate Medical Director of the Company (the "Medical Director"), and Chi B. Vo, M.D., the Physician P<!rthers' Representative under the Purchase Agreement (as defined below) (the ''Partners' Representative").

RECITALS: WHEREAS, as of the date hereof, the Company intends to acquire all of the issued and outstanding membership interests of Austin Anesthesiology Group, PJ.;LC C'AAG"), pursuant to that certain Membership Interest Purchase Agreement, dated as of October 6, 2011, among the Company, AAG, AAG Holdings, AAG Sidecar LLC, those certain Physicians who arc members of AAG, and the Physician Partners' Representative (the "Purchase Agreement") (unless the context shall otherwise require, capitalized terms used herein without definition shall have the respective meanings ascribed thereto in the Purchase Agreement); WHEREAS, the Physicians desire to establish an Advisory Boru·d at1d set fmth certain understandings and agreements among themselves regarding the operations of their practice following the Closing under the Purchase Agreement; and WHEREAS, a significant inducement to Physicians~ entering into the Purchase Agreement, and consummating the transaction contemplated thereby, is the Physicians' agreement to be bound by the covenants set forth herein, which covenants are narrowly tailored and necessary to protect the Physicians' legitimate interests.as a group.

NOW THEREFORE, in consideration of the foregoing recitals, the mutu.al covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Advisory Board.

(a) The Physicians hereby establish a board (the "Advisory Board") to provide binding advice and guidance to the Medical Director on certain matterSas further set forth herein. The Advisory Board shall consist ofseve11 (7) members{ea.cn an "Advisory Board Member" and, colleCtively, the "Advisory Board Members"), each ofwhornmust be a pruty to this Agreement, and one of which shall be the Medical Director. 'rhe Advisory Board Members (other than the Medical Director) will serve tenns of three (3) years. '[wo (2) Advisory Board Members will be elected each year consistent with AAG's past practices for management committee elections. The Medical Director's term on the Advisory Board will be co-terminus with the term as Medical Director set forth in Section 3(a). The names of the Advisory Board

23502.2-688675 v1 EXHIBIT l-A 162 Members to serve as such shall be evidenced on Exhibit A attached hereto and made a part hereof, as amended upon any change of the Advisory Board.

(b) Any Advisory Board Member may resign at any time by giving written notice to all of the Physicians. The resignation of l!lny Advisory Board Member shall talw effect upqn receipt of notice thereof or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. ·· (c) An Advisory Board Member may be removed, with or without cause, by the affirmative vote of at least a majority of the Physicians. Furthermore, the Advisory Board may by majority vote cast a vqte of"no confidence" in an Advisory Board Member, in which case the Advisory Board shall refer the matter to the Physicians for a vote to remove such Advisory Board Member.

(d) If an Advisory Board Member (the "Vacating Member") (i) is removed in accordance with Section 1(c) or (ii) resigns or otherwise vacates the position for any reaSoil, the Physicians shall elect a new Advisory Board Member to replace the Vacating Member by the vote of a simple majority of the Physicians.

(e) Unless otherwise prohibited by any officer or AfiHiate of the Company, any Advisory Board Member may examine the books and records ofthe Company for a purpose reasonably related to such Advisory Board Member's position as an Advisory Board Member.

(f) The Advisory Board Members will not receive any additional compensation from the Company for serving as Advisory Board Members.

(g) The Advisory Board may designate one or more committees. Any such committee, to the extent detetmined by the Advisory Board, shall have and may ex~icise all authority deterniined by the Advisory Board, subject to any restrictions contained herein. The terms. qualifications and duties ofthe members of such committees shall be detertnined by the Advisory Board and shall be substantially consistent with the past practices of AAG.

(h) l}nless otherWise undertaken by an officer, director or other Affiliate of the Company, the Medical Director, with input from the Advisory Board, shall be responsible for implementing, documenting, carrying-out and enforcing the disciplin_ary procedures of the Company substantially consistent with the pastpractices of AAG.

2. Meetings of the Advisory Board.

(a) The Advisory Board may hold its meetings, both regular and special, in such manner as is determined by the Advisory Board from time to time.

(b) At least four (4) of the Advisory Board Members shall be necessary to constitute a quorum for the transaction of business; provided, that every act or decision done or

made by the Advisory Board shall require the affim1ative vote of at least four (4) Advisory Board Members.

(c) Advisory Board Members may participate in any meeting of the Advisory Board by means of conference telepqone or similar communications equipment, provided all persons participating in the meeting can hear one aQOther, and such participation in a meeting shall constitute presence in person at the meeting.

(d) All votes required of the Advisory Board hereunder may be by voice vote unless a written ballot is requested, whiQh request may be made by one Advisory Board Member.

(e) Any action, which under any provision of this Agreement is to be taken at a meeting of the Advisory Board, may be taken without a meeting 'by written consent signed by not less than the number of Advisory Board Members necessary to take the action at a meeting ofthe Advisory Board at which all Advisory Board Member~ were present and voted. Such written consent will be kept with the records of the Advisory Board.

(f) A majority of the Advisory Board Members may adjourn any Advisory Board meeting to meet again at a stated day and hour or until the time fixed for the next regular meeting of the Advisory Board.

3. Medical Director.

(a) The Physicians acknowledge and agree that Noah Bunker, M.D. has been appointed as the initial Medical Director of the C9mpany pursuant to the Corporate Medical Director Agreement, dated as of the date hereof, by and between Noah Bunker, M.D. and the Company (the "Medical Director Agreement"). Notwithstanding the terms and conditions of the Medical Director Agreement, the initial Medical Director and each oth~r Medical Dii·ector Of the Company thereafter shall serve for single tetms of four (4) yeats. Any Medical Director may seek re-election for subsequent term{s) of four (4) years each; provided, that the then-current Medical Director who is not re-elected must resigh in accordance with the Medical Director Agreement with sufficient notice such th~t the Medical Director's term is limited to 1bur (4) years. The Medical Director shall be elected by the affirmative vote of a simple majority of the Physicians.

(b) I In the event of a dispute between the Medical Director and the Advisory Bom·u and/or the Physicians, a simple majority of the Physicians may cast a vote of"no confidence" in the Medical Director. In such event, the Medical Director shall have thirty (30) days from the date of such vote of no confidence to resolve the dispute with due notification to the Advisory Board and the Phy~icians of such dispute and !he resolution thereof. Should the dispute remain unresolved following the expiration of such thirty {30) day cure period as determined by th~ Advisory Board in it sole discretion then upon the affirmative vote of a simple majority of the Physicians (excluding, for this purpose, the Medical Director), the Medical Director shall resign as the Medical Director. Furthermore, seventy-five percent(75%) or more of the Physicians (excluding, for this purpose, the Medical Director) (a "Supermajority ofthe

Physicians") may elect to remove the Medical Director at any time for any reason or for no reason; provided that the Physicians and the Medical Director understand and agree that ~uch removal will be subject to the consent of the Company (such consent not to be unreasonably withheld or delayed). Any such resignation by or removal of the Medical Director pursuant to th:i.s Section S(b) shall occur upon at least ninety (90) days' prior written notice to the Company and the Medical Director. The Physicians and !he Medical Director also understand and agree that the Company may elect to remove the Medical Director for any reason or for no reason upon at leasf ninety (9n) days' prior written notice to the Mc;:dical Director and the Partners' Representative. The Medical Director may voluntarily resign and terminate his ot her services under the Corporate Medical Director Agreement for any reason or for no reason upon at least ninety (90) days' prior written notice to the Comp@y and the Partners' Repre~entative. A majority of the Physicians shall have the power and authority to appoint, by written notice to the Company, a replacement for n;ny terminated Medical Director (a "~Replacement Medical Director"), which replacement shall satisfy the qualifications set forth in Addendum 1 to the Corporate Medical Director Agreement ("Addendum 1") an!l otherwis_e be acceptable to the Company (such acceptance not to be unreasonably withheld or delayed). The parties acknowledge that under the terms of the Corporate Medical Director Agreement, if the Physicians fail to appoint a Replacement Medical Director who satisfies the qualifications set forth in such Addendum 1 and is otherwise acceptable to the Company (such acceptance not to be unreasonably withheld or delayed) on or before the ninety-first (91 51) day following notice of the termination of the Medical Director or the date of death of the Medical Director, then the Co111pany will h:ave the power and authority to appoint a Replacement Medical Director in good faith. If, for any reason, there is a vacancy in the Medical Director position, then pending any replacement thereof in accordance with the terms hereof and the Corporate Medical Director Agreement, a majority of the Physicians shall have the right to immediately appoint a temporary successor to have responsibility for and authority to conduct the rights and duties granted to the Medi_ccai Director Under the Purchase Agreement and the Physifans' Employment Agreements, which temporary successor shall satisfy the qualifications set forth in Addendum 1 and otherwise be acceptable to the Company (such acceptance not to be unreasonably withheld or delayed); provided that the Company shall appoint a temporary successor if none i~ appointed by a majority of the Physicians within ten (1 0) Business bays of any vacancy in the position of MediCal Director. For the avoidance of doubt, the Advisory Board may at any time recommend to the Physicians that the Medical Director be removed upon the required vote of the Physicians specified above.

(c) T11e parties acknowledge that under the Corporate Medical Director Agreement, the Medical Director will receive an a:tiliual service stipenq from the Company or general group funds of the practice in an amount equal to Ten Thousand Dollars ($1 0,000). The M{dical Director shall defray p~rsonal cos1s of all non-clinical work, i!lcludi]1g per diem coverage, from any such stipend received for his other duties as the Medical Director. The Advisory Board may determil1e in its sole discretion that the Medical Director should receive additional compensation or bene:tits in consideration for the Medical Director's services in such role, and in such event the Advisory BQard shall recommend to the Medical Director the source of such additional compensation or bendits.

(d) The Medi_cal Director shall abide by all of the terms and conditions of this Agreement. The Medical Director shall maintain his or her share ofciinical responsibilities throughout his or her service tenn as Medical Director. The Medical Director is expected to be an effective liaison between the Company and the Physicians and is expected to faithfully and reciprocally communiq.te all expectations,demands and/or decisions as pertinent to the Companf and tbe Physicians. The Medical Director shall not, and shall fisc coimneteially reasonable efforts to cause the Company notto, without seeking approval from the Advisory Board: (i) Ul}ilaterally hir~ or fire any Physicians, associate physiCians or other professionals or office staff; (ii) unilaterally alter salaries ofthe Physicians, associate physicians or other or professiona}s or offt_ce staff; (iii) unil{iterally altefaaily monthly schedules; (iv) unilaterally alter physician service sites ortimes; or (v) make recommendations to the President of the Company on salary and bonus disbursement and the division ~nd allocatiop. of the "Performance Incentive Bonus,"as de:flped in the Physicians' Employment Agreements; provided further, that the Medical Director shall make bonus disbursement reports available for inspection by the Physicians at the offices of the Practice. During the Initial Te11n of the Physiciails' Employm~ht Agreements and during the applicable period for negotiating the Renewal term of the Physicians' EmploymentAgreements, the Medical Director shall not on behalf of the Company, either directly or indirectly, (i) negotiate, recomrricnd, approve or offer any Physician employment terms and conditions inconsistent in any material respect with the employment terms and conditions of other Physicians (except for the pre-approval of Outside Activities (as defined in the Phys!cians' Employment Agreements)), or (ii) negotiate, recommend, approve or offer any Physician-special incentives, bonuses or other benefits not alTered to the other Physicians.

(e) The Corporate Medical Director shall use co:mifiercially reasonable efforts to delegate appropriate duties and responsibilities to the Advisory Board from time to time. The Medical Director shall use comin~rcially reasonable efforts to sH~re information fr()m or related to the Company with the Advisory Board.

(f) Notwithstanding anything to the contrary herein, (i) in the event of any conflict between the terms of this Agreement and the Medical Director Agreement, then the terms Of the Medic-al Director Agreement shall control; and (ii) in the event the Medical Director receives advice and/or directives from the Advisory Board and/or the Physicians that conflicts With advice and/or directives from the Company or its Affiliates, then the Physicians understand and agree thaithe Medical Director will follow the advice and/or directives from the Company and its Affiliates, 4. Partners' Representative.

(a) ThePhysicians acknowle~ge and agree that Chi B. Vo, M.D. has been appointed as the Pat1ner.s' Represent~tive pursuant to the Purchase Agreement and wil1 act as an agent of the Physicians under the Purchase Agreement and is granted such powers as are delegated under the Purchase Agreement, (b) Notwithstanding the foregoing and the powers that are delegated to the Partners' Representative under the Purchase Agreement, the Partners' Representative shall

provide to the Physicians prompt notice and copies of all notices and communications transmitted to the Partners' Representative by the Buyer under the Purchase Agreement. In addition, the Partners' Representative shall not, without first consulting in good faith with and receiving prior written consent from, a majority of the Physicians: (A) waive provisions of the Purchase Agreement or any other Transaction Document; (B) resolve any dispute arising under the Purchase Agreement or any other Transaction Document, including, btit not limited to, as contemplated by Section 6 of the Purchase Agreement; (C) make any material decisions with respect to the defense of any litigation described in Section 6.3 of the Purchase Agreement; (D) agree to, negotiate, enter into settlements and compromises of, or d~mand arbitration with respect to any such claims referenced in subparagraphs (ii) and (iii) above; or (E) take or fail to take any other actions that would have an adverse impact on the rights of the Physicians, economic or otherwise, under the Purchase Agreement.

(c) The Partners' Representative may resign by delivering written notice t9 the Physicians with a copy to the Buyer, at least thirty (30) days prior to the effective date of s11ch resignation. A majority ofthe Physicians may terminate the appointment ofthe Partners' Representative, by delivering written notice thereto, with a copy to the Buyer, whiCh notice shall designate the effective date of such termination not earlier than five (5) Business Days after the B\lyer's rec~ipt of such notice. In the event of such resigmition or termination, a successor Prutners' Representative shall be appointed by a majority ofthe Physicians and written notice of such appointment shall be delivered to the Buyer. If, at any time, the Partners' Representative has resigned or has been termitmted and a successor Partners' Representative has not been appointed in accordance with the foregoing sentence, then _unless and until a successor Partners' Representative is so appointed, the Medical Director shall be deemed to be the successor Partners' Representative for purposes ofthis Agreement and the Purchase Agreement. After the appointment (or deemed appointment) of a personas a successor Partners' Representative, all references to such Partners' Representative shall be deemed to include such successor.

5. Physician Obligations.

(a) Each Physicianlihderstarids and (lgrees that (i) in addition to the consideration under the Purchase Agreement, beginningon January 1, 2013, the Physicians are eligible fpr certain bonuses \Ulder the Company's PhysiCian Performance Incentive Program based upon the proilts of the Company, (ii) he or she has entered into an Employment Agreement with the Company to perfoi:m certain services for the Compatiy for an initial term as set forth in his or her Employment Agreement (the "Initial Terni") and (iii) if he or she

terminates his or her employment with the Company prior to the expiration of the Initial Term, the Physicians may suffer harm, including, without limitation, increased workloads necessitated by such terrrlination, mat¢rial impairment of the ability of the Physicians to earn bqrtuses under the Company's Physician Perfbtmance Incentive Program, material impairment of the Physician' relationships with hospitals and other health-care facilities, third-party payors and other stakeholders, and hiring and tnrlning costs related to replacement physicians.

(b) In light oftheforegoing, if a Physician's employment With the Company is terminated for any reason duringothe Initial Term of a te1minating Physician's Employment Agreement other than atertninatio:h without cause by the Company, subject to Section 5(c) hereof, theri such terminating physician (a "Terminating Physician") shall promptly pay to the non-terminating Physiciaps, but in any event within five (5) Business Days of the termination of s).lch Terminating Physician's employment, n.cs liquid11ted damages, and not as a penalty, the amount set forth below to be shared equally by the non-terminating .Physicians (th~ ''Llguidated Damages Amount"). If the Liquidated Damages Amount is not paid by the Terminating Physician within such five (5) Business Day period, then the Liquidated Damages Amount shall thereafter bear interest at the rate often percent (1 0%) per animm until such Liquidated Damages Amount, together with the accrued interest, is paid in full.

Terminating Physician Liquidated Damages Amount Carolyn G. Biebas, M.D. $400,000 James C. Chapin, M.D. $400,000 Richard S. Himes, Jr., M.D. $~~(),000 Richard L. Laube, M.D. $320,000 Gary J. Mihm, M.D. $240,000 Sharon A. Oxford, M.D. $400,000 All other Physicians $500,000

The Liquidated Damages Amount for Ann John, M.D. shall be (i) $375,000 ifthc terrilination date occurs prior to the two (2) year anniversary of employment with the Company, or (ii) $300,000 if the termination date occurs at anytime thereafter during the initial Term of her Employment Agreement.

In addition to the Liquidated Damages A!nount, the Terminating Physician shall reimburse the Company and the Physicians for all out of pocket costs and attorneys' fees incurred by the Company and/or the Phy~icians in any arbitration or litigation to enfotce the Terminating Physician's Employment Agreement or this Agreement. The Physicians each acknowledge and agree that the Liquidated Damage Amount is reasonable in light of the anticipatedharm which would be causco by a Termin!lting Physician's breach of ordefault under this Agreement, the difficulty ofproof ofloss, the inconvenience and non-feasibility of otherwise optaining an adequate remedy, and the value of the transactions to be consummated under the Purchase Agreement and the other Transaction Documents.

(c) Notwithstanding the foregoing and for the avoidance of doubt, i1 is hereby acknowledged and agreed that the provisions set forth in this Section 5 shall not apply to a Physician in the event (i) of the death of such Physician, (ii) such Physician suffers a permanent Disability (as defined in the Physician's Employment Agreement) or an "own occupation" disabiBty 1 (iii) such Physician is terminated due to a Material Decline or Right-Sizing (as such tertl)s·ai'edefineci in the P}1ysician's Employ111eilt AgreeJ1ient), (iv) the Company's contract with St: David's Healthcare Partnership is terminated, (v) ofPhysician's Qualifying Termination (as cl~fined in the Physicia:il's Employment Agreement), or (vi)of an approved termination pursuant to Section 5(d) below. the Physicians also acknowledge and agree that unforeseen conditions may arise during the Initial Term that rriay prompt a Physician to tertninate his or her employment with the Company. Under such circumstances, a Physician may petition the Advisory Board and upon receiving the written consent ofa majority of the Advisory Board, may t~@inate his or her employment with the Company without being required to pay the Liquidated Damages Amount and the out of pocket costs and attorneys' fees referenced in Section $(b) above.

(d) Conflict of Interest. In the event that a Physician desires to voluntarily terminate his or her Employment Agreefuent in order to provide other services to the Company or its Affiliates, such Physician may petition the other Physicians to allow the termination of his or her employment with the Company, and upon receiving the written consent of at least a majority of the other Physicians, may terminate his or her employment with the Company without beip.g required to pay the Liquidated Damages Am()unt and the out ofpocketcosts and attorneys' fees referenced in Section 5(b) above. During the Initial Term of the Physicians' Employment Agreements and during the applicable }Jeriod for negoti~ting the Renewal Ts:rm of the Physicians' Employment Agreements, each Phys:lcian shall report to the Advisory Board the occurrence of any offer, negotiation or discussion whereby any such Physician would receive ¥rriployment terms and conditions inconsi~tent in any material respect with the employment terms and conditions of other Physicians (except for the pre-approval of Outside Activities (as defined in the Physicians' Employment Agreements)), or any special incentives, bonuses oi other benefits not Offered to the other Physicians; (e) The Physicians ackfi{)wledge and agree that nothing contained in this Agreement shall in any way limit or impair the Company's rights under any Employment Agreements or other agteements with the Physicians.

6. Indemnification.

(a) Any person who at any time serves or has served as an Advisory Board Member shall have a right to be indemnified by the Physicians to the fullest extent permitted by law agairist (i) reasonable expenses, including attorneys' fees, actually and necessarily incurred by him or her in cohifection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (and '"1Y appeal therein), and whether Qr not brought by or on behalf.ofthe Physicians, seeking to hold hi111-or het lhtblc by reason of the fact that he or she is or was acting in such capacity, and (ii) reasonable payments made by him or her in satisfaction of any judgment, money decree, fine, penalty or settlement for which he or she may have become liable in any such action, suit or proceeding; provided

however, that an Advisory Board Memb_er shall only he entitled to ind~mnification pursuant to this Section 6 so long as such Advisory Board Member acted in good faith in carrying out the decisions or actions which were the subject or basis of liability as set forth abovcin items (i) and (ii); provided further, that no Advisory Board Member shall be entitled to indeJ1111ification in the event of such Advisory Board Member's gross negligence.

(b) The Advisory Board ~shall take all such action as may be necessary and appropriate to require the Physicians to pay the indemnification requirecl by this provision, including without limitation, to the extent needed, making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnity due him or her. The Physicians shall pay their Pro Rata Shan~ of such indemnity claim to tlie claimant within ten (1 0) business days of receipt of notice of any such claim for indemnity. Forpurposes ofthis Section 6, the "Pro Rata Share" shall he an amount equal to the total amount ofthe indemnity claim approved by the Advisory Board divided by the then-cuiTent number of Physicians party to this Agreement. If a Physician's Pro Rata Share is not paid within teh (1 0) business days, then interest shall accrue at the rate often percent (10%) per annum until such Pro Rata Share, together with the accrued interest, is paid in full.

(c) Any person who at any time after the adoption of this provision serves or has serv(!d on the Advisory Board s}1all be deemed to be doing or .to have done so :in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provision of this provision.

(d) The Physicians shall (upon receipt of an undertaking by or on behalfofthe Advisory Board Member involved) pay expenses (including attorneys' fees) incuiTed by such Advisory Board Member in defending any threatened, pending or completed action, suit or proceeding and any appeal therein whether civil, criminal, administrative, investigative or arbitrative and whether formal or informalor appearing as a witness at a time when he or she has not been named as a defen:aartt or a respondent with respect thereto in advance of the flnal disposition ofsuch proceeding. · 7. Miscellaneous.

(a) Notices and Voting Procedures. All notices and other communications hereunder shall be in writing and may be given by personal delivery, reputable express courier, registered or certified fuail (return receipt requested), or by email, in t11e discretion of the Advisory Board. Such notice shall be deemed effective when received if it is given by personal delivery, reputable expre.ss courier or einail, and will be effective three (3) days after mailing by registered or certified mail, so long as it is actually received within five (5) days (arid, if not so receivs:o within five ($) days, is effective when actually received), fo the parties at the addre·~s.es specified on Exhibit Rhcreto or such other address of which notice is provided pursuant to th:is provisign. Any vote, consent or approval of either the Advisory Board or the Physicians may be delivered and conducted by email ballot or any other means determined by the Advisory Board.

Meeting minutes and voting records shall be recorded and disseminated by the Advisory Board in a maill1er substantially consistent with the past practices of AAG.

(b) Enforcement. The Physicians agree that a breach or violation of fhe tem1s of of this Agreement by any them may cause irreparabl~ damage to the other, the exact amount of which is impossible to ascertain, and for that reason the Physicians agree that the non- breaching parties wi11 be entitled to a decree of specific performance of the terms of this Agreement or an itl.juhction restrai:tling further breach or violation thereof by the breaching party or parties, said nght to be in addition to any other remedies of the parties.

(c) Amendments. This Agreement may be amended only with the approval of at least fl. majority of the Physicians. Any amendments tQ this Agreement shall be binding on all Physicians, the Medical Director and the Partners' Representative.

(d) No Third Party Beneficiaries. This Agreement is entered into solely for the benefit of the parties hereto and no term, provision or covenant hereunder shall confer or be deemed to confer a benefit on any other person, oth(}r than as may be set forth hei'ein.

(e) Assignment. Np party hereto may assign, delegate or otherwise transfer any of such party's rights, interests or obligations under this Agreement.

(f) Severability. Each provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality ot invalidity sha11, to the greatest extent possible, not affecttbe legality or validity of the remainder of this Agreement. In the event that any provision ofthis Agreement shall be declared by a COUrt of COmpetent jurisdjctign to exceed the limits St1Ch ~OUrt deems tea~sonable and enrorceable, said provisions shall be deemed modified to the minimum extent necessary to make suchprovisions reasonable and enforceable.

(g) No Waiver. Neither the failure nor any delay on the part of any party hereto in exe:rcising any right_, power or privilege granted herein shall op(!tatc as a waiver thereof, nor shaH any single orpartial exercise thereof preclude any other or further exercise of any other right, power or privilege which Il1ay be provided by law.

(h) Counterparts: Delivery by Facsimile. 'Ibis Agreement may be executed in any number of 90Unterparts with the saJI1,e effect as if all parties hereto h.aci signed the same document. All counterparts shall be construed together and shall constitute one agreement. This Agreement and any amcndil).enls hereto, to the extent signeo and delivcrt!d by mean~ of a facsimile machine or by e-mail in PDF or similar format, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto, each other party hereto or thereto shall re-cxecute original forms of this Agreefiieht and deliver thelJl to all other parties. N() PrfrtY hereto shall raise the l!Se Of a facsimile machine or e-mail to deliver a signature or the fact that any signature or agreement or instrument was transmitted or coffil!lunicated through the use of{l. facsimile l1l~chine or e-mail as a defense to the formation of a contract and each such party forever waives any such defense.

(i) Controlling Law. This Agreement has been entered into inthc State of Texas, artd this Agreement, including any rights, remedies, or obligations provided for hereunder, shall be construed and enforced in accordance with the laws of the State of Texas.

G) Non-Voting Physicians. Notwithstanding anything herein to the contrary, ]Uchard S.ijimecs, Jr., M.D., l9chard L. Laube, M.D. and (}aryJ. Mihni, M;D. (the "Non-Voting Physicians'!) slrall not be entitled to vote on any matter set forth herein and are not eligible to serve oJl the Advisory Board; provided how~ver, that sm.:h Non-Voting Physicians shiill have all other rights, and be boundby all obligations, of the Physicians underthis Agreement.

(k) Additional Physicians. From time to time after the Effective Date of this Agreement, the Advisory Board may invite new physicians hired by the Company ("New PHysicians") to participate in the beilefits and become bound by the tem1s of this Agreement by signing a joinder to this Agreement in a manner determined by the Advisory Board. In such event, the Advisory Board will deterinine any and all conditions, rights and duties associated with any New Physician's joinder to this Agreement~and such NewPhysicians shall thereafter be ''Physicians" hereunder for all purposes; provided however, that New Physicians shall not be subject to the provisions of Sections 4 ana S(a) through S(d) ofthis Agreement and shall not be considered a "Physician'' for the purposes of such sections.

(1) Replacement Medical Directors. Any Replacement Medical Director must becom~ bound by the terms of this AgfeeJUent by signing a joinder to this Agreement in the form of Exhibit C hereto.

(m) Spousal Consent. As a condition precedent to the effectiveness ofthe Agreement, each Physician's spouse shall execute a consent substantially in the form attached hereto as EXhibit D.

[Signature Pages Follow]

IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory Board and Internal Operations Agreement to be effective as of the date first above written.

PHYSICIANS:

Erick S. Allen, M.D.

Mark Archibald, M.D.

Scott Bale, M.D.

Shawn A. Barrett, M.D.

T. MarkBedillion, M.D.

Carolyn G. Biebas, M.D.

Ravneet K. Birmg, M.D.

Elizabeth L. Buchholz, M.D.

W. Andrew Buchholz, M.D.

Noah S. Bunker, M.D.

Paul Carrell, M.D.

23502.2-668675 v1

IN WI'INESS WHEREOF, the undersigned have executed and delivered this Advisory Board and Internal Operations Agreement to be effective as of the date first above written.

James C. Chapin, M;D.

Holly Clause, M.D.

David J. Cross, M.D.

William J. Crowley, Ill, M.D.

B. Will Curtis, M.D.

Jad L. Davis, M.D.

Brian D. Dewan, M.D.

Khoa J:)o, ~M.D.

Allen D. Dornak, M.D.

Cedric Dupont, M.D.

Stanley R. Eckert, M.D.

23502.2-688675 v1

IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory Board and Internal Operations Agreement to be effective as of the date first above written.

Joseph D. Eddings) M.D.

William A. Eilers) III, M.D.

S. Dralq: Fason, M.D.

Troy W. Gras, M.D.

Deborah L. Hamill, M.D.

Christine Harrison) M.D.

LD R. Herz_og) M.D.

StevenS. Hewitt, M.D.

RichardS. Himes, Jr., M.D.

Everett Brew Houston, Jr., M.D.

Rima Jakstys) M.D.

23502.2-688675 v1

IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory Board and Internal Operations Agreement to be effective as of the date first above written.

Zeeyoung T. Jang, M.D.

Jeffrey M. Jekot, M.D.

Ann John, M.D.

Joe D. Kocks, Jr., M.D.

Richard L. Laube, M.D.

~ ~

Jonathan J. Lee, M.D.

Scott J. Leighty, M.D.

SuzatmeN. Litna, M.D.

Shelby Marquarat, M.D.

Gary J. Mihm, M.D.

George M. Miller, M.D.

23502.2-686675 v1

IN WITNESS WHEREOF, the undersigned have executed a11d delivered this Advisory Board and Internal Operations Agreement to be effective as of the date first above written.

Steven E. Miller, M.D.

Mattin C. Milliken, M.D.

Paul B. Nelson, M.D.

Jeffrey J. Nitzsche, M.D.

Oliver E. Orth, M.D.

Slfaron A. Oxford, M.D.

Diinpal R. Patel, M:D.

M. Brett Pillow, M.D.

Vijay K. Ravula, M.D.

Jeffrey J. Rockwell; M.D.

Kevin R. Shelly, M.D.

23502.2-688675 v1

. IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory Board and Internal Operations Agreement to be effective as ofthe date first above written.

Gary W; Smith, M.D.

Tracy D. Stranc1hagen, M.D.

Ryan Sturgeon, M.D.

ChiB. Vo,M.D.

David J. Walton, M.D.

MEDICAL DIRECTOR: Noah Bunker,· M.D.

Address:

PARTNERS' REPRESENTATIVE: Chi B. Vo, M.D.

Address:

23502.2-688675 v1

EXHIBIT A ADVISORY BOARD

Noah S. Bunker, M.D. (term expires on [October 6], 2Ql~) Paul Carrell, M.D. (term expires on Decernber31, 2012) Jad L. Davis, M.D. (tenn expires on December 31, ~013) LD R. I-lerzog, }v1.D. (term expires on Decen1ber 31, 2011) Everett Brew Houston, Jr., M.D. (term expires on December 31, 2013) Jonathan J. Lee, M.D. (term expires on December31, 2012) Jeffrey J. Rockwell, M.D. (term expires on December 31, 2011)

23502.2-688675 v1

EXlllBITB NOTICE ADDRESSES last First Full Adclress Allen Erick S. 68Q2 Edgefield Drb1e Au~tin TX, 78731-2~06 Archibald Mark 12909 ParkDr Austin TX, 78732 Bal.e Scott 3421 Bunny Run Austin TX, 78746 Barrett Shawn A. 1205 Nprwalk Lane, Unit E Austin TX, 78703 Bedillion T. Mark PO Box50536 Austin TX, 78763-053() Biebas Carolyn G. 2504 Velasquez Austin TX,78703 Siring Ravneet K. 714 w. Monroe, #4 Austin TX, 78704 Buchnolz Elizabeth L. 1905 Manana Street A.ustili TX, 78730 Buchhblz W.Andrew 1905Manana Street Austin TX, 78730 .'· Bunker Noah$. 2900Roi.md Table Road Austin TX, 78746 Carrell Paul 3101T()ro Canyon Road Austin TX, 78746 Chapin James C. 2003 Ringtail Ridge Austin TX, 78746 Clause Holly 4017 Bunny Run Austin TX, 7c8746 cross David_t 511 Texas Ave Austin TX, 787()5 Crowley, Ill William J. 4505 Elkwater Cove AIJ_stin TX, 78746 0

Curtis B. Will 421 W~st 3rdStreet, #1910 Austin TX, }8701 Davis Jad l. 2319 WppdwayRound_Rock TX, 78681 _ Dewan Brian D. 5805 Gentle Br('!eze Terrace Austin TX, 78731 DO Khoa 1753 Gaylord Drive Au~tin TX, 78728 _ Dornak Allen D. 801 W. Stli St #1706 AI,Jstin, TX,~78703 Dupont C~dric 29 Pascal lane Austin 1]<, 787A6 Eckert Stanley R. 7713 Sandia LoopAustin TX, 78735 Eddings Joseph D. 404 Talkeetna Lo Cedar Park TX, 78613 tilers, Ill William A. 502 Indigo Ln GeorgetoWn TX,78628 Fason s. Drake 3410 Foothill Terrace Austin TX, 18731 Gras Troy W. 1609 Lynnville Trail Austin TX,78727 Hamill Deborah L. 4005 Hidden Canyon Cove Austin TX,78746 Harrison Christine 708 Garner Avenue Austin TX, 78704 Herzog LOR. 3010 Hatley Drive Austin TX, 78746 Hewitt Steven 1105 Sprague Lane AuStin TX,o78746 Himes, Jr: RichardS. _714 WihdsongTrail AustinTX, 78746 l:iouston. Jr. Everett B. . 2901Wade AVenue AJJstin TX, 78703 -- Jakstys Rima . 4601N.Lamar Blvd Unit 5211 Austin TX, 78751 Jang Zeeyoung 4009 Lewis Lane, #AAustin T)(, 7875.6 Jekot Jeffrey M. .. 3804Woodcutter's Way Austin TX, 78746-1543 John Ann 2002 Kinney Unit B.,1\ustin tx, 78704 Kocks, Jr. Joe D. 1607 Mt. Larson Road Austin TX, 78746

23502.2-688675 v1

Laube Rh::hard L. 412 Beardsley Lane Austin TX,78746 Lee Jonathan J. 1806 lntervail Dr. Austin TX, 78746 Leighty s"cottJ. 390Q Walnut Clay Drive Austin TX, 78731 Lima Suzanne N. 4112 Avenue B AustlnTX, 78751 Marquardt Shelby 19_0!lW. Koenig Lane_Au_stin TX, 78756 Mihm Gary J. 4708 Peace Pipe Pa!h Austin TX, 78746 Miller George M. 4603 Strass D[~Austin TX, 78731 Miller St~ven E. 7206 Villa_Maria Lane Austin lX 7~759 Milliken Martin c. 1810 RaJeigh Avenue Austin, TX, 78703 Nelson Paul B. 311 WesJ 5th st. #1103 Austin TX, 78701 Nitzsche Jeffrey J. 5408 Cuesta Verde Au~tinTX, 78746 Orth Oliver E. 5013 Spartanburg Cove Austin TX, 78730 Oxford Sharon A. 3606 Fall Trail Austin TX, 78731 Patel Dimpal R. 4613 Twin Valley Circle AustinTX, 78731 Pillow M. Brett 316 Eanes School Rd. Austin TX, 78746 Ravula Vijay K. 4206 Bellvue Ave. AustinTX, 78756 Rockwell Jeffrey J. 2914 Montebello Court Austin TX, 78746 Shelly Kevin R. 3008Pescadero Cove Austin TX, 78746 Smith GaryW. 34161\tlt Bonnell Circle Austin TX, 78731 Strand hagen Tracy D. 600 RidersTrail Austin TX, 78733 Sturgeon Ryan 11425 Dpna_Villa Drive AustinTX, 78726 Vo Chi B. 5911 Mo1.mtain Villa Drive Austin TX, 78731 Walton DavidJ. 3501 Native Dancer Cove Austin TX, 78746

23502.2-688675 v1

EXHIBITC JOINDER TO ADVISORY BOAR]) AND INTERNAL OPERATIONS AGREEMENT

I hereby accept my appointment as Med!c.a.! Director pursuant to the Advisory Board and Internal Operations Agreement dated October 6, 2.011 (the "Agrement"), and agree to be bound by the tctn1s of, and to comply with and fulfill all obligations, Goilirilitirients, and agreements otherwise imposed upon the Medical Director thereunder.

----------'M.D. ''Replacement Corporate Medical Director"

23502.2-688675 v1

EXHIBITD FORM OF SPOUSAL CONSENT WRITTEN CQNSENT OF SPOUSE OF "'--------'----~--' M.D.

In cgnnection with that certain Advisory Board and Internal Operations Agreement entered into on October_, 2011 (the "Advisory Board Agreement"),.by, between and among the individual physicians, jncluding the Signatory (as defined below), whoseh!!tnes are set forth on the signature pages thereto (collectively, the ''Physicians"), the undersigned, being the lawful spouse of --------~--' M.D. (''Signatory'') hereby certifies as follows: 1. I hereby consent to the execution by Signatory of the Advisory Board Agreement and the performance by Signatory of Signatory's obligations under the Advisory Board Agreement.

2. I have had an opportunity to review the Advisory Board Agreement.

3. I have had an opportunity to consult with an attorney and other advisors regarding the Advisoty Board Agreement arid the tnmsactions contemplated thereurtder priotto executing and delivering this written consent.

. .. 4. I hereby acknowledge and agree that the Physicians and their respective agents and affiliates are entitled to rely on the consent provided hereunder.

IN WITNESS WIIEREOF, the undersigned has duly executed this Written Consent on October _ _, 2011.

Name:

Witness

23502.2-.688675 v1

Filed October 23 A9:43 Amalia Rodriguez-Mendoza District Clerk Travis District CAUSE NO. D-1-GN-13-002811 D-1-GN-13-002811 TRACY D. STRANDHAGEN, § IN THE DISTRICT COURT PLAINTIFF, § § § v. § TRAVIS COUNTY, TEXAS § § NOAH S. BUNKER, PAUL CARRELL, § EVERETT BREW HOUSTON, JR., § W. ANDREW BUCHHOLZ, SCOTT J. § LEIGHTY, JAD L. DAVIS, and § HOLLY CLAUSE § DEFENDANTS. § 353RD JUDICIAL DISTRICT

DEFENDANTS' FIRST AMENDED ANSWER TO THE HONORABLE JUDGE OF SAID COURT: COME NOW, NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE, Defendants in the above entitled and numbered cause, and file their First Amended Answer, and would show unto the Court as follows: I.

As authorized by Rule 92 of the Texas Rules of Civil Procedure, Defendants NOAH S.

BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE generally deny each and every allegation contained in Plaintiffs Original Petition or any superseding or supplemental petitions, and respectfully request that Plaintiff be required to prove same by a preponderance ofthe evidence as required by the Constitution and the laws of the State of Texas.

II.

Defendants assert some and/or all of the issues the subject of Plaintiffs Declaratory Judgment have not matured and Plaintiffs claims should be dismissed.

III.

Defendants invoke §37.006 of the TEX. CIV. PRAC. & REM. CODE and assert all persons who have or claim any interest that would be affected by this declaratory action have not been made parties to this action.

IV.

Defendants invoke §37.008 of the TEX. CIV. PRAC. & REM. CODE, which states that the court may refuse to render or enter a declaratory judgment or decree if the judgment or decree would not terminate the uncertainty or controversy giving rise to the proceeding.

v. Defendants assert that Plaintiff does not have a separate, valid cause of action against the named Defendants.

VI.

Defendants have retained the services of Carls McDonald & Dalrymple, L.L.P. to assist them in this matter. Accordingly, Defendants seek recovery of their attorneys' fees incurred in this matter pursuant to TEX. CIV. PRAC. & REM. CODE §37.009.

WHEREFORE, PREMISES CONSIDERED, Defendants NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J.

HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE respectfully pray as follows: 1. That upon trial of this matter judgment be entered that Plaintiff take nothing; 2. That Defendants be awarded reasonable attorneys' fees; 3. That Defendants be discharged with their costs incurred herein; and 4. For such other and further relief to which Defendants may be justly entitled.

DEFENDANTS' FIRST AMENDED ANSWER Page 2 of3

Respectfully submitted, CARLS, MCDONALD & DALRYMPLE, L.L.P. Barton Oaks Plaza 1 I South Mopac Expressway Suite 280 Austin, Texas 78746 (512) 4 72-4845 (512) 472-8403 (fax)

, ~ ·, / "'7,: . ·(·'"\.__ I ./ ;[L~ U v VlD u/VU-v/ By: _ _ _ _ " -----ttdi---------- Kelly A. McDonald State Bar No. 13551275 Carla Garcia Connolly State Bar No. 076311 00 ATTORNEYS FOR DEFENDANTS NOAH S. BUNKER. PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. I-IEIGHTY, .lAO L. DAVIS and HOLLY CLAUSE CERTIFICATE OF SERVICE I certify that a true and correct copy of the foregoing has been sent by hand delivery, cetiified mail, return receipt requested, electronic means or facsimile to: Daniel H. Byrne Lessie G. Fitzpatrick FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, TX 78701-4286 VIA FAX

in accordance with the Texas Rules of Civil Procedure, on the 23rd day of October, 2013.

Kelly AJ McDonald

DEFENDANTS' FIRST AMENDED ANSWER Page 3 of 3

1/30/2014 4:51:30 PM Amalia Rodriguez-Mendoza District Clerk Travis County CAUSE NO. D-1-GN-13-002811 D-1-GN-13-002811

TRACY D. STRANDHAGEN, § IN THE DISTRICT COURT PLAINTIFF, § § § v. § TRAVIS COUNTY, TEXAS § § NOAH S. BUNKER, PAUL CARRELL, § EVERETT DREW HOUSTON, JR., § W. ANDREW BUCHHOLZ, SCOTT J. § LEIGHTY, JAD L. DAVIS, and § HOLLY CLAUSE § DEFENDANTS. § 353RD JUDICIAL DISTRICT DEFENDANTS' RESPONSE IN OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT TO THE HONORABLE JUDGE OF SAID COURT: COME NOW, NOAH S. BUNKER, PAUL CARRELL, EVERETT DREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE, Defendants in the above entitled and numbered cause, and file their Response in Opposition to Plaintiff's Motion for Summary Judgment, and would show the Court as follows: I. Summary of Argument Plaintiff is not entitled to summary judgment because (1) she has failed to establish that the liquidated damages provision in the Advisory Board and Internal Operations Agreement is an unenforceable penalty; and (2) the liquidated damage provision does not require Defendants to assert rights under Plaintiff's employment agreement.

II. Background Plaintiff Tracy D. Strandhagen and the fifty nine other partners in Austin Anesthesiology Group, PLLC sold their membership interests to American

Anesthesiology of Texas, Inc. in October 2011. At the same time that the physicians negotiated the buyout, they negotiated and entered into employment agreements with the new group. To further shape their ongoing working relationships, the physicians also negotiated and entered into an Advisory Board and Internal Operations Agreement ("Agreement") among themselves, pursuant to which they established an advisory board from their members to provide advice and guidance to the medical director and committed to each other that they would not terminate their employment with the new company during their initial terms. They agreed that if a physician did terminate employment with the new company during the initial term, the other physicians would be subject to harm, including, increased workloads necessitated by the termination, material impairment of their ability to earn bonuses under the Physician Performance Incentive Program, material impairment of the physician's relationships with hospitals and other health care facilities, third party payers and other stakeholders, and hiring and training costs related to replacement physicians. In light of the difficulty of proof of loss and the inconvenience and non-feasibility of obtaining an adequate remedy, the terminating physician would pay the others a liquidated damage amount. For Plaintiff and most of the others, this amount was $500,000. The physicians expressly agreed that the liquidated damage amount was reasonable in light of the terms of their Agreement, the difficulty of proof of losses, the inconvenience and non-feasibility of otherwise obtaining an adequate remedy and the value of the transactions consummated under the purchase agreement and other transaction documents. See Agreement, attached as Exhibit 1-A to Plaintiff's Motion.

Plaintiff's employment terminated in 2013. The facts surrounding her termination are in dispute. They are the subject of legal proceedings she initiated with the EEOC and

the ongoing dispute between Plaintiff and her former employer. Plaintiff filed this declaratory judgment action asking the court to preemptively determine that (1) the liquidated damages provision in the Agreement could not be enforced against her because she was terminated without cause; and (2) the liquidated damages provision was an unenforceable penalty. The Court sustained Defendant's Plea to the Jurisdiction with regard to Plaintiff's claim that she was terminated without cause. Plaintiff now moves for summary judgment on her claim that the liquidated damages provision is unenforceable.

Ill. Plaintiff's First Claim Plaintiff contends that the liquidated damages provision in the Agreement is an unenforceable penalty. Liquidated damages are an acceptable measure of damages that parties stipulate in advance will be assessed in the event of a contract breach. Flores v. Millennium Interests, Ltd., 185 S.W.3d 427 (Tex. 2005), citing Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex. 2005). Generally, a liquidated damages provision is enforceable if, at the time the contract is entered into, actual damages are difficult to estimate and the amount specified in the contract is a reasonable forecast of just compensation.

Whether a contractual provision is an enforceable liquidated damages provision or an unenforceable penalty is a question of law, but if fact issues exist, they must be resolved before the legal issue can be decided. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). A claim that a liquidated damages provision is an unenforceable penalty is an affirmative defense to the enforceability of the provision and the summary judgment movant has the burden of conclusively establishing every element of the defense. /d.;

Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex. 1984); Ryland Grp. v. Hood, 924 S.W. 2d 120, 121 (Tex. 1996) (per curiam); Liaquat Ali Khan v. Nizarali Meknojiya No. 03-11- 00580-CV, 2013 WL 3336874, at *2 (Tex. App.- Austin June 28, 2013, no pet.); GPA Holding, Inc. v. Baylor Health Care System; 344 S.W.3d 467, 475 (Tex. App.- Dallas 2011, pet denied).

In order to prevail on a motion for summary judgment that a liquidated damage clause was an unenforceable penalty, a movant would have to conclusively establish that (1) the harm caused by the breach is not incapable or difficult of estimation; and (2) the liquidated damages amount agreed to among the parties is was not a reasonable forecast of just compensation.

Phillips, 820 S.W.2d at 788; GPA Holding, p. 476. Evidence related to the lack of difficulty of estimation of damages and the lack of reasonableness of the forecast must be viewed as of the time the contract was executed. Baker v. International Record Syndicate, Inc., 812 S.W.2d 53 (Tex. App. -Dallas 1991, no pet), citing Mayfield v. Hicks, 575 S.W.2d 571, 576 (Tex. Civ. App. -Dallas 1978, writ ref'd n.r.e.).

Additionally, the party seeking to invalidate the liquidated damages provision must prove the amount of the other party's actual damages and show that the liquidated damages are disproportionate to the actual damages. Phillips 820 S.W.2d at 788; Baker at p. 55; citing Commercial Union Ins. Co. v. La Villa School Dist., 779 S.W.2d 102, 107 (Tex. App. - Corpus Christi 1989, no writ); Garden Ridge v. Advance International, Inc., 403 S.W.3d 432, 440 {Tex. App.- Houston [14 1h Dist.] 2013, pet. filed), citing Chan v. Montebello Dev. Co., No. 14-06-00936-CV, 2008 WL 2986379, at *3 (Tex. App. - Houston [14h Dist.] July 31, 2008, pet. denied}.

Plaintiff cannot prevail on her motion for summary judgment because she has offered no evidence: (1) that the damages for breach were not incapable or difficult to ascertain; (2) the liquidated damages amount agreed to by the parties was not a reasonable forecast of just compensation when the Agreement was entered into; or (3) of the actual amount of damages for her breach and that it is disproportionate to the stipulated liquidated damage amount In order to prevail, Plaintiff is required to conclusively establish alf three elements. All three inquiries involve questions of fact. Plaintiff has not offered any facts to establish any of these three required elements.

Plaintiff contends only that because the damages would be the same if she breached on the first day or the last day, the amount of liquidated damages is not reasonable. She offers no law to support her contention that the liquidated damage amount must be calibrated to the date of her breach. It would not be reasonable or workable to impose such a requirement At the time the Agreement was entered into, it was unknown when a breach, if there was one, would occur. At the time the contract was entered into, the parties could not calculate what the actual damages would be for each identified type of harm that would be sustained, beginning on an unknown date in the future, or how long the harm would be suffered. Damage analysis is dependent upon a number of factors that could not be ascertained in advance, as well as factors that are highly subjective. For example, the effect of the termination on the other physicians' ability to earn bonuses would depend on the revenues and expenses at the time of the breach, the impact and duration of a decline in profits associated with the termination. To quantify damages to the physicians'

ongoing relationships with hospitals, surgery centers and third party payers, extensive information would be needed about specifics of those relationships at the time of the breach. The valuation of the harm caused by increased workloads necessitated by termination is a subjective analysis.

Given the amount of time and expense and likelihood for disagreement that would be involved in calculating damages for breach, there is no question why the physicians found it advantageous to estimate what they considered to be a fair amount of compensation for harm they believed would occur in the event of a breach. Liquidated damages provide a means for parties who are faced with unknown, uncertain and difficult to predict damages to blend all of these unknown factors and agree among themselves upon an estimate they consider to be reasonable in light of their assessment of the anticipated harm. Whether the liquidated damages amount might be unreasonable on the first or last day is not in issue. The issue is whether it was reasonable at the time of termination. Plaintiff failed to provide any evidence that it was unreasonable at the time of termination.

IV. Plaintiff's Second Claim In her second ground for summary judgment, Plaintiff asserts that the liquidated damages provision of the Agreement is not enforceable against her because it seeks to render her liable to the Defendants for breach of her employment agreement, which they are not parties to. She claims that because the Defendants were not parties to or third party beneficiaries to her employment agreement, they cannot seek damages from her for terminating her employment.

Plaintiff's assertion is without merit. Although superficially similar, Plaintiff's employment agreement with her former employer is not the same as the Advisory Board and Internal Operations Agreement she entered into with her physician colleagues. The contractual commitments were made in different contracts, between different parties, for different reasons, and for different consideration. The enforceability of the Agreement entered into between Plaintiff and Defendants and its liquidated damages provision does not require Defendants to have standing to assert rights under Plaintiff's employment agreement. Plaintiff's citation of Resolution Trust Corp. v. Kemp, 951 F.2d 657, 662 (5th Cir. 1992) is not on point. In that case, the appellant's claims were based solely on a subordination agreement to which it was not a party. Those facts are quite different from those presented in this case. Defendants entered into a separate agreement with Plaintiff. Defendants have not claimed rights under Plaintiff's employment agreement.

V. Conclusion and Prayer Plaintiff has failed to prove as a matter of law, all of the essential elements of the affirmative defense that the liquidated damages clause is an unenforceable penalty. She has failed to provide any evidence on the three elements she is required to prove in order to prevail. See MMP, Ltd. v. Jones, 710 S.W.2d 59, 60 (Tex. 1986). Further, evidence presented by Defendants reflects that issues of fact exist that would preclude a summary judgment on this issue. Plaintiff has failed to show that no genuine issue of material fact exists and that she is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c).

Provident Life &Ace. Ins. Co. v. Knott, 128 S.W.3d 211,215-16 (Tex. 2003).

WHEREFORE, PREMISES CONSIDERED, Defendants NOAH S. BUNKER, PAUL CARRELL, EVERETT DREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT

J. HE!GHTY, JAD L. DAVIS and HOLLY CLAUSE respectfully pray that the Court deny Plaintiff's Motion for Summary Judgment and award and such other and further relief to which Defendants may be justly entitled.

Respectfully submitted, CARLS, MCDONALD & DALRYMPLE, L.L.P. Barton Oaks Plaza 1 South Mopac Expressway Suite 280 Austin, Texas 78746 (512) 472-4845 (512) 472-8403 (fax)

Kelly A Donald State Bar No. 13551275 Carla Garcia Connolly State Bar No. 07631100 A TIORNEYS FOR DEFENDANTS NOAH S. BUNKER, PAUL CARRELL, EVERETT DREW HOUSTON, JR, W.

ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE CERTIFICATE OF SERVICE I certify that a true and correct copy of the foregoing has been sent by certified mail, return receipt requested and by electronic means in accordance with the Texas Rules of Civil Procedure, on the 30th day of January, 2014 to: Daniel H. Byrne Lessie G. Fitzpatrick FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, TX 78701-4286

2/25/201410:41:46 AM Amalia Rodriguez-Mendoza District Clerk Travis County CAUSE NO. D-1-GN-13-002811 D-1-GN-13-002811

TRACY D. STRANDHAGEN, § IN THE DISTRICT COURT PLAINTIFF, § § § v. § TRAVIS COUNTY, TEXAS § § NOAH S. BUNKER, PAUL CARRELL, § EVERETT DREW HOUSTON, JR., § W. ANDREW BUCHHOLZ, SCOTT J. § LEIGHTY, JAD L DAVIS, and § HOLLY CLAUSE § DEFENDANTS. § 353R 0 JUDICIAL DISTRICT DEFENDANTS' REPLY TO PLAINTIFF'S SUPPLEMENTAL BRIEIFING IN SUPPORT OF PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT TO THE HONORABLE JUDGE OF SAID COURT: COME NOW, NOAH S. BUNKER, PAUL CARRELL, EVERETT DREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE, Defendants in the above entitled and numbered cause, and file their Reply to Plaintiff's Supplemental Briefing Submitted to the Court after the February 20, 2014 hearing and would show the Court as follows: After the hearing on Plaintiff's Motion for Summary Judgment, Plaintiff provided the Court with supplemental copies of the cases presented at the hearing, along with commentary on those cases and additional cases not cited in her motion or reply brief, or presented to the Court at the hearing. As Plaintiff's Reply brief to Defendants' Response was filed after 5:00p.m. the evening before the summary judgment hearing, Defendants were not able to provide the Court with a rebuttal brief prior to the hearing. Defendants wish to respond to the points raised in Plaintiff's Reply brief and in the supplemental briefing submitted to the Court after the hearing.

Strandhagen asserts as the basis for her summary judgment motionthat the liquidated damage clause is an unenforceable penalty. Texas law consistently holds that such a claim is an affirmative defense and the party asserting the defense must establish each and every element of the defense. The party must establish that the harm caused by the breach is not hard to estimate and that the liquidated amount is not a reasonable forecast of just compensation. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991 ); Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex. 1984); Ryland Grp. v. Hood, 924 S.W. 2d 120, 121 (Tex. 1996) (per curiam); GPA Holding, Inc. v. Baylor Health Care System; 344 S.W.3d 467, 475 (Tex. App.- Dallas 2011, pet denied). None of the cases cited by Plaintiff support her assertion that in order to be granted a summary judgment on her claim that the liquidated damage clause is a penalty, she does not have to establish all of the elements of the affirmative defense. None of the cases cited by Plaintiff hold that the party seeking to invalidate a liquidated damage clause only needs to establish that the stipulated amount of damages is unreasonable.

By way of contrast, a party seeking to enforce a liquidated damage clause must establish that damages were difficult to estimate and the stipulated amount is a reasonable estimate of damages. Phillips, p. 788; Stewart v. Basey, 245 S.W. 2d 484, 486 (Tex. 1952). Whether moving to enforce a liquidated damages clause or have it struck as a penalty, the moving party has the burden of pleading and proving all elements.

The Phillips, Stewart and Baker cases cited by Plaintiff all discuss a movant's right to enforce a liquidated damage clause. In none of the cases, was the movant only required to satisfy half of the burden. In Phillips, the Texas Supreme Court refused

Martha Phillips' liquidated damage claim for ten times the amount of her actual damages, as had the trial court and court of appeals. The Texas Supreme Court reiterated that in order to enforce a liquidated damage clause, the court must find that the harm caused by the breach is hard to estimate and that the stipulated amount was a reasonable forecast of actual damages. /d. at p. 788. It explained that a contract provision that required a multiple of actual damages does not meet either prong of the test: (1) the harm caused by the breach was not incapable or difficult of estimation and (2) rather than forecasting damages, the clause required them to be determined then multiplied. ldl at p. 789.

In Stewarl, the trial court and court of appeals refused Stewart's claim for liquidated damages. The Texas Supreme Court upheld the court of appeals' decision, holding that the harm caused by the breach would have to be hard to estimate and the agreed amount of damages would have to be a reasonable forecast of just compensation. Stewart did not meet that burden. /d. at p. 486-487.

In Baker, the jury awarded Baker actual damages for destruction of the negatives his photographs, despite his claim for a higher amount under the liquidated damages clause in his contract. The Dallas Court of Appeals overturned the trial court decision. It noted that under Texas law, a liquidated damages provision would be enforced when the court finds that the harm caused by the breach is incapable or difficult to estimate and the amount of liquidated damages is a reasonable forecast of actual damages. The Court held that Baker had established that an accurate determination of the damages was virtually impossible. In response to evidence reflecting a lower value of some of Baker's other photographs on the issue of the reasonableness of the damage forecast, the court noted that this was not evidence of the value of the photographs in question, as

photographs are unique and have many factors bearing on their actual value. The court explained that: "[p]roof of this loss is difficult; where damages are real but difficult to prove, injustice will be done if the court substitutes the requirements of judicial proof for the parties' own informed agreement as to what is a reasonable measure of damages. /d. at 55~56.

In the SP Terrace case cited in Plainitiff's summary judgment reply brief, the Houston 151 District Court of Appeals reiterated the requirement that a party asserting that a liquidated damages clause is asserting an affirmative defense and bears the burden of proof. SP Terrance, L.P. v. Meritage Homes of Texas, LLC; 334 S.W.3d 275, 287 (Tex. App. - Houston [1st Dist.] 2010, no pet.) Citing the Dallas Court of Appeals' Baker decision discussed above, the court went on to note that "[g]enerally, that party must prove the amount of actual damages, if any, to demonstrate that the actual loss was not an approximation of the stipulated sum". /d. The Houston court went on to note that before a court can resolve the question of law as to whether the clause is a penalty, sometimes factual issues must first be resolved (citing Phi/lips). The court declined to remove the liquidated damages provision because SP Terrace presented no evidence that the clause operated as a penalty. !d. The court cited a similar holding from the Dallas Court of Appeals on this point (also cited in Plaintiff's reply), Urban Television Network Corp. v. Creditor Liquidity Solutions, LP. 227 S. W. 3d 917,918-919 (Tex. App.- Dallas 2009, no pet).

In Urban Television, the Dallas Court of Appeals confirmed that a party asserting that a liquidated damages clause is a penalty has the burden of pleading and proving the elements of the defense. When the plaintiff established with summary judgment evidence

that defendant breached the contract, and its right to liquidated damages, the court ruled that the burden then shifted to the defendant to prevent evidence that the liquidated damage clause was a penalty, which it failed to do. Urban Television Network Corp. v. Creditor Liquidity Solutions, LP. 227 S. W. 3d 917, 918-919 (Tex. App.- Dallas 2009, no pet).

The Commercial Union case cited by Plaintiff involved a movant seeking to avoid a liquidated damages clause. Commercial Union Ins. Co. v. La Villa School Dist., 779 S.W.2d 102, 107 (Tex. App. - Corpus Christi 1989, no writ). The La Villa ISO was awarded liquidated damages at trial under a construction contract The contractor had asserted the clause was a penalty. The court of appeals noted that when a party asserts a liquidated damages clause is a penalty, it has the burden of establishing that defense.

Contrary to Plaintiff Strandhagen's comments, the Corpus Christi Court of Appeals did not find that the contractor failed to prove either that damages were not difficult to estimate or that the amount was an unreasonable forecast (one or the other). There is no such language in the opinion. The court of appeals held that absent findings and conclusions from the trial court, it presumed the trial court found the damages were incapable or difficult to estimate and the liquidated damages constituted just compensation. !d. at pgs.

106-107.

The Garden Ridge case involved competing breach of contract claims. At issue was whether a charge back provision in the contract provided for liquidated damages or was a penalty. In its opinion holding that the provision was penalty, the court noted that Advance International established that the harm anticipated from its alleged noncompliance was not difficult to estimate; (2) Garden Ridge did not attempt to show the

charge back amounts were a reasonable estimate; and (3) Advance International met its burden to show that the chargeback amounts constituted a disproportionate estimate of actual damages. Garden Ridge v. Advance International, Inc., 403 S.W.3d 432, 439-440 (Tex. App.- Houston [141h Dist.] 2013, pet. filed) In GPA Holdings, the Dallas Court of Appeals held that GPA was not entitled to summary judgment on its claim that the liquidated damages clause was a penalty. GPA Holding, Inc. v. Baylor Health Care System; 344 S.W.3d 467, 475 (Tex. App.- Dallas 2011, pet denied). The court held that in order to obtain summary judgment on the affirmative defense of penalty, GPA was required to prove every element of the defense.

GPA did not offer evidence to support either one. 'The difficulty (or lack of difficulty) in estimation as well as the unreasonableness of the damages estimate where GPA's to prove". ld at p. 476. Like GPA, Plaintiff Strandhagen failed to offer evidence to establish that damages were not difficult to estimate or to establish that the stipulated amount was unreasonable.

Nacogdoches Heart Clinic; 2013 Tex. App. LEXIS 1066, *19-20 (Tex. App.- Tyler 2013, pet. denied) was not cited in Plaintiff Strandhagen's Motion for Summary Judgment or her reply brief. The Tyler Court of Appeals held that the covenant not to compete was unenforceable because it was overbroad and imposed a greater than necessary restraint.

The court went on to note in dicta that in order for a liquidated damages clause to be enforceable, the harm caused by the breach must be difficult to estimate and the amount called for must be a reasonable forecast of just compensation. The amount to be paid ($100,000 per month) was equal to the amount of monthly compensation under the

contract Thus, if NHC attempted to claim the liquidated damages, it would not be entitled to prevail, because it could not establish both of the required prongs. !d. at pgs. *19-20.

In Nexstar, the court of appeals would not enforce the liquidated damages clause because the liquidated damages were not in lieu of other damages. It is not relevant to this case. Nexstar Broad, Inc. v. Gray; 2008 Tex. App. LEXIS 4736, *7-8 (Tex. App.- Beaumont 2008, no pet.)

The Community Development case reiterates the requirement that liquidated damages be a reasonable forecast of just compensation. Community Dev. Serv. Inc. v Replacement Parts Mfg., Inc.; 670 S. W. 2d 721, 727 (Tex. App. - Houston [1st Dist.J 1984, no writ). There was no discussion of the test endorsed by the Texas Supreme Court for determining whether a liquidated damages clause is in fact a penalty. The court's determination was that a damage clause that that subjects parties to the same reparation for any default, no matter how large or small, would not be a reasonable forecast of just compensation. /d. at p. 726. It does not eliminate the requirement that a party seeking to overturn a liquidated damage clause must offer evidence that damages are not difficult to estimate and the forecast is not a reasonable measure of damages for breach at the time the agreement is entered into.

Plaintiff has conceded for purposes of her motion that damages in this case were difficult to quantify. She is not entitled to summary judgment because she has failed to establish this required element Nor has she offered evidence sufficient to establish that the stipulated damage amount is unreasonable. She asserts only that the measure of damages agreed to among the parties is per se unreasonable because it does not provide a timing component. The time of the breach is not a controlling factor. The parties

identified multiple types of harm that would be suffered in the event of a breach: increased workloads, material impairment of the ability to earn bonuses and their relationships with hospitals, surgery centers and 3rd party payors, etc. These factors are highly subjective and dependent upon the facts and circumstances at the time of the breach. It is not a linear analysis resolved by a determination of the date of breach. As noted consistently by Texas courts, while the issue of whether a clause is a penalty is a question of law, very often there are fact issues that must be resolved first. Absent evidence as to whether the stipulated amount was a reasonable forecast at the inception of the agreement, she has failed to establish the second required element Nor has she offered any evidence of what the actual damages were at the time of her breach to show that the stipulated amount was at odds with "just compensation". Plaintiff has failed to offer evidence of any of the elements of her claim. She has failed to meet her summary judgment burden.

In Eberts, the Dallas Court of Appeals held that because an injunction preventing breach had been entered, liquidated damages could not awarded at the same time. It did not speak to the burden that a summary judgment movant must meet in order to establish that a liquidated damage clause is a penalty. Rather, the case involved a defendant asserting that at trial, the plaintiff failed to meet its burden of establishing that the liquidated damages clause was a reasonable forecast of damages. Eberts v. Businesspeople Personnel Servs., Inc. 620 S.W. 2d 861, 863-865 (Tex. Civ. App.- Dallas 1981, no writ).

The RTC, South Texas Water and Lake River cases cited by Plaintiff all involve fact patterns in which third parties attempted to assert rights under contracts that they were not parties to. Additionally, the Lake River case does not involve Texas law. Lake

River Corp. v. Carbo-Rundum Co., 769 F.2d 1284, 1290 (7th Cir. 1985); Resolution Trust Corp. v. Kemp, 951 F.2d 657, 662 (5th Cir. 1992); South Texas Water Authority v. Lomas; 223 S.W.3d 304 ((Tex. 2007). In contrast to these cases, Plaintiff Strandhagen entered into the Internal Operations and Advisory Board Agreement with her former partners at the time they sold their interests in Austin Anesthesiology Group. It is an entirely different agreement than her employment agreement It has different parties, different promises made for different reasons, for different consideration than her employment agreement.

Plaintiff also asserted that her claim of penalty should not be treated as an affirmative defense because she is a plaintiff asserting a claim for declaratory judgment.

She cites no authority to support her position. Plaintiff preemptively filed this suit in anticipation of a possible action by her former partners to enforce the liquidated damage clause, contending that it is a penalty. The fact that she filed suit in anticipation of a possible claim does not make her assertion that the clause is a penalty any less an affirmative defense than if she were a defendant asserting the argument For these reasons and as set forth in Defendant's Response to Plaintiff's Motion for Summary Judgment, Defendants urge the Court to Deny Plaintiff's Motion.

Respectfully submitted, CARLS, MCDONALD & DALRYMPLE, L.L.P. Barton Oaks Plaza 1 South Mopac Expressway Suite 280 Austin, Texas 78746 (512) 472-4845 (512) 472-8403 (fax)

Kelly A. cDonald State Bar No. 13551275 1';_111 eel OJl§!ld @s;:m£9l5l\IY:.99 n}

Carla Garcia Connolly State Bar No. 07631100 cg~g~@@gmcdlaw.com ATTORNEYS FOR DEFENDANTS NOAH S. BUNKER, PAUL CARRELL, EVERETT DREW HOUSTON, JR., W.

ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L DAVIS and HOLLY CLAUSE CERTIFICATE OF SERVICE l certify that a true and correct copy of the foregoing has been sent by certified mail, return receipt requested and by electronic means in accordance with the Texas Rules of Civil Procedure, on the 25th day of February, 2014 to: Daniel H. Byrne Lessie G. Fitzpatrick FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, TX 78701-4286

Kelly A. McDonald

NOTICE SENT~LOCUTORY NONE DC BK14156 PG221

DISP PARTIES· ALL DISP CODE: ~ CLS 'flRtCf REDACT PGS:_ _ _-,:o-~- NO. D-1-GN-13-002811 JUDQE OL!J CLERK.~~- TRACYD.sT § IN THE DISTRICT COURT § PLAINTIFF § § v. § § § NOAH S. BUNKER, PAUL § 353rd JUDICIAL DISTRICT CARRELL, EVERETT BREW § HOUSTON, JR., W.ANDREW § BUCHHOLZ, SCOTT J. LEIGHTY, § JAD L. DAVIS, and HOLLY § ..... e"' <Cc:r CLAUSE, § § DEFENDANTS § TRAVIS COUNTY, TEXAS

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT On February 20, 2014, Plaintiffs Motion for Summary Judgment came on to be heard. After reading the pleadings, hearing the arguments presented by counsel, reviewing the case law, and considering the same, the Court finds that the Motion is GRANTED.

Therefore, IT IS ORDERED, ADJUDGED, AND DECREED that Plaintiffs Motion for Summary Judgment is GRANTED, and the Court DECLARES that the $500,000 purported liquidated damages clause in the Advisory Board and Internal Operations Agreement is an unenforceable penalty.

All relief not expressly granted is DENIED.

SIGNED on this the &A'J day of May, 2014.

JUDGE ORLINDA L. NARANJO 419TH DISTRICT COURT

( i (

FBH FRITZ, BYRNE, HEAD & HARRISON,PLLC H Artnmevs at Lm1 July 22, 2013

VIA EMAIL [email protected] William T. Davis, Esq.

Jackson Lewis N. Akard, Suite 2500 Dallas, Texas 75201 RE: Tracy Strandhagen; Mednax, Inc. a subsidiary of Anesthesiology Associates of Texas, Inc. Dear Bill: After further discussions with our client, we hereby notify you that under the circumstances and in light of the working conditions and hostile work environment perpetuated by local management (and ratified by Mednax), Dr. Strandhagen has concluded that she has been effectively terminated without cause and has no choice but to advise you that she will no longer be able to perform her functions as an anesthesiologist for the Mednax subsidiary Anesthesiology Associates of Texas, Inc. Dr. Strandhagen filed her pending EEOC charge in the context of a history of pervasive gender discrimination resulting in hostile work environment within the Austin group for female physicians, particularly those like Tracy who express any reluctance to capitulate to the will of the male-dominated management of the practice. Most recently, Dr. Strandhagen has been threatened with mandatory but completely inappropriate career-threatening sanctions for declining to acquiesce with a male surgeon's request that she anesthetize a patient and jeopardize his health in violation ofNPO guidelines.

As you know, Dr. Strandhagen reported to Mednax's Human Resources Department that she was a victim of gender discrimination shortly after this complaint was leveled by Dr. Rose (in the aftermath of her clinically appropriate decision to refuse to capitulate his request). However, Mednax initially failed to take any action to investigate Dr. Strandhagen's report, and followed up to a limited extent only after being prodded further by Dr. Strandhagen. In the meantime, local Mednax management perpetuated the hostile environment and also retaliated against Dr. Strandhagen by seeking to professionally brand her as a "disruptive physician" and ordering her to take a "disruptive physician" class. To our knowledge all the physicians that have reviewed the situation agreed with Dr. 111/ue Drive fl ... Clie/11 Oriellled SUITE 2000 AUSTIN, TEXAS 78701 (5 12) 476-2020 FAX: (5 12) 477-5267 WWW.FBHH.COM

' ( ( William T. Davis, Esq.

Jackson Lewis July 22, 2013 Page2

Strandhagen's clinical decision to refuse to acquiesce to Dr. Rose's demand (and we note that under AMA guidelines a key element of the disruptive physician classification requires some element of questionable clinical decisionmaking). We understand that in the entire history of this group, the "disruptive physician" stigma has been imposed only one other time also against a female physician who ultimately resigned. Adding insult to injury, we understand that since then rather than taking steps to rectify the environment and rescinding its demand that Tracy submit to a stigmatizing "boot camp," Mednax has ordered its generally younger and less experienced facility chiefs (all of whom are male) to "keep an eye" on Dr. Strandhagen.

As we informed you, Dr. Strandhagen was disheartened to recently learn that as a result of its belated investigation Mednax still thinks that her gender discrimination complaint lacks merit, and refuses to reverse its decision to require her to attend the "disruptive physician" training. As Mednax undoubtedly anticipated, this conduct and the other actions which local management continues to take have undermined her credibility with fellow physicians and medical staft and resulted in intolerable working conditions for our client that are now impacting her ability to properly exercise independent and effective clinical judgment. Tracy cannot ethically continue to practice in this environment and considers that she has been terminated without cause within the meaning of her employment agreement.

Under the terms of her employment agreement, Dr. Strandhagen is therefore entitled to continue to receive her base salary for the remainder of the agreement's seven year term, subject to offsets to the extent that she succeeds in finding suitable employment in her specialty as permitted by the agreement. Upon confirmation that Mednax plans to fulfill its obligations under that agreement, including payment of her severance, Dr. Strandhagen is of course willing to fulfill all of her obligations under the agreement, including notifying the affected hospitals of her resignation of privileges, within the periods required under the agreement.

We look forward to Mednax's response to our client's position as outlined above. We will r:espond to Mednax's position that Tracy does indeed have behavioral issues which warrant this retaliation in the due course of the EEOC complaint process and any subsequent proceedings, but suffice it to say that we are confident that those contentions lack merit.

' ( William T. Davis, Esq.

Jackson Lewis July 22, 2013 Page3

As I mentioned to you, I will be traveling for the next few days, so if we are unable to communicate feel free to contact my partner, Lessie Fitzpatrick.

Very truly yours, Au:JHP~mt ..

Daniel H. Byrne b3 pev~ DHB/mpy cc: Client

AMERICAN ANESTHESIOLOGY ..

Via UPS Overnight Mail September 30,2013

Tracy D. Strandhagen, M.D.

600 Riders Trail Austin, TX 78733 Re: Tracy Strandhagen, M.D.'s Employment Agreement with American Anesthesiology of Texas, Inc. ("AAT") dated November 8, 2011 (the "Agreement").

Dear Dr. Strandhagen: You have failed to report to work and instead have continued to abandon your duties despite numerous requests to return to work. As you have been previously advised, this constitutes a material breach of the Agreement. You were advised of this breach by letters dated July 24, August 15, August 28, and September 12. You have been provided deadlines to comply with, which have been extended numerous times. Your continued failure to perform your duties has imposed a hardship on AAT and caused it to suffer damages.

As you know, you received a large portion of the purchase price when AA T acquired the practice and entered into the Agreement with you in connection with that transaction. The claims you previously made related to discrimination are inconsistent with the tenus of the covenants, representations, and warranties you made in connection with the transaction, which induced AAT to close on the transaction.

In addition, AA T investigated those claims and dete1minecl that they had no merit and also concluded that requesting you to attend training seminars was reasonable. It is important to AAT that all of its employees treat others courteously, respectfully, and with dignity, regardless of whether they are clinically correct. The failure to do so can adversely affect patient care.

The simple facts are that you have simply abandoned your duties, despite repeated requests to return to work and notices of breach being provided. Therefore, AAT must terminate your employment with cause as a result of your material breach.

This is notice oftermination with cause of your employment with AAT, effective September 30, 2013, pursuant to Section VIII.B.2. (a), (g) and (m) of the Agreement You are reminded that all of the post termination clauses and restrictions in the Agreement shall remain in effect after your te1mination. These include, but are not limited to, your Confidentiality, Non- Compete, Non-Solicitation, and Non-Disparagement clauses. You are also reminded that you are required to resign privileges as required in Section IX.B. ofthe Agreement within five (5) business days.

AAT expects you to honor your commitments under these provisions and will take all steps necessary to confirm your compliance. We request confirmation that you have resigned privileges as required within ten (1 0) business days of this letter. Please fax a copy of said resignations to the Credentialing Department at fax number: (954) 858-0591.

WWW.A MER IC AN AN ESTH E S 10 lO GV. COM EXHIBIT 1301 CONCORD TERRACE SUNRISE, FLORIDA 33323 (~00.243.3839 (ss4.384.0175 ~ Finally as a result of your employment with AAT being terminated for cause, AAT will maintain, at your expense, professional liability insurance covering your acts during your period of employment. The cost of such insurance is Six Thousand One Hundred and Thirty~Five and 00/100 Dollars ($6,135.00). The tail insutance cost, which is the current cost for an extended reporting period as determined in accordance with AAT's cun·ent insurance program, should be paid no later than thirty (30) days from the date of receipt of this correspondence. A check in the specified amount should be made payable to: American Anesthesiology, Inc. and sent to: American Anesthesiology, Inc., 1301 Concord Terrace, Stmrise, Florida, 33323, Attn: Ann Zugarramurdi. Going forward you are required to provide AA T with written notice of any lawsuit, claim, patient complaint, or physician report that you become aware of relating to the provision of medical services by you or any other employee of AAT or hospital within five (5) days of receiving such notice. Certificates of insurance will be forwarded to you by our Risk Management Department after the effective date of termination. If you have any questions, please call our Insurance Administrator at: (800) 243-3839 x 5285.

Karl B. agner President American Anesthesiology, Inc.

Via Fax: 512-477-5267 & Email: [email protected] Mr. Daniel H. Byrne Fritz, Byrne, Head & Harrison, PLLC San Jacinto Blvd., Suite 2000 Austin, TX 78701

Filed August 14 P5:19 Amalia Rodriguez-Mendoz District Clerk Travis District D-1-GN-13-002811 CAUSE NO. D-1-GN-13-002811 TRACY D. STRANDHAGEN, § IN THE DISTRICT COURT § PLAINTIFF, § § v. § § NOAH S. BUNKER, PAUL CARRELL, § EVERETT BREW HOUSTON, JR., § TRAVIS COUNTY, TEXAS W. ANDREW BUCHHOLZ, SCOTT J. § LEIGHTY, JAD L. DAVIS, and § HOLLY CLAUSE § § DEFENDANTS. § 353RD JUDICIAL DISTRICT PLAINTIFF'S FIRST AMENDED PETITION Plaintiff TRACY D. STRANDHAGEN ("Strandhagen") files this First Amended Petition complaining of Defendants NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. LEIGHTY, JAD L. DAVIS, and HOLLY CLAUSE, as follows: I. DISCOVERY LEVEL 1. Plaintiff pleads that discovery should be conducted in accordance with a Level 3 discovery control plan under TEX. R. CIV. P. 190.4.

II. PARTIES 2. Plaintiff is an individual residing in Travis County, Texas.

3. Defendant Noah S. Bunker is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever he may be found.

4. Defendant Paul Carrell is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever he may be found.

5. Defendant Everett Brew Houston, Jr. is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever he may be found.

6. Defendant W. Andrew Buchholz is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever he may be found.

7. Defendant Scott J. Leighty is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever he may be found.

8. Defendant Jad L. Davis is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever he may be found.

9. Holly Clause is an individual residing in Travis County and may be served with citation at his work address 8140 North MoPac Expy, Building 3, Suite 210, Austin, TX 78759, or wherever she may be found.

III. JURISDICTION AND VENUE 10. Subject matter jurisdiction is proper because the amount in controversy exceeds the minimum jurisdictional limits of the Court. Personal jurisdiction over Defendants is proper because they are residents of the State of Texas.

11. Venue is proper in Travis County, Texas as the county ofDefendants' residences and because all of the events or omissions giving rise to Plaintiff's claims occurred in Travis County. TEX. CIV. PRAC. & REM. CODE §15.002.

IV. BACKGROUND FACTS 12. In 2011, Plaintiff Strandhagen was a partner along with Defendants and other anesthesiologists in Austin Anesthesiology Group, LLP ("AAG"), which specialized in anesthesiology and post-operative pain management. In or around October of 2011, AAG entered into a transaction (the "Buyout") whereby its operations were sold to American Anesthesiology of Texas, Inc. ("AAT"). AAT is an indirect subsidiary of Mednax, Inc. ("Mednax"), a publicly traded medical group that is a national provider of medical services, including anesthesia services.

13. At the time of the Buyout, Plaintiff and other AAG-affiliated individual physicians entered into separate employment agreements with AAT, whereby the physicians agreed to continue to work for AAT on terms and conditions set forth therein. At the same time, these same physicians entered into a separate agreement among themselves dated October 7, 2011 entitled "Advisory Board and Internal Operations Agreement" (the "Internal Agreement") (Exhibit A hereto). The Internal Agreement established an "Advisory Board" to provide "binding advice and guidance" to the medical director appointed under that agreement.

Defendants are the current members of that Advisory Board. It also contains a section entitled "Physician Obligations" (referred to herein as the "Termination Penalty Provisions") whereby the physicians purportedly agreed that if their employment with AAT terminated at any time prior to January 1, 2018 (other than (among other exceptions) a termination without cause by ATT), the terminating physician became obligated to pay each of the other sixty-plus physicians

signing the Internal Agreement their pro rata share of a $500,000 1 lump sum, plus interest at 10%, purportedly as "liquidated damages." This amount (less than $10,000 per physician) is purportedly payable to the individual physicians severally.

14. In December of 2012 Plaintiff Strandhagen became embroiled in an employment dispute with AAT2 which eventually resulted in Strandhagen reporting to Mednax management that she was a victim of gender discrimination. Three days after this report, Mednax (acting at all times on behalf of AAT) took an adverse employment action against Dr. Strandhagen by ordering her to attend a class for "disruptive physicians" which would stigmatize Dr. Strandhagen for the rest of her career. 3 Dr. Strandhagen declined to comply with this directive, and complained to both Mednax and the EEOC that this action was unlawful and a result of gender discrimination. She sought to mediate this dispute with Mednax/AAT as part of the EEOC's dispute resolution program, but after initially agreeing to mediate Mednax abruptly repudiated that agreement on July 27, 2013 and has since refused to proceed.

15. After a limited investigation that occurred only after prodding by Dr. Strandhagen, Mednax ostensibly determined that Dr. Strandhagen's gender discrimination There are a handful of exceptions for physicians other than Plaintiff for whom the lump sum amount is somewhat smaller.

The dispute was precipitated by a complaint filed against Dr. Strandhagen by Dr. Harris Rose. Dr. Rose, a surgeon who is well known for his aggressive and bullying behavior, complained to Mednax that Dr. Strandhagen behaved inappropriately by failing to capitulate to his demand that she anesthetize a patient in violation of NPO guidelines. When Dr. Strandhagen declined to anesthetize the patient, the Dr. Rose called her partners, seeking to pressure her to reverse her clinically appropriate decision. One of these partners, a male, called Dr. Strandhagen and attempted to convince her (unsuccessfully) that she should proceed with the anesthesia. The Advisory Board ultimately concluded that Dr. Strandhagen's actions indeed adhered to NPO guidelines.

The attempt to brand Dr. Strandhagen's conduct as that of a "disruptive physician" is unfounded.

American Medical Association defmes disruptive behavior as personal conduct, whether verbal or physical, that negatively affects or that potentially may negatively affect patient care. However, criticism that is offered in good faith with the aim of improving patient care should not be construed as disruptive behavior. AMA Opinion 9.045 (emphasis added).

complaint was without merit and refused to reverse its directive that Dr. Strandhagen attend the stigmatizing "disruptive physician" class. As was intended by Mednax, these decisions damaged Dr. Strandhagen's reputation and undermined her authority and credibility with fellow physicians and medical staff, resulting in increasingly intolerable working conditions and impairing her ability to make clinically appropriate decisions for patients under her care, eventually leading to her constructive termination without cause on July 22, 2103. See Exhibit B (Byrne letter).

16. Dr. Strandhagen has learned that despite the fact that she was terminated by Mednax without cause, and despite the fact that the Termination Penalty Provisions are unenforceable as a penalty under Texas law, Defendants and perhaps others are seeking to pursue her for collection of their shares of the $500,000 termination penalty described in the Termination Penalty Provisions. A justiciable controversy thus exists between Plaintiff and Defendants.

V. CAUSE OF ACTION A. DECLARATORY JUDGMENT 17. A substantial and justiciable controversy exists about the rights and the status of the parties under the terms of the Termination Penalty Provisions. Accordingly, Dr. Strandhagen seeks a declaratory judgment that she was terminated without cause and therefore the Termination Penalty Provisions are inapplicable to her. Additionally, Dr. Strandhagen seeks a declaratory judgment that the liquidated damages provision in the Termination Penalty Provisions is an invalid and unenforceable penalty as a matter of law because (1) it purports to render her liable to Defendants and the other physicians for damages for her alleged breach of a contract (her employment agreement with AAT) to which they are not parties or third party

beneficiaries, (2) the harm caused by a breach of the employment agreement as anticipated at the time it was entered into was not incapable or difficult of estimation, and (3) the amount required to be paid under the liquidated damages clause is not a reasonable forecast of just compensation, thereby rendering the Termination Penalty Provisions an unenforceable penalty under Texas law.

B. ATTORNEYS'FEES 18. Plaintiff has retained the services of Fritz, Byrne, Head & Harrison, PLLC to assist her in pursuing a declaratory judgment in this matter. Accordingly, Plaintiff seeks to recover her reasonable attorneys' fees incurred in this matter pursuant to TEX. CIV. PRAC. & REM. CODE§ 37.009.

VI. PRAYER WHEREFORE, Plaintiff requests that Defendants be cited to appear and answer herein, and· that on final hearing, the Court issue the declaratory relief as requested above, award Plaintiff reasonable attorneys' fees, and such other and further relief, at law or in equity, to which Plaintiff may show herself to be justly entitled.

Respectfully submitted, FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, Texas 78701-4286 Telephone: (512) 476-2020 Telecopy: (512) 477-5267

Daniel H. Byrne -------- State Bar No. 03565600 Lessie G. Fitzpatrick State Bar No. 24012630 ATTORNEYS FOR PLAINTIFF

Filed October 23 A9: 12 Amalia Rodriguez-Mendoza District Clerk Travis District D-1-GN-13-002811 CAUSE NO. D-1-GN-13-002811

TRACY D. STRANDHAGEN, § IN THE DISTRICT COURT PLAINTIFF, § § § v. § TRAVIS COUNTY, TEXAS § § NOAH S. BUNKER, PAUL CARRELL, § EVERETT BREW HOUSTON, JR., § W. ANDREW BUCHHOLZ, SCOTT J. § LEIGHTY, JAD L. DAVIS, and § HOLLY CLAUSE § DEFENDANTS. § 353RD JUDICIAL DISTRICT DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT TO THE HONORABLE JUDGE OF SAID COURT: COME NOW, NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE, Defendants in the above entitled and numbered cause, and file their Amended Plea to the Jurisdiction and in the alternative, Plea in Abatement, and would show unto the Court as follows: I. Background 1. On August 14, 2013 Plaintiff filed her Original Petition and her First Amended Petition. Plaintiff states in her First Amended Petition that she is a physician and former partner of Austin Anesthesiology Group, LLP. In or around October 20 11 American Anesthesiology of Texas, Inc. purchased Austin Anesthesiology Group, LLP and Plaintiff became employed by American Anesthesiology of Texas, Inc. 2. At the time of the purchase, Plaintiff also entered into a contractual agreement with the other partners of Austin Anesthesiology Group, LLP, entitled "Advisory Board and

Internal Operations Agreement." The contract contains a provision, which obligates a partner that terminates his/her employment without cause to pay the non-terminated partners of Austin Anesthesiology Group, LLP damages.

3. Plaintiff has filed a charge of discrimination with the The Texas Workforce Commission Civil Rights Division and the EEOC naming American Anesthesiology of Texas, Inc. and Mednax, Inc. as her employers, asserting she had been discriminated and retaliated against because of her gender, and that these actions resulted in her constructive termination.

See Exhibits A and B.

4. Plaintiff asserts in her Petition that she has "learned ..... Defendants and perhaps others are seeking to pursue her for collection ... " under the Advisory Board and Internal Operations Agreement. Plaintiff seeks a declaratory judgment that she was terminated without cause and therefore the Termination Penalty Provisions of the "Advisory Board and Internal Operations Agreement" are not applicable to her.

5. Plaintiff also seeks a declaratory judgment that the liquidated damages provision in the Termination Penalty Provisions is an invalid and unenforceable penalty as a matter of law because ( 1) it purports to render her liable to Defendants and the other physicians for damages for her alleged breach of a contract (her employment agreement with AAT) to which they are not parties or third party beneficiaries, (2) the harm caused by a breach of the employment agreement as anticipated at the time it was entered into was not incapable or difficult of estimation, and (3) the amount required to be paid under the liquidated damages clause is not a reasonable forecast of just compensation rendering the Termination Penalty Provisions an unenforceable penalty under Texas law.

DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT Page 2 of8

II. Evidence Defendants rely on the following evidence is support of this Amended Plea to the Jurisdiction and the same is incorporated herein for all purposes: Exhibit A Charge of Discrimination (filed on May 2, 2013); Exhibit B July 22, 2013 correspondence from Daniel H. Byrne (attorney for Plaintiff); Exhibit C Amended Charge of Discrimination (filed on September 26, 2013) (portions redacted); Exhibit D October 14, 2013 correspondence from Daniel H. Byrne (attorney for Plaintiff).

III. Plaintiff's Claims are Unripe The Court lacks jurisdiction because Plaintiffs claims are not ripe. Plaintiff admits that she is seeking interpretation of a provision in a contract based upon learning she may be pursued in a breach of contract claim. It is undisputed Plaintiff has not been sued for breach of contract.

Nor has any demand been made by the Defendants or by any of the former partners of Austin Anesthesiology Group, LLP under the Advisory Board and Internal Operations Agreement.

A declaratory judgment is not available to resolve issues that are not yet mature and are subject to change. City ofGarland v. Louton, 691 S.W.2d 603, 605 (Tex.l985). The UDJA does not permit litigants to "fish in judicial ponds for legal advice." California Prods. v. Puretex Lemon Juice, Inc., 334 S. W.2d 780, 781 (Tex.l960). Although a contract may be construed either before or after there has been a breach, the UDJA does not extend an open-ended invitation to parties seeking interpretation of their contracts. There must be some showing that litigation is imminent between the parties unless the contractual uncertainties are judicially resolved. Paulsen v. Texas Equal Access to Justice Found., 23 S.W.3d 42, 46 (Tex. App.- Austin 1999, pet. denied). Subject matter jurisdiction requires there to be a live controversy between the parties. State Bar ofTexas v. Gomez, 891 S.W.2 243, 245, (Tex. 1994). There is

DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT Page 3 of 8

no showing that litigation is imminent unless contractual uncertainties are resolved. The issues that are the subject of Plaintiffs request for declaratory judgment have not matured.

IV. Court Lacks Jurisdiction Over Employment Claims Plaintiff has filed a Charge of Discrimination with the Texas Texas Workforce Commission Civil Rights Division under both the Texas Commission on Human Rights Act ("TCHRA") Tex. Labor Code, Ch. 21 and Title VII of the Civil Rights Act of 1964. 1 In her Charge, she named Austin Anesthesiology Group, PLLC and later amended to substitute American Anesthesiology of Texas, Inc. ("AAT") and Mednax, Inc. as her employers, and asserted that she had been discriminated and retaliated against because of her gender, and that these actions resulted in her constructive termination. See Exhibits A and C. Plaintiffs claims in this suit stem from the employment-related claims she has brought in another forum, the Texas Workforce Commission Civil Rights Division. This Court does not have jurisdiction to hear Plaintiffs employment related claims while they are pending before the Texas Workforce Commission Civil Rights Division. Exhaustion of administrative remedies under Title VII and the TCHRA is a jurisdictional prerequisite to filing suit. Barnes v. Levitt. 118 F.3d 404, 408 (5 1h Cir. [Tex.J 1997) cert. denied, 523 U.S. 1136 (1998); Schroeder v. Texas Iron Works. Inc., 813 S.W.2d 483, 488 (Tex. 1991 ). The UDJA cannot be used as a backdoor to district court to circumvent the procedures and remedies provided by the TCHRA. See Texas Dept. of Public Safety v. Moore, 985 S.W.2d 149, 156 (Tex. App.- Austin 1998, no pet.).

For the reasons set forth above, Plaintiffs lawsuit is subject to dismissal because this Court lacks jurisdiction.

The Equal Employment Opportunity Commission ("EEOC") has certified the Texas Workforce Commission Civil Rights Division as an agency whose finings and resolutions it will usually accept. 29 CFR §§ 1601.75, 1601.80) DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT Page 4 of8

V. Alternative Plea in Abatement In the alternative, this case should be abated because Plaintiff has failed to join as necessary parties those whose interests would be affected by the declarations sought. The UDJA provides that when declaratory relief is sought, all persons who have or claim any interest that would be affected by the declaration must be made parties. Tex. Civ. Prac. & Rem. Code §37.006.

The threshold issue in Plaintiff's declaratory judgment action is whether she was terminated without cause by AAT. In the Advisory Board and Internal Operations Agreement, which Plaintiff requests the Court to interpret in the present case, "the physicians" purportedly agreed that if their employment with AAT terminated at any time prior to January I, 2018, other than a termination without cause by AAT, the terminating physician became obligated to pay each of the other sixty-plus physicians signing the Internal Agreement a sum of money. See Plaintiff's First Amended Petition, pages 3-4. Plaintiff has admitted sixty-plus physicians who are parties to the agreement potentially have an interest and would be affected by the declaration made the basis of this suit, yet she has sued only the seven (7) members of the advisory board.

As the contractual rights of all sixty-plus physicians would be affected by the declaratory judgment sought, they must be joined as parties. April Sound Management Corp v Concerned Property Owners for April Sound Inc., a Texas Non-profit Corporation and Developer for April Sound Subdivision, 153 S.W.3d 519 (2004).

Plaintiff alleges that AAT and Mednax, Inc., as her employers, discriminated and retaliated against because of her gender, and that these actions resulted in her constructive termination. See Exhibits A and C. She is asking the Court to declare that she was terminated without cause by her employers, but the entities she has identified as her employers and whose

DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT Page5of8

conduct she contends lead to her termination are not parties to the suit. Further, Plaintiff does not assert the Defendants were in any way involved in her termination.

Plaintiffs allegations in her Charge of Discrimination are the same as those asserted in this suit. Plaintiff claims discriminatory treatment occurred in December 2012 when Dr. Harris Rose lodged a complaint against her. See Exhibit C, page 6. Plaintiff relies on the same facts in the present case for her assertion that in December 2012 she became embroiled in a dispute with AAT. See Plaintiffs First Amended Petition, page 4. On October 14, 2013, attorney Daniel H.

Byrne, acting on behalf of Plaintiff, notified attorney Hunter T. McLean, attorney for Mednax, Inc. that it is Plaintiffs position that she was not "terminated for cause." See Exhibit D. Thus, the Plaintiff has conceded in her Charge of Discrimination that AA T and Mednax, Inc. have an interest "that would be affected by the declaration" of whether she was terminated "with cause" or "without cause" and neither of these entities are parties to this action.

A Plea in Abatement in a declaratory judgment action is appropriate if necessary parties are absent. Dahl v. Hartman, 14 S.W.3d 434, 435-36 (Tex. App-Houston [14 1h Dist.] 2000, pet denied). In Dahl, the trial court abated a declaratory judgment action and ordered the Plaintiff to serve additional parties. When the Plaintiff failed to do so, the trial court dismissed the Plaintiffs case.

Texas Rule of Civil Procedure 39(a) also requires joinder. The rule provides that a person subject to service shall be joined as a party if: (I) in his absence complete relief cannot be accorded among those already parties; or (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (i) as a practical matter impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple or otherwise inconsistent obligations by reason of his claimed interest.

DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT Page 6 of8

If Defendant's Plea to the Jurisdiction is not granted, this case should be abated and Plaintiff ordered to serve Mednax, Inc., American Anesthesiology of Texas, Inc. and all parties to the Advisory Board and Internal Operations Agreement.

VI.

WHEREFORE, PREMISES CONSIDERED, Defendants NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT J.

HEIGHTY, lAD L. DAVIS and HOLLY CLAUSE respectfully pray as follows: 1. That the Court grant Defendants' Amended Plea to the Jurisdiction and the Court dismiss any and all of Plaintiffs claims; or 2. In the alternative, the Court grant Defendants' Plea in Abatement and order Plaintiff to serve Mednax, Inc., American Anesthesiology of Texas, Inc. and all parties to the Advisory Board and Internal Operations Agreement; and 3. Defendants be discharged with their costs incurred herein; and 4. For such other and further relief to which Defendants may be justly entitled.

Respectfully submitted, CARLS, MCDONALD & DALRYMPLE, L.L.P. Barton Oaks Plaza 1 I South Mopac Expressway Suite 280 Austin. Texas 78746 (512) 4 72-4845 -1 (512) 472-8403 (fax) // ,I !

I i\ IJ !I )'; I I,/~/{· <,-JJ 7../1/;1,L .11, /(; By :__1_\c..:~....:.{_,;L._I'ff---'(,._'l_f_/_v_v_;_!}_i-~_.{}'_~_·- ' - - - Kelly A. McDonald State Bar No. 13551275 Carla Garcia Connolly State Bar No. 07631100 ATTORNEYS FOR DEFENDANTS DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND I'LioA IN ABATEMENT !'age 7 of 8

NOAH S. BUNKER, PAUL CARRELL, EVERETT BREW HOUSTON, JR., W. ANDREW BUCHHOLZ, SCOTT I. HEIGHTY, JAD L. DAVIS and HOLLY CLAUSE CERTIFICATE OF SERVICE I certifY that in accordance with the Texas Rules of Civil Procedure, on the 23rd day of October, 2013 a true and correct copy ofthe foregoing has been sent by hand delivery, certified mail, return receipt requested, electronic means or facsimile to: Daniel H. Byrne Lessie G. Fitzpatrick FRITZ, BYRNE, HEAD & HARRISON, PLLC San Jacinto Boulevard, Suite 2000 Austin, TX 78701-4286 VIA FAX

Kelly A~ cDonald

DEFENDANTS' AMENDED PLEA TO THE JURISDICTION AND PLEA IN ABATEMENT Page 8 of 8

I <1111 l"r;H:y Strandhagcu. ;md Ill~ addt'l.:ss is 600 l{idcrs l rail. 1\ustit1. T~\as 7X7J.3 (512.750.X2~6). I \\ould like 111 lile a cll<lrg.~..· nl' g.cmkr disnilllination ami rcl<lliation against Austin t\nesth1.:Silllog.y (in.Hip. P.l..l..l'./ivh:dnax. Inc.. \\hid1 is lot.:ak·d at XI..J.O North i\.loP<lt.: J: ....;pn:ssway. Huilding. 3. Suite 1~0. Austin. !"l.':...;as 7X759 (512.3..JJ.22lJ2).

Austin An~.:sthl.'siol,lg.y (iroup ("t\;\( ;··) has 1n cr I00 cmployces. <IIHI rYh:dna\. "hid1 I bdicvc is its parent organi1.ation. has on:r 500 cmplnyccs natioll\vidc. I belic,·e that I am hcing uisc.:riminatcd against on the bnsis 1ll" gcndcr anu retaliated against !i.1r speaking out ag.aimt discrimination.

I began '' orking as an anesthesiologist lor /\AG ·s pn.:dcccsSlll' group in 2000 and have a good work n:cord. I have b~..·cn nominated by tht: Austin Association of Opcr;lling Room Nurses tor Physidun of the Year and have a work record that demonstrates my l:lHllmitm~:nt to our patients nnd sound patil:lll cure. (iender Discrimima ion I have been subjected ln " series of discriminatory conduct thnt affects the terms. conditions. and privikgcs nf my employment b~..·cnusc I am fl:malc (and as l explain bdllW. also because I ha\·c raised issues or gend~.:r discrimination \Vith my l:lllploycr). I have been singled out fur discriminatory treatment anu disciplined l'nr condu~..·t that would not have led to discipline or advcrsc employment n~.:tion against a mHie employee or physician. When I have stood my ground or advoc;ttcd for bctt...·r puticnt care, I have been told that I am being toll tl.m;l..'flll. iltn "making waves ... need to ··fly helmv the raum."

-I-

Exhibit A - 000002 and thr like. N~,.·,.:dh..·ss to say. '' h~.·n a mall: ph~ si~o.:i;lll stands up 1\H· ''hat h~.· hdir' es in lor is 1..:\·en ahruptur rude). th~o:rL' is 110 dist:iplinc rortll~.:nming_ <liHI. he is judged as Sl111pl~

told hy my t:mployt:r tlwt I am a ··disruptiv~.· physic.:ian" ami ;un heing required tll travd to ( 'hic.:ago ltlr tlm.:e days or t:llllllSL'Iing.. AI first. I \\ilS told that I \\ uuld be n.:quir~.·d to pay 1\lr this lr;lining. and now it is uneh.:ar who ''ill he pJying for my time and cxren~~.·s.

!'his is a very signilit:<l!ll adn:rse employment <H.:tion. as hcing I;Jht.:led " "disrnptiw physit:ian" can have n rrotl.HuHI negJtivc cftcct on a dnctor"s career. Furthermore. the tam "disrurtivc physicinn" is almost a term-of-art in the medical prol't.:ssiun. with very dear guidelines on \vhat conduct t:nn l~.:ad tn the ·'diagnosis" (so to spcnk) of \\ho is a disruptive physician. I do rwt meet these guidelines. hut my empluyc.:r is trying tu brand me as such and requiring this training. so as to jcopardi1.c my career and cmplo}lliCnt opportunities. all because of my gender. Specitically. to my knowkugc. only one other physician at our group hns been sent to such counseling nnd she. too. wns a female. \Vho was denigrated hy criteria or expectations that \Vould not have k·d to any discipline or adverse action being takl.'n against a male physit:ian or employee.

Re!ciliat ion l bclic\'t! that I hnvc also hecn singled out for such trl·utmcnl because I complained ahout gcmkr discrimination and stereo!) ping w my employer. Ml)St n:ccntly. I sent a \Hillen complaint w my employer in .January 2013, and w11s then told that l was being disruptive and was ordered to take this counseling fur being a disruptiv~ physician.

-1-

Exhibit A - 000003 - G. .

\\Ollll:n cmploy~~s \\tlh regard to mat~:rnity kavc and other tn:atmcnt. Nnw. alkr my most rc~:cnt l'lllllplaint. I am being tnld that till' <llh crsc l'lllplu~ 1111.:111 ;tction hL·ing heaped upon 1111.! is !'or C\ cnts that Ol'l'lliTcd ha~:k in 200J and 200·L "hid1 I tlll)ught had hcL'll

I bd ievc that 111)' Clll plnycr has Ia ken. and is l'tlll( illll i ng. to take. au n:rsc

dis~o:riminillllr)' treatment to my supervisors ~111<.! tn nur !Iuman Rcsoun;cs Ocpnrtnwnt. would likc this dwrg~:: l:n)ss-lilcu wirh the Texas Workforce Commission-Civil Rights Division. pkast:.

I am rcpn:scnll.·d by Philip Durst, (~f' the Austill lmv _jirlll t~l Deats Durst Ou·en & Lel-y. 1'./.. LC. 120-1 San Amonio. Suite 203. Austin. Te!XCis 787()/ (512--17-1-6200: j/2- -17-1-7896 (jax)) and ask that he be provided copies of any intormation regarding my ~.:hargc:. I ~1sk that this swtemcnt. which is int~nded to be a general <kscription of the l'Vt:nts nnd cannot possibly cont•1in all derails about my yl!ars of employment with my employer be t.:onsidcred part nf my (harge.

DATED:

-3-

Exhibit A- 000004 AUTHORITIES Page 1

AMERICAN NATIONAL INSURANCE COMPANY AND AMERICAN NA- TIONAL PROPERTY AND CASUALTY COMPANY, Appellants v. FRANK E.

CANNON II, CLIFTON MARK GRAYLESS, DEBORAH GLENN, AND ROBERT WESTOVER, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMI- LARLY SITUATED, Appellees NO. 09-01-511 CV COURT OF APPEALS OF TEXAS, NINTH DISTRICT, BEAUMONT 86 S.W.3d 801; 2002 Tex. App. LEXIS 6933 May 16, 2002, Submitted September 26, 2002, Opinion Delivered NOTICE: [**1] PUBLISH The four named plaintiffs, Frank E. Cannon II, Clifton Mark Grayless, Deborah Glenn, and Robert Westover PRIOR HISTORY: On Appeal from the 221st Dis- ("plaintiffs"), sold ANPAC and ANICO insurance pur- trict Court Montgomery County, Texas. Trial Cause No. suant to agent agreements.

00-01-00371-CV.

THE AGREEMENTS DISPOSITION: REVERSED AND REMANDED.

General Agent Agreements The agreements provide, in part, that plaintiffs will COUNSEL: John L. Carter, Karen Jewell, Catherine B. not solicit ANPAC or ANICO policyholders in a specific Smith - Vinson & Elkins - Houston. Janet Rushing, David territory for a specified time period after termination of LeBlanc - Greer, Herz & Adams - Galveston. Greg Abbott the agreements. The proscribed time period under the - Bracewell & Patterson - Austin. Warren W. Harris, ANPAC contract is one year; the ANICO time period is Richard C. Kroger - Bracewell & Patterson - Houston. two years. Under the ANPAC contract, "territory" is de- Mark Ramsey, Adrian V. Villacorta - Ramsey & Murray - fined as an area "within a twenty-five (25) mile radius of Houston, for appellants. the Agent's office. This territory may be enlarged upon written request [**2] from the Agent and written ap- Paul Dobrowski, David P. Andis - Dobrowski & Associ- proval from the Company." The territory covered by the ates - Houston. Stephen McClain - McClain & Harrell - ANICO agreement is "any territory in which [the Agent Conroe, for appellees. is] properly licensed."

JUDGES: Before Walker, C.J., Burgess and Gaultney, Agent Advance Agreements J.J.

Three of the four plaintiffs also signed Agent Ad- vance Agreements with ANPAC. Although ANPAC OPINION BY: DAVID B. GAULTNEY agents are paid by commission on the policies they actu- ally sell, ANPAC can, under the contract, make payments OPINION of compensation to the agents in advance of sales. The [*804] This interlocutory appeal is from a class advance payments are to be offset against the agents' certification order. Appellant American National Insur- earned commissions. The ANICO agreements contain ance Company ("ANICO") is a life insurance company. similar provisions.

Appellant American National Property and Casualty THE LAWSUIT [*805] Company ("ANPAC") is a property and casualty insurance company and a subsidiary of appellant ANICO.

Page 2 86 S.W.3d 801, *; 2002 Tex. App. LEXIS 6933, **

Plaintiffs assert they were defrauded. They claim 297, 305, 44 Tex. Sup. Ct. J. 948 (Tex. 2001) (quoting they were each told they would "own their own business" Texas Workers' Compensation Comm'n v. Garcia, 893 and, if terminated, would not have to repay any money S.W.2d 504, 517-18 (Tex. 1995)). Ripeness focuses on previously advanced to them. Plaintiffs also claim they when the action may be brought; advisory opinions or were wrongfully terminated. Their pleadings allege indi- adjudications based on contingent or hypothetical facts vidual claims of breach of contract, fraud, and negligent are precluded by dismissal of claims that are not ripe. See misrepresentation, as well as violations of the Deceptive Gibson, 22 S.W.3d at 851-852. If the plaintiff lacks indi- Trade Practices Act and the Insurance Code. Plaintiffs vidual standing or the claim is not ripe, the court should request actual and punitive damages for themselves and dismiss the suit for want of jurisdiction. See M.D. An- actual damages for a class of agents similarly situated. derson, 52 S.W.3d at 711; [**5] see also Gibson, 22 S.W.3d at 853.

The trial court's class certification order named plaintiffs [**3] to represent the following persons in a ANPAC's standing and ripeness arguments, as they class action: pertain to the non-compete provisions, are as follows: (1) if the time frame on the named plaintiff's non-compete [Class A] All persons in Texas who, from January 1, provision is operative at the beginning of litigation but 1993[,] to the present, executed an independent contractor expires during the course of the suit, the party has no agreement with ANPAC and/or ANICO containing a standing; (2) if, on the other hand, the named plaintiff is non-competition provision; and still an agent of the company and the non-compete clause [Class B] All persons who, from January 1, 1993[,] to has not been triggered, the party has no standing and the the present, executed any advance agreement with claim is not ripe. Generally, a personal stake must exist at ANPAC and/or ANICO. the beginning of litigation and continue throughout the lawsuit's existence. See Southern Pac. Terminal Co. v. The trial court certified the following two issues for Interstate Commerce Comm'n, 219 U.S. 498, 514-16, 31 class treatment: S. Ct. 279, 55 L. Ed. 310 (1911); see also United States 1. [Class A] Declaratory judgment, wherein Plaintiffs Parole Comm'n v. Geraghty, 445 U.S. 388, 394, 398, 404, . . . request this Court to declare that the covenants not to 100 S. Ct. 1202, 63 L. Ed. 2d 479 (1980). An exception to compete contained in the ANICO and ANPAC agree- the general rule may apply when a claim on the merits is ments are not "ancillary to or part of an otherwise en- capable of repetition, yet evades review. Id. 445 U.S. at forceable agreement at the time the agreement [was] 398; see also Sosna v. Iowa, 419 U.S. 393, 402, 95 S. Ct. made" and that they do not otherwise comply with section 553, 42 L. Ed. 2d 532 (1975). In this case we need not 15.50 et. seq. of the Texas Business and Commerce Code; consider [**6] the applicability of the exception. The and fact that the non-compete period here expires during the litigation does not mean the plaintiff has no personal stake 2. [Class B] Declaratory judgment, wherein Plaintiffs and lacks standing; if the plaintiff suffers injury as a result . . . request this Court to declare that any balance owing of the provision, the plaintiff would continue to have an ANICO and/or ANPAC pursuant to the advance agree- interest in a determination of the invalidity of the clause. ments does not have to be paid upon termination of the Furthermore, the employed plaintiff has a justiciable relationship. interest in determining whether, upon leaving the com- The class certification order provides that individual pany, the plaintiff would be required to comply with the issues will be tried to a jury [*806] after the trial court non-compete provision, particularly when, as here, rules [**4] on the two issues certified for class treat- counterclaims to enforce the non-compete clauses have ment. been filed.

JURISDICTION Similarly, ANPAC points out that if class represent- atives are currently agents, whether they will have to pay We first consider ANPAC's contention that the trial money after termination of their relationship with ANICO court lacked jurisdiction because the four class repre- is unknown and cannot be ascertained until termination sentatives lack standing or their claims are not ripe. See occurs. But in a declaratory judgment action, a party to a The M.D. Anderson Cancer Ctr. v. Novak, 52 S.W.3d 704, contract may file suit to declare rights under a contract if 710, 44 Tex. Sup. Ct. J. 905-711 (Tex. 2001) (standing); the circumstances show the presence of "'ripening seeds see also Waco Indep. Sch. Dist. v. Gibson, 22 S.W.3d of controversy.'" See City of Waco v. Texas Natural 849, 851, 43 Tex. Sup. Ct. J. 731 (Tex. 2000) (ripeness). Resource Conservation Comm'n, 2002 Tex. App. LEXIS To establish standing, a plaintiff must show "a distinct 3231, No. 03-01-00217- CV, 2002 WL 924192, at *4 injury to the plaintiff and 'a real controversy between the (Tex. App.--Austin, May 9, 2002, no pet. h.) [**7] parties, which . . . will be actually determined by the (quoting Texas Dep't of Banking v. Mount Olivet Ceme- judicial declaration sought.'" Brown v. Todd, 53 S.W.3d Page 3 86 S.W.3d 801, *; 2002 Tex. App. LEXIS 6933, **

tery Ass'n, 27 S.W.3d 276, 282 (Tex. App.--Austin 2000, party's ability to present viable claims or defenses. pet. denied). Here, plaintiffs assert that contracts and Bernal, 22 S.W.3d at 434, 437. related oral representations warrant a declaration by the CLASS A trial court that no money need be repaid under the [*807] advance agreements once the contract is terminated. In For Class A claims, plaintiffs request a declaration contrast, appellants maintain the monies advanced under that the non-compete covenants were not ancillary to or these contracts must be repaid. Appellants have sought to part of an otherwise enforceable agreement at the time the enforce both the advance agreements and non-compete agreements were made and that the covenants do not provisions by filing counterclaims against the named otherwise comply with section 15.50, et. seq. of the Texas plaintiffs herein and by making demand upon or filing suit Business & Commerce Code. Both the ANICO and against other agents in the State. We conclude the issues ANPAC contracts contain similar non-compete clauses, are ripe and the plaintiffs have standing. ANPAC's issue the main differences being the scope of the geographical one is overruled. and time restrictions. Section 15.50 provides that a non-compete covenant is enforceable if the covenant: STANDARD OF REVIEW . is ancillary to or part of an otherwise enforceable The appellate review standard for a class certification agreement; order is abuse of discretion. Southwestern Ref. Co. v. Bernal, 22 S.W.3d 425, 439, 43 Tex. Sup. Ct. J. 706 (Tex. . is made at the time the other agreement is made; 2000). The trial court abuses its discretion if it acts . contains reasonable limitations [**10] as to time; without reference to any guiding principles or acts arbi- trarily or unreasonably. See Downer v. Aquamarine . contains reasonable limitations as to geographical Operators, Inc., 701 S.W.2d 238, 242 (Tex. 1985). A area; failure by a trial court to [**8] analyze or apply the law correctly is an abuse of discretion. McDaniel v. Yar- . contains reasonable limitations as to scope of activ- brough, 898 S.W.2d 251, 253, 38 Tex. Sup. Ct. J. 337 ity to be restrained; and, (Tex. 1995). [*808] . imposes no more restraint than is neces- sary to protect the goodwill or other business interest of To obtain class certification, the proponent of the class the promisee. must satisfy all four criteria in Rule 42(a) and at least one of the conditions in Rule 42(b). See TEX. R. CIV. P. 42; See TEX. BUS. & COM. CODE ANN. § 15.50(a) see also Bernal, 22 S.W.3d at 433. The order here relies (Vernon 2002). on three separate Rule 42(b) provisions. The legal conclusion as to whether a particular geo- RULE 42(b)(4) graphical restraint is reasonable would include consider- ation of the class member's market territory and individual We first consider the trial court's certification of the circumstances. Agents for ANPAC and ANICO are lo- class under Rule 42(b)(4). A class action satisfies (b)(4) if cated throughout Texas. Under the ANPAC agreement the two requirements are met: if questions of law or fact geographical restriction is a twenty-five mile radius of the common to the members of the class predominate over agent's office unless enlarged by agreement. Under the any questions affecting only individual members; and if ANICO agreement the non-compete provision covers the the class action is superior to other available methods for area in which the agent is licensed. What the restricted the fair and efficient adjudication of the controversy. See geographical territory actually is for each individual TEX. R. CIV. P. 42(b)(4). The test for predominance is not agent, whether the territory has been enlarged, whether whether common issues outnumber uncommon issues, the twenty-five mile zone described in the ANPAC con- but rather whether "common or individual issues will be tract corresponds to an agent's territory, and whether or the object of most of the efforts of the litigants and the not the geographical limitations in both contracts are court." Bernal, 22 S.W.3d at 434. Predominance is de- reasonable in view of the relevant market factors will termined by identifying the substantive issues that [**9] require [**11] individual determinations. If the trial are dispositive of the litigation, assessing which issues court does find any of the non-compete clauses unen- will predominate, and determining whether these pre- forceable because of unreasonable limitations -- for ex- dominating issues are common to the class. See Bernal, ample, a geographical restriction covering the entire li- 22 S.W.3d at 434. The (b)(4) requirement of predomi- cense area -- the trial court is required by statute to reform nance precludes class action litigation where the sheer each covenant to the extent necessary to make it reason- complexity and diversity of the individual issues would able. See TEX. BUS. & COM. CODE ANN. § 15.51(c) overwhelm or confuse a jury or severely compromise a (Vernon 2002). Section 15.51(c) provides in part, that if the covenant not to compete is "ancillary to or part of an Page 4 86 S.W.3d 801, *; 2002 Tex. App. LEXIS 6933, **

otherwise enforceable agreement but contains limitations the advance agreements. As worded, the scope of the issue as to time, geographical area, or scope of activity to be necessarily encompasses any representations referenced restrained that are not reasonable . . . the court shall re- in the plaintiffs' pleadings. Plaintiffs pleaded oral modi- form the covenant to the extent necessary to cause the fications [**14] of the written contracts, misrepresenta- limitations contained in the covenant . . . to be reasona- tion, and fraud -- all issues that may turn on individual ble[.]" Id.; see generally B.J. Software Sys., Inc. v. circumstances. Although plaintiffs' letter brief to the trial Osina, 827 S.W.2d 543, 546 (Tex. App.--Houston [1st. court indicates plaintiffs do not rely on any oral repre- Dist.] 1992, no pet.). In reforming covenants found to be sentations regarding the written advance agreements, their unreasonable, the court should take into account indi- pleadings, both before and after the certification order, vidual circumstances. See Evan's World Travel, Inc. v. state otherwise. The issues, as broadly worded, include Adams, 978 S.W.2d 225, 233- 34 (Tex. App.--Texarkana the claims made in plaintiffs' pleadings. What each class 1998, no pet.) (geographical restriction [**12] re- member in this case was told regarding monies owed formed). Fact specific individual determinations would be under the advance agreements, along with any reliance on unavoidable here. See generally Dairyland County Mut. those representations, would require individual determi- Ins. Co. of Texas v. Casburg, 63 S.W.3d 590, 592 (Tex. nation. Because individual issues predominate over App.--Beaumont 2001, pet dism'd w.o.j.) ("Little value is common issues, Rule 42(b)(4) is not satisfied. See gener- gained from a class action where factual distinctions make ally Peltier Enters., Inc. v. Hilton, 51 S.W.3d 616, 623 the class unmanageable.") (citing Barnes v. American (Tex. App.--Tyler 2000, pet. denied) ("answering the Tobacco Co., 161 F.3d 127, 143 (3d. Cir. 1998)). In this questions of materiality and reliance as to one plaintiff case, Section 15.50's reasonableness determinations does not answer the same question as to other putative cannot be made on a class-wide scale. class members.").

CLASS B RULE 42(b)(2) For Class B claims, the plaintiffs request a declara- The trial court also relied on Rule 42(b)(2) in certi- tion that any balance owed by an agent under an advance fying the class. A class action cannot be certified under agreement does not have to be repaid. The plaintiffs (b)(2) unless the "party opposing the class has acted or pleaded the basis of their request as being representations refused to act on grounds generally applicable [**15] to made by appellants to plaintiffs to that effect. Yet in a the class, thereby making appropriate final injunctive supplemental letter brief to the trial court prior to class relief or corresponding declaratory relief with respect to certification, plaintiffs disavowed any reliance on oral the class as a whole[.]" TEX. R. CIV. P. 42(b)(2). As under representations as the basis for a declaration of no amount section (b)(4), the merits of each putative class member's owed; plaintiffs told the trial judge that their issue was claims, under both the non-compete agreement and the grounded in "the 'four corners' of the agreements.'" advance payment agreement, depend on that individual's Plaintiffs maintain the same argument on appeal. circumstances: for example, the reasonableness of the non-compete restrictions given the individual's circum- The issue certified for class treatment requires the stances, and the individual's reliance on any misrepre- [**13] trial court to declare whether any outstanding sentation regarding advance payments. Under section balance must be paid upon termination of the relationship. (b)(2) these individual factors preclude injunctive relief or The ANICO advance agreement provides that the com- corresponding declaratory relief without consideration of pany is authorized to bring suit for collection of any un- individual circumstances, at least as the issues are broadly paid balance. The general agent agreement also gives worded in the certification order.

ANICO a first lien which it may foreclose as permitted [*809] by law and provides that ANICO can offset the Furthermore, in a section 42(b)(2) class action, the indebtedness against the agent's commissions, fees, or injunctive or declaratory relief sought must predominate other compensation. In the ANPAC advance agreement, over the monetary relief sought. See TCI Cablevision of the agent assigns to the company the right, title, and in- Dallas v. Owens, 8 S.W.3d 837, 847 (Tex. terest in any compensation payable to the agent under the App.--Beaumont 2000, pet. dism'd by agr.). Any mone- advance agreement in consideration for the advance tary relief sought in a (b)(2) class action must be inci- payments. ANPAC is given the right to reduce and offset dental to the related claims for injunctive relief or corre- any amounts owed to it against commissions, fees, and sponding declaratory relief. Incidental [**16] damages other compensation payable to the agent. The written flow directly from liability to the class as a whole on the agreements clearly speak of an agent's indebtedness in claims forming the basis of the injunctive or declaratory connection with advance payments that are not repaid. relief. See Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415 (5th Cir. 1998) (applying FED. R. CIV. P. The Class B issue, as certified, involves more than a 23(b)(2), the counterpart to Rule 42(b)(2)). Rather than determination of the precise meaning of the language in being dependent on subjective, individual circumstances Page 5 86 S.W.3d 801, *; 2002 Tex. App. LEXIS 6933, **

of class members, incidental damages should be amenable The trial court also relied on Rule 42(b)(1)(A) in cer- to [*810] easy calculation, using objective standards. tifying the class. Rule 42(b)(1)(A) requires a showing that Allison, 151 F.3d at 425. As the Allison court explained, the prosecution of separate actions by or against individ- "Liability for incidental damages should not require ad- ual members of the class would create a risk of incon- ditional hearings to resolve the disparate merits of each sistent or varying adjudications with respect to individual individual's case; it should neither introduce new and members of the class and establish incompatible standards substantial legal or factual issues, nor entail complex of conduct for the party opposing the class. But as we individualized determinations. Thus, incidental damages have noted, TEX. BUS. & COM. CODE ANN. § 15.50 will, by definition, be more in the nature of a group requires an individual determination of the reasonableness remedy, consistent with the forms of relief intended for of the non- compete restrictions; the reasonableness de- (b)(2) class actions." Id. at 415. pends on the individual facts and circumstances affecting the individual agent. See generally Texas Dep't of Given the nature of the relief requested here and the Transp. v. Barrier, 40 S.W.3d 153, 159-60 (Tex. degree to which recovery of damages in both classes App.--Houston [14th Dist.] 2001, no pet.). Similarly, the requires individualized proof and determinations, the enforcement of the advance [**18] agreements depends damages requested by plaintiffs are not sufficiently on the varying circumstances and merits of each potential [**17] "incidental" to permit them in a class action un- member's case. Rule 42(b)(1)(A) is not satisfied. der Rule 42(b)(2). The damages sought here are more of an individual remedy and less of a group remedy -- de- The trial court's certification order is vacated and this pendent more upon the varying circumstances and merits case is remanded to the trial court for proceedings con- of each potential member's case. Rule 42(b)(2) is not sistent with this opinion. satisfied. See generally Casburg, 63 S.W.3d at 592.

REVERSED AND REMANDED.

RULE 42(b)(1)(A) DAVID B. GAULTNEY Justice Page 1

JEFF BAKER D/B/A JEFF BAKER PHOTOGRAPHY, Appellant v. INTERNA- TIONAL RECORD SYNDICATE, INC., Appellee No. 05-90-00914-CV COURT OF APPEALS OF TEXAS, Fifth District, Dallas 812 S.W.2d 53; 1991 Tex. App. LEXIS 1962; 15 U.C.C. Rep. Serv. 2d (Callaghan) 875

June 4, 1991, Filed PRIOR HISTORY: [**1] On Appeal from the International Record Syndicate (IRS) hired Baker to 116th Judicial District Court; Dallas County, Texas; Trial take photographs of the musical group Timbuk-3. Baker Court Cause No. 89-5233-F. mailed thirty-seven "chromes" (negatives) to IRS [**2] via the business agent of Timbuk-3. When the chromes DISPOSITION: Reversed and Rendered. were returned to Baker, holes had been punched in thir- ty-four of them. Baker sued for the damages to these chromes. The trial court submitted the issues of actual COUNSEL: Dana Andrew Lejune. damages and attorney's fees to the jury. The jury found $ 15,000 in actual damages and $ 5000 for attorney's fees.

Will Pryor.

The trial court rendered judgment awarding $ 51,000 in actual damages and $ 5000 for attorney's fees. The dam- JUDGES: Chief Justice Craig Trively Enoch and Justices age award was pursuant to a liquidated damages clause, T.C. Chadick 1 and Spencer Carver. 2 Opinion by Chief which set damages at $ 1500 per chrome. The trial court Justice Craig Trively Enoch. later modified the judgment, awarded Baker the $ 15,000 actual damages found by the jury, and eliminated the The Honorable T.C. Chadick, Justice, Retired, attorney's fee award.

Supreme Court of Texas, sitting by assignment.

2 The Honorable Spencer Carver, Justice, Re- LIQUIDATED DAMAGES tired, Court of Appeals, Fifth District of Texas at The provision printed on Baker's invoice states: Dallas, sitting by assignment. "reimbursement for loss [*55] or damage shall be de- termined by a photograph's reasonable value which shall OPINION BY: ENOCH be no less than $ 1,500 per transparency." A liquidated damages clause is meant to be the measure of recovery in OPINION the event of nonperformance or breach of a contract. [*54] OPINION ON MOTION FOR REHEAR- Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (Tex. ING 1952). The determination of whether a contractual clause is enforceable as a liquidated damages provision or [**3] The opinion of this court issued April 15, 1991 is void as a penalty is a question of law. Mayfield v. Hicks, withdrawn. This is the opinion of the court. Jeff Baker, 575 S.W.2d 571, 576 (Tex. Civ. App.--Dallas 1978, writ d/b/a Jeff Baker Photography (Baker), appeals a judgment ref'd n.r.e.). rendered in his favor in a breach of contract case. The trial court determined that a liquidated damages provision was The Uniform Commercial Code provides: unenforceable and awarded damages to Baker based on jury findings. We reverse the trial court's judgment and Damages for breach by either party may render judgment for Baker. be liquidated in the agreement but only at an amount which is reasonable in light of Page 2 812 S.W.2d 53, *; 1991 Tex. App. LEXIS 1962, **; 15 U.C.C. Rep. Serv. 2d (Callaghan) 875 the anticipated or actual harm caused by might be called the "actual harm" test. The burden of the breach, the difficulties of proof of loss, proving this defense is upon the party seeking to invali- and the inconvenience or non-feasibility of date the clause. Id. The party asserting this defense is otherwise obtaining an adequate remedy. required to prove the amount of the other party's actual A term fixing unreasonably large liqui- damages, if any, to show that the actual loss was not an dated damages is void as a penalty. approximation of the stipulated sum. Id. at 106-07; Johnson Eng'rs, Inc. v. Tri-Water Supply Corp., 582 S.W.2d 555, 557 (Tex. Civ. App.--Texarkana 1979, no TEX. BUS. & COM. CODE ANN. § 2.718(a) (Tex. UCC) writ). (Vernon 1968).

While evidence was presented that showed the value Under Texas law, a liquidated damages provision of several of Baker's other projects, this was not evidence will be enforced when the court finds (1) the harm caused of the value of the photographs in question. The evidence by the breach is incapable or difficult of estimation, and clearly shows that photographs are [**6] unique items (2) the amount of liquidated damages is a reasonable with many factors bearing on their actual value. Each of forecast of just compensation. Advance Tank & Constr. the thirty-four chromes may have had a different [*56] Co. v. City of DeSoto, 737 F. Supp. 383, 384 (N.D. Tex. value. Proof of this loss is difficult; where damages are 1990); Rio Grande Valley Sugar Growers, Inc. v. real but difficult to prove, injustice will be done the in- Campesi, 592 S.W.2d 340, 342 n.2 (Tex. 1979). This jured party if the court substitutes the requirements of might be termed the "anticipated harm" test. The party judicial proof for the parties' own informed agreement as asserting that a liquidated damages clause is, in fact, a to what is a reasonable measure of damages. The evidence penalty provision has the [**4] burden of proof. Com- offered to prove Baker's actual damages lacks probative mercial Union Ins. Co. v. La Villa School Dist., 779 force. IRS failed to establish Baker's actual damages as to S.W.2d 102, 106 (Tex. App.--Corpus Christi 1989, no these particular photographs. writ). Evidence related to the difficulty of estimation and Even assuming that the jury's findings as to damages the reasonable forecast must be viewed as of the time the are an accurate assessment, we do not agree that that sum contract was executed. Mayfield, 575 S.W.2d at 576. is so disproportionate to the stipulated sum so as to ab- Baker testified that he had been paid as much as $ rogate the parties' agreement. Consequently, we conclude 14,000 for a photo session, which resulted in twenty-four that the facts and circumstances of this case require that photographs and that several of these photographs had we reach a decision contrary to the one made by the trial also been resold. Baker further testified that he had re- court. We sustain Baker's first point of error and hold that ceived as little as $ 125 for a single photograph. Baker the liquidated damages clause is enforceable. also testified he once sold a photograph for $ 500. Sub- ATTORNEY'S FEES sequently, he sold reproductions of the same photograph three additional times at various prices; the total income In his original petition, Baker pleaded a breach of from this one photo was $ 1500. This particular photo was contract and sought attorney's fees pursuant to section taken in 1986 and was still producing income in 1990. 38.001 of the Civil Practice and Remedies Code. At trial, Baker demonstrated, therefore, that an accurate determi- Baker's [**7] attorney took the stand and testified that a nation of the damages from the loss of a single photograph one-third or 40% contingency fee was reasonable. All is virtually impossible. testimony on reasonableness and necessity of attorney's fees was unrebutted. The jury awarded Baker $ 5000 in Timbuk-3's potential for fame was an important fac- attorney's fees. The trial court then rendered judgment tor in the valuation of the chromes. At the time of the setting aside the award of attorney's fees. For a trial court photo session, Timbuk-3's potential was unknown. In to disregard a jury's findings and enter a judgment not- view of the inherent difficulty in determining [**5] the withstanding the verdict, it must determine that there is no value of a piece of art, the broad range of values and evidence upon which the jury could have made its find- long-term earning power of photographs, and the un- ings. Dowling v. NADW Mktg., Inc., 631 S.W.2d 726, 728 known potential for fame of the subject, $ 1500 is not an (Tex. 1982); Collision Center Paint & Body, Inc. v. unreasonable estimate of Baker's actual damages.

Campbell, 773 S.W.2d 354, 356 (Tex. App.--Dallas 1989, Additionally, liquidated damages must not be dis- no writ). proportionate to actual damages. If the liquidated dam- We review the evidence in the light most favorable to ages are shown to be disproportionate to the actual dam- the jury finding, considering only the evidence and in- ages, then the liquidated damages can be declared a pen- ferences that support the finding and rejecting the evi- alty and recovery limited to actual damages proven. dence and inferences contrary to the finding. Navarette v. Commercial Union Ins. Co., 779 S.W.2d at 107. This Temple Indep. School Dist., 706 S.W.2d 308, 309 (Tex. Page 3 812 S.W.2d 53, *; 1991 Tex. App. LEXIS 1962, **; 15 U.C.C. Rep. Serv. 2d (Callaghan) 875 1986); Collision Center, 773 S.W.2d at 357. Where there We reverse the judgment of the trial court. We render is more than a scintilla of competent evidence to support judgment for Baker in the amount of $ 51,000 for actual the jury's finding, then the judgment notwithstanding the damages and $ 5000 for attorney's fees. TEX. R. APP. P. verdict should be reversed. Collision Center, 773 S.W.2d 80(b)(3). at 356-57. [**8] We sustain Baker's second point of Reversed and Rendered. error.

Page 1

Board of Water Engineers of the State of Texas v. City of San Antonio No. A-5083 Supreme Court of Texas 155 Tex. 111; 283 S.W.2d 722; 1955 Tex. LEXIS 553

October 26, 1955, Decided SUBSEQUENT HISTORY: [***1] Rehearing ment is germane to the subject matter of the original act or Overruled November 23, 1955. the portion thereof which the caption of the amendatory act declares to be amended.

PRIOR HISTORY: Error to the Court of Civil Ap- Statutes -- Constitutional Law. peals for the Third District, in an appeal from Travis County. An amendment to an act of the legislature, creating a corporation to furnish water to certain entities and au- DISPOSITION: The judgments of both courts are thorizing such agency to contract with federal authorities, affirmed. to borrow money and issue bonds, and perform other duties for the promotion of said corporation, which con- tains new matter precluding the diversion of water from HEADNOTES its watershed was void under the constitutional rule that no bill shall contain more than one subject which must be Declaratory Judgments -- Prerequisites. expressed in its caption.

In an action seeking a declaratory judgment the pre- requisite requirements for such process is that there shall SYLLABUS be a real controversy between the parties which will be The City of San Antonio, Texas, seeking to establish actually determined by the judicial declaration asked for. a priority for securing a more ample supply of water for its Jurisdiction -- Statutes -- Rights and Remedies. city needs, filed an application with the State Board of Water Engineers for permission to establish a priority to An action by a city to have the State Board of Water withdraw water from the Guadalupe River watershed.

Engineers approve its application to take water from a The board refused to grant [***3] such application be- watershed other than its own, claiming that the statute cause Article 1434a R.S. prohibits the withdrawal of forbidding such right and upon which the board, in re- water from said watershed, for the purpose of transporting fusing such permit, based its action is unconstitutional, it to a point outside of said watershed. Other facts will be presents a justiciable controversy as to the constitutional- found in the opinion of the Court. ity of the statute and the rights of the parties thereunder.

Because plaintiff failed to ask for other specific relief than The City of San Antonio filed a suit against said that of a declaratory judgment was no bar to his action. board seeking a declaratory judgment declaring the pro- visions of Section 1a of Article 1434a, to be unconstitu- Statutes -- Amendments. tional. The trial court rendered judgment favorable to the In construing the constitutional rule that no bill shall city. The Court of Civil Appeals affirmed that judgment, contain more than one subject which shall be expressed in 273 S.W. 2d 913. The Board of Water Engineers has [***2] its title, the rule that the caption of an amendatory brought error to the Supreme Court. act is not necessarily deficient because it merely stated that a particular prior law or a particular section thereof is being amended does not apply unless the actual amend- Page 2 155 Tex. 111, *; 283 S.W.2d 722, **; 1955 Tex. LEXIS 553, *** COUNSEL: John Ben Shepperd, Attorney General, reason of a large and rapid increase in population and Burnell Waldrep and Johns Reeves, Assistant Attorney water consumption within and around its corporate limits, Generals, for petitioner. coupled with a serious fall in its potential underground water supply. While the City is located outside of the The Court of Civil Appeals erred in holding that a justi- natural watershed of the Guadalupe River and could make ciable controversy was presented, and that the provisions use of the Canyon Dam waters only by means of an ex- of section 1a of Article 1434a are in violation of Article pensive pipe line, it has become interested in the dam III, section 35, of the Constitution of Texas. Cowan v. project, as other cities of the state have done in other and Cowan, 254 S.W. 742, error refused; Cobb v. Harrington, comparable situations, to the point of making detailed 144 Texas 360, 190 S.W. 2d 709; Praetorians v. State, 184 studies and attempting to secure priorities for a portion of S.W. 2d 300; Gulf Ins. Co. v. James, 143 Texas 424, 185 the excess waters it might make or help to make available S.W. 2d 966. [***6] if it should participate in the enterprise.

In the latter connection, Art. 7496, Vernon's Tex. Boyle, Wheeler, Gresham, Davis & Gregory and J. D.

Civ. Stats. Ann., provides, generally speaking, for an [***4] Wheeler, all of San Antonio, for respondent. application or "presentation" to the Board by "any person who desires to investigate the feasibility of any water In reply to petitioner's contentions cited Arnold v. Leon- appropriation or use of water" in certain large quantities, ard, 114 Texas 535, 273 S.W. 2d 799; Hamilton v. St. upon approval and filing of which by the Board, the study Louis, S.F. & T. Ry. Co., 115 Texas 455, 283 S.W. 475; may be made and a priority for the corresponding work Rodriguez v. Gonzales, 148 Texas 537, 227 S.W. 2d 791. and water appropriation established as of the filing date, subject to specified conditions as to beginning and com- JUDGES: Mr. Justice Garwood delivered the opinion of pletion of the work. The respondent City made such a the Court. presentation, but the Board refused to approve or file it, stating in effect that it would have approved and filed it as OPINION BY: GARWOOD a proper and meritorious application under the statute, but for the single fact of the City being located beyond the OPINION natural watershed of the river and thus prohibited from [*112] [**723] This so far successful suit by the diverting the waters by the express terms of Sec. 1-a of respondent, City of San Antonio, against our petitioner, Art. 1434a, supra. 1 Board of Water Engineers of the State of Texas, presents questions as to (a) existence vel non of a justiciable con- 1 "Sec. 1a. It shall be unlawful for any person, troversy within our Uniform Declaratory Judgments Act firm, association, or corporation to withdraw any of 1943 (Art. 2524-1, Vernon's Tex. Civ. Stats. Ann.) and water from the Guadalupe River or Comal River (b) validity of a given statutory amendment (Sec. 1-a of or any tributaries of such rivers or springs emp- Art. 1434a, Vernon's Tex. Civ. Stats. Ann.) as against our tying into such rivers, or either of them, for the constitutional restrictions concerning subjects and cap- purpose of transporting such water to any point or tions of legislative acts (Art. III, Sec. 35) and local or points located outside of the natural watersheds of special laws (Art. III, Sec. 56), Vernon's Ann. State Con- such rivers. stitution.

"Any such withdrawal or attempted with- [*113] The source of the controversy is the pro- drawal of water from said rivers, springs, and/or posed construction by the Guadalupe River Authority of tributaries may be enjoined in a suit for injunction the so-called Canyon Dam in Comal County, a flood brought by any person, municipality, or corpora- control project to be financed in whole or part [***5] by tion owning riparian rights in or along said rivers. the United States. Evidently the corresponding federal The venue of such suits shall be in the District laws and regulations permit of municipalities such as the Court of the county where such withdrawal or at- respondent City participating in the project in order to tempted withdrawal occurred." augment their own water supply by building the dam [***7] The respondent City thereupon instituted higher than it would otherwise be and furnishing the this suit for declaratory [*114] judgment that Sec. 1-a necessary funds for this purpose. This participation, is unconstitutional. Its pleadings did not specifically however, is in effect conditioned upon permission from allege arbitrariness upon [**724] the part of the Board the petitioner Board for the taking of the additional im- nor specifically pray for ancillary relief such as mandatory pounded waters in question. injunction or mandamus. They did clearly allege the The respondent City, one of the three largest in above-mentioned facts concerning the attempted filing of Texas, is faced with a serious water-supply problem by the respondent's presentation, including the Board's ex- Page 3 155 Tex. 111, *; 283 S.W.2d 722, **; 1955 Tex. LEXIS 553, *** clusive reliance on Sec. 1-a for its refusal to approve and which are not presumptively valid. That Sec. 1-a is file. Parts of the relief prayed were (1) a determination presumptively valid is all that the respondent has admit- "that the plaintiff has the legal right to have the presenta- ted, if admitting anything. The controversy is as to tion accepted and filed with priority" and (2) whether it is actually valid. Clearly this is a real and "other relief, general and special." practical controversy, because the [***10] respondent insists on its application being approved and filed despite The trial court rendered the declaratory judgment as the statute, on which the Board relies, and asserts valuable prayed. Following this the petitioner Board, pending its rights of a property nature to be effective or ineffective appeal, proceeded to file the respondent's presentation but depending upon such approval and filing. Clearly, too, with the express reservation that such filing was condi- the judicial declaration in suit will determine the contro- tioned upon affirmance of the trial court judgment. The versy, because the Board will approve and file the City's Austin Court of Civil Appeals has affirmed it. 273 S.W. application if the statute is declared invalid and will 2d 913. properly continue to refuse to do so if it is declared valid.

No point appears to be made that the case is moot or Nor is there merit to the apparently further contention otherwise nonjusticiable merely by reason of the actual that a justiciable controversy is absent because of the filing of the application, [***8] and we think the con- failure of the respondent to pray specifically for other than ditional character of the Board's approval would have declaratory relief. Even assuming the actual prayer for rendered such a view untenable had it been urged. But "other relief, general [**725] and special" to be with- lack of a justiciable controversy is argued, as we under- out significance, the argument is yet in the very teeth of stand the briefs, on the theory that the respondent's failure Secs. 1 and 8 of Art. 2524-1, supra, and, indeed, of the to allege an abuse of discretion or arbitrariness concedes a main purpose of declaratory judgments, which is to permit discretion of the Board to treat Art. 1434a, Sec. 1-a, supra, of settling actual controversies by appropriate judicial as valid in the absence of a contrary adjudication, and declaration, without necessarily invoking "traditional therefore also the discretion to refuse approval and filing relief," such as injunction or other writs, damages and the of the respondent's application. This alleged concession like. Indeed, it has been observed that some of the "tra- is said to make the suit one for a mere "advisory opinion" ditional remedies," such [***11] as decrees removing a as to the constitutionality of the statute in question. We cloud or cancelling an instrument, are themselves but do not so regard it. declaratory judgments, despite that their names may The expressions "advisory opinion" and "justiciable suggest otherwise. See Hodges, supra, p. VII. [*116] controversy" as here used refer to the requirements, which The lack of a prayer for traditional types of relief does not undoubtedly exist as prerequisite to the declaratory of itself even suggest absence of the essential require- judgment process, that (a) there shall be a real controversy ments of a real controversy, determinable by the suit. between the parties, which (b) will be actually determined The real issue in the case is whether Sec. 1-a, supra 1 by the judicial declaration sought. See Hodges, General is void because of Art. III, Sec. 35 of our State Constitu- Survey of the Uniform Declaratory [*115] Judgment tion, stating that: Act in Texas, Vol. 8, Vernon's Tex. Civ. Stats. Ann., p. XI (1951); also Sec. 6, Art. 2524-1, supra; Cobb v. Har- "No bill shall contain more than one subject, rington, [***9] 144 Texas 360, 190 S.W. 2d 709, 172 which shall be expressed in its title. But if any subject A.L.R. 837; Railroad Commission v. Houston Natural Gas shall be embraced in an act, which shall not be expressed Corp., (Tex. Civ. App., cited in Cobb v. Harrington) 186 in the title, such act shall be void only as to so much S.W. 2d 117; Garwood Irr. Co. v. Lundquist (Tex. Civ. thereof, as shall not be so expressed."

App.), 252 S.W. 2d 759; wr. of er. refused; McDonald, Texas Civil Practice, Vol. 1, Sec. 2.01. 1 See note one on page 113.

But to admit the legal fact, if it is a fact, that the pe- Well prior to the existence of Sec. 1-a, the bulk of the titioner Board may properly await the judgment of a court present Art. 1434a was enacted as Senate Bill No. 103, before ignoring the prohibition of Sec. 1-a, supra, is not to Chapter 76, p. 202, Acts of the First Called Session, 43rd admit that there is no dispute over whether the Board has Legislature (1933). The object of the Act, expressed in the ultimate duty to cease refusing to approve and file the its [***12] first section, was to provide for the formation respondent's application and whether the respondent has of corporations by three or more citizens of the State "for the present right, which it expressly pleaded and prayed to the purpose of furnishing a water supply to towns, cities, have declared, that such approval be given and filing and private corporations and individuals." Sec. 1 of the accepted. If it were otherwise, there would rarely be a Act also detailed sundry provisions concerning dividends, proper case for declaratory judgment concerning the va- sinking fund for replacements and the like as properly lidity of a statute, because there will be very few statutes includible in the charter. Sec. 2 of the Act authorized Page 4 155 Tex. 111, *; 283 S.W.2d 722, **; 1955 Tex. LEXIS 553, *** such corporations as might be organized under the Act to Mortgage Company, 82 Texas 496, 501-2, 17 S.W. 840, contract with all federal agencies, borrow money, issue 842-3; English and Scottish-American Mortgage and bonds and do other such things for the promotion of their Investment Company, Ltd. v. Hardy, 93 Texas 289, 297-8, corporate purposes. The remaining six sections provided 55 S.W. 169, 171. But this rule, of course, has its limits. for additional specific powers and duties of such corpo- Indeed, it might well be argued that the [***15] "one rations, more or less in elaboration of Sections 1 and 2. subject" requirement of the Constitution, although part of In no part of the Act does a word such as "river," "stream," the same sentence containing the title or caption re- "watercourse," "watershed," "dam" or "lake" occur. quirement, should operate independently of the latter, so as to invalidate an amendatory or original act containing Sec. 1-a was enacted in 1941 as part, although a large more than one subject, even though all of the diverse part, of a purported amendment to Sections 1 and 2 of the subjects be covered in full detail in the caption. In any 1933 Act above mentioned by House Bill 953, Chap. 407, event, as hereinafter shown, the cited rule sustaining Acts 47th Legislature, Regular Session. The caption of general captions of amending acts does not apply unless the Amendatory Act read: the actual amendment is germane to the subject matter of "An Act amending Sections 1 and 2 of Chapter 76, the original act or, as the case may be, the portion thereof Senate Bill No. 103, page 202, General and Special which the caption of the amendatory act declares to be [***13] Laws, passed at the First Called Session of the amended. And [*118] while conceivably a lack of Forty-third Legislature; and declaring an emergency." germaneness in the instant case between Sec. 1-a and the rest of the Act might invalidate the section under either The body of the Act declared Sec. 1 of the earlier Act the "one subject" or caption requirements, the more rele- to be "amended so as to read as follows." Then followed vant decisions speak largely in terms of the latter, and "Section 1," in terms identical with the original Sec. 1 therefor so shall we. except for the insertion [*117] of a few words giving these corporations the additional powers to supply "sewer The Gunter case, supra, voided an amendatory act service" and to serve "military camps and bases." Then as because the caption, while giving numbers of a title and a distinct paragraph, although without any separate en- sections as being amended, omitted to state to what ex- acting clause, came "Section 1-a" 1, which was completely isting body of laws or law these numbers corresponded. new. Then followed an enacting clause re-enacting The opinion acknowledges the rule relied on by [***16] "Section 2" with addition of merely a few words so as the petitioner Board; but it does so with the observation " expressly to permit corporate borrowings from sources in although it might seem to us that a different rule would be addition to federal agencies. The next provision, or more in harmony with the requirements of the Constitu- emergency clause, referred only to the need of "the addi- tion," and shows clearly that the purposes of these re- tional powers hereby conferred upon water supply cor- quirements would be defeated by extending the rule so as, porations authorized by said Chapter 76" (emphasis ours) in effect, to make the body of the amendatory act itself as the emergency, thus omitting any reference to the explanatory of its own caption 2. Similarly the English subject matter of Sec. 1-a" 1, and Scottish-American Mortgage Co., case, supra, in referring to the rule, said: See note one on page 113.

"The reason must be that the naming of the arti- [***14] Keeping in mind the constitutional provi- cle to be amended directs attention to all of the provisions sion above quoted, we thus note two features of the therein, as the subject of the amending act, and that such amending act: (a) there is conceivably more than "one provisions can be ascertained by reading the article to be subject" involved in an act, of which Sec. 1-a prohibits all amended." (93 Texas 289, 298, 55 S.W. 169, 171.) persons from taking water from [**726] the Guadalupe and Comal Rivers to other watersheds, and of which the In other words, the rule invoked by the petitioner Board is remainder deals with the general subject of organization justified only because and to the extent that the reader of and corporate powers of water supply and sewer corpo- the caption of the amendatory bill and the existing law or rations; and (b) the caption of the amending act does not section to which the caption refers will thereby ascertain expressly refer to Sec. 1-a or its content, unless by the the subject of the amendatory bill without having to read words "amending Sections 1 and 2 of" the former law. the amendatory bill itself.

The petitioner Board, in upholding Sec. 1-a, relies 2 "The constitution declares that the 'subject largely on the rule that the caption of an amending act is shall be expressed in the title,' and it cannot be said not necessarily deficient because it merely states that a that this has been done where the title does no particular prior law or particular section thereof is being more than to furnish a reference to some other amended and does not give further particulars. The State writing, document, or law from which by search v. McCracken, 42 Texas 383; Gunter v. Texas Land and Page 5 155 Tex. 111, *; 283 S.W.2d 722, **; 1955 Tex. LEXIS 553, *** the true purpose of a title may be ascertained. If State v. McCracken, 42 Texas 384. The reason for such had been the intention of the people the the holding appears to be that the naming of the peremptory language would not have been article to be amended directs attention to all of the used. No one would contend that a title as provisions therein, as the subject of the amending follows, 'An Act in reference to the subject em- act, and that such provisions can be ascertained by braced in the bill to which this is the title' would be reading the article to be amended. However, when sufficient, although such a title attached to a bill the Legislature restricts the title of an amendatory would give most easy reference to sources of in- act by reference to the number in the code of the formation from which the subject of the contem- article amended, and announces its purpose to deal plated law might be ascertained. This is so with the original bill in respect to particular mat- because the Constitution requires the subject of an ters therein, it is bound to govern itself accord- act to be given in the title to it, and a mere refer- ingly, and keep within what it had itself declared ence to something else for the information thus would be the limits of its proposed action. Suth- required to be given is not sufficient." (82 Texas erland Statutory Construction (2d Ed.), vol. 1, sec. 502, 17 S.W. 842). 139; State v. American Sugar Refining Co., 106 La. 553, 31 So. 181, 186." [***17] [**727] Obviously, however, if the provisions of the law or section to be amended involve a [***19] Thus the essential germaness of Sec. 1-a subject different from that actually dealt with in the body of Art. 1434a to the subject matter of Secs. 1 and 2 of the of the amending act, a reading of the [*119] former original act depends on whether a reader of the latter will not disclose to the reader the true subject of the sections, concerning organization and powers of water amending act but, on the contrary, will mislead him as to supply corporations and nowhere mentioning rivers in the latter. And so, as in the English and Scot- general or in particular, would by his reading reasonably tish-American Mortgage Co., case, supra, we find that be forewarned of a subject such as a general prohibition references to the rule of general amendatory captions are against diverting waters from the Guadalupe or Comal couched in limiting language such as "any amendment Rivers to points beyond their respective watersheds. To germane to the subject treated in the article referred to" state the question is, we think, to answer it, particularly (emphasis supplied). when we consider that the hypothetical readers of the caption and earlier law are not merely members of the In Katz v. State, 122 Texas Crim. Rep. 231, 54 S.W. legislature but also "the people." See Gulf Ins. Co. v. 2d 130, the body of the amendatory bill dealt with the James, 143 Texas 424, 431-2, [*120] 185 S.W. 2d 966, occupation tax on "money lenders," which in the original 970. As the respondent appropriately argues, the City of act ( Art. 7047 R.C.S. 1925) was the subject matter of Sec. San Antonio, or perhaps some individual citizen or part- 15. The caption of the amendatory bill read, " to nership not the least interested in the subject of the or- amend Section 14 relating to and imposing an occu- ganization and corporate powers of water supply corpo- pation tax on money lenders and defining same ." rations, but very interested in the waters of the Guadalupe Actually Sec. 14 of Art. 7047 dealt with the tax on "loan and Comal Rivers. might reasonably have read the caption brokers," and accordingly the amendment was held void, in question and old Secs. 1 and 2 (or, for that matter, every notwithstanding that its caption reference to Sec. 14 of section) of Art. 1434a and concluded [***20] that the Art. 7047 [***18] (loan brokers) was qualified by the proposed amendment would in all probability not affect words "money lenders," which was the actual subject of their interests. the amendment. The language of the court is of interest. 3 Ex parte Turner, 122 Texas Crim. Rep. 357, 55 S.W. 2d We thus consider Sec. 1-a to be invalid under Sec. 35 833, is to the same effect. of Art. III of the Constitution and accordingly find it unnecessary to consider the effect of Sec. 56 of Art. III, "The courts of this state have held that a ref- concerning local or special laws. erence to number of an article in a code, such as The judgments of the trial court and Court of Civil our Revised Statutes, is sufficient in the title of an Appeals are affirmed. act amendatory thereof, to allow any amendment germane to the subject treated in the article re- Opinion delivered October 26, 1955. ferred to. English & Scottish-American Mortg. & Inv. Co. v. Hardy, 93 Texas 289, 55 S.W. 169; Rehearing overruled November 23, 1955.

Page 1

California Products, Incorporated, Et Al v. Puretex Lemon Juice, Incorporated No. A-7421 Supreme Court of Texas 160 Tex. 586; 334 S.W.2d 780; 1960 Tex. LEXIS 563; 3 Tex. Sup. J. 255

March 23, 1960, Decided SUBSEQUENT HISTORY: [***1] Rehearing Strickland, Wilkins, Hall & Mills and J. E. Wilkins [***2] Overruled May 18, 1960. , of Mission, for respondents.

PRIOR HISTORY: Error to the Court of Civil Ap- JUDGES: Mr. Justice Griffin delivered the opinion of the peals for the Fourth District in an appeal from Willacy Court.

County.

OPINION BY: GRIFFIN DISPOSITION: Judgment of the Court of Civil Ap- peals is affirmed. OPINION [*587] [**780] Petitioners herein, hereafter called plaintiffs, filed this suit in the 107th District Court HEADNOTES of Willacy County, Texas, against respondent herein, Declaratory Judgments. hereafter called defendant, seeking a declaratory judg- ment to determine whether or not a certain bottle in which The declaratory judgment statute was not designed to plaintiffs expected to sell lemon and lime juice would aid litigants to seek legal advice at the hands of the courts, violate a judgment of the 107th District Court entered but there must be a justiciable controversy between the June 3, 1952. The prior suit in the 107th District Court parties in suit before a declaratory judgment action will was between the same parties, except petitioners herein lie. were defendants and respondent herein was plaintiff. In the first suit between the parties, Puretex, as plaintiff, SYLLABUS recovered a permanent injunction against California This is a suit by petitioners seeking a declaratory Products and Davis prohibiting them from marketing their judgment as to whether a bottle which they proposed to lemon and lime juice in bottles which resembled in ap- manufacture and use for the production of their products pearance the bottles used by plaintiff. This judgment would be in violation of an injunction previously issued was an agreed judgment and there was no appeal taken enjoining them from using a bottle similar to the one used from it and it became final. After the entry of the above by respondents, before they proceed further in its manu- decree, petitioner files this declaratory judgment suit. facture. A trial court's judgment in favor of petitioners [**781] Trial was had before a jury and two spe- was reversed and judgment rendered by the Court of Civil cial issues were answered [***3] by the jury. The first Appeals that they take nothing. 334 S.W. 2d 449. Peti- issue asked the jury to find from a preponderance of the tioners have brought error to the Supreme Court. evidence whether plaintiff planned to have bottles made of the kind set out in a blueprint introduced in evidence, COUNSEL: Robert H. Kern, Jr., of McAllen, James & such bottles to be used as containers in which to market its Conner and Allen B. Conner, of Fort Worth, for petition- lemon and lime juice. The jury answered this issue in the ers. affirmative which was favorable to the plaintiff. The second issue asked the jury to find from a preponderance Page 2 160 Tex. 586, *; 334 S.W.2d 780, **; 1960 Tex. LEXIS 563, ***; 3 Tex. Sup. J. 255 of the [*588] evidence whether the bottle and its 16 Am. Jur. 282, section 9; Hodges, General Survey of the markings which plaintiff proposed to use to market its Uniform Declaratory Judgments Act in Texas, Vernon's lemon and lime juice "will not so closely resemble in Texas Civil Statutes, Vol. 8, p. VII. The Court of Civil appearance the bottle of the defendant and its markings as Appeals has cited and discussed some additional authori- to be liable to deceive a reasonably prudent buyer, exer- ties and we will not repeat them. cising such ordinary care and observation as shoppers "The rule with respect to the necessity for a justicia- generally may be expected to use so as to mislead such ble controversy may be stated [***6] in the vernacular in buyer into believing that this bottle contains Puretex this wise: The Uniform Declaratory Judgments Act does lemon or lime juice." The jury answered, "It will not be not license litigants to fish in judicial ponds for legal likely to deceive." On this verdict, the court rendered advice." Anderson, Declaratory Judgments, 2d. Ed., Vol. judgment for plaintiff-California Products, Inc. The 1, p. 47, quoting from Lide v. Mears, 231 N.C. 111, 56 judgment entered by the trial court reads, in part, as fol- S.E. 2d 404. lows: [**782] The case nearest in point to the case at bar "That the terms of the agreed judgment entered by which we have been able to find is the case of Ladner v. this Court on June 3, 1952, in Cause No. 1860, [***4] Siegel, 294 Pa. 368, 114 Atl. 274, (1928). Plaintiffs entitled Puretex Lemon Juice, Inc. v. California Products, Ladners owned certain residences on land purchased from Inc., and Charles H. Davis, properly construed, do not defendant Siegel. On the remaining land adjoining prohibit the use by Plaintiffs herein, in the marketing of plaintiffs' residences, Siegel proposed to erect a shopping lemon and lime juices, of a bottle resembling the said center. One of the buildings was to be occupied by a bottle of Defendant in any respect whatsoever, but the garage operated for the general repair and service of au- purport and meaning thereof is to prevent the use by tomobiles for the public. The Ladners brought suit Plaintiffs of a bottle so resembling in appearance that of against Siegel seeking to restrain him from erecting and Defendant's bottle as to be calculated to mislead and de- occupying the garage as a violation of the residential ceive the buying public, and; district use. The Ladners won this suit and secured their "That the use by Plaintiff, California Products, Inc. of injunction. That cause became final. its proposed bottle, above described in the marketing of its Thereafter Siegel filed a declaratory judgment action lemon and lime juices will not be violative of, or incon- asking the court to fix his rights in the conduct of the sistent with, the injunction issued by this Court in said garage in case it was carried on in such a way as not to Cause No. 1860." constitute a private nuisance. The court was presented Defendant appealed to the Court of Civil Appeals. with [***7] the question of determining a method by That Court reversed and rendered denying plaintiff any which Siegel would operate the garage, and then asked to relief. The basis for the opinion of the Court of Civil determine whether or not such method of operation would Appeals was (1) plaintiffs had shown no justiciable in- be permitted in this residential district. The trial court terest, and were only seeking an advisory opinion from entered a judgment setting out a method whereby the the Court and (2) the trial court had no right to modify and garage could be operated so as not to constitute a private change the terms of the judgment entered some five years nuisance. in the past. 324 S.W. 2d 449.

On appeal the Supreme Court of Pennsylvania says We granted the petition for writ of error on [***5] the crucial question is "do the circumstances here dis- plaintiffs' first point. This asserted error by the Court of closed give any jurisdiction to the court below to enter a Civil Appeals in holding there was not an actual, real, or declaratory judgment?" [*590] The Court then quotes bona fide controversy between the parties. Petition- from the Declaratory Judgments Act which provides that ers-plaintiffs also have points on the error of the Court of courts of record "within their respective jurisdictions, Civil Appeals in holding that the trial court had no right to shall have power to declare rights, status, and other legal modify and change the terms of the previous judgment. relations" between parties where there is a real matter in controversy. (These are the identical provisions in our All parties agree that there must be a justiciable con- statute -- Art. 2524-1.) The Court then says the Declara- troversy between the parties before a declaratory judg- tory Judgments Act gives the court no power to grant ment action [*589] will lie. That is well settled law. advisory opinions, or to determine matters not essential to Board of Water Engineers v. City of San Antonio, 1955, the decision of the actual controversy although such 155 Texas 111, 283 S.W. 2d 722(1); Parks v. Francis, questions may in the future require adjudication, or Texas Civ. App., 1947, 202 S.W. 2d 683(5), no writ his- passing upon contingent or certain other situations. The tory; Southern Traffic Bureau v. Thompson, Texas Civ. court then says: App., 1950, 232 S.W. 2d 742(10), ref., n.r.e.; Anderson, Declaratory Judgments, 2d Ed., Vol. 1, p. 38, section 9; Page 3 160 Tex. 586, *; 334 S.W.2d 780, **; 1960 Tex. LEXIS 563, ***; 3 Tex. Sup. J. 255 "* * [***8] * In the present case, the question of "It is further a well established rule that a declaratory whether the use of the garage as now contemplated would judgment should not be based upon facts which are par- constitute an offensive business in the neighborhood, and ticularly subject to mutation and change as are the facts a private nuisance, affecting not only complaints, but here. Anderson on Declaratory Judgments, p. 195, sec- others residing near by, could not be determined until its tion 72." actual operation at some future date."

A declaratory judgment rendered herein would not And the Court further says: settle the controversy between the parties. The perma- nent injunction in Cause No. 1860 is still outstanding. A "* * * If such a proceding [as sought] was to be violation of that judgment is subject to be punished for countenanced, then approval would be given to applica- contempt in a proper proceeding. It cannot be deter- tions in any like equity case to have a determination as to mined whether or not a proposed [***10] bottle will be whether the court's order should be held ineffective, under violative of the injunction issued on June 3, 1952 until stated facts depending on contingent and future events, California Products seeks to market its product in a bottle with resulting confusion, and the decree would lack the in the same market with Puretex. Only in this way can it finality which is contemplated in law. If petitioners be determined whether the California Products' bottle is of believe the operation intended to be unobjectionable un- the size and appearance that it misleads and deceives the der the order made, they may proceed at their own risk. * buying public into believing that it is securing Puretex * * 'Construction of a decree cannot be given until the products rather than California products. question comes regularly before the court in proceedings requiring construction and application to acts alleged to We agree with the Court of Civil Appeals that this have been done or omitted under it.' 21 C.J. 689." proceeding is one in which an advisory opinion is sought.

Should we decide that the bottle proposed to be used by To the same effect see Shattuck v. Shattuck, 1948, 67 California Products did violate the injunction, we would Ariz. 122, 192 P. 2d 229(18); Glassford v. Glassford, settle nothing. California could continue indefinitely to 1953, 79 Ariz. 220, 262 P. [***9] 2d 382(3); National propose bottles of different sizes, shapes and colors on Biscuit Co. v. Kellogg Co., 1938 (Dist. Ct. Del.) 2 F. Supp. which it could seek an equally indefinite number of ad- 801; J. Greenebaum Tanning Co. v. National Labor Re- visory opinions as to whether such bottles violate the lations Board (7th Cir.) 129 F. 2d 487(2); 154 A.L.R. injunction. Such procedure would accomplish nothing.

740, et seq.

California Products should propose a bottle which it In the case of Southern Traffic Bureau v. Thompson, thinks does not violate the injunction, use it and litigate Texas Civ. App., 1950, 232 S.W. 2d 742, ref., n.r.e., it was the material issue on a contempt hearing. said: We affirm the judgment of the Court of Civil Ap- "The Uniform Declaratory Judgments Act does not peals. provide for the giving of merely advisory opinions on the Associate Justice Greenhill not sitting. part of courts. In government this is a duty of the exec- utive branch. In private [*591] business it is the Opinion delivered March 23, 1960. function of [**783] the legal profession. City and [***11] Rehearing overruled May 18, 1960.

County of Denver v. Lynch, 92 Colo. 102, 18 P. 2d 907, 86 A.L.R. 907.

Page 1

H. C. Carter, Appellant v. Dripping Springs Water Supply Corporation, Appellee NO. 03-03-00753-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 2005 Tex. App. LEXIS 461

January 21, 2005, Filed PRIOR HISTORY: [*1] FROM THE DISTRICT COURT OF HAYS COUNTY, 274TH JUDICIAL FACTUAL AND PROCEDURAL BACKGROUND DISTRICT. NO. 02-1912, HONORABLE ROBERT T.

Carter is an individual residing in Hays County, PFEUFFER, JUDGE PRESIDING.

Texas. DSWSC is a non-profit member-owned Texas water-supply corporation [*2] with its principal place of DISPOSITION: Reversed and Remanded. business in Dripping Springs, Texas. In February 1997, Carter entered into an unimproved-property purchase contract with DSWSC for the sale of approximately COUNSEL: For APPELLANT: Mr. Matthew T. Slimp, seventeen acres. DSWSC acquired the property for the Mr. Terry L. Scarborough, HANCE, SCARBOROUGH , purpose of building a wastewater treatment facility. The WRIGHT, WOODWARD & WEISBART, L.L.P., Aus- contract contained the following buyback provision: tin, TX.

In the event [DSWSC] is unable to ob- For APPELLEE: Ms. Karey Nalle Oddo, Mr. Craig T. tain environmental, historical, archeolog- Enoch, WINSTEAD, SECHREST & MINICK, P.C., ical, permitting or such other clearance or Austin, TX. approvals from governmental regulatory agencies after the purchase of the property, JUDGES: Before Justices Kidd, Patterson and Puryear; or for any other reason [DSWSC]'s Justice Kidd Not Participating. wastewater facility cannot go forward, [DSWSC] must hold the property for a OPINION BY: David Puryear period of two years from the date of clos- ing. [DSWSC] must then offer [to] resell OPINION the exact same property to [Carter] for $ 87,500.00 and hold such offer to [Carter] MEMORANDUM OPINION open for six (6) months from date of no- H.C. Carter ("Carter") entered into an agreement with tice. At anytime after receiving notice to Dripping Springs Water Supply Corporation ("DSWSC") repurchase the land, but not after six in which Carter agreed to sell property to DSWSC for the months from receipt of notice, [Carter] purpose of developing a wastewater treatment facility. shall repurchase the land for the sum of $ One of the provisions of the contract allowed Carter to 87,500.00, plus the cost of any boundary repurchase the property in question if Drippings Springs survey which may be required by [Carter] was unable to build the treatment facility. Carter filed suit or any third party lender. [DSWSC] shall to enforce the buyback provision, but the district court furnish a title policy [*3] and convey granted DSWSC's plea to the jurisdiction and dismissed good title by general warranty deed to the case. Carter appeals the district court's grant of the [Carter] in the event of such repurchase. plea to the jurisdiction. We will reverse the order and (altered to substitute "DSWSC" for "Buy- remand the cause. er" and "Carter" for "Seller").

Page 2 2005 Tex. App. LEXIS 461, *

stated that the plans for an organized disposal system will not be approved if any portion of the system's treatment facilities, storage ponds, or surface irrigation components The parties interpret the buyback provision in dif- are located within 500 feet of the boundary of any city ferent ways. Carter takes the position that the buyback park or any land owned by an organization whose purpose agreement creates a two-year time limit in which DSWSC is to protect, promote, maintain, or restore any structure is required to obtain all the necessary permits to build the listed on the National Register of Historic Places. In the facility and proceed in building the facility. Further, ordinance, an organized disposal system is defined as Carter alleges that when the two-year period of time ex- "any publicly or privately owned system for the collec- pired, the contract gave Carter the right to repurchase the tion, treatment and/or disposal of sewage from more than property for six months thereafter. Carter insists that one residence, [*6] duplex or commercial building that DSWSC did not satisfy the two-year provision because it is installed and operated in accordance with the terms and did not obtain all the permits necessary to build the facil- conditions of a valid permit issued by" the Commission. ity; he asserts that DSWSC never applied for nor received The facility discussed in the contract was a wastewater a site-development permit from the City of Dripping treatment facility that could provide service to 120 sin- Springs, which is necessary for the development of any gle-family lots. Carter claims the seventeen acres is next land that is within the corporate limits of the City of to a park and a recorded historical landmark. Therefore, Dripping Springs or its extraterritorial jurisdiction. See Carter insists the 500-foot provision applies to the prop- Dripping Springs, Tex., Ordinance No. 52-B § 10A erty in question. (2001), at p. 13. 1 However, DSWSC counters by con- tending that it has been able to obtain the necessary per- DSWSC counters and contends that, under the con- mits to proceed with the [*4] facility. Specifically, tract, it has a reasonable amount of time to exhaust all DSWSC insists its proposed wastewater facility has been alternatives, that the buyback provision does not have a permitted by the Texas Commission on Environmental two-year time limit, and that before Carter can seek to Quality ("the Commission"). 2 Further, DSWSC asserts repurchase the property, DSWSC must give Carter notice. that it has a certificate of convenience and necessity au- Further, DSWSC contends the ordinance does not apply thorizing it to provide water service in portions of Hays to the property in question, it is not impossible for County and a Texas Pollutant Discharge Elimination DSWSC to build the facility on the property in question, System permit, which allows it to provide wastewater and unless Carter can prove as a matter of law that it is treatment and disposal services in Hays County. physically impossible for it to build the facility, then Carter's claims are not ripe, and he is not entitled to pro- It is worth noting that the City of Dripping ceed in district court.

Springs passed an ordinance specifying that the In July 1997, Carter offered to purchase lot twenty, seventeen acres in question lie within the ex- which is another piece of property owned by DSWSC that tra-territorial jurisdiction of Dripping Springs. See was [*7] purchased in order to access the original sev- Dripping Springs, Tex., Ordinance No. 1310.26 enteen acres. Carter contends that the offer did not contain (2003). a time limit and that the offer was never revoked. Carter For convenience, we will refer to both the also alleges the Board of Directors of DSWSC held a Commission and its predecessor, the Texas Nat- meeting and agreed to accept Carter's offer to purchase lot ural Resource Conservation Commission, as the twenty. In August 1997, Joel Wilkinson, who was an Commission. employee of DSWSC, sent Carter a letter stating that the Carter also contends that it is not possible for Board had agreed to grant Carter the first right to purchase DSWSC to build the treatment facility and insists that, as the lot at the price DSWSC had paid in the event the lot a result, Carter is entitled to repurchase the property. and the seventeen-acre tract were not used for developing [*5] Carter asserts that because of the passage of an wastewater facilities. Carter asserts that he believed, ordinance by the City of Dripping Springs and because of based on his prior interactions with Wilkinson during the a provision in the contract requiring DSWSC to construct original contract formation, that Wilkinson was author- a 150-foot natural-vegetative buffer along the property ized to accept Carter's offer; however, DSWSC denies boundary, it is physically impossible for DSWSC to build that Wilkinson had the authority to accept Carter's offer. a treatment facility on the property in question. The or- Further, Carter asserts that his offer and DSWSC's ac- dinance in question was enacted in May 2001, and the ceptance letter created an amendment to the original ordinance listed restrictions for building an organized contract and that he is entitled to purchase the seventeen disposal system within Dripping Springs or within its acres and lot twenty. extraterritorial jurisdiction. See Dripping Springs, Tex., In April 2001, Carter wrote a letter to the president of Ordinance No. 52-D (2001). Specifically, the ordinance DSWSC asking to purchase lot twenty and the original Page 3 2005 Tex. App. LEXIS 461, *

seventeen acres under the buyback provision of the con- should not reach the merits of the case. Id. A court should tract, [*8] and he tendered $ 10,000 as a down pay- look to the facts alleged in the pleadings and may consider ment. Carter stated in the letter that if DSWSC refused to evidence when necessary to resolve the jurisdictional sell the property to him, he would be forced to sue questions in issue. Id. at 555. A court should construe DSWSC. DSWSC refused to sell any of the property to the pleadings liberally in a way that favors jurisdiction Carter. unless the petition affirmatively demonstrates a lack of jurisdiction. See Peek v. Equip. Serv. Co., 779 S.W.2d Carter filed suit seeking a declaratory judgment re- 802, 804, 33 Tex. Sup. Ct. J. 77 (Tex. 1989). garding his rights and obligations under the buyback provision of the contract. Carter contended that DSWSC Ripeness had not received all the necessary permits and approvals In its plea to the jurisdiction, which the district court for the wastewater facility to go forward and that it was granted, DSWSC alleged that Carter's claims were not not possible for DSWSC to build the wastewater facility ripe. Specifically, DSWSC's plea to the jurisdiction con- as required under the terms of the contract. Carter sought a tended that Carter's claims were not ripe because (1) no declaration that, as a result of DSWSC's alleged inability facts support Carter's charge that it was impossible for to obtain permits and inability to build the facility, he was DSWSC to build its wastewater facility; (2) the property entitled to exercise his right to purchase the seventeen in question is outside Dripping Springs's city limits and, acres and lot twenty. therefore, not bound by the city ordinances that Carter Carter then filed an amended motion for summary alleges prevent DSWSC from building its [*11] facility; judgment. In response, DSWSC filed its own motion for (3) the buyback provision does not specify when DSWSC summary judgment and a plea to the jurisdiction, styled as must send notice to Carter of his right to repurchase the a motion to dismiss for lack of jurisdiction, and asserted property; and (4) no notice has been received by Carter, so the following: (1) Carter's claims were not ripe for review Carter is not entitled to enforce the buyback provision. and (2) Carter lacked standing to sue. Both parties at- For a claim to be justiciable, the claim must be ripe, tached attorney's fees affidavits to their pleadings. and the concept of ripeness emphasizes the need for a The district [*9] court denied both motions for concrete injury and focuses on when an action may be summary judgment and granted DSWSC's plea to the brought. Waco Indep. Sch. Dist. v. Gibson, 22 S.W.3d jurisdiction without findings of fact or conclusions of law. 849, 851, 43 Tex. Sup. Ct. J. 731 (Tex. 2000). Under the Further, the district court also awarded $ 22,986.94 to ripeness doctrine, courts consider whether, at the time a DSWSC for attorney's fees. In response, Carter filed a lawsuit is filed, the facts are sufficiently developed and motion for reconsideration and contended that the district show that an injury has or is likely to occur. Id. at 852. A court could not award attorney's fees if it granted case is not ripe if determining whether a plaintiff has a DSWSC's plea to the jurisdiction. The district court de- concrete injury depends on events that have not come to nied the motion for reconsideration, signed an order dis- pass or that are based on hypothetical or contingent facts. missing Carter's action without prejudice, and awarded Id. DSWSC $ 22,986.94 in attorney's fees.

A declaratory judgment, on the other hand, is ap- Carter filed a request for findings of fact and con- propriate if a justiciable controversy exists as to the rights clusions of law to determine what evidence the trial court and status of the parties and if the controversy will be had relied on in sustaining DSWSC's plea to the jurisdic- resolved by the declaration sought. Bonham State Bank tion. Also, Carter filed a motion for new trial. The district v. Beadle, 907 S.W.2d 465, 467, 38 Tex. Sup. Ct. J. 768 court denied both the request and the motion for new trial. (Tex. 1995). Determining whether a court has jurisdiction Carter appeals the district court's decisions and asserts the [*12] over a declaratory-judgment action is a question of district court erred by granting DSWSC's plea to the ju- law and is subject to de novo review. Paulsen v. Texas risdiction, by awarding DSWSC attorney's fees, by Equal Access to Justice Found., 23 S.W.3d 42, 44 (Tex. denying Carter's motion for a new trial, and by concluding App.--Austin 1999, pet. dism'd), order withdrawn on other that some of Carter's objections to the attorney's fees were grounds (April 26, 2001); see Texas Dep't of Transp. v. waived. City of Sunset Valley, 146 S.W.3d 637, 646, 47 Tex. Sup. Ct. J. 1252 (Tex. 2004) (subject matter jurisdiction re- DISCUSSION viewed de novo). The Uniform Declaratory Judgment Act gives an individual whose rights and legal relations are at The purpose of a plea to the jurisdiction [*10] is to issue in a contractual dispute a vehicle where he can so- defeat a cause of action without regard to whether the licit the court to resolve questions of construction or va- claims raised are meritorious. Bland Indep. Sch. Dist. v. lidity under a contract. National County Mut. Fire Ins.

Blue, 34 S.W.3d 547, 554, 44 Tex. Sup. Ct. J. 125 (Tex. Co. v. Johnson, 829 S.W.2d 322, 324 (Tex. App.--Austin 2000). When deciding a plea to the jurisdiction, the court Page 4 2005 Tex. App. LEXIS 461, *

1992), aff'd, 879 S.W.2d 1, 37 Tex. Sup. Ct. J. 75 (Tex. tion on the merits. Essentially what the trial court did was 1993). Section 37.004(b) of the Uniform Declaratory to decide on the merits that DSWSC was still "going Judgment Act provides that "[a] contract may be con- forward" under the contract, but, under this view, the case strued before or after there has been a breach." Tex. Civ. would never be ripe for resolution.

Prac. & Rem. Code Ann. § 37.004(b) (West 1997).

For ripeness to bar Carter's claim, we would have to DSWSC asserts on appeal that, in this case, deter- assume that DSWSC's construction of the contract is mining whether Carter has a concrete injury depends upon correct. However, the contract can be construed in other events that have not yet come to pass; therefore, DSWSC ways. Under DSWSC's interpretation, the events trigger- insists that [*13] the case is not ripe. Further, DSWSC ing the buyback provision have not occurred; however, contends that the facts supporting Carter's right to seek a under Carter's interpretation, the events triggering the declaratory judgment were not in existence at the time buyback provision have already occurred. Carter asserts Carter filed suit and that the conditions that needed to be that the buyback provision requires DSWSC to resell the met in order for Carter to demand DSWSC resell the property to Carter two years after the date of closing if property to him had not occurred. Specifically, DSWSC DSWSC is not able to obtain all the necessary permits and asserts that Carter's ability to repurchase the seventeen approvals by that time and that the failure to do so is a acres and lot twenty was contingent upon DSWSC being breach of the contract. Further, Carter insists that the unable to obtain permits for the wastewater facility or language "and hold such offer to Seller open for six (6) being prevented from going forward with development. months from date of notice" does not create a condition However, DSWSC insists that neither one of these events precedent under which DSWSC must give Carter notice has occurred. In addition, DSWSC urges that the before he can repurchase the property. Rather, Carter six-month-notice provision requires that DSWSC send contends that the [*16] six-month provision refers to the notice to Carter informing him of his right to repurchase six-month period after Carter has been offered the prop- the property before the buyback provision takes effect and erty in which he could exercise his mandatory right to that the requirement does not specify when DSWSC must purchase the property. DSWSC, on the other hand, alleges send notice to Carter. Because no notice has been sent, that the six-month notice requirement means that DSWSC DSWSC insists that Carter is not able to force the sale of must give Carter notice of his buyback right before Carter the properties and that his claims are, therefore, not ripe. can sue. Both Carter's and DSWSC's readings of the contract are reasonable, and Carter is entitled to have the In support of its position that a case is not ripe if the court determine what the buyback provision means. injury depends on events that have not yet occurred and that a court may not rule on a hypothetical fact [*14] Whether it is possible for DSWSC to build its facility situation, DSWSC relies on many cases. See, e.g., on the property in question as a result of the city ordi- Camarena v. Texas Employment Comm'n, 754 S.W.2d nances and the vegetative buffer requirement is a deter- 149, 31 Tex. Sup. Ct. J. 563 (Tex. 1988) (exemption de- mination the trial court must make because it is an argu- nied most agricultural workers benefits, but case not ripe ment on the merits. Because the only way to resolve these because Commission had, at time of judgment, not at- disputed issues is a trial on the merits, we hold that tempted to deny benefits); Firemen's Ins. Co. v. Burch, Carter's claims are ripe for consideration. 442 S.W.2d 331, 12 Tex. Sup. Ct. J. 49 (Tex. 1968) (asking Standing court to declare liability of insurance company upon a judgment that may be rendered in the future is purely Although DSWSC's plea to the jurisdiction contained speculative, so declaratory judgment inappropriate). allegations of both ripeness and standing, the district court However, these cases are distinguishable from this case did not differentiate between the two allegations when it because here a court is not being asked to make a decla- granted DSWSC's plea. On appeal, DSWSC has only ration based upon facts that may or may not occur in the argued the ripeness issue. However, we will examine the future. Rather, this case asks a court to choose between standing issue briefly. two competing interpretations of a contract whose terms In DSWSC's plea to the [*17] jurisdiction, which are dependent upon future events. See, e.g., Kel- the trial court granted, DSWSC alleged that Carter did not ley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, have standing to file this suit because there was a variation 42 Tex. Sup. Ct. J. 130 (Tex. 1998) (court asked to declare in how Carter was identified in his original petition and whether insurance contract's pollution exclusion clause excluded Kelley from clean up costs). request for declaratory relief and in the general warranty deed.

Thus, DSWSC is urging an interpretation contrary to We review a claim that a trial court lacks sub- Carter's, but if these issues are not determined by a trial ject-matter jurisdiction under a de novo standard. See court on the merits and [*15] if the contract provisions Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 928, 41 are not construed, the parties will never receive a resolu- Page 5 2005 Tex. App. LEXIS 461, *

Tex. Sup. Ct. J. 517 (Tex. 1998). A party interested in a Further, to the extent that DSWSC argued that Carter contract or other writings constituting a contract who does not have the capacity to sue because the deed names desires to have the contract construed by a court in order H.C. Carter, Trustee, DSWSC is urging a distinction that to determine his rights, status, or other legal relations does not matter under the facts of this case. Even assum- affected by the contract has standing to file suit. See Tex. ing Carter acted as an agent, an agent may sue in his own Civ. Prac. & Rem. Code Ann. § 37.004(a) (West 1997). name when the agent [*19] contracts in his own name.

See Perry v. Breland, 16 S.W.3d 182, 187 (Tex. Name Discrepancy App.--Eastland 2000, pet. denied). Carter contracted in DSWSC contends that because the general warranty his own name as evidenced by the contract at issue in this deed names H.C. Carter, Trustee as guarantor and because case, which defines Carter as the seller. In addition, Carter the plaintiff's original petition and request for declaratory and DSWSC should be allowed to present evidence at trial judgment was filed by H.C. Carter, individually, then the on whether or not Carter has satisfied all the necessary trial court lacked subject-matter jurisdiction over the prerequisites for filing suit. claim. DSWSC contends that because the property was We hold that the trial court has subject-matter juris- conveyed by H.C. Carter, Trustee rather than H.C. Carter, diction over this case, and we hold that Carter has stand- then Carter was not [*18] the "seller" under the contract ing to file this claim. and, therefore, Carter had no interest to adjudicate. Fur- ther, DSWSC argues that, as a result of the discrepancy in CONCLUSION names, Carter did not possess title to the seventeen acres at the time of contract or at the time the general warranty Because we conclude that the claims presented were deed was obtained and, therefore, did not satisfy all the ripe for resolution, that the trial court had subject-matter conditions precedent required to maintain this suit. jurisdiction, and that Carter had standing to file the suit, we reverse the district court's order granting DSWSC's However, a party does not always have to be identi- plea to the jurisdiction and remand the case for further fied in the exact same manner in every document for a proceedings not inconsistent with this opinion. 3 claim to be valid, especially when there is no evidence that a different person was meant to be identified. See, Because we are reversing the order of the e.g., Salazar v. Tower, 683 S.W.2d 797, 799 (Tex. district court, we need not address the issue of App.--Corpus Christi 1984, no writ) (omission of "Jr." attorney's fees or objections to attorney's fees. insufficient to establish lack of identity). This proposition seems especially true where, as here, the difference was [*20] David Puryear, Justice the presence of a title and not a difference in a name.

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COMMERCIAL UNION INSURANCE COMPANY AND TOCON CONSTRUC- TION CORPORATION, Appellants, v. LA VILLA INDEPENDENT SCHOOL DISTRICT, Appellee. and LA VILLA INDEPENDENT SCHOOL DISTRICT, Ap- pellant, v. BILL CAUDLE, SR., Appellee No. 13-88-642-CV COURT OF APPEALS OF TEXAS, Thirteenth District, Corpus Christi 779 S.W.2d 102; 1989 Tex. App. LEXIS 2568

October 12, 1989 SUBSEQUENT HISTORY: [**1] Motion for La Villa entered into a construction contract with Rehearings Overruled November 9, 1989.

Tocon, the general contractor, dated March 16, 1983, for the construction of a new gymnasium. Pursuant to the PRIOR HISTORY: On Appeal from the 332nd requirements of the contract and Tex. Rev. Civ. Stat. Ann. District Court of Hidalgo County, Texas. art. 5160 (Vernon 1987), Tocon furnished La Villa with a performance bond, dated March 16, 1983, for $ 196,050.00, with Commercial as surety. This amount was JUDGES: Norman L. Utter, Seerden and Benavides, JJ. later increased to $ 196,462.00 to reflect the full amount of the contract price. On April 1, 1983, Rudy Gomez, La OPINION BY: UTTER Villa's architect, issued notice to Tocon to proceed. This notice informed Tocon that work was to begin within ten OPINION days of the notice and that Tocon had until August 8, 1983 [*104] La Villa Independent School District (La to complete the project. Tocon thereafter commenced Villa), brought suit against Commercial Union Insurance construction of the gymnasium.

Company (Commercial), Tocon Construction Corpora- On November 7, 1983, a certificate of substantial tion (Tocon), and Bill Caudle, Sr., alleging numerous completion was issued by the architect and La Villa, as theories of recovery as to each defendant for problems reflected on that certificate, accepted the work completed that developed with respect to a gymnasium that Tocon and assumed full possession on January 19, 1984. Tocon constructed. Commercial filed a performance bond on this was subsequently notified of various deficiencies which project in favor of La Villa, and Caudle was the president, needed correction. A letter from Gomez dated January 16, chief executive officer, and majority shareholder of 1984 informed Tocon that there was a problem [**3] Tocon. After a bench trial, the court ordered that La Villa with paint discoloration. Although Tocon corrected sev- recover $ 12,950.00 and attorneys' fees from Commercial eral other defects and represented that it would correct the and Tocon, jointly and severally, but denied any recovery problem with the paint discoloration, Tocon failed to against Caudle. The trial court's order specifically denies remedy this problem. On August 13, 1985, La Villa ac- La Villa's Deceptive Trade Practice Act claims, but does cepted a $ 12,950.00 bid to re-paint the gymnasium from not otherwise specify under which theory La Villa is another contractor. On February 20, 1986, La Villa filed being permitted to recover. The court further denied all of this suit to recover its losses. the defendant's counterclaims, including Tocon's coun- terclaim regarding a "liquidated damage provision" In considering a "no evidence", "insufficient evi- [**2] in its contract with La Villa. We affirm in part and dence" or "against the great weight and preponderance of reverse in part. the evidence" point of error, we will follow the well-established test set forth in Pool v. Ford Motor Co., 715 S.W.2d 629 (Tex. 1986); Dyson v. Olin Corp., 692 Page 2 779 S.W.2d 102, *; 1989 Tex. App. LEXIS 2568, **

S.W.2d 456 (Tex. 1985); Glover v. Texas General In- 3. August 8, 1983 -- date of comple- demnity Co., 619 S.W.2d 400 (Tex. 1981); Garza v. tion as specified in the architect's notice to Alviar, 395 S.W.2d 821 (Tex. 1965); Allied Finance Co. v. proceed Garza, 626 S.W.2d 120 (Tex. App. -- Corpus Christi 1981, 4. November 7, 1983 -- date of sub- writ ref'd n.r.e.); and Calvert, No Evidence and Insuffi- stantial completion signed by architect cient Evidence Points of Error, 38 Texas L. Rev. 361 (1960). 5. January 16, 1984 -- architect states that there is a problem with paint discol- There were no findings of fact and conclusions of law oration filed in this cause. Absent findings of fact and conclusions of law, all questions of fact should be presumed to support 6. January 19, 1984 -- date of sub- the judgment, and the judgment [**4] should be af- stantial completion accepted [**6] by firmed if it can be upheld on any legal theory that finds school district support in the pleadings and in the evidence. Point 7. February 14, 1984 -- last payment Lookout West, Inc. v. Whorton, 742 S.W.2d 277, 278 (Tex. made by school district received by Tocon 1987); Campbell & Son Construction Co. v. Housing Authority of Victoria, 655 S.W.2d 271, 274 (Tex. App. -- 8. March 26, 1984 -- letter by architect Corpus Christi 1983, no writ). regarding paint problem Commercial and Tocon's first through third points of 9. November 27, 1984 -- Cau- error contend that the trial [*105] court erred in grant- dle/Tocon letter stating that paint work ing a recovery against Commercial upon the surety bond. will be subcontracted out They argue that the evidence conclusively showed that the claim was barred by limitations and that the trial court's 10. October 1, 1985 -- attorney de- holding to the contrary was against the overwhelming mand letter weight and preponderance of the evidence. 11. February 20, 1986 -- suit filed.

The record reflects that the performance bond stated that "any suit under this bond must be instituted before the expiration of two (2) years from the date on which final Under Tex. Rev. Civ. Stat. Ann. art. 5160 G, no suit payment under the Contract falls due." However, the shall be instituted on a bond after the expiration of one performance bond also stated that it was being ". . . exe- year after the date of final completion of such contract. cuted pursuant to the provisions of Article 5160 of the However, the performance bond in question stated that Revised Civil Statutes of Texas as amended, and all lia- any suit must be instituted before the expiration of two bilities on this bond . . . shall be determined in accordance years from the date on which final payment under the with the provisions of said Article [**5] . . . ." Gomez contract falls due. filed a certificate of substantial completion on November 7, 1983, and Tocon requested final payment on November We find that under either application of the statute of 29, 1983. Gomez sent La Villa a letter dated December 1, limitations, this case is barred by limitations. The evi- 1983, wherein he submitted Tocon's request for final dence was that on November 7, 1983, La Villa's architect payment, but stated various amounts were going to be signed the certificate of substantial completion. On Jan- retained to correct deficiencies and for liquidated dam- uary 19, 1984, La Villa accepted the certificate of sub- ages. La Villa made this payment by check dated Febru- stantial completion. On February 14, 1984, payment was ary 14, 1984. La Villa filed this suit to recover its losses received. Suit was not filed until February 20, 1986, on February 20, 1986. which is more than two years after La Villa accepted the certificate of substantial [**7] completion.

The issues are whether the one or two year statute of limitations is applicable, and whether the trial court's It is settled that a surety on a bond is entitled to rely determination that the case was not barred by limitations on the architect's certificate of completion as final dis- is supported by the evidence. charge of its duty on the bond. Transamerica Insurance Co. v. Victoria Housing Authority, 669 S.W.2d 818 (Tex. The events of this transaction occurred as follows: App. -- Corpus Christi 1984, writ ref'd n.r.e.); City of Midland v. Waller, 430 S.W.2d 473 (Tex. 1968). In 1. March 16, 1983 -- parties enter a Transamerica, this Court held that substantial completion contract and bond of a contract is regarded as full performance.

2. April 1, 1983 -- notice to proceed is Transamerica, 669 S.W.2d at 822. The contract between issued by the architect La Villa and Tocon defines the date of substantial com- Page 3 779 S.W.2d 102, *; 1989 Tex. App. LEXIS 2568, **

pletion as "the Date certified by the Architect when Con- for each calendar day of delay until the struction is sufficiently complete, in accordance with the work is Substantially Complete: Contract Documents, so the Owner can [*106] occupy One Hundred Dollars ($ 100.00) or utilize the work or designated portion thereof for the use of which it is intended." If we apply Article 5160 G, this case should have been filed no later than one year Pursuant to this provision, La Villa withheld $ 9,100.00 after January 19, 1984, the date the school district ac- from Tocon's payment because of Tocon's failure to cepted the certificate of substantial completion. If we complete the project on the date set forth in the contract. apply the two year statute, the suit should have been Alejas Salazar, the superintendent of the La Villa Inde- brought before the expiration of two years from February pendent School District, testified that the teachers and the 14, 1984, the date the last payment was made to Tocon by students suffered an inconvenience because they did not [**8] the school district. Under either interpretation, the have full use of the building. Salazar further testified that case is barred. he could not actually calculate dollar [**10] for dollar La Villa argues that the statute was extended by the the damages suffered by the inconvenience, but that a representations by Tocon that they were going to repair hundred dollars a day would be a reasonable amount to the paint problems. The representations by Tocon might retain as liquidated damages. Salazar also testified that the have been used to toll the statute of limitations regarding liquidated damage provision was included in the contract any liability the contractor might have had to the owner if to provide retribution should they suffer monetarily. such question was in issue, but we hold that it would not The right of parties to make their own bargains is not serve to toll the statute regarding the surety whose duty unlimited, but rather is limited by the universal rule for under the bond is discharged upon completion of the measuring contractual damages based on just compensa- contract. La Villa does not direct us to any portions of the tion for the loss or damage actually sustained. Stewart v. record in which Commercial took any affirmative act Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (1952). A which would toll the statute of limitations as to it. We liquidated damage provision will be enforced when the sustain Tocon and Commercial's first three points of error. court finds: (1) the harm caused by the breach is incapable Commercial and Tocon's fourth through sixth points or difficult of estimation; and (2) that the amount of liq- of error contend the trial court erred in refusing to grant uidated damages called for is a reasonable forecast of just Tocon an offset of $ 9,100.00, plus interest and attorneys' compensation. Rio Grande Valley Sugar Growers, Inc. fees. They complain that the evidence conclusively v. Campesi, 592 S.W.2d 340, 342 n.2 (Tex. 1979); Stewart, showed that the "liquidated damage provision" under 245 S.W.2d at 486; Stewart v. Basey, 241 S.W.2d 353, 357 which La Villa retained the $ 9,100.00 was a penalty (Tex. Civ. App. -- Austin 1951, writ ref'd). However, the provision and that the trial court's holding to the contrary party asserting that a liquidated damages clause is, in fact, was against the overwhelming weight and preponderance a penalty provision has the burden of proving this defense. of the [**9] evidence. Johnson Engineers, Inc. v. Tri-Water [**11] Supply Corp., 582 S.W.2d 555, 557 (Tex. Civ. App. -- Texarkana The contract between Tocon and La Villa provided 1979, no writ). In order to meet this [*107] burden, the that: party asserting the defense is required to prove the amount of the other parties' actual damages, if any, to show that TIME OF COMMENCEMENT AND the liquidated damages are not an approximation of the SUBSTANTIAL COMPLETION stipulated sum. Id.; see also Robinson v. Granite Equip- The Work to be performed under this ment Leasing Corp., 553 S.W.2d 633, 637 (Tex. Civ. App. Contract shall be commenced as noted in -- Houston [1st Dist.] 1977, writ ref'd n.r.e.); Oetting v. the Notice to Proceed, and, subject to au- Flake Uniform & Linen Service, Inc., 553 S.W.2d 793, thorized adjustments, Substantial Com- 795 (Tex. Civ. App. -- Fort Worth 1977, no writ). If the pletion shall be achieved not later than as liquidated damages are shown to be disproportionate to noted in the Notice to Proceed. the actual damages, then the liquidated damages must be declared a penalty and recovery limited to the actual The Owner will suffer financial loss if damages proven. the Project is not Substantially Complete on the date set forth in the Contract Since no findings and conclusions were filed by the Documents. The Contractor (and his trial court, we presume that the trial court found that the Surety) shall be liable for and shall pay to damages caused by Tocon's breach were either incapable the Owner the sums thereinafter stipulated or difficult to estimate and that the liquidated damages as fixed, agreed and liquidated damages constituted just compensation. No evidence was offered regarding the extent, if any, of La Villa's actual damages Page 4 779 S.W.2d 102, *; 1989 Tex. App. LEXIS 2568, **

pertaining to the inability to use the gymnasium, and the (1952); Aransas Natural Gas Co. v. Renfro, 430 S.W.2d record clearly supports the [**12] difficulty in ascer- 591, 592 (Tex. Civ. App. -- Waco 1968, writ ref'd n.r.e.). taining damages resulting from the delay in use to a sec- We finally note that the trial court could have found and ondary school's gymnasium. See City of Marshall v. At- concluded that Tocon failed to make a good faith attempt kins, 60 Tex. Civ. App. 336, 127 S.W. 1148, 1151 (Tex. to settle this case.

Civ. App. 1910, writ dism'd); but see Loggins Construc- Raymundo Lopez, La Villa's attorney, testified that tion Co. v. Steven F. Austin State University Board of he spent 126 hours on the case prior to trial, and an addi- Regents, 543 S.W.2d 682, 685-86 (Tex. Civ. App. -- Tyler tional twenty [*108] hours during the trial of the case.

1976, writ ref'd n.r.e.) (held that withholding $ 250.00 a He further testified that his normal rate is $ 85.00 an hour day for delayed usage of a football stadium was a penalty for out of court time and $ 100.00 an hour for court time, as a matter of law). Therefore, after reviewing the entire and requested various amounts for post-judgment attor- record, we hold that the trial court did not err in refusing to ney's fees. He also testified that the above amounts were offset $ 9,100.00, plus attorneys' fees and interest from the fair, reasonable and customary attorney's fees in Hidalgo damages it awarded La Villa. Appellants' fourth through County, [**15] Texas. sixth points of error are overruled.

In the absence of findings of fact and conclusions of By their seventh through tenth points of error, law, we will presume that the court found such facts as Commercial and Tocon contend the trial court erred in were necessary to support the judgment. Commercial awarding attorney's fees to La Villa. They complain that Credit Corp. v. Smith, 143 Tex. 612, 187 S.W.2d 363, 365 the award of attorney's fees was unreasonable and un- (1945); Bennett v. State National Bank, 623 S.W.2d 719, necessary because Tocon agreed to pay the full amount (Tex. Civ. App. -- Houston [1st Dist.] 1981, writ ref'd due, plus attorney's fees, prior to suit being filed, but that n.r.e.). We hold that there is sufficient evidence to support La Villa declined such payment when "Tocon refused to La Villa's amount of attorney's fees to La Villa. Tex. Civ. surrender its right to claim that the 'liquidated damage Prac. & Rem. Code Ann. § 38.001 (Vernon 1986). We provision' [**13] was invalid and to recover sums overrule Commercial and Tocon's seventh through tenth withheld thereby." They also argue that there is either no points of error. evidence or insufficient evidence to support an award of attorney's fees to La Villa. By its first point of error, La Villa contends the trial court erred in refusing to enter judgment against Caudle in The record and the above complaints reveal that his individual capacity for his own conduct and for the Tocon placed a condition upon its settlement offer; i.e. conduct of Tocon. By its second point of error, La Villa that Tocon would retain the right to claim that the liqui- asserts the trial court erred in refusing to modify or correct dated damage provision was invalid. We further disa- the judgment and in not granting a new trial. By its fourth gree with Commercial and Tocon's assertions that the point of error, La Villa argues that the trial court erred amount offered was all that La Villa was entitled to re- because entering judgment for Caudle was so against the ceive. The contract expressly permits the liquidated great and overwhelming weight of the evidence as to be damages, and La Villa was within their rights to seek such manifestly erroneous and unjust. an award. Therefore, La Villa was not offered to be paid all that it was seeking in damages. When reviewing a jury verdict to determine the [**16] factual sufficiency of the evidence, the court of Although Tex. Civ. Prac. & Rem. Code Ann. § appeals must consider and weigh all the evidence, and 38.002(3) (Vernon 1986) does include, as a prerequisite to should set aside the verdict only if it is so contrary to the a recovery of attorney's fees, that "payment for the just overwhelming weight of the evidence as to be clearly amount owed must not have been tendered before the wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 expiration of the 30th day after the claim is presented (Tex. 1986); Dyson v. Olin Corp., 692 S.W.2d 456, 457 (emphasis added)," an offer to settle is insufficient as a (Tex. 1985). However, absent findings of fact and con- defense to a claim for attorney's fees. Even had there been clusions of law, all questions of fact should be presumed a tender in this case, it has been held that a tender of an to support the judgment, and the judgment should be amount less than the amount claimed is [**14] legally affirmed if it can be upheld on any legal theory that finds insufficient to avoid the awarding of attorney's fees. support in the pleadings and in the evidence. Point Hoot v. Quality Ready-Mix Co., 438 S.W.2d 421, 428-29 Lookout West, Inc. v. Whorton, 742 S.W.2d 277, 278 (Tex. (Tex. Civ. App. -- Corpus Christi 1969, no writ); Barreda 1987); Campbell & Son Construction Co. v. Housing v. Merchants National Bank, 206 S.W. 726, 727 (Tex. Civ. Authority of Victoria, 655 S.W.2d 271, 274 (Tex. App. -- App. -- San Antonio 1918, no writ). Further, attorney fees Corpus Christi 1983, no writ). are recoverable under the statute regardless of when suit is filed if payment is not made within the thirty day period. The corporate fiction shall be disregarded, even Gateley v. Humphrey, 151 Tex. 588, 254 S.W.2d 98, 101 though corporate formalities have been observed and Page 5 779 S.W.2d 102, *; 1989 Tex. App. LEXIS 2568, **

corporate and individual property have been kept sepa- business. Luksa left Tocon in January of 1984 after de- rately, when the corporate form has been used as part of a ciding not to purchase the corporation. The record reflects basically unfair device to achieve an inequitable result. that this occurred after the La Villa contract had been Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. substantially completed and that Tocon was solvent and in 1986). Specifically, the corporate fiction shall be disre- good operating condition when he [**19] left. Thereaf- garded: [**17] ter, Tocon bought Luksa's shares for around $ 25,000.00.

Vaughn's subsequent death triggered a buy/sell (1) when the fiction is used as a means agreement that had been previously created. Tocon of perpetrating fraud; thereafter purchased Vaughn's interest as follows: 3,050 (2) where a corporation is organized shares at $ 3.57 per share; 3,050 shares to be bought at a and operated as a mere tool or business future date at ten percent of the book value established by conduit of another (alter ego); a 1984 audit report. Ultimately, Tocon suffered a cash shortage which resulted in Caudle, as the sole remaining (3) where the corporate fiction is re- shareholder, loaning cash to the corporation, which by the sorted to as a means of evading an existing time of trial amounted to $ 20,000.00. However, all other legal obligation; debts, including pre-1984 loans made by Caudle, have (4) where the corporate fiction is em- been paid and Tocon still has a substantial amount of ployed to achieve or perpetrate monopoly; equipment and computer software. (5) where the corporate fiction is used Caudle received $ 1,500.00 in salary in 1985, but has to circumvent a statute, and(6) where the not received remuneration of any kind from Tocon since corporate fiction is relied upon as a pro- that time. The record, as a whole, reveals that Tocon has tection of crime or to justify wrong. always been operated as an independent entity and that the shareholder's personal accounts have not been commin- gled with Tocon's accounts. The record further reveals Id. at 272. However, the corporate veil should be pierced that La Villa contracted with Tocon without personal and personal liability imposed upon an individual only guarantees from its shareholders and that Luksa, not under the most compelling of circumstances. Aztec Caudle, originally handled the La Villa project.

Management & Investment Co. v. McKenzie, 709 S.W.2d [**20] After weighing all the evidence, we hold 237, 239 (Tex. App. -- Corpus Christi 1986, no writ); that the verdict is not so contrary to the overwhelming Hickman v. Rawls, 638 S.W.2d 100, 102 (Tex. App. -- weight of the evidence as to be clearly unjust and wrong.

Dallas 1982, writ ref'd n.r.e.). The fact that a majority or even all of the stock in a corporation is owned by a single We can find no basis which would permit us to pierce individual does not of itself make the corporation the alter Tocon's corporate veil or to impose liability upon Caudle ego of the individual or, without more, justify the piercing as an individual. Although Caudle did write various letters of the corporate veil. See Massachusetts v. Davis, 140 stating that he would personally fund the payment for the Tex. 398, [**18] 168 S.W.2d 216, 224 (1942), cert. corrective work, these letters were apparently written for denied, 320 U.S. 210, 87 L. Ed. 1848, 63 S. Ct. 1447 settlement purposes so as to avoid litigation and these (1943); Aztec Management, 709 S.W.2d at 239. offers were obviously not accepted by La Villa. We overrule La Villa's first, second, and fourth points of error. [*109] Tocon commenced business sometime around March 15, 1978 and has received both a corporate By its third point of error, La Villa contends the trial charter and a certificate of good standing from the State of court erred in admitting exhibits M21-M36 and M38 into Texas. Tocon has enacted bylaws, filed franchise and evidence. La Villa complains that although it requested income tax returns, appointed or elected directors and Caudle to produce these documents by a "Request for officers, and held stockholder and director's meetings. Production and Inspection of Documents" on January 9, Eugene Vaughn was the original president, but Caudle is 1989, Caudle failed to produce these documents prior to the current president of the corporation. Tocon issued the time he offered them at trial. shares of stock for cash consideration when it was first The record reveals that La Villa expressly stated that organized with Vaughn and Caudle each receiving fifty it had no objection when M21 was offered for admission percent of the shares in the corporation. In 1980-1981, into evidence and that M22-25 either do not exist or were Vaughn and Caudle each sold Marvin Luksa five percent never offered and admitted into evidence. In fact, [**21] of the shares they owned.

M22-25 do not appear to be listed in the exhibit index and It was decided near the completion of the La Villa have not been made a part of the record on appeal. The project that Tocon was going to terminate its construction record further reveals that Caudle testified regarding the Page 6 779 S.W.2d 102, *; 1989 Tex. App. LEXIS 2568, **

contents of M26-M36 and M38 in detail without objection tents of M26-M36 and M38 before lodging its objection. just before they were offered for admission into evidence. We overrule La Villa's third point of error.

The record also reflects that La Villa called Caudle to By its fifth point of error, La Villa contends the trial testify during its case-in-chief and that Caudle testified court erred in refusing to file findings of fact and conclu- that he had personally loaned money to Tocon so that it sions of law. La Villa argues that its motion for new trial could handle its financial obligations. M26-36 constitute had the effect of extending the time within which a re- various promissory notes and the respective checks which quest for findings of fact and conclusions of law could were executed between Caudle/Bill Caudle Properties and have been properly filed.

Tocon.

Tex. R. Civ. P. 296 expressly provides that the request We hold that La Villa has waived error, if any, for findings of fact and conclusions [**23] of law "shall committed by the trial court. A party may not complain on be filed within ten days after the final judgment is signed." appeal [*110] of the improper admission of evidence Although the filing of a motion for new trial used to ex- when that party, itself, introduced evidence of a similar tend the period within which such a request could be filed, character. McInnes v. Yamaha Motor Corp., U.S.A., 673 amendments to Tex. R. Civ. P. 296 which became effec- S.W.2d 185, 188 (Tex. 1984), cert. denied, 469 U.S. 1107, tive April 1, 1984, expressly deleted all references re- 105 S. Ct. 782, 83 L. Ed. 2d 777 (1985); Pouncy v. Gar- garding a motion for new trial. Further, Tex. R. Civ. P. ner, 626 S.W.2d 337, 340 (Tex. App. -- Tyler 1981, writ 306a now provides that "the date of judgment or order is ref'd n.r.e.). The admission of improper evidence is also signed as shown of record shall determine the beginning waived when testimony to the same effect has [**22] of the periods prescribed by these rules . . . [including] been previously admitted without objection. Badger v. requests for findings of fact and conclusions of law."

Symon, 661 S.W.2d 163, 164 (Tex. App. -- Houston [1st Dist.] 1983, writ ref'd n.r.e.); Hundere v. Tracy & Cook, The record reflects that the judgment in this case was 494 S.W.2d 257, 263-64 (Tex. Civ. App. -- San Antonio signed on September 7, 1988, but that La Villa did not file 1973, writ ref'd n.r.e.). Moreover, to be timely, an objec- a request for findings of fact and conclusions of law until tion to the admission of evidence must be made before September 19, 1988. Therefore, La Villa's request was testimony has been adduced regarding the substance of untimely and the trial court did not err in refusing to file the objectionable evidence. Montes v. Lazzara Shipyard, findings of fact and conclusions of law. Lynd v. Wesley, 657 S.W.2d 886, 889 (Tex. App. -- Corpus Christi 1983, 705 S.W.2d 759, 764 (Tex. App. -- Houston [14th Dist.] no writ); Harry Brown, Inc. v. McBryde, 622 S.W.2d 596, 1986, no writ). We overrule La Villa's fifth point of error.

600 (Tex. App. -- Tyler 1981, no writ). Here, La Villa The judgment is REVERSED and RENDERED that waited until after Caudle testified in detail as to the con- La Villa take nothing against Commercial. The judgment of the trial court is otherwise AFFIRMED. [**24] Page 1 679 S.W.2d 721, *; 1984 Tex. App. LEXIS 6484, **

COMMUNITY DEVELOPMENT SERVICE, INC., d/b/a CHAMPION EQUITY CORPORATION, APPELLANT v. REPLACEMENT PARTS MANUFACTURING, INC., APPELLEE No. 01-84-0092-CV COURT OF APPEALS OF TEXAS, First District, Houston 679 S.W.2d 721; 1984 Tex. App. LEXIS 6484

October 18, 1984 PRIOR HISTORY: [**1] Appeal from the The jury found that appellant materially breached the 268th District Court of Fort Bend County, Texas Trial contract and found that appellee suffered damages in the Court Cause No. 37,750A. amount of $71,820 based on the lost profits on the non-sale of 114 residential lots.

OPINION BY: DOYLE In its first two points of error, appellant contends that the trial court erred in entering judgment based on the OPINION jury's response to special issue numbers 11 and 12 be- cause appellant did not have a contractual obligation to [*722] This is an appeal from a judgment awarding pay property taxes as they accrued or to pay interest to appellee damages for breach of contract in the amount of appellee in October 1980. Thus, as a matter of law, such $71,820 actual damages, plus $11,440.60 prejudgment failure did not constitute a material breach of the contract interest. in question. [*723] On October 6, 1978, appellant, Community In response to special issues 11 and 12, the jury spe- Development Service, Inc., d/b/a, Champion Equity cifically found that appellant's failure to pay interest and Corporation (Champion Equity) entered into a contract property taxes as they accrued to appellee in October 1980 with appellee, Replacement Parts Manufacturing, Inc. constituted a material breach of the contract. (RPM) to purchase 144 residential lots over a three-year period. Title to the lots was to be acquired as each one Appellant relies on his contractual interpretation of was "taken down" or closed. Appellant was also re- paragraphs II (b) and (c) of the contract of sale to sub- quired to pay interest to appellee and property taxes on stantiate his contention. [**3] These paragraphs de- any of the 144 lots for which legal title had not been ac- scribe the manner in which the purchase price of the lots quired. shall be paid: Between October 1978 and October 1980, appellant (c) The balance of the total purchase "took down" only 30 lots. Additionally, appellant price shall be payable to Seller as follows: stopped making tax and interest payments to appellee.

Consequently, in October, 1980 appellee notified appel- (1) The sum of $310,500.00 (repre- lant that the contract was cancelled. In response thereto, senting remaining 90% of lot price multi- appellant filed suit alleging that appellee had breached his plied by 30 lots) shall be paid to Seller 60 contract by failing to deliver lots with construction of the days after notification to Buyer by Seller, roads in [**2] accordance with the City of Stafford and which shall include certification of lot Federal Housing Authority (FHA) specifications. Ap- completion, at which time Seller shall pellee filed a counter-claim, alleging that appellant's convey to Buyer by general warranty deed, failure to pay property taxes and interest constituted a insured by owners title policy, good and material breach of the contract. indefeasible title to Buyer to 30 lots se- lected by Buyer, and Page 2 679 S.W.2d 721, *; 1984 Tex. App. LEXIS 6484, **

*** (a) Seller shall clear the street right-of-way and utility easements within (4) The sum of $351,900.00 (repre- Kingsway, it being understood that (1) any senting remaining 90% of lot purchase additional clearing shall be done by Buyer price multiplied by 34 lots) shall be paid to at its expense, and (2) Seller shall mini- Seller within 1095 days of said notification mize damage to the trees within Kingsway; to Buyer by Seller of lot completion at (b) each lot or reserve being conveyed which time Seller shall convey title as shall be free of trash, garbage, or any im- above described to remaining 34 lots. provements not contemplated hereby, and Provided however, (a) Buyer may at except for clearing of trees, be in a condi- any time tender to Seller $10,350.00 per tion suitable for commencement of con- lot and demand that Seller convey title to struction of single family detached hous- lots selected by Buyer and the purchase ing; . . . price of any lots so acquired shall be counted in reduction of the next due in- stallment of Buyer to Seller as above de- Appellant claims that because appellee failed to keep scribed; (b) Buyer shall pay all taxes as each lot free of trash, the appellee had not fulfilled the due from the date of [**4] lot completion conditions which activate appellant's responsibility for and furnish Seller with copy of said paid taxes and interest. The appellee argues that the language tax receipts and (c) Buyer shall pay Seller does not constitute a condition precedent, but merely a interest at the rate of 10% per annum on covenant, the breach of which might be a defense to any the unpaid balance outstanding, such in- contract action by appellee against appellant. terest to commence upon the date of lot completion and to be payable quarterly As a general rule, where neither party has alleged that thereafter. the contract is vague or ambiguous, the construction of the contract is a question of law for the court. City of Pine- hurst v. Spooner Addition Water Co., 432 S.W.2d 515 (Tex. 1968). The court also construes [**6] the meaning Specifically, the appellant contends for the first time of contracts where neither party makes allegations spec- on appeal, that the last paragraph cited above, which ifying the language subject to different interpretation, so describes the appellant's duty to pay taxes and interest to that the opposing party is prepared to offer evidence ex- appellee, is part of paragraph II (c). plaining the meaning. Sale v. Contran Corporation, 486 The contract also provides as follows: S.W.2d 161 (Tex. Civ. App. -- Dallas 1972, writ ref'd n.r.e.). The court is required to give effect to the inten- Provided that the obligations of Seller tion of the parties as expressed or as it is apparent in the as enumerated in paragraphs (a) - (f) of writing. Pitts v. Ashcraft, 586 S.W.2d 685 (Tex. Civ. Paragraph I on pages 1-2 of this Contract App. -- Corpus Christi 1979, writ ref'd n.r.e.). [*724] shall be conditions precedent to In the instant case, reading the contract as a whole the obligations of Buyer as set forth in and considering the surrounding circumstances, the trial Paragraphs II(b) and (c) of this Contract court could have reasonably concluded that the paragraph with respect to each group of lots to be which contained the language, "Buyer shall pay all taxes purchased thereunder. as due from the date of lot completion and furnish Seller with copy of said paid tax receipts", was not part of par- agraph II (b) and (c) of the contract which set forth the Appellant urges this court to find that the above conditions precedent to the obligation of buyer to pay the contractual language requires the seller (appellee) to ful- balance of the purchase price. Instead, the court could fill certain "conditions precedent" before the buyer (ap- have construed the provision as being a written covenant, pellant) will be responsible for payment of taxes and contained in a separate paragraph. interest as allegedly required in paragraph II (c). Some The passage containing the language starts a new of the conditions which the seller is required to fulfill are paragraph which [**7] introduces an alternative method described in paragraph [**5] I(a): of purchasing the lots, and outlines the seller's obligation Seller agrees to the following: to pay taxes and interest. If the parties had intended this section to be part of paragraph II (c), they could have easily included it numbered as (c)(5) or clearly shown that Page 3 679 S.W.2d 721, *; 1984 Tex. App. LEXIS 6484, **

it was part of (c)(4). Moreover, it is well established that supported by data from the actual contract price. Wilfin, if the intent of the parties is doubtful, or if a condition Inc. v. Williams, 615 S.W.2d 242, 244 (Tex. Civ. App. -- would impose an absurd or impossible result, then the Dallas 1981, writ ref'd n.r.e.). However, a witness may agreement will be interpreted as creating a covenant rather also provide evidence of lost profits by testifying as to than a condition. Hohenberg Bros. Co. v. George E. what his profit would have been, based on his knowledge Gibbons & Co., 537 S.W.2d 1, 3 (Tex. 1976). of the cost of performance of each element of the contract and subtracting the total of such costs from the contract In the case at bar, to hold that the appellee's price. Wilfin, Inc., supra at 245. three-year obligation to make tax and interest payments on the lot was suspended until appellant cleared the oc- In the instant case, the jury was given the following casional debris that accumulated on the lots would impose [**10] instructions for determining the damages: "an absurd result" particularly in light of the other condi- tions which suspend tax and interest payments. INSTRUCTION Paragraph II (b) provides for payment only upon the In connection with the following completion of the development of 144 lots. Paragraph II Special Issue, you are only to consider (c) provides that the balance of the total purchase price is such damage, if any, that you find from a only payable sixty days after seller notifies [*725] the preponderance of the evidence was shown buyer by sending certification of lot [**8] completion to have been the natural, probable, and and conveying to buyer a general warranty deed. foreseeable consequence of Champion Equity's conduct or to have been within the The paragraph clearly demonstrates the parties' in- contemplation of the parties. You may tention to condition appellant's obligation to pay the bal- consider only those losses, if any, the ance on the lots on their certification as being complete. payment of which would place R.P.M., Since such intent is not clearly demonstrated in the para- Inc. as nearly as possible in the position it graph requiring the payment of taxes and interest, we find would have occupied had Champion Eq- that the appellee's obligation to pay taxes and interest was uity performed the contract, if, indeed it not part of paragraph II (b) or (c) and was therefore not did not. You may consider only such conditioned on appellee's keeping the lots clear of trash damage, if any, that was actually sustained and debris. Points of error one and two are overruled. and you shall not speculate as to damages In points of error three, four, and five, appellant which, although possible, have not been contends that the trial court erred in granting judgment in proved by a preponderance of the credible favor of appellee for damages because there was no evi- evidence. dence, or alternatively insufficient evidence of the "ben- efit of the bargain" or the value of the property at the time appellee knew or should have known of the breach as The jury was also to consider only such damage, if any, compared to the value the property should have had at that that they found from time. a preponderance of the evidence would give Champion Equity the benefit of its Generally, the measure of damages for breach of bargain as of the date Champion Equity contract is the amount necessary to place plaintiff in a knew of the breach or should have known financial position equal to that which it would have had if of the breach, if any, of R.P.M., Inc. You the contract had been performed by both parties. [**9] are further instructed that benefit of its Little Darling Corp. v. Ald, Inc., 566 S.W.2d 347 (Tex. bargain is the difference between the value Civ. App. -- Dallas 1978, no writ). Under this standard, of what Champion Equity had at [**11] the injured party is compensated only for the damages or the time it knew or should have known of loss actually sustained. North American Corp. v. Allen, the breach and the value of what Cham- 636 S.W.2d 797 (Tex. App. -- Corpus Christi 1982, no pion Equity should have had at that time. writ).

Lost profits are recoverable under this standard if the evidence shows that the loss of profits was a material and The jury was instructed to consider only such losses that probable consequence of the breach of the act complained would place appellee in the position it would have occu- of and the amount due is shown with sufficient certainty. pied had the breach not occurred. According to this Id. at 799; see also Little Darling Corp., supra. instruction, lost profits would be included [*726] within the foreseeable consequences of a lost sale, and Generally, lost profits are properly calculated by deducting the costs of the injured party's performance Page 4 679 S.W.2d 721, *; 1984 Tex. App. LEXIS 6484, **

would be recoverable if supported by the evidence. The leading case relating to appellant's contention is Wilfin, Inc., supra. Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (1952) which sets out the applicable rule in cases similar Evidence of appellee's lost profits was provided by to the instant one: Mr. Webster, who was the president and sole stockholder in appellee's corporation. Mr. Webster testified without In those cases in which courts enforce objection that the costs of appellee's performance in- stipulations of the parties as a measure of cluded a 10% down payment on its lots owned by Mr. damages for the breach of covenants, the Shipwash, which were to be resold by appellee to appel- principle of just compensation is not lant. abandoned and another principle substi- The appellee had contracted to pay Mr. Shipwash tuted therefor. What courts really do in $9720 per lot. Appellee then contemplated selling these those cases is to permit the parties to es- same lots to appellant for $11,500 each. timate in advance the amount of damages, provided they adhere to the principle of Appellant had paid a down payment of 10% or just compensation. Restatement of Con- $1,150 per lot to appellee, and had contracted to pay the tracts, Sec. 339, accurately expresses the remaining $10,350 per lot over a period of three years. rule as follows: Appellee had anticipated that his gross profit would be $630 per lot. Appellant's [**12] breach of contract, (1) An agreement, made after purchasing only 30 of the 144 lots, caused appellee in advance of breach fixing to lose $630 profit on each of the remaining 114 lots, or a the damages therefor, is not total of $71,820. Mr. Webster's testimony provided [**14] enforceable as a competent evidence of appellee's "benefit of the bargain" contract and does not affect which included lost profits. Appellant's third, fourth, and the damages recoverable fifth points of error are overruled. for the breach, unless In its sixth point of error, appellant contends that the (a) the amount so fixed trial court erred in awarding appellee damages because the is a reasonable forecast of damages awarded were barred by the liquidated damages just compensation for the clause contained in the contract for deed. harm that is caused by the The contract for deed provided as follows: breach, and (b) the harm that is Seller shall give Buyer thirty (30) days caused by the breach is one written notice of any default hereunder and that is incapable or very should the Buyer fail to correct such de- difficult of accurate esti- fault within ten (10) days from receipt of mation. (emphasis added) notice, Seller, its successors or assigns, shall have, as its sole remedy the right to declare this agreement terminated and Buyers earnest money forfeited. In the event of default by Seller, Buyer's sole remedy is that the earnest money shall be In Stewart, the court held that the "stipulated damage refunded and this agreement terminated. provision" in a lease would be treated as a penalty because the provision was not narrowly drawn or limited to the breach of any one major covenant, but could also be Appellant contends that this provision limited damages triggered by the breach of a trivial or unimportant for any default by buyer to the earnest money paid to convenant. The Texas [*727] Supreme Court em- appellee. The jury [**13] found in response to special phasized that the provision did not adhere to the rule of issue no. 15 that the earnest money totalled $165,600. "just compensation." Id. See also Bethel v. Butler Drilling, Appellant further contends that since the above provision 635 S.W.2d 834 (Tex. App. -- Houston [14th Dist.] 1982, is enforceable as liquidated damages, and the appellee writ ref'd n.r.e.); (Court refused to uphold a liquidated was in possession of the earnest money, the trial court was damages provision in a lease, which was triggered equally barred from awarding additional damages to appellee. by the nonpayment of rent or the breach of any other The appellant further contends that the provision is un- covenant); Mayfield v. Hicks, 575 S.W.2d 571 (Tex. Civ. enforceable because it provides for a penalty to secure App. -- Dallas 1978, writ ref'd n.r.e.); (Court condemned a performance of the contract. similar provision as a penalty because the contract [**15] Page 5 679 S.W.2d 721, *; 1984 Tex. App. LEXIS 6484, **

provided the same reparation for breach of each and every In its last point of error, appellant contends that the covenant); Loggins Constr. Co. v. Stephen F. Austin St. trial court erred in awarding damages to appellee based on Univ., 543 S.W.2d 682 (Tex. Civ. App. -- Tyler 1976, writ the jury's response to special issue 13 because the appellee ref's n.r.e.). receives an inequitable windfall, recovering both the earnest money and $71,820 in lost profits. Appellant Under the principle of just compensation, "The gen- contends that this result is inequitable in that the award eral rule is that if such a provision is for a penalty to se- grants recovery of both liquidated damages and recovery cure performance of the contract, it is unenforceable and of profits. the party claiming a breach is required to prove his actual damages." However, if the parties actually intended the In special issue 13, the jury was instructed to consider provision to constitute their estimate of the damages that only those losses, if any, the payment of which would would actually be sustained by the party harmed by the place appellee as nearly as possible in the position it breach, and the amount so fixed is a reasonable estimate would have occupied had the appellant performed the of just compensation for the harm contemplated by the contract. The jury was further instructed to consider only breach, and the amount of the damages is incapable or those damages that were shown to be the natural, proba- hard to determine, it is enforceable. The parties' intention ble, [*728] and foreseeable consequences [**18] of in making the provision is not controlling in this respect. appellant's conduct.

Loggins Construction Co., supra; Brace v. Dante, 466 The appellee contends that the jury correctly found S.W.2d 66, 69 (Tex. Civ. App. -- Dallas 1971, no writ). that appellant's forfeited earnest money did not give ap- Applying this principle of law to the contractual pellee the benefit of its bargain and did not put appellee in provision before this court, we conclude that the parties the position it would have occupied had appellant per- intended that the provision constitute an estimate of their formed the contract. Appellee points out that except for damages in the event of a breach. However, [**16] the defective liquidated damages provision, the contract the amount fixed is not a reasonable forecast of just does not provide that the earnest money must be returned compensation for the harm caused by any breach of the once the parties began performance. Appellee urges this contract. court to find that the jury rightfully considered the "reali- ties of the transaction made the basis of this lawsuit."

The provision states that "upon any default hereunder by the buyer" or "in the event of default" by the seller, the The jury had sufficient evidence before it from which sole remedy shall be the retention, or refund respectively, it could conclude that the retention of appellant's earnest of any earnest money tendered. The defect in this pro- money by appellee did not adequately compensate ap- vision which makes it a penalty rather than a liquidated pellee for the harm caused by appellee's breach and did damage provision, is that upon the occurrence of any not place appellee in the position it would have occupied default, even a minor one, by either party, the injured had the appellant performed the contract. party may terminate the contract and keep over $160,000 The record reflects that the earnest money contracted in earnest money as damages. for and received by appellee reduced the amount of the A provision becomes a penalty if it provides for un- outstanding purchase price. Both parties agree that be- reasonable damages for trivial breaches as well as rea- tween November 10, 1978 and March 1979, appellant sonable damages for major breaches. Stewart, supra; closed or "took down" 30 lots under the contract for deed. Bethel, supra; and Mayfield, supra. It is immaterial that Moreover, [**19] appellant paid approximately the actual breach was for default in tax and interest pay- $222,021 in interest on lots not taken down. Several ments. Mayfield, supra. If the seller failed to keep any homes were built and sold on the lots "taken down." one lot entirely free from trash, or if the buyer paid the Clearly, both parties had begun performance of the taxes but failed to furnish seller with a copy of paid tax three-year contract. This is important because there is no receipts, either injured party could terminate the contract evidence that any of the "earnest money" was placed in an and demand to keep the earnest money. Certainly, such escrow account to secure performance of the contract. In minor breaches could [**17] not be held to warrant fact, appellee testified that the majority of the money termination of the contract plus the award or retention of appellant paid to appellee was immediately passed to Mr. any earnest money. Shipwash in order to pay off the appellee's debt to Mr. Shipwash on the parallel contract. The record also re- Because the clause in this case subjects the parties to flects that appellee subtracted the amounts received from the same reparation for any default under the contract, we appellant on the "taken down" lots, including the hold that the provision is a penalty rather than one of $165,000 earnest money, before appellee computed his liquidated damages. Therefore, the trial court did not err lost profits. in awarding damages to appellee and the appellant's sixth point of error is overruled.

Page 6 679 S.W.2d 721, *; 1984 Tex. App. LEXIS 6484, **

Therefore, the jury's finding, that appellee would constitute a "double recovery." Appellant's seventh point need an additional $71,820 in order to be fairly and rea- of error is overruled. sonably compensated for damages sustained by appel- The judgment of the trial court is affirmed. lant's breach, was supported by the evidence and did not Page 1 132 S.W.3d 471, *; 2003 Tex. App. LEXIS 9952, **

Continental Holdings, Ltd., Appellant v. Jim Leahy, Individually; Brown, Parker & Leahy, L.L.P.; and Thompson & Knight, L.L.P., Appellees No. 11-02-00326-CV COURT OF APPEALS OF TEXAS, ELEVENTH DISTRICT, EASTLAND 132 S.W.3d 471; 2003 Tex. App. LEXIS 9952

November 20, 2003, Decided PRIOR HISTORY: [**1] Appeal from Dallas In this case, Continental alleged that the Lawyers County. breached their duties to Continental in the arbitration proceeding by failing to introduce evidence that was suf- DISPOSITION: Affirmed. ficient to satisfy its burden of proof on the benefit of the bargain damages. Continental also alleged [**2] that the arbitrators would have awarded it benefit of the bargain COUNSEL: For Plaintiff or Petitioner: Coyt Randal damages but for the Lawyers' negligence. The Lawyers Johnston, Robert L. Tobey, Johnston & Tobey, Dallas, moved for summary judgment, asserting that their alleged TX. Roy Ryden Anderson, Professor of Law, Southern negligence did not proximately cause any damage to Methodist University School of Law, Dallas, TX.

Continental because a limitation-of-liability provision in Continental's contract with Western excluded recovery of For Defendant or Respondent: David N. Kitner, Christine benefit of the bargain damages. The trial court granted Roseveare, Strasburger & Price, Attorneys At Law, Dal- summary judgment to the Lawyers. We affirm. las, TX. P. Michael Jung, Strasburger & Price, Dallas, TX.

Issues Presented JUDGES: Panel consists of: Arnot, C.J., and Wright, J., Continental presents five issues for review. In its first and McCall, J. issue, Continental asserts a general complaint that the trial court erred in granting summary judgment. In its second OPINION BY: TERRY McCALL and third issues, Continental asserts that the trial court erred in granting summary judgment because (a) the ar- OPINION bitrators ruled that the limitation-of-liability provision in the contract did not prevent the recovery of benefit of the [*472] This is a legal malpractice case. Continental bargain damages and (b) the arbitrators' ruling on the Holdings, Ltd. sued its former lawyers, Jim Leahy, Indi- limitation-of-liability issue was binding on the trial court. vidually; Brown, Parker & Leahy, L.L.P.; and Thompson In its fourth issue, Continental argues that the trial court & Knight, L.L.P. (the Lawyers). The Lawyers represented erred in granting summary judgment because, irrespective Continental in an arbitration proceeding in which Conti- of the arbitrators' ruling, the contract permitted it to re- nental sought to recover damages from Western Atlas cover benefit of the bargain [**3] damages for Western's International, Inc. resulting from Western's breach of a breach. In its fifth issue, Continental asserts that, if the contract. The arbitrators determined that Western contract did not unambiguously permit or deny recovery breached the contract and awarded some of the damages of Continental's benefit of the bargain damages, the cause sought by Continental. However, the arbitrators found should be remanded to the trial court for a resolution of that Continental did not meet its burden of proof on its the factual dispute presented by the ambiguous contract. alleged benefit of the bargain damages and denied Con- tinental recovery of those damages.

Background Facts Page 2 132 S.W.3d 471, *; 2003 Tex. App. LEXIS 9952, **

Continental agreed to perform geophysical services earned on the Pacific Titan Contract itself, but for for Western under the contract. [*473] The contract [Western's] breach." Continental argues that it is entitled required Continental to provide Western with the vessel, to recover those lost profits from the Lawyers. In their the M/V Pacific Titan, fully crewed, for a period of 12 motion for summary judgment, the Lawyers asserted that, months. The start date for the contract was October 1, because the limitation-of-liability provision in Continen- 1998. A number of disputes arose between Continental tal's contract with Western precluded Continental's re- and Western; and, on December 29, 1998, Western issued covery of lost profits damages, their alleged negligence in a notice of termination of the contract. Continental as- failing to present sufficient evidence of lost profits in the serted that Western's termination of the contract was arbitration proceeding did not proximately cause any wrongful. damage to Continental. The trial court granted summary judgment to the Lawyers on this ground.

Continental and Western submitted a number of their disputes to arbitration, including the issue whether Standard of Review Western had the right to terminate the contract. The arbi- trators determined that Western's termination of the con- This appeal involves the review of a traditional mo- tract constituted a breach of the contract. Under the con- tion for summary judgment. We will apply the tract, the charter rate for the M/V Pacific Titan was $ well-recognized standard of review for traditional sum- 33,000 per day. Continental argued [**4] that, as a result mary judgments. We must consider the summary judg- of Western's breach, it was entitled to recover $ 33,000 a ment evidence in the light most favorable to the day for the full contract term of one year. The arbitrators non-movant, indulging [**6] all reasonable inferences disagreed in their findings: in favor of the non-movant, and determine whether the movant proved that there were no genuine issues of ma- 20. The classic measure of contract terial fact and that it was entitled to judgment as a matter damages is to put the injured party in the of law. Nixon v. Mr. Property Management Company, position it would have been in had the Inc., 690 S.W.2d 546, 28 Tex. Sup. Ct. J. 384 (Tex. 1985); contract been performed. Awarding Con- City of Houston v. Clear Creek Basin Authority, 589 tinental the day rate of $ 33,000 per day for S.W.2d 671, 23 Tex. Sup. Ct. J. 7 (Tex. 1979). A defendant a full year, as urged by Continental, does [*474] is entitled to summary judgment if it either dis- not, however, accomplish this goal. If the proves an element of each of the plaintiff's causes of ac- contract clearly called for such a remedy in tion or establishes an affirmative defense on each of the the event of early termination, and we find plaintiff's causes of action as a matter of law. American that it does not, the remedy would consti- Tobacco Company, Inc. v. Grinnell, 951 S.W.2d 420, 425, tute an impermissible penalty. 40 Tex. Sup. Ct. J. 658 (Tex. 1997); Science Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911, 40 Tex. Sup. Ct. J. 438 21. One way to compensate Conti- (Tex. 1997). nental for its damages would be to con- sider the revenues expected to be earned, The Effect of the Arbitration Award less the expenses saved as a consequence of the breach. It was Continental's burden The Lawyers argue that Continental waived the issue to prove its damages with reasonable cer- of the conclusive effect of the arbitrators' award - that the tainty. The undated budget produced at the contract did not prevent recovery of benefit of the bargain hearing does not alone constitute compe- damages - by failing to present the issue to the trial court tent evidence of the expenses saved as a in its response to the Lawyers' motion for summary consequence of the breach. Continental did judgment. The record establishes that Continental raised not sustain its burden of proof on any the issue for the first [**7] time in its motion for re- "benefit of the bargain" damages, and we hearing and/or new trial. TEX.R.CIV.P. 166a(c) provides therefore decline to award such damages. that "issues not expressly presented to the trial court by written motion, answer or other response shall not be considered on appeal as grounds for reversal." Continen- The arbitrators did, however, award the following dam- tal's failure to raise the issue of the conclusive effect of the ages [**5] to Continental: (1) $ 1,056,000 for services arbitrators' award in its response to the Lawyers' motion performed under the contract before Western terminated for summary judgment constituted a waiver of the issue. it; and (2) $ 2,251,405 for costs that Continental incurred Kelley-Coppedge, Inc. v. Highlands Insurance Company, in performing the contract. 980 S.W.2d 462, 467, 42 Tex. Sup. Ct. J. 130 (Tex. 1998)(holding that a party waived reliance on an Continental defines its benefit of the bargain damages argument that it asserted for the first time in a motion for under the contract as "those profits that it would have Page 3 132 S.W.3d 471, *; 2003 Tex. App. LEXIS 9952, **

new trial)(citing McConnell v. Southside Independent arbitration award. Postlewaite v. McGraw-Hill, supra at School District, 858 S.W.2d 337, 343, 36 Tex. Sup. Ct. J. 48; Tarter v. Metropolitan Savings & Loan Association, (Tex. 1993), and City of Houston v. Clear Creek Basin supra at 927. We need not determine whether the arbi- Authority, supra at 676). Continental's second and third trators decided the limitation-of-liability issue because, issues are overruled. even if they did, their ruling on the issue was not essential to their award. The limitation-of-liability provision in the Even if Continental had presented this issue in its contract constitutes an affirmative defense. See Regency response to the Lawyers' motion for summary judgment, Advantage Limited Partnership v. Bingo Idea-Watauga, the arbitration award would not have bound the trial court Inc., 928 S.W.2d 56, 63 (Tex.App. - Fort Worth 1995), on the limitation-of-liability issue. Continental argues aff'd in part and rev'd in part, 936 S.W.2d 275, 39 Tex. that, although the arbitrators did not refer to the limita- Sup. Ct. J. 1040 (Tex. 1996). The arbitrators ruled that tion-of-liability provision [**8] in their award, the arbi- Continental failed to meet its burden of proof on the issue trators addressed the limitation-of-liability issue and de- of its "lost profits" damages. It is not necessary to address cided the issue in its favor. To support its argument, an affirmative defense when a plaintiff does not first Continental asserts that "the arbitrators would never have establish its affirmative claims for relief. Therefore, a discussed Continental's lost revenue and absence of evi- finding on the limitation-of-liability issue was not essen- dence of expenses saved, had those profits been excluded tial to the arbitrators' award because of their finding of by the Pacific Titan Contract." The Lawyers respond that failure of proof. Even if Continental had presented a col- the limitation-of-liability provision in the contract was an lateral estoppel defense in the trial court, the doctrine of affirmative defense of Western and that the arbitrators collateral estoppel would not have [**11] barred the never reached that affirmative defense issue because of Lawyers from litigating the limitation-of-liability issue.

Continental's insufficient evidence on benefit of bargain Postlewaite v. McGraw-Hill, supra at 48. damages.

An arbitration award is conclusive on the parties as to Continental's Alleged Damages and the Limita- all matters of fact and law submitted to the arbitrators tion-of-Liability Provision because the award has the effect of a judgment of a court The limitation-of-liability provision in Paragraph of last resort. CVN Group, Inc. v. Delgado, 95 S.W.3d 13.2 of the general agreement of the contract provides 234, 238, 46 Tex. Sup. Ct. J. 366 (Tex. 2002); Powell v. that: Gulf Coast Carriers, Inc., 872 S.W.2d 22, 24 (Tex.App. - Houston [14th Dist.] 1994, no writ). This case is not a Neither [Western] or [Continental] direct appeal from an arbitration award. Rather, Conti- shall bear any liability to the other for loss nental attempts to rely on the arbitration award in this of production, loss of profits, loss of collateral proceeding against its former lawyers. In col- business or any other indirect or conse- lateral proceedings, [**9] the courts apply collateral quential damages, including, inter-alia, estoppel principles to arbitration awards. Postlewaite v. special and punitive damages.

McGraw-Hill, 333 F.3d 42, 48 (2nd Cir. 2003); Drago Daic, Trustee v. Nauru Phosphate Royalties, (Texas), Inc., 27 S.W.3d 695, 701 (Tex.App. - Beaumont 2000, Continental asserts that the term "loss of profits" is mod- pet'n den'd); Fluor Daniel, Inc. v. H.B. Zachry Company, ified by the phrase "or any other indirect or consequential Inc., 1 S.W.3d 166, 169 (Tex.App. - Corpus Christi 1999, damages" so as to prevent only the recovery of "indirect" pet'n den'd). "The doctrine of collateral estoppel precludes or "consequential" lost profits damages. Continental ar- relitigation of any ultimate issue of fact actually litigated gues that the limitation-of-liability provision does not and essential to the judgment in a prior suit." Tarter v. preclude its claim for damages because it is seeking to Metropolitan Savings & Loan Association, 744 S.W.2d recover "direct" lost profits damages.

926, 927, 31 Tex. Sup. Ct. J. 195 (Tex. 1988). If an issue was not actually [*475] decided in a prior arbitration Continental correctly states that breach of contract proceeding or if its resolution was not necessary to the damages are categorized as (1) "direct" or "general" arbitration award, its litigation in a subsequent proceeding damages or (2) "consequential" or "special" damages. See is not barred by collateral estoppel. Postlewaite v. Frost Nat. Bank v. Heafner, 12 S.W.3d 104, 111 n. 5 McGraw-Hill, supra at 48. (Tex.App. [**12] - Houston [1st Dist.] 1999, pet'n den'd). Furthermore, lost profits damages may take the Thus, collateral estoppel would have precluded the form of "direct" damages or the form of "consequential" Lawyers from litigating the limitation-of-liability issue damages. See Hycel, Inc. v. American Airlines, Inc., 328 only if (1) the arbitrators decided the limita- F. Supp. 190, 193 (S.D. Tex. 1971); Imaging Systems tion-of-liability issue and (2) the arbitrators' ruling on the International, Inc. v. Magnetic Resonance Plus, Inc., 227 limitation-of-liability [**10] issue was essential to the Page 4 132 S.W.3d 471, *; 2003 Tex. App. LEXIS 9952, **

Ga. App. 641, 490 S.E.2d 124 (Ga. 1997). Profits lost on Paragraphs 2 and 3 of the supplemental agreement the breached contract itself, such as the amount that Con- provided in part: tinental would have received on the contract less its saved expenses, are classified as "direct" damages. Profits lost 2. The daily charter rate for the Pacific on other contracts or relationships resulting from the Titan is US $ 33,000.00 per day. This breach are classified as "indirect" damages. See Imaging amount is payable for each day the vessel Systems International, Inc. v. Magnetic Resonance Plus, is under contract, regardless of whether or Inc., supra. Continental's alleged lost profits damages are not the vessel is acquiring seismic data. "direct" damages.

3. In addition, the Pacific Titan will The issue is whether the limitation-of-liability pro- receive US $ 55.00 per CMP kilometer for vision precludes the recovery of "direct" profits damages. all accepted CMP kilometers.

In construing a written contract, the primary concern of [*476] the court is to ascertain the true intentions of the parties as expressed in the instrument. R & P Enterprises Thus, the early termination remedy [**15] set forth v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518, in Section III, Paragraph 6 of the general agreement and 23 Tex. Sup. Ct. J. 280 (Tex. 1980). [**13] To achieve Paragraphs 2 and 3 of the supplemental agreement pro- this objective, courts should examine and consider the vided that Continental would receive: (1) $ 33,000 for entire writing in an effort to harmonize and give effect to each day that the vessel was under contract and (2) $ 55 all of the provisions of the contract so that none will be per CMP kilometer for all accepted CMP kilometers. The rendered meaningless. Coker v. Coker, 650 S.W.2d 391, vessel was under contract until December 29, 1998, the 26 Tex. Sup. Ct. J. 368 (Tex. 1983); Southland Royalty date that Western terminated the contract.

Company v. Pan American Petroleum Corporation, 378 S.W.2d 50, 7 Tex. Sup. Ct. J. 171 (Tex. 1964); Universal C. The early termination remedy limited Continental's I. T. Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d recovery of damages under the schedule to the time period 154, 158 (Tex. 1951). No single provision taken alone will that the vessel was under contract. In this case, however, be given controlling effect; rather, all of the provisions Continental seeks to recover "direct" lost profits for the must be considered with reference to the whole instru- time period that the contract would have been in effect ment. Myers v. Gulf Coast Minerals Management Cor- had Western not terminated it. As such, Continental's poration, 361 S.W.2d 193, 196, 6 Tex. Sup. Ct. J. 24 alleged "direct" lost profits damages relate to a time pe- (Tex. 1962); Citizens Nat. Bank in Abilene v. Texas & P. riod that the vessel was no longer under contract; there- Ry. Co., 136 Tex. 333, 150 S.W.2d 1003, 1006 (Tex. 1941). fore, Continental's requested remedy is inconsistent with The courts give terms their plain, ordinary, and generally the early termination remedy. The contract's early termi- accepted meaning unless the instrument shows that the nation remedy is consistent with interpreting the limita- parties used them in a technical or different sense. Her- tion-of-liability provision to preclude the recovery of itage Resources, Inc. v. NationsBank, 939 S.W.2d 118, "direct" lost profits. Otherwise, Continental would be 122, 39 Tex. Sup. Ct. J. 537 (Tex. 1996). permitted to recover [*477] damages in excess of those permitted by the early termination remedy.

We will apply these rules of construction in deter- mining whether the contract precludes [**14] Conti- [**16] Other rules of contract construction also nental's recovery of "direct" lost profits damages. The support a conclusion that Western and Continental in- contract included: (1) a general agreement; (2) a supple- tended to preclude the recovery of "direct" lost profits mental agreement; and (3) a supplemental agreement No. damages. The plain, ordinary, and generally accepted 2. The contract provided Continental with a specific meaning of the term "loss of profits" includes "direct" remedy in the event of early termination for reasons other damages and "indirect" damages. Hycel, Inc. v. American than Continental's default. Section III, Paragraph 6 of the Airlines, Inc., supra; Imaging Systems International, Inc. general agreement provided: v. Magnetic Resonance Plus, Inc., supra. Continental's and Western's use of the phrase "or any other indirect or CONTRACT RATE consequential damages" does not establish that they in- tended to alter the plain meaning of "loss of profits." If [Western] shall pay [Continental] in accordance with Continental and Western had intended to preclude only the rates, charges and fees, and on the terms set out in the recovery of "indirect" lost profits, they did not need to Supplemental Agreement....Additionally, in the event of include the phrase "loss of profits" in the provision be- early termination for reasons other than [Continental's] cause a general prohibition of recovery of "indirect" default, [Continental] shall be compensated according to damages would include "indirect" lost profits. Therefore, the schedule contained in Supplemental Agreement. (Emphasis added) Page 5 132 S.W.3d 471, *; 2003 Tex. App. LEXIS 9952, **

to adopt Continental's interpretation of Paragraph 13.2 [**17] This Court's Ruling would render the term "loss of profits" meaningless.

The judgment of the trial court is affirmed.

We find that Paragraph 13.2 unambiguously pre- TERRY McCALL cludes the recovery of "direct" and "indirect" lost profits damages. Continental's first, fourth, and fifth issues are JUSTICE overruled.

Page 1 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680

COUNTY OF CAMERON, PETITIONER v. CHARLENE MILLS BROWN, IN- DIVIDUALLY, CLIFTON LINWOOD BROWN, INDIVIDUALLY AND AS LE- GAL REPRESENTATIVES OF THE ESTATE OF NOLAN BARRETT BROWN, DECEASED, AND JEFF FARRINGTON, RESPONDENTS NO. 00-1020 SUPREME COURT OF TEXAS 80 S.W.3d 549; 2002 Tex. LEXIS 58; 45 Tex. Sup. J. 680 October 3, 2001, Argued May 23, 2002, Opinion Delivered PRIOR HISTORY: [**1] ON PETITIONS FOR darkness and constituted a premises defect for which the REVIEW FROM THE COURT OF APPEALS FOR THE Texas Tort Claims Act waives governmental immunity.

THIRTEENTH DISTRICT OF TEXAS. The trial court ruled that the plaintiffs' pleadings fail to Brown v. Texas DOT & Cameron County, 2000 Tex. App. state a claim under the Act, [**2] and granted the de- LEXIS 5560 (Tex. App. Corpus Christi Aug. 17, 2000) fendants' pleas to the jurisdiction. The court of appeals reversed, holding that the pleadings and evidence estab- DISPOSITION: Judgment of the Court of Appeals lished a premises defect for which immunity was waived. reversing dismissal by the trial court is affirmed; cause S.W.3d . We must decide whether the plaintiffs' remanded to the trial court for further proceedings. pleadings, together with pertinent jurisdictional evidence, are sufficient to raise a premises-defect claim within the Act's immunity waiver.

COUNSEL: For PETITIONER: Kraehe, Mr. George The defendants argue that the failed lighting cannot Christian, Brownsville, TX. under any circumstances constitute a premises defect because the resulting darkness was open and obvious, and For RESPONDENT: Jensen, Mr. Brian L., Jensen Rosen not an unreasonably dangerous condition. But whether or & Steinberg, Houston, TX, Bright, Mr. David T., Watts & not that ultimately proves to be the case, we hold that the Heard, Corpus Christi, TX, Prestia, Mr. Joseph, Presita & pleadings and jurisdictional evidence do not affirmatively Ornelas, Edinburg, TX. negate the existence of an unreasonably dangerous con- dition. Thus, the trial court should not have dismissed the JUDGES: JUSTICE O'NEILL delivered the opinion of plaintiffs' claims on this basis. The plaintiffs' pleadings do the Court, in which CHIEF JUSTICE PHILLIPS, JUS- fail, however, to allege another necessary premises-defect TICE ENOCH, JUSTICE BAKER, JUSTICE element -- that the plaintiffs did not actually know of the HANKINSON, and JUSTICE RODRIGUEZ joined. dangerous condition. Because the plaintiffs must be af- JUSTICE JEFFERSON filed a concurring opinion, in forded an opportunity to amend to remedy this omission, which JUSTICE OWEN joined. JUSTICE RODRIGUEZ we affirm the court of appeals' judgment reversing and filed a concurring opinion. JUSTICE HECHT filed a remanding [**3] the case to the trial court. dissenting opinion.

I. Background OPINION BY: Harriet O'Neill This case arises from an auto accident that occurred on the Queen Isabella Causeway, which is the only bridge OPINION connecting [*553] South Padre Island to the Texas [*552] In this wrongful-death action, plaintiffs mainland. Nolan Brown was crossing the causeway at claim that a failed block of lights at the end of an elevated about 3:00 a.m., traveling east toward South Padre, when and curving causeway, with narrow shoulders and limited he lost control of his truck. Brown's truck struck the con- access, suddenly and unexpectedly plunged motorists into crete median that separates the two east-bound lanes from Page 2 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 the two west-bound lanes, skidded, and turned over on its gued that providing roadway illumination is a discretion- side. When it came to rest, Brown's passenger exited the ary function, so that they owed no duty to ensure illumi- vehicle through the sunroof. While Brown was attempting nation on the causeway. Defendants further argued that the same escape, an oncoming car driven by Hector there was no duty to warn motorists of the failed lighting Mucio Martinez crashed into Brown's truck. Brown died because the defective condition, which they describe as at the scene. "darkness," was open and obvious, and not an unreason- ably dangerous condition as a matter of law.

The record indicates that the causeway curves, has narrow shoulders, and rises approximately 109 feet above In response, [**6] the plaintiffs acknowledged the bay. Once drivers enter the causeway, a concrete me- that the defendants had no initial duty to illuminate the dian prevents them from turning around. When the acci- causeway, but claimed that the decision to install street- dent in this case occurred, a block of streetlights on the lights gave rise to a nondiscretionary duty to maintain causeway's eastern section was not functioning. The first [*554] them. Plaintiffs further responded that, because part of the bridge was illuminated for traffic heading the causeway entrance was illuminated, the sudden toward South Padre Island, but there was no illumination darkness from the block of failed lighting came upon at the accidents' scene. drivers unexpectedly, thus leaving the question of the condition's open and obvious nature for the jury to con- The [**4] State owns the causeway and its street- sider. light system. However, Cameron County assumed certain maintenance responsibilities over the causeway's street- After an evidentiary hearing, and without ruling on light system under an agreement with the Texas Depart- the defendants' special exceptions, the trial court granted ment of Transportation ("TxDOT"). 1 Correspondence the defendants' jurisdictional pleas, dismissed the claims between TxDOT and the County shows that maintaining against them, and severed them from the underlying the causeway's streetlights had been a problem since at claims against the contractor and Martinez. The court of least 1995. In November of that year, Kenneth Conway, a appeals reversed the trial court's judgment, holding that county park-system director, wrote to TxDOT's district (1) maintaining the causeway's streetlights was not a engineer that thirty causeway streetlights were not func- discretionary function exempt from the Tort Claims Act's tioning and presented a "serious safety hazard." In an immunity waiver, and (2) the plaintiffs' allegations and April 1996 letter to TxDOT, Conway wrote that "incon- the pertinent jurisdictional evidence were sufficient to sistent lighting on the causeway presents a safety hazard raise a premises-defect claim under the Act. 2000 Tex. to the traveling public, particularly motorists who may be App. LEXIS 5560, __ S.W.3d __. We granted review to stranded in poorly lit sections." By August 1996, over consider whether the plaintiffs' claims fall within the Tort thirty streetlights had failed, and the record indicates that Claims Act's sovereign-immunity [**7] waiver. at least that many were not functioning a month later when the accidents occurred. II. The Tort Claims Act The State, its agencies, and subdivisions, such as Among themselves, TxDOT and the County counties, generally enjoy sovereign immunity from tort disputed their respective responsibilities under the liability unless immunity has been waived. See TEX. maintenance agreement. The lower courts did not CIV. PRAC. & REM. CODE §§ 101.001(3)(A)-(B), consider this issue, nor do the parties raise it here.

101.025; Texas Dep't of Transp. v. Able, 35 S.W.3d 608, [**5] Brown's survivors sued TxDOT, the County, 611, 43 Tex. Sup. Ct. J. 1055 (Tex. 2000). The Tort Claims the contractor the County hired to repair the streetlights, Act expressly waives sovereign immunity in three general and Martinez. The plaintiffs alleged that Brown was areas: "'use of publicly owned automobiles, premises stranded in a poorly lit section of the causeway when he defects, and injuries arising out of conditions or use of was fatally injured, and that defective wiring caused the property.'" 2 Able, 35 S.W.3d at 611 (quoting Lowe v. streetlights to fail, creating an unreasonably dangerous Texas Tech Univ., 540 S.W.2d 297, 298 (Tex. 1976)). But condition. They alleged that the causeway's condition the Act does not waive immunity for discretionary deci- constituted a premises defect, a special defect, or a misuse sions, such as whether and what type of safety features to of personal property, for which the Tort Claims Act provide. See TEX. CIV. PRAC. & REM. CODE § waives governmental immunity. Brown's passenger in- 101.056; State v. San Miguel, 2 S.W.3d 249, 251, 42 Tex. tervened to seek recovery for his own injuries. Sup. Ct. J. 1139 (Tex. 1999).

TxDOT and the County filed special exceptions and 2 Although the plaintiffs alleged that the pleas to the jurisdiction, arguing that the plaintiffs' alle- causeway's failed lighting constituted a premises gations failed to state claims within the Act's sover- defect, a special defect, and a misuse of tangible eign-immunity waiver. Specifically, the defendants ar- property, the court of appeals considered only Page 3 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 their premises-defect claim. Here, too, the parties 868, 44 Tex. Sup. Ct. J. 667 (Tex. 2001); Bland Indep. focus almost exclusively on that claim. Thus, we Sch. Dist. v. Blue, 34 S.W.3d 547, 554, 44 Tex. Sup. Ct. consider only whether the pleadings and jurisdic- J. 125-55 (Tex. 2000). 3 When we consider a trial court's tional evidence raise a premises-defect claim order on a plea to the jurisdiction, we construe the within the Act's sovereign-immunity waiver. pleadings in the plaintiff's favor and look to the pleader's intent. See Texas Ass'n of Bus. v. Texas Air Control [**8] The Act provides that a governmental unit is Bd., 852 S.W.2d 440, 446 (Tex. 1993); Peek v. Equip- liable for injury and death caused by a condition of real ment Serv. Co. of San Antonio, 779 S.W.2d 802, 804-05 property "if the governmental unit would, were it a private (Tex. 1989). When a plaintiff fails to plead facts that person, be liable to the claimant according to Texas law." establish jurisdiction, but the petition does not af- TEX. CIV. PRAC. & REM. CODE § 101.021(2). With firmatively demonstrate incurable defects in jurisdic- respect to ordinary premises defects, however, the Act tion, the issue is one of pleading sufficiency and the specifically limits the governmental duty owed to a plaintiff should be afforded the opportunity to amend. claimant to "the duty that a private person owes to a li- See Peek, 779 S.W.2d at 804-05; Texas Dep't of Cor- censee on private property." TEX. CIV. PRAC. & REM. rections v. Herring, 513 S.W.2d 6, 9-10 (Tex. 1974). On CODE § 101.022(a). Thus, a governmental unit may be the other hand, if the pleadings affirmatively negate liable for an ordinary premises defect only if a private the existence of jurisdiction, then a plea to the juris- person would be liable to a licensee under the same cir- diction may be granted without allowing the [**11] cumstances. plaintiff an opportunity to amend. See Peek, 779 A licensee asserting a premises-defect claim gener- S.W.2d at 804-05. ally must show, first, that the defendant possessed -- that is, owned, occupied, or controlled -- the premises where 3 The County argues that the court of ap- the injury occurred. Wilson v. Texas Parks & Wildlife peals erred in considering evidence outside of Dep't, 8 S.W.3d 634, 635, 43 Tex. Sup. Ct. J. 148 (Tex. the pleadings in reviewing the pleas to the ju- 1999) (per curiam denying petition for review) (citing risdiction. Given our holdings in Bland and City of Denton v. Van Page, 701 S.W.2d 831, 835 (Tex. White, which the County does not cite, this 1986)). A property possessor must not injure a licensee by argument has no merit. Bland, 34 S.W.3d at willful, wanton, [**9] or grossly negligent conduct, 554-55; White, 46 S.W.3d at 868. and must use ordinary care either to warn a licensee of a IV. Discussion condition that presents an unreasonable risk of harm of which the possessor is actually aware and the licensee is Defendants argue that, for several reasons, the plain- not, or to make the condition reasonably safe. [*555] tiffs have either failed to allege or their pleadings effec- State Dep't of Highways & Pub. Transp. v. Payne, 838 tively negate certain elements of a premises-defect claim S.W.2d 235, 237 (Tex. 1992). within the Act's immunity waiver. First, the County con- tends that it neither owned nor exercised exclusive control Here, the plaintiffs have not alleged that the de- over the causeway or its streetlight system, and therefore fendants injured them willfully or wantonly, or that they cannot be held liable for the alleged premises defect. were grossly negligent. And although the defendants Second, the County contends that the plaintiffs have not argue generally, as a policy matter, that the court of ap- alleged a condition posing an unreasonable risk of harm peals' decision impinges upon governmental units' dis- because it was not foreseeable that Brown would lose cretion in deciding whether and what kind of lighting to control [**12] of his vehicle and then be struck by a install along roadways, they do not challenge the court of motorist while attempting to exit the wreckage. Third, the appeals' holding that the plaintiffs' claims in this case are defendants claim that any risk of harm presented by the based upon the defendants' maintenance of the causeway alleged defect was not unreasonable when weighed lighting and thus do not concern discretionary acts. Ac- against the burden that governmental entities would face cordingly, we consider only whether the plaintiffs' if the defendants here could be held liable for the failed pleadings and jurisdictional evidence are sufficient to block of lighting. Fourth, the defendants characterize the allow them to maintain a premises-defect claim within the alleged dangerous condition as "darkness at night," and Act's immunity waiver. argue that this condition is so open and obvious that III. Standard of Review knowledge of the condition should be imputed to cause- way motorists. Finally, the defendants contend that, even In deciding a plea to the jurisdiction, a court may if knowledge of the dangerous condition cannot be not weigh the claims' [**10] merits but must con- [*556] imputed to the plaintiffs, the plaintiffs neverthe- sider only the plaintiffs' pleadings and the evidence less failed to plead an element necessary to maintain their pertinent to the jurisdictional inquiry. Texas Natural Res. Conservation Comm'n v. White, 46 S.W.3d 864, Page 4 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 premises-defect claim, that is, that they did not actually ble-risk-of-harm element. As the court of appeals ob- know of the danger. served, "the Causeway is more dangerous than an ordi- nary road" upon the complete failure of a large block of A. Possession of the Premises streetlights. 2000 Tex. App. LEXIS 5560 at *8, S.W.3d at . The causeway curves and ascends to an The County argues that it cannot be subjected to a approximate height of 109 feet above the water, its premises-liability claim within the Act's immunity waiver shoulders are narrow, and concrete barriers prevent mo- because it neither owned nor exercised exclusive control torists who drive onto it from turning around. We cannot over the causeway or its streetlight system. See Wilson, 8 say, as a matter of law, that it is unforeseeable that a sig- S.W.3d at 635. But a premises-liability defendant may be nificant and unexpected change in lighting at night on a held liable for a dangerous [**13] condition on the narrow and curving causeway could impair a motorist's property if it "assumed control over and responsibility for ability to avoid obstacles that lie ahead. While Brown's the premises," even if it did not own or physically occupy alleged lack of care may be an issue of comparative re- the property. Van Page, 701 S.W.2d at 835; see also sponsibility for the jury to decide, see TEX. CIV. PRAC.

Wilson, 8 S.W.3d at 635. The relevant inquiry is whether & REM CODE § 33.012, it does not render the subsequent the defendant assumed sufficient control over the part of harm in this case unforeseeable. [*557] Furthermore, the premises that presented the alleged danger so that the we cannot determine from the pleadings and the limited defendant had the responsibility to remedy it. Cf. Van jurisdictional evidence that Brown was in fact negligent in Page, 701 S.W.2d at 833-34 (concluding that the city did operating his vehicle. not assume control over a storage building, which was on plaintiff's lot and which housed the alleged dangerous Importantly, correspondence in the record reveals condition). Here, the plaintiffs allege that the County that the defendants themselves knew of the general [**16] "maintained the [causeway] pursuant to a contract with danger that the causeway's numerous, nonfunctioning the State." And it is undisputed that the County assumed streetlights posed. Kenneth Conway, the County's certain maintenance responsibilities over the causeway's park-system director, described the failed lighting as "a streetlight system. Construing the pleadings in the plain- serious public safety issue" and "a serious safety hazard." tiffs' favor, we conclude that they adequately allege the In a letter to TxDOT, Conway specifically identified the first element of a premises-liability claim - that the danger posed to motorists "stranded in poorly lit sections" County possessed the property. See id. of the causeway. The general foreman of the contractor hired to repair the lights, too, recognized the danger. He B. Foreseeablity of Harm wrote in a letter that the causeway's lighting system posed an "extreme hazard." Considering the pleaded facts and A condition poses an unreasonable risk of harm for the record evidence, we cannot conclude that the events in premises-defect purposes when there [**14] is a "suffi- question were not foreseeable. cient probability of a harmful event occurring that a rea- sonably prudent person would have foreseen it or some C. Unreasonableness of Risk similar event as likely to happen." Seideneck v. Cal Bayreuther Assocs., 451 S.W.2d 752, 754 (Tex. 1970) . The defendants argue that conditions on the cause- The County contends that the pleaded condition did not way did not present a risk of harm that was unreasonable pose an unreasonable risk of harm because a reasonably when measured against the burden that governmental prudent person could not have foreseen that a driver such entities would face if the County and TxDOT could be as Brown would lose control of his vehicle and then, while held liable in this case. They contend that allowing the exiting the wreckage, be struck by another motorist. But plaintiffs' claims to proceed will effectively require gov- foreseeability does not require that the exact sequence of ernmental entities to either light every stretch of public events that produced an injury be foreseeable. See roadway or remove all lighting, because any unexpected Walker v. Harris, 924 S.W.2d 375, 377, 39 Tex. Sup. Ct. J. illumination change might constitute a premises defect for (Tex. 1996); see also Clark v. Waggoner, 452 which they [**17] may be held liable. Governmental S.W.2d 437, 440 (Tex. 1970) (stating that foreseeability entities could face liability, they claim, for every street- prong of proximate cause does not "require that [de- light that might flicker or go out. But our holding is not so fendants] anticipate just how injuries will grow out of broad. A governmental unit's sovereign immunity is not [the] dangerous situation"). Instead, only the general waived for failure to install lighting, which is a discre- danger must be foreseeable. Walker, 924 S.W.2d at 377. tionary decision, or even for not repairing lighting that has Here, focusing on the general danger and the causeway's been installed if an unreasonably dangerous condition is particular characteristics, we cannot say that the plaintiffs not thereby created. Our decision rests upon the cause- failed to plead, or that their [**15] pleadings affirma- way's unique characteristics and the nature of the partic- tively negate, their premises-liability claim's unreasona- ular dangerous condition alleged.

Page 5 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 The County analogizes the dangerous condition al- travel lanes in each direction and prevents drivers from leged here to visual obstructions along roadways caused turning back once embarking upon the bridge. Only a by overgrown vegetation. We have recognized that relatively narrow shoulder beside the traffic lanes is holding counties liable for failing to remove such ob- available to accommodate vehicles in emergency situa- structions could impose a significant burden on counties. tions.

See Jezek v. City of Midland, 605 S.W.2d 544, 546-47 On the evening in question, the causeway was lit at (Tex. 1980). But the County misconstrues the plaintiffs' the point of entry, but there was no illumination further pleadings. Unlike Jezek, the condition alleged here is not [**20] along the causeway at the accident scene. The simply a naturally occurring one that causes a visual ob- relevant inquiry is whether the lighting failure was open struction, but rather a malfunctioning block of artificial and obvious to motorists entering the causeway, because lighting that the defendants failed to maintain, causing a that is the point at which they could choose to avoid the sudden and unexpected change in driving [**18] condi- condition or otherwise protect themselves. Cf. Harvey v. tions.

Seale, 362 S.W.2d 310, 312 (Tex. 1962) (stating that a licensee "can remain off the premises if he does not wish D. Knowledge of the Condition to subject himself to the risk of injury" from an open and Tort law has long recognized that a landowner has a obvious condition). Construing the pleadings and the privilege to "make use of the land for his own benefit, and jurisdictional evidence in the plaintiffs' favor, and con- according to his own desires." PROSSER & KEETON, sidering the causeway's particular characteristics, we PROSSER & KEETON ON TORTS § 57, at 386 (Law- cannot say that sudden darkness created by the failed yers' ed. 1984). The extent of that privilege, however, lighting at the accident scene was a danger open and ob- varies depending upon the character of the owner's con- vious to motorists entering the illuminated causeway so sent to others' entry on the premises. See RESTATEMENT that knowledge of the condition should be imputed to (SECOND) OF TORTS § 342 cmt. h. Because a licensee them as a matter of law. Accordingly, we cannot conclude enters for his or her own purposes, "he has no right to that the pleadings affirmatively negate the plaintiffs' lack demand that the land be made safe for his reception, and of actual knowledge. he must in general . . . look out for himself." PROSSER & KEETON, PROSSER & KEETON ON TORTS § 60, at 2. Actual Knowledge (Lawyers' ed. 1984). If a licensee is aware of a dan- The defendants contend that, even if we cannot im- gerous condition, he has all that he is entitled to expect, pute knowledge of the alleged dangerous condition from that is, an opportunity for an intelligent choice as to the pleadings, the plaintiffs failed to plead that they did whether the advantage to be gained by coming on the not actually know of the [**21] condition. 4 The de- [*558] land is sufficient to justify him in incurring the fendants contend that the trial court's dismissal order risks involved. RESTATEMENT (SECOND) OF TORTS § should be upheld on this basis. We agree that the plaintiffs cmt. l. Thus, to establish liability for a premises de- failed to allege this necessary premises-defect element. fect, a licensee must prove that he or she did not actually Moreover, we disagree with the court of appeals' conclu- know of the condition. See Payne, 838 S.W.2d at 237. sion that we can infer this element from the pleadings. [**19] Nevertheless, the court of appeals did not err in reversing the trial court's judgment and remanding, because the 1. Imputed Knowledge plaintiffs' [*559] pleadings do not affirmatively Defendants contend that the dangerous condition demonstrate an incurable jurisdictional defect, but merely here is nothing but "darkness at night," which is so open a pleading deficiency. Because the trial court did not rule and obvious that knowledge of the condition must be on the defendants' special exceptions and allow the imputed to causeway users. This imputed knowledge, plaintiffs an opportunity to amend their pleadings, omit- they claim, negates an essential element of the plaintiffs' ting this element cannot support the trial court's judgment. premises-defect claims. See id. But construing the plain- See Herring, 513 S.W.2d at 9-10 (holding that when the tiffs' allegations in favor of jurisdiction, as we must, the allegations do not "affirmatively negate" a claim, dis- dangerous condition alleged is not merely "darkness" but missal for failure to state a claim is appropriate only when a failed block of artificial lighting that caused a sudden, the plaintiff has been "given an opportunity to amend after unexpected and significant transition from light to dark- special exceptions have been sustained"); see also 7 ness. This condition may or may not have been open and WILLIAM V. DORSANEO III, TEXAS LITIGATION obvious to ordinary users considering the causeway's GUIDE § 70.03[4][f] (stating that after a trial court sus- particular characteristics. Specifically, the record indi- tains special exceptions, "the pleader must [**22] be cates that the causeway is narrow, curves, and rises high given, as a matter of right, an opportunity to amend"). above the bay. A cement median barrier separates the two Accordingly, we affirm the court of appeals' judgment Page 6 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 reversing and remanding the case, because the plaintiffs spondents have failed to state a cause of action under the should be afforded an opportunity to amend their plead- Torts Claims Act. But because the respondents' pleadings ings. do not negate jurisdiction, I respectfully concur in the Court's judgment only.

4 At oral argument, plaintiffs suggested for the Certainly, the facts of the case are disturbing. The first time that the relevant inquiry is not whether accident occurred on the South Padre Island Causeway, a Brown actually knew of the dangerous condition, lengthy stretch of elevated, curving highway connecting a but whether Martinez, the motorist who struck major tourist destination to the mainland. Although con- him, knew. While it is true that Martinez is also a tinuous illumination was installed along the route, on the licensee, the ultimate issue is whether the de- night of the accident a bank of lights was not functioning. fendants acted reasonably toward Brown and his They had been malfunctioning for some time, and the passenger. Thus, the proper focus is whether the County's park-system director considered this fact to be "a plaintiffs themselves actually knew of the alleged serious safety hazard." Nolan Brown lost control of his dangerous condition. truck at that site [*560] and the truck hit a median and overturned. Another vehicle crashed into the overturned V. Conclusion truck, resulting in Brown's death. These tragic facts are We hold that, considering the causeway's particular unique, but then, so are the facts of many other accidents. characteristics, the large block of nonfunctioning street- The Court identifies a number of factors that pur- lights, and the defendants' own knowledge of the danger portedly distinguish this case from other [**25] thor- to causeway users, the pleadings do not affirmatively oughfares. We are told, for example, that this case in- negate the existence of an unreasonably dangerous con- volves a causeway that curves and ascends, has narrow dition. We conclude, however, that [**23] the plaintiffs shoulders, concrete barriers, and a block of malfunction- failed to plead that they did not actually know of the ing lights that caused "a sudden and unexpected change in dangerous condition, an element necessary to prove a driving conditions." 2000 Tex. App. LEXIS 5560 at premises-defect claim. Because this pleading defect is one *7, S.W.3d . Although the number of causeways in for which the plaintiffs should be afforded an opportunity this State are relatively few, the remaining factors, alone to amend, we affirm the court of appeals' judgment re- or in combination, describe highways and byways in versing the trial court's dismissal for lack of jurisdiction every county and city throughout the State. and remanding the case to the trial court.

Public roads are generally constructed, owned, and Harriet O'Neill maintained by governmental entities. For that reason, Justice those entities are potential defendants in nearly every automotive accident case. In many cases, competent at- CONCUR BY: WALLACE B. JEFFERSON; XAVIER torneys can argue plausibly that the circumstances in their RODRIGUEZ client's case are at least as unique as the circumstances here. Because the Court's opinion does not identify any CONCUR limiting principle, accidents on roads with defective il- lumination, curves or hills, or with concrete barriers or JUSTICE JEFFERSON, joined by JUSTICE OWEN, narrow shoulders, will be sure to inspire litigation in concurring in the judgment. which County of Cameron will become the standard re- The Court holds that the unique characteristics of the buttal to jurisdictional pleas. causeway constitute an "unreasonably dangerous condi- The installation of roadway lighting is a discretionary tion" for which governmental entities may be liable under decision that governmental agencies [**26] balance the Texas Tort Claims Act. But the Court never articulates along with other resource-allocation decisions. No statute a principle to identify in future cases the characteristics requires that governmental entities provide roadway that will give rise to a cause of action within the terms of lighting. And no statute requires governmental entities to the Act. In this area of governmental immunity, the warn of absent lighting or changed conditions of roadway Court's "I know it when I see it" analysis exacts too great a lighting. The Legislature has entrusted these matters to price. The resulting uncertainty from the Court's lack of governmental discretion. But beginning today, govern- guidance will, I fear, inundate courts with claims against mental entities must exercise this discretion at their peril. state and local governments for what amounts to discre- tionary decisions involving [**24] the design and illu- After today, governmental entities will balance the mination of Texas roadways. In my view, this uncertainty decision to illuminate roadways against the real possibil- is unwarranted because darkness is not an unreasonably ity that those lights, once installed, might fail and thrust dangerous condition. Thus, I would hold that the re- drivers into "sudden darkness" at night. They will weigh Page 7 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 the social utility of additional lighting against the very real when the pleadings [**29] do not allege enough juris- threat that scarce resources will be spent defending claims dictional facts. Texas Ass'n of Bus. v. Texas Air Control involving accidents where some segment of those lights Bd., 852 S.W.2d 440, 446 (Tex. 1993). While it may be has malfunctioned. Assuming those entities are risk unlikely that the respondents will be able to plead suffi- averse, the prudent course may well be to adopt a con- cient jurisdictional facts, they should be allowed that servative stance and reduce or eliminate highway-lighting opportunity. For this reason only, I concur in the Court's initiatives. However, this Court should not impose that judgment.

Hobson's choice on governmental entities.

WALLACE B. JEFFERSON More than two decades ago, in Jezek v. City of Mid- JUSTICE land, 605 S.W.2d 544 (Tex. 1980), this Court recognized the [**27] obvious dangers in imposing a similar duty JUSTICE RODRIGUEZ, concurring. on counties. We stated: "It would be a rigorous burden The plaintiffs acknowledge that the governmental indeed for a rural county in a state such as Texas to police defendants were not required by any law to illuminate the and remove vegetation from roads when they cause visual causeway. Their initial decision to illuminate the highway obstruction." Id. at 547. But today, instead of reaffirming what we said in Jezek, the Court attempts to distinguish was a discretionary act. CIV. PRAC. & REM. CODE § this case because "the condition alleged here is not simply 101.056. The question then arises: after a governmental unit decides to install streetlights, does it have a duty to a naturally occurring one that causes a visual obstruction, ensure that the lights work properly? but rather a malfunctioning block of artificial lighting that the defendants failed to maintain . . . ." 2000 Tex. App. The Court decides, and I agree, that the plaintiffs' LEXIS 5560 at *7, __ S.W.3d __. I am not persuaded by pleadings and the evidence in this case are sufficient to the Court's distinction. Darkness is certainly naturally raise a premises defect claim. "If a claim arises from a occurring and a governmental entity's failed attempts to premise defect, the governmental unit owes to the protect against the dangers posed by darkness do not claimant only the duty that a private person owes to a create an unreasonably dangerous condition. At some licensee on private property . . . ." Id. § 101.022(a). We point along every highway, streetlights end, plunging have previously stated in City of Grapevine v. Roberts, drivers into darkness. And requiring governmental enti- 946 S.W.2d 841, 40 Tex. Sup. Ct. J. 623 (Tex. 1997), ties to shield drivers from every transition from light to [**30] that: dark along a roadway would be a heavy burden indeed. if the condition was an ordinary premise defect, the [*561] Today's decision is even more alarming [governmental unit] owed [the plaintiff] the same duty because, under the Court's analysis the ultimate question - that a private landowner owes a licensee. Generally, the whether the roadway is "unreasonably dangerous" [**28] duty a landowner owes a licensee is not to injure the li- - is answered not only by the existence of malfunctioning censee through willful, wanton, or grossly negligent lights, but also by the extent to which the roadway has conduct. An exception to the general rule is that if the hills or curves, barriers or narrow shoulders. Because landowner has knowledge of a dangerous condition and these roadway design decisions are discretionary, they the licensee does not, the landowner has a duty either to should not be used to aid in establishing liability. State v. warn the licensee or to make the condition reasonably Rodriguez, 985 S.W.2d 83, 85, 42 Tex. Sup. Ct. J. 318 safe. (Tex. 1999) ("Design of any public work, such as a roadway, is a discretionary function involving many pol- Id. at 843 (citations omitted). I agree that the govern- icy decisions, and the governmental entity responsible mental units knew that the lights were not working may not be sued for such decisions."). While I do not properly. I also agree that Brown should be afforded the believe the Court intends to impose liability for discre- opportunity to replead regarding whether he did not ac- tionary acts, the absence of any principled basis for lim- tually know about the allegedly dangerous condition. iting the scope of the Court's opinion is deeply trouble- some and will undoubtedly jeopardize discretionary I write separately, however, to state that I join in the road-design decisions. judgment because our current law mandates this result. I share, however, the concerns expressed by JUSTICE Some areas of the law permit case-by-case devel- HECHT that the "burden on the governments of Texas opment, leaving it to later courts to discern any emerging will be felt" by this opinion. It should be noted that the pattern. But in my view, it is unnecessary in this area of Texas Department of Transportation reports that there are the law. Darkness, however characterized, cannot con- approximately 79,297 "centerline" [*562] miles of stitute an unreasonably dangerous condition. The harm to roads and highways [**31] maintained by the State. 1 In our jurisprudence of so holding is simply too great. We addition, there are 142,170 miles of county roads in generally allow litigants to amend to cure pleading defects Texas. 2 Page 8 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 illumination, and the State has no duty to light the great Pocket Facts, Texas Department of Trans- outdoors." Id. 3 portation (March 2002).

2 Id. 3 Indeed, in Jezek v. City of Midland, 605 S.W.2d 544 (Tex. 1980), this Court similarly rec- Whether to install lights in the first instance is an ognized that counties did not have a duty to clear exercise of the government's discretion. But once having or warn of vegetation that obstructed a driver's done so, the maintenance of such a lighting system is vision. We stated: "It would be a rigorous burden ministerial and does not afford immunity from liability. indeed for a rural county in a state such as Texas to This leads to the absurd result that when a governmental police and remove vegetation from roads when unit builds new roads or streets it should decide not to they cause visual obstruction." Id. at 547. light them. [**34] The Second Court of Appeals was correct.

The Court's opinion is limited to deciding whether a There is no duty to light "the vast areas of Texas" and the plea to the jurisdiction was properly granted, and it does 300,000 plus miles of highways, roads, and streets in this not subject the governmental defendants to any liability.

State. Ironically, the Court's opinion today [*563] Upon remand, Brown will still need to cure his pleading provides no incentive for governmental units to increase defect and establish causation. The problem that exists, public safety in that regard. I defer to the Legislature to act however, is that numerous other governmental defendants upon the County's public policy arguments regarding the will now incur substantial litigation costs ascertaining financial burden that may be placed on counties to main- when bulbs in exterior light fixtures burned out, what tain all exterior lighting. caused the light bulbs to burn out, and whether [**32] the bulbs have been burned out for so long that the gov- XAVIER RODRIGUEZ ernmental entity should have discovered that fact and JUSTICE replaced them. Plaintiffs will second guess (1) when government employees should have arrived to do the DISSENT BY: Nathan L. Hecht necessary repairs, (2) whether the governmental em- ployees should have erected temporary signs, and (3) how DISSENT many employees should have been dispatched to work on the lights. See City of Baytown v. Peoples, 9 S.W.3d 391 JUSTICE HECHT, dissenting. (Tex. App.-Houston [14th Dist.] 1999, no pet.).

Assume for me, if you will, that all roadways that are In Tarrant County Water Control & Improvement dark at night are unreasonably dangerous. This is hard, I District No. 1 v. Crossland, 781 S.W.2d 427 (Tex. know, since almost all of the roadways in the world are App.--Ft. Worth 1989, writ denied), the plaintiffs were dark at night, and for that reason most cars are equipped fatally injured in a nighttime boating accident. There is a with headlamps. But assume that darkness at night is bridge in the portion of the reservoir where they were unreasonably dangerous so that we can take that issue off killed. A boat must slow down to sit lower in the water in the table. (As an aside, I should point out that sunshine can order to go safely under the bridge because of the amount also make a roadway unreasonably dangerous because it of clearance between the water and the underside of the gets in your eyes; but that is not this case, and the Court bridge. Id. at 430. The plaintiffs were killed when their wisely reserves that issue for, as it were, another day.) heads struck the underside of the bridge. Id. The plaintiffs' Before a governmental entity in Texas can be liable for an estates argued that the bridge and reservoir areas should unreasonably dangerous [**35] condition in a roadway, have been lighted and that warning signs should [**33] there must be proof either that the condition was a "special have been provided. In reversing a jury award of over $ defect" -- like an excavation or obstruction 1 -- or that the 1.2 million, the court of appeals noted that the plaintiffs plaintiff did not know of the condition. 2 Since nighttime did not point to any specific act or omission other than the darkness is nothing like an excavation or obstruction, lack of lights at the bridge. Id. at 432. The Second Court Texas law leaves a plaintiff but one avenue (if you will) of of Appeals noted that "the decedents faced the most recovery for damages caused by the relatively regular common and obvious danger known to man, darkness." going down of the sun, and that is to prove that he could Id. at 435. The Second Court of Appeals further observed not see that it was dark. "why [should] the bridge . . . be considered more dan- gerous than any other unlighted recreational area. With 1 TEX. CIV. PRAC. & REM. CODE § 4,790 square miles of inland water and more than 200 101.022(b); State Dep't of Highways. & Pub. major reservoirs, Texas ranks second behind Minnesota Transp. v. Payne, 838 S.W.2d 235, 238 (Tex. for the most inland water among the continental states . . . 1992). . In summary, vast areas of Texas are devoid of artificial 2 Payne, 838 S.W.2d at 237.

Page 9 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 Now one might say: well, that's impossible; any fool 5 Ante at . driving along can tell by looking whether a roadway is I must say that I cannot quite grasp the Court's point light or dark. But the Supreme Court of Texas is not any here. The conditions of the unlighted causeway may have fool; it has an easy answer for such skepticism when "the made it unreasonably dangerous, but we have already dangerous condition alleged is not merely 'darkness' but a assumed (against all common sense) that every unlighted failed block of artificial lighting that caused [**36] a roadway is unreasonably dangerous, even a straight, wide, sudden, unexpected and significant transition from light flat, low one. The issue is not how narrow or curvy or high to darkness." 3 Mind you, no one claims in this case that he a roadway is, or how many lanes it has or how wide its was driving along and the roadway lighting suddenly went shoulder is; the issue is whether a driver can see that it's off. The lights had been off for awhile, long enough for dark or not. Dark, narrow roadways look just as dark as Cameron County to know about it; if that were not true, dark, wide roadways. Widening roads, or straightening the County would not be liable for the darkness for an- them up, or leveling them off, or giving them shoulders other reason, and that is that it did not know the lights does not lighten them up very much. were out. 4 But Cameron County knew the lights were out on a section of the Queen Isabella Causeway for the same Like any driver on any unlighted roadway in the reason that Nolan Brown and Hector Martinez and anyone world, Brown should have known when he came upon the else driving along, or anyone else who just looked, knew dark part [**39] of the causeway that if he stopped for it: because it was dark there. So when the Court says the some reason, a driver coming along behind him might darkness was "sudden", it means nothing more than that plough into him, and Martinez should have known that if the causeway was lighted for a stretch, and then for a he outran his headlights, he might hit something. But, stretch it wasn't. By saying that the darkness was "unex- again, none of this has anything to do with whether a pected", I suppose the Court means that Brown and Mar- driver coming up on a dark road can see that it's dark, tinez had not anticipated as they were driving along that which determines whether the plaintiffs can possibly win the lights might be out. But when they came upon the this case. darkness, they surely must have thought to themselves, So is there any point to this part of the Court's dis- "Hmmm, the highway's dark here," just as if they had come to the end of any lighted roadway. So however cussion? No. Then why is it in the opinion? I can't say. unexpected the darkness [**37] may have been, it was Wholly apart from everything that's been said so far, "the relevant inquiry," the Court says, is "whether the lighting still plain as day, so to speak. And when the Court says the failure was open and obvious to motorists entering the "transition from light to darkness" was "significant", I causeway, because that is the point at which they could confess I haven't a clue what it means. The distinction choose to avoid the condition or otherwise protect them- between darkness that is "significant" and plain old in- significant darkness is lost on me. selves." 6 Now, at last, we're onto something. This at least makes sense. All the plaintiffs must prove in this case is that when Brown entered the causeway, he could not see Ante at (emphasis added). far enough ahead to know that some of the lights were out.

4 Payne, 838 S.W.2d at 237.

He has not pleaded this, the Court says, but he should be It seems obvious that any driver moving down the allowed to amend. Well, I for one am strongly in favor of road can see whether it is dark [*564] no matter how a reasonable opportunity to amend. I do not favor waiver "sudden, unexpected and significant" that darkness is, so I of valid claims [**40] and defenses because of the in- don't quite see what difference any of this makes to advertent mistakes inevitable for even the ablest counsel. whether the plaintiff can prove that he did not know that But there's no point in having the plaintiffs amend their an obviously dark roadway was dark. Either he could see pleadings if they're still going to lose as a matter of law. the road was dark or he couldn't, and how is it possible Amendment is futile unless, if they allege that Brown did that he couldn't and be licensed to drive? It look lighted not know when he entered the causeway that some of it but it really wasn't? Well, the Court says, it was the con- was not lighted, they can prevail. Is that allegation, if dition of the causeway that made all the difference. proved, sufficient to make the County liable for the darkness? Yes, says the Court. Well, then, the County The causeway is narrow, curves, and rises high above should just pay up. Unless it can prove that Brown had the bay. A cement median barrier separates [**38] the supervision (including x-ray vision to see through the two travel lanes in each direction and prevents drivers bridge) or was clairvoyant, it can't possibly escape liabil- from turning back once embarking upon the bridge. Only ity, because no one but Superman and Nostradamus could a relatively narrow shoulder beside the traffic lanes is [*565] possibly have known, entering the causeway, that available to accommodate vehicles in emergency situa- the lights were out ahead. (I assume, as we all must, that tions. 5 Brown hadn't been over the causeway enough at night to know that sometimes the lights were out, and that even if Page 10 80 S.W.3d 549, *; 2002 Tex. LEXIS 58, **; 45 Tex. Sup. J. 680 he had, he had every reasonable expectation that the lights would have been fixed since his last crossing.) 7 Ante at .

And if that's what the Court thinks, why not just say Ante at . so? Why not just say: Look, if you choose to light a [**41] To put the Court's holding as plainly as roadway, you must maintain the lighting or face liability possible: Had the causeway been wider, flatter, or for accidents that happen in areas of darkness. Two rea- straighter, and had it had wider shoulders, Brown could sons, I suppose. One, such a rule of liability could move either have looked down the road and seen that it was dark governments not to light roadways at all rather than face in one spot and then turned back, or pulled over, or liability for inevitable lighting failures, thereby placing somehow stayed in the light (even though he did not know the traveling public in greater danger. And two, the rule he needed to because he did not know he was about to cannot take into account that lighting must end some- wreck his truck on the concrete barrier in the median), but where, and why the effect of that darkness on motorists is he could do none of those things; and even though Brown any different from failed lighting is inexplicable. saw the darkness when he came upon it, it was sudden, It may be, however -- one cannot always tell for sure unexpected, and significant, and besides, he did not know -- that the Court does not really [*566] mean what it of the darkness when he entered the causeway; so there- says. Indeed, in another case decided today, Rocor In- fore the County is liable. Logic does not flow through this ternational, Inc. v. National [**44] Union Fire In- like a quiet stream, I know, but I am trying to restate the surance Co., 8 the Court discloses that it did not really Court's position as accurately as I can. Even if this rule, mean what it said in American Physicians Insurance bizarre as it is, were correct, I am at a loss to understand Exchange v. Garcia. 9 So it does happen, much too often, its application to this case. What difference could it pos- and it may be that this case is just another "restricted sibly have made to Brown had he known when he entered railroad ticket, good for this day and train only." 10 While the causeway that part of it was unlit? He never thought he we can't say that all highways should be lighted, or even was going to wreck his truck, in the darkness or the light. that existing lighting should be repaired, maybe the No reasonable driver could possibly have thought, well, if plaintiffs in this undeniably tragic case will get something part of this [**42] causeway is dark and I wreck my in settlement. This occasional propensity of the Court to vehicle there, others may not be able to see me, so I'll try to help out a particularly sympathetic litigant without cross if it's lit, but if it's not, I'm staying on the mainland. destroying the law emerged in an oral argument not long "The relevant inquiry" posited by the Court raises the ago. Professor Laurence H. Tribe, arguing a case in this precise concern expressed by the County as well as amici Court, was actually asked, "Can't we just have a rule for curiae, the Texas Municipal League, the Texas City At- this case alone without implicating other, similar cases?" torneys Association, and the Texas Municipal League "Not and be a court," he replied, more than a little sur- Intergovernmental Risk Pool, which is, as the Court rec- prised. If the Court's "relevant inquiry" is for real, then the ognizes, that "allowing the plaintiffs' claims to proceed law of premises liability has been changed fairly signifi- will effectively require governmental entities to either cantly -- like light to dark. The burden on the governments light every stretch of public roadway or remove all of Texas will be felt, and we should just say so. If not, then lighting, because any unexpected illumination change we have not acted like a court. might constitute a premise defect for which they may be held liable." 7 The Court never dismisses this concern 8 2002 Tex. LEXIS 60, S.W.3d (Tex. because, truth to tell, it's valid. How often will it happen 2002). that a driver enters a lighted portion of a roadway without [**45] being able to see a dark spot ahead? Lots. And what dif- 9 876 S.W.2d 842 (Tex. 1994). ference does it make whether lights are out or whether the 10 Smith v. Allwright, 321 U.S. 649, 669, 88 L. lighted portion has just ended? Most drivers still won't Ed. 987, 64 S. Ct. 757 (1944) (Roberts, J., dis- know, when they start out, where the darkness is up ahead. senting).

So if the Court means what it says today, and "the relevant Either way, I respectfully dissent. inquiry" is what a driver can [**43] see when he first enters a lighted roadway, then the governments of Texas Nathan L. Hecht simply need to redo their budgets or raise taxes or both to cover the costs of extra lighting and litigation like this. Justice Page 1

Gerald E. Eberts, Appellant v. Businesspeople Personnel Services, Inc., Appellee No. 20573 COURT OF APPEALS OF TEXAS, Fifth District, Dallas 620 S.W.2d 861; 1981 Tex. App. LEXIS 4027

August 6, 1981 PRIOR HISTORY: [**1] From A District Court not within the scope of the pleadings. Consequently, any of Collin County, Texas error in overruling the special exceptions is waived.

Banner Dairies v. Geers, 292 S.W.2d 169, 171 (Tex. Civ. App. -- El Paso 1956, writ dism'd); Pounds v. Jenkins, 157 COUNSEL: For Appellant: Mr. James R. Caton - S.W.2d 173, 176 (Tex. Civ. App. -- Texarkana 1941, no McKinney, Texas. For Appellee: Mr. Jerry W. Mills - writ).

Dallas, Texas.

2. Injunctive Relief JUDGES: Clarence A. Guittard, Chief Justice.

Defendant urges that there is no evidence, or insuf- ficient evidence, to show that injunctive relief is necessary OPINION BY: GUITTARD for the protection of plaintiff's business and goodwill. Our review of the record reveals evidence sufficient to support OPINION the trial court's findings in this respect. The court found [*862] Businesspeople Personnel Services, Inc., that plaintiff had trained defendant as a job counselor in sued its former employee, Gerald E. Eberts, to restrain providing placement and counselling services; that de- him from competing in violation of restrictive covenants fendant had established and maintained substantial in his employment contract and also for liquidated dam- goodwill for plaintiff between himself and plaintiff's ages. The trial court, sitting without a jury, granted the clients and prospective clients; that defendant had access injunction and awarded recovery of damages in an amount to confidential business information, including lists of less than that stipulated in the contract. Defendant Eberts clients and business methods; that defendant [**3] re- appeals. We affirm the injunction and modify the signed his employment with plaintiff and began an em- judgment by denying recovery of damages. ployment agency business with his wife; that he adver- tised the services of such agency and contacted various 1. Special Exceptions employers who were previous or prospective customers of plaintiff; that defendant had declared his intention to Defendant complains of the court's action in over- continue such competitive activities before he was re- ruling his special exceptions because the petition was strained by the court; and that plaintiff's goodwill and its factually insufficient to allege a cause of action. The relationship with its clients had been damaged. These special exceptions, however, fail to point out that the findings support the court's conclusions that defendant's petition is insufficient to allege grounds for injunctive actions constitute a material breach of his employment relief. They complain, rather, that various allegations of agreement and that the injunction prayed for was rea- the petition are conclusions of the pleader and are too sonably necessary to protect plaintiff's goodwill from vague and general to give defendant fair notice. De- further competitive activities by defendant and safeguard fendant [**2] does not show in what manner the gener- plaintiff's confidential business information. Conse- ality of the pleadings deprived him of a reasonable op- quently, we hold that there is sufficient evidence to sup- portunity to defend. He made no objection to plaintiff's port the injunctive relief granted. evidence on the ground that it came as a surprise or was Page 2 620 S.W.2d 861, *; 1981 Tex. App. LEXIS 4027, **

Defendant further contends that the contract was amount. The only testimony concerning damages was by unenforceable because of wrongful conduct by plaintiff. plaintiff's president, who testified that he was unable to Although defendant alleged certain breaches of the em- state the amount of any damages from defendant's breach ployment contract, the court made no finding of fact as to of the contract other than expenses of litigation, including that issue, and defendant made no request for additional attorney's fees and loss of time by himself and other em- findings as authorized by rule 298 of the Texas Rules of ployees. There was no estimate of the amount of com- [**4] Civil Procedure. Consequently, this defense was missions lost because of defendant's competition in the waived. Elliott v. Bowden, 564 S.W.2d 825, 828 (Tex. Civ. period between the termination of his employment with App. -- Corpus Christi 1978, writ ref'd n.r.e.); Micrea, Inc. plaintiff on February 15, 1980, until he was restrained v. Eureka Life Insurance Co. of America, 534 S.W.2d 348, from further competition on March 4, 1980. The trial (Tex. Civ. App. -- Fort Worth 1976, writ ref'd n.r.e.). court found that plaintiff has expended $ 5,000 for attor- ney's fees and expenses of suit. This record contains Defendant complains that the injunction in the terms neither pleading nor proof supporting recovery of $ 7,500 of the contract is overbroad and is unenforceable for want as either a statutory or a contractual attorney's fee. Ex- of specificity. We cannot agree. The injunction re- penses of litigation are not recoverable as damages unless strains defendant from engaging in the business of a pri- expressly provided by statute or contract. Hammonds v. vate employment agency or agent within a one-hundred Hammonds, 158 Tex. 516, 313 S.W.2d 603, 605 (1958); mile radius from the Dallas County Courthouse until Wm. Cameron & Co., Inc. v. American Surety Co. of New [*863] February 15, 1982, and from assisting in the York, 55 [**7] S.W.2d 1032, 1035 (Tex. Comm'n App. finding of employees for employers, or employment for 1932, opinion adopted). This rule applies to a litigant's employees for a commission or fee, within that area for loss of time. Phillips v. Latham, 523 S.W.2d 19, 27 (Tex. that period. The injunction further restrains defendant Civ. App. -- Dallas 1975, writ ref'd n.r.e.). from disclosing plaintiff's confidential records, business methods, and names of its customers and clients. This Neither is plaintiff entitled to recovery of the full $ decree conforms to the terms of the contract and we find 10,000 as the liquidated damages stipulated in the con- from the record that it meets the test of reasonableness as tract. Plaintiff argues that the liquidated damages provi- to time and space established by Weatherford Oil Tool sion is enforceable because the amount stipulated is Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950, 951 payable in lieu of actual damages that are difficult to (1960). Consequently, [**5] it is valid and enforceable. ascertain. This argument is inconsistent with the peti- Gonzales v. Norris of Houston, Inc., 575 S.W.2d 110, 113 tion, which alleges and prays for both actual and liqui- (Tex. Civ. App. -- Houston [14th Dist.] 1978, writ ref'd dated damages. If this inconsistency is ignored, we must n.r.e.); Integrated Interiors, Inc. v. Snyder, 565 S.W.2d consider whether the provision for $ 10,000 liquidated 350, 352 (Tex. Civ. App. -- Fort Worth 1978, writ ref'd damages is a reasonable forecast of just compensation for n.r.e.). Defendant has not suggested any manner in the harm expected as a result of a breach; otherwise the which it should be reformed so as to limit its scope in any provision is an unenforceable penalty. Stewart v. Basey, other respect. Consequently, we need not consider 150 Tex. 666, 245 S.W.2d 484, 486 (1952); RESTATE- whether such a reformation would be proper. MENT OF CONTRACTS, § 339 (1932).

The provision in question is as follows: 3. Damages Finally, defendant urges that the trial court erred in First Party and Second Party agree that awarding "liquidated damages" of $ 7,500 because the the actual damages to First Party resulting evidence is insufficient to meet plaintiff's burden of proof from any breach of this non-compete as to reasonableness. Plaintiff makes no attempt to justify agreement by Second Party will be and are the award of $ 7,500 as based on evidence of actual uncertain, intangible [**8] and not read- damages, but presents a counterpoint urging that it is ily or accurately ascertainable; that a fair entitled to recover the $ 10,000 liquidated damages stip- [*864] and reasonable estimate of the ulated in the contract. We conclude that the trial court's damages to First Party that will result award of $ 7,500, which it characterized as "liquidated therefrom under the circumstances is Ten damages," cannot be supported either as actual damages Thousand Dollars ($ 10,000.00); and the or as liquidated damages, and that the $ 10,000 payment parties desiring to dispense with the high stipulated is an unenforceable penalty in view of the spe- costs to each of litigating the issue of ac- cific enforcement of the contract [**6] by injunction. tual damages; it is, therefore, agreed that in the event Second Party shall breach the The award of $ 7,500 cannot be supported as actual above non-compete covenant, he (she) damages because, as defendant contends, the evidence shall pay to First Party the sum of Ten does not establish any basis for the recovery of that Page 3 620 S.W.2d 861, *; 1981 Tex. App. LEXIS 4027, **

Thousand Dollars ($ 10,000.00) as liqui- tract. Wirth & Hamid Fair Booking, Inc. v. Wirth, 265 dated damages which shall be in addition N.Y. 214, 192 N.E. 297, 300-01 (1934); 5A CORBIN, to (and not in lieu of) First Party's right to CONTRACTS, § 1071, at 401 (1964); see McMurray v. specific performance of such covenant by Faust, 224 Iowa 50, 276 N.W. 95, 100 (1937); Heatwole v. Second Party and the right to pursue same Gorrell 35 Kan. 692, 12 P. 135, 138-39 (1886). The in- in a court of equity (injunctive relief). consistency of these remedies is similar to that recognized by this court [**11] in Robert G. Beneke & Co. v. Cole, 550 S.W.2d 321, 322 (Tex. Civ. App. -- Dallas 1977 no writ), in which we held that liquidated damages could not In support of the reasonableness of this provision, be recovered in addition to actual damages, notwith- plaintiff argues that the trial court found that the average standing a provision in the contract purporting to author- fee earned by plaintiff was about $ 3,000 per placement. ize such a recovery.

Plaintiff insists: "It is not unreasonable to estimate that within a two-year period at least [four fees] from such Plaintiff relies on Mayhall v. Proskowetz, 537 S.W.2d placements ($ 12,000) would be lost due to the competi- 320 (Tex. Civ. App. -- Austin 1976, writ ref'd n.r.e.) as tion of an ex-employee." This argument assumes that supporting its contention that a provision for liquidated defendant would not be restrained by injunction during damages for competition by a former employee is en- the two-year period. Actually, [**9] defendant was forceable. In that case, however, there was no claim for free to compete less than three weeks, and there is no injunction; thus liquidated damages were not, as here, evidence that plaintiff has lost any business because of recovered in addition to injunctive relief. Rather, the defendant's competition within that period or that de- contract provided for a liquidated sum of $ 5,000 because fendant violated the injunction after the restraining order of the difficulty of proving [*865] damages, and that was issued. If enforceable, the contract would exact a amount was presumably fixed in lieu of all other com- payment of $ 10,000 for any breach of the restrictive pensation as satisfaction for a breach that might continue covenant, whether the breach continues for only one day for the entire three-year period. Consequently, we do not or for two years, and would authorize an injunction en- regard Mayhall as contrary to our holding in the present forcing the restriction for any portion of the period re- case. maining. Under these circumstances the $ 10,000 cannot Plaintiff also argues in support of the reasonableness be considered a genuine pre-estimate of the harm to be of the liquidated damage provision that the amount stip- suffered by any single breach. 5A CORBIN, CON- ulated is based on anticipated expenses of litigation TRACTS, § 1071, at 401 (1964). Consequently, it falls [**12] rather than loss of business and goodwill from within the condemnation of Stewart v. Basey, supra, and defendant's breach. Plaintiff's president testified that he other Texas decisions holding that a stipulation for a thought $ 10,000 was reasonable because of time already liquidated damages should be treated as an unenforceable lost and attorney's fee already incurred, and that he chose penalty if the contract contains several matters of different the $ 10,000 figure because he knew that attorney's fees degrees of importance and the sum stipulated is payable were expensive and that litigation would cause loss of for the breach of any, even the least. Accord: Krenek v. time for him and other personnel involved. If the liqui- Wang Laboratories, Inc., 583 S.W.2d 454 (Tex. Civ. App. dated damage provision is based on an estimate of the -- Waco 1979, no writ); Servisco v. Tramco, Inc., 568 attorney's fee, it does not conform to the requirement in S.W.2d [**10] 434, 437 (Tex. Civ. App. -- Texarkana Stewart, supra at 487, that the damages be difficult of 1978, writ ref'd n.r.e.). accurate estimation, because attorney's fees are routinely The present contract may be enforceable if it is re- proved and recovered when authorized by contract or by garded as giving plaintiff an option to elect between in- statute. Regardless of whether a recovery of an attor- junctive relief and liquidated damages. Also, if actual ney's fee would have been proper in this case if based on damages are proved, plaintiff may be entitled to damages proper pleading and proof, which the present record does for a breach that occurred before the suit was filed as well not show, we hold that an estimate of the attorney's fee as to an injunction restraining subsequent breaches. and other expenses anticipated in enforcing a contract Payment of damages, however, constitutes satisfaction for does not support the reasonableness of a provision for any injury that may be caused by the breach, whereas an liquidated damages. injunction has the effect of a decree of specific perfor- With respect to the injunction, the judgment is af- mance restraining any breach that would otherwise cause firmed, and with respect to the recovery of damages, the damage. Therefore, if the court grants an injunction judgment is reversed and judgment is rendered that preventing the breach from continuing and becoming plaintiff [**13] take nothing. Costs are divided equal- total, it should not at the same time give judgment for the ly. full amount of liquidated damages specified in the con- Page 1 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

FARMERS INSURANCE EXCHANGE AND ALLSTATE COUNTY MUTUAL INSURANCE COMPANY, Appellants v. JUAN RODRIGUEZ, Appellee NO. 14-10-00995-CV COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON 366 S.W.3d 216; 2012 Tex. App. LEXIS 1217

February 16, 2012, Opinion Filed SUBSEQUENT HISTORY: Petition for review denied guez, denial of Farmers' plea to the jurisdiction, and entry by Rodriguez v. Farmers Ins. Exch. & Allstate County of declaratory judgment finding coverage under the Mut. Ins. Co., 2013 Tex. LEXIS 306 (Tex., Apr. 19, 2013) Farmers insurance policy. In three issues, Farmers con- tends the trial court lacked subject matter jurisdiction over PRIOR HISTORY: [**1] Rodriguez's claim against Farmers, the homeowner's On Appeal from the 125th District Court, Harris policy issued by Farmers does not provide liability cov- County, Texas. Trial Court Cause No. 2008-33641. erage for Woodling, and Rodriguez filed an impermissible direct action against Farmers without satisfying condi- tions precedent in Woodling's insurance policy. We hold JUDGES: Panel consists of Justices Frost, Seymore, and the trial court erred by granting summary and declaratory Jamison. judgments against Farmers and denying Farmers' plea to the jurisdiction because Rodriguez's claim against Farm- OPINION BY: Martha Hill Jamison ers was not ripe when the court made its rulings. We therefore reverse and render judgment dismissing Ro- OPINION driguez's claims against Farmers for lack of subject matter jurisdiction. [*219] Appellee Juan Rodriguez was injured while helping his neighbor Michael Woodling remove a deer Allstate appeals the trial court's summary judgment stand from Woodling's trailer. Rodriguez sued Woodling in favor of Rodriguez against Allstate and declaratory for negligence and, in the same case, Rodriguez's auto- judgment finding coverage under the UIM policy. In four mobile insurer, appellant Allstate County Mutual Insur- issues, Allstate contends its policy does not cover Ro- ance Company, seeking coverage under an unin- driguez's injury but the Farmers policy does. We hold the sured/underinsured motorist (UIM) policy. Rodriguez UIM provisions in Rodriguez's [**3] automobile policy later amended his petition to add Woodling's insurer, provide coverage for his injury. We therefore affirm the appellant Farmers Insurance Exchange, seeking liability trial court's summary judgment and declaratory judgment coverage for Woodling under his homeowner's policy. In against Allstate. a pre-trial partial summary judgment, the court declared the claims were covered by both insurance policies. At Undisputed Factual Background trial, the jury found no negligence on the part of Rodri- The following facts are undisputed. Using a trailer guez, found that Woodling was negligent, and found that hitched to his pickup truck, [*220] Woodling1 trans- Woodling's negligence caused Rodriguez's damages. The ported a deer stand from his deer lease to his residence. He primary issues on appeal pertain to the trial court's subject pulled into his driveway and attempted to remove the deer matter jurisdiction over the claims against Farmers and stand from the trailer. He pushed the deer stand out of the interpretation of standard form language in the Allstate trailer until the legs on the stand touched the driveway. He automobile policy. left the stand resting at a 30-degree angle against the Farmers appeals the trial court's grant of [**2] trailer. He then attached a come-along2 to a fence post and summary judgment against Farmers in favor of Rodri- to the stand and attempted to raise the stand upright. Re- Page 2 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

alizing he could not accomplish the task alone, he re- uninsured motor vehicle so that the Allstate policy did not quested assistance from his neighbor, Rodriguez. apply. The trial court granted Rodriguez's motion and denied motions filed by Allstate and Farmers. In a com- Woodling is not a party to this appeal. bined plea to the jurisdiction and motion to vacate the A come-along is a tool used for moving heavy court's order granting partial summary judgment, Farmers loads or for tightening wire. COLLINS ENGLISH reasserted its jurisdictional arguments [*221] before DICTIONARY (2003 ed.). trial of the underlying personal injury [**6] claim. The court denied the combined motion.

Rodriguez and Woodling decided to lift the stand manually by walking forward out of the trailer and onto The record does not show whether the trial the driveway. They began in the trailer, each using both court ruled on that motion. hands to push the stand upward. Then they stepped onto the driveway and took "one or two" more steps. [**4] Before trial, Allstate, while contesting coverage un- When the stand was no longer touching the trailer, der its policy, stipulated to be bound by the jury's findings Woodling realized it was too heavy and yelled, "Juan, I on negligence and damages. The jury found Woodling can't hold it. Jump." Woodling then jumped away, leaving 100% negligent and awarded damages to Rodriguez to- Rodriguez alone to hold the stand, which weighed ap- taling $233,123.71. Rodriguez subsequently filed a mo- proximately 350 pounds. The stand fell, and Rodriguez tion for summary judgment against Allstate, seeking a was injured. declaration that his injuries were covered under the All- state policy, which the trial court granted. After reducing The liability provisions of the Farmers homeowners the jury award based on the amount of Rodriguez's in- policy contain the following exclusion for bodily injury curred medical expenses, the trial court entered judgment claims: "arising out of the ownership, maintenance, op- awarding Rodriguez $211,618.42, plus interest and costs, eration, use, loading or unloading of . . . trailers [or] and declaring that Rodriguez's injuries were covered semi-trailers" except for "trailers or semi-trailers while under both the Farmers and Allstate policies. not being towed by or carried on a motor vehicle."

Rodriguez's Allstate automobile policy included UIM Standards of Review coverage for damages Rodriguez was "legally entitled to recover from the owner . . . of an uninsured [or underin- Traditional Summary Judgment. sured] motor vehicle [including any type of trailer] be- To prevail on a traditional Rule 166a(c) sum- cause of bodily injury sustained by [Rodriguez and] mary-judgment motion, a movant must prove that there is caused by an accident." Under the Allstate policy, the no genuine issue regarding any material fact and that it is uninsured or underinsured owner's liability must "arise entitled to judgment as a matter of law. See Tex. R. Civ. P. out of the ownership, maintenance or use of the uninsured 166a(c); Little v. Tex. Dep't of Criminal Justice, 148 motor vehicle." (Emphasis added.)

S.W.3d 374, 381 (Tex. 2004). A plaintiff moving for a traditional [**7] summary judgment must conclusively Procedural History prove all essential elements of its claim. See Rodriguez filed suit against Woodling and Allstate on Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex. June 2, 2008, asserting a negligence claim against [**5] 1999).

Woodling and a claim against Allstate for UIM coverage.

A defendant may prevail by traditional summary Rodriguez amended his petition on September 16, 2008, judgment if it conclusively negates at least one essential adding Farmers as a defendant and seeking declarations element of a plaintiff's cause of action. See IHS Cedars that the exclusion from liability coverage in the Farmers Treatment Ctr. of DeSoto, Tex., Inc. v. Mason, 143 S.W.3d policy did not apply or, alternatively, that Rodriguez's 794, 798 (Tex. 2004). A movant seeking traditional damages arose from the use of a trailer covered by the summary judgment on an affirmative defense has the Allstate policy. initial burden of establishing entitlement to judgment as a Farmers filed a motion to sever, contending Rodri- matter of law by conclusively establishing each element guez's joinder of Farmers was improper.3 Rodriguez of his affirmative defense. See Chau v. Riddle, 254 S.W.3d moved for partial summary judgment against Farmers, 453, 455 (Tex. 2008); see also Tex. R. Civ. P. 166a(b)-(c). seeking a declaration that Farmers had a contractual ob- A matter is conclusively established if reasonable people ligation to indemnify Woodling. Farmers moved for could not differ as to the conclusion to be drawn from the summary judgment based on improper joinder, lack of evidence. See City of Keller v. Wilson, 168 S.W.3d 802, ripeness, and applicability of its "trailers or semi-trailers" 816 (Tex. 2005). exclusion. Allstate moved for summary judgment, as- serting that the accident did not arise out of the use of an Page 3 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

If the movant meets its burden, the burden then shifts solved the declaratory judgment issues by ruling on mo- to the nonmovant to raise a genuine issue of material fact tions for summary judgment, we review the propriety of precluding summary judgment. See Centeq Realty, Inc. v. the trial court's grant of the declaratory judgments under Siegler, 899 S.W.2d 195, 197 (Tex. 1995). The evidence the [**10] same standards applicable for review of raises a genuine issue of fact if reasonable and summary judgments. English, 174 S.W.3d at 370. fair-minded jurors could differ in [**8] their conclusions Therefore, we must determine whether the trial court in light of all of the summary-judgment evidence. Good- properly granted Rodriguez's declaratory judgment re- year Tire & Rubber Co. v. Mayes, 236 S.W.3d 754, 755 quests and, if not, enter the judgment which should have (Tex. 2007). been entered by the trial court. Id. On appeal, we review de novo a trial court's summary Jurisdiction over Claim against Farmers judgment ruling. See Mann Frankfort Stein & Lipp Ad- visors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009). In its third issue, Farmers contends Rodriguez lacked In our review, we consider all the evidence in the light standing to sue Farmers and Rodriguez's claim against most favorable to the nonmovant, crediting evidence Farmers was not ripe, depriving the trial court of sub- favorable to the nonmovant if reasonable jurors could, and ject-matter jurisdiction. We agree with Farmers that Ro- disregarding contrary evidence unless reasonable jurors driguez's claim was not ripe.5 could not. See Mack Trucks, Inc. v. Tamez, 206 S.W.3d 572, 582 (Tex. 2006). When, as here, the parties file 5 Accordingly, we do not reach the other issues competing motions for summary judgment and the trial presented by Farmers regarding whether Rodri- court grants one motion and denies the other, this court guez's injury was covered by the Farmers policy, should review both parties' summary-judgment evidence whether Rodriguez filed an impermissible direct and determine all questions presented. Valence Operating action against Farmers without first satisfying Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005); English conditions precedent in the policy, or whether v. B.G.P. Int'l, Inc., 174 S.W.3d 366, 370 (Tex. Rodriguez had standing to bring his claim against App.--Houston [14th Dist.] 2005, no pet.). Farmers. We likewise do not reach two of All- state's issues asserting that Rodriguez's injuries are Subject-matter jurisdiction. covered under the Farmers policy (issues three and four).

The absence of subject-matter jurisdiction may be raised by a plea to the [*222] jurisdiction or another Ripeness is a threshold issue that implicates sub- procedural vehicle such as a motion for summary judg- ject-matter jurisdiction. Robinson v. Parker, 353 S.W.3d ment. Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 554 753, 755 (Tex. 2011). In evaluating [**11] ripeness, (Tex. 2000).4 [**9] When a plea to the jurisdiction courts consider "whether, at the time a lawsuit is filed, the challenges jurisdictional facts, as here, we consider the facts are sufficiently developed 'so that an injury has evidence submitted by the parties. Stinson v. Ins. Co. of occurred or is likely to occur, rather than being contingent Penn., 286 S.W.3d 77, 83 (Tex. App.--Houston [14th or remote.'" Id. (emphasis in orig.) (citation omitted).

Dist.] 2009, pet. denied). The standard of review for a Although a claim is not required to be ripe at the time of jurisdictional plea based on evidence generally mirrors filing, if a party cannot demonstrate a reasonable likeli- that of a traditional motion for summary judgment. Id. hood that the claim will soon ripen, the case must be dismissed. Id. A case is not ripe when resolution depends Thus, it was appropriate for Farmers to assert on contingent or hypothetical facts, or upon events that in its summary-judgment motion that the trial have not yet come to pass. Id. at 756 (citing Waco Indep. court lacked subject-matter jurisdiction. See Blue, Sch. Dist. v. Gibson, 22 S.W.3d 849, 852 (Tex. 2000)). 34 S.W.3d at 554. Farmers subsequently filed a "[T]he essence of the ripeness doctrine is to avoid prem- plea to the jurisdiction on the same jurisdictional ature adjudication . . . [and] to hold otherwise would be grounds. the essence of an advisory opinion, advising what the law would be on a hypothetical set of facts." Id. (citing Pat- Declaratory judgment. terson v. Planned Parenthood of Houston and Se. Tex., 971 S.W.2d 439, 444 (Tex. 1998)) (second alteration in In reviewing a declaratory judgment, we refer to the original). procedure for resolution of the issue at trial to determine the applicable standard of review on appeal. Tex. Civ. [*223] A tort claimant has no direct claim against Prac. & Rem. Code § 37.010; English, 174 S.W.3d at 370; the tortfeasor's liability insurer until the insured tortfeasor see also Gen. Agents Ins. Co. of Am. v. El Naggar, 340 is adjudged liable to the tort claimant.6 Angus Chem. Co. S.W.3d 552, 557 (Tex. App.--Houston [14th Dist.] 2011, v. IMC Fertilizer, Inc., 939 S.W.2d 138, 138 (Tex. 1997) pet. denied). Here, because the trial court implicitly re- [**12] (per curiam); State Farm Cnty. Mut. Ins. Co. of Page 4 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

Tex. v. Ollis, 768 S.W.2d 722, 723 (Tex. 1989) (per In Firemen's Insurance Co. v. Burch, the Supreme curiam); Great Am. Ins. Co. v. Murray, 437 S.W.2d 264, Court of Texas held that there can be no justiciable con- (Tex. 1969). A party injured by the insured is a troversy regarding the insurer's duty to indemnify before a third-party beneficiary of a liability insurance policy, but judgment has been rendered against an insured. 442 he cannot enforce the policy directly against the insurer S.W.2d 331, 332-34 (Tex. 1968). The supreme court has until it has been established, by final judgment or agree- recognized a limited exception to this rule that applies ment, that the insured has a legal obligation to pay dam- "when the insurer has no duty to defend and the same ages to the injured party. Ollis, 768 S.W.2d at 723. It is reasons that negate the duty to defend likewise negate any undisputed that when the trial court granted Rodriguez possibility the insurer will ever have a duty to indemnify." summary judgment against Farmers, Woodling's obliga- Farmers Tex. Cnty. Mut. Ins. Co. v. Griffin, 955 S.W.2d tion to pay damages to Rodriguez had not been estab- 81, 84 (Tex. 1997) (emphasis in original); see also D.R. lished by final judgment or by agreement. Therefore, Horton-Tex., Ltd. v. Markel Int'l Ins. Co., 300 S.W.3d 740, Rodriguez's claim against Farmer's was not ripe when the 744 (Tex. 2009). trial court granted summary judgment. See Certain Un- Rodriguez sued Farmers seeking payment based on derwriters at Lloyds, London v. Four J's Cmty. Living Farmers' purported duty to indemnify Woodling. While Ctr., Inc., No. H-11-0713, 2011 U.S. Dist. LEXIS 138687, generally acknowledging that a third party may not 2011 WL 6026689, at *1-2 (S.D. Tex. Dec. 2, 2011) [*224] sue an insurance company for payment under its (holding that, under Texas law, tort plaintiff did not yet policy without a judgment against the insured, Rodriguez have claim under tort defendant's insurance policy be- argues the exception recognized in Griffin should be ap- cause final judgment had not yet been rendered upon jury plied here because "undisputed [**15] facts pertaining verdict in plaintiff's favor); Robinson, 353 S.W.3d at to the duty to indemnify . . . were included in the summary 755-56 (holding that declaratory-judgment [**13] judgment record [and] are consistent with the factual claims were not yet ripe because there was no showing record at trial and the fact-finder's disposition of the per- that claimants had suffered a concrete injury); Gibson, 22 sonal injury lawsuit." We find no merit in this argument.

S.W.3d at 853 (noting that to allow premature adjudica- tion of contingent situations would "eschew the ripeness The holding in Griffin pertained to an underlying tort doctrine" and "create an impermissible advisory opin- suit for injuries sustained in a drive-by shooting. D.R. ion."). Horton-Tex., Ltd., 300 S.W.3d at 744-45 (citing Griffin, S.W.2d at 84). The policy in that case excluded cov- This principle applies where the insurance erage for intentional torts. Griffin, 955 S.W.2d at 83. The policy contains a so-called "no action" provision. Griffin court thus concluded no "conceivable set of facts" See Struna v. Concord Ins. Servs., Inc., 11 S.W.3d could be developed in the underlying case that would 355, 359 (Tex. App.--Houston [1st Dist.] 2000, no transform the intentional shooting into an auto accident pet.). Section I, ¶ 11 of the Farmers policy is a "no covered by the policy. D.R. Horton-Tex., Ltd., 300 S.W.3d action" provision. at 745. The court held that the duty to indemnify may be adjudicated before judgment is entered on the claim Though a claim is not required to be ripe at the time against the insured, when the facts negate both the duty to of filing, if a party cannot demonstrate a reasonable like- defend and the duty to indemnify.8 Griffin, 955 S.W.2d at lihood that the claim will soon ripen, the case must be 84. Here, the duty to defend is not at issue.9 More im- dismissed. See Robinson, 353 S.W.3d at 755. The record portantly, even though the parties do not dispute the un- does not reflect any agreement establishing Woodling's derlying accident facts, the jury was required to decide obligation to pay Rodriguez damages.7 Therefore, Ro- and apportion liability before judgment could be [**16] driguez cannot demonstrate a reasonable likelihood that entered. Thus, when the lawsuit was filed, coverage of his claims against Farmers will soon ripen in the case Rodriguez's injury under the Farmers policy was contin- under review, and these claims must be dismissed for lack gent on the jury's future liability finding, if any, including of subject-matter jurisdiction. See id. apportionment between Woodling and Rodriguez. The Griffin exception is inapplicable. See D.R. Horton-Tex., 7 Rodriguez cannot obtain a final judgment Ltd., 300 S.W.3d at 743-45 (distinguishing Griffin); Bur- against Woodling until Rodriguez's claim against lington Northern and Santa Fe Ry. Co. v. Nat'l Union Fire Farmers is adjudicated [**14] because Farmers Ins. Co. of Pittsburgh, Pa., 334 S.W.3d 217, 219-20 (Tex. and Woodling are both parties. But Rodriguez's 2011) (same). We hold that Rodriguez's claims against claim is not ripe and cannot be adjudicated until Farmers were not ripe and that the trial court lacked ju- after Rodriguez obtains a final judgment against risdiction to grant summary judgment against Farmers Woodling. declaring coverage under the Farmers policy. The trial court erred in denying Farmers' plea to the jurisdiction, Page 5 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

and the proper remedy is to reverse the trial court's when those terms are not specifically included in the judgment as to Rodriguez's claims against Farmers and policy. See, e.g., Emcasco Ins. Co. v. Am. Int'l Specialty render judgment dismissing these claims for lack of sub- Lines Ins. Co., 438 F.3d 519, 525 (5th Cir. 2006); Pan- ject matter jurisdiction. handle Steel Prods. Co. v. Fidelity Union Cas. Co., 23 S.W.2d 799, 801 (Tex. Civ. App.--Fort Worth 1929, no The duty to indemnify requires payment of all writ) (holding injury of passerby that occurred after iron covered claims and judgments against an insured, beam was unloaded from truck and was being carried whereas the duty to defend requires tender of a across sidewalk was result of use [**19] of truck). The defense in any lawsuit brought against the insured parties have not cited, and research has not revealed, any that seeks damages for an event potentially cov- Texas cases construing UIM policies that have held the ered by the policy. D.R. Horton-Tex., Ltd., 300 term "use" without a "loading and unloading" clause ex- S.W.3d at 743. [**17] An insurer's duty to de- cludes coverage for loading and unloading. fend is justiciable before the entry of judgment on Allstate cites Liberty Mutual Insurance Co. v. a claim against the insured. See English, 174 American Employers Insurance Co., 556 S.W.2d 242 S.W.3d at 371. (Tex. 1977) for the proposition that the inclusion of a Rodriguez's injury, moreover, did not arise "loading and unloading" endorsement in an insurance from an intentional tort. policy expands coverage from the coverage afforded by We sustain Farmers' third issue. the phrase "ownership, maintenance, or use." Id. at 244.

But the court in Liberty Mutual did not construe UIM Coverage of Rodriguez's Injury by the Allstate Policy coverage or the "ownership, maintenance, or use" clause.11 It analyzed whether injured workers were "borrowers" of In two issues, Allstate argues the trial court erred by the automobile to determine if they were insured persons denying its summary judgment motion against Rodriguez, under the policy.12 Id. Liberty Mutual does not hold that granting summary judgment in favor of Rodriguez, and the "use" of a vehicle may never include "loading and declaring that UIM language in his automobile policy unloading" merely because the policy does not include provide coverage for his injury. In reference to the "use" those terms. See id. Moreover, the intent to exclude cov- exclusion, Allstate contends that "loading and unloading" erage must be expressed in clear and unambiguous a trailer is not use as contemplated under the Allstate [*226] language. Nat'l Union Fire Ins. Co. of Pittsburgh, policy, and even if it were, there is no coverage because Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. Rodriguez's injury did not "arise out of" the use of the 1991). If Allstate intended to exclude loading and un- trailer. We are not persuaded by these arguments. loading [**20] from the scope of coverage, then it was The Allstate policy specifies that liability of the incumbent upon it to expressly and clearly state the ex- owner of an uninsured or underinsured vehicle "must arise clusion in the policy. See Nat'l Auto. & Cas. Ins. Co. v. out of the ownership, [*225] maintenance, or use of the Glens Falls Ins. Co., 493 S.W.2d 909, 911-12 (Tex. Civ. uninsured motor vehicle."10 (Emphasis added.) The term App.--Tyler 1973, no writ) (holding clause expressly "use" is not defined in the policy. Allstate urges us to hold excluding "loading and unloading" of vehicle was effec- that "loading and unloading" is excluded because the tive). Having failed to do so, Allstate may not now com- "use" clause omits these activities [**18] as a matter of plain.13 See Nat'l Union Fire Ins. Co., 811 S.W.2d at 555. law. We decline to do so. The commercial policy in Liberty Mutual The policy defines "uninsured motor vehi- included "loading and unloading." cle" to include underinsured motor vehicles. 12 Liberty Mutual involved competing auto- mobile and general liability policies. Id. at 243.

Automobile insurers in Texas are required to provide The automobile policy excluded nonemployees of UIM coverage in all policies. The quoted language from the insured unless they were "borrowers" of vehi- the Allstate policy mirrors statutory requirements. See cles owned by the insured. Id. A "borrower" was Tex. Ins. Code § 1952.101(a). The purpose of UIM cov- defined by the court as "someone who has, with erage is to protect conscientious drivers from financial permission of the owner, temporary possession loss caused by irresponsible parties, and courts liberally and use of the property of another for his own construe the UIM statutes. Tex. Farm Bureau Mut. Ins. purposes." Id. at 244. Before the addition of the Co. v. Sturrock, 146 S.W.3d 123, 128 (Tex. 2004); loading and unloading endorsement to the stand- Stracener v. United Servs. Auto. Ass'n, 777 S.W.2d 378, ard automobile liability policy, neither the auto- (Tex. 1989). Texas state and federal courts applying mobile policy nor the standard liability policy de- Texas law have concluded that automobile liability poli- fined which insurer had liability coverage for in- cies may cover loading and unloading of a vehicle even juries sustained upon the premises of one who was Page 6 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

insured under a general liability [**21] policy the natural territorial limits of an automo- during the loading and unloading of a vehicle not bile, and the actual use must not have owned or hired by the general liability insured. Id. terminated; (3) the automobile must not The court concluded the policy exclusion for merely contribute to cause the condition persons who were unloaders but not "borrowers" which produces the injury, but must itself of the vehicle was intended to limit the insurer's produce the injury.15 liability for injuries of nonemployees who were not borrowers of the vehicle. Id. at 245. By con- trast, the Allstate policy covers injuries to Rodri- Id. at 157.16 guez caused by the owner or operator of an unin- sured or underinsured motor vehicle, including 14 See 6B JOHN A. APPLEMAN, INSURANCE "trailer[s] of any type." It does not expressly limit LAW AND PRACTICE § 4317, at 367-69 (Buckley Allstate's liability based on whether an injured ed. 1979); 8A COUCH ON INSURANCE 3d § 119:37, party is a "borrower" of a vehicle. at 119-56 (2005).

13 Allstate also cites an unreported federal dis- 15 The Lindsey court noted this is not an "ab- trict court's opinion that held a "use" clause solute test," but the factors are helpful in focusing (without "loading and unloading" language) the analysis. 997 S.W.2d at 157-58; see also would not cover injuries sustained by a patient Mid-Continent Cas. Co., 323 S.W.3d at 155 n.4. who travelled in an ambulance to the hospital. See The test is only a conceptual framework to analyze St. Paul Fire & Marine Ins. Co. v. Am. Int'l Sur- the inclusion or exclusion at issue. Mid-Continent plus Lines Ins. Co., No. 3:95-CV-0790-D, 1997 Cas. Co., 323 S.W.3d at 155 n.4 U.S. Dist. LEXIS 4956, 1997 WL 160192, at *3-4 16 The court acknowledged that the third factor (N.D. Tex. Mar. 31, 1997). The court held that "the may be difficult to define because it is not always acts of providing emergency medical care and of clear how the vehicle, as opposed to other things, carrying a person from some location to an am- contributed to an accident. Lindsey, 997 S.W.2d at bulance are . . . a necessary incident to the opera- 157; see also Mid-Continent Cas. Co..323 S.W.3d tion of an ambulance service, [**22] but are not at 156. fairly described as the use of an ambulance." 1997 Using the factors elucidated in Lindsey as a frame- U.S. Dist. LEXIS 4956, [WL] at *3. The inclusion work, and [**24] taking into consideration the broad of a loading and unloading clause would not alter definition of "use" recognized in Texas jurisprudence, we the court's reasoning or result. conclude that Rodriguez's injury resulted from use of the Allstate further argues that Rodriguez's injuries did trailer as a matter of law. not "arise out of" any use of the trailer. We disagree. [*227] Inherent nature. It is in the inherent nature Texas courts broadly define "use" of a motor vehicle in of a trailer that it will be used to haul and tow materials. the context of insurance policies. Mid-Continent Cas. Co. Cf. Mid-Continent Cas. Co., 323 S.W.3d at 155 ("[I]t is in v. Global Enercom Mgmt., Inc., 323 S.W.3d 151, 156 the inherent nature of a 2000 Ford F-250 Super Duty (Tex. 2010). It is a "general catchall . . . , designed and pickup truck on a cell tower job site that it will be used to construed to include all proper uses of the vehicle." Lyons haul and tow materials."); Panhandle Steel Prods. Co., 23 v. State Farm Lloyds & Nat'l Cas. Co., 41 S.W.3d 201, S.W.2d at 801 (holding, when delivery of material was (Tex. App.--Houston [14th Dist.] 2001, pet. denied) main purpose of haul, "loading and unloading were as (citing State Farm Mut. Auto. Ins. Co. v. Pan Am. Ins. Co., necessary to accomplish that purpose as was the driving of 437 S.W.2d 542, 545 (Tex. 1969)). "Use" means "to put the truck from plaintiff's place of business to the point of into action or service; to employ for or apply to a given delivery"). That process includes not only the immediate purpose." Id. (citing LeLeaux v. Hamshire-Fannett I.S.D., action of loading and unloading materials from the trailer 835 S.W.2d 49, 51 (Tex. 1992)). In Mid--Century Ins. Co. but also moving them from their starting point to their of Tex. v. Lindsey, 997 S.W.2d 153 (Tex. 1999), the court destination.17 See Liberty Mut. Ins. Co., 556 S.W.2d at employed the following factors suggested in two insur- 244; Travelers Ins. Co. v. Emp'r's Cas. Co., 380 S.W.2d ance treatises14 to help determine when a motor vehicle 610, 612 (Tex. 1964); Panhandle Steel Prods. Co., 23 has been in "use" under a similar UIM insuring provision: S.W.2d at 801. Using a trailer in this manner is "not an unexpected or unnatural use of the vehicle." See For an injury to fall [**23] within the Mid-Continent Cas. Co., 323 S.W.3d at 155 [**25] "use" coverage of an automobile policy (1) (citing Lindsey, 997 S.W.2d at 158); Commercial Stand- the accident must have arisen out of the ard Ins. Co., 455 S.W.2d at 717. inherent nature of the automobile, as such; (2) the accident must have arisen within Page 7 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

17 Here, the parties do not dispute that the deer "[u]ninsured motor vehicle" "a land motor vehicle stand did not reach its final destination. or trailer of any type." (Emphasis added.) Thus, the same principles apply here.

Natural territorial limits. The accident was within the "natural territorial limits" of the trailer, even though Cause. The third factor is whether the vehicle pro- Woodling and Rodriguez had taken a few steps out of the duced the injury. Lindsey, 997 S.W.2d at 157. The Su- trailer. In Mid-Continent Casualty Company and Lindsey, preme Court of Texas has stated that the causation inquiry this factor was satisfied even though both accidents oc- in this context involves "but for" causation. curred outside the insured vehicles. See Mid-Continent Mid-Continent Cas. Co., 323 S.W.3d at 156. A but for Cas. Co., 323 S.W.3d at 155 (holding injuries sustained cause is "one without which the event would not have when rope that was anchored on one end to the truck occurred." Transcon. Ins. Co. v. Crump, 330 S.W.3d 211, broke arose from use of truck); Lindsey, 997 S.W.2d at 223 (Tex. 2010).

160 (holding injury arose out of use of truck when child Rodriguez's accident would not have occurred if entered through sliding rear window and accidentally Rodriguez had not been assisting Woodling in unloading discharged loaded shotgun mounted over rear window, the deer stand from the trailer. See Mid-Continent Cas. injuring person in nearby vehicle, because child did not Co., 323 S.W.3d at 156 (holding rope would not have stray from purpose of entering truck by playing with gun broken causing injuries if truck had not been used to hoist or trying to shoot it). [**28] headache ball). The accident did not merely hap- The Supreme Court has adopted the complete opera- pen near the trailer: Woodling and Rodriguez could not tion doctrine, which defines the terms "loading and un- have accomplished the same result without the presence loading" in the context of an insurance policy. "'[L]oading of the trailer, and, as we have noted, the use of a trailer and unloading' embraces not only the immediate trans- includes unloading materials. See id.; Panhandle Steel ference of the [**26] goods to or from the vehicle, but Prods. Co., 23 S.W.2d at 802.19 The trial court properly also the complete operation of transporting the goods found the "use" clause in Allstate's policy covered Ro- between the vehicle and the place from or to which they driguez's injury. are being delivered." Liberty Mut. Ins. Co., 556 S.W.2d at 244; Travelers Ins. Co., 380 S.W.2d at 612.18 Any activi- 19 ties involved in moving the goods to their final physical destination are themselves included in the term "unload- [S]ince the act of unloading was ing" and thus qualify as a use of the vehicle for insurance one of the natural and necessary purposes. See Travelers Ins. Co., 380 S.W.2d at 613-14. steps to the undertaking to deliver The court noted, "[w]hen a vehicle is being unloaded it is the [truck's contents], and followed being used to the same extent as if it were being driven, in natural sequence the use of the and the person doing the unloading is entitled to the same truck to that end, which use was protection as the owner or operator." Id. at 614; see also specifically contemplated and Commercial [*228] Standard Ins. Co. v. Am. Gen. Ins. covered by the policy, we believe Co., 455 S.W.2d 714, 716-17 (Tex. 1970) (quoting Trav- that the conclusion is unavoidable elers Ins. Co.). We conclude under these circumstances that the use of the truck was the that Woodling and Rodriguez were using the trailer when primary and efficient cause of the the accident occurred. injury, even though it should not be held to be the proximate cause.

18 The cited cases that apply the complete op- eration doctrine involved third party claims arising from liability provisions of standard automobile Panhandle Steel Prods. Co., 23 S.W.2d at 802. insurance policies, whereas this case involves a This case is not controlled by the cases cited by All- liability claim arising under a UIM provision. state in support of its argument that the accident was not Liberty [**27] Mutual and Travelers Insurance caused by the use of a trailer as such. The cases cited by Company, however, both construe language in Allstate regarding UIM policies involved intentional standard automobile policies that is identical to the shootings from one vehicle into another that were held to language in the Allstate UIM provision providing be incidental to the use of [**29] the vehicles. See, e.g., coverage for injuries "aris[ing] out of the owner- State Farm Mut. Auto. Ins. Co. v. Whitehead, 988 S.W.2d ship, maintenance, or use" of the insured vehicle.

744, 745 (Tex. 1999); Collier v. Emp'rs Nat'l Ins. Co., 861 See Liberty Mut. Ins. Co., 556 S.W.2d at 243 n.1; S.W.2d 286, 289 (Tex. App.--Houston [14th Dist.] 1993, Travelers Ins. Co., 380 S.W.2d at 612. The UIM writ denied). Here, as we have held, Rodriguez was in- policy, moreover, expressly covers as an jured while he was unloading the trailer--which was a Page 8 366 S.W.3d 216, *; 2012 Tex. App. LEXIS 1217, **

proper use--so his injury was not merely incidental to the door frame. 835 S.W.2d at 51. The court held that the use of the trailer. injury did not arise from the use of the bus because the driver was not aboard when the injury occurred--in other National Union Fire Insurance Co. v. Merchants words, the injury did not arise from the school district's or Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex. 1997) in- its driver's operation or use of the bus--and immunity was volved a duty to defend. An insurer's duty to defend is not waived. Id. at 52. Brown v. Houston Independent determined from the four corners of the pleadings and the School District, 123 S.W.3d 618 (Tex. App.--Houston language of the insurance policy. Id. at 141. In such cases, [14th Dist.] 2003, pet. denied), involved an officer who if the petition does not allege facts within the scope of pulled over a woman in his patrol car and sexually as- coverage, the insurer is not required to defend a suit saulted her in her own vehicle. Id. at 619. Thus, the assault against its insured. Id. The petition in National Union did not occur in the patrol car, but in a vehicle which was alleged only that a driver was operating the insured's truck not operated by the officer. Id. at 622; see also when he negligently discharged a firearm injuring the Mid-Continent Cas. Co., 323 S.W.3d at 156. Here, by plaintiff. Id. at 142. The insurance policy only covered contrast, the use of the vehicle covered by the Allstate claims where the injury was caused by an accident re- policy was not similarly limited to a particular user. sulting from the use of a covered auto. Id. Accordingly, Moreover, Rodriguez's injury arose from using the trailer the allegations did not give rise to a duty to defend by the as a trailer while he was unloading it. See Mid-Continent insurer. Id.; see also Mid-Continent Cas. Co., 323 S.W.3d Cas. Co., 323 S.W.3d at 155; Lindsey, 997 S.W.2d at 160. at 156. [**30] Here, we are not dealing with the duty to defend; thus, the same pleading standard does not apply.20 21 Waivers of sovereign immunity must be construed narrowly. LeLeaux, 835 S.W.2d at 51.

20 Lindsey, by contrast to National Union, was not a duty-to-defend case, but involved an action We hold [**32] that the trial court did not err by to recover UIM benefits, as in this case. See 997 rendering summary judgment against Allstate in favor of S.W.2d at 154. Thus, the allegations in the petition Rodriguez and by declaring that Woodling's liability arose were not at issue. The plaintiff proved the vehicle from the use of the trailer. We overrule Allstate's first and was in use at the time of the accident because the second issues. child's "sole purpose was to gain entry into the truck" through the back window and he did not Conclusion stray from that purpose. Lindsey, 997 S.W.2d at We hold that Rodriguez's claims against Farmers 158. He did not play with the gun or try to shoot it. were not ripe and thus the trial court did not have juris- Id.; see also Mid-Continent Cas. Co., 323 S.W.3d diction to enter a judgment against Farmers. Therefore, as at 154-55. to the claims against Farmers, we reverse the trial court's [*229] The other two cases cited by Allstate were judgment and render judgment that these claims be dis- not insurance coverage cases, but instead involved claims missed for lack of subject-matter jurisdiction. under the Texas Torts Claims Act (TTCA). The TTCA We further hold that the trial court did not err by en- waives governmental immunity for "property damage, tering summary judgment and declaratory judgment in personal injury, or death aris[ing] from the operation or favor of Rodriguez against Allstate. We affirm that por- use of a motor driven vehicle." 21 LeLeaux, 835 S.W.2d at tion of the declaratory judgment finding Woodling's lia- (citing Tex. Civ. Prac. & Rem. Code § 101.021(1)(A)). bility arose from "use" of the trailer and finding coverage The required "operation or use" under the TTCA is by the over Rodriguez's injury under the Allstate policy. governmental employee. Id. LeLeaux involved a school bus that was not in operation when a student jumped up /s/ Martha Hill Jamison from [**31] where she had been sitting in the open rear doorway of the empty school bus and hit her head on the Justice Page 1 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325

FPL ENERGY, LLC, FPL ENERGY PECOS WIND I, L.P., FPL ENERGY PECOS WIND II, L.P., AND INDIAN MESA WIND FARM, L.P., PETITIONERS, v. TXU PORTFOLIO MANAGEMENT COMPANY, L.P. N/K/A LUMINANT ENERGY COMPANY, LLC, RESPONDENT NO. 11-0050 SUPREME COURT OF TEXAS 426 S.W.3d 59; 2014 Tex. LEXIS 272; 57 Tex. Sup. J. 325 October 15, 2012, Argued March 21, 2014, Opinion Delivered SUBSEQUENT HISTORY: Released for Publica- OPINION tion May 2, 2014. [*60] JUSTICE GREEN delivered the opinion of the Court.

PRIOR HISTORY: [**1] ON PETITION FOR REVIEW FROM THE COURT In this contract interpretation case, TXU Portfolio OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS. Management Company, L.P. (TXUPM) contracted to TXU Portfolio Mgmt. Co., L.P. v. FPL Energy, LLC, 328 receive electricity and renewable energy credits (RECs) S.W.3d 580, 2010 Tex. App. LEXIS 5905 (Tex. App. Dal- from wind farms owned by FPL Energy, LLC. FPL failed las, 2010) to provide the required [**2] electricity and RECs.

TXUPM sued FPL for breach of contract; FPL counter- claimed, arguing TXUPM failed to provide FPL with COUNSEL: For American Wind Energy Company LLC, sufficient transmission [*61] capacity. The trial court Amicus Curiae: Gene Grace, AWEA, Washington, DC. granted two partial summary judgments. First, it issued a declaratory judgment that the contracts required TXUPM For REC Stakeholders, Amicus Curiae: Pamela Stanton to provide transmission capacity. Second, it declared the Baron, Attorney at Law, Austin TX. contracts' liquidated damages provisions unenforceable.

The remaining issues were tried to a jury, and the trial For FPL Energy, LLC, Petitioner: Allen Ryan Paulsen, court entered take-nothing judgments for both parties.

Anne McGowan Johnson, Ben L. Mesches, Nina Cortell, Both parties appealed. The court of appeals reversed both Haynes & Boone, L.L.P., Dallas TX; Jeffrey M. Tillotson, summary judgment rulings. 328 S.W.3d 580, 591 (Tex. John D. Volney, Lynn Tillotson Pinker & Cox, L.L.P., App.--Dallas 2010, pet. granted).

Dallas TX.

We address the following issues: (1) did TXUPM owe FPL a contractual duty to provide adequate trans- For TXU Portfolio Management Company, L.P., Re- mission capacity to FPL; (2) if FPL breached and spondent: Daniel Lee Gus, James W. Walker, Walker Sewell LLP, Dallas TX; James C. Ho, Gibson Dunn & TXUPM did not, do the liquidated damages provisions Crutcher LLP, Dallas TX; Lawrence J.C. VanDyke, Of- apply to energy and RECs or only to RECs; and (3) are the liquidated damages provisions in these contracts en- fice of the Attorney General, Solicitor General's Office, forceable? We affirm the court of appeals' holding that Austin TX.

TXUPM owed no contractual duty to provide transmis- JUDGES: JUSTICE GREEN delivered the opinion of the sion capacity. However, we hold the liquidated damages Court. provisions apply only to RECs and are unenforceable as a penalty. Accordingly, [**3] we reverse the court of appeals' judgment in part and remand the case to the court OPINION BY: Paul W. Green of appeals to determine damages.

Page 2 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 I. Factual and Procedural Background For approximately four years, FPL failed to produce the agreed upon electricity and RECs. TXUPM filed suit In Texas, the electric industry consists of three main seeking damages for FPL's breach of the contracts. FPL components: power generation, power transmission, and counterclaimed, arguing that it could not meet its obliga- power distribution. Electric producers own and operate tions because of congestion on the ERCOT grid. When generating facilities. The Electric Reliability Council of the grid lacks capacity to transmit all energy produced in Texas, Inc. (ERCOT), with few exceptions, manages the an area, ERCOT issues curtailment orders instructing transmission of electricity through an interconnected certain facilities to cease production. FPL claims it re- network--or grid--of transmission lines. Finally, retail ceived curtailment orders from ERCOT which, along with electric providers distribute electricity directly to con- an unexpected lack of wind in the area, caused it to pro- sumers. duce less energy than promised. FPL blamed the conges- In 1999, the Legislature created ambitious goals for tion and resulting curtailment orders on TXUPM, insist- renewable energy in Texas. See Act of May 27, 1999, 76th ing that TXUPM bore responsibility to ensure transmis- Leg., R.S., ch. 405, § 39, sec. 39.904, 1999 Tex. Gen. sion capacity for all energy FPL could produce.

Laws 2543, 2598-99. The Legislature charged the Public Both parties filed motions for partial summary Utility Commission of Texas (PUC) with establishing judgment. Each [**6] sought declaratory judgment to minimum renewable energy production requirements for clarify the portions of the contracts relating to transmis- all Texas electric providers. TEX. UTIL. CODE § sion capacity and liquidated damages. The trial court 39.904(c)(1). The Legislature also tasked the PUC with issued several rulings. First, the court declared that the establishing a REC trading program. Id. § 39.904(b). A contracts unambiguously required TXUPM to provide all REC reflects one megawatt hour (MWh) "of renewable transmission services, including transmission capacity, to energy that is physically metered and verified in Texas."

FPL. Second, the court determined that the liquidated TEX. ADMIN. CODE § 25.173(c)(13). [**4] Electric damages provisions in the contracts were not enforceable, producers thus simultaneously create both electricity from and thus void, because a liquidated damages amount of renewable sources and the corresponding RECs, yet $50 per REC was not a realistic forecast of damages. producers may choose to sell the two separately. Id. § 25.173(d). The REC trading program allows electric Consistent with these rulings, the trial court's in- providers unable to satisfy the minimum renewable en- structions to the jury indicated that TXUPM was required ergy requirements to purchase and hold RECs "in lieu of to provide transmission capacity and that the liquidated capacity from renewable energy technologies." TEX. UTIL. damages were unenforceable. The jury found that CODE § 39.904(b); see 16 TEX. ADMIN. CODE § TXUPM should receive $8.9 million in compensatory 25.173(d)(2). damages for FPL's failure to deliver renewable energy, yet the jury determined that TXUPM secured cover for the TXU Electric, a retail electric provider (and a dif- missing electricity by acquiring substitute electricity. The ferent entity than TXUPM), solicited proposals from jury also found that TXUPM owed no compensatory renewable energy producers to meet the new renewable damages to FPL for TXUPM's alleged failure to ensure energy production requirements. In 2000, TXU Electric transmission capacity. The trial court entered judgment on entered agreements with two wind farm subsidiaries of the jury's verdict, ordering that (1) FPL take nothing on its FPL: Pecos Wind I, L.P. and Pecos Wind II, L.P. Also in claims; and [**7] (2) TXUPM take nothing, despite the 2000, FPL acquired a third party's rights to a similar jury's damage award, because TXUPM covered. contract with TXU Electric for Indian Mesa Wind Farm, L.P. Under the contracts, FPL sells TXU Electric RECs The court of appeals affirmed the take-nothing and the renewable electric energy used to produce those judgment for the damages claims but reversed and ren- credits. TXU Electric assigned the contracts to TXUPM, a dered judgment on the issues related to declaratory relief. power marketer and, importantly, not a retail electric 328 S.W.3d at 591. The court held that the contracts did provider. The contracts with Pecos Wind I and II are not require TXUPM to provide the necessary transmission identical. The Indian Mesa contract largely contains capacity. Id. at 587. As to liquidated damages, the court of [**5] the same provisions, but, as [*62] explained appeals held that the provisions were enforceable because below, the parties point to relevant differences in support damages were difficult to estimate, the $50 rate was a of their claimed intent at the time of contracting. Two reasonable estimate of just compensation, and FPL could provisions of these contracts give rise to this dispute: one not meet its burden to show that the $50 rate was dis- provision governing TXUPM's transmission responsibil- proportionate to TXUPM's actual damages. Id. at 587-90. ities and one providing for liquidated damages in the We granted FPL's petition for review and address the event that FPL fails to meet certain production require- three issues before us--whether TXUPM was responsible ments. for ensuring transmission capacity, whether the liquidated Page 3 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 damages provisions apply to failure to deliver electricity, from the Renewable Resource Facility and whether the liquidated damages provisions are en- throughout the Contract Term ("Required forceable. 55 Tex. Sup. Ct. J. 320 (Feb. 17, 2012). Transmission Services").

II. Contract Interpretation Section 1.02(a) of the contracts defines "Net Energy" as Before deciding the enforceability of the liquidated "the amount [**10] of electric energy in MWh produced damages provisions, we must resolve two matters of by the Renewable Resource Facility and delivered to the contract interpretation [*63] --TXUPM's responsibility Connecting Entity." (emphasis added). Under section for transmission [**8] capacity and the scope of the 2.02, a Connecting Entity owns any "transmission or liquidated damages provisions. Our analysis begins with distribution system with which the Renewable Resource the legal question of the contracts' ambiguity. See Dynegy Facility is interconnected." The Connecting Entity serves Midstream Servs., Ltd. P'ship v. Apache Corp., 294 as the "Delivery Point."

S.W.3d 164, 168 (Tex. 2009). If we can give a clear and definite legal meaning to a contract, it is not ambiguous as FPL urges a broad view of TXUPM's responsibility a matter of law. Gilbert Tex. Constr., L.P. v. Underwriters for transmission services. FPL contends that TXUPM's at Lloyd's London, 327 S.W.3d 118, 133 (Tex. 2010). An obligation to provide transmission services "without lim- ambiguous contract, however, has a doubtful or uncertain itation" encompasses the capacity to deliver electricity meaning or is reasonably susceptible to multiple inter- from the Renewable Resource Facility (i.e. FPL) to the pretations; we will not find ambiguity simply because the load (i.e. TXUPM's customer base). In support, FPL ar- parties disagree over a contract's meaning. Dynegy Mid- gues that Net Energy can refer only to a quantity and has stream Servs., 294 S.W.3d at 168. Our primary concern in no bearing on how and when delivery occurs. FPL further contract interpretation is to "ascertain the true intentions argues that the more specific language, "from the Re- of the parties as expressed in the instrument." Coker v. newable Resource Facility," should trump Net Energy, Coker, 650 S.W.2d 391, 393 (Tex. 1983). We consider the which is defined elsewhere in the contracts. See Forbau v. entire writing to harmonize and effectuate all provisions Aetna Life Ins. Co., 876 S.W.2d 132, 133-34 (Tex. 1994) such that none are rendered meaningless. Id. Further, we (stating the rule that, in contract interpretation, a more "construe contracts from a utilitarian standpoint bearing in specific provision will control over a general [*64] mind the particular business activity sought to be served." statement). FPL points to congestion beyond the Delivery Frost Nat'l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310, Point, explaining that as electricity is generated [**11] (Tex. 2005) (per curiam) [**9] (quoting Reilly v. and delivered virtually simultaneously, it cannot stop and Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987)). wait at the Delivery Point for congestion to clear. In a compelling visual, FPL suggests that the transmission A. Transmission Capacity towers might burn down if FPL generated and sent elec- tricity without an available, guaranteed path to the con- We first consider whether the contracts require sumer. FPL complains that TXUPM caused the grid TXUPM to provide adequate transmission capacity to congestion and thus prompted the resulting curtailment FPL. The trial court and the court of appeals found section orders.1 2.03 unambiguous, a finding the parties do not challenge. 328 S.W.3d at 584-85. We may, nonetheless, declare a The record shows that FPL earlier claimed contract ambiguous, see J.M. Davidson, Inc. v. Webster, that TXUPM: (1) prioritized its own fossil 128 S.W.3d 223, 231 (Tex. 2003), but we hold that section fuel-derived energy; (2) knowingly overstated to 2.03, when construed in light of the entire contracts, has a ERCOT its intention to transmit fossil fuel energy, definite legal meaning and, thus, is unambiguous. See resulting in curtailment orders for wind-produced Gilbert Tex. Constr., 327 S.W.3d at 133. energy; and (3) exercised its authority as a "Qual- Section 2.03(a) of the contracts, entitled "Transmis- ified Scheduling Entity," whose responsibility is sion," reads as follows: to report anticipated electricity generation to ERCOT, to influence ERCOT's schedule for en- TXU Electric shall provide, by pur- ergy transmission on the grid. FPL's briefs, how- chasing or arranging for, all services, in- ever, do not pursue these arguments. FPL peti- cluding without limitation Transmission tioned this Court to review the meaning of the Services, Ancillary Services, any control contracts as to TXUPM's obligations to provide area services, line losses except for line transmission services, not TXUPM's alleged role losses on [FPL's] side of the Delivery in creating congestion. Thus, we will not consider Point, and transaction fees, necessary to these arguments. See Guitar Holding Co., L.P. v. deliver Net Energy to TXU Electric's load Hudspeth Cnty. Underground Water Conserva- Page 4 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 tion Dist. No. 1, 263 S.W.3d 910, 918 (Tex. 2008) mission service providers. See 16 TEX. ADMIN. CODE § [**12] (holding issues waived if not presented in 25.5(143), (144). As between the original contracting the petition for review or in the briefs). parties, the contracts required a separate agreement to address interconnection if TXU Electric was the con- TXUPM interprets the contracts as placing the risk of necting entity; the parties do not suggest any such transmission system incapacity on FPL. TXUPM notes agreement exists. Between TXUPM and FPL, no such that the contracts identify "lack of transmission capacity" agreement can exist because TXUPM, as a power mar- as an "Uncontrollable Force" outside the reasonable con- keter, cannot own transmission systems. See id. § trol of the parties. If capacity is beyond the control of the 25.5(83) (defining "power marketer" to exclude owners of parties, TXUPM questions, how then can TXUPM bear transmission systems). The contracts obligate FPL to responsibility for failure to provide capacity? Section 4.05 secure interconnection with a Connecting Entity, or of the contracts reinforces this point by making clear that transmission service provider, which under the PUC rules FPL must pay liquidated damages for failure to supply cannot be TXUPM. See id. § 25.5(83), (143). Reading RECs even if the failure was the result of inadequate sections 2.02 and 2.03 together, FPL must make all in- transmission capacity. Finally, TXUPM argues that the terconnection arrangements so that electricity can reach contracts' definition of Net Energy binds this Court; in- the Delivery Point, and TXUPM must ensure that facili- corporating Net Energy, as defined, into section 2.03 ties [**15] exist beyond the Delivery Point to allow for means that TXUPM owes a duty to provide transmission delivery to consumers. These provisions do not speak to services only after the Delivery Point. Under TXUPM's the situation here, where both parties claim to meet their interpretation, if FPL could not deliver electricity because responsibilities but congestion on the grid inhibits energy of congestion, FPL bore the risk and, thus, must bear the generation and delivery. consequences. We agree with TXUPM's interpretation.

Given these facts, then, we must consider which party We begin by recognizing the apparent textual con- is responsible for congestion beyond the Delivery Point. flict. Read in isolation, section 2.03 contains language While FPL blames grid congestion on TXUPM, we be- supportive [**13] of either a broad or narrow interpre- lieve the contracts recognize such congestion as beyond tation of TXUPM's transmission service responsibilities. both parties' control. Section 6.02(a) of the contracts ad- "[F]rom the Renewable Resource Facility" implies that dresses "Uncontrollable Force," including "[e]vents or TXUPM would have to secure transmission capacity so circumstances that are outside of a Party's reasonable FPL could deliver electricity. But the use of the term Net control," which "may include . . . lack of transmission Energy, which exists only upon FPL's delivery to the capacity or availability." The contracts mention trans- Connecting Entity, suggests that TXUPM bears respon- mission capacity only in this section. Congestion and sibility only if the grid possesses capacity for TXUPM to curtailment issues, which affect transmission capacity and deliver any generated electricity. availability, must fall within this provision. Section We cannot interpret a contract to ignore clearly de- 6.02(b) goes on to excuse a party from performance in the fined terms, see Frost Nat'l Bank, 165 S.W.3d at 313, and, event of an Uncontrollable Force if certain criteria are thus, we must accord Net Energy its due meaning. The met; there is no dispute that FPL did not meet those cri- contracts assigned TXUPM responsibility only for teria. transmission services required to deliver Net Energy, and Section 4.05, entitled "Effect of Outages and Un- Net Energy represents the amount of energy produced by controllable Force," outlines the general rule that payment FPL and delivered to the Connecting Entity. TXUPM's and other [**16] calculations in sections 4.01-.10 are responsibility for transmissions services, then, begins not impacted by Uncontrollable Force. The exception to once FPL-generated electricity reaches the Connecting this rule, discussed below, applies to reduce the Annual Entity on the grid--the Delivery Point. The contracts' use Quantity of RECs that FPL must produce for TXUPM of the phrase "from the Renewable Resource Facility" is only when PUC substantive rules would excuse the simply a designation of where the energy originated. It shortfall. The exception does not excuse FPL from its does not alter the definition of Net Energy provided in obligation to deliver electricity. In essence, the contracts section 1.02 or in other sections [**14] throughout the allocate the risk of curtailment and congestion to FPL by contracts. clearly establishing that such events affect contract obli- [*65] The placement of section 2.03 in the context gations only in certain instances not found here. We must of all interconnection requirements reinforces this con- respect and enforce this assignment of risk. See Gym-N-I clusion. Section 2.02 requires FPL to "make all arrange- Playgrounds, Inc. v. Snider, 220 S.W.3d 905, 912 (Tex. ments . . . necessary to interconnect . . . with a transmis- 2007) ("Freedom of contract allows parties to bargain for sion or distribution system," i.e. the Connecting Entity. mutually agreeable terms and allocate risks as they see Transmission systems are owned and operated by trans- fit.").

Page 5 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 To summarize, the contracts obligate FPL to inter- Rate. The Deficiency Payment is intended connect with a Connecting Entity, which cannot be to be liquidated damages and not a penalty.

TXUPM. TXUPM bears responsibility for providing transmission services from the Delivery Point at the Connecting Entity. To the extent that lack of transmission Vastly simplified, a Net Deficiency occurs when FPL fails capacity impairs electricity generation at the wind farms, to meets its "Annual Quantity" REC quota, even taking the contracts provide that such lack of capacity is an into account past overproduction.

Uncontrollable Force and FPL, therefore, bears the risk.

Section 4.04(f) [**19] sets the Deficiency Rate as We [**17] note that this analysis does not fail be- follows: cause of the unique nature of electricity, [*66] despite FPL's assertions. Admittedly, electricity generation, The initial Deficiency Rate is $50 per transmission, and distribution occur almost simultane- MWh, based upon the $50 per MWh ously. But even if electricity moves too fast to pinpoint its number in [PUC] Substantive Rule § physical location, the parties certainly can conceptualize 25.173. If the $50 per MWh in that Rule is its location for the purpose of creating energy contracts amended, then the Deficiency Rate is au- like the ones in question today. Several contractual pro- tomatically adjusted to the amended visions make this clear: section 2.03(a) assigns FPL re- number stated in that Rule. If [PUC] Sub- sponsibility for any loss of electricity on its side of the stantive Rule §25.173 is amended or re- Delivery Point; and section 3.01(b) makes FPL responsi- pealed without replacement so that the $50 ble for maintenance and operational compliance with number is no longer in the [PUC] Sub- ERCOT guidelines for facilities up to the Delivery Point. stantive Rules, then the Deficiency Rate is This conceptualization of electricity's location pervades $50. To the extent that the [PUC] deter- the contracts, and the parties assigned different responsi- mines the annual average market value of bilities and liabilities based upon that understanding. RECs applicable to [TXUPM] for a year, then the Deficiency Rate for that year will Here, ERCOT issued curtailment orders, effectively be the lesser of (i) the $50 per MWh (as it constraining energy generation, rather than energy may be later amended), and (ii) twice the transmission. FPL was therefore prevented from gener- annual average market value of RECs ap- ating electricity and meeting its contractual obligations. plicable to [TXUPM] as determined by the Although ERCOT made final curtailment decisions, that [PUC] . . . . For a year for which there is a does not mean that neither party bore the risk in [**18] Deficiency Payment due, [TXUPM] shall the event of congestion and curtailment. make reasonable efforts to obtain a de- We hold that the contracts did not require TXUPM to termination of the annual average market provide transmission capacity for FPL but rather allocated value of RECs by the [PUC], but nothing risk of inadequate transmission capacity to FPL. in this Section or in this Agreement obli- gates [TXUPM] to turn in fewer RECs B. Liquidated Damages than are required of [*67] it by the [PUC] program administrator in order to We next consider the breadth of the liquidated dam- obtain such a determination. ages provision in section 4.04. The court of appeals did not address the ambiguity of the section, and neither party argues the provision is ambiguous. We conclude that the provisions are unambiguous because we may discern a TXUPM argues that the contracts [**20] cover both definite legal meaning by construing the provisions in energy and RECs, and, therefore, the liquidated damages light of each contract as a whole. See Gilbert Tex. Constr., clauses must apply to both. TXUPM reads subsections (d) L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, and (f) in the context of contract Article IV (sections (Tex. 2010). 4.01-.10), entitled "Payment, Records, and Billings."

According to TXUPM, because FPL simultaneously The provisions state in relevant part: produces RECs and energy, the parties simply use RECs as a counting mechanism for both, rather than a term If there is a Net Deficiency for a year . . limited strictly to RECs. In support, TXUPM references . . [FPL] shall pay [TXUPM] a Deficiency section 4.02, which provides the contracts' payment Payment equal to the product of (i) the terms, whereby TXUPM must pay FPL a unified price for difference in MWh between (a) the Net an Annual Quantity of MWhs of Renewable Energy Deficiency, and (b) the MWh of Trans- comprised of both energy and RECs. Sections 4.03 and ferred RECs, times (ii) the Deficiency Page 6 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 4.04(a)-(c) outline a quarterly and annual reconciliation Where the parties intended to address both energy process to smooth any discrepancies based on the differ- and RECs, the contracts do [*68] so. In section 4.02, ences between continuous production of electricity and the payments are based [**23] on "all RECs and Net the quarterly issuance of RECs. Section 4.04(d), the ar- Energy produced by [FPL]." Section 4.03 contains ex- gument goes, necessarily incorporates the language used plicit references to section 4.02 and the payments under in the other sections. That section states: "[FPL] may elect section 4.02. The liquidated damages provisions, in con- to obtain and transfer RECs to [TXUPM] that were not trast, provide no such reference. We will not, as TXUPM produced at the Renewable Resource Facility to com- urges, selectively import terms from other provisions to pletely or partially offset the Net Deficiency . . . not to compensate for the absence of the term "energy"; rather, exceed the sum of (i) 20% of the Annual Quantity, we conclude that the omission was intentional and delib- [**21] and (ii) the Uncontrollable Force Deficiency for erate. See Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d that year." Thus, TXUPM argues, Section 4.04(d) as a 640, 646 (Tex. 1996) ("We have long held that courts will whole must refer to the Annual Quantity of both energy not rewrite agreements to insert provisions parties could and RECs. have included or to imply restraints for which they have not bargained.").

In response, FPL points to the absence of "Net En- ergy" or "Renewable Energy" anywhere in the liquidated This interpretation does not conflict with, or render damages provisions and highlights several clauses con- meaningless, any other provision of the contracts. To the sistent with an exclusive focus on RECs. First, section contrary, other provisions recognize that RECs often 4.04(d), quoted above, contains a mechanism for FPL to receive differential treatment. Section 3.03(b) provides deliver RECs from another source if FPL cannot produce that if TXUPM cannot take delivery of electricity, FPL the RECs at its own facilities. That provision deals only may sell electricity to the Connecting Entity, but must with RECs, and not electricity. Second, the Deficiency then sell the REC so produced to TXUPM. Section Rate is tied to the PUC's substantive rules on REC penal- 4.04(d) allows FPL to cover REC deficiencies with RECs ties. 24 Tex. Reg. 9142 (1999), adopted 25 Tex. Reg. 82 from other sources. These distinctions make sense be- (2000), amended by 32 Tex. Reg. 5165 (2007), proposed cause an electricity provider may readily obtain RECs on 32 Tex. Reg. 487 (former 16 TEX. ADMIN. CODE § [**24] the open market, whereas it is more difficult for 25.173(o)) (Pub. Util. Comm'n of Tex.). The PUC rules providers to arrange for substitute electricity to meet their impose penalties for failure to retire sufficient RECs, not commitments. for failure to deliver electricity. Id. Third, the Indian Mesa Support for differential treatment of RECs also flows contract more clearly limits the liquidated damages pro- from the regulatory scheme incorporated by reference into vision to RECs by eliminating the entire provision in the the contracts. Section 4.04(f) incorporates a Deficiency event that RECs cease to exist. For the reasons below, we Rate from the PUC rules, then found in Texas Adminis- hold that the liquidated damages clauses [**22] apply trative Code Title 16, section 25.173. 24 Tex. Reg. 9142 only to RECs. (1999), adopted 25 Tex. Reg. 82 (2000), amended by 32 At the outset, we note that sophisticated parties have Tex. Reg. 5165 (2007), proposed 32 Tex. Reg. 487 broad latitude in defining the terms of their business re- (former 16 TEX. ADMIN. CODE § 25.173(o)) (Pub. Util. lationship. See Forest Oil Corp. v. McAllen, 268 S.W.3d Comm'n of Tex.). Section 25.173, at the time of con- 51, 58 (Tex. 2008) (articulating the principle that Texas tracting, assignment, and breach, contained a mechanism courts should uphold contracts "negotiated at arm's length for excusing REC deficiencies due to events "beyond by 'knowledgeable and sophisticated business players' [the] reasonable control of the provider." Id. Such events represented by 'highly competent and able legal counsel'" included lack of transmission capacity or curtailment (quoting Schlumberger Tech. Corp. v. Swanson, 959 orders from ERCOT. See id. (former 16 TEX. ADMIN.

S.W.2d 171, 180 (Tex. 1997)). We must construe contracts CODE § 25.173(o)(4), (5)). The contracts incorporate this by the language contained in the document, with a mind to mechanism through section 4.05, which reduces the An- Texas's strong public policy favoring preservation of the nual Quantity to the extent that Administrative Code freedom to contract. El Paso Field Servs., L.P. v. MasTec section 25.173 excused penalties for REC deficiencies. In N. Am., Inc., 389 S.W.3d 802, 811-12 (Tex. 2012); see also sum, the contracts reduce FPL's REC obligations when Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24, 26 the PUC provides an excuse for the deficiency. (Tex. App.--Amarillo 2000, no pet.) ("In short, the parties The [**25] very inclusion of the Deficiency Rate, strike the deal they choose to strike and, thus, voluntarily which reflects the actual penalty TXUPM would have to bind themselves in the manner they choose."). Therefore, pay for a REC deficiency, suggests the liquidated dam- the lack of reference to electricity or energy in the liqui- ages clause was intended to compensate only for REC dated damages provisions is critical. deficiencies. To underscore this point, we note that when the parties entered the contracts, TXU Electric was sub- Page 7 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 ject to regulatory penalties for REC deficiencies. See id. REC. We hold that the liquidated damages provisions (former 16 TEX. ADMIN. CODE § 25.173(c)(1)). If FPL apply only to REC deficiencies. failed to deliver both electricity and RECs, and TXU Electric consequently could not meet its REC require- III. Enforceability of Liquidated Damages ments, the PUC would assess a penalty against TXU We next consider the enforceability of the liquidated Electric. The liquidated damages clause would yield $50 damages provisions when applied only to RECs. FPL per REC, or the equivalent of the regulatory penalty. This contends that the provisions impose an unenforceable would compensate TXU Electric for the undelivered penalty when applied to compensate only for REC defi- REC, but what about the undelivered electricity? Liqui- ciencies. Although TXUPM argues primarily that the dated damages would provide no compensation to TXU provisions reasonably forecast damages for electricity and Electric for FPL's failure to deliver electricity. This belies RECs--a position foreclosed [**28] by our holding in TXUPM's assertion that the provisions were intended to this case--TXUPM's arguments regarding the difficulty of compensate for both RECs and electricity. We conclude estimation of REC-based damages and the reasonableness that the liquidated damages clauses compensate for REC of the forecast of damages still resonate. Because the deficiencies and leave common law remedies available liquidated damages provisions fail our test for enforcea- for electricity deficiencies. bility, however, we hold the provisions unenforceable. [*69] The Indian Mesa contract further solidifies The basic principle underlying contract damages is [**26] our interpretation. Section 10.02 of the Indian compensation for losses sustained and no more; thus, we Mesa contract provides that "if RECs cease to exist, then will not enforce punitive contractual damages provisions.

Section 4.03 and Section 4.04 of this Agreement will be See Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 automatically deleted." This section preserves the (Tex. 1952). In Phillips v. Phillips, we acknowledged this agreement as an electricity-only contract if RECs disap- principle and restated the two indispensable findings a pear. Because the liquidated damages provision becomes court must make to enforce contractual damages provi- a nullity without RECs, we must conclude that the provi- sions: (1) "the harm caused by the breach is incapable or sion is intended to compensate only for REC deficiencies. difficult of estimation," and (2) "the amount of liquidated To do otherwise would render the provision meaningless, damages called for is a reasonable forecast of just com- and this we cannot do. See Coker, 650 S.W.2d at 393. pensation." 820 S.W.2d 785, 788 (Tex. 1991) (citing Rio Limiting the liquidated damages provisions to their Grande Valley Sugar Growers, Inc. v. Campesi, 592 plain language also has the benefit of advancing stability S.W.2d 340, 342 n.2 (Tex. 1979)). We evaluate both in the renewable energy marketplace, including the vital prongs of [*70] this test from the perspective of the role of RECs. Under the legislative scheme, RECs and parties at the time of contracting.2 In Phillips we recog- energy are "unbundled." TEX. UTIL. CODE § 39.904(b); nized that, under this test, a liquidated damages provision ERCOT Nodal Protocols § 14.3.2(1) (January 1, 2013). may be unreasonable "because [**29] the actual dam- Electric providers may either generate their own renewa- ages incurred were much less than the amount contracted ble energy or purchase RECs on the open market. 16 TEX. for." 820 S.W.2d at 788. A defendant making this asser- ADMIN. CODE § 25.173(d), (l). Though FPL and TXUPM tion may be required to prove the amount of actual dam- chose to contract for both in this case, we should not allow ages before a court can classify such a provision as an that fact to cloud our analysis. As amici curiae REC unenforceable penalty. Id. While the question may require stakeholders have pointed out, a contrary holding could a court to resolve certain factual issues first, ultimately the [**27] impede the REC market, which facilitates re- enforceability of a liquidated damages provision presents newable energy development by allowing prospective a question of law for the court to decide. Id. electric producers to secure a guaranteed long-term rev- enue stream. Yet if, as TXUPM urges, "REC" does not 2 Polimera v. Chemtex Envtl. Lab., Inc., No. mean only REC, substantial uncertainty may arise re- 09-10-00361-CV, 2011 Tex. App. LEXIS 3886, at garding the desirability of such investments, the meaning *12 (Tex. App.--Beaumont May 19, 2011, no pet.) of existing contracts, the negotiation of future contracts, (mem. op.); Baker v. Int'l Record Syndicate, Inc., and the ease of regulatory compliance. We are loath to 812 S.W.2d 53, 55 (Tex. App.--Dallas 1991, no interfere with a functioning market when the language of writ); Mayfield v. Hicks, 575 S.W.2d 571, 576 the contracts does not so require. (Tex. Civ. App.--Dallas 1978, writ ref'd n.r.e.); Muller v. Light, 538 S.W.2d 487, 488 (Tex. Civ. The plain language of the liquidated damages provi- App.--Austin 1976, writ ref'd n.r.e.); Schepps v. sions, the differential treatment of RECs and electricity in Am. Dist. Tele. Co. of Tex., 286 S.W.2d 684, 690 the contracts, and the separate provisions of the Indian (Tex. Civ. App.--Dallas 1955, no writ); Zucht v. Mesa contract all support a limited interpretation of a Stewart Title Guar. Co., 207 S.W.2d 414, 418 Page 8 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 (Tex. Civ. App.--San Antonio 1947, writ dism'd); plication only if TXUPM were actually assessed a pen- accord RESTATEMENT (SECOND) OF CONTRACTS § alty.

356 cmt. b (1981) (identifying the time of making We view the reasonableness of the forecast from the a contract as the moment to evaluate [**30] the time of contracting. E.g., Mayfield v. Hicks, 575 S.W.2d reasonableness of a liquidated damages clause).

571, 576 (Tex. Civ. App.--Dallas 1978, writ ref'd n.r.e.); accord RESTATEMENT (SECOND) OF CONTRACTS § 356 cmt.

A. Difficulty of Estimating Damages b (1981) (identifying the time of making a contract as the We first consider the difficulty of estimating damages moment to measure the reasonableness of anticipated at the time of contracting. TXUPM emphasizes the un- loss). We are not persuaded, as FPL urges, to attach a certainty of the market for RECs. FPL counters that all "penalty" label merely because the liquidated damages parties knew a REC marketplace would soon exist and clause derives from a "penalty" scheme; that does not, provide transparent pricing by the time the obligations standing alone, make it a penalty. Stewart, 245 S.W.2d at under the contracts became due. We agree with TXUPM 486 ("[T]he courts will not be bound by the language of that damages for RECs were difficult to estimate at the the parties."). time of contracting.

Although the initial per-REC deficiency rate is $50, The implementing legislation for the REC scheme the contracts also provide: passed in 1999, Act of May 27, 1999, 76th Leg., R.S., ch. 405, § 39, sec. 39.904, 1999 Tex. Gen. Laws 2543, To the extent that the [PUC] determines 2598-99, but at the time of contract formation in 2000, the the annual average market value of RECs market for RECs did not yet exist. The nature of FPL's applicable to [TXUPM] for a year, then the obligation compounded the difficulty. The contracts re- Deficiency Rate for that year will be the quired FPL to deliver an annual quantity of RECs. lesser of (i) the $50 per MWh (as it may be TXUPM could not identify the specific time, and thus the later amended), and (ii) twice the annual spot price in the REC market, in order to calculate the average market value of RECs applicable damage for any specific REC deficiency. Even if the to [TXUPM] as determined by the [PUC]. contracts anticipate a healthy marketplace for RECs, the uncertain success of a novel legislative scheme surely poses a challenge to predicting damages. Indeed, as ex- The contracts thus anticipate that the amount [**33] of plained previously, [**31] the Indian Mesa contract damages may be tied to market value, rather than an ar- foresaw the potential disappearance of the REC scheme bitrary number. Further, section 4.05 of the contracts and provided for continuation of the contract in the event anticipates that the PUC substantive rules will affect the of the scheme's demise. The uncertain marketplace for REC requirements: RECs suffices to meet the "difficulty of estimation" prong The exception . . . is that the Annual of the contractual damages test. Quantity for a year is decreased to the ex- tent that [TXUPM] is excused from paying B. Reasonableness of Damage Forecast a penalty by reason of any event under Section 25.173(o)(4) and (5) of the [PUC] We next turn to the second prong, the reasonableness Substantive Rules that adversely affected of the forecast of damages. FPL argues that the liquidated production of RECs by the Renewable damages provisions, which derive directly from the reg- Resource Facility in that year. ulatory penalty scheme, impose the maximum penalty in all situations. FPL points to an ameliorative provision in the penalty regulations that excuses REC deficiencies due As discussed above, former PUC rules, then found in Title to lack of transmission capacity or the actions of a gov- 16, Section 25.173 of the Texas Administrative Code, ernmental authority, such as an ERCOT curtailment. See excused REC deficiencies due to lack of transmission 24 Tex. Reg. 9142 (1999), adopted 25 Tex. Reg. 82 capacity or curtailment orders. 24 Tex. Reg. 9142 (1999), (2000), amended by 32 Tex. Reg. 5165 (2007), proposed adopted 25 Tex. Reg. 82 (2000), amended by 32 Tex. Reg. 32 Tex. Reg. 487 (former 16 TEX. ADMIN. CODE § 5165 (2007), proposed 32 Tex. Reg. 487 (former 16 TEX. 25.173(o)) (Pub. Util. Comm'n of Tex.). Many of ADMIN. CODE§ 25.173(o)) (Pub. Util. Comm'n of Tex.).

TXUPM's counter-arguments are inextricably tied to The contracts therefore contemplate that REC obligations contractual damages provisions [*71] based on RECs of the parties, and the resulting damages, are a product of and electricity, and we need not acknowledge those ar- and intertwined with the regulatory scheme. The liqui- guments here. TXUPM does assert, however, that the dated damages provisions attempt to integrate these ame- liquidated damages provisions were [**32] not intended as indemnity clauses and therefore are not limited to ap- Page 9 426 S.W.3d 59, *; 2014 Tex. LEXIS 272, **; 57 Tex. Sup. J. 325 liorative processes, and thus, on their face, reasonably damages equal only $6,160,000. To reach damages of $29 forecast damages. million on a 220,000 REC deficiency would require an effective deficiency rate of $132 per REC. The disparity Yet the facts of [**34] this case demonstrate the grows if we consider that TXUPM also avoided the con- chasm between the liquidated damages provisions as tract price of $24 per MWh of Renewable Energy--which written and the result of the provisions under the court of includes a REC and a MWh of electricity. Although only a appeals' judgment. First, the number of deficient RECs portion of the $24 is attributable to the REC not pur- varies significantly between TXUPM's assertion and what chased, it nonetheless would further diminish TXUPM's the regulatory scheme would indicate. FPL had a collec- actual damages. In Phillips, we recognized that a liqui- tive deficiency of 580,000 RECs, yet 62% (or about dated damages provision may be unreasonable in light of 360,000) were not produced because of transmission actual damages. 820 S.W.2d at 788. The burden of prov- congestion and associated ERCOT curtailment orders, ing unreasonableness falls to FPL. See id. The court of which are excused by the PUC rules. Id. TXU Electric appeals held that FPL failed to meet this burden, yet the was subject to PUC penalties for REC deficiencies at the court's evaluation was based on evidence of damages for time of contract formation. Id. (former 16 TEX. ADMIN. electricity and RECs. 328 S.W.3d at 589-90. Our holding CODE § 25.173(c)(1)). Upon assignment to TXUPM, a on the scope of the liquidated damages clauses limits our power marketer, no party was subject to PUC penalties. consideration to damages for REC deficiencies. The evi- See 16 TEX. ADMIN. CODE § 25.5(83) (defining power dence reviewed in this opinion demonstrates [**37] that marketer as an wholesaler seller of electricity who does FPL has met its burden. not own generation, transmission, or distribution facilities in Texas, which would exclude TXUPM from REC pen- Phillips did not create a broad power to retroactively alties). This change in relationship did [*72] not un- invalidate liquidated damages provisions that appear dermine each contract, but it fundamentally changed the reasonable as written. See 820 S.W.2d at 788. Nor do we basis for the liquidated damages provisions. Those pro- create such a power here. But when there is an un- visions presuppose that TXU Electric or its successors bridgeable discrepancy between liquidated damages pro- would respond to potential penalties for REC [**35] visions as written and the unfortunate reality in applica- deficiencies. When those successors have no REC penalty tion, we cannot enforce such provisions. The forecast of obligations, they may, as occurred here, fail to secure a damages was flawed by its reliance on events that did not regulatory excuse for deficiencies that would obviate any and perhaps cannot occur--a PUC determination of the need for the liquidated damages provisions. If the PUC market value of RECs and a failure to secure a regulatory could assess a penalty against TXUPM, the penalty would excuse for curtailment-based REC deficiencies. When the be based on the 220,000 RECs attributable to lack of liquidated damages provisions operate with no rational wind, not congestion. relationship to actual damages, thus rendering the provi- sions unreasonable in light of actual damages, they are Second, the Deficiency Rate calculation failed to tie unenforceable. See id. Because the liquidated damages the damages to market value as the contracts contemplate. provisions operate as a penalty, we hold the provisions Section 4.04(f) of the contracts allows for a Deficiency unenforceable.

Rate of either $50 or twice the annual average market value of RECs "[t]o the extent that the [PUC] determines IV. Conclusion the annual average market value." The PUC expressly declined TXUPM's request for such a determination. The We hold that the contracts do not require TXUPM to actual market value of a REC during the period in ques- provide transmission capacity [*73] to FPL, and thus tion ranged from $4 to $14. The fortuity of a PUC de- TXUPM did not breach the contracts. FPL may owe termination thus utterly controls the damages, irrespective damages for its breach, but the liquidated damages pro- of the actual market value. For instance, the appropriate visions in the contracts are unenforceable as a penalty. amount of damages should fall in the range of $8 to $28 Accordingly, [**38] we reverse in part the judgment of (twice the average market value), depending on what the the court of appeals and remand the case to the court of PUC would have determined as the actual market value of appeals to determine damages consistent with this opin- a REC in each year. ion.

In combination, this creates an unacceptable [**36] Paul W. Green disparity. The court of appeals assessed damages at $29 Justice million. If we use the REC deficiency of 220,000 (as reduced under PUC rules), and the reduced Deficiency OPINION DELIVERED: March 21, 2013 Rate of $28 (the upper bound of the possible range), actual Page 1

GARDEN RIDGE, L.P., Appellant v. ADVANCE INTERNATIONAL, INC., AND HERBERT A. FEINBERG, Appellees NO. 14-11-00624-CV COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON 403 S.W.3d 432; 2013 Tex. App. LEXIS 4497; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548

April 9, 2013, Opinion Filed SUBSEQUENT HISTORY: Petition for review denied On appeal, Garden Ridge argues that the trial court by Garden Ridge, L.P. v. Advance Int'l, Inc., 2014 Tex. committed reversible error when it (1) refused to submit a LEXIS 876 (Tex., Oct. 3, 2014) question on prior material breach, (2) improperly in- structed the jury on damages, and (3) commented on the PRIOR HISTORY: [**1] weight of the evidence in its instructions on breach of On Appeal from the 164th District Court, Harris contract. We conclude that the chargeback provisions County, Texas. Trial Court Cause No. 2009-80706. [**2] as applied in this case are unenforceable as a matter of law as penalties, and we overrule Garden Ridge's jury charge issues. We therefore affirm the trial court's judg- COUNSEL: For APPELLANT: Leif Alexander Olson, ment.

Jared Gregory Leblanc, HOUSTON, TX.

I. FACTUAL AND PROCEDURAL BACKGROUND For APPELLEE: Constance H. Pfeiffer, Jeffrey Todd Bentch, HOUSTON, TX. Garden Ridge is a Houston-based chain of housewares and home décor stores. Advance Interna- JUDGES: Panel consists of Justices Frost, Christopher, tional, a company owned by Feinberg, is one of Garden and Jamison. (Frost, J., concurring). Ridge's vendors. In 2009, Advance sent Garden Ridge quote sheets for lighted inflatable holiday snowmen, OPINION BY: Tracy Christopher which included a color photo of each item and described its cost, weight, dimensions, and packaging. The two OPINION snowmen on the quote sheets each wore a scarf, held a broom that stated "Merry Christmas" on it, and waved; [*434] Appellant Garden Ridge, L.P. (Garden one stood eight feet tall, and the other stood nine feet tall.

Ridge) sued Advance International, Inc., and Herbert A.

We refer to this snowman as "waving snowman." Ad- Feinberg (collectively, Advance) for breach of contract vance then sent two sample snowmen1 to Garden Ridge; and a declaratory judgment that Garden Ridge had one of the samples did not match its quote sheet. The [*435] complied with its contracts with Advance. Ad- sample eight-foot snowman wore a Santa-type hat and vance counterclaimed for breach of contract. The jury held a "Merry Christmas" banner. We refer to this found in favor of Advance. Although Garden Ridge ac- snowman as "banner snowman." cepted two shipments of inflatable snowmen from Ad- vance, Garden Ridge refused to pay anything for either See App. A. shipment, claiming that one shipment was nonconform- ing. Garden Ridge based its refusal to pay on chargeback Garden Ridge sent Advance two purchase orders, one provisions outlined in the parties' contracts. Advance for approximately 950 nine-foot waving snowmen (PO argued that the chargeback provisions are unenforceable '721), and the other for approximately 3,500 eight-foot penalties. waving [**3] snowmen (PO '743), based on the quote sheets. Garden Ridge planned to sell each nine-foot Page 2 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 waving snowman for $59.99, and each eight-foot waving snowmen it received from Advance, and further testified snowman for $39.00. Garden Ridge planned to mark that Garden Ridge made all the money it would have down the eight-foot waving snowmen to $20.00 each made if the snowmen were delivered exactly as ordered. during its one-day Thanksgiving Shop-a-Thon sale, and it One of Garden Ridge's buyers, Sheria Cole, admitted she prepared and had printed an advertising circular promot- did not know of any dollar amount that Garden Ridge was ing this special price and picturing the eight-foot waving harmed by the snowmen shipment and that Garden Ridge snowman. had less-than-zero receipt cost for the snowmen. Cole also testified that she was unaware of anyone at Garden Ridge Five days before Thanksgiving, Garden Ridge real- having done any actual-harm calculations from the un- ized that the eight-foot snowmen that Advance sent were authorized substitution of the eight-foot banner snowmen not waving snowmen, but instead were banner snowmen. or any calculations to determine whether Garden Ridge's The nine-foot snowmen that Advance sent were waving chargebacks were reasonably proportional to any actual snowmen. Garden Ridge decided to honor the $20.00 harm it suffered. Garden Ridge acknowledges that it did Shop-a-Thon price on the nine-foot waving snowmen. not argue any amount of actual damages other than zero There were no customer complaints, and both the and that the record reflects no actual [**6] damages eight-foot banner snowmen and the nine-foot waving resulting from Advance's noncompliance violations. snowmen sold well.

The trial court granted Advance's motion for directed The parties' contracts consist of the purchase orders, verdict on Garden Ridge's breach-of-contract claim be- the vendor cover letter, and the vendor compliance man- cause of lack of evidence on damages resulting from ual. Based on liquidated-damages provisions outlined in Advance's noncompliance violations, but did not grant the vendor compliance manual, Garden Ridge assessed Advance's motion for directed verdict on Garden Ridge's chargebacks against Advance for its alleged noncompli- declaratory-judgment claim or Advance's motion for ance violations. For Advance's "purchase order" viola- directed verdict seeking to have Garden Ridge's charge- tion--by sending the eight-foot [**4] banner snowman back provisions declared legally unenforceable as penal- instead of the waving snowman, Garden Ridge charged ties. back to Advance the entire merchandise cost plus the cost of freight on PO '743 as a "unauthorized substitution" The trial court submitted to the jury questions on chargeback, which totaled [*436] $49,176.00. In addi- Garden Ridge's declaratory-judgment claim and on Ad- tion to paying nothing for the eight-foot banner snowmen, vance's breach-of-contract claim, but refused to submit a Garden Ridge paid nothing for the nine-foot waving question on Garden Ridge's prior-material-breach de- snowman despite the fact that those snowmen complied fense. On Garden Ridge's declaratory-judgment claim, the with PO '721. Garden Ridge charged back to Advance the jury found that Garden Ridge did not comply with the entire merchandise cost plus the cost of freight on the terms of the three listed agreements (to purchase the nine-foot waving snowmen as a "merchant initiated" eight-foot snowmen, to purchase the nine-foot snowmen, chargeback, which totaled $29,178.00. Additionally, from and to purchase other items listed in the "summary of September through November 2009, Garden Ridge as- chargebacks" exhibit). On Advance's breach-of-contract sessed another $13,241.84 in noncompliance chargebacks claim, the jury found that Garden Ridge failed to comply to Advance on other merchandise for "ticketing/packing" with these agreements by failing to pay for the eight-foot violations involving not marking cartons sequentially or snowmen, the nine-foot snowmen, and other items listed otherwise mislabeling them, and for "purchase order" [**7] in the chargeback exhibit. The jury, in separate violations involving short or incomplete orders. findings, awarded Advance damages in the amount of $49,176.00 for the eight-foot snowmen, $29,781.00 for Advance demanded payment for its snowmen and the nine-foot snowmen, and $500.00 for other items listed other items and staged protests at Garden Ridge's head- in the chargeback exhibit. The trial [*437] court ren- quarters. Thereafter, Garden Ridge sued Advance for dered final judgment on the jury's verdict and on a stipu- breach of contract and a declaratory judgment that Garden lation for legal fees.

Ridge had complied with the contracts. Advance coun- terclaimed for breach [**5] of contract and asserted that Garden Ridge appeals the trial court's final judgment, Garden Ridge's claims were barred because the charge- arguing in three issues that the trial court committed re- back provisions are unenforceable as penalties. Garden versible error in its jury charge. First, Garden Ridge Ridge defended against Advance's counterclaim by as- contends that the trial court erred in refusing to submit a serting that Advance breached the contracts first. jury question on Garden Ridge's affirmative defense of prior material breach. Second, Garden Ridge argues that At trial, Garden Ridge's divisional merchandise the trial court erred by improperly instructing the jury in manager/vice president Linda Troy admitted that Garden the damages question on the reasonableness of Garden Ridge made approximately $113,000 in profit on the Ridge's chargebacks. Third, Garden Ridge complains that Page 3 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 the trial court's inclusion of instructions on acceptance pute that it accepted the snowmen, and there is no and contract price in the breach-of-contract question were evidence that its actions fall within section 2.717. improper comments on the weight of the evidence. 3 Advance further contends that prior material breach never can be asserted in any UCC case that II. ANALYSIS concerns nonconforming goods. See Glenn Thurman, Inc. v. Moore Constr., Inc., 942 S.W.2d A. Refusal to submit prior-material-breach question 768, 771-72 (Tex. App.--Tyler 1997, no writ).

However, we need not decide this issue to finally Garden Ridge concedes that it is not entitled to a jury dispose of this appeal. See TEX. R. APP. P. 47.1. question on prior material breach if this court determines that the chargeback [**8] provisions are unenforceable a. Determining whether a liquidated-damages provi- as penalties. Thus, we first proceed to address the legal sion constitutes a penalty question of whether the chargeback provisions are en- forceable. Whether a contractual provision is an enforceable liquidated-damages [**10] provision [*438] or an 1. Do the chargeback provisions at issue assess liqui- unenforceable penalty is a question of law for courts to dated damages or penalties? decide. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991) (citation omitted). The party asserting that a liqui- The parties agree that this case is governed by the dated-damages clause is a penalty provision bears the Uniform Commercial Code, as adopted by Texas, which burden of pleading and proof. See id. at 789 (citing TEX. R. applies to transactions involving goods. TEX. BUS. & COM.

CIV. P. 94).

CODE ANN. § 2.102 (West 2009).2 The parties agree that section 2.718(a) of the UCC, on liquidation of damages, "Liquidated damages" ordinarily refers to an ac- governs the enforceability of the chargeback provisions in ceptable measure of damages that parties stipulate in this case. Section 2.718(a) provides: advance will be assessed in the event of a contract breach.

Flores v. Millennium Interests, Ltd., 185 S.W.3d 427, 431 (a) Damages for breach by either party (Tex. 2005) (citing Valence Operating Co. v. Dorsett, 164 may be liquidated in the agreement but S.W.3d 656, 664 (Tex. 2005)). "The common law and the only at an amount which is reasonable in Uniform Commercial Code have long recognized a dis- the light of the anticipated or actual harm tinction between liquidated damages and penalties." Id. caused by the breach, the difficulties of (citing TEX. BUS. & COM. CODE § 2.718(a), and Stewart v. proof of loss, and the inconvenience or Basey, 150 Tex. 666, 245 S.W.2d 484, 485-86 (1952)). non-feasibility of otherwise obtaining an Section 2.718(a) codified the common-law distinction adequate remedy. A term fixing unrea- between liquidated damages and penalties as part of sonably large liquidated damages is void Texas' adoption of the UCC's article on sales. Id. at 432. as a penalty.

In Phillips v. Phillips, the Texas Supreme Court re- stated the common-law test for determining whether to enforce a liquidated-damages provision. 820 S.W.2d at Id. § 2.718(a). The parties also agree that if the charge- 788. "In order to [**11] enforce a liquidated damages back provisions governing Advance's noncompliance clause, the court must find: (1) that the harm caused by the violations at issue are unenforceable as penalties, Garden breach is incapable or difficult of estimation, and (2) that Ridge no longer has any basis to argue that Advance the amount of liquidated damages called for is a reason- committed [**9] any prior material breach.3 But what able forecast of just compensation." Id. (citing Rio the parties do not agree on is the proper analysis by which Grande Valley Sugar Growers, Inc. v. Campesi, 592 courts determine the legal question of whether a liqui- S.W.2d 340, 342 n.2 (Tex. 1979), and comparing to TEX. dated-damages provision is unenforceable as a penalty.

BUS. & COM. CODE § 2.718(a)). The Phillips court ex- plained that one way a party can "show that a liquidated Under the UCC, a buyer can reject, accept, or damages provision is unreasonable" is by showing that partially accept nonconforming goods. TEX. BUS. "the actual damages incurred were much less than the & COM. CODE ANN. § 2.601 (West 2009). The amount contracted for," which requires the party "to prove buyer must pay at the contract rate for goods it what those actual damages were." Id. Thus, in such a case, accepts. Id. § 2.607(a). A buyer who notifies the "factual issues must be resolved before the legal question seller of his intention to do so may deduct dam- can be decided." Id. Phillips, however, involved no fact ages resulting from any breach of the contract issues because the contractual provision at issue "by from any part of the price still due under that which one party agrees to pay the other some multiple of contract. Id. § 2.717. Garden Ridge does not dis- actual damages for breach of the agreement does not meet Page 4 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 either part of the legal test for an enforceable liquidated Garden Ridge's CFO, Bill Uhrig, testified that the damages provision." Id. at 789. The Phillips court there- chargeback schedule was created because actual damages fore declared the provision at issue--which called for from noncompliance violations are difficult to calculate, "liquidated damages ten times the amount [the limited and that the schedule was based on computations and [**12] partner] loses as a result of" a breach of estimations by Garden Ridge's executive and purchasing trust--unenforceable as a penalty on its face. Id. at 787, staff.

789.

Garden Ridge primarily relies on two cases from the The common-law test as described in Phillips closely Dallas Court of Appeals. See GPA Holding, Inc. v. Baylor tracks the language of section 2.718(a) of the UCC. The Health Care Sys., 344 S.W.3d 467 (Tex. App.--Dallas code allows damages to be liquidated "only at an amount 2011, no pet.); Baker v. Int'l Record Syndicate, Inc., 812 which is reasonable in the light of the anticipated or actual S.W.2d 53 (Tex. App.--Dallas 1991, no writ). Neither of harm caused by the breach, the difficulties of proof of these cases, however, supports Garden Ridge's position loss, and the inconvenience or non-feasibility of otherwise that the test is to be conducted solely on an ex ante basis. obtaining an adequate remedy." TEX. BUS. & COM. CODE In GPA Holding, the appellate court found that GPA, ANN. § 2.718(a). It further states: "A term fixing unrea- a third-party administrator for self-funded health plans, sonably large liquidated damages is void as a penalty." Id. did not meet its burden to establish that a "clause requiring The first clause of section 2.718(a)--"reasonable in the payment of normal billed charges [instead of the original light of the anticipated or actual harm caused by the provider discounted rates] after 45 days" in GPA's hos- breach"--correlates to "reasonable forecast of just com- pital services agreement with Baylor was an unenforcea- pensation," from the common-law test. See id.; Phillips, ble penalty. 344 S.W.3d at 476. GPA did not prove that 820 S.W.2d at 788. The second and third clauses of sec- "the harm [**15] from late payment is [not] difficult to tion 2.718(a)--"the difficulties of proof of loss, and the estimate, or that the normal billed charges were an un- inconvenience or non-feasibility of otherwise obtaining reasonable forecast of the loss actually sustained." Id. an adequate remedy"--correlate to "that the harm caused (emphasis added). Nothing in the GPA Holding court's by the breach is incapable or difficult of estimation," from analysis precludes a consideration of reasonableness the common-law test. See TEX. BUS. & COM. CODE ANN. § based on actual damages; and in fact, the court assessed 2.718(a); Phillips, 820 S.W.2d at 788. [**13] Further, Baylor's actual damages, i.e., whether the normal billed the sentence that "[a] term fixing unreasonably large liq- charges were a "reasonable amount for the health care uidated damages is [*439] void as a penalty" under services and supplies provided in the charges at issue in section 2.718(a) correlates to "a liquidated damages pro- this case." Id. vision is unreasonable because the actual damages in- curred were much less than the amount contracted for." In Baker, while the appellate court noted that evi- See TEX. BUS. & COM. CODE ANN. § 2.718(a); Phillips, dence related to the difficulty of estimation and the rea- 820 S.W.2d at 788. We therefore conclude that the sonableness of the damages forecast should be viewed as common-law test as described in Phillips and the UCC of the time the contract was executed, or the "anticipated test as outlined in 2.718(a) reflect the same essential harm" test, the court also expressly stated: "Additionally, factors and the same type of reasonableness test. Thus, liquidated damages must not be disproportionate to actual common-law case law continues to inform our analysis damages. If the liquidated damages are shown to be dis- here. proportionate to the actual damages, then the liquidated damages can be declared a penalty . . . ." 812 S.W.2d at 55. b. Do actual damages matter The Baker court called this the "actual harm" test: "The party asserting this defense is required to prove the Garden Ridge argues that the test is conducted en- amount of the other party's actual damages, if any, to tirely on an ex ante basis. That is, if, at the time the con- show that the actual loss [**16] was not an approxima- tract is formed, actual damages are difficult to estimate tion of the stipulated sum." Id. This "actual harm" test is and the amount specified in the contract is a reasonable entirely consistent with what the Texas [*440] Su- forecast of just compensation, a liquidated-damages term preme Court stated in Phillips, that a party can show is enforceable. Garden Ridge contends that the test con- unreasonableness based on "the actual damages incurred tains no ex post actual-harm assessment to determine [being] much less than the amount contracted for." 820 reasonableness. Thus, according to Garden Ridge, Ad- S.W.2d at 788. vance could only show that the chargeback provisions were unenforceable as penalties if, ex ante, actual dam- This court also has recognized that actual harm fac- ages are easy to estimate [**14] or the liquidated dam- tors into the test to determine whether a liquidat- ages are based on an unreasonable forecast. Garden Ridge ed-damages provision is an enforceable penalty. In Chan asserts that Advance did not meet its burden because v. Montebello Development Co., we described the Phillips Page 5 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 test as follows: "The test for determining whether a pro- proportionate estimation of Garden Ridge's actual dam- vision is valid and enforceable as liquidated damages is ages; therefore, the chargeback provisions are void as (1) if the damages for the prospective breach of the con- penalties under the UCC. tract are difficult to measure; and (2) the stipulated dam- Advance elicited evidence from Garden Ridge em- ages are a reasonable estimate of actual damages." Chan ployees Troy and Cole sufficient to prove that Garden v. Montebello Dev. Co., No. 14-06-00936-CV, 2008 Tex. Ridge suffered no actual damages as a result of Advance's App. LEXIS 5980, 2008 WL 2986379, at *3 (Tex. substitution of the eight-foot banner snowmen. The trial App.--Houston [14th Dist.] July 31, 2008, pet. denied) court also determined that Garden Ridge suffered no (citing Phillips, 820 S.W.2d at 788). Further, we stated: actual damages from any of Advance's noncompliance violations when the court directed a verdict against Gar- In order to meet this burden, the party den Ridge on its breach-of-contract claim; Garden Ridge asserting the defense is required to prove does not challenge that ruling. And Garden Ridge [*441] the amount of the other parties' actual itself acknowledges it argued no amount of actual dam- damages, if any, to show that the liqui- ages other than zero and [**19] the record shows that dated damages are not an approximation of Garden Ridge suffered no actual damages resulting from the stipulated [**17] sum. If the liqui- Advance's noncompliance violations. dated damages are shown to be dispropor- tionate to the actual damages, then the Thus, Advance has shown that the chargebacks as- liquidated damages must be declared a sessed by Garden Ridge for Advance's "unauthorized penalty . . . . substitution" and "merchant initiated" noncompliance violations--100% of the invoiced merchandise cost plus freight for the eight-foot banner snowmen and the 2008 Tex. App. LEXIS 5980, [WL] at *3-4 (citations nine-foot waving snowmen, for a total of omitted). $79,457.00--were unreasonably large when compared to Garden Ridge's actual damages of zero. Advance also has Most importantly, the UCC reasonableness test ex- shown that the additional chargebacks assessed by Garden plicitly refers to actual harm, providing that one way a Ridge for Advance's "short or incomplete order," "carton liquidated-damages provision can be invalidated is where markings," and "cartons not numbered correctly" non- the stipulated amount proves unreasonable in light of "the compliance violations on other merchandise--totaling anticipated or actual harm caused by the breach." TEX. approximately $13,000--were unreasonably large when BUS. & COM. CODE ANN. § 2.718(a) (emphasis added). In compared to Garden Ridge's actual damages of zero. addition, the UCC expressly provides that "[a] term fixing Therefore, as a matter of law, we conclude that, under unreasonably large liquidated damages is void as a pen- these circumstances,4 the chargeback amounts were un- alty." Id.; see id. cmt. 1. In order to determine whether a reasonable, and that the chargeback provisions are unen- term fixes unreasonably large liquidated damages, it fol- forceable as penalties under the UCC because they fixed lows that courts would need to consider what actual harm, unreasonably large liquidated damages. Accordingly, we if any, was caused by the breach and then compare it to the overrule Garden Ridge's first issue. stipulated amount of liquidated damages.

Thus, both the common law and the UCC allow for 4 Advance further argues that the chargeback courts to determine the reasonableness of a liquidat- provisions are [**20] unenforceable on their ed-damages clause by considering whether the defendant face, as in Phillips. However, while Advance was has shown that the stipulated amount was "unreasonably able to prove that Garden Ridge suffered no actual large" compared to the actual damages. See TEX. BUS. & damages here, perhaps there may exist circum- COM. CODE ANN. § 2.718(a); Phillips, 820 S.W.2d at 788. stances whereby the nature of the unauthorized substitution, short or incomplete order, mismarked c. [**18] Comparing the amount of the chargebacks carton, or other noncompliance issue leading to a to Garden Ridge's actual damages merchant-initiated chargeback would not result in actual damages of zero and whereby the charge- Advance argues that it proved that the harm antici- back amounts when compared to those actual pated from its alleged noncompliance was not difficult to damages would not be disproportionate. estimate, that Garden Ridge did not even attempt to de- termine a chargeback amount that was reasonable in light d. Whether the amount of the chargebacks is reason- of the anticipated or actual harm, and that the liquidated able in light of Garden Ridge's anticipated harm damages Garden Ridge assessed are disproportionate to its actual damages. We conclude Advance met its burden Even if the concurring opinion is correct that Ad- to show that the chargeback amounts constituted a dis- vance also had to prove the stipulated damages were Page 6 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 unreasonable in light of the anticipated harm in order for reasonably reflect Garden Ridge's anticipated harm for us to conclude that the chargeback provisions are unrea- [**23] an unauthorized substitution, where the challenged sonable under section 2.718(a), we conclude that Ad- provisions allowed Garden Ridge to charge back 100% of vance has done so in this case. As explained in subsection merchandise cost plus freight for any unauthorized sub- II.A.1.c., Advance has shown that the stipulated amounts stitution, no matter how slight and no matter if Garden are unreasonable in light of the actual Ridge even anticipated incurring any harm. harm--zero--suffered by Garden Ridge. Further, Advance has shown that the stipulated amounts are unreasonable in B. Instruction on damages light of the harm anticipated by Garden Ridge.

Garden Ridge next argues that the trial court com- Here, according to the challenged [**21] liquidat- mitted reversible error by including the following in- ed-damages provisions, Garden Ridge anticipated at the struction as part of its question on Advance's damages: time of contract that an unauthorized substitution of any type would result in harm of 100% of the cost of the The unauthorized substitution provision merchandise, plus freight. In fact, Garden Ridge's buyer in the Vendor Compliance Manual is un- Cole testified that Garden Ridge had the discretion to reasonable if the actual damages that assess the full 100% chargeback, even if the only devia- Garden Ridge incurred were much less tion in the snowmen had been green versus red buttons. than the charge-back amount.

Cole further testified that she was not aware of any in- stance where Garden Ridge had decided not to issue a chargeback because there was "no harm, no foul" or During the charge conference, Garden Ridge objected to where Garden Ridge had exercised its discretion to not the inclusion of this instruction as improper because charge back "fully" for an unauthorized substitution. whether the chargeback provisions constitute penalties Garden Ridge's CFO Uhrig agreed that a button-color was a question reserved for the court, not the jury. Garden substitution would constitute noncompliance, for which Ridge further objected that the trial court should not in- Garden Ridge could charge back the full 100% of mer- clude this instruction because it would permit the jury to chandise cost. In other words, no matter what the degree assess damages on a basis that is not permitted in the of substitution, and no matter whether the substitution is law--that is, there is no actual-damages component to even anticipated to result in any harm, Garden Ridge's whether a liquidated damages provision is unreasonable unauthorized-substitution rule provides that Garden and thus constitutes a penalty.5 The trial court overruled Ridge keeps the merchandise without paying the vendor Garden [*443] Ridge's objections, [**24] which any [*442] thing and makes the vendor cover the freight. properly are preserved for our review. See Thota v. Young, 366 S.W.3d 678, 689 (Tex. 2012).

Even though, according to Uhrig, Garden Ridge is "very [**22] good at estimating our costs," he admitted Advance argues that Garden Ridge failed to that at the time it was developing the chargeback schedule preserve this particular complaint about the al- Garden Ridge did not perform any actual studies on what legedly ex ante nature of the liquidated-damages costs it would incur due to vendor noncompliance. Fur- determination. Garden Ridge specifically objected ther, Uhrig could not explain any specifics on how Garden to the inclusion of this particular instruction. The Ridge "figure[d] out what the costs are and what would be context of the charge conference also reveals that appropriate charge-backs." Cole also testified that she was although Garden Ridge requested and the trial not aware of Garden Ridge having performed any analysis court allowed an instruction paraphrasing the first as to whether the 100% chargeback amount reasonably sentence of section 2.718(a) to indicate when liq- approximates the anticipated harm that Garden Ridge uidated damages were reasonable, Garden Ridge would suffer from an unauthorized substitution. Despite did not agree to the trial court's inclusion of the this lack of detail regarding the 100% chargeback amount instruction addressing reasonableness with regard for anticipated harm from vendor violations, Uhrig testi- to "actual damages" because that particular in- fied that "on average" charging back 100% somehow struction, in contrast with the previous instruction reflected Garden Ridge's costs for unauthorized substitu- Garden Ridge requested and the court allowed, did tions. Uhrig further indicated that Garden Ridge's not reflect a "legally permissible" basis for the jury chargebacks communicate to vendors, "Don't do this"; to award damages to Advance. Thus, Garden and Garden Ridge's CEO, Tim Kibarian, agreed that Ridge sufficiently made the trial court aware of its chargebacks are the "penalty" if its vendors do not follow complaint that its actual incurred damages should its rules. not be included in any reasonableness assessment We therefore conclude that Advance has proven that by the jury of whether the chargebacks constituted Garden Ridge's liquidated-damages provisions do not penalties, and the trial court overruled Garden Page 7 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 Ridge's complaint. [**25] See Thota v. Young, However, because the instruction concerns whether 366 S.W.3d 678, 689 (Tex. 2012) ("[T]he proce- the chargeback provisions are unreasonable and thus dural requirements for determining whether a unenforceable as penalties, which is a legal issue for the party has preserved error in the jury charge are trial court to decide, Phillips, 820 S.W.2d at 788, we explained by one basic test: 'whether the party conclude that the trial court improperly submitted this made the trial court aware of the complaint, timely instruction6 to the jury. The complained-of instruction and plainly, and obtained a ruling.'" (quoting State describes a reasonableness [*444] analysis that the trial Dep't of Highways v. Payne, 838 S.W.2d 235, 241 court itself was supposed to conduct--this instruction, (Tex. 1992))). despite its proper statement of the law, would not assist the jury. See Thota, 366 S.W.3d at 687. Moreover, alt- We review a trial court's decision whether to submit a hough the Phillips court indicated that in some cases the particular instruction in its charge for abuse of discretion. jury might have to resolve a factual issue before the trial Id. at 687 (citing In re V.L.K., 24 S.W.3d 338, 341 (Tex. court can decide the ultimate legal question of enforcea- 2000)); City of Houston v. Proler, 373 S.W.3d 748, 760 bility, here, no fact issues remained; the trial court already (Tex. App.--Houston [14th Dist.] 2012, no. pet. h.) (citing had found that [**28] Garden Ridge suffered no Shupe v. Lingafelter, 192 S.W.3d 577, 579 (Tex. 2006)). breach-of-contract actual damages due to Advance's The trial court has considerable discretion to determine noncompliance violations when the court directed a ver- proper jury instructions, and "[i]f an instruction might aid dict against Garden Ridge on that claim. See 820 S.W.2d the jury in answering the issues presented to them, or if at 788. As a matter of law, these chargebacks were un- there is any support in the evidence for an instruction, the reasonable and void as penalties; "consequently, [the instruction is proper." Thota, 366 S.W.3d at 687 (quoting instruction] w[as] surplusage, expressly prohibited by the La.-Pac. Corp. v. Knighten, 976 S.W.2d 674, 676 (Tex. Texas Supreme Court in Acord v. General Motors Corp., 1998)). "An instruction is proper if it (1) assists the jury, 669 S.W.2d 111, 116 (Tex. 1984)." Bean v. Baxter (2) accurately states the law, and (3) finds support in the Healthcare Corp., 965 S.W.2d 656, 664 (Tex. pleadings [**26] and evidence." Id. (citing Columbia App.--Houston [14th Dist.] 1998, no pet.); see also Rio Grande Healthcare, L.P. v. Hawley, 284 S.W.3d 851, Elloway v. Pate, 238 S.W.3d 882, 896 (Tex. 855-56 (Tex. 2009)). We will not reverse a judgment for a App.--Houston [14th Dist.] 2007, no pet.) (citing Acord, charge error unless that error was harmful because it 669 S.W.2d at 116). The trial thus abused its discretion by "probably caused the rendition of an improper judgment" unnecessarily instructing the jury on the reasonableness of or "probably prevented the petitioner from properly pre- Garden Ridge's chargebacks. senting the case to the appellate courts." Id. (citing TEX. R. APP. P. 44.1(a) and 61.1); Proler, 373 S.W.3d at 760 The trial court also improperly submitted the (citing La.--Pac. Corp., 976 S.W.2d at 676 (Tex. 1998)); previous instruction, which Garden Ridge re- see also Bed, Bath & Beyond, Inc. v. Urista, 211 S.W.3d quested and which essentially tracks the first 753, 757 (Tex. 2006). We examine the entire record to sentence of section 2.718: determine whether the instruction probably caused an improper judgment. Thota, 366 S.W.3d at 686-87; Urista, Parties may agree in a contract S.W.3d at 757. to damages payable upon a breach As discussed above in subsection II.A.1.b, a party can if that contractual amount is rea- prove that a liquidated-damages clause is unenforceable sonable in light of the anticipated and void as a penalty if it shows that the actual damages or actual harm caused by the incurred by the other party are much less than or dispro- breach, the difficulties of proof of portionate to the contracted-for amount. The com- loss, and the inconvenience or plained-of instruction here essentially tracks the language non-feasibility [**29] of other- from Phillips--that a liquidated-damages provision is wise obtaining an adequate reme- unreasonable and unenforceable as a penalty "because the dy. actual damages incurred were much [**27] less than the amount contracted for." See 820 S.W.2d at 788. Therefore, the instruction properly stated the "actual harm" portion of See TEX. BUS. & COM. CODE ANN. § 2.718(a). We the common-law test. Id.; see also Chan, 2008 Tex. App. note that this instruction also properly references LEXIS 5980, 2008 WL 2986379, at *3. Further, the com- "actual harm" as a component of the reasonable- plained-of instruction correlates to the equivalent portion ness test. of the UCC test that "[a] term fixing unreasonably large Our review of the record reveals, however, that this liquidated damages is void as a penalty." TEX. BUS. CODE abuse of discretion was harmless.7 Including a surplus ANN. § 2.718(a). instruction on the law is only harmful when it amounts to Page 8 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 a comment on the weight of the evidence. Bean, 965 cause the rendition of an improper judgment; and we S.W.2d at 664 (discussing Acord, 669 S.W.2d at 113, overrule Garden Ridge's second issue.

116). Although the trial court instructed jurors about a potential situation where Advance's damages may be C. Instructions on breach of contract reduced to essentially nothing--that is, if Garden Ridge's In its final issue, Garden Ridge argues that the trial chargebacks actually were reasonable and thus enforcea- court's inclusion of the UCC's definition regarding what ble as a matter of law--including this instruction was not constitutes the acceptance of goods--section "reasonably calculated to cause [nor] probably did cause 2.606(a)8--and the UCC's provision that the buyer must prejudicial harm to appellant[]" Garden Ridge. See Acord, pay the contract [**32] rate for goods it accepts--section 669 S.W.2d at 116 (citation omitted). Moreover, by in- 2.607(a)9--in its instructions to the jury on Advance's cluding this instruction, the trial court "did not offer [its] breach-of-contract claim constituted an impermissible opinion, assume the truth of a material fact, exaggerate, comment on the weight of the evidence. During the minimize, or withdraw relevant evidence." See Bean, 965 charge conference, Garden Ridge objected to the inclu- S.W.2d at 664. [**30] Therefore, including the surplus sion of these instructions as unnecessary because Garden instruction did not constitute a comment on the weight of Ridge did not dispute that it accepted the goods. Garden the evidence.

Ridge thus contends that these "surplusage" instructions improperly "nudged" the jury toward Advance's theory of Garden Ridge insists that we must presume the case. The trial court overruled Garden Ridge's objec- harm pursuant to Harris County v. Smith, 96 tions, which properly are preserved for our review. See S.W.3d 230 (Tex. 2002), and Crown Life Ins. Co. Thota, 366 S.W.3d at 689. v. Casteel, 22 S.W.3d 378 (Tex. 2000). The Texas Supreme Court, however, has refused to extend Section 2.606(a) provides: the presumed-harm scenario to instruction error.

See Thota, 366 S.W.3d at 692-93 (concluding that (a) Acceptance of goods occurs "even assuming the new and independent cause when the buyer instruction in this charge constituted error, it does not raise a Casteel issue"); Urista, 211 S.W.3d at (1) after a reasonable oppor- 756-57 (declining to extend Casteel's pre- tunity to inspect the goods signifies sumed-harm analysis to trial court's submission of to the seller that the goods are an erroneous unavoidable-accident instruction). conforming or that he will take or retain them in spite of their Nor did including the improper instruction mislead or non-conformity; or confuse the jury in its determination of damages on Ad- vance's breach-of-contract claim. Advance presented (2) fails to make an effective evidence relating to over $92,000 in chargebacks Garden rejection (Subsection (a) of Section Ridge assessed, and evidence that these chargebacks 2.602), but such acceptance does reflected what Garden Ridge deducted from Advance's not occur until the buyer has had a merchandise invoices. The jury's answers to what was reasonable opportunity to inspect "the difference between what Garden Ridge agreed to pay them; or and what it actually paid for [the] snowmen" reflect [**31] that the jury considered the contract rate as what (3) does any act inconsistent with the seller's ownership; but if Garden Ridge agreed to pay for the nine-foot and such act is wrongful as against the eight-foot snowmen within PO '721 and PO '743, which seller it is an acceptance only if included collection of freight, and that Garden Ridge actually paid nothing whatsoever to Advance for these ratified by him. snowmen. Thus, the jury found that for the snowmen Advance had proven its full amount of damages--that the TEX. BUS. & COM. CODE ANN. § 2.606(a). differences reflected the exact amounts Garden Ridge "The [**33] buyer must pay at the contract charged [*445] back. The jury's answer to what was rate for any goods accepted." TEX. BUS. & COM. "the difference between what Garden Ridge agreed to pay and what it actually paid for other items charged back on CODE ANN. § 2.607(a). [Advance's] Exhibit" reflects that the jury considered the This is a UCC breach-of-contract case in which Ad- evidence presented on the remaining approximately vance pleaded, and presented evidence, that Garden Ridge $13,000 in chargebacks and determined that Advance had breached by accepting and then not paying the contract proven damages on $500 of these other chargebacks. price for the snowmen and other goods at issue. The par- Therefore, the erroneous instruction did not probably ties do not dispute that their contracts are governed by the Page 9 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 UCC. Section 2.606(a) and section 2.607(a), the sources provisions based upon a hindsight analysis that the Texas of the trial court's instructions, are located in the UCC Legislature never intended. subchapter concerning "Breach, Repudiation, and Ex- cuse." Further, both of these instructions properly state the Text of the Applicable Statute law. TEX. BUS. & COM. CODE ANN. § 2.606(a) & 2.607(a) Appellant/plaintiff Garden Ridge, L.P. asserts that (West 2009). These instructions thus are proper because the liquidated-damages provisions in its contracts for the they (1) assisted the jury in answering the breach ques- sale of goods with appellee/defendant Advance Interna- tion, (2) accurately stated the law, and (3) found support tional, Inc. are enforceable. Advance maintains that these in the pleadings and evidence. See Thota, 366 S.W.3d at provisions are void as penalties and unenforceable. Both (citing Hawley, 284 S.W.3d at 855-56). We therefore sides agree, and the law provides, that this issue is gov- conclude that the trial court did not abuse its discretion by erned by Texas Business and Commerce Code section submitting the complained-of trial instructions.

2.718(a), [**35] which provides in its entirety as fol- lows: III. CONCLUSION Accordingly, having overruled all of Garden Ridge's (a) Damages for breach by either party issues, we affirm the trial court's judgment. may be liquidated in the agreement but only at an amount which is reasonable in /s/ Tracy Christopher the light of the anticipated or actual harm Justice caused by the breach, the difficulties of proof of loss, and the inconvenience or Panel consists [**34] of Justices Frost, Christopher, non-feasibility of otherwise obtaining an and Jamison. (Frost, J., concurring). adequate remedy. A term fixing unrea- sonably large liquidated damages is void [*446] APPENDIX A as a penalty.

Tex. Bus. & Comm. Code Ann. § 2.718(a) (West 2013).

We review the trial court's interpretation of applica- ble statutes de novo. See [*447] Johnson v. City of Fort Worth, 774 S.W.2d 653, 655-56 (Tex. 1989). In construing a statute, our objective is to determine and give effect to the Legislature's intent. See Nat'l Liab. & Fire Ins. Co. v. Allen, 15 S.W.3d 525, 527 (Tex. 2000). If possible, we must ascertain that intent from the language the Legisla- ture used in the statute and not look to extraneous matters for an intent the statute does not state. Id. If the meaning of the statutory language is unambiguous, we adopt the interpretation supported by the plain meaning of the pro- vision's words. St. Luke's Episcopal Hosp. v. Agbor, 952 CONCUR BY: Kem Thompson Frost S.W.2d 503, 505 (Tex. 1997). We must not engage in [**36] forced or strained construction; instead, we must CONCUR yield to the plain sense of the words the Legislature chose.

In an issue of first impression in this court, the ma- See id. jority construes Texas Business and Commerce Code Section 2.718(a) in a manner that conflicts with the un- Interpretation of the Statutory Text ambiguous language of that provision and with opinions Advance, as the party asserting that the liquidat- from two sister courts of appeals. By allowing a breaching ed-damages provisions are penalties, had the burden of party to show that a liquidated-damages provision is un- proving that these provisions do not satisfy the applicable reasonable based only upon a comparison between the legal standard for an enforceable liquidated-damages amount of the stipulated damages and the amount of the provision under Section 2.718(a). Baker v. International actual damages incurred, the majority exposes liquidat- Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. ed-damages provisions in sale-of-goods contracts to a App.--Dallas 1991, no writ). Under the plain meaning of legal standard that may bar enforcement of many such Section 2.718(a), it was incumbent upon Advance to establish that the amount of damages set by the provisions Page 10 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 in question was not reasonable in light of the anticipated unambiguous meaning of "or" in statute was the disjunc- harm and the actual harm caused by the breach, the dif- tive).1 If a [**39] liquidated-damages provision may be ficulties of proof of loss, and the inconvenience or reasonable based upon either anticipated harm or actual non-feasibility of otherwise obtaining an adequate rem- harm caused by the breach, then Advance, as the party edy. See Tex. Bus. & Comm. Code Ann. § 2.718(a). with the burden of proving the provision is unenforceable, had to establish unreasonableness under both anticipated Both Section 2.718(a) and Texas common law pro- harm and actual harm caused by the breach. See Tex. Bus. vide that a liquidated-damages provision is enforceable as & Comm. Code Ann. § 2.718(a). long as it is not a penalty. See id.; Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991) (discussing legal standard In cases decided after June 14, 1927, the Su- under Texas common law). But, to prove that a provision preme Court of Texas's notation of "writ refused" is a penalty [**37] under Texas common law, a party or "petition refused" denotes that the court of must prove that (1) the harm caused by the breach is not appeals's opinion is the same as a precedent of the incapable or difficult of estimation, or (2) that the amount Supreme Court of Texas. See Yancy v. United of liquidated damages called for is not a reasonable Surgical Partners Int'l, Inc., 236 S.W.3d 778, 786 forecast of just compensation. See Phillips, 820 S.W.2d at n.6 (Tex. 2007).

788. The Supreme Court of Texas has indicated that a party may prove that the amount of liquidated damages is The majority concludes that the legal standard under not a reasonable forecast of just compensation under the Section 2.718(a) is the same as the legal standard under common-law test only by showing that the actual dam- Texas common law and that Advance did not have to ages incurred were much less than the liquidated-damage show that the liquidated-damages provision was not rea- amount. See id. sonable in light of the anticipated harm. See ante at pp.

7-12. This conclusion is contrary to the plain meaning of As can be seen by comparing the legal standard under the statutory text, under which the liquidated-damages Section 2.718(a) and the legal standard under Texas amount may be reasonable based upon either anticipated common law, the two legal standards are significantly harm or actual harm caused by the breach. See id. The different. See McFadden v. Fuentes, 790 S.W.2d 736, majority treats the statutory sentence "[a] term fixing 737-38 (Tex. App.--El Paso 1990, no writ) (holding that [**40] unreasonably large liquidated damages is void as a the legal standard under Section 2.718(a) is different from penalty" as equivalent to the following sentence from and supersedes the legal standard under Texas common Phillips's articulation of the common law rule: "a liqui- law in sales-of-goods cases); George E. Henderson, A dated damages provision is unreasonable because the New Chapter 2 for Texas: Well-Suited or Ill-Fitting? 41 actual damages incurred were much less than the amount TEX. TECH. L. REV. 235, 488-91 (2009) (attaching law contracted for." See ante at p. 9 (considering second sen- professor's analysis concluding that the legal standard tence from Section 2.718(a) as equivalent to this sentence under Section 2.718(a) is different from the legal standard from Phillips); Tex. Bus. & Com. Code Ann. § 2.718(a); [**38] under Texas common law). See also Phillips, 820 Phillips, 820 S.W.2d at 788. In the second sentence of S.W.2d at 788 (reciting the legal standard from Texas Section 2.718(a), the Legislature did not address the legal common law and then citing Section 2.718(a) with a "Cf." standard by which courts are to determine whether a liq- signal, indicating that the statute is different from the uidated-damages provision is void as a penalty; that common law but deals with an analogous subject matter). standard is addressed in the first sentence of Section Under Section 2.718(a), Advance had the burden of 2.718(a). See Tex. Bus. & Com. Code Ann. § 2.718(a). proving that the amount of damages set by the provisions The majority relies upon the Supreme Court of Tex- in question was not reasonable in the light of both the as's decision in Flores v. Millennium Interests, Ltd. See anticipated harm and actual harm caused by the breach. 185 S.W.3d 427 (Tex. 2005). The Flores court addressed See Tex. Bus. & Comm. Code Ann. § 2.718(a); Hender- the circumstances under which a seller of real property son, supra, 41 TEX. TECH. L. REV. at 491 (attaching law under a contract for deed may be liable for the statutory [*448] professor's analysis concluding that under Sec- "liquidated damages" afforded in Texas Property Code tion 2.718(a) a liquidated-damages provision is valid if section 5.077(c). See id. at 429-33. In a general discussion reasonable with respect to either anticipated harm or of the meaning of the term "liquidated damages," [**41] actual harm caused by the breach). Under the unambig- the Flores court correctly stated that both Texas common uous meaning of the word "or" in the statute, a liquidat- law and Section 2.718(a) recognize a distinction between ed-damages provision may be reasonable based upon an enforceable liquidated-damages provision and a void either anticipated harm or actual harm caused by the penalty. See id. at 431. The Flores court did not state that breach. See Comdisco, Inc. v. Tarrant County App. Dist., the legal standards under Section 2.718(a) and the com- 927 S.W.2d 325, 327 (Tex. App.--Fort Worth 1996, writ mon law are the same, nor did the Flores court address the ref'd) (holding, in Supreme Court of Texas precedent, that Page 11 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 legal standard a party must satisfy to show that a liqui- of liquidated-damages clauses and parties' willingness dated-damages provision is a penalty under Section and desire to choose this remedy in transactions involving 2.718(a). See id. at 429-33. The Flores case does not the sale of goods. See Tex. Bus. & Com. Code Ann. § support the majority's analysis. 2.718(a). The Legislature also recognized that in certain situations, liquidated-damages provisions should not be The majority also relies upon the Supreme Court of enforceable, and the Legislature crafted a specific legal Texas's decision in Phillips. [*449] See 820 S.W.2d at standard for making this determination. See id. 788. The Phillips court addressed the legal standard under Texas common law. See id. Determining the proper legal When a buyer and a seller agree to a liquidat- standard under Section 2.718(a) was not before the Phil- ed-damages provision, both parties have a potential up- lips court, and the court did not address this issue. See id. side and a potential downside. The idea is that, even The Phillips court did not state that the legal standards though the non-breaching [**44] party's expectation under Section 2.718(a) and the common law are the same. damages may be far greater than the amount specified in See id. Instead, after reciting the legal standard under the liquidated-damages clause, the non-breaching party's Texas common law, the Phillips court cited Section recovery is capped at the amount of specified liquidated 2.718(a) with a "Cf." signal, indicating that the statute is damages. Under freedom-of-contract principles, courts different from the common law but deals with an analo- must honor the parties' agreement unless the stipulated gous [**42] subject matter. See id. The Phillips court did amount is shown to be unreasonable under Section not address the difference between the two legal stand- 2.718(a). See id. Under this standard, as discussed above, ards, and this difference was not necessary to the dispo- the party asserting that the provision is void as a penalty sition of that case. See id. The Phillips case does not must prove that the stipulated amount is unreasonable support the majority's analysis regarding the legal stand- based both on the harm anticipated at the time of con- ard under Section 2.718(a). tracting and the actual harm caused by the breach. At the [*450] time of contracting, unknown factors often make The majority further relies upon this court's opinion estimation and calculation of potential damages uncer- in Chan v. Montebello Development Company. See No. tain.2 This uncertainty at the time of contracting is often 14-06-00936-CV, 2008 Tex. App. LEXIS 5980, 2008 WL what makes the determination of liquidated damages 2986379, at *3-6 (Tex. App.--Houston [14th Dist.] July difficult. Hindsight has a way of making estimations that 31, 2008, pet. denied) (mem. op.). The Chan court ad- were reasonable at the time seem unreasonable after a dressed the legal standard under Texas common law. See breach. By the time a breach has occurred and the dispute id. Because the determination of the proper legal standard has come to court, the costs and valuations are often easier under Section 2.718(a) was not before the Chan court, the to estimate and, with hindsight, honest estimates made at court did not address this issue. See id. Nor did the Chan the inception of the contract might prove to be too high or court state that the legal standards under Section 2.718(a) too low. [**45] This is part of the risk of doing business and the common law are the same. See id. The Chan case that parties embrace when agreeing to a liquidat- does not support the majority's analysis regarding the ed-damages provision. In evaluating these provisions, legal standard under Section 2.718(a). courts should not lose sight of important principles of freedom of contract and must uphold the sanctity of con- An Unwarranted Hindsight Analysis tract unless the liquidated-damages provision is shown to Under the legal standard the majority adopts today, be a penalty under the standard articulated by the Legis- parties breaching sale-of-goods contracts may avoid en- lature in Section 2.718(a). See id. forcement of liquidated-damages provisions based upon a hindsight analysis. This approach [**43] not only con- 2 A retail merchant that advertises its products travenes the statutory text but also undermines important in mass media has a distinct need for the seller to freedom-of-contract values that are a cornerstone of provide conforming goods because the retail Texas jurisprudence. merchant must be able to furnish conforming goods to the public. Patrons who see an adver- Texas has a fundamental public policy in favor of a tisement and come to the retail merchant's store broad freedom of contract. See Nafta Traders, Inc. v. reasonably may expect to be able to purchase the Quinn, 339 S.W.3d 84, 95 (Tex. 2011) (stating that "[a]s a item advertised. Garden Ridge testified that when fundamental matter, Texas law recognizes and protects a the product is not as advertised, the merchant broad freedom of contract"). Liquidated-damages provi- suffers loss of customer goodwill. It may often be sions in commercial transactions benefit both sides by difficult to estimate the amount of damages from providing certainty and predictability. By including Sec- the loss of goodwill and patronage accompanying tion 2-718(a) in Texas's version of the Uniform Com- the breach of a seller who fails to deliver con- mercial Code, the Texas Legislature recognized the utility forming goods the retail merchant had advertised.

Page 12 403 S.W.3d 432, *; 2013 Tex. App. LEXIS 4497, **; 80 U.C.C. Rep. Serv. 2d (Callaghan) 548 With the legal standard adopted by the majority to- which this issue has been presented. See Petition for Re- day, the court fails to honor the Legislature's intent of view, FPL Energy, LLC v. TXU Portfolio Management providing leeway [**46] for the parties to have stipu- Co., No. 11-0050, 2012 Tex. LEXIS 134 (Tex. granted lated to an amount of liquidated damages that was rea- Feb. 17, 2012) [**47] . If this issue is not addressed in the sonable under conditions prevailing at the time of con- Supreme Court of Texas's opinion in the FPL Energy tracting but that ends up not measuring damages in a case, uniformity and predictability in the application of completely accurate manner in a particular case. Enforc- Section 2.718(a) would be served by high-court review of ing liquidated-damages provisions when they accurately this issue in this case or another. gauge actual damages and not enforcing them when they do not deprives the non-breaching party of the remedy it Conclusion bargained to receive, contrary to Section 2.718(a). See id. The majority's interpretation of Section 2.718(a) is more restrictive than the legal standard provided by the A Possible Resolution on the Horizon Legislature under the plain meaning of that statute. But, The Supreme Court of Texas has yet to address the because no error asserted by Garden Ridge probably legal standard a party must satisfy to show that a liqui- caused the rendition of an improper judgment or probably dated-damages provision is a penalty under Section prevented Garden Ridge from properly presenting this 2.718(a). With today's opinion from this court, there are case on appeal, the trial court's judgment should be af- now three different and conflicting views on this question firmed. Accordingly, [*451] though I respectfully from the three intermediate appellate courts that have decline to join the majority opinion, I concur in the court's addressed this issue. Compare ante at p. 6-12, with TXU judgment.

Portfolio Management Co. v. FPL Energy, LLC, 328 /s/ Kem Thompson Frost S.W.3d 580, 587-88 (Tex. App.--Dallas 2010, pet. grant- ed), and with McFadden, 790 S.W.2d at 737-38. The Justice Supreme Court of Texas has granted review in a case in Page 1

GPA HOLDING, INC., Appellant v. BAYLOR HEALTH CARE SYSTEM 1, Appel- lee The trial court's judgment recites that the full name of the plaintiff is "Baylor Health Care System, on behalf of Baylor All Saints Medical Center, Baylor Heart and Vascular Hospital, Baylor Specialty Hospital, Baylor Institute for Rehabilita- tion, Baylor University Medical Center, Baylor Medical Center at Garland, Baylor Regional Medical Center at Grapevine, Baylor Medical Center at Irving, Our Children's House at Baylor, Baylor Regional Medical Center at Plano, and Baylor Medical Center Ellis County."

No. 05-09-00586-CV COURT OF APPEALS OF TEXAS, FIFTH DISTRICT, DALLAS 344 S.W.3d 467; 2011 Tex. App. LEXIS 3713

May 18, 2011, Opinion Filed SUBSEQUENT HISTORY: Released for Publica- OPINION tion September 13, 2011. [*470] Opinion By Justice Moseley Rehearing denied by GPA Holding, Inc. v. Baylor Health Care Sys., 2011 Tex. App. LEXIS 7446 (Tex. App. Dallas, In this breach of contract case, appellant GPA Aug. 9, 2011) Holding, Inc. challenges the trial court's summary judg- Petition for review denied by, Motion to strike denied by ment awarding damages to appellee Baylor Health Care GPA Holding, Inc. v. Baylor Health Care Sys., 2012 Tex. System based on GPA's obligation to pay certain health LEXIS 1077 (Tex., Dec. 14, 2012) care claims. Because we conclude the trial judge correctly Petition for review denied by GPA Holding, Inc. v. Baylor interpreted the three written contracts governing the par- Health Care Sys., 2013 Tex. LEXIS 171 (Tex., Mar. 1, ties' relationship, we affirm the trial court's judgment.

2013) I. BACKGROUND PRIOR HISTORY: [**1] Baylor provides health care services to individual On Appeal from the 298th Judicial District Court, patients. Many of Baylor's patients are members of health Dallas County, Texas. Trial Court Cause No. 06-00120. plans. Baylor has many contracts with health benefit entities, including insurance companies and preferred provider organizations (PPOs), through which individual COUNSEL: For APPELLANT: David Michael Walsh, patients gain access to Baylor's hospitals and services at IV, Chamblee & Ryan, P.C., Dallas, TX. discounted rates.

For APPELLEE: Ben Taylor, Fulbright & Jaworski Private Healthcare Systems, Inc. (PHCS) operates a L.L.P., Dallas, TX. network of PPOs. PHCS enters into contracts known as preferred provider agreements with health care providers JUDGES: Before Justices Morris, Moseley, and Myers. (such as Baylor) to negotiate discounts from the providers' Opinion By Justice Moseley. full charges for health [**2] care services. PHCS also enters into contracts known as subscriber services OPINION BY: JIM MOSELEY agreements with insurance companies, employer health plans, managed care organizations, and third-party ad- Page 2 344 S.W.3d 467, *; 2011 Tex. App. LEXIS 3713, **

ministrators, to provide them and their members access to element of its affirmative defense. See Brownlee v. health care services at the discounted rates established by Brownlee, 665 S.W.2d 111, 112 (Tex. 1984). Whether a the preferred provider agreements. contractual provision is an unenforceable penalty and not a liquidated damage clause is an affirmative defense. See GPA is a third-party administrator; its customers are TEX. R. CIV. P. 94; Phillips v. Phillips, 820 S.W.2d 785, self-funded health plans. Third-party administrators pro- (Tex. 1991) ("Although penalty is not among the vide claims handling services and administrative support affirmative defenses enumerated in Rule 94, TEX. R. CIV. to health plans. By contracting with various PPO net- P., the listing in that rule is not exclusive. Penalty is, in the works, such as PHCS, GPA also offers its customers--and language of the rule, a 'matter constituting an avoidance or their members--access to medical services from a network affirmative defense' [citations omitted].") of providers (e.g. Baylor) at discounted rates.

The interpretation of an unambiguous contract is a Baylor sued GPA for failure to pay for health care question of law for the court. MCI Telecomms. Corp. v. services Baylor provided to members of certain health Tex. Utils. Elec. Co., 995 S.W.2d 647, 650-51 (Tex. 1999). care plans administered by GPA. GPA in turn filed a The court's primary concern [**5] in interpreting a third-party action against PHCS. Both Baylor and GPA written contract is to determine the mutual intent of the moved for summary judgment; Baylor in fact filed several parties as manifested in the contract. Coker v. Coker, 650 motions for partial summary judgment. The trial judge S.W.2d 391, 393 (Tex. 1983). The parties' intent must be granted Baylor's motions and denied GPA's motion. The taken from the agreement, and the agreement must be parties then entered into an agreed final judgment and enforced as written. Wells Fargo Bank, Minn., N.A. v. N. severance, by which GPA's third-party claims against Cent. Plaza I, L.L.P., 194 S.W.3d 723, 726 (Tex. PHCS were [**3] severed into a separate cause, and App.-Dallas 2006, pet. denied). We favor an interpreta- final judgment was entered for Baylor. GPA appeals the tion that affords some consequences to each part of the judgment in favor of Baylor. PHCS is not a party to this agreement so that none of the provisions will be rendered appeal. meaningless. Coker, 650 S.W.2d at 394. Unless the agreement shows that the parties used a term in a technical II. STANDARD OF REVIEW or different sense, we give the terms their plain, ordinary, The standards for reviewing summary judgments are and generally accepted meaning. Heritage Res., Inc. v. well-established, [*471] and we follow them in re- NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). Under viewing this appeal. See Nixon v. Mr. Prop. Mgmt. Co., generally accepted principles of contract interpretation, 690 S.W.2d 546, 548-49 (Tex. 1985) (summary judgment all writings that pertain to the same transaction will be standards of review). When both parties move for sum- considered together, even if they were executed at dif- mary judgment, each party bears the burden of estab- ferent times and do not expressly refer to one another. lishing that it is entitled to judgment as a matter of law. DeWitt Cnty. Elec. Co-op., Inc. v. Parks, 1 S.W.3d 96, 102 City of Garland v. Dallas Morning News, 22 S.W.3d 351, (Tex. 1999). This rule, however, is a device for ascer- (Tex. 2000). When the trial court grants one motion taining and giving effect to the intention of the parties and and denies the other, we review the summary judgment cannot [**6] be applied arbitrarily. Id. evidence presented by both parties and determine all questions presented. Id. The reviewing court should ren- III. DISCUSSION der the judgment that the trial court should have rendered or reverse and remand if neither party has met its sum- A. The Contracts mary judgment burden. Id. Baylor relies on three written contracts to establish its If a defendant moves for summary judgment on an claim against GPA. First, Baylor relies on a Subscriber affirmative defense, it must conclusively establish each Services Agreement between PHCS and GPA dated April essential element of the affirmative defense. Selz v. 17, 1998, amended by an Amendment, [*472] As- Friendly Chevrolet, Ltd., 152 S.W.3d 833, 836 (Tex. signment, and Assumption of the Subscriber Services App.--Dallas 2005, no pet.) ("To prevail [**4] on Agreement with effective dates of September 1, 2002 and summary judgment, a defendant as movant must either January 1, 2003. Under the Subscriber Services Agree- disprove at least one element of each of the plaintiff's ment, GPA 2 became a subscriber to PHCS's "compre- theories of recovery or plead and conclusively establish hensive medical management system." 3 As a subscriber each essential element of an affirmative defense, thereby to PHCS's network, GPA could offer its customers access rebutting the plaintiff's cause of action."). Similarly, if a to PHCS's network of medical care providers at the dis- party seeks to avoid summary judgment by way of an count rates negotiated by PHCS. affirmative defense, it must come forward with summary judgment evidence sufficient to raise a fact issue on each Page 3 344 S.W.3d 467, *; 2011 Tex. App. LEXIS 3713, **

2 The Subscriber Services Agreement was ac- obligate the "Payor (or its designee) to comply with the tually between PHCS and a Texas corporation duties and obligations of [the HSA], including, but not named "Group & Pension Administrators, Inc." limited to, paying for Covered Services rendered to The parties entered into a Rule 11 agreement that Members in accordance with the provisions of Article IV "[f]or purposes of this case, G&P Administrators, of [the HSA]."

Inc, and GPA Holding, Inc. agree that they can be treated as one entity for the purpose of discovery 4 Except as discussed herein. and liability." In accordance with this agreement, Third, Baylor relies on a Subscriber Acknowledg- in this opinion we will refer only to GPA. ment between GPA and PHCS effective January 1, 2003.

3 The Subscriber Services Agreement recites its The Subscriber Acknowledgment refers to both the Sub- purpose: scriber Services Agreement and the HSA, reciting that GPA and PHCS have entered into the Subscriber Services A. PHCS is in the business of Agreement and that PHCS has entered into contracts with providing provider networks health care providers for participation in its network. The [**7] and a comprehensive medi- Subscriber Acknowledgment requires GPA "to pay or cal management system, including arrange to pay PHCS Preferred Providers [which would utilization review, quality assur- include Baylor] in accordance with the PHCS Preferred ance, and other cost containment Provider Agreement for such Preferred Provider, for the related services throughout the markets and the networks for which [GPA] has purchased United States. provider network Services from PHCS." (First brackets B. Plans offered and managed added.) B. Is GPA a "Payor"? by Subscriber [GPA] provide In its first issue, GPA contends the trial court erred in health benefits and/or services to granting Baylor's motion for summary judgment because eligible participants under health GPA is not [**9] a "payor" under the HSA. At the out- benefit plans. set, GPA makes a procedural argument that summary C. Plans offered and managed judgment was improper because Baylor did not move for by Subscriber generally include summary judgment on this issue. We disagree. financial incentives to encourage [*473] Baylor filed four motions for partial sum- eligible participants to choose mary judgment. In its first motion, Baylor requested that treatment from providers who have the trial court interpret the three contracts at issue and contracted with entities, such as "find, as a matter of law, that GPA is bound by the terms preferred provider organizations and conditions of the HSA with respect to the health care and exclusive provider organiza- claims at issue in this case, including the requirements of tions, who are in the business of Section 4.4(a)." In its own motion for summary judgment, offering provider discounts and GPA argued, "GPA is not a 'Payor' obligated to pay under other managed medical benefits. the terms of the Baylor/PHCS Agreement," and Baylor D. Subscriber is interested in filed a summary judgment response again arguing that and intent upon becoming a sub- GPA was bound by the terms of the agreement. scriber for services of PHCS, thus The trial court granted Baylor's motion and denied availing itself of the PHCS com- GPA's, necessarily deciding that GPA was a "Payor" prehensive medical management bound by the provisions of the HSA, including section system.

4.4(a). We reject GPA's argument that the issue was not presented to and decided by the trial court.

Turning to GPA's substantive argument, GPA asserts Second, Baylor relies on a Hospital Services the HSA defines "Payor" very narrowly. It argues the Agreement (HSA) between Baylor and PHCS dated evidence established that GPA's clients--and not it- January 1, 2002. Under the HSA, Baylor became a "Pre- self--were "Payors" [**10] under the HSA. It contends ferred Provider" in PHCS's network. It agreed to pro- that as a third party administrator, it did not actually pay vide-at discounted rates 4 -health care services ("Covered claims but only offered administrative services to facili- Services") to persons ("Members") covered by "Health tate payment of claims by the employer-funded health Plans" (including PPOs) created or sponsored by a plans that were GPA's clients. Because the HSA's pay- "Payor" (a defined [**8] term in the HSA). As part of the ment provisions apply only to "Payors" and GPA is not a HSA, PHCS warranted that its contracts with each Payor Payor, GPA contends it is not responsible to pay for Page 4 344 S.W.3d 467, *; 2011 Tex. App. LEXIS 3713, **

Baylor's services, and thus that the trial court erred in federal district court, we may consider federal precedent entering summary judgment in favor of Baylor. when it is well-reasoned and helpful. See Davenport v. Garcia, 834 S.W.2d 4, 20 (Tex. 1992) ("With a strongly The HSA defines a "Payor" as an in- independent state judiciary, Texas should borrow from surance company, employer health plans, well-reasoned and persuasive federal procedural and Taft-Hartley fund, plan sponsors or other substantive precedent when this is deemed helpful, but similarly situated entities or organizations should never feel compelled to parrot the federal judici- which are obligated (directly or through its ary."). designee) to pay for Covered Services for As here, there were three contracts in Epoch Group: a Members in accordance with such Health HSA between PHCS and Baylor, a subscriber services Plans. agreement between PHCS and Epoch, and a payor ac- knowledgment between PHCS and Epoch. Epoch Group, F.Supp. 2d at 752. Discussing its conclusion that the GPA offered the affidavits of Kathy Enochs, the chief three documents constituted a single, unified contract, the operating officer of GPA, and Madalyn Straughn, the vice court reasoned: president of operations for GPA, to establish that GPA is not an insurance company, employer health plan, Indeed, all three instruments were re- Taft-Hartley fund, or plan sponsor. Enochs also testified quired to complete the relationship that GPA was not a "payor" under the definition in the [**13] between the parties. The Subscriber contract.

Services Agreement, which provided dis- GPA does not dispute it is a party to the Subscriber counts from PHCS to Payors, could not Services Agreement and the Subscriber Acknowledg- operate effectively without PHCS con- ment. [**11] In fact, Enochs testified GPA could not tracting with providers through hospital access PHCS's preferred providers at a discount without services agreements. The very foundation the Subscriber Services Agreement and the Subscriber of the discounts offered in [the] Subscriber Acknowledgment. She testified GPA entered into the Services Agreement appears to be the agreement with PHCS "to market their network to our agreements between PHCS and providers plans that we administer." such as Baylor. Moreover, Payor Ac- knowledgments serve no apparent purpose In Exhibit J to the Subscriber Services Agreement, other than to commit Payors to comply under "Duties of the Subscriber," paragraph 2(b) pro- with the terms and conditions of the pro- vides, "The Subscriber [i.e. GPA] shall abide by the terms vider agreements. of any agreement with a Participating Provider [e.g. Baylor] entered into by PHCS on behalf of the Subscriber with regard to the provision of PPO services." (Brackets Id. at 755 (citation omitted). added.) In the Subscriber Acknowledgment, GPA "agrees to pay or arrange to pay PHCS Preferred Providers in GPA distinguishes Epoch Group, arguing the court accordance with the PHCS Preferred Provider Agreement did not decide the question whether Epoch was a "payor" for each such Preferred provider, for the markets and the under the HSA. Perhaps because Epoch signed a docu- networks for which Subscriber has purchased provider ment called "payor acknowledgment" instead of "sub- network Services from PHCS." scriber acknowledgment," the issue whether Epoch was a "payor" for purposes of the agreements was not presented The discounts offered to GPA's customers were the to the Epoch Group court. Regardless of the titles of the result of the relationships among the parties to all three two agreements, however, their substance was the same: agreements. If PHCS did not contract with Baylor under to commit the payor or subscriber "to comply with the the HSA, there would be no discount to PHCS's sub- terms and conditions of the provider agreements," so that scribers on the fees for Baylor's services. If GPA did not provider discounts set forth in hospital services agree- in turn contract with [**12] PHCS to take advantage of ments could be extended to the subscriber's customers. the discounts offered in the HSA, those [*474] dis- [**14] See id. at 755. counts would not have been available to GPA's customers.

We conclude, as did the trial court, that GPA is bound In Baylor University Medical Center v. Epoch Group, by the HSA. Reading the three agreements together, GPA L.C., 340 F. Supp. 2d 749, 755 (N. D. Tex. 2004), similar committed to abide by the terms of the HSA and to pay or contracts were held to "constitute a single, unified con- arrange to pay Baylor in accordance with the HSA. Even tract" requiring a claims supervisor to timely pay Baylor's though the summary judgment evidence showed that GPA clean claims. While we are not bound by a decision of a was not an "insurance company, employer health plan[], Page 5 344 S.W.3d 467, *; 2011 Tex. App. LEXIS 3713, **

Taft-Hartley fund, [or] plan sponsor[]," we conclude the If a court determines that a contract term is a liqui- evidence (i.e. the three contracts) proves as a matter of dated damages clause, the court may then determine law that GPA falls within the contractual definition of whether the clause is enforceable, or whether it is an "other similarly situated entities or organizations which unenforceable penalty. The policy underlying the prohi- are obligated (directly or through its designee) to pay for bition against penalties is to ensure that a party to a con- Covered Services for Members in accordance with such tract receives "just compensation," that is, "neither more Health Plans." We overrule GPA's first issue. nor less than his actual damages." Phillips, 820 S.W.2d at 788 (quoting Stewart v. Basey, 150 Tex. 666, 245 S.W.2d B. "Liquidated Damages" or "Penalty"? 484, 485-86 (1952)). In order to enforce a liquidated damages provision and determine the provision is not a The HSA also contains terms regarding payment of penalty, "the court must find: (1) that the harm caused by claims: the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is a 4.4 Claim Processing reasonable forecast of just compensation." Phillips, 820 (a) Payor (or its designee) shall pay all S.W.2d at 788 (quoting Rio Grande Valley Sugar Grow- Clean Claims for Covered Services ers, Inc. v. Campesi, 592 S.W.2d 340, 342 n.2 (Tex. [*475] within forty-five (45) calendar 1979)). days of receipt of a Clean Claim contain- Baylor argues that section 4.4 is neither a liquidated ing the information set out in Section 4.3 damages provision nor a penalty. Baylor asserts that sec- from Hospital in accordance with the ap- tion 4.4 "does not fix in advance compensation for GPA's plicable reimbursement rates attached on failure to perform," but [**17] rather "provides a Schedule 1. . . . If Payor (directly or two-tiered pricing structure that grants GPA discounts through its designee) does not pay within (often substantial) if claims are paid within forty-five forty-five [**15] (45) days of receipt of a days." Baylor further contends that even if section 4.4 is a Clean Claim, Payor shall no longer be eli- liquidated damages provision, it is enforceable under gible for the rates set forth on Schedule 1 Texas law and is not a penalty because damages are dif- and shall be obligated to pay Hospital at ficult or impossible to estimate, and Baylor's normal Hospital's Normal Billed Charges and billed charge is a reasonable forecast of just compensa- hospital may elect to terminate this tion.

Agreement . . . .

For purposes of this opinion, we will assume without deciding that section 4.4(a) of the HSA is a liquidated In its second issue, GPA contends the trial court erred in damages provision, and examine whether the clause is denying its motion for summary judgment because the also an unenforceable penalty under the factors set forth in amount of damages awarded against it under this provi- Phillips. sion constituted an unenforceable liquidated damages The party asserting that a liquidated damages clause penalty. is an unenforceable penalty (here, GPA) bears the burden GPA complains that the above section, by requiring of proof. Urban Television Network Corp. [*476] v. payors to pay the hospital's "Normal Billed Charges" Liquidity Solutions, Ltd., 277 S.W.3d 917, 919 (Tex. unless the payor pays a Clean Claim within 45 days, App.-Dallas 2009, no pet.) (citing Murphy v. Cintas "fixes compensation for breach in advance of the breach," Corp., 923 S.W.2d 663, 665-66 (Tex. App.-Tyler 1996, and is thus an impermissible penalty. writ denied)). GPA moved for summary judgment on the issue whether section 4.4(a) of the HSA is an unen- "The term 'liquidated damages' ordinarily refers to an forceable penalty. To obtain summary judgment on the acceptable measure of damages that parties stipulate in affirmative defense of penalty, GPA must prove each advance will be assessed in the event of a contract element of the defense. See Brownlee, 665 S.W.2d at 112; breach." Flores v. Millenium Interests, Ltd., 185 S.W.3d [**18] Selz, 152 S.W.3d at 836; see also Phillips, 820 427, 431 (Tex. 2005); see also Valence Operating Co. v. S.W.2d at 789. GPA argues the payment of "Normal Dorsett, 164 S.W.3d 656, 664 (Tex. 2005) ("[l]iquidated Billed Charges" is not a reasonable forecast of just com- damages clauses fix in advance the compensation to a pensation, and the harm caused by late payment is not party accruing from the failure to perform specified con- incapable or difficult of estimation. See Phillips, 820 tractual obligations"). Whether a contract [**16] term is S.W.2d at 788. In support of its motion for summary a liquidated damages clause is a question of law for the judgment, GPA offered evidence comparing the dis- court. Valence Operating Co., 164 S.W.3d at 664. counted rates to the hospital's normal billed rates for the charges at issue. GPA offered a chart attached to the af- Page 6 344 S.W.3d 467, *; 2011 Tex. App. LEXIS 3713, **

fidavit of Madalyn Straughn that showed the percentage enforceable penalty, the trial judge did not err in denying difference between the discounted rate and the normal GPA's motion for summary judgment on this issue. We billed charge for each of the charges at issue. GPA notes overrule GPA's second issue. "the overwhelming majority of the percentage charges are 33% or more." [*477] C. Claims arising before 2003 In response to GPA's motion for summary judgment, In its third issue, GPA argues the trial judge erred by Baylor offered evidence regarding the difficulty of esti- awarding damages for the period of time before GPA mation and the reasonableness of the charges. Baylor signed the Subscriber Acknowledgment Form. While offered the affidavit of Janda Edwards to explain that GPA admits signing the Subscriber Services Agreement Baylor's normal billed charge "is the amount Baylor in 1998, it argues that it did not agree to "pay or arrange to charges for services and supplies to entities or individuals pay" until [**21] the 2003 amendments set forth in the who do not have access to a discount through a contract Subscriber Acknowledgment. Therefore, GPA argues, with Baylor." Edwards explained Baylor's normal billed any claims arising in 2002 or before were included im- charge "is established by each facility and is [**19] properly in the trial court's judgment. based upon an analysis of many factors including the Baylor counters that GPA's obligations were set forth service provided, the amount of personnel time needed to in the Subscriber Services Agreement, including the provide the service, the amount of capital equipment agreement to abide by any agreement between PHCS and needed to provide the service, the amount of routine a hospital, and those obligations did not change in 2003. equipment needed to provide the service, the overhead, Because GPA accepted the benefits of the agreements and market value." Edwards also testified that Baylor's before 2003, Baylor argues, it must also accept the obli- normal billed charge is a reasonable amount for the health gations. care services and supplies provided in the charges at issue in this case. We agree with Baylor that GPA's obligation to abide by the HSA did not change in 2003. While the "pay or GPA quotes from Edwards's affidavit and argues, arrange to pay" language does not appear in the Sub- "Baylor offered no justification attempting to show how scriber Services Agreement, GPA did agree at that time to the changed billing rate was a reasonable estimate of the abide by the provisions of the HSA, and, as noted in cost associated with payments being untimely." GPA Epoch Group, "the very foundation" of the discounts posits that a "more reasonable" calculation would be "a offered to GPA's customers are "the agreements between $30 service fee and 18% annual interest," and argues, "our PHCS and providers such as Baylor." Epoch Group, 340 society routinely deals with late payments by a modest F. Supp.2d at 755. The Epoch Group court commented service fee and interest, and thus Baylor's damages were that the payor acknowledgments "serve no apparent pur- calculable." GPA does not offer evidence to support these pose other than to commit Payors to comply with the arguments, however. The difficulty (or lack of difficulty) terms and conditions of the provider agreements." Id. The in estimation as well as the unreasonableness of the contractual relationship among the parties was [**22] damages estimate were GPA's to prove. Urban Television established when GPA signed the Subscriber Services Network Corp., 277 S.W.3d at 919. General statements Agreement and began to take advantage of the discounted about a "more reasonable" [**20] or "modest" rate are rates offered under the HSA. The trial court did not err in not evidence that the harm from late payment is difficult awarding damages for the period of time before GPA to estimate, or that the normal billed charges were an signed the Subscriber Acknowledgment. We overrule unreasonable forecast of the loss actually sustained. See GPA's third issue.

Phillips, 820 S.W.2d at 788. GPA also emphasized that Baylor itself referred to the normal billed charge as a CONCLUSION "penalty." The substance of the provision controls, how- ever. See Arthur's Garage, Inc. v. Racal-Chubb Security We overrule GPA's issues and affirm the trial court's Systems, Inc., 997 S.W.2d 803, 810 (Tex. App.-Dallas judgment.

1999, no pet.) (provision entitled "liquidated damages" JIM MOSELEY was actually a limitation of liability provision, so penalty analysis was not appropriate). Because GPA did not meet JUSTICE its burden of establishing that the clause requiring pay- ment of normal billed charges after 45 days was an un- Page 1

Great American Products, Appellant v. Permabond International, a Division of Na- tional Starch and Chemical Company, Appellee NO. 03-00-00683-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 94 S.W.3d 675; 2002 Tex. App. LEXIS 7175

October 10, 2002, Filed NOTICE: [**1] PUBLISH contractual, or statutory theories. Although the jury an- swered favorably for Great American on certain uncon- SUBSEQUENT HISTORY: Released for Publica- ditionally submitted issues, the jury also affirmatively tion February 7, 2003. found that Great American had agreed to be bound by the warranty disclaimer and limited remedy provisions con- PRIOR HISTORY: FROM THE DISTRICT tained in Permabond's invoices. Great American moved COURT OF COMAL COUNTY, 22ND JUDICIAL for judgment, asking the trial court to disregard the jury's DISTRICT. NO. C98-504A, HONORABLE DON G. finding that Great American had agreed to the warranty HUMBLE, JUDGE PRESIDING. disclaimer and limited remedy provisions. Permabond [**2] also moved for judgment, asserting that the jury DISPOSITION: Affirmed. finding that Great American had agreed to be bound by the warranty disclaimer and limited remedy provisions rendered immaterial its findings relating to any breach of COUNSEL: For Appellant: Mr. Thomas H. Crofts, Jr., warranty, breach of agreement, damages, and attorney's Mr. Michael J. Murray, Crofts, Callaway & Jefferson, A fees. The trial court rendered judgment that Great Amer- Professional Corporation, San Antonio, TX. ican take nothing. After the court denied its motion for new trial, Great American appealed. We will affirm the For Appellee: Mr. Martin L. Mayo - Scott & Mayo, P.C., judgment of the district court.

Houston, TX. Mr. Barry Abrams - Abrams, Scott & FACTUAL AND PROCEDURAL BACK- Bickley LLP, Houston, TX.

GROUND JUDGES: Before Chief Justice Aboussie, Justices B. A. This dispute arises out of the sale of an industrial Smith and Puryear. adhesive by Permabond to Great American. Great American is a wholesale manufacturer and assembler of OPINION BY: [*676] David Puryear various gift items, including glassware affixed with pewter emblems. Great American uses industrial adhesive OPINION to attach pewter emblems to the glassware. The glassware is then placed under an ultraviolet light which cures the Appellant Great American Products ("Great Ameri- adhesive (UV adhesive), permanently affixing the em- can") appeals the district court's judgment that Great blem. Great American has claimed to use this process, or American take nothing in its suit against appellee one similar to it, successfully for approximately twelve Permabond International ("Permabond"). Great [*677] years prior to the dispute with Permabond.

American sued Permabond on a variety of tort, ex- tra-contractual, statutory, and contract theories, claiming Permabond is a division of National Starch and that Permabond sold defective adhesive which caused Chemical Company ("National Starch"). National Starch certain product failures and economic losses. The jury [**3] makes a variety of industrial products that in turn failed to find for Great American on any of its tort, extra- are incorporated into other products. Permabond manu- Page 2 94 S.W.3d 675, *; 2002 Tex. App. LEXIS 7175, **

factures and sells various types of UV adhesive, including ARD QUALITY, AND SUCH REPLACEMENT the UV adhesive at issue in this case. SHALL BE BUYER'S EXCLUSIVE REMEDY.

Before the events giving rise to this suit, Great As evidenced by the disclaimer, the invoice provided American had purchased and used other Permabond ad- that replacement was the exclusive remedy for noncon- hesives for several years. In December 1994, Permabond forming adhesive. 1 suggested that Great American begin purchasing a Permabond UV adhesive. However, after looking at Great 1 The invoice also stated: American's operation, Permabond's sales engineer told 2. While Seller may from time to time offer Great American that it did not currently have a suitable recommendations and advice with respect to the product that would work with Great American's system. use of its products, it is understood that Buyer, in In late 1995, Permabond informed Great American acting on any such recommendation or advice that it had developed an adhesive suitable for Great does so entirely at its own risk.

American. According to Great American, Permabond's .... representatives consistently assured Great American that changing to Permabond's adhesive would not require 9. THE GOODS COVERED BY THIS IN- Great American to substantially modify its existing VOICE ARE SOLD EXPRESSLY ON THE manufacturing process. Permabond delivered the adhe- CONDITION OF BUYER'S ASSENT THAT sive for testing. After sampling and testing the Permabond THESE TERMS OF SALE, INCLUDING THE adhesive, Great American agreed to purchase it, signing a EXCLUSION OF WARRANTIES GOVERN blanket order agreement in March 1996. THIS PURCHASE AND SALE. BUYER'S FAILURE TO OBJECT TO THESE TERMS OF The blanket order agreement stated in pertinent [**4] SALE WITHIN FIVE DAYS AFTER THE part that: "All sales are subject to National Starch and DATE OF SELLER'S ACKNOWLEDGMENT & Chemical Company's standard terms and conditions as set TERMS OF SALE (IF SUCH AN AC- forth in its invoices." According to Great American, KNOWLEDGMENT WAS MADE TO HIS Permabond did not explain those terms and conditions, ORDER) OR BUYER'S TAKING DELIVERY but simply began shipping the adhesive. In response, OF ANY GOODS SUPPLIED HEREUNDER, Permabond contends that during the course of dealing WHICHEVER IS SOONER, SHALL CONSTI- with Great American [*678] over the years, it con- TUTE SUCH ASSENT. sistently communicated the fact that Permabond would not and could not be responsible for damages that Great [**6] Great American timely remitted the pay- American might later claim resulted from the use of ments charged on each invoice. However, Great Ameri- Permabond's adhesives. Furthermore, it claims that this can claims it never expressly accepted the "terms of sale" limitation was conveyed in each invoice sent with the on the invoices. Permabond contends the invoice dis- purchase of a Permabond product and that Great Ameri- claimer put Great American on notice that Great Ameri- can never disputed any of the disclaimers it received from can would have no recourse for relying on the recom- Permabond. mendations or advice of Permabond, and Great American agreed that its exclusive remedy would be replacement With each shipment of its adhesive to Great Ameri- adhesive. can, Permabond sent a two-sided invoice that stated the quantity and price on the front and set out the "terms of The parties dispute the extent of the express warranty sale" on the reverse side. Among the terms was a dis- made to Great American by Permabond. Great American claimer of warranty which stated in pertinent part: contends Permabond expressly warranted that the adhe- sive it supplied would be suitable for use in Great Amer- 1. SELLER HEREBY EXCLUDES ANY AND ALL ican's manufacturing process, without substantial modi- WARRANTIES, GUARANTEES, OR REPRESENTA- fication, and would perform satisfactorily if implemented TIONS WHATSOEVER, EXPRESS OR IMPLIED AND into that process. Permabond contends it made only a EXPRESSLY EXCLUDES ANY AND ALL WAR- limited warranty that it would provide Great American RANTIES AS TO MERCHANTABILITY [**5] OR with its standard quality adhesive.

FITNESS FOR A PARTICULAR PURPOSE . . . .

BUYER ASSUMES RISK FOR RESULTS OBTAINED The blanket order agreement expired on April 30, FROM USE OF THESE GOODS WHETHER USED 1997. Great American continued to purchase adhesive ALONE OR IN COMBINATION WITH OTHER from Permabond but claims that after the blanket order PRODUCTS. SELLER'S LIABILITY HEREUNDER agreement [*679] expired, there was no expression, SHALL BE LIMITED TO REPLACEMENT OF ANY either in Great American's purchase order or in GOODS WHICH ARE NOT OF SELLER'S STAND- Permabond's response, and no other evidence which Page 3 94 S.W.3d 675, *; 2002 Tex. App. LEXIS 7175, **

suggested [**7] the parties had continued to be bound by When asked in Question No. 3 and Question No. 4 the "terms of sale" set forth in the invoices. Permabond whether Permabond failed to comply with any warranty contends that Great American never informed Permabond and whether this failure was a producing cause of dam- that it did not consider itself bound by the warranty ex- ages to Great American, the jury answered affirmatively. 2 clusion and limited remedy provisions set out on each The questions submitted did not differentiate between invoice. Permabond also contends that the exclusion of express and implied warranties. For the breach of [*680] warranty provisions and limited remedy provisions in the warranty claim, the jury awarded Great American $ invoices were part of the parties' course of dealing and 70,000 for repair and replacement expenses and $ 250,000 course of performance and were in accord with standard in lost profits. industry practices.

2 Question No. 3 of the jury charge was "Do In July 1997, Things Remembered, a customer of you find that Permabond failed to comply with Great American, reported that the pewter emblems on its any warranty? You are instructed . . . that 'failed to glass mugs were falling off. The first failures reported by comply' means any of the following." The ques- Things Remembered were all produced at an Anchor tion then listed and defined the following warran- Hocking plant in Ohio, which had been employed to do ties: (1) express warranty; (2) the implied war- some of Great American's manufacturing while the ranty of merchantability; (3) the implied warranty company relocated to Texas from Illinois. Great Ameri- of fitness for a particular purpose; and (4) the im- can claims that the plant had just begun using the plied warranty of good and workmanlike perfor- Permabond adhesive and had used the lighting system that mance. Question No. 4 of the jury charge was " was recommended by Permabond to properly cure the Was the failure, if any, of Permabond to comply adhesive. Subsequently, more problems were noted by with a warranty a producing cause of damages to Great American in products manufactured at its New GAP?"

Braunfels plant. [**10] In a series of answers to the sub-parts of After Great American became aware of problems Question No. 7, 3 the jury found that Great American and with [**8] the UV adhesive, it notified Permabond.

Permabond had agreed to the following: (A) Permabond Permabond dispatched representatives to the New would provide adhesive suitable for use in Great Ameri- Braunfels facility to investigate the problem. After run- can's manufacturing facility, (B) Permabond would pro- ning tests on the adhesive, Permabond informed Great vide technical service regarding adhesive supplied for use American that it thought Great American's curing light in the Great American process, (C) Great American would source was inadequate and this was the source of the pay Permabond for adhesive it supplied that was suitable problem. Great American claims that Permabond did not for use in Great American's manufacturing facility, and acknowledge its earlier assurances that its product was (D) the parties would be bound by the standard terms and compatible with Great American's existing manufacturing conditions as stated in Permabond's invoices. process. Furthermore, Great American claims that Permabond did not explain the Anchor Hocking problems Question No. 7 of the jury charge was "Did which occurred despite Great American's use of the agreement between GAP and Permabond in- Permabond's preferred fusion-lighting system. clude any of the following terms: (A) Permabond After testing the adhesive, Permabond supplied Great would provide adhesive suitable for use in GAP's American with an alternative UV adhesive to address the manufacturing facility, (B) Permabond would problems that Great American had experienced. Great provide technical service regarding adhesive sup- American used this adhesive for a short period, but plied for use in the GAP process, (C) GAP would eventually returned to the original adhesive it used before pay Permabond for adhesive it supplied that was the Permabond product. suitable for use in GAP's manufacturing facility, (D) The parties would be bound by the standard Great American filed suit in June 1998. The case was terms and conditions as stated in Permabond's tried before a jury. The trial court submitted the charge invoices." The jury answered "yes" to each subpart proposed by Great American which included the follow- of Question No. 7. ing liability theories: deceptive trade practices, breach of warranties, [**9] breach of contract, fraud, negligent [**11] In Question No. 8, 4 which dealt with the misrepresentation, and negligence. As to the deceptive breach of contract claim, the jury found Permabond failed trade practices claims, fraud claims, and negligent mis- to comply with the terms of the agreement inquired about representation claims, the jury failed to find Permabond in Question No. 7. As to the breach of contract claim, the liable. jury awarded Great American $ 70,000 for repair and replacement expenses and $ 250,000 in lost profits.

Page 4 94 S.W.3d 675, *; 2002 Tex. App. LEXIS 7175, **

In its second issue, Great American complains that Question No. 8 of the jury charge was " Did the trial court erred in not rendering judgment that it re- Permabond fail to comply with the agreement?" cover for breach of express warranty. Great American asserts that the jury's affirmative answer to Question No. 3 Following the return of the jury's verdict, but before regarding breach of any warranty necessarily means that the rendition of judgment, Permabond moved for entry of the jury found that Permabond breached an express war- judgment in its favor asserting that the jury's answer to ranty. We disagree.

Question No. 7(D), that the parties were bound by the terms and conditions set forth in the invoices, negated the The question regarding breach of warranty submitted jury's findings relating to the breach of warranty and to the jury states in pertinent part: breach of contract claims because the invoices effectively Do [**14] you find that Permabond failed to com- disclaimed express and implied warranties. Alternatively, ply with any warranty?

Permabond requested that the court enter judgment non obstante veredicto (notwithstanding the verdict). See Tex. You are instructed in answering this Question that the R. Civ. P. 301. term "failed to comply" means any of the following: In response, [**12] Great American contended . Failing to comply with an express warranty that the jury's answers required judgment in its favor.

Great American asked the trial court to disregard the jury's . Implied Warranty of Merchantability finding that Great American had agreed to be bound by . Implied Warranty of Fitness for Particular Purpose the standards and terms stated in Permabond's invoices, which included the warranty disclaimer and limited . Implied Warranty of Good and Workmanlike Per- remedy provision. It argued that because Permabond had formance expressly warranted its goods and services, its attempted Answer "Yes" or "No." disclaimer was ineffective.

Because of the ambiguous nature of the jury question, The trial court rendered judgment that Great Ameri- one cannot discern whether the jury's affirmative answer can take nothing. Great American then moved to modify relates to one or more of the implied warranties or to the the judgment and alternatively for a new trial, but the express warranty. Based on the plain meaning of the in- court denied the motion. In five issues on appeal, Great struction, an affirmative answer to "any of the following" American contends that: (1) the trial court erred in ren- is not a finding of breach of express warranty. dering judgment that Great American take nothing be- cause the blanket order agreement had expired at the time In order to recover for the breach of an express war- of the breach and a proper construction of the verdict ranty, a plaintiff must prove: (1) an express affirmation of entitles Great American to recover damages for both fact or promise by the seller relating to the goods; (2) that breach of warranty and breach of contract; (2) even if such affirmation of fact or promise became a part of the there were an effective disclaimer of implied warranty, basis of the bargain; (3) that the plaintiff relied upon said the trial court erred in not rendering judgment [*681] affirmation of fact or promise; (4) that the goods failed to that Great American recover for breach of express war- comply with the affirmations of fact or promise; (5) that ranty, because the disclaimer was legally inoperative the plaintiff was injured by such failure [**15] of the [**13] as to the express warranty; (3) even if there were product to comply with the express warranty; and (6) that an effective disclaimer of warranty, the trial court erred in such failure was the proximate cause of plaintiff's injury. not rendering judgment that Great American recover for Morris v. Adolph Coors Co., 735 S.W.2d 578, 587 (Tex. breach of contract, because, as a matter of law, App.--Fort Worth 1987, writ ref'd n.r.e.). Great American Permabond's invoices did not disclaim responsibility for had the burden to plead, prove, and submit all elements breach of the agreement; (4) even if there were an effec- but failed to do so. In essence, Great American is asking tive limitation of remedy, the trial court erred in not ren- this Court to deem a finding of breach of express warranty dering judgment that Great American recover damages, based on an ambiguous jury submission so as to invalidate because, as a matter of law, the limitation of remedy the trial court's judgment. This we will not do. provision in Permabond's invoices failed of its essential Great American requested Jury Question No. 3, and purpose; and (5) the trial court erred in not rendering the trial court submitted it over Permabond's objections. judgment that Great American recover attorney's fees The jury answered this question in the affirmative. It is awarded by the jury. unknown whether the jury found an express warranty by DISCUSSION Permabond. Even assuming the validity of Great Ameri- can's argument regarding express warranties, where a Breach of Express Warranty jury's findings are capable of two constructions and one Page 5 94 S.W.3d 675, *; 2002 Tex. App. LEXIS 7175, **

would reconcile the findings in favor of the judgment, holding that limited warranty and limited remedy provi- reconciliation in favor of the judgment that was rendered sion rendered irrelevant any jury finding regarding lost on the jury verdict is mandatory. Materials Mktg. Corp. profits). A question is immaterial when it should not have v. Spencer, 40 S.W.3d 172, 176 (Tex. App.--Texarkana been submitted, it calls for a finding beyond the province 2001, no pet.). We overrule issue two. of the jury, e.g., a question of law, or when it was properly submitted but has been rendered immaterial by other [**16] [*682] Disregarding Jury Findings findings. Id. A trial court may disregard a finding on an In issues one and three, Great American argues that immaterial issue and render judgment on the remaining the trial court erred by disregarding, or failing to recon- findings; such a judgment is not considered a judgment cile, certain jury findings in support of the jury's verdict. notwithstanding the verdict. Kuehnhoefer v. Welch, 893 Underlying these issues is the apparent conflict between S.W.2d 689, 692 (Tex. App.--Texarkana 1995, writ de- the jury's answers to Questions Nos. 3 and 8 (that nied).

Permabond breached a warranty and breached its agree- In the instant case, Permabond filed a motion for ment) and the jury's answer to Question No. 7(D) (that judgment in which it urged the trial court to disregard the Great American agreed to be bound by the standard terms jury's findings of breach of warranty and breach of and conditions in Permabond's invoices). 5 As discussed, agreement based on the [**18] jury's affirmative answer the standard terms and conditions in Permabond's in- to Question No. 7(D), finding that Great American agreed voices disclaimed all warranties and limited Great to be bound by the standard terms and conditions, i.e., the American's remedy to replacement of the glue. disclaimer of warranties contained in its invoices. In the alternative, Permabond asked for a judgment notwith- 5 In issue one, Great American specifically standing the verdict based on insufficient evidence. The claims that because the blanket order agreement trial court ultimately rendered final judgment for had expired at the time of breach, the jury findings Permabond that Great American take nothing by its suit. of breach of warranty and breach of agreement can be reconciled by construing the answer to Ques- We agree with Permabond that the jury's answer to tion No. 7(D) as a finding that the parties had once Question No. 7(D) rendered its answers relating to breach agreed to be bound, but that the agreement was not of warranty immaterial. In answering Question No. 7(D), in force when the breach occurred. However, that the jury impliedly found that Great American agreed to be is not how the jury charge reads. The jury was in- bound by the standard terms and conditions, including the structed that the parties had "entered into an disclaimer and limitation of remedy, [*683] contained agreement regarding the purchase and sale" of the in its sales invoices. Once the jury found that Great Permabond adhesive. The jury was asked whether American agreed to be bound by the standard terms and that agreement included the agreement to be conditions on Permabond's invoices, the jury's findings of bound by the standard terms contained in breach of warranty became immaterial. A disclaimer of Permabond's invoices. In answering Question No. warranty is an affirmative defense. Tex. R. Civ. P. 94; 7, the jury was directed to consider the parties' Johnston v. McKinney Am., Inc., 9 S.W.3d 271, 280 (Tex. course of dealing, usage of trade, and course of App.--Houston [14th Dist.] 1999, pet. denied). An af- performance. There is nothing in the charge or firmative defense is by its nature "one of confession question that referenced the blanket order agree- [**19] and avoidance" which seeks to establish an in- ment. In addition, there is nothing to indicate the dependent reason why the plaintiff should not prevail. jury was thinking about some prior, expired Texas Beef Cattle Co. v. Green, 921 S.W.2d 203, 212, 39 blanket order agreement when it answered Ques- Tex. Sup. Ct. J. 523 (Tex. 1996) (jury's finding of affirm- tion No. 7. In answering Question No. 7(D) af- ative defense of justification rendered immaterial finding firmatively, the jury expressly found that Great of actual malice).

American had agreed to be bound by the terms and In addition, the jury's answer to Question No. 7(D) conditions stated in the invoices; therefore, the rendered its answer to Question No. 8 immaterial because terms and conditions in the invoices were found to Permabond expressly provided in its invoices that a buy- be part of the parties' agreement. er's exclusive remedy for substandard goods was limited [**17] A trial court may disregard a jury's answers to replacement of the goods. By answering all sub-parts to that have no support in the evidence or when the answers Question No. 7 in the affirmative, the jury specifically to the questions are immaterial. Southeastern Pipe Line found: (1) Permabond agreed to provide suitable adhesive Co., Inc. v. Tichacek, 997 S.W.2d 166, 172, 42 Tex. Sup. and technical service to Great American; (2) Great Ct. J. 772 (Tex. 1997); see also Southwestern Bell Tel. American agreed to pay Permabond for the adhesive if Co. v. FDP Corp., 811 S.W.2d 572, 577, 34 Tex. Sup. Ct. suitable; and (3) both parties agreed to be bound by the J. 690 (Tex. 1991) (rendering take nothing judgment and terms included in Permabond's invoices. In answering Page 6 94 S.W.3d 675, *; 2002 Tex. App. LEXIS 7175, **

Question No. 8 affirmatively, the jury found that Permabond responds that Great American failed to submit Permabond had failed to comply with its part of the a jury question on the issue or raise the issue in its agreement, specifically, providing suitable adhesive and pleadings below and thus has waived it on appeal. Great technical service to Great American. At the same time, by American counters that its [**22] failure to submit a jury finding that the parties agreed to be bound by the terms question on whether Permabond's limited remedy failed and conditions of the invoices, the [**20] jury also of its essential purpose is not fatal to its pursuit of this found that the remedy for failure to comply with the issue on appeal. See Mercedes Benz of N. Am., Inc. v. agreement was limited to replacement of the defective Dickenson, 720 S.W.2d 844 (Tex. App.--Fort Worth 1986, product. no writ). In Mercedes Benz, the court of appeals consid- ered the issue of whether a limited remedy failed of its The record reveals that the issue of disclaimer was essential purpose, reasoning that the defendant could not addressed throughout the trial, during closing arguments, complain of the plaintiff's failure to plead the issue or to and was raised by Permabond in its pleadings below. submit a jury question on the issue in the absence of spe- Permabond's general manager testified that Permabond's cial exceptions to the plaintiff's pleadings. Id. at 853-54. disclaimer of warranty and limitation of remedy language The court relied on Roark v. Allen in which the supreme was standard in the chemical industry, or a "usage of court rejected the appellate court's determination that the trade." Additionally, from the testimony of Great Amer- plaintiffs' petition was insufficient to support the submis- ican's CEO and purchasing agent, the jury could infer that sion of special issues to the jury on the issue of negli- Great American, based on its prior course of dealing with gence. Roark v. Allen 633 S.W.2d 804, 1982 Tex. LEXIS Permabond, should have been aware of the disclaimer 313, 25 Tex. Sup. Ct. J. 348 (Tex. 1982). However, unlike language contained on Permabond's invoices and corre- the instant case, the Roark plaintiffs submitted a jury spondence. Furthermore, the preface to Question No. 7 of question on the issue of negligence, although they did not the court's charge specifically instructed the jury on plead it specifically in their petition. Id. at 809. In the course of dealing and usage of trade: instant case, Great American not only failed to plead but A "course of dealing" is a sequence of previous also [**23] failed to submit a jury question on the issue conduct between the parties to a particular transaction of whether the limited remedy failed of its essential pur- which is fairly to be regarded as establishing a common pose; therefore, we hold it has waived this issue on appeal. basis of understanding for interpreting their expressions Tex. R. App. P. 33.1; see also Henderson v. Ford Motor or other conduct. Co., 547 S.W.2d 663, 668-69 (Tex. App.--Amarillo 1977, no writ).

A "usage of trade" is any practice or method of dealing having such regularity of [**21] observance in Attorney's fees place, vocation or trade as to justify an expectation that it In issue five, Great American claims the trial court will be observed with respect to the transaction in ques- erred in not rendering judgment on the jury's award of tion. attorney's fees to Great American. To recover attorney's Where an agreement for sale involves repeated oc- fees under Section 38.001 of the Texas Civil Practice and casions for performance by either party with knowledge Remedies Code, a party must (1) prevail on a cause of of the nature of the performance and opportunity for ob- action for which attorney's fees are recoverable, and (2) jection to it by the other, any course of performance ac- recover damages. See Tex. Civ. Prac. & Rem. Code Ann. § cepted or acquiesced in without objection shall be relevant 38.001 (West 1997); Green Int'l, Inc. v. Solis, 951 S.W.2d to determine the meaning of the agreement. 384, 390, 40 Tex. Sup. Ct. J. 610 (Tex. 1997) (citing State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 437, 38 Finally, we note that Great American requested the Tex. Sup. Ct. J. 947 (Tex. 1995)). Great American has charge of which it now complains. In summary, we hold neither prevailed on any cause of action for which attor- that the trial court did not err by disregarding the jury's ney's fees are recoverable, nor has it recovered any answers to the breach of warranty and breach of agree- damages. Issue five is overruled. ment questions. We overrule issues one and three. [*684] Limited Remedy Failed of Essential Pur- CONCLUSION pose? Having overruled all of Great [**24] American's In issue four, Great American urges that, as a matter issues on appeal, we affirm the judgment of the district of law, the limited remedy Permabond provided in its court. invoices failed of its essential purpose and that the jury's David Puryear, Justice inconsistent answers can be reconciled on this basis.

Page 1

Patricia Hamilton, Leonard Smith, and Latisha Hamilton, Appellants v. Texas Property and Casualty Insurance Guaranty Association; George Piccoli as Receiver for International Underwriters Insurance Company; White's Wrecker Service; and Lawrence Newhouse, Appellees NO. 03-98-00355-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 1999 Tex. App. LEXIS 3163

April 29, 1999, Filed NOTICE: [*1] PURSUANT TO THE TEXAS and the remaining appellants were her passen- RULES OF APPELLATE PROCEDURE, UN- gers. Latisha Hamilton also sued as next friend PUBLISHED OPINIONS SHALL NOT BE CITED AS for Senquinsha Howard, a minor.

AUTHORITY BY COUNSEL OR BY A COURT. [*2] For convenience, we will refer collectively to PRIOR HISTORY: FROM THE DISTRICT the Guaranty Association, White's Wrecker, and COURT OF TRAVIS COUNTY, 250TH JUDICIAL Newhouse as appellees except where necessary to DISTRICT. NO. 94-12823, HONORABLE name them individually. George Piccoli, the MARGARET A. COOPER, JUDGE PRESIDING. Delaware receiver for International Underwriters Insurance Company ("the receiver") was served DISPOSITION: Affirmed. but did not answer.

3 The claim of Senquinsha Howard was settled and approved by the court. The partial summary JUDGES: Jan P. Patterson, Justice. Before Justices judgment granted to appellees became a final Jones, Kidd and Patterson. judgment on March 31, 1997, by combining the partial summary judgment with the court's ap- OPINION BY: JAN P. PATTERSON proval of the minor's settlement. The Hamiltons appeal only the summary judgment ruling that OPINION does not affect the claim of the minor.

Appellants Patricia Hamilton, Leonard Smith, and This appeal involves interpretation of the Texas Latisha Hamilton, 1 appeal from a summary judgment in Property and Casualty Insurance Guaranty Act (the favor of appellees, Texas Property and Casualty Insur- "Guaranty Act"). 4 The Guaranty Act provides for the ance Guaranty Association ("Guaranty Association"), payment by the Guaranty Association of "covered White's Wrecker Service (the "insured") and Lawrence claims" up to a statutorily mandated maximum cap in the Newhouse. 2 The Hamiltons sued appellees for personal event a member insurance company becomes insolvent. injuries they suffered in an automobile accident. Appel- The question raised is whether an injured third party may lees filed a motion for partial summary judgment which seek recovery when the insurance company is in receiv- was granted by the trial court and became a final judg- ership in Delaware, [*3] has been declared an im- ment. 3 The Hamiltons now appeal the granting of the paired insurer in Texas, and the statute of limitations has motion. expired as to the insured party. We hold that, under the circumstances of this case, the Hamiltons may not re- For convenience and clarity, we will refer to cover. We will affirm the trial court's summary judg- the appellants as the "Hamiltons." Patricia Ham- ment. ilton was the driver of the appellants' automobile, Page 2 1999 Tex. App. LEXIS 3163, *

4 See Tex. Ins. Code Ann. art. 21.28-C (West THE GUARANTY ACT Supp. 1999).

The Guaranty Act establishes an association of all property and casualty insurers licensed to transact busi- FACTUAL AND PROCEDURAL BACKGROUND ness in Texas. See Guaranty Act § 6. 7 By assessing con- The facts of the case are uncontested. On February tributions from solvent member insurers, the Guaranty 19, 1992, a White's Wrecker Service truck driven by Association maintains a guaranty fund which assumes Lawrence Newhouse collided with the Hamiltons' vehi- insolvent insurers' obligations with respect to statutorily cle. White's Wrecker was insured by International Un- defined "covered claims." Id. § 5(8). The fund is held by derwriters Insurance Company ("IUIC"), a Delaware the Guaranty Association to pay insureds' claims up to a insurance company. On March 11, 1993, IUIC was statutorily mandated maximum cap in the event the in- placed in receivership in Delaware and was designated surance company becomes insolvent. The stated purpos- an impaired insurer by the Texas Commissioner of In- es of the Act are: (1) to protect policyholders and claim- surance on March 22, 1993. The impairment of IUIC ants from financial loss because of the impairment of an authorized the Guaranty Association to pay "covered insurer, and (2) to provide a mechanism [*6] for the claims" 5 against IUIC insureds. payment of "covered claims" under certain insurance policies. Id. § 2.

5 A "covered claim" is defined as "an unpaid claim of an insured or third-party liability claim- 7 The Texas Insurance Code creates three sep- ant that arises out of and is within the coverage arate guaranty funds: the Texas Title Insurance and not in excess of the applicable limits of an Guaranty Association to administer "covered insurance policy to which this Act applies, issued claims" of an "impaired" title insurance company or assumed . . . by an insurer licensed to do busi- authorized to do business in the state, Tex. Ins. ness in this state. . . ." Tex. Ins. Code Ann. art. Code Ann. art. 9.48, § 14; the Texas Property 21.28-C, § 5(8) (West Supp. 1999). and Casualty Insurance Guaranty Association to provide funds to the receiver for the payment of [*4] The Hamiltons' attorney received a letter "covered claims" of an "impaired" member of the dated July 6, 1993, from an adjuster, apparently on be- association, Tex. Ins. Code Ann. art. 21.28-C, § half of the Guaranty Association, acknowledging the 14; and the Life, Accident, Health, and Hospital Association's involvement in the claim. The letter de- Service Insurance Guaranty Association to pro- scribed the procedure for filing claims with the Guaranty vide funds to the receiver for payment of the Association and further stated: "The Association is con- "contractual obligations" of an "impaired" mem- sidered the insurer to the extent of its obligation on cov- ber company, Tex. Ins. Code Ann. art. 21.28-D, ered claims and to that extent has all the rights, duties, § 6. The procedures as well as the definitions of and obligations of the impaired insurer as if the insurer "covered claim" are defined by the applicable had not become impaired." The Hamiltons filed proofs of statutory provision. claim with the Delaware receiver in November and De- cember, 1993. On June 20, 1994, they sued White's The receiver and the Guaranty Association are crea- Wrecker Service and Lawrence Newhouse for personal tures of statute. 8 Prior to 1992, the Texas receiver had injuries sustained as a result of the collision. They also dual [*7] responsibilities: liquidation of the company named the Guaranty Association and the Delaware re- and the administration, evaluation, and payment of ceiver in the lawsuit. claims with funds advanced by the various guaranty funds. The Guaranty Association, under the old statute, Appellees moved for summary judgment on the played no claims-processing role but merely provided an grounds that, under Texas law, the Hamiltons could not extra purse for the payment of claims the receiver deter- maintain a direct cause of action against the Guaranty mined were "covered claims." See Chandler v. Gutierrez, Association, and that the claims against White's and 906 S.W.2d 195, 198 (Tex. App.--Austin 1995, writ de- Newhouse were barred by the two-year statute of limita- nied). tions. The trial court granted the motion, holding that the Hamiltons could not maintain a direct cause of action 8 See Couch on Insurance, Guarantee Asso- [*5] against the Association and that all claims of ciations § 6:27 (3d ed. 1997). plaintiffs (except the minor's) were barred by the appli- cable two-year statute of limitations. 6 In 1991, the Texas Legislature made substantial changes to the insurance liquidation statute. 9 The Actions for personal injury must be brought changes included the transfer of the receiver's duty to within two years of the injury. See Tex. Civ. Prac. administer, evaluate, and pay claims to the Guaranty & Rem. Code Ann. § 16.003 (West 1986). Association for all companies placed in receivership on Page 3 1999 Tex. App. LEXIS 3163, *

or after January 1, 1992. Specifically, the Guaranty As- limitations. Since the judgment is final as to the Guaran- sociation undertook "to discharge the policy obligations ty Association regarding its direct action bar, we need of the impaired insurer, including the duty to defend only address the remaining defendants, White's Wrecker insureds under a liability policy, to the extent that policy and Newhouse. obligations [*8] are covered claims" under the Act. 10 We review the record under the familiar precepts of See Guaranty Act § 8(b). It is this changed role of the summary judgment law that a summary judgment is Guaranty Association that is disputed by the parties. Be- proper only when a movant establishes that there is no cause of the procedural posture of this case, we do not genuine issue of material fact and that he is therefore address the changed role of the Association in the han- entitled to judgment as a matter of law. In deciding dling of claims. whether there is a disputed issue of material fact, matters in the record that favor the nonmovant will be taken as The Guaranty Act was amended in 1991 and true and every reasonable inference from the record must became effective on January 1, 1992. The be resolved in favor of the nonmovant. See Nixon v. Mr. amended Act applies to any company designated Property Management Co., 690 S.W.2d 546, 548-49 an impaired insurer on or after January 1, 1992. (Tex. 1985). A defendant who conclusively establishes The Act has been amended since 1992, but those all of the [*10] elements of an affirmative defense is amendments are not relevant to this appeal. entitled to summary judgment. See Cathey v. Booth, 900 Article 21.28-C section 8(d) authorizes the S.W.2d 339, 341 (Tex. 1995).

Association to: When a defendant moves for summary judgment on its investigate and adjust, com- affirmative defense, it must prove each element of its promise, settle, and pay covered defense as a matter of law, leaving no issues of material claims to the extent of the associa- fact. See Johnson & Johnson Med., Inc. v. Sanchez, 924 tion's obligation and deny all other S.W.2d 925, 927 (Tex. 1996). When the defendant moves claims. The association may re- for summary judgment on a statute of limitations de- view settlements, releases, and fense, the defendant must conclusively (1) prove when judgments to which the impaired the cause of action accrued, and (2) if the plaintiff insurer or its insureds were parties pleaded a tolling provision, negate its application as a to determine the extent to which matter of law. See Jennings v. Burgess, 917 S.W.2d 790, those settlements, releases, and (Tex. 1995). Once the movant has established a right judgments may be properly con- to a summary judgment as a matter of law, the burden tested. Any judgment taken by shifts to the non-movant. The non-movant must then default or consent against an in- respond to the motion for summary judgment by pre- sured or the impaired insurer, and senting to the trial court summary judgment proof suffi- any settlement, release, or judg- cient to raise a fact issue. See Casso v. Brand, 776 ment entered into by the insured or S.W.2d 551, 556 (Tex. 1989). the impaired insurer, is not bind- ing on the association, and may The uncontroverted summary judgment evidence not be considered as evidence of establishes that the Hamiltons' claims are barred by the liability or of damages in connec- statute of limitations. The automobile accident occurred tion with any claim brought on February [*11] 19, 1992. The lawsuit was filed on against the association or any oth- June 20, 1994, more than two years following the date er party under this Act. their cause of action accrued. Once appellees demon- strated that the Hamiltons filed their lawsuit more than two years following the accrual of their cause of action, Guaranty Act § 8(d). the burden shifted to the Hamiltons to produce evidence sufficient to raise a fact issue that would preclude sum- [*9] DISCUSSION mary judgment. See City of Houston v. Clear Creek Ba- sin Auth., 589 S.W.2d 671, 678 (Tex. 1979). This they In granting the appellees' motion for summary failed to do. judgment, the trial court specified two grounds in its or- der: (1) that appellants did not have a direct cause of The Hamiltons contend that they relied upon a letter action against the Guaranty Association and (2) that the to their lawyer to delay the filing of their lawsuit and that claims were barred by the two-year statute of limitations. they were misled by the letter into believing that they On appeal, the Hamiltons challenge the court's granting should await denial of their claims before filing suit. of summary judgment only on the basis of the statute of Specifically, on July 6, 1993, a claims adjuster, on behalf Page 4 1999 Tex. App. LEXIS 3163, *

of the Guaranty Association, sent a letter to the When a motion for new trial is filed after a summary Hamiltons' attorneys "to notify you of your rights and judgment has been granted, as here, the district court is obligations." The letter went on to state: entitled to consider only the [*14] record as it existed prior to granting the summary judgment. See Parchman You must file your third party liability claim against v. United Liberty Life Ins. Co., 640 S.W.2d 694, 696 an insured of International Underwriters, with the Asso- (Tex. App.--Houston [14th Dist.] 1982, writ ref'd n.r.e.). ciation. In the event the Association denies your claim, Having raised no issue of estoppel in response to the you are entitled to appeal that denial by filing suit against motion for summary judgment, as it was their burden to the insured in the same manner as you [*12] would file do, appellants are not entitled to raise the issue on ap- suit if International Underwriters had not become im- peal. paired.

Even if the issue of estoppel could now be raised by In November and December 1993, the Hamiltons the Hamiltons, it is without merit. First, it is moot as to filed proofs of claim with the Delaware receiver. They the Guaranty Association. Appellants' estoppel argument filed this lawsuit in July 1994. does not apply to the Association because the summary Relying solely upon the July 1993 letter, the judgment is final on other grounds. Moreover, a plaintiff Hamiltons contend that they were not told in the letter may invoke equitable estoppel to prevent an opponent that their claims were subject to a statute of limitations from pleading limitations if the opponent, his agent, or and that the letter was misleading as to the procedure to representatives made representations that induced the be followed for third party claims. They assert that these plaintiff to delay filing suit within the applicable statute factual issues regarding the Association's conduct are of limitations. See Cook v. Smith, 673 S.W.2d 232, 235 sufficient to estop appellees from asserting a limitations (Tex. App.--Dallas 1984, writ ref'd n.r.e.). To invoke defense. Because appellees adduced conclusive evidence equitable estoppel, proof must be made of the following that the suit was barred by the limitations period, the elements: (1) a false representation or concealment of a burden was on appellants, as the non-movants, to pro- material fact; (2) made with actual or constructive duce summary judgment evidence sufficient to raise a knowledge of the facts; (3) to a party without knowledge fact issue on estoppel in avoidance of the affirmative [*15] or the means of knowledge of the real facts; (4) defense of limitations. with the intention that it should have been acted upon; and (5) the party to whom it was made must have relied The scope of review in an appeal from a summary upon or acted upon it to his prejudice. See id.; judgment is necessarily limited. It is well recognized that Gulbenkian v. Penn, 151 Tex. 412, 252 S.W.2d 929, 932 a summary judgment motion must expressly state the (Tex. 1952). grounds upon which it is made and will stand or fall on those grounds alone. See McConnell v. Southside Indep.

As evidence in support of their response to appellees' Sch. Dist., 858 S.W.2d 337, [*13] 339 (Tex. 1993). motion, the Hamiltons attached the following five docu- Likewise, the answer or response to the motion must set ments: a copy of the appellees' motion for summary forth the grounds upon which the non-movant relies to judgment; a copy of a partial summary judgment order defeat the motion. Issues not expressly and timely pre- rendered in another district court case, which was never sented by written answer or response may not be consid- appealed and has no precedential value in this case; a ered on appeal as grounds for reversal. See Tex. R. Civ. copy of a letter from an adjusting firm to the Hamiltons' P. 166-a(c); see also Cincinnati Life Ins. Co. v. Cates, counsel dated July 28, 1992 seeking additional infor- 927 S.W.2d 623, 625 (Tex. 1996); Abbott Labs., Inc. v. mation about their injuries; the notification letter of July Segura, 907 S.W.2d 503, 507 (Tex. 1995); Clear Creek 1993 from a second adjusting firm, presumably on behalf Basin Auth., 589 S.W.2d at 678. of the Guaranty Association to the Hamiltons' counsel; Reviewing the record, we find that the issue of es- and a Plan of Operation of the Guaranty Association, toppel was not timely presented to the trial court. The which was not in effect at the time of the Hamiltons' Hamiltons failed to address estoppel in either their re- claims, containing claims-handling information for the sponse to the motion for summary judgment or in their Association. supplemental response. They raised for the first time the There is no summary judgment evidence on any el- issue of estoppel in their Motion for New Trial. This, ement of estoppel sufficient to raise a fact question that alone, does not put the issue before this court. See would defeat summary [*16] judgment. At most, there Hruska v. First State Bank of Deanville, 747 S.W.2d 783, is argument of counsel that the July 1993 letter, standing (Tex. 1988); Keightley v. Republic Ins. Co., 946 alone, is misleading. No affidavits or testimony were S.W.2d 124, 126 (Tex. App.--Austin 1997, no writ). submitted to show, for example, that the Hamiltons' at- torneys, who received the letter, were without knowledge Page 5 1999 Tex. App. LEXIS 3163, *

of the real facts, that the Guaranty Association intended if a new trial was granted. See Jackson v. Van Winkle, for the Hamiltons or their attorney to rely on the letter, 660 S.W.2d 807, 809 (Tex. 1983). Except for the first that the Hamiltons or their counsel relied upon the letter, prong, the Hamiltons wholly fail to make the requisite or even that the letter was wrong or misleading. In addi- showing. tion, the record is devoid of any showing that White's A trial court has broad discretion in deciding wheth- Wrecker or Newhouse engaged in any conduct that er to grant a new trial based upon new evidence, and the would warrant the invocation of equitable estoppel. The trial court's [*18] discretion will not be disturbed on Hamiltons have failed to carry their burden of adducing appeal absent a showing of a manifest abuse of discre- evidence to defeat the affirmative defense and the evi- tion. See Champion Int'l Corp. v. Twelfth Court of Ap- dence is, in any event, insufficient to constitute estoppel. peals, 762 S.W.2d 898, 899 (Tex. 1988). Finding no Accordingly, we overrule appellants' first issue. abuse of discretion in the ruling of the trial court, we As their second issue on appeal, the Hamiltons overrule appellants' second issue on appeal. contend that the trial court erred in failing to grant a new trial because of unresolved issues of disputed fact. They As a final issue on appeal, appellants argue that because also argue that newly acquired evidence is relevant to the Guaranty Association is a quasi-governmental entity, their claim that the Guaranty Association should be eq- its use of the limitations defense violates the "open uitably estopped from asserting a limitations defense. courts" provision of the Texas Constitution. Appellants [*17] Appellants attached to the motion the Associa- did not raise this constitutional argument in the trial tion's Plan of Operation which sets forth the Associa- court, and therefore, we may not consider it on appeal. tion's claims-handling procedures. They argue that, under See Boyd v. Fuel Distribs., Inc., 795 S.W.2d 266, 271 the plan, the Association was required to deny appellants' (Tex. App.--Austin 1990, writ denied). We overrule the claims in writing and that the document constitutes new third issue. evidence supporting their estoppel argument. The record CONCLUSION reflects that the document attached to the motion was the Association's Plan of Operation which was approved in We conclude that the trial court did not err in grant- June 1996 and was not in effect during the period of the ing partial summary judgment to appellees, and we af- lawsuit. firm the judgment of the trial court.

To be entitled to a new trial on the basis of newly Jan P. Patterson, Justice discovered evidence, the party seeking the new trial must satisfy the court that: (1) the evidence has come to the Before Justices Jones, Kidd and Patterson knowledge of the party since the trial; (2) it could not Affirmed have been discovered earlier by the exercise of reasona- ble diligence; (3) it is not cumulative; and (4) it is so Filed: April 29, 1999 material that it would probably produce a different result Page 1

HAMPDEN CORPORATION AND FANTASY DIAMOND CORPORATION, Ap- pellants v. REMARK, INC. AND ROBERT KRAMER, Appellees No. 05-13-00529-CV COURT OF APPEALS OF TEXAS, FIFTH DISTRICT, DALLAS 2014 Tex. App. LEXIS 6900

June 25, 2014, Opinion Filed SUBSEQUENT HISTORY: Petition for review denied judgment interest against Hampden; (2) $228,611.30 in by Remark, Inc. v. Hampden Corp., 2014 Tex. LEXIS damages and prejudgment interest against Fantasy Dia- 1024 (Tex., Oct. 10, 2014) mond; and (3) attorney's fees, costs, and post-judgment interest against both appellants.

PRIOR HISTORY: [*1] On Appeal from the 366th Judicial District Court, 1 See Hampden Corp. v. Remark, Inc., 331 Collin County, Texas. Trial Court Cause No. S.W.3d 489 (Tex. App.--Dallas 2010, pet. denied).

366-00342-06.

In four issues on appeal, appellants contend the trial Hampden Corp. v. Remark, Inc., 331 S.W.3d 489, 2010 court erred because (1) the agreement in question was Tex. App. LEXIS 10052 (Tex. App. Dallas, 2010) modified as a matter of law, which precludes any recov- ery; (2) plaintiffs' claim is barred by "waiver or estoppel"; (3) the damages awarded by the trial court improperly COUNSEL: For Appellants: Jeffrey S. Levinger, Dallas, [*2] included treble damages under the Texas Sales TX.

Representatives Act, see TEX. BUS. & COM. CODE ANN. § 54.004 (West 2009); and (4) plaintiffs were not entitled to For Appellees: Evan Lane (Van) Shaw, Dallas, TX; Janet the attorney's fees awarded.

R. Randle, Dallas, TX.

We decide in favor of appellants on their first issue.

JUDGES: Before Justices Lang, Myers, and Brown. Consequently, we need not address appellants' remaining Opinion by Justice Lang. issues. We reverse the trial court's judgment and render a take-nothing judgment in favor of appellants. Because the OPINION BY: DOUGLAS S. LANG law to be applied in this case is well settled, we issue this memorandum opinion. See TEX. R. APP. P. 47.2, 47.4.

OPINION I. FACTUAL AND PROCEDURAL BACKGROUND MEMORANDUM OPINION The following facts are not disputed by the parties.

Opinion by Justice Lang Hampden and Fantasy Diamond design, manufacture, and sell jewelry and watches. In approximately 1988, Irving Appellees Remark, Inc. ("Remark") and Robert Wein, Fantasy Diamond's chairman at that time, contacted Kramer filed a breach of contract claim against appellants Kramer about facilitating sales of those products to re- Hampden Corporation ("Hampden") and Fantasy Dia- tailer JCPenney. Later that same year, Kramer and Re- mond Corporation ("Fantasy Diamond") based on a dis- mark, a company formed by Kramer, entered into an pute respecting compensation under a sales agreement. agreement with Fantasy Diamond and a predecessor to Following a bench trial and a subsequent appeal to and Hampden2 pursuant to which Remark received commis- remand by this Court,1 the trial court rendered judgment sions on both companies' net sales to JCPenney. awarding Remark (1) $67,483.36 in damages and pre- Page 2 2014 Tex. App. LEXIS 6900, *

2 Hereafter, "Hampden" is used in this back- Several months later, Joseph Wein sent Kramer a ground section of this opinion to refer to appellant letter dated January 18, 2005 (the "January 18, 2005 let- Hampden and/or its [*3] predecessors. ter"), that stated in part (1) "[d]uring those conversations last summer, I told you that you . . . must be prepared for In 1996, Remark was requested by Hampden and reducing income from [*5] Fantasy and Hampden going Fantasy Diamond to sign a "standard Sales Representation forward"; (2) "neither Fantasy nor Hampden requires Agreement" and Remark did so (the "1996 Agreement"). ongoing outside representation at JCPenney or anywhere The 1996 Agreement provided in part (1) the "Sales else"; and (3) on December 31, 2005, the "retainer" Representative," Remark, was to be paid a 5% commis- payments "will end entirely" and "our representative sion on the net sales of Hampden and Fantasy Diamond relationship will cease." Remark received monthly re- products to JCPenney; (2) the agreement would "continue tainer payments from Fantasy Diamond and Hampden and remain in full force and in effect until cancelled by through 2005. No payments were made to Remark or either party, which cancellation may be effected by either Kramer by Fantasy Diamond or Hampden after December party giving to the other 15 days' notice in writing of its 31, 2005. intent to cancel, said notice to be mailed by certified or registered mail"; and (3) "[t]he relationship between the In 2006, Remark and Kramer ("plaintiffs") sued Company and the Sales Representative is and shall be that Fantasy Diamond and Hampden ("defendants") for, of independently contracting parties and not that of em- among other claims, breach of contract. In their sixth ployer/employee." amended petition, the live petition at the time of the judgment now complained of, plaintiffs asserted in part In 2002, Wein's son, Joseph Wein, became chairman that defendants breached the 2002 Agreement by failing and chief executive officer of both Fantasy Diamond and to pay plaintiffs as required under that agreement and such Hampden. In October of that year, Kramer received sep- breach "also violates [the Texas Sales Representatives arate letters from Louis Price, president of Fantasy Dia- Act] and entitles Plaintiffs to damages for three (3) times mond, and Jim Herbert, president of Hampden, stating the unpaid commissions" and reasonable attorney's fees that as of January 1, 2003, Remark's commission on net and costs. Defendants filed general denial answers. sales to JCPenney would be reduced to 2.5%. Each letter requested that Kramer [*4] indicate his agreement by At the November 17, 2008 bench trial, defendants "signing below and returning the original" to the sender. argued in part that the 2002 Agreement was modified by Kramer signed and returned each of those letters (collec- the parties when defendants provided notice of a change tively, the "2002 Agreement"). [*6] in compensation in 2004 and plaintiffs accepted that change by their "continued performance," i.e. accepting Following a meeting with Kramer in summer 2004, retainer payments from defendants.3 Plaintiffs argued at Joseph Wein sent Kramer a letter dated July 1, 2004 (the trial that the 1996 Agreement, rather than the 2002 "July 1, 2004 letter"), that stated in part Agreement, was the operative agreement between the parties and was breached by defendants.

Per our conversation, we will convert payment to REMARK from commission Additionally, as to the alleged modification, to retainer beginning immediately. defendants also asserted that subsequent to the Beginning July 1, 2004 REMARK July 1, 2004 letter, Joseph Wein sent Kramer a will earn a retainer at an annualized rate of letter dated July 30, 2004, that stated the payments $100,000, or a monthly rate of $8,333.33. of $8,333 per month would continue through June 2005 and the amount of the monthly payments Beginning January 1, 2005, RE- would change to $6,250 beginning July 1, 2005, MARK will earn a retainer at an annual- rather than January 1, 2005. Defendants referred ized rate of $75,000, or a monthly rate of to that letter and the July 1, 2004 letter, collec- $6,250. tively, as the "notice letters" and/or "the 2004 Of course, this retainer is "at will" and Agreement." However, at trial, Kramer testified he can be modified or terminated by either of did not remember receiving the July 30, 2004 us at any time. letter.

In a post-trial brief, defendants contended plaintiffs' claim respecting breach of the 1996 Agreement was not (emphasis original). The letter was on Fantasy Diamond supported by plaintiffs' pleadings. The trial court (1) letterhead and the closing stated "Warm personal regards, granted plaintiffs leave to file a post-trial "seventh FANTASY DIAMOND CORPORATION" (emphasis amended petition" asserting breach of the 1996 Agree- original), followed by Joseph Wein's signature.

Page 3 2014 Tex. App. LEXIS 6900, *

ment and (2) rendered judgment in [*7] plaintiffs' favor and (2) the other party accepted the based on breach of the 1996 Agreement. change.

Defendants appealed to this Court. In December 2010, this Court concluded the trial court erred by grant- (citing and quoting Hathaway v. Gen. Mills, Inc., 711 ing plaintiffs leave to file their post-trial pleading. This S.W.2d 227, 228-29 (Tex. 1986)). Further, according to Court vacated the trial court's judgment and remanded the defendants, case to the trial court "to allow it to consider the evidence Fantasy Diamond and Hampden con- at trial in light of the claims pleaded in Remark and clusively established that (1) they provided Kramer's sixth amended petition." Hampden Corp., 331 Plaintiffs notice of the changes to the 2002 S.W.3d at 499.

Agreement, and (2) Plaintiffs accepted On remand in the trial court, plaintiffs filed a "Motion those changes as a matter of law. After for Final Judgment." Therein, plaintiffs stated in part that discussing their financial issues with Kramer agreed to the reduction of the commission from Kramer, and instead of invoking their 5% to 2.5% in October 2002. Plaintiffs asserted "[t]his unilateral right to terminate their rela- commission change to the 1996 commission structure, tionship with Kramer and Remark, De- constitutes the 2002 agreement, which essentially modi- fendants notified Kramer that, effective fied the 1996 commission rate, leaving all terms of the July 1, 2004, they would cease paying him 1996 agreement as part of the 2002 agreement." However, based on a commission structure and in- plaintiffs contended Kramer "never agreed to have the stead would begin paying a fixed monthly 2.5% commission altered in any manner." Additionally, retainer--specifically, $8,333 per month plaintiffs alleged that "[s]ubsequently, Defendants ceased from July 1, 2004 until June 30, 2005 and paying any commissions or payments to Plaintiff, without $6,250 per month beginning on July 1, providing proper notice as called for in the contract." 2005. Although Kramer was not asked to Plaintiffs claimed [*8] damages based on 2.5% of de- countersign Defendants' notice letters, he fendants' net sales to JCPenney from January 1, 2003, acknowledged that he received them; he through October 2008, minus the amounts actually paid to did not quit and instead continued to work plaintiffs by defendants during that time. Further, plain- as a sales representative for Defendants for tiffs asserted that in light of defendants' breach, plaintiffs the next 18 months; and he accepted and are entitled to "three times the unpaid commissions" and retained all of the monthly [*10] retainer reasonable attorney's fees and costs pursuant to the Texas payments without complaint. Under these Sales Representatives Act. circumstances, Plaintiffs' continuing work and retention of payments constitute ac- Defendants filed an "Opposition to Plaintiffs' Motion ceptance of the 2004 Agreement as a for Final Judgment and Cross-Motion for Take-Nothing matter of law.

Judgment." Therein, defendants contended in part that they did not breach the 2002 Agreement because "it was modified by mutual agreement effective July 1, 2004" and (citations to record omitted). plaintiffs "were paid everything they were owed under the 2004 Agreement." Specifically, defendants stated Plaintiffs and defendants both cited evidence from the November 2008 trial record in their motions, includ- In analogous cases involving at-will ing, in part, copies of the 1996 Agreement; the 2002 employment, "either party may impose Agreement; the July 1, 2004 letter; and the January 18, modifications to the employment terms as 2005 letter. Additionally, defendants cited the following a condition of continued employment." testimony of Kramer on direct examination: When an employer notifies an employee or independent contractor of changes in the Q. . . . So 2002 and 2003, you moved terms of their relationship, the employee or forward and you're now receiving two and independent contractor "must accept the a half percent on commissions that you had new terms or quit." If he "continues generated--on sales rather that had been working with knowledge of the changes, made from Fantasy and Hampden to he has accepted the changes [*9] as a JCPenney. You're getting two and a half matter of law." Thus, to prove a modifica- percent now, correct? tion of an at-will contract, a party must A. Correct. show (1) that it gave notice of the change, Page 4 2014 Tex. App. LEXIS 6900, *

Q. And then in 2004, another letter .... sent to you saying, hey, we're going to Q. And over . . . the years, [Hampden] change the deal again. We're not going to and Fantasy Diamond Corporation paid give you two and a half percent, we're you several hundred--in excess of millions going to give you a flat fee per month. Do of dollars for compensation for your ser- you remember that letter? vices rendered, did they [*12] not?

A. I remember the letter, but that was A. I've never totaled it up. I don't a shocker. know what the amount is.

Q. There's no dispute--is there any dispute that they paid you all the commis- Further, Kramer testified as follows on sions you were due until 2002 when the cross-examination: agreement was changed to two and a half percent, and they then paid you two and a Q. Now, when you were talking to Mr. half percent until the agreement was Price and Mr. Herbert about this change changed in 2004, and that they then paid [*11] of compensation from 5 to two and a you your retainer amount in 2004 and half percent, they each told you that their 2005? There's no dispute that those companies were going through financial amounts were paid to you, correct? difficulties, correct?

A. Correct.

A. I have no recollection of that. ....

Q. You did this to help protect these In a reply to defendants' response and cross-motion, companies by being able to pay you an plaintiffs argued in part (1) "there was conflicting testi- amount that they could afford? mony as to whether Kramer ever knew that his continued A. Correct. efforts were to be interpreted as an acceptance," which .... knowledge "is critical to whether the continued effort of Q. Did [Joseph Wein] tell you [in the 'employee' will be deemed acceptance" and (2) in summer 2004] that you had to be prepared Hathaway, the court "found that the intent of the parties to reduce your income from these compa- was not to modify the contract, and continued employ- nies and not be dependent on them going ment was NOT acceptance of terms not intended." (em- forward? phasis original).

A. I think he said that. And I said that's At the hearing on plaintiffs' motion for final judgment not something that his father would ever and defendants' opposition and cross-motion, defendants have done. asserted, inter alia, their argument described above that .... the 2002 Agreement was modified by the parties in 2004 Q. . . . [Y]ou did receive [the July 1, as a matter [*13] of law pursuant to Hathaway. Plaintiffs 2004 letter], correct? asserted in response to that argument that (1) under Hathaway, "the employee has to have knowledge of the A. Yes. modification, and it must know the nature and changes Q. And this was following your con- and certainty of their imposition, and that was what was versation with Mr. Wein about your missing here" and (2) "[n]o one ever told Bob Kramer, by compensation, correct? the way, if you take this money, you are accepting this deal."

A. Right. .... Defendants filed a post-hearing response to plaintiffs' Q. And then in January of 2005, you reply in which they asserted in part "[b]y citing to received . . . a letter from Mr. Wein in [Hathaway], Plaintiffs acknowledge (as they must) that which he's describing for you the fact that only two elements are required to prove a modification of your independent contractor relationship an at-will employment or sales representative contract: (1) with his--the companies would expire, end unequivocal notice of the change, and (2) acceptance of on December 31, 2005. Do you remember the change." receiving that letter?

In a reply to that response, plaintiffs asserted that "in A. Yes. none of the cases cited by Defendants was there, as here, a Page 5 2014 Tex. App. LEXIS 6900, *

clear history of modification procedures." According to plaintiffs' reply, "[t]here is absolutely NO evidence that 4 Although Kramer was a plaintiff in the trial the parties intended to alter the clear prior method of court, the trial court's January 22, 2013 final modifications, providing a signature line on letterhead or judgment does not award him any relief in his in- signature from ALL DEFENDANTS, and/or signature dividual capacity. Kramer did not appeal the trial line for KRAMER to sign and or acknowledge the court's judgment. He has filed an "Appellees' change" and "[n]othing put KRAMER [*14] on Opening Brief" in this appeal jointly with appellee 'unequivocal notice' that these documents, combined with Remark. continued working by KRAMER, would bind REMARK as binding modifications." (emphasis original). Addi- II. MODIFICATION OF THE 2002 AGREEMENT tionally, in the conclusion to their reply, plaintiffs stated as follows: A. Standard of Review We review the legal sufficiency of the evidence to As established by the documentary and support a trial court's judgment after a bench trial under oral testimony at trial, DEFENDANT the same standards applicable to a jury's verdict. See Ortiz FANTASY DIAMOND CORPORA- v. Jones, 917 S.W.2d 770, 772 (Tex. 1996); Roberson v. TION'S proffer of evidence of a modifica- Robinson, 768 S.W.2d 280, 281 (Tex. 1989); Ashcraft v. tion: Lookadoo, 952 S.W.2d 907, 910 (Tex. App.--Dallas 1. Contradicted their earlier methods 1997), pet. denied, 977 S.W.2d 562 (Tex. 1998). When of modification; there are no findings of fact or conclusions of law filed, the trial [*16] court's judgment implies all findings of 2. Did not advise fact necessary to support it. See, e.g., BMC Software KRAMER/REMARK the earlier methods Belg., N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex. 2002); of modification with signature were being Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 83 altered; (Tex. 1992); Weisfeld v. Tex. Land Fin. Co., 162 S.W.3d 3. Did not advise 379, 381 (Tex. App.--Dallas 2005, no pet.). If a reporter's KRAMER/REMARK that continued ser- record is filed, an appellant may challenge the legal and vice would mean acceptance of the terms; factual sufficiency of the trial court's implied findings.

See, e.g., Heine, 835 S.W.2d at 84; Roberson, 768 S.W.2d 4. Reference oral negotiations that at 281; Volume Millwork, Inc. v. W. Houston Airport were expressly contested and refuted by Corp., 218 S.W.3d 722, 729 (Tex. App.--Houston [1st Plaintiff; and Dist.] 2006, pet. denied).

5. Did not mention HAMPDEN When a party challenges the legal sufficiency of the As such, KRAMER/REMARK'S evidence supporting an adverse finding on an issue on continued service did not accept the al- which the party had the burden of proof, it must show that leged modifications to the 2002 agreement the evidence establishes as a matter of law all vital facts in .... support of the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001); PopCap Games, Inc. v. MumboJumbo, LLC, 350 S.W.3d 699, 710 (Tex. (emphasis original). Attached to plaintiffs' reply were App.--Dallas 2011, pet. denied). The appellant must show excerpts from trial testimony of Kramer in which he stated that there is no evidence to support the trial judge's finding he did not "agree to" the 2004 changes to his compensa- and that the evidence conclusively establishes the finding tion. urged by the appellant. [*17] See R.J. Suarez Enters. Inc. v. PNYX L.P., 380 S.W.3d 238, 245 (Tex. App.--Dallas In a final judgment dated January 22, 2013, the trial 2012, no pet.). In our review, we must credit evidence court rendered judgment in favor of Remark as described favorable to the finding if reasonable jurors could and above.4 Defendants filed a timely request for findings of disregard contrary evidence unless reasonable jurors fact and conclusions [*15] of law and a notice of past could not. City of Keller v. Wilson, 168 S.W.3d 802, 827 due findings of fact and conclusions of law. No findings (Tex. 2005). "Evidence is conclusive only if reasonable of fact or conclusions of law were issued by the trial court. people could not differ in their conclusions, a matter that Additionally, defendants filed a "Motion to Vacate, depends on the facts of each case." Id. at 816.

Modify, Correct, or Reform the Judgment" in which they asserted, inter alia, the modification arguments described B. Applicable Law above. That motion was overruled by operation of law.

This appeal timely followed.

Page 6 2014 Tex. App. LEXIS 6900, *

Contract modification is an affirmative defense. Intec General Mills, Inc. under an "employment at will con- Sys., Inc. v. Lowrey, 230 S.W.3d 913, 918 (Tex. tract"6 to sell shirts for General Mills on a commission App.--Dallas 2007, no pet.) (citing Brownlee v. Brownlee, basis. Id. at 228. On January 21, 1980, Hathaway met with 665 S.W.2d 111, 112 (Tex. 1984)). The party asserting it General Mills' national sales manager to discuss lowering bears the burden of proof. Id. (citing Hathaway, 711 Hathaway's 1980 commission rate. Id. Hathaway testified S.W.2d at 229); see White v. Harrison, 390 S.W.3d 666, he disagreed with the rate change and was told by the (Tex. App.--Dallas 2012, no pet.). national sales manager to discuss the proposed new commission rate with Gary [*20] Duncan, Hathaway's C. Application of Law to Facts regional sales manager. Id. Further, Hathaway testified Duncan told him not to worry about the rate change and In their first issue, appellants contend the trial court that Duncan would "take care of the situation." Id. erred by rendering judgment against them on appellees' Hathaway continued to work for General Mills. claim for breach of the 2002 Agreement to pay a 2.5% commission because "as a matter of law, Plaintiffs agreed It is not clear from the opinion in Hathaway in July 2004 to a new fixed monthly retainer arrangement whether the "employment at will contract" in that that defendants fully performed." Appellants argue case was in writing. See id. [*18] "[t]here is no evidence to support an implied finding that plaintiffs did not agree to the July 2004 letter In February 1980, General Mills sent Hathaway a changing the commission to a fixed monthly retainer" and letter proposal containing the new rates. Id. Hathaway "the evidence conclusively establishes that they did agree testified that Duncan told him not to sign the letter and to that change." Specifically, according to appellants, (1) that Duncan would "talk to" the national sales manager contract modifications in "employment-related contexts" about the rate changes. Id. Hathaway did not sign the require only two elements, "unequivocal notice of the letter. Id. After firing Hathaway in April 1980, General change and acceptance of the change by continued em- Mills offered to pay him under the proposed new, lower ployment" and (2) both of those elements were conclu- commission rates for his work to that time. Id. Hathaway sively established by the evidence in this case. Further, sued General Mills for the old, higher commissions, al- appellants assert "[i]n implicitly holding otherwise--i.e., leging that he never accepted the new rates. Id. The case that Plaintiffs did not 'agree' to the modification set forth was tried before a jury. Id. in the [July 2004 notice letters]--the court below appears In its answers to the jury questions, the jury found (1) to have disregarded the undisputed evidence or misun- Hathaway did not accept or ratify the commission rate derstood the controlling law on contract formation." 5 change and (2) General Mills ratified Hathaway's refusal to accept the changes. Id. Based on those findings, the trial Appellants assert "[t]he trial court's rulings court rendered judgment in favor of Hathaway. [*21] Id. are necessarily implicit because it did not file any This Court reversed, holding that Hathaway accepted the findings of fact or conclusions of law despite lower rates as a matter of law by continuing to work for Defendants' timely request and past due notice."

General Mills knowing of the changed rates. Id. However, appellants state, "this Court need not follow the usual remedy of abating the appeal and On appeal to the supreme court, Hathaway argued remanding the case because the material facts in General Mills did not clearly notify him of the rate question are not [*19] disputed and the trial changes and, therefore, he did not accept the modification judge (who did not try this case) would do no more as a matter of law by remaining with General Mills. Id. than review the same record as this Court would." The supreme court agreed. Id. That court stated "to prove a modification of an at will employment contract, the Appellees respond that the trial court "was correct in party asserting the modification must prove two things: rendering its finding that Defendants breached the [2002 (1) notice of the change; and (2) acceptance of the Agreement] because there was never any modification to change." Id. at 229. Specifically, that court stated that agreement." According to appellees, this Court "should affirm the trial court's finding that there was no To prove notice, an employer asserting intent to modify the 2002 agreement, and that because a modification must prove that he une- Defendants/Appellants did not provide unequivocal no- quivocally notified the employee of defi- tice, Plaintiffs'/Appellees' continued service was not an nite changes in employment terms. Cases agreement of the terms of any post-2002 proposed modi- dealing with employment modifications fication." require that the employee have knowledge In support of their arguments on this issue, both sides of the proposed modification. Fairness also cite Hathaway. See 711 S.W.2d at 227. In that case, dictates this rule. To have knowledge of a plaintiff Gregg N. Hathaway was employed by defendant modification, the employee must know the Page 7 2014 Tex. App. LEXIS 6900, *

nature of the changes and the certainty of like appellants, appellees assert that the requirements their imposition. stated in Hathaway are applicable to this appeal and, [*24] as described above, cited Hathaway in support of The employer asserting a modifica- their arguments on remand in the trial court. Therefore, tion must also prove that the employee we adopt the proposition utilized by the Fourteenth Court accepted the proposed changes. If the em- of Appeals in Houston in Price Pfister, Inc. v. Moore & ployer proves [*22] that he has une- Kimmey, Inc., 48 S.W.3d 341, 350 n.2 (Tex. quivocally notified the employee of the App.--Houston [14th Dist.] 2001, pet. denied), that changes, the employee's continuing em- "[a]lthough Hathaway specifically deals with an at-will ployment will constitute acceptance as a employment contract, we will accept as true both parties' matter of law. assertion that its analysis should be applied to the parties' agreement in this case." Id. (applying Hathaway re- quirements in case involving non-employee sales repre- Id. (citations omitted). The supreme court reasoned that sentative); see also Tex. Farm Bureau Mut. Ins. Cos. v. the record, which included Hathaway's testimony that he Sears, 84 S.W.3d 604, 606 (Tex. 2002) (applying law was told to discuss the changes with Duncan and was told pertaining to at-will employment after concluding inde- by Duncan not to worry and that Duncan would "take care pendent insurance agent whose contract with insurance of it," showed evidence of "conflicting signals from company provided either party could terminate without General Mills' managers" that made "unequivocal notifi- cause upon ten days' notice was "an at-will agent" and "as cation" a jury question. Id. The supreme court concluded the parties acknowledge, his relationship with [the in- that because General Mills did not conclusively prove or surance company] has all the characteristics of at-will request a jury question on notification, that element must employment").7 be deemed in support of the judgment and against une- quivocal notification. Id. Like the court in Price Pfister, we "express no In the case before us, appellants argue, without citing opinion, however, whether Hathaway governs authority, that the sales representative agreement between oral agreements outside of the context of at-will the parties is "analogous" to an "at-will employment employment." [*25] Price Pfister, 48 S.W.3d at contract." Further, appellants assert in their appellate brief 350 n.2. that courts have "consistently applied" the principles Appellees argue this case is distinguishable from the stated in Hathaway "to enforce modifications of com- cases cited by appellants and fails to meet the require- pensation agreements with sales representatives, and to ments of Hathaway because appellants' "unilateral pro- reject their claims for breach of the original agreement." posed 'modification'" altered the parties' "prior modifica- In support of that [*23] assertion, appellants cite several tion procedures." According to appellees, Texas cases involving employee/employer relationships and one federal case involving a non-employee sales There is absolutely NO evidence that agent. See Mitsubishi Aircraft Int'l, Inc. v. Maurer, 675 the parties intended to alter the clear prior S.W.2d 286 (Tex. App.--Dallas 1984, no writ) (involving method of modifications, providing a sig- employee sales representative); L.G. Balfour Co. v. nature line on letterhead or signature from Brown, 110 S.W.2d 104 (Tex. Civ. App.--Fort Worth ALL DEFENDANTS, and/or signature 1937, no writ) (involving employee sales representative); line for KRAMER to sign and or Perkins v. Ulrich, No. 14-05-00992-CV, 2007 Tex. App. acknowledge the change. Nothing put LEXIS 3088, 2007 WL 1191903 (Tex. App.--Houston KRAMER on "unequivocal notice" that [14th Dist.] Apr. 24, 2007, no pet.) (involving sales as- these documents, combined with contin- sociate employed by home builder); Bell v. Phillips, No. ued working by KRAMER, would bind 14-00-01189-CV, 2002 Tex. App. LEXIS 2734, 2002 WL REMARK as binding modifications.

576036 (Tex. App.--Houston [14th Dist.] Apr. 18, 2002, no pet.) (involving employee sales representative); Cen- tury Sales, Inc. v. Jupiter Aluminum, Inc., No. (emphasis original). Additionally, appellees contend (1) 4:02-CV-0607-A, 2002 U.S. Dist. LEXIS 24578, 2002 WL "FANTASY DIAMOND CORPORATION'S proffer of 31875610 (N.D. Tex. Dec. 20, 2002) (involving evidence of a modification . . . [d]id not mention non-employee sales agent).

HAMPDEN" (emphasis original); (2) the parties' "prior The record shows the 1996 Agreement stated "[t]he modifications with signatures and from both defendants" relationship between the Company and the Sales Repre- "expressly contradict any interpretation of [the July 2004 sentative is and shall be that of independently contracting notice letters] as BINDING MODIFICATIONS" (em- parties and not that of employer/employee." However, phasis original); and (3) Kramer "unequivocally denied Page 8 2014 Tex. App. LEXIS 6900, *

agreeing to" or "negotiating" any of the new terms. In of law. Hathaway, 711 S.W.2d at 229. "To have support of those arguments, [*26] appellees cite (1) In re knowledge of a modification, the employee must know Halliburton Co., 80 S.W.3d 566, 569 (Tex. 2000), in the nature of the changes and the certainty of their impo- which the supreme court, in concluding the notice in that sition." Id. The July 1, 2004 letter (1) stated that pursuant case was unequivocal and the employee's continuing to a prior conversation between Kramer and Joseph Wein, employment constituted acceptance, quoted language in which the record shows pertained to reducing Kramer's the "notice documents" that "explained" the modification, income from both Fantasy Diamond and Hampden, stated the effective date, and "explained that by working payment to Remark would be converted to retainer "be- after that date an employee would indicate that he or she ginning immediately" and (2) set forth in detail the accepted the provision" and (2) Hathaway.8 amounts of the retainer payments to be received by Re- mark. Although appellees cite Hathaway and In re Hal- Additionally, appellees cite Stowers v. Har- liburton in support their position that appellants were per, 376 S.W.2d 34 (Tex. Civ. App.--Tyler 1964, required to advise them that "the earlier methods of writ ref'd n.r.e.) for the same statement of law modification with signature were being altered" neither of quoted above from Hathaway. those cases mentions or addresses any "earlier methods of modification" or any requirement to advise as to alteration To the extent appellees contend In re Halliburton of such. See [*29] id. at 228-29; In re Halliburton, 80 requires appellants to show Kramer knew his continued S.W.3d at 568. Further, appellees cite Hathaway to sup- service and acceptance of the monthly retainer payments port their position that "prior modifications with signa- would indicate he accepted the alleged modification, we tures and from both defendants" "expressly contradict" cannot agree. While In re Halliburton quotes portions of a any interpretation of the July 1, 2004 letter as a binding notice that so advised the employee in that case, the law modification. However, unlike the case before us, specifically stated and applied in that case is the two-part Hathaway involved "conflicting signals" during the par- test from Hathaway and no additional elements of proof ties' communications pertaining to the alleged modifica- are described or imposed by the In re Halliburton court. tion in question in that case. Hathaway, 711 S.W.2d at See In re Halliburton, 80 S.W.3d at 568-69, 572-73.

229. Appellees cite no authority, and we have found none, Next, we consider appellees' [*27] assertion that the to support the position that the "prior modifications" al- July 1, 2004 letter did not "mention" Hampden. Appellees leged by appellees constitute "conflicting signals" pur- do not specifically explain how this assertion is material suant to Hathaway. Finally, Kramer's testimony that he to their argument. To the extent this assertion can be "unequivocally denied agreeing to" or "negotiating" any construed as an argument that appellees were not given of the alleged modifications is immaterial to our analysis notice that the alleged modification pertained to Hampden of whether the record establishes the two elements re- as well as Fantasy Diamond, the record shows Kramer quired by Hathaway. See id. testified (1) Joseph Wein told him in summer 2004 that he On this record, we conclude the evidence conclu- had to be prepared to reduce his income from "these sively established appellants "unequivocally notified" companies" and not be dependent on "them" going for- appellees of the change in question and appellees accepted ward and (2) Kramer received the July 1, 2004 letter from that change. Accordingly, we conclude the parties' 2002 Joseph Wein following that conversation. The July 1, Agreement was modified as a matter of law. See id. 2004 letter stated in part "[p]er our conversation, we will convert payment to REMARK from commission to re- We decide in favor of appellants on their [*30] first tainer beginning immediately." The letter was signed by issue.

Joseph Wein, who was chairman and chief executive officer of both Fantasy Diamond and Hampden. While the III. CONCLUSION July 1, 2004 letter did not "mention" Hampden, the record We decide appellants' first issue in their favor. In shows that letter was written pursuant to a conversation light of our resolution of that issue, we need not address between Kramer and Joseph Wein respecting payments appellants' remaining issues.9 from both Fantasy Diamond and Hampden. Further, there is no evidence in the record that any party intended or Additionally, appellees (1) state in the fact understood that the change from [*28] commission to section of their appellate brief that "[n]o notice via retainer pertained only to Fantasy Diamond. certified mail was ever provided as required under As to appellee's remaining arguments, Hathaway the terms of the agreement" and (2) asserted in part provides that if an employer proves he "unequivocally during oral argument before this Court that the notified" an at-will employee of "definite changes in fifteen-day notice of termination by certified or employment terms," the employee's continuing employ- registered mail as required by the parties' agree- ment will constitute acceptance of the changes as a matter ment "did not occur here." However, appellees Page 9 2014 Tex. App. LEXIS 6900, *

stated during oral argument (1) although the trial JUSTICE court's judgment from which this appeal is taken did not specifically address the termination date of JUDGMENT the parties' agreement, the damages awarded by In accordance with this Court's opinion of this date, the trial court appear to be based on a termination the judgment of the trial court is REVERSED and date of December 31, 2005 and (2) appellees do judgment is RENDERED that appellees REMARK, INC. not contest that the parties' agreement was termi- and ROBERT KRAMER take nothing on their claims. nated effective December 31, 2005. Appellees did not appeal the trial court's judgment, nor do they It is ORDERED that appellants HAMPDEN assert a cross-issue or argument in their appellate CORPORATION and FANTASY DIAMOND COR- brief respecting the termination date of the PORATION recover their costs of this appeal from ap- agreement. Therefore, appellees' assertions re- pellees REMARK, INC. and ROBERT KRAMER. specting the termination date of the parties' [*31] Judgment entered this 25th day of June, 2014. agreement present nothing for this Court's review.

See TEX. R. APP. P. 25.1(c), 38.2. /Douglas S. Lang/ We reverse the trial court's judgment and render a DOUGLAS S. LANG take-nothing judgment in favor of appellants.

JUSTICE /Douglas S. Lang/ DOUGLAS S. LANG Page 1 2003 Tex. App. LEXIS 9027, *

Healix Infusion Therapy, Inc., Appellant v. Nicholaos C. Bellos, M.D., P.A., Appellee No. 11-02-00346-CV COURT OF APPEALS OF TEXAS, ELEVENTH DISTRICT, EASTLAND 2003 Tex. App. LEXIS 9027

October 23, 2003, Decided PRIOR HISTORY: [*1] Appeal from Dallas Dr. Bellos sued Healix in another lawsuit; the parties County. reached a settlement in that suit. Both parties agreed not to disclose the nature of the settlement agreement. The DISPOSITION: Affirmed. agreement provided for $ [*2] 10,000.00 in liquidated damages in the event of a breach by either party. After the settlement agreement was signed, Methodist Hospitals of COUNSEL: For Plaintiff or Petitoner: Murphy Klasing, Dallas (Methodist), where Dr. Bellos practiced, sent $ Kenneth Moursund Jr., McGinnis, Lockridge & Kilgore, 6,385.13, which it owed to Dr. Bellos, because it mis- Houston, TX. takenly believed that Healix held a lien against Dr. Bellos.

Healix sent a letter and a copy of the settlement agreement For Defendant or Respondent: Cathy Hendrickson, Kevin to Methodist to show that there was no lien. Dr. Bellos A. Kinnan, Ryan Downton, Bruce Howell, Arter & claimed that Healix breached the settlement agreement Hadden, Attorneys at Law, Dallas, TX. Jeffrey Hellberg when Healix furnished the agreement to Methodist, and Jr., Flanary Carter Schubert, P.C., Attoneys at Law, Dal- he sued Healix to recover under the liquidated damages las, TX. provision of the agreement.

JUDGES: Panel consists of: Arnot, C.J., and Wright, J., A trial court must grant a motion for summary and McCall, J. judgment if the moving party establishes that no genuine issue of material fact exists and that the moving party is OPINION BY: JIM R. WRIGHT entitled to judgment as a matter of law. TEX.R.CIV.P. 166a(c); Lear Siegler, Inc. v. Perez, 819 S.W.2d 470, OPINION 471, 35 Tex. Sup. Ct. J. 154 (Tex. 1991). Once the movant establishes a right to a summary judgment, the Memorandum Opinion non-movant must come forward with evidence or law that The trial court granted a motion for summary judg- precludes summary judgment. City of Houston v. Clear ment filed by Nicholaos C. Bellos, M.D., P.A. and en- Creek Basin Authority, 589 S.W.2d 671, 678-79, 23 Tex. forced a contractual liquidated damages clause against Sup. Ct. J. 7 (Tex. 1979). When reviewing a summary Healix Infusion Therapy, Inc. The trial court awarded Dr. judgment, [*3] the appellate court takes as true evidence Bellos $ 10,000.00 in his suit against Healix. The trial favorable to the non-movant. Every reasonable inference court also awarded attorney's fees to Dr. Bellos. In two must be indulged in favor of the non-movant and any issues on appeal, Healix argues that the liquidated dam- doubts resolved in its favor. American Tobacco Com- ages clause is an unenforceable penalty and that there are pany, Inc. v. Grinnell, 951 S.W.2d 420, 425, 40 Tex. Sup. genuine issues of material fact regarding damages. 1 We Ct. J. 658 (Tex. 1997); Nixon v. Mr. Property Manage- affirm. ment Company, Inc., 690 S.W.2d 546, 548-49, 28 Tex. Sup. Ct. J. 384 (Tex. 1985). In order to succeed on an The award of attorney's fees is not contested affirmative defense in a summary judgment proceeding, a in this appeal. defendant must establish every element of the affirmative Page 2 2003 Tex. App. LEXIS 9027, *

defense. American Tobacco Company, Inc. v. Grinnell, contacted Dean Matthys, the corporate risk manager for supra. Methodist, to have him destroy the agreement. She further stated that Matthys indicated that only he and his assistant Courts will enforce liquidated damages provisions in were aware of the settlement agreement. Also included in contracts when the court finds that the harm resulting the summary judgment evidence was an affidavit given by from a breach of the contract is incapable or difficult to Matthys as well [*6] as a letter from Matthys to Healix. estimate and when it also finds that the amount provided These documents indicated that the copy of the settlement as liquidated damages is a reasonable forecast of just agreement was destroyed soon after it was received by compensation. Rio Grande Valley Sugar Growers, Inc. Methodist and that the only two people to see the agree- v. Campesi, 592 S.W.2d 340, 342 n.2, 23 Tex. Sup. Ct. J. ment, Matthys and his assistant Lisa Irby, were not in- (Tex. 1979). The "difficulty of estimation" and "rea- volved with the re-credentialing process at Methodist. sonable forecast" questions must be determined from Finally, Healix offered as summary judgment evidence evidence of the circumstances which existed at the time Dr. Bellos's response to a request for disclosure that any the parties executed the agreement. Baker v. Interna- economic damages suffered by Dr. Bellos were difficult tional Record Syndicate, Inc., 812 S.W.2d 53 [*4] to estimate. (Tex.App. - Dallas 1991, no writ). Courts will not enforce liquidated damages clauses which do not meet those cri- This evidence does not meet the burden Healix must teria because the clauses would constitute unenforceable bear: that at the time the agreement was made damages penalties. Phillips v. Phillips, 820 S.W.2d 785, 35 Tex. could be easily ascertained and that the amount of the Sup. Ct. J. 220 (Tex. 1991). Determining whether a liqui- liquidated damages award was not a reasonable forecast dated damages clause is enforceable or whether it is an of just compensation. Healix contends that the award of unenforceable penalty is a question of law. Phillips v. liquidated damages is disproportionate to the actual Phillips, supra. damages suffered by Dr. Bellos because Dr. Bellos did not have any actual damages. To emphasize this point, Healix In this case, the initial burden was on the movant. relies on Baker. "If the liquidated damages are shown to However, when a party raises the affirmative defense of be disproportionate to the actual damages, then the liq- penalty, that party assumes the burden to conclusively uidated damages can be declared a penalty and recovery establish the defense. Baker v. International Record limited to actual damages proven." Baker v. International Syndicate, Inc., supra. Therefore, the burden was upon Record Syndicate, Inc., supra at 55. [*7] Healix still Healix to prove that the contractual liquidated damages must show that, at the time the agreement was made, the was an unenforceable penalty. amount of the liquidated damages was not a reasonable The settlement agreement offered as summary forecast. To prove this defense, Healix must prove actual judgment evidence by Dr. Bellos showed that the parties damages, if any, to show that the actual loss was not an agreed to keep the nature of the settlement agreement approximation of the stipulated sum. Baker v. Interna- confidential. The parties further agreed that a breach of tional Record Syndicate, Inc., supra. That damages are the confidentiality clause would result in imminent and not yet ascertainable is not tantamount to evidence of irreparable harm and that the damages for a breach of "zero" damages. confidentiality would be $ 10,000.00. Healix admitted in The summary judgment evidence establishes that its response to Dr. Bellos's [*5] request for admissions there was an agreement between Healix and Dr. Bellos that it agreed to the confidentiality of the agreement and that prohibited the disclosure of the nature of the settle- that it agreed to the $ 10,000.00 liquidated damages ment agreement and that Dr. Bellos performed all the clause. Dr. Bellos's affidavit reflected that he agreed to the required acts under the agreement. Healix breached the confidential nature of the agreement and that he had per- agreement by sending a copy of the agreement to Meth- formed all acts required of him under the settlement odist. Because we find that Healix failed to meet its bur- agreement. His affidavit further showed that Methodist den of proof on the penalty issue and because Healix subjected him to a re-credentialing process every two failed to raise a genuine issue of material fact, we hold years. He was unaware of how the disclosure of the that the trial court did not err when it granted Dr. Bellos's agreement would affect the re-credentialing process, but motion for summary judgment. Healix's issues on appeal states that he has been harmed in a manner that is "inca- are overruled. pable of or difficult of estimation."

The judgment of the trial court is affirmed.

As part of its proof, Healix attached the affidavit of Heather Hughes-Glass, the corporate risk manager for JIM R. WRIGHT Healix. In her affidavit, Heather Hughes-Glass stated that, JUSTICE as soon as she became aware of the confidentiality pro- vision of the agreement that was sent to Methodist, she Page 1

HIRSCHFELD STEEL COMPANY, INC., Appellant v. KELLOGG BROWN & ROOT, INC. AND HARRIS COUNTY-HOUSTON SPORTS AUTHORITY, Appel- lees NO. 14-04-00504-CV COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON 201 S.W.3d 272; 2006 Tex. App. LEXIS 7152

August 15, 2006, Judgment Rendered August 15, 2006, Opinion Filed PRIOR HISTORY: [**1] On Appeal from the declaratory relief against the general contractor and the 270th District Court. Harris County, Texas. Trial Court owner. After a jury trial, the trial court rendered judgment Cause No. 02-24591. that both the subcontractor and the general contractor take nothing on their claims against each other. On appeal, the DISPOSITION: Affirmed. subcontractor (1) challenges the legal and factual suffi- ciency of the jury's finding that it did not substantially perform [**2] its duties under the subcontract, (2) as- COUNSEL: For APPELLANTS: Steven J. Lownds, serts the trial court abused its discretion in admitting Dallas, TX; Marcie Lynn Schot, Dallas, TX; Roger D. evidence regarding the warranty, (3) claims the trial court Townsend, Houston, TX. erred in not rendering judgment in its favor on an alleg- edly separate and independent contract claim for for APPELLEES: Daniel J. Kraftson, McLean, TX; E. maintenance work on the roof, and (4) argues the trial Katherine Strahan, Houston, TX; Gene L. Locke, Hou- court erred in rendering summary judgment dismissing its ston, TX; Kerry McMahon, Houston, TX; Nicholas A. declaratory-judgment claims. In its cross-appeal, the Simms, Houston, TX. general contractor asserts the trial court erred in denying it attorney's fees under provisions of the subcontract al- JUDGES: Panel consists of Justices Fowler, Frost, and lowing the prevailing party in litigation between the Guzman. subcontractor and the general contractor to recover at- torney's fees. We affirm the trial court's judgment.

OPINION BY: Kem Thompson Frost I. FACTUAL AND PROCEDURAL BACKGROUND OPINION Appellee Harris County-Houston Sports Authority [*275] This case arises out of the construction of (hereinafter the "Sports Authority") is the owner of Mi- what is now known as Minute Maid Park and involves nute Maid Park, a state-of-the-art professional baseball disputes among the owner of the ball park, the general stadium located in downtown Houston. In December contractor, and one of its subcontractors. The subcon- 1997, the Sports Authority and appellee Kellogg Brown & tractor sued the general contractor asserting contract Root, Inc. ("Kellogg") entered into a contract for the claims for retainage and contract damages as well as construction of Minute Maid Park (hereinafter the "Con- seeking a declaratory judgment against both the owner struction Contract"). In May of 1998, Kellogg and ap- and the general contractor that the subcontractior's pellant Hirschfeld Steel [**3] Company, Inc. (hereinaf- ten-year warranty on the park's retractable roof was void. ter "Hirschfeld") entered into a subcontract, under which The general contractor asserted a counterclaim for breach Hirschfeld agreed to provide various metal systems for of contract and declaratory relief. The trial court granted Minute Maid Park (hereinafter the "Subcontract"). As part summary judgment denying the subcontractor's claims for of the Subcontract, Hirschfeld agreed to design and build Page 2 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

all structural, architectural, electrical, and mechanical this agreement, Kellogg agreed that the ten-year warranty components required to provide a complete and working on the Roof System is in full force and effect and is en- retractable roof system for Minute Maid Park (hereinafter forceable directly against Kellogg notwithstanding the "Roof System"). Under the Subcontract, Hirschfeld purported revocation of this warranty by Hirschfeld. [*276] also was required to warrant various aspects of the Roof System for ten years. Litigation In May 2002, Hirschfeld filed this lawsuit against Performance of First-Year Maintenance Services Kellogg and the Sports Authority. Hirschfeld asserted Hirschfeld subcontracted with Uni-Systems, Inc. to claims against Kellogg for retainage under the Subcon- perform some of the services required under the Subcon- tract and other contract damages. Hirschfeld also sought a tract. Uni-Systems provided some first-year maintenance declaratory judgment against both the Sports Authority services for the Roof System, but a dispute arose over who and Kellogg that its ten-year warranty on the retractable was supposed to pay for these services. The Sports Au- roof was void because of an alleged failure to perform thority asserted that first-year maintenance services were required maintenance on the Roof System. Kellogg included in the Construction Contract and should be counterclaimed for breach of contract and [**6] declar- performed at no additional cost to the Sports Authority. atory-judgment relief.

Kellogg asserted that these services were not included in The Sports Authority and Kellogg filed motions for the Construction Contract and that Kellogg was entitled to summary judgment asserting, among other things, that (1) a change order under that contract [**4] giving it addi- the trial court lacked subject matter jurisdiction over tional compensation for providing these services. As [*277] Hirschfeld's declaratory-judgment claims re- between the Sports Authority and Kellogg, an arbitration garding the ten-year warranty because the claims were not panel eventually ruled against the Sports Authority's po- ripe and (2) as a matter of law, the Subcontract does not sition and determined that Kellogg was not obligated to make performance of maintenance on the Roof System a provide the first-year maintenance services without re- condition precedent to the existence of Hirschfeld's war- ceiving additional compensation. In any event, ranty. The trial court granted both motions for summary Uni-Systems allegedly provided various first-year judgment and dismissed Hirschfeld's claims for a declar- maintenance services and sought payment from atory judgment that its warranty was void.

Hirschfeld for these services. Hirschfeld settled with Uni-Systems and then sought payment from Kellogg for The contract claims of Kellogg and Hirschfeld were the first-year maintenance services allegedly provided on tried to a jury. The jury found that (1) Hirschfeld did not its behalf by Uni-Systems. substantially perform its duties under the Subcontract; (2) $ 1,259,922 remains unpaid under the Subcontract; (3) Subcontractor's Suspension of Ten-Year Warranty remedying or repairing Hirschfeld's defects and/or omis- sions would cost $ 500,000; (4) Hirschfeld performed On September 22, 2000, Hirschfeld sent a letter to first-year maintenance through its subcontractor Kellogg stating that Hirschfeld was declaring the ten-year Uni-Systems as directed by Kellogg; and (5) $ 240,000 is warranty suspended based on the Sports Authority's al- the fair and reasonable value of the first-year maintenance leged failure to perform maintenance on the Roof System provided by Hirschfeld through its subcontractor allegedly required by the ten-year warranty. Hirschfeld Uni-Systems. asserted that the warranty would be suspended until Hirschfeld reinstated the warranty based on the occur- The trial court signed [**7] a final judgment in- rence of various events, including completion of all re- corporating its summary-judgment rulings on Hirschfeld's pairs necessitated by the Sports Authority's failure to declaratory-judgment claims and ordering that Hirschfeld perform the required maintenance [**5] and the per- and Kellogg take nothing by their claims. The trial court formance of all required maintenance on the roof mecha- denied Kellogg's request for attorney's fees under a pro- nism. Hirschfeld did not thereafter reinstate its ten-year vision in the Subcontract allowing the prevailing party in warranty. litigation between the parties to recover its attorney's fees.

Hirschfeld appealed, and Kellogg cross-appealed.

Settlement Agreement Between Owner and General Contractor II. ISSUES PRESENTED Kellogg and the Sports Authority finally resolved all On appeal, Hirschfeld raises the following issues: of their differences regarding this project and entered into a settlement agreement effective March 29, 2002. This (1) Is the evidence legally and factually agreement provided that Kellogg would receive final sufficient to support the jury's finding that payment from the Sports Authority by April 26, 2002. In Page 3 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

Hirschfeld did not substantially perform its matter of law. Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 duties under the Subcontract? S.W.3d 154, 157, 47 Tex. Sup. Ct. J. 40 (Tex. 2003). (2) Did the trial court reversibly err in IV. ANALYSIS admitting allegedly irrelevant testimony regarding Hirschfeld's suspension of its A. Did the trial court err in granting summary judg- warranty? ment as to the declaratory-judgment claims relating to (3) In light of the jury's findings, did the ten-year warranty? the trial court erroneously refuse to render In its fourth issue, which we address first, Hirschfeld judgment in favor of Hirschfeld on its asserts that the trial court erred in granting summary claim for $ 240,000 and attorney's fees judgment as to its claims for declaratory judgment re- based on its claim regarding first-year garding the ten-year warranty. In their motions for sum- maintenance? mary judgment, Kellogg and the Sports Authority argued (4) Did the trial court err in granting the trial court lacked subject matter jurisdiction because summary judgment as to Hirschfeld's the declaratory-judgment claims are not ripe and, in the claims against Kellogg and the Sports alternative, they fail on the merits. The trial court granted Authority for declaratory judgment re- the motions without specifying [**10] the grounds. garding the ten-year [**8] warranty? Because the trial court dismissed the claims with preju- dice rather than without prejudice, it does not appear that the trial court concluded it lacked jurisdiction under the ripeness doctrine. However, it is possible the trial court In its cross-appeal, Kellogg asserts the trial court found a lack of ripeness and rendered an improper judg- erred by not awarding Kellogg its attorney's fees. ment based on this determination. Furthermore, even if the trial court did not conclude the declaratory-judgment III. STANDARDS OF REVIEW claims were not ripe, we still would lack jurisdiction if In reviewing the trial court's traditional summary this were so. Therefore, we must address the ripeness judgment as to Hirschfeld's declaratory-judgment claims, issue in any event. we take as true all evidence favorable to the non-movant, In deciding a ripeness issue, we ask whether, at the and we make all reasonable inferences in the time a lawsuit is filed, the facts have developed suffi- non-movant's favor. Dolcefino v. Randolph, 19 S.W.3d ciently so that an injury has occurred or is likely to occur, 906, 916 (Tex. App.--Houston [14th Dist.] 2000, pet. rather than being contingent or remote. Patterson v. denied). If the movant's motion and summary-judgment Planned Parenthood of Houston & Se. Tex., Inc., 971 evidence facially establish its right to judgment as a S.W.2d 439, 442, 41 Tex. Sup. Ct. J. 1001 (Tex. 1998). The matter of law, the burden shifts to the non-movant to raise ripeness inquiry thus focuses on whether the case involves a genuine, material fact issue sufficient to defeat summary uncertain or contingent future events that may not occur judgment. Id. as anticipated or may not occur at all. Id. By maintaining In construing the Subcontract, our primary concern is this focus, the ripeness doctrine serves to avoid premature to ascertain and give effect to the intentions of the parties adjudication. Id. as expressed in the contract. Kelley-Coppedge, Inc. v. The Texas Declaratory Judgment Act is a remedial Highlands Ins. Co., 980 S.W.2d 462, 464, 42 Tex. Sup. Ct. statute whose purpose [**11] is to afford relief from J. 130 (Tex. 1998). To ascertain the parties' true inten- uncertainty and insecurity with respect to rights, status, tions, we examine the entire agreement in an effort to and other legal relations. TEX. CIV. PRAC. & REM. harmonize and give effect to all of its provisions so that CODE ANN. § 37.002(b) (Vernon 1997). We must con- none will be rendered meaningless. MCI Telecomms. strue and administer this statute liberally. Id. A court of Corp. v. Tex. [*278] Utils. Elec. Co., 995 S.W.2d 647, record, acting within its jurisdiction, has power to declare 652, 42 Tex. Sup. Ct. J. 656 (Tex. 1999). [**9] Whether rights, status, and other legal relations whether or not a contract is ambiguous is a question of law for the court. further relief is or could be claimed. Id. § 37.003(a) Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121, (Vernon 1997). A person with an interest in a written 39 Tex. Sup. Ct. J. 537 (Tex. 1996). A contract is am- contract may ask a court to determine any question of biguous when its meaning is uncertain and doubtful or is construction or validity arising under the contract and susceptible to more than one reasonable interpretation. Id. obtain a declaration of rights, status, or other legal rela- However, when a written contract is worded so that it can tions thereunder. Id. § 37.004(a) (Vernon 1997). A con- be given a certain or definite legal meaning or interpreta- tract may be construed either before or after a breach. Id. § tion, it is unambiguous, and the court construes it as a 37.004(b).

Page 4 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

Kellogg and the Sports Authority assert that c. This Subcontractor shall warrant Hirschfeld's declaratory-judgment claims regarding the the design of the roof mechanism and the ten-year warranty are not ripe because so far no warranty roof Structure [sic] against errors and claims have been made or threatened. However, the rec- omissions for a period of ten (10) years ord reflects that there is a real and current controversy from the date of Substantial Completion of regarding this warranty. Kellogg relies on its interpreta- the project. tion of the warranty to support the trial court's 5. This Subcontractor shall warrant take-nothing [**12] judgment on Hirschfeld's contract the interface between design of [**14] [*279] claim. If Hirschfeld's construction of the war- the structural Roof [sic] system and the ranty is correct, this court's analysis of Hirschfeld's first roof mechanism for a period of ten (10) and second issues on appeal will be affected. After careful years from the date of final completion of consideration, we conclude that Hirschfeld's declarato- the project. The following clarifications ry-judgment claims regarding the ten-year warranty are are acknowledged as a basis of Subcon- ripe. See Patterson, 971 S.W.2d at 442; City of Waco v. tractor's [Guaranteed Maximum Price]: Tex. Nat. Res. Conserv. Comm'n, 83 S.W.3d 169, 175-78 (Tex. App.--Austin 2002, pet. denied) (holding that de- a. This Subcontractor shall warrant claratory-judgment claims were ripe). Therefore, we have the design, manufacture, and installation appellate jurisdiction over these claims, and the trial court of the roof mechanism to perform [its] in- erred to the extent it granted summary judgment on this tended purpose of; [sic] opening and basis. closing the roof structure without exces- sive noise, excessive vibration, and/or We now must decide whether the trial court erred in excessive wear for a period of ten (10) refusing to grant Hirschfeld's request for a declaratory years from the date of Substantial Com- judgment that its ten-year warranty is void and its revo- pletion of the project. cation of this warranty was effective. Hirschfeld argues that it no longer owes any obligations under the ten-year b. Acts of God and other normal in- warranty on the Roof System because alleged express surable risks are excluded from this war- conditions precedent--scheduled inspections and ranty. maintenance--did not occur. Hirschfeld asserts that the c. Architectural elements (i.e. glass, performance of the inspections and maintenance is a roof membrane) are excluded from this condition precedent [**13] to the existence of the warranty. ten-year warranty as a matter of law, or in the alternative, that the Subcontract is ambiguous in this regard. d. Adequacy of design of structural The Subcontract states the following: roof components to perform as a static roof is excluded from this warranty (i.e. if the roof design is determined to be adequate 4. This Subcontractor shall provide a for a static roof under design loads, this Ten (10) Year Warranty for the Mecha- Subcontractor will guarantee the perfor- nized Retractable Roof System which in- mance of the roof structure and mechanism corporates the Structural Steel, Roof Deck and Roof Mechanization System in its en- to jointly perform their designed function; tirety. The Ten-Year Warranty shall pro- if the roof design [*280] were to be determined to be inadequate for a static vide the following coverage: roof under design loads, [**15] this a. This Subcontractor shall warrant Subcontractor does not warrant that inad- the structural steel and deck against all equacy). defects in quality and workmanship, manufacture and installation for a period 6. This Subcontractor shall specify and publish a ten- (10) year written of ten (10) years, from the date of Sub- maintenance program for the Roof stantial Completion of the project.

Mechanization System, which includes a b. This Subcontractor shall warrant manufacturer recommended maintenance the roof mechanism against all defects in schedule. The ten- (10) year maintenance quality and workmanship, manufacture program shall be submitted to the Archi- and installation for a period of ten (10) tect/Engineer of record. However, the Ar- years, from the date of Substantial Com- chitect/Engineer of record's review com- pletion of the project. ments must not diminish the integrity of the Page 5 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

specified maintenance program as a con- By [**17] the Owner, which includes dition of the ten- (10) year warranty, un- detailed observations and recommenda- less the subject revisions are accepted by tions. The Owner's annual maintenance the Contractor. This Subcontractor's ten and inspections shall include (at a mini- (10) [sic] year written maintenance pro- mum) but are not limited to the following: gram shall include but is not limited to the 1. The maintenance contractor se- folllowing: lected by the Owner shall perform a "point a. A schedule of daily and weekly by point" inspection, developed and pub- inspections required to be performed by lished by this Subcontractor in accordance the Owners [sic] Roof Mechanization with the completed design, and submitted System operator, which will facilitate to the Architect/Engineer of record on this identification of potential maintenance project. The Owner shall submit a copy of issues. the inspection report to this Subcontractor and the Contractor. b. A schedule of quarterly required maintenance and inspections to be per- 2. The maintenance contractor se- formed by a maintenance contractor to be lected by the Owner shall implement a selected by the Owner. The Owner shall local observation system that will be publish quarterly reports to this Subcon- monitored via modem at all times, each tractor, (copied to the Contractor) [sic] The time the roof is operated. The Owner shall Owner's quarterly maintenance and in- submit pertinent information regarding the spections [**16] shall include (at a location of the observation post and con- minimum) but are not limited to the fol- tact information shall be submitted to this lowing: Subcontractor and the Contractor. [*281] The Owner shall dispatch a local techni- 1. The maintenance contractor se- cian to the site in the event any problems lected by the Owner shall grease all wheel are detected, and notify this Subcontractor bearings, lubricate all open gearing, clean accordingly. This Subcontractor shall ad- power feed rail, clean microwave guide, vise the Owner as required to resolve any clean all electrical component cooling fins. operational malfunctions. This Subcon- 2. The maintenance contractor se- tractor shall maintain a permanent record lected by the Owner shall perform a full regarding issues of this [**18] nature system inspection, utilizing a minimum of throughout the life of the warranty [sic] A sixty (60) man hours and two (2) techni- complete report regarding issues of this cians. The full system inspection shall be nature shall be submitted to the Contractor developed and published by this Subcon- by the Subcontractor. tractor in accordance with the completed design, and reviewed by the Archi- tect/Engineer of record. Attachment B of the Subcontract (emphasis added).

3. The maintenance contractor se- Relying primarily on the italicized language above, lected by the Owner shall perform a "point Hirschfeld asserts that the written maintenance program by point" inspection, developed and pub- described in Paragraph 6 above is a condition precedent lished by this Subcontractor in accordance and that, if this maintenance program is not followed, then with the completed design reviewed by the its ten-year warranty is void. To determine whether a Architect/Engineer of record on this pro- condition precedent exists, the intention of the parties ject. must be ascertained, and that can be done only by looking at the entire contract. Criswell v. European Crossroads c. A schedule of annual maintenance Shopping Ctr., Ltd., 792 S.W.2d 945, 948, 33 Tex. Sup. Ct. and inspections required to be performed J. 598 (Tex. 1990). To make performance specifically by the maintenance contractor selected by conditional, a term such as "if," "provided that," "on the Owner, which shall include all struc- condition that," or some similar phrase of conditional tural, mechanical, and electrical compo- language normally must be included. Id. If no such lan- nents, including finishes. An inspection guage is used, the terms typically will be construed as a report shall be published to this Subcon- covenant in order to prevent a forfeiture. Id. Though there tractor (and copied to the Contractor) [sic] is no requirement that such phrases be utilized, their ab- Page 6 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

sence is probative of the parties' intention that a promise tract to the contrary, it is further expressly agreed be made, rather than [**19] a condition imposed. Id. In that final payment by the [Sports Authority] to construing a contract, forfeiture by finding a condition [Kellogg] is an absolute condition precedent to precedent is to be avoided when another reasonable final payment by [Kellogg] to [Hirschfeld]." reading of the contract is possible. Id. When the intent of Sections 4 and 5 require Hirschfeld to warrant for ten the parties is doubtful or when a condition would impose years (1) the Structural Steel, Roof Deck and roof an absurd or impossible result, the agreement will be mechanism against all defects in quality and workman- interpreted as creating a covenant rather than a condition. ship, manufacture, and installation, (2) the design of the Id. Because of their harshness in operation, conditions are roof mechanism and roof structure against errors and not favored in the law. Id. omissions, (3) the interface between the design of the There is no language in the Subcontract stating that structural roof system and the roof mechanism, and (4) the there will be a ten-year warranty from Hirschfeld "if," design, [**22] manufacture, and installation of the roof "provided that," or "on condition that" the written mechanism to perform its intended purpose of opening maintenance program is followed. There is no contract and closing the roof structure without excessive noise, language stating that nonperformance of the maintenance excessive vibration, and/or excessive wear. Given these program will void the warranty. 1 Hirschfeld focuses on a substantial warranties, it would not be reasonable to in- sentence that uses the word "condition"; however, this terpret the passing reference in the Subcontract as stating sentence notably does not use the term "condition prece- a condition precedent, and it would not be reasonable to dent." The term "condition" can mean a condition prece- interpret this statement as an intention to void the ten-year dent, but it also can be used more generally to mean a term warranty based on the failure to make one daily inspection or provision in a contract that is not a condition precedent. or the failure to grease one wheel bearing, as required by See BLACK'S LAW DICTIONARY 312-13 (8th ed. the written maintenance program in section 6.

2004) (defining condition as "a future and uncertain event After considering the entire Subcontract under the on which [**20] the existence or extent of an obligation applicable legal standard, we conclude that, under the or liability depends" and also as "a term, provision, or unambiguous language of the Subcontract, performance clause in a contract"). In Attachment B of the Subcontract, of the written maintenance plan is not a condition prece- the parties first describe the ten-year warranty required of dent to the existence of Hirschfeld's ten- year warranty.

Hirschfeld in sections 4 and 5, and then, in section 6, they See Criswell, 792 S.W.2d at 948-49 (holding that contract require Hirschfeld to publish a ten-year written mainte- language did not make sale of the property on a condo- nance program, which Hirschfeld must submit to the minium basis a condition precedent to plaintiff's entitle- Architect/Engineer. The sentence upon which Hirschfeld ment to compensation); Sturges v. System Parking, Inc., relies states that, although the Architect/Engineer may 834 S.W.2d 472, 474 (Tex. App.--Houston [14th Dist.] make comments and suggest revisions to this maintenance 1992, writ [**23] dism'd by agr.) (concluding there was program, these comments and suggested revisions no condition precedent under contract as a matter of law). [*282] alone do not change the maintenance program The trial court did not err in granting the traditional mo- unless Kellogg accepts them. In the course of stating this, tions for summary judgment filed by the Sports Authority the parties provided in the Subcontract that the Archi- and Kellogg and in dismissing with prejudice Hirschfeld's tect/Engineer's comments "must not diminish the integrity declaratory-judgment claims regarding the ten-year war- of the specified maintenance program as a condition of ranty. 2 Accordingly, we overrule Hirschfeld's fourth the ten- (10) year warranty, unless the subject revisions issue. are accepted by the Contractor." However, given that these sophisticated parties do not indicate in any other Kellogg also asserted a no-evidence motion sentence of the Subcontract that performance of the for summary judgment regarding these claims; written maintenance is a condition precedent to the ex- however, by concluding the trial court did not err istence of Hirschfeld's warranty obligation, it seems in granting the traditional motion, we need not [**21] unlikely that if they intended as much they would analyze this additional ground for summary have mentioned it only in passing as they were addressing judgment. the effect of the Architect/Engineer's comments on the written maintenance program.

B. Is the evidence legally and factually sufficient to support the jury's finding that the subcontractor did Elsewhere in the Subcontract, the parties used not substantially perform its duties under the Sub- language creating an express condition precedent. contract?

For example, in section 22(C)(8) of the Subcon- tract's Attachment A, the parties state that In its first issue, Hirschfeld attacks the legal and "[n]otwithstanding any provision of this Subcon- factual sufficiency of the evidence to support the jury's Page 7 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

finding that Hirschfeld failed to substantially perform its willfully departed from the terms of the duties under the Subcontract. Because Hirschfeld [**24] Subcontract, that it has not omitted essen- had the burden of proof as to this issue, for Hirschfeld to tial points of the Subcontract, that it has succeed in its legal-sufficiency challenge, we must con- honestly and faithfully performed the clude that Hirschfeld conclusively proved it substantially construction contract in its material and performed its duties under the Subcontract as a matter substantial particulars, and that the only [*283] of law. See Dow Chem. Co. v. Francis, 46 S.W.3d variance from the strict and literal per- 237, 241, 44 Tex. Sup. Ct. J. 664 (Tex. 2001). Hirschfeld formance of the Subcontract consists of asserts it made this showing and therefore the trial court technical or unimportant omissions or de- should have awarded it attorney's fees and $ 759,922--the tails. difference between the amount the jury found was unpaid under the Subcontract ($ 1,259,922) and the cost of remedying or repairing Hirschfeld's defects and omissions With the exception of using a different word to refer to the as found by the jury ($ 500,000). In making this deter- Subcontract, this instruction regarding the meaning of mination, we must consider the evidence in the light most "substantial performance" is identical to the instruction favorable to the challenged finding and indulge every proposed by Hirschfeld in its pretrial submission to the reasonable inference that would support it. See City of trial court. At trial, no party objected to this instruction as Keller v. Wilson, 168 S.W.3d 802, 822, 48 Tex. Sup. Ct. J. to what constitutes "substantial performance." 3 Therefore, (Tex. 2005). We must credit favorable evidence if a we review the sufficiency of the evidence under [**27] reasonable factfinder could and disregard contrary evi- the above instruction, without regard to whether it is a dence unless a reasonable factfinder could not. See id. at correct statement of the law. See St. [*284] Joseph 827. We must determine whether the evidence at trial Hosp. v. Wolff, 94 S.W.3d 513, 530, 46 Tex. Sup. Ct. J. would enable a reasonable and fair-minded person to find 142 (Tex. 2003) (stating that appellate courts in civil cases the facts at issue. [**25] See id. The factfinder is the review sufficiency of evidence based on the definitions sole judge of the credibility of the witnesses and the contained in the charge, unless a party objects to the weight to be given their testimony. See id. at 819. Evi- charge and points out the correct definition that is not dence is conclusive only if reasonable people could not being used in the charge); Osterberg v. Peca, 12 S.W.3d differ in their conclusions. See id. 31, 55, 43 Tex. Sup. Ct. J. 380 (Tex. 2000) (holding that court could not review the sufficiency of the evidence As to Hirschfeld's factual-sufficiency challenge, we based on a particular legal standard because that standard examine the entire record, considering both the evidence was not submitted to the jury and no party objected to the in favor of, and contrary to, the challenged finding. Cain charge on this ground or requested that the jury be v. Bain, 709 S.W.2d 175, 176, 29 Tex. Sup. Ct. J. 214 (Tex. charged using this standard); L&F Distributors v. Cruz, 1986). After considering and weighing all the evidence, 941 S.W.2d 274, 279, 286 (Tex. App.--Corpus Christi we set aside the fact finding only if it is so contrary to the 1996, writ denied) (holding that parties are bound by a overwhelming weight of the evidence as to be clearly charge that misinforms the jury about the substantive law wrong and unjust. Pool v. Ford Motor Co., 715 S.W.2d unless a party properly brings the defect in the charge to 629, 635, 29 Tex. Sup. Ct. J. 301 (Tex. 1986). The trier of the trial court's attention). fact is the sole judge of the credibility of the witnesses and the weight to be given to their testimony. GTE Mobilnet of Although Kellogg objected that this instruc- S. Tex. v. Pascouet, 61 S.W.3d 599, 615-16 (Tex. tion failed to specifically state that substantial App.--Houston [14th Dist.] 2001, pet. denied). We may completion of a project or building is not neces- not substitute our own judgment for that of the trier of sarily the same as a contractor substantially per- fact, even if we would reach a different answer on the forming its responsibilities under the contract, the evidence. Maritime Overseas Corp. v. Ellis, 971 S.W.2d instruction given was consistent with Kellogg's 402, 407, 41 Tex. Sup. Ct. J. 683 (Tex. 1998). [**26] The proposed additional instruction. The trial court amount of evidence necessary to affirm a judgment is far simply declined to give a more specific instruction less than that necessary to reverse a judgment. Pascouet, in this regard. 61 S.W.3d at 616. [**28] As discussed above, the Subcontract re- The jury found that Hirschfeld did not substantially quired Hirschfeld to warrant various matters relating to perform its duties under the Subcontract based on the the Roof System for ten years. 4 According to the March following instruction regarding substantial performance: 29, 2002 Settlement Agreement between the Sports Au- thority and Kellogg (hereinafter "Settlement Agree- To establish "substantial performance" ment"), the ten-year warranty commenced on August 1, Hirschfeld must show that: [sic] it has not 2000. Although Kellogg may have admitted in its coun- Page 8 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

terclaim that Hirschfeld "provided" Kellogg with a ity] or its authorized representative has ten-year warranty, this does not prevent Kellogg from demonstrated that the required mainte- asserting, as it has, that Hirschfeld suspended, revoked, or nance is being performed on the roof repudiated the warranty that it provided. mechanism." . If all of these conditions are satisfied, As quoted above, sections 4 and 5 of At- then Hirschfeld will acknowledge that tachment B of the Subcontract state that [*285] the ten-year warranty is reinstat- Hirschfeld "shall warrant" for a period of ten years ed, effective retroactively to the date the (1) the design of the Roof System, (2) the interface roof mechanism was put in service by the between the design of the structural roof system Sports Authority. and the roof mechanism, and (3) the design, manufacture, and installation of the roof mecha- nism to perform its intended purpose. In section Hirschfeld did not reinstate its ten-year warranty after 20(B) of Attachment A of the Subcontract, sending this letter.

Hirschfeld also agreed to "promptly make good, without cost to [Kellogg] or [the Sports Authori- Although Kellogg and Hirschfeld have different po- ty], any and all defects due to faulty workmanship sitions as to when any final payment by Kellogg to and/or materials which may appear within the Hirschfeld was due, under either party's interpretation, the guarantee or warranty period(s) established in the final payment from Kellogg to Hirschfeld, including any Contract Documents." retainage owed, was not due before April 26, 2002. 5 There was evidence before the jury that Hirschfeld pro- [**29] On September 22, 2000, Hirschfeld sent a vided the ten-year warranty but then suspended it on letter to Kellogg stating the following: September 22, 2000, and thereafter did not reinstate it. At trial, Hirschfeld's corporate representative testified that . After the Roof System was put in ser- (1) the ten-year warranty on the Roof System was "an vice and used to support the Sports Au- important and critical part of the undertaking"; (2) thority's use of Minute Maid Park, the something was communicated to the effect that if Sports Authority failed to perform or cause Hirschfeld was unwilling [**31] to offer a ten-year to be performed the level of maintenance warranty on the Roof System, then Kellogg would not required by Hirschfeld's ten-year warranty enter into the Subcontract with Hirschfeld; (3) when the on the Roof System and required by the parties entered into the Subcontract, "the 10-year war- manufacturer's "O & M manual [sic]." As a ranty that Hirschfeld promised to provide was an essential result of this failure, Hirschfeld believed as part of the contract" and (4) he considers the words of September 22, 2000, that the roof "suspend" and "revoke" in this context to be essentially mechanism was unreliable and potentially the same. There is evidence that from September 22, 2000 in disrepair. forward, Hirschfeld asserted that the ten-year warranty . Additionally, because the required was suspended and not in effect based on the alleged maintenance was not being performed by failure to perform an alleged condition precedent--the or on behalf of the Sports Authority, the written maintenance plan. As discussed above, this terms of Hirschfeld's ten-year warranty maintenance plan is not a condition precedent to the ex- have not been satisfied. istence of the ten-year warranty. Under the applicable standard of review, Hirschfeld did not conclusively prove . Hirschfeld believes the Sports Au- that (1) it did not willfully depart from the terms of the thority's failure to comply with these Subcontract, (2) it did not omit essential points of the warranty requirements "entitles Subcontract, (3) it honestly and faithfully performed the [Hirschfeld] to declare its warranty obli- construction contract in its material and substantial par- gations suspended until such time as the ticulars, and (4) the only variance from the strict and roof mechanism commissioning has been literal performance of the Subcontract consists of tech- completed, all repairs necessitated by [the nical or unimportant omissions or details. Furthermore, Sports Authority's] failure to perform the under the [**32] applicable standard of review, we required maintenance have been compet- conclude that there is factually sufficient evidence to ed, the manufacturer has inspected and support the jury's finding that, under the jury charge def- certified that the roof mechanism is in inition, Hirschfeld did not substantially perform its duties compliance with all [**30] original re- under the Subcontract. quirements and operating parameters for such mechanism, and [the Sports Author- Page 9 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

5 At trial, Kellogg asserted that any final pay- . Any alleged failure to perform contrac- ment to Hirschfeld was not due until Kellogg re- tual covenants that do not include any ceived final payment from the Sports Authority on work on the construction project should April 26, 2002. Hirschfeld asserted that, under not be considered in determining whether change order 18 to the Subcontract, final payment Hirschfeld substantially performed all of from Kellogg was due thirty days after Kellogg its duties under the Subcontract. issued a final "Certificate for Payment" following Hirschfeld's full performance of the Subcontract (with certain exceptions). Hirschfeld asserted that Without commenting on the validity of any of these the relevant parts of the Subcontract had been substantive legal arguments, as a threshold matter, we fully performed and that the Settlement Agree- note that all of these arguments involve legal standards for ment constituted the final "Certificate for Pay- what constitutes "substantial performance" that were not ment." Under this theory, final payment, if any, submitted to the jury. Significantly, no party objected to was due thirty days after March 29, 2002, on April the failure to submit these legal standards to the jury, and 28, 2002. no party requested that these legal standards be submitted On appeal, Hirschfeld asserts that it conclusively to the jury. Therefore, we cannot use these legal standards proved substantial performance at trial based on [**33] in our review of the sufficiency of the evidence to support the following arguments: the jury's finding that Hirschfeld did not substantially perform its duties under the Subcontract. See Wolff, 94 . Kellogg admitted in the Settlement S.W.3d at 530; Osterberg, 12 S.W.3d at 55; L&F Dis- Agreement that the project was completed tributors, 941 S.W.2d at 279, 286. Accordingly, we by August 1, 2000, and, under Texas law, overrule Hirschfeld's first issue. substantial completion of the Project is the C. Did the trial court reversibly err in admitting same as substantial performance by allegedly irrelevant testimony [**35] regarding Hirschfeld of all of its duties under the the subcontractor's suspension of its warranty?

Subcontract.

In its second issue, Hirschfeld asserts the trial court . Kellogg and the Sports Authority abused its discretion in determining that evidence re- received the benefit of their bargain. garding Hirschfeld's suspension of its ten-year warranty Hirschfeld performed its work under the was relevant. Hirschfeld claims that it preserved this Subcontract, and only minor repairs were alleged error by its pretrial motion under Texas Rule of necessary. Under Texas law, this showing Civil Procedure 248, which states: is all that is needed for Hirschfeld to es- tablish substantial performance of its ob- When a jury has been demanded, ques- ligations under the Subcontract. tions of law, motions, exceptions to pleadings, and other unresolved pending [*286] . The cost of the backcharges on matters shall, as far as practicable, be the Subcontract were less then one percent heard and determined by the court before of the Subcontract price. More than nine- the trial commences, and jurors shall be ty-nine percent of the work required by the summoned to appear on the day so desig- Subcontract allegedly was performed sat- nated. isfactorily.

. Once Hirschfeld provided the warranty, TEX. R. CIV. P. 248. any subsequent suspension, revocation, or repudiation of the warranty would be a Nowhere in its Rule 248 motion does Hirschfeld ask breach-of-warranty issue that cannot be the trial court to exclude any evidence or argue that any considered in determining whether evidence is irrelevant. Furthermore, our record does not Hirschfeld substantially performed all of reflect that Hirschfeld obtained a ruling on this motion. its duties under the Subcontract, as shown by this court's opinion in Coastal Chem., Hirschfeld also asserts that it preserved error by the Inc. v. Brown, 35 S.W.3d 90, 93 (Tex. following objection at trial: [**34] App.--Houston [14th Dist.] 2000, [Counsel for Kellogg]: Now, you're pet. denied). aware, aren't you, that it's Hirschfeld's po- sition in this case that it has revoked the Page 10 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

warranty with regard [**36] to the Nonetheless, we conclude that these two jury findings do ten-year warranty? not entitle Hirschfeld to relief under this theory. The jury was neither asked about the formation of this alleged oral [Counsel for Hirschfeld]: Objection, contract nor instructed that it existed. Even if Kellogg Your Honor. This is a judiciary [sic] ad- directed Hirschfeld to perform first-year maintenance mission on this issuance of the warranty through its subcontractor Uni-Systems, this direction and there is an issue on this in the motion. could have been given even if the maintenance work in [Trial Court]: Approach. question constituted additional work covered by the Subcontract, as asserted by Kellogg. Likewise, a deter- (At the Bench, off the record) mination of the fair and reasonable value of these services Overruled. would be appropriate to a quantum meruit claim or to a claim under the Subcontract if no rate of compensation was specified. Even if the second finding were held to be a Hirschfeld did not assert in this objection that any evi- damages question on this alleged contract claim, we could dence was irrelevant. Because it did not voice in the trial not imply findings that these damages resulted from a court the evidentiary [*287] complaint it raises in its breach of the alleged oral contract because such findings second issue on appeal, Hirschfeld failed to preserve error would not be in support of the trial court's judgment. See as to this issue. See Hardin v. Hardin, 161 S.W.3d 14, 27 TEX. R. CIV. P. 279 (stating that appellate courts will (Tex. App.--Houston [14th Dist.] 2004, no pet.). In any imply findings of omitted and unrequested [**39] es- event, even if error had been preserved, we could not sential elements of a claim whose absence from the charge conclude that the trial court abused its discretion in ad- did not draw an objection, if (1) at least one essential mitting this evidence. Accordingly, we overrule element necessarily referable to that claim was found by Hirschfeld's second issue. the jury, (2) there is factually sufficient evidence to sup- port a finding on the omitted elements, and (3) the implied D. In light of the jury's findings, did the trial court findings support the trial court's judgment); Gulf States erroneously refuse to render judgment in favor of the Utilities Co. v. Low, 79 S.W.3d 561, 564, 45 Tex. Sup. Ct. subcontractor for damages plus attorney's fees based J. 724, 45 Tex. Sup. Ct. J. 793 (Tex. 2002) (holding that on its claim regarding first-year maintenance? findings may be deemed under Rule 279 only when they support the trial court's judgment).

In its third issue, Hirschfeld asserts that, based on the jury's verdict, the trial court should have rendered judg- After reviewing the record, we conclude that ment in its favor on its claim for $ [**37] 240,000 plus Hirschfeld did not conclusively prove the existence and attorney's fees for first-year maintenance work performed breach of an independent [*288] oral contract with under a contract independent from the Subcontract. The Kellogg for the provision of first-year maintenance ser- jury found that (1) Hirschfeld performed first-year vices. Therefore, Hirschfeld's failure to obtain jury find- maintenance through its subcontractor Uni-Systems as ings on this issue precludes recovery on this claim. See directed by Kellogg and (2) $ 240,000 is the fair and TEX. R. CIV. P. 279 (stating that "[u]pon appeal all in- reasonable value of the first-year maintenance provided dependent grounds of recovery or of defense not conclu- by Hirschfeld through its subcontractor Uni-Systems. sively established under the evidence and no element of Hirschfeld asserts that, even if it did not substantially which is submitted or requested are waived"); In re S.A.P., perform the Subcontract so as to be entitled to relief 156 S.W.3d 574, 577, 48 Tex. Sup. Ct. J. 368 (Tex. 2005). thereunder, it still is entitled to recover against Kellogg Accordingly, we overrule Hirschfeld's third issue. under an alleged independent oral contract based on these two jury findings. 6 Hirschfeld asserts it does not seek to [**40] E. Did the trial court err in denying the gen- recover under a theory of quantum meruit. eral contractor recovery of its attorney's fees under the Subcontract?

6 If this work fell under the Subcontract, then The Subcontract contains a provision entitling "[t]he Hirschfeld's failure to substantially perform the prevailing party in any litigation arising out of any dispute Subcontract would bar its recovery. See Dobbins between [Kellogg] and [Hirschfeld]" to recover its attor- v. Redden, 785 S.W.2d 377, 378, 33 Tex. Sup. Ct. ney's fees and all other costs incurred as a result of this J. 273 (Tex. 1990). litigation. 7 During trial Hirschfeld and Kellogg stipulated Although Kellogg asserts that Hirschfeld never that if either of them were entitled to recover attorney's pleaded such a claim for breach of an alleged [**38] oral fees, then a reasonable and necessary amount of such fees contract for first-year maintenance, we presume for the would be $ 1.2 million. 8 The trial court refused to award sake of argument that Hirschfeld did plead such a claim.

Page 11 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

Kellogg such fees and did not award either side any entire $ 500,000 under its counterclaim. The trial amount of attorney's fees. court denied this relief, and Kellogg has not ap- pealed this ruling.

7 Kellogg also relies on another provision of the [*289] On appeal, Kellogg points to its pleadings Subcontract allowing Kellogg to recover attor- and emphasizes the language in its counterclaim, which ney's fees if it is determined to be the "prevailing states that Kellogg sought to recover no more than $ party" in the litigation; however, the scope of this 700,000 [**43] in addition to keeping the retainage. provision is not broader than the quoted provision Although Kellogg's counterclaim does say this, Kellogg and this clause involves the same inquiry into overlooks the reality that, if the jury had answered "$ 5.2 whether Kellogg was the "prevailing party" in this million" to question three of the charge, as Kellogg re- litigation. quested, then Kellogg would have been entitled to amend Though the parties stipulated as to the ag- its counterclaim and recover the greater amount awarded gregate amount of fees for each side in the litiga- by the jury. See Greenhalgh v. Service Lloyds Ins. Co., tion, neither party undertook to segregate fees on a 787 S.W.2d 938, 939-40, 33 Tex. Sup. Ct. J. 387 (Tex. claim-by-claim basis, and neither party has argued 1990) (stating that trial court would have abused its dis- that the Subcontract entitled it to fees as a "pre- cretion if it had denied plaintiff's request to amend his vailing party" on a claim-by-claim basis. petition after trial to ask for $ 128,000 in punitive dam- [**41] In its issue on cross-appeal, Kellogg asserts ages, which was the amount awarded by the jury, rather that the trial court erred in impliedly concluding that it than $ 100,000, which was the amount requested in his was not a "prevailing party" entitled to attorney's fees live petition during trial); Whole Foods Mkt. Sw., L.P. v. under the Subcontract. Hirschfeld went to trial on a peti- Tijerina, 979 S.W.2d 768, 776 (Tex. App.--Houston [14th tion that asserted breach-of-contract and declarato- Dist.] 1998, pet. denied) (stating that "[a]n amendment is ry-judgment claims against Kellogg. 9 Likewise, Kellogg mandatory if it is merely procedural in nature such as went to trial on a counterclaim asserting conforming the pleadings to the evidence at trial"). breach-of-contract and declaratory-judgment claims In its counterclaim, Kellogg also sought declaratory against Hirschfeld. Although Kellogg requested separate relief as to eleven matters. Both in its motion for entry of liability and damages questions on its contract counter- judgment and in one of its motions to modify judgment, claims, the trial court apparently concluded that a jury Kellogg continued to request [**44] declaratory relief finding that Hirschfeld did not substantially perform its under its counterclaim. Kellogg also sought to recover $ duties under the Subcontract would be equivalent to a 500,000 based on the jury's answer to question three. finding that Hirschfeld breached the Subcontract and Nonetheless, the trial court adhered to its original judg- therefore did not submit a separate liability question as to ment, which ordered that both Hirschfeld and Kellogg Kellogg's contract counterclaim. Likewise, the trial court take nothing on all of their claims. apparently reasoned that question three could serve as part of the determination of the amount that should be de- In sum, at trial, Hirschfeld sought approximately $ 2 ducted from the retainage if Hirschfeld proved substantial million in contract damages plus declaratory relief against performance and that this question also could be used to Kellogg, and Kellogg asserted a counterclaim for ap- determine Kellogg's damages, if any, under its counter- proximately $ 4 to $ 5 million plus declaratory relief claim. During closing argument at trial, Kellogg, [**42] against Hirschfeld. The trial court's judgment ordered that without objection, argued that the answer to question both parties take nothing on their claims. In this context, three should be at least $ 3.9 million and as much as $ 5.2 we conclude the trial court did not err in determining that million. The jury answered "$ 500,000." Therefore, at neither Hirschfeld nor Kellogg was a "prevailing party" in trial, Kellogg sought to recover as much as $ 5.2 million this litigation entitled to all of its attorney's fees under the on its contract counterclaim. This amount would be $ Subcontract. See Western Skies P'ship/Physician's 3,940,078 if $ 1,259,922 (the amount found by the jury to Healthcare Assocs., L.C. v. Physician's Healthcare be unpaid under the Subcontract) is subtracted from the $ Assocs. L.C., 2004 Tex. App. LEXIS 4438, No. 5.2 million. 10 08-02-00231-CV, 2004 WL 1078491, at *4 (Tex. App.--El Paso May 13, 2004, no pet.) (holding in memorandum More than four months before trial, Hirschfeld opinion that trial court did not err in concluding that, dropped from its petition negligence and fraud under contractual provisions awarding fees to "prevailing claims that it had been asserting. party" in the litigation, no party prevailed [**45] be- Even though the $ 500,000 found by the jury cause all parties recovered nothing on their claims and in question three is less than the $ 1,259,922 found counterclaims). Accordingly, we overrule Kellogg's by the jury to be unpaid under the Subcontract, cross-issue.

Kellogg sought in the trial court to recover the Page 12 201 S.W.3d 272, *; 2006 Tex. App. LEXIS 7152, **

V. CONCLUSION the jury's findings and the evidence at trial, we conclude the [*290] trial court did not err in refusing to render Under the unambiguous language of the Subcontract, judgment in favor of Hirschfeld on its claim seeking performance of the written maintenance plan is not a compensation for first-year maintenance services. As to condition precedent to the existence of Hirschfeld's Kellogg's cross-appeal, we conclude the trial court did not ten-year warranty. Therefore, the trial court did not err in err in denying Kellogg recovery of all its attorney's fees dismissing with prejudice Hirschfeld's declarato- [**46] in this litigation under the "prevailing party" ry-judgment claims regarding the ten-year warranty. provisions in the Subcontract.

Under the applicable standard of review, there is legally and factually sufficient evidence to support the jury's Having overruled all of the issues raised in the appeal finding that Hirschfeld did not substantially perform its and cross-appeal, we affirm the trial court's judgment. duties under the Subcontract. Hirschfeld did not preserve /s/ Kem Thompson Frost error as to whether the trial court abused its discretion by admitting allegedly irrelevant testimony regarding Justice Hirschfeld's suspension of its ten-year warranty. Based on Page 1

HOOVER SLOVACEK LLP, FORMERLY HOOVER, BAX & SLOVACEK, LLP, PETITIONER, v. JOHN B. WALTON, JR., RESPONDENT NO. 04-1004 SUPREME COURT OF TEXAS 206 S.W.3d 557; 2006 Tex. LEXIS 1129; 50 Tex. Sup. J. 125 December 1, 2005, Argued November 3, 2006, Delivered SUBSEQUENT HISTORY: [**1] Released for TICE HECHT filed a dissenting opinion, in which JUS- Publication December 22, 2006. TICE MEDINA and JUSTICE WILLETT joined.

PRIOR HISTORY: ON PETITION FOR REVIEW OPINION BY: Wallace B. Jefferson FROM THE COURT OF APPEALS FOR THE EIGHTH DISTRICT OF TEXAS. From Winkler County; 8th dis- OPINION trict (08-03-00366-CV, 149 S.W.3d 834, 10-14-04). [*559] We deny Walton's motion for rehearing and Hoover Slovacek LLP v. Walton, 2006 Tex. LEXIS 646 grant Hoover Slovacek's motion for rehearing. (Tex., 2006) Walton v. Hoover, Bax & Slovacek, L.L.P., 149 S.W.3d We withdraw our opinion of June 30, 2006 and sub- 834, 2004 Tex. App. LEXIS 9107 (Tex. App. El Paso, stitute the following in its place.

2004) In this case, we must determine whether an attorney DISPOSITION: The court affirmed the reversal of hired on a contingent-fee basis may include in the fee agreement a provision stating that, in the event the attor- the trial court's judgment, reversed the court of appeals' ney is discharged before completing the representation, take-nothing judgment, and remanded to the court of the client must immediately pay a fee equal to the present appeals for further consideration of whether there was good cause for the client to terminate the representation. value of the attorney's interest in the client's claim. We conclude that this termination fee provision is contrary to public policy and unenforceable. We affirm the court of appeals' judgment in part, reverse in part, and remand to COUNSEL: For PETITIONER: Mr. Mike A. Hatchell, the court of appeals for further proceedings.

Ms. Molly H. Hatchell, Mr. Charles R. Watson, Jr., LOCKE LIDDELL & SAPP, L.L.P., Austin, TX; Mr. Steven L. Hughes, MOUNCE, GREEN, MYERS, SAFI [**2] I Background & GALATZAN, El Paso, TX; The Honorable Thomas R. In June 1995, John B. Walton, Jr. hired attorney Phillips, BAKER BOTTS, L.L.P., Austin, TX. Steve Parrott of Hoover Slovacek LLP (Hoover) to re- cover unpaid royalties from several oil and gas companies For RESPONDENT: Mr. John M. Phalen, Jr., Mr. Daniel operating on his 32,500 acre ranch in Winkler County.

J. Sheehan, Jr., Mr. Michael L. Atchley, DANIEL The engagement letter granted Hoover a 30% contingent SHEEHAN & ASSOCIATES, L.L.P., Dallas, TX. fee for all claims on which collection was achieved through one trial. Most significantly, the letter included JUDGES: CHIEF JUSTICE JEFFERSON delivered the the following provision: opinion of the Court, in which JUSTICE O'NEILL, JUSTICE WAINWRIGHT, JUSTICE BRISTER, JUS- You may terminate the Firm's legal TICE GREEN, and JUSTICE JOHNSON joined. JUS- representation at any time . . . . Upon ter- mination by You, You agree to immedi- Page 2 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 ately pay the Firm the then present value of When Hoover sought to intervene in the settlement the Contingent Fee described [herein], plus proceedings between Walton and Bass, the trial court all Costs then owed to the Firm, plus sub- severed Hoover's claim, and the parties tried the case sequent legal fees [incurred to transfer the before a jury. Richard Bianchi, a former state district representation to another firm and with- judge in Harris County, testified as Hoover's expert wit- draw from litigation]. ness. Bianchi opined that a 28.66% contingent fee was, "if [**5] anything, lower than normal, but certainly rea- sonable under these circumstances," and that "it would only be unconscionable to ignore the agreement of the Shortly after signing the contract, Walton and Parrott parties." He also testified that charging more than Walton agreed to hire Kevin Jackson as local counsel and reduced ultimately recovered from Bass "doesn't change the deal Hoover's contingent fee to 28.66%. Parrott negotiated they made. That's just a bad business deal." In contrast, settlements exceeding $ 200,000 with Texaco and El Paso Walton's local counsel, Kevin Jackson, testified that he Natural Gas, and Walton paid Hoover its contingent fee. had never heard of attorneys charging a percentage based Parrott then turned to Walton's claims against Bass En- on the present value of a claim at the time of discharge terprises Production Company (Bass), and hired ac- rather than the client's actual recovery, and that the $ 1.7 countant Everett Holseth to perform [**3] an audit and million fee was unconscionable. compile evidence establishing the claims' value. 1 Meanwhile, Walton authorized Parrott to settle his claims The jury failed to find that Walton discharged Hoover against Bass for $ 8.5 million. for good cause or that Hoover's fee was unconscionable.

The trial court entered judgment on the verdict, which Holseth never completed the audit, but testi- awarded Hoover $ 900,000. 2 The court of appeals re- fied that he estimated the value of Walton's claims versed and rendered a take-nothing judgment for Walton, at $ 2 million to $ 4 million. concluding that Hoover's fee agreement was uncon- scionable as a matter of law. 149 S.W.3d 834, 847. We In January 1997, Parrott made an initial settlement granted Hoover's petition for review. 2005 Tex. LEXIS demand of $ 58.5 million. Bass's attorney testified that 758, 49 Tex. Sup. Ct. J. 15 (Oct. 14, 2005). Because our Parrott was unable to support this number with any legal reasoning differs from the court of appeals' in some re- theories, expert reports, or calculations, and that the de- spects, we affirm its judgment in part, reverse in part, and mand was so "enormous" he basically "quit listening." [**6] remand this case to the court of appeals.

The following month, however, Bass offered $ 6 million not only to settle Walton's claims, but also to purchase the The jury was instructed to multiply the pre- surface estates of eight sections of the Winkler County sent value of Walton's claims at the time Hoover ranch, acquire numerous easements, and secure Walton's was discharged by 28.66%. Thus, the jury pre- royalty interests under the leases. Walton refused to sell, sumably valued the claims at $ 3.14 million ($ but authorized Parrott to accept $ 6 million to settle only 900,000/ .2866 = $ 3.14 million). The court of Walton's claims for unpaid royalties. Walton also wrote appeals speculated that, because $ 900,000 is the Parrott and expressed [*560] discontent that Parrott did exact amount for which Walton settled with Bass, not consult [**4] him before making the $ 58.5 million perhaps the jury inadvertently failed to multiply demand. According to Walton, Parrott responded by this value by 28.66%. 149 S.W.3d 834, 842 n.3. pressuring him to sell part of the ranch and his royalties Walton challenges the legal sufficiency of the for $ 6 million. In March 1997, Walton discharged Par- evidence supporting the jury's implicit finding that rott, complaining that Parrott was doing little to prosecute his claims were worth $ 3.14 million, but because his claims against Bass and had damaged his credibility we conclude that Hoover's termination fee provi- by making an unauthorized and "absurd" $ 58.5 million sion is unenforceable, we do not reach this issue. demand.

Walton then retained Andrews & Kurth LLP, which, II in November 1998, settled Walton's claims against Bass for $ 900,000. By that time, Hoover had sent Walton a bill Discussion for $ 1.7 million (28.66% of $ 6 million), contending that When interpreting and enforcing attorney-client fee Bass's $ 6 million offer, and Walton's subsequent au- agreements, it is "not enough to simply say that a contract thorization to settle for that amount, established the pre- is a contract. There are ethical considerations overlaying sent value of Walton's claims at the time of discharge. the contractual relationship." Lopez v. Munoz, Hockema Walton paid Andrews & Kurth approximately $ 283,000 & Reed, L.L.P., 22 S.W.3d 857, 868, 43 Tex. Sup. Ct. J. in hourly fees and costs, but refused to pay Hoover.

Page 3 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 806 (Tex. 2000) [**7] (Gonzales, J., concurring and [**9] dissenting). 5 See Ted Schneyer, Legal-Process Constraints on the Regulation of Lawyers' Contingent Fee In Texas, we hold attorneys to the Contracts, 47 DEPAUL L. REV. 371, 389-90 highest standards of ethical conduct in (1998) (arguing that institutional constraints have their dealings with their clients. The duty is made regulation of contingent fees excessive and highest when the attorney contracts ineffective). [*561] with his or her client or otherwise In Texas, if an attorney hired on a contingent-fee takes a position adverse to his or her cli- basis is discharged without cause before the representa- ent's interests. As Justice Cardozo ob- tion is completed, the attorney may seek compensation in served, "[a fiduciary] is held to something quantum meruit or in a suit to enforce the contract by stricter than the morals of the marketplace. collecting the fee from any damages the client subse- Not honesty alone, but the punctilio of an quently recovers. Mandell & Wright v. Thomas, 441 honor the most sensitive, is then the S.W.2d 841, 847, 12 Tex. Sup. Ct. J. 346 (Tex. 1969) standard of behavior." Accordingly, a (citing Myers v. Crockett, 14 Tex. 257 (1855)). Both lawyer must conduct his or her business remedies are subject to the prohibition against charging or with inveterate honesty and loyalty, al- collecting an unconscionable fee. TEX. DISCIPLINARY ways keeping the client's best interest in R. PROF'L CONDUCT 1.04(a), reprinted in TEX. mind.

GOV'T CODE, tit. 2, subtit. G app. A (TEX. STATE BAR R. art. X, § 9). 6 Whether a particular fee amount or contingency percentage charged by the attorney is un- Id. at 866-67 (alteration in original) (citations omitted). conscionable under all relevant circumstances of the The attorney's special responsibility to maintain the representation [**10] is an issue for the factfinder. 7 See, highest standards of conduct and fair dealing establishes a e.g., Curtis v. Comm'n for [*562] Lawyer Discipline, professional benchmark that informs much of our analysis 20 S.W.3d 227, 233 (Tex. App.--Houston [14th Dist.] in this case.

2000, no pet.) (concluding that the evidence was suffi- Although contingent fee contracts are increasingly cient to support a finding that a contingent fee equaling used by businesses and other sophisticated parties, their 70-100% of the client's recovery was unconscionable). On primary purpose is to allow plaintiffs who cannot afford the other hand, whether a contract, including a fee an attorney to obtain legal services by compensating the agreement between attorney and client, is contrary to attorney from the proceeds of any recovery. [**8] public policy and unconscionable at the time it is formed Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d is a question of law. See, e.g., TEX. BUS. & COM. CODE 812, 818, 40 Tex. Sup. Ct. J. 591 (Tex. 1997). The con- § 2.302 (courts may refuse to enforce contracts deter- tingent fee offers "the potential of a greater fee than might mined to be unconscionable as a matter of law); SkiRiver be earned under an hourly billing method" in order to Dev., Inc. v. McCalla, 167 S.W.3d 121, 136 (Tex. compensate the attorney for the risk that he or she will App.--Waco 2005, pet. denied) ("The ultimate question of receive "no fee whatsoever if the case is lost." Id. In ex- unconscionability of a contract is one of law, to be de- change, the client is largely protected from incurring a net cided by the court."); Pony Express Courier Corp. v. financial loss in connection with the representation. 3 This Morris, 921 S.W.2d 817, 821 (Tex. App.--San Antonio risk-sharing feature creates an incentive for lawyers to 1996, no writ) (distinguishing procedural and substantive work diligently and obtain the best results possible. 4 A aspects of unconscionability). closely related benefit is the contingent fee's tendency to reduce frivolous litigation by discouraging attorneys from 6 Although the Disciplinary Rules do not define presenting claims that have negative value or otherwise standards of civil liability for attorneys, they are lack merit. 5 persuasive authority outside the context of disci- plinary proceedings, and we have applied Rule Depending on the terms of the agreement, 1.04 as a rule of decision in disputes concerning clients sometimes pay court costs and other ex- attorney's fees. TEX. DISCIPLINARY R. penses of the litigation. PROF'L CONDUCT preamble P15; see also See Lester Brickman, Contingent Fees With- Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d out Contingencies: Hamlet Without the Prince of 193, 205, 45 Tex. Sup. Ct. J. 470 (Tex. 2002); Denmark?, 37 UCLA L. REV. 29, 43 (1989) (ar- Bocquet v. Herring, 972 S.W.2d 19, 21, 41 Tex. guing that contingent fees are appropriate only in Sup. Ct. J. 650 (Tex. 1998); Arthur Andersen, 945 cases where there is a realistic risk of S.W.2d at 818. nonrecovery). [**11] Page 4 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 Under the Disciplinary Rules, a fee is un- complies with the principle that a contingent-fee lawyer conscionable if a competent lawyer could not form "is entitled to receive the specified fee only when and to a reasonable belief that the fee is reasonable. TEX. the extent the client receives payment." RESTATEMENT DISCIPLINARY R. PROF'L CONDUCT 1.04(a). (THIRD) OF THE LAW GOVERNING LAWYERS § 35(2) The reasonableness of a fee is determined by (2000). Hoover's termination fee, however, sought im- considering all relevant circumstances relating to mediate payment of the firm's contingent interest without the representation, including: regard for when and whether Walton eventually prevailed.

Public policy strongly favors a client's freedom to employ (1) the time and labor required, a lawyer of his choosing and, except in some instances the novelty and difficulty of the where counsel is appointed, to discharge the lawyer dur- questions involved, and the skill ing the representation [**13] for any reason or no reason required to perform the legal ser- at all. See Martin v. Camp, 219 N.Y. 170, 114 N.E. 46, 48 vices properly; (N.Y. 1916) (describing this policy as a "firmly estab- lished rule which springs from the personal and confi- (2) the likelihood . . . that the dential nature" of the attorney-client relationship); see acceptance of the particular em- also Whiteside v. Griffis & Griffis, P.C., 902 S.W.2d 739, ployment will preclude other em- (Tex. App.--Austin 1995, writ denied) (noting that the ployment by the lawyer; policy supporting a client's freedom to select his attorney (3) the fee customarily precludes the application of commercial standards to charged in the locality for similar agreements that restrict the practice of law); TEX. DIS- legal services; CIPLINARY R. PROF'L CONDUCT 1.15 cmt. 4 ("A [*563] client has the power to discharge a lawyer at any (4) the amount involved and time, with or without cause . . . ."). Nonetheless, we rec- the results obtained; ognize the valid competing interests of an attorney who, (5) the time limitations im- like any other professional, expects timely compensation posed by the client or by the cir- for work performed and results obtained. Thus, attorneys cumstances; are entitled to protection from clients who would abuse the contingent fee arrangement and avoid duties owed (6) the nature and length of the under contract. Striving to respect both interests, Mandell professional relationship with the provides remedies to the contingent-fee lawyer who is client; fired without cause. Hoover's termination fee provision, (7) the experience, reputation, [**14] however, in requiring immediate payment of the and ability of the lawyer or lawyers firm's contingent interest, exceeded Mandell and forced performing the services; and(8) the client to liquidate 28.66% of his claim as a penalty for whether the fee is fixed or contin- discharging the lawyer. Because this feature imposes an gent on results obtained or uncer- undue burden on the client's ability to change counsel, tainty of collection before the legal Hoover's termination fee provision violates public policy services have been rendered. and is unconscionable as a matter of law.

Notwithstanding its immediate-payment require- ment, several additional considerations lead us to con- TEX. DISCIPLINARY R. PROF'L CONDUCT clude that Hoover's termination fee provision is unen- 1.04(b), cited in Arthur Andersen, 945 S.W.2d at forceable. In Levine v. Bayne, Snell & Krause, Ltd., we 818. refused to construe a contingent fee contract as entitling [**12] Hoover's termination fee provision pur- the attorney to compensation exceeding the client's actual ported to contract around the Mandell remedies in three recovery. 40 S.W.3d 92, 95, 44 Tex. Sup. Ct. J. 387 (Tex. ways. First, it made no distinction between discharges 2001). In that case, the clients purchased a home con- occurring with or without cause. Second, it assessed the taining foundation defects, and stopped making mortgage attorney's fee as a percentage of the present value of the payments when the defects were discovered. Id. at 93. client's claim at the time of discharge, discarding the They agreed to pay their lawyer one-third of "any amount quantum meruit and contingent fee measurements. Fi- received by settlement or recovery." Id. A jury awarded nally, it required Walton to pay Hoover the percentage fee the clients $ 243,644 in damages, but offset the award immediately at the time of discharge. against the balance due on their mortgage, resulting in a net recovery of $ 81,793. Id [**15] . The lawyer sued to In allowing the discharged lawyer to collect the con- collect $ 155,866, a fee equaling one-third of the gross tingent fee from any damages the client recovers, Mandell recovery plus pre- and post-judgment interest and ex- Page 5 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 penses. Id. In refusing to interpret "any amount received" Examining the risk-sharing attributes of the parties' as permitting collection of a contingent fee exceeding the contract reveals that Hoover's termination fee provision client's net recovery, we emphasized that the lawyer is weighs too heavily in favor of the attorney at the client's entitled to receive the contingent fee "'only when and to expense. Specifically, it shifted to Walton the risks that the extent the client receives payment.'" Id. at 94 (quoting accompany both hourly fee and contingent fee agreements RESTATEMENT (THIRD) OF THE LAW GOVERNING while withholding their corresponding benefits. In obli- LAWYERS § 35). A reasonable client does not expect that gating Walton to pay a 28.66% contingent fee for any a lawyer engaged on a contingent-fee basis will charge a recovery obtained by Parrott, the fee caused Walton to fee equaling or, as in this case, exceeding 100% of the bear [**18] the risk that Parrott would easily settle his recovery. 8 In Levine, we noted that "'[l]awyers almost claims without earning the fee. But Walton also bore the always possess the more sophisticated understanding of risk inherent in an hourly fee agreement because, if he fee arrangements. It is therefore appropriate to place the discharged Hoover, he was obligated to pay a 28.66% fee balance of the burden of fair dealing and the allotment of regardless of whether he eventually prevailed. This risk in the hands of the lawyer in regard to fee arrange- "heads lawyer wins, tails client loses" provision altered ments with clients.'" Id. at 95 (quoting In re Myers, 663 Mandell almost entirely to the client's detriment. Indeed, N.E.2d 771, 774-75 (Ind. 1996)). We believe Hoover's the only scenario in which Hoover's termination fee pro- termination fee provision is unreasonably susceptible to vision would benefit Walton is if he expected the value of overreaching, [**16] exploiting the attorney's superior his claim to significantly increase after discharging information, and damaging the trust that is vital to the Hoover. In that case, Walton could limit Hoover's fee to attorney-client relationship. 28.66% of a relatively low value, and avoid paying 28.66% of a much larger recovery eventually obtained Hourly fee agreements and cases in which the with new counsel. Thus, it is conceivable that a client prevailing party recovers attorney's fees from an viewing the events in hindsight could find that the ar- opposing party do not implicate the concerns rangement worked out to his benefit. At the time of con- presented here. Thus, pursuant to statute or a tracting, however, the client has no reason to desire such a contract between the parties, it is not uncommon provision because the winning scenario is not only un- for courts to approve fee-shifting awards that ex- likely, but also entirely arbitrary in relation to its timing ceed the damages recovered by the client. See, and occurrence. Moreover, to the extent the client believes e.g., Hruska v. First State Bank of Deanville, 747 the value of his claim will increase as a result of em- S.W.2d 783, 785, 31 Tex. Sup. Ct. J. 292 (Tex. ploying new counsel, a rational [**19] client would 1988) (upholding $ 12,570 fee where the client forego the representation altogether rather than agree to recovered $ 2,920); Sibley v. RMA Partners, L.P., the provision. In sum, the benefits of Hoover's termination 138 S.W.3d 455, 458-59 (Tex. App.--Beaumont fee provision are enjoyed almost exclusively by the at- 2004, no pet.) (upholding $ 82,748 fee where the torney. client stood to recover approximately $ 43,000).

Hoover's termination fee provision is also antagonis- The Disciplinary Rules provide that a contingent fee tic to many policies supporting the use of contingent fees is permitted only where, quite sensibly, the fee is "con- in civil cases. Most troubling is its creation of an incentive tingent on the outcome of the matter for which the service for the lawyer to be discharged soon after he or she can is rendered." TEX. DISCIPLINARY R. PROF'L CON- establish the present value of the client's claim with suf- DUCT 1.04(d). [**17] [*564] Hoover's termination ficient certainty. Whereas the contingent fee encourages fee, if not impliedly prohibited by Rule 1.04(d), is directly efficiency and diligent efforts to obtain the best results forbidden by Rule 1.08(h), which states that "[a] lawyer possible, Hoover's termination fee provision encourages shall not acquire a proprietary interest in the cause of the lawyer to escape the contingency as soon as practica- action or subject matter of litigation the lawyer is con- ble, and take on other cases, thereby avoiding the de- ducting for the client, except that the lawyer may . . . mands and consequences of trials and appeals. Moreover, contract in a civil case with a client for a contingent fee the provision encourages litigation of a subset of claims that is permissible under Rule 1.04." Id. 1.08(h)(2). Thus, that would not be pursued under traditional contingent fee even if Hoover's termination fee provision is viewed as agreements. transforming a traditional contingent fee into a fixed fee, Finally, Hoover's termination fee provision creates it nonetheless impermissibly grants the lawyer a proprie- problems relating to valuation and administration, but not tary interest in the client's claim by entitling him to a in the manner articulated by the court of appeals. The percentage of the claim's value without regard to the ul- court of appeals viewed the parties' contract as empow- timate results obtained. ering Parrott alone to determine [**20] the value of Walton's claims at the time of discharge, concluding that Page 6 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 "[a]n agreement that leaves the damages to be paid upon contingent fee for settlements that Parrott negotiated with termination by one party wholly [*565] within the Texaco and El Paso Natural Gas, and Walton does not unfettered discretion of the other party is so one-sided as contend that this portion of the agreement is uncon- to be substantively unconscionable." 149 S.W.3d at 846 scionable. On the contrary, in his brief to the court of (citations omitted). We disagree, because nothing in their appeals, Walton argued in the alternative that Hoover was fee agreement indicates that Parrott retained such discre- limited to recovering 28.66% of the $ 900,000 settlement tion. On the contrary, the contract is silent with respect to reached in the Bass litigation and requested rendition of valuation. Nevertheless, its silence in that respect exposes judgment in that amount. Severing the termination [**23] an additional defect--the contract fails to explain how the fee provision, the remainder of the fee agreement is en- present value of the claims will be measured. It does not forceable. Thus, if Hoover were discharged without cause, describe how the nature and severity of the client's injuries it would be entitled to either its contingent fee or com- will be characterized, nor does it state whether any other pensation in quantum meruit. Mandell, 441 S.W.2d at 847. factors, such as venue, availability and quality of wit- The court of appeals rendered a take-nothing judg- nesses, the defendant's wealth and the strength of its ment against Hoover, holding the entire fee agreement counsel, and the reprehensibility of the defendant's con- unenforceable and denying a recovery in quantum meruit duct will apply to the calculation. Lawyers have a duty, at because Hoover failed to present evidence [*566] of the outset of the representation, to "inform a client of the the reasonable value of its services. 149 S.W.3d at 847. basis or rate of the fee" and "the contract's implications for We agree that Hoover no longer has a claim for quantum the client." Levine, 40 S.W.3d at 96 (citing RESTATE- meruit, but we disagree with the take-nothing judgment.

MENT (THIRD) OF THE LAW GOVERNING LAWYERS In the trial court, Hoover sought to enforce the contract's §§ 38(1), 18). [**21] We have stated that "to impose termination fee provision. Our holding, however, severs the obligation of clarifying attorney-client contracts upon the termination fee provision, leaving a contingent fee the attorney 'is entirely reasonable, both because of [the contract subject to Mandell. The jury (1) found that attorney's] greater knowledge and experience with respect Walton did not comply with the contract and (2) failed to to fee arrangements and because of the trust [the] client find that Walton had good cause to discharge Hoover. has placed in [the attorney].'" Levine, 40 S.W.3d at 95 Under Mandell, therefore, Hoover was entitled to its (quoting Cardenas v. Ramsey County, 322 N.W.2d 191, contingent fee: 28.66% of $ 900,000, or $ 257,940. In the (Minn. 1982)) (alterations in original). For these trial court, and again in his appellate brief, Walton argued reasons, the "failure of the lawyer to give at the outset a that Hoover was entitled to only this amount, and Hoover clear and accurate explanation of how a fee was to be [**24] requested this relief in the alternative in its brief calculated" weighs in favor of a conclusion that the fee to this Court. 9 may be unconscionable. TEX. DISCIPLINARY R. PROF'L CONDUCT 1.04 cmt. 8. And while experts can Because the trial court's judgment awarded calculate the present value of a claim at the time of dis- Hoover the more favorable recovery under its charge, this extra time, expense, and uncertainty can be termination fee provision, Hoover was not re- avoided under hourly billing and the traditional contin- quired to raise the alternative theory as a cross gent fee, even in cases in which a discharged attorney point on appeal. Boyce Iron Works, Inc. v. Sw. Bell seeks compensation from a disgruntled client.

Tel. Co., 747 S.W.2d 785, 787, 31 Tex. Sup. Ct. J.

Our conclusion that Hoover's termination fee provi- 310 (Tex. 1988). Hoover's contention that it is en- sion is unconscionable does not render the parties' entire titled to enforce its contingent fee arises from the fee agreement unenforceable. See RESTATEMENT court of appeals' judgment. It may be raised in this (SECOND) OF CONTRACTS § 208 [**22] (1981) ("If a Court without having first filed a motion for re- contract or term thereof is unconscionable at the time the hearing in the court of appeals. TEX. R. APP. P. contract is made a court may refuse to enforce the con- 49.9; see also Bunton v. Bentley, 153 S.W.3d 50, tract, or may enforce the remainder of the contract without 53, 48 Tex. Sup. Ct. J. 197 (Tex. 2004). the unconscionable term, or may so limit the application In the court of appeals, however, Walton challenged of any unconscionable term as to avoid any unconscion- the factual and legal sufficiency of the evidence support- able result."); Williams v. Williams, 569 S.W.2d 867, 871, ing the jury's finding on the good-cause issue. Because the 21 Tex. Sup. Ct. J. 400 (Tex. 1978) (explaining that an court of appeals reversed and rendered judgment, it did illegal provision generally may be severed if it does not not reach Walton's sufficiency points. Accordingly, we constitute the essential purpose of the agreement); In re remand the case to that court for [**25] consideration of Kasschau, 11 S.W.3d 305, 313 (Tex. App.--Houston [14th those issues.

Dist.] 1999, no pet.) (concluding that an unenforceable provision may be severed if the parties would have en- III tered into the contract without it). Walton paid Hoover its Page 7 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 (holding that an attorney suspended from practice Conclusion before completion of representation was not enti- tled to recover on the contract or for quantum Hoover's termination fee provision penalized Walton meruit, but stating: "If an attorney, without just for changing counsel, granted Hoover an impermissible cause, abandons his client before the proceeding proprietary interest in Walton's claims, shifted the risks of for which he was retained has been conducted to the representation almost entirely to Walton's detriment, its termination, or if such attorney commits a and subverted several policies underlying the use of con- material breach of his contract of employment, he tingent fees. We hold that this provision is unconscionable thereby forfeits all right to compensation." (in- as a matter of law, and therefore, unenforceable. We af- ternal quotation marks omitted)), and Kelly v. firm that part of the court of appeals' judgment reversing Murphy, 630 S.W.2d 759, 761-762 (Tex. the trial court's judgment, but reverse its take-nothing App.--Houston [1st Dist.] 1982, writ ref'd n.r.e.) judgment, and remand this case to the court of appeals for (holding that an attorney who dismissed his cli- further proceedings. TEX. R. APP. P. 60.2(a), (d). ent's lawsuit without authorization was not enti- Wallace B. Jefferson tled to recover for quantum meruit), with Rocha v. Ahmad, 676 S.W.2d 149, 156 (Tex. App.--San Chief Justice Antonio 1984, writ dism'd) (holding that attorney discharged for good cause was nevertheless enti- DISSENT BY: Nathan L. Hecht tled to recover for quantum meruit, and stating: "If the former client pleads and proves good cause for DISSENT discharge, . . . then the attorney is not entitled to JUSTICE HECHT, joined by JUSTICE MEDINA recover under the contract of employment. In such and JUSTICE WILLETT, dissenting. a case, the attorney may attempt to recover a fee for services rendered up to the time of discharge I withdraw my dissenting opinion dated June 30, under quantum meruit.").

2006 and substitute this one in its stead. [**27] No rational plaintiff changes lawyers midway 2 Mandell & Wright v. Thomas 441 S.W.2d 841, through a case in order to recover less, and John B. Wal- 847, 12 Tex. Sup. Ct. J. 346 (Tex. 1969) ("In ton, Jr. was not irrational. So when he retained what is Texas, when the client, without good cause, dis- now the law firm of Hoover Slovacek LLP to collect charges an attorney before he has completed his royalties for oil and gas produced on his 32,500-acre work, the attorney may recover on the contract for [**26] ranch for a contingent fee of 28.66% of any re- the amount of his compensation." (citing Myers v. covery, he must have reasoned that if he had to discharge Crockett, 14 Tex. 257 (1855); White v. Burch, 19 the firm it would be to maximize recovery, in which event S.W.2d 404 (Tex. Civ. App.--Fort Worth 1929, the firm should not receive a percentage of the final re- writ ref'd); White v. Burch, 33 S.W.2d 512 (Tex. covery and thereby benefit from services rendered by the Civ. App.--Fort Worth 1930, writ re f'd ); Cottle new lawyers but should be paid only what the fee was County v. McClintock & Robertson, 150 S.W.2d worth at the time of discharge. Without an agreement on 134 (Tex. Civ. App.--Amarillo 1941, writ dism'd the subject, if Hoover Slovacek were discharged for good judgment cor.))). One might well think that the cause, it might have the right to be paid the value of its most the client would owe in such circumstances services [*567] rendered, 1 but if it were discharged would be the contractual fee prorated for the ser- without good cause, it would be entitled to its full con- vices the lawyer actually performed. See RE- tingent fee from the final recovery. 2 Walton and Hoover STATEMENT (THIRD) OF THE LAW GOV- Slovacek agreed instead that if he terminated the repre- ERNING LAWYERS § 40 cmt. c (2000) ("Allow- sentation, with or without cause, he would "immediately ing a discharged or withdrawing lawyer to recover pay the Firm the then present value of the Contingent compensation under a fee contract with the client Fee". Hoover Slovacek would not receive a percentage of is sometimes more appropriate . . . where the client the final recovery if discharged without cause, and Walton discharges a contingent-fee lawyer without cause would pay the value of the fee, which could take into just before the contingency occurs, perhaps in account more than the time spent and thus might be more order to avoid paying the contractual percentage or less than the value of the services rendered by the firm fee. . . . [T]he contractual fee is prorated for the based on an hourly rate. services actually perform ed . . . ."). But that is not Texas law, and the parties in this case have not Compare Royden v. Ardoin, 160 Tex. 338, 331 suggested it should be.

S.W.2d 206, 209, 3 Tex. Sup. Ct. J. 149 (Tex. 1960) Page 8 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 [**28] What appears to have been a good-faith between other parties or in other circumstances. If a court effort by lawyer and client to reach a fair arrangement for can imagine circumstances in which an agreement could handling the difficult possibility of estrangement was, be unconscionable -- and here, the Court has tried to list according to the Court, unconscionable, meaning that "a every conceivable way that could happen, and then some competent lawyer could not form a reasonable belief that -- it is unconscionable. Here are the seven reasons the the fee is reasonable." 3 This, of course, does not reflect Court gives for holding this termination fee agreement very well on Hoover Slovacek or its distinguished counsel unconscionable and against public policy: in this case, who have advocated the reasonableness of the . The agreement does not distinguish between dis- fee, and the Court's condemnation of what might appear to charges with and without cause. True, but surely a lawyer be a rather innocuous fee agreement may also come as a and client can agree to a termination fee that avoids surprise to a large number of other lawyers who have up wrangling over whether discharge was with or without until now considered themselves competent. Worse still, cause, given the intrinsic uncertainties in that issue. the Court says, the agreement violated public policy, Walton and Hoover Slovacek settled on a termination fee which means, not that it was bad, but that it "contra- that Walton, at least, surely thought would be less than a vene[d] some positive statute or some well-established percentage of the ultimate recovery, and the firm, perhaps, rule of law". 4 The [*568] Court does not actually thought might be more than the value of services rendered identify a statute or rule of law that has been contravened, at an hourly fee. Mere compromise is not [**31] un- and truthfully, none has been. In fact, the agreement has conscionable, but if it were, no matter here. Walton un- done no devilry at all. To be sure, Walton and Hoover dertook to prove that he discharged Hoover Slovacek with Slovacek have fought hard over how much is owed, the cause but failed to convince the jury, so even if the firm claiming at least $ 1.7 million (28.66% of $ 6 million, agreement had drawn the distinction, he could not take which Walton once may have [**29] though this claims advantage of it. At this point, the distinction is irrelevant. were worth), maybe more, while the client admits to owing no more than $ 257,940 (28.66% of the$ 900,000 . If the contingent fee were worth more at the time of his claims actually settled for), and maybe nothing at all. discharge than at the end of the case, it would be a bad But fighting over an agreement does not make the deal for the client. So it would, but a fee agreement is not agreement unconscionable and against public policy, or unconscionable and against public policy merely because the number of valid agreements would be much smaller. it could be a bad deal for the client. As noted at the outset, a rational plaintiff does not change lawyers to recover TEX. DISCIPLINARY R. PROF'L CONDUCT less, and if that is what Walton did, he has himself to 1.04(a) ("A fee is unconscionable if a competent blame. The Court criticizes this agreement because it lawyer could not form a reasonable belief that the would benefit the client only when the claim is improved fee is reasonable."). by changing lawyers, but since the client is in control, Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, benefit to the client should always be intended and, absent 553, 44 Tex. Sup. Ct. J. 554 (Tex. 2001) ("'Public misjudgment, achieved. Moreover, there is no evidence in policy, so me courts have said, is a term of vague this case that Hoover Slovacek's contingent fee was ever and uncertain meaning, which it pertains to the worth more than it would have been at the end of the case. law-making power to define, and courts are apt to If the fee was worth as much at discharge as it would have encroach upon the domain of that branch of the been at the end, the agreement gave the [**32] firm only government if they characterize a transaction as what Texas law would if there had been no termination invalid because it is contrary to public policy, clause, since it has not been established that discharge was unless the transaction contravenes some positive for cause. [*569] Walton couldhave made a bad deal, statute or some well-established rule of law.'"); but there is no evidence he did.

Town of Flower Mound v. Stafford Estates Ltd. Partnership, 135 S.W.3d 620, 628, 47 Tex. Sup. . Ascertaining the value of a contingent fee mid-case is hard. There is some tension between this argument and Ct. J. 497 (Tex. 2004); Texas Commerce Bank, the previous one, which assumes that a contingent fee can N.A. v. Grizzle, 96 S.W.3d 240, 250, 46 Tex. Sup. be valued before the end of the case to the client's detri- Ct. J. 318 (Tex. 2002);.Churchill Forge, Inc. v. ment. Actually, the value of a contingent fee mid-case Brown, 61 S.W.3d 368, 373, 45 Tex. Sup. Ct. J.

116 (Tex. 2001). may well be impossible to prove with sufficient certainty for recovery, even in a case like this one involving only [**30] What does make an agreement uncon- economic damages. Walton's lawyer first demanded $ scionable and against public policy, according to the 58.5 million to settle, the defendants countered with $ 6 Court, is not its terms, which seem fair enough in this million and conditions, Walton demanded $ 6 million case, or any consequence to the parties, as yet unrealized without conditions, the defendants offered $ 300,000, and here, but what might happen if the agreement were made the case finally settled for $ 900,000, due largely to new Page 9 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 and unforeseen developments. Walton discharged Hoover scionable, rule 1.08(h) is [*570] inapplicable, and if Slovacek 22 months into a 42-month-long case. What was the termination fee was unconscionable, rule 1.08(h) is Hoover Slovacek's contingent fee worth at discharge? inconsequential. Either way, rule 1.08(h) is irrelevant.

That question has been fully tried but has still not been . A client should not reasonably expect a contingent answered -- there is no evidence what a willing buyer fee to equal or exceed the recovery. Certainly not, but would have paid a willing seller for [**33] a claim like even if that could ever occur with a termination fee like Walton's the day he discharged Hoover Slovacek -- and it the one in this case, and it is not at all clear that it ever may not be answerable. Even if the audit of royalty pay- could, it has not happenedin this case. Walton settled for $ ments Walton commissioned had been completed, un- 900,000, and there is no evidence that he owes Hoover certainties remained in determining whether he had been Slovacek more than 28.66% of that amount. The Court underpaid. But the Court seems not to notice that Hoover notes that its concerns do not extend to hourly fee Slovacek bears the burden of proving the value of its fee, agreements, but it is not clear why only contingent fees and any difficulty in carrying that burden does not preju- are subject to abuse. 5 dice Walton, it benefits him. . A lawyer who knows that the value of a claim is 5 See RESTATEMENT (THIRD) OF THE LAW declining has an incentive to misbehave, provoke dis- GOVERNING LAWYERS § 34 cmt. c (2000) charge, collect more than he would in the end, and turn to ("Accordingly, the reasonableness of a fee due more lucrative business. This argument rejects what the under an hourly rate contract, for example, de- previous one asserts, that the value of a contingent fee is pends on whether the number of hours the lawyer hard to predict. But more importantly, the Court appears worked was reasonable in light of the matter and to assume a jurisdiction in which lawyers do not owe client. It is also relevant whether the lawyer pro- clients a fiduciary duty, the intentional breach of which is vided poor service, such as might make unrea- a tort remedied by actual and exemplary damages. A sonable a fee that would be appropriate for better lawyer as wicked as the Court's imagination may be more services, or services that were better or more deterred by the threat of punitive damages than the threat successful than normally would have been ex- of a voided contract. In any event, no evidence in this case pected . . . ."). hints at anything even approaching this pollo poco [**36] In sum, the Court "believe[s] Hoover's nightmare. termination fee provision is unreasonably susceptible to . The agreement required [**34] Walton to pay overreaching, exploiting the attorney's superior infor- up at discharge. But if there had been no agreement, mation, and damaging the trust that is vital to the attor- Walton would undisputedly have been required to pay ney-client relationship." 6 Although I think the Court's Hoover Slovacek at discharge the value of its services arguments are strained at best, even if they had more rendered. The impoverished client the Court hypothesizes substance, a fee agreement should not be voided as un- -- certainly not Walton -- who could afford representation conscionable and against public policy based merely on only on a contingent fee, would be required to pay for the what could happen but was not intended and has not in value of the discharged lawyer's services at termination. fact occurred. It could have happened that Hoover To agree to what the law would otherwise provide can Slovacek provoked its own discharge for nefarious rea- hardly be unconscionable. Even so, it would in fact have sons, or that Walton discharged Hoover Slovacek for been no burden on Walton. He could have paid Hoover cause, or that when he did, the termination fee exceeded Slovacek, just as he paid his new lawyers $ 283,000 at an the contingent fee, or that he was somehow prejudiced by hourly rate. And in any event, in over nine years, Walton the difficulty in evaluating the termination fee, or that he has not yet paid Hoover Slovacek one cent for prosecuting had to pay before any recovery was realized, or that the his claims against the Bass defendants. fee exceeded his recovery. Any of these things could have happened, but none did. Walton and Hoover Slovacek . The agreement violated professional rule 1.08(h) by anticipated exactly what occurred and tried to make allowing Hoover Slovacek to acquire an interest in Wal- suitable provision for it. Whether their agreement was ton's claim other than by a contingent fee authorized by unconscionable, and therefore abhorrent to public policy rule 1.04. Here the circularity is dizzying. To restate the and void, should be determined by their [**37] initial argument: if the agreement was unconscionable in viola- expectations and the actual consequences, not on hyper- tion of rule 1.04 of the Texas Disciplinary Rules of Pro- bolic hypothesizing in hindsight. As the comment to rule fessional Conduct, it gave Hoover Slovacek an interest 1.04 states: [**35] in Walton's claim prohibited by rule 1.08(h), which excepts only interests created by an agreement [F]ee arrangements normally are made valid under rule 1.04, which this agreement was not, if at the outset of representation, a time when indeed it wasn't. If the termination fee was not uncon- Page 10 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 many uncertainties and contingencies ex- But the Court may not be serious. It may be that to- ist, while claims of unconscionability are day's decision will be limited to this one particular fee made in hindsight when the contingencies agreement in this one isolated situation, portending have been resolved. . . . Except in very nothing for fee agreements in general. 9 If so, then the unusual situations, therefore, the circum- rules governing fee agreements will merely have a minor stances at the time a fee arrangement is exception, and only the Court's authority to articulate made should control in determining a general rules will suffer. Of course, the careful lawyer on question of unconscionability. 7 a contingent fee can simply charge what the law allows for termination of representation without good cause: the full fee. The client will be penalized for changing lawyers Agreements are unconscionable when they are not or and will pay for services not rendered, but it will not be cannot be proper, not when it is merely possible for them unconscionable. to be improper.

9 See County of Cameron v. Brown, 80 S.W.3d 6 Ante at . 549, 565-566, 45 Tex. Sup. Ct. J. 680 (Tex. 2002) TEX. DISCIPLINARY R. PROF'L CONDUCT (Hecht, J., dissenting) ("It may be, however -- one 1.04 cmt. 7; see also RESTATEMENT (THIRD) cannot always tell for sure -- that the Court does OF THE LAW GOVERNING LAWYERS § 34 cmt. not really mean what it says. . . . [I]t may be that c ("Although reasonableness is usually assessed as this case is just another 'restricted railroad ticket, of the time the contract was entered into, later good for this day and train only.'" (citing Smith v. events might be relevant. . . . [E ]vents not known Allwright, 321 U.S. 649, 669, 64 S. Ct. 757, 88 L. or contemplated when the contract was made can Ed. 987 (1944) (Roberts, J., dissenting))). render the contract unreasonably favorable to the [**40] We have taken as given that the only fee a lawyer or, occasionally, to the client. . . . To de- Texas lawyer is prohibited from charging is one that is termine what events client and lawyer contem- illegal or unconscionable because that is what rule 1.04(a) plated, their contract must be construed in light of of the Texas Disciplinary Rules of Professional Conduct its goals and circumstances and in light of the provides. 10 In most states, lawyers cannot charge unrea- possibilities discussed with the client . . . ."). sonable fees; 11 not so in Texas. In Texas, a lawyer is [**38] Again, it matters not whether the parties [*572] prohibited only from charging a fee that a com- have behaved admirably throughout. [*571] Walton petent lawyer could not reasonably believe to be reason- does seem to have had an inflated view of the value of his able. 12 Of course, Texas law does not award lawyers claims (about 900%), though perhaps no more than many unreasonable fees, so one could argue that notwithstand- clients, and he may not have had good cause to discharge ing rule 1.04(a), a lawyer suing to collect a fee must prove Hoover Slovacek -- at least he could not convince a jury that it is reasonable, not merely that it is not uncon- he did. And Hoover Slovacek may have been overly ag- scionable. In matters other than lawyer discipline, the gressive, at first in pursuing the defendants (demanding $ Disciplinary Rules of Professional Conduct have been 58.5 million to settle a $ 900,000 claim) and then in pur- held to "provide guidelines and suggest the relevant con- suing Walton (demanding millions for a legal fee worth $ siderations" without supplying the rule of decision, 13 and 257,940). But Hoover Slovacek's lawyers are not here on one could argue that the role of rule 1.04(a) in enforcing disciplinary charges, and Walton is not applying for Cli- fee agreements is similarly limited. 14 But none of the ent of the Year. An agreement is not unconscionable parties here does. because a party acts unconscionably -- and there is cer- tainly no evidence that Walton or Hoover Slovacek did. 10 TEX . DISCIPLINARY R. PROF'L CON- DUCT 1.04 (a) ("A lawyer shall not enter into an If the Court is serious about today's analysis, many arrangement for, charge, or collect an illegal fee or more fee agreements and other contracts will be uncon- unconscionable fee."). scionable. The Court says that "[h]ourly fee agreements . . [**41] . do not implicate the [same] concerns" it has about the 11 ALASKA R. PROF'L CONDUCT Rule agreement in this case, 8 but they do. Fees based on hourly 1.5(a); ARIZ. R. PROF'L CONDUCT ER 1.5(a); rates seemingly reasonable at the outset could end up ARIZ. R. PROF'L CONDUCT, ER 1.5(a); ARK. being excessive in easily imaginable circumstances, R. PROF'L CONDUCT, Rule 1.5(a), (e)(3); [**39] but that mere potential does not invalidate an COLO. R. PROF'L CONDUCT Rule 1.5(a), (f); agreement.

COLO. R. CIV. P. Ch. 23.3 (contingent fees), Rules 3, 7; CONN. R. PROF'L CONDUCT, Rule Ante at .

1.5(a); DEL. R. PROF'L CONDUCT, Rule 1.5(a); Page 11 206 S.W.3d 557, *; 2006 Tex. LEXIS 1129, **; 50 Tex. Sup. J. 125 D.C. R. PROF'L CONDUCT Rule 1.5(a); GA. R. GOVERNING LAWYERS §§ 34-35 (contingent PROF'L CONDUCT Rule 4-102, Rule 1.5(a); fees, incorporating § 34) (2000).

HAW. R. PROF'L CONDUCT Rule 1.5(a); [**42] IDAHO R. PROF'L CONDUCT Rule 1.5(a); ILL. 12 See supra note 2.

R. PROF'L CONDUCT Rule 1.5(a); IND. R. 13 In re Users System Services, Inc., 22 S.W.3d PROF'L CONDUCT Rule 1.5 (a); KAN. R. 331, 334, 42 Tex. Sup. Ct. J. 812 (Tex. 1999); In re PROF'L CONDUCT Rule 1.5(a), (e) (court re- EPIC Holdings, Inc., 985 S.W.2d 41, 48, 42 Tex. view); KY. R. PROF'L CONDUCT SCR Sup. Ct. J. 235 (Tex. 1998); National Medical 3.130(1.5(a)); LA. R. PROF'L CONDUCT Rule Enterprises, Inc. v. Godbey, 924 S.W.2d 123, 132, 1.5(a), (f)(5) (unearned fee/expense depos- 39 Tex. Sup. Ct. J. 698 (Tex. 1996); Henderson v. it/retainer provision); MD. R. PROF'L CON- Floyd, 891 S.W.2d 252, 254, 38 Tex. Sup. Ct. J.

DUCT Rule 1.5(a); MINN. R. PROF'L CON- 166 (Tex. 1995) (per curiam); Spears v. Fourth DUCT Rule 1.5(a); MISS. R. PROF'L CONDUCT Court of Appeals, 797 S.W.2d 654, 656, 34 Tex. Rule 1.5(a); MO. R. PROF'L CONDUCT Rule Sup. Ct. J. 66 (Tex. 1990); Ayres v. Canales, 790 4-1.5(a); MONT. R. PROF'L CONDUCT Rule S.W.2d 554, 556 n.2, 33 Tex. Sup. Ct. J. 504 (Tex. 1.5(a); NEV. R. PROF'L CONDUCT Rule 155.1; 1990).

N.J. RULES PROF'L CONDUCT RPC 1.5(a); 14 Cf. Johnson v. Brewer & Pritchard, P.C., 73 N.M. R. PROF'L CONDUCT RULE 16-105(A); S.W.3d 193, 205, 45 Tex. Sup. Ct. J. 470 (Tex. N.D. R. PROF'L CONDUCT Rule 1.5(a); OKLA. 2002) (referring to Rule 1.04 to determine a per- R. PROF'L CONDUCT Rule 1.5(a); R.I. R. missible referral fee); Bocquet v. Herring, 972 PROF'L CONDUCT Rule 1.5(a); S.C. R. PROF'L S.W.2d 19, 21, 41 Tex. Sup. Ct. J. 650 (Tex. 1998) CONDUCT Rule 1.5(a); S.D. R. PROF'L (referring to Rule 1.04 for factors indicating rea- CONDUCT Rule 1.5(a); TENN. R. PROF'L sonableness of attorney fee); Arthur Andersen & CONDUCT Rule 1.5(a); VT. R. PROF'L CON- Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818, DUCT Rule 1.5(a); VA. R. PROF'L CONDUCT 40 Tex. Sup. Ct. J. 591 (Tex. 19 97) (same).

Rule 1.5(a); WASH. R. PROF'L CONDUCT Rule The Court remands the case to the court of appeals to 1.5(a); W. VA. R. PROF'L CONDUCT Rule review the sufficiency of the evidence regarding the jury's 1.5(a); WIS. R. PROF'L CONDUCT SCR failure to find that Walton discharged Hoover Slovacek 20:1.5(a); and WYO. R. PROF'L CONDUCT [**43] for good cause. In the end, Hoover Slovacek may Rule 1.5(a). See also ABA MODEL RULES OF recover as much or more without the termination fee PROFESSIONAL CONDUCT Rule 1.5(a) (no provision. This is certainly an odd way of applying "unreasonable" fees or expenses) (1983); ABA unconscionability. I would enforce the termination fee ETHICS 2000 REVISED MODEL RULES OF agreement. Accordingly, I respectfully dissent.

PROFESSIONAL CONDUCT Rule 1.5(a), (e)(3) (2003); and RESTATEMENT OF THE LAW Nathan L. Hecht Justice Page 1 977 S.W.2d 798, *; 1998 Tex. App. LEXIS 5352, **

IN RE THE CITY OF DALLAS, TEXAS NO. 2-98-207-CV COURT OF APPEALS OF TEXAS, SECOND DISTRICT, FORT WORTH 977 S.W.2d 798; 1998 Tex. App. LEXIS 5352

August 25, 1998, Delivered DISPOSITION: [**1] Dallas's petition for writ of The question presented in this mandamus proceeding mandamus denied. is whether the trial court abused its discretion in denying the City of Dallas's motion to transfer venue to Dallas County under the mandatory venue provision of section COUNSEL: SAM A. LINDSAY AND LINDA 65.023(a) of the Texas Civil Practice and Remedies Code. LAWSON GAITHER, CITY OF ATTORNEYS OF Specifically, we have been asked to decide whether the DALLAS, TEXAS AND CARRINGTON, COLEMAN, primary relief sought in the underlying suit filed by the SLOMAN, AND BLUMENTHAL, L.L.P. AND JAMES City of Fort Worth is the issuance of a permanent injunc- E. COLEMAN, JR., ELIZABETH D. WHITAKER, tion, which would require that the suit be tried in Dallas LYNDON F. BITTLE, AND AMY K. HUNT OF County, or the rendition of a declaratory judgment, which DALLAS, TEXAS. would allow the suit to be tried in Tarrant County. We hold that the primary relief sought by Fort Worth is de- KELLY, HART & HALLMAN, P.C. AND DEE J. claratory, not injunctive, and that venue in Tarrant County KELLY, MARSHALL M. SEARCY, AND BRIAN S. is proper. Accordingly, we hold that the trial court did not STAGNER OF FORT WORTH, TEXAS. abuse its discretion in denying the motion to transfer venue and we deny Dallas's petition for writ of manda- RANDALL W. WILSON AND THOMAS W. mus.

PATERSON OF HOUSTON, TEXAS AND E.

LAWRENCE VINCENT, JR. OF DALLAS TEXAS.

BACKGROUND HARRIS, FINLEY & BOGLE, P.C. AND BILL F. In 1968, after years of conflict between the cities of BOGLE AND RUSSELL R. BARTON OF FORT Dallas and Fort Worth over airport development, the cities WORTH, TEXAS AND LOCKE, PURNELL, RAIN, [**2] reached an agreement for the development of a HARRELL, P.C. AND MORRIS HARRELL, MICHAEL new regional airport, DFW Airport. The city managers of V. POWELL, CYNTHIA KEELY TIMMS, AND Dallas and Fort Worth signed a "Contract and Agreement" ELIZABETH E. MACK OF DALLAS, TEXAS. (the Contract), effective April 15, 1968, and the city councils adopted a "1968 Regional Airport Concurrent JUDGES: PANEL M, CAYCE, C.J.; DAUPHINOT and Bond Ordinance" (the Joint Bond Ordinance), effective BRIGHAM, JJ. November 12, 1968. 1 In the Contract, the cities created a joint venture for the construction, development, and op- OPINION BY: JOHN CAYCE eration of DFW airport. 2 As contemplated by the Con- tract, the cities both passed the Joint Bond Ordinance to OPINION provide for issuance of bonds to finance DFW Airport.

Dallas and Fort Worth further agreed to phase out inter- [*800] ORIGINAL PROCEEDING state commercial passenger air service from their respec- tive local airports, transfer such service [*801] to DFW OPINION Airport, and refrain from any future acts or policies that would compete with DFW Airport. The cities also agreed Page 2 977 S.W.2d 798, *; 1998 Tex. App. LEXIS 5352, **

that they would, "through every legal and reasonable aircraft, as long as the total number of passenger seats is means promote the optimum development of the lands limited to 56 or less. 5 and Facilities comprising the Regional Airport at the earliest practicable date . . . ." 4 See Act of Oct. 27, 1997, Pub. L. No. 105-66, § 337(b), 1997 U.S.C.C.A.N. (111 Stat. 1447); see We shall sometimes collectively refer to the also H.R. REP. No. 105-313, at 45 (1997), re- Contract and the Joint Bond Ordinance as the printed in 1997 U.S.C.C.A.N. 1991, 2005.

1968 agreement. [**5] [**3] 5 See Act of Oct. 27, 1997, Pub. L. No. 105-66, 2 The Contract provides that the duration of the § 337(a). joint venture shall be perpetual, "unless sooner Soon after the passage of the Shelby Amendment, terminated and dissolved by operation of law or by Dallas city officials took the public position that federal mutual agreement of the Cities of Dallas and Fort law mandates that Dallas expand Love Field service in Worth; provided, however, that the same shall not accordance with the loosened restrictions of the Shelby be dissolved by mutual agreement of the parties if Amendment and began to explore the possibility of ex- such action would violate the terms or provisions panding passenger air service out of Love Field. Antici- of any outstanding joint revenue bonds relating to pating that Dallas would eventually allow commercial the Project." flights outside the scope of the 1968 agreement, Fort Following the deregulation of the airline industry in Worth filed the underlying suit against Dallas, naming the 1978, Congress enacted the Wright Amendment, which Dallas/Fort Worth International Airport Board (the DFW dictated that passenger planes could fly from Love Field Board) and Legend Airlines, Inc. (Legend), among others, only to cities in Texas and four bordering states: New as co-defendants. 6 Mexico, Oklahoma, Arkansas, and Louisiana. 3 Since its passage, this federal legislation has been integral in fur- 6 In addition to Dallas, the DFW Board and thering the cities' 1968 agreement to protect DFW Airport Legend, Fort Worth sued Jeffrey P. Fegan, the from expanded interstate competition with Love Field. DFW Board's executive director, and Astraea Aviations Services, Inc. d/b/a Dalfort Aviation.

3 See Act of Feb. 15, 1980, Pub. L. No. 96-192, American Airlines, Inc. later intervened in the suit § 29(c), 1980 U.S.C.C.A.N. (94 Stat. 48); see also on Fort Worth's side.

S. REP. No. 96-329, reprinted in U.S.C.C.A.N. [**6] The gravamen of Fort Worth's complaint is 54, 86-87. For a summary of the historical back- that Dallas continues to be bound by the 1968 agreement, ground concerning the development of DFW notwithstanding the loosened flight restrictions for Love Airport, see City of Dallas v. Continental Airlines, Field allowed by the Shelby Amendment. Fort Worth Inc., 735 S.W.2d 496, 497-500 (Tex. App.--Dallas requests a declaratory judgment under the Uniform De- 1987, writ denied). claratory Judgments Act (the Declaratory Judgments Act) [**4] Both cities have repeatedly reaffirmed the to construe the 1968 agreement and asks the trial court 1968 agreement since its execution. In 1992, the Dallas for a "declaration" that Dallas is prohibited under the 1968 and Fort Worth city councils enacted a joint resolution agreement from expanding commercial flight operations confirming their ongoing commitment to DFW Airport into and out of Love Field. and to the covenants they made in the 1968 agreement. As recently as last year, the cities passed the "Twenty Ninth 7 See TEX. CIV. PRAC. & REM. CODE ANN. Supplemental Regional Airport Concurrent Bond Ordi- §§ 37.001-.011 (Vernon 1997). nance," authorizing the issuance of DFW Regional Air- On October 31, 1997, Dallas and Legend each moved port joint revenue refunding bonds, one of the many sup- to transfer venue of the underlying suit to Dallas County. plemental bond ordinances the cities have passed over the Among the grounds asserted for changing venue, Dallas past thirty years. and Legend contended that Fort Worth's suit is primarily a The relations between the two cities began to change, request for a permanent injunction, and not for a declar- however, in October 1997, when Congress passed a bill atory judgment. Therefore, Dallas and Legend asserted called the Shelby Amendment. This legislation amended the case is governed by section 65.023(a) of the Texas the Wright Amendment to allow turn-around passenger Civil Practice and Remedies Code, [*802] which pro- air travel from Love Field to three additional states: vides [**7] that venue in a suit for an injunction is Kansas, Alabama, and Mississippi. 4 The Shelby mandatory in the county of the defendant's residence. 8 Amendment also removed much of the Wright Amend- ment's prohibition against the use of reconfigured jet Page 3 977 S.W.2d 798, *; 1998 Tex. App. LEXIS 5352, **

8 See TEX. CIV. PRAC. & REM. CODE ANN. 1968 agreement. When declaratory relief is § 65.023(a) (Vernon 1997); see also TEX. CIV. sought, all persons or entities who have or claim PRAC. & REM. CODE ANN. § 15.016 (Vernon any interest that would be affected by the decla- 1986) ("An action governed by any other statute ration must be made parties. See TEX. CIV. PRAC. prescribing mandatory venue shall be brought in & REM. CODE ANN. § 37.006(a) (Vernon the county required by that statute."). 1997).

14 See In re Continental Airlines, Inc., No. In May 1998, Continental Airlines, Inc. and Conti- 2-98-184-CV (Tex. App.--Fort Worth June 23, nental Express, Inc. (collectively, Continental) announced 1998, orig. proceeding) (not designated for pub- that Continental would begin scheduled interstate pas- lication), pet. pending, No. 98-0598 (Tex. July 3, senger service between Love Field and Cleveland, Ohio 1998); In re Legend Airlines, Inc., No. on July 1, 1998. In an apparent reaction to this an- 2-98-189-CV (Tex. App.--Fort Worth June 23, nouncement, Fort Worth amended its pleadings to name 1998, orig. proceeding) (not designated for pub- Continental as a defendant to the suit. 9 Continental then lication), pet. pending, No. 98-0599 (Tex. July 3, moved to transfer venue to Dallas County on the same 1998). bases as Legend.

After we denied Continental's and Legend's Fort Worth also joined Mesa Airlines, Inc. requests for mandamus relief, both parties filed mandamus proceedings in the Supreme Court of [**8] On June 15, 1998, Fort Worth applied for a Texas. The supreme court has set those petitions temporary restraining order (TRO) and a temporary in- for oral argument on September 9, 1998. junction to prevent Continental from scheduling passen- ger flights between Love Field and Cleveland in contra- [**10] We write in this proceeding to address the vention of the cities' 1968 agreement, until final resolution merits of Dallas's petition because, unlike the temporary of the underlying lawsuit. After a four-day hearing that ancillary relief Fort Worth sought and obtained against began on June 29, the trial court granted a temporary Continental to preserve the status quo until the dispute injunction against Continental. 10 That ruling is the subject below is resolved, the principal and primary relief Fort of a separate appeal to this court. 11 Worth seeks in the underlying suit is directly against Dallas; 15 that is, a declaration by the trial court that Dallas Fort Worth seeks no relief, injunctive or is prohibited by the 1968 agreement from allowing Con- otherwise, against Legend. tinental, Legend, and other defendants to schedule ex- Continental Airlines, Inc. v. City of Fort panded passenger flights from Love Field. The issue we Worth, Texas, No. 2-98-211-CV. must decide is whether the relief Fort Worth seeks against Dallas is primarily injunctive in nature, as Dallas claims, Meanwhile, on June 19, 1998, a hearing was held on or declaratory, as Fort Worth asserts. If Dallas is correct, Dallas, Continental, and Legend's motions to transfer the case must be transferred to Dallas County. Otherwise, venue. The trial court denied the motions, and Continental the case may remain in Tarrant County. Dallas does not and Legend filed separate petitions for writs of mandamus complain that it would not [*803] receive a fair and with this court. impartial trial if the case remains in Tarrant County. 16 Departing somewhat from its position in the trial court, Continental contended in this court that venue is 15 Fort Worth does not seek any direct relief mandatory in Harris County, 12 or, [**9] in the alterna- against either Continental or Legend. tive, Dallas County. Continental claimed that Fort Worth's 16 A defendant may obtain a change of venue suit is purely injunctive in nature because Continental has by alleging and proving that it cannot obtain an no contract with Fort Worth to construe by declaratory impartial trial in the county where the action is judgment, 13 and because the only relief Fort Worth seeks pending. See TEX. R. CIV. P. 257(c). against Continental is coercive--a TRO and a temporary injunction. Legend also contended that Fort Worth's suit [**11] STANDARD OF REVIEW was purely injunctive because Fort Worth did not seek In deciding whether a writ of mandamus is appro- damages or other noninjunctive relief. On June 23, 1998, priate, we recognize that mandamus will issue only to we denied those petitions without written opinion. 14 correct a clear abuse of discretion or the violation of a duty imposed by law when there is no other adequate 12 Continental's principal office is in Harris remedy at law. See Republican Party v. Dietz, 940 S.W.2d County.

86, 88 (Tex. 1997) (orig. proceeding). A trial court clearly 13 Continental is a proper party to the suit abuses its discretion when it reaches a decision so arbi- notwithstanding the fact that it is not a party to the trary and unreasonable as to amount to a clear and preju- Page 4 977 S.W.2d 798, *; 1998 Tex. App. LEXIS 5352, **

dicial error of law. See Walker v. Packer, 827 S.W.2d proper venue, we only look to the express relief sought in 833, 839 (Tex. 1992) (orig. proceeding). A trial court has the allegations and prayer of the plaintiff's petition. See no discretion in determining what the law is or in applying Renwar Oil Corp. v. Lancaster, 154 Tex. 311, 276 S.W.2d the law to the facts. See Walker, 827 S.W.2d at 840. Thus, 774, 775 (1955). When those pleadings show that the a clear failure by the trial court to analyze or apply the law issuance of a permanent injunction is the primary and correctly will constitute an abuse of discretion and may principal [**14] relief sought in the lawsuit, venue is result in mandamus. See id. mandatory in the county of the defendant's domicile. See Brown v. Gulf Television Co., 157 Tex. 607, 306 S.W.2d A defendant raises the question of proper venue by 706, 708 (1957) (construing the predecessor statute to objecting to a plaintiff's venue choice through a motion to section 65.023(a)); Guion v. Gibson, 439 S.W.2d 715, 716 transfer venue. See TEX. R. CIV. P. 86; Wilson v. Texas (Tex. Civ. App.--Houston [14th Dist.] 1969, no writ). On Parks & Wildlife Dep't, 886 S.W.2d 259, 260 (Tex. 1994). the other hand, if a review of the allegations and the The fact that mandatory venue lies in another county prayer in the plaintiff's petition shows that issuance of a provides one basis for a venue transfer. See [**12] TEX. permanent injunction would be merely ancillary to a R. CIV. P. 86(3)(b). If the plaintiff's chosen venue rests on judgment awarding declaratory relief, the requirement a permissive venue statute and the defendant files a mer- that the suit be brought in the county of the defendant's itorious motion to transfer based on a mandatory venue domicile does not apply. See Brown, 306 S.W.2d at 708; provision, the trial court must grant the motion. See Guion, 439 S.W.2d at 716.

Wichita County v. Hart, 917 S.W.2d 779, 781 (Tex. 1996); Langdeau v. Burke Inv. Co., 163 Tex. 526, 358 S.W.2d [*804] INJUNCTIVE VS. DECLARATORY RE- 553, 556 (1962). An erroneous denial of such a motion is LIEF reviewable by mandamus. See TEX. CIV. PRAC. & REM.

CODE ANN. § 15.0642 (Vernon Supp. 1998). In such a An injunction is coercive and equitable in nature. See situation, the relator does not have to show an inadequate Valley Oil Co. v. City of Garland, 499 S.W.2d 333, 335 remedy at law -- only that the trial court erroneously re- (Tex. Civ. App.--Dallas 1973, no writ). The function of fused to enforce a mandatory venue provision. See KJ injunctive relief is to restrain motion and to enforce inac- Eastwood Inv., Inc. v. Enlow, 923 S.W.2d 255, 258 (Tex. tion. See Boston v. Garrison, 152 Tex. 253, 256 S.W.2d App.--Fort Worth 1996, orig. proceeding). 67, 70 (1953); R.I.O. Sys., Inc. v. Union Carbide Corp., 780 S.W.2d 489, 493 (Tex. App.--Corpus Christi 1989, MANDATORY VENUE UNDER SECTION 65.023(a) writ denied).

Section 65.023 provides: To be entitled to injunctive relief, a plaintiff [**15] must prove the existence of a wrongful act, imminent [A] writ of injunction against a party who is a resident harm, irreparable injury, and the absence of an adequate of this state shall be tried in a district or county court in the legal remedy. See Morris v. Collins, 881 S.W.2d 138, 140 county in which the party is domiciled. (Tex. App.--Houston [1st Dist.] 1994, writ denied). Fear TEX. CIV. PRAC. & REM. CODE ANN. § or apprehension of the possibility of injury is not suffi- 65.023(a) (Vernon 1997). The important right provided to cient; the plaintiff must prove that the defendant has at- a defendant under this statute to defend a suit for perma- tempted or intends to harm the plaintiff in the future. See nent injunction in the [**13] county of the defendant's State v. Morales, 869 S.W.2d 941, 946-47 (Tex. 1994); domicile originated with our first state legislature in 1846, Frey v. DeCordova Bend Estates Owners Ass'n, 647 and it has been preserved since that time by all successive S.W.2d 246, 248 (Tex. 1983); Morris, 881 S.W.2d at 140. legislatures. 17 In contrast, a declaratory judgment is one that simply declares the rights, status, or other legal relations of the See Act approved May 13, 1846, 1st Leg., § parties without ordering anything to be done. See TEX. 152, 1846 Tex. Gen. Laws 363, 406, reprinted in 2 CIV. PRAC. & REM. CODE ANN. § 37.003(a), (b) H.P.N. GAMMEL, THE LAWS OF TEXAS (Vernon 1997) (trial court has "power to declare rights, 1838-1846, at 1669, 1712 (Austin, Gammel Book status, and other legal relations whether or not further Co. 1898); TEX. CIV. STAT. art. 2996 (1895); relief is or could be claimed," and the declaration "has the TEX. REV. CIV. STAT. ANN. art. 4656 (Vernon force and effect of a final judgment or decree"); Harris 1952), repealed by Act of May 17, 1985, 69th County Tax Assessor-Collector v. Reed, 210 S.W.2d 852, Leg., R.S., ch. 959, § 9, 1985 Tex. Gen. Laws 854 (Tex. Civ. App.--Austin 1948, no writ) (holding that 3242, 3322 (current version at TEX. CIV. PRAC. when party brings a declaratory judgment action, no relief & REM. CODE ANN. § 65.023 (Vernon 1997)). [**16] other than declaratory judgment need be sought).

In determining whether a lawsuit constitutes a suit for The purpose of a declaratory judgment is to settle and to permanent injunction for the purpose of determining afford relief from uncertainty and insecurity with respect Page 5 977 S.W.2d 798, *; 1998 Tex. App. LEXIS 5352, **

to these rights, statuses, and other legal relations. See Worth's request for a declaratory judgment. The reserva- TEX. CIV. PRAC. & REM. CODE ANN. § 37.002(b). tion of Fort Worth's statutory right to obtain supplemental Actual injury or harm is not a prerequisite to a declaratory injunctive relief to enforce the requested declaratory judgment lawsuit; a trial court may construe a contract in judgment, if necessary, does not transform the primary a declaratory judgment action before a breach occurs. See objective of Fort Worth's suit from a declaratory judgment id. § 37.004(b); Hasty, Inc. v. Inwood Buckhorn Joint into a permanent injunction.

Venture, 908 S.W.2d 494, 499 (Tex. App.--Dallas 1995, writ denied). 18 See TEX. CIV. PRAC. & REM. CODE ANN. § 37.011.

The law presumes that the defendant will recognize and respect the rights declared by a declaratory judgment Dallas also singles out two phrases in the 24-page and will abide by the judgment in carrying out its duties. body of the petition as proof that Fort Worth is primarily See Valley Oil Co., 499 S.W.2d at 335-36. However, seeking [**19] to enjoin Dallas--"irreparable harm is ancillary injunctive relief may be obtained when the evi- imminent" and "the status quo will be changed." Dallas's dence shows that the defendant will not comply with the reliance on this language is misplaced. First, when read in judgment. See Texas Education Agency v. Leeper, 893 context, it is clear that the phrase "irreparable harm is S.W.2d 432, 446 (Tex. 1994); Commissioners' Court v. imminent" was inserted in the petition merely to introduce Rayburn, 264 S.W.2d 552, 555 (Tex. Civ. a series of paragraphs explaining why Fort Worth believes App.--Beaumont 1954, no writ). The Declaratory Judg- it is necessary to sue Dallas for a declaratory judgment. ments Act itself expressly authorizes a party to obtain These allegations properly advise the trial court that the supplemental ancillary [**17] relief, including a per- controversy is ripe for adjudication. 19 Nor does the alle- manent injunction, to enforce a declaratory judgment. See gation that "the status quo will be changed" if Dallas Valley Oil Co., 499 S.W.2d at 336 (holding that declara- breaches the 1968 agreement change the nature of the tory judgment does not bar subsequent proceeding for primary relief sought by Fort Worth to a permanent in- coercive relief to enforce rights established by judgment junction. The Declaratory Judgments Act expressly au- where losing party contravenes judgment); see also TEX. thorizes a party to ask the trial court to construe the party's CIV. PRAC. & REM. CODE ANN. § 37.011 ("Further rights under a written contract before a breach of the relief based on a declaratory judgment or decree may be contract occurs. 20 In such a case, it is customary and granted whenever necessary or proper. The application proper to describe, as Fort Worth has done, the alleged must be by petition to a court having jurisdiction to grant consequences that may flow from a future breach of the the relief."). contract.

FORT WORTH'S PETITION ONLY REQUESTS 19 A declaratory judgment is appropriate only if DECLARATORY RELIEF a real and substantial controversy exists between the parties. See Bonham State Bank v. Beadle, 907 Dallas contends that the language in Fort Worth's S.W.2d 465, 467 (Tex. 1995). Declaratory judg- prayer asking the trial court to declare that Dallas is ment actions are frequently attacked on grounds "prohibited, under the Contract and the Joint Bond Ordi- that the claims are hypothetical or abstract and nance" from expanding commercial flights to and from therefore do not present a justiciable controversy.

Love Field, when read in the context of other language in See, e.g., Firemen's Ins. Co. v. Burch, 442 S.W.2d the body of Fort Worth's petition, compels us to find that 331, 332-35 (Tex. 1968); Lane v. Baxter the primary relief sought by Fort Worth against Dallas is a Healthcare Corp., 905 S.W.2d 39, 41-42 (Tex. permanent injunction. We disagree. None of the cited App.--Houston [1st Dist.] 1995, no writ); Powell language, either standing alone or combined with other v. Estelle, 580 S.W.2d 169, 171 (Tex. Civ. allegations in Fort Worth's petition, supports a finding that App.--Austin 1979, writ ref'd n.r.e.), cert. denied, Fort Worth's suit against Dallas [**18] is primarily in- 444 U.S. 892, 62 L. Ed. 2d 129, 100 S. Ct. 198 junctive in nature. (1970).

Nowhere in its petition or prayer for relief does Fort [**20] Worth request that the trial court order Dallas, or any 20 See TEX. CIV. PRAC. & REM. CODE ANN. other defendant, to do [*805] or not to do anything. § 37.004(b).

Rather, the petition and prayer request seven elements of Finally, Dallas asserts that Fort Worth's suit is merely relief, each of which consists only of a declaration. Alt- a well-masked request for a permanent injunction and hough the last, standardized phrase of Fort Worth's prayer urges us to look beyond the live pleadings to divine an- reserves the right to seek "further relief," including in- other motive and intent for this suit that is not found in the junctive relief, this remedy is expressly authorized by the pleadings. We refuse to engage in such speculation. 21 Declaratory Judgments Act 18 and is ancillary to Fort Page 6 977 S.W.2d 798, *; 1998 Tex. App. LEXIS 5352, **

There is no indication in the record before us that, con- nio 1962, no writ) (undisputed that primary and trary to the explicit allegations in its pleadings, Fort ultimate purpose of lawsuit was permanent in- Worth is actually seeking an injunction to permanently junction). enjoin Dallas from operating Love Field in a manner inconsistent with the 1968 agreement. The record plainly CONCLUSION shows that Fort Worth is only seeking a "declaration" The primary relief Fort Worth seeks against Dallas is from the trial court that, among other things, Love Field declaratory in nature, not injunctive. The fact that a de- service remains restricted by the 1968 agreement. The claratory judgment [*806] adverse to Dallas's position issuance of a permanent injunction in the underlying case may, if Dallas abides by [**22] the judgment, have the would be necessary and proper if, and only if, it were effect of restricting passenger air service out of Love Field shown that a party intended to contravene the trial court's to that allowed by the 1968 agreement does not transform final decision. See Leeper, 893 S.W.2d at 446. We are Fort Worth's declaratory judgment action into a suit for a confident that the parties in this case will abide by the trial permanent injunction for venue purposes. court's declarations, whatever [**21] they may ulti- mately be. Because we hold that the primary relief sought in Fort Worth's suit is a declaratory judgment, section 65.023 of We are also unaware of any Texas case in the Texas Civil Practice and Remedies Code does not which a court has construed a plaintiff's pleadings apply. Accordingly, we hold that the trial court did not as impliedly seeking primarily injunctive relief abuse its discretion in denying Dallas's motion to transfer when the plaintiff only expressly asked for a de- venue, and we deny the relief requested in Dallas's peti- claratory judgment. In those cases where courts tion for writ of mandamus. have construed a suit for declaratory relief as one primarily seeking injunctive relief, the plaintiff JOHN CAYCE expressly requested the issuance of a permanent CHIEF JUSTICE injunction. See Burton v. Rogers, 504 S.W.2d 404, 405 (Tex. 1973) (plaintiff requested both perma- PANEL M: CAYCE, C.J.; DAUPHINOT and nent injunction and declaratory judgment); Guion, BRIGHAM, JJ. 439 S.W.2d at 717 (request for permanent injunc- DELIVERED AUGUST 25, 1998 tion was undisputed); Rainbo Baking Co. v. Aiken, 362 S.W.2d 660, 660 (Tex. Civ. App.--San Anto- In re: DOW CORNING CORP., Debtor. BEAR STEARNS GOVERNMENT SE- CURITIES, INC., , et al., Appellants, v. DOW CORNING CORP., et al., Appellees.

05a0360p.06 No. 04-1916 UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT 419 F.3d 543; 2005 U.S. App. LEXIS 17967; 2005 FED App. 0360P (6th Cir.); 45 Bankr. Ct. Dec. 46 July 27, 2005, Argued August 22, 2005, Decided August 22, 2005, Filed PRIOR HISTORY: [**1] Appeal from the United After the discussions reached an impasse over terms States District Court for the Eastern District of Michigan covering the consequences in the event settlement pay- at Detroit. No. 01-71843--Denise Page Hood, District ments were not timely, Dow Corning suggested a clause Judge. requiring payments of $ 100 [**2] per day to each plaintiff for any time during which settlement payments were late. The plaintiffs agreed to this clause, and entered COUNSEL: ARGUED: Abraham Singer, PEPPER into the settlement agreement, later selling their right to HAMILTON, Detroit, Michigan, for Appellants. settlement payments to Appellant Bear Stearns. When Dow Corning declared bankruptcy and began to miss David L. Ellerbe, NELIGAN, TARPLEY, STRICKLIN, payments under the settlement agreement, Bear Stearns ANDREWS & FOLEY, Dallas, Texas, for Appellees. attempted to enforce the clause via a bankruptcy claim.

The district court, on Dow Corning's motion for summary ON BRIEF: Abraham Singer, Mary K. Deon, PEPPER judgment, held that the clause was a penalty unenforcea- HAMILTON, Detroit, Michigan, for Appellants. ble under Texas law, and also found that a condition precedent to the contractual provision of liquidated David L. Ellerbe, NELIGAN, TARPLEY, STRICKLIN, damages had not been met. Bear Stearns now appeals, ANDREWS & FOLEY, Dallas, Texas, for Appellees. arguing that the condition precedent was in fact met, and that Dow Corning should be estopped from asserting that JUDGES: Before: MOORE and COLE, Circuit Judges; the clause is a penalty. Because the clause is a penalty and WISEMAN, District Judge. * unenforceable under Texas law, and because Texas courts preclude parties from being estopped from asserting an * The Honorable Thomas A. Wiseman, Jr., illegality defense, we AFFIRM the decision below.

United States District Judge for the Middle Dis- trict of Tennessee, sitting by designation. I.

Following revelations that many of Dow Corning's OPINION BY: Ransey Guy Cole silicone-based breast implants were faulty, numerous suits were filed against Defendant-Appellee Dow Corning OPINION Corp. ("Dow Corning"). [**3] Twenty-seven Texas [*546] [***2] R. GUY COLE, JR., Circuit residents ("Plaintiffs") filed suit in Texas state court in Judge. Twenty-seven Texas plaintiffs seeking recovery 1994, alleging various claims against Dow Corning. Dow for injuries resulting from allegedly faulty breast implants Corning found itself "under significant pressure" to settle engaged in settlement negotiations with the implants' these twenty-seven cases, especially since any findings of manufacturer, Dow Corning Corp., a Michigan company. fact made in these cases (the "Texas cases") could have Page 2 419 F.3d 543, *; 2005 U.S. App. LEXIS 17967, **; 2005 FED App. 0360P (6th Cir.), ***; 45 Bankr. Ct. Dec. 46 significant adverse effects upon Dow Corning's position In the event that [Dow Corning] fails to in a related multi-district case and related global settle- make any payment in accordance with ment discussions then pending in federal court in Ala- [the] Agreement, and Plaintiff must seek bama. Dow Corning was also motivated to settle because enforcement of the judgment to obtain the of its view that the Texas cases were filed in a "plain- amounts due, then [Dow Corning] will pay tiff-friendly" forum. Dow Corning thus hired Ken Fein- to Plaintiff, as liquidated damages, the sum berg, a noted expert in settlement practice, to engage in of One Hundred Dollars ($ 100.00) per day settlement negotiations with the Plaintiffs. for each day that payment is not made from the date payment was due until the [*547] But for one sticking point, the negotiations date Plaintiff receives the full amount due went smoothly. Both parties agreed that Texas law would and owing under the terms of this agree- control the settlement agreement. Dow Corning would ment. These liquidated damages shall be in pay the Plaintiffs a total of $ 17 million over the course of addition to the assessment [**6] of costs several years, in a series of seven installments. This and interest as provided in the agreed payment would be secured by an "Agreed Judgment" filed judgment and the acceleration of install- in Texas court, though the judgment would be enforced ment payments as provided in [] the only if Dow Corning failed to make a timely settlement Agreement. payment. Plaintiffs' counsel [**4] would be responsible for determining what portion of the $ 17 million each individual Plaintiff would receive. Further, if Dow The Plaintiffs' attorneys noted at that time that if the new Corning ever were late on an installment payment, the provision provided for a "penalty," the provision would entire settlement amount would come due. However, near not be enforceable under Texas law. the end of negotiations, Plaintiffs' counsel insisted on a clause (the "no credit clause") which provided that if Dow The parties agreed on this language, and inserted the Corning ever failed to make a timely payment, it would clause into each settlement agreement. Dow Corning paid not receive credit against the judgment for previously the first installment payment, totalling $ 4 million, on made payments. For example, under this clause, if Dow December 1, 1994. However, on May 15, 1995, Dow Corning failed to make a required final payment of $ Corning filed for bankruptcy in the Eastern District of 200,000 to a particular Plaintiff, that Plaintiff would be Michigan, and thereafter failed to make any further pay- able to enforce the "agreed judgment" against Dow ments under the settlement agreement -- the second in- Corning for the full settlement amount of $ 1,400,000, stallment having been due on July 1, 1995. All of the rather than merely for the $ 200,000 portion of the judg- Plaintiffs timely filed claims in bankruptcy court for the ment remaining unpaid. This would occur despite the fact amounts due under the settlement agreement. In February that the Plaintiff in this example would already have re- 1997, while the bankruptcy [*548] case was pending, ceived $ 1,200,000 of the $ 1,400,000 due. Plaintiffs' the Plaintiffs all sold their claims to Appellant Bear counsel justified this clause by stating that it would pro- Stearns Investment Products, Inc., and related entities vide a significant incentive for Dow Corning to pay (collectively, "Bear Stearns"). Bear Stearns was then scheduled payments on time. substituted for the Plaintiffs in the bankruptcy case.

Not wishing to place itself in a position where it could Years later, a reorganization plan was approved for potentially be required to "double-pay" a significant [**5] Dow Corning. The plan included payment [**7] to Bear portion of the settlement, Dow Corning steadfastly ob- Stearns of the full remaining settlement amount of $ 13 jected to the no credit [***3] clause. However, Dow million, plus post-petition interest of $ 9.6 million. 1 Corning by its own admission at this time felt "a tre- During bankruptcy proceedings, Bear Stearns also mendous sense of urgency to finalize the settlement." claimed liquidated damages in the amount of $ 8.75 mil- Accordingly, Dow Corning's attorneys proposed replac- lion pursuant to the settlement agreement. Dow Corning ing the no credit clause in each Plaintiff's agreement with filed an objection to this portion of Bear Stearns's claim, language requiring a "penalty" of $ 100 to be paid for each and the bankruptcy court, without any written findings, day that Dow Corning was late in paying a particular sustained the objection and disallowed the liquidated Plaintiff. After insisting that all uses of "penalty" be damages portion of the claim. Bear Stearns appealed to changed to "liquidated damages," and after making some the district court. Since Dow Corning was fully solvent insignificant stylistic changes, Plaintiffs' attorneys agreed and had agreed to pay whatever the district court deter- to insert the following language proposed by Dow Corn- mined was due, the court allowed the confirmed plan to ing: become effective while the liquidated damages appeal was pending. As a result, just after the plan's effective date, on June 1, 2004, Bear Stearns was paid the $ 22.6 Page 3 419 F.3d 543, *; 2005 U.S. App. LEXIS 17967, **; 2005 FED App. 0360P (6th Cir.), ***; 45 Bankr. Ct. Dec. 46 million both parties agreed was due under the plan. case, we agree with the parties and the district court, and Meanwhile, Bear Stearns and Dow Corning each had filed apply Texas law in determining the enforceability of the a motion for summary judgment in district court with subject contract terms. regard to the additional liquidated damages. The district Since the instant claims were brought in bankruptcy court denied Bear Stearns's motion, and granted summary court pursuant to federal bankruptcy jurisdiction, federal judgment to Dow Corning, finding that the liquidated procedural rules apply. Therefore, we review the district damages clause was a penalty unenforceable [**8] un- court's legal conclusions de novo. In re Batie, 995 F.2d der Texas law, and that even if it were not, a condition 85, 88 (6th Cir. 1993); In re Dow Corning Corp., 280 precedent to any award of liquidated damages had not F.3d 648, 656 (6th Cir. 2002). In applying state law, we been met. The district court then certified the grant of anticipate how the relevant state's highest court would summary judgment as final, under Fed. R. Civ. P. 54(b), rule in the case and are bound by controlling decisions of since the ruling conclusively resolved all claims with that court. Allstate Ins. Co. v. Thrifty Rent-A-Car Sys., regard to the liquidated damages clause. This timely ap- Inc., 249 F.3d 450, 454 (6th Cir. 2001). Intermediate state peal followed. appellate courts' decisions are also viewed as persuasive unless it is shown that the state's highest court would Bear Stearns is also an appellant in another decide the issue differently. Id. Dow Corning appeal currently pending before this Court. All parties agree that the legal issues pre- Under federal procedural law, in deciding a motion sented by the two appeals are effectively unrelated for summary judgment in a bankruptcy proceeding, this and that Dow Corning will pay additional Court must determine [**11] if "the pleadings, deposi- post-petition interest on all money due under the tions, answers to interrogatories, and admissions on file, settlement agreement if such additional interest is together with the affidavits, if any, show that there is no awarded to Bear Stearns as a result of the other genuine issue as to any material fact and that the moving appeal. party is entitled to a judgment as a matter of law." Fed R. Civ. P. 56(c); see also Fed. R. Bankr. P. 7056 ("Rule 56 [***4] II.

F.R.Civ.P. applies in adversary proceedings."). As usual, A. Choice of Law and Standard of Review we view the evidence in the light most favorable to the non-moving party. See, e.g., Matsushita Elec. Indus. Co. Both parties agree that, pursuant to the settlement v. Zenith Radio Corp., 475 U.S. 574, 586-88, 89 L. Ed. 2d agreement's choice-of-law provision, the construction and 538, 106 S. Ct. 1348 (1986). However, since the instant enforcement of terms of the settlement agreement is appeal is from both the grant of summary judgment to governed [**9] by the laws of Texas. Though there is a Dow Corning and the denial of summary judgment to circuit split over what choice-of-law provisions a federal Bear Stearns, it is appropriate to consider the evidence in court exercising bankruptcy jurisdiction should apply, the light most favorable to each party. compare, e.g., Liberty Tool, & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, Finally, under Texas law, the determination of 1069 (9th Cir. 2002) (requiring use of federal whether a contract term is properly a liquidated damages choice-of-law principles) with, e.g., In re Gaston & provision or instead an unenforceable penalty is purely a Snow, 243 F.3d 599, 604-07 (2d Cir. 2001) (describing question of law. See, e.g., Valence Operating Co. v. this split in great detail and requiring use of the forum Dorsett, 164 S.W.3d 656, 664, 48 Tex. Sup. Ct. J. 671 state's choice-of-law principles); see also, e.g., In re (Tex. 2005) [**12] ("Whether a contract term is a liq- Southwest Equip. Rental, 1992 U.S. Dist. LEXIS 21396, uidated damages provision is a question of law for the No. CIV 1-90-62, 1992 WL 684872, at *9 n.48 (E.D. Tenn court to decide."); S. Union Co. v. CSG Sys., 2005 Tex. Jul. 9, 1992), both Michigan choice-of-law rules and App. LEXIS 564, No. 03-04-00172-CV, 2005 WL 171349, general equitable choice-of-law policies support enforc- at *4 (Tex. Ct. App. Jan. 27, 2005) ("Whether the liqui- ing parties' agreed-upon choice-of-law clauses absent any dated damages provision is enforceable is a question of strong public policy concerns to the contrary. See, e.g., law."). "Sometimes, however, factual issues must be re- Mill's Pride, Inc. v. Cont'l Ins. Co., 300 F.3d 701, 705 (6th solved before the legal question can be decided. For ex- Cir. 2002) ("Michigan choice of law rules . . . require a ample, to show that a liquidated damages provision is court to balance the expectations of the parties to a con- unreasonable because the actual damages incurred were tract with the interests of the states involved to determine much less than the amount contracted for, a defendant which state's law to apply." (citations omitted)); Re- may be required to prove what the actual damages were." statement (Second) of Conflicts of Law [*549] § 302 Phillips v. Phillips, 820 S.W.2d 785, 788, 35 Tex. Sup. Ct. [**10] (1971) (suggesting similar principles in the J. 220 (Tex. 1991). non-state-specific context). As we are aware of no public policy disfavoring application of Texas law in the instant [***5] B. Liquidated Damages Page 4 419 F.3d 543, *; 2005 U.S. App. LEXIS 17967, **; 2005 FED App. 0360P (6th Cir.), ***; 45 Bankr. Ct. Dec. 46 Bear Stearns first argues that the $ 100 per day pro- be easy to estimate. For this proposition, the district court vision is a valid liquidated damages clause. Under Texas relied significantly on language from Langever v. R.G. law, a "liquidated damages" term is treated as a penalty, Smith & Co., 278 S.W. 178, 179 (Tex. Ct. App. 1925): unenforceable for reasons of public policy, except when all three of the following conditions are met: In determining the intention of the par- ties to such stipulation, certain First, [(1)] the anticipated damages for a well-recognized [**15] rules of con- breach must be difficult or impossible to struction enter into the consideration, an estimate. Also, [(2)] the amount of liqui- important one of which is, the certainty or dated damages must be a reasonable uncertainty of the actual damages which a forecast of the [**13] amount necessary breach will occasion, and the ease or dif- to render just compensation. In addition, ficulty of ascertaining or proving such [(3)] 'liquidated damages must not be dis- damages; hence, in a case of a contract for proportionate to actual damages,' as the payment of money simply, a stipula- measured at the time of the breach. Thus, if tion to pay a fixed sum, in default of per- the liquidated damages are disproportion- formance, will be regarded as an agree- ate [*550] to the actual damages, the ment for a penalty and not as a covenant clause will not be enforced and recovery for liquidated damages--the reason for this will be limited to the actual damages rule being that, for the nonpayment of proven. money, the law awards damages measured by interest, and hence there is no difficulty in ascertaining the damages in such a case.

Thanksgiving Tower Partners v. Anros Thanksgiving Partners, 64 F.3d 227, 232 (5th Cir. 1995) (footnotes omitted) (quoting Baker v. Int'l Record Syndicate, 812 Id. While this passage from Langever, taken alone, is S.W.2d 53, 55 (Tex. Ct. App. 1991)). Further, "the party supportive of the district court's holding, the district court seeking to prevent enforcement bears the burden of proof ignored the fact that this was only one factor to be con- on these [three] issues." Id.; see also Fluid Concepts, sidered under Texas law. The plaintiff in Langever al- Inc. v. DA Apartments Ltd. P'ship, 159 S.W.3d 226, 231 leged that, due to non-payment on the contract at issue, he (Tex. Ct. App. 2005) (concluding that trial court had erred had lost significant profits (as, presumably, he was in- in granting summary judgment to defendant where de- tending to reinvest the money once received), and that the fendant had presented no evidence supporting denial of liquidated damages term had been an attempt to estimate liquidated damages, despite plaintiff's failure to provide the result of his not having been paid. [***6] Despite any proof in support of such damages). Accordingly, to the dicta cited by the district [**16] court in the instant defeat Bear Stearns's motion for summary judgment and case, the Langever court went on to state first that, "Where to prevail on its own summary judgment motion, Dow it is certain that damages will flow, and where it is certain Corning bore the burden of [**14] proving that any one they cannot be accurately measured, or where it appears of the preceding conditions had not been met. Finally, their ascertainment, if possible, will be difficult, the best Texas law grants strong deference to enforcement of reasons exist for respecting the agreement of the parties in contract terms, including liquidated damages terms, advance upon a sum mutually satisfactory." Id. The shown to be mutually bargained for by equally competent Langever [*551] court then granted enforcement of the parties. S. Union, 2005 Tex. App. LEXIS 564, 2005 WL clause, despite its dicta, noting that "Any effort to estab- 171349, at *5 (citing Shel-al Corp. v. Am. Nat'l Ins. Co., lish the actual damages for a breach of a contract such as 492 F.2d 87, 94 (5th Cir. 1974)). The district court ruled the one under consideration here would be attended with against Bear Stearns, finding that none of the prongs of such unusual considerations and surrounded with such the liquidated damages test were met. uncertainty and difficulties as to take the case out of the usual class of cases of mere default in the payment of 1. Were Future Damages Stemming From Breach money, and thus to afford fair grounds for sustaining an Difficult to Estimate? agreement for liquidated damages." Id. Bear Stearns first argues that the district court erred Accordingly, Langever merely stands for Texas's when it determined that all liquidated damages clauses in consistent law that liquidated damages clauses in con- contracts for the payment of money are unenforceable tracts for payment of money are unenforceable except penalties. The district court concluded that since interest when damages are particularly difficult to estimate. Bear can be paid to offset any delay in receiving money due Stearns argues that the liquidated damages clauses in the under a contract, damages for such contracts will always instant case were intended to compensate for difficulties Page 5 419 F.3d 543, *; 2005 U.S. App. LEXIS 17967, **; 2005 FED App. 0360P (6th Cir.), ***; 45 Bankr. Ct. Dec. 46 [**17] encountered by the Plaintiffs were they not to resulting from non-payment of settlement monies, in- receive the settlement monies they were expecting to cluding inability to meet future medical and other obliga- receive. According to Plaintiffs' attorneys, such damages tions, would be easy to calculate. Obviously, the twen- specifically included losses sustained by the Plaintiffs' ty-seven Plaintiffs would each face differing levels of inabilities to meet obligations they had made based on the such damages, and in this particular case, no party has promise of Dow Corning to make payments under the argued that the Plaintiffs' medical or other obligations settlement agreement. Bear Stearns alleges that such dif- were uniform or predictable. Accordingly, Dow Corning ficulties would have been particularly difficult to estimate has failed to show that the anticipated damages would not here, because Plaintiffs' difficulties included damages be difficult to estimate. beyond the usual "lost investment opportunities" and [***7] 2. Was the Liquidated Damages Clause a inabilities to make house and car payments. Rather, Bear Reasonable Forecast of Just Compensation for Such Stearns asserts that the clause was also intended to com- Damages? pensate for difficulties resulting from a failure to be able to meet future obligations incurred in expectation of re- The district court also gave two reasons for con- ceiving settlement payments, including obligations such cluding that Bear Stearns [**20] ought to lose on prong as future (and inherently unpredictable) medical services two, regarding whether the amount of liquidated damages required due to illness caused by the allegedly faulty was a reasonable forecast of the amount necessary to implants, and also Plaintiffs' "decisions to discontinue render just compensation. Unsurprisingly, Dow Corning working if they could afford to do so." agrees with both. First, the district court found that the $ per day simply was not a forecast of compensation for On this prong, Dow Corning raises two arguments in any damages, but rather was initially intended as a pen- addition to that relied upon by the district court. First, alty. Second, the district court concluded that even if the Dow Corning argues that the items Bear Stearns [**18] Plaintiffs' attorneys had intended this clause as compen- claims would be "damages" following non-payment are sation for damages, there was no evidence that the likely actually damages that the initial settlement itself had amount of such damages was ever estimated at all or that contemplated, and thus the liquidated damages clause it was compared with $ 100 per day, nor was any evidence effectively would double-pay for these amounts. Bear provided that any negotiations over what amount would Stearns responds by noting that the liquidated damages be reasonable compensation had ever occurred. The dis- provision was not intended to cover medical expenses trict court concluded that the clause thus was not a "rea- resulting from the faulty implants, but rather to compen- sonable forecast of just compensation." sate for additional costs associated with receiving late payments from Dow Corning. We agree with Bear Stearns Bear Stearns argues that the burden was on Dow that this conclusion is reasonable in light of Langever, Corning to prove that the clause was not a reasonable which specifically allowed liquidated damages in a situa- forecast, and that Dow Corning simply has not presented tion in which future damages resulting from non-payment any evidence that the clause was not a reasonable forecast were likely to be more than the time-value of monies of damages. However, this argument both discounts the owed under the original contract. evidence Dow Corning has presented and overstates Dow Corning's burden. Dow Corning [**21] has presented Dow Corning's second argument is that the parties evidence that the parties did not discuss potential uncer- simply were not anticipating any additional damages from tain damages resulting from breach, and has also pre- non-payment, difficult to calculate or otherwise. Dow sented evidence that the clause was initially proposed as a Corning cites to the fact that the liquidated damages penalty untied to any potential damages. clause was initially proposed as a "penalty," and that none of the attorneys in the case from either side could re- Bear Stearns argues that the district court unfairly member any discussions regarding difficult-to-calculate shifted the burden of proof to Bear Stearns. However, damages. In contrast, Bear Stearns notes that at least one such a shifting was not improper in light of evidence of [**19] the Plaintiffs' attorneys stated specifically that presented by Dow Corning that is probative of a lack of "the liquidated damages provision was to recognize that both intent to provide just compensation and the existence [Plaintiffs] would have losses sustained by their inability of any consideration of any estimates of what just com- to meet the obligations that they had made based on the pensation would be. Bear Stearns's only statement to promise of Dow Corning to make payments under this counter Dow Corning's evidence of a lack of connection Agreement." These duelling assertions, however, go to between the clause and any estimate of damages is that the question of whether the provision was actually a just "given the large number of individual Plaintiffs and the forecast of any damages, and not to whether such dam- difficulty in estimating each Plaintiff's actual damages in ages, if contemplated, would be difficult to calculate. the event of a breach by Dow, the $ 100 per day figure was Dow Corning does not argue that the damages [*552] a reasonable estimate of those damages." This argument Page 6 419 F.3d 543, *; 2005 U.S. App. LEXIS 17967, **; 2005 FED App. 0360P (6th Cir.), ***; 45 Bankr. Ct. Dec. 46 may reasonably rebut one of Dow Corning's other argu- 3. Are the Liquidated Damages Disproportionate to ments, that the damages were not reasonably predictive of the Actual Damages Incurred by Plaintiffs? damages potentially or actually incurred by any one spe- Because Dow Corning has met its burden of proving cific Plaintiff. Regardless, however, the fact that there are that the clause was not a reasonable estimation of any numerous Plaintiffs or that [**22] each Plaintiff's dam- anticipated damages, the entire three-part test must be ages were uncertain does not logically imply that $ 100 resolved in its favor. See, e.g., Baker, 812 S.W.2d at 55. per day was a reasonable estimate of damages.

Therefore, we need not determine whether the "liquidated Bear Stearns further argues that "having proposed the damages" under the clause would be disproportionate to $ 100 per day figure, Dow clearly believed it was rea- any actual damages incurred by Plaintiffs. sonable at the time." However, such an inference cannot be made. When Dow Corning proposed the $ 100 figure, C. Quasi-Estoppel and Unenforceable Liquidated the uncontradicted evidence shows that it intended the Damages Clauses figure as a penalty, and not as a reasonable estimation of Under Texas law, the illegality of a liquidated dam- some set of damages. Bear Stearns cites no evidence tying ages clause is an affirmative defense that must be asserted the $ 100 figure to any of the types of damages it claims by a defendant when it is not clear from the face of the Plaintiffs were estimated to face [*553] post-breach, agreement that the clause is illegal. See, e.g., Phillips v. while Dow Corning cites evidence probative of an ab- Phillips, 820 S.W.2d 785, 789-90, 35 Tex. Sup. Ct. J. 220 sence of a concern for whether $ 100 was just compensa- (Tex. 1991). Bear Stearns argues that the doctrine of tion. For this reason alone, Bear Stearns's arguments fail. quasi-estoppel should prevent [**25] Dow Corning See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, from being able to assert this affirmative defense, and 252, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (requiring a therefore that the liquidated damages clause should be party defending against a motion for summary judgment enforced. Quasi-estoppel is appropriate where "it would to provide more than a "scintilla" of evidence to support be unconscionable to allow a person to maintain a position the conclusion that there is a genuine issue of material fact inconsistent with one to which he acquiesced, or from for trial). which he accepted a benefit." Lopez v. Munoz, Hockema The district court also held that the $ 100 per day & Reed, L.L.P., 22 S.W.3d 857, 864, 43 Tex. Sup. Ct. J. provision was not a reasonable estimate of just compen- 806 (Tex. 2000) (citing Atkinson Gas Co. v. Albrecht, sation [**23] for the anticipated damages because such 878 S.W.2d 236, 240 (Tex. Ct. App. 1994)). Bear Stearns liquidated damages would constitute double recovery for argues that since Dow Corning proposed the clause in damages already compensated by the base settlement order to induce settlement with the Plaintiffs, thereby payments. See, e.g., Eberts v. Businesspeople Personnel avoiding costly litigation, Dow Corning cannot now assert Servs., Inc., 620 S.W.2d 861 (Tex. Ct. App. 1981) (disal- that the clause is illegal. However, regardless of whether lowing double recovery via liquidated damages); Robert quasi-estoppel would be appropriate here, [*554] G. Beneke & Co., Inc. v. Cole, 550 S.W.2d 321 (Tex. Ct. Texas courts have clearly stated that one cannot be es- App. 1977) (same). However, Bear Stearns properly notes topped from arguing that a contract term is illegal for that the damages for which it is claiming liquidated public policy reasons. See, e.g., In re Kasschau, 11 damages are not damages contemplated by the underlying S.W.3d 305, 312-14 (Tex. Ct. App. 1999); see also In re contract, since the [***8] damages at issue here are Calderon, 96 S.W.3d 711, 719-20 (Tex. Ct. App. 2003). those resulting from a breach of the settlement agreement Accordingly, under Texas law, Dow Corning simply itself (e.g. difficulties or other costs resulting from ina- cannot be estopped from asserting the affirmative defense bility to pay medical bills or other bills which Plaintiffs [**26] of illegality, even if quasi-estoppel would oth- had incurred relying on the availability of settlement erwise be applicable. Because Dow Corning did indeed money), and not those for which the settlement payments assert this defense, and because we conclude that this are supposed to compensate the Plaintiffs (e.g. expenses defense has merit, Bear Stearns's argument fails. resulting directly from potentially faulty implants). Ac- cordingly, the district court should not have concluded III. that enforcement of the liquidated damages clause would Because we conclude that Dow Corning met its constitute double recovery. Nonetheless, because [**24] burden of showing that the liquidated damages clause at Dow Corning provided evidence that the provisions were issue is a penalty clause unenforceable under Texas law not actually reasonable estimations of any anticipated for reasons of public policy, we need not address whether damages from breach, the second prong of the liquidated a condition precedent to enforcement of the clause was damages test, and thus the result of the entire test, was met. We therefore AFFIRM both the district court's de- properly resolved in Dow Corning's favor. nial of Bear Stearns's summary judgment motion and the grant of summary judgment to Dow Corning.

Page 1

IN RE RICHARD ALLEN KASSCHAU, Relator NO. 14-99-00737-CV COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON 11 S.W.3d 305; 1999 Tex. App. LEXIS 9300

December 16, 1999, Opinion Filed PRIOR HISTORY: [**1] Appeal from 312TH BACKGROUND DISTRICT COURT, Harris County; James D. Squier, Luckmi Kasschau ("Luckmi"), the real party in in- Judge. terest, sued the relator, Richard Allan Kasschau ("Rich- This Opinion Substituted on Overrule of Rehearing ard"), for divorce in the 312th District Court of Harris for Withdrawn Opinion of November 10, 1999, Previ- County. In her petition, Luckmi sought not only dissolu- ously Reported at: 1999 Tex. App. LEXIS 8399. tion of the marriage, but also conservatorship and support [**2] of their two children and division of the commu- DISPOSITION: Petition Denied. nity estate. Richard answered the suit with a general de- nial, a plea for confirmation of his separate property, and a request for reimbursement, attorney's fees, and expenses.

COUNSEL: Linda Marshall - of Houston, TX, for rela- The parties subsequently agreed to mediation. The parties tor. settled all issues at mediation and the court approved the settlement. 1 Shawn Russel Casey - of Houston, TX, for respondent.

1 The copy of the mediated settlement agree- JUDGES: Panel consists of Justices Yates, Fowler and ment provided by Richard is neither file-stamped Frost. nor signed by the court. Nevertheless, the report- er's record from a later hearing establishes that the OPINION BY: KEM THOMPSON FROST court signed and approved the agreement.

Before the court entered judgment, however, Luckmi OPINION nonsuited her divorce petition. Unaware of the nonsuit, Richard filed an "original counter-petition" for divorce. In [*308] ORIGINAL PROCEEDING WRIT OF his counter-petition, Richard sought enforcement of the MANDAMUS OPINION ON REHEARING mediated settlement agreement, denied paternity of the The motion for rehearing of relator, Richard Allen second child born during the marriage, and asserted var- Kasschau, is overruled. The court's opinion of November ious tort claims against Luckmi and Shivi Kumar Pawa 10, 1999, is withdrawn and this opinion is substituted in ("Shivi"), the alleged father of the second child. [**3] its place. Luckmi subsequently filed in the same court a new peti- tion for divorce, seeking the same relief sought in her first In this original proceeding, the relator seeks a writ of suit. Luckmi also denied Richard's paternity of the second mandamus directing the trial court to vacate two orders in child and sought various temporary orders. the underlying divorce case: (1) denying reinstatement of an "original counter petition" for divorce, and (2) setting Meanwhile, back in the first suit, Richard filed a aside a mediated settlement agreement. Because the first motion to reinstate his counter-petition for divorce and to order is not reviewable by mandamus and the second consolidate the two divorce actions. He also asked the order was not a clear abuse of discretion, we deny the writ. court to enter judgment on the mediated settlement agreement. Luckmi opposed the motion for judgment, Page 2 11 S.W.3d 305, *; 1999 Tex. App. LEXIS 9300, **

asserting that: (1) certain conditions precedent to judg- trial court clearly abuses its discretion by making an ar- ment had not been satisfied; namely, Shivi had not filed an bitrary and unreasonable decision that amounts to a clear intervention as contemplated [*309] by the settlement and prejudicial error of law. See Johnson v. Fourth Court agreement, and (2) the settlement agreement was void of Appeals, 700 S.W.2d 916, 917 (Tex. 1985). Richard because it required Richard to turn over certain audiotape complains the trial court violated a duty imposed by law recordings of Luckmi for destruction by the parties' at- by refusing to reinstate his counter-petition and declining torneys, an act Luckmi claimed would be illegal. See TEX. to enter judgment on the mediated settlement agreement.

PEN. CODE ANN. §§ 16.02(b)(1), 37.09(a)(1) (Vernon We address each of these complaints and the question of 1994). whether Richard has an adequate remedy by appeal.

At a hearing on these motions, the trial court granted Reinstatement of the Counter-Petition the motion to consolidate the two divorce actions based on its conclusion that Luckmi's nonsuit did not defeat the Richard first contends the trial court violated a min- mediated settlement agreement. The court, however, isterial duty by refusing to reinstate his "original coun- denied Richard's motion to reinstate the [**4] coun- ter-petition," even though it was filed after Luckmi's ter-petition, finding that only Richard's claim for attor- nonsuit. Under Texas Rule of Civil Procedure 162, a ney's fees survived the nonsuit. The court withdrew its plaintiff has an absolute, unqualified right to take a non- approval of the mediated settlement agreement, finding suit before she introduces all her [**6] evidence, as long the agreement void and unenforceable because it required as the defendant has not made a claim for affirmative performance of an illegal act. The court put its first two relief. See BHP Petroleum Co., Inc. v. Millard, 800 rulings in writing by order signed the same day as the S.W.2d 838, 840 (Tex. 1990); General Land Office v. Oxy hearing. U.S.A., Inc., 789 S.W.2d 569, 570 (Tex. 1990); Greenberg v. Brookshire, 640 S.W.2d 870, 871 (Tex. 1982) (per After the hearing, Richard filed a request to enforce curiam). The trial court's refusal to grant a nonsuit in the the terms of the mediated settlement agreement, except absence of a defendant's claim for affirmative relief vio- for the allegedly illegal provision. In the meantime, Shivi lates a ministerial duty and can be corrected by manda- filed an intervention seeking to establish paternity, con- mus. See Quanto Int'l Co., Inc. v. Lloyd, 897 S.W.2d 482, servatorship and support of the second child. After the (Tex. App.--Houston [1st Dist.] 1995, orig. pro- trial court signed an order setting aside the entire mediated ceeding). Similarly, the trial court's reinstatement of a settlement agreement, Richard filed this petition for writ case after the court has lost jurisdiction because of a of mandamus. 2 nonsuit may also be reviewed by [*310] mandamus.

See id. (citing Johnson v. Harless, 651 S.W.2d 259, 260 Luckmi objects to the documents included in (Tex. 1983). Neither of these situations is present here. the appendix to the petition. These were the only documents provided in support of mandamus re- The trial court did not refuse to grant a nonsuit nor lief. A petition for writ of mandamus must contain did it attempt to reinstate the case without jurisdiction to an appendix, which must include "a certified or do so. Instead, the court merely refused to consider sworn copy of any order complained of, or any Richard's counter-petition for divorce. We can see no other document showing the matter complained reason to remedy the court's ruling by mandamus [**7] of." See TEX. R. APP. P. 52.3(j). The orders of rather than by an appeal. The requirement that a person which Richard complains are included in the ap- seeking mandamus relief establish the lack of an appellate pendix and appear to be signed by the trial court, remedy is a "fundamental tenet" of mandamus practice. but are not file-stamped. The verification of See In re Masonite Corp., 42 Tex. Sup. Ct. J. 789, 793 ( Richard's counsel states only "that the pleadings June 17, 1999 ) (J. Baker dissenting) (and cases cited contained in the appendix are true and correct therein). An appellate remedy is not inadequate merely copies." While the verification makes no mention because it may involve more expense or delay than ob- of "orders, motions or other documents," we con- taining mandamus. See id. Although, on rare occasions, strue "pleadings" in this instance to include all the exceptional circumstances may justify mandamus relief documents in the appendix. despite the presence of a generally adequate appellate remedy, such circumstances do not exist when a trial [**5] MANDAMUS court's ruling is merely incidental to the trial process and does not permanently deprive a party of substantial rights.

Mandamus relief is available if the trial court violates See id. at 793. Furthermore, the mere fact that a trial a duty imposed by law or clearly abuses its discretion, court's erroneous order will result in an eventual reversal either in resolving factual issues or in determining legal on appeal does not mean that trial will be a "waste of issues when there is no adequate remedy at law. See judicial resources." See id. Rather, mandamus should Walker v. Packer, 827 S.W.2d 833, 839-40 (Tex. 1992). A Page 3 11 S.W.3d 305, *; 1999 Tex. App. LEXIS 9300, **

issue only in situations involving manifest and urgent a ministerial duty in this case. One of the two reported necessity and not for grievances to which other remedies cases addressing section 153.0071 of the Family Code may apply. See id. at 792. Because Richard neglects to holds that subsection (e) requires the trial court to enter explain why the court's ruling on his motion to reinstate judgment on a mediated settlement agreement that meets cannot be [**8] remedied by an appeal, we decline to the requirements of subsection (d). See Alvarez v. Reiser, address the court's ruling by mandamus. 958 S.W.2d 232, 234 (Tex. App.--Eastland 1997, writ denied). 3 In Alvarez, the husband sued the wife for di- Judgment on the Mediated Settlement Agreement vorce. 958 S.W.2d at 233. The wife answered and filed a cross-petition for divorce. See id. At mediation, the parties Richard also contends the trial court violated a min- reached a settlement agreement that complied with the isterial duty by refusing to enter judgment on the mediated requirements of section 153.071(d). See id. The trial court settlement agreement. Sections 6.602(b) and 153.0071(d) entered judgment on the mediated settlement agreement of the Family Code state that "a mediated settlement even though the wife had withdrawn her consent to the agreement is binding on the parties if the agreement: (1) agreement. See id. The wife appealed and the appellate provides in a separate paragraph that the agreement is not court affirmed, concluding that: (1) a party's unilateral subject to revocation; (2) is signed by each party to the withdrawal of consent does not negate the enforceability agreement; and (3) is signed by the parties' attorney, if of a mediated settlement [**11] agreement that complies any, who is present at the time the agreement is signed." with section 153.0071(d), and (2) "a separate suit for Section 157.0071(d) adds the requirement of "an under- enforcement of a contract is not necessary." Id. at 234. lined statement that the agreement is not subject to revo- cation." Finally, subsections (c) and (e) of these statutes 3 Spinks v. Spinks, 939 S.W.2d 229 (Tex. provide that "a party is entitled to judgment" on a medi- App.--Houston [1st Dist.] 1997, no writ) is the ated settlement agreement that meets the above require- only other reported case addressing section ments "notwithstanding Rule 11 . . . or another rule of 153.0071. In that case, the court held that a party law." could revoke a mediated settlement agreement that It is undisputed that the mediated settlement agree- did not comply with section 153.071(d). See id. at ment in the underlying case meets the requirements of 230. sections 6.602(b) and 153.0071(d). Relying on these Here, the issue is not whether Luckmi could revoke Family Code provisions, Richard argues that Luckmi her consent to the mediated settlement agreement, but could [**9] not revoke her consent to the agreement by whether the agreement itself was valid and enforceable. nonsuiting her divorce action and that the trial court vio- Notably, the lower court did not rule that Luckmi had lated a ministerial duty by refusing to enter judgment on revoked her consent to the mediated settlement agreement the agreement. Citing the noted arbitration case, Jack B. by taking a nonsuit. To the contrary, in consolidating the Anglin v. Tipps, 842 S.W.2d 266, 271-73 (Tex. 1992), two divorce actions, the court expressly stated that Richard also argues that without mandamus relief, he will Luckmi's nonsuit did not defeat the agreement. Instead of be deprived of the rapid, inexpensive alternative to liti- immediately entering judgment on the mediated settle- gation provided by the Family Code. We need not com- ment agreement, however, the trial court reviewed [**12] pare mediated settlement agreements under the Family the agreement and concluded it was void.

Code to arbitration agreements. Instead, we conclude that Richard lacks an adequate remedy from the trial court's Neither the plain language of the Family Code nor the ruling because he will be deprived of the settlement's holding in Alvarez foreclose the court's action. First, as benefits if forced to expend further time and resources noted, sections 6.602 and 153.0071 of the Family Code litigating a suit that may have been settled. See, e.g., provide that "a party is entitled to judgment" on a medi- Mantas v. Fifth Court of Appeals, 925 S.W.2d 656, 659 ated settlement agreement if certain requirements of those (Tex. 1996) (holding that relator who settled case on ap- statutes are met. Where, as here, the legislature has not peal lacked adequate remedy for appellate court's refusal defined the terms in the statute, we must apply their or- to abate appeal pending suit to enforce settlement dinary meaning. See In re Clark, 977 S.W.2d 152, 156 agreement); see also Harris County Appraisal Dist. v. (Tex. App.--Houston [14th Dist.] 1998, orig. proceeding).

Johnson, 889 S.W.2d 531, 533-34 (Tex. App.--Houston "Entitle" means in part "to grant a legal right to or qualify [14th Dist.] 1994, orig. proceeding) (mandamus [*311] for." See BLACK'S LAW DICTIONARY 553 (7th ed. is appropriate [**10] to compel a district judge to pro- 1999). That a party has a "right to" judgment, or "qualifies ceed to trial and judgment). for" judgment on a mediated settlement agreement does not deprive the court of discretion to review an agreement While we find the court's refusal to enter judgment on before entering judgment. Second, while Alvarez pre- the mediated settlement agreement is a proper subject for cludes a party from revoking consent to a mediated set- mandamus, we conclude that the trial court did not violate Page 4 11 S.W.3d 305, *; 1999 Tex. App. LEXIS 9300, **

tlement agreement that complies with section 153.0071, it court." See Lewis, 199 S.W.2d at 149. Here, the trial court does not hold that the court's duty to enter judgment on concluded from the facts before it that the settlement such an agreement is ministerial. A court's duty to enter agreement called for the performance of an illegal act. See judgment on a settlement agreement becomes ministerial TEX. PEN. CODE ANN. § 16.02(a)(1) (Vernon 1994) (" a only [**13] after it has first rendered judgment on that person commits an offense if he intentionally intercepts . . agreement. See In re Bland, 960 S.W.2d 123, 124 (Tex. . a wire, oral, or electronic communication").

App. Houston [1st Dist.] 1997, orig. proceeding) (J. O' At the hearing on Richard's motions, the court heard Connor dissenting) (citing Dunn v. Dunn, 439 S.W.2d uncontroverted testimony that Richard secretly tape rec- 830, 832 (Tex. 1969)); see also In the Marriage of Bea- orded Luckmi's phone conversations with various third vers, 648 S.W.2d 729, 732 (Tex. App.-- Amarillo 1983, no persons. 4 Aware of these tape recordings at the time of writ). Here, the trial court approved the settlement mediation, the parties put the following provision in their agreement, but never rendered judgment on the agree- settlement agreement: ment. See, e.g., S & A Restaurant Corp. v. Leal, 892 S.W.2d 855, 857-58 (Tex. 1995) (holding that approval of Husband ordered to deliver all tape recordings of a settlement does not necessarily constitute a rendition of Wife and transcripts and all copies thereof to Linda judgment in the absence of a clear intent to render judg- Marshall [husband's attorney] by 5:00 p.m., five days ment). As a [*312] result, the court had no ministerial [**16] after entry of decree. Attorneys to meet, inspect, duty to enter judgment and thus, did not violate such a and destroy all of same. Parties enjoined from dissemi- duty. nating or distributing a copy of tapes or transcripts.

Notwithstanding this legal conclusion, the facts of the Luckmi testified that after filing for divorce, underlying case demonstrate that the parties did not intend she discovered a recording device attached to a for the court to immediately enter judgment on the set- phone in the garage of the house where she and tlement agreement. Specifically, the mediated settlement Richard lived. She testified that the device also agreement expressly contemplates certain contingencies contained a tape of her conversations with others in connection with Shivi's intervention. It states that the including, her mother, Shivi, and friends. Luckmi court would likely require an [**14] intervention to testified that she was unaware of the recording resolve certain issues regarding the second child and that device or the tape and that she did not give per- entry of a decree would be delayed, and agreed temporary mission to anyone to record her conversations. orders entered while these issues were resolved. Thus, the Luckmi also testified that when she confronted facts of this case establish the trial court's discretion to Richard, he acknowledged installing the device review the agreement before entering judgment. Ac- and making the recordings. When Richard was cordingly, we hold that the trial court did not violate a questioned on this topic, his counsel invoked the ministerial duty by refusing to enter judgment on the Fifth Amendment on Richard's behalf and in- mediated settlement agreement. structed him not to answer.

Legality of the Mediated Settlement Agreement Taking into account that Shivi and others might urge authorities to bring criminal charges against Richard, the Finally, Richard contends the trial court clearly court concluded that this provision illegally required abused its discretion by setting aside the entire mediated [**17] the parties to destroy evidence in a potential settlement agreement on grounds of illegality. "A contract criminal proceeding brought at the instance of non-parties to do a thing which cannot be performed without violation to the settlement agreement. 5 Section 37.09(d)(1) of of the law" violates public policy and is void. See Lewis v. [*313] the Penal Code states that "a person commits an Davis, 145 Tex. 468, 199 S.W.2d 146, 148-149 (1947); see offense if the person knowing that an offense has been also Montgomery v. Browder, 930 S.W.2d 772, 778 (Tex. committed, alters, destroys, or conceals any record, App.--Amarillo 1996, writ denied). The rationale behind document or thing with intent to impair its verity, legibil- the rule is not to protect or punish either party to the con- ity or availability as evidence in any subsequent investi- tract, but to benefit and protect the public. See Mont- gation or official proceeding." TEX. PEN. CODE ANN. § gomery, 930 S.W.2d at 778; see also Plumlee v. Paddock, 37.09(d)(1) (Vernon Supp. 1999) (emphasis added). This 832 S.W.2d 757, 759 [**15] (Tex. App.-Fort Worth statute makes it a crime to alter or destroy evidence of a 1992, writ denied). Because of the presumption in Texas crime even before the commencement of a criminal pro- that contracting parties are knowledgeable of the law and ceeding. Richard argues the provision in question is legal contract accordingly, courts will generally leave the par- because it does not require immediate destruction of the ties as they find them. See id. Thus, "where the illegality tapes and correspondingly prohibits dissemination of does not appear on the face of the contract, it will not be them. The Penal Code does not provide a time after which held void unless facts showing its illegality are before the a person, knowing that an offense has been committed, Page 5 11 S.W.3d 305, *; 1999 Tex. App. LEXIS 9300, **

may legally destroy evidence. Richard contends, howev- Haby, 589 S.W.2d 521, 524 (Tex. App.--Austin 1979, writ er, that "if they waited until the statute of limitations ex- ref'd n.r.e.). The issue is whether the parties would have pired . . . the agreement would be fully and lawfully per- entered into the agreement absent the illegal parts. See formed." We reject the notion that once the statute of Rogers, 763 S.W.2d at 925; see also McFarland, 589 limitations on the state wire tap [**18] law runs, de- S.W.2d at 524. Therefore, we must determine the central struction of the tapes would no longer violate § and essential purpose of the settlement agreement.

37.09(d)(1), and, therefore, could not be characterized as Richard argues that the resolution of the various is- an illegal act. 6 Richard's argument incorrectly assumes sues related to divorce, not the destruction of the tapes, that the mere passage of time transforms an illegal act into was the essential purpose of the settlement agreement. In a legal one. The statute of limitations is an affirmative contrast, Luckmi argues that the destruction [*314] of defense; it does not bar prosecution for violation of a the tapes was the consideration for her release of claims statute. See Proctor v. State, 967 S.W.2d 840, 844 (Tex. against Richard and, thus, was an essential purpose of the Crim. App. 1998) (defense created by statute of limita- agreement. Given the structure of the settlement agree- tions is forfeited if not asserted before the guilt/innocence ment and its interrelated terms and provisions, we cannot stage of trial). An act prohibited by § 37.09(d)(1) does not say that the trial court acted without reference to guiding magically become legal upon the expiration of the statute rules and principles in concluding that the agreement is of limitations. While the running of the limitations period entire and indivisible. Because the court found part of the provides the accused with a potential defense to any consideration for the settlement [**21] agreement ille- prosecution for violation of the statute, it does not change gal, it was justified in finding the entire agreement void the nature or character of the act. For this reason, we are and unenforceable. Therefore, we find the trial court did unable to find that the trial court committed a clear and not abuse its discretion by declaring the entire agreement prejudicial error of law by declaring the settlement void and refusing to enforce it. agreement illegal and unenforceable based on its finding that the agreement, on its face, called for a violation of § Lastly, Richard argues that Luckmi is estopped from 37.09(d)(1). questioning the agreement's validity because she accepted a $ 1000 cash payment under its terms. A void contract These non-parties include Shivi. Under the cannot be rendered enforceable by estoppel. See Reyes v. settlement agreement, Richard agreed to release Storage & Processors, Inc., 995 S.W.2d 722, 725 n.3 Shivi of all claims, except for child support. (Tex. App.--San Antonio 1999, pet. filed) (holding that However, the release was conditioned on Shivi employee who accepted benefits of void agreement lim- releasing claims against Richard. iting worker's compensation benefits was not estopped [**19] from complaining about agreement). Thus, Luckmi is not We note that § 37.09(d)(1) applies to the de- estopped from questioning the agreement's validity. struction of evidence that might be used in "any Therefore, we find no clear abuse of discretion by the trial subsequent investigation or official proceeding" court in setting aside the entire agreement. and is not limited to a violation of the state wire tap laws. CONCLUSION Nevertheless, Richard argues the court abused its In conclusion, we recognize that there are competing discretion in refusing to eliminate any illegal provision public policy interests at stake here. On the one hand, and enforce the remainder of the settlement agreement. As courts are responsible for carrying out this state's policy of a general rule, where part of the consideration for an encouraging the peaceable resolution of disputes involv- agreement is illegal, the entire agreement is void if the ing the parent-child relationship through voluntary set- contract is entire and indivisible. See Montgomery, 930 tlement [**22] procedures. See TEX. CIV. PRAC. & S.W.2d at 778. The doctrine of severability is an exception REM. CODE ANN. §§ 154.002, 154.003 (Vernon 1997). that applies in circumstances in which the original con- On the other hand, public policy prohibits courts from sideration for the contract is legal, but incidental promises enforcing illegal contracts. See Lewis, 199 S.W.2d at 151; within the contract are found to be illegal. See id. In such a see also Montgomery, 930 S.W.2d at 778. Here, we are case, the court may sever the invalid provision and uphold unable to find the trial court violated the public policy the valid portion, provided the invalid provision does not encouraging settlements by refusing to enforce a settle- constitute the main or essential purpose of the agreement. ment agreement that it found contained an illegal provi- See Rogers v. Wolfson, 763 S.W.2d 922, 925 (Tex. sion. Accordingly, because the trial court neither violated App.--Dallas 1989, writ denied). Severability of the con- a duty imposed by law nor clearly abused its discretion by tract [**20] is determined by the intent of the parties as refusing to enter judgment on the mediated settlement evidenced by the language in the contract. See Mont- agreement, we deny mandamus relief. gomery, 930 S.W.2d at 778-79; see also McFarland v. Page 6 11 S.W.3d 305, *; 1999 Tex. App. LEXIS 9300, **

/s/ Kem Thompson Frost Petition Denied and Opinion filed December 16, 1999 Justice Page 1

In The Matter Of: OCA, INC, formerly doing business as Orthodontic Center of America; ORTHALLIANCE NEW IMAGE; ORTHODONTIC CENTERS OF TEXAS INC; PEDOALLIANCE INC; ORTHOALLIANCE, INC, a Delaware Cor- poration, Debtors; DOUG CROSBY, DDS, DONALD B DOAN, DDS, GLENWOOD JORDAN, DDS, ELGIN E WELLS; Plaintiffs-Appellees, OCA INC, A Delaware Corp; PEDOALLIANCE INC; Plaintiffs-Appellants; RICHARD R WOEHRLE, DDS, MS; MICHAEL M DILLINGHAM DDS PC, a Texas Professional Corpora- tion; MICHAEL M. DILLINGHANI, DDS; AUSTIN ORTHODONTIC SPECIAL- ISTS; ROBERT P. BUCK; BUCK ORTHODONTICES ASSOCIATES PC; STEPHEN N COLE; BAY AREA ORTHODONTICES PC, Plaintiffs-Appellees v. ORTHALLIANCE NEW IMAGE; ORTHONDONTIC CENTERS, OF TEXAS INC; Defendants-Appellants; DUDLEY M HODGKINS; DUDLEY M HODGKINS, DDS, MSD, PC, A Texas Professional Corp; WILLIAM R IZZARD; RUBY IZZARD DDS PC, Defendants-Appellee, ORTHOALLIANCE INC, a Delaware Corporation; Defendant-Appellant, RON RISINGER, D.D.S.; RON RISINGER, DDS PC, Movants -Appellees; ROBERT PACKARD; PACKARD ORTHODONTICS PA, Amicus Cu- riae No. 07-30430 UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT 552 F.3d 413; 2008 U.S. App. LEXIS 26509; 50 Bankr. Ct. Dec. 277

December 12, 2008, Filed PRIOR HISTORY: [**1] For MICHAEL M DILLINGHAM DDS PC, a Texas Appeal from the United States Bankruptcy Court for Professional Corporation, MICHAEL M DILLINGHAM, the Eastern District of Louisiana. DDS, AUSTIN ORTHODONTIC SPECIALISTS, Plain- Penny v. Orthalliance, Inc., 255 F. Supp. 2d 579, 2003 tiffs - Appellees: J David Forsyth, Sessions, Fishman & U.S. Dist. LEXIS 4719 (N.D. Tex., 2003) Nathan, New Orleans, LA; Peter Charles Forbes, Horo- witz Forbes LLP, Denver, CO. DISPOSITION: AFFIRMED.

For ROBERT P BUCK, BUCK ORTHODONTICS ASSOCIATES P C, STEPHEN N COLE, BAY AREA COUNSEL: For DOUG CROSBY, DDS, DONALD B ORTHODONTICS P C, Plaintiffs - Appellees: Bruce A DOAN, DDS, GLENWOOD JORDAN, ELGIN E Cranner, Michael H Pinkerton, David Phillip Curtis, Frilot WELLS, Plaintiffs - Appellees: William C Gambel, LLC, New Orleans, LA. Milling Benson Woodward, New Orleans, LA. For ORTHALLIANCE NEW IMAGE, For OCA INC, A Delaware Corp, PEDOALLIANCE ORTHONDONTIC CENTERS OF TEXAS INC, INC, Plaintiffs - Appellants: Robert John Clary, William ORTHOALLIANCE INC, a Delaware Corporation, De- L Foreman, Owens, Clary & Aiken, Dallas, TX; Warren fendants - Appellants: Robert John Clary, William L Horn, Heller, Draper, Hayden, Patrick & Horn, New Foreman, Owens, Clary & Aiken, Dallas, TX; Warren Orleans, LA. Horn, Heller, Draper, Hayden, Patrick & Horn, New Orleans, [**2] LA. Page 2 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 For DUDLEY M HODGKINS, DUDLEY M A. Woodworth, D.D.S.; Woodworth Orthodon- HODGKINS DDS, MSD, PC, A Texas Professional tics, P.A.. Lisa L. Kerns; Lisa Loomis Kerns, Corp, Defendants - Appellees: Kell Corrigan Mercer, D.D.S., P.C., a Texas Professional Corporation; Brown McCarroll, Austin, TX. William F. Terhune; William F. Terhune, D.M.D., P.C., a Texas Professional Corporation; and For WILLIAM R IZZARD, RUDY IZZARD DDS PC, Richard R. Woehrle, D.D.S., M.S. were dismissed Defendants - Appellees: William C Gambel, Milling as parties to this appeal before oral argument be- Benson Woodward, New Orleans, LA. cause they reached a settlement with OCA.

For RON RISINGER, D.D.S. R, RON RISINGER, DDS FACTS AND PROCEEDINGS [**4] BELOW PC, Movants - Appellees: Joseph Naus, Michael Allyn This case arises out of a dispute over various BSAs, Stroud, Wiener, Weiss & Madison, Shreveport, LA. which OCA had entered into with Orthodontists in the state of Texas. 2 According to the terms of the BSAs, OCA For ROBERT PACKARD, PACKARD ORTHODON- purchased or leased office space and purchased equip- TICS PA, Amicus Curiaes: Sean Joseph McCaffity, Ro- ment for each office. OCA was also responsible for billing chelle Hutcheson & McCullough, Plano, TX. patients, filing insurance claims, hiring nondental per- sonnel, setting dress codes, and managing a bank account JUDGES: Before GARWOOD, CLEMENT, and through which the dental practice's funds flowed. The ELROD, Circuit Judges.

Orthodontists were not authorized to withdraw funds from the operating account, so OCA periodically transferred OPINION BY: GARWOOD money from these accounts to pay the Orthodontists their compensation. In exchange, the Orthodontists agreed to OPINION work a minimum number of hours each week at the prac- [*416] GARWOOD, Circuit Judge: tice and not to perform orthodontic work outside that office. The Orthodontist would receive an hourly rate for Debtors-appellants OCA, Inc., formerly doing busi- seeing patients, and OCA would receive an hourly man- ness as Orthodontic Centers of America, Inc.; agement fee in addition to being reimbursed for its over- OrthAlliance New Image, Inc.; Orthodontic Centers of head. Profits were then split according to the respective Texas, Inc.; PedoAlliance, Inc.; and OrthAlliance, Inc. ownership interests of OCA and the Orthodontists. The (collectively "OCA") directly appeal the January 17, 2007 BSAs were to be in force for long periods of time, some interlocutory order of the bankruptcy court granting par- up to forty years, and their terms severely restricted the tial summary judgment and holding that the Business Orthodontists' ability to terminate [**5] or assign them.

Services Agreements or Management Agreements (col- lectively the "BSAs") that OCA entered with a number of OCA entered into contracts with orthodontists orthodontists and their professional corporations (collec- in many states, but this appeal only deals with tively the "Orthodontists) 1 were [**3] illegal under contracts between OCA and orthodontists prac- Texas law. We affirm. ticing in Texas.

1 The following dentists and professional cor- The Orthodontists entered this case at various points porations were parties to this appeal: Doug in the litigation stream. Appellee orthodontist Buck ini- Crosby, D.D.S.; Donald B. Doan, D.D.S.; Elgin E. tially brought suit against Orthalliance, Inc. in [*417] Wells; Dudley M. Hodgkins; Dudley M. Texas state court seeking an accounting and a declaration Hodgkins, D.D.S., M.S.D., P.C., a Texas Profes- that his BSA was void for illegality under Texas law. The sional Corporation; Lisa L. Kerns; Lisa Loomis case was removed to federal court and later transferred to Kerns, D.D.S., P.C., a Texas Professional Corpo- the United States District Court for the Northern District ration; William F. Terhune; William F. Terhune, of Texas on November 11, 2002. Appellee orthodontist D.M.D., P.C., a Texas Professional Corporation; Cole brought a similar suit that was eventually consoli- William R. Izzalrd; Rudy Izzard, D.D.S., P.C.; dated with Buck's case and others in Penny v. Richard R. Woehrle, D.D.S., M.S.; Michael M. OrthAlliance, Inc. ("Penny"), Case No. 3:01-CV-1569-N, Dillingham, D.D.S., P.C., a Texas Professional in the Northern District of Texas, in June 2004. 3 The Corporation; Michael M. Dillingham, D.D.S.; district court severed Cole's and Buck's cases from the Austin Orthodontic Specialists, Inc.; Robert P. Penny litigation in July 2005. OCA's filing for chapter 11 Buck; Buck Orthodontics Associates, P.C.; Ste- protection in the proceedings below in the Eastern District phen N. Cole; Bay Area Orthodontics, P.C.; Ron of Louisiana stayed Cole's and Buck's cases on March 6, Risinger, D.D.S.; Ron Risinger, D.D.S., P.C.; Don 2006. The bankruptcy court, however, lifted the stay for Page 3 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 the purpose of allowing the Northern District of Texas tify the bankruptcy court's January 17, 2007 order district court to rule on whether [**6] Buck's and Cole's for direct appeal with respect to Woodworth.

BSAs were void for illegality under Texas law. On No- vember 20, 2006, the district court for the Northern Dis- [*418] JURISDICTION trict of Texas held that the BSAs were void for illegality OCA directly appealed to this court the bankruptcy because they were nearly identical to the contracts in court's January 17, 2007 interlocutory order pursuant to Penny that were held to be illegal under Texas Occupation 28 U.S.C. § 158(d)(2). This statute was enacted to provide Code § 251.003(a)(4). The district court then transferred for direct review of bankruptcy court judgments, orders, the remainder of the case to the bankruptcy court for the or decrees by the applicable court of appeals in cases Eastern District of Louisiana. where the bankruptcy court or the district court certify that there is no controlling decision from the Supreme Court or See Penny v. Orthalliance, Inc., 255 F. Supp. circuit court, the case involves a matter of public im- 2d 579 (N.D. Tex. 2003). portance, there are conflicting precedents, or an immedi- Appellee orthodontist Izzard terminated his BSA in ate appeal may materially advance the progress of the April 2005, before OCA filed for bankruptcy. Appellees bankruptcy proceeding. 28 U.S.C. § 158(d)(2)(A)(i)--(iii). orthodontists Wells, Doan, Dillingham, Crosby, Jordan, If this certification is made, the applicable court of ap- Hodgkins, and Woodworth were still performing under peals has jurisdiction if it authorizes the direct appeal. Id. their respective BSAs when OCA filed for bankruptcy. § 158(d)(2)(A).

After filing for chapter 11 protection, OCA, as debtor On March 7, 2007, the bankruptcy court certified that in possession, commenced adversary proceedings in the this case met the requirements for direct appeal because it bankruptcy court against Hodgkins and Izzard seeking a involved a question of law on which [**9] there was no declaration that their BSAs were not void for illegality controlling decision by the Fifth Circuit or the Supreme under Texas law. Appellees orthodontists Doan, Crosby, Court, it involved a matter of public importance, and a Wells, and Dillingham brought adversary proceedings direct appeal would materially advance the progress of the seeking to have their BSAs declared void for illegality. In case. A panel from this court granted OCA's petition for a contested proceeding, appellee [**7] orthodontist leave to appeal under section 158(d). The only question is Woodworth filed a motion for summary judgment, which whether section 158(d)(2) permits this court to hear direct sought to have his BSA declared void for illegality. The appeals from interlocutory orders of bankruptcy courts. 5 bankruptcy court held a joint hearing to determine the legality of all of the Texas BSAs on January 10, 2007. At 5 Prior to the adoption of section 158(d)(2), this this hearing, the bankruptcy court announced from the court generally lacked jurisdiction to review in- bench that it was granting the Orthodontists' motions for terlocutory orders of bankruptcy courts. Prome- partial summary judgment and holding that the BSAs nade Nat'l Bank v. Phillips (In re Phillips), 844 were void for illegality under Texas law based on several F.2d 230, 231 (5th Cir. 1988). prior Texas federal district court rulings in similar cases.

The text of the statute grants the courts of appeals The bankruptcy court entered its Order Granting Partial "jurisdiction of appeals described in the first sentence of Summary Judgment on January 17, 2007. subsection (a)." Id. § 158(d)(2)(A) (emphasis added). The On January 19, 2007, OCA moved to have the first sentence of section 158(a) grants district courts ju- bankruptcy court certify its interlocutory judgment for risdiction over bankruptcy appeals from interlocutory direct appeal under 28 U.S.C. § 158(d)(2), and the Or- orders or decrees if granted leave by the district court. Id. thodontists moved to have the January 17, 2007 order § 158(a)(3). Since interlocutory orders are included in the made final. On March 7, 2007, the bankruptcy court first sentence of subsection (a) and all of the other juris- granted OCA's motion and certified that the requirements dictional prerequisites of section 158(d)(2) are met, this to directly appeal its January 17, 2007 order to the Fifth court has jurisdiction to hear OCA's [**10] direct appeal Circuit were present. It also denied the Orthodontists' from the bankruptcy court. 6 motions to make its earlier judgment final." 4 CA filed its petition for direct review of the bankruptcy court's inter- 6 Woodworth argues that his appeal is not locutory order with the Fifth Circuit on March; [**8] 16, properly before this court because the certification 2007. The petition was granted on May 15, 2007. for direct appeal of his case was not signed until March 9, 2007, which was more than 30 days after On March 9, 2007, the bankruptcy court sep- the judgment was entered on January 17, 2007. At arately denied Woodworth's motion to make his oral argument Woodworth argued that his case judgment final and granted OCA's motion to cer- was distinguishable from the other orthodontists because his was a contested proceeding, not an Page 4 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 adversarial proceeding, and his judgment is final.

Assuming arguendo that Woodworth is correct I. Standard of Review; Applicable Law and his judgment is final, his argument still fails When directly reviewing an order from a bankruptcy because a party may request certification for direct court, findings of fact are reviewed for clear error and appeal up 60 days after the entry of the judgment, conclusions of law are reviewed de novo. FED. R. order, or decree. 28 U.S.C. § 158(d)(2)(E). This 60 BANKR. P. 8013; Drive Fin. Servs., L.P. v. Jordan, 521 day limit applies regardless of whether the judg- F.3d 343, 346 (5th Cir. 2008). A lower court's grant of ment, order, or decree is final or interlocutory. summary judgment presents a question of law reviewed OCA received certification for direct appeal on de novo. Since all of the BSA's in this appeal involved the March 9, 2007, which is within 60 days of the practice of dentistry in Texas, Texas law governs their entry of the judgment or order to be appealed on enforceability. See Butner v. United States, 440 U.S. 48, January 17, 2007. Therefore, the appeal was 99 S.Ct. 914, 918, 59 L. Ed. 2d 136 (1979) ("Property timely filed. Additionally, Woodworth argued that interests are created and defined by state law. . [**13] . . his case was not properly included in OCA's peti- [T]here is no reason why such interests should be ana- tion for leave to appeal to the Fifth Circuit. After lyzed differently simply because an interested party is reviewing the record, however, we [**11] con- involved in a bankruptcy proceeding.") clude that OCA did properly include Woodworth in its petition for direct appeal, so this court does II. Are Corporations "Persons" for Purposes of Sec- have jurisdiction over his appeal. tion 251.003(a)(4) Since this is an appeal from an interlocutory order Legislation governing the operations of dentists is from the bankruptcy court regarding a question of law on codified in the Texas Occupations Code (the "Code"). which there is no controlling precedent, we will treat this When the Code was recodified in 1999, the legislature appeal essentially as we treat certified questions from added section 1.002, which provides that the "Govern- district courts. See 28 U.S.C. § 1292(b). ment Code (Code Construction Act), applies to the con- struction of each provision in this code except as other- DISCUSSION wise expressly provided by this code." Tex. Occ. Code § 1.002. The Texas Government Code defines the term The Texas Occupations Code prohibits a person from "person" to include corporations "unless the statute or practicing dentistry without a [*419] license. Tex. Occ. context in which the word or phrase is used requires a Code § 256.001. Texas defines practicing dentistry as different definition." Tex. Gov't Code § 311.005(2). engaging in any one of ten different activities. See Tex. Occ. Code § 251.003(a). In this case, the bankruptcy court Section 251.003(a) does not contain its own defini- granted the Orthodontists' motions for partial summary tion of "person," but nevertheless, OCA argues that the judgment and held that the BSAs between OCA and the term should not be read to include corporations. The basis Orthodontists were void for illegality because they ena- of its argument is that the recodification of the Code was bled OCA, which is unlicensed, to practice dentistry not meant to enact substantive change in the law and the without a licence by owning, maintaining, or operating a prior version of section 251.003(a)(4) did not itself ex- place of business in which it employed or engaged by pressly include corporations in its definition of person. contract someone else to practice dentistry. Tex. Occ. [**14] See Tex. Occ. Code § 1.001(a) (stating that the Code § 251.003(a)(4). 7 OCA argues that this ruling was revisions were not meant to make any substantive erroneous because it is a corporation and is hence not a changes). "person" under section 251.003(a)(4), [**12] the bank- The previous version of section 251.003(a)(4) pro- ruptcy court should have permitted the parties to use the vided that anyone who engaged in the following conduct severability clause in the BSAs to cure the BSAs' illegal- ity, and the bankruptcy court failed to consider whether an was engaged in dentistry: assignment of part of OCA's rights or obligations under "(4) Any one who owns, maintains or the BSAs to an affiliate would have rendered the BSAs operates any office or place of business legal. where he employs or engages under any [*420] kind of contract whatsoever, any Section 251.003(a)(4) provides "(a) For pur- poses of this subtitle, a person practices dentistry other person or persons to practice dentis- if the person: . . . (4) owns, maintains, or operates try as above defined shall be deemed to be practicing dentistry himself, and shall an office or place of business in which the person himself be required to be duly licensed to is employs or engages under any type of contract practice dentistry as hereinabove defined another o person to practice dentistry; . . . ." and shall be subject to all of the other Page 5 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 provisions of this Chapter, even though the corporation." Article 23(2) Revised Civil Statutes of person or persons so employed or engaged Texas, 1925, repealed by Acts 1985, 69th Leg. ch. 479, § by him shall be duly licensed to is practice 224. This provision was essentially replaced by the above dentistry as hereinabove defined." Tex. referenced provision of TEX. GOV'T CODE § 311.005(2), Rev. Civ. Stat. art. 4551a(4) (1935) (em- likewise enacted by Acts 1985, 69th Leg., ch. 479, § 1. phasis added) ("Article 4551a(4)"). See also, e.g., James N. Tardy Co v. Tarver, 120 Tex. 591, 39 S.W.2d 848, 850 (Tex. 1931) ("person" in Texas civil statute includes corporation under Article [**17] 23); OCA argues that the references to he, himself, and him Wyche v. Wichita Engineering Co., 374 S.W.2d 728, 732 limit the definition of "person" to natural persons. (Tex. Civ. App.-Dallas 1964, writ ref'd n.r.e.) (same); United States v. Texas Construction Co., 237 F.2d 705, OCA also notes that Article 4551a(4) was passed in (5th Cir. 1955) (same; not citing Article 23).

1935 along with an identical criminal statute, Tex. Penal Code art. 754a(4) (1935) ("Article 754a(4)"), which only Assuming arguendo that OCA's argument is correct, applied to natural persons. OCA argues that the [**15] we would have to determine how to apply recodified doctrine of in pani materia requires the civil statute and section 251.003(a)(4) [*421] when, on the one hand, the penal statute to be read in harmony because they were there is the general legislative directive that the recodifi- adopted by the same legislature regarding the same sub- cation was not meant to make substantive changes to the ject matter. See Garrett v. Mercantile Nat'l Bank at Dal- law, Tex. Occ. Code § 1.001(a), and, on the other hand, las, 140 Tex. 394, 168 S.W.2d 636, 637 (Tex. 1943); the current statutory definition of "person" includes cor- Braun v. State, 40 Tex. Crim. 236, 49 S.W. 620, 622-23 porations "unless the statute or context in which the word (Tex. Crim. App. 1899). Consequently, the civil statute or phrase is used requires a different definition." Tex. should be read to only apply to natural persons because Gov't Code § 311.005(2). When presented with a similar the criminal statute's application was limited to natural situation, the Texas Supreme Court held that a legislative persons. statement that an amendment did not make substantive changes to a law does not overcome the unambiguous One problem with this argument is that when these language of a recodified statute that the legislature enacts, statutes were passed Texas did not subject corporations to even if the language in the new statute does change the criminal liability. See Robert W. Hamilton, Corporate prior law. Fleming Foods of Tex., Inc. v. Rylander, 6 Criminal Liability in Texas, 47 TEX. L. REV. 60, 60 S.W.3d 278, 283-84 (Tex. 1999). In reaching this decision, (1968) (noting that Texas did not subject corporations to the Texas Supreme Court noted that if the [**18] general criminal prosecutions at that time); see also Linda C. statement that none of the changes made during the re- Anderson, Corporate Criminal Liability for Specific In- codification was allowed to overturn the current plain tent Crimes and Offenses of Criminal Negligence--The language in the statute, no citizen would be able to know Direction of Texas Law, 15 ST. MARY'S L.J. 231, 233 what the current law was without combing through vol- (1984) (stating that the Texas Penal Code was revised in umes of session laws. Id. at 284-85. That was deemed to 1974, and that revision incorporated many of Professor be an unacceptable result. Id. at 285. Given the holding in Hamilton's suggestions and imposed criminal liability on Rylander, the only remaining question would be whether corporations). Since Texas did not subject corporations to the current statutory language unambiguously includes criminal [**16] prosecution before 1974, the fact that corporations within the definition of person. As stated Article 754a(4) did not apply to corporations tells us little above, the Code's definition of person includes corpora- about whether Article 4551(a)(4), a civil statute, was tions unless the statute's text or context requires a different meant to apply to corporations. 8 definition. Tex. Gov't Code § 311.005(2). The text of the statute does not require a deviation for the general defi- Furthermore, Texas courts apply the doctrine nition because its wording does not refer exclusively to a of in pari materia to resolve contradictions be- natural person. Tex. Occ. Code § 251.003(a)(4). tween two statutes that cover similar subjects. S.

Pac. Co. v Sorey, 104 Tex. 476, 140 S.W. 334, 336 This construction is supported by another subsection (Tex. 1911). But it is not contradictory for a civil of the statute and a revisor's note. Following the definition sanction to be broader than a criminal sanction for of what constitutes practicing dentistry, the statute spe- the same conduct. cifically excludes a number of persons from that defini- tion. 9 Tex. Occ. Code § 251.004(a). In this section, Dental That still leaves OCA's argument that the previous Health Service Corporations incorporated under the Texas iteration of section 251.003(a)(4) did not apply to corpo- Non-Profit [**19] Corporation Act are specifically ex- rations. However, since at least 1925 it has been the law in cluded. Id. § 251.004(a)(8). 10 If corporations were not Texas that in civil statutes "unless a different meaning is "persons" under section 251.003(a), there would have apparent from the context" the word 'Person' includes a Page 6 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 been no reason for the legislature to specifically exclude F. Supp. 2d 579, 581-83 (N.D. Tex. 2003); Becka v. Or- these particular entities. Additionally, the section 251.003 thodontic Ctrs. of Am., Inc., No. 4:03-CV-80, 2005 U.S. revisor's note four comments that the previous version of Dist. LEXIS 46904, *10-11 (E. D. Tex. Mar. 31, 2005); section 251.003(a)(5) [Article 4551a section (5)] referred Buck v. OrthAlliance, Inc., No. 3:05-CV-1485-N, 2006 to a "person, firm, group, association, or corporation," but U.S. Dist. LEXIS 98128, *5 (N.D. Tex. Nov. 20, 2006); that was replaced with "person" because "under Section Turner v. OCA, Inc., No. M0-05-CV-091, 2006 U.S. Dist.

311.005(2), Government Code (Code Construction Act), LEXIS 98129, *11 (W.D. Tex. Dec. 5, 2006). 11 OCA or its 'person' is defined to include a corporation or any other subsidiaries were the defendants in each of those cases, legal entity. That definition applies to the revised law." and OCA has not argued that the BSAs at issue in this case Tex. Occ. Code § 251.003(a) revisor's note 4 (for the 1999 are materially different from those at issue in Penny, revision of Article 4551a into the Occupations Code). Becka, or Turner. A review of the record confirms that OCA argues that the revisor's note is inapplicable because their terms are Substantially similar. it refers to section 251.003(a)(5) (relating to dental ap- pliance fitting etc.), not section 251.003(a)(4). This ob- 11 The opinion in Becka was later vacated jection is misplaced, however, because "person" has the upon the agreement of the parties. Packard v. same meaning throughout section 251.003(a). OCA, Inc., No. 4:05-CV-273, 2007 U.S. Dist.

LEXIS 98064, *12 (E.D. Tex. Feb. 23, 2007) These exclusions were added in 2001, after (magistrate judge). [**22] Since the bankruptcy the recodification. court ruled on January 17, 2007, two other Texas Section 251.004(a)(8) provides: "(a) A per- federal district courts have held that other very son does not practice dentistry as provided similar BSAs, which are not a part of this appeal, [**20] by Section 251.003 if the person is: . . . (8) violated Texas law. Packard 2007 U.S. Dist. a Dental Health Service Corporation chartered LEXIS 98064, at *13-14; Orthodontic Ctrs. of under Section A(1), Article 2.01, Texas Tex., Inc. v. Wetzel, No. 1-06-CA-626-LY, slip op. Non-Profit Corporation Act (Article 1396-2.01, at 5-8 (W.D. Tex. Jul. 10, 2007); Vernon's Texas Civil Statutes); . . . ."

OCA does not directly dispute that the terms of the Since the plain language of the Code unambiguously BSAs enable it to practice dentistry under section includes corporations in its definition of "person," that 251.003(a)(4) . Instead, it argues that the BSAs do not run language must be given effect even if the previous version afoul of various regulations promulgated by the Texas of section 251.003(a)(4) did not apply to corporations. State Board of Dental Examiners. This argument, how- ever, is irrelevant, because the regulations cited by OCA [*422] III. Are the BSAs illegal were promulgated to define whether a "person" was Under Texas law, a contract is illegal, and thus void, "practicing dentistry" under section 251.003(a)(9), not if the contract obligates the parties to perform an action section 251.003(a)(4), of the Code. See Tex. Occ. Code § that is forbidden by the law of the place where the action 254.0011. 12 is to occur. Miller v. Long-Bell Lumber Co., 148 Tex. 160, 222 S.W.2d 244, 246 (Tex. 1949). Contracts are pre- 12 Section 251.003(a)(9) provides that sumptively legal, so the party challenging the contract carries the burden of proving illegality. Franklin v. "a person practices dentistry if Jackson, 847 S.W.2d 306, 310 (Tex. App.--El Paso 1992, the person: . . . writ denied). "When two constructions of a contract are (9) controls, influences, at- possible, preference will be given to that which does not tempts to control or influence, or result in violation of law." Lewis v. Davis, 145 Tex. 468, otherwise interferes with the exer- 199 S.W.2d 146, 149 (Tex. 1947). cise of a dentist's independent The bankruptcy court, relying on decisions from professional judgment regarding various federal district courts for the Northern, Eastern, the diagnosis or treatment of a and [**21] Western districts of Texas interpreting sim- dental disease, disorder, or physi- ilar BSAs, granted partial summary judgment in favor of cal condition; . . . ." the Orthodontists and held that the BSAs were illegal Section 251.003(a)(9) is mod- under Texas Occupation Code § 251.003(a)(4) because, ified by § 251.003(b) [**23] as written, they allowed OCA to practice dentistry without which provides: a license by owning, maintaining, or operating a place of business in which OCA engaged someone else in the "(b) The practice of dentistry practice of dentistry. See Penny v. Orthalliance, Inc., 255 under Subsection (a)(9) does not: Page 7 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 (1) require an entity to pay for IV. Severance services that are not provided for in OCA next argues that the bankruptcy court erred by an agreement; or holding that the BSAs were void for illegality because (2) exempt a dentist who is a they contained severability and modification clauses, so member of a hospital staff from the bankruptcy court should have severed or modified the following hospital bylaws, medical illegal portions of the BSAs in order to cure any defects staff bylaws, or established poli- instead of voiding them for illegality. [**25] To support cies approved by the governing its argument, OCA cites a case in which this court held board and the medical and dental that an indemnity agreement was not void for illegality staff of the hospital." merely because one provision of the agreement was ille- gal. Transamerica Ins. Co. v. Avenell, 66 F.3d 715, Section 254.0011 provides: 721-22 (5th Cir. 1995). The Orthodontists respond by (a) The board may adopt rules arguing that reformation is not applicable in this situation relating to the practice of dentistry because the portion of the contract that is illegal is the as described by Section main or essential purpose of the agreement, not merely an 251.003(a)(9) to prohibit a dentist incidental promise. See Williams v. Williams, 569 S.W.2d from engaging in contracts that 867, 871 (Tex. 1978). allow a person who is not a dentist We first note that in the proceedings below, OCA did to influence or interfere with the not raise this severability argument in its motion for par- exercise of the dentist's independ- tial summary judgment. It only raised this contention ent professional judgment. orally at the hearing to determine whether the BSAs were (b) Rules adopted by the board facially illegal, and at that time, OCA's position was that, under this subtitle may not pre- if the bankruptcy court held that the BSAs were illegal, it clude a dentist's right to contract should then hold an additional hearing, before certifying with a management service organ- the issue for appeal, to consider whether provisions could ization. Rules affecting contracts be severed to cure the illegality. In response, the bank- for provision of management ser- ruptcy court stated that it would not hold a "reformation vices apply the same to dentists hearing until some higher court decides whether they're contracting with management ser- illegal or not." OCA acquiesced [**26] to that decision, vice organizations and to dentists and never filed a motion to hold a reformation hearing. It otherwise contracting for man- is only on appeal that OCA argued that Texas law requires agement services. a court to consider severability before voiding a contract for illegality. However, this court generally does not consider arguments first raised on appeal. See Kinash v. Callahan, 129 F.3d 736, 739 n.10 (5th Cir. 1997). [*423] By failing to argue why it believes that the bankruptcy court's holding that the BSAs violated section Furthermore, while Texas law does allow a severa- 251.003(a)(4) was erroneous, OCA has failed to raise an bility clause to save a contract that contains illegal provi- issue [**24] that would merit reversing the bankruptcy sions, the existence of a severability clause does not court's judgment. Furthermore, given the pervasiveness of guarantee that a contract will always thus be saved from the involvement in the practice of dentistry that the BSAs illegality. Williams makes it clear that severability is only require OCA to engage in, the fact that every district court [*424] appropriate when the illegal provision is not an that has considered whether similar BSAs violate Texas essential part of the contract. 569 S.W.2d at 871. Even law has held that they were void for illegality, and the OCA's cited precedent acknowledges this limitation. longstanding tradition in Texas preventing [A> con- Avenell, 66 F.3d at 722 ("'[W]here the subject matter of demning <A] unlicensed individuals or corporations the contract is legal, but the contract contains an illegal (other than professional corporations in the relevant pro- provision . . . the illegal provision may be severed and the fession) from in substance owning a controlling equity valid portion of the contract enforced."' (quoting Pana- interest in the practice of a licensed learned health pro- sonic Co. v. Zinn, 903 F.2d 1039, 1041 (5th Cir. 1990)) fessional, see, e.g., Garcia v. Texas Board of Medical (emphasis added)). In this case, the illegal portions of the Examiners, 384 F. Supp. 434, 437-440 (W.D. Tex. 1974); BSA are not simply incidental provisions.

Flynn Bros. Inc. v. First Medical Associates, 715 S.W.2d As written, the [**27] BSAs create an interlocking 782, 784-85 (Tex. App.--Dallas 1986, writ ref'd n.r.e.), we set of obligations that required OCA to exercise consid- hold that the bankruptcy court did not err. erable control over the Orthodontists' practices. For in- Page 8 552 F.3d 413, *; 2008 U.S. App. LEXIS 26509, **; 50 Bankr. Ct. Dec. 277 stance, OCA conducted the financial and marketing ac- of section 251.003(a)(4). See Pan E. Exploration Co. v. tivity of the practices, and it maintained the facilities, Hufo Oils, 855 F.2d 1106, 1132-33 (5th Cir. 1988) equipment, and support personnel required to operate the (holding that Texas low permitted disregarding the cor- practices. The BSAs also stipulated how much each Or- porate form because the corporation was established thodontist was required to work, and greatly restricted [*425] to circumvent a statute); see also Flynn Bros., their ability to perform services outside of the BSAs. In Inc., 715 S.W.2d at 785 (holding that it was illegal to form exchange for these services, OCA charged a fee that was a corporation to avoid the Texas Medical Practice Act's tied to the profits of the practices. The BSAs provided restrictions against unlicensed persons practicing medi- little to no ability for the Orthodontists to oversee any of cine). Moreover, OCA has provided no legal basis to OCAs decisions related to their practice. Ultimately, the support its conclusion that since it could have assigned its Orthodontists were essentially only left with control over obligations, the contracts are not void for illegality. diagnosing and treating their patients. Accordingly, the OCA cites an Illinois case in which a court rejected a subject matter of the agreement runs afoul of section claim that a contract was void for illegality because the 251.003(a)(4)'s prohibition of unlicensed persons from contract had been assigned and the assignment cured the owning, operating, or maintaining a premises at which illegality. Heller Equity Capital Corp. v. Clem Envtl. those persons also employ or engage another person to Corp., 232 Ill. App. 3d 173, 596 N.E.2d 1275, 1280, 173 practice dentistry.

Ill. Dec. 396 (Ill. App. 1992). [**30] Heller is distin- OCA has never attempted to identify any specific guishable, however, because in that case the curing as- provisions of the BSAs that could be severed to make the signment had already occurred. Heller, 596 N.E.2d at BSAs compliant with section 251.003(a)(4). [**28] 1280. Here OCA has not alleged that it has even attempted Instead, OCA repeatedly states that since the statute only to have any of its obligations under the BSA actually prohibits both owning, operating, or maintaining a prem- assigned to one of its affiliates. 13 ise and engaging someone else in the practice of dentistry, this court could sever provisions so that OCA would only 13 OCA has not attempted to make any as- be performing one of these functions. Even if that might signments to cure the defects in the BSAs even be possible (and we do not hold that it is), nevertheless though four separate federal district court judg- OCA's failure to identify specific provisions of the BSAs ments have voided similar BSAs for illegality to be severed, renders this court unable to determine under Texas law. whether such severance would cure the BSAs' illegality.

OCA also cites Texas cases, which stand for the As a result, we decline to reverse the judgment of the general proposition that a contract that could have been bankruptcy court on 'the basis of OCA's argument that performed in a legal manner should not be voided because provisions of the BSAs could be severed to cure the ille- it was performed in an illegal manner. See Lewis, 199 gality. S.W.2d at 149; Signal Peak Enters. of Tex., Inc. v. Bettina Invs., Inc., 138 S.W.3d 915, 921 (Tex. App.--Dallas 2004, V. Assignment pet. struck). Lewis and Signal Peak are also not on point because both of those cases dealt with contracts that were Finally, OCA contends that the bankruptcy court not facially illegal, meaning there was a way for the par- should not have held that the BSAs were void for illegal- ties to legally fulfill their obligations under the express ity because the BSAs grant OCA the power to assign its terms of the contract. In this case, the bankruptcy court obligations, without the consent of the Orthodontists, if correctly held that the BSAs, as written, cannot be per- the assignee is a controlled affiliate of OCA. The Ortho- formed legally by the current parties. dontists counter that OCA never raised this argument in the bankruptcy court, so it is waived. Without knowing [**31] which obligations would be assigned to which affiliates, it is impossible for this A thorough review of the record confirms that OCA court to determine whether the assigned BSA could be did not raise the issue of assignment in the bankruptcy performed legally. For this reason and because OCA court. At oral argument, OCA [**29] also admitted that failed to raise this argument below, we decline to reverse it had not raised the assignment issue below. Since this the judgment of the bankruptcy court on this ground. issue was not properly presented to the bankruptcy court, it cannot be raised now for the first time on appeal. See CONCLUSION Kinash, 129 F.3d at 739 n.10.

For the foregoing reasons, the judgment of the Additionally, it is unclear whether Texas corporate bankruptcy court is AFFIRMED. law would allow OCA to assign its obligations to one of its controlled affiliates in order to avoid the requirements Page 1

IN RE POLY-AMERICA, L.P., IND. AND D/B/A POL-TEX INTERNATIONAL, AND POLY-AMERICA GP, L.L.C., RELATORS NO. 04-1049 SUPREME COURT OF TEXAS 262 S.W.3d 337; 2008 Tex. LEXIS 770; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140; 156 Lab. Cas. (CCH) P60,669 January 25, 2006, Argued August 29, 2008, Opinion Delivered SUBSEQUENT HISTORY: Released for Publica- dissenting opinion. JUSTICE WILLETT did not partici- tion October 10, 2008. pate in the decision.

PRIOR HISTORY: In re Luna, 175 S.W.3d 315, 2004 OPINION BY: Harriet O'Neill Tex. App. LEXIS 8241 (Tex. App. Houston 1st Dist., 2004) OPINION [*344] ON PETITION FOR WRIT OF MAN- COUNSEL: For Poly-America, L.P., RELATOR: Ms. DAMUS Erica W. Harris, Susman Godfrey L.L.P., Houston, TX.; Mr. Craig T. Enoch, Winstead PC, Austin, TX.; Mr. In this retaliatory-discharge case, the employee's Adam Brian Ross, Poly-America, LP, Grand Prairie, TX. employment contract contains an arbitration agreement that requires the employee to split arbitration costs up to a For Mr. Johnny Luna, REAL PARTIES: Mr. G. Scott capped amount, limits discovery, eliminates punitive Fiddler, Law Office of G. Scott Fiddler, P.C., Houston, damages and reinstatement remedies available under the TX. Workers' Compensation Act, and imposes other condi- tions on the arbitration process. We must decide whether For Texas Association of Business, AMICUS CURIAE: any or all of these provisions are unconscionable and, if Mr. Jeffrey C. Londa, Ogletree Deakins Nash Smoak & they are, whether the contract's severability clause pre- Stewart, P.C., Houston, TX. serves the arbitration right. We hold that the trial court did not abuse its discretion in allowing the arbitrator to assess For Society for Human Resource Management Texas the unconscionability of the agreement's fee-splitting and State Council, AMICUS CURIAE: Ms. Audrey Elaine discovery-limitation provisions as applied in the course of Mross, Davis Munck Butrus, P.C., Dallas, TX. arbitration. We further hold that the arbitration agree- ment's provisions precluding remedies under the Workers' For The Texas Trial Lawyers Association, AMICUS Compensation Act are substantively [**2] unconscion- CURIAE: Mr. Kirk L. Pittard, Durham & Pittard, LLP, able and void under Texas law. However, those provi- Dallas, TX.; Mr. Peter M. Kelly, Law Office of Peter M. sions are not integral to the parties' overall intended pur- Kelly, P.C., Houston, TX. pose to arbitrate their disputes and, pursuant to the agreement's severability clause, are severable from the JUDGES: [**1] JUSTICE O'NEILL delivered the remainder of the arbitration agreement, which we con- opinion of the Court, in which CHIEF JUSTICE clude is otherwise enforceable. Accordingly, we condi- JEFFERSON, JUSTICE HECHT, JUSTICE WAIN- tionally grant the petition for mandamus.

WRIGHT, JUSTICE MEDINA, JUSTICE GREEN, and JUSTICE JOHNSON joined. JUSTICE BRISTER filed a I. Facts Page 2 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 Johnny Luna began his employment with Pol-Tex CODE § 451.001-.003. Claiming that Poly-America acted International, d/b/a Poly-America, L.P., in October 1998. with malice, ill will, spite, or specific intent to cause in- Upon his hiring, Luna signed an agreement to submit "all jury, Luna sought both reinstatement and the imposition claims or disputes" to arbitration. Approximately four of punitive damages. He additionally sought a declaratory years later, Luna signed an amended agreement to arbi- judgment that the arbitration agreement was unenforcea- trate that contained substantially the same provisions. ble [**5] because, among other reasons, its provisions Both the 1998 and 2002 agreements provide that they are violated public policy and were unconscionable. Luna governed by the Federal Arbitration Act (FAA). 9 U.S.C. submitted two affidavits -- his own, and that of an expert §§ 1-14. Additionally, both agreements contain a series of witness -- in support of his claims. Poly-America re- requirements for the arbitration between the parties. All sponded with a motion to compel arbitration which, after claims must be asserted within a maximum of one year a hearing, the trial court granted. from the occurrence of the event from which the claim Luna sought a writ of mandamus in the court of ap- arises. Fees associated with arbitration -- including but not peals, reasserting his argument that provisions of the limited to mediation fees, the arbitrators' fees, court re- arbitration agreement were substantively unconscionable. porter fees, and fees to secure a place [**3] for a hearing The court of appeals held that, in light of the fee-splitting -- are to be split between the parties, with the employee's provisions and limitations on remedies, the arbitration share capped at "the gross compensation earned by the agreement as a whole was substantively unconscionable.

Employee in Employee's highest earning month in the 175 S.W.3d 315, 318. Poly-America sought review in this twelve months prior to the time the arbitrator issues his Court. We hold that the arbitration agreement's provision award." Each side is permitted limited forms of discovery: that eliminates available remedies under the Workers' twenty-five interrogatories (including sub-parts), twen- Compensation Act is unenforceable, but we find that ty-five requests for production or inspection of documents provision severable from the arbitration agreement as a or tangible things, and one oral deposition of no more than whole and conditionally grant Poly-America's writ of six hours. Parties may not use written depositions or re- mandamus. quests for admission; the agreement prohibits discovery of either party's financial information except for the em- II. Standard of Review ployee's earnings if the employee seeks lost wages, back pay, and/or front pay; and all aspects of the arbitration are Mandamus is the proper means by which to seek re- deemed confidential. Finally, the arbitrator is stripped of view of an order compelling arbitration under the FAA. In authority to award punitive, exemplary, or liquidated re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480, 483 damages, or to order reinstatement of employment. (Tex. 2001). In In re Palacios, we recognized [**6] that it is "important for federal and state law to be as consistent In December 2002, Luna suffered a work-related as possible" in enforcement and review of provisions neck injury when he accidentally hit his head on a pipe. under the FAA. 221 S.W.3d 564, 565 (Tex. 2006) (per Poly-America's company doctor examined Luna and curiam) (quoting In re Kellogg Brown & Root, Inc., 166 diagnosed him with an acute cervical spine flexion injury.

S.W.3d 732, 739 (Tex. 2005)). Federal courts may not Luna subsequently filed a workers' compensation claim review orders compelling arbitration and staying litigation and began receiving [**4] physical therapy. Approxi- ("compel-and-stay orders") by interlocutory appeal. See 9 mately two weeks later, Luna returned to work on a re- U.S.C. § 16(b)(1) ("[A]n appeal may not be taken from an lease for light duty; however, Luna continued to suffer interlocutory order . . . granting a stay of any action under pain and utilized previously scheduled vacation time to Section 3 of this title."). Accordingly, as we noted in recover from his injury. After being warned by the com- Palacios, it would be inappropriate to exercise our own pany doctor that he needed to return to work and get off of mandamus power in a manner inconsistent with the fed- workers' compensation if he wanted to keep his job, eral courts' practice. See Palacios, 221 S.W.3d at 565. [*345] Luna returned to work without restrictions on Although mandamus review is generally available in January 10, 2003. Upon his return, Luna noticed that federal courts to review non-appealable interlocutory another person was already being trained for his position, rulings, mandamus is granted only in exceptional cases. and he claims that his supervisor began to harass him. One See generally Gulfstream Aerospace Corp. v. Mayacamas month later, Luna told his supervisor that his neck con- Corp., 485 U.S. 271, 288-90, 108 S. Ct. 1133, 99 L. Ed. 2d tinued to bother him and that he needed to return to the & n.13 (1988) (holding that, where a particular order company doctor; the next day that Luna was scheduled to is not appealable, mandamus is available and "will be work, he was fired. appropriate in exceptional cases"). As we acknowledged Luna filed this suit asserting claims for unlawful re- in Palacios, federal courts have applied this template to taliatory discharge under section 451.001 of the Labor [**7] orders that cannot be appealed under the FAA, Code ("the Workers' Compensation Act"). TEX. LAB. although they almost never grant mandamus relief. 221 Page 3 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 S.W.3d at 565-66 ("Even after Green Tree [Financial cumstances that the forum state would deem un- Corp.--Alabama v. Randolph, 531 U.S. 79, 121 S. Ct. 513, conscionable. Douglas, 495 F.3d at 1068. 148 L. Ed. 2d 373 (2000)], the Fifth Circuit has held that Although federal precedent in this area is not uni- federal mandamus review of an order staying a case for formly clear, it appears a federal court would be permitted arbitration may still be available if a party can meet a -- albeit not compelled -- to address the merits of the 'particularly [*346] heavy' mandamus burden to show mandamus arguments in this case. If such review were 'clearly and indisputably that the district court did not categorically unavailable and unconscionability deter- have the discretion to stay the proceedings pending arbi- minations the sole realm of arbitrators, as the dissenting tration.'") (quoting Apache Bohai Corp. v. Texaco China, Justice proposes, development of the law as to this B.V., 330 F. 3d 307, 310-11 (5th Cir. 2003)). This general threshold issue would be substantially hindered if not rule has been broadly applied to unappealable ancillary precluded altogether. Nevertheless, federal precedent interlocutory orders in proceedings under the FAA, see, counsels against granting relief unless the stringent re- e.g., Georgiou v. Mobil Exploration & Prod. Servs., Inc. quirements for mandamus are met. See Gulfstream, 485 U.S., 190 F.3d 538, 1999 WL 642871 at *3 (5th Cir. 1999) U.S. at 289. Federal courts grant mandamus only upon (dismissing appeal of order staying litigation in favor of demonstration of a "clear and [**10] indisputable" right arbitration proceeding in foreign forum, and denying to issuance of the writ: "First, the party seeking the issu- mandamus because plaintiffs failed to carry the "particu- ance of the writ must have no other adequate means to larly heavy burden" to warrant mandamus relief from attain the relief he desires. . . . Second, the petitioner must such an order); Cofab Inc. v. Phila. Joint Bd., Amalga- satisfy the burden of showing that his right to issuance of mated Clothing & Textile Workers Union, the writ is clear and indisputable. Third . . . the issuing AFL-CIO-CLC, 141 F.3d 105, 110 (3d Cir. 1998); [**8] court, in the exercise of its discretion, must be satisfied and appears to also apply to compel-and-stay orders under that the writ is appropriate under the circumstances." section 16(b)(1), see Douglas v. U.S. Dist. Court, 495 Cheney v. U.S. Dist. Court, 542 U.S. 367, 380-81, 124 S.

F.3d 1062, 1065 (9th Cir. 2007) (granting mandamus Ct. 2576, 159 L. Ed. 2d 459 (2004). Our own mandamus relief from compel-and-stay order); Manion v. Nagin, 255 standard is similar, requiring a demonstration that F.3d 535, 538-40 & n.4 (8th Cir. 2001) (dismissing appeal [*347] the trial court clearly abused its discretion by of various interlocutory orders, including order compel- failing to correctly analyze or apply the law and a deter- ling arbitration, and denying mandamus because Manion mination that the benefits of mandamus outweigh the had not made "any showing that he [was] entitled to such detriments such that an appellate remedy is inadequate. extraordinary relief"); McDermott Int'l, Inc. v. Under- See In re Prudential Ins. Co. of Am., 148 S.W.3d 124, writers at Lloyds Subscribing to Memorandum of Ins. No. 135-36 (Tex. 2004). Because arbitration is intended to 104207, 981 F.2d 744, 748 (5th Cir. 1993) ("This court provide a lower-cost, expedited means to resolve disputes, has recognized that [mandamus review of an order com- mandamus proceedings will often, if not always, deprive pelling arbitration] may be available [but] McDermott has the parties of an arbitration agreement's intended benefits failed to satisfy [the] demanding standard."). 1 when a compel-and-stay order is at issue; accordingly, courts should be hesitant to intervene. With these stand- While it is true that several of these cases ards in mind, we turn to the compel-and-stay [**11] pre-date the Supreme Court's decision in Green order in this case.

Tree, they do not pre-date the authority on which the Supreme Court relied in noting that an order III. Unconscionability and the Federal Arbitration Act compelling arbitration and staying rather than dismissing the underlying litigation "would not be Poly-America argues that the FAA's "strong pre- appealable." 531 U.S. at 87 n.2 (citing 9 U.S.C. § sumption" favoring arbitration applies in this case, and 16(b)(1)) (emphasis added). Unlike the present furthermore that the FAA preempts all state public-policy case, the two cases in which the courts denied grounds for finding the agreement to arbitrate unen- [**9] mandamus relief from compel-and-stay or- forceable. See In re R&R Personnel Specialists of Tyler, ders did not involve claims that enforcement of the Inc., 146 S.W.3d 699, 705 (Tex. 2004) (holding that the arbitration provisions would prevent the plaintiffs FAA preempts "any public policy underlying the Texas from vindicating important statutory rights. See workers' compensation statutes that is contrary to the Manion, 255 F.3d 535; McDermott Int'l, Inc., 981 enforceability of arbitration agreements"). Because nei- F.2d 744. In Douglas, the Ninth Circuit granted ther this presumption nor federal preemption applies in a mandamus relief, concluding that a choice-of-law state court's assessment of whether parties have entered provision in the arbitration agreement would not into a valid and enforceable agreement to arbitrate under allow enforcement of the agreement under cir- state contract law, we disagree.

Page 4 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 Section 2 of the FAA provides that arbitration damages or restricting other remedies under the Workers' agreements "shall be valid, irrevocable, and enforceable, [**14] Compensation Act is generally unenforceable save upon such grounds as exist at law or in equity for the under Texas law, an arbitration contract with these same revocation of any contract." 9 U.S.C. § 2 (emphasis limitations will also be unenforceable. added). Thus, an agreement to arbitrate is valid under the Nevertheless, under Texas law, as with any other FAA if it meets the requirements of the general contract contract, agreements to arbitrate are valid unless grounds law of the applicable state. In re AdvancePCS Health L.P., exist at law or in equity for revocation of the agreement. 172 S.W.3d 603, 606 (Tex. 2005) (citing First Options of The burden of proving such a ground -- such as fraud, Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S. Ct. unconscionability or voidness under public policy -- falls 1920, 131 L. Ed. 2d 985 (1995)). [**12] In determining on the party opposing the contract. See FirstMerit Bank, the validity of an agreement to arbitrate under the FAA, S.W.3d at 756. Thus, while we reject Poly-America's courts must first apply state law governing contract for- assertions that we must apply a presumption favoring mation. See 9 U.S.C. § 2; First Options, 514 U.S. at 944. arbitration in assessing whether the parties entered into an The United States Supreme Court has repeatedly enforceable agreement under Texas law and that the FAA emphasized that "state law, whether of legislative or ju- preempts Texas public policies that may make certain dicial origin, is applicable [to the determination of the contractual provisions generally unenforceable, Luna validity of an agreement to arbitrate] if that law arose to nevertheless bears the burden to establish that the chal- govern issues concerning the validity, revocability, and lenged provisions are unenforceable. enforceability of contracts generally." Perry v. Thomas, 482 U.S. 483, 493 n.9, 107 S. Ct. 2520, 96 L. Ed. 2d 426 IV. Arbitration and Unconscionability Under Texas (1987). Thus, courts "may not . . . invalidate arbitration Law agreements under state laws applicable only to arbitration provisions." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. A. General Standard 681, 687, 116 S. Ct. 1652, 134 L. Ed. 2d 902 (1996); see Agreements to arbitrate disputes between employers also Perry, 482 U.S. at 493 n.9 ("A state-law principle and employees are generally enforceable under Texas that takes its meaning precisely from the fact that a con- law; there is nothing per se unconscionable about an tract to arbitrate is at issue does not comport with [section agreement to arbitrate employment disputes and, in fact, 2].").

Texas law has historically [**15] favored agreements to However, the purpose and language of the FAA re- resolve such disputes by arbitration. See Advance PCS, quire only that agreements to arbitrate be placed "upon the 172 S.W.3d at 608; EZ Pawn Corp. v. Mancias, 934 same footing as other contracts." Doctor's Assocs., 517 S.W.2d 87, 90 (Tex. 1996); Cantella & Co. v. Goodwin, U.S. at 687 (quoting Scherk v. Alberto-Culver Co., 417 924 S.W.2d 943, 944 (Tex. 1996).

U.S. 506, 511, 94 S. Ct. 2449, 41 L. Ed. 2d 270 (1974)) Unconscionable contracts, however -- whether re- (emphasis added); see also H.R. REP. NO. [**13] lating to arbitration or not -- are unenforceable under 68-96, at 1 (1924) (noting that by enacting section 2, Texas law. A contract is unenforceable if, "given the Congress sought to place agreements to arbitrate "upon parties' general commercial background and the com- the same footing as other contracts, where [they] be- mercial needs of the particular trade or case, the clause long[]"). Perry makes clear that state courts may not involved is so one-sided that it is unconscionable under fashion special rules regarding the enforceability [*348] the circumstances existing when the parties made the of arbitration contracts per se. See Perry, 482 U.S. at 492 contract." FirstMerit Bank, 52 S.W.3d at 757; see also In n.9. Furthermore, once an enforceable contract to arbitrate re Halliburton Co., 80 S.W.3d 566, 571 (Tex. 2002) is found, there is a strong federal presumption in favor of ("[S]ubstantive unconscionability . . . refers to the fairness arbitration such that myriad doubts -- as to waiver, scope, of the arbitration provision itself."). Unconscionability is and other issues not relating to enforceability -- must be to be determined in light of a variety of factors, which aim resolved in favor of arbitration. See, e.g., In re FirstMerit to prevent oppression and unfair surprise; in general, a Bank, 52 S.W.3d 749, 752 (Tex. 2001); Prudential Sec. contract will be found unconscionable if it is grossly Inc. v. Marshall, 909 S.W.2d 896, 898-99 (Tex. 1995). one-sided. See DAN B. DOBBS, 2 LAW OF REMEDIES However, a state court must initially determine -- through 703, 706 (2d ed. 1993); see also RESTATEMENT (SE- the neutral application of its own contract law -- whether COND) OF CONTRACTS § 208, cmt. a (1979) ("The an enforceable agreement exists in the first instance, and determination that a contract or term is or is not uncon- whether "generally applicable contract defenses . . . may scionable [**16] is made in the light of its setting, pur- be applied to invalidate arbitration agreements without pose, and effect. Relevant factors include weaknesses in contravening" the policies of the FAA. Doctor's Assocs., the contracting process like those involved in more spe- 517 U.S. at 687. Thus, in this case, if a contract limiting cific rules as to contractual capacity, fraud, and other Page 5 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 invalidating causes; the policy also overlaps with rules unenforceable even though included in an agreement to which render particular [*349] bargains or terms un- arbitrate. See Gilmer, 500 U.S. at 33 ("[A]rbitration enforceable on grounds of public policy."). Although not agreements are enforceable, 'save upon such grounds as subject to precise doctrinal definition, see Sw. Bell Tel. exist at law or in equity for the revocation of any con- Co. v. DeLanney, 809 S.W.2d 493, 498 (Tex. 1991) tract.'") (quoting 9 U.S.C. § 2). To determine the permis- (GONZALEZ, J., concurring), unconscionability -- as sibility of restrictions on a particular worker's access to delineated by the above principles -- has been recognized statutory rights, we analyze the provisions of the actual and applied by this Court for well over a century. See, e.g., statute at issue; thus, to analyze the enforceability of the Flanagan v. Pearson, 61 Tex. 302, 307 (1884); Fowler v. various restrictions and waivers in the employment con- Stoneum, 11 Tex. 478, 493 (1854); Hemming v. tract at issue in this case, we turn to the retaliato- Zimmerschitte, 4 Tex. 159, 166 (1849); Luckett v. Town- ry-discharge provisions of the Texas Workers' Compen- send, 3 Tex. 119, 131 (1848). sation [**19] Act, TEX. LAB. CODE §§ 451.001-.003.

Whether a contract is contrary to public policy or C. Purpose and Structure of the Texas Workers' unconscionable at the time it is formed is a question of Compensation Act's Anti-Retaliation Provisions law. Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006). Because a trial court has no discretion to The Texas Workers' Compensation Act was enacted determine what the law is or apply the law incorrectly, its to protect Texas [*350] workers and employees. Fid. & clear failure to properly analyze or apply the law of Cas. Co. of N.Y. v. McLaughlin, 134 Tex. 613, 135 S.W.2d unconscionability constitutes an abuse [**17] of discre- 955, 956 (Tex. 1940). The Texas Legislature enacted the tion. See Walker v. Packer, 827 S.W.2d 833, 840 (Tex. original Workers' Compensation Act in 1913 in response 1992). to the needs of workers who, despite a growing incidence of industrial accidents, were increasingly being denied B. Arbitration and Statutory Rights recovery. Kroger Co. v. Keng, 23 S.W.3d 347, 350 (Tex. 2000); Tex. Workers' Compensation Comm'n v. Garcia, An arbitration agreement covering statutory claims is 893 S.W.2d 504, 510 (Tex. 1995). In order to ensure valid so long as the arbitration agreement does not waive compensation for injured employees while protecting the substantive rights and remedies the statute affords and employers from the costs of litigation, the Legislature the arbitration procedures are fair, such that the employee provided a mechanism by which workers could recover may "effectively vindicate his statutory rights." In re from subscribing employers without regard to the work- Halliburton, 80 S.W.3d at 572. Federal courts, analyzing ers' own negligence, see Kroger, 23 S.W.3d at 351, while the enforceability of arbitration provisions relating to limiting the employers' exposure to uncertain, possibly federal statutory claims, have noted that such contracts are high damage awards permitted under the common law, not enforceable when a party is forced to "forgo the sub- see Reed Tool Co. v. Copelin, 689 S.W.2d 404, 407 (Tex. stantive rights afforded by the statute," as opposed to 1985). In light of the purposes of the Workers' Compen- merely "submit[ting] to resolution in an arbitral, rather sation Act as a whole, "[i]t is the settled policy of this than a judicial, forum." Mitsubishi Motors Corp. v. Soler State [**20] to construe liberally the provisions of the . .

Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S. Ct. . [l]aw, in order to effectuate the purposes for which it was 3346, 87 L. Ed. 2d 444 (1985). In the context of federal enacted." Huffman v. S. Underwriters, 133 Tex. 354, 128 claims, either an expression of federal intent to exclude S.W.2d 4, 6 (Tex. 1939) (citations omitted). As we have certain categories of claims from arbitration, see Gilmer v. recently noted, "[b]ecause we should liberally construe Interstate/Johnson Lane Corp., 500 U.S. 20, 26, 111 S. Ct. the Workers' Compensation Act in favor of the injured 1647, 114 L. Ed. 2d 26 (1991), or the excessive waiver of worker, a strained or narrow construction of [the Act] statutory rights, see Mitsubishi, 473 U.S. at 628, may would be improper. Moreover, it would be injudicious to render a particular dispute un-arbitrable. State courts, construe the statute in a manner that supplies by implica- bound by the FAA [**18] under the supremacy clause, tion restrictions on an employee's rights that are not found have more limited power, as the FAA preempts state laws in . . . [the] plain language." Kroger, 23 S.W.3d at 349. that specifically disfavor arbitration. Perry, 482 U.S. at 492 n.9; see Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, The Texas Workers' Compensation Act provides that (Tex. 1992) (holding that the FAA preempts state a subscriber to the workers'-compensation system may not statutes to the extent they are inconsistent with the FAA's "discharge or in any other manner discriminate against an purpose to require courts to compel arbitration when the employee because the employee has . . . filed a workers' parties have so provided in their contracts). compensation claim in good faith." TEX. LAB. CODE § 451.001-.001(1). The Legislature's purpose in enacting However, where a particular waiver of substantive section 451.001 was to protect persons entitled to benefits remedies or other provision of a contract is unconsciona- under the Act and to prevent them from being discharged ble -- independent of the agreement to arbitrate -- it will be Page 6 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 for seeking to collect those benefits. See Tex. Steel Co. v. 165, 167 (Tex. Civ. App.--Galveston 1939, writ dism'd) Douglas, 533 S.W.2d 111, 115 (Tex. Civ. App.--Fort ("[T]he courts will not enforce contracts which are either Worth 1976, writ ref'd n.r.e.). Since recovery [**21] of expressly or impliedly prohibited by the [Workers' benefits under the Workers' Compensation Act is the Compensation] Act."). exclusive remedy available to injured employees of sub- This case concerns the validity of a subscribing em- scribing employers, see TEX. LAB. CODE § 408.001(a), ployer's use of an agreement that, in the course of re- the availability of remedies for retaliatory discharge pro- quiring arbitration between the parties in work-related tects employees' exercise of their statutory rights to disputes, imposes a series of procedural and substantive compensation under the Act. See Padilla v. Carrier Air limits on the employee's rights. We must analyze the Conditioning, 67 F. Supp. 2d 650, 664 (E.D. Tex. 1999); challenged limitations in light of the policies underlying Mid-South Bottling Co. v. Cigainero, 799 S.W.2d 385, the Workers' Compensation Act, and the purposes of its (Tex. App.--Texarkana 1990, writ denied). In ac- anti-retaliation provisions, to determine whether they cordance with these principles, the anti-retaliation provi- improperly shift the cost of injury from a subscribing sions of the Act must protect employees even before they employer onto its employees in contravention of the Act's have actually filed a claim, because otherwise "the law provisions. Cf. Lawrence v. CDB Servs., Inc., 44 S.W.3d would be completely useless and would not accomplish 544, 550 (Tex. 2001) [**24] (noting that the agreements the purpose for which it was enacted. . . . [A]ll the em- did not "shift the risk of on-the-job injuries to the em- ployer would have to do in order to avoid the conse- ployees"); see also Gentry v. Superior Court, 42 Cal. 4th quences of the statute would be to fire the injured work- 443, 64 Cal. Rptr. 3d 773, 782, 165 P.3d 556 (Cal. 2007), man before he filed the claim." Tex. Steel Co., 533 S.W.2d cert. denied 552 U.S. 1296, 128 S. Ct. 1743, 170 L. Ed. 2d at 115.

541 (2008) (noting that under California law, when an "The decisions of this State do not look with favor employee is bound by a predispute arbitration agreement upon contracts waiving rights arising under the Work- to adjudicate nonwaivable statutory employment rights, men's Compensation Law." Huffman, 128 S.W.2d at 6. the arbitration agreement may not limit damages, dis- Such waivers affect not only the individual employee covery must be sufficient to arbitrate the claim, there must subject to the waiver, but also the public, which [**22] be a written arbitration decision, and the employer must bears the cost of the workers' compensation program. See pay all costs "unique to arbitration").

Holt v. Cont'l Group, Inc., 708 F.2d 87, 91 (2d Cir. 1983) ("A retaliatory discharge carries with it the distinct risk V. The Challenged Arbitration Provisions that other employees may be deterred from protecting their rights under the Act."). Therefore, we [*351] have A. Limitation of Remedies invalidated contracts that purport to relieve employers of The Workers' Compensation Act specifies that "[a] their obligations under the Workers' Compensation Act. person who violates section 451.001 is liable for reason- See James v. Vernon Calhoun Packing Co., 498 S.W.2d able damages incurred by the employee as a result of the 160, 162 (Tex. 1973) (noting that "[w]e are much im- violation," and that "[a]n employee discharged in viola- pressed with the idea that there is a large element of public tion of section 451.001 is entitled to reinstatement in the interest in the administration of [the Workers' Compen- former position of employment." TEX. LAB. CODE § sation Act]"); Hazelwood v. Mandrell Indus. Co., 596 451.002(a)--(b). We have previously explained that S.W.2d 204, 206 (Tex. Civ. App.--Houston [1st Dist.] "reasonable damages" are not limited to actual damages, 1990, writ ref'd n.r.e.) ("If . . . this balance [established by see Azar Nut Co. v. Caille, 734 S.W.2d 667, 669 (Tex. the Act] is tipped so that the employee's benefits under the 1987), but may include future damages, as well as exem- statute are substantially reduced, the clear intent of the plary or punitive damages when it is [**25] shown that legislature is thwarted."). We have likewise held unen- the employer acted with actual malice in retaliating forceable contracts that explicitly relieve employers of against the employee for filing a workers' compensation tort liability, relying either on common law prohibitions claim. See Cont'l Coffee Prods. v. Cazarez, 937 S.W.2d against such contracts, see Barnhart v. Kansas City M. & 444, 454 (Tex. 1996); Carnation Co. v. Borner, 610 O. Ry. Co. of Tex., 107 Tex. 638, 184 S.W. 176, 179 (Tex. S.W.2d 450, 454-55 [*352] (Tex. 1980). The arbitration 1916), or upon the Workers' [**23] Compensation Act, agreement in this case eliminates two types of remedies see Petroleum Cas. Co. v. Smith, 274 S.W.2d 150, 151 available under the anti-retaliation provisions of the (Tex. Civ. App.--San Antonio 1954, writ ref'd) (noting that Workers' Compensation Act, prohibiting the arbitrator "[t]he right to workmen's compensation is statutory, and from ordering reinstatement or awarding punitive dam- cannot be abridged by private agreements or special ap- ages. See TEX. LAB. CODE § 451.002 (providing for plications for employment"); Clevenger v. Burgess, 31 reinstatement and an award of reasonable damages). Luna S.W.2d 675, 678 (Tex. Civ. App.--Beaumont 1930, writ contends these limitations render the agreement uncon- ref'd); Tex. Employers Ins. Ass'n v. Peppers, 133 S.W.2d Page 7 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 scionable and unenforceable because they prevent him by conditioning employment upon waiver of the very from effectively vindicating his statutory rights in arbi- provisions designed to protect employees who have been tration, thus undercutting the basic assumptions of the the subject of wrongful retaliation.

FAA. See Gilmer, 500 U.S. at 28 (noting that claims under Our decision in Lawrence, 44 S.W.3d 544, is fully other federal statutes are appropriate for arbitration so consistent with this view. There, employees of a long as the litigant can effectively vindicate any statutory non-subscribing employer [*353] elected, after they rights). The court of appeals agreed with Luna. 175 were hired, to participate in an employer benefit plan that S.W.3d at 323-24. Although it noted other courts' deci- would provide injured employees with specified benefits sions upholding punitive-damages waivers, id. at 323, and in lieu of common law remedies. Id. at 545-46. We re- further noted that preclusion of statutory [**26] reme- fused to void the agreement on public-policy grounds, dies may not always portend unconscionability, id., the discerning "no clear legislative intent to prohibit agree- court held that the preclusion of remedies here interfered ments such as those presented." Id. at 545. We empha- with Luna's ability to bring his retaliatory-discharge claim sized that participation in the workers' compensation under the Workers' Compensation Act and thus weighed program is voluntary for employers in Texas, and that toward the contract's unconscionability, id. courts are ill equipped to weigh whether a Poly-America argues that the court of appeals' deci- non-subscribing employer's particular benefits plan would sion conflicts with Pony Express Courier Corp. v. Morris, undermine the purposes of the Workers' Compensation 921 S.W.2d 817, 822 (Tex. App.--San Antonio 1996, no Act. See id. at 551-53. 2 Our decision was specifically writ), and decisions of other courts indicating that limita- tailored to non-subscribing employers who elected not to tions of remedies are permissible, e.g., Inv. Partners v. participate in the workers' compensation program. Im- Glamour Shots Licensing, Inc., 298 F.3d 314, 318 n.1 (5th portantly, we distinguished cases involving contracts Cir. 2002). Because we view the anti-retaliation provi- imposed as a condition of employment, emphasizing that sions of the Workers' Compensation Act as a "[t]he distinction between an employment [**29] con- non-waivable legislative system for deterrence necessary tract that requires a prospective employee, as a condition to the nondiscriminatory and effective operation of the of the receipt or retention of employment, to agree to limit Texas Workers' Compensation system as a whole, we the employer's liability . . . and a voluntary occupational agree with Luna that the provisions eliminating key insurance program, in which the employee has the option remedies under the statute are unenforceable. to enroll . . . is decisive." Lawrence, 44 S.W.3d at 550 (quoting Brito v. Intex Aviation Servs., Inc., 879 F. Supp. An arbitration agreement covering statutory claims is 650, 654 (N.D. Tex. 1995)) (citing Clevenger, 31 S.W.2d valid so long as "the arbitration agreement does not waive at 678; Barnhart, 184 S.W. at 176)). substantive rights and remedies of the statute and the arbitration procedures are fair so that the employee may The Texas Legislature, exercising its poli- effectively [**27] vindicate his statutory rights." In re cy-making role, responded immediately and out- Halliburton, 80 S.W.3d at 572. "'[B]y agreeing to arbitrate lawed such plans. See TEX. LAB. CODE § a statutory claim, a party does not forgo the substantive 406.033(e). rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.'" This case presents just such a liability-limiting pro- Gilmer, 500 U.S. at 26 (quoting Mitsubishi, 473 U.S. at vision, imposed as a condition of employment, which we 628). In this case, Luna contends Poly-America acted suggested in Lawrence would violate public policy. See with actual malice in unlawfully discharging him, a claim id. Such waivers would allow subscribing employers to for which the Workers' Compensation Act allows punitive enjoy the Act's limited-liability benefits while exposing damages. See TEX. LAB. CODE § 451.002; Azar Nut Co., workers to exactly the sort of costs -- of injuries paid for 734 S.W.2d at 668. Permitting an employer to contractu- by the employee for fear of retribution for making a claim ally absolve itself of this statutory remedy would under- -- that the Act is specifically designed to shift onto the mine the deterrent purpose of the Workers' Compensation employer. The balance established by the Act is thus Act's anti-retaliation provisions. In creating the Texas "tipped so that the employee's benefits under the statute Workers' Compensation Act, the Legislature carefully are substantially reduced, [and] the clear intent [**30] of balanced competing interests -- of employees subject to the legislature is thwarted." Hazelwood, 596 S.W.2d at the risk of injury, employers, and insurance carriers -- in 206. As we have previously refused to enforce private an attempt to design a viable compensation system, all agreements that allow subscribing employers to reap the within constitutional limitations. See Garcia, 893 S.W.2d system's benefits while burdening employees with the at 521. Were we to endorse Poly-America's position and cost of injury, so too we find the provisions of the present permit enforcement of these remedy limitations, a sub- contract -- which substantively limit Poly-America's lia- scribing employer could avoid the Act's [**28] penalties bility for wrongful retaliation and thereby undermine the Page 8 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 deterrent regime the Legislature specifically designed to or cross-examination, which Poly-America failed to do; protect Texas workers -- void under Texas law. See Tex. consequently, the court of appeals based its ruling on the Steel, 533 S.W.2d at 115; Holt, 708 F.2d at 91. undisputed facts established by Luna's affidavits. Both parties cite Anglin, 842 S.W.2d at 269, to support their B. Fee-Splitting Provision respective positions. There, we defined the proper cir- cumstances under which a trial court should hold a full The arbitration agreements provide that, in the event evidentiary hearing on a motion to compel arbitration: of a claim, all fees related to arbitration -- including but not limited to mediation fees, the arbitrators' fees, costs of Because the main benefits of arbitration procuring a location for a hearing, and court reporter fees lie in expedited and less expensive dispo- -- will be split equally between the employer and the sition of a dispute, and the legislature has employee, with the employee's contribution capped at an mandated that a motion to compel arbitra- amount equal to "the gross compensation earned by the tion be decided summarily, we think Employee in Employee's highest earning month in the [**33] it unlikely that the legislature in- twelve months prior to the time the arbitrator issues his tended the issue to be resolved following a award." The court of appeals held that this provision full evidentiary hearing in all cases. We "weigh[ed] heavily toward a finding of substantive also envision that the hearing at which a [**31] unconscionability." 175 S.W.3d at 322. motion to compel arbitration is decided Poly-America argues that this was clear error: first, be- would ordinarily involve application of the cause the court of appeals improperly inferred that Luna terms of the arbitration agreement to un- could not afford likely arbitration costs based solely on disputed facts, amenable to proof by affi- subjective evidence and, second, because it failed to davit. With these considerations in mind, compare such costs to the [*354] expected costs of we hold that the trial court may summarily litigation. 3 Luna responds that it was Poly-America that decide whether to compel arbitration on failed to present evidence of the comparative cost of liti- the basis of affidavits, pleadings, discov- gation and that the evidence presented was sufficient to ery, and stipulations. However, if the ma- allow an objective determination that the likely costs of terial facts necessary to determine the issue arbitration were beyond Luna's financial means. We begin are controverted, by an opposing affidavit with the evidentiary challenge. or otherwise admissible evidence, the trial court must conduct an evidentiary hearing The Society for Human Resource Manage- to determine the disputed material facts. ment Texas State Council submitted an amicus brief supporting Poly-America's arguments, ar- guing that the court of appeals wrongfully failed to Id. Because the only facts Luna presented on the motion to compare Luna's alleged costs with the prospective compel were uncontroverted under this standard -- Luna's cost of litigation. The Texas Trial Lawyers Asso- affidavits accompanying his original petition were neither ciation likewise submitted an amicus brief sup- contradicted nor challenged in Poly-America's response -- porting Luna, arguing that unconscionability we believe the court of appeals acted properly in crediting should be determined by comparing "the general those facts on appeal. financial condition of the claimant's peer group" to estimated arbitration costs. Luna attached to his original petition his own affi- davit and that of an expert witness providing detailed 1. Evidentiary Challenge estimates of the likely cost [**34] of arbitration in Lu- na's case, and Luna's expected share under the agree- Poly-America claims that the court of appeals, by ment's capped fee-splitting provision based on his crediting [**32] Luna's factual allegations concerning monthly salary (approximately $ 3,300.00) as a his financial inability to share arbitration costs, improp- Poly-America supervisor. Luna described his anticipated erly applied a new evidentiary standard that will require share of the arbitration costs as "way more money than I all parties seeking to compel arbitration to engage in can afford," and averred that, if he [*355] had to pay expensive discovery whenever a resisting party submits such an amount to have his claim determined, he would be cursory and subjective evidence that arbitration costs are unable to pursue his claim against the company unless he "unaffordable." This evidentiary burden, Poly-America could find an attorney willing to pay those fees. Luna argues, is contrary to Texas law and policy that supports recounted that he had attempted to retain two attorneys, summary disposition of motions to compel arbitration. In but they had refused to represent him on a contingent-fee response, Luna contends the facts upon which the court of basis because of the arbitration agreement. appeals relied could have been controverted by affidavit Page 9 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 Poly-America did not dispute these facts but asserted must agree with Poly-America that the trial court did not legal arguments in its pleadings that the cost provisions, abuse its discretion in ordering arbitration in this case. as written or as applied, were not unconscionable under Courts across the country [**37] have universally Texas law. At the hearing on its motion to compel, condemned the use of fee-splitting agreements in em- Poly-America again asserted only legal arguments in ployment contracts that have the effect of deterring po- response to Luna's challenge to the cost-splitting provi- tential litigants from vindicating their statutory rights in sion. There is no indication in the record that the trial an arbitral forum. See Green Tree, 531 U.S. at 90-91. court discredited or otherwise viewed the facts recited in Some courts have gone so far as to find fee-sharing Luna's affidavits as insufficient; rather, on the basis of agreements unenforceable per se. See, e.g., Cole v. Burns Poly-America's legal arguments, the trial [**35] court Int 'l Sec. [*356] Servs., 323 U.S. App. D.C. 133, 105 granted the motion to compel. This disposition was con- F.3d 1465, 1483-85 (D.C. Cir. 1995), cited in Hallibur- sistent with our statements in Anglin in which we indi- ton, 80 S.W.3d at 572; Shankle v. B-G Maint. Mgmt. of cated that motions to compel should be decided summar- Colo., Inc., 163 F.3d 1230, 1233-35 (10th Cir. 1999); ily unless disputed issues of fact require a full evidentiary Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054, hearing. See id. 1062 (11th Cir. 1998). These courts reason that "an em- However, the court of appeals clearly differed from ployee can never be required, as a condition of employ- the trial court in its view of the law. It held that the trial ment, to pay an arbitrator's compensation in order to se- court's granting of the motion to compel -- in light of cure the resolution of statutory claims . . . . [T]his would Luna's averred inability to afford his likely arbitration surely deter the bringing of arbitration and constitute a de costs and the agreement's other limitations -- was an abuse facto forfeiture of statutory rights." Cole, 105 F.3d at of discretion. 175 S.W.3d at 318-20. In doing so, the court 1468; accord Shankle, 163 F.3d at 1235 ("Such a result of appeals properly credited the undisputed facts con- clearly undermines the remedial and deterrent functions tained in Luna's affidavits as to the total expected cost of of . . . anti-discrimination laws."). arbitration and Luna's anticipated share based upon his We agree that fee-splitting provisions that operate to pre-termination monthly income. Id. at 319-20. prohibit an employee from fully and effectively vindi- Poly-America contends the court of appeals improperly cating statutory [**38] rights are not enforceable. See ruled based on Luna's subjective, and thus practically Halliburton, 80 S.W.3d at 572. However, this Court joins incontrovertible, belief that he could not afford arbitra- the majority of other courts which -- though recognizing tion, which does not satisfy this Court's requirements of the same policy concerns articulated by courts holding "specific" evidence to support claims of unconscionably fee-splitting arrangements per se unconscionable -- re- expensive arbitration. See In re U.S. Home Corp., 236 quire some evidence that a complaining party will likely S.W.3d 761, 764 (Tex. 2007). However, the court of ap- incur arbitration costs in such an amount as to deter en- peals [**36] relied not solely upon Luna's belief but forcement of statutory rights in the arbitral forum. See upon his and his expert's specific monetary estimates, U.S. Home Corp., 236 S.W.3d at 764; FirstMerit Bank, 52 which provided objective support for Luna's uncontro- S.W.3d at 756-57. As federal courts have likewise recog- verted claim that arbitration costs would preclude his nized: pursuit of the lawsuit. See 175 S.W.3d at 319. The court of appeals did not, therefore, rely solely on subjective and [I]n some cases, the potential of incur- incontrovertible allegations. ring large arbitration costs and fees will deter potential litigants from seeking to 2. Unconscionability of Fee-Splitting Provisions vindicate their rights in the arbitral forum .

Poly-America alternatively challenges the court of . . . [I]f the fees and costs of the arbitral appeals' conclusion that the agreement's cost-allocation forum deter potential litigants, then that provisions favor a finding of unconscionability because forum is clearly not an effective, or even the court did not consider the relative costs that Luna adequate, substitute for the judicial forum . would likely incur if the case were litigated in court -- . . . [T]he burden of demonstrating that costs that, based on Poly-America's estimates, would incurring such costs is likely under a given greatly exceed the capped cost of arbitration -- and Luna set of circumstances rests, at least initially, failed to provide any evidence of the actual cost of arbi- with the party opposing arbitration. tration that he would bear. Although we have no doubt that some fee-splitting provisions may operate to dis- courage employees like Luna from seeking vindication of Morrison v. Circuit City Stores, Inc., 317 F.3d 646, their rights under the Workers' Compensation Act, we 659-60 (6th Cir. 2003); accord Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir. Page 10 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 2001); [**39] Rosenberg v. Merrill Lynch, Pierce, better situated to assess whether the cost provision in this Fenner & Smith, Inc., 170 F.3d 1, 16 (1st Cir. 1999). case will hinder effective vindication of Luna's statutory rights and, if so, to modify the contract's terms accord- Luna contends the magnitude of the fee he could ingly. See Halliburton, 80 S.W.3d at 572. We conclude incur under the arbitration agreement, which he estimates the trial court did not abuse its discretion in refusing to to be as high as $ 3,300, will prevent him from pursuing declare the contract's cost-splitting provision uncon- his claim. Poly-America counters that litigation costs scionable and nullify the arbitration agreement. would be much higher, and therefore the arbitration agreement's capped cost-splitting provision benefits the C. Discovery Limitations employee and cannot be unconscionable. It is true that in evaluating the enforceability of fee-splitting provisions, The 2002 agreement provides that each party may some courts take into account the relative costs of arbi- serve on the other a single set of twenty-five interrogato- tration versus litigation. See, e.g., Bradford, 238 F.3d at ries (including sub-parts) and one set of twenty-five re- n.5 (focusing upon "a claimant's expected or actual quests for production or inspection of documents or tan- arbitration costs and his ability to pay those costs, meas- gible things. Additionally, the agreement [**42] in- ured against a baseline of the claimant's expected costs for cludes limitations alleged by Luna to be unconscionable: litigation and his ability to pay those costs"). However, at (1) a limitation of each party to a single, six-hour deposi- this stage of the proceedings, much of this evidence is tion; (2) a prohibition on requests for admission; (3) a ban necessarily speculative, and thus counsels against a on inquiry into Poly-America's finances; and (4) a confi- court's ex ante interference with arbitration. dentiality provision requiring confidentiality of the parties and their attorneys regarding all aspects of the arbitration.

We do not doubt that arbitration costs might be so Luna contends these limitations make it virtually impos- high in a given case as to preclude access to the forum. sible for him to prove his claim of retaliatory discharge But "the 'risk' that [a claimant] will be saddled with and render the arbitration agreement unconscionable. [**40] prohibitive costs is too speculative to justify the invalidation of an arbitration agreement." Green Tree, 531 Although an issue of first impression in this Court, U.S. at 91. Luna has not demonstrated that the ability to several courts around the country have analyzed the en- pursue his claim in the arbitral forum hinges upon his forceability of similar arbitration provisions limiting par- payment of the estimated costs; to the contrary, depending ties' access to various forms of discovery. Applying a rule upon the circumstances, Luna may not have to bear any functionally equivalent to that used to analyze cost at all, and [*357] Poly-America has presented fee-splitting provisions, these courts refuse to enforce some evidence that the capped cost-splitting arrangement such limitations when adequate evidence is presented that may even benefit Luna. The fee-splitting provision in a plaintiff's ability to present his or her claims in an arbi- Luna's arbitration agreement caps his share of costs at "the tral forum is thereby hindered. See, e.g., Hulett v. Capitol gross compensation earned by Employee in Employee's Auto Group, Inc., No. 07-6151-AA, 2007 U.S. Dist. LEXIS highest earning month in the twelve months prior to the 81380, 2007 WL 3232283, at *4--*5 (D. Or. Oct. 29, time the arbitrator issues his award." (Emphasis added). 2007) (holding discovery restrictions that prohibited re- Luna, however, presented evidence of his "highest quests for admission or interrogatories [**43] and lim- monthly salary in the year preceding [his] termination ited parties to three depositions unconscionable because from the company," a period necessarily earlier than that they "serve to unreasonably withhold information from relevant under the arbitration agreement. The record plaintiff that would otherwise be available through dis- contains no fact-based estimation of Luna's wages in the covery, thus hindering her ability to present her claims in relevant time period and, thus, no evidence of his likely an arbitration forum"); accord Ostroff v. Alterra share of arbitration costs. Healthcare Corp., 433 F. Supp. 2d 538, 547 (E.D. Pa. 2006). Courts upholding arbitration provisions containing Just as we allow litigants who demonstrate an ina- discovery limitations have done so in recognition of the bility to pay costs to proceed with their claims in court, same principle, but determined that a particular [*358] however, we see [**41] nothing that would prevent party failed to provide adequate evidence that the provi- arbitrators from fairly adjusting employee cost provisions sions "prove insufficient to allow . . . claimants . . . a fair when necessary to allow full vindication of statutory opportunity to present their claims." Gilmer, 500 U.S. at rights in the arbitral forum. See TEX. R. CIV. P. 145. The 31; see, e.g., In re Cotton Yarn Antitrust Litig., 505 F.3d contract presented in this case specifically provides that 274, 286-87 (4th Cir. 2007); Amisil Holdings, Ltd. v. the arbitrator may modify unconscionable terms; if the Clarium Capital Mgmt., No. C06-05255MJJ, 622 F. cost provisions precluded Luna's enforcement of his Supp. 2d 825, 2007 U.S. Dist. LEXIS 69550, 2007 WL non-waivable statutory rights, they would surely be un- 2768995, at *4 (N.D. Cal. Sept. 20, 2007) ("[Claimant] conscionable for the reasons we have explained and the has not adequately demonstrated why arbitration under arbitrator would be free to modify them. The arbitrator is Page 11 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 the AAA rules would deny it a fair opportunity to present cause' standard to claims relating to Employee's claims its claims."). concerning his employment or separation therefrom" is substantively unconscionable because it prohibits, in a We agree with these courts that, where the underlying retaliatory-discharge case, inquiry into whether the em- substantive right is not waivable, ex ante limitations on ployer had a valid, nondiscriminatory reason for firing the discovery that unreasonably impede effective prosecution employee. Poly-America contends the contract cannot be of such rights [**44] are likewise unenforceable. read as Luna claims, and in fact does not [*359] pre- However, because the relevant inquiry depends upon the vent such an inquiry. We agree with Poly-America, and facts presented in a given case and the particular discov- with the court of appeals, that this prohibition does not ery limitations' effect upon the relevant statutory regime, operate as Luna asserts; rather, the prohibition simply we are doubtful that courts -- assessing claims and dis- emphasizes that the contract relates to at-will employ- covery limitations before arbitration begins -- are in the ment. See Montgomery County Hosp. Dist. v. Brown, 965 best position to accurately determine which limits on S.W.2d 501, 502 (Tex. 1998). Thus, the prohibition pre- discovery will have such impermissible effect. vents the arbitrator from substituting a "good cause" re- In this case, Luna's expert witness testified that in quirement for the "at will" standard. The provision does most employment-discharge cases the employer only not, however, prohibit inquiry into whether Poly-America needs to take the plaintiff's deposition, while the plaintiff improperly terminated Luna in retaliation for his filing of generally needs testimony from a number of witnesses to a workers' compensation claim. Because we read the disprove the employer's likely defense that termination provision merely to articulate an accepted rule of em- was based on poor performance. Additionally, the expert ployment contracts, and not [**47] to restrict a neces- stated, the employee will likely wish to depose additional sary inquiry into the motivations behind Poly-America's witnesses to show a pattern or practice of discrimination, termination of Luna in this case, we agree with the court whereas the employer typically has a ready pool of of appeals that the provision is not unconscionable. See In available employees and managers to assist in preparing re Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. for the arbitration. For these reasons, the expert con- 2006) (rejecting a claim that an arbitration provision was cluded, the arbitration agreement's discovery limitations substantively unconscionable where the challenged pro- "significantly reduce the plaintiff's ability to prevail in vision "effectively incorporate[d] established provisions arbitration, regardless of how strong a plaintiff's case of contract law"). [**45] is on the merits."

E. One-Year Limitations Period We agree that if the discovery limitations the arbi- tration agreement imposes operate to prevent effective The arbitration agreement includes a clause that re- presentation of Luna's claim they would be unenforcea- quires written notice of a claim to be filed within a ble. But at this point in the proceedings, without knowing maximum of one year from the events giving rise to an what the particular claims and defenses -- and the evi- arbitrable claim. Luna contends this provision uncon- dence needed to prove them -- will be, discerning the scionably shortens the two-year statute of limitations discovery limitations' potential preclusive effect is largely applicable to claims of retaliatory discharge. See Johnson speculative. The assessment of particular discovery needs & Johnson Med., Inc. v. Sanchez, 924 S.W.2d 925, 927 in a given case and, in turn, the enforceability of limita- (Tex. 1996). However, as Luna filed this case well within tions thereon, is a determination we believe best suited to the one-year period and thus suffered no prejudice from the arbitrator as the case unfolds. As with cost-sharing, this provision, it is immaterial to Luna's claims of sub- discovery limitations that prevent vindication of stantive unconscionability. non-waivable rights or "prove insufficient to allow [Luna] a fair opportunity to present [his] claims," Gilmer, 500 F. Lifetime Application U.S. at 31, would be unconscionable and thus not binding Finally, Luna argues that the arbitration agreement on the arbitrator, as the agreement in this case specifically unconscionably applies even to claims that may arise after acknowledges. At this point in the proceedings, though, Luna's employment with Poly-America [**48] has we cannot conclude that the evidence presented to the trial ended and which may have nothing to do with Luna's court compelled a finding that the discovery limitations employment. While we can imagine circumstances that were per se unconscionable. Thus, the trial court did not might present a closer question, Luna's claims here con- abuse its discretion. cern his employment and termination, the central focus of the agreement. We thus agree with the court of appeals D. Prohibition on Inquiry [**46] into "Good Cause" that this provision does not render the arbitration agree- Luna claims the arbitration provision that prohibits ment per se unconscionable. See 175 S.W.3d at 326. the arbitrator's ability "to apply a 'just cause' or 'good Page 12 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 VI. Severability Hoover Slovacek, 206 S.W.3d at 565 (citing RESTATE- MENT (SECOND) OF CONTRACTS § 208 (1981)).

The arbitration agreement in this case contains a Whether or not the invalidity of a particular provision severability clause, which provides as follows: affects the rest of the contract depends upon whether the remaining provisions are independent or mutually de- Should any term of this Agreement be pendent promises, which courts determine by looking to declared illegal, unenforceable, or uncon- the language of the contract itself. See John R. Ray & scionable, the remaining terms of the Sons, Inc. v. Stroman, 923 S.W.2d 80, 86 (Tex. Agreement shall remain in full force and App.--Houston [14th Dist.] 1996, writ denied) (citing effect. To the extent possible, both Em- Hanks v. GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex. ployee and Company desire that the Arbi- 1982)). The relevant inquiry is whether or not parties trator modify the term(s) declared to be would have entered into the agreement absent the unen- illegal, unenforceable, or unconscionable forceable provisions. See Patrizi v. McAninch, 153 Tex. in such a way as to retain the intended 389, 269 S.W.2d 343, 348 (Tex. 1954); see also City of meaning of the term(s) as closely as pos- Beaumont v. Int'l Ass'n of Firefighters, Local Union No. sible.

399, 241 S.W.3d 208, 215 (Tex. App.--Beaumont 2007, no pet.) (citing Rogers v. Wolfson, 763 S.W.2d 922, 925 (Tex. App.--Dallas 1989, writ denied)); [**51] Stroman, 923 Poly-America argues that, even if elements of its arbitra- S.W.2d at 86 (citing Frankiewicz v. Nat'l Comp. Assocs., tion agreement with Luna are unconscionable, arbitration 633 S.W.2d 505, 507-08 (Tex. 1982)). We have previously is nevertheless required because the unconscionable pro- allowed severance of illegal contract provisions where the visions are severable from the general agreement to arbi- invalid provisions were "only a part of the many recip- trate. 4 Luna [*360] contends the unconscionable pro- rocal promises in the agreement" and "did not constitute visions are integral to the entire [**49] contract and are the main or essential purpose of the agreement." Williams, therefore not severable. The court of appeals agreed with S.W.2d at 871.

Luna, stating that the fee-splitting and remedies-limitation provisions "together deprive Luna of his opportunity to The 2002 version of the arbitration agreement in this vindicate his claim in the arbitral forum" and concluding case is over five pages long and contains numerous pro- that "those provisions are integral to the purpose of the visions not challenged by Luna as imposing any uncon- agreement and cannot be severed." 175 S.W.3d at 328. scionable burdens: procedures for mediation, selection of The court of appeals came to this conclusion, it appears, a neutral arbitrator, filing of motions, and other general by identifying the fee-splitting and remedies-limitation provisions governing arbitration procedures. We agree provisions as weighing in favor of unconscionability "as a with Poly-America that the intent of the parties, as ex- whole," but the court did not identify any particular pro- pressed by the severability clause, is that unconscionable vision that, by itself, would defeat the agreement's pur- provisions be excised where possible. Furthermore, it is pose. See id. at 322, 324. We have determined, however, clear by the contract's terms that the main purpose of the that the remedies-limitation provisions are individually agreement is for the parties to submit their disputes to an unconscionable and void, and see no reason why they arbitral forum rather than proceed in court. See id. Ex- cannot be easily excised from the contract without de- cising the unconscionable provisions we have identified feating its underlying purpose. will not defeat or undermine this purpose, which we have upheld in the context of agreements to [**52] arbitrate The Court received briefs from amici curiae employment disputes. See AdvancePCS, 172 S.W.3d at the Texas Association of Business and the Society 608; EZ Pawn Corp., 934 S.W.2d at 90; Cantella & Co., for Human Resource Management Texas State 924 S.W.2d at 944.

Council, both of which argue that the court of appeals erred in refusing to sever the provisions it VII. Conclusion deemed unconscionable from the remainder of the We hold invalid, as substantively unconscionable and arbitration agreement. [**50] The brief submit- void, provisions of the parties' [*361] contract that ted by amicus curiae the Texas Trial Lawyers prohibit the award of punitive damages or reinstatement Association argues that such severance would be and thus inhibit effective vindication of Luna's retaliato- improper. ry-discharge claim in an arbitral forum. We further hold An illegal or unconscionable provision of a contract that the trial court did not abuse its discretion in allowing may generally be severed so long as it does not constitute the arbitrator to determine whether the fee-splitting the essential purpose of the agreement. See Williams v. agreement and discovery limitations -- as applied in the Williams, 569 S.W.2d 867, 871 (Tex. 1978); see also course of arbitration -- are unconscionable. Because we Page 13 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 find the invalid remedies-limitation provisions severable from Palacios is neither prudent nor appropriate for at from the agreement to arbitrate, which we conclude is least five reasons. otherwise enforceable, the trial court did not abuse its discretion in compelling arbitration. Accordingly, we 5 See, e.g., CSR Ltd. v. Link, 925 S.W.2d 591, conditionally grant the writ of mandamus. 597 (Tex. 1996) ("Because of the size and com- plexity of the asbestos litigation, the most prudent Harriet O'Neill use of judicial resources in this case is to permit a Justice preliminary resolution of the fundamental issue of personal jurisdiction by writ of mandamus.")

OPINION DELIVERED: August 29, 2008 (emphasis added); In re Dean, 527 F.3d 391, 396 (5th Cir. 2008) ("The decision whether to grant DISSENT BY: Scott Brister mandamus is largely prudential."); In re Atlantic Pipe Corp., 304 F.3d 135, 140 (1st Cir. 2002) DISSENT (concluding mandamus was "prudent under the JUSTICE BRISTER, dissenting. circumstances"); In re Chimenti, 79 F.3d 534, 539 (6th Cir. 1996) (noting availability of interlocu- The hard thing about granting mandamus relief is tory appeal was merely one of several factors af- knowing when to stop. This Court has tried over the years fecting court's "prudential [**55] considera- to set mandamus boundaries through various tests, all of tions" regarding issuance of mandamus). which soon generated exceptions, [**53] and most of 6 Cheney v. U.S. Dist. Court for Dist. of Co- which were met with objections that the "established" lumbia, 542 U.S. 367, 380-81, 124 S. Ct. 2576, boundaries of mandamus were being ignored. 159 L. Ed. 2d 459 (2004) (holding mandamus Only two years ago, we held in In re Palacios that should issue when there is (1) no other adequate mandamus review was available for "orders that deny remedy, (2) a "clear and indisputable" right, and arbitration, but not orders that compel it." 1 We noted that (3) "the writ is appropriate under the circum- this was a reversal of previous practice, 2 but was neces- stances"). sitated by the Supreme Court's 2000 opinion in Green First, Congress amended the Federal Arbitration Act Tree Financial Corp. v. Randolph, which said that orders in 1988 so that it "permits immediate appeal of orders compelling arbitration "would not be appealable" unless hostile to arbitration, . . . but bars appeal of interlocutory they included final dismissal of the case. 3 Today the orders favorable to arbitration." 7 Texas law is to the same Court comes full circle, saying once again that mandamus effect. 8 As the trial court's order here was favorable to review of orders compelling arbitration is "proper," arbitration, we should defer to the cost-benefit analysis though courts should be "hesitant" about it. 4 Apparently, already conducted by the federal and state legislatures. 9 so long as one expresses qualms, Palacios is a dead letter. We cannot simply substitute mandamus when interlocu- tory appeal is prohibited without running into serious 221 S.W.3d 564, 566 (Tex. 2006) (emphasis Supremacy Clause problems; 10 "[f]requent pre-arbitration added). review would inevitably frustrate Congress's intent to Id. at 565 (noting abrogation of Freis v. move the parties to an arbitrable dispute out of court and Canales, 877 S.W.2d 283, 284 (Tex. 1994)). into arbitration as quickly and easily as possible." 11 531 U.S. 79, 87 n.2, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000). 7 Green Tree Fin. Corp.-Ala. v. Randolph, 531 4 S.W.3d , . U.S. 79, 86, 121 S. Ct. 513, 148 L. Ed. 2d 373 Of course, firm rules governing mandamus are made (2000) (construing 9 U.S.C. § 16) (emphasis to be broken, as issuance of the writ is primarily a matter added). of judgment and prudence. 5 As the United States Supreme 8 See TEX. CIV. PRAC. & REM. CODE § Court said in 2004, mandamus is appropriate if a party 171.098; In re Palacios, 221 S.W.3d 564, 566 shows a clear right, [**54] no alternative remedy, and (Tex. 2006). that mandamus is "appropriate under the circumstances." 6 9 I [**56] n re McAllen Med. Ctr., Inc., 275 This test (especially the last prong) defies precise appli- S.W.3d 458, , 2008 Tex. LEXIS 456 (Tex. 2008) cation, but years of judicial effort have failed to produce a ("Although mandamus review is generally a mat- better one. As a result, reasonable judges will sometimes ter within our discretion, our place in a govern- [*362] disagree whether mandamus is "prudent" or ment of separated powers requires us to consider "appropriate under the circumstances," and sometimes also the priorities of the other branches of Texas decide differently in one case than the next. But departing government.").

Page 14 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 See U.S. CONST. art. VI, cl. 2 ("[T]he Laws arbitrators and foreclose judicial review of the details of of the United States . . . shall be the supreme Law the result. This also appears to violate the parties' agree- of the Land; and the Judges in every State shall be ment in this case, which authorized the arbitrator to ad- bound thereby, any Thing in the Constitution or dress unconscionability: Laws of any State to the Contrary notwithstand- ing."). Should any term of this Agreement be Perry Homes v. Cull, 258 S.W.3d 580, 587, declared illegal, unenforceable, or uncon- 2008 Tex. LEXIS 423 (Tex. 2008) (quoting Pres- scionable, the remaining terms of the ton v. Ferrer, 552 U.S. 346, , 128 S. Ct. 978, Agreement shall remain in full force and 169 L. Ed. 2d 917 (2008) and Moses H. Cone Mem effect. To the extent possible, both Em- 'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22, ployee and Company desire that the Arbi- 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983)) (internal trator modify the term(s) declared to be quotations omitted). illegal, unenforceable, or unconscionable in such a way as to retain the intended Second, the trial court ordered these parties to arbi- meaning of the term(s) as closely as pos- tration five years ago. Had mandamus proceedings not sible. intervened, this dispute would have long since been con- cluded. Surely the time and expense incurred arbitrating this case would have been less than that incurred in Telling the arbitrators in advance what legal rulings they mandamus review. And now that mandamus review is should make (as the Court does today) is an improper way concluded, the parties must go to arbitration anyway. to circumvent these restrictions.

Given our state's strong public policy favoring freedom of contract, 12 claims that a contract [**57] is unconscion- Fifth and finally, the Court decides an important able are asserted far more often than they are sustained. question in the abstract that the arbitration may render After today's decision, it is hard to see how any arbitration moot. The Court concedes that unconscionability of the cannot be stopped in its tracks by alleging fee-splitting and discovery-limiting clauses should be unconscionability. deferred to the arbitrator. But unconscionability of the remedy-stripping [**59] clause is just as fact-based, and Fairfield Ins. Co. v. Stephens Martin Paving, just as speculative until all the facts are arbitrated. The LP, 246 S.W.3d 653, 664 (Tex. 2008); Fortis fairness of such clauses is not as one-sided as the Court Benefits v. Cantu, 234 S.W.3d 642, 649 (Tex. suggests; many employees might actually prefer cash for 2007); Lawrence v. CDB Servs., Inc., 44 S.W.3d lost wages (and no appellate delays) rather than rein- 544, 553 (Tex. 2001). statement or a long shot at punitive damages. As the Court notes, several courts have held that such "limitations of Third, today's opinion is purely advisory; if an arbi- remedies are permissible." 16 Twice in 2003 the Supreme trator ignores it, there is little we can do. Both federal and Court declined to hold that a remedy-stripping arbitration state law require courts to enforce an arbitrator's decision, clause violates the FAA -- each time deferring the ques- no matter what it is, with very few exceptions. 13 The tion until after arbitrators had addressed it. 17 We should allowable exceptions concern extrinsic or procedural do the same here. matters like corruption, fraud, or refusing to hear evi- dence; 14 they do not include (as the Supreme Court just 16 S.W.3d at . held) disregarding the law, even if a legal error is "mani- See PacifiCare Health Sys., Inc. v. Book, 538 fest." 15 What is the benefit of mandamus review if the U.S. 401, 406-07, 123 S. Ct. 1531, 155 L. Ed. 2d resulting order can be ignored?

578 (2003) (holding that "since we do not know how the arbitrator will construe the remedial lim- See 9 U.S.C. §§ 9-11; TEX. CIV. PRAC. & itations" barring treble damages, "the proper REM. CODE §§ 171.087-171.088, 171.091. course is to compel arbitration"); Green Tree Fin.

14 Id. Corp. v. Bazzle, 539 U.S. 444, 454, 123 S. Ct. 15 Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 2402, 156 L. Ed. 2d 414 (2003) (remanding for U.S. 576, , 128 S.Ct. 1396, 1404, 170 L. Ed. 2d arbitrator to determine whether contracts prohib- (2008). ited class arbitration). [*363] Fourth, even if most arbitrators would We have never held (as the Court holds repeatedly comply with an appellate court's mandamus [**58] today) that an arbitration agreement is invalid unless an rulings, issuing them creates a hybrid procedure unknown employee can "effectively vindicate his statutory rights." to the arbitration acts. As already noted, those statutes 18 We [**60] did not say so in In re Halliburton Co. (as commit matters concerning the law and the merits to the Page 15 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 the Court's citations aver), where that phrase appears only salary payments pending arbitration); see also in a parenthetical describing an opinion by an intermedi- Cofab, 141 F.3d at 110 (involving temporary stay ate appellate court in Michigan, an opinion we neither of motion to enforce arbitration award pending approved nor adopted. 19 Nor does the Court's judgment NLRB review of related matter). comply with this new standard. Despite the remedy limits 24 See Adam Borstein, Arbitrary Enforcement: imposed here, an arbitrator could still award Johnny Luna When Arbitration Agreements Contain Unlawful years of future lost wages, which would certainly seem Provisions, 39 LOY. L.A.L. REV. 1259, 1275 to "effectively vindicate his statutory rights." Even more (2006) ("This combination of finding than the fee-splitting or discovery-limiting provisions, it is unconscionability and favoring public policy over simply too early to tell whether the remedy-stripping enforcement of the FAA has made the Ninth provisions will be unfair to Luna at all. Circuit more hostile towards unlawful arbitration provisions than any other federal circuit."); Mi- 18 S.W.3d at , , ,& . chael G. McGuinness & Adam J. Karr, Califor- 19 80 S.W.3d 566, 572 (citing Rembert v. nia's "Unique" Approach to Arbitration: Why This Ryan's Family Steak Houses, Inc., 235 Mich. App. Road Less Traveled Will Make All the Difference 118, 596 N.W.2d 208, 226 (Mich. Ct. App. 1999)). on the Issue of Preemption Under the Federal Arbitration Act, 2005 J. DISP. RESOL. 61, 91-92 Such an important and controversial question should (2005)("[T]he conclusion that California not be decided in such an offhanded and abstract way. We courts--and the Ninth Circuit--are imposing their should instead wait to see whether the arbitration [*364] own biases against arbitration is inescapable."); award makes such a decision necessary; "if it is not nec- Steven M. Warshawsky, Gilmer, the Contractual essary to decide more, it is necessary not to decide more."

20 Exhaustion Doctrine, and Federal Statutory Em- ployment Discrimination Claims, 19 LAB. LAW.

20 PDK Labs. Inc. v. U.S. D.E.A., 360 U.S. App. 285, 303 n.180 (2004) ("The Ninth Circuit con- D.C. 344, 362 F.3d 786, 799 (D.C. Cir. 2004) tinues to be hostile to mandatory arbitration (Roberts, J., concurring). agreements."); Dennis R. Nolan, Employment [**63] Arbitration After Circuit City, 41 The Court overlooks [**61] all these problems on BRANDEIS L.J. 853, 890 (2003) ("[D]espite the ground that mandamus "has been broadly applied" by Congress's broad endorsement of arbitration in the federal courts to review orders compelling arbitration. 21 FAA and the Supreme Court's repeated confirma- But the string citations that follow do not support that tion of that policy, many judges (not all of them on claim. Of the five cases cited, three predated Green Tree, the Ninth Circuit) remain deeply skeptical if not and a fourth did not involve a trial court order favorable openly hostile."); Hai Jiang, Do We Allow Con- to arbitration. 23 The single case granting mandamus relief tract Law to Administer Civil Rights Remedies? from an order favorable to arbitration was by the Ninth Casenote on Haskins v. Prudential Insurance Co., Circuit, the court widely recognized as the "most hostile," 2003 L. REV. MICH. ST. U. DET. C.L. 251, 260 "far to the left of center," 25 and "renegade" court in the (2003) ("The Ninth Circuit is the most hostile to country in employment arbitration cases. 26 Even so, arbitration of employment discrimination claims mandamus was granted in that case only because arbi- among the circuit courts . . . ."). trating the single class representative's case could moot 25 See Earl Greene III, Note, Armendariz v. the class action he had brought, wiping it out without Foundation Health Psychcare Services, Inc.: The appellate review. 27 In short, there is no "broad" consensus California Supreme Court Searches For a Middle for doing precisely the opposite of what Congress and the Ground, 1 J. AM. ARB. 105, 108-09 (2001) ("On Texas Legislature intended. a mandatory arbitration agreement enforcement continuum, the Ninth Circuit would be sitting far 21 S.W.3d at . to the left of center as it seems to be more con- Geourgiou v. Mobil Exploration & Prod. cerned with protecting the statutory rights of em- Servs., Inc. US, 190 F.3d 538 (5th Cir. 1999); ployees than toeing the line with the Supreme Cofab Inc. v. Phil. Joint Bd., Amalgamated Court.")

Clothing & Textile Workers Union, 141 F.3d 105 26 See Jennifer LaFond, Notes, The Private (3d Cir. 1998); McDermott Intern., Inc. v. Un- Enforcement of Public Laws in Armendariz v. derwriters at Lloyds Subscribing to Memorandum Foundation Health Psychcare Servs., 29 PEPP. L. of Ins. No. 104207, 981 F.2d 744 (5th Cir. 1993). REV. 401, 414 n.127 (2002) ("The Ninth Circuit Manion v. Nagin, 255 F.3d 535, 540 (8th [**64] is the renegade circuit with respect to . . .

Cir. 2001) [**62] (involving injunction to obtain Page 16 262 S.W.3d 337, *; 2008 Tex. LEXIS 770, **; 51 Tex. Sup. J. 1237; 28 I.E.R. Cas. (BNA) 140 [whether] employees can be compelled to arbitrate While appeal from arbitration awards is very limited, statutory claims."). that appeal is an adequate remedy unless the benefits of Douglas v. U.S. Dist. Court, 495 F.3d 1062, mandamus outweigh the costs. 29 Considering the costs 1068-69 (9th Cir. 2007). expended so far, I doubt Johnny Luna [**65] would consider them outweighed by getting the right to seek [*365] It is certainly true that leaving matters like reinstatement in arbitration (which employees rarely re- unconscionability to arbitrators will mean development of quest) and punitive damages (which they rarely get). the law is "substantially hindered," 28 but the same could Accordingly, I agree with the Court that the court of ap- be said of arbitration in all cases. It is hard to see the allure peals erred in reviewing and reversing the trial court's of a system in which decision-makers can ignore the law, order compelling arbitration. But I disagree that we have unless of course one is planning to ignore the law oneself. any place reviewing those matters either. To that extent, I Based on its popularity, few arbitrators apparently go that respectfully dissent. far. But even carefully selected judges and jurors make mistakes, and carefully selected arbitrators are surely no In re BP Products N. Am., Inc., 244 S.W.3d less fallible. Nevertheless, these are policy matters that 840, 845 (Tex. 2008); In re Prudential Ins. Co. of only Congress can address or amend; we cannot disregard Am., 148 S.W.3d 124, 136 (Tex. 2004). the express legislative limits on interlocutory review merely by calling it mandamus when we think the ques- Scott Brister tions are important and the issues well-briefed.

Justice 28 S.W.3d at . OPINION DELIVERED: August 29, 2008 Page 1 980 S.W.2d 462, *; 1998 Tex. LEXIS 152, **; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412

KELLEY-COPPEDGE, INC., PETITIONER v. HIGHLANDS INSURANCE COMPANY, RESPONDENT No. 97-0926 SUPREME COURT OF TEXAS 980 S.W.2d 462; 1998 Tex. LEXIS 152; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412 April 28, 1998, Argued November 12, 1998, Delivered DISPOSITION: [**1] Reverseed the court of ap- mitigate potential damage, and entered into agreements peals and rendered judgment for KCI. with Mobil and the adjoining landowner to clean up the soil in accordance with Texas Railroad Commission standards. Highlands eventually paid to repair the Mobil JUDGES: JUSTICE SPECTOR delivered the opinion of pipeline and for the lost oil. When KCI presented High- the Court, in which CHIEF JUSTICE PHILLIPS, JUS- lands with the cleanup costs, however, Highlands denied TICE ENOCH, JUSTICE ABBOTT and JUSTICE the claim.

HANKINSON joined. JUSTICE GONZALEZ filed a KCI then sued Highlands for a declaratory judgment dissenting opinion, in which JUSTICE HECHT, JUS- on Highlands's coverage obligations, breach of insurance TICE OWEN and JUSTICE BAKER joined. contract, and attorneys' fees. Both parties moved for summary judgment. Finding that the insurance contract's OPINION BY: ROSE SPECTOR pollution exclusion clause did not exclude KCI's cleanup costs, the trial court granted summary judgment for KCI OPINION and overruled Highlands's motion. The trial court later [*463] ON PETITION FOR REVIEW FROM granted KCI summary judgment on damages for $ THE COURT OF APPEALS FOR THE SECOND 435,000.

DISTRICT OF TEXAS The court of appeals reversed and rendered summary In this case, we consider whether Kelley-Coppedge, judgment for Highlands. 950 S.W.2d at 419. Relying on Inc. (KCI), an independent contractor, "occupied" the Tri County Service Co. v. Nationwide Mutual Insurance easement on which it was performing operations, thereby Co., 873 S.W.2d 719, 719 (Tex. App.--San Antonio 1993, invoking the pollution exclusion clause of a commercial writ denied), the court held that because KCI had the right general liability policy. The court of appeals held that KCI to be on the easement to perform operations, it occupied did occupy the easement and therefore rendered summary the easement for the purposes [**3] of the insurance judgment that KCI take nothing. 950 S.W.2d 415. We policy. 950 S.W.2d at 419. Because section f.(1)(a) of reverse and render judgment for KCI. KCI's policy excluded coverage for the release of pollu- tants from [*464] premises it "owned or occupied," the I court held that KCI could not recoup its cleanup costs from Highlands. Id. We granted KCI's petition for review While laying pipe along an easement, KCI, an oil and and now reverse and render judgment for KCI. gas pipeline contractor, inadvertently struck a Mobil Oil pipeline causing the release of 1600 barrels of crude oil.

II The spill damaged a third party's land upon which the easement was located. The issue we must resolve is whether the pollution exclusion clause contained in KCI's insurance policy with At the time, Highlands Insurance Co. covered KCI Highlands excluded coverage for KCI's cleanup costs. under a commercial general liability policy. [**2] The relevant portions of the pollution exclusion clause are After the spill, KCI notified Highlands, took steps to Page 2 980 S.W.2d 462, *; 1998 Tex. LEXIS 152, **; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412 subsections f.(1)(a), f.(1)(d), and f.(2)(a). Exclusion f.(1) of law for the court to decide by looking at the contract as of the policy excludes coverage for: a whole in light of the circumstances present when the contract was entered. Only where a contract is first de- "Bodily injury" and "property damage" arising out of termined to be ambiguous may the courts consider the the actual, alleged or threatened discharge, dispersal, parties' interpretation, and admit extraneous evidence to seepage, migration, release or escape of pollutants: determine the true meaning of the instrument. (a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or 907 S.W.2d at 520 (citations omitted). See also Heritage loaned to, any insured; Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996) (observing that when construing unambigu- *** ous instruments "we give terms their plain, ordinary, (d) At or from any premises, site or location on which [**6] and generally accepted meaning . . ."). We must any insured or any contractors or subcontractors working also attempt to give effect to all contract provisions so that directly or indirectly on any insured's behalf are per- none will be rendered meaningless. Universal C.I.T. forming operations: Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d 154, 158 (Tex. 1951); see also Michael Sean Quinn, Liability (i) if the pollutants are [**4] brought on or to the Insurance Contracts: A Primer, 34 TEX. J. BUS. L. 2, premises, site or location in connection with such opera- 19-20 (1997). We proceed with these principles as our tions by such insured, contractor or subcontractor; guide.

Exclusion f.(2) excludes coverage for: [*465] Each party argues an alternate meaning for Any loss, cost or expense arising out of any the term "occupy" as used in the policy. An ambiguity does not arise, however, merely because the parties ad- (a) Request, demand or order that any insured or vance conflicting contract interpretations. Grain Deal- others test for, monitor, clean up, remove, contain, treat, ers Mut. Ins. Co. v. McKee, 943 S.W.2d 455, 458 (Tex. detoxify or neutralize, or in any way respond to, or assess 1997). Only when, after applying the applicable rules of the effects of pollutants . . . . (emphasis added). construction, a contract term is susceptible of two or more This dispute turns on whether or not the term "occu- reasonable interpretations will the term be ambiguous. pied by" in the policy encompasses KCI's activities on the Glover v. National Ins. Underwriters, 545 S.W.2d 755, easement. Highlands contends that "to occupy" is simply 761 (Tex. 1977). We find no ambiguity in this contract. "to take up significant parts of an occupied space" or "to Highlands contends that the plain meaning of "to be there." KCI contends that something more than mere occupy" is "to take up space." Thus, KCI's mere presence presence is needed, and that Highlands's interpretation of on the easement constitutes "occupation" as contemplated section f.(1)(a) renders section f.(1)(d) meaningless and by the pollution exclusion clause. Because section f.(1)(a) the insurance contract ambiguous as a whole. excludes coverage for any pollutant [**7] discharge A from any premises the insured "occupied," KCI cannot recover its cleanup costs. In support of its definition of Initially, we note that we interpret insurance policies "occupy," Highlands cites Tri County, 873 S.W.2d at 720, in Texas according to the rules of contract interpretation. the only Texas case to consider this issue.

Balandran v. Safeco Ins. Co. of America, 972 S.W.2d 738, (1998); National Union Fire Ins. Co. v. CBI Indus., Inc., Tri County was a paving subcontractor working un- 907 S.W.2d 517, 520 (Tex. 1995); Forbau v. Aetna [**5] der contract to pave an H.E.B. parking lot. Tri County Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). In CBI, we began its operations in September 1990 and finished them set forth guidelines courts are to follow when interpreting in December 1990. After Tri County sprayed oil on the insurance contracts: parking lot, heavy rains washed the oil into a nearby creek. H.E.B. then removed the oil from the creek and The primary concern of a court in construing a writ- docked Tri County for the cost of cleanup. Tri County ten contract is to ascertain the true intent of the parties as claimed this loss under its commercial general liability expressed in the instrument. If a written contract is so (CGL) policy with Nationwide. Nationwide later denied worded that it can be given a definite or certain legal coverage, invoking a pollution exclusion clause identical meaning, then it is not ambiguous. Parol evidence is not to that at issue here. Tri County then sued Nationwide. admissible for the purpose of creating an ambiguity.

If, however, the language of a policy or contract is Tri County argued that it never "occupied" the parking lot subject to two or more reasonable interpretations, it is because it held no property interest in the site. After ambiguous. Whether a contract is ambiguous is a question holding that the clause was unambiguous, the court of appeals held that the plain, ordinary meaning of "occu- Page 3 980 S.W.2d 462, *; 1998 Tex. LEXIS 152, **; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412 pied" did not necessarily mean ownership, and was broad Highlands, the court of appeals, and the Tri County enough to encompass Tri County's operations. 873 court all rely on our decision in Hernandez v. Heldenfels, S.W.2d at 721. Highlands argues that we should [**8] 374 S.W.2d 196, 200 (Tex. 1963), to support their defini- reach the same conclusion as the Tri County court and tions of "occupy." They contend we set forth a definition hold that KCI "occupied" the easement. of "occupy" broad enough to cover the contractor's activ- ities in Tri County and the contractor's activities in the KCI, however, contends that accepting Highlands's case at hand. definition of occupy would render exclusion f.(1)(d) meaningless. KCI argues that if any presence, no matter In Heldenfels, however, we implied that an "occupi- how transitory, is occupancy under section f.(1)(a), then er" is one who has "exclusive control" of premises. See id. this section excludes all operations of the insured, in- at 198. We stated: cluding those performed by contractors or subcontractors, The thesis of the appellate court is that as Heldenfels regardless of whether the insured owns the property or was the occupier of the premises -- the roadway in ques- not. Thus, section f.(1)(d)'s provision excluding coverage tion -- and Hernandez had no business with Heldenfels for the insured's operations on another's land would be and was not engaged in furthering Heldenfels' interest in surplusage. In support of this argument, KCI cites United any way, he was necessarily a licensee. Had Heldenfels States Fidelity & Guaranty Co. v. B&B Oil Well Service, been entitled as a matter of right to an exclusive posses- Inc., 910 F. Supp. 1172 (S.D. Miss. 1995). sion of the premises as against the owner, this theory In that case, B&B, an oil well contractor, had con- might be tenable. However, as we view the record, there is tracted to rework some oil wells. A number of landowners [**11] no evidence that Southwestern, as the owner, on whose land the oil wells were located sued B&B al- granted to . . . Heldenfels an exclusive right. Heldenfels leging that the landowners' property had been contami- Brothers had the right to occupy such portions of the nated by pollutants from B&B's operations. USF&G, roadway as were necessary for them to use in carrying out which insured B&B under a CGL policy nearly identical the obligations which they had assumed as a subcontrac- to that between KCI and Highlands, sought a declaratory tor, but they did not have the right to bar the owner and its judgment that under the contracts of insurance issued to employees therefrom. . . . Both Heldenfels and Hernandez B&B, B&B [**9] had no coverage for the contamina- were using the roadway because the interests of South- tion. Id. at 1175. western as the owner required such use. Both, in a sense, were invitees of the owner and . . . each owes a duty to While the court ultimately held that another provision prevent injury to the other through negligence. excluded coverage, the court also held that because B&B was not an "occupier" of the premises, section f.(1)(a) of 374 S.W.2d at 198-99. In sum, we suggested that for a the insurance contract did not bar coverage. 910 F. Supp. contractor to be an "occupier" of premises, it must have an at 1178-81. As here, the insurer relied on Tri County in exclusive right of possession to that premises. arguing that the insured occupied the premises. However, the court distinguished the case from Tri County by In Heldenfels, however, the meaning of "occupied" framing the question before it as: "Does occasional, lim- was not at issue, and the passage that the Tri County court ited work performed by a subcontractor, such as B&B, at quoted was merely a recitation of the assumed fact that the a well site operated and controlled by another amount to subcontractor had "the right to occupy such portions of the occupancy?" Id. at 1178. Answering the question in the roadway as were necessary" for the performance of its negative, the court stated that "if any sort of occupancy, work. Thus, the Tri County court incorrectly stated that 'no matter how transitory or for whatever purpose,' were Heldenfels "articulated a definition" of "occupy." More- deemed sufficient to invoke subsection (a) of this pollu- over, the language [**12] quoted above suggests, like tion exclusion, 'the remaining subsections, (b) through B&B Oil Well Service, that we intended something more (d), would be meaninglessly superfluous.'" Id. (quoting than mere presence for a subcontractor to "occupy" Schumann v. New York, 160 Misc. 2d 802, 610 N.Y.S.2d premises.

987, 991 (Ct. Cl. 1994)). "In the court's view, . . . each Both parties cite Gregory v. Tennessee Gas Pipeline aspect of the 'occupancy' definition suggests something Co., 948 F.2d 203 (5th Cir. 1991), as support for their other than a transient, nonpossessory relation to the position. In Gregory, the city of Natchitoches, Louisiana, [**10] [*466] property. Subsection (a) is thus inap- created a lake to provide for the city's drinking water plicable." Id. (footnote omitted). Thus, B&B Oil Well supply. A gas company maintained a facility next to the Service held that a well contractor reworking a well was lake and allegedly discharged chemicals into the lake. As not an occupier because its presence was too transient and a result, several landowners sued the gas company and the nonpossessory to be occupancy. city. The city then filed a third-party complaint against its insurer, seeking coverage. Claiming that the city "occu- Page 4 980 S.W.2d 462, *; 1998 Tex. LEXIS 152, **; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412 pied" the lake under exclusion (a) (the same as KCI's "owned," "rented," and "loaned." In short, we agree with section f.(1)(a)) and was therefore excluded from cover- Gregory that to "occupy" means "to hold or keep for use," age, the insurer denied coverage. The city claimed that, and we conclude that KCI's interpretation of the word while it did own the bed of the lake, it did not own "the "occupy" in section f.(1)(a) is the only reasonable inter- waters, fish, flora, or fauna of the lake." Id. at 205. Thus, pretation. We therefore hold that section f.(1)(a) unam- the issue before the court was whether the city "occupied" biguously does not apply to exclude coverage for KCI's the lake as that term was used in the insurance contract. cleanup costs. 2 948 F.2d at 204-06.

2 Highlands also claims that exclusion f. is an Because the city "created the lake, owns at least a "absolute pollution exclusion." Nevertheless, the large portion of the bed, and maintains and uses the [**13] cases Highlands cites for support concern policies lake and its waters for a drinking water supply," the court with much broader pollution exclusion clauses. held that the city did occupy the lake. Id. at 207. The court See National Union Fire Ins. Co., 907 S.W.2d at defined "occupy" as "to keep or hold for use." Id. 1 (policies excluding coverage for the "dis- charge, dispersal, release or escape of pollutants, At least one state court's holding is in line with anywhere in the world" and "however caused and B&B Oil Well Service and Gregory. See C.O. whenever occurring") (emphasis added).

Falter, Inc. v. Crum & Forster Ins. Cos., 79 Misc. 2d 981, 361 N.Y.S.2d 968, 974 (Sup. Ct. 1974) Even the secondary authorities cited by ("Construed in its ordinary sense and given its Highlands indicate that coverage is available un- intended meaning, the word 'occupy' suggests . . . der exclusion f. in certain instances, including continued physical presence [on the premises ]. "off-site pollution releases." Most telling, how- This exclusion is intended to deprive an insured ever, is that in Highlands's own policy with KCI is from the benefit of coverage for damages it causes an endorsement entitled "Total Pollution Exclu- while 'occupying' the [premises]. Plaintiff's occa- sion." This endorsement is a substitute for exclu- sional trips to the [premises] to make minor im- sion f. in the policy and would exclude all pollu- provements do not suggest that it 'occupied' the tion coverage. However, by its own terms, the damaged property within the intent of the exclu- endorsement does not apply in the state of Texas. sion and at the time of the loss."). Because this endorsement does not apply in Texas, Highlands cannot claim that exclusion f. is an [*467] We agree with KCI that if the court of ap- absolute pollution exclusion clause. peals was correct that any presence, no matter how tran- sitory, constitutes occupancy under section f.(1)(a), then [**16] B [**14] section f.(1)(d) is rendered meaningless. Sub- Finally, Highlands argues that section f.(2)(a) ex- paragraph (a) applies to releases at or from premises plicitly excludes KCI from coverage for its cleanup costs. owned or controlled by the contractor. Subparagraph (d) Nevertheless, Highlands waived reliance on this portion broadens the scope of the exclusion to include releases at of the policy because it asserted its applicability for the or from premises owned by a third party at which the first time in its motion for new trial. McConnell v. contractor is performing operations, but only if the con- Southside Indep. Sch. Dist., 858 S.W.2d 337, 343 (Tex. tractor brings the pollutants onto the site. By negating 1993) (holding that an issue not presented in a response to coverage for a contractor's entire operations at a job site, a motion for summary judgment cannot later be raised on the court of appeals' interpretation leaves section f.(1)(d) appeal); City of Houston v. Clear Creek Basin Auth., 589 nothing to exclude. Under the court of appeals' interpre- S.W.2d 671, 676 (Tex. 1979). As a result, exclusion tation, there would be absolutely no reason to include (d) f.(2)(a) does not operate to exclude KCI from recovering since (a) already excludes all of the contractor's opera- its cleanup costs. We express no opinion on whether tions, whether or not the contractor owns or controls the KCI's costs would have been excluded had Highlands not premises on which it is performing operations. Under that waived reliance on this section. reading, a contractor's off-premises coverage is com- pletely eliminated.

III A reading that does give meaning to both provisions We hold that the term "occupied by" in this insurance is that section f.(1)(a) refers to operations on premises policy's pollution exclusion clause does not encompass owned or controlled by the contractor, while section KCI's operations on a third-party's premises. The provi- f.(1)(d) refers to operations taking place on a third-party's sion unambiguously excludes costs for pollution spillage premises. This reading is consistent with the plain, ordi- from or on the insured's own premises. We therefore nary, and generally accepted meaning of "occupied" when reverse the court of appeals and render judgment for KCI. [**15] read in context with the other terms in the clause, Page 5 980 S.W.2d 462, *; 1998 Tex. LEXIS 152, **; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412 Rose Spector py" actually supports Highland's position. In Gregory, the city did not have exclusive control over and use of the Justice lake, but others also used it for recreational purposes. See OPINION DELIVERED: November 12, 1998 948 F.2d at 204-05. Gregory supports the proposition that one may "occupy" a premises without owning or having DISSENT BY: RAUL [**17] A. GONZALEZ exclusive use of it.

This Court also misreads Hernandez v. Heldenfels, DISSENT 374 S.W.2d 196 (Tex. 1963), to suggest that in order for a JUSTICE GONZALEZ, joined by JUSTICE contractor to be an "occupier" of a premises, it must have HECHT, JUSTICE OWEN, and JUSTICE BAKER, dis- an exclusive right of possession to the premises. First, our senting. interpretation of the term "occupier" in Heldenfels applied only to premises liability actions, not to insurance cov- The Court concludes that an insured did not "occupy" erage. Second, not even in the context of premises liability the work site where it caused an oil spill, and therefore the law must an "occupier" of land actually "possess" the pollution exclusion provision in the insured's commercial land. One who "is entitled to exclusive control" of a general liability insurance policy did not preclude premises, even if not an owner, may be an "occupier" of [*468] coverage. I disagree and would affirm the judg- the land. See id. at 198. Third, just because one who has ment of the court of appeals. an exclusive right of possession or control of a property Natural Gas Pipeline Company of America ("NGP") may be deemed an "occupier" of the property does not contracted Kelley-Coppedge, Inc. ("KCI") to construct mean that the converse is true -- that one who does not pipelines for NGP. Their contract expressly obliged NGP have a right to exclusive possession or control of a prop- to "furnish right-of-way" as appropriate to KCI and spe- erty [**20] is not an occupier. Even so, while it per- cifically granted KCI "the right to conduct operations for formed its pipe-laying operations, KCI had what is tan- the construction of pipelines (gas, water, drain and sew- tamount to exclusive control through a contractual "right age) over a strip of ground fifty feet (50') in width." For a of way" on NGP's easement. period of no fewer than nineteen days, KCI placed The Court's reliance on C.O. Falter, Inc. v. Crum & workers and equipment on NGP's easement in Wise Forster Insurance Cos., 79 Misc. 2d 981, 361 N.Y.S.2d County. In the course of laying pipeline along this ease- 968 (Sup. Ct. 1974), and United States Fidelity & Guar- ment, KCI's workers punched a hole in a crude oil pipe- anty Co. v. B&B Oil Well Service, Inc., 910 F. Supp. 1172 line, causing the discharge of 1,600 barrels of crude oil at (S.D. Miss. 1995), is also misplaced. The C.O. Falter the location KCI was working. court construed the word "occupy" to mean "continued Section f.(1)(a) of KCI's insurance policy excluded physical presence," not "occasional trips to the [premises] coverage for pollution-related losses, damage [**18] or to make minor improvements." 361 N.Y.S.2d at 974. injuries "at or from any premises, site or location which is Similarly, the B&B Oil court concluded that "occasional, or was at any time owned or occupied by, or rented or limited work performed by a subcontractor, such as B&B, loaned to, any insured." Section f.(1)(d) excluded cover- at a well site operated and controlled by another" did not age of the same at any place "on which any insured or any amount to occupancy. 910 F. Supp. at 1178. The B&B Oil contractors or subcontractors working directly or indi- court compared the occasional workover operations B&B rectly on any insured's behalf are performing operations . . performed on wells to the work of a plumber or telephone . if the pollutants are brought on or to the premises, site or repairman. Id. at 1178 n.7. KCI's physical presence on location in connection with such operations by such in- the easement, by contrast, was not occasional, limited, or sured, contractor or subcontractor." brief; nor was it merely engaged in routine maintenance operations. Rather, KCI placed a crew and [*469] The Court concludes that to "occupy" means "to hold heavy [**21] machinery at the job site over a period of or keep for use," citing Gregory v. Tennessee Gas Pipe- several days. line Co., 948 F.2d 203, 207 (5th Cir. 1991), in support of this definition. In Gregory, the court concluded that the Based on any of the preceding definitions, KCI City of Natchitoches "occupied" the lake it created, even clearly "occupied" the easement. The various construc- if it did not "own" the lake, because it regulated the lake tions placed on the term "occupancy" in the preceding levels and used the lake to supply the city's drinking wa- cases, however, are not controlling. Because the term ter. Id. Gregory held that one who "holds or maintains "occupied" is not ambiguous, "it is the court's duty to give [property] for use" also "occupies" it. Id. It does not fol- the words used their plain meaning." See Puckett v. U.S. low, however, that one who does not hold or maintain Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984). property for use does not "occupy" it. Nevertheless, the Gregory court's construction of the [**19] term "occu- Page 6 980 S.W.2d 462, *; 1998 Tex. LEXIS 152, **; 47 ERC (BNA) 1860; 141 Oil & Gas Rep. 412 Based on the plain, ordinary, and generally accepted 1 In general, an employer is not vicariously li- meaning of occupied, a person or thing occupies a space if able for the negligence of its subcontractor. See it is there. One may occupy a vehicle, a hotel room, or Baptist Memorial Hosp. Sys. v. Sampson, 969 even an airplane seat or bathroom for a short period of S.W.2d 945, 947 (Tex. 1998). However, an em- time without ever possessing or controlling it. The term ployer may be liable for the negligence of its occupy and its cognates are routinely defined as indicat- subcontractor if the employer retains the right or ing physical presence or proximity in the automobile power to control the manner in which the sub- insurance context. See, e.g., Genthner v. Progressive Cas. contractor performs its work but fails to exercise Ins. Co., 681 A.2d 479, 482 n.1 (Me. 1996) (citing cases reasonable care in supervising the contractor. See deciding who could be covered as an "occupant" under Hoechst-Celanese Corp. v. Mendez, 967 S.W.2d general automobile insurance policies). KCI unambigu- 354, 356 (Tex. 1998). ously occupied NGP's easement by being there and using [**23] Finally, we should not hold that some re- it to construct a pipeline. dundancy or overlapping application in multiple policy KCI argues that if mere presence and use of a prem- provisions renders any of the provisions meaningless. It is ises constitutes [**22] occupancy under section f.(1)(a) not uncommon for contracts to have redundant terms, of the policy, then section f.(1)(d) is rendered meaning- expressions and provisions, especially when specific less. However, as Highland contends, the two sections provisions require regulatory pre-approval or when have independent, non-overlapping meanings because standard-form contracts are crafted to accommodate a section f.(1)(a), unlike section f.(1)(d), does not exclude wide variety of clients and circumstances. See Grain pollution damages on a third party's premises occupied by Dealers Mut. Ins. Co. v. McKee, 943 S.W.2d 455, 458 an insured's subcontractor rather than the insured. The (Tex. 1997). The use of several terms and overlapping policy indemnified KCI for any vicarious liability it might provisions is usually intended to clarify the scope and incur for pollution-related damages caused by a KCI intent of the instrument and insulate it from any misun- subcontractor who did not bring the pollutants to the site, derstanding. but excluded it for any damages for which KCI was di- Because I disagree with the Court's definition of rectly responsible. Stated another way, the insurance "occupy," I dissent. policy provided coverage for pollution-related damages in only a narrow set of circumstances -- circumstances over Raul A. Gonzalez which KCI had minimal control and for damages arising Justice only out of vicarious liability. 1 OPINION DELIVERED: November 12, 1998 Page 1 2013 Tex. App. LEXIS 7976, *

Liaquat Ali Khan, Appellant v. Nizarali Meknojiya, Appellee NO. 03-11-00580-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 2013 Tex. App. LEXIS 7976

June 28, 2013, Filed PRIOR HISTORY: [*1] attorney's fees. Because we conclude that the holdover FROM THE DISTRICT COURT OF TRAVIS provision is not an unenforceable penalty, we reverse the COUNTY, 200TH JUDICIAL DISTRICT NO. trial court's judgment and remand the case for further D-1-GN-08-001931, HONORABLE LORA J. proceedings.

LIVINGSTON, JUDGE PRESIDING.

BACKGROUND DISPOSITION: Reversed and Remanded.

Khan owns commercial property located in Austin, Texas. [*2] In 1996, Khan and Meknojiya entered into a written lease agreement, and Meknojiya began operating a COUNSEL: For appellant: Mr. D. Todd Smith, Smith convenience store on the leased premises. The parties Law Group, P.C., Austin, TX. renegotiated their lease ("the lease") in March 2002. The renegotiated lease required Meknojiya to pay $4,500 per For appellee: Mr. Timothy J. Herman, Howry Breen & month in "base rent" and included the following para- Herman, L.L.P., Austin, TX. graph, which the parties refer to as a "holdover provision": Mr. John Sepehri, Texas Apartment Association, Austin, 2.07 Holding Over. If Tenant does not TX. vacate the Leased Premises upon the ex- piration or earlier termination of the Lease, JUDGES: Before Chief Justice Jones, Justices Goodwin Tenant shall be a tenant at sufferance for and Field. the holdover period and all of the terms and provisions of this Lease shall be ap- OPINION BY: Scott K. Field plicable during that period, except that Tenant shall pay Landlord (in addition to OPINION additional rent payable under this Lease and any other sums payable under this MEMORANDUM OPINION Lease) as base rental for the period of such Landlord Liaquat Ali Khan sued tenant Nizarali holdover an amount equal to two times the Meknojiya for breach of the parties' commercial lease. In base rent which would have been payable the suit, Khan sought damages pursuant to the lease's by Tenant had the holdover period been a holdover provision, contending that Meknojiya became a part of the original terms of the Lease holdover tenant as a of result Khan's termination of the (without waiver of Landlord's right to re- lease. Meknojiya moved for summary judgment on the cover damages as permitted by law). sole ground that Khan's recovery under the holdover provision is barred as a matter of law because it represents an unenforceable penalty in the form of "double-rent."

According to Khan, Meknojiya committed a series of The trial court granted partial summary judgment in favor breaches following execution of the 2002 lease. For in- of Meknojiya, and following a bench trial only on attor- stance, Khan contends that [*3] Meknojiya (1) failed to ney's fees, the court rendered a final judgment that Khan obtain or renew required insurance, (2) failed to provide take nothing on his claims and that Meknojiya recover Page 2 2013 Tex. App. LEXIS 7976, *

the required insurance documentation, and (3) permitted a party, their reasonable attorney['s] corporation owned by other individuals to operate the fees, court costs and expenses, in- convenience store without obtaining Khan's prior written cluding but not limited to travel consent. Khan notified Meknojiya in writing, through and witness costs. counsel, that Meknojiya was in default of the lease and that Khan was exercising his option to terminate the lease effective May 1, 2002. Nevertheless, despite additional notices of default, Meknojiya continued to occupy the STANDARD OF REVIEW premises and to pay $4,500 per month until January 2, We review a trial court's ruling on summary judg- 2007, the date the lease was set to have expired by its own ment de novo. Valence Operating Co. v. Dorsett, 164 terms.

S.W.3d 656, 661 (Tex. 2005). A moving party is entitled to Khan subsequently sued Meknojiya for breach of the summary judgment if (1) there are no genuine issues of lease, asserting that upon Meknojiya's breach of the lease material fact and (2) the movant is entitled to judgment as and Khan's notification that the lease was terminated, a matter of law. Tex. R. Civ. P. 166a(c). A party who Meknojiya occupied the property as a tenant at sufferance. moves for traditional summary judgment on another See ICM Mortg. Corp. v. Jacob, 902 S.W.2d 527, 530 party's claim is entitled to summary judgment when he (Tex. App.--El Paso 1994, writ denied) (citing Restate- negates at least one essential element of that claim or ment (First) of Property § 22 (1936)) ("A tenant at suf- conclusively establishes each element of an affirmative ferance is a person who has been in lawful possession of defense. Science Spectrum, Inc. v. Martinez, 941 S.W.2d property but who wrongfully remains as a holdover after 910, 911 (Tex. 1997). When reviewing the trial court's his right to possession has expired."). Khan sought dam- summary judgment ruling, we take as true all evidence ages [*4] in an amount equal to the difference that favorable to the nonmovant, and we indulge [*6] every Meknojiya actually paid during the alleged holdover reasonable inference and resolve any doubts in the period and the amount that Meknojiya was required to pay nonmovant's favor. Valence Operating Co., 164 S.W.3d at for the same time period under paragraph 2.07. 661.

Khan moved for partial summary judgment, asserting In part, Khan's arguments on appeal raise matters of that he conclusively established all elements of his claim contract construction. In construing a written agreement, for breach of the lease.1 Meknojiya filed a response and we must ascertain and give effect to the parties' intentions subsequently moved for summary judgment asserting that as expressed in the agreement. Frost Nat'l Bank v. L & F Khan's recovery was barred as a matter of law because the Distribs., Ltd., 165 S.W.3d 310, 311-12 (Tex. 2005) (per double-rent rate under paragraph 2.07 constitutes an un- curiam). We consider the agreement as a whole and at- enforceable penalty. After conducting a hearing, the trial tempt to harmonize and give effect to all provisions of the court granted Meknojiya's motion for summary judgment contract. Id. If the contract language can be given a certain but denied Khan's motion. Following a bench trial on or definite legal meaning, then the language is not am- Meknojiya's remaining counterclaim for attorney's fees, biguous, and this Court will construe the contract as a the trial court rendered a final judgment incorporating the matter of law. SAS Inst., Inc. v. Breitenfeld, 167 S.W.3d trial court's order granting summary judgment in favor of 840, 841 (Tex. 2005) (quoting Coker v. Coker, 650 S.W.2d Meknojiya and ordering Khan to pay $60,191.71 in at- 391, 393 (Tex. 1983)). torney's fees.2 In three issues on appeal, Khan argues that the trial court erred in granting summary judgment in DISCUSSION favor of Meknojiya and consequently, in awarding Meknojiya moved for traditional summary judgment Meknojiya attorney's fees as the prevailing party. on the sole ground that the lease's holdover provision, calling for double rent, is an unenforceable liquidat- 1 Khan also asked the trial court to render ed-damages provision, i.e. a penalty. This assertion by summary judgment that [*5] he was entitled to Meknojiya is an affirmative defense that he had the bur- attorney's fees, but to reserve judgment on the den of pleading and proving. See Phillips v. Phillips, 820 amount of fees for a separate hearing.

S.W.2d 785, 788 (Tex. 1991). As a result, [*7] to be Paragraph 13.03 of the lease states: entitled to summary judgment, Meknojiya had to conclu- sively establish every element of this defense. See Ryland Attorney's Fees. The prevailing Grp., Inc. v. Hood, 924 S.W.2d 120, 121 (Tex. 1996) (per party in any legal proceeding curiam). brought under or with a relation to this agreement shall be entitled to "The universal rule for measuring damages for the recover form the non-prevailing breach of a contract is just compensation for the loss or Page 3 2013 Tex. App. LEXIS 7976, *

damage actually sustained." Phillips, 820 S.W.2d at 788. peals in Dallas in analyzing whether a similar clause Accordingly, a liquidated-damages provision is not en- operated as a penalty provision. See Meridien Hotels, Inc. forceable if, in effect, it is a penalty. See id. ("Whether a v. LHO Fin. P'ship I, L.P., 255 S.W.3d 807 (Tex. contractual provision is an enforceable liquidated dam- App.--Dallas 2008, no pet.). In Meridien Hotels, the ages provision or an unenforceable penalty is a question landlord leased hotel space to the tenant under a lease that of law for the court to decide."). A liquidated-damages required the tenant to pay 1.5 times the base rental amount provision is enforceable only if a court finds that (1) the if the tenant remained [*10] in the space upon termina- harm caused by the breach is incapable or difficult of tion of the lease by one of the parties or the lease term's estimation, and (2) the amount of liquidated damages expiration.3 Id. at 822. The landlord sent the tenant a called for is a reasonable forecast of just compensation. notice of termination of the lease, but the tenant remained Id. Whether a liquidated-damages provision is an unen- in the hotel space anyway. Id. at 814. The landlord forceable penalty is a question of law for the court, alt- eventually sued the tenant, seeking multiple types and hough sometimes factual issues must be resolved before amounts of damages, including $2,130,136 in holdover the court can decide the legal question. Id. rent, plus prejudgment interest, all of which the trial court awarded. Id. In his first and second issues on appeal, Khan argues that the trial court erred in granting Meknojiya's sum- Specifically, the lease at issue in Meridien mary-judgment motion because [*8] Meknojiya failed to Hotels, Inc. v. LHO Financing Partnership I, L.P., conclusively establish the essential elements of his af- contained the following provision: firmative defense of penalty. Specifically, Khan argues that, as a matter of law, paragraph 2.07 is not an unen- Any holding over by Tenant forceable penalty provision because it is not a liquidat- after the expiration or sooner ter- ed-damages provision at all. Instead, according to Khan, mination of this Agreement shall paragraph 2.07 simply sets forth the parties' agreed rental be treated as a daily tenancy at rate for any holdover period. Based on the unambiguous sufferance at a rate equal to one language of the lease, we agree. and one-half (1.5) times the Rent Whether a contract term is a liquidated-damages and other charges herein provided provision is a question of law for the court. Valence Op- (prorated on a daily basis). erating Co., 164 S.W.3d. at 664. "The term 'liquidated damages' ordinarily refers to an acceptable measure of damages that parties stipulate in advance will be assessed 255 S.W.3d 807, 822 (Tex. App.--Dallas 2008, no in the event of a contract breach." Flores v. Millennium pet.)

Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005). Here, The tenant appealed, claiming that the holdover rent paragraph 2.07 sets an agreed-upon rental rate for situa- provision was an unlawful penalty and that, as a result, the tions in which the tenant has failed to surrender the leased trial court erred in awarding pre-judgment interest on that premises upon expiration of the lease term or earlier ter- amount. Id. at 822. Concluding that the holdover rental mination by one of the parties. The provision itself de- rate did not constitute a penalty, the court of appeals scribes the amount due during the holdover period as concluded that the provision "does not [*11] punish "base rental for the period of such holdover." Further, appellants; it instead requires that if appellants make the paragraph 2.07 states that payment [*9] of such rental decision to hold over beyond the term of the lease, they amounts do not waive the landlord's right to recover must pay a higher rate for doing so. Appellants were on "damages as permitted by law." In other words, based on notice that [the landlord] considered the lease terminated, the plain language of the lease, there is no indication that yet they chose to stay, having agreed in the lease to pay the parties intended the amounts owed under paragraph 1.5 times the usual rent for doing so." Id. 2.07 as a means of forecasting damages in the event of a breach. And, while rent under paragraph 2.07 may, in Likewise, in this case, paragraph 2.07 of the parties' certain circumstances, form the basis of measuring dam- lease agreement sets out in advance the rent to be paid ages, it does not independently set a damages amount or should the tenant choose to remain on the premises after attempt to calculate damages. Simply put, any amount one of the parties terminates the lease or the lease expires owed under paragraph 2.07 does not equate to a stipulated by its own terms, creating a tenancy at sufferance. Upon measure of damages; rather, it is an agreed-upon rental expiration or termination of the lease, the tenant must amount that is due under particular circumstances. decide whether to (1) leave the leased premises (assuming he is not forcibly removed) or (2) hold over under the Our conclusion that paragraph 2.07 of the lease is not lease as a tenant at sufferance and pay additional rent at a liquidated-damages provision, and therefore is not a the agreed holdover rate. Such additional rent is not a penalty, is consistent with that of our sister court of ap- Page 4 2013 Tex. App. LEXIS 7976, *

penalty; in fact, it does not represent liquidated damages quire a separate determination of damages or the at all. Rather, the additional rent is the agreed-to, bar- application of any multiplier to that amount. Thus, gained-for amount of rent due and owing in the event of a even if we were to conclude that paragraph 2.07 is holdover.4 a liquidated-damages provision, unlike the court in Phillips we could not conclude that it consti- Meknojiya relies on Phillips v. Phillips, 820 tutes a penalty on its face.

S.W.2d 785 (Tex. 1991), for the proposition that a Because paragraph 2.07 of the parties' lease agree- contractual [*12] provision in which one party ment is not a liquidated-damages provision, it cannot be agrees to pay the other some multiple of damages an unenforceable penalty, as a matter of law. We therefore is an unenforceable penalty. Phillips is a classic conclude that the trial court erred in granting summary illustration of a liquidated-damages provision that judgment in favor of Meknojiya on this ground. In addi- constitutes an unlawful penalty. In the midst of tion, because Meknojiya should not have prevailed on divorce proceedings, a husband and wife agreed to summary judgment, it follows that he was not entitled to create a limited partnership rather than divide their attorney's fees. We sustain appellant's first and second substantial assets. Id. at 786-87. The agreement issues on appeal.5 contained the following provision: "If the general partner breaches his trust hereunder, he shall pay In his third issue on appeal, Khan argues that, to the limited partner as liquidated damages ten even if the double-rent rate set forth in paragraph times the amount she loses as a result of such 2.07 represents liquidated damages, [*14] breaches of trust." Id. at 787. In other words, once Meknojiya failed to satisfy his burden to establish actual damages were established for breach of the that it is an unenforceable penalty. Having sus- parties' contract, they would be multiplied by ten tained Khan's first and second issues on appeal, we to reach the damages award. Id. at 789. The su- do not address this issue. See Tex. R. App. P. 47.1. preme court held that this provision was an un- enforceable penalty provision, rather than an en- CONCLUSION forceable liquidated damages provision. Id. Because we conclude that the trial court erred in Meknojiya's reliance on Phillips in this case is granting summary judgment, we reverse the trial court's misplaced. First, unlike paragraph 2.07, the pro- judgment and award of attorney's fees in favor of vision at issue in Phillips was undisputedly a liq- Meknojiya. We remand the case to the trial court for uidated-damages provision. As previously dis- further proceedings consistent with this opinion. cussed, paragraph 2.07 is not a liquidat- ed-damages provision at all, but instead is a rental Scott K. Field, Justice [*13] amount that is triggered if and when the lease expires or is terminated. Second, the liqui- Before Chief Justice Jones, Justices Goodwin and Field dated-damages provision at issue in Phillips was an unenforceable penalty on its face because the Reversed and Remanded amount awarded by the provision was computed by multiplying actual damages (once established). Filed: June 28, 2013 See id. at 789. Here, paragraph 2.07 does not re- Page 1

LAKE RIVER CORPORATION, Plaintiff-Appellee-Cross-Appellant, v. CARBO- RUNDUM COMPANY, Defendant-Appellant-Cross-Appellee Nos. 84-1623, 84-1688 UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT 769 F.2d 1284; 1985 U.S. App. LEXIS 21908 April 22, 1985, Argued August 9, 1985, Decided PRIOR HISTORY: [**1] Appeal from the would receive Ferro Carbo in bulk from Carborundum, United States District Court for the Northern District of "bag" it, and ship the bagged product to Carborundum's Illinois, Eastern Division, No. 82 C 6292-Thomas R. [**2] customers. The Ferro Carbo would remain Car- McMillen, Judge. borundum's property until delivered to the customers.

Carborundum insisted that Lake River install a new DISPOSITION: AFFIRMED IN PART, RE- bagging system to handle the contract. In order to be sure VERSED IN PART, AND REMANDED. of being able to recover the cost of the new system ($89,000) and make a profit of 20 percent of the contract price, Lake River insisted on the following mini- COUNSEL: Michael R. Turoff, Arnstein, Gluck, Lehr, mum-quantity guarantee: Barron & Milligan, Chicago, Illinois, for Plaintiff.

In consideration of the special equip- Glen H. Kanwit, Hopkins & Sutter, Chicago, Illinois, for ment [i.e., the new bagging system] to be Defendant. acquired and furnished by LAKE-RIVER for handling the product, CARBORUN- JUDGES: Eschbach and Posner, Circuit Judges, and DUM shall, during the initial three-year Gibson, Senior Circuit Judge. * term of this Agreement, ship to LAKE-RIVER for bagging a minimum * Hon. Floyd R. Gibson of the Eighth Circuit, quantity of [22,500 tons]. If, at the end of sitting by designation. the three-year term, this minimum quantity shall not have been shipped, OPINION BY: POSNER LAKE-RIVER shall invoice CARBO- RUNDUM at the then prevailing rates for OPINION the difference between the quantity bagged [*1286] POSNER, Circuit Judge. and the minimum guaranteed.

This diversity suit between Lake River Corporation and Carborundum Company requires us to consider If Carborundum had shipped the full minimum quantity questions of Illinois commercial law, and in particular to that it guaranteed, it would have owed Lake River roughly explore the fuzzy line between penalty clauses and liq- $533,000 under the contract. uidated-damages clauses.

After the contract was signed in 1979, the demand for Carborundum manufactures "Ferro Carbo," an abra- domestic steel, and with it the demand for Ferro Carbo, sive powder used in making steel. To serve its midwestern plummeted, and Carborundum [**3] failed to ship the customers better, Carborundum made a contract with guaranteed amount. When the contract expired late in Lake River by which the latter agreed to provide distri- 1982, Carborundum had shipped only 12,000 of the bution services in its warehouse in Illinois. Lake River Page 2 769 F.2d 1284, *; 1985 U.S. App. LEXIS 21908, ** 22,500 tons it had guaranteed. Lake River had bagged the tract. The issue is whether an entitlement to damages, 12,000 tons and had billed Carborundum for this bagging, large or small, entitles the victim of the breach to assert a and Carborundum had paid, but by virtue of the formula in lien on goods that are in its possession though they belong the minimum-guarantee clause Carborundum still owed to the other party.

Lake River $241,000 -- the contract price of $533,000 if Lake River has not been very specific about the type the full amount of Ferro Carbo had been shipped, minus of lien it asserts. We think it best described as a form of what Carborundum had paid for the bagging of the quan- artisan's lien, the "lien of the bailee, who does work upon tity it had shipped. or adds materials to chattels . . . ." Restatement of Security When Lake River demanded payment of this amount, § 61, comment on clause (a), at p. 165 (1941). Lake River Carborundum refused, on the ground that the formula was the bailee of the Ferro Carbo that Carborundum de- imposed a penalty. At the time, Lake River had in its livered to it, and it did work on the Ferro Carbo -- bagging warehouse 500 tons of bagged Ferro Carbo, having a it, and also storing it (storage is a service, too). If Carbo- market value of $269,000, which it refused to release rundum had refused to pay for the [**6] services that unless Carborundum paid the $241,000 due under the Lake River performed on the Ferro Carbo delivered to it, formula. Lake River did offer to sell the bagged product then Lake River would have had a lien on the Ferro Carbo and place the proceeds in escrow until its dispute with in its possession, to coerce payment. Cf. National Bank Carborundum over the enforceability of the formula was of Joliet v. Bergeron Cadillac, Inc., 66 Ill. 2d 140, 143-44, resolved, but Carborundum rejected the offer and trucked 361 N.E.2d 1116, 1117, 5 Ill. Dec. 588 (1977). But in fact, in bagged Ferro Carbo from the East to serve its custom- when Lake River impounded the bagged Ferro Carbo, ers in Illinois, at an additional cost of $31,000. Carborundum had paid in full for all bagging and storage services that Lake River had performed on Ferro Carbo Lake River brought this [**4] suit for $241,000, shipped to it by Carborundum. The purpose of impound- which it claims as liquidated damages. Carborundum ing was to put pressure on Carborundum to pay for ser- counterclaimed for the value of the bagged Ferro Carbo vices not performed, Carborundum having failed to ship when Lake River impounded it and the additional cost of the Ferro Carbo on which those services would have been serving the customers affected by the impounding. The performed. theory of the counterclaim is that the impounding was a conversion, and not as Lake River contends the assertion Unlike a contractor who, having done the work con- of a lien. The district judge, after a [*1287] bench trial, tracted for without having been paid, may find himself in gave judgment for both parties. Carborundum ended up a box, owing his employees or suppliers money he does roughly $42,000 to the good: $269,000 + not have -- money he was counting on from his customer $31,000-$24100-$17,000, the last figure representing -- Lake River was the victim of a breach of a portion of the prejudgment interest on Lake River's damages. (We have contract that remained entirely unexecuted on either side. rounded off all dollar figures to the nearest thousand.) Carborundum had not shipped the other 10,500 tons, as Both parties have appealed. promised; but on the other hand Lake River had not had to bag those 10,500 tons, as it had promised. [**7] It is The only issue that is not one of damages is whether not as if Lake River had bagged those tons, incurring Lake River had a valid lien on the bagged Ferro Carbo that heavy costs that it expected to recoup from Carborundum, it refused to ship to Carborundum's customers -- that, and then Carborundum had said, "Sorry, we won't pay indeed, it holds in its warehouse to this day. Although you; go ahead and sue us."

Ferro Carbo does not deteriorate with age, the domestic steel industry remains in the doldrums and the product is A lien is strong medicine; it clogs up markets, as the worth less than it was in 1982 when Lake River first facts of this case show. Its purpose is to provide an effec- withheld it. If Lake River did not have a valid lien on the tive self-help remedy for one who has done work in ex- product, then it converted it, and must pay Carborundum pectation of payment and then is not paid. The vulnerable [**5] the $269,000 that the Ferro Carbo was worth back position of such a person gives rise to "the artisan's priv- then. ilege of holding the balance for work done in the past."

United States v. Toys of the World Club, Inc., 288 F.2d 89, It might seem that if the minimum-guarantee clause (2d Cir. 1961) (Friendly, J.) (emphasis added). A lien was a penalty clause and hence unenforceable, the lien is thus a device for preventing unjust enrichment -- not for could not be valid, and therefore that we should discuss forcing the other party to accede to your view of a contract the penalty issue first. But this is not correct. If the con- dispute. "The right to retain possession of the property to tractual specification of damages is invalid, Lake River enforce a possessory lien continues until such time as the still is entitled to any actual damages caused by Carbo- charges [*1288] for such materials, labor and services rundum's breach of contract in failing to deliver the are paid." Bull v. Mitchell, 114 Ill. App. 3d 177, 181, 448 minimum amount of Ferro Carbo called for by the con- N.E.2d 1016, 1019, 70 Ill. Dec. 138 (1983); cf. Ill. [**8] Page 3 769 F.2d 1284, *; 1985 U.S. App. LEXIS 21908, **

Rev. Stat. ch. 82, § 40. Since here the charges were paid would have been unrelated to -- and certainly exceeded -- before the lien was asserted, the lien was no good. the investment in the bagging system.

Lake River tries to compare its position to that of a It is no answer that the bagging system should be conventional lien creditor by pointing out that it made presumed to have been amortized equally over the life of itself particularly vulnerable to a breach of contract by the contract, and therefore to have been only half amor- buying specialized equipment at Carborundum's insist- tized when Carborundum broke the contract. [**11] ence, to the tune of $89,000, before performance under Amortization is an accounting device; it need not reflect the contract began. It says it insisted on the minimum cash flows. There is no evidence that when the contract guarantee in order to be sure of being able to amortize this was broken, Lake River was out of pocket a cent in re- equipment over a large enough output of bagging services spect of the bagging system, especially when we consider to make the investment worthwhile. But the equipment that the bagging system was still usable, and was used to was not completely useless for other contracts -- Lake fulfill another contract.

River having in fact used it for another contract; it was not The hardest issue in the case is whether the formula in the major cost of fulfilling the contract; and Lake River the minimum-guarantee clause imposes a penalty for received almost $300,000 during the term of the contract, breach of contract or is merely an effort to liquidate thus enabling it to amortize much of the cost of the special damages. Deep as the hostility to penalty clauses runs in equipment. Although Lake River may have lost money on the common law, see Loyd, Penalties and Forfeitures, 29 the contract (but as yet there is no proof it did), it was not Harv. L. Rev. 117 (1915), we still might be inclined to in the necessitous position of a contractor who completes question, if we thought ourselves free to do so, whether a his performance without receiving a dime and then is told modern court should refuse to enforce a penalty clause by his customer to sue for the price. The recognition of a where the signator [*1289] is a substantial corporation, [**9] lien in such a case is based on policies akin to well able to avoid improvident commitments. Penalty those behind the rule that a contract modification procured clauses provide an earnest of performance. The clause by duress will not be enforced. See, e.g., Selmer Co. v. here enhanced Carborundum's credibility in promising to Blakeslee-Midwest Co., 704 F.2d 924 (7th Cir. 1983). ship the minimum amount guaranteed by showing that it When as a practical matter the legal remedy may be in- was willing to pay the full contract price even if it failed adequate because it operates too slowly, self-help is al- [**12] to ship anything. On the other side it can be lowed. But we can find no case recognizing a lien on facts pointed out that by raising the cost of a breach of contract like these, no ground for thinking that the Illinois Su- to the contract breaker, a penalty clause increases the risk preme Court would be the first court to recognize such a to his other creditors; increases (what is the same thing lien if this case were presented to it, and no reason to and more, because bankruptcy imposes "deadweight" believe that the recognition of such a lien would be a good social costs) the risk of bankruptcy; and could amplify the thing. It would impede the marketability of goods without business cycle by increasing the number of bankruptcies responding to any urgent need of creditors. in bad times, which is when contracts are most likely to be Conrow v. Little, 115 N.Y. 387, 393, 22 N.E. 346, broken. But since little effort is made to prevent busi- (1889), on which Lake River relies heavily because nessmen from assuming risks, these reasons are no better the lien allowed in that case extended to "money expended than makeweights. in the preparation of instrumentalities," is not in point.

A better argument is that a penalty clause may dis- The plaintiffs, dealers in paper, [**10] had made ex- courage efficient as well as inefficient breaches of con- tensive deliveries to the defendants for which they had tract. Suppose a breach would cost the promisee $12,000 received no payment. See id. at 390-91, 22 N.E. at 346. If in actual damages but would yield the promisor $20,000 Lake River had bagged several thousand tons of Ferro in additional profits. Then there would be a net social gain Carbo without being paid anything, it would have had a from breach. After being fully compensated for his loss lien on the Ferro Carbo; and maybe -- if Conrow is good the promisor would be no worse off than if the contract law in Illinois, a question we need not try to answer -- the had been performed, while the promisor would be better lien would have included not only the contract price for off by $8,000. But now suppose the contract contains a the Ferro Carbo that Lake River had bagged but also the penalty clause under which [**13] the promisor if he unreimbursed, unsalvageable cost of the special bagging breaks his promise must pay the promisee $25,000. The system that Lake River had installed. But that is not this promisor will be discouraged from breaking the contract, case. Carborundum was fully paid up and Lake River has since $25,000, the penalty, is greater than $20,000, the made no effort to show how much if any money it stood to profits of the breach; and a transaction that would have lose because the bagging system was not fully amortized. increased value will be forgone.

The only purpose of the lien was to collect damages which Page 4 769 F.2d 1284, *; 1985 U.S. App. LEXIS 21908, **

On this view, since compensatory damages should be clause is a question of law rather than fact, [**16] sufficient to deter inefficient breaches (that is, breaches Weiss v. United States Fidelity & Guaranty Co., 300 Ill. that cost the victim more than the gain to the contract 11, 16, 132 N.E. 749, 751 (1921); M.I.G. Investments, Inc. breaker), penal damages could have no effect other than to v. Marsala, supra, 92 Ill. App. 3d 400, 406, 414 N.E.2d deter some efficient breaches. But this overlooks the 1381, 1386, and unlike some courts of appeals we do not earlier point that the willingness to agree to a penalty treat a determination by a federal district judge of an issue clause is a way of making the promisor and his promise of state law as if it were a finding of fact, and reverse only credible and may therefore be essential to inducing some if persuaded that clear error has occurred, though we give value-maximizing contracts to be made. It also overlooks his determination respectful consideration. See, e.g., the more important point that the parties (always assum- Morin Bldg. Products Co. v. Baystone Construction, Inc., ing they are fully competent) will, in deciding whether to 717 F.2d 413, 416-17 (7th Cir. 1983); In re Air Crash include a penalty clause in their contract, weigh the gains Disaster Near Chicago, 701 F.2d 1189, 1195 (7th Cir. against the costs -- costs that include the possibility of 1983); 19 Wright, Miller & Cooper, Federal Practice and discouraging an efficient breach somewhere down the Procedure § 4507, at pp. 106-110 (1982). road -- and will include the clause only [**14] if the Mindful that Illinois courts resolve doubtful cases in benefits exceed those costs as well as all other costs. favor of classification as a penalty, see, e.g., Stride v. 120 On this view the refusal to enforce penalty clauses is West Madison Bldg. Corp., supra, 132 Ill. App. 3d at 605, (at best) paternalistic -- and it seems odd that courts 477 N.E.2d at 1321; Pick Fisheries, Inc. v. Burns Elec- should display parental solicitude for large corporations. tronic Security Services, Inc., 35 Ill. App. 3d 467, 472, 342 But however this may be, we must be on guard to avoid N.E.2d 105, 108 (1976), [**17] we conclude that the importing our own ideas of sound public policy into an damage formula in this case is a penalty and not a liqui- area where our proper judicial role is more than usually dation of damages, because it is designed always to assure deferential. The responsibility for making innovations in Lake River more than its actual damages. The formula -- the common law of Illinois rests with the courts of Illinois, full contract price minus the amount already invoiced to and not with the federal courts in Illinois. And like every Carborundum -- is invariant to the gravity of the breach. other state, Illinois, untroubled by academic skepticism of When a contract specifies a single sum in damages for any the wisdom of refusing to enforce penalty clauses against and all breaches even though it is apparent that all are not sophisticated promisors, see, e.g., Goetz & Scott, Liqui- of the same gravity, the specification is not a reasonable dated Damages, Penalties and the Just Compensation effort to estimate damages; and when in addition the fixed Principle, 77 Colum. L. Rev. 554 (1977), continues sum greatly exceeds the actual damages likely to be in- steadfastly to insist on the distinction between penalties flicted by a minor breach, its character as a penalty be- and liquidated damages. See, e.g., Bauer v. Sawyer, 8 Ill. comes unmistakable. See M.I.G. Investments, Inc. v. 2d 351, 359-61, 134 N.E.2d 329, 333-34 (1956); Stride v. Marsala, supra, 92 Ill. App. 3d at 405-06, 414 N.E.2d at 120 West Madison Bldg. Corp., 132 Ill. App. 3d 601, 1386; cf. Arduini v. Board of Educ., 93 Ill. App. 3d 925, 605-06, 477 N.E.2d 1318, 1321, 87 Ill. Dec. 790 (1985); 931-33, 418 N.E.2d 104, 109-10, 49 Ill. Dec. 460 (1981), [**15] Builder's Concrete Co. v. Fred Faubel & Sons, rev'd on other grounds, 92 Ill. 2d 197, 441 N.E.2d 73, 65 Inc., 58 Ill. App. 3d 100, 107, 373 N.E.2d 863, 869, 15 Ill. Ill. Dec. 281 (1982); 5 Corbin on Contracts § 1066 (1964).

Dec. 517 (1978). To be valid under Illinois law a liquida- This case is within the gravitational field of these princi- tion of damages must be a reasonable estimate at the time ples [**18] even though the minimum-guarantee clause of contracting of the likely damages from breach, and the does not fix a single sum as damages. need for estimation at that time must be shown by refer- Suppose to begin with that the breach occurs the day ence to the likely difficulty of measuring the actual after Lake River buys its new bagging system for $89,000 damages from a breach of contract after the breach occurs. and before Carborundum ships any Ferro Carbo. Carbo- If damages would be easy to determine then, or if the rundum would owe Lake River $533,000. Since Lake estimate greatly exceeds a reasonable upper estimate River would have incurred at that point a total cost of only [*1290] of what the damages are likely to be, it is a $89,000, its net gain from the breach would be $444,000. penalty. See, e.g., M.I.G. Investments, Inc. v. Marsala, 92 This is more than four times the profit of $107,000 (20 Ill. App. 3d 400, 405-06, 414 N.E.2d 1381, 1386, 47 Ill. percent of the contract price of $533,000) that Lake River Dec. 265 (1981). expected to make from the contract if it had been per- The distinction between a penalty and liquidated formed: a huge windfall. damages is not an easy one to draw in practice but we are Next suppose (as actually happened here) that breach required to draw it and can give only limited weight to the occurs when 55 percent of the Ferro Carbo has been district court's determination. Whether a provision for shipped. Lake River would already have received damages is a penalty clause or a liquidated-damages $293,000 from Carborundum. To see what its costs then Page 5 769 F.2d 1284, *; 1985 U.S. App. LEXIS 21908, **

would have been (as estimated at the time of contracting), system has no value apart from the contract. If it were first subtract Lake River's anticipated profit on the con- worth only $20,000 to Lake River, the range would be 434 tract of $107,000 from the total contract price of percent to 150 percent. $533,000. The difference -- Lake River's total cost of Lake River argues that it would never get as much as performance -- is $426,000. Of this, $89,000 is the cost of the formula suggests, because it would be required to the new bagging system, a fixed cost. The rest mitigate its damages. This is a dubious argument on sev- ($426,000-$89,000=$337,000) presumably consists of eral grounds. First, mitigation of damages is a doctrine of variable costs [**19] that are roughly proportional to the the law of court-assessed damages, while the point of a amount of Ferro Carbo bagged; there is no indication of liquidated-damages clause is to substitute party assess- any other fixed costs. Assume, therefore, that if Lake ment; and that point is blunted, and the certainty that River bagged 55 percent of the contractually agreed liquidated-damages clauses are designed to give the pro- quantity, it incurred in doing so 55 percent of its variable cess of assessing damages impaired, if a defendant can costs, or $185,000. [*1291] When this is added to the force the plaintiff to take less than the damages specified cost of the new bagging system, assumed for the moment in the clause, on the ground that the plaintiff could have to be worthless except in connection with the contract, the avoided some of them. It would seem therefore that the total cost of performance to Lake River is $274,000. clause in this case should be read to eliminate any duty of Hence a breach that occurred after 55 percent of con- mitigation, that what Lake River is doing is attempting to tractual performance was complete would be expected to rewrite the clause to make [**22] it more reasonable, yield Lake River a modest profit of $19,000 and that since actually the clause is designed to give Lake ($293,000-$274,000). But now add the "liquidated dam- River the full damages it would incur from breach (and ages" of $241,000 that Lake River claims, and the result is more) even if it made no effort to find a substitute use for a total gain from the breach of $260,000, which is almost the equipment that it bought to perform the contract, this two and a half times the profit that Lake River expected to is just one more piece of evidence that it is a penalty gain if there was no breach. And this ignores any use clause rather than a liquidated-damages clause. See value or salvage value of the new bagging system, which Northwest Collectors, Inc. v. Enders, 74 Wash. 2d 585, is the property of Lake River -- though admittedly it also 594, 446 P.2d 200, 206 (1968). ignores the time value of money; Lake River paid $89,000 for that system before receiving any revenue from the But in any event mitigation would not mitigate the contract. penal character of this clause. If Carborundum did not ship the guaranteed minimum quantity, the reason was To complete the picture, assume that the [**20] likely to be -- the reason was -- that the steel industry had breach had not occurred till performance was 90 percent fallen on hard times and the demand for Ferro Carbo was complete. Then the "liquidated damages" clause would therefore down. In these circumstances Lake River would not be so one-sided, but it would be one-sided. Carbo- have little prospect of finding a substitute contract that rundum would have paid $480,000 for bagging. Against would yield it significant profits to set off against the full this, Lake River would have incurred its fixed cost of contract price, which is the method by which it proposes $89,000 plus 90 percent of its variable costs of $337,000, to take account of mitigation. At argument Lake River or $303,000. Its total costs would thus be $392,000, and suggested that it [*1292] might at least have been able its net profit $88,000. But on top of this it would be enti- to sell the new bagging equipment to someone for some- tled to "liquidated damages" of $53,000, for a total profit thing, and the figure $40,000 was proposed. If the [**23] of $141,000 -- more than 30 percent more than its ex- breach occurred on the first day when performance under pected profit of $107,000 if there was no breach. the contract was due and Lake River promptly sold the The reason for these results is that most of the costs to bagging equipment for $40,000, its liquidated damages Lake River of performing the contract are saved if the would fall to $493,000. But by the same token its costs contract is broken, and this saving is not reflected in the would fall to $49,000. Its profit would still be $444,000, damage formula. As a result, at whatever point in the life which as we said was more than 400 percent of its ex- of the contract a breach occurs, the damage formula gives pected profit on the contract. The penal component would Lake River more than its lost profits from the breach -- be unaffected. dramatically more if the breach occurs at the beginning of With the penalty clause in this case compare the liq- the contract; tapering off at the end, it is true. Still, over uidated-damages clause in Arduini v. Board of Education, the interval between the beginning of Lake River's per- supra, which is representative of such clauses upheld in formance and nearly the end, the clause could be expected Illinois. The plaintiff was a public school teacher whose to generate [**21] profits ranging from 400 percent of contract provided that if he resigned before the end of the the expected contract profits to 130 percent of those school year he would be docked 4 percent of his salary. profits. And this is on the assumption that the bagging This was a modest fraction of the contract price. And the Page 6 769 F.2d 1284, *; 1985 U.S. App. LEXIS 21908, **

cost to the school of an untimely resignation would be common law damages. See, e.g., Restatement, Second, difficult to measure. Since that cost would be greater the Contracts § 356, comment a (1981). In this case that more senior and experienced the teacher was, the fact that would be the unpaid contract price of $241,000 minus the the liquidated damages would be greater the higher the costs that Lake River saved by not having to complete the teacher's salary did not make the clause arbitrary. Even contract (the variable costs on the other 45 percent of the the fact that the liquidated damages were the same Ferro Carbo [*1293] that it never had to bag). The case whether the teacher resigned at the beginning, [**24] must be remanded to the district judge to fix these dam- the middle, or the end of the school year was not arbitrary, ages. for it was unclear how the amount of actual damages Two damage issues remain. The first concerns Car- would vary with the time of resignation. Although one borundum's expenses of delivering bagged Ferro Carbo to might think that the earlier the teacher resigned the greater its customers to replace that impounded by Lake River. the damage to the school would be, the school might find The district judge gave Carborundum the full market it easier to hire a replacement for the whole year or a great value of the bagged Ferro Carbo. Lake River argues that it part of it than to bring in a replacement at the last minute should not have to pay for Carborundum's expense of to grade the exams left behind by the resigning teacher. selling additional Ferro Carbo -- additional in the sense Here, in contrast, it is apparent from the face of the con- that Carborundum is being given credit for the full retail tract that the damages provided for by the "liquidated value of the product that Lake River withheld. [**27] damages" clause are grossly disproportionate to any To explain, suppose that Carborundum had an order for probable loss and penalize some breaches much more $1,000 worth of bagged Ferro Carbo, which Lake River heavily than others regardless of relative cost. was supposed to deliver; and because it refused, Carbo- We do not mean by this discussion to cast a cloud of rundum incurred a transportation cost of $100 to make a doubt over the "take or pay" clauses that are a common substitute shipment of bagged Ferro Carbo to the cus- feature of contracts between natural gas pipeline compa- tomer. Carborundum would still get $1,000 from the nies and their customers. Such clauses require the cus- customer, and if that price covered the transportation cost tomer, in consideration of the pipeline's extending its line it would still make a profit. In what sense, therefore, is to his premises, to take a certain amount of gas at a spec- that cost a separate item of damage, of loss? On all Ferro ified price -- and if he fails to take [**25] it to pay the Carbo (related to this case) sold by Carborundum in the full price anyway. The resemblance to the mini- Midwest, Carborundum received the full market price, mum-guarantee clause in the present case is obvious, but either from its customers in the case of Ferro Carbo ac- perhaps quite superficial. Neither party has mentioned tually delivered to them, or from Lake River in the case of take-or-pay clauses, and we can find no case where such a the Ferro Carbo that Lake River refused to deliver. Hav- clause was even challenged as a penalty clause -- though ing received a price designed to cover all expenses of sale, in one case it was argued that such a clause made the a seller cannot also get an additional damage award for damages unreasonably low. See National Fuel Gas Dis- any of those expenses. tribution Corp. v. Pennsylvania Public Utility Comm'n, 76 If, however, the additional Ferro Carbo that Carbo- Pa. Commw. 102, 126-27 n.8, 464 A.2d 546, 558 n.8 rundum delivered to its midwestern customers in substi- (1983). If, as appears not to be the case here but would tution for Ferro Carbo previously delivered to, and im- often be the case in supplying natural gas, a supplier's pounded by, Lake River would have been sold in the East fixed costs were a very large fraction of his total costs, a at the same price but lower cost, Carborundum would take-or-pay clause might well be a reasonable liquidation have had an additional [**28] loss, in the form of re- of damages. In the limit, if all the supplier's costs were duced profits, for which it could recover additional incurred before he began supplying the customer, the damages. But it made no effort to prove such a loss. contract revenues would be an excellent measure of the Maybe it had no unsatisfied eastern customers, and ex- damages from breach. But in this case, the supplier (Lake panded rather than shifted output to fulfill its midwestern River, viewed as a supplier of bagging services to Car- customers' demand. The damages on the counterclaim borundum) incurred only a fraction of its costs before must be refigured also. performance began, and the interruption of performance generated a considerable cost saving that is not reflected Finally, Lake River argues that Carborundum failed [**26] in the damage formula. to mitigate its damages by accepting Lake River's offer to deliver the bagged product and place the proceeds in The fact that the damage formula is invalid does not escrow. But a converter is not entitled to retain the pro- deprive Lake River of a remedy. The parties did not con- ceeds of the conversion even temporarily. Lake River had tract explicitly with reference to the measure of damages an opportunity to limit its exposure by selling the bagged if the agreed-on damage formula was invalidated, but all product on Carborundum's account and deducting what it this means is that the victim of the breach is entitled to his claimed was due it on its "lien." Its failure to follow this Page 7 769 F.2d 1284, *; 1985 U.S. App. LEXIS 21908, **

course reinforces our conclusion that the assertion of the to redetermine both parties' damages in accordance with lien was a naked attempt to hold Carborundum hostage to the principles [**29] in this opinion. The parties may Lake River's view -- an erroneous view, as it has turned present additional evidence on remand, and shall bear out -- of the enforceability of the damage formula in the their own costs in this court. Circuit Rule 18 shall not contract. apply on remand.

The judgment of the district court is affirmed in part AFFIRMED IN PART, REVERSED IN PART, and reversed in part, and the case is returned to that court AND REMANDED.

Page 1 2007 Tex. App. LEXIS 8849, *

LHR Enterprises, Inc.; Task Services, Inc.; Business Staffing, Inc.; Harry Sewill; Rick Chapman; and Transglobal Mortgage, Inc., Appellants v. Mike Geeslin, in His Official Capacity as Commissioner of Insurance for the State of Texas; Texas De- partment of Insurance; and State Office of Administrative Hearings for the State of Texas, Appellees NO. 03-05-00176-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 2007 Tex. App. LEXIS 8849

November 7, 2007, Filed SUBSEQUENT HISTORY: Petition for review denied Staffing, Inc.; Task Services, Inc.; Rick Chapman; and by LHR Enters. v. Geeslin, 2008 Tex. LEXIS 178 (Tex., Harry Sewill (cumulatively "the appellants") were en- Feb. 22, 2008) gaged in the unauthorized practice of insurance and re- ferred the matter to the State Office of Administrative PRIOR HISTORY: [*1] Hearings ("SOAH"). In response, the appellants filed a FROM THE DISTRICT COURT OF TRAVIS declaratory-judgment action in district court seeking COUNTY, 345TH JUDICIAL DISTRICT. NO. declarations that the Commissioner did not have the au- GN402881, HONORABLE SUZANNE COVINGTON, thority to refer the matter for a hearing before SOAH.

JUDGE PRESIDING. Shortly thereafter, the Commissioner and the Department filed a plea to the jurisdiction contending that the district DISPOSITION: Dismissed on Appellees' Motion. court did not have jurisdiction [*2] over the case because the appellants had failed to show a valid waiver of sov- ereign immunity. The district court granted the plea, and COUNSEL: For Appellant: Mr. Bogdan Rentea, Rentea the appellants appealed the judgment of the district court. & Associates, Austin, TX. We will dismiss this case for want of subject-matter ju- risdiction.

For Appellee: Mr. Kristofer S. Monson, Assistant Solic- itor General, Austin, TX. BACKGROUND JUDGES: Before Justices Patterson, Puryear and Pem- Proceedings Before SOAH berton.

The case presently before us is related to another case involving the appeal of an administrative order. Because it OPINION BY: David Puryear is helpful in explaining the outcome of this appeal, we will briefly review some of the facts of the related case.

OPINION In 2004, the staff of the Department of Insurance MEMORANDUM OPINION ("Staff") became concerned that several companies and individuals, including the appellants, were engaged in the The procedural history of this case is complicated by unauthorized business of insurance. See Tex. Ins. Code its relationship to another case before the Department of Ann. §§ 101.051 (specifying what constitutes business of Insurance ("Department"). Although we will discuss the insurance), .102 (prohibiting unauthorized business of various proceedings in more detail later in the opinion, we insurance) (West Supp. 2006). In particular, the Staff will briefly summarize the proceedings here. The Com- believed that the appellants and others were improperly missioner of Insurance became concerned that LHR En- engaged in the business of providing various companies' terprises, Inc.; Transglobal Mortgage, Inc.; Business Page 2 2007 Tex. App. LEXIS 8849, *

employees with workers' compensation insurance cover- administrative penalties on individuals that are neither age. licensed to engage in the business of insurance nor regu- lated by the insurance code. See Tex. Ins. Code Ann. § After formalizing their concerns, the Staff filed a 84.021 (West Supp. 2006) (authorizing Commissioner to report with the Commissioner that detailed the allegations impose administrative penalties on individuals who are against the [*3] appellants and others. The report also "licensed or regulated" under insurance code or another contained the Staff's recommendation that the Commis- Texas insurance law). sioner order that all the parties investigated (1) be held jointly and severally liable for any unpaid workers' com- In addition, the appellants also sought a declaration pensation claims, (2) pay monetary penalties, and that the Commissioner may not refer a matter to SOAH (3)cease practicing the business of insurance in Texas. See for a determination of whether a cease-and-desist order id. §§ 84.041 (providing that if Staff determines that in- should be issued to stop an individual from engaging in surance violations have occurred, they have the authority certain activities when the statutory time for requesting a to file report with Commissioner that specifies facts hearing has expired. See id. §§ 101.151(a) (authorizing forming basis of their conclusion and also specifies any Commissioner to set hearing concerning issuance of penalty that they feel should be imposed), .021 (West cease-and-desist order and specifying that Commissioner Supp. 2006) (authorizing Commissioner to impose pen- is required to provide notice of hearing), .152 (providing alty on individual who violates insurance law, rule, or that unless parties agree otherwise, hearing must be held order). "not earlier than the fifth day or later than the 30th day after" notice was given), .153 (West Supp. 2006) (allow- In July 2004, the Commissioner referred the matter to ing Commissioner to issue cease-and-desist order after SOAH for a contested-case hearing to determine whether hearing has been held). the appellants and others had engaged in the unauthorized business of insurance and whether a cease-and-desist In response to the appellants' [*6] petition, the order prohibiting the parties from engaging in the alleg- Commissioner and the Department filed a plea to the edly improper actions should be issued. See, e.g., id. §§ jurisdiction. In their plea, they argued that because this 31.021(a) (requiring Commissioner to "administer and case is essentially a suit against state agencies, the ap- enforce" insurance code), 40.002 (requiring SOAH to pellants had the burden of proving a waiver of sovereign conduct hearing when required under insurance code), immunity. Further, the Commissioner and the Department [*4] 101.151 (West Supp. 2006) (authorizing Commis- contended that because the appellants failed to plead and sioner to set hearing to determine whether prove a waiver, the district court did not have jurisdiction cease-and-desist order should be imposed if, among other over the appellants' claims. things, Commissioner has reason to believe that individ- Ultimately, the district court granted the plea to the ual has violated insurance provision or rule). jurisdiction, and the appellants appeal the district court's During the proceedings, the investigated parties, in- judgment. cluding the appellants, filed pleas to the jurisdiction and a motion for summary disposition. The administrative law DISCUSSION judge overseeing the case denied the motions, and the The appellants raise three issues on appeal. First, they investigated parties appealed the administrative law argue that the district court erred when it granted the plea judge's ruling to the Commissioner. The Commissioner to the jurisdiction. Specifically, they contend that their denied the appeal. Subsequently, a hearing was scheduled suit does not implicate sovereign immunity because it before SOAH. seeks declaratory and injunctive relief against state offi- cials acting beyond their statutory authority. See Texas Declaratory-Judgment Action Natural Res. Comm'n v. IT-Davy, 74 S.W.3d 849, 855 Soon after the Commissioner requested a hearing (Tex. 2002) (explaining that "[p]rivate parties may seek before SOAH, the appellants filed a petition for declara- declaratory relief against state officials who allegedly act tory relief in the district court. See Tex. Civ. Prac. & Rem. without legal or statutory authority" but that "such suits Code Ann. §§ 37.001-.011 (West 1997 & Supp. 2006) are not 'suits against the State' . . . because suits [*7] to (Uniform Declaratory Judgments Act). The propriety of compel state officers to act within their official capacity the district court's judgment is the subject of this appeal. do not attempt to subject the State to liability" and, therefore, "do not implicate the sovereign-immunity doc- In their petition, the appellants sought, among other trine" (citation omitted)). Second, the appellants argue things, a declaration that the Commissioner did not have that the district court erred by failing to declare that the the authority to require a hearing before SOAH. Specifi- Commissioner does not have the authority to impose cally, they sought a declaration [*5] that the Commis- administrative penalties on individuals who are not li- sioner has no authority to require a hearing or impose Page 3 2007 Tex. App. LEXIS 8849, *

censed or regulated under the provisions of the insurance merely authorizes a court "to declare rights, status, and code. Finally, the appellants insist that the district court other legal relations" when subject-matter jurisdiction is erred when it failed to declare that the Commissioner may already present. See Tex. Civ. Prac. & Rem. Code Ann. § not refer a matter to SOAH for a hearing if the referral is 37.003(a) (West 1997) (court may act "within its juris- not made within the time allowed by statute. diction"); Texas Ass'n of Bus. v. Texas Air Control Bd., 852 S.W.2d 440, 444 (Tex. 1993). Although the Act does After the appellants filed this appeal, the SOAH not expand the jurisdiction of a trial court, [*10] "[a] suit hearing for determining whether the appellants and the under the [Act] is not confined to cases in which the par- other investigated parties had engaged in the unauthorized ties have a cause of action apart from the Act itself." practice of insurance was held. After the hearing con- TexasDep'tof Pub. Safety v.Moore, 985 S.W.2d 149, 153 cluded, the Commissioner issued a final order, which (Tex. App.--Austin 1998, no pet.). specified that none of the appellants had violated any insurance provision or regulation and that, accordingly, In order for a court to have jurisdiction to consider a no sanction or penalty should be imposed upon them. declaratory-judgment action, there must be a "justiciable Shortly thereafter, the Commissioner and the Department controversy as to the rights and status of" the parties, and filed a motion to dismiss this appeal. [*8] 1 In their mo- the requested declaration "must actually resolve the con- tion, the Commissioner and the Department argue that troversy." Brooks v. Northglen Ass'n, 141 S.W.3d 158, because a final order has been issued absolving the ap- 163-64 (Tex. 2004). "A justiciable controversy is one in pellants of any wrongdoing, this Court no longer has which a real and substantial controversy exists involving a subject-matter jurisdiction over the appellants' declaratory genuine conflict of tangible interests and not merely a claims. Because our resolution of the motion to dismiss is theoretical dispute." Moore, 985 S.W.2d at 153; see also dispositive of this appeal, we will now turn to the various City of Euless v. Dallas/Fort Worth Int'l Airport Bd., 936 arguments made by the parties regarding the motion to S.W.2d 699, 703 (Tex. App.--Dallas 1996, writ denied) dismiss. (explaining that if there is no actual controversy between parties, declaratory judgment is improper). However, a As part of their motion to dismiss, the Com- person seeking declaratory relief need not have yet in- missioner and the Department attached a copy of curred an actual injury of the sort for which consequential the final order. relief might be granted. See Bexar Metro. Water Dist. v. City of Bulverde, 156 S.W.3d 79, 88 (Tex. App.--Austin The appellants seek relief under the Uniform De- 2004, pet.denied). Instead, [*11] the Act is intended to claratory Judgment Act. See Tex. Civ. Prac. & Rem. Code provide a means to determine, before any wrong has ac- Ann. § 37.001-.011. The Act allows an individual "whose tually occurred, the rights of parties when a controversy rights, status, or other legal relations are affected by a has arisen and is remedial in nature. Id. statute" to "have determined any question of construction or validity arising under the . . . statute . . . and obtain a The need for a justiciable controversy is related to the declaration of rights, status, or other legal relations jurisdictional concepts of standing and ripeness and does thereunder." Id. § 37.004(a) (West 1997). In this case, the not supersede these concepts. See Texas Dep't of Ins appellants seek declarations concerning the authority of v.Reconveyance Servs., Inc.,240 S.W.3d 418, 451, 2007 the Commissioner. This Court has previously recognized Tex. App. LEXIS 7262, at *38 (Tex. App.--Austin 2007, no that individuals may request declaratory relief regarding pet. h.). Ripeness is a necessary component of sub- whether state agencies or officers have acted beyond ject-matter jurisdiction, Atmos Energy Corp. v. Abbott, [*9] their statutory authorities. See, e.g., Texas Dep't of 127 S.W.3d 852, 857 (Tex.App.--Austin 2004, no pet.), Ins., Div. of Workers' Comp. v. Lumbermens Mut. Cas. and concerns when a claim may be made, Patterson v. Co., 212 S.W.3d 870, 874-75 (Tex. App.--Austin 2006, pet. Planned Parenthood, 971 S.W.2d 439, 442 (Tex. 1998). denied) (holding that claimant may seek declaration that The requirement that a claim be ripe for review is based agency's issuance of advisories was outside agency's on the prohibition against issuing advisory opinions. Id.; statutory authority). However, while individuals may see also Tex. Const. art. II, § 1 (separation of powers); employ the Act to challenge actions as beyond an agency's Northglen Ass'n, 141 S.W.3d at 164 (explaining that sep- or officer's authority, a court must still have sub- aration of powers provision bars issuance of advisory ject-matter jurisdiction over the case before it may opinions). A claim is ripe if the facts involved demon- properly issue a declaration. Subject-matter jurisdiction strate that "an injury has occurred or is likely to occur." may be considered for the first time on appeal, and ap- Patterson, 971 S.W.2d at 442; see also City of Waco v. pellate courts may raise that issue on their own accord. Texas Natural Res. Comm'n, 83 S.W.3d 169, 175 (Tex. See Aguilar v. Weber, 72 S.W.3d 729, 731 (Tex. App.--Austin 2002, pet. denied) [*12] ("In determining App.--Waco 2002, no pet.). The Act does not expand the whether a cause is ripe for judicial consideration, we look scope of a trial court's subject-matter jurisdiction but to see if the facts have sufficiently developed to show that Page 4 2007 Tex. App. LEXIS 8849, *

an injury has occurred, or is likely to occur"). In other words, there must be a concrete injury for the claim to be Subsequently, as previously discussed, the Commis- ripe. See Atmos Energy Corp., 127 S.W.3d at 858. A claim sioner issued a final order in the complained-of contest- is not ripe if it is based on hypothetical or contingent facts ed-case proceeding. The Commissioner's order concluded that may not occur as anticipated or may not occur at all. that none of the appellants were engaged in the unau- See Waco Indep. Sch. Dist. v. Gibson, 22 S.W.3d 849, 852 thorized practice of insurance or had violated any insur- (Tex. 2000). ance provisions or regulations and that, therefore, no In this case, there is no concrete dispute to resolve. penalty should be imposed upon the appellants. As the The appellants pled the following, relevant jurisdictional State argues, these developments resolve the controversy facts as the basis for their suit: on which Appellants' suit is based, i.e., the subject matter of the July [*14] 16, 2004 Notice of Hearing has been On June 24, 2004, pursuant to section resolved in Appellants' favor.

84.041 of the insurance code, the Staff Appellants nonetheless urge that a justiciable con- delivered to the Commissioner a report "in troversy remains because the Commissioner's order states which it alleged that these Plaintiffs en- a conclusion of law that, "Under Tex. Ins. Code § 84.021, gaged in activities in the State of Texas in the Commission may impose an administrative penalty on violation of the Texas Insurance Code, and a person, including an entity, that is licensed or regulated recommended that administrative penalties under and who violates the Insurance Code or rules be assessed against them in the aggregate adopted or orders issued thereunder." However, absent amount of $ 2,000,000." another impending hearing or other action by the De- "[T]he Staff, on July 16, 2004, filed partment adversely impacting the appellants in some with SOAH and served on these Plaintiffs concrete way, the Commissioner's legal conclusion a Notice of Hearing, thereby initiating a amounts to a bare, abstract statement of legal opinion, and contested case . . . [which] was assigned any judicial determination regarding the conclusion Docket No. 454--4-75940H." would necessarily be no more than a mere abstract advi- sory opinion. Cf. Waco Indep. Sch. Dist., 22 S.W.3d at 852 The [*13] pleadings then recount (explaining that "ripeness doctrine allows courts to avoid that the appellants filed a plea to the juris- premature adjudication, and serves the constitutional diction and general denial in the SOAH interests in prohibiting advisory opinions"). proceeding, that the Staff filed a response asserting various statutory bases for juris- We conclude that we do not have subject-matter ju- diction, that the administrative law judge risdiction over this appeal and, therefore, grant the denied the appellant's plea to the jurisdic- Commissioner and the Department's motion to dismiss the tion and summary disposition motion, and case. See Tex. R. App. P. 43.2 (explaining that one of that they appealed the decision to the [*15] permissible types of appellate judgments is to dis- Commissioner, who upheld it. miss appeal); South Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 308 (Tex. 2007) (dismissing case after de- The appellants pled that they "have termining court did not have subject-matter jurisdiction not and will not voluntarily subject them- over case). selves to the [Department]'s jurisdiction" and sought a declaration that "the Com- David Puryear, Justice missioner as a matter of law does not have Before Justices Patterson, Puryear and Pemberton jurisdiction over the Plaintiffs to take the action contemplated by the July 16, 2004 Dismissed on Appellees' Motion Notice of Hearing."

Filed: November 7, 2007 Page 1 575 S.W.2d 571, *; 1978 Tex. App. LEXIS 3847, **

Cecil W. Mayfield, David Hughes, Margaret H. O'Neal and John Robert Trimmier, Appellants v. Dave Hicks and Dave Hicks Company, Inc., Appellees No. 19540 Court of Civil Appeals of Texas, Fifth District, Dallas 575 S.W.2d 571; 1978 Tex. App. LEXIS 3847

October 24, 1978 SUBSEQUENT HISTORY: [**1] Rehearing 1. These default judgments have now become Denied November 28, 1978. final since no appeal was taken from them.

Only the guarantors appeal from the trial court's PRIOR HISTORY: From a District Court of Dallas judgment asserting, among other grounds, certain de- County, Texas fenses to the leases that go to the question of the liability of Four C [*574] Corporation on the leases. In re- sponse, appellees argue that guarantor-appellants are COUNSEL: Philip C. McGahey, Bagby, McGahey, Ross collaterally estopped from asserting any defenses going to & DeVore, Arlington, for appellants. questions relating to the liability of the primary obligor, Four C, or to the extent of that liability, since the judgment Don R. Hanmer, Carrington, Coleman, Sloman, Johnson against Four C is now final. Additionally, guaran- & Blumenthal, Dallas, for appellees. tor-appellants contend that the guaranties were ambigu- ous, that consideration for the guaranties had failed, that OPINION BY: AKIN attorneys' fees were not recoverable under the guaranties, that all offsets and credits had not been allowed them, and OPINION that the liquidated damage [**3] provision of the lease [*573] This is an appeal from an instructed verdict was a penalty. With respect to the defenses to the leases, rendered against the guarantors of two equipment leases. we hold that these guarantors are not collaterally estopped Dave Hicks Company sued Four C Corporation, the pri- and, thus they may assert all defenses available to the mary obligor, for amounts due under the first equipment primary obligor. We also hold that the "liquidated dam- lease agreement and sued Mayfield, Hughes, O'Neal and age" provision of the lease is a penalty rather than a pro- Trimmier, the guarantors, on a guaranty of Four C Cor- vision for just compensation. Accordingly, we reverse poration's obligations under this lease. Dave Hicks, indi- and remand so that appellees may prove their actual vidually, also sued Four C Corporation for the amounts damages. due under a second equipment lease and sued the guar- Collateral Estoppel antors under the terms of a similar guaranty. Four C Corporation neither filed an answer nor participated at Appellees argue that the trial court properly in- trial. The trial judge, acting on the provisions of an al- structed a verdict for the appellees because the liability of leged liquidated damage clause in each lease, granted a the primary obligor on the leases had been finally deter- default judgment in favor of Dave Hicks Company mined by the default judgments and that the appellants, as against Four C Corporation for $ 289,401.08, plus $ guarantors, are collaterally estopped from asserting any 15,000 in attorneys' fees and also granted a default defenses to the liability of the primary obligor, Four C judgment in favor of Dave Hicks, [**2] individually, Corporation, under the leases. In this respect, they con- against Four C Corporation for $ 20,765.51 and attorneys' tend that since the judgment is final as to Four C, the rule fees of $ 2,500. 1 Both plaintiffs were then granted an applies that a judgment against the principal obligor con- instructed verdict against the guarantors. clusively establishes the extent of the principal's liability with respect to a guarantor, if that judgment is obtained in Page 2 575 S.W.2d 571, *; 1978 Tex. App. LEXIS 3847, **

a suit of which the guarantor had full knowledge and an thus no basis for appellees' actual damages. The lessors opportunity to defend, citing R. G. McClung Cotton Co. v. argue, however, that the provision is a valid stipulation of [**4] Cotton Concentration Co., 479 S.W.2d 733, 742 liquidated damages, for which the lessee became liable (Tex.Civ.App.-Dallas 1972, writ ref'd n.r.e.); Empire upon default. We agree with appellants that the provision Steel Corp. v. Omni Steel Corp., 378 S.W.2d 905 is a penalty rather than a liquidated damage provision and (Tex.Civ.App.-Fort Worth 1964, writ ref'd n.r.e.); Latimer that the question of actual damages should be submitted to v. Texas & N. O. R. Co., 56 S.W.2d 933 the jury. The provision in each lease provides: (Tex.Civ.App.-Beaumont 1933, writ ref'd); Young v. Bank of Miami, 175 S.W. 1102 (Tex.Civ.App.-Amarillo 1915, Upon the occurrence of an event of writ ref'd). Although we agree with the principle as- Default, and at any time thereafter, Lessor, serted by appellees, it is not applicable to the facts in this in addition to any other rights and reme- case because the guarantors have not had an opportunity dies he may have, Shall have the right to . . to defend which is a predicate to the application of col- . Take possession of the Equipment, lateral estoppel. 1 Freeman on Judgments § 447, at 978 whereupon Lessee's right to use the same (5th ed. 1925). Indeed, in the cases cited by appellees, under and subject to the terms and provi- those courts applied the rule where the primary obligor's sion of this Lease, and any other right or liability had been established in an action where the interest of Lessee to or in the Equipment guarantor had an opportunity to defend but either did not [**7] shall absolutely cease, But such so do or did so unsuccessfully as in Young v. Bank of taking by Lessor shall not relieve Lessee of Miami, supra, and subsequently attempted to attack that its obligations and liabilities hereunder . . . judgment in a later action by the obligee against the . If Lessor repossesses the Equipment, guarantor. It is only in this situation that courts have ap- Lessor shall have the right, at his option, to plied collateral estoppel. Here, the guarantors attempted lease the Equipment to any other party . . . to assert the defenses available to their principal [**5] in or Lessor may sell the Equipment or sal- the trial court rather than consciously ignore the oppor- vage the valuable components thereof. In tunity to present such defenses. There was no other the event of any such leasing or sale, There opportunity to defend because there had been no prior shall be due from Lessee, and Lessee will action. Thus, the general rule that guarantors have the immediately pay to Lessor, the difference right to raise any defenses to the guaranteed obligation between the amount of rentals to be re- that the principal may have applies. Accordingly, we ceived from any third person, or the pur- hold that where a guarantor has notice of the action chase price at said sale, as the case may be, against his principal and he takes part in the suit, he is not And the total unpaid rental and other bound by the adjudication of the principal's liability by a amounts to be paid herein, plus all costs default judgment against his principal in the same action. and expenses of Lessor in repossessing, This is true because the guarantor may have had no au- transporting, repairing, releasing, selling thority to answer in the principal's behalf or to defend in or otherwise handling the equipment. the name of his principal. Indeed, before collateral es- (Emphasis added) toppel applies, the opportunity to defend must be such that the guarantor can actually control the suit with respect to any defenses including those available to the primary The vice in this provision that makes it a penalty rather obligor. U. S. Wire & Cable Corp. v. Ascher Corp., 34 than a liquidated damage provision is that upon the oc- N.J. 121, 167 A.2d 633, 637 (1961). Thus, where the currence of even a minor default by the lessee, the lessor guarantor is merely given notice that the primary obligor may then declare the lessee in default, take possession of expects the guarantor "to assist" in the conduct of the the equipment, and, in addition, demand payment of all defense, it is insufficient notice or control so as to pre- lease payments called for in the lease. The coupling of clude the [**6] guarantor from asserting the same de- repossession with acceleration of rent, [**8] irrespec- fenses in a subsequent suit or in the same suit. 1 Freeman tive of the type of breach, is the defect in this provision. on Judgments § 449, at 984-85 [*575] (5th ed. 1925). It is immaterial that the actual breach was for nonpayment Accordingly, we must now turn to all points of error as- of rentals. A provision is a penalty if it provides for un- serted by appellants. reasonable payments for a minor breach. For example, the leases here provide that an event of default occurs if Liquidated Damages or Penalty the lessee does not punctually perform any of the obliga- Appellants contend that the clauses in both leases tions contained in the leases and the leases obligate the which entitle the lessor to repossess the equipment and lessee to keep the equipment in good appearance. Con- sue for unpaid rentals is an unenforceable penalty, and ceivably, if the lessee did not punctually keep the Page 3 575 S.W.2d 571, *; 1978 Tex. App. LEXIS 3847, **

equipment in good appearance, then the lessor could Appellants contend next that the trial court erred in declare the lessee to be in default. Such a minor breach granting judgment against them for attorneys' fees under could then lead to draconian penalties disproportionate to the guaranties. They assert that although the lease obli- any actual damage that the lessors may suffer. In Stewart gated Four C Corporation to pay attorneys' fees, since the v. Basey, 150 Tex. 666, 245 S.W.2d 484, 487 (1952), the guaranty agreement does [**11] not expressly provide supreme court condemned a similar provision as a penalty for attorneys' fees, the guarantor is not liable for them, because the lease provided the same reparation for breach citing Miller v. Bush, 42 S.W.2d 156, 159 of each and every covenant in the lease, thus violating the (Tex.Civ.App.-Waco 1931, writ ref'd). Miller is not, principle of just compensation. Consequently, that court however, controlling because in that case the attorneys' concluded that the provision in that case to be a penalty fees were not allowed because neither the guaranty nor the rather than a provision for liquidated damages. Since the obligation guaranteed provided for attorneys' fees. clause in our case subjects the lessee to the [**9] same Consequently, that court applied the rule that guarantors reparation for the breach of any covenant, we likewise are not liable for attorneys' fees, unless they are provided hold that the provision is a penalty rather than one for for in the contract guaranteed, or, if that contract is silent liquidated damages. United States Leasing Corp. v. Smith, with respect to attorneys' fees, unless the guaranty so 555 S.W.2d 766, 770 (Tex.Civ.App.-Tyler 1977, writ ref'd provides. In this case the contract guaranteed expressly n.r.e.); Annot., 104 A.L.R. 132 (1936); 5 Williston on provides for attorneys' fees and the guaranty agreement Contracts § 779 (3rd ed. 1961). specifically binds the guarantor to pay all indebtedness incurred by the lessor by reason of the lessor's default.

Although appellees pleaded that the breach was for This, of course, includes attorneys' fees incurred in as- unpaid rentals, it does not save the provision from being a serting the rights of the obligee. Since the lease agree- penalty because that question turns on whether the provi- ments provide for attorneys' fees against the principal sion provides for reasonable compensation. Of course, it obligor, and since the guaranties cover any and all in- would be unreasonable to permit the lessor to repossess debtedness that the primary obligor may owe, the attor- and to require the lessee or its guarantors to pay the entire neys' fees are included as a part of the guaranteed debt. rentals set forth in the lease for [*576] any insignifi- Gubitosi v. Schoellkopf Products, Inc., 545 S.W.2d [**12] cant, technical breach. Thus, the question of whether the 528, 538 (Tex.Civ.App.-Tyler 1976, no writ); Young v. J. provision is a penalty or a liquidated damage clause is F. Zimmerman & Sons, Inc., 434 S.W.2d 926, 927 determined by the reasonableness of the provision with (Tex.Civ.App.-Waco 1968, writ dism'd); McGhee v. respect to just compensation. Since we have held this Wynnewood State Bank, 297 S.W.2d 876, 884 provision to be a penalty, it will not support the damages (Tex.Civ.App.-Dallas 1957, writ ref'd n.r.e.). Accord- in the judgment instructed by the trial court. On remand ingly, we hold that trial court properly concluded that the question of actual damages is one of proof to be de- attorneys' fees were recoverable from the guarantors. termined by the jury.

Interest Nevertheless, appellees argue that the instructed verdict [**10] was proper because appellants failed to Additionally, appellants complain of the refusal of request proper special issues inquiring whether the liq- the trial court to admit evidence showing that certain sums uidated damage clause was a penalty. We cannot agree allegedly guaranteed by appellants Wharton and Mayfield because any jury issues pertaining to whether a contrac- were interest, and, therefore, not within the guaranty. In tual clause is enforceable as a liquidated damage provi- this respect, they contend that, as a matter of law, these sion or void as a penalty are immaterial since this deter- guarantors cannot be made liable for interest. We cannot mination is a question of law for the trial court, rather than agree. Since the lease provides for interest and since that a jury question and must be viewed as of the time the is the contract guaranteed, the trial court properly per- contract was executed. Schepps v. American District mitted recovery of interest on the same rationale as that of Telegraph Co. of Texas, 286 S.W.2d 684, 690 attorneys' fees, discussed Supra. (Tex.Civ.App.-Dallas 1955, no writ); Zucht v. Stewart Admission of Summaries Title Guaranty Co., 207 S.W.2d 414, 418 (Tex.Civ.App.-San Antonio 1947, writ dism'd ); Muller v. Appellants next argue that the trial court erred in Light, 538 S.W.2d 487, 488 (Tex.Civ.App.-Austin 1976, admitting into evidence certain appellees' exhibits which writ ref'd n.r.e.). Thus, appellees' contention lacks merit. were summaries of accounts relating to payment [*577] Since we have held that the trial court erred in instructing made to appellees on the leases and pertain to certain a verdict, we turn now to other questions that may arise payments made and credits [**13] due. They assert upon retrial. that these summaries were hearsay since the proper predicate for their admission into evidence under Attorneys' Fees Tex.Rev.Civ.Stat.Ann. art. 3737e (Vernon Supp. 1978) Page 4 575 S.W.2d 571, *; 1978 Tex. App. LEXIS 3847, **

was not laid. We agree because it was not shown that the anty was identical to the date of the lease. Some testimony original records were voluminous or that appellants had was to the effect that some of the guarantors actually had access to the original underlying records. Black signed the guaranties as long as several months after the Lake Pipe Line Co. v. Union Construction Co., 538 lease. The evidence is, however, undisputed that the S.W.2d 80, 93-94 (Tex. 1976); Hanson Southwest Corp. v. guarantors would execute the guaranties and that without Dal-Mac Construction Co., 554 S.W.2d 712, 723 the guaranties the lessors would not furnish the equip- (Tex.Civ.App.-Dallas 1977, writ ref'd n.r.e.). ment. We conclude that appellants' contention lacks merit. In Maykus v. Texas Bank & Trust Co. of Dallas, Consideration 550 S.W.2d 396, 398 (Tex.Civ.App.-Dallas 1977, no Appellants also assert that the instructed verdict was writ), the promissory note was dated August 8, 1973, and improper because there were issues raised by the evidence the guaranty was dated August 15, 1973, and the argu- as to whether the guaranty agreements were supported by ment was advanced by appellant [**16] that this shifted consideration. In this respect, they contend that they the burden to appellee to show new consideration. In presented evidence that the guarantors were to receive rejecting this contention, we stated that this apparent stock or stock options in Four C Corporation as consid- discrepancy did not refute the presumption of considera- eration for acting as guarantors and that since the guar- tion inherent in the guaranty agreement, and, therefore, antors failed to receive this stock, there was no consider- held that: ation for the execution of the guaranties. Whether appel- lants failed to receive stock from the primary obligor is (M)ere evidence of a time discrepancy immaterial. Rather, our question is whether consideration in execution between a note and a written exists between the plaintiffs [**14] and the guarantors. guaranty agreement is legally insufficient In this respect sufficient consideration exists if the pri- to rebut the statutory presumption of con- mary obligor receives some benefit. Bonner Oil Co. v. sideration which supports a separate Gaines, 108 Tex. 232, 191 S.W. 552 (1917); Hargis v. guaranty accord.

Radio Corp. of America, Electronic Components, 539 S.W.2d 230, 232 (Tex.Civ.App.-Austin 1976, no writ); Estes v. Oilfield Salvage Co., 284 S.W.2d 201, 204 [*578] Thus, the mere fact that a guaranty agreement (Tex.Civ.App.-Dallas 1955, no writ). Here it is undis- was executed subsequent to the passing of consideration puted that the equipment covered by both of these leases for the principal obligation does not rebut the statutory was delivered to Four C in reliance on the guaranties and presumption of consideration nor does it shift the burden that the primary obligor received the benefit of its bargain. of proof to the plaintiffs to show additional consideration.

We conclude, therefore, that this contention is without Ambiguity merit.

Finally, appellants argue that the trial court erred in Appellants next contend that since the guaranties refusing to submit issues to the jury with respect to their were executed after the leases, the consideration for the allegation that the guaranties are ambiguous and further, leases cannot also serve as consideration for the guaran- that the trial court erred in determining as a matter of law ties. We cannot agree. Before addressing the merits of that the guaranties were not ambiguous. Appellants urge this contention, we first note that all written contracts are that the guaranties are ambiguous because the agreements presumed to be supported by consideration. provide in one part that all guarantors are "jointly and Tex.Rev.Civ.Stat.Ann. art. 27 (Vernon 1969); Unthank v. severally" [**17] liable and that they bind themselves Rippstein, 386 S.W.2d 134, 138 (Tex. 1964); Maykus v. to pay "any and all indebtedness" which would indicate a Texas Bank & Trust Co. of Dallas, 550 S.W.2d 396 general liability of each signer for the total indebtedness (Tex.Civ.App.-Dallas 1977, no writ); Waters v. Waters, as set out in the equipment leases, and then the same 498 S.W.2d 236, [**15] 240-41 (Tex.Civ.App.-Tyler instrument later provides that "the undersigned shall not 1973, writ ref'd n.r.e.). Thus the guaranties themselves be required to pay the lessor hereunder more than the sum import consideration and the burden is on appellants to set out adjacent to the undersigned names." Thus, appel- show lack of consideration. Maykus, Supra, at 398. This lants contend that on the face of the instrument it calls for appellants have failed to do. two different liabilities. We cannot agree. First, it was Finally, appellants urge that since there were ques- not error for the trial judge to refuse to submit issues on tions of fact as to whether the lease agreements and the alleged ambiguity of the guaranties because the ques- guaranties were executed several months apart, consider- tion of whether a written agreement is ambiguous is a ation for the leases cannot serve as consideration for the question of law for the court, rather than for a jury ques- guaranties. One guaranty shows that it was executed six tion. Davis v. Andrews, 361 S.W.2d 419 days after the lease; however, the date on the other guar- (Tex.Civ.App.-Dallas 1962, writ ref'd n.r.e.). Secondly, Page 5 575 S.W.2d 571, *; 1978 Tex. App. LEXIS 3847, **

a reading of the guaranty agreements clearly indicates that more than the amount stated by each guarantor's name. the agreements are capable of only one meaning and that Accordingly, the guaranty agreements [**18] were not is that each guarantor is jointly and severally liable for the ambiguous. indebtedness of Four C Corporation under each lease Reversed and remanded. except that none of the guarantors can be required to pay Page 1

MBM FINANCIAL CORPORATION, ET AL., PETITIONERS, v. THE WOOD- LANDS OPERATING COMPANY, L.P., RESPONDENT NO. 08-0390 SUPREME COURT OF TEXAS 292 S.W.3d 660; 2009 Tex. LEXIS 634; 52 Tex. Sup. J. 1221 March 12, 2009, Argued August 28, 2009, Opinion Delivered PRIOR HISTORY: [**1] 1 CHARLES DICKENS, BLEAK HOUSE ON PETITION FOR REVIEW FROM THE COURT (1853).

OF APPEALS FOR THE NINTH DISTRICT OF In this case, the plaintiff obtained a judgment for $ TEXAS.

1,000 in damages and almost $ 150,000 in attorney's fees.

MBM Fin. Corp. v. Woodlands Operating Co., L.P., 251 But there was no evidence to support the amount of the $ S.W.3d 174, 2008 Tex. App. LEXIS 2535 (Tex. App. 1,000 award, and it is too large to constitute nominal Beaumont, 2008) damages. As the award to the client must be set aside, the attorney's fee award must also. Accordingly, we reverse and render a take-nothing judgment.

COUNSEL: For MBM Financial Corporation, PETI- TIONERS: Jennifer Bruch Hogan, Richard P. Hogan Jr. I. Background and Matthew E. Coveler, Hogan & Hogan, L.L.P., Phillip R. Livingston and Deanna H. Livingston, Livingston & The Woodlands Operating Company leased the 19 Livingston, LLC, Houston, TX. copiers at issue here from MBM Financial Corporation 2 and installed them in late 2000 and early 2001. Each For Woodlands Operation Company, L.P., RESPOND- machine [**2] was covered by a separate four-year ENT: Karen D. Smith, Kirby D. Hopkins and Rachael lease, with annual renewals thereafter unless notice was McDonell Rolon, Drucker, Ruthledge & Smith, L.L.P., sent between 90 and 180 days before the end of the ex- The Woodlands, TX. isting term. The leases required the Woodlands to return the copiers to a location MBM specified.

JUDGES: JUSTICE BRISTER delivered the opinion of the Court. JUSTICE O'NEILL did not participate in the 2 The equipment was leased from MBM Fi- decision. Scott Brister, Justice. nancial Corporation, now known as MBM Finan- cial Interest L.P., and serviced by Marimon OPINION BY: Scott Brister Business Systems, Inc. The two companies were operated from the same location by the same em- OPINION ployees, and Anthony Marimon was the chief operating officer of both. Because the parties and [*663] Since Jarndyce v. Jarndyce, 1 there have judgment treat the two corporations as the same, been charges that some cases benefit the lawyers more we refer to both herein as "MBM," the party listed than the clients. But suits cannot be maintained solely for as lessor. the attorney's fees; a client must gain something before attorney's fees can be awarded. While making losing The Woodlands decided not to renew the leases in parties bear their own attorney's fees may add injury to mid-2004 and asked MBM for the end-of-term dates and insult, the American Rule has long been that each party instructions for return. MBM employees provided the pays its own lawyers. dates and approved a draft termination letter from the Woodlands. But when the actual termination letter arrived Page 2 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 (viewing the evidence in the light favorable to the trial are available for breach of contract, as this Court has court's judgment), 3 MBM's president unilaterally changed stated at least a dozen times. 6 As we wrote in 1853: the dates so the notice would be untimely and demanded rent for another year. To bolster MBM's position, he The law is, that if the contract is proven signed the leases and inserted commencement dates to be broken, the law would give some [**3] for the first time after the Woodlands filed suit. damage, sufficient to authorize a verdict Until suit was filed, MBM also refused to designate a for the plaintiff, [**5] although, in the return location for the bulky equipment. absence of proof of special loss, the dam- ages would be nominal only. 7 See City of Keller v. Wilson, 168 S.W.3d 802, 819-21 (Tex. 2005) (discussing jury verdicts). The same standard of review applies to a trial court's We are hardly alone in recognizing nominal damages for findings following a bench trial. See Catalina v. breach of contract; so do the First and Second Restate- Blasdel, 881 S.W.2d 295, 297 (Tex. 1994). ments, 8 Williston, 9 Corbin, 10 and Black's Law Diction- ary. 11 While more generous damage measures make The Woodlands sued, asserting claims for breach of nominal damages rare, and some judges have questioned contract, fraud, and declaratory relief. MBM counter- the reason behind them, 12 we agree that nominal [*665] claimed for additional rent of $ 160,000, though it later damages may be recovered for breach of contract. dropped that claim. After a two-day bench trial, the trial court rendered judgment awarding the Woodlands $ 1,000 See, e.g., Lubbock Mfg. Co. v. Sames, 598 in damages and $ 145,091.59 in attorney's fees through S.W.2d 234, 237 (Tex. 1980); Travelers Ins. Co. v. trial. The court of appeals affirmed the damages and part Employers Cas. Co., 380 S.W.2d 610, 614-15 of the fee award. 4 On appeal, MBM challenges both. (Tex. 1964); Woodward v. Harlin, 121 Tex. 46, 39 S.W.2d 8, 9 (Tex. 1931); Malakoff Gin Co. v. 251 S.W.3d 174, 184.

Riddlesperger, 108 Tex. 273, 192 S.W. 530, 532 (Tex. 1917); Porter v. Kruegel, 106 Tex. 29, 155 II. Nominal Damages & Breach of Contract S.W. 174, 175 (Tex. 1913); Raymond v. At trial, the Woodlands requested only nominal Yarrington, 96 Tex. 443, 73 S.W. 800, 804 (Tex. damages. The judgment describes the $ 1,000 award as 1903); Davis v. Tex. & P. Ry., 91 Tex. 505, 44 S.W. "actual damages," but the trial court's findings and con- 822, 823 (Tex. 1898); Seibert v. Bergman, 91 Tex. clusions describe them as "actual damages in the form of 411, 44 S.W. 63, 64 (Tex. 1898); East Line & Red nominal damages." [*664] We agree with MBM that River R.R. v. Scott, 72 Tex. 70, 10 S.W. 99, 102 no evidence supports $ 1,000 as either. (Tex. 1888); Stuart v. W. Union Tel. Co., 66 Tex. 580, 18 S.W. 351, 352 (Tex. 1885); Moore v. An- The only damages mentioned [**4] at trial related derson, 30 Tex. 224, 231 (1867); Hope v. Alley, 9 to wasted time the Woodlands spent trying to get MBM's Tex. 394, 395 (1853); McGuire v. Osage Oil cooperation. But there was no evidence about the value of Corp., 55 S.W.2d 535, 537 (Tex. Comm'n App. that time--either the quantity or the cost of it. The 1932, holdings approved); [**6] see also Note, Woodlands blamed this gap on the difficulty of tracking Pleading--Necessity of Damage to Cause of Ac- the lost time, but never explained why it could not have tion, 9 TEX. L. REV. 111, 112 (1930) (citing been estimated. If the difficulty of proof always dis- cases). charged the burden of proof, many litigants would simply Hope, 9 Tex. at 395. not bother. 5 While the Woodlands could have estimated Restatement (Second) of Contracts § 346(2) the value of wasted time, it could not ask the trial court to (1981) ("If the breach caused no loss or if the pull a figure from thin air. amount of the loss is not proved under the rules stated in this Chapter, a small sum fixed without See, e.g., Wal-Mart Stores, Inc. v. Gonzalez, regard to the amount of loss will be awarded as 968 S.W.2d 934, 937 (Tex. 1998) ("[T]hat proof of nominal damages."); accord Restatement (First) causation is difficult does not provide a plaintiff of Contracts § 328 (1932). with an excuse to avoid introducing some evi- 9 See 24 Samuel Williston & Richard A. Lord, dence of causation." (quoting Schaefer v. Tex. A Treatise on the Law of Contracts § 64:6 (4th ed. Employers' Ins. Ass'n, 612 S.W.2d 199, 205 (Tex. 2002) ("An unexcused failure to perform a con- 1980))). tract is a legal wrong. An action will therefore lie Nevertheless, the Woodlands argues the award was for the breach although it causes no injury. Nom- justified as nominal damages. We agree nominal damages inal damages may then be awarded.").

Page 3 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 See 11 JOSEPH M. PERILLO, CORBIN David Pearce & Roger Halson, Damages for ON CONTRACTS § 55.10 (rev. ed. 2005) ("[F]or Breach of Contract: Compensation, Restitution every breach of contract, a cause of action exists. . and Vindication, 28 Oxford J. Legal Stud. 73, 76 . . If the aggrieved party has suffered no com- n.25 (2008) (noting that English cases can be pensable damages, a judgment for nominal dam- found awarding nominal damages of £ 1, £ 2, £ 5, ages will be entered."). £ 10, and £ 15).

11 BLACK'S LAW DICTIONARY 418 (8th 17 Black's Law Dictionary 418 (8th ed. 2004). ed. 2004) (defining nominal damages as "[a] small 18 See, e.g., Nicholas v. Pa. State Univ., 227 amount fixed as damages for breach of contract F.3d 133, 146 (3rd Cir. 2000) (Alito, J.) (holding without regard to the amount of harm"). trial court properly reduced nominal damages See Chronister Oil Co. v. Unocal Ref. & award from $ 1,000 to $ 1).

Mktg. (Union Oil Co. of Ca.), 34 F.3d 462, 466 It appears from the record that the trial court awarded (7th Cir. 1994) [**7] (Posner, C.J.) (stating that $ 1,000 as rough compensation for the wasted time the "for reasons we do not understand every victim of Woodlands incurred. But nominal damages [**9] are not a breach of contract, unlike a tort victim, is enti- for compensation; they are for cases in which there are no tled" to nominal damages). damages, or none that could ever be proved. 19 While a few But $ 1,000 is not nominal damages. "[T]he usual older cases hold otherwise, 20 in recent decades the rule in meaning of the phrase 'nominal damages' refers to an Texas has been that nominal damages are not available award of one dollar." 13 Despite substantial changes over when the harm is entirely economic and subject to proof the centuries in what a dollar will buy, it remains the (as opposed to non-economic harm to civil or property standard award in federal cases, 14 and in Texas cases as rights). 21 Thus, in Gulf States Utilities [*666] Co. v. well. 15 A few cases have awarded nominal damages of $ Low, we rejected nominal damages because actual dam- and even $ 100, 16 but nominal damages are supposed ages had been incurred, yet the plaintiff failed to prove the to be a "trifling sum," 17 and $ 1,000 hardly falls in that amount. 22 "While mathematical precision is not required category. 18 to establish the extent or amount of one's damages, one must bring forward the best evidence of the damage of Harkins v. Crews, 907 S.W.2d 51, 61 (Tex. which the situation admits . . . ." 23 On this record, the $ App.--San Antonio 1995, writ denied); accord ITT 1,000 damage award to the Woodlands cannot be sus- Commercial Fin. Corp. v. Riehn, 796 S.W.2d 248, tained as either actual or nominal damages.

257 (Tex. App.--Dallas 1990, no writ) (stating that "nominal damages [are] traditionally the sum of 19 Black's Law Dictionary 418 (8th ed. 2004) one dollar or perhaps ten dollars"); see also (defining nominal damages as "[a] trifling sum Perillo, supra note 10 ("The usual amount of awarded when a legal injury is suffered but when nominal damages is six cents or one dollar . . . ."). there is no substantial loss or injury to be com- See, e.g., Faragher v. City of Boca Raton, pensated"); see County of Dallas v. Wiland, 216 524 U.S. 775, 783, 118 S. Ct. 2275, 141 L. Ed. 2d S.W.3d 344, 356 (Tex. 2007) (noting that denial of (1998); Farrar v. Hobby, 506 U.S. 103, 107, procedural due process justified award of nominal 113 S. Ct. 566, 121 L. Ed. 2d 494 (1992); Carey v. damages when no harm resulted); [**10] see Piphus, 435 U.S. 247, 267, 98 S. Ct. 1042, 55 L. also Malakoff Gin Co., 192 S.W. at 532; Raymond Ed. 2d 252 (1978). v. Yarrington, 96 Tex. 443, 73 S.W. 800, 804 (Tex. See, e.g., Henry S. Miller Co. v. Evans, 452 1903); McGuire v. Osage Oil Corp., 55 S.W.2d S.W.2d 426, 434 (Tex. 1970); [**8] Tex. Dis- 535, 537 (Tex. Comm'n App. 1932, holdings ap- posal Sys. Landfill, Inc. v. Waste Mgmt. Holdings, proved); Williston & Lord, supra note 9.

Inc., 219 S.W.3d 563, 584 (Tex. App.--Austin 20 See State v. Jackson, 388 S.W.2d 924, 926 2007, pet. denied); State v. Miles, 458 S.W.2d 943, (Tex. 1965); Davis v. Tex. & P. Ry., 91 Tex. 505, 944 (Tex. Civ. App.--Waco 1970, writ ref'd n.r.e.); 44 S.W. 822, 823 (Tex. 1898); Moore v. Anderson, Lucas v. Morrison, 286 S.W.2d 190, 192 (Tex. Civ. 30 Tex. 224, 231 (1867); Hope v. Alley, 9 Tex. 394, App.--San Antonio 1956, no writ); Caswell v. J.S. 395 (1853).

McCall & Sons, 163 S.W. 1001, 1002 (Tex. Civ. 21 See Gulf Coast Inv. Corp. v. Rothman, 506 App.--Austin 1913, no writ). S.W.2d 856, 858 (Tex. 1974) (rejecting claim for See, e.g., Williams v. Kaufman County, 352 nominal damages when evidence showed plaintiff F.3d 994, 1014-15 (5th Cir. 2003) (nominal suffered no economic damage); see also Coastal damages of $ 100); Malakoff Gin Co. v. Oil & Gas Corp. v. Garza Energy Trust, 268 Riddlesperger, 108 Tex. 273, 192 S.W. 530, 532 S.W.3d 1,12 n.36 (Tex. 2008) (stating that nominal (Tex. 1917) (nominal damages of $ 10); see also damages are available for mere trespass against Page 4 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 possessory interest, but reversionary interest is not before us. Accordingly, the Woodlands' fee award owner must prove actual economic damages); cannot be affirmed based on Chapter 38.

Wiland, 216 S.W.3d at 356-57 (stating that nom- inal damages are available for denial of procedural 28 Mustang Pipeline Co., 134 S.W.3d at 201; due process); St. Paul Surplus Lines Ins. Co. v. Green Int'l, 951 S.W.2d at 390; Beaston, 907 Dal-Worth Tank Co., 974 S.W.2d 51, 53 (Tex. S.W.2d at 437.

1998) (per curiam) (stating that nominal damages are available for loss of credit reputation). IV. Attorney's Fees: Fraud Arising From Breach of 79 S.W.3d 561, 567 (Tex. 2002). Contract Rothman, 506 S.W.2d at 858.

Alternatively, the Woodlands argues it is entitled to While we normally remand [**11] for a new trial attorney's fees based on fraud arising from a breach of when there is some evidence to support an amount of contract, pointing to this [**13] Court's reference to actual damages, 24 in this case there was no evidence about such an award in Gill Savings Ass 'n v. Chair [*667] the amount of damages at all. And "where the record King. 29 But in Gill we merely reinstated bankruptcy and shows as a matter of law that the plaintiff is entitled only appellate fees; we did not address the court of appeals' to nominal damages, the appellate court will not reverse award of fees for both contract and fraud on the basis that merely to enable him to recover such damages." 25 Ac- they were inextricably intertwined. 30 We explicitly re- cordingly, we must render judgment that the Woodlands jected this intertwining exception in Tony Gullo Motors I, take nothing as damages on its breach of contract claim. L.P. v. Chapa and reiterated that fees are not allowed for torts like fraud. 31 Thus, even if the Woodlands' fraud See Guevara v. Ferrer, 247 S.W.3d 662, 670 claim arose from a breach of contract, that is no basis for (Tex. 2007); Tony Gullo Motors I, L.P. v. Chapa, an attorney's fee award. 212 S.W.3d 299,314-15 (Tex. 2006).

25 Travelers Ins. Co. v. Employers Cas. Co., 29 797 S.W.2d 31, 31 (Tex. 1990) (per curiam). 380 S.W.2d 610, 614-15 (Tex. 1964); accord Wil- 30 See 783 S.W.2d 674, 680 (Tex. liston & Lord, supra note 9 ("[A] judgment for the App.--Houston [14th Dist.] 1989), aff'd as modi- defendant will not be reversed merely to give the fied, 797 S.W.2d 31 (Tex. 1990). plaintiff nominal damages unless some substantial 31 212 S.W.3d 299, 311-14 (Tex. 2006). right of the plaintiff will thereby be protected.").

V. Attorney's Fees: Bad Faith & Vexatious Conduct III. Attorney's Fees: Breach of Contract The Woodlands also argues it is entitled to attorney's Chapter 38 of the Civil Practices and Remedies Code fees because MBM "has acted in bad faith, vexatiously, allows recovery of attorney's fees in breach of contract wantonly, or for oppressive reasons." The rules of civil cases: "A person may recover reasonable attorney's fees . . procedure allow fees as a sanction against a party who . in addition to the amount of a valid claim and costs, if the files pleadings in bad faith 32 or abuses the discovery claim is for . . . an oral or written contract." [**12] 26 To process. 33 But the Woodlands filed no motion for sanc- recover fees under this statute, a litigant must do two tions pursuant to those rules. Its fee claim was not based things: (1) prevail on a breach of contract claim, and (2) on MBM's litigation [**14] conduct but on its recover damages. 27 The second requirement is implied pre-litigation conduct; such fees are recoverable only if a from the statute's language: for a fee recovery to be "in contract or statute so provides. As the Woodlands cannot addition to the amount of a valid claim," the claimant recover fees based on contract or fraud, allegations that must recover some amount on that claim. the breach was in bad faith or the fraud vexatious do not change that result.

26 Tex. Civ. Prac. & Rem. Code § 38.001.

27 Mustang Pipeline Co. v. Driver Pipeline Co., 32 See TEX. R. CIV. P. 13. 134 S.W.3d 195, 201 (Tex. 2004) (per curiam); 33 See, e.g., Tex. R. Civ. P. 215.1(d), Green Int'l, Inc. v. Solis, 951 S.W.2d 384, 390 215.2(b)(8), 215.4(b), 215.5(b). (Tex. 1997); State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 437 (Tex. 1995). VI. Attorney's Fees: Declaratory Judgment & Breach of Contract While some damages are necessary to recover fees under this statute, 28 this Court has never said whether The court of appeals affirmed part of the attorney's nominal damages are enough. But as the Woodlands can fee award based on the Declaratory Judgments Act. 34 recover neither actual nor nominal damages, that question MBM asserts four reasons why declaratory relief was improper and cannot support a fee award. We disagree Page 5 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 that declaratory relief was improper but agree it cannot should have declined to exercise such ju- support the fee award here. risdiction because it deprived the real plaintiff of the traditional right to choose 34 251 S.W.3d 174, 183-84. the time and place of suit. 40 First, MBM argues that declaratory relief is not available for contract claims (like those here) that are But the "real plaintiff" and the "traditional right to choose "fully matured and predicated upon a terminated rela- the time and place of suit" are materially different in tionship." But the Act says relief is available in contract contract and tort cases. The "real" plaintiff in a tort action cases "before or after there has been a breach," 35 so a is the injured party, yet both parties often suffer injury if a matured breach is explicitly covered by the Act. 36 Further, contract collapses. When each party claims the other declaratory relief is often available after a relationship has breached (as is usually the case), 41 it is hard to say who been terminated, as in cases concerning noncompetition ought to be the "real" plaintiff. Here, for example, why [**15] covenants signed by former employees, 37 or off- should MBM get to choose the time and place of suit setting judgments between former litigants. 38 MBM notes rather than the Woodlands? The Act itself [**17] spe- that we justified declaratory relief in [*668] BHP Pe- cifically contemplates declarations that are negative troleum Co. v. Millard by referring to an "ongoing and (non-liability) as well as affirmative (liability). 42 And continuing relationship," but that was solely to show that historically, declarations of non-liability under a contract the defendant's counterclaim (relating to the parties' future have been among the most common suits filed under the rights) went beyond the plaintiff's claim (relating to past Act, including: damages alone). 39 We disagree that a party can immunize . suits by insurers to declare itself against declaratory relief by simply terminating any non-liability under a duty-to-defend ongoing relationship. clause, 43 Tex. Civ. Prac. & Rem. Code § 37.004(b) . suits by employees to declare (emphasis added). non-liability under a covenant not to 36 See RESTATEMENT (SECOND) OF compete, 44 and JUDGMENTS § 33 cmt. a (1982) ("But while the . suits by a party to declare declaratory action is perhaps most important as a non-liability for higher or additional pay- kind of preventive device, its use is not so re- ments. 45 stricted; it is also sometimes permitted after the wrong has been committed, when a coercive remedy could be awarded to or against the plain- Extending the bar against declarations of non-liability tiff in the declaratory action."). from tort to contract cases would drastically handicap See Mann Frankfort Stein & Lipp Advisors, declaratory-judgment practice in Texas.

Inc. v. Fielding, 289 S.W.3d 844, 852, 2009 Tex. LEXIS 124 (Tex. 2009) (declaring former em- 695 S.W.2d 564, 566 (Tex. 1985). ployee's noncompetition covenant enforceable); See, e.g., Mustang Pipeline Co. v. Driver see also Lowenberg v. City of Dallas 261 S.W.3d Pipeline Co., 134 S.W.3d 195, 200 (Tex. 2004) 54, 59 (Tex. 2008) (per curiam) (affirming de- (per curiam); Bennett v. Cochran, 96 S.W.3d 227, claratory judgment [**16] regarding unlawful (Tex. 2002) (per curiam); Callahan & Assocs. tax that had been repealed). v. Orangefield Indep. Sch. Dist., 92 S.W.3d 841, Bonham State Bank v. Beadle, 907 S.W.2d 842 (Tex. 2002) (per curiam); State ex rel. Dep't of 465, 468 (Tex. 1995).

Criminal Justice v. VitaPro Foods, Inc., 8 S.W.3d 39 800 S.W.2d 838, 841-42 (Tex. 1990).

316, 321 (Tex. 1999); Stuart v. Bayless, 964 Second, MBM urges that declarations of non-liability S.W.2d 920, 921 (Tex. 1998) (per curiam); For- should be barred in contract cases, just as they are in tort mosa Plastics Corp. USA v. Presidio Eng'rs & cases. As we said in Abor v. Black: Contractors, Inc., 960 S.W.2d 41, 43 (Tex. 1998); Green Int'l, Inc. v. Solis, 951 S.W.2d 384, 386 Because [the Act] appears to give the (Tex. 1997); [**18] Stewart Title Guar. Co. v. courts jurisdiction over declarations of Aiello, 941 S.W.2d 68, 70 (Tex. 1997); Mancorp, non-liability of a potential defendant in a Inc. v. Culpepper, 802 S.W.2d 226, 227 (Tex. tort action, we find that the . . . District 1990).

Court had jurisdiction over the suit. 42 Tex. Civ. Prac. & Rem. Code § 37.003(b) However, we hold that the trial court ("The declaration may be either affirmative or Page 6 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 negative in form and effect, and the declaration 49 See, e.g., In re Sw. Bell Tel. Co., 235 S.W.3d has the force and effect of a final judgment or 619, 625 (Tex. 2007) (holding declaratory relief decree."). unavailable until administrative remedies were 43 See, e.g., Fairfield Ins. Co. v. Stephens exhausted); Thomas v. Long, 207 S.W.3d 334, 342 Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008); (Tex. 2006) (same); State v. Morales, 869 S.W.2d Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 941, 942 (Tex. 1994) (holding civil courts can S.W.2d 81 (Tex. 1997) (per curiam); Nat'l Union declare criminal laws unconstitutional only in Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast limited circumstances); Canyon Creek Land Motor Lines, Inc., 939 S.W.2d 139 (Tex. 1997) Corp., 456 S.W.2d at 894 (holding civil courts (per curiam); Liberty Mut. Fire Ins. Co. v. San- generally should not entertain declaratory actions ford, 879 S.W.2d 9 (Tex. 1994) (per curiam). to overturn an administrative agency's interpreta- See, e.g., Mann Frankfort Stein & Lipp Ad- tion of a penal statute the agency is to enforce); visors, Inc. v. Fielding, 289 S.W.3d 844 2009 Tex. Cobb, 190 S.W.2d at 714 ("We do not hold that the LEXIS 124 (Tex. 2009); In re AutoNation, Inc., declaratory judgment procedure may be used 228 S.W.3d 663 (Tex. 2007). when a statute provides an administrative board or See, e.g., Yzaguirre v. KCS Res., Inc., 53 other special tribunal or special procedure for the S.W.3d 368, 370 (Tex. 2001); VitaPro Foods, Inc., particular type of case in hand as, for example, a 8 S.W.3d at 321. workmen's compensation case.").

50 See Tex. Civ. Prac. & Rem. Code § [*669] Third, MBM argues that declaratory 37.004(a), (b) (stating that "[a] contract may be judgments are available only if there is no adequate al- construed [**21] either before or after there has ternative cause of action. But this has never been the rule been a breach," and that "[a] person interested in Texas. Shortly after the Legislature passed the Act in under . . . writings constituting a contract . . . may 1943, 46 this Court adopted exactly [**19] the opposite have determined any question of construction or rule, stating that "the existence of another adequate rem- validity arising under the . . . contract"). edy does not bar the right to maintain an action for de- claratory judgment" and finding this rule supported by Yet while declaratory relief may be obtained under "better reasoning." 47 The federal courts follow the same the Act in all these circumstances, that does not mean rule, as Federal Rule of Civil Procedure 57 makes clear: attorney's fees can too. Texas has long followed the "The existence of another adequate remedy does not pre- "American Rule" prohibiting fee awards unless specifi- clude a declaratory judgment that is otherwise appropri- cally provided by contract or statute. 51 By contrast, the ate." We agree the Act cannot be invoked when it would Declaratory Judgments Act allows fee awards to either interfere with some other exclusive remedy 48 or some party in all cases. 52 If repleading a claim as a declaratory other entity's exclusive jurisdiction. 49 But prohibiting judgment could justify a fee award, attorney's fees would declaratory judgments whenever a breach of contract be available for all parties in all cases. That would repeal claim is available would negate the Act's explicit terms not only the American Rule but also the limits imposed on covering such claims. 50 fee awards in other statutes. Accordingly, the rule is that a party cannot use the Act as a vehicle to obtain otherwise Uniform Declaratory Judgments Act, 48th impermissible attorney's fees. 53 Leg., R.S., ch. 164, 1943 Tex. Gen. Laws 265.

47 Cobb v. Harrington, 144 Tex. 360, 190 51 See Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.2d 709, 714 (Tex. 1945); accord Tex. Liquor S.W.3d 299, 310-11 (Tex. 2006).

Control Bd. v. Canyon Creek Land Corp., 456 52 See Tex. Civ. Prac. & Rem. Code § 37.009.

S.W.2d 891, 895 (Tex. 1970); Crow v. City of 53 See Martin, 133 S.W.3d at 267; THPD, Inc. Corpus Christi, 146 Tex. 558, 209 S.W.2d 922, v. Cont'l Imports, Inc., 260 S.W.3d 593, 619-20 (Tex. 1948); see also McKinley v. McKinley, (Tex. App.--Austin 2008, no pet.); Warrantech 496 S.W.2d 540, 542 (Tex. 1973). Corp. v. Steadfast Ins. Co., 210 S.W.3d 760, 770 See, e.g., Martin v. Amerman, 133 S.W.3d (Tex. App.--Fort Worth 2006, pet. denied); 262, 267 (Tex. 2004) (noting that the Property [**22] Sani v. Powell, 153 S.W.3d 736, 745 (Tex. Code describes trespass-to-try-title actions App.--Dallas 2005, pet. denied); City of Houston [**20] as "the method for determining title"); v. Texan Land & Cattle Co., 138 S.W.3d 382, 392 John G. & Marie Stella Kenedy Mem'l Found. v. (Tex. App.--Houston [14th Dist.] 2004, no pet.); Dewhurst, 90 S.W.3d 268, 289 (Tex. 2002) (noting Sw. Guar. Trust Co. v. Hardy Road 13.4 Joint that Natural Resources Code provisions author- Venture, 981 S.W.2d 951, 957 (Tex. izing declaratory suits by coastal property owners App.--Houston [1st Dist.] 1998, pet. denied); do not provide for fees).

Page 7 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 Boatman v. Lites, 970 S.W.2d 41, 43 (Tex. Nevertheless, the Woodlands argues it is entitled to App.--Tyler 1998, no pet.). fees because the declaratory relief it sought did more than merely duplicate the issues litigated in its contract and [*670] The Act was originally "intended as a fraud claims. The five declarations the Woodlands ob- speedy and effective remedy" for settling disputes before tained in the judgment were: substantial damages were incurred. 54 It is "intended to provide a remedy that is simpler and less harsh than co- 1. that the Woodlands "complied with ercive relief, if it appears that a declaration might termi- its contractual obligations to provide no- nate the potential controversy." 55 But when a claim for tice of its intent not to renew"; declaratory relief is merely tacked onto a standard suit based on a matured breach of contract, allowing fees 2. that MBM "improperly failed to under Chapter 37 would frustrate the limits Chapter 38 timely designate a carrier and location for imposes on such fee recoveries. And granting fees under the return"; Chapter 37 when they are not permitted under the specific 3. that MBM's manipulation of the common-law or statutory claims involved would violate termination dates barred it from making the rule that specific provisions should prevail over gen- "any claim that [the Woodlands] failed to eral ones. 56 While the Legislature intended the Act to be provide timely notice"; remedial, 57 it did not intend to supplant all [**23] other statutes and remedies. 58 4. that the Woodlands "relied to its detriment on the termination dates pro- Cobb, 190 S.W.2d at 713. vided by MBM"; and 55 Restatement (Second) of Judgments § 33 cmt. c (1982). 5. that the Woodlands "has suffered See, e.g., Tex. Gov't Code § 311.026(b) (re- damage as a direct result of its detrimental reliance upon the termination dates pro- quiring that specific statutory provisions prevail vided by MBM." over general ones in statutory construction); Strong v. Garrett, 148 Tex. 265, 224 S.W.2d 471, 475 (Tex. 1949) (noting the "general rule" that specific descriptions in deeds prevail over general [*671] Whether the Woodlands sent timely notice of cancellation and MBM failed to designate a return loca- ones). tion were part and parcel of the Woodlands' contract 57 See Tex. Civ. Prac. & Rem. Code § claim. And whether MBM misrepresented the [**25] 37.002(b). termination dates and the Woodlands relied on those Crow v. City of Corpus Christi, 146 Tex. 558, 209 S.W.2d 922, 924 (Tex. 1948) ("[T]he misrepresentations were duplicative of the Woodlands' remedy afforded by the Declaratory Judgment Act fraud claim. Thus, the declarations sought by the Wood- lands merely duplicated issues already before the trial is additional and does not supplant any existing court. remedy."); Restatement (Second) of Judgments § cmt. c ("[D]eclaratory actions are to supple- It is easy to understand the Woodlands' frustration ment rather than supersede other types of litiga- with MBM. Viewing the evidence in the proper light, tion."). MBM withheld information, changed renewal dates, and At trial, the Woodlands recovered no damages on its manipulated the truth to try to get more rent than it was entitled to. It raised dodges, defenses, and counterclaims breach of contract claim, so it cannot recover fees under at various stages that all eventually collapsed in a heap, Chapter 38. Allowing it to recover the same fees under but only after forcing the Woodlands to incur legal fees Chapter 37 would frustrate the provisions and limitations of the neighboring chapter in the same Code. 59 Accord- and costs. But to recover those fees, the Woodlands had to ingly, we hold the Woodlands cannot recover attorney's recover damages for breach of contract. That it failed to do. As Chief Justice Calvert wrote for this Court almost fees under the Declaratory Judgments Act.

50 years ago: Cf. City of Waco v. Lopez, 259 S.W.3d 147, Perhaps every successful litigant should 153-55 (Tex. 2008) [**24] (holding the Legis- lature did not intend to allow claimants to elect be permitted to recover his attorney fees between Human Rights and Whistleblower Acts from the opposite party. But whether that policy would be wise is for the Legislature, because differing procedures and remedies would not the courts, to decide. Apparently the frustrate legislative goals).

Legislature has not thought it wise. 60 Page 8 292 S.W.3d 660, *; 2009 Tex. LEXIS 634, **; 52 Tex. Sup. J. 1221 Accordingly, we reverse the judgment of the court of appeals and render judgment that [**26] the Woodlands take nothing.

60 Van Zandt v. Fort Worth Press, 359 S.W.2d Scott Brister 893, 896 (Tex. 1962).

Justice OPINION DELIVERED: August 28, 2009 Page 1

DAVID L. MCFADDEN, Appellant, v. PEDRO ZARAGOSA FUENTES, Appellee No. 08-89-00402-CV COURT OF APPEALS OF TEXAS, Eighth District, El Paso 790 S.W.2d 736; 1990 Tex. App. LEXIS 967; 12 U.C.C. Rep. Serv. 2d (Callaghan) 728

April 25, 1990 PRIOR HISTORY: [**1] Appeal from 34th Dis- sent Fuentes notice that if the $ 30,000.00 of March 1, trict Court of El Paso County, Texas. TC No. 86-8580, 1986 was not timely made, "Mr. McFadden (seller) will William Moody, Judge. have no alternative but to cancel the agreement and retain all money paid pursuant to the terms of the agreement."

On September 10, 1986, the seller filed suit for conse- COUNSEL: ATTORNEY FOR APPELLANT, Harris, quential damages caused by the breach of contract.

Hon. Ralph E., El Paso, Texas.

The focal point of the appeal is whether the exacted $ 20,000.00 was a penalty of forfeiture to be applied toward ATTORNEY FOR APPELLEE, Broaddus, Jr., Hon. consequential damages for a breach of contract, or Francis C., El Paso, Texas. whether it was proper liquidated damages that had been stipulated to by the parties whereby "cancellation" of the JUDGES: JERRY WOODARD, Justice, Fuller, contract precludes any further damage award.

Woodard and Koehler, JJ.

To be enforceable as liquidated damages under OPINION BY: WOODARD common law, the damages must be uncertain and the stipulation must be reasonable. Stewart v. Basey, 150 OPINION Tex. 666, 245 S.W.2d 484 (1952). However, in 1965, the Uniform Commercial Code was enacted in Texas. The [*737] OPINION specific provisions of the UCC supersede the common This is an appeal from a summary judgment in favor law applicable to transactions in goods. of the Defendant, Mr. Fuentes. We reverse. Tex.Bus.&Com.Code Ann. sec. 2.718 (Vernon 1968), provides for [**3] liquidated damages in the agreement The parties contracted for Fuentes' purchase of cer- subject to their reasonableness in light of anticipated or tain bowling, restaurant and bar equipment. On the exe- actual harm, difficulties in proving loss and inconven- cution of the agreement, $ 20,000.00 was paid, $ ience or nonfeasibility of otherwise obtaining an adequate 30,000.00 was to be paid on or before March 1, 1986 and remedy. Section 2.719 now provides that remedies in case $ 135,000.00 was to be paid on May 1, 1986, which was of default can be contracted for, including an exclusive or the date Fuentes was to take possession of the property. sole remedy where expressly agreed upon. Section 2.719, The contract was prepared by the attorney for the seller. It Uniform Commercial Code Comment states: provided that "[i]n the event Buyer fails to pay the full purchase price for the personal property as provided for (2) Subsection (1)(b) creates a presumption that herein on or before May 1, 1986, Seller shall have the clauses prescribing remedies are cumulative rather than right to retain all money paid pursuant to the terms and exclusive. If the parties intend the term to describe the conditions of this Agreement, and cancel this Agree- sole remedy under the contract, this must be clearly ex- ment." Under the contract, $ 20,000.00 was deposited pressed. with the attorney for the seller [**2] as earnest money to The limitation or exclusion of consequential damages be held in escrow until the terms of the agreement had must not be unconscionable, but unconscionability would been complied with. On January 13, 1986, the attorney Page 2 790 S.W.2d 736, *; 1990 Tex. App. LEXIS 967, **; 12 U.C.C. Rep. Serv. 2d (Callaghan) 728 be a matter of confession and avoidance, and was not also retains any remedy for breach of the whole contract affirmatively pleaded in this case. The pertinent para- or any unperformed balance." Whenever a statute or other graphs of the contract are as follows: legal rule requires a specified "legal meaning" to be given to certain words, the requirement is that the use of those (1) With the execution of this Agreement, (the buyer words shall produce a particular legal effect whether the shall) deposit $ 20,000.00 in escrow with Ralph E. Harris, contracting parties intended to produce it or not. 3 Corbin said deposit representing earnest money to be held in On Contracts, sec. 550, at 196-197 (West 1960). A mis- escrow by the said Ralph E. Harris until such time as all take in understanding what the legal definition is would be terms and conditions of this Agreement are complied a mistake of law. Corbin, sec. 619, at 766. A mistake of with; [**4] . . . law has not been pleaded by the parties. .....

We hold that there is no evidence establishing that (2) In the event Buyer fails to pay the full purchase any stipulated sum is reasonable in light of (1) the antic- price for the personal property as provided for herein on ipated or actual harm caused by the breach; (2) the diffi- or before May 1, 1986, Seller shall have the right to retain culties of proof or loss; and (3) the difficulty [**6] of all money paid pursuant to the terms and conditions of this otherwise obtaining an adequate remedy as required by Agreement, and cancel this Agreement. Section 2.718(a), and therefore, no valid liquidated damage provision has been established. Further, even if The contract further provides that the buyer has the this were so, under the facts of this case, forfeiture of the option to cancel the contract or extend the closing date if sum would be precluded from being a sole remedy by the the property becomes damaged by fire or other casualty. It provisions of Section 2.719(a)(2) which require express also provides that if the seller is unable to convey the agreement for such a limitation of remedy. The language property, the money shall be [*738] returned to buyer, in this case expressly retains any remedy for breach of the and the buyer has the right to cancel the agreement. whole contract by the solitary use of the legal phrase In the interpretation of contracts, the primary concern "cancel the agreement." It would be valid argument gen- of courts is to ascertain and to give effect to the intentions erally, however, that if a liquidated damage clause were of the parties as expressed in the instrument. R & P created under Section 2.718, it would logically self oper- Enterprises v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d ate to be the exclusive remedy selection as contemplated (Tex. 1980). To achieve this object, the Court will by Section 2.719. examine and consider the entire instrument so that none of The movant for summary judgment has the burden of the provisions will be rendered meaningless. If a written showing that there is no genuine issue of material fact and instrument is so worded that a court may properly give it a that he is entitled to judgment as a matter of law. In de- certain or definite legal meaning or interpretation, it is not ciding whether or not there is a disputed fact issue pre- ambiguous. On the other hand, [**5] a contract is am- cluding summary judgment. evidence favorable to the biguous only when the application of the applicable rules nonmovant will be taken as true. Every reasonable in- of interpretation to the instrument leave it genuinely un- ference must be indulged in favor of the nonmovants and certain which one of the two meanings is proper meaning. any doubts resolved in their favor. Nixon v. Mr. Property Id. at 519.

Management [**7] Company, Inc., 690 S.W.2d 546 Tex.Bus.&Com.Code Ann sec. 2.106(d) states (Tex. 1985). "'Cancellation' occurs when either party puts an end to the Judgment of the trial court is reversed and the cause is contract for breach by the other and its effect is the same remanded for trial. as that of 'termination' except that the cancelling party Page 1

CHRISTOPHER MCGINNIS, INDIVIDUALLY, AND BY NEXT FRIEND, BUFFY MCGINNIS, Plaintiffs, VS. UNION PACIFIC RAILROAD CO., Defendant and Third-Party Plaintiff, METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS, Intervenor VS. LIBERTY MUTUAL FIRE INSURANCE COMPANY AND THOSE CERTAIN INDIVIDUAL UNDERWRITERS of LLOYD'S LONDON, FORMING SYNDICATE 1861 AND SYNDICATE 2003 SUBSCRIBING SEVERALLY TO POLICY NUMBER 576/UF7273700 FOR THE 2003 LLOYD'S YEAR OF ACCOUNT, Third-Party Defendants.

CIVIL ACTION NO. 3:07-CV-32 UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS, GALVESTON DIVISION 612 F. Supp. 2d 776; 2009 U.S. Dist. LEXIS 33687

March 14, 2009, Decided SUBSEQUENT HISTORY: Reconsideration granted by, in part, Reconsideration denied by, in part McGinnis v. For Tonicstar Limited, Member of Syndicate 1861 and Union Pac. R.R. Co., 2009 U.S. Dist. LEXIS 81383 (S.D. 2003 and Catlin Sydicate Ltd., Member of Syndicate Tex., Sept. 8, 2009) 2003, Subscribing Severally, and Not for One another to Policy Number 576/UF2727300, Third Party Defendant: PRIOR HISTORY: McGinnis v. Union Pac. R.R. Co., John Martin Ribarits, LEAD ATTORNEY, Preis Roy, 2008 U.S. Dist. LEXIS 112602 (S.D. Tex., Apr. 24, 2008) Houston, TX.

For Metropolitan Transit Authority of Harris County, COUNSEL: [**1] For Christopher McGinnis, Indi- Texas, Intervenor: Bryan S Dumesnil, LEAD ATTOR- vidually, and by next friend, Buffy McGinnis, Plaintiff: NEY, Bracewell Giuliani LLP, Houston, TX; William G George William Gore, LEAD ATTORNEY, Attorney at Hagans, Bracewell & Giuliani LLP, Houston, TX.

Law, Houston, TX.

JUDGES: KEITH [**2] P. ELLISON, UNITED For Union Pacific Railroad Company, Defendant, STATES DISTRICT JUDGE.

ThirdParty Plaintiff: John L Hagan, LEAD ATTORNEY, Jones Day, Houston, TX; Benton R Bond, Union Pacific OPINION BY: KEITH P. ELLISON RR Co, Spring, TX.

OPINION For Liberty Mutual Fire Insurance Company, Third Party Defendant: Michael Phillips, LEAD ATTORNEY, Phil- [*782] MEMORANDUM AND ORDER lips Akers PC, Houston, TX.

Before the Court are the Motions for Summary Judgment of Third-Party Defendants Liberty Mutual Fire For Certain Underwriters at Lloyd's, London, Subscribing Insurance Company ("Liberty Mutual") (Docket Entry to Policy Number 576/UF7273700, Third Party Defend- ("Doc.") No. 64) and Underwriters of Lloyd's, London ant: John Martin Ribarits, LEAD ATTORNEY, Preis ("Lloyd's") (Doc. No. 66), and all objections, responses Roy, Houston, TX; Jennifer E Michel, Preis & Roy, and replies thereto (respectively, Doc. Nos. 74, 76, 84 & Lafayette, LA; Leah N. Englehardt, Preis & Roy, A PLC, 85; Doc. Nos. 76, 81, 87, 88 & 90). Also before the Court New Orleans, LA. are the Partial Motions for Summary Judgment of Page 2 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

Third-Party Plaintiff Union Pacific Railroad Company that accidents might arise from Siemens' use of the prop- ("UP") (Doc. Nos. 67 & 69) and Intervenor Metropolitan erty. Due to the increased risk, Metro and UP agreed to Transit Authority ("Metro") (Doc. No. 65), and all objec- incorporate two important requirements into the lease tions, responses and replies thereto (respectively, Doc. agreement to protect UP. First, pursuant to the terms of Nos. 71, 77, 89 & 91; Doc. Nos. 70, 78, 86). the lease agreement, [**5] Metro was required to pur- chase specified insurance to protect UP from the increased After reviewing the Motions, all related filings, and risk. The agreement provides: the relevant law, the Court finds, for the reasons discussed below, that Liberty Mutual's Motion for Summary [Metro] shall, at its sole costs and ex- Judgment should be granted in part and denied in part, that pense, procure and maintain during the life Lloyd's Motion for Summary Judgment should be denied, of this Agreement the following insurance [**3] that UP's Motions for Partial Summary Judgment of coverage: UP should be granted in part and denied in part, and that Metro's Motion for Partial Summary Judgment should be A. Commercial General Liability in- granted in part and denied in part. surance. This insurance shall contain broad form contractual liability with a single I. FACTUAL BACKGROUND limit of at least $ 5,000,000 each occur- rence or claim and an aggregate limit of at A. Metro's Light Rail Project least $ 10,000,000. Coverage must be purchased on a post 1998 ISO or equiva- In 2001, Metro began construction of a light rail lent form. transportation system in Houston, Texas. The initial phase of the light rail project included the construction of a 7.5 *** mile light rail system with 16 stations, downtown street B. Railroad Protective Liability in- improvements, a Transit Administration building, Park surance naming only [UP] as the insured and Ride lots, a test track, a rail operations building, and with a combined single limit of $ the design, manufacture, assembly, testing and acceptance 2,000,000 per occurrence with a $ of 18 light rail vehicles ("LRVs"). Metro obtained seven 6,000,000 aggregate major contracts for the construction of the light rail sys- tem. One of Metro's contracts for construction was with *** Siemens Transportation Systems ("Siemens"), the Vehi- C. Workers Compensation and Em- cle and Systems Contractor. Metro's contract with Sie- ployers Liability insurance ... mens was on a "ready to go" turnkey basis, which meant that Siemens was responsible for virtually all aspects of *** the light rail project related to the vehicles and systems, including the track, the LRVs, fare collection, catenary, D. Umbrella or Excess Policies In the sub-stations, signaling, and communications. In [**4] event [Metro] utilizes Umbrella or excess particular, the "ready to go" contract made Siemens re- policies, these policies shall "follow form" sponsible for the installation of the 18 LRVs, which each and afford no less coverage than the pri- required separate testing before Metro would take final mary policy. acceptance for their use in its light rail transportation system. This testing, [*783] or "burning-in" process, also referred to as commissioning, necessitated Siemens' (Doc. No. 55, Ex. A-4 at Bates 1590-91.) use of a suitable test track. Siemens was also required to Metro separately agreed to release and indemnify UP provide Metro employees with operator training and to for losses as follows: supervise the LRVs. [Metro], to the extent it may lawfully do B. Metro's Lease Agreement with Union Pacific so, waives and releases any and all claims In order to facilitate the installation or testing by against [UP] for, and agrees to indemnify, Siemens of Metro's new fleet of LRVs, Metro entered into defend and [**6] hold harmless [UP], its negotiations with Union Pacific ("UP") for a five year affiliates, and its and their officers, agents lease agreement to construct, maintain, and operate a test and employees ("Indemnified Parties") track on UP's land. Because the premises Metro sought to from and against, any loss, damage (in- lease for its light rail project were located in close prox- cluding without limitation, punitive or imity to a railroad right-of-way owned by UP, on which it consequential damages), injury, liability, operated two active rail lines, there was an increased risk claim, demand, cost or expense (including, Page 3 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

without limitation, attorneys' fees and ris County, Texas (Metro) and others, all as more fully set court costs), fine or penalty (collectively, forth in the attached Policy Wording." The Declarations "Loss") incurred by any person (including, listed the "Named Insured" as "THE METROPOLITAN without limitation, [UP], [Metro], or any TRANSIT AUTHORITY OF HARRIS COUNTY, employee of [UP] or [Metro]) and arising TEXAS (METRO), Contractors, Subcontractors of any from or related to (i) any use of the Prem- tier and Consultants and Sub-Consultants of any tier, for ises by [Metro] or any invitee or licensee whom any afore-mentioned Insureds have agreed by or [Metro], (ii) any act or omission of contract to furnish the insurance coverage provided under [Metro], its officers, agents, employees, this policy per the project." (Id.) As set forth in the Dec- licensees or invitees, or (iii) any breach of larations page, the Umbrella policy provided limits of $ this Lease by [Metro]. 50,000,000 per occurrence, $ 50,000,000 General Ag- gregate (in accordance with Section III, Limits of Insur- ance), and $ 50,000,000 Products-Completed Operations (Id. at Bates 1587.) The agreement limited the indemnity Aggregate for the period (otherwise in accordance with to situations where UP was not solely negligent. (Id.) Section III, Limits of Insurance). The Declarations page also [**9] provided that there was a $ 25,000 "Self In- C. The Insurance Policies sured Retention (inclusive of Defense Costs)." (Id.) To secure insurance coverage for the light rail D. The Accident, Subsequent Claims & Settlements transportation system, Metro retained the services of Willis of Texas, an insurance broker. With the assistance On January 23, 2004, Christopher McGinnis, a UP of Willis of Texas, Metro purchased a Railroad Protective worker, was operating one of UP's Hyrail vehicles. He Liability policy ("RPL"), a Wrap-Up policy, and an Um- was traveling to a work site on the railroad tracks. As he brella or Excess [*784] policy. First, with regard to the waited behind another Hyrail vehicle that had already RPL, in exchange for Metro's [**7] payment of a $ crossed the LRV test track and had maneuvered onto the 29,760 advance premium, which was based on a contract rail road tracks, another UP employee manually lifted the cost of $ 30,000,000, Liberty Mutual issued RPL policy crossing arm so that McGinnis could also cross the test number TE2-691-004173-031. The RPL listed "Union track and maneuver his Hyrail vehicle onto the railroad Pacific Railroad Company" as the Named Insured and tracks. McGinnis was not aware that a LRV was ap- "Metropolitan Transit Authority of Harris County" as the proaching the crossing. The LVR, unable to stop, collided "Designated Contractor." (Doc. No. 64, Ex. A.) The pol- with McGinnis s Hyrail vehicle. The collision seriously icy provided liability limits in the amount of $ 2,000,000 injured McGinnis. Several individuals on the LRV also per occurrence, or an aggregate limit of $ 4,000,000. The sustained injuries. effective dates of coverage under the RPL were from Following the collision, the individuals on the LRV March 14, 2001 to September 14, 2004. (Id.) who were injured brought suit against UP and McGinnis, Liberty Mutual also issued Wrap-Up policy number and McGinnis filed the instant suit against UP. UP placed RG2-691-004173-011, in which "Metropolitan Transit Liberty Mutual on notice of the loss, tendered both the Authority of Harris County" was listed as the Named claims and suits brought against it to Liberty Mutual Insured. (Doc. No. 64, Ex. B.) The Wrap-Up policy, under the RPL policy, and demanded a defense [*785] consisting of three layers, included an Owner Controlled and indemnity. In addition, pursuant to the contractual Consolidated Insurance Program ("OCCIP"), a General indemnification [**10] obligation in the Lease Agree- Amendatory Endorsement ("GAE"), and a Commercial ment, UP tendered the claims and suits brought against it General Liability Insurance ("CGL") policy. (Id.) The to Metro. Metro, in turn, tendered UP's demands for con- policy provided a limit of liability for personal injury and tractual indemnity to Liberty Mutual and demanded a property damage to $ 2,000,000 per occurrence, a general defense and indemnity under the CGL policy. Liberty aggregate limit (other than Products-Completed Opera- Mutual denied UP's demand for defense and indemnity tions) of $ 4,000,000, and a Products-Completed Opera- under the RPL policy. Liberty Mutual also denied Metro's tions Aggregate [**8] Limit of $ 4,000,000. (Id.) The demand for coverage. UP and Metro made similar de- effective dates for coverage under this policy were from mands for defense and indemnity to Lloyd's under the March 14, 2001 to September 14, 2001. Umbrella policy, but their demands were denied.

In addition, Lloyd's issued Commercial Umbrella or After conducting an investigation of the accident, UP Excess policy number 576/UF72727000, with effective decided to settle the claims brought by the individuals on dates of coverage from March 14, 2001 to September 14, the train, as well as the lawsuit brought by McGinnis. UP 2004. (Doc. No. 65, Ex. B.) The "Schedule" listed "the alleges that it paid close to six million dollars to settle all Assured" as "The Metropolitan Transit Authority of Har- Page 4 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

the bodily injury and property damages claims arising out 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 of the accident. (1986); see also United [*786] States v. Arron, 954 F.2d 249, 251 (5th Cir. 1992). "An issue is genuine if the II. PROCEDURAL BACKGROUND evidence is sufficient for a reasonable jury to return a verdict for the nonmoving party." Cooper Tire & Rubber Plaintiff Christopher McGinnis filed his Complaint Co. v. Farese, 423 F.3d 446, 454 (5th Cir. 2005). against UP on January 19, 2007. McGinnis settled his claims UP on March 23, 2007. On March 29, 2007, before Under Rule 56(c), [**13] the moving party bears the the case was officially closed, UP filed its Third-Party initial burden of informing the court of the basis for its Complaint against Liberty Mutual and Lloyd's for the belief that there is an absence of a genuine issue for trial following: (1) breach of contract under the RPL and the and of identifying those portions of the record that Umbrella policy; (2) declaratory judgment; [**11] (3) demonstrate such an absence. See Matsushita Elec. Indus. violations of Sections 541.060, 541.061, 541.151, and Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.

542.051 of the Texas Insurance Code; (4) fraud; and (5) in Ct. 1348, 89 L. Ed. 2d 538 (1986); see also, Burge v. the alternative, reformation of the policies based on mu- Parish of St. Tammany, 187 F.3d 452, 464 (5th Cir. tual mistake, and relief based on waiver and estoppel. 1999). (Doc. Nos. 9 & 46.) Metro successfully intervened in the Where the moving party meets its initial burden un- action on April 5, 2007. (Doc. Nos. 13 & 14.) Metro's der Rule 56(c), the burden then shifts to the nonmovant to Complaint, and Amended Complaint in Intervention, show a genuine issue of material fact exists that precludes allege the same causes of action brought by UP. (Doc. No. summary judgment. "[T]he nonmoving party must come 47.) forward 'with specific facts showing that there is a genu- Meanwhile, on April 5, 2007, Liberty Mutual and ine issue for trial.'" Matsushita, 475 U.S. at 586-87 Lloyd's filed a lawsuit based on the same policies and (quoting FED. R. CIV. P. 56(e)) (emphasis in original); events in the 133rd Judicial District Court of Harris see also, Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 County, Texas, effecting service on April 10, 2007. Dis- S. Ct. 2548, 91 L. Ed. 2d 265 (1986). To sustain the covery in the state case was conducted for use in either burder, the nonmoving party must produce evidence ad- court. Thereafter on January 30, 2008, UP filed an missible at trial. See Anderson, 477 U.S. at 242; see also, Amended Third-Party Complaint (Doc. No. 46) and Thomas v. Price, 975 F.2d 231, 235 (5th Cir. 1992) ("To Metro filed an Amended Intervenor Complaint (Doc. No. avoid summary judgment, the nonmoving party must 47.) Amended Answers were then filed by Third-Party adduce evidence which creates a fact issue.").

Defendants Liberty Mutual and Lloyd's.

At the summary judgment stage, the court views the Each of the parties then filed Motions for Summary facts in a light most favorable to [**14] the nonmoving Judgment. On June 16, 2008, Liberty Mutual and Lloyd's party and draws all reasonable inferences in favor of the filed their respective Motions for Summary Judgment nonmovant, but only when "there is a 'genuine' dispute as with each maintaining that, for various reasons, no cov- to those facts." Scott v. Harris, 550 U.S. 372, 127 S.Ct. erage exists under the Railroad [**12] Protection Lia- 1769, 1776, 167 L.Ed.2d 686 (2007); see also Goodson v. bility policy ("RPL"), the Wrap-Up policy, or the Um- City of Corpus Christi, 202 F.3d 730, 735 (5th Cir. 2000) brella policy. Also on June 16, 2008, Metro filed its Mo- ("[T]he nonmoving party may not rest on the mere alle- tion for Partial Summary Judgment (Doc. No. 65) and, on gations or denial of its pleadings, but must respond by June 19, 2008, UP filed Motions for Partial Summary setting forth specific facts indicating a genuine issue for Judgment with regard to the RPL and the Umbrella poli- trial."). "[A] nonmovant cannot overcome summary cy. (Doc. Nos. 67 & 69.) The parties have filed their re- judgment with conclusory allegations and unsubstant ared spective responses and replies and, thus, this case is ripe assertions." Mace v. City of Palestine, 333 F.3d 621, 624 for adjudication. n. 7 (5th Cir. 2003); see also Johnston v. City of Houston, Tex., 14 F.3d 1056, 1060 (5th Cir. 1994) ("only evi- III. SUMMARY JUDGMENT STANDARD dence-not argument, not facts in the complaint--will sat- isfy the burden."). Nor can the nonmovant overcome Summary judgment is appropriate "if the pleadings, summary judgment by showing "some metaphysical depositions, answers to interrogatories, and admissions on doubt as to the material facts" in an attempt to create a file, together with the affidavits, if any, show that there is genuine dispute. Matsushita, 475 U.S. at 584-86. no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

IV. ANALYSIS FED. R. CIV. P. 56(c). A fact is "material" if its resolution in favor of one party might affect the outcome of the suit Texas rules of contract interpretation apply in this under governing law. See Anderson v. Liberty Lobby, Inc., diversity case. Canutillo Indep. Sch. Dist. v. National Page 5 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

Union Fire Ins. Co., 99 F.3d 695, 700 (5th Cir. 1996). The UP also contends that it is entitled to recover attorney fees interpretation [**15] of insurance contracts is governed from Liberty Mutual. (Id.) by the same rules that apply to contracts generally. Id. They must be interpreted to effectuate the intent of the B. Coverage for Bodily Injury and Property Damage parties at the time the contracts were formed. Kel- Liberty Mutual contends that, under the RPL policy, ley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, the covered work, as described in the Declarations, was (Tex. 1998); Glover v. Nat'l Ins. Underwriters, 545 clearly and unambiguously limited to laying the test track, S.W.2d 755, 761 (Tex. 1977). When the words of a policy and the accident occurred after the test track was com- are unambiguous, they are to be given their plain, ordi- pleted. Conversely, UP maintains that the covered work, nary, and generally accepted meaning, unless the policy as described in the Declarations, was not limited to (or clearly indicates that the contractual terms have been used intended to be limited to) the construction of the test track, in a different of technical sense. Puckett v. U.S. Fire Ins. but also included the testing or commissioning of the LRV Co., 678 S.W.2d 936, 938 (Tex. 1984). When the language on the test track. of a policy is susceptible to more than one construction, however, it should be construed strictly against the insurer The Court starts with the policy language. As con- and liberally in favor of the insured. Barnett v. Aetna Life tained in "Section I - Coverages," the RPL provides: Ins. Co., 723 S.W.2d 663, 666 (Tex. 1987); see also, Nat'l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d ... [Liberty Mutual] will pay those sums 552, 555 [*787] (Tex. 1991) (holding that any ambi- that the insured becomes legally obligated guities in a policy are construed against the drafter). to pay as damages because of "bodily in- Where the question of interpretation involves an excep- jury" or "property damage" ... [artsing] out tion or limitation on the insurer's liability under the policy, of acts or omissions at the "job location" an even more stringent construction [**16] is required. which are related to or are in connection Barnett, 723 S.W.2d at 666. with the "work" described [**18] in the Declarations.

V. RAILROAD PROTECTIVE LIABILITY ACT A. Liberty Mutual and UP's Cross Motions for (Doc. No. 64, Ex. A; Doc. No. 65, Ex. A-6.)

Summary Judgment There is no dispute that UP is the named insured Liberty Mutual and UP have filed cross motions for under the policy. (Doc. No. 64, Ex. A.) Nor can there be Summary Judgment regarding the RPL policy. Liberty any dispute that UP was "legally obligated to pay" dam- Mutual contends that there is no coverage for UP under ages because of "bodily injury" or "property damage." the RPL for the following reasons: (1) the bodily injury Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651, 680 and property damage were not related to or in connection (Tex.App.--Houston [14th Dist.] 2006, pet. denied) (in- with the "work" described in the policy; and (2) any cov- terpreting "legally obligated to pay" to mean an obligation erage would be excluded based on the "completed work" imposed by law, such as an obligation to pay pursuant to a exclusion, the non-insured's contractual liability exclu- judgment, settlement, contract or statute); Comsys Info. sion, and the sole proximate cause exclusion. (Doc. No. Tech. Servs. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 64.) UP responds that the bodily injury and property 189 n. 3 (Tex.App.--Houston [14th Dist.] 2003, pet. de- damage fall were covered, and that Liberty Mutual failed nied) (recognizing a judgment is not the only manner by to establish the application of its policy exclusions. (Doc. which an insured can become legally obligated to pay No. 74.) because a legal obligation can also arise [*788] out of a contract, such as a settlement); Texas Prop. & Cas. Ins.

UF seeks declaratory relief under the RPL policy Guar. Ass'n v. Boy Scouts of Am., 947 S.W.2d 682, 691 based on the following grounds: (1) that the policy pro- (Tex.App.--Austin 1997, no writ). The policy defines "job vides coverage for bodily injury or property damage location" as follows: "the job location designated in the arising out of acts or omissions at the test track and related Declarations including any area directly related to the to work or operations performed by Metro or its subcon- 'work' designated in the Declarations. 'Job location' in- tractors; (2) that liability is established, as a matter of law, cludes the ways next to [**19] it." (Doc No. 64, Ex. A, by the settlement of the underlying claims; (3) that Section V -- Definitions.) The Declarations page desig- [**17] Liberty Mutual breached its duty to defend UP; (4) nates "Houston, Texas" as the "job location." (Id.) 1 The that the "completed work" exclusion does not apply; and bodily injury or property damage arose out of acts or (5) that Liberty Mutual breached its duty to pay for omissions at the job location, which was Houston, Texas. property damage to UP's Hyrail vehicle. (Doc. No. 67.)

Page 6 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

1 Inconsistent with the Declarations page, Lib- (Doc. No. 64, Ex. A.) Liberty Mutual contends that "[t]he erty Mutual erroneously refers to the Job Location above designation unambiguously limits the scope of the as "a two-mile span 25 feet from existing track." 'work' to the laying of a two-mile test track" and since the (Doc. No. 64 at 6.) accident occurred after the test track was completed, there is no coverage. UP counters that Liberty Mutual's position The dispute between the parties is over the policy is flawed for several reasons. First, UP contends that provision which requires that the acts or omissions at the Liberty Mutual only reaches this interpretation by reading "job location" must be related to or connected with the the first and second sentences together and, thus, arguing "work" as described in the Declaration. "Related to or that the work described in the Declarations only consisted connected with" is not defined in the policy. Texas courts only of laying the "[t]wo mile test track" that was "25 feet have broadly construed the phrase "aris[ing] out of [or] . . from existing track." UP maintains that Liberty Mutual . related to or . . . in connection with." Utica Nat'l Ins. Co. has improperly [*789] merged the two sentences to- v. American Indem. Co., 141 S.W.3d 198, 203 (Tex. 2004) gether because each sentence actually refers to a separate ("'arise out of' means that there is simply a 'causal con- job site. In support of its argument, UP offers evidence, in nection or relation,' which is interpreted to mean that there the form of the RPL Policy Questionnaire, which it states is but for causation, though not necessarily direct or clarifies that the two sentences, in fact, refer to two sep- proximate causation"); Scottsdale Ins. Co. v. Texas Sec. arate areas or job sites where an exposure point [**22] Concepts & Investigation, 173 F.3d 941, 943 (5th Cir. existed. Second, UP argues that, once clarified, Item 6 is 1999) (phrase "arising out of" means that "a [**20] ambiguous because it can reasonably be read as describ- claim need only bear an incidental relationship to the ing the job site (i.e., the two-mile test tract which was built described conduct[.]"); Fontenot v. Mesa Petroleum Co., feet from an existing track) as opposed to providing a 791 F.2d 1207, 1214 (5th Cir. 1986) (language "arising in description of the work to be done at this location. connection herewith" contained in indemnity agreement unambiguously encompasses all activities reasonably 1. Whether an Ambiguity Exists incident to or anticipated by principal activity of contract).

The policy defines "work" to mean "work or operations Determining whether an ambiguity exists in a con- performed by the 'contractor' including materials, parts or tract is a question of law which a court decides in light of equipment furnished in connection with the work or op- the surrounding circumstances. R&P Enterprises erations." "Operations," while not defined in the policy, 2 LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518 (Tex. ordinarily means "the operating of or putting and main- 1980). "A court may conclude that a contract is ambigu- taining in action of something (as a machine or an indus- ous even in the absence of such pleading by either party." try)." WEBSTER'S THIRD NEW INTERNATIONAL Sage Street Assocs. v. Northdale Construction Co., 863 DICTIONAEY 1581 (1993). S.W.2d 438, 445 (Tex. 1993); see also, Texas v. American Tabacco Co., 463 F.3d 399, 407 n. 14 (5th Cir. 2006). A When not defined in an insurance policy, a contract is not ambiguous if it can be given a definite or court will give the terms used in the insurance certain meaning as a matter of law. Nat'l Union Fire Ins. contract their ordinary and generally accepted Co. v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex. meaning. Pa. Pulp & Paper Co. v. Nationwide 1995). An ambiguity will exist if the contract language is Mut. Ins. Co., 100 S.W.3d 566, 574 "uncertain and doubtful or it is reasonably susceptible to (Tex.App.--Houston [14th Dist.] 2003, pet. de- more than one meaning." Coker v. Coker, 650 S.W.2d nied). 391, 393 (Tex. 1983). An ambiguity does not arise [**23] based merely on conflicting interpretations of the The cornerstone of the parties' dispute centers on the contract language. Forbau v. Aetna Life Ins. Co., 876 meaning and scope of the "work" described in the Dec- S.W.2d 132, 134 (Tex. 1994). Parole evidence is also not larations. In particular, Item 6 of the Declarations page, admissible to render a contract ambiguous. Sun Oil Co. which is titled the "Designation [**21] of the Job Site (Delaware) v. Madeley, 626 S.W.2d 726, 732 (Tex. 1981). and Description of Work," provides the following: An ambiguity may be patent (i.e., evident on the face Two mile test track built 25 feet from of the contract), or latent (i.e., apparent when a contract is existing track. Metro will be laying track applied to the subject matter with which the contract across an existing bridge that runs over deals). CBI Indus., Inc., 907 S.W.2d at 520 (a latent am- Union Pacific tracks (no bridge construc- biguity exists when the contract appears to convey a sen- tion). sible meaning on its face, but it cannot be carried out without further clarification). When a latent ambiguity arises, the focus shifts to the facts and circumstances under which the agreement was made (Centerpoint En- Page 7 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

ergy Houston Elec., L.L.P. v. Old TJC Co., 177 S.W.3d [**26] The rail yard where the light rail vehicles (LRVs) 425, 431 (Tex.App.--Houston [1st Dist.] 2005, pet. de- are being assembled and tested and railroad overpass. The nied)), and parol evidence is admissible for the purpose of overpass is an existing bridge." (Id.) ascertaining the true intention of the parties as expressed In light of the surrounding circumstances of the con- in the agreement. CBI Indus., Inc., 907 S.W.2d at 520; see tract, the two sentence description contained in Item 6 also, Balandran v. Safeco Ins. Co. of America, 972 S.W.2d referred to two different sites. Given this clarification, as 738, 741 (Tex. 1998) (court examined surrounding cir- urged by UP, the Court agrees that an ambiguity exists cumstances); Bache Halsey Stuart Shields, Incorp. v. because an alternate, but just as reasonable, interpretation Alamo Savings Assoc. of Texas, 611 S.W.2d 706, 708 of Item 6 is that the first sentence ("Two mile test track (Tex.Civ.App.--San Antonio 1980, no writ) [**24] built 25 feet from existing track) merely describes the (quoting Murphy v. Dilworth, 137 Tex. 32, 151 S.W.2d location where work would be done, but not the action to 1004, 1005 (Tex. 1941) ("[W]here a question concerning be taken at that location. the interpretation of a contract arises, a court will 'take the wording of the instrument, consider the same in light of 2. The Effect of the Ambiguity the surrounding circumstances and apply the pertinent rules of construction thereto and thus settle the meaning of Generally, Texas law provides that, when an insur- the contract.'")). "This does not mean, however, that the ance contract is susceptible to more than one reasonable parties may prove the making of an agreement different interpretation, a court must resolve the uncertainty by from that expressed in the written contract, nor that the adopting the construction that most favors the insured. unambiguous language used in the contract may be vio- Barnett, 723 S.W.2d at 666. This rule is derived from the lated or the legal effect thereof changed." Murphy, 151 more general rule that ambiguous contracts are construed S.W.2d at 1005. Instead, "[i]t can do no more than explain against the drafter. Balandran, 972 S.W.2d at 741 n.1; the doubtful relations of the instrument consistently with Temple-Eastex, Inc. v. Addison Bank, 672 S.W.2d 793, the relations of the parties, the subject matter of the con- 798 (Tex. 1984). However, in the present case, the Court's tract, and the other incidents thereof." Id. at 1006. concern is that the description of the [**27] work found in Item 6 of the Declarations was derived, almost verba- [*790] In the instant case, in an attempt to show the tim, from the RPL application that Willis of Texas com- surrounding circumstances from which a latent ambiguity pleted and provided to Liberty Mutual, and, given the emerged, UP asks the Court to consider the RPL Policy incorporated language, it is far from clear what the parties Questionnaire. While Liberty Mulual objects to the in- actually intended. Therefore, the Court cannot automati- troduction of the RPL Application on the ground that cally find coverage based on ambiguity in the insurance consideration of the extrinsic evidence it is improper, the agreement. Because the Court finds that this coverage Court OVERRULES the objection as the [**25] evi- dispute cannot be resolved based on available rules of dence is permissible to show the circumstances sur- contract interpretation, the court must resort to parole rounding the contract. evidence to determine whether the contracting parties As urged by UP, the RPL Policy Questionnaire clar- intended the RPL to provide coverage for building the test ifies the circumstances surrounding the policy. The re- track, as well as for the use of the track to commission the sponses to the RPL Policy Questionnaire were provided to LRVs. While it is true that the parties have offered parole Liberty Mutual by Willis of Texas. (Doc. No. 67, Ex. 4.) evidence regarding their intent, the scope of the light rail The responses to the questionnaire provided that the total project, the carrier's classification of the policy, the estimated cost of the job was $ 30 million with an esti- amount of the premium paid in relation to the project, and mated $ 4.5 to $ 4.7 million of the total amount attributed the purported post-accident conduct by Liberty Mutual in to the cost of the work within 50 feet of the railroad tracks. extending the policy for testing, [*791] genuine issues (Id.) In response to a quest on regarding the "duration of of material fact exist which preclude this Court from the work within 50 feet of tracks," Willis of Texas re- deciding this issue as a matter of law. Instead, the Court sponded that "[b]ecause LRV testing will be done assume reserves for the trier of fact the disputed issue concerning testing will occur on tracks within 25 feet of existing track [**28] the scope of the work as set forth in the Item 6 of for the term." (Id.) Further, when asked about the "Loca- the Declarations. Accordingly, on the issue of coverage tion/Description of Project plus work directly affecting under the RPL policy, Liberty Mutual's Motion for railroad operations," Willis of Texas responded that Summary Judgment and UP's Motion for Partial Sum- "[t]here will be a two mile test track built 25 feet from mary Judgment on this issue of coverage under the RPL existing track. Metro will by laying track across an ex- policy are both denied. isting bridge that runs over Union Pacific tracks (no bridge construction)." (Id.) However, Willis of Texas C. Coverage for UP's Property Damage further qualified that "[t]wo exposure points exist.

Page 8 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

UP also seeks a declaration that it is entitled to cov- D. The Completed Work Exclusion erage for the damage to its property. (Doc. No. 67 at 21.)

Liberty Mutual and UP have also filed cross-motions Liberty Mutual responds that the policy's liability cover- on whether the RPL excludes coverage for bodily injury age will not extend to cover damage to UP's own property. or property damage that occurs after the work is com- (Doc. No. 71 at 17.) UP clarifies that it is not making a pleted. In particular, the Completed Work Exclusion in claim under Coverage A (Liability), but is instead making the policy provides: a claim under Coverage B (first-party property damage coverage). (Doc. No. 91 at 19.) Coverage B provides: The "work" will be deemed completed at the earliest of the following times: We will pay for "physical damage to property" to which this insurance applies. (1) When all the "work" The "physical damage to property" must called for in the "contrac- occur during the policy period. The tor's" contract has been "physical damage to property" must arise completed. out of acts or omissions at the "job loca- tion" which are related to or in connection [*792] (2) When all with the "work" described in the Declara- the "work" to be done at the tions. The property must be owned by or "job location" has been leased or entrusted to you under a lease or completed. trust agreement. (3) When that part of the "work" done at the "job (Doc. No. 64, [**29] Ex. A.) The policy defines "phys- location" has been put to its intended use by you, the ical damage to property" as "direct and accidental loss of governmental authority or or damage to rolling stock and their contents, mechanical other contracting party. construction equipment or motive power equipment, railroad tracks, roadbeds, catenaries, signals, bridges or buildings." (Id.) Liberty Mutual does not dispute that the damage to UP's signal clearly falls within the definition of "physical "Contractor" is defined under the policy to mean [**31] damage to property." Liberty Mutual disputes whether the "the contractor designated in the Declarations and in- Hyrail vehicles involved in the accident fall within the cludes all subcontractors working directly or indirectly for definition of "physical damage to property" because they that 'contractor' but does not include you." Metropolitan are not mechanical construction equipment or motive Transit Authority of Houston is listed on the Declarations power equipment." (Doc. No. 71 at 17.) The policy does page as the "Designated Contractor." In addition, the not define "mechanical construction equipment" or "mo- policy defines "work" to mean "work or operations per- tive power equipment" and, as such, the terms should be formed by the 'contractor,' including materials, parts or given their plain, ordinary meaning. (Doc. No. 91 at 19.) equipment furnished in connection with the work or op- UP urges that the "undisputed evidence is that the two erations." [Hyrail] vehicles involved in the Accident were There is no real dispute that the test track at this job 'mechanical [track] construction equipment' and/or location was laid or that the testing of the light rail trains 'motive power equipment' in the ordinary sense of those was in progress. Instead, once again, the dispute centers words." (Id.) The Court agrees with UP; however, this does not resolve the dispute. Similar to the coverage pro- on the meaning and scope of "work" as defined in the vision discussed above, Coverage B still requires [**30] policy and as harmonized with the "work" described in the Declarations. (See Doc. No. 91 at 18.) Liberty contends that the "physical damage to property must arise out of that the completed work exclusion was triggered because acts or omissions at the 'job location' which are related to the earliest of the times delineated was when Metro or in connection with the 'work' described in the Declara- completed laying the test track 25 feet from the UP track, tions." (Doc. No. 64, Ex. A.) For the same reasons pre- viously discussed, the Court reserves for the trier of fact and the test track was put to its intended use by the con- the disputed issue concerning the scope of the work as set tracting party, whereas UP counters that the "work" did not just consist of laying the track, but also included the forth in the Item 6 of the Declarations. Accordingly, UP's testing or commissioning of each of the light rail trains.

Motion for Partial Summary Judgment as to the RPL's [**32] Once again, for the same reasons previously dis- coverage for property damage is denied. cussed, the Court reserves for the trier of fact the disputed Page 9 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

issue concerning the scope of the work as set forth in the tors; (3) your stockholders; and (4) any railroad operating Item 6 of the Declarations. Accordingly, both Liberny over your tracks." (Id., Ex. A at 3.) Notably, as urged by Mutual's Motion for Summary Judgment and UP's Motion UP, the policy's definition of "insured" does not include for Partial Summary Judgment on this point must be de- all UP employees. 3 nied.

3 Although irrelevant given the facts in this E. The Non-Insured Contract Liability Exclusion case, the policy also defined "insured" to include "your designated employees" which were defined Liberty Mutual maintains that coverage does not ex- as: "(a) [a]ny supervisory employee of yours at the tend to UP under the RPL due to the non-insured contract 'job location'; (b) [a]ny employee of yours while liability exclusion. (Doc. No. 64 at 11-12.) The policy operating, attached to or engaged on work trains or excludes coverage "for which the insured is obligated to other railroad equipment at the 'job location' which pay damages by reason of the assumption of liability in a are assigned exclusively to the 'contractor'; or (c) contract or agreement." (Doc. No. 64, Ex. A.) For the [a]ny employee of yours not described in a. or b. purposes of the exclusion, Union Pacific did not assume above who is specifically loaned or assigned to the the liability in a contract or agreement; rather, it was work of the 'contractor' for the prevention of ac- Metro who assumed the liability, and Metro is not an cidents or protection of property." (Doc. No. 64, insured as defined under the policy. Thus, this exclusion is Ex. A at 7.) inapplicable and Liberty Mutual's Motion for Summary Judgment on this point is denied. Under Texas law, exclusions in an insurance policy must be construed narrowly. Barnett, 723 S.W.2d at 666; F. Sole Proximate Cause of Loss Exclusion Glover, 545 S.W.2d at 761. Had Liberty Mutual wanted to exclude coverage when the sole proximate cause of the Liberty Mutual claims that "Union Pacific is solely to loss was caused by either UP or any of UP's employees, it blame for the accident" and, therefore, coverage is pre- could have explicitly done so, and the failure to include cluded based on the policy's [**33] sole proximate cause UP's employees [**35] within the explicit definition of of loss exclusion. (Doc. No. 64 at 12.) The RPL policy "insured" suggests that this particular policy exclusion contains an exclusion for "Acts or Omissions of Insured." should be construed against Liberty Mutual. Barnett, 723 The exclusion provides: S.W.2d at 665. Notwithstanding this fact, summary judgment is inappropriate because, as conceded by the "Bodily injury" or "property damage", parties (See Doc. No. 74 at 16-20; Doc. No. 84 at 9 n. 11), the sole proximate cause of which is an act the determination of whether UP's acts or omissions were or omission of any insured other than acts the sole proximate cause of the collision is normally a or omissions of any of "your designated question of fact. See generally, Texas Pacific Indem. Co. employees". This exclusion does not apply v. Bldg Material Distrib. Inc., 508 S.W.2d 488, 489 to injury or damage sustained at the "job (Tex.Civ.App.--Waco 1974, writ ref'd n.r.e.) (sole proxi- location" by any of "your designated em- mate cause was defined for a jury to mean "the only ployees" or employee of the "contractor", proximate cause [and] [i]f there is more than one proxi- or by any employee of the governmental mate cause of an event, then no single proximate cause authority or any other contracting party can be the sole proximate cause."). Furthermore, as urged (other than you) specified in the Declara- by UP, this exclusion does not apply to bodily injury or tions. property damage sustained by employees of the "con- tractor," or by any employee of the governmental author- ity, or any other contracting party specified in the decla- (Doc. No. 54, Ex. A at 2.) rations. "Contractor" is defined to include the contractor UP counters that Liberty Mutual has not established, designated in the Declarations, which is Metro, and "all as a matter of law, that UP was "the sole proximate cause" subcontractors working directly for that 'contractor' of this accident. UP initially maintains that this exclusion [**36] [Metro]." (Doc. No. 64, Ex. A. at p. 6 of 7.) Thus, is limited to UP or its corporate [*793] executives and with regard to the injury or damage sustained by either does not apply to any alleged negligence on the part of Metro employees or employees of its subcontractors, the either UP worker Christopher McGinnis or the other UP exception to the exclusion applies. Thus, this exclusion worker involved in the accident. For purposes of this would not preclude coverage for the $ 465,702.05 UP paid exclusion, the policy defines "insured" as: "(1) 'you' (the to settle injury or damage claims brought by either Metro named insured shown in the declarations or [UP]); (2) employees or its subcontractors. (Doc. No. 74 at 17.) your 'executive officers' and directors, but only with re- spect [**34] to their duties as your officers and direc- Page 10 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

Accordingly, based on the reasons stated, Liberty and (2) recover [actual] damages."); see also, Mustang Mutual's Motion for Summary Judgment based on the Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 201 sole proximate cause of loss exclusion is denied. (Tex. 2004) (per curiam) (noting that even though the claimant had a valid claim, it "was not entitled to recover G. Fraud, Mutual Mistake And Estoppel attorney's fees because it was not awarded damages on its breach of contract claim"). In this case, it is premature to Liberty Mutual seeks dismissal of UP and Metro's consider UP's entitlement, if any, to attorney's fees under claims of fraud, mutual mistake and estoppel as it relates Section 38.001. See Solis, 951 S.W.2d at 390. to the RPL policy. (Doc. No. 64 at 21-24.) These issues, however, are inextricably linked to the determination Section 37.009 of the Texas Civil Practice & Reme- regarding the scope of work to which the RPL policy dies Code provides that in any proceeding under the Texas applied. The Court, having reserved the disputed issue Uniform Declaratory Judgments Act ("DJA"), "the court concerning the scope of the work to a trier of fact, defers may award costs and reasonable and necessary attorney's these issues as well. Liberty Mutual's Motion for Sum- [**39] fees as are equitable and just." TEX. CIV. PRAC. & mary Judgment on the ground that [*794] UP and REM.CODE §37.009. However, as urged by Liberty Metro's claims for fraud, mutual mistake, and estoppel Mutual, the Fifth Circuit's holding in Utica forecloses with regard to the RPL is denied. UP's request for attorney's fees under Section 37.009.

Utica Lloyd's of Texas v. Mitchell, 138 F.3d 208, 209 (5th H. UP's Insurance Code Claims Cir. 1998) (holding that "a party may not rely on the Texas DJA to authorize attorney's fees in a diversity case Liberty Mutual seeks dismissal [**37] of UP's because the statute is not substantive law."); see also, claims which allege violations of various insurance pro- Camacho v. Texas Workforce Comm'n, 445 F.3d 407, visions. Liberty Mutual contends that where there is no 409-410 (5th Cir.) (reaffirming validity of Utica), cert. coverage, there can be no violation. Liberty Mutual also denied, 549 U.S. 826, 127 S. Ct. 349, 166 L. Ed. 2d 44 asserts that UP's claims under the insurance code are (2006). barred by limitations. (Doc. No. 64 at 20.) The Court concludes that the determination of these issues is best UP's Motion for Partial Summary Judgment seeking deferred pending the resolution of the coverage issues. attorney's fees under Section 37.009 is denied with prej- Liberty Mutual's Motion for Summary Judgment on this udice, but its request for attorney's fees under Section ground is, therefore, denied without prejudice to recon- 38.001 is denied, without prejudice, as premature. sideration if appropriate.

VI. WRAP UP POLICY I. Attorney's Fees A. Liberty Mutual's Motion for Summary Judgment UP seeks to recover attorney fees for the prosecution and defense of this suit pursuant to Sections 37.009 and 1. Whether UP is an Insured 38.001 of the Texas Civil Practice and Remedies Code. (Doc. No. 67 at 22.) Liberty Mutual argues that UP is not Liberty Mutual maintains that UP is not an insured entitled to recover attorney's fees under Section 38.001 under the Wrap Up [*795] policy. UP responds by because it has not prevailed. (Doc. No. 71 at 24.) Liberty requesting the Court to defer any determination of Mutual also argues, relying on Utica Lloyd's of Texas v. whether it is an insured under this policy until after ad- Mitchell, 138 F.3d 208, 209 (5th Cir. 1998), that UP is not dressing the RPL policy. In particular, UP argues that if entitled to attorney's fees under Section 37.009. (Doc. No. no coverage is afforded under the RPL, then it may qual- at 24.) ify as an [**40] insured under the GAE. However, con- sidering UP's response to Liberty Mutual's Motion, the Section 38.001 of the Texas Civil Practice & Reme- Court sees no compelling reason to defer this determina- dies Code, in relevant part, provides that "[a] person may tion. recover reasonable [**38] attorney's fees from an indi- vidual or corporation, in addition to the amount of a valid Metro procured a Wrap-Up policy for the Light Rail claim and costs, if the claim is for: ... an oral or written Project. As explained by Liberty Mutual, the Wrap Up contract." TEX. CIV. PRAC. & REM.CODE § 38.001. In policy consists of "a three-layered pyramid" of coverage order to recover attorney's fees pursuant to Section with the base layer being the Commercial General Lia- 38.001, a party must be a prevailing party and recover bility ("CGL") policy, which was modified by a General actual damages on its claim. See Green Int'l, Inc. v. Solis, Amendatory Endorsement ("GAE"), and then further 951 S.W.2d 384, 390 (Tex. 1997) ("To recover attorney's modified by the Owner Controlled Consolidated Insur- fees under Section 38.001, a party must (1) prevail on a ance Program Amendment of Coverage ("OCCIP" cause of action for which attorney's fees are recoverable, Amendments). (Doc. No. 64 at 12-13, Ex. B.)

Page 11 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

The OCCIP Amendment provides that the insureds limits of insurance of this policy exceed protected by the Wrap Up policy include the First Named those of such other insurance or whether Insured (Metro), the Additional Named Insureds set forth such other insurance is valid and collecti- in the Schedule of the OCCIP Amendment, and any Ad- ble. ditional Named Insureds identified in the underlying CGL or GAE. (Doc. No. 64, Ex. B at Bates "Metro 1484".) The "ADDITIONAL NAMED INSURED SCHEDULE" (Doc. No. 64, Ex. B at Bates "Metro 1479".) In the present provides: case, while it is true that Metro was required by the Lease Agreement to provide coverage for UP, there is no dispute All subcontractors of any tier, as their that Metro procured separate liability insurance for UP in interests may appear, for whom the First the form of the RPL. 4 Nor is there any dispute [*796] Named Insured has agreed by contract to that the RPL policy was in effect on the date of the inci- provide general liability coverage under dent. The Court, therefore, grants Liberty Mutual's Mo- the owner controlled insurance program, tion for Summary Judgment on the ground that UP is not excluding vendors, suppliers, [**41] an insured under the Wrap-Up policy. off-site fabricators, material dealers and others who merely make deliveries to or 4 By the terms of the terms of the Lease of from the Project Site(s). Property agreement, Metro was required, at its own cost and expense, to procure an RPL policy for UP. (Doc. No. 64, Ex. C.) (Doc. No. 64, Ex. B at Bates "Metro 1485".) UP is not a subcontractor of Metro. Thus, UP is not an additional VII. METRO'S CLAIM FOR DECLARATORY insured under the provisions of the OCCIP policy. UP RELIEF also does not qualify as the Named Insured or as an addi- 5 tional insured under the definitions contained in the CGL policy. (Doc. No. 64, Ex. B at Bates "Metro 1465; 1509; 5 The issue regarding whether Metro's action 1519-20".) presents a justiciable controversy is one which is Finally, the GAE policy contains a "Blanket Addi- raised against Metro by both Liberty Mutual and tional Insured" Amendment that provides: Lloyds under their respective policies. In fact, [**43] in their respective Motions for Summary SECTION II - WHO IS AN INSURED Judgment against Metro, Liberty Mutual and is amended to include as an insured any Lloyd's adopted and incorporated by reference person, organization, state or other politi- each others arguments. To avoid unnecessary du- cal subdivision, trustee or estate for whom plication, the Court addresses all the insurance you have agreed in writing to provide lia- carriers arguments against Metro based on bility coverage. But: justiciability herein.

The insurance provided by this Liberty Mutual and Lloyd's assert that Metro should amendment: not be permitted to proceed with its Complaint in Inter- vention seeking declaratory relief because no justiciable 1. Applies only to "personal injury" or controversy exists between the parties--namely, Metro "property damage" arising out of (a) "your and UP. work" or (b) premises or other property owned by or rented to you; The federal Declaratory Judgment Act provides, in part, the following: 2. Applies only to coverage and limits of insurance required by the written In a case of actual controversy within agreement, but in no event exceeds either its jurisdiction, ... any court of the United the scope of coverage or the limits of in- States, upon the filing of an appropriate surance provided in this policy; and pleading, may declare the rights and other 3. Does not apply to any person, or- legal relations of any interested party ganization, state or [**42] other political seeking such declaration, whether or not subdivision, trustee or estate for whom you further relief is or could be sought. have procured separate liability insurance while such insurance is in effect, regard- less of whether the scope of coverage or Page 12 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

28 U.S.C. § 2201. The purpose of the Act "is to settle surance contract and, thus, it is entitled to seek a declara- 'actual controversies' before they ripen into violations of tion of its rights against the carriers. (Id.) The Court law or a breach of contractual duty." Hardware Mut. Cas. agrees. See TEX. CIV. PRAC. & REM.CODE ANN. § Co. v. Schantz, 178 F.2d 779, 780 (5th Cir. 1949). A 37.004(a) (Vernon Supp. 2007) (authorizing a person district court has discretion in deciding whether to enter- interested under a written contract to seek declaratory tain a declaratory judgment action. St. Paul Ins. Co. v. relief); American States Inc. Co. v. Bailey, 133 F.3d 363, Trejo, 39 F.3d 585, 590 (5th Cir. 1994). [**44] In 368 (5th Cir. 1998) (recognizing that even where a tort making this determination, the court must consider (1) action has not proceeded to judgment, a dispute con- whether the declaratory action is justiciable; (2) whether cerning an insurer's duty to defend or indemnify its in- the court has authority to grant declaratory relief; and (3) sured for losses sustained by a third party presents an whether to exercise its discretion to decide or dismiss the actual controversy within the meaning of the federal De- action. Orix Credit Alliance, Inc. v. Wolfe, 212 F.3d 891, claratory Judgment Act); Farmers Texas County Mut. Ins.

895 (5th Cir. 2000). Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997) (recognizing the necessity of a declaratory judgment action to deter- The law provides that for an action to be justiciable, mine the party's obligation to defend or indemnify even an "actual controversy" must exist between the parties. before either a judgment is rendered or a settlement Wolfe, 212 F.3d at 895. In other words, to be justiciable, reached); see generally, Collier v. Allstate County Mut. the action "must be such that it can presently be litigated Ins. Co., 64 S.W.3d 54, 62 (recognizing duty to indemnify and decided and not hypothetical, conjectural, conditional arises after claim has been adjudicated by judgment, set- or based on the possibility of a factual situation that may tlement or contract to be legally responsible to pay dam- never develop." AXA RE Prop. & Cas. Ins. Co. v. Day, ages). 162 Fed. Appx. 316, 319 (5th Cir. 2006) (quoting Brown & Root, Inc. v. Big Rock Corp., 383 F.2d 662, 665 (5th Third, Liberty Mutual and [**47] Lloyd's contend Cir. 1967)); see generally, 10B Charles A. Wright, et al., that Metro's contractual indemnity obligation to UP is FEDERAL PRACTICE AND PROCEDURE § 2757 "wholly illusory" and, thus, unenforceable, for the fol- (2008). lowing reasons: (1) the indemnity obligatior does not satisfy the basic conspicuous test required of indemnity In the present case, Liberty Mutual and Lloyds con- agreements in Texas; (2) a condition precedent to in- tend that no substantial controversy exists between the demnity by Metro is the lack of sole negligence on the part parties for several reasons. First, they contend that Metro of UP; (3) Metro is not legally liable for any claims "has never been sued by the McGinness [sic] Plaintiffs or stemming from the accident because it enjoys sovereign any other person injured in the Accident," [**45] and immunity; and (4) Metro's indemnity agreement with UP "[a]t this point in time, more than four years after the is void because it violates Article XI, § 7 of the Texas Accident, it is clear that no meritorious bodily injury Constitution, which forbids a governmental entity from claims will ever be made against METRO." (Doc. No. 64 creating a debt. (Doc. No. 64 at 19; Doc. No. 66 at 5-10.) at 18.) This argument is not persuasive. Even if the injured The Court will address each argument in turn. 6 parties' suits against Metro were barred by the statutory limitation period for torts, any such bar would not pre- The Court once again notes that, while pre- clude UP from pursuing Metro on its contractual indem- sented in a different order, these same arguments nity claim. See Houston Lighting & Power Co. v. Eller are made by both Liberty and Lloyd's in their Outdoor Advertising Co. of Texas, 635 S.W.2d 133, Motions for Summary Judgment. (Doc. No. 66 at 134-35 (Tex.App.-Houston [1st Dist.] 1982, writ ref'd 5-10.) n.r.e).

Second, Liberty Mutual and Lloyd's argue that, de- A. Whether Validity Of Indemnity Agreement & The spite the contractual indemnity agreemens, Metro "has Express Negligence Rule Precludes Metro From never paid a dime to Union Pacific as a result of the Ac- Bringing This Action cident," [*797] and "[w]hatever demands, if any, Un- Under Texas law, release or indemnity agreements ion Pacific may have made to METRO, the demands were are valid and enforceable. However, because such provi- never reduced to a final judgment and are not the subject sions involve an extraordinary shifting of risk, Texas of any pending litigation." (Doc. No. 64 at 18.) Metro requires [**48] compliance with fair notice require- counters that the carrier's argument "completely ignores ments. See Dresser Indus., Inc. v. Page Petroleum, Inc., the fact that the critical inquiry is whether METRO has a 853 S.W.2d 505, 508-09 (Tex. 1993). The fair notice re- justiciable controversy," not with UP, but with the in- quirement is two-fold: (1) the party seeking to enforce a surance carriers. (Doc. No. 76 at 3.) Metro maintains that release provision must comply with the express negli- a controversy exists between itself and [**46] the in- gence doctrine, and (2) the provision must be conspicu- surance carriers regarding the obligations under the in- Page 13 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

ous. Id. Under the express negligence rule, "a party's declaratory judgment is proper even though there are intent to be released from [or indemnified for] all liability future contingencies that will determine whether a con- caused by its own future negligence must be expressed in troversy ever actually becomes real"). Further, at issue is unambiguous terms within the four corners of the con- Metro's contract with its insurance carrier, not with UP. tract." Arthur's Garage, Inc. v. Racal-Chubb Sec. Sys.

Inc., 997 S.W.2d 803, 814 (Tex.App.--Dallas 1999, no C. Whether Sovereign Immunity Precludes Metro pet.) (citing Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d from Bringing This Action 705, 708 [*798] (Tex. 1987); see also, Storage & Liberty Mutual and Lloyd's claims that no substantial Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. controversy exists because Metro enjoys sovereign im- 2004). The conspicuousness rule provides that the re- munity and, thus, will never be legally liable for any leasing language must be conspicuously written so that a damages. (Doc. No. 64 at 19; Doc. No. 66 at 6-9.) Metro reasonable person against whom it is to operate should counters that it lawfully purchased insurance [**51] to notice it. Reyes, 134 S.W.3d at 192; Dresser, 853 S.W.2d cover UP's potential liability stemming from and as a at 508 n.2; Cate v. Dover Corp., 790 S.W.2d 559, 561 condition of the Lease Agreement, a fact known to the (Tex. 1990) (party who, prior to entering into contract, has carriers, and, in the alternative, any immunity Metro may actual knowledge of its terms cannot escape enforcement enjoy does not shield the insurance carriers or excuse their of those terms [**49] on the ground that the terms are performance under the insurance contract. (Doc. No. 76 at inconspicuous); Costal Transp. Co. v. Crown Cent. Pe- 12-20; Doc. No. 86 at 4-8.) troleum Corp., 20 S.W.3d 119, 126 (Tex.App.--Houston [14th Dist. 2000, pet. denied) (holding indemnity agree- In Texas, sovereign or governmental immunity de- ment read by indemnitor conspicuous and rejecting prives a trial court of subject matter jurisdiction for law- indemnitor's argument that indemnitee must show that suits in which the state or certain governmental units have indemniton actually noticed the indemnity language when been sued unless the entity consents to suit. Texas Dep't of reading the agreement). Transp. v. Jones, 8 S.W.3d 636, 638 (Tex. 1999); Fed. Sign v. Tex. S. Univ., 951 S.W.2d 401, 405 (Tex. 1997), The language "any negligence" contained in the superseded by statute on other [*799] grounds as stated Lease Agreement (Doc. No. 65, Ex. A-4, at Bates 1587) in General Serv. Com'n v. Little-Tex Insulation Co., Inc., expressly identifies Metro's intent to release UP from 39 S.W.3d 591, 593 (Tex. 2001); Duhart v. State, 610 liability for UP's negligence (see Reyes, 134 S.W.3d at S.W.2d 740, 741 (Tex. 1980); Hosner v. De Young, 1 Tex. 192); thus, the provision satisfies the express negligence 764, 769 (1847). Governmental immunity includes two doctrine. See Atlantic Richfield Co. v. Petroleum Pers. distinct principles, immunity from suit and immunity Inc., 768 S.W.2d 724, 726 (Tex. 1989) (although not dif- from liability. Jones, 8 S.W.3d at 638; Fed. Sign, 951 ferentiating between degrees of negligence, a contractual S.W.2d at 405. Immunity from liability is an affirmative indemnity provision that incluced "any negligent act of defense, while immunity from suit deprives a court of ARCO" was sufficient to satisfy the express negligence subject matter jurisdiction. Jones, 8 S.W.3d at 638; Fed. doctrine). Turning to the conspicuousness rule, Metro Sign, 951 S.W.2d at 405. concedes that it had actual knowledge of the release pro- vision in the agreement which renders compliance with It [**52] is true that a governmental entity does not the fair notice requirement irrelevant. See Reyes, 134 waive immunity from suit simply by contracting with a S.W.3d at 192 (conspicuousness rule satisfied where party private party. LittleTex, 39 S.W.3d at 594. Nevertheless, [**50] has actual knowledge). The indemnity provision "legislative control over waiving immunity from suit does contained in the Lease Agreement is valid and enforceable not mean that the State can freely breach contracts with under Texas law. private parties, or that the State can use sovereign im- munity as a shield to avoid paying for benefits the State B. Whether Condition Precedent In Indemnity accepts under a contract." Rather, when a governmental Agreement Precludes Metro From Bringing This Ac- entity contracts with a private party, it waives immunity tion from liability. Id.; Tooke v. City of Mexia, 197 S.W.3d 325, 344-45 (Tex. 2006); Ben Bolt-Palito Blanco Consol.

Liberty Mutual and Lloyd's next argue that no sub- Indep. School Dist. v. Political Subdivisions stantial controversy exists between Metro and UP because Prop./Casualty Joint Self-Insurance Fund, 212 S.W.3d Metro's contractual obligation to indemnify UP is con- 320, 327 (Tex. 2006); Catalina Development Inc. v. tingent on a determination that UP is not solely negligent.

County of El Paso, 121 S.W.3d 704, 705 (Tex. 2003). (Doc. No. 64 at 19.) This argument is not persuasive. See generally, 10B Charles A. Wright, et al., FEDERAL In the present case, the insurance carriers 7 contend PRACTICE AND PROCEDURE § 2757 at 476 (2008) that even if Metro had waived immunity from liability by (recognizing that "[i]t is clear that in some instances a entering into the lease agreement with UP, its immunity Page 14 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

from suit has not been waived and, as such, the carriers are shielded from indemnity. In support of their position, the D. Whether Article XI, § 7 Of The Texas Constitution carriers rely on cases that hold that, unless waived, a Precludes Metro From Bringing This Action governmental entity, like Metro, is immune from [**53] Liberty Mutual and Lloyd's contend that the indem- suit. Notably, however, the carriers point to no authority nity clause in the lease agreement is void because it cre- that extends the immunity of a governmental entity to its ates an impermissible debt under the Texas Constitution. insurance carriers. Instead, as urged by Metro, analogous Article 11, § 7 of the Texas Constitution, Vernon's Ann. case law supports the opposite conclusion--namely, that St., provides, in part, that: Metro's immunity will not shield the insurance carrier.

United Services Auto. Ass'n v. Blakemore, 782 S.W.2d (N)o debt for any purpose shall ever be 277, 279 (Tex.App--Waco 1989, writ denied) (in a case incurred in any manner by any city or where the driver enjoyed sovereign immunity from both county unless provision is made, at the suit and damages, the court determined that the driver's time of creating the same, for levying and immunity did not preclude recovery from the insurance collecting a sufficient tax to pay the inter- carrier who provided uninsured motorist coverage; to hold est thereon and provide at least two per otherwise, "[t]he policy language would be rendered ab- cent (2%) as a sinking fund; * * *. solutely meaningless by interpreting 'legally entitled to recover' as the ability to sue the United States" when sovereign immunity precluded suit). Similarly, in the This section, by its own terms, appears limited to city and context of bankruptcy cases, courts have determined that, counties. Moreover, neither insurance carrier offers any even where a debtor is discharged, this does not preclude authority to indicate that this section would be applied to a recovery from an insurance carrier who may be liable on governmental entity such as Metro. behalf of the debtor. Watkins v. United States, 462 F.Supp. 980, 991 (S.D. Ga. 1977) (explaining that "any Assuming Section 7 applied to Metro, Texas law does difference between [sovereign immunity] and the effect of provide that an indemnity agreement is a "debt" within the a bankruptcy discharge, is [**54] legally insufficient" meaning of [**56] Article 11, § 7 of the Texas Consti- and, therefore, concluding that uninsured motorist cov- tution. Brown v. Jefferson County, 406 S.W.2d 185, 188 erage was available even though state enjoyed sovereign (Tex. 1966); Texas & New Orleans R.R. v. Galveston immunity); Matter of Edgeworth, 993 F.2d 51, 54 (5th County, 141 Tex. 34, 169 S.W.2d 713 (1943) (citing to Cir. 1993) (recognizing that "scope of a section 524(a) McNeill v. City of Waco, 89 Tex. 83, 33 S.W. 322 (1895) injunction does not affect the liability of liability insurers and Stevenson v. Blake, 131 Tex. 103, 113 S.W.2d 525 and does not prevent establishing their liability by pro- (1938)). However, this does not mean, as suggested by the ceeding against a discharged debtor."); In re Jet Florida insurance carriers, that the indemnity obligation contained Systems, Inc., 883 F.2d 970, 975 (11th Cir. 1983) (em- in the Lease Agreement created an impermissible debt in phasizing that neither bankruptcy's "'fresh start' policy" violation of the Texas Constitution. For example, in nor "§ 524 was designed to immunize 'third parties such as Brown, the Texas Supreme Court concluded that an in- insurers who may be liable on behalf of the debtor,' and demnification obligation incurred by a county govern- the insurer [*800] should not gain a benefit that was ment was valid and enforceable, even though there was a not intended or in any way computed within the rate theoretical possibility that the county's future financial charged for its policy."). As aptly explained by one court, obligations under the indemnity obligation might exceed "[a]ny other outcome would result in a windfall to insur- the county's taxing authority. Brown, 406 S.W.2d at ers, which receive premiums as the quid pro quo for 189-90. Distinguishing the facts of its case from Texas & providing insurance. Any other outcome would also dis- New Orleans R.R. v. Galveston County, where the county advantage both innocent, third party, personal injury incurred an open-ended indemnity agreement, which claimants ...." In re White, 73 B.R. 983, 985 (Bkrtcy D. spanned 99 years, without providing any mechanism for D.C. 1988). Further, to allow the insurance carrier to paying a future claim under the obligation, the Court in escape liability on this basis would be "fundamentally Brown upheld the county's obligation because, at the time wrong." In re Lembke, 93 B.R. 701, 703 (Bkrtcy D. N.D. it agreed to the indemnification, [**57] the county put in 1988). [**55] The holdings in these cases persuades this place sufficient provisions to ensure the satisfaction of Court that, while the purpose of sovereign immunity is to any claim on the obligation. Id. protect Metro (and the public), it will not shield third Similar to Brown, when Metro assumed the indem- parties, like insurance carriers, who may be liable on nity obligation, it provided a mechanism for the payment behalf of Metro. of claims that might arise under the indemnity agreement by purchasing the insurance policies. In addition, Metro Supra note 8. can levy any necessary taxes to fund its obligations in- Page 15 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

curred in connection with the light rail project. Thus, the Court cannot conclude that the indemnity obligation (Doc. No. 64, Ex. B (CGL policy tab).) According to the contained in the Lease Agreement created an impermis- OCCIP Amendment, the insurance agreement only ap- sible [*801] debt in violation of the Texas Constitu- plies to bodily injury, property damage, and personal tion. injury arising out of: 1. Operations performed for the First E. Whether Metro's Allegations Of Insurance Code Named Insured or Additional Named In- Violations Should Be Dismissed In Absence Of Cov- sured by an Additional Named Insured at a erage Under the Policy Project Site listed in the Designated Pro- ject Schedule; or Liberty Mutual seeks dismissal of Metro's claims under various provisions of the Insurance Code on the 2. Acts or omissions of the First grounds that where there is no coverage, there can be no Named Insured in connection with its su- violation of the Insurance Code provisions. Liberty Mu- pervision of operations performed by an tual also contends Metro's claims are barred by the two Additional Named Insured at a Project Site year stature of limitations. (Doc. No. 64 at 20.) Metro listed in the Designated Project Sched- responds by urging that, to the extent there is coverage ule.... under the policy, it would be premature for the Court to address the viability of the extra-contractual [**58] issues, particularly before any discovery is completed. (Doc. No. 64, Ex. B (OCCIP Amendment tab).)

The Court agrees. Liberty Mutual's Motion for Summary Metro contends that the undisputed facts giving rise Judgment on this ground is denied without prejudice. to the accident establish coverage under the insuring agreement. First, for purposes of the insuring agreement, VIII. Metro's Motion for Partial Summary Judgment there is no dispute [**60] that the First Named Insured is on the Wrap-Up Policy Metro. Second, Metro maintains that Siemens was an Metro seeks a declaration that the accident and the Additional Named Insured under the Wrap-Up policy. In resulting liability of Metro and UP triggered Liberty order to qualify as an Additional Named Insured, Siemens Mutual's obligations under the CGL policy. Metro con- must be [*802] Metro's subcontractor for whom Metro tends that "[t]he general liability policy issued by Liberty "agreed by contract to provide general liability coverage Mutual to Metro contractually obligates Liberty Mutual to under the owner controlled insurance program ["OCIP"], indemnify Metro and Union Pacific for personal injuries excluding vendors, suppliers, off-site fabricators, material and property damage claims resulting from the accident dealers and others who merely make deliveries to or from that gives rise to this coverage dispute." (Doc. No. 65 at the Project Site(s)." (Doc. No. 64, Ex. B (OCCIP 3.) Metro also contends that "Liberty Mutual incorrectly Amendment tab) at Bates "Metro 1484".) While Liberty states that at least two exclusions preclude coverage: (1) Mutual concedes that "the Siemens contract provides that the 'Products-Completed Operations Hazard' exclusion Metro will provide an OCIP policy for Siemens," it asserts and (2) the 'auto' exclusion." (Id.) In response Liberty that "it is not clear that Siemens is Metro's subcontractor Mutual asserts the following: (1) whatever coverage ap- or that Siemens is not a vendor or off-site fabricator." plies to Metro as a result of the accident is not ripe for (Doc. No. 70 at 6.) Based on the plain language of this adjudication in this declaratory judgment action; (2) policy provision, vendors and off-site fabricators are Metro is not "legally obligated to pay" any damages be- excluded only if they "merely" make deliveries to or from cause of bodily injury or property damage; and (3) Liberty the Project Site, which, based on the undisputed evidence, Mutual does not [**59] contend that the "Prod- would clearly not have included Siemens. ucts-Completed Operations hazard" precludes coverage Third, Metro contends that there is no dispute that: under the Wrap-Up policy. (Doc. No. 70 at 2-4.) The (1) the bodily injury and property damage arose out of the Court proceeds to address the issues. commissioning of [**61] LRV 115; (2) that Siemens In the Wrap-Up policy, the CGL Coverage Form was performing operations for Metro by supervising the contains an insuring agreement which provides: commissioning of LRV 115; and (3) that Siemens was engaged in these operations for Metro at a "Project Site We will pay those sums that the insured listed in the Designated Project Schedule." (Doc. No. 65 becomes legally obligated to pay as dam- at 13-15.) In support of its contentions, Metro relies on the ages because of "bodily injury" or "prop- affidavit of Sharon K. Messa, the Risk Manager for Metro erty damage" to which this insurance ap- who monitored and directed the resolution of any claims plies. resulting from the light rail project. (Doc. No. 65, Ex. A at 2, PP 1-3.) In her affidavit, Messa swears to the following: Page 16 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

occurred. Nor is there any dispute that, in the Lease Siemens delivered the first LRV to Agreement, Metro contractually agreed to assume UP's METRO in April 2003 and the installation tort liability as long as UP was not the sole, direct cause of and commissioning of these vehicles, in- the loss. Finally, there is no dispute that UP has paid to cluding the training fo METRO's LRV settle the claims arising from this accident and requested operators, began shortly thereafter. On Metro indemnify it for the amount it paid pursuant to the January 23, 2004, a light rail vehicle indemnity agreement. ("LRV 115") being commissioned by Turning back to the insurance policy, the Court finds Siemens and being operated by a METRO that the phrase "legally obligated to pay" is not defined in employee on the test track located on the the policy. However, giving the phrase its ordinary Lease premises collided with a Union Pa- meaning (Pa. Pulp & Paper Co. v. Nationwide Mut. Ins. cific welding truck at crossing # 755612H, Co., 100 S.W.3d 566, 574 (Tex.App.--Houston [14th also identified as the intersection of Kirby Dist.] 2003, pet. denied) [**64] (recognizing that courts Drive and the railroad tracks in Houston, give terms used in an insurance contract their ordinary and Harris County, Texas (the "Accident"). At generally accepted meaning unless the policy shows the the time of the Accident, Siemens was words were meant in a technical sense)), "it means an training and supervising the METRO em- obligation imposed by law, such as an obligation to pay ployee that was operating LRV [**62] pursuant to a judgment, settlement, contract, or statute."

115.

Lennar Corp., 200 S.W.3d at 680; see also, Comsys, 130 S.W.3d at 189 n. 3 (recognizing a judgment is not the only manner by which an insured can become "legally obli- (Id. at 8-9, P 20.) Liberty Mutual asserts that, aside from gated to pay," because a legal obligation can also arise out the affidavit of Sharon K. Messa, which it claims is of a contract or a settlement); Boy Scouts of America, 947 conclusory and not based on personal knowledge, there is S.W.2d at 691 (same). Here, Metro's legal obligation to no evidence that Siemens was "even present at the time of pay is by contract. Once UP settled the claims and suits the Accident, let alone conducting operations." (Doc. No. arising from this accident, Metro's obligation under the at 6.) However, given Messa's position with Metro agreement was triggered. Accordingly, Metro's Motion (i.e., Risk Manager who monitored and directed the res- for Partial Summary Judgment on the grounds that cov- olution of any claims resulting from the light rail project), erage is triggered under the Wrap-UP policy is granted. 8 the Court simply cannot agree with Liberty Mutual and, therefore, overrules Liberty Mutual's objection to Messa's Metro also moves for summary judgment on affidavit. whether the Wrap-Up policy's auto exclusion Fourth, Metro contends that the accident did not oc- precluded coverage and whether the Lease cur within the "Products-Completed Operations Hazard." Agreement constituted the Insured Contract. Lib- (Doc. No. 65 at 15-16.) Metro claims that the undisputed erty Mutual does not dispute Metro's position on facts demonstrate that Metro's "work" was ongoing at the either; therefore, Metro's Motion for Partial time of the accident because the Siemens' Contract called Summary [**65] Judgment is granted as on both for commissioning of all 18 LRVs prior to final ac- issues. ceptance for use in Metro's operation of the Light Rail system. Notably, however, in its response, Liberty Mutual IX. UMBRELLA POLICY clearly states that it "does not contend that the "prod- ucts-completed operations hazard" precludes coverage A. Lloyd's, Metro, and UP's Motions for Summary under the Wrap-Up policy. (Doc. No. 70 at 3.) Judgment Finally, perhaps the central [**63] issue related to With regard to the Umbrella policy, the parties have the insuring agreement is whether Metro is "legally ob- filed competing Motions for Summary Judgment. In its ligated to pay" for bodily injury or property damage. Motion for Summary Judgment, Lloyd's maintains that Liberty Mutual maintains that "legally obligated to pay" the action against it must be dismissed on the following can only be established by a judgment against the insured, grounds: (1) Metro and UP lack standing to pursue their and since Metro [*803] is immune from suit, this has claims (Doc. No. 66 at 5-6); (2) immunity bars UP from not been established, and, until such point in time as it is, asserting any claim against Metro (Id. at 6-9); (3) the Liberty Mutual is under no obligation to pay under the indemnity provision in the lease agreement is void (Id. at Wrap-Up policy. There is, of course, no dispute that the 9-10); (4) UP is not an additional insured under the Um- Lease Agreement contained the indemnity agreement or brella policy (Id. at 11-12); (5) the auto exclusion pre- that the agreement was entered into before the accident cludes coverage for the accident (Id. at 12-13); (6) the Page 17 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

Umbrella policy only provides coverage during construc- qualifies as an insured based on the definitions contained tion (Id. at 13-15); (7) the claims are barred by late notice in the Umbrella policy. (Doc. No. 81 at 2, 8.) (Id. at 15); (8) the insured(s) failed to obtain Lloyd's It is true that by the terms of the Lease Agreement, consent to settle the McGinnis case (Id. at 15-16); (9) the Metro was required, at its own cost and expense, to pro- Umbrella policy restricts legal action against the insurer cure and maintain commercial liability insurance, railroad because the sums sought by Metro and UP were not ju- protection insurance, liability insurance, worker's com- dicially determined (Id. at 16-17); (10) Lloyd's had no pensation and [**68] employer's liability insurance, and duty to defend because the Complaint alleged facts ex- umbrella or excess policies, in the event lessee utilizes cluded by the policy (Id. at 17); [**66] and (11) even to umbrella and excess policies .... (Doc. No. 64, Ex. C). the extent coverage existed, Lloyd's did not act in bad Further, Exhibit C of the Lease provides that "[a]ll poli- faith (Id. at 17-18). Metro and UP have responded to each cy(ies) required above (excluding Workers Compensa- of Lloyd's arguments. tion) ... name [UP] as an additional insured." (Id.) Con- In addition, both UP and Metro have filed Motions trary to UP's contentions, as written, this provision cannot for Partial Judgment. In its [*804] Motion, UP main- be read as requiring Metro to buy an umbrella or excess tains that it is an insured under the Umbrella policy (Doc. policy under the Lease Agreement for UP. Instead, the No. 69 at 8-12), the scope of coverage includes the test Lease Agreement merely provides that "in the event" track and operations on the test track as required under the Metro purchases one, it shall "follow form" and "afford no contract documents (Id. at 18-19), the auto exclusion does less coverage than the primary policy." UP's argument, not preclude coverage under the policy (Id. at 13-18), and therefore, fails. it is entitled to attorneys fees from Lloyd's under section The Court now examines the definitions of "insured" 38.006 of the Texas Civil Practice and Remedies Code. found in the policy. The Umbrella policy, in relevant part, (Id. at 12-13). defines "insured" as follows: In its Motion, Metro maintains that Lloyd's is obli- gated to indemnify Metro for the amounts it owes UP 4. Any person or organization, other (Doc. No. 65 at 15), the "Products-Completed Operations than the Named Insured, included as an Hazard" is not applicable because Metro's work was not additional insured in the policies listed in complete on the date of the accident (Id. at 16), the auto the Schedule of Underlying Insurance but exclusion does not preclude coverage (Id. at 16-22), and not for broader coverage than is available all the conditions precedent of the Umbrella policy have to such person or organization under such been performed. (Id. at 22). underlying policies. **** B. Metro's Standing 7. Any person, organization, trustee, In its Motion, similar to the claim asserted by Liberty or estate to whom you are obligated by a Mutual, Lloyd's maintains that Metro lacks [**67] written Insured Contract to provide in- standing to bring this suit. (Doc. No. 66 at 5-6.) Having surance [**69] such as is afforded by this discussed the issue above, the Court will not reiterate it policy but only with respect to: herein. Lloyd's Motion for Summary Judgment on the ground that Metro lacks standing to bring this Declaratory a. liability arising out of Judgment is denied. operations conducted by you or on your behalf; or 2. Whether UP Lacks Standing Because It Is Not An Additional Insured [*805] b. facilities owned or used by you.

Lloyd's maintains that UP is not an insured under the Umbrella policy. Lloyd's also maintains that Texas is not a direct action state and UP, being nothing more than a third-party claimant, "has no standing to pursue any claims against [it]." (Doc. No. 66 at 6; 11-12.) Con- (Doc. No. 66, Ex. B at 10.) The term "Insured Contract" versely, in its Motion, UP maintains that it is an insured means: "[a]ny oral or written contract or agreement en- under the Umbrella policy based on the following: (1) tered into by you and pertaining to your business under pursuant to the terms of the Lease Agreement, if Metro which you assume the tort liability of another party to pay purchased an Umbrella or Excess policy, Metro was re- for Bodily Injury, Property Damage, Personal Injury or quired to name UP as an additional insured; and (2) UP Advertising Injury to a third person or organization. Tort liability means a liability that would be imposed by law in Page 18 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

the absence of any contract or agreement." (Id. at 11.)

Under the policy "you" "refers to the Named Insured" 3. Whether Governmental Immunity Or Article XI, §7 which, in this case, is Metro. (Id. at 7, 10.) Of The Texas Constitution Preclude This Action For purposes of paragraph (4), while the Schedule of Lloyd's contends, similar to Liberty Mutual's argu- Underlying Insurance includes the RPL and the Wrap-Up ments, that governmental immunity (Doc. No. 66 at 6-9), policy, UP was the named insured, not an additional in- and a violation of Article 11, § 7 of the Texas Constitution sured, under the RPL policy. Further, UP was not a named precludes this action. (Id. at 9-10.) Having addressed or additional insured under the Wrap-Up policy. 9 Ac- these issues above, the Court will not reiterate its discus- cordingly, contrary to its argument, UP would not qualify sion here. Lloyd's Motion for Summary Judgment on as an insured under subparagraph 4. these points is denied.

9 An issue would appear to exists as to whether, 4. Whether the Auto Exclusion Precludes Coverage based on the Lease Agreement, Metro was re- Lloyd's, [**72] Metro and UP all seek summary quired to name UP as [**70] an additional in- judgment regarding the application [*806] of the auto sured under the CGL. However, since this issue exclusion. In its Motion, Lloyd's argues that UP and was not clearly raised by the parties, the Court Metro's claims are specifically excluded because the ac- declines to address it. cident arises from the use of an auto, which, by en- Turning to paragraph (7), UP maintains that the Lease dorsement, is not covered under the policy. (Doc. No. 66 Agreement, which required Metro to indemnify UP for at 12-13.) In their respective Motions, Metro and UP tort liabilities, is an "Insured Contract" under the Um- dispute Lloyd's contention that the auto exclusion applies brella policy. Lloyd's disputes UP's contention on the and argue that a Hyrail vehicle is "mobile equipment" and, basis that the Lease Agreement is invalid. Lloyd's argu- thus, not excluded. (Doc. No. 65 at 21-27; Doc. No. 69 at ment is unavailing. A concern regarding the validity of the 13-18.) indemnity agreement is a separate and distinct determi- The auto exclusion in the Umbrella policy is found in nation from construing the scope of an "insured contract" "Endorsement No. 16." The exclusion reads: "It is under- under an insurance policy. Mid-Continent Cas. Co. v. stood and agreed that this Insurance does not apply to Swift Energy, 206 F.3d 487, 492-93 (5th Cir. 2000) Bodily Injury or Property Damage arising out of the (construing "insured contract" broadly when carrier ownership, maintenance, operation, use, loading or un- challenged demand for coverage); LeBlanc v. Global loading of any Auto." 11 Under the policy, "auto" is de- Marine Drilling Co., 193 F.3d 873, 875 (5th Cir. 1999); fined as "a land motor vehicle, trailer or semi trailer de- Certain Underwriters at Lloyd's London v. Oryx Energy signed for travel on public roads, including any attached Co., 142 F.3d 255, 258 (5th Cir. 1998); see also, Motiva machinery or equipment. But auto does not include mo- Enterprises, L.L.C. v. Liberty Mut. Ins. Co., 2006 U.S. bile equipment." (Doc. No. 66, Ex. A, at Bates Dist. LEXIS 81373, 2006 WL 3246039, * 9-10 (S.D.Tex. UW/Wil00009.)

2006). As urged by UP, the indemnity agreement con- tained in the Lease Agreement is an "Insured Contract" Unlike the CGL policy, which by its terms is for purposes of the Umbrella policy. Thus, under para- limited to the operation and use of an auto by "any graph IV.E.7, [**71] UP is an "insured" under the Um- insured," the auto exclusion [**73] in the um- brella policy. 10 brella policy is more broadly worded and applies to the use of "any auto" regardless of insured sta- UP's coverage as an additional insured under tus. the Umbrella policy is separate from Metro's coverage as the named insured. See Evanston Ins. Based on the policy language, Lloyd's argues that the Co. v. Atofina Petrochemicals, Inc., 256 S.W.3d truck or welding truck, as referred to in various docu- 660, 663-64 (Tex. 2008) (recognizing difference ments, 12 is a land motor vehicle and, being licensed and between contractual liability coverage supporting registered, was designed for travel on the public roads the contractor's (named insured's) indemnity, and and, thus, it is clearly an "auto.". Conversely, Metro and the coverage owed directly to Atofina as an addi- UP contend that the Hyrail vehicle qualifies as "mobile tional insured). equipment," as defined in the policy, for two reasons.

First, Metro and UP maintain that the Hyrail vehicle falls Accordingly, Lloyd's Motion for Summary Judgment under the policy's first definition of "mobile equipment" on the ground that UP is not an insured under the Um- which broadly reads, in part: "any of the following type of brella policy and, thus, has no standing to bring this action land vehicles, including any attached machinery or is denied; and UP's Motion for Partial Summary Judgment equipment," such as "bulldozers, farm machinery, fork- on these grounds is granted.

Page 19 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

lifts and other vehicles designed for use principally off Second, [**76] Metro and UP maintain that the public roads." There is, of course, no dispute that the Hyrail vehicle falls under the policy's fourth definition of Hyrail vehicle is a land vehicle. Further, as urged by the "mobile equipment" because it is a vehicle that is "main- parties, the operative issue is not whether the vehicle can tained primarily to provide mobility to permanently or does travel on public roads, but whether it was designed mounted . . . [p]ower cranes." Significantly, the definition for use principally off public roads. Doty v. Safeco Ins. does not require that the vehicle be maintained for the Co., 400 So.2d 718, 723 (La.App. 1981) (explaining that "sole" purpose of providing mobility to the power crane. the phrase [**74] "designed for use principally off pub- Instead, as provided by the very terms of the policy, the lic roads" makes clear that the determining issue is not vehicle must only be maintained (not used) primarily to whether the vehicle is or can be used on public roads, but provide mobility to a permanently mounted power crane. the primary purpose for which the vehicle is designed or The competent evidence before the Court establishes that structurally suited). While Lloyd's appears to suggest that the Hyrail was equipped with a "telescope power crane the fact the Hyrail vehicle is registered negates this in- with [a] 20-foot reach that [was] permanently mounted to terpretation, there is nothing in the policy provision that the vehicle." (Doc. No. 67, Ex. E (Affidavit of Jeffrey requires the vehicle not be subject to motor vehicle reg- Crook).) While the Hyrail had other uses, the evidence istration to fall within its parameter. In fact, whether the before the Court establishes that it was maintained pri- vehicle was registered and licensed to operate on the marily to provide mobility to the permanently mounted public roadways is not controlling in deciding that it was power crane for work done on the railroad tracks. not designed for use principally off public roads. Republic Not dissuaded, Lloyd's insists that the mobile Ins. Co. v. Bolton, 564 S.W.2d 440, 442 equipment exception to the auto exclusion specifically (Tex.Civ.App.--Dallas 1978, writ ref'd n.r.e.) (recognizing provides that "self-propelled vehicles with the following that "[t]he vehicle's susceptibility to state inspection and types of permanently attached equipment are not mobile licensing, together with its present use as a racing vehicle, equipment [**77] but will be considered autos . . . were simply evidentiary considerations bearing on the welding." However, as urged by UP, this argument is vehicle's design."). Rather, as stated, the purpose for flawed. Definition number 6, by its own terms, serves as a which the vehicle's use was principally "designed" is the "catch-all" provision and applies only when the other operative question. See generally, Malbrough v. Wheat, provisions do not. (Doc. No. 89 at 18-20.) In addition, as 428 So.2d 1110, 1113 (La.App. 1st Cir. 1983) (although a written, the second phrase of Definition number 6 farm tractor may be [**75] driven on public [*807] ("[h]owever..."), can only be construed to modify this roads, the evidence established that it was not principally particular provision or paragraph, as opposed to all the designed for this purpose). preceding classes of mobile equipment.

12 In its pleadings, Lloyd's makes much of the Accordingly, having failed to establish the applica- terms that lay people use to refer to the Hyrail tion of the auto exclusion, Lloyd's Motion for Summary vehicle; however, this is not relevant when de- Judgment on this ground must be denied, and both Metro's termining whether the vehicle falls within the and UP's Motions for Partial Summary Judgment on this policy's definitions. issue must be granted.

In the present case, Metro and UP offer evidence, by 5. Whether Coverage Under Umbrella Policy Limited way of an affidavit from Jeffrey Crook, which supports To Construction their contentions that the Hyrail is "mobile equipment." (Doc. No. 67, Ex. E (Affidavit of Jeffrey Crook).) Lloyd's Lloyd's argues that the Umbrella policy does not re- objects to Crook's affidavit (Doc. Nos. 72 & 73) on the spond to the claims at issue because the construction of basis that Crook lacks personal knowledge, and his affi- the test track was completed. (Doc. No. 66 at 13-15; see davit is based on hearsay, conclusory opinions, and also, Doc. No. 77 at 21-22; Doc. No. 87 at 15.) Lloyd's speculation. However, having considered Crook's affida- relies upon the "Risk, Interest, Location and Limits of vit, the Court finds that Lloyd's objections are without Liability" provision contained in the "Schedule," the merit and, thus, they are overruled. Accordingly, the "Divided Work Endorsement" found in Endorsement No. competent summary judgment evidence before this Court 19, and the definitions contained in Endorsement No. 1 demonstrates that the truck, modified into a Hyrail vehi- concerning [**78] the "Project Site" and "Work." UP cle, was "designed for use principally" on the railroad responds that the Umbrella policy cannot reasonably be tracks and, thus, off public roads. The mere fact that the interpreted to be limited to construction of the test track.

Hyrail vehicle can operate on public roads does not alter (Doc. No. 69 at 18; see also, Doc. No. 89 at 20-21.) this conclusion. See Malbrough, 428 So.2d at 1113; Page 20 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

[*808] The "Risks, Interests, Location and Limits which is part of the "entire completed construction or the of Liability" provision found in the "Schedule" provides various separately identifiable parts required to be fur- the following: nished under the contract documents," clearly falls within the policy's definition of "work." Thus, because the pro- This Policy provides Umbrella Liability visions of the Umbrella policy are not limited to con- coverage in respect of the construction of struction, the Court concludes that Lloyd's Motion for Light Rail System - 7.5 miles with 16 sta- Summary Judgment on this ground is denied, and UP's tions, including (but not limited to) Motion for Partial Summary Judgment on this issue is Downtown improvement, Transit Admin- granted. istration Building and Park/Ride Lots, as per wording attached hereto which is 6. Whether Alleged Violations Of The Conditions hereby declared to be incorporated in and Precedent Preclude Coverage to form an integral party of this Policy.

Metro and Lloyd's filed competing Motions for Summary Judgment regarding the issue of whether the conditions precedent to coverage under the Umbrella (Doc. No. 66, Ex. B at Bates UW/Wil 4.) policy have been met. (Doc. No. 65 at 22; Doc. No. 66 at In addition, the "Divided Risk Endorsement" states 15-16.) UP filed a response to Lloyd's Motion. (Doc. No. that "[i]t is hereby understood and agreed that this Policy [**81] 81 at 11-14). The Court begins by addressing applies only to liability which arises in connection with Metro's Motion.

Work, at or emanating from the Project Site." (Doc. No. In its Motion, Metro appears to seek a declaration that 66, Ex. A at Bates 41.) Endorsement No. 1 defines Lloyd's has waived "any challenge to Metro's averment "Work" as "[t]he entire completed construction or the that it 'has complied with and performed under [*809] various separately identifiable parts required to be fur- the essential terms and elements of . . . the Lloyd's Policy nished under the contract documents." (Id. at Bates 24.) In and any defects in performance by Metro do not prevent addition, "Project Site" means "[t]hat area [**79] de- the parties from accomplishing the purposes of the poli- scribed in the construction contract documents including cies' [reference omitted], by not specifically, and with the area available for Contractor operations, access routes, particularity, denying performance, as is required by the right-of-ways, and approved additional sites necessary or Federal Rules of Civil Procedure 9(c)." (Doc. No. 65 at incidental thereto." (Id.) "Contractor" includes "[a]ny 22.) Lloyd's responds that, contrary to Metro's assertions, individual, partnership, firm or corporation which has when Lloyd's filed its Answer, it specifically denied entered into a Contract for construction with The Metro- Metro's performance of the conditions precedent. (Doc. politan Transit Authority of Harris County, Texas (Metro) No. 78 at 12.) The Court agrees. Metro's Motion for Par- to perform Work at the Project Site unless such entity is tial Summary Judgment on the ground that Lloyd's specifically excluded from the OCIP." waived compliance with the conditions precedent by Based on these policy provisions, Lloyd's argues that failing to comply with Rule 9(c) of the Federal Rules of the Umbrella policy "clearly only provides coverage with Civil Procedure is denied respect to construction of the listed items" and "[n]o Turning to the competing Motion, Lloyd's contends coverage is afforded for operational use of the listed that coverage is precluded under the Umbrella policy on items. (Doc. No. 66 at 14.) Lloyd's interpretation of these the grounds of (1) delayed notice, and (2) failure to obtain policy provisions is too strained. Under the policy, the consent to settle or the "no-action" clause. (Doc. No. 66 at "Project Site" includes the test track, not only because it 15-17.) [**82] UP filed a response refuting each of was the "area described in the construction contract Lloyd's arguments. The Court addresses each issue in documents" (Doc. No. 65-2, Ex. A at 2, P5; 7, P17), but turn. also because it was the "area available for Contractor operations," which included the testing or commissioning 7. Whether Delayed Notice Precludes Coverage the LRVs. In addition, as provided in the policy language, "the construction of the [**80] Light Rail System" in- Lloyd's contends that the delayed notice by Metro cluded "the final design, manufacturing, supply, installa- and UP precludes coverage under the Umbrella policy. tion, testing, training, spare parts, and operations and (Doc. No. 66 at 15.) 13 UP counters that Lloyd's has not maintenance technical support" of the LRVs was a nec- established late notice and, even if they had, they have essary and required part of the construction of the Light failed to show prejudice. (Doc. No. 81 at 11.)

Rail System. (Doc. No. 65-3, Ex.1-A at 12 of 113; see also, Doc. No. 65-3, Ex.1-A at 14 of 114.) Finally, as 13 Lloyd's complains that it did not receive broadly defined in the policy, the testing of the LRVs, timely notice of the accident or the suit and that it Page 21 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

was given less than 24 hours to consider a settle- participate in the settlement negotiations or instruct either ment offer to Plaintiff McGinnis. Metro or UP to refrain from settlement to allow Lloyd's to determine whether to participate. Following several tel- The Umbrella policy requires Metro n 14 to notify ephone discussions with Lloyd's counsel, on February 27, Lloyd's "as soon as practicable of an Occurrence which 2007, UP's counsel, sent a letter to Lloyd's counsel in may result in a claim under this policy." (Doc. No. 66, Ex. which he provided the status of the case, [**85] de- B at Bates UW/Wil 20.) The policy further provides that manded a defense, demanded "first-dollar liability cov- "[i]f a claim is made or suit is brought against any Insured erage under the Lloyd's Umbrella Policy for the Incident" that is reasonably likely to involve this policy [Metro] or, in the alternative, "without waiver, Union Pacific must notify [Lloyd's] in writing as soon as practicable." demands that Lloyd's provide indemnity excess to the (Id.) This provision of the policy was further modified by underlying scheduled policies," and demanded Lloyd's Endorsement 17, which stated "[i]t is understood and "immediately effect a settlement of the McGinnis claim." agreed that notice of Occurrence, claim or Suit shall be (Doc. No. 89, Ex. A-1.) On March 13, 2007, Lloyd's made in accordance with Condition F. Duties In The denied coverage under the Umbrella policy. (See Doc. No. Event [**83] Of An Occurrence, Claim Or Suit via the 66, Ex. C-2.) On March 22 and 23, 2007, UP emailed following entity: 'Willis of Texas.'" (Id. at Bates UW/Wil counsel for Liberty Mutual and Lloyd's once again re- 40.) There is no dispute that Willis of Texas had notice of questing their participation in the settlement and also the accident and UP's claims shortly after the occurrence informed them of UP's intent to accept the settlement offer in 2004. Thus, pursuant to the terms of the agreement, sought by Plaintiff McGinnis unless directed not to by notice to Willis of Texas satisfied the terms of this con- either carrier. (Doc. No. 66, Ex. C-2; Doc. No. 77, Exs. Y dition. & Z.) Without hearing from Lloyd's, on March 23, 2007, Notwithstanding this fact, under Texas law, an in- after both insurers not only declined to participate in the sured's failure to give timely notice will not defeat cov- settlement discussions, but also declined coverage, UP erage absent a showing by the insurer that they have been settled Plaintiff McGinnis' claims. (Doc. No. 66, Ex. C-2.) prejudiced. PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d On March 27, 2007, a letter from Lloyd's counsel "reit- 630, 636-37 (Tex. 2008); Hernandez v. Gulf Group erates" their declination of coverage. (Id.) In the letter, Lloyds, 875 S.W.2d 691, 693 (Tex. 1994); Hanson Prod. although having previously declined coverage, Lloyd's Co. v. Americas Ins. Co., 108 F.3d 627, 629-30 (5th Cir. objected to the increased settlement [**86] amount 1997) (insurer must establish it was prejudiced by late contemplated by UP to settle Plaintiff McGinnis' claims, notice). Prejudice will not be presumed from either de- complained that they did not have adequate information layed notice or "settlement without consent." PAJ, 243 upon which to evaluate the reasonableness of the new S.W.3d at 634; Hanson, 108 F.3d at 631; Comsys, 130 settlement amount, objected that UP gave them only 24 S.W.3d at 191-92. Instead, an insurer "must demonstrate a hours to consider Plaintiff's new settlement demand, and material change in position to establish prejudice" and reserved their right to contest the reasonableness of the "may not disclaim coverage on the basis of prejudice that settlement amount. (Id.) Notably, however, Lloyd's was is only theoretical or presumed merely from [*810] the notified of the suit before trial and had previously been length of delay." Coastal Refining & Marketing Inc. v. invited to participate in the settlement discussions.

U.S. Fidelity & Guaranty Co., 218 S.W.3d 279, 288 Lloyd's not only declined, but denied coverage under the (Tex.App.--Houston [14th Dist.] 2007, pet. denied). policy before any settlement was reached. [**84] "Whether an insurer is prejudiced by delayed no- As pointed out by UP, in its Motion for Summary tice is generally a question of fact," but a court may de- Judgment, Lloyd's only specific claims of prejudice are as termine the issue as a matter of law when the material follows: facts are undisputed. St. Paul Guardian Ins. Co. v. Cen- trum G.S. Ltd., 383 F.Supp.2d 891, 902 (N.D. Tex. 2003). [it was] prejudiced by the ultimate set- Willis of Texas notified Lloyd's of the loss sometime tlement Union Pacific entered into with in late September 2006. There is no dispute that, in early Plaintiff McGinnis because the original November 2006, UP provided all the information re- settlement agreement reached between the quested by Lloyd's for the stated purpose of evaluating the two was for considerably less. See Exhibit coverage applicable to the accident. (See Doc. No. 66, Ex. "C." For reasons unknown to Underwrit- C-1 at Bates W17054.) On November 28, 2006, UP ers, Union Pacific failed to formalize the communicated with Lloyd's regarding the direct settle- original settlement, allowing a significant ment negotiations involving the claims made by Plaintiff increase in the demands of Plaintiff McGinnis. (Doc. No. 66, Ex. C-1 at Bates W17052-54; McGinnis, to the extreme prejudice of Doc. No. 77, Ex. U.) Lloyd's did not affirm or deny cov- Underwriters. erage or tender a reservation of rights and also did not Page 22 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

Furthermore, [**89] another consequence of a [*811] (Doc. No. 66 at 23.) To the extent that Lloyd's breach of the duty to defend is the inability to enforce suggests that its [**87] inability or failure to obtain a against the insured any conditions in the policy; the in- smaller settlement, or more favorable settlement, consti- sured is no longer constrained by "no action" or "no vol- tutes prejudice sufficient to relieve an insurer of its duty to untary assumption of liability" clauses. Parker Products, defend or indemnify its insured, any such assertion would Inc., 498 S.W.2d at 679. Thus, a consequence of breach is not suffice to establish prejudice. Centrum G.S. Ltd., 383 that an insurer who wrongfully failed to defend its insured F.Supp.2d at 902 (recognizing that inability to obtain a is liable for any damages assessed against the insured, up more favorable judgment is not a circumstance that will to the policy limits, subject only to the condition that any establish prejudice). Based on the evidence presented, the settlement be reasonable. Western Alliance Ins. Co. v. Court cannot conclude that Lloyd's was prejudiced as a Northern Ins. Co. of New York, 176 F.3d 825, 830 (5th matter of law. See Coastal Refining & Marketing, 218 Cir. 1999). The insured must demonstrate only that, in S.W.3d at 290-92 (delayed notice to insurer of suit until settling, his conduct conformed to the standard of a pru- less than a month before trial did not prejudice insurer dent uninsured. Simon v. Maryland Cas. Co., 353 F.2d where it learned of suit while defense and negotiations 608, 612 (5th Cir. 1965) (citing United States Auto. Ass'n were still ongoing, insurer was provided access to litiga- v. Russom, 241 F.2d 296, 301 (5th Cir. 1957)) (when the tion file, and insurer was invited to participate in settle- insurer repudiates coverage, an assured is entitled to ex- ment discussions). Lloyd's Motion for Summary Judg- ercise the judgment of a prudent uninsured person in ment on the ground of late notice is, therefore, denied. compromising the claim); Willcox v. American Home Assur. Co., 900 F.Supp. 850, 855-56 (S.D. Tex. 1995) 8. Whether "No Action" Clause Precludes Cov- (recognizing that "[w]hen an insured compromises and erage settles the [*812] case without the sanction of a judg- Lloyd's next contends that the "no action" clause ment, the [**90] insured may, in a separate suit initiated precludes coverage under the policy. (Doc. No. 66 at 16.) against the insurer, recover the amount of damages he In particular, the Umbrella policy contains the following paid or promised to pay in settlement of the case upon clause: sufficient proof of facts establishing that the settlement was made in good faith, upon reasonable basis, and for a There will be no right of action against [**88] us reasonable amount"); see also, Atofina Petrochemicals, under this insurance unless: S.W.3d at 677 (when an insurer wrongfully denies coverage and its insured enters into an agreed judgment, 1. You have complied with all the terms the insurer may not contest the reasonableness of the of this policy; and agreed judgment). Finally, when an insured settles a 2. The amount you owe has been de- claim, without knowing whether or not it would be cov- termined with our consent or by actual trial ered by the policies, this "leav[es] in place its motive to and final judgment. minimize the settlement amount in case it became solely responsible for payment." Id. at 674. Accordingly, Lloyd's Motion for Summary Judgment based on the (Doc. No. 66, Ex. B at Bates UW/Wil 20.) UP responds "no-action" clause is denied. that Lloyd's "reliance on the no-action clause . . . is mis- placed because they denied coverage." (Doc. No. 81 at 9. Whether Lloyd's Breached Duty to Defend 14.) While it is true that "the insurance company may In its Third-Party Complaint, UP alleges that Lloyd's ordinarily insist upon compliance with this condition for breached its duty to defend. In its Motion for Summary its own protection" (Gulf Ins. Co. v. Parker Prods. Inc., Judgment, Lloyd's maintains that it had no duty to defend 498 S.W.2d 676, 679 (Tex. 1973)), the law is well-settled because the complaint alleged facts excluded by the pol- that once an insurer has breached its duty to defend, the icy. (Doc. No. 66 at 17.) The Umbrella policy, in relevant insured is free to proceed as he sees fit; he may engage his part, provides: own counsel and either settle or litigate, at his option.

Great American Indemnity Co. v. Corpus Christi, 192 II. Defense S.W.2d 917, 919 (Tex.Civ.App.-San Antonio 1946, writ ref'd n.r.e.). Having forfeited its right to conduct the de- A. We shall have [**91] the right fense, the insurer is bound by the judgment or settlement. and duty to defend any claim or suit Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026, 1029 seeking damages covered by the terms and (judgment), reh'g denied, 583 F.2d 541 (5th Cir. 1978); conditions of this policy when: Ranger Insurance Co. v. Rogers, 530 S.W.2d 162, 166-67 (Tex.Civ.App.-Austin 1975, writ ref'd n.r.e.) (settlement).

Page 23 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

1. The applicable limits 951 S.W.2d at 390 (where breach of contract was estab- of Insurance of the under- lished, but jury awarded no damages for the breach, the lying policies listed in the party was not entitled to attorney's [*813] fees under Schedule of Underlying statute). In this case, it is premature to consider UP's en- Insurance and the limits of titlement, if any, to attorney's fees under Section 38.001.

Insurance of any other See Solis, 951 S.W.2d at 390. Accordingly, UP's Motion Underlying Insurance for Partial [**93] Summary Judgment seeking attorney's providing coverage to the fees under Section 38.001 is denied without prejudice as Insured have been ex- premature. hausted by payment of claims to which this policy 11. Whether No Coverage Under Policy Precludes Bad applies; or Faith Claim 2. Damages are sought Lloyds argues that since no coverage existed under for Bodily Injury, Property the policy, any claim that it acted in bad faith fails. (Doc.

Damage, Personal Injury, No. 66 at 17-18.) UP responds that, while the carriers or Advertising Injury cov- "have correctly recited Texas law on the issue," to the ered by this policy but not extent coverage exists under the policy, additional dis- covered by any underlying covery would be necessary and, thus, it would be "prem- insurance listed in the ature for the Court to consider and rule on the viability of Schedule of Underlying the extra-contractual claims." (Doc. No. 81 at 15.) Insofar Insurance or any other un- as coverage exists under the policy, the Court agrees with derlying insurance provid- UP. Lloyd's Motion for Summary Judgment is denied on ing coverage to the Insured. this point.

VIII. CONCLUSION For all the reasons set forth above, the following is ORDERED by the Court: (Doc. No. 66, Ex. B at Bates UW/Wil 7.) UP maintains that it "has demonstrated that the various suits filed A. Liberty Mutual's Motion for Sum- against it arising out of the Accident fall within the scope mary Judgment (Doc. No. 64) is of coverage" (Doc. No. 69 at 19), and Lloyd's "must de- GRANTED as to the issue that UP is not fend [UP] under the Umbrella policy if (i) the RPL Policy an insured under the Wrap-Up policy, but covers the claims and is exhausted by payment; or (ii) if DENIED as to all other relief sought the RPL Policy does not cover the claims." The Court within its Motion; agrees. Since the Complaint's alleged facts fall within the scope of coverage and were not otherwise excluded by the B. Metro's Motion for Partial Sum- policy, Lloyd's [**92] Motion for Summary Judgment mary Judgment (Doc. No. 65) is on this ground is denied. GRANTED as to the following issues: (1) liability coverage exists for Metro under 10. Whether UP is Entitled to Attorney's Fees the Wrap-Up policy; (2) [**94] the auto UP maintains that it is entitled to attorney's fees under exclusion does not apply to preclude cov- Section 38.001 of the Texas Civil Practice and Remedies erage for Metro under the Wrap-Up policy; Code for bringing this action against Lloyd's for breach of and (3) the Lease Agreement is an "insured contract. (Doc. No. 69 at 12.) While Lloyd's filed a re- contract" under the Wrap-Up policy, and sponse to UP's Motion, it did not address UP's argument DENIED as to all other relief sought that it is entitled to attorney's fees. (See Doc. Nos. 77 & within its Motion; 87.)

C. Lloyd's Motion for Summary As previously discussed, in order to recover attor- Judgment (Doc. No. 66) is DENIED in its ney's fees pursuant to Section 38.001, a party must be a entirety; prevailing party and recover actual damages on its claim.

D. UP's Motion for Partial Summary See Mustang Pipeline Co., 134 S.W.3d at 201 (noting that Judgment under the RPL Policy (Doc. No. even though the claimant had a valid claim, it "was not 66) is DENIED; and entitled to recover attorney's fees because it was not awarded damages on its breach of contract claim"); Solis, Page 24 612 F. Supp. 2d 776, *; 2009 U.S. Dist. LEXIS 33687, **

E. UP's Motion for Partial Summary Judgment under the Umbrella Policy (Doc.

No. 69) is GRANTED as to the following issues: (1) UP is an additional insured under the Umbrella policy; (2) UP has IT IS SO ORDERED. standing to bring this action; (3) the auto SIGNED this 14th day of March, 2009. exclusion does not apply to preclude cov- erage under the Umbrella policy; and (4) /s/ Keith P. Ellison the Umbrella policy is not limited merely to construction, and DENIED as to all KEITH P. ELLISON other relief sought within its Motion. UNITED STATES DISTRICT JUDGE Page 1 923 S.W.2d 663, *; 1996 Tex. App. LEXIS 750, **

R. K. MURPHY A/K/A KEN MURPHY D/B/A MURPHY'S EXXON AND D/B/A MURPHY'S CHEVRON, APPELLANT v. CINTAS CORPORATION, APPELLEE NO. 12-94-00371-CV COURT OF APPEALS OF TEXAS, TWELFTH DISTRICT, TYLER 923 S.W.2d 663; 1996 Tex. App. LEXIS 750

February 23, 1996, delivered February 23, 1996, filed SUBSEQUENT HISTORY: [**1] Rehearing Cintas Corporation is a national company that [**2] Denied March 14, 1996. Motion for Rehearing of Appli- rents uniforms, towels and mats to businesses on a weekly cation for Writ of Error Overruled November 15, 1996. basis. Murphy owns and [*665] operates an Exxon and Chevron service station in Tyler, Texas. From 1988 until PRIOR HISTORY: APPEAL FROM THE 1991, Murphy and Cintas entered into a series of contracts COUNTY COURT AT LAW NO. 2. SMITH COUNTY, to rent uniforms. Initially, Cintas filed suit against Mur- TEXAS. phy alleging that he had failed to pay in accordance with their agreements which resulted in $ 8,724.59 in damages.

As exhibits to its petition, Cintas attached the contracts, COUNSEL: H.L. MCGEE. the invoices and Cintas's affidavit stating that the claim against Murphy was just and true, that it was due, and that RONNIE HORSLEY. all just and lawful credit had been allowed. TEX. R. CIV. P. 185.

JUDGES: CHARLES R. HOLCOMB (AUTHOR), A.

ROBY HADDEN, TOM B. RAMEY, JR. (NOT PAR- Murphy answered by an unsworn denial, but alleged TICIPATING) that Cintas "failed to furnish clean, high quality garments and failed to replace torn, damaged and worn garments OPINION BY: CHARLES R. HOLCOMB when requested." Murphy also alleged that Cintas was not entitled to recover liquidated damages because the liqui- OPINION dated damage provision was an unenforceable penalty.

After a non-jury hearing, the court rendered judgment in [*664] Ken Murphy appeals from a judgment favor of Cintas. Neither party requested findings of fact awarding Cintas Corporation $ 6,167.30 for breach of a and conclusions of law. uniform rental agreement. In the first six points of error, Murphy challenges the legal sufficiency of the evidence to In points one, two, three, four, five, six and eight, support the court's award of liquidated damages. In his Murphy challenges the legal [**3] sufficiency of the seventh point, Murphy contends that the court erred when evidence to support the court's award of liquidated dam- it awarded liquidated damages because the stipulated ages. According to Murphy, the record is void of any damage clause in the contract was an unenforceable pen- evidence regarding the amount of monetary loss that alty, as a matter of law. In his last point, Murphy contends Cintas actually suffered as a result of the breach or the that the court erred when it refused to set aside the judg- reasonableness of the liquidated damage provision. He ment and render a take-nothing judgment in his favor. In also argues that the record is void of any evidence that the one cross-point, Cintas contends that the court erred when amount of liquidated damages was a reasonable forecast it permitted Murphy to file a trial amendment after the of just compensation. Therefore, Murphy concludes that court had taken the case under advisement. We will af- the court erred when it awarded damages in accordance firm. with the liquidated damage provision of the contract ra- Page 2 923 S.W.2d 663, *; 1996 Tex. App. LEXIS 750, **

ther than awarding damages in accordance with common evidence to prove the amount of Cintas' actual damages. law contract law. We do not agree. Accordingly, points one, two, three, four, five, six and [**6] eight are overruled.

When findings and conclusions are neither requested nor filed, the trial court is presumed to have made all of In his seventh point, Murphy contends that the court the findings necessary to support its judgment. Roberson erred when it awarded Cintas liquidated damages because v. Robinson, 768 S.W.2d 280, 281 (Tex. 1989). All ques- the contractual provision was, as a matter of law, an un- tions of fact are presumed found in support of the judg- enforceable penalty. The disputed liquidated damage ment and the judgment will be upheld on any legal theory clause stated: raised by the evidence. Point Lookout West, Inc. v. Whorton, 742 S.W.2d 277, 278-79 (Tex. 1987). Further, In the event of cancellation of this ser- Murphy's points of error are "no evidence" points. In vice agreement by the Customer prior to deciding a "no evidence" point, we must [**4] consider the termination date, other than for failure only the evidence and inferences tending to support the of the Company to perform under its finding and disregard all evidence and inferences to the guarantee, the Customer will pay the contrary. Davis v. City of San Antonio, 752 S.W.2d 518, greater of 50% of the weekly service (Tex. 1988). charge per person per week for the unex- pired term, or buy back all of the garments Here, we have a dispute between the parties about in inventory at the rates listed above as whether the court rendered judgment on a suit on sworn replacement value. account or breach of contract. TEX. R. CIV. P. 185. To be a valid suit on sworn account, the account or liquidated money demand must involve a claim for goods, wares, Citing Servisco v. Tramco Inc., 568 S.W.2d 434, 437 (Tex. merchandise, personal services rendered, labor done or App - Texarkana 1978, writ ref'd n.r.e); Mayfield v. Hicks, labor or materials furnished. Great-ness Prof. Serv. v. 575 S.W.2d 571, 575 (Tex. App. - Dallas 1978, writ ref'd First Nat. Bank of Louisville, 704 S.W.2d 916, 917 (Tex. n.r.e.) and Bethel v. Butler Drilling Co., 635 S.W.2d 834, Civ. App. - Houston [14th] Dist. 1986, no writ). Had (Tex. App. - Houston, 1982, writ ref'd n.r.e), Murphy Cintas properly filed a suit on a sworn account in ac- argues that a contract provision is a penalty and is unen- cordance with Rule 185, and Murphy had failed to file a forceable if it provides for unreasonable payments for a written denial under oath, Murphy could not have denied minor breach. In Servico, the court held that "a sum stip- Cintas's claim, he could not have disputed that he received ulated to be paid under an agreement should be treated as the services, and he could not have disputed the correct- an unenforceable [**7] penalty if the agreement con- ness of the stated charges. Vance v. Holloway, 689 tains several matters of different degrees of importance S.W.2d 403, 404 (Tex. 1985); Airborne Express Corp v. and the sum stipulated is payable for the breach of any, CRB Marketing, Inc., 566 S.W.2d 573, 575 (Tex. 1978). even the least." Murphy argues that, under the language of However, a lawsuit involving a breach of a lease [**5] the Cintas-Murphy agreement, Murphy could have been agreement is not a valid claim on sworn account because a liable for the same amount of damages whether he lease agreement does not involve a purchase and sale, and breached the agreement by failing to pay the rental for all title to personal property has not passed from one party to of the uniforms, by failing to pay for one shirt or by vio- another. Id. Thus, we hold that Cintas's cause of action lating any of the other obligations contained in the con- against Murphy is not a suit on sworn account as a matter tract. Murphy also contends that the harm caused by the of law. Id. breach must not be capable of estimation or difficult to Having determined that the court rendered judgment estimate to be an enforceable liquidated damage stipula- in favor of Cintas under a breach of contract, we will tion. Because employees of Cintas testified that docu- determine whether there is any evidence to support the mentation of the actual damage that Cintas incurred as a damage award. Murphy argues that, because Cintas did result of the breach were available at the time of trial, not offer proof of its actual damages, there was no evi- Murphy concludes that Cintas admitted that the liquidated dence in the record to show that the liquidated damage damage provision was unenforceable. provision in the contract was reasonable. As an affirma- In Stewart v. Basey, the Supreme Court considered tive defense to Cintas's claim for liquidated damages, the difference between an enforceable liquidated damage Murphy pled penalty. TEX. R. APP. P. 94; Phillips v. provision and an unenforceable penalty. Stewart v. Phillips, 820 S.W.2d 785, 789 [*666] (Tex. 1991). In Basey, 150 Tex. 666, 245 S.W.2d 484 (1952). More re- doing so, Murphy not Cintas had the burden to prove that cently, the courts have restated this two-part Stewart test the liquidated damage provision was unreasonable and a when analyzing [**8] the validity of a contractual penalty. Gorman v. Life Ins. Co. of North America, 811 damages provision: S.W.2d 542, 546 (Tex. 1991). Murphy did not offer any Page 3 923 S.W.2d 663, *; 1996 Tex. App. LEXIS 750, **

In order to enforce a liquidated damage clause, the Accordingly, we hold that the liquidated [*667] dam- court must find: age clause is enforceable. Point seven is overruled.

In his last point of error, Murphy contends that the (1) that the harm caused by the breach is court erred when it refused to set aside the judgment and incapable or difficult of estimation; and render a take-nothing judgment in his favor. However, he failed to cite any authority to support his position. Under (2) that the amount of liquidated damages Rule 74(f), Murphy's point is not preserved for our review. called for is a reasonable forecast of just TEX. R. APP. P. 74(f); Tobias v. Univ. of Texas at Ar- compensation. lington, 824 S.W.2d 201, 206-07 (Tex. App. - Fort Worth 1991, writ denied).

Phillips, 820 S.W.2d at 788. For the provision to be an In one cross-point, Cintas contends that the court unenforceable penalty, the uncertainty of the damages and erred when it allowed Murphy to file a trial amendment the reasonableness of the stipulation must have existed at after the ease had been heard by the court. According to the time when the contract was executed. Oetting v. Cintas, Murphy had failed to plead the defense of penalty Flake Uniform & Linen Service, 553 S.W.2d 793, 796 to the contract action under Rule 94 until after both parties (Tex. Civ. App. - Ft. Worth 1977, no writ). Even though had closed and the court had taken [**10] the case under Murphy contends that the actual damage incurred by advisement. TEX. R. CIV. P. 94. However, the only an- Cintas could have been calculated at the time of trial, such swer in the transcript is Defendant's Second Amended testimony was long after the contract between Cintas and Original Answer. The record before us does not contain Murphy had been executed. To forecast the actual dam- any of the answers that precede Murphy's last amended ages to Cintas as a result of Murphy's termination of the answer, from which Cintas complains. Accordingly, we contract sixty months in advance would be fraught with cannot determine from the record to what extent Murphy uncertainty. Further, similar contracts for liquidated amended his prior pleadings. To complain of error on damages have been approved in Liberty Sign Co. v. appeal, it is incumbent upon the complaining party to Newsom 426 S.W.2d 210 (Tex. 1968); Blakeway v. Na- submit evidence in the record to support his claim. TEX. tional Credit Corporation, 439 S.W.2d 155 [**9] (Tex. R. APP. P. 50(d). Cintas's cross-point is overruled.

Civ. App. - Austin 1969, writ ref'd n.r.e.); Blakeway v. CHARLES HOLCOMB, General Electric Credit Corporation, 429 S.W.2d 925 (Tex. Civ. App. - Austin 1968, writ ref'd n.r.e.); Hyde v. Justice Claude Neon Federal Co., 157 S.W.2d 952 (Tex. Civ. App. - Eastland 1941, writ dism'd); White v. Wilbanks, Opinion delivered February 23, 1996. 144 S.W.2d 941 (Tex. Civ. App. - Amarillo 1940, no writ).

Page 1 2008 Tex. App. LEXIS 4736, *; 27 I.E.R. Cas. (BNA) 1872

NEXSTAR BROADCASTING, INC. D/B/A KBTV NBC 4, Appellant v. JENNIFER GRAY AND KTBS, INC., Appellees NO. 09-07-364-CV COURT OF APPEALS OF TEXAS, NINTH DISTRICT, BEAUMONT 2008 Tex. App. LEXIS 4736; 27 I.E.R. Cas. (BNA) 1872 March 13, 2008, Submitted June 26, 2008, Opinion Delivered PRIOR HISTORY: [*1] on the ground that there was no evidence of damages and On Appeal from the 60th District Court, Jefferson rendered judgment that Nexstar take nothing from KTBS.

County, Texas. Trial Cause No. B-174,467.

Nexstar asserts eight issues for appellate review.

KTBS raises a cross-point attacking the sufficiency of the DISPOSITION: REVERSED AND REMANDED. evidence to support the [*2] jury's finding of $ 2,000 in damages. See TEX. R. CIV. P. 324(c). We reverse the trial court's judgment. The cause is remanded for a new trial.

COUNSEL: For APPELLANT: William L. Davis, Esq., Jackson Lewis LLP, Dallas. BACKGROUND For APPELLEES: Scott L. Zimmer, Cook, Yancey, King Gray was originally hired by Nexstar as a reporter in & Galloway, Shreveport, LA; Wyatt D. Snider, Snider & 2003 and signed an employment contract. In 2004, Gray signed another contract with Nexstar as an on-air per- Byrd, L.L.P., Beaumont; Jason M. Byrd, Snider & Byrd, former for a term of employment from April 11, 2004, to L.L.P., Beaumont.

May 31, 2006. The contract contained a provision titled "Remedies and Procedure for Remedying Disputes," JUDGES: Before McKeithen, C.J., Gaultney and Horton, JJ. which stated: In the event Employee elects to breach OPINION BY: DAVID GAULTNEY this Agreement and leave employment prior to the conclusion of the term, the OPINION Company may accept as liquidated dam- ages for said breach the amount of $ MEMORANDUM OPINION 10,000. In the event the Company deter- Nexstar Broadcasting, Inc. d/b/a KBTV NBC 4 ap- mines that the liquidated damages amount peals a judgment rendered in a lawsuit filed against for- described above is insufficient to cover all mer employee Jennifer Gray for breach of contract and of its damages, the Company may seek to against Gray's subsequent employer, KTBS, Inc., for obtain additional compensatory and con- interference with the contract. A jury awarded Nexstar $ 1 sequential damages by pursuing an action in nominal damages from Gray on the breach of contract under paragraph 7(a) herein. claim, and $ 2,000 in actual damages from KTBS on the tortious interference with the contract claim. The trial court granted Gray a declaratory judgment, ruling that a In February 2005, Gray gave notice that she would be liquidated damages provision in the contract was an un- enforceable penalty as a matter of law. The trial court resigning from her position. Nexstar sent her a letter re- ruled that Nexstar was not entitled to attorney's fees and minding her of her continuing obligations under the con- tract. The letter informed Gray she would have to pay $ awarded attorney's fees to Gray. The court granted 10,000 if she left her employment. [*3] Nexstar learned KTBS's motion for judgment notwithstanding the verdict Page 2 2008 Tex. App. LEXIS 4736, *; 27 I.E.R. Cas. (BNA) 1872

that KTBS was interested in hiring Gray and sent KTBS a ing royalties under deed). The counterclaim must seek letter stating that Gray was still under contract. affirmative relief and allege that the defendant has a cause of action, independent of the plaintiff's claim, on which Gray stopped appearing as an on-air performer for the defendant could recover benefits, compensation, or Nexstar in March 2005. Within two weeks of Gray's de- relief. Millard, 800 S.W.2d at 841; HECI Exploration Co. parture, she began working for KTBS. v. Clajon Gas Co., 843 S.W.2d 622, 638-39 (Tex. THE DECLARATORY JUDGMENT AND AT- App.--Austin 1992, writ denied). A counterclaim that TORNEY'S FEES presents no new controversy may not be asserted simply to recover attorney's fees. Hitchcock Props. Inc. v. Lev- Nexstar's lawsuit against Gray sought "liquidated ering, 776 S.W.2d 236, 239 (Tex. App.--Houston [1st damages from Gray and/or all actual and consequential Dist.] 1989, writ denied). damages proximately caused by her breach of contract."

Gray filed a counterclaim seeking a declaratory judgment Gray sought a declaration that the remedies provision that the liquidated damages provision in the contract was in the contract was an unenforceable penalty and void as a an unenforceable penalty as a matter of law. matter of law. This requested declaration is essentially a restatement of the "penalty" affirmative defense asserted The trial court found that the liquidated damages in Gray's answer. See Phillips v. Phillips, 820 S.W.2d 785, provision in the employment contract was an unenforce- 789 (Tex. 1991) (noting that "penalty" is an affirmative able penalty. The jury awarded Nexstar $ 1.00 in nominal [*6] defense to an award of damages under a liquidated damages from Gray for the breach of contract. Nexstar damages provision). She sought no greater relief in her and Gray stipulated to the amount of reasonable attorney's counterclaim than she asserted in her affirmative defense; fees, but not to entitlement to attorney's fees. The trial Gray denied Nexstar's entitlement to liquidated damages. court awarded Gray attorney's fees. See Millard, 800 S.W.2d at 842. Gray and Nexstar have no In issue one, Nexstar argues the trial court erred in ongoing relationship. See HECI Exploration Co., 843 granting the declaratory judgment, because Gray had S.W.2d at 639. Gray's declaratory judgment counterclaim simply re-asserted an affirmative defense as a request for presented no new controversy. Under the circumstances, declaratory judgment. In issue six, Nexstar contends the award of attorney's fees to Gray under the Declaratory [*4] the trial court erred in awarding Gray attorney's fees Judgments Act was unauthorized. See Hitchcock Props., because Gray asserted the declaratory judgment counter- 776 S.W.2d at 239. We sustain issues one and six. 1 claim merely to recover attorney's fees that were other- wise not recoverable. 1 In issue seven, Nexstar also argues the trial court abused its discretion in awarding attorney's The purpose of the Declaratory Judgments Act is to fees. We need not address this issue because of our "settle and to afford relief from uncertainty and insecurity resolution of issues one and six. with respect to rights, status, and other legal relations[.]"

TEX. CIV. PRAC. & REM. CODE ANN. § 37.002(b) LIQUIDATED DAMAGES (Vernon 1997). A declaratory judgment is appropriate In issue two, Nexstar argues the trial court erred in only if there is a justiciable controversy and the declara- failing to award liquidated damages because Nexstar tion sought will resolve the controversy. Bonham State prevailed on the breach of contract claim, and the contract Bank v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995). The Act provision was enforceable as a matter of law. Nexstar is not available to settle disputes already pending before argues that liquidated damages are appropriate because the court. BHP Petroleum Co. v. Millard, 800 S.W.2d 838, damages were difficult or incapable of estimation at the (Tex. 1990). time the contract was signed, and $ 10,000 was a rea- A trial court may allow a counterclaim seeking a de- sonable [*7] forecast of just compensation. claratory judgment if it is more than a mere denial of the "Whether a contractual provision is an enforceable plaintiff's cause of action and has greater ramifications liquidated damages provision or an unenforceable penalty than the original lawsuit. See id. at 842. Generally, a is a question of law[.]" Phillips, 820 S.W.2d at 788. A counterclaim will have greater ramifications than the liquidated damages provision may be enforceable if the original claim if it would have the effect of settling future harm caused by the breach is difficult to estimate and the disputes between the parties. See, e.g., id. (allowing de- amount of liquidated damages is a reasonable forecast of claratory judgment counterclaim that defined [*5] the just compensation. Id. Evidence that the harm caused is parties' obligations under an ongoing contract for the difficult to estimate, and that the amount of liquidated foreseeable future); Winslow v. Acker, 781 S.W.2d 322, damages is a reasonable forecast, must be viewed as of the (Tex. App.--San Antonio 1989, writ denied) (holding time the parties executed the contract. Baker v. Int'l Rec- trial court did not err in allowing declaratory judgment counterclaim that would settle all future disputes regard- Page 3 2008 Tex. App. LEXIS 4736, *; 27 I.E.R. Cas. (BNA) 1872

ord Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.--Dallas established as a matter of law, an appellate court must 1991, no writ). render judgment for that proposition. Id. Generally, a contractual provision that does not ex- In a factual sufficiency review, the appellate court clude further liability for actual damages is not a reason- considers and weighs all of the evidence and will set aside able forecast of just compensation and is an unenforceable a verdict only if the evidence is so weak or if the finding is penalty. Robert G. Beneke & Co., v. Cole, 550 S.W.2d so against the great weight and preponderance of the 321, 322 (Tex. Civ. App.--Dallas 1977, no writ). The evidence that it is clearly wrong [*10] and unjust. Id. provision must make clear that the amount of liquidated Nexstar points out the jury instructions on damages damages will be in lieu of other damages. Birdwell v. for interference with the contract and breach of the con- Ferrell, 746 S.W.2d 338, 340 (Tex. App.--Austin 1988, no tract were the same: "out of pocket" damages. The jury writ). found $ 2,000 in "out of pocket" damages resulted from The provision in this case provided for $ 10,000 as the interference with contract, but $ 1 in damages resulted liquidated damages, but also stated [*8] that "[i]n the from the breach of contract. Nexstar argued in a event the Company determines that the liquidated dam- post-judgment pleading that it was entitled to contract ages amount described above is insufficient to cover all of damages, at the least, in "the same $ 2,000 awarded its damages, the Company may seek to obtain additional against Defendant KTBS." In its claim against Gray, compensatory and consequential damages by pursuing an Nexstar argues on appeal "it is clear that the jury im- action under paragraph 7(a) herein." This provision does properly failed to consider the undisputed evidence re- not limit Nexstar's recovery to liquidated damages or garding Nexstar being 'out of pocket' $ 2,000 for the make clear that liquidated damages will be recovered in speech pathologist/talent coach because it found Nexstar lieu of actual damages; under the provision, Nexstar could was 'out of pocket' this amount in its answer to the dam- claim the "liquidated" damages and then claim any addi- ages question against KTBS." 2 tional damages by taking the dispute to an arbitrator under paragraph 7(a). The trial court did not err in failing to 2 We address the arguments made and issues award $ 10,000 as "liquidated" damages. Issue two is raised despite Nexstar's failure to object to the overruled. asserted conflict before the jury was discharged.

See generally C. & R. Transport, Inc. v. Campbell, ACTUAL DAMAGES 406 S.W.2d 191, 195-96 (Tex. 1966); Little Rock In issue three, Nexstar asserts the evidence conclu- Furniture Mfg. Co. v. Dunn, 148 Tex. 197, 222 sively established that Nexstar suffered damages in excess S.W.2d 985 (1949). But see Columbia Med. Ctr. of of the $ 1 awarded by the jury. Nexstar argues it provided Las Colinas v. Bush, 122 S.W.3d 835, 861 (Tex. undisputed evidence that it incurred $ 14,615.49 in actual App.--Fort Worth 2003, pet. denied); [*11] damages; we understand Nexstar to argue in issue three Coastal Chem, Inc. v. Brown, 35 S.W.3d 90, 99 that it proved $ 14,615.49 in damages as a matter of law. (Tex. App.--Houston [14th Dist.] 2000, pet. de- In the alternative, Nexstar argues in issue four that the nied). jury's finding of $ 1 in actual damages is against the Nexstar also contends it paid $ 7,000 to promote a overwhelming weight of the evidence. new morning show format that featured Gray as a mete- In [*9] issue eight, Nexstar argues the trial court orologist. The news director testified regarding this ex- erred in disregarding the jury's finding on damages pense as follows: against KTBS for tortious interference with the contract.

A judgment notwithstanding the verdict is proper when no [Plaintiff's Counsel]: And how much evidence supports the jury's finding. Mancorp, Inc. v. was that total cost?

Culpepper, 802 S.W.2d 226, 227 (Tex. 1990). Nexstar [News Director]: I need to look. I'm contends the evidence supported a finding of at least $ not positive off the top of my head.

2,000 in damages, the amount found by the jury. KTBS argues by cross-point that the $ 2,000 finding is unsup- [Q]: Well, just give me your best es- ported by the evidence. timate.

A party attacking the legal sufficiency of evidence [A]: I believe it ran about $ 7,000. concerning an adverse finding on an issue on which it has [Q]: Okay. the burden of proof must demonstrate that the evidence conclusively established all vital facts in support of the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001). If the proposition contrary to the verdict is Page 4 2008 Tex. App. LEXIS 4736, *; 27 I.E.R. Cas. (BNA) 1872

Nexstar did not show that it promoted the morning show and $ 607.81 for a plane ticket. Nexstar also paid $ 810 to format only because of Gray. At the time of trial, Nexstar a freelance reporter who covered some of Gray's reporting still aired the morning show with the same format. duties. KTBS argues Nexstar would have been required to replace Gray at the end of her contract in any event and Nexstar also argues that it is entitled to the $ 146.31 would have incurred the costs even without the alleged in makeup expenses it paid to Gray. The employment interference. contract states that Gray would be reimbursed for makeup expenses for up to $ 50 per month. Nexstar presented two THE JURY'S FINDINGS checks spent in makeup reimbursements: $ 73.61 paid in The findings by the jury, that [*14] Nexstar suffered November 2004; and $ 73.70 paid on April 20, 2004. $ 1 in out of pocket damages as a result of Gray's breach KBTV's news director testified that Gray used the makeup and $ 2,000 in out of pocket damages as a result of while she worked for Nexstar. Nexstar would have paid KTBS's tortious interference, address the same material these expenses even had Gray fully performed under the fact. The measure of damages under the interference with contract. contract claim is the same as that under the breach of Nexstar asserts that it reimbursed Gray $ [*12] contract claim in this case. See Am. Nat'l Petroleum Co. & 3,110.07 for her meteorology school tuition. Gray Oil Invs., Ltd. v. Transcon. Gas Pipe Line Corp., 798 acknowledged that Nexstar paid for her to attend mete- S.W.2d 274, 278 (Tex. 1990). orology school. KBTV's news director testified that The trial judge found no evidence to support the $ Nexstar did not normally pay for meteorology school but 2,000 damage finding and signed a judgment notwith- agreed to pay Gray's tuition because she had "great po- standing the verdict. There is legally sufficient evidence tential." The trial court admitted into evidence the checks in this record of some damages, however. Though this issued by Nexstar for Gray's tuition: $ 1,431.50 paid on record may not support an award of all of the costs of January 16, 2004; $ 1,194.07 paid on June 1, 2004; and $ finding a replacement, the jury could reasonably conclude 484.50 paid on July 28, 2004. The last two tuition checks, some of the costs incurred in covering Gray's job duties, for $ 1,194.07 and $ 484.50, were paid during the term of hiring a freelance reporter, and finding a replacement on employment under the March 2004 contract. However, short notice could have been avoided if KTBS had not Nexstar was not required to reimburse Gray for her me- interfered with the contract. See Guevara v. Ferrer, 247 teorology school tuition expenses under the March 2004 S.W.3d 662, 670 (Tex. 2007) ("[W]hen there is evidence contract. to support some damages it is not appropriate to render Nexstar argues that it paid $ 2,000 to a speech judgment."). But the jury made conflicting jury findings pathologist, or talent coach, who provided Gray with on conflicting evidence concerning the same [*15] ma- voice training. The talent coach trained all of the on-air terial fact. The jury also found the same evidence did not performers. KBTV's news director would set a day plan- support more than $ 1 in damages for the breach of con- ner for the coach and would allocate how much time each tract. On this record, a coherent judgment cannot be ren- individual would spend with the coach. The time an in- dered. A new trial is required. 3 dividual would spend with the coach varied according to how long the individual worked with the station and how 3 In issue five, Nexstar argues the trial court much potential they had. KBTV's general manager [*13] erred in denying its request for attorney's fees testified that when Gray first started working with the because it prevailed on its breach of contract claim station, the coach spent more time with Gray to improve against Gray. Because we reverse and remand the her voice. However, Nexstar did not present evidence cause for a new trial, we do not reach this issue. showing how much time Gray spent with the coach, nor CONCLUSION did it segregate Gray's time with the coach from the time the other on-air performers trained with the coach. The The trial court's judgment is reversed. The cause is record does not show whether the training occurred when remanded for a new trial.

Gray was first hired under the original contract, or during REVERSED AND REMANDED. the term of the second contract.

DAVID GAULTNEY Finally, Nexstar also contends it incurred costs in hiring Gray's replacement and paid for an on-air per- Justice former to fill in for Gray. While Nexstar sought candi- dates to replace Gray, Gray's meteorology duties were Submitted on March 13, 2008 covered by the station's chief and weekend meteorolo- Opinion Delivered June 26, 2008 gists. Nexstar paid Gray's meteorology replacement $ 191.30 in traveling expenses, $ 750 in moving expenses, Page 1 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001

PATTI PATTERSON, M.D., INTERIM COMMISSIONER OF HEALTH, IN HER OFFICIAL CAPACITY, WILLIAM REYN ARCHER, RECENTLY APPOINTED COMMISSIONER OF HEALTH, IN HIS OFFICIAL CAPACITY, AND THE TEXAS DEPARTMENT OF HEALTH, APPELLANTS v. PLANNED PARENTHOOD OF HOUSTON AND SOUTHEAST TEXAS, INC., APPELLEE No. 97-0889 SUPREME COURT OF TEXAS 971 S.W.2d 439; 1998 Tex. LEXIS 104; 41 Tex. Sup. J. 1001 February 4, 1998, Argued June 23, 1998, Delivered PRIOR HISTORY: [**1] ON DIRECT APPEAL [*439] On direct appeal, the Texas Commissioner FROM THE 250TH JUDICIAL DISTRICT COURT OF of Health asks us to reverse the judgment of [*440] the TRAVIS COUNTY, TEXAS. trial court declaring rider 14 to the 1997-1999 Department of Health family planning appropriation to be unconsti- DISPOSITION: Vacated trial court's judgment and tutional. The rider forbids the use of state funds to dis- dismissed this case for want of jurisdiction. pense prescription drugs to minors without parental con- sent. Planned Parenthood challenged rider 14 on the grounds that it conflicts with federal law and violates the COUNSEL: FOR APPELLANTS: Castro, Mr. Daniel unity-in-subject clause of the Texas Constitution. Because R., Watt & Associates, Austin, TX. Wilburn, Ms. Debra we determine that the challenge to rider 14 is not ripe, we L., Office of Attorney General of Texas, Dan Morales, vacate the trial court's judgment and dismiss this case for A.G., Austin, TX. Watts, MR. Edward P., Watt & Asso- want of jurisdiction. ciates, Austin, TX.

The State of Texas voluntarily participates in [**2] FOR APPELLEE: Dickie, Ms. Martha S., Minton Burton four federal programs that provide funds for family plan- Foster & Collins, Austin, TX. Duggins, Mr. David C., ning services: (1) Title X of the Public Health Service Act, Burton, Mr. Charles R., Clark Thomas & Winters, Austin, 42 U.S.C. § 300, which provides project grants to public TX. and private agencies for family planning services; (2) Temporary Assistance to Needy Families, 42 U.S.C. § McCown, Judge, The Honorable F, Austin, TX. 701 (TANF, also known as the Welfare Reform Act), which provides grants to the states to assist needy fami- JUDGES: JUSTICE HANKINSON delivered the opin- lies; (3) Title XIX of the Social Security Act, 42 U.S.C. § ion of the Court, in which CHIEF JUSTICE PHILLIPS, 1396 (Medicaid), which provides medical care to the JUSTICE HECHT, JUSTICE ENOCH, JUSTICE needy through a cooperative federal-state program; and SPECTOR, JUSTICE OWEN, and JUSTICE BAKER (4) Title XX of the Social Security Act, 42 U.S.C. § 1397, joined. JUSTICE GONZALEZ filed a concurring opin- which provides block grants to the states for social ser- ion, in which JUSTICE ABBOTT joined. JUSTICE vices, including family planning. The funds from these GONZALEZ, joined by JUSTICE ABBOTT, concurring four programs compose the state's family planning ap- in the judgment. propriation, identified in the General Appropriations Act as Department of Health Strategy D.1.2. See General OPINION BY: DEBORAH G. HANKINSON Appropriations Act, 75th Leg., R.S., ch. 1452, 1997 Tex. Gen. Laws 5535, 5663. The federal government is the sole OPINION source of funds for all the programs except Medicaid. As a voluntary participant in the Medicaid program, the state Page 2 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001 agrees to match every nine dollars of federal funds with regulations. Because the Title X Family Planning Pro- one dollar of state [**3] funds. See 42 U.S.C. § gram operates under total budgeting principles, if this 1396b(a)(5). In 1997 the legislature appropriated ap- Rider is fully implemented, the Texas Department of proximately $ 93 million for family planning services for Health would be ineligible to receive Title X funding." each year of the coming biennium, with approximately $ The concept of "total budgeting principles" means that if a 5.4 million per year representing the state's required family planning program receives any money through matching funds for Medicaid. In 1997 the legislature also Title X, Title X regulations apply to all of the funds in that attached rider 14 to the family planning appropriation, program, "including but not limited to grant funds, declaring that "no state funds may be used to dispense grant-related income or matching funds." 42 C.F.R. 59.2 prescription drugs to minors without parental consent." (1997).

General Appropriations Act, 75th Leg., R.S., ch. 1452, In light of this express suggestion that Texas might 1997 Tex. Gen. Laws 5535, 5675. lose its federal family planning funds, Planned As part of its family planning services, plaintiff Parenthood filed this action against the Department and Planned Parenthood of Houston and Southeast Texas, its commissioner seeking a declaration that rider 14 is Inc., provides prescription medication, including contra- unconstitutional. It alleged that the rider violates the Su- ceptives and drugs for treating sexually transmitted dis- premacy Clause, Article [**6] 6, Clause 2, of the United eases, to minors without requiring parental consent. States Constitution by imposing a parental consent re- Planned Parenthood contracts with the state to receive quirement in conflict with federal law, and violates the funds for these services under Title X, Title XX, and unity-in-subject clause, article III, section 35, of the Texas TANF. Planned Parenthood is also an enrolled Medicaid Constitution by amending or repealing certain provisions provider, and is reimbursed on a fee-for-service basis by of the general law in an appropriations act. the Department of Health (through an insurance program) At trial before the court, the parties stipulated to a for the family planning services it provides to Medi- number of facts, including that "effective September 1, caid-eligible individuals. The federal regulations [**4] 1997, Planned Parenthood will no longer be eligible to governing these programs have been interpreted to pro- receive Medicaid funds for providing prescription medi- scribe the imposition of a parental notification or consent cation to minors without consent." Planned Parenthood requirement. See New York v. Heckler, 719 F.2d 1191, called as its sole witness Carol Pavlica, the director of the 1196 (2d Cir. 1983) (invalidating federal regulation re- family planning program for the Department of Health. quiring parental notification of prescription contracep- She explained that although the Department had not yet tives as unauthorized by Title X); Planned Parenthood made any final or official decisions, it was considering Ass'n v. Schweiker, 226 U.S. App. D.C. 139, 700 F.2d 710, two plans in its efforts to implement rider 14. Under the (D.C. Cir. 1983) (explaining that federal regulations first plan (identified by the parties as "Plan A"), the state forbid state from denying Title X services to minors who would simply require all minors receiving prescription lack parental consent); T H v. Jones, 425 F. Supp. drugs from family planning programs to have parental 873, 878 (D. Utah 1975), aff'd in part, 425 U.S. 986, 96 S. consent. She acknowledged that in her opinion this plan Ct. 2195, 48 L. Ed. 2d 811 (1976) (invalidating state pa- would jeopardize all federal family planning funds. rental consent requirement for family planning services as conflicting with federal welfare and Medicaid require- To avoid potentially jeopardizing federal family ments). planning [**7] funds, the Department was considering a second plan ("Plan B"). Under Plan B, the state would Concerned about what it perceived to be a conflict continue to pay for prescriptions to minors without pa- between the federal program rules' forbidding a parental rental consent, but would pay for those prescriptions with consent requirement and rider 14's explicit parental con- federal funds other than Medicaid funds (Medicaid being sent requirement, Planned Parenthood asked defendant the only program with a matching state component), in- Texas Department of Health about the Commissioner of cluding prescriptions for Medicaid-eligible minors. Thus Health's opinion on the effect of rider 14 on family plan- under this plan, in Pavlica's opinion, the state could ning funds. The Department of Health and its commis- comply with the legislature's dictate that no state funds be sioner are charged with administering [**5] and dis- used to dispense prescription drugs to minors lacking tributing funds the legislature appropriates for family parental consent, without violating the federal rules that planning services. The Commissioner in turn requested an receipt of family planning services cannot be conditioned opinion from the United States Department of Health and on parental consent, or jeopardizing other federal family Human Services (DHHS). A regional health administrator planning funds. She made clear that under Plan B, neither for DHHS replied by letter that, in his view, rider 14 "is, Planned Parenthood nor its minor clients (including those on its face, inconsistent with the applicable Title X family eligible for Medicaid) would suffer any change in re- [*441] planning legislative authority and implementing quirements, services, or funding; in other words, the state Page 3 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001 does and will continue to pay for prescriptions for minors with federal law, and that even the Department's proposed even if they lack parental consent, but from federal funds plan to use federal funds without a state matching com- without a state matching fund component. She also testi- ponent did not resolve that conflict. Based on the letter fied she believed the state would not be jeopardizing its from DHHS, the court concluded that "this threatened federal funds by implementing [**8] Plan B because the cut-off of federal funds -- which directly threatens state would not in fact be imposing a parental consent Planned Parenthood -- is sufficient to give Planned requirement. Parenthood standing to force compliance with the law."

The court also premised standing on its finding that the The trial court declared rider 14 unconstitutional on administrative costs of implementing Plan B would be the bases that (1) it conflicts with the federal laws gov- paid for with funds that would otherwise be available to erning the four federal programs in the family planning Planned Parenthood to assist needy individuals. appropriation, and (2) it violates article III, section 35, of the Texas Constitution by attempting to repeal or amend While the trial court framed this issue as one of certain provisions of Chapter 32 of the Texas Human standing, we view it more precisely as one of ripeness.

Resources Code. The court rendered judgment enjoining Ripeness, like standing, is a threshold issue that impli- the Commissioner from implementing rider 14. It also cates subject matter jurisdiction, Mayhew v. Town of issued detailed findings of fact and conclusions of law. Sunnyvale, 905 S.W.2d 234, 244 (Tex. 1998), and like standing, emphasizes the need for a concrete injury [**11] Under federal law, the trial court concluded that the for a justiciable claim to be presented. See DAVIS & rules governing the federal family planning programs in PIERCE, II ADMINISTRATIVE LAW TREATISE, § which the state participates forbid imposition of parental 15.12, at 361 (3d ed. 1994) ("In many cases the two consent requirements, and preempt any state law to the problems of standing and ripeness are merged; a party contrary that would affect programs drawing on those may lack standing because what has happened to him is federal funds. Although the trial court termed it "an ad- not far enough developed, but the lack of development mirable effort" to comply with both federal law and rider may be the essence of unripeness."). But if standing fo- 14, the court concluded that the Department's proposed cuses on the question of who may bring an action, see plan to track prescriptions and payments (Plan B) and use Barshop v. Medina County Underground Water Conser- federal funds without a state matching component to vation Dist., 925 S.W.2d 618, 626-627 (Tex. 1996), ripe- [*442] pay for prescriptions without parental consent ness examines when that action may be brought. At the would [**9] not avoid the conflict with federal law: time a lawsuit is filed, ripeness asks whether the facts "While a state can restrict the use of state money appro- have developed sufficiently so that an injury has occurred priated solely for state purposes, a state cannot restrict the or is likely to occur, rather than being contingent or re- use of state money appropriated to match federal money. mote. See Nichol, Ripeness and the Constitution, 54 U.

Under federal law, matching money must come without CHI. L. REV. 153, 169 (1987); 13A WRIGHT ET AL., restrictions or it is not matching money."

FEDERAL PRACTICE AND PROCEDURE, § 3532.1, Under Texas law, the trial court rejected Planned at 130 (2d ed. 1984). Ripeness thus focuses on whether Parenthood's assertion that the rider amended or repealed the case involves "uncertain or contingent future events Chapter 32 of the Family Code (permitting consent by a that may not occur as anticipated, or indeed may not occur nonparent to treatment of a minor under certain circum- at all." WRIGHT, supra, § 3532, at 112. By maintaining stances), but ruled that it did amend or repeal certain this focus, the ripeness doctrine serves to avoid premature provisions of Chapter 32 of the Human Resources Code [**12] adjudication. While the standing doctrine has (governing the state's medical assistance program for been much criticized, ripeness, especially in its pragmatic needy individuals). It determined that section 32.024(a) of focus, has found the approval of commentators. See, e.g., the Human Resources Code requires the Department of Mansfield, Standing and Ripeness Revisited: The Su- Health to provide medical services to the needy in ac- preme Court's "Hypothetical" Barriers, 68 N.D. L. REV. cordance with federal law, and section 32.031(b) author- 1, 19-20 (1992); WRIGHT, supra, § 3532, at 112 ("As izes the Department to spend state funds to do so. Thus the compared to standing, ripeness decisions have developed trial court concluded that the rider unconstitutionally a generally satisfactory method for resolving the problems amended general law by bringing the state out of com- of prematurity."). pliance with the federal rules governing family planning The constitutional roots of justiciability doctrines funds: "Texas has chosen in its own general law to spend such as ripeness, as well as standing and mootness, lie in its funds [**10] consistent with federal law, and a rider the prohibition on advisory opinions, which in turn stems cannot amend or repeal that general law." The trial court from the separation of powers doctrine. See TEX. CONST. also concluded that Planned Parenthood had standing to art. II, § 1 (separation of powers), art. IV, §§ 1, 22 (at- bring its claims because it receives part of the funds that torney general is part of the executive department, and is the state is placing at risk by enforcing a rider in conflict Page 4 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001 empowered to issue advisory opinions to the governor supra, § 3532.3, at 147 ("adjudication may be postponed [*443] and other officials), art. V, § 8 (district court until a better factual record is available, 'even though the jurisdiction); Texas Ass'n of Bus. v. Texas Air Control Bd., challenged statute is sure to work the injury alleged.'") 852 S.W.2d 440, 444 (Tex. 1993) (explaining that "we (quoting Babbitt v. United Farm Workers Nat'l Union, have construed our separation of powers article to prohibit 442 U.S. 289, 300, 60 L. Ed. 2d 895, 99 S. Ct. 2301 courts from issuing advisory opinions because such is the (1979)). Moreover, avoiding premature litigation prevents function of the executive rather than the judicial [**13] courts from "entangling themselves in abstract disagree- department"); Morrow v. Corbin, 122 Tex. 553, 62 S.W.2d ments over administrative policies" while at the same time 641, 646 (Tex. 1933) (explaining that under the constitu- serving to "protect the agencies from judicial interference tion, appellate court jurisdiction does not extend to issuing until an administrative decision has been formalized and advisory opinions); see also Farmers Tex. County Mut. its effects felt in a concrete way by the challenging par- Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997) (re- ties." City of El Paso v. Madero Dev. & Constr. Co., 803 viewing justiciability principles in light of 1985 constitu- S.W.2d 396, 398-99 (Tex. App. -- El Paso 1991, writ tional amendment to district court jurisdiction). denied) (citing Abbott Lab. v. Gardner, 387 U.S. 136, 18 L. Ed. 2d 681, 87 S. Ct. 1507 (1967)); see also DAVIS & The courts of this state are not empowered to give PIERCE, supra, § 15.12, at 360 (explaining that ripeness advisory opinions. Wessely Energy Corp. v. Jennings, law "limits the ability [**16] of courts to intrude exces- 736 S.W.2d 624, 628 (Tex. 1987); United Servs. Life Ins. sively on the policymaking domains of the politically Co. v. Delaney, 396 S.W.2d 855, 859 (Tex. 1965); Alamo accountable [branches of government]"); Nichol, supra, Express v. Union City Transfer, 158 Tex. 234, 309 S.W.2d at 178 (similarly noting that ripeness doctrine "allows the 815, 827 (Tex. 1958). This prohibition extends to cases courts to postpone interfering when necessary so that that are not yet ripe. See Camarena v. Texas Employment other branches of government . . . may perform their Comm'n, 754 S.W.2d 149, 151 (Tex. 1988); Public Util. functions unimpeded").

Comm'n v. Houston Lighting & Power Co., 748 S.W.2d 439, 442 (Tex. 1987); City of Garland v. Louton, 691 We examine the ripeness of Planned Parenthood's S.W.2d 603, 605 (Tex. 1985); California Prod., Inc. v. claims in light of these principles. Planned Parenthood Puretex Lemon Juice, 160 Tex. 586, 334 S.W.2d 780, 783 argues that any implementation of rider 14 will result in it (Tex. 1960). A case is not ripe when its resolution depends losing federal funds, at the very least those provided on contingent or hypothetical facts, or upon events that through Title X. Thus Planned Parenthood urges that it is have [**14] not yet come to pass. See Camarena, 754 in immediate danger [*444] of sustaining some direct S.W.2d at 151 (holding trial court could not grant relief injury because of the Department's planned implementa- based on "a hypothetical situation which might or might tion of rider 14. Planned Parenthood further argues that it not arise at a later date. District courts, under our Con- is unclear whether the Department can legitimately sep- stitution, do not give advice or decide cases upon specu- arate federal and state funds, and that even if the De- lative, hypothetical or contingent situations"). partment can lawfully implement such a plan, Planned Parenthood is harmed by the administrative costs of im- The concerns addressed by the ripeness doctrine plementation. encompass more than a question of constitutional prohi- bition. The doctrine has a pragmatic, prudential aspect The record does not support Planned Parenthood's that is directed toward "[conserving] judicial time and assertions. Pavlica, the sole witness, explained that the resources for real and current controversies, rather than Department had not finalized its plans, but was leaning to abstract, hypothetical, or remote disputes." Mayhew, 964 Plan B, and had only just begun investigating [**17] S.W.2d 922, 928; see also Nichol, supra, at 174 ("ripeness what automation demands Plan B might require. She analysis carries the banner of prudence rather than pow- emphasized that Planned Parenthood and its clients would er"). Refraining from issuing advisory opinions and experience no change in actual services provided or paid waiting for cases' timely factual development is also es- for under Plan B, but that only the funding source for sential to the proper development of the state's jurispru- some of the prescriptions would change. She testified that dence. See Entman, Flawed Activism: The Tennessee the Department would not in fact require parental consent Supreme Court's Advisory Opinions on Joint Tort Liabil- before paying for prescriptions to minors under Plan B: ity and Summary Judgment, 24 MEM. ST. U.L. REV. 193, "We would not change the parental consent requirements (1994); Frankfurter, A Note on Advisory Opinions, 37 so minors would continue to be served." The letter from HARV. L. REV. 1002, [**15] 1002-03 (1924). "Liti- DHHS does not specifically address Plan B, but refers to gation based upon hypothetical possibility rather than rider 14 "on its face," states that Texas may be ineligible concrete fact is apt to be poor litigation. The demand for to receive Title X funds "if [rider 14] is fully imple- specificity, therefore, stems from a judicial desire for mented," and clearly assumes that parental consent will be better lawmaking." Nichol, supra, at 177; WRIGHT, required before any drugs are prescribed. (Emphasis Page 5 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001 added.) Nothing in the record demonstrates that the fed- standing to challenge rider 14, even assuming the case is eral government has actually considered Plan B, much ripe. I would dismiss the case because Planned less suggested revoking or withdrawing funding based on Parenthood lacks standing either in its own right or on it. Likewise, no evidence supports the trial court's con- behalf of the minors of the State [**20] of Texas. clusion that the administrative costs of implementing Plan [*445] In Texas, "[a] two-part test governs whether B would come from family planning program funds that a plaintiff has standing to challenge a statute." Barshop v. would otherwise have gone to Planned Parenthood, or Medina Underground Water Conservation Dist., 925 even the actual amount [**18] of what those adminis- S.W.2d 618, 626 (Tex. 1996). First, the "plaintiff must . . . trative costs would be. Pavlica testified that although she suffer some actual or threatened restriction under that was "not exactly sure" what the administrative costs might statute." Texas Workers' Compensation Comm'n v. Gar- be, based on her experience, she "would guess . . . [that] it cia, 893 S.W.2d 504, 518 (Tex. 1995). "Second, the would be several hundreds of thousands of dollars" to plaintiff must contend that the statute unconstitutionally segregate the funds. She did not suggest or even speculate restricts the plaintiff's rights, not somebody else's." Id. about where the administrative funds would come from.

This testimony is not specific enough to support the con- Planned Parenthood maintains that rider 14 "uncon- clusion that harm to Planned Parenthood is imminent. stitutionally restricts its own rights" in two ways. First, if the United States Department of Health and Human Ser- This is precisely the kind of case in which resolution vices (DHHS) determines that Texas Department of of the claim presented depends on the occurrence of con- Health's implementation of rider 14 will result in a loss of tingent future events that may not occur as anticipated or federal family planning funds, then Planned Parenthood may not occur at all. We simply do not know what the "will not be able to subsidize all the costs of providing federal government will do if the state carries out its plan expensive prescription drugs to minor patients who can- to segregate the funds, and the record does not even not obtain parental consent." Second, even if the DHHS is demonstrate what exactly the state will do. Without satisfied that "Plan B" does not violate federal regulations, knowing what the federal government will do, Planned Planned Parenthood claims it is harmed by the adminis- Parenthood cannot show a conflict between federal and trative costs expended to implement Plan B. However, state demands or that the state's proposed action will cause Planned [**21] Parenthood fails to identify the source of it any injury. While Planned Parenthood does not have to its "right" or "entitlement" to Texas tax revenues or to the wait until its funds are actually revoked or cut off, its most efficient and cost-effective administration of those potential injury must be more certain; the threat [**19] tax revenues. must be established by something more definite than the DHHS letter presented in this case, which does not ad- In Texas Association of Business v. Texas Air Control dress whatever final action the Department of Health may Board, 852 S.W.2d 440 (Tex. 1993), we held that "the take to meet its statutory obligations to the legislature and standing requirement stems from two limitations on sub- Congress. Because its alleged injury remains contingent, ject matter jurisdiction: the separation of powers doctrine Planned Parenthood's claim is not yet ripe for review. and, in Texas, the open courts provision." Id. at 443 (emphasis added). The open courts provision provides: The essence of the ripeness doctrine is to avoid premature adjudication of just such a situation; to hold All courts shall be open, and every person for an in- otherwise would be the essence of an advisory opinion, jury done him, in his lands, goods, person or reputation, advising what the law would be on a hypothetical set of shall have remedy by due course of law. facts. Neither this Court nor the trial court has the power to do so. Accordingly, we vacate the trial court's judgment TEX. CONST. art. I, § 13. We held that this provision and dismiss this case for want of jurisdiction. "contemplates access to the courts only for those litigants suffering an injury." 852 S.W.2d at 444 (emphasis added).

Deborah G. Hankinson This provision, which authorizes the courts to remedy Justice injuries done in one's "lands, goods, person or reputation," implicitly defines the bounds of potentially justiciable OPINION DELIVERED: June 23, 1998 issues. Cf. Baptist Mem'l Hosp. Sys. v. Arredondo, 922 S.W.2d 120, 121 (Tex. 1996) (recognizing that under the CONCUR BY: RAUL A. GONZALEZ open courts provision, the legislature may limit a cause of action [**22] unless it unreasonably restricts "a CONCUR well-recognized common law cause of action"). For a I concur with the Court that the challenge to rider 14 plaintiff to have standing, it must demonstrate that it at is not ripe. I write separately to address the threshold issue least arguably has some legal or liberty interest grounded the Court leaves open -- whether Planned Parenthood has in the constitution, a statute, or the common law. See Page 6 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001 Spring Branch I.S.D. v. Stamos, 695 S.W.2d 556, 561 (a) This chapter shall be liberally construed and ap- (Tex. 1985) ("A property or liberty interest must find its plied in relation to applicable federal laws and regulations origin in some aspect of state law."). so that adequate and high quality health care may be made available to all children and adults who need the care and Planned Parenthood, therefore, must have some ar- are not financially able to pay for it. guable basis for asserting that rider 14 abrogates some legal or liberty interest of its own. Planned Parenthood has (b) If a provision of this chapter conflicts with a not alleged that rider 14 abridges any common law right provision of the Social Security Act or any other federal arising under property, tort, or contract law. It has not act [**25] and renders the state program out of con- identified any fundamental right to state subsidization, see formity with federal law to the extent that federal Board of Regents v. Roth, 408 U.S. 564, 577, 33 L. Ed. 2d matching money is not available to the state, the con- 548, 92 S. Ct. 2701 (1972) ("To have a property interest in flicting provision of state law shall be inoperative to the a benefit, a person clearly must have more than an abstract extent of the conflict but shall not affect the remainder of need or desire for it. He must have more than a unilateral this chapter. expectation of it. He must, indeed, have a legitimate claim TEX. HUM. RES. CODE § 32.002. This section pro- of entitlement to it."), or to the most efficient and least vides indigent children and adults with a statutory interest wasteful administration of the state's health care re- in maintaining the flow of federal health care funds, but it sources. Cf. Flast v. Cohen, [**23] 392 U.S. 83, 102, does not give Planned Parenthood, a conduit for these 20 L. Ed. 2d 947, 88 S. Ct. 1942 (1968) ("[To establish taxpayer-supported services, a similar statutory interest.

Article III standing] it will not be sufficient to allege an The statute's purposes are directed to the beneficiaries of incidental expenditure of tax funds in the administration the state and federal funds, not to fund Planned of an essentially regulatory statute."). Generally, a state's Parenthood's budget. choice of whether to fund a particular program or the efficiency of its administration is not actionable. Fur- What the Legislature gives the Legislature can take thermore, Planned Parenthood does not identify any im- away. The adults and children deprived of further enti- plicit right or entitlement owing it under the Texas Con- tlements may have a remedy if the process by which the stitution or the Texas Human Resources Code abridged by Legislature terminates them does not accord with due rider 14, even if federal funds are cut off. process. See, e.g., Goldberg v. Kelly, 397 U.S. 254, 263-64, 25 L. Ed. 2d 287, 90 S. Ct. 1011 (1970) (holding The unity-in-subject clause of the Texas Constitution that procedural due process requires that evidentiary does not, by itself, provide Planned Parenthood any legal hearing be held before public assistance payments to or liberty interest. See TEX. CONST. art. III, § 35. This welfare recipients are terminated); Goldsmith v. United Court has previously invalidated riders as void under States Bd. [**26] of Tax Appeals, 270 U.S. 117, 123, Section 35 of Article III of the Texas Constitution, but only 70 L. Ed. 494, 46 S. Ct. 215 (1926) (holding that Board's where the plaintiff asserted an otherwise protected inter- refusal to admit petitioner to the practice of law without a est. [*446] In LeCroy v. Hanlon, 713 S.W.2d 335, 338 prior hearing or statement of reasons for denial violated (Tex. 1986), for example, this Court held that sections of due process). Planned Parenthood has no standing in its an omnibus fee bill increasing filing fees violated the own right to challenge rider 14's alleged conflict with the "caption requirement" of Article III, Section 35. However, provisions of the Texas Human Resources Code. the plaintiff's standing to raise this claim was [**24] not in doubt because he claimed that the filing fees burdened In its Original and First Amended Original Petition, his personal, constitutional right to open courts. See id. at Planned Parenthood argued that it has standing to repre- 337. In Moore v. Sheppard, 144 Tex. 537, 192 S.W.2d sent the interests of the minors of the State of Texas.

559, 562 (Tex. 1946), this Court held that an amendment Under Texas law, however, only the parents or guardians to an appropriation bill directing that fees paid to clerks of a minor may represent their legal interests. See TEX. for either official or unofficial documents be deposited FAM. CODE § 151.003(a)(7). Planned Parenthood is not with the State Treasury violated the unity-in-subject the surrogate parent of Texas's minor children. Its status clause. There, the plaintiffs' standing was also not in as an advocacy organization for certain rights of minors question, because they had an arguable property interest (e.g., access to contraceptives without parental consent) in the compensation they received "for [services] that they does not confer it standing. See, e.g., Texas Dep't of [had] no obligation, under the law, to perform." 192 Mental Health and Mental Retardation v. Petty, 778 S.W.2d at 560. S.W.2d 156, 163-66 (Tex. App. -- Austin 1989, writ dism'd w.o.j.) (holding that Advocacy, Inc., a non-profit Planned Parenthood asserts that rider 14 conflicts advocacy organization for the rights of the mentally dis- with the purposes of Section 32 of the Human Resources abled, lacked standing to sue on behalf [**27] of the Code. That section provides, in pertinent part, that: rights of the mentally disabled).

Page 7 971 S.W.2d 439, *; 1998 Tex. LEXIS 104, **; 41 Tex. Sup. J. 1001 The question of Planned Parenthood's standing to affirmed the ancient and well-established right of parents represent the minors of the state of Texas obscures the to guide and direct the decisions of their minor children. larger issue underlying this case -- parental rights. The "The natural right which exists between parents and their purpose of rider 14 was to withhold state funds from a children is one of constitutional dimensions." Wiley v. program that, as currently implemented, interferes with Spratlan, 543 S.W.2d 349, 352 (Tex. 1976). "The child is parental supervision over the health care and sexual be- not the mere creature of the state; those who nurture havior of minor children. Indeed, Planned Parenthood's [**29] him and direct his destiny have the right, coupled policy of providing minors prescription drugs without with the high duty, to recognize and prepare him for ad- parental consent, for which it seeks this state's subsidies, ditional obligations." Pierce v. Society of Sisters, 268 U.S. is inconsistent with Texas law. Section 151.003(a)(6) of 510, 535, 69 L. Ed. 1070, 45 S. Ct. 571 (1925). Only a the Texas Family Code provides, in pertinent part: generation ago, this Court recognized the fundamental importance of parental rights in reaffirming the doctrine [*447] (a) A parent of a child has the following of parental immunity: rights and duties: We trust that it is not out of date for the state and its ... courts to be concerned with the welfare of the family as (6) the right to consent to the child's marriage, en- the most vital unit in our society. We recognize that peace, listment in the armed forces of the United States, medical tranquility and discipline in the home are endowed and and dental care, and psychiatric, psychological and sur- inspired by higher authority than statutory enactments and gical treatment . . . . court decisions. Harmonious family relationships depend on filial and parental love and respect which can neither TEX. FAM. CODE § 151.003(a)(6) (emphasis added). be created nor preserved by legislatures or courts. The most we can do is to prevent the judicial system from The importance of parental involvement in minors' being used to disrupt the wide sphere of reasonable dis- decisions to avail themselves of contraceptive or abortion cretion which is necessary in order for parents to properly services is aptly illustrated in the amicus brief of several exercise their responsibility to provide nurture, care, and families supporting rider 14 who unsuccessfully at- discipline for their children. tempted [**28] to intervene at the trial level. The daughter of one of the individuals filing the amicus brief Felderhoff v. Felderhoff, 473 S.W.2d 928, 933 (Tex. was impregnated on two separate occasions by her 1971). These principles cannot be reiterated often enough, mother's boyfriend while she was living with her mother. [**30] especially in the context of a minor's health and Both times, the live-in boyfriend took the daughter -- once sex-related decisions. To grant Planned Parenthood when she was twelve and once when she was thirteen -- to standing to represent the state's minors would usurp this an abortion clinic in order to conceal his criminal deeds. A vital parental role. parental consent requirement would have prevented the live-in boyfriend from being able to continue his abuse. Accordingly, I would hold not only that the case is The irony of Planned Parenthood's argument that it rep- not ripe, but also that Planned Parenthood has failed to resents the state's minors is that when some of those mi- otherwise establish standing to challenge rider 14. nors sought to intervene to speak for themselves -- Raul A. Gonzalez through their lawful representatives -- Planned Parenthood opposed their intervention. Justice Unlike the federal authorities the Court cites early in Opinion Delivered: June 23, 1998 its opinion, other courts, including our own, have strongly Page 1 23 S.W.3d 42, *; 1999 Tex. App. LEXIS 8949, **

James W. Paulsen; Independent Bankers Association of Texas; Texas Bankers Asso- ciation; and Texas Savings & Community Bankers Association, Appellants v. Texas Equal Access to Justice Foundation, Appellee NO. 03-98-00709-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 23 S.W.3d 42; 1999 Tex. App. LEXIS 8949

December 2, 1999, Filed SUBSEQUENT HISTORY: [**1] Motion for Before this Court, appellants have abandoned the request Rehearing of Petition for Review Denied April 26, 2001. for injunctive relief and now seek only a declaration that Petition for Review Dismissed for Want of Jurisdiction (1) IOLTA ("interest on lawyers trust account") accounts January 18, 2001. Rehearing Overruled March 23, 2000. generally and in this particular case are "general" not Released for Publication March 23, 2000.As Corrected "special" accounts; (2) the relationship between an attor- December 13, 1999. ney-depositor and the financial institution that administers an IOLTA account is that of creditor and banker, respec- PRIOR HISTORY: FROM THE DISTRICT tively; (3) the financial institution holds legal title to all COURT OF TRAVIS COUNTY, 353RD JUDICIAL sums deposited in the IOLTA account at issue in this case; DISTRICT. NO. 98-06951, HONORABLE (4) the financial [**2] institution incurs no legal liability MARGARET A. COOPER, JUDGE PRESIDING. to third parties, including the attorney's clients, solely because it participates in the IOLTA program; and (5) DISPOSITION: Judgment Vacated and Cause Dis- Paulsen is not subject to professional discipline for failure missed. to participate in the Texas IOLTA program, pending definitive resolution of that program's constitutionality.

We will vacate the trial court's judgment and dismiss the COUNSEL: FOR APPELLANT: Mr. James Walter cause for lack of a justiciable controversy.

Paulsen, Houston, TX. Mr. Mark Schwartz, Mr. Howard Nirken, Jenkens & Gilchrist, Austin, TX. FACTUAL AND PROCEDURAL BACKGROUND The Texas IOLTA program, like similar programs FOR APPELLEE: Mr. Darrell E. Jordan, Hughes & Luce, instituted in almost every other state, was established to L.L.P., Dallas, TX. raise money to provide legal assistance to low-income Texans. The "Rules Governing the Operation of the Texas JUDGES: Before Justices Jones, Yeakel and Patterson.

Equal Access to Justice Program" oblige attorneys to participate, subject to suspension of their law licenses. See OPINION BY: J. WOODFIN JONES Tex. R. Equal Access to Justice Prog. 24 (State Bar Rules art. 11). When an attorney holds client funds, the money OPINION should ordinarily be deposited into a trust account to earn [*43] Appellants James W. Paulsen (Paulsen), interest for the client. But where the amount held is Independent Bankers Association of Texas, Texas Bank- nominal, such that it could not be expected to earn enough ers Association, and Texas Savings and Community interest to offset the cost of maintaining a separate trust Bankers Association (collectively, Bankers) sued the account, the funds are required to be deposited into [**3] Texas Equal Access to Justice Foundation (the Founda- an IOLTA account. See Tex. R. Equal Access to Justice tion), appellee, seeking declaratory and injunctive relief. Prog. 4, 6. The IOLTA account pools all such deposits The trial court denied all requested relief. The Texas from the attorney; collectively, the sums generate interest Supreme Court then declined to hear a direct appeal. where no individual deposit could. The interest is then Page 2 23 S.W.3d 42, *; 1999 Tex. App. LEXIS 8949, **

paid to the Foundation, which distributes the interest While the banks are contractually obligated to pay IOLTA received from all IOLTA accounts in Texas to interest to the Foundation, they also fear liability from low-income legal services. See Tex. R. Equal Access to threatened lawsuits should they continue to participate in Justice Prog. 4, 10. the IOLTA program.

A constitutional takings challenge to Texas's IOLTA Appellee, the Foundation, does not disagree with program was brought in Phillips v. Washington Legal appellants as to the constitutionality of the IOLTA pro- Foundation, which resulted in a 1998 United States Su- gram. In fact, the Foundation has vigorously defended the preme Court decision holding that interest [*44] IOLTA program as a defendant in the ongoing Phillips earned on an IOLTA account is the private property of the [**6] litigation. It apparently disagrees with appellants clients of the attorney who established the account. 524 only as to how far this Court should go in deciding the U.S. 156, 172, 118 S. Ct. 1925, 141 L. Ed. 2d 174 (1998). ultimate constitutional issues involved. This lack of ad- That case is now on remand to the United States District versarial debate between the parties was noted in an Court for the Western District of Texas for further pro- amicus brief tendered by David Furlow, an attorney who ceedings to determine whether those funds have been disputes the constitutionality of the IOLTA program. "taken" by the state without just compensation. While DISCUSSION Phillips did not decide the ultimate issue of whether compliance with the IOLTA program effectuates a gov- The Uniform Declaratory Judgments Act gives courts ernmental taking of client property, it is fair to say that the the power to "declare rights, status, and other legal rela- constitutionality of the program is uncertain [**4] in the tions whether or not further relief is or could be claimed." wake of the Supreme Court's decision. It is that uncer- Tex. Civ. Prac. & Rem. Code Ann. § 37.003 (West tainty that appellants hope to resolve in this action. 1997). The determination of jurisdiction over a declara- tory judgment action is a question of law and so is subject The Phillips decision left many questions unan- to de novo review. See Texas Dep't of Pub. Safety v. swered, in part because of the procedural framework in Moore, 985 S.W.2d 149, 153 (Tex. App.--Austin 1998, no which the case was brought. That case was an appeal from pet.). the trial court's grant of summary judgment and so arrived before the Supreme Court without the benefit of discov- An action for declaratory relief is subject to the same ery. Since the record was essentially devoid of details, the jurisdictional requirements [*45] as any other action Phillips decision made no reference to banking law or the brought in our courts. "Subject matter jurisdiction re- particulars of an IOLTA contract between an attorney and quires that the party bringing the suit have standing, that bank. The Phillips decision therefore makes no reference there be a live controversy between the parties, and that to the distinction recognized in Texas banking law be- the case be justiciable." State Bar of Tex. v. Gomez, 891 tween "general" and "special" accounts; this distinction, S.W.2d 243, 245 (Tex. 1994) [**7] (plurality opinion) appellants assert, would have led to a different ruling. (citing Texas Ass'n of Business v. Texas Air Control Bd., Appellants urge us to clarify what they characterize as the 852 S.W.2d 440, 443-46 (Tex. 1992)). The parties before Supreme Court's misstatement of Texas law and to hold us cannot satisfy these threshold jurisdictional require- that both the principal and the interest earned on "general" ments. Because the trial court lacked subject matter ju- accounts--and IOLTA accounts are apparently all "gen- risdiction over this case, we will vacate that court's eral"--are the property of the bank and not the client. judgment and dismiss the cause.

Since the interest earned is bank property, appellants argue, there is no unconstitutional taking involved when Appellant Paulsen [**5] the bank pays that interest to the Foundation. Paulsen seeks declaratory judgment because, by re- fusing to deposit a $ 1,000 client retainer in his IOLTA All parties to this suit agree on the constitutionality of account, he claims he faces the imminent suspension of IOLTA. Appellant Paulsen is an attorney who has re- ceived a $ 1,000 retainer from a client and claims uncer- his law license. It is not at all clear from the record that the tainty as to his rights and obligations with respect to this suspension of Paulsen's license is inevitable or imminent.

In a post-submission brief, however, Paulsen attached a money. The Equal Access to Justice Rules require him to letter he received from the Foundation informing him that deposit the $ 1,000 in an IOLTA account or risk suspen- disciplinary action will be initiated if he does not comply sion of his license to practice law, yet he claims the Phil- with IOLTA rules. Assuming without deciding that we lips decision exposes him to liability to his client for breach of fiduciary duties if he does deposit the funds. can consider this letter, and further assuming that the Bankers are the principal trade organizations for Texas letter confers standing on Paulsen, we nonetheless con- clude that his suit must be dismissed for want of jurisdic- financial institutions. They claim that the contracts signed tion, for he has not demonstrated any justiciable contro- by their members and attorneys establishing IOLTA ac- versy with his putative opponent in this case. counts are brought into question by the Phillips decision.

Page 3 23 S.W.3d 42, *; 1999 Tex. App. LEXIS 8949, **

The crux of the claimed dispute between [**8] Judgments Act specifically provides that "a contract may Paulsen and the Foundation lies in the interpretation of the be construed either before or after there has been a Supreme Court's Phillips decision. Paulsen argues that if breach." Tex. Civ. Prac. & Rem. Code Ann. § 37.004(b) we accept as a correct statement of Texas law the Phillips (West 1997); see also In re City of Dallas, 977 S.W.2d holding that interest earned in IOLTA accounts is client 798, 804 (Tex. App.--Fort Worth 1998, no pet.); Hasty property, 1 then the decision places him in an ethical Inc. v. Inwood Buckhorn Joint Venture, 908 S.W.2d 494, quandary. If he continues to participate in the IOLTA 499 (Tex. App.--Dallas 1995, writ denied). Section 37.004 program, Paulsen believes he breaches his ethical duty to does not, however, extend an open-ended invitation to his client when he contracts with his bank to turn IOLTA parties seeking interpretation of their contracts. There interest over to the Foundation. On the other hand, if he must be some showing that litigation is imminent between does not give the interest to the Foundation, he breaches the parties unless the contractual uncertainties are judi- professional ethics rules and stands to lose his law license. cially resolved. See Reuter v. Cordes-Hendreks Coiffures, The Foundation disagrees with Paulsen only as to whether Inc., 422 S.W.2d 193, 196 (Tex. Civ. App.--Houston [14th Phillips creates ethical uncertainty. It believes that Phil- Dist.] 1967, no writ). lips answered only the question of whether a client could ever have a property right in interest that would not exist 2 In an IOLTA contract, the Foundation is without the IOLTA program; the Foundation believes declared to be a third-party beneficiary to the Phillips did not establish conclusively that IOLTA inter- contract between the financial institution and the est is always client property. That question will be de- attorney who establishes the account. cided by the federal district court on remand. This dispute, [**11] Bankers have not demonstrated any immi- then, centers on how broadly Phillips can be read. nent contractual dispute with the Foundation. As primary proof of their grounds for uncertainty, Bankers cite a letter 1 Of course, Paulsen does not really want us from Michael Mazzone 3 to appellant banking groups to accept this as true at all. He frames the issue in warning that the banks could face liability for the tort of these terms to attempt to create a justiciable con- conversion for any interest paid by them to the Foundation troversy between himself and the Foundation. The after the Phillips decision. In the letter, Mazzone omi- real goal of the litigation is apparently to have this nously warned that he has "personal knowledge that there Court decide that the U.S. Supreme Court was are lawyers who are planning a class action lawsuit wrong in so holding, and that consequently against a number of banks."

IOLTA is constitutional under Texas law. We discuss infra why the present case is an inappro- 3 Mazzone is a named plaintiff in the Phillips priate one for deciding that issue. litigation. [**9] What is troubling about this appeal is that the Mazzone's letter is insufficient to support an action parties all believe that an attorney can ethically participate for declaratory judgment. It amounts to a threat from a in the Texas IOLTA program. Paulsen merely claims that stranger to this action who refers to unnamed sources who someone else might construe Phillips differently, and that may be contemplating a lawsuit at some point in the fu- such an alternate interpretation would put him in an eth- ture. Bankers' feared liability to theoretical litigants is ical bind. With no true opponent in the Foundation, what simply too remote to support a claim for declaratory re- Paulsen seeks, in essence, is an advisory opinion inter- lief. Further, it does not appear that the litigation the preting a decision from the Supreme Court to resolve his Bankers fear would even involve [**12] the Foundation. doubts about the IOLTA program. But, of course, the Mazzone's letter warned banks that they could be liable separation of powers doctrine prevents us from complying for the tort of conversion if they continue to pay IOLTA with this request. Neither the legislature nor the constitu- interest to the Foundation. In that event, any liability for tion has vested us with the authority to render an advisory conversion would be to the clients of the depositing at- opinion. See Tex. Const. art. II, § 1; Olson v. Commission torneys and not to the Foundation. for Lawyer Discipline, 901 S.W.2d 520, 522 (Tex. App.--El Paso 1995, no writ). We therefore hold that Bankers, as evidenced by their briefs, strongly be- Paulsen has presented [*46] no justiciable controversy lieve that IOLTA is constitutional and apparently intend between himself and the Foundation. to honor their contracts establishing IOLTA accounts unless and until a court declares the IOLTA program Appellant Bankers unconstitutional. Even assuming that the Foundation Bankers claim to have standing in this declaratory would have standing to protect its right as third-party relief action because they are faced with uncertainty and beneficiary to the interest earned on IOLTA accounts, insecurity in their performance of current contracts with there is no justiciable controversy where, as here, there is the Foundation. 2 The Uniform Declaratory [**10] an absence of any real threat or intention to breach a Page 4 23 S.W.3d 42, *; 1999 Tex. App. LEXIS 8949, **

contract. See id. (citing Spradley v. Whitehall, 314 S.W.2d We are not unsympathetic to appellants' arguments.

615, 619 (Tex. Civ. App.--Fort Worth 1958, no writ)). The Phillips decision does appear to have at least over- The trial court, therefore, lacked jurisdiction to grant the looked, if not misstated, a large body of Texas banking relief sought by Bankers. law that distinguishes between "general" and "special" accounts. See, e.g., Texas Commerce Bank v. Townsend, True Controversy 786 S.W.2d 53 (Tex. App.--Austin 1990, writ denied). In a The only issue on which the parties to this case seem general account, Texas law is clear that the financial in- to disagree is how broadly Phillips should be read. Ap- stitution holds title to the funds deposited. See id. at 54. pellants paint a doomsday picture that throws all banking Paulsen's contract with his bank establishing an IOLTA practices [**13] into uncertainty unless we hold that the account expressly states that it is a general account. Since Supreme Court misstated Texas law, grant declaratory the Phillips court stated that "interest follows principal," relief reiterating the distinction between "general" and Phillips, 524 U.S. at 165-66, the natural conclusion would "special" accounts, and explicitly hold that IOLTA is be that the interest earned in an IOLTA account belongs to constitutional. Appellants assert in the alternative that if, the banks as well. This appears to be in direct conflict with despite their arguments to the contrary, we believe Phil- the actual Phillips holding that interest earned in an lips is correct, we should hold IOLTA expressly uncon- IOLTA account is the property of the attorney's client. See stitutional. The Foundation thinks the Phillips holding is Phillips, 524 U.S. at 172. [*47] more narrow than appellants read it; they have no Whatever our impressions of the constitutional ar- qualms with a declaration from this Court that IOLTA is guments in support of IOLTA, however, this particular constitutional, but they urge us to refrain from deciding case provides a singularly inappropriate context for de- IOLTA is unconstitutional on the strength of the Phillips ciding [**16] those issues. Both appellants and the decision. They otherwise have no dispute with appellants' Foundation are committed to upholding the constitution- position and encourage us to grant the declaratory relief ality of the IOLTA program. In its brief the Foundation sought. candidly admits that it does not contest the central legal We must not decide a case that amounts to no more premises of appellants' argument, and emphasizes that the than a disagreement on how broadly the Phillips decision Foundation is making the same pro-IOLTA arguments in can be read. "A mere difference of opinion, not involving the ongoing Phillips litigation in the federal district court. the assertion of adverse interests, is not sufficient to In their arguments, the parties attempt to demonstrate support an action for declaratory judgment." Reuter, 422 that they are not in unanimous agreement on how far this S.W.2d at 196 (quoting 26 C.J.S. Declaratory Judgments, Court might go if we were to agree with the Supreme § 29 (1956)). In spite of the injuries [**14] and uncer- Court, but neither side ever seriously argues that IOLTA tainties appellants claim they will suffer, it seems they could be anything but constitutional. The hair-splitting have no real dispute with the Foundation. This case has difference between the parties' positions hardly presents been marked throughout by a near-total lack of true con- the sort of robust debate a court should expect and de- troversy between the parties. The trial below was very mand when a major constitutional ruling is at issue. At brief. Paulsen was the only witness who testified, and core, both appellants and the Foundation [*48] are in cross-examination by the Foundation's lawyer was per- total agreement that IOLTA should be declared constitu- functory, consisting of only three questions to confirm tional. It would be inappropriate for us to decide an issue that the Phillips court did not determine the ultimate of such gravity where there has been no genuine debate. In constitutionality of the IOLTA program. On appeal, the fact, the Supreme Court has expressly held that where Foundation has not even raised the strongest reasons in both litigants agree on the constitutionality of a statute support of the trial court's judgment--those jurisdictional being challenged and desire the same [**17] result, there issues we have detailed above; indeed, appellee's brief is a is no case or controversy before the court. See Moore v. mere seven pages long. They are seven well-written and Charlotte-Mecklenburg Bd. of Educ., 402 U.S. 47, 48, 28 thoughtful pages, to be sure, but the brevity underscores L. Ed. 2d 590, 91 S. Ct. 1292 (1971). the lack of true controversy in this case.

Truly, the appropriate forum for deciding the issues at Whatever dispute appellants claim to have with the the heart of this appeal is in the federal district court, Foundation is clearly secondary to their desire to have this where the Phillips litigation is now pending on remand Court effectively overrule the U.S. Supreme Court, de- and the court is faced squarely with the constitutionality claring that the Court misinterpreted Texas law in its of IOLTA. If the facts of this case were altered only Phillips ruling. Appellants' briefs focus almost exclu- slightly, we would be required to defer to that court's sively on the constitutionality of IOLTA, paying only proceeding, for there is a wide body of law that would minor attention to the claimed [**15] dispute with the prevent us from deciding this declaratory judgment action Foundation. if another action were pending between the same parties Page 5 23 S.W.3d 42, *; 1999 Tex. App. LEXIS 8949, **

which would adjudicate the issues involved in the present state bars of Texas, Mississippi, and Louisiana in action. See Texas Liquor Control Bd. v. Canyon Creek support of IOLTA. The Foundation is a party to Land Corp., 456 S.W.2d 891, 895 (Tex. 1970); Tucker v. the ongoing Phillips litigation, but Bankers are Graham, 878 S.W.2d 681, 683 (Tex. App.--Eastland not.

1994, no writ); Southern Traffic Bureau v. Thompson, 232 CONCLUSION S.W.2d 742, 750 (Tex. Civ. App.--San Antonio 1950, writ ref'd n.r.e.). Because the parties before us are not identical We hold that appellants have not presented this Court to those involved in the Phillips litigation, that doctrine or the trial court with [**19] a justiciable controversy. [**18] cannot squarely dispose of this case. 4 The par- Paulsen seeks an advisory opinion from this Court inter- ties before us could, however, have intervened in the preting a United States Supreme Court opinion. Bankers Phillips suit and presented their constitutional arguments face no imminent litigation over their IOLTA contracts, in a more direct fashion to the district court. That case has and their claimed uncertainty as to their rights and obli- been hotly contested and is certain to involve a much gations is insufficient to present the court with a justicia- fuller and more balanced debate than has developed in the ble action. For these reasons, the trial court lacked subject present cause. For that reason, the ongoing Phillips liti- matter jurisdiction over the action presented; we therefore gation would be a more appropriate forum for settling the vacate that court's judgment and dismiss the cause. question of whether the IOLTA program creates an un- J. Woodfin Jones, Justice constitutional taking of client property.

Before Justices Jones, Yeakel and Patterson 4 Paulsen is not a party to the Phillips case, but he was involved in the case to the extent that Judgment Vacated and Cause Dismissed he drafted the amicus curiae briefs tendered to the Filed: December 2, 1999 Fifth Circuit Court of Appeals on behalf of the Page 1

MARTHA JEAN PHILLIPS, PETITIONER v. HARRY S. PHILLIPS, ET AL., RESPONDENTS No. D-0107 SUPREME COURT OF TEXAS 820 S.W.2d 785; 1991 Tex. LEXIS 154; 35 Tex. Sup. J. 220

December 11, 1991, Delivered PRIOR HISTORY: [**1] ON APPLICATION RSP Kelley, Mr. Patrick ATT 011203600 214/561-1600 FOR WRIT OF ERROR TO THE COURT OF APPEALS FOR THE TWELFTH DISTRICT OF TEXAS Ireland, Carroll & Kelley, P.C.

6101 S. Broadway COUNSEL: PET Wilk, Mr. Michael S. ATT 021478000 713/223-5181 Suite 500 Hirsch & Westheimer, P. C. Tyler, TX 75703 2500 RepublicBank Center RSP Carroll, Mr. Otis ATT 003895700 903/561-1600 Louisiana Ireland, Carroll & Kelley, P.C.

Houston, TX 77002 6101 S. Broadway PET Stock, Ms. Anna L. ATT 019254000 713/223-5181 Suite 500 Hirsch & Westheimer, P.C. Tyler, TX 75703 2550 RepublicBank Center JUDGES: HECHT, Gonzalez, Mauzy, Doggett Louisiana OPINION BY: NATHAN L. HECHT Houston, TX 77002 OPINION [*786] OPINION PET Gross, Mr. Jay N. ATT 008532980 713/223-5181 We granted the applications for writ of error in this Hirsch & Westheimer case to decide whether a contractual provision that re- quires payment of a multiple of actual damages for breach 25th Floor NCNB Center of trust is an unenforceable penalty, and if so, whether the defense of penalty was waived because it was not pleaded.

700 Louisiana The trial court and court of appeals refused [**2] to enforce the provision. 792 S.W.2d 269. We affirm the Houston, TX 77002-2728 judgment of the court of appeals.

Page 2 820 S.W.2d 785, *; 1991 Tex. LEXIS 154, **; 35 Tex. Sup. J. 220 During 32 years of marriage, Harry and Martha amount of distributions aired to be paid the part- Phillips accumulated over $ 18 million in community ners and by failing to make all the distributions property, primarily through the oil and gas business Harry aired by the agreement, but that Martha ratified managed. When they divorced, rather than break up their Harry's actions in making distributions other than oil and gas holdings, they created Phillips & Phillips, Ltd., as called for by the agreement. a limited partnership, and transferred the bulk of their During the trial the parties stipulated that a reasona- assets to it. Each had an equal interest in the partnership. ble fee for legal services necessary for Martha's prosecu- Harry, the only general partner, agreed to work for the tion of the case was $ 235,302.14. The jury was aware of partnership full-time without salary and to offer Martha this stipulation, and the trial court surmised that the jury the option to participate in any business opportunities he included this amount in its $ 300,000 finding. Accord- pursued outside the partnership. Martha, the only limited ingly, the [**5] trial court rendered judgment for Martha partner, agreed that she would have no right to participate for a total of $ 300,000, $ 235,302.14 against the part- in Harry's business decisions for the partnership and that nership and $ 64,697.86 against Harry, and refused to she would leave each of her four children by Harry at least award Martha any additional amount for attorney fees. one-sixth of her estate.

The trial court also ordered the partnership dissolved.

The partnership agreement required Harry to pay Martha appealed; Harry did not. The court of appeals himself and Martha each a minimum [*787] of $ held that the trial court erred in refusing to award Martha 21,000 per month for 24 months, and then minimum the $ 235,302.14 stipulated attorney fees in addition to the monthly distributions adjusted for inflation and for oil and $ 300,000 damages found by the jury, but that the trial gas prices. It also required Harry to furnish Martha certain court did not err in refusing to award Martha decuple financial [**3] information about the partnership and to damages under the partnership agreement. Consequently, cooperate with her in auditing its affairs. The agreement the appeals court reversed the judgment of the trial court contained the following provision: "If the general partner in part and rendered judgment against Harry for a total of breaches his trust hereunder, he shall pay to the limited $ 535,302.14, plus interest. 2 partner as liquidated damages ten times the amount she loses as a result of such breaches of trust. Errors of 2 Harry contends that the court of appeals judgment shall not be considered breaches of trusts." should Dot have disturbed the trial court's damage The value of the partnership increased under Harry's award. As a rule, however, the judgment in a case management, but Harry did not fully comply with the tried by a jury must conform to the verdict. See terms of the written agreement. In particular, after the first TEX. R. CIV. P. 301. The trial court properly did months Harry distributed much less than the required not ask the jury to include in its determination of minimum amounts, never actually calculating what pay- Martha's actual damages a reasonable fee for legal ments the agreement required. He also failed to provide services necessary to her prosecution of the case. timely annual statements of operations and refused to See Hammonds v. Hammonds, 158 Tex. 516, 313 cooperate fully with Martha's attempts to audit the part- S.W.2d 603, 605 (Tex. 1958). We must assume nership. that the jury followed the trial court's instructions and answered the question put to them. See Martha eventually sued Harry for dissolution of the Turner, Collie & Braden v. Brookhollow, Inc., 642 partnership and damages based upon Harry's breach of S.W.2d 160, 167 (Tex. 1982). Given that assump- contractual and fiduciary duties. The case was tried to a tion, we must conclude that the jury's answer of $ jury, who found that Harry breached the partnership 300,000 to the trial court's question did not include agreement by favoring himself in paying his personal attorney fees. expenses and encumbering partnership assets, thus en- dangering partnership distributions. The jury also [**4] Harry argues that, logically, the jury must found that Harry breached both the partnership agreement have arrived at their $ 300,000 finding by adding $ and his fiduciary duty to Martha by failing to keep current 37,585 accounting fees which Martha testified she and complete partnership books, failing to prepare re- incurred to the stipulated $ 250,000 in attorney quired annual statements, and interfering with Martha's fees. However plausible Harry's explanation of the efforts to examine partnership books and records. 1 The jury's reasoning process may be, it cannot substi- jury assessed Martha's actual damages at $ 300,000. None tute for the jury's finding. bat the jury found, not of the jury's findings are challenged by the parties on why the jury found it, is the relevant inquiry ab- appeal. sent jury misconduct. First Nat'l Bank v. Zim- merman, 442 S.W.2d 674, 678 (Tex. 1969).

1 The jury also found that Harry breached the partnership agreement by failing to calculate the Page 3 820 S.W.2d 785, *; 1991 Tex. LEXIS 154, **; 35 Tex. Sup. J. 220 Under Rule 301, the trial court could properly More recently, in Rio Grande Valley Sugar Growers, Inc. have rendered judgment awarding Martha less v. Campesi, 592 S.W.2d 340, 342 n.2 (Tex. 1979), we than the $ 300,000 found by the jury as actual restated the two-part Stewart test for determining whether damages only if the finding had no support in the to enforce a contractual damages provision as follows: "In evidence. See Burt v. Lochausen, 151 Tex. 289, order to enforce a liquidated damage clause, the court 249 S.W.2d 194, 199 (Tex. 1952). See also 4 R. must find: (1) that the harm caused by the breach is in- McDONALD, TEXAS CIVIL PRACTICE IN capable or difficult of estimation, and (2) that the amount DISTRICT AND COUNTY COURTS & 17.32 of liquidated damages called for is a reasonable forecast nn. 7-8 (rev. 1984). Harry does not argue here that of just compensation." Cf. TEX. BUS. & COM. CODE § there is no evidence to support the jury's finding. 2.718(a). 3 Thus, we conclude that the court of appeals was correct in rendering judgment against Harry for 3 "Damages for breach by either party may be the actual damages found by the jury plus stipu- liquidated in the agreement but only at an amount lated attorney fees. which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficul- Harry also complains of the court of appeals' ties of proof of loss, and the inconvenience or judgment that he, rather than the partnership, pay non-feasibility of otherwise obtaining an adequate Martha's attorney fees. This point, however, was remedy. A term fixing unreasonably large liqui- not raised in Harry's motion for rehearing in the dated damages is void as a penalty." court of appeals and is therefore not preserved.

See TEX. R. APP. P. 131(e); Oil Field Haulers [**8] Ass'n v. Railroad Commission, 381 S.W.2d 183, Whether a contractual provision is an enforceable (Tex. 1964). liquidated damages provision or an unenforceable penalty [**6] [*788] Martha contends that she is entitled is a question of law for the court to decide. Farrar v. to recover liquidated damages equal to ten times the actual Beeman, 63 Tex. 175, 181 (1885); see Lefevere v. Sears, damages found by the jury, as provided by the limited 629 S.W.2d 768, 771 (Tex. Civ. App.-El Paso 1981, no partnership agreement. Harry contends that the contrac- writ); Muller v. Light, 538 S.W.2d 487, 488 (Tex. Civ. tual provision is not an enforceable agreement for liqui- App.-Austin 1976, writ ref'd n.r.e.); Schepps v. American dated damages but an unenforceable penalty. Martha Dist. Telegraph Co., 286 S.W.2d 684, 690 (Tex. Civ. argues that even if Harry is correct, he has waived any App.-Dallas 1955, no writ); Zucht v. Stewart Title Guar. defense of penalty by failing to plead it as an affirmative Co., 207 S.W.2d 414, 418 (Tex. Civ. App.-San Antonio defense. 1947, writ dism'd); Bourland v. Huffhines, 244 S.W. 847, 849 (Tex. Civ. App.-Amarillo 1922, writ dism'd). Some- We first considered the difference between an en- times, however, factual issues must be resolved before the forceable liquidated damages provision and an unen- legal question can be decided. For example, to show that a forceable penalty in Stewart v. Basey, 150 Tex. 666, 245 liquidated damages provision is unreasonable because the S.W.2d 484, 485-486 (Tex. 1952). There we explained: actual damages incurred were much less than the amount Volumes have been written on the question of when a contracted for, a defendant may be required to prove what stipulated damage provision of a contract should be en- the actual damages were. See Johnson Eng'rs, Inc. v. forced as liquidated damages and when enforcement Tri-Water Supply Corp., 582 S.W.2d 555, 557 (Tex. Civ. should be denied because it is a penalty provision. . . . All App.-Texarkana 1979, no writ); Oetting v. Flake Uniform agree that to be enforceable as liquidated damages the & Linen Serv., Inc., 553 S.W.2d 793, 796-797 (Tex. Civ. damages must be uncertain and the stipulation must be App.-Fort Worth 1977, no [**9] writ); Smith v. Lane, reasonable. 236 S.W.2d 214, 215 (Tex. Civ. App.-San Antonio 1950, [*789] no writ); Southern Plow Co. v. Dunlap Hardware ... Co., 236 S.W. 765, 766-767 (Tex. Civ. App.-Dallas 1922, The right of competent parties to make their own no writ); Walsh v. Methodist Episcopal Church, 212 S.W. bargains is not unlimited. The universal rule for measur- 950, 952 (Tex. Comm'n App. 1919, judgm't adopted). ing damages for the breach of a contract is just compen- The enforceability of the contractual provision in this sation for the loss or damage actually [**7] sustained. case involves no fact issues. A contractual provision like By the operation of that rule a party generally should be the one here by which one party agrees to pay the other awarded neither less nor more than his actual damages. A some multiple of actual damages for breach of the party has no right to have a court enforce a stipulation agreement does not meet either part of the legal test for an which violates the principle underlying that rule. enforceable liquidated damages provision. It cannot meet the first prong of the test because the harm caused by the Page 4 820 S.W.2d 785, *; 1991 Tex. LEXIS 154, **; 35 Tex. Sup. J. 220 breach of the contract is not incapable or difficult of es- defendant may rely upon the defenses though his only timation. The provision assumes actual damages can and pleading is a general denial." Raney v. White, 267 S.W.2d will be determined, indeed must be determined, before the 199, 200 (Tex. Civ. App.-San Antonio 1954, writ ref'd). prescribed multiplier can be applied. The provision cannot Pleading an agreement illegal on its face in effect antici- meet the second prong of the test because, instead of pates the defense. The other principle is that the courts attempting to forecast actual damages, it calls for them to will not enforce a plainly illegal contract even if the par- be determined and then multiplied. Cf. Robert G. Beneke ties do not object. Lawson, 34 S.W. at 921. Enforcement & Co. v. Cole, 550 S.W.2d 321 (Tex. Civ. App.-Dallas of an illegal agreement violates public policy. Id. 1977, no writ) (contract provision which fixes [**10] For the same reasons, we hold that the defense of liquidated damages without excluding additional liability penalty is not waived by the failure to plead it if it is ap- for actual damages is not a reasonable forecast of just parent on the face of the petition and established as a compensation and therefore a penalty). A contractual matter of law. Enforcement of a penalty, like enforcement provision like the one in this case is thus, on its face, an of an illegal contract, violates [*790] public policy. unenforceable penalty.

RESTATEMENT (SECOND) OF CONTRACT § 356; Harry, however, did not plead penalty as an affirma- see State v. Alpha Oil & Gas, Inc., 747 S.W.2d 378 (Tex. tive defense to an award of damages under the liquidated 1988). It should not be done, even if the parties do not damages provision in the partnership agreement. Alt- object. In this case Martha pleaded that she was "entitled hough penalty is not among the affirmative defenses to damages . . . in the amount of ten (10) times all losses enumerated in Rule 94, TEX. R. CIV. P., the listing in that suffered". Inasmuch as Martha's own pleading establishes rule is not exclusive. Penalty is, in the language of the that the contractual provision she relies upon is an unen- rule, a "matter constituting an avoidance or affirmative forceable penalty under our decisions [**13] in Stewart defense." Johnson, 582 S.W.2d at 557; Oetting, 553 and Campesi as a matter of law, Harry was not required to S.W.2d at 795-796; Robinson v. Granite Equip. Leasing plead penalty as an affirmative defense.

Corp., 553 S.W.2d 633, 637 (Tex. Civ. App.-Houston [1st Contrary to the dissent's very exaggerated alarms, we Dist.] 1977, writ ref'd n.r.e.); Walter E. Heller & Co. v. B. do not hold that the affirmative defense of penalty need C. & M., Inc., 543 S.W.2d 696, 697 (Tex. Civ. never be pleaded. Whenever the defense is not clearly App.-Houston [1st Dist.] 1976, writ ref'd n.r.e.); LoBue v. established on the face of the pleadings, as it is here, it United Serv. Planning Ass'n, 467 S.W.2d 574, 576 (Tex. must be pleaded. We do not "resurrect[] trial by ambush", Civ. App.-Fort Worth 1971, writ dism'd); Young v. J. F. post, at , or "retreat from . . . encouraging full disclo- Zimmerman & Sons, Inc., 434 S.W.2d 926, 927 (Tex. Civ. sure during discovery", post, at . We apply a narrow App.-Waco 1968, writ dism'd); Smith v. Waite, 424 but necessary exception, long and well established, to the S.W.2d [**11] 691, 693 (Tex. Civ. App.-Waco 1968, general requirement that affirmative defenses be pleaded. writ ref'd n.r.e.); Smith, 236 S.W.2d at 215; Southern We do not hold that penalty "can be asserted as a defense Plow, 236 S.W. at 766-767; Walsh, 212 S.W. at 952. As a for the first time on appeal", post, at , in violation of general rule, an affirmative defense must be pleaded or it Rule 52(a), TEX. R. APP. P. The record in this case re- is waived. TEX. R. CIV. P. 94. flects that the issue of penalty was raised in the trial court, One exception to this rule is the defense of illegality, and that the trial court refused to enforce the penalty a defense specifically listed in Rule 94. "If the illegal provision of the partnership agreement. nature of the document to be relied upon or sought to be ***** enforced is apparent from the plaintiffs pleadings, it is not necessary that illegality be specially pleaded by the de- Accordingly, we conclude that Martha is not entitled fendant in order to rely upon it as a defense." Lewkowicz to recover ten times her actual damages. Finding no error v. El Paso Apparel Corp., 625 S.W.2d 301, 303 (Tex. in the judgment of the court of appeals, we affirm it.

1981); accord Niles v. Harris County Fresh Water Supply Dist., 339 S.W.2d 562, 563 (Tex. Civ. App.-Waco 1960, NATHAN L. HECHT writ ref'd); Reid v. Associated Employers Lloyds, 164 Justice S.W.2d 584, 585-586 (Tex. Civ. App.-Fort Worth 1942, writ ref'd); Montgomery Ward & Co. v. Lusk, 52 S.W.2d Dissenting [**14] Opinion by Justice Gonzalez, 1110 (Tex. Civ. App.-Waco 1932, writ ref'd); Texas & joined by Justices Mauzy and Doggett P. Coal Co. v. Lawson, 89 Tex. 400, 34 S.W. 919, 921 (Tex. 1896). Two principles support this exception to the OPINION DELIVERED: December 11, 1991 general rule that affirmative defenses are waived if not pleaded. One is that "when a plaintiff in his pleadings DISSENT BY: RAUL A. GONZALEZ anticipates [**12] defensive matters and pleads them, a DISSENT Page 5 820 S.W.2d 785, *; 1991 Tex. LEXIS 154, **; 35 Tex. Sup. J. 220 DISSENTING OPINION 16.2 Yes. If the general partner breaches his trust hereunder, he shall pay to the limited partner Despite the clear language of TEX. R. CIV. P. 94 and as liquidated damages ten times the amount she the collective wisdom of every court of appeals of this loses as a result of such breach. Errors of judgment state that has considered the issue, the majority holds that shall not be considered breaches of trusts". a defendant need not affirmatively plead the defense of "penalty" in a contract action. This holding resurrects trial [**16] Eight years later, Mrs. Phillips sued Mr. by ambush and rejects the notion that parties are entitled Phillips, alleging that he violated the agreement. [*791] to know what theories of law they will face at trial. I Mr. Phillips entered a general denial and asserted the would hold that by failing to plead it, Mr. Phillips waived affirmative defenses of limitations, laches, and equitable his right to assert that the contract he entered into with his estoppel. In a unanimous verdict, the jury found that Mr. wife is unenforceable. Furthermore, since Mr. Phillips Phillips breached the agreement by interfering with Mrs. waived the penalty defense by failing to affirmatively Phillips right to examine the books and records of the plead it, I would not reach the question of whether the partnership, and by willfully underpaying Mrs. Phillips contractual provision in question is, on its face, an unen- and overpaying himself. forceable penalty. I thus would reverse the judgment of AFFIRMATIVE DEFENSE the court of appeals and remand this cause to the trial court for entry of a judgment that enforces the provision. Rule 94 enumerates specific affirmative defenses which are waived if not pleaded, such as accord and sat- Mr. and Mrs. Phillips were married for 32 years prior isfaction, arbitration and award, fraud, illegality, statute of to getting a divorce. With the assistance of counsel, they frauds, statute of limitations, "and any other matter con- entered [**15] into a pre-divorce agreement, whereby stituting an avoidance or affirmative defense." TEX. R. they transferred about $ 18 million of their assets into a CIV. P. 94. An affirmative defense does not tend to rebut partnership which Mr. Phillips would manage. Mr. Phil- factual propositions asserted by a plaintiff, but seeks to lips in effect said to his soon-to-be ex-wife: "Trust me." establish an independent reason why the plaintiff should As a disincentive to cheating or short changing Mrs. not recover. Gorman v. Life Ins. Co. of North America, Phillips, Mr. Phillips pledged that he would pay her 10 811 S.W.2d 542, 546 (Tex. 1991). Asserting the defense of times the amount of the losses if he violated the contract. 1 penalty does not deny the facts pleaded by the plaintiff; The agreement also recited that Mr. Phillips owed Mrs. instead, it is an independent reason why the contract Phillips a fiduciary duty, a higher standard of care than should not be enforced as written. [**17] In other normally exists between parties to a contract. 2 words, if the defendant asserts facts that defeat in whole or in part the plaintiff's claim, such assertion amounts to an At trial, Mr. Phillips testified as follows: affirmative defense that must be pleaded or it is waived.

Q There's another interesting provision in [the "Penalty" is a classic affirmative defense; in my view, it partnership agreement] that says if Mrs. Phillips clearly falls within the purview of Rule 94. can show that you have breached your fiduciary The majority implies that as long as the issue does not duty to her that you will be obliged to pay her 10 depend upon evidence or findings, no purpose is served times any amount that she proves. Are you fa- by requiring that it be specifically pleaded. But there is a miliar with that? valid purpose to serve, namely, the need for notice and A Yes sir. fair play, so as to avoid trials by ambush.

Q How in the world did that get in there? The court refers to Lewkowicz v. El Paso Apparel Corp., 625 S.W.2d 301, 303 (Tex. 1981), for its holding A I wanted her to let me-wanted to prove to that pleading is not necessary if the affirmative defense her that I would not do anything wrong. appears on the face of the plaintiff's pleadings. That case Q So- is distinguishable because it involved the defense of ille- gality of contract. The defense of illegality is a special A So I put it in myself. situation and a poor choice from which to draw a rule of Q Was it your idea? general applicability. The rule that a court will not enforce an illegal contract is for the public's benefit rather than A Yes, sir. contending parties. Lewis v. Davis, 145 Tex. 468, 199 The partnership agreement provides: S.W.2d 146, 151 (Tex. 1947). A strong policy reason 16.1 Fiduciary Capacity. "The general part- supports [**18] the illegality exception. That is, courts ner shall act in a fiduciary capacity with respect to should not have to validate contracts that are illegal on the limited partner." their face merely because a defendant has failed to plead illegality.

Page 6 820 S.W.2d 785, *; 1991 Tex. LEXIS 154, **; 35 Tex. Sup. J. 220 Here, the court seems to be saying that pleading and legal theories upon which a party intends to rely at trial. proof are not necessary, because the issue of whether the This trend not only encourages litigants to be well pre- liquidated damages provision is a penalty is a question of pared for trial, but also enables disputes to be resolved on law. In some contracts it may be possible to determine their true merits and not on "mere technicalities." It makes from their four corners that they impose a penalty. The no sense to me to subject parties to a severe sanction for classic example is the lease that assesses the same liqui- failing to disclose witnesses or to supplement discovery dated damages for every breach, regardless of how trivial. responses, but not require them to plead the legal theory Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (Tex. upon which they intend to rely to defeat their opponent's 1952). But, in most cases, proof will be necessary. claim. The majority has created an exception to Rule 94 Commercial Union Ins. Co. v. La Villa I.S.D., 779 S.W.2d that has a visceral appeal, but collapses on its own logic.

102, 106-107 (Tex. App. -- Corpus Christi 1989, no writ); The court says that the contractual provision in issue is a See D. WENDORF, ET AL., TEXAS RULES OF EVI- penalty as a matter of law, and thus need not be pleaded DENCE MANUAL, I-38 (3rd ed. 1991). (and can be asserted as a defense for the first time on appeal). But a defendant likewise may defeat a contract A good example of the need for proof is Presnal v. claim under a statute of limitations [**21] defense. And Energy Corp., 788 S.W.2d 123, 127 (Tex. App. -- Houston while the defendant may be entitled to a judgment as a [1st Dist. 1990], writ denied). In that case, a mineral lease matter of law, we nevertheless require affirmative plead- provided that the lessee was required to drill a second well ing of the statute of limitations defense. The court ulti- or pay $ 75,000, which the defendant contended was a mately rationalizes its de facto modification of Rule 94 by penalty. There is no way a court could possibly [**19] relying on the RESTATEMENT (SECOND) OF CON- know if this provision is a reasonable forecast of damages TRACTS § 356 to assert that public policy demands the and therefore not a penalty, unless pleadings and proof result. The court expands the public policy exception to develop the issue. It would be patently unfair not to re- Rule 94's pleading requirement beyond the exception for quire defendant to notify the plaintiff that the possible illegal contracts to include contracts that allegedly impose existence of penalty would be an issue and this is contrary a penalty. This is a faulty rationale. First, this is not a case to well establish case law. where pure contract principles apply. Mr. Phillips agreed Every intermediate appellate court considering this to a higher standard of care (namely, a fiduciary's stand- issue has held that penalty is an affirmative defense under ard) than he normally would have owed Mrs. Phillips in a Rule 94 which is waived if not pleaded. Bethel v. Butler standard contractual relationship. Courts impose damages Drilling Co., 635 S.W.2d 834, 838-839 (Tex. App. -- on parties who violate a fiduciary duty in order to punish Houston [14th Dist.] 1982, writ ref'd n.r.e.); Robinson v. the party's breach of trust. I agree with the Restatement § Granite Equip. Leasing Corp., 553 S.W.2d 633, 637 (Tex. 356's directive that the "central objective behind the sys- Civ. App. -- Houston [1st Dist.] 1977, [*792] writ ref'd tem of contract remedies is compensatory, not punitive." n.r.e.); Walter E. Heller & Co. v. B.C. & M., Inc., 543 RESTATEMENT (SECOND) OF CONTRACTS § 356 S.W.2d 696, 697 (Tex. Civ. App. -- Houston [1st Dist.] comment a (1979). But Mr. Phillips entered into this 1976, writ ref'd n.r.e.); LoBue v. United Serv. Planning agreement with his eyes open, accepting a higher than Ass'n, 467 S.W.2d 574, 576 (Tex. Civ. App. -- Fort Worth normal [**22] standard of care and devising and 1971, writ dism'd); Young v. J. F. Zimmerman & Sons, adopting a measure of damages for his breach of that Inc., 434 S.W.2d 926, 927 (Tex. Civ. App. -- Waco 1968, standard. I do not see how the it advances the best interest writ dism'd); Smith v. Waite, 424 S.W.2d 691, 693 (Tex. of the public to bail him out of his bargain. I would hold Civ. App. -- Waco 1968, writ ref'd n.r.e.). that penalty is an affirmative defense that must be pleaded and that Mr. Phillips waived this defense by failing to There is no compelling reason for this [**20] court plead it. For the above reasons, I dissent. now to reject by implication the well-grounded pleading practice and disagree with the cases cited above that hold Raul A. Gonzalez that as a rule penalty is an affirmative defense which must Justice be pleaded or it is waived. In my view, this is a retreat from this court's recent trend towards encouraging full OPINION DELIVERED: December 11, 1991 disclosure during discovery of all witnesses, facts and Justices Mauzy and Doggett join this opinion Restatement of the Law, Second, Contracts Copyright (c) 1981, The American Law Institute Case Citations Rules and Principles Chapter 9 - The Scope of Contractual Obligations Topic 2 - Considerations of Fairness and the Public Interest Restat 2d of Contracts, § 208 § 208 Unconscionable Contract or Term If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the ap- plication of any unconscionable term as to avoid any unconscionable result.

COMMENTS & ILLUSTRATIONS: Comment: a. Scope. Like the obligation of good faith and fair dealing (§ 205), the policy against unconscionable contracts or terms applies to a wide variety of types of conduct. The determination that a contract or term is or is not unconscionable is made in the light of its setting, purpose and effect. Relevant factors include weaknesses in the contracting process like those involved in more specific rules as to contractual capacity, fraud, and other invalidating causes; the policy also overlaps with rules which render particular bargains or terms unenforceable on grounds of public policy. Policing against unconscionable contracts or terms has sometimes been accomplished "by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract." Uniform Commercial Code § 2-302 Comment 1. Particularly in the case of stand- ardized agreements, the rule of this Section permits the court to pass directly on the unconscionability of the contract or clause rather than to avoid unconscionable results by interpretation. Compare § 211. b. Historic standards. Traditionally, a bargain was said to be unconscionable in an action at law if it was "such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other;" damages were then limited to those to which the aggrieved party was "equitably" entitled. Hume v. United States, 132 U.S. 406 (1889), quoting Earl of Chesterfield v. Janssen, 2 Ves. Sen. 125, 155, 28 Eng. Rep. 82, 100 (Ch. 1750). Even though a contract was fully enforceable in an action for damages, equitable remedies such as specific per- formance were refused where "the sum total of its provisions drives too hard a bargain for a court of conscience to assist."

Campbell Soup Co. v. Wentz, 172 F.2d 80, 84 (3d Cir. 1948). Modern procedural reforms have blurred the distinction between remedies at law and in equity. For contracts for the sale of goods, Uniform Commercial Code § 2-302 states the rule of this Section without distinction between law and equity. Comment 1 to that section adds, "The principle is one of the prevention of oppression and unfair surprise (Cf. Campbell Soup Co. v. Wentz, . . .) and not of disturbance of allo- cation of risks because of superior bargaining power." c. Overall imbalance. Inadequacy of consideration does not of itself invalidate a bargain, but gross disparity in the values exchanged may be an important factor in a determination that a contract is unconscionable and may be sufficient ground, without more, for denying specific performance. See §§ 79, 364. Such a disparity may also corroborate indi- cations of defects in the bargaining process, or may affect the remedy to be granted when there is a violation of a more specific rule. Theoretically it is possible for a contract to be oppressive taken as a whole, even though there is no weakness in the bargaining process and no single term which is in itself unconscionable. Ordinarily, however, an un- conscionable contract involves other factors as well as overall imbalance.

Illustrations: 1. A, an individual, contracts in June to sell at a fixed price per ton to B, a large soup manufacturer, the carrots to be grown on A's farm. The contract, written on B's standard printed form, is obviously drawn to protect B's interests and not A's; it contains numerous provisions to protect B against various contingencies and none giving analogous protection to A. Each of the clauses can be read restrictively so that it is not unconscionable, but several can be read literally to give unrestricted discretion to B. In January, when the market price has risen above the contract price, A repudiates the contract, and B seeks specific performance. In the absence of justification by evidence of commercial setting, purpose, or effect, the court may determine that the contract as a whole was unconscionable when made, and may then deny spe- cific performance.

2. A, a homeowner, executes a standard printed form used by B, a merchant, agreeing to pay $ 1,700 for specified home improvements. A also executes a credit application asking for payment in 60 monthly installments but specifying no rate. Four days later A is informed that the credit application has been approved and is given a payment schedule calling for finance and insurance charges amounting to $ 800 in addition to the $ 1,700. Before B does any of the work, A repudiates the agreement, and B sues A for $ 800 damages, claiming that a commission of $ 800 was paid to B's salesman in reliance on the agreement. The court may determine that the agreement was unconscionable when made, and may then dismiss the claim. d. Weakness in the bargaining process. A bargain is not unconscionable merely because the parties to it are un- equal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party. But gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms. Factors which may contribute to a finding of unconscionability in the bargaining process include the following: belief by the stronger party that there is no reasonable probability that the weaker party will fully perform the contract; knowledge of the stronger party that the weaker party will be unable to receive substantial benefits from the contract; knowledge of the stronger party that the weaker party is unable reasonably to protect his interests by reason of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors. See Uniform Consumer Credit Code § 6.111.

Illustration: 3. A, literate only in Spanish, is visited in his home by a salesman of refrigerator-freezers for B. They negotiate in Spanish; A tells the salesman he cannot afford to buy the appliance because his job will end in one week, and the salesman tells A that A will be paid numerous $ 25 commissions on sales to his friends. A signs a complex installment contract printed in English. The contract provides for a cash price of $ 900 plus a finance charge of $ 250. A defaults after paying $ 32, and B sues for the balance plus late charges and a 20% attorney's fee authorized by the contract. The ap- pliance cost B $ 350. The court may determine that the contract was unconscionable when made, and may then limit B's recovery to a reasonable sum. e. Unconscionable terms. Particular terms may be unconscionable whether or not the contract as a whole is un- conscionable. Some types of terms are not enforced, regardless of context; examples are provisions for unreasonably large liquidated damages, or limitations on a debtor's right to redeem collateral. See Uniform Commercial Code §§ 2-718, 9-501(3). Other terms may be unconscionable in some contexts but not in others. Overall imbalance and weaknesses in the bargaining process are then important.

Illustrations: 4. A, a packer, sells and ships 300 cases of canned catsup to B, a wholesale grocer. The contract provides, "All claims other than swells must be made within ten days from receipt of goods." Six months later a government inspector, upon microscopic examination of samples, finds excessive mold in the cans and obtains a court order for destruction of the remaining cases in B's warehouse. In the absence of justifying evidence, the court may determine that the quoted clause is unconscionable as applied to latent defects and does not bar a claim for damages for breach of warranty by B against A.

5. A, a retail furniture store, sells furniture on installment credit to B, retaining a security interest. As A knows, B is a woman of limited education, separated from her husband, maintaining herself and seven children by means of $ 218 per month public assistance. After 13 purchases over a period of five years for a total of $ 1,200, B owes A $ 164. B then buys a stereo set for $ 514. Each contract contains a paragraph of some 800 words in extremely fine print, in the middle of which are the words "all payments . . . shall be credited pro rata on all outstanding . . . accounts." The effect of this language is to keep a balance due on each item until all are paid for. On B's default, A sues for possession of all the items sold. It may be determined that either the quoted clause or the contract as a whole was unconscionable when made.

6. A, a corporation with its principal office in State X, contracts with B, a resident of State X, to make improvements on B's home in State X. The contract is made on A's standard printed form, which contains a clause by which the parties submit to the jurisdiction of a court in State Y, 200 miles away. No reason for the clause appears except to make litiga- tion inconvenient and expensive for B. The clause is unconscionable. f. Law and fact. A determination that a contract or term is unconscionable is made by the court in the light of all the material facts. Under Uniform Commercial Code § 2-302, the determination is made "as a matter of law," but the parties are to be afforded an opportunity to present evidence as to commercial setting, purpose and effect to aid the court in its determination. Incidental findings of fact are made by the court rather than by a jury, but are accorded the usual weight given to such findings of fact in appellate review. An appellate court will also consider whether proper standards were applied.

Illustration: 7. A, a finance company, lends money to B, a manufacturing company, on the security of an assignment by B of its accounts receivable. The agreement provides for loans of 75% of the value of assigned accounts acceptable to A, and forbids B to dispose of or hypothecate any assets without A's written consent. The agreed interest rate of 18% would be usurious but for a statute precluding a corporation from raising the defense of usury. Substantial advances are made, and the balance owed is $ 14,000 when B becomes bankrupt, three months after the first advance. A determination that the agreement is unconscionable on its face, without regard to context, is error. The agreement is unconscionable only if it is not a reasonable commercial device in the light of all the circumstances when it was made. g. Remedies. Perhaps the simplest application of the policy against unconscionable agreements is the denial of specific performance where the contract as a whole was unconscionable when made. If such a contract is entirely executory, denial of money damages may also be appropriate. But the policy is not penal: unless the parties can be restored to their pre-contract positions, the offending party will ordinarily be awarded at least the reasonable value of performance rendered by him. Where a term rather than the entire contract is unconscionable, the appropriate remedy is ordinarily todeny effect to the unconscionable term. In such cases as that of an exculpatory term, the effect may be to enlarge the liability of the offending party.

REPORTERS NOTES: This Section is new; it follows Uniform Commercial Code § 2-302. See Davenport, Unconscionability and the Uniform Commercial Code, 22 U. Miami L. Rev. 121 (1967); Ellinghaus, In Defense of Unconscionability, 78 Yale L.J. 757 (1969); Leff, Unconscionability and the Code -- The Emperor's New Clause, 115 U.

Pa. L. Rev. 485 (1967); Shulkin, Unconscionability -- The Code, the Court and the Consumer, 9 B.C. Ind. & Com. L. Rev. (1968); Spanogle, Analyzing Unconscionability Problems, 117 U. Pa. L. Rev. 931 (1969); Murray, Unconscionability: Unconscionability, 31 U. Pitt. L. Rev. 1 (1969); Braucher, The Unconscionable Contract or Term, 31 U. Pitt. L. Rev. 337 (1970); Leff, Unconscionability and the Crowd -- Consumers and the Common Law Tradition, 31 U.

Pitt. L. Rev. 349 (1970); Spiedel, Unconscionability, Assent and Consumer Protection, 31 U. Pitt. L. Rev. 359 (1970); Comments, 58 Dick. L. Rev. 161 (1954), 18 U. Chi. L. Rev. 146 (1950); 45 Va. L. Rev. 583 (1959); Annot., 18 A.L.R.3d 1305 (1968).

Comment a. Uniform Commercial Code § 2-302 is literally inapplicable to contracts not involving the sale of goods, but it has proven very influential in non-sales cases. It has many times been used either by analogy or because it was felt to embody a generally accepted social attitude of fairness going beyond its statutory application to sales of goods. See Seabrook v. Commuter Housing Co., 72 Misc.2d 6, 338 N.Y.S.2d 67 (Civ. Ct. 1972) (apartment lease); Kugler v. Romain, 58 N.J. 522, 279 A.2d 640 (1971) (consumer fraud proceeding by Attorney General); C & J Fertilizer, Inc. v. Allied Mut.

Ins. Co., 227 N.W.2d 169, 179-81 (Iowa 1975) (construction of burglary insurance policy); Contract Buyers League v. F & F Investment, 300 F. Supp. 210 (N.D. Ill. 1969) (class action with regard to sales of residential property -- no unconscionability found); see other examples listed in Albert Merrill School v. Godoy, 78 Misc.2d 647, 357 N.Y.S.2d 378 (Civ. Ct. 1974). In many of the cases cited contracts of adhesion were involved. It is to be emphasized that a contract of adhesion is not unconscionable per se, and that all unconscionable contracts are not contracts of adhesion. Nonetheless, the more standardized the agreement and the less a party may bargain meaningfully, the more susceptible the contract or a term will be to a claim of unconscionability. See Comment c to § 211; Note, Unconscionability and Standardized Con- tracts, 5 N.Y.U. Rev. L. & Soc. Change 65 (1975); 3 Corbin, Contracts § 559B (Supp. 1980). On adhesion contracts, see id. §§ 559A-I (Supp. 1980).

Comment c. Illustration 1 is based on Campbell Soup Co. v. Wentz, 172 F.2d 80 (3d Cir. 1948). Cf. Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973), cert. denied, 415 U.S. 920 (1974) (termination provision in service station franchise while facially neutral, in fact was one-sided in favor of oil company, and consequently was "void as against the public policy of this statute"). Illustration 2 is based on American Home Improvement, Inc. v. MacIver, 105 N.H. 435, 201 A.2d 886 (1964); cf. Central Budget Corp. v. Sanchez, 53 Misc.2d 620, 279 N.Y.S.2d 391 (1967).

Comment d. For examples of factors weighing in favor of a finding of unconscionability, see Albert Merrill School v. Godoy, 78 Misc.2d 647, 357 N.Y.S.2d 378 (Civ. Ct. 1974) (disproportionate levels of education, language difficulty and deceptive practices); Seabrook v. Commuter Housing Co., 72 Misc.2d 6, 338 N.Y.S.2d 67 (Civ. Ct. 1972) (long and complex lease printed in small type and containing many highly technical terms; landlord but not tenant represented by counsel; housing a scarce commodity); Kugler v. Romain, 58 N.J. 522, 279 A.2d 640 (1971) (goods were of extremely little use to buyers; price was two and one-half times a "reasonable market price"; sellers made many misrepresentations and deceptions; buyers were poor, uneducated and inexperienced); Wheeler v. St. Joseph Hosp., 63 Cal. App.3d 345, 133 Cal. Rptr. 775 (1976) (stress of hospital admitting room, superior bargaining position of hospital, failure to call patient's attention to arbitration clause) (it is not clear whether the court was relying on the unconscionability concept or on one limited to contracts of adhesion); Weidman v. Tomaselli, 81 Misc.2d 328, 365 N.Y.S.2d 681 (Cty. Ct.), aff'd, 84 Misc.2d 782, 386 N.Y.S.2d 276 (App. Term 1975) (overwhelming need for housing, no bargaining as to terms; landlord's dominant position; tenant forced to waive valuable statutory and constitutional rights; attorney's fees due from tenant whenever landlord commenced proceedings after tenant's default, even if suit was unsuccessful). For examples of cases rejecting unconscionability claims, see Graziano v. Tortora Agency, 78 Misc.2d 1094, 359 N.Y.S.2d 489 (Civ. Ct. 1974) (tenant was in real estate business and its principal was a sophisticated businessman; its counsel advised tenant not to sign lease; tenant had successfully litigated a claim based on a lease before); Curtis Elev. Co. v. Hampshire House, Inc., 142 N.J. Super. 537, 362 A.2d 73 (1976) (bargaining between experienced businessmen familiar with problems of industry -- provision excused performance in event of a strike and industry had history of labor troubles); Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App.3d 668, 97 Cal. Rptr. 811 (1971) (while bargaining strength was unequal, no unfair imposition would result from arbitration clause's enforcement) (adhesion contract -- "unconscionable" not used in opinion); Wille v. Southwestern Bell Tel. Co., 219 Kan. 755, 519 P.2d 903 (1976) (disparity of bargaining power alone is not enough); Royal Indem. Co. v. Westinghouse Elec. Corp., 385 F. Supp. 520 (S.D.N.Y. 1974) (very large industrial contract between large and knowledgeable companies; equal bargaining power, long negotiations); Wheeler v. St. Joseph Hosp., supra, (dissenting opinion) (while hospital admitting room is not an ideal locale for bargaining, arbitration clause did not contain very complicated language and patient, who was entering only for tests, had plenty of time to read and sign the document). See also Madden v. Kaiser Fdtn. Hosps., 17 Cal.3d 699, 131 Cal. Rptr. 882, 552 P.2d 1178 (1976); Ciofalo v. Vic Tanny Gyms, Inc., 10 N.Y.2d 294, 220 N.Y.S.2d 962, 177 N.E.2d 925 (1961). Illustration 3 is based on Frostifresh Corp. v. Reynoso, 52 Misc.2d 26, 274 N.Y.S.2d 757 (Cty. Ct. 1966), rev'd as to damages, 54 Misc.2d 119, 281 N.Y.S.2d 964 (App. Term 1967); cf. State by Lefkowitz v. ITM, Inc., 52 Misc.2d 39, 275 N.Y.S.2d 303 (Sup. Ct. 1966) (referral sales, excessive price); Jones v. Star Credit Corp., 52 Misc.2d 189, 298 N.Y.S.2d 264 (Sup. Ct. 1969) (poor, uneducated buyers, excessive price); Toker v. Perl, 103 N.J. Super. 500, 247 A.2d 701 (1968) aff'd, 108 N.J. Super. 129, 260 A.2d 244 (1970) (deceptive practice, excessive price). But cf. Hernandez v. S.I.C. Fin. Co., 79 N.M. 673, 448 P.2d 474 (1968) (debtor understood English).

Comment e. Illustration 4 is based on Kansas City Wholesale Grocery Co. v. Weber Packing Corp., 93 Utah 414, 73 P.2d 1272 (1937); cf. Hardy v. General Motors Acceptance Corp., 38 Ga. App. 463, 144 S.E. 327 (1928); Wilson Trading Corp. v. David Ferguson, Ltd., 23 N.Y.2d 398, 297 N.Y.S.2d 108, 244 N.E.2d 685 (1968); Q. Vandenberg & Sons v. Siter, 204 Pa. Super. Ct. 392, 204 A.2d 494 (1964). But cf. Whitaker v. Cannon Mills Co., 132 Conn. 434, 45 A.2d 120 (1945). Illustration 5 is based on Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965); see also Weidman v. Tomaselli, 81 Misc.2d 328, 365 N.Y.S.2d 681 (Cty. Ct.), aff'd, 84 Misc.2d 782, 386 N.Y.S.2d 276 (App. Term 1975); cf. Uniform Consumer Credit Code § 2.409. Illustration 6 is based on Paragon Homes, Inc. v. Carter, 56 Misc.2d 463, 288 N.Y.S.2d 817 (Sup. Ct.), aff'd mem., 30 A.D.2d 1052, 295 N.Y.S.2d 606 (1968); cf. Uniform Consumer Credit Code § 1.201(9). But cf. National Equip. Rental, Ltd. v. Szukhent, 375 U.S. 311 (1964); The Monrosa v. Carbon Black Export, Inc., 359 U.S. 180 (1959) (validity of choice-of-forum clause not decided); Indussa Corp. v. S.S. Ranborg, 377 F.2d 200 (2d Cir. 1967) (choice-of-forum clause invalid under Carriage of Goods by Sea Act); Clinic Masters, Inc. v. District Court, 556 P.2d 473 (Colo. 1976) (signatory was an educated professional; other party's ties were all with state of forum chosen).

Comment f. Illustration 7 is based on In re Elkins-Dell Mfg. Co., 253 F. Supp. 864 (E.D. Pa. 1966); compare Royal Indem. Co. v. Westinghouse Elec. Corp., 385 F. Supp. 520 (S.D.N.Y. 1974).

CROSS REFERENCES: ALR Annotations: Doctrine of unconscionability as applied to insurance contracts. 86 A.L.R.3d 862.

Construction and application of agreement by medical or social work student to work in particular position or at particular location in exchange for financial aid in meeting costs of education. 83 A.L.R.3d 1273.

Validity and construction of "No Damage" clause with respect to delay in building or construction contract. 74 A.L.R.3d 187.

Construction and effect of tenure provisions of contract or statute governing employment of college or university faculty member. 66 A.L.R.3d 1018.

Validity and construction of provision (Escalator Clause) in land contract or mortgage that rate of interest payable shall increase if legal rate is raised. 60 A.L.R.3d 473.

Employer's termination of professional athlete's services as constituting breach of employment contract. 57 A.L.R.3d 257.

Construction of contract for installation of vending machine on another's premises. 53 A.L.R.3d 471.

"Unconscionability" as ground for refusing enforcement of contract for sale of goods or agreement collateral thereto. 18 A.L.R.3d 1305.

Construction and effect of agreement relating to salary of partners. 66 A.L.R.2d 1023.

"Escalator" price adjustment clauses. 63 A.L.R.2d 1337.

Validity, construction and effect of contract, option, or provision for repurchase by vendor. 44 A.L.R.2d 342.

Validity and effect of promise not to make a will. 32 A.L.R.2d 370.

Digest System Key Numbers: Contracts 1 Legal Topics: For related research and practice materials, see the following legal topics: Contracts LawDefensesUnconscionabilityGeneral Overview Restatement of the Law, Second, Contracts Copyright (c) 1981, The American Law Institute Case Citations Rules and Principles Chapter 16 - Remedies Topic 2 - Enforcement by Award of Damages Restat 2d of Contracts, § 356 § 356 Liquidated Damages and Penalties (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is rea- sonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. (2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.

COMMENTS & ILLUSTRATIONS: Comment: a. Liquidated damages or penalty. The parties to a contract may effectively provide in advance the damages that are to be payable in the event of breach as long as the provision does not disregard the principle of compensation. The enforcement of such provisions for liquidated damages saves the time of courts, juries, parties and witnesses and reduces the expense of litigation. This is especially important if the amount in controversy is small. However, the parties to a contract are not free to provide a penalty for its breach. The central objective behind the system of contract remedies is compensatory, not punitive. Punishment of a promisor for having broken his promise has no justification on either economic or other grounds and a term providing such a penalty is unenforceable on grounds of public policy. See Chapter 8. The rest of the agreement remains enforceable, however, under the rule stated in § 184(1), and the remedies for breach are determined by the rules stated in this Chapter. See Illustration 1. A term that fixes an unreasonably small amount as damages may be unenforceable as unconscionable. See § 208. As to the liquidation of damages and modi- fication or limitation of remedies in contracts of sale, see Uniform Commercial Code §§ 2-718, 2-719. b. Test of penalty. Under the test stated in Subsection (1), two factors combine in determining whether an amount of money fixed as damages is so unreasonably large as to be a penalty. The first factor is the anticipated or actual loss caused by the breach. The amount fixed is reasonable to the extent that it approximates the actual loss that has resulted from the particular breach, even though it may not approximate the loss that might have been anticipated under other possible breaches. See Illustration 2. Furthermore, the amount fixed is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss. See Il- lustration 3. The second factor is the difficulty of proof of loss. The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty (see § 351), the easier it is to show that the amount fixed is reasonable. To the extent that there is uncertainty as to the harm, the estimate of the court or jury may not accord with the principle of compensation any more than does the advance estimate of the parties. A determination whether the amount fixed is a penalty turns on a combination of these two factors. If the difficulty of proof of loss is great, consid- erable latitude is allowed in the approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude is allowed in that approximation. If, to take an extreme case, it is clear that no loss at all has occurred, a provision fixing a substantial sum as damages is unenforceable. See Illustration 4.

Illustrations: 1. A and B sign a written contract under which A is to act in a play produced by B for a ten week season for $ 4,000.

A term provides that "if either party shall fail to perform as agreed in any respect he will pay $ 10,000 as liquidated damages and not as a penalty." A leaves the play before the last week to take another job. The play is sold out for that week and A is replaced by a suitable understudy. The amount fixed is unreasonable in the light of both the anticipated and the actual loss and, in spite of the use of the words "liquidated damages," the term provides for a penalty and is un- enforceable on grounds of public policy. The rest of the agreement is enforceable (§ 184(1)), and B's remedies for A's breach are governed by the rules stated in this Chapter.

2. A, B and C form a partnership to practice veterinary medicine in a town for ten years. In the partnership agreement, each promises that if, on the termination of the partnership, the practice is continued by the other two mem- bers, he will not practice veterinary medicine in the same town during its continuance up to a maximum of three years. A term provides that for breach of this duty "he shall forfeit $ 50,000 to be collected by the others as damages." A leaves the partnership, and the practice is continued by B and C. A immediately begins to practice veterinary medicine in the same town. The loss actually caused to B and C is difficult of proof and $ 50,000 is not an unreasonable estimate of it. Even though $ 50,000 may be unreasonable in relation to the loss that might have resulted in other circumstances, it is not unreasonable in relation to the actual loss. Therefore, the term does not provide for a penalty and its enforcement is not precluded on grounds of public policy. See Illustration 14 to § 188.

3. A contracts to build a grandstand for B's race track for $ 1,000,000 by a specified date and to pay $ 1,000 a day for every day's delay in completing it. A delays completion for ten days. If $ 1,000 is not unreasonable in the light of the anticipated loss and the actual loss to B is difficult to prove, A's promise is not a term providing for a penalty and its enforcement is not precluded on grounds of public policy.

4. The facts being otherwise as stated in Illustration 3, B is delayed for a month in obtaining permission to operate his race track so that it is certain that A's delay of ten days caused him no loss at all. Since the actual loss to B is not difficult to prove, A's promise is a term providing for a penalty and is unenforceable on grounds of public policy. c. Disguised penalties. Under the rule stated in this Section, the validity of a term providing for damages depends on the effect of that term as interpreted according to the rules stated in Chapter 9. Neither the parties' actual intention as to its validity nor their characterization of the term as one for liquidated damages or a penalty is significant in determining whether the term is valid. Sometimes parties attempt to disguise a provision for a penalty by using language that purports to make payment of the amount an alternative performance under the contract, that purports to offer a discount for prompt performance, or that purports to place a valuation on property to be delivered. Although the parties may in good faith contract for alternative performances and fix discounts or valuations, a court will look to the substance of the agreement to determine whether this is the case or whether the parties have attempted to disguise a provision for a penalty that is un- enforceable under this Section. In determining whether a contract is one for alternative performances, the relative value of the alternatives may be decisive.

Illustration: 5. A contracts to build a house for B for $ 50,000 by a specified date or in the alternative to pay B $ 1,000 a week during any period of delay. A delays completion for ten days. If $ 1,000 a week is unreasonable in the light of both the anticipated and actual loss, A's promise to pay $ 1,000 a week is, in spite of its form, a term providing for a penalty and is unenforceable on grounds of public policy. d. Related types of provisions. This Section does not purport to cover the wide variety of provisions used by parties to control the remedies available to them for breach of contract. A term that fixes as damages an amount that is unrea- sonably small does not come within the rule stated in this Section, but a court may refuse to enforce it as unconscionable under the rule stated in § 208. A mere recital of the harm that may occur as a result of a breach of contract does not come within the rule stated in this Section, but may increase damages by making that harm foreseeable under the rule stated § 351. As to the effect of a contract provision on the right to equitable relief, see Comment a to § 359. As to the effect of a term requiring the occurrence of a condition where forfeiture would result, see § 229. Although attorneys' fees are not generally awarded to the winning party, if the parties provide for the award of such fees the court will award a sum that it considers to be reasonable. If, however, the parties specify the amount of such fees, the provision is subject to the test stated in this Section. e. Penalties in bonds. Bonds often fix a flat sum as a penalty for non-occurrence of the condition of the bond. A term providing for a penalty is not unenforceable in its entirety but only to the extent that it exceeds the loss caused by the non-occurrence of the condition.

Illustration: 6. A executes a bond obligating himself to pay B $ 10,000, on condition that the bond shall be void, however, if C, who is B's cashier, shall properly account for all money entrusted to him. C defaults to the extent of $ 500. A's promise is unenforceable on grounds of public policy to the extent that it exceeds the actual loss, $ 500.

REPORTERS NOTES: This Section is based on former §§ 339 and 579, but Subsection (1) has been redrafted to harmonize with Uniform Commercial Code § 2-718(1). The Code's reference to "the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy" has been omitted as already being expressed by the language of Subsection (1), as explained in the Comment. See 5 Corbin, Contracts ch. 58 (1964 & Supp. 1980); 5 Williston, Contracts §§ 776-89 (3d ed. 1961); Clarkson, Miller & Muris, Liquidated Damages v. Penalties: Sense or Nonsense, 1978 Wis. L. Rev. 351; Goetz & Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum. L. Rev. 554 (1977); Macneil, Power of Contract and Agreed Remedies, 47 Cornell L.Q. 495 (1962); Sweet, Liquidated Damages in California, 60 Calif. L. Rev. 84 (1972); The [English] Law Commission, Penalty Clauses and Forfeiture of Monies Paid (Law of Contract Working Paper No. 61, 1975). Notes, 45 Fordham L. Rev. 1349 (1977); 72 Nw. U.L. Rev. 1055 (1978).

Comment b. Illustration 1 is based on Illustration 1 to former § 339; H.J. McGrath Co. v. Wisner, 189 Md. 260, 55 A.2d 793 (1947). Illustration 2 is based on Illustration 2 to former § 339; Jaquith v. Hudson, 5 Mich. 123 (1858). It is supported by 5 Corbin, Contracts § 1066 (1964 & Supp. 1980); McCormick, Damages § 151 (1935); and is consistent with the rationale behind § 184(2). But cf. Bauer v. Sawyer, 8 Ill.2d 351, 134 N.E.2d 329 (1956); Management, Inc. v. Schassberger, 39 Wash.2d 321, 235 P.2d 293 (1951). Illustration 3 is based on Illustration 3 to former § 339; United States v. Bethlehem Steel Co., 205 U.S. 105 (1907); Banta v. Stamford Motor Co., 89 Conn. 51, 92 A. 665 (1914); Dave Gustafson & Co. v. State, 83 S.D. 160, 156 N.W.2d 185 (1968). But cf. Priebe & Sons v. United States, 332 U.S. 407 (1947); Hungerford Constr. Co. v. Florida Citrus Exposition, Inc., 410 F.2d 1229 (5th Cir.), cert. denied, 396 U.S. 928 (1969). Illustration 4 is supported by Massman Constr. Co. v. City Council of Greenville, Miss., 147 F.2d 925 (5th Cir. 1945); Northwest Fixture Co. v. Kilbourne & Clark Co., 128 F. 256 (9th Cir. 1904); Norwalk Door Closer Co. v. Eagle Lock and Screw Co., 153 Conn. 681, 220 A.2d 263 (1966). It rejects the view of Illustration 7 to former § 339; Southwest Eng'r Co. v. United States, 341 F.2d 998 (8th Cir.), cert. denied, 382 U.S. 819 (1965); McCarthy v. Tally, 46 Cal.2d 577, 297 P.2d 981 (1956); cf. Bethlehem Steel Corp. v. Chicago, 350 F.2d 649 (7th Cir. 1965). That the difficulties of proof of loss are to be determined at the time the contract is made, not at the time of the breach, see Hutchison v. Tompkins, 259 So.2d 129 (Fla. 1972). As to whether the actual loss must be reasonably foreseeable, compare comment, 45 Fordham L.

Rev. 1349, 1357 (1977), with 1 N.Y.L. Rev'n Comm'n, Study of the Uniform Commercial Code, Leg. Doc. (1955) No. 65, p. 581 n. 468.

Comment c. Illustration 5 is based on Illustration 5 to former § 339.

Comment d. Allowing attorneys' fees, see Puget Sound Mutual Sav. Bank v. Lillions, 50 Wash.2d 799, 314 P.2d 935 (1957), cert. denied, 357 U.S. 926 (1958). As to whether a specified sum as attorney's fees is a penalty, see Equitable Lumber Corp. v. IPA Land Dev. Corp., 38 N.Y.2d 516, 381 N.Y.S.2d 459, 344 N.E.2d 391 (1976).

Comment e. Illustration 6 is based on Illustration 8 to former § 339.

CROSS REFERENCES: ALR Annotations: Damages for wrongful termination of automobile dealership contracts. 54 A.L.R.3d 324.

Right and measure of recovery for breach of obligation to drill exploratory oil or gas wells. 4 A.L.R.3d 284.

Measure of damages, to advertiser, for radio or television station's breach or wrongful termination of contract. 90 A.L.R.2d 1199.

Liability of building or construction contractor for liquidated damages for breach of time limit provision where he abandons work after time fixed for its completion. 42 A.L.R.2d 1134.

Measure and items of compensation of contractor under cost-plus contract which is terminated, without breach, before completion. 28 A.L.R.2d 867.

Provision in land contract for forfeiture of payments as one for liquidated damages or penalty. 6 A.L.R.2d 1401.

Digest System Key Numbers: Damages 74-86 Legal Topics: For related research and practice materials, see the following legal topics: Contracts LawRemediesForeseeable DamagesGeneral OverviewContracts LawRemediesLiquidated Damage Page 1

CARROLL G. ROBINSON, BRUCE R. HOTZE, AND JEFFREY N. DAILY, PE- TITIONERS, v. ANNISE D. PARKER, MAYOR; CITY OF HOUSTON; HOUSTON CITY COUNCIL, ET AL., RESPONDENTS NO. 08-0658 SUPREME COURT OF TEXAS 353 S.W.3d 753; 2011 Tex. LEXIS 637; 54 Tex. Sup. J. 1640 November 18, 2009, Argued August 26, 2011, Opinion Delivered SUBSEQUENT HISTORY: Released for Publica- For Kubosh, Ms. Francis M., Amicus Curiae: Mr. David tion October 28, 2011. A. Furlow, Thompson & Knight, L.L.P., Houston TX; Rehearing denied by Robinson v. Parker, 2011 Tex. Mr. Levi James Benton, Benton Massey PLLC, Houston LEXIS 809 (Tex., Oct. 21, 2011) TX.

PRIOR HISTORY: [**1] JUDGES: JUSTICE GREEN delivered the opinion of the ON PETITION FOR REVIEW FROM THE COURT Court. JUSTICE GUZMAN did not [**2] participate in OF APPEALS FOR THE FOURTEENTH DISTRICT OF the decision.

TEXAS.

White v. Robinson, 260 S.W.3d 463, 2008 Tex. App. OPINION BY: Paul W. Green LEXIS 2391 (Tex. App. Houston 14th Dist., 2008) OPINION [*754] In this case, we are asked to decide (1) COUNSEL: For Robinson, Ms. Carroll G., Petitioner: whether citizens who signed a petition proposing a local Mr. William A. 'Andy' Taylor, Ms. Amanda Eileen Staine ballot initiative have standing to assert their declaratory Peterson, Andy Taylor & Associates, P.C., Houston TX. judgment claims that the voter-approved initiative is valid and must be enforced; and (2) the validity of the vot- For White, Mr. Bill, Respondent: Mr. Scott J. Atlas, Bill er-approved initiative. Because the citizens' claims are not White for Texas, Houston TX; Ms. Melanie Plowman ripe, however, we cannot reach those issues.

Sarwal, Weil Gothshal & Manges LLP, Austin TX; Honorable Patrick W. Mizel, Ms. Stacey Neumann Vu, I Vinson & Elkins LLP, Houston TX; Mr. Stephen Douglas Pritchett Jr., Beck Redden & Secrest, L.L.P., Houston TX; Petitioners Carroll G. Robinson, Bruce R. Hotze, and Mr. Arturo G. Michel, City Attorney, City of Houston Jeffrey N. Daily are citizens of Houston who participated Legal Dept., Houston TX; Mr. Patrick Zummo, Law Of- to varying degrees in efforts to place a proposition re- fices of Patrick Zummo, Houston TX; Mr. John garding city revenues and spending on the ballot for pub- Berchmans Daily, Weil Gotshal & Manges LLP, Houston lic referendum. Hotze and Daily organized the petition TX; Mr. David M. Gunn, Beck Redden & Secrest, L.L.P., drive and helped draft the final language of the proposal.

Houston TX. All three Petitioners signed the petition, donated time and money to campaigns promoting the passage of the prop- For Continental Airlines, Inc., Amicus Curiae: Mr. Jon- osition, and voted in favor of it. athan Day, Andrews Kurth LLP, Houston TX; Mr. War- On November 2, 2004, Houston voters passed the ren W. Harris, Bracewell & Giuliani, LLP, Houston TX. proposition, called Proposition 2, as well as Proposition 1, which the Houston City Council had placed on the ballot by its own act in response to Prop. 2.1 Prop. 1 garnered Page 2 353 S.W.3d 753, *; 2011 Tex. LEXIS 637, **; 54 Tex. Sup. J. 1640 more votes, with 280,596 favorable votes, or 64% of the minimum annual increases of 10% total, as opposed to 242,697 [**3] favorable votes for in the senior and disabled home- Prop. 2, or 56% of the total. However, the City of Houston stead property tax exemptions determined that, because Prop. 1 and Prop. 2 conflict, through the 2008 tax year.

Prop. 2 was ineffective and unenforceable. The City based that determination both on what Petitioners refer to as Prop. 1's "poison pill provision," 2 and on the conflict- ing-ordinance provision in the Houston City Charter. See 2 Prop. 1 provides: Hous., Tex., Code Ordinances, City Charter art. IX, § 19 (2006) ("[A]t any election for the adoption of amend- If another proposition for a ments if the provisions of two or more proposed amend- Charter amendment relating to ments approved at said election are inconsistent the limitations on increases in City amendment receiving the highest number of votes shall revenues is approved at the same prevail."). The mayor therefore [*755] did not certify election at which this proposition is the results of the passage of Prop. 2 to the secretary of also approved, and if this proposi- state, and the city council did not enter an order in the city tion receives [**5] the higher records declaring that Prop. 2 had been adopted. See TEX. number of favorable votes, then LOC. GOV'T CODE §§ 9.005(b) (requiring city council to this proposition shall prevail and pass an ordinance declaring the adoption of an initiative the other shall not become effec- that receives a majority of the vote), 9.007 (requiring tive. mayor to certify results of an election that passes a charter amendment to the secretary of state).

Petitioners sought relief from the court of appeals, Prop. 2 was described on the ballot as: which granted their petition for writ of mandamus, hold- ing that the City had failed to perform the ministerial The City Charter of the City of duties of certifying the results to the secretary of state and Houston [**4] shall be amended entering an order declaring the charter amendments to to require voter approval before the have been adopted. In re Robinson, 175 S.W.3d 824, City may increase total revenues 826-32 (Tex. App.--Houston [1st Dist.] 2005, orig. pro- from all sources by more than the ceeding). On the same day that they petitioned for man- combined rates of inflation and damus relief, Petitioners filed the underlying suit seeking population, without requiring any a declaratory judgment that Prop. 2 is effective and must limit of any specific revenue be enforced. While that case was pending, the city council source, including water and sewer passed an ordinance recognizing that both Prop. 1 and revenues, property taxes, sales Prop. 2 had passed but also declaring that Prop. 1 had taxes, fees paid by utilities and received the higher number of votes. As a result, both developers, user fees, or any other propositions became part of the Houston City Charter. See sources of revenues.

Hous., Tex., Code Ordinances, City Charter art. III, § 1; art. VI-a, § 7; art. IX, § 20 (2006). The trial court ulti- mately granted summary judgment in favor of Petitioners.

Prop. 1 was described on the ballot as: The court of appeals, however, ruled that Petitioners The Charter of the City of lacked standing to assert [**6] their claims, relying on Houston shall be amended to re- our holding in Brown v. Todd, 53 S.W.3d 297, 305 (Tex. quire voter approval before prop- 2001). 260 S.W.3d 463, 470-72 (Tex. App.--Houston [14th erty tax revenues may be increased Dist.] 2008, pet. filed). The court remanded the case to the in any future fiscal year above a trial court to allow Petitioners to amend their pleadings limit measured by the lesser of and establish standing. Id. at 466.

4.5% or the cumulative combined rates of inflation and population Robinson, Hotze, and Daily petition for review on growth. Water and sewer rates two grounds.3 First, they assert that the court of appeals would not increase more than the erred when it determined that Petitioners lack standing. cumulative combined rates of in- Second, they ask us to consider the merits of their claim flation and population growth that Prop. 2 should be enforced. without prior voter approval. The Charter Amendment also requires Page 3 353 S.W.3d 753, *; 2011 Tex. LEXIS 637, **; 54 Tex. Sup. J. 1640 The current Houston mayor has been substi- transmittal letter to this Court, Petitioners stated that tuted for her predecessor. See TEX. R. APP. P. "proper calculations by an independent outside auditor 7.2(a) (automatic substitution when public officer would show that the City is not in compliance [with] the is party in official capacity). spending controls" set forth in Prop. 2. But a case is not ripe when the determination of whether a plaintiff has a II concrete injury can be made only "on contingent or hy- pothetical facts, or upon events that have not yet come to Ripeness "is a threshold issue that implicates subject pass." Gibson, 22 S.W.3d at 852. From such inconclusive matter jurisdiction . . . [and] emphasizes the need for a documentation and mere allegations and speculation, we concrete injury for a justiciable claim to be presented." cannot ascertain with necessary certainty that the City has Patterson v. Planned Parenthood of Hous. & Se. Tex., 971 failed to comply with Prop. 2's spending caps or that it is S.W.2d 439, 442 (Tex. 1998). In evaluating ripeness, we likely to exceed the spending caps in the near future. See consider "whether, at the time a lawsuit is filed, the facts Perry, 66 S.W.3d at 249 (stating that a case based on are sufficiently developed 'so that an injury has occurred "uncertain or contingent future events" is not ripe for or is likely to occur, rather than being contingent or re- judicial determination); Patterson, 971 S.W.2d at 444 mote.'" Waco Indep. Sch. Dist. v. Gibson, 22 S.W.3d 849, (explaining that a potential injury cannot be ripe unless it 851-52 (Tex. 2000) [**7] (emphasis in original) (quoting is established with certain and definite documentation).

Patterson, 971 S.W.2d at 442). Although a claim is not required to be ripe at the time of filing, if a party cannot Because [**9] there is no showing that Petitioners demonstrate a reasonable likelihood that the claim will have suffered a concrete injury, we hold that Robinson, soon ripen, the case must be dismissed. See Perry v. Del Hotze, and Daily have failed to present a sufficiently ripe, Rio, 66 S.W.3d 239, 251 (Tex. 2001). justiciable claim. We express no opinion on whether, even if the case were ripe, Robinson, Hotze, and Daily would The record is silent as to whether the City has, in fact, have standing to assert their declaratory judgment claims, failed to comply with the Prop. 2 spending caps. As the as "[t]he essence of the ripeness doctrine is to avoid parties acknowledged at oral argument, the record in this premature adjudication . . . [and] to hold otherwise would case indicates that then-mayor Bill White, in response to be the essence of an advisory opinion, advising what the Prop. 2's inclusion in the City Charter, stated his intention law would be on a hypothetical set of facts." Patterson, to comply with the caps Prop. 2 imposed. In an attempt to S.W.2d at 444. show noncompliance, Petitioners presented several documents with their post-submission brief. Petitioners III point to a May 2009 letter from then-controller [*756] Annise Parker, who is now mayor of Houston, stating that Because Petitioners' claims are not ripe for adjudica- the controller's office is "no longer responsible for ana- tion, the trial court did not have jurisdiction to hear this lyzing the budget for compliance with Proposition 2." dispute. See Gibson, 22 S.W.3d at 852. Accordingly, we However, nothing in that letter or elsewhere in the record vacate the judgments of the court of appeals and trial court indicates that the City has actually failed or will soon fail and dismiss the case for want of jurisdiction. to comply with Prop. 2's spending caps. Petitioners also Paul W. Green point to a series of letters they sent to the City's [**8] accounting firm. In the letters, they demanded documen- Justice tation of the City's compliance with Prop. 2, as well as correction of alleged errors in the City's calculation of its OPINION DELIVERED: August 26, 2011 compliance with Prop. 2's allowable spending caps. In a Page 1

ROWAN COMPANIES, INC., Plaintiff-Appellant, v. Huey P. GRIFFIN, Defend- ant-Appellee No. 88-3291 UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT 876 F.2d 26; 1989 U.S. App. LEXIS 9696; 1989 AMC 2371

June 22, 1989 SUBSEQUENT HISTORY: [**1] Rehearing to the accident, but nonetheless provided Griffin with Denied July 31, 1989. maintenance, cure, and advance payments until January of 1988. At that time Rowan received a medical [**2] PRIOR HISTORY: Appeal from the United States report from Griffin's physician indicating that Griffin had District Court for the Eastern District of Louisiana. made full recovery. Rowan invoked the Declaratory Judgment Act and sought a judicial declaration of its obligation with reference to further maintenance and cure, COUNSEL: Lawrence E. Abbott, Elton F. Duncan, III, in light of the medical report indicating maximum re- Attorneys for Appellant. covery. 1 The district court granted Griffin's motion to dismiss the declaratory judgment suit, assigning no rea- Michael X., Houma, Louisiana, David J. Shea, Attorneys sons. Rowan's motion for reconsideration was summarily for Appellee. rejected. Again, no reasons were assigned for the court's refusal to resolve the declaratory judgment action. This * JUDGES: Politz and Jolly, Circuit Judges, and Hunter, appeal followed.

District Judge.

1 Rowan's complaint alleged diversity, 28 * District Judge for the Western District of U.S.C. § 1332, and maritime, 28 U.S.C. § 1333, Louisiana, sitting by designation. jurisdiction.

Analysis OPINION BY: POLITZ The Declaratory Judgment Act, 28 U.S.C. § 2201, OPINION provides in pertinent part: [*27] POLITZ, Circuit Judge In a case of actual controversy within Rowan Companies, Inc. appeals the dismissal of its its jurisdiction . . . any court of the United suit for a declaratory judgment. Concluding that Rowan's States, upon the filing of an appropriate suit against one of its employees, Huey P. Griffin, pre- pleading, may declare the rights and other sents an actual controversy that is justiciable under the [**3] legal relations of any interested Declaratory Judgment Act, 28 U.S.C. § 2201, we reverse party seeking such declaration, whether or and remand. not further relief is or could be sought. Any such declaration shall have the force and Background effect of a final judgment or decree and For purposes of this appeal the following facts are shall be reviewable as such. taken as true. On June 10, 1987 Griffin sustained a back injury while working on a drilling rig owned and operated by Rowan. Rowan preserved its liability position relative Page 2 876 F.2d 26, *; 1989 U.S. App. LEXIS 9696, **; 1989 AMC 2371 In addressing the Act's restriction to cases of actual con- the parties in the conventional suit are reversed; the in- troversy the Supreme Court has stated: quiry is the same in either case." Id. Guided by these The Constitution limits the exercise of teachings, this court has applied the following rule when the judicial power to "cases" and "contro- determining whether a request for declaratory judgment versies." . . . The Declaratory Judgment relief presents an actual controversy: Act of 1934, in its limitation to "cases of actual controversy," manifestly has regard A controversy, to be justiciable, must to the constitutional provision and is op- be such that it can presently be litigated erative only in respect to controversies and decided and not hypothetical, conjec- which are such in the constitutional sense. tural, conditional or based upon the possi- The word "actual" is one of emphasis ra- bility of a factual situation that may never ther than of definition . . . develop.

A "controversy" in this sense must be one that is appropriate for judicial deter- mination. A justiciable controversy is thus distinguished from a difference or dispute Brown & Root, Inc. v. Big Rock Corp., 383 F.2d 662, 665 of a hypothetical or abstract character; (5th Cir. 1967). from one that is academic or moot. The controversy must be definite and concrete, Mindful of these principles, we address the instant touching the legal relations of parties appeal. The dispute presented by Rowan's complaint is having adverse legal interests. It must be a whether Rowan's legal obligation to provide Griffin with real and substantial controversy admitting maintenance and cure has been extinguished because of specific relief through [**4] a decree Griffin has reached maximum cure. This is not a hypo- of a conclusive character, as distinguished thetical, conjectural, or conditional question, or one based from an opinion advising [*28] what upon the possibility of a factual situation that may never the law would be upon a hypothetical state develop. Rather, the controversy is real, definite, and of facts. Where there is such a concrete concrete, and therefore justiciable, for all of the acts case admitting of an immediate and defin- necessary [**6] for resolution of the merits of the claim itive determination of the legal rights of -- Griffin's injury and the course of his subsequent medi- the parties in an adversary proceeding cal recovery -- occurred prior to the filing of Rowan's upon the facts alleged, the judicial function complaint. may be appropriately exercised although Griffin contends that there is no justiciable contro- the adjudication of the rights of the liti- versy because he had not made a formal or informal de- gants may not require the award of process mand for continued maintenance and cure payments prior or the payment of damages. to Rowan's request for a declaratory judgment. We disa- gree. Such a demand is not a requisite for use of this ju- dicial problem-solver. The purpose of the Declaratory Judgment Act is "'to afford one threatened with liability an early adjudication without waiting until his adversary Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-41, 57 should see fit to begin an action after the damage has S. Ct. 461, 463-64, 81 L. Ed. 617 (1937) (citations omit- accrued.'" Government Employees Ins. Co. v. LeBleu, 272 ted); see also 10A C. Wright, A. Miller & M. Kane, F. Supp. 421, 427 (E.D.La. 1967) (quoting 3 Barron & Federal Practice and Procedure § 2757 (1983).

Holtzoff, Federal Practice and Procedure (Wright Edition) While recognizing the difficulty of fashioning a pre- § 1262). The declaratory judgment vehicle also is in- cise test for identifying a justiciable controversy, the tended to provide a means of settling an actual contro- Court has clearly instructed that "the question in each case versy before it ripens into a violation of the civil or is whether the facts alleged, under all the circumstances, criminal law, or a breach of a contractual duty. show that there is a substantial controversy, between Scott-Burr Stores Corp. v. Wilcox, 194 F.2d 989, 990 (5th parties having adverse legal interests, of sufficient im- Cir. 1952). mediacy and reality to warrant the issuance of a declara- Our conclusion that Rowan's complaint presents a tory judgment." Maryland Casualty Co. v. Pacific Coal & [**7] justiciable controversy does not mean that the Oil Co., 312 U.S. 270, 273, 61 S. Ct. 510, 512, 85 L. Ed. district court is obliged to entertain the action. It is well (1941). [**5] Moreover, "it is immaterial that fre- established that a district court "is not required to provide quently, in the declaratory judgment suit, the positions of declaratory judgment relief, and it is a matter for the dis- Page 3 876 F.2d 26, *; 1989 U.S. App. LEXIS 9696, **; 1989 AMC 2371 trict court's sound discretion whether to decide a declar- judgments outside the scope of Cone." 706 F.2d at atory judgment action." Mission Ins. Co. v. Puritan 601 n. 1.

Fashions Corp., 706 F.2d 599, 601 (5th Cir. 1983) (citing Five years later, the panel in Evanston Ins.

Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 62 S. Ct. Co. v. Jimco, Inc., 844 F.2d 1185 (5th Cir. 1988), 1173, 86 L. Ed. 1620 (1942)); see also Dresser Indus., inadvertently overlooked Puritan Fashions and its Inc. v. Insurance Co. of N. Am., 358 F. Supp. 327, 330 rejection of Moses Cone, as applied to declaratory (N.D.Tex.) (Declaratory Judgment Act "gives the court a judgment proceedings. In Jimco the panel held choice, not a command"), aff'd, 475 F.2d 1402 (5th Cir. that in considering whether to dismiss a declara- 1973). And, although a district court may not dismiss a tory judgment action a district court should apply request for declaratory judgment relief "on the basis of the Colorado River-Moses Cone factors. Jimco whim or [*29] personal disinclination," Hollis v. Ita- thus placed stricter limitations than Puritan wamba County Loans, 657 F.2d 746, 750 (5th Cir. 1981), Fashions on the district court's exercise of discre- the court may consider a variety of factors in determining tion. The tension between Puritan Fashions and whether to decide a declaratory judgment suit. For ex- Jimco was recognized in Sandefer Oil & Gas, Inc. ample, declaratory judgment relief may be denied because v. Duhon, 871 F.2d 526 (5th Cir. 1989). of a pending state court proceeding [**8] in which the matters in controversy between the parties may be fully In the case at bar we follow Puritan Fashions. litigated, Brillhart, 316 U.S. at 494-95, 62 S. Ct. at We do so because we are bound to follow the de- 1175-76; Hollis, 657 F.2d at 750; Employers' Liab. As- cision of the first panel. See Ryals v. Estelle, 661 surance Corp. v. Mitchell, 211 F.2d 441, 443 (5th Cir.), F.2d 904 (5th Cir. 1981). In addition, we are cert. denied, 347 U.S. 1014, 74 S. Ct. 869, 98 L. Ed. 1137 persuaded that Puritan Fashions states the better (1954), because the declaratory complaint was filed in rule, more consistent with the essence of the De- anticipation of another suit and is being used for the claratory Judgment Act. purpose of forum shopping, Pacific Employers Ins. Co. v. [**9] In Mission Ins. Co. v. Puritan Fashions M/V CAPT. W.D. CARGILL, 751 F.2d 801, 804 (5th Cir.), Corp., 706 F.2d 599, 601 & n. 2 (5th Cir. 1983), we ad- cert. denied, 474 U.S. 909, 106 S. Ct. 279, 88 L. Ed. 2d 244 (1985); Puritan Fashions, 706 F.2d at 602, because dressed the standard to be applied when reviewing a dis- of possible inequities in permitting the plaintiff to gain trict court's decision to dismiss a declaratory judgment complaint. Noting that dismissals under the Declaratory precedence in time and forum, id., or because of incon- Judgment Act and dismissals under the doctrine of forum venience to the parties or the witnesses, id. 2 non conveniens typically are based on many of the same considerations, we perceived no reason for the standard of In Puritan Fashions, 706 F.2d at 601 n.1, a panel of this court rejected application of Moses review to vary. Forum non conveniens dismissals are H. Cone Memorial Hospital v. Mercury Con- reviewed under an abuse of discretion standard. Piper Aircraft Co. v. Reyno, 454 U.S. 235, 102 S. Ct. 252, 70 L. struction Corp., 460 U.S. 1, 103 S. Ct. 927, 74 L.

Ed. 2d 419 (1981). In Puritan Fashions we held that Ed. 2d 765 (1983), to declaratory judgment ac- standard applicable to the review of dismissals of declar- tions. In Cone and its companion case, Colorado atory judgment actions.

River Water Conservation District v. United States, 424 U.S. 800, 96 S. Ct. 1236, 47 L. Ed. 2d In the instant case the district court did not assign (1976), the Supreme Court narrowly circum- reasons for its dismissal of Rowan's complaint. A reading scribed the instances in which a district court may of the sparse record leads us to surmise that the dismissal dismiss an action because of parallel state court was based on the trial court's conclusion that Rowan's litigation, absent traditional grounds for absten- complaint failed to state a justiciable controversy, for the tion. The Court listed several factors a district argument focused on this issue. If that be the case, the court must balance in determining the appropri- district court erred as a matter of law for the court does ateness of a dismissal in the interest of wise judi- have jurisdiction. [**10] However, after addressing the cial administration, and stressed that the balance relevant factors the court will be free to exercise its dis- should be weighted heavily in favor of the exer- cretion to maintain or reject the suit. 3 cise of jurisdiction. Neither Colorado River nor Moses Cone, however, involved a declaratory 3 Subsequent to the district court's dismissal of judgment suit. Recognizing this, the Puritan Rowan's complaint for declaratory judgment re- Fashions panel held that "the purely remedial and lief, Griffin filed a maintenance and cure suit equitable nature of declaratory judgments vests against Rowan in Texas state court. This is an the court with discretion, and sets declaratory important factor that the district court should take into account. See Brillhart; Hollis; Mitchell. Fur- Page 4 876 F.2d 26, *; 1989 U.S. App. LEXIS 9696, **; 1989 AMC 2371 ther, in an appropriate setting it may be significant 821 F.2d 1147, 1166 (5th Cir. 1987) (en banc), vacated on that a maintenance and cure claim joined with a other grounds, Pan American World Airways, Inc. v. Jones Act claim must be submitted to a jury when Lopez, 490 U.S. 1032, 109 S. Ct. 1928, 104 L. Ed. 2d 400 both arise out of one set of facts. Fitzgerald v. (1989). However, we have said definitively, that in the United States Lines Company, 374 U.S. 16, 83 S. context of a forum non conveniens dismissal "a district Ct. 1646, 10 L. Ed. 2d 720 (1963). court abuses its discretion when it summarily denies or grants a motion to dismiss without either written or oral If our surmising is incorrect and the district court explanation" or "when it fails to address and balance the concluded that an actual controversy [*30] existed but relevant principles and factors of the doctrine." Id. As in exercised its discretion to reject the suit, we nevertheless Puritan Fashions, we perceive no reason why these re- must remand. Without an assignment of reasons for the quirements should not also apply to a district court's dis- district court's action, we cannot perform the appellate missal under the Declaratory Judgment Act, and we now function. [**11] In determining whether a district court hold that they do. abused its discretion in dismissing on the basis of forum non conveniens, we observed that "it is difficult to for- The judgment of the district court is REVERSED and mulate a list of examples which will always be abuses of the matter is REMANDED for further proceedings in discretion." In re Air Crash Disaster Near New Orleans, conformity herewith.

Page 1

RUSK STATE HOSPITAL, PETITIONER, v. DENNIS BLACK AND PAM BLACK, INDIVIDUALLY AND AS REPRESENTATIVES OF THE ESTATE OF TRAVIS BONHAM BLACK, DECEASED, RESPONDENTS NO. 10-0548 SUPREME COURT OF TEXAS 392 S.W.3d 88; 2012 Tex. LEXIS 731; 55 Tex. Sup. J. 1320 October 6, 2011, Argued August 31, 2012, Opinion Delivered SUBSEQUENT HISTORY: Released for Publica- HECHT filed a concurring [**2] opinion. JUSTICE tion October 12, 2012. LEHRMANN filed a concurring and dissenting opinion, in which CHIEF JUSTICE JEFFERSON and JUSTICE PRIOR HISTORY: [**1] MEDINA joined.

ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE TWELFTH DISTRICT OF OPINION BY: Phil Johnson TEXAS.

Rusk State Hosp. v. Black, 379 S.W.3d 283, 2010 Tex. OPINION App. LEXIS 4687 (Tex. App. Tyler, June 23, 2010) [*91] In this health care liability claim the trial court denied Rusk State Hospital's challenge to the plain- tiffs' expert reports. The Hospital filed an interlocutory COUNSEL: For Rusk State Hospital, Petitioner: Clar- appeal from that ruling. On appeal the Hospital, for the ence Andrew Weber, Kelly Hart & Hallman LLP, Austin first time, asserted it was immune from suit. The court of TX; Daniel T. Hodge, First Asst. Attorney General, Aus- appeals refused to consider the immunity issue because it tin TX; David C. Mattax, Director of Defense Litigation, had not been presented to the trial court. After addressing Timothy Edward Boughal, Office of the Attorney Gen- the merits of the Hospital's challenge to the expert reports, eral, Austin TX; David S. Morales, Office of the Attorney the court of appeals remanded the case to the trial court for General of Texas, Deputy First Assistant Attorney Gen- further proceedings. eral, Austin TX; Greg W. Abbott, Attorney General of Texas, Austin TX; James C. Ho, Gibson Dunn & Crutcher We conclude that the court of appeals erred by re- LLP, Dallas TX; Jonathan F. Mitchell, Solicitor General fusing to consider the immunity claim because immunity Office of the Attorney General, Austin TX; Michael P. from suit implicates courts' subject-matter jurisdiction.

Murphy, Asst. Solicitor General, Austin TX; William After considering the immunity claim, which was briefed (Bill) J. Cobb III, Attorney General's Office, Deputy Atty. and argued in this Court, however, we affirm the judg- General for Civil Litigation, Austin TX. ment of the court of appeals remanding the case to the trial court because (1) the pleadings and record neither estab- For Black, Dennis and Pam Black, Individually and as lish a waiver of the Hospital's immunity nor conclusively Representatives of the Estate of Travis Bonham Black, negate such a waiver; and (2) the Hospital has not shown Deceased, Respondent: Dennis Gerald Black, Jeremy conclusively that [**3] either the plaintiffs had a full, Mitchell Skaggs, Black & Skaggs, P.C., Tyler TX. fair opportunity in the trial court to develop the record as to immunity and amend their pleadings, or that if the case JUDGES: JUSTICE JOHNSON delivered the opinion of is remanded and the plaintiffs are given such an oppor- the Court, in which JUSTICE HECHT, JUSTICE tunity they cannot show immunity has been waived.

WAINWRIGHT, JUSTICE GREEN, JUSTICE WILLETT, and JUSTICE GUZMAN joined. JUSTICE I. Background Page 2 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 Travis Black was a psychiatric patient in Rusk State considering the issue on interlocutory appeal when it had Hospital when he was found unconscious with a plastic not been presented to or ruled on by the trial court. Id. at bag over his head. Efforts to resuscitate him were un- . The appeals court, considering both Dr. Combs's report successful and he died. Delbert Van Dusen, M.D., per- and Dr. Van Dusen's autopsy report as statutory reports, formed an autopsy, determined Travis died of asphyxia- concluded that the Blacks' claims regarding sleep depri- tion, and concluded that he committed suicide. vation, failure to prescribe adequate medication, and indifference to Travis's medical needs were not addressed Travis's parents, Dennis and Pam Black, filed a health by them, so it dismissed those claims with prejudice. Id. at care liability suit against the Hospital and other entities . Although the appeals court also concluded that the that are not parties to this appeal.1 The Blacks alleged that Blacks' expert reports were deficient with respect to their the Hospital (1) was negligent by providing or allowing [**6] remaining negligence claims, it determined the Travis access to a plastic bag that was inherently dan- reports nonetheless represented a good-faith effort to gerous in an inpatient psychiatric setting, and the negli- comply with section 74.351 and remanded for the trial gence involved a condition, use, or misuse of tangible court to consider whether to grant a 30-day extension for personal property; (2) was negligent in training and su- the Blacks to cure the deficiencies. See TEX. CIV. PRAC. & pervising its employees, which resulted in Travis's death REM. CODE § 74.351(c) (providing that "the court may either by assisted suicide or murder; and (3) acted with grant one 30-day extension to the claimant in order to cure deliberate indifference to Travis's medical and psychiatric the deficiency" if it concludes the claimant's timely filed [**4] needs by depriving him of sleep and refusing to expert reports are deficient); Leland v. Brandal, 257 prescribe appropriate medication.

S.W.3d 204, 205 (Tex. 2008) (holding that "when ele- ments of a timely filed expert report are found deficient, The Blacks also sued the State of Texas and either by the trial court or on appeal, one thirty-day ex- the Texas Department of State Health Services. tension to cure the report may be granted" and remanding The court of appeals dismissed the claims against the case to the trial court for it to consider whether to grant the State and the Department. S.W.3d , an extension). . The Blacks do not complain of that action.

The Blacks did not seek review of the court of ap- The Blacks timely served the Hospital with an expert peals' decision, but the Hospital did and we granted its report from psychologist Dennis Combs, Ph.D., and a petition for review. 54 Tex. Sup. Ct. J. 1156 (June 17, copy of Dr. Van Dusen's autopsy report. See TEX. CIV. 2011). The Hospital argues that immunity from suit de- PRAC. & REM. CODE § 74.351. The Hospital moved for prives the trial court of subject-matter jurisdiction and the dismissal of the suit on the basis that these reports failed to interlocutory appeal statute did not preclude the court of satisfy the statutory requirements of section 74.351. See appeals from determining the jurisdictional issue. The id. The trial court denied the motion and the Hospital Hospital [**7] then argues that we should dismiss the appealed. See id. § 51.014(a)(9) (providing that a person case because the Blacks' pleadings, even if true, do not may immediately appeal an interlocutory trial court order allege a claim for which the Hospital's immunity has been that denies all or part of the relief sought by a motion waived by the Tort Claims Act (TCA). See TEX. CIV. under section 74.351(b)).

PRAC. & REM. CODE §§ 101.001-.109. [*92] On interlocutory appeal the Hospital argued We begin by addressing our jurisdiction over the in- that the trial court erred by denying its motion to dismiss terlocutory appeal. and, for the first time, asserted it had sovereign immunity from suit. Regarding its immunity claim, the Hospital II. Interlocutory Appeal Jurisdiction argued that the Blacks' pleadings did not allege a cause of action for which the [**5] Hospital's immunity was Generally, Texas appellate courts have jurisdiction waived and therefore the Blacks failed to meet their bur- only over final judgments. Bally Total Fitness Corp. v. den of showing the trial court had jurisdiction. Jackson, 53 S.W.3d 352, 352 (Tex. 2001). An exception S.W.3d , . The Blacks responded that their filings exists for certain interlocutory orders. See TEX. CIV. PRAC. complied with statutory expert report requirements; the & REM. CODE § 51.014(a); Jackson, 53 S.W.3d at 355. In court of appeals could not consider the Hospital's im- relevant part, section 51.014(a) provides that munity argument because it was neither presented to nor considered by the trial court; and in any event their A person may appeal from an interloc- pleadings were sufficient to demonstrate a claim for utory order of a district court, county court which the Hospital's immunity was waived. Id. at . at law, or county court that: The court of appeals did not address the immunity ... issue because "the weight of authority" precluded it from Page 3 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 (8) grants or denies a plea to the ju- Sovereign immunity in Texas embodies two con- risdiction by a governmental unit . . . ; [or] cepts: immunity from liability and immunity from suit.

Albert, 354 S.W.3d at 373. Immunity from liability pro- ... tects governmental entities from judgments, while im- [*93] (9) denies all or part of the munity from suit completely bars actions against those relief sought by a motion under Section entities unless the Legislature expressly consents to suit.

74.351(b), except that an appeal may not Reata Constr. Corp. v. City of Dallas, 197 S.W.3d 371, be taken from an order granting an exten- 374 (Tex. 2006); Tooke v. City of Mexia, 197 S.W.3d 325, sion under Section 74.351. 332 (Tex. 2006) ("[I]mmunity from suit . . . bars suit [**10] against [a governmental] entity altogether."); Wichita Falls State Hosp. v. Taylor, 106 S.W.3d 692, 696 TEX. CIV. PRAC. & REM. CODE § 51.014(a)(8), (9). Section (Tex. 2003) ("Unlike immunity from suit, immunity from 74.351(b), which section 51.014(a)(9) references, speci- liability does not affect a court's jurisdiction to hear a case fies that a court must dismiss a health [**8] care liability and cannot be raised in a plea to the jurisdiction."); Tex. claim if the plaintiff does not timely serve an expert report Natural Res. Conservation Comm'n v. IT-Davy, 74 S.W.3d and the defendant physician or health care provider 849, 857 (Tex. 2002) ("We again reaffirm that it is the properly objects. See id. § 74.351(b). Legislature's sole province to waive or abrogate sovereign immunity."); Tex. Dep't of Transp. v. Jones, 8 S.W.3d 636, When an interlocutory appeal is taken pursuant to (Tex. 1999) (per curiam).2 section 51.014(a), the court of appeals' judgment ordi- narily is conclusive. See TEX. GOV'T CODE § 22.225(b)(3).

2 In this case we address immunity from suit, so But we may consider an interlocutory appeal when the references to immunity will be references only to court of appeals' decision conflicts with the decision of immunity from suit unless specified otherwise. another court of appeals on a material issue of law. Id. §§ 22.001(a)(2), (e); 22.225(c). This case presents an issue [*94] The Legislature has waived governmental on which the courts of appeals are in conflict: May an entities' immunity from certain claims by means of the appellate court consider on interlocutory appeal whether a Tort Claims Act (TCA). See TEX. CIV. PRAC. & REM. governmental entity has immunity when the trial court did CODE §§ 101.001-.109. But the TCA embodies only lim- not address the issue first. Compare S.W.3d. at ited waivers of sovereign immunity; it does not abolish it. ("[W]e hold that the weight of authority precludes our See Kerrville State Hosp. v. Clark, 923 S.W.2d 582, 584 consideration on interlocutory appeal of jurisdictional (Tex. 1996). challenges not presented to or ruled on by the trial court."), with Fort Bend Cnty. Toll Road Auth. v. Oliva- B. Immunity and Interlocutory Appeals res, 316 S.W.3d 114, 118 (Tex. App.--Houston [14th Referencing our decision in Waco Independent Dist.] 2010, no pet.) ("An appellate court must consider School District v. Gibson, 22 S.W.3d 849, 851 (Tex. challenges to the trial court's subject-matter jurisdiction 2000), the Hospital argues that immunity from suit is an on interlocutory appeal, regardless [**9] of whether [**11] issue of subject-matter jurisdiction that may be such challenges were presented to or determined by the raised for the first time on interlocutory appeal in the same trial court."). We have jurisdiction to resolve the conflict. manner as standing and ripeness. Conversely, the Blacks TEX. GOV'T CODE § 22.001(a)(2). argue that Gibson is distinguishable and other cases cited by the Hospital do not support its position because they III. Sovereign Immunity involved either appeals from final judgments or interloc- utory appeals in which the trial court had granted or de- A. Nature of Immunity nied a plea to the jurisdiction.

The doctrine of sovereign immunity derives from the In Gibson, the trial court granted, in part, Waco In- common law and has long been part of Texas jurispru- dependent School District's (WISD) motion to dismiss for dence. See Hosner v. De Young, 1 Tex. 764, 769 (1847) want of jurisdiction. 22 S.W.3d at 851. The motion was (holding that the State could not be sued in her own courts based on WISD's claim that the Gibsons failed to exhaust absent her consent "and then only in the manner indicat- their administrative remedies before filing suit. Id. The ed"); see also City of Dallas v. Albert, 354 S.W.3d 368, Gibsons filed an interlocutory appeal. Id. WISD re- (Tex. 2011) ("[The] boundaries [of sovereign im- sponded not only by re-urging its argument concerning munity] are established by the judiciary, but we have exhaustion of remedies, but also by challenging the trial consistently held that waivers of it are the prerogative of court's jurisdiction on standing and ripeness grounds. See the Legislature."). id. at 851. The court of appeals refused to address WISD's standing and ripeness arguments, reasoning that those Page 4 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 issues were not preserved for appeal because WISD had neither.") (Brister, J., [**14] concurring). The dissent not presented them to the trial court in its motion to dis- echoes that theme today. But regardless of whether im- miss. Id. This Court reversed: munity equates to a lack of subject-matter jurisdiction for all purposes, it implicates a court's subject-matter juris- [T]he court [of appeals] [**12] con- diction over pending claims. So if a governmental entity cluded that standing and ripeness were not validly asserts that it is immune from a pending claim, any properly preserved for its review. We court decision regarding that claim is advisory to the disagree. We decided in [Texas Associa- extent it addresses issues other than immunity, and the tion of Business v. Texas Air Control Texas Constitution does not afford courts jurisdiction to Board, 852 S.W.2d 440, 445 (Tex. 1993)] make advisory decisions or issue advisory opinions. Val- that because subject matter jurisdiction is ley Baptist Med. Ctr. v. Gonzalez, 33 S.W.3d 821, 822 essential to the authority of a court to de- (Tex. 2000) (per curiam) ("Under article II, section 1 of cide a case, it cannot be waived and may the Texas Constitution, courts have no jurisdiction to issue be raised for the first time on appeal. advisory opinions."); see also TEX. CONST. art. IV, §§ 1, (empowering the attorney general, as part of the ex- ecutive department of government, to issue advisory Id. opinions to the governor and other officials).

The Blacks are correct that Gibson does not precisely Section 51.014(a) expands the jurisdiction of courts square with the facts and posture of this case. Gibson of appeals. It specifies circumstances in which a litigant involved an interlocutory appeal from a trial court order may immediately appeal from an order that would oth- granting a plea to the jurisdiction, whereas here no juris- erwise be unappealable because a final judgment has not dictional argument was presented to or ruled on by the been rendered in the matter. See TEX. CIV. PRAC. & REM. trial court. Compare id. at 851, with S.W.3d at . CODE § 51.014(a); [**15] see also Cherokee Water Co. The jurisdictional issues in Gibson were also different: v. Ross, 698 S.W.2d 363, 365 (Tex. 1985) (orig. proceed- there the questions concerned standing and ripeness rather ing) (per curiam) ("Unless there is a statute specifically than immunity. See Gibson, 22 S.W.3d at 851. Further, in authorizing an interlocutory appeal, the Texas appellate Gibson the school district pled that the Gibsons' claims courts have jurisdiction only over final judgments."). were not ripe and that the Gibsons did not have standing. Because section 51.014(a) is a limited exception to the Id. But we disagree that these differences dictate a dif- general rule that a party may appeal only from final ferent outcome here. judgments or orders, it is strictly construed. See Bally, 53 S.W.3d at 355. Strictly construing a statute, however, does The court of appeals reasoned that section 51.014(a) not call for reading restrictions into it that violate consti- precluded it from reviewing an immunity claim that was tutional principles. The court of appeals effectively con- neither raised nor ruled [**13] upon in the trial court. strued section 51.014(a) to require appellate courts to See S.W.3d . The Hospital argues that this rea- address the merits of cases without regard to whether the soning misapprehends the analysis regarding section courts have jurisdiction. That construction violates con- 51.014(a) because the statute does not supplant the con- stitutional principles. TEX. CONST. art. II, § 1. But section stitutional requirement that courts must have jurisdiction 51.014(a) can be construed in a way so that it does not to adjudicate a dispute. We agree with the Hospital. The conflict with the Constitution. See Stockton v. Offenbach, inquiry is not whether section 51.014(a) grants appellate 336 S.W.3d 610, 618 (Tex. 2011); Brooks v. Northglen courts authority to review an immunity claim; rather, it is Ass'n, 141 S.W.3d 158, 169 (Tex. 2004). See also TEX. whether section 51.014(a) divests appellate courts of such GOV'T CODE § 311.021(1) (specifying that the Legislature authority. We conclude that it does not. intends statutes to comply with the Constitution). We hold [*95] We have said on numerous occasions that that if immunity is first asserted [**16] on interlocutory sovereign immunity deprives courts of subject-matter appeal, section 51.014(a) does not preclude the appellate jurisdiction. See, e.g., Tex. Dep't of Parks & Wildlife v. court from having to consider the issue at the outset in Miranda, 133 S.W.3d 217, 225-26 (Tex. 2004); Jones, 8 order to determine whether it has jurisdiction to address S.W.3d at 638; see also State v. Lueck, 290 S.W.3d 876, the merits. We disapprove of those cases in which courts (Tex. 2009) (recognizing that a plea to the jurisdiction of appeals have held differently.3 properly presents the immunity issue). It has been sug- gested that while immunity implicates subject-matter 3 E.g., Clear Lake City Water Auth. v. jurisdiction, it does not necessarily equate to a lack of Friendswood Dev. Co., 256 S.W.3d 735, 747 n.14 subject-matter jurisdiction. See Reata, 197 S.W.3d at 381 (Tex. App.--Houston [14th Dist.] 2008, pet. ("[S]overeign immunity includes concerns about both dism'd); City of Celina v. Dynavest Joint Venture, subject-matter and personal jurisdiction but is identical to 253 S.W.3d 399, 404 (Tex. App.--Austin 2008, no Page 5 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 pet.); Univ. of Tex. Sw. Med. Ctr. at Dallas v. to show jurisdiction despite having had full and fair op- Estate of Arancibia, 244 S.W.3d 455, 461-62 (Tex. portunity in the trial court to develop the record and App.--Dallas 2007), aff'd on other grounds, 324 amend the pleadings; or, if such opportunity was not S.W.3d 544 (Tex. 2010); Kinney Cnty. Ground- given, that the plaintiff would be unable to show the ex- water Conservation Dist. v. Boulware, 238 S.W.3d istence of jurisdiction if the cause [**19] were remanded 452, 461 (Tex. App.--San Antonio 2007, no pet.); to the trial court and such opportunity afforded. If the Austin Indep. Sch. Dist. v. Lowery, 212 S.W.3d governmental entity meets this burden, then the appellate 827, 834 (Tex. App.--Austin 2006, pet. denied); court should dismiss the plaintiff's case. See Koseoglu, Brenham Hous. Auth. v. Davies, 158 S.W.3d 53, 233 S.W.3d at 840 ("[W]e agree that Koseoglu deserves (Tex. App.--Houston [14th Dist.] 2005, no the opportunity to amend his pleadings if the defects can pet.); City of Dallas v. First Trade Union Sav. be cured. But Koseoglu's pleading defects cannot be Bank, 133 S.W.3d 680, 687-88 (Tex. App.--Dallas cured, and he has made no suggestion as to how to cure 2003, pet. denied). the jurisdictional defect."); Gibson, 22 S.W.3d at 853 ("With every available opportunity to generate record [*96] In addition to the constitutional concerns set evidence opposing WISD's challenges, the Gibsons could out above, we note a practical significance to precluding not have done so because the evidence required to do so appellate [**17] review of immunity on interlocutory did not exist."). If, however, the governmental entity does appeal: precluding such review would be inconsistent not meet this burden, the appellate court should remand with the purpose of section 51.014(a). If we agreed with the case to the trial court for further proceedings. [*97] the court of appeals' reasoning--as the Blacks ask us to do See Westbrook v. Penley, 231 S.W.3d 389, 395 (Tex. and the dissent contends we should do--then on remand 2007) ("If the pleadings are insufficient to establish ju- the Hospital could assert immunity and file a plea to the risdiction but do not affirmatively demonstrate an incur- jurisdiction. If its plea were denied the Hospital could file able defect, the plaintiff should be afforded an opportunity another interlocutory appeal. See TEX. CIV. PRAC. & REM. to replead."); Cnty. of Cameron v. Brown, 80 S.W.3d 549, CODE § 51.014(a)(8). Such a process would work against (Tex. 2002) (remanding a case to the trial court for the main purpose of the interlocutory appeal statute, repleading when the pleadings failed to show jurisdiction which is to increase efficiency of the judicial process. See but did not [**20] affirmatively demonstrate an incura- Tex. A&M Univ. Sys. v. Koseoglu, 233 S.W.3d 835, 845 ble jurisdictional defect). (Tex. 2007).

But as we have previously acknowledged, a plaintiff C. Response to the Dissent may not have had fair opportunity to address jurisdic- The dissent urges that we fully re-examine the basis tional issues by amending its pleadings or developing the for our numerous prior statements that immunity deprives record when the jurisdictional issues were not raised in the courts of subject-matter jurisdiction.4 What the dissent trial court. See Gibson, 22 S.W.3d at 853 (recognizing that effectively urges is a change in the nature of immunity in safeguards are necessary to protect a plaintiff when an Texas, and in the relationship between the legislative and appellate court considers an issue of subject-matter juris- judicial branches of government regarding management diction in the first instance because the plaintiff has not of the public fisc. That is a significant issue, but the parties had an opportunity to amend its pleadings, but concluding did not raise it in the courts below or this Court. Ad- that the Gibsons [**18] could not show their claim was dressing it would take us beyond what is necessary to ripe even with "every available opportunity to generate decide this appeal and we decline to do so, except to the record evidence opposing WISD's challenges"). Under extent it is addressed by our opinion and holding. such circumstances appellate courts must construe the pleadings in favor of the party asserting jurisdiction, and, See Tex. Dep't of Ins. v. Reconveyance Servs., if necessary, review the record for evidence supporting Inc., 306 S.W.3d 256, 258 (Tex. 2010) (per jurisdiction. Tex. Ass'n of Bus., 852 S.W.2d at 446. In curiam); Univ. of Tex. at El Paso v. Herrera, 322 some instances the pleadings or record may conclusively S.W.3d 192, 202 (Tex. 2010); Lueck, 290 S.W.3d negate the existence of jurisdiction, in which case the suit at 880-81; Koseoglu, 233 S.W.3d at 843; State v. should be dismissed. See Miranda, 133 S.W.3d at 227 ("If Shumake, 199 S.W.3d 279, 283 (Tex. 2006); the pleadings affirmatively negate the existence of juris- Reata, 197 S.W.3d at 374; Harris Cnty. v. Sykes, diction, then a plea to the jurisdiction may be granted 136 S.W.3d 635, 638 (Tex. 2004); Miranda, 133 without allowing the plaintiffs an opportunity to S.W.3d at 225-26; Hoff v. Nueces Cnty., 153 amend."). But if the pleadings and record neither demon- S.W.3d 45, 48 (Tex. 2004) (per curiam); Dallas strate jurisdiction nor conclusively negate it, then in order Area Rapid Transit v. Whitley, 104 S.W.3d 540, to obtain dismissal of the plaintiff's claim, the defendant (Tex. 2003); [**21] State ex rel. State Dep't entity has the burden to show either that the plaintiff failed of Highways & Pub. Transp. v. Gonzalez, 82 Page 6 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 S.W.3d 322, 327 (Tex. 2002); IT-Davy, 74 S.W.3d The Hospital contends the Blacks' allegations that it at 855; Dep't of Transp. v. Garza, 70 S.W.3d 802, provided or failed to prohibit access to a plastic bag, or (Tex. 2002); Travis Cnty. v. Pelzel & Assocs., that a Hospital employee either murdered Travis or as- Inc., 77 S.W.3d 246, 248 (Tex. 2002), superseded sisted his suicide, do not fit within the TCA's limited on other grounds by statute as recognized in, waiver of immunity, even if they are true. The Blacks Tooke, 197 S.W.3d at 342; Tex. Natural Res. disagree. They emphasize that the Hospital's policy clas- Conservation Comm'n v. White, 46 S.W.3d 864, sified the plastic bag as inherently dangerous in an inpa- (Tex. 2001); Tex. Dep't of Criminal Justice v. tient psychiatric setting. The Blacks argue that their Miller, 51 S.W.3d 583, 585 (Tex. 2001); Kinnear pleadings assert the Hospital was negligent in providing, v. Tex. Comm'n on Human Rights ex rel. Hale, 14 furnishing, or allowing Travis to access the bag; its neg- S.W.3d 299, 300 (Tex. 2000) (per curiam). ligence involved a use or condition of tangible personal property; and the negligence proximately caused Travis's IV. The Blacks' Claim death. They suggest such pleadings sufficiently allege a claim within the TCA's waiver of immunity. We disagree A. The Tort Claims Act with the Blacks.

The court of appeals did not address the Hospital's Neither providing nor prohibiting access to the bag claim of immunity. Rather than remanding the case to the was a "use." The Blacks' "use" argument erroneously court of appeals for it to do so, however, we address the equates providing, [**24] furnishing, or allowing access issue in the interest of judicial economy. See TEX. R. APP. to tangible property with putting or bringing the property P. 53.4; Reid Road Mun. Util. Dist. No. 2 v. Speedy Stop into action or service or applying the property to a given Food Stores, Ltd., 337 S.W.3d 846, 855 (Tex. 2011). purpose. See Cowan, 128 S.W.3d at 245-46 (explaining that "use" means "to put or bring into action or service; to As relevant to the Blacks' claim against the Hospital, employ for or apply to a given purpose" (citations omit- the TCA provides that a governmental unit is liable for ted)). Comparing Cowan to the case at bar illustrates this "personal injury and death so caused by a condition or use point. Cowan involved the death of James Roy Cowan, a of tangible personal or real property if the governmental psychiatric patient at San Antonio State Hospital. Id. at unit [**22] would, were it a private person, be liable to 245. The hospital allowed Cowan access to suspenders the claimant according to Texas law." TEX. CIV. PRAC. & and a walker, which Cowan then used in causing his own REM. CODE § 101.021(2). Section 101.021(2) waives death. Id. We held that the hospital's immunity was not immunity for claims based upon the "use" of tangible waived by the TCA because the hospital did not "use" the personal property only when the governmental unit itself suspenders and walker within the meaning of section uses the property. See id.; San Antonio State Hosp. v. 101.021(2) by merely giving them to Cowan. See id. at Cowan, 128 S.W.3d 244, 245-46 (Tex. 2004). A govern- ("[T]he Hospital's immunity can be waived only for mental unit does not "use" property within the meaning of its own use of Cowan's walker and suspenders, and not by the TCA when it merely allows someone else to use it.

Cowan's use of them."). Here, the Blacks allege the Hos- Cowan, 128 S.W.3d at 246; see Dallas Cnty. v. Posey, 290 pital allowed Travis access to the plastic bag that was used S.W.3d 869, 871 (Tex. 2009). Immunity is waived for in causing his death. These allegations do not present a claims based on a "condition" of tangible property if the claim for which the Hospital's immunity is waived by the condition proximately causes personal injury or death. See TCA because, as we held in Cowan, a hospital [**25] TEX. CIV. PRAC. & REM. CODE § 101.021(2); Posey, 290 does not "use" tangible personal property (e.g., a plastic S.W.3d at 872; Dallas Cnty. Mental Health & Mental bag) within the meaning of section 101.021(2) by merely Retardation v. Bossley, 968 S.W.2d 339, 343 (Tex. 1998). providing, furnishing, or allowing a patient access to it.

A condition does not proximately [*98] cause an injury or death if it does no more than furnish the means to make The Blacks also allege that a "condition" of the plas- injury or death possible; that is, immunity is waived only tic bag caused Travis's death. They emphasize the plastic if the condition (1) poses a hazard in the intended and bag was a contraband item and inherently dangerous in ordinary use of the property and (2) actually causes an the inpatient psychiatric setting. These facts, they argue, injury or death. See Posey, 290 S.W.3d at 871, 873; bring their claim under the TCA's waiver of immunity Bossley, 968 S.W.2d at 343. [**23] The TCA does not pursuant to our decision in Lowe v. Texas Tech University, waive immunity for claims arising from intentional torts. 540 S.W.2d 297 (Tex. 1966). The Hospital responds that See TEX. CIV. PRAC. & REM. CODE § 101.057(2) ("This the Blacks' reliance on Lowe is misplaced because in that chapter does not apply to a claim . . . arising out of assault, case the property was being put to its intended and ordi- battery, . . . or any other intentional tort."). nary use when a defect in the property caused an injury.

The Hospital argues that because the plastic bag was not B. Was the Hospital's Immunity Waived? being put to its ordinary, intended use when it caused Page 7 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 Travis's [*99] death, the Hospital's immunity is not death, see TEX. PENAL CODE § 22.08(a), and section waived for a claim based on the alleged condition of the 101.057(2) specifies that the Hospital's immunity is not bag. The Hospital is correct. waived for such a claim. See TEX. CIV. PRAC. & REM.

CODE § 101.057(2). We first address the Hospital's second In Lowe, the plaintiff alleged that he injured his knee argument because it is dispositive. playing football after the University's football coach or- dered him to remove his knee brace and reenter a game A person commits the criminal offense of aiding su- without it. Id. at 302 (Greenhill, C.J., concurring). icide if "with intent to promote or assist the commission of [**26] The Court concluded that the knee brace was an suicide by another, he aids or attempts to aid the other to integral part of Lowe's football uniform and held that the commit suicide." TEX. PENAL CODE § 22.08(a). The stat- TCA waived the University's immunity because the uni- ute proscribes action taken with the intent that a suicide form it gave Lowe was defective due to its lack of a knee result. Actions taken with the specific intent to inflict brace. See id. at 300 (majority opinion). We subsequently harm are characterized as intentional torts. See Reed Tool limited the precedential value of Lowe "to claims in which Co. v. Copelin, 689 S.W.2d 404, 406 (Tex. 1985). Thus, a plaintiff alleges that a state actor has provided property assuming, without deciding, that assisting [*100] sui- that lacks an integral safety component and that lack of cide or murder is a tort, it requires actions taken with this integral component led to the plaintiff's injuries." intent to cause harm and is an intentional tort. The Hos- Kerrville State Hosp. v. Clark, 923 S.W.2d 582, 585 (Tex. pital's immunity as to such a tort is not waived. See City of 1996). Laredo v. Nuno, 94 S.W.3d 786, 789 (Tex. App.--San Antonio 2002, no pet.) (holding that section 101.057(2) Here, the Blacks argue that the Hospital's act of fur- [**29] applied to claims against a police officer in part nishing Travis with a plastic bag considered inherently because the officer's conduct was referable to an inten- dangerous in the inpatient psychiatric setting was analo- tional decision to seize a vehicle illegally). gous to giving him property that lacked an integral safety component. They support this assertion by pointing out In sum, even construed in their favor, the Blacks' that we framed the issue in Cowan as "whether merely pleadings do not allege a cause of action within the TCA's providing someone with personal property that is not itself waiver of the Hospital's immunity. And the record does inherently unsafe is a 'use' within the meaning of the Act." not contain any evidence to support jurisdiction. 128 S.W.3d at 245 (emphasis added). But, as the Hospital The Hospital argues that if we reach this point in our maintains, the Blacks' argument fails to recognize that the analysis, we should dismiss the Blacks' claims with TCA waives immunity for an inherently dangerous con- prejudice because they failed to carry their burden to show dition [**27] of tangible personal property only if the the trial court had jurisdiction. See, e.g., Miranda, 133 condition poses a hazard when the property is put to its S.W.3d at 226-27; City of Garland v. Louton, 691 S.W.2d intended and ordinary use, which the plastic bag was not.

603, 605 (Tex. 1985). But because the Hospital made its See Posey, 290 S.W.3d at 872. In the circumstances of immunity argument for the first time in the court of ap- Travis's care at the Hospital, any inherently dangerous peals, the case will be remanded for further proceedings aspects of the plastic bag were at most a means to make on the jurisdictional issue unless the Hospital shows that his death possible. Cf. id. (reasoning that exposed tele- one of three situations exist: (1) the Blacks' pleadings or phone wires did not proximately cause an inmate's death the record conclusively negate jurisdiction; (2) the Blacks because the exposed wires were no more than a condition had a full and fair opportunity in the trial court to develop of the property that the inmate used to form a ligature to the record and amend their pleadings to show jurisdiction take his life). yet failed to do so; or (3) if the Blacks did not have such an The Blacks alternatively urge that the Hospital's opportunity, they cannot [**30] show jurisdiction even negligence resulted in Travis's death by assisted suicide or if the case is remanded to the trial court and they are given murder. Their argument focuses on the possibility that a the opportunity to develop the record as to jurisdiction and Hospital employee assisted Travis in committing suicide, amend their pleadings. We next look to see whether the and they contend that aiding suicide is not an intentional Hospital has conclusively shown one of the above situa- tort within the meaning of section 101.057. See TEX. CIV. tions.

PRAC. & REM. CODE § 101.057(2) (providing that the TCA The Blacks contend that they did not have a fair op- does not apply to claims arising out of intentional torts). portunity in the trial court to develop the record as to The Hospital's response is twofold. It first asserts that the jurisdiction. They note that there have been no oral dep- TCA waives immunity only for certain torts, and assisted ositions of the parties and they have been unable to ex- suicide is a crime, not a tort. Second, the Hospital argues plore the basis of statements contained in a report based [**28] that even if assisted suicide falls within the ambit on the Texas Department of Family and Protective Ser- of the TCA, it is more akin to an intentional tort than vice's investigation into Travis's death--particularly negligence because it requires an intent to cause injury or Page 8 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 statements of another Hospital patient who claimed to case",7 which must be ascertained by every court in every have seen a Hospital staff member putting a bag over case.8 A statute authorizing an interlocutory appeal does Travis's head. not empower a court to decide issues in a case over which it lacks subject-matter jurisdiction.

We agree with the Blacks, in part. The Hospital has not shown conclusively by this record either that they had TEX. CIV. PRAC. & REM. CODE § 74.351. a full and fair opportunity in the trial court to develop the Id. §§ 101.021, 101.025. record as to jurisdiction and amend their pleadings, or that Id. § 51.014(a)(9) (providing that a person if the case is remanded to the trial court for further pro- may appeal from an interlocutory order that "de- ceedings they will be unable to show jurisdiction. Thus, nies all or part of the relief sought by a motion the cause will be remanded to the trial court for further under Section 74.351(b)"). proceedings.

5 Cherokee Water Co. v. Ross, 698 S.W.2d 363, 365 (Tex. 1985) ("Unless there is a statute specif- VI. Conclusion ically authorizing an interlocutory appeal, the The [**31] judgment of the court of appeals is af- Texas appellate courts have jurisdiction only over firmed. The Blacks' claims against the Hospital are re- final judgments."). manded to the trial court for further proceedings con- 6 S.W.3d (Tex. App.--Tyler 2010). sistent with this opinion. 7 Tellez v. City of Socorro, 226 S.W.3d 413, 413 (Tex. 2007) [**33] (per curiam) (quoting United Phil Johnson States v. Cotton, 535 U.S. 625, 630, 122 S. Ct. Justice 1781, 152 L. Ed. 2d 860 (2002)).

8 Univ. of Tex. Sw. Med. Ctr. at Dallas v. OPINION DELIVERED: August 31, 2012 Loutzenhiser, 140 S.W.3d 351, 358 (Tex. 2004) ("[A] court is obliged to ascertain that subject CONCUR BY: Nathan L. Hecht; Debra H. Lehrmann matter jurisdiction exists regardless of whether the parties have questioned it." (emphasis in origi- CONCUR nal)).

We recently wrote that "we, like the U.S. Supreme For two reasons, I agree that immunity from suit Court, have recognized that our sometimes intemperate "sufficiently partakes of the nature of a jurisdictional bar" 9 use of the term 'jurisdictional' has caused problems." 1 All that it must be considered on interlocutory appeal, even if we decide in this case is [*101] whether an appellate not raised in the trial court. One is that if immunity is court in an interlocutory appeal permitted by statute can ultimately established, the decision on the merits of the decide an issue of governmental immunity from suit out- interlocutory appeal will have been advisory at the time it side the scope of the appeal. The Court answers yes and was rendered and therefore outside the court of appeals' wisely stops there. jurisdiction.10 The other reason is practical: an interlocu- tory appeal is also permitted from a denial of immunity, 11 In re United Servs. Auto. Ass'n, 307 S.W.3d and it would conserve time and expense to decide the 299, 306 (Tex. 2010) (footnote omitted). issue in one interlocutory appeal instead of two. Because Rusk State Hospital appealed from the trial court's an appellate court can decide an immunity issue beyond denial of its motion to dismiss this health care liability the scope of an interlocutory appeal, and there are reasons claim for want of an adequate expert report required by why it should, I agree with the Court that it must [*102] the Medical Liability Act ("MLA"),2 but also argued that do so unless, as in this case, the record has not been suf- its governmental immunity from suit has not been waived ficiently developed. by the Texas Tort Claims Act ("TTCA"),3 an argument it did not make in the trial court. The statute permitting this 9 Edelman v. Jordan, 415 U.S. 651, 678, 94 S. interlocutory appeal from the denial of the Hospital's Ct. 1347, 39 L. Ed. 2d 662 (1974) [**34] (refer- motion to [**32] dismiss does not extend to issues of ring to Eleventh Amendment immunity). immunity,4 and the court of appeals, mindful that its ju- 10 Valley Baptist Med. Ctr. v. Gonzalez, 33 risdiction over interlocutory appeals is limited to that S.W.3d 821, 822 (Tex. 2000) (per curiam) ("Under provided by statute,5 refused to consider the Hospital's article II, section 1 of the Texas Constitution, TTCA argument, deciding only that the trial court erred in courts have no jurisdiction to issue advisory failing to dismiss some of the claims against the Hospital opinions."). on its motion to dismiss under the MLA. 6 But immunity 11 TEX. CIV. PRAC. & REM. CODE § 51.014(a)(8) from suit implicates subject-matter jurisdiction, as the (providing that a person may appeal from an in- Court states, and thus "involves a court's power to hear a terlocutory order that "grants or denies a plea to Page 9 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 the jurisdiction by a governmental unit"); see Tex. or can be, attributed to immunity from suit. With that A&M Univ. Sys. v. Koseoglu, 233 S.W.3d 835, 843 understanding, I join in the Court's opinion. (Tex. 2007) ("Pleas to the jurisdiction asserting sovereign immunity are the subject of Section 16 Steel Co. v. Citizens for a Better Env't, 523 51.014(a)(8)."). U.S. 83, 90, 118 S. Ct. 1003, 140 L. Ed. 2d 210 8 S.W.3d 636, 638 (Tex. 1999) (per curiam). (1998) (quoting United States v. Vanness, 85 F.3d 13 8 S.W.3d at 639. We have since held that a 661, 663 n.2, 318 U.S. App. D.C. 95 (D.C. Cir. denial of immunity from suit can be immediately 1996)); see also Morales v. Liberty Mut. Ins. Co., appealed regardless of the procedural vehicle used 241 S.W.3d 514, 516 n.1 (Tex. 2007) ("Of course, to raise the issue. Tex. Dep't of Crim. Justice v. 'jurisdiction' has many meanings, and both courts Simons, 140 S.W.3d 338, 349 (Tex. 2004). and legislators often use it to mean something other than a court's power to adjudicate a case.

But the Court does not equate immunity to a lack of Both the United States Supreme Court and this subject-matter jurisdiction. The similarities between the Court have cautioned against assuming two led us to state in Texas Department of Transportation 'jurisdiction' means 'subject-matter jurisdiction' v. Jones that "the law in Texas has been that absent the due to the stark consequences that accompany the state's consent to suit, a trial court lacks subject matter latter term." (citations [**37] omitted)). jurisdiction."12 But the only issue in [**35] that case was whether immunity from suit can be asserted in a plea to Nathan L. Hecht the jurisdiction so that the government can immediately Justice appeal an adverse ruling.13 Jones cannot fairly be read to equate immunity from suit with a lack of subject-matter OPINION DELIVERED: August 31, 2012 jurisdiction.

DISSENT BY: Debra H. Lehrmann There are important differences between immunity from suit and lack of subject-matter jurisdiction.14 For one DISSENT thing, the government can waive immunity from suit, either for broad classes of claims or on a case-by-case Although I concur that this case should be remanded basis.15 But it cannot waive subject-matter jurisdiction, for to the trial court, I respectfully dissent, in part, from the example, by consenting to suit on a claim beyond the Court's judgment. While I agree that subject matter juris- court's jurisdiction. For another, while a court is obliged to diction issues such as mootness and ripeness must be examine its subject-matter jurisdiction on its own in every considered by an appellate court even if they were not first case, we have never suggested that a court should raise presented to the trial court, I disagree that sovereign im- immunity on its own whenever the government is sued. munity is of the same character. While sovereign im- This case is more typical: not only did the trial court not munity [*103] does, as the Court notes, implicate raise immunity, the government itself did not raise the subject matter jurisdiction, it also implicates personal issue and has no explanation why. jurisdiction. However, acknowledging that sovereign immunity implicates subject matter jurisdiction does not See Reata Constr. Corp. v. City of Dallas, mean that the harsh rules associated with that label nec- 197 S.W.3d 371, 381 (Tex. 2006) ("[S]overeign essarily apply. Because we should look to the jurisdic- immunity includes concerns about both subject tional rules individually, applying them according to the matter and personal jurisdiction, but is identical to purpose behind the doctrine of sovereign immunity, I neither.") (Brister, J., concurring). would require governmental entities to raise the issue first 15 TEX. CIV. PRAC. & REM. CODE §§ in the trial court.

107.001-.004; [**36] see also Reata, 197 S.W.3d at 378 (a city's decision to file suit for damages I. SOVEREIGN IMMUNITY "encompassed a decision to leave its sphere of The Court rests its decision on the notion that sover- immunity from suit" for monetary claims against eign immunity "implicates subject matter jurisdiction," the city that are "germane to, connected with, and but carefully avoids squarely determining that it is an properly defensive to" the city's affirmative issue of subject matter jurisdiction. [**38] I write sepa- claims; the city was not immune to monetary claims against it to the extent those claims would rately to explain why I would hold that it is not, were we offset the city's affirmative claims). to reach the issue.

This Court first recognized sovereign immunity in "'Jurisdiction,' it has been observed, 'is a word of 1847, holding that "no State can be sued in her own courts many, too many, meanings.'"16 Not all of them have been, without her consent and then only in the manner indicat- Page 10 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 ed." Hosner v. De Young, 1 Tex. 764, 769 (1847). The v. Lueck, 290 S.W.3d 876, 879 (Tex. 2009); State v. Court has frequently referred to sovereign immunity as Shumake, 199 S.W.3d 279, 282 (Tex. 2006); Hoff v. jurisdictional. See, e.g., Anderson, Clayton & Co. v. State Nueces Cnty., 153 S.W.3d 45, 47 (Tex. 2004) (per curiam); ex rel. Allred, 122 Tex. 530, 62 S.W.2d 107, 110 (Tex. Reata, 197 S.W.3d at 373; Harris Cnty. v. Sykes, 136 1933) (holding that when the State waived immunity by S.W.3d 635, 637 (Tex. 2004); Miranda, 133 S.W.3d at filing suit, the trial court "acquired jurisdiction of the 221-22; Dallas Area Rapid Transit v. Whitley, 104 S.W.3d parties and subject-matter"); Tex. Dep't of Parks & Wild- 540, 541 (Tex. 2003); State ex rel. State Dep't of High- life v. Miranda, 133 S.W.3d 217, 224-26 (Tex. 2004). We ways & Pub. Transp. v. Gonzalez, 82 S.W.3d 322, 325 have often held that sovereign immunity is properly as- (Tex. 2002); [**41] Travis Cnty. v. Pelzel & Assocs., serted in the trial court by a plea to the jurisdiction. See, Inc., 77 S.W.3d 246, 247 (Tex. 2002); Tex. Natural Res. e.g., Miranda, 133 S.W.3d at 225-26; Tex. Dep't of Conservation Comm'n v. IT--Davy, 74 S.W.3d 849, 851 Transp. v. Jones, 8 S.W.3d 636, 638-39 (Tex. 1999) (per (Tex. 2002); Tex. Dep't of Transp. v. Garza, 70 S.W.3d curiam). 802, 804 (Tex. 2002); Tex. Dep't of Crim. Justice v. Mil- ler, 51 S.W.3d 583, 586 (Tex. 2001); Tex. Natural Res.

Although we have consistently referred to sovereign Conservation Comm'n v. White, 46 S.W.3d 864, 866 (Tex. immunity as jurisdictional, we have not clearly defined 2001); Jones, 8 S.W.3d at 637. Moreover, in none of these that term. Subject matter jurisdiction and personal juris- cases has the Court analyzed the legal issues involved in diction are jurisdictional; a court cannot render judgment holding that sovereign immunity is an issue of subject without both. CSR Ltd. v. Link, 925 S.W.2d 591, 594 (Tex. matter jurisdiction.

1996). [**39] Subject matter jurisdiction involves a court's power to hear and resolve the legal and factual A. Sovereign Immunity Implicates Aspects of Both issues of a class of cases. Middleton v. Murff, 689 S.W.2d Subject Matter Jurisdiction and Personal Jurisdiction 212, 213 (Tex. 1985) (per curiam) (citing Deen v. Kirk, 508 S.W.2d 70, 72 (Tex. 1974)). Subject matter jurisdic- Characterizing an issue as subject matter jurisdiction tion cannot be waived or conferred by agreement, can be has profound consequences. Therefore, we should be raised at any time, and must be considered by a court sua cautious when we apply that label and should not default sponte. Reata Constr. Corp. v. City of Dallas, 197 S.W.3d to using it in circumstances when it is not clear that the 371, 379 (Tex. 2006) (Brister, J., concurring) (citing Univ. issue is solely one of subject matter jurisdiction. I would of Tex. Sw. Med. Ctr. at Dallas v. Loutzenhiser, 140 hold that, because sovereign immunity implicates aspects S.W.3d 351, 358 (Tex. 2004)); see also Waco Indep. Sch. of both personal jurisdiction and subject matter jurisdic- Dist. v. Gibson, 22 S.W.3d 849, 850 (Tex. 2000). In con- tion, but is identical to neither, the rules associated with trast, personal jurisdiction involves a court's power to bind subject matter jurisdiction do not apply generally. Rather, a particular party. CSR Ltd., 925 S.W.2d at 594. Unlike jurisdictional rules apply individually, [**42] according subject matter jurisdiction, personal jurisdiction can be to the purposes underlying the doctrine of sovereign voluntarily waived by an appearance. Reata, 197 S.W.3d immunity. Reata, 197 S.W.3d at 382 (Brister, J., concur- at 379 (Brister, J., concurring) (citing Hilburn v. Jennings, ring). 698 S.W.2d 99, 100 (Tex. 1985)).

Although some of our recent cases have, with no In the last decade, we have sometimes referred to analysis, referred to sovereign immunity as an issue of sovereign immunity as a matter of subject matter juris- subject matter jurisdiction, sovereign immunity impli- diction, beginning with a per curiam opinion in Texas cates elements of both personal jurisdiction and subject Department of Transportation v. Jones, 8 S.W.3d at 639 matter jurisdiction, and has always had its own set of [**40] (holding that the court of appeals had to determine jurisdictional rules. In the earliest Texas cases, sovereign whether the driver's pleadings in a suit for damages stated immunity was addressed in terms of amenability to suit, a a claim under the Texas Tort Claims Act before affirming term borrowed from personal jurisdiction. Reata, 197 the trial court's denial of the Department of Transporta- S.W.3d at 380 & n.16 (Brister, J., concurring) ("'[I]t is one tion's plea to the jurisdiction); see also, e.g., Univ. of Tex. of the essential attributes of sovereignty not to be ame- at El Paso v. Herrera, 322 S.W.3d 192, 202 (Tex. 2010); nable to the suit of a private person without its own con- Reata, 197 S.W.3d at 374; Miranda, 133 S.W.3d at sent . . . .'" (quoting Bd. of Land Comm'rs v. Walling, 225-26. However, these cases did not involve a govern- Dallam 524 (Tex. 1843))). These cases were not anoma- mental unit attempting [*104] to raise sovereign im- lies, as sovereign immunity has been traditionally con- munity for the first time on interlocutory appeal; instead, sidered a problem of personal jurisdiction. In his Com- in every case the governmental unit had raised the issue of mentaries on the Laws of England, Blackstone concluded sovereign immunity to the trial court. See Herrera, 322 that sovereign immunity arose from the nature of the S.W.3d at 193; Tex. Dep't of Ins. v. Reconveyance Servs., sovereign party, not the subject matter of the case: Inc., 306 S.W.3d 256, 258 (Tex. 2010) (per curiam); State Page 11 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 Hence, it is, that no suit or action can be limitation on the court's power to hear the case."). A suit brought against the king, even in civil against the State is beyond the judicial cognizance of the [**43] matters, because no court can have courts because of the State's role as a party, not because of jurisdiction over him. For all jurisdiction the subject matter of the suit. Despite sometimes referring implies superiority of power: authority to to sovereign immunity as an issue of subject matter ju- try would be vain and idle, without an risdiction, we have also held that the State no longer had authority to redress; and the sentence of a immunity because it filed an affirmative claim for relief. court would be contemptible, unless that Reata, 197 S.W.3d at 377 (holding that the City of Dallas's court had power to command the execution decision to file suit "encompassed a decision to leave its of it: but, who . . . shall command the king? sphere of immunity" for related claims); see also Kinnear v. Tex. Comm'n on Human Rights, 14 S.W.3d 299, 300 (Tex. 2000) (per curiam) (holding that the trial court had WILLIAM BLACKSTONE, COMMENTARIES *242. The jurisdiction over claims against the State in a case where Founders also referred to sovereign immunity in terms of the State had filed suit); IT--Davy, 74 S.W.3d at 861 personal jurisdiction. See Caleb Nelson, Sovereign Im- (Hecht, J., concurring) ("[T]he State can waive immunity munity as [*105] a Doctrine of Personal Jurisdiction, by filing suit."). These decisions are inconsistent with the HARV. L. REV. 1559, 1565-66 (2002) (explaining that absolute nature [**46] of subject matter jurisdiction, the Founders believed sovereign immunity was more which cannot be waived and can be raised at any time. See relevant to personal jurisdiction than subject matter ju- Gibson, 22 S.W.3d at 850 ("[S]ubject matter jurisdiction risdiction). In addressing the question of state sovereign challenges cannot be waived, and may be raised for the authority, Alexander Hamilton borrowed the language of first time on appeal."); Scott Dodson, Hybridizing Juris- personal jurisdiction when he wrote in the Federalist diction, 99 CALIF. L. REV. 1439, 1473 (2011) (noting that Papers, "It is inherent in the nature of sovereignty not to sovereign immunity lacks some features of subject matter be amenable to the suit of an individual without its con- jurisdiction). The ability of states to waive immunity or sent." THE FEDERALIST NO. 81 (Alexander Hamilton); consent to suit is an important feature which is incon- see also, e.g., Kawasaki Steel Corp. v. Middleton, 699 sistent with the characterization of sovereign immunity as S.W.2d 199, 200 (Tex. 1985) (per curiam) (listing the an issue of subject matter jurisdiction: defendant being "amenable to the jurisdiction of the court" [**44] as one of the elements of personal juris- The state legislature may wish to waive diction). immunity in an entire class of cases, such as discrimination cases. Or, the [*106] As I have noted, sovereign immunity implicates el- state may wish to consent to a particular ements of both subject matter jurisdiction and personal lawsuit from which it would otherwise be jurisdiction. While the decision whether to compensate immune. Public pressure or individualized particular claimants may raise separation of powers con- considerations of fairness and justice may cerns, implicating policy issues beyond the traditional motivate a state's decision to waive or realm of judicial proceedings, see Tex. Parks & Wildlife consent. On the other hand, equally im- Dep't v. Sawyer Trust, 354 S.W.3d 384, 401 (Tex. 2011) portant concerns for the state fisc might (Hecht, J., concurring in part and dissenting in part), and justify a decision not to waive immunity or invoking subject matter jurisdiction issues, these consid- consent to suit. In short, the [non-subject erations also arise from the fact that the State is the party matter jurisdiction] characteristics of being sued. While it is true that the judiciary is not the waiver and consent provide an opportunity proper branch of government to decide how the State for the states to strike a balance between should spend its money, the authority to render judgment [**47] the legitimate concerns of suing a that obliges parties to pay is not related to whether the state and the need for redress of injuries party can or should pay. The sovereign immunity doctrine caused by the state. The importance of the flows from the fact that the State is the party at risk--an ability to waive immunity or consent to issue more closely aligned with personal jurisdiction. At suit supports a [non-subject matter juris- its core, there is something incongruous about saying that dictional] characterization. traditional contract and tort suits are beyond the subject matter of the judiciary simply because one party is a governmental entity. [**45] See Scott Dodson, Manda- Dodson, Mandatory Rules, supra, at 23 (citations omit- tory Rules, 61 STAN. L. REV. 1, 20 (2008) ("The primary ted). It is clear that "sovereign immunity is diffi- function of state sovereign immunity--granting a state the cult--perhaps impossible--to characterize as [subject right not to be subject to a lawsuit at the insistence of an individual--speaks to a right of a particular party, not to a Page 12 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 matter jurisdiction] because it can be waived or consented munity both explicitly and by its conduct to." Dodson, Hybridizing Jurisdiction, supra, at 1483. during litigation. A court may raise an Eleventh Amendment issue sua sponte; by Similarly, in federal courts, sovereign immunity is contrast, it must address Article III matters, not synonymous with subject matter jurisdiction. See such as standing or an absence of federal Idaho v. Coeur D'Alene Tribe of Idaho, 521 U.S. 261, 267, question jurisdiction, as soon as they come 117 S. Ct. 2028, 138 L. Ed. 2d 438 (1997) (holding that to its attention. Congress may, when acting the Eleventh Amendment "enacts a sovereign immunity pursuant to its Fourteenth Amendment from suit, rather than a nonwaivable limit on the Federal authority, abrogate state sovereign im- Judiciary's subject-matter jurisdiction"); Katherine Flo- munity; it has no corresponding power rey, Insufficiently Jurisdictional: The Case Against with respect to any other Article III doc- Treating State Sovereign Immunity as an Article III Doc- trine. Finally, state sovereign immunity, trine, 92 CALIF. L. REV. 1375, 1399 (2004) ("[S]tate sov- unlike any other Article [**50] III ques- ereign immunity and [subject matter] jurisdictional re- tion, is subject to a broad and important quirements are more different than alike."). Federal courts exception: under the doctrine of Ex parte have recognized that states may waive their sovereign Young, a suit for prospective injunctive immunity, revealing [**48] an inconsistency with sub- relief against a state official is not consid- ject matter jurisdiction, which cannot be created by ered a suit against the state and may be waiver or consent. See Commodity Futures Trading pursued in federal court.

Comm'n v. Schor, 478 U.S. 833, 851, 106 S. Ct. 3245, 92 L. Ed. 2d 675 (1986) (explaining that parties cannot con- fer subject matter jurisdiction beyond the limitations Florey, supra, at 1379-80 (citations omitted). The ability imposed by Article III by consent (citing United States v. of states to waive sovereign immunity or consent to suit is Griffin, 303 U.S. 226, 229, 58 S. Ct. 601, 82 L. Ed. 764 inconsistent with the characterization of sovereign im- (1938))); Atascadero State Hosp. v. Scanlon, 473 U.S. munity as a subject matter jurisdiction issue under both 234, 238, 105 S. Ct. 3142, 87 L. Ed. 2d 171 (1985) (noting federal and Texas case law. that a State may waive its immunity and consent to suit in federal court); Ballew v. Cont'l Airlines, Inc., 668 F.3d Additionally, in many states, sovereign immunity is 777, 786 (5th Cir. 2012) (noting that parties cannot create not considered an element of subject matter jurisdiction. subject matter jurisdiction by consent or waiver (citing See, e.g., Sea Hawk Seafoods, Inc. v. State, 215 P.3d 333, Buchner v. FDIC, 981 F.2d 816, 818 (5th Cir. 1993))); 339 (Alaska 2009) (describing state sovereign immunity Elam v. Kan. City S. Ry. Co., 635 F.3d 796, 802 (5th Cir. as an affirmative defense "that does not affect a court's 2011) ("Litigants cannot bestow subject matter jurisdic- subject-matter jurisdiction"); Washington v. Whitaker, tion on federal courts by waiver or consent."); Meyers ex 317 S.C. 108, 451 S.E.2d 894, 898 (S.C. 1994) ("[W]e rel. Benzing v. Tex., 410 F.3d 236, 255 (5th Cir. 2005) overrule the antiquated rule that sovereign immunity is a ("[W]hen Texas removed this case to federal court it jurisdictional bar and, accordingly, cannot be waived. We voluntarily invoked the jurisdiction of the federal courts join those jurisdictions which hold that sovereign im- and waived its immunity from suit in federal court." munity is an affirmative defense that must be pled." (ci- (citing Lapides v. Bd. of Regents of Univ. Sys. of Ga., 535 tations omitted)). Indeed, some states have held that sov- U.S. 613, 122 S. Ct. 1640, 152 L. Ed. 2d 806 (2002))); ereign immunity is an issue of personal jurisdiction Nelson, supra, at 1610 [**49] ("In deriving its doctrine [**51] rather than an issue of subject matter jurisdiction. of sovereign immunity, the [Supreme] Court has therefore See, e.g., German v. Wis. Dep't of Transp., Div. of State mixed together two very different sorts of ideas; it has Patrol, 2000 WI 62, 235 Wis. 2d 576, 612 N.W.2d 50, 55 blended concepts drawn from the law of personal juris- (Wis. 2000) ("If sovereign immunity is properly raised, diction with concepts drawn from the law of subject then the court is without personal jurisdiction over the matter jurisdiction."). One scholar summed up the diffi- state."); Data Gen. Corp. v. Cnty. of Durham, 143 N.C. culties inherent in federal courts treating sovereign im- App. 97, 545 S.E.2d 243, 246 (N.C. Ct. App. 2001) munity as a subject matter jurisdiction issue: ("[S]overeign immunity presents a question of personal jurisdiction rather than subject matter jurisdiction . . . ."). [S]overeign immunity doctrine contains Sovereign immunity is far from universally considered a elements that are inconsistent with re- subject matter jurisdiction issue. garding it as a limit on subject matter ju- Given that sovereign immunity implicates aspects of risdiction. While parties cannot ordinarily both subject matter and personal jurisdiction, it becomes create a basis for federal jurisdiction by apparent that its jurisdictional rules cannot be derived consenting to litigate in federal [*107] simply by labeling sovereign immunity subject matter or court, a state may waive sovereign im- Page 13 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 personal jurisdiction. Accordingly, it is time to recognize interlocutory appeals in section 51.014, which allows that "sovereign immunity has always had its own set of them under certain circumstances, including when the jurisdictional rules because jurisdiction over private and trial court denies a plea to the jurisdiction by a govern- public parties is simply different." Reata, 197 S.W.3d at mental entity. See id. § 51.014(a)(8); Bally Total Fitness (Brister, J., concurring). Corp. v. Jackson, 53 S.W.3d 352, 355 (Tex. 2001) (noting "the Legislature's intent that section 51.014 be strictly B. The Implications of Treating Sovereign Immunity construed"). Our courts of appeals have repeatedly held as a Subject Matter Jurisdiction Issue that sovereign immunity should be raised in the trial court, and that [**54] issues not presented to the trial court on a A decision that sovereign immunity presents a ques- plea to the jurisdiction may not be raised in an interlocu- tion of subject matter jurisdiction [**52] would have tory appeal. See Scott v. Alphonso Crutch LSC Charter profound implications. Since subject matter jurisdiction Sch., Inc., S.W.3d , , 2010 Tex. App. LEXIS "'cannot be conferred upon any court by consent or 6811 (Tex. App.--Austin 2010, pet. filed) (mem. op.); Scott waiver,' a judgment [against a governmental actor] will v. Alphonso Crutch Life Support Ctr., S.W.3d , never be considered final if the court lacked sub- , 2009 Tex. App. LEXIS 5111 (Tex. App.--Austin 2009, ject-matter jurisdiction." Dubai Petrol. Co. v. Kazi, 12 pet. filed) (mem. op.); Clear Lake City Water Auth. v. S.W.3d 71, 76 (Tex. 2000) (quoting Fed. Underwriters Friendswood Dev. Co., 256 S.W.3d 735, 747 n.14 (Tex. Exch. v. Pugh, 141 Tex. 539, 174 S.W.2d 598, 600 (Tex. App.--Houston [14th Dist.] 2008, pet. dism'd); City of 1943)). In Wisconsin Department of Corrections v. Celina v. Dynavest Joint Venture, 253 S.W.3d 399, 404 Schacht, Justice Kennedy noted problems with allowing (Tex. App.--Austin 2008, no. pet.); Univ. of Tex. Sw. Med.

States to belatedly assert sovereign immunity: Ctr. at Dallas v. Estate of Arancibia, 244 S.W.3d 455, 461-62 (Tex. App.--Dallas 2007), aff'd on other grounds, [*108] [W]e allow States to proceed 324 S.W.3d 544 (Tex. 2010); Kinney Cnty. Groundwater to judgment without facing any real risk of Conservation Dist. v. Boulware, 238 S.W.3d 452, 461 adverse consequences. Should the State (Tex. App.--San Antonio 2007, no pet.); Austin Indep. Sch. prevail, the plaintiff would be bound by Dist. v. Lowery, 212 S.W.3d 827, 834 (Tex. App.--Austin principles of res judicata. If the State were 2006, pet. denied); Brenham Hous. Auth. v. Davies, 158 to lose, however, it could void the entire S.W.3d 53, 61 (Tex. App.--Houston [14th Dist.] 2005, no judgment simply by asserting its immunity pet.); City of Dallas v. First Trade Union Sav. Bank, 133 on appeal.

S.W.3d 680, 687-88 (Tex. App.--Dallas 2003, pet. denied).

But see Tex. Dep't of Transp. v. Olivares, 316 S.W.3d 89, 95 (Tex. App.--Houston [14th Dist.] 2010, no pet.). 524 U.S. 381, 394, 118 S. Ct. 2047, 141 L. Ed. 2d 364 (1998) (Kennedy, J., concurring). Even a losing plaintiff Looking [**55] to the purposes behind the doctrine would be able to avoid the entire judgment by asserting of sovereign immunity for guidance, I agree with those the State's sovereign immunity on appeal. If sovereign courts of appeals that have held that an immunity defense immunity deprives the courts of subject matter jurisdic- may not be raised for the first time on appeal. First, im- tion, governmental entities could attack years-old judg- munity from suit protects the government from the ex- ments by asserting sovereign immunity because without pense involved in defending lawsuits. Reata, 197 S.W.3d subject matter jurisdiction, the [**53] judgments would at 382 (Brister, J., concurring). Requiring the government be void. Due to the dramatic effects and perpetual uncer- to raise the issue of sovereign immunity in the trial court tainty caused by characterizing an issue as one of subject reduces [*109] such expense by avoiding ongoing, matter jurisdiction, this Court in Dubai noted that "the unnecessary litigation early in the process. Because sov- modern direction of policy is to reduce the vulnerability of ereign immunity's modern rationale is the protection of final judgments to attack on the ground that the tribunal the public fisc, it should be asserted as early as possible. lacked subject matter jurisdiction." 12 S.W.3d at 76 See Tooke v. City of Mexia, 197 S.W.3d 325, 331-32 (Tex. (quoting RESTATEMENT (SECOND) OF JUDGMENTS § 11 2006) (stating that an important purpose of sovereign cmt. e (1982) (internal quotation marks omitted)). immunity is "to shield the public from the costs and consequences of improvident actions of their govern- II. ASSERTING SOVEREIGN IMMUNITY ON ments"); Wichita Falls State Hosp. v. Taylor, 106 S.W.3d INTERLOCUTORY APPEAL 692, 695 (Tex. 2003) (noting that states have retained immunity to "protect the public treasury"). The purpose of Generally, appellate jurisdiction exists only in cases protecting the public fisc is ill-served by allowing im- where a court has rendered a final judgment disposing of munity to be raised post-judgment, possibly even years all issues and parties. See TEX. CIV. PRAC. & REM. CODE § after litigation has ended. See Dodson, Mandatory Rules, 51.012. The Legislature provided a narrow exception for supra, at 24 [**56] (noting that a governmental actor Page 14 392 S.W.3d 88, *; 2012 Tex. LEXIS 731, **; 55 Tex. Sup. J. 1320 "has little to gain by asserting immunity only late in the excused from raising an issue due to inadvertence; the proceedings"). Taxpayers are penalized when the State is State should not be treated differently. For these reasons, I not required to bring the matter up early to get the case would hold that governmental entities may not raise sov- dismissed before money is expended defending the law- ereign immunity for the first time on appeal. suit. When attorneys for the State fail to raise sovereign immunity in the trial court, that failure might not be based III. Conclusion on oversight. The State's attorneys often make tactical I concur in the Court's judgment remanding the case decisions in deciding which issues they choose to raise. to the trial court, but for the reason set forth by the court of By not requiring the State to raise the issue of sovereign appeals--so that the trial court may consider granting the immunity in the trial court, the Court is providing it with a Blacks a thirty-day extension to cure the deficiencies in strategic advantage that other parties lack. Moreover, such their reports--rather than for the reasons expressed by this a lenient rule penalizes taxpayers by dissuading consci- Court today. Any issues dealing with sovereign immunity entious attorneys for the State from developing proce- should be raised at that time in the trial court. I disagree dures to ensure that the matter is raised timely (in order to that the government is entitled to raise the issue for the avoid subsequent liability), resulting in unnecessary and first time on appeal. costly litigation. Second, the doctrine should not result in "one law for the sovereign and another for the subject," as Debra H. Lehrmann such a rule would look "less like sovereign immunity than Justice sovereign inequity." Reata, 197 S.W.3d at 383 (Brister, J., concurring). Whether the failure to assert immunity in the OPINION DELIVERED: August 31, 2012 [**57] trial court is intentional or not, no other party is Page 1 2005 Tex. App. LEXIS 564, *

Southern Union Company, Appellant v. CSG Systems, Inc., Appellee NO. 03-04-00172-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 2005 Tex. App. LEXIS 564

January 27, 2005, Filed SUBSEQUENT HISTORY: [*1] awarded and does not challenge liability. Because there is 53.7(F) mot. for extension of time filed by, 03/14/2005 legally sufficient evidence in the record to support the judgment, we affirm the award except as modified.

PRIOR HISTORY: FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL BACKGROUND DISTRICT NO. GN-100403, HONORABLE PAUL Beginning in the late 1990's, Southern Union expe- DAVIS, JUDGE PRESIDING. rienced technological difficulties and realized that its [*2] computer system was no longer capable of printing and DISPOSITION: Affirmed as Modified. mailing approximately one million bills per month to its customers. 1 Southern Union investigated companies to which it could outsource these operations and then re- COUNSEL: For APPELLANT: Ms. Cynthia Keely quested proposals from several potential vendors. CSG Timms, Mr. W. Scott Hastings, LOCKE, LIDDELL & responded to Southern Union's request in February 2000.

SAPP, L.L.P., Dallas, TX, Mr. John L. Foster, MINTON, Southern Union selected CSG's bid from the field of BURTON, FOSTER & COLLINS, Ms. Jennifer Ramsey, candidates, and the two companies engaged in formal CANTEY & HANGER, L.L.P., Austin, TX. negotiations from April until September.

For APPELLEE: Mr. Scott S. Cooley, Mr. Patton G.

1 At the time, Southern Union had a contract Lockridge, Mr. Travis C. Barton, McGINNIS, with Pitney Bowes for that company to package LOCKRIDGE & KILGORE, L.L.P., Austin, TX. the mailings after Southern Union processed and printed them, but that contract was set to expire in JUDGES: Before Justices Kidd, Patterson and Puryear; December 2001.

Justice Kidd not participating.

A contract was finalized and signed by representa- OPINION BY: Jan P. Patterson tives from both Southern Union and CSG as of October 13, 2000. The contract contained a "discontinuance fee" OPINION provision, obligating Southern Union to pay a specified amount of damages to CSG in the event that Southern MEMORANDUM OPINION Union terminated the agreement before its five-year term expired. [*3] The parties agree that the provision was Southern Union Company, a gas utility provider, intended as a liquidated damages provision. contracted with CSG Systems, Inc., a printing company, to outsource Southern Union's print-and-mail operations. After the contract was finalized, CSG provided The conversion of services was more problematic than Southern Union with a written project plan contemplating anticipated, causing Southern Union to cease operations December 1, 2000 as the date for CSG to "go live" with and sue CSG for breach of contract. Following trial, the the print-and-mail operations. In the months leading up to jury found in favor of CSG. Accordingly, the trial court that deadline, implementation problems arose on both entered a final judgment awarding damages to CSG. sides and the conversion fell behind schedule. The com- Southern Union appeals only the amount of damages panies continued discussions in an attempt to solve the Page 2 2005 Tex. App. LEXIS 564, *

problems until the first week of January 2001, when acknowledges and agrees that, without Southern Union ceased work on the project. Southern the certainty of revenue promised by the Union filed suit against CSG on February 7, asserting commitments set forth in this Agreement, breach of contract among other causes of action. CSG would have been unwilling to pro- vide the Services at the fees set forth in the In its verdict, the jury found that Southern Union and Agreement. Because of the difficulty in CSG were both in breach of the agreement, but that CSG's ascertaining CSG's actual damages for breach was excused, and that CSG would be fairly and a termination or other breach of the reasonably compensated by an award of $ 2.1 million for Agreement by Customer resulting in a the discontinuance fee; $ 111,000 for the cost of paper and termination of this Agreement before envelopes purchased by CSG; $ 1,045,944 for CSG's lost the expiration of the then-current term, profits; and $ 140,000 for the cost of software licenses Customer agrees that prior to such provided by CSG to Southern Union. Beneath the last termination and [*6] in addition to element of damages, the jury wrote "upon return of 300 all other amounts then due and owing to licenses to CSG, the answer [*4] would be $ 0." The trial CSG, Customer will pay to CSG (as a court determined that, as a matter of law, it was proper to contract and not as a penalty) an award liquidated damages in lieu of actual damages, and amount equal to a percentage of the to- therefore entered a final judgment in conformance with tal Subscriber Statement Minimum for the jury's verdict, for a total amount of $ 2,351,000, plus the remaining term of the Agreement, interest and attorney's fees. as defined in Schedule C, times the then current ESP Processing Fees for the ANALYSIS First Physical Page, as defined in On appeal, Southern Union challenges the award of Schedule C beginning with the calendar damages to CSG Systems, claiming that CSG should not month in which termination occurs be awarded any liquidated damages pursuant to the dis- ("Discontinuance Fee"). If any such continuance fee provision, but rather that CSG's recovery termination occurs prior to the first should be confined to $ 1,045,944 in lost profits. Southern anniversary of the Effective Date of this Union first asserts that, based on the timing of its breach, Agreement, the percentage shall be fifty the proper calculation of the fee results in a zero sum. percent (50%). If between the first and Alternatively, Southern Union asserts that even if the second anniversary of the Effective Date it proper calculation is $ 2.1 million, CSG is not entitled to shall be thirty percent (30%) and if fol- recover the award because that amount constitutes an lowing the second anniversary of the Ef- illegal penalty. Southern Union also claims that pre- fective Date it shall be ten percent (10%). judgment interest should not be awarded on CSG's dam- Customer acknowledges and agrees that ages for the discontinuance fee or lost profits. Finally, the Discontinuance Fee is a reasonable Southern Union urges that it is entitled to a remittitur of $ estimation of the actual damages which 140,000 because it returned the software licenses to CSG. CSG would suffer if CSG were to fail to receive the amount of processing busi- The Discontinuance Fee Provision ness contemplated by this Agreement.

Customer shall not be required to pay the Southern [*5] Union's first issue, asserting that the Discontinuance Fee if CSG terminates this timing of Southern Union's breach results in zero damages Agreement other than as a result of Cus- for the discontinuance fee, turns on a construction of the tomer's breach of its obligations hereunder provision's terms. We agree with the parties that the pro- or if Customer [*7] terminates the vision is unambiguous. We therefore review this issue as a Agreement for a material, uncured breach matter of law, looking only to the contract's four corners by CSG. The Discontinuance Fee shall be and interpreting its plain meaning. See French v. Chev- CSG's sole remedy resulting from a ter- ron U.S.A., Inc., 896 S.W.2d 795, 796-97, 38 Tex. Sup. Ct. mination or other breach of this Agreement J. 445 (Tex. 1995). The discontinuance fee provision by Customer resulting in a termination of states: this Agreement before the expiration of the then-current term. In the event of a sale or The parties have mutually agreed upon transfer of all or substantially all of the fees for the Services to be provided Southern Union Company's assets to a hereunder based upon certain assumed third party, the percentages used to calcu- volumes of processing activity, and the late the Discontinuance Fee shall be length of the term of Agreement. Customer Page 3 2005 Tex. App. LEXIS 564, *

twenty-five percent (25%), fifteen percent vision specifies the circumstances in which Southern (15%) and five percent (5%), respectively. Union is excused from paying the discontinuance fee, and none impose such a timing limitation. To the contrary, the provision's express terms state that Southern Union shall (Emphasis added.) be liable for the discontinuance fee, at [*10] a rate of fifty percent, should it cause "any termination" within one The provision refers to Southern Union as year of signing the contract.

"Customer."

Testimony of witnesses from both Southern Union The parties agree that, given the plain meaning of the and CSG also supports CSG's assertion that the provision relevant language, the proper way to calculate the dis- was intended to apply during the implementation phase, to continuance fee for a breach within the first year of protect the significant up-front contributions made by signing the agreement is to multiply the applicable CSG before it had received any profits from the agree- "Subscriber Statement Minimum" by the applicable "ESP ment. Pamela Vanlandingham, CSG's Senior Vice Presi- Processing Fees" and then take fifty percent of that total. dent and General Manager of the statement processing The parties disagree, however, on how to determine one center, testified that during November and December, the [*8] factor of this equation: the Subscriber Statement CSG team "worked around the clock" to complete the Minimum. Southern Union asserts that, pursuant to project, which included working "very hard over the Schedule C, the minimum does not accrue until after the holidays," and that "CSG [had] expended right at 500 to "commencement date." 3 Because Southern Union 600 hours" when Southern Union breached the contract. breached this agreement prior to the commencement date, Southern Union officials confirmed that the nature of this it claims that the minimum was zero, and that the total contract required front-loaded efforts by CSG and that, calculation should therefore be zero. prior to terminating the agreement, they were aware of the money CSG invested on supplies and equipment, and of Schedule C states that, within the first year of the hours CSG put toward programming, testing, and the contract, the "minimums begin ninety (90) implementing the new system. David Kvapil, the Chief days . . . following the initiation date of services Financial Officer for Southern Union, testified that he ('Commencement Date'). . . ." The contract defines knew CSG had worked "well beyond the number of hours the commencement date as "the first day of the they were [*11] going to dedicate to the project," that calendar month in which the Services commence." CSG had provided a "significant batch of bills" to Schedule D discusses "services" as including a list Southern Union for approval, and that CSG had spent of activities related to the printing, inserting and over $ 100,000 on envelopes and paper by the end of mailing of customer bills in a specified carrier December 2000. Christine Shores, a business analyst for envelope, during specified billing cycles. Southern Union's mail services division, testified that CSG agrees that the commencement date had Southern Union approved the order for paper and enve- not yet occurred at the time of Southern Union's lopes prior to CSG placing it, and that Southern Union breach. was aware of the time and money spent by CSG in its efforts to commence live operations.

CSG interprets the provision to mean that, [*9] although Schedule C prevents Southern Union from Based on the plain meaning of the provision, as having to pay the monthly minimum until after the supported by the witnesses' testimony, Southern Union's commencement date, that time restriction does not apply liability for the discontinuance fee is not limited to a to Southern Union's liability under the discontinuance fee breach occurring after the commencement of live opera- provision. CSG asserts that Southern Union's interpreta- tions. Southern Union is liable under the discontinuance tion is wrong because it allows Southern Union to breach fee for its breach of the agreement during the implemen- the contract without consequence, so long as it does so tation phase. The amount of fair and reasonable damages within ninety days of the commencement date, regardless pursuant to the discontinuance fee was therefore properly of the significant time and money invested by CSG during calculated by the jury, and affirmed by the trial court, as $ the implementation phase. According to CSG, the liqui- 2.1 million. Southern Union's first issue is overruled. dated damages provision is most necessary during this initial time period because of the parties' unequal contri- Liquidated Damages butions and because of the difficulty in calculating po- Southern Union claims in its second issue that, if the tential damages before any actual profits have been made. discontinuance fee is properly calculated as $ 2.1 million, We agree with CSG's reading of the contract. Noth- [*12] then CSG is not entitled to any recovery of that ing in the provision limits its applicability to a breach amount because it constitutes an improper penalty. For the occurring after the commencement of services. The pro- purposes of this case, the parties agree that the discon- Page 4 2005 Tex. App. LEXIS 564, *

tinuance fee should be treated as an award of liquidated timate and therefore agreed a liquidated damages provi- damages. sion was necessary.

A liquidated damages provision may only be en- "The fundamental purpose of a valid liquidated forced when the court finds "(1) that the harm caused by damages provision is to provide a reasonable measure of the breach is incapable or difficult of estimation and (2) compensation in the event of a breach where, at the time that the amount of liquidated damages called for is a the provision is agreed to the damages are indeterminable reasonable forecast of just compensation." Phillips v. or will be otherwise difficult to prove." 24 Williston on Phillips, 820 S.W.2d 785, 788, 35 Tex. Sup. Ct. J. 220 Contracts § 65:3, at 250 (4th ed. 2002). It is well estab- (Tex. 1991). The party challenging the award of liquidated lished that lost profits can be inherently difficult to esti- damages has the burden to establish that the two-prong mate. See Texas Inst., Inc. v. Teletron Energy Mgmt., test is not satisfied and that, instead, the award of liqui- Inc., 877 S.W.2d 276, 279, 37 Tex. Sup. Ct. J. 676 (Tex. dated damages is an unenforceable penalty. See 1994). Frequently, lost profits are too speculative to re- Dominzo v. Progressive County Mut. Ins. Co., 54 S.W.3d cover because their calculation depends on "uncertain 867, 875 (Tex. App.--Austin 2001, pet. denied). Whether [*15] and changing conditions, such as market fluctua- the liquidated damages provision is enforceable is a tions," and this uncertainty is heightened where no profits question of law. Phillips, 820 S.W.2d at 788. have been made at the time the contract is breached. Id. The contract reflects that Southern Union and CSG sought Difficulty of Estimation to avoid such speculation in agreeing to the liquidated damages provision. The sliding scale of damages recog- Southern Union seeks to satisfy the first part of its nized the front-loaded value to be provided by CSG. As burden by claiming that CSG's damages were easy to argued by CSG, had there not been a discontinuance fee to estimate. Southern Union bases this claim on a "price rely on, in the event of a breach by Southern Un- projection" [*13] document prepared by CSG before ion--particularly early in the contract term--then CSG entering the agreement, which anticipated that CSG would have risked being unable to recover because of the would earn a total profit of $ 1,045,944 over the five-year uncertainty in calculating its lost profits. term of its contract with Southern Union. Because the jury ultimately awarded this exact amount to CSG as lost That CSG prepared a projection of its prices, and that profits, Southern Union argues that CSG was capable of the jury looked to the projection as a reasonable calcula- precisely estimating its damages, and therefore the liqui- tion for lost profits, does not satisfy Southern Union's dated damages provision is an unenforceable penalty from burden. The purpose of the document was not to define which CSG is not entitled to recover. The record, how- CSG's potential damages. Rather, as Vanlandingham ever, shows otherwise. testified, the projection was an internal tool used by CSG to outline the prices it anticipated charging for its The language of the discontinuance fee provision print-and-mail services, so that CSG could make an in- supports the trial court's determination that an award of formed bid in response to Southern Union's request for liquidated damages was proper because CSG's actual proposal. Vanlandingham also testified that the projection damages were not easy to estimate. The provision ex- [*16] was prepared with a "conservative accounting pressly states that it was included in the contract "because approach to pricing." CSG excluded several items from its of the difficulty in ascertaining CSG's actual damages for calculations because, prior to entering the contract, the a termination or other breach of the Agreement," and that parties had not assigned a value to these items. This in- "CSG would have been unwilling to provide the Services creased the difficulty of estimating damages. CSG's ex- at the fees set forth in the Agreement" had Southern Union pert confirmed the difficulty of this estimation by ex- not promised "certainty of revenue" by obligating itself to plaining several different ways that CSG's lost profits pay the discontinuance fee in the event that it breached the could be calculated, with the results ranging between contract. This provision was a bargained-for exchange, approximately $ 1 million to $ 4 million. After hearing negotiated and approved [*14] by both companies. this evidence, the jury determined that $ 1,045,944 was a When a provision is mutually bargained for by reasonable award of lost profits. But their verdict does not equally competent parties, we give deference to its en- establish that the estimation was either an easy or precise forcement. See Shel--Al Corp. v. American Nat'l Ins. one to make. Given the mutually agreed-upon terms of the Co., 492 F.2d 87, 94 (5th Cir. 1974). Stanley Mayer, provision, and the evidence in support of its plain mean- Southern Union's Chief Information Officer, testified that ing, we are unpersuaded by Southern Union's assertion the provision's terms were negotiated between attorneys that CSG's damages were easy to estimate. representing both companies. From the face of the con- tract, Southern Union understood at the time it entered the Reasonable Forecast of Just Compensation agreement that CSG's damages would be difficult to es- Page 5 2005 Tex. App. LEXIS 564, *

Southern Union seeks to satisfy the second part of its when the terms are mutually bargained for between burden by showing that the discontinuance fee provision equally competent parties. See Shel--Al Corp., 492 F.2d is an unenforceable penalty because the amount awarded at 94; Loggins Constr. Co. v. Stephen F. Austin State to CSG as liquidated damages is unreasonable. Southern Univ. Bd. of Regents, 543 S.W.2d 682, 685 (Tex. Union claims that this is established simply by the fact App.--Tyler 1976, writ ref'd). Southern Union's own wit- [*17] that the $ 2.1 million awarded to CSG pursuant to nesses testified that the language of the discontinuance fee the discontinuance fee is double the amount found by the provision was bargained for and intended by the parties, jury as lost profits. A liquidated damages provision will and that the amount awarded under the discontinuance fee be considered an unenforceable penalty if the amount was reasonable. In response to questions on awarded is so disproportionate to the actual or anticipated cross-examination, Stanley Mayer agreed that the provi- damages that it in effect punishes the breach, thereby sion was mutually negotiated, that he approved its terms, coercing performance of the contract by making it too and that he knew Southern Union would be responsible costly to not adhere to its terms. 24 Williston on Contracts for paying the fee if it breached the contract. When David § 65:3, at 249 (4th ed. 2002); see also Kothe v. R.C. Kvapil was asked whether he was aware at the time Taylor Trust, 280 U.S. 224, 226, 74 L. Ed. 382, 50 S. Ct. Southern Union filed suit against CSG "that the calcula- (1930). tion of the discontinuance fee would be approximately $ 2 million," he responded that, [*20] "Yeah. I think that's But Southern Union fails to cite, and we are unaware what it calculates to." Kvapil further agreed that Southern of, any cases in support of its claim that a two-to-one ratio Union understood the purpose of the discontinuance fee of liquidated-to-actual damages is unreasonable per se. was "to compensate CSG for all the work they have done There is, however, authority to the contrary. In Baker v. and all their expectation" and that this was "fair."

International Record Syndicate, Inc., our sister court approved a liquidated damages award of $ 51,000, which The jury was asked to determine what amount would was more than triple the $ 15,000 found as actual dam- be "fair and reasonable" to award CSG pursuant to the ages. 812 S.W.2d 53, 56 (Tex. App.--Dallas 1991, no discontinuance fee, and it responded "$ 2.1 million." A writ). The Texas Supreme Court also upheld a trial court's jury's findings on damages should be upheld if there is judgment awarding $ 790,000 in liquidated damages, sufficient evidence in the record to show that the amount which was twice the $ 395,000 found as actual damages. is fair and reasonable compensation. Dillard Dep't [*18] Sealock v. Texas Fed. Sav. & Loan Assoc., 755 Stores, Inc. v. Silva, 148 S.W.3d 370, 371, 48 Tex. Sup. Ct. S.W.2d 69, 70, 31 Tex. Sup. Ct. J. 511 (Tex. 1988). J. 63 (Tex. 2004). Here, the jury was entitled to make this finding based on both the express language of the contract Southern Union seeks to distinguish such cases by and on the testimony of Southern Union's witnesses. We urging that, even if it is normally reasonable to award find that this is sufficient evidence from which the jury liquidated damages in an amount that is double the actual could determine that it was reasonable to award CSG $ 2.1 damages, this ratio is unreasonable in a case where the million in liquidated damages. Southern Union's second amount at issue involves millions rather than thousands of issue is overruled. dollars, as here. Again, while no cases support Southern Union's claim, there is authority to the contrary. In a case Prejudgment Interest involving high-end commercial real estate, the Fifth Circuit held that a liquidated damages award of $ 5 mil- Southern Union urges in its third issue that, regard- lion was reasonable, despite an internal memorandum less of whether CSG is awarded lost profits or the dis- stating that the anticipated damages were $ 1.4 million. continuance fee, CSG is not entitled to recover prejudg- Thanksgiving Tower Partners v. Anros Thanksgiving ment interest on [*21] either award because both en- Partners, 64 F.3d 227, 232 (5th Cir. 1995). Thus, as a compass elements of future damages, and section matter of law, it is not unreasonable per se to award liq- 304.1045 of the finance code, as amended in 2004, spe- uidated damages in an amount that is double the actual cifically prohibits recovery of prejudgment interest on damages. Moreover, in this case, the reasonableness of awards of future damages. Tex. Fin. Code Ann. § CSG's award is supported by the record. 304.1045 (West Supp. 2004-05). CSG counters that the finance code does not prevent prejudgment interest in this The discontinuance fee expressly states that it "is not case because, by its express terms, the provision only a penalty" and that it "is a reasonable estimation of the applies to cases involving "wrongful death, personal in- actual damages which CSG would suffer if CSG were jury, or property damage." Tex. Fin. Code Ann. §§ [*19] to fail to receive the amount of processing busi- 304.101, .1045 (West 1998 & Supp. 2004-05). Southern ness as contemplated by this Agreement." Although par- Union asserts in response that, despite its express terms, ties cannot avoid a challenge to a liquidated damages section 304.1045 prevents prejudgment interest here provision simply by characterizing it as "reasonable," based on the Texas Supreme Court's holding that the such express language is instructive of the parties' intent Page 6 2005 Tex. App. LEXIS 564, *

statutory framework should be applied to all cases, not ing Co. v. Olcott, 744 S.W.2d 929, 932, 31 Tex. Sup. Ct. J. just those involving "wrongful death, personal injury, and 213 (Tex. 1988) (Wallace, J., dissenting) ("The Legisla- property damage." Johnson & Higgins of Tex., Inc. v. ture has given contracting parties notice that if they enter Kenneco Energy, Inc., 962 S.W.2d 507, 514, 530, 41 Tex. into and subsequently breach agreements in which dam- Sup. Ct. J. 268 (Tex. 1998). CSG argues, however, that ages are liquidated or otherwise ascertainable, they may even if section 304.1045 prevents prejudgment interest on be held liable for prejudgment interest. Parties to contracts future damages in a breach-of-contract case, it is still have always had this corresponding obligation and right . . proper for CSG to recover prejudgment interest [*22] on . ."). the amount awarded as the discontinuance fee because it We decline to reach the issue of whether the finance is an award of liquidated, not future, damages. We review code prevents recovery of prejudgment interest on future the trial court's award of prejudgment interest for an abuse damages in a breach-of-contract case because we agree of discretion. Purcell Const., Inc. v. Welch, 17 S.W.3d with CSG's argument that liquidated damages are distinct 398, 402 (Tex. App.--Houston [1st Dist.] 2000, no pet.). from future damages and, as such, section 304.1045 does Southern Union and CSG agree that the discontinu- not prohibit the recovery of prejudgment [*24] interest ance fee was intended to be a liquidated damages provi- on liquidated damages. The trial court therefore did not sion. Liquidated damages are given in lieu of actual abuse its discretion in awarding prejudgment interest to damages and thus they are not considered "future dam- CSG on the $ 2.1 million it recovered pursuant to the ages," even though aspects of the liquidated award may discontinuance fee. compensate the party for what would have otherwise been recovered as future losses. See Lafarge Corp. v. Wolff, Remittitur Inc., 977 S.W.2d 181, 188 n.13 (Tex. App.--Austin 1998, In its final issue, Southern Union asserts that the pet. denied); Eberts v. Businesspeople Personnel Servs., judgment should be modified to remit $ 140,000 of CSG's Inc., 620 S.W.2d 861, 864-65 (Tex. App.--Dallas 1981, no damages. The jury expressly stated in the verdict that if writ). Liquidated damages are distinct from future dam- Southern Union returned the software licenses provided to ages because the measure of liquidated damages is stipu- it by CSG, then CSG would be entitled to zero damages lated to before the occurrence of a breach and thus, unlike for the licenses. It is undisputed that Southern Union future damages, the amount of liquidated damages can be returned the licenses. The trial court awarded CSG $ immediately ascertained at the time of the breach. See 140,000 for the licenses, over Southern Union's objection.

Phillips, 820 S.W.2d at 788. [*23] It is permissible for a CSG does not oppose a remittitur of $ 140,000. Southern trial court to award prejudgment interest when a contract Union's fourth issue is sustained and we modify the "provides the conditions on which liability depends and . . judgment accordingly. In all other respects, the trial . fixes a measure by which the sum payable can be as- court's judgment is affirmed. certained with reasonable certainty." Wheat v. American Title Ins. Co., 751 S.W.2d 943, 944-45 (Tex. Jan P. Patterson, Justice App.--Houston [1st Dist.] 1988, no writ); see also Sealock, 755 S.W.2d. at 70 (upholding award of pre- judgment interest on liquidated damages); Perry Roof- Page 1

1 of 1 DOCUMENT SOUTHWESTERN BELL TELEPHONE COMPANY, Petitioner, v. EUGENE C.

DELANNEY, Respondent No. C-8282 SUPREME COURT OF TEXAS 809 S.W.2d 493; 1991 Tex. LEXIS 25; 34 Tex. Sup. J. 402

March 6, 1991, Delivered SUBSEQUENT HISTORY: [**1] Dissenting to publication of the 1980-1981 directory, DeLanney's Opinion of June 19, 1991. wife asked [**2] Bell to cancel the single line and add a third number to their existing rotary line. The Yellow PRIOR HISTORY: From Galveston County; Sixth Pages advertisement was billed to DeLanney's single line.

District. When that line was canceled, DeLanney's Yellow Pages advertisement was automatically deleted from the direc- tory due to Bell's internal procedures.

JUDGES: Thomas R. Phillips, Chief Justice. Concurring When the advertisement was not published as prom- Opinion by Justice Raul A. Gonzalez. Concurring Opin- ised, DeLanney sued Bell, alleging negligence and viola- ion by Justice Lloyd Doggett. Dissenting Opinion by tion of the Texas Deceptive Practices -- Consumer Pro- Justice Oscar H. Mauzy. tection [*494] Act ("DTPA"), TEX. BUS. & COM.

CODE §§ 17.41-17.63. Bell answered and urged by spe- OPINION BY: PHILLIPS cial exception that DeLanney's petition failed to state a cause of action for negligence. No ruling was made on this OPINION special exception, and DeLanney proceeded to trial on both claims. [*493] OPINION After DeLanney rested his case in chief, Bell moved We consider whether a cause of action for negligence for a directed verdict on both theories of liability. The trial is stated by an allegation that a telephone company neg- court granted Bell's motion as to the DTPA claim, but ligently failed to perform its contract to publish a Yellow denied it as to negligence. The remaining issues were Pages advertisement. The court of appeals held that the submitted to a jury. company's failure to perform its contract was a basis for recovery in tort as well as contract, and that the clause The jury found that Bell was negligent in omitting limiting the telephone company's liability could not apply DeLanney's advertisement from the Yellow Pages and to limit tort damages. 762 S.W.2d 772. We reverse the that such negligence was a proximate cause of damages to judgment of the court of appeals and render judgment in DeLanney. The jury assessed these damages at $ 109,000 favor of Bell. [**3] for lost profits in the past and $ 40,000 for lost profits in the future. After ordering a partial remittitur Facts which reduced future lost profits to $ 21,480, the trial court rendered judgment for DeLanney. Bell appealed.

Eugene DeLanney advertised his real estate business in the Galveston Yellow Pages for several years. For the Breach of Contract or Negligence 1980-1981 directory, he again contracted with Bell for a Yellow Pages advertisement. At this time DeLanney had The court of appeals, with one justice concurring and two business phones, a rotary line and a single line. Prior one justice dissenting, affirmed. A majority of the court Page 2 809 S.W.2d 493, *; 1991 Tex. LEXIS 25, **; 34 Tex. Sup. J. 402 held that Bell's cancellation of DeLanney's Yellow Pages ordinarily on the contract. See PROSSER AND KEETON advertisement was correctly submitted as a negligence at 656; 1 J. EDGAR, JR. & J. SALES, TEXAS TORTS claim. The dissenting justice argued that because AND REMEDIES § 1.03[4][b] at 1-36 (1990). We ap- DeLanney sought damages for breach of a duty created plied this analysis in Jim Walter Homes, [*495] Inc. v. under the contract, rather than a duty imposed by law, the Reed, 711 S.W.2d 617, 618 (Tex. 1986), where we wrote: claim sounded only in contract. We agree with the dissent.

The [**6] acts of a party may breach duties in tort or The majority below relied on Montgomery Ward & contract alone or simultaneously in both. The nature of the Co. v. Scharrenbeck, 146 Tex. 153, 157, 204 S.W.2d 508, injury most often determines which duty or duties are (1947), where we quoted from 38 AM. JUR. Negli- breached. When the injury is only the economic loss to the gence § 20 (1941) as follows: subject of a contract itself the action sounds in contract Accompanying every contract is a common-law duty alone. to perform with care, skill, reasonable expedience and Bell's duty to publish DeLanney's advertisement faithfulness the thing agreed to be done, and a negligent arose solely from the contract. DeLanney's damages, lost failure to observe any of these conditions is a tort, as well profits, were only for the economic loss caused by Bell's as a breach of the contract.In Scharrenbeck, the defendant failure to perform. Although DeLanney pleaded his action agreed to repair [**4] a water heater in plaintiff's home. as one in negligence, he clearly sought to recover the A short time after repair, the heater ignited the roof, de- benefit of his bargain with Bell. We hold that Bell's failure stroying the house and its contents. Although the contract to publish the advertisement was not a tort. 2 Under our obligated the defendant to put the water heater back in analysis in Reed, DeLanney's claim was solely in con- good working order, the law also implied a duty to the tract. defendant to act with reasonable skill and diligence in making the repairs so as not to injure a person or property Prosser and Keeton suggest seven generaliza- by his performance. In failing to repair the water heater tions as helpful in distinguishing between tort and properly, the defendant breached its contract. In burning contract liability. Those which are useful to this down plaintiff's home, the defendant breached a com- case include: (1) obligations imposed by law are mon-law duty as well, thereby providing a basis for tort obligations; (2) misfeasance or negligent af- plaintiff's recovery in tort. firmative conduct in the performance of a promise The principle recognized in Scharrenbeck has also generally subjects an actor to tort liability as well been recognized by commentators in this area. As one as contract liability for physical harm to persons prominent authority has explained: "Tort obligations are and tangible things; (3) recovery of intangible in general obligations that are imposed by law -- apart economic losses is normally determined by con- from and independent of promises made and therefore tract law; and (4) there is no tort liability for apart from the manifested intention of the parties -- to nonfeasance, i.e., for failing to do what one has avoid injury to others." W. KEETON, D. DOBBS, R. promised to do in the absence of a duty to act apart KEETON & D. OWEN, PROSSER AND KEETON ON from the promise made. PROSSER AND THE LAW OF TORTS § 92 at 655 (5th Ed. 1984) KEETON at 656-57. [hereinafter "PROSSER AND KEETON"]. If the de- [**7] DeLanney, however, did not request jury fendant's conduct -- such as negligently burning down a questions on breach of contract, and he did not object to house [**5] -- would give rise to liability independent of their omission. Because the jury was asked only questions the fact that a contract exists between the parties, the as to liability resulting from Bell's negligence, DeLanney plaintiff's claim may also sound in tort. Conversely, if the waived any claim for breach of contract. Ramos v. Fri- defendant's conduct -- such as falling to publish an ad- to-Lay, Inc., 784 S.W.2d 667, 668 (Tex. 1990) (the plain- vertisement -- would give rise to liability only because it tiff has the "burden to obtain affirmative answers to jury breaches the parties' agreement, the plaintiff's claim or- questions as to the necessary elements of his cause of dinarily sounds only in contract. 1 action") (citing TEX. R. CIV. P. 279).

1 Of course, some contracts involve special re- DeLanney did obtain an affirmative answer to the lationships that may give rise to duties enforceable question whether there was a disparity in bargaining as torts, such as professional malpractice. power between the parties in negotiating the Yellow Pages agreement. The court of appeals correctly deter- In determining whether the plaintiff may recover on a mined that disparity in bargaining power is irrelevant in a tort theory, it is also instructive to examine the nature of negligence suit. Perhaps the issue was submitted because the plaintiff's loss. When the only loss or damage is to the DeLanney pled that Bell's conduct was unconscionable subject matter of the contract, the plaintiff's action is under the DTPA. Because of his failure to comply with Page 3 809 S.W.2d 493, *; 1991 Tex. LEXIS 25, **; 34 Tex. Sup. J. 402 the notice requirements of the DTPA, however, feasance or nonfeasance, it is, in substance an action on DeLanney's entire cause of action under the DTPA, in- the contract, whatever may be the form of the pleading." cluding any claim of unconscionability, was dismissed by (citations omitted).Id. at 735. I believe that this formula- a directed verdict. For this reason, and because DeLanney tion comes closer than Scharrenbeck to [**10] stating a submitted no contract issues, the jury finding concerning general rule to distinguish contract from tort and that the disparity of [**8] bargaining power is of no effect. broad language in Scharrenbeck must be read in light of the particular circumstances of that case. The opinion in For the foregoing reasons, the judgment of the court Scharrenbeck is correct in its observation that a contract of appeals is reversed, and judgment is rendered that may be the occasion that brings the parties together, but it DeLanney take nothing. is the relationship or situation of the parties that gives rise to a duty in law, the breach of which is a tort. See Greater CONCUR BY: GONZALEZ; DOGGETT Houston Transp. Co. v. Phillips, 801 S.W.2d 523 (Tex. 1990). Had Montgomery Ward repaired the water heater CONCUR gratuitously, it would have owed Scharrenbeck a duty not to create a dangerous condition. See Colonial Sav. Ass'n v. CONCURRING OPINION Taylor, 544 S.W.2d 116, 119 (Tex. 1976); Fox v. Dallas Raul A. Gonzalez, Justice, concurring. Hotel Co., 111 Tex. 461, 240 S.W. 517, 520 (Tex. 1922); RESTATEMENT (SECOND) OF TORTS § 323 (1965).

I agree with the court that Bell's failure to publish the Thus the duty to not create a dangerous condition existed advertisement was not a tort and that it sounded solely in independent of any contractual relationship. contract. I also agree that DeLanney failed to discharge his burden to obtain affirmative findings to jury questions In summary, when a party must prove the contents of on the contract. However, I do not fault the court of ap- its contract and must rely on the duties created therein, the peals for its confusion. We have muddled the law of action is "in substance an action on the contract, even "contorts" and an all encompassing bright line demarca- though it is denominated an action for negligent perfor- tion of what constitutes a tort distinct from breach of mance of the contract." Bernard [**11] Johnson, Inc. contract has proven to be elusive. See generally W. v. Continental Constructors, Inc., 630 S.W.2d 365, 368 PROSSER & W. KEETON, THE LAW OF TORTS § 1 (Tex. App. -- Austin 1982, writ ref'd n.r.e.) (emphasis in (5th ed. 1984); see also American Nat'l Petro. Co. v. original).

Transcontinental Gas Pipe Line Corp., 798 S.W.2d 274, 280 (1990) (Gonzalez, J., dissenting). Bell's Duty DeLanney and the court of appeals rely heavily on the The majority in the court of appeals also suggested statement in Montgomery Ward & Co. v. Scharrenbeck, that negligence was a proper theory because Bell care- 146 Tex. 153, 204 S.W.2d 508, 510 (Tex. 1947), that: lessly deleted DeLanney's advertisement while making changes to his telephone service. In this manner, the court Accompanying every contract is a common-law duty to endeavored to connect the omission of the Yellow Pages perform with [**9] care, still, reasonable expedience advertisement to Bell's duty of public service. and faithfulness the thing agreed to be done, and a neg- The gravamen of DeLanney's complaint, however, ligent failure to observe any of these conditions [*496] was not with his telephone service, which was changed is a tort, as well as a breach of the contract. according to request and apparently to his satisfaction.

Despite this broad language, not every breach of Rather, his complaint was with Bell's failure to publish his contract accompanied by negligence creates a cause of advertisement as promised, and this was a matter of pri- action in tort. In International Printing Pressman & As- vate contract. A-ABC Appliance, Inc. v. Southwestern sistants' Union v. Smith, 145 Tex. 399, 198 S.W.2d 729, Bell Tel. Co., 670 S.W.2d 733, 735 (Tex. App. -- Austin (Tex. 1946), we acknowledged that no single concise 1984, writ ref'd n.r.e.). Although Bell is a regulated public rule will define the rights of parties in every situation. We utility, all of its functions are not in the realm of public nonetheless wrote: service. The "printing, distribution, or sale of advertising in telephone directories" is not a public service function.

Generally speaking, "actions in contract and in tort TEX. REV. CIV. STAT. ANN. art. 1446c, § 3(s) (Vernon are to be distinguished in that an action in contract is for Supp. 1991). the breach of a duty arising out of a contract either express or implied, while an action in tort is for a breach of duty Limitation of Liability imposed by law. . . ." "If the action is not maintainable [**12] The connection drawn by the court of ap- without pleading and proving the contract, where the gist peals between the Yellow Pages advertisement and of the action is the breach of the contract, either by mal- DeLanney's telephone service also affected the court's Page 4 809 S.W.2d 493, *; 1991 Tex. LEXIS 25, **; 34 Tex. Sup. J. 402 view regarding the validity of a limitation of liability at 735. I therefore believe that the majority view presents clause contained in the contract between Bell and the sounder approach.

DeLanney. This clause provided: Unconscionability The applicant agrees that the telephone company shall not be liable for errors in or omissions of the direc- Even though the Yellow Pages is a matter of private tory advertising beyond the amount paid for the directory contract, DeLanney may still recover the full value of the advertising omitted in which error occurs for the issue life consequential damages caused by Bell's breach of con- of the directory involved.DeLanney argued that the clause tract if the clause limiting Bell's liability is unenforceable was unenforceable and, in the context of DeLanney's because a court may deny enforcement of an uncon- [*497] negligence claim, the court of appeals agreed. scionable clause or contract. See Tri-Continental Leasing 762 S.W.2d at 776. Corp. v. Burns, 710 S.W.2d 604, 609 (Tex. App. -- Hou- ston [1st Dist.] 1985, [**15] writ ref'd n.r.e.) (Levy, J., In an apparent attempt to resolve conflicting deci- dissenting); see also Universal C.I.T. Credit Corp. v. sions, the court of appeals suggested that the clause might Daniel, 150 Tex. 513, 243 S.W.2d 154, 159-60 (Tex. be enforced to limit a claim for breach of contract, see 1951); RESTATEMENT (SECOND) OF CONTRACTS § Wade v. Southwestern Bell Tel. Co., 352 S.W.2d 460 (Tex. (1979); TEX. BUS. & COM. CODE ANN. § 2.302 Civ. App. -- Austin 1961, no writ), but could not be ap- (Tex. UCC)(Vernon 1968). We must consider then plied to limit liability for negligence. See Reuben H. whether the clause limiting Bell's liability for errors or Donnelly Corp. v. McKinnon, 688 S.W.2d 612 (Tex. App. omissions to the cost of the Yellow Pages advertising is -- Corpus Christi 1985, writ ref'd n.r.e.); see also Helms v. unconscionable under the circumstances of this case.

Southwestern Bell Tel. Co. [**13] , 794 F.2d 188 (5th Cir. 1986). The conflict between Wade and McKinnon DeLanney argues that it is. Because he had no mirrors a larger split of authority regarding the validity of meaningful choice and no bargaining power in the trans- such limitation of liability clauses. See Annotation, Lia- action, he contends that his contract with Bell was one of bility of Telephone Company for Mistakes in or Omissions adhesion. Yellow Pages was the only commercial tele- From its Directory, 47 A.L.R. 4th 882 (1986). phone directory in DeLanney's market area at the time.

The only way to buy space in this directory was on Bell's McKinnon follows a minority line of cases which terms dictated through a non-negotiable, standardized refuse to enforce such provisions. See Morgan v. South contract. DeLanney concludes that his inability to nego- Cent. Bell Tel. Co., 466 So.2d 107 (Ala. 1985); Allen v. tiate more favorable terms rendered the limitation of lia- Michigan Bell Tel. Co., 61 Mich. App. 62, 232 N.W.2d bility clause unenforceable. In support of this argument, (Mich. Ct. App. 1975); Rozeboom v. Northwestern he relies on a jury finding that a disparity in bargaining Bell Tel. Co., 358 N.W.2d 241 (S.D. 1984); Discount power existed between himself and Bell when the contract Fabric House, Inc. v. Wisconsin Tel. Co., 117 Wis. 2d was made. 1 587, 345 N.W.2d 417 (Wis. 1984). The unifying theme of these decisions is that directory advertising is a unique The following question was submitted to the advertising medium inextricably linked to the telephone jury over Bell's objections: company's public service function. Thus on the premise of Bell's status as a public utility monopoly, these courts Do you find from a preponderance of the have rejected the limitation of liability as contrary to the evidence that there was a disparity of bargaining public interest or unconscionable. power between the plaintiff and the defendant in negotiating the contract for Yellow Page adver- A larger number of jurisdictions, however, have up- tising. held similar liability limitation clauses for directories. In [**14] Helms v. Southwestern Bell Telephone Co., the Instruction: A disparity of bargaining power Fifth Circuit lists decisions from twenty-six states which exists when one party has no real choice in ac- have upheld similar clauses. Helms, 794 F.2d at 192 n.9; cepting a agreement limiting the liability of the see generally Annotation, Liability of Telephone Com- other party. pany for Mistakes in or Omissions From its Directory, 47 The jury found there was a disparity of bar- A.L.R. 4th 882. These decisions have generally recog- gaining power. nized Yellow Pages advertising to be a matter of private contract, rather than a public service function. The ma- [**16] [*498] Bell responds that the validity of jority view is compatible with Texas law, which also the clause limiting liability was not a question of fact for excludes the sale of advertising in directories from Bell's the jury, but one of law for the court. I agree. 2 This is public service function. TEX. REV. CIV. STAT. ANN. clearly the case under the Uniform Commercial Code. art. 1446c, § 3(s); see also A-ABC Appliance, 670 S.W.2d TEX. BUS. & COM. CODE § 2.302 comments 1 & 3 Page 5 809 S.W.2d 493, *; 1991 Tex. LEXIS 25, **; 34 Tex. Sup. J. 402 (Tex. UCC)(Vernon 1968); G. WALLACH, THE LAW 3 The comment to UCC section 2.302 provides: OF SALES UNDER THE UNIFORM COMMERCIAL The basic test is whether, in light of the gen- CODE para. 5.04 at 5-5 (1981); see also RESTATEMENT eral commercial background and the commercial SECOND OF CONTRACTS § 208, comment f (1979). needs of the particular trade or case, the clauses Although the UCC does not expressly apply to service involved are so one-sided as to be unconscionable transactions, such as the sale of advertising in the Yellow under the circumstances existing at the time of the Pages, the provision pertaining to unconscionability "has making of the contract. . . . The principal is one of been applied to numerous transactions outside the cov- the prevention of oppression and unfair surprise . . erage of Article 2 of the Code." J. CALAMARI & J. . and not of disturbance of allocation of risks be- PERILLO, THE LAW OF CONTRACTS § 9-39 at 420 cause of superior bargaining power. (3d Ed. 1987); see also J. WHITE & R. SUMMERS, THE UNIFORM COMMERCIAL CODE § 4-32 at 200 (3d ed. Tex. Bus. & Com. Code Ann. § 2.302 com- 1989). ment 1.

4 A comment to section 208 of the Restatement Here we are concerned with unconscionability provides: under the common law as distinguished from unconscionability under the DTPA. The DTPA The determination that a contract or term is or is not unconscionable is made in the light of its defines "unconscionable action or course of ac- setting, purpose and effect. Relevat factors include tion" and, unlike the common law, makes it an weaknesses in the contracting process like those issue of fact for the jury. Tex. Bus. & Com. Code involved in more specific rules as to contractual Ann. § 17.45 (5); see also Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex. 1985). capacity, fraud, and other invalidating causes; the policy also overlaps with rules which render par- [**17] I also agree with Bell that bargaining dis- ticular bargains or terms unenforceable on parity alone does not establish unconscionability. Com- grounds of public policy. ments to the UCC indicate that the principle of RESTATEMENT (SECOND) OF CON- unconscionability is "not of disturbance of allocation of risks because of superior bargaining power." TEX. BUS. TRACTS § 208 comment a (1979). & COM. CODE ANN. § 2.302 comment 1. A comment to [**19] Although many factors are relevant and no the Restatement provides that a "bargain is not uncon- single formula exists, 5 proof of a claim [*499] of scionable merely because the parties to it are unequal in unconscionability begins with two broad questions: (1) bargaining position, nor even because the inequality re- How did the parties arrive at the terms in controversy; and sults in an allocation of risks to the weaker party." RE- (2) Are there legitimate commercial reasons which justify STATEMENT (SECOND) OF CONTRACTS § 208 com- the inclusion of these terms? Mallor, Unconscionability in ment d. The Code and Restatement thus agree that a dis- Contracts Between Merchants, 40 SW. L.J. 1065, 1072 parity in bargaining power, while relevant, is not the (1986); 1 J. WHITE & R. SUMMERS, UNIFORM litmus test for unconscionability. See Wade v. Austin, 524 COMMERCIAL CODE, § 4-3, 4-4 (3d ed. 1988); J.

S.W.2d 79, 85-86 (Tex. Civ. App. -- Texarkana 1975, no CALAMARI & J. PERILLO, THE LAW OF CON- writ). Something more must be shown. TRACTS, § 9-40 (3d. 1987); R. HILLMAN, J.

How much more is a difficult question, however, MCDONNELL & S. NICKLES, COMMON LAW AND because the term unconscionable has no precise legal EQUITY UNDER THE UNIFORM COMMERCIAL CODE para. 6.02 [2][b-d] (1985); Williams v. Walk- definition. Courts and commentators have struggled with er-Thomas Furniture Co., 121 App. D.C. 315, 350 F.2d its meaning. In Wade v. Austin, the court wrote that a (DC Cir. 1965). The first question, often described as determination of unconscionability must be made from "the entire atmosphere in which the agreement was the procedural aspect of unconscionability, 6 is concerned made." Id. at 86. One authority has [**18] written that with assent and focuses on the facts surrounding the bargaining process. Mallor, Unconscionability in Con- unconscionability cannot be defined because "it is not a tracts Between Merchants, 40 SW. L.J. 1065, 1072 concept, but a determination to be made in light of a (1986). The second question, often described as the sub- variety of factors not unifiable into a formula." 1 J. stantive aspect of unconscionability, is concerned with the WHITE & R. SUMMERS, UNIFORM COMMERCIAL CODE § 4-3 at 203 (3d ed. 1988)(emphasis in original). fairness of the resulting agreement. Id. The UCC 3 and Restatement 4 recognize the doctrine of The Supreme Court of Kansas has identified unconscionability, but provide only a rough outline of its ten factors as useful aids in determining meaning. unconscionability questions. They are: (1) the use of printed form contracts drawn by the party in the Page 6 809 S.W.2d 493, *; 1991 Tex. LEXIS 25, **; 34 Tex. Sup. J. 402 strongest economic position, which establish in- vice, Board of Realtors, yard signs, radio and television. dustry-wide standards offered on a take it or leave After weighing all of the above, I am not convinced that it basis; (2) excessive price; (3) a denial of basic the clause limiting Bell's liability for errors or omissions rights and remedies to a consumer buyer; (4) the to the cost of the Yellow Pages advertising is uncon- inclusion of penalty clauses; (5) the circumstances scionable. surrounding the execution of the contract, in- For the foregoing reasons, I concur with the judg- cluding commercial setting; (6) the hiding of ment. disadvantageous clauses in a mass of fine print or in inconspicuous places; (7) phrasing clauses in CONCURRING OPINION language that is incomprehensible to a layman or that diverts his attention from the problems they Lloyd Doggett, Justice raise; (8) a overall imbalance in the obligations I concur in the court's judgment but write separately and rights imposed by the bargain; (9) exploitation because it should, and could, be based solely upon our of the underprivileged, unsophisticated, unedu- holding in Jim Walter Homes, Inc. v. Reed, 711 S.W.2d cated, and the illiterate; and (10) inequality of bargaining or economic power. Wille v. South- 617, 618 (Tex. 1986). Today's brief writing concerning the western Bell Tel. Co., 219 Kan. 755, 549 P.2d 903, nature of torts and contracts unnecessarily adds more confusion than clarity.

906-07 (Kan. 1976).

6 As & framework for decision commentators [*500] The court does recognize that in some as and courts have generally followed the analysis yet unspecified instances a tort action may lie between proposed by Professor Arthur Leff. Leff, contracting parties. It appropriately observes that a tort unconscionability and the Code -- The Emperor's action may arise based upon a number of relationships New Clause, 115 U. Pa. L. Rev. 485, 487 (1967). that could be created by contract. Although the court Professor Leff labelled the different types of offers only one example of a contractual relationship unconscionability as "substantive" and "proce- [**22] creating duties the breach of which gives rise to dural," distinguishing the content of the contract actions both in tort and contract, S.W.2d at n.1 from the process by which the allegedly offensive (the relationship between a professional and client), our terms found their way into the agreement. developing jurisprudence recognizes others. See. e.g., Viles v. Security Nat'l Ins. Co., 788 S.W.2d 566, 567 (Tex. [**20] DeLanney concentrates on the procedural 1990) (relationship between insured and insurer). In ad- aspect, emphasizing the absence of any meaningful choice dition, the court correctly recognizes that the breach of in the bargain. Bell, on the other hand, contends that the certain common-law duties creates liability in tort; the provision was nevertheless fair and reasonable under the existing commercial circumstances. existence of a contract does not alter those duties.

Bell submits that its contract merely sought to real- It is thus incumbent upon the trial courts not to begin and end their inquiry with the contract but to examine the locate the commercial risk inherent in its business in a circumstances surrounding the parties' relationship, in- reasonable manner. This risk existed because the directory cluding any duties imposed by law, in determining was to run for one year and mistakes could not be cor- whether a tort action may be maintained. rected during this period. Bell contends that the enormous benefit derived from Yellow Pages advertising by some subscribers when compared to the relatively modest DISSENT BY: MANZY amount charged by Bell, coupled with Bell's inability to mitigate damages, created a business risk it needed to DISSENT reallocate. This it attempted to do by limiting its liability.

DISSENTING OPINION Bell further submits that the clause limiting liability was not one-sided or grossly unfair because it benefitted Oscar H. Manzy, Justice, dissenting. both parties. It benefitted the subscriber by keeping Yel- I respectfully dissent. The contractual relationship low Pages rates low in relation to other types of adver- creates duties not only under contract law, but under tort tising and in relation to the return expected by the sub- law as well. A contract may create the state of things scriber. It benefitted Bell by shielding it from a risk of which furnishes the occasion for the tort. Montgomery potential liability which was out of proportion [**21] to Ward & Co. v. Scharrenbeck, 146 Tex. 153, 157, 204 the consideration charged by Bell. Although it would not S.W.2d 508, 510 (1947). negotiate, Bell argues that DeLanney had other suitable advertising alternatives such as newspapers, magazines, Every contract is accompanied by a duty [**23] to direct mail, phone solicitation, the Multiple Listing Ser- perform that contract with care, skill, reasonable expedi- Page 7 809 S.W.2d 493, *; 1991 Tex. LEXIS 25, **; 34 Tex. Sup. J. 402 ence and faithfulness, and the negligent failure to observe even contemplated within the telephone service contract. any of the conditions imposed by this duty constitutes a It was the negligent performance of the telephone service tort. Id. In determining whether the action is one in con- contract that the jury found was the proximate cause of tract or tort or both, the court must look to the substance of DeLanney's damages. 1 Southwestern Bell breached its the cause of the action, and not necessarily the manner in duty to perform the telephone service contract with care, which it was pleaded. Jim Walter Homes, Inc. v. Reed, skill and faithfulness. 711 S.W.2d 617, 617-18 (Tex. 1986)(citing International Printing Pressman and Ass't Union v. Smith, 145 Tex. 1 In its answers to the special issues, the jury 399, 198 S.W.2d 729 (Tex. 1946)). Where the injury in- specifically found Bell to be negligent. volves failure to perform a contract and the only loss is Issue (1)(a) Whether Bell was negligent in that economic loss that is the substance of the contract failing to inform DeLanney that the installation of itself, the action sounds only in contract and not in tort. a rotary system would cancel the Yellow Pages Jim Walter Homes, 711 S.W.2d at 618. listing.

However, this case not only involves the failure to Issue (1)(b) Whether Bell was negligent in perform a contract, it also involves the negligent perfor- failing to adequately train and inform its em- mance of a second contract. DeLanney had two contracts ployees that a order to cancel one of the telephone with Bell. For several years he had contracted with Bell numbers would cancel the Yellow Pages adver- for Yellow Pages advertisements. Prior to the incident the tisement; and subject of this lawsuit, he had already contracted with Bell for a 1980-81 Yellow Pages listing. In addition [**24] to Issue (i)(c) Whether Bell was negligent in the Yellow Pages advertisement contract, DeLanney had a failing to recognize that the automatic cancellation separate contract with Bell for telephone service. of the Yellow Pages advertisement would occur when the billing procedure was changed.

Prior to the publication of the 1980-81 telephone di- rectory, DeLanney contracted to alter his telephone ser- The jury further found that each of these acts vice by canceling his single line and adding a third num- of negligence proximately caused DeLanney's ber to his two-number rotary line. When the alteration of injuries. the telephone service was requested, the separate contract for the Yellow Pages advertisement was not modified or [**25] This case was correctly tried in the trial court, and the jury's verdict formed the basis of the trial even mentioned by either party. Cancellation of the single court's judgment, which the court of appeals affirmed. telephone line, pursuant to the telephone service contract, resulted in the cancellation of the Yellow Pages adver- I would affirm the judgment of the court of appeals. tisement because the advertisement was billed to that number. The Yellow Pages advertisement itself, was not Oscar H. Mauzy, Justice.

Page 1 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

SP TERRACE, L.P. AND TYEE MANAGEMENT, LLC, Appellants v. MERITAGE HOMES OF TEXAS, LLC, Appellee NO. 01-09-00155-CV COURT OF APPEALS OF TEXAS, FIRST DISTRICT, HOUSTON 334 S.W.3d 275; 2010 Tex. App. LEXIS 8448

October 21, 2010, Opinion Issued SUBSEQUENT HISTORY: Released for Publica- extended the deadline, or alternatively that its compliance tion April 6, 2011. was excused. It claims fact issues exist on its affirmative defenses of oral modification, waiver, delay and inter- PRIOR HISTORY: [**1] ference by Meritage, on the amount of attorney's fees, and On Appeal from the 165th District Court, Harris on its counterclaim against Meritage. We conclude [**2] County, Texas. Trial Court Cause No. 2007-43637. that SP Terrace raises a fact issue on the issues of waiver SP Terrace, L.P. v. Meritage Homes of Tex., LLC, 2010 and delay, but not as to contract modification or inter- Tex. App. LEXIS 3438 (Tex. App. Houston 1st Dist., May ference. We therefore reverse the trial court's summary 6, 2010) judgment and remand the case for trial. We grant rehear- ing and withdraw our opinion and judgment dated May 6, 2010, to address an argument that SP Terrace raises in its COUNSEL: For APPELLANT: Michael C. O'Connor, motion for rehearing. Our disposition is unchanged.

O'Connor, Craig, Gould & Evans, P.C., Houston, TX.

Background For APPELLEE: David Watkin Jones, Beck, Redden & Secrest, LLP, Houston, TX. Underlying Facts SP Terrace entered into an earnest money contract JUDGES: Panel consists of Chief Justice Radack and with Meritage to develop and sell ninety-six lots in a Justices Bland and Massengale. proposed Harris County subdivision. The development plan required small and narrow lots, and Meritage was OPINION BY: Jane Bland one of a few builders who could construct houses to fit the particular lot sizes. The contract terms required SP Ter- OPINION race to improve the overall subdivision. In particular, it required SP Terrace to file a subdivision plat with Harris [*279] OPINION ON REHEARING County by a December 31, 2005 substantial completion In this dispute over an earnest money contract to deadline. After substantial completion, Meritage would develop a plat of real estate, the trial court granted sum- then purchase the lots in a series of transactions. The total mary judgment in favor of Meritage Homes of Texas, purchase price was $ 2,688,000. Meritage deposited ten LLC (Meritage) on its breach of contract claim against SP percent of this price, $ 268,000, with SP Terrace as ear- Terrace, LP, and Tyee Management, LLC (collectively, nest money. If SP Terrace did not achieve substantial SP Terrace). The trial court summarily rejected SP Ter- completion [**3] by December 31, 2005, Meritage race's counterclaims for breach of contract against could terminate the contract and recover its earnest money Meritage. deposit. But, if Meritage delayed SP Terrace's perfor- mance of its contractual obligations, the substantial com- The contract called for SP Terrace to file a subdivi- pletion deadline would "be extended to the extent of any sion plat by December 31, 2005. SP Terrace concedes that such delay." it did not meet this deadline. But it argues that the contract Page 2 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

On November 30, representatives from Meritage and noted that SP Terrace failed to present any evidence that SP Terrace met to discuss [*280] the project. At this the amount of liquidated damages was an unreasonable point, SP Terrace was ready to file the subdivision plat. forecast of the amount of its damages.

Meritage asked for changes to the plat, and it requested SP Terrace responded with the Todd and Smalley that SP Terrace postpone filing the plat to accommodate affidavits to show that fact issues existed regarding (1) an those changes. SP Terrace agreed, but informed Meritage agreement to extend the substantial completion deadline; that a six-month extension of the substantial completion (2) whether Meritage, through its oral agreement to ex- deadline would be necessary to address these and any tend the deadline and its continued work with SP Terrace future changes to the development. According to Tyler after December 31, 2005, waived the deadline; and (3) Todd, the president of Tyee Management, SP Terrace's whether Meritage breached its duties to cooperate with SP general partner, and Kelly Smalley, the project manager, Terrace and to not delay or interfere with [**6] SP the parties orally agreed to extend the substantial com- Terrace's performance of its contractual obligations. SP pletion deadline, and the representatives of Meritage Terrace also argued that the liquidated damages provision agreed to sign a written extension memorializing the oral of the contract, which limited SP Terrace's recovery to modification. Smalley mailed a written agreement to retention of the earnest money deposit, was unenforceable Meritage before December 31, 2005. She never received a penalty because it hypothetically would allow the forfei- response. ture of the deposit due to any breach by Meritage, in- The parties continued to work together to make cluding a trivial one. changes [**4] and improvements to the development [*281] The trial court granted Meritage's motions. into early February 2006. But on February 3, Meritage Shortly thereafter, Meritage moved for entry of a final informed SP Terrace that, due to SP Terrace's failure to judgment, asking the trial court to award it $ 268,000 in meet the substantial completion deadline, Meritage was damages, $ 71,170.50 in attorney's fees incurred in pros- terminating the contract and demanding the return of its ecuting its claims in the trial court proceedings, $ 40,000 earnest money deposit. in attorney's fees if SP Terrace appeals to an intermediate appellate court, and an additional $ 27,500 in attorney's Procedural History fees if Meritage ultimately prevails after full briefing and After SP Terrace refused to return the earnest money oral argument to the Texas Supreme Court. deposit, Meritage sued for breach of contract. SP Terrace SP Terrace moved the trial court to reconsider the counterclaimed for breach of contract, alleging that summary judgment. SP Terrace attached excerpts from Meritage (1) delayed SP Terrace's performance, (2) failed the deposition of Michael Pizzitola, taken after the orig- to cooperate with SP Terrace, and (3) breached their oral inal submission of the summary judgment motions, to agreement to extend the substantial completion deadline further support its contentions. SP Terrace also attached by six months, all of which entitled SP Terrace to retain the affidavit of its counsel of record opposing Meritage's the earnest money deposit and recover actual damages in requested amount [**7] of attorney's fees. The trial addition to the earnest money it kept. court's docket sheet includes the following entry for De- Meritage moved for traditional and no-evidence cember 8, 2008: "D. (seller) Motion for leave of court to summary judgment on its claims against SP Terrace and file additional evidence granted." The trial court did not on SP Terrace's counterclaim. Meritage contended that memorialize the docket entry in any order, even though the parties never agreed to extend the substantial com- SP Terrace submitted a proposed order and requested that pletion deadline. Meritage argued that SP Terrace's the trial court sign it. The trial court entered a final counterclaim failed as a matter of law because it did not judgment in favor of Meritage, awarding the $ 268,000 state a claim for affirmative relief and the liquidated earnest money deposit as damages and the full amount of damages provision in the contract precluded [**5] SP attorney's fees requested by Meritage.

Terrace from recovering actual damages in excess of the earnest money deposit. Meritage contended that SP Ter- Discussion race's waiver defense failed because Meritage never re- nounced its right to terminate the contract, and the for- Standard of Review ty-eight days that had passed between the substantial We review de novo the trial court's grant of a motion completion deadline and the date Meritage demanded the for summary judgment. Provident Life & Accid. Ins. Co. return of its earnest money deposit was not long enough to v. Knott, 128 S.W.3d 211, 215-16 (Tex. 2003). After an show that Meritage intended to yield its right to terminate. adequate time for discovery, a party may move for Meritage argued that any oral modification of the contract no-evidence summary judgment if there is no evidence of is unenforceable because it materially altered the obliga- one or more essential elements of a claim or defense on tions of the underlying written contract. Meritage also Page 3 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

which the adverse party bears the burden of proof at trial. Dist.] 1990, no writ) (citing Energo Int'l Corp. v. Modern TEX. R. CIV. P. 166a(i). Once a party moves for Indus. Heating, Inc., 722 S.W.2d 149, 151-52 (Tex. no-evidence summary judgment, the burden shifts to the App.--Dallas 1986, no writ) ("Consequently, there is no non-movant to present evidence raising a genuine issue of indication in the record that permission of the court was material fact on each element specified in the motion. requested or obtained to file the amended answer and that Mack Trucks, Inc. v. Tamez, 206 S.W.3d 572, 582 (Tex. the amended answer was properly before the court.")). SP 2006). [**8] We review the evidence in the light most Terrace contends that our holding in Dolcefino supports favorable to the non-movant, crediting favorable evidence its argument despite these cases. In Dolcefino, however, if reasonable jurors could, and disregarding contrary ev- the trial judge stated on the record at the motion for re- idence unless reasonable jurors could not. Mann Frank- consideration hearing that "the court will include the fort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d evidence offered today in the summary judgment record.

844, 848 (Tex. 2009) (citing City of Keller v. Wilson, 168 The court, even taking this evidence into the record, de- S.W.3d 802, 827 (Tex. 2005)). nies Plaintiff's motion for new trial." See Dolcefino, 126 S.W.3d at 134. We noted that the trial judge's statement on When we construe a contract, we must "ascertain and the record indicated that the judge had accepted the evi- give effect to the parties' intentions as expressed in the dence as belatedly offered summary judgment evidence. document." Frost Nat'l Bank v. L & F Distribs., Ltd., 165 See id. Here, in contrast, SP Terrace requested that the S.W.3d 310, 311-12 (Tex. 2005) (per curiam). We con- trial court sign an order granting leave to file the addi- sider the contract as a whole in order to give effect to all tional evidence that it had attached to [**11] the motion provisions of the contract. See id. at 312. We give con- for reconsideration. It attached the docket sheet and a tractual terms their plain, ordinary, and generally accepted proposed order, but the trial court never entered the order. meaning unless the contract shows that the parties in- Following Miller, we decline to extend the Dolcefino tended a different meaning to control. See Heritage Res. v. analysis to docket sheet entries, and thus hold that this NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). evidence is not part of the summary judgment record.

Late-Filed Summary Judgment Evidence In a similar vein, Meritage, in its response to SP Terrace's motion for reconsideration, attached excerpts SP Terrace initially contends that the trial court erred from the deposition of Tyler Todd that it had not previ- in granting summary judgment because the late-filed ously filed with the trial court. Meritage did not request deposition testimony of Meritage's Michael Pizzitola leave of court to late-file these excerpts from Todd's creates fact issues. Texas Rule of Civil Procedure 166a(c) deposition, and thus these excerpts do not form part of the provides that "[e]xcept on leave of [**9] court, the ad- summary judgment record. See TEX. R. CIV. P. 166a(c); verse party, not later than seven days prior to the day of Dolcefino, 126 S.W.3d at 133. hearing may file and serve opposing affidavits or other written response." TEX. R. CIV. P. 166a(c). A trial court Oral Modification of the Substantial Completion Dead- may accept late-filed summary judgment evidence, but it line must affirmatively indicate that it accepted or considered that [*282] evidence. See Stephens v. Dolcefino, 126 Turning to the merits, SP Terrace first contends that S.W.3d 120, 133-34 (Tex. App.--Houston [1st Dist.] 2003, an oral modification to the contract exists and thus it is not pet. denied). If no order in the record indicates that the liable for any breach associated with missing the De- court gave leave to file untimely evidence, then we pre- cember 31 deadline. Under the statute of frauds, a contract sume that the trial court did not consider the evidence. See for the sale of real estate must be in writing and signed by Benchmark Bank v. Crowder, 919 S.W.2d 657, 663 (Tex. the party charged with compliance with its terms. TEX. 1996); Dixon v. E.D. Bullard Co., 138 S.W.3d 373, 375-76 BUS. & COM. CODE ANN. § 26.01(b)(4) (Vernon 2009). (Tex. App.--Houston [14th Dist.] 2004, pet. granted, Generally, if a contract falls within [**12] the statute of judgm't vacated w.r.m.); Farmer v. Ben E. Keith Co., 919 frauds, then a party cannot enforce any subsequent oral S.W.2d 171, 176 (Tex. App.--Fort Worth 1996, no writ). material modification to the contract. See Dracopoulas v. Rachal, 411 S.W.2d 719, 721 (Tex. 1967); see also Walker SP Terrace relies on the trial court's docket entry as v. Tafralian, 107 S.W.3d 665, 670 (Tex. App.--Fort Worth sufficient indication that the trial court granted it leave to 2003, pet. denied). late-file the Pizzitola deposition as summary-judgment evidence. We previously have held, however, that a In Dracopoulas, the Texas Supreme Court held un- docket entry "forms no part of the record we may con- enforceable an oral modification [*283] that extended sider; it is a memorandum made for the trial court and the time for performance indefinitely. See Dracopoulas, clerk's convenience. [**10] This rule results, in part, 411 S.W.2d at 722. The court reasoned that the termina- from the inherent unreliability of docket entries." Miller v. tion date of the contract was the "hinge upon which still Kendall, 804 S.W.2d 933, 944 (Tex. App.--Houston [1st other contractual rights and duties turn," and extending Page 4 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

the termination date indefinitely would destroy other It is thus undisputed that the parties never signed a written contractual provisions that depended on the termination agreement to extend the deadline beyond December 31. In date to become operative. See id.; see also King v. addition, SP Terrace viewed the extension of time to be a Texacally Joint Venture, 690 S.W.2d 618, 620 (Tex. material alteration to the contract, sufficient to excuse it App.--Austin 1985, writ ref'd n.r.e.) ("It has been held that from further performance, stating to the trial court: attempted alteration of the time for performance in real Meritage agreed to extend the substan- estate contracts is a material alteration." (citing Vendig v. tial completion date and/or caused a de- Traylor, 604 S.W.2d 424 (Tex. Civ. App.--Dallas 1980, fault or delay in the substantial comple- writ ref'd n.r.e.))). But see Triton Comm'l Props., Ltd. v. tion. Meritage then refused to perform Norwest Bank Tex., N.A., 1 S.W.3d 814, 819 (Tex. App.-- under the Contract by its February 3, 2006 Corpus Christi 1999, pet. denied) (holding that extending letter. This evidence is sufficient to show a [**13] the time for performance does not, by itself, ma- prior or anticipatory [**15] breach by terially alter the underlying obligations, even if the con- Meritage, which would excuse further tract would otherwise terminate). In the right circum- performance by SP Terrace. stances, an extension for the time for performance can be a material alteration.

SP Terrace thus asserts that Meritage's breach of the al- This case presents one of those circumstances. Even leged oral extension of the substantial completion dead- if the oral modification extending performance would not line was sufficient to excuse any further performance by ordinarily materially alter the underlying written contract, SP Terrace. The modification here is a [*284] material when a party relies on the modification to assert that the term--as such, it is unenforceable because it was never other party is in material breach to excuse further per- reduced to writing. See Walker, 107 S.W.3d at 670; King, formance, the modification then becomes material and 690 S.W.2d at 620. We hold that the trial court correctly unenforceable unless in writing. See Walker, 107 S.W.3d granted summary judgment on SP Terrace's affirmative at 670; King, 690 S.W.2d at 620. defense of modification.

Todd and Smalley described the November 30 meeting between Meritage and SP Terrace representa- Waiver of the Substantial Completion Deadline tives. Each averred that, at this meeting, Meritage repre- SP Terrace next contends that a fact issue exists re- sentatives requested that SP Terrace delay filing the sub- garding Meritage's waiver of the December 31 deadline. division plat to allow the parties to continue making A party establishes waiver by demonstrating (1) the ex- changes to the development. SP Terrace agreed, but re- press renunciation of a known right or (2) silence or in- quested a six-month extension of the December 31 dead- action for so long as to show the intent to yield a known line. According to Todd and Smalley, Meritage's repre- right. See Motor Vehicle Bd. v. El Paso Indep. Auto sentatives agreed to extend the deadline and to sign a Dealers, 1 S.W.3d 108, 111 (Tex. 1999). Waiver can also written agreement confirming that extension. Smalley result from acts that induce the other party to believe that mailed a [**14] written extension to Meritage before the party will not insist on exact performance within the December 31, and although Meritage never returned a contractual time limits. See Kennedy Ship & Repair, LP v. signed extension, it also never objected.

Pham, 210 S.W.3d 11, 20 (Tex. App.--Houston [14th Meritage points to a January 20, 2006, letter from Dist.] 2006, no pet.); [**16] see also KMI Continental Smalley to Steve Harding as evidence that the parties did Offshore Prod. Co. v. ACF Petrol. Co., 746 S.W.2d 238, not agree to extend the deadline: 243 (Tex. App.-- Houston [1st Dist.] 1987, writ denied) ("[A] waiver can occur if a party knowingly possessing I had previously sent you an addendum the right acts in such a manner that the party misleads the to the Earnest Money Contract prior to the opposing party into believing that a waiver has oc- end of the year extending the date of the curred."); Alfred, Meroney & Co. v. Rowe, 619 S.W.2d contract to June 30, 2006. As of this date, I 210, 213 (Tex. App.--Amarillo 1981, writ ref'd n.r.e.). have not received an executed addendum. I The surrounding facts and circumstances must know there are still questions to be an- plainly demonstrate a party's intent to waive a known swered, but we need some assurance that right. See El Paso Indep. Auto Dealers, 1 S.W.3d at 111. we can reach an agreement and declare Waiver may result when: (1) a party assents to the other some sort of modified substantial comple- party's continued performance without objection to the tion. delay; (2) a party states that it will not require strict compliance with a deadline or acts such that the other party reasonably believes strict compliance will not be Page 5 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

required; or (3) a party insists on performance by the other Delgado, 936 S.W.2d at 485 ("A party to a contract may party even after breach of the agreement. See Delgado v. effectively waive a breach by the other party by continu- Methodist Hosp., 936 S.W.2d 479, 485 (Tex. ing to insist on performance by the other party even after a App.--Houston [14th Dist.] 1996, no writ); Fairfield Fin. breach.").

Group, Inc. v. Gawerc, 814 S.W.2d 204, 209 (Tex. App.--Houston [1st Dist.] 1991, no writ); Seismic & Dig- Delay and Interference by Meritage ital Concepts, Inc. v. Digital Res. Corp., 590 S.W.2d 718, SP Terrace contends that fact issues exist as to (Tex. Civ. App.--Houston [1st Dist.] 1979, no writ). whether Meritage caused delays and interfered with SP [**17] Ordinarily waiver is a fact question; however, we Terrace's performance of its contractual obligations thus decide a waiver issue as a matter of law if the facts and breaching an implied duty to cooperate. circumstances are admitted or established. See El Paso Indep. Auto Dealers, 1 S.W.3d at 111. We examine the written contract to determine the obligations of the parties. See Bank One, Tex., N.A. v. Todd and Smalley aver that, at the end of November, Stewart, 967 S.W.2d 419, 435 (Tex. App.--Houston [14th SP Terrace was prepared to file the subdivision plat, but Dist.] 1998, pet. denied), cited with approval in Keck v. delayed the filing at Meritage's request. They both averred Nat'l Union Fire Ins. Co., 20 S.W.3d 692, 701 (Tex. 2000); that they told Meritage that delaying the filing of the plat Nalle v. Taco Bell Corp., 914 S.W.2d 685, 687 (Tex. would require a six-month extension of the substantial App.--Austin 1996, writ denied). We do not imply a completion deadline and that Meritage orally agreed to covenant regarding a matter specifically covered by the this extension, which suggested to them that Meritage terms of the written contract, but we imply a duty to co- would not insist upon the December 31 deadline. Smalley operate to the extent necessary for the contract's perfor- further averred that she mailed the written extension prior mance. See Stewart, 967 S.W.2d at 434. Thus, a party to December 31 and never received any objections to the cannot "hinder, prevent, or interfere with [another's] abil- extension. Todd and Smalley continued to work with ity to perform [its] duties under [the] agreement." See id. Meritage on the development into February 2006. at 435. [**20] The implied covenant to cooperate differs Smalley participated in a January 10, 2006, meeting with from the broader implied covenant of good faith and fair Steve Harding of Meritage to "discuss the proposed sub- dealing, which the Texas Supreme Court has rejected. See division changes."

Case Corp. v. Hi-Class Bus. Sys. of Am., Inc., 184 S.W.3d Meritage cites Beal Bank, S.S.B. v. Schleider, 124 760, 770 (Tex. App.--Dallas 2005, pet. denied) (citing S.W.3d 640 (Tex. App.--Houston [14th Dist.] 2003, pet. Tex. Nat'l Bank v. Sandia Mtg. Corp., 872 F.2d 692, denied), to support its contention that SP Terrace does not 698-99 (5th Cir. 1989)). raise a fact issue on waiver. In Beal Bank, [**18] the When one party prevents another from timely per- Fourteenth Court of Appeals held that representations that forming its contractual obligations, the failure to timely "an extension would not be a problem," the parties were perform is excused. See Anderson Dev. Corp. v. Coastal "set to go," and the bank would "get [*285] back to" States Crude Gathering Co., 543 S.W.2d 402, 406 (Tex. Schleider were insufficient to establish waiver. See id. at Civ. App.--Houston [14th Dist.] 1976, writ ref'd n.r.e.); 654. In contrast, here, Todd and Smalley aver that see also Dorsett v. Cross, 106 S.W.3d 213, 217 (Tex. Meritage continued to participate in meetings with SP App.--Houston [1st Dist.] 2003, no pet.) ("Prevention of Terrace representatives and work with SP Terrace on performance by one party excuses performance by the further changes to the development even after the De- other party."). According to Todd and Smalley, SP Ter- cember 31 deadline, indicating that it continued to insist race prepared to file the subdivision plat in November on performance after breach of the agreement. In his 2005, but at Meritage's request, it delayed filing it. affidavit, Tyler Todd states that SP Terrace "continued to Smalley also stated the following: work with [Meritage] under the Contract and to accom- modate changes requested by [Meritage] throughout De- The development was often delayed by cember 2005, January 2006, and into February 2006." lack of information, delays in approvals Kelly Smalley states that a Meritage representative par- and changes in plans and designs from ticipated in a meeting to discuss the proposed subdivision [Meritage]. For example, I could not ob- changes on January 10, 2006, after the deadline. We hold tain timely approval from [Meritage] for that SP Terrace raises a fact issue as to whether Meritage finalizing the design of the [**21] fences, waived the December 31 substantial completion deadline the location of the electrical service, Steve and its right to terminate the contract on this basis, par- Harding's failure to attend a meeting on ticularly in light of the contract provision that the sub- November 16, 2005 with CenterPoint En- stantial completion deadline "would be [**19] extend- ergy and failure to respond to CenterPoint ed" to the extent of any delay caused by Meritage. See Energy on various [*286] issues. These Page 6 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

failures and delays caused a delay in the Meritage argues that because SP Terrace always substantial completion of the subdivision. possessed the earnest money deposit, and if SP Terrace prevailed or Meritage abandoned its claim, SP Terrace would simply retain the earnest money. Therefore, SP Section 16(k) of the contract provides that: "Seller [SP Terrace's counterclaim, which asks the trial court to de- Terrace] shall not be responsible for any damage or delay termine that SP Terrace is entitled to the earnest money, is caused by Purchaser [Meritage] or Purchaser's agent . . . essentially a claim for declaratory relief. We disagree. SP and the time limits for Seller's performance hereunder Terrace asked the trial court to determine it has a right to shall be extended to the extent of any such delay." 1 We the earnest money deposit, but it also seeks actual dam- hold that SP Terrace's summary judgment evidence raises ages beyond the earnest money deposit. See Howell v. a fact issue as to whether a delay caused by Meritage Mauzy, 899 S.W.2d 690, 706 (Tex. App.--Austin 1994, extended the substantial completion deadline. writ denied) ("A court may allow a declaratory-judgment counterclaim, however, if it is something more than a The contract provides in section 16(k) that the mere denial of the plaintiff's claim and has greater rami- substantial completion deadline "would be ex- fications than the original suit. A counterclaim has greater tended" if Meritage caused the delay of the dead- ramifications than the original suit if it seeks affirmative line. Meritage argued in the trial court that SP relief.") (internal citations [**24] omitted). We hold that Terrace's reference to section 16(k) in an amended SP Terrace's allegations state a claim for relief inde- pleading filed after its motion for partial summary pendent of Meritage's breach of contract [*287] claim. judgment was filed came too late to support its If the trier of fact concludes that Meritage has waived contractual defenses. We disagree, in so much as performance of the substantial completion deadline and SP Terrace expressly argued in its summary was in breach of the agreement, then SP Terrace is entitled judgment response that "by words, actions to pursue its claim for breach. [**22] and inaction, Meritage caused the default and/or delay in the substantial completion." B. Earnest Money as Liquidated Damages SP Terrace asked the trial court to set aside the ear- Summary Judgment on SP Terrace's Counterclaim nest money liquidated damages provision for a breach by SP Terrace also sues Meritage for breach of contract, Meritage, contending that it penalizes Meritage because it and seeks damages beyond the earnest money deposit. requires Meritage to forfeit its earnest money no matter The trial court rejected this claim, and SP Terrace appeals. how trivial its breach. SP Terrace requests this interpre- Meritage responds that SP Terrace's counterclaim is not tation of the contract so that its damages claim against one for affirmative relief, but in any event, SP Terrace's Meritage can exceed the earnest money deposit it kept recovery is limited to the earnest money contract. after Meritage terminated the contract. The clause in question provides that, upon default by Meritage, SP A. Claim for Affirmative Relief Terrace, as its sole remedy, may terminate the contract and retain the earnest money deposit.

Meritage argues that SP Terrace's asserted contrac- tual defense to the refund of Meritage's earnest money We enforce a liquidated damages clause if (1) the deposit is not an affirmative claim for relief. To qualify as harm caused by the breach is incapable or difficult of a claim for affirmative relief, the defendant must allege a estimation, and (2) the amount of liquidated damages is a cause of action independent of the plaintiff's claim, on reasonable forecast of just compensation. See Phillips v. which the defendant can recover benefits, compensation, Phillips, 820 S.W.2d 785, 788 (Tex. 1991). [**25] An or relief, even though the plaintiff may abandon or fail to assertion that a liquidated damages provision constitutes establish its claim. See Gen. Land Office v. OXY USA, an unenforceable penalty is an affirmative defense, and Inc., 789 S.W.2d 569, 570 (Tex. 1990). If the defendant the party asserting penalty bears the burden of proof. See only resists the plaintiff's right to recover, then it does not Urban Television Network Corp. v. Liquidity Solutions, state a claim for affirmative relief. See id. 277 S.W.3d 917, 919 (Tex. App.--Dallas 2009, no pet.); Fluid Concepts, Inc. v. DA Apts., LP, 159 S.W.3d 226, 231 In its "Second Amended Answer and First Amended (Tex. App.--Dallas 2005, no pet.). Generally, that party Counterclaim," SP Terrace stated that Meritage's [**23] must prove the amount of actual damages, if any, to "actions, promises and representations" constituted a prior demonstrate that "the actual loss was not an approxima- breach of the contract by Meritage, which excused SP tion of the stipulated sum." Baker v. Int'l Record Syndi- Terrace from further performance and entitled SP Terrace cate, Inc., 812 S.W.2d 53, 55 (Tex. App.--Dallas 1991, no to retain the earnest money deposit and recover actual writ). If the amount stipulated in the liquidated damages damages, including lost profits, of at least $ 1,400,000. clause is "shown to be disproportionate to actual damag- Page 7 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

es," we should declare that the clause is a penalty and limit thousand dollars . . . would be so unreasonable that no recovery to actual damages. Johnson Eng'rs, Inc. v. court would lend its power to enforce it"); Community Tri-Water Supply Corp., 582 S.W.2d 555, 557 (Tex. Civ. Dev., 679 S.W. 2d at 727 (jury findings and evidence App.-- Texarkana 1979, no writ); see also TEX. BUS. & supported claim that earnest money provision operated as COM. CODE ANN. § 2.718(a) (Vernon 2009) ("A term penalty); Bethel, 635 S.W.2d at 843 (upholding trial fixing unreasonably large liquidated damages is void as a court's determination that liquidated damages clause was penalty."). Whether a liquidated damages clause is an penalty against breaching party, and limiting plaintiff's unenforceable penalty is a question of law for the court, recovery to actual damages). but sometimes factual issues [**26] must be resolved A liquidated damages provision is a penalty if it before the court can decide the legal question. See Phil- punishes the breaching party by subjecting it to a dis- lips, 820 S.W. 2d at 788. For example, in Phillips, the proportionately high amount of damages relative to rea- Texas Supreme Court observed that "to show that a liq- sonably anticipated actual damages. Absent evidence that uidated damages provision is unreasonable because the the earnest money amount here was not a reasonable actual damages incurred were much less than the amount approximation of an anticipated breach, limiting recovery contracted for, a defendant may be required to prove what to the earnest money deposit and preventing a party from the actual damages were." Id. recovering actual damages in excess of the bargained for SP Terrace adduced no evidence in the trial court that liquidated amount does not constitute a penalty to the Meritage's forfeit of its earnest money operated as a pen- breaching party. 2 We decline to hold as a matter of law alty because Meritage's breach was a trivial one. Its aim that the earnest money provision in this case is a penalty. was just the opposite--it was to prove that Meritage's Cf. Phillips, 820 S.W.2d at 788-89 (no fact issue that breach caused damages far higher than the earnest money provision was penalty against breaching party because it amount, although it offered no proof of that theory either. provided that actual damages be determined [**29] and We decline to remove a limitation of remedy provision multiplied tenfold). absent any evidence that the liquidated amount in the contract is unreasonably high or low in light of the alleged 2 Other jurisdictions that have addressed this breach. See Urban Television, 277 S.W.3d at 919; Fluid issue have held similarly, and refused to strike the Concepts, Inc., 159 S.W.3d at 231. liquidated damages provision on the ground that it is an unenforceable penalty. See, e.g., Mahoney v. SP Terrace relies on cases in which courts have dis- Tingley, 85 Wn.2d 95, 529 P.2d 1068, 1070 regarded liquidated damages provisions as unreasonable (Wash. 1975) ("A penalty exists where there is an in their approximation of actual damages for trivial attempt to enforce an obligation to pay a sum fixed breaches. See Stewart v. Basey, 150 Tex. 666, 245 S.W.2d by agreement of the parties as a punishment for the 484, 487 (Tex. 1952) [**27] ("Our conclusion is that, failure to fulfill some primary contractual obliga- since the contract provided the same reparation for the tion. In this case, it is not the party in default who breach of each [*288] and every covenant, and since it seeks relief from an excessively high liquidated would be unreasonable and a violation of the principle of damages provision. Rather, the provision operates just compensation to enforce it as to some of them, the to limit the recovery of the party who incurred a provision for stipulated damages should be treated as a loss as a result of the other parties' breach. There penalty."); Community Dev. Serv., Inc. v. Replacement being no element of punishment involved, it Parts Mfg., Inc., 679 S.W.2d 721, 727 (Tex. cannot be said that plaintiff is being penalized in App.--Houston [1st Dist.] 1984, no writ) (holding that any sense.")(internal citations omitted); Margaret liquidated damages clause in earnest money contract was H. Wayne Trust v. Lipsky, 123 Idaho 253, 846 unenforceable penalty, because even though it provided P.2d 904, 910 (Idaho 1993) (following Mahoney reasonable damages for major breaches of the contract, it and refusing to strike down liquidated damages also allowed unreasonable damages for trivial breaches); provision as penalty when non-breaching party Bethel v. Butler Drilling Co., 635 S.W.2d 834, 837-38 sought damages in excess of provision amount). (Tex. App.--Houston [14th Dist.] 1982, writ ref'd n.r.e.) (holding same). These cases are distinguishable in that Required Notice to Recover Earnest Money either it was the breaching party who argued that the provision was a penalty, or in that the party seeking to set Finally, SP Terrace contends that it did not receive aside the provision adduced evidence that the liquidated thirty days' notice and an opportunity [**30] to cure the damages clause was not a reasonable approximation of default. Section 9(c) of the contract states: damages caused by the breach. See Stewart, 245 S.W.2d at 487 (where actual damages incurred by breaching party In the event Seller shall default in amounted to $ 38.50, [**28] "stipulation to pay several Seller's obligations hereunder . . . Pur- Page 8 334 S.W.3d 275, *; 2010 Tex. App. LEXIS 8448, **

chaser shall give Seller thirty (30) days (Tex. 2003) ("[W]e must examine and consider the entire written notice and opportunity to cure such writing in an effort to harmonize and give effect to all the default. If Seller fails to cure its default provisions of the contract so that none will be rendered within the thirty day period provided in meaningless."). We therefore hold that SP Terrace was [*289] the notice, Purchaser, as its sole not entitled to notice and a thirty day opportunity to cure and exclusive remedies, may either (i) any failure to comply with the substantial completion terminate this Contract and obtain the re- deadline. turn of its Earnest Money or (ii) enforce specific performance of Seller's obligation Conclusion to convey the Lot(s) upon payment of the We hold that SP Terrace failed to raise a fact issue on Purchase Price. its affirmative defenses of modification and interference by Meritage, but raises fact issues whether Meritage waived performance of the December 31 substantial Meritage responds that the contract does not require no- completion deadline and whether Meritage caused delay tice and an opportunity to cure because section 4(i) states that extended the time for performance. We further hold that if "Substantial Completion does not occur by De- that SP Terrace's counterclaim states a claim for affirma- cember 31, 2005 at option of Purchaser this Contract shall tive relief, but that SP Terrace fails to prove on this record terminate and Purchaser is relieved of any obligation that the earnest money provision of the contract is unen- hereunder." We agree, and hold that once Meritage exer- forceable as a matter of law. We therefore [**32] reverse cised its option to terminate due to SP Terrace's failure to and remand the case for further proceedings. 3 meet the deadline, Meritage was relieved of further con- tractual obligations, including the requirement of SP Terrace also contends that the trial court providing notice and an opportunity to cure. Reading the awarded unreasonable and excessive attorney's contract to require notice and an opportunity to cure be- fees to Meritage. Because we reverse and remand fore recovering the earnest [**31] money, even if SP on the merits, we vacate the award of attorney's Terrace did not achieve substantial completion by De- fees. cember 31, would render section 4(i)'s provision that failure to achieve substantial completion by December 31 Jane Bland relieves Meritage of any contractual obligation a nullity.

Justice See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 Page 1

The State of Texas, Appellant, v. Harry W. Margolis et al., Appellees No. 11654 Court of Civil Appeals of Texas, Third District, Austin 439 S.W.2d 695; 1969 Tex. App. LEXIS 2467; 1969 Trade Cas. (CCH) P72,751

March 26, 1969 SUBSEQUENT HISTORY: [**1] N.R.E. person of certain goods on both Saturday and Sunday.

The plan operates by means of contracts under which PRIOR HISTORY: From the District Court of Sundaco each Saturday night acquires from the other T5avis County, 167th Judicial District, No. 161990, appellee corporations all merchandise in their stores and, Honorable Herman Jones, Judge Presiding. after conducting business through Sunday, returns the stores to the corporations that operate the remaining days of the week. Profits made on Sunday are divided be- JUDGES: Trueman E. O'Quinn, Associate Justice. tween Sundaco and the other corporations.

Appellees brought suit for declaratory judgment un- OPINION BY: O'QUINN der Section 15.12 of the Texas Business and Commerce Code which purports to authorize suit when petitioner is OPINION "* * * uncertain of whether or not his action or proposed [*697] Appellees sought and obtained a declara- action violates or will violate the prohibition contained in tory judgment in district court holding that they did not Section 15.04 of this code * * *" (Emphasis supplied). violate State statutes, prohibiting monopolies, trusts, or Section 15.04 of the code prohibits all monopolies, trusts, conspiracies in restraint of trade, by operating a mer- and conspiracies in restraint of trade and declares such chandising conception designed to avoid the restraints of combinations illegal. a penal statute making it unlawful for any person to sell We have decided [**3] that because there is absent certain goods on both of the two consecutive days of from the record any showing that a presently justiciable Saturday and Sunday. controversy exists between the State and the appellees, The State of Texas, defendant below, has appealed any judgment under the record would be an advisory from this judgment and contends that appellees are en- opinion the courts are not authorized to render. We do gaged in a monopoly or trust that fixes, maintains, affects, not reach the State's points of error as to price control and or controls prices and that their activity tends to lessen lessening competition, and will notice only briefly the competition. The State also urges that the statute under point under which validity of Section 15.12 is challenged. which this suit was brought for a declaratory judgment We will order the cause dismissed. violates provisions of the State Constitution forbidding Appellees alleged the following with regard to the the rendition of advisory opinions by the courts. existence of a presently justiciable controversy: Appellees are individuals and corporations engaged in an arrangement under which Sundaco, Inc., a retail "The Defendant, The State of Texas, store entity organized for the purpose [**2] of making acting under its Attorney General and/or the arrangement, is open for business only on Sundays, District Attorney of Tarrant County, Tex- and the other appellee corporations are open only on as, and other Counties in which a corporate Mondays through Saturdays. The purpose of this system Plaintiff has operations, has contended that of merchandising is to avoid violation of Article 286a, the actions and/or proposed actions of all Texas Penal Code, which makes unlawful the sale by any of the Plaintiffs, their agents and employ- Page 2 439 S.W.2d 695, *; 1969 Tex. App. LEXIS 2467, **; 1969 Trade Cas. (CCH) P72,751 ees, violate or will violate the prohibitions Juice, Inc., 160 Tex. 586, 334 S.W.2d 780 (1960); Lee v. contained in Section 15.04 of the Business Calvert, 356 S.W.2d 840 (Tex.Civ.App., 1962, Austin, and Commerce Code. It is contended by writ ref. n.r.e.). It is the duty of the court to decide said Defendant that said actions or pro- whether a justiciable controversy exists. Ainsworth posed actions of the Plaintiffs, their em- [**6] v. Oil City Brass Works, 271 S.W.2d 754 ployees and agents, constitute a monopoly, (Tex.Civ.App., 1954, Beaumont, no writ). trust, and/or conspiracy in restraint of The Supreme Court recently declared, "In the ab- trade, as defined in Section 15.01, 15.02, sence of a constitutional provision authorizing the Texas and 15.03, [**4] of the Business and courts to render advisory opinions, such power does not Commerce Code. That by reason of said exist and may not be conferred by agreement of the par- actions and/or proposed actions, the ties." Firemen's Insurance Company of Newark, New Plaintiffs are subject to the civil and Jersey v. Burch, 442 S.W.2d 331, 12 Tex.Sup.Ct. Jour. 49 criminal penalties provided for in Section (October 11, 1968).

15.29 through Section 15.33 of the Busi- ness and Commerce Code. Further, said The State contends that Section 15.12 of the Business Defendant has indicated its intention to and Commerce Code is unconstitutional in providing for [*698] proceed against the Plaintiffs declaratory judgments where there is a lack of justiciable pursuant to said penalty provisions of said controversy. "The provisions of Section 15.12," the State Code, which has given rise to a bona fide argues, "which authorize the courts to consider the pro- controversy and created justiciable issues spective actions of an individual expressly negates the which the Court has authority to deter- necessity of their (there) being a justiciable controversy mine." ripe for determination."

We agree with the State that insofar as Section 15.12 purports to empower courts to pass on prospective ac- At the trial no evidence was introduced and none was tions, the statute contravenes the provisions of Section 1, offered by appellees to prove any of the allegations set out Article II, of our State Constitution prescribing separation above. If the State had "indicated its intention to proceed of powers. The courts of this State, because of this pro- against the plaintiffs" and invoke the penalty provisions of vision of the Constitution, are prohibited from rendering the code, as appellees alleged in their petition, such in- advisory opinions [**7] and the power may not be con- tention is not reflected in the record. The State filed an ferred by the Legislature. Morrow v. Corbin, 122 Tex. answer to the petition, specially denying numerous alle- 553, 62 S.W.2d 641, 646 (1933). gations, and generally denied each and every allegation in the petition. The State by its answer did not seek penal- Appellees argue in response to the State's contention, ties, nor did the State pray for injunctive relief to restrain that the State's "* * * argument is made * * * after ten continuous months of litigation before the trial court, both appellees. The State's answer was in all respects purely in pretrial procedures and in trial and post trial proce- defensive. dures, after a trial of approximately three and a half days, The State's general denial [**5] put appellees in the filling approximately four hundred and forty-five pages of position of having to prove every material fact of their a statement of facts and after the preparation of a brief * * cause of action. Boswell v. Handley, 397 S.W.2d 213 *" in this Court. "The justiciable [*699] controversy," (Tex. 1965). The burden was upon appellees to establish appellees say, "between the appellant and the appellees is that the trial court had authority to entertain the suit by obvious from the record before this Court." proving that a justiciable controversy existed. Reuter v. We do not agree with appellees that a justiciable Cordes-Hendreks Coiffures, Inc., 422 S.W.2d 193 (Tex.Civ.App., 1967, Houston (14th Dist.), no writ). controversy, required to be pleaded and proved, is obvi- ous from the record. As we have observed, appellees Section 15.12, in which it is provided that a person "* alleged in their petition, as a basis for showing a justicia- * * uncertain of whether or not his action or proposed ble controversy, that the State "has indicated its intention action violates or will violate * * *" Section 15.04 of the to proceed against the Plaintiffs pursuant to said penalty code is authorized to file suit against the state for declar- provisions of said Code, which has given rise to a bona atory judgment, cannot confer upon the courts power to fide controversy and created justiciable issues which the render an advisory opinion to the person who is "uncer- Court has authority to determine." tain" as to the legality of his actions or proposed actions.

It is obvious from [**8] the record that appellees Even in declaratory actions, the courts may render opin- filed their petition seeking advice from the courts because ions only if there exists a justiciable controversy between they were "uncertain of whether or not (their) action or the parties. California Products, Inc. v. Puretex Lemon Page 3 439 S.W.2d 695, *; 1969 Tex. App. LEXIS 2467, **; 1969 Trade Cas. (CCH) P72,751 proposed action" in carrying on the Sundaco scheme The power of courts to pass upon the "uncertainty" "violates or will violate" Section 15.04 prohibiting mo- appellees have with regard to their actions will arise only nopolies, trusts, and conspiracies in restraint of trade. when the interest of appellees require the use of judicial Even if all but the prospective aspects of Section 15.12 are authority for their protection against actual interference. valid, and we do not decide that question, the suit for A threat that is only hypothetical is not enough. United declaratory judgment will not lie unless proof is made of a Public Workers v. Mitchell, 330 U.S. 75, 67 S. Ct. 556, 91 bona fide threat of interference by the State invoking the L. Ed. 754 (1947). In Hitchcock v. Kloman, 196 Md. 351, anti-trust laws. 76 A.2d 582 (Md. 1950) the Court of Appeals of Maryland refused to entertain suit for declaratory judgment in the Discretion rests with the Attorney General as to absence of a threat to interfere with activities of petitioner, whether anti-trust suits will be brought by the State to although the attorney general had delivered opinions that interdict the Sundaco operations and invoke penalties. similar activities came within the state statute petitioner The record is devoid of any showing that appellees had asked the court to construe. There it was held that mere been ordered to discontinue their operations. There is no existence of the statute did not pose such a threat as to evidence of a threat to interfere with Sundaco activities as present a justiciable controversy. a violation of Section 15.04. No threat of interference by the State with the rights of appellees appears beyond that In the absence of proof that there existed a justiciable implied by the existence of the statute and the State's controversy, the courts are without jurisdiction. For the answer defending against the petition for declaratory reasons we have stated, this cause is dismissed for want of judgment. Appellees may not compel the Attorney Gen- [**10] jurisdiction. eral to exercise his [**9] discretion by filing suit for Dismissed for want of jurisdiction. declaratory judgment.

Page 1

E. C. Stewart et ux v. James Marvin Basey No. A-3346 Supreme Court of Texas 150 Tex. 666; 245 S.W.2d 484; 1952 Tex. LEXIS 373

January 16, 1952, Decided PRIOR HISTORY: [***1] Error to the Court of to remand said case to the trial court to determine the Civil Appeals for the Third District, in an appeal from actual amount of damages suffered by lessors.

Travis County.

SYLLABUS DISPOSITION: The judgment of the Court of Civil This was a suit by E. C. Stewart and his wife to col- Appeals is affirmed. lect from James Marvin Basey rents for the unexpired term of a lease of certain buildings which he had rented under a five year contract claiming the right to enforce a HEADNOTES provision in their lease contract that should the lease be Damages -- Intention. forfeitured, lessees should pay as liquidated damages the sum of $ 150.00 per month for each and every month of Liquidated damages are unenforcible unless the the unexpired term of the lease contract. They also sued, amount therefor was uncertain in the contemplation of the in the alternative, for actual damages. They actually parties at the time the contract was executed, and the occupied and paid rent for 11 months. The trial court stipulation therefor must be reasonable. awarded damages of $ 38.50 for the destruction of a door, Measure of Damages -- Contracts -- Leases. but denied all other relief. The Court of Civil Appeals reversed that judgment and remanded the cause to the trial Parties competent to contract, while having the right court to determine the actual damages sustained by les- to make their own bargain, should not be permitted to sors, 241 S.W. 2d 353. The Stewarts have brought error to have a court enforce a stipulation which would violate the the Supreme Court. rule that a breach of said contract should be the just compensation for the loss or damage actually sustained, COUNSEL: E. M. DeGeurin, of Austin, for petitioners. and the damaged party should be awarded neither less nor more than his actual damage. [***3] The Court of Civil Appeals erred in not ren- Damages -- Leases -- Appeal and Error -- Penal- dering judgment in favor of petitioners in the amount of ties. the unliquidated damages as agreed to in the lease con- tract. Galveston, H. & S.A. Ry. Co. v. Johnson, 74 Texas The proviso in a lease contract that should lessees fail 256; Rio Bravo Oil Co. v. Weed, 121 Texas 427, 50 S.W. to make their monthly payment of the rents, and lessors 2d 1080; Fidelity & Dep. Co. of Md. v. Walker, 75 Fed. should exercise their option to terminate the contract for 2d 115-118. that reason, or for some other breach of the contract, les- see would become obligated to pay a lump sum at that W. R. Smith, Jr., of Austin, for respondents. time equal to the total for each and [***2] every month of the unexpired term of the contract, was not a provision JUDGES: Mr. Chief Justice Hickman delivered the for stipulated damages, but was a penalty and was opinion of the Court. unenforcible. It was not error for the court of civil appeals OPINION BY: HICKMAN Page 2 150 Tex. 666, *; 245 S.W.2d 484, **; 1952 Tex. LEXIS 373, *** It will be observed that liability for the payment of $ OPINION 150.00 [*669] per month as liquidated damages is not limited to the breach of any one particular covenant of the [*667] [**485] The controlling question in this contract. The covenant to pay the rent when due is but case is whether the language quoted below stipulating the one of the covenants the breach of which would give rise damages recoverable for [*668] the breach of a lease to a claim by the lessors for $ 150.00 per month for each contract is a provision for liquidated damages or for a and every month of the unexpired term of the lease. penalty. The trial court construed it as a provision for a penalty and, finding that the lessor suffered no damages Volumes have been written on the question of when a by lessee's breach except $ 38.50 caused by the destruc- stipulated damage provision of a contract should be en- tion of a partition door in one of the leased buildings, forced as liquidated damages and when [***6] en- rendered judgment for that amount only. The Court of forcement [**486] should be denied because it is a Civil Appeals upheld the trial court in its refusal to award penalty provision. One line of cases, of which Eakin v. liquidated damages, but reversed that portion of the Scott, 70 Texas 442, 7 S.W. 777, is typical, states that the judgment awarding only $ 38.50 as damages and re- intention of the parties governs and another line states that manded the case to the trial court for the sole purpose their intention is immaterial, but when the results are [***4] of determining the amount of actual damages examined there appears but little disparity between them. sustained by the lessor. 241 S.W. 2d 353. All agree that to be enforceable as liquidated damages the damages must be uncertain and the stipulation must be By a contract in writing petitioners, E. C. Stewart and reasonable. There is a statement in the opinion in Eakin wife, leased to respondent, James Marvin Basey, three v. Scott, supra, which, standing alone, would lead to the store buildings on South Congress Avenue in the city of conclusion that the damages in that case were certain in Austin. The lease stated that it was for a term of five amount. But when the entire opinion is read, it becomes years, beginning on January 1, 1949, and ending at mid- obvious that the damages were very uncertain in the night on December 31, 1954. The dates cover a period of contemplation of the parties when the contract was exe- six years, but for the purposes of this opinion it is imma- cuted; and that is the true test of uncertainty. The true terial whether the term was five years or six years. The theory is well expressed in Williston on Contracts, Re- lease provided for a monthly rental of $ 325.00, payable vised Edition, Sec-779, p. 2192, in this language: each month in advance. Respondent went into posses- sion under the lease and paid the monthly rentals through "But as has been seen, the chief, almost the only, November, 1949, during which month he vacated the means of determing whether the parties in good faith buildings. On the following December 5th the keys were endeavored to assess the damages is afforded by the returned to petitioners upon their request, since which amount of damages stipulated for, and the nature of the time they have executed leases to other tenants. The breach upon which the [***7] stipulation was agreed to provision of the contract which we are called upon to become operative. This is but saying in other words that construe reads as follows: the reasonableness or unreasonableness of the stipulation is decisive."

"The failure to pay any monthly installment of rental when such installment is due shall terminate this lease at The cases which hold that the intention of the parties the option of Lessors. The failure of Lessee to make said controls impute to the parties an intention to provide for a payment or payments or the [***5] breach of this con- penalty when it would be unreasonable and unjust to do tract otherwise by him shall render him liable to Lessors, otherwise, even though their language clearly expresses as agreed liquidated damages, the sum of One Hundred the contrary intention. They indulge in a presumption in Fifty (150) Dollars per month for each and every month of order to arrive at the justice of the case. The cases which the unexpired term of this lease which shall become due disregard the intention of the parties treat the question as and payable when the option to terminate this lease is one of the legality of the stipulation. The reasoning in exercised or at the time of the breach of this contract Langever v. R. G. Smith & Co., Comm. App., 278 S.W. otherwise by Lessee if any, and the payment thereof be 178, 179, is typical of that employed in cases which an- secured by lien on the property of Lessee in said Store nounce that the intention of the parties controls. The Buildings at said time." statement in the opinion that "the real intention of the parties when ascertained will control" is followed by the Another provision of the contract is: statement that such intention "is not necessarily ascer- "That the violation of any term of this lease by either tained by the words [*670] employed." Regardless of party hereto shall terminate the same at the option of the which line of cases is followed, the courts will not be other." bound by the language of the parties.

Page 3 150 Tex. 666, *; 245 S.W.2d 484, **; 1952 Tex. LEXIS 373, *** The right of competent parties to make their own was followed in Palestine Ice, Gin & Fuel Co. v. Walter bargains is not unlimited. The universal [***8] rule for Connally & Co., 148 S.W. 1109, error refused, and in measuring damages for the breach of a contract is just Sanders Nursery Co. v. J.C. Engleman, Inc., - 109 S.W. 2d compensation for the loss or damage actually sustained. 1131, error dismissed.

By the operation of that rule a party generally should be When that rule is applied to the provisions in the awarded neither less nor more than his actual damages. A contract before us it seems clear that the stipulation should party has no right to have a court enforce a stipulation be construed as a provision for a penalty and not for liq- which violates the principle underlying that rule. In uidated damages. Obviously, the stipulation was not those cases in which courts enforce stipulations of the carefully drawn. It provides that for the failure of lessee parties as a measure of damages for the breach of cove- to pay any installment of rent when due or for his breach nants, the principle of just compensation is not abandoned of any other obligation of the contract, the lessors could, and another principle substituted therefor. What courts at their option, terminate the lease. Should they elect to really do in those cases is to permit the parties to estimate terminate it, the lessee would be obligated to pay them at in advance the amount of damages, provided they adhere that time a sum of money arrived at by multiplying $ to the principle of just compensation. Restatement of 150.00 by the number of months of the unexpired term of Contracts, Sec. 339, accurately expresses the rule as fol- the lease. Should they not elect to terminate the lease they lows: could, nevertheless, demand that amount in a lump sum "(1) An agreement, made in advance of breach, fixing on the date of the breach. The lease contains several the damages therefor, is not enforceable as a contract and covenants other than the covenant to [***11] pay rent does not affect the damages recoverable for the breach, when due. One is a covenant of indemnity in this lan- unless. guage: "(a) the amount so fixed is a reasonable forecast of "Lessee further covenants and agrees to keep Lessors just compensation for the harm that is caused by the free and harmless from any and every claim, demand, or breach, and cause of action arising in or on the leased premises during the term of this lease." "(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate [***9] estima- Another is a covenant that lessee will prudently use tion." the premises and avoid injuries thereto, except usual wear and tear, and another that lessee will "make such repairs This comment on subsection (1) follows: as are not caused by Lessors or their agents and the usual "b. Contracts are frequently made in which per- depletion of said property." formance of very different degrees of importance and It is not necessary for us to decide whether petitioners value are promised and one large sum of money is made would have been entitled to liquidated damages had the payable as damages for any breach whatever. Since such lease contract contained no covenant except the covenant a contract promises the same reparation for the breach of a to pay rent, and we therefore pass that question by without trivial or comparatively unimportant stipulation as for the discussion. It is clear that petitioners should not be breach of the most important one or of the whole contract, awarded a large sum for liquidated damages for the breach it is obvious that the parties have not adhered to the rule of of the other covenants just mentioned. Take, for in- just compensation. In this matter neither the intention of stance, the covenant for indemnity. Whatever amount the parties nor their expression of intention is the gov- respondent might have been called upon to pay petitioners erning consideration. The payment promised may be a as an indemnity would have been a [*672] definite penalty, though described expressly as liquidated dam- amount measured by the liability theretofore adjudged ages, and vice versa." against petitioners. An obligation to pay an indemnity is [**487] The rule as declared in that comment is in [***12] nothing more than an obligation to pay a sum of effect the same as that declared in Williston on Contracts, money theretofore ascertained, and a provision that failure Revised Edition, Vol. 3, Sec. 783, p. 2204; McCormick on to pay a definite sum of money upon default of perfor- Damages, Sec. 151; 15 Am. Jur., Damages, Sec. 253; and mance of a covenant in a contract entitles the obligee to C.J.S., damages, Sec. [*671] 111. Early in the recover liquidated damages in excess of the interest rate history of this court in Durst v. Swift, 11 Texas 273, 282, will not be enforced. Langever v. R. G. Smith & Co., the rule was stated in this language: "* * * where the Comm. App., 278 S.W. 178. agreement contains several matters of different [***10] With respect to the other covenants above mentioned, degrees of importance, and yet the sum named is payable it was found by the trial court that respondent breached for the breach of any, even the least * * * the sum stipu- them, and damages of $ 38.50 were assessed against him lated to be paid has been treated as a penalty." That rule therefor. A stipulation to pay several thousand dollars Page 4 150 Tex. 666, *; 245 S.W.2d 484, **; 1952 Tex. LEXIS 373, *** for the breach of a covenant which might well result in We approve the action of the Court of Civil Appeals damages of $ 38.50 or even less would be so unreasonable on rehearing in remanding the case for the purpose of that no court would lend its power to enforce it. determining the actual damages instead [***13] of rendering it.

Our conclusion is that, since the contract provided the same reparation for the breach of each and every cove- The judgment of the Court of Civil Appeals is af- nant, and since it would be unreasonable and a violation of firmed. the principle of just compensation to enforce it as to some Opinion delivered January 16, 1952. of them, the provision for stipulated damages should be treated as a penalty.

Page 1

TEXAS ASSOCIATION OF BUSINESS, APPELLANT v. TEXAS AIR CONTROL BOARD AND TEXAS WATER COMMISSION, APPELLEES NO. C-9556 SUPREME COURT OF TEXAS 852 S.W.2d 440; 1993 Tex. LEXIS 22; 36 Tex. Sup. J. 607

March 3, 1993, Delivered PRIOR HISTORY: [**1] ON DIRECT AP- action seeking a ruling that statutes empowering two state PEAL FROM THE 250TH DISTRICT COURT, administrative agencies to levy civil penalties for viola- TRAVIS COUNTY, TEXAS. tions of their regulations conflict with the open courts and jury trial provisions of the Texas Constitution. The ad- ministrative agencies denied TAB's claims, and along COUNSEL: For APPELLANT: Golemon, Mr. R. with two Intervenors, 1 filed counterclaims seeking a Kinnan, ATT 008108000, 512/472-5456, Checkley, Jr., declaration [*442] that the same statutes and regula- Mr. James W., ATT 004170500, 512/479-9732, Axe, Jr., tions comport with those constitutional provisions.

Mr. Albert R., ATT 001415740, 512/472-5456, Alexan- der, Mr. Douglas W., ATT 000992350, 512/472-5456, 1 The League of Women Voters and the Lone Brown McCarroll & Oaks Hartline, 1400 Franklin Plaza, Star Chapter of the Sierra Club intervened in the Congress Avenue, Austin, TX 78701-4043. suit and were aligned as defendants with the Texas Air Control Board and the Texas Water Commis- For APPELLEES: Caroom, Mr. Douglas G., ATT sion. Justice Doggett contends that the standing of 003832700, 512/472-8021, Dugat III, Mr. William D., the Intervenors should be addressed along with ATT 006173600, 512/472-8021, Bickerstaff, Heath & TAB's. We disagree. Standing concerns a party's Smiley, San Jacinto Center, Suite 1800, 98 San Jacinto faculty to invoke the court's subject matter juris- Boulevard, Austin, TX 78701. Kelly, Ms. Mary E., ATT diction. Once it has been invoked by a plaintiff, a 011235650, 512/479-8125, Henry, Kelly, Johnson & court's subject matter jurisdiction is not affected Lowerre, 2103 Rio Grande, Austin, TX 78705. Lynch, by the status of defendants or intervenors aligned Ms. Nancy N., ATT 012731400, 512/463-2012, Office of in interest with defendants. the Attorney General of Texas, Dan Morales, A.G., P. O. [**3] Following a bench trial, the trial court denied Box 12548, Capitol Station, Austin, TX 78711. Johnson, the relief sought by TAB, and as requested by the State Ms. Amy R., ATT 010679550, 512/322-4143, Office of and Intervenors, declared that section 4.041 of the Texas Public Insurance Counsel, 816 Congress Avenue, Suite Clean Air Act, sections 26.136 and 27.1015 of the Texas 1400, Austin, TX 78701-2430.

Water Code, and section 8b of the Texas Solid Waste Disposal Act, as well as the rules and regulations prom- JUDGES: Cornyn, Doggett, Gammage, Spector ulgated under those statutes, are constitutional with regard to the open courts and jury trial provisions. We affirm the OPINION BY: JOHN CORNYN trial court's judgment as it relates to TAB's jury trial challenge and reverse its judgment as to TAB's open OPINION courts challenge. [*441] OPINION An overview of the regulatory scheme enacted by the The Texas Association of Business (TAB), on behalf legislature and these agencies is essential to an under- [**2] of its members, brought this declaratory judgment standing of this case. In 1967, the Texas Legislature en- Page 2 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 acted the Clean Air Act of Texas. Clean Air Act of Texas, WATER CODE § 26.123. This was the regulatory 60th Leg., R.S., ch. 727, 1967 Tex. Gen. Laws 1941. The scheme in effect when the district court rendered judg- Clean Air Act was designed to safeguard the state's air ment in this case. 3 resources without compromising the economic develop- ment of the state. Id. at § 1. The Act created the Texas Air 2 Act of June 14, 1985, 69th Leg., R.S., ch. 637, Control Board and granted it the authority to promulgate § 33, 1985 Tex. Gen. Laws 2350, 2359 (amending regulations to accomplish the Act's goals. Id. at § Texas Clean Air Act codified at TEX. REV. CIV. 4(A)(2)(a). In the event the Air Control Board determined STAT. ANN. art. 4.041 (Vernon 1976), currently that [**4] a violation of its regulations had occurred, it codified as amended at TEX. HEALTH & was authorized to enforce those regulations in district SAFETY CODE § 382.088; Act of June 15, 1985, court. Upon a judicial determination that a violation of the 69th Leg., R.S., ch. 795, § 6.001, 1985 Tex. Gen. Air Control Board's regulations had occurred, two cu- Laws 2719, 2813 (amending Solid Waste Disposal mulative remedies were available, injunctive relief to Act codified at TEX. REV. CIV. STAT. ANN. art. prohibit further violations and assessment of a fine rang- 4477-7 (Vernon 1976), currently codified as ing from $ 50 to $ 1,000 for each day the violations per- amended at TEX. HEALTH & SAFETY CODE § sisted. Id. at § 12(B). 361.252; Act of June 15, 1985, 69th Leg., R.S., ch. 795, § 5.007, 1985 Tex. Gen. Laws 2719, 2806 In 1969, the Texas Legislature enacted the Solid (amending TEX. WATER CODE § 26.136).

Waste Disposal Act. Solid Waste Disposal Act, 61st Leg., 3 Although some amendments have been R.S., ch. 405, 1969 Tex. Gen. Laws 1320. The express adopted since, they are not relevant to the issue purpose for this legislation was to protect public health presented in this case. See Diana C. Dutton, EN- and welfare by regulating the "collection, handling, stor- VIRONMENTAL, 45 SW. L.J. 389 age, and disposal of solid waste." Id. at § 1. The Texas (1991)(summarizing statutory developments).

Water Quality Board was designated the primary agency to effectuate the Disposal Act's purpose. Id. at § 4(f). Like [**7] After the Air Control Board or Water the Air Control Board, the Water Quality Board was au- Commission assesses a penalty, the offender must either thorized to enforce its rules and regulations in state district timely pay the penalty or file suit in district court. How- court. The Solid Waste Disposal Act provided the same ever, a supersedeas bond or cash deposit paid into an remedies as the Clean Air Act. See id. at § 8(c). escrow account, in the full amount of the penalty, is a prerequisite to judicial review. TEX. HEALTH & In the last of the relevant statutory enactments, in SAFETY CODE §§ 382.089(a),(b), 361.252(k),(l); TEX. 1969, the Texas Legislature promulgated a revised [**5] WATER CODE § 26.136(j). A party who fails to make a version of the Water Quality Act. Water Quality Act - cash deposit or file a bond forfeits all rights to judicial Revision, 61st Leg., R.S., ch. 760, 1969 Tex. Gen. Laws review. TEX. HEALTH & SAFETY CODE §§ 2229. By that Act, the Water Quality Board was given the 361.252(m), 382.089(c); TEX. WATER CODE § power to develop a statewide water quality plan, to per- 26.136(k). form research and investigations, and to adopt rules and issue orders necessary to effectuate the Act's purposes. Id. TAB alleges that it is a Texas not-for-profit corpora- at § 3.01-3.10. The Water Quality Act provided the same tion, that its members do business throughout Texas, and remedies as the Solid Waste Management Act and the that it is authorized to represent its members on any matter Clean Air Act. See id. at § 4.02. that may have an impact on their businesses.

Originally, neither the Water Quality Board nor the TAB filed this suit under the Declaratory Judgments Air Control Board had the power to levy civil penalties Act, TEX. CIV. PRAC. & REM. CODE §§ 37.001-37.011, directly in the event it determined that its regulations or alleging that some of its members had been subjected to orders had been violated. Instead, each board was required civil penalties assessed by either the Air Control Board or first to file suit against the violator in district court. Only the Water Commission. TAB further alleged that all of its the district court had the power to assess civil penalties. other members that operate their businesses pursuant to the pertinent provisions of the Texas Clean Air Act, the The legislature substantially changed this enforce- Texas Water Code, or the Texas [**8] Solid Waste ment scheme in 1985. That year the Air Control Board Disposal Act or any rules or orders issued pursuant to and the Water Commission (formerly the Water Control those provisions were put at "substantial risk (if not cer- Board) were granted the power to assess civil penalties tainty)" of being assessed civil penalties by the Air Con- directly of up to $ 10,000 per day per violation. 2 Both trol Board or the Water Commission. Thus this suit does administrative bodies also retained the option to pursue not challenge specific instances of the Air Control Board's civil penalties in district [**6] court. TEX. HEALTH or the Water Commission's exercise, or threatened exer- [*443] & SAFETY CODE §§ 361.224, 382.081; TEX. cise, of the civil penalty power. Instead, TAB's suit is a Page 3 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 facial challenge to the constitutionality of this adminis- 102 S. Ct. 752 (1982); Warth v. Seldin, 422 U.S. 490, 498, trative enforcement scheme under the Texas Constitution. 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1974); see also, Antonin Scalia, The Doctrine of Standing as an Essential Element The Defendants and Intervenors counterclaimed of the Separation of Powers, 18 SUFFOLK U. L. Rev seeking a declaratory judgment that the statutes, rules, and 881, 889 n.69 (1983)(noting that [**11] the dicta of regulations challenged by TAB do not, on their face, Flast v. Cohen, 392 U.S. 83, 100, 20 L. Ed. 2d 947, 88 S. conflict with the open courts and jury trial provisions of Ct. 1942 (1968), suggesting that standing is unrelated to our constitution. The trial court granted the Defendants' the separation of powers doctrine has since been disa- and Intervenors' requested declaratory judgment and de- vowed). Under this doctrine, governmental authority nied TAB's request for a declaratory judgment. The court vested in one department of government cannot be exer- also denied TAB's request for injunctive relief. cised by another department unless expressly permitted TAB appealed directly to this court. See TEX. GOV'T by the constitution. Thus we have construed our separa- CODE § 22.001(c); 4 TEX. R. APP. P. 140. In this court, tion of powers article to prohibit courts from issuing ad- TAB has limited its challenges to claims of unconstitu- visory opinions because such is the function of the exec- tional denial of a jury trial and violation of our constitu- utive rather than the judicial department. 6 Firemen's Ins. tion's open [**9] courts provision. Co. v. Burch, 442 S.W.2d 331, 333 (Tex. 1969); Morrow v. Corbin, 122 Tex. 553, 62 S.W.2d 641, 644 (Tex. 1933).

4 "An appeal may be taken directly to the su- Accordingly, we have interpreted the Uniform Declara- preme court from an order of a trial court granting tory Judgments Act, TEX. CIV. PRAC. & REM. CODE §§ or denying an interlocutory or permanent injunc- 37.001-.011, to be merely a procedural device for decid- tion on the ground of the constitutionality of a ing cases already within a court's jurisdiction rather than a statute of this state." TEX. GOV'T CODE § legislative enlargement of a court's power, permitting the 22.001(c). rendition of advisory opinions. Firemen's Ins. Co., 442 S.W.2d at 333; United Serv. Life Ins. Co. v. Delaney, 396 I. Standing S.W.2d 855, 863 (Tex. 1965); California Prods., Inc. v. Puretex Lemon Juice, Inc., 160 Tex. 586, [**12] 334 Before we reach the merits of this case, we first con- S.W.2d 780 (1960). sider the matter of the trial court's jurisdiction, as well as our own; specifically we determine whether TAB has The analysis is the same under the federal standing to challenge the statutes and regulations in constitution. See e.g. Correspondence of the Jus- question. Because TAB's standing to bring this action is tices, Letter from Chief Justice John Jay and the not readily apparent, and because our jurisdiction as well Associate Justices to President George Washing- as that of the trial court depends on this issue, we re- ton, August 8, 1793 in Laurence H. Tribe, Amer- quested supplemental briefing on standing at the oral ican Constitutional Law 73 n.3 (2nd ed. 1988). argument of this case. In response, the parties insist that any question of standing has been waived in the trial court The distinctive feature of an advisory opinion is that and cannot be raised by the court for the first time on it decides an abstract question of law without binding the appeal. We disagree. parties. Alabama State Fed'n of Labor v. McAdory, 325 U.S. 450, 461, 89 L. Ed. 1725, 65 S. Ct. 1384 (1945); Subject matter jurisdiction is essential to the authority Firemen's Ins. Co., 442 S.W.2d at 333; Puretex Lemon of a court to decide a case. Standing [**10] is implicit in Juice, Inc., 160 Tex. at 591, 334 S.W.2d at 783. An the concept of subject matter jurisdiction. The standing opinion issued in a case brought by a party without requirement stems from two limitations on subject matter standing is advisory because rather than remedying an jurisdiction: the separation of powers doctrine and, in actual or imminent harm, the judgment addresses only a Texas, the open courts provision. Subject matter jurisdic- hypothetical injury. See Allen v. Wright, 468 U.S. 737, tion [*444] is never presumed and cannot be waived. 5 751, 82 L. Ed. 2d 556, 104 S. Ct. 3315 (1984). Texas courts, like federal courts, have no jurisdiction to render Justice Doggett confuses subject matter ju- such opinions. risdiction with personal jurisdiction. Only the latter can be waived when uncontested. See TEX. The separation [**13] of powers doctrine is not the R. CIV. P. 120a. only constitutional basis for standing. Under federal law, standing is also an aspect of the Article III limitation of One limit on courts' jurisdiction under both the state the judicial power to "cases" and "controversies." Sierra and federal constitutions is the separation of powers doc- Club v. Morton, 405 U.S. 727, 731, 31 L. Ed. 2d 636, 92 S. trine. See TEX. CONST. art. II, § 1; Valley Forge Chris- Ct. 1361 (1972). To comport with Article III, a federal tian College v. Americans United for Separation of court may hear a case only when the litigant has been Church and State, 454 U.S. 464, 471-74, 70 L. Ed. 2d 700, Page 4 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 threatened with or has sustained an injury. Valley Forge waivable. See ___ S.W.2d at ___. The other state Christian College, 454 U.S. at 471. Under the Texas cases cited deal with the waiver of objections to Constitution, standing is implicit in the open courts pro- join a real party in interest or to a party's capacity vision, which contemplates access to the courts only for to sue rather than to jurisdictional standing. See those litigants suffering an injury. Specifically, the open International Depository, Inc. v. State, 603 A.2d courts provision provides: 1119, 1122 (R.I. 1992)(addressing real party in interest objection); Princess Anne Hills Civ. All courts shall be open, and every League, Inc. v. Susan Constant Real Estate Trust, person for an injury done him, in his lands, 413 S.W.2d 599, 603 n.1 (Va. 1992)(addressing goods, person or reputation, shall have real party in interest objection); Sanford v. Jack- remedy by due course of law. son Mall Shopping Ctr. Co., 516 So.2d 227, 230 (Miss. 1987)(addressing real party in interest ob- jection); Jackson v. Nangle, 677 P.2d 242, 250 TEX. CONST. art. I, § 13 (emphasis added). Because n.10 (Alaska 1984)(addressing real party in inter- standing is a constitutional prerequisite to maintaining a est objection); Poling v. Wisconsin Physicians suit under both federal and Texas law, we look to the more Serv., 120 Wis. 2d 603, 357 N.W.2d 293, 297-98 extensive jurisprudential experience of the federal courts (Wisc. App. 1984)(addressing real party in interest on this subject for any guidance it may yield. objection); Torrez v. State Farm Mut. Auto Ins.

Co., 130 Ariz. 223, 635 P.2d 511, 513 n.2 (Ariz. Under federal law, a lack of standing deprives a court App. 1981)(addressing real party in interest ob- of subject [**14] matter jurisdiction because standing is jection); Brown v. Robinson, 354 So.2d 272, 273 an element of such [*445] jurisdiction. Carr v. Alta (Ala. 1977); Cowart v. City of West Palm Beach, Verde Indus., 931 F.2d 1055, 1061 (5th Cir. 1991); 255 So.2d 673, 675 (Fla. 1971)(addressing ca- Simmons v. Interstate Commerce Comm'n, 900 F.2d pacity objection).

1023, 1026 (7th Cir. 1990); M.A.I.N. v. Commissioner, Maine Dept. of Human Serv., 876 F.2d 1051, 1053 (1st [**16] Subject matter jurisdiction is an issue that Cir. 1989); Haase v. Sessions, 266 U.S. App. D.C. 325, may be raised for the first time on appeal; it may not be 835 F.2d 902, 908 (D.C. Cir. 1987); Page v. Schweiker, waived by the parties. Texas Employment Comm'n v. 786 F.2d 150, 153 (3d Cir. 1986); see also Lujan v. De- International Union of Elec., Radio and Mach. Workers, fenders of Wildlife, 119 L. Ed. 2d 351, 112 S. Ct. 2130 Local Union No. 782, 163 Tex. 135, 352 S.W.2d 252, 253 (1992); Heckler v. Mathews, 465 U.S. 728, 737, 79 L. Ed. (Tex. 1961); RESTATEMENT (SECOND) OF JUDG- 2d, 104 S. Ct. 1387 (1984); Warth, 422 U.S. at 511. Other MENTS § 11, comment c (1982). This court recently re- states have followed this analysis in construing their own iterated that axiom in Gorman v. Life Insurance Co., 811 constitutions. 7 See e.g., Prudential-Bache Sec., Inc. v. S.W.2d 542, 547 (Tex.), cert. denied, 116 L. Ed. 2d 60, Commissioner of Revenue, 588 N.E.2d 639, 642 (Mass. 112 S. Ct. 88 (1991). Because we conclude that standing is 1992); Bennett v. Board of Trustees for Univ. of N. Col- a component of subject matter jurisdiction, it cannot be orado, 782 P.2d 1214, 1216 (Colo. App.), cert. denied, waived and may be raised for the first time on appeal. 8 797 P.2d 748 (Colo. 1989); Pace Constr. Co. v. Missouri Highway and Transp. Comm'n, 759 S.W.2d 272, 274 (Mo. 8 Justice Doggett disagrees that standing is a App. 1988); Terracor v. Utah Bd. of State Lands Forestry, component of subject matter jurisdiction, yet he 716 P.2d 796, 798-99 (Utah 1986); State by McClure declines to explain what role standing plays in our [**15] v. Sports and Health Club, Inc., 370 N.W.2d jurisprudence. From his harsh critique of the doc- 844, 850 (Minn. 1985), appeal dism'd, 478 U.S. 1015 trine, it seems that he not only objects to the con- (1986); Smith v. Allstate Ins. Co., 483 A.2d 344, 346 (Me. clusion that standing cannot be waived but also to 1984); Ardmare Constr. Co. v. Freedman, 191 Conn. 497, the conclusion that standing is a requirement to 467 A.2d 674, 675 n.4, 676-77 (Conn. 1983); Horn v. initiate a lawsuit.

County of Ventura, 24 Cal. 3d 605, 596 P.2d 1134, 1142 [**17] If we were to conclude that standing is un- (Cal. 1979); Stewart v. Board of County Comm'rs of Big reviewable on appeal at least three undesirable conse- Horn County, 175 Mont. 197, 573 P.2d 184, 186, 188 quences could result. First and foremost, appellate courts (Mont. 1977); Albritton v. Moore, 238 La. 728, 116 So.2d would be impotent to prevent lower courts from exceed- 502, 504 (La. 1959). ing their constitutional and statutory limits of authority.

Second, appellate courts could not arrest collusive suits.

7 Of the states listed by Justice Doggett, only Third, by operation of the doctrines of res judicata and Illinois, Iowa, Kentucky, New York, South Da- collateral estoppel, judgments rendered in suits address- kota, and perhaps Ohio, Pennsylvania and Wash- ing only hypothetical injuries could bar relitigation of ington actually treat jurisdictional standing as Page 5 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 issues by a litigant who eventually suffers an actual in- Because standing is a component of subject matter jury. We therefore hold that standing, as a component of jurisdiction, we consider TAB's standing under the same subject matter [*446] jurisdiction, cannot be waived in standard by which we review subject matter jurisdiction this or any other case and may be raised for the first time generally. That standard requires the pleader to allege on appeal by the parties or by the court. facts that affirmatively demonstrate the court's jurisdic- tion to hear the cause. Richardson v. First [**20] We are aware that this holding conflicts with Texas Nat'l Life Ins. Co., 419 S.W.2d 836, 839 (Tex. 1967).

Industrial Traffic League v. Railroad Commission, 633 When reviewing a trial court order dismissing a cause for S.W.2d 821, 823 (Tex. 1982) (per curiam). 9 The analysis want of jurisdiction, Texas appellate courts "construe the that leads us to the conclusion we reach here, however, pleadings in favor of the plaintiff and look to the pleader's compels us to overrule Texas Industrial Traffic League intent." Huston v. Federal Deposit Ins. Corp., 663 S.W.2d and disapprove of all cases relying on it to the extent that 126, 129 (Tex. App.--Eastland 1983, writ ref'd n.r.e. they conflict with this opinion. 10 Although our concern 1984); see also W. Wendell Hall, Standards of Appellate for the rule of stare [**18] decisis makes us hesitant to Review in Civil Appeals, 21 ST. MARY'S L.J. 865, 870 overrule any case, when constitutional principles are at (1990). issue this court as a practical matter is the only govern- ment institution with the power and duty to correct such Here, however, we are not reviewing a trial court errors. See Payne v. Tennessee, 115 L. Ed. 2d 720, 111 order of dismissal for want of jurisdiction, we are con- S.Ct. 2597, 2609-11 (1991) (observing that reexamination sidering standing for the first time on appeal. A review of of constitutional decisions is appropriate when "correc- only the pleadings to determine subject matter jurisdiction tion through legislative action is practically impossible"). is sufficient in the trial court because a litigant has a right to amend to attempt to cure pleading defects if jurisdic- Texas Industrial Traffic League relied on two tional facts are not alleged. See TEX. R. CIV. P. 80. Fail- cases to support its holding that standing cannot be ing that, the suit is dismissed. When an appellate court raised for the first time on appeal: Coffee v. Rice questions jurisdiction on appeal for the first time, how- University, 403 S.W.2d 340, 341 (Tex. 1966), and ever, there is no opportunity to cure the defect. Therefore, Sabine River Authority v. Willis, 369 S.W.2d 348, when a Texas appellate court reviews the standing of a (Tex. 1963). We need not overrule these two party sua sponte, it must construe the petition in favor of cases, however, because unlike Texas Industrial the party, and if necessary, [**21] review the entire Traffic League, we believe that standing was record to determine if any evidence supports standing. present in the trial court in these cases. Our con- TAB asserts standing on behalf of its members. The cern is with a party's right to initiate a lawsuit and general test for standing in Texas requires that there "(a) the trial court's corresponding power to hear the shall be a real controversy between the parties, which (b) case ab initio. Standing is determined at the time will be actually determined by the judicial declaration suit is filed in the trial court, and subsequent sought." Board of Water Engineers v. City of San Antonio, events do not deprive the court of subject matter 155 Tex. 111, 114, 283 S.W.2d 722, 724 (1955). Texas, jurisdiction. Carr, 931 F.2d at 1061. however, has no particular test for determining the [**19] standing of an organization, such as TAB. See e.g., Touchy v. [*447] Houston Legal Found., 432 S.W.2d Justice Doggett claims that we overrule three 690, 694 (Tex. 1968); Texas Highway Comm'n v. Texas additional decisions of this court. See Central Ass'n of Steel Importers, Inc., 372 S.W.2d 525, 530-31 Educ. Agency v. Burke, 711 S.W.2d 7 (Tex. (Tex. 1963). While we agree with the statement of the 1986)(per curiam); American Gen. Fire & Casu- general test for standing set out in Board of Water Engi- alty Co. v. Weinberg, 639 S.W.2d 688 (Tex. 1982); neers, we foresee difficulties in relying on it alone to Cox v. Johnson, 638 S.W.2d 867 (Tex. 1982)(per determine the standing of an organization like TAB. For curiam). We disagree. These cases hold that mat- instance, when members of an organization have indi- ters not raised in the trial court are waived. One vidual standing, but the organization was not established exception noted by these decisions, however, is a for the purpose of protecting the particular interest at lack of jurisdiction which may be raised by a issue, it is not necessarily in the members' best interest to party, or the court, for the first time on appeal. allow such a disinterested organization to sue [**22] on Justice Doggett does not believe that standing falls their behalf. Furthermore, an organization should not be within that exception because he contends that allowed to sue on behalf of its members when the claim standing is not jurisdictional. asserted requires the participation of the members indi- vidually rather than as an association, such as when the Consequently, we proceed to determine here, on our own motion, whether TAB has standing to bring this suit.

Page 6 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 members seek to recover money damages and the amount purpose. TAB was chartered to "represent the interests of of damages varies with each member. its members on issues which may impact upon its mem- bers' businesses." Considering a very similar question in The United States Supreme Court has articulated a New York State Club Association, the United States Su- standard for associational standing that lends itself to our preme Court held that: "The associational interests that use. We adopt that test today. In Hunt v. Washington State the consortium seeks to protect are germane to its pur- Apple Advertising Commission, the Court held that an pose: appellant's certificate of incorporation states that its association has standing to sue on behalf of its members purpose is 'to promote the common business interests of when "(a) its members would otherwise have standing to its [*448] [member clubs].'" [**25] 487 U.S. at 10 sue in their own right; (b) the interests it seeks to protect n.4. (bracketed language in original). Likewise, the in- are germane to the organization's purpose; and (c) neither terests TAB desires to protect are germane to the organi- the claim asserted nor the relief requested requires the zation's purpose, and thus the second prong is met. participation of individual members in the lawsuit." 432 U.S. 333, 343 (1977); see also New York State Club Ass'n. Under the third and final prong of the Hunt test, v. City of New York, 487 U.S. 1, 9, 101 L. Ed. 2d 1, 108 S. TAB's pleadings and the record must demonstrate that Ct. 2225 (1988); International Union, United Auto., neither the claim asserted nor the relief requested require Aerospace and Agric. Implement Workers of Am. v. the participation of individual members in the lawsuit.

Brock, 477 U.S. 274, 282, 91 L. Ed. 2d 228, 106 S. Ct. The Supreme Court has interpreted this prong as follows: 2523 (1986). This standard [**23] incorporates the standing analysis we adopted in Board of Water Engi- Whether an association has standing to neers, yet addresses the additional concerns we have invoke the court's remedial powers on noted. behalf of its members depends in substan- tial measure on the nature of the relief We now apply the Hunt standard to the case before sought. If in a proper case the association us. Reviewing the record in its entirety for evidence seeks a declaration, injunction, or some supporting subject matter jurisdiction, and resolving any other form of prospective relief, it can doubt in TAB's favor, we conclude that TAB has standing reasonably be supposed that the remedy, if to pursue the relief it seeks in this case. granted, will inure to the benefit of those The first prong of the Hunt test requires that TAB's members of the association actually in- pleadings and the rest of the record demonstrate that jured.

TAB's members have standing to sue in their own behalf.

This requirement should not be interpreted to impose unreasonable obstacles to associational representation. In Hunt, 432 U.S. at 343, (quoting Warth, 422 U.S. at 515). this regard the United States Supreme Court stated that " By seeking damages on behalf of its members, ne- the purpose of the first part of the Hunt test is simply to cessitating that each individual prove lost profits partic- weed out plaintiffs who try to bring cases, which could not ular to its operations, the organization in Warth lacked otherwise be brought, by manufacturing allegations of standing to sue; rather, each individual member had to be standing that lack any real foundation." New York State a party to the [**26] suit. These facts are distinguishable Club Ass'n, 487 U.S. at 9. We are satisfied that TAB has from Brock, in which the union challenged an adminis- not manufactured this lawsuit. A comparison of the asso- trative interpretation of statutory provisions relating to ciation's membership roster with the list of businesses unemployment compensation. 477 U.S. 274. Recogniz- subjected to state penalties indicates individual TAB ing that the suit raised "a pure question of law," and that members [**24] have been assessed administrative "the individual circumstances" of any aggrieved member penalties pursuant to the challenged enactments. Addi- were not in issue, the Court held that the UAW had tionally, TAB has alleged that other of its members re- standing to challenge the government's actions. Id. at main at substantial risk of penalty. A substantial risk of 287-88, 290; see also Pennell, 485 U.S. at 7 n.3 (facial injury is sufficient under Hunt. See e.g., Pennell v. City of challenge to rent ordinance does not require participation San Jose, 485 U.S. 1, 7, 99 L. Ed. 2d 1, 108 S. Ct. 849 n.3 of individual landlords). Here, TAB seeks only prospec- (1988)(concluding that association of landlords had tive relief, raises only issues of law, and need not prove standing based on pleadings that individual members the individual circumstances of its members to obtain that would likely be harmed by rent ordinance). Thus TAB relief, thus meeting the third prong of Hunt. satisfies the first prong of the Hunt test.

Having found that TAB meets all three prongs of the The second prong of Hunt requires that TAB's pleadings Hunt test, we conclude that TAB has standing to pursue and the rest of the record demonstrate that the interests the relief it seeks in this case.

TAB seeks to protect are germane to the organization's Page 7 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 II. Open Courts requirement is an unreasonable financial barrier to access to the courts in light of the state interest involved.

TAB contends that the prepayment requirements of the statutes and regulations in question violate the open Thus, contrary to Justice Doggett's reading courts provision of the Texas Constitution by unreasona- of our opinion, the Sax test is inapplicable. bly restricting access to the courts. After the agency has found a party to be in violation of any [**27] of these The stated purpose of the regulatory statutes at issue statutes and regulations, the offender must either tender a here is to protect our state's natural resources. 13 There is cash deposit or post a supersedeas bond in the full amount no question that this is an important state interest. 14 The of the penalties assessed, or forfeit the right to judicial state argues that the prepayment provisions further this review. 11 interest by increasing the deterrent effect of the penalties and by aiding in their collection. The state maintains that a In most other jurisdictions, such prepayment violator will be less deterred by an administrative penalty provisions are required only to stay execution of if it can delay payment without bond while appealing the judgments and are not prerequisites to the right to case in the courts. The state also argues that delay may appeal itself. See Gary Stein, Expanding the Due render the penalty uncollectible, as the violator may be- Process Rights of Indigent Litigants: Will Texaco come insolvent. [**30] Trickle Down?, 61 N.Y.U. L. REV. 463, 469 (1986). 13 The Clean Air Act was implemented to "safeguard the state's air resources from pollution Historically, we have recognized at least three sepa- by controlling or abating air pollution and emis- rate constitutional guarantees emanating from our open sions of air contaminants . . . ." TEX. HEALTH & courts provision. First, courts must actually be open and SAFETY CODE § 382.002(a). The Texas Water operating, so that, for example, the legislature must place Code was implemented to "maintain the quality of every county within a judicial district. Runge & Co. v. water in the state consistent with the public health Wyatt, 25 Tex. Supp. 294 (1860). Second, citizens must and enjoyment . . ." TEX. WATER CODE § have access to those courts unimpeded by unreasonable 26.003. financial barriers, so that the legislature cannot impose a The importance is evidenced by article XVI, litigation tax in the form of increased filing fees to en- section 59(a) of our constitution, which provides hance [**28] the state's general revenue, LeCroy v. in relevant part that: "The conservation and de- Hanlon, 713 S.W.2d 335, 342 (Tex. 1986). Finally, velopment of all the natural resources of this State meaningful legal remedies must be afforded to our citi- . . . and the preservation and conservation of all zens, so that the legislature may not abrogate the right to such natural resources . . . are each and all . . . assert a well-established common law cause of action public rights and duties." TEX. CONST. art. XVI, § unless the reason for its action outweighs the litigants' 59(a). constitutional right of redress. Sax v. Votteler, 648 S.W.2d 661, 665-66 (Tex. 1983). In considering these rationales, we note that the prepayment provisions actually consist of two elements.

Here the second guarantee is applicable. This is not a First, the assessed penalty must be paid, or financial se- question of the abrogation of any well-established com- curity provided, within thirty days; enforcement is not mon law cause [*449] of action, 12 just as it is not a stayed pending any period of judicial review. 15 Second, question of the physical absence of a court to which a [**31] if payment is not made or financial security pro- complaint may be brought. The issue before us is access to vided within the thirty-day period, the right to judicial the courts. In previous cases involving this issue, we did review is forfeited. We agree that the rationales advanced not predicate our decision on whether the party whose by the state justify the first of these elements. Requiring access had been restricted was attempting to assert a expeditious payment of the administrative penalties in- common law cause of action. In LeCroy, for example, the creases their effectiveness. The legislature, however, court did not permit increased filing fees for statutory could have imposed the first element without the second. causes of action while denying them for common law It could have provided the agency with the right to col- claims. 713 S.W.2d 335. Likewise in Dillingham v. lection of assessed penalties unless a supersedeas bond is Putnam, when the court struck down a statute requiring a posted, yet provided for judicial review. The requirement supersedeas bond as a condition of appeal, the court did of immediate payment, without the corresponding for- not [**29] concern itself with whether the particular feiture provision, would not have implicated the open appeal being restricted involved a common law or statu- courts provision, as the charged party could have obtained tory claim. 14 S.W. 303 (Tex. 1890). Similarly, in the judicial review regardless of payment. This approach present case, the issue is simply whether the prepayment would have been in accordance with the usual procedure Page 8 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 governing appeals of trial court judgments. See TEX. R. [**34] III. Jury Trial APP. P. 40. Any litigant may appeal without superseding TAB also claims that the statutes empowering these the trial court's judgment, but the mere pendency of an agencies to assess civil penalties violate the right to a jury appeal does not stay enforcement of the judgment. 16 trial guaranteed by the Texas Constitution. 19 We disagree. [*450] Our specific focus for purposes of our open courts analysis, therefore, is not whether the requirement TAB claims that the lack of a jury trial be- of immediate payment is [**32] reasonable, but whether fore the agency as well as the lack of a trial de the forfeiture of the right of judicial review, if the penal- novo violate article I, section 15. We limit our ties are not superseded, is reasonable. inquiry to the absence of a trial de novo because, as this court has said: "Trial by jury cannot be If the person charged does not make pay- claimed in an inquiry that is non-judicial in its ment or post bond within thirty days, the agency character, or with respect to proceedings before an may forward the matter to the attorney general for administrative board." Middleton v. Texas Power enforcement. TEX. HEALTH & SAFETY & Light Co., 108 Tex. 96, 185 S.W. 556, 561-62 CODE § 382.089(c), § 361.252(m); TEX. WATER (Tex. 1916). Even if the right to a jury is denied CODE § 26.136(k). before an administrative agency, the dispositive It has been argued that our procedure of al- question is whether a trial de novo and the corre- lowing immediate enforcement of trial court sponding right to a jury trial is constitutionally judgments violates federal due process when the required upon judicial review of the agency's de- judgment debtor is financially unable to post a cision. See Cockrill v. Cox, 65 Tex. 669, 674 supersedeas bond and immediate enforcement will (1886)("The right of jury trial remains inviolate, cause irreparable injury. Texaco, Inc. v. Pennzoil though denied in the court of first instance [in civil Co., 784 F.2d 1133 (2d Cir. 1986), rev'd on other cases], if the right to appeal and the jury trial on grounds, 481 U.S. 1, 95 L. Ed. 2d 1, 107 S. Ct. appeal are secured.")(bracketed language in orig- 1519 (1987). A similar argument could be fash- inal). ioned under the Texas open courts provision, but TAB does not assert that argument here. TAB's [**35] Article I, section 15 of our constitution 20 open courts challenge centers not on the require- preserves a right to trial by jury for those actions, or ment of immediate payment, but on the forfeiture analogous actions, tried to a jury at the time the constitu- of judicial review if payment is not made. tion of 1876 was adopted. E.g., State v. Credit Bureau of Laredo, 530 S.W.2d 288, 291 (Tex. 1975); White v. White, [**33] We conclude that the forfeiture provision is 108 Tex. 570, 196 S.W. 508 (1917); Hatten v. City of an unreasonable restriction on access to the courts. While Houston, 373 S.W.2d 525 (Tex. Civ. App.--Houston 1963, the requirement of prepayment or the posting of a bond to writ ref'd n.r.e.); Hickman v. Smith, 238 S.W.2d 838 (Tex. stay enforcement furthers the state's important environ- Civ. App.--Austin 1951, writ ref'd). A jury trial is not mental interests by creating a strong incentive for timely mandated by this provision for any other judicial pro- payment of the assessed penalties, the forfeiture provision ceeding. Id. serves no additional interest. 17 The state may accomplish its goals by enforcing the prepayment requirements Article I, section 15, provides, in pertinent without infringing on a party's right to its day in court. part: Accordingly, we hold that the statutes and regulations at issue facially violate our open courts provision. 18 The right of trial by jury shall remain inviolate. The Legislature Thus, contrary to Justice Doggett's assertion, shall pass such laws as may be we do not strike down the penalties themselves. needed to regulate the same, and to Nothing in this opinion prohibits the state's col- maintain its purity and efficiency. * lection of assessed penalties. We hold as violative **. of our open courts provision only the requirement that the penalties be paid as a condition to judicial review. Furthermore, nothing in our opinion re- TAB has not presented in this court, as it did be- quires that penalties already paid be refunded. low, its complaint that the statutes and regulations That the affected parties may be able to af- also violate of the right to jury trial under article V, ford prepayment is irrelevant. The guarantee of section 10 of the Texas Constitution. constitutional rights should not depend on the balance in one's bank account. [**36] In Credit Bureau, we concluded that a suit for civil penalties for violation of an injunction issued Page 9 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 pursuant to the Texas Deceptive Trade Practices Act was by delegating duties to an administrative agency. Here, analogous to the common law action for debt, tried to a we simply reaffirm what this court held almost a half jury at the time our constitution was adopted. 530 century ago, in Corzelius v. Harrell 143 Tex. 509, 186 S.W.2d at 293. Thus, we held that the right to a jury trial S.W.2d 961 (1945). In Corzelius, we concluded that cer- for that action remained inviolate. Id. We observed in tain judicial functions, including fact finding, may be Credit Bureau, however, that in certain types of adversary delegated constitutionally by the legislature to adminis- proceedings the constitutional right to a jury trial does not trative agencies in furtherance of the preservation and attach. Among the proceedings we referred to are appeals conservation of the state's natural resources. The decision from administrative decisions. 21 Id. (citing State v. De in Corzelius was based on article XVI, section 59(a) of Silva, 105 Tex. 95, 145 S.W. 330 (1912), and Texas our constitution, which provides in relevant part: "The [*451] Liquor Control Bd. v. Jones, 112 S.W.2d 227 conservation and development of all the natural resources (Tex. Civ. App.--Houston 1963, writ ref'd n.r.e.)). Con- of this State . . . and the preservation and conservation sistent with this noted exception in Credit Bureau, we [**39] of all such natural resources . . . are each and all . conclude that these agencies' assessments of environ- . . public rights and duties; and the Legislature shall pass mental penalties are not actions, or analogous actions, to all such laws as may be appropriate thereto." TEX. those tried to a jury at the time the constitution of 1876 CONST. art. XVI, § 59(a). "By the use of the broad lan- was adopted. To hold that these environmental statutes guage used in Article XVI, Section 59(a)," the court and regulations promulgated in the late 1960s merely stated, "the Legislature is authorized to enact such laws as parrot common law and statutory rights triable to a [**37] are necessary to carry out the purposes for which such jury in 1876 would turn a blind eye to the emergence of constitutional amendment was adopted." Corzelius, 186 the modern administrative state and its profound impact S.W.2d at 964. 24 on our legal and social order. In the late 19th century, ours was primarily a sparsely-populated agrarian society. See 24 Justice Doggett contends that the basis for generally, T.R. Fehrenbach, Lone Star: A History of our jury trial holding is overbroad. Instead, he Texas and the Texans, 279-324 (1983). By contrast, would have us adopt the "imperfectly employed" concentrated industrial activity and its by-products, in- federal test first enunciated in Atlas Roofing Co. v. cluding the wide-spread emission of pollutants, with their Occupational Safety & Health Review Comm'n, resulting potential for significant damage to our natural 430 U.S. 442 (1977). infra, ___ S.W.2d at ____. resources are phenomena of relatively recent origin. In The basis for our decision is more limited, arising response to such phenomena, regulatory schemes, such as as it does out of TEX. CONST. article XVI, section those challenged here, were designed to balance mounting 59(a) and our decision in Corzelius. environmental concerns with our state's economic vitality.

There is no doubt that the legislature delegated the In 1876 no governmental schemes akin to these existed. 22 power to assess these civil penalties to the Air Control Thus, we conclude that the contested proceedings are not [**40] Board and the Water Commission as a manifes- analogous to any action tried to a jury in 1876. Accord- tation of the public's interest in preserving and conserving ingly, we hold that no right to a jury trial attaches to ap- the state's air and water resources. That intent is apparent peals from administrative adjudications under the envi- from the policy statements of the relevant statutes. 25 ronmental statutes and regulations at issue here. 23 [*452] We conclude, therefore, that the delegation of the fact-finding function by the legislature to the Air Control While the Credit Bureau court specifically Board and the Water Commission under this statutory referred to the broader jury trial provision in arti- scheme was within the legislature's constitutional author- cle V, section 10 when it discussed the adminis- ity. trative proceeding exception, that exception nec- essarily also applies to the narrower provision 25 The Clean Air Act proclaims: found in article I, section 15. [**38] 22 We do not consider nineteenth century criminal nuisance laws comparable to modern The policy of this state and environmental regulations. See ___ S.W.2d ___.

23 Despite Justice Doggett's trumpeting of our the purpose of this chapter to constitution's guarantee of trial by jury, he agrees safeguard the air resources of the state from pollution by controlling that the right does not attach under the circum- or abating air pollution and emis- stances of this case. sions of air contaminants, con- We should not be misunderstood to say that the leg- sistent with the protection of public islature may abrogate the right to trial by jury in any case health, general welfare, and phys- Page 10 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 ical property of the people, in- rule, which directs a reviewing court to reverse cluding the aesthetic enjoyment of and remand the agency adjudication if the agency air resources by the public and the decision is: maintenance of adequate visibility.

1) in violation of constitutional or statutory provisions; TEX. HEALTH & SAFETY CODE § 382.002.

2) in excess of the statutory authority of the agency; The Texas Water Code pro- claims in relevant part: 3) made upon unlawful proce- dure; It is the policy of this state and the purpose of the subchapter to maintain the quality of water in the 4) affected by other error of law; state consistent with the public health and enjoyment 5) not reasonably supported by substantial evidence in view of the ... reliable and probative evidence in the record as a whole; or TEX. WATER CODE § 26.003.

6) arbitrary and capricious or characterized by abuse of discre- tion or clearly unwarranted exer- [**41] Of course, the fact that no jury trial is pro- cise of discretion. vided by the legislature to an alleged violator of these environmental protection laws does not mean that the agencies' power to assess Id. penalties is unbridled. 26 The Air Control Board and We have held that judicial review under the Water Commission may act only within constitutional APTRA based on the record developed before the and statutory parameters. agency "furnishes more assurance of due process and a surer means of determining whether an agency acted arbitrarily, capriciously and without The actions of the agencies involved in this due regard for the evidence." Imperial Am. Re- proceeding are subject to the Administrative sources Fund, Inc. v. Railroad Comm'n of Tex., Procedure and Texas Register Act (APTRA), 557 S.W.2d 280, 285 (Tex. 1977); see also, which specifically affords a "full panoply of pro- Southwestern Bell Tel. Co., 571 S.W.2d at 509. cedural safeguards" to a party to contested case [**42] For the reasons set out above, we reverse before those agencies. Southwestern Bell Tel. that portion of the trial court's judgment declaring that Co. v. Public Util. Comm'n of Tex., 571 S.W.2d section 4.041 of the Texas Clean Air Act, sections 26.136 503, 507 (Tex. 1978). These procedural safeguards and 27.1015 of the Texas Water Code, and section 8b of include the right to notice, the making of a full the Texas Solid Waste Disposal Act and the rules and record of the proceeding before the agency, the regulations promulgated under those statutes comport taking of depositions, the right to subpoena wit- with the open courts provision of our constitution, article nesses, the application of the rules of evidence, the I, section 13. We declare that the requirement of a preparation of proposal for decision and the filing supersedeas bond or cash deposit paid into an escrow of exceptions and briefs, as well as separately account as a prerequisite to judicial review under TEX. stated findings of fact and conclusions of law.

HEALTH & SAFETY CODE §§ 382.089(a),(b), TEX. CIV. STAT. ANN. art. 6252-13a § 19 361.252(k),(l), and TEX. WATER CODE § 26.136(j) is (Vernon Supp. 1993). Judicial review is provided unconstitutional. We affirm that portion of the trial court's by section 19(e) under the substantial evidence Page 11 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 judgment declaring that the listed statutes, rules, and imposed. Dillingham v. Putnam, 109 Tex. 1, 5-6, 14 S.W. regulations do not violate the jury trial provision of our 303, 304 (1890). This is true even if that "judgment" takes constitution, article I, section 15. the form of an administrative agency decision. Adminis- trative agency decisions, for the most part, entitle an ap- John Cornyn pellant to only "substantial evidence" as opposed to de Justice novo review. To further burden those regulated with prepayment of the "judgment" as the only alternative to Concurring and Dissenting Opinion by Justice Dog- total loss of even substantial evidence review violates the gett. basic concept of our constitutional open courts in Texas.

Concurring and Dissenting Opinion by Justice As to the issue (or non-issue) of standing, the major- Gammage. ity in effect adopts the position of federal courts that Concurring and Dissenting Opinion by Justice standing is a jurisdictional question. Otherwise it cannot Spector. be fundamental error to be addressed when no party raises it. Standing was not raised and should not be addressed in Justice Hightower not sitting. this cause.

OPINION DELIVERED: March 3, 1993 Even assuming [**45] standing is an element of subject matter jurisdiction, the court should not write on CONCUR BY: BOB GAMMAGE (In Part); LLOYD the issue in this case. Even though a judgment is void and DOGGETT (In Part); ROSE SPECTOR (In Part) [**43] subject to collateral attack at any point if there is an ab- sence of subject matter jurisdiction, see Mercer v. Phillips DISSENT BY: BOB GAMMAGE (In Part); LLOYD Natural Gas Co., [*477] 746 S.W.2d 933, 936 (Tex. DOGGETT (In Part); ROSE SPECTOR (In Part) App. -- Austin 1988, writ denied), unassigned error of lack of jurisdiction should be addressed only if jurisdic- DISSENT tion is in fact lacking. Since the majority concludes there CONCURRING AND DISSENTING OPINION was standing in this case, and since no party raised its existence as an issue, there is no reason to address it at all, BOB GAMMAGE even if it would be fundamental error if lacking.

Though I would prefer not to write separately, I find I The basis for the majority's discussion is its sudden am unable to agree entirely with any single opinion of the revelation that "standing is implicit in the concept of court's other members. I must write this concurring and subject matter jurisdiction." __ S.W.2d at __. Their dissenting opinion because, while I agree with the dispo- opinion then claims this implication comes from the sep- sition of this cause, I disagree with substantial portions of aration of powers doctrine and the open courts provision the reasoning and language in the majority's opinion and I of the Texas Constitution. It is a curiosity of legal schol- agree with part of Justice Doggett's concurring and dis- arship, however, that in the 156 prior years of its exist- senting opinion. ence, this court never before found standing "implicit" in I agree with the preliminary portion of Justice those constitutional provisions, but in fact wrote that Cornyn's majority opinion, which correctly sets forth the standing could be [**46] waived and hence was not regulatory scheme and basic dispute. fundamental error. Texas Indus. Traffic League v. Rail- road Comm'n, 633 S.W.2d 821, 823 (Tex. 1982). Justice I agree substantially with Part II of Justice Doggett's Doggett's opinion adequately addresses why there is no opinion and his jury trial discussion. In my view, whether implication from those provisions that standing is juris- or not a suit is a "cause" for purposes of the right to a jury dictional. trial is not controlled by whether it was first determined by an administrative agency. I also agree with Part III of The majority's struggle to put standing in issue when Justice Doggett's opinion relating to standing, which I will it is not prompts me to address two statements in its further address below. I agree with Part II of Justice opinion which strike me as either misleading or just plain Cornyn's majority opinion. The statutes may not condition wrong. The majority asserts, without citation to authority, access to the courts on prepayment [**44] of a penalty. that "subject matter jurisdiction is never presumed," __ The principle here is the same as for a supersedeas bond. S.W.2d at __, and in a footnote repeats that assertion in The statute may condition the right to restrain the pre- urging that "Justice Doggett confuses subject matter ju- vailing party (the State) from executing (enforcing) its risdiction with personal jurisdiction. Only the latter can be judgment (administrative order) on the posting of a bond waived when uncontested. See TEX. R. CIV. P. 120a." __ for the full amount. It may not, however, condition the S.W.2d at __n.5. The majority's claim that subject matter right to appeal the judgment on posting of the full penalty Page 12 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 jurisdiction is never presumed is at its very best mis- of cases the court is empowered to adjudicate under the leading. applicable constitutional and statutory provisions. See Pope v. Ferguson, [*478] 445 S.W.2d 950, 952 (Tex. Connected with this discussion is the implicit asser- 1969), cert. denied, 397 U.S. 997, 25 L. Ed. 2d 405, 90 S. tion in another footnote that there is a "jurisdictional Ct. 1138 (1970); Bullock v. Briggs, 623 S.W.2d 508, 511 standing" that is different from "objections to join a real (Tex. App. -- Austin 1981, writ ref'd n.r.e.), cert. denied, party in interest or to a party's capacity to sue rather than 452 U.S. 1135 (1982). In this sense, there is no presump- jurisdictional standing." __ S.W.2d at __n.7. These re- tion because if the case is not one over which the court had marks are made [**47] in an attempt to distinguish the constitutional and statutory authority to act one does not cases cited by Justice Doggett from those of other states "presume" subject matter jurisdiction to make it valid. If a holding that standing is not jurisdictional. I suppose we justice of the peace grants a divorce, the judgment is void should be encouraged to find out that there are some types because that is not the type of case the constitution and of "standing" that will not be jurisdictional, but it occurs legislature entrusts to that court, and appellate courts will to me that by using the term "jurisdictional standing" the [**49] not "presume" the justice court had jurisdiction in court is begging the question -- if it is jurisdictional, then order to make the judgment valid. it must be fundamental. The problem is that the Texas cases, at least as I read them, define "standing" in terms of But what the majority addresses here under the rubric "the party's capacity to sue," 1 which is one example we of "standing" is not a court assuming jurisdiction over a are given of non-jurisdictional standing. The majority type of dispute for which the statutes do not grant it opinion is calculated -- no, guaranteed -- to cause confu- power. The district court undoubtedly had jurisdiction sion because apparently this court will henceforth tell over the declaratory judgment and injunction action litigants on a case-by-case basis whether the standing brought there, since district courts may entertain declar- problems in their cases are "jurisdictional" or merely atory judgment and injunction actions. The question of formal. standing the majority gratuitously addresses here is re- lated to an incidental party issue.

1 Before it adopts a federal test and federal This court has expressly held that some facts or sim- gloss, the majority asserts the "general test for ilar matters relating to party issues are presumed. For standing in Texas" is what it quotes from Board of example, for many years the subject matter jurisdiction Water Engineers v. City of San Antonio, 155 Tex. for certain trial courts as set by the statutes has included a 111, 114, 283 S.W.2d 722, 724 (1955). The ma- jurisdictional amount, sometimes as a minimum amount jority overrules the Texas Industrial Traffic in controversy and sometimes as both a maximum and League case, which addressed standing in the minimum. Womble v. Atkins, 160 Tex. 363, 370, 331 context of "justiciable interest" discussed in the S.W.2d 294, 299 (1960). This court has held that juris- more recent cases of Coffee v. Rice University, diction, so far as the amount in controversy is concerned, 403 S.W.2d 340 (Tex. 1966), and Sabine River is determined by the pleadings unless facts disclose that a Authority v. Willis, 369 S.W.2d 348 (Tex. 1963). party fraudulently or in bad faith pleaded claims to make The context of the cases differed from Board of it disclose [**50] there was jurisdiction over the case Water Engineers, of course. The precise meaning where there was not. Brown v. Peters, 127 Tex. 300, 94 of "standing" in fact depends on the context. The S.W.2d 129, 130 (Tex. Comm'n App. B 1936). Despite the majority adopts a federal gloss, and the federal supposed requirement that the pleadings demonstrate courts have stated, "Generalizations about stand- jurisdiction, we have also held that unless the pleadings ing to sue are largely worthless as such." Associ- affirmatively show there is no jurisdiction, the court will ation of Data Proc. Serv. Orgs. v. Camp, 397 U.S. presume the existence of jurisdiction in the trial court.

150, 151 (1970). Using "standing" to mean a Peek v. Equipment Serv. Co., 779 S.W.2d 802, 804 (Tex. party's legal capacity to sue is my best description 1989). 2 This is not the only sense in which subject matter of the labyrinth of different cases the majority uses jurisdiction is "presumed" as to collateral matters. If a interchangeably. defendant contests jurisdiction and alleges in a verified [**48] There is no need to create this confusion. pleading that plaintiff's fraudulent pleading amount was The majority's fomenting it, however, requires that I ad- for the purpose of conferring jurisdiction on the trial dress it to some extent. I will discuss the "subject matter court, but the trial judge still renders judgment in the case, never presumed" proposition first, then weave into the on appeal the fact issue of jurisdiction is presumed de- "jurisdictional standing" language. cided against the defendant. Ellis v. Heidrick, 154 S.W.2d 293, 294 (Tex. Civ. App. -- San Antonio 1941, I agree that subject matter jurisdiction is never pre- writ ref'd); see also Maddux v. Booth, 108 S.W.2d 329, sumed in one respect. Subject matter jurisdiction exists (Tex. Civ. App. -- Amarillo 1937, no writ)(appeal when the nature of the case falls within a general category Page 13 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 bond from county court to district court did not show S.W.2d 927, 928 (Tex. 1965). Lack of personal jurisdic- filemark making the appeal timely, held "the absence of tion can be waived by the party, and personal jurisdiction such a [**51] question being made in the trial court the is presumed in a collateral attack on the judgment, presumption is that the court had jurisdiction"). Further, if whereas error in assuming constitutional or statutory the very power of the judge who sits is in question, that jurisdiction not conferred upon the court in question can authority too may be presumed. It is presumed that the be neither waived nor ignored. See Crawford v. McDon- assignment of a retired judge was properly made pursuant ald, 88 Tex. 626, 631-32, 33 S.W. 325, 328 (1895). This to all statutory requirements absent an express showing to court has long recognized that there may be party issues, the contrary in the record. Texaco, Inc. v. Pennzoil Co., i.e., the matter is "a mere matter of procedure" as opposed 729 S.W.2d 768, 855 (Tex. App. -- Houston [1st Dist.] to the constitutional or statutory power of a court to render 1987, writ ref'd n.r.e.). judgment, that may be presumed as to either type of ju- risdiction. Id. at 630, 33 S.W. at 327.

2 Richardson v. First Nat'l Life Ins. Co., 419 The majority should not adopt the federal courts' po- S.W.2d 836 (Tex. 1967), relied upon by the ma- sition that "standing" is jurisdictional. There is a funda- jority for the proposition that pleadings must "af- mental [**54] difference between federal law and state firmatively show that the court has jurisdiction to law that controls here. Federal courts are courts of limited hear the cause," ___ S.W.2d at ___, was expressly jurisdiction. Marbury v. Madison, 5 U.S.(1 Cranch) 137, distinguished in Peek. This unanimous opinion 178-79, 2 L. Ed. 60 (1803). The parties asserting a claim written for the Court by Chief Justice Phillips ex- must plead and prove (when not obvious) that jurisdiction plained that Richardson really meant that if the exists. FED. R. CIV. P. 8(a). A party suing under a statute pleadings affirmatively showed there was no ju- must establish his right to claim under that statute - his risdiction, then the case should be dismissed, but standing - in order to establish jurisdiction. General otherwise there was a presumption that the amount Comm., Brotherhood of Locomotive Eng'rs v. Mis- omitted from the pleading would support juris- souri-Kansas-Texas Ry. Co., 320 U.S. 323, 337-38 diction. Peek, 779 S.W.2d at 804. (1943). Consequently, standing is a part of jurisdiction [**52] There is a type of lack of standing that this under federal procedure, related to the "case" or "con- court formerly held to be fundamental error. When there troversy" requirement of the federal constitution. Asso- was a joint interest in property involved in the litigation, ciation of Data Proc. Serv. Orgs. v. Camp, 397 U.S. 150, and the joint owner was not joined as a party, this court 151 (1970). But there is no "case" or "controversy" limi- earlier held that the party defect was jurisdictional fun- tation language in the Texas Constitution. In state courts damental error that could be raised for the first time on of general jurisdiction, the power to entertain any suit not appeal. The injustice which that rule caused prompted prohibited by either the federal constitution or federal law [*479] this court to reduce those "indispensable" nec- is presumed. Cincinnati v. Louisville & N. Ry. Co., 223 essary parties to near nonexistence. Petroleum Anchor U.S. 390, 56 L. Ed. 481, 32 S. Ct. 267 (1912). State courts Equip., Inc. v. Tyra, 406 S.W.2d 891, 893-94 (Tex. 1966); have all residual jurisdiction that federal courts [**55] see also Cooper v. Texas Gulf Indus., Inc., 513 S.W.2d lack. Id.; see generally 2 CHESTER J. ANTIEAU, 200, 203 (Tex. 1974). It was no accident that this court MODERN CONSTITUTIONAL LAW § 10:1 at 4-5 listed the case which the majority today overrules, Texas (1969). We should continue to recognize that "standing," Indus. Traffic League v. Railroad Comm'n, 633 S.W.2d like other procedural issues, may be waived. There is no (Tex. 1982), as one of the cases showing that "fun- reason to overrule the Texas Industrial Traffic League damental or unassigned error is a discredited doctrine" as case, or its related progeny. applied to these collateral defect-in-party type claims.

BOB GAMMAGE Cox v. Johnson, 638 S.W.2d 867, 868 (Tex. 1982). After more than a hundred years of trying to narrow funda- JUSTICE mental error exceptions, the majority today takes a Opinion Delivered: March 3, 1993. quantum leap backward.

CONCURRING AND DISSENTING OPINION In an appeal of or other direct [**53] attack on a trial court default judgment, it is service on the defendant Lloyd Doggett and related due process requirements which must affirm- atively appear on the record. In such cases personal ju- "Don't Mess With Texas" risdiction cannot be presumed. Capitol Brick, Inc. v. Fleming Mfg. Co., 722 S.W.2d 399, 401 (Tex. 1986); -- A motto that captures the Texas spir- Uvalde Country Club v. Martin Linen Supply Co., 690 it.

S.W.2d 884, 885 (Tex. 1985); McKanna v. Edgar, 388 Page 14 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 Texans understand the directive "Don't Mess With Tex- laws, the majority has also created significant new un- as"; the majority does not. If the mess is big enough, if the certainties for a wide range of state governmental activity stench is strong enough, no matter how great the danger to -- tax collection is imperiled, laws to protect nursing home public health and safety, an industrial litterer can "mess" residents are effectively voided, and even a leading with Texas without fear of immediate punishment or weapon in the war on drugs is threatened. At a time of legally effective citizen action. budgetary crisis exacerbated by the majority's great mis- adventure in public school finance, 2 today's opinion raises And what an occasion for permitting polluters to a substantial question of whether the State will be required "mess" with Texas air and water. Our state tops the nation [**58] to return to those who despoil Texas millions of in total toxic emissions and ranks dead last among the dollars in administrative penalties collected during the fifty states in important measures of environmental qual- almost eight years this case has wandered through the ity. 1 Although last in air [*453] and water cleanliness, judicial system.

Texas today becomes the first state to strike down the imposition of penalties by administrative [**56] agen- See Carrollton-Farmers Branch Indep. Sch. cies to enforce statutes protecting the environment. I Dist. v. Edgewood Indep. Sch. Dist., 826 S.W.2d dissent from today's manipulation of the law to paralyze 489, 537 (Tex. 1992) (Doggett, J., dissenting). anti-pollution efforts, tragically announced at a time when protecting the quality of the air we breathe and the water This major blow to our environment is matched only we drink is so critical. by the threat to our system of justice lurking in the arcane language of today's opinion. Hidden within its lengthy Statistics compiled from data sent by compa- legal mumbo-jumbo is an unprecedented blow to our jury nies to the Environmental Protection Agency system. The constitutional right of trial by jury, already show that in 1990 535.7 million pounds of toxic suffering at the hands of this majority, is no longer invi- chemicals were released into the Texas environ- olate; it may be abrogated at any time. Instead of walking ment, more than in any other state. Texas also into a courthouse, where a jury is guaranteed, citizens may ranked first in the release of chemicals known to be detoured to an administrative agency, to explain their cause both cancer and birth defects. See Texas problems to bureaucrats not directly answerable to the Citizen Action, Poisons in Our Neighborhoods, community.

Toxic Pollution in Texas, Sept. 1992, at 1; see also Today precedent and tradition have been trampled as John Sharp, Texas Comptroller of Public Ac- the majority's long-standing fear of ordinary people in our counts, Texas at Risk: Environmental Hazards legal [**59] system has taken firm hold. The drafters of Threaten State's Air, Land, and Water, Fiscal our Texas Constitution realized something that the ma- Notes Aug. 1991 (noting the release of about 800 jority has long ceased to appreciate -- ordinary Texans can million pounds of toxic substances in 1989). Ad- make an extraordinary contribution to our system of jus- ditionally, only two states ranked below Texas in tice. The more their collective voice expressed in a jury the American Public Health Association's Pollu- verdict is disregarded, the more new barriers are contrived tion Standard Index, based on data gathered be- to shut them out of our system of justice, the less justice tween 1989 and 1991. See American Public Health that system will offer.

Ass'n, America's Public Health Report Card: A State-by-State Report on the Health of the Public I. Open Courts (1992).

The ability of state agencies to enforce environmental [**57] Today's opinion delivers a double whammy laws through the assessment of administrative penalties is to protection of our natural resources. Polluters are first declared unconstitutional by the majority as contradicting shielded from swift punishment for harming our envi- our state guarantee of open courts. While concluding that ronment, and then the courthouse door is slammed shut in TAB certainly has a right to judicial review on behalf of the face of Texans who organize to object. Incredibly, this its members, I disagree that the statutory restrictions it second punch was not even sought by the corporate or- challenges unreasonably restrict access to the courts. ganization that brought this challenge; it was wholly de- signed by the majority during the three years that this Access to the courts is unquestionably a fundamental cause has lingered in this court. Announced today is an constitutional and common law right. Article I, section 13 easily manipulable "friends in, foes out" rule to prevent of the Texas Constitution forms the nucleus of this pro- further actions by those who organize to protect taxpay- tection: ers, consumers or the environment. [*454] The open courts provision Through its broad writing designed to eviscerate specifically guarantees all litigants the administrative enforcement of our state's environmental Page 15 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 right to redress their grievances -- to use a how its analysis today differs from that employed popular and correct phrase, the right to in Sax and LeCroy. their day [**60] in court. This right is a substantial state constitutional right.

Because a substantial right is in- volved, the legislature cannot arbitrarily or LeCroy v. Hanlon, 713 S.W.2d 335, 341 (Tex. 1986) unreasonably interfere with a litigant's (citations omitted). This court has a long history of as- right of access to the courts. Thus, the suring that the right of access remains guaranteed to Texas general open courts provision test balances citizens. 3 the legislature's actual purpose in enacting the law against that law's interference with See, e.g., H. Runge & Co. v. Wyatt, 25 Tex. the individual's right of access to the Supp. 291 (1860) (placement of counties within courts. The government has the burden to judicial districts); Dillingham v. Putnam, 109 Tex. show that the legislative purpose out- 1, 14 S.W. 303 (Tex. 1890) (striking requirement weighs the interference with the individu- of supersedeas bond as a prerequisite to appeal); al's right of access.

Hanks v. City of Port Arthur, 121 Tex. 202, 48 S.W.2d 944 (1932) (requirement that city be noti- fied of street defect within twenty-four hours of 713 S.W.2d at 341 (citations omitted; emphasis sup- accident unreasonable restriction on right of ac- plied). cess to courts); Sax v. Votteler, 648 S.W.2d 661 (Tex. 1983) (striking statute of limitations barring Applying this test, we have permitted certain re- action of minor); LeCroy, 713 S.W.2d 335 (Tex. strictions on access to the courts, while disallowing [**63] others. Compare LeCroy, 713 S.W.2d at 341 1986) (holding unconstitutional increased filing (court filing fee unreasonably restricts access to judicial fees designed to generate state revenues). system), and Dillingham v. Putnam, 109 Tex. 1, 14 S.W. In Sax v. Votteler, 648 S.W.2d 661 (Tex. 1983), we 303 (1890) (supersedeas bond as prerequisite to appeal, [**61] required a litigant alleging an unconstitutional without regard to ability to pay, unconstitutional), with denial of access to the courts to show that: (1) a cogniza- Clanton v. Clark, 639 S.W.2d 929 (Tex. 1982) (court may ble common law cause of action is being restricted and (2) constitutionally dismiss suit for failure to timely file cost the limitation is unreasonable or arbitrary when balanced bond), and Federal Crude Oil Co. v. Yount-Lee Oil Co., against the purpose and basis of the statute. The majority 122 Tex. 21, 52 S.W.2d 56 (1932) (requirement that today appropriately eliminates the first showing in certain franchise taxes be paid prior to filing suit upheld under cases. In some circumstances the distinction between article I, § 13); compare Lucas v. United States, 757 common law and statutory causes of action clearly does S.W.2d 687 (Tex. 1988) (limitations on damages for not affect whether access to the courts has been denied. medical malpractice unconstitutional), with Rose v. Doc- tors Hosp., 801 S.W.2d 841 (Tex. 1990) (same limitations The second part of the Sax test, however, continues to upheld under open courts provision in wrongful death be applied in all open courts cases. 4 Thus, in determining cases). I favor a more complete and predictable open whether the open courts provision of the Texas Constitu- courts analysis designed to discourage such anomalous tion is violated by the requirement that administrative results. penalties be paid as a prerequisite to judicial review, we must balance two competing interests: the right of TAB's [*455] Today's implementation of the second members to access to the courts and the state's concern prong of the Sax test demonstrates its malleability. After with effective and timely enforcement of its laws pro- perfunctorily reciting the purpose of administrative pen- tecting the environment. The majority today restates in alties, the majority, without any further analysis, con- rather vague terms this second prong: "whether the pre- cludes [**64] that: "the forfeiture provision is an un- payment requirement is an unreasonable financial barrier reasonable restriction on access to the courts," S.W.2d at, to access to the courts in light of the state interest in- and "the forfeiture provision serves no additional [state] volved." S.W.2d [**62] at . As we held in LeCroy: interest." Id. at . Enacted by the Legislature as an im- portant means of enforcing our state's environmental Oddly, the majority asserts that "the Sax test is laws, these penalties are today judicially extinguished. inapplicable" to today's open courts decision, The majority determines that these laudable legislative S.W.2d at n.12, even as it explicitly relies on the objectives are not sufficiently "important" to justify the analysis used in LeCroy, which in turn applied the possibility that the use of penalties may perhaps someday Sax test. Nor does the majority attempt to explain Page 16 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 impose some slight financial strain on some hypothetical This very mandate of the people, as well as protection of polluter. the public health and safety was effectuated in the Clean Air Act, 6 the Texas Water Code, 7 and the Solid Waste Whether examined under either the vague test em- Disposal Act, 8 including the right to assess administrative ployed today or my more exacting formulation, the ma- penalties. Protection of Texas' air, water and land is un- jority's conclusory analysis suffers from at least three deniably a compelling interest. major flaws: (1) a failure to recognize the compelling interest, grounded in our state constitution, served by Tex. Health & Safety Code § 382.002, pro- administrative penalties, including prepayment provi- vides that: sions; (2) a disregard of the extensive statutory constraints on penalty usage which represents the least restrictive It is the policy of this state and means to achieve this purpose; and (3) an assumption that the purpose of this Act to safeguard the prepayment provision interferes with individual ac- the air resources of the state from cess to the courts unsupported by even a single specific pollution by controlling or abating instance of such a restrictive [**65] effect. air pollution and emissions of air The balancing required by Sax mandates careful contaminants, consistent with the consideration of the rights being affected. The more sig- protection of health, general wel- nificant the right the litigant asserts, the more onerous the fare, and physical property of the government's burden becomes. TAB has asserted a right people, including the aesthetic en- to judicial review of penalties imposed against its mem- joyment of the air resources by the bers. This interest is encompassed within the right of people and the maintenance of access to the courts, which we declared a "substantial state adequate visibility. constitutional right." LeCroy, 713 S.W.2d at 341.

The State has met its burden by demonstrating a compelling interest in employing administrative penalties Tex. Water Code § 26.003, provides that: reflected in constitutionally-guaranteed protection of our state's natural resources. Although not critical in over- It is the policy of this state and coming an open courts challenge, a constitutional predi- the purpose of this subchapter to cate for the state's interest is a highly persuasive factor in maintain the quality of water in this the balancing process. As declared in article XVI, section state consistent with the public 59(a) 5 : health and enjoyment, the propa- gation and protection of terrestrial 5 This natural resources provision receives and aquatic life, the operation of conflicting treatment in today's opinion, amply existing industries, and the eco- demonstrating both the malleability of the Sax test nomic development of the state . . .. as applied by the majority and the majority's dis- dain for the right to trial by jury. While declaring that article XVI, § 59(a) will not permit payment [**67] of even the most modest penalties under our open 8 Tex. Health & Safety Code § 361.002, de- courts provision, the majority inexplicably finds clares that: that it forms an insurmountable barrier to the right to jury trial. The majority makes no attempt to It is the policy of this state and reconcile its inconsistent analysis of these consti- the purpose of this Act to safeguard tutional guarantees. the health, welfare, and physical [**66] property of the people, and to pro- tect the environment, through con- The preservation and conservation of trolling the management of haz- all . . . natural resources of the State are ardous wastes, including the ac- each and all declared public rights and counting for hazardous wastes duties; and the Legislature shall pass all generated. laws as may be appropriate thereto.

[*456] The form of these particular administrative penalties has certainly been fashioned to serve this im- Page 17 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 portant state interest through the least restrictive means. ability to bring [**70] an enforcement action in state Penalty usage is substantially limited and can in no way court. See Tex. Water Code § 26.123; Tex. Health & be said to be arbitrarily imposed. All three statutes at issue Safety Code § 382.081; id. § 361.224. The effort of the require that, once a violation is established, the agency Texas Legislature to improve the effectiveness of en- assessing a penalty must consider such factors as the forcement through the use of administrative penalties is seriousness of the violation, including but not limited to today rendered a nullity. the nature, circumstance, extent, and gravity of the pro- Given the time and expense that must be devoted to hibited acts; the hazard or potential hazard created to the pursuing an enforcement action in court, the State will public health or safety of the public; the history of pre- have the capability to proceed against only the most vious violation; the amount necessary to deter future egregious wrongs. The vast majority of administrative violations; and efforts to correct the violation. 9 There is penalties to date have been relatively small, reflecting thus statutory [**68] assurance that the amount of any technical yet important statutory violations. 10 In the ab- resulting penalties will be directly related to the conduct. sence of an administrative penalty power, most of these would have gone unpunished, even though collectively Tex. Health & Safety Code § 382.088(c)(1-5) the environmental impact of small violations could be (Clean Air Act), § 361.251(c)(1-5) (Solid Waste more profound than a major catastrophe. Relieving pol- Disposal Act); Tex. Water Code § 26.136(c). The luters from immediate sanctions dismantles the effec- Texas Water Code imposes additional considera- tiveness of our laws protecting natural resources; no lesser tions, including "the impact of the violation on a means has been identified that provides for prompt en- receiving stream or underground water reservoir, forcement. I would hold that the state has demonstrated a on the property owners . . . and on water users," as compelling interest in environmental protection that has well as the extent of previous violations, the de- been implemented by the least restrictive means, thus gree of culpability involved, any good faith effort overriding any modest impediment [**71] that the pre- to correct the violation and any economic benefit payment of penalties may impose on access to the courts. gained as a result of the illegal conduct. Tex. Water Code § 26.136(c).

10 See Appendices to Brief of Appellees Texas Requiring that assessed penalties be paid, or a bond in Air Control Board and Texas Water Commission. the same amount be posted, prior to challenging the [*457] Not even the slightest evidence has been agency action in court is not unreasonable under these provided to this court to suggest any actual restrictive circumstances. Unlike the filing fee held violative of the effect. No affidavit of any member of the Texas Associa- open courts provision in LeCroy, the legislative purpose is tion of Business appears in the record stating that an ina- not to raise money by making it more expensive for citi- bility to pay an administrative penalty has barred judicial zens to enforce their [**69] legal rights. Instead, the review. As to most of the penalties assessed, $ 5,000 or legislative objective is to deter and punish violations of less in amount, it is doubtful that such a contention could the law that pose an environmental threat. be made. The majority necessarily concludes that im- The wheels of justice grind slowly, with final reso- posing fines of $ 2,000 against Exxon Chemical Com- lution often years in reaching. Indeed, in this court they pany, Shell Oil Company and Union Carbide Corporation sometimes hardly grind at all. Clearly those willing to has left those entities financially unable to pursue an profit from polluting our natural resources will not hesi- appeal. 11 While the enormity of some future penalty could tate to employ the delays in the judicial system to their in fact unconstitutionally bar judicial access, that is cer- advantage. A declaration of bankruptcy by a perhaps tainly not the case here. See Jensen v. State Tax Comm'n, deliberately undercapitalized corporation during the 835 P.2d 965, 969 (Utah 1992) (payment of assessed pendency of a suit is likely to relieve the polluter of any taxes, penalties [**72] and interest as precondition to responsibility to remedy the damage it has caused. suit "not unconstitutional in all cases," but only those in which taxpayer financially barred from prosecuting ap- Showing no awareness of the purpose of and need for peal); see also Morrison v. Chan, 699 S.W.2d 205, 207 administrative penalties, the majority finds that "expedi- (Tex. 1985) (medical malpractice statute of limitations not tious payment" is adequately guaranteed by the ability of unconstitutional as applied to facts of case). the agency, through the attorney general, to initiate an enforcement action to collect the amount assessed.

11 See Appendices to Brief of Appellees Texas S.W.2d at & n.15. In other words, the purpose of imme- Air Control Board and Texas Water Commission diate deterrence of violation of environmental laws is at 27, 44, 55. ensured by the filing of a lawsuit that may take as many years to resolve as this case has. These agencies charged Eliminating the need to prove actual restrictive effect, with protecting our natural resources have long had the the majority declares "irrelevant" that "the affected parties Page 18 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 may be able to afford prepayment." S.W.2d n.18. Unex- 14 Tex. Health & Safety Code §§ 773.065-.067 plained is how this statement can be reconciled with Dil- (administrative penalties to enforce Emergency lingham, in which this court found of critical importance Medical Services Act). the failure to accommodate those financially unable to [**75] post a supersedeas bond as a prerequisite to judicial re- 15 Tex. Rev. Civ. Stat. Ann. art. 4582b, § 6G view. Opining that "the guarantee of constitutional rights (Vernon Supp. 1992) (administrative penalties for should not depend on the balance in one's bank account," violation of statutes governing funeral directing id., the majority would accord our state's largest busi- and embalming). nesses the same treatment as [**73] indigents in avoid- 16 Tex. Health & Safety Code §§ 431.054-.056 ing financial responsibility for court and other litigation (Texas Food, Drug & Cosmetic Act); id. § costs. 466.043 (regulation of narcotic drug treatment programs).

Nor is the majority restrained by Texas decisional Tex. Health & Safety Code §§ 433.094-.096 law validating similar requirements. We long ago upheld (Texas Meat & Poultry Inspection Act); id. §§ against this same type of challenge the condition that a 144. 081-.083 (Texas Renderers' Licensing Act). corporation pay its franchise taxes in order to file a court 18 See also Tex. Rev. Civ. Stat. Ann. art. action. Federal Crude Oil Co. v. Yount-Lee Oil Co., 122 5069-51.17 (Vernon 1987 & Supp. 1992) (ad- Tex. 21, 52 S.W.2d 56 (Tex. 1932); accord Rimco Enter- ministrative penalties for violation of the Texas prises, Inc. v. Texas Elec. Svc. Co., 599 S.W.2d 362 (Tex. Pawnshop Act).

Civ. App.--Fort Worth 1980, writ ref'd n.r.e.). Various statutory requirements that taxes, penalties and interest be The most widespread damage, however, from today's paid prior to contesting them in court have likewise sus- decision will be in the enforcement of laws protecting our tained an open courts challenge. See Filmstrips and environment, where the Legislature has determined again Slides, Inc. v. Dallas Central Appraisal Dist., 806 S.W.2d and again that such penalties are the most effective means (Tex. App.--Dallas 1991, no writ) (property taxes); of assuring compliance and preventing pollution of our Robinson v. Bullock, 553 S.W.2d 196 (Tex. Civ. air, water and land. 19 The majority ensures that those who App.--Austin 1977, writ ref'd n.r.e.), cert. denied, 436 pollute will be brought to justice very slowly or not at all.

U.S. 918, 56 L. Ed. 2d 759, 98 S. Ct. 2264 (1978) (sales taxes). 19 Tex. Rev. Civ. Stat. Ann. art. 1446c, § 73A (Vernon Supp. 1992) (permitting assessment of The majority also ignores the certainty that far more civil penalty for violation of Public Utility Regu- than three statutes are impacted by today's decision. A latory Act "resulting in pollution of the air or wa- broad range of regulatory enforcement programs vital to ter of this state or posing a threat to the public protection of the public [**74] health and safety will be safety"); Tex. Rev. Civ. Stat. Ann. art. 4477-3a, § stripped of their most timely and effective sanctions to (Vernon Supp. 1992) (Texas Asbestos Health deter harmful conduct. Laws designed to protect the old -- Protection Act); Tex. Rev. Civ. Stat. Ann. art. residents in nursing homes 12 -- the young -- our children 5920-11, § 30 (Vernon Supp. 1992) (Texas Coal away at camp 13 -- the sick and the injured, 14 and those we Mining and Surface Reclamation Act); Tex. Rev. have lost 15 will be substantially weakened. Others, en- Civ. Stat. Ann. art. 6053-2 (Vernon Supp. 1992) suring the sanitariness of food, drugs and cosmetics, 16 as (safety standards for transportation of gas and for well as the slaughter and [*458] disposition of dead gas pipeline facilities); Tex. Rev. Civ. Stat. Ann. animals, 17 will be similarly rendered less effective. 18 Even art. 8905, § 9 (Vernon Supp. 1992) (Water Well where such penalties have not been frequently enforced, Pump Installers Act); Tex. Nat. Res. Code § their potential use may promote law enforcement.

40.254 (Oil Spill Prevention and Response Act); id. § 81.0531-.0533 (assessment of penalties for See Tex. Health & Safety Code § 242.066 violation of Railroad Commisssion statutes and (administrative penalty for statutory violations rules "which pertain to safety or the prevention or "threatening the health and safety of a resident" of control of pollution"); id. § 116.143-.145 (viola- a convalescent or nursing home); id. § 242.069 tion of laws relating to compressed natural gas (penalty must be prepaid or a bond posted prior to "resulting in pollution of the air or water of this judicial review). state or posing a threat to the public safety"); id. § 13 Tex. Health & Safety Code §§ 131.2661-.2663 (violations of Uranium Surface 141.016-141.018 (providing for administrative Mining and Reclamation Act "resulting in pollu- penalties for violation of laws regulating youth tion of the air or water of this state or posing a camps and requiring their payment or the posting threat to the public safety"); id. § 141.013-.015 of a bond prior to judicial review). (violation of geothermal resources regulations Page 19 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 "pertaining to safety or the prevention or control Procedures within our judicial system are also of pollution"); id. Tex. Water Code 13.4151 (reg- threatened. Why is not the requirement [**78] that ulation of water and sewer utilities); id. § corporations and other organizations appear in court only 27.1013-.1015 (Injection Well Act); id. § 28.067 through counsel a violation of the open courts provision, (regulation of water wells and mine shafts); id. § since the cost of retaining an attorney in most cases ex- 29.047 (Salt Water Haulers Act); id. § 33.009 ceeds the average administrative penalty considered here? (regulation of water well pump installers); Tex. Inadequately considered by the majority's opinion is Rev. Civ. Stat. Ann. art. 7621e, § 8A; Tex. Health its effect on the millions of dollars in administrative pen- & Safety Code § 372.004 (water saving perfor- alties that have already been paid under the statutes now mance standards); id. § 401.389 (Texas Radiation declared unconstitutional. Yet, under the general rule that Control Act). our decisions apply retroactively, past violators of envi- [**76] Other statutes that impose administrative ronmental laws may stand to reap a substantial windfall. 21 penalties permit the filing of an affidavit of inability to In the firm grasp of this majority, "open courts" may have pay in lieu of prepayment or the posting of a bond. 20 been rewritten to mean open coffers. While claiming that Because the majority's reasoning strikes down adminis- nothing in today's writing suggests that a refund is re- trative penalties without reference to financial ability, quired, the majority apparently once again concludes that S.W.2d at n., these statutes similarly cannot be enforced. monies extracted by the state under the coercion of an unconstitutional system may be retained. See Carroll- Tex. Ag. Code § 12.020 (L) (violation of ag- ton-Farmers Indep. Sch. Dist., 826 S.W.2d at 515-23 ricultural statutes); id. § 76.1555 (failure to com- (holding tax unconstitutional, but requiring taxpayers to ply with pesticide regulations); Tex. Water Code § continue payment for two years).

34.011 (irrigation regulation); Tex. Rev. Civ. Stat. Ann. art. 41a-1, § 21D(f) (Vernon Supp. 1992) 21 Under recent and highly erratic writings de- (public accounting); Tex. Rev. Civ. Stat. Ann. art. termining retroactivity, of course, anything can 135b-6, § 10B(k) (Vernon Supp. 1992) (Structural happen. See, e.g., Carrollton-Farmers Indep. Sch.

Pest Control Act); Tex. Rev. Civ. Stat. Ann. art. Dist., 826 S.W.2d at 515-23; Elbaor v. Smith, 5155, § 5(h) (Vernon Supp. 1992) (labor wage S.W.2d (Tex. 1992) (creating uncertainty by dis- laws); Tex. Rev. Civ. Stat. Ann. art. 5282c, § approval of a type of pre-trial agreements previ- 23A(k) (Vernon Supp. 1992) (Professional Land ously upheld by this court).

Surveying Practices Act); Tex. Rev. Civ. Stat. [**79] The majority today throws a large wrench Ann. art. 6573a, § 19A(k) (Vernon Supp. 1992) into the workings of the important administrative mech- (Real Estate License Act); Tex. Rev. Civ. Stat. anism of our Texas government. By severely limiting Ann. art. 9100, § 17(m) (Vernon Supp. 1992) enforcement powers, the majority leaves law enforcers (Texas Department of Licensing and Regulation). little choice but to forego prosecution of law violators. [**77] Today's writing poses a potentially crip- Our laws designed to protect and conserve our natural pling effect for collection of taxes. All of our state statutes resources are substantially weakened at the time their in this area require that assessed taxes, penalty and inter- strength is most needed. est be prepaid before a suit challenging them may be filed.

See generally Tex. Tax Code §§ 112.051, 112.101. If such II. Trial by Jury requirements are unconstitutionally void even to fulfill a The harm caused to our environment by today's constitutional mandate of environmental protection, their writing is equalled only by the severe blow struck against validity for tax collection is certainly subject to question. our fundamental right of trial by jury. In holding that TAB See R Communications, Inc. v. Sharp, 839 S.W.2d 947 and its members have no right to a jury trial, the majority (Tex. App.--Austin 1992, writ granted). employs an analysis that has far-reaching ramifications.

Nor has the majority sought to consider the conse- While I recognize the need to accommodate the evolution quences of its decision for a major weapon in the war of the administrative state, the history of this important against drugs, forfeiting prior to judicial review money, guarantee mandates that only the narrowest of exceptions vehicles and other property alleged to have been used in be permitted. violating our criminal laws. Tex. Crim. Proc. Code art. The ability of each individual to have a case heard by 59.02-.011. Most frequently invoked to seize assets from other members of the community is a vital part of our drug dealers, such as money and cars that could finance heritage and law. Long ago, Texans emphasized the their defense, this statute provides for the return of prop- paramount importance of this guarantee, stating in their erty prior to trial only [*459] on the posting of a bond grievances against the Mexican government: for the full value. Id. art. 59.02(b).

Page 20 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607

It has failed and refused to secure, on a Bailey v. Haddy, Dallam 35, 40-41 (Tex. 1841). 25 firm [**80] basis, the right of trial by jury, that palladium of civil liberty, and 25 In our time this great constitutional principle only safe guarantee for the life, liberty, and continues to be reaffirmed: property of the citizen.

It is fundamental to our system of justice and the intention and The Declaration of Independence of the Republic of policy of the law to permit all Texas (1836), reprinted in Tex. Const. app. 519, 520 persons to have a trial by jury of (Vernon 1955). A strong guarantee of this right had been disputed fact issues essential for a unsuccessfully sought in an 1833 draft constitution, 22 determination of [their rights]. The which was submitted to Mexico by Stephen F. Austin 23 right of trial by jury is a valuable and was later incorporated in the 1836 Texas Independ- right which should be guarded ence Constitution. 24 jealously by all state courts.

22 "The right of trial by jury, and the privilege of the Writ of Habeas Corpus shall be established Steenland v. Texas Commerce Bank Nat'l Ass'n, by law, and shall remain inviolable." Proposed 648 S.W.2d 387, 391 (Tex. App.--Tyler 1983, writ Constitution for the State of Texas art. 4 (1833), ref'd n.r.e.); see also Lopez v. Lopez, 691 S.W.2d reprinted in Documents of Texas History, 80 95, 97 (Tex. App.--Austin 1985, no writ) ("trial by (Ernest Wallace ed., 1963). jury should be granted zealously by all the courts See Eugene C. Barker, Stephen F. Austin, in of this state").

The Handbook of Texas 84 (Walter Prescott Webb [**82] In 1845, expanding the scope of this right ed., 1952). was the subject of spirited debate in the deliberations over Constitution of the Republic of Texas, Dec- the new constitution for statehood. In addition to the pre- laration of Rights, Section 9 (1836), reprinted in vious guarantee, which was carried forward in a new Bill Tex. Const. app. 523, 536 (Vernon 1955), pro- of Rights, 26 further protection was included in the Judi- vided that "the right of trial by jury shall remain ciary Article. Tex. Const. art. IV, § 16 (1845). While inviolate." under our national Constitution and those of almost all of [**81] The central role of the jury as a democratic our sister states trial by jury is available only for those institution was firmly recognized, indeed celebrated, in actions that could have been brought at common law, the our early jurisprudence by the Supreme Court of the Re- Texas Constitution since 1845 has also preserved that public of Texas: right in cases that historically would have been brought in equity. Thus, even when a private party seeks injunctive The institution of jury trial has, perhaps, relief that will inure to the public's benefit, any derogation seldom or never been fully appreciated. It of the right to a jury nonetheless violates the Texas Con- has been often eulogized in sounding stitution. [*460] phrase, and often decried and de- rided. An occasional corrupt, or biased, or 26 Tex. Const. art. I, § 12 (1845) (retaining silly verdict is not enough for condemna- identical language from 1836 provision). tion; and when it is said the institution in- Urging support of the additional Judiciary Article terposes chances of justice and checks guarantee, Convention President Thomas Rusk declared: against venality and oppression, the measure of just praise is not filled. Its It is a dangerous [**83] principle to immeasurable benefits, like the perennial trust too much power in the hands of one springs of the earth, flow from the fact that man. Would it not be better to trust a considerable portions of the communities power of this nature in the hands of twelve at stated periods are called into the courts men, than to confide it to the breast of one? to sit as judges of contested facts, and under the ministry of the courts to apply the laws . . . . Let us then preserve and William F. Weeks, Debates of the Texas Convention 268 transmit this mode of trial not only invio- (1846). He was opposed by John Hemphill, later the first late, but if possible purified and perfected.

Chief Justice of this court, who actually "preferred the Page 21 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 civil law" system, id. at 271-73, and Jefferson County senting); Boyles v. Kerr, ___ S.W.2d ___, ___ delegate James Armstrong, who insisted the new section (Tex. 1992) (Doggett, J., dissenting); Leleaux v. would "operate very injuriously." Id. at 270. He declared: Hamshire-Fannett Indep. Sch. Dist., 835 S.W.2d It would be better, in my opinion, to 49, 55-56 (Tex. 1992) (Doggett, J., dissenting); leave it to the legislature to apply these Reagan v. Vaughn, 804 S.W.2d 463, 491 (Tex. things; it is enough for us to say in the 1991) (Doggett, J., concurring and dissenting); constitution that the trial by jury shall be Greater Houston Transp. Co. v. Phillips, 801 preserved inviolate. If we intend the jury to S.W.2d 523, 527 (Tex. 1990) (Doggett, J., dis- determine every thing, it would be better to senting). dispense with the judge altogether, as a Today's opinion accurately describes one element of useless appendage of the court. the dual constitutional protection for this fundamental liberty: Id. Today it is this same fear of juries, fortunately rejected Article I, section 15 of our constitution in 1845, that now unfortunately prevails. preserves a right to trial by jury for those The original language providing for trial by jury in actions, or analogous actions, tried to a the Judiciary Article of 1845 was retained in later con- jury at the time the constitution of 1876 stitutions, Tex. Const. art. IV, § 16 (1861), Tex. Const. art. was adopted.

IV, § 20 (1866), but was thereafter [**84] extended to "all cases of law or equity." Tex. Const. art. V, § 16 (1869). It took its final form in our present Constitution of S.W.2d at (footnote omitted). Then the majority grossly 1876, which continues to afford not one but two assur- [**86] misconstrues this standard while making selec- ances on this vital subject: tive and misleading use of jurisprudence developed under the further guarantee of article V. In the trial of all causes in the District With its hangnail sketch of Texas history limited to Courts, the plaintiff or defendant shall, one historian's very generalized description of Texas in upon application made in open court, have the era "between 1835 and 1861", 28 S.W.2d at, the ma- the right to trial by jury . . . . jority ignores our longstanding concerns regarding threats to our natural resources. As early as 1860, the Legislature acted to penalize polluters, providing that: Tex. Const. art. V, § 10.

The right of trial by jury shall remain T.R. Fehrenbach, Lone Star: A History of inviolate.

Texas and the Texans 279 (1983).

Tex. Const. art. I, § 15. Rather than keeping it "inviolate," If any person . . . shall in anywise the majority today severely violates this right. pollute, or obstruct any water course, lake, [*461] Our heritage is now rejected by the majority pond, marsh or common sewer, or con- in favor of a deliberately overbroad writing that treats trial tinue such obstruction or pollution so as to by jury as a mere anachronism. This is consistent with the render the same unwholesome or offensive majority's increasing disfavor of decisionmaking by or- to the county, city, town or neighborhood dinary citizens composed as a jury. 27 Today's opinion thereabouts, or shall do any act or thing insists that our constitutional assurance of trial by jury that would be deemed and held to be a does not offer protection against legislative delegation of nuisance at common law, shall be . . . fined factfinding to an administrative bureaucracy. In essence, in any sum not exceeding five hundred the majority engages in a massive redistribution of power dollars . . . . 29 from the people to the bureaucratic arm of state govern- ment. This extreme position [**85] is totally unjustified in view of the staunch legal and historical underpinnings of our constitutional commitment to afford Texans a jury of their peers. 29 Act of Feb. 11, 1860, Tex. Gen Laws 97, a later version of which was referenced by this court 27 See, e.g., May v. United Services, ___ in Gulf, Colo. & Santa Fe Ry. v. Reed, 80 Tex. 362, S.W.2d ___, ___ (Tex. 1992) (Doggett, J., dis- 15 S.W. 1105, 1107 (1891).

Page 22 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607

[**87] his home was rendered almost unin- habitable; his family and himself were kept In an early decision considering whether a criminal nui- in bad health; and he was, in the language sance was posed by a tallow factory near Galveston at of a witness, "a walking skeleton." which cattle were slaughtered and their carcasses and offal were allowed to accumulate, this court stated: This court further observed that It requires no aid of the common law to The stench was so offensive that he had convince any one accustomed to pure air, to shut the doors to eat and sleep. . . . The and who has been brought by accident or testimony shows that the filth on this place necessity within the sickening and of deposit was so indescribable, and was so malarious influence of one of our modern offensive as to make persons sick, and tallow and beef factories, that it is a dis- could be perceived a mile away. gusting and nauseous nuisance, even for miles around it . . . [those] so offending should be indicted and punished to the Id. Affirming the judgment declaring the dump a common extent of the law. law nuisance, this court declared: There is also no doubt that every person Allen v. State, 34 Tex. 230, 233-34 (1871). How signif- has a right to have the air diffused over his icantly has this court's once vigorous enforcement of premises free from noxious vapors and anti-pollution laws waned. noisome smells . . . .

Defilement of the environment was not only made punishable as a crime, but also subject to a common law Id. 31 action for nuisance. See generally Horace Wood, Wood's Law of Nuisances 501-21, 576-692 (2d ed. 1883) (dis- See also Rhodes v. Whitehead, 27 Tex. 304, cussing nuisance recovery at common law for various (1863)(remanding for trial a complaint against forms of air and water pollution). Such actions were reg- a dam across the San Antonio river, recognizing ularly brought in Texas before 1876 to halt activities that the creation "of pools of stagnant and putrid harmful to our air and water. In 1856, this court recog- water" or the "tendency to cause sickness in [the nized [**88] that "what constitutes a nuisance is well plaintiff's] family or immediate neighborhood," defined." 30 [*462] Burditt v. Swenson, 17 Tex. 489 was sufficient to constitute a nuisance); Jung v. (1856). Considering an action to enjoin operation of a Neraz, 71 Tex. 396, 9 S.W. 344, 344-45 (1888) livery stable on Congress Avenue in Austin because (nuisance properly alleged by claim that "inter- "manure and filth has already accumulated to such an ment of dead bodies in [proposed cemetery] would extent, that it now causes an unhealthy and disagreeable infect, poison, and injure [plaintiffs'] wells, and effluvia, exceedingly offensive and prejudicial," id. at the use of low grounds, and further injure plain- 492, this court concluded such "noisome smells" consti- tiffs' health by the foul odors from the decompo- tuted a nuisance. Id. at 502-03. In City of Fort Worth v. sition of said bodies.").

Crawford, 74 Tex. 404, 12 S.W. 52, 54 (Tex. 1889), an individual asserted that, because of the dumping of gar- [**90] bage, filth and bodies of dead animals on city land, The majority's suggestion that "pollutants . . . are phenomena of relatively recent origin," S.W.2d at, is The court further stated: "The word means, contradicted by the nineteenth century legislative re- literally, annoyance; in law, it signifies, according sponse of criminalizing pollution and the common use of to Blackstone, 'anything that worketh hurt, in- the common law of nuisance to fight soiling of the air and convenience, or damage.' . . . . 'So closely (says water. With the ongoing construction of the railroads, the Blackstone) does the law of England enforce that mining of coal and sulphur, the emergence of industry and excellent rule of Gospel morality, of doing to the nascence of our oil and gas industry, our state's natural others as we would they should do unto our- resources were by no means pure and unthreatened in selves.'" Id. at 492. Accord Miller v. Burch, 32 1876. See James C. Cobb, Industrialization and Southern Tex. 208, 210 (1869).

Society 1877-1984, 128 (1984) (describing pollution [**89] relating to increased rail usage, lumbering and urban Page 23 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 sewage); see also Robert A. Calvert & Arnoldo De Leon, article is thus decreed as dependent on form, not sub- The History of Texas 186-191 (1990) (discussing the stance; not analogy, but exactitude. Under the majority's development of Texas industry in the late 1800's, in- analysis, Credit Bureau was wrongly decided since a cluding lumbering, beef processing and mining); Louis J. regulatory prohibition against deceptive non-disclosure or Wortham, 5 A History of Texas (1924) (examining in- ambiguous language with the capacity to deceive was dustrial development in the nineteenth century). Only the beyond the "deceptive acts" of common law fraud or scope and depth of the problem has changed. But even if deceit as it existed in 1876. the fouling of the environment were a recent technological Seizing upon the rather obvious proposition that the "innovation" of the past century, that would be irrelevant. administrative state had not yet been created in [**93] As I recently wrote [**91] in another context, 1876, the majority concludes that there is no right to trial by jury in judicial review of an administrative proceeding.

The law is not irretrievably locked in But under article I it is the nature of the cause of action the days before televisions and that controls, not the procedures under which it is en- videocameras, nor limited to operators of forced. Each of the three statutes considered today defines telegraphs and horse-drawn carriages. "pollution" of air, water or land to incorporate early nui- sance concepts. Tex. Health & Safety Code § 382.003(3)(contaminants that "are or may tend to be in- Boyles v. Kerr, ___ S.W.2d ___, ___ (Tex. 1992) (Dog- jurious to or to adversely affect human health or welfare, gett, J., dissenting). There is nothing about technological animal life, vegetation or property [or] interferes with the change that has made trial by jury any less vital. 32 normal use and enjoyment of animal life, vegetation, or property"); id. § 361.003(44) ("contamination of any land Although some critics allege that juries are land or surface or subsurface water in the state that ren- not competent to deal with complex scientific and ders the land or water harmful, detrimental, or injurious to technological issues, empirical data demonstrates humans, animal life, vegetation"); Tex. Water Code § otherwise.

26.001(13)(contamination that "renders the water harm- ful, deterimental, or injurious to humans, animal life, Research shows . . . that the vegetation, or property"). The majority fails to examine opportunity exists for meaningful these provisions and makes no attempt to distinguish their [juror] participation in a wide substance from nuisance actions at the time the constitu- range of adjudicatory and regula- tion was adopted. The focus must be on the nature of civil tory proceedings. . . . To the extent [**94] and criminal nuisance actions as they existed in that juries encounter difficulties, 1876, not on whether administrative agencies existed then these difficulties often vex judges to bring such actions. That the creation of some adminis- as well. . . . The full potential of lay trative agency was not contemplated in 1876 does not participation in adjudication has mean that any type of factfinding transferred to that not been realized. agency in 1993 or hereafter is beyond the purview of a jury. With its new approach, the majority is only clearing the way for a steady expansion of factfinding and Joe Cecil, Valerie Hans, and Elizabeth Wiggins, decisionmaking by bureaucracy at the expense of trial by Citizen Comprehension of Difficult Issues: Les- jury. sons From Civil Jury Trials, 40 Am. U. L. Rev. 727, 773-74 (1991). Concluding that no common law action analogous to the assessment of administrative penalties existed in 1876, [**92] But because there was no modern bureau- the majority professes a superficial limit on its holding cracy in 1876, the majority insists: "no governmental tied to article XVI, § 59(a) of the Texas Constitution, as schemes akin to these existed." Id. at . While our laws and interpreted in Corzelius v. Harrell, 143 Tex. 509, 186 society have grown more complicated, the mandate S.W.2d 961 (1945). S.W.2d at n.24. Nothing in this pro- [*463] of our constitution has not. As we concluded in vision affects the determination of whether a nuisance State v. Credit Bureau of Laredo, Inc., 530 S.W.2d 288, action for pollution is analogous to an enforcement action (Tex. 1975): "The right to a trial by jury is not limited for the same conduct. Clearly, the majority's reasoning to the precise form of action . . . at common law." If there rests solely on the fact that no administrative agency was was an analogous cause of action with a right to jury trial charged in 1876 with protecting the state's resources. Nor in 1876, then our article I jury trial guarantee requires it does Corzelius in any way address the right to jury trial. today. Yet the majority ignores the fact that even the Under the [**95] majority's asserted "narrow" holding, earliest of pollution statutes was designed to deter and the right to trial by jury can be immediately abrogated in punish those who harm our environment. Our jury trial Page 24 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 any case in which natural resources are even remotely was added to authorize the Legislature to regulate involved, including private disputes that this court has railroads after the people had issued strong com- held are subject to jury trial, such as those involving plaints against them). mineral ownership, contract rights, or mineral lease terms.

To preserve the workings of modern government, See, e.g., Amarillo Oil Co. v. Energy-Agri Prod., Inc., 794 some exception for administrative proceedings may be S.W.2d 20, 26 (Tex. 1990). necessary, but it should be drawn narrowly so as not to The constitutional limitation on legislative power to encompass every conceivable action that could arguably delegate away the people's right to trial by jury was amply be assigned to some existing or future administrative demonstrated by the writing of this court in White v. body. And that is precisely what, until today, our Texas White, 108 Tex. 570, 196 S.W. 508 (Tex. 1917). There a courts have usually done. In two decisions concerning husband had his wife, who apparently did not contest that administrative cancellation of a permit to sell liquor, she was a "lunatic," committed to a state asylum. Com- courts narrowly recognized that no "cause of action" was mitment proceedings had been statutorily transferred to a involved. The court in Bradley v. Texas Liquor Control "commission" appointed by a county judge and comprised Bd., 108 S.W.2d 300 (Tex. Civ. App.--Austin 1937, writ of six members, "as many of [whom] shall be physicians ref'd n.r.e.), specifically excluded from its ruling cases as may be possible." Act of [*464] April 8, 1913, 33rd "based upon a civil right of [an individual] to compensa- Leg., ch. 163, art. 152, 1913 Tex. Gen. Laws 342. Alt- tion." Relying on Bradley, 34 the court in Texas Liquor hough a review of decisions of other states and of federal [**98] Control Bd. v. Jones, 112 S.W.2d 227, 229-30 practice indicated substantial support for what appeared to (Tex. Civ. App.--Texarkana 1937, no writ), noted that be a quite reasonable legislative attempt [**96] to en- unlike other administrative proceedings that might in- trust the determination of mental competency to the ex- volve rights of the same character as a "cause of action," pertise of the medical profession, 196 S.W. at 514-15, this the cancellation of a liquor license is a proceeding brought Court rightly concluded there that by the state pursuant to its police power to protect the "welfare, health, peace . . . and safety of the people of trial by jury means something more Texas." than a hearing before a commission. . . .

34 See also State v. De Silva, 105 Tex. 95, 145 S.W. 330 (Tex. 1912) (also holding that cancella- Id. at 511. Such "a hearing before a commission, in lieu of tion of liquor license is not a "cause"). the time-honored trial by jury, is invalid." Id. at 515.

This concern for "the safety of the people of Texas" -- Moreover, the rights and needs of the public, id., is not dissimilar [contrary] reasoning [in other jurisdic- from the doctrine of "public rights" rather imperfectly tions] as to the right of the legislature to employed by the federal courts. State cancellation of a dispense with jury trials is not applicable liquor license essentially represents a "public right." In to our judicial system and laws, and it is Atlas Roofing Co. v. Occupational Safety & Health Re- obnoxious to our [Texas] Constitution . . . view Comm'n, 430 U.S. 442 (1977), the court distin- ." guished between cases involving governmental action to protect the public health and [**99] safety and those involving only private rights: Id. I maintain that the wholesale transfer of authority for factfinding from juries to the bureaucracy announced here At least in cases in which "public is no less offensive to the rights our Constitution guaran- rights" are being litigated -- e.g., cases in tees. which the government sues in its sovereign Beginning with the constitutional amendment that led capacity to enforce public rights created by to the creation of the Railroad Commission, 33 the use of statutes . . . [the constitutional right to a administrative agencies in Texas has steadily increased. jury trial] does not prohibit . . . assign[ment Today this arm of government implements broad legisla- of] the factfinding function to an adminis- tive plans regulating many areas of public concern, in- trative forum with which the jury would be cluding the conduct of public utilities, the development incompatible. and conservation of energy resources, and the protection [**97] of the environment. Id. at 450.

33 See Tex. Const. art. X, § 2 and interp. com- Bradley and Jones are also consistent with writings in mentary (Vernon 1955) (noting that the provision other jurisdictions strictly excluding from any adminis- Page 25 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 trative public rights exception actions invoking private [*465] rights for which the Constitution mandates a right to trial by jury: See Texas Constitutional Revision Commission, A New Constitution for Texas: Text, Explanation, Although the award of general com- Commentary 120-21 (1973). pensatory damages may have substantive [**101] effect, in that it deters violation of the regulatory scheme . . . when the damages as identical in meaning, that is, as pro- awarded advance a substantial private in- tecting the right of trial by jury only as it terest in remuneration that is dispropor- existed at common law or by statutes in tionate to the concept of public relief, the effect at the time of the adoption of the right to a jury trial is implicated and a jury Constitution. is required.

530 S.W.2d at 292 (citing Hickman v. Smith, 238 S.W.2d McHugh v. Santa Monica Rent Control Bd., 49 Cal. 3d 838 (Tex. Civ. App.--Austin 1951, writ ref'd), as im- 348, 777 P.2d 91, 117 (Cal. 1989) (Panelli, J., concur- properly assigning the two provisions equivalent mean- ring); Bishop Coal [**100] Co. v. Salyers, 380 S.E.2d ing). We held that the Judiciary Article affords a unique 238, 246 (W.Va. 1989) (subjective determinations of right to trial by jury even for causes of action unknown at damages are constitutionally entrusted to juries); Broward the time of the Constitution's adoption. Id. 36 County v. La Rosa, 505 So.2d 422, 424 (Fla. 1987) (con- stitutional right to jury precludes administrative awards of The Credit Bureau opinion was authored for unliquidated damages). the court by now former Chief Justice Jack Pope, Fortunately the rights of Texans are not constrained who had written previously, "the struggle for sur- by whether the right to a jury trial was preserved in vival by the institution we call the jury is truly the analogous actions in 1876. We have written quite clearly epic of our law." Jack Pope, The Jury, 39 Tex. L. that an even broader right to trial by jury is afforded under Rev. 426 (1961). That struggle continues today. article V, section 10 than under article I, section 15. 35 Instead of heeding this holding, the majority seizes State v. Credit Bureau of Laredo, Inc., 530 S.W.2d 288, upon a citation to a commentary in that writing as an (Tex. 1975). Relying on Walsh v. Spencer, 275 excuse to rewrite the Constitution. In the discussion of the S.W.2d 220, 223 (Tex. Civ. App.--San Antonio 1954, no article V jury [**102] trial guarantee in Credit Bureau, writ), which described the "much broader guarantee" of which involved no administrative action, we noted a few the Judiciary Article, and Tolle v. Tolle, 104 S.W.2d 1049, "isolated" proceedings that do not constitute a "cause" that 1050 (Tex. 1907), which said of the provision, "language have been identified on a "case-by-case determination." cannot be more comprehensive than this," we expressly Id. at 293. We made shorthand reference to a commen- disapproved of earlier cases "mistakenly" treating the two tator's brief list of exceptions carved from the otherwise provisions inviolate right to trial by jury. Id. (citing Whitney R. Harris, Jury Trial in Civil Cases -- A Problem in Consti- In the commentary for recommended article tutional Interpretation, 7 Sw. L.J. 1, 8 (1953) (listing V, section 14(e) of the proposed 1974 Constitu- child custody by habeas corpus and adoption proceedings, tion, the significance of holdings regarding this election contests, and contempt proceedings)). Addition- more expansive language was also noted: ally, Harris relied upon Jones for the broader proposition that proceedings originally brought before administrative The right of trial by jury guar- agencies are excepted from constitutional jury rights. 7 anteed in Article V, Section 10 of Sw. L.J. at 12-13. 37 the 1876 Constitution is not de- pendent on the existence of the Though he wrote in unnecessarily global right at the time the Constitution terms regarding this exception, even Harris rec- was adopted in 1876. The guaran- ognized that tee extends to any "cause" insti- tuted in the district court. A the plain language of the Judi- "cause" is defined as a suit or ac- ciary section conferring the right of tion concerning any question, civil trial by jury in all causes in the or criminal, contested before a district courts would seem to enti- court of justice.

Page 26 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 tle parties to jury trials irrespective limited circumstance, I would define proceedings in- of whether that right existed at the volving "public rights" as those in which the government, time of the adoption of the Con- as a real party in interest, enforces a regulatory or statu- stitution. tory scheme. Contrary to the majority, I do not suggest that we follow its standard preference [**105] for cop- ying a "federal test," S.W.2d at n.24. Rather, I recommend Harris, supra, at 6-7. a narrow and clear Texas standard that looks to Texas law predating Atlas Roofing, and which learns from the mis- [**103] [*466] Today the majority overexpands application of this doctrine in the federal courts. this exception before considering the rule it prefers that exception to swallow. In Credit Bureau we attributed To some extent every action legislatively "broad meaning [to] the word 'cause.'" 530 S.W.2d at 292. entrusted to an administrative agency involves a In defining it, we did not limit its meaning in the past, but public right. At the same time even actions by turned to a relatively contemporary dictionary as well as private parties may have incidental regulatory ef- older authority. Id. Clearly this term must adapt to fects and are unquestionably invested with a pub- modern developments; our understanding of a "cause" is lic interest. See The Dallas Morning News, Inc. v. not frozen in 1876. See Davenport v. Garcia, 834 S.W.2d Fifth Court of Appeals, ___ S.W.2d ___, ___ (Tex. 4, 19 (Tex. 1992). Both the text of our Constitution and its 1992, orig. proceeding) (Doggett, J., dissenting historical backdrop demand that the right to trial by jury from overruling of motion for leave to file petition remain "inviolate." When, as here, however, changing for writ of mandamus). circumstances require reexamination of the scope of this The "public rights" concept has been re- right in order to preserve the evolved workings of gov- cently muddled by the federal courts. In ernment, we must ensure that any exception does not Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, destroy the guarantee. 38 We should instead follow the 106 L. Ed. 2d 26, 109 S. Ct. 2782 (1989), the court, command of our Constitution in light of our contemporary although upholding the right to a jury trial for situation, by limiting any exception in the most narrow defendants sued for fraudulent conveyance by a way possible without completely undermining the ad- trustee in bankruptcy, broadened the scope of its ministrative state. "public rights" exception to include all cases "in- volving statutory rights that are integral parts of a The majority notes the existence of other public regulatory scheme and whose adjudication statutory procedural protections, such as those Congress has assigned to an administrative contained in the Administrative Procedure and agency." Id. at 55 n.10. See also Thomas v. Union Texas Register Act, Tex. Rev. Civ. Stat. art. Carbide Agric. Prod. Co., 473 U.S. 568, 586 6252-13a, § 19(e). S.W.2d at n.26. While im- (1985) (rejecting the view that the government portant, these measures certainly do not constitute must bring suit in order for litigation to involve a complete substitute for a jury trial. If the Texas "public rights"). I believe that such an expansive Constitution guarantees a right to trial by jury, no reading of "public rights" would not be consistent lesser protection will suffice. with the broad state constitutional protection of [**104] the right to trial by jury in Texas.

I would accordingly clarify any existing exception for [**106] Here TAB's members are not entitled to a administrative proceedings to preserve the right to trial by jury trial because the state is enforcing public regulations jury in all suits except those in which the state is enforcing by imposing administrative penalties. Although this ac- a regulation or statute protecting the public. If construed tion is analogous to a common law nuisance claim, here too broadly, however, even this exception limited to the state is protecting the public's right to a clean envi- "public rights" could destroy our traditional reliance on ronment rather than an [*467] individual's use and the jury system. 39 Indeed, despite the writing in Atlas enjoyment of private property.

Roofing, such erosion has already begun at the federal The right to trial by jury is a critical state constitu- level. 40 Properly limited, however, a "public rights" ad- tional guarantee. Denigrating my concern with protecting ministrative exception to the right to trial by jury is both this liberty, the majority dismisses my writing as "trum- constitutionally sound and easy to apply. While perhaps peting." S.W.2d at n.23. The trumpet call has sounded far-reaching in other contexts, "public rights" that conflict from the very earliest days of our Republic, heralding our with the right of each member of the public to have factual right to trial by jury, a clarion to our citizens to shout out disputes resolved by a public jury must be narrowly con- to preserve their heritage against attack. It demands that strued. I would not permit the concept of "public rights" to any intrusion on this right be narrow in scope, clear- be perverted to deny such a fundamental right. In this Page 27 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 ly-announced and thoughtfully considered. The majority's ternatively, that the record adequately demonstrated the refusal to define with certainty its erosion of the right to right of the Texas Association of Business under Texas trial by jury sounds a weak and shaky chord, reflecting a law to initiate this litigation. Why then does the majority lack of commitment to this fundamental guarantee. At- insist on writing? Because it dare not pass up the oppor- tempting to let the strong note drown the weak, the ma- tunity to close access to our courts to those citizens who jority seeks to hide its equivocation by reference to my choose to challenge environmental [**109] degradation, conclusion that a jury trial is not required under [**107] neighborhood destruction and consumer abuse. Through a these anti-pollution statutes, id., and by criticizing the narrowly crafted test, the majority extends an invitation to narrow, clear and thoughtful exception I have drawn TAB to come into the courts while telling other public today. Id. interest groups to stay out.

The inviolate nature of the right to trial by jury de- As the majority recognizes, "the parties in- mands that this vital guarantee be circumscribed in only sist that any question of standing has been waived the most extraordinary circumstances and that any ex- in the trial court and cannot be raised by the court ception to it be clearly and narrowly construed. Although for the first time on appeal." S.W.2d at .

I do not disagree with the result announced by the major- ity, the analysis employed is designed to destroy one of While devoting over half of today's opinion to a our most precious freedoms as Texans. The alternative I nonissue in this litigation, the majority oddly limits its offer would permit our administrative bodies to imple- inquiry to only one of the three organizations asserting ment efficiently their regulations, while ensuring that standing here. Nothing is said as to the League of Women efficiency concerns do not envelop a fundamental civil Voters and the Sierra Club, both of which intervened in liberty. 41 the trial court and were aligned as defendants with the State. Asserting the interests of its members in water and In view of recent attacks nationwide on the air quality, as well as its involvement in protecting the jury system, a recent study determined that state's natural resources, the League of Women Voters claimed standing to defend the challenged regulations.

Our central conclusion is that Similarly, the Sierra Club [*468] based its standing the civil jury system is valuable [**110] on its purpose of environmental enhancement and works well. . . . It is [not] and conservation of natural resources. By completely "broken," and therefore it need not ignoring whether these groups were proper parties and by be "fixed." The jury system is a embracing a federal standing test hostile to their partici- proven, effective, an important pation, the majority erects new barriers to deny Texans means of resolving civil disputes. access to Texas courts.

To achieve this result, the majority must overcome what, until recently, was viewed as a considerable obsta- The Brookings Institution, Charting a Future for cle -- Texas law. This court has repeatedly held that the the Civil Jury System 2 (1992). issue of standing may not be raised for the first time on appeal, either by the parties or by the court. In Texas [**108] III. Standing Industrial Traffic League v. Railroad Comm'n of Texas, The issue of standing is a stranger to this litigation. 633 S.W.2d 821, 822-23 (Tex. 1982), we concluded: No party before this court has ever asserted that the Texas Association of Business lacked capacity to challenge the A party's lack of justiciable interest actions of state government. How rare the occasion when must be pointed out to the trial court . . . in all litigants agree a written plea in abatement, and a ruling thereon must be obtained or the matter is on the proper resolution of an issue, but how truly waived. extraordinary is such unanimity when the parties are two state regulatory agencies, the Texas Association of Business, the Sierra Club and the League of Women Voters. This, nonetheless, is the exceptional circumstance in which we find ourselves today as all of these diverse No plea challenging the standing of [the parties have urged the court not to decide this matter in the party] was filed in the district court. The manner adopted. Addressing the question of standing issue of standing was therefore waived, solely at the belated insistence of the majority, all parties and the court of appeals erred in writing on asserted that this issue was not in dispute; that, under the issue at all. recent precedent, standing had been waived; 42 and, al- Page 28 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 Paso 1988, writ denied); City of Fort Worth v. Groves, 746 S.W.2d 907, 913 (Tex. App.--Fort (Emphasis supplied). The sole issue presented in Coffee v. Worth 1988, no writ); Barron v. State, 746 S.W.2d William Marsh Rice University, 403 S.W.2d 340 (Tex. 528, 530 (Tex. App.--Austin 1988, no writ); 1966), [**111] was whether the court of appeals erred in Reynolds v. Charbeneau, 744 S.W.2d 365, 367 dismissing a case, on its own motion, for want of standing. (Tex. App.--Beaumont 1988, writ denied); This court held that, because standing had not been chal- Champion v. Wright, 740 S.W.2d 848, 851 (Tex. lenged in the trial court, that issue could not deprive the App.--San Antonio 1987, writ denied); Texas court of appeals of subject matter jurisdiction. Id. at Low-Level Radioactive Waste Disposal Authority 347-48. Assuming that standing was lacking in Sabine v. El Paso County, 740 S.W.2d 7, 8 (Tex. App.--El River Authority of Texas v. Willis, 369 S.W.2d 348, Paso 1987, writ dism'd w.o.j.); S.I. Property 349-50 (Tex. 1963), 43 this court nonetheless held that Owners' Ass'n v. Pabst Corp., 714 S.W.2d 358, dismissal was erroneous, because the absence of a justi- 360 (Tex. App.--Corpus Christi 1986, writ ref'd ciable interest was not first raised in the trial court. We n.r.e.); Gonzales v. City of Lancaster, 675 S.W.2d have repeatedly cited these decisions with approval. See 293, 294-95 (Tex. App.--Dallas 1984, no writ); Central Educ. Agency v. Burke, 711 S.W.2d 7, 8 (Tex. Mabe v. City of Galveston, 687 S.W.2d 769, 771 1986) (per curiam); American General Fire & Casualty (Tex. App.--Houston [1st Dist.] 1985, writ Co. v. Weinberg, 639 S.W.2d 688 (Tex. 1982); Cox v. dism'd); Develo-cepts, Inc. v. City of Galveston, Johnson, 638 S.W.2d 867, 868 (Tex. 1982) (per curiam). 668 S.W.2d 790, 793 (Tex. App.--Houston [14th Dist.] 1984, no writ); Griffith v. Pecan Plantation Despite the clear statement in Sabine River Owners Ass'n, Inc., 667 S.W.2d 626, 628 (Tex. that "we assume without deciding that Sabine has App.--Fort Worth 1984, no writ); City of Houston no justiciable interest," 369 S.W.2d at 349, the v. Public Utility Comm'n of Texas, 656 S.W.2d majority today asserts that "standing was present" 107, 110 n.1 (Tex. App.--Austin 1983, writ ref'd in the trial court in that case. S.W.2d at n.9. n.r.e.); Public Utility Comm'n v. J.M. Huber Corp., 650 S.W.2d 951, 955-56 (Tex. [**112] Time and time again, the courts of appeals App.--Austin 1983, writ ref'd n.r.e.); Vaughn have also refused to consider challenges to standing not Bldg. Corp. v. Austin Co., 620 S.W.2d 678 (Tex. first raised in the trial court. 44 Until today, the only criti- App.--Dallas 1981), aff'd, 643 S.W.2d 113 (Tex. cism of our prior holdings to this effect has [*469] 1982); War-Pak, Inc. v. Rice, 604 S.W.2d 498 consisted primarily of writings authored by one appellate (Tex. App.--Waco 1980, writ ref'd n.r.e.). judge. 45 [**113] Texas Dep't of Mental Health v. Petty, 778 See, e.g., Espiricueta v. Vargas, 820 S.W.2d S.W.2d 156, 166 (Tex. App.--1989, writ dism'd 17, 20 (Tex. App.--Austin 1991, writ denied); In- w.o.j.) (opinion by Powers, J.); Public Utility tegrated Title Data Systems v. Dulaney, 800 Comm'n v. J.M. Huber Corp., 650 S.W.2d 951, S.W.2d 336 (Tex. App.--El Paso 1990, no writ); 954-56 (Tex. App.--Austin 1983, writ ref'd State v. Euresti, 797 S.W.2d 296, 299 (Tex. n.r.e.)(opinion by Powers, J.); Hooks v. Texas App.--Corpus Christi 1990, no writ); Cissne v. Dep't of Water Resources, 645 S.W.2d 874 (Tex. Robertson, 782 S.W.2d 912, 917 (Tex. App.--Austin 1983, writ ref'd n.r.e.) (opinion by App.--Dallas 1989, writ denied); Broyles v. Ash- Powers, J.); see also Kircus v. London, 660 S.W.2d worth, 782 S.W.2d 31, 34 (Tex. App.--Fort Worth 869, 872 n.3 (Tex. App.--Austin 1983, no writ) 1989, no writ); Horton v. Robinson, 776 S.W.2d (opinion by Phillips, C.J.).

260, 263 (Tex. App.--El Paso 1989, no writ); L.G. v. State, 775 S.W.2d 758, 760 (Tex. App.--El Paso 1989, no writ); Wilson v. United Farm Workers of The majority has a simple way to deal with this venerable America, 774 S.W.2d 760, 764 (Tex. body of law -- overrule only one case, making today's App.--Corpus Christi 1989, no writ); Smiley v. abrupt change in the law appear less drastic, while ig- Johnson, 763 S.W.2d 1, 4 (Tex. App.--Dallas noring the rest. In fact, six Texas Supreme Court cases 1988, writ denied); Ex Parte McClain, 762 S.W.2d must be overruled and no less than twenty-five decisions 238, 242 (Tex. App.--Beaumont 1988, no writ); of the courts of appeals must be disapproved to reach Goeke v. Houston Lighting & Power Co., 761 today's result. The concept of reliance on the prior deci- S.W.2d 835, 837 n.1 (Tex. App.--Austin 1988), sions of Texas courts has long since ceased to offer the rev'd on other grounds, 797 S.W.2d 12 (Tex. slightest restraint on this majority. 46 1990); Group Medical and Surgical Service, Inc. v. Leong, 750 S.W.2d 791, 794-95 (Tex. App.--El Page 29 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 46 See, e.g., Boyles v. Kerr, S.W.2d, (Tex. type of writing within the last year. See Edgewood Indep.

1992) (Doggett, J., dissenting) (objecting to ma- Sch. Dist. v. Kirby, 804 S.W.2d 491, 501 (Tex. 1991) jority's overruling of landmark Texas Supreme (Doggett, J., concurring); Carrollton-Farmers Branch Court decision permitting recovery for negligence Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist., 826 resulting in emotional distress); Walker v. Packer, S.W.2d 489, 537 (Tex. 1992) (Doggett, J., dissenting) 827 S.W.2d 833, 835 (Tex. 1992, orig. proceeding) (advisory opinions issued and retracted as necessary to (Doggett, J., dissenting) (noting majority's "mass thwart efforts to satisfy the constitutional command of execution of precedent," encompassing "a dozen equity and efficiency in our public schools). Writing on an or more Texas Supreme Court cases and countless issue not raised by any party, as the majority reaches out decisions of the courts of appeals"); Carroll- to revise the law of standing today, seems to me the very ton-Farmers Branch Indep. Sch. Dist., S.W.2d at essence of an "advisory" opinion. (Tex. 1992) (Doggett, J., dissenting) (discussing The second newly-announced constitutional basis is rejection by majority of its own decision issued equally ironic -- our state's vital guarantee that "all courts less than one year previously); Stewart Title Guar. shall be open," Tex. Const. art. I, § 13, in some inexpli- Co. v. Sterling, 822 S.W.2d 1, 12 (Tex. 1991) cable way, mandates that they be closed to some and (Doggett, J., dissenting) (majority disregards its requires continual judicial monitoring of all who attempt own recent precedent, looking instead to overruled to enter. No authority of any type is cited [**116] for case); Rose v. Doctors Hosp., 801 S.W.2d 841, 852 this [*470] proposition that "open" courts really means (Tex. 1990) (Doggett, J., dissenting) (disapproving "closed" courts. Nothing in the history or text of the pro- of rejection of recent controlling precedent). vision justifies this reading nor has any Texas court pre- [**114] Bulldozing a new path through this juris- viously attempted such converse interpretation. This prudential forest, the majority vaults standing to a new constitutional guarantee is used today as a two-edged and remarkable prominence by suddenly discovering that sword: the majority invokes the open courts provision to it has not just one but two constitutional bases. And what bar environmental groups from seeking judicial assistance unusual constitutional pillars each of these new finds in enforcing the laws, while in the very same opinion represents. First, the proscription of the separation of misinterpreting this provision to allow continued violation powers doctrine against issuance of advisory judicial of statutes protecting our precious natural resources. 48 opinions allegedly requires rigorous enforcement of standing even when no party debates its existence. This 48 See section I, supra. link between standing and separation of powers is not Then, with a final flourish, standing is conveniently predicated on any directly relevant prior court decision, 47 classified as a nonwaivable component of subject matter but instead is entirely premised on an article openly an- jurisdiction. Until today, Texas followed the rule, adopted tagonistic to standing for environmental groups. S.W.2d by many of our sister states considering the issue, that at, citing Atonin Scalia, The Doctrine of Standing as an objections to a party's standing are waived if not first Essential Element of the Separation of Powers, 17 Suffolk raised in the trial court. 49 No Texas case is cited for the U. L. Rev. 881 (1983). The current majority may be the proposition that standing is part of nonwaivable subject first in the nation to anchor standing on this constitutional matter jurisdiction [**117] because, until today, this theory. court had repeatedly stated precisely the very opposite -- that standing is not jurisdictional. 50 The United States Supreme Court has clearly stated that standing does not implicate separation See, e.g., Brown v. Robinson, 354 So. 2d 272, of powers concerns. See Flast v. Cohen, 392 U.S. 273 (Ala. 1977); Jackson v. Nangle, 677 P.2d 242, 83, 100, 20 L. Ed. 2d 947, 88 S. Ct. 1942 (1968) n.10 (Alaska 1984); Torrez v. State Farm Mut. ("The question whether a particular person is a Auto Ins. Co., 130 Ariz. 223, 635 P.2d 511, 513 proper party to maintain the action does not, by its n.2 (Ariz. App. 1981); Cowart v. City of West Palm own force, raise separation of powers problems Beach, 255 So. 2d 673, 675 (Fla. 1971); Lyons v. related to improper judicial interference in areas King, 397 So.2d 964 (Fla. App. 1981); Greer v. committed to other branches of . . . Govern- Illinois Housing Development Auth., 524 N.E.2d ment.").

561, 582 (1988); Matter of Trust of Rothrock, 452 [**115] The authorities addressing the prohibition N.W.2d 403, 405 (Iowa 1990); Tabor v. Council on advisory opinions cited in support of this proposition, for Burley Tobacco, Inc., 599 S.W.2d 466, 468 of course, in no way implicate the question of standing. (Ky. App. 1980); Sanford v. Jackson Mall Shop- This precedent-setting concern with advisory opinions ping Ctr. Co., 516 So. 2d 227, 230 (Miss. 1987); contrasts markedly with the eagerness to issue this very Fossella v. Dinkins, 66 N.Y.2d 162, 495 N.Y.S.2d Page 30 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 352, 485 N.E.2d 1017, 1019 (1985); Public permitted to waive, consent to, or neglect Square Tower One v. Cuyahoga County Bd. of to complain about an error at trial and then Revision, 516 N.E.2d 1280, 1281 n.2 (Ohio App. surprise his opponent on appeal by stating 1986); Federman v. Pozsonyi, 365 Pa. Super. 324, his complaint for the first time. 529 A.2d 530, 532 (Pa. Super. 1987); McMullen v. Zoning Board of Harris Township, 494 A.2d 502 (Pa. Commw. Ct. 1985); International Depository, Pirtle v. Gregory, 629 S.W.2d 919, 920 (Tex. 1982).

Inc. v. State, 603 A.2d 1119, 1122 (R.I. 1992); While this court has condemned "trial by ambush," State v. Miller, 248 N.W.2d 377, 380 (S.D. 1976); Gutierrez v. Dallas indep. School Dist, 729 S.W.2d 691, Princess Anne Hills Civ. League, Inc. v. Susan 693 [*471] (Tex. 1987), today the majority promotes Constant Real Estate Trust, 243 Va. 53, 413 "ambush on appeal."

S.E.2d 599, 603 n.1 (Va. 1992); Tyler Pile Indus- Three purported policy justifications for the majori- tries, Inc. v. State Dep't of Revenue, 714 P.2d 123, ty's actions are offered, with not a single supporting au- (Wash. 1986); Poling v. Wisconsin Physicians thority. The first concern is that a strict standing rule is Serv., 120 Wis. 2d 603, 357 N.W.2d 293, 297-98 necessary to prevent collusive litigation. Under Texas (Wisc. App. 1984). The majority's odd attempt to law, the filing of a fictitious suit constitutes contempt by distinguish some of these cases, all of which are counsel, Tex. R. Civ. P. 13, and may serve as the basis predicated in terms of standing, as involving for a host of sanctions, including dismissal with prejudice. solely the question of whether the litigant was a Tex. R. Civ. P. 215-2b(5). Nor [**120] does our Texas proper "real party in interest" has never been judiciary lack the ability to reject collusive litigation. drawn previously in the published decisions of any Felderhoff v. Felderhoff, 473 S.W.2d 928, 932 ("We be- Texas court addressing the question of standing. lieve that our laws and judicial system are adequate to See cases cited at notes 44, supra, and 50, infra. ferret out and prevent collusion. . . ."); cf. Whitworth v. [**118] Bynum, 699 S.W.2d 194, 197 (Tex. 1985) (refusing to See Texas Industrial Traffic League, 633 uphold Texas Guest Statute because of danger of collu- S.W.2d at 822-23; Central Educ. Agency v. Burke, sion). Adhering to precedent today would in no way un- 711 S.W.2d at 8; American General Fire & Cas- dermine the power to dismiss fraudulent suits. ualty Co. v. Weinberg, 639 S.W.2d 688; Cox v. Johnson, 638 S.W.2d at 868. To avoid overruling The second virtue proclaimed for today's holding is these, the majority claims all three recognized that the guarantee that the lower courts will be restrained from lack of subject matter jurisdiction can initially be exceeding their jurisdictional powers. S.W.2d at . This raised on appeal. True, but ignored is the conclu- concern is derived solely from the federal law mandate sion of each that subject matter jurisdiction cannot that a federal appellate court is duty-bound to verify not be waived while standing can be. only its own jurisdiction but that of the lower courts as well. Federal courts, however, have limited jurisdiction; Texas has with good reason determined that standing Texas courts do not. Our Texas Constitution creates is not excepted from traditional rules of appellate proce- courts of general jurisdiction, investing them with all of dure. Our appellate system is predicated on the require- the "judicial power of this State." Tex. Const. art. V, § 1. ment of presentation of complaints to the lower court The differences are evident in our procedural rules. While coupled with preservation and briefing in the reviewing a federal court must affirmatively ascertain jurisdiction court. See Tex. R. App. P. 52; 74(d), 131(e). Appellate over parties appearing before it, a Texas court's jurisdic- courts face considerable difficulties in deciding an issue tion [**121] is presumed until proven lacking by a not presented to the trial court; ordinarily, the necessary contesting party. See Tex. R. Civ. P. 120a. facts will not be fully developed. The unstated effect of today's opinion is to require trial courts to develop facts as Lastly, the majority expresses concern as to the res to undisputed issues or risk subsequent appellate [**119] judicata effect on other potential litigants of a judgment reversal. This is not an effective use of our limited judicial rendered in the absence of genuine standing. S.W.2d at . resources. Aware of this concern, the very federal judiciary that this majority is so eager to emulate has failed to perceive it as The requirement that issues first be presented to the a problem of significance. International Union, United trial court serves another function -- preventing parties Automobile, Aerospace and Agricultural Implement from "laying behind the log": Workers of America v. Brock, 477 U.S. 274, 290, 91 L. Ed. 2d 228, 106 S. Ct. 2523 (1986). If representation is in- The reason for the requirement that a adequate, or a conflict of interest between members exists, litigant preserve a trial predicate for com- any judgment will have minimal preclusive effect. Id. plaint on appeal is that one should not be Instead of completely barring access to the courts, pro- Page 31 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 cedural safeguards can ameliorate any potentially over- LeCroy v. Hanlon, 713 S.W.2d 335, 339 (Tex. 1986). broad effects. See generally Charles A. Wright, Arthur R. This constitutional mandate is reflected in decisions Miller & Edward H. Cooper, 18 Federal Practice & Pro- of this court adopting an "open courts" approach to cedure § 4456 at 490-94 (1981 & Supp. 1991). standing in general and associational standing in particu- The manufactured nature of the majority's concerns lar. On several occasions, we have recognized the power becomes all the more evident when the real world expe- of the [**124] Legislature to exempt litigants from proof rience of Texas is considered. The majority is unable to of "special injury." Scott v. Board of Adjustment, 405 point to a single example of collusion during the three S.W.2d 55, 56 (Tex. 1966) (standing may be shown even [**122] decades our Texas rule, which allows the issue in the absence of particular damage); Spence v. Fenchler, of standing to be waived, has been in place. During this 107 Tex. 443, 180 S.W.597 (1915) (under statute, "any period there have likewise been no examples of lower citizen" able to seek injunction, without showing partic- courts making a grab for extrajurisdictional power, nor of ular interest or personal damage). 51 In enacting the Uni- oppressed litigants shackled by the res judicata effect of form Declaratory Judgments Act, the Texas Legislature contrived litigation. has granted a broad right of standing: any person "whose rights, status or other legal relations are affected by a In defining state requirements for standing, we are in statute" may seek a declaration of those rights. Tex. Civ. no way bound by federal jurisprudence founded upon Prac. & Rem. Code § 37.004 (emphasis supplied). converse jurisdictional principles from our own. Texas courts can afford their citizens access to justice in cir- Our past acknowledgement of the legislative cumstances where they would have been unable to estab- power to expand access to Texas courts is incon- lish standing in the federal courts. See City of Los Angeles sistent with today's conclusion that we must nar- v. Lyons, 461 U.S. 95, 113, 75 L. Ed. 2d 675, 103 S. Ct. rowly limit access. See Mark V. Tushnet, The New 1660 (1983) ("state courts need not impose the same Law of Standing: A Plea for Abandonment, 62 standing . . . requirements that govern federal-court pro- Corn. L. Rev. 663 (1977) (because court decisions ceedings"); Doremus v. Board of Education, 342 U.S. do not question legislative power to confer 429, 434, 96 L. Ed. 475, 72 S. Ct. 394 (1952) (state courts standing by statute, they suggest that standing not restrained by "case or controversy" limitations of rules are not constitutionally grounded).

Federal Constitution); Greer v. Illinois Housing Devel- opment Auth., 122 Ill.2d 462, 524 N.E.2d 561, 120 Ill. [**125] This court has previously extended its Dec. 531 (1988) ("We are not, of course, required to fol- "open courts" approach to groups representing the inter- low the Federal law on issues of justiciability and stand- ests of their members. 52 In Texas Highway Comm'n v. ing."). [**123] Texas Ass'n of Steel Importers, 372 S.W.2d 525, 530-31 (Tex. 1963), we permitted a business association to chal- The differences between our Texas Constitution and lenge an administrative order. Although the order ad- the Federal Constitution not only justify, but also require, dressed only the import of foreign products for highway that citizen groups be accorded a broader right of access construction, this court recognized standing of an organ- [*472] to our state courts. The Texas Constitution con- ization whose interest in foreign imports was not so lim- tains no express limitation of courts' jurisdiction to "cas- ited: es" or "controversies," as provided by the federal charter.

U.S. Const. art. III, § 2. Instead, it affirmatively protects 52 Despite the participation of associational the rights of litigants to gain access to our judicial system: litigants before this court, we have never before questioned standing on our own motion. See, e.g., All courts shall be open, and every Austin Indep. Sch. Dist. v. Sierra Club, 495 S.W.2d person for an injury done him, in his lands, (Tex. 1973). goods, person or reputation, shall have remedy by due course of law.

Some of [the respondents] are owners of imported foreign manufactured Tex. Const. art. 1, § 13. As this court has recognized, products suitable for highway construction The provision's wording and history purposes. All of them are actively engaged demonstrate the importance of the right of in the sale and use of imported manufac- access to the courts. . . . The right of access tured products. . . .Such parties clearly to the courts has been at the foundation of have the right and litigable interest to have the American democratic experiment. the challenged . . [**126] . Order de- clared null and void.

Page 32 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 ceived but as yet totally unrealized woes, the majority imposes a difficult to meet, easy to manipulate standard Id. at 531. Similarly, in Touchy v. Houston Legal Foun- drawn from federal law "that lends itself to our use." Id. at dation, 432 S.W.2d 690 (Tex. 1968), the court considered . Never needing an invitation to impose more federal whether an organization of attorneys had standing to requirements on Texas citizens, the majority writes into maintain a suit against a charitable corporation to restrain our Texas law books the confused and troubling federal violations of ethical canons governing the practice of law. standing limitations. Not surprisingly, that law has taken a Based solely on "the special interest attorneys have in regressive turn, denying standing to public interest asso- their profession," the court held standing was established. ciations, including those seeking to protect the environ- ment. See Gene R. Nichol, Jr., Abusing Standing: A The "open courts" approach 53 of Touchy and Texas Comment on Allen v. Wright, 133 U. Pa. L. Rev. 635, 659 Highway Commission is quite sufficient to allow TAB (1985) ("One could perhaps be forgiven for confusing access to the Texas [*473] courts. 54 These two associ- standing's agenda with that of the New Right."). ational standing cases are all but ignored today, brushed aside as setting forth "no particular test." S.W.2d at . The benefits of permitting an association to represent the concerns of its members are manifest. As recognized See Safe Water Foundation of Texas v. City in United Auto Workers, 477 U.S. at 290, "The primary of Houston, 661 S.W.2d 190, 193 (Tex. reason people join an organization is often to create an App.--Houston [1st Dist.] 1983, writ ref'd n.r.e.) effective [**129] vehicle for vindicating interests that (recognizing precedent of this court as according they share with others." Judicial economy is promoted broad right of standing), app. dism'd, 469 U.S. 801 when one litigant can, in a single lawsuit, adequately (1983); Texas Industrial Traffic League v. Rail- represent many members with similar interests, thus road Comm'n of Texas, 628 S.W.2d 187 (Tex. avoiding repetitive and costly actions. The wider range of App.--Austin) (discussing Supreme Court's ex- resources often available for associations enhances their pansive approach to standing to allow access to effectiveness in litigation: Texas courts), rev'd, 633 S.W.2d 821 (Tex. 1982) (per curiam), overruled by Tex. Ass'n of Bus. v. Special features, advantageous both to Tex. Air Control Bd., S.W.2d (Tex. 1992). the individuals represented and to the ju- [**127] dicial system as a whole, . . .distinguish Accord Hunt v. Bass, 664 S.W.2d 323, 324 suits by associations on behalf of their (Tex. 1984) (recognizing statutorily-granted members . . . . An association suing can standing of litigants to seek mandamus to reduce draw upon a pre-existing reservoir of ex- substantial delays in court operations); Safe Water pertise and capital. "Besides financial re- Foundation of Texas v. City of Houston, 661 sources, organizations often have special- S.W.2d 190 (Tex. App.--Houston [1st Dist.], writ ized expertise and research resources re- ref'd n.r.e.), app. dism'd, 469 U.S. 801 (1983) lating to the subject matter of the lawsuit (drinking water consumer group had standing to that individual plaintiffs lack." . . . These contest fluoridation of city water). resources assist both courts and plaintiffs.

Yet in these cases in which the merits of standing are preserved for appellate court review, the Texas test ap- Id. at 289-90. In some cases, an injury that is substantial plied has not been complicated. We simply look to as to many may have an individual financial impact too whether a party has a stake in the action sufficient to small to make a challenge economically feasible. Asso- ensure adversarial presentation of the issues and to ciational representation may be the only means of re- whether the court's judgment will have any effect on those dressing conduct when the harm is limited in degree but before it. See Board of Water Engineers v, City of San substantial segments of society are affected. Additionally, Antonio, 155 Tex. 111, 283 S.W.2d 722, 724 (1955)("there [**130] in challenging policies of government, organi- shall be a real controversy between the parties, which . . . zations are generally less susceptible than individuals to will be actually determined by the judicial declaration retaliation by the bureaucrats they challenge. sought."). Because both of these considerations are met in the instant case, reference to federal law is wholly These benefits are ignored as the majority declares [**128] unnecessary. that henceforth the right of associations to bring suit in Texas courts will be constricted by a three-part federal test Today, however, to justify meddling with Texas set forth in Hunt v. Washington State Apple Advertising standing law, the majority declares that "we foresee dif- Comm'n, 432 U.S. 333, 343, 53 L. Ed. 2d 383, 97 S. Ct. ficulties" not here with TAB, but in future cases involving 2434 (1977), requiring that "(a) its members would oth- organizational standing. S.W.2d at . To cure these per- Page 33 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 erwise have standing to sue in their own right; (b) the difficult enough without the compounding effect interests it seeks to protect are germane to the organiza- of constitutional attribution."). tion's [*474] purpose; and (c) neither the claim asserted [**133] Moreover, in turning to the federal law of nor the relief requested requires the participation of indi- standing, the majority invokes a doctrine that has been vidual members in the lawsuit." 55 criticized more heavily and justifiably than perhaps any other. See, e.g., Gene R. Nichol, Jr., Rethinking Standing, These requirements are allegedly necessary 72 Cal. L. Rev. 68, 68 (1984); Mark V. Tushnet, The to protect "the members' best interest." S.W.2d at .

"Case or Controversy" Controversy, 93 Harv. L. Rev. Perhaps an organization's members are in a better 1698, 1713-21 (1980). Even the United States Supreme position than this court to determine what is in Court has recognized that federal standing requirements their best interest. have an "iceberg quality," Flast v. Cohen, 392 U.S. 83, 94, Yet the Hunt test won't hunt in [**131] Texas. It is 20 L. Ed. 2d 947, 88 S. Ct. 1942 (1968); yet the majority adopted purportedly because of the similarities between fails to navigate a course, not unlike the captain of the the state and federal constitutional underpinnings of the Titanic, that would steer Texas well away from this po- standing doctrine. Two critical factors are ignored: (1) the tential disaster. significant differences between the Texas and United The concept of standing is "employed to refuse to States Constitutions and (2) the fact that much of federal decide the merits of a legal claim." Charles A. Wright, standing doctrine is not mandated by the federal charter, Arthur R. Miller & Edward H. Cooper, Federal Practice & but is imposed solely on the grounds of judicial "pru- Procedure § 3531, at 338. Critics of the doctrine's com- dence." Warth v. Seldin, 422 U.S. 490, 498, 45 L. Ed. 2d plexity and uncertainty have recognized how subject it is 343, 95 S. Ct. 2197 (1974) ("This [standing] inquiry in- to manipulation: "standing . . . is no more than a conven- volves both constitutional limitations on federal-court ient tool to avoid uncomfortable issues or to disguise a jurisdiction and prudential limitations on its exercise."). surreptitious ruling on the merits." Id. at 348 (citing The majority works a grave disservice to our Texas commentaries). 57 Important rights can be left unpro- Constitution by equating our open courts provision, af- tected [**134] [*475] as a result. Id. at § 3531.3, firmatively guaranteeing all Texans access to our judicial 416-17 ("Standing decisions present courts with an op- system, with an express federal constitutional limitation portunity to avoid the vindication of unpopular rights, or on the right to seek redress in court. Despite the fact that even worse to disguise a decision on the merits in . . . the two provisions are vastly different in language, history opaque standing terminology . . . . Unarticulated and and purpose, the majority nonetheless determines to "look arbitrary predilection, cast as standing, defeats rights that to the more extensive jurisprudential experience of the deserve judicial protection."). federal courts" to determine standing. This is clearly an erroneous course. See Davenport v. [**132] Garcia, 57 See also, e.g., Valley Forge Christian Col- 834 S.W.2d 4, (Tex. 1992, orig. proceeding) (in blindly lege v. Americans United for Separation of adhering to federal law, "based on different language, Church and State, 454 U.S. 464, 490, 70 L. Ed. 2d different history and different cases, "from our treasured 700, 102 S. Ct. 752 (1982) (Brennan, J., dissent- state heritage, law and institutions . . . [we] derive nothing. ing); Abram Chayes, The Supreme Court, 1981 . . ."). Term -- Foreword: Public Law Litigation and the Burger Court, 96 Harv. L. Rev. 4, 23 (1982) Even the federal constitutional constraint is a simple (Having ritually recited the standing formula, "the one, looking to whether "the plaintiff has 'alleged such a Court then chooses up sides and decides the personal stake in the outcome of the controversy' as to case."); Michael A. Wolff, Standing to Sue: Ca- warrant his invocation of the court's remedial powers on pricious Application of Direct Injury Standard, 20 his behalf." Warth, 422 U.S. at 498, quoting Baker v. St. L. U. L.J. 663, 678 (standing barrier "raised or Carr, 369 U.S. 186, 204, 7 L. Ed. 2d 663, 82 S. Ct. 691 lowered based on the degree of hostility to, or (1962). In fact, this bare-bones test closely resembles the favoritism for, consideration of the issues on their approach that Texas courts have long chosen to follow. To merits"); Albert Broderick, The Warth Optional the extent Hunt constructs additional barriers to access to Standing Doctrine: Return to Judicial Suprema- our judicial system, they are wholly court-created. 56 No cy? 25 Cath. U. L. Rev. 467, 504, 516-17 (1976). justification for their adoption is contained in the majority opinion. [**135] Even during the three years that this par- ticular cause has been pending here, the federal courts Charles A. Wright, Arthur R. Miller & Ed- have been hard at work to manipulate standing require- ward H. Cooper, Federal Practice & Procedure, § ments to bar public interest groups from seeking judicial 3531.3, at 418 ("The problems [of standing] are vindication of rights common to their members. In Lujan Page 34 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 v. National Wildlife Federation, ___ U.S. ___, 497 U.S. standing as a procedural issue, then unnecessarily modi- 871, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990), a nation- fies all Texas precedent addressing the merits of standing. ally-recognized environmental group challenged a new Without explanation, today's opinion simply photocopies development classification for certain federal wilderness into our Texas law books the federal law of standing with areas that allegedly violated several federal statutes. The all of its much-criticized complexities. Once again the suit was dismissed for lack of standing based upon a rigid majority chooses more Washington wisdom for Texas construction of the requirement of injury to the associa- when what we need is more Texas thinking in Washing- tion's members. This decision has been widely criticized ton. See Bexar County Sheriff's Civ. Service Comm'n v. as significantly impairing the ability of public interest Davis, 802 S.W.2d 659, 665 (Tex. 1990) (Doggett, J., groups to represent their members, particularly those that dissenting). seek to protect this nation's environment and natural re- While today the corporate members of the Texas sources. 58 Today the majority eagerly positions itself to Association of Business are permitted to challenge the give the same treatment to those Texans who would peti- bureaucracy, tomorrow this same reasoning will be em- tion our state courts to protect the public interest. The ployed to bar public interest, neighborhood, environ- majority not only conspicuously relies on Lujan, S.W.2d mental and consumer groups from vindicating the rights at, but also embraces the extremist anti-environmental of their members. Today's opinion not only repudiates our stance propounded [**136] in an article openly critical past "open courts" approach to access to the judicial sys- of judicial opinions permitting citizens to complain of tem but also eliminates the long-recognized [**138] harm inflicted upon our natural resources. Id. at, citing appellate requirement that [*476] error be preserved.

Atonin Scalia, The Doctrine of Standing as an Essential The majority has charged well beyond traditional con- Element of the Separation of Powers, 17 Suffolk U. L. straints in its writing.

Rev. 881 (1983).

To the extent this case is about standing, it is about See Katherine B. Steuer and Robin L. Juni, standing still, about closing the courthouse door, once Court Access for Environmental Plaintiffs: standing open. For today the majority extends a standing Standing Doctrine in Lujan v. National Wildlife invitation to those who would harm our environment to Federation, 15 Harv. Envtl. L. Rev. 187, 232-33 act without fear of citizen challenge in the Texas courts. (1991); Sarah A. Robichaud, Note, Lujan v. Na- tional Wildlife Federation: The Supreme Court IV. Conclusion Tightens the Reins on Standing for Environmental Today the environment is the immediate victim.

Groups, 40 Cath. U. L. Rev. 443, 470-74 (1991); Those who pollute our rivers, release toxins into our air, V. Maria Cristiano, Note, In Determining an En- vironmental Organization's Standing to Challenge and damage our land cannot be promptly penalized. In- Government Actions Under the Land Withdrawal stead, only after the very slow wheels of our judicial system have creaked to a stop will violators of environ- Review Program, the Use of Lands in the Vicinity mental protection laws be held accountable. of Lands Adversely Affected by the Order of the Bureau of Land Management Does Not Constitute Yet the environment is not the whole story. Much as a Direct Injury--Lujan v. National Wildlife Federa- river may seem pure and clear even at the place where tion, 2 Seton Hall Const. L.J. 445 (1991); Michael illegal sewage is being pumped into it, the danger from a J. Shinn, Note, Misusing Procedural Devices to court's opinion may not be immediately apparent on its Dismiss an Environmental Lawsuit, 66 Wash. L. surface. Only after the reasoning is applied in other cases Rev. 893, 904-12 (1991); Lynn Robinson O'Don- is the severity of the resulting harm to our system of jus- nell, Note, New Restrictions in Environmental tice revealed. Today's impairment of the ability of con- Litigation: Standing and Final Agency Action Af- cerned citizens to vindicate the rights of many in our ter Lujan v. National Wildlife Federation, 2 Vill. [**139] courts and the majority's knockout punch to the Envtl. L.J. 227, 251 (1991); Bill J. Hays, Com- right of trial by jury will unfold in future cases to bar ment, Standing and Environmental Law: Judicial participation of ordinary citizens in Texas courts.

Policy and the Impact of Lujan v. National Wild- life Federation, 39 Kan. L. Rev. 997, 1042-43 The mess in Texas is not only with our environment (1991). but with the misinterpretation of the law.

[**137] Rather than a careful consideration of our Lloyd Doggett Texas precedent and our unique Texas Constitution, today Justice Texans are handed yet another unthinking embrace of federal law. Claiming "guidance" from federal precedent, Opinion Delivered: March 3, 1993 S.W.2d at, the majority overrules all Texas cases treating CONCURRING AND DISSENTING OPINION Page 35 852 S.W.2d 440, *; 1993 Tex. LEXIS 22, **; 36 Tex. Sup. J. 607 Rose Spector polluters will be left with little if any incentive to timely comply with environmental laws and regulations.

I agree with the substance of the concurring and dissenting opinion by Justice Doggett. I write separately, The effects of today's decision, though, extend far however, to explain why I would uphold the statutory beyond the statutes at issue in this case. By rejecting these requirement that those who run afoul of environmental prepayment requirements, without regard to the state laws make timely payment of administrative penalties interest involved, the majority has struck a severe blow to before seeking judicial review. this state's ability to enforce a broad range of regulations in the public interest. The similar statutory provisions In two other causes decided today, this court has identified in the opinion by Justice Doggett, ___ S.W.2d considered open courts challenges to the statutory re- at ___, [**141] cannot be dismissed as minor techni- quirement that state mineral lessees prepay administrative calities; they are carefully-crafted measures that the leg- deficiency assessments before seeking judicial review of islature considered vital to protect the public from recal- those assessments. State v. Flag-Redfern Oil Co. and State citrant lawbreakers. Casting those provisions aside will v. Rutherford Oil Corp., ___ S.W.2d ___ (Tex. 1993) seriously disrupt the effective operation of our state gov- (considering Tex. Nat. Res. Code § 52.137). Our analysis ernment. in those cases focused on the [*480] public interest at stake: the State's only interest in the prepayment re- The Texas Constitution cannot be construed in ab- quirement, we noted, [**140] was its financial interest solutes. The basic right of access to the courts must be in immediate access to disputed royalty payments. Id. at balanced against the need to protect the public's health and ___. Thus, we concluded that the prepayment requirement safety. While the restriction at issue in this case may be of section 52.137 was no different, in constitutional terms, substantial, I would hold that the public's interest in clean from the litigation tax disapproved in LeCroy v. Hanlon, air and water, combined with the due process afforded to 71 S.W.2d 335, 342 (Tex. 1986). Id. TAB's members in the administrative process, tips the balance in favor of the prepayment requirement. I there- The present case, in contrast, does not involve a liti- fore dissent. gation tax. The Clean Air Act, the Solid Waste Disposal Act, and the Water Quality Act embody this state's Rose Spector commitment to protect the environment; and the pre- Justice payment requirements struck down today were intended to give force to that commitment, not to raise revenue. OPINION DELIVERED: March 3, 1993 Without the need to prepay administrative penalties, Page 1

LexisNexis (R) Texas Annotated Statutes Copyright © 2014 by Matthew Bender & Company, Inc. a member of the LexisNexis Group All rights reserved.

*** This document is current through the 2013 3rd Called Session *** CIVIL PRACTICE AND REMEDIES CODE TITLE 2. TRIAL, JUDGMENT, AND APPEAL SUBTITLE C. JUDGMENTS CHAPTER 37. DECLARATORY JUDGMENTS GO TO TEXAS CODE ARCHIVE DIRECTORY Tex. Civ. Prac. & Rem. Code § 37.002 (2014) § 37.002. Short Title, Construction, Interpretation (a) This chapter may be cited as the Uniform Declaratory Judgments Act. (b) This chapter is remedial; its purpose is to settle and to afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations; and it is to be liberally construed and administered. (c) This chapter shall be so interpreted and construed as to effectuate its general purpose to make uniform the law of those states that enact it and to harmonize, as far as possible, with federal laws and regulations on the subject of declar- atory judgments and decrees.

Page 1

LexisNexis (R) Texas Annotated Statutes Copyright © 2014 by Matthew Bender & Company, Inc. a member of the LexisNexis Group All rights reserved.

*** This document is current through the 2013 3rd Called Session *** CIVIL PRACTICE AND REMEDIES CODE TITLE 2. TRIAL, JUDGMENT, AND APPEAL SUBTITLE C. JUDGMENTS CHAPTER 37. DECLARATORY JUDGMENTS GO TO TEXAS CODE ARCHIVE DIRECTORY Tex. Civ. Prac. & Rem. Code § 37.004 (2014) § 37.004. Subject Matter of Relief (a) A person interested under a deed, will, written contract, or other writings constituting a contract or whose rights, status, or other legal relations are affected by a statute, municipal ordinance, contract, or franchise may have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status, or other legal relations thereunder. (b) A contract may be construed either before or after there has been a breach. (c) Notwithstanding Section 22.001, Property Code, a person described by Subsection (a) may obtain a determination under this chapter when the sole issue concerning title to real property is the determination of the proper boundary line between adjoining properties.

Page 1 985 S.W.2d 149, *; 1998 Tex. App. LEXIS 7354, **

Texas Department of Public Safety, Appellant v. Charles V. Moore, Appellee NO. 03-98-00135-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 985 S.W.2d 149; 1998 Tex. App. LEXIS 7354

November 30, 1998, Filed PRIOR HISTORY: [**1] FROM THE DIS- section 411.007 of the [**2] Texas Government Code TRICT COURT OF TRAVIS COUNTY, 250TH JUDI- and the UDJA; (2) the trial court's decision to order the CIAL DISTRICT. NO. 95-00349, HONORABLE PAUL four positions vacated; and (3) the trial court's discretion R. DAVIS, JR., JUDGE PRESIDING. in awarding attorney's fees. We will affirm the trial court's order in part and reverse in part.

DISPOSITION: Affirmed in Part; Reversed and BACKGROUND Rendered in Part.

In October 1993, the Department announced a va- cancy in the position of Assistant Commander of the COUNSEL: FOR APPELLANT: The Honorable Dan Criminal Intelligence Service. Commander Don Plemons, Morales, Attorney General, Mr. Martin J. Thompson, Jr., the officer charged with making the recommendation for Assistant Attorney General, Austin, TX. appointment to fill the vacancy, orally interviewed seven candidates. Among these candidates were Charles Moore, FOR APPELLEE: Mr. Paul Dodson, White, Huseman & a white male, and Enrique Garcia, an Hispanic male.

Pletcher, Corpus Christi, Tx. Plemons recommended Garcia, and Garcia was appointed to the position. Moore sued in district court.

JUDGES: Before Justices Powers, Jones and Kidd.

Moore originally brought suit under the Human Rights Act claiming he was the victim of reverse racial OPINION BY: MACK KIDD discrimination when he was denied promotion in favor of Garcia. 1 Moore later amended his petition to include a OPINION declaratory judgment claim based upon the Department's [*152] Appellant, the Texas Department of Public alleged failure to comply with section 411.007(b) of the Safety (the "Department"), failed to recommend appellee Texas Government Code, which requires that the De- Charles Moore for promotion to the position of Assistant partment make promotions or appointments based upon Commander of the Criminal Intelligence Service. Moore merit determined by examination. [**3] See Tex. Gov't sued under the Human Rights Act claiming reverse dis- Code Ann. § 411.007(b) (West 1998). The trial court crimination and, by later amendment, under the Uniform granted cross motions for summary judgment; declaring Declaratory Judgments Act (the "UDJA") seeking a dec- that the Department failed to comply with all the re- laration that the Department acted outside its statutory quirements of section 411.007(b) in promoting Garcia to authority in filling four high-ranking positions without Assistant Commander of the Criminal Intelligence Ser- examining applicants based on merit. The trial court vice, and dismissing Moore's discrimination claim for granted summary judgment against Moore on the dis- failure to exhaust the necessary administrative remedies. 2 crimination claim. The trial court also granted partial Moore does not appeal the dismissal of his discrimination summary judgment in favor of Moore, declaring that the claim.

Department acted outside its statutory authority in filling the four positions, and ordered those positions vacated. 1 The relevant statute provides: The Department appeals. In its points of error, the De- partment challenges (1) the trial court's jurisdiction under Page 2 985 S.W.2d 149, *; 1998 Tex. App. LEXIS 7354, **

An employer commits an unlawful employ- norms for the Department in promoting its employees, ment practice if because of race, color, disability, and fails to create any cause of action in Moore. Addi- religion, sex, national origin, or age the employer: tionally, the Department contends that the UDJA likewise fails to create a cause of action in Moore, and cannot be (1) fails or refuses to hire an individual, dis- used as a vehicle to interpret section 411.007(b) of the charges an individual, or discriminates in any Labor Code. The determination of jurisdiction under the other manner against an individual in connection UDJA is a question of law. See Ainsworth v. Oil City with compensation or the terms, conditions, or Brass Works, 271 S.W.2d 754, 760 (Tex. Civ. privileges of employment; or App.--Beaumont 1954, no writ). We will look first to the (2) limits, segregates, or classifies an em- jurisdiction of the trial court before deciding whether the ployee or applicant for employment in a manner court erred in entering its order. that would deprive or tend to deprive an individual [**6] Jurisdiction and the Declaratory Judg- of any employment opportunity or adversely af- ments Act fect in any other manner the status of an employee.

Enacted in 1943, the UDJA confers on Texas courts Tex. Labor Code Ann. § 21.051 (West the authority to "declare rights, status, and other legal 1996). relations whether or not further relief is or could be [**4] claimed." Tex. Civ. Prac. & Rem. Code Ann. § 37.003 2 An employee of the State of Texas who al- (West 1997). The Legislature intended the UDJA to be leges employment discrimination must file a remedial, to settle and afford relief from uncertainty and complaint with the Texas Commission on Human insecurity with respect to rights, and to be liberally con- Rights not later than the 180th day after the date strued. Tex. Civ. Prac. & Rem. Code Ann. § 37.002 the alleged unlawful employment practice oc- (West 1997). Describing the subject matter available for curred. Tex. Labor Code Ann. § 21.202 (West relief, the UDJA provides: 1996). Furthermore, any federal complaint of employment discrimination shall be filed with the A person interested under a deed, will, written con- Equal Employment Opportunity Commission tract, or other writings constituting a contract or whose within 180 days; except that if the employee files rights, status, or other legal relations are affected by a with a state agency then the employee has 300 statute, municipal ordinance, contract, or franchise may days to file. 42 U.S.C.S. § 2000e-5(c) (1989). have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, A plaintiff's failure to file a complaint and or franchise and obtain a declaration of rights, status, or pursue administrative remedies creates a jurisdic- other legal relations thereunder. tional bar to his claim. See Schroeder v. Texas Iron Works, 813 S.W.2d 483, 488 (Tex. 1991). Tex. Civ. Prac. & Rem. Code Ann. § 37.004 (West 1998) (emphasis added).

Before the trial court rendered final judgment, the Department filled the positions of Commander of the A suit under the UDJA is not confined to cases in Criminal Intelligence Service, Commander of Narcotics, which the parties have a cause of action apart from [**7] and Assistant [*153] Commander of Narcotics; also by the Act itself. Transportation Ins. Co. v. Franco, 821 appointment, and also, allegedly, without a competitive S.W.2d 751, 754 (Tex. App.--Amarillo 1992, writ denied). examination. The trial court allowed amendment of A declaratory judgment, however, is appropriate only if Moore's petition to ask for declaratory relief [**5] re- (1) a justiciable controversy exists as to the rights and garding these three additional positions. Subsequently, the status of the parties; and (2) the controversy will be re- trial court rendered final judgment declaring that the solved by the declaration sought. See Bonham State Bank Department failed to comply with the competitive ex- v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995) (citing Texas amination requirements of section 411.007(b) in hiring Ass'n of Bus. v. Texas Air Control Bd., 852 S.W.2d 440, the four aforementioned positions, and ordered them 446 (Tex. 1993)); see also City of Austin v. L.S. Ranch, vacated and filled through competitive examination. The Ltd., 970 S.W.2d 750, 754, (Tex. App.--Austin 1998, no trial court also awarded Moore attorney's fees. The De- pet.). A justiciable controversy is one in which a real and partment brings this appeal. substantial controversy exists involving a genuine conflict of tangible interest and not merely a theoretical dispute.

DISCUSSION See Beadle, 907 S.W.2d at 467. A justiciable controversy must be distinguished from an advisory opinion, which is The Department initially challenges the trial court's ju- prohibited under both the Texas and federal constitutions. risdiction to hear Moore's claim. Specifically, the De- See Texas Air Control Bd., 852 S.W.2d at 444. A judg- partment argues that section 411.007(b) only establishes ment under the UDJA depends on a finding that the issues Page 3 985 S.W.2d 149, *; 1998 Tex. App. LEXIS 7354, **

are not hypothetical or contingent, and the questions tional rules to future appointment vacancies. The De- presented must resolve an actual controversy. Empire partment has already taken an adverse stance to Moore's Life Ins. Co. v. Moody, 584 S.W.2d 855, [**8] 858 position by allegedly not requiring competitive examina- (Tex. 1979). A justiciable controversy, however, does not tions when filling the initial vacancy. The Department's necessarily equate with a fully ripened cause of action: repetition of the same behavior in filling three subsequent positions emphasizes the actuality of the controversy.

It is not necessary that a person who seeks a declaration of There is clearly a justiciable controversy sufficient to rights under this statute shall have incurred or caused invoke the court's jurisdiction through the UDJA to clarify damage or injury in a dispute over rights and liabilities, Moore's, and any other applicant's, rights as they pertain but it has frequently been held that an action for declara- to the Department's hiring procedure. Furthermore, the tory judgment would [*154] lie when the fact situation trial court's declaration resolves the controversy by in- manifests the presence of 'ripening seeds of a controver- forming the Department that its actions in filling Assistant sy.' Such appear where the claims of several parties are Commander and Commander positions without examin- present and indicative of threatened litigation in the im- ing applicants based on merit falls outside its statutory mediate future which seems unavoidable, even though the authority. differences between the parties as to their legal rights have The Department next argues that sovereign immunity not reached the state of an actual controversy. shields the Department as an agency of the state. The Department argues that the UDJA does not act to waive Ainsworth, 271 S.W.2d at 761. the State's ordinary immunity from liability. Suits chal- The crux of this appeal concerns the application of lenging an [**11] agency's action as being outside the section 411.007(b) to the advancement of personnel scope of its delegated authority are not suits against the within the Department through appointment or promo- State requiring legislative or statutory authority. Public tion. In the section entitled "Officers and Employees," Util. Comm'n v. City of Austin, 728 S.W.2d 907, 911 (Tex. section 411.007(b) provides: App.--Austin 1987, writ ref'd n.r.e.). Because Moore's suit under the UDJA sought a declaration that the Department Appointment or promotion of an officer or employee acted outside its statutory authority in appointing various must be based on merit determined by examination under high-level positions without examining applicants based commission rules that take into consideration the appli- on merit, no explicit waiver by the State was necessary. cant's age, physical [**9] condition, experience, and Therefore, Moore's suit was not barred by sovereign education. Each person who has an application on file for immunity. We hold the trial court had jurisdiction to hear a position in the department shall be given reasonable Moore's claim under the UDJA and overrule the De- written notice of the time and place of those examinations. partment's points of error in that regard. Tex. Gov't Code Ann. § 411.007(b) (West 1998).

The Requirement of "Merit-Based" Promotion The Department originally contends that section 411.007(b) creates no cause of action in Moore, and, We must now determine whether the trial court erred therefore, the trial court had no jurisdiction to hear the in holding that the Department acted outside its statutory case. The trial court received its jurisdiction from the authority when filling the four vacancies. The enabling controversy created by the Department's application of statutes of the Department clearly provide for merit-based section 411.007(b) to Moore, not from the words of the promotion and appointment. See Tex. Gov't Code Ann. statute itself. The UDJA provides for a declaration of [*155] § 411.007(b) (West 1998). That same section rights for persons "whose rights, status, or other legal further provides for a competitive examination of some relations are affected by a statute . . . ." Tex. Civ. Prac. & sort, and provides that all applicants "shall receive [**12] Rem. Code Ann. § 37.004 (West 1998). Jurisdiction notice of the time and place of such examinations." Id. under the UDJA primarily depends on the nature of the While it is true that the statute, under the section entitled controversy; whether the controversy is merely hypo- "Duties of Director," reserves for the Director's discretion thetical or rises to the justiciable level. See Empire Life some positions to be filled by "direct appointment," the Ins., 584 S.W.2d at 858. section limits these direct appointments to chiefs of bu- reaus. See Tex. Gov't Code Ann. § 411.006(6) (West Moore's interest in being treated according to statute 1998) (emphasis added). 3 No other positions are men- when applying for vacant positions in the Department tioned. clearly implicates the UDJA's purpose of clarifying rights affected by statute. The controversy [**10] lies not in 3 The relevant section of the statute provides: the actions of the Department in reviewing Moore's ap- "The director shall: . . . appoint, with the advice plication for Assistant Commander of Criminal Intelli- and consent of the commission, the chiefs of bu- gence, but in the Department's application of its promo- Page 4 985 S.W.2d 149, *; 1998 Tex. App. LEXIS 7354, **

reaus provided for by this chapter." Tex. Gov't examination. The language of the statute, and that of the Code Ann. § 411.006(6) (West 1998). Department's own rules, clearly envisions a merit-based promotional system for all those positions not specifically Pursuant to section 411.004(3), the Public Safety exempted as director appointments. And, according to Commission (the "Commission") promulgated rules statute and the rules promulgated by the Commission, governing appointments and promotions. See Tex. Gov't Assistant Commander and Commander are not positions Code § 411.004(3) (West 1998). 4 These rules include so exempted. Furthermore, the mere existence of section the policy that the Department shall make all appoint- 26.04(4) in the Department's General Manual expanding ments based on merit. See 37 Tex. Admin. Code § 1.21(a) the number of exemptions beyond statutory limits both (1998). In keeping with [**13] the policy of making exceeds the Department's authority and belies the De- appointments based on merit, the rules provide that partment's argument that the oral interviews given appli- "examinations will be conducted for all positions ex- cants fulfilled the requirement of a competitive examina- cepting unskilled labor, trades, and direct appointments tion. made by the Director." 37 Tex. Admin. Code § 1.27 (1998) (emphasis added). Reading the rule in conjunction Moore argues that the statute contemplates written with the statute, the rule exempts from competitive ex- examinations as the proper manifestation of competitive amination only unskilled labor, trades, and the chiefs of examinations. To the extent that Moore seeks affirmation bureaus. However, despite the language of the statute from this Court for his position, we reject it. The De- restricting directorial appointments to bureau chiefs, and partment maintains the discretion to [*156] create despite the Department's own rules advocating the policy procedures for competitive examinations regarding of promotions based on merit, the Department seeks in its promotive appointments, provided such procedures make General Manual to expand the number of director ap- a good faith effort to comply with the statutory and pointments exempted from competitive examination: agency requirement of "merit-based" promotions. [**16] The Department should bear in mind, however, 4 The relevant section of the statute provides: that the written notice requirements of the statute re- "The commission shall . . . adopt rules necessary garding a stated time and location for the competitive for carrying out the department's work." Tex. Gov't examination seem to mandate some type of formalized Code Ann. § 411.004(3) (West 1998). and structured examination. 5 See Tex. Gov't Code Ann. § 411.007(b) (West 1998).

Positions of major division chief, assistant major di- vision chief, division chief, [**14] regional com- 5 We reject, for example, the suggestion made mander, commander, assistant commander, senior Ranger by the Department at oral argument that an official captain, assistant supervisor of Rangers, Director and with the Department could discharge the De- Assistant Director of Personnel and of Training, other partment's responsibility to offer a competitive positions deemed necessary and appropriate by the Di- examination by merely examining the personnel rector and positions of the Director's staff will be filled by records of the applicants. direct appointment of the Director.

The Injunctive Order Texas Department of Public Safety General Manual, Chap. 7, § 26.04(4). The Department next contends that even if the trial court had jurisdiction to declare that the Department failed The Department argues that the Assistant Com- to comply with section 411.007(b) in hiring Garcia and mander and Commander positions are exempt from the others without resort to competitive examination, the competitive examination by virtue of the discretion trial court had no jurisdiction, or, alternatively, abused its granted the Department by statute coupled with the listing discretion, in ordering the Department to vacate the four of director appointments found in the Department's Gen- positions contested by Moore. We note initially that ac- eral Manual. In the alternative, the Department argues tions under [**17] the UDJA are sui generis; they are that, should the Assistant Commander position be subject unique in that the declarations of "rights, status and other to competitive examination, the oral interview by Com- legal relations" are not truly legal or equitable. See Cobb mander Plemons given to applicants should suffice. While v. Harrington, 144 Tex. 360, 190 S.W.2d 709, 713 (Tex. we agree with the Department that the statute does pro- 1945); see also Texas Liquor Control Bd. v. Canyon vide discretion to the Commission and the Department to Creek Land Corp., 456 S.W.2d 891, 895 (Tex. 1970). We create its own rules and to define examination based on further note that, at the time of the trial court's rendition of merit for purposes of promotional appointments, we reject final judgment, Moore's discrimination claim had been the notion that the Assistant Commander and Commander dismissed through summary judgment; thus the trial positions are exempt, or that the oral [**15] interview court's authority to act was based on the UDJA alone. could fulfill the statutory requirement of a competitive Moore argues that the UDJA allows the trial court to grant Page 5 985 S.W.2d 149, *; 1998 Tex. App. LEXIS 7354, **

the injunctive relief requested, namely the vacation of the represented Moore's exclusive injunctive [**20] remedy four positions, as ancillary to the declaratory relief until his administrative remedies had been exhausted. awarded. See Tex. Civ. Prac. & Rem. Code § 37.011 Moore could have sought an injunction to halt the De- (West 1998); see also Davis v. Pletcher, 727 S.W.2d 29, partment from promoting Garcia and the other three ap- (Tex. App.--San Antonio 1987, writ ref'd n.r.e.). Under pointments had he followed the proper administrative the facts presented here, we disagree. procedures. He failed to do so. He sought and received in district court a declaration that the Department had mis- As Moore suggests, the UDJA allows for injunctive interpreted and misapplied section 411.007(b). This dec- relief ancillary to a declaration of rights in some situa- laration clarified Moore's rights and status regarding fu- tions: "Further relief based on a declaratory judgment or ture vacancies in the Department. However, the order by decree may be granted whenever necessary or proper. The the trial court retroactively vacating the four Assistant application must be by petition to [**18] a court having Commander and Commander positions rewarded Moore jurisdiction to grant relief." Tex. Civ. Prac. & Rem. Code. for failing to follow the exclusive remedies provided for Ann. § 37.011 (West 1998). 6 This power to grant ancil- him by law. Declaratory relief creates no substantive lary relief is conditioned on such relief being necessary rights. State v. Morales, 869 S.W.2d 941, 947 (Tex. and proper. For the following reasons, such relief in this 1994). It provides a procedural device for the determina- case is inappropriate. tion of controversies which are already within the juris- diction of the court. Id. The remedy afforded by the UDJA 6 Several courts, including this one, have in- is additional and does not supplant any existing remedy. terpreted section 37.011 of the UDJA as allowing Cobb, 190 S.W.2d at 713; Crow v. City of Corpus Christi, parties to combine a request for declaratory relief 146 Tex. 558, 209 S.W.2d 922, 924 (Tex. 1948). Because with a request for injunction. See Weaver v. AIDS the exclusive remedy available to Moore regarding his Servs. of Austin, Inc., 835 S.W.2d 798, 803 (Tex. reverse discrimination [**21] claim is the Human Rights App.--Austin 1992, writ denied) (AIDS services Act, which contains the right to injunctive relief, the trial group seeking declaration of rights and injunction court erred in vacating the positions in the Department barring protestors from interfering with work- based solely on the ancillary injunctive power contained shops); Davis, 727 S.W.2d at 35 (purchaser of real in the UDJA. property seeking declaration interpreting various property conveyances and injunction to halt trig- Furthermore, the trial court's order undercut the purpose gering of acceleration clause). of the Human Rights Act to create a comprehensive ad- Regarding Moore's original reverse discrimination ministrative review. See Stinnet, 858 S.W.2d at 577. The claim, filing a complaint with the Human Rights Com- Human Rights Act was intended to embody the policies mission and exhausting administrative remedies was a embedded in Title VII, 42 U.S.C. § 2000e et seq., in- mandatory [**19] prerequisite to filing a civil action cluding "administrative procedures involving informal alleging a violation of the Human Rights Act under the conference, conciliation and persuasion, as well as judi- Texas Labor Code. Schroeder v. Texas Iron Works, Inc., cial review of administrative action." Schroeder, 813 813 S.W.2d 483, 488 (Tex. 1991). The rationale for this S.W.2d at 487. Allowing the jurisdiction created by the result is that the Human Rights Act provides the exclusive UDJA to circumvent the procedures and remedies pro- remedy for alleged discrimination in administrative vided by the Human Rights Act could create a back door agency personnel decisions. See Stinnett v. Williamson to district court not contemplated by the Legislature. The County Sheriff's Dep't, 858 S.W.2d 573, 577 (Tex. proper remedy for Moore is prospective. His declaratory App.--Austin 1993, writ denied). Thus, Moore's failure to judgment carries preclusive effect in any future lawsuit, exhaust his administrative remedies was a jurisdictional whether administrative or judicial, should the Department bar to filing a discrimination claim in district court, and fail to offer him notice and the opportunity for mer- the trial court properly granted summary judgment against it-based promotion as required by section 411.007(b). See Moore's claim. Schroeder, 813 S.W.2d at 488. Valley Oil Co. v. City of Garland, [**22] 499 S.W.2d 333, 335 (Tex. Civ. App.--Dallas 1973, no writ). Thus, the This procedural posture becomes important with regard to retroactive injunctive relief ordered by the trial court was the trial court's award of injunctive relief based solely on not "necessary and proper" as required under the UDJA jurisdiction under the UDJA because it allows Moore to before ancillary injunctive relief could be awarded. We circumvent the exclusive remedies provided for, and the reverse the trial court's order vacating the Department's purposes contained in, the Human Rights Act. [*157] appointments of Assistant Commander of Criminal Intel- The Human Rights Act includes a provision for injunctive ligence Service, Commander of Criminal Intelligence relief from unlawful employment practices. See Tex. Service, Commander of Narcotics, and Assistant Com- Labor Code Ann. § 21.210 (West 1996). This provision mander of Narcotics.