City of Conroe v. San Jacinto River Auth.

602 S.W.3d 444

CITY OF CONROE, Texas ; City of Magnolia, Texas ; and City of Splendora, Texas, Petitioners,

v.SAN JACINTO RIVER AUTHORITY and Ken Paxton, Attorney General of Texas, Respondents

No. 18-0989

Supreme Court of Texas.

Argued January 9, 2020

OPINION DELIVERED: March 27, 2020

Rehearing Denied June 12, 2020

Michael V. Powell, Locke Lord LLP, Amanda Leigh Cottrell, Stanton LLP, Dallas, for Petitioners.

Ramon G. Viada III, Viada & Strayer, The Woodlands, for City of Conroe, Texas.

Leonard V. Schneider IV, Liles Parker PLLC, Kingwood, for City of Magnolia, Texas, City of Splendora, Texas.

Kyle D. Hawkins, Solicitor General, Brantley David Starr, Cynthia Ann Morales, Darren Lee McCarty, Jeffrey C. Mateer, First Asst. Attorney General, Joshua R. Godbey, Warren Kenneth Paxton, Office of the Attorney General, Kyle Wolfe, Texas Lottery Commission, Austin, for Ken Paxton.

April Lynn Farris, Charles R. Parker, James E. Zucker, Reagan W. Simpson, Richard B. Farrer, Wyatt J. Dowling, Yetter Coleman LLP, Houston, for San Jacinto River Authority.

Paul Stephen Radich, Houston, for Amici Curiae Montgomery County Municipal Utility District No. 19, Montgomery County Municipal Utility District No. 99, Rayford Road Municipal Utility District, Southern Montgomery County Municipal Utility District.

Michelle Maddox Smith, SledgeLaw Group, PLLC, Austin, for Amicus Curiae Northeast Texas Muinicipal Water District.

Stacey Steinbach, Austin, for Amicus Curiae Texas Water Conservation Association.

Catherine Welbes Norman, Eugene Montes, Wendy Kay Luersen Harvel, Coffin Renner LLP, Austin, for Amicus Curiae Upper Trinity Regional Water District and North Texas Municipal Water District.

Cullom Brantley Jones, Marvin W. Jones, Sprouse Shrader Smith PLLC, Amarillo, for Other interested party E.S. Water Consolidators, Inc., Everett Square, Inc., Quadvest, L.P., T&W Water Service Company, Utilities Investment Co., Inc., Woodland Oaks Utility, L.P.

Justice Busby delivered the opinion of the Court.

This case concerns the scope of the Expedited Declaratory Judgment Act (EDJA), which permits issuers of bonds and other public securities to resolve certain disputes regarding their securities as to all interested parties on an expedited basis. See TEX. GOV'T CODE ch. 1205. The San Jacinto River Authority, which has contracts to sell water to cities and other customers and uses the revenue to pay off its bonds, seeks declarations regarding the contracts and specific water rates set under them. We conclude that the EDJA gives the trial court jurisdiction to declare whether the execution of the contracts—which meets the statutory definition of public security authorization—was legal and valid, but not whether the Authority complied with the contracts in setting specific rates. We also hold that the cities’ governmental immunity does not bar an EDJA suit, which is brought in rem to adjudicate interests in property.

BACKGROUND

Petitioners—the Cities of Conroe, Magnolia, and Splendora (collectively, the Cities)—are located in Montgomery County, on the northern edge of the Greater Houston metropolitan area. As Montgomery County's population has grown significantly in recent decades, so have concerns about its reliance on groundwater drawn from the Gulf Coast Aquifer. The Legislature formed the Lone Star Groundwater Conservation District to address these concerns. In 2008, the Conservation District required all large-volume groundwater users—including the Cities—to develop and implement plans for reducing their usage substantially. Mandatory groundwater-usage cutbacks took effect in January 2016.

Respondent San Jacinto River Authority (SJRA) is a legislatively created conservation and reclamation district charged with regulating the water resources of the San Jacinto River Basin. Anticipating the Conservation District's mandatory groundwater-usage cutbacks, SJRA developed a Groundwater Reduction Plan (GRP) to draw surface water from Lake Conroe, treat the water, and sell it to large-volume users.

To finance the GRP's surface-water treatment plant and related infrastructure, SJRA issued seven series of bonds between 2009 and 2016 that had an outstanding principal balance of approximately $520 million at the time this suit was filed. For each bond series, SJRA's Board of Directors adopted a resolution authorizing the bonds’ issuance and delivery and specifying the bonds’ purpose and terms. The resolutions pledged revenues from GRP water-sales contracts to service the bond debt, maintain a bond reserve fund, and cover operation and maintenance expenses for the GRP project.

In accordance with its enabling legislation,¹ SJRA entered into bilateral GRP contracts with about 80 water-system operators (the Participants) in 2010, agreeing to provide them with surface water in exchange for monthly payments.² To comply with several requirements of the Texas Government and Water Codes,³ SJRA obtained the Attorney General's approval of all the contracts and bonds, and it registered the bonds with the Comptroller. The contracts and bonds thus became "incontestable" and "valid, binding, and enforceable according to [their] terms." GOV'T CODE § 1371.059(a).

According to the GRP contracts, water payments are calculated by determining the volume of water used by each Participant and multiplying that volume by the rate SJRA's Board of Directors sets in a separate rate order that "shall be amended from time to time." Although SJRA's enabling statute empowers it to set rates sufficient to repay its bonds, the GRP rate orders and rates are governed entirely by the GRP contracts’ terms. Specifically, the contracts require that "[t]he fees, rates, and charges adopted under the Rate Order" be promulgated using certain procedures and be the lowest that are: (1) consistent with good management practices by SJRA; (2) necessary and proper to meet certain GRP financial needs, including bond-debt repayment; (3) consistent with SJRA's statutory and constitutional duties and responsibilities; and (4) just, reasonable, and nondiscriminatory.⁴ The dispute in this case involves SJRA's compliance with these terms.

SJRA began delivering water to Participants in September 2015, and the Conservation District's groundwater-usage cutbacks took effect in January 2016. Shortly thereafter, the City of Conroe and several other Participants challenged the groundwater-usage cutbacks as unconstitutional and in excess of the Conservation District's statutory authority.⁵

The dispute expanded to include SJRA after its 2017 fiscal-year rate order increased the fees, rates, and charges for water under the Participants’ contracts.⁶ The Conroe and Magnolia City Councils each passed resolutions accusing SJRA of overcharging for water in violation of its GRP contracts and questioning the legitimacy of the GRP program. These resolutions directed city officials to refuse payment of the increased rates and pay SJRA the old rates.

In response, SJRA filed this suit in Travis County, alleging that the rate increase was justified and seeking four declarations under the EDJA:

1. that the SJRA is authorized to set rates for Participants pursuant to the procedures set forth in the GRP Contracts [the Authority Declaration];

2. that the SJRA issued its fiscal year 2017 Rate Order, including the setting of its fiscal year 2017 rate, in accordance with the procedures set forth in the GRP Contracts [the Compliance Declaration];

3. that the SJRA's fiscal year 2017 rate, Rate Order, and the GRP Contracts, including the Contract with Conroe, are legal and valid [the Validity Declaration]; and 4. that Conroe's refusal to pay the fiscal year 2017 rate is illegal and invalid, and its failure to pay is a breach of the GRP Contract [the Breach of Contract Declaration].

The EDJA provides an "issuer" of "public securities" an expedited declaratory procedure to establish the "legality and validity" of public securities and "public security authorizations." GOV'T CODE § 1205.021. A proceeding under the EDJA is in rem and requires only the Attorney General's participation; all other "interested parties" may choose to opt in after posting a bond. Id. §§ 1205.023, .041–.044, .063. The EDJA permits venue in Travis County. Id. § 1205.022.

After SJRA gave notice of its EDJA action, several Participants—including the Cities of Conroe, Magnolia, and Splendora—opted in as interested parties. The Cities then filed materially similar pleas to the jurisdiction.⁷ Arguing the trial court lacked subject-matter jurisdiction to adjudicate SJRA's claims under the EDJA, the Cities alleged the claims did not seek declarations as to "the legality and validity" of a "public security authorization," but instead seek to litigate what are substantively suits on contracts that properly lie outside the statute. The Cities also asserted governmental immunity as an independent jurisdictional bar. After the trial court denied their pleas to the jurisdiction, the Cities jointly perfected an interlocutory appeal.

The court of appeals held primarily for SJRA. The court recognized that "questions regarding the EDJA's reach implicate the trial court's subject-matter jurisdiction to adjudicate the claims the Act would authorize." 559 S.W.3d 656, 668 (Tex. App.—Austin 2018). It held that the trial court properly denied the Cities’ pleas to the jurisdiction as to the Authority, Compliance, and Validity Declarations, reasoning the EDJA conferred jurisdiction over these "declarations as to SJRA's own rights and the legal status of its own acts, without explicit regard to any other person or party." Id. at 678. But the court of appeals dismissed the Breach of Contract Declaration for want of jurisdiction, concluding it concerned in personam rights and therefore did not fall within the EDJA's grant of in rem jurisdiction. Id. at 678, 683. Finally, the court rejected the Cities’ assertions of governmental immunity, reasoning that SJRA's arguments regarding the "complex interplay between the GRP...