Justice Jeff Boyd
Justice Jimmy Blacklock
Justice Evan Young
By a 7-2 majority, the Texas Supreme Court has held that a city executing a Chapter 380 economic development agreement with a private business is acting in a proprietary capacity and thus may be sued for breach of contract.
City of League City, Texas v. Jimmy Changas, Inc. (No. 21-0307) arose from a dispute over reimbursements of capital recovery fees, development fees, and city sales tax payments under a Chapter 380, Local Government Code, agreement to develop a Jimmy Changas restaurant. Under the agreement, Jimmy Changas agreed to invest $5 million and create 80 new jobs. When the time came to pay up, the city balked, alleging that the restaurateur did not provide documentation of either the amount ultimately invested or the number of jobs created. Jimmy Changas disputed the allegation and filed suit, asserting breach of contract. The city filed a plea to the jurisdiction asserting governmental immunity. The trial court denied the plea, and the Houston [14th] Court of Appeals affirmed. The city sought review.
In an opinion by Justice Boyd, joined by Chief Justice Hecht and Justices Lehrman, Devine, Busby, Huddle, and Young, SCOTX affirmed. The single question was whether the city’s execution of the Chapter 380 agreement constituted a “governmental” or “proprietary” function for purposes of the common law and the statutory list of government functions contained in § 101.0215(a), CPRC (providing a nonexclusive list of 36 functions). Unlike tort claims, in which the Tort Claims Act authorizes a limited waiver of governmental immunity, no such limitation exists for contract actions. Consequently, a city engaging in a proprietary action for the benefit of its local residents acts essentially as a private corporation and may be sued for breach.
Under the common law, governmental functions “are those that involve ‘the performance of purely governmental matters solely for the public benefit,’ are ‘normally performed by governmental units,’ and are performed ‘as a branch of the state—such as when a city “exercise[s] powers conferred on [it] for purposes of essentially public…pertaining to the administration of general laws made to enforce the general policy of the state”’” (citations omitted). The Tort Claims Act echoes this definition, defining the term as “those functions that are enjoined on a municipality by law and are given it by the state as part of the state’s sovereignty, to be exercised by the municipality in the interest of the general public.” § 101.0215(a), CPRC. As noted above, § 101.0215 goes on to list governmental functions for which immunity is not waived. If the function at issue is not in the list, the Court will consider four factors: “(1) whether the city’s act of entering into the contract was mandatory or discretionary, (2) whether the contract was intended to benefit the general public or the city’s residents, (3) whether the city was acting on the State’s behalf or its own behalf when it entered the contract, and (4) whether the city’s act of entering into the contract was sufficiently related to a governmental function to render the act governmental even if would otherwise have been proprietary” (the so-called Wasson factors from Wasson Ints., Ltd. V. City of Jacksonville, 559 S.W.3d 142, 150 (Tex. 2018)).
First, city tried to shoehorn the Chapter 380 agreement into the exception provided by § 101.0215(a)(34), which covers “community development or urban renewal activities undertaken by municipalities and authorized under Chapters 373 and 374, Local Government Code.” The Court swiftly rejected this argument, noting that (a)(34) doesn’t say anything about Chapter 380 agreements as a matter of pure statutory construction. Justice Boyd further opined that Chapter 380, which promotes economic development and stimulate business and commercial activity, are dissimilar from Chapter 373 and 374, which deal specifically with urban blight, slum clearance, and rehabilitation. And, as the Court observed, the city’s 380 agreement itself stated that its purpose was “creating local jobs and increasing state sales tax revenue.”
Second, the city turned to the Wasson factors. Conceding that it acted discretionarily when it entered the agreement, the city argued that the agreement would benefit not just city residents, but the state as well. The Court, however, pointed to the language of the agreement, which emphasized its purpose of economic development for the city itself. Additionally, the fact that the state would receive most of the sales tax from the restaurant did not change the analysis, since the agreement was nonetheless for the primary benefit of the city. In response to the third prong, the Court determined that the city acted on its own behalf when it entered the agreement, not the state’s. Sometimes, the Court noted, a city may enter a discretionary contract for which the state provides funding or some other direct support. Given the particular facts, such an arrangement might warrant a finding that the city acted on behalf of the state. But not here.
As to the fourth prong, the Court found that the agreement was not “sufficiently related” to a governmental function, disagreeing with the city’s argument that state law permitted it to establish a local economic development corporation. No, the Court replied, not only is economic development not an “essential” function of government, local economic development programs are private entities. Giving it one more try, the city asserted that counties have Chapter 381 authority, and since all functions of a county are “governmental,” so are Chapter 381 agreements and, by extension, 380 agreements. The Court rejected this as well, distinguishing between counties, which are “involuntary agents of the state” with no independent power to serve local interests. Instead, “municipal corporations are established to serve their local residents by engaging in both proprietary and governmental functions. Because of the nature of a municipality, the nature of its functions matters.” The Court affirmed.
Justice Young filed a concurring opinion taking issue with the Wasson factors. He would prefer more of a bright-line test that: (1) presumes a city, as a corporate entity, acts in a discretionary fashion all the time, unless the city can show evidence rebutting the presumption (i.e., that it acted at the direction of the state); (2) takes into consideration whether the city’s action constitutes a compensable taking; and (3) dispenses with the principle that immunity “protects the public from the costs of their government’s ‘improvident actions.’” As Justice Young points out, voters can take care of “improvident” elected officials. “No governmental unit,” Justice Young concluded, “especially in Texas, where promises really matter—should be able to evade its obligations so capriciously.”
Justice Blacklock, joined by Justice Bland, dissented. He likewise would eject the Wasson factors and invited the Legislature to clarify the issue. He further would have ruled that the Chapter 380 agreement at issue constituted a governmental function—a statutorily authorized function that “implements a tax-rebate grant program authorized by [the Texas Constitution] and Chapter 380 …for the diffuse benefit of the people.” Noting that if taxation is not an “essential” public function, nothing is, Justice Blacklock likened Jimmy Changas to “a participant in a government-benefits program operated in the city’s distinctly ‘public capacity’ pursuant to a statute—not as a participant in a bargained-for exchange of a ‘private character.’” Further, the waiver of immunity in Chapter 271, Government Code, for breach of contract actions involving a contract for providing goods or services does not in any sense apply to a Chapter 380 agreement. Under the ruling of the majority, Justice Blacklock laments, “[t]he corporate welfare recipient now has more access to the courts than a government contractor. That this is where we have ended up speaks for itself about the pitiable state of the law in this area.”
Economic development professionals from both the local government and business sides are invited to review this decision and the concurring and dissenting opinions. The majority duly follows the Court’s precedent, the concurrence hopes for another case to come along in which the Court can revise its government/proprietary function analysis, the dissent calls %@!&* on the whole affair. The interesting thing is, they are all right, and their disagreement has far more to do with larger issues. Justice Young wants to turn the inquiry around and look at it from the perspective that cities are not inherently “sovereign,” but corporate in nature. Justice Blacklock’s strong language about “corporate welfare,” in our view, is very telling, as is his invitation to the Legislature to resolve the issue and take the courts out of deciding who gets a remedy and who doesn’t. The upshot, we think, is that the split in this case does not show any ideological disagreement. What it does show is a disagreement over the role of the courts vis-à-vis the Legislature in this area of the law.
