Over a dissent by Chief Justice Gray, the Waco Court of Appeals has struck down agreements between an economic development foundation, the City of Corsicana, and Navarro County for the construction of a retail store entered into Chapters 380 and 381, Local Government Code. Cities and counties make wide use of Chapter 380 and 381 to pledge sales tax and other public revenue for economic development purposes.
Corsicana Industrial Foundation, Inc.,Gander Mountain Company and JP Morgan Chase, N.A. v. City of Corsicana and Navarro County (No. 10-17-00316-CV; filed January 11, 2024) arose from contracts entered into in 2004 by the Foundation with the city and county to finance the construction of a Gander Mountain store on a 132-acre tract owned by the Foundation. Under the agreements, the city and county agreed to pledge sales tax revenue from Gander Mountain, as well as from a Home Depot and other businesses on the tract, to repay a $10 million construction loan. Chase loaned the money. The Foundation then leased the site to Gander, which opened for business in August 2004. The store, however, closed in 2015, leaving part of the initial construction loan outstanding. In early 2016 the city and county, wanting out of the deal, filed a declaratory judgment action in the Navarro County district court seeking a declaration that the 380 and 381 agreements executed in 2004 were unconstutional under Art. III, § 52-a, because the agreements failed “to place sufficient controls on the transaction to ensure that the public purposes for which the original grant was made are carried out” and that their obligation to grant sales tax revenue to repay the loan terminated when the store went out of business. The Foundation assigned its claims to Chase, which defended the action. Gander Mountain, unfortunately, filed a Chapter 11 bankruptcy petition.
The trial court eventually signed a final judgment in 2017 rendering a declaratory judgment in the city’s and county’s favor and ordered that Gander Mountain, the Foundation, and Chase take nothing on their breach of contract claims against the city and county. The trial court found that “the closing of the Gander Mountain store extinguished the public purposes which authorized the City’s and County’s grants of public money to repay loans taken out by the foundation to build the Gander Mountain store,” that the 380 and 381 agreements did not place sufficient controls on the expenditure of public funds, and that the grant of public money terminated at the moment the public use for which the money was granted—the operation of the Gander Mountain store—ceased. Chase appealed.
In an opinion by Justice Smith and joined by Justice Johnson, the court of appeals affirmed. The threshold question was the appropriate standard that applied to a constitutional challenge under Art. III, § 52-a. This section carves out an exception to Art. III, § 52(a), which bars a loan or grant of public money to an individual, association, or corporation for any purpose. Added in. 1987, § 52-a authorizes the Legislature to create economic development programs and enable loans and grants of public money for economic development purposes. Chapters 380 and 381 implement § 52-a by authorizing cities and counties, respectively, to enter into such agreements. Chase argued that the agreements were constitutional under § 52-a because they the pledged sales tax revenue was clearly used for economic development purposes, as that section and Chapters 380 and 381 specify. The city and county countered that SCOTX’s decision in Tex. Mun. League Intergovernmental Risk Pool v. Tex. Workers’ Comp. Comm’n, 74 S.W.3d 377 (Tex. 2002) reaffirmed the three-part test established in prior cases for determining whether a grant of public money is constitutional. If this test applies, the city and county argue, the agreements are unconstitutional.
The court of appeals agreed that the test applies and that the agreements fail it. According to Texas Municipal League, which challenged the constitutionality of the Texas Workers’ Compensation Subsequent Injury Fund, when enacting legislation involving the grant of public money for public purposes, the Legislature must: “(1) ensure that the statute’s predominant purpose is to accomplish a public purpose, not to benefit private parties; (2) retain public control over the funds to ensure that the public purpose is accomplished and to protect the public’s investment; and (3) ensure that the political subdivision receives a return benefit.” Observing that nothing in § 52-a abrogates this pre-existing test, the court determined that since public funds may only be used for public purposes, a court must still determine whether such purposes actually exist and whether the governmental entity receives a return benefit.
Applying the test here, the court determined that the Chapter 380 and 381 agreements specifically sought to incentivize the construction and operation of Gander Mountain store in Corsicana, which, it was hoped, would spur further retail and other development. The court rejected Chase’s argument that the agreements more broadly encouraged economic development in general and, consequently, did not depend on Gander Mountain maintaining the operation of the store while the construction loan remained outstanding. As summarized by the majority, Chase’s position required the court to affirm “the ongoing grant of public dollars to a defunct business.” Sizing up the evidence, the majority determined that the pertinent documentation clearly shows that the agreements and loan pertained only to construction of the Gander Mountain store, not to economic development more generally. They also specified that the purpose of pledging sales tax revenue to repaying the loan was “to facilitate . . . the economic development of the Gander Mountain facility,” not the development of the entire shopping center.
Having established that the 380 and 381 agreements pertained solely to the public purpose of building and operating a Gander Mountain store, the majority turned to whether the public purpose extinguished when the store went out of business. The court concluded that it did because once the store closed, “it was no longer possible to accomplish the public purposes of ensuring the presence and operation of Gander Mountain in Corsicana.” Moving to the second prong of the test—public control over the funds to ensure that the project fulfilled its public purpose—the court found that the agreements contained no provisions enabling the city and county to enforce the agreements or providing a remedy in case, as in the event, the store closed before the loan was repaid (i.e., a clawback provision). To the contrary, the agreements make repayment of the loan absolute and unconditional, indicating a complete absence of public control. Since the agreements, in the majority’s judgment, did not give the city or county any such control in order “to protect taxpayer money and ensure the public purposes are being met,” they failed the second prong of the Texas Municipal League test. As to the third prong, the majority did not have to reach the issue because the city and county did not assert it in their summary judgment motion. The court thus determined that the 380 and 381 agreements were unconstitutional and void ab initio.
Chief Justice Gray dissented on the basis that the city and county made the deal and should live with it. He feared that the majority’s decision would chill the use of 380 and 381 agreements because creditors could never be certain of repayment if the local entities could bail out down the road. He has a very good point, and one that might be taken up by SCOTX, should Chase decide to seek review.