Texas Southern University v. State Street Bank and Trust Company, CMS Viron Corporation--Appeal from 80th District Court of Harris County

Opinion issued January 11, 2007

In The

Court of Appeals

For The

First District of Texas

NOS. 01-05-00758-CV

01-06-00497-CV

__________

TEXAS SOUTHERN UNIVERSITY, Appellant

V.

STATE STREET BANK AND TRUST COMPANY,

CMS VIRON CORPORATION, AND

CMS ENERGY RESOURCE MANAGEMENT COMPANY, Appellees

On Appeal from the 80th District Court

Harris County, Texas

Trial Court Cause No. 2002-54422

CONCURRING AND DISSENTING OPINION ON REHEARING

I withdraw my concurring and dissenting opinion issued June 8, 2006 and substitute this opinion in its stead. To the extent this case may be properly construed as a breach of contract action on a valid contract, I join the opinion of the Court and urge the Supreme Court of Texas to adopt the waiver-by-conduct exception to sovereign immunity from suit adopted by most other states. See Federal Sign v. Tex. S. Univ., 951 S.W.2d 401, 419-20 (Tex. 1997) (Enoch, J., dissenting). However, I do not think it is necessary to reach the issue of waiver of sovereign immunity because I believe that appellees CMS Viron Corporation and CMS Energy Resource Management Company (collectively "Viron") and State Street Bank and Trust Company ("State Street") have properly pleaded an inverse condemnation claim against appellant Texas Southern University ("TSU"), to which there is no sovereign immunity, and that this case should be decided as an inverse condemnation case. Therefore, I dissent from the majority's holding that State Street and Viron have not properly pleaded an inverse condemnation claim, and I concur in the judgment reversing and remanding this case.

Law of Inverse Condemnation

Sovereign immunity consists of two principal doctrines: immunity from liability and immunity from suit. Federal Sign, 951 S.W.2d at 405; Texas Parks & Wildlife Dep't v. Callaway, 971 S.W.2d 145, 149 (Tex. App.--Austin 1998, no pet.). When a state agency, like TSU, enters a contract, it waives its immunity from liability, but not from suit. Federal Sign, 951 S.W.2d at 405-06; Callaway, 971 S.W.2d at 149. However, while sovereign immunity generally protects the State from lawsuits for monetary damages, it "offers no shield against a taking claim brought under Article I, section 17 of the Texas Constitution." Kenedy Mem'l Found. v. Mauro, 921 S.W.2d 278, 282 (Tex. App.--Corpus Christi 1995, pet. denied); see also General Servs. Comm'n v. Little-Tex Insulation Co., 39 S.W.3d 591, 598 (Tex. 2001) (sovereign immunity does not shield State from action for compensation under takings clause). (1) Rather, "[t]he Constitution itself is . . . a waiver of governmental immunity for the taking, damaging or destruction of property for public use." Steele v. City of Houston, 602 S.W.2d 786, 791 (Tex. 1980); see also Callaway, 971 S.W.2d at 149 (action for inverse condemnation is exception to doctrine of sovereign immunity). Thus, to the extent this is properly construed as a takings case, the doctrine of sovereign immunity does not apply.

The State in its exercise of sovereign power has the unquestioned right to take private property for a public use. State v. Hale, 146 S.W.2d 731, 736 (Tex. 1941). However, the takings clause prohibits the State from taking a person's property under its sovereign powers without adequate compensation. Little Tex, 39 S.W.3d at 598; see also Hale, 146 S.W.2d at 736 (takings power is subject to right of owner to adequate compensation for taking of property). The language of the takings clause, article I, section 17 of the Constitution, has no exceptions or limitations attached; rather, "[i]t is a clear, definite statement of the rule which prevails in this State, which controls all the departments of the State government." Hale, 146 S.W.2d at 736. Ordinarily, a state agency compensates a property owner before taking his property, either by paying an agreed value or by paying the value determined in a formal condemnation proceeding. Callaway, 971 S.W.2d at 148. Inverse condemnation occurs when the State or its agency physically takes or invades property or unreasonably interferes with the property owner's right to use and enjoy it. Id. "An 'inverse condemnation' proceeding is the avenue of relief available when property has been taken or damaged for public use without compensation or a proper condemnation proceeding, and the property owner wishes to recover compensation for his loss." Id.

To recover damages for inverse condemnation, the property owner must prove that a governmental entity intentionally took the owner's property for public use without paying adequate compensation or was substantially certain that such a taking would be the result of its intentional acts. See Tex. Const. art. I, 17; City of Dallas v. Jennings, 142 S.W.3d 310, 313-14 (Tex. 2004); see also Little-Tex, 39 S.W.3d at 598 (holding that, to establish takings claim, property owner must plead and prove State's intentional performance of certain acts resulted in taking of property for private use). To defeat a plea to the jurisdiction, however, the property owner need only plead sufficient facts to show the elements of an inverse-condemnation cause of action. See Kerr v. Dep't of Transp., 45 S.W.3d 248, 251 n.3 (Tex. App.--Houston [1st Dist.] 2001, no pet.).

In determining the existence of jurisdiction, a court must "construe the pleadings in the plaintiff's favor and look to the pleader's intent." County of Cameron v. Brown, 80 S.W.3d 549, 555 (Tex. 2002). The appellate court's task is not to decide the merits of the case, but to examine the claims in the pleadings, taking the facts pled to be true, and to determine whether those facts support jurisdiction in the trial court. Osburn v. Denton County, 124 S.W.3d 289, 292 (Tex. App.--Fort Worth 2004, pet. denied). The court may also consider relevant evidence submitted by the parties when necessary to resolve jurisdictional issues raised by the pleadings. Texas Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 227 (Tex. 2004); Harris County Flood Control Dist. v. Adam, 56 S.W.3d 665, 667 n.4 (Tex. App.--Houston [14th Dist.] 2001, pet. dism'd w.o.j.). "If the evidence creates a fact question regarding the jurisdictional issue, the trial court cannot grant the plea to the jurisdiction, and the fact issues will be resolved by the fact finder." Miranda, 133 S.W.3d at 227-28. "Whether particular facts are enough to constitute a taking is a question of law." Little-Tex, 39 S.W.3d at 598.

Application of Law to Jurisdictional Facts

State Street alleges that TSU, a state agency, intentionally entered a contract to procure energy saving heating and cooling equipment from Viron's predecessor through fraudulent inducement and that TSU's intentional fraudulent representations resulted in TSU's taking the equipment for the use of the university, hence for a "public use," without compensation and that State Street, as assignee of Viron's property interest in the equipment, may, therefore, seek compensation for the equipment from TSU under the takings clause. Therefore, State Street's pleading, on its face, alleges an inverse condemnation claim against TSU. See Jennings, 142 S.W.3d at 313-14.

TSU contends, however, that under Little-Tex, it cannot have the requisite intent for constitutional-takings jurisprudence because it is withholding money from State Street pursuant to a contract dispute. See id. at 598-99. It contends that because it took the equipment pursuant to a contract, it was acting "within a color of right under the contract and not under its eminent domain powers." Id. at 599. State Street replies that no valid contract was formed because TSU fraudulently induced the agreement with Viron, and, therefore, the contract between TSU and Viron is void and gives rise to no "colorable right" to the equipment on the part of TSU. I agree with State Street.

A contract must be based upon valid consideration, i.e., mutuality of obligation. Federal Sign, 951 S.W.2d at 408. A contract that lacks mutuality of obligation is "illusory and void," and thus unenforceable. Id. at 409. "Where the execution of a contract is procured by fraud, misrepresentation, or concealment, such that there is no real assent to the agreement, assent may be negated and the binding nature of the contract avoided." Amouri v. Southwest Toyota, Inc., 20 S.W.3d 165, 169 (Tex. App.--Texarkana 2000, pet. denied).

Fraudulent inducement is a type of fraud claim that requires a showing that a false material misrepresentation was made that (1) was either known to be false when made or was asserted without knowledge of its truth or falsity, (2) was intended to be acted on, (3) was relied on, and (4) caused injury. See Formosa Plastics Corp. v. Presidio Eng'rs & Contractors, 960 S.W.2d 41, 47 (Tex. 1998); Amouri, 20 S.W.3d at 168-69. "As a rule, a party is not bound by a contract procured by fraud." Formosa Plastics, 960 S.W.2d at 46. Indeed, "'the law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it.'" Id. (quoting Bates v. Southgate, 308 Mass. 170, 31 N.E.2d 551, 558 (1941)). Thus, a contract procured by fraud conveys no contractual rights. See id. However, the plaintiff must present evidence that the defendant "made representations with the intent to deceive and with no intention of performing as represented," and the evidence must be relevant to the defendant's intent at the time the representation was made. Id. at 48.

Here, State Street presented evidence that TSU signed a lease agreement (the "Lease") with Viron's predecessor under which TSU was to be lessee of approximately $8.5 million of heating and cooling equipment and Viron's predecessor, or its assignee, was to be the owner. Before the equipment was delivered, Viron assigned to State Street's predecessor in interest, by a written assignment, the title and ownership in the equipment and all moneys payable, or to become payable, with respect to the equipment. TSU acknowledged the assignment in writing. Consequently, State Street delivered $8,547,545.51 into an acquisition fund so that the equipment could be purchased.

State Street and Viron also presented evidence that, in order to induce Viron's predecessor to enter the Lease, TSU promised to pay rent in exchange for the equipment over a ten-year period, after which it would obtain an equity interest in the equipment and acquire title to it. TSU also specifically represented and warranted that it had "presented this Master Lease for approval and adoption as a valid obligation on its part and that all requirements have been met and procedures have been followed to ensure the enforceability of the Master Lease." In addition, it represented and warranted that it "ha[d] the legal capacity to enter into this Master Lease" and that its "obligation under this Master Lease constitutes an enforceable obligation."

Finally, Viron's predecessor demanded an "opinion of counsel" that TSU's promises were valid, and it received an opinion letter from TSU's general counsel representing that TSU had "the power and authority to enter into the Master Lease," that the execution of the Master Lease had been "duly authorized by all necessary actions," that the officer who signed the Lease was "duly authorized" to execute the Lease and the attached documents, that the Lease "constitutes a legal, valid and binding deferred payment obligation of the Lessee, enforceable in accordance with its terms," and that "[t]his opinion may be relied upon by you and your assigns." These extraordinary assurances were required by Viron because of TSU's then recent success in avoiding its contractual obligations to Federal Sign on sovereign immunity grounds. See Federal Sign, 951 S.W.2d at 412.

TSU, however, failed to make any lease payments. Among its stated reasons was that TSU's associate vice president did not have authority to enter into the Lease and related documents. In other words, it contradicted its own written representation that it did have such authority, made in order to induce Viron's predecessor to deliver the equipment to it. Moreover, TSU's corporate representative, the University's Senior Vice President for Business and Finance, Quintin Wiggins, testified by deposition that the procedures to create a valid lease agreement had not been followed, so that the Lease was never valid and was unenforceable; the Lease was never authorized by the TSU Board of Regents of the Higher Education Coordinating Board; TSU was not the owner of the equipment, but merely a lessee; and State Street had title to the equipment. Wiggins, in his capacity as corporate representative, thus also contradicted TSU's express written representations that the execution of the Lease had been duly authorized by all necessary actions, that the Lease was valid and enforceable, and that the Lease could be relied upon by Viron's predecessor and its assigns. Wiggins acknowledged that TSU had never made any lease payments. Thus the only consideration given by TSU for the equipment it took was its own admittedly false promises.

Under the circumstances of this case, TSU's representations of fact--subsequently repudiated by its corporate representative under oath--can be construed in only two ways. First, they may have been intentionally false representations made to induce Viron and its assignees to finance and install over $8 million worth of heating and cooling equipment on the premises of TSU. If TSU's counsel's representations of law were based on its false representations of fact that proper procedures had been followed and that the proper persons with the proper authority had approved the lease, its representations of law were likewise false and could have been intended only to enable TSU to take Viron's and its assignees' property without compensation. Alternatively, the representations may have been true when made or made without knowledge of their truth or falsity, but made with the fraudulent intent to give TSU an exit strategy when called upon to pay for the equipment it had obtained. It could--as it did--falsely deny that the contract was authorized or that procedures had been followed, thereby denying the truth of its own representations and warranties and the validity of the contract while retaining the equipment it had procured on the basis of its "colorable right" under the very contract it repudiated on the basis of its own admitted falsehoods. Either way, TSU intentionally made false material misrepresentations to take and retain millions of dollars worth of energy saving equipment for the use of the university without compensating Viron, or its predecessor in interest, or its assignee, State Street.

I would hold, on the basis of the pleadings and the jurisdictional facts in the record, that the Lease between Viron and TSU lacked mutuality of obligation and was, therefore, illusory and void. See Federal Sign, 951 S.W.2d at 408-09. Thus, this is not a contract dispute and TSU has no "colorable right" to the equipment. Rather, it knowingly made false representations to obtain and retain the equipment for its own use with the intention of not compensating the acknowledged owner, originally Viron's predecessor, now Viron's assignee, State Street. Thus, this is an inverse condemnation case, not a breach of contract case. Therefore, I would hold that State Street, as assignee of the property rights in the equipment, properly pleaded an inverse condemnation claim based on TSU's allegedly taking the equipment for the use of the university without compensation or with substantial certainty that that would be the result of its intentional acts. See Jennings, 142 S.W.3d at 313-14.

Inverse Condemnation v. Contract Disputes with Sovereign Entities

This case is totally unlike those cases in which a state entity has successfully urged its sovereign immunity to claims based on a dispute arising from a valid contract. Cf. Federal Sign, 951 S.W.2d at 408-09 (consideration for valid contract existed in form of mutual promises where Federal Sign promised to build scoreboards in exchange for TSU's promise to pay; Federal Sign began building scoreboards; and TSU subsequently notified Federal Sign its bid was unacceptable and contracted with other manufacturers); Smith v. Lutz, 149 S.W.3d 752, 760-61(Tex. App.--Austin 2004, no pet.) (when university obtained possession of software from plaintiff by virtue of contract voluntarily entered and dispute arose over plaintiff's performance and university's payments, university was acting under color of contractual rights and did not have requisite intent for eminent domain); Freedman v. Univ. of Houston, 110 S.W.3d 504, 506, 509 (Tex. App.--Houston [1st Dist.] 2003, no pet.) (suit over terms of employment contracts with university constituted suit for breach of contract, not for "taking" of property without compensation to owner); State v. Steck Co., 236 S.W.2d 866, 869 (Tex. Civ. App.--Austin 1951, writ ref'd) ("Appellee by making the contract, manufacturing the stamps and delivering them to the State did so voluntarily and with its own consent, and can not now say the stamps were taken under the power of eminent domain.") (quoted in Little-Tex, 39 S.W.3d at 599).

Rather than resembling the foregoing cases--each of which evidenced a valid contract knowingly and voluntarily entered--this case closely resembles Callaway, an inverse condemnation case. In that case, the Texas Parks and Wildlife Department opened a canal over Callaway's property to public use in contravention of the terms of an easement. See Callaway, 971 S.W.2d at 147-48. Callaway sued the Department in inverse condemnation, contending that it had effectively taken his property without compensation. Id. The Department responded by recharacterizing Callaway's claim as a suit for breach of the easement agreement, i.e., as a suit to which it had sovereign immunity. Id. at 148. The Austin Court of Appeals expressly distinguished Callaway's inverse condemnation claims from mere breach of contract claims, stating that Callaway's claim did not rest on breach of contract alone but on the taking of his property without compensation, and that in each case in which it had held that sovereign immunity prevented a private party from recovering damages from the State for an alleged breach of contract, the State's duty to pay "arose solely from its contract with the private party." Id. at 150.

The Callaway court opined, "The existence of a contract is not talismanic, but merely leaves the state's immunity from suit intact; it does not build an impenetrable wall nullifying the possibility of other waivers of and exceptions to that immunity." Id. The court observed that in taking Callaway's property, the Department had done more than merely breach a contract; it had acted affirmatively to open the property to public boating. Id. at 150-51. Thus the issue was whether the Department had taken or damaged Callaway's property by its affirmative acts aside from withholding performance of its contractual obligations. Id. Disregarding the easement agreement, the court was left with Callaway's claim that the Department had intentionally performed certain acts that resulted in a taking or damaging of his property for public use, which acts gave rise to a lawful cause of action under article I, section 17 of the Texas Constitution, the takings clause. Id. at 150-51.

The same reasoning has been applied and the same result reached in other cases similar to the instant case and Callaway. In Kenedy Memorial Foundation v. Mauro, the Corpus Christi Court of Appeals upheld a property owner's right to bring an inverse condemnation suit when the Commissioner of the General Land Office, having statutory authority to determine the boundary between State and private property, refused to recognize a change in the physical characteristics of land and in state law interpreting boundaries, and continued to grant mineral leases on a portion of the disputed property, to the State's benefit. 921 S.W.2d at 282; State v. Holland, 161 S.W.3d 227, 230, 232-33 (Tex. App.--Corpus Christi 2005, pet. granted) (holder of patent on polymer-based filters properly pled an inverse condemnation claim against State for using series of special polymer-based filters to remove pollution in violation of patent where State contended that it acted under color of right under implied-in-fact contract with Holland's companies, but there was little evidence of contract and State's witness acknowledged there was no contract).

More generally, the Supreme Court of Texas has held that an inverse condemnation suit for damages is a proper vehicle for recovery "when the government's action against an economic interest of an owner is for its own advantage." City of Austin v. Teague, 570 S.W.2d 389, 391-93 (Tex. 1978) (upholding propriety of inverse condemnation suit by landowners when city used its regulatory police power to deny waterway development permit, causing landowners to lose all use of land, so that city by indirection acquired at no cost scenic easement which it had recommended State Highway Department acquire by purchase); see also State v. Biggar, 873 S.W.2d 11, 13-14 (Tex. 1994) (finding inverse condemnation when landowners pled and proved that State intentionally caused expiration of site development plan and resulting decrease in value of tract by denying landowners' request for easement exchange, thus reducing amount required to pay for portion of tract being taken through eminent domain).

The Supreme Court in Teague, quoting this Court, opined, "The social desirability of leaving government free to seek its own enrichment at the expense of those whom it governs under the guise that it has the power to regulate harmful conduct is not readily apparent." Teague, 570 S.W.2d at 393-94 (quoting Kirschke v. City of Houston, 330 S.W.2d 629 (Tex. Civ. App.--Houston 1959, writ ref'd n.r.e.)). The social desirability of leaving government free to seek its own enrichment under the guise of "colorable rights" derived from an illusory contract is no more readily apparent than the governmental action condemned in Teague and Biggar.

Conclusion

I would hold that State Street, having succeeded to Viron's rights against TSU, has properly pleaded an inverse condemnation case against TSU.

Since a state agency has no sovereign immunity to an inverse condemnation claim, I would affirm the trial court's denial of TSU's pleas to the jurisdiction relating to Viron's and State Street's inverse-condemnation claims and would remand this case to the trial court for trial.

Evelyn V. Keyes

Justice

Panel consists of Justices Nuchia, Keyes, and Hanks.

Justice Keyes, concurring and dissenting.

1. The Fifth Amendment states: "[N]or shall private property be taken for public use, without just compensation." U.S. Const. amend. V. Likewise, the Texas Constitution provides, "No person's property shall be taken, damaged or destroyed for or applied to public use without adequate compensation being made, unless by the consent of such person . . . ." Tex. Const. art. I, 17.