City of League City v. Jimmy Changas, Inc.
| Docket Number | 21-0307 |
| Decision Date | 09 June 2023 |
| Parties | City of League City, Texas, Petitioner, v. Jimmy Changas, Inc., Respondent |
| Court | Texas Supreme Court |
Argued October 4, 2022
On Petition for Review from the Court of Appeals for the Fourteenth District of Texas
This interlocutory appeal involves the thorny governmental/proprietary dichotomy in a breach-of-contract context. The court of appeals held that governmental immunity does not protect a city against a breach-of-contract claim because the city was acting in its proprietary capacity when it entered into the contract. We agree and affirm.
The Texas Local Government Code authorizes cities to grant and loan public funds for various beneficial purposes. Chapter 373, for example, permits municipal expenditures for "community development" purposes, including the "elimination of slums and areas affected by blight" and the "prevention of blighting influences and of the deterioration of property and neighborhood and community facilities important to the welfare of the community." Tex. Loc. Gov't Code § 373.002(b). Similarly, chapter 374 authorizes cities to fund "urban renewal" programs "to encourage urban rehabilitation" and "to provide for the redevelopment of slum and blighted areas." Id. § 374.013(a).
This dispute involves an "Economic Development Incentives Grant Agreement" under chapter 380, which permits cities to provide "economic development" incentives "to promote state or local economic development and to stimulate business and commercial activity in the municipality." Id. § 380.001(a). The Agreement describes plans by Jimmy Changas, Inc. to invest $5 million to construct a 10,000-square-foot restaurant facility on a particular tract within the City of League City's entertainment district. Jimmy Changas projected the facility would be at least equal in quality to an existing Jimmy Changas restaurant in Pasadena, Texas, and would create at least eighty full time and forty part-time jobs. League City agreed that, if Jimmy Changas completed the facility as projected,[1] the City would reimburse all of Jimmy Changas's capital-recovery fees for water and wastewater services, all fees Jimmy Changas would pay to obtain plat approvals and building permits, and a percentage of Jimmy Changas's local-sales-tax payments based on the restaurant's total annual sales.
Consistent with chapter 380's authorization, the Agreement recited that its purposes were "to promote state or local economic development and to stimulate business and commercial activity in the City," to "contribute to the economic development of the City by generating employment and other economic benefits to the City," and to encourage Jimmy Changas to develop the property "in a manner that establishes the area as a regional destination."
After Jimmy Changas completed the project, League City refused to provide the reimbursements, contending that Jimmy Changas failed to timely submit documentation establishing it had invested at least $5 million and created at least eighty full-time jobs. Jimmy Changas contends it submitted all the required documentation and that the City waived any complaint about the timeliness of its submission by continuously requesting additional documents beyond those Jimmy Changas initially submitted.
Jimmy Changas filed this suit asserting that League City breached the Agreement by refusing to pay the promised reimbursements. The City filed a plea to the jurisdiction, arguing that governmental immunity bars the claim and that no statute waives that immunity. The trial court denied the plea, and the City filed an interlocutory appeal.[2] The court of appeals affirmed, holding that governmental immunity does not apply to Jimmy Changas's claim because League City was acting in its proprietary capacity-as opposed to its governmental capacity-when it entered into the Agreement. 619 S.W.3d 819, 828 (Tex. App.-Houston [14th Dist.] 2021). We granted the City's petition for review and now affirm.
To "shield the public from the costs and consequences of improvident actions of their governments," sovereign immunity generally bars claims against the State and its agencies. Tooke v. City of Mexia, 197 S.W.3d 325, 332 (Tex. 2006). Municipal corporations often function in a governmental capacity on the State's behalf but at other times function as "a private corporation," City of Tyler v. Ingram, 164 S.W.2d 516, 519 (Tex. 1942), "for the private advantage and benefit of the locality and its inhabitants." Wasson Ints., Ltd. v. City of Jacksonville (Wasson I), 489 S.W.3d 427, 433 (Tex. 2016). Because "sovereign immunity is inherent in the State's sovereignty," municipalities "share that protection when they act 'as a branch' of the State but not when they act 'in a proprietary, non-governmental capacity.'" Wasson Ints., Ltd. v. City of Jacksonville (Wasson II), 559 S.W.3d 142, 146 (Tex. 2018) (quoting Wasson I, 489 S.W.3d at 430).
The common law has long recognized this dichotomy when cities are sued in tort, and we held in Wasson I that it also applies when cities are sued for breach of contract. See Wasson I, 489 S.W.3d at 439. To determine whether a municipality engaged in a governmental or proprietary function when it entered into a particular contract, we look to both the common law and to Texas statutes.
Under the common law, proprietary functions are those that a city performs "in its discretion," "primarily for the benefit of those within the corporate limits of the municipality," and not as "an arm of the government" or "a branch of the state" or "under the authority, or for the benefit, of the sovereign." Wasson II, 559 S.W.3d at 147 (quoting Wasson I, 489 S.W.3d at 427; Gates v. City of Dallas, 704 S.W.2d 737, 739 (Tex. 1986); Dilley v. City of Houston, 222 S.W.2d 992, 993 (Tex. 1949)). Proprietary functions "can be, and often are, provided by private persons." Id. (quoting Joe R. Greenhill & Thomas V. Murto III, Governmental Immunity, 49 Tex. L. Rev. 462, 463 (1971)).
Governmental functions under the common law 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 essentially public . . . pertaining to the administration of general laws made to enforce the general policy of the state.'" Id. (quoting Wasson I, 489 S.W.3d at 433 (in turn quoting City of Galveston v. Posnainsky, 62 Tex. 118, 127 (1884)); Tooke v. City of Mexia, 197 S.W.3d 325, 343 (Tex. 2006) (in turn quoting Dilley, 222 S.W.2d at 993); Greenhill & Murto, 49 Tex. L. Rev. at 463).
The Texas Constitution specifically authorizes the legislature to define governmental and proprietary functions "for all purposes." Tex. Const. art. XI, § 13. Exercising this authority, the legislature has addressed the dichotomy for purposes of tort claims but not for claims for breach of contract. Generally consistent with the common-law descriptions, the Tort Claims Act defines proprietary functions as "those functions that a municipality may, in its discretion, perform in the interest of the inhabitants of the municipality." Tex. Civ. Prac. & Rem. Code § 101.0215(b). Statutorily, proprietary functions include, but are not limited to, "the operation and maintenance of a public utility," "amusements owned and operated by the municipality," and "any activity that is abnormally dangerous or ultrahazardous." Id.
By contrast, the Act defines governmental functions 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." Id. § 101.0215(a). In addition to this general definition, the Act includes a non-exclusive list designating thirty-six specific activities as governmental functions, ranging from "police and fire protection and control" to "animal control." Id. § 101.0215(a)(1), (33).
"Although these statutory definitions and designations apply expressly to tort claims, we explained in Wasson I that they can also 'aid our inquiry' when applying the dichotomy in the contract-claims context." Wasson II, 559 S.W.3d at 147-48 (quoting Wasson I, 489 S.W.3d at 439). "We thus consider" in contract cases "both the statutory provisions and the common law in determining whether a city's contractual conduct is governmental or proprietary." Id. at 148.
If a particular activity is not included in the statutory list of governmental functions, we look to the general definitions under both the common law and the statute. Id. at 150. Based on those definitions, we consider the following 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 it would otherwise have been proprietary. Id.[3]
"The distinction between a municipality's governmental and proprietary functions 'seems plain enough, but the rub comes when it is sought to apply the test to a...
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