East Houston Apartments v. City of Houston

• Decision Date: 25 June 2009
• Docket Number: No. 01-08-00966-CV.,01-08-00966-CV.
• Parties: EAST HOUSTON ESTATE APARTMENTS, L.L.C., Appellant, v. CITY OF HOUSTON, Appellee.
• Court: Texas Court of Appeals

294 S.W.3d 723

EAST HOUSTON ESTATE APARTMENTS, L.L.C., Appellant, v. CITY OF HOUSTON, Appellee.

No. 01-08-00966-CV.

Court of Appeals of Texas, Houston (1st Dist.).

June 25, 2009.

Charles M. Hessel, Leah Ann Rush, The Hessel Law Firm, Waller, TX, Willie Powells, Houston, TX, for Appellant.

Arturo G. Michel, Erica Chapman Schwam, City of Houston Legal Department, Houston, TX, for Appellee.

Panel consists of Justices KEYES, HANKS, and BLAND.

OPINION

EVELYN V. KEYES, Justice.

The appellant, East Houston Estate Apartments, L.L.C. ("East Houston"), appeals the trial court's order sustaining the plea to the jurisdiction of appellee, City of Houston ("the City").¹ In one issue, East Houston argues that the trial court erred in granting the City's plea to the jurisdiction because the City performed a proprietary act by entering the agreement with East Houston, or, alternatively, that the City's governmental immunity is waived by Texas Local Government Code section 271.152.²

We affirm.

Background

On August 6, 1996, East Houston entered into a loan agreement with the City. The loan agreement provided:

This Agreement provides for a Loan ... from the City to the Owner to assist in the rehabilitation of a 130 unit apartment complex located at 7600 East Houston Road, Houston, Harris County, Texas, and known as the East Houston Estate Apartments. Funding is being provided to the City pursuant to a HOME Investment Partnership Agreement ("HOME Agreement") between the City and the United States of America, acting by and though its Department of Housing and Urban Development, for federal funding of a HOME Investment Partnerships Program under the National Affordable Houston Act of 1990, as amended ("HOME Program").

The Loan shall be issued to the Owner from the City subject to the conditions and terms of this Agreement. This Loan Agreement covers a community development activity undertaken by the City and authorized under Chapter 373 and/or 374 of the Texas Local Government Code.

The Agreement also stated "Loan shall mean the loan contemplated by this Agreement, in the maximum principal amount of Seven Hundred Fifty Thousand and No/ 100 Dollars ($750,000.00) made by the City to the Owner for the purpose of financing a portion of the rehabilitation costs of the Project." To accompany the Loan Agreement, East Houston executed a promissory note naming the City as payee in the principal sum of and a "Deed of Trust, Security Agreement, and Financing Statement." The Loan Agreement further provided that East Houston must "execute an agreement with a Project Manager who has been approved by the Director [of the City's Department of Housing and Community Development or designee]" before the funds could be disbursed.

The Loan Agreement also required that East Houston "obtain a firm commitment" from another lender, who would act as the Senior Lender, "for financing a portion of the acquisition and construction of the Project in at least the amount of $1,167,070.00." Thus, also on August 6, 1996, East Houston entered into a loan agreement with Chase Bank of Texas, N.A. ("Chase Bank"), and Chase Bank and the City entered into an inter-creditor agreement acknowledging Chase Bank as the Senior Lender.

Among the "Covenants of the Owner" were requirements that East Houston "use the proceeds of the Loan only for items included in the Final Budget that has been approved by the Director," deadlines for the commencement and completion of work, the requirement that the owner "perform the Work in a good and workmanlike manner and in substantial accordance with the Work Write-up that has been approved by the Director," and requirements that East Houston comply with various other statutory provisions and regulations and with certain "affordability requirements." Specifically, the Agreement provided:

[T]he Owner shall comply with the following affordability requirements:

a. At least twenty percent (20%) of the sixty-six (66) Designated Units, i.e., at least thirteen (13) units, shall be rented only to those families whose gross income does not exceed fifty percent (50%) of the median income for the area, as determined by HUD, and each of these thirteen (13) or more units shall bear rent no greater than thirty percent (30%) of the adjusted income of the qualified tenant family, less a monthly allowance for utilities and services (excluding telephone) to be paid by the tenant.

b. The remaining Designated Units shall be rented only to those families whose gross income does not exceed eighty percent (80%) of the median income for the area, as determined by HUD, and these units shall bear rents no greater than the lesser of —

(1) the fair market rent for comparable existing housing units in the area as established by HUD under 24 CFR § 888.111, less a monthly allowance for any utilities and services (excluding telephone) to be paid by the tenant; or

(2) a rent that does not exceed thirty (30%) percent of the adjusted income of a family whose gross income equals sixty-five percent (65%) of the median income for the area, as determined by HUD, with adjustments for the number of bedrooms in the unit, less a monthly allowance for utilities and services (excluding telephone) to be paid by the tenant.

The Loan Agreement also contained numerous provisions regarding repayment of the loan and disbursement procedures and circumstances under which the Director could declare a default under the loan.

The Loan Agreement provided that the Affordability Period — i.e., the period during which the designated units of the Project had to remain affordable under HUD standards — was fifteen years from Project Completion and that the "Designated Units for the Project covered by this Agreement shall consist of 51% of the units (66 units)."³ In addition, the Loan Agreement contained a section titled "Federal Funding Limitation" that stated as follows:

Owner understands that the availability of the Loan proceeds is dependent upon federal funding. Unless and until the City receives adequate funds from HUD, the City shall have no obligation to the Owner under this Agreement. In the event that the funds received by the City under the HOME Agreement with HUD are insufficient to meet the City's commitments, the Director may reallocate all or a portion of the funds that are budgeted for this Agreement.

The Loan Agreement was approved and authorized by City Ordinance 98-126 on February 18, 1998. Subsequently, work on the Project began.

After numerous construction delays, Chase attempted to foreclose on East Houston's property on August 11, 2003. At that time, according to East Houston, the City had loaned East Houston approximately $237,000 of the $750,000 in federal funds provided for in the Loan Agreement, and Chase Bank, as the Senior Lender, had loaned East Houston approximately one-third of the $1,167,070.00 provided for in its own loan agreement with East Houston for the Project. East Houston had not repaid any of the money Chase Bank and the City had lent it for the Project. On August 29, 2003, East Houston filed a Chapter 11 bankruptcy proceeding that was eventually dismissed. No action was taken under the loan agreements for several years.

On May 11, 2007, East Houston Apartments, L.L.C. ("EHA") purchased Chase Bank's position in Chase's loan agreement with East Houston and posted East Houston's real property for foreclosure. East Houston filed another bankruptcy proceeding on July 2, 2007. On September 10, 2007, the bankruptcy court lifted the stay to allow EHA to enforce its rights through foreclosure. Subsequently, EHA sold East Houston's property at foreclosure on October 2, 2007.

East Houston filed its original petition in this lawsuit on September 9, 2008, alleging breach of contract by Chase Bank and the City for failing to release to it all of the funds allotted by the loan agreements. East Houston alleged damages "in an amount equal to the estimated value of the property being at least $2,000,000.00 along with lost net income of at least $300,000 per year for the twenty-year period that the real estate project had to be used for low income housing, for an aggregate lost profits claim of $6,000,000.00." East Houston also alleged fraud, rescission and setoff, and civil conspiracy, and it requested punitive damages of $6,000,000.00 and attorney's fees. In its first amended petition, East Houston argued that the City had waived its immunity from suit because the acts or omissions that formed the basis of the lawsuit involved proprietary acts of the City for which it did not have governmental immunity.

On October 8, 2008, the City filed a plea to the jurisdiction arguing that, because the Loan Agreement between itself and East Houston covered a Community Development Activity authorized by Chapter 373 or Chapter 374, or both, of the Texas Local Government Code,⁴ and because such activity was statutorily defined as a governmental function, the City was immune from suit for all claims arising out of that activity.

On October 28, 2008, East Houston responded to the City's plea to the jurisdiction arguing that Community Development Activities authorized by Chapters 373 or 374 of the Local Government Code are proprietary activities of a municipality and also that the City had failed to prove that the Loan Agreement was properly authorized under Chapter 373 or 374, and, therefore, the City's immunity from suit was waived. Alternatively, East Houston argued that the City's immunity was waived under Texas Local Government Code section 271.152, which waives governmental immunity from suit for breach of certain contracts entered into by a governmental entity.⁵ On October 29, 2008, East Houston filed its second amended petition, adding its argument that the City's immunity from suit was waived by Local Government Code section 271.152 and acknowledging that its damages against the City would be correspondingly limited by that statute. East Houston also added...