State/Operating Contractors ABS Emissions, Inc. v. Operating Contractors/State
| Decision Date | 28 January 1999 |
| Docket Number | No. 03-97-00497-CV,03-97-00497-CV |
| Citation | 985 S.W.2d 646 |
| Parties | STATE of Texas, et al./OPERATING CONTRACTORS ABS EMISSIONS, INC., et al., Appellants, v. OPERATING CONTRACTORS/STATE of Texas, et al., Appellees. |
| Court | Texas Court of Appeals |
Debora McWilliams Alsup, Thompson & Knight, P.C., Austin, for Appellants.
D. Douglas Brothers, Brothers & Thomas, Austin, R. Terry Bell, Bell, Nunnally & Martin PLLC, Dallas, Williams Powers, Jr., Austin, for Appellees.
Before Justices KIDD, B.A. SMITH and POWERS. *
Appellant, the State of Texas, et al. (the "State"), and appellee, the Operating Contractors (the "OCs"), et al., bring cross appeals from the judgment of the trial court awarding the OCs approximately $16 million in damages under the Texas and United States constitutions and approximately $7 million in attorney's fees under the Uniform Declaratory Judgment Act (the "UDJA") 1 due to the State's alleged unconstitutional repeal of a centralized automobile emissions testing program. We will reverse and render judgment that the OCs take nothing.
In response to amendments made by Congress to the Federal Clean Air Act in 1990, the United States Environmental Protection Agency (the "EPA") mandated periodic testing of vehicle exhaust emissions in certain geographic areas having high levels of air pollution. See 42 U.S.C. § 7401 (1994). In 1992, the EPA designated three such "non-attainment areas" in the state of Texas: the Dallas/Fort Worth, Houston/Beaumont/Port Arthur, and greater El Paso areas. To encourage compliance with the new federal air pollution standards, Congress conditioned the availability of federal highway funds on the actions of state governments in bringing state emissions testing programs into compliance with EPA guidelines. See 42 U.S.C. §§ 7509, 7410(m) (1994).
Accordingly, the Texas Legislature in 1991 authorized the Texas Air Control Board, the predecessor to the Texas Natural Resource Conservation Commission (the "TNRCC"), 2 to modify the existing state emissions testing program to better comply with the new EPA guidelines. 3 The TNRCC designed a program whereby vehicle registration would be dependent upon successful emissions testing performed by a centralized testing facility equipped with high-technology equipment. The TNRCC submitted the proposal, or state implementation plan ("SIP"), to the EPA for approval. Prior to formal EPA approval, the 1993 Legislature provided express authority to the TNRCC to contract with private entities to implement and operate the new program. See Tex. Health & Safety Code Ann. § 382.037(f) (West 1992); Act of May 24, 1993, 73d Leg., R.S., ch. 547, § 2. With EPA approval still pending, the TNRCC contracted with Tejas Testing One and Tejas Testing Two (collectively "Tejas") to manage the implementation and operation of the new program in two of the three non-attainment areas: Dallas/Fort Worth and Houston/Beaumont/Port Arthur. Tejas signed two identical Emissions Contracts (collectively the "Emissions Contract") with the State which established the responsibilities of the two contracting parties and covered a period of seven years. The EPA formally approved the Texas plan a year later.
The structure of the new program required Tejas, as the Managing Contractor, to construct and staff numerous emissions testing facilities in the Dallas/Forth Worth and Houston/Beaumont/Port Arthur areas. Pursuant to the Emissions Contract, Tejas hired local OCs to run each individual testing facility. Each of the forty-three OCs signed both a lease with Tejas leasing the testing facility from Tejas, and a Service Agreement with Tejas establishing the obligations and responsibilities of the two contracting parties. 4 The OCs signed no contract directly with the State.
The Emissions Contract between Tejas and the State and the Service Agreement between each OC and Tejas contained exculpatory clauses designed to deal with the possibility of an early termination of the new emissions testing program. The Emissions Contract contained a provision stating:
9.3 Early Termination of the Contract without Fault by Managing Contractor.
The TNRCC may terminate this Contract in the absence of fault by the Managing Contractor .... if the Program is repealed or substantially amended . ... If this contract is terminated by the TNRCC prior to the Normal Termination Date for any such reason, the TNRCC agrees, to the extent funds are appropriated by the Legislature of the State of Texas for the express purpose of this section 9.3, to pay to the Managing Contractor the compensation described in this section 9.3 for property used or intended to be used in the performance of this Contract. The TNRCC agrees to take all steps necessary to request such funding from the Legislature. (emphasis added).
The Service Agreement likewise contained a clause addressing the early termination of the program:
31. Termination of the Emissions Contract or the Lease(s):
OC recognizes that both the TNRCC and Tejas have the right under the Emissions Contract to terminate the Emissions Contract prior to the date on which this agreement is to terminate in accordance with section 8 of this Agreement. In the event (i) the TNRCC or Tejas terminates the Emissions Contract, or (ii) the Lease(s) terminates, then this Agreement shall automatically terminate without further action or notice. Termination of this Agreement pursuant to this section 31 of this Agreement shall immediately and automatically terminate the Lease(s). OC agrees that it shall have no claim for damages against Tejas or any other person, including but not limited to the TNRCC and Tejas' lessors, mortgagees, lenders and assignees, in the event the TNRCC or Tejas terminates the Emissions Contract. (emphasis added).
Tejas and the OCs made significant investments of time and money to ensure that the emissions testing program would be operational at the agreed time. In return for this investment, Tejas stood to recoup its costs and to gain an estimated $77 million in profits over the seven year term of the Emissions Contract. Testimony by one OC at trial estimated each OC's annual salary over the seven year period to be $140,000. On January 2, 1995, the new emissions testing program became operational.
By the opening of the 1995 Legislative Session, political support for the new centralized emissions testing program had begun to erode. In addition, the legislature may have been responding to rumors that Congress was going to relax the EPA emissions testing standards. 5 Whatever the reason, after only four weeks of operation, the Texas Legislature placed a 90-day moratorium on the program. See Tex. S.B. 19, Act of Jan. 31, 1995, 74th Leg., R.S., ch. 1. Senate Bill 19 ("S.B.19") suspended operation of the program, and also appropriated $8.8 million in order to make payments to the OCs for salaries, bonuses, and maintenance of the stations during the moratorium. Following the 90-day moratorium, the legislature passed laws permanently ending the centralized emissions testing program and reestablishing a decentralized program. 6 See Tex. S.B. 178, Act of May 1, 1995, 74th Leg., R.S., ch. 34. Senate Bill 178 ("S.B.178") further provided that:
SECTION 13. Any change or amendment to the vehicle emissions inspection and maintenance program allowed or contemplated by this Act, including any change or amendment to that program negotiated and agreed to by the governor:
(1) is an amendment or repeal of that program under any contract for implementation of that program;
(2) does not constitute a default by the state under a contract for implementation of that program;
(3) is not a waiver of the state's defenses available under law or under any existing contract for the implementation of that program; and
(4) does not waive the state's sovereign immunity or any defenses available to the state.
Id. (emphasis added). The OCs were reimbursed by Tejas for all start-up costs incurred during the development and operation of the ill-fated program.
The TNRCC made some effort to redesign the program with Tejas to fit the new political desire for decentralization, but these efforts failed. The TNRCC estimated Tejas's losses and petitioned the legislature for the return of that investment. Pursuant to S.B.178, the TNRCC designed a new emissions testing program and submitted it to the EPA in June 1996. The EPA approved the new program in July 1997. See 62 Fed.Reg. 37138-44, 40 C.F.R. § 52.2310 (1997).
After filing for bankruptcy protection in September, Tejas filed suit in district court against the State in November 1995. The OCs intervened. Both Tejas and the OCs challenged the state legislation ending the emissions testing program on a number of grounds, including both constitutional and contractual claims. The trial began in January 1997, and final judgment was signed on April 21, 1997. The trial court found that S.B. 178 amounted to an unconstitutional impairment of contract under both the Texas and United States Constitutions, and an unconstitutional taking and unconstitutional retroactive law under the Texas Constitution. See U.S. Const. art. I, § 10; Tex. Const. art. I, §§ 16, 17. The trial court, however, found against Tejas and the OCs on their breach of contract claims. The trial court awarded Tejas nearly $170 million in damages, interest, and attorney's fees. The trial court awarded the OCs approximately $23 million in damages and attorney's fees. The monetary awards represented lost profits estimated over the entire seven-year term contemplated by the Emissions Contract and Service Agreement. After entry of the final judgment, the State settled with Tejas. The dispute between the OCs and the State was not settled, and is now before this Court on cross-appeals. The State, in several points of error, appeals the judgment awarding the OCs $23 million. The OCs, in four points of error, appeal ...
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