Austin Court of Appeals rules escrow retention for project completion is proprietary function

Canario’s, Inc. v. City of Austin, 03-14-00455-CV (Tex. App. – Austin, August 26, 2015).

Canario’s, as developer of a project to construct a nightclub, deposited with the City over $100,000 to be held as fiscal security to ensure proper completion of the project under a city regulation. The escrow agreement provided that the funds and accrued interest would be released to Canario’s upon the City’s acceptance of the improvements. The City later received a letter from Caranrio’s president requesting release  of the funds, but to Ms. Flores and Mr. Cornejo his “local partners.”  Based on the letter, the City released the funds. Caranario’s, Inc. later informed the City Flores and Cornejo were not authorized to receive the funds. Canario’s sued the City for breach of fiduciary duty, breach of contract, and negligence, alleging that in releasing the funds, the City had violated its policies and its duty to verify the identity of a payee. The City responded with a plea to the jurisdiction which the trial court granted and Canario’s appealed.

Consistent with its side of a split amongst the court of appeals, the Austin Court of Appeals holds to the position the proprietary-governmental dichotomy exists in the contract context. The court held in determining whether an act is proprietary or governmental falls on the specific acts underlying the claim — the City’s decision to accept and hold escrow deposits and its handling of the return of such deposits.  The City’s collecting, holding, and distributing escrow funds are functions that could easily be handled by a private entity and are discretionary and not essential to or even usually associated with a municipality’s planning or zoning functions.  As a result, such acts are proprietary and no immunity is implicated. The plea was therefore improperly granted.

If you would like to read this opinion click here. Justice Puryear, Justice Pemberton and Justice Field.  Memorandum Opinion by Justice Puryear.  The attorneys listed for the City are Ms. Megan Mosby,  Ms. Meghan L. Riley and Ms. Karen Kennard.  The attorneys listed for Canario’s are Mr. Adam Pugh and Mr. Michael S. Truesdale.