District Could Be Liable for Interest on Bonds

Harris County Fresh Water Supply District v FWO Development, LTD

This is an interlocutory appeal from the denial of the jurisdictional arguments contained within the District’s motion for summary judgment.  The case has a lot of history involved, but the main thing to get out of this case is to be very careful in your contracts with developers when you have regulatory agencies involved or bond issues.

Essentially, in this case, the District and FWO entered into a contract to construct a water facility. In the contract, it noted the District would use “best efforts” to issue bonds under the “best available terms.”   The District went to the TCEQ for approval of the bond issues.  The TCEQ, pursuant to its own rules, noted that interest on the bonds was only allowed for two years.  However, the contract did not specify the two year term and regulations state the interest could be provided up to five years if the District supported it.  FWO brought a breach of contract claim asserting the District did not use its best efforts to obtain the five years of interest. The District filed a motion asserting the TCEQ had exclusive jurisdiction over the interest issue and FWO must exhaust its administrative remedies.

The Court of Appeals for the Fourteenth District held the TCEQ did not have exclusive jurisdiction over that issue, it was discretionary and no exhaustion is required. It further held that since the contract did not specify the cap on interest, the breach of contract claim could go forward claiming the District did not seek the five years of interest under the contract.  The important thing to get out of this ruling is that even if the bonds are limited to a certain interest, if it is not specified in the contract, your entity could be liable out of other funds for any difference.

This is an interlocutory appeal, so the case is not over.  It’s just one battle in the fight.  However, it could be utilized by developers if your contracts are not tight enough.  So double-check your contracts.

If you would like to read the opinion, click here.