Public entities which issue bonds can utilize Expedited Declaratory Judgment Act for validation of contract execution, but not compliance says Texas Supreme Court

City of Controe, et al, v San Jacinto River Authority, et al, 18-0989, (Tex. March 27, 2020)

This is a case brought under the Expedited Declaratory Judgment Act (EDJA) involving proper compliance by the local government with bond requirements. The EDJA provides an “issuer” of “public securities” an expedited declaratory procedure to establish the “legality and validity” of public securities and “public security authorizations.” Tex. Gov’t Code § 1205.021.

The Lone Star Groundwater Conservation District was created to address concerns about inhabitance of an area and their reliance on groundwater drawn from the Gulf Coast Aquifer. In 2008, the Conservation District required all large-volume groundwater users—including the Cities—to develop and implement plans for reducing their usage substantially. Mandatory groundwater usage cutbacks took effect in January 2016. Respondent San Jacinto River Authority (SJRA) is a legislatively created conservation and reclamation district developed a Groundwater Reduction Plan (GRP) to draw surface water from Lake Conroe, treat the water, and sell it to large-volume users. SJRA issued seven series of bonds between 2009 and 2016 that had an outstanding principal balance of approximately $520 million. SJRA entered into bilateral GRP contracts with about 80 water-system operators. Although SJRA  can set, the GRP rates are governed entirely by contract. Several cities sued the Conservation District, which suit expanded to include SJRA. Several cities asserted they would not pay. SJRA filed suit   under the EDJA seeking a declaration regarding the contracts and rates. The cities opted into the suit, but then filed pleas to the jurisdiction alleging SJRA did not seek a declaration as to “the legality and validity” of a “public security authorization,” but instead seek to litigate what are substantively suits on contracts that properly lie outside the statute.  The trial court denied the pleas and the cities appealed. The intermediary court of appeals held primarily for SJRA and the cities appealed to the Texas Supreme Court.

The EDJA was enacted to “stop ‘the age old practice allowing one disgruntled taxpayer to stop the entire bond issue simply by filing suit.’”  The Court went through an analysis of the EDJA and its purpose in considering jurisdiction and definitions. SJRA and the Attorney General contend the GRP contracts, rate order, and rates themselves are public security authorizations because they are all connected to the bonds SJRA issued to finance the GRP Project.  The Court first held the Authority Declaration concerns the legality and validity of SJRA’s contracts with GRP Participants, as GRP rate orders and rates are creatures of the contracts.  As a result, the EDJA permits the trial court to exercise jurisdiction over this declaration.  However, the Court held the rate orders and rates lacked a proper connection with the bonds. Even though the rate order and rates may affect the amount SJRA is paid under the contracts, neither has an authorizing connection with the public securities. The EDJA treats execution of a contract to be connected but does not treat compliance with a contract as a public security authorization. As a result, SJRA can seek a declaration the contract was validly executed, but not whether it complied with the contract. As a result, the EDJA confers jurisdiction to declare whether the GRP contracts (as public security authorizations) are legal and valid, but it does not extend to declaring whether a specific rate amount set in a particular rate order is valid as it is controlled by the contract.  SJRA may not obtain EDJA declarations concerning the Cities’ in personam rights and liabilities. The EDJA permits only in rem declarations concerning property rights.

If you would like to read this opinion click here. Opinion by Justice Busby. The court docket page with attorney information is found here.