In The Courts

Water Cases

Bush v. Lone Oak Club, LLC, 18-0264, 2020 WL 1966931 (Tex. Apr. 24, 2020).

This case is a title dispute between the Commissioner of the General Land Office and the Lone Oak Club—a private landowner—over portions of the submerged bed of Lone Oak Bayou. Members of the public hunt and fish in the shallow water of Lone Oak Bayou. The Lone Oak Club asserts that it owns the bed of a portion of the bayou, and that people trespass when they make contact with the bayou bed.

The Club’s predecessor owners purchased 160 acres of land, including a portion of the bayou’s bed, from the State. The Legislature later passed the Small Bill, which validated such conveyances that included the “the beds… of watercourses or navigable streams.” The Commissioner claims that the Small Bill does not validate a landowner’s title to the bayou’s submerged bed, because “navigable streams” refers only to those portions of the streambed not subject to ebb and flow of the tide, and that the Lone Oak Bayou is not a navigable stream within the scope of a statutory conveyance.

In its opinion, the Texas Supreme Court contemplated the Small Bill’s effect on validating the conveyance of certain state-owned submerged streambeds. Citing the Navigable Stream Statute’s definition of navigable streams, the Court clarified the definition of “navigable streams” within the meaning of the Small Bill as including portions of the stream both above and below the tide line, and held that the Small Bill expressly authorized the State to convey those beds to private owners.

In determining whether Lone Star Bayou is a navigable stream, the Court concluded that there are factual disputes that need to be resolved regarding whether the bayou is a navigable stream within the scope of statutory conveyance, and remanded the case for further proceedings.

Pape Partners, Ltd. v. DRR Family Properties LP, 10-17-00180-CV, 2020 WL 499639 (Tex. App.—Waco Jan. 29, 2020, no pet.).

The Waco Court of Appeals recently considered the nature of the Texas Commission on Environmental Quality’s (“TCEQ”) jurisdiction, ultimately holding that the Legislature has vested the TCEQ with the exclusive jurisdiction to determine surface water rights, and the parties must exhaust their administrative remedies before resorting to the courts.

Pape Partners, Ltd. purchased a tract of land, which included irrigation (surface) water rights. When the Papes tried to record their purchase of the water rights with TCEQ in 2015, TCEQ notified DRR Family Properties LP (“DRR”), and ultimately concluded that DRR owned a portion of the surface water rights. Rather than filing administrative appeal, Pape Partners moved to reverse TCEQ’s decision by filing suit in District Court. The District Court granted DRR’s motion to dismiss for lack of subject matter jurisdiction, and Pape appealed.

On appeal, the Papes asserted that the trial court erred in granting DRR’s motion, because 1) the question of property ownership is within the sole jurisdiction of the courts, 2) the legislature did not vest TCEQ with exclusive jurisdiction over the Papes’ claims, and 3) the ruling violates the separation of powers in the Texas Constitution. The Papes cited four opinions to establish that water rights ownership disputes are excepted from TCEQ’s jurisdiction under Tex. Water Code §5.013(a)(1).

The Waco Court of Appeals held that 1) the district court properly dismissed the case for lack of subject matter jurisdiction, because the Tex. Water Code Ann. §26.023 implies TCEQ’s exclusive jurisdiction over the subject, and 2) the legislative scheme giving TCEQ jurisdiction did not violate separation of powers, because art. 16 §59 of the Texas Constitution specifically establishes the authority given to TCEQ.

Litigation Cases

SCOTX (sort of) takes up derivative sovereign immunity for private lottery contractor in Nettles v. GTECH Corp., No. 17-1010, 2020 WL 3116609 (Tex. June 12, 2020).

GTECH contracted to provide instant-ticket manufacturing and other services to the Texas Lottery Commission. Several ticket-purchasers filed two suits against GTECH alleging the instructions on a scratch-off lottery ticket were misleading, causing them to believe they had winning tickets when they did not. Plaintiffs brought claims for fraud, fraud by nondisclosure, aiding and abetting the Commission’s fraud, tortious interference with the plaintiffs’ contracts with the Texas Lottery, and conspiracy with the Commission.

GTECH asserted in its plea to the jurisdiction in each case that derivative sovereign immunity barred all the claims against it because the suits were premised on alleged conduct directed and controlled by the Commission, an entity with sovereign immunity. One trial court granted GTECH’s plea to the jurisdiction, but the other court denied the plea. On appeal, the Dallas Court of Appeals affirmed the trial court’s grant of the plea to the jurisdiction and the Austin Court of Appeals affirmed in part and reversed in part the trial court’s denial of the plea.

The Supreme Court held that as to the fraud claims, GTECH would not qualify for derivative sovereign immunity “even if we recognized that doctrine,” reasoning the Commission did not control GTECH’s choices in writing the game instructions (thereby affirming the Austin Court of Appeals’ judgment holding that GTECH is not entitled to immunity from the fraud claims, and reversing the portion of the Dallas Court of Appeals’ judgment holding otherwise). Further, the Court held that GTECH is entitled to immunity from the allegations of aiding and abetting the Commission’s fraud and of conspiracy with the Commission.

The Court reasoned that “because the plaintiffs necessarily must override the substance of the Commission’s underlying decisions in order to impose derivative liability on GTECH, these allegations implicate the purposes of sovereign immunity” (thereby affirming the Dallas Court of Appeals’ judgment in part as to these allegations). The Court did not reach the question of whether Texas should recognize the doctrine of derivative sovereign immunity for contractors or what standard should be adopted for determining the scope of that immunity. Because GTECH exercised discretion in choosing the game instructions, it would not be entitled to derivative immunity from fraud claims based on those instructions.

SCOTX rules Arbitration clauses enforceable against local governmental entities in San Antonio River Auth. v. Austin Bridge & Rd., L.P., 581 S.W.3d 245 (Tex. App. 2017), aff’d, No. 17-0905, 2020 WL 2097347 (Tex. May 1, 2020).

In San Antonio River Authority v. Austin Bridge & Road, L.P. and Hayward Baker, Inc., a divided SCOTX held that local governmental entities that have agreed to arbitration clauses can be required to arbitrate. The San Antonio River Authority (“SARA”) hired Austin Bridge & Road, L.P. to help make repairs on the Medina Lake Dam.The parties singed a written agreement including a provision requiring disputes arising under the contract to be decided by binding arbitration.

When costs of the project exceeded initial expectations, a dispute arose as to who was obligated to pay the additional costs and Austin Bridge invoked the contract’s arbitration provisions. SARA sought dismissal of the claims, citing governmental immunity in a plea to the jurisdiction submitted to the arbitrator. After the arbitrator denied SARA’s motion, SARA filed suit in district court to enjoin the arbitration and sought a determination of whether governmental immunity barred the claims against it.

The Supreme Court took up three questions: (1) whether the agreement to arbitrate is enforceable, (2) if so, whether the courts must decide matters of governmental immunity, notwithstanding the agreement of the parties, and (3) whether immunity bars the breach-of-contract claim against SARA. Citing local governmental entities’ authority to enter into contracts and waive immunity to suit under Chapter 271 of the Local Government Code, the Court reasoned that Chapter 271 authorized SARA to agree to arbitrate disputes arising from its construction contract with Austin Bridge.

Because SARA properly entered into a contract under Chapter 271 that contained an enforceable arbitration provision, it waived its immunity to suit and could not later assert that it did not have the power to bind itself to resolving a dispute under the contract through arbitration. However, the Court emphasized that a court must decide a local government’s immunity from suit and liability, notwithstanding a contractual agreement to the contrary. Therefore, SARA could not agree to permit an arbitrator to decide questions of governmental immunity. Governmental entities should therefore be aware when contracting under Chapter 271 with third parties that the entity may be bound by an arbitration provision should there be a dispute under the contract.

Air and Waste Cases

States and Interest Groups Challenge EPA’s COVID-19 Enforcement Discretion Guidance: Natural Resources Defense Council, et al. v. EPA, et al., No. 1:20-cv-03058-CM (S.D. N.Y, pet. filed Apr. 16, 2020) and New York, et al. v. EPA, et al., No. 1:20-cv-03714 (S.D. N.Y., pet. Filed May 13, 2020.

In the April 2020 edition of The Lone Star Current, we reported on both the TCEQ and EPA COVID-19 enforcement discretion guidance, which allows regulated entities to seek enforcement discretion from the respective agencies for non-compliance issues caused by COVID-19. EPA released its guidance document on March 26, 2020 and recently, 15 public interest groups and nine states (New York, California, Illinois, Maryland, Michigan, Minnesota, Oregon, Vermont, and Virginia) have filed lawsuits against the agency, all claiming that the guidance promotes non-compliance. The lawsuits also demand that the EPA immediately release all enforcement discretion requests to the public.

The EPA recently responded to the lawsuit brought by the collective public interest groups, which is currently styled as Natural Resources Defense Council, et al. v. EPA, et al. and pending in the U.S. District Court for the Southern District of New York. In its response, the EPA argues that the plaintiffs do not challenge the actual enforcement discretion policy, but have instead wrongly demanded that the agency undertake a multi-state rulemaking imposing an enforceable requirement that all regulated entities unable to comply with EPA’s monitoring and reporting requirements because of COVID-19 file a public justification for their reasons. The EPA points out in its response that such a disclosure is not required by any existing statute or regulation. The EPA also responded to the plaintiffs’ allegations that the enforcement discretion policy encourages non-compliance and emphasized that the agency is afforded deference in determining its own priorities, especially those related to enforcement discretion. The EPA must also defend against the states’ lawsuit, which is also currently pending in the same court, but styled New York, et al. v. EPA, et al.

The EPA has not published a list of entities requesting enforcement discretion under the new policy at this time. Under the TCEQ’s similar enforcement discretion guidance, TCEQ recently published a spreadsheet showing the status of requests received by TCEQ for enforcement discretion, but does not list the requesting entity.

U.S. Supreme Court Holds Parties Cannot Use State Law to Expand EPA Superfund Remedies: Atlantic Richfield Co. v. Christian, No. 17-1498 (U.S. 2020).

In a recent U.S. Supreme Court case involving cleanup liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), Atlantic Richfield Co. v. Christian, the Court held that: (1) CERCLA “does not deprive state courts of jurisdiction over state-law claims related to Superfund sites,” and (2) property owners who are potentially responsible parties under CERCLA must obtain EPA permission “before undertaking remedial activities that diverge from the remedy selected for the site by EPA.”

The Supreme Court clarified several existing CERCLA issues in its Opinion. First, without EPA’s approval, a Potentially Responsible Party (“PRP”) cannot use state law to force another PRP to conduct remediation beyond what EPA has selected as an appropriate remedy. Second, CERCLA does not bar an impacted party from bringing suit for damages under state law, so long as that party does not also seek damages for remedial actions beyond what EPA has directed. Third, a party’s PRP status and its ultimate CERCLA liability are two distinct concepts, and “even where a party may not be required to share in the costs of remediation, its status as a PRP has implications.” Fourth, the term “facility” under CERCLA should be interpreted broadly and may extend beyond property lines to wherever contamination is located.

Fifth Circuit Court Stays Lawsuit Regarding Texas’ State Implementation Plan: Sierra Club, et al. v. EPA, et al., No. 20-60303 (5th Cir., pet. filed Apr. 16, 2020).

The U.S. Court of Appeals for the Fifth Circuit recently stayed a lawsuit, Sierra Club v. EPA, pursued by environmental groups concerning the EPA’s decision to approve revisions to Texas’ State Implementation Plan (“SIP”) with respect to ozone standards. The stay allows the D.C. Circuit Court to decide whether it is the proper venue over the Fifth Circuit for this suit, as a similar lawsuit was filed in the D.C. Circuit Court, as well. The petitioners (Sierra Club) brought suit in both court systems, but argued that venue belongs in the D.C. Circuit Court because the EPA decision at issue concerns federal air standards. EPA and the State of Texas argue the lawsuit is only of regional significance because the suit pertains to EPA actions on plans for Houston and Dallas specifically, and therefore the case belongs in the Fifth Circuit.

On April 6, 2020, the EPA approved the Texas SIP revisions, determining Houston and Dallas had sufficiently demonstrated that they met the resignation criteria for ozone NAAQS. The approval went into effect May 6, 2020.

Utilities Cases

Supreme Court to Review ERCOT’s Immunity from Lawsuits. The Texas Supreme Court has granted the review of a lower court’s ruling that the Electric Reliability Council of Texas (ERCOT)—the state’s power grid manager—is entitled to sovereign immunity. Sovereign immunity is the legal principle that protects governments and agencies from lawsuits.

The test of ERCOT’s sovereign immunity is led by an electricity generator, Panda Power. The Dallas company sued ERCOT four years ago, alleging that ERCOT manipulated the state’s power needs to encourage new power plant construction and to relieve the political pressure building in Texas at that time. Following ERCOT’s projections that Texas desperately needed more generation, Panda invested $2.2 billion to build three power plants, including one in Sherman and two in Temple. Panda argues that ERCOT reinforced its message in press releases and presentations, which Panda asserts were used by rating agencies to provide favorable bond ratings for power companies taking on debt to build generation facilities. The Public Utility Commission even thanked Panda Power in 2012 for helping to relieve pressure on the Texas grid.

However, by the next year, Texas had more than enough capacity, with new generation coming online, including wind projects. The capacity being more adequate than ERCOT projected resulted in lower power prices than Panda expected.

Panda sued ERCOT in 2016, alleging fraud, negligent misrepresentation and breach of fiduciary duty, seeking $2.7 billion in damages. Panda argues that ERCOT did not correct errors in its generation forecast because it wanted to encourage the construction of power plants.

ERCOT halted the case three years ago when it filed an emergency petition with the appeals court in Dallas asserting that it was protected from lawsuits by sovereign immunity. Elec. Reliability Council of Tex., Inc. v. Panda Power Generation Infrastructure Fund, LLC, 552 S.W.3d 297 (Tex. App.—Dallas 2018, pet. granted). The appeals court sided with ERCOT. ERCOT argues that it needs immunity from lawsuits because it is funded by fees paid by the power industry. Therefore, a verdict ordering ERCOT to pay damages would result in spreading the costs among providers, which ultimately will be passed on to customers in the form of higher electricity prices.

The Supreme Court has not yet set a date for a hearing, but we will provide updates as this case progresses.

“In the Courts” is prepared by Cole Ruiz, an Associate in the Districts and Water Practice Groups; Lindsay Killeen, an Associate in the Litigation Practice Group; Samuel Ballard, an Associate in the Air and Waste Practice Group; and Patrick Dinnin, an Associate in the Energy and Utility Practice Group. If you would like additional information, please contact Cole at 512.322.5887 or cruiz@lglawfirm.com, Lindsay at 512.322.5891 or lkilleen@lglawfirm.com, Sam at 512.322.5825 or sballard@lglawfirm.com or Patrick at 512.322.5848 or pdinnin@lglawfirm.com.