In the Courts

Water Cases

Tex. v. New Mexico, 65, ORIG., 2020 WL 7327826 (U.S. Dec. 14, 2020).

This water dispute between Texas and New Mexico concerns the evaporative losses associated with water stored in New Mexico upon the request of Texas’s Pecos River Commissioner.

The Pecos River originates in the Sangre de Cristo Mountains east of Santa Fe, New Mexico, traversing New Mexico and Texas before converging with the Rio Grande River near Del Rio, Texas. In 1949, Texas and New Mexico entered into, and Congress approved of, the Pecos River Compact, providing for the equitable apportionment of the use of the Pecos River’s water between the two states.

In 1987, after a number of early disputes, the Supreme Court determined that New Mexico had not complied with the Compact when it failed to release sufficient water to Texas, and issued a decree setting forth each state’s rights and duties. The Court also appointed a disinterested River Master to perform annual calculations of New Mexico’s water delivery to ensure it complies with its Compact obligations. In making those calculations, the River Master must abide by the River Master’s Manual, which the Court described as “an integral part” of its Decree. A party may seek the Supreme Court’s review of the River Master’s calculations within 30 days of its final determination.

In 2014, Tropical Storm Odile poured heavy amounts of rain over the Pecos River Basin, filling Texas’s Red Bluff Reservoir. To prevent flooding, Texas’s Pecos River Commissioner requested that New Mexico store Texas’s portion of the flows. New Mexico’s Commissioner agreed, caveating that the water belongs to Texas, and that evaporative losses will be borne by Texas. A federally owned reservoir in New Mexico retained large amounts of flood waters in the Pecos Basin. When the reservoir’s authority to hold the water expired, it began to release the water. Texas could not use the released water, so it also released the water to make room for water flowing from New Mexico.

The River Master’s calculations of New Mexico’s Compact obligations for 2014 and 2015 (the time during which it stored Texas’s water) did not reduce Texas’s rights to delivery based on the evaporated losses. The 30-day review period lapsed, and New Mexico filed no objection. However, in 2018, New Mexico challenged the River Master’s calculations. Rather than dismiss the untimely objection, the River Master modified the Manual, allowing retroactive changes to final reports, and amended the 2015 report to credit New Mexico for the evaporative loss.

The Supreme Court, which has original jurisdiction over river compact disputes, held for New Mexico, citing language in the Compact and Decree, which provides that “If a quantity of the Texas allocation is stored in facilities constructed in New Mexico at the request of Texas, then … this quantity will be reduced by the amount of reservoir losses attributable to its storage…”

Sustainable Tex. Oyster Res. Mgmt., L.L.C. v. Hannah Reef, Inc., 01-18-00088-CV, 2020 WL 7502493 (Tex. App.—Houston [1st Dist.] Dec. 22, 2020, no pet. h.).

The dispute in this case follows the 2014 issuance of a Coastal Surface Lease (the “Lease”) from the Chambers–Liberty Counties Navigation District (“Navigation District”) to Sustainable Texas Oyster Resource Management, L.L.C. (“STORM”). The Lease authorized STORM to cultivate and harvest oysters on certain submerged land in Galveston and Trinity Bays, granted STORM the exclusive right to produce oysters on the submerged land, and authorized STORM to protect the submerged land from trespassers.

However, when the Navigation District issued STORM the Lease, parts of the 23,000 acres covered by the Lease were already subject to six existing oyster-production permits, known as “certificates of location,” and accompanying oyster leases issued by the Texas Parks and Wildlife Department (“TPWD”) to several oystermen (“the Oystermen”). The certificates of location and accompanying leases authorized the Oystermen to plant and construct private oyster beds. TPWD had also issued permits and licenses to the Oystermen authorizing the Oystermen to harvest oysters from naturally-occurring oyster reefs located within public fishing grounds, which also lie within the boundaries of STORM’s lease.

Under the Lease, STORM began to treat the Oystermen as trespassers. Litigation ensued, and the Oystermen filed a motion for partial summary judgment, arguing that the Lease was invalid as a matter of law because the Texas Wildlife Conservation Act gave the TPWD exclusive authority to regulate oyster-production activities in Texas. The trial court granted declaratory relief to the Oystermen, declaring (1) TPWD had the exclusive authority to regulate the cultivation and harvesting of oysters; (2) the Navigation District did not have the legal authority to issue the Lease to STORM; and (3) the Lease was void and unenforceable against the Oystermen. The trial court also declared that the Oystermen were not trespassers as a matter of law and ordered STORM to take nothing on its counterclaims.

On appeal to the Houston Court of Appeals, STORM argued that the trial court erred in its declarations, and asserted that the Oystermen improperly prosecuted their case under the Uniform Declaratory Judgment Act (“UDJA”). The Court, reviewing the issue of declaratory relief de novo, held that the trial court properly determined Lease’s validity under the UDJA, and that such declarations were correct as a matter of law.

Rio Grande City Consol. Indep. Sch. Dist. v. Puentes, 13-19-00033-CV, 2020 WL 6878736 (Tex. App.—Corpus Christi Nov. 24, 2020, no pet. h.).

This case involves a contract dispute over the design and construction of Rio Grande City High School, and turns on whether the “economic loss rule” forecloses the Rio Grande City Consolidated Independent School District’s (“RGCCISD”) negligence claim. The Corpus Christi Court of Appeals employed the decision in Sharyland Water Supply Corporation vs. the City of Alton to decide the question of economic loss.

RGCCISD contracted with Delfino Garza, Jr. d/b/a Design Group International (“DGI”) to design and construct the school facilities. DGI then executed an agreement with Edward Puentes, P.E., David Cash, P.E., and DBR Engineering Consultants, Inc. (“DBR”) for engineering services. RGCCISD was not a party to DGI’s contract with DBR, but sued DBR for, among other things, breach of contract. DBR filed a motion for summary judgment asserting in summary that RGCCISD’s tort claims are barred by the economic loss rule.

Under the economic loss rule, parties are precluded from recovery in tort for economic losses resulting from a party’s failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy.

In Sharyland, Alton and Sharyland entered into a Water Supply Agreement under which Alton conveyed its water system to Sharyland, and in exchange, Sharyland provided potable water to Alton residents and maintained the system. Alton thereafter contracted with a construction company to build a sanitary sewer system.

Sharyland alleged that it suffered significant injury because Alton’s sanitary sewer residential service connections were negligently installed by the construction company in violation of state regulations and industry standards, and sued Alton for breach of contract. The Texas Supreme Court stated in its final ruling, “[c]onstruction defect cases…usually involve parties in a contractual chain who have had the opportunity to allocate risk, unlike the situation faced by Sharyland…The [economic loss rule] cannot apply to parties without…contractual privity, merely because one of those parties had a construction contract with a third party, and when the contracting party causes a loss unrelated to its contract.”

Embracing Sharyland, the Court affirmed the trial court’s judgment.

In re Plains Pipeline, L.P., 08-19-00224-CV, 2020 WL 6375332 (Tex. App.—El Paso Oct. 30, 2020, no pet. h.).

Here, a groundwater exploration company (“Winkler”) sued a petroleum tank farm (“Plains”) seeking declaratory judgment to establish its right to use the surface estate of Plains. Plains holds a lease on a 160-acre surface estate (the “Property”), which gives Plains the right to store, handle, treat, and transport oil, gas, and other minerals, including the right to construct, maintain, and operate oil tanks and pipelines on the premises.

To resolve these differences, Winkler sued Plains seeking a declaratory judgment stating that as owner of the dominant groundwater estate, Winkler is entitled to develop the groundwater estate by making use of the surface of the Property, and that there are no other reasonable and efficient means of producing groundwater off the Property.

Winkler sought by motion a pre-trial inspection of the Property under Texas Rule of Civil Procedure 196.7 (“TRCP 196.7”), which would consist of seven test wells. After a showcase of procedural filings and hearings, the district court found that Winkler’s test wells would cause minimal interference and burden to Plains, and that the information gleaned from the inspection outweighed any burden to Plains. The district court ordered that Winkler be permitted to drill the seven test holes. Plains filed a motion for writ of mandamus arguing that the district court abused its discretion in granting Winkler the right to drill its test wells.

Plains argued that the Texas Water Code gives the surface lessee the exclusive right to possess and use the groundwater beneath the property. Winkler, however, claimed that the groundwater rights had previously been severed from the surface estate and that it holds the groundwater rights by virtue of a groundwater lease it received in 2014 for groundwater under the 160-acre surface estate. Winkler also argued that it has an implied easement in the surface estate that requires Plains to reasonably accommodate its interests.

The El Paso Court of Appeals held that a TRCP 196.7 order by a trial court is not an abuse of discretion if (1) the request is relevant and (2) the discovery sought cannot be obtained from a more convenient, less burdensome, or less expensive source, and (3) if the burden of the proposed inspection does not outweigh its likely benefits.

In a lengthy analysis of the proposed inspection’s relevance, burden, expense, and likely benefit to the ongoing dispute, the Court held that the trial court did not abuse its discretion in granting the drilling of seven test wells.

Litigation Cases

Fifth Circuit vacates district court decision that held Texas Water Code was preempted by Section 1926(b) Federal Law protections.

In 2018, the United States District Court for the Western District of Texas held in Crystal Clear Special Util. Dist. v. Marquez that protections afforded by 7 U.S.C.
§ 1926(b) (protecting federally indebted water associations from municipal expansion) preempted Texas Water Code Section 13.254(a-6) (moved to
§ 13.2541 effective September 1, 2019) thus prohibiting the Public Utility Commission (“PUC”) from taking up petitions to decertify property from the holder of a certificate of convenience and necessity (CCN) that borrowed money under a federal-loan program. 316 F. Supp. 3d 965 (W.D. Tex. 2018).

On appeal, the Fifth Circuit vacated the district court’s Crystal Clear decision based on the Fifth Circuit’s intervening decision in Green Valley Spec. Util. Dist. v. City of Schertz, Tex., 969 F.3d 460 (5th Cir. 2020). In Green Valley, decided August 7, 2020, the Fifth Circuit affirmed the ruling that it lacked jurisdiction to determine the preemption issue raised in that case and did not issue an express opinion. Nonetheless, the court rejected the Crystal Clear holding that Texas Water Code Section 13.254(a-6) is always preempted by Section 1926(b).

Since Crystal Clear, the PUC has refused to release property under the streamlined expedited release process from a federally indebted CCN holder. With Crystal Clear vacated, the PUC is no longer restricted, and has begun to process release petitions again. Crystal Clear has now been remanded back to district court for decision in line with Green Valley—we wil see how the district court proceeds and keep you posted.

Modified contract with City still held to waive Governmental Immunity.

In City of Mason v. Blue Oak Eng’g, LLC, the City and Blue Oak entered into a contract in 2015 for services related to a landfill permit. 04-20-00227-CV, 2020 WL 7365452, at *1 (Tex. App.—San Antonio Dec. 16, 2020, no pet. h.). Two years into the contract, Blue Oak advised the City that it would be unable to obtain the specific landfill permit stated in the contract but would pursue another landfill permit. The original 2015 contract provided for a total estimated compensation due to Blue Oak of $142,130. Blue Oak continued obtaining a landfill permit and the City paid it approximately $300,000. Blue Oak then billed the City for an additional $62,000, which the City refused to pay. Blue Oak sued the City for breach of contract and quantum meruit to recover the unpaid amount.

The City filed a Plea to the Jurisdiction arguing it had not waived immunity to the breach of contract claim pursuant to Section 271.152 of the Texas Local Government Code. The trial court denied the City’s Plea. In order for immunity to be waived under Section 271.152, five elements must be met: 1) the contract must be in writing, (2) state the essential terms of the agreement, (3) provide for goods or services, (4) to the local governmental entity, and (5) be executed on behalf of the local governmental entity. City of Houston v. Williams, 353 S.W.3d 128, 135 (Tex. 2011). In its Plea, the City argued the contract at issue did not meet this test as the “essential terms” of the original contract limit its scope to the particular landfill permit stated for the estimated payment stated in the contract, and therefore the work for which Blue Oak now sought repayment, which involves a different permit type and a payment amount beyond the estimate, cannot fall within the scope of the contract. Both the trial and appellate Courts rejected the City’s argument and held the dispute does not implicate jurisdiction. Entities should be aware that under this ruling even fundamentally modified contracts can still be subject to the waiver of immunity in Section 271.152.

As a matter of first impression SCOTX holds Charter School District entitled to governmental immunity.

In El Paso Educ. Initiative, Inc. v. Amex Properties, LLC, the Texas Supreme Court held for the first time open-enrollment charter schools and their charter-holders have governmental immunity from suit and liability to the same extent as public schools. 602 S.W.3d 521 (Tex. 2020). This case began when a landlord/developer filed suit against a charter school district for anticipatory breach of lease executed by district superintendent for development of new charter school.

Generally, charter schools operate under a contract (the charter) with the Commissioner of Education. Under each charter, an open-enrollment charter school must meet the Commissioner’s “financial, governing, educational, and operational standards.” The Court reasoned that although most charter-holders are private, nonprofit organizations, they nonetheless must adhere to state law and the Commissioner’s regulations governing public schools or risk revocation of its charter or contracts.

These facts, in conjunction with the fact that, like public school districts, open-enrollment charter schools are “largely publicly-funded,” provided the Court’s reasoning that charter schools act as an arm of the State government and are therefore entitled to governmental immunity. The Court further argued that “extending governmental immunity to open-enrollment charter schools also satisfies governmental immunity’s purposes,” stating that “diverting charter school funds to defend lawsuits and pay judgments affects the State’s provision of public education and reallocates taxpayer dollars from the legislature’s designated purpose.”

“In the Courts” is prepared by Cole Ruiz, an Associate in the Firm’s Water Practice Group, and Lindsay Killeen, an Associate in the Firm’s Litigation Practice Group. If you would like additional information, please contact Cole at 512.322.5887 or cruiz@lglawfirm.com, or Lindsay at 512.322.5891 or lkilleen@lglawfirm.com.