Court Opinion

ID: 4580706
Source: CourtListenerOpinion
Date Created: 2020-10-27 09:13:16.79525+00
Date Added: 2024-06-11T13:44:03.863102
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                     NO. 03-18-00397-CV

 Appellant, Texley Incorporated d/b/a Glamour Girls // Cross-Appellant, Glenn Hegar, in
              his Official Capacity as Texas Comptroller of Public Accounts

                                                v.

Appellee, Glenn Hegar, in his Official Capacity as Texas Comptroller of Public Accounts //
                Cross-Appellee, Texley Incorporated d/b/a Glamour Girls

                FROM THE 250TH DISTRICT COURT OF TRAVIS COUNTY
        NO. D-1-GN-18-001834, THE HONORABLE JAN SOIFER, JUDGE PRESIDING

                                          OPINION

               Taxpayer Texley Incorporated d/b/a Glamour Girls (Texley) challenges the

district court’s order sustaining the Comptroller’s plea to the jurisdiction and dismissing all but

one of Texley’s claims challenging a tax assessment.          On cross-appeal, the Comptroller

challenges an order enjoining its efforts to collect the disputed assessment. Because the district

court did not have the benefit of recent precedent from the Supreme Court of Texas, see

generally EBS Sols., Inc. v. Hegar, 601 S.W.3d 750 (Tex. 2020), we will reverse both orders and

remand the case.

                                        BACKGROUND

               Texley has operated a bar and lounge in the Houston area since 2001. Before the

lounge opened, Texley obtained a municipal permit that would allow Texley to operate the
lounge as a sexually oriented business pursuant to certain local ordinances. That permit allowed

the lounge to provide entertainment featuring nude performers. In May of 2007, for reasons not

relevant here, the City of Houston notified Texley that it would revoke the permit. The City

allegedly informed Texley that it could continue to operate the lounge and provide live

entertainment but said that Texley’s entertainers would have to maintain the coverage provided

by a bikini top and bottom at all times. According to Texley, it has operated the lounge—which

it refers to as a “bikini bar”—in this manner since the revocation of the permit.

               In 2015, the Comptroller levied an assessment of over $1.4 million against Texley

for allegedly operating the lounge as a sexually oriented business from January 1, 2008, through

September 1, 2015. See Tex. Bus. & Com. Code § 102.052(a) (“A fee is imposed on a sexually

oriented business in an amount equal to $5 for each entry by each customer admitted to

the business.”).   The Comptroller subsequently reduced the assessment to approximately

$1.15 million. Texley denied it had operated a sexually oriented business during the period at

issue but began paying the tax under protest. Texley eventually stopped making payments,

averring that it was unable to do so.

               Texley’s protest was ultimately transferred to an administrative law judge (ALJ)

at the State Office of Administrative Hearings (SOAH). Over the course of the contested-case

hearing, Texley complained of certain discovery irregularities on the Comptroller’s part and

objected to the admission of much of the Comptroller’s evidence. As relevant here, the ALJ

overruled those objections but assured Texley that he would take Texley’s concerns into account

when evaluating “the weight of the evidence.” After reviewing the competing arguments and the

evidence, the ALJ issued a proposal for decision holding that the Comptroller had satisfied its

burden to show that Texley was operating a sexually oriented business and recommending that

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“the assessment against [Texley] should be upheld in its entirety.” The Comptroller adopted the

proposal with only minor revisions.

               Texley sought judicial review of the Comptroller’s final order under Chapter 112

of the Tax Code. In addition to bringing its claim under Chapter 112 of the Tax Code, Texley:

(1) alleged that the Comptroller had engaged in ultra vires conduct by attempting to collect the

assessment; (2) sought a declaration, under Section 37.003 of the Civil Practice and Remedies

Code (the UDJA), that the Comptroller had no authority to collect the tax; (3) sought a

declaration, under the UDJA, that Section 112.101 of the Tax Code is unconstitutional to the

extent it “precludes Texley from obtaining judicial review of tax liability”; (4) sought a

declaration, under Section 2001.038 of the Government Code, that certain regulations apply to

the Comptroller during a contested-case hearing; and 5) sought an injunction “restraining the

Comptroller from attempting to collect on the assessed fee until there is a decision on the

merits.” Texley did not pay the assessment before bringing suit, see EBS Sols., 601 S.W.3d at

750 (“[T]he taxpayer normally must meet some prepayment prerequisite prior to bringing the tax

suit.” (citing Tex. Tax Code §§ 112.001, .051, .101)), but instead filed an oath of inability to pay

taxes or post bond, see id. (“In section 112.108, the Legislature carved out an exception to the

prepayment prerequisite.” (citing Tex. Tax Code § 112.108)).

               In response to the suit, the Comptroller raised a plea to the jurisdiction,

emphasizing Texley’s failure to make full payment of the amount assessed and arguing that

Texley’s claims, with the exception of its challenge to the constitutionality of Section 112.101,

“are not authorized by statute and, therefore, are barred by sovereign immunity.” The district

court sustained the plea, dismissing “all of [Texley’s] claims for lack of subject-matter

jurisdiction except for its constitutional challenge to Texas Tax Code section 112.101.” In a

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separate order, the district court awarded Texley the requested injunction, prohibiting “the

Comptroller from taking action in furtherance of collecting or enforcing Sexually Oriented

Business Fees, penalties or interest for the assessment period of January 1, 2008 through

September 30, 2015.”      Texley timely appealed from the order sustaining the plea to the

jurisdiction, and the Comptroller timely appealed from the order awarding the injunction.

                                     TEXLEY’S APPEAL

               Texley challenges the district court’s order sustaining the Comptroller’s plea to

the jurisdiction.   “Immunity from suit bars a suit against the State unless the Legislature

expressly consents to the suit.” Texas Nat. Res. Conservation Comm’n v. IT-Davy, 74 S.W.3d 849,

853 (Tex. 2002).     A state agency may assert sovereign immunity “through a plea to the

jurisdiction or other procedural vehicle, such as a motion for summary judgment” or a Rule 91

motion. Alamo Heights Indep. Sch. Dist. v. Clark, 544 S.W.3d 755, 770 (Tex. 2018); City of

Austin v. Liberty Mut. Ins., 431 S.W.3d 817, 822 (Tex. App.—Austin 2014, no pet.). When a

governmental entity challenges jurisdiction on immunity grounds, the plaintiff “must

affirmatively demonstrate the court’s jurisdiction by alleging a valid waiver of immunity.” See

Ryder Integrated Logistics, Inc. v. Fayette County, 453 S.W.3d 922, 927 (Tex. 2015) (per

curiam) (quoting Dallas Area Rapid Transit v. Whitley, 104 S.W.3d 540, 542 (Tex. 2003)). We

review the disposition of a plea to the jurisdiction de novo. City of Houston v. Houston Mun.

Emps. Pension Sys., 549 S.W.3d 566, 575 (Tex. 2018).

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               As the source of the district court’s jurisdiction over its suit for injunction,

Texley’s live petition points to Chapter 112 of the Tax Code.1             With Chapter 112, “the

Legislature has waived the State’s sovereign immunity as to three types of tax challenges—

protests, injunctions, and refunds—conferring exclusive, original jurisdiction on the district

courts of Travis County.” EBS Sols., 601 S.W.3d at 750 (citing Tex. Tax Code §§ 112.001, .051,

.101, .108; In re Nestle USA, Inc., 359 S.W.3d 207, 208–09 (Tex. 2012) (orig. proceeding);

R Commc’ns, Inc. v. Sharp, 875 S.W.2d 314, 318–19 (Tex. 1994)). “For each of these suits, the

taxpayer normally must meet some prepayment prerequisite prior to bringing the tax suit.” Id.

(citing Tex. Tax Code §§ 112.001, .051, .101). “For a protest or refund suit, the taxpayer must

first pay the amount allegedly owed in taxes and fees, accompanied by a statement as to which

type of challenge the taxpayer makes.” Id. (citing Tex. Tax Code §§ 112.051, .151). “For a suit

seeking a statutory injunction, the taxpayer elects to either pay the taxes, fees, and penalties

allegedly owed or file a ‘good and sufficient bond’ equal to twice the amount of taxes, fees, and

penalties allegedly owed.” Id. (quoting Tex. Tax Code § 112.101(a)). These prepayment

requirements are jurisdictional. See id.

               Yet “the Legislature [has] carved out an exception to the prepayment prerequisite,

allowing certain taxpayers to challenge a tax assessment without meeting the prepayment

prerequisite.” Id. (citing Tex. Tax Code § 112.108). This narrow exception is set forth in the

latter part of Section 112.108’s general prohibition on suits for injunctive and declaratory relief:

       1
          The Comptroller argues that Texley’s Chapter 112 claim is not before this Court, but
the order dismissing that claim is before this Court, see Tex. Civ. Prac. & Rem. Code
§ 51.014(8), and we cannot undertake review of the order without reference to the claim, see
Hegar v. Autohaus LP, 514 S.W.3d 897, 906 (Tex. App.—Austin 2017, pet. denied) (explaining
implications of relief available through Chapter 112 of the Tax Code for jurisdiction over claims
brought under UDJA).
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       Except for a restraining order or injunction issued as provided by this subchapter,
       a court may not issue a restraining order, injunction, declaratory judgment, writ of
       mandamus or prohibition, order requiring the payment of taxes or fees into the
       registry or custody of the court, or other similar legal or equitable relief against
       the state or a state agency relating to the applicability, assessment, collection, or
       constitutionality of a tax or fee covered by this subchapter or the amount of the
       tax or fee due, provided, however, that after filing an oath of inability to pay the
       tax, penalties, and interest due, a party may be excused from the requirement of
       prepayment of tax as a prerequisite to appeal if the court, after notice and
       hearing, finds that such prepayment would constitute an unreasonable restraint
       on the party’s right of access to the courts.

Tex. Tax Code § 112.108 (emphasis added). By filing its oath of inability to pay, Texley seeks

to avail itself of this exception to the general rule requiring prepayment.

               The Supreme Court of Texas recently clarified the procedure the district court

must use to evaluate its jurisdiction over a suit for injunction when the taxpayer has not paid the

amount assessed by the Comptroller. See generally EBS Sols., 601 S.W.3d 744. In EBS

Solutions, the taxpayer sought judicial review of a tax assessment under Chapter 112 after

prepaying only part of the assessment. Id. at 747. In response to the taxpayer’s petition for

relief, the Comptroller raised a plea to the jurisdiction, arguing that the taxpayer could not invoke

the district court’s jurisdiction under Chapter 112 without first prepaying the entire assessment.

See id. at 748. The taxpayer filed an oath of inability to pay pursuant to Section 112.108, and the

district court held a hearing and found that full payment would constitute an “unreasonable

restraint” on the taxpayer’s access to the courts. See id. It then overruled the plea to the

jurisdiction. See id. On appeal, this Court agreed with the Comptroller’s interpretation of

Chapter 112 but held that the taxpayer, on remand, could seek injunctive and declaratory relief

through the UDJA. See Hegar v. EBS Sols., Inc., 549 S.W.3d 849, 858 (Tex. App.—Austin

2018, pet. granted), rev’d, 601 S.W.3d 744 (2020).

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               The Supreme Court of Texas, however, rejected both this Court’s holdings and

the Comptroller’s characterization of the district court’s jurisdiction. See 601 S.W.3d at 760–61.

While the high court acknowledged that Chapter 112’s waiver of sovereign immunity “normally”

requires the taxpayer to make payment under protest before bringing suit, see id. at 750, it went

on to hold that the taxpayer had invoked jurisdiction over its challenge by availing itself

of Section 112.108’s exception to the general prepayment requirement, see id. at 761. The

Court explained:

       Under section 112.108, a taxpayer is excused from the prepayment prerequisites
       otherwise required to waive the State’s sovereign immunity only if: (1) the
       taxpayer files an oath of inability to pay the tax, penalties, and interest due; (2) a
       hearing is set and notice provided; (3) the trial court conducts a hearing; and
       (4) the trial court finds that “prepayment would constitute an unreasonable
       restraint on the party’s right of access to the courts.”
Id. at 760–61 (quoting Tex. Tax Code § 112.108).           Finding these criteria satisfied in the

taxpayer’s case, the Supreme Court rejected the Comptroller’s jurisdictional arguments and the

taxpayer’s as-applied challenge to the constitutionality of Section 112.108’s restriction on suits

for injunctive and declaratory relief. See id. at 760.

               In this case, as in EBS Solutions, the taxpayer sought judicial review of an

assessment under Chapter 112 without first paying the entire amount assessed. Also like in EBS

Solutions, the taxpayer filed an oath of inability to pay. But in absence of the high court’s

guidance in EBS Solutions, which had not yet been decided, the district court did not hold a

hearing on the alleged ability to pay or determine whether “prepayment would constitute an

unreasonable restraint on [Texley’s] right of access to the courts.” See id. Those procedures are

mandatory once a taxpayer files an oath of inability to pay. See id. at 762 (“The oath simply

leads to the next steps in the process.”). This Court has no power to hold such a hearing or make
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such a finding. See Texas Nat’l Bank v. Karnes, 717 S.W.2d 901, 903 (Tex. 1986). As such,

both parties have acknowledged that remand for the hearing and determination is appropriate

here.2 Accordingly, because the district court did not follow the procedures the Supreme Court

requires in cases like these, we will reverse the district court’s order sustaining the plea to the

jurisdiction and remand the case for readjudication of that plea following a hearing on Texley’s

alleged inability to pay the disputed tax assessment. See White v. Davis, 475 S.W.3d 783 (Tex.

2015) (remanding for reconsideration under intervening precedent); North Am. Consultants, Inc.

v. MacLennan, No. 13-00-289-CV, 2000 WL 34410008, at *4 (Tex. App.—Corpus Christi

Dec. 7, 2000, no pet.) (remanding for “compliance with” procedures set forth in intervening

precedent); First Bank v. Shiflett, 843 S.W.2d 610, 618 & n.1 (Tex. App.—Houston [14th Dist.]

1992, writ denied) (gathering authority and explaining that correct disposition in such cases is

reversal and remand, not vacation and remand).

                         THE COMPTROLLER’S CROSS-APPEAL

               The Comptroller challenges the district court’s order enjoining its collection

efforts. A temporary injunction is an extraordinary remedy designed to preserve the status quo

of the subject of litigation pending trial on the merits. Butnaru v. Ford Motor Co., 84 S.W.3d 198,

204 (Tex. 2002); Walling v. Metcalfe, 863 S.W.2d 56, 57 (Tex. 1993). Although the party

seeking an injunction is not required to establish it will prevail at trial, it must establish: (1) a

       2
          Texley urges this Court to decide the question of ability to pay as a matter of law, but
we decline to do so. In addition to clarifying the procedure required to evaluate a challenge to an
assessment where the taxpayer has filed an oath of inability to pay, the high court’s analysis in
EBS Solutions also bears on the viability of Texley’s UDJA claim and its constitutional
challenge. The district court should have the first opportunity to consider those implications for
this case. See Mansions in the Forest, L.P. v. Montgomery County, 365 S.W.3d 314, 317 (Tex.
2012) (“[J]udicial decision-making is more accurate when trial courts have the first opportunity
to consider and rule on error.”).
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cause of action against the defendant; (2) a probable right to the relief sought; and (3) a probable,

imminent, and irreparable injury in the interim if the injunction is not granted.          Butnaru,
84 S.W.3d at 204; Walling, 863 S.W.2d at 58. We review an order granting a temporary

injunction for clear abuse of discretion. Walling, 863 S.W.2d at 58. A court abuses its discretion

when it acts without regard for governing legal principles. Downer v. Aquamarine Operators,

Inc., 701 S.W.2d 238, 241–42 (Tex. 1985).

               In this case, the district court granted injunctive relief based on Texley’s

constitutional challenge to Section 112.101 of the Tax Code. That section provides:

       (a) An action for a restraining order or injunction that prohibits the assessment or
       collection of a tax or fee imposed by this title or collected by the comptroller
       under any law, including a local tax collected by the comptroller, or a statutory
       penalty assessed for the failure to pay the tax or fee may not be brought against
       the public official charged with the duty of collecting the tax or fee or a
       representative of the public official unless the applicant for the order or injunction
       has first:

               (1) filed with the attorney general not later than the fifth day before the
               date the action is filed a statement of the grounds on which the order or
               injunction is sought; and

               (2) either:

                       (A) paid to the public official who collects the tax or fee all taxes,
                       fees, and penalties then due by the applicant to the state; or

                       (B) filed with the public official who collects the tax or fee a good
                       and sufficient bond to guarantee the payment of the taxes, fees, and
                       penalties in an amount equal to twice the amount of the taxes, fees,
                       and penalties then due and that may reasonably be expected to
                       become due during the period the order or injunction is in effect.

       (b) The amount and terms of the bond and the sureties on the bond authorized by
       Subsection (a)(2)(B) must be approved by and acceptable to the judge of the court
       granting the order or injunction and the attorney general.

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       (c) The application for the restraining order or injunction must state under the
       oath of the applicant or the agent or attorney of the applicant that:

               (1) the statement required by Subsection (a)(1) has been filed as provided
               by that subsection; and

               (2) the payment of taxes, fees, and penalties has been made as provided
               by Subsection (a)(2)(A) or a bond has been approved and filed as provided
               by Subsection (a)(2)(B) and Subsection (b).

       (d) The public official shall deliver a payment or bond required by Subsection
       (a)(2) to the comptroller. The comptroller shall deposit a payment made under
       Subsection (a)(2)(A) to the credit of each fund to which the tax, fee, or penalty is
       allocated by law. A payment made under Subsection (a)(2)(A) bears pro rata
       interest. The pro rata interest is the amount of interest that would be due if the
       amount had been placed into the suspense account of the comptroller.

Tex. Tax Code § 112.101.           Texley asked the district court to declare this section

“unconstitutional to the extent [it] represent[s] an unconstitutional bar to TEXLEY’s right

to access judicial redress, unconstitutional bar to access to the courts, precludes TEXLEY

from obtaining judicial review of tax liability by means of a declaratory action, violates the

open-courts provision and imposes unreasonable financial barrier to court access.”

               Based on its own arguments and the governing legal authority, Texley cannot

establish a probable right to the declaration sought. The open-courts clause provides, “All courts

shall be open, and every person for an injury done him, in his lands, goods, person or reputation,

shall have remedy by due course of law.” See Tex. Const. art. I, § 13. The Supreme Court of

Texas has explained that this clause prohibits, as relevant here, “unreasonable financial barriers”

to judicial review. Central Appraisal Dist. v. Lall, 924 S.W.2d 686, 692 (Tex. 1996). Texley

has filed an oath of inability to pay as outlined in Section 112.108 of the Tax Code, seeking to

avail itself of the prepayment exception discussed in EBS Solutions and thereby obtain judicial

review of the disputed assessment without first paying that assessment or posting bond. See EBS

                                                10
Sols., 601 S.W.3d at 760–61. If it prevails with these arguments, the district court will have no

choice but to afford Texley the judicial review it seeks without requiring prepayment, see id.,

thereby eliminating the complained-of “bar” to “judicial redress.” If Texley does not prevail

with those arguments, it will be because the district court found that the statutory obligation to

pay the assessment—while undeniably presenting a financial predicate to judicial review—does

not “constitute an unreasonable restraint on [Texley’s] right of access to the courts,” see Tex.

Tax Code § 112.108 (emphasis added) (requiring such determination). Such a finding would

preclude Texley’s as-applied constitutional challenge as a matter of law.         See EBS Sols.,
601 S.W.3d at 754 (noting that open-courts provision prohibits only “unreasonable” financial

barriers to access to courts). Thus, because Texley cannot establish a probable right to the relief

sought through its constitutional challenge to Section 112.101 of the Tax Code, it is not entitled

to a temporary injunction pending the adjudication of that claim.3 We therefore reverse the order

awarding the injunction.

                                        CONCLUSION

               We reverse the order sustaining the plea and the order enjoining the Comptroller’s

collection efforts. We remand for further proceedings consistent with this opinion and the

Supreme Court’s holdings and reasoning in EBS Solutions, 601 S.W.3d 744.

       3
          We express no opinion as to whether, on remand, Texley can establish a right to an
injunction based on any of its other claims.
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                                            __________________________________________
                                            Edward Smith, Justice

Before Justices Goodwin, Baker, and Smith

Reversed and Remanded

Filed: October 23, 2020

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