Court Opinion

ID: 9353899
Source: CourtListenerOpinion
Date Created: 2023-01-13 01:00:23.178676+00
Date Added: 2024-06-11T17:09:33.581672
License: Public Domain

Case: 21-40662     Document: 00516608761         Page: 1   Date Filed: 01/12/2023

           United States Court of Appeals
                for the Fifth Circuit                                 United States Court of Appeals
                                                                               Fifth Circuit

                                                                             FILED
                                                                      January 12, 2023
                                  No. 21-40662
                                                                        Lyle W. Cayce
                                                                             Clerk
   The Hanover Insurance Company,

                                                           Plaintiff—Appellee,

                                      versus

   Binnacle Development, L.L.C., formerly known as
   Binnacle Development and Construction, L.L.C.; Lone
   Trail Development, L.L.C.; SSLT, L.L.C.,

                                                      Defendants—Appellants.

                  Appeal from the United States District Court
                      for the Southern District of Texas
                            USDC No. 3:19-CV-111

   Before Higginbotham, Southwick, and Higginson, Circuit
   Judges.
   Leslie H. Southwick, Circuit Judge:
         An insurer sued three developers for reimbursement of expenses. The
   developers seek to reduce their obligation through a damages clause they say
   is permissible for “district contracts” under the Texas Water Code. The
   relevant contracts, though, were not executed by a district. Summary
   judgment for the insurer is AFFIRMED.
Case: 21-40662         Document: 00516608761               Page: 2      Date Filed: 01/12/2023

                                          No. 21-40662

               FACTUAL AND PROCEDURAL BACKGROUND
           This dispute involves three construction projects (the “Projects”) in
   Galveston County, Texas. Hanover Ins. Co. v. Binnacle Dev., LLC, 493 F.
   Supp. 3d 585, 587 (S.D. Tex. 2020).                       The defendants, Binnacle
   Development, Lone Trail Development, and SSLT, are land developers. Id.
   All three are controlled by Jerry LeBlanc, Jr.
           Each developer contracted with R. Hassell Properties, Inc. to
   complete paving and infrastructure projects in Galveston County Municipal
   Utility District (“MUD”) No. 31.1 Id. The three Hassell contracts were
   form MUD contracts created by MUD attorneys. Each contract stated that
   it was “for Galveston County Municipal Utility District No. 31.”
           Hassell won the contracts after a public bidding process mandated by
   statute. See TEXAS WATER CODE § 49.273(d). Hassell submitted bids to the
   Galveston County MUD and was ultimately awarded the contracts. Though
   the Galveston County MUD managed the public bidding process and

           1
             A MUD is a form of water district authorized by the Texas Constitution. Save
   Our Springs All., Inc. v. Lazy Nine Mun. Util. Dist. ex rel. Bd. of Dirs., 198 S.W.3d 300, 308
   (Tex. App. — Texarkana 2006). They are created either “by the Texas Commission on
   Environmental Quality (TCEQ) or by a specific act of the Texas Legislature.” Id. The
   purpose of a MUD is “to provide services such as water, sewer, and drainage to areas where
   those services do not exist.” David Bumgardner & Keyavash Hemyari, Dodging Mud
   Slingers: An Analysis and Defense of Texas Municipal Utility Districts, 21 TEX. REV. L. & POL.
   377, 388–89 (2017). “MUDs are reimbursement vehicles.” Id. at 390. Typically, a
   developer pays for infrastructure up front and assumes all the risk until homes are
   constructed on a development. Id. Once the developer has completed construction, the
   MUD sells municipal bonds and uses the proceeds to purchase the infrastructure from the
   developer. Id. The MUD then levees a tax on the homeowners residing in the district to
   service the bonds. Id.

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   planned to purchase the infrastructure after completion, it was not a party to
   any of the Hassell contracts.
          At Hassell’s request, Hanover “issued payment and performance
   bonds as a surety in favor of the [developers] for” the Projects. Hanover Ins.
   Co., 493 F. Supp. 3d at 587. As part of the surety arrangement, Hanover and
   Hassell entered into an indemnity agreement. Id. Under that agreement,
   Hanover would be assigned the contract balances for the Projects in the event
   that Hassell defaulted. Id.
          Hassell ultimately failed to complete construction on the Projects and
   defaulted. Id. Hanover then took over the contracts and completed the
   Projects after the contract deadlines.
          Hanover subsequently sued the developers in federal court to recover
   the contract balances on the Projects. The parties agreed that — absent any
   offsets, described below — Hanover was entitled to approximately $575,000
   for the Projects. The developers, however, raised an affirmative defense
   seeking an offset based on a liquidated-damages provision in each contract
   charging $2,500 for each day completion was delayed. It is a fairly detailed
   provision, with standard language about time being of the essence, and both
   parties agree the measure of harm would be difficult to determine. The
   money language is this:
          5. LIQUIDATED DAMAGES FOR DELAY/ECONOMIC
          DISINCENTIVE . . . Therefore, the Contractor and the
          Owner agree that for each and every calendar day the Work or
          any portion thereof shall remain uncompleted after the
          expiration of the time limit(s) set in the Contract, or as
          extended under [other contract provisions] . . . Contractor shall
          be liable to Owner for liquidated damages in the amount of
          $2,500 for each such calendar day, which sum the parties agree
          is a reasonable forecast of the damages the Owner will sustain
          per day that the Work remains uncompleted and in no way

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          constitutes a penalty. Said $2,500 per day shall also be
          considered an “economic disincentive for late completion of
          the Work” pursuant to Section 49.271(e), Texas Water Code.
          Section 49.271 of the Water Code authorizes “economic disincentives
   for late completion of [] work” to be imposed in a “district contract.” TEX.
   WATER CODE § 49.271(e). The liquidated-damages clause here would, if
   enforced, amount to an offset of $900,000. Hanover Ins. Co., 493 F. Supp.
   3d at 588.
          Both parties moved for summary judgment. Id. The district court
   addressed two issues: “(1) Whether the Texas Water Code applies to the
   parties’ contracts, and (2) if not, whether the liquidated-damages clauses
   constitute unenforceable penalties under Texas common law.” Id. at 588–89.
   On the first issue, the court analyzed the Texas Water Code. Id. at 589–90.
   It concluded that because no district is a party to the contracts at issue, the
   economic disincentive provision from the Water Code does not apply. Id. at
   590. On the second issue, the court found that the damages clauses in the
   contracts constitute an unenforceable penalty. Id. at 592. The court granted
   summary judgment for Hanover. Id. The developers appealed.
                                 DISCUSSION
          Summary judgment is proper when “there is no genuine dispute as to
   any material fact.” FED. R. CIV. P. 56(a). We review its grant de novo.
   Nationwide Mut. Ins. Co. v. Baptist, 762 F.3d 447, 449 (5th Cir. 2014).
          “In Texas, the construction of a contract presents a question of law.”
   Balfour Beatty Constr., L.L.C. v. Liberty Mut. Fire Ins. Co., 968 F.3d 504, 509
   (5th Cir. 2020). This court “review[s] de novo questions involving the
   construction or interpretation of contracts.” L & A Contracting Co. v.
   Southern Concrete Servs., Inc., 17 F.3d 106, 109 (5th Cir. 1994). Similarly,

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   “[t]he construction of a statute is a question of law which the Court reviews
   de novo.” Grigg v. C.I.R., 979 F.2d 383, 384 (5th Cir. 1992).
          The developers make two arguments here. The first is that the
   Hassell contracts are district contracts, with their liquidated-damages
   provisions validated by the Water Code’s authorization of economic
   disincentives in contracts. The second is that even if the provisions are not
   protected by the Water Code, the liquidated-damages provisions are
   enforceable because they are not a penalty.
          I.     District contracts
          We first consider whether Chapter 49 of the Water Code applies to
   the Hassell contracts. Even if it does, the second issue is whether the Water
   Code authorizes the terms of the liquidated-damages provision.             We
   conclude the Water Code does not apply and end our analysis there.
          Chapter 49 of the Water Code is titled “Provisions Applicable to All
   Districts” and applies to “all general and special law districts.” TEX. WATER
   CODE § 49.002(a). The relevant statute here, Section 49.271, provides:
          (a) Any contract made by the board for construction work shall
          conform to the provisions of this chapter.
          ...
          (e) A district contract for construction work may include
          economic incentives for early completion of the work or
          economic disincentives for late completion of the work.
   The “board” refers to the “governing body of a district.” § 49.001(a)(3). It
   appears that no Texas appellate court has construed Section 49.271.
          Hanover sees this as a straightforward case. Section 49.271 begins by
   noting its limited applicability: “Any contract made by the board for
   construction work shall conform to the provisions of this chapter.”
   (emphasis added). The plain language of Section 49.271, Hanover argues,

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   forecloses its application to contracts between two private parties. Hanover
   contends that legislative history reiterates this conclusion. That history
   demonstrates that Section 49.271 “authorize[s] districts to include economic
   incentives for early completion of construction contracts.” H. Research Org.
   Bill Analysis, Tex. H.B. 1541, 78th Reg. Sess., at 4 (2003) (emphasis added).
          “[I]f   a statute is   unambiguous,”      courts    must   “adopt     the
   interpretation supported by its plain language unless such an interpretation
   would lead to absurd results.” TGS-NOPEC Geophysical Co. v. Combs, 340
   S.W.3d 432, 439 (Tex. 2011). The text of Section 49.271 certainly supports
   that the “economic disincentives” language is relevant only to a contract
   “made by the board” of a district. TEX. WATER CODE § 49.271(a), (e). The
   developers seek to overcome that seemingly natural reading with several
   arguments. We address each of them.
          First, the developers argue that because Section 49.271 is not, like
   some other sections, limited “only to a district,” it does not require a district
   to be a contracting party. We disagree with the premise, as Section 49.271(a)
   limits its applicability to contracts “made by the board,” and boards govern
   districts. Still, we examine the developers’ examples. We find the cited
   sections to limit their applicability to specific types of districts. One example
   is a section which “applies only to a district that is located wholly within the
   boundaries of a municipality with a population of more than 1.5 million.”
   Section 49.052(h).     Other sections contain similar qualifications, often
   according to a district’s location or population.
          Though some sections in Chapter 49 are limited only to certain types
   of districts, that does not support that Section 49.271, which lacks identical
   language, should apply regardless of whether a district is involved. In fact,
   we find the opposite conclusion more reasonable. Chapter 49 is titled
   “Provisions Applicable to All Districts.” The structure of Chapter 49

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   suggests that the chapter, as a whole, applies only to districts unless a section
   narrows its application to certain types of districts.
          Next, the developers argue that Section 49.278 of Chapter 49, which
   is entitled “Nonapplicability,” does not limit Section 49.271’s application
   only to districts. Such limiting language is not there, but it is elsewhere in the
   chapter. Because Section 49.271 already limits its application to contracts
   “made by the board” of a district, further exclusion would be redundant.
          Third, the developers argue that Chapter 2253 of the Texas
   Government Code provides that district contracts need not include a district
   as a contracting party. Chapter 2253 governs performance and payment
   bonds on public works projects. See TEXAS GOV’T CODE § 2253.001. It is
   incorporated into the Water Code through Section 49.275, which states that
   “[a]ny person, firm, partnership, or corporation to whom a contract is let
   must give good and sufficient performance and payment bonds in accordance
   with Chapter 2253, Government Code.” Here, the surety bonds stated they
   complied with Chapter 2253 of the Texas Government Code.2
          The developers argue Chapter 2253 contemplates that a “public
   works contract” can include a contract between a prime contractor and a
   subcontractor, which are two private parties. Thus, the developers reason,
   Chapter 49’s incorporation of Chapter 2253 indicates the former also applies
   to a contract between two private parties.
          Whether Chapter 2253 even applies is unclear due to the absence of
   any public entity in the Hassell contracts. The section of Chapter 2253 that
   prescribes bonding requirements applies only when a “governmental entity []
   makes a public work contract with a prime contractor.” TEXAS GOV’T CODE

          2
            Hanover contends that Chapter 2253 was erroneously mentioned on the bonds
   because form bonds were used. We have no need to decide if that is so.

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   § 2253.021(a) (emphasis added). Furthermore, even were Chapter 2253 to
   apply, we do not find it inconsistent to conclude that Section 49.271 applies
   only to contracts “made by the board” of a district. See TEX. WATER CODE
   § 49.271(a). We conclude that Chapter 2253’s incorporation into the Water
   Code does not convert the contracts here into “district contracts.”
           Fourth, the developers argue that the definition of “district facility”
   under the Water Code favors a broad reading of “district contract.”
   “District facility” is defined, in part, as “any plant [or] equipment . . .
   supplied for . . . the business or operations of a district.” TEX. WATER CODE
   § 49.001(a)(10). The developers assert that this definition means that any
   contract that results in construction “for . . . the operations of a district” can
   be a district contract, regardless of whether a district is a signatory party.
           The developers are correct that the Hassell contracts were “for
   Galveston County Municipal Utility District No. 31.”                       Further, the
   Galveston County MUD planned to purchase the infrastructure upon
   completion. There is, though, no need to explore other sections of the Water
   Code when the relevant section here prescribes its own scope. As we stated
   earlier, Section 49.271(a) states that it applies to contracts “made by the
   board” of a district. The “district facility” definition does not alter that
   requirement.3
           Finally, the developers argue, in the alternative, that even if the
   Hassell contracts are not district contracts, they incorporate the economic
   disincentive provision of Section 49.271. The developers assert that there is
   nothing in Chapter 49 of the Water Code that prohibits contractors engaged

           3
             We are mindful that the contracts here were “for” the Galveston County MUD.
   At other times, though, there is direct contracting between a MUD and developer. See,
   e.g., N.P., Inc. v. Turboff, 111 S.W.3d 40, 41 (Tex. 2003); Marhaba Partners Ltd. P’ship v.
   Kindron Holdings, LLC, 457 S.W.3d 208, 210–11 (Tex. App. — Houston [14th Dist.] 2015).

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   in public works to adopt Section 49.271’s right to include an economic
   disincentive clause. The defendants analogize to the Federal Arbitration Act
   (“FAA”), 9 U.S.C. ch. 1, which allows contracting parties to incorporate the
   right to arbitration.
          The comparison to the FAA is imaginative but inapt. The text of
   Section 49.271 limits it to “district contracts.” There is no text to support
   that private parties may rely on, or indeed are protected by, Section 49.271
   where there is no contract executed by the district board. The better analogy
   is based on the fact that the FAA applies to contracts involving foreign and
   interstate commerce. See 9 U.S.C. § 1–2; Hanover Ins. Co., 493 F. Supp. 3d
   at 590. Similarly, as we just noted, Section 49.271 states that it applies to
   “district contract[s].” TEX. WATER CODE § 49.271(e). The developers are
   trying to make the Water Code apply to contracts between private parties
   that one day may be assumed by a district. That expansion of the statute
   ignores its clear wording.
          We hold that Section 49.271 allows “economic disincentive” clauses
   only in contracts where a district is a contracting party. Because no district
   is party to the Hassell contracts, they cannot incorporate “economic
   disincentive” clauses permitted under the Texas Water Code.
          II.     Liquidated damages analysis
          Even though the Water Code is inapplicable, that does not
   automatically invalidate the damages clause here. In Texas, liquidated
   damages cannot “function[] as a penalty” and “must not be punitive,
   neither in design nor operation.” Atrium Med. Ctr., LP v. Houston Red C
   LLC, 595 S.W.3d 188, 192 (Tex. 2020). The developers understandably do
   not try to make that standard apply. Instead, they seek to avoid it altogether
   by contending the damages clause is not a liquidated-damages provision but
   one that limits liability. The damages clause, they say, is meant to “reduce

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   or offset any amount owed, as opposed to being used as an affirmative claim
   to recover liquidated damages.” Therefore, the argument goes, the damages
   clause is not subject to Texas’s liquidated-damages jurisprudence.
          To decide what this provision is, we are guided by the need to “look
   to the substance of the contract’s terms to determine if [a] provision
   constitutes ‘liquidated damages.’” Sunbelt Servs., Inc. v. Grove Temp. Serv.,
   Inc., No. 05-05-01090-CV, 2006 WL 2130144, at *3 (Tex. App. — Dallas
   Aug. 1, 2006).
          The damages clause is entitled “LIQUIDATED DAMAGES FOR
   DELAY/ECONOMIC DISINCENTIVE” and expressly provides for
   “liquidated damages in the amount of $2,500 for each [] calendar day” of
   delay. This provision does not, in substance, set a mere limitation of liability
   or delimit damages to “an agreed maximum.” 24 WILLISTON ON
   CONTRACTS § 65:6 (4th ed.). Rather, the clause provides that Hassell is
   liable for the liquidated damages of $2,500 for every day the Projects are late.
   Looks like a liquidated-damages provision to us.
          Moreover, the damages clause bears little resemblance to recognized
   limitation of liability clauses. In one of our decisions, for example, we found
   a limitation of liability clause where the contract stated that “[i]n no event
   shall the liability of either party . . . exceed $500,000.” Global Octanes Texas,
   L.P. v. BP Expl. & Oil Inc., 154 F.3d 518, 521 (5th Cir. 1998). In another
   opinion, a Texas Court of Appeals concluded that a provision stating
   “liability is and shall be limited to the sum of . . . $350.00” was a limitation
   of liability clause. Arthur’s Garage, Inc. v. Racal-Chubb Sec. Sys., Inc., 997
   S.W.2d 803, 809–10 (Tex. App. — Dallas 1999, no pet.). The damages
   clause here, by contrast, does not set a ceiling on liability but prescribes a per
   diem damages amount. That is a liquidated-damages clause.

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          Because the developers do not contend that the damages clause
   survives a liquidated-damages analysis, we need not consider that possibility.
   See Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994). We do not disturb
   the district court’s finding that the clause is an unenforceable penalty under
   Texas law.
          AFFIRMED.

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