East Houston Estate Apartments, LLC v. City of Houston – Case Brief Summary (Texas)

In East Houston Estate Apartments, LLC v. City of Houston, 294 S.W.3d 723 (Tex. App.--Houston 1st Dist. 2009, no pet.), East Houston Apartments entered into a loan agreement with the City of Houston so that East Houston Apartments could rehabilitate a 130-unit apartment complex. Id. at 726.

Funding for the City's loan to East Houston Apartments was provided to the City pursuant to a HOME Investment Partnership Agreement ("HOME Agreement") between the City and the United States of America, acting by and through its Department of Housing and Urban Development, for federal funding of a HOME Investment Partnerships Program under the National Affordable Houston Act of 1990, as amended ("HOME Program"). Id.

East Houston Apartments sued the City for breach of contract, alleging that the City had wrongfully failed to release to it all of the funds allocated by the loan agreements. Id. at 728.

In response to the lawsuit, the City filed a plea to the jurisdiction based on governmental immunity. Id.

On appeal, the First Court of Appeals considered whether the loan agreement constituted a contract that would waive governmental immunity under Tex. Loc. Gov't Code section 271.152. Id. at 734.

East Houston Apartments argued that it provided to the City the service of rehabilitating the apartment complex, and because the terms of the loan agreement restricted the amount of rent it could charge for a portion of its units for a period of years, it also provided low-income housing for City residents. Id.

The First Court of Appeals rejected this argument, concluding that these services were not the type of service "envisioned by section 271.152." Id. at 736.

According to the court, while it was clear that the "City would benefit in a general way from having East Houston's apartment units refurbished and from the availability of more housing for low-income families, nothing in the contract obligated East Houston to provide any municipal service directly to the City." Id.

"The central purpose of the agreement between the City and East Houston was to facilitate a loan of money from the City's portion of federal funds and from private funds to a private entity for the purpose of renovating East Houston's empty apartment building." Id.

"The City was thus a conduit of federal funds and a facilitator of the project, but no services were provided directly to the City." Id.

The First Court of Appeals further reasoned that the plain meaning of section 271.152 supported its conclusion that section 271.152 did not apply to contracts "in which the benefit that the City would receive is an indirect, attenuated one." Id.

The court explained that section 271.152 "is clearly limited as to which contracts fall under the waiver of immunity from suit." Id. "If every contract that confers some attenuated benefit on a governmental entity constitutes a contract for a 'service,' the limitation of contracts covered by section 271.152 to 'contract for goods or services provided to the entity' loses all meaning." Id.

The court explained that "nothing in the statute nor in its legislative history supports such an interpretation." Id.

The court reasoned that "had the legislature intended to waive immunity from liability for every contract participated in by the State, it could have done so." The court thus concluded that it "must interpret the limitation as having some meaning." Id.

In East Houston Estate Apartments, L.L.C. v. City of Houston, the city entered into a loan agreement with East Houston Estate to assist in the rehabilitation of an apartment complex. 294 S.W.3d at 726.

Funding for East Houston Estate's loan was provided through the federal government. Id. The city agreed to disburse the federal funds to East Houston Estate subject to certain terms and conditions in the loan agreement. Id. at 726, 735.

After numerous construction delays, East Houston Estate filed for bankruptcy and the property was sold at foreclosure. Id. at 728.

East Houston Estate sued the city claiming the city had breached its contract by failing to release all the funds allotted by the loan agreement. Id. The city filed a plea to the jurisdiction arguing that the loan agreement covered a community development activity, which is statutorily defined as a governmental function, and thus, the city was immune from suit for claims arising from the activity. Id.

East Houston Estate argued that the city's immunity was waived under section 271.152. Id. at 729. East Houston Estate contended that its agreement with the city provided for East Houston Estate to provide the service of rehabilitating the apartment complex and providing low-income housing for city residents in exchange for the city's agreement to release to East Houston Estate all funds allocated by the loan agreement. Id. at 734.

The First Court of Appeals found that section 271.152 did not apply to the loan agreement. Id. at 735-36. The court explained:

"It is clear that, while the City would benefit in a general way from having East Houston's apartment units refurbished and from the availability of more housing for low-income families, nothing in the contract obligated East Houston to provide any municipal service directly to the City. The central purpose of the agreement between the City and East Houston was to facilitate a loan of money from the City's portion of federal funds and from private funds to a private entity for the purpose of renovating East Houston's empty apartment building. The City was thus a conduit of federal funds and a facilitator of the project, but no services were provided directly to the City. This is clearly not the type of "service" envisioned by section 271.152." Id. at 736.

The court concluded that any benefit to the city would be an indirect, attenuated benefit. Id.

The First Court of Appeals further explained the limitations on the word "services" in the statute:

"If every contract that confers some attenuated benefit on a governmental entity constitutes a contract for a "service," the limitation of contracts covered by section 271.152 to "contract for goods or services provided to the entity" loses all meaning. Nothing in the statute or in its legislative history supports such an interpretation. Had the legislature intended to waive immunity from liability for every contract participated in by the State, it could have done so. We must interpret the limitation as having some meaning."

In East Houston Estate, the court found that while the city would benefit in a general way from having an old apartment complex renovated and from the addition of more low-income housing, the benefits did not stem from the type of services envisioned by the statute because they were indirect and attenuated benefits. 294 S.W.3d at 736.