Mandamus granted to vacate temporary injunction

In re Church Builders Inc., Richard A. Humphrey, and Randy Beckett
(Tex.App. - Austin, Feb. 21, 2008)(Opinion by Justice Patterson) (temporary injunction successfully challenged by petition for writ of mandamus) (Before Justices Patterson, Puryear and Henson)
Appeal from 428th District Court of Hays County
Disposition: Mandamus granted

ORIGINAL PROCEEDING FROM HAYS COUNTY

M E M O R A N D U M O P I N I O N

Relators Church Builders, Inc. (CBI), Richard A. Humphrey, and Randy Beckett bring a petition for writ of mandamus and a motion for emergency relief challenging a temporary injunction order. The trial court enjoined relators from disposing of any of their assets pending judgment and ordered relators within a few days to produce, and in some cases prepare, thirty-seven categories of documents. For the reasons that follow, we conditionally grant the writ of mandamus and motion for emergency relief and direct the trial court to vacate the temporary injunction.

This original proceeding arises out of a construction contract dispute between real party in interest Kyle United Methodist Church (KUMC) and CBI. Pursuant to a contract with KUMC, CBI agreed to construct a 6,400 square foot building for approximately $594,000. Before CBI completed construction and after KUMC made several payments for a total of $564,312, a dispute arose between the parties, CBI stopped construction, and KUMC made no further payments to CBI. KUMC thereafter brought suit alleging negligence, negligent misrepresentation, breach of contract, fraud, statutory fraud, fraud by nondisclosure, violation of the Texas Property Code, conversion, violation of the Theft Liability Act, violation of the Deceptive Trade Practices Act, and conspiracy. KUMC sought monetary damages and injunctive relief--to "enjoin and restrain [relators] from depositing, withdrawing or transferring any funds from their personal and business operating accounts."

The trial court granted a temporary restraining order on January 22 against relators preventing them from withdrawing funds from two specific accounts and from "any account where proceeds were deposited from the [KUMC] project." The trial court also ordered relators to produce five categories of documents by January 28, and to appear before the court on January 31 to show cause why a temporary injunction should not be issued.

At the temporary injunction hearing on January 31, Beckett, CBI's Chief Financial Officer, was the only relator that was served and present. (1) Beckett provided some of the documents pursuant to the TRO prior to the hearing. He testified concerning the documents that he had provided, payments CBI received and made relating to the construction of KUMC's building, and the status of construction. Beckett testified that he advised Humphrey by telephone of KUMC's suit but that he did not show Humphrey a copy of KUMC's petition. Harold Dailey, the pastor of KUMC, also testified at the hearing concerning the relationship and dispute between the parties and the status of payments and construction. Dailey estimated that the building was approximately fifty percent complete when CBI stopped construction.

At the conclusion of the hearing, the trial court entered a temporary injunction. The trial court enjoined relators, Amy Humphrey, and the Humphrey Family Revocable Trust (2) from withdrawing or spending any funds in their possession until judgment:

IT IS, THEREFORE, ORDERED that Defendants are commanded forthwith to desist and refrain from the following actions until judgment in this cause is rendered by this Court:

a. Withdrawing any funds from the date of this order from the Citizens National Bank of Texas Account No. 040110312;
b. Withdrawing any funds from the date of this order from the JP Morgan Chase Account No. 740595384;
c. Withdrawing any funds from any account where Church Builders, Inc., Church Contractors, Inc., Randy Beckett, Richard Humphrey, Amy D. Humphrey, and/or Humphrey Family Revocable Trust is an owner or signer on the bank account;
d. Transferring, spending or encumbering any funds currently in the possession of Church Builders, Inc., Church Contractors, Inc., Randy Beckett, Richard Humphrey, Amy D. Humphrey, and/or Humphrey Family Revocable Trust; and
e. Transferring, selling or encumbering any real or personal property owned or in the possession of Church Builders, Inc., Church Contractors, Inc., Randy Beckett, Richard Humphrey, Amy D. Humphrey, and/or Humphrey Family Revocable Trust.

The trial court also ordered relators and Amy Humphrey to take certain actions, including to produce, and in some instances to prepare, thirty-seven categories of documents by February 6 and to appear for their depositions within thirty days of the order. (3) Relators thereafter brought this petition for writ of mandamus and motion for emergency relief.

Relators contend that they do not have an adequate remedy by way of appeal and seek emergency relief because the trial court abused its discretion and compliance with the temporary injunction subjects relators to "immediate risk of financial loss." Relators contend that because all of their business and personal bank accounts are frozen, they are enjoined from even buying groceries. They also contend that the order requires extensive discovery production in an impossibly short period of time.

Mandamus is an extraordinary remedy, available only when a trial court clearly abuses its discretion and when there is no adequate remedy on appeal. In re Ford Motor Co., 165 S.W.3d 315, 317 (Tex. 2005); Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992). Because the injunction at issue here has an immediate financial effect on relators and may cause irreparable harm, the situation before us "involv[es] manifest and urgent necessity," and we conclude the relators do not have an adequate remedy on appeal. (4) See Walker, 827 S.W.2d at 840; see also In re Argyll Equities, LLC, 227 S.W.3d 268, 273 (Tex. App.--San Antonio 2007, no pet.) (petition for writ of mandamus conditionally granted vacating writ of attachment that froze assets needed to meet present operating costs). We, therefore, turn to whether the trial court clearly abused its discretion in granting the temporary injunction to entitle relators to mandamus relief.

The purpose of a temporary injunction is to preserve the status quo until a 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, 58 (Tex. 1993). "Status quo is defined as 'the last, actual, peaceable, noncontested status which preceded the pending controversy.'" Universal Health Servs., Inc. v. Thompson, 24 S.W.3d 570, 577 (Tex. App.--Austin 2000, no pet.) (quoting Transport Co. v. Robertson Transports, Inc., 261 S.W.2d 549, 553-54 (1953)). Because the decision whether to grant or deny a request for a temporary injunction is within the trial court's discretion, we must view the evidence in the light most favorable to the trial court's order, indulging every reasonable inference in its favor, and determine whether the order was so arbitrary that it exceeds the bounds of reasonable discretion. Id. at 576.

To obtain a temporary injunction, KUMC was required to plead and prove a cause of action against relators, a probable right to the relief sought, and "a probable, imminent, and irreparable injury in the interim." Butnaru, 84 S.W.3d at 204. Relators' challenge is to the third element. Relators contend that because KUMC can be compensated adequately in damages, and there was no evidence that relators are insolvent, that the trial court abused its discretion by granting injunctive relief pending the trial on the merits.

"An injury is irreparable if the injured party cannot be adequately compensated in damages or if the damages cannot be measured by any certain pecuniary standard." Id.; see also Telephone Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 610-11 (Tex. App.--Houston [1st Dist.] 2002, no pet.) (applicant must show that the defendant is incapable of responding in damages or damages are incapable of calculation to support injunctive relief). KUMC does not contend that its damages are incapable of calculation, and it did not provide evidence that KUMC cannot be adequately compensated in damages. (5) See also LeFaucheur v. Williams, 807 S.W.2d 20, 22-23 (Tex. App.--Austin 1991, no writ) (applicant generally must demonstrate either defendant insolvent or applicant's injury not compensable in money damages to support temporary injunctive relief). KUMC pleaded that relators "in all likelihood" are "financially distressed," but it did not provide proof that relators were incapable of responding in damages, i.e., that they were insolvent. KUMC provided evidence of two disputes between two other churches and Church Contractors, Inc., a separate but related company, but this evidence does not support an inference that CBI, or any of the individual relators, is insolvent and unable to pay a judgment.

We conclude that the trial court clearly abused its discretion by enjoining relators pending judgment and that relators do not have an adequate remedy on appeal. (6) We, therefore, conditionally grant the writ and motion for emergency relief. The writ will issue only if the trial court does not comply with this opinion.
__________________________________________
Jan P. Patterson, Justice
Before Justices Patterson, Puryear and Henson
Filed: February 21, 2008

1. Humphrey, individually and as the registered agent for CBI, was not served at the time of the hearing. KUMC provided an affidavit from a service processor showing several attempts to serve Humphrey, and the court granted a motion for substituted service on Humphrey at the conclusion of the injunction hearing. Service was effected on Humphrey the day after the hearing.
2. Amy Humphrey is employed by CBI and was added as a party by KUMC in a second amended petition that was filed January 31--the day of the hearing. She was not served prior to the hearing, and the record is unclear what her relationship is to relators. Similarly, the record is unclear what the Humphrey Family Revocable Trust's role is in the dispute, and the trust was not added as a party.
3. The trial court granted the injunctive relief requested in KUMC's second amended petition. According to the record, KUMC filed its amended petition on the day of the hearing. KUMC did not provide relators with a copy of the amended petition prior to the hearing, and Beckett, the only relator present, was not aware that KUMC had filed an amended petition seeking greater injunctive relief until the hearing was complete.
4. Because a party may bring an interlocutory appeal from a temporary injunction, there is generally an adequate remedy on appeal, and mandamus is not an available remedy. See Tex. Civ. Prac. & Rem. Code Ann. § 51.014(4) (West Supp. 2007).
5. KUMC did not plead or seek an injunction pursuant to the Uniform Fraudulent Transfer Act. See Tex. Bus. & Com. Code Ann. § 24.008 (West 2002) (injunctive relief available in action under this title against "further disposition by the debtor or transferee, or both, of the asset transferred or of other property"); see also Telephone Equip. Network, Inc., v. TA/Westchase, Ltd., 80 S.W.3d 601, 610 (Tex. App.--Houston [1st Dist.] 2002, no pet.) (temporary injunction under the Uniform Fraudulent Transfer Act prohibiting party from disposing of assets not an improper pre-judgment attachment of assets). Nothing in this opinion prevents KUMC from amending its pleadings and seeking a temporary injunction reasonable in scope on these grounds.
6. Relators raises two other grounds to support mandamus relief. Relators contend that the trial court abused its discretion by ordering relators to prepare and produce thirty-seven categories of documents because KUMC did not show good cause for varying the discovery rules. See Tex. R. Civ. P. 191.1. Relators also contend that the trial court abused its discretion because, as to the parties enjoined, only Beckett had been served, and in any event, relators were not given notice and an opportunity to be heard as to the relief KUMC requested in the second amended petition. See Tex. R. Civ. P. 681. Because we conclude the trial court abused its discretion in ordering injunctive relief and conditionally grant the writ vacating the injunction, we need not address Relators' other grounds for relief.

State of Texas v. Mid-South Pavers, Inc (Tex.App. - Austin Dec. 19, 2007)

Construction contract dispute

AFFIRMED IN PART; REVERSED AND REMANDED IN PART: Opinion by Justice Patterson (Before Justices Patterson, Puryear and Pemberton)

Appellant, State of Texas// Cross-Appellant, Mid-South Pavers, Inc. v. Appellee, Mid-South Pavers, Inc.// Cross-Appellee, State of Texas--Appeal from 345th District Court of Travis County

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. D-1-GN-06-000141, HONORABLE JOHN DIETZ, JUDGE PRESIDING

O P I N I O N

This appeal arises from a dispute over a highway construction contract between Appellant/Cross-Appellee the Texas Department of Transportation and Appellee/Cross-Appellant Mid-South Pavers, Inc. See Tex. Transp. Code Ann. § 201.112 (West Supp. 2007). After Mid-South filed an administrative complaint, which TxDOT denied, a hearing was held before an administrative law judge at the State Office of Administrative Hearings. The ALJ submitted a proposal for decision to the executive director of TxDOT for adoption. In the agency's final order, the executive director rejected several of the ALJ's findings of fact and conclusions of law and substituted his own findings and conclusions in place thereof. Mid-South sought judicial review of the final order in district court, and the district court reversed, finding that the executive director committed error by declining to adopt the ALJ's findings of fact and conclusions of law in the PFD. For the reasons set forth below, we affirm the district court's judgment reversing the final order in part, and we reverse in part and remand this cause to TxDOT for further proceedings consistent with this opinion.
FACTUAL AND PROCEDURAL BACKGROUND
The highway construction contract
On December 29, 1998, Mid-South entered into a highway construction contract with TxDOT to repair and re-pave 25.306 kilometers, or approximately 15 miles, of Interstate Highway 20 in Parker County. The contract price was $4,373,977.16. The project required two general tasks: full-depth repairs of the concrete pavement in the driving lanes and complete re-paving of the shoulders and roadway in asphalt. The repaving of the shoulders and roadway was divided into six separate stages: placement of microsurfacing (1) on bridge decks; planing of the shoulders and repaving them with Type B hot mix; placement of the HMAC base; placement of the Petromat; (2) placement of the Type D hot mix asphalt surface on the driving lanes; and placement of pavement markings and markers. All of the work under the contract was to be completed within 135 days. If Mid-South failed to complete the work in a timely manner, the contract allowed TxDOT to impose liquidated damages of $1,000 per day.
The parties held a preconstruction meeting on January 22, 1999. (3) Present at this meeting were Jimmey Bodiford, John Bailey, Allen Boone, Neal Kime, John Sharpe, and Ray Buzalsky on behalf of TxDOT; Ron Gillihan, Jeff Hannon, Luke Miller, and Ed Parks on behalf of Mid-South; and Russell Baldwin and Brady Gage on behalf of J.L. Steel, a Mid-South subcontractor. Work began on the contract three days later on January 25, 1999. TxDOT accepted the project as complete on January 29, 2001, and imposed $216,000 in liquidated damages.
Administrative proceedings and judicial review
Following TxDOT's acceptance of the project, Mid-South initiated administrative proceedings under section 201.112 of the Texas Transportation Code for additional compensation in the amount of $2,570,654.76, including a refund of the liquidated damages assessed by TxDOT. See Tex. Transp. Code Ann. § 201.112 (allowing for administrative resolution of claims against TxDOT); Texas Dep't of Transp. v. Jones Bros. Dirt & Paving Contractors, Inc., 92 S.W.3d 477, 484 (Tex. 2002) (statutory procedure under section 201.112 is exclusive remedy for contract disputes between TxDOT and private parties). Mid-South presented fourteen claims for additional compensation and also sought recovery of attorney's fees, costs, and interest.
After TxDOT denied Mid-South's claims, Mid-South requested a contested case hearing before an ALJ. See Tex. Transp. Code Ann. § 201.112(b). The case was referred to SOAH for a hearing. A three-day hearing was held in February 2005, and the parties presented live testimony from eleven witnesses. In addition, the parties filed almost seventy exhibits, including deposition testimony from additional witnesses. After the close of the hearing and evidentiary record, the ALJ prepared a PFD recommending that all or part of seven of Mid-South's claims be granted in the amount of $1,097,885.70. The ALJ also recommended that Mid-South recover attorney's fees in the amount of $102,680.59, and interest. The total recommended recovery was $1,200,566.29, plus interest.
Upon review and consideration of the PFD, TxDOT's executive director concluded that all or part of six of Mid-South's claims should be granted in the amount of $605,135.96. The executive director also concluded that Mid-South's claims for attorney's fees and interest should be denied. TxDOT made a final payment of $605,135.96 to Mid-South on December 23, 2005.
Mid-South sought judicial review of the final order in district court. See Tex. Transp. Code Ann. § 201.112(d). Finding that the executive director erred in failing to comply with section 2001.058(e) of the Administrative Procedure Act and in denying Mid-South's recovery of attorney's fees as allowed under chapter 2251 of the government code, the district court reversed the final order and remanded the cause to TxDOT for further proceedings. This appeal followed.
Mid-South's claims for additional compensation
On appeal, the parties join issue on three of the claims for additional compensation urged by Mid-South below, as well as Mid-South's request for attorney's fees and interest. With respect to each of these claims, Mid-South challenges the executive director's changes to the ALJ's proposed findings of fact and conclusions of law. Accordingly, a description of the disputed claims and the related changes made by the executive director follows.
1. Reduced lane closures/Operational delays
Mid-South sought additional compensation of $1,380,583.81 for work delays caused by TxDOT's refusal to allow overnight lane closures. The ALJ recommended approval of this claim in the amount of $610,743. Upon review, the executive director reduced Mid-South's recovery on this claim to $359,262.
From the outset, the parties disputed whether the contract allowed overnight lane closures. The record reflects that the issue of overnight lane closures was raised and discussed by the parties several times during the preconstruction meeting but was never resolved. The ALJ found that four provisions in the contract would have led Mid-South to believe that overnight lane closures would be permitted:
Items 1 thru 6 shall be accomplished with no more than one lane closure, 4 kilometers in total length in place on each of the eastbound and westbound lanes at the same time.
The area of exposed fabric shall at no time exceed the area which may be covered in two days' hot mix asphalt laying operation. The initial area of fabric coverage will be determined by the engineer and thereafter will be determined by the area covered by hot mix asphalt on the two preceding days of laying operations.
It is the intent of these plans that exposed fabric alone shall not be open to thru traffic.
All pavement repair in ramps, ramp acceleration lanes shall be made in daylight hours so that such lanes shall be restored and remain unobstructed for travel at night.
Mid-South's owner, Ronald Gillihan, testified that overnight lane closures were "very common" in highway construction projects and that he considered that as a factor when deciding whether to bid on a particular job, including this one. Gillihan further testified that if TxDOT intended to preclude overnight lane closures, that type of restriction would normally be included in the plans. With regard to the contract provisions quoted above, Gillihan testified that he understood the language in the first provision to allow one lane closure in each of the two eastbound lanes and each of the two westbound lanes as long as the lane closures did not impede the traffic. Gillihan testified that he understood the language in the second and third provisions to allow overnight lane closures. According to Gillihan, the language in these provisions would allow Mid-South to lay enough Petromat in one day that it could cover with asphalt in two days but that Mid-South would have to prevent traffic from driving on the exposed Petromat surface, which would require an overnight lane closure. Gillihan also testified that he understood the fourth provision to mean that Mid-South could not have overnight closures of ramps and acceleration lanes, but that overnight closures of the driving lanes were not otherwise prohibited.
When Mid-South was ready to begin the asphalt milling and paving operations on the driving lanes, the record reflects that TxDOT refused to authorize overnight lane closures. As a result of TxDOT's refusal to permit overnight lane closures, Mid-South was required to spend an additional two to three hours per day to set up traffic control and equipment. This resulted in a loss of efficiency in Mid-South's ability to perform the contract, and Mid-South faced the prospect of incurring liquidated damages as a result of the delays.
When questioned about its refusal to permit overnight lane closures, the evidence shows that TxDOT gave two conflicting answers. First, TxDOT claimed that Mid-South had lost its contractual right to have overnight lane closures because of poor safety practices. Two TxDOT witnesses, Stucker and Bodiford, testified about Mid-South's poor safety performance. Stucker testified that he would rate Mid-South's performance on safety at a one out of ten, with one being the lowest score, because Mid-South ignored his instructions on safety matters on multiple occasions. Bodiford testified that Mid-South "was creating an undue burden on the traveling public." The second reason given by TxDOT for its refusal to allow overnight lane closures was that it never intended to allow them in the first instance. Stucker testified, "Well, it was our intent that this--that the plans weren't set up for--or they weren't--you know the overnight closures weren't intended." Another TxDOT witness, Robert Julian, testified that "the intent was not to have any planned overnight lane closures." Julian further testified that if Mid-South planned to have overnight lane closures Mid-South "should have [had] enough foresight . . . to call and ask if that's going to be acceptable," even though he agreed that nothing in the plain language of the contract prohibited overnight lane closures.
Applying the "gross error standard" (4) to Mid-South's claim, the ALJ determined that TxDOT committed error based on its failure to "extend[ ] the length of the project to accommodate the change in work conditions" and the referee's (5) "failure to exercise honest judgment." Based on these determinations, the ALJ recommended granting Mid-South's claim in the amount of $610,743. Upon review of the PFD, the executive director reduced Mid-South's recovery on this claim to $359,262.
The difference between the amount recommended by the ALJ and the amount ultimately awarded by the executive director stems from the different loss of efficiency factors applied by the ALJ and the executive director for Mid-South's role in creating delays. In reaching his recommendation of $610,743, the ALJ relied on the expert testimony of Charles Odom, who testified on behalf of Mid-South that Mid-South's efficiency should be reduced by a factor of 15%. In contrast, the executive director determined that Mid-South's efficiency should be reduced by a factor of 50% because Mid-South "was also responsible for the delay." (6) Based on this determination, the executive director made changes to findings of fact 92 and 96. The executive director provided the following explanation for these changes:
While the ALJ recommended a discount factor of 15% as proposed by Mid-South's witness Mr. Odom, a factor of 50% is more appropriate. Mr. Odom's determination that Mid-South was 15% responsible was a figure that Mr. Odom testified "just popped out." His testimony is an admission that Mid-South was also responsible for the delay. The estimation should be increased to 50% because Mid-South participated in the pre-construction meeting but did not effectively communicate concerning whether overnight lane closures were allowed. Mid-South's Mr. Gillihan received a copy of the minutes of the meeting (showing the issue unresolved) but he did not read them. Mid-South never contacted TxDOT for clarification of the contract. (7)
(Citations omitted.)
2. Microsurfacing
Under the original work schedule, the microsurfacing was to be completed after the full-depth concrete repairs, but prior to the asphalt paving. As a result of delays associated with multiple change orders regarding the concrete repairs, Mid-South was compelled to shift the microsurfacing out of sequence. Because the concrete repairs were not completed until December of 1999, the cold-weather conditions prevented Mid-South from completing the microsurfacing until the following spring. (8)
The record shows that Mid-South subcontracted the application of microsurfacing to Cox Paving. After Cox Paving completed the microsurfacing, TxDOT began to notice several problems with the paved surface. Both the ALJ and the executive director determined that the principal cause of the microsurfacing failure was the installation of multiple layers of microsurfacing. Mid-South and TxDOT discussed various options for correcting the problems with the microsurfacing, and Mid-South ultimately agreed to pay another subcontractor to remove the defective microsurfacing. Mid-South then sought additional compensation for the microsurfacing work as part of its administrative claims.
The technical challenge faced by Cox Paving was to install the microsurfacing so as to create a smooth transition from the paved surfaces to the bridge surfaces. As the ALJ explained, this challenge was made more difficult because the approaches to the bridge were uneven. Although the evidence showed that TxDOT considered milling the approaches to create a more uniform surface on which the two pavement surfaces could tie smoothly together, TxDOT rejected this technique.
David Laumer, the supervisor for Cox Paving, testified that Keith Stucker, a TxDOT inspector, contacted him directly (9) and asked if it was possible to raise the level of the microsurfacing to better match the level of asphalt on the bridge deck. Laumer responded that the only way to do this was to apply two layers of microsurfacing. Laumer testified that Stucker instructed him to install two layers of microsurfacing on all the bridges. Stucker testified that he did not instruct Cox Paving to install two layers of microsurfacing.
The ALJ recommended that Mid-South's claim for additional compensation be paid on the basis that TxDOT had interfered with Mid-South's management of the work on the contract. (10) The ALJ also recommended that TxDOT add 82 days to the contract period resulting in the return of an additional $82,000 in liquidated damages to Mid-South. The executive director rejected this recommendation on the basis of Stucker's testimony that he did not instruct Cox Paving to install two layers of microsurfacing. Based on his determination that Stucker did not instruct Cox Paving to apply two layers of microsurfacing, the executive director made changes to findings of fact 167, 170, 172, and 175. The executive director explained the rationale for these changes in finding of fact 167 of the final order:
While the ALJ concluded that Mr. Stucker (a TxDOT employee) instructed Cox to install two lifts of microsurfacing, the preponderance of the evidence does not support that conclusion. The deposition of the supervisor for Cox Paving, David Laumer, showed that when discussing the uneven level of the two surfaces, he suggested to Mr. Stucker that the problem could be solved by applying two lifts of microsurface. Mid-South Exhibit No. 22, p.4, lines 8-10. The next succeeding finding of fact shows Mr. Laumer's proposed solution turned out to be the cause for the future failure of the microsurfacing. His deposition also shows that, according to Mr. Laumer, Mr. Stucker "directed" Mr. Laumer to apply two lifts of microsurface. His deposition was taken in February 2005. In contrast, earlier in time (during the surfacing of the first bridge), Mr. Laumer described to Marion [Ed] Parks the same communications Mr. Laumer had with Mr. Stucker. At that time, as Mr. Parks recalled the conversation, Mr. Laumer only said that he had "got together" with Mr. Stucker on "it." It is not clear whether "it" was a discussion of the problem, or of any proposed solution to the problem. Tr. 384, lines 6-25. Mr. Stucker's testimony showed he did not instruct Mr. Laumer to apply two lifts of microsurface. Tr. 1071, lines 10-20. When the decision was made to apply two lifts of microsurface, contemporaneous meeting minutes and correspondence also show that Cox Paving made the decision. TxDOT Exhibit No. P1B (attachment F).
The executive director also made a corresponding change to conclusion of law 9, which deleted the reference in that conclusion to Mid-South's microsurfacing claim.
3. Return of liquidated damages
As a result of his decision to reject Mid-South's claim related to microsurfacing, the executive director made the following related changes to findings of fact 195 and 196 regarding liquidated damages: (11)
195. Because Claim No. 12, relating to microsurfacing, was [dis]approved, and the parties do not dispute that TxDOT charged 82 days to the contract while this issue was being resolved, Mid-South is [not] entitled to an 82-day extension on this part of the claim.
196. Mid-South is entitled to a total extension of 109 [27] days, translating into a reduction in liquidated damages of $109,000 [$27,000]. (12)
4. Attorney's fees and interest
Because the executive director denied Mid-South's claims under the Prompt Payment Act for attorney's fees and interest, the executive director made changes to findings of fact 197 and 198 to reflect this denial. The executive director also made corresponding changes to conclusions of law 12 and 13. To the extent the executive director provided an explanation for these changes, that explanation appears in the final order at conclusion of law 12 as follows:
The case concerns the adjudication of Mid-South's contract claims under Tex. Transp. Code § 201.112, which does not authorize the payment of interest or attorney's fees. A contract claim and a Prompt Payment Act claim are two different questions. Alamo Community College District v. Browning Construction Co., 131 S.W.3d 146, 167 (Tex. App.--San Antonio 2004, pet. filed).[ (13)] Here there was a bona fide dispute between Mid-South and TxDOT and therefore the Prompt Payment Act did not apply. Tex. Gov't Code ch. 2251.
DISCUSSION
In five issues TxDOT complains the trial court erred in its reversal of the final order. Specifically, TxDOT argues that the trial court incorrectly required the executive director to meet the requirements in government code section 2001.058 when changing the ALJ's proposed findings of fact and conclusions of law. TxDOT further argues it has sovereign immunity from Mid-South's claims for attorney's fees and interest; substantial evidence supports the executive director's findings, conclusions and decisions regarding operational delays, microsurfacing and return of liquidated damages; and there was no error in the executive director's deletion of findings of fact and conclusions of law that did not affect the final decision.
Mid-South responds that the trial court correctly applied section 2001.058; the executive director improperly changed the ALJ's findings of fact and conclusions of law; the doctrine of sovereign immunity is not implicated with respect to Mid-South's claims for attorney's fees and interest; and there is no evidence to support the executive director's reduction to Mid-South's efficiency factor. On cross-appeal, Mid-South contends the trial court erred in denying its claim for interest. Mid-South claims it was entitled to recover interest because the evidence shows there was not a bona fide dispute between Mid-South and TxDOT.
Standard of review
We review TxDOT's final order under the substantial evidence rule. See Tex. Transp. Code Ann. § 201.112(d); Tex. Gov't Code Ann. § 2001.174 (West 2000). "Broadly speaking, the substantial evidence rule is a court review device to keep the courts out of the business of administering regulatory statutes enacted by the Legislature; but it remains the business of the courts to see that justice is administered to competing parties by governmental agencies." Lewis v. Metro. Sav. & Loan Ass'n, 550 S.W.2d 11, 13 (Tex. 1977). Under a substantial-evidence review, we presume that the agency's order is supported by substantial evidence, and the appellant has the burden of overcoming this presumption. Graff Chevrolet Co., Inc. v. Texas Motor Vehicle Bd., 60 S.W.3d 154, 159 (Tex. App.--Austin 2001, pet. denied). When a court is applying the substantial-evidence standard of review to an agency decision, the issue for the reviewing court is not whether the agency's decision was correct, but whether the record demonstrates some reasonable basis for the agency's action. Central Power & Light Co. v. Public Util. Comm'n, 36 S.W.3d 547, 561 (Tex. App.--Austin 2000, pet. denied). We may not substitute our judgment for that of the agency on matters committed to agency discretion. Tex. Gov't Code Ann. § 2001.174; H.G. Sledge, Inc. v. Prospective Inv. & Trading Co., Ltd., 36 S.W.3d 597, 602 (Tex. App.--Austin 2000, pet. denied). We will reverse the agency's order if the decision is not reasonably supported by substantial evidence, is arbitrary or capricious, or is characterized by an abuse of discretion. See Tex. Gov't Code Ann. § 2001.174(2)(E), (F).
TxDOT's claims
1. Tex. Transp. Code Ann. § 201.112 v. Tex. Gov't Code Ann. § 2001.058(e)
In its first issue, TxDOT argues the trial court erred in requiring the executive director to meet the standards in section 2001.058(e) of the government code when changing the ALJ's findings of fact and conclusions of law. Specifically, TxDOT contends the executive director need only satisfy the requirements in section 201.112 of the transportation code when making changes to the PFD. Because he did so in this case, TxDOT maintains the trial court erred in reversing the final order. Mid-South responds that the Administrative Procedure Act (APA) provides minimum standards for all state agencies and that nothing in section 201.112 expressly supersedes the application of section 2001.058. In support of these arguments, Mid-South relies on this Court's opinion in Flores v. Employees Retirement System, 74 S.W.3d 532 (Tex. App.--Austin 2002, pet. denied).
While section 2001.058 provides the general rule that guides an agency's discretion when making changes to an ALJ's findings of fact or conclusions of law, we agree with TxDOT that section 2001.058 does not apply in this case. The plain language of section 201.112(c) specifies that section 201.112(c) of the transportation code, not section 2001.058 of the government code, governs the executive director's discretion to make changes in a PFD. Section 201.112(c) states:
An administrative law judge's proposal for decision rendered under chapter 2001, Government Code, shall be submitted to the director for adoption. Notwithstanding any law to the contrary, the director may change a finding of fact or conclusion of law made by the administrative law judge or may vacate or modify an order issued by the administrative law judge. The director shall provide a written statement containing the reason and legal basis for a change made under this subsection.
Tex. Transp. Code Ann. § 201.112(c) (emphasis added). The phrase "[n]otwithstanding any law to the contrary" makes clear the legislature's intent that section 201.112(c) supersede other Texas law regarding an agency's ability to change findings of fact or conclusions of law, including section 2001.058 of the APA. See, e.g., Southwestern Pub. Serv. Co. v. Public Util. Comm'n, 962 S.W.2d 207, 212-13 (Tex. App.--Austin 1998, pet. denied) ("SWEPCO") (finding similar language in section 2003.049(g) of the government code expressly supersedes APA section 2001.058). Rather than imposing the general restrictive APA section 2001.058 on TxDOT proceedings heard by SOAH under section 201.112, the legislature has crafted a specific provision for such proceedings. Accordingly, we conclude the trial court erred in applying section 2001.058 and requiring the executive director to satisfy the provisions of that statute when making changes to the PFD. We sustain TxDOT's first issue on appeal.
2. Compliance with section 201.112
Sustaining TxDOT's claim that the trial court erred in its application of section 2001.058 does not end our inquiry. We must still determine whether the executive director's changes to the PFD satisfy the standards in section 201.112(c). Mid-South argues the executive director failed to comply with section 201.112 and his changes to the ALJ's findings of fact and conclusions of law were arbitrary and capricious and, therefore, the final order should be reversed. TxDOT responds, "There are no limitations imposed on the executive director's power to change a finding of fact or conclusion of law." Because we conclude the executive director acted arbitrarily and capriciously and failed to comply with section 201.112 when making changes to the ALJ's findings of fact and conclusions of law, we affirm the trial court's judgment reversing the final order.
The executive director's authority to change a finding of fact or conclusion of law is not without limits. While section 201.112(c) allows the executive director to make changes to a PFD, the executive director must provide a written statement containing the reason and legal basis for any changes made. See Tex. Transp. Code Ann. § 201.112(c). The executive director's final order must be supported by substantial evidence considering the reliable and probative evidence in the record as a whole. See id. § 201.112(d) (final order subject to review under the APA); Tex. Gov't Code Ann. § 2001.174. It must comport with the executive director's statutory authority and be free of constitutional, statutory, procedural, or other legal error, and it may not be arbitrary or capricious or otherwise characterized by an abuse of discretion. See Tex. Gov't Code Ann. § 2001.174.
The executive director's changes to particular findings and conclusions suggest that the executive director was acting as TxDOT's own factfinder despite the legislature having delegated that duty to the ALJ in section 201.112(b). See Montgomery Indep. Sch. Dist. v. Davis, 34 S.W.3d 559, 564 (Tex. 2000) ("Having chosen to delegate the fact-finding role to the hearing examiner, a board cannot then ignore those findings with which it disagrees and substitute its own additional findings."). The record reflects that certain changes made by the executive director are not supported by substantial evidence and, in some instances, the executive director failed to comply with the requirement to provide a written statement containing the reason and legal basis for changing the ALJ's findings of fact and conclusions of law. See Tex. Transp. Code Ann. § 201.112(c); 43 Tex. Admin. Code § 9.2(g)(4) (West 2007). These aspects of the executive director's decision raise serious due process concerns.
While this Court has previously recognized that an administrative agency is not subject to the same rules and restrictions as a court of law, an agency must respect the due process rights of those persons who appear before it in contested cases. See Flores, 74 S.W.3d at 539 (citing Texas State Bd. of Pharmacy v. Seely, 764 S.W.2d 806, 815 (Tex. App.--Austin 1988, writ denied); Madden v. Texas Bd. of Chiropractic Exam'rs, 663 S.W.2d 622, 625-27 (Tex. App.--Austin 1983, writ ref'd n.r.e.)). Section 201.112 contemplates that when a contractor is dissatisfied with TxDOT's informal resolution of his claims, the contractor may request a formal administrative hearing to resolve those claims under Chapter 2001 of the government code. See Tex. Transp. Code Ann. § 201.112(b); Tex. Gov't Code Ann. § 2001.051 (West 2000) (providing opportunity for contested case hearing). Under the statute and TxDOT's rules, this hearing is delegated to an ALJ at SOAH. See Tex. Transp. Code Ann. § 201.112(b)-(c); 43 Tex. Admin. Code §§ 1.21-.33 (procedures in contested cases), 9.2(g)(3)(D)(ii) (request for contested case hearing) (West 2007). The purpose of such a hearing is to give the litigants an opportunity to present evidence. Any conflicts in the evidence are resolved by the decision-maker by weighing the evidence and evaluating the credibility of witnesses. See F. Scott McCown, When Can an Agency Change the Findings or Conclusions of an Administrative Law Judge? 50 Baylor L. Rev. 65, 74 (1998). The resolution of disputed facts requires weighing the evidence and making credibility determinations. Id. Accordingly, a neutral decision-maker is crucial to a fair adjudicatory hearing. 2 Kenneth Culp Davis & Richard J. Pierce, Jr., Administrative Law Treatise § 9.8 at 67 (3d ed. 1994). Because the ALJ has heard the evidence and observed the demeanor of the witnesses, the ALJ is in a superior position than an agency head or board reviewing the proposed decision. Id.
By permitting a contractor dissatisfied with TxDOT's informal resolution of a claim under section 201.112 to request a formal administrative hearing, the legislature has recognized the importance of a neutral decision-maker. See Tex. Transp. Code Ann. § 201.112(b). In addition, the legislature has cabined the executive director's discretion to make changes to the ALJ's proposed decision by requiring the executive director to provide a written statement of the reason and legal basis for each change. Id. § 201.112(c). The supreme court recognized the importance of this limitation in Montgomery Independent School District v. Davis:
If a board could find additional facts, resolving conflicts in the evidence and credibility disputes, it would then be serving as its own factfinder despite delegating the factfinding role to a hearing examiner, and the process of using an independent factfinder would be meaningless. An independent factfinder is integral to the structure of the hearing-examiner process; permitting a school board to select an independent factfinder avoids having the board, a party to the dispute, act as its own factfinder when reviewing the employment decision of its own administration. The Legislature has further protected the independent nature of the hearing-examiner process by requiring the board to state in writing the reason, including the legal basis for any change or rejection it makes under section 21.5259 [of the education code].
34 S.W.3d 559, 564 (Tex. 2000). Because of the seriousness of the issues raised by the executive director's treatment of Mid-South's claims, we discuss each of the director's changes to the ALJ's proposed findings of fact and conclusions of law.
A. Reduced lane closures/Operational delays
With respect to Mid-South's request for additional compensation on this claim, the ALJ recommended awarding Mid-South $610,743. In the final order, however, the executive director awarded Mid-South $310,262 on this claim. The primary difference between the amount proposed by the ALJ and the amount awarded by the executive director results from the executive director's application of a 50% reduction to Mid-South's efficiency. The executive director explained that he applied a 50% reduction to Mid-South's efficiency because Mid-South "was also responsible for the delay" and that "Mid-South never contacted TxDOT for clarification of the contract." We conclude, however, that the executive director's explanation for his changes to findings of fact 92 and 96, and the related change to conclusion of law number 11, is not supported by substantial evidence.
The record reflects that Mid-South presented testimony from three witnesses--Charles Odom, Dr. John Borcherding, and Dr. Calin Popescu--regarding the delays that resulted from TxDOT's initial refusal to permit overnight lane closures. Odom testified that based on his experience and training he reduced Mid-South's efficiency by 15%. Although TxDOT presented the testimony of Charles Shook on this issue, the record reflects that Shook did not recommend a reduction to Mid-South's efficiency, but instead presented an entirely different calculation of the amount that Mid-South should recover on this claim. This Court has previously held that an agency decision that falls within the range of relevant evidence in the record is supported by substantial evidence. See Central Power & Light Co. v. Public Util. Comm'n, 36 S.W.3d 547, 559 (Tex. App.--Austin 2000, pet. denied). The only evidence in the record regarding a reduction to Mid-South's efficiency was the 15% figure presented by Odom. There is nothing in the record to support the executive director's determination that Mid-South's efficiency should be reduced by a factor of 50%. While it may be true that Mid-South was also responsible for some of the delay, without more, this fact alone does not translate into a 50% reduction to Mid-South's efficiency. Therefore, we conclude that findings of fact 92 and 96 (and conclusion of law number 11) are not supported by substantial evidence. Accordingly, we affirm the district court's reversal of the final order and remand for further proceedings on the issue of operational delays.
B. Microsurfacing
The executive director also made changes to the ALJ's proposed decision regarding those claims related to microsurfacing. The ALJ recommended granting Mid-South's microsurfacing claim in the amount of $159,269. But, in the final order, the executive director denied this claim altogether, making changes to findings of fact 167, 170, 172, and 175 and conclusion of law 11. Both the ALJ and the executive director based their decisions on the testimony of David Laumer, a supervisor for Cox Paving, and Keith Stucker, a TxDOT employee. The explanation given by the executive director in finding of fact 167 reflects that the executive director also relied on the testimony of Marion Edward "Ed" Parks, a Mid-South employee, and TxDOT Exhibit No. P1B (Attachment F). (14)
The record reflects that Laumer and Stucker gave conflicting testimony with Laumer stating that Stucker instructed him to apply two layers of microsurfacing and Stucker claiming that he did not instruct Laumer to apply two layers of microsurfacing. Parks's testimony reflects that Laumer got together with Stucker on "it." In his explanation for the changes to the ALJ's findings, the executive director acknowledges that Parks's testimony "is not clear whether 'it' was a discussion of the problem, or of any proposed solution to the problem." Thus, Parks's testimony fails to resolve the direct conflict between the testimony of Laumer and Stucker. The executive director's explanation shows that he attempted to resolve this conflict by relying on Attachment F in TxDOT Exhibit No. P1B. Referring to a letter from Mid-South to Cox Paving on August 11, 2000, Attachment F contains the following excerpt:
On June 8, 2000 when David Laumer met with Midsouth Pavers Ed Parks, he was shown the bridge deck and approaches. He told Mr. Parks that microsurfacing would be able to correct any deficiencies. He never told Our Project Superintendent that there was a danger of rutting or loss of texturing. In fact, David Laumer told Ed Parks that he had already showed Keith Stucker, chief Inspector for TxDOT, what he planned on doing and had Keith's blessing. If this job could be built as directed by the plans and specifications, your representative had the duty to notify Midsouth Pavers before any work began.
* * *
Keith Stucker, chief Inspector notified Midsouth Pavers after the first bridge deck was completed, Sanchez Creek, that Cox Paving takeoff header was unacceptable. When Ed Parks and Larry Brown pointed out high spot to David Laumer, he said Keith Stucker had already made him aware of the bump they had left. Ed Parks offered David Laumer the use of straightedge, he declined, stating that he could fix the problem. Once again, Midsouth Pavers was not informed of any potential problems that could result from your effort to correct your problem . . . .
(Emphasis added.) The ALJ stated that he gave no weight to the Bohuslav report, but the executive director relied on this excerpt from Attachment F in support of his determination that Cox Paving, not TxDOT, made the decision to apply two layers of microsurfacing. This excerpt does not conclusively identify who made the decision or gave approval to apply two layers of microsurfacing. The italicized statement merely demonstrates that Laumer "planned" to do something--presumably to apply two layers of microsurfacing--and that Stucker gave his "blessing" to this plan. Thus, we are still confronted with the conflict between the testimony of Laumer and Stucker.
This Court considered a similar situation in which an agency reversed a hearings examiner's findings based on credibility in Texas State Board of Medical Examiners v. Birenbaum, 891 S.W.2d 333 (Tex. App.--Austin 1995, writ denied). In that case, the hearings examiner discounted the testimony of two witnesses because she questioned their credibility. Id. at 337. The Board's final order showed that the Board clearly found both witnesses to be credible. Id. Recognizing the substantial evidence standard of review, we concluded it was unnecessary to address this apparent discrepancy in the findings between the hearings examiner and the Board because there was independent evidence in the record to support the Board's decision. Id. at 338.
In the record before us, there is no other evidence that conclusively resolves the credibility conflict between Laumer and Stucker, and we must now consider the question we left unanswered in Birenbaum. Like the situation we addressed in Birenbaum, the ALJ, a neutral disinterested decision-maker who heard the testimony and observed the demeanor of the witnesses, resolved the credibility conflict in favor of Mid-South, whereas the executive director, the administrative head of an interested party who reviewed the PFD, resolved the same conflict in favor of TxDOT. On this record, there is a clear question of witness credibility, which was resolved by the ALJ one way and by the executive director in a completely different way. By resolving conflicts and credibility issues in disputed evidence, the executive director has essentially stepped into the shoes of the factfinder and reweighed the evidence to reach a specific result. This is not what the legislature envisioned in section 201.112.
In that section, the legislature allowed TxDOT to establish by rule an informal procedure to resolve certain contract claims. See Tex. Transp. Code Ann. § 201.112(a). If a person was dissatisfied with TxDOT's informal resolution, the legislature allowed that person to request a formal administrative hearing pursuant to Chapter 2001 of the government code--i.e., the APA. Id. § 201.112(b). The legislature has also required the executive director to provide a written statement of the reason and legal basis for any change the executive director makes to the ALJ's proposed decision. Id. § 201.112(c). By allowing a person to request a formal administrative hearing, the legislature has delegated the factfinding role to the ALJ, not to the executive director. Having delegated this factfinding role to the ALJ, the legislature in section 201.112 did not permit the executive director to disregard those findings with which he disagrees and substitute his own findings. See Davis, 34 S.W.3d at 564. By requiring the executive director to provide a written statement of the reason and legal basis for any changes to the ALJ's proposal, the legislature has safeguarded the independent nature of the administrative hearing process. See id.; Flores, 74 S.W.3d at 540. The executive director's decision on the microsurfacing issue is at odds with these fundamental administrative law principles.
The supreme court has made clear that an agency's final order may be supported by substantial evidence and yet be invalid for arbitrariness. Texas Health Facilities Comm'n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 454 (Tex. 1984); Lewis, 550 S.W.2d at 13-14; Starr County v. Starr Indus. Servs., Inc., 584 S.W.2d 352, 355-56 (Tex. Civ. App.--Austin 1979, writ ref'd n.r.e.); compare Tex. Gov't Code Ann. § 2001.174(2)(E) with id. § 2001.174(2)(F). "[A]rbitrary action of an administrative agency cannot stand." Lewis, 550 S.W.2d at 16. An administrative agency acts in an arbitrary manner when the treatment accorded to parties in the administrative process denies them due process of law. Id. At a minimum, due process requires that an agency's decision comport with the authority granted to the agency under its own statute and rules. Id. at 13 (agency proceedings must satisfy due process). In deciding whether the executive director acted arbitrarily and capriciously, we must determine whether the final order was based on a consideration of all relevant factors and whether there is a rational connection between the facts and the decision of the executive director. See Starr County, 584 S.W.2d at 355-56. We may not substitute our judgment for that of the agency. Id.
The executive director's explanation for the changes made to findings of fact 167, 170, 172 and 175 demonstrates that the executive director abused his discretion in making these changes and that his decision was arbitrary and capricious. Although section 201.112 gives the executive director broad discretion to make changes to the ALJ's proposed findings of fact and conclusions of law, the executive director may not ignore the evidence. See Tex. Gov't Code Ann. § 2001.174. Given the ambiguities in the testimony of Ed Parks and TxDOT Exhibit No. P1B, the executive director's explanation shows that he simply chose to believe Stucker, a TxDOT employee, over Laumer, a third-party subcontractor. (15) We have found no other independent evidence in the record to support the executive director's determination that Stucker did not instruct Cox paving to apply two layers of microsurfacing. The executive director's explanation thus gives the appearance of being arbitrary and capricious because the executive director did not hear the testimony or evaluate the witnesses' demeanor, and yet he chose to resolve the conflict in testimony and credibility in favor of TxDOT, irrespective of the facts as determined by the ALJ.
On this record, we conclude that the executive director's decision was arbitrary and capricious. There is no rational connection between the facts as supported by the evidence and the executive director's decision. We are unpersuaded by TxDOT's argument that section 201.112 allows the executive director to reweigh the evidence and substitute his own credibility determinations in place of those made by the ALJ. See Davis, 34 S.W.3d at 564; Flores, 74 S.W.3d at 540-41. This is not to say that the ALJ's credibility determinations are always immune from change under section 201.112. See, e.g., SWEPCO, 962 S.W.2d at 214 (section 2003.049(g) of the government code allows the public utility commission to reevaluate the evidence admitted at a SOAH hearing to determine if the ALJ's findings are supported by a preponderance of evidence); Birenbaum, 891 S.W.2d at 338 (board may change credibility findings where change is supported by independent record evidence). But on this record, where the ALJ, and not the executive director, heard the testimony and observed the demeanor of the witnesses, and in the absence of independent evidence in the record to support the executive director's credibility choice, we conclude that the executive director's decision to reject the ALJ's findings based on credibility was arbitrary and capricious. Accordingly, we affirm the district court's reversal of the final order and remand for further proceedings on the issue of microsurfacing.
C. Return of liquidated damages
In light of our conclusion that the executive director's decision on the microsurfacing issue was arbitrary and capricious, we likewise conclude that the executive director's related changes to findings of fact 195 and 196, and the corresponding change to conclusion of law 11, were arbitrary and capricious. We affirm the district court's reversal of the final order and remand for further proceedings on the issue of return of liquidated damages.
D. Changes to other findings
In its fifth issue on appeal, TxDOT argues that the executive director need not provide a written statement of the reason and legal basis for those changes to findings of fact or conclusions of law "that did not affect the final decision." Because every finding of fact and conclusion of law plays a role in the agency's final decision, it is difficult for us to see how TxDOT can argue that any change by the executive director, other than perhaps a typographical correction, would not affect the final decision in some manner. Moreover, the legislature has expressly required the executive director to provide a written statement containing the reason and legal basis for a change to the ALJ's findings or conclusions. Tex. Transp. Code Ann. § 201.112(c); see also Levy v. Texas State Bd. of Med. Exam'rs, 966 S.W.2d 813, 816 (Tex. App.--Austin 1998, no writ) (agency required to "articulate specifically its reasons for each individual change made"); Employees' Retirement Sys. v. McKillip, 956 S.W.2d 795, 800 (Tex. App.--Austin 1997, no pet.) (same), overruled in part on other grounds by Texas Natural Res. Conservation Comm'n v. Sierra Club, 70 S.W.3d 809, 814 (Tex. 2002).
Our review and comparison of the PFD and the final order show that the executive director deleted findings of fact 121 and 122 without providing the explanation required in section 201.112(c). For this reason, we affirm the district court's reversal of the final order and remand for further proceedings regarding these deleted findings.
By our holding that the executive director must provide a written statement for each individual change to the ALJ's findings or conclusions, we do not mean to prohibit an agency from making corresponding changes to related findings of fact or conclusions of law for the same or similar reasons. Rather, we emphasize that the agency need only explain the rationale for each of its changes. See Levy, 966 S.W.2d at 816. We overrule TxDOT's fifth issue.
3. Sovereign immunity
In its second issue on appeal, TxDOT argues that it has sovereign immunity from Mid-South's claims for attorney's fees and interest. More specifically, TxDOT contends that there is no clear and unambiguous waiver of sovereign immunity for attorney's fees and interest on contract claims against TxDOT. The ALJ recommended approval of Mid-South's claims for attorney's fees and interest, but the executive director denied both claims in the final order. The district court reversed the final order, awarding attorney's fees, but not interest, to Mid-South. (16) TxDOT seeks reversal of the district court's judgment to the extent it awards attorney's fees to Mid-South. Because we conclude that sovereign immunity has been waived, we affirm the district court's judgment awarding attorney's fees. (17)
Sovereign immunity protects the state from lawsuits for money damages and includes both immunity from suit and immunity from liability. General Servs. Comm'n v. Little-Tex Insulation Co., 39 S.W.3d 591, 594 (Tex. 2001). Immunity from suit bars a suit against the state unless the legislature has expressly consented to the suit. Id. If the legislature has not expressly waived immunity from suit, the state retains such immunity even if its liability is undisputed. Federal Sign v. Texas S. Univ., 951 S.W.2d 401, 405 (Tex. 1997). Immunity from liability protects the state from money judgments even if the legislature has consented to suit. Little-Tex, 39 S.W.3d at 594.
A. Immunity from suit
TxDOT argues that it has sovereign immunity from Mid-South's claims for attorney's fees and interest because nothing in the plain language of section 201.112 of the transportation code waives sovereign immunity for those claims. We disagree. Section 201.112 provides that a person may seek resolution of "a claim arising out of a contract." See Tex. Transp. Code Ann. § 201.112(a). The supreme court has held that section 201.112 provides the exclusive remedy for contract claims against TxDOT. See Jones Bros., 92 S.W.2d at 484. Based on this holding, we conclude that section 201.112 waives sovereign immunity from suit for all claims arising out of a contract governed by that section. See Tex. Transp. Code Ann. § 201.112(a)(1)-(5) (describing those contracts subject to section 201.112).
Having concluded that section 201.112 waives immunity from suit for all claims "arising out of a contract," we must determine whether Mid-South's claims for attorney's fees and interest are claims "arising out of a contract" within the meaning of section 201.112. This question presents a matter of statutory construction.
When construing a statute, our primary goal is to determine and give effect to the legislature's intent. City of San Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003). To determine legislative intent, we look to the statute as a whole, as opposed to isolated provisions. State v. Gonzalez, 82 S.W.3d 322, 327 (Tex. 2002). We begin with the plain language of the statute at issue and apply its common meaning. City of San Antonio, 111 S.W.3d at 25. Where the statutory text is unambiguous, we adopt a construction supported by the statute's plain language, unless that construction would lead to an absurd result. Fleming Foods of Tex., Inc. v. Rylander, 6 S.W.3d 278, 284 (Tex. 1999).
The word "arise" means to originate, stem, or result from. Black's Law Dictionary 102 (7th ed. 1999). The supreme court has previously construed the phrase "arising out of" in section 101.057(2) of the Texas Tort Claims Act. (18) See Delaney v. University of Houston, 835 S.W.2d 56, 59 (Tex. 1992). Section 101.057(2) is an exception to the limited waiver of immunity under the tort claims act, which provides in relevant part that the Texas Tort Claims Act does not apply to a claim "arising out of assault, battery, false imprisonment or any other intentional tort . . . ." Id. at 58. Consistent with its holding in LeLeaux v. Hamshire-Fannett Independent School District, 835 S.W.2d 49, 51 (Tex. 1992), in which the supreme court construed the phrase "arises from" in section 101.021 of the tort claims act, (19) the supreme court in Delaney held that the phrase "arising out of" requires a certain nexus, or connection, between the claim and the intentional tort. Delaney, 835 S.W.2d at 59.
In this case, Mid-South filed an administrative claim under section 201.112 asserting claims for additional compensation under the contract, as well as claims for attorney's fees and interest under the Prompt Payment Act, chapter 2251 of the government code. There can be little doubt that Mid-South's claims for attorney's fees and interest stem or result from the contract. Without the contract and the claims for additional compensation thereunder, Mid-South would have no claims for attorney's fees or interest. Based on the supreme court's holding in Delaney, we find a sufficient nexus between Mid-South's claims for attorney's fees and interest and the contract between Mid-South and TxDOT. See id. Therefore, we conclude that Mid-South's claims for attorney's fees and interest are claims "arising out of a contract" within the meaning of section 201.112 and that section 201.112 necessarily waives sovereign immunity from suit on those claims.
B. Immunity from liability
We next consider whether immunity from liability has likewise been waived. The supreme court has consistently held that the state waives immunity from liability when it contracts with a private party. Compare Tex. Transp. Code Ann. § 201.112(e), with Texas Natural Res. Conservation Comm'n v. IT-Davy, 74 S.W.3d 849, 854 (Tex. 2002), and Little-Tex, 39 S.W.3d at 594. Texas law is clear, however, that a prevailing party may not recover attorney's fees unless permitted by statute or contract. See, e.g., Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 95 (Tex. 1999); Travelers Indem. Co. of Conn. v. Mayfield, 923 S.W.2d 590, 593 (Tex. 1996); Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex. 1992); First City Bank-Farmers Branch v. Guex, 677 S.W.2d 25, 30 (Tex. 1984); New Amsterdam Cas. Co. v. Texas Indus., Inc., 414 S.W.2d 914, 915 (Tex. 1967). Neither party argues that the contract provides for the recovery of attorney's fees or interest. TxDOT argues that section 201.112 expressly states that it does not waive sovereign immunity from liability. TxDOT further contends that the Prompt Payment Act does not apply and, even if it did, there is no clear and unambiguous waiver of sovereign immunity from liability in the statute. Mid-South responds that the legislature's inclusion of section 2251.053, see Tex. Gov't Code Ann. § 2251.053 (West Supp. 2007), which expressly applies to contracts with TxDOT, demonstrates that the Prompt Payment Act applies in this case. Mid-South also points to section 2251.043, see id. § 2251.043 (West 2000), as providing an express waiver of sovereign immunity.
The Prompt Payment Act requires governmental entities, including state agencies like TxDOT, to make timely payments for the purchase of goods and services, including purchases made by contract. See generally Tex. Gov't Code Ann. §§ 2251.001-.055; House Comm. on Bus. & Commerce, Bill Analysis, Tex. H.B. 275, 69th Leg., R.S. (1985). By its express terms, government code section 2251.053 "applies only to a contract entered into by [TxDOT] for the construction or maintenance of a highway or related facility." Tex. Gov't Code Ann. § 2251.053(a). We agree with Mid-South that the legislature's inclusion of section 2251.053 makes clear that the Prompt Payment Act, chapter 2251 of the government code, applies to contracts with TxDOT.
Moreover, section 2251.043 provides that in a formal administrative or judicial action to recover a payment or interest due under chapter 2251, "the opposing party, which may be the governmental entity or the vendor, shall pay the reasonable attorney's fees of the prevailing party." Id. § 2251.043 (West 2000). By its terms, section 2251.043 requires the opposing party to pay the prevailing party's attorney's fees regardless of whether the opposing party is a governmental entity. Id. The plain language of this provision contemplates that a governmental entity like TxDOT may be required to pay reasonable attorney's fees. Id. By authorizing such payments, it follows and we conclude the legislature in section 2251.043 has waived sovereign immunity from liability for the award of attorney's fees. See Texas Educ. Agency v. Leeper, 893 S.W.2d 432, 446 (Tex. 1994) (by authorizing awards of attorney's fees, the Uniform Declaratory Judgments Act necessarily waives governmental immunity for such awards). (20) We overrule TxDOT's second issue and affirm the district court's judgment that Mid-South is entitled to recover attorney's fees.
4. Substantial Evidence
In its third and fourth issues on appeal, TxDOT claims that the district court erred in reversing the final order because it was supported by substantial evidence. Specifically, TxDOT argues that substantial evidence supports the executive director's findings, conclusions, and decisions regarding operational delays, microsurfacing, and return of liquidated damages. As previously noted, there is no evidence in the record supporting the executive director's decision to reduce Mid-South's efficiency by a factor of 50%; therefore, we conclude that the executive director's findings, conclusions and decision regarding operational delays are not supported by substantial evidence. With regard to the executive director's findings, conclusions and decisions on microsurfacing and return of liquidated damages, we find that, based on Stucker's testimony, there is substantial evidence to support the executive director's decision. Nevertheless, as explained above, we conclude that the executive director's decision was arbitrary and capricious. Accordingly, we overrule TxDOT's third and fourth issues.
Mid-South's Claim on Cross-Appeal
In a single issue on cross-appeal, Mid-South argues that the district court erred in denying Mid-South's claim for interest under the Prompt Payment Act. See Tex. Gov't Code Ann. §§ 2251.002 (exceptions to interest payments), .026 (authorizing interest payments by state agencies). Section 2251.002 of the government code provides that where there is a bona fide dispute between a political subdivision and a vendor, contractor, subcontractor, or supplier that causes a payment to be late, interest is not due on that payment. See id. § 2251.002(a)(1). (21) Because the district court found that a bona fide dispute existed between Mid-South and TxDOT, the district court affirmed the final order finding that Mid-South was not entitled to interest. We disagree.
Section 2251.026(a) of the Prompt Payment Act provides that state agencies, like TxDOT, are liable for interest on overdue payments. (22) Id. § 2251.026(a) (West Supp. 2007). In the case of a disputed payment, section 2251.042 provides that a vendor, like Mid-South, is entitled to interest if the dispute is resolved in the vendor's favor. See id. § 2251.042 (West 2000).
Moreover, the exception for a "bona fide dispute" found in section 2251.002(a)(1) applies only to political subdivisions, not state agencies. Id. § 2251.002(a)(1). That exception provides:
This chapter does not apply to a payment made by a governmental entity, vendor, or subcontractor if: . . . there is a bona fide dispute between the political subdivision and a vendor, contractor, subcontractor or supplier about the goods delivered or the services performed that causes the payment to be late.
Id. (emphases added). The Prompt Payment Act's definition of "governmental entity" confirms this distinction. See id. § 2251.001(3) (West Supp. 2007). Section 2251.001(3) defines "governmental entity" as "a state agency or political subdivision of this state." Id. TxDOT is a state agency, not a political subdivision. Because the plain language of section 2251.002(a)(1) references only "a bona fide dispute between the political subdivision and a vendor, contractor, subcontractor, or supplier," the exception in section 2251.002(a)(1) does not apply to TxDOT--a state agency--and it is not relevant whether a bona fide dispute existed between Mid-South and TxDOT. For these reasons, we conclude that the district court erred in its judgment that Mid-South was not entitled to interest.
The record reflects that the ALJ awarded interest to Mid-South on those claims in which he recommended that Mid-South prevail. The ALJ noted that TxDOT did not dispute the accrual dates urged by Mid-South. (23) Nor did TxDOT dispute the interest rates urged by Mid-South. (24) The executive director adopted the ALJ's recommendations that Mid-South prevail on Claim Nos. 1, 4, 9, and 13, and TxDOT has not challenged those determinations on appeal. We conclude that Mid-South is entitled to interest on Claim Nos. 1, 4, 9, and 13 based on the amounts originally awarded by the executive director for those claims. With regard to the additional claims that we have remanded--including Claim No. 2 for reduced lane closures/operational delays; Claim No. 12 for microsurfacing; and Claim No. 14 for return of liquidated damages--we conclude that Mid-South is entitled to interest based on the amounts ultimately awarded on remand. Accordingly, we sustain Mid-South's issue on cross-appeal, and we remand for further proceedings to determine the interest due on Mid-South's claims.
CONCLUSION
Having considered all of the claims raised on appeal by both TxDOT and Mid-South, we affirm the district court's judgment reversing the final order in part, and we reverse in part and remand this cause to TxDOT for further proceedings consistent with our opinion as authorized under section 2001.174(2) of the APA. See Tex. Gov't Code Ann. § 2001.174(2) (West 2000). With the exception of the issue regarding interest due Mid-South, we limit the scope of this remand to the record previously established by the parties before the ALJ. See Texas Health Facilities Comm'n v. Nueces County Hosp. Dist., 581 S.W.2d 768, 770 (Tex. Civ. App.--Austin 1979, no writ) (limiting scope of remand under similar statute); First Sav. & Loan Assoc. v. Lewis, 512 S.W.2d 62, 64 (Tex. Civ. App.--Austin 1974, writ ref'd n.r.e.) (court may control scope of its remand).
__________________________________________
Jan P. Patterson, Justice
Before Justices Patterson, Puryear and Pemberton
Affirmed in part; Reversed and Remanded in part
Filed: December 19, 2007
1. Microsurfacing is a special hot mix asphaltic concrete (HMAC) slurry that is used to improve skid resistance on the driving lanes of bridges. Microsurfacing is applied in a thinner layer than HMAC pavement.
2. Petromat is a sheet of fabric that is placed between the roadbed and the asphalt paving.
3. Although the PFD states the preconstruction meeting was held on January 28, 1999, the record reflects that it was actually held on January 22, 1999.
4. The gross error standard applies when the parties to a contract agree to be bound by the decision of a referee. Texas Dep't of Transp. v. Jones Bros. Dirt & Paving Contractors, Inc., 92 S.W.3d 477, 480 (Tex. 2002). Under this standard, a referee's decision is final and conclusive "unless in making it [the referee] is guilty of fraud, misconduct, or such gross mistake as would imply bad faith or failure to exercise honest judgment." City of San Antonio v. McKenzie Constr. Co., 150 S.W.2d 989, 996 (Tex. 1941).
Item 5.2 of the contract between TxDOT and Mid-South states, "The Engineer will act as referee in all questions arising under the terms of the contract between the parties thereto and his decision shall be final and binding." We conclude that the plain language of section 5.2 supports application of the gross error standard to Mid-South's claims. See Jones Bros., 92 S.W.3d at 480. Mid-South does not challenge application of the gross error standard on appeal.
5. Under the terms of the contract, TxDOT Area Engineer Jimmey Bodiford served as referee.
6. Although Charles Shook testified on behalf of TxDOT regarding the delays associated with TxDOT's refusal to allow overnight lane closures, he did not apply a 50% reduction to Mid-South's efficiency. There was no evidence in the record that Mid-South's efficiency should be reduced by a factor of 50%.
7. The executive director provided this explanation in finding of fact 92 of the final order, but did not provide a separate explanation for the change to finding of fact 96. We note that finding of fact 96 is simply the mathematical calculation of the amount to be awarded Mid-South when applying the 50% loss of efficiency factor.
8. Since microsurfacing is a liquid asphalt, TxDOT imposes a temperature requirement that prohibits putting down microsurfacing in colder weather.
9. The ALJ found this direct contact to be one of several instances of TxDOT's direct negotiations and interference with a Mid-South subcontractor.
10. The ALJ recommended payment in the amount of $159,269, which included "the amount of Cox [Paving]'s invoice, less the amount paid by TxDOT for part of the work, plus the amount of Dustrol's invoice for the milling [and removal of the microsurfacing], plus some equipment and supply costs."
11. The executive director also made a corresponding change to conclusion of law 11.
12. Language added by the executive director appears in brackets [ ], and language deleted by the executive director appears in strike out.
13. The supreme court dismissed the petition for review pursuant to settlement on April 28, 2006.
14. TxDOT Exhibit No. P1B, also referred to by the parties as "the Bohuslav report," was a document prepared by TxDOT for the purpose of settlement negotiations with Mid-South. Under TxDOT rules, this report is not admissible for any purpose, and TxDOT objected to its admissibility in the hearing before SOAH. See 43 Tex. Admin. Code § 9.2(b)(3)(C) (West 2007). We observe, however, that the executive director relied on this report in the final order.
15. That the executive director chose to believe Stucker, a TxDOT employee, over Laumer, a third-party subcontractor, is underscored by TxDOT's challenge below to the admissibility of Exhibit No. P1B--a challenge they do not bring forth on appeal.
16. The district court based its award of attorney's fees on section 2251.043 of the Prompt Payment Act. See generally Tex. Gov't Code Ann. §§ 2251.001-.055 (West 2000 & Supp. 2007).
17. We address Mid-South's cross-appeal on the district court's denial of interest below.
18. Tex. Civ. Prac. & Rem. Code Ann. § 101.057(2) (West 2005).
19. Tex. Civ. Prac. & Rem. Code Ann. § 101.021 (West 2005).
20. Because the plain language of section 2251.026 of the government code likewise authorizes interest payments by a state agency, we also conclude that the legislature has necessarily waived sovereign immunity from liability for the award of interest. See Tex. Gov't Code Ann. § 2251.026 (West Supp. 2007); Texas Educ. Agency v. Leeper, 893 S.W.2d 432, 446 (Tex. 1994).
21. We note that section 2251.002 was amended in 2003, but the amendment provided that it only applied to contracts executed after September 1, 2003. See Act of May 28, 2003, 78th Leg., R.S., ch. 286, § 4(b), 2003 Tex. Gen. Laws 1252, 1255. The parties agree that because the contract at issue here was executed in 1998 the pre-2003 version of section 2251.002 applies. The parties also agree that the 2003 amendments do not affect the outcome of this appeal because there were no substantive changes to the relevant provisions in the statute. Therefore, we cite to the current version of the statute.
22. Prior to its amendment in 2001, section 2251.026(a) provided:
If the warrant for a payment the originating state agency owes is not mailed or electronically transmitted before the payment is overdue, the agency is liable for an interest payment that accrues under this chapter.
Act of May 4, 1993, 73rd Leg., R.S., ch. 268, § 1, 1993 Tex. Gen. Laws 583, 845, amended by Act of May 20, 1997, 75th Leg., R.S., ch. 634, § 3(a), 1997 Tex. Gen. Laws 2179, 2180 (current version at Tex. Gov't Code Ann. § 2251.026(a) (West Supp. 2007)). The current version of section 2251.026(a) provides:
A state agency is liable for any interest that accrues on an overdue payment under this chapter and shall pay the interest from funds appropriated or otherwise available to the agency at the same time the principal is paid.
Tex. Gov't Code Ann. § 2251.026 (West Supp. 2007).
23. Mid-South urged accrual dates of July 20, 2000 for Claim No. 12; October 3, 1999, for claim No. 14; and October 3, 1999, for all other claims.
24. Based on section 2251.025(b) of the government code, Mid-South urged an interest rate of 1% per month through June 30, 2004, and 5% per annum (the Wall Street Journal prime rate as of July 1, 2003, plus 1%) thereafter. See Tex. Gov't Code Ann. § 2251.025(b) (West 2000 & Supp. 2007). Although TxDOT did not dispute the interest rates urged by Mid-South, we note that section 2251.025(b) was amended in 2003, and the legislature provided that the amendments do not apply to a payment that became overdue before September 1, 2004. See Act of June 2, 2003, 78th Leg., R.S., ch. 1310, § 122(f), 2003 Tex. Gen. Laws 4748, 4794-95. The rate of interest for such a payment is "the rate determined under the law in effect before July 1, 2004, and the former law is continued in effect for that purpose." Id.

Osborne v. Jauregui, Inc. (Tex.App. - Austin, Aug. 29, 2007)

Austin, TX - Third Court of Appeals reverses denial of attorney's fees in home owners' DTPA suit against builder and remands for fee segregation. Also remands homeowner insurance subrogation claim for re-evaluation in light of new Texas Supreme Court precedent. Trial court had denied subrogation claim prior to release of supreme court's opinion in Fortis Benefits v. Cantu, No. 05-0791 (Tex. Jun. 29, 2007)(Opinion by Justice Willett).

Appellants, Dr. Phillip Osborne and Deborah Osborne// Cross-Appellant, State Farm Lloyds vs. Appellee, Jauregui, Inc. // Cross-Appellees, Dr. Phillip Osborne and Deborah Osborne, No. (Tex.App.- Austin, August 29, 2007)(residential construction defect, mold claim, equitable and contractual subrogation rights of homeowner's insurance carrier, attorney's fees entitlement of prevailing party in DTPA suit)(Opinion by Justice Henson) (Before Justices Patterson, Puryear and Henson)
Appeal from 353rd District Court of Travis County
Disposition: Reversed and remanded
Also see dissenting opinion by Justice Puryear

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
NO. 99-08727, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING

OPINION BY JUSTICE DIANE HENSON

This appeal arises from a dispute between appellants and cross-appellees Dr. Phillip Osborne and Deborah Osborne and appellee Jauregui, Inc. Jauregui was the architect and builder of the Osbornes' house, which turned out to contain numerous defects that eventually led to mold contamination, among other problems. State Farm provided the Osbornes' homeowners' insurance.

After mold was discovered in the house, the Osbornes brought suit against Jauregui and various subcontractors, seeking damages in excess of $2,000,000. State Farm intervened, asserting a subrogation claim for the amount it paid the Osbornes under their homeowners' policy. All parties other than Jauregui settled prior to trial for a total settlement amount of $1,260,500.

After the jury returned a verdict finding that the Osbornes had suffered approximately $835,000 in damages, the trial court applied a settlement credit in Jauregui's favor and entered judgment that the Osbornes should take nothing on their claims. The trial court declined to award the Osbornes attorney's fees and further declined to grant State Farm any of the proceeds from the Osbornes' settlement with the subcontractors under its subrogation claim.

The Osbornes and State Farm both appealed. We reverse the denial of the Osbornes' request for attorney's fees and the denial of State Farm's subrogation claim. We remand to the trial court for a calculation of attorney's fees and a reconsideration of State Farm's claim for subrogation rights against the settlement proceeds.

BACKGROUND

In 1997, the Osbornes bought a house from Jauregui for slightly more than $1 million. Shortly
after moving in, the Osbornes noticed flaws in the construction. They later learned that the house had serious mold problems due to various construction errors. The Osbornes also noticed that because the house was built along a golf course, golf balls frequently hit and damaged the house, although Jauregui and its realtor had assured them there would be no "golf ball problem." (1)

Prior to filing suit, the Osbornes provided Jauregui with a demand letter, offering to settle for the amount of $866,000, but Jauregui refused, responding with a counter-offer of $12,810. (2) In July 1998, the Osbornes sued Jauregui and its owner, Jose Luis Jauregui, asserting causes of action under the Texas Deceptive Trade Practices Act (DTPA) and for breach of contract, negligence, breach of warranty, real-estate fraud, and negligent misrepresentation.

The Osbornes also sued a number of subcontractors and suppliers of construction materials, alleging negligence, breach of warranty, DTPA violations, and products liability. (3) In March 2003, State Farm intervened as the Osbornes' subrogee. Shortly before trial, the Osbornes settled with all the defendants except Jauregui and its owner. The settling defendants paid a total of $1,260,500--$1,120,500 of which remains after the payment of expert-witness fees.

The Osbornes, who put on evidence at trial that they suffered a minimum of $2,418,153 in damages, excluding damages for mental anguish, bodily injury, and attorney's fees, went to trial to pursue its claims against Jauregui and its owner, the remaining defendants.

The jury found that Jauregui was negligent and breached warranties made to the Osbornes. The jury found that the Osbornes suffered damages totaling $835,158.78: $250,000 for repairs necessary to bring the house to the condition reasonably expected when they bought it; $220,000 for lost or damaged clothing and non-furniture personal effects; $70,000 for non-clothing items that were condemned due to mold contamination; $28,000 for repairs actually made by the Osbornes; $1,000 for damaged furniture; $95,158.78 for alternate living expenses; and $171,000 for moving, storage, and cleaning of their belongings. (4)

The jury found that Jauregui was responsible for 48% of the Osbornes' damages and that the subcontractors and suppliers were responsible for the remaining 52%. The jury determined that Jauregui did not engage in unconscionable conduct, deceptive practices, fraud, or negligent misrepresentation. The jury did not find Jauregui's individual owner responsible for any of the Osbornes' damages.

Jauregui elected a dollar-for-dollar credit of the settlement funds against the damages awarded by the jury, and after applying that credit to the jury award, the trial court entered a judgment that the Osbornes should take nothing against Jauregui and refused to award attorney's fees against Jauregui. The trial court also denied State Farm's claim that it was entitled to any settlement funds through subrogation.

The court made findings of fact and conclusions of law in which it found that there was evidence that the Osbornes had incurred $1,149,641.30 in attorney's fees, (5) but concluded that they were not entitled to attorney's fees because they did not obtain a net recovery from Jauregui and because they did not segregate the fees among the various claims and parties. Finally, the court found that because State Farm did not pay for any of the Osbornes' attorney's fees, the fees were "an uncompensated expense of collection," and that State Farm did not meet its burden to present evidence showing what portions of the settlement credits were "allocated to the items State Farm paid for . . . as opposed to other items of damage and expenses of collection alleged by [the Osbornes] in their petitions that State Farm had not paid for, such as mental anguish, bodily injury, repairs and attorney's fees." The court concluded that State Farm was not entitled to the settlement proceeds because it had not shown that the proceeds were payments for losses it had covered.

On appeal, the Osbornes argue that they were "prevailing parties" under the DTPA and were not required to segregate their attorney's fees. In its cross-appeal against the Osbornes, State Farm argues that the trial court abused its discretion in denying State Farm's subrogation claim because that denial grants the Osbornes a double recovery. State Farm also argues that any money received from Jauregui would be subject to State Farm's subrogation rights and that the trial court properly denied the Osbornes' request for attorney's fees.

STANDARD OF REVIEW

The availability of attorney's fees under a particular statute is a question of law to be reviewed de novo. Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 94 (Tex. 1999); see Johnson v. City of Fort Worth, 774 S.W.2d 653, 656 (Tex. 1989) ("Matters of statutory construction are questions of law for the court to decide."). The extent to which attorney's fees can or cannot be segregated is a mixed question of law and fact. Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 313 (Tex. 2006). Where segregation of fees is possible, remand is required. Id. at 314.

In the absence of an unambiguous contractual provision regarding subrogation, the right to subrogation is grounded in equitable principles, and "[a] trial court's balancing of the equities should not be disturbed on appeal unless a showing is made that it would be inequitable to allow the judgment to stand." Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App.--Austin 1995, writ denied).

DISCUSSION

Attorney's Fees

The trial court determined that the Osbornes were not eligible to recover attorney's fees because they were not "prevailing parties" under the DTPA. The trial court also found that the Osbornes could not recover attorney's fees because they had not segregated their attorney's fees among the various claims and defendants. The Osbornes argue on appeal that they should recover attorney's fees as prevailing parties under the DTPA and that they were not required to segregate their attorney's fees because the fees were based on inextricably intertwined claims derived from the same set of facts.

Under the DTPA, a "consumer who prevails shall be awarded court costs and reasonable and necessary attorneys' fees." Tex. Bus. & Com. Code Ann. § 17.50(d) (West Supp. 2006). The Texas Supreme Court has held that a plaintiff "who is awarded actual damages under the DTPA should also be awarded attorney's fees, even though the damage award is entirely offset by an opposing claim." McKinley v. Drozd, 685 S.W.2d 7, 10 (Tex. 1985). While McKinley involved a DTPA claim offset by a counterclaim rather than settlements from other defendants, the court emphasized the "legislative mandate to liberally construe the [DTPA] to protect consumers from deceptive practices, and the legislative intent to provide consumers with an efficient and economical means to seek redress for those deceptive practices." Id. at 9.

The Texas Supreme Court has not ruled on whether the reasoning in McKinley would apply in a situation where the damages owed by one defendant, such as Jauregui in the present case, were entirely offset by settlement amounts from other defendants. The appellate courts have been split in determining whether a plaintiff "prevails" under the DTPA where settlement amounts from other defendants exceed the judgment. Jauregui relies primarily on Hamra v. Gulden, 898 S.W.2d 16, 19 (Tex. App.--Dallas 1995, writ dism'd w.o.j.), which held that a plaintiff who sued two defendants jointly and severally did not prevail on a DTPA claim where the settlement credit from one defendant exceeded the damages found at trial, citing only Blizzard v. Nationwide Mutual Fire Insurance Co., 756 S.W.2d 801, 806 (Tex. App.--Dallas 1988, no writ), to support this holding.

The payments made to the plaintiff prior to trial in Blizzard, however, constituted insurance payments from her insurer. Id. at 806-07. The plaintiff sued her insurance company, but the amount of damages found by the jury at trial did not exceed the total amount of insurance payments paid to the plaintiff by the defendant prior to trial. These pretrial payments, made by the defendant subject to the judgment rather than a settling party, resemble the insurance benefits paid prior to trial by the defendant in Allstate Insurance Co. v. Bonner, 51 S.W.3d 289, 292 (Tex. 2001), where the plaintiff could not recover attorney's fees under the insurance code because the judgment amount owed by a defendant insurance company was entirely offset by benefits previously paid by that defendant. In cases where the amount of damages found by the jury at trial is lower than payments previously paid to the plaintiff by the defendant to compensate for such damages, it is reasonable to view the plaintiff as not having prevailed on a claim.

In the present case, however, the jury did not find that Jauregui owed less in damages than some amount that Jauregui had already paid to the Osbornes. Instead, the jury found Jauregui responsible and assessed damages in the amount of $835,000, while Jauregui reaped the benefits of its refusal to settle by offsetting the entire judgment with settlement funds paid by other defendants.

We find the facts in the instant case to more closely resemble those in Roberts v. Grande, 868 S.W.2d 956, 962 (Tex. App--Houston [14th Dist.] 1994, no writ), in which the plaintiff was allowed an award of attorney's fees even though the judgment was entirely offset by settlement amounts. "[A]pplying an offset from a previous settlement should not deprive a consumer of its attorney's fees." Id.

The Osbornes made a settlement offer to Jauregui prior to trial in the amount of $866,000, which proved to be a reasonable demand in light of the subsequent jury award, at a time when the Osbornes' attorney's fees had only reached $22,000. Jauregui responded with a counter-offer of only $12,810, forcing the Osbornes to incur an additional $1,127,641.30 in attorney's fees. (6) The Osbornes should not be penalized for proceeding to trial when their good-faith attempt to negotiate a settlement prior to filing suit was refused.

The dissent maintains that the Osbornes should not be awarded attorney's fees because they were fairly compensated for their damages before trial and that they should not continue to "litigate a claim after being made whole." However, the dissent assumes that the Osbornes were fairly compensated for their damages, ignoring the fact that the Osbornes put on evidence at trial that they suffered at least $2,418,153 in damages, excluding damages for mental anguish, bodily injury, and attorney's fees. Before litigation began, State Farm's experts had estimated that the Osbornes' damages exceeded their homeowners' insurance policy limit of $1,874,687, which left an uninsured deficit of approximately $600,000, not including uncovered damages such as mental anguish, bodily injury, and attorney's fees. Meanwhile, shortly before trial, the Osbornes were able to negotiate settlement amounts with certain defendants, but only after incurring substantial attorney's fees. The settlement amounts totaled $1,260,500 and were placed in trust because of State Farm's subrogation claim. Thus, prior to trial it was unclear whether the Osbornes would actually receive any of the settlement funds due to State Farm's subrogation interest. In light of the damage estimates produced by both the Osbornes and State Farm, it was highly unlikely that the Osbornes could have predicted that a jury would find that they suffered only $835,158.78 in damages.

While it is true that the Osbornes had received $1,874,687 from State Farm in insurance payments prior to trial and even assuming that they would receive all of the $1,260,500 in settlement amounts for a total of $3,135,187, the Osbornes were also relying on evidence that they had suffered at least $2,418,153 in damages and incurred almost $1,149,641 in attorney's fees for a total of $3,567,794. Therefore, unless the Osbornes went to trial, they would still have had at least $432,607 in uncompensated damages. If the jury had agreed that the Osbornes suffered $2,418,153 in damages as a result of Jauregui's conduct, and the trial judge had awarded the Osbornes their full $1,149,641 in attorney's fees, the Osbornes would have recovered $2,307,294 at trial, taking into account the dollar-for-dollar settlement credit. Assuming the Osbornes would then have been "made whole," and assuming State Farm properly asserted its subrogation claim to $1,874,687, the Osbornes would have been left with the $432,607 they needed to be fully compensated. Faced with these circumstances prior to trial, it was not at all unreasonable for the Osbornes to continue to pursue their claims against Jauregui.

Awarding attorney's fees to the Osbornes before applying the settlement credit is consistent with the reasoning in McKinley and the purpose of the DTPA. The Texas legislature determined that the DTPA "shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty and to provide efficient and economical procedures to secure such protection." Tex. Bus. & Com. Code Ann. § 17.44(a) (West 2002).

Because we find that the Osbornes were prevailing parties under the DTPA, we conclude that the trial court erred by holding that the Osbornes were not entitled to attorney's fees because they did not prevail under the DTPA. However, the trial court also held that the Osbornes were not entitled to attorney's fees because they failed to segregate the fees among the various claims and parties. The Osbornes contend that they are not required to segregate their attorney's fees by claim or defendant because the fees are related to inextricably intertwined claims that are based on a common set of facts.

Generally, a party seeking attorney's fees has a duty to segregate the fees incurred in pursuing claims or defendants for which fees are recoverable from those in which they are not, and a trial court may refuse to award attorney's fees in the absence of segregation. West Beach Marina, Ltd. v. Erdeljac, 94 S.W.3d 248, 267 (Tex. App.--Austin 2002, no pet.). However, there has historically been an exception to this rule when claims "are dependent upon the same set of facts or circumstances and thus are 'intertwined to the point of being inseparable.'" Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 11 (Tex. 1991) (quoting Gill Sav. Ass'n v. Chair King, Inc., 783 S.W.2d 674, 680 (Tex. App.--Houston [14th Dist.] 1989), modified, 797 S.W.2d 31 (Tex. 1990)). The Osbornes argue that they are subject to this exception because the facts necessary to prove that the various subcontractors and suppliers performed defective work or supplied defective products are the same facts necessary to prove that Jauregui failed to construct the house in a good and workmanlike manner.

The Texas Supreme Court recently curtailed the Stewart Title exception, stating that intertwined facts do not make fees recoverable and that "it is only when discrete legal services advance both a recoverable and unrecoverable claim that they are so intertwined that they need not be segregated." Chapa, 212 S.W.3d at 313-14. However, the Osbornes' failure to segregate fees does not mandate a denial of all attorney's fees because "an unsegregated damages award requires a remand." Id. at 314.

We find that the Osbornes have a duty to segregate their attorney's fees into recoverable and nonrecoverable claims. While the claims against Jauregui and the various settling defendants may arise from the same set of facts, this exception no longer applies. We remand for purposes of determining the amount of attorney's fees incurred by the Osbornes on the DTPA claim against Jauregui in a manner consistent with Chapa. See id.

Subrogation

The trial court determined that State Farm did not have subrogation rights against the settlement proceeds because State Farm did not meet its burden to present evidence allocating the settlement amounts to losses covered by insurance payments. State Farm argues that its contractual right of subrogation displaces any equitable considerations regarding whether the Osbornes have been "made whole" for their damages. State Farm further argues that even under an equitable determination of subrogation rights, it is entitled to the settlement proceeds because the Osbornes have already been "made whole" by insurance payments totaling $1,874,687.28. State Farm contends that it is entitled to the settlement funds without being required to show which settlement amounts were allocated to damages covered by insurance payments.

The principle of subrogation provides that an insurer that has paid its insured for losses covered by an insurance policy is entitled to the insured's rights and remedies against a third party for the covered losses. Harris v. American Prot. Ins. Co., 158 S.W.3d 614, 622 (Tex. App.--Fort Worth 2005, no pet.). Texas courts are "particularly hospitable" to the concept. Id. (quoting Interfirst Bank Dallas, N.A. v. United States Fid. & Guar. Co., 774 S.W.2d 391, 397 (Tex. App.--Dallas 1989, writ denied)).

In the absence of a contractual subrogation provision, subrogation rights are "firmly granted in" and "not easily detached from" equity. Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App.--Austin 1995, writ denied). If either an insured or an insurer "must to some extent go unpaid, the loss should be borne by the insurer for that is a risk the insured has paid it to assume." Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d 342, 344 (Tex. 1980) (quoting Garrity v. Rural Mut. Ins. Co., 253 N.W.2d 512, 514 (Wis. 1977)). An insurer is not entitled to an equitable right of subrogation until the insured is "made whole" for his loss. Ortiz, 597 S.W.2d at 343; Esparza, 909 S.W.2d at 552.

In determining equitable subrogation rights, "[t]o avoid injustice, the equities must still be balanced in deciding what amount, if any, the subrogee is entitled to receive in a given case . . . . A trial court is not cast adrift on the sea of equity without guidance, however. Various rules and considerations offer moorings for the trial court in applying equity." Esparza, 909 S.W.2d at 552. Such considerations include the prevention of a double recovery by the insured, the parties' conduct during settlement or before the court, and evidence of damages. Id. at 552-553.

In a determination of subrogation based purely on equitable factors, the trial court did not abuse its discretion in denying subrogation rights to State Farm. For example, State Farm, by arguing at trial and on appeal that the Osbornes are not entitled to attorney's fees under the DTPA, asserted a position that was adverse to the very parties whose interests State Farm, as an insurer, was expected to protect. The fact that State Farm attempts to compromise the Osbornes' efforts to achieve the fullest possible recovery suggests that equity should not favor State Farm in a determination of subrogation rights.

Furthermore, State Farm's statements at trial directly conflict with its argument on appeal that the Osbornes were "made whole" because the jury returned a judgment of $835,158.78 in damages, and the total insurance payments received by the Osbornes exceed this amount. For example, State Farm stated in its third amended petition in intervention that the Osbornes suffered damages at least in the amount of $1,902,247.44. A judicial admission is conclusive upon the party making it, relieves the opposing party's burden of proving the admitted facts, and bars the admitting party from disputing it. Mendoza v. Fidelity & Guar. Ins. Underwriters, Inc., 606 S.W.2d 692, 694 (Tex. 1980). State Farm also put on an expert, Buddy Henderson, to testify that $1,477,351 was a reasonable cost of repairs for the house and that he relied on this amount in determining that State Farm should pay the full policy limits to the Osbornes. A party's testimony at trial will be treated as a judicial admission if (1) the statement is deliberate, clear, and unequivocal, (2) the statement is contrary to an essential fact embraced in the theory of recovery asserted by the party giving the testimony, (3) the statement is not also destructive of the opposing party's theory of recovery, and (4) it would be unjust to permit a party to recover after he has sworn himself out of court by clear and unequivocal testimony. Id. Each of these factors is satisfied with reference to Henderson's expert testimony that the cost of repairs alone could reasonably be $1,477,351.

However, State Farm now asserts that the Osbornes' damages are limited to the amount of the jury verdict. As a policy matter, allowing this drastic change in State Farm's damages assessment would mean that insured parties could not accept insurance payments from an insurer without fear that in the future, the insurer would claim that it had overpaid and that the excess should be used to offset settlement payments for mental anguish or other uncovered damages. These factors support the trial court's equitable decision to deny subrogation to State Farm. Based on longstanding Texas law regarding equitable subrogation at the time the trial court's judgment was issued, the trial court did not abuse its discretion.

However, the Texas Supreme Court recently held in Fortis Benefits v. Cantu, No. 05-0791, 2007 Tex. LEXIS 603, at *18-19 (Tex. June 29, 2007), that contract-based subrogation rights trump equitable considerations, which are to be used by default in the absence of a contractual right to subrogation. As a result, equitable considerations such as the "made whole" doctrine are to apply "only in the absence of contrary reimbursement language in the contract." Id. at *18.

The contract at issue in Fortis established a right of subrogation, stating, "Upon payment of benefits, We will be subrogated to all rights of recovery a Covered Person may have against any person or organization. . . . Such right extends to the proceeds of any settlement or judgment; but is limited to the amount of benefits We have paid." Id. at *5 n.11. The Texas Supreme Court noted that because the provision was "not imprecise or ambiguous" and it gave Fortis "an unfettered right to recover the proceeds from the settlement," equitable considerations must give way to the language of the contract. Id.

State Farm, in its petition for intervention, stated that "State Farm is equitably entitled to seek recovery for such damages against Defendants as a real-party-in-interest, and is authorized to pursue this claim in the name of its insured. [The Osbornes] have assigned their rights and interest to the extent of such benefits paid to them by State Farm." This language reflects both equitable and contractual subrogation principles. In addition, State Farm claims in its October 20, 2004 motion to modify, correct, or reform the judgment that the trial court's judgment is in error "in that it denies State Farm Lloyds the right to apply settlement funds received from third parties in satisfaction of State Farm Lloyds [sic] contractual and equitable subrogation claim." (7)

The subrogation provision in the Osbornes' homeowners' insurance policy with State Farm reads in its entirety:

Subrogation. An insured may waive in writing before a loss all rights of recovery against any person. If not waived, we may require an assignment of rights of recovery for a loss to the extent that payment is made by us.
If an assignment is sought, an insured must sign and deliver all related papers and cooperate with us.

This provision, which merely states that State Farm "may" require an assignment of rights, is significantly more ambiguous than the provision at issue in Fortis, which states that the insurer "will be subrogated to all rights of recovery," including "the proceeds of any settlement or judgment." Fortis, 2007 Tex. LEXIS 603, at *5 n.11 (original emphasis removed, emphases added).

Even if State Farm's contractual right to subrogation controls over equitable considerations, State Farm may be prevented from recovering settlement funds due to its failure to allocate the funds to covered versus uncovered losses. The subrogation provision in the Osbornes' policy states that an assignment of rights may be required "for a loss to the extent that payment is made by [State Farm]." In a claim for subrogation where settlement amounts are at issue, an insurer bears the burden of showing what amount, if any, of the settlement amounts correspond to amounts paid by it. Ortiz, 597 S.W.2d at 344.

Subrogation should not be awarded if it is not clear what portion of the settlement is intended to compensate for covered losses. Id. "In true subrogation cases, where the insurer is bringing the action against the third party, or is participating in the insured's action against the third party, recovery by the insurer is generally limited to the same elements as those for which it has made payment." Lee R. Russ & Thomas F. Segalla, 16 Couch On Insurance § 226-52 (3d ed. 2000).

It is not clear from the record which types of losses were meant to be covered by the amounts that the Osbornes received from the settling parties. "[T]he mere fact that an insured receives a recovery from another source may not establish that the amounts recovered correspond to the same elements of loss for which the insured has already recovered from the insurer." Id.

State Farm failed to allocate the settlement funds to covered versus uncovered losses. We can assume that because State Farm asserts in its brief that it assisted "vigorously" in securing the settlements, there was ample opportunity to make such an allocation. There is no evidence that the remaining settlement amounts are allocable to covered damages, rather than uncovered damages such as mental anguish, attorney's fees, or any reduction in the house's market value due to the "golf ball problem."

Because the trial court's order denying subrogation rights to State Farm was issued prior to Fortis and thus before specific contractual subrogation rights were deemed controlling over equitable principles, the trial court did not have an opportunity to evaluate and interpret the subrogation clause in the Osbornes' homeowners' policy. Therefore, we remand to the trial court for a review of the subrogation provision in order to determine whether the language is sufficiently precise and unambiguous to control over equitable subrogation principles and to evaluate the effect of State Farm's failure to allocate the settlement funds, in light of the Texas Supreme Court's holding in Fortis.

In the event that Fortis is applicable to the Osbornes' homeowners' policy, the contractual subrogation provision must control over equitable considerations. In the alternative, if the trial court finds that Fortis does not apply to the present case because the contractual subrogation provision is not sufficiently precise and unambiguous, the determination of State Farm's subrogation rights must be based on the "trial court's balancing of the equities." Esparza, 909 S.W.2d at 552. Based on an evaluation of equitable factors, the trial court did not abuse its discretion in denying subrogation rights to State Farm. However, we find it significant that at the time such rights were denied, the Osbornes were also denied their attorney's fees. We have since determined that the Osbornes should be awarded attorney's fees. As a result, the factors that may be taken into account by the trial court in balancing the equities to determine subrogation rights have changed. Where the facts have changed, the trial court's equitable determination may change as well because "[e]quity is inextricably tied to facts" and "the conflict of interests in subrogation . . . cannot be resolved by a bright-line test that curtails a trial court's discretion to apply equity based on the facts of the case." Id. at 553. In light of the fact that this case has been remanded to the trial court for purposes of segregating the Osbornes' attorney's fees and to allow for a review of the contractual subrogation provision and the applicability of Fortis, the trial court, if it finds Fortis to be inapplicable, may also wish to revisit its equitable determination of State Farm's subrogation rights.

We reverse the trial court's denial of State Farm's subrogation claim and remand to the trial court for purposes of reviewing the contractual subrogation provision in light of Fortis and, if necessary, revisiting its equitable determination of State Farm's subrogation rights as a result of our award of attorney's fees to the Osbornes and remand for the purpose of calculating the fee award.

CONCLUSION

Because the Osbornes were prevailing parties under the DTPA, they are entitled to reasonable and necessary attorney's fees from Jauregui. We reverse the trial court's denial of the Osbornes' attorney's fees. Because we find that the Osbornes were required to segregate their attorney's fees, we remand for the purposes of segregation.

Because the Texas Supreme Court's recent decision in Fortis Benefits v. Cantu requires that precise and unambiguous contractual language regarding subrogation controls over equitable considerations, we reverse the trial court's denial of State Farm's subrogation claim and remand for a determination of State Farm's subrogation rights in light of the contractual subrogation provision in the Osbornes' homeowners' policy and, if Fortis is deemed inapplicable, a determination of State Farm's equitable subrogation rights after any award of attorney's fees to the Osbornes.

Diane Henson, Justice
Before Justices Patterson, Puryear and Henson;
Dissenting Opinion by Justice Puryear
Reversed and Remanded
Filed: August 29, 2007

1. Any reduction in the house's market value due to the "golf ball problem" is one example of a loss suffered by the Osbornes that would generally not be covered by a homeowners' insurance policy.
2. A pre-suit demand letter is required in order to pursue a claim under the Texas Deceptive Trade Practices Act. Tex. Bus. & Com. Code Ann. § 17.505(a) (West 2002). This statutory notice requirement is designed to afford parties the opportunity to negotiate and settle prior to suit, potentially avoiding lengthy and costly litigation. Star Houston Inc. v. Kundak, 843 S.W.2d 294, 297 (Tex. App.--Houston [14th Dist.] 1992, no writ). If a defendant tenders an offer during settlement negotiations that is refused by the plaintiff, and the amount tendered turns out to be equal to or greater than the damages found at trial, the plaintiff's attorney's fee award is limited to the amount of fees incurred at the time the rejected settlement offer was made. Tex. Bus. & Com. Code Ann. § 17.5052(h) (West 2002).
3. The Osbornes also sued Jauregui's realtor, but those claims are not before us on appeal.
4. No questions were submitted to the jury regarding the measure of damages for items such as permanent reduction in market value of the home or the loss of time spent by the Osbornes in attempting to correct problems with the house. See Ludt v. McCollum, 762 S.W.2d 575, 576 (Tex. 1988) (holding that permanent reduction in market value after repair is recoverable in DTPA claim); Village Mobile Homes, Inc. v. Porter, 716 S.W.2d 543, 549-50 (Tex. App.--Austin 1986, writ ref'd n.r.e.) (holding that damages for lost time may be recoverable in DTPA claim).
5. The Osbornes have since received $17,606.01 from one of the defendants and state that if they prevail, the fees should be reduced to $1,132,035.29. They also seek $50,000 in appellate fees.
6. It is not uncommon for an attorney's fee award to exceed the damages recovered. Hoover Slovacek L.L.P. v. Walton, 206 S.W.3d 557, 563 n.8 (Tex. 2006).
7. State Farm further states in its November 12, 2004 motion to modify, correct, or reform the amended final judgment that "because State Farm Lloyds has already paid $1,874,687.28 to the Plaintiffs, and the Plaintiffs' damages were only $835,158.78, State Farm Lloyds is both equitably and contractually entitled to subrogation."