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Economic development corporations aren’t entitled to sovereign immunity, according to the Texas Supreme Court

April 19, 2019

The Texas Supreme Court ruled in March that local development corporations aren’t entitled to claim sovereign immunity. The issue arose in the context of a contract dispute involving the Rosenberg Development Corporation (RDC) and a performance agreement it entered into with Imperial Performing Arts, a nonprofit performing arts organizationThe RDC challenged the court’s jurisdiction to hear any of Imperial’s claims, contending that it was immune from liability for damages under the Texas Local Government Code. The court, however, didn’t agree. Rosenberg Development Corporation v. Imperial Performing Arts, Inc., 2019 Tex. LEXIS 242, 2019 WL 1090918(3/8/19).

The court first explained that the Texas Development Corporation Act authorizes municipalities to create local economic development corporations like the RDC, noting the legislature’s findings that establishing and funding economic development corporations is “in the public interest” and “serve[s] a public purpose.” Significantly, while the Development Corporation Act requires economic development corporations to comply with open meetings and public records laws, it classifies economic development corporations as nonprofit corporate entities with “the powers, privileges, and functions of a nonprofit corporation.” The law further specifies that economic development corporations are not “political subdivisions” and it prohibits municipalities from granting them any “attributes of sovereignty.”

Next, the court discussed the doctrine of sovereign immunity, which protects the states and their agencies from liability for damages. In Texas this immunity takes two forms: “(1) immunity from suit even when the sovereign’s liability is not disputed and (2) immunity from liability even though the sovereign has consented to the suit.” As the court explained: “Immunity from suit recognizes the judiciary’s limited authority over its sovereign creator and thus implicates the courts’ subject-matter jurisdiction to resolve a dispute against the state. In comparison, immunity from liability only protects the state from money judgments, is not jurisdictional, and must be raised as an affirmative defense rather than by jurisdictional plea. As a common-law doctrine, the judiciary determines whether immunity exists in the first instance, and if it does, we defer to the Legislature to waive or abrogate it.” The court also explained that “political subdivisions” such as municipalities are not stand-alone sovereigns and therefore are not generally entitled to sovereign immunity, but under the doctrine of governmental immunity they’re deemed to share the state’s immunity whenever they act in the performance of state functions. As the court cautioned, however, “governmental immunity extends ‘as far as the state’s [immunity] but no further,'” and thus “no immunity exists for acts performed in a proprietary, non-governmental capacity.”

In determining that the RDC was not entitled to immunity from suit under the governmental immunity doctrine, the court emphasized that economic development corporations were not the sort of “political subdivision” typically eligible for this type of immunity. Rather, the Development Corporation Act “explicitly rejects an economic development corporation’s political-subdivision status.” The court also declined to find any implied legislative intent in the nature of economic development corporations that would be sufficient to grant them governmental immunity, and it distinguished an earlier case involving a self-insurance fund on the basis that the self-insurance fund, unlike economic development corporations, was specifically defined as a “local government.” While the RDC emphasized that economic development corporations aren’t “ordinary” nonprofit entities because they’re subject to open meetings and public records laws, as well as other restrictions and requirements not usually applied to private nonprofits, the court found this argument unpersuasive. As it noted, “heavily regulating an entity does not equate to conferring governmental-entity status.”

The court also emphasized that governmental immunity is a common law rule “exclusively for the judiciary to define,” and thus even if economic development corporations were defined as “political subdivisions” this might not be sufficient for immunity to attach. In this respect, the court explained that “granting immunity to economic development corporations is not necessary to satisfy the political, pecuniary, and pragmatic policies underlying our immunity doctrines. Governmental immunity benefits the public by preventing disruptions of key governmental services, but economic development corporations are not tasked with performing essential services. Rather, these entities are authorized for the limited purpose of promoting and developing enterprises to encourage employment and the public welfare.” The court similarly found that immunity wouldn’t be justified on the basis of public fisc concerns, noting that “sovereign immunity is ‘designed to guard against the unforeseen expenditures associated with the government’s defending lawsuits and paying judgments.'” Economic development corporations simply do not present this sort of risk of unforeseen governmental expenditures, the court explained, since they typically operate by developing projects in accordance with prearranged plans and performance agreements, and because the statutory scheme contains other restrictions on liability and financial exposure.

“Governmental immunity,” the court concluded, “does not extend like ripples from a pebble tossed into a pond but, instead, is limited to those entities acting as an arm of state government. Despite fulfilling public purposes, economic development corporations do not exist quite like an arm of the state government, imbued with aspects of sovereignty such as immunity from suit. Moreover, the fundamental purposes of governmental immunity do not countenance immunizing economic development corporations like RDC from suit nor does the Development Corporation Act purport to contemplate the same.”

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