Magic Valley Electric Cooperative v. City of Edcouch

NUMBER 13-05-202-CV COURT OF APPEALS THIRTEENTH DISTRICT OF TEXAS CORPUS CHRISTI - EDINBURG MAGIC VALLEY ELECTRIC COOPERATIVE Appellant, v. CITY OF EDCOUCH, Appellee. On appeal from the 332nd District Court of Hidalgo County, Texas. DISSENTING MEMORANDUM OPINION Before Chief Justice Valdez and Justices Castillo and Garza Dissenting Memorandum Opinion by Justice Castillo Appellant, Magic Valley Electric Cooperative ("Magic Valley"), brings this interlocutory appeal from an order certifying a class, pursuant to section 51.014(a)(3) of the Texas Civil Practice and Remedies Code. Tex. Civ. Prac. & Rem. Code Ann. ' 51.014(a)(3) (Vernon Supp. 2004-05). Appellant contends that the trial court erred in certifying the class because the class representative does not have standing and is inadequate as a representative, and because appellee, the City of Edcouch, Texas ("Edcouch"), has failed to satisfy the requisites of numerosity, typicality, or predominance. While the majority affirms the trial court, I would reverse and remand. I. Background Magic Valley is an electric cooperative, owned by its membership, which services principally rural areas in south Texas. As populations have grown, cities in that region have annexed new territories which, in some instances, included customers of Magic Valley. As a result, Magic Valley has become subject to various ordinances and/or franchise agreements requiring it to pay franchise taxes to those cities in which it has customers. A municipality is entitled to collect a franchise tax in exchange for permitting use of its streets, alleys, or public ways. See Tex. Tax. Code Ann. '182.025 (Vernon 2002). This provision of the tax code, as enacted prior to its amendment in 1999, provided that an incorporated city or town was entitled to make a reasonable lawful charge for use of its streets, alleys, or public ways, but the total charge, however designated or measured, could not exceed two percent of the "gross receipts" of the public utility "for the sale of gas, electric energy, or water within the city."[1] As amended in 1999, the section now provides that "total charges, however designated, that relate to distribution service of an electric utility or transmission and distribution utility within the city may not exceed the amounts as prescribed in section 33.008 of the Texas Utilities Code." Tex. Tax. Code Ann. '182.025 (Vernon 2002). The utilities code provides that a municipality may collect "a charge based on each kilowatt hour of electricity delivered by the utility to each retail customer whose consuming facility's point of delivery is located within the municipality's boundaries." Tex. Util. Code Ann. ' 33.008(b) (Vernon Supp. 2004-05).[2] A municipality and electric utility may mutually agree to a different level of compensation, or to a different method for determining the amount the municipality may charge. Id. ' 33.008(f). Magic Valley first began paying franchise fees to Edcouch in 1980 or 1981. Edcouch contends that Magic Valley incorrectly defined and calculated "gross receipts" to include only sales of kilowatt hours of electricity, thereby failing to include as receipts revenue from various other fees.[3] Edcouch contends that Magic Valley thereby violated its agreement with the city and seeks certification of a class composed of all municipalities having franchise agreements with Magic Valley. Edcouch filed suit in December 1996, bringing claims for breach of contract, negligent misrepresentation, and fraud, as well as an action for a declaratory judgment that class members "are entitled to judgment . . . declaring the rights, status and legal relationship between [Edcouch], the potential class and Magic Valley with respect to Magic Valley's withholding proper municipal fees due and owing to Edcouch."[4] No further action occurred in the case until the matter was placed on the drop docket in January 2003, at which time Edcouch moved to retain the matter on the docket.[5] A docket control order was issued setting trial for December 2003; an agreed motion for continuance was filed in January 2004. In August 2004, Edcouch pursued the class certification issues, and the class certification hearing was held October 6, 2004. Evidence at the hearing established that Magic Valley serves a five-county area in south Texas, but that the cities that could potentially be members of the proposed class are located only in Cameron, Willacy, and Hidalgo counties. Evidence further established that there are twenty-seven cities that could potentially be members of the class. Of these, only eleven have a written franchise agreement with Magic Valley. Edcouch has no written agreement with Magic Valley, and no ordinance pertaining to its collection of franchise fees is in evidence. The trial court certified the class by order dated March 7, 2005. In that order, the class is defined as: All Texas municipal corporations, municipalities, cities, towns and villages that have or have had, existing or expired franchise agreements that required Defendant Magic Valley Electric Cooperative (hereinafter referred to as "MVEC") to pay various percentages of gross receipts received by MVEC from its electrical lighting and power sales consumed within the corporate limits of the municipalities, and where there has not been the execution of any prior effective release of the claims alleged in this litigation. The order continues: The class claims, issues, or defenses are as follows: Defendant MVEC entered into franchise fee agreements with all Plaintiffs to pay a certain percentage of its "gross receipts." Defendant breached the agreements by various acts and procedures, accounting tricks and acts of malfeasance and misfeasance resulting in substantial lost revenue and harm to the Plaintiff and causing damages to Plaintiff and other similarly situated cities.[6] The order identifies common issues of fact, including "that there was an agreement with MVEC" which "permitted MVEC to perform specific tasks within the territory of a class member," by which "MVEC was to pay a percentage of its gross receipts to the class member," and that MVEC did not pay the promised amounts and failed to include revenue received from its electrical and power sales in its calculations. "The issues of law common to the class members are the court's construction of MVEC's legal obligations, based on the franchise agreement, to pay a percentage of its 'gross receipts . . .'" Portions of the order certifying the class also state: 7. The following issues of fact and law may affect only individual members: Whether a written franchise fee contract exists between some of the class member[s] and whether lack of such contract would invite a different interpretation of the franchise fee agreement. This incorporates any affirmative defenses raised by defendant against municipalities with oral contracts. In addition, the issues on damages may affect individual members. 8. The following issues will be the object of most of the efforts of the litigants and the court: whether MVEC's calculations of the member's franchise fee, a method universally calculated regardless of oral or written contract, properly took into consideration all gross receipts. 9. Other available methods of adjudication that exist for this controversy [include] joinder. However after review of the evidence, it is deemed by this court to be impracticable and inferior to class certification. II. Issues on Appeal Magic Valley appeals from this interlocutory order of class certification, raising five issues: (1) the trial court erred in holding that Edcouch has standing to bring the suit and to serve as class representative; and (2) Edcouch failed to satisfy the requisites of rule 42,[7] including (a) numerosity (issue two), (b) typicality (issue three), (c) adequacy to serve as a class representative (issue four), and (d) predominance and superiority as required under rule 42(b)[8] (issue five). III. Analysis A. Standing Standing to sue is a fundamental prerequisite to bringing a legitimate judicial action; it governs a court's jurisdiction and its essential authority to hear a case. Tex. Ass'n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 443 (Tex. 1993). It is therefore a prerequisite to class certification and may properly be considered in an interlocutory appeal. M.D. Anderson Cancer Ctr. v. Novak, 52 S.W.3d 704, 710 (Tex. 2001) (holding that standing is a threshold inquiry regardless of whether the plaintiff brings an individual or class action). A plaintiff must have both standing and capacity to bring a lawsuit. Coastal Liquids Transp., L.P. v. Harris County Appraisal Dist., 46 S.W.3d 880, 884 (Tex. 2001). In Texas, the standing doctrine requires that there be (1) "a real controversy between the parties," that (2) "will be actually determined by the judicial declaration sought." Nootsie, Ltd. v. Williamson County Appraisal Dist., 925 S.W.2d 659, 662 (Tex. 1996). Standing focuses on the question of who may bring an action. M.D. Anderson, 52 S.W.3d at 708. Without standing, a court lacks subject matter jurisdiction to hear the case. Tex. Ass'n of Bus., 852 S.W.2d at 443. A plaintiff has standing when it is personally aggrieved." Nootsie, 925 S.W.2d at 661. A plaintiff is "personally aggrieved" when it demonstrates that it "possesses an interest in a conflict distinct from that of the general public, such that the defendant's action have caused the plaintiff some particular injury." Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992); Tex. Dep't of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 646 (Tex. 2004) (citing Hunt v. Bass, 664 S.W.2d 323, 324 (Tex. 1984)). "That a suit may be a class action . . . adds nothing to the question of standing, for even named plaintiffs who represent a class 'must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent.'" M.D. Anderson, 52 S.W.3d at 708 (quoting Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 40 (1976)). Magic Valley contends that Edcouch lacks standing because it does not have a contract with Magic Valley and, therefore (1) does not fall within the class definition, and (2) has not been "personally aggrieved," see Nootsie, 925 S.W.2d at 661, or sustained any injury as a result of breach of contract, see M.D. Anderson, 52 S.W.3d at 710; Wilson v. Andrews, 10 S.W.3d 664, 669 (Tex. 1999). Nothing in the order for class certification mandates that the franchise agreement between Edcouch and Magic Valley be in writing. It is further undisputed in the evidence that Magic Valley made payments to Edcouch, over an extended period of years, denominated in Magic Valley's own records as payments for "franchise tax." The dispute in issue is not whether such payments were made, but whether they were sufficient "per the agreement." The absence of a written agreement (or any accompanying ordinance) therefore does not necessarily reflect the absence of an oral or implied agreement. Further, the trial court specifically contemplated and provided for potential oral agreements in its order. The evidence does not preclude the existence of a contract between Magic Valley and Edcouch, whether oral or implied. The evidence further reflects that Edcouch did in fact receive payments from Magic Valley denominated as franchise taxes over an extended period of time and. If any error in calculation of payment of the type alleged was made, Edcouch would have sustained the same type of particularized injury as those cities with a written agreement. See Lujan , 504 U.S. at 560; City of Sunset Valley, 146 S.W.3d at 646. I agree with the majority that Edcouch has standing to bring its causes of action, and agree that Magic Valley's first issue should be overruled. B. Rule 42 RequisitesBStandard of Review An appellate court reviews the propriety of the class certification in light of the claims asserted by the named plaintiffs, but in no way evaluates the merits of those claims. See Intratex Gas Co. v. Beeson, 22 S.W.3d 398, 404 (Tex. 2000) ("Deciding the merits of the suit in order to determine . . . its maintainability as a class action is not appropriate."). Review of an interlocutory appeal from a class certification order is limited to determining whether the trial court's order constituted an abuse of discretion. Ford Motor Co. v. Ocanas, 138 S.W.3d 447, 451 (Tex. App.BCorpus Christi 2004, no pet.); see also Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675, 690‑91 (Tex. 2002). Review of a trial court's decision under an abuse of discretion standard requires a determination of whether the trial court acted without reference to any guiding rules or principles. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985). The exercise of discretion is within the sole province of the trial court, and an appellate court may not substitute its discretion for that of the trial judge. Johnson v. Fourth Ct. App., 700 S.W.2d 916, 918 (Tex. 1985). Rather, an abuse of discretion occurs only when the trial court reaches a decision that is "so arbitrary and unreasonable as to amount to a clear and prejudicial error of law." Id. at 917. However, no automatic right exists to maintain a lawsuit as a class action. Southwestern Ref. Co. v. Bernal, 22 S.W.3d 425, 439 (Tex. 2000) (quoting Sun Coast Res., Inc. v. Cooper, 967 S.W.2d 525, 529 (Tex. App.BHouston [1st Dist.] 1998, pet. dism'd w.o.j.)). Courts must take a cautious approach to class certification and must perform a rigorous analysis to determine whether all certification prerequisites have been met. Bernal, 22 S.W.3d at 435; accord, Schein, 102 S.W.3d at 690. "Compliance with Rule 42 must be demonstrated; it cannot merely be presumed." Schein, 102 S.W.3d at 691. The Supreme Court has expressly rejected the approach of "certify now and worry later." Bernal, 22 S.W.3d at 435; Schein, 102 S.W.3d at 690. The plaintiffs bear the burden of showing their entitlement to certification. See Cooper, 967 S.W.2d at 529; Glassell v. Ellis, 956 S.W.2d 676, 682 (Tex. App.BTexarkana 1997, pet. dism'd w.o.j.). The rigorous analysis performed by the court must include an indication of how the claims will likely be tried so that conformity with rule 42 can be meaningfully evaluated. Schein, 102 S.W.3d at 688. Courts are to "go beyond the pleadings" and understand the "claims, defenses, relevant facts, and applicable substantive law" in order to make a meaningful determination that the requirements of certification have been met. Bernal, 22 S.W.3d at 435. Typically, under this standard of review, the appellate court must indulge every presumption favorable to the trial court's ruling. Fid. and Guar. Life Ins. Co. v. Pina, 165 S.W.3d 416, 422 (Tex. App.BCorpus Christi, 2005 no pet.) (citing Graebel/Houston Movers, Inc. v. Chastain, 26 S.W.3d 24, 29 (Tex. App.BHouston [1st Dist.] 2000, pet dism'd w.o.j.)). On certification issues, however, the appellate court is not bound by this presumption and must independently determine whether the requirements of rule 42 have been fully satisfied. Pina, 165 S.W.3d at 422; Ocanas, 138 S.W.3d at 451; see also Schein, 102 S.W.3d at 691; Bernal, 22 S.W.3d at 435 (determining that actual compliance with rule 42 "must be demonstrated; it cannot be presumed"). A trial court's conclusions of law are not binding on this Court, which is free to make its own legal conclusions. Harlingen Irrigation Dist. Cameron County No. 1 v. Caprock Communications Corp., 49 S.W.3d 520, 530 (Tex. App.BCorpus Christi 2001, pet. denied); Muller v. Nelson Sherrod & Carter, 563 S.W.2d 697, 701 (Tex. Civ. App.BFort Worth 1978, no writ). "Conclusions of law are reviewed de novo as a question of law and will be upheld if the judgment can be sustained on any legal theory supported by the evidence." Harlingen Irrigation Dist., 49 S.W.3d at 530 (citing Circle C Child Dev. Ctr., Inc. v. Travis Cent. Appraisal Dist., 981 S.W.2d 483, 485 (Tex. App.BAustin 1998, no pet.)). A trial court's conclusions of law may not be reviewed for factual sufficiency and may be reversed only if they are erroneous as a matter of law. Stable Energy, L.P. v. Newberry, 999 S.W.2d 538, 547 (Tex. App.BAustin 1999, pet. denied); Hofland v. Fireman's Fund Ins. Co., 907 S.W.2d 597, 599 (Tex. App.BCorpus Christi 1995, no writ). Incorrect conclusions of law do not require reversal, provided that the controlling findings of fact support a correct legal theory. Stable Energy, 999 S.W.2d at 547. 1. Numerosity Magic Valley contends in its second issue that the trial court erred in finding that the proposed class action satisfied rule 42's requirements for numerosity. See Tex. R. Civ. P. 42(a)(1). The record reflects that the maximum potential number of cities that could be members of the class totals twenty-seven. The record further reflects that all of these cities are located in south Texas, in the counties of Cameron, Willacy, and Hidalgo. To meet the numerosity requirement, Edcouch had the burden of establishing that "the class is so numerous that joinder of all members is impracticable." Id. This determination is not based on numbers alone: The test is whether joinder of all members is practicable in view of the size of the class and such factors as judicial economy, the nature of the action, geographical location of class members, and the likelihood that class members would be unable to prosecute individual lawsuits. Chastain, 26 S.W.3d at 32 (quoting Weatherly v. Deloitte & Touche, 905 S.W.2d 642, 653 (Tex. App.BHouston [14th Dist.] 1995, writ dism'd w.o.j.)). This Court previously considered a similar set of circumstances in Rio Grande Valley Gas Co. v. City of Pharr, 962 S.W.2d 631 (Tex. App.BCorpus Christi 1997, writ dism'd w.o.j.). The City of Pharr sought certification of a class including "all Texas municipalities" having franchise agreements with the entities sued that entitled them to payments based on a percentage of gross receipts from gas sales. Id. at 641. Evidence reflected that the putative class was composed of over thirty municipalities in the Rio Grande Valley, with the remainder ("a clear majority of the total") located outside south Texas and throughout the state. Id. Because over ninety municipalities were involved, and because of the distance between class members, the City of Pharr was able to demonstrate that joinder of all would be impractical. Id. The City of Pharr also submitted materials in evidence demonstrating the limited size and resources of many of the class members, in support of its contention that many cities would not pursue their claims without the class action vehicle. Id. Similarly, in Central Power & Light Co. v. City of San Juan, 962 S.W.2d 602 (Tex. App.BCorpus Christi 1998, pet. dism'd w.o.j.),[9] the proposed class was composed of all Texas municipalities having municipal fee ordinances requiring Central Power & Light to pay a percentage of gross receipts from electrical lighting and power sales as franchise taxes. Id. at 606. The class consisted of at least 128 cities located in forty-four different counties. Id. at 609. This Court concluded from the evidence presented in City of San Juan that the numerosity element was "presumptively satisfied." Id. Determining whether or not a class is so numerous that joinder is impracticable is not based upon numbers alone. Rio Grande Valley Gas, 962 S.W.2d at 641 (citing Deloitte & Touche, 905 S.W.3d at 653). "Rather, the test is whether joinder of all members is impracticable in view of the size of the class and such factors as judicial economy, the nature of the action, geographical locations of class members, and the likelihood that class members would be unable to prosecute individual lawsuits." Id. No mechanical rules exist for making this determination, and in proper circumstances, a putative class very few in number has been found sufficient to comply with the numerosity requirement. Id. Impractical does not mean impossible, but the class representative must show that it is extremely difficult or inconvenient to join all members of the class. Id. (citing Chevron U.S.A., Inc. v. Kennedy, 808 S.W.2d 159, 161 (Tex. App.BEl Paso 1991, writ dism'd w.o.j.)). However, in this instance, I conclude that no such showing was made. The only evidence in the record relating to numerosity is that the total potential class encompasses, at most, twenty-seven cities located in three contiguous counties in south Texas. This does not comport with unmanageable numbers of putative class members located in geographically diverse or distant locales. Further, although there is argument, there is absolutely no evidence of the type presented in Rio Grande Valley Gas that unrepresented municipalities possess insufficient resources to independently pursue similar claims, or indeed that they wish to pursue such claims. Cf. Rio Grande Valley Gas, 962 S.W.2d at 641. There is no evidence that joinder would be "impractical." I conclude that Edcouch has failed to satisfy its burden to establish the requisite prong of numerosity. Tex. R. Civ. P. 42(a)(1), and I would sustain Magic Valley's second issue on appeal. 2. Remaining Issues Because of my conclusion on numerosity, I do not reach other issues raised on appeal, including those relating to typicality, adequacy, predominance, and superiority.[10] Tex. R. App. P. 47.1. Conclusion I conclude that class certification is improper because the requisite prong of numerosity under rule 42 has not been satisfied. I would reverse the trial court's order of class certification and remand for further proceedings. ERRLINDA CASTILLO Justice Dissenting Memorandum Opinion delivered and filed this the 23rd day of March, 2006. [1] See Act of May 29, 1981, 67th Leg., R.S., ch. 389, '182.025, 1981 Tex. Gen. Laws 1490, 1716, amended by Act of May 27, 1999, 76th Leg., R.S., ch. 405, ' 56, 1999 Tex. Gen. Laws 2543, 2623. [2] Act of May 27, 1999, 76th Leg., R.S. Ch. 405 '15, 1999 Tex. Gen. Laws 2543, 2551 (effective 9/1/99). [3] These may include disconnect fees, membership fees, or service fees. [4] It is nevertheless undisputed that Magic Valley collects and then passes these fees through to the cities as revenue, retaining no portion of the fees and receiving no compensation for this service. The essence of the disagreement appears to be that Magic Valley failed to include all sources of revenue in its definition of "gross receipts." [5] Testimony in the record indicates there was an informal agreement between the parties' attorneys not to pursue the case until final resolution of all appeals in Central Power & Light Co. v. City of San Juan, 962 S.W.2d 602 (Tex. App.BCorpus Christi 1998, pet. dism'd w.o.j.). However, appeals relating to the class certification in that matter were resolved by December 1998. A later appeal from the final order of the Public Utilities Commission was resolved in May 2000. See Central Power & Light v. Pub. Util.Comm'n, 17 S.W.3d 780 (Tex. App.BAustin 2000, pet. denied) (the petition for review was denied December 7, 2000). [6] Although Edcouch indicated at the class certification hearing that it could drop other claims beyond breach of contract, it has never done so. Although the class certification order directly references only the breach of contract claim (while also stating that breach occurred through "accounting tricks and acts of malfeasance and misfeasance"), outstanding claims in the underlying suit continue to include negligent misrepresentation and fraud. [7] Tex. R. Civ. P. 42(a). [8] Tex. R. Civ. P. 42(b). [9] This is the case which ostensibly delayed progress in this suit. See note 5. [10] Although I do not reach remaining issues, I nevertheless note serious concerns about Edcouch's adequacy to represent the class, given the extraordinary delays below in pursuing the litigation, regardless of the professed reason, and the complete inability of the tendered representative (as opposed to class counsel) to address serious concerns presented about the litigation. The named representatives must fairly and adequately protect the interests of the class members. Tex. R. Civ. P. 42(a)(4). Adequacy of representation has two elements: (1) an absence of antagonism between the class representatives and the class members, and (2) an assurance the representatives will vigorously prosecute the class claims and defenses. Graebel/Houston Movers, Inc. v. Chastain, 26 S.W.3d 24, 32 (Tex. App.BHouston [1st Dist.] 2000, pet. denied); E & V Slack, Inc. v. Shell Oil Co., 969 S.W.2d 565, 568 (Tex. App.BAustin 1998, no pet.). The adequacy inquiry serves to uncover conflicts of interest between the named parties and the class they seek to represent. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997). Adequacy of representation is a question of fact that must be determined by reference to the individual circumstances of each case. Entex v. City of Pearland, 990 S.W.2d 904, 915 (Tex. App.BHouston [14th Dist.] 1999, no pet.). Factors affecting this determination include: (1) adequacy of counsel, (2) potential conflicts of interest, (3) the personal integrity of the plaintiffs, (4) the representatives' familiarity with the litigation and their belief in the legitimacy of the grievance, (5) whether the class is unmanageable because of geographical limitations, and (6) whether the plaintiffs can afford to finance the class action. Forsyth v. Lake LBJ Inv. Corp., 903 S.W.2d 146, 150 (Tex. App.BAustin 1995, writ dism'd w.o.j.) (op. on reh'g). Here, the representative for Edcouch (its city manager) could not identify other putative class members. She stated there had only been one meeting relating to the suit in three years, and that nothing had happened since the matter was filed in 1996. She could only speculate that putative class members shared consistent interests (no evidence of communications between and only speculation about the possibility of existing disputes), in the face of evidence that some putative class members had written contracts by which they were paid franchise taxes based on 4% instead of a 2% factor, and that this higher rate might in fact be jeopardized by the instant litigation. She was unable to express familiarity with the bases on which payments made were calculated. She had no information relating to the circumstances of other cities or potential conflicts of interests. She was not even aware of Magic Valley's pleadings or the existence of a counter-claim. I consider this evidence indicative of inadequate representation.