Surety Case Law Note: Sovereign Immunity v. Subrogation
January 30, 2024
In this Surety Today Blog post we consider a Case Law Note addressing the issue of the intersection between sovereign immunity and equitable subrogation. The case is:
SAN ANTONIO WATER SYS. V. GUARANTEE CO. OF N. AM. USA,
No. 08-23-00123-CV, 2024 WL 42357, at *1–5 (Tex. App. Jan. 3, 2024)
This case involved two separate projects with the same contractor, Thyssen-Laughlin, Inc. (“Thyssen”), the same surety, The Guarantee Company of North America USA (“Surety”), and the same owner, the San Antonio Water System (SAWS). The facts are these: The first project was known as the “Mel Waiters Project” and the second was known as the “Westpointe Project.” A dispute arose between SAWS and Thyssen on the Mel Waiters Project. SAWS eventually sued Thyssen for breach of performance under its contract and the Surety for breach under the performance bond.
In response, the Surety filed a counterclaim against SAWS relating to the Westpointe Project in which it alleged (1) that SAWS breached the Westpointe Project contract by failing to pay the balance due of $119,990.33 for the labor, materials, goods, and services Thyssen delivered to the project for the benefit of SAWS; (2) that SAWS improperly released contract funds to Thyssen in the amount of $346,037.45 without Surety’s consent, nine days after the Surety directed SAWS to not make any such payments without its consent and (3) that SAWS violated the Texas Prompt Payment Act.
SAWS filed a motion to dismiss the Surety’s counterclaims asserting that it was a governmental entity and entitled to sovereign immunity. The trial court denied SAWS’ motion and SAWS appealed. SAWS is a governmental entity owned by the City of San Antonio that provides water and wastewater services. Generally speaking, as a governmental entity, SAWS would be immune from suit unless that immunity has been waived. Absent the State’s consent to suit, governmental immunity deprives the court of subject-matter jurisdiction to hear a suit against the governmental entity.
To defeat SAWS’s immunity challenge, the Surety had the burden to plead facts that, if true, affirmatively demonstrate that governmental immunity either does not apply or has been waived. The Surety asserted that immunity had been waived by SAWS’s contracting with Thyssen. The parties acknowledged that the legislature had waived immunity for breach of contract claims. As a result, the Surety’s failure to pay claim was not subject to the appeal and remained pending before the trial court. The appeal therefore only addressed whether SAWS’s governmental immunity was waived with respect to the alleged improper release of contract funds and/or on the prompt payment claim.
The premise of the improper payment counterclaim was that SAWS did not retain funds after receiving notice from the Surety informing SAWS that it should withhold the funds from Thyssen. The notice to SAWS claimed that the Surety had received claims against the Payment Bond and directed SAWS that no payments be made to any entity, no matter the payment form, without the consent of the Surety. SAWS ignored the notice and paid Thyssen $346,037.45, nine days after the notice. Thyssen then used the funds for purposes other than the project.
The court held that the statutory waiver of immunity did not apply to the Surety because there was no contract between SAWS and the Surety. Therefore, the Surety relied on equitable subrogation to argue that immunity was waived because it stepped into Thyssen’s shoes to recover from SAWS. The Surety contended that a claim by a general contractor’s Surety for equitable subrogation, in which the Surety seeks to step into the shoes of a contractor and recover from a governmental entity for breach of contract, falls within waiver of governmental immunity from suit. However, the court took a narrow view of subrogation and noted that “[w]hether contractual subrogation or equitable subrogation, the insurer stands in the shoes of the insured, obtaining only those rights held by the insured against a third party, subject to any defenses held by the third party against the insured.” Thus, the court held that “although [the Surety] asserts a right to equitable subrogation, it may step into Thyssen’s shoes to assert only those rights held by Thyssen against SAWS, subject to any defenses held by SAWS against Thyssen.”
In this case, the Westpointe Project contract did not require SAWS to hold retainage and only required SAWS to make payments on account, for the performance of the work in accordance with the agreement, at the prices set forth in the contractor’s proposal. The court reasoned that because SAWS did not breach its obligation to pay Thyssen in accordance with the contract and because of the payment made by SAWS to Thyssen no further monies were owed to Thyssen, the Surety could not stand in Thyssen’s shoes, since Thyssen held no rights as against SAWS. In addition, the court noted that the Westpointe Project contract did not require SAWS to obtain Surety consent before paying any funds. Therefore, the court held that SAWS did not breach the contract by not retaining funds or obtaining consent to release any funds. Thus, the court concluded that the Surety’s counterclaim for “improper release of contract funds” did not fall within the scope of the waiver of governmental immunity even when equitable subrogation was applied.
Addressing the Surety’s claim for violation of the Texas Prompt Pay Act, the Court noted that the Act did not apply to a governmental entity by its express terms. Since SAWS is a governmental entity, the Prompt Pay Act claim should have been dismissed and the trial court’s ruling was reversed.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.