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TEXAS COURT OF APPEALS, THIRD DISTRICT, AT
AUSTIN

NO. 03-04-00240-CV

Northwest Austin
Municipal Utility District No. 1, Don Zimmerman,

William C. Ferguson, and Alan R. Weiss,
Appellants

v.

City of Austin; Mayor Will Wynn,
Brewster McCracken, Lee Leffingwell,

Mike Martinez, Randi Shade, Laura Morrison, and
Sheryl Cole,

in their Official Capacities as City Council
Members, Appellees
(1)

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT

NO. GN203378, HONORABLE LORA J.
LIVINGSTON, JUDGE PRESIDING

O P I N I O
N

Appellants Northwest Austin Municipal Utility District No. 1, Don
Zimmerman, William C. Ferguson, and Alan R. Weiss appeal from the judgment
against them in their suit to declare that an agreement executed by the
District and appellees City of Austin and City Council members
(collectively, "the City") is an "allocation agreement" under section
54.016(f) of the Texas Water Code and that the agreement violates
section 54.016(f) by allowing both the City and the District to assess and
collect their full rate of property taxes.
(2) The trial court granted partial summary judgment in
favor of the City, upholding the City's property tax levy and collection
of taxes. Because we hold that the agreement is an allocation agreement as
a matter of law, we reverse the district court's order in part and render
summary judgment in favor of the District on this issue. However, because
summary judgment is improper as to the parties' remaining declaratory
claims, we reverse this portion of the judgment and remand for further
proceedings.

BACKGROUND

In 1984, real estate developer Nash Phillips/Copus ("NPC") purchased
2,348 acres in northwest Travis County, located in the City of Austin's
extraterritorial jurisdiction. NPC petitioned the City for water and
wastewater services and sought to create a municipal utility
district
(3) to provide water and wastewater services to the
property, known as the Canyon Creek development. The City opposed the
creation of the Northwest Austin MUD proposed by NPC, arguing that the
City had recently approved a number of MUDs in its extraterritorial
jurisdiction and expressing concerns that the proliferation of MUDs can
have "a substantial impact on the City's fiscal integrity."

When a city denies a request to include land within its
extraterritorial jurisdiction in a proposed MUD, the water code provides
that authorization may be sought by petitioning the Texas Water
Commission
(4) without securing the written consent of the city.
See Tex. Water Code Ann. § 54.016(b)-(d) (West
Supp. 2008). Under these provisions, which apply "only to land within the
extraterritorial jurisdiction of a city,"

the commission shall allow creation or inclusion of the land in a
proposed district upon a finding that the city either does not have the
reasonable ability to serve or has failed to make a legally binding
commitment with sufficient funds available to provide water and wastewater
service adequate to serve the proposed development at a reasonable cost to
the landowner.

Id. § 54.016(d). "The provisions of this section shall
apply whether the land is proposed to be included in the district at the
time of creation of a district or to be included by annexation to a
district." Id. Any party may appeal the Commission's decision in
district court. Id.

After the City refused to grant permission for the inclusion of land
within its extraterritorial jurisdiction in the proposed district, NPC
petitioned the Commission for authorization. Following a contested case
hearing, the Commission granted permission to create three MUDs (Northwest
Austin MUD Nos. 1, 2, and 3). The City then filed suit in district court
to appeal the Commission's decision. While the City's administrative
appeal was pending, NPC and the City resumed negotiations and
ultimately reached a settlement regarding the creation of
the Northwest Austin MUDs. The Austin City Council voted for the
formation of the District on January 15, 1987, and confirmed its decision
with the passage of Ordinance 870514-X on May 14, 1987. In addition to
providing the City's "written consent to the creation of a district,"
see id. § 54.016(a) (written consent to be provided by
resolution or ordinance), Ordinance 870514-X authorized the city manager
"to execute, on behalf of the City, the Agreement Concerning Creation and
Operation of the Northwest Austin Municipal Utility District No. 1" (the
"Agreement").
(5) The Agreement states that the parties understand
and acknowledge that "all the land to be included within the District
is to be annexed for full purposes by the City prior to final action for
creation of the District by the Commission." Under the Agreement, the
City would provide retail water, wastewater, and drainage services to
customers within the District, while the District and NPC would finance
and construct the water, wastewater, and drainage infrastructure and
facilities according to the City's development regulations; upon
completion, the facilities would be owned, maintained, and operated by the
City. The Agreement further provides, in section 7.2:

It is understood and agreed by the parties hereto that the City shall
have the authority to assess and collect ad valorem taxes at the City's
full tax rate within the District as for any other property within the
City of Austin and the District shall have the authority to assess and
collect the ad valorem tax established by the District unless either the
City or the District are prohibited by a court of law from assessing and
collecting all or a portion of the City's or the District's ad valorem tax
rate.

After the Agreement was executed, the City passed an ordinance to annex
the subject property into the corporate limits of the city.
Thereafter, the City filed the Agreement in district court, which remanded
the petitions for creation of the Northwest Austin MUDs to the Commission
for reconsideration. Among the changes agreed upon by the parties were the
dissolution of the three existing MUDs approved by the Commission, the
creation of two rather than three districts, and corresponding boundary
changes. The district court issued an order approving the Agreement,
settling the City's suit against the Commission.

The Commission created the District as an in-city MUD on March 16,
1988. A subsequent election confirmed the District's creation and
authorized $21.1 million in bonds for the construction of water,
wastewater, and drainage facilities. Under the water code, the District is
required to levy and collect ad valorem taxes sufficient to pay for the
debt services to these bonds. Id. § 54.601 (West 2002)
(district board shall levy continuing direct annual ad valorem tax each
year while all or part of bonds are outstanding on all taxable property
within district in amount sufficient to pay interest as it becomes due, to
create sinking fund for payment of principal or redemption price at any
earlier required redemption date, and to pay expenses of assessing and
collecting taxes); see also id. § 54.602 (non-exhaustive
list of factors board shall consider in determining actual rate to be
levied each year). In reviewing the bonds, the Commission found that "the
creation of the District will not unreasonably affect total tax
assessments on all land and properties located within the proposed
District." The Commission further concluded that "all of the requirements
of section 54.016 of the Texas Water Code, as amended, have been
fully complied with, met and accomplished."

In September 2002, the District and various individual homeowners filed
suit challenging section 7.2 of the Agreement. They sought declarations
that (1) section 54.016(f) of the water code prohibits the City from
charging its full tax rate to the residents of the District, and
(2) the residents' continuing duty to pay taxes to the District to
retire the debt incurred by the District requires the City to reduce its
own tax rate imposed on the residents of the District. In the District and
taxpayers' view, the Agreement is an "allocation agreement" within the
meaning of section 54.106(f), requiring the Agreement to ensure that
"the total annual ad valorem taxes collected by the city and the district
from taxable property within the district does not exceed an
amount greater than the city's ad valorem tax upon such property."
See Tex. Water Code Ann. § 54.106(f)(2). The District and
taxpayers also sought injunctive relief from the "illegal and excessive"
taxes imposed by the City, as well as attorney's fees and costs.

By counterclaim, the City sought its own declaratory judgment that the
Agreement is not an "allocation agreement" under the water code, that
section 54.016(f) is not applicable, and that the District had breached
the Agreement by seeking to declare section 7.2 invalid. Alternatively, if
the court found that the Agreement was subject to the requirements of
section 54.106(f), the City sought a declaration that the water code
provision was null and void "to the extent it reduces the amount of the
City's property taxes owed by the residents of the District or grants them
an illegal tax exemption from the payment of the City's property taxes."
The City also asserted a number of affirmative defenses against the
District's claims, including laches and the statute of limitations, and
filed a plea to the jurisdiction on the basis that the plaintiffs lacked
standing and the City had not waived its immunity from suit for what was,
in essence, a breach of contract claim.

The parties filed cross-motions for partial summary judgment on the
merits. The trial court denied the District's motion for partial
summary judgment and granted partial summary judgment in favor of the
City, finding that the District's claims are barred by the statute of
limitations and laches and declaring that the Agreement between the City
and the District is not an "allocation agreement" under section 54.016(f)
of the water code. The trial court made further declarations that
(1) the City's property tax levy was valid under the Agreement and
property taxes were properly collected from residents of the District
under the Agreement, and (2) section 54.016(f) of the water code does
not create a tax exemption under the Texas Constitution. The trial court
also granted the City's plea to the jurisdiction with respect to the
individual plaintiffs for lack of standing, denied the City's plea as to
the District,
(6) and granted the City's motion for partial summary
judgment on attorney's fees, creating the final judgment from which the
District and taxpayers now appeal.

STANDARD OF REVIEW

The propriety of a summary judgment is a question of law that we review
de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661
(Tex. 2005). When reviewing a summary judgment, we take as true all
evidence favorable to the nonmovant and we indulge every reasonable
inference and resolve any doubts in the nonmovant's favor. Id.
When both parties have filed motions for summary judgment and the district
court grants one motion and denies the other, the reviewing court looks to
the summary judgment proof presented by the parties, determines all
questions presented, and if the reviewing court determines that the trial
court erred, renders the judgment that the trial court should have
rendered. FM Props. Operating Co. v. City of Austin, 22
S.W.3d 868, 872 (Tex. 2000); Commissioners Court of Titus County v.
Agan, 940 S.W.2d 77, 81 (Tex. 1997). We affirm the summary judgment
if any of the theories presented to the trial court and preserved for
appellate review are meritorious. Joe v. Two Thirty Nine Joint
Venture, 145 S.W.3d 150, 157 (Tex. 2004).

DISCUSSION

The District
(7) brings five issues on appeal. In its first issue,
the District argues that the Agreement is an "allocation agreement"
subject to the requirements of section 54.016(f) of the Texas Water
Code, mandating that the City reduce the ad valorem tax rate it charges
taxpayers in the District. The District's second issue asserts that,
contrary to the City's counterclaim, section 54.016(f) does not
create an unconstitutional tax exemption. In the District's third issue,
it argues that neither the statute of limitations nor laches bars the
District from obtaining a declaration of its rights. The District asserts
in its fourth issue that the individual homeowners have standing to
challenge the consent agreement between the City and District to obtain a
declaration of their rights, and therefore the district court erred in
granting the City's plea to the jurisdiction with respect to the
individual plaintiffs. Finally, in its fifth issue, the District argues
the award of the City's attorney's fees should be reversed because it is
"inequitable and unfair."

Nature of the Agreement

In its first issue, the District asserts the trial court erred in
finding that the Agreement between the District and the City is not an
"allocation agreement" under water code section 54.016(f) and that section
54.106(f) does not apply to the Agreement.

Whether the Agreement is an "allocation agreement" is a legal question
that we review de novo. See City of Rockwall v. Hughes, 246
S.W.3d 621, 625 (Tex. 2008). In construing statutes, we ascertain and give
effect to the legislature's intent as expressed by the language of
the statute. Id.; State v. Shumake, 199 S.W.3d 279,
284 (Tex. 2006). We use definitions prescribed by the legislature and
consider any technical or particular meaning that the words have acquired.
Tex. Gov't Code Ann. § 311.011(b) (West 2005). Otherwise, we construe
the statute's words according to their plain and common meaning, Texas
Dep't of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 642
(Tex. 2004), unless a contrary intention is apparent from the context,
Taylor v. Firemen's & Policemen's Civil Serv. Comm'n, 616
S.W.2d 187, 189 (Tex. 1981), or unless such a construction leads to absurd
results, University of Tex. S. W. Med. Ctr. v. Loutzenhiser, 140
S.W.3d 351, 356 (Tex. 2004); see also Texas Dep't of Protective &
Regulatory Servs. v. Mega Child Care, Inc., 145 S.W.3d 170, 177 (Tex.
2004) (noting that when statutory text is unambiguous, courts must adopt
interpretation supported by statute's plain language unless that
interpretation would lead to absurd results).

We presume that the legislature intended a just and reasonable result
by enacting the statute. Tex. Gov't Code Ann. § 311.021(3) (West
2005). When a statute's language is clear and unambiguous, it is
inappropriate to resort to rules of construction or extrinsic aids to
construe the language. Hughes, 246 S.W.3d at 626 (citing St.
Luke's Episcopal Hosp. v. Agbor, 952 S.W.2d 503, 505 (Tex. 1997);
Ex parte Roloff, 510 S.W.2d 913, 915 (Tex. 1974)). We look to the
entire act in determining the legislature's intent with respect to a
specific provision. See Taylor, 616 S.W.2d at 190; Wilburn v.
State, 824 S.W.2d 755, 760 (Tex. App.--Austin 1992, no writ). The
legislature is presumed to enact a statute with complete knowledge of the
existing law and with reference to it. See Acker v. Texas Water
Comm'n, 790 S.W.2d 299, 301 (Tex. 1990); Southwestern Bell Tel.
Co. v. Public Util. Comm'n, 888 S.W.2d 921, 926 (Tex. App.--Austin
1994, writ denied).

Section 54.016(f) of the water code states:

(f) A city may provide in its written consent for the
inclusion of land in a district that a contract ("allocation agreement")
between the district and the city be entered into prior to the first issue
of bonds, notes, warrants, or other obligations of the district. The
allocation agreement shall contain the following provisions:

(1) a method by which the district shall continue to exist following
the annexation of all territory within the district by the city, if the
district is initially located outside the corporate limits of the
city;

(2) an allocation of the taxes or revenues of the district or the city
which will assure that, following the date of the inclusion of all the
district's territory within the corporate limits of the city, the total
annual ad valorem taxes collected by the city and the district from
taxable property within the district does not exceed an amount greater
than the city's ad valorem tax upon such property;

(3) an allocation of governmental services to be provided by the city
or the district following the date of the inclusion of all of the
district's territory within the corporate limits of the city;

(4) such other terms and conditions as may be deemed appropriate by the
city.

Tex. Water Code Ann. § 54.016(f).

According to the District, section 54.016(f) defines an "allocation
agreement" as any contract that is (1) provided for by the city in
its written consent to the creation of a district, and (2) entered
into prior to the district's first issuance of bonds or other obligations.
Provided these two conditions are met, the District asserts, the
contract is an "allocation agreement" as a matter of law and must contain
the provisions set forth in the subsections (1) through (4) of section
54.016(f).

The City challenges this interpretation as being too broad because it
mandates that "if any contract, of any nature" is entered into prior to a
district's first bond issuance, then it is an allocation agreement. Citing
various provisions within section 54.016 that purportedly authorize the
execution of "consent agreements" and other contracts between a city and a
district, the City asserts that the legislature did not intend to make
every pre-bond contract between a city and a district an "allocation
agreement."
(8) In addition, the City urges that the parties had
"continuously identified" the Agreement as a "consent agreement" since the
time that it was executed, characterizing the District's acquiescence to
the use of this term as an admission against interest. Moreover, the City
argues, the Agreement cannot be declared an allocation agreement by this
or any other court because, in the City's view, the legislature invested
cities with the sole authority to decide whether an agreement is an
allocation agreement. Noting that section 54.016(f) begins, "A city
may provide in its written consent," id. (emphasis
added), the City maintains that there can be no allocation agreement
without the express consent of the City, and that the evidence is
undisputed "that the City made the choice not to enter into an allocation
agreement" in this case.

Based on the plain language of subsection (f) of the statute and the
overall statutory scheme created by section 54.016, we conclude that
neither party's interpretation is entirely correct. It is true that the
word "may" creates discretionary authority or grants permission or a
power, while the word "shall" imposes a duty. See Tex. Gov't Code
Ann. § 311.016 (West 2005); see also Southwestern Bell Tel. Co. v.
Public Util. Comm'n, 31 S.W.3d 631, 637-38 (Tex. App.--Austin 2000),
aff'd, 92 S.W.3d 424 (2002). Therefore, we agree with the City
that the statute invests cities with the power to decide if, when
submitting their written consent to the creation of a municipal utility
district, such a contract will be executed. However, in the event that a
city's written consent does provide for the execution of a contract with a
district specifically addressed to the allocation of taxes, revenues, and
government services before the first issuance of bonds, the legislature
has clearly expressed that such a contract is an "allocation agreement"
and has declared that certain mandatory provisions must be included in the
agreement. See Tex. Water Code Ann. § 54.016(f) ("The
allocation agreement shall contain the following
provisions . . . .") (emphasis added). While a city is
not required to execute a contract in connection with its consent to the
inclusion of land within a district in every instance, it is required to
comply with subsection (f) when it is clear that the city, in submitting
its written consent, will contract with the district to allocate the
taxes, revenues, and governmental services between the two entities. Thus,
the City is incorrect that the question of whether the Agreement is an
allocation agreement is not subject to judicial review because the statute
leaves the choice to execute such an agreement to the sole discretion of
the City. It is plain from the statute that a city may only decide whether
it will enter into an allocation agreement. The entirely different matter
of whether a contract is an allocation agreement was settled by the
legislature when it declared that a pre-bond contract between a city and a
district governing the allocation of taxes, revenues, and governmental
services is an "allocation agreement." See id. Nor are we
convinced by the City's contention that it may "enter into a contract with
a district without following any of the requirements of § 54.016(f)"
because cities are statutorily invested with the authority to enter into
contracts independent of the authority granted by section 54.016(f).
The City's power to execute contracts--under the water code or
otherwise--is not in dispute. Rather, the issue is whether the specific
contract that the City entered into with the District is what the
legislature has termed an "allocation agreement." Whether the City could
have executed an agreement under a different provision in section 54.016
has no bearing on this analysis. Likewise, the fact that the parties might
have referred to the Agreement as something other than an allocation
agreement does not by itself control whether the agreement is, as a matter
of law, an allocation agreement. Such an interpretation would read
subsection (f) out of the statute entirely by allowing a party to avoid
the mandatory provisions that must be included in an allocation agreement,
simply because it calls the agreement something different or asserts that
the agreement was entered into under different authority. Because we must
give effect to all the words of a statute and avoid constructions that
treat statutory language as surplusage, see Spradlin v. Jim Walter
Homes, Inc., 34 S.W.3d 578, 580 (Tex. 2000), we must reject the
City's argument.

Instead, we look to the statute to determine whether the Agreement is
what section 54.016(f), by its plain meaning, defines as an
"allocation agreement": a contract between the District and the City,
provided for in the City's written consent for the inclusion of land in a
district, that was entered into prior to the first issue of bonds,
and provides (1) a method by which the District shall continue to
exist following the annexation of its territory by the City, if the
District was initially located outside the corporate limits of the City;
(2) an allocation of taxes or revenues of the City or the District
ensuring that the total ad valorem taxes collected by the City and the
District from property in the District does not exceed the City's ad
valorem tax upon the same property; and (3) an allocation of
governmental services to be provided by the City or the District following
the date of the inclusion of all the District's territory within the
corporate limits of the City. See id.
§ 54.016(f)(1)-(3).

Here, Ordinance 870514-X--the City's written consent for the inclusion
of land in the District--states that "the City and the Applicant for
consent to creation have negotiated a consent agreement." Then, in part
one, the ordinance provides, "The City Manager is authorized to execute,
on behalf of the City, the Agreement Concerning Creation and Operation of
the Northwest Austin Municipal Utility District No. 1, attached hereto as
Exhibit 'A'." The Agreement was executed between the City and the District
prior to the first issuance of District bonds. Thus, the District argues,
the Agreement is precisely the sort of contract contemplated by the
statute because all of the "statutory prerequisites" are met.
However, this does not end the inquiry; the terms of the Agreement must
also reflect each of the substantive requirements mandated by the statute.
The first requirement, that an allocation agreement include "a method by
which the district shall continue to exist following the annexation of all
territory within the district by the city," applies only if the district
is initially located outside the corporate limits of the city. See id.
§ 54.016(f)(1). In this case, the area including the District
was annexed into the City's corporate limits before the District
was created, so section 54.016(f)(1) does not apply. The third
requirement, that the agreement allocate the governmental services to be
provided by the city or the district, see id.
§ 54.016(f)(3), is clearly met.
(9)

The second requirement--the central dispute in this appeal--requires an
allocation agreement to contain "an allocation of the taxes or revenues of
the district or the city which will assure
that . . . the total annual ad valorem taxes collected
by the city and the district from taxable property within the district
does not exceed an amount greater than the city's ad valorem tax
upon such property." Id. § 54.016(f)(2). The District
argues that the Agreement contains such an allocation provision, but that
it allocates taxes in a way that violates the statute and must be simply
amended to set forth a proper allocation. This provision, contained in
section 7.2 of the Agreement, states that "the City shall have the
authority to assess and collect ad valorem taxes at the City's full tax
rate within the District as for any other property within the City of
Austin and the District shall have the authority to assess and collect the
ad valorem tax established by the District." Thus, the Agreement fails to
allocate taxes in the manner required by the statute because it allows
both taxing authorities to tax at their full ad valorem rate, without
regard to the other entity's rate. An "allocation" is a "designation or
apportionment for a specific purpose." Black's Law Dictionary 59 (7th
ed.). The Agreement contemplates no apportionment of taxes between the
City and the District, but it clearly designates the taxing authority of
each party.

The question, then, is whether the parties could have executed an
allocation agreement when the Agreement does not precisely track the
language of section 54.016(f)(2). The District urges that we must
interpret the Agreement as an allocation agreement in order to prevent the
City from unjustly benefitting from its failure to comply with the statute
at the District taxpayers' expense. As evidence that the legislature did
not intend to allow the City to continue taxing District residents at its
full ad valorem rate following annexation, the District cites the
legislative history of section 54.016(f). See Hearings on Tex. H.B.
1974 Before House Comm. on Natural Res., 66th Leg., R.S. (Apr. 18,
1979) (transcript available at Legislative Reference Library). House Bill
1974 was designed to allow a municipal utility district to continue in
existence after being annexed by a city without forcing the city to assume
the district's debt obligations, as was the case under the prior law when
districts automatically dissolved upon annexation. See Act of
June 13, 1979, 66th Leg., R.S., ch. 796, 1979 Tex. Gen. Laws 2026, 2026.
Because the district would survive post-annexation, however, the taxpayers
in the newly annexed district would remain subject to the water district's
taxes in order to pay off the district's bonded indebtedness, and be
forced to pay the city's ad valorem taxes; therefore, according to
the testimony before the House committee, the allocation-agreement statute
would need to ensure that the residents of a district annexed under the
new law would not pay taxes any higher than what other citizens paid
in ad valorem taxes to the city.
(10) This concern is clearly reflected in section
54.016(f)(2), which seeks to prevent the total annual ad valorem
taxes collected by a city and a district from exceeding the city's ad
valorem tax upon such property.

The set of circumstances motivating the passage of House Bill 1974 and
the resulting amendment to the water code is identical in this case, where
the City has agreed to the inclusion of land in the District, annexed that
territory, and now has taxing authority over residents who are
also faced with paying the District's taxes. Just as the statutory
scheme contemplates, the District is to continue in existence after its
annexation into the corporate city limits. In conjunction with its written
consent, the City executed a contract that largely complies with the
statute, outlining the post-annexation relationship between the City and
the District and spelling out the rights and duties of each entity,
including an allocation of government services that each will provide.
Although the Agreement does not apportion taxes between the City and the
District in strict accordance with section 54.016(f)(2), it clearly
addresses the taxing powers of both the City and the District and
acknowledges that their respective tax rates may be limited by statute. An
agreement such as this, which defines the post-annexation relationship
between a city and a district and addresses each of the subject-matter
components of section 54.016(f), must be construed as an allocation
agreement in order to effectuate the legislature's intent. Where the
parties enter into a contract that provides for the post-annexation
survival of the District and the subject matter of the contract
corresponds to the elements listed in section 54.016(f), that contract is
an allocation agreement as a matter of law.

Therefore, in light of the history and purpose of the statute, and the
fact that the Agreement substantially conforms with section 54.016(f), we
hold that the Agreement is an allocation agreement and must be brought
into conformity with section 54.016(f)(2).

Tax Allocation Provisions

The District further asserts that in order for the Agreement to comply
with section 54.016(f)(2), it must be amended to require the City to
reduce the ad valorem tax rate it charges District taxpayers. The
Agreement currently provides that "the City shall have the authority to
assess and collect ad valorem taxes at the City's full rate" and likewise
that "the District shall have the authority to assess and collect the ad
valorem tax established by the District." The Agreement permits such rates
"unless either the City or the District are prohibited by a court of law
from assessing and collecting all or a portion of the City's or the
District's ad valorem tax rate."

Under section 54.016(f)(2), the Agreement must provide for an
allocation "of taxes or revenues of the district or the city which will
assure that . . . the total annual ad valorem taxes
collected by the city and the district from taxable property within the
district does not exceed an amount greater than the city's ad valorem
tax upon such property." Id. § 54.016(f)(2). By the
Agreement's own terms, the tax allocation provision in section 7.2 must
therefore be severed and the parties must "immediately amend this
Agreement" to conform with this Court's holding that section 7.2 of the
Agreement violates section 54.016(f) of the Texas Water Code.
(11)

The District asserts that requiring the City to reduce its tax rate is
the only possible way to bring the Agreement into conformity with section
54.016(f)(2) because the District must maintain a tax rate sufficient
to meet its statutory obligations. As discussed previously, the
water code requires a district to collect ad valorem taxes sufficient
to service its bond debt. See id. § 54.601. The District
must have sufficient tax revenues to pay interest on its bonds as it
becomes due, to create a sinking fund for the payment of principal, and to
pay the expenses of assessing and collecting taxes. Id. However,
the City points out that it also has bonded debt supported by tax revenues
and other obligations under various statutes that are met with its tax
revenues. Adopting the same rationale as the District, the City argues
that its tax rate cannot be reduced because it too is statutorily required
to tax at a rate sufficient to service its bonded debt and meet its own
statutory obligations.

The statute itself does not explain how or at what rate the City's and
District's taxes should be set, but provides only that there must be an
allocation to ensure a specific result. Nor does the plain language of the
statute signify an intent on the part of the legislature to mandate a
reduction in a city's tax rate alone. As the City points out, the use of
the phrase "taxes or revenues" suggests that the legislature could have
anticipated other ways to comply with its intent to reduce the burden on
taxpayers through, for example, a revenue-sharing scheme. Given the
statute's silence on the issue, we disagree that the water code requires
that the City must reduce its tax rate by the amount the District charges,
while the District is permitted to tax at its current rate, or even
potentially increase its tax rate.

By the Agreement's own terms, the parties must negotiate an allocation
of taxes or revenues between the City and the District and amend the
Agreement so that it complies with section 54.016(f)(2), subject to review
by the Commission. Therefore, we sustain the District's first issue in
part, holding that the Agreement is an allocation agreement and that it
must conform with section 54.016(f)(2) of the water code. However, we
overrule the District's first issue with respect to its claim that the
City is required to reduce its ad valorem tax rate by the amount of the
District's rate and hold that the district court did not err in failing to
declare that the City must reduce its tax rate.

"Tax Exemption"

In response to the District's second issue, the parties address whether
section 54.016(f) creates an unconstitutional tax exemption. The
district court declared that section 54.016(f) "does not create a tax
exemption authorized by the Texas Constitution so Texas Water Code
§ 54.016(f) does not require the City to exempt MUD residents from
the City's ad valorem property tax." Essentially, the parties do not
disagree with the trial court's ruling, but they apply different
interpretations to the declaration. The District interprets the ruling to
mean that, were this Court to hold that the Agreement is an allocation
agreement, then the City would have to reduce the ad valorem taxes for
District residents, and that reduction would not be unconstitutional.
Accordingly, the District agrees with the declaration that section
54.016(f) does not create an unconstitutional tax exemption. The City
responds that the trial court properly declared that section
54.016(f) does not create a tax exemption authorized by the Texas
Constitution, so section 54.016(f) does not require the City to
exempt the District's residents from the City's ad valorem taxes. The
City offers the following additional grounds to affirm the district
court's order: (1) the City's taxes are legitimate taxes of an
overlapping political subdivision; and (2) the City's and
District's taxes are not "double taxation." The City further contends that
if section 54.016(f) applies to the Agreement, then any forced
reduction in City taxes would be unconstitutional.

We have held that the Agreement is an allocation agreement and
therefore must comply with section 54.016(f), but that the statute does
not necessarily require the City to lower its tax rate for property within
the District. Therefore, the statute does not create a tax exemption
because no property is made "exempt" from taxation. Our resolution of the
District's first issue advances an interpretation of the statute that
avoids any conflict with the constitution, see Tex. Gov't Code
Ann. § 311.021 (West 2005), and renders it unnecessary to address the
City's alternative grounds for affirming the district court's order.
Because the district court correctly found that the statute does not
create an unconstitutional tax exemption, we sustain the District's second
issue and, having held that the statute does not require any reduction in
City taxes, further hold that the water code creates no unconstitutional
tax exemption.

Standing

Because it is dispositive of the District's remaining points regarding
the individual plaintiffs, we next address the District's fourth issue
asserting that the City's plea to the jurisdiction should not have been
granted on the basis that these individuals lacked standing to sue. The
District argues that the individual plaintiffs have a justiciable interest
in the interpretation of the Agreement because the statute requires the
Agreement to contain an appropriate allocation "exclusively for
the benefit of those paying ad valorem taxes to both the city and the
district," thereby conferring standing on the individuals as third-party
beneficiaries of the Agreement.

There is a presumption against conferring third-party-beneficiary
status on noncontracting parties. South Tex. Water Auth. v.
Lomas, 223 S.W.3d 304, 306 (Tex. 2007); MCI Telecomms. Corp.
v. Texas Utils. Elec. Co., 995 S.W.2d 647, 652 (Tex. 1999). In
deciding whether a third party may enforce or challenge a contract between
others, it is the contracting parties' intent that controls.
Lomas, 223 S.W.3d at 306; see also Corpus Christi Bank &
Trust v. Smith, 525 S.W.2d 501, 503-04 (Tex. 1975). The intent
to confer a direct benefit upon a third party must be clearly and fully
spelled out or enforcement by the third party must be denied. MCI
Telecomms. Corp., 995 S.W.2d at 651. A third party may only enforce a
contract when the contracting parties themselves intend to secure some
benefit for the third party and entered into the contract directly for the
third party's benefit. Id.; Stine v. Stewart, 80 S.W.3d
586, 589 (Tex. 2002). To qualify as one for whose benefit a contract was
made, the third party must benefit more than incidentally; he must be
either a donee or creditor beneficiary. MCI Telecomms. Corp., 995
S.W.2d at 651.

In this case, the Agreement provides for the construction, operation,
and maintenance of water and wastewater facilities in the District funded
by the issuance of District bonds that will be secured by the District's
taxes and net revenues. The Agreement does not mention the District
residents except as they are referred to as "the City's customers" for
retail water delivery and wastewater services. In fact, the Agreement
expressly declares that it is "for the benefit of the City, the District,
and NPC, its successors and assigns, and shall not be construed to confer
any benefit on any other party except as expressly provided herein." We
conclude that there is nothing in the Agreement that would confer donee-
or creditor-beneficiary standing upon the individual plaintiffs to seek a
declaration of their rights under this Agreement. Therefore, the district
court correctly determined that the individual plaintiffs lack standing to
assert that section 7.2 of the Agreement violates the water code. See
El Paso Cmty. Partners v. B&G/Sunrise Joint Venture, 24 S.W.3d
620, 626 (Tex. App.--Austin 2000, no pet.) (holding that person who is not
party to contract does not have standing to challenge contract). The
District's fourth issue is overruled.

Statute of Limitations and
Laches

In its third issue, the District asserts that neither the District's
nor the individual plaintiffs' claims are barred by the statute of
limitations or laches. Having determined that the individual plaintiffs
lacked standing, we address these issues only as they relate to the claims
brought by the District.

To be entitled to summary judgment on an affirmative defense such as
limitations, the movant must conclusively prove all of the elements of the
defense. See University of Houston v. Clark, 38 S.W.3d 578, 580
(Tex. 2000). Once the defendant has established a right to summary
judgment on an affirmative defense, the burden shifts to the plaintiff to
present issues which preclude summary judgment. Huckabee v. Time
Warner Entm't Co., L.P., 19 S.W.3d 413, 420 (Tex. 2000); City of
Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex.
1979). The City asserted in its motion that the
District's claims "are barred by the two-year and/or four-year statute of
limitations under Texas Civil Practice and Remedies Code §§ 16.003,
16.004, 16.051. The two-year statute applies to issues relating to the
payment of taxes and the four-year statute relates to the actions relating
to the Consent Agreement between the District and the City." See
Tex. Civ. Prac. & Rem. Code Ann. §§ 16.003, .004, .051 (West
2002).

The district court granted the City's affirmative defense that the
District's claims are barred by the four-year statute of limitations, but
did not specify whether it was granting the defense asserted under section
16.004 or 16.051. However, the District did not assert any claims governed
by section 16.004, so that section could not have provided a basis for the
district court's ruling. See id. § 16.004 (four-year
limitations period for specific performance of contract for conveyance of
real property; penalty or damages on penal clause of bond to convey real
property; debt; fraud; breach of fiduciary duty; suit on bond of executor,
administrator, or guardian; and suit against partner for settlement of
partnership accounts). Therefore, summary judgment could only have been
granted on the basis that the District's claims are barred by the residual
limitations period of section 16.051. See id. § 16.051
("Every action for which there is no express limitations period, except an
action for the recovery of real property, must be brought not later than
four years after the day the cause of action accrues.").

As we understand the City's pleadings, "the District's actions relating
to the Consent Agreement" refers to the District's request for a
declaration of its rights under section 54.016(f) of the water code.
Because a declaratory judgment action is a procedural device used to
vindicate substantive rights, it is generally governed by the statute of
limitations for the legal remedy underlying the claim; consequently, to
determine what statute of limitations should apply to an action for a
declaratory judgment, one must look to the legal remedy underlying the
cause of action. See, e.g., Transportation League, Inc. v.
Morgan Express, Inc., 436 S.W.2d 378, 387 (Tex. Civ. App.--Dallas
1969, writ ref'd n.r.e.) ("the statutes of limitation do not apply to . .
. a suit for a declaratory judgment, at least until the provisions of such
are set in action by the actual occurrence of a controversy"); Outlaw
v. Bowen, 285 S.W.2d 280, 284 (Tex. Civ. App--Amarillo 1955,
writ ref'd n.r.e.) (holding same). Given that the only applicable
limitations period pleaded by the City in this case is the residual
four-year period under section 16.051, we must determine whether the City
established as a matter of law that the District's suit was filed more
than four years after its cause of action accrued. A cause of action
accrues and the applicable limitations period begins to run when a
wrongful act causes some legal injury. S.V. v. R.V., 933 S.W.2d
1, 3 (Tex. 1996); Moreno v. Sterling Drug, Inc., 787 S.W.2d 348,
351 (Tex. 1990). Put another way, a cause of action accrues when facts
come into existence by which a party knows, or should know, that it is
entitled to seek a judicial remedy. Murray v. San Jacinto Agency,
Inc., 800 S.W.2d 826, 828 (Tex. 1990).

According to the City, the District's cause of action accrued on June
18, 1989, when the District board president signed the Agreement
containing the non-complying tax allocation provision. Since that time,
the City argues, the District board has known that its residents have had
to pay taxes to both the City and the District "at the full amount,"
citing evidence that from as early as 1991, District residents had
complained to the board about double taxation and the board had discussed
the problem of overlapping taxes with City representatives. The District
counters that the underlying injury is not the parties' initial execution
of an unlawful contract term, but the continuous and ongoing violation of
a statute. Conceding that the City might be able to assert a limitations
defense against the claims brought by the individual homeowners for taxes
improperly collected more than four years prior to filing suit, the
District maintains that it cannot be time-barred in its request for
declaratory judgment to determine whether the Agreement is currently in
violation of section 54.016(f) of the water code. In support, the District
cites to cases where courts have held that the statute of limitations
merely limited the number of years for which a plaintiff could recover
damages for the payment of illegal fees and taxes, but did not bar the
plaintiff from bringing suit to challenge the legality of the
fee or tax. See Bowles v. Clipp, 920 S.W.2d 752, 759-60
(Tex. App.--Dallas 1996, writ denied) (in suit filed more than ten
years after county order was implemented to allow collection of illegal
fee, challenge to legality of order was not barred by statute of
limitations, but recovery was limited to fees paid previous two years);
Bowles v. Reed, 913 S.W.2d 652, 657-58 (Tex. App.--Waco
1995, writ denied) (holding same); see also Dallas County Comm.
College Dist. v. Bolton, 89 S.W.3d 707, 721-22 (Tex. App.--Dallas
2002), rev'd on other grounds, 185 S.W.3d 868 (Tex. 2005)
(adopting reasoning in Clipp); City of Austin v. Austin
Prof'l Fire Fighters' Ass'n, 935 S.W.2d 179, 183-84 (Tex.
App.--Austin 1996, writ granted w.r.m.) (fire fighters' suit for
declaratory judgment that city's length-of-service policies violated
statute, filed 19 years after change in policy, was not barred by
limitations, but recovery under contract was limited to four years of
longevity backpay).

The District also attempts to distinguish the unpublished decision from
this Court relied upon by the City in its motion for summary judgment for
the proposition that "limitations bars declaratory judgment actions
seeking to invalidate 'illegal' terms of a contract." See Beadles v.
Lago Vista Prop. Owners Ass'n, No. 03-02-00228-CV, 2002 Tex. App.
LEXIS 7940 (Tex. App.--Austin Nov. 2, 2002, pet. denied) (mem. op., not
designated for publication). In that case, Beadles, a property owner,
filed suit for declaratory judgment against the property owners'
association in 2000, seeking a declaration that the maintenance-fee
assessments levied by the association were invalid. Id. at *2-3.
His challenge to the validity of the fee assessments was based in part on
his allegation that a 1992 amendment to the association's voting
procedures violated the Texas Non-Profit Corporation Act, thereby
rendering all subsequent actions of the association invalid, including the
fee assessments. Id. at *3. The association asserted the
affirmative defense of limitations, arguing that Beadles could not
complain about changes made to the voting procedures more than four years
after they were amended. Id. at *3-4. In defense to the statute
of limitations, Beadles argued that the entire corporate structure of the
association, after the 1992 amendment, constituted an illegal contract
and, therefore, each vote taken by the association perpetuated the
underlying cause of action and defeated the running of the limitations
period. Id. at *8.

This Court rejected Beadles's argument that the 1992 amendment
instituted an illegal voting mechanism in violation of the Non-Profit
Corporations Act. Id. at *9. Therefore, we held that any
complaint regarding the change in voting procedures "arose from the
procedure of amending and publishing them, which took place in 1992,"
more than four years before Beadles brought his complaint.
Id. After this case was decided, Beadles again brought suit
against the association, challenging the maintenance fees it assessed
against him in the years since his first suit. See Beadles v. Lago
Vista Prop. Owners Ass'n, No. 03-05-00194-CV, 2007 Tex. App. LEXIS
3861 (Tex. App.--Austin May 18, 2007, no pet.) (op. on reh'g) (mem.
op., not designated for publication). In the second case, which was also
appealed to this Court, we reiterated our previous holding that the voting
structure was not illegal because it did not violate the Non-Profit
Corporations Act and determined Beadles was barred by res judicata from
bringing the same claim. Id. at *9-10. But we went on to state
that "[i]f this Court had determined that the voting procedures were not
allowed under the Act, we would have had to address Beadles's claim of a
continuing breach that would have tolled the statute of limitations."
Id. at *10.

Here, the District asserts essentially the same argument that Beadles
had raised: because the tax-allocation provision of the Agreement violates
the water code, there has been a continuing breach that tolled the statute
of limitations, and thus the District's claim is not barred by
limitations. We disagree with the City, however, that our decision in
Beadles stands for a rule that a declaratory-judgment action will
be barred by limitations "even when there [is] a 'continuing' violation of
a state statute." On the contrary, we held that because there was
never a violation of the statute in the first place, there was no
continuing violation and therefore no basis for concluding that the
statute of limitations had been tolled. In this case, however, we have
determined that section 7.2 of the Agreement does violate section
54.016(f) of the water code. Therefore, as we would have in
Beadles if the voting procedures had violated the Non-Profit
Corporations Act, we turn to the issue of whether there was a continuing
violation.

In asserting that section 7.2 of the Agreement is in continuous
violation of the water code, the District analogizes to cases
involving challenges to the legality of municipal policies brought
many years after those policies were adopted. For example, in
Haliburton v. City of San Antonio, 974 S.W.2d 779 (Tex.
App.--San Antonio 1998, no pet.), the court held that limitations did not
bar police officers' claims against the city for failure to pay them in
accordance with the statute during the period of limitations, even though
the underpayment had continued for at least 25 years, because the
continued underpayment represented a continuing violation of the governing
statute. 974 S.W.2d at 783. Likewise, in City of Austin, this
Court rejected an argument that the fire fighters' declaratory judgment
cause of action arose when the city changed its policy and stopped
including time spent in the fire academy as "service time" for purposes of
determining longevity compensation. 935 S.W.2d at 183-84. We held instead
that their claims were not barred by the statute of limitations even
though they initially arose outside the applicable period. Id. at
184.
(12) Similarly, the District argues that it should not
be prevented from bringing its challenge to the legality of section 7.2 of
the Agreement more than four years after that contract provision was
adopted. We agree. Because the statute of limitations has not run on the
District's underlying claim that section 7.2 of the Agreement is a
continuing violation of the water code, the District's declaratory
judgment action is not barred by limitations.

Nor did the City establish that the District's suit is barred by
laches. Laches is an equitable defense akin to estoppel and requires a
showing that (1) the suing party unreasonably delayed asserting his
rights, and (2) due to the delay, the opposing party has made a good
faith change of position to its detriment. City of Fort Worth v.
Johnson, 388 S.W.2d 400, 403 (Tex. 1964). The record is devoid
of evidence that the City has made any change of position due to the
District's purported delay in seeking a declaration of its
rights.
(13) See id. at 403-04. Moreover, it is
well-established that where a unit of government is exercising its
governmental powers, it is not subject to the defense of laches. City
of Hutchins v. Prasifka, 450 S.W.2d 829, 835 (Tex. 1970); Capitol
Rod & Gun Club v. Lower Colorado River Auth., 622 S.W.2d 887, 896
(Tex. App.--Austin 1981, writ ref'd n.r.e.). In Capitol Rod & Gun
Club, this Court held that the LCRA, a political subdivision, could
not be estopped from seeking a declaration of its rights under a contract
pertaining to matters within the scope of its governmental functions. 622
S.W.2d at 896. Likewise, the District in this case seeks a declaration
regarding its rights under an agreement that bears directly on the
District's own governmental functions in its capacity as a municipal
utility district and taxing entity.

We sustain the District's third issue in part, holding that summary
judgment should not have been granted because neither limitations nor
laches barred the District's claims against the City.

Attorney's Fees

In its fifth issue, the District claims that the trial court erred by
awarding attorney's fees to the City. Because we have determined that the
trial court erred by declaring that the Agreement is not an allocation
agreement, we reverse the trial court's award of attorney's fees to the
City and remand this issue to the trial court to reconsider the parties'
claims for attorney's fees. See Tex. Civ. Prac. & Rem. Code
Ann. § 37.009 (West 2008).

CONCLUSION

Because we hold that the Agreement between the City and the District is
an allocation agreement under Texas Water Code section 54.016(f) and
that section 54.016(f) applies to this Agreement, we reverse the
summary judgment in part and render judgment in favor of the District on
this issue. Furthermore, because the District's suit for declaratory
judgment was not barred by the statute of limitations or laches, we
reverse this portion of the summary judgment and remand the parties'
remaining declaratory claims for further proceedings consistent with this
opinion. We conclude that the district court properly granted the City's
plea to the jurisdiction as to the individual plaintiffs for lack of
standing and affirm the district court's order dismissing their suit. In
light of our disposition reversing the summary judgment in part, we
reverse the award of attorney's fees to the City and remand the issue of
attorney's fees to the trial court for further consideration.

W. Kenneth Law, Chief Justice

Before Chief Justice Law, Justices Puryear and Onion*

Affirmed in part; Reversed and Rendered in part; Reversed and Remanded
in part

Filed: November 14, 2008

* Before John F. Onion, Jr., Presiding Judge (retired), Court of
Criminal Appeals, sitting by assignment. See Tex. Gov't Code Ann.
§ 74.003(b) (West 2005).

1. Current City Council members have been substituted
for their predecessors. See Tex. R. App. P. 7.2(a) (automatic
substitution when public officer is party in official capacity).

2. Section 54.016(f) was added in 1979. See
Act of May 25, 1979, 66th Leg., R.S., ch. 796, § 1, 1979 Tex. Gen. Laws
2026, 2026. The parties do not urge, and we do not find, substantive
changes in the relevant sections of the water code. Accordingly, the
current code is cited for convenience.

3. A municipal utility district, or "MUD," is a
political subdivision of the State with limited governmental powers
related to the provision of water, wastewater, and drainage services.
See Tex. Water Code Ann. § 49.211 (West 2008); see also
id. § 54.012 (West 2002), § 54.201 (West Supp. 2008).

4. The Texas Water Commission became part of the Texas
Natural Resource Conservation Commission, now renamed the Texas Commission
on Environmental Quality. For simplicity, all the variations of the entity
will be referred to as the Commission.

5. The Agreement was initially entered into by the
City and NPC in December 1987. The District, after it was created by order
of the Commission the following year, approved and executed the Agreement.

6. The City does not complain on appeal about the
denial of its plea to the jurisdiction as to the District.

7. As do the parties in their briefs, we will refer to
the appellants collectively as "the District," apart from where the
applicable law requires us to distinguish between the claims brought by
the MUD and the individual plaintiffs.

8. For example, the City argues that section
54.016(a), which requires that a city provide its written consent to the
inclusion of land within a district, establishes the authority for a
"consent agreement" to be entered into between a city and a district
because the provision refers to the "restrictions and conditions" that a
city can place on its written consent, thus implicating a pre-bond
contract, or "consent agreement," between the parties.

9. As the City acknowledges, the Agreement "identifies
the responsibilities of each party" regarding the provision of water,
wastewater, fire, police, EMS, drainage, park and facilities maintenance,
and other municipal functions, and these responsibilities are also set out
in other agreements and city ordinances. The City's point that the
Agreement "is not an allocation agreement merely because it identifies the
responsibilities of each party" is well taken; accordingly, it is only one
factor we consider in light of the statute as a whole in determining
whether the Agreement is what the legislature has defined as an allocation
agreement.

10. According to the bill sponsor,

What [H.B] 1974 basically does is allow the city and a water
district before the first bonds are issued to enter into an agreement with
the approval of the [Commission] whereby the city, at some point along the
way, can annex that water district but does not have to assume the bonds.
The bonds will stay with the water district, and the people living in the
water district will continue to pay their taxes to the water district and
pay all the bonded indebtedness. But there has to be in the agreement
that's approved by the State that the people will not pay taxes any higher
than what already ad valorem taxes for all the other citizens in that
given city.

See Hearings on Tex. H.B. 1974 Before House Comm. on
Natural Res., 66th Leg., R.S. (Apr. 18, 1979) (transcript available
at Legislative Reference Library).

11. The Agreement provides, in relevant
part:

Section 12.1. Severability. The provisions of this Agreement
are severable and, in the event any word, phrase, clause, sentence,
paragraph, section or other provision of this Agreement, or the
application thereof to any person or circumstance, shall ever be held or
determined to be invalid, illegal or unenforceable for any reason, the
remainder of this Agreement shall remain in full force and effect and the
application thereof to any other person or circumstance shall not be
affected thereby.

Section 12.2. Enforceability. In the event that the Commission
or any court of competent jurisdiction determines that any provision of
this Agreement is beyond the scope of the Texas Water Code, the City, NPC
and the District agree to immediately amend this Agreement to conform to
such ruling or decision.

12. Moreover, there is also the line of cases dealing
with contracts that contemplate continuing obligations, for which the rule
is that limitations does not begin to run until: (1) the parties'
obligations under the contract are complete; (2) the contract is
terminated in accordance with its terms; or (3) the contract is
anticipatorily repudiated by one party and this repudiation is adopted by
the other party, whichever event is earlier. See, e.g., City
of Corpus Christi v. Taylor, 126 S.W.3d 712, 725 (Tex. App.--Corpus
Christi 2004, pet. dism'd); Hubble v. Lone Star Contracting
Corp., 883 S.W.2d 379, 382 (Tex. App.--Fort Worth 1994, writ denied).

13. The City cites as evidence an affidavit from its
utilities finance manager stating that the City has in good faith
collected its full property taxes from residents of the District and has
provided full municipal services to the area since 1989. Contrary to the
City's assertion, this is not evidence of its change of position as a
result of the District's delay in seeking a declaration that the ad
valorem property tax allocation in the Agreement violated the water code.
The City's argument presupposes that the appropriate relief to redress the
District's delay would be a mandatory reduction in the City's tax rate;
however, as has been discussed, the statute requires no such rate
reduction that would support the City's laches
theory.