SJRA Litigation Update

We would like to provide you with an update on the ongoing SJRA litigation. There have been several reports and opinions from various sources about the lawsuits in Montgomery County involving SJRA’s surface water facility. However, some of these reports have been inaccurate.

While it is not possible to address all the issues or recount the entire history of the water scandal that has affected our county, we want to ensure that our customers are informed about the current situation.

Thank you for your attention.

First MOCO Case (2019)

In September 2019, Quadvest and several other private utility companies filed a lawsuit against SJRA in Montgomery County, alleging that SJRA breached the GRP Contracts by charging excessive groundwater pumpage fees in violation of the Contracts, which specifically require groundwater pumpage fees to be set at a rate that neither benefits nor punishes the consumer. The Utilities later amended the lawsuit to include additional claims that the GRP Contracts are void because SJRA committed fraud to induce the Utilities to participate in the Contracts, and further, that the Contracts have failed due to mutual mistake, frustration of purpose, and lack of consideration. On March 27, 2020, SJRA filed an Original Counterclaim and Crossclaim in the suit, in which it attempted to retaliate against the Cities of Conroe, Magnolia, and Splendora by dragging them into the litigation on a breach of contract claim for failure to timely pay SJRA’s increased rates due under the GRP Contracts. After the City of Splendora was removed from the case, the remaining two Cities filed pleas to the jurisdiction, contending that SJRA’s claims against them were barred on the basis of governmental immunity. The district court granted the Cities’ plea to the jurisdiction and dismissed SJRA’s case against them. Following an appeal by SJRA, on April 21, 2022, the Ninth District Court of Appeals in Beaumont affirmed the lower court’s decision and dismissed the Cities of Conroe and Magnolia from the case once again. SJRA filed a petition for review in the Texas Supreme Court. In April 2024, that court reversed the trial court and court of appeals, saying that the Cities were not immune from suit over their refusal to pay the full amount of the SJRA increases.

Although the Supreme Court held that the Cities were not immune from this particular suit, the court then noted that SJRA’s victory might be short-lived, stating: “Of course, later events could render the contract unenforceable on the merits . . . For example, a contract could be held to be unconscionable, or a court might find that a condition precedent to an obligation has not been satisfied, thus rendering a contract unenforceable even though there was a contract stating its essential terms at formation.”

Therefore, the Supreme Court left a door open to the Cities (and by implication, Quadvest) to defend against the enforcement of the GRP contracts by asserting the various defenses already raised in their pleadings.  For example, Quadvest can plead and prove that the contracts are or have become unconscionable, or that SJRA has breached the contracts by improperly calculating the groundwater pumpage fees.

While the Supreme Court remanded this case to the trial court, it is not likely to go to trial in the near future. It is inherently tied to the second Montgomery County case between SJRA and Quadvest, explored below.

Second MOCO Case (2020)

On July 14, 2020, Quadvest issued a press release announcing that it would no longer pay SJRA’s fees. Instead, all SJRA fees would be held in an escrow account and refunded to its customers following a favorable final verdict in the litigation with SJRA. Ten days later, Woodland Oaks Utility also expressed the same intention. In response, SJRA filed a new lawsuit against Quadvest and Woodland Oaks, alleging breach of contract for failure to pay fees and rates due under the GRP Contracts. Due to the similarities between the issues being argued in both cases in Montgomery County, the Utilities filed a plea to have the two cases consolidated into one lawsuit. The district court denied the Utilities’ request. Quadvest and Woodland Oaks asked the Beaumont Court of Appeals to reverse that ruling. That Court handed down an opinion stating that the trial court should not conduct a trial in the Second MOCO Case until all the dust settled in the First MOCO Case because they involved the same basic issues and should be tried together.  Following that appellate ruling, the parties filed motions for summary judgment.  Quadvest’s motion was based on the reality that the only thing it received under the GRP Contract was compliance with the now-defunct LSGCD rules, and the GRP Contract therefore failed of its purpose and was no longer supported by consideration.  SJRA filed a motion for summary judgment based on its claim that Texas incontestability statutes made the GRP Contracts immune from challenge “by anyone for any reason at any time.”  

In an opinion handed down in May 2024, the Beaumont Court of Appeals sided with SJRA, stating that the GRP contracts cannot be contested because they are pledged to pay bonds issued by SJRA.  The Beaumont court claimed that Quadvest had three incentives to execute the GRP contracts: (1) the proceeds from the contracts allowed SJRA to build infrastructure to provide lake water to users in Montgomery County; (2) the contracts gave Quadvest the right to obtain credits against groundwater pumpage restrictions imposed by the then-existing rules of Lone Star GCD; and (3) Quadvest was relieved of the duty to develop groundwater reduction plans of its own to meet the LSGCD pumpage reductions.  Of course, Quadvest receives no lake water at all. Of equal importance, the LSGCD regulations mentioned by the Beaumont court no longer exist, making the second and third “incentives” equally meaningless. This same analysis, which Quadvest believes to be fundamentally incorrect, permeates the court’s discussion of the “incontestability” statutes, which is premised on looking at a dictionary for the definition of “incontestable” in lieu of engaging in analysis of the three statutes relied on by SJRA. The Beaumont court even went so far as to say Quadvest cannot rely on any of the defenses to the contracts it has raised.  This is apparently contrary to the holding of the Supreme Court in its opinion issued in May 2024, as noted above. Quadvest plans to petition the Supreme Court for review.  

Because the two Montgomery County cases are intrinsically related, the trial court will likely not attempt to try the First MOCO Case until all appeals have been exhausted in the Second MOCO Case. The trial judge will then consolidate the two cases for trial.  

Anti-Trust Case (2019)

In November 2019, Quadvest and Woodland Oaks Utility, L.P. filed a federal anti-trust lawsuit against SJRA in the United States District Court for the Southern District of Texas. The Utilities argued that SJRA was monopolizing and fixing the price of water in Montgomery County at the expense of residents, in violation of Sections I and II of the Sherman Act. SJRA filed a motion to dismiss the case, alleging that the Utilities’ lawsuit was time barred by the statute of limitations and the latches doctrine, that SJRA was entitled to state action immunity, and that the Utilities failed to state a valid claim under the Sherman Act. On August 14, 2020, the district court ruled against SJRA, denying its motion for summary judgment on all grounds.  U.S. District Judge Vanessa D. Gilmore held that SJRA could not provide any proof that the Texas legislature authorized SJRA to violate federal antitrust law by destroying groundwater competition and monopolizing surface water in Montgomery County, and thus, the suit should proceed. Predictably, just six days after Judge Gilmore’s ruling, SJRA filed an interlocutory appeal challenging the court‘s denial of its state action immunity defense. Roughly a year later, on August 3, 2021, the United States Fifth Circuit Court of Appeals in New Orleans denied SJRA’s appeal, holding that SJRA is not entitled to state action immunity. 

The case proceeded to a bench trial in January 2024.  While the trial judge indicated he would issue a ruling quickly, that ruling has not been forthcoming.  If the court holds that SJRA violated anti-trust law, the GRP contracts would be null and void from the outset.  At that point, the judge presiding over the two MOCO cases would be asked to rule that the Cities and Quadvest are no longer under the burden of those contracts.