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City of Houston v. First City
Citations: 827 S.W.2d 462; 1992 Tex. App. LEXIS 693; 1992 WL 44634Docket: 01-90-00622-CV
Court: Court of Appeals of Texas; March 11, 1992; Texas; State Appellate Court
An appeal was filed regarding a delinquent property tax collection suit initiated by the City of Houston and the Houston Independent School District (HISD) against Russo Properties, Inc. for unpaid taxes from 1985 to 1987 on the Lyric Centre Office Building. First City National Bank of Houston, which held a lien on the property, was joined as a defendant and counterclaimed against the City and HISD, as well as their law firm. The trial court ruled partially in favor of both the City and HISD and First City Bank, leading to appeals from all parties. The key legal issues addressed include: 1) the proper assessment of a penalty under the Texas Tax Code, 2) whether this penalty assessment was precluded by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 3) the existence of an accord and satisfaction related to tax payments made by the City and HISD, and 4) the entitlement of parties to attorney's fees. Background information reveals that First City Bank underwent reorganization with FDIC assistance in April 1988, resulting in the establishment of New First City Bank, which assumed liabilities and engaged in asset management for a related entity, Collecting Bank, designated to handle nonperforming assets. The reorganization aimed to stabilize the bank's finances by removing troubled loans and securing a significant investment from an outside group, supported by FDIC contributions. Series A preferred stock held by the FDIC is prioritized over other stock classes of Collecting Bank, ensuring the FDIC recoups its full investment of $970 million before other stockholders receive distributions. Following the FDIC-assisted reorganization on April 19, 1988, First City Bank transferred its note and lien interest regarding the Property to Collecting Bank and subsequently foreclosed its lien in May 1988. In their amended petition, the City and HISD claimed delinquent taxes for the years 1985, 1986, and 1987, asserting that First City Bank paid $607,750.58 and $779,830.15 toward outstanding taxes on April 28, 1988. They contended that accrued penalties of 15% on unpaid amounts under Tex. Tax Code Ann. § 33.07 for 1985 and 1986 are statutory and cannot be waived. The funds from these checks covered all taxes for 1985 and 1986 but were insufficient for 1987, leading to a deficiency of $64,670.09 owed to the City and $80,240.73 to HISD as of December 31, 1989. The plaintiffs also sought reasonable attorney's fees for the 1987 tax year, calculated at 15% of the $490,485.60 owed. In response, First City Bank denied the allegations and raised several affirmative defenses. They argued that the payments were specifically intended for taxes, interest, and penalties under Tex. Tax Code Ann. § 33.01 and should not have been applied to penalties under § 33.07 or § 33.48. This misapplication allegedly left some taxes delinquent, constituting a breach of contract. They further contended that the acceptance of the checks by the City and HISD constituted an accord and satisfaction, resolving pre-1988 tax obligations, and that the City's refusal to apply the funds correctly caused First City Bank to incur over $20,000 in attorney's fees. Lastly, they claimed that the penalties for the tax years in question are preempted by federal banking laws. First City requested that the City and Houston Independent School District (HISD) be ordered to reapply the proceeds from checks according to an accord and satisfaction and sought recovery of attorney's fees of at least $20,000. Additionally, First City filed a counterclaim against the City, HISD, and the law firm of Heard, Goggan, reiterating similar facts from its previous pleadings and seeking at least $5,000 in attorney's fees. In response, the City and HISD denied the allegations and asserted several affirmative defenses: (1) First City’s claims involve governmental functions protected by sovereign immunity under Texas law; (2) the funds received were not conditionally tendered, as the accompanying communications were merely statements of intent and not binding conditions; and (3) there was no meeting of the minds necessary for establishing an accord and satisfaction. Key facts include First City Bank, on April 28, 1988, remitting checks to the City and HISD for outstanding taxes, totaling $608,422.58 and $779,071.81, respectively. The accompanying letters specified that the payments were intended solely for tax, interest, and penalties under section 33.01(a), excluding penalties or fees under sections 33.07 and 33.48. Both taxing entities acknowledged understanding these terms as conditions for endorsing the checks. However, on May 4, 1988, the tax office manager informed First City Bank that the checks had been applied contrary to these instructions, leading to delinquent accounts. First City Bank responded on May 6, insisting the payments were not to cover penalties under the specified sections and deemed the application of funds an unlawful conversion and breach of contract. First City demanded either a reallocation of the payments as instructed or a refund, both of which the City and HISD rejected. As of April 28, 1988, the total delinquent taxes, interest, and penalties owed were $608,422.58 to the City and $779,071.81 to the Houston Independent School District (HISD) for the tax years 1985, 1986, and 1987. Penalties assessed under section 33.07 were: for 1985, $3,783.23 by the City and $0.00 by HISD; for 1986, $48,798.77 by the City and $65,975.72 by HISD; for 1987, $0.00 by the City and $52,582.00 by HISD. Heard, Goggan had contracts with the City and HISD for tax collection, entitling them to a 15% fee on collected amounts. Following a bench trial, a judgment was signed on March 20, 1990, which stated that payments made by Defendant First City on April 28, 1988, satisfied all base tax, interest, and penalties owed under Section 33.01 of the Texas Property Tax Code for the specified tax years. The payments did not cover penalties, costs, or attorney’s fees related to Sections 33.07 or 33.48. The City was awarded $4,400 and HISD $5,600 in penalties, costs, and attorney’s fees, with interest accruing 30 days post-judgment. The Tax Assessor-Collector for both entities was ordered to adjust the tax rolls to reflect that the payments constituted full payment of all base tax, interest, and penalties for the specified years, and to show the amounts owed as $4,400 for the City and $5,600 for HISD. Upon settling the awarded amounts, all assessments for the tax years 1985, 1986, and 1987 would be considered paid in full, leading to the release of tax liens on the property. Court costs were assigned to the party that incurred them, and all other relief not granted was denied. Relevant sections of the tax code outline penalties and interest for delinquent taxes, establishing a 6% penalty for the first month delinquent, escalating to 12% if unpaid by July 1, along with accruing interest at a rate of 1% per month. Section 33.07 allows taxing units or appraisal districts to impose an additional penalty of up to 15% on delinquent taxes that remain unpaid as of July 1 of the year they become delinquent, provided the unit has contracted with an attorney for collection efforts. If this penalty is applied, the taxing unit cannot recover attorney's fees in subsequent lawsuits for tax collection. Additionally, property owners must be notified of the delinquency and penalty 30 to 60 days before July 1. Section 33.48 permits taxing units to recover reasonable attorney's fees of up to 15% in tax collection suits. In the appeal involving the City of Houston and the Houston Independent School District (HISD), the trial court's findings indicated that both entities understood the terms of certain letters and checks as a condition for endorsing the checks to release all taxes, penalties, and interest for tax years 1985 to 1987. The trial court concluded that First City Bank did not intend to pay any costs, fees, or penalties under Sections 33.07 or 33.48 with its payments. The court determined that the allocation of those payments by the City and HISD was improper, establishing an accord and satisfaction based on the conditions set forth in the letters and checks. Consequently, any payments allocated to penalties or fees were deemed involuntary and subject to refund or reallocation to satisfy the base tax obligations. The trial court did not reduce the penalty but enforced the original terms under which the checks were accepted. The reliance of the City and HISD on **Jones v. Williams** is inappropriate as its holding does not apply to the penalties outlined in section 33.07, which was established by legislation effective January 1, 1982, to cover collection costs. The City and HISD argue that the doctrine of accord and satisfaction is irrelevant in tax collection, claiming it applies only to situations involving implied contracts. They express concern that allowing taxpayers to submit conditioned endorsements could lead to evasion of full tax payments, yet provide no supporting authority. Additionally, they assert that no accord and satisfaction exists due to a lack of mutual assent, as the checks' legends did not condition negotiation on payment allocation but merely provided guidance ignored by the City and HISD. They contend that such conditional payments violate City Ordinance Section 44-16, asserting that only legal contracts can be subject to accord and satisfaction. Under Texas law, all claims arising from express or implied contracts may be settled through accord and satisfaction, provided the contracts are legal. When a check is tendered with conditions, and those conditions are accepted by cashing the check, a contract is formed. Thus, when a conditional payment is made to resolve a disputed obligation, its acceptance constitutes an accord and satisfaction. The elements of accord and satisfaction require the existence of a new contract and mutual assent between the parties. An accord involves an agreement for one party to provide something different than what they are entitled to, while satisfaction is the actual performance of that agreement. In this case, the acceptance of the checks by the City and HISD, which explicitly noted the exclusion of certain disputed penalties, indicates that accord and satisfaction should apply. The City and HISD accepted the checks with terms they acknowledged, thereby accepting the conditions associated with the payments. The City and HISD's attempt to retain funds while disregarding the conditions of payment does not negate the existence of a binding contract regarding the application of those funds. Similar to the case Warrior Constructors v. Small Business Investment Co., where a creditor was required to apply payments as specified by a guarantor, the current situation establishes several key facts: 1) there is a dispute over penalties and fees under specific sections; 2) First City Bank issued checks with clear conditions regarding how funds should be allocated; 3) the City and HISD received these checks and accompanying letters; 4) they understood the conditions; and 5) they deposited the checks but allocated the funds contrary to the specified terms. The trial court determined that the City and HISD's acceptance of the checks implied mutual agreement to the specified application of funds. Accordingly, it concluded that their alternative allocation constituted a breach of contract and that acceptance of the checks amounted to accord and satisfaction. Although no explicit contract language was present, the circumstances indicated an implied contract based on mutual intent. The court noted that conduct can demonstrate assent, and the question of mutual assent is a factual matter for the trial judge. The trial court's findings are supported by evidence viewed favorably to First City Bank, leading to the overruling of the first and third points of error. The City and HISD argue that the trial court incorrectly ruled that attorney's fees under section 33.48 and penalties under section 33.07 of the Texas Tax Code were unreasonable. They assert that: 1) a customary attorney's fee for tax collection is 15% of the tax, penalty, and interest; 2) this fee can be applied to delinquent taxes without a section 33.07 penalty; 3) if the section 33.07 conditions are unmet, they can still recover attorney's fees under section 33.48; 4) for partially paid 1987 taxes, they seek separate attorney's fees determination; 5) expert testimony supports that 15% is a customary fee; 6) courts often reference customary fees to assess reasonableness; 7) only the City and HISD can contest fee reasonableness; 8) First City Bank failed to counter the presumption of unreasonableness for section 33.48 fees. They also claim entitlement to recover additional collection costs under section 33.07 as a statutory penalty, amounting to 15% of unpaid tax, penalty, and interest by July 1 for 1985 and 1986, separate from attorney's fees. Furthermore, they believe they are entitled to recover 15% of delinquent taxes, penalties, and interest for 1987 as reasonable attorney's fees. They affirm that for tax years 1985 and 1986, they had properly contracted with an attorney, adopted the section 33.07 penalty, and notified the property owner of the delinquency. However, it is noted that there is no record indicating that the City or HISD officially adopted the section 33.07 penalty or provided timely notice to the property owner about the tax delinquency and penalty for those years. Section 33.01 base penalties for delinquent taxes from the 1987 tax year were paid on April 28, 1988, and were accepted by the City and HISD, excluding penalties under section 33.07 and attorney's fees under section 33.48. Sections 33.07 and 33.48 are interrelated rather than unrelated; they serve complementary purposes with respect to collection costs. Specifically, if attorney's fees are awarded, section 33.07 penalties cannot be recovered, and vice versa, to prevent double recovery. The stipulated collection costs in this case were solely attorney's fees. Post-April 29, 1988, the costs incurred by the City and HISD pertained only to disputes over collection costs and attorney's fees, which do not qualify as recoverable collection costs under section 33.07. The City and HISD cannot recover a section 33.07 penalty in their collection efforts for the 1985 and 1986 tax years, as their claim of at least $181,930.56 includes an unqualified section 33.07 penalty of $118,557.72 limited to those years. While they seek section 33.48 attorney's fees for 1987, they do not seek a section 33.07 penalty for that year. The attorney's fees issue is confined to determining their reasonableness for the 1987 tax collection. Any statute allowing for attorney's fees is penal and must be strictly enforced, with the awarded amount being subject to the trial court's discretion based on ethical rules and the circumstances of the case. In a "JOINT PRE-TRIAL ORDER," both parties agreed to submit expert witness testimony regarding the reasonableness of attorney's fees without further trial testimony. Expert depositions were provided to the trial court, and neither party challenged the expertise or qualifications of these witnesses on the matter of attorney's fees. The City and HISD's attorney, Heard, Goggan, failed to maintain records of hours worked in preparing for trial. An expert from Heard, Goggan acknowledged that tax suit filings for delinquent taxes are typically automated and did not provide objective evidence regarding the specific work done in this case. He conceded a lack of knowledge about the case's facts and suggested that the 15 percent attorney's fee sought was reasonable only in a broader statewide context. The legal work performed included filing a bankruptcy court statement and preparing three petitions based largely on computerized data from taxing units. First City Bank's expert, a former associate of the bank's counsel, testified that a reasonable attorney's fee would be $15,000 and described the requested fee of $192,000 as excessive given the case's straightforward nature and the absence of significant risk for Heard, Goggan. The City and HISD invoked the presumption of reasonableness for customary fees under Tex. Civ. Prac. Rem. Code Ann. 38.003, which they failed to substantiate as applicable to their claim against First City Bank. Even if applicable, the presumption was rebutted by the factors outlined in Johnson v. Georgia Highway Express, Inc. The key issue was not the customary fees for Heard, Goggan's contracts but the reasonableness of the fees sought from First City Bank. Section 33.48 permits only reasonable attorney's fees approved by the court, not a mandatory 15 percent. The onus was on the taxing units to prove the reasonableness of the fees. The challenge to First City Bank's expert was deemed an issue of the weight of testimony rather than admissibility, leaving the assessment of witness credibility to the trial court. The appellate court must not replace the judgment of the trier of fact. First City Bank presented evidence challenging the reasonableness of the attorney's fees sought by the City and HISD, who bore the burden of proving the fees' reasonableness. A claim of "no evidence" was deemed inappropriate as First City Bank was not required to prove the fees unreasonable. The City and HISD's argument that First City Bank lacked standing to contest the attorney's fees was rejected. Regarding the City and HISD's assertion that the trial court erred by not allowing foreclosure on the tax liens, the appellate court found their argument waived due to insufficient evidence presented during the trial and failure to request findings of fact or conclusions of law on this issue. In First City Bank's appeal, it argued that FIRREA should apply to bar property tax penalties against it. Additional background included a consulting agreement with A. Robert Abboud for restructuring Old First City Bank, leading to the acquisition and reorganization of New First City Bank, which involved significant financial transactions and asset transfers. Collecting Bank emerged as a national bank with its governance structure and authority to manage its affairs, including the sale of its acquired assets to cover expenses. The FDIC has the authority, after April 19, 1998, to require New First City Bank and its Subsidiaries to repurchase a minimum of $100 million worth of Series A preferred stock at $10.00 per share. The trial court determined that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) does not prevent the assessment of tax penalties when the FDIC is neither acting as a receiver nor a party to the lawsuit. FIRREA, enacted on August 9, 1989, aims to stabilize federal deposit insurance funds and facilitate responses to failed depository institutions. Section 219 of FIRREA amended the Federal Deposit Insurance Act (FDIA), stating that when acting as a receiver, the FDIC is not liable for penalties or fines related to unpaid taxes or fees. This amendment applies to the FDIC's actions in both its corporate and receiver capacities. The FDIC’s role in this case is as a lender and a shareholder of Collecting Bank, which is a separate entity with its own directors elected by its shareholders, while the FDIC only holds nonvoting shares. The legal status of a national bank’s receivership is dictated by 12 U.S.C. 191, 192, which outlines the appointment of a receiver, potentially the FDIC, but this procedure was not followed for First City Bank. FIRREA was intended as a comprehensive reform package, and had Congress intended to grant tax immunity to the FDIC for nonvoting stock ownership, it likely would have included explicit language to that effect. The FDIC acquired $970 million in Series A preferred stock from the Subsidiaries as part of a reorganization. If personal property taxes are levied on this preferred stock, the FDIC could argue it is exempt under FIRREA. However, any debts incurred by First City Bank to the City and HISD occurred before FIRREA's enactment, and U.S. laws are generally applied prospectively, not retroactively. The Federal Deposit Insurance Corp. v. Jenkins case addresses the judicial expansion of FDIC defenses post-FIRREA. The FDIC acquired all claims of a failed bank through a purchase and assumption agreement and sought a declaratory judgment asserting that shareholders' claims, except those under securities law, were derivative. The FDIC contended that it should have absolute priority in such claims to maximize recovery for the insurance fund. However, the Eleventh Circuit ruled against this expansion, stating that the Federal Deposit Insurance Act does not indicate an intention to create an absolute priority for the FDIC, and reversed the lower court's policy-based finding. Additionally, First City Bank claimed that Collecting Bank, as a successor in interest to the FDIC, inherited the FDIC's defenses. This argument relied on the D'Oench, Duhme doctrine, which allows successors to assert equitable estoppel. However, the court determined that neither First City Bank nor Collecting Bank qualifies as a successor in interest to the FDIC. Collecting Bank is a successor to First City Bank due to a transfer related to the Russo Loan, making the D'Oench Duhme doctrine inapplicable. The court emphasized that the policy behind D'Oench Duhme aims to protect the FDIC and its successors during rapid asset transfers, which was not the case here given the lengthy transaction period. Consequently, the trial court's conclusion that FIRREA does not inhibit tax penalties was upheld. The FDIC was neither a receiver nor a party to the lawsuit involving First City Bank. The court overruled First City Bank's first point of error. Regarding the second point of error, the trial court ruled that Heard, Goggan was not liable for attorney's fees, a decision upheld by the court. The trial court found that attorney's fees are not recoverable from an attorney when the party they represent breaches a contract. Although First City Bank was entitled to $40,000 in attorney's fees due to a breach of an accord and satisfaction, Heard, Goggan was not held liable. First City Bank incurred over $40,000 in attorney's fees to compel compliance from the City and Houston Independent School District (HISD) with the accord and satisfaction. It was established that Heard, Goggan, along with United Governmental Services, was contracted to collect delinquent taxes for the City and HISD. However, the decision to process First City Bank's checks contrary to instructions was made solely by the City and HISD. The checks were made payable to the taxing units, not to Heard, Goggan. Tax collection is a governmental function, and in Texas, an agent is typically not personally liable if acting on behalf of a disclosed principal unless specific exceptions apply. None of these exceptions were relevant in this case. First City Bank's assertion that Heard, Goggan made the decision to accept the checks was rejected; the decision was made by the taxing units' personnel. Thus, Heard, Goggan's actions did not constitute participation in the breach of contract, as the responsibility lay with the City and HISD. Heard, Goggan, along with their attorneys and collecting agents, acted lawfully in their advisory role to tax officials of governmental agencies. The cases cited by First City Bank, including Black v. Baker, Archer v. City of Cisco, and City of Garland v. White, do not apply to this appeal as their facts are distinguishable; those cases involved personal liability for unlawful actions taken without proper authority, unlike Heard, Goggan's authorized actions in tax collection. First City Bank's argument that a governmental function becomes proprietary when contracted out is not applicable here, as tax collection remains a governmental function regardless of the involvement of a private law firm. The decision in City of Round Rock v. Smith reaffirmed that certain functions, like plat approval, are quasi-judicial and not proprietary, while the construction of storm sewers is proprietary. Heard, Goggan's actions were within their agency scope as attorneys for the City and HISD in delinquent tax matters, which legally required them to prosecute suits to collect unpaid taxes. Section 33.41 mandates that governmental entities use the courts for tax collection, which they can only do through an attorney. Personal liability for agents performing governmental functions, such as tax collection, would contradict public policy aimed at ensuring immunity for taxing units. Therefore, the trial court correctly determined that attorney's fees incurred by First City Bank and HISD are not recoverable from Heard, Goggan, affirming the trial court's judgment. Justice Cohen concurs, while Justice O'Connor dissents, reflecting on the role of courts in protecting citizens from government abuse. Courts should be willing to address abuses in cases like this, as it serves the public interest and benefits taxpayers. Justice O'Connor's dissent suggests judicial notice of Houston City Ordinance 44-16, advocating for a judgment favorable to the City and Houston Independent School District (HISD) due to their obligation to adhere to the ordinance. However, it is argued that the ordinance does not apply to HISD, meaning HISD cannot benefit from it. Additionally, the City should not be protected by the ordinance because it had the option to return the check instead of adhering to the ordinance’s stipulations. Ordinance 44-16 specifically pertains to the tax assessor-collector of the City and does not grant the City authority over separate entities like HISD. The City claims it was unable to apply the funds as directed by First City’s transmittal letter, but evidence suggests that it should have returned the checks, reflecting its usual practice with conditional payments. Testimony from Gordon Welch indicates that the City typically returns checks when it cannot fulfill the specified conditions, and such failure to return the checks could support a finding of accord and satisfaction. Furthermore, First City argues that the ordinance, as applied, is unconstitutional under the Texas Constitution's open courts provision. While the ordinance does not inherently infringe upon First City's right to redress, its application could negate challenges against penalty statutes by ensuring that penalties are paid in full and non-refundable. First City asserts it faced limited options—conditional payment, no payment with foreclosure risk, or full payment without refund potential. It contends that if it cannot obtain relief through this suit, it effectively has no access to the courts, a serious claim warranting consideration. Courts should refrain from making constitutional rulings if a case can be resolved on nonconstitutional grounds and should only declare an ordinance unconstitutional if it cannot be interpreted in a constitutional manner. The judgment affirms First City's access to the courts while maintaining public interest in scrutinizing government actions, thus avoiding a ruling on the constitutional issue. Justice O'Connor dissents regarding the majority's handling of point of error three, where the City contends that the writing on checks did not represent a conditional endorsement and that the trial court's order to reallocate funds was erroneous. O'Connor agrees with the City's argument and criticizes the majority for disregarding City Ordinance Section 44-16, which governs the allocation of partial payments by the tax assessor. The majority's rationale for excluding the ordinance—its absence in trial evidence—is challenged by O'Connor, who cites Texas Rule of Evidence 204, allowing judicial notice of municipal ordinances. The ordinance mandates that partial payments be applied to the oldest delinquent tax year first and specifies how payments should be credited. O'Connor argues the majority erred in not considering this ordinance in their decision. Partial payments made by First City toward city and school taxes must be allocated proportionally to the respective taxes due and must be sufficient to resolve delinquencies within a reasonable timeframe, as outlined in the city ordinance. First City attempted to bypass this ordinance through conditions stated on the checks and accompanying letter, which the court found to be ineffective since no city representative could accept these conditions without violating the ordinance. The doctrine of accord and satisfaction, which requires a mutual agreement to settle a debt for less than the full amount, was deemed inapplicable because First City did not provide a lesser payment to fully satisfy the debt; instead, it made a partial payment while attempting to reserve disputed amounts for later resolution. The court emphasized that such partial payments do not fulfill the criteria for accord and satisfaction as they lack the necessary agreement to discharge the entire obligation. The judge expressed disagreement with the majority opinion and indicated that First City’s legal representation was fully aware of the city's ordinance, suggesting any claim of abuse would more likely pertain to the City rather than First City.