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Opinion issued January 11,
2007

In
The

Court of
Appeals

For
The

First
District of Texas

NOS. 01-05-00758-CV

01-06-00497-CV

__________

TEXAS
SOUTHERN UNIVERSITY, Appellant

V.

STATE STREET BANK AND TRUST COMPANY,

CMS VIRON
CORPORATION, AND

CMS ENERGY
RESOURCE MANAGEMENT COMPANY, Appellees

On Appeal
from the 80th District Court

Harris County, Texas

Trial Court
Cause No. 2002-54422

OPINION ON
REHEARING

Texas
Southern University, appellant, and State Street Bank and Trust Company,
appellee, both filed motions for rehearing. Having considered the motions
and responses, the Court finds the motions to be without merit. The Court,
however, withdraws its Opinion and judgment issued June 8, 2006 and issues
the following in its stead.

CMS Viron
Corporation and CMS Energy Resource Management Company (collectively
"Viron") and State Street Bank and Trust Company asserted numerous claims
against one another and Texas Southern University ("TSU") arising from an
alleged contract between TSU and Viron. In this interlocutory appeal, TSU,
a political subdivision of the State of Texas, appeals the trial court's
denial of its pleas to the jurisdiction based on sovereign immunity.
(1)

In four
issues, TSU contends that (1) Viron has not obtained legislative
permission to sue TSU; (2) a party cannot circumvent the State's immunity
from suit by recasting a contract claim as one for inverse condemnation;
(3) the Uniform Declaratory Judgments Act does not expand the court's
jurisdiction; and (4) Viron did not possess a vested property right in the
equipment and TSU acquired the equipment pursuant to its contract with
Viron, not through the exercise of eminent-domain powers. We affirm in
part and reverse and remand in part.

I. FACTUAL
(2) AND PROCEDURAL BACKGROUND

In
an attempt to lower its energy costs, TSU solicited bids for
"comprehensive energy conservation services," including "performing a
comprehensive energy audit, and to include energy and maintenance-related
staffing requirements and an evaluation of current staff qualifications,"
and "providing equipment and/or services, including all financing,
necessary to achieve long-term, cost-effective energy efficiency, and
reduce the University's operating costs." After soliciting bids for the
project, on January 16, 1998, TSU notified Viron that the TSU Board of
Regents had authorized "the award of a contract to Viron Energy Services
for the referenced project." As part of the energy audit, Viron submitted
a proposed "Performance Based Energy Savings Agreement" ("Energy Savings
Agreement") to carry out the corrective measures discussed in the energy
audit. The Energy Savings Agreement called for six projects for the
improvement of TSU's physical plant for a total price of $13,534,281. TSU
agreed to pay $5,097,546
(3) in cash with the remaining $8,334,281 to be funded by a
lease between TSU and Viron. In July 1998, after a meeting during which
the Board of Regents authorized the TSU administration to proceed with the
Energy Savings Agreement, the Energy Savings Agreement was executed by
TSU's President, James M. Douglas, and James Mullaney of Viron.

Academic
Capital, L.L.C. offered to provide financing for the proposed
lease/purchase agreement. Academic Capital proposed that it would deposit
approximately $8.3 million in an escrow account to be established to fund
the purchase of the equipment necessary for the TSU project. From the
escrow account, Viron would be paid in four equal installments of
$2,083,570.25. Academic Capital designated its alter ego, Academic
Services, as escrow agent under the escrow agreement.

In
September 1998, Viron and TSU executed the Master State and Municipal
Lease/Purchase Agreement ("the Master Lease") wherein TSU requested that
Viron get the equipment. In the Master Lease, TSU certified that it had
"the legal capacity to enter into [the] Master Lease." TSU was to retain
title to the equipment; however, if TSU was in default, the title was to
"re-vest immediately in and shall revert to [Viron] free of any right,
title or interest of TSU."

The rental
payment schedule found in the Master Lease provided for 20 semiannual
payments of $554,818.43
(4) for a total of $11,122,869.93. The first payment was due on
February 1, 2000 and the last payment on August 1, 2009. The rental
payment schedule was signed by Harold Johnson, associate vice president of
Facilities Planning and Operations for TSU.

An opinion
letter from Cheryl Elliot Thornton, TSU's General Counsel, was attached as
an exhibit to the Master Lease. In that letter, Thornton
stated:

The Master
Lease is a governmental purpose obligation and constitutes a legal, valid
and binding deferred payment obligation of [TSU], enforceable in
accordance with its terms and does not constitute a debt of [TSU] under
the laws of the State of Texas. In the event [Viron] obtains judgment
against [TSU] for money damages in connection with the Master Lease, [TSU]
will be obligated to pay such judgment. . . .

. . .
.

. . . The
signature of the official of [TSU] which appears on the Master Lease and
the attached documents is true and genuine; I know him/her to hold the
office set forth below his/her name. Such official is duly authorized to
execute the Master Lease and the attached documents. I have attached
hereto a copy of such authorization. . . .

. .
. .

. .
. This opinion may be relied upon by you and your
assigns.

Viron, TSU,
and Academic Services agreed that the previously-executed escrow agreement
would become part of the Master Lease.

Viron
assigned to Academic Capital its benefits under the Master Lease, and TSU
executed its acknowledgment of the assignment which included its
understanding that the payment schedule was unchanged. A few months later,
Academic Capital and Academic Services assigned the Master Lease, which
included the escrow agreement, to State Street Bank. Among the rights
assigned were (1) all rights as the owner and lessor of the equipment; (2)
all right, title and interest in and to the equipment; and (3) all right,
title and interest in and to all payments to be made by TSU in connection
with the equipment. In return, State Street advanced $8,547,545.51 into an
acquisition fund to be used by Viron to finance the purchase and the
delivery of the equipment. The acquisition fund was to be administered by
Academic as an escrow account.

On April 2,
1999, TSU sent Viron a "Notice to Proceed" with the Thermal Plant Chiller
Upgrade project.
(5) Viron completed its work in March 2000.

As the
project progressed, the first three required payments were made by
Academic Capital from State Street's escrow account to
Viron as scheduled on September 1, 1998; March 1, 1999; and September 1,
1999, each in the amount of $2,083,570.25. Viron contends, however, that
it never received the final payment it was due. The payment was sent to
State Street instead.

The first
payment to be made by TSU under the Master Lease was due on February 1,
2000. At that time, TSU, via its new President and new General Counsel,
asserted that the Master Lease was not a valid obligation of TSU and
refused to make the payments.
(6) Among other things, TSU maintained that the purported Master
Lease was void because the TSU representative had not been authorized by
the TSU Board of Regents, the Texas Higher Education Coordinating Board,
or in accordance with law, to enter into such an undertaking. When the
first payment was due, Academic Capital paid the installment to State
Street out of the Viron's escrow account. State Street contends that it
was unaware that the money was not coming directly from TSU. To date, TSU
has not made any of the lease payments due under the terms of the Master
Lease, and the equipment remains on its campus.

Viron
informed the Texas Attorney General's office of TSU's outstanding balance.
TSU and Viron could not agree to everything; however, they did address
Viron's work on the thermal chiller plant system. TSU paid Viron the
balance of $5,100,000 due on that part of the project.
(7)

In the
summer of 2001, State Street learned that TSU was not making the required
installment payments and also that the purported Master Lease "had not
been authorized by TSU's Board of Regents, or the Coordinating Board, or
in accordance with the law, and was therefore void and unenforceable."
State Street notified TSU and Viron that these actions constituted
defaults of the purported Master Lease and Viron was required to
repurchase the purported Lease from State Street for the $7,621,451.27
unpaid balance due to State Street. To date, it has not done
so.

State
Street's Claims
(8)

State
Street's third amended petition asserted an inverse condemnation claim
against TSU and also sought the trial court's determination and
declaration that (1) the purported lease and all related documents "were
executed without the requisite authority" and are "void and unenforceable
against TSU;" (2) TSU does not have any rights to the equipment; (3) State
Street holds all rights, title and interest to the equipment; (4) TSU has
"no right, title, or interest to the equipment and must return the
equipment to State Street;" and (5) State Street is entitled to a
constructive trust and return of the equipment to State Street.

In its plea
to the jurisdiction, TSU argued that (1) State Street failed to allege any
waiver of TSU's immunity from suit; (2) characterizing a contract dispute
as a declaratory judgment claim does not confer jurisdiction on a trial
court; (3) declaratory judgment seeking to establish a contract's validity
may not be maintained without legislative permission; (4) State Street
lacks standing to assert a claim for inverse condemnation; (5) State
Street had no ownership interest prior to the assignment of the contract
from Academic Capital to State Street; and (6) all of State Street's
alleged right, title, and interest flow from the contract. There was no
sworn denial of State Street's ownership.

Quintin
Wiggins, TSU's Senior Vice President for Business and Finance, testified
that the Master Lease was never valid, it was never authorized by the TSU
Board of Regents or the Higher Education Coordinating Board, TSU was not
the owner of the equipment, State Street had title to the equipment, and
TSU had never made any lease payments on the equipment.

The trial
court denied the plea to the jurisdiction as to State Street's claims
without explanation.

Viron's
Claims
(9)

Viron's
second amended counterclaim and third-party petition asserted numerous
causes of action against TSU including breach of contract (breach of the
Energy Audit Agreement, the Energy Savings Agreement, and the Master
Lease),
(10) unjust enrichment, inverse condemnation, and
indemnification in the event that State Street recovered from Viron.
Finally, Viron requested that the trial court make a "determination and
declaration that the Master Lease and all related documents signed by any
representative of TSU are valid, binding, and enforceable obligations of
TSU."

In its plea
to the jurisdiction, TSU argued that (1) Viron failed to allege waiver of
TSU's immunity from suit in its contract causes of action; (2) Viron's
declaratory judgment suit fails because it is seeking to enforce
performance under a contract and is, thus, a suit against the State that
cannot be maintained without legislative permission; and (3) "Viron lacks
standing to assert an inverse condemnation claim as it seeks to assert the
claim on behalf of State Street." The
trial court issued a lengthy order denying TSU's plea. After recitation of
the relevant factual allegations, the trial court found that, "in light of
the extraordinary factual circumstances presented," the court could not
conclude that TSU was "entitled to prevail" on its pleas to the
jurisdiction. The trial court further stated in response to TSU's argument
that Viron had no standing to assert a claim for inverse condemnation
that, because there was a fact question "as to what extent [Viron]
currently has an ownership interest in the equipment under the Master
Lease . . . , it is inappropriate at this time to deny the plea with
prejudice as to the inverse condemnation claim." Finally, the trial court
acknowledged that "ambiguity exists as to whether and [to] what extent a
state agency can waive sovereign immunity by its conduct . . . . The
[c]ourt, however, is unaware of definitive case law that precludes
application of waiver-by-conduct doctrine to circumstances as potentially
unique as those in this case."

TSU
appeals the trial court's denial of its pleas to the
jurisdiction.

II. APPLICABLE LAW

A.
The Sovereign Immunity Doctrine

Texas has
long recognized that sovereign immunity, unless waived, protects the State
of Texas, its agencies, and its officials from lawsuits for damages,
absent legislative consent to sue the State. Dir. of Dep't of Agric.
& Env't v. Printing Indus. Ass'n of Tex., 600 S.W.2d 264, 265
(Tex. 1980); Griffin v. Hawn, 341 S.W.2d 151, 152-53 (Tex. 1960);
Hosner v. DeYoung, 1 Tex. 764, 769 (1847). Sovereign immunity
embraces two principles: immunity from suit and immunity from liability.
Mo. Pac. R.R. Co. v. Brownsville Navigation Dist., 453 S.W.2d
812, 813 (Tex. 1970). Immunity from suit bars a suit against the State
unless the Legislature expressly consents to the suit. Tex. Natural
Res. Conservation Comm'n v. IT-Davy, 74 S.W.3d 849, 853 (Tex. 2002).
If the Legislature has not expressly waived immunity from suit, the State
retains such immunity even if its liability is not disputed. Fed. Sign v.
Tex. S. Univ., 951 S.W.2d 401, 405 (Tex. 1997). Immunity from
liability protects the State from money judgments even if the Legislature
has expressly given consent to sue. IT-Davy, 74 S.W.3d at 853.
The bar of sovereign immunity is a creature of common law and not of any
legislative enactment. Tex. A&M Univ.-Kingsville v. Lawson,
87 S.W.3d 518, 520 (Tex. 2002).

The Texas
Supreme Court has long recognized that "it is the Legislature's sole
province to waive or abrogate sovereign immunity." Fed. Sign, 951
S.W.2d at 409. The Legislature may consent to suits against the State by
statute or by resolution. Gen. Serv.
Comm'n v. Little-Tex Insulation Co., 39 S.W.3d 591, 594 (Tex.
2001).
The Legislature is better suited than the courts to weigh the conflicting
public policies associated with waiving immunity and exposing the
government to increased liability, the burden of which the general public
must ultimately bear. IT-Davy, 74 S.W.3d at 854.

Legislative
control over waiving immunity from suit does not mean that the State can
freely breach contracts with private parties or that the State can use
sovereign immunity as a shield to avoid paying for benefits the State
accepts under a contract. Id. Rather, if a party who contracts
with the State feels aggrieved, it can seek redress by asking the
Legislature to waive immunity from suit. Id.; see Tex.
Civ. Prac. & Rem. Code Ann. §§107.001-.005 (Vernon 2005).

When the
State contracts with a private party, it waives immunity from liability.
Little-Tex, 39 S.W.3d at 594. The State does not, however, waive
immunity from suit simply by contracting with a private party.
Id. Immunity from suit bars a suit against the State unless the
State expressly gives its consent to the suit. Id.; see also
Tex. Civ. Prac. & Rem. Code Ann. §§ 101.025; 107.001-.005.
Although the claim asserted may be one on which the State acknowledges
liability, this rule precludes a remedy until the Legislature consents to
suit. See Mo. Pac. R.R., 453 S.W.2d at 813. Legislative consent
for suit or any other sovereign immunity waiver must be "by clear and
unambiguous language." Univ. of Tex. Med. Branch at Galveston v.
York, 871 S.W.2d 175, 177 (Tex. 1994); Duhart v. State, 610
S.W.2d 740, 742 (Tex. 1980).

Immunity
from liability protects the State from judgments even if the
Legislature has expressly given consent to the suit. Mo. Pac.
R.R., 453 S.W.2d at 813. Even if the Legislature authorizes suit
against the State, the question remains whether the claim is one for which
the State acknowledges liability. See State v. Isbell, 94 S.W.2d
423, 425 (Tex. 1936). The State neither creates nor admits liability by
granting permission to be sued. Tex. Civ. Prac. & Rem. Code Ann. §
107.002 ("A resolution granting permission to sue does not waive to any
extent immunity from liability."); Isbell, 94 S.W.2d at 424-25.
However, when the State contracts, the State is liable on contracts made
for its benefit as if it were a private person. State v. Elliott,
212 S.W. 695, 697-98 (Tex. Civ. App.--Galveston 1919, writ ref'd).
Consequently, when the State contracts with private citizens, it waives
immunity from liability.

B.
Plea to the Jurisdiction

A plaintiff
who sues the State must establish the State's consent to sue. Tex.
Dep't of Transp. v. Jones, 8 S.W.3d 636, 638 (Tex. 1999). Otherwise,
sovereign immunity from suit defeats a trial court's subject-matter
jurisdiction. Id. The State may assert sovereign immunity from
suit in a plea to the jurisdiction. Id. A plea to the
jurisdiction is a dilatory plea that seeks dismissal of a case for lack of
subject-matter jurisdiction, thus defeating "a cause of action without
regard to whether the claims asserted have merit." Bland Indep. Sch.
Dist. v. Blue, 34 S.W.3d 547, 554 (Tex. 2000). Subject-matter
jurisdiction is essential to the authority of a court to decide a case.
See Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex. 1998).

In a suit
against a governmental unit, the plaintiff must affirmatively demonstrate
the court's subject-matter jurisdiction by alleging a valid waiver of
immunity. Dallas Area Rapid Transit v. Whitley, 104 S.W.3d 540,
542 (Tex. 2003). To determine whether the plaintiff has met that burden,
we consider the facts alleged by the plaintiff and, to the extent it is
relevant to the jurisdictional issue, the evidence submitted by the
parties. Id. (quoting White, 46 S.W.3d at 868). "[I]f
the pleadings affirmatively negate the existence of jurisdiction, then a
plea to the jurisdiction may be granted without allowing the plaintiff an
opportunity to amend." County of Cameron v. Brown, 80 S.W.3d 549,
555 (Tex. 2002). A plea to the jurisdiction must be denied where the State
contends that it is immune on the basis of a "contract dispute" but where
fact issues exist regarding the existence of a contract. State v.
Holland, 161 S.W.3d 227, 233 (Tex. App.--Corpus Christi 2005, pet.
filed). Because immunity from suit defeats a trial court's subject-matter
jurisdiction, immunity from suit may properly be asserted in a plea to the
jurisdiction. See Tex. Dep't of Parks & Wildlife v. Miranda,
133 S.W.3d 217, 225-26 (Tex. 2004).

We review a
trial court's ruling on a jurisdictional plea de novo, construing the
pleadings in the plaintiff's favor and looking to the pleader's intent.
Id. at 226; IT-Davy, 74 S.W.3d at 855. Whether the
pleader has alleged facts that affirmatively demonstrate subject-matter
jurisdiction is a legal question that we review de novo. Miranda,
133 S.W.3d at 226. "If a plea to the jurisdiction challenges the existence
of jurisdictional facts, [a court is to] consider relevant evidence
submitted by the parties when necessary to resolve the jurisdictional
issues raised." Id. at 227. Yet, "[i]f the evidence creates a
fact question regarding the jurisdictional issue, then the trial court
cannot grant the plea to the jurisdiction, and the fact issues will be
resolved by the fact finder." Id. at 227-28.

C.
Declaratory Judgment Act

The Uniform
Declaratory Judgment Act ("DJA") is a remedial statute designed "to settle
and to afford relief from uncertainty and insecurity with respect to
rights, status, and other legal relations." Tex. Civ. Prac. & Rem.
Code Ann. § 37.002(b) (Vernon 1997); IT-Davy,74 S.W.3d at 855.
The Act provides:

A person
interested under a deed, will, written contract, or other writings
constituting a contract or whose rights, status, or other legal relations
are affected by a statute, municipal ordinance, contract, or franchise may
have determined any question of construction or validity arising under the
instrument, statute, ordinance, contract, or franchise and obtain a
declaration of rights, status, or other legal relations
thereunder.

Tex. Civ.
Prac. & Rem. Code Ann. § 37.004(a) (Vernon 1997). The DJA does not
extend a trial court's jurisdiction, and a litigant's request for
declaratory relief does not confer jurisdiction on a court or change a
suit's underlying nature. IT-Davy, 74 S.W.3d at 855.

Private
parties may seek declaratory relief against state officials who allegedly
act without legal or statutory authority, but such suits are not "suits
against the State." Id. (quoting W. D. Hayden Co. v.
Dodgen, 308 S.W.2d 838, 840 (Tex. 1958)). This is because suits to
compel state officers to act within their official capacity do not attempt
to subject the State to liability. Id. In contrast,
declaratory-judgment suits against state officials seeking to establish a
contract's validity, to enforce performance under a contract, or to impose
contractual liabilities are suits against the State. Id. That is
because such suits attempt to control state action by imposing liability
on the State. Id. at 856. Consequently, such suits cannot be
maintained without legislative permission. Id.; see also Fed.
Sign, 951 S.W.2d at 404. Private parties cannot circumvent the
State's sovereign immunity from suit by characterizing a suit for money
damages, such as a contract dispute, as a declaratory-judgment claim.
IT-Davy, 74 S.W.3d at 856; Freedman v. Univ. of Houston,
110 S.W.3d 504, 508 (Tex. App.--Houston [1st Dist.] 2003, no
pet.).

D.
Inverse Condemnation and Federal Takings Clause

The Fifth
Amendment states: "[N]or shall private property be taken for public use,
without just compensation." U.S. Const. amend. V.
(11) The Texas Constitution provides that, "No person's property
shall be taken, damaged or destroyed for or applied to public use without
adequate compensation being made, unless by the consent of such person . .
. ." Tex. Const. art. I, § 17. Although sovereign immunity generally
protects the State from lawsuits for monetary damages, it offers no shield
against a taking claim brought under article 1, section 17 of the Texas
Constitution. Steele v. City of Houston, 603 S.W.2d 786, 791
(Tex. 1980); see also Little-Tex, 39 S.W.3d at 594.

To have
standing to sue for inverse condemnation, a party must have a property
interest at the time of the alleged taking. City of Keller v.
Wilson, 168 S.W.3d 802, 808 (Tex. 2005); City of Houston v.
Boyle, 148 S.W.3d 171, 178 (Tex. App.--Houston [1st Dist.] 2004, no
pet.). Not any property interest will do; that interest must have risen to
the level of a vested right. State/Operating Contractors ABS
Emissions, Inc. v. Operating Contractors/State, 985 S.W.2d 646, 651
(Tex. App.--Austin 1999, pet. denied). A vested property right is
one that has been fixed by a court's final judgment or that has some
definitive, rather than merely potential, existence. Reiss v.
Reiss, 40 S.W.3d 605, 608 (Tex. App.--Houston [1st Dist.] 2001),
rev'd on other grounds, 118 S.W.3d 439 (Tex. 2003). Standing is a
constitutional prerequisite to maintaining suit. See Tex. Ass'n of
Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 444 (Tex. 1993);
Hunt v. Bass, 664 S.W.2d 323, 324 (Tex. 1984).

The
State does not have the requisite intent under constitutional-takings
jurisprudence when it withholds property or money from an entity in a
contract dispute. Little-Tex, 39 S.W.3d at 598-99. Rather, the
State is acting within a color of right under the contract and not under
its eminent domain powers. Id. at 599.

To recover
damages for inverse condemnation, State Street and Viron had to prove that
TSU intentionally took or damaged the equipment for public use, or were
substantially certain that would be the result. See Tex. Const.
art. I, § 17; City of Dallas v. Jennings, 142 S.W.3d 310, 313-14
(Tex. 2004). To defeat TSU's plea to the jurisdiction, however, State
Street need only plead sufficient facts to show the elements of an
inverse-condemnation cause of action. See Kerr v. Tex. Dep't of
Transp., 45 S.W.3d 248, 251 n.3 (Tex. App.--Houston [1st Dist.] 2001,
no pet.).

III. ANALYSIS

TSU argues
that, as a political
subdivision of the State, it enjoys immunity
from Viron's and State Street's suits absent legislative consent. See
Fed. Sign, 951 S.W.2d at 408. In response, Viron offers three
theories to support its contention that TSU waived its sovereign immunity
from suit. Specifically, Viron asserts that TSU's immunity from suit was
waived by: (1) TSU's accepting full contractual benefits ("waiver by
conduct"), (2) inverse condemnation, and (3) legislative consent in the
Declaratory Judgment Act. Similarly, State Street offers two theories to
support its contention that TSU waived its sovereign immunity from suit
by: (1) inverse condemnation and (2) legislative consent in the
Declaratory Judgment Act.

A.
Waiver by Conduct

In issue
one, TSU argues that Viron has not obtained legislative permission to sue
TSU. It questions if sovereign immunity defeats subject-matter
jurisdiction over Viron's claims against TSU for breach of contract,
unjust enrichment, indemnity, and a declaratory judgment with respect to
the validity of the contract between Viron and TSU. In response, Viron
argues that TSU has waived its sovereign immunity by its
conduct.

1.
Standing

TSU argues
that, "because Viron admittedly assigned all of its rights under the
Contract, . . . it lacks standing to sue TSU for breach of that
Contract."

Viron does
not claim ownership of the equipment. Viron validly assigned all its
interest in the equipment in question to State Street Bank. Viron argues,
however, that, because TSU refuses to acknowledge that State Street ever
acquired any interest in the equipment by virtue of the assignment, Viron
retains the breach of contract claim.

An
oversimplification of the facts helps illuminate Viron's explanation of
how it "retains a genuine and substantial stake in this
litigation."

•Viron
and TSU entered into a contract;

•TSU has
accepted the benefit of millions of dollars worth of equipment under
that contract;

•TSU has
refused to pay the contracted price;

•Viron
assigned its right to receive payments from TSU to State Street Bank,
which financed the deal;

•State
Street sued TSU for defaulting on its payments;

•State
Street also sued Viron for breach of warranty and indemnity on the
theory that Viron is financially liable for TSU's default;

•Viron
sued TSU to protect itself from being forced to pay TSU's
default;

•Viron
faces a potential multi-million dollar loss in this case.

This
three-way litigation is plainly a situation in which a real controversy
exists between Viron and TSU which can be determined by monetary relief.
Thus, it satisfies the constitutional minimum for standing. See Texas
Ass'n of Bus., 852 S.W.2d at 446 ("The general test for standing in
Texas requires that there (a) shall be a real controversy between the
parties, which (b) will be actually determined by the judicial declaration
sought."). We hold that Viron has standing to asserts its contract claims.
See Miranda, 133 S.W.3d at 227-28.

2.
Supreme Court cases from Federal Sign to
present

In the
seminal case, Federal Sign v. Texas Southern University, the
Supreme Court held that sovereign immunity bars breach-of-contract claims
against the State unless the claimant has obtained legislative consent to
sue. Id. In Federal Sign, a contract had been executed
but it was terminated by TSU before performance. Id. at 403.
Justice Baker's majority opinion cautioned that the holding was limited
and observed that "[t]here may be other circumstances where the State may
waive its immunity by conduct other than simply executing a contract so
that it is not always immune from suit when it contracts." Id. at
408 n.1 Writing for a plurality of four justices, Justice Hecht concurred
in Federal Sign and reinforced the significance of the narrow
holding of the Court by stating that "today's decision does not hold that
the State is always immune from suit for breach of contract absent
legislative consent; it holds only that the mere execution of a contract
for goods and services, without more, does not waive immunity from suit."
Id. at 413 (Hecht, J., concurring). Justice Hecht posed a series
of hypotheticals that might support a waiver of sovereign
immunity:

•We do not address whether the State is immune from suit on debt
obligations, such as bonds.

•Would
the result be different if Federal Sign had already installed the
scoreboards and TSU refused to pay the agreed price?

•Or if TSU had accepted the scoreboards, acknowledged that Federal
Sign had fully complied with the contract, but refused to pay the agreed
price?

•Or if
TSU refused to pay in order to force Federal Sign to make a concession
on another contract?

Id. at 412
(Hecht, J., concurring). Justice Hecht recognized that the Federal
Sign opinion does "not attempt to decide such hypotheticals today."
Id. (Hecht, J., concurring).

In 2001,
the Texas Supreme Court revisited the issue in General Services
Commission v. Little-Tex Insulation Co., 39 S.W.3d 591 (Tex. 2001).
Justice Baker wrote for the majority that held that the State does not
waive immunity merely by accepting benefits under a contract. Id.
at 595-98. The Little-Tex case involved two companion cases. One
case involved a construction dispute in which the construction had been
completed, and the State, after paying the full contract price, refused to
pay a claim for adjustments. Id. at 599. The second case involved
an asbestos abatement contract that was terminated by the State, in the
middle of performance, based on disputes regarding the contractor's
performance. Id. at 594. Neither case involved a situation in
which a contract had been fully performed and the State refused to pay
anything. In fact, neither of the cases addressed any of the hypotheticals
previously raised in Justice Hecht's concurrence to Federal Sign.
After determining that the cases fell within the newly-enacted
administrative procedure found in Chapter 2260 of the Government Code,
(12) the court concluded that "there is but one route to the
courthouse for breach-of-contract claims against the State, and that route
is through the Legislature." Id. at 597. Here, however, the trial
court determined, and we agree, that Chapter 2260 does not apply in this
case.

The next
year, the Texas Supreme Court again addressed the waiver-by-conduct
exception to sovereign immunity in Texas Natural Resource Conservation
Commission v. IT-Davy, 74 S.W.3d 849 (Tex. 2002), and it was divided
4-4 on the issue with one dissenting justice (Justice Enoch). In
IT-Davy, the State had paid a contractor the full contract price
under the original terms, but it paid only a small percentage of a claim
for additional expenses and lost profits asserted under an "equitable
adjustment" clause. Id. at 851. Eight justices agreed that the
facts did not support a waiver-by-conduct exception, but were divided on
the reasoning. Justice Baker authored a plurality opinion urging a
bright-line approach barring a waiver-by-conduct exception under any
circumstances. Id. at 857. Justice Hecht authored a concurrence
for a plurality of four justices explaining why the facts in
IT-Davy did not rise to the level anticipated in his Federal
Sign hypotheticals. Id. at 860-62. He wrote, "My
hypothetical supposed a government agency that chiseled a contractor just
because it could get away with doing so. Here, TNRCC and IT-Davy have a
legitimate disagreement over what price should be paid for the extra work.
. . . This is nothing more than an ordinary contract dispute."
Id. at 861. The plurality concurrence also stated that "I cannot
join, however, in the broad language of Justice Baker's opinion that
indicates that the State is always immune from suit for breach of contract
absent legislative consent." Id. at 860. Justice Hecht concluded
by stating that "I cannot absolutely foreclose the possibility that the
State may waive immunity in some circumstances other than by statute."
Id. at 862.

In
Travis County v. Pelzel & Associates, 77 S.W.3d 246 (Tex.
2002), the Supreme Court rejected another waiver-by-conduct assertion in a
case involving a construction contract. After the building was completed,
Travis County paid virtually the entire contract price of $414,164.80, but
withheld $5,500 because the performance was not timely, relying on a
liquidated damages clause. Id. at 247. The court found no waiver
of immunity because the conduct at issue in that case did not amount to a
waiver. Id. at 252. The court held that "[w]hen a governmental
unit adjusts a contract price according to the contract's express terms,
it does not, by its conduct, waive immunity from suit, even if the
propriety of that adjustment is disputed." Id. Viron contends
that this holding illustrates the Texas Supreme Court's desire to impute a
more "modest, case-by-case approach" when considering
waiver-by-conduct.

In
Texas A&M University-Kingsville v. Lawson, Justice Hecht,
writing for a 5-4 Court, adopted a waiver exception for immunity in
breach-of-contract cases: When the State settles a claim from which it is
not immune, sovereign immunity does not protect it from a
breach-of-contract action to enforce the settlement agreement. 87 S.W.3d
at 518. Lawson settled his Whistleblower Act case against the University,
but later sued the University alleging that it violated the terms of the
settlement. Id. at 519. The court recognized that "a suit for
breach of a settlement agreement is separate and apart from the suit on
the settled claim" and held that "enforcement of a settlement of a
liability for which immunity is waived should not be barred by immunity."
Id. at 521. In so holding, the court rejected both the court of
appeals' "adoption of a broad waiver-by-conduct exception to sovereign
immunity" and Justice Rodriguez's dissent's "rigid view of immunity from
suit for breach of contract." Id. at 522-23.

The Court's
latest decision on the subject can be found in Catalina Development,
Inc. v. County of El Paso, 121 S.W.3d 704, 704 (Tex. 2003), where a
county solicited bids for purchasing a parcel of land, accepted the
highest bid, deposited the tendered earnest money, and sent the purported
buyer a warranty deed and affidavit to be used to close the transaction.
The county delayed authorization to sign the deed, and a newly-elected
commissioner's court refused to approve the sale. Id. While
repeatedly stating that the State may waive its immunity by conduct, the
court held "the equitable basis for such a waiver simply does not exist
under this set of facts." Id. at 705-06. The court distinguished
the facts in Catalina from those in Federal Sign by
stating that "the County did not profit unfairly at Collins's expense,"
and, despite the fact that he fully performed under the contract, Collins
"ignores an important distinction between [Justice Hecht's hypothetical in
his concurrence in] Federal Sign and this case. In Federal
Sign, the State was the buyer of commercial goods, while here the
County is the seller of government land. Collins does not seek to recover
for goods already conveyed." Id. at 706. The Catalina
court, which consisted of eight justices and one dissenter (Justice
Enoch), clearly establishes that the court will evaluate the
waiver-by-conduct exception to sovereign immunity on the facts of each
case, not as a categorical matter or bright-line rule. 3.
Application to our facts

The Texas
Supreme Court has never addressed a waiver-by-conduct exception argument
faced with the "extraordinary factual circumstances" as the trial court
described them here. In its order denying TSU's plea to the jurisdiction
against Viron, the trial court listed the following eight "relevant
factual allegations":

1. On
January 16, 1998, TSU notified [Viron] by letter that the TSU Board of
Regents had authorized the award of a contract to [Viron] for the
performance of an audit of TSU's energy system (the "energy audit
agreement"). The letter was signed by Dannette McElroy-Davis, project
manager, and Harold Johnson, associate vice president of Facilities
Planning and Operations for TSU.

2. On
January 28, 1998, two TSU officials instructed [Viron] in a written
"Notice to Proceed" to commence work on the audit.

3. On
February 25, 1998, TSU General Counsel Cheryl Elliot Thornton ("Thornton")
notified a TSU official that the energy audit agreement was "acceptable
for final execution," subject to some technical revisions.

4. The
energy audit agreement was executed by TSU President James M. Douglas
("Douglas") on or about March 4, 1998.

5. [Viron]
completed the energy audit in June 1998.

6. As a
result of the audit's findings, [Viron] submitted a proposal to TSU in
which [Viron] offered to commence work on six projects aimed at improving
energy conservation and efficiency on the TSU campus. The proposal, titled
the Performance Based Energy Savings agreement (the "PBES agreement"),
called for [Viron] to provide both services and equipment to
TSU.

7. At a
meeting on July 10, 1998, the TSU Board of Regents authorized the TSU
administration to proceed with the PBES agreement. President Douglas
subsequently executed the PBES agreement on behalf of TSU on July 27,
1998.

8. Pursuant
to the PBES agreement, [Viron] and TSU entered into a Master State and
Municipal Lease/Purchase Agreement (the "Master Lease") [footnote omitted]
in September 1998 to finance the purchase of equipment needed to complete
the energy projects. In a letter attached to the Master Lease, TSU General
Counsel Thornton represented to [Viron] that the Master Lease was "duly
authorized by all necessary action on the party of the Lessee (TSU)" and
that the Master Lease was "legal, valid, and binding" and "enforceable in
accordance with its terms."

Viron
alleges that, after it provided approximately $13 million in equipment and
services, TSU declared that the agreements in question were not valid
obligations and refused to make payments due. Quintin Wiggins, TSU's
corporate representative, testified that TSU did not make any lease
payments on the equipment it received from the Master Lease. Viron
contends that these facts alone are enough to create a waiver-by-conduct
exception. It argues, however, that

the
injustice is even worse, because this case also includes an additional
fact that appears in none of the prior cases: The government officials
lured Viron into the Master Lease with false promises that the contract
would be valid and enforceable, then disclaimed any obligation on the
contract by taking the position that the contract was not valid after all.

We agree.
Based on the facts before us, we overrule point of error one and hold that
sovereign immunity does not defeat the trial court's subject-matter
jurisdiction over Viron's claims for breach of contract.

B.
Waiver by the DJA

In issue
three, TSU contends that the DJA does not expand courts' jurisdiction, and
the declaration that State Street seeks concerns the validity of a
contract with the State. TSU questions whether the trial court lacks
jurisdiction to make this declaration.

State
Street sought the trial court's determination and declaration that (1) the
purported Master Lease and all related documents "were executed without
the requisite authority" and are "void and unenforceable against TSU"; (2)
TSU does not have any rights to the equipment; (3) State Street holds all
rights, title and interest to the equipment; (4) TSU has "no right, title,
or interest to the equipment and must return the equipment to State
Street"; and (5) State Street is entitled to a constructive trust and
return of the equipment to State Street. State Street's declaratory
judgment action against TSU affirmatively pleads that its dispute with TSU
is not based on a contract. State Street argues that TSU cannot contest
its ownership because TSU failed to controvert ownership by verified
denial as required by Texas Rule of Civil Procedure 93, which states that
a pleading that a "plaintiff is not entitled to recover in the capacity in
which he sues" is required to "be verified by affidavit." Tex. R. Civ. P.
93(2).
(13) State Street further contends that TSU cannot contest State
Street's allegation that there is no contract between the parties because
TSU failed to controvert, by verified denial as required by rule 93, State
Street's express pleading that the Master Lease was void ab
initio.
(14)

TSU argues
that IT-Davy conclusively bars Viron's declaratory-judgment
claim, which requests a declaration that the contract is valid and State
Street's declaratory judgment claim, which seeks a declaration that the
contract is "void and unenforceable."

The Texas
Supreme Court has identified only two types of declaratory-judgment claims
that a plaintiff may assert against the State; a plaintiff may seek either
(1) to compel a state officer to act within his official capacity or (2)
to establish a contract's validity, enforce performance under a contract,
or impose contractual liabilities. IT-Davy, 74 S.W.3d at 855. The
first category of claims are not "suits against the State." W. D.
Haden Co. v. Dodgen, 308 S.W.2d 838, 840 (Tex. 1958). In contrast,
the second category of claims are suits against the State "because such
suits attempt to control state action by imposing liability on the State."
IT-Davy, 74 S.W.3d at 856. Consequently, such suits cannot be
maintained without legislative permission. Id.

Viron's and
State Street's requests for declarations concerning the Master Lease's
validity fall squarely within the second category of declaratory-judgment
claims identified in IT-Davy and thus fall outside the trial
court's subject-matter jurisdiction. See id.

We sustain
issue three.

C.
Waiver by Inverse Condemnation

In issue
two, TSU asserts that, under established Texas law, a party cannot
circumvent the State's immunity from suit by recasting a contract claim as
one for inverse condemnation. Assuming that TSU obtained the equipment
pursuant to a written contract, not through the exercise of eminent-domain
powers, TSU asks us to decide if Viron can overcome TSU's sovereign
immunity simply by pleading an inverse-condemnation claim. In issue four,
TSU contends that, on the day of the assignment, Viron did not possess a
vested property right in the equipment, and the evidence establishes that
TSU acquired the equipment pursuant to its contract with Viron, not
through the exercise of eminent-domain powers. TSU questions whether
either of these facts suffice to deprive the trial court of jurisdiction
over State Street's inverse-condemnation and federal takings clause
claims.

Both State
Street and Viron alleged inverse condemnation and takings in their
pleadings. State Street asserts no contract claim against TSU and seeks no
recovery under the allegedly void Master Lease. Rather, State Street
asserts that it is the owner of the equipment by virtue of two
assignments: the Viron/Academic Assignment and the Academic/State Street
Assignment.

1.
Standing

TSU argues
that State Street lacks standing based on correspondence it sent to TSU.
On September 14, 2001, State Street sent a letter to the President of TSU,
Priscilla Slade,
(15) and the former President, Harold Johnson, notifying them of
TSU's default under the Master Lease. State Street stated that, without
waiving its rights under the Master Lease, it was deferring "the
re-vesting and reverting of title to the equipment in [State Street] until
such time as we have notified you of same. It should be further noted that
the unpaid Rental Payments payable continue to accrue interest in the
manner provided for late payments . . . of the [Master] Lease."
(16) TSU contends that
"this letter speaks for itself--both as to State Street's acknowledgment
of the Contract's existence . . . and to State Street's lack of title to
the equipment."

State
Street argues that, through the assignment, it paid $8.5 million "for the
equipment." TSU responds, however, that State Street's payment was not
"for the equipment," but rather for "an array of rights that notably
failed to include any vested property right in the equipment."

With
respect to Viron, TSU contends that Viron lacks standing to assert an
inverse condemnation claim because it assigned away any right it may have
had in the equipment. Viron concedes that it "does not claim ownership of
the equipment. Viron validly assigned all its interest in the equipment in
question to State Street Bank so the inverse condemnation claim belongs to
State Street Bank." Viron argues, however, that, because TSU refuses to
acknowledge that State Street ever acquired any interest in the equipment
by virtue of the assignment, Viron retains the property interest and the
inverse condemnation claim.

We hold
that the evidence creates a fact question regarding the standing
jurisdictional issue thus requiring us to resolve the issue in favor of
Viron and State Street. See IT-Davy, 74 S.W.3d at 855; see
also Miranda, 133 S.W.3d at 227-28.

2.
Color of Contract

TSU
contends that, even if Viron and State Street had standing to pursue their
takings claims, the trial court still lacked jurisdiction because TSU
acquired the equipment under color of contractual right and thus without
any intent to exercise eminent-domain power.

In its
third amended petition, State Street alleged, in relevant part:

In
exercising dominion over and use of the equipment, TSU intentionally
denied State Street its property and applied it for public
use.

The past
and continuing use of State Street's equipment is a physical act that
constitutes a taking of property and an unreasonable interference with
State Street's exclusive right to use and enjoy the property in violation
of the Texas and United States constitutions.

This
intentional act was done without process or a proper condemnation
proceeding.

TSU has
expressly denied it has any title to the equipment. Further, it has
acknowledged that it is not bound by any contract conferring right to the
equipment.
(17) Therefore, the university is exercising eminent domain
powers. Conversely, TSU's withholding of State Street's property is not
the result of a contract dispute because the sworn testimony of its
designated representative concedes that there are no enforceable contracts
that regulate, control, or affect its right in these
matters.

State
Street seeks to recover just and adequate compensation from TSU for the
past and continuing taking of its property.

State
Street was not required to prove these allegations at this stage of the
lawsuit; all that was required to defeat TSU's plea to the jurisdiction
was a pleading of facts showing the elements of an inverse-condemnation
cause of action. See Kerr, 45 S.W.3d at 251 n.3. State Street
contends that it has satisfied its obligations because it has alleged that
(1) there is no contract, (2) it owns the equipment, (3) its assignment is
valid, and (4) TSU's taking of the equipment was intentional.

In its
second amended counterclaim and third-party petition, Viron alleged the
following with respect to its inverse-condemnation claim:

By virtue
of the assignment of the Master Lease, State Street Bank acquired certain
property rights in some of the equipment that was installed by Viron on
the TSU campus. Specifically, State Street Bank acquired rights in
equipment other than the equipment relating to the Main Thermal Plant
upgrade, which was not financed under the Master Lease and for which TSU
paid cash. By exercising dominion and control over such other equipment,
for which it has not paid, TSU has intentionally denied State Street Bank
its rights in such property. Such action by TSU constitutes a taking of
property without due process of a proper condemnation proceeding.

It is clear
that the equipment was delivered to TSU, and its possession of the
equipment was by virtue of the Master Lease and not by virtue of a taking
within the meaning of article I, section 17 of the Texas Constitution.
Tex. Const. art. I, § 17. Viron voluntarily and with its own consent
delivered the equipment to TSU after making the Master Lease. In so doing,
Viron cannot now say that the equipment was taken under the power of
eminent domain. See State v. Steck Co., 236 S.W.2d 866, 869 (Tex.
Civ. App.--Austin 1951, writ ref'd) (holding that unenforcible contract
precludes legal liability and no constitutional violation).

We hold
that State Street's and Viron's pleadings and evidence fail to allege
sufficient facts to establish TSU's requisite intent under
constitutional-takings jurisprudence. See Little-Tex, 39 S.W.3d
at 598-99.

We sustain
issues two and four.

Conclusion

We affirm
the trial court's orders denying TSU's pleas to the jurisdiction with
respect to Viron's contract claims and reverse the trial court's denial of
TSU's pleas to the jurisdiction relating to Viron's and State Street's
inverse-condemnation and declaratory judgment claims.

George C.
Hanks, Jr.

Justice

Panel
consists of Justices Nuchia, Keyes, and Hanks.

Justice
Keyes, concurring and dissenting.

1. Appellate cause
number 01-05-00758-CV pertains to TSU's plea to the jurisdiction filed in
response to State Street's claims, and appellate cause number 06-00497-CV
pertains to TSU's plea to the jurisdiction filed in response to Viron's
claims.

2. The "facts"
have been extracted from State Street's and Viron's pleadings.

3. TSU also paid Viron $101,100 to compensate it for
its work in preparing the energy audit.

4. The final payment was for $581,509.76.

5. These thermal
chillers constituted the largest, both fiscally and physically, part of
the contract.

6. State Street asserts that Viron concealed from
State Street TSU's position that the purported Master Lease and related
instruments were void for lack of authority and the existence of other
disputes between TSU and Viron, while at the same time Viron requested and
received more than $6 million out of the escrow account.

7. State Street contends that Viron's attempted
"release" had no effect on the status of the equipment or State Street's
rights in it because (1) Viron had already assigned all right, title, and
interest to the equipment to State Street and (2) TSU had no legal or
contractual right, title or interest in the equipment as it never had the
requisite legal authority to enter into a contract with State Street as
the owner of the equipment.

8. State Street also sought a declaratory judgment
against the other defendants and asserted claims for conversion, unjust
enrichment, breach of fiduciary duty, fraudulent transfer, alter ego and
single business enterprise, and breach of contract, warranty, and
covenants.

9. Viron sued Academic Capital, Academic Services, and
State Street for breach of fiduciary duty, breach of contract, conversion,
negligence, gross negligence, fraud, tortious interference, misapplication
of fiduciary property, civil conspiracy, and alter ego.

10. The Court is mindful that, under chapter 2260 of
the Texas Government Code, the sole remedy of a private party asserting a
breach-of-contract claim against the state is through an administrative
process. See Tex. Gov't Code Ann. § 2260 (Vernon 2004). The
Legislature, however, has amended chapter 2260 to specify that such
administrative process does not apply to contracts "executed or awarded on
or before August 30, 1999," such as those at issue here. See Tex.
Gov't Code Ann. § 2260.002(2) (Vernon Supp. 2005).

11. There is some question whether State Street and
Viron alleged federal claims as well as their state claims for inverse
condemnation. We read their pleadings to assert a claim for federal
"takings" and will accordingly address both the alleged federal and state
constitutional violations.

12. Tex. Gov't Code Ann. §§ 2260.001 -2260.006
(Vernon 2000).

13. Texas Rule of Civil
Procedure 93(2) provides that "[a] pleading setting up any of the
following matters, unless the truth of such matters appear of record,
shall be verified by affidavit. . . . 2. That the plaintiff is not
entitled to recover in the capacity in which he sues . . . ."
Tex. R. Civ. P. 93(2).

14. We do not find State Street's rule 93 argument
persuasive. When capacity is contested, rule 93 requires that a verified
plea be filed unless the truth of the matter appears of record. Tex. R.
Civ. P. 93; Sixth RMA Partners, L.P. v. Sibley, 111 S.W.3d 46, 56
(Tex. 2003). "Capacity has been defined as a party's personal right to
come into court and should not be confused with the question of whether a
party has an enforceable right or interest." Austin Nursing Ctr., Inc.
v. Lovato, 171 S.W.3d 845, 849 (Tex. 2005) (quoting 6A Wright,
Miller, & Kane, Federal Practice and Procedure: Civil 2D § 1559, at
441 (2d ed. 1990). Furthermore, a trial court has no discretion to refuse
a trial amendment unless (1) the opposing party presents evidence of
surprise or prejudice or (2) the amendment is objected to and asserts a
new cause of action or defense and is thus prejudicial on its face. Tex.
R. Civ. P. 66; Chapin & Chapin, Inc. v. Tex. Sand & Gravel
Co., 844 S.W.2d 664, 665 (Tex. 1992); Francis v. Coastal Oil
& Gas Corp., 130 S.W.3d 76, 91 (Tex. App.--Houston [1st Dist.]
2003, no pet.).

15. Slade was terminated from her position as
president on July 17, 2006.

16. TSU's Board of
Regents, the Assistant Attorney General of Texas, and TSU's interim
general counsel were copied on the letter.

17. These statements are derived from Wiggins's
deposition. TSU responds that Wiggins's testimony is not binding and
simply represents a "subsequently adopted litigation
position."