Stare decisis is a formidable cornerstone in our legal system, so it was remarkable that recently on a single day, the Texas Supreme Court changed course not once, but twice, finally providing certainty in two areas that perplexed many practitioners in the field.
One of the questions was deceptively simple: if a home rule city’s statute or charter provides that a city may “sue and be sued,” does this waive sovereign immunity from suit? While the apparent answer was yes, the answer was not self-evident to the courts, and a circuit split resulted. That question was resolved recently in Tooke v. City of Mexia,1 where the Court overruled long-standing precedent and held that “sue and be sued” and similar phrases did not, by themselves, waive immunity from suit.2
On the same day, the Court issued an opinion reversing course on a related issue. In 2004, the Court held for the first time in Reata Construction Corp. v. City of Dallas3 that when a city intervenes in a suit seeking damages in negligence – or, presumably, asserts any claim or counterclaim for monetary damages – it waives its immunity from suit. In doing so, the Court expanded its prior opinion in Anderson, Clayton & Co. v. State ex rel. Allred, which stated that:

[W[here a state voluntarily files a suit and submits its rights for judicial determination it will be bound thereby and the defense will be entitled to plead and prove all matters properly defensive. This includes the right to make any defense by answer or cross-complaint germane to the matter in controversy.4

Whereas Anderson, Clayton waived immunity from suit when a governmental entity filed suit, now Reata purported to extend Anderson, Clayton to instances where a governmental entity filed an intervention – or presumably, a counterclaim.
The original decision no doubt caused consternation to a number of governmental entities engaged in litigation, and the Court granted rehearing. On June 30, 2006, the Court withdrew its original opinion and issued a new opinion holding that immunity from suit is waived – but only to the extent the plaintiff’s claim against the governmental entity is germane to the claim by the local government.
Overlaid on top of Reata and Tooke is the 79th Texas Legislature’s passage of HB 2039, which provides a qualified waiver of immunity for certain contracts for goods and services involving certain governmental entities.5 This article traces the threads among these three developments in the law of sovereign immunity.

Tooke, “Sue and be Sued,” and Why the Masons are Unable to Waive Immunity from Suit
In Texas, sovereign immunity encompasses two features: (1) immunity from liability, which protects a governmental entity from having a judgment collected against it; and (2) immunity from suit, which bars suit against a governmental entity in the first place.6 For contract actions, immunity from liability is waived when a governmental entity enters into a contract, but Tooke addressed the question of when immunity from suit is waived.
In Tooke, a sole proprietorship was awarded a three-year contract from the City of Mexia to collect brush and leaves from the city’s curbsides.7 The sole proprietorship performed the contract and was paid by the City for the first year.8 However, shortly thereafter, the City announced that although it had paid all past invoices, it was “discontinuing” the contract for lack of funding.9 The sole proprietorship sued for future lost profits.10
Thus, in Tooke, the only damages at issue were future lost profits that the Court characterized as consequential damages.11 In response, the City asserted that it was immune from suit, but the plaintiff argued that the phrases in the City’s charter that provided it could “sue and be sued” and “plead and implead” waived immunity from suit.12 The trial court agreed, but the 10th Court of Appeals reversed, which led to the Court’s granting the petition for review to resolve a circuit split.13
First, the Court noted its history of deference to the Legislature as to waivers of immunity for contract claims because it “involves policy choices more complex than simply waiver of immunity.”14 Rather, “legislative control over sovereign immunity allows the Legislature to respond to changing conditions and revise existing agreements if doing so would benefit the public.”15 
Because the City of Dallas alleged that the phrases waiving its immunity from suit were contained in the Local Government Code, the Court first reviewed the statute’s history. Tracing the statute from its 1858 inception, the Court noted that it originally provided that a town would be “invested with all rights incident to such corporations under this act, and shall have the power to sue and be sued, plead and be impleaded; and to hold and dispose of real and personal property.”16 Although the statute was revised periodically, the Court focused on the fact that none of these iterations referenced a municipality’s immunity from suit. “Rather, each appears to use common language to refer to an entity’s capacity to be involved in litigation.”17 In contrast, the Court dryly noted that similar language had also been used in 1858 to incorporate the “Grand and Subordinate Chapters of Royal Arch Masons” – an organization that clearly had no sovereign immunity to waive!18 Historically, then the phrases “sue and be sued” and “plead and be impleaded” must have referred to grants of capacity, not waivers of immunity.
The Court then turned to its prior ruling in Missouri Pacific Railroad Co. v. Brownsville Navigation District.19 There, the Court had held – without analysis – that the phrase “sue and be sued” was “quite plain and gives general consent for [the governmental entity] to be sued in the courts of Texas in the same manner as other defendants.”20
The Tooke Court then took stock of the circuit split that occurred as a result of Missouri Pacific and cited instances where some statutes were interpreted as waiving immunity, while others were not.21 It also reviewed decisions of the United States Supreme Court where “sue and be sued” was not accorded a consistent meaning as waiving sovereign immunity.22  Finally, the Court noted that “in many statutes, ‘sue and be sued’ and ‘plead and be impleaded’ have nothing to do with immunity at all.”23 
These instances were also viewed through the lens of the heightened standard for waivers of immunity legislatively required by the recent passage of Section 311.034 of the Texas Government Code: “In order to preserve the legislature’s interest in managing state fiscal matters through the appropriations process, a statute shall not be construed as a waiver of sovereign immunity unless the waiver is effected by clear and unambiguous language.”24
Based on these considerations, the Tooke Court acknowledged that Missouri Pacific’s holding that “sue and be sued” is “‘quite plain and gives general consent for [a governmental entity] to be sued in the courts of Texas in the same manner as other defendants’ simply cannot be applied as a general rule.”25 It thus overruled Missouri Pacific and held that phrases such as “sue and be sued” and “plead and be impleaded” do not clearly and unambiguously waive immunity from suit.26 Many times, such phrases deal with grants of capacity and thus, merely mean that a governmental entity “can be sued and impleaded in court when suit is permitted, not that immunity is waived for all suits.”27 Ultimately, courts are to review the context of the usage to determine whether immunity is waived.28

Tooke’s Interaction with HB 2039’s Qualified Waiver of Immunity from Suit
Tooke answered another question: how Tooke’s holding interacts with House Bill 2039. By passing HB 2039, the Legislature enacted Local Government Code Sections 271.151-.153, which provides for a qualified waiver of immunity from suit for claims, including claims arising from written contracts for goods and services. Because of this qualified waiver, sovereign immunity does not bar recovery for monies owed by the local governmental entity, including interest and monies owed due to change orders or for increased costs to perform the work due to owner-caused delays or acceleration.29 Expressly excluded from this qualified waiver, however, are consequential damages, exemplary damages, or damages for unabsorbed home office overhead.
HB 2039’s effective date was September 1, 2005, but an interesting feature is its limited retroactivity provision. HB 2039’s qualified waiver applies to a claim that arises under a contract executed before September 1, 2005, but “only if sovereign immunity has not been waived with respect to the claim before the effective date of this Act.”30 Essentially, because HB 2039 only provides for a qualified waiver, it can be superseded for these claims if another, presumably more complete waiver already exists. In summary:

1. If there is an already-existing waiver of immunity from suit before September 1, 2005, then HB 2039’s qualified waiver has no effect.
2. If there is no already-existing waiver of immunity from suit before September 1, 2005, then HB 2039’s qualified waiver retroactively applies.

For claims after September 1, 2005 – or if HB 2039’s qualified waiver applies before September 1, 2005 – the statute is valid as to all claims within its ambit, but this too is limited by its terms. HB 2039 enacted Texas Local Government Code Section 271.151, which limits the qualified waiver’s application to cases involving a “local governmental entity” and a “contract subject to this subchapter.” Inherent in these definitions is a host of exceptions to HB 2039’s qualified waiver. First, local governmental entities do not include a unit of a state government such as counties, county courts, or special purpose districts.31 Second, because “contracts subject to this subchapter” include only written contracts for goods or services, there is presumably no waiver under the chapter for non-written contracts or cases that involve real estate or debt obligations. Thus, for claims that fulfill the select criteria laid out in Section 271.151, Tooke apparently holds no effect – HB 2039 supersedes Tooke.32

Reata and Disincentives to Litigation
On the same day that the Texas Supreme Court handed down Tooke, the Court also reformulated its decision in Reata Construction Corp. v. City of Dallas.33 Initially, the Reata Court held on April 4, 2004 that when a governmental entity intervenes in a suit – or presumably, files a counterclaim – it waives its immunity from suit.34 In so holding, the Court relied on the rationale set forth in Anderson, Clayton & Co. v. State ex rel. Allred, that “where a state voluntarily files a suit and submits its rights for judicial determination it will be bound thereby and the defense will be entitled to plead and prove all matters properly defensive. This includes the right to make any defense by answer or cross-complaint germane to the matter in controversy.“35 Whereas Anderson, Clayton waived immunity from suit when a governmental entity filed suit, now Reata purported to extend Anderson, Clayton to instances when a governmental entity filed an intervention – or presumably, a counterclaim.
The City of Dallas moved for rehearing, which was granted. The State of Texas submitted an amicus curiae brief arguing that the Court should at most allow counterclaims as an offset to the State’s request for affirmative relief, and that the subject matter of such counterclaims must be sufficiently related to the government’s claims that they constituted a defense to payment.36
Nearly two years later, the Court withdrew its initial opinion and replaced it with a new holding and rationale. In its June 30, 2006 opinion, the Court held that when a governmental entity intervenes in a suit, it waives its immunity for claims against it that are germane to, connected with, and properly defensive – but only to the extent that those claims offset those of the governmental entity. Thus, if a plaintiff sued a governmental entity for $1 million, and the governmental entity seeks a counterclaim of $10, the most that the plaintiff presumably can hope to recover is $10 – the amount just large enough to offset a $10 recovery by the governmental entity. A governmental entity “continues to have immunity from affirmative damage claims against it for monetary relief exceeding amounts necessary to offset the [governmental entity’s] claims.”37
In so holding, the Court first emphasized that a “lack of immunity may hamper governmental functions by requiring tax resources to be used for defending lawsuits and paying judgments rather than using those resources for their intended purposes.”38 However, the Court noted that “if the governmental entity interjects itself into or chooses to engage in litigation to assert affirmative claims for monetary damages, the entity will presumably have made a decision to expend resources to pay litigation costs.”39 The Court emphasized that “[i]f the opposing party’s claims can operate only as an offset to reduce the government’s recovery, no tax resources will be called upon to pay a judgment, and the fiscal planning of the governmental entity should not be disrupted.”40 In fashioning this limited waiver, however, the Court also balanced the plaintiff’s interest, recognizing that it was “fundamentally unfair” to allow a governmental entity to claim immunity while asserting affirmative claims against a plaintiff.41
Implicit in Reata’s reformulated holding is a more nuanced rationale than its original opinion. There, the Court held that a governmental entity who intervenes in a case – or presumably files a counterclaim – completely waives its immunity.42 In its revised opinion, the Reata Court avoided providing incentives for litigiousness. Initially, it should be noted that counterclaims and interventions subject to Reata are not voluntary because they will almost certainly be compulsory, not permissive counterclaims. Reata applies to claims that are “germane to, connected with and properly defensive” to a governmental entity’s claims, which language seems to encompass claims that fall under the test for compulsory counterclaims (pertaining to claims that arise out of the same transaction or occurrence).43 Had the Reata Court not re-formulated its holding, plaintiffs would have been able to put Texas governmental entities to an unsavory choice: (1) file their compulsory counterclaim and waive their immunity from suit; or (2) forego their compulsory counterclaim to retain immunity. This would permit plaintiffs who won the race to the courthouse to effectively control when a governmental entity could assert its immunity.
Worse, Reata’s previous holding would have incentivized plaintiffs to litigate immediately when they otherwise might have explored peaceful means of resolution. For example, if the governmental entity files suit first, then under Anderson, Clayton, the governmental entity waives its immunity from suit. However, under Reata’s previous holding, if the plaintiff files suit first, then the governmental entity will be forced to choose between waiving its immunity or waiving its compulsory counterclaims. The plaintiff then would have had the incentive to file suit immediately to gain that tactical advantage. Under Reata’s new holding, however, if a plaintiff files suit first, then the governmental entity may or may not assert its compulsory counterclaims against the plaintiff – but will always retain its limited immunity. Because the plaintiff cannot force the governmental entity to waive that immunity, there is no advantage for it to file suit first. Similarly, the governmental entity is not incentivized to file suit first, because doing so would completely waive its immunity under Anderson, Clayton.
Thus, Reata’s new holding essentially removes any asynchronous result as to whether a plaintiff sues first or a governmental entity sues first – and removes any incentive to race to the courthouse.44

Casey T. Wallace is of counsel to Haynes and Boone, LLP. He has extensive experience in public law representation, including state and local governmental entities.
Michael Chu is a former law clerk to U.S. District Judge Kenneth M. Hoyt and a former associate in the business litigation section of Haynes and Boone LLP. He will be joining the U.S. Attorney’s Office in Las Vegas to focus on white collar crime.

Endnotes
1.Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006). 2.In addition to home rule cities, language authorizing local governments to “sue and be sued” is including in the authorizing statutes for many Texas local governments (Tex. Gov’t Code Ann. §§ 51.013, 51.033 (Vernon 1999)); water districts (Tex. Water Code Ann. § 49.066 (Vernon 2000)): and schools (Tex. Educ. Code Ann. § 11.151(a) (Vernon 2006)).   3. Reata Construction Corp. v. City of Dallas, 197 S.W.3d 371 (Tex. 2006).   4. This is codified at Tex. Gov’t Code Ann. § 51.013, 51.033 (Vernon 1999).    5. Anderson, Clayton & Co. v. State ex rel. Allred, 62 S.W.2d 107, 110 (Tex. 1933).   6. Tooke, 197 S.W.3d at 332-33.    7. Id. at 329-30.    8. Id.    9. Id.    10. Id.    11. Id. at 346.    12. Id. at 330.    13. Id.  The plaintiff also raised – unsuccessfully – two other arguments.  It argued that the City had hired it for what amounted to a proprietary function, but the Court held that collecting brush was analogous to collecting waste, a governmental function.  The Court also gave short shrift to the plaintiff’s argument that the City waived immunity by partly performing the contract.   14. Id. at 332 (citing Texas A&M Univ.—Kingsville v. Lawson, 87 S.W.3d 518, 522 (Tex. 2002) (plurality).    15. Id. (citing Texas Nat. Res. Conserv. Comm’n v. I-T Davy, 74 S.W.3d 849, 854 (Tex. 2002)).   16. Id. at 333.    17. Id. (emphasis in original).    18. Id. at 334.    19. 453 S.W.2d 812 (Tex. 1970)   20. Id. at 813.   21. Tooke. at 335-36, 340; compare Gene Duke Builders, Inc. v. Abilene Hous. Auth., 168 S.W.3d 2125, 220 (Tex. App.—Eastland 2005, pet. filed) (“sue and be sued in Local Govt. Code § 392.065 waives immunity) with Satterfield & Pontikes Constr., Inc. v. Irving Indep. Sch. Dist., 123 S.W.3d 63, 68 (Tex. App.—Dallas 2003) (“sue and be sued” is not a clear and ambiguous waiver as required by statute). For an excellent discussion, please also see A. Craig Carter, Is Sue and Be Sued Language A Clear And Unambiguous Waiver of Immunity, 35 St. Mary’s L.J. 275, 291-92 (2004).     22. Tooke, 197 S.W.3d at 336-37 (comparing, for example, United States Postal Serv. v. Flamingo Indus. (USA) Ltd., 540 U.S. 736, 742 (2004) (Postal Reorganization Act of 1971’s “sue and be sued” clause waives immunity) with People of Porto Rico v. Castillo, 227 U.S. 2707, 273-77 (1913) (holding “sue and be sued” did not waive immunity)).   23. Id. at 341-42.   24. Id. at 338 n. 63; see alsoDuhart v. State, 610 S.W.2d 740, 742 (Tex. 1980) (holding that waivers of sovereign immunity must be by clear and unambiguous language).  25. Id. at 340.    26. Id. at 342.    27. Id. at  344.    28. Id. at 337.     29. Tex. Loc. Gov’t Code § 271.153.     30. Id. at 27 (citing Act of May 23, 2005, 79th Leg., R.S., ch. 604, § 2, 2005 Tex. Gen. Laws 1548, 1549).    31. Section 271.151(3) expressly refers to Government Code § 2260.001 which defines “unit of state government” as “the state or an agency, department, commission, bureau, board, office, council, court, or other entity that is in any branch of state government and that is created by the constitution or a statute of this state, including a university system or institution of higher education.  The term does not include a county, municipality, court of a county or municipality, special purpose district, or other political subdivision of this state.”   32. Tooke, 197 S.W.3d at 346.   33. 192 S.W.3d 371 (Tex. 2006).   34. 2004 WL 226907 (Tex. Apr. 2, 2004) (withdrawn).   35. 62 S.W.2d 107, 110 (Tex. 1933).   36. See R. Ted Cruz & Kristofer S. Monson, Governmental Immunity:  Historical Observations and Recent Developments, paper submitted to State Bar of Texas 20th Annual Advanced Civil Appellate Practice Course, p. 5 (Sept. 7-8, 2006).   37. Reata, 197 S.W.3d at 377.   38. Id. at 375.    39. Id. at 375.    40. Id. at 375.    41. Id. at 375-76.   42. Reata Constr. Corp. v. City of Dallas, 2004 WL 226907 (Tex. Apr. 2, 2004) (withdrawn).    43. Compare Reata, 197 S.W.3d at 373 with Tex. R. Civ. P. 97(a) (“Compulsory Counterclaims”); see also Wyatt v. Shaw Plumbing Co., 760 S.W.2d 245, 247 (Tex. 1988) (holding that failure to assert a counterclaim that arises out of the same transaction or occurrence within that suit bars the claimant from asserting the claim in a later suit).    44. See Reata, 197 S.W.3d at 377 (“Moreover, we see no substantive difference between a decision by the City to file an original suit and the City’s decision to files its claim as an intervenor in Southwest’s suit”).

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