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Clear Creek Independent School District v. Cotton Commercial USA, Inc.

Court of Appeals of Texas, Fourteenth District

August 1, 2017


         On Appeal from the 405th District Court Galveston County, Texas Trial Court Cause No. 10-CV-4248

          Panel consists of Justices Boyce, Busby, and Jewell.


          Kevin Jewell Justice

         Today we decide whether a trial court possessed jurisdiction to confirm an arbitration award on a breach of contract claim against a school district notwithstanding the district's assertion of governmental immunity from suit. In the aftermath of Hurricane Ike, the school district contracted with a "national disaster recovery services" company to provide "restoration services" regarding the district's facilities. After the work was complete but before the company received full payment, the district accused the contractor of (1) fabricating invoices to substantiate its charges, (2) failing to perform services for which it had submitted invoices, and (3) price gouging by charging an inflated rate for work performed under the contract. The district sued the contractor for fraud and for money had and received. Citing an arbitration provision in the contract, the company sought arbitration, which we compelled in a prior appeal. Cotton Commercial USA, Inc. v. Clear Creek Indep. Sch. Dist., 387 S.W.3d 99, 108 (Tex. App.-Houston [14th Dist.] 2012, no pet.) ("Cotton I"). During the arbitration, the contractor asserted its own claim for breach of contract because the district allegedly failed to pay the full balance owed. The arbitrator (1) found the contractor knowingly made false representations and billed for work not performed, but awarded no damages to the district; and (2) found the district materially breached the contract and awarded the contractor damages for the amount due and owing.

         When the contractor moved to confirm the award, the district asserted governmental immunity in a plea to the jurisdiction. The trial court denied the plea and confirmed the arbitration award.

         The district appeals, asserting that the trial court erred in exercising its subject-matter jurisdiction to confirm the award. The trial court lacked jurisdiction, the district argues, because the parties' agreement did not fall within Texas Local Government Code section 271.152's waiver of immunity for breach of contract claims against local governmental entities.

         We conclude that the agreement qualifies as a "contract subject to [chapter 271]"[1] and that the district's immunity from suit is waived to adjudicate a claim for the agreement's breach. Accordingly, we hold that the trial court had subject-matter jurisdiction to confirm the arbitration award, and we affirm the trial court's judgment.


         In September 2008, Hurricane Ike damaged a number of campuses within the Clear Creek Independent School District ("CCISD").[2] To reopen its campuses, CCISD entered into a Restoration Service Agreement ("Restoration Agreement") with Cotton USA ("Cotton"), an independent general contractor. The Restoration Agreement called for Cotton to provide "restoration services, " which, according to CCISD's amended petition, obligated Cotton "to remove debris from its premises and perform remediation and restoration services following clean up." The Restoration Agreement was presented to CCISD as a time and materials contract with an attached rate sheet. While the agreement stated that Cotton would provide a "scope of services" in a written estimate, it is undisputed that Cotton never provided CCISD with a scope of services or a written estimate.

         The Restoration Agreement specifically authorized the use of subcontractors Cotton deemed necessary for completion of the work and provided for payment in accordance with a rate schedule. The Restoration Agreement also authorized the use of "a particular trade or service" on a "cost plus 10% overhead and 10% profit" basis if there was a "specific need" for a service that Cotton did not provide.

         Cotton subcontracted with Cottonwood Debris Company, LLC ("Cottonwood"), a company owned by Cotton's principals, to provide debris-removal services. Cotton's Chief Executive Officer arranged the subcontract relationship and set the prices that CCISD would be charged. Different from CCISD's time and materials agreement with Cotton, Cottonwood's charges were to be made on a per crew basis. CCISD was not informed orally or in writing of the rates that Cottonwood would charge, or the fact that debris removal would not be performed on a time and materials basis.

         The debris removal occurred from approximately September 18, 2008, through September 29, 2008. Remediation occurred through the end of October 2008. Cottonwood never actually had an employee on the CCISD job, nor did Cottonwood actually perform any work on the CCISD job. Instead, Cotton's CEO arranged for a number of subcontractors to remove debris from CCISD's facilities. Cottonwood then added its profit to the subcontractors' charges and invoiced Cotton. Cotton, in turn, added a twenty percent markup to Cottonwood's charges and invoiced CCISD.

         A disagreement over payment for debris-removal services is the source of the present dispute. In reviewing Cotton's billing, including $1.4 million in charges related to Cottonwood's debris-removal work, CCISD discovered that Cottonwood had billed for certain services that the District knew with certainty Cottonwood had not performed. The total billed for those discrete services was $36, 000. To substantiate Cottonwood's charges, CCISD requested documentation supporting the work Cottonwood claimed it performed. Further, at CCISD's request, CCISD and Cottonwood dealt directly with each other in an attempt to resolve the issues surrounding Cottonwood's charges.

         Cottonwood had not maintained detailed backup documentation of the work it performed, and the Restoration Agreement did not require documentation of subcontractor charges. After the work was completed, CCISD asserted that payment of the invoices required backup documentation. Cottonwood did not disclose to CCISD that it did not have all backup information, but Cottonwood's Vice President directed Cotton's Executive Director to provide CCISD with backup documents. Although CCISD knew that some of the documentation would have to be created, neither Cotton nor Cottonwood informed CCISD that all documents were estimates and some were false. Cotton advised Cottonwood that it did not have the type of documentation requested by CCISD. Because Cottonwood did not have the documentation, Cotton's Executive Director and one of his subcontractors created crew sheets to provide to CCISD. Cottonwood provided the crew sheets to CCISD in January 2009. Cottonwood did not disclose that the crew sheets were falsified.

         CCISD subsequently paid Cottonwood approximately $700, 000-half of Cottonwood's $1.4 million in debris-removal charges.

         Separately from debris removal, CCISD also discovered that Cottonwood had fabricated documents relating to fuel charges. In February 2009, CCISD requested that Cottonwood provide substantiation for the fuel Cottonwood claimed to have used on the job. Cottonwood estimated and created purported third-party fuel tickets and submitted them to CCISD as genuine invoices from the fuel provider. CCISD, however, confirmed with the fuel provider that the invoices were not genuine.

         Based on Cottonwood's fabricated documentation, CCISD decided to make no further payments to Cottonwood. Neither the false crew sheets nor the fabricated fuel tickets increased the amount Cotton originally billed to CCISD.[3]

         CCISD, which was at the time attempting to seek reimbursement of its debris-removal costs from the Federal Emergency Management Agency ("FEMA"), notified FEMA of Cottonwood's allegedly fraudulent actions. FEMA initially denied CCISD's request for reimbursement. CCISD appealed FEMA's determination and was successful in obtaining a partial reimbursement of $296, 315.

          That left CCISD with a gap of $258, 816.99 in reimbursement that would potentially have to be borne by the district and, ultimately, its taxpayers and students. That gap in payment was in large part due to Cotton's falsification of invoices. CCISD subsequently obtained a grant from the Texas Education Agency that covered CCISD's out-of-pocket costs related to Hurricane Ike not otherwise reimbursed by FEMA. The grant was only available because FEMA had refused full reimbursement.

         CCISD filed this suit against Cotton Commercial USA, Inc. ("Cotton Commercial"), the surviving company after Cotton and Cottonwood merged, asserting claims for fraud and money had and received. CCISD sought to recover money damages for lost FEMA reimbursements and for amounts paid to Cottonwood to which, CCISD alleged, Cottonwood was not entitled.[4] Cotton Commercial moved to compel arbitration and stated that it would assert a counterclaim against CCISD for breach of contract in the arbitration proceeding. The trial court granted Cotton Commercial's motion to compel as to Cotton Commercial's putative counterclaim against CCISD, but denied the motion as to CCISD's claims against Cotton Commercial. On interlocutory appeal, this court reversed the partial denial of arbitration, and the parties proceeded to arbitration as to their respective claims against each other. Cotton I, 387 S.W.3d at 108.

         In the arbitration proceeding, Cotton Commercial asserted a breach of contract claim against CCISD for approximately $700, 000, the amount it alleged was due and owing for Cottonwood's debris-removal work. Based on the evidence presented by the parties, the arbitrator found:

1. Cotton and CCISD entered into a valid and binding contract that allowed Cotton to hire Subcontractors and bill on a "cost plus" basis.
2. The contract did not limit the number of subcontractors nor require any time and materials information from them.
3. CCISD failed to pay the $705, 122.60 due pursuant to the contract.
4. CCISD has a lawful credit in the amount of $36, 000 for overcharges on work not done.
5. Cotton breached the contract by invoicing for work not performed, but its breach was not material.[5]
6. CCISD['s] failure to pay is a material breach of contract.
7. CCISD is not liable under the Prompt Pay Act, Tex. Gov't Code [§] 2251.021 because a bona fide, good faith dispute existed as to the charges.
8. Cotton by and through its agent for negotiations on payment of the invoices, Cottonwood, knowingly made false representations, which were initially relied upon by CCISD to its detriment.
9. CCISD was forced not to submit a large portion of Cotton/Cottonwood's charges to FEMA because they were fraudulent.
10. Although CCISD was ultimately compensated for [its] losses during Ike, [its] recovery was made more arduous and difficult by the fraudulent statements of Cotton. There is no evidence of the value of the difficulty or additional expense to recover reimbursement that were incurred.
11. The Texas Education Agency grant that ultimately covered the gap in FEMA payments is not a "collateral source" as asserted by CCISD. FEMA and the Texas Education Agency were both sources available to CCISD for reimbursement of storm costs.
12. CCISD is immune from the award of attorney's fees because pursuant to the provision of chapter 271 of the Texas Local Government Code applicable to the contract in issue, the contract must specifically allow the recovery of fees and specifically reference Section 271.159. The contract in issue did not. CCISD has not waived [its] immunity for attorney's fees.

         Based on her findings, the arbitrator ordered that Cotton Commercial recover from CCISD the total sum of $669, 122.60, plus pre- and post-judgment interest. The arbitrator declined to award damages to CCISD on its affirmative claims.

         Cotton Commercial moved to confirm the award in the trial court. CCISD moved to vacate the award and filed a plea to the jurisdiction. As grounds for its motion to vacate and plea to the jurisdiction, CCISD asserted that it remained immune from suit because the legislature's waiver of immunity for breach of contract claims against a local governmental entity did not apply under the present facts. See Tex. Loc. Gov't Code § 271.152. As CCISD argued, section 271.152's waiver of immunity provision does not apply to Cotton Commercial's claim for debris-removal damages because the parties never executed a written contract for debris-removal services. More particularly, CCISD argued that the Restoration Agreement lacked an essential term because it contained no scope of work. Hence, the Restoration Agreement upon which Cotton Commercial's claim is based is not a "contract subject to this subchapter" under section 271.151(2).[6] The trial court denied CCISD's motion and plea, confirmed the award, and rendered a final judgment in Cotton Commercial's favor.

         CCISD ...

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