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Honors Academy, Inc. v. Texas Education Agency

Supreme Court of Texas

April 27, 2018

Honors Academy, Inc., d/b/a/ Honors Academy and American YouthWorks, Inc., d/b/a American YouthWorks Charter School, Petitioners,
Texas Education Agency and Michael Morath, In His Official Capacity as Texas Commissioner of Education, Respondents

          Argued Date: January 10, 2018

          On Petition for Review from the Court of Appeals for the Third District of Texas

          Justice Blacklock did not participate in the decision.


          John P. Devine, Justice

         Section 12.115 of the Texas Education Code requires the Commissioner of Education to revoke an open-enrollment charter school's charter after three consecutive years of "an unacceptable performance rating, " an unsatisfactory "financial accountability performance rating, " or any combination of the two. Tex. Educ. Code § 12.115(c). The Commissioner's revocation decision is subject to an administrative review, but the decision may not be appealed beyond that. Id. § 12.116(c). Two open-enrollment charter schools nevertheless seek judicial review of the Commissioner's decision to revoke their charters, raising both constitutional and ultra vires complaints. A district court forestalled the Commissioner's revocation by granting temporary injunctive relief. After an interlocutory appeal, the court of appeals vacated the temporary injunctions and dismissed the suit, concluding that sovereign immunity barred the schools's claims. Tex. Educ. Agency v. Am. YouthWorks, Inc., 496 S.W.3d 244, 270 (Tex. App.-Austin 2016). We agree and affirm.

         I. Background

         "Since 1995, open-enrollment charter schools have been a part of the Texas public-school system." LTTS Charter Sch., Inc. v. C2 Constr., Inc., 342 S.W.3d 73, 74 (Tex. 2011). Charter schools are created under and generally governed by chapter 12 of the Education Code. This chapter provides for three charter types: home-rule school district, campus or campus program, and open-enrollment. Tex. Educ. Code § 12.002. This appeal concerns open-enrollment charters. Such charters are typically held and run by nonprofit corporations, qualifying under § 501(c)(3) of the Internal Revenue Code. See id. § 12.101(a)(3). Although less common, institutions of higher education and governmental entities are also eligible to apply for such a charter. Id. § 12.101(a)(1), (4).

         The petitioners here are American YouthWorks, Inc., which formerly operated the American YouthWorks Charter School (collectively AYW), and Honors Academy, Inc., which formerly operated the Honors Academy Charter School (collectively Honors). Both are private, nonprofit corporations and early charter applicants under chapter 12. See id. § 12.101 (authorizing Commissioner to grant applications for an open-enrollment charter school). AYW obtained its charter in 1996 and describes itself as a drop-out-recovery school serving "Austin's under-served and under-privileged youth, through work, work-study and work training opportunities." Honors received its charter in 1998 and describes its schools as serving a large population of transient, low-income, at-risk students who have not been successful in regular public schools. Honors's schools are located predominantly in north Texas. AYW and Honors continuously operated their schools under renewals until legislative changes to chapter 12 led the Commissioner to revoke their charters.

         Pertinent here is the work of the Texas Sunset Commission, which in 2012 issued its report on the Texas Education Agency (TEA). The report included a section on charter schools.[1] The report noted that, while some charter schools were among the highest-achieving schools, others were among the lowest-performing schools. The Sunset Commission focused on the difficulty in addressing academic and financial issues at these low-performing schools. The report emphasized the TEA's inability to move quickly to revoke charters for poor performance, and that the delay left "students to be educated at under performing charter schools" for too long.[2] The Sunset Commission believed that the TEA lacked the tools necessary to effectively address poor academic and financial performance and urged that revocations "should occur more quickly to protect students from an inadequate education."[3] The report recommended that the Legislature require the Commissioner of Education to revoke a charter, without a hearing, if the charter school failed to satisfy academic or financial accountability standards for three consecutive years.[4]

         During the 2013 session, the Legislature acted on the Sunset recommendation by amending the Education Code to change the Commissioner's authority in this regard. Before these amendments, the Commissioner had discretionary authority under section 12.115 to revoke a charter or take a lesser adverse action against a charter holder that committed a material violation of its charter, failed in its fiscal management of the school, failed to protect the health, safety, or welfare of its students, or failed to comply with applicable law. Act of May 28, 2001, 77th Leg., R.S., ch. 1504, § 12, 2001 Tex. Gen. Laws 5344, 5350. After the amendment, the grounds listed in section 12.115 became mandatory. Tex. Educ. Code § 12.115(a). Moreover, the legislation included additional mandatory grounds for revocation, including one that required the Commissioner to revoke an open-enrollment charter if the school's academic or financial performance fell below acceptable standards over a three school-year period:

(c) The commissioner shall revoke the charter of an open-enrollment charter school if:
(1) the charter holder has been assigned an unacceptable performance rating under Subchapter C, Chapter 39, for the three preceding school years;
(2) the charter holder has been assigned a financial accountability performance rating under Subchapter D, Chapter 39, indicating financial performance lower than satisfactory for the three preceding school years; or
(3) the charter holder has been assigned any combination of the ratings described by Subdivision (1) or (2) for the three preceding school years.

Id. § 12.115(c). In determining the years of unsatisfactory performance, the Commissioner was directed to begin with the three-year period immediately preceding the legislation:

(c-1) For purposes of revocation under Subsection (c)(1), performance during the 2011-2012 school year may not be considered. For purposes of revocation under Subsection (c)(1), the initial three school years for which performance ratings under Subchapter C, Chapter 39 [academic accreditation], shall be considered are the 2009-2010, 2010-2011, and 2012-2013 school years. For purposes of revocation under Subsection (c)(2), the initial three school years for which financial accountability performance ratings under Subchapter D, Chapter 39 [financial accountability], shall be considered are the 2010-2011, 2011-2012, and 2012-2013 school years. This subsection expires September 1, 2016.

Id. § 12.115(c-1).

         The legislation also amended the procedure for revoking a charter under section 12.115. It directed the Commissioner to adopt an informal procedure to implement review of the Commissioner's now mandated revocation decisions. Id. § 12.116(a). An appeal of that decision to the State Office of Administrative Hearings (SOAH) was permitted, but the appeal was not a contested-case hearing or subject to the Administrative Procedure Act. Id. § 12.116(b). Instead, the legislation provided that the administrative law judge was to review the Commissioner's decision under an "arbitrary and capricious or clearly erroneous" standard and that the judge's determination was final and not subject to judicial review. Id. § 12.116(c). These revisions to the Education Code took effect on September 1, 2013.

         On December 18, 2013, the Commissioner notified AYW and Honors by letter that their schools had been identified as charters that met the criteria for mandatory revocation under the new legislation. In these letters, the Commissioner explained that he was revoking its open-enrollment charter (effective June 30, 2014) under Education Code § 12.115(c). He cited the performance ratings that were the basis for each recipient's charter revocation and attached exhibits corresponding to the identified ratings. The Commissioner also noted that the performance ratings on which the revocations were based were "final and not appealable" because "all rights to appeal the ratings identified above had been waived or exhausted."

         The letters further described the informal appeals process available to the schools: they had "the right to request an informal review of, and hearing regarding" the Commissioner's revocation decision, but "only if the charter holder submits a written request that contains specific answers to each of the findings included in this Notice." The Commissioner explained further that if the charter holder's timely request was denied during the informal review, the charter school's revocation issue would be sent to the SOAH for a hearing under § 12.116. Finally, the Commissioner noted that the SOAH hearing would be "limited to the specific findings and revocation detailed in this correspondence, " that his decision would be upheld "unless the judge finds the decision is arbitrary and capricious or clearly erroneous, " and that the SOAH judge's decision would be final and not subject to further appeal.

         AYW pursued the Commissioner's informal review process, but the Commissioner determined that he would proceed with the revocation. The Commissioner then forwarded AYW's appeal to the SOAH. After receiving notice of the denial of its informal appeal and the SOAH hearing date, AYW filed suit against the Commissioner and the Texas Education Agency (hereafter collectively referred to as "Commissioner") in district court.

         Honors also pursued its right to an informal review with the Commissioner who again determined that the revocation would proceed. Honors's appeal was forwarded to the SOAH, and the administrative law judge issued a decision upholding the revocation on May 20, 2014. Before that occurred, however, Honors intervened in AYW's pending litigation against the Commissioner.

         II. The Judicial Proceedings

         AYW asserted several claims in its district-court petition, including the deprivation of a vested property right without due process, the unconstitutional impairment of contract based on the retroactive use of past financial ratings to revoke AYW's charter, and ultra vires claims. AYW sought a temporary injunction specifically to stop the SOAH hearing from proceeding and more generally to prevent the revocation from occurring. Honors's petition alleged similar claims and sought similar relief, although it did not seek to stop its SOAH hearing.

         The Commissioner responded with a general denial and plea to the jurisdiction. Hearings ensued after which the district court issued two orders temporarily enjoining the Commissioner from (1) taking any further action to revoke AYW's charter and (2) from taking any further action to impair Honors's educational operations or enforce any order revoking Honors's charter. The respective injunctions were slightly different because the administrative law judge decided Honors's SOAH appeal before the district court issued the temporary injunction.

         The Commissioner immediately appealed the temporary injunctions. The district court subsequently denied the Commissioner's plea to the jurisdiction, and the Commissioner appealed that interlocutory order as well. The Commissioner's two appeals were consolidated for decision in the appellate court. The court of appeals vacated the temporary injunctions and dismissed AYW's and Honors's underlying claims, concluding that all claims were barred by sovereign immunity. 496 S.W.3d at 270. Petitions for review in this Court followed.

          III. The Petitions for Review

         The Petitions here challenge the validity of the Commissioner's decision to revoke AYW and Honors's respective charters, but chapter 12 does not provide for judicial review of these administrative orders. See T ex. Educ. Code § 12.116(c)(2) (making decision of the administrative law judge final). Moreover, "[i]t is well settled that trial courts may review an administrative action only if a statute provides a right to judicial review, or the action adversely affects a vested property right or otherwise violates a constitutional right." In re Office of the Attorney Gen., 456 S.W.3d 153, 157 (Tex. 2015) (per curiam) (citing Stone v. Tex. Liquor Control Bd., 417 S.W.2d 385, 385-86 (Tex. 1967)). Because the statute does not provide for judicial review, AYW asserts both due process and contractual impairment/retroactivity claims based on an asserted vested right to its charter. See Tex. Const. art. I, §§ 16, 19. AYW also asserts that the Commissioner's actions were ultra vires, precluding the application of sovereign immunity and providing another path to judicial review. See City of El Paso v. Heinrich, 284 S.W.3d 366, 372 (Tex. 2009) (noting "that suits to require state officials to comply with statutory or constitutional provisions are not prohibited by sovereign immunity"). Honors confines its argument to the Commissioner's alleged ultra vires actions in revoking its charter. We begin with AYW's constitutional claims.

         A. AYW's Constitutional Claims

         The Texas Constitution provides that "[n]o citizen of this State shall be deprived of life, liberty, property, privileges or immunities . . . except by the due course of the law of the land." Tex. Const. art. I, § 19. Our due course clause is nearly identical to the federal due process clause, which provides: "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law. . . ." U.S. Const. amend. XIV, § 1. Because the two are so similar, "we have traditionally followed contemporary federal due process interpretations of procedural due process issues." Univ. of Tex. Med. Sch. at Houston v. Than, 901 S.W.2d 926, 929 (Tex. 1995); see also Patel v. Tex. Dep't of Licensing & Regulation, 469 S.W.3d 69, 86 (Tex. 2015) (noting the typical alignment of federal and state law in this area).

         Before any substantive or procedural due-process rights attach, however, the citizen must have a liberty or property interest that is entitled to constitutional protection. Klumb v. Hous. Mun. Emps. Pension Sys., 458 S.W.3d 1, 15 (Tex. 2015). Property interests "are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law . . . ." Bd. of Regents of State Colls. v. Roth, 408 U.S. 564, 577 (1972). To have a constitutionally protected property interest, a person must have a "legitimate claim of entitlement" rather than a mere "unilateral expectation." Id. Texas law similarly states that a "vested right" is "something more than a mere expectancy based upon an anticipated continuance of an existing law." City of Dallas v. Trammell, 101 S.W.2d 1009, 1014 (Tex. 1937).

         AYW asserts that it was denied due process in the revocation of its charter, but before determining what process was due, we first consider whether AYW has a "property interest that is entitled to procedural due process protection." Klumb, 458 S.W.3d at 15. In other words, we must determine that AYW possessed a vested right to its charter.

         The court of appeals concluded that AYW's charter was not a "vested" or constitutionally protected property interest. 496 S.W.3d at 262. To the contrary, the court stated that specific provisions in the charter and the Education Code "conclusively negate[d] any such possible property interest." Id. at 261. The court noted that "[s]ome substantive limit on the State's discretion is an essential characteristic of a property interest warranting constitutional protection, " id. (quoting Grounds v. Tolar Indep. Sch. Dist., 856 S.W.2d 417, 418 (Tex. 1983), and that here, state law and the charter itself gave the "State[] unlimited discretion over the charters." Id.

         AYW, of course, disagrees. AYW views its charter as a contract with the State for an open-enrollment charter school that vested upon execution and, according to AYW's argument, could not be divested or impaired thereafter absent due process of law. AYW's original charter incorporated by reference all applicable requirements of state and federal law, and although the charter did not specifically mention Education Code § 12.115, it did paraphrase some of that section's requirements, providing:

Charterholder understands that the Board may modify, place on probation, revoke or deny renewal to a charter if the Board[5] determines that a material violation of the charter has occurred, that Charterholder has failed to satisfy generally accepted accounting standards of fiscal management, or that the Charterholder has failed to comply with an applicable law or rule.

AYW's subsequent charter renewal in 2002 did not again paraphrase the revocation grounds, but rather simply incorporated "applicable law." AYW contends that its charter incorporated a "for cause" provision, specifically the limitations on revocation found in its original charter and in Education Code § 12.115, asserting that these limitations on State discretion created its vested right.

          The Commissioner responds that AYW's charter is not a property right that can be distinguished from the legislative mandate creating such right. Because the charter-school system is a legislative creation, AYW's right to operate a school rests entirely on the Legislature's decision to continue the system. Moreover, AYW's right to any particular terms rests on the Legislature's decision to continue the current law because a charter's terms are governed by statute. Thus, although AYW's charter and its renewal take the form of a contract, both documents anticipate and incorporate changes to the law governing charters as they arise. The original charter incorporated "amendments" to the state and federal law governing charter schools, while the charter renewal incorporated all applicable law, which included Education Code § 12.1071. Under that section, AYW's acceptance of state funds constitutes its agreement to any amendments to the laws governing charter schools. Tex. Educ. Code § 12.1071. Because AYW's original charter and subsequent renewal recognize the Legislature's authority to alter the charter's terms, the Commissioner submits the documents are inextricably intertwined with the Legislature's regulatory authority, rendering AYW's interest in its charter "entirely contingent on State discretion, " and not a vested property right. See 496 S.W.3d at 262.

         An open-enrollment charter school is "indisputably part of the Texas public-education system." LTTS Charter Sch., 342 S.W.3d at 76. Thus, AYW's contention is that its charter with the State created a contractual relationship that vested its place in that system. The nature of that relationship and AYW's underlying rights therein thus require an examination of the laws that made AYW a part of public education.

          The State's relationship with its open-enrollment charter schools is principally set forth in chapter 12 of the Education Code (the Charter Schools Act). Enacted as part of major reforms to the Texas education system in 1995, the chapter's stated purposes included the establishment of "a new form of accountability for public schools" and the encouragement of "different and innovative learning methods." Tex. Educ. Code § 12.001(a)(4)-(5). State oversight of this new component of the public school system remained, however, to "ensure[] the fiscal and academic accountability" of the charters. Id. § 12.001(b). That oversight, however, was not to be "applied in a manner that unduly regulates the instructional methods or pedagogical innovations of the charter schools." Id.

         A charter is obtained by application to the Commissioner, who, along with a designated member of the Board of Education, is charged with "throughly investigating and evaluating an applicant." Id. § 12.101(b). As already mentioned, applicants are typically nonprofit, 501(c)(3) corporations. See id. § 12.101(a)(3). Any charter the Commissioner proposes to grant may be reviewed and denied by the Board, but if not, the charter takes effect 90 days after notice. Id. § 12.101(b-0). The number of charters the Commissioner may grant, however, is limited by statute. See id. § 12.101. (b-1)-(b-2).

         The charter for an open-enrollment charter school is "in the form of a written contract signed by the commissioner and the chief operation officer of the school." Id. § 12.112. The initial term is for five years, and if the charter is renewed, the renewal is for ten years. Id. §§ 12.101(b-5), .1141(i). Once chartered, the school is authorized to provide instruction to students under the charter's described structure, and the school retains that authority subject to renewal under section 12.1141, revocation under section 12.115, and Chapter 39A, which pertains to other actions the Commissioner may take when a school fails to meet academic and financial accountability standards. Id. § 12.102. Open-enrollment charter schools do not have the power to tax, id. § 12.102, but they generally are entitled to state funding, id. § 12.106, and services, id. § 12.104(c), as if they were school districts. Open-enrollment charter schools are subject to the Education Code and the rules adopted under it only to the extent specifically provided. Id. § 12.103(b). Open-enrollment charter schools also accept changes to applicable law made after the effective date of their charters by accepting state funds. Id. § 12.1071(a).

         This legislative scheme indicates that an open-enrollment charter is a new and innovative form of public schooling rather than a mere contract to outsource public education to a private entity. And while charter schools are designed to foster greater flexibility through less regulation, they are regulated nonetheless. Rather than create an ownership interest or vested right in public education, the charter is in the nature of a license or permit to operate a charter school subject to applicable laws and regulations. Cf. Pocono Mountain Charter Sch. v. Pocono Mountain Sch. Dist., 908 F.Supp.2d 597, 609 (M.D. Pa. 2012) (holding that relationship is regulatory, not contractual). We accordingly agree with the court of appeals that the Legislature has neither bargained away its discretion over this aspect of public education nor created vested private-property rights in the creation of the charter school system. 498 S.W.3d at 261.

         AYW maintains, however, that the Legislature created its vested right in the charter by establishing a "for cause" limitation on its revocation. AYW argues further that the Commissioner's discretion in applying that "for cause" limitation is what is at issue rather than the Legislature's authority over the public school system. AYW submits that "where an official or administrator is the decision-maker charged with administering a right, the proper analysis for determining whether the right is vested is the existence of limitations placed on the decision-making official or administrator's discretion to impair the right, " citing Grounds v. Tolar Independent School District, 856 S.W.2d 417, 418 (Tex. 1993), in support. The Texas League of Community Charter Schools[6]and the Texas Charter Schools Association[7] have filed amicus briefs that similarly rely on our decision in Grounds to support AYW's due process claim.

         The amici argue that an open-enrollment charter is a contract that creates a vested property interest in the charter issued by the Commissioner. See Tex. Educ. Code § 12.112 (providing that an open-enrollment charter "shall be in the form of a written contract"). They submit that a constitutionally protected property interest includes "an individual entitlement grounded in state law, which cannot be removed except 'for cause, '" Logan v. Zimmerman Brush Co., 455 U.S. 422, 430 (1982), and analogize the situation here to that in Grounds where we noted a substantive ...

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