Exhibit 99.1
[BAKER BOTTS LLP LOGO] ONE SHELL PLAZA AUSTIN
910 LOUISIANA DALLAS
HOUSTON,TX DUBAI
77002-4995 HONG KONG
HOUSTON
TEL +1 LONDON
713.229.1234 MOSCOW
FAX +1 NEW YORK
713.229.1522 RIYADH
www.bakerbotts. WASHINGTON
com
December 16, 2005
To Each Person Listed on
the Attached Schedule I
Re: CenterPoint Energy Houston Electric, LLC;
CenterPoint Energy Transition Bond Company II, LLC
Constitutional Issues
Ladies and Gentlemen:
We have acted as counsel to CenterPoint Energy Transition Bond Company II,
LLC, a Delaware limited liability company (the "Issuer"), and CenterPoint Energy
Houston Electric, LLC ("CenterPoint"), an operating electric utility
incorporated under the laws of the State of Texas, in connection with the
purchase by the Issuer on the date hereof of the Transition Property, as defined
in the Sale Agreement referred to below, from CenterPoint, the issuance by the
Issuer of the Transition Bonds referred to below, and the related transactions
described below.
THE TRANSACTION
On the date hereof, CenterPoint has sold its rights and interests under the
Financing Order, which became the Transition Property upon such transfer, to the
Issuer under the Transition Property Sale Agreement dated as of December 16,
2005 (the "Sale Agreement"), by and between CenterPoint and the Issuer and the
related bill of sale dated as of December 16, 2005. Under the Transition
Property Servicing Agreement dated as of December 16, 2005, by and between
CenterPoint, in its capacity as Servicer, and the Issuer, CenterPoint has agreed
to service the Transition Property. Under the Administration Agreement dated as
of December 16, 2005, by and between CenterPoint, in its capacity as
Administrator, and the Issuer, CenterPoint has agreed to perform certain
administrative services on behalf of the Issuer. On the date hereof, the Issuer
has issued its Senior Secured Transition Bonds, Series A (the "Transition
Bonds") under an Indenture dated as of December 16, 2005 ("Indenture"), by and
between the Issuer, Wilmington Trust Company, as trustee (the "Trustee"), and
Deutsche Bank Trust Company Americas, as securities intermediary.
As used herein, "Transaction Documents" means the above-referenced
documents, and "Transaction" means the transactions contemplated by the
Transaction Documents. Capitalized terms used and not otherwise defined herein
have the meanings set forth in the Sale Agreement.
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To Each Person Listed on
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OPINIONS REQUESTED
You have requested our opinion as to:
(a) whether the holders of the Transition Bonds (the "Bondholders") could
challenge successfully under the Contract Clause of the United States
Constitution (Article I, Section 10; and herein "Federal Contract Clause") or
under the Contract Clause of the Texas Constitution (Article I, Section 16; and
herein "Texas Contract Clause") the constitutionality of any action by the State
of Texas (including the Commission) of a legislative character, including the
repeal or amendment of the securitization provisions of the Electric Choice
Plan, that a court of competent jurisdiction would determine repeals, amends or
violates the Pledge set forth in Section 39.310 of the Texas Electric Choice
Plan ("Electric Choice Plan") (codified in the Public Utility Regulatory Act
("PURA"), TEX. UTIL. CODE ANN. Sections 11.001-64.158) in a manner that
substantially reduces, alters or impairs the value of the Transition Property or
substantially reduces, alters or impairs the Transition Charges, (any such
impairment being referred to herein as "an impairment") prior to the time that
the Transition Bonds are fully paid and discharged; and
(b) whether, under the Fifth Amendment to the United States Constitution,
which provides in relevant part, "nor shall private property be taken for public
use, without just compensation" ("Federal Takings Clause"), or Article I,
Section 17 of the Texas Constitution, which provides that "[n]o 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"
("Texas Takings Clause"), a reviewing court would find a compensable taking if
the State takes action of a legislative character that repeals, amends or
violates the Pledge or takes other action in contravention of the Pledge that
the court concludes (i) permanently appropriates the Transition Property or
denies all economically productive use of the Transition Property; or (ii)
destroys the Transition Property other than in response to emergency conditions;
or (iii) substantially reduces, alters or impairs the value of the Transition
Property or a substantial property interest of the Bondholders in the Transition
Property and deprives the Transition Bondholders of their reasonable
expectations arising from their investments in the Transition Bonds (a
"taking").
You have also inquired as to the circumstances under which injunctive
relief would be available to address a legislative act which will cause such
impairments.
FACTS AND ASSUMPTIONS
In connection with rendering the opinions set forth below, we have examined
and relied upon originals or copies, certified or otherwise identified to our
satisfaction, of (i) the Sale Agreement; (ii) the Indenture; (iii) the
Registration Statement (including the prospectus and
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To Each Person Listed on
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prospectus supplement included therein) initially filed with the Securities and
Exchange Commission on September 12, 2005, as amended and as declared effective
by the Securities and Exchange Commission with respect to the Transition Bonds
("Registration Statement"); (iv) the Electric Choice Plan; (v) the Financing
Order issued by the Texas Public Utility Commission ("Commission") on March 16,
2005 ("Financing Order"), PUC Docket No. 30485; and (vi) such other documents
relating to the Transaction as we have deemed necessary or advisable as a basis
for such opinions.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents, we have assumed that the parties to such documents had
the power, corporate or other, to enter into and perform all obligations
thereunder and have also assumed the due authorization by all requisite action,
corporate or other, and execution and delivery by such parties of such
documents, including the Transaction Documents, and the validity and binding
effect thereof. We have assumed that any Texas legislation impairing the value
of Transition Bonds and Transition Properties would constitute a "substantial"
modification of the Electric Choice Plan provisions that provide support for
Transition Properties or Transition Bonds.
We have made no independent investigation of the facts referred to herein,
and with respect to such facts have relied, for the purpose of rendering this
opinion and except as otherwise stated herein, exclusively on the statements
contained and matters provided for in the Transaction Documents, the
Registration Statement, and such other documents relating to the Transaction as
we deemed advisable, including the factual representations, warranties, and
covenants contained therein as made by the respective parties thereto.
Members of this firm are admitted to the Bar of the State of Texas. We
express no opinion herein as to the laws of any jurisdiction other than the laws
of the State of Texas and the federal laws of the United States of America to
the extent specifically referred to herein.
PLEDGE OF THE STATE OF TEXAS
Section 39.310 of PURA sets forth a pledge ("Pledge") by the State of
Texas, "for the benefit and protection of financing parties and the electric
utility," in a securitization transaction contemplated by the Electric Choice
Plan:
Transition bonds are not a debt or obligation of the state and are not a
charge on its full faith and credit or taxing power. The state pledges,
however, for the benefit and protection of financing parties and the
electric utility, that it will not take or permit any action that would
impair the value of transition property, or, except as permitted by Section
39.307, reduce, alter, or impair the
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To Each Person Listed on
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transition charges to be imposed, collected, and remitted to financing
parties, until the principal, interest and premium, and any other charges
incurred and contracts to be performed in connection with the related
transition bonds have been paid and performed in full.
TEX. UTIL. CODE ANN. Section 39.310 (2005)(1) Section 39.310 also authorizes the
Issuer "to include this pledge in any documentation relating to those bonds."
Id. We note that the State's pledge is set forth on the Transition Bonds and in
the Indenture.
ANALYSIS
If Texas were to take action of a legislative character, including the
repeal or amendment of the securitization provisions of the Electric Choice
Plan, that a court would determine violates the Pledge in a manner that
substantially reduces, alters or impairs the value of the Transition Property or
substantially reduces, alters or impairs the Transition Charges, such action
would raise issues under the Contract Clause of the Texas Constitution, the
Contract Clause of the United States Constitution, the Takings Clause of the
Texas Constitution, and the Takings Clause of the United States Constitution.
Such action may be invalidated if it violates any one of those four
constitutional provisions. We address each of those provisions in turn.
A. THE CONTRACT CLAUSES
The Texas and Federal Constitutions, through their respective Contract
Clauses, limit the power of the Texas legislature to enact laws "impairing the
obligation of contracts." U.S. CONST. art. I Section 10; TEX. CONST. art. I
Section 16. The Texas Supreme Court has authoritatively interpreted the Texas
Contract Clause to prohibit laws that directly target the terms of a private
contract; that provision, however, does not prohibit the State from taking
action under the police power that only incidentally affects the subject matter
of the contract. The federal provision relies on a multi-factor balancing test
to determine whether an impairment is justified by the government's exercise of
its police power.
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(1) Section 39.307, entitled "True-Up," provides:
A financing order shall include a mechanism requiring that transition
charges be reviewed and adjusted at least annually, within 45 days of the
anniversary date of the issuance of the transition bonds, to correct any
overcollections or undercollections of the preceding 12 months and to
ensure the expected recovery of amounts sufficient to timely provide all
payments of debt service and other required amounts and charges in
connection with the transition bonds.
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To Each Person Listed on
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1. THE TEXAS CONSTITUTION'S CONTRACT CLAUSE
Article I, Section 16 of the Texas Constitution provides that "[n]o . . .
law impairing the obligation of contracts . . . shall be made." That provision
applies in different ways to two types of contracts: (1) contracts between
private parties ("private contracts"); and (2) contracts between a private party
and the State of Texas ("state contracts").
a. PRIVATE CONTRACTS
The contractual obligations between private parties - including those
between a creditor and debtor - may not be "impaired" by an act of the
legislature. TEX. CONST. art. I Section 16; see Travelers Ins. Co. v. Marshall,
76 S.W.2d 1007 (Tex. 1934). While the Texas Supreme Court has not defined with
precision what constitutes an "impair[ment of] the obligation of contracts,"
Langever v. Miller, 76 S.W.2d 1025, 1029-35 (Tex. 1934) (quoting cases and other
authorities), that court has understood an "impairment" generally to be a
legislative act that "nullifies that portion of the contract, read in the light
of the then existing statute, which entitled" a party to a right under the
contract. Id. at 1029. More particularly, the Texas Supreme Court has
distinguished legislation having only "incidental effects" on contracts from
legislation "specifically directed at the terms of a contract." Barshop v.
Medina County Underground Water Conservation Dist., 925 S.W.2d 618, 634 (Tex.
1996). When the legislature passes a statute of the former type, it does not
violate the Texas Constitution so long as it is "a valid exercise of the police
power necessary to safeguard the public safety and welfare." Id. at 635. But
when the legislature enacts a statute specifically directed at the terms of a
contract, it violates the Texas Contract Clause.
Although the case law delineating those two types of legislation is far
from comprehensive,(2) three decisions offer guidance. The first is Travelers
Ins. Co. v. Marshall, 76 S.W.2d 1007 (Tex. 1934). The legislation at issue in
that case was a "moratorium act" that delayed banks' recourse in collecting
collateral property upon borrower default; the contract at issue was the loan
agreement between the bank and the borrower. 76 S.W.2d at 1008-09. The Texas
Supreme Court held that the act violated the Texas Contract Clause. Describing
its holding in broad terms, the Texas Supreme Court declared that any law
impairing the obligation of a contract is unconstitutional, regardless of the
emergency conditions that the legislature might cite to justify the impairment.
Id. at 1011. "The limitation thus imposed is emphatic, unambiguous and without
exception; it applies alike to all contracts and protects all obligations of
contracts from destruction or impairment by subsequent legislation." Id.
Three years later, the U.S. Supreme Court decided Henderson Co. v.
Thompson, 300 U.S. 258 (1937), in which the court applied the Texas Contract
Clause and interpreted
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(2) In 1996, the Texas Supreme Court noted that it had not considered the scope
of the Contract Clause in the preceding sixty-two years. See Barshop, 925 S.W.2d
at 634.
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Travelers.(3) In Henderson, the challenged legislation regulated the natural gas
industry: It defined "sweet" and "sour" gas; it prohibited certain uses of sweet
gas; and it prohibited the extraction of sweet gas from particular sources. Id.
at 260. The plaintiff's gas wells were classified as "sweet gas," and the
extraction of the gas was therefore prohibited. Id. at 261. Plaintiff alleged
that the legislation impaired two sets of contracts: (1) contracts between a gas
processing plant and its suppliers for the receipt of sweet gas; and (2)
contracts between the processing plant and its customers for the delivery of
sweet gas residue. 300 U.S. at 266. The U.S. Supreme Court held that the state
statute did not impair the contracts because it was not "specifically directed
against the terms of the contract." Id. at 266. Rather, the court concluded, the
legislation "deal[t] merely with the use of an article of commerce; and its
effect upon contracts [wa]s incidental." Id. The U.S. Supreme Court noted that
"the Constitution of the State of Texas has never been held to avoid a police
statute dealing directly with physical things in the interest of the public
welfare, and touching contractual relationships only incidentally as they may
have attached to those physical things prior to the passage of the statute." Id.
(internal quotation marks omitted). The U.S. Supreme Court distinguished the
facts before it from those in Travelers on the same ground: In Travelers, the
challenged law directly regulated the enforcement of contracts, whereas in
Henderson the challenged law regulated only the articles of commerce at issue in
the contracts and not the terms of the contracts themselves.
Returning to the issue more recently in Barshop, 925 S.W.2d at 634, the
Texas Supreme Court ratified the reasoning of Henderson. In Barshop, the State
had enacted legislation regulating the extraction of water from Texas's Edwards
Aquifer. The plaintiffs - two county water conservation districts, a cattle
raisers organization, a cattle company, and a private individual - alleged that
the act violated the Texas Contract Clause. They argued that the law impaired
the obligation of contracts between suppliers of potable water who drew their
water from the aquifer and the customers of those suppliers, because the new
Texas law threatened the ability of the suppliers to satisfy their customers'
contractual demands. See Findings of Fact and Conclusions of Law, Medina County
Underground Water Conservation Dist. v. Barshop, No. 95-08-13471-CV at Paragraph
323 (Dist. Ct. of Medina County, Dec. 18, 1995). The Texas Supreme Court
rejected that claim, holding that the obligation was not unconstitutionally
impaired "because the Act [was] a valid exercise of the police power necessary
to safeguard the public safety and welfare," and the law was not directly aimed
at the terms of the contract. 925 S.W.2d at 634-35.
Taken together, Barshop, Henderson, and Travelers indicate that legislation
that substantially modifies the terms of a private contract to which the State
is not a party, or that materially delays the recourse available to parties of
the contract, would constitute a violation of the Texas Contract Clause. Here,
Texas authorized Transition Bond issuers to include the State's
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(3) The Supreme Court reviewed the legislation under the Texas Constitution as
well as under several provisions of the U.S. Constitution. 300 U.S. at 261. The
Texas Supreme Court has stated that the U.S. Supreme Court's interpretation of
the State Constitution is not binding on Texas state courts, although the U.S.
Supreme Court's analysis has been viewed as persuasive. See, e.g., Barshop, 925
S.W.2d at 634-35 ("While the Supreme Court's decision in Henderson was not
controlling on Texas courts, several courts of appeals have noted its holding in
concluding that an exercise of the police power necessary to safeguard the
public safety and welfare can justify the impairment of contractual rights and
obligations.").
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pledge not to "reduce, alter, or impair the transition charges" in bond
documentation, and issuers included those terms in bond documentation. Any state
action of a legislative character, including the repeal or amendment of the
securitization provisions of the Electric Choice Plan, that a court would
determine violates the Pledge in a manner that substantially reduces, alters or
impairs the value of the Transition Property or substantially reduces, alters or
impairs the Transition Charges, would contravene Section 39.310, and as such
would constitute an act specifically directed at a term of the contract. Such an
act would be directed specifically at the Pledge as reproduced in the Transition
Bonds, contract terms the State had authorized by legislation.
b. STATE CONTRACTS
The Pledge itself may also constitute a binding contract between the State
of Texas and the issuers and holders of Transition Bonds. In enacting the
legislation, not only did the State of Texas pledge that it would not interfere
with the Transition Bonds, but it also authorized "any party issuing transition
bonds" to include that Pledge in the bonds and in associated agreements. TEX.
UTIL. CODE. ANN. Section 39.310. As described in detail below, see infra pp.
11-13, the U.S. Supreme Court has found that, for the purposes of the Federal
Constitution, a statute may constitute a binding contractual obligation with
private parties despite "the presumption . . . that a law is not intended to
create private contractual or vested rights but merely declares a policy to be
pursued until the legislature shall ordain otherwise." Nat'l R.R. Passenger
Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 466 (1985) (internal
quotation marks omitted); see also U.S. Trust Co. v. New Jersey, 431 U.S. 1,
17-18 & n.14 (1977) (noting that parties stipulated that the state legislation
at issue constituted a contractual obligation of the State). Consistent with the
analysis below, see infra pp. 11-13, Section 39.310 of PURA may convey an intent
to bind the State of Texas contractually. Section 39.310 does not merely contain
a Pledge from the State of Texas. It also authorizes the inclusion of the Pledge
in specified contracts, expressly incorporating Texas's promises and obligations
into those contracts.
The Texas Supreme Court has not specifically addressed whether PURA or
similar laws should be construed as binding contractual obligations. But two
illustrative cases suggest that the Texas Supreme Court may hold that they are.
See Morris & Cummings v. Texas, 62 Tex. 728, 1884 WL 8989 at *11-*12 (Tex.
1884); Basset v. City of El Paso, 30 S.W. 893, 895 (Tex. 1895). In Morris &
Cummings, Morris & Cummings had contracted with the city of Corpus Christi in
1872 to collect tolls on behalf of the city. 1884 WL at *11. In 1873, the State
of Texas re-incorporated Corpus Christi with legislation that explicitly
"recognized previous [city ordinances and contracts] as valid and binding
contracts between the city and Morris & Cummings, who had acted under and
availed themselves of [the provisions of said ordinances and contracts]." 1884
WL at * 6. In 1875, the State of Texas repealed the act incorporating Corpus
Christi, purportedly extinguishing the city's contracts with Morris & Cummings.
The Texas Supreme Court held that, although "[t]he power of the legislature to
alter or repeal an act chartering a municipal corporation is undoubted," id. at
*11, the State could not repeal the 1875 charter in such a way as would
effectively extinguish the contractual agreement
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between Morris & Cummings and the city, id. at *12-*13. The State was obligated
not "to absolve [the municipality] from its liabilities to creditors . . . ."
Id. at *12.
In Basset, the city of El Paso had issued bonds to fund its waterworks. 30
S.W. at 894. The city council passed an ordinance "creat[ing] a special fund, in
the city treasury, to be known as the waterworks bonds sinking fund," to repay
the bonds, and levying property taxes to raise the necessary revenue. Id. The
court held that city officials had authority to levy the tax. One reason given
by the Texas Supreme Court was that "[t]he bonds, when issued, would be based
upon and relate back to this order providing for the interest and sinking fund,
and the order would be part of the contract between the city and the holder of
the bonds." Id. at 895 (emphasis added). Because the tax was an implicit
obligation in the bond contract, a "[bond]holder could compel the levy of a
sufficient tax" if the city failed to do so of its own volition. Id.
Thus, in Basset and Morris & Cummings, the Texas Supreme Court recognized
that legislation providing funding, authorization, and support for particular
contractual relationships cannot be repealed if it will impermissibly impair
contractual obligations. Regrettably, Basset and Morris & Cummings are not of
recent vintage; each is more than 100 years old. In addition, they are factually
distinguishable from the legislation at issue here. In both of those cases,
there were written contracts executed by a governmental entity, and the
statutory promise was held to be incorporated into that governmental agreement.
Here, by contrast, there is no explicit contractual instrument executed by a
governmental entity to which the Pledge might be appended. Texas did, however,
authorize the Issuer and Bondholders to include Texas's Pledge in their
agreements. That is evidence that the State of Texas intended its Pledge to
become an enforceable part of those agreements, much as the charter became part
of the contract between the city and the contractor in Morris & Cummings, and as
the property-tax ordinance became part of the contract between the city and
bondholders in Bassett.
c. CONCLUSION: AVAILABILITY OF INJUNCTIVE AND DECLARATORY RELIEF
Based on our analysis of relevant judicial authority, as set forth above,
and subject to all of the qualifications, limitations and assumptions (including
the assumption that any impairment would be "substantial") set forth in this
letter, it is our opinion that a reviewing court would conclude (i) that the
State Pledge creates a binding contractual obligation of the State of Texas for
purposes of the Texas Contract Clause and (ii) unless the State's action is a
reasonable exercise of its sovereign powers and is of a character reasonable and
appropriate to the public purpose justifying such action, provides a basis upon
which the Bondholders (or the Trustee acting on their behalf) could challenge
successfully, under the Texas Contract Clause, the constitutionality of any
action by the State (including the Commission) of a legislative character,
including the repeal or amendment of the securitization provisions of the
Electric Choice Plan, that a court would determine violates the Pledge in a
manner that substantially reduces, alters or impairs the value of the Transition
Property or substantially reduces, alters or impairs the Transition Charges.
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If Texas legislation did violate the Texas Contract Clause, then the
parties to the contract could obtain an injunction prohibiting state executive
branch officials from enforcing the legislation. See Travelers, 76 S.W.2d at
1008; Dir. of Dept. of Agric. and Env't v. Printing Indus. Ass'n of Texas, 600
S.W.2d 264, 265-66 (Tex. 1980). The complainants could, in the alternative,
secure a declaratory judgment that the State's actions violated the Texas
Contract Clause. "Private parties may seek declaratory relief against state
officials who allegedly act without legal or statutory authority. . . . This is
because suits to compel state officers to act within their official capacity do
not attempt to subject the State to liability. . . . Therefore, certain
declaratory-judgment actions against state officials do not implicate the
sovereign-immunity doctrine." Texas Natural Res. Conservation Comm'n v. IT-Davy,
74 S.W.3d 849, 855 (Tex. 2002) (citations omitted).(4)
The entry by a court of an injunction to enjoin an impairment would be
subject to a showing that (1) immediate and irreparable harm would occur if the
injunction does not issue, (2) the claim for relief is based upon an established
legal right, (3) there is no adequate remedy at law, (4) the equities
preponderate in favor of the moving party, and (5) there has been a violation of
the Texas Contract Clause and such action is not necessary to further a
significant and legitimate public purpose. The availability of such injunctive
relief would be further subject to the discretion of the courts: "The decision
to grant or deny a temporary injunction lies in the sound discretion of the
trial court, and the court's grant or denial is subject to reversal only for a
clear abuse of discretion." Walling v. Metcalfe, 863 S.W.2d 56, 58 (Tex. 1993)
(citing State v. Walker, 679 S.W.2d 484 (Tex. 1984)). Whether to provide
declaratory relief is likewise subject to the courts' discretion: "A trial court
has discretion to enter a declaratory judgment so long as it will serve a useful
purpose or will terminate the controversy between the parties." Bonham State
Bank v. Beadle, 907 S.W.2d 465, 468 (Tex. 1995). We note that, to the extent
that any impairment also constitutes a "taking" under the Texas or Federal
Takings Clauses so as to require the State to pay just compensation, see infra
Part B ("The Takings Clauses"), the availability of such compensation might
constitute an adequate remedy at law and equitable relief and declaratory relief
might be unavailable. Cf. Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1016
(1984).
2. THE FEDERAL CONSTITUTION'S CONTRACT CLAUSE
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(4) The phrase "certain declaratory-judgment actions" refers to those that, in
substance or effect, do not seek to establish the State's monetary liability
under a contract. As the Texas Supreme Court explained in Federal Sign v. Texas
Southern University, "we distinguish suits to determine a party's rights against
the State from suits seeking damages. A party can maintain a suit to determine
its rights without legislative permission." 951 S.W.2d 401, 404 (Tex. 1997),
cited in IT-Davy, 74 S.W.3d at 856. Suits that would have the practical effect
of extracting money damages from the State for breach of contract can only be
filed pursuant to Texas's "comprehensive schemes that allow contracting parties
to resolve breach-of-contract claims against the State." Id. at 857 (citing TEX.
CIV. PRAC. & REM. CODESS.107.001; TEX. GOV'T CODESS.SS.2260.001-.108). Because a
Contract Clause claim against state executives seeking to enjoin the enforcement
of an impairment of contract would not, in name or in effect, impose financial
obligations on the State, such a claim would not be governed by the State's
"comprehensive schemes."
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The Federal Constitution also prohibits Texas from passing any law
"impairing the Obligation of Contracts." U.S. CONST. art. I Section 10. The
Federal Contract Clause, like its Texas counterpart, operates differently on
private contracts on the one hand and government contracts on the other. The
U.S. Supreme Court has indicated that "impairments of a State's own contracts
would face more stringent examination under the Contract Clause than would laws
regulating contractual relationships between private parties," although "private
contracts are not subject to unlimited modification under the police power."
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 n.15 (1978) (quoting
U.S. Trust, 431 U.S. at 22-23) (citation and internal quotation marks omitted).
a. PRIVATE CONTRACTS
To prevail on a claim that federal legislation unconstitutionally impairs
the obligation of a contract to which the State is not a party, the plaintiff
must demonstrate that the statute alters contractual rights or obligations.
Nat'l R.R., 470 U.S. at 1455. If there is an impairment, then the reviewing
court must determine whether that impairment is substantial enough to constitute
an unconstitutional impairment of the rights or obligations.
In determining whether a law unconstitutionally impairs the obligations of
a private contract, the courts consider a variety of factors. In Allied
Structural Steel, supra, and Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398
(1934), the U.S. Supreme Court explicitly weighed five such considerations: (1)
Whether the law was enacted pursuant to an "emergency"; (2) whether the law was
enacted to "protect a basic societal interest, not a favored group"; (3) whether
the relief was "appropriately tailored to the emergency that it was designed to
meet"; (4) whether the imposed conditions were "reasonable"; and (5) whether the
legislation was limited to the duration of the emergency. Allied Structural
Steel, 438 U.S. at 242 (citing Blaisdell, 290 U.S. at 434-447).
The U.S. Supreme Court has since marshaled those considerations into a
three-step test. See Energy Reserves Group, Inc. v. Kansas Power and Light Co.,
459 U.S. 400 (1983). Courts first consider whether the state law operates as a
substantial impairment of a contractual relationship. (For the purposes of this
letter, we assume that the impairment is substantial.) Where there is a
substantial impairment, the State must demonstrate that the regulation had a
significant and legitimate public purpose. Once such a purpose is identified,
courts will consider whether the regulation's adjustment of rights and
responsibilities is based upon reasonable conditions and is of a character
appropriate to the public purpose justifying the measure's adoption. Id. at
411-13.
i. LEGITIMATE PUBLIC PURPOSE
If Texas were to pass legislation that substantially impairs contractual
obligations, then courts would inquire whether "the adjustment of the rights and
responsibilities is based upon reasonable conditions and is of a character
appropriate to the public purpose justifying the legislation's adoption." Energy
Reserves Group, 459 U.S. at 412. Where the State is not a party to the contract,
the court will "defer to legislative judgment as to the necessity and
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reasonableness of a particular measure." Id. at 413. "[T]he State . . . must
have a significant and legitimate public purpose behind the regulation, such as
the remedying of a broad and general social or economic problem." Id. at 411-12.
The State must be acting pursuant to its "police power, rather than providing a
benefit to special interests." Id. at 412.
In judging necessity, the U.S. Supreme Court has considered the context in
which the law was enacted. In Blaisdell, the state legislation was justified as
a response to the lodestar of economic emergencies, the Great Depression. 290
U.S. at 242. In Allied Structural Steel, by contrast, the Court held that
general concern about pensions was not by itself a sufficient emergency; nor had
the government declared an official emergency. 438 U.S. at 249. Finally, in
Energy Reserves Group, the Court noted that the Kansas statute at issue had been
enacted to protect consumers from the escalation of natural gas prices caused by
recent deregulation. 459 U.S. at 416-17. Judgment of this factor's application
to hypothetical Texas legislation is impossible without knowledge of the context
in which that legislation is passed; in any event, a more urgent context would
receive greater deference from the courts than would a nonemergency.
The U.S. Supreme Court has also considered, on the question of
justification, whether the challenged law was passed to protect broad societal
interests or merely to benefit some to the detriment of others. In Blaisdell,
the Supreme Court approved a law treating all debtors and creditors alike. The
statute had not been passed "for the mere advantage of particular individuals
but for the protection of a basic interest of society." 290 U.S. at 445.
(Notably, this assertion was largely a priori, and the opinion offered no
further explanation.) In Allied Structural Steel, by contrast, the Supreme Court
criticized a law that affected only some employers (those closing offices in
Minnesota) and that took aim "only at those who had in the past been
sufficiently enlightened as voluntarily to agree to establish pension plans for
their employees." Id. at 249-250.
ii. REASONABLENESS
Finally, the conditions set by the law must be reasonable in light of their
justification. In Blaisdell, the emergency-justified regulations regarding
mortgage recourse were deemed "reasonable" because they did not wholly
eviscerate mortgage obligations; rather, they merely extended the period for
redemption following a foreclosure. Moreover, the act was not of indefinite
duration, but was time-limited (albeit subject to extension). 290 U.S. at
446-48. In Allied Structural Steel, by contrast, the statute - which "impos[ed]
a sudden, totally unanticipated, and substantial retroactive obligation upon the
company to its employees" - "was not enacted to deal with a situation remotely
approaching the broad and desperate emergency economic conditions of the early
1930's - conditions of which the Court in Blaisdell took judicial notice." 438
U.S. at 249. In Energy Reserves Group, the U.S. Supreme Court noted that the
Kansas gas price caps applied to only a small amount of gas consumed in the
State, and that the law reintroduced certainty to a market otherwise operating
under "indefinite price escalator clauses." 459 U.S. at 418. Importantly, the
court conducted that analysis "in light of the deference to which the Kansas
Legislature's judgment is entitled." Id. If Texas were to enact
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legislation substantially impairing obligations of contract, then the courts
would invalidate the legislation if it was unreasonable in relation to the
conditions put forth to justify its enactment.
b. STATE CONTRACTS
i. EXISTENCE OF A CONTRACT
To prevail on a claim that state legislation unconstitutionally impairs the
obligation of a contract to which the State is a party, the plaintiff must first
demonstrate the existence of such a contract. As noted above, supra p. 7, courts
have held that, "absent some clear indication that the legislature intends to
bind itself contractually, the presumption is that 'a law is not intended to
create private contractual or vested rights but merely declares a policy to be
pursued until the legislature shall ordain otherwise.'" Nat'l R.R. Passenger
Corp., 470 U.S. at 465-66 (quoting Dodge v. Bd. of Educ., 302 U.S. 74, 79
(1937)). "Policies, unlike contracts, are inherently subject to revision and
repeal, and to construe laws as contracts when the obligation is not clearly and
unequivocally expressed would be to limit drastically the essential powers of a
legislative body." Id. at 466. National Railroad identified two principal
considerations in determining whether a legislative act creates a contractual
obligation.
First, if the legislation "provides for the execution of a written contract
on behalf of the state, then the case for an obligation binding upon the state
is clear. Absent an adequate expression of an actual intent of the state to bind
itself," however, the finding of a contract is less likely. Nat'l R.R., 470 U.S.
at 466-67 (internal quotation marks and citations omitted) (emphasis in
original). PURA's Section 39.310, detailing the State's Pledge, authorizes
parties to execute written contracts incorporating the Pledge, but whether that
suffices to manifest the State's intent to "bind" itself is less obvious.
Section 39.310 maintains that "[t]ransition bonds are not a debt or obligation
of the state" - a statement that appears to disclaim governmental financial
liability for the bonds themselves. But to say that Texas did not bind itself,
by contractual obligation, to make payment on or financially backstop Transition
Bonds is not the same as to say that the State did not bind itself to not enact
countervailing legislation. In Section 39.310, the State expressly "pledges . .
.. for the benefit and protection" of bondholders and electric utilities, "that
it will not take or permit" countervailing legislation. That statement is, by
its terms, a promise. And the State evinced its intent for parties to rely on
the promise when ordering their affairs by authorizing the Pledge's inclusion in
specified contracts, albeit ones to which the State is not a signatory.
The text of Section 39.310 of PURA compares favorably with the legislation
at issue in National Railroad. Indeed, in authorizing inclusion of the Pledge in
contracts and thereby outlining the terms on which private parties may execute
contracts, Texas included none of the express reservations found in the statute
at issue in National Railroad. For example, in National Railroad, the U.S.
Supreme Court noted that, "lest there be any doubt . . . Congress 'expressly
reserved' its rights to 'repeal, alter, or amend the Act at any time.'" Id. at
467. In marked contrast, Texas issued no such reservation in PURA and, indeed,
"pledge[d]," for the "protection" of parties, to "not take or permit" any
actions impairing the Transition Bond
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contracts. TEX. UTIL. CODE ANN. Section 39.310. That language weighs in favor of
finding a binding contractual obligation on the State. Indeed, it is similar to
the language conceded to create a contractual obligation in U.S. Trust. Unlike
the statute construed in National Railroad, the Texas Pledge expressly uses the
word "pledge" in its assurance. The language indicates the State's intent to be
bound vis-a-vis any holders of transition bonds and supports the conclusion that
the Pledge constitutes a contractual relationship between the State and the
Bondholders.
Second, National Railroad suggests that an "atmosphere of pervasive prior
regulation" weighs against finding a contract. 470 U.S. at 468-69. In that case,
however, the atmosphere was explicitly reinforced by express reservation of the
power to repeal. Id. at 469. The Texas Pledge here has no such express
reservation and actually promises that "the state will not take or permit any
action that would impair the value of transition property, or . . . reduce,
alter, or impair the transition charges to be imposed, collected, and remitted
to financing parties . . . ." TEX. UTIL. CODE. ANN. Section 39.310 (emphasis
added). An "atmosphere of pervasive prior regulation" may weigh against the
reasonable expectation that further regulation is not forthcoming. But the Texas
Pledge's strong statement appears specifically designed to disavow and forestall
the expectation of further regulation that would interfere with the collection
of charges financing the Transition Bonds (e.g., reducing, altering, or
impairing the transition charges), or that would otherwise substantially impair
the value of Transition Property.(5)
ii. RESERVED-POWERS DOCTRINE
Assuming a contract and legislation that substantially impairs the
obligation of that contract, the contract would not be enforceable if it
purported to "bargain[] away" the "reserved powers" of the State. U.S. Trust,
431 U.S. at 23. That is, even if Texas intended to be contractually bound, it
must be within the State's power to create that obligation. Generally speaking,
while a State can "contract[] away" its power to tax and spend in the future, it
cannot do the same with its power of eminent domain or its police power. Id. at
23-24 & n. 21. Regulation of utilities is one of the police powers of the
States. Pacific Gas & Elec. v. State Energy Resources Conservation & Dev.
Comm'n, 461 U.S. 190, 206 (1983).
In our opinion, the Pledge does not constitute an impermissible attempt to
"contract away" the police power of the State of Texas. The State has merely
pledged not to reduce, alter, or impair the transition charges that will fund
repayment of the Transition Bonds or
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(5)The U.S. Supreme Court has, in other contexts, found binding contractual
obligations, but it has done so under circumstances materially different from
those here. In one of those cases, the obligation was appended to another
existing contract between a state government and the complaining party. See
State of Indiana ex rel. Anderson v. Brand, 303 U.S. 95 (1938) (holding that
state Tenure Act created binding contractual obligations enforceable by teachers
with contractual relationships with public schools). In another case, the U.S.
Supreme Court held that a general act modifying corporate charters constituted a
contractual relationship, but there the legislation provided that it would
"shall not go into effect or be binding upon [a] company until the said company
.. . . shall have signified its assent hereto . . . ." New Jersey v. Yard, 95
U.S. 104, 110 (1887). In effect, the State had given private parties the power
to "accept" its "offer." See also U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S.
1, 17 (1976) (noting that parties conceded that legislation created a
contractual obligation).
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impair the value of the Transition Property, which presumably includes the right
to impose and collect charges under the terms of the Financing Order. Health and
safety regulations regarding the transmission of electricity going forward will
not affect these charges. Nor can the Pledge be read as contracting away any
power to regulate the safety of utility properties. Therefore, the
reserved-powers doctrine would not preclude a court from holding that violation
of the terms of the Pledge constitutes an unconstitutional violation of the
Contract Clause of the United States Constitution.
c. CONCLUSION: AVAILABILITY OF INJUNCTIVE AND DECLARATORY RELIEF
Based on our analysis of relevant judicial authority, as set forth above,
it is our opinion, subject to all of the qualifications, limitations and
assumptions (including the assumption that any impairment would be
"substantial") set forth in this letter, that a reviewing court would conclude
that the State Pledge (i) creates a binding contractual obligation of the State
of Texas for purposes of the Federal Contract Clause and (ii) unless the State's
action is a reasonable exercise of its sovereign powers and is of a character
reasonable and appropriate to the public purpose justifying such action,
provides a basis upon which the Bondholders (or the Trustee acting on their
behalf) could challenge successfully, under the Federal Contract Clause, the
constitutionality of any action by the State (including the Commission) of a
legislative character, including the repeal or amendment of the securitization
provisions of the Electric Choice Plan, that a court would determine violates
the pledge in a manner that substantially reduces, alters or impairs the value
of the Transition Property or substantially reduces, alters or impairs the
Transition Charges.
If Texas legislation did violate the Federal Contract Clause, then holders
and issuers of Transition Bonds could file suit in federal court against the
governor or other state executive officers responsible for enforcing the
unconstitutional legislation, requesting injunctive relief to prevent
enforcement of the new measure. Ex Parte Young, 209 U.S. 123, 159-60 (1908). In
order to obtain injunctive relief, the plaintiff must also show that enforcement
of the unconstitutional legislation is imminent. Morales v. TWA, 504 U.S. 374,
381 (1992).(6) The provision of injunctive relief would be subject to judicial
discretion, and would be subject to a showing that (1) immediate and irreparable
harm would occur if the injunction does not issue, (2) the claim for relief is
based upon an established legal right, (3) there is no adequate remedy at law,
and (4) the equities preponderate in favor of the moving party. See supra p. 9.
In addition, declaratory relief would be available subject to the court's
discretion. 28 U.S.C. Section 2201; Wilton v. Seven Falls Co., 515 U.S. 277,
282-83 (1995). Finally, as noted above, supra p. 9, the availability of
injunctive and declaratory relief might be limited where the State's actions
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(6)The complainants would not be able to sue the State of Texas for damages
resulting from the Federal constitutional violation, because the State would be
immune from suit under the 11th Amendment to the United States Constitution.
See, e.g., North Carolina v. Temple, 134 U.S. 22, 25, 30 (1890) (holding that
North Carolina enjoys sovereign immunity from claimed violation of federal
Contract Clause) (citing Ex Parte Ayers, 123 U.S. 443 (1887)). The complainants,
however, would be able to sue individual officers for injunctive relief under Ex
Parte Young.
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constitute an unconstitutional "taking" for which the aggrieved party can recoup
money damages at law.
3. CONCLUSION: THE FEDERAL AND TEXAS CONSTITUTIONS' CONTRACT CLAUSES
Based on our analysis of relevant judicial authority, as set forth above,
it is our opinion, subject to all of the qualifications, limitations and
assumptions (including the assumption that any impairment would be
"substantial") set forth in this letter, that a reviewing court would conclude
that (i) the Pledge creates a binding contractual obligation of the State of
Texas for purposes of the Federal Contract Clause and the Texas Contract Clause,
and (ii) the Pledge provides a basis upon which the Bondholders (or the Trustee
acting on their behalf) could challenge successfully, under the Federal Contract
Clause and the Texas Contract Clause, the constitutionality of any action by the
State (including the Commission) of a legislative character, including the
repeal or amendment of the securitization provisions of the Electric Choice
Plan, that a court would determine violates the Pledge in a way that
substantially reduces, alters or impairs the value of the Transition Property or
substantially reduces, alters or impairs the Transition Charges, prior to the
time that the Transition Bonds are fully paid and discharged, unless the action
is a reasonable exercise of the State's sovereign powers and is of a character
reasonable and appropriate to the public purpose justifying such action.
B. THE TAKINGS CLAUSES
Because the Texas Takings Clause largely has been assumed to be coextensive
with the Federal Takings Clause, see infra p. 18 (citing, inter alia, Sheffield
Dev. Co. v. City of Glenn Heights, 140 S.W.3d 660, 669 (Tex. 2004)), we begin
with a review of the Federal Takings Clause.
1. THE FEDERAL CONSTITUTION'S TAKINGS CLAUSE
The Takings Clause of the Fifth Amendment to the United States Constitution
states: "nor shall private property be taken for public use, without just
compensation." That provision is made applicable to the States via the
Fourteenth Amendment. Webb's Fabulous Pharmacies v. Beckwith, 449 U.S. 155
(1980). The Takings Clause covers both tangible and intangible property.
Ruckelshaus, 467 U.S. at 1003. Outside of a limited category of "per se"
regulatory takings, challenges to legislation pursuant to the Takings Clause are
essentially decided on an ad hoc factual basis. Penn Central Transp. Corp. v.
New York, 438 U.S. 104, 124 (1978); Ruckelshaus, 467 U.S. at 1005.
a. EXISTENCE OF PROPERTY RIGHTS
Whether the enactment of legislation that repeals, amends, or modifies the
provisions of the Electric Choice Plan providing for, authorizing, or supporting
the collection of charges financing the Transition Bonds, or that otherwise
substantially impairs the value of Transition Property, in violation of the
Pledge, constitutes an unlawful "taking" turns primarily on whether a court
would conclude that "property" has been appropriated by the government.
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The Supreme Court has stated broadly that "contracts . . . are property and
create vested rights" for the purposes of the Takings Clause. Lynch v. United
States, 292 U.S. 571, 577 (1934). It has clarified more recently, however, that
"the fact that legislation disregards or destroys existing contractual rights
does not always transform the regulation into an illegal taking." Connolly v.
Pension Benefit Guar. Corp., 475 U.S. 211, 224 (1986). "Contracts may create
rights of property, but when contracts deal with a subject matter which lies
within the control of Congress, they have a congenital infirmity. Parties cannot
remove their transactions from the reach of dominant constitutional power by
making contracts about them." Id. at 223-24.
To determine whether a property right has been unconstitutionally invaded,
the U.S. Supreme Court has focused on three factors of "particular
significance": (1) "the economic impact of the regulation on the claimant"; (2)
"the extent to which the regulation has interfered with distinct
investment-backed expectations"; and (3) "the character of the governmental
action." Connolly, 475 U.S. at 225 (quoting Penn Central, 438 U.S. at 124).
In Connolly, Congress enacted a requirement that employers pay a fixed and
certain amount to the Pension Benefit Guaranty Corporation to cover the
company's "unfunded vested benefits." 475 U.S. at 211. The plaintiffs, a group
of employers, sued on the grounds that, because the terms of the trust
agreements that they had executed with their employees required the employers to
pay a lesser contribution, the new federal requirements of additional payments
impaired the employers' rights under the trust agreements. Id. at 217-20.
Although the U.S. Supreme Court acknowledged that the legislation "completely
deprives" employers of the additional funds that they would now have to pay to
satisfy the statutory requirement, 475 U.S. at 225-26, it noted that pension
plans were long the subject of extensive government oversight: "Those who do
business in the regulated field cannot object if the legislative scheme is
buttressed by subsequent amendments to achieve the legislative end." Id. at 227
(quoting FHA v. The Darlington, Inc., 358 U.S. 84, 91 (1958)). Consequently,
those operating in an area subject to pervasive government regulation generally
cannot have a reasonable investment-backed expectation that regulations will not
change. Id. The U.S. Supreme Court further observed that the government, in
passing the challenged legislation, did not "physically invade or permanently
appropriate any of the employer's assets for its own use." Id. at 225.
In United States v. Security Industrial Bank, 459 U.S. 70 (1982), the U.S.
Supreme Court considered a challenge to a bankruptcy reform statute. The
creditor plaintiffs argued that the bill's modification of a bankruptcy law -
allowing debtors to avoid pre-modification liens on debtor property -
constituted an unconstitutional "taking" of the creditors' property rights in
the liens. Although the government's action involved no physical occupation of
the plaintiffs' property, the U.S. Supreme Court stressed that "[t]he total
destruction by the government of all compensable value of these liens, which
constitute compensable property, has every possible element of a Fifth Amendment
taking and is not a mere consequential incidence of a valid regulatory measure."
Id. at 77. To avoid this apparent constitutional infirmity, the U.S. Supreme
Court construed the legislation as applying only to lien interests vesting after
the legislation took effect. 475 U.S. at 82.
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It is our opinion that the enactment of legislation that repeals, amends,
or modifies the provisions of the Electric Choice Plan providing for,
authorizing, or supporting the collection of charges financing the Transition
Bonds, or that otherwise substantially impairs the value of Transition Property,
without just compensation, would be deemed an unconstitutional taking of
property akin to that in Security Industrial Bank if the act appropriates a
substantial property interest of the Bondholders in the bondable Transition
Property and deprives the Bondholders of their reasonable expectations arising
from their investments in the Transition Bonds. That conclusion is based
primarily on the application of the second of the three Connolly factors, "the
extent to which the regulation has interfered with distinct investment-backed
expectations." The enactment of such legislation would levy retroactive burdens
on the contracting parties despite clear "investment-backed" expectations -
expectations specifically promoted and endorsed by the Texas legislature in
promulgating the Pledge and in encouraging contracting parties to include the
Pledge in Transition Bond documentation. That the Texas legislature made the
Pledge "for the benefit and protection" of utilities and financing parties makes
the expectations of those parties all the more reasonable.
The first of the Connolly factors - "the economic impact of the regulation
on the claimant" - would also favor holders and issuers of Transition Bonds
where, as is assumed for present purposes, the modification of relevant portions
of the Electric Choice Plan is substantial and the act appropriates a
substantial property interest of the Bondholders in the bondable Transition
Property and deprives the Bondholders of their reasonable expectations arising
from their investments in the Transition Bonds. If Texas were to enact
legislation that repeals, amends, or modifies the provisions of the Electric
Choice Plan providing for, authorizing, or supporting the collection of charges
financing the Transition Bonds, or that otherwise substantially impairs the
value of Transition Property, then the economic impact on bondholders would be
great.
The third Connolly factor - the character of the government's action - does
not appear significant. There is no actual physical invasion of property. But
actual physical invasion of the property is not a necessary condition to a
successful takings claim.
b. ENFORCEMENT OF THE "JUST COMPENSATION" PROVISION
An aggrieved property owner generally may not claim a violation of the U.S.
Constitution's Takings Clause until after attempting to recover compensation
through state processes. "The Fifth Amendment does not require that compensation
precede the taking." Ruckelshaus, 467 U.S. at 1016. Injunctions are not
available against a state government to remedy an alleged Takings Clause
violation when a suit for compensation can be brought against the sovereign
after the taking. Id.; see Williamson County Regional Planning Comm'n v.
Hamilton Bank of Johnson City, 473 U.S. 172, 194-95 (1985). Because Texas
provides for "inverse condemnation" proceedings by aggrieved property owners -
even in the case of nonphysical "regulatory takings," Tower of Flower Mound v.
Stafford Estates Ltd. P'ship, 135 S.W.3d 620, 645-46 (Tex. 2004) - a federal
cause of action may not arise until the aggrieved property owner has requested
compensation from the State and resort to that process failed to
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"yield just compensation." Ruckelshaus, 467 U.S. at 1013 (quoted in Williamson
County, 473 U.S. at 195). To the extent that Texas's inverse condemnation
procedure is unavailable or inadequate, however, a federal claim could be
brought. 473 U.S. at 196-97.(7)
The case law does not clearly indicate whether, if a federal suit claiming
compensation under the Federal Takings Clause is brought directly against the
State of Texas, the State can assert sovereign immunity. Although the Texas
Supreme Court has held that Texas has waived its sovereign immunity against
Takings Clause claims under the Texas Constitution, Steele v. City of Houston,
603 S.W.2d 786, 791 (1996), a State's waiver of sovereign immunity in one forum
or against one class of claims cannot necessarily be construed to be a waiver of
sovereign immunity in other forums or against other claims. According to the
U.S. Supreme Court, "[t]he government cannot be sued, except with its own
consent. It can declare in what court it may be sued, and prescribe the forms of
pleading and the rules of practice to be observed in such suits. It may restrict
the jurisdiction of the court to a consideration of only certain classes of
claims against the [the government]." McElrath v. United States, 102 U.S. 426,
440 (1880); see also West v. Gibson, 527 U.S. 212, 226 (1999) (Kennedy, J.,
dissenting). The U.S. Supreme Court, however, has noted uncertainty as to
whether a State's declaration of sovereign immunity against a federal takings
claim would have effect. City of Monterey v. Del Monte Dunes at Monterey, Ltd.,
526 U.S. 687, 713-714 (1999) (assuming arguendo that "the sovereign immunity
rationale retains its vitality in cases where [the Fifth] Amendment is
applicable"). Nonetheless, the enforcement of legislation that effects a taking
could be enjoined by a suit against state officers if monetary relief were
unavailable, subject to the five considerations set forth above. See supra p. 9.
Thus, to the extent that there is a taking without just compensation and just
compensation is unavailable through state (or federal) procedures, aggrieved
bondholders and issuers could seek to enjoin enforcement of the state
legislation by suing individual officers under Ex Parte Young and 42 U.S.C.
Section 1983.
c. CONCLUSION
Based on our analysis of relevant judicial authority, as set forth above,
it is our opinion, subject to all of the qualifications, limitations and
assumptions set forth in this letter, that, under the Federal Takings Clause, a
reviewing court would hold that the State would be required to pay just
compensation to Bondholders if the State's repeal or amendment of the Electric
Choice Plan or other action in violation of the Pledge constitutes a permanent
appropriation of a substantial property interest of the Bondholders in the
bondable Transition Property and deprives the Bondholders of their reasonable
expectations arising from their investments in the Transition Bonds. There can
be no assurance, however, that any such award of just compensation would be
sufficient to pay the full amount of principal of and interest on the Transition
Bonds.
2. THE TEXAS CONSTITUTION'S TAKINGS CLAUSE
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(7)As noted above, Texas has established procedures for obtaining
compensation.
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Article I, Section 17 of the Texas Constitution provides that "[n]o
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." The Texas Supreme Court does not appear to have decided whether the
protections of the Takings Clauses of the Federal and Texas Constitutions are
coextensive. In a number of recent cases, however, that court has assumed that
the clauses are equivalent. Tower of Flower Mound, 135 S.W.3d at 630-31;
Sheffield Dev. Co. v. City of Glenn Heights, 140 S.W.3d 660, 669 (Tex. 2004);
City of Austin v. Travis County Landfill Co., 73 S.W.3d 234, 238-39 (Tex. 2002);
Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 932 (Tex. 1998).
Under the Texas Takings Clause, all property is subject to the valid
exercise of the police power and compensation is generally not required for
incidental losses. City of College Station v. Turtle Rock Corp., 680 S.W.2d 802,
804 (Tex. 1984). However, if a governing body, in the exercise of its police
power, enacts a regulation that goes "too far" in the regulation of private
property, then that governing body may be held to have taken property pursuant
to its power of eminent domain, requiring that the government pay compensation
to the owner. Id.
a. THE EXISTENCE OF PROPERTY RIGHTS
Several Texas courts of appeals have expressed doubt that the Texas Takings
Clause covers the deprivation of rights and interests not attached to real
property. Bates v. Texas State Technical Coll., 983 S.W.2d 821, 826 n.8 (Tex.
App.-Waco 1999, writ denied) ("In our search, we could find no cases that hold
that 'property' applies to an individual's property interest in continued
employment. Rather, our search indicated that 'property' as stated in the Texas
constitution refers to real property."); De Mino v. Sheridan, 2004 WL 1794558 at
*6 (Tex. App.-Houston (1 Dist.) 2004, no writ); De Mino v. Univ. of Houston,
2004 WL 2296131 at *4 (Tex. App.-Austin 2004, writ filed Mar. 30, 2005).
But the Texas Supreme Court has held that a franchise is "property"
protected by the Texas Takings Clause. Brazosport Sav. and Loan Ass'n v.
American Sav. and Loan Ass'n 342 S.W.2d 747, 750 (Tex. 1961) (explaining that
"[i]n character and nature a franchise is essentially in all respects property,
and is governed by the same rules as to its enjoyment and protection and is
regarded by the law precisely as other property"). A "franchise" is "a special
privilege conferred by government upon an individual or organization which does
not belong to the citizenry at large and in which activity one otherwise could
not engage without the franchise." State of Texas v. Operating Contractors, 985
S.W.2d 646, 653 (Tex. App.-Austin 1999, writ denied) (summarizing Texas case law
regarding franchises and the Takings Clause). In view of those cases, we believe
that the Texas Supreme Court would consider a contract (like a franchise) to be
"property" protected by the Texas Takings Clause.
b. CONCLUSION: ENFORCEMENT OF THE "JUST COMPENSATION" PROVISION
Based on our analysis of relevant judicial authority, as set forth above,
it is our opinion, subject to all of the qualifications, limitations and
assumptions set forth in this letter,
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that, under the Texas Takings Clause, a reviewing court would hold that the
State is required to pay just compensation to Bondholders if the State were to
enact legislation that repeals, amends, or modifies the provisions of the
Electric Choice Plan providing for, authorizing, or supporting the collection of
charges financing the Transition Bonds, or that otherwise substantially impairs
the value of Transition Property, where that legislation constitutes a permanent
appropriation of a substantial property interest of the Bondholders in the
bondable Transition Property and deprives the Bondholders of their reasonable
expectations arising from their investments in the Transition Bonds.
In the event of such a taking, the aggrieved party would seek damages
through an inverse condemnation proceeding against the State. Tarrant Reg'l
Water Dist. v. Gragg, 151 S.W.3d 546, 554 (Tex. 2004). The Texas Takings Clause
is self-effectuating, as the Texas Supreme Court has recognized the existence of
"a lawful cause of action under Section 17, Article I, of the Texas
Constitution." Steele, 603 S.W.2d at 791. "The Constitution itself is the
authorization for compensation for the destruction of property . . . ." Id. For
that same reason, the court has authoritatively held, Texas waives its sovereign
immunity against inverse condemnation suits under the Texas Takings Clause. Id.
Injunctive relief is not available in advance of the unlawful taking where the
property owner can sue for damages under inverse condemnation. Town of Flower
Mound, 135 S.W.3d at 646.
3. CONCLUSION: THE FEDERAL AND TEXAS CONSTITUTIONS' TAKINGS CLAUSES
Based on our analysis of relevant judicial authority, as set forth above,
it is our opinion, subject to all of the qualifications, limitations and
assumptions set forth in this letter, that if it concludes that the Transition
Property is protected by the Federal and Texas Takings Clauses, a reviewing
court of competent jurisdiction would find a compensable taking if the State
were to enact a law that, without paying just compensation to the bondholders
(i) permanently appropriates the Transition Property or denies all economically
productive use of the Transition Property; or (ii) destroys the Transition
Property, other than in response to emergency conditions; or (iii) substantially
reduces, alters or impairs the value of the Transition Property, if the law
unduly interferes with the bondholders' reasonable investment backed
expectations.
There can be no assurance, however, that any award of compensation would be
sufficient to pay the full amount of principal of and interest on the Transition
Bonds.
GENERAL MATTERS
We note that judicial analysis of issues relating to the Federal Contract
Clause, the Federal Takings Clause, the Texas Contract Clause, and the Texas
Takings Clause, and the retroactive effect to be given to judicial decisions has
typically proceeded on a case-by-case basis and that the courts' determinations,
in most instances, are usually strongly influenced by the facts and
circumstances of the particular case. We further note that there are no reported
controlling
[BAKER BOTTS LOGO]
To Each Person Listed on
the Attached Schedule I - 21 - December 16, 2005
judicial precedents of which we are aware directly on point. Our analysis is
necessarily a reasoned application of judicial decisions involving similar or
analogous circumstances. Moreover, the application of equitable principles
(including the availability of injunctive relief or the issuance of a stay
pending appeal) is subject to the discretion of the court which is asked to
apply them. We cannot predict the facts and circumstances which will be present
in the future and may be relevant to the exercise of such discretion. The
foregoing opinions are based upon our evaluation of existing judicial decisions
and arguments related to the factual circumstances likely to exist at the time
of a Federal Contract Clause, Federal Takings Clause, Texas Contract Clause, or
Texas Takings Clause challenge to a law passed by the legislature; such
precedents and such circumstances could change materially from those discussed
above in this letter. Consequently, there can be no assurance that a court will
follow our reasoning or reach the conclusions which we believe current judicial
precedent supports. It is our and your understanding that none of the foregoing
opinions is intended to be a guaranty as to what a particular court would
actually hold; rather each such opinion is only an expression as to the decision
a court should reach if the issue were properly prepared and presented to it and
the court followed what we believe to be the applicable legal principles under
existing judicial precedent. The recipients of this letter should take these
considerations into account in analyzing the risks associated with the subject
transaction.
This letter is limited to the federal laws of the United States of America
and to the laws of the State of Texas.
This letter is being delivered solely for the benefit of the persons to
whom it is addressed. We assume no obligation to update or supplement the
opinions or statements expressed herein to reflect any facts or circumstances
which may hereafter come to our attention with respect to such opinions or
statements, including any changes in applicable law which may hereafter occur.
Very truly yours,
/s/ BAKER BOTTS L.L.P.
SCHEDULE I
CenterPoint Energy Transition Bond Company II, LLC
1111 Louisiana, Suite 4655B
Houston, Texas 77002
CenterPoint Energy Houston Electric, LLC
1111 Louisiana
Houston, Texas 77002
Wilmington Trust Company
Rodney Square North
1100 North Market St.
Wilmington, DE 19890-0001
Attn: Corporate Trust Administration
Standard & Poor's, a division of The McGraw-Hill Companies
Attention: Asset Backed Surveillance Department
55 Water Street
New York, New York 10041
Moody's Investors Service, Inc.
Attention: ABS Monitoring Department
99 Church Street
New York, New York 10007
Fitch, Inc.
Attention: ABS Surveillance
1 State Street Plaza
New York, New York 10004
Lehman Brothers Inc.
Credit Suisse First Boston LLC
Greenwich Capital Markets Inc.
c/o Lehman Brothers Inc.
745 7th Avenue
New York, NY 10019