Can a 1993 Texas law stop an economic development corporation from paying a debt it took on before the law passed?

Plain-English summary

A county attorney, writing for the Copperas Cove Economic Development Corporation, asked the Attorney General about a 1993 addition to the law that governs city economic development corporations. The new provision, section 4A(q) of article 5190.6, said that one of these corporations "may not assume a debt or make any expenditure to pay principal or interest on a debt if the debt existed before the date the city created the corporation." The corporation had a specific problem. In 1991 it had been assigned the City of Copperas Cove's obligation on a note worth about $505,870, and it had been paying on that note ever since. If section 4A(q) reached backward, the corporation could be forced to stop paying a debt it had legally taken on two years before the statute existed.

The office said the statute could not be read that way. Article I, section 16 of the Texas Constitution forbids any "retroactive law" or "law impairing the obligation of contracts," and the federal Constitution carries a similar bar on states impairing contracts. Reading section 4A(q) to cut off payments on a note the corporation had already assumed in 1991 would retroactively impair that obligation, so a court would not apply it that way. The legislative history pointed the same direction: the House member who offered the amendment described it as stopping corporations from taking on failed projects' debts going forward, not as voiding deals already in place. The conclusion was that section 4A(q) reaches only debts a corporation assumes after the statute's 1993 effective date.

Currency note

This opinion was issued in 1994. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Texas has since recodified the bulk of article 5190.6 into the Local Government Code (the recodified statute now sits in title 12, subtitle C1), and the old "4A" and "4B" corporation labels were replaced by "type A" and "type B" corporations. Section and article numbers cited here reflect the law as it stood in 1994. Read this page for the office's reasoning on retroactivity, and verify the current statute before relying on any specific provision number.

What the opinion meant for those who asked

For the development corporation and its board: The opinion concluded the corporation could keep making payments on the note it had assumed in 1991. Section 4A(q) was read to bar only the assumption of pre-existing debts going forward, so a debt the corporation had lawfully taken on before the 1993 amendment was not invalidated.

For city officials and county attorneys: The opinion treated the 1993 restriction as forward-looking. After its effective date, a 4A corporation could not assume or service a debt that predated the city's creation of the corporation; before that date, obligations the corporation had already undertaken stood, because applying the new bar to them would be an unconstitutional retroactive impairment of contract.

Common questions

What did section 4A(q) prohibit?
It barred a city economic development corporation from assuming a debt, or spending money on principal or interest on a debt, if that debt existed before the city created the corporation.

Could the 1993 law force a corporation to stop paying a debt it had already taken over?
No. The office concluded that applying the bar to a debt the corporation assumed before the 1993 amendment would violate the retroactive-law and contract-impairment clause of article I, section 16 of the Texas Constitution, so a court would not read it that way.

Why did the date the debt was assumed matter so much?
Because the constitutional protection turns on timing. The corporation took on the note in 1991; the statute was enacted in 1993. A law that releases or undoes an obligation already in force impairs it, which the constitution forbids, so the office read the statute to apply only to debts assumed after it took effect.

Background and statutory framework

Article 5190.6, V.T.C.S., authorized Texas cities to create nonprofit development corporations to promote economic development. Section 4A governed a particular kind of these corporations, funded by a local sales tax. In 1993 the legislature added subsection (q) (Acts 1993, 73d Leg., ch. 1022, § 2), barring a 4A corporation from assuming or paying down "a debt if the debt existed before the date the city created the corporation."

The factual setup mattered. According to the corporation's attorney, the City of Copperas Cove deeded four tracts to the Copperas Cove Industrial Foundation in May 1989 and, in a simultaneous participation agreement, became the payor of last resort on a note of roughly $505,870 secured by a deed of trust. In December 1991 the Copperas Cove Economic Development Corporation was assigned the city's interest in that agreement and assumed the financial obligation. The corporation had been paying on the note ever since, so a literal, backward-looking reading of the 1993 amendment would have cut off those payments.

The office grounded its answer in the constitutional bar on retroactive laws and laws impairing contracts. Article I, section 16 of the Texas Constitution provides that "[n]o bill of attainder, ex post facto law, retroactive law, or any law impairing the obligation of contracts, shall be made," and the federal Constitution contains a parallel prohibition on states impairing contracts (U.S. Const. art. I, § 10, cl. 1). Those protections reach contracts made by governmental entities (Determan v. City of Irving, 609 S.W.2d 565, 569 (Tex. Civ. App.—Dallas 1980, no writ); Attorney General Opinion DM-31 (1991)). The office quoted Cardenas v. State, 683 S.W.2d 128, 131 (Tex. App.—San Antonio 1984, no writ), for the point that the guaranty is directed against impairing the obligation of contracts, meaning what a party is bound by law to perform, and that any law releasing part of that obligation impairs it. Because applying section 4A(q) to the 1991 note would impair an obligation already in force, the office concluded a court would construe the provision to apply only to debts assumed after its enactment. The legislative history reinforced this: the amendment's sponsor explained on the House floor that it was meant to keep communities from taking on the debt of failed projects in the future, not to undo obligations already on the books.

Citations

Constitutional and statutory provisions discussed:

• V.T.C.S. art. 5190.6, § 4A(q) (1993 bar on a 4A corporation assuming a pre-existing debt)
• Acts 1993, 73d Leg., ch. 1022, § 2 (enacting subsection (q))
• Tex. Const. art. I, § 16 (no retroactive law or law impairing the obligation of contracts)
• U.S. Const. art. I, § 10, cl. 1 (federal contract-impairment clause)
• Tex. Const. art. III, §§ 52, 52a (referenced in footnote regarding the underlying transactions)

Cases discussed:

• Determan v. City of Irving, 609 S.W.2d 565, 569 (Tex. Civ. App.—Dallas 1980, no writ)
• Cardenas v. State, 683 S.W.2d 128, 131 (Tex. App.—San Antonio 1984, no writ)
• Attorney General Opinion DM-31 (1991)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0299
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1994/dm0299.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

August 11, 1994

Honorable Edwin E. Powell, Jr.
Coryell County Attorney
P.O. Box 7[illegible]
Gatesville, Texas 76528

Opinion No. DM-299

Re: Whether section 4A(q) of the Development Act of 1979, V.T.C.S. art. 5190.6, would violate article I, section 16 of the Texas Constitution if applied retroactively (RQ-670)

Dear Mr. Powell:

On behalf of the Copperas Cove Economic Development Corporation (the "development corporation"), you ask about the effect of section 4A(q) of the Development Act of 1979 (the "act"), V.T.C.S. art. 5190.6 (as amended by Acts 1993, 73d Leg., ch. 1022, § 2), which provides as follows:

A corporation under this section may not assume a debt or make any expenditure to pay principal or interest on a debt if the debt existed before the date the city created the corporation.

A letter submitted with your request from the development corporation's attorney states that the development corporation is subject to section 4A. The attorney also provides the following background information:

On May 16, 1989, the City of Copperas Cove deeded four tracts to the Copperas Cove Industrial Foundation. In the Participation Agreement which was executed simultaneously, the City of Copperas Cove became the payor of last resort for a $505,870.36 note secured by a Deed of Trust on the property. On December 3, 1991, the Copperas Cove Economic Development Corporation (EDC) was assigned the City of Copperas Cove's interest in the Participation Agreement, and the EDC assumed its financial obligation.[1] [Footnote added.]

The development corporation's attorney contends that if section 4A(q) is construed to prohibit the development corporation from making payments on the note, it would run afoul of article I, section 16 of the Texas Constitution which provides that "[n]o bill of attainder, ex post facto law, retroactive law, or any law impairing the obligation of contracts, shall be made." The United States Constitution contains a similar prohibition against the impairment of contractual obligations by the states. U.S. Const. art. I, § 10, cl. 1. This constitutional prohibition against laws which retroactively impair contracts applies to contracts made by governmental entities. See Determan v. City of Irving, 609 S.W.2d 565, 569 (Tex. Civ. App.—Dallas 1980, no writ); Attorney General Opinion DM-31 (1991). In Cardenas v. State, 683 S.W.2d 128, 131 (Tex. App.—San Antonio 1984, no writ), the court explained that "the guaranty of the Constitution is directed against the impairment of the obligation of contracts rather than the contract itself, that is, what the party to a contract is required by duty and by law to perform. Any law which releases a part of this obligation, . . . must impair it. . . . The obligation includes the relevant law in force at the time the contract is made." Cardenas, 683 S.W.2d at 131 (citations omitted). Because the statute at issue in that case would have impaired the obligation of a contract if applied retroactively, the court declined to apply its provisions retroactively. Id.

We agree that if section 4A(q) is construed to prohibit the development corporation from making payments on the note, it would run afoul of article I, section 16 of the Texas Constitution because it would retroactively impair the development corporation's obligation to make payments on the note which it undertook in 1991, almost two years prior to the enactment of that 1993 amendment to the act. We believe that in such a case a court would construe section 4A(q) only to apply to debts assumed by a development corporation after its enactment date.

We further note that nothing in the legislative history suggests that the legislature intended section 4A(q) to invalidate existing contracts. The amendment that became section 4A(q) was offered by Representative Holzheauser during a House Committee on Economic Development hearing. In offering the amendment, Representative Holzheauser explained:

It addresses a problem that I brought up the other night about communities being coerced into or feeling that they would have to . . . or could get some benefit from taking on a project that may have failed in the community. Well this just says you can't do that. You can't take on that debt that's already there. It's got to be a [new project].

Hearings on H.B. 2297 Before the House Comm. on Economic Development, 73d Leg. (March 17, 1993) (tape available through House Video/Audio Services Office). We believe it is clear from this testimony that section 4A(q) is intended to prohibit development corporations from assuming existing debts in the future, not to impair any existing obligations.

SUMMARY

Section 4A(q) of the Development Act of 1979, V.T.C.S. art. 5190.6, would violate article I, section 16 of the Texas Constitution if applied retroactively. A court would construe section 4A(q) only to apply to debts assumed by a development corporation after its enactment date.

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

DREW DURHAM
Deputy Attorney General for Criminal Justice

JAVIER AGUILAR
Special Assistant Attorney General

RENEA HICKS
State Solicitor

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Mary R. Grouter
Assistant Attorney General

[1] We infer from the letter that the development corporation was created after May 16, 1989. We do not examine the validity of the underlying transactions you describe. See Tex. Const. art. III, §§ 52, 52a.