Can a Texas school board pay a law firm a flat fee for legal services without it being an illegal gift of public funds?

Plain-English summary

The Commissioner of Education asked the AG for guidance on whether an independent school district board of trustees could lawfully enter a contract that paid a law firm a minimum flat fee for legal services no matter how many hours the firm worked. The backdrop: the district and three individual trustees had sued to challenge the district's closure and the appointment of a board of managers after the district lost its accreditation over failed accountability ratings. The contract reportedly set a flat fee of $300,000, which at the firm's claimed $400 hourly rate would cover up to 750 hours, with extra hours billed on top. Soon after the fee was paid, a board of managers took control and the trustees lost authority over the district. The Commissioner asked whether the agreement might be an unconstitutional gift of public funds under article III, section 52(a) of the Texas Constitution.

The AG made an important threshold point: it does not construe or approve specific contracts, and it had not even been given a copy of this one. The core questions, whether a particular expenditure serves a public purpose and provides a public benefit, are fact questions a court cannot resolve in the opinion process and that the school district must decide in the first instance, subject to judicial review. So the AG gave general guidance rather than a yes-or-no on this contract.

That guidance tracked the Texas Supreme Court's framework. A school board can spend public money on legal services without violating section 52(a) when the expenditure's predominant purpose is public rather than to benefit private parties, the district keeps sufficient control to ensure the public purpose is met, the district receives a return benefit, and the spending provides a clear public benefit. The AG then addressed the Commissioner's specific worries. An incidental benefit to individual trustees does not by itself raise a constitutional problem if the contract is predominantly for a legitimate public purpose. On control, the AG explained that the swap from trustees to a board of managers is much like outgoing trustees being replaced by incoming ones; what matters constitutionally is not who enforces the controls but whether controls existed when the money was spent, and a legal-services agreement can itself supply that control. On return benefit, only sufficient, not equal, consideration is required, and courts generally do not second-guess the adequacy of consideration unless a gross disparity shows unconscionability, bad faith, or fraud. The AG added that an alleged violation of the disciplinary rule against unconscionable fees is not itself direct evidence of an unconstitutional expenditure, and that a court would be unlikely to judge a contract's constitutionality based on a private party's conduct after the contract was signed, such as refusing to refund unspent funds.

Currency note

This opinion was issued in 2016. 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. The Education Code provisions on boards of managers and school district governance, the Disciplinary Rules of Professional Conduct, and the case law applying article III, section 52(a) may all have developed since this opinion issued, so confirm the current law before relying on the specifics here.

What the opinion meant for those who asked

The Commissioner of Education (as the opinion described it): The opinion told the Commissioner that the AG could not declare the specific flat-fee contract constitutional or unconstitutional, because the controlling questions are fact questions for the school district to decide first, subject to court review. It supplied the article III, section 52(a) test and applied it in general terms to each of the Commissioner's concerns about incidental benefit to trustees, loss of control, return benefit, and the disciplinary rules.

The school district and its governing body (as the opinion described it): The opinion framed the public-purpose determination as one the district's governing body makes in the first instance. It explained that the later appointment of a board of managers, which suspends the trustees' powers, did not change whether control measures were in place when the expenditure was made, and that a legal-services agreement's own terms can provide the required control.

Lawyers and law firms contracting with public bodies (as the opinion described it): The opinion described how a flat or fixed fee is not inherently improper, but noted that the disciplinary rules bar an unconscionable fee and that how a lawyer treats a fixed fee paid up front (for example, depositing unearned funds in an operating account rather than a trust account) can violate the rules. It cautioned that a contract allowing the firm not to perform could raise questions about whether sufficient control over the expenditure was retained.

Common questions

Can a Texas school district pay a law firm a flat fee for legal work?
The opinion did not forbid it. The AG explained that a flat or fixed fee is not inherently unconstitutional, and that a legal-services expenditure is permissible under article III, section 52(a) when it serves a predominantly public purpose, the district retains sufficient control, the district receives a return benefit, and there is a clear public benefit.

Is a flat-fee contract an illegal "gift of public funds" if the firm works fewer hours than expected?
Not necessarily, under the opinion. The AG explained that only sufficient, not equal, consideration is required, and that courts generally do not inquire into the adequacy of consideration unless there is a gross disparity showing unconscionability, bad faith, or fraud. Whether a particular fee passes is a fact question for the district and, ultimately, a court.

Does it matter that a board of managers later took over from the trustees?
The opinion said the constitutional question is whether control measures existed when the expenditure was made, not who is enforcing them afterward. It compared the manager takeover to ordinary turnover when new trustees replace outgoing ones.

If the contract violated the attorney-fee rules, would that make it an unconstitutional expenditure?
Not by itself, under the opinion. The AG found no authority for treating an alleged violation of the Disciplinary Rules as direct evidence of an unconstitutional expenditure; a court would instead apply the Texas Municipal League public-purpose test to decide the constitutional question.

Background and statutory framework

School district trustees have the exclusive power to govern and oversee the district's schools, including authority to sue, be sued, and enter contracts (Tex. Educ. Code § 11.151(a)-(b); id. § 11.1511(c)(4); Dallas Indep. Sch. Dist. v. Finlan, 27 S.W.3d 220, 242 (Tex. App.-Dallas 2000, pet. denied)). When accreditation is revoked, the Commissioner may appoint a board of managers (id. § 39.102(a)(9), (b)), and during that appointment the trustees' powers are suspended while the managers exercise the trustees' powers and duties (id. § 39.112(a)-(b)), a transfer the opinion likened to ordinary staggered-term turnover (id. § 11.059(b)-(c)).

Article III, section 52(a) prohibits authorizing a political subdivision, including a school district, to grant public money to an individual, association, or corporation, and its purpose is to prevent gratuitous grants of public funds for private purposes (Tex. Const. art. III, § 52(a); Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717, 740 (Tex. 1995)). An expenditure for a public purpose that provides a clear public benefit in return is not an unconstitutional grant, and the Texas Supreme Court applies a three-part test: the predominant purpose must be public rather than to benefit private parties, the body must retain sufficient control, and it must receive a return benefit (Texas Mun. League Intergov'tl Risk Pool v. Texas Workers' Comp. Comm'n, 74 S.W.3d 377, 383-84 (Tex. 2002)). An incidental benefit to a private party does not invalidate an expenditure made for the direct accomplishment of a legitimate public purpose (Barrington v. Cokinos, 338 S.W.2d 133, 140 (Tex. 1960)). Contractual terms may themselves supply the required control (Key v. Comm'rs Ct. of Marion Cty., 727 S.W.2d 667, 669 (Tex. App.-Texarkana 1987, no writ)). Only sufficient consideration is required, and courts do not inquire into adequacy absent a gross disparity showing unconscionability, bad faith, or fraud (Parker v. Dodge, 98 S.W.3d 297, 301 (Tex. App.-Houston [1st Dist.] 2003, no pet.)).

The Disciplinary Rules of Professional Conduct define proper attorney conduct, and Rule 1.04 bars an unconscionable fee, defined as one a competent lawyer could not reasonably believe is reasonable (Tex. Disciplinary Rules Prof'l Conduct R. 1.04). A fixed fee paid at the start is not prohibited, but mishandling unearned funds can violate the rules, including the requirement to keep unearned client funds in a trust account (id. R. 1.14; Tex. Comm. on Prof'l Ethics, Op. 611, 2011 WL 5831792, at 2 (2011)). A grievance may be filed under the disciplinary procedure rules (Tex. Rules Disciplinary P. R. 2.10). A court would apply the Texas Municipal League analysis, not a rules violation standing alone, to decide whether an expenditure comports with section 52(a) (Morales v. Hidalgo Cty. Irrigation Dist., No. 13-14-00205-CV, 2015 WL 5655802, at 3 (Tex. App.-Corpus Christi Sept. 24, 2015, pet. denied) (mem. op.)).

Citations

Constitutional and statutory provisions:

• Tex. Const. art. III, § 52(a) (gift of public funds)
• Tex. Educ. Code §§ 11.151(a)-(b), 11.1511(c)(4) (trustee powers)
• Tex. Educ. Code §§ 39.102(a)(9), (b), 39.112(a)-(b) (board of managers)
• Tex. Educ. Code § 11.059(b)-(c) (staggered terms)
• Tex. Disciplinary Rules Prof'l Conduct R. 1.04, R. 1.14
• Tex. Rules Disciplinary P. R. 2.10

Cases:

• Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717 (Tex. 1995)
• Texas Mun. League Intergov'tl Risk Pool v. Texas Workers' Comp. Comm'n, 74 S.W.3d 377 (Tex. 2002)
• Dallas Indep. Sch. Dist. v. Finlan, 27 S.W.3d 220 (Tex. App.-Dallas 2000, pet. denied)
• Barrington v. Cokinos, 338 S.W.2d 133 (Tex. 1960)
• Key v. Comm'rs Ct. of Marion Cty., 727 S.W.2d 667 (Tex. App.-Texarkana 1987, no writ)
• Parker v. Dodge, 98 S.W.3d 297 (Tex. App.-Houston [1st Dist.] 2003, no pet.)
• Morales v. Hidalgo Cty. Irrigation Dist., No. 13-14-00205-CV, 2015 WL 5655802 (Tex. App.-Corpus Christi Sept. 24, 2015, pet. denied)

Texas Attorney General opinions and ethics opinions:

• Tex. Att'y Gen. Op. Nos. KP-0041 (2015), GA-0076 (2003), GA-0078 (2003), KP-0056 (2016), KP-0091 (2016), DM-431 (1997)
• Tex. Comm. on Prof'l Ethics, Op. 611, 2011 WL 5831792 (2011)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0099
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2016/kp0099.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

June 27, 2016

Mr. Mike Morath Opinion No. KP-0099
Commissioner of Education
Texas Education Agency Re: Whether a school district board of trustees
1701 North Congress Avenue may enter into a contract for legal services
Austin, Texas 78701-1494 under a flat fee arrangement (RQ-0088-KP)

Dear Commissioner Morath:

    Your predecessor asked for "guidance about whether an independent school district Board of Trustees ... may lawfully enter into a contract for legal services that provides that the district will pay a minimum flat fee for legal services regardless [of] how many hours are worked by the law firm." [1] Your predecessor explained that a lawsuit was filed by the district and three individual members of the Board of Trustees to challenge the closure of the district and future placement of a board of managers after the district's accreditation had been revoked due to failed accountability ratings. See Request Letter at 1; see also TEX. EDUC. CODE § 39.102(a)(9), (b) (providing for the appointment of a board of managers). According to your predecessor, the contract at issue is reportedly for a flat fee of $300,000 which, at the law firm's alleged hourly rate of $400, would cover up to 750 hours of legal services, beyond which the district would be billed. Request Letter at 1. But, as stated in the request letter, "the Board of Managers assumed control over the district-and the Board of Trustees lost control of the district-subsequent to execution of the contract and payment of the fee." Id. Your predecessor thus asked "whether this agreement may amount to an unconstitutional gift of public funds" under article III, section 52(a) of the Texas Constitution. Id. We have not been provided a copy of the agreement in question, nor does this office construe or approve specific contracts. Tex. Att'y Gen. Op. No. KP-0041 (2015) at 4 (stating that "construction of a contract is beyond the scope of an attorney general opinion"). While we cannot provide a definitive answer regarding the legality of the contract in question, we can provide general guidance about the questions your predecessor asked.

    School district trustees generally "have the exclusive power and duty to govern and oversee the management of the public schools of the district," including the authority to "sue and be sued." TEX. EDUC. CODE § 11.151(a)-(b); see also id. § 11.1511(c)(4) (authorizing a school board to "enter into contracts"); Dallas Indep. Sch. Dist. v. Finlan, 27 S.W.3d 220, 242 (Tex. App.-Dallas 2000, pet. denied) (noting that "[s]chool board trustees have broad authority to expend funds to ... initiate lawsuits in matters relating to their office and to district management"). In the exercise of this duty, a school board must stay within the bounds of article III, section 52(a) of the Texas Constitution. This provision prohibits the Legislature from authorizing a political subdivision, including a school district, to grant public money or anything of value to an "individual, association or corporation." TEX. CONST. art. III, § 52(a). The purpose of article III, section 52(a) is to prevent the gratuitous grant of public funds for private purposes. See Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717, 740 (Tex. 1995). The Texas Supreme Court has recognized that an expenditure of public funds that is for a public purpose and that provides a clear public benefit in return, however, is not an unconstitutional grant of public funds. See Texas Mun. League Intergov'tl Risk Pool v. Texas Workers' Comp. Comm'n, 74 S.W.3d 377, 383 (Tex. 2002). The court articulated a three-part test to determine whether an expenditure of public funds accomplishes a public purpose as contemplated by article III, section 52(a). Id. at 384. Based on that test, the school board's expenditure for legal services would accomplish a public purpose under article III, section 52(a) if (1) the expenditure's predominant purpose is to accomplish a public purpose, not to benefit private parties; (2) sufficient control over the expenditure is retained to ensure that the public purpose is accomplished; and (3) the school district receives a return benefit. See id.; see also Tex. Att'y Gen. Op. No. GA-0076 (2003) at 6-7 (applying the three-part test to a school district expenditure).

    Regarding the first prong of the test, whether a public purpose is served by a particular expenditure as contemplated under article III, section 52(a) raises fact questions that cannot be answered in an attorney general opinion and would be a decision for the governmental body of the school district to determine in the first instance, subject to judicial review. See Tex. Att'y Gen. Op. Nos. GA-0076 (2003) at 7, KP-0056 (2016) at 2. However, an expenditure which incidentally benefits another party is not invalidated under the constitution if it is made for the direct accomplishment of a legitimate public purpose. Barrington v. Cokinos, 338 S.W.2d 133, 140 (Tex. 1960). Thus, an incidental benefit to individual trustees does not raise article III, section 52(a) concerns if the contract is predominantly for the direct accomplishment of a legitimate public purpose of the school district.

    Regarding the second prong, your predecessor contended that "because the ... Trustees ... no longer have authority to control litigation on behalf of the district, they consequently have no means to ensure that the services provided are sufficient to accomplish a public purpose for the district." Request Letter at 2. When a board of managers is appointed to govern a school district, "the powers of the board of trustees of the district are suspended for the period of the appointment," during which time the managers "exercise all of the powers and duties assigned to a board of trustees ... by law, rule, or regulation." TEX. EDUC. CODE § 39.112(a)-(b). In some respects, this transfer of authority is effectively no different than when outgoing trustees whose terms have ended are replaced by incoming trustees. See id. § 11.059(b)-(c) (providing for staggered terms of either three or four years). The principal constitutional concern regarding control measures is not who is implementing them but whether such controls ensuring that the expenditure serves a public purpose exist in the first place. In other circumstances, this office has concluded that an agreement for legal services can itself provide the requisite control to satisfy the requirements of article III, section 52(a). See Tex. Att'y Gen. Op. No. GA-0078 (2003) at 5 (concluding that a commissioners court could find that the terms of a proposed contract for internet legal research services provides sufficient control to ensure that the public purpose is carried out); see also Key v. Comm'rs Ct. of Marion Cty., 727 S.W.2d 667, 669 (Tex. App.-Texarkana 1987, no writ) (providing that contractual terms may suffice to provide the requisite control). Whether sufficient controls exist in this specific contract is a question we cannot answer, but the fact that the trustees have been replaced by a board of managers does not affect whether control measures to ensure the expenditure serves a public purpose were put into place when the expenditure was made. See Request Letter at 2.

    Regarding the third prong, your predecessor questioned the return benefit provided to the district, noting the possibility that the payment could constitute a "windfall" if the law firm worked less than 750 hours. Id. Article III, section 52(a) requires that a return benefit be received in exchange for the expenditure of public funds. Texas Mun. League, 74 S.W.3d at 383. What constitutes a sufficient return benefit in this case could depend on a number of factors in addition to the number of hours of legal services rendered, such as the complexity of the case and the quality of the representation. Only sufficient—not equal—consideration is required to keep a political subdivision's expenditure of public funds from being unconstitutional. Id. at 384. Under contract law principles, a court generally will not inquire into the adequacy of consideration supporting a contract. Parker v. Dodge, 98 S.W.3d 297, 301 (Tex. App.-Houston [1st Dist.] 2003, no pet.). However, "if there is such a gross disparity in the relative values exchanged as to show unconscionability, bad faith, or fraud," a court may examine the adequacy of the contract in the interest of equity. Id. Under such circumstances, a question could arise as to whether the contract provides a return benefit sufficient to satisfy the requirements of article III, section 52(a).

    The Texas Supreme Court has explained that an expenditure of public funds must also provide a clear public benefit in order to comply with article III, section 52(a). See Texas Mun. League Intergov'tl Risk Pool, 74 S.W.3d at 383. Your predecessor alleged that "there is no demonstrable public benefit to challenging closure of the district" and that, instead, the expenditure "ultimately benefits the individual board member plaintiffs rather than the district." Request Letter at 2. Whether the public would benefit from the expenditure is a fact question that would require looking into the background of the contract. Such a determination cannot be made in the abstract and is not appropriate for the opinion process. [2] See Tex. Att'y Gen. Op. No. KP-0091 (2016) at 2 ("[f]act finding is beyond the scope of an attorney general opinion").

    Your predecessor also asked whether an agreement including "a non-refundable flat fee for [the] provision of future legal services" that was in violation of Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct (the "Rules") would violate article III, section 52(a). Request Letter at 2. The Rules generally define proper conduct of attorneys for purposes of professional discipline. See TEX. DISCIPLINARY RULES PROF'L CONDUCT preamble ¶ 10, reprinted in TEX. GOV'T CODE, tit. 2, subtit. G, app. A (Tex. State Bar R. art. X, § 9). Rule 1.04 prohibits a lawyer from charging an "unconscionable fee." Id. R. 1.04. "A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable." Id. R. 1.04(a); see also id. R. 1.04(b)(8) (including "whether the fee is fixed ... before the legal services have been rendered" among factors that may be considered in determining the reasonableness of a fee). The Texas Supreme Court Committee on Professional Ethics has explained that while the Rules "do not prohibit a lawyer from entering into an agreement with a client that requires the payment of a fixed fee at the beginning of the representation," the deposit and treatment of such fees by a lawyer can, under certain circumstances, result in a violation of the Rules. [3] Tex. Comm. on Prof'l Ethics, Op. 611, 2011 WL 5831792, at *2 (2011).

    The Rules provide an avenue for filing a grievance against an attorney under the Texas Rules of Disciplinary Procedure. TEX. RULES DISCIPLINARY P. R. 2.10, reprinted in TEX. GOV'T CODE, tit. 2, subtit. G, app. A-1. However, we find no authority for using an alleged violation of the Rules as direct evidence of an unconstitutional expenditure under article III, section 52(a). To the extent that underlying circumstances forming the basis for an alleged violation of the Rules suggest that an expenditure does not comport with the requirements of article III, section 52(a), a court would rely on the test in Texas Municipal League to make that determination. See, e.g., Morales v. Hidalgo Cty. Irrigation Dist., No. 13-14-00205-CV, 2015 WL 5655802, at *3 (Tex. App.-Corpus Christi Sept. 24, 2015, pet. denied) (mem. op.) (applying the Texas Municipal League analysis to an employment contract in the context of early termination).

    Finally, your predecessor asked, in the event that the district severed the agreement with the law firm, whether the firm's subsequent refusal to refund unspent funds would violate the constitution. Request Letter at 2. As we understand the hypothetical, the expenditure of public funds would have already occurred, and the issue would be whether the refusal of the law firm to issue a refund would change the nature of the return benefit so as to potentially trigger constitutionality concerns. Whether a public purpose is served by a particular expenditure as contemplated under article III, section 52(a) is a determination for a political subdivision to make in the first instance, subject to judicial review. Tex. Att'y Gen. Op. No. KP-0056 (2016) at 2. Because such a determination is generally made at the time the contract is entered into, it is unlikely that a court would consider conduct subsequent to the contract's execution, particularly the actions of a private party, in determining whether the contract itself violates article III, section 52(a). However, if the contract allows for the possibility that the law firm would not perform, it may raise constitutional questions about whether sufficient control over the expenditure was retained to ensure that the public purpose is accomplished.

[1] Letter from Mr. Michael Williams, Comm'r of Educ., to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Dec. 31, 2015), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter"); see also Letter from Mr. Mike Morath, Comm'r of Educ., to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Jan. 8, 2016) (on file with the Op. Comm.) (confirming intention to proceed with the opinion request after succeeding Mr. Williams as Commissioner of Education).

[2] However, even as a theoretical matter, boundaries exist beyond which there is clearly no public purpose. See Tex. Att'y Gen. Op. No. DM-431 (1997) at 1-2 (concluding that a county could not reimburse an incumbent sheriff for attorney's fees incurred in defending an election contest because the contest involved only his personal interest as a candidate and not his interest as a county official or the interests of the governmental entity).

[3] In particular, [a] lawyer is not permitted to enter into an agreement with a client for a payment that is denominated a "non-refundable retainer" but that includes payment for the provision of future legal services rather than solely for the availability of future services. Such a fee arrangement would not be reasonable under Rule 1.04(a) and (b), and placing the entire payment, which has not been fully earned, in a lawyer's operating account would violate the requirements of Rule 1.14 to keep funds in a separate trust or escrow account when the funds have been received from a client but have not yet been earned. Tex. Comm. on Prof'l Ethics, Op. 611, 2011 WL 5831792, at *2 (2011).

                                 SUMMARY

                  Under the test articulated by the Texas Supreme Court, a
         school district's contract for legal services would violate article III,
         section 52(a) of the Texas Constitution if (1) the expenditure's
         predominant purpose does not accomplish a public purpose, but
         instead benefits private parties; (2) sufficient control over the
         expenditure is not retained to ensure that the public purpose is
         accomplished; (3) the school district does not receive a return
         benefit; and (4) the expenditure fails to provide a clear public benefit
         in return. Whether a public purpose is served by a particular
         expenditure raises fact questions that cannot be answered in an
         attorney general opinion and would be a decision for the school
         district in the first instance, subject to judicial review.

                 In utilizing this test to evaluate public expenditures, Texas
         courts have suggested that (1) an incidental benefit to individual
         trustees does not invalidate the expenditure if the contract is
         predominantly for the direct accomplishment of a legitimate public
         purpose of the school district; (2) the principal constitutional
         concern regarding control measures is not who is implementing
         them but whether such controls are put into place to begin with; and
         (3) what constitutes an adequate return benefit depends on a variety
         of specific circumstances but is called into doubt if there is such a
         gross disparity in the relative values exchanged as to show
         unconscionability, bad faith, or fraud.

                To the extent that circumstances forming the basis for an
         alleged violation of the Texas Disciplinary Rules for Professional
         Conduct suggest that an expenditure does not comport with the
         requirements of article III, section 52(a), a court would rely on the
         test articulated by the Texas Supreme Court to make that
         determination. However, it is unlikely that a court would consider
         conduct subsequent to a contract's execution in determining whether
         the contract itself violates article III, section 52(a).

                                        Very truly yours,

                                        KEN PAXTON
                                        Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

BECKY P. CASARES
Assistant Attorney General, Opinion Committee