Monday, August 13, 2007

Houston Court of Appeals issues new opinion in SOB dispute: Webworld Marketing Group v. Thomas (Tex.App.- Aug. 2, 2007)

Webworld Marketing Group, L.L.C. v. Tommie Thomas, No. 01-04-00749-CV (Tex.App.- Houston [1st Dist.] Aug. 2, 2007)(Opinion by Justice Hanks)(SOB regulation)(Before Justices Nuchia, Keyes and Hanks)
Appeal from 215th District Court of Harris County
Trial court judge: Hon. Levy Benton


We withdraw our opinion and judgment of March 22, 2007 and issue the following in its stead.

Webworld Marketing Group, L.L.C. ("Webworld"), appellant, filed this action against Tommy Thomas ("the Sheriff") (1) alleging that the Sheriff unlawfully denied Webworld's application for a Sexually Oriented Business ("SOB") permit. At trial, a jury was asked to find "from a preponderance of evidence" (2) (1) whether the location of Webworld's proposed enterprise was located a minimum of 1500 feet from any dwelling in existence at that location at least 30 days before Webworld's application dated March 19, 2001, (2) whether Webworld knowingly made a misleading statement of material fact by omitting or falsifying information in its application for an SOB permit, (3) whether the Sheriff arbitrarily denied Webworld's application for an SOB permit, and (4) whether the Sheriff acted in good faith in denying the application for an SOB permit. All issues were answered in favor of Webworld. No conclusions of law were requested from nor issued by the trial court.

The Sheriff filed a motion for judgment notwithstanding the verdict ("JNOV") arguing that there was legally insufficient evidence to support the jury's findings on questions 1, 3, and 4. Without stating its reasons, the trial court granted the Sheriff's motion for JNOV and denied all relief Webworld sought against the Sheriff. In its sole point of error on appeal, Webworld contends that the trial court erred in granting the JNOV. We affirm the judgment of the trial court.


In March of 2000, Steve Fisher, managing director of Woodbridge Investment Company, purchased some property on which he wanted to establish a gentleman's club. Fisher, who had experience with SOBs, was aware of the importance of finding land that was not within 1500 feet of any residential use because of the requirements to get a permit for an SOB. See Tex. Loc. Gov't Code Ann. § 243.007 (Vernon 2005); Harris County, Tx., Ordinance 83-1812 (August 6, 1996) ("Ordinance").

Within 1500 feet of the proposed SOB, there was a two-story parrot shop owned by Joe Melvin and his wife. Fisher drove by the parrot shop almost daily, and it was his impression that no one was living there. In December 2000, Webworld was formed to lease the land from Fisher and run the SOB. In March 2001, Fisher climbed a ladder in the middle of the day to investigate the Melvins' upstairs property and took some pictures through the window. He could see all the way to the back wall and noticed that it was largely unfinished, "bare stud walls, no insulation, no Sheetrock, no electrical or plumbing, no furniture, stored bird cages," and appeared to be commercial storage for the shop downstairs. He acknowledged that it looked like there was some sort of construction underway in the space. Fisher testified that he did an Internet check on Harris County Appraisal District website regarding the property which indicated that it was an F-1 commercial property.

After his investigation, Fisher called Darla Gideon of Webworld and advised her that there was nothing in the parrot shop and that she should apply for the SOB permit. Gideon testified that she drove by the parrot shop "many" times between January 2001 and March 2001 and saw "no vehicles parked out front. No activity. The upstairs had no blinds or drapes on it." There was a sign on the door, which clearly stated that the store would be closed during that time, December through March, for approximately three months, as it was every year while the Melvins were on vacation. Gideon also testified that none of the other store owners in the area told her anything different about the parrot shop. Gideon testified that, before filing the application for the permit, she believed that there was no toilet, running water, or electricity in the upstairs of the parrot shop.

On March 19, 2001, Webworld filed for the SOB permit and certified that there was no residence within 1500 feet of the SOB site. In accordance with the requirements for an SOB permit, Webworld sent letters to all property owners within the 1500-foot radius, advising them of its intention to establish the SOB. The property owners then had the opportunity to write a letter to the Sheriff with any objections to the SOB's permit being issued.

After receipt of this notice, the Melvins wrote a letter to the Sheriff explaining that they had a "residence" above the parrot shop within the 1500-foot radius. In the letter, Mr. Melvin stated that he and his wife moved in as residents at the parrot shop "in early February of [2001]" and "had applied for and received an occupancy permit 4 years or so ago." The Melvins had purchased this land in 1996 and applied for a permit to build first the shop on the ground level and then a garage apartment upstairs where they would eventually live. As part of the permitting process, the Melvins submitted drawings to the City of Houston regarding the planned construction. The Melvins testified that they planned to do the construction slowly as funds became available to avoid going into debt. The Melvins also testified that they stayed upstairs periodically, beginning in 1998, after the framing was completed, while they continued working on the building. They stated that they stayed there, on average, two or three nights a month during this time. The Melvins also applied for a homestead exemption; however, because they already owned another home in Montgomery County and could only have one homestead, the exemption was denied. Due to lack of funding, little progress was made on the building construction in 1999. The Melvins testified that they still lived at the shop occasionally throughout 1999. They also testified that they occasionally stayed at the shop between the Spring of 2000 and December 24, 2000. In January 2001, Mr. Melvin testified that he paid $22,000 to a contractor to install dry wall and basic plumbing and do electrical work in the upstairs space.

The Sheriff sent an investigator to the parrot shop to speak with the Melvins. The investigator went upstairs to inspect the property and requested that the Melvins provide an affidavit concerning the time that they spent upstairs in the parrot shop, recognizing that, if the parrot shop was a dwelling on or before February 19, 2001, the permit would be denied. In an apparent contradiction to his earlier letter to the Sheriff, Mr. Melvin stated in the affidavit that "there was a few times in February" 2001 when they stayed overnight at the parrot shop and that "[f]or the period of time beginning in March [2001], we live in the residence" above the parrot shop. (Emphasis added.) The affidavit also set forth the frequency of the Melvins' occupancy of the parrot shop during 2000 and in March 2001.

We first began living in this building in Spring of 2000. After we moved into the building in Spring 2000, we moved out approximately December 24, 2000. We did not move in again until March 2001.
. . .
From the period of time beginning in March, we live in the residence above the parrot shop approximately 3 and ½ days a week, beginning Thursday and continuing through Sunday. Occasionally during this period of Thursday through Friday, however, we do stay at our Montgomery County residence.

The affidavit did not state that the Melvins had started residing in the space on February 19, 2001, 30 days before the date of the Webworld permit application.

On May 15, 2001, Webworld received a letter from Major Juan Jorge, detective bureau commander for the Sheriff, denying its SOB permit on the ground that it violated Section VIII(e)(4) of the Ordinance because (1) the SOB was within 1500 feet of a dwelling, (2) Webworld had knowingly made a misleading statement by providing an incorrect address of the SOB, and (3) Webworld had knowingly made a misleading statement because "the proposed building which was to be a cabaret will not fit in the area of your lot area . . . ." Gideon testified that, after receiving Major Jorge's letter, she made several telephone calls to Reliant Houston Lighting & Power ("HL&P"), and she was told that, for the property in question, HL&P had assigned "5, 6, 7 addresses. Some half addresses to light poles and things like that." Gideon was able to obtain the new address for the planned building on the Woodbridge property. Gideon explained that, when the application was filed, the land was ". . . raw. Trees, mud, dirt, animals." There was no building in place.

Just over one month later, Webworld's attorney wrote a letter acknowledging that it had discovered that the address for the SOB was wrong on the application, and he advised the Sheriff's office of the correct address. Attached to the letter from Webworld's lawyer were at least two documents. One was a map that Webworld had created of the property in question with the correct addresses in place. "Becky" from HL&P signed the map and stated that she agreed that the addresses were correct. The second was a letter from an engineering firm stating that it had designed the building, and the building would fit on the pad site. Gideon never heard back from the Sheriff. At trial, the Melvins never testified as to the specific date that they started residing upstairs at the parrot shop in 2001. Major Jorge testified that, contrary to the statements in his letter denying the permit on May 15, 2001, he had no evidence that Webworld knowingly made a misstatement or a misleading statement of material fact by omitting or falsifying information on its SOB permit application. Major Jorge testified that having the incorrect address on the application would not be a basis for denying a permit if (1) the location was known to the Sheriff, (2) his department knew which structures existed within 1500 feet of the proposed building site, and (3) the address was corrected in time. Major Jorge testified that, before denying the permit, the Sheriff knew of the location of the proposed SOB site, and he admitted that the Sheriff had to know of the physical location in order to determine whether the parrot shop was within 1500 feet of the proposed building. The court also heard testimony that the Ordinance does not require that the proposed building fit within the pad site.

The Sheriff's investigator who inspected the upstairs space was no longer employed with the office at the time of trial, and no one at the Sheriff's office could testify as to what the space looked like 30 days prior to Webworld's application. However, four witnesses and an appraiser for the Harris County Appraisal District ("HCAD") testified to having been upstairs in the shop prior to March 2001. Roberta Jaeger, a parrot shop customer, testified that, in 2000, the upstairs looked "like it was being lived in" with a bed that had bedding on it, an electrical hookup, and a basic toilet, and there was sheet rock on the walls when she recalled visiting the premises in the Spring of 2001. Charles Cashdollar, a business associate of the Melvins, testified that, when he saw the space in 1999, it looked "three-quarters" of the way finished, with a bed and plumbing, and it looked like it had been lived in. He also testified that, in 1999 and 2000, he recalled seeing some furniture in the space. Carl Kluge, an appraiser with HCAD, testified that, in 1998, the upstairs looked like "a garage apartment type of situation." It looked like the electrical and plumbing were being "roughed in," and there were no fixtures in at that time. He testified that, even if HCAD designated the building as commercial, a dwelling may exist on the property. Joseph Gueno, a parrot shop customer, testified that, at some time during his visits to the property in mid-1999 through 2000, he saw some walls, air conditioners, and cabinets that had been installed and a bed, a dresser, and some clothes. Larry Wilson, an employee of the Melvins who also helped them work on the upstairs space, testified that the space started to look like a "dwelling" in the Fall or Winter of 2000 and, by this time, the Melvins had been spending the night and placed some furniture in the space.

Substantial Evidence Rule

Although the parties did not address the issue of jurisdiction in several rounds of briefing, it is well established that in cases such as this involving a suit for judicial review to a district court from an order of an administrative agency, the district court, in reaching its decision, is bound by the substantial evidence rule. City of Dallas v. Furrh, 541 S.W.2d 271, 273 (Tex. Civ. App.--Texarkana 1976, writ ref'd n.r.e.); City of Dallas v. Stevens, 310 S.W.2d 750, 755 (Tex. Civ. App.--Dallas 1958, writ ref'd n.r.e.). (3)

Neither the trial court nor the court of appeals has been granted the authority by the State of Texas to review the agency's factual determinations under any other standard. As the Texas Supreme Court explained in Thomas v. Stanolind Oil & Gas Co., the review of agency decisions is not handled like other typical civil matters:

A proceeding of this nature is not comparable to a proceeding in an ordinary civil suit in which the fact findings of the jury are attacked on the ground of the insufficiency of the evidence to sustain them. In that proceeding, trial courts and courts of civil appeals are clothed with the authority, not possessed by this court, to set aside such findings if they are thought to be against the great weight and overwhelming preponderance of the evidence. But those courts are not clothed with authority to set aside fact findings of an administrative agency made within the scope of its statutory powers on that ground. The Legislature has clothed administrative agencies with special powers to perform special functions and in reviewing fact findings of such agencies no question of the preponderance of the evidence is involved. The question is whether or not there is any substantial evidence affording reasonable support for such findings and the orders entered thereunder. That is a question of law of which this court, along with the lower courts, has jurisdiction and in the exercise of that jurisdiction we consider the record before us.
198 S.W.2d 420, 421 (Tex. 1946) (emphasis added).

Under the substantial evidence rule, the party seeking to set aside an agency's order has the burden of proving that it is not supported by substantial evidence. See Mercer v. Ross, 701 S.W.2d 830, 831 (Tex. 1986). "Substantial evidence is more than a mere scintilla, but less than a preponderance of the evidence." City of Houston v. Tippy, 991 S.W.2d 330, 334 (Tex. App.--Houston [1st Dist.] 1999, no pet.). Under this rule, if the evidence before the court, taken as a whole, is such that reasonable minds could have reached the same conclusion reached by the agency, then the order must be sustained. Trapp v. Shell Oil Co., 198 S.W.2d 424, 440-41 (Tex. 1946); White v. City of Dallas, 517 S.W.2d 344, 348 (Tex. Civ. App.--Dallas 1974, no writ). The court reviewing the agency's decision must not put itself in the position of the agency and substitute its findings for that of the agency even if it concludes that the overwhelming preponderance of evidence is against the agency's decision. City of San Angelo v. Boehme Bakery, 144 Tex. 281, 286-87, 190 S.W.2d 67,70 (Tex. 1945). The determination of whether an agency's decision was supported by substantial evidence is a question of law to be reviewed de novo by the district court and the court of appeals. See Thomas, 198 S.W.2d at 421.
"An administrative decision is generally not arbitrary and capricious if it is supported by substantial evidence." Hinkley v. Tex. State Bd. of Med. Exam'rs, 140 S.W.3d 737, 743 (Tex. App.--Austin 2004, pet. denied) (citing Gerst v. Nixon, 411 S.W.2d 350, 354 (Tex. 1966)). "However instances may arise in which the agency's action is supported by substantial evidence, but is arbitrary and capricious nonetheless. One such instance is when a denial of due process has resulted in the prejudice of substantial rights of a litigant." Id. (quoting Health Facilities Comm'n v. Charter Med-Dallas, Inc., 665 S.W.2d 446, 454 (Tex. 1984)). As Texas courts have held, the agency decision must be remanded if the court concludes that "the agency has not actually taken a hard look at the salient problems and has not genuinely engaged in reasoned decision-making." Starr County v. Starr Indus. Servs., Inc., 584 S.W.2d 352, 356 (Tex. Civ. App.--Austin 1979, writ. ref.d n.r.e.).


Under the substantial evidence rule, as a matter of law, there was substantial evidence introduced in the trial court which reasonably supported the Sheriff's denial of a permit to Webworld. As noted in Sections I and II of the Ordinance, the State of Texas has granted Harris County the authority to regulate sexually oriented businesses within its jurisdiction and to make factual determinations regarding the regulation of such entities. The Harris County Commissioners Court has delegated this authority to the Sheriff. As also noted in Section II, the State of Texas has provided for a suit for judicial review of the factual determinations made by the Sheriff under the Ordinance. This review is to be made only under the substantial evidence rule.

Pursuant to Section VIII(e)(4) of the Ordinance, the Sheriff may deny a permit to operate an SOB that is not located a minimum of 1500 feet from any dwelling in existence at that location at least 30 days prior to the date of the application for the permit. (4) At trial, the Sheriff presented more than a scintilla of evidence to the trial court to support his conclusion that the Melvins had taken up residence at the parrot shop by February 19, 2001, 30 days prior to the filing of Webworld's permit application, and it was undisputed that the parrot shop was within 1500 feet of the proposed SOB. Reasonable minds could have reached these same factual findings based on the evidence presented regarding the Melvins' stays at the shop, the improvements in the upstairs area as a residence and the Melvins' first letter to the Sheriff. These facts are a valid basis under the Ordinance to deny the permit. A review of the entire record also established that the Sheriff presented evidence that he followed established internal procedures in investigating the Melvins' claims of residing at the parrot shop. While it is troubling that the Sheriff could not explain all of the statements in his letter to Webworld denying the permit application or why he did not respond to subsequent letters from Webworld, the Sheriff's actions did not deny Webworld with its right to due process. (5) Accordingly, the Sheriff's conduct was not arbitrary or capricious.

In Stevens, the Dallas Court of Civil Appeals addressed factual and procedural circumstances analogous to those in this case. Stevens, 310 S.W.2d at 751-52. In Stevens, the plaintiff sued the chief of police for failing to issue a permit for a dance hall pursuant to a city ordinance because the Chief found that the dance hall constituted a public nuisance. The trial court submitted, under a preponderance of evidence standard, the issues of whether the dance hall constituted a public nuisance and whether the chief's conduct was arbitrary and capricious. The jury found in favor of the plaintiff. Citing the Texas Supreme Court's opinion in Thomas v. Stanolind Oil & Gas Co., the court of civil appeals reviewed the jury verdict and held that both it and the trial court could only review the chief's decision under the substantial evidence rule as a matter of law, not under a preponderance of the evidence standard. Stevens, 310 S.W.2d at 755. Disregarding the jury verdict, the court of civil appeals found that there was substantial evidence supporting the chief's decision and held that the trial court should have entered a judgment in favor of the chief. We reach the same conclusion in this case. Having reached this conclusion, we need not address the Sheriff's appellate points.


Accordingly, we affirm the trial court's judgment in favor of the Sheriff.
George C. Hanks, Jr.

Panel consists of Justices Nuchia, Keyes, and Hanks.
Justice Keyes, concurring and dissenting.

1. The caption on this appeal as filed spells the Sheriff's name "Tommie Thomas." We use the correct spelling in the body of both the majority opinion and the concurring and dissenting opinion.
2. At trial, neither party objected to the court's instruction that the issues be considered by the jury under the "preponderance of evidence" standard.
3. Subject-matter jurisdiction concerns a court's power over cases. It stems from the doctrine of separation of powers, and aims to keep the judiciary from encroaching on subjects properly belonging to another branch of government. Subject-matter jurisdiction cannot be waived or conferred by agreement, must be considered by a court sua sponte, and can be raised for the first time on appeal. See Tex. Ass'n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 445-46 (Tex. 1993).
4. Under the Ordinance, a "dwelling" is a house, duplex, apartment, townhome, condominium, mobile home or any other building used as a "residence." The term "residence" means, personal presence at some place of abode with no present intention of definite and early removal and with purpose to remain for undetermined period, not infrequently, but not necessarily combined with design to stay permanently.
5. Webworld does not allege that the Sheriff violated its rights under either the United States or Texas constitutions in denying its permit.

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