Noah S. Bunker Paul Carrell Everett Brew Houston, Jr. W. Andrew Buckholz Scott J. Leighty Jad L. Davis And Holly Clause v. Tracy D. Strandhagen, 03-14-00510-CV

Background

In 2011 Austin Anesthesiology Group physicians sold the practice to AAT; individual physicians (including Strandhagen and the board members) signed employment agreements with AAT and an internal operating agreement among themselves.
The operating agreement included a liquidated-damages clause: if a physician’s employment terminated during the Initial Term (seven years for Strandhagen) except for termination without cause by the company, the terminating physician would pay $500,000 to the non-terminating physicians.
Strandhagen’s employment ended five years into the seven-year term; AAT asserted it terminated her for cause. The board members did not dispute those two facts.
Strandhagen sued the board members under the UDJA, seeking a declaration that the liquidated-damages clause is an unenforceable penalty. The trial court denied the board members’ plea to the jurisdiction and granted Strandhagen summary judgment that the clause was an unenforceable penalty.
The board members appealed, challenging both ripeness/jurisdiction and the grant of summary judgment. The Court of Appeals reversed the summary judgment and remanded, but upheld denial of the jurisdictional plea.

Issues

Issue	Plaintiff's Argument (Strandhagen)	Defendant's Argument (Board members)	Held
Ripeness / jurisdiction to decide penalty defense in UDJA action	Her employment prematurely ended and AAT said it was for cause; that created a matured breach and a real controversy so UDJA relief is proper.	No justiciable controversy because litigation was not imminent and the board members had not threatened enforcement; UDJA cannot adjudicate affirmative defenses.	Denied plea to jurisdiction; claim was ripe because facts giving rise to breach had occurred and UDJA may decide penalty defense even if other proceedings or defenses remain.
Whether liquidated-damages clause is an unenforceable penalty as a matter of law	Clause is a penalty because it fixes $500,000 regardless of timing of breach and thus is a "one size fits all" provision disproportionate to actual harm.	Clause is a reasonable forecast of just compensation: it was narrowly drafted, applies only to early termination (with carve-outs), and parties expressly bargained and labeled it reasonable.	Reversed summary judgment for Strandhagen: she failed to conclusively prove the clause was a penalty on the face of the contract; material fact issues remain (facial unreasonableness not established).
Whether proof of actual damages was required to show unreasonableness	Actual damages evidence not necessary when clause is facially unreasonable; she argued timing should affect harm making clause facially unreasonable.	Actual damages or extrinsic evidence may be needed; here the clause is not facially unreasonable and parties bargained for it.	Court held actual-damages proof is not always required but Strandhagen did not meet her summary-judgment burden to show facial unreasonableness; extrinsic evidence may be needed.
Standing of board members to enforce clause	(Strandhagen argued) Board members lack standing because they would be enforcing Strandhagen’s employment agreement (to which they are not parties).	Board members are parties to the operating agreement that contains the liquidated-damages clause and thus have standing to enforce it.	Court rejected Strandhagen’s standing argument; board members, as operating-agreement signatories, have standing.

Key Cases Cited

Valence Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005) (standard of review for summary judgment)
M.D. Anderson Hosp. & Tumor Inst. v. Willrich, 28 S.W.3d 22 (Tex. 2000) (summary-judgment burden to prove no genuine issue of material fact)
Texas Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217 (Tex. 2004) (standards for plea to the jurisdiction and challenges to jurisdictional facts)
MBM Fin. Corp. v. Woodlands Operating Co., 292 S.W.3d 660 (Tex. 2009) (UDJA covers matured breaches of contract)
Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991) (two-part test for enforcing liquidated-damages clauses and when factual issues may be required)
FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59 (Tex. 2014) (liquidated-damages enforcement requires showing difficulty of estimating harm and reasonable forecast of compensation)
Stewart v. Basey, 245 S.W.2d 484 (Tex. 1952) (invalidating a "one size fits all" liquidated damages clause)
Bonham State Bank v. Beadle, 907 S.W.2d 465 (Tex. 1995) (trial court discretion under UDJA to enter declarations that will serve a useful purpose)