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Click here for the full text of this decision FACTS:In 1999, Sedona Contracting Inc. contracted to build a research and technology center for the Texas Department of Transportation and purchased an $11.02 million performance bond with sureties Fidelity & Deposit Co. and Colonial American Casualty & Surety Co. (collectively Fidelity). When Sedona defaulted, TxDOT demanded that Fidelity perform under the bond. Fidelity executed a takeover agreement with TxDOT and hired Faulkner Construction to complete the job. While Faulkner finished the project, cost-related disputes arose between Fidelity and TxDOT, with Fidelity asserting multiple claims for additional money through TxDOT’s administrative dispute-resolution system. Before Fidelity pursued administrative remedies, TxDOT sued Fidelity, claiming that Fidelity had failed to perform under its performance bond and that Sedona’s default had inflicted economic losses on the state. Fidelity counterclaimed, arguing that TxDOT, not Sedona, defaulted on the original contract and the subsequent Takeover Agreement. TxDOT filed a plea to the jurisdiction, arguing sovereign immunity and Fidelity’s failure to exhaust administrative remedies. The trial court denied TxDOT’s plea to the jurisdiction and granted Fidelity summary judgment on its motion that TxDOT had waived immunity. The 3rd Court of Appeals affirmed, holding that 1. TxDOT waived immunity against Fidelity’s counterclaims by filing suit; and 2. the dispute-resolution process in Texas Transportation Code �201.112 applied only to contracts for construction of bridges and roads, not buildings. HOLDING:Vacated and remanded. After the 3rd Court issued its decision in this case, the Texas Supreme Court in 2006 issued Reata Construction Corp. v. City of Dallas, which permits “adverse parties to assert, as an offset, claims germane to, connected with, and properly defensive to those asserted by the governmental entity.” TxDOT, the court stated, initiated this litigation by suing for damages on the performance bond, so TxDOT has no immunity against counterclaims sufficiently related to the state’s bond-enforcement claim. TxDOT retained immunity from suit, however, to the extent that Fidelity’s damages exceeded the amounts offsetting TxDOT’s monetary recovery. The 3rd Court in its decision expressly declined “to sift through the claims of each party and specify which of Fidelity’s claims arise from the State’s suit,” and accordingly also did not restrict Fidelity’s counterclaims to a mere offset of TxDOT’s claims. In light of Reata, the court stated that a trial court must both specify the claims that arise from the state’s suit and limit any recovery to an offset. TxDOT also argued that the trial court lacked jurisdiction, because Fidelity failed to exhaust TxDOT’s dispute-resolution process. But the court found that the Texas Transportation Code’s administrative remedies did not cover the construction contract in question; thus, the trial court has subject-matter jurisdiction, and TxDOT “must participate in the litigation process as an ordinary litigant” � assuming the trial court deems Fidelity’s claims “germane to, connected with, and properly defensive to” TxDOT’s claims. OPINION:Per curiam.

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