Vergo Patio Gardens, Inc. v. Railroad Commission of Texas ( 2021 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-19-00070-CV
Vergo Patio Gardens, Inc., Appellant
v.
Railroad Commission of Texas, Appellee
FROM THE 200TH DISTRICT COURT OF TRAVIS COUNTY
NO. D-1-GN-17-004723, THE HONORABLE JAN SOIFER, JUDGE PRESIDING
MEMORANDUM OPINION
This appeal arises out of a suit for judicial review of an administrative order. In
the underlying administrative proceedings, Vergo Patio Gardens, Inc., applied for the renewal of
its landfarm permit, but the Railroad Commission of Texas denied the application. Vergo
requested a contested case hearing. A week before the hearing, Vergo and staff for the executive
director of the Commission (Staff) filed a joint motion to dismiss the hearing setting pursuant to
an attached Rule 11 agreement (the Rule 11 Agreement), but the administrative law judge (ALJ)
denied the motion. Following the hearing, the ALJ recommended denying Vergo’s application,
and the Commission entered an order to that effect. The district court affirmed. We conclude
that the ALJ had a ministerial duty to enforce the Rule 11 Agreement that settled the parties’
dispute and that proceeding with the hearing and denying the joint motion to dismiss prejudiced
Vergo’s substantial rights. We therefore reverse and remand. See Tex. Gov’t Code
§ 2001.174(2)(F).
BACKGROUND
Vergo received its original permit to landfarm in 1986. See 16 Tex. Admin. Code
§ 3.8(a)(25) (2018) (R.R. Comm’n, Water Protection) (defining “landfarming” as “[a] waste
management practice in which oil and gas wastes are mixed with or applied to the land surface in
such a manner that the waste will not migrate off the landfarmed area”). In 1998, after
amendments and renewals to that permit, Vergo applied to renew and amend its permit
under the 1996 version of section 3.8 of title 16 of the Texas Administrative Code (Rule 8).
See 16 Tex. Admin. Code § 3.8 (1996) (R.R. Comm’n, Water Protection), repealed by
25 Tex. Reg. 6487, 6488 (2000), adopted by 38 Tex. Reg. 2318 (2013).1 Under Rule 8, Staff
reviews permit applications and makes the initial decision to approve or deny an unprotested
application. See Rule 8(d)(6)(D) (1996). Staff notified Vergo that its permit would not expire
until the Commission had made a final determination on Vergo’s application. See Tex. Gov’t
Code § 2001.054(b). Staff did not take final action on the application until October 2013, when
it denied Vergo’s application. In a letter, Staff claimed that the information submitted with the
application and gathered during the review process demonstrated that Vergo violated Rule 8,
mismanaged oil and gas waste, and may cause or allow pollution to surface and subsurface
waters at the landfarm property. Vergo then requested a contested case hearing.
The Commission initially set the hearing for February 2014. Vergo filed a motion
for continuance, and then the parties filed multiple agreed motions for continuances to conduct
1
Rule 8 has been amended and reorganized over the years. For convenience, we will
use “Rule 8” to refer to the 1996 version and cite to this version as “Rule 8 (1996).”
2
discovery, gather samples, and engage in settlement negotiations. The ALJ granted the requests
for continuance, ultimately setting the hearing for October 2016. In a letter to the parties, the
ALJ stated, “[t]he continuance granted by this ALJ on May 10, 2016 is the last that will be
granted” and “[i]f the parties have not reached a settlement by September of 2016, they should
prepare to go to hearing.” In September, Vergo filed an opposed motion for further continuance
and a motion to reconsider the continuance, but the ALJ denied both.
On September 28, the parties filed a joint motion to dismiss the hearing setting,
explaining that they “have entered into a Rule 11 Agreement allowing the parties to enter a
60-day binding settlement period” and “request that the hearing setting be removed to allow the
parties to resolve this matter without the necessity of a hearing.” The parties attached to the
dismissal motion their signed Rule 11 Agreement—including exhibits—which provided:
1. A joint motion to dismiss the hearing date of October 3, 2016 shall be filed on or no later
than September 30, 2016.
2. Either party shall file a motion to dismiss with prejudice the hearing request to consider
denial of permit no. LF-0032 with prejudice against refilling [sic] on December 2, 2016.
3. Vergo waives any and all claims, demands, rights or interests, whether existing or alleged
to exist now or at any time in the future, at either the administrative or district court level,
relating to the proposed renewal of permit no. LF-0032, or any action of the RRC [the
Commission] relating to such permit.
4. Vergo shall agree to the terms of the May 5, 2016 Settlement Agreement (“Draft Permit”)
attached hereto as Exhibit “A.”
5. Vergo shall, within 45 days of October 3, 2016 (i.e., on or before November 17, 2016),
provide items 1–8 of Exhibit “B” to counsel for the RRC. Any items completed prior to
this 45-day deadline should be submitted as soon as possible. A recommended
submission schedule for items 1-8 is attached hereto as Exhibit “C.”
6. Vergo understands that after review and approval by the RRC, items 1-8 of Exhibit “B”
will be used to supplement and complete the “Draft Permit.” Vergo further understands
and agrees that such documents must be submitted in form and substance that meets
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regulatory requirements of the RRC, and failure to submit documents that meet
requirements will result in non-renewal of permit no. LF-0032.
7. Vergo shall work diligently and cooperatively with RRC Staff to timely submit a
stormwater management plan, as referenced in Exhibit “B,” within 45 days of October 3,
2016 (i.e., on or before November 17, 2016).
8. Vergo shall implement a method for stormwater management consistent with RRC
methods approved by Staff as summarized and attached hereto as Exhibit “D.”
9. The review and approval period for items 1–8, described in Exhibit “B,” shall end 60
days from October 3, 2016 (i.e., on December 2, 2016). All submissions received after
45 days from October 3, 2016 (i.e., after November 17, 2016) are deemed late and shall
not be accepted for review of the permit renewal application.
10. The current permit no. LF-0032, attached hereto as Exhibit “E,” shall expire on
December 2, 2016 (i.e., 60 days from October 3, 2016).
11. After December 2, 2016, Vergo shall not continue operations at the subject site unless the
RRC issues a renewal landfarm permit.
12. The 45 and 60 day deadlines shall begin simultaneously on October 3, 2016. The 45-day
deadline shall end on November 17, 2016 and the 60-day deadline shall end on
December 2, 2016.
In a September 29 letter to the parties, however, the ALJ stated, “I am not inclined to continue
the current hearing dates . . . over a hastily drafted Rule 11 Agreement that may be
unenforceable. I will continue the current hearing dates if presented with a Rule 11 Agreement
with teeth in it.”2 The ALJ then denied the joint motion to dismiss.
After the hearing, the ALJ issued its proposal for decision (PFD), recommending
that Vergo’s application be denied and concluding that Vergo failed to prove that renewal of the
2
In the September 29 letter, the ALJ stated two reasons why the Rule 11 Agreement
might be unenforceable. First, the ALJ asserted that the second paragraph discussed a hearing
request to consider denial of the permit, but the hearing request is to consider the renewal of the
permit. Second, the ALJ claimed that the third paragraph is vague and implies that Vergo waives
its right of appeal, but there is a “loophole” because some issues “may be fast-tracked straight
into the court of appeals, skipping the district court level.” The Commission neither raises nor
defends the ALJ’s stated reasons in its briefing to this Court.
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permit would prevent the pollution of groundwater and surface water resources, as required by
Rule 8. The Commission adopted the findings of fact and conclusions of law—substituting one
finding of fact to correct a date—and ordered Vergo’s application denied. Vergo filed a motion
for rehearing challenging Staff’s experts and evidence submitted to support the PFD’s findings
of fact, the ALJ’s and Commission’s application of Rule 8, and the ALJ’s denial of the Rule 11
Agreement settling the case. The Commission denied the motion. Vergo sought judicial review
in district court, and the district court affirmed. Vergo now appeals to this Court.
STANDARD OF REVIEW
“Final orders of the Commission are ‘deemed to be prima facie valid and [are]
subject to review under the substantial evidence rule.’” Westlake Ethylene Pipeline Corp.
v. Railroad Comm’n, 506 S.W.3d 676, 681 (Tex. App.—Austin 2016, pet. denied) (quoting H.G.
Sledge, Inc. v. Prospective Inv. & Trading Co., 36 S.W.3d 597, 602 (Tex. App.—Austin 2000,
pet. denied)) (alteration in original). The substantial evidence rule, as codified in the
Administrative Procedure Act (APA), requires reversal or remand if the appellant’s substantial
rights have been prejudiced because the administrative findings, inferences, conclusions, or
decisions: (1) violate a constitutional or statutory provision, (2) exceed the agency’s statutory
authority, (3) were made through unlawful procedure, (4) are affected by other error of law,
(5) are not reasonably supported by substantial evidence, or (6) are arbitrary or capricious or
characterized by abuse of discretion or clearly unwarranted exercise of discretion. Tex. Gov’t
Code § 2001.174(2). “We apply this analysis without deference to the district court’s judgment.”
Jenkins v. Crosby Indep. Sch. Dist., 537 S.W.3d 142, 149 (Tex. App.—Austin 2017, no pet.)
(citing Texas Dep’t of Pub. Safety v. Alford, 209 S.W.3d 101, 103 (Tex. 2006) (per curiam)).
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DISCUSSION
On appeal, Vergo raises three issues: (1) whether the ALJ erred by breaching its
ministerial duty to enter an order dismissing the case when presented with the Rule 11
Agreement and joint motion to dismiss, (2) whether Vergo met its burden to demonstrate that
there was no potential for polluting subsurface waters, and (3) whether the Commission met its
burden of good cause to terminate Vergo’s permit. Because we conclude that the first issue is
dispositive of this appeal, we do not address Vergo’s other issues. See Tex. R. App. P. 47.1, .4.
Texas Rule of Civil Procedure 11 applies only to agreements made
during pending litigation, which we have held does not include the course of an
administrative proceeding. See Castillo v. Texas Bd. of Prof’l Eng’rs, No. 03-10-00124-CV,
2010 WL 5129127, at *4 (Tex. App.—Austin Dec. 14, 2010, no pet.) (mem. op.) (“Because the
parties entered into the agreement during the course of the administrative proceeding, it was
governed by the provisions of the APA, not by the rules of civil procedure.”); see also Tex. R.
Civ. P. 11 (“Unless otherwise provided in these rules, no agreement between attorneys or parties
touching any suit pending will be enforced unless it be in writing, signed and filed with the
papers as part of the record, or unless it be made in open court and entered of record.” (emphasis
added)). Nevertheless, the APA provides that parties to a contested case may informally dispose
of the matter by agreed settlement, unless precluded by law. Tex. Gov’t Code § 2001.056. And
at the time of the hearing, the Commission’s rules provided, “No stipulation or agreement shall
be considered unless it is in writing and signed by the parties or their authorized representatives,
or dictated into the record during the course of the proceeding.” 16 Tex. Admin. Code § 1.123(2016) (R.R. Comm’n, Stipulations), repealed by 42 Tex. Reg. 1214, 1214 (2017), adopted by
42 Tex. Reg. 4131, 4131 (2017). Because the language of former Rule 1.123 is substantially
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similar to the language of Texas Rule of Civil Procedure 11 and given the lack of case law
interpreting former Rule 1.123, case law discussing Rule 11 agreements may provide guidance in
our interpretation of the rule. See Shamrock Psychiatric Clinic, P.A. v. Texas Dep’t of Health
& Human Servs., 540 S.W.3d 553, 560 (Tex. 2018) (per curiam) (concluding that because State
Office of Administrative Hearing’s Rule 155.415 and Rule 11 “are nearly identical in language,”
“we agree that cases discussing Rule 11 agreements may guide our interpretation of . . .
Rule 155.415”).
“Rule 11 agreements are contracts relating to litigation” and “[t]o be effective, a
Rule 11 agreement must consist of ‘a written memorandum which is complete within itself in
every material detail, and which contains all of the essential elements of the agreement.’” Id. at
560–61 (quoting Padilla v. LaFrance, 907 S.W.2d 454, 460 (Tex. 1995)). In construing a Rule
11 agreement, we apply “the same rules as a contract.” Id. at 560 (citing Trudy’s Tex. Star, Inc.
v. City of Austin, 307 S.W.3d 894, 914 (Tex. App.—Austin 2010, no pet.)). Thus, construing the
agreement as a contract, we consider whether the Rule 11 Agreement contained the essential
elements to informally dispose of the matter.
Here, there is no dispute that the Rule 11 Agreement was in writing, signed by the
parties, and filed in the administrative proceeding. See id. at 561 (noting that agreement was in
writing, signed, and filed with court as required by rules). The Commission describes the Rule
11 Agreement as “an agreement-to-attempt-to-agree to settle” and argues that “the Rule 11
agreement was not itself a settlement of the issues” but “merely provided for the possibility of
settlement if certain underlying conditions were met.” We disagree. The Rule 11 Agreement
provides that Vergo “shall” agree to the terms of the attached draft permit; that Vergo “shall”
provide necessary items and “shall” take certain actions for the Commission to supplement and
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complete the draft permit; that Vergo’s failure to provide the documents “will result in non-
renewal of permit”; that the attached permit to the Rule 11 Agreement “shall” expire on
December 2; and that Vergo “shall not” continue operations after December 2 without receiving
a renewal landfarm permit. Under the Rule 11 Agreement, nothing is left for Vergo to agree to;
the essential elements of the agreement are in place. If Vergo failed to perform, it would result
in a nonrenewal of the permit; if Vergo did perform, the Commission would supplement and
complete the permit. See Lesikar v. Moon, 237 S.W.3d 361, 367 (Tex. App.—Houston [14th
Dist.] 2007, pet. denied) (“The word ‘shall’ as used in contracts is generally mandatory,
operating to impose a duty.” (citing Roberts v. Clark, 188 S.W.3d 204, 210 (Tex. App.—Tyler
2002, pet. denied))). Moreover, under either scenario, Vergo has waived its “claims, demands,
rights or interest” relating to the renewal of the permit or to any action taken by the Commission
related to the permit under the Rule 11 Agreement. And Exhibit B of the Rule 11 Agreement
expressly states, “By participating in the Rule 11 Agreement, Vergo Patio Gardens relinquishes
all rights to a hearing regarding the renewal of Permit no. LF-0032.”
The Commission’s only explanation for why the Rule 11 Agreement did not settle
all the issues related to the permit renewal is that “the Rule 11 agreement specifically references
a separate settlement agreement that was yet to be signed by Vergo.” But the referenced
“separate settlement agreement”—Exhibit A of the Rule 11 Agreement—is a draft permit titled
“PERMIT TO LANDFARM CERTAIN NONHAZARDOUS OIL AND GAS WASTES.”
Exhibit A does not require Vergo’s signature: the only signature block was for a Commission
manager, and above the signature block it states, “This authorization is granted subject to review
and cancellation should investigation show that such authorization is being abused.” We
disagree that Vergo’s signature was required for the referenced “separate settlement
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agreement”—i.e., the renewal permit—to be issued. See Rule 8(d)(6)(A) (1996) (providing that
permits are issued by Commission). Accordingly, we conclude that the Rule 11 Agreement
contained the essential elements to informally dispose of the matter.3
The Texas Supreme Court recently explained that administrative law judges
generally have a ministerial duty to enforce a valid Rule 11 agreement. See Shamrock
Psychiatric Clinic, 540 S.W.3d at 562. The relevant background facts of Shamrock Psychiatric
Clinic are as follows. Shamrock and the Texas Health and Human Services Commission’s
Office of Inspector General corresponded regarding consolidating a “payment-hold case with the
soon-to-be-filed overpayment-recoupment case,” which was memorialized in the Inspector
General’s status report and in the administrative law judge’s order relying on that report to
continue the hearings. Id. at 556–57, 561. Nevertheless, the Inspector General later sent
Shamrock a final notice of overpayment, which included notice of a 15-day appeal requirement,
but Shamrock did not timely appeal. Id. at 557. The Inspector General “notified Shamrock of
the State’s intent to dismiss the overpayment and payment-hold cases due to Shamrock’s failure”
to timely appeal, and Shamrock responded with a letter referencing their agreement to
consolidate the cases. Id. “Disregarding the letter,” the Inspector General filed a motion to
dismiss the pending case. Id. The administrative law judge initially denied the motion, finding
that the parties had entered into an “agreement that the payment hold and final notice of
overpayment cases would be heard together.” Id. But the Inspector General then withdrew its
“payment-hold case” and argued that the administrative law judge no longer had jurisdiction to
enforce the agreement because no contested case was pending on either issue. Id. at 558. The
3
For these reasons, we also disagree with the stated rationale of the ALJ in describing
the Rule 11 Agreement as potentially unenforceable.
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administrative law judge then dismissed the case. Id. Shamrock sued in district court for “a writ
of mandamus directing the administrative law judge to enforce the alleged Rule 11 agreement
between the parties,” alleging that the administrative law judge “had a ministerial duty to enforce
or abide by the Rule 11 agreement created by the parties’ communications.” Id. at 558–59.
The Texas Supreme Court, interpreting the Rule 11 agreement as a contract,
concluded that a valid Rule 11 agreement existed and that it was complete within itself and
contained the essential elements of the agreement. Id. at 561. The Court then noted, “[t]he
power to conduct adjudicative proceedings necessarily includes . . . ‘the power to accept and act
upon an agreement between the parties that removes from dispute and litigation a subsidiary
issue of fact or law’” and “[w]ielding this power is not only a judge’s right, but a judge’s
responsibility,” given the “‘ministerial duty to enforce a valid Rule 11 agreement.’” Id. at 561–
62 (quoting Fortis Benefits v. Cantu, 234 S.W.3d 642, 651 (Tex. 2007); Cities of Abilene
v. Public Util. Comm’n, 146 S.W.3d 742, 747 (Tex. App.—Austin 2004, no pet.)). Accordingly,
the Court concluded that “the administrative law judge failed to perform a purely ministerial act”
to enforce the Rule 11 agreement. Id. at 562.
Following Shamrock Psychiatric Clinic, we conclude here that the ALJ likewise
failed to act in accordance with this responsibility and abused its discretion by failing to comply
with its ministerial duty. The Commission argues that the joint motion to dismiss did not request
that the ALJ dismiss the case; instead, the joint motion “merely asked the ALJ to ‘remove’ the
hearing setting to allow the parties to enter settlement negotiations.” But the joint motion
described the Rule 11 Agreement as “allowing the parties to enter a 60-day binding settlement
period” for the provision of additional information to “supplement” and “complete” the renewal
permit and requested that the hearing setting be removed “to allow the parties to resolve this
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matter without the necessity of a hearing.” (Emphasis added.) Accordingly, we construe the
joint motion not as a request to allow settlement negotiations, but as a request to enforce the
Rule 11 Agreement to resolve the dispute by settlement agreement, not by hearing.
The Commission also claims that “[r]egardless, Vergo waived its complaint by
failing to adequately state it in its motion for rehearing.” “The motion for rehearing is a statutory
prerequisite to an appeal in a contested case and must be sufficiently definite to notify the agency
of the error claimed so that the agency can either correct or prepare to defend the error.” Scally
v. Texas State Bd. of Med. Exam’rs, 351 S.W.3d 434, 444–45 (Tex. App.—Austin 2011, pet.
denied) (internal citations omitted); see Tex. Gov’t Code § 2001.145 (providing that “[a] timely
motion for rehearing is a prerequisite to an appeal in a contested case”). “The standard is one of
fair notice” and does not require “a briefing of the law or facts.” Scally, 351 S.W.3d at 445. The
Commission asserts that Vergo did not mention in its rehearing motion “the legal basis that
Vergo now raises: that the ALJ had [a] ‘ministerial duty to enforce’ the Rule 11 agreement to
dismiss the case.” But Vergo’s rehearing motion had a section titled “Denial of Settlement
Agreement” and expressly stated that “the parties entered into a Rule 11 Agreement settling this
case”; “the [ALJ] refused to enter the agreement”; the parties were “forced” “to utilize their
resources trying this case” and “to attend a three-day hearing”; and “the ALJ wrongfully denied
the settlement agreement.” We conclude that Vergo’s rehearing motion met the standard of fair
notice on the legal issue of whether the ALJ should have enforced the Rule 11 Agreement.
Compare, e.g., Burke v. Central Educ. Agency, 725 S.W.2d 393, 398 (Tex. App.—Austin 1987,
writ ref’d n.r.e.) (finding waiver), with Morgan v. Employees’ Ret. Sys., 872 S.W.2d 819, 821
(Tex. App.—Austin 1994, no writ) (concluding error preserved).
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In sum, the parties entered into a voluntary settlement agreement,4 but the ALJ
refused to enforce the agreement by proceeding with the contested case hearing. Vergo
preserved error and presented the ALJ’s error to the Commission in its rehearing motion, but the
Commission entered an order denying the permit application based on the hearing and resulting
PFD. In so doing, Vergo’s substantial rights—including those created by the Rule 11
Agreement—were prejudiced because Vergo was “forced” “to attend a three-day hearing” and
“utilize [its] resources trying this case” when the dispute had already been settled by the Rule 11
Agreement. We therefore hold that the Commission’s decision was “arbitrary and capricious or
characterized by an abuse of discretion or clearly unwarranted exercise of discretion,” and the
APA requires that we reverse and remand this case. See Tex. Gov’t Code § 2001.174(2)(F).
CONCLUSION
For these reasons, we reverse and remand for further proceedings consistent with
this opinion.
__________________________________________
Melissa Goodwin, Justice
Before Justices Goodwin, Baker, and Kelly
Reversed and Remanded
Filed: February 10, 2021
4
“It is the policy of this state to encourage the peaceable resolution of disputes[.]” Tex.
Civ. Prac. & Rem. Code § 154.002; see Transport Ins. v. Faircloth, 898 S.W.2d 269, 280 (Tex.
1995) (noting that “[p]ublic policy favors the amicable settlement of controversies” because
settlement “avoid[s] the uncertainties regarding the outcome of litigation, and the often
exorbitant amounts of time and money to prosecute or defend claims at trial”); Schlumberger
Tech. Corp. v. Swanson, 959 S.W.2d 171, 178 (Tex. 1997) (“Texas law favors and encourages
voluntary settlements and orderly dispute resolution.”).
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