      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                      NO. 03-06-00441-CV



           Key Science & Technology Associates, Inc., d/b/a Key Associates, Appellant

                                                v.

                    Texas Commission on Environmental Quality, Appellee


     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT
       NO. GN401125, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING



                             MEMORANDUM OPINION

                Following a contested-case hearing, the Texas Commission on Environmental Quality

(“the Commission”)1 ordered appellant, Key Science & Technology Associates, Inc. (“Key”), to

return approximately $685,000 in overpayments for environmental remediation services. Key sought

judicial review. The Travis County District Court affirmed the Commission’s order. On appeal to

this Court, Key argues that the Commission did not follow its own rules in determining the “actual

cost” of the corrective work, misapplied agency law concepts, and erroneously concluded that unpaid

subcontractor invoices were not reimbursable as “actual costs” of the cleanup. We will affirm the

district court’s judgment.




       1
          The Texas Commission on Environmental Quality was known as the Texas Natural
Resource Conservation Commission when this case arose and the Texas Water Commission before
that. See Hallco Texas, Inc. v. McMullen County, 221 S.W.3d 50, 64-65 (Tex. 2006). To avoid
confusion, we refer to the agency as “the Commission.”
                      FACTUAL AND PROCEDURAL BACKGROUND

               In the 1980s, the Commission began requiring owners and operators of leaky

petroleum storage tanks to perform remediation work. The Commission instituted a reimbursement

program to help cover the costs. See 30 Tex. Admin. Code (“Code”) §§ 334.301-.322 (2004).2 The

program allowed direct reimbursement to contractors who performed remediation work on behalf

of owners and operators. See id. § 334.302(j) (contractor may receive reimbursement on behalf of

owner or operator if designated as agent or assignee).

               Between 1997 and 2001, Key obtained direct reimbursement for 285 storage tank

remediation projects on which it served as prime contractor. In each instance, Key obtained

reimbursement by submitting to the Commission (1) an assignment of reimbursement rights to Key,

executed by the relevant owner or operator; (2) a promissory note to Key, executed by the same

owner or operator; and (3) an affidavit executed by Key stating that the owner or operator had fully

paid it for its services via the promissory note. See id., id. § 334.306(b)(7)(E).

               In 2001, a Commission audit revealed that Key had not actually incurred

approximately $685,000 in costs for which it had nevertheless been reimbursed.              See id.

§§ 334.530-.538 (authorizing and providing rules for audits of entities receiving reimbursement).

Part of this amount consisted of subcontractor payments that Key reported to the Commission but

never made, and part of it consisted of subcontractor payments that Key made but got back in

marketing and origination fees. The Commission demanded repayment. See id. § 334.534. Key


       2
         Throughout this opinion we cite the 2004 regulations that were in effect when this dispute
arose. See Frank v. Liberty Ins. Corp., 255 S.W.3d 314, 318 n.3 (Tex. App.—Austin 2008, pet.
denied).

                                                  2
demanded a hearing. See id. §§ 334.535-.536. The administrative law judge who presided over the

hearing found for the Commission, and the Commission subsequently issued a final order requiring

repayment. Key filed a suit for judicial review in Travis County District Court. See Tex. Gov’t

Code Ann. § 2001.171 (West 2008). The district court affirmed the Commission’s order, and Key

perfected this appeal.


                                    STANDARD OF REVIEW

                We review de novo a district court’s determination that an agency order

was supported by substantial evidence.        See Sanchez v. Texas State Bd. of Med. Exam’rs,

229 S.W.3d 498, 511 (Tex. App.—Austin 2007, no pet.). We review the underlying agency order

to determine whether it is supported by substantial evidence. Id. at 510. We presume that it is, and

the appellant has the burden of proving otherwise. Buddy Gregg Motor Homes, Inc. v. Motor

Vehicle Bd. of the Texas Dep’t of Transp., 179 S.W.3d 589, 602 (Tex. App.—Austin 2005, pet.

denied). An agency decision is supported by substantial evidence if “‘some reasonable basis exists

in the record for the agency’s action.’” Id. (quoting Graff Chevrolet Co., Inc. v. Texas Motor Vehicle

Bd., 60 S.W.3d 154, 159 (Tex. App.—Austin 2001, pet. denied)). An agency decision can meet this

standard even if the record evidence preponderates against it, so long as the agency did not act

arbitrarily or without regard to the facts. Id.


                                           DISCUSSION

                Key makes three arguments in support of sixteen points of error. We will address the

arguments in turn.



                                                  3
Argument 1: The Commission Failed to Follow Its Rules Regarding Proof of Payment

                 A petroleum tank owner or operator may obtain reimbursement equal to its “actual

cost” of remediation. Code § 334.309(c). Applications for reimbursement of such costs must

include “proof that the amounts shown on the invoices for which reimbursement is requested have

been paid in full by the claimant.” Id. § 334.306(b)(7). This proof may consist of


       a promissory note issued by the eligible owner or operator to the person who
       performed the corrective action for the claimed amount accompanied by a notarized
       affidavit signed by the person who performed the corrective action, affirming that the
       amounts which the applicant represents as being paid to person who performed the
       corrective action, were paid in full, via the promissory note.


Id. § 334.306(b)(7)(E). Key included promissory notes and affidavits in all of the reimbursement

applications it submitted to the Commission on behalf of owners and operators. As a result, Key

argues, it “proved” the owners’ and operators’ “actual costs” conclusively, and the Code did not

permit an investigation into whether Key actually incurred the costs that it passed on to the owners

and operators.

                 We disagree. Code section 334.532(b) states: “By making payment of claims to

eligible persons . . . , the [Commission’s] executive director makes no statement or admission that

the payments are for necessary, reimbursable, or allowable costs.” Section 334.532(a) states:

“Payment by the agency of a claim for money from the Petroleum Storage Tank Remediation Fund

means that the claim is subject to post-payment audit.” These rules clearly indicate that even though

promissory notes and affidavits may serve as prima facie “proof” of entitlement to reimbursement,

the Commission intended to permit investigation (and adjustment, if necessary) of all



                                                 4
reimbursements paid out of the Remediation Fund. Moreover, under Key’s interpretation of section

334.306(b)(7), contractors would have an absolute right to reimbursement for whatever they chose

to charge their clients, regardless of their services’ objective value.

               An inspection of the promissory notes at issue reveals that they could not have proven

the owners’ and operators’ “actual costs.” While each note indicated the “principal amount” that

Key had charged the owner or operator, each also stated that payment of this amount would come

“solely” from reimbursement funds issued by the Commission. That is, if the Commission

reimbursed Key for less than the amount of the note, Key had no recourse against the owner or

operator to collect the remainder. Thus, each note indicated neither how much money Key actually

expended nor how much it was actually “owed” by the owner or operator. In short, the “principal

amount” listed on each promissory note was virtually meaningless, and the promissory notes did not

actually show that Key had been “paid in full.” The Commission correctly interpreted the Code to

allow further inquiry.

               We reject Key’s interpretation of Code section 334.306(b)(7) because it nullifies other

Code sections, leads to absurd results, and contradicts the Commission’s reasonable interpretation

of the Code. See Tex. Gov’t Code Ann. § 311.021 (presumption that entire statute is intended to be

effective); Buddy Gregg Motor Homes, 179 S.W.3d at 608 (“A statute should not be construed in

a way that leads to absurd conclusions when there is a more reasonable interpretation.”); id. at 602

(“When an administrative agency is charged with a statute’s enforcement and also construes the

statute, the agency’s construction of the statute is entitled to serious consideration as long as the




                                                   5
construction is reasonable and does not contradict the plain meaning of the statute.”). Key’s first

argument is overruled.


Argument 2: The Commission Misapplied Agency Law Concepts

               The Commission concluded that Key acted as an agent for owners and operators in

purchasing subcontractor services.       It also concluded that Key used a company called

Reimbursement Capital, L.L.C. (“RCAP”) as its subagent for purchasing these services. Key

contends that these conclusions are not supported by substantial evidence in the record.

               We disagree. First, all the promissory notes at issue state that Key advanced

remediation costs “on behalf of” owners and operators. Second, Key admits that it acted as owners’

and operators’ agent in requesting and receiving reimbursement from the Commission. These facts

constituted a reasonable basis for the Commission to conclude that Key acted as an agent when it

purchased subcontractor services. See Buddy Gregg Motor Homes, 179 S.W.3d at 602 (agency

decision is supported by substantial evidence if some reasonable basis exists in record for

agency’s action).

               Key counters that because the promissory notes did not make owners and operators

personally liable for all of Key’s expenses, but rather only entitled Key to whatever reimbursements

the Commission might issue, the signatories must not have intended to create an agency relationship.

This argument assumes that principals must be personally liable for all financial obligations incurred

on their behalf by agents. That is not the law. See MortgageAmerica Corp. v. American Nat’l Bank

of Austin, 651 S.W.2d 851, 857 (Tex. App.—Austin 1983, writ ref’d n.r.e.) (“‘In the absence of

terms to the contrary in the agreement of employment, the principal has a duty to indemnify


                                                  6
the agent . . .’”) (emphasis added) (quoting Restatement (Second) of Agency § 438(2)(b) (1958));

see also Restatement (Third) of Agency § 8.14(b) (2006) (“A contract between a principal and an

agent may . . . specify when and to what extent the principal has a duty to indemnify the agent . . . .”).

Thus, promissory notes that guarantee third-party reimbursement but not personal indemnification

are consistent with the existence of an agency relationship. Indeed, such promissory notes were to

be expected here: they allowed Key to be fully compensated3 for servicing owners and operators

who needed to remediate but could not afford personal liability.

                Substantial evidence also supports the Commission’s conclusion that RCAP acted

as Key’s subagent. The Commission found, and Key does not dispute, that the “lines of separation”

between Key and RCAP “were quite porous.” Dr. Morris Key founded, controlled, and made

decisions for both companies. Among other acts indicating that RCAP was Key’s subagent, RCAP

paid subcontractor invoices with money it borrowed from Key. Key asserts that this evidence does

not substantially support the Commission’s subagency conclusion, but it offers no argument or

evidence to support this assertion. Such a conclusory assertion would be unpersuasive even if we

did not presume that the Commission’s conclusion was correct. See Sweed v. City of El Paso,

194 S.W.3d 684, 686 (Tex. App.—El Paso 2006, no pet.) (brief, conclusory statements, unsupported

by legal citations, are insufficient to sustain appellant’s complaint); Buddy Gregg Motor Homes,

179 S.W.3d at 602 (appellate courts presume that agency’s action was supported by substantial

evidence). Key’s second argument is overruled.




        3
        Each promissory note explicitly states that it constitutes “full payment” for Key’s services,
and Key does not claim that the notes ever left it with a shortfall.

                                                    7
Argument 3: Key Was Entitled to Reimbursement Even If It Did Not Pay Its Subcontractors

               Finally, Key argues that paying its subcontractors was not a prerequisite to

reimbursement. Key once again cites Code section 334.306(b)(7), which states that an application

for reimbursement must contain “proof that the amounts shown on the invoices for which

reimbursement is requested have been paid in full by the claimant.” Key argues that because

“claimant” refers to an owner or operator, the only prerequisite to reimbursement is that the owner

or operator has fully paid the invoice submitted to it by its prime contractor. Key argues that it does

not matter whether the prime contractor has paid its subcontractors’ invoices before submitting its

own invoice to the owner or operator. Thus, Key argues, the owners and operators it worked for (and

Key by extension) were entitled to reimbursement regardless of whether Key paid its subcontractors’

invoices.

                 Key makes this argument because it had not fully paid many of its subcontractors’

invoices at the time it received reimbursement from the Commission. In some instances Key simply

withheld payment, while in others Key received “marketing” and “origination” fee offsets that

reduced its out-of-pocket costs by up to fourteen percent. Key nevertheless sought reimbursement

for the full amounts of its subcontractors’ invoices.

               Key’s third argument is a variation on its first, and the argument fails for the same

reasons. As already discussed, Key’s interpretation of Code section 334.306(b)(7) nullifies the

Code’s audit provisions and would permit limitless “reimbursement” for unincurred expenses. We

decline to adopt such an interpretation. See Tex. Gov’t Code Ann. § 311.021 (must presume entire

statute is intended to be effective); Buddy Gregg Motor Homes, 179 S.W.3d at 608 (“A statute



                                                  8
should not be construed in a way that leads to absurd conclusions when there is a more reasonable

interpretation.”). As the Commission noted in its conclusions of law, any subcontractor invoice

that was not paid in full could not be considered a reimbursable “actual cost.” Key’s third

argument is overruled.


                                         CONCLUSION

               The Commission’s final order was supported by substantial evidence in the record,

and the district court properly affirmed it. We affirm the district court’s judgment.



                                              __________________________________________

                                              J. Woodfin Jones, Chief Justice

Before Chief Justice Jones, Justices Puryear and Henson

Affirmed

Filed: July 8, 2009




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