Strata Resources, a Texas Partnership Steven Bland Epps And Charles W. Brandes, Individually v. State of Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-06-00393-CV

Strata Resources, a Texas Partnership; Steven Bland Epps; and
Charles W. Brandes, Individually, Appellants

v.

The State of Texas, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT
NO. D-1-GV-01-003566, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING

OPINION

Strata Resources and its one-time general partners, Stephen Bland Epps and

Charles W. Brandes, appeal a judgment imposing administrative and civil penalties and requiring

reimbursement for funds expended to plug certain wells formerly operated by Strata. They bring five

issues contending that the well-plugging expenses imposed on Epps were pre-petition debts

discharged in Epps’s bankruptcy, that they are not liable for plugging expenses on two of the wells

because the Railroad Commission acted improperly in converting these wells into water wells for

the landowner’s benefit, that the Commission failed to properly offset well-plugging expenses with

the well equipment’s salvage value, that the civil penalties imposed are not supported by the

evidence, and that the attorney’s fees award is not supported by the evidence. We will affirm the

judgment in part, reverse and render in part, and reverse and remand in part.
 BACKGROUND

The State’s claims for well-plugging reimbursement and penalties were tried to the

bench, and the following summarizes the pertinent evidence presented. Epps and Brandes were

Strata’s sole partners. Strata was the operator on four sets of oil wells at issue in these proceedings:

(1) the Salinas Lease, Well Nos. 1, 2, and 4; (2) the Oliveira Lease, Well Nos. 1, 2A, 3, and 4; (3) the

Q.K. Barber Lease, Well No. 1; and (4) four wells on the Guzman or Ramirez leases. On November

24, 1997, after Strata had become the operator on the Salinas and Oliveira wells, Brandes withdrew

from the partnership. However, no new form P-4 was filed after Brandes withdrew from the

partnership.1 See 16 Tex. Admin. Code § 3.58(a) (2007).2 The district court concluded that Brandes

had remained personally liable for maintaining the Salinas and Oliveira wells and for those leases,

and appellants do not challenge those holdings.

The Commission issued an administrative order with respect to each of the four sets

of wells. The first of the four orders (docket number XX-XXXXXXX) was issued September 12, 2000,

and required Strata and Epps, individually, to plug the Q.K. Barber Lease, Well No. 1, and assessed

1
A form P-4 is a Producer’s Transportation Authority and Certificate of Compliance.
2
For convenience, we cite to the current versions of statutes and rules except where language
in the prior version affects our analysis or the outcome.

Rule 3.58(a) provides:

The Commission form P-4 establishes the operator of an oil lease, gas well, or other
well; certifies responsibility for regulatory compliance, including plugging wells in
accordance with §3.14 of this title (relating to plugging); and identifies gatherers,
purchasers, and purchasers’ commission-assigned system codes authorized for each
well or lease. Operators shall file form P-4 for new oil leases, gas wells, or other
wells; recompletions; reclassifications of wells from oil to gas or gas to oil;
consolidation, unitization or subdivision of oil leases; or change of gatherer, gas
purchaser, gas purchaser system code, operator, field name or lease name.

2
Strata and Epps, individually, an administrative penalty of $4,000. The remaining three orders were

issued November 9, 2000. One of the November 9 orders (docket number XX-XXXXXXX) involved

the Guzman Lease, Well No. 12; the Ramirez Lease, Well No. 14; the Ramirez-Guzman Unit Lease,

Well No. 7; and the Guzman-Ramirez Lease, Well No. 8, and assessed Strata and Epps, individually,

an administrative penalty of $8,000. Another November 9 order (docket number XX-XXXXXXX)

required Strata, Epps, and Brandes, individually, to plug the Salinas Lease, Well Nos. 1, 2, and 4.

The order also assessed an administrative penalty against all three appellants, individually, in the

amount of $6,000. In its final November 9 order (docket number XX-XXXXXXX), the Commission

required Strata, Epps, and Brandes, individually, to plug the Oliveira Lease, Well Nos. 1, 2A, 3, and

4, and assessed an administrative penalty in the amount of $8,000. Each of the orders gave

appellants thirty days to comply with its terms. Appellants neither filed motions for rehearing nor

complied with any of the four orders.

After issuing these orders, the Commission approached the owner of the land on

which the Salinas No. 4 and Oliveira No. 4 were located. At the request of the landowner, the

Commission took over and reconditioned these wells and converted them into water wells. Epps

testified that he was not notified of the Commission’s action with respect to these wells.

On October 18, 2001, the State brought suit against Strata, Epps, and Brandes under

the natural resources code to enforce its orders. See Tex. Nat. Res. Code Ann. § 89.043(a)

(West Supp. 2007). The State sought administrative and civil penalties for failure to comply with

the orders to plug abandoned wells. The State also sought reimbursement for well-plugging costs,

prejudgment interest, attorney’s fees, and court costs. In addition, the State asked the trial court for

3
an injunction requiring appellants to plug their remaining wells or otherwise bring those wells into

compliance with Commission rules.

On August 3, 2003, while the suit was pending, Epps filed for Chapter 13 bankruptcy.

According to Epps, the Commission was given notice of the bankruptcy, appeared at the hearing, and

filed a claim for administrative penalties. On September 10, 2004, Epps’s case was converted from

a Chapter 13 bankruptcy case to a Chapter 7 bankruptcy case. Epps was discharged from Chapter 7

bankruptcy on December 27, 2004.

On December 15, 2005, following Epps’s discharge from bankruptcy, the district

court heard evidence and arguments in the case. Following trial, the court rendered judgment

imposing $14,000 in administrative penalties, $10,000 in civil penalties, and $36,863.20 in

reasonable plugging expenses jointly and severally from Strata, Epps, and Brandes. This portion of

the judgment reflected penalties and reimbursement expenses imposed regarding the Salinas and

Oliveira wells.3 Strata, Epps, and Brandes were also ordered, jointly and severally, to plug the

Oliveira No. 3. The district court also imposed $12,000 in administrative penalties and $10,000 in

civil penalties jointly and severally from Strata and Epps in connection with the remaining two sets

of wells and enjoined Strata and Epps, jointly and severally, to plug the Q.K. Barber Well No. 1,

according to Commission rules. In addition, the court ordered that the State recover attorney’s fees

in the amount of $7,500 and court costs in the amount of $343 jointly and severally from all

appellants.

3
These amounts, according to the district court’s subsequent findings of fact and conclusions
of law, represented $17,705.70 in plugging expenses, $6,000 in administrative penalties, and $5,000
in civil penalties related to the Salinas wells; and $19,157.50 in plugging expenses, $8,000 in
administrative penalties, and $5,000 in civil penalties related to the Oliveira wells.

4
 The district court subsequently made findings of fact and conclusions of law. Strata,

Epps, and Brandes appealed.

DISCUSSION

Plugging cost reimbursement

In their first issue, appellants argue that the cost of plugging the wells was a pre-

petition debt that was discharged by Epps’s discharge from Chapter 7 bankruptcy. The State

disagrees. Additionally, the State brings a cross-point in which it urges that the plugging cost

reimbursement debt was not discharged in bankruptcy because the Commission had no notice

of the bankruptcy.

While Strata, Epps, and Brandes argue this issue collectively, only Epps filed for

bankruptcy and raised the affirmative defense of discharge. We also note that Epps’s argument

regarding discharge is limited to his liability for plugging costs, not the administrative or civil

penalties. Consequently, this issue concerns only Epps’s liability for plugging-cost reimbursement.

Discharge of pre-petition debt

Under the bankruptcy code, whether a claim for payment of the type at issue in this

case is discharged depends on when that claim arose. The bankruptcy code defines a “claim” as a:

(A) right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives
rise to a right to payment, whether or not such right to an equitable remedy
is reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, or unsecured.

5
11 U.S.C.A. § 101(5) (West Supp. 2008). As the statute explicitly states, whether a claim is

unliquidated, contingent, unmatured, or unsecured is immaterial. The bankruptcy code requires only

that the elements giving rise to liability occurred before the bankruptcy petition was filed.

Congress intended a broad construction of the term “claim” to permit the broadest

possible relief in bankruptcy court. Johnson v. Home State Bank, 501 U.S. 78, 83-86 (1991); In re

National Gypsum, 139 B.R. 397, 405 (Bankr. N.D. Tex. 1992). As the National Gypsum court

observed:

The legislative history of the Code reflects Congress’ intent that the term “claim” be
given broad interpretation so that all legal obligations of the debtor, no matter how
remote or contingent will be able to be dealt with in the bankruptcy case. The courts
accordingly have given a broad and expansive reading to the term “claim.”

National Gypsum, 139 B.R. at 405 (internal citations omitted). Thus, courts must look to

the earliest possible date upon which a claim may arise, so as to maximize the scope of a discharge.

Id. at 404-09.

Whether a claim is a pre-petition claim requires an examination of the underlying

substantive law. Id. at 405. At issue here are provisions of the natural resources code governing the

plugging and replugging of oil and gas wells. The legislature authorized the Commission to plug

or replug oil and gas wells in certain circumstances:

(a) If the commission determines at a hearing under Section 89.041 of
this code that a well has not been properly plugged or needs
replugging, the commission, through its employees or through a
person acting as agent for the commission, may plug or replug the
well if:

6
 (1) the well was properly plugged according to rules in effect at the time
the well was abandoned or ceased to be operated; or

(2) neither the operator nor nonoperator properly plugged the well, and

(A) neither the operator nor nonoperator can be found; or

(B) neither the operator nor nonoperator has assets with which to
properly plug the well.

Tex. Nat. Res. Code Ann. § 89.043(a). After the Commission plugs or replugs a well under section

89.043(a), the Commission may order the operator to reimburse plugging costs and may enforce its

order by filing suit, and:

(3) if the commission plugs the well, the commission:

(A) by order may require the operator to reimburse the commission for
the plugging costs; or

(B) may request the attorney general to file suit against the
operator to recover those costs;

Id. § 89.043(c)(3). Thus, it is only after the Commission plugs a well that the Commission may

order reimbursement for plugging costs from the well operator. In other words, the cause of action

is not ripe until the Commission actually plugs the well. See id. § 89.083(f) (West Supp. 2007) (“If

the commission plugs a well under Sections 89.043 through 89.044 of this code, the state has a cause

of action for all reasonable expenses incurred in plugging or replugging the well and not recovered

under Section 89.085 of this code or through reimbursement to the commission.”) (emphasis added).

Epps argues that, under the natural resources code, even if the State’s reimbursement

claim was not ripe before Epps filed his bankruptcy petition, the State’s contingent claim arose for

7
bankruptcy purposes when Strata failed to comply with the Commission’s plugging orders, thirty

days after the orders were issued. To support its argument, Epps relies chiefly on National Gypsum.

139 B.R. 397. The issue in National Gypsum was whether future environmental response and

resource damage costs under the Comprehensive Environmental Response, Compensation, and

Liability Act (CERCLA)4 were “claims” within the meaning of the bankruptcy code. Id. at 403.

According to the court, “[a] claim exists only if before filing of the bankruptcy petition, the

relationship between the debtor and the creditor contained all the elements necessary to give rise to

a legal obligation—‘a right to payment’—under the relevant non-bankruptcy law.” Id. at 405. Even

if the claims under the applicable statutory provisions are not yet ripe for adjudication at the time the

bankruptcy petition is filed, as long as “all the elements that can give rise to liability” have occurred

pre-petition, the claim is a pre-petition claim that is discharged in bankruptcy. Id.

Similar to the claims at issue here, the CERCLA claims in National Gypsum were not

ripe until after the cleanup. “Liability is not assessed until after the EPA has investigated a site,

decided what remedial measures are necessary, and determined which potentially responsible persons

will bear the costs.” Id. (quoting In re Combustion Equip. Assoc., Inc., 838 F.2d 35, 37

(2d Cir. 1988)). Although the amount of the claim may be unknown pre-petition, in light of an

underlying statutory scheme in which speedy remediation is promoted by requiring cleanup before

suit can be brought for reimbursement and in light of Congress’s intent that the term “claim” be

given a broad interpretation, the court ultimately held that “all future response and natural resource

4
Under CERCLA, private parties that incur costs in cleaning up hazardous substances may
bring suit against certain statutorily defined responsible parties to recoup those costs. 42 U.S.C.A.
§ 9607(a)(4)(B) (West 2005).

8
damages costs based on pre-petition conduct that can be fairly contemplated by the parties at the time

of Debtors’ bankruptcy are claims under the Code.” Id. at 409.

Other cases interpreting the interplay between environmental cleanup statutes and the

bankruptcy code also support Epps’s position. For example, addressing the interplay between the

bankruptcy code and CERCLA, some courts have applied a foreseeability analysis to determine at

what point CERCLA claims arose or were contingent. See, e.g., In re Chicago, Milwaukee, St. Paul

& Pac. R.R., Co., 974 F.2d 775 (7th Cir. 1992); Mesiti v. Microdot, Inc., 156 B.R. 113 (Bankr. N.H.

1993). A claim was foreseeable under CERCLA, for example, where parties knew that the

hazardous substance had been released, that response costs would be incurred, that such a hazardous

release likely fell within the purview of CERCLA, and that derailment of the debtor’s train had

caused the hazardous release. Chicago, 974 F.2d at 787. Though still a contingent claim, the

bankruptcy debtor could be tied to a known release of hazardous substances; therefore, the claim had

arisen under CERCLA at the time of bankruptcy. Id. at 786.

The Fifth Circuit has employed a similar analysis in its interpretation of the interplay

between the bankruptcy code and environmental statutes. For example, addressing an environmental

liability claim against the debtor, the Fifth Circuit affirmed the bankruptcy court’s determination that,

because the claimant became aware of the hazardous release before the close of the bankruptcy case

and because the claimant had information that would allow a connection to be made between the

debtor and the hazardous release, the claim arose pre-petition. In re Crystal Oil Co., 158 F.3d 291,

296-97 (5th Cir. 1998).

The Fifth Circuit has also adopted a similar test for non-environmental claims,

interpreting the term “claim” broadly in favor of discharge. Attempting to define the scope of

9
“claim” in considering whether a claim for tort liability arose pre-petition, the court explained that

“a claim arises at the time of the debtor’s negligent conduct forming the basis for liability only if the

claimant had some type of specific relationship with the debtor at that time.” Lemelle v. Universal

Mfg. Corp., 18 F.3d 1268, 1276 (5th Cir. 1994). Applying this test, the court held that the tort-

liability claim did not arise pre-petition because the injury occurred three years after the bankruptcy

petition was filed and no pre-petition relationship had existed between the parties. Id. at 1277.

In another case, the Fifth Circuit reviewed certain state court claims against the

claimant’s ex-husband to determine whether those claims arose pre- or post-petition. In re Egleston,

448 F.3d 803, 812-14 (5th Cir. 2006). The state court settlement order between the parties had

ordered the ex-husband to pay alimony to the ex-wife. Id. at 805. Six months later, the ex-husband

filed for bankruptcy. Id. He then failed to make some of the alimony payments and was held in

contempt of court. Id. at 806-07. Unable to pay her bills without the alimony payments, the ex-wife

lost both her home and her car. Id. at 807. A state court again found the ex-husband in contempt

and, among other things, ordered him to pay certain sums to compensate his ex-wife for her lost

house and car. Id. Affirming the judgment of the lower courts, the Fifth Circuit held that the

portions of the state court judgment at issue arose pre-petition and, therefore, represented the ex-

husband’s liability for discharged debt. Id. at 812-14. The court reasoned that the state court awards

had been made to compensate the ex-wife for her loss of the house and the vehicle and that she had

been unable to continue making payments as a direct result of her ex-husband’s failure to make

alimony payments. Id. at 813. The ex-husband had breached his obligation to make payments pre-

petition. Id. In addition, foreclosure proceedings on the house had begun pre-petition, and the car

10
was “up for repossession” pre-petition. Id. Although the debts had not matured pre-petition, they

arose pre-petition and were, therefore, discharged under the bankruptcy code’s “broad definition of

‘claim.’” Id. at 814.

The cases cited by the State to support its position that the claim did not exist at the

time the bankruptcy petition was filed are unpersuasive. In one case, the issue was whether an action

of the Department of Environmental Resources (DER) was an action to enforce a money judgment

under section 362(b)(5) of the bankruptcy code and, therefore, an action subject to the automatic

stay. Penn Terra, Ltd. v. Department of Envtl. Res., 733 F.2d 267, 272 (3d Cir. 1984). Contrary to

the State’s interpretation, the court in Penn Terra determined whether the actions of the DER were

an attempt to enforce a money judgment; the court did not determine whether a pre-petition order

to take environmental correction actions constituted a “claim” under section 101(5). Id. The court

concluded that the suit brought by DER was brought as an equitable action to prevent future harm,

not as an action to enforce a “money judgment” because a money judgment must result in the

“adjudication of liability for a sum certain.” Id. at 275-78. Thus, according to the court, the “police

powers” exception to the automatic stay provision found in section 362(b)(5) was applicable.5

5
Section 362(b)(5) provides:

(b) The filing of a petition under section 301, 302, or 303 of this title does not
operate as a stay

(5) under subsection (a)(2) of this section, of the enforcement of a
judgment, other than a money judgment, obtained in an action or
proceeding by a governmental unit to enforce such governmental
unit’s police or regulatory power

11 U.S.C.A. § 362(b)(5) (West Supp. 2008).

11
Id. at 278-79. The court did not address what constitutes a “claim” under section 101(5). See

id. at 274-79.

In another case cited by the State, the issue was, similarly, whether the EPA’s

enforcement action against Commonwealth qualified as the enforcement of a money judgment

under section 362(b)(5) of the bankruptcy code. Commonwealth Oil Ref. Co. v. EPA, 805 F.2d 1175

(5th Cir. 1986). The State correctly states the court’s holding that the EPA’s order was an exercise

of the EPA’s police or regulatory powers and not an action to enforce a money judgment; therefore,

the automatic stay did not apply to the EPA’s actions. This holding, however, has no application to

the present case.

In the third case cited by the State to support its position, the issue was whether the

automatic stay provision applied where the debtor’s acts occurred pre-petition but the resulting cause

of action arose post-petition. In re M. Frenville Co., 744 F.2d 332, 333 (3d Cir. 1984). A&B, a

certified public accounting firm, had been engaged by M. Frenville Co., Inc., as an independent

auditor and accountant and, in this capacity, prepared financial statements for Frenville. Creditors

of Frenville filed an involuntary petition in bankruptcy against Frenville. Id. Several banks also

filed suit against A&B, alleging that the financial statements had been negligently and recklessly

prepared. Id. A&B sought to include Frenville in this proceeding to obtain indemnification or

contribution from Frenville for any loss suffered by A&B as a result of the banks’ suit. Id. at 333-34.

The bankruptcy judge, however, refused to lift the automatic stay, which barred A&B’s action for

indemnification and contribution. Id. at 334.

According to the court, the applicability of the automatic stay depended on whether

the claim arose pre-petition or post-petition. Id. at 336. More specifically, the determination to be

12
made was at what point the claimant had a right to payment for indemnity or contribution. Id. Under

New York law, a third-party complaint for contribution or indemnity may only be brought after the

defendant (A&B) serves his answer in the suit brought by the plaintiff (the banks). Id. at 337. A

claim for contribution or indemnification does not accrue at the time of Commission of the

underlying act but at the time of payment of the judgment stemming from a claim on the underlying

act. Id. at 337. Thus, before suit was brought by the banks, A&B had no claim or cause of action

against Frenville. Id. at 337. A&B would only have a right to payment from the banks if A&B were

found liable to the banks. Id. Therefore, once suit was brought by the banks, even before A&B filed

its answer, A&B would have an unmatured, unliquidated, disputed claim.6 Id. At the time the

bankruptcy petition was filed, the banks had not filed suit; therefore, A&B had no claim against

Frenville. Id.

Here, the State is in a position analogous to the banks in Frenville. It is the State that

has the right to bring suit against Epps, not some other third party. The State had a right to payment

thirty days after Epps failed to comply with Commission orders even though its claim had not yet

been filed and was, therefore, unmatured, unliquidated, and disputed. Under section 101(5),

however, even though the claim was unmatured, unliquidated, and disputed, the elements giving rise

to liability occurred before the bankruptcy petition was filed. Consequently, the State’s claim arose

pre-petition. See 11 U.S.C.A. § 101(5).

6
The court emphasized that, had an indemnity contract existed between the banks and
A&B, A&B would have had a contingent right to payment even before the banks filed suit; however,
no such contract existed in this case. In re M. Frenville Co., 744 F.2d 332, 337 (3d Cir. 1984).

13
 We note that all three cases cited by the State interpret the automatic stay provisions

of the bankruptcy code. To the extent that those provisions apply here, they support Epps’s rather

than the State’s position. Section 362 requires that the filing of a petition in bankruptcy operates as

a stay of:

the commencement or continuation, including the issuance or employment of
process, of a judicial, administrative, or other proceeding against the debtor that was
or could have been commenced before the commencement of the case under this title,
or to recover a claim against the debtor that arose before the commencement of the
case under this title

11 U.S.C.A. § 362(a)(1) (West Supp. 2008) (emphasis added). The automatic stay would apply to

the State’s claim, as the claim “could have been commenced” thirty days after Strata failed to comply

with the Commission’s orders of September and November 2000. Conversely, in Frenville, for

example, the claim at issue was an action for indemnity. 744 F.2d at 335. Under New York law,

the claim could not be filed until the defendant served his answer in the suit brought by the plaintiff.

Id. The suit was not initiated by plaintiffs until fourteen months after bankruptcy was filed;

therefore, the automatic stay did not apply. Here, however, the State could have plugged the wells

and then filed its claim for indemnity at any time following thirty days of Strata’s noncompliance

with the Commission’s order.

Broadly summarizing its arguments, the State asserts that “[i]n Texas, unlike other

federal environmental laws, the right to payment does not come into existence when the violation

occurs; rather, in Texas, the Commission’s right to payment only exists if and only if the

Commission plugs or replug [sic] a well.” In essence, the State is arguing that the underlying

14
substantive federal and state and state environmental laws operate differently despite the similarities

in procedures by which reimbursement claims arise and are filed. The State, however, cites no

authority for this proposition, and the cases cited and discussed above in support of this proposition

either do not apply or offer no support for the State’s position.

We conclude that the State’s claim arose before the bankruptcy was filed and,

therefore, assuming the State had notice of the claim, the reimbursement claim against Epps should

have been discharged in his bankruptcy. Accordingly, we sustain Epps’s first issue.

Notice

Under section 523(a)(3) of the bankruptcy code, “Exceptions to Discharge,” a debtor

is not discharged from any debt that is:

(3) neither listed nor scheduled under section 521(1) of this title, with the name,
if known to the debtor, of the creditor to whom such debt is owed, in time to
permit—

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of
this subsection, timely filing of a proof of claim, unless such creditor
had notice or actual knowledge of the case in time for such timely
filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this
subsection, timely filing of a proof of claim and timely request for a
determination of dis-chargeability of such debt under one of such
paragraphs, unless such creditor had notice or actual knowledge of the
case in time for such timely filing and request

11 U.S.C.A. 523(a)(3) (West Supp. 2008). Here, there is no evidence, and Strata does not assert, that

the plugging expenses reimbursement claim was a listed or scheduled debt.7 Consequently,

7
Although Strata’s Exhibit 5 appears to show that Strata listed the State as a creditor under
the name of Ronald R. DelVento, who was the chief of the Bankruptcy and Collections Division at
the Attorney General’s Office, there is no evidence that any debts to the State were scheduled.

15
discharge here turns on whether the State had “notice or actual knowledge of the case in time for”

timely filing of a proof of claim and timely request for a determination of dischargeability. The

district court found that “[t]he Commission had notice or actual knowledge of the bankruptcy of

Stephen Bland Epps.”

In its cross-point, the State argues that the plugging-cost reimbursement liability could

not have been discharged in Epps’s bankruptcy because the evidence is insufficient to support the

trial court’s finding that the State had notice of the bankruptcy proceeding. In reply, Epps argues that

the State had the burden of proof on this issue but failed to present any evidence to prove that it had

no notice. Further, according to Epps, even if Epps had the burden of proof on the notice issue, the

record contains sufficient evidence to support the court’s judgment.

Discharge in bankruptcy is an affirmative defense. Tex. R. Civ. P. 94; In re Haga,

131 B.R. 320, 327 (Bankr. W.D. Tex. 1991); In re Anderson, 72 B.R. 495, 496 (Bankr. Minn. 1987).

The affirmative defense of discharge establishes a prima facie defense to any claim brought against

the debtor for a pre-petition debt. In re Haga, 131 B.R. at 327. It is the debtor’s burden to establish

discharge, and as part of its burden, the debtor must show that the creditor had notice or actual

knowledge of the case in time to file a proof of claim and request for a determination of

dischargeability. Id.; Walters v. Hunt, 146 B.R. 178, 183 (Bankr. W.D. Tex. 1992). Thus, Epps has

the burden of showing that the State had notice or actual knowledge of the case in time to file a proof

of claim and request for determination of dischargeability.

When a party challenges the legal sufficiency of the evidence supporting an adverse

finding on an issue on which it does not have the burden of proof, that party must demonstrate on

appeal that there is no evidence to support the adverse finding. Croucher v. Croucher, 660 S.W.2d

16
55, 58 (Tex. 1983). In reviewing a no evidence point, we consider all of the evidence in the light

most favorable to the prevailing party, indulging every reasonable inference in that party’s favor.

Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 285-86 (Tex. 1998). If there

is more than a mere scintilla of evidence to support the finding, the evidence is legally sufficient, and

we will overrule the issue. Haggar Clothing Co. v. Hernandez, 164 S.W.3d 386, 388 (Tex. 2005).

When the evidence of a vital fact is “so weak as to do no more than create a mere surmise or

suspicion of its existence, the evidence is no more than a scintilla and, in legal effect, is no

evidence.” Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex. 2004) (quoting Kindred

v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex. 1983)).

The State maintains that, pursuant to section 523(a)(3), there is no evidence that it

had notice of the bankruptcy proceedings. Further, even if there is evidence of notice, the State

argues, there is no evidence establishing when the proceeding occurred, and it was Epps’s burden

to establish that the State had “notice or actual knowledge of the case in time for such timely filing

and request.” See 11 U.S.C.A. § 523(a)(3)(B). Therefore, according to the State, Epps cannot be

discharged from its debt for plugging costs.

Although the State is correct that no evidence establishes when the referenced

proceeding occurred and whether such proceeding occurred in time to allow the State to timely file

its claim, the State conceded in its post-trial brief that it had, indeed, filed a claim in the bankruptcy

proceeding initiated by Epps’s August 3, 2003 bankruptcy petition:

Plaintiff’s claim for administrative penalties is nondischargeable
under federal bankruptcy law. Defendant Steven Bland Epps filed for
bankruptcy protection on August 3, 2003 in the United States
Bankruptcy Court for the Southern District of Texas. The
Commission filed a claim for $22,800.00 in administrative penalties
as an unsecured nonpriority claim.

17
In so stating, the State has conceded that it had actual notice of the bankruptcy sufficient to allow

it to file its claim before the deadline. See 11 U.S.C.A. 523(a)(3)(B).8

Viewing the evidence of notice in the light most favorable to the judgment, we

conclude that there was sufficient evidence to support the district court’s finding that the State had

notice or actual knowledge of Epps’s bankruptcy. See City of Keller, 168 S.W.3d at 829-30.

Accordingly, we overrule the State’s cross-point and hold that Epps’s liability for plugging-expense

reimbursement was discharged in his bankruptcy.

Water-well conversions of Salinas No. 4 and Oliveira No. 4

As Epps’s liability for plugging-cost reimbursement was discharged in his

bankruptcy, appellants’ remaining challenges to the plugging-cost reimbursement award concern

only Brandes and Strata. In their second issue, appellants argue that they should not be responsible

for the plugging costs on the Salinas No. 4 and the Oliveira No 4 because the State converted the

wells to water wells for the benefit of the landowner without notice to appellants. These actions,

appellants maintain, violated the Commission’s own rules and preclude the State from charging the

cost of conversion to appellants. The State responds that, even if the Commission converted the

wells to water wells without giving notice to appellants, the State’s claim for plugging cost

reimbursement is unaffected.

8
Epps also presented some evidence of the filing of his Chapter 13 bankruptcy petition on
August 3, 2003, later conversion to a Chapter 7 case on September 10, 2004, and entry of an order
of discharge on December 27, 2004. When asked whether, during the bankruptcy proceeding which
is shown by Exhibits 4 and 5, a representative of the Commission appeared at any of the hearings
held in that proceeding, Epps responded in the affirmative. Specifically, Epps responded that
Guy Grossman, the director for District 3, had attended the bankruptcy proceedings. He further
testified that, to his knowledge, the Commission was “fully aware of what was going on.”

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 Commission rules allow it to plug dry or inactive wells in the following

circumstances:

(A) After notice and hearing, if the well is causing or is likely to cause the
pollution of surface or subsurface water or if oil, gas, or other formation fluid
is leaking from the well, and:

(i) Neither the operator nor any other entity responsible for plugging the
well can be found; or

(ii) Neither the operator nor any other entity responsible for plugging the
well has assets with which to plug the well.

(B) Without a hearing if the well is a delinquent inactive well and:

(i) the Commission has sent notice of its intention to plug the well as
required by §89.043(c) of the Texas Natural Resources Code; and

(ii) the operator did not request a hearing within the period (not less than
10 days after receipt) specified in the notice.

(C) Without notice or hearing, if:

(i) The Commission has issued a final order requiring that the operator
plug the well and the order has not been complied with; or

(ii) The well poses an immediate threat of pollution of surface or
subsurface waters or of injury to the public health and the operator
has failed to timely remediate the problem.

16 Tex. Admin. Code § 3.14(b)(4) (2007). If state funds are expended for the above plugging

operations, “the Commission may seek reimbursement from the operator and any other entity

responsible for plugging the well.” Id. § 3.14(b)(5). This was the basis for the plugging

reimbursement claims against appellants.

Here, the Commission plugged the wells pursuant to section 3.14(b)(4)(C)(i). See

id. § 3.14(b)(4)(C)(i). The Commission issued orders requiring that appellants bring the Salinas and

19
Oliveira wells into compliance or plug them. It is undisputed that appellants did not comply with

these orders. Therefore, the State was authorized to plug these wells pursuant to

section 3.14(b)(4)(C)(i). See id.

Commission rules also specify general requirements for plugging. Id. § 3.14(d).

These rules provide that when a well is converted to a water well, the operator must plug the well

up to the base of the usable quality water strata. See id. § 3.14(a)(4)(A). Further, Mark England,

an engineering specialist for the field operation section of the Commission’s oil and gas section,

testified that plugging the wells by converting them into water wells cost the State less than

completely plugging the wells.

The crux of appellants’ argument is that while the Commission had the right to seek

reimbursement for fully plugging the wells, the Commission cannot recover those costs if it plugs

the well in a manner allowing it to be used as a water well—even when doing so would cost the State

less than fully plugging the well, and yield the added benefit of a water well. We find no support

for appellants’ contention. We conclude that the Commission plugged the Salinas No. 4 and

Oliveira No. 4 consistent with the requirements of sections 3.14(b)(4) and (5) of its rules. The fact

that the Commission’s method of plugging also provided a benefit to the landowner by converting

the wells into water wells has no bearing on the State’s ability to “seek reimbursement from the

operator and any other entity responsible for plugging the well,” and appellants cite no authority

indicating otherwise. See id. 3.14(b)(5). Accordingly, we overrule appellants’ second issue.

Salvage of equipment

In appellants’ third issue, they argue that they are not liable for the costs of plugging

the Salinas Well Nos. 1 and 2 and the Oliveira Well Nos. 1 and 2A because the State failed to prove

20
certain reimbursement amounts—specifically, the value of wellsite equipment that the Commission

salvaged—that appellants are entitled to offset against plugging costs. The State responds that the

natural resources code allows, but does not require, such an offset and that to challenge the value of

the offset, appellants were required to make a claim on the oil-field cleanup fund under section

89.086 of the code. See Tex. Nat. Res. Code Ann. § 89.086 (West Supp. 2007).

Appellants’ argument is essentially an evidentiary-sufficiency challenge:

The State did not meet its burden of proof by a preponderance of the evidence that
the plugging costs for those wells identified in State Exhibit 5, for which the trial
court awarded judgment for reimbursement, complied with the requirements of
§ 89.083(f); that is, the plugging costs incurred by the State, less properly priced
wellsite equipment sold by the Railroad Commission at the statutory value.

Appellants dispute the State’s contention that wellsite equipment sold by the State to offset

reimbursement costs was sold at the generally recognized market value. At trial, Epps testified as

to his opinion of the generally recognized market value, which, in his view, was “greatly in excess”

of the salvage price set by the Commission.

Read together, sections 89.083(f) and 89.085 of the natural resources code allow the

Commission to offset reimbursement costs with proceeds from the sale of equipment:

(f) If the commission plugs a well under Sections 89.043 through 89.044 of this
code, the state has a cause of action for all reasonable expenses incurred in
plugging or replugging the well and not recovered under Section 89.085 of
this code or through reimbursement to the commission.

21
Tex. Nat. Res. Code Ann. § 89.083(f). To the extent that the Commission decides to dispose of well

equipment, section 89.085 requires it to do so “in a commercially reasonable manner” to cover

plugging costs:

(a) When the commission forecloses its lien under Section 89.083 on a
delinquent inactive well, well-site equipment and any amount of
hydrocarbons from the well that is stored on the lease are presumed to have
been abandoned and may be disposed of by the commission in a
commercially reasonable manner by either or both of the following methods:

(1) entering into a plugging contract that provides that the person
plugging or cleaning up pollution, or both, will take title to well-site
equipment, hydrocarbons from the well that are stored on the lease,
or hydrocarbons recovered during the plugging operation in exchange
for a sum of money deducted as a credit from the contract price; or

(2) selling the well-site equipment, hydrocarbons from the well that are
stored on the lease, or hydrocarbons recovered during the plugging
operation at a public auction or a public or private sale.

Id. § 89.085(a) (West Supp. 2007). Further,

The commission shall dispose of well-site equipment or hydrocarbons under this
section at a price or value that reflects the generally recognized market value of the
equipment or hydrocarbons, with allowances for physical condition.

Id. § 89.085(c). According to appellants, “[t]he evidence is undisputed that the Commission

disposed of wellsite equipment, State Ex. 5, but not at the price or value required by statute.”9

9
In their initial brief, appellants also argued that the Commission failed to account for all
equipment. However, in their reply brief, appellants concede that “[t]he evidence is undisputed that
the Commission disposed of wellsite equipment, State Ex. 5, but not at the price or value required
by statute.” We, therefore, address only the “price or value” for which the equipment was sold.

22
 The district court concluded that “[t]he reasonableness of the amounts for which

salvaged equipment was sold is irrelevant to Strata Resources, Steven Bland Epps, and

Charles W. Brandes’s liability for state funds spent to plug the wells in question.” At trial and on

appeal, the State has argued that the exclusive means of asserting rights to proceeds of well

equipment sales is not section 89.083 or section 89.085, as appellants assert, but in the statutes

governing claims against the oil-field cleanup fund. See id. § 89.086. Because such proceeds are

deposited in the oil-field cleanup fund, the State maintains that the claimant must file his claim

against the fund pursuant to section 89.086:

A person with a legal or equitable ownership or security interest in well-site
equipment or hydrocarbons disposed of under Section 89.085 of this code may make
a claim against the oil-field cleanup fund . . . .

Id. § 89.086(a). In addressing such a claim, the Commission may conduct a hearing to receive

evidence. Id. § 89.086(e). If the claimant is not satisfied with the Commission’s decision on such

a claim, he may appeal to the Travis County district court. Id. § 89.087(a) (West 2001).

As the statutory scheme for making a claim on the oil-field cleanup fund is separate

and independent from the Commission’s claim for reimbursement of plugging costs, we hold that

the district court was correct in concluding that “[t]he reasonableness of the amounts for which

salvaged equipment was sold is irrelevant.” To challenge the value the Commission obtained when

disposing of their wellsite equipment, appellants were required to make a claim on the oil-field

cleanup fund pursuant to section 89.086. Appellants made no such claim. Accordingly, we overrule

appellants’ third issue.

23
Civil Penalties

In their fourth issue, appellants challenge the district court’s judgment imposing civil

penalties against them. The civil penalties were based on section 85.381 of the natural

resources code:

(a) In addition to being subject to any forfeiture provided by law and to any
penalty imposed by the commission for contempt for violation of its rules or
orders, any person who violates the provisions of Sections 85.045 and 85.046
of this code, Title 102, Revised Civil Statutes of Texas, 1925, as amended,
including provisions of this code formerly included in that title, or any rule
or order of the commission promulgated under those laws is subject to a
penalty of not more than:

(1) $10,000 when the provision, rule, or order pertains to safety
or the prevention or control of pollution; or

(2) $1,000 when the provision, rule, or order does not pertain to
safety or the prevention or control of pollution.

(b) The applicable maximum penalty may be assessed for each and every day of
violation and for each and every act of violation.

Tex. Nat. Res. Code Ann. § 85.381 (West 2001). The district court imposed civil penalties of

$5,000 for appellants’ violations of the administrative orders regarding each of the four groups of

wells at issue. Consequently, it imposed a total of $20,000 in penalties—$10,000 of which Strata,

Epps and Brandes were jointly and severally liable, and another $10,000 for which only Strata and

Epps were jointly and severally liable.

Appellants contend that legally and factually insufficient evidence supports the

district court’s civil penalties award because the court made no finding of the precise number of days

for which they were in violation of each of the administrative orders.

24
 It is undisputed that none of the appellants complied with any of the four orders prior

to trial. Based on the date of the orders and the date of trial, the orders that implicated only Strata

and Epps were violated for a total of 3,722 days, while the orders that also implicated Brandes were

violated for total of 16,488 days.10 Thus, there is evidence in the record that Brandes was in

violation of Commission orders for a total of 16,488 days while Strata and Epps were in violation

of Commission orders for a total of 20,210 days.

When a trial court finds one or more elements of a ground of recovery or defense,

omitted elements “will be supplied by presumption in support of the judgment” if supported by the

evidence. Tex. R. Civ. P. 299. The district court was authorized, based on the number of days the

10
The calculations are as follows:

September 12, 2000: issued for one well, Q.K. Barber, Well No. 1, for failure to pay administrative
penalty; implicates Strata and Epps; 1,890 days of violation (from the 30 days after the date of the
order, September 12, 2000 to the date of trial, December 15, 2005).

November 9, 2000 order 1: issued for four wells, Guzman, Well No. 12, Ramirez, Well No. 14,
Ramirez Guzman, Well No. 7, and Guzman-Ramirez, Well No. 8, for failure to pay administrative
penalty; implicates Strata and Epps; these wells were brought into compliance by Strata on
December 9, 1999; 1832 days of violation for failure to pay $8,000 administrative penalty (from
30 days after the date of the order, November 9, 2000 to the date of trial, December 15, 2005);
1832 days of violation for each Strata and Epps.

November 9, 2000 order 2: issued for three wells, Salinas, Wells No. 1, 2, and 4; implicates Strata,
Epps, and Brandes; 1832 days of violation for each well for failure to plug or for failure to pay
reimbursement costs and 1832 days for failure to pay administrative penalty (from 30 days after the
date of the order, November 9, 2000 to the date of trial, December 15, 2005); 1832 times 4 equals
7,328 days of violation for each Strata, Epps, and Brandes.

November 9, 2000 order 3: issued for four wells, Oliveira, Wells No. 1, 2A, 3, and 4; implicates
Strata, Epps, and Brandes; 1832 days of violation for each well for failure to plug or for failure to
pay reimbursement costs and 1832 days for failure to pay administrative penalty (from 30 days after
the date of the order, November 9, 2000 to the date of trial, December 15, 2005); 1832 times 5 equals
9,160 days of violation for each Strata, Epps, and Brandes.

25
evidence showed each appellant was in violation and the statutory per-day maximums for civil

penalties, to impose civil penalties for as much as $202,100,000 for Strata and Epps and

$164,880,000 for Brandes. The district court’s assessment of penalties of $20,000 for Strata and

Epps and $10,000 for Brandes is, thus, well within the range of its authority and the evidence.

Having found the evidence sufficient to support the trial court’s award of civil

penalties, we overrule appellants’ fourth issue.11

Attorney’s fees

In their fifth issue, appellants challenge the district court’s award of $7,500 in

attorney’s fees, imposed jointly and severally against Strata, Epps, and Brandes. Appellants argue

that there is insufficient evidence of the reasonableness or necessity of the fees. Relatedly,

appellants complain that the State failed to segregate its attorney’s fees incurred in prosecuting

claims for which fees were recoverable from those in which fees were not recoverable.

The State presented the following evidence of its attorney’s fees:

• During its four-year pendency of the case prior to trial (October 18, 2001
through December 15, 2005), seven attorneys represented the State.

• In total, State attorneys spent a total of 127 hours on the case.

• State attorneys served no discovery on appellants.

• The trial attorney, who had been practicing for one and one-half years, had
a billing rate of $150 per hour.

11
Our disposition of appellants’ issue renders moot the State’s cross-point challenging the
district court’s fact finding that State Exhibit 4, which contained both the administrative orders and
the State’s calculations of the numbers of days of violation, “does not identify the number of days
of violation by Strata Resources, Steven Epps or Charles Brandes.”

26
The State, however, did not segregate its attorney’s fees between claims or defendants. The State

asserted different claims against Epps and Brandes in which it could recover attorney’s fees. The

State could recover administrative and civil penalties against Epps in connection with all four groups

of wells, but against Brandes regarding only two groups of wells. Conversely, while the State was

entitled to recover well-plugging expenses against Brandes, we have held that such expenses were

not recoverable against Epps.

A claimant is required to segregate attorney’s fees between claims for which

attorney’s fees are recoverable and those for which fees are not recoverable. Tony Gullo Motors

v. Chapa, 212 S.W.3d 299, 313 (Tex. 2006). It is only when legal services advance both recoverable

and unrecoverable claims that the services are so intertwined that the associated fees need not be

segregated. Id. at 313-14. Here, the claims for civil penalties, administrative penalties, and

reimbursement of well-plugging expenses were separate and distinct. To prove its claim for civil

penalties, the State needed only to prove that appellants failed to comply with Commission orders.

To prove its claim for reimbursement costs, however, the State needed to show that it had plugged

the wells and incurred plugging costs in compliance with the natural resources code. The State was

also required to address Epps’s affirmative defense that his claims for reimbursement had been

discharged in bankruptcy. Indeed, the record shows that most of the trial focused on the State’s

reimbursement claim rather than the State’s claim for civil penalties. Although the claims are not

necessarily “so intertwined” that they could not have been segregated, the State’s fee entries include

only general entries, such as “reviewing/researching file(s)” and “conferring with agency personnel.”

See id.; Owens v. Ousey, 241 S.W.3d 124, 134 (Tex. App.—Austin 2007, pet. denied). Based on

the evidence, we cannot conclude that there is sufficient evidence that the amount of attorney’s fees

27
for which each appellant was held jointly and severally liable—$7,500—was reasonable. We,

therefore, remand to the district court to segregate and award attorney’s fees based only on the

State’s recoverable claims against each appellant. See Owens, 241 S.W.3d at 134 (remanding

because evidence of attorney’s fees for entire case is some evidence of what amount of segregated

fees should be). To this extent, we sustain appellants’ fifth issue.

CONCLUSION

We reverse the district court’s judgment awarding the State reimbursement from Epps

for well-plugging costs. We remand the case to the district court for further proceedings regarding

the amount of attorney’s fees imposed against each appellant. We otherwise affirm the district

court’s judgment.

__________________________________________

Bob Pemberton, Justice

Before Justices Patterson, Pemberton and Waldrop

Affirmed in part; Reversed and Rendered in part; Reversed and Remanded in part

Filed: July 11, 2008

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