IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 08-20152

FLINT HILLS RESOURCES LP

Plaintiff-Appellant

v.

JAG ENERGY INC

Defendant-Appellee

Appeals from the United States District Court 

for the Southern District of Texas

Before GARWOOD, GARZA, and OWEN, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

In this contract case, Flint Hills Resources LP (“Flint Hills”) appeals from

the district court’s judgment in favor of JAG Energy Inc. (“JAG”). The district

court determined thatFlint Hills breached the parties’ contract by unreasonably

suspending its own performance. For the following reasons, we reverse the

district court and render judgment in favor of Flint Hills. 

I

This dispute arose from a contract to supply natural gas condensate in

south Texas. Flint Hills, a refiner of crude oil products, agreed to purchase

“[a]pproximately 1,000 barrels per day” of “Mexican Condensate” from JAG, a

broker in such products. The agreement permitted either party to cancel the

United States Court of Appeals

Fifth Circuit

F I L E D

February 12, 2009

Charles R. Fulbruge III

Clerk
No. 08-20152

2

arrangement with one month’s notice. The contract began without incident in

December of 2005. In mid-March of 2006, Flint Hills employee Rhonda Schlatter

(“Schlatter”) attended a business lunch with Rodrigo Aranda (“Aranda”) of PMI

Trading (“PMI”). PMI is the marketing arm of Pemex, the Mexican national oil

company and the only authorized seller of freshly extracted Mexican condensate.

Atthis lunch meeting, Aranda allegedly told Schlatter that PMI/Pemex had been

experiencing thefts of condensate in Mexico and warned that other companies

might be selling this stolen condensate in the United States. Aranda did not

name JAG or any other specific company as a suspected seller of the stolen

condensate. 

Schlatter reported this information to her supervisors, and Flint Hills

immediately engaged a Washington D.C. law firm and a Mexico City law firm

to advise Flint Hills about its rights and obligations. The Mexican law firm

confirmed that there was an ongoing investigation into thefts of condensate in

Mexico but offered no specific information. The D.C. law firm advised Flint Hills

that continuing to purchase condensate from JAG could subject Flint Hills to

criminal liability if the product was in fact stolen. Flint Hills did not attempt to

contact Aranda or anyone at PMI/Pemex for further investigation. 

On March 24, Flint Hills informed JAG thatthey refused to accept further

deliveries due to a legal issue. On March 26, Flint Hills clarified that it was

suspending payments until JAG provided title evidence demonstrating that

JAG’s condensate was purchased from PMI/Pemex at some point downstream.

JAG responded by identifying two of its immediate suppliers and promising to

forward documents showing that Pemex was “the first link in one of these

chains.” No such documents were ever produced by JAG. After several more

weeks of discussion on this title issue, Flint Hills sent a letter cancelling the

agreement on May 16. JAG subsequently brought a contract claim in the district
No. 08-20152

3

court, alleging that Flint Hills breached the parties’ agreement by withholding

payment. 

The district court held a bench trial and applied Texas contractlaw. After

considering the evidence and the parties’ contract, the court determined that

Flint Hills had overreacted to a vague rumor and acted unreasonably in

suspending payment. The court also determined that JAG acted reasonably in

refusing to provide a chain of title linking the condensate back to Pemex, as it

was industry practice to conceal suppliers for competitive reasons. Accordingly,

the district court held that Flint Hills had breached the agreement and awarded

JAG damages for the period between March 25 and July 1. Flint Hills now

appeals this determination of breach. 

II

On appeal from a judgment after a bench trial, we review findings of fact

for clear error and conclusions of law de novo. Houston Exploration Co. v.

Halliburton Energy Servs., Inc., 359 F.3d 777, 779 (5th Cir. 2004). We assume

arguendo that the district court’s determination that Flint Hills breached the

contract constitutes a finding of fact. We have stated that it is “well-settled that

whether the parties’ conduct constitutes breach presents a pure question of fact

. . . .” Concise Oil & Gas P’ship v. La. Interstate Gas Corp., 986 F.2d 1463, 1469

(5th Cir. 1993) (internal quotation marks omitted); see also Leson Chevrolet Co.

v. Oakleaf & Associates, Inc. 796 F.2d 76, 79 (5th Cir. 1986) (per curiam)

(reviewing the district court’s finding of breach under a clearly erroneous

standard). “A finding of fact is clearly erroneous when, although there is

evidence to support it, the reviewing court based on all the evidence is left with

the definitive and firm conviction that a mistake has been committed. However,

factual findings made under an erroneous view of controlling legal principles are

reviewed de novo.” Houston Exploration, 359 F.3d at 779 (internal citations and

quotation marks omitted). 
No. 08-20152

1 The district court made the following relevant findings of fact and conclusions of law:

13. Flint Hills had the opportunity to withhold payment “in the event of

any adverse claim, lien, dispute or lack of information affecting” title. At no

time, did an adverse claim exist to condensate delivered by JAG to Flint Hills.

14. Without an adverse claim to the condensate, Flint Hills’ nonpayment was commercially unreasonable.

****

18. Flint Hills breached the contract when it rejected additional

condensate on March 24 through July 1. Flint Hills had no commercial basis to

reject the condensate. The absence of an adverse claim or plausible factual

support for a question of title made Flint Hills’ arbitrary quibbling about the

sequence of sales categorically unreasonable.

4

III

Flint Hills contends thatthe district court erred in finding that Flint Hills

breached the parties’ contract by suspending payment based on its general

suspicions of theft. In relevant part, the contract provided as follows:

[Paragraph 5]: In the event of any adverse claim, lien, dispute

or lack of information affecting or concerning title to the property or

to the crude oil proceeds from lands described in this agreement,

Buyer may withhold payment for the crude oil until the claim, lien,

dispute or lack of information is settled or resolved, without liability

for interest. If requested, Seller agrees to furnish evidence of title

satisfactory to Buyer. 

****

[Paragraph 14]: In the event that either party shall default in

any payment or other performance under this or any other agreement

exiting by and between the parties hereto, . . . [then] the other party,

at its option, shall have the right to withhold any payments or any

deliveries of crude oil and/or condensate due under this or any other

such agreement . . . . 

(Emphasis added). The district court interpreted this language to create

a limited right to withhold payment—one available where a third-party brings

an adverse claim of ownership or where there is objective evidence of bad title.1

In evaluating Flint Hills decision to withhold payment, the court repeatedly
No. 08-20152

2 The district court acknowledged that JAG failed to provide this evidence of title but

reasoned that it was “industry practice” for a broker to conceal its suppliers. While this may be an

accurate observation of the oil-products industry generally, it is not relevant under the contract

language. JAG unconditionally agreed to furnish satisfactory evidence of title upon Flint Hills’

request. 

5

emphasized thatFlint Hills had “overreacted”to a vague rumor and inadequately

investigated the general allegations of theft. On this basis, the court held that

Flint Hills breached the contract by withholding payment.

After a review ofthe record, we find thatthe district court committed clear

error. The district court’s focus on the reasonableness of Flint Hills’ own

investigation was inconsistent with the contract language. Under the plain

terms of the agreement, Flint Hills could suspend payment upon any “dispute

or lack of information affecting” title. This right to suspend payment based on

a lack of information was not conditioned on the presence of an adverse claim,

verifiable proof of theft, or objective evidence of wrongdoing. Furthermore, the

contract unconditionally provided that “[i]f requested, [JAG] agrees to furnish

evidence of title satisfactory to [Flint Hills].” 

Applying these terms to the undisputed facts, we find that Flint Hills did

not commit breach: Flint Hills was concerned about the source of JAG’s product.

Exercising its contractual rights, Flint Hills requested evidence of title tying

JAG’s condensate back to Pemex and suspended its purchases until this “lack of

information” was resolved. JAG was then obligated to provide “satisfactory”

evidence of title. After initially promising to do so, JAG ultimately failed to

provide any reliable evidence thatits condensate was purchased through Pemex

at some point downstream.2 When it became clear that JAG could not or would

not provide this requested evidence, Flint Hills cancelled the arrangement.

Thus, the “lack of information” regarding title was never resolved. Regardless

of whether Flint Hills’ initial suspicious were objectively reasonable, its
No. 08-20152

3 Flint Hills also contends thatthe district court erred in (1) excluding Flint Hill’s expert

witness, (2) calculating damages, and (3) finding Flint Hill’s suspension of performance

unreasonable under the Uniform Commercial Code. Because we find that Flint Hills did not

breach the contract, these claims are moot and we do not address them. 

6

subsequent conduct was at all times authorized under paragraphs 5 and 14 of

the contract. 

In sum,the district court erred in concluding that Flint Hills breached the

contract. Even if we credit all of the court’s factual findings—that Aranda’s

comment was disingenuous, that Flint Hill’s investigation was inadequate, and

that Flint Hills overreacted—Flint Hills was nevertheless entitled to request

evidence of title and suspend payment until any “lack of information” was

resolved to its satisfaction. The district court improperly imposed extracontractual requirements of commercial reasonableness and verifiable proof on

Flint Hills. Thus, the district court committed clear error in determining that

Flint Hills breached the contract.3

IV

Viewing the record as a whole, we are convinced that Flint Hills’ actions

were consistent with its contractual rights. Accordingly, we REVERSE the

judgment of the district court and RENDER a take-nothing judgment in favor

of Flint Hills.