Court Opinion

ID: 2951089
Source: CourtListenerOpinion
Date Created: 2015-09-16 19:55:44.208257+00
Date Added: 2024-06-11T12:26:33.107517
License: Public Domain

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                                       In The

                              GJnurt of Appeals
                                       For The

              ifftrat Supreme Sufctctal Etatrtrt of ffiexas

                                NO. 01-87-00137-CV

                VALERO TRANSMISSION COMPANY, Appellant
                                                    „                 FILED IN
                                         V.                       COURT OF APPEALS
                                                                    HOUSTON, TEXAS
                 MITCHELL ENERGY CORPORATION, Appellee/j- 3 1 j.0
                                                     KAIHRYNCOX
                                                                   CLERK

                      On Appeal from the 295th District Court
                              Harris County, Texas
                          Trial Court Cause No. 85-05219

           Valero Transmission Company              ("Valero"),     a natural gas
pipeline   company,     appeals      from     a    temporary    injunction           order
requiring that it purchase and take, pending a trial on the merits,
certain    quantities    of    gas     from       Mitchell   Energy      Corporation
("Mitchell"), a gas producing company, pursuant to its gas purchase
agreement with Mitchell.

           In the temporary injunction order, the trial court found

that on March 21, 1975, Mitchell and Valero entered into a gas
purchase contract that as amended, has a contract term of 20 years
from February 1, 1981. The court found that under the provisions of
this contract, Valero agreed to:
          (i) exercise its best efforts in good faith,
          and in cooperation with [Mitchell], to request
          deliveries   of   gas   that   will   maintain
          [Mitchell's] leases in force and effect; and to

          (ii)   actually  purchase   from   [Mitchell]
          quantities   of gas   sufficient  to   permit
          [Mitchell] to prevent drainage of gas from
          [its]   leases  by   producers   other   than
          [Mitchell].

          The court found that Valero breached these agreements,

and that as a result, Mitchell's leases in three fields subject to
the contract were being drained by offsetting producers. The court

found that   as   a    further     result    of    the   breach,   Mitchell    was   in

imminent danger of losing 11 leases that were subject to the gas
purchase contract.

          Based on the foregoing findings, the court required that
Valero, pending a final hearing on the merits, do the following:
          (i) To prevent drainage of gas from Mitchell's
          leases, Valero is required to purchase and take
          gas from designated wells "in an amount equal
          to the full prorated allowable assigned to each
          such well by the Railroad Commission of Texas
          [but not more gas than a particular well is
          physically capable of producing]"; and
          (2) To prevent Mitchell from losing its leases,
          Valero is required to purchase and take                     from
          designated wells "the amount of gas which each
          such well can physically produce in one day,
          [but not to exceed the prorated allowable
          assigned to such well]." Valero is further
          required to make any necessary nominations to
          the     Texas      Railroad   Commission        so   that   its
          purchases         and takes under this paragraph             ...
          will not cause Valero to violate Texas law.

          Under       the    gas   purchase       contract,    Mitchell      dedicated

exclusively to Valero all of its gas reserves in designated lands
and leases in several counties. Mitchell agreed to sell and deliver

                                            -2-
to Valero, and Valero agreed to purchase and take, all gas produced

from said lands and leases during the 20-year term of the contract.

The contract specifies the quantities, quality, and prices to be

paid for the gas, and contains clauses designed to protect Mitchell
against drainage and against the loss of its leases because of lack

of production. The contract also contains a force majeure clause
and a provision that the contract is deemed to be modified by any
contrary Texas law.         The contract was amended in             1978 to include

additional acreage,         and again in 1981,       when Mitchell agreed to
drill 15 additional wells in return for a higher price per unit for
gas produced from the new wells.

             Beginning in 1983,         Valero no longer complied with the
minimum   purchase      and      take   requirements    of    the     gas    purchase
contract, and thereafter, Mitchell brought suit alleging breach of
contract. Ancillary to the main action, Mitchell sought a temporary
injunction, which is the subject of this appeal.
             We first address Valero's contention that the trial court

lacked    subject     matter      jurisdiction     to   enter       the     temporary
injunction.    Valero    contends       that   Mitchell's    suit    constitutes    a

collateral     attack       on    the    rules,    regulations,        and     orders

administered     by   the     Texas     Railroad   Commission,       and    that   the
district courts of Travis County have exclusive jurisdiction to
hear such suits.      See Alpha Petroleum Co. v. Terrellf 122 Tex. 257,
59 S.W.2d 364 (1933); Tex. Nat. Res. Code Ann. sec. 85.241 (Vernon
1978).

                                           -3-
                We overrule Valero's contention.               Mitchell's suit was for

breach     of    contract,        and   its action         for a     temporary     injunction

merely sought to compel Valero's continuing performance of certain

terms of the gas purchase contract pending a trial on the merits.

Mitchell's suit does not challenge or seek an exemption from any
rule,     regulation,        or     order     of    the    Texas    Railroad      Commission.

Although the Texas Railroad Commission is given general statutory
authority to regulate the production of gas, the Commission does

not have authority to hear contract disputes or to abrogate the
parties'       respective rights          under the gas purchase contract.                   See

Railroad Comm'n v. City of Austinf 524 S.W.2d 262 (Tex. 1975); see

also Humble Oil & Refining Co. v. Railroad Comm'n. 133 Tex. 330,
128 S.W.2d 9 (1939); Railroad Comm'n v. United Gas Pipe Line Co.                               f
358 S.W.2d 907 (Tex. Civ. App.—Austin 1962, writ ref'd n.r.e.); A.
Anderson, The Texas Approach to Gas Proration and Ratable Take.                               57

U.    Colo.    L. Rev.      199,    220-21     (1986).     Indeed,    the Texas Railroad

Commission,       in   adopting         16 Tex.      Admin.    Code       sees.   3.30,     3.34
(1987), has itself expressly acknowledged that these rules "shall

not    affect     existing        contractual       rights    and    obligations        between
parties." 12 Tex. Reg. 536 (February 17, 1987).

                Mitchell sought temporary specific performance of certain

terms of a contract, pending a trial on the merits,                           and such suit

could     properly     be    determined        by    the    district      court    of     Harris

County,       notwithstanding the fact that the parties are generally
subject to the regulatory authority of the Railroad Commission. We

accordingly        hold      that       the   trial       court     has     subject     matter

                                                   -4-
jurisdiction         over    this      contract      dispute     and    over    Mitchell's
ancillary action for temporary injunction. See Zimmerman v. Texaco.

Inc.,    413 S.W.2d 387    (Tex.    1967),    refusing    writ    n.r.e.      on   409
S.W.2d 607,         612-13 (Tex. Civ. App.—El Paso 1966); Loonev v. Sun

Oil Co,, 170 S.W.2d 297, 300 (Tex. Civ. App.—Texarkana 1943, writ
ref'd).

               We therefore overrule Valero»s seventh point of error.

               We   next    consider       Valero»s    contentions       that   the     trial

court abused its discretion in granting the temporary injunction.
The purpose of a temporary injunction is to preserve the status
quo, and one seeking such relief must show a probable right to
recover on the merits at the eventual trial, irreparable injury in
the interim if the injunction is not granted, and the absence of an
adequate remedy at law. Arkansas Louisiana Gas Co. v. Fenderf 593
S.W.2d 122,         123    (Tex.    Civ.    App.—Tyler 1979,           no writ).      Valero
contends that Mitchell failed to sustain its burden of showing
these elements.

               In its first point of error, Valero asserts that Mitchell

failed    to    demonstrate        a   probable       right to     recover      under      the
provisions of the gas purchase contract. Under this point, Valero
argues that it has taken gas under the contract in accordance with

its market demand and that any contractual requirement that it
purchase additional amounts would constitute a violation of Texas

law.     In addition, Valero contends that Mitchell failed to present
evidence of probative value showing that it would sustain damages
from Valero's failure to take minimum quantities of gas.                              In its

                                               -5-
related point of error nine, Valero asserts that the temporary
injunction order requiring performance of the contract, as written,
violates the law and is therefore void and unenforceable.

             A    trial    court   is     clothed   with    broad   discretion    in

deciding whether to issue a temporary injunction to preserve the
rights of the parties pending a final trial on the merits.                    Texas

Foundries.       Inc. v.   Int'l Moulders & Foundry Workers' Unionr              151
Tex. 239, 248 S.W.2d 460 (1952). On review of a temporary order, a
trial court's decision will be reversed only if the record shows a
clear abuse of discretion.              Id.   at 462;     see Davis v.   Hueyr   571
S.W.2d 859 (Tex. 1978).

             Thus, in reviewing the temporary injunction order, we are
not permitted to decide questions of factual insufficiency or reach
the underlying merits of the case.                  Id.    at 861-62. Nor may we
substitute our judgment for that of the trial court.                     Indeed, we
must draw all reasonable inferences in favor of the trial court's

decision.    Davis v.      Bache Halsey Stuart Shields.          Inc..   630 S.W.2d
754, 757 (Tex. App.—Houston [1st Dist.] 1982, no writ).

             We first conclude that the contract, and the temporary
injunction order enforcing it, is not illegal on its face, so that

Valero had the burden of demonstrating its defense of illegality.
We may find an abuse of discretion in the trial court's holding
against Valero only if         illegality was established as a matter of

law.

             Valero's claim of illegality is based upon the premise

that there was no market demand for the gas Valero contracted to

                                              -6-
purchase from Mitchell.            Valero argues that a market for gas is
defined by price;         that the price at which it would have to sell

contract      gas,   based    on    its     cost,    is    over       $4    per   unit;     that

currently natural gas is selling on the spot market for under $2
per unit; and thus, there is no existing market for $4 gas. Valero
contends that any contractual requirement that it take and pay for
gas in excess of its market demand violates the law.

              The Texas Railroad Commission has statutory jurisdiction
to   govern    and   regulate       all    oil    and    gas    wells,       common      carrier

pipelines,      persons      owning       or operating         pipelines,         and persons
owning and operating oil and gas wells in Texas. See Tex. Nat. Res.

Code Ann. sec. 81.051 (Vernon 1978).                    However, as discussed above,
the Railroad Commission has no authority                         to    abrogate contract
rights.    Nor do the Railroad Commission rules purport to affect
contract rights. 12 Tex. Reg. 536." A previous attempt to preempt
contractual     provisions         that    were     inconsistent           with   a   Railroad

Commission interpretive order was struck down by the District Court
of Travis County on a complaint that the Commission had exceeded

its authority.       See Dallas Production Co. v. Railroad Comm'n.                           No.

260,641 (Travis Cty. Dist. Ct., June 10, 1977).

              Even if we were to assume that the Railroad Commission

rules cited by Valero did affect the parties' obligations under the

contract, we find that Valero has not proven that complying with
the contract would violate the law.

               The   primary purpose of regulating natural                         gas    is to

prevent    waste,    to   promote         conservation,        and    to    compel       ratable

                                              -7-
production     for    protection       of    correlative          rights   in    a    common

reservoir. See Tex. Nat. Res. Code Ann. sec. 86.001 (Vernon 1978).
The statutory definition of "waste" includes the production of gas
in excess of reasonable market demand for the type of gas produced.
Section 86.012(7) (Vernon Supp. 1987).

             Under     current      Texas     Railroad       Commission       rules,      the

production    or     purchase    of    gas   in     excess   of     "market     demand"    is

prohibited. 16 Tex. Admin. Code sees. 3.30 and 3.34.                          These rules

also prohibit discrimination by a purchaser between producers in a
common field and establish a priority system for the purchase of
different types of natural gas. Id.

             The Texas Railroad Commission sets production allowables

for gas that are based on monthly estimates of market demand by gas
purchasers.       These    "buyer     nominations"       must       show   expected       gas
requirements from each field from which the buyer purchases gas.
Sections 3.30(c),         (d) . Based on this information, the Commission
divides the total allowable monthly production in a field among the
wells    in that field       and assigns a "prorated allowable"                      to each

well. The allowables are computed so as to accord each producer the

opportunity to produce its fair share of the total gas to be
produced from the field that month.

             The monthly demand nominations from gas purchasers such

as Valero must include estimates for each field of gas from which
the     purchaser    takes   gas.     Thus,       Valero's    nominations,        its     own

estimates of demand, will affect the Commission's determination of

total    market     demand   for      any    month,    as    well     as   the    prorated

                                              -8-
allowable assigned to Valero's producers.    If actual demand turns

out to be more or less than the estimates, the allowables may be
adjusted accordingly.

          There was     testimony that the Texas Railroad   Commission

determines the "total market demand" for any month by considering
the volume of gas generally salable on the market as shown by gas
purchaser nominations.    In this case, there was evidence that the

gas market demand,    and Valero's total volume of purchased gas,
dropped considerably from 1981 to 1986. But there was also evidence

showing that special marketing programs of Valero's parent company
replaced 30-40% of that lost volume, and these special arrangements
made it possible for Valero to move its expensive gas, even though
the market price for gas was lower.1
          In two of the fields subject to the parties' contract,
Mitchell is the only producer in the field that has connections to

Valero's pipeline, so discrimination is not an issue there. In the

fields that Mitchell shares with other of Valero's          producers,
Valero contends that because it is required to take gas ratably
among those producers,     it cannot purchase contract amounts only

    There was testimony that the market for expensive              gas
    consisted mostly of long-term contracts or "captive"
    markets. To hold up its sales of higher-than-market-price gas,
    Valero sometimes will sell a downstream purchaser a "mix" of
    differently priced gas,     e.g.,   20% of the purchaser's
    requirements from expensive contract gas and 80% from cheaper
    special marketing program gas. The average price for the gas
    is thus lower than it would be if Valero sold only the
    expensive gas.

                                   -9-
from    Mitchell.       That      is,    it    must    take    the    same      percentage       of

production capability from all producers in a field.

               The     trial      court's       injunction          order      sets     out     its

requirements          with     specific        reference       to     Railroad        Commission

standards. It first requires Valero, in order to prevent drainage
from Mitchell's wells, to take the full prorated allowable assigned
to    each well       by the Commission.             A well's prorated              allowable    is

generally the amount of gas that the well is allowed to produce and

that a buyer may purchase from it. However,                         allowables are not an

absolute legal limit on production in any specific month. See Tex.

Nat.    Res.    Code    Ann.      sec.    86.090       (Vernon      Supp.      1987).    Section

86.090,    for       example,     provides         for temporary          overproduction        and
underproduction of wells to adjust owners' correlative rights to
produce and sell gas from a common reservoir. Further, Mitchell
presented      evidence        that     the    rules      relating        to   allowables       are
flexibly       interpreted         by    the       Commission       based      on     individual

circumstances and based on the policies underlying regulation of
oil and gas in Texas.               Valero's contentions that the injunction
would require it to illegally take gas in excess of market demand

and    discriminate          in   favor       of    Mitchell        are     speculative.        See
Universal Resources Corp. v. Panhandle E. Pipe Line Co. , 813 F.2d

at 80. Valero has not demonstrated that requiring it to take the

prorated allowable of gas from Mitchell's wells would result in a

violation of the law.

               The court's temporary injunction order further requires
Valero, in order to maintain Mitchell's                       leases in effect, to take

                                                   -10-
an amount of gas          equal   to one day's deliverability each month,

subject again to each well's prorated allowable. That is, the order

limits Valero's required taking to the well's prorated allowable if

one   day's     production     would     exceed    that     allowable.         Because    the

monthly    well      production       allowables     are    based       upon    buyer     gas
nominations,      the    temporary      injunction also requires               that Valero

make any necessary nominations to the Railroad Commission so that

its purchases and takes will not cause it to violate Texas                               law.

Again,    the    injunction's         requirements    are    defined       in    terms     of

complying     with      all   applicable    laws,     and    Valero      has    failed     to

conclusively      demonstrate         its   defense    that       the    court's     order

requires it to violate the law.

              Valero also relies on the             force majeure clause in the

contract, asserting that any failure of performance on its part was
"due to causes beyond its reasonable control," which it could not

have prevented by the exercise of due diligence.                         It argues that
under Commission rules, it had only slight control over the price
it had to charge for its gas, and that neither party could control
downstream market demand for gas at the high contract price.                         Thus,
Valero    argues,       the   force    majeure     clause    in    the    gas     purchase
contract excuses its performance and precludes Mitchell's right to
a temporary       injunction.     At the very least,              Valero asserts,         it
should not be required to pay above market price for the gas that
the injunction requires it to take.

              We overrule these assertions. A force majeure clause does

not relieve a contracting party of the obligation to perform,

                                            -11-
unless    the     disabling      event      was    unforeseeable    at    the   time     the

parties made the contract.                 See Gulf Oil Corp. v.         Federal Energy
Regulatory Comm'n. 706 F.2d 444, 452 (3rd Cir. 1983), cert, deniedf

464 U.S. 1038 (1984) ; Mainline Inv. Corp. v. Gaines. 407 F. Supp.
423, 427    (N. D. Tex. 1976). An economic downturn in the market for

a   product     is    not   such      an   unforeseeable      occurrence    that     would

justify     application          of   the     force      majeure   provision,      and     a
contractual obligation cannot be avoided simply because performance
has become more economically burdensome than a party anticipated.
Alamo Clav Prod.. Inc. v. Gunn Tile Co.. 597 S.W.2d 388 (Tex. Civ.

App.—San Antonio 1980, writ ref'd n.r.e.); see Measdav v. Kwik -

Kqpv Corp.. 713 F.2d 118, 126 (5th Cir. 1983); Mainline Inv. Corp..
407 F. Supp.       at 427.

              Indeed, the uncertainty of future market prices is often

the motivation for entering into a long-term contract. The primary
purpose of a price agreement is to fix the price and consequently
to avoid the risk of price fluctuation. 407 F. Supp. at 427. Thus, a
sudden or significant change in price, or the fact that one of the

parties     may      gain   or   lose during         a   particular      period of     the
contract,       is    not   sufficient        to    constitute     an    extraordinary,
unforeseeable event that would excuse performance under the force
majeure clause. Id.

             In summary, we find that the court-ordered requirements
are reasonable and do not require Valero to violate the law.                             We

therefore conclude that Valero has failed to establish its claims

of illegality, and we overrule points of error one and nine.

                                              -12-
             In its second and third points of error, Valero argues
that Mitchell was           not entitled to temporary injunctive relief,
because Mitchell failed to establish probable irreparable harm and

the absence of an adequate remedy at law.

             There    was    evidence   from    which   the      trial    court      could

reasonably have decided that drainage was occurring from several of

Mitchell's wells subject to the contract. Mitchell's expert witness
presented data on pressure comparisons over time and related it to

production    from    wells     offsetting     Mitchell's     wells       in   the    same

field.    He also explained other methods of attempting to measure
drainage and justified why his technique was more reliable.

            Mitchell also presented evidence that all                    of its leases

were beyond their primary term and that the land covered by at
least 11 leases would automatically revert back to the holders of

the mineral interests if there was no production from the leased

tracts. There was testimony that Mitchell had spent millions                            of

dollars    acquiring    the leases      and drilling        and operating            these
wells.

            Although the probative value of Mitchell's evidence was

seriously challenged by Valero, the trial court could reasonably
have found from the evidence that because of drainage,                         Mitchell

would probably       suffer a    permanent     loss   of   gas    from beneath         its

leased tracts,       and that due to such drainage,           it would likely be

deprived of a chance to recover              its fair share of gas from the

common reservoir.       There was also evidence supporting the finding
that Mitchell was threatened with the loss of 11 leases due to lack

                                         -13-
of production.     The court could reasonably have decided that the

extent of Mitchell's probable loss was beyond precise measurement,
so that it would be extremely difficult to quantify Mitchell's
right of compensation for such loss. Thus, the record supports the
trial   court's    conclusion      that    Mitchell      would   suffer     imminent,
irreparable injury in the absence of temporary injunctive relief,
and that it lacked an adequate remedy at law.

           Because we find that there is some evidence of probative
value to support the trial court's decision,                we overrule Valero's

second and third points of error. See Matuszak v. Houston Oilers.

Inc.. 515 S.W.2d 725,        728   (Tex.    Civ. App.—Houston [14th Dist.]
1974, no writ).

           In its sixth point of error, the appellant contends that

the court abused its discretion in granting relief that disrupts
the status quo and exceeds that necessary to prevent irreparable
harm.   Essentially,   Valero      complains      that    even   if   it    should   be

required to comply with the provisions of the temporary injunction,
it should not be compelled to pay the contract price, but rather
should be permitted to pay the market price for the gas purchased.
Valero argues that the        "high prices" required by the                 order are

unnecessary   to   prevent    lease       loss    or   drainage,      and   thus     the

temporary injunction order grants relief beyond that required to
preserve the status quo.

           There is evidence in the record that the interim prices
at which the temporary injunction ordered Valero to purchase gas
were the last noncontested prices Valero had paid for Mitchell's

                                           -14-
gas under the contract. Given this circumstance, we conclude that

the trial court's temporary injunction order tends to preserve the

status quo. The court did not abuse its discretion in setting the
prices that Valero must pay for gas pending a trial on the merits.

             The sixth point of error is overruled.

             In    its    fifth     point    of     error,   Valero    contends       that

Mitchell was not entitled to equitable relief because it failed to

demonstrate       that   it   had    "clean       hands."     Valero       asserts    that

Mitchell had other potential buyers of gas available, i.e., special
marketing programs of its own and of other companies that buy gas
cheaply on the spot market, and that Mitchell unreasonably refuses
the opportunity to sell its gas at a price $2 to                           $4 under the

contract price. Valero argues that these alternative markets would

afford Mitchell wholly adequate relief and would not require Valero
to   illegally     discriminate      in     favor    of   Mitchell    over    its    other

producers.

             We overrule this point, because there was no showing that
Mitchell     engaged     in any wrongful conduct             relating to the gas
purchase agreement or that it did anything that brought about the

alleged    breach.       Indeed,     there    was     evidence      that     on    several

occasions,    when Valero took no gas under the contract,                         Mitchell
eventually agreed to sell its gas at a lower price to Valero's own

special marketing program, VIGAS,                 in an attempt to avoid some of
its anticipated damages. Mitchell's refusal to re-negotiate its gas
purchase     contract      with     Valero    certainly      does     not     constitute

wrongful conduct precluding its right to equitable relief.

                                             -15-
             In its eighth point of error, the appellant contends that

the temporary injunction was an abuse of discretion because it will

impede the public interest by forcing Valero to violate the laws

relating to the oil and gas industry.                  In its fourth point of
error,   the   appellant      asserts    summarily    that   Mitchell     failed   to

sustain its burden to demonstrate a balance of equities in its
favor, because Mitchell allegedly sought to take action contrary to
Texas law and Commission rules, which supersede any inconsistent
contract provisions.          We have found previously found that Valero
has   not    met   its    burden    of   demonstrating       that   the   temporary
injunction     order     is   illegal,   or   that   it will    force     Valero   to

violate any law or regulation. Points of error four and eight are
overruled.

             The trial court's temporary injunction order is affirmed.

                                              FRAN^xG. EVANS
                                                 lef Justice

Justices Cohen and Hoyt also sitting.

Do not publish. Tex. R. App. P. 90.

                                          -16-