Court Opinion

ID: 4088804
Source: CourtListenerOpinion
Date Created: 2016-10-12 05:42:13.451964+00
Date Added: 2024-06-11T07:45:24.779770
License: Public Domain

Affirmed and Opinion filed October 6, 2016.

                                     In The

                    Fourteenth Court of Appeals

                             NO. 14-15-00058-CV

HIGHMOUNT EXPLORATION & PRODUCTION LLC AND DOMINION
OKLAHOMA TEXAS EXPLORATION & PRODUCTION, INC., Appellants
                                       V.

    HARRISON INTERESTS, LTD., DAN J. HARRISON III, AND BFH
                   MINING, LTD., Appellees

                   On Appeal from the 190th District Court
                           Harris County, Texas
                     Trial Court Cause No. 2009-06060

                                OPINION
      At issue in this appeal is the interpretation of an agreement governing the
payment of royalties by an oil and gas producer. The royalty owners filed suit
asserting that the producer was underpaying them because (1) the royalty
agreement entitled the owners to royalties the producer was not paying and (2) the
producer was improperly deducting marketing costs in calculating the royalties
owed to the royalty owners. Both parties filed summary-judgment motions on both
issues. The trial court granted the royalty owners’ summary-judgment motions.
We affirm.

                  I.    FACTUAL AND PROCEDURAL BACKGROUND

      In conjunction with the sale of their interests in certain real property to
Meridian Oil Production, Inc. in 1990, Harrison Interests, Ltd., Dan J. Harrison III,
and Bruce F. Harrison reserved a “5% of 8/8 perpetual nonparticipating royalty
interest,” and the parties entered into a royalty agreement to set out the terms
governing the administration and payment of the royalty interests (the
“Agreement”). Appellant/defendant Dominion Oklahoma Texas Exploration &
Production, Inc., a successor-in-interest to Meridian Oil Production, Inc., sold the
mineral interests to appellant/defendant HighMount Exploration & Production, Inc.
in 2007.

      The same year, appellees/plaintiffs Harrison Interests, Ltd., Dan J. Harrison
III, and BFH Mining, Ltd. (collectively the “Harrison Parties”) requested an audit
and concluded from the audit results that HighMount Exploration & Production,
Inc. and Dominion Oklahoma Texas Exploration & Production, Inc. (collectively
the “HighMount Parties”) had not been paying them the full amount owed under
the Agreement. Based on the audit, the Harrison Parties raised two issues related
to royalty payments. First, the Harrison Parties claimed the HighMount Parties
had not been paying them royalties on gas produced from the real property, oil and
gas leases, and oil, gas, and mineral leases that were the subject of the 1990
conveyance and the Agreement (hereinafter “Subject Interests”) and used as fuel to
power equipment on the Subject Interests. Second, the Harrison Parties claimed
the HighMount Parties had been deducting marketing costs improperly.

                                         2
      A. Claims

         The Harrison Parties filed suit against the HighMount Parties in January
2009, eventually asserting claims for breach of the Agreement, conversion, and
claims based on alleged violations of the Texas Natural Resources Code.1 The
Harrison Parties asserted their entitlement to royalties on all gas used for fuel on
the Subject Interests under section 4(e) of the Agreement.

      B. Summary Judgment Motions

         The HighMount Parties moved for partial summary judgment, arguing that
section 4(e) of the Agreement does not entitle the Harrison Parties to compensation
for gas the HighMount Parties use for fuel on the Subject Interests and that the
HighMount Parties are entitled to deduct the marketing costs in calculating the
royalties owed under the Agreement. The Harrison Parties filed two separate
summary-judgment motions in which they asserted they are entitled to royalties on
gas used for fuel on the Subject Interests and that the HighMount Parties breached
the Agreement by deducting marketing costs in calculating the royalties owed.
The trial court granted both of the Harrison Parties’ summary-judgment motions
and denied the HighMount Parties’ summary-judgment motion.

         The Harrison Parties moved for rendition of a final judgment, attaching to
the motion evidence of their damages and reasonable and necessary attorney’s
fees. The trial court rendered a final judgment and awarded the Harrison Parties
actual damages, prejudgment interest, and reasonable and necessary attorney’s
fees. The HighMount Parties have appealed.

1
    The Harrison Parties later nonsuited their conversion claims.

                                                  3
                             II.   ISSUES AND ANALYSIS

      The trial court granted two traditional summary-judgment motions in favor
of the Harrison Parties on two issues relating to the construction of the Agreement.
The HighMount Parties challenge the trial court’s granting of both of these
summary-judgment motions. We review a grant of summary judgment de novo.
KCM Financial LLC v. Bradshaw, 457 S.W.3d 70, 79 (Tex. 2015). In a traditional
summary-judgment motion, if the movant’s motion and summary-judgment
evidence facially establish its right to judgment as a matter of law, the burden
shifts to the nonmovant to raise a genuine, material fact issue sufficient to defeat
summary judgment. M.D. Anderson Hosp. & Tumor Inst. v. Willrich, 28 S.W.3d
22, 23 (Tex. 2000). In our review of the trial court’s granting of the Harrison
Parties’ traditional summary-judgment motions, we consider all the evidence in the
light most favorable to the HighMount Parties, crediting evidence favorable to the
HighMount Parties if reasonable jurors could, and disregarding contrary evidence
unless reasonable jurors could not. See Mack Trucks, Inc. v. Tamez, 206 S.W.3d
572, 582 (Tex. 2006). The evidence raises a genuine fact issue if reasonable and
fair-minded jurors could differ in their conclusions in light of all the summary-
judgment evidence. Goodyear Tire & Rubber Co. v. Mayes, 236 S.W.3d 754, 755
(Tex. 2007). When the order granting summary judgment does not specify the
grounds upon which the trial court relied, we must affirm the summary judgment if
any of the independent summary-judgment grounds is meritorious. FM Props v.
Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).

      A. Did the trial court err in granting summary judgment as to the
         royalties allegedly owed on gas used for fuel on the Subject Interests?
      In one of the Harrison Parties’ summary-judgment motions, they asserted
that, as a matter of law, the HighMount Parties breached the Agreement by failing

                                         4
to pay the Harrison Parties royalties on gas used for fuel on the Subject Interests.
Section 4(e) of the Agreement provides that the “Owners shall receive their royalty
share of the gross proceeds for gas used or utilized on or off the Subject Interests,
such as gas used for fuel.” Under their first issue, the HighMount Parties argue
that the trial court erred in granting summary judgment on this ground because (1)
there are no “gross proceeds” for gas used for fuel on the Subject Interests, (2)
under the cost-sharing methodology in the Agreement, the HighMount Parties do
not owe the Harrison Parties for post-production costs that jointly benefit both
parties, (3) when section 4(e) is considered in the context of the entire Agreement,
it is clear that the Agreement does not require the HighMount Parties to pay the
Harrison Parties royalties on gas used for fuel in the plant, (4) the interpretation the
Harrison Parties suggest is problematic because it is difficult to calculate the
royalty amount on gas used for fuel on the Subject Interests, and (5) the provision
assessing royalties on “residue gas” shows the parties did not intend for royalties to
be paid on gas used for fuel on the Subject Interests.

      The Agreement provides in relevant part:

      (a) As to gas produced or to be produced from the Subject Interests
      under a Short Term Sale, the royalties shall be Owners’ royalty share
      of the gross proceeds for the first sale or disposition of the gas from
      the Subject Interests, provided that such royalties never shall be less
      than Owners’ royalty share of the aggregate sum derived by
      multiplying the Spot Gas Price of such gas for the month or months
      covered by the Short Term Sale by the respective volumes of gas sold
      in such month or months under the Short Term Sale.
      (b) In the event Producer intends to make gas produced or to be
      produced from the Subject Interests subject to a Long Term Sale. . .
      (c) If the gas produced from the any well situated on the Subject
      Interests shall contain in suspension condensate, gasoline or other
      natural gas liquid hydrocarbons that economically can be separated
      from the gas by the installation by Producer of traps, separators or

                                           5
      other mechanical devices, then Producer shall install such devices on
      the surface of the Property, and Owners shall receive royalty on the
      condensate, gasoline or other natural gas liquids so recovered in
      accordance with the terms of paragraph 3 of this Royalty Agreement,
      together with royalty on the residue gas in accordance with the terms
      of paragraphs 4(a) and 4(b) of this Royalty Agreement.
      (d) If gas or casinghead gas or separated gas resulting from field
      separation produced from the Subject Interests is processed at any
      location by or for the account of Producer, or by or for the account of
      any affiliate of Producer, for the recovery and sale or other disposition
      for value of liquid hydrocarbons, helium, carbon dioxide, sulfur, or
      any other elements of the gas stream, then in lieu of royalties on gas
      provided in paragraphs 4(a) and 4(b), the royalties shall be Owners’
      royalty share of the gross proceeds less Owners’ royalty share
      allocable portion of the reasonable, direct costs (excluding
      amortization and depreciation on pipeline and plant investment and
      direct overhead associated therewith) of processing such gas in the
      plant for the recovery of such liquid hydrocarbons, helium, carbon
      dioxide, sulfur and other elements, and the royalties on the residue gas
      resulting from such processing operation attributable to gas produced
      from the Subject Interests shall be in an amount and determined as
      provided in paragraphs 4(a) and 4(b) above; provided, however, that
      in the event liquid hydrocarbons, helium, carbon dioxide, sulfur or
      any other elements of the gas stream are recovered and sold separate
      from the basic gas stream as contemplated in this paragraph, the total
      royalties paid to Owners on such production (after deduction of the
      above costs) never shall be less than would have been paid to Owners
      if the liquid hydrocarbons, helium, carbon dioxide, sulfur, or any other
      elements of the gas stream had remained in, and been sold as, part of
      the basic gas stream.
      (e) Owners shall receive their royalty share of the gross proceeds for
      gas used or utilized on or off the Subject Interests, such as gas used
      for fuel.
The Agreement defines “gross proceeds” as:

       the entire economic benefit and all consideration in whatever form
      received by or accruing to Producer or an affiliate of Producer,
      including but not limited to sales proceeds or proceeds or benefits of
      an exchange, prepayments for future production, reimbursements for
                                         6
      severance taxes or for other taxes or costs, settlements or payments for
      the release or amendment of a sales contract or arrangement, and take-
      or-pay payments or settlements and the like, and any insurance
      proceeds from lost or destroyed oil and gas, provided that “gross
      proceeds” shall not include any fee or charge for services
      (transportation, compression, treating and the like) relating to gas
      produced from the Subject Interests after such gas leaves the Subject
      Interests. In the event Producer transports, or causes to be
      transported, gas production from the Subject Interests on a gas
      transmission line to a market or sale “gross proceeds” for such gas
      shall be determined after deducting any fees or charges incurred by
      Producer from the owner of the gas transmission line for such delivery
      or transportation to such market or sale; such fees or charges shall be
      for transportation of gas after it leaves facilities to which Marketing
      Costs, if any, relate and shall exclude fees or charges of Marketing
      Costs.
      In construing contracts, our primary concern is to ascertain and give effect to
the intentions of the parties as expressed in the contract. Kelley-Coppedge, Inc. v.
Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex. 1998).         To ascertain the parties’
intentions, we examine the entire agreement in an effort to harmonize and give
effect to all provisions of the contract so that none will be rendered meaningless.
MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 652 (Tex. 1999).
Whether a contract is ambiguous is a question of law for the court. Heritage Res.,
Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). A contract is ambiguous
when its meaning is uncertain and doubtful or is reasonably susceptible to more
than one interpretation. Id. But, when a written contract is worded so that it can
be given a certain or definite legal meaning or interpretation, we hold it
unambiguous, and we construe it as a matter of law. Am. Mfrs. Mut. Ins. Co. v.
Schaefer, 124 S.W.3d 154, 157 (Tex. 2003). We cannot rewrite the contract or add
to its language under the guise of interpretation. See id. at 162.

                                           7
            1. The plain language of section 4(e), the context of the Agreement,
               and the provision relating to residue gas
     In section 4(e) the parties specifically address gas used for fuel on or off the
Subject Interests. The gas in question is gas used for fuel on the Subject Interests.
Under the plain language of section 4(e) the Harrison Parties are to receive their
royalty share of the gross proceeds for this gas. The HighMount Parties argue
both that there are no gross proceeds from the gas used for fuel on the Subject
Interests and that sections 4(c) and 4(d) also govern gas used as fuel on the
Subject Interests because the gas entering the Subject Interests is separated. The
HighMount Parties state that section 4(d) allows them to deduct processing costs
from the royalty on the separated elements and that under these provisions the
Harrison Parties are entitled to gross proceeds only on residue gas.

     In the Agreement the parties define “gross proceeds” as “the entire economic
benefit and all consideration in whatever form received by or accruing to Producer
. . . .” The HighMount Parties acknowledge receiving an economic benefit from
the gas used for fuel on the Subject Interests. The economic benefit to the
HighMount Parties is that the HighMount Parties do not have to pay for other fuel
to be used to power the equipment on site. The HighMount Parties argue that
even if the gas used for fuel provides an economic benefit, each example of gross
proceeds stated in the definition is an example in which the Producer alone
receives an economic benefit. Even presuming that this is so, nothing in the plain
language of the definition excludes from its scope situations in which both the
Producer and the royalty owners receive an economic benefit. To the contrary,
the term “gross proceeds” encompasses all economic benefits flowing to the
Producer, except for specific exclusions, which include fees or charges for certain
services relating to gas produced from the Subject Interests. The definition of

                                         8
“gross proceeds” contains no exclusion for economic benefits received by the
Producer from the use of gas produced from the Subject Interests for fuel. Nor
does the provision contain any general exclusion for economic benefits received
by the Producer in a situation in which the royalty owners also receive an
economic benefit.

     Under certain circumstances described in sections 4(c) and 4(d), the
Agreement provides that the royalty owners shall receive royalties on residue gas
in accordance with the terms of sections 4(a) and 4(b) of the Agreement. The
HighMount Parties assert that the agreement that the Producer shall pay royalties
on residue gas shows that the parties did not intend for any royalty to be paid on
gas consumed in the treatment and processing steps. As with other contracts
under Texas law, parties to a royalty agreement have a broad freedom to agree as
to the nature and scope of the royalties to be paid, as to how the royalties will be
calculated, and as to the items on which royalties must be paid. See French v.
Occidental Permian, Ltd., 440 S.W.3d 1, 8 (Tex. 2014) (stating that parties are
free to agree on what royalty is due, the basis on which it is to be calculated, and
how expenses are to be calculated); Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84,
95 (Tex. 2011) (stating that “[a]s a fundamental matter, Texas law recognizes and
protects a broad freedom of contract”). The parties’ agreement in section 4(c)
regarding the payment of royalties on residue gas, condensate, gasoline, and other
natural-gas liquids does not show that the parties could not or did not agree in
section 4(e) that the Producer would pay royalties on gas used for fuel. The
HighMount Parties cite a case in which the agreement did not expressly address
whether royalties would be paid on fuel gas and the court gave effect to industry
custom and usage, under which, according to the uncontroverted evidence in that
case, no royalty was paid for fuel gas. See Atlantic Richfield Co. v. Holbein, 672

                                         9
S.W.2d 507, 515–16 (Tex. App.—San Antonio 1984, writ ref’d n.r.e.). The
    Holbein case is not on point because the Agreement in today’s case expressly
    provides that royalties shall be paid on the gross proceeds of gas used for fuel and
    because parties are free to expressly agree to a term that contradicts a custom or
    usage.2 See 4N Intern., Inc. v. Metropolitan Transit Auth., 56 S.W.3d 860, 862–
    63 (Tex. App.—Houston [1st Dist.] 2001, pet. denied). Under the plain language
    used in section 4(e), the Producer must pay royalties on the gross proceeds of gas
    used for fuel.3

                2. Cost-sharing Methodology

         The HighMount Parties argue that even if “a simplistic reading” of the
section 4(e) leads to the conclusion that the HighMount Parties owe the Harrison
Parties royalties, the overall cost-sharing methodology demonstrated throughout
the Agreement shows the parties intended to share the post-production costs of the
gas. The HighMount Parties point out that section 4(d) allows them to deduct costs
for extracting hydrocarbons in the circumstances described in that section and that
the general terms of the Agreement allow the HighMount Parties to deduct costs
for the processing and transportation of gas. According to the HighMount Parties,
post-production costs are shared when the costs jointly benefit the owner and
Producer. They argue that because using gas for fuel on the Subject Interests
jointly benefits the Harrison Parties and the HighMount Parties, the Harrison
Parties should share the cost of the gas used for fuel.

         While the parties agreed to share some post-production costs, the plain

2
  In addition, the summary-judgment evidence in this case does not contain any custom-and-
usage evidence.
3
 The Birnbuam v. SWEPI, L.P. case cited by the HighMount Parties is not on point because the
agreement in that case did not contain such an express provision. See 48 S.W.3d 254, 255–58
(Tex. App.—San Antonio 2001, pet. denied).

                                            10
language of the Agreement entitles the Harrison Parties to royalties on gas used for
fuel. See Kachina Pipeline Co., Inc. v. Lillis, 471 S.W.3d 445, 454 (Tex. 2015).
Although other provisions in the Agreement contain a cost-sharing scheme, there is
no express language stating that the intent of the Agreement is for the parties to
share post-production costs in all instances. Nothing in the Agreement forecloses
an interpretation that the parties intended to share many post-production costs, but
that they intended for the Producer to receive royalties on the gross proceeds of gas
used for fuel. The plain language of the Agreement states that the owners are to
receive such royalties.

             3. Problematic calculations

      The HighMount Parties assert that interpreting the Agreement to conclude
they owe the Harrison Parties royalties on gas used for fuel is absurd because there
is no way to calculate the royalty amount on gas used for fuel. But, the record
reveals that such a calculation is possible. After the Harrison Parties audited the
HighMount Parties in 2007, the auditor prepared an exhibit showing the monthly
amount of royalty that had not been paid in respect of the gas used for fuel. The
evidence shows that the Harrison Parties were able to calculate an underpayment
amount. After the trial court granted the Harrison Parties’ summary-judgment
motion, the Harrison Parties submitted evidence regarding the amount of these
royalties that the HighMount Parties had failed to pay, and the trial court rendered
a final judgment based on these damage amounts.             In the trial court, the
HighMount Parties stated that the Harrison Parties’ computation of these damages
was accurate, and the HighMount Parties have not challenged on appeal the trial
court’s determination of the amount of these damages. The record shows that it is
not impossible to calculate the economic benefit received by or accruing to the
HighMount Parties from the use of gas produced from the Subject Interests for

                                         11
fuel, nor is it impossible to calculate the royalty to be paid on this benefit. The
plain text of the Agreement requires the HighMount Parties to pay the Harrison
Parties royalties on gas used for fuel on the Subject Interests. See Kachina Pipeline
Co., Inc., 471 S.W.3d at 454. The trial court did not err in granting the Harrison
Parties’ summary-judgment motion in this regard. Accordingly, we overrule the
HighMount Parties’ first issue.

       B. Did the trial court err in granting summary judgment as to the
          marketing costs?
       Under their second issue, the HighMount Parties assert that the trial court
erred in granting the Harrison Parties’ summary-judgment motion as to liability on
the claim that the HighMount Parties breached the Agreement by deducting
marketing costs in calculating the royalties owed based on the costs of compressors
at the “DP6” facility.      In addition to other summary-judgment grounds, the
Harrison Parties asserted in this motion that to deduct the costs of the DP6
compressors, the Agreement requires that these compressors be downstream from a
“central facility” and that these compressors are not downstream from a “central
facility.”

       1. Language from the Agreement

       Section 7(b) of the Agreement provides as follows:

            All royalties shall be determined and delivered or paid to
       Owners after deducting therefrom the following costs:
                   (i) as to gas produced from the Subject Interests,
             Owners’ royalty share of Producer’s monthly Marketing Costs
             for such gas; however, for purposes of this paragraph 7(b),
             Producer’s monthly Marketing Costs (whether actually
             incurred by Producer or an affiliate of Producer or charged to
             the Producer by a third party) shall not exceed ten (10) cents
             per MCF and shall be charged only as to gas production put

                                          12
              through the facility for which the Marketing Costs are
              charged; . . . 4
       The Agreement defines “Marketing Costs” as:

       (i)      the reasonable, capital costs of property actually installed by
                Producer or an affiliate of Producer after the Effective Time,
                which property:
                      (a) is depreciable for purposes of the Internal Revenue
                          Code of 1986, as amended; and
                      (b) is required to be installed downstream from a central
                          facility in order to deliver gas produced from the
                          Subject Interests to a gas transmission line or
                          otherwise to a market; and
                      (c) is part of a facility to transport gas produced from the
                          Subject Interests from a central facility to a gas
                          transmission line or is part of a facility compressing or
                          treating such gas as required for delivery to such a gas
                          transmission line; and
       (ii)     charges made by a third party that is not an affiliate of Producer
                directly attributable to property actually installed after the
                Effective Time, which property:
                      (a) is installed downstream from a central facility in order
                          to transport gas produced from the Subject Interests to
                          a gas transmission line or otherwise to a market; and
                      (b) is part of a facility required to transport gas produced
                          from the Subject Interests from a central facility to a
                          gas transmission line, or is part of a facility
                          compressing or treating such gas as required for
                          delivery to such a gas transmission line.
The Agreement defines a “central facility” as:

       the final set of heaters, separators, meters and tanks that are operated

4
  “MCF” is defined in the Agreement as “one thousand (1000) cubic feet of gas with ‘cubic feet
of gas’ meaning the amount of gas contained in a cubic foot of space and at a base pressure of
fourteen and sixty-five one-hundredths (14.65) pounds per square inch absolute and at a base
temperature of sixty degrees Fahrenheit.”

                                             13
      as a unit and into which production from more than one oil or gas well
      on the Subject Interests is gathered for final treating and measurement
      prior to delivery to a gas transmission line owned or operated by a
      principal purchaser of gas in the Permian Basin.

      Under the unambiguous language of the Agreement, for the DP6 compressor
costs to be the basis of the marketing-costs deduction in the royalty calculation the
DP6 compressors must be located downstream from a final set of heaters,
separators, meters, and tanks that are operated as a unit and into which production
from more than one oil or gas well on the Subject Interests is gathered for final
treating and measurement before delivery to a gas transmission line owned or
operated by a principal purchaser of gas in the Permian Basin.

      2. The Harrison Parties’ Summary-Judgment Evidence

      Seeking to negate this proposition as a matter of law, the Harrison Parties
attached to their summary-judgment motion the affidavit of Don Rockwell, who
testified as follows:

    Rockwell is the West Texas Area Engineer for Harrison Interests, Ltd.
     and has reviewed Harrison’s files regarding the Sonora Ranch and the
     leases granted to Meridian in Annexes 1 and 2 of the Agreement,
     otherwise referred to as the “Subject Interests.”
    Rockwell has personal knowledge of the facts stated in his affidavit,
     and those facts are true and correct.
    Rockwell has visited the Sonora field in his duties as West Texas
     Engineer.
    The property contains a number of central processing facilities that
     treat and process gas subject to the Agreement.
    One of those central processing facilities is called “DP6” and is
     located to the south of the Sonora Ranch. The compressors on this
     facility compress the gas production off the Subject Interests into a
     high-pressure gas line and on to a nearby transmission line to market

                                         14
       for sale. The compressors are located on the DP6 central facility and
       are part of the facility.
     Once the gas leaves the compressors, the gas then goes through other
      vessels on the facility, such as a filter separator, an eight-inch
      discharge meter, an amine contactor, a heat exchanger, a recovery
      separator, and a dehydration tower, before it flows to sale.
     Downstream from these compressors are a series of heaters,
      separators, meters, tanks, and other vessels, where the gas is further
      treated and eventually sent to market.
     From Rockwell’s understanding of the Agreement, none of these
      compressors are downstream from a central facility, as that term is
      defined.

       The Harrison Parties’ summary-judgment evidence proved as a matter of
law that the DP6 compressors are not located downstream from a “central facility,”
as that term is defined in the Agreement.            The Harrison Parties’ summary-
judgment motion and summary-judgment evidence facially establish their right to
judgment as a matter of law as to whether the HighMount Parties breached the
Agreement by deducting marketing costs based on the costs of the DP6
compressors. See Willrich, 28 S.W.3d at 23–24. Therefore, the burden shifted to
the HighMount Parties to raise a genuine, material fact issue sufficient to defeat
summary judgment. See id.

       3. The Complete Absence of Authentication of the HighMount Parties’
          Summary-Judgment Evidence
       In response to the Harrison Parties’ summary-judgment motion regarding the
deduction of marketing costs, the HighMount Parties submitted two documents as
summary-judgment evidence—a two-page memorandum signed by an attorney-
expert and a one-page diagram of the DP6 facility.5              These documents were

5
 The memorandum does not purport to be an affidavit, and the HighMount Parties do not assert
on appeal that the memorandum is an affidavit.

                                            15
attached to the HighMount Parties’ summary-judgment response. The HighMount
Parties submitted no affidavit, testimony, or other evidence to authenticate the
memorandum or the diagram. There was a complete failure to authenticate the
memorandum and the diagram.6

       In In re Estate of Guerrero, this court, sitting en banc, determined that under
precedent from the Supreme Court of Texas and from this court, a document
submitted as evidence in a summary-judgment or a motion-to-compel-arbitration
context has a substantive defect and is incompetent if there was a complete failure
to authenticate the document.7 See 465 S.W.3d 693, 705, 706–08 (Tex. App.—
Houston [14th Dist.] 2015, pet. filed) (en banc). Thus, the complete absence of
authentication of the memorandum and the complete absence of authentication of
the diagram are substantive defects that are not waived by the failure to object and
obtain a ruling in the trial court. See id. at 706–08. Under this court’s precedent in
In re Estate of Guerrero, these substantive defects make the memorandum and
diagram incompetent to raise a genuine fact issue to prevent a summary judgment.
See Elizondo v. Krist, 415 S.W.3d 259, 264 (Tex. 2013) (holding that conclusory
statements are incompetent to create a fact issue to prevent a summary judgment);
In re Estate of Guerrero, 465 S.W.3d at 705, 706–08 (holding that a complete

6
  In the memorandum, the attorney-expert states that he incorporates into the memorandum the
contents of a prior memorandum. The HighMount Parties did not submit this prior memorandum
in response to the marketing-costs summary-judgment motion, but they appear to have submitted
the other memorandum in response to the summary-judgment motion that is the subject of the
first appellate issue. Presuming without deciding that we may consider the other memorandum in
determining whether a fact issue exists as to the marketing-costs motion, there was a complete
failure to authenticate the other memorandum as well.
7
  The In re Estate of Guerrero court relied upon the Mansions in the Forest precedent from the
Supreme Court of Texas in this regard. See In re Estate of Guerrero, 465 S.W.3d 693, 708 (Tex.
App.—Houston [14th Dist.] 2015, pet. filed) (en banc) (citing Mansions in the Forest, L.P. v.
Montgomery County, 365 S.W.3d 314, 317 (Tex. 2012) (per curiam) for the proposition that a
complete failure to authenticate is a defect in substance).

                                             16
failure to authenticate a document is a defect of substance that makes the document
“no competent evidence,” and equating a complete failure to authenticate a
document with conclusory statements in an affidavit); Niu v. Revcor Molded
Prods. Co., 206 S.W.3d 723, 729 (Tex. App.—Fort Worth 2006, no pet.) (holding
that a complete failure to authenticate a document renders the document
incompetent to raise a fact issue preventing summary judgment). Therefore, the
memorandum and the diagram submitted by the HighMount Parties in response to
the marketing-costs summary-judgment motion cannot raise a genuine fact issue.8
See Elizondo, 415 S.W.3d at 264; In re Estate of Guerrero, 465 S.W.3d at 706–07;
Niu, 206 S.W.3d at 729. Because the only evidence submitted by the HighMount
Parties is substantively defective and incompetent, under the applicable standard of
review, in response to the marketing-costs summary-judgment motion, the
HighMount Parties did not raise a genuine, material fact issue sufficient to defeat
summary judgment. See Willrich, 28 S.W.3d at 23–24. On this basis alone, the
trial court did not err in granting this summary-judgment motion on the ground that
the summary-judgment evidence proved as a matter of law that the DP6
compressors are not located downstream from a “central facility,” as that term is
defined in the Agreement.

8
   The Harrison Parties submitted another diagram of the DP6 facility in support of their
marketing-costs summary-judgment motion. The Harrison Parties authenticated this diagram.
Nonetheless, this diagram is materially different from the diagram that the HighMount Parties
submitted. The Harrison Parties’ diagram is difficult to read, does not contain the arrows,
highlighting, and legend regarding “rich gas” and “lean gas” in the other diagram, and does not
raise a genuine fact issue precluding summary judgment. See Kings River Trail Ass’n v.
Pinehurst Trail Holdings, 447 S.W.3d 439, 445–47 (Tex. App.—Houston [14th Dist.] 2014, pet.
denied).

                                              17
       4. The Memorandum9
       In response to the Harrison Parties’ summary-judgment motion regarding the
deduction of marketing costs, the HighMount Parties submitted a two-page
memorandum signed by an attorney-expert and a one-page diagram of the DP6
facility. In the memorandum, the attorney-expert states that the attorney for the
HighMount Parties provided the attorney-expert with three schematics and a plat.
The schematics and the plat are not attached to the memorandum or otherwise
proved up in the summary-judgment evidence. The attorney-expert states that,
based on the schematics and the plat, he “understand[s] the following concerning
compression at DP6”:

     All of the facilities at DP6 are located on the Subject Interests and
      were installed by the Producer after the Effective Time of the
      Agreement.

     Just “prior to” the compressors located at DP6, there are several
      separators that receive the full gas stream from a majority of
      Producer’s wells located on the Subject Interests.
     “After and by compression” the separated gas stream is delivered to
      the Enterprise Products Operating LLC Pipeline on the Subject
      Interests.
     The separated gas stream then leaves the Subject Interests in the
      Enterprise Pipeline, which transmits and delivers the separated gas
      stream to a third-party processing plant.

       In the memorandum, the attorney-expert states that the definition of “central
facility” does not include the word “compressors” or “compression” and that
“[t]herefore, based on the plain language of the Agreement, the compressors at
DP6 are not part of a ‘central facility,’ but clearly downstream of a central

9
  Justice Christopher joins all of this opinion except for subsections 4 and 5 of Section II. B. of
this opinion, which Justice Christopher does not join.

                                                18
facility.”10 The attorney-expert also states that it is his opinion that compression at
DP6 falls within the definition of “Marketing Costs” because the compressors are
downstream of a central facility to compress gas for delivery to the Enterprise
Pipeline for transmission to a third-party processing plant. Therefore, the attorney-
expert opines that the Producer may deduct monthly marketing costs for such
compression, not to exceed ten cents per MCF, in calculating the royalty payable to
the royalty owners.           Each of these statements is a legal opinion or a legal
conclusion that is incompetent to raise a genuine fact issue, even absent a ruling by
the trial court on an objection to this effect. See Mercer v. Daoran Corp., 676
S.W.2d 580, 583 (Tex. 1984); In re Estate of Guerrero, 465 S.W.3d at 706–07;
Kastner v. Gutter Mgmt., Inc., No. 14-09-00055-CV, 2010 WL 4457461, at *8
(Tex. App.—Houston [14th Dist.] Nov. 4, 2010, pet. denied) (mem. op.). The
statements constitute no evidence.

          The attorney-expert also states that the separators and associated meters at
DP6 would constitute a central facility by the express terms of the Agreement
because a majority of the production from the wells on the Subject Interests is
delivered to DP6 for separation before delivery to a gas transmission line. The
attorney-expert further says that after compression, the separated gas stream is
delivered to the Enterprise Pipeline for transmission to a third-party processing
plant. Even if there had not been a complete failure to authenticate the
memorandum, under the applicable standard of review, neither these statements
nor any other statement in the memorandum would raise a genuine fact issue as to
whether the DP6 compressors are located downstream from a final set of heaters,
separators, meters, and tanks that are operated as a unit and into which production

10
     The underlining is in the original.

                                             19
from more than one oil or gas well on the Subject Interests is gathered for final
treating and measurement before delivery to a gas transmission line owned or
operated by a principal purchaser of gas in the Permian Basin.11 See Kings River
Trail Ass’n v. Pinehurst Trail Holdings, 447 S.W.3d 439, 445–47 (Tex. App.—
Houston [14th Dist.] 2014, pet. denied).

       5. The Diagram
       On appeal, the HighMount Parties assert that there is a genuine fact issue as
to whether the compressors for the “rich” gas stream in the DP6 facility are located
downstream from a central facility.12 In support of this argument, the HighMount
Parties rely on the diagram of the DP6 facility that they attached to their summary-
judgment response. This diagram is different from the diagram submitted by the
Harrison Parties because it has highlighting, arrows, and a legend added to it in an
attempt to show the flow of the “rich” gas, the flow of the “lean” gas, and the
location of the compressors and other equipment. There is no summary-judgment
evidence as to who created the diagram submitted by the HighMount Parties, nor is
there any evidence explaining the various symbols on the diagram, including
symbols that appear after what the diagram indicates is the flow of the “rich” gas

11
   In the memorandum, the attorney-expert states that he incorporates into the memorandum the
contents of a prior memorandum. The HighMount Parties did not submit this prior memorandum
in response to the marketing-costs summary-judgment motion, but they appear to have submitted
the other memorandum in response to the summary-judgment motion that is the subject of the
first appellate issue. Presuming without deciding that we may consider the other memorandum in
determining whether a fact issue exists as to the marketing-costs motion, under the applicable
standard of review, no statement in this memorandum raises a genuine fact issue as to whether
the DP6 compressors are located downstream from a final set of heaters, separators, meters, and
tanks that are operated as a unit and into which production from more than one oil or gas well on
the Subject Interests is gathered for final treating and measurement before delivery to a gas
transmission line owned or operated by a principal purchaser of gas in the Permian Basin.
12
    The HighMount Parties do not argue that the there is a fact issue as to whether the
compressors for the “lean” gas stream in the DP6 facility are located downstream from a central
facility.

                                               20
through two compressors.          Even if there had not been a complete failure to
authenticate this diagram, under the applicable standard of review, in response to
the marketing-costs summary-judgment motion, this diagram would not raise a
genuine, material fact issue sufficient to defeat summary judgment. See Willrich,
28 S.W.3d at 23–24.

       The trial court did not err in granting this summary-judgment motion on the
ground that the summary-judgment evidence proved as a matter of law that the
DP6 compressors are not located downstream from a “central facility,” as that term
is defined in the Agreement.13 Accordingly, we overrule the HighMount Parties’
second issue.14

                                      III.    CONCLUSION

       The trial court did not err in granting the Harrison Parties’ summary-
judgment motion on their claim that the HighMount Parties breached the
Agreement by failing to pay the Harrison Parties royalties on gas used for fuel
because the plain language of the Agreement entitles the Harrison Parties to
royalties on the gross proceeds from gas used for fuel on the Subject Interests. Nor
did the trial court err in granting summary judgment that the HighMount Parties
breached the Agreement by deducting marketing costs based on the costs of the
DP6 compressors because the summary-judgment evidence proved as a matter of
law that the DP6 compressors are not located downstream from a “central facility,”

13
   Because we may affirm the trial court’s summary judgment as to marketing costs on this
ground, we need not and do not address the other summary-judgment grounds asserted by the
Harrison Parties in this motion.
14
   The HighMount Parties have not assigned error or presented argument on appeal as to any
challenge to the amount of damages, interest, or attorney’s fees awarded by the trial court or to
the trial court’s rendition of a final judgment without a trial or summary-judgment rulings as to
the amount of damages, interest, or attorney’s fees that should be awarded. Therefore, these
issues are not before this court.

                                               21
as that term is defined in the Agreement. We affirm the trial court’s judgment.

                                      /s/    Kem Thompson Frost
                                             Chief Justice

Panel consists of Chief Justice Frost and Justices Christopher and Donovan.
(Justice Christopher joins all of this opinion except for subsections 4 and 5 of
Section II. B. of this opinion, which Justice Christopher does not join).

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