Court Opinion

ID: 4321454
Source: CourtListenerOpinion
Date Created: 2018-10-16 23:34:08.525835+00
Date Added: 2024-06-11T13:28:26.488131
License: Public Domain

Affirmed and Opinion filed October 16, 2018.

                                     In The

               Fourteenth Court of Appeals
                              NO. 14-17-00170-CV

                             OBO, INC., Appellant
                                        V.
  APACHE CORPORATION AND PERMIAN BASIN JOINT VENTURE,
                     LLC, Appellees

                    On Appeal from the 55th District Court
                            Harris County, Texas
                      Trial Court Cause No. 2015-39006

                                OPINION

      This appeal of a summary judgment involves claims and counterclaims
concerning the interpretation and application of the governing agreements for an
oil and gas unit in West Texas. Appellees Apache Corporation and Permian Basin
Joint Venture, LLC (PBJV) sued appellant OBO, Inc. for failure to pay unit
operating expenses as required under the agreements. OBO counterclaimed against
Apache, seeking a declaration that Apache could not act as unit operator because it
was not a working interest owner and asserting among other things that Apache
was grossly negligent. In its judgment, the trial court ordered OBO to pay PBJV
$195,330.45 in past due expenses and further ordered that OBO take nothing on its
counterclaims against Apache.

       In its first issue, OBO contends that the trial court erred in granting summary
judgment against its request for a declaration that Apache could not act as unit
operator because it was not a working interest owner. In its second issue, OBO
asserts that the trial court erred in awarding judgment to PBJV because PBJV was
not the unit operator, made no affirmative claims, and provided no evidence that it
had incurred any expenses. And in its third issue, OBO contends that the trial court
erred in granting summary judgment against certain of OBO’s counterclaims.
Finding no merit in OBO’s arguments, we affirm.

                                        I. Background

       OBO owns an 11 percent working interest in the Shafter Lake San Andres
Unit in West Texas. PBJV owns 81.4 percent of the working interest in that unit.
Under the unit’s governing documents, the Unit Agreement and the Unit Operating
Agreement, the “Unit Operator” must be a working interest owner. It is undisputed
that by 2007, PBJV was designated as Unit Operator. In January 2007, PBJV
entered a Contract Services Agreement with Apache, pursuant to which PBJV
delegated to Apache certain operator duties.1 Under the agreement, Apache’s
services were to be “subject to the reasonable direction of [PBJV].” PBJV also
gave Apache a power of attorney, authorizing it to act on PBJV’s behalf.2

       1
         At least some evidence in the record indicates that Apache owns a 95% interest in
PBJV, although OBO asserts that this relationship is not entirely clear. It is undisputed, however,
that PBJV and Apache are separate entities.
       2
          Pursuant to the Contract Services Agreement, Apache was to provide PBJV with
“certain operations, marketing, land administration, accounting, reservoir engineering and other
                                                2
       For several years, part of the services Apache provided included sending
Joint Interest Billings (JIBs) to the working interest owners in the unit, including
OBO, for their share of operating expenses. OBO declined or failed to pay a
number of these JIBS and Apache filed the present lawsuit in July 2015. In its
original petition, Apache represented itself to be “the operator”; however, in the
second amended petition, PBJV was added as a plaintiff and it was specifically
stated that PBJV contracted with Apache to operate the unit. PBJV and Apache
further asserted in the second amended petition that OBO breached the unit’s
governing agreements by failing to pay the past due JIBs.

       In OBO’s second amended answer and counter-petition, it generally denied
the allegations; asserted that Apache lacked standing because it was not a working
interest owner and thus could not act as Unit Operator; and raised several
counterclaims against Apache, including for declaratory judgment and “gross
negligence and willful misconduct.”3 OBO did not assert any claims against PBJV.
OBO’s declaratory judgment action sought a declaration that Apache could not act
as Unit Operator because it was not a working interest owner as required by the
unit’s governing documents. Specifically, among its requests for relief, OBO
sought a declaration that Apache was “an unlawful and unauthorized Unit
Operator.”

services in connection with the Oil & Gas Interests.” The agreement further listed the services to
be provided in each category, including “billing . . . all working interest owners.” The purpose of
the power of attorney was to grant Apache “the authority to execute, amend or extend contracts
associated with ownership and operation of the Oil & Gas Interests.” The power of attorney
specifically authorized Apache “to execute and deliver in the name of PBJV any and all
agreements, instruments, communications, and any other documentation that Apache deems
necessary or advisable in the fulfilment of its obligations under the Contract Services
Agreement.”
       3
         OBO also counterclaimed for trespass, conversion, and breach of contract. The trial
court granted summary judgment against those claims, which OBO does not challenge in this
appeal.

                                                3
       OBO’s claims that it labels as “gross negligence and willful misconduct”
were, in essence, contingent on its being unsuccessful in its request for a
declaration that Apache cannot be the operator. OBO’s counterclaim states: “If the
Court determines that Apache was a proper operator of the Unit, Apache was
grossly negligent and committed willful misconduct in its failure to operate the
Unit as a reasonably prudent operator would.” The claims turn in part on the
applicability of an exculpatory clause in the Unit Operating Agreement to permit
the assessment of damages.4

       PBJV and Apache filed a joint traditional and no-evidence motion for
summary judgment. Along with this motion, appellees presented evidence of
OBO’s nonpayment of the JIBs. Appellees additionally argued in the motion that,
contrary to OBO’s assertions, Apache was not serving as Unit Operator in its own
right but was conducting operations on behalf of PBJV, pursuant to the Contract
Services Agreement and power of attorney, and PBJV was the actual Unit
Operator. Appellees further contended that OBO could produce no evidence that
Apache had acted with gross negligence or willful misconduct.

       In response, OBO argued among other things that the unit governing
documents did not permit Apache to act as Unit Operator, the exculpatory clause
was inapplicable, and Apache’s operation of the unit was grossly negligent. OBO
attached to its response a purported expert declaration criticizing Apache’s
continued operation of nonproductive wells. OBO also filed its own motion for
partial summary judgment, requesting the court declare that Apache could not act

       4
         The exculpatory clause provided that: “Unit Operator shall conduct unit operations in a
good and workmanlike manner as would a prudent operator under the same or similar
circumstances. . . . Unit Operator shall not be liable to Working Interest Owners for damages,
unless such damages result from its gross negligence or willful misconduct.” (Emphasis added).
OBO asserted that Apache breached the contractual duty of conducting operations in a good and
workmanlike manner through gross negligence and willful misconduct.

                                               4
as the Unit Operator.

       In its final judgment, the trial court granted what it referred to as PBJV’s
motion for summary judgment and awarded PBJV $195,330.45. The trial court
further denied OBO’s motion for partial summary judgment and ordered that it
take nothing on its counterclaims against Apache.5

                                 II. Standards of Review

       Summary judgments. We review a trial court’s grant of summary judgment
under a de novo standard. Nall v. Plunkett, 404 S.W.3d 552, 555 (Tex. 2013) (per
curiam). In a traditional motion for summary judgment, the movant must state
specific grounds supporting judgment, and a defendant who conclusively negates
at least one essential element of a cause of action is entitled to judgment. Tex. R.
Civ. P. 166a(c); Nall, 404 S.W.3d at 555. If the movant’s motion and summary-
judgment evidence conclusively establish a right to judgment as a matter of law,
the burden then shifts to the nonmovant to raise a genuine issue of material fact
sufficient to defeat summary judgment. M.D. Anderson Hosp. & Tumor Inst. v.
Willrich, 28 S.W.3d 22, 23 (Tex. 2000).

       In a no-evidence motion, the movant contends that the nonmovant can
produce no evidence supporting one or more essential elements of a claim for
which the nonmovant would bear the burden of proof at trial. Tex. R. Civ. P.
166a(i); Boerjan v. Rodriguez, 436 S.W.3d 307, 310 (Tex. 2014). The trial court
must grant a no-evidence motion unless the nonmovant raises a genuine issue of
material fact on each challenged element. Tex. R. Civ. P. 166a(i); Hamilton v.
Wilson, 249 S.W.3d 425, 426 (Tex. 2008) (per curiam).
       5
          Although the trial court did not expressly mention Apache in the final judgment, OBO’s
counterclaims were only against Apache and not PBJV. The final judgment contained express
finality language, and Apache does not raise any cross-issues in this appeal concerning its
requests for affirmative relief.

                                               5
       When reviewing a summary judgment, we take as true all evidence
favorable to the nonmovant, and we indulge every reasonable inference and
resolve any doubts in the nonmovant’s favor. Valence Operating Co. v. Dorsett,
164 S.W.3d 656, 661 (Tex. 2005).

       Agreement construction. OBO’s issues to some extent revolve around the
proper construction of the unit’s governing documents: the Unit Agreement and the
Unit Operating Agreement. The construction of an unambiguous agreement
presents a question of law that we review de novo. Tawes v. Barnes, 340 S.W.3d
419, 425 (Tex. 2011).6 Our primary concern in interpreting an agreement is to
ascertain and give effect to the intentions of the parties as expressed in the
instrument. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). We
therefore give terms their plain and ordinary meaning unless the contract indicates
that the parties intended a different meaning. Dynegy Midstream Servs., Ltd. P’ship
v. Apache Corp., 294 S.W.3d 164, 168 (Tex. 2009). We examine and consider the
entire writing in an effort to harmonize and give effect to all provisions of the
contract, so that none will be rendered meaningless. J.M. Davidson, 128 S.W.3d at
229.

                                     III. Discussion

       In its appeal, OBO does not contest its failure to pay the JIBs. Instead, as set
forth above, in three issues, OBO contends that the trial court erred in granting
summary judgment (1) against its request for a declaration that Apache could not
act as Unit Operator because it was not a working interest owner; (2) to PBJV
because PBJV was not the unit operator, made no affirmative claims, and provided
no evidence that it had incurred any expenses; and (3) against certain of OBO’s

       6
         Neither side here argues that the agreements were ambiguous in any respect, and we
have discerned no relevant ambiguity.

                                            6
counterclaims.

       A. Unit Operator Must Be Working Interest Owner

       In its first issue, OBO asserts that the governing documents unambiguously
mandate that only a working interest owner can be the Unit Operator, and because
Apache was not a working interest owner, it could not act as Unit Operator. On
that basis, OBO argues that the trial court erred in granting summary judgment
against its request for a declaration that Apache could not act as the Unit Operator.

       Appellees, however, do not dispute that only a working interest owner can
be designated as Unit Operator.7 Appellees insist instead that Apache was not
acting as the Unit Operator but was merely providing operator services pursuant to
a contract with the designated Unit Operator, PBJV. Therefore, according to
appellees, the trial court did not err in denying OBO’s requested declaration
because the point was essentially uncontested and would have had no effect on any
matter in the lawsuit. Moreover, appellees say, the JIBs submitted by Apache to
OBO and the other working interest owners were prepared and submitted on behalf
of PBJV.

       As a general rule, all contractual duties are delegable. See Crim Truck &
Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 596 (Tex. 1992);
Restatement (Second) of Contracts § 318 (1981). There are exceptions to this rule,
such as for when contractual rights involve certain matters of personal confidence,
see Crim Truck, 823 S.W.2d at 596, or for when delegation is contrary to public
policy or the terms of the contract, see Restatement (Second) of Contracts § 318.
Here, OBO suggests only that the contract itself prohibited delegation of PBJV’s
       7
        As both OBO and appellees point out, section 1.10 of the Unit Agreement defines “Unit
Operator” as “the Working Interest Owner designated by Working Interest Owners under the
Unit Operating Agreement to develop and operate the [unit], acting as operator and not as a
Working Interest Owner.”

                                             7
duties as operator.

      As stated, the unit governing documents required the Unit Operator to be a
working interest owner. In its Contract Services Agreement with Apache and
attendant power of attorney, PBJV did not name or designate Apache as Unit
Operator; it merely contracted with Apache to provide operator services for the
unit, i.e., PBJV delegated those contractual duties to Apache. As mentioned above,
Under the Contract Services Agreement, Apache’s services were to be “subject to
the reasonable direction of [PBJV].”

      OBO points to two specific sections of the governing documents it argues
would be rendered meaningless if the documents are interpreted as allowing
delegation of the operator’s duties. See J.M. Davidson, 128 S.W.3d at 229
(explaining that proper construction of an agreement requires that all provisions be
harmonized so that none are rendered meaningless). The first provision OBO cites
is part of section 1.10 of the Unit Agreement, which defines “Unit Operator” as
“the Working Interest Owner designated by Working Interest Owners under the
Unit Operating Agreement to develop and operate the [unit], acting as operator
and not as a Working Interest Owner.” (Emphasis added). Although OBO is not
specific in its argument, it appears to suggest that the emphasized language means
that only the Unit Operator, i.e., PBJV, could perform any operator functions, i.e.,
“act as operator.” There is, however, a more reasonable interpretation of this
language.

      Reading all provisions of the agreement in harmony, we conclude the phrase
“acting as operator” in section 1.10 is used to differentiate actions by the entity
designated as Unit Operator while wearing the hat of Unit Operator from its
actions while wearing the hat of Working Interest Owner. It is not reasonable to
interpret this sparse language as creating a prohibition against the delegation of

                                         8
operator duties, particularly when another, reasonable explanation exists. See
Westwind Expl., Inc. v. Homestate Sav. Ass’n, 696 S.W.2d 378, 382 (Tex. 1985)
(explaining that a reasonable interpretation of an agreement is preferred to one
which is unreasonable); Hycarbex, Inc. v. Anglo-Suisse, Inc., 927 S.W.2d 103, 108
(Tex. App.—Houston [14th Dist.] 1996, no writ) (same).

      OBO additionally asserts that if the governing documents are interpreted as
permitting Apache to become Unit Operator, the voting and operator removal
language in section 6.2 of the Unit Operating Agreement would be rendered
meaningless. Section 6.2 states in relevant part that “Working Interest Owners may
remove Unit Operator at any time by the affirmative vote of at least eighty percent
(80%) of the voting interest remaining after excluding the voting interest of Unit
Operator.” OBO states that PBJV could “effectively nullify the provision by voting
its 81.4% interest in favor of Apache.” But this argument lies on the faulty premise
that Apache actually became the Unit Operator by way of its Contract Services
Agreement with PBJV and attendant power of attorney. As explained above, it is
undisputed that Apache could not and did not become the Unit Operator because it
was not a working interest owner. Section 6.1 is unaffected by the delegation of
operator duties to Apache and is not rendered meaningless.

      OBO does not cite any other specific section of the governing documents as
being rendered meaningless by interpreting the governing documents as not
prohibiting the delegation of operator duties to Apache. Moreover, no provisions in
the governing documents explicitly or implicitly prohibit the delegation of operator
duties. Indeed, under section 7.10 of the Unit Operating Agreement, the Unit
Operator was permitted, but not required, to “employ its own tools and equipment”
in performing operations. This provision suggests that the Unit Operator could
delegate the performance of its duties by contracting with a third party, in keeping

                                         9
with the general rule of law. See Crim Truck, 823 S.W.2d at 596; Restatement
(Second) of Contracts § 318.

       Because Apache was not acting as the Unit Operator but was merely
performing operator services pursuant to its contract with PBJV and the unit
governing documents do not prohibit such delegation, the trial court did not err in
granting summary judgment against OBO’s request for a declaration that Apache
could not act as the Unit Operator. Accordingly, we overrule OBO’s first issue.8

       B. PBJV was Unit Operator

       In its second issue, OBO asserts that the trial court erred in granting
judgment favoring PBJV because PBJV was not the Unit Operator, asserted no
affirmative claims, and presented no evidence that it incurred any damages by
OBO’s failure to pay the past due JIBs issued by Apache.9 As mentioned above, in
its final judgment, the trial court expressly awarded damages to PBJV and not
Apache.

       We begin by noting that Apache has not complained in this appeal regarding

       8
         In its reply brief, OBO asserts that prior to PBJV becoming unit operator, Apache had
been both a working interest owner and unit operator. OBO further states that when Apache
divested itself of its working interest, and thus was no longer eligible to be unit operator, certain
unit operator successor provisions and voting procedures should have been invoked but were
ignored. OBO, however, offers no record citations to support these factual assertions beyond
general cites to the governing documents, offers no cite where it made this argument in the trial
court, and offers no explanation as to how these allegations are relevant to the present appeal.
See Tex. R. App. P. 38.1(i) (requiring clear and concise argument for the contentions made in a
brief with appropriate citations to authorities and the record). Moreover, we typically do not
address contentions made for the first time in a reply brief. See id. 38.3; Pochron v. Oleksy, No.
14-12-00650-CV, 2014 WL 494894, at *5 (Tex. App.—Houston [14th Dist.] Feb. 6, 2014, no
pet.) (mem. op.); Swaab v. Swaab, 282 S.W.3d 519, 527, n.10 (Tex. App.—Houston [14th Dist.]
2008, no pet.).
       9
           The entirety of OBO’s substantive argument on this issue comprises just five sentences
of its brief.

                                                10
its omission from the final judgment.10 Instead, appellees argue that either the trial
court intended to award damages to both PBJV and Apache when it referenced
only PBJV in the final judgment or, in the alternative, it does not matter that
Apache was omitted because Apache was acting only on behalf of PBJV in
prosecuting the lawsuit.11 We agree with the latter contention. As discussed in
detail above, PBJV was the designated Unit Operator for the Shafter Lake San
Andres Unit, and Apache was involved with the unit only as a contractor providing
certain operator services for PBJV pursuant to the Contract Services Agreement
and attendant power of attorney. This arrangement is further reflected in appellees’
motion for summary judgment, which indicated that Apache was participating only
on behalf of PBJV. Moreover, the final judgment also recognizes that the basic
breach of contract claim belonged to PBJV as Unit Operator and not Apache,
which was a nonparticipant to the unit’s governing documents and involved in the
case only as a service-provider to PBJV.

       OBO is incorrect in arguing that PBJV did not assert any affirmative claims
in this case because, in the second amended petition, both PBJV and Apache
alleged a breach of contract cause of action and requested actual damages based on
the alleged breach. This petition also explained the contractual relationship
between PBJV and Apache and the basis for the breach of contract claim. PBJV
therefore clearly raised affirmative claims.

       OBO also is incorrect in arguing that PBJV presented no evidence that it
incurred any damages by OBO’s failure to pay the past due JIBs issued by Apache.
As explained, Apache submitted the JIBs to OBO and the other working interest

       10
            See supra n.5.
       11
           Appellee’s first argument rests on the fact that their motion for summary judgment
referred to PBJV and Apache collectively as “PBJV.” Appellees suggest the trial court carried
this nomenclature forward into the final judgment.

                                             11
owners on behalf of PBJV. Under the Contract Services Agreement, Apache
specifically agreed to bill the working interest owners as part of its services to
PBJV. The power of attorney specifically authorized Apache “to execute and
deliver in the name of PBJV any and all . . . instruments, communications, and any
other documentation that Apache deems necessary or advisable in the fulfilment of
its obligations under the Contract Services Agreement.” Moreover, under section
11.1 of the Unit Operating Agreement, PBJV, as Unit Operator, was obligated to
“initially . . . pay all Unit Expense” (including operating costs) and then obtain
reimbursement from the working interest owners in proportion to their interest
owned. OBO’s failure to pay and the amount of the damages were proven by an
affidavit from an Apache employee who supervised JIB collections as well as by a
spreadsheet that the employee authenticated, amounts of which OBO has not
contested. PBJV’s summary judgment evidence therefore established that PBJV
incurred damages when OBO failed to pay the JIBs that Apache submitted to the
working interest owners on PBJV’s behalf. Accordingly, we overrule OBO’s
second issue.

       C. “Gross Negligence” and the Exculpatory Clause apply only to parties
to the agreement
      In its third issue, OBO asserts that the trial court erred in granting summary
judgment against its gross negligence counterclaim against Apache because (1)
Apache cannot rely on the exculpatory clause in the Unit Operating Agreement
because it was not the Unit Operator, and (2) even if the exculpatory clause
applies, OBO raised a material issue of fact regarding whether Apache’s conduct
was grossly negligent. OBO’s arguments on appeal misunderstand or misrepresent
the nature of both the exculpatory clause and OBO’s own gross negligence claim.

      The exculpatory clause appears in Article 7 of the Unit Operating

                                        12
Agreement, which sets forth the “Authorities and Duties of Unit Operator.” In
relevant part, the clause in section 7.2 provides that: “Unit Operator shall conduct
unit operations in a good and workmanlike manner as would a prudent operator
under the same or similar circumstances. . . . Unit Operator shall not be liable to
Working Interest Owners for damages, unless such damages result from its gross
negligence or willful misconduct.”

      In its brief, OBO urges that “Apache is not entitled to the limitation of
liability in the exculpatory clause, because it is not a proper party to the
Agreements or the legal operator of the Unit.” As explained above, appellees agree
that Apache was not the Unit Operator and the evidence supports this conclusion.
Therein lies the rub. OBO’s breach of contract and gross negligence counterclaims
were based on Apache’s alleged breaches of the Unit Operating Agreement.
OBO’s counterclaim stated: “Apache owed a duty to OBO under the Unit
Operating Agreement to act as a reasonably prudent operator would.”12 OBO does
not explain how it can recover from Apache for alleged breaches of an agreement,
or breaches of a duty imposed by an agreement, to which Apache was not a party.
See Mission Grove, L.P. v. Hall, 503 S.W.3d 546, 552 (Tex. App.—Houston [14th
Dist.] 2016, no pet.) (“It is ‘axiomatic . . . that a contract between other parties
cannot create an obligation or duty on a non-contracting party . . . .” (quoting City
of Beaumont v. Excavators & Constructors, Inc., 870 S.W.2d 123, 129 (Tex.
App.—Beaumont 1993, writ denied))); Sanders v. Total Heat & Air, Inc., 248
S.W.3d 907, 912 (Tex. App.—Dallas 2008, no pet.) (“Privity is an essential
element for recovery in any action based on contract . . . .”).

      OBO has not alleged, either in its petition or in its brief, any duty or duties

      12
         As discussed above, these counterclaims were also made expressly contingent on
Apache being determined by the court to be a proper Unit Operator.

                                          13
Apache may have violated outside of those it alleges were created under the Unit
Operating Agreement. OBO specifically has not alleged that Apache committed
ordinary negligence. OBO has only asserted that if Apache was the Unit Operator,
it breached duties it owed as Unit Operator. See Reeder v. Wood Cty. Energy, LLC,
395 S.W.3d 789, 790, 792–97 (Tex. 2012) (addressing “gross negligence” claims
pursuant to exculpatory clause in oil and gas joint operating agreement as breach of
contract claims). Because Apache was not the Unit Operator, the trial court
properly granted summary judgment against OBO’s contingent claims for breach
of contract and gross negligence. Accordingly, we overrule OBO’s third issue.

      Finding no merit in any of OBO’s arguments, we affirm the trial court’s
judgment.

                                      /s/    Martha Hill Jamison
                                             Justice

Panel consists of Justices Boyce, Jamison, and Brown.

                                        14