MIGLv.DOMINION OKLA, EXPLOR PROD

Court of Appeals of Texas, Thirteenth District, Corpus Christi — EdinburgFeb 15, 2007
No. 13-05-589-CV (Tex. App. Feb. 15, 2007)

No. 13-05-589-CV

Delivered: February 15, 2007.

On appeal from the 25th District Court of Lavaca County, Texas.

Before Chief Justice VALDEZ and Justices RODRIGUEZ and GARZA.


MEMORANDUM OPINION


ROGELIO VALDEZ, Chief Justice.

Frank J. Migl, Elrose Migl, Brenda Kay Stephens, Martha Mendoza, Louise Haines, Betty Haines Ferguson, Laura Rowlett, and Shirley J. Moor, individually and as independent executor of the estate of Clifford Ray Thomas, Jr., (collectively referred to as "the Migls"), are the lessors of an oil and gas lease located in Lavaca County. The Migls sued Dominion Oklahoma Texas Exploration Production, Inc., ("Dominion"), the current lessee, for damages stemming from the alleged under payment of royalties. The trial court granted summary judgment in Dominion's favor. The Migls appeal from the summary judgment. We affirm the trial court's judgment.

I. ISSUES

The Migls raise six issues on appeal, which may be properly addressed in three. The Migls ask us to determine whether the trial court erred in granting summary judgment because there were disputed fact issues about (1) whether Dominion failed to obtain the highest price reasonably possible, (2) whether Dominion defrauded the Migls by representing to them that the royalty distributions were the highest price reasonably possible, and (3) whether the trial court erred in granting a final judgment based upon a summary judgment motion that did not seek judgment on all claims before the trial court.

II. BACKGROUND

A. Factual Background

The underlying dispute stems from gas sales made according to a gas purchase agreement dated March 1, 1998, between Costilla Energy, the predecessor-in-interest to Dominion and seller of natural gas, and Houston Pipeline Company ("HPL"), the buyer. The original agreement committed all of the leasehold's gas to HPL and was effective through February 2002. The agreement set a contract price at two-percent below the Houston Ship Channel/Beaumont, Texas Index. It also allowed the parties to mutually agree on a basket price as an alternative to the contract price. The basket price was a differential average of four price indices.

The original agreement's duration and price calculations were amended four times between 1998 and March 2001. Some of the amendments changed the contract price based on delivery points, MMBtu standards, and carbon dioxide modifications. Costilla executed the first two amendments. The second amendment extended the original agreement's term through February 2005. On June 14, 2000, pursuant to a bankruptcy court order, Costilla assigned its interest in the lease in question to Louis Dreyfus, who executed two more amendments to the agreement before the lease was acquired by Dominion in November 2001. Approximately three years later, in December 2004, Dominion asked HPL for the basket price. HPL promptly refused the request.

B. Procedural Background

In their live petition, the Migls raised six causes of action based upon Dominion's sale of gas at allegedly below market prices. The causes of action are: (1) breach of implied covenants of the lease, (2) breach of express covenants of the lease, (3) common law duty to account for all transactions, (4) common law fraud, (5) statutory fraud based upon a violation of 27.01 of the Texas Business Commerce Code, and (6) a request for attorney's fees.

The Migls's live petition contains a section titled, "Cause of Action for Breach of Lease and Breach of Contract." That section advances claims against Dominion based upon the lease's covenants, but it does not articulate a breach of contract claim stemming from the market value provisions found in the gas purchase agreement executed by Costilla and HPL.

The Migls alleged that Dominion sold gas below market value and that such below market sales violated the express and implied covenants of the lease. The relevant royalty provision contains a bifurcated clause, which reads:

On gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or for the extraction of gasoline or other product therefrom, the market value at the well or one-eighth of the gas so sold or used, provided that the gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. (emphasis added)

In essence, the Migls alleged that the lease expressly obligates the lessee to sell natural gas for market value and that the implied covenant to reasonably market the lease's natural gas requires the lessee to obtain the best reasonably price. To support the position that Dominion fell short on its obligations, the Migls marshaled as evidence several of Dominion's invoices, invoices for wells proximately located to the wells administered by Dominion but administered by different producers, and an expert report by Charles Guffrey, Ph.D. The report uses the Houston Ship Channel gas price index to support the proposition that Dominion sold gas below market value.

Dominion generally denied the Migls' allegations, asserted several affirmative defenses, and filed special exceptions to all of the Migls' causes of action. On November 21, 2004, Dominion filed a traditional and no evidence motion for summary judgment. The trial court postponed consideration of the summary judgment motion for several months to allow further discovery. On June 16, 2005, the trial court considered a renewed motion for summary judgment. Dominion's first traditional summary judgment argument was that it did not need to prove that the lease's natural gas was sold at "market value" because that is the lease's standard for gas sold off of the lease premises, and all of the gas was sold at the well. Secondly, Dominion argued that it had no control over the price at which the gas was sold because of a pre-existing contract negotiated by Costilla, Dominion's predecessor. Dominion's no-evidence summary judgment argument was that evidence of self-dealing or negligence is required to sustain an action for breach of the implied covenant to market oil or gas and the Migls offered no evidence of either negligence or self-dealing. See Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, 374 (Tex. 2001).

The first two-thirds of Dominon's renewed motion for summary judgment asks for a traditional summary judgment, while the last third requests a no-evidence summary judgment.

The Migls responded to Dominion's summary judgment motion. They objected to three affidavits attached to Dominion's summary judgment motion and to the form of Dominion's hybrid summary judgment motion. The Migls insisted that the hybrid motion was conclusory and that the trial court should therefore treat it as a traditional motion for summary judgment. See Michael v. Dyke, 41 S.W.3d 746, 751-52 (Tex.App.-Corpus Christi 2001, no pet.) (holding that when it is not readily apparent to the trial court that summary judgment is sought under rule 166a(i), the court should presume that it is filed under the traditional summary judgment rule and analyze it according to those well-recognized standards).

Although the Migls objected to Dominion's affidavits below, their objections are not presented in any of the issues on appeal. Therefore, we need not address them. Tex. R. App. P. 38.1(e).

In response to Dominon's first two summary judgment arguments, the Migls contended that Dominon had a duty to reasonably market the gas and obtain the best possible price regardless of the point-of-sale or pre-existing contracts. The Migls further argued that determining the best reasonable price was a fact question, which precluded summary judgment. Regarding Dominon's no-evidence summary judgment argument, the Migls argued that Dominon's tardy request for a better price was some evidence of negligence.

The trial court signed an order granting Dominion's renewed motion for summary judgment and entered a take nothing judgment against the Migls. The Migls filed a motion for new trial, which was overruled by operation of law. This appeal ensued.

III. DISCUSSION

A. Issue 3: Finality of the Judgment

The renewed summary judgment motion prayed for a judgment that the plaintiffs take nothing and that Dominion have its costs of court. The final judgment granted Dominion's prayer and included a Mother Hubbard clause, which stated that "[a]ll relief not expressly granted in this judgment is denied." The Migls challenge the finality of the judgment in their third issue. They claim that the summary judgment motion did not address their claims for (1) breach of lease, (2) accounting, and (3) attorney's fees. As discussed below, we find that the trial court sufficiently dealt with the Migls' express and implied covenant claims.

With regard to the accounting and attorney's fees claims, we turn our attention to the intent of the trial court and the behavior of the parties because finality of a judgment "must be resolved by a determination of the intention of the court as gathered from the language of the decree and the record as a whole, aided on occasion by the conduct of the parties." Lehmann v. Har-Con Corp., 39 S.W.3d 191, 203 (Tex. 2001) (quoting 5 Ray W. McDonald, Texas Civil Practice 27:4, at 4 (John S. Covell, ed., 1992 ed.)).

Assuming a suit for an accounting is an independent cause of action, the record establishes that the trial court intended to deny the Migls request for an accounting. See T.F.W. Mgmt. v. Westwood Shores Prop. Owners Ass'n, 79 S.W.3d 712, 717(Tex.App.-Houston [14th Dist.] 2002, pet. denied) (treating an accounting as a cause of action based on alleged contractual obligations and principles of equity); compare Michael, 41 S.W.3d at 754. (holding that an action for accounting may be a suit in equity, or it may be a particular remedy sought in conjunction with another cause of action.). The record is replete with invoices and accounting records provided by Dominion to the Migls. Indeed, the Migls used the accounting records provided by Dominion to fashion an expert report. The final judgment's Mother Hubbard clause joined with the invoices in the record and the absence of any evidence showing Dominion's attempt to conceal accounting records demonstrates an intention by the trial court and the parties to finally dispose of the accounting claim, if there was one.

The Migls' request for attorney's fees was denied in the final judgment as well. As a general rule, attorney's fees are not recoverable unless allowed by statute or by contract. See Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex. 1992). Section 38.001 of the civil practice and remedies code allows a party to recover such fees if the party prevails on a cause of action for which attorney's fees are recoverable and recovers damages. Green Int'l, Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997). Attorney's fees are recoverable in a suit on a contract pursuant to subsection 38.001(8). Tex. Civ. Prac. Rem. Code Ann. § 38.001(8) (Vernon 1997). A party who does not recover for breach of contract, however, cannot recover attorney's fees under that theory. Brosseau v. Ranzau, 81 S.W. 3d 381, 397 (Tex.App.-Beaumont 2002, pet. denied). Section 91.406 of the natural resources code provides for attorney's fees in certain oil and gas disputes if there is a judgment "in favor of the plaintiff." Tex. Nat. Res. Code Ann. § 91.406 (Vernon 2001). In the case at hand, the Migls did not prevail on a breach of contract claim or an oil and gas dispute as defined by the natural resources code. Consequently, the record evidences an intention that the trial court's denial of attorney's fees to the Migls be final.

Therefore, we construe the judgment in the instant to be final and appealable because it unequivocally expresses an intent to dispose of the case. See Lehmann, 39 S.W.3d at 206. The Migls' third issue is overruled.

B. Standard of Review

We review the district court's grant of summary judgment de novo. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 156 (Tex. 2004). When a movant presents both traditional and no-evidence grounds for summary judgment, and the district court does not specify the ground upon which the motion is granted, as here, we must affirm the summary judgment if any of the theories presented to the trial court and preserved for appellate review are meritorious. Provident Life Accident Ins. Co. v. Knott, 128 S.W.3d 211, 217 (Tex. 2003). 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. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 549 (Tex. 1985).

A defendant who moves for summary judgment under rule 166a(c) is entitled to have its motion granted if it conclusively negates at least one of the essential elements of the plaintiff's cause of action or if it conclusively proves each element of its affirmative defense, thereby showing that it, as the movant, is entitled to judgment as a matter of law because no genuine issues of material fact remain. Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 222-23 (Tex. 1999). The defendant must support its motion with proper summary judgment evidence. Tex. R. Civ. P. 166a(c). Only if the defendant meets its burden does the burden shift to the plaintiff, as the nonmovant, to establish that a genuine issue of material fact remains. Id.

The defendant's burden in moving for summary judgment under rule 166a(i) is less strenuous. The defendant must establish that "after adequate time for discovery . . . there is no evidence of one or more essential elements of a claim or defense on which an adverse party would have the burden of proof at trial." Id. at rule 166a(i); Fort Worth Osteopathic Hosp., Inc. v. Reese, 148 S.W.3d 94, 98 (Tex. 2004). The burden then shifts to the plaintiff, in its attempt to defeat the summary judgment motion, to produce sufficient evidence to raise a genuine issue of material fact supporting the disputed issue. Forbes Inc. v. Granada Biosciences, Inc., 124 S.W.3d 167, 172 (Tex. 2003). The plaintiff must produce more than a scintilla of probative evidence, meaning that it must not be "so weak as to do no more than create a mere surmise or suspicion of a fact." King Ranch v. Chapman, 118 S.W.3d 742, 751 (Tex. 2003).

C. Issue 1: Dominion's Royalty Obligations

1. Obligations under the express covenants of the lease

In reviewing the Migls' live petition we note their implicit allegation that gas was sold both on and off the premises and that all of the gas was sold below market value, thereby violating the express covenant to sell gas for market value and the implied covenant to reasonably market. Under the bifurcated royalty provision, gas sold off-premises is governed by a market value formula and gas sold on-premised is governed by an amount realized (or proceeds-based) calculation. Therefore, at the outset we must determine which royalty provision applies to the instant case because Dominion is required to calculate royalties owed to the Migls based on the bifurcated royalty provisions contained in the lease agreement. See Alameda Corp. v. Transamerican Natural Gas Corp., 950 S.W.2d 93, 97 (Tex.App.-Houston [14th Dist.] 1997, writ denied) (recognizing that royalty payments must be determined from provisions of oil and gas lease).

Dominion asserted that all of the gas sales took place at meters located on the leasehold. It offered affidavits from its employees and the gas purchase agreement, which indicated that all of the natural gas extracted from the lease was sold at a meter located on the leasehold. The Migls failed to offer controverting evidence to the trial court, and their brief does not contest Dominion's assertion of on premises sales. All the Migls have to support their claim that Dominion violated the express covenant of the lease by not selling gas at market value are pleaded factual allegations. Pleadings do not constitute summary judgment evidence. City of Houston v. Clear Creek Basin Authority, 589 S.W.2d 671, 678 (Tex. 1979). Consequently, the Migls' claim for violation of the express covenant to sell gas at market value did not survive summary judgment because the uncontroverted evidence shows all of the gas was sold on premises. Therefore, only the proceeds based royalty calculation is applicable, while the market based formula is inapplicable. See Amoco Prod. Co. v. First Baptist Church of Pyote, 611 S.W.2d 610, 610 (Tex. 1980) ("The parties can draft either a `market value' or a `proceeds' royalty provision, and their intent will be followed by the courts.").

Gas sold on the leasehold shall be treated as sold at the wells for royalty calculations purposes. See Exxon Corp. v. Middleton, 613 S.W.2d 240, 243 (Tex. 1981) (holding that "sold at the wells" means sold at the wells within the lease)

2. Obligations under the implied covenants of the lease

In order to understand the Migls implied covenant claim, we must determine which covenants are applicable. The broad implied covenants of an oil and gas lease are: (1) to develop the premises, (2) to protect the leasehold, and (3) to manage and administer the lease. Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567 (Tex. 1981). Included within the covenant to manage and administer the lease is the duty to reasonably market the oil and gas produced from the premises. Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex. 1987). The implied covenant to reasonably market the lease's natural gas is applicable when the royalty clause calls for an amount-realized (or proceeds) based calculation. Cf. Union Pac. Res. Group, Inc. v. Hankins, 111 S.W.3d 69, 70 (Tex. 2003) (holding that a covenant to obtain the best price reasonably attainable is implied under Texas law only to proceeds leases, not to market-value leases). The duty to reasonably market oil and gas obligates a lessee to market the production with due diligence and obtain the best price reasonably possible. Brown, 754 S.W.2d at 106.

The facts of the present case are inversely related to the facts of a royalty dispute that the Texas Supreme Court has already confronted. In that case, the royalty provision contained a bifurcated clause exactly like the one in the present case, except the gas sales took place off-premises. See Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, 370 (Tex. 2001). The lessee in Yzaguirre entered into a twenty-year gas purchase agreement in which buyer agreed to purchase gas for a fixed price. Id. Over the course of the agreement, the contract price rose above the market for natural gas and lessee paid lessors a royalty based on the market value, as directed by the lease, rather than a royalty based on the amount realized value. Id. Lessors sued lessee claiming a breach of the implied covenant to reasonably market. Id. Lessee was granted summary judgment. Id. The Texas Supreme Court affirmed the trial court's summary judgment. Id. at 374. (refusing to use an implied marketing covenant to negate the express royalty provisions in the leases and transform the "market value" royalty into a "higher of market value or proceeds" royalty.).

The Migls reliance on the best price reasonably possible portion of the duty to reasonably market to create a fact issue is misplaced. The Texas Supreme Court has noted that "market value may be wholly unrelated to the price the lessee receives as the proceeds of a sales contract." Id at 372. The instant case is no different than Yzaguirre. In this case, the lessee engaged in a long-term contract that was arguably less lucrative than a contract relying on market fluctuations. Yet, despite the Migls's market value evidence, we look to the proceeds clause and the jurisprudence surrounding the applicable implied covenants. Id. at 374.

An action based on the implied covenant to reasonably market focuses on the behavior of the lessee rather than on evidence of other sales, and asks whether the lessee acted as "a reasonably prudent operator under the same or similar facts and circumstances." Union Pac. Res. Group, Inc. v. Hankins, 111 S.W.3d 69, 71 (Tex. 2003); see Alexander, 622 S.W.2d at 567-68. The Migls offered no evidence of how Dominion failed to act as a reasonably prudent operator other than asserting the generic allegation of selling gas below market value. They claim that Dominion's allegedly tardy request of the basket price is some evidence of negligence on Dominion's part. The allegation does not rise beyond suspicion of a fact. Any inference of negligence by Dominion's allegedly tardy request is not supported by evidence that such a request would have yielded higher profits. Assuming the basket price was higher than the contract price Dominion was receiving, the gas purchase agreement's mutual assent requirement coupled with HPL's prompt refusal show that a request for basket pricing was not a viable option.

Reviewing the evidence in the light most favorable to the Migls, we hold that no genuine issue of material fact remains regarding whether Dominion failed to act as a reasonably prudent operator. See Steel, 997 S.W.2d at 222-23. The Migls' first issue is overruled.

D. Issue 2: Fraud Claims

By their second issue, the Migls complain that the trial court improperly granted summary judgment on their fraud claims. In their live petition the Migls raised common law and statutory fraud claims against Dominion. The theory is that by tendering royalty payments to the Migls, Dominion represented that the royalties were the best price reasonably possible when in fact the royalties were for gas sold at below market prices.

The Migls common law fraud claims fail. To establish common law fraud, a plaintiff must prove: "(1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the representation was made with the intention that it be acted upon by the other party; (5) the party acted in reliance upon the representation; and (6) the party suffered injury." Johnson Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 524 (Tex. 1998). Assuming, without deciding, that royalty payments constitute a representation, Dominion has established as a matter of law that it was receiving the only price feasibly available — that being the contract price. The second and third elements of a common law fraud claim are therefore missing.

The Migls also allege statutory fraud. See Tex. Bus. Com. Code Ann. § 27.01 (Vernon 1987). Section 27.01 provides for a statutory cause of action for fraud in real estate and stock transactions. Id. It only applies to misrepresentations of material fact made to induce another to enter into a contract for the sale of land or stock. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex.App.-Waco 2000, pet. denied). Because Dominion is a successor-in-interest to the original lessee, section 27.01 does not apply. The Migls' second issue is overruled.

IV. CONCLUSION

The judgment of the trial court is affirmed. Tex. R. App. P. 43.2(a).